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Eaton Announces Net Income Per Share in the Third Quarter of $1.02

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CLEVELAND--(BUSINESS WIRE)--

Diversified industrial manufacturer Eaton Corporation (NYSE: ETN) today announced net income per share of $1.02 for the third quarter of 2012, a decrease of 5 percent from the $1.07 earned in the record third quarter of 2011. Sales in the third quarter were $3.95 billion, 4 percent below the third quarter of 2011. Net income in the third quarter was $345 million compared to $365 million in 2011.

Net income in both periods included charges for integration of acquisitions. Before these acquisition integration charges, operating earnings per share in the third quarter of 2012 were $1.07 compared to $1.08 per share in 2011, a decrease of 1 percent. Operating earnings in the third quarter were $363 million compared to $367 million in 2011.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our third quarter results came in very close to our expectations despite the slowdown in economic growth which we discussed in September at several investment conferences. Economic growth in the EU and China remained subdued during the quarter, while industrial activity in the U.S. decelerated during the quarter reflecting uncertainties over fiscal reforms that have led customers to hold back on purchases. As a result, we expect our markets for full year 2012 will show less growth than we had anticipated earlier in the year, with our markets for the year now estimated to grow between 1 to 2 percent.

“Sales in the third quarter declined by 4 percent compared to the third quarter of 2011,” said Cutler. “This reduction in sales was comprised of declines of 2 percent from core growth and 4 percent from foreign exchange, offset by 2 percent growth from acquisitions. End markets declined 1 percent in the quarter.

“We are pleased with our 14.6 percent segment operating margin in the third quarter,” said Cutler. “Our electrical segments posted particularly strong margins, with the Electrical Americas segment registering an operating margin of 18.2 percent and the Electrical Rest of World segment registering an operating margin of 11.2 percent.

“Our operating cash flow in the third quarter was $606 million,” said Cutler. “We expect our operating cash flow in the fourth quarter to be even stronger, reflecting our typical seasonal pattern.

“For the fourth quarter we anticipate our sales, prior to any impact from the close of the Cooper transaction, are likely to be about the same as the third quarter,” said Cutler. “Our results in the fourth quarter will also be impacted by the expected close of the Cooper acquisition. In addition to Eaton's operating results, we expect our fourth quarter results to contain a partial quarter of Cooper operating results, purchase price accounting adjustments, and financing costs and the additional share count associated with closing the Cooper transaction. As a result, we anticipate to incur certain expenses in the fourth quarter related to the acquisition originally forecast to be incurred in 2013.

“We are pleased that Eaton's and Cooper's shareholders approved the Cooper acquisition last Friday,” said Cutler. “We are awaiting two additional regulatory approvals and expect the acquisition to close in the fourth quarter. We are excited about the addition of Cooper to Eaton, as the combined company will have approximately 60 percent of its sales in the electrical markets, based on 2011 results, which are holding up well through this current period of global softness. In addition, Cooper's profitability, as shown in its third quarter earnings release, remains quite strong.”

Business Segment Results

Third quarter sales for the Electrical Americas segment were $1.14 billion, up 6 percent compared to 2011 and a quarterly record for this segment. Operating profits in the third quarter were a record $207 million. Excluding acquisition integration charges of $1 million during the quarter, operating profits were a record $208 million, up 31 percent over results in 2011.

“End markets for our Electrical Americas segment grew 4 percent during the third quarter,” said Cutler. “Both the nonresidential and residential electrical markets posted particularly strong growth in the quarter.

“Our bookings in the Electrical Americas segment, adjusted for foreign exchange and acquisitions, decreased 3 percent compared to our all-time record third quarter of 2011,” said Cutler. “We did book some particularly large orders in October. We expect that our Electrical Americas markets in 2012 will grow by 6 percent.

“At the end of September, we completed the acquisition of Chilean electrical manufacturer Rolec Comercial e Industrial S.A.,” said Cutler. “Rolec significantly expands our capabilities to serve mining and other heavy industrial applications in Chile and Peru.”

Sales for the Electrical Rest of World segment were $686 million, a decline of 9 percent compared to the third quarter of 2011. The sales decrease was comprised of a decline of 6 percent from foreign currency and 3 percent from core sales. The segment reported operating profits of $76 million. Excluding acquisition integration costs of $1 million during the quarter, operating profits were $77 million, up 24 percent over results in 2011.

“Our markets in the third quarter declined 6 percent,” said Cutler. “Our bookings for the Electrical Rest of World segment, adjusted for foreign exchange and acquisitions, declined 3 percent in the quarter. For all of 2012, we continue to believe that the markets in our Electrical Rest of World segment will decline by 3 percent.”

Hydraulics segment sales were $763 million, up 6 percent compared to the third quarter of 2011. The sales increase was comprised of a 13 percent increase from acquisitions offset by a decline of 4 percent from core sales and 3 percent from foreign exchange. Global hydraulics markets were down 4 percent in the quarter, with U.S. markets down 1 percent and non-U.S. markets down 6 percent.

Operating profits in the third quarter were $93 million. Excluding acquisition integration costs of $5 million during the quarter, operating profits were $98 million, down 11 percent from the third quarter of 2011.

“Global hydraulics markets in the third quarter were impacted by a slowdown in capital expenditures, particularly in the construction equipment industries in the U.S. and China,” said Cutler. “We believe the slowdown has been caused primarily by general economic uncertainties in both countries, which has resulted in some customers postponing purchases. Our bookings, adjusted for foreign exchange and acquisitions, declined 25 percent in the third quarter from last year's record third quarter. For all of 2012, we now believe global hydraulics markets will decline 2 percent, 5 percent lower than we had expected in July.

“We were pleased to close our acquisition of South Korean hydraulics manufacturer Jeil during the third quarter,” said Cutler. “Jeil brings to Eaton an exciting range of motors and valves for the construction equipment market.”

Aerospace segment sales were $419 million, flat with the third quarter of 2011. Aerospace markets were up 4 percent compared to the third quarter of 2011. Operating profits in the third quarter were $49 million, down 31 percent from the third quarter of 2011.

“Our Aerospace margins were 11.7 percent,” said Cutler. “The margins were impacted by the continued shift in the mix to a higher percentage of commercial OEM business, as well as volume modestly below our earlier expectations.

“Aerospace bookings decreased 7 percent during the third quarter, adjusted for foreign exchange, reflecting in particular the decline in defense aerospace markets,” said Cutler. “We continue to believe that our Aerospace markets will grow by 4 percent in 2012.”

The Truck segment posted sales of $549 million in the third quarter, down 23 percent compared to 2011. Truck production in the third quarter was down 8 percent, with U.S. markets down 3 percent and non-U.S. markets down 11 percent. The segment reported operating profits of $103 million, down 26 percent compared to the third quarter of 2011.

“We now expect the NAFTA Class 8 market to total 270,000 units, a reduction from our forecast in July, largely driven by the uncertain economic outlook in the U.S.,” said Cutler. “Despite the lower level of truck sales in the third quarter, our margins remained strong at 18.8 percent.”

The Automotive segment posted third quarter sales of $390 million, down 12 percent from the third quarter of 2011. Global automotive markets were flat, with U.S. markets up 8 percent and non-U.S. markets down 3 percent. The segment reported operating profits of $41 million, down 34 percent from the third quarter of 2011.

“U.S. automotive production in the third quarter of 2012 was strong while European automotive production in the quarter declined considerably,” said Cutler. “For all of 2012, we now expect global automotive markets to grow 2 percent, 1 percent less than our expectations in July.”

Eaton Corporation is a diversified power management company with more than 100 years of experience providing energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power. With 2011 sales of $16.0 billion, Eaton is a global technology leader in electrical components, systems and services for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 74,000 employees and sells products to customers in more than 150 countries. For more information, visit www.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. 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 discussed during the call.

This news release contains forward-looking statements concerning our fourth quarter sales, the closing of the Cooper acquisition, 2013 results and our worldwide markets. 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; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; increases 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; the impact of acquisitions and divestitures; unanticipated difficulties in completing or integrating acquisitions including Cooper; failure to close the Cooper acquisition; new laws and governmental regulations; interest rate changes; 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.

Financial Results

The company's comparative financial results for the three months and nine months ended September 30, 2012 are available on the company's website, www.eaton.com.

               
 
EATON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 

Three months
ended
September 30

   

Nine months
ended
September 30

(In millions except for per share data) 2012 2011 2012 2011
Net sales $ 3,950 $ 4,123 $ 11,978 $ 12,016
 
Cost of products sold 2,747 2,900 8,316 8,444
Selling and administrative expense 687 668 2,079 2,031
Research and development expense 102 104 313 316
Interest expense-net 42 29 100 92
Other (income) expense-net (4 ) (10 ) 7   (30 )
Income before income taxes 376 432 1,163 1,163
Income tax expense 29   65   123   172  
Net income 347 367 1,040 991
Less net income for noncontrolling interests (2 ) (2 ) (2 ) (3 )
Net income attributable to Eaton common shareholders $ 345   $ 365   $ 1,038   $ 988  
 
Net income per common share
Diluted $ 1.02 $ 1.07 $ 3.05 $ 2.86
Basic 1.02 1.07 3.08 2.90
 
Weighted-average number of common shares outstanding
Diluted 339.8 341.9 339.7 344.4
Basic 337.6 338.1 336.7 339.7
 
Cash dividends declared per common share $ 0.76 $ 0.34 $ 1.52 $ 1.02
 

Reconciliation of net income attributable to Eaton common shareholders to operating earnings

Net income attributable to Eaton common shareholders $ 345 $ 365 $ 1,038 $ 988
Excluding acquisition integration charges (after-tax) 18   2   30   6  
Operating earnings $ 363   $ 367   $ 1,068   $ 994  
 
Net income per common share - diluted $ 1.02 $ 1.07 $ 3.05 $ 2.86
Excluding per share impact of acquisition integration charges (after-tax) 0.05   0.01   0.09   0.02  
Operating earnings per common share $ 1.07   $ 1.08   $ 3.14   $ 2.88  
 

See accompanying notes.

               
 
EATON CORPORATION
BUSINESS SEGMENT INFORMATION
 
 

Three months
ended
September 30

   

Nine months
ended
September 30

(In millions) 2012 2011 2012 2011
Net sales
Electrical Americas $ 1,143 $ 1,074 $ 3,363 $ 3,071
Electrical Rest of World 686 755 2,020 2,285
Hydraulics 763 717 2,267 2,130
Aerospace 419 420 1,285 1,218
Truck 549 715 1,805 1,964
Automotive 390   442   1,238   1,348  
Total net sales $ 3,950   $ 4,123   $ 11,978   $ 12,016  
 
Segment operating profit
Electrical Americas $ 207 $ 156 $ 559 $ 432
Electrical Rest of World 76 62 181 209
Hydraulics 93 109 325 335
Aerospace 49 71 168 166
Truck 103 139 339 349
Automotive 41   62   133   167  
Total segment operating profit 569 599 1,705 1,658
 
Corporate
Amortization of intangible assets (45 ) (47 ) (129 ) (143 )
Interest expense-net (42 ) (29 ) (100 ) (92 )
Pension and other postretirement benefits expense (41 ) (35 ) (121 ) (105 )
Other corporate expense-net (65 ) (56 ) (192 ) (155 )
Income before income taxes 376 432 1,163 1,163
Income tax expense 29   65   123   172  
Net income 347 367 1,040 991
Less net income for noncontrolling interests (2 ) (2 ) (2 ) (3 )
Net income attributable to Eaton common shareholders $ 345   $ 365   $ 1,038   $ 988  
 

See accompanying notes.

           
 
EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 

September 30,
2012

December 31,
2011
(In millions)
Assets
Current assets
Cash $ 425 $ 385
Short-term investments 620 699
Accounts receivable-net 2,645 2,444
Inventory 1,801 1,701
Other current assets 704   597
Total current assets 6,195 5,826
 
Property, plant and equipment-net 2,794 2,602
 
Other noncurrent assets
Goodwill 5,838 5,537
Other intangible assets 2,253 2,192
Deferred income taxes 1,064 1,134
Other assets 656   582
Total assets $ 18,800   $ 17,873
 
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 108 $ 86
Current portion of long-term debt 307 321
Accounts payable 1,441 1,491
Accrued compensation 385 420
Other current liabilities 1,467   1,319
Total current liabilities 3,708   3,637
 
Noncurrent liabilities
Long-term debt 3,690 3,366
Pension liabilities 1,509 1,793
Other postretirement benefits liabilities 645 642
Deferred income taxes 569 442
Other noncurrent liabilities 437   501
Total noncurrent liabilities 6,850   6,744
 
Shareholders' equity
Eaton shareholders' equity 8,220 7,469
Noncontrolling interests 22   23
Total equity 8,242   7,492
Total liabilities and equity $ 18,800   $ 17,873
 

See accompanying notes.

 
 

EATON CORPORATION

NOTES TO THE THIRD QUARTER 2012 EARNINGS RELEASE

Amounts are in millions of dollars unless indicated otherwise (per share data assume dilution).

This earnings release includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per common share, and operating profit before acquisition integration charges for each business segment as well as corporate expense, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in this earnings release. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton's financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.

 

Note 1. ACQUISITIONS OF BUSINESSES

In 2012 and 2011, Eaton acquired businesses and entered into a joint venture in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions and the related annual sales prior to acquisition are summarized below:

Acquired businesses and joint venture        

Date of
transaction

   

Business
segment

   

Annual
sales

Rolec Comercial e Industrial S.A.

September 28,

Electrical

$85 for the

A Chilean manufacturer of integrated power assemblies and low- and medium-voltage switchgear, and a provider of engineering services serving mining and other heavy industrial applications in Chile and Peru.

2012

Americas

12 months
ended
September 30,
2012


 
Jeil Hydraulics Co., Ltd.

July 6,

Hydraulics

$189 for 2011

A Korean manufacturer of track drive motors, swing drive motors, main control valves and remote control valves for the construction equipment market.

2012

 
Polimer Kaucuk Sanayi ve Pazarlama A.S.

June 1,

Hydraulics $335 for 2011
A Turkish manufacturer of hydraulic and industrial hose for construction, mining, agriculture, oil and gas, manufacturing, food and beverage, and chemicals markets. This business sells its products under the SEL brand name.

2012

 
Gycom Electrical Low-Voltage Power Distribution, Control and Automation

June 1,

Electrical

$24 for 2011
A Swedish electrical low-voltage power distribution, control and automation components business.

2012

Rest of
World

 
E.A. Pedersen Company

December 29,

Electrical

$37 for 2011
A United States manufacturer of medium voltage switchgear, metal-clad switchgear, power control buildings and relay control panels primarily for the electrical utilities industry.

2011

Americas

 
IE Power, Inc.

August 31,

Electrical

$5 for 2010
A Canadian provider of high power inverters for a variety of mission-critical applications including solar, wind and battery energy storage.

2011

Americas

 
E. Begerow GmbH & Co. KG

August 15,

Hydraulics $84 for 2010
A German system provider of advanced liquid filtration solutions. This business develops and produces technologically innovative filter media and filtration systems for food and beverage, chemical, pharmaceutical and industrial applications.

2011

 
ACTOM Low Voltage

June 30,

Electrical

$65 for the

A South African manufacturer and supplier of motor control components, engineered electrical distribution systems and uninterruptible power supply (UPS) systems.

2011

Rest of
World

year ended
May 31,
2011

 
C.I. ESI de Colombia S.A.

June 2,

Electrical

$8 for 2010
A Colombian distributor of industrial electrical equipment and engineering services in the Colombian market, focused on oil and gas, mining, and industrial and commercial construction.

2011

Americas

 
Internormen Technology Group

May 12,

Hydraulics $55 for 2010
A Germany-based manufacturer of hydraulic filtration and instrumentation with sales and distribution subsidiaries in China, the United States, India and Brazil.

2011

 
Eaton-SAMC (Shanghai) Aircraft Conveyance System Manufacturing Co., Ltd.

March 8,

Aerospace Joint venture
A 49%-owned joint venture in China focusing on the design, development, manufacturing and support of fuel and hydraulic conveyance systems for the global civil aviation market.

2011

 
Tuthill Coupling Group

January 1,

Hydraulics

$35 for the

A United States based manufacturer of pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications.

2011

year ended
November 30,
2010

 

On May 21, 2012, Eaton reached an agreement to acquire Cooper Industries plc (Cooper). Cooper is incorporated in Ireland and is a diversified global manufacturer of electrical components and tools with sales of $5.4 billion for 2011. At the close of the transaction, Eaton and Cooper will be combined under a newly created company (New Eaton), which is currently called Eaton Corporation Limited and is incorporated in Ireland. The total consideration to be received by Cooper shareholders in the transaction is comprised of both cash and equity and has a value of approximately $11.8 billion based on the closing share price of Eaton common stock of $42.40 on May 18, 2012. At the close of the transaction, the former shareholders of Eaton and Cooper are expected to own approximately 73% and 27% of New Eaton, respectively. The transaction was approved by shareholders of both companies on October 26, 2012, and is subject to receipt of certain regulatory approvals and other customary conditions. The transaction is expected to close in the fourth quarter of 2012.

 

Note 2. ACQUISITION INTEGRATION CHARGES

Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:

        Three months ended September 30

Acquisition
integration charges

   

Operating profit
as reported

   

Operating profit
excluding acquisition
integration charges

Business segment

2012   2011 2012   2011 2012   2011
Electrical Americas $ 1 $ 3 $ 207 $ 156 $ 208 $ 159
Electrical Rest of World 1 76 62 77 62
Hydraulics 5 1 93 109 98 110
Aerospace 49 71 49 71
Truck 103 139 103 139
Automotive     41   62   41   62
Total business segments before income taxes 7 4 $ 569   $ 599   $ 576   $ 603
Corporate 20    
Total before income taxes $ 27   $ 4  
After-tax integration charges $ 18 $ 2
Per common share $ 0.05 $ 0.01
 
Nine months ended September 30

Acquisition
integration charges

Operating profit
as reported

Operating profit
excluding acquisition
integration charges

Business segment

2012 2011 2012 2011 2012 2011
Electrical Americas $ 4 $ 7 $ 559 $ 432 $ 563 $ 439
Electrical Rest of World 5 1 181 209 186 210
Hydraulics 9 1 325 335 334 336
Aerospace 168 166 168 166
Truck 339 349 339 349
Automotive     133   167   133   167
Total business segments before income taxes 18 9 $ 1,705   $ 1,658   $ 1,723   $ 1,667
Corporate 28    
Total before income taxes $ 46   $ 9  
After-tax integration charges $ 30 $ 6
Per common share $ 0.09 $ 0.02
 

Business segment charges for the third quarter of 2012 were related primarily to Internormen Technology Group, Jeil Hydraulics, Polimer Kaucuk Sanayi ve Pazarlama (SEL) and E. Begerow GmbH & Co. KG. Business segment charges for the first nine months of 2012 were related primarily to The Moeller Group, Internormen Technology Group, E. Begerow GmbH & Co. KG and Tuthill Coupling Group. Business segment charges in 2011 were related primarily to CopperLogic, Wright Line Holding and EMC Engineers. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

Corporate charges in 2012 were related primarily to pre-acquisition transaction costs associated with the planned acquisition of Cooper. These charges were included in Selling and administrative expense and Interest expense-net. In Business Segment Information, the charges were included in Interest expense-net and Other corporate expense-net.

 

Note 3. RETIREMENT BENEFITS PLANS

The components of retirement benefits expense follow:

        Three months ended September 30

Pension
benefit expense

   

Other postretirement
benefits expense

2012   2011 2012   2011
Service cost $ 41 $ 35 $ 5 $ 4
Interest cost 51 52 10 10
Expected return on plan assets (64 ) (58 ) (2 )
Amortization 33   22   3   3
61 51 16 17
Curtailment loss 1
Settlement loss 8   5    
Total expense $ 69   $ 57   $ 16   $ 17
 
Nine months ended September 30

Pension
benefit expense

Other postretirement
benefits expense

2012 2011 2012 2011
Service cost $ 123 $ 106 $ 13 $ 12
Interest cost 156 158 29 30
Expected return on plan assets (192 ) (176 ) (5 )
Amortization 99   66   10   9
186 154 47 51
Curtailment loss 1
Settlement loss 19   15    
Total expense $ 205   $ 170   $ 47   $ 51
 
 

Note 4. INCOME TAXES

The effective income tax rate for the third quarter of 2012 was 7.7% compared to 15.2% for the third quarter of 2011 and 10.6% for the first nine months of 2012 compared to 14.8% for the first nine months of 2011. The lower effective tax rate in the third quarter of 2012 was primarily attributable to the utilization of deferred tax assets in Asia Pacific jurisdictions, as well as adjustments related to the filing of the 2011 income tax returns in the United States and international tax jurisdictions. The lower effective tax rate in the first nine months of 2012 was attributable to the items noted above, the favorable impact of enhanced investment incentives in Europe, and a reduction in deferred tax liabilities in a European jurisdiction due to the realization of a lower effective tax rate.

Eaton Corporation
Media Relations
Scott Schroeder, 216-523-5150
scottrschroeder@eaton.com
or
Investor Relations
Donald Bullock, 216-523-5127





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