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Is Eaton Ready for More Acquisitions?

By Jack Keough

When it purchased Cooper Industries, one of the largest electrical manufacturers in the world, for $11.5 billion two years ago, Eaton indicated that the company would probably not be a player in acquisition activity until it fully absorbed the costs associated with the purchase.

That time may be at hand. Eaton expects its balance sheet will be strengthened in 2015 due to continued strong cash flow, synergistic savings and strong profits, all creating an atmosphere for the company to expand.  The diversified industrial manufacturer had record operating cash flow of $943 million in the third quarter, excluding litigation settlements in the second quarter.

That litigation included a settlement agreement with ZF Meritor LLC, a joint venture between a Meritor, Inc. subsidiary and ZF Friedrichshafen AG, and Meritor Transmission Corporation that completely resolved the antitrust lawsuit that had been pending in the United States District Court, District of Delaware. The parties agreed that Eaton will pay ZF Meritor LLC $500 million as part of the settlement.

As it released “strong and solid” numbers for the third quarter, Eaton saw sales growth in a number of its business segments, CEO Alexander M. “Sandy” Cutler told financial analysts. Cutler said that the company now could possibly be looking at acquisitions next year, a stock buyback, or possibly both. Eaton could begin looking at possible acquisitions early in 2015 before completing those later in the year.  The company is bullish in its outlook and during the quarter bought back about $225 million of its stock or roughly 3.4 million shares. For the year, Eaton has spent $324 million in stock repurchases.

Cutler said Eaton has laid the foundation for a good fourth quarter and into 2015, despite lackluster sales outside the U.S.

One of the problems Eaton has faced, as have many manufacturers, is the uneven growth in the U.S. and global markets. Eaton saw good sales growth in the U.S. this year in many markets, excluding agricultural.  But in the rest of the world, Eaton recorded only a one percent growth.

“What we’re seeing is an incremental stronger growth in the U.S. and a mixed bag in the rest of the world,” Cutler said during an appearance on CNBC’s Jim Cramer’s Mad Money show.

Cutler said he expects market growth in 2015 to be similar to this year with continuing improvement in the U.S. and lower growth in other countries.

Sales for its Electrical Products segment were a record $1.9 billion, up 3 percent over 2013. Operating profits were $330 million. Excluding acquisition integration charges of $8 million during the quarter, operating profits were a record $338 million, up 9 percent over the third quarter of 2013. Lighting also continue to be a solid growth segment .Cutler said sales of LED products were up sharply and it is now making up a larger percentage of the company’s total lighting revenue.

Sales for the Electrical Systems and Services segment were a record $1.7 billion, up 1 percent over third quarter of 2013.

The utility business also saw growth.

“Frankly, we were a little bit positively surprised that the utility business had a better tone to it here in the U.S. in the third quarter than we have thought. But the rest of it has been pretty much as we had expected,” Cutler said.

If Eaton does become involved in acquisitions, it would be a continuation of what the company had been doing prior to the purchase of Cooper. Eaton had been an acquirer of companies throughout the world.  In Chile, for example, Eaton purchased Comercial e Industrial S.A. Headquartered in Santiago, Chile, Rolec is a manufacturer of integrated power assemblies and low-voltage and medium-voltage switchgear, and a provider of engineering services serving mining and other heavy industrial applications in Chile and Peru.

And it also hasn’t stopped expanding. Just a few months ago, Eaton broke ground on a $12 million factory in Morocco where circuit breakers and other products will be produced. The plant will employ 500 workers.

Eaton also noted that three weeks ago it won a major contract to provide electrical distribution equipment for a 6.4-megawatt (MW) DC solar installation at the Mandalay Bay Resort and Casino Convention Center in Las Vegas. The MGM Resorts International and NRG Energy project is the world’s largest rooftop solar array on a convention center, and is predicted to generate enough energy to power up to the equivalent of 1,000 homes per year.

So, with strong financial reports, and a reach that spans the globe, it seems that the Eaton shark may be circling the tank once again.

Jack Keough was the editor of Industrial Distribution magazine for more than 26 years. He often speaks at industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com.

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