伊頓 (ETN) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding, and welcome to the Eaton Fourth Quarter of 2020 Earnings Call. (Operator Instructions) Just a brief reminder, today's conference is being recorded.

I'm now happy to turn the conference over to Senior Vice President of Investor Relations, Yan Jin.

Hi. Good morning. I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's Fourth Quarter 2020 Earning Call. With me today are Craig Arnold, our Chairman and CEO; and Rick Fearon, Vice Chairman and our Chief Financial and Planning Officer. Our agenda today include opening remarks by Craig, highlighting the company's performance in the fourth quarter. As we have done in our past calls, we'll be taking questions at the end of Craig's comments.

The press release today and the presentation we'll go through today has been posted on our website at www.eaton.com. Please note that both the press release and the presentation include reconciliation to non-GAAP measures. A webcast of this call is accessible on our website and will be ready for replay.

I would like to remind you that our comments today will include the statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties and are also described in our earnings release and the presentation. They're also outlined in our related 8-K filing.

So with that, I will turn it over to Craig.

Thanks, Yan. Appreciate it. And we'll start on Page 3. And we naturally have a lot of good news to talk about today, but I'd say we'd be remiss if we didn't begin by at least acknowledging Rick Fearon and his upcoming retirement. As most of you know, Rick will reach mandatory retirement age of 65 in March and will retire on March 31. And so I'd like to extend a sincere thanks to Rick for his 19 years of service to Eaton. Rick has obviously played just an instrumental role in the transformation and shaping of our company and the company that we have today. And he's been a trusted partner to the management team, to our Board, and certainly to me personally. And looking back, Rick has participated in more than 75 of these earnings calls, and this will be his last one. So we certainly wish Rick and his family well as he makes this transition onto life after Eaton, if there is life after Eaton. I'm not sure, Rick. But Rick will also be around for another couple of months and also will attend the investor meeting on March 1.

Moving to Page 4. I'd also like to welcome Tom Okray to Eaton as well. Tom becomes Eaton's CFO effective April 1. Tom was previously the CFO of W.W. Grainger and joined the team in January. Throughout his career, he's held various leadership positions at Advanced Auto Parts, at Amazon and GM. Tom is a seasoned CFO with a strong track record of success, and we anticipate he will bring a very unique perspective and set of skills to the role here at Eaton. He's operational, he's growth-oriented, and he just has outstanding knowledge of distribution channels. Like Rick, Tom is also a global leader who's lived around the world, including several countries in Europe as well as Korea. And so we're very happy to welcome Tom to the Eaton team as well and look forward to his contributions in the future.

Now on the move to more good news and turning to Page 5. Here, we summarize a number of recent noteworthy accomplishments. And I'll begin with the recent announcements to acquire Tripp Lite for $1.65 billion and Cobham Mission Systems for $2.8 billion, 2 very strategic acquisitions that improve the profitability, and quite frankly, the growth outlook for our company. The acquisition of Tripp Lite will enhance the breadth of our edge computing and distributed IT product portfolio and will also expand our single-phase UPS business in the United States. We're paying approximately 12x 2020 EBITDA, 11x estimated 2021 EBITDA, and we expect this transaction to close in the middle part of 2021.

Yesterday, we also announced the acquisition of Cobham Mission Systems. Cobham is a leading manufacturer of air radar refueling systems, environmental systems and actuation. And Cobham also adds highly complementary products to our company and has a strong position, importantly, on growing defense platforms. We're paying approximately 14x 2020 EBITDA, 13x estimated '21 EBITDA, and we expect this transaction to close in the early part of Q4.

And if we can just turn to Q4 specifically, we certainly have a stronger-than-expected quarter, and we're pleased with our solid results. Our team just continued to execute well despite the pandemic. Q4 earnings per share of $1.18 on a GAAP basis and $1.28 on an adjusted basis. Our Q4 revenues of $4.7 billion were down 5% organically, which was at the high end of the range that we provided, and it's up 3% versus Q3. And our decremental margins were 21%, also better than the guidance of 25% that we provided.

I'm also very pleased that with very strong free cash flow. I mean our operating cash flows were $943 million, and our free cash flows were $845 million, both of which exceeded prior year levels. And for 2020, we generated $2.6 billion of free cash flow, which was at the top end of our guidance range, and an all-time record for free cash flow to sales at 14.3%. So a lot of really positive kind of things to talk about there as the business and the company continues to execute well.

Turning to Page 6, we summarize our Q4 financial results. And I'll only note a few items on this page. First, acquisitions increased sales by 2%, which was more than offset by the divestiture of Lighting and Automotive Fluid Conveyance, which reduced sales by 8%.

Second, our segment margins of 17.4% were very strong, for sure, and only 40 basis points below prior year despite lower volumes. And then just as a bit of a reminder, I would note that we record all of our charges related to acquisitions, divestitures and restructuring at corporate instead of at the segment level, which hopefully makes it easier to model the company going forward.

Moving to Page 7, we summarize our Electrical Americas segment. Revenues were down 18%, and this was made up of a 1% decline in organic revenues and then 17% mainly due to the divestiture of Lighting. In this segment, we saw strong growth in data centers and residential markets, which was offset by weakness in industrial and commercial markets.

Operating margins increased 120 basis points to 21.1%, and this very strong margin performance was due to really effective cost-containment actions, but also aided by the divestiture of Lighting. This combination resulted in very strong decremental margin performance of 15%.

While orders were down 1% on a rolling 12-month basis, data center orders were particularly strong and actually up double digit. Our backlog grew by 12%, and this was driven by strength in both residential and data center markets.

Lastly, and as I mentioned at the beginning, we're very pleased to announce the acquisition of Tripp Lite. This business is just a tremendous strategic fit with our existing Electrical franchise and allow us to continue to capitalize on this digitalization trend that requires edge computing. And when you think about some of the future estimates suggesting that some 75% of enterprise-generated data will be created and processed via edge computing, we expect this rapid growth to continue for some time to come.

Next, on Page 8, we show the results of our Electrical Global segment. Revenues declined 5% with a 7% decline in organic revenue, partially offset by 2% positive currency. And this was better than the midpoint of our expectations for the quarter. The lower organic sales were driven by weakness, not surprisingly, in oil and gas and industrial markets. And if you exclude oil and gas and industrial businesses, kind of more project-driven businesses, Europe was down slightly, and Asia Pacific was actually up low single digit.

Operating margins declined 40 basis points on a year-over-year basis. And here, once again, decremental margins were well managed at 25%. In this segment, our orders declined 6% on a rolling 12-month basis with continued weakness in oil and gas and industrial markets. And excluding oil and gas and industrial markets, orders were down 1%. And we saw strength in data centers and residential markets. And in fact, data centers were actually up some 30%.

We also continue to expand our backlog, which was up 14%, driven once again by strength in residential and data center markets. Lastly, we were pleased to announce in mid-December an agreement to buy 50% of HuanYu High Tech, which is based in China. HuanYu manufactures low-voltage circuit breakers and contactors in China and also throughout Asia Pacific. This investment will provide us access to a really strong portfolio of products, and it will open up significant growth opportunities for our company throughout Asia Pacific. And we'd expect this transaction to close sometime in Q2.

Turning to Page 9, we summarize our Hydraulics segment. Revenues were up 2%, which was all organic. This was much better than the down 7.5% at the midpoint of our guidance as markets just continued to recover faster than anticipated, and especially, I'd say, in China and in Europe. Operating margins were 10.5%, up 70 basis points from Q3.

The momentum in this segment really continued really throughout the quarter, resulting in a 25% increase in Q4 orders with strength in both agriculture and construction equipment markets. We're working towards closing the Hydraulics transaction by the end of the first quarter. I would also add though, but given some of the time needed to complete all of the regulatory approvals, we wouldn't be surprised to see this slip into the early part of the second quarter.

Next on Page 10, we have the results for our Aerospace segment. As expected, revenues declined 13%, down 25% organically, partially offset by an 11% increase from the acquisition of Souriau and 1% positive currency. The organic revenue decline was primarily driven by the continued downturn, as we all know, in commercial markets, partially offset by double-digit growth in military sales. Operating margins declined to 13 -- excuse me, to 18.3%, but we see these at still very healthy levels of performance.

And lastly, yesterday, we announced the acquisition of Cobham Mission Systems. Cobham, a technology leader in important defense aerospace product lines, will add a number of complementary capabilities to our Aerospace business. The acquisition will significantly increase our exposure to, once again, growing defense platforms. It will enhance our fuel systems business and strongly position our Aerospace business for future growth.

Moving to Page 11, we summarize our Vehicle segment. Revenues here declined 7%, including a 1% organic decline, negative 5% from the divestiture of our Automotive Fluid Conveyance business and 1% headwind from negative currency. The 1% decline in organic revenues was once again much better than the 8.5% decline at the midpoint of our guidance as both light motor vehicle and truck markets have continued to rebound more quickly than we anticipated. We had particular strength actually in South America and in Asia Pacific.

NAFTA Class 8 production was down 6% in Q4, but once again, this was better than expected. We're certainly happy also to see the rebound in operating margins of 16.6%, down just slightly versus prior year and up 260 basis points sequentially. And our decremental margin performance here was once again very solid at 23%.

Turning to Page 12. We show the results of our eMobility segment. Revenues increased 13%, including 11% organic and 2% currency tailwind. Organic growth was also here much higher than the 1.5% growth at the midpoint of our guidance. We experienced solid growth across all regions, which was driven by both high-voltage electrical solutions for passenger cars as well as low-voltage solutions for commercial vehicles.

Operating margins were a negative 5.9%. And once again, it's just a reflection of the fact that we continue to invest more in R&D and program implementation in this fast-growing segment of the company. We have a robust pipeline of opportunities, and we continue to see electrification as a significant growth opportunity into the future.

So before we turn our attention to '21, I'd like to take a minute to really summarize our results for 2020, and those are shown on Page 13. First, while the pandemic caused certainly an unprecedented economic volatility and downturn, we remain focused on delivering for all of our stakeholders. We remain focused on keeping our employees safe, delivering for our customers, and certainly supporting our communities. And we're also proud of how well we performed for our shareholders. We took the appropriate cost-reduction and cost measurement -- cost-management measures to ensure solid decremental margins of 23% and resilient cash flow of $2.6 billion. Our free cash flow to adjusted earnings conversion was very robust at 149%. And free cash flow to sales was 14.3%, 90 basis points over 2019 and another all-time record.

We launched a $280 million multiyear restructuring program to reduce fixed costs. This is really targeted mostly in those businesses that have been impacted by the pandemic. And these actions will yield $200 million of mature year benefits and make certainly Eaton stronger in the long run.

We will also continue to transform our portfolio, announcing or completing divestitures valued at $4.7 billion. We acquired Power Distribution, Inc., and we also announced our intention to acquire 50% of HuanYu High Tech. In addition, we returned $2.8 billion to shareholders via buyback and dividend payments.

And lastly, we delivered very strong shareholder returns, results that were 20 basis points above the median of our peer group. And so we're certainly proud of that performance as well. Overall, certainly proud of the team and certainly even more encouraged by our prospects for the future.

As we continue to transform Eaton into a company of higher growth, higher margins and more consistent earnings, the company certainly feels like in 2020, we took an important step forward, demonstrating that it is, in fact, a different company, and we're well on our way to delivering against that goal.

Moving to Page 14, we list our revenue and margin guidance for 2021. Overall, here, we expect organic growth between 4% and 6% with weakness in Q1 followed by strength thereafter, and obviously, given the comparisons, particular strength in Q2. In both our Electrical segments, we expect organic growth to be 3% to 5%. And just starting with the Americas, we expect to see continued strength in residential, data center and utility markets, solid growth in industrial control markets and ongoing weakness in commercial construction markets.

In Electrical Global, we anticipate strength in residential, data centers, utility and industrial control markets, so very much like in the Americas, offset by softness in commercial construction and in the oil and gas market. And for Hydraulics, we expect organic growth to be between 4% and 6% with broadly improving markets around the world. And in Aerospace, we expect organic growth of 2% to 4% with strength in military, offset by continued weakness in commercial markets. And for Vehicle, we anticipate strong organic growth, some 10% to 12%, with strength in both light vehicle markets and truck markets. And just as a reminder here, our Eaton Cummins joint venture will actually consolidate the revenues associated with this particular joint venture. And so much of this growth will show up in the joint venture, not in Eaton's revenue. And in eMobility, organic growth is expected to be up 14% to 16% driven by strength in electric vehicles globally.

Turning to segment margins. We expect Eaton to be between 17.8% and 18%. At the midpoint, it's 140 basis points improvement over 2020, and importantly, 20 basis points over the pre-pandemic levels in 2019.

If we could turn to Page 15. And really, before we discuss the rest of our 2020 guidance, we'd like to show you the math behind our new definition of adjusted EPS. In 2020, we're revising our definition of adjusted EPS to add back amortization of intangibles. We believe this will provide investors with a more accurate measure of performance. And it will also, quite frankly, make it easier for you to compare our performance with our peers. The table shows adjusted EPS using our current and new definitions for both 2020 and for our guidance range for 2021.

It's important to note here as well that the applicable tax rate for intangibles is 23.5%, and this is really based upon the tax jurisdictions where the intangibles are located. For 2021, we expect full year adjusted EPS to be between $5.40 and $5.80. And this includes $0.7 from the after-tax impact of intangibles, $0.25 of accretion from the addition of Tripp Lite and Cobham, but this $0.25 is reduced by $0.15 due to lower-than-planned share repurchases and additional financing costs. So on a net basis, the 2 acquisitions will add $0.10 to our expectations for earnings for 2021. We're assuming that Tripp Lite closes once again at the start of Q3 and Cobham closes at the start of Q4.

Turning to Page 16, we cover the balance of our 2021 guidance. Organic growth, as we talked about, 4% to 6%, with divestitures subtracting 8% and positive currency adding $200 million. Adjusted operating cash flow is expected to be between $2.3 billion and $2.7 billion, and CapEx will be approximately $500 million. On an adjusted free cash flow, this is projected to be $1.8 billion to $2.2 billion with a midpoint of $2 billion. The way I would say to think about this is 2021 for us is really a bit of a transition year with several unusual items impacting cash flow, including approximately $200 million due to the sale of the Hydraulics business.

We have an incremental $125 million related to our multiyear restructuring plan, approximately $125 million due to the repayment of the CARES Act payroll deferral from 2020, and as I noted, $110 million increase in capital spending, which we really see as a return to more historical levels and the levels we were at prior to the COVID-19-driven reductions.

I'd also note that the increase in capital spend is going to support strategic growth, and we're really pleased to put dollars to work here. For example, in Q4, we announced $100 million investment to expand our North America electrical manufacturing and distribution centers. Excluding these items, as I think about this as a transition year, the midpoint of our guidance would really be approximately $2.6 billion.

And lastly, our Q1 guidance is as follows: We expect earnings to be between $1.17 and $1.27, for revenues to be down 3% to 4%, for segment margins to come in between 15.7% and 16.1%. And consistent with the full year, we expect our tax rate to be between 15.5% and 16.5%.

And finally, I'd like to conclude on Page 17 with a summary we'd say -- why we think Eaton remains a very attractive long-term investment. First, we're an intelligent power management company. And this means that we're well positioned to take advantage of perhaps what we think is the most important secular growth trend that we will experience in our lifetime; an energy transition driven by climate change, increasing electrification really of everything, and explosive growth in connectivity.

And it's also helpful, and I'll remind you that we've been at it for some time in terms of being a leader in ESG practices, which is now becoming increasingly important around the world. In fact, I'd say that Eaton's commitment to sustainability is deeply embedded in the belief that what's good for the planet is also good for Eaton, and that environmentally friendly solutions will create growth opportunities for our company.

As you know, our commitment to improve our business portfolio with a focus on high growth, higher earnings and more earnings consistency is ongoing. That's exactly what we've been doing over the last number of years and what we'll continue to do.

Today, some 85% of our segment profits come from Electrical and Aerospace and with -- and that percentage will actually continue to grow with these announced acquisitions. And while not complete, I think it's clear to say that our strategy is working. Our operating margin guidance for 2021 at 17.8% at the midpoint is an all-time record and 20 basis points above 2019.

In addition, our cash flow continues to be a real point of differentiation. As we demonstrated in 2020, it's not only strong, but it's resilient under all economic conditions. You can expect this point of differentiation to continue. Lastly, we expect to deliver 8% to 10% EPS growth over the 5-year planning horizon, including 14% in 2021.

And so with that, I'll turn it back to Yan for Q&A.

Thanks, Craig. (Operator Instructions)

Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instruction.

(Operator Instructions) First, we'll go to the line of Nicole DeBlase of Deutsche Bank.

Rick, best of luck in retirement. It was great working with you.

Great. Thanks, Nicole.

So maybe starting with some of the order trends that you saw within Electrical. I'm not sure that the trailing 12-month trend really tells the story here, especially since we are seeing improvement into next year in your organic growth guidance.

So Craig, maybe you could talk a little bit about what you're seeing in realtime in the end markets. And what's starting to show -- or what's continuing to show sequential improvement in the fourth quarter and into early 1Q?

Yes. Nicole, appreciate the question. And that's obviously the big one that we're all spending a lot of time focusing on. And I'd say that if you think about our Electrical Americas business in the fourth quarter, it continued to be impacted, quite frankly, by the spread of COVID-19 and some intermittent shutdowns and supply chain issues that we experienced, principally here in the U.S. market. And so I would suggest that if you think about those areas that have been strong and continue to be strong and the things that are really driving the increase in the backlog, residential markets continue to be doing this extraordinarily strong to the point where I'd say we're still needing to run after that market. We're still trying to fulfill this increasing backlog in that business. And so residential, we think, continues to be extremely strong.

You heard me talk about what's going on today in the data center market and some of the double-digit growth in the Americas, up 30% in Global. And so data center market is driven by this insatiable appetite that we all have for data. It continues to grow very strongly. Utility markets continue to do well.

There's been a lot written about what's happening today in commercial construction, and that's the market that everybody's watching and we are as well. We think it's important to note even there that if you think about for Eaton, specifically, commercial construction is under 20% of our total Electrical business in the Americas. Of that, some 1/3 of it goes into retrofit and upgrades, which tend to be more predictable.

And then there are markets like warehousing, for example, that's in commercial construction, which has a much higher electrical intensity than, let's say, retail, that's doing quite well. And so I'd say that, by and large, we're comfortable with the guidance that we provided for our Electrical businesses in the Americas and globally. 3% to 5%, very much consistent with the trends that we saw during the course of Q4, assuming we don't have the supply chain-related disruptions that we experienced. And we're certainly encouraged by the fact that we built backlog. And as you know, the backlog for us typically ships in 12 months or less. So that gives us also lots of confidence in our ability to deliver those revenue numbers.

Got it. That's really helpful color, Craig. And then for my follow-up, can we just talk a little bit about unpacking the outlook for margins? What you guys have embedded for underlying decrementals relative to other puts and takes, like temporary costs coming back, some of the restructuring payback that you'll start to see this year, maybe some M&A impact? If you could provide some color there.

Yes. And I think the margins that we guided to, 7.8% at the midpoint, an all-time record, is certainly very much indicative of the fact that the incremental margins in 2021 are going to be quite attractive.

Certainly, we're going to start to see some benefits associated with the $280 million restructuring program that we put in place, $200 million in mature year. But we start to see some of those benefits clearly in '21.

The other thing with respect to -- we did, like other companies, take a number of temporary cost-containment measures during the course of 2020. And I'd say for the most part, we're expecting most of our costs to come back in 2021. The one place that we'll continue to see some benefits with respect to cost-containment measures -- certainly, we're not spending nearly as much traveling, hotels. And so our travel and entertainment expenses will certainly continue to run at levels that are well below historical levels.

But the other things that we've done during the course of 2020 to contain costs, we're assuming that all those costs come back into the business during 2021. And so for the most part, I'd say the plan is very well conceived and thought through. And the margins that we've articulated for our businesses are very much consistent with where our businesses are currently running and simply adding to that, these increments and decrements for cost-containment measures plus restructuring benefits. And so we're comfortable with the number.

Next, we'll go to the line of Andrew Obin of Bank of America.

First, I want to extend my congratulations and thanks to Rick. You probably don't remember it, but you and Sandy were my first meeting as a senior analyst in London years and years ago. So thank you for all the help.

You're welcome. I do remember that, Andrew. And you've been a loyal commentator over all these years, so thank you.

But just a question -- just a broader question. A lot of change in Eaton. If you look, there's new appointments. Katrina Redmond, Raj as the CTO. You have new Head of Energy Transition. Can you just sort of talk about what should we think about this change? And what does it signal about the direction of the company over the next couple of years? That's my first question.

Yes. I'd say -- I appreciate you commenting on the changes because we have -- like every company, you go through a period of refreshment. And sometimes, these are additions, as you think about moving the strategic direction of the company in a particular direction or 2. And sometimes, people simply time out, like Rick has.

And but certainly, if you think about some of the additions that we've made like to add Aravind Yarlagadda to our team and he reports to me, and he's our Chief Digital Officer. And that's really a reflection of the fact that I talk about these 3 big trends that are taking place and, as I mentioned, perhaps the 3 biggest trends that we'll see in our lifetimes around energy transition, connectivity, climate change and the like. So this is really positioning the organization to capitalize on these trends that we're seeing inside of our markets. And so I think these are changes that we're absolutely thrilled with.

And we think we're bringing in people or having people step up to take on responsibilities that are -- ensure that Eaton takes our fair share of these growth opportunities that we're looking at into the future. And so I just think it's -- these changes, I would hope that you'd see that they are very much strategically aligned with where the company has said that we want to go. And these are things that are certainly going to help us capitalize on those opportunities.

And just a follow-up question. We're getting a lot of questions on your eMobility business. And I know we're definitely still in the investment stage and will be for a while. But could you just comment in terms of who should we think as your customers? Because clearly, a lot of activity in sort of electric vehicle space. Can you just talk, are you targeting North American players, players in Asia, Europe? As this thing emerges 2, 3 years from now as a bigger business, who should we see as the key customer base there?

Yes. And I appreciate the question on eMobility. And obviously, it's a very hot space and a lot going on there. And I'd say for us, it's not so much a focus on a geographic solution as much as it is really a technology-driven solution. So we're really focusing on those areas around power electronics, power conversion, inverters, converters, power distribution, onboard charging. So for us, we're endeavoring to be a global player, serving both the light vehicle market, I'd say, and importantly, by the way, the commercial vehicle market, where we have a very strong footprint today with commercial vehicle customers. And so I would think about it really more we are endeavoring to play around the world and to be balanced, quite frankly, around the world. But it's really focusing on very particular technologies and products where we think we can offer a unique solution and deliver acceptable returns to the company.

I guess the question is, we know about your very strong position with existing players, with traditional OEMs, just going back to your internal combustion engine days. But should we see it also taking a fair share with the emerging players as well?

Yes. I'd say, even today, if you think about the emerging players, I mean, today, we -- Tesla is a great example. Tesla is a customer today. And so I would say that absolutely, whether it's an existing player as they work their way through this transition to electrification, or it's some of the emerging players in the U.S. and around the world, I mean, you could think about us pursuing opportunities with all of them.

Next, we have the line of Nigel Coe, Wolfe Research.

So Rick, [8 -- or $0.08 TSO] is not bad. So congratulations on a great career, and we will miss you.

Great. Thank you, Nigel.

So I just want to clarify on the guidance framework. Hydraulics, is that in for 1 quarter? I'm sorry if I missed that in the prepared remarks. Is that in for 1 quarter? And is Hydraulics in your 1Q guide for organic and margins?

Yes, it is. It is in for 1 quarter, and it is included in the guidance for Q1. That's correct.

And the market growth rate that we gave for Hydraulics, that's the growth rate in Q1.

Q1. Exactly right. And then move on to Electrical Americas. And I fully absorbed the comments about COVID and supply chain. But it did come in slightly below your plan for those reasons, I guess. But just a little bit of context in terms of what happens during the quarter in the Americas. And did we see channel destocking? And the sequential kind of Q to Q on the margin in that segment was a bit heavier than what we'd expected. So a little bit of context there would be helpful.

Yes. No, I'd say specifically, as the quarter unfolded, I would say that we, in the U.S., certainly experienced second waves and an additional kind of supply chain-related constraints in the Americas that certainly impacted the business. And I'd say on a relative basis, the month of December and the end of the quarter was better than the beginning of the quarter as some of the supply chain constraints began to be sorted somewhat. As you probably read and hear, there's lots of issues in the various ports, LA, Long Beach. And so it really has been a supply chain issue. It's been, in some cases, an issue around keeping our sites fully staffed on the manufacturing floor as absentee rates, whether it's for Eaton or some of the suppliers, had been a little bit of a challenge during the early part of the quarter.

And so I'd say, no, the Americas business specifically, it's performing very much in line with what we would have anticipated. But for these disruptions, I'd say, in supply chain. And specifically to your question around destocking, I'd say no. I mean, we didn't really -- at this juncture, we think inventory levels in the channel, with the exception, as I noted, in residential, we think the channel is largely where it should be given the outlook for revenue.

And so I think we, quite frankly, still have some channel stocking to do in the residential side of the business. But other than that, it's pretty well aligned.

Next, we'll go to the line of Jeff Sprague of Vertical Research.

Congrats, Rick. I don't think this is your last earnings call, though. I think you'll dial in next quarter with us. You'll make it 76. You're not going to let go of that easily.

Yes. You can bet on that, Jeff.

I just wanted to dig into Cobham a little, if we could. Tripp Lite looks like a total slam dunk from my vantage point. There's some questions around Cobham that I'm hoping you could maybe address.

The PE firm disclosed EBITA, I think it was, of GBP 95 million in 2019. So that's about $124 million. I think your acquisition multiple implies it's running 2 10-ish. And I'm getting a fair amount of questions. Is there just some kind of accounting change there relative to Boeing program accounting? And if there's any particular disconnect actually in the EBIT in that business relative to how the cash flows might be running in the business.

Jeff, I'll address that. If you looked at that unit, that unit had a lot of intercompany relationships with other parts of Cobham. And so you have to actually unpack that information and restate it to get to the stand-alone Cobham Mission Systems' EBITDA. And so that's what we're referring to, the appropriate stand-alone Cobham Mission Systems' EBITDA.

So there's not any extraordinary growth in between 2019 and 2021 on accounting changes or anything?

No.

No. And how about the cash flow equation there?

Well, it's -- we're not expecting to own it for much of '21. As we said, the start of Q4 is what we're building in at the close. And so there'll be just a modest amount of cash flow. But next year, we would expect you would have a full year's worth of quite good cash flow. EBITDA margins as a percentage of sales are quite good in that business.

If I can just add, Jeff, I would just tell you that we are every bit as excited about Cobham Mission Systems as we are Tripp Lite. We think they're both highly strategic acquisitions. We think both of them do wonders for our business. And specific to Cobham Mission Systems, I think it's very -- it's all about what platforms are you on in the Aerospace business. And if you're on the right platform at the right time, these businesses go on for a very long period of time. The typical military platform could run 40, 50 years. And we're at the very front end of what's going to be a very long expansion cycle on the military side, and Cobham has been very successful on some of the most important military platforms that are going to run for a very long period of time. So we think it really adds a large level of continuity and consistency and predictability to the company and to our Aerospace business for some time to come.

And Jeff, just to put some meat on what I said, the EBITDA margins are between 20% and 25%. So that's a very attractive business.

Yes. Can you also just comment on how you utilize that tax benefit that's part of the deal?

That's simply a 338(h)(10) election. So all that means is that, that will give us a tax deduction for the asset value. And typically, in a situation like this, you end up paying the seller for that because we're the ones that are going to be able to deduct that value.

I see. Good luck with the deals. Much appreciated.

Next, we have the line of Scott Davis of Melius Research.

Congrats, Rick.

Thanks.

Hate to ask kind of [Mnuchin] here, but what is the full amortization effect once these 2 big deals close?

Well, here's the way to think about it, Scott. The gross accretion -- are you talking about amortization or accretion?

Just the amortization, not the accretion.

Oh, okay. You're going to have -- you got $0.70 from -- that's the current Eaton amortization. And then I'll give you -- just 1 second, I'll give you the...

While Rick's looking that up, Scott, did you have a second question? We'll let Rick go through the book.

I do. If we go back to eMobility, and I know the question was asked in kind of a different way, and I'm going to ask it again. I mean, do you expect the growth rate to match up with kind of the penetration of electric vehicles? I mean, because I think -- if memory serves me right, I think the forecasts are something like 50% growth rates in EVs in 2021. But should it be a higher growth rate than the actual SAAR in EVs because you have a higher content per vehicle that's going in or increasing content for -- I'm just kind of struggling to reconcile your conservative forecast with the actual growth that people are expecting.

Yes. And I think so much of it, Scott, is going to be a function on which platform are you on and when does the platform that you're on get launched into the marketplace. And so a lot of the growth today in EVs and what's perhaps in some of the forecasts are based upon some existing platforms heavily influenced by companies like Tesla.

But the other thing I would say is if you think about our eMobility business, it's both in electrification of cars, but it's also the legacy business as well. And so it's really all of the electrical content that we have going into vehicles in general, not just the high-voltage electrical solutions that you're seeing specifically on eMobility platforms. And so for us, it's what we have fairly good visibility to.

Things could turn out to be slightly different than that, but it's really a function of which platform that you're on.

And Scott, the answer to your question on the intangible amortization for the full year of both of those deals is about $0.15.

Okay. Okay. Good.

Next, we have the line of Joe Ritchie of Goldman Sachs.

I'll pass along my kudos and congratulations to you, well, Rick. Really enjoyed working with you throughout the years.

Great. Thanks, Joe.

So maybe just starting off on the 2 acquisitions. Can you guys maybe just provide a little bit more history that you have with the company -- with both of those companies? How long have they've been on your radar screen? And then also specifically, anything you could tell us about how those companies performed through the pandemic?

Yes. I'd say that for us, Joe, we're always actively courting companies and strategically, if you think about today, the way these 2 companies fit into our broader portfolio, you could imagine that they've been on our list for some time. And we always find that when you create long-term relationships and you're working with companies and the management team early on in the process, it increases your likelihood of success. And as a result, we're absolutely thrilled to be able to add these 2 companies to our portfolio.

And so suffice it to say that we've been at it with these companies for some time. Obviously, these transactions tend to come together fairly quickly. But a lot of courting had taken place long before these deals were finally signed overall.

And then in terms of performance, I mean, both of these businesses performed extremely well through the pandemic, as you saw -- or you'll likely see with Cobham. And because it's a military business, they actually -- despite the fact that we went through this pandemic, their military business, just like our military business, held up very well. I mean, that's one of the good attributes of having military businesses. In general, they tend to be much more consistent, much more predictable than perhaps some of the more commercial endeavors.

And the same thing I would say would be true of Tripp Lite. While the revenues regressed a little bit during the course of 2020, it held up much better than most other businesses, largely because of the segment of the market that it's serving in, essentially, enterprise, data solutions, computing at the edge. They're exposed, obviously, to this growth in 5G. And so both of these businesses, I would say, held up better than the underlying markets.

Yes. That's helpful, Craig. I guess maybe just following up on a question from earlier on the cash flow of these 2 businesses. And so fully recognize it's not going to have much of an impact in 2021. But if you take a look at your EBITDA -- implied EBITDA for -- in the out-years on an annual basis, it's about $365 million, $370 million. I guess just in that context, how should we think about whether it's in absolute dollar amount, free cash flow margins or free cash flow conversion for the 2 businesses that are coming in?

I mean, I believe from a cash conversion basis, you'll see that it will be very high for these 2 businesses because they will have a fair amount of intangible amortization. And obviously, that's noncash amortization. And their underlying EBITDA margins are quite strong, and so they should actually be additive to our overall free cash flow margins.

Next, we go to the line of Ann Duignan, JPMorgan.

And Rick, I think I see you more likely playing golf in Ireland than sitting on a beach, but however. Hopefully, both. But...

You know him well.

Anyway, I guess, Rick, my question of you is on the Tripp Lite acquisition, single phase. For a long time, you had said that single phase was not a very attractive end market. It was lower-margin, more commodity-type business. What's changed or what's different about Tripp Lite that makes you think that this is different this time?

Well, actually, I don't know where you got the impression that single phase is lower margin. In fact, it's never been lower margin. It actually has margins that are every bit as good as 3-phase.

And the market -- actually, if you look at the entire power quality market, the market splits out historically about half 3-phase and half single-phase. And we, of course, are already a significant participant in a single phase market, not as much in the U.S. as we are in EMEA and APAC. And so this simply gives us a complete global footprint for the single-phase business.

And we -- the single-phase business is one that we built up over really the last 10 years through several acquisitions, starting with MGE, which we did in '07; and Phoenixtec, which we did in '08. And so we've been -- we're a very knowledgeable acquirer in this space. And so this was an opportunity to add a fill-in for us, a company that gave us the Americas exposure that we hadn't gotten through those other acquisitions. And it's a very high-margin space. It has been ever since we participated in it.

Okay. I'm going back even earlier than that. So maybe I'm digging back too far in my memory. I apologize for that.

Maybe you could give us a little bit more color, like you did on Electrical Americas. Maybe you could talk about Electrical Global and what you saw there through the course of the fourth quarter and any supply chain issues. And you mentioned supply chain issues in the context of Electrical Americas, but what about copper prices? Are you concerned about input costs as you go through 2021?

Yes. Appreciate that question, Ann. And I'd say very much like we experienced in the U.S., I'd say our Electrical Global business, while it did better than what we anticipated, you find many of the same trends where I'd say that residential markets, utility markets, data centers continue to be very strong.

The one headwind we have that we -- in Electrical Global, as you know, we report our oil and gas exposure through Crouse-Hinds in our Electrical Global business. And the oil and gas markets continue to be weak. And so that's perhaps holding that business back a little bit.

But with respect to supply chain, yes, we're absolutely seeing it. We're seeing inflationary pressures in copper. We're seeing it in some steel. We're seeing some availability and some pressures also on microprocessors and the like around the company. And the way I would think about that once again is that we've seen this stuff starting to kind of raise its head back in the fourth quarter. Our teams have been very busy putting together mitigation plans, largely around things that we can do to either change sourcing or taking our prices up in the marketplace.

And while there could always be a quarter-or-so timing impact, we're confident that we'll be able to offset any inflation that we see in the business with either cost-reduction measures or through pricing in the marketplace.

But yes, no question, what you're hearing about copper and some of the other commodities is absolutely consistent with what we're seeing, which is maybe, on the other hand, is an indication also that markets are strengthening. So the other side of that equation, you typically see these commodity increases when the market is inflecting positively.

Fair point. Appreciate it. And good luck, Rick.

Thanks.

Next, we have the line of David Raso, Evercore ISI.

Congratulations, Rick.

Thanks.

I have 2 calculations I was hoping you can sanity check, and then a quick follow-up. At the end of '21, after all the businesses that are sold, acquired, on a pro forma basis, is the net debt-to-EBITDA for the company is about, I'd say, about 2.5x? And then on the accretion -- I'm sorry, if you can please answer that one first.

Well, yes. Certainly, it has gone up a bit with this -- with EBITDA having come down somewhat in 2020. But when you're looking at 2021 EBITDA, it's hard to do that on the back of an envelope, but it sounds roughly correct.

Yes. I tried to run it out through year-end and basically looked at it on pro forma, Hydraulics out for all year '21 and added the other deals and so forth, and did repo and dividends. So, okay.

In the second calc, the accretion from the deals. On the first full year of ownership -- not '21, full year of ownership, the accretion I'm coming up with is sort of $0.50 to $0.60 EPS. Is that sort of where we should be thinking?

It's probably -- the way to think about it, Dave, is it's probably around -- if you just look at the gross accretion and you don't factor in the money that we're using to buy this, we would have used for repurchases or whatever. But if you look at the gross accretion, it's probably around $0.70. And one way to think about it is you get $0.25 in 2021, and you'll get another $0.45 in 2022.

And that's before taking, say, swag 2% lost opportunity for interest income or debt -- short-term debt for -- on the $4.5 billion?

Yes. Yes, I'm just looking at the gross...

For that. Okay. So it's about $0.50 to $0.60. Okay. And then after these -- I mean, obviously, you've been very active. I mean the last few days alone. But after these moves, should we think of the company more digestion mode through the end of '22 as a base case?

I'd say that what we've always found to be the case is that deals are opportunistic in the sense that you never know when you're going to get an opportunity to buy a company that is the right strategic fit at the right multiple. And I'd say that from a capacity standpoint, we have capacity to do more. Our team certainly has an appetite to do more, and we continue to be active and having other conversations. And so I'd say you can expect us to continue to be opportunistic.

I mean the good news about these acquisitions, while they're material in size in terms of impact on the company, they're relatively well contained in terms of which piece of the company will have the responsibility for integrating. So you could expect that the aerospace team will be busy, obviously, integrating Cobham. And so you could probably expect nothing material in addition to Cobham in Aerospace. But the company is large, and we have other businesses today where they have plenty of capacity to do things and to integrate acquisitions, if we can find the right company that is the right strategic fit at the right price.

Next, we have the line of John Inch, Gordon Haskett.

Rick, we're all jealous, so congratulations.

Thank you.

I wanted to pick up on Ann Duignan's theme about the [ROS], Craig. How much visibility do you have, including, say, risk toward your project backlog and, say, margins profile? And considering, obviously, the Brightlayer inputs and cost increasing, how flexible is that? Are there clauses in it? Just any more color would be helpful.

I appreciate the question because we obviously are carrying a very large backlog in our Electrical businesses, both in the Americas and globally. And I'd like -- what I would tell you about the backlog in general, that -- and as it relates to sort of the guidance that we provided, is that we factored all of that in. And so we understand what we have in the backlog. We understand the type of commodity inflation we're likely to experience this year based upon the run-up in commodities, steel, copper and others. And based upon that, we've come up with our kind of the outlook for the year.

And so -- but I would tell you it's a bit of a mixed bag. In some cases, we're able to reprice things that are in the backlog based upon the agreements and the contracts with customers and basket of commodities and the like. In other cases, we cannot. But I think the important message for everyone to kind of appreciate is that all of that has been factored into the guidance that we provided for the year.

No. That's fair. Are you raising prices now, by the way, whether it be projects or other items in anticipation of the [ROS] ? I know you said things lag kind of a quarter or 2. At what point you have to say, "We got to raise prices", versus sort of seeing if these moves are temporary? And I agree with you. I think it is a result of increasing -- it's a signal of increasing, improving demand and improving economy.

Yes. No, I'd say that -- I can tell you today that we have planning going on, in some cases, actions being taken across the company. And it will vary by customer, by market, by business. But the simple answer is there's either planning or activity taking place right now where we've seen and experienced inflation. Quite frankly, not just on the commodity side, but also in transportation and logistics.

Yes. Makes sense. And just as a follow-up. Tom, I think one of the items that within his background that was flagged was perhaps his experience with respect to distribution and maybe the opportunity to help Eaton further build out its distribution network and growth opportunities outside of the U.S. I'm wondering if you guys could maybe expand upon what you see as this opportunity. And is this sort of a long-term vision? Or are there actual things you could actually be sort of working on in the near term?

Yes. What I'd add to that is, and as you know, most of our company goes to market through distribution. And it's -- I'd say, if you think about all of the core assets that Eaton has as an organization, our distributors and the relationship that we have with distributors is probably one of our greatest assets. And I think everybody is also well aware of the fact that the nature of distribution is changing. And as we think about Tom and what he can bring to the organization based upon his experience at places like Amazon, helping us think through the nature of distribution and helping our distributors, quite frankly, think through changes that they need to make within their businesses to deliver different kinds of experiences to their customers is where we would expect that Tom will put his fingerprints on the company. And we remain committed to distribution. We think it's a big part of our future. We'd like to do more through our existing distributors. And so we're just very hopeful and expect that Tom will bring some unique insights there.

Good luck, Rick.

Thanks.

Thank you all. I think we're reaching the end of our call. We do appreciate everybody's questions. As always, Chip and I will be available to answer any follow-up questions. Thank you for joining us today, and have a great day. Thank you.

Ladies and gentlemen, that does conclude the presentation for this morning. Again, we thank you very much for all of your participation and using AT&T's teleconferencing services. You may now disconnect.