By Lewis Krauskopf
Feb 4 Diversified manufacturer Eaton Corp
issued a forecast for 2014 just within analysts'
estimates, but reported disappointing quarterly profit margins
on Tuesday, sending shares down more than 3 percent.
The maker of electrical and hydraulic systems reported a
fourth-quarter operating profit of $1.08 per share, exceeding
analysts' estimates by 2 cents. But this was due to an
unexpected tax benefit that obscured underlying weakness in its
results, analysts said.
"The quarter basically benefited from a much
lower-than-expected tax rate," said Mig Dobre, an analyst at
Robert W. Baird.
He said the tax benefit added 16 cents per share compared to
his estimate, while operating income fell 22 cents short of his
"From an operating standpoint, margins were frankly shy of
what was guided and what was expected," Dobre said.
Noting the boost from lower-than-expected taxes, Sanford
Bernstein analyst Steven Winoker characterized the quarterly
results as an "operational miss."
The company said the tax benefit related to the closing of
its acquisition of Cooper Industries.
Dobre said the company's 2013 profit margin was 14.9 percent
compared to the 15.25 percent the company projected in October.
In an interview, Eaton Chief Executive Officer Sandy Cutler
said a main reason for the lower-than-expected margins stemmed
from costs tied to introducing new products in its vehicle
segment, while its electrical and aerospace segments came in
below margin targets as well.
The company said fourth-quarter net income rose to $479
million, or $1 per share, from $179 million, or 46 cents per
share, a year ago. The year-earlier quarter included costs
related to the acquisition of Cooper.
Excluding items, Eaton earned $1.08 per share, 2 cents
better than the average analyst estimate, according to Thomson
Revenue increased 28 percent to $5.53 billion, while
analysts looked for $5.55 billion.
Most of the sales increase came from acquisitions, while
Eaton's base business increased 4 percent.
"We had the strongest volume quarter, in terms of organic
growth, that we had in any quarter" in 2013, Cutler said.
Eaton expects earnings in a range of $4.50 to $4.90 per
share for 2014, excluding acquisition-related charges, or an
increase of 9 percent to nearly 19 percent. Analysts'
expectations were at the higher end of that range, at $4.88 a
Dobre said the forecast "at first glance appears
Eaton said it anticipated its markets would grow by 3
percent this year.
Cutler said the company is projecting that overall
manufacturing and industrial production will rise at a faster
clip than the global economy in 2014, which he said would
increase about 3 percent.
"That's a better environment obviously than we saw in '13,"
Cutler said. "The big change really comes from Europe," which
will grow somewhat in 2014 after being a drag on the economy
last year, he said.
Eaton shares were down 3.2 percent to $68.01 in afternoon
trading on the New York Stock Exchange.