Some Macro Insights From Eaton’s Earnings

I always like taking a good hard look at Eaton’s earnings.  They’re a globally diversified power management company with a strong correlation to the global economy.   Their earnings reports are always incredibly insightful about the state of the global economy.  Here are some highlights:

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “We are pleased with our record second quarter results. Core sales grew 3 percent and acquisitions added 1 percent of growth, which were offset by a negative 5 percent from foreign exchange, largely from the lower value of the euro and the Brazilian real. End markets grew 3 percent in the quarter.

Insight: rising USD is hurting domestic earnings.  

“Our revenues were impacted in the second quarter by lower than expected end market growth and by lower than expected foreign exchange rates,” said Cutler. “Nonetheless, we had strong incremental margins on our volume growth during the quarter, which allowed us to increase our segment margins to 14.7 percent, setting a new segment operating margin record for the second quarter.

Insight: margins are still strong despite increasing revenue pressures.  International revenues are definitely sagging.  

“The uncertainty in Europe, as well as slower economic growth rates in China, India and Brazil, resulted in weakness in a number of our end markets,” said Cutler. “We now believe our end markets for the year are likely to grow by 3 to 4 percent, a reduction from the 5 percent growth we had forecast in April. We also anticipate that the impact of foreign exchange rates on revenue will be more negative than previously forecast. Fortunately, our improved margins and our lower tax rate are expected to partially offset these factors. As a result, we expect operating earnings per share in the third and fourth quarters to continue at record levels.

Insight: the global economy is definitely slowing.

“In light of the above and the fact that we are midway through the year, we are narrowing our full year guidance range and slightly adjusting the midpoint,” said Cutler. “Absent any impact from the completion of the Cooper transaction, our guidance for operating earnings per share, which exclude charges to integrate our recent acquisitions, is between $4.20 and $4.50 and for net income per share is between $4.09 and $4.39.

Insight: as expected, guidance is tepid at best as the outlook becomes increasingly uncertain.  

“Overall, we continue to expect 2012 to be a year of record sales and record profits,” said Cutler. “Our sales are projected to be 4 percent above 2011 and our operating earnings per share at the midpoint of our guidance is 10 percent above 2011.

Insight: despite the overall problems, profits are still solid.  

“We took several financing actions in the second quarter to begin to prepare for the close of the Cooper transaction,” said Cutler. “We issued a total of $600 million of 9- and 11-year term debt, and we renewed and enlarged two expiring lines of credit and amended our third line of credit, resulting in our credit lines now totaling $2.0 billion.”

Insight: credit markets are still healing.  

“End markets for our Electrical Americas segment grew 8 percent during the second quarter,” said Cutler. “The construction markets, both residential and non-residential, were the strongest parts of the business in the quarter.

Insight: real estate in the USA really is healing.  

Read the full report here.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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