Eaton Beats Revs, Guides Well - Analyst Blog

By Zacks | February 05, 2013 AAA

Industrial manufacturer Eaton Corporation (ETN) released its fourth quarter results with earnings per share of 96 cents falling short of the year-ago figure of $1.08 per share by 11.1%. Earnings were nevertheless ahead of the Zacks Consensus Estimate of 94 cents.

Eaton's GAAP earnings during the fourth quarter were 60 cents per share versus $1.07 per share reported in the year-ago quarter. The difference between GAAP and operating earnings was due to charges of 36 cents related to integrating recent acquisitions.

For the full year 2012, Eaton earned $3.94 per share, falling short of the Zacks Consensus Estimate by 3.4% and the year-ago earnings by 0.5%.

Revenue

Eaton's fourth quarter total revenue was $4.33 billion, up 7.4% from $4.03 billion a year ago.

Quarterly revenue was $186 million higher than the Zacks Consensus Estimate of $4,147 million.

Revenue in 2012 was $16,311 million, surpassing the Zacks Consensus Estimate by $152 million. Total revenue in 2012 was up by 1.6% from $16,049 million reported in 2011.

The year-over-year increase was due to positive contribution from acquired assets, offset to some extent by lower-than-expected end-market growth and uncertainty in economic recovery in the major regions of the world.

Segment Analysis

Electrical Americas: Within its Electrical unit, Electrical Americas' revenues improved 3% from the year-ago quarter to $1.2 billion, while operating profit (excluding acquisition integration charges) increased 11% to $193 million. The upside reflected end market growth of 1% and 11% in order bookings, compared to the prior-year quarter.

Electrical Rest of the World: The Electrical Rest of the World segment's sales were up 2% to $711 million. Operating income of $71 million (excluding acquisition integration charges) was up 1% from the year-ago quarter.

Hydraulics: At $693 million, Hydraulics segment's sales dipped 2% over the prior year, while operating profits came in at $51 million, down 52% from the corresponding quarter last year.

Aerospace: Segmental sales in the quarter grew 1% to $434 million while operating profit was down 42.0% to $45 million.

Truck: The Truck segment posted a decline of 8% resulting in sales of $504 million. It earned an operating income of $81 million, down 41% from the year-ago quarter.

Automotive: Segment sales declined 8% year over year to $367 million. It posted an operating profit of $17 million, a decline of 13% from the comparable quarter last year, mainly due to restructuring actions taken during the quarter to cope with continued softness in European markets.

Cooper: Total revenue from this segment was $470 million and operating income excluding acquisition integration charges was $68 million.

Highlight of the Release

The cost of product sold in the fourth quarter 2012 was $3.1 billion, increasing 11.1% from the prior-year period.

Selling and administrative expenses also followed a similar trend, increasing 15.3% to $815 million from $707 million in the prior year. Corporate integration charges for Cooper were included in selling and administrative expenses resulting in the jump in expenses.

For 2012, interest expenses increased 76.3% to $208 million, primary due to a higher debt level. $4.94 billion of debts issued with an average interest rate of 2.74% increased the interest burden of the company.

Financial Health

Cash and short-term investments as of Dec 31, 2012 were $1.11 billion versus $1.08 billion as of Dec 31, 2011.

Long-term debt was $9.76 billion as of Dec 31, 2012 compared with $3.37 billion as of Dec 31, 2011. The substantial increase was due to the debts issued by the company to fund the acquisition of Cooper Industries.

Guidance

Eaton expects its 2013 pro forma earnings in the range of $4.05 - $4.45 per share. The guidance excludes acquisition integration charges. First quarter 2013 earnings are expected to be between 70 cents and 80 cents per share.

Eaton expects the Cooper acquisition to contribute to its top line and expects its 2013 revenue to improve by 42% from the year-ago level. Eaton expects its overall electrical markets to improve by 3% to 4% in 2013 from 2012 levels.

Eaton expects its Aerospace market to grow by 2% in 2013, while the global hydraulics market is expected to decline by 4% in 2013.

Other Company Releases

A. O. Smith Corporation (AOS) reported earnings of 91 cents per share in the fourth quarter, beating the Zacks Consensus Estimate by a dime. Parker-Hannifin Corporation (PH) reported earnings of $1.19 per share in the fourth quarter, surpassing the Zacks Consensus Estimate of $1.12 for the quarter. UQM Technologies Inc. (UQM) reported a loss of 2 cents per share in the fourth quarter, lower than the Zacks Consensus Estimate of a loss of 3 cents.

Our View
 
The company benefited from its acquired assets during the year. Yet, these benefits were partially offset by the higher interest burden of the company. Besides, tax break from its international locations also boosted the results of the company.

Eaton has made a few acquisitions during 2012 and expects them to add $6 billion to its revenue in the long run. We believe integration of all these acquired assets and continuation of operation in a profitable manner will be key to the company achieving its targets. Cleveland, Ohio-based diversified power management company Eaton Corporation is a leading supplier of power accessories in the aerospace industry and has customers spanning 150 countries. With a market cap of $19.12 billion, the company has 74,000 full time employees. Eaton Corporation currently retains a Zacks #3 Rank (Hold).

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