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Diversified power management company Eaton Corporation (ETN - Analyst Report) released its second quarter results with earnings per share of $1.09 falling short of the year-ago figure of $1.15 by 5.2%. Earnings were also lower than the Zacks Consensus Estimate of $1.11 by 2 cents.

Eaton’s GAAP earnings during the second quarter were $1.04 per share versus $1.12 per share reported in the year-ago quarter. The difference between GAAP and operating earnings was due to charges of 5 cents related to integrating recent acquisitions.

Total Revenue

Eaton’s second quarter total revenue was $5.6 billion, up 37.7% from $4.06 billion a year ago.

The year-over-year increase was primarily due to the contributions from acquired assets. The acquired assets contributed to a 40% improvement in sales, while core sales declined by 2% from the year-ago period. The decline in core sales indicates a sluggish demand in some of its end markets.

The quarterly revenue was lower than the Zacks Consensus Estimate of $5.81 billion by 3.6%.

Segment Analysis

Electrical Product:  Total revenue for the segment was $1.8 billion, up 95% from the year-ago quarter, reflecting the impact of the Cooper Industries acquisition. Operating profit, excluding acquisition integration charges of $12 million, was $284 million, up 88% from the year-ago comparable period.

Electrical Systems and Service: Total revenue for the segment was $1.6 billion, up 78% from the year-ago quarter, reflecting the impact of the Cooper Industries acquisition. Operating profit, excluding acquisition integration charges of $11 million, was $238 million, surging 148% year over year.

Hydraulics: At $772 million, Hydraulics sales improved nearly 1% over the prior year, while operating profit excluding integration charges came in at $112 million, a decline of 11% from the corresponding quarter last year.

Aerospace: Segmental sales in the quarter grew 2% to $4446 million while operating profit was up 14.0% to $67 million.

Vehicle: Segment revenue declined by 4% year over year to $1 billion. However, operating income of $172 million improved 2% from the year-ago quarter.

Operating Update

Cost of product sold in the second quarter 2013 was $3.87 billion, increasing 37.5% from the prior-year period.

Selling and administrative expenses also followed a similar trend, increasing 39.1% to $960 million from $690 million in the prior year. Corporate integration charges for the Cooper acquisition were included in selling and administrative expenses resulting in the jump in expenses.

Research and development expenses increased 51.9% to $161 million.

Total segment operating profit was up 42.2% to $842 million.

Financial Update

Cash and short-term investments as of Jun 30, 2013 were $1 billion versus $1.1 billion as of Dec 31, 2012.

Long-term debt was $9.01 billion as of Jun 30, 2013 compared with $9.76 billion as of Dec 31, 2012.

Since some of its end markets are growing at a much slower pace than previously expected, Eaton decided to lower its capital expenditure for 2013 by $50 million to $650 million.


Eaton trimmed the top end of its 2013 pro forma earnings by 20 cents. The revised earnings expectation is in the range of $4.05–$4.25 per share. Third quarter 2013 earnings are expected to be between $1.05 and $1.15 per share, which exclude integration charges of $64 million.

Eaton expects the Cooper acquisition to add to its top line with synergy savings outstripping earlier estimates. Synergy savings in 2013 are expected to be $115 million, $25 million higher than the prior estimate and in 2014 to be $210 million, $30 million higher than earlier estimate.

Other Company Releases

A. O. Smith Corporation (AOS - Snapshot Report) reported earnings of 52 cents per share in the second quarter 2013, beating the Zacks Consensus Estimate of 43 cents by 20.93%.

Rexnord Corporation (RXN - Analyst Report) reported first quarter fiscal 2014 earnings of 24 cents, surpassing the Zacks Consensus Estimate of 20 cents.

Parker-Hannifin Corporation (PH - Analyst Report) is scheduled to release its fourth quarter fiscal 2013 results on Aug 6, 2013. The Zacks Consensus Estimate for the quarter is $1.96.

Our View
Eaton continues to benefit from the contributions of its acquired assets. The acquired assets are saving the day for the company, when core sales are declining due to  sluggish end markets.

In the reported quarter, Eaton’s research and development expenses increased 51.9%, an indication of its efforts to bring in new technology to support the wide customer base spread across 175 countries.

Dublin, Ireland based Eaton Corporation was founded in 1916. This company is a leading supplier of power accessories in the aerospace industry. With a market cap of $33.08 billion, the company has 103,000 full time employees. Eaton Corporation currently retains a Zacks Rank #3 (Hold).

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