01—Abstract
Summary
Summary of the 10-K filed February 24, 2016. Cited figures are marked; the original filing is the authoritative source.
Eaton Corporation plc (ETN) reported 2015 results that were shaped by a broad slowdown in its end markets and a strong U.S. dollar.
Net sales fell 8% to $20.9 billiona, with organic sales down 2% and currency translation subtracting roughly 6 points. Despite the top-line decline, gross margin expanded to 31.5% from 30.6%, aided by restructuring savings and cost controls. Net income attributable to Eaton rose 10% to $1.98 billion and diluted EPS increased 13% to $4.23.
The comparison is distorted by 2014, which included a $644 millionb litigation charge (Meritor and Triumph) and a $154 million pre-tax gain on the Aerospace divestiture. On the non-GAAP measure management emphasizes, operating earnings rose 6% to $2,010 million and operating EPS rose 8% to $4.30. Excluding those 2014 items, underlying earnings fell in 2015 on lower volume, currency headwinds, a higher tax rate, and $129 million of new restructuring charges.
Cash generation and capital returns were solid. Operating cash flow was $2.37 billionc, up from $1.88 billion, which benefited from the absence of the 2014 litigation payments. Eaton returned about $1.7 billion to shareholders through dividends ($1.03 billion paid, with declared dividends per share up to $2.20 from $1.96) and share repurchases of $682 million (11.3 million shares).
Debt fell to $8.45 billiond from $9.03 billion, and cash dropped to $268 million. Shares outstanding declined to 458.8 million from 467.9 million. Management guided to about $525 million of 2016 capex and announced a restructuring program expected to cost $140 million in 2016 and $130 million in 2017, with projected annualized savings of $400 million by 2018.
For investors, the key issues are the sustained weakness in oil and gas, industrial, and hydraulics markets, the fact that Hydraulics operating margin fell to 10.0%, and the multi-year restructuring program. Balance-sheet risks include $15.1 billion of undistributed foreign earnings that management intends to reinvest indefinitely, a pending U.S. Tax Court case over $265 million of IRS transfer-pricing assessments, and pension underfunding of about $1.6 billion. Goodwill of $13.5 billion and intangibles of $6.0 billion represent a large share of total assets, though management reports fair values substantially exceed carrying amounts.
02—Key points
Key Highlights
- Net sales fell 8% to $20,855 million, reflecting a 6-point currency headwind and a 2% organic decline driven by weaker end markets.
- GAAP diluted EPS rose 13% to $4.23, but the comparison is flattered by 2014's $644 million litigation charge; operating EPS rose 8% to $4.30.
- Gross margin expanded to 31.5% from 30.6%, helped by restructuring savings and cost control, despite $129 million of 2015 restructuring charges.
- Operating cash flow increased 26% to $2,371 million, partly because 2014 included roughly $654 million of Meritor and Triumph litigation payments.
- Eaton returned about $1.7 billion to shareholders through dividends ($1,026 million) and buybacks ($682 million), and reduced total debt to $8.45 billion.
- Hydraulics was the weakest segment, with sales down 17% and operating margin falling to 10.0%, while Vehicle and Aerospace margins expanded.
- A new restructuring program is expected to cost $140 million in 2016 and $130 million in 2017, targeting about $400 million of annualized savings by 2018.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Eaton Corp plc kept $0.09.
- Revenue$20.86B100.0%
- Cost of revenue−$14.30B68.6%
- Gross profit$6.55B31.4%
- Operating costs−$3.42B16.4%
- Operating income$3.13B15.0%
- Interest, other & tax−$1.16B5.6%
- Net income$1.97B9.5%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 24, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $20.86B$22.55B | −7.5% |
| Cost of Revenue | $14.30B$15.65B | −8.6% |
| Gross Profit | $6.55B$6.91B | −5.1% |
| R&D Expenses | $625.00M$647.00M | −3.4% |
| SG&A Expenses | $3.60B$3.81B | −5.6% |
| Operating Income | $3.13B$3.31B | −5.4% |
| Net Income | $1.97B$1.80B | +9.5% |
| EPS (Basic) | $4.23$3.78 | +11.9% |
| EPS (Diluted) | $4.22$3.76 | +12.2% |
| Shares Outstanding (Basic) | 465.50M474.10M | −1.8% |
| Shares Outstanding (Diluted) | 467.10M476.80M | −2.0% |
05—Questions
Frequently Asked Questions
How did Eaton's underlying performance trend in 2015 once one-time items are excluded?
The 2014 results included a $644 million litigation charge and a $154 million gain on the Aerospace divestiture, which distort year-over-year comparisons. Using management's operating earnings measure, which excludes acquisition integration charges, operating earnings rose 6% to $2,010 million, and operating EPS rose 8% to $4.30. Management notes that excluding the 2014 litigation and divestiture items, earnings declined in 2015 because of lower volume, currency translation, a higher tax rate, and $129 million of restructuring charges. The EPS gain was also helped by share repurchases.
What is driving the restructuring program and what benefits are expected?
Eaton announced a multi-year restructuring initiative in 2015 to respond to declining market conditions. Charges were $129 million in 2015 and are expected to total $140 million in 2016 and $130 million in 2017. Management projects annualized savings of about $400 million, fully realized in 2018. The 2015 charges were concentrated in Vehicle ($34 million), Hydraulics ($31 million), and Electrical Systems and Services ($29 million).
What are the main risks to Eaton's balance sheet and earnings outlook?
Key risks include: (1) continued weakness in oil and gas, industrial, and hydraulics markets; (2) an IRS transfer-pricing dispute covering the 2005–2006 and 2007–2010 tax years, with combined proposed assessments of roughly $265 million in tax plus penalties, now before the U.S. Tax Court; (3) a pension funded-status deficit of about $1.6 billion, with 2016 contributions expected at $162 million; (4) goodwill and intangibles totaling about $19.5 billion, or roughly 63% of total assets, which would be exposed to any future impairment; and (5) currency translation, which reduced 2015 sales by about 6%.
How strong is Eaton's liquidity and debt position?
Eaton ended 2015 with $268 million of cash and $177 million of short-term investments, down from $781 million of cash in 2014. Total debt declined to $8.45 billion from $9.03 billion after $1.03 billion of debt repayments. The company has $2.0 billion of committed revolving credit facilities with no borrowings outstanding, supporting its $2.0 billion commercial paper program. Its credit ratings are A-/Baa1/BBB+ with stable outlooks. Management states it is in compliance with all debt covenants.
What did Eaton's dividend and buyback activity look like, and how are they funded?
Declared dividends per share rose to $2.20 in 2015 from $1.96 in 2014, and the quarterly dividend was raised to $0.57 in February 2016. Eaton paid $1.03 billion in dividends and repurchased 11.3 million shares for $682 million, reducing shares outstanding to 458.8 million from 467.9 million. Management states that dividends and share repurchases are funded primarily from non-U.S. operations. Eaton has $15.1 billion of undistributed foreign earnings that it intends to reinvest indefinitely, so these cash flows do not depend on repatriation.
06—Continue