10-QPeriod: Q3 FY2018

Eaton Corp plc Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 30, 2018For Securities:ETN

Summary

Eaton Corp plc reported its third-quarter and nine-month results for the period ending September 29, 2018. The company experienced a significant year-over-year decrease in net income, primarily due to a substantial arbitration award expense in Q3 2018, which contrasted with a significant gain on the sale of a business in the prior year's comparable period. Excluding these one-time items, adjusted earnings showed improvement, driven by increased net sales and operational efficiencies across most segments. Net sales saw a moderate increase of 4% for the quarter and 6% for the nine months, driven by organic sales growth across all segments, particularly in Electrical Systems and Services, Hydraulics, Aerospace, and Vehicle. However, the company faced headwinds from commodity inflation and increased freight costs. Looking ahead, investors should monitor the company's response to the arbitration award, ongoing integration of its eMobility segment, and the management of operational costs.

Financial Highlights

49 data points
Beta

Revenue

$5.41B

33.5% Gross Margin

Net Income

$416.00M

7.7% Net Margin

EPS (Diluted)

$0.95

Total Assets

$31.63B

Cash & Equivalents

$327.00M

Free Cash Flow

$869.00M

Financial Statements
Beta
Revenue$5.41B
Cost of Revenue$3.60B
Gross Profit$1.81B
R&D Expenses$138.00M
SG&A Expenses$889.00M
Net Income$416.00M
EPS (Basic)$0.96
EPS (Diluted)$0.95
Shares Outstanding (Basic)433.50M
Shares Outstanding (Diluted)436.30M

Key Highlights

  • 1Net sales increased by 4% to $5.41 billion for the third quarter and 6% to $16.15 billion for the first nine months, driven by organic sales growth across most segments.
  • 2Net income attributable to shareholders decreased significantly by 70% to $416 million in Q3 2018 and by 36% to $1.51 billion in the first nine months, largely impacted by a $206 million after-tax expense from an arbitration decision.
  • 3Excluding the arbitration expense (Q3 2018) and the gain on the sale of a business (Q3 2017), adjusted earnings showed a decrease, reflecting the impact of these significant one-time items.
  • 4Diluted earnings per share (EPS) decreased to $0.95 in Q3 2018 from $3.14 in Q3 2017, and from $5.24 to $3.45 for the nine-month period, heavily influenced by the arbitration award and the prior year's business sale gain.
  • 5The Electrical Systems and Services segment showed strong performance with a 7% increase in net sales and a 19% increase in operating profit for the quarter.
  • 6The company is re-segmenting its businesses, with the new eMobility segment now reporting separately, which includes certain legacy Electrical Products and Vehicle product lines.
  • 7Eaton repurchased $600 million of its shares in the first nine months of 2018, indicating a continued focus on capital return to shareholders.

Frequently Asked Questions

The primary driver for the significant decrease in net income for the third quarter of 2018 was a $206 million after-tax expense related to an arbitration decision, compared to a substantial gain on the sale of a business in the prior year's comparable period. Excluding these one-time items, the underlying operational performance showed improvement.

The new eMobility segment, which was formed in the first quarter of 2018, reported net sales of $80 million for the third quarter of 2018, a 7% increase year-over-year. However, its operating profit decreased by 38% to $10 million, primarily due to increased research and development costs.

Eaton was ordered to pay $293 million in an arbitration award related to claims by Pepsi-Cola. A Texas court confirmed the award, and Eaton is considering its options, including an appeal. The after-tax impact for Q3 2018 was $206 million. The company also noted ongoing tax audits in Brazil and the US, but management believes these will not have a material adverse effect.

During the first nine months of 2018, Eaton repurchased 7.7 million ordinary shares for $600 million. This demonstrates a commitment to returning capital to shareholders, although no shares were repurchased in the third quarter itself.