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Eaton's Q3 Earnings In Line with Estimates

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Diversified power management company Eaton Corporation (ETN - Analyst Report) released its third quarter results with earnings per share of $1.12 surpassing the year-ago figure of $1.07 by 4.7%. Earnings were in line with the Zacks Consensus Estimate.

As expected, the year-over-year increase was primarily due to higher contribution from the acquired assets of Cooper Industries.

Eaton’s GAAP earnings during the third quarter were $1.07 per share versus $1.02 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 third quarter total revenue was $5.6 billion, up 41.9% from $3.95 billion a year ago.

The year-over-year increase was primarily due to the contributions from acquired assets. These assets led to a 40% improvement in sales, while core sales contributed 3% to the sales rise.

Quarterly revenue was lower than the Zacks Consensus Estimate of $5.7 billion by 1.6%.

Segment Analysis

Electrical Product:  Total revenue for the segment was $1.82 billion, up 97.7% from the year-ago quarter on the back of acquisition synergies. Operating profit, excluding acquisition integration charges of $9 million, was $310 million, up 79% from the year-ago comparable period.

Electrical Systems and Service: Total revenue for the segment was $1.6 billion, up 80% from the year-ago quarter, reflecting the impact of the Cooper Industries acquisition. Operating profit, excluding acquisition integration charges of $10 million, was $241 million, surging 115% year over year.

Hydraulics: At $739 million, Hydraulics sales improved nearly 3% over the prior year, while operating profit excluding integration charges came in at $97 million, a decline of 1% from the corresponding quarter last year.

Aerospace: Segmental sales in the quarter grew 7% to $448 million while operating profit was up 31.0% to $64 million.

Vehicle: Segment revenue declined by 3% year over year to $964 million. However, operating income of $161 million improved 12% from the year-ago quarter.

Operating Update

Cost of product sold in the third quarter 2013 was $3.88 billion, increasing 41.3% from the prior-year period.

Selling and administrative expenses also followed a similar trend, increasing 40.7% to $967 million from $687 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 62.7% to $166 million.

Total segment operating profit was up 48.7% to $846 million. The increase was driven by a better performance from the Electrical Product, Electrical Systems and Service and Vehicle segments.

Financial Update

Cash and short-term investments as of Sep 30, 2013 were $1.34 billion versus $1.1 billion as of Dec 31, 2012.

Long-term debt was $9.03 billion as of Sep 30, 2013 compared with $9.76 billion as of Dec 31, 2012.

Guidance

Eaton trimmed the top end of its 2013 pro forma earnings by 10 cents. The revised earnings expectation is in the range of $4.05–$4.15 per share. Fourth quarter 2013 earnings are expected to be between $1.00 and $1.10 per share, which exclude integration charges of $40 million.

The downward revision in guidance was primarily due to NAFTA Class 8 truck market and continued weakness in the global hydraulics markets, which will eventually impact Eaton’s overall performance in 2013.

Other Company Releases

A. O. Smith Corporation (AOS - Snapshot Report) reported earnings of 54 cents per share in the third quarter 2013, beating the Zacks Consensus Estimate of 44 cents by 22.73%.

Rexnord Corporation (RXN - Analyst Report) reported second quarter fiscal 2014 earnings of 31 cents per share, surpassing the Zacks Consensus Estimate of 26 cents.

Parker-Hannifin Corporation (PH - Analyst Report) reported first quarter fiscal 2014 earnings of $1.67 per share, surpassing the Zacks Consensus Estimate of  $1.47 by 13.61%.

Our View
 
Eaton continues to benefit from the contributions of its acquired assets. In addition, the nominal core sales growth has added to the reported numbers.

On the flip side, the continued softness in the hydraulics market could impact the overall performance of the company. In addition, seasonal variance could affect the company’s fourth quarter.

We appreciate Eaton’s consistent endeavor to develop new products and technology and to support the wide customer base spread across 175 countries. Accordingly, research and development expenses increased 62.7% in the quarter, ahead of the 51.9% increase incurred in the second quarter.

Eaton Corporation currently retains a Zacks Rank #3 (Hold). With a market cap of $32.46 billion, the company has 102,000 full time employees.

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