Earnings per Share for the Fourth Quarter of $1.46, Excluding Charges of $0.28 Per Share for Acquisition and Divestiture Costs and $0.09 Per Share for Expected Vehicle Warranty Costs
2019 Full Year Operating Cash Flow a Record $3.5 Billion
Earnings Per Share for 2020, Excluding Acquisition and Divestiture Costs, Expected to be Between $5.60 and $5.90
February 4, 2020
DUBLIN, Ireland ... Power management company Eaton Corporation plc (NYSE:ETN) today announced that earnings per share were $1.09 for the fourth quarter of 2019. Excluding charges of $0.28 per share for acquisition and divestiture transaction and integration costs, and $0.09 per share for expected vehicle warranty costs, earnings per share were $1.46. This is flat with earnings per share in the fourth quarter of 2018.
Sales in the fourth quarter of 2019 were $5.2 billion, down 4 percent from the fourth quarter of 2018. Organic sales were down 4 percent. Acquisitions added ½ percent to sales, which was offset by negative currency translation of ½ percent.
Craig Arnold, Eaton chairman and chief executive officer, said, “Our earnings per share of $1.46, excluding charges for acquisition and divestiture costs and expected vehicle warranty costs, were at the high end of our guidance despite market growth coming in weaker than our expectations. Segment margins were 16.4 percent, while our segment margins excluding the above charges were 17.8 percent. This is above the high end of our guidance range and a 40 basis point improvement over the fourth quarter of 2018.”
“During the fourth quarter, the company recorded a pre-tax charge of $50 million for expected warranty costs in our Vehicle segment,” said Arnold. “The costs are being incurred to correct the performance of a product which incorporated a defective part from a supplier.”
“For full year 2019, sales were $21.4 billion, down 1 percent from 2018 with flat organic sales and negative currency translation of 1 percent,” said Arnold. “Segment margins were 17.2 percent. Segment margins excluding charges for acquisition and divestiture transaction and integration costs and the expected vehicle warranty costs were 17.6 percent, an all-time record and up 80 basis points over 2018.”
“We made a number of major portfolio changes during 2019,” said Arnold. “We sold our Automotive Fluid Conveyance business and signed an agreement to sell our Lighting business. And in January 2020, we announced the sale of our Hydraulics business. The Lighting sale is expected to close in the first quarter of 2020, following receipt of the last regulatory approvals, and the Hydraulics sale is expected to close by the end of the year. We also acquired three businesses during 2019, investing $1.2 billion, and announced just yesterday the acquisition of Power Distribution, Inc. The costs in 2019 associated with all these transactions were $198 million.”
“Earnings per share for 2019 were $5.25. Excluding charges of $0.42 per share for acquisition and divestiture transaction and integration costs, and $0.09 per share for the expected vehicle warranty costs, earnings per share were $5.76. This represents a 7 percent increase over 2018 earnings per share, excluding the impact of the 2018 arbitration decision,” said Arnold. “Operating cash flow was $3.5 billion, and free cash flow was $2.9 billion, both all-time records. Share repurchases in 2019 totaled $1.0 billion, representing 3 percent of shares outstanding at the beginning of the year.”
“Looking at 2020, we expect our organic revenues to be between down 1 percent and up 1 percent versus 2019. The divestitures of our Lighting and Automotive Fluid Conveyance businesses are expected to reduce our sales by 7½ percent while the acquisitions of Souriau-Sunbank, Ulusoy, Innovative Switchgear, and Power Distribution, Inc. are expected to add approximately 2 percent to sales,” said Arnold. “We anticipate adjusted segment margins, which exclude acquisition and divestiture costs, to be between 17.8 percent and 18.2 percent, representing at the midpoint a 40 basis point improvement over 2019, excluding the impact in 2019 of vehicle warranty costs.”
“We expect 2020 adjusted earnings per share to be between $5.60 and $5.90, flat at the midpoint with 2019, excluding the 2019 vehicle warranty costs,” said Arnold. “We anticipate adjusted earnings per share for the first quarter of 2020 to be between $1.16 and $1.26, a 4 percent decrease at the midpoint from the first quarter of 2019.”
Business Segment Results
Sales for the Electrical Products segment were $1.8 billion, down 2 percent from 2018, driven entirely by a decline in organic sales. Excluding Lighting, organic sales grew 1 percent. Operating profits were $340 million. Excluding $15 million of costs related to the divestiture of the Lighting business, adjusted operating profits were $355 million, up 9 percent over the fourth quarter of 2018.
“Operating margins in the fourth quarter were 19.4 percent,” said Arnold. “Excluding costs related to the divestiture of the Lighting business, adjusted operating margins were 20.3 percent, up 210 basis points over 2018 and a fourth quarter record.”
“Orders in the fourth quarter, excluding Lighting, were down 2 percent, with growth strongest in residential and commercial construction markets in the Americas, offset by weakness in industrial markets globally,” said Arnold.
Sales for the Electrical Systems and Services segment were $1.7 billion, up 4 percent over the fourth quarter of 2018. Organic sales were up 2 percent and the acquisitions of Ulusoy and Innovative Switchgear added 2 percent to sales. Operating profits were $276 million. Excluding acquisition costs of $10 million related to Ulusoy and Innovative Switchgear, adjusted operating profits were $286 million, up 7 percent over the fourth quarter of 2018.
“Operating margins were 16.5 percent. Excluding acquisition integration costs, adjusted operating margins were 17.1 percent, an improvement of 50 basis points over 2018 and a fourth quarter record,” said Arnold. “The twelve-month rolling average of our orders in the fourth quarter was up 2.5 percent, with growth across all regions. Excluding hyperscale data center orders, which are sometimes lumpy due to customers placing orders for multiple years in a single quarter, the twelve-month rolling average of our orders in the fourth quarter was up 4 percent.”
“We were pleased to sign yesterday an agreement to acquire Power Distribution, Inc.,” said Arnold. “The acquisition provides us with additional mission-critical products for data center and industrial markets.”
Hydraulics segment sales were $565 million, down 13 percent from 2018 driven entirely by a decline in organic sales. Revenue declined due to continued weakness in the global mobile equipment market and destocking at both OEMs and distributors. Operating profits in the fourth quarter were $54 million, down 36 percent from the fourth quarter of 2018.
“Operating margins were 9.6 percent,” said Arnold. “Orders in the fourth quarter decreased 11 percent from the fourth quarter of 2018, driven by continued weakness in the global mobile equipment market.”
“We are pleased with the agreement we reached two weeks ago to sell our Hydraulics business to Danfoss A/S for $3.3 billion,” said Arnold. “This sale marks a further step in transforming Eaton into a company with higher growth, higher margins, and more consistent earnings. We started this transformation in 2017 with the creation of the Eaton Cummins JV in Vehicle. With the divestitures of Automotive Fluid Conveyance, Lighting, and now Hydraulics, we are continuing to aggressively pursue these objectives.”
Aerospace segment sales were $512 million, up 3 percent over the fourth quarter of 2018. Organic sales were up 2 percent, and the acquisition of Souriau-Sunbank added 1 percent. Operating profits in the fourth quarter were $123 million. Excluding $1 million of acquisition costs related to Souriau-Sunbank, adjusted operating profits were $124 million, up 9 percent over the fourth quarter of 2018.
“Operating margins in the quarter were 24.0 percent. Excluding costs related to the acquisition of Souriau-Sunbank, adjusted operating margins were 24.2 percent, a fourth quarter record and up 130 basis points over 2018,” said Arnold. “The twelve-month rolling average of our orders in the fourth quarter was up 6 percent. We saw particular strength in orders for military, aftermarket, and business jets.”
“We closed the acquisition of Souriau-Sunbank near the end of December,” said Arnold. “We are excited by the growth opportunities in the Aerospace connector market and by the opportunity to take connectors into non-Aerospace markets.”
The Vehicle segment posted sales of $664 million, down 19 percent from the fourth quarter of 2018. Organic sales were down 18 percent and negative currency translation was 1 percent. Operating profits in the fourth quarter were $63 million. Excluding the $50 million expected warranty costs, operating profits were $113 million, down 23 percent from the fourth quarter of 2018.
“Our revenue in Vehicle declined due to the impact of the GM strike, Class 8 OEM shutdowns, and continued global weakness in light vehicles,” said Arnold. “Operating margins in the quarter were 9.5 percent. Excluding the warranty costs, adjusted operating margins were 17.0 percent.”
“We are pleased to have completed the divestiture of our Automotive Fluid Conveyance business at the end of 2019,” said Arnold.
eMobility segment sales were $75 million, down 6 percent from the fourth quarter of 2018, driven entirely by a decline in organic sales. Growth in electric vehicle platforms was more than offset by weakness in legacy internal combustion engine platforms. Operating profits in the fourth quarter were $1 million, reflecting a significant step-up in research and development, and manufacturing start-up costs for new electric vehicle programs.
“Since the formation of the segment in the first quarter of 2018, the mature year revenue from our new program wins is expected to be $450 million,” said Arnold.
Eaton’s mission is to improve the quality of life and the environment through the use of power management technologies and services. We provide sustainable solutions that help our customers effectively manage electrical, hydraulic, and mechanical power – more safely, more efficiently, and more reliably. Eaton’s 2019 revenues were $21.4 billion, and we sell products to customers in more than 175 countries. We have approximately 101,000 employees.
Notice of conference call: Eaton’s conference call to discuss its fourth quarter results is available to all interested parties as a live audio webcast today at 11 a.m. United States Eastern Time via a link on Eaton’s home page. This news release can be accessed under its headline on the home page. Also available on the website prior to the call will be a presentation on fourth quarter results, which will be covered during the call.
This news release contains forward-looking statements concerning first quarter and full-year 2020 adjusted earnings per share, organic sales growth, adjusted segment margins, the expected impact on 2020 sales of acquisitions and divestitures, and the closing dates for the Lighting and Hydraulics divestitures. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; natural disasters; the performance of recent acquisitions; unanticipated difficulties completing or integrating acquisitions; new laws and governmental regulations; interest rate changes; changes in tax laws or tax regulations; stock market and currency fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.
The company’s comparative financial results for the twelve months ended December 31.
Kelly Jasko, Media Relations, +1 (440) 523-5304
Yan Jin, Investor Relations, +1 (440) 523-7558