Eaton’s end-market conditions remain largely unchanged since the end of April: there was moderate growth in North American commercial and nonresidential construction and vehicles (especially trucking), the electrical systems segment was better in April and May, and China and Brazil remain tougher-than-expected regions.
Sequential and year-over-year declines in industrial margins reflect many new product launches in late 2013 but are now resolved; in first quarter 2014, vehicle sales were weaker than expected as a result of Brazil’s economic malaise, offsetting sharply high sales of U.S. heavy-duty trucks.
Eaton’s aerospace business has been burdened with significant new program launch expenses and a significantly higher mix of sales skewed to lower-margin OEM versus more profitable aftermarket.
After a dearth of large sales for several months, April was a stronger month for electrical systems and services, and that has continued in May as well.
In second quarter 2014, nonresidential construction has rebounded as expected, vehicle markets have been as expected excluding Brazil, hydraulics has been as expected excluding China, and aerospace remains on track. Overall macro data is not particularly encouraging and China is still decelerating.
Hydraulics has enjoyed strong orders with the exception of China, where new equipment sales are very weak for construction and mining mobile equipment.
Eaton’s served end-markets are still expected to grow between 2% and 4%, with 3% most likely. Eaton has raised its second-quarter operating EPS estimate by $0.10 for the one-time after-tax aerospace divestiture gain, which should more than offset the $0.08 of previously announced additional restructuring.
Cooper Industries has significantly expanded Eaton’s electrical solutions, but fuse and circuit breakers were also a particularly strong complementary fit to benefit Eaton; Cooper also strengthened Eaton’s industrial market access significantly.
The 54%/46% sales mix in and outside the United States is targeted to move to 60%/40% by Easton over the next several years; Eaton is particularly focused on combining its hydraulics strength with Cooper’s oil-and-gas market strength to better position Eaton in a large, vibrant end-market.
Backup power is another area where Eaton is benefiting from Cooper’s strong industrial market access, as well as its strong position with utilities, for backup power and power conditioning; Eaton believes its advanced power electronics gives it a big edge versus competitors.