Eaton Reports 9% Increase in Net Income; Stock Up 18% YTD

Power management company Eaton Corporation plc (ETN) today announced that net income and operating earnings per share were $3.14 for the third quarter of 2017. Net income and operating earnings per share, adjusted for the gain from the formation of the Eaton Cummins Automated Transmission Technologies joint venture, were $1.25, up 9 percent over the third quarter of 2016. Net income and operating earnings per share included $0.03 negative impact from the three recent hurricanes and the earthquake in Mexico City.

The Eaton Cummins joint venture closed at the end of July. Eaton recorded a pre-tax gain of $1.077 billion, of which $533 million related to the pre-tax gain from the $600 million proceeds from the transaction and $544 million related to the company’s 50 percent investment in the joint venture being remeasured to fair value. The after-tax gain was $843 million, or $1.89 per share.

Sales in the third quarter of 2017 were $5.21 billion, up 4½ percent over the same period in 2016. The sales increase consisted of 3½ percent growth in organic sales and 1 percent increase from positive currency translation.

Craig Arnold, Eaton chairman and chief executive officer, said, “Our third quarter net income and operating earnings per share, excluding the gain on the Eaton Cummins joint venture, were at the midpoint of our guidance range despite the impact of the recent natural disasters. Coming into the quarter, we expected organic sales would be up between 2½ and 3½ percent and currency translation would be flat. Our organic sales grew 3½ percent, the high end of our guidance range, and positive currency translation impacted sales 1 percent. Organic growth of 3½ percent exceeded the 2 percent growth rate that we experienced in both the first and second quarters of 2017.

“Segment margins in the third quarter were a record 16.4 percent,” said Arnold. “Excluding restructuring costs in the segments of $11 million in the quarter, segment margins were 16.7 percent. Segment margins excluding restructuring costs were reduced in the quarter by 0.2 percentage points due to the hurricanes and the Mexico City earthquake.

“During the quarter, we refinanced $1 billion of debt maturing in early November,” said Arnold. “We elected to take $250 million of the proceeds and put it into our U.S. qualified pension plans.

“Operating cash flow in the third quarter, excluding the $250 million pension contribution, was a quarterly record, at slightly over $1.0 billion,” said Arnold. “We continued to return substantial cash to our shareholders, repurchasing $324 million of our shares in the quarter, making our year-to-date repurchases a total of $789 million, 2.4 percent of our shares outstanding at the beginning of the year.

“For full year 2017, excluding the gain on the Eaton Cummins joint venture, we are affirming the midpoint of our guidance and narrowing our guidance range by 5 cents at the upper and lower ends of the range,” said Arnold. “As a result, we now expect net income and operating earnings per share to be between $4.55 and $4.65. This represents a 9 percent increase at the midpoint of our guidance over 2016. We anticipate net income and operating earnings per share for the fourth quarter of 2017 to be between $1.19 and $1.29.”

Business Segment Results

Sales for the Electrical Products segment were $1.9 billion, up 5 percent over the third quarter of 2016. Organic sales were up 4 percent and currency translation was positive 1 percent. Operating profits, excluding acquisition integration charges of $1 million during the quarter, were $347 million, up 5 percent over the third quarter of 2016.

“Operating margins in the third quarter were 18.7 percent, and excluding the $11 million impact from the recent natural disasters, 19.2 percent,” said Arnold. “Orders in the third quarter were up 5 percent over the third quarter of 2016, driven by growth in all regions.”

Sales for the Electrical Systems and Services segment were $1.4 billion, down 1 percent from the third quarter of 2016. Organic sales were down 2 percent while currency translation was positive 1 percent. Segment operating profits were $196 million, down 1 percent from the third quarter of 2016.

“Operating margins were 13.8 percent,” said Arnold. “Orders in the third quarter were down 1 percent from the third quarter of 2016, with a slight increase in North America more than offset by declines in EMEA and APAC. The decline in EMEA was principally due to lower large project orders from the UK and Middle East, while the decline in APAC reflects lower orders from data centers and utility markets.”

 

Hydraulics segment sales were $634 million, up 13 percent over the third quarter of 2016, entirely driven by organic sales growth. Operating profits in the third quarter were $80 million, an increase of 31 percent over the third quarter of 2016.

“Operating margins in the quarter were 12.6 percent, and excluding restructuring costs of $9 million, 14.0 percent,” said Arnold. “Hydraulics orders in the third quarter of 2017 were up 22 percent over the third quarter of 2016, with solid growth in all geographic regions. We continued to see order strength from both OEMs and distributors.”

Aerospace segment sales were $438 million, flat with the third quarter of 2016. Operating profits in the third quarter were $84 million, down 5 percent from the third quarter of 2016.

“Operating margins in the quarter were 19.2 percent,” said Arnold. “Orders in the quarter were up 11 percent compared to the third quarter of 2016. We saw strength across all our major end markets, with the exception of military transport and military rotorcraft.”

The Vehicle segment posted sales of $861 million, up 10 percent over the third quarter of 2016. Organic sales were up 9 percent and currency translation was positive 2 percent, partially offset by negative 1 percent impact from the formation of the Eaton Cummins joint venture. Operating profits in the third quarter were $150 million, up 23 percent over the third quarter of 2016.

“Operating margins in the quarter were 17.4 percent, and excluding restructuring costs of $2 million, 17.7 percent,” said Arnold.

“North American Class 8 truck production grew 34 percent in the third quarter compared to the third quarter of 2016,” said Arnold. “We now expect full year 2017 production to be 250,000 units.”

Eaton is a power management company with 2016 sales of $19.7 billion. We provide energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton is dedicated to improving the quality of life and the environment through the use of power management technologies and services. Eaton has approximately 96,000 employees and sells products to customers in more than 175 countries. For more information, visit Eaton.com.

Notice of conference call: Eaton’s conference call to discuss its third quarter results is available to all interested parties as a live audio webcast today at 10 a.m. United States Eastern time via a link on the center of Eaton’s home page. This news release can be accessed under its headline on the home page. Also available on the website prior to the call will be a presentation on third quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning fourth quarter and full-year 2017 operating earnings and net income per share, and expected full-year NAFTA Class 8 truck production. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; natural disasters; the performance of recent acquisitions; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; changes in tax laws or tax regulations; stock market and currency fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.