ETN Eaton Corp New

Excluding Income of $62 Million Related to the New U.S. Tax Bill, Net Income and Adjusted Earnings Per Share Were $1.29, Up 15 Percent Over Fourth Quarter of 2016 and at High End of Guidance Range

Operating Cash Flow in the Fourth Quarter of $879 Million, Resulting in Record Full Year Operating Cash Flow of $2.7 Billion

2018 Net Income and Adjusted Earnings per Share Expected to be Between $5.00 and $5.20, Reflecting 10 percent Growth at Midpoint of Range, Excluding the Gain on Eaton Cummins Joint Venture and the Income Related to the New U.S. Tax Bill in 2017

Power management company Eaton Corporation plc (NYSE:ETN) today announced that net income and adjusted earnings per share were $1.43 for the fourth quarter of 2017. Adjusted earnings per share excludes $1 million of acquisition integration charges recorded in the quarter. Excluding income in the quarter of $62 million related to the new U.S. tax bill, net income and adjusted earnings per share were $1.29, up 15 percent over the fourth quarter of 2016.

Sales in the fourth quarter of 2017 were $5.2 billion, up 7 percent over the same period in 2016. The sales increase consisted of 5 percent growth in organic sales and 2 percent increase from positive currency translation.

Craig Arnold, Eaton chairman and chief executive officer, said, “We had a strong fourth quarter, with revenues above the high end of our guidance range, and net income and adjusted earnings per share, excluding the impact of the new U.S. tax bill, at the high end of our guidance range. Coming into the quarter, we expected organic sales would be up between 3 and 4 percent and currency translation would add 1½ percent growth. Our organic sales ended up growing 5 percent, and positive currency translation impacted sales 2 percent. The 5 percent organic growth was our highest quarterly rate of growth during 2017.

“The impact of the new U.S. tax bill was income of $62 million in the fourth quarter,” said Arnold. “Marking our deferred tax assets and liabilities to the lower tax rate created $79 million of income, which was offset by a $17 million charge for the mandatory repatriation tax.

“Our orders in the fourth quarter grew rapidly in every segment,” said Arnold. “Segment margins in the fourth quarter were a record 16.5 percent. Excluding restructuring costs in the segments of $36 million in the quarter, segment margins were 17.1 percent.

“Operating cash flow in the fourth quarter was $879 million,” said Arnold. “We continued to return substantial cash to our shareholders, repurchasing $61 million of our shares in the quarter, making our full year repurchases a total of $850 million, 2.5 percent of our shares outstanding at the beginning of the year.”

For full year 2017, sales were $20.4 billion, 3 percent higher than 2016. Net income and adjusted earnings per share were $6.68. Excluding the gain on the Cummins JV and the income arising from the new tax bill, net income and adjusted earnings per share were $4.65 per share, up 11 percent and 10 percent, respectively, over 2016. Operating cash flow in 2017 was a record $2.7 billion. Excluding $350 million contributed to our U.S. qualified pension plans during the year, operating cash flow was $3.0 billion.

“Looking at 2018, we expect our organic revenues to grow approximately 4 percent,” said Arnold. “We anticipate segment margins to be between 16.3 and 16.9 percent, a significant step up from 15.8 percent in 2017.

“We expect 2018 net income and adjusted earnings per share to be between $5.00 and $5.20, representing at the midpoint a 10 percent increase over 2017, excluding the gain on the Cummins JV and the income arising from the new tax bill in 2017,” said Arnold. “We anticipate net income and adjusted earnings per share for the first quarter of 2018 to be between $1.00 and $1.10.”

Business Segment Results

Sales for the Electrical Products segment were $1.8 billion, up 6 percent over the fourth quarter of 2016. Organic sales were up 3 percent and currency translation was positive 3 percent. Operating profits, excluding acquisition integration charges of $1 million during the quarter, were $331 million, up 4 percent over the fourth quarter of 2016.

“Operating margins in the fourth quarter were 18.2 percent, and excluding restructuring costs of $15 million, 19.0 percent,” said Arnold. “Orders in the fourth quarter were up 5 percent over the fourth quarter of 2016, driven by growth in the Americas and EMEA.”

Sales for the Electrical Systems and Services segment were $1.5 billion, up 3 percent over the fourth quarter of 2016. Organic sales were up 2 percent while currency translation was positive 2 percent. During the quarter we divested our stake in a joint venture, which reduced sales by 1 percent. Segment operating profits were $225 million, up 27 percent over the fourth quarter of 2016. Excluding restructuring costs of $9 million in 2017 and $29 million in 2016, operating profits were up 14 percent.

“Operating margins were 15.0 percent, and excluding the $9 million restructuring costs, 15.6 percent,” said Arnold. “Orders in fourth quarter were up 12 percent over the fourth quarter of 2016, led by strong growth in the Americas. We saw particular strength in power distribution assemblies, harsh and hazardous systems, and services.”

Hydraulics segment sales were $614 million, up 18 percent over the fourth quarter of 2016. Organic sales were up 17 percent and currency translation was positive 1 percent. Operating profits in the fourth quarter were $74 million, an increase of 100 percent over the fourth quarter of 2016. Excluding restructuring costs of $6 million in 2017 and $23 million in 2016, operating profits were up 33 percent.

“Operating margins in the quarter were 12.1 percent, and excluding the restructuring costs of $6 million, 13.0 percent,” said Arnold. “Hydraulics orders in the fourth quarter of 2017 were up 25 percent over the fourth 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 $441 million, up 4 percent over the fourth quarter of 2016. Organic sales were up 2 percent and currency translation was positive 2 percent. Operating profits in the fourth quarter were $88 million, up 5 percent over the fourth quarter of 2016.

“Operating margins in the quarter were 20.0 percent,” said Arnold. “Orders in the quarter were up 9 percent compared to the fourth quarter of 2016. We saw strength in almost all major end markets.”

The Vehicle segment posted sales of $838 million, up 13 percent over the fourth quarter of 2016. Organic sales were up 12 percent and currency translation was positive 3 percent, partially offset by negative 2 percent impact from the formation of the Eaton Cummins joint venture. Operating profits in the fourth quarter were $140 million, up 44 percent over the fourth quarter of 2016. Excluding restructuring costs of $5 million in 2017 and $13 million in 2016, operating profits were up 32 percent.

“Operating margins in the quarter were 16.7 percent, and excluding the restructuring costs of $5 million, 17.3 percent,” said Arnold.

Eaton is a power management company with 2017 sales of $20.4 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 fourth 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 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 fourth quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning first quarter and full-year 2018 net income and adjusted earnings per share, and 2018 organic revenue growth and segment margins. 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.

Financial Results

The company’s comparative financial results for the twelve months ended December 31, 2017 are available on the company’s website, www.eaton.com.

        EATON CORPORATION plc CONSOLIDATED STATEMENTS OF INCOME  

Three months endedDecember 31

Year endedDecember 31

(In millions except for per share data) 2017 2016* 2017 2016* Net sales $ 5,213 $ 4,867 $ 20,404 $ 19,747   Cost of products sold 3,535 3,319 13,756 13,409 Selling and administrative expense 862 863 3,565 3,505 Research and development expense 144 145 584 589 Interest expense - net 65 60 246 233 Gain on sale of business — — 1,077 — Other income - net (28 ) (79 ) (38 ) (107 ) Income before income taxes 635 559 3,368 2,118 Income tax expense 1   51   382   199   Net income 634 508 2,986 1,919 Less net income for noncontrolling interests —   (4 ) (1 ) (3 ) Net income attributable to Eaton ordinary shareholders $ 634   $ 504   $ 2,985   $ 1,916     Net income per share attributable to Eaton ordinary shareholders Diluted $ 1.43 $ 1.12 $ 6.68 $ 4.20 Basic 1.44 1.12 6.71 4.21   Weighted-average number of ordinary shares outstanding Diluted 443.3 452.4 447.0 456.5 Basic 440.3 450.5 444.5 455.0  

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

Net income attributable to Eaton ordinary shareholders $ 634 $ 504 $ 2,985 $ 1,916 Excluding acquisition integration charges (after-tax) 1   1   2   3   Adjusted earnings $ 635   $ 505   $ 2,987   $ 1,919     Net income per share attributable to Eaton ordinary shareholders - diluted $ 1.43 $ 1.12 $ 6.68 $ 4.20 Excluding per share impact of acquisition integration charges (after-tax) —   —   —   0.01   Adjusted earnings per ordinary share $ 1.43   $ 1.12   $ 6.68   $ 4.21  

*Year and three months ended December 31, 2016 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note 2.

See accompanying notes.

        EATON CORPORATION plc BUSINESS SEGMENT INFORMATION  

Three months endedDecember 31

Year endedDecember 31

(In millions) 2017 2016* 2017 2016* Net sales Electrical Products $ 1,822 $ 1,726 $ 7,193 $ 6,957 Electrical Systems and Services 1,498 1,455 5,666 5,662 Hydraulics 614 520 2,468 2,222 Aerospace 441 425 1,744 1,753 Vehicle 838   741   3,333   3,153   Total net sales $ 5,213   $ 4,867   $ 20,404   $ 19,747     Segment operating profit Electrical Products $ 330 $ 316 $ 1,287 $ 1,240 Electrical Systems and Services 225 177 770 711 Hydraulics 74 37 288 198 Aerospace 88 84 332 335 Vehicle 140   97   537   474   Total segment operating profit 857 711 3,214 2,958   Corporate Amortization of intangible assets (100 ) (95 ) (388 ) (392 ) Interest expense - net (65 ) (60 ) (246 ) (233 ) Pension and other postretirement benefits expense (7 ) (15 ) (45 ) (60 ) Gain on sale of business — — 1,077 — Other corporate income (expense) - net (50 ) 18   (244 ) (155 ) Income before income taxes 635 559 3,368 2,118 Income tax expense 1   51   382   199   Net income 634 508 2,986 1,919 Less net income for noncontrolling interests —   (4 ) (1 ) (3 ) Net income attributable to Eaton ordinary shareholders $ 634   $ 504   $ 2,985   $ 1,916  

*Year and three months ended December 31, 2016 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note 2.

See accompanying notes.

    EATON CORPORATION plc CONDENSED CONSOLIDATED BALANCE SHEETS  

December 31,2017

December 31,2016*

(In millions) Assets Current assets Cash $ 561 $ 543 Short-term investments 534 203 Accounts receivable - net 3,943 3,560 Inventory 2,620 2,346 Prepaid expenses and other current assets 656   381 Total current assets 8,314 7,033   Property, plant and equipment - net 3,502 3,443   Other noncurrent assets Goodwill 13,568 13,201 Other intangible assets 5,265 5,514 Deferred income taxes 253 325 Other assets 1,698   960 Total assets $ 32,600   $ 30,476   Liabilities and shareholders’ equity Current liabilities Short-term debt $ 6 $ 14 Current portion of long-term debt 578 1,552 Accounts payable 2,166 1,718 Accrued compensation 453 379 Other current liabilities 1,849   1,822 Total current liabilities 5,052   5,485   Noncurrent liabilities Long-term debt 7,167 6,711 Pension liabilities 1,226 1,659 Other postretirement benefits liabilities 362 368 Deferred income taxes 538 321 Other noncurrent liabilities 965   934 Total noncurrent liabilities 10,258   9,993   Shareholders’ equity Eaton shareholders’ equity 17,253 14,954 Noncontrolling interests 37   44 Total equity 17,290   14,998 Total liabilities and equity $ 32,600   $ 30,476

*December 31, 2016 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note 2.

See accompanying notes.

EATON CORPORATION plcNOTES TO THE FOURTH QUARTER 2017 EARNINGS RELEASE

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

Note 1. NON-GAAP FINANCIAL INFORMATION

This earnings release includes certain non-GAAP financial measures. These financial measures include adjusted earnings, adjusted earnings per ordinary share, net income and adjusted earnings per ordinary share excluding the gain on the sale of a business and income from the new United States (U.S.) tax bill, and operating profit before acquisition integration charges for each business segment as well as corporate, each of which differs 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 certain transactions, allowing investors to more easily compare Eaton Corporation plc's (Eaton or the Company) financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.

Net income and adjusted earnings per ordinary share of $1.43 for the three months ended December 31, 2017 were $1.29 excluding $0.14 per share of income from the new U.S. tax bill. Net income and adjusted earnings per ordinary share of $6.68 for the year ended December 31, 2017 were $4.65 excluding $1.89 per share from the gain on the sale of the business related to the Eaton Cummins Automated Transmission Technologies joint venture and $0.14 per share of income from the new U.S. tax bill.

Note 2. CHANGE IN ACCOUNTING POLICY

During the fourth quarter of 2017, the Company changed its method of accounting for certain inventory in the United States from the last-in, first-out (LIFO) method to the first-in, first out (FIFO) method. The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers. All prior periods presented have been retrospectively adjusted to apply the new method of accounting.

The Tax Cuts and Jobs Act ("TCJA"), which was signed into law on December 22, 2017, would have required $14 of additional tax expense to adjust the deferred tax asset related to the LIFO reserve to the new tax rate if inventories continued to be computed under the LIFO method. The change from the LIFO method to the FIFO method eliminated the need to record this $14 of additional tax expense.

The following financial statement line items within the accompanying financial statements were adjusted, as follows:

   

Three months endedDecember 31, 2017

 

Three months endedDecember 31, 2016

(In millions except for per share data)

AscomputedunderLIFO

 

AsreportedunderFIFO

  Effect of change

Asoriginallyreported

 

Asadjusted

 

Effect ofchange

TCJA   Other Consolidated Statements of Income Cost of products sold $ 3,541 $ 3,535 $ — $ (6 ) $ 3,319 $ 3,319 $ — Income before income taxes 629 635 — 6 559 559 — Income tax expense 13 1 (14 ) 2 51 51 — Net income 616 634 14 4 508 508 — Net income attributable to Eaton ordinary shareholders 616 634 14 4 504 504 —   Net income per ordinary share Diluted $ 1.39 $ 1.43 $ 0.03 $ 0.01 $ 1.12 $ 1.12 $ — Basic $ 1.40 $ 1.44 $ 0.03 $ 0.01 $ 1.12 $ 1.12 $ —   Adjusted earnings Adjusted earnings $ 617 $ 635 $ 14 $ 4 $ 505 $ 505 $ — Adjusted earnings per ordinary share $ 1.39 $ 1.43 $ 0.03 $ 0.01 $ 1.12 $ 1.12 $ —   Business Segment information Other corporate income (expense) - net $ (56 ) $ (50 ) $ — $ (6 ) $ 18 $ 18 $ —    

Year endedDecember 31, 2017

 

Year EndedDecember 31, 2016

(In millions except for per share data)

AscomputedunderLIFO

 

AsreportedunderFIFO

 

Effect of change

Asoriginallyreported

 

Asadjusted

 

Effect ofchange

TCJA

  Other Consolidated Statements of Income Cost of products sold $ 13,770 $ 13,756 $ — $ (14 ) $ 13,400 $ 13,409 $ 9 Income before income taxes 3,354 3,368 — 14 2,127 2,118 (9 ) Income tax expense 391 382 (14 ) 5 202 199 (3 ) Net income 2,963 2,986 14 9 1,925 1,919 (6 ) Net income attributable to Eaton ordinary shareholders 2,962 2,985 14 9 1,922 1,916 (6 )   Net income per ordinary share Diluted $ 6.63 $ 6.68 $ 0.03 $ 0.02 $ 4.21 $ 4.20 $ (0.01 ) Basic $ 6.66 $ 6.71 $ 0.03 $ 0.02 $ 4.22 $ 4.21 $ (0.01 )   Adjusted earnings Adjusted earnings $ 2,964 $ 2,987 $ 14 $ 9 $ 1,925 $ 1,919 $ (6 ) Adjusted earnings per ordinary share $ 6.63 $ 6.68 $ 0.03 $ 0.02 $ 4.22 $ 4.21 $ (0.01 )   Business Segment information Other corporate income (expense) - net $ (258 ) $ (244 ) $ — $ (14 ) $ (146 ) $ (155 ) $ 9    

December 31, 2017

   

December 31, 2016

(In millions)

Ascomputedunder LIFO

 

As reportedunder FIFO

 

Effect ofchange

 

Asoriginallyreported

 

Asadjusted

 

Effect ofchange

Condensed Consolidated Balance Sheets Inventory $ 2,514 $ 2,620 $ 106 $ 2,254 $ 2,346 $ 92 Deferred income taxes - noncurrent asset 253 253 — 360 325 (35 ) Deferred income taxes - noncurrent liability 512 538 26 321 321 — Total equity 17,210 17,290 80 14,941 14,998 57  

Note 3. SALE OF A BUSINESS

On July 31, 2017, Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated transmission business for $600 in cash to Cummins, Inc. The new joint venture is named Eaton Cummins Automated Transmission Technologies. The Company recognized a pre-tax gain of $1,077, of which $533 related to the pre-tax gain from the $600 proceeds from the sale and $544 related to the Company’s remaining 50% investment in the joint venture being remeasured to fair value. The after-tax gain was $843, or $1.89 per share. The fair value is based on the price paid to Eaton for the 50% interest sold to Cummins, Inc. and further supported by a discounted cash flow model. Eaton will account for its investment on the equity method of accounting.

Note 4. ACQUISITION INTEGRATION CHARGES

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

 

Acquisitionintegration charges

 

Operating profitas reported

 

Operating profitexcluding acquisitionintegration charges*

Three months ended December 31 2017   2016 2017   2016 2017   2016 Business segments Electrical Products $ 1 $ 1 $ 330 $ 316 $ 331 $ 317 Electrical Systems and Services — — 225 177 225 177 Hydraulics — — 74 37 74 37 Aerospace — — 88 84 88 84 Vehicle —   —   140   97   140   97 Total business segments 1 1 $ 857   $ 711   $ 858   $ 712 Corporate —   —  

Total acquisition integration charges before income taxes

1 1 Income taxes —   —   Total after income taxes $ 1   $ 1   Per ordinary share - diluted $ — $ —

*Operating profit excluding acquisition integration charges is used to calculate operating margin where that term is used in this release.

     

Acquisitionintegration charges

Operating profitas reported

Operating profitexcluding acquisitionintegration charges*

Year ended December 31 2017   2016 2017   2016 2017   2016 Business segments Electrical Products $ 4 $ 3 $ 1,287 $ 1,240 $ 1,291 $ 1,243 Electrical Systems and Services — 1 770 711 770 712 Hydraulics — — 288 198 288 198 Aerospace — — 332 335 332 335 Vehicle —   —   537   474   537   474 Total business segments 4 4 $ 3,214   $ 2,958   $ 3,218   $ 2,962 Corporate —   —  

Total acquisition integration charges before  income taxes

4 4 Income taxes 2   1   Total after income taxes $ 2   $ 3   Per ordinary share - diluted $ — $ 0.01

*Operating profit excluding acquisition integration charges is used to calculate operating margin where that term is used in this release.

Business segment acquisition integration charges in 2017 related to the integration of Ephesus Lighting, Inc. (Ephesus), which was acquired in 2015. The charges associated with Ephesus were included in Selling and administrative expense. Business segment acquisition integration charges in 2016 related to the integration of Ephesus and Oxalis Group Ltd. (Oxalis), which was acquired in 2015. The charges associated with Ephesus were included in Cost of products sold and Selling and administrative expense, while the charges associated with Oxalis were included in Cost of products sold.

Note 5. UNITED STATES TAX CUTS AND JOBS ACT

The effective income tax rate for the fourth quarter of 2017 was expense of 0.2% compared to expense of 9.1% for the fourth quarter of 2016. The tax rate for the fourth quarter of 2017 includes an estimated tax benefit of $62 related to the Tax Cuts and Jobs Act (“TCJA”), which was signed into law on December 22, 2017. The $62 tax benefit related to the TCJA is comprised of a $79 tax benefit for adjusting deferred tax assets and liabilities, offset by a $17 tax expense for the taxation of unremitted earnings of non-U.S. subsidiaries owned directly or indirectly by U.S. subsidiaries of Eaton. Excluding the impact of the TCJA, the tax rate for the fourth quarter was expense of 10.0%. The increase in the effective tax rate in the fourth quarter of 2017 compared to the fourth quarter of 2016 was due to greater levels of income in higher tax jurisdictions.

The effective income tax rate for full year 2017 was expense of 11.3% compared to expense of 9.4% for full year 2016. The tax rate for full year 2017 includes $234 of tax expense on the gain related to the Eaton Cummins JV transaction, which closed during the third quarter, and a tax benefit of $62 related to the TCJA. Excluding the gain and related tax impact on the Eaton Cummins JV transaction, and the impact of the TCJA, the tax rate for full year 2017 was expense of 9.2%. The decrease from 9.4% for the full year 2016 compared to 9.2% for the full year 2017 was due to the resolution of tax contingencies in various tax jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of Accounting Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

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Eaton Corporation plcScott R. Schroeder, Media Relations, +1 440-523-5150scottrschroeder@eaton.comorDon Bullock, Investor Relations, +1 440-523-5127