Diversified industrial manufacturer Eaton Corporation plc (NYSE:ETN) today announced record sales and operating earnings, driven by the acquisition of Cooper Industries. Sales in the second quarter were $5.6 billion, 38 percent above the same period in 2012. Operating earnings for the second quarter of 2013, excluding charges of $39 million to integrate recent acquisitions, were $519 million, an increase of 32 percent over 2012. Operating earnings per share, which exclude charges of $0.05 per share to integrate recent acquisitions, were $1.09 for the second quarter of 2013. This result is a decrease of 5 percent from the second quarter of 2012, reflecting the shares issued as part of the acquisition of Cooper Industries and the purchase price accounting charges resulting from the transaction.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our second quarter operating earnings per share came in just below the midpoint of our guidance, despite softer market conditions than we expected at the start of the quarter. We were able to largely offset the lower revenue by generating higher operating margins, with our overall segment margin coming in at 15.6 percent, a quarterly record. This strong performance reflects our enhanced portfolio as a result of the Cooper Industries acquisition, Cooper integration savings, and our continued focus on productivity improvements.
“Our 38 percent sales growth in the second quarter consisted of a decline of 2 percent in core sales, offset by 40 percent growth from acquisitions,” said Cutler. “The decline in our core sales reflected soft conditions in several of our end markets, which have shown a continuation of the sluggish economic conditions experienced in many parts of the world during the second half of 2012 and in the first quarter of 2013.
“We entered 2013 expecting it would be a year of subpar global economic growth, leading to approximately 2 to 3 percent growth in our markets,” said Cutler. “With global economic growth coming in lower than our earlier expectations, we now believe our markets will grow just 1 percent in 2013.
“We generated strong cash flow in the second quarter, posting $609 million of operating cash flow, and after capital spending of $129 million, $480 million of free cash flow,” said Cutler. “With our markets in 2013 growing more slowly than expected, we have reduced our capital spending. We expect operating cash flow in 2013 to come in between $2.5 billion and $2.6 billion, about $100 million lower than our prior forecast, while capital expenditures are now estimated to be $650 million, $50 million lower than our prior forecast.
“As the Cooper integration has progressed, we have been able to realize synergy savings at a faster pace than we had expected,” said Cutler. “We now estimate 2013 synergy savings to be $115 million, $25 million higher than our prior estimate. For 2014, we now estimate synergy savings of $210 million, $30 million higher than our earlier estimate.
“We anticipate operating earnings per share for the third quarter of 2013, which exclude an estimated $64 million of charges to integrate our recent acquisitions, to be between $1.05 and $1.15,” said Cutler.
“We are reducing the top end of our guidance range for full year operating earnings per share by $0.20, reflecting lower expected market growth during 2013, and we are also narrowing the guidance range,” said Cutler. “Accordingly, we now expect full year operating earnings per share to be between $4.05 and $4.25, a 2 percent reduction at the midpoint compared to our previous guidance range of between $4.05 and $4.45. Based on the $4.15 midpoint of our guidance, our operating earnings per share in 2013 will grow 5 percent.”
Business Segment Results
Sales for the Electrical Products segment were $1.8 billion, up 95 percent over the second quarter of 2012, reflecting the impact of the Cooper Industries acquisition. Operating profits were $272 million. Excluding acquisition integration charges of $12 million during the quarter, operating profits were $284 million, up 88 percent over the second quarter of 2012.
“Our bookings in the Electrical Products segment were up 2 percent from the combined bookings of Eaton and legacy Cooper in the second quarter a year ago,” said Cutler. “We are pleased with the 16.2 percent operating margin in Electrical Products, reflecting a significant step up from the 14.7 percent we posted in the first quarter.”
Sales for the Electrical Systems and Services segment were $1.6 billion, up 78 percent over the second quarter of 2012, reflecting the impact of the Cooper Industries acquisition. Operating profits were $227 million. Excluding acquisition integration charges of $11 million during the quarter, operating profits were $238 million, up 148 percent over the second quarter of 2012.
“Combined bookings in the quarter were up 2 percent compared to the second quarter of 2012,” said Cutler. “We posted a strong 14.7 percent operating margin in Electrical Systems and Services in the second quarter.
“In both of our Electrical segments, our end markets were strongest in the U.S., the Middle East, and Latin America, with weakness in Asia Pacific and Europe,” said Cutler. “We believe sales will improve modestly from the second to third quarters, in line with the normal seasonal pattern of demand. However, overall growth in our electrical markets for 2013 is now expected to be about 2 percentage points less than our expectations at the end of the first quarter.”
Hydraulics segment sales were $772 million, an increase of less than 1 percent compared to the second quarter of 2012. Sales growth was driven by revenues from acquisitions completed in 2012, which accounted for 10 percent growth, offset by a 9 percent decline in core sales and a 1 percent decline from currency translation. Operating profits in the second quarter were $104 million. Excluding acquisition integration charges of $8 million, operating profits were $112 million, a decline of 11 percent.
“The hydraulics markets in the second quarter grew modestly compared to the first quarter,” said Cutler. “Compared to strong conditions in the second quarter of 2012, the year-over-year comparisons are negative. Reflecting this, our bookings in the quarter declined 12 percent from the second quarter of 2012.
“Our operating margin in Hydraulics rebounded to 14.5 percent in the second quarter, a significant step up from 11.9 percent in the first quarter,” said Cutler.
Aerospace segment sales were $446 million, up 2 percent over the second quarter of 2012. Operating profits in the second quarter were $67 million, an increase of 14 percent compared to a year earlier.
“Aerospace markets in the second quarter continued their modest growth, with strongest growth in the commercial OEM market,” said Cutler. “Our operating margin came in at 15.0 percent, an improvement over the 14.3 percent we realized in the first quarter.”
The Vehicle segment posted sales of $1.0 billion, down 4 percent compared to the second quarter of 2012. The segment reported operating profits of $172 million, an increase of 2 percent over the second quarter of 2012.
“Our NAFTA truck and European vehicle customers experienced generally weaker market conditions compared to the second quarter of last year,” said Cutler. “However, NAFTA Class 8 truck production grew about 20 percent from the first quarter of 2013. In addition, the South American and Asian vehicle markets posted good growth in the second quarter.
“We are pleased with our Vehicle operating margin of 17.2 percent, a marked step up from the 14.1 percent margin in the first quarter.”
