01—Abstract
Summary
Summary of the 10-K filed February 22, 2017. Cited figures are marked; the original filing is the authoritative source.
Eaton Corporation plc (ETN) reported a year of top-line contraction in 2016, with net sales falling 5% to $19.7 billiona (down from $20.9 billion in 2015), driven by a 4% decline in organic sales and a 1% negative currency translation impact.
The decline was concentrated in the Vehicle segment (down 14%, on weakness in North American Class 8 trucks), the Hydraulics segment (down 10%, on weak mobile and industrial markets) and Electrical Systems and Services (down 5%, reflecting oil and gas weakness). Electrical Products was flat. Despite weaker volumes, gross margin improved to 32.1% from 31.5%, helped by restructuring savings, and diluted EPS was essentially flat at $4.21b versus $4.23 in 2015.
Net income attributable to Eaton shareholders fell 3% to $1.92 billionc, partly offset by a $68 million insurance-related gain in Q4 2016. Management reported non-GAAP operating earnings per share of $4.22, down 2%. Cash generation remained strong.
Operating cash flow rose to $2.55 billiond (from $2.37 billion), supported by lower pension contributions and working capital. Eaton returned substantial cash to shareholders, paying $1.04 billion in dividends and repurchasing $730 million of shares, and it entered 2017 with a new $2.5 billion repurchase authorization. Total debt was roughly $8.3 billion, and the company refinanced its revolving credit facilities and issued €550 million of 0.75% euro notes due 2024.
Management expects $100 million in restructuring charges in 2017 and projects $518 million in annualized savings by 2018 from its multi-year restructuring program. Balance sheet risks to note include a $1.7 billion net unfunded pension position and continued tax disputes with the IRS over transfer pricing, where the company faces proposed assessments in the hundreds of millions of dollars.
02—Key points
Key Highlights
- Net sales declined 5% to $19.7 billion, with organic sales down 4% and currency translation a 1-point headwind; the Vehicle (-14%) and Hydraulics (-10%) segments drove the decline.
- Diluted EPS was $4.21 versus $4.23 in 2015; operating EPS of $4.22 was down 2%, with Q4 2016 benefiting from roughly $68 million of insurance-related income.
- Gross margin expanded to 32.1% from 31.5%, reflecting restructuring savings and cost controls that offset lower volumes and unfavorable product mix.
- Operating cash flow increased to $2.55 billion, and free cash flow after $497 million of capex was about $2.06 billion, comfortably covering $1.04 billion of dividends and $730 million of buybacks.
- Dividends were raised to $2.28 per share for 2016 (from $2.20), and the board declared a quarterly dividend of $0.60; a new $2.5 billion share repurchase program was approved in February 2016.
- Restructuring charges of $211 million in 2016 are expected to fall to $100 million in 2017, with projected annualized savings of $518 million when fully realized in 2018.
- Material ongoing risks include IRS transfer-pricing litigation (proposed assessments of roughly $190 million in additional tax plus $72 million in penalties for 2007-2010, plus $75 million plus $52 million for 2005-2006), Brazilian tax disputes, and a $1.7 billion net pension underfunding.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Eaton Corp plc kept $0.10.
- Revenue$19.75B100.0%
- Cost of revenue−$13.40B67.8%
- Gross profit$6.35B32.2%
- Operating costs−$3.39B17.2%
- Operating income$2.96B15.0%
- Interest, other & tax−$1.04B5.3%
- Net income$1.92B9.7%
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 22, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $19.75B$20.86B | −5.3% |
| Cost of Revenue | $13.40B$14.30B | −6.3% |
| Gross Profit | $6.35B$6.55B | −3.1% |
| R&D Expenses | $587.00M$625.00M | −6.1% |
| SG&A Expenses | $3.46B$3.60B | −3.7% |
| Operating Income | $2.96B$3.13B | −5.6% |
| Net Income | $1.92B$1.97B | −2.8% |
| EPS (Basic) | $4.21$4.23 | −0.5% |
| EPS (Diluted) | $4.20$4.22 | −0.5% |
| Shares Outstanding (Basic) | 455.00M465.50M | −2.3% |
| Shares Outstanding (Diluted) | 456.50M467.10M | −2.3% |
05—Questions
Frequently Asked Questions
Why did Eaton's revenue decline in 2016?
Net sales fell 5% to $19.7 billion, reflecting a 4% drop in organic sales as end markets weakened and a 1% negative currency impact from a stronger U.S. dollar. The largest declines were in the Vehicle segment, due to the lower North American Class 8 truck market, and in Hydraulics, due to weak mobile and industrial demand. Electrical Products was flat, and Aerospace declined only 3%.
Did Eaton's profitability hold up despite lower sales?
Largely yes. Gross margin rose to 32.1% from 31.5% on restructuring savings and cost controls. Net income attributable to Eaton shareholders fell 3% to $1.92 billion, and diluted EPS was nearly flat at $4.21. Results were supported by a $68 million insurance-related gain in Q4 2016, so underlying earnings were somewhat weaker than reported.
How strong is Eaton's cash flow and capital return program?
Operating cash flow was $2.55 billion, up from $2.37 billion, aided by lower pension contributions and working capital. After $497 million of capital expenditures, free cash flow was about $2.06 billion, which funded $1.04 billion of dividends and $730 million of share repurchases. The company also entered 2017 with a new $2.5 billion buyback authorization.
What are the main risks investors should monitor?
Key risks include continued weakness in cyclical end markets such as oil and gas, mobile hydraulics, and North American heavy trucks; the unresolved IRS transfer-pricing case, where Eaton disputes proposed assessments tied to its Puerto Rico and Dominican Republic operations; Brazilian tax disputes; and a net unfunded pension position of about $1.7 billion that could require higher contributions depending on asset returns and discount rates.
What is the outlook for restructuring and cost savings?
Eaton launched a multi-year restructuring program in 2015 and incurred $211 million of charges in 2016. Management expects about $100 million of restructuring charges in 2017 and projects annualized savings of $518 million when fully realized in 2018, which should support margins if end-market demand stabilizes.
06—Continue