10-QPeriod: Q3 FY2019

Eaton Corp plc Quarterly Report for Q3 Ended Sep 30, 2019

Filed October 29, 2019For Securities:ETN

Summary

Eaton Corporation plc's third quarter 2019 report shows a slight decrease in net sales, down 2% year-over-year to $5.31 billion, primarily driven by unfavorable currency translations and lower sales volumes in the Vehicle and Hydraulics segments. However, net income attributable to shareholders saw a significant increase of 44% to $601 million, or $1.44 per diluted share, up from $0.95 in the prior year. This improvement was largely due to the absence of a significant arbitration expense incurred in the prior year's third quarter and strong performance in Electrical Products and Electrical Systems and Services, along with favorable share repurchases. The company is actively reshaping its portfolio through strategic acquisitions and divestitures. Notable activities include the acquisition of Ulusoy Elektrik and ISG, and a committed acquisition of Souriau-Sunbank. Concurrently, Eaton is pursuing the divestiture of its Lighting business for $1.4 billion, expected to close in early 2020, and plans to divest its Automotive Fluid Conveyance business. These portfolio actions indicate a strategic focus on core power management solutions.

Financial Highlights

54 data points
Beta

Revenue

$5.31B

33.9% Gross Margin

Net Income

$602.00M

11.3% Net Margin

EPS (Diluted)

$1.44

Total Assets

$31.89B

Cash & Equivalents

$549.00M

Free Cash Flow

$940.00M

Financial Statements
Beta
Revenue$5.31B
Cost of Revenue$3.51B
Gross Profit$1.80B
R&D Expenses$147.00M
SG&A Expenses$885.00M
Interest Expense$54.00M
Net Income$602.00M
EPS (Basic)$1.44
EPS (Diluted)$1.44
Shares Outstanding (Basic)416.60M
Shares Outstanding (Diluted)418.40M

Key Highlights

  • 1Net sales for Q3 2019 decreased by 2% to $5.31 billion, impacted by currency headwinds and reduced volumes in Vehicle and Hydraulics segments.
  • 2Net income attributable to ordinary shareholders significantly increased by 44% to $601 million, or $1.44 per diluted share, compared to $0.95 in Q3 2018.
  • 3The increase in net income was largely due to the absence of a $275 million arbitration decision expense recognized in Q3 2018.
  • 4Eaton completed the acquisition of Ulusoy Elektrik for approximately $214 million and Innovative Switchgear Solutions (ISG) during the quarter.
  • 5The company entered into an agreement to sell its Lighting business for $1.4 billion, with an expected closing in Q1 2020.
  • 6Strong operating profit growth was observed in the Electrical Products (4%) and Electrical Systems and Services (21%) segments.
  • 7Net cash provided by operating activities increased to $2.51 billion for the first nine months of 2019, up from $1.84 billion in the prior year.

Frequently Asked Questions

The significant increase in net income attributable to Eaton ordinary shareholders in Q3 2019 was primarily driven by the absence of a substantial arbitration decision expense of $275 million that was recognized in the third quarter of 2018. Additionally, strong performance in segments like Electrical Products and Electrical Systems and Services, coupled with the positive impact of share repurchases, contributed to the improved net income.

Eaton is actively managing its portfolio through both acquisitions and divestitures. In the third quarter of 2019, the company completed the acquisition of Ulusoy Elektrik and ISG, and has a committed acquisition of Souriau-Sunbank pending closure. Simultaneously, Eaton is progressing with the divestiture of its Lighting business for $1.4 billion, with an expected closing in the first quarter of 2020, and plans to sell its Automotive Fluid Conveyance business. This indicates a strategic shift towards focusing on core power management solutions.

The Hydraulics segment experienced a 10% decrease in net sales for Q3 2019 due to a 8% decrease in organic sales, attributed to weakness in global mobile equipment markets and inventory destocking by OEMs and distributors. Similarly, the Vehicle segment saw a 13% decrease in net sales, with organic sales down 12%, driven by softness in global light vehicle markets and the transfer of revenues to the Eaton Cummins Automated Transmission Technologies joint venture. These segments faced headwinds during the quarter.

The effective income tax rate for the third quarter and the first nine months of 2019 increased to 16.0% and 14.5%, respectively, compared to 5.2% and 10.8% in the same periods of 2018. This increase was mainly due to the absence of a significant tax benefit from the arbitration decision in the prior year and a higher proportion of income being generated in higher tax jurisdictions.