Analysis ETN
Eaton beat its growth forecast. Where did the extra profit go?
Sales growth and segment margins exceeded July targets. Higher corporate expenses absorbed much of the gain before it reached pretax earnings.
Eaton's sales grew faster than its own forecast, even after removing acquisitions and currency movements. The power-management company reported 19% organic growth for Q3, against a July forecast of 13.5% to 15.5%.
Eaton raised its annual growth outlook. Higher corporate costs left a much smaller improvement in pretax income than in segment profit.
A beat beyond the acquisitions
Research by Ticker Byline shows that Eaton exceeded the upper end of its earlier organic-growth forecast by 3.5 percentage points. Our comparison of July's guidance with November's results also finds higher-than-forecast segment margins and adjusted earnings.
| Measure | July forecast | Actual |
|---|---|---|
| Organic sales growth | 13.5%–15.5% | 19% |
| Segment operating margin | 24.6%–25.0% | 25.3% |
| Adjusted diluted EPS | $3.46–$3.56 | $3.68 |
| GAAP diluted EPS | $2.77–$2.87 | $2.77 |
Reported sales rose 28% to $8.95 billion. Acquisitions contributed eight percentage points and currency one point. The remaining growth came from the existing business, including demand for data-center, industrial and commercial power equipment.
Why earnings did not rise as quickly
Eaton's segments produced $514 million more operating profit than a year earlier. Higher corporate expenses absorbed $419 million of that increase, leaving a $95 million improvement in pretax income.
Those expenses included higher amortization of intangible assets, interest and other corporate costs. The company attributes the rise in other corporate expenses primarily to acquisition and divestiture costs.
Adjusted EPS removes specified acquisition and divestiture charges, restructuring items and intangible amortization. It rose 20% to $3.68. GAAP EPS rose 7% to $2.77, matching the bottom of July's range.
Eaton raised its annual adjusted EPS outlook to $13.70 to $13.80 from $13.40 to $13.60. The annual organic-growth range rose to 13% to 15%. Its GAAP EPS forecast midpoint edged down two cents to $10.44.
More investment, less quarterly free cash
Q3 free cash flow fell to $1.03 billion from $1.17 billion as capital spending rose to $275 million from $178 million and operating cash eased. Nine-month operating cash still increased 17% to $2.94 billion.
Demand remains strong, though not every order-growth rate accelerated. Rolling twelve-month organic order growth rose in Electrical Global and Aerospace but eased from 41% to 39% in Electrical Americas.
The Eaton company profile tracks those orders, debt and the completed acquisitions alongside its pending portfolio changes.