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Eaton Beats Earnings, Sales Lag

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Diversified power management company Eaton Corporation (ETN - Free Report) released its first quarter results with earnings per share of 84 cents falling short of the year-ago figure of 92 cents by 8.7%. However, earnings were ahead of the Zacks Consensus Estimate by a nickel.

Eaton’s GAAP earnings during the first quarter were 79 cents per share versus 91 cents 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.


Eaton’s first quarter total revenue was $5.31 billion, up 34.1% from $3.96 billion a year ago.

The year-over-year increase was due to positive contribution from acquired assets, offset to some extent by a decline in core sales and unfavorable currency conversion.

However, quarterly revenue was $88 million lower than the Zacks Consensus Estimate of $5.39 billion.

Segment Analysis

Electrical Americas: Within its Electrical unit, Electrical Americas’ revenues improved 87% from the year-ago quarter to $1.7 billion, while operating profit (excluding acquisition integration charges) increased 76% to $244 million. The significant upside reflects the positive impact from the acquisition of Cooper Industries.

Electrical Rest of the World: The Electrical Rest of the World segment’s sales were up 79% to $1.5 billion. Operating income of $215 million (excluding acquisition integration charges) was up 176% from the year-ago quarter. Combined booking in the quarter improved 2% year over year.

Hydraulics: At $756 million, Hydraulics sales improved 3% over the prior year, while operating profits came in at $90 million, down 18% from the corresponding quarter last year.

Aerospace: Segmental sales in the quarter grew 1% to $434 million while operating profit was up 3.0% to $62 million.

Vehicle: Segment revenue improved 11% year over year to $939 million. However,  operating income of $132 million declined 18% from the year-ago quarter.

Operating Update

Cost of product sold in the first quarter 2013 was $3.73 billion, increasing 35.6% from the prior-year period.

Selling and administrative expenses also followed a similar trend, increasing 36.5% to $958 million from $702 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 44.8% to $152 million.

Despite the increase in expenses in the reported quarter, a more significant improvement in the top line benefited margins. Total segment operating profit was up 32.9% to $723 million.

Financial Health

Cash and short-term investments as of Mar 31, 2013 were $639 million versus $577 million as of Dec 31, 2012.

Long-term debt was $9.47 billion as of Mar 31, 2013 compared with $9.76 billion as of Dec 31, 2012.


Eaton reiterated its 2013 pro forma earnings in the range of $4.05–$4.45 per share. The guidance excludes acquisition integration charges. Second quarter 2013 earnings are expected to be between $1.05 and $1.15 per share.

Eaton expects the Cooper acquisition to contribute to its top line and expects its overall markets to improve by 2% to 3% in 2013 from 2012 levels.

Other Company Releases

A. O. Smith Corporation (AOS - Free Report) reported earnings of 96 cents per share in the first quarter 2013, beating the Zacks Consensus Estimate by 19 cents.

Parker-Hannifin Corporation (PH - Free Report) reported earnings of $1.68 per share in the third quarter of fiscal 2013, surpassing the Zacks Consensus Estimate by a penny.

UQM Technologies Inc. (UQM - Free Report) is expected to report its fourth quarter fiscal 2013 earnings on May 25, 2013. The Zacks Consensus Estimate is at a loss of 3 cents.

Our View
Eaton Corporation’s first quarter results benefited from the contribution of its acquired assets. The acquired assets are expected to boost the performance of Eaton going forward.

However, the pace of economic recovery in Eaton’s service territories has been sluggish, which we believe resulted in a 5% decline in Eaton’s core sales. In addition, bookings in Electrical Products and Hydraulics segments declined from the year-ago quarter.  

Even though Eaton continues to benefit from its acquired assets, the decline in core sales of the company in the last three quarters is something that the company needs to address.

Cleveland, Ohio-based Eaton Corporation was founded in 1916. This company is a leading supplier of power accessories in the aerospace industry and has customers spanning 150 countries. With a market cap of $27.63 billion, the company has 103,000 full time employees. Eaton Corporation currently retains a Zacks Rank #3 (Hold).

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