Third Quarter 2017 Earnings Release October 31, 2017 Craig Arnold
Forward-looking Statements and Non-GAAP Financial Information This presentation or the comments we make on our call today contain forward-looking statements concerning, among other matters, performance of our worldwide end markets, fourth quarter 2017 net income and operating earnings per share, full year 2017 net income and operating earnings per share, segment margins, capital expenditures, cash flow, tax rate, corporate expenses, projected revenue growth, foreign currency exchange impact, proposed share repurchases and the costs and benefits associated with planned restructuring actions. 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 integrating acquisitions; new laws and governmental regulations; interest rate changes; stock market and currency fluctuations; war, civil or political unrest or terrorism; 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. This presentation includes certain non-gaap measures as defined by SEC rules. A reconciliation of those measures to the most directly comparable GAAP equivalent is provided in the investor relations section of our website at www.eaton.com. 2
Highlights of Q3 Results Net income and operating earnings per share of $3.14 Excluding gain of $1.89 from formation of Eaton Cummins JV, net income and operating earnings per share of $1.25, at midpoint of guidance Net income and operating earnings per share include $(0.03) negative impact from recent natural disasters Sales of $5.2B Organic revenues up 3.5% Forex impact of positive 1% Reported record segment margins of 16.4% Excluding impact of restructuring costs, segment margins were 16.7% Natural disasters negatively impacted reported segment margins by (0.2)% Q3 operating cash flow of $1B, excluding pension contribution of $250M Completed refinancing of $1B of debt maturing in November Contributed $250M to pension fund Repurchased $324M in shares in Q3 YTD repurchases total $789M or 2.4% of outstanding shares 3
Comparison to Q3 Guidance Q3 2017 Operating EPS Guidance $ 1.25 Higher organic revenues 0.02 Forex 0.01 Negative impact of recent natural disasters (0.03) Q3 Operating EPS, excluding gain from JV 1.25 Gain from Eaton Cummins JV 1.89 Q3 2017 Actual Operating EPS $ 3.14 4
Financial Summary (M) 3Q 17 3Q 16 V 16 Sales $5,211 $4,987 4.5% Segment Operating Profit as Reported 856 799 7% Acquisition Integration Charges (1) (1) Segment Operating Profit 857 800 7% Segment Operating Margin 16.4% 16.0% 40 bps Restructuring Costs (11) (22) Segment Operating Margin, excluding restructuring costs 16.7% 16.5% 20 bps Net Income 1,399 523 167% Sales Growth: Organic 3.5% Forex 1% Total 4.5% Net income and operating earnings per share assuming dilution Net income and operating earnings per share, excluding gain from joint venture $3.14 $1.25 5
Electrical Products Segment (M) 3Q 17 3Q 16 V 16 Sales $1,857 $1,767 5% Operating Profit as Reported 346 331 5% Acquisition Integration Charges (1) (1) Segment Operating Profit 347 332 5% Operating Margin 18.7% 18.8% 10 bps Restructuring Costs -- (1) Operating Margin, excluding restructuring costs 18.7% 18.8% 10 bps Sales Growth: Organic 4% Forex 1% Total 5% Bookings up 5% in Q3 on growth in all regions Segment margins at 19.2%, excluding impact of natural disasters 6
Electrical Systems & Services Segment (M) 3Q 17 3Q 16 V 16 Sales $1,421 $1,436 1% Segment Operating Profit 196 197 1% Operating Margin 13.8% 13.7% 10 bps Restructuring Costs -- (7) Operating Margin, excluding restructuring costs 13.8% 14.2% 40 bps Sales Growth: Organic (2)% Forex 1% Total (1)% Bookings down 1% on weakness on utility and data center markets in APAC and lower large project orders in the UK and Middle East Large assembly orders up 16% in Q3 following increase of 25% in Q2 7
Hydraulics Segment (M) 3Q 17 3Q 16 V 16 Sales $634 $562 13% Segment Operating Profit 80 61 31% Operating Margin 12.6% 10.9% 170 bps Restructuring Costs (9) (10) Operating Margin, excluding restructuring costs 14.0% 12.6% 140 bps Sales Growth: Organic 13% Forex 0% Bookings up 22% in Q3 on strength at OEMs and distributors, and across all geographies Total 13% 8
Aerospace Segment (M) 3Q 17 3Q 16 V 16 Sales $438 $436 -- Segment Operating Profit 84 88 5% Operating Margin 19.2% 20.2% 100 bps Restructuring Costs -- 1 Operating Margin, excluding restructuring costs 19.2% 20.0% 80 bps Sales Growth: Organic 0% Forex 0% Total 0% Bookings in Q3 up 11% on strength in all major markets except military transport and military rotorcraft 9
Vehicle Segment (M) 3Q 17 3Q 16 V 16 Sales $861 $786 10% Segment Operating Profit 150 122 23% Operating Margin 17.4% 15.5% 190 bps Restructuring Costs (2) (5) Operating Margin, excluding restructuring costs 17.7% 16.2% 150 bps Sales Growth: Organic 9% Divestiture (1)% Forex 2% Total 10% NAFTA Class 8 truck production up 34% in Q3 2017 NAFTA Class 8 build forecast now 250K Completed Eaton Cummins JV in Q3, received $600M cash for 50% interest in the business 10
For Full Year 2017, We Now Expect Organic Revenue Growth of 2% 3% Segment Prior 2017 Organic Growth Guidance Current Organic Growth Change From Prior Guidance Electrical Products 2% - 4% 2% - 4% --- Electrical S & S (2)% - 0% (2)% - 0% --- Hydraulics 10% - 12% 10% - 12% --- Aerospace (1)% - 1% (1)% - 1% --- Vehicle 0% - 2% 2% - 4% 2% Total 1% - 3% 2% - 3% 0.5% 11
Update on Restructuring Actions $M Q1 Actual Q2 Actual 2017 Q3 Actual Q4 Plan Total Restructuring Costs $20 $33 $22 $25 $100 For FY 2017, total restructuring costs of $100M and incremental annual benefits of $155M remain unchanged 12
Segment Operating Margin Expectations Updated 2017 Guidance* Electrical Products 17.8% - 18.2% Electrical Systems and Services 13.3% - 13.7% Hydraulics 11.8% - 12.2% Aerospace 19.0% - 19.4% Vehicle 15.7% - 16.1% Eaton Consolidated 15.6% - 16.0% * includes net impact of restructuring actions in 2017 13
2017 Guidance 4 th Quarter Outlook $1.19 - $1.29 Operating EPS / Net Income Per Share Organic revenues expected to increase 3.0% - 4.0% versus Q4 2016 Natural disasters expected to reduce Q4 earnings by $(0.03), reflected in guidance Segment margins between 16.3% and 16.7% Tax rate between 10.5% and 11.5% 2017 Full Year Outlook $6.44 - $6.54 Operating EPS / Net Income as reported $4.55 - $4.65 Operating EPS / Net Income Per Share, adjusted for impact of JV Organic Revenue Growth 2% - 3% Forex +$50M Segment Operating Margins 15.6% - 16.0% Corporate Expenses (interest, pension, other corporate) Up $40M over 2016, excluding impact of insurance income in Q4 2016 Tax Rate (including impact of JV) 13.0% - 14.0% Adjusted Operating Cash Flow (excluding $250M pension contribution in Q3) Adjusted Free Cash Flow $2.7B - $2.9B $2.2B - $2.4B Capex $525M 2016 Eaton. All Rights Reserved.. Share Repurchases $800M 14
Initial Thoughts on 2018 Improving global economic conditions leading to market growth of ~3% in 2018 Eaton Cummins JV to reduce reported revenues by ~$(175)M in 2018 Tax rate likely between 11% and 13% Expect $800M of share repurchases, completing our four year, $3B share repurchase program 15
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