Fourth Quarter 2016 Earnings Release February 2, 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, first 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, organic revenue growth, foreign currency exchange impact, 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; 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 Q4 Results Net income and operating earnings per share of $1.12 Sales of $4.9B Organic revenue down (3)% Forex impact of (1)% Segment operating margins of 14.6% 16.3% excluding restructuring costs Restructuring expense of $90M in Q4, reflecting $70M accelerated from 2017 in light of ~$70M income in Q4 from insurance matters Operating cash flow of $638M and $2.6B for full year 2016 Share repurchases Q4: $163M or 2.6M shares FY 2016: $730M or 11.8M shares (2.6% of outstanding shares at beginning of year) 3
Comparison to Q4 Guidance Operating EPS Reconciliation vs. Guidance Midpoint of guidance $ 1.10 Higher organic growth $ 0.02 Negative Forex $ (0.01) Better performance excluding insurance income and accelerated restructuring costs $ 0.01 Other income from insurance $ 0.14 2017 restructuring actions pulled forward $ (0.14) Q4 2016 Net Income and Operating EPS $ 1.12 4
Financial Summary (M) 4Q 16 4Q 15 V 15 Sales $4,867 $5,057 4% Segment Operating Profit as Reported 711 795 11% Acquisition Integration Charges (1) (13) Segment Operating Profit 712 808 12% Segment Operating Margin 14.6% 16.0% 140 bps Restructuring Costs (83) (1) Segment Operating Margin, excluding restructuring costs 16.3% 16.0% 30 bps Net Income 504 532 (5)% Sales Growth: Organic (3)% Forex (1)% Total (4)% Reconciliation of net income to operating earnings Net income per share assuming dilution $ 1.12 Operating earnings per share $ 1.12 5
Electrical Products Segment (M) 4Q 16 4Q 15 V 15 Sales $1,726 $1,730 --- Operating Profit as Reported 316 298 6% Acquisition Integration Charges (1) (8) Segment Operating Profit 317 306 4% Operating Margin 18.4% 17.7% 70 bps Restructuring Costs (17) --- Operating Margin Excluding Restructuring Costs Sales Growth: Organic 1% Forex (1)% Total 0% 19.4% 17.7% 170 bps Orders up 3%, with strength in Americas and APAC, and EMEA flat In Americas, residential and lighting orders particularly strong In APAC, strength in Power Quality 6
Electrical Systems & Services Segment (M) 4Q 16 4Q 15 V 15 Sales $1,455 $1,494 3% Operating Profit as Reported 177 203 13% Acquisition Integration Charges --- (5) Segment Operating Profit 177 208 15% Operating Margin 12.2% 13.9% 170 bps Restructuring Costs (29) (3) Operating Margin Excluding Restructuring Costs 14.2% 14.1% 10 bps Sales Growth: Organic (2)% Forex (1)% Total (3)% Orders down 7%, with weakness in Americas, EMEA flat, and strength in APAC Large industrial and oil and gas projects continue to negatively impact both sales and orders 7
Hydraulics Segment (M) 4Q 16 4Q 15 V 15 Sales $520 $552 6% Segment Operating Profit 37 62 40% Operating Margin 7.1% 11.2% 410 bps Restructuring Costs (23) 3 Operating Margin Excluding Restructuring Costs 11.5% 10.7% 80 bps Sales Growth: Organic (5)% Forex (1)% Total (6)% Orders up 8% Order strength in all geographic regions Mobile OEM orders particularly strong 8
Aerospace Segment (M) 4Q 16 4Q 15 V 15 Sales $425 $440 3% Segment Operating Profit 84 77 9% Operating Margin 19.8% 17.5% 230 bps Restructuring Costs (1) --- Operating Margin Excluding Restructuring Costs 20.0% 17.5% 250 bps Sales Growth: Organic 0% Forex (3)% Total (3)% Orders down 1% Order strength in commercial and military transports, and in military rotorcraft Continued weakness in business jets and military fighters 9
Vehicle Segment (M) 4Q 16 4Q 15 V 15 Sales $741 $841 12% Segment Operating Profit 97 155 37% Operating Margin 13.1% 18.4% 530 bps Restructuring Costs (13) (1) Operating Margin Excluding Restructuring Costs 14.8% 18.5% 370 bps Sales Growth: Organic (12)% Forex 0% Total (12)% NAFTA Class 8 production at 228K in 2016, slightly above last forecast Expect NAFTA Class 8 production in 2017 flat with 2016 Global light vehicle production expected to grow modestly in 2017 10
Update on 2016 Restructuring Actions 2016 $M Q1 Actual Q2 Actual Q3 Actual Q4 Plan Q4 Actual 2016 Total Restructuring Costs $(63) $(35) $(23) $(24) $(90) $(211) Insurance Income $70 For 2016, total restructuring costs were $211M. Q4 costs included ~$70M accelerated from 2017 plans, partially offset by $4M lower costs for original Q4 actions. The impact of $70M in additional restructuring was offset by income from insurance matters in Q4. 11
2016 Full Year Restructuring Costs $M 2016 Actual Restructuring Costs Electrical Products $44 Electrical Systems & Services $49 Hydraulics $67 Aerospace $4 Vehicle $35 Corporate $12 Total $211 12
Highlights of Full Year 2016 Results Markets remained weak, especially in large industrial projects, oil and gas, NAFTA heavy duty vehicle, and global hydraulics 2016 total revenues were down (5)% from 2015, $(100)M below our original plan Organic revenues down (4)%, or $(200)M below midpoint of initial guidance Forex was (1)%, $100M better than original guidance Self-help actions, driven by the second year of our multi-year restructuring program, resulted in margin improvements Excluding restructuring costs, full-year operating margins were 16.0% in 2016, up 20 bps over 2015 2016 restructuring costs were $211M, including $70M accelerated from 2017 plan. Incremental benefits were $210M in 2016 Operating EPS of $4.22 versus original midpoint of guidance of $4.30 Strong cash flow of $2.6B with free cash flow to net income of 107%, and 10.4% free cash flow as a percentage of sales Debt retirement in Q1 of $240M $730M of share repurchases, year two of $3B four-year program Dividend increase of 4% in February 2016 $100M contribution to U.S. qualified pension plan in Q4 13
For 2017, We Expect Organic Revenues to Be Flat Segment 2017 Organic Revenue Growth Electrical Products 1% - 3% Electrical S & S (2)% - (4)% Hydraulics 0% - 2% Aerospace 1% - 3% Vehicle 0% 2% Total 0% 14
2017 Segment Operating Margin Expectations Segment 2017 Guidance* Electrical Products 18.3% - 18.9% Electrical Systems and Services 13.2% - 13.8% Hydraulics 10.9% - 11.5% Aerospace 19.1% - 19.7% Vehicle 14.8% - 15.4% Eaton Consolidated 15.5% - 16.1% * Includes net impact of restructuring actions 15
Update to Restructuring Program Cost and Benefits 2015 2016 2017 2018 Total Program $M Cost Benefit Cost Benefit Cost Benefit Cost Benefit Cost Benefit Oct 2016 Plan $(145) $200 $(180) $155 $(454) $508 Actual $(129) $78 $(211) $210 Current Plan $(100) $155 --- $75 $(440) $518 Regular Ongoing Restructuring $(70) $(60) $30 2017 restructuring cost now estimated at $100M, reflecting $70M moved to Q4 of 2016 and $10M lower estimate to accomplish remaining 2017 actions Total program are costs now estimated at $440M over three years, yielding $518M of cumulative benefits In 2017, restructuring actions expected to deliver $266M incremental profit versus 2016 ($155M incremental expected benefits plus $111M lower costs) In 2018, the program expected to deliver $175M incremental profit versus 2017 ($75M incremental benefits from 2017 actions and $100M lower year-to-year costs) 16
2017 Guidance Organic Revenue Growth Forex 2017 Full Year Outlook $4.30 - $4.60 Operating EPS / Net Income Per Share Flat $(300)M Segment Operating Margins 15.5% - 16.1% Corporate Expenses (interest, pension, other corporate) Flat with 2016 excluding $70M insurance income in Q4 Tax Rate 9.5% - 10.5% Operating Cash Flow Free Cash Flow $2.6B - $2.8B $2.1B - $2.3B Capex $525M Share Repurchases ~$750M 1 st Quarter Outlook $0.80 - $0.90 Operating EPS / Net Income Per Share Revenues down (3)% compared to Q1 2016, half from organic declines and half from forex Segment margins between 13.6% and 14.0%, including restructuring costs Tax rate of 6%-7% 17
Summary 2017 operating EPS up 5% at midpoint of guidance versus 2016, with net income per share up 6% 2017 organic revenues expected to be flat with 2016 Not factoring in any impact from policies of new administration, given uncertainties about what/when policies are implemented Restructuring program is delivering expected benefits $210M incremental benefits in 2016, with incremental benefits of $155M in 2017 Costs for 2017 will be $100M, lower than 2016 by $111M Reduced structural costs position the business for strong returns as markets recover For 2017 we expect another year of strong cash flow. Capital allocation priorities remain unchanged: Capital spending to invest in businesses at ~3% of sales or $525M Dividend growth in line with future earnings growth Share repurchase program, in its third year, will continue as planned at approximately $750M Contributed $100M to U.S. qualified pension plan in January 2017 18
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