01—Abstract
Summary
Summary of the 10-K filed February 26, 2014. Cited figures are marked; the original filing is the authoritative source.
Eaton Corporation plc's 2013 10-K shows a transformational year driven by the November 30, 2012 acquisition of Cooper Industries (total purchase price $13.2 billiona).
Net sales rose 35% to $22.0 billionb from $16.3 billion, with acquisitions contributing 36 points of growth while core sales were flat and currency subtracted 1 point. Net income attributable to Eaton shareholders increased 53% to $1.86 billion, and diluted EPS rose 13% to $3.90. Excluding after-tax acquisition integration charges and transaction costs, operating EPS was $4.13, up 5%.
The effective tax rate fell to 0.6% from 2.5%, which flatters reported earnings, and the Company's Irish domicile and its tax disputes deserve scrutiny. Balance sheet and cash generation strengthened. Operating cash flow rose to $2.29 billionc from $1.66 billion, and free cash flow after $614 million of capital expenditures was roughly $1.67 billion, comfortably covering $796 million of dividends.
Total debt fell to about $9.5 billiond from $10.8 billion, and the net-debt-to-capital ratio improved to 31.8% from 39.2%. Goodwill ($14.5 billion) and other intangibles ($7.2 billion) make up roughly 61% of total assets of $35.5 billion, so impairment risk and asset quality are key monitoring items. Credit ratings were A-/Baa1/BBB+, with Moody's on negative outlook.
Key risks include integration execution on Cooper, cyclical end markets, a pending $270 million sale of two aerospace businesses to Safran, a $1.2 billion U.S. Tax Court transfer-pricing dispute, which the Company says carries an assessment of about $127 million plus penalties, and an ongoing Meritor antitrust case with damages estimated at $475 to $800 million. The Company says it does not expect these matters to have a material impact, but investors should weigh the uncertainty. Management forecasts 3% end-market growth for 2014.
02—Key points
Key Highlights
- Net sales rose 35% to $22.0 billion, with acquisitions adding 36 points and core sales flat; Cooper Industries contributed most of the growth.
- Net income attributable to Eaton shareholders increased 53% to $1.86 billion; diluted EPS was $3.90 versus $3.46, while operating EPS excluding integration charges was $4.13.
- The effective tax rate was 0.6% versus 2.5% in 2012, a major driver of earnings growth that may not be fully repeatable.
- Operating cash flow increased to $2.29 billion from $1.66 billion; capex was $614 million, and dividends paid were $796 million.
- Net debt-to-capital improved to 31.8% from 39.2%, though total debt remains high at about $9.5 billion and Moody's has a negative outlook.
- Goodwill and intangibles total about $21.7 billion, roughly 61% of total assets, which increases exposure to future impairment.
- Pending $270 million sale of the Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions businesses to Safran is expected to close in Q2 2014.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Eaton Corp plc kept $0.08.
- Revenue$22.05B100.0%
- Cost of revenue−$15.37B69.7%
- Gross profit$6.68B30.3%
- Operating costs−$3.50B15.9%
- Operating income$3.18B14.4%
- Interest, other & tax−$1.32B6.0%
- Net income$1.86B8.4%
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 26, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $22.05B$16.31B | +35.2% |
| Cost of Revenue | $15.37B$11.45B | +34.3% |
| Gross Profit | $6.68B$4.86B | +37.3% |
| R&D Expenses | $644.00M$439.00M | +46.7% |
| SG&A Expenses | $3.89B$2.89B | +34.3% |
| Operating Income | $3.18B$2.22B | +43.4% |
| Net Income | $1.86B$1.22B | +52.9% |
| EPS (Basic) | $3.93$3.54 | +11.0% |
| EPS (Diluted) | $3.90$3.46 | +12.7% |
| Shares Outstanding (Basic) | 473.50M347.80M | +36.1% |
| Shares Outstanding (Diluted) | 476.70M350.90M | +35.9% |
05—Questions
Frequently Asked Questions
How did the Cooper Industries acquisition change Eaton's financial profile?
The $13.2 billion Cooper acquisition, completed November 30, 2012, was the dominant driver of 2013 results. It added about 36 points of sales growth and increased Electrical Products and Electrical Systems and Services segment sales by roughly 82% and 66%, respectively. It also raised amortization of intangibles (to $437 million from $195 million) and interest expense (to $271 million from $208 million), and it left goodwill and intangibles at about 61% of total assets.
Is Eaton's earnings growth in 2013 sustainable?
Part of the growth is not organic. Core sales were flat, and the 53% rise in net income was helped by a 0.6% effective tax rate, down from 2.5%, and by the absence of 2012 transaction and restructuring costs. Operating EPS, which excludes integration charges, grew only 5% to $4.13. Investors should look at core growth and the normalized tax rate, which the Company said is affected by Cooper integration and tax planning.
What are the most significant legal and tax risks disclosed?
The most significant items are the U.S. Tax Court dispute with the IRS over the Puerto Rico and Dominican Republic transfer-pricing notice, with proposed assessments of $75 million in tax plus $52 million in penalties for 2005 and 2006; the Meritor antitrust case, where the plaintiff's amended damages estimate is $475 to $800 million and no loss estimate can be made; and a Brazilian tax assessment on goodwill amortization that could take ten years to resolve. Management believes none will have a material effect, but these are contingent exposures.
How strong is Eaton's liquidity and debt position?
Liquidity is solid. Cash and short-term investments totaled about $1.7 billion, and Eaton had $2.0 billion in committed revolving credit facilities with no borrowings outstanding, plus about $2.1 billion in non-U.S. short-term lines. Total debt declined to about $9.5 billion after repaying the $669 million bridge loan, and mandatory 2014 maturities are $567 million. Credit ratings are A-/Baa1/BBB+, with Moody's outlook negative.
What is the outlook for 2014 and beyond?
As of early February 2014, management expected end markets to grow about 3% in 2014, with Vehicle growing 4%. It forecast capital expenditures of about $700 million, pension contributions of about $362 million, and continued restructuring and integration spending through 2015. The pending Safran divestiture is expected to close in Q2 2014. Management did not provide earnings guidance in this filing, and forward-looking results depend on the end-market, currency, and integration risks described in the filing.
06—Continue