01—Abstract
Summary
Summary of the 10-K filed February 28, 2013. Cited figures are marked; the original filing is the authoritative source.
Eaton Corporation plc's 2012 Form 10-K reports a transformational year driven by the November 30, 2012 acquisition of Cooper Industries for a total purchase price of $13,192 milliona ($6,543 million cash plus $6,649 million in Eaton shares).
Net sales rose 2% to $16,311 millionb, with acquisitions contributing about 5 points and currency subtracting 3 points, while core sales were flat. Cooper contributed only one month ($470 million in sales), so the full-year effect is not yet visible in the 2012 results. Net income attributable to Eaton ordinary shareholders fell 10% to $1,217 million, and diluted EPS declined 12% to $3.46.
Operating earnings before acquisition integration charges and transaction costs were roughly flat at $1,384 millionc, or $3.94 per share, versus $3.96 in 2011. The reported decline reflects $222 million of pre-tax integration and transaction costs (including $178 million of transaction and financing costs) and $50 million of fourth-quarter restructuring charges. The effective tax rate fell to 2.5% from 12.9%, largely due to a significant international tax benefit after the Cooper deal, which flattered net income.
Balance sheet and leverage changed materially. Total assets nearly doubled to $35,848 milliond, driven by $14,396 million of goodwill and $6,779 million of other intangibles. Total debt rose to about $10.8 billion, and the net-debt-to-capital ratio increased to 39.2% from 26.5%.
Eaton repaid the $669 million bridge facility balance on February 1, 2013, and sold its 50% interest in Apex Tool Group to Bain Capital on the same date. Operating cash flow improved to $1,664 million, and the company reported $180 million of 2013 capital expenditure guidance context of about $700 million. Management guides to 2013 end-market growth of 2% to 3%, with expected net sales growth of about 42% including roughly $6 billion of incremental acquisition sales.
Investors should note that the Cooper purchase price allocation is preliminary, that a 2013 reorganization will change reportable segments, and that the company's credit ratings carry negative outlooks at all three major agencies. Key open risks include the Meritor antitrust judgment (damages amount not estimable), the IRS transfer-pricing dispute over canceled Advance Pricing Agreements (a $75 million tax plus $52 million penalty proposal), and a Brazilian tax assessment. Management believes none of these will have a material impact on the consolidated financial statements, although the Meritor matter remains unquantified.
02—Key points
Key Highlights
- Acquired Cooper Industries on November 30, 2012 for $13,192 million, which lifted goodwill to $14,396 million and total assets to $35,848 million (from $17,873 million).
- Net sales grew 2% to $16,311 million: acquisitions added 5 points and currency subtracted 3 points, while core sales were flat. Cooper contributed only $470 million for one month of 2012.
- Diluted EPS fell 12% to $3.46 (net income $1,217 million), but operating earnings were roughly flat at $3.94 per share, excluding $0.48 per share of integration and transaction costs.
- The effective tax rate dropped to 2.5% from 12.9%, driven by a significant post-Cooper international tax benefit, which supported 2012 net income.
- Total debt rose to about $10.8 billion and the net-debt-to-capital ratio climbed to 39.2% from 26.5%; credit ratings (A-/Baa1/BBB+) all carry negative outlooks.
- Operating cash flow increased 33% to $1,664 million, and the company sold its Apex Tool Group stake for about $1.6 billion (closed February 1, 2013).
- 2013 guidance calls for 2% to 3% end-market growth and about 42% net sales growth, including roughly $6 billion of incremental acquisition sales; the Meritor antitrust judgment remains unquantified.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Eaton Corp plc kept $0.07.
- Revenue$16.31B100.0%
- Cost of revenue−$11.45B70.2%
- Gross profit$4.86B29.8%
- Operating costs−$2.65B16.2%
- Operating income$2.22B13.6%
- Interest, other & tax−$999.0M6.1%
- Net income$1.22B7.5%
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 28, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $16.31B$16.05B | +1.6% |
| Cost of Revenue | $11.45B$11.26B | +1.7% |
| Gross Profit | $4.86B$4.79B | +1.6% |
| R&D Expenses | $439.00M$417.00M | +5.3% |
| SG&A Expenses | $2.89B$2.74B | +5.7% |
| Operating Income | $2.22B$2.26B | −1.9% |
| Interest Expense | $276.00M$174.00M | +58.6% |
| Net Income | $1.22B$1.35B | −9.9% |
| EPS (Basic) | $3.54$3.98 | −11.1% |
| EPS (Diluted) | $3.46$3.93 | −12.0% |
| Shares Outstanding (Basic) | 347.80M338.30M | +2.8% |
| Shares Outstanding (Diluted) | 350.90M342.80M | +2.4% |
05—Questions
Frequently Asked Questions
Why did reported EPS decline in 2012 despite the Cooper acquisition?
Diluted EPS fell 12% to $3.46 from $3.93 mainly because of $222 million in pre-tax acquisition integration charges and transaction costs, which included $178 million in transaction and financing fees, plus $50 million in fourth-quarter restructuring charges. Excluding acquisition-related costs, operating EPS was $3.94 versus $3.96 in 2011, so underlying earnings were roughly flat. Also note that the 2012 tax rate was unusually low at 2.5%, which partly offset these costs.
How much did Cooper contribute to 2012 results, and what should investors expect for 2013?
Cooper contributed $470 million in net sales and $66 million in segment operating profit for the one month it was owned in 2012. Eaton expects 2013 net sales to grow about 42%, with roughly $6 billion of incremental sales from recent acquisitions. The pro forma unaudited 2012 net sales including Cooper for the full year were $21,792 million.
Is Eaton's balance sheet more leveraged after the Cooper deal?
Yes. Long-term debt rose to $9,762 million from $3,366 million, and total debt reached about $10.8 billion. The net-debt-to-capital ratio increased to 39.2% from 26.5%. The $669 million bridge facility balance was repaid on February 1, 2013. Management says the most restrictive covenant (secured debt to net worth at 10%) is far from being breached, and all three credit agencies assign negative outlooks.
What are the most significant unresolved legal and tax risks?
The largest is the Meritor antitrust case over heavy-duty truck transmissions, where a jury found liability and the Third Circuit reversed the zero-damages judgment, allowing plaintiffs to amend their damages report; no loss estimate can be made. Other items include an IRS transfer-pricing dispute over canceled Advance Pricing Agreements (proposed $75 million in taxes plus $52 million in penalties) and a Brazilian tax assessment. Management believes none will have a material impact on the consolidated financial statements.
Why does the low 2012 effective tax rate matter for future earnings?
The 2.5% effective tax rate reflected a significant international tax benefit from post-Cooper actions, enhanced foreign tax credit utilization, and restructuring-related provision reductions. These benefits are not expected to recur at the same level, so investors should expect a higher effective tax rate in future periods. The company also noted that the American Taxpayer Relief Act will add roughly $20 million of tax benefits recognized in Q1 2013, and that about $8 billion of non-U.S. earnings are indefinitely reinvested.
06—Continue