ETN Eaton Corp New

Diversified industrial manufacturer Eaton Corporation plc (NYSE:ETN) today announced record quarterly sales and operating profits, driven by the acquisition of Cooper Industries. Sales in the first quarter of 2013 were $5.31 billion, 34 percent above the same period in 2012. Operating earnings for the first quarter of 2013, excluding charges of $22 million to integrate recent acquisitions, were a record $400 million, an increase of 28 percent over 2012. Operating earnings per share, which exclude charges of $0.05 per share to integrate recent acquisitions, were $0.84 for the first quarter of 2013. This result is a decrease of 9 percent from the first quarter of 2012, reflecting the shares issued as part of the acquisition of Cooper Industries and the purchase price accounting charges resulting from the transaction.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our first quarter results are a solid start to the year, coming in above the high end of our guidance despite markets being slightly weaker than our expectations. We were able to generate attractive operating margins, reflecting our enhanced portfolio as a result of the Cooper Industries acquisition and our continued focus on productivity improvements.

“Our 34 percent sales growth in the first quarter consisted of a decline of 5 percent in core sales and a 1 percent decline from currency translation, offset by 40 percent growth from acquisitions,” said Cutler. “Our markets in the first quarter were lower than a year ago, reflecting a continuation of the sluggish economic conditions experienced in many parts of the world during the second half of 2012.

“We entered 2013 expecting it would be a year of subpar global economic growth, leading to approximately 2 to 3 percent growth in our markets,” said Cutler. “We continue to believe our markets will grow 2 to 3 percent in 2013, most likely toward the lower end of the range.

“We anticipate operating earnings per share for the second quarter of 2013, which exclude an estimated $25 million of charges to integrate our recent acquisitions, to be between $1.05 and $1.15,” said Cutler. “There are two primary drivers of the expected increase in second quarter operating earnings per share over the first quarter: first, seasonally higher volumes, since our sales in the second quarter are typically 5 to 10 percent higher, and second, the absence of purchase price inventory expense in the second quarter related to the Cooper Industries acquisition.

“We are maintaining our guidance for full year operating earnings per share of between $4.05 and $4.45,” said Cutler. “2013 is a year in which our results will depend more on our execution than on global growth. We are off to a great start this year, with our execution driving stronger than expected results in the first quarter. Based on the midpoint of our guidance, our operating earnings per share in 2013 will grow 8 percent.”

Business Segment Results

Sales for the Electrical Products segment were $1.7 billion, up 87 percent over 2012, reflecting the impact of the Cooper Industries acquisition. Operating profits were $241 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $244 million, up 76 percent over the first quarter of 2012.

“Our bookings in the Electrical Products segment were down 3 percent from the combined bookings of Eaton and legacy Cooper in the first quarter a year ago,” said Cutler.

Sales for the Electrical Systems and Services segment were $1.5 billion, up 79 percent over the first quarter of 2012, reflecting the impact of the Cooper Industries acquisition. The segment reported operating profits of $210 million. Excluding acquisition integration charges of $5 million during the quarter, operating profits were $215 million, up 176 percent. Combined bookings in the quarter increased 2 percent compared to the first quarter of 2012.

“In both of our Electrical segments, our end markets were strongest in the U.S., the Middle East and Latin America, with mixed conditions in Asia Pacific and weakness in Europe,” said Cutler. “We believe sales will improve during the balance of the year, in line with the normal seasonal pattern of demand.”

Hydraulics segment sales were $756 million, an increase of 3 percent compared to the first quarter of 2012. Sales growth was driven by revenues from acquisitions completed in 2012, which accounted for 13 percent growth, offset by a 9 percent decline in core sales and a 1 percent decline from currency translation. Operating profits in the first quarter were $78 million. Excluding acquisition integration charges of $12 million, operating profits were $90 million, a decline of 18 percent.

“The hydraulics markets in the first quarter grew modestly compared to the fourth quarter,” said Cutler. “Compared to strong conditions in the first quarter of 2012, the year-over-year comparisons are negative. Reflecting this, our bookings in the quarter declined 8 percent from the first quarter of 2012.”

Aerospace segment sales were $434 million, up 1 percent over the first quarter of 2012. Operating profits in the first quarter were $62 million, an increase of 3 percent compared to a year earlier.

“Aerospace markets grew modestly in the first quarter, with strongest growth in the commercial OEM market,” said Cutler.

The Vehicle segment posted sales of $939 million, down 11 percent compared to the first quarter of 2012. The segment reported operating profits in the first quarter of $132 million, a decrease of 18 percent from the first quarter of 2012.

“Continuing the trends we saw in the second half of last year, our NAFTA and European customers experienced generally weaker market conditions,” said Cutler.

Notice of conference call: Eaton’s conference call to discuss its first 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 first quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning second quarter and full year 2013 operating earnings per share, acquisition integration charges, and the performance of 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; 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 performance of recent acquisitions; unanticipated difficulties integrating acquisitions; 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 ended March 31, 2013 are available on the company’s website, www.eaton.com.

Eaton is a diversified power management company providing energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power. A global technology leader, Eaton acquired Cooper Industries plc in November 2012. The 2012 revenue of the combined companies was $21.8 billion on a pro forma basis. Eaton has approximately 103,000 employees and sells products to customers in more than 175 countries. For more information, visit www.eaton.com.

              EATON CORPORATION plc CONSOLIDATED STATEMENTS OF INCOME    

Three months endedMarch 31

  (In millions except for per share data) 2013 2012 Net sales $ 5,310 $

3,960

 

  Cost of products sold 3,735 2,754 Selling and administrative expense 958 702 Research and development expense 152 105 Interest expense-net 75 28 Other (income) expense-net (10 ) 3   Income before income taxes 400 368 Income tax expense 20   57   Net income 380 311 Less net income for noncontrolling interests (2 ) —   Net income attributable to Eaton ordinary shareholders $ 378   $ 311     Net income per ordinary share Diluted $ 0.79 $ 0.91 Basic 0.80 0.93   Weighted-average number of ordinary shares outstanding Diluted 475.1 339.8 Basic 471.9 335.4   Cash dividends declared per ordinary share $ 0.42 $ 0.38  

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

Net income attributable to Eaton ordinary shareholders $ 378 $ 311 Excluding acquisition integration charges and transaction costs (after-tax) 22   2   Operating earnings $ 400   $ 313     Net income per ordinary share - diluted $ 0.79 $ 0.91

Excluding per share impact of acquisition integration charges and transaction costs (after-tax)

0.05   0.01   Operating earnings per ordinary share $ 0.84   $ 0.92  

See accompanying notes.

                EATON CORPORATION plc BUSINESS SEGMENT INFORMATION     Three months endedMarch 31   (In millions) 2013 2012 Net sales Electrical Products $ 1,660 $ 886 Electrical Systems and Services 1,521 852 Hydraulics 756 735 Aerospace 434 430 Vehicle 939   1,057   Total net sales $ 5,310   $ 3,960     Segment operating profit Electrical Products $ 241 $ 139 Electrical Systems and Services 210 76 Hydraulics 78 109 Aerospace 62 60 Vehicle 132   160   Total segment operating profit 723 544   Corporate Amortization of intangible assets (107 ) (42 ) Interest expense-net (75 ) (28 ) Pension and other postretirement benefits expense (38 ) (41 ) Inventory step-up adjustment (33 ) (2 ) Other corporate expense-net (70 ) (63 ) Income before income taxes 400 368 Income tax expense 20   57   Net income 380 311 Less net income for noncontrolling interests (2 ) —   Net income attributable to Eaton ordinary shareholders $ 378   $ 311  

See accompanying notes.

                EATON CORPORATION plc CONDENSED CONSOLIDATED BALANCE SHEETS   March 31,2013 December 31,2012 (In millions) Assets Current assets Cash $ 639 $ 577 Short-term investments 397 527 Accounts receivable-net 3,685 3,510 Inventory 2,394 2,349 Deferred income taxes 459 449 Prepaid expenses and other current assets 622 432 Total current assets 8,196 7,844   Property, plant and equipment-net 3,841 3,877   Other noncurrent assets Goodwill 14,275 14,396 Other intangible assets 6,664 6,779 Deferred income taxes 1,103 1,254 Other assets 898 1,698 Total assets $ 34,977 $ 35,848   Liabilities and shareholders’ equity Current liabilities Short-term debt $ 84 $ 757 Current portion of long-term debt 569 314 Accounts payable 1,978 1,879 Accrued compensation 318 463 Other current liabilities 1,954 2,018 Total current liabilities 4,903 5,431   Noncurrent liabilities Long-term debt 9,473 9,762 Pension liabilities 1,794 1,997 Other postretirement benefits liabilities 728 732 Deferred income taxes 2,007 2,024 Other noncurrent liabilities 862 774 Total noncurrent liabilities 14,864 15,289   Shareholders’ equity Eaton shareholders’ equity 15,167 15,086 Noncontrolling interests 43 42 Total equity 15,210 15,128 Total liabilities and equity $ 34,977 $ 35,848

See accompanying notes.

EATON CORPORATION plcNOTES TO THE FIRST QUARTER 2013 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 ordinary share, and operating profit before acquisition integration charges and transaction costs 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 AND SALE OF BUSINESSES

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

Acquired businesses        

Date of

transaction

    Business

segment

    Annual sales Cooper Industries plc (Cooper)

November 30,

Electrical

$5,409

A diversified global manufacturer of electrical products and systems, with brands including Bussmann electrical and electronic fuses; Crouse-Hinds and CEAG explosion-proof electrical equipment; Halo and Metalux lighting fixtures; and Kyle and McGraw-Edison power systems products.

2012

Products;ElectricalSystems andServices

for 2011

  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

Systems andServices

12 monthsendedSeptember 30,2012

  Jeil Hydraulics Co., Ltd.

July 6,

Hydraulics

$189

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

2012

for 2011

  Polimer Kaucuk Sanayi ve Pazarlama A.S.

June 1,

Hydraulics

$335

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

for 2011

  Gycom Electrical Low-Voltage Power Distribution, Control and Automation

June 1,

Electrical

$24

A Swedish electrical low-voltage power distribution, control and automation components business.

2012

Systems andServices

for 2011

 

Sale of Apex Tool Group, LLC

On October 10, 2012, Cooper and Danaher announced they had entered into a definitive agreement to sell Apex Tool Group, LLC (Apex) to Bain Capital for approximately $1.6 billion subject to post-closing adjustments. On February 1, 2013, the sale of Apex was completed.

Note 2. ACQUISITION INTEGRATION CHARGES AND TRANSACTION COSTS

Eaton incurs integration charges and transaction costs related to acquired businesses. A summary of these charges follows:

        Three months ended March 31

Acquisitionintegration charges andtransaction costs

   

Operating profitas reported

   

Operating profitexcluding acquisitionintegration charges

2013   2012 2013   2012 2013   2012 Acquisition integration charges Electrical Products $ 3 $ — $ 241 $ 139 $ 244 $ 139 Electrical Systems and Services 5 2 210 76 215 78 Hydraulics 12 1 78 109 90 110 Aerospace — — 62 60 62 60 Vehicle —   —   132   160   132  

160

 

Total business segments 20 3 $ 723   $ 544   $ 743   $ 547   Corporate integration charges 6   —   Total acquisition integration charges $ 26   $ 3     Transaction costs Corporate transaction costs $ 5   $ —   Total transaction costs $ 5   $ —     Total acquisition integration charges and transaction costs before income taxes $ 31   $ 3   Total after income taxes $ 22 $ 2 Per ordinary share - diluted $ 0.05 $ 0.01  

Business segment integration charges for the first quarter of 2013 were related primarily to Cooper, Polimer Kaucuk Sanayi ve Pazarlama, Jeil Hydraulics, and Rolec Comercial e Industrial S.A. Business segment integration charges for the first quarter of 2012 were related primarily to ACTOM Low Voltage, E. Begerow GmbH & Co. KG, Tuthill Coupling Group and Internormen Technology Group. 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 integration charges in 2013 were related to the acquisition of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information the charges were included in Other corporate expense-net.

Acquisition-related transaction costs, such as investment banking, legal, and other professional fees are not included as a component of consideration transferred in an acquisition but are expensed as incurred. Acquisition related transaction costs in 2013 were related to the acquisition of Cooper. These charges were included in Selling and administrative expense, Interest expense-net and Other corporate expense-net. In Business Segment Information the charges were included in Interest expense-net and Other corporate expense-net.

See Note 1 for additional information about Cooper and other business acquisitions.

Note 3. RETIREMENT BENEFITS PLANS

The components of retirement benefits expense follow:

        Three months ended March 31

Pensionbenefit expense

   

Other postretirementbenefits expense

2013   2012 2013   2012 Service cost $ 47 $ 41 $ 5 $ 4 Interest cost 57 53 9 9 Expected return on plan assets (78 ) (64 ) (2 ) (1 ) Amortization 40   33   3   4   66 63 15 16 Settlement loss 6   6   —   —   Total expense $ 72   $ 69   $ 15   $ 16    

Note 4. INCOME TAXES

The effective income tax rate for the first quarter of 2013 was 5.0% compared to 15.6% for the first quarter of 2012. The lower effective tax rate in the first quarter of 2013 was primarily attributable to recording in the first quarter of 2013 the entire U.S. research and experimentation credit for 2012 as a result of a legislative change that occurred in January 2013, the effects of the Cooper transaction and integration, and enhanced utilization of foreign tax credits in the U.S.