Eaton Reports Fourth Quarter Operating Earnings Up 63 Percent Over 2012

Power management company Eaton Corporation plc (NYSE:ETN) today announced operating earnings for the fourth quarter of 2013, which exclude charges of $55 million to integrate recent acquisitions, of $516 million, up 63 percent over the fourth quarter of 2012. Operating earnings per share for the fourth quarter, which exclude $0.08 per share to integrate recent acquisitions, were $1.08, an increase of 32 percent over the fourth quarter of 2012.

Sales in the quarter were $5.5 billion, 28 percent higher than the same period in 2012. Net income in the fourth quarter of 2013 was $479 million compared to $179 million in 2012.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our growth accelerated in the fourth quarter, with core sales growth of 4 percent, the strongest quarter of core sales growth in 2013. In addition to our 4 percent core sales growth, we had 25 percent growth from acquisitions, offset slightly by a reduction of 1 percent from currency exchange.

“We generated record cash flow in the fourth quarter, with operating cash flow of $872 million, up 27 percent over the fourth quarter of 2012,” said Cutler. “During the quarter, we completed our purchase price accounting for Cooper. Our Cooper integration remains well ahead of schedule, setting a solid foundation for the $95 million of additional Cooper integration savings we expect to realize in 2014.

“In mid-January we signed an agreement to sell two aerospace units to Safran for a price of $270 million. The two units have total annual revenues of approximately $100 million,” said Cutler. “The transaction is expected to close early in the second quarter.”

For the full year 2013, sales were a record $22.0 billion, 35 percent higher than in 2012. Operating earnings in 2013, which exclude $163 million in charges to integrate our recent acquisitions, totaled a record $2.0 billion, an increase of 42 percent compared to 2012. Operating earnings per share for 2013 were a record $4.13, up 5 percent over 2012.

“Our full year 2013 sales increase of 35 percent reflects principally the revenues from our 2012 acquisitions, as growth in our markets remained sluggish for much of the year,” said Cutler. “We generated record operating earnings per share in 2013, up 5 percent over 2012, despite the additional shares we issued as part of the Cooper acquisition and the purchase price charges resulting from the five acquisitions completed in 2012. Operating cash flow in 2013 was a record $2.3 billion, up 37 percent over 2012.

“Our board will address the first quarter dividend at its meeting later this month,” said Cutler.

“In 2014, we anticipate our markets will grow 3 percent,” said Cutler. “We expect that 2014 operating earnings per share will set another record. We estimate that first quarter operating earnings per share, which exclude an estimated $76 million of charges to integrate our recent acquisitions, will be between $0.95 and $1.05 per share.

“For the full year 2014, we estimate that operating earnings per share, which exclude an estimated $168 million of charges to integrate our recent acquisitions, will be between $4.50 and $4.90 per share. This guidance does not factor in any gain from the divestiture of the two aerospace units,” said Cutler. “Based on the $4.70 midpoint of this guidance, our operating earnings per share in 2014 will grow 14 percent.”

Business Segment Results

Fourth quarter sales for the Electrical Products segment were $1.8 billion, up 57 percent from the fourth quarter of 2012, reflecting the impact of the Cooper Industries acquisition. Operating profits in the fourth quarter were $276 million. Excluding acquisition integration charges of $20 million during the quarter, operating profits totaled $296 million, up 64 percent from the fourth quarter of 2012.

“Our bookings in the Electrical Products segment increased 4 percent from the combined bookings of Eaton and legacy Cooper in the fourth quarter a year ago,” said Cutler.

Fourth quarter sales for the Electrical Systems and Services segment were $1.6 billion, an increase of 38 percent over the fourth quarter of 2012, reflecting the impact of the Cooper Industries acquisition. Operating profits were $221 million. Excluding acquisition integration charges of $11 million during the quarter, operating profits totaled $232 million, up 54 percent over the fourth quarter of 2012.

“Our bookings in the Electrical Systems and Services segment declined 4 percent from the combined bookings of Eaton and legacy Cooper in the fourth quarter a year ago, reflecting a slowdown in orders from the U.S. government and continued weak demand from the utility market,” said Cutler.

“For 2014, we believe the markets served by our Electrical segments will grow 3 percent,” said Cutler.

Hydraulics segment fourth quarter sales were $714 million, up 3 percent over the fourth quarter of 2012. Operating profits in the fourth quarter were $84 million. Excluding acquisition integration charges of $8 million in the fourth quarter of 2013, operating profits were $92 million, up 80 percent over the fourth quarter of 2012.

“The global hydraulics market has stabilized, with signs in some parts of the market that growth is improving,” said Cutler. “Our bookings in the fourth quarter increased 19 percent over last year, led by the mobile markets. For 2014, we anticipate our Hydraulics markets will grow 3 percent.”

The Aerospace segment posted fourth quarter sales of $446 million, an increase of 3 percent over the fourth quarter of 2012. Operating profits in the fourth quarter were $59 million, up 31 percent over the fourth quarter of 2012.

“Aerospace bookings in the fourth quarter increased 8 percent over the fourth quarter of 2012,” said Cutler. “In 2014, we expect continued good growth in commercial aerospace markets and a small decline in defense aerospace markets. Overall, we expect our Aerospace markets in 2014 will grow 3 percent.”

The Vehicle segment posted sales of $930 million in the fourth quarter, up 7 percent over the fourth quarter of 2012. Operating profits were $127 million, up 30 percent over the fourth quarter of 2012.

“Most parts of our Vehicle markets showed good growth in the fourth quarter,” said Cutler. “For 2014, we expect our Vehicle markets will grow 4 percent.”

Eaton is a power management company with 2013 sales of $22.0 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 102,000 employees and sells products to customers in more than 175 countries. For more information, visit www.eaton.com.

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 10 a.m. United States Eastern time via a link on the center of 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 2014 operating earnings per share, and full year 2014 operating earnings per share and the performance of our worldwide markets. 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; increases 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; the performance of recent acquisitions; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; 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.

Financial Results

The company’s comparative financial results for the three months and year ended December 31, 2013 are available on the company’s website, www.eaton.com.

Amounts are in millions of dollars unless indicated otherwise (per share data assume dilution).

This earnings release includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per ordinary share, and operating profit before acquisition integration charges and transaction costs for each business segment as well as corporate expense, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in this earnings release. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton's financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.

Note 1. ACQUISITIONS OF BUSINESSES

In 2012, Eaton acquired businesses in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions. These transactions and the related annual sales prior to acquisition are summarized below:

Note 2. ACQUISITION INTEGRATION CHARGES AND TRANSACTION COSTS

Eaton incurs integration charges and transaction costs related to acquired businesses. A summary of these charges follows:

Business segment integration charges in 2013 were related primarily to the integrations of Cooper and Polimer Kaucuk Sanayi ve Pazarlama. Business segment integration charges in 2012 were related primarily to the integrations of Polimer Kaucuk Sanayi ve Pazarlama, Jeil Hydraulics, Cooper and Internormen Technology Group. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information the charges reduced Operating profit of the related business segment.

Corporate integration charges in 2013 and 2012 were related primarily to the acquisition of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information the charges were included in Other corporate expense - net.

Acquisition-related transaction costs, such as investment banking, legal, and other professional fees, and costs associated with change in control agreements, are not included as a component of consideration transferred in an acquisition but are expensed as incurred. Acquisition-related transaction costs in 2013 and 2012 were related to the acquisition of Cooper. These charges were included in Selling and administrative expense, Interest expense - net and Other corporate expense - net. In Business Segment Information the charges were included in Interest expense - net and Other corporate expense - net.

See Note 1 for additional information about Cooper and other business acquisitions.

Note 3. RETIREMENT BENEFITS PLANS

The components of retirement benefits expense follow:

Note 4. INCOME TAXES

The effective tax rate for the fourth quarter of 2013 was a benefit of 12.4% compared to a benefit of 102.8% for the fourth quarter of 2012. The effective tax rate for full year 2013 was expense of 0.6% compared to expense of 2.5% for full year 2012. The difference in effective tax rates for the fourth quarter and full year 2013 was primarily attributable to the effects associated with the acquisition of Cooper, along with greater levels of income in lower tax jurisdictions and additional foreign tax credit utilization.