During Eaton’s recent conference call to discuss the company’s second quarter earnings report, CEO Craig Arnold took questions from reporters on a variety of topics, including it’s future in lighting, how tariffs are impacting the company, and the company’s forecast for merger and acquisition activity.
I would say that as we talk about our own Lighting business and our own strategy with respect to Lighting is that we have made a decision to be perhaps more selective than others around business that we’re chasing,” Arnold told reporters. “And we made some adjustments in terms of where we focus our efforts. And I can tell you that as we think about the segments of the markets where we think are attractive and the places that we want to play, you generally see better pricing power, better pricing stability. I can’t say if you think about the entire market at the low end of the market that that dynamic has changed dramatically. But the places that we anticipate playing and the places where we think we have an opportunity to sell differentiated value-added solutions, we do have a lot better pricing power in those markets.”
“We know Lighting was down closer to 4% in the quarter, not 10%. But I’d say that today I could just tell you that it’s better. I mean, we’ve not given specific margin numbers for our Lighting business, and I would just tell you that the margins in Lighting are certainly below, well below the average for the Electrical Products segment. And so they certainly have a negative impact on the overall margins for the segment. But inside of that, we have a fairly large Lighting business and still posted 18.5% margins in Electrical Products which I think is a real testament to the strength of the franchise.”
“With regard to tariffs, we think there will be a very modest cost impact for our businesses overall, some $65 million. But we also fully expect to mitigate this increase through actions that are currently underway or will shortly be implemented in our businesses,” Arnold said. “So I won’t go through the tariff details in a lot of detail, but I would emphasize kind of the two main points. And one, our long-term strategy has been and continues to be to manufacture in the same zone in which we sell, and this certainly reduces the tariff impact on Eaton. And secondly, we’re committed to move swiftly to take pricing actions to offset any tariff impact that we do see in our businesses.”
“At this juncture I would say that it’s too early. It’s very possible that with tariffs being put on lighting products coming out of China and a lot of the low-end lighting coming from China that there is in fact a bit of tailwind and help for the market and the industry overall,” Arnold added.
“But I would just say the way we think about it today is it’s just too early to judge whether it’s going to play out that way, and it’s not baked into our forecast that way, and if it turns out to be a net positive, it certainly would be a bit of upside for us.”
Mergers And Acquisitions
“Having paid down the last tranche of debt associated with the Cooper acquisition, the company is certainly in a position today both from an organizational capacity standpoint and from a cash standpoint that we have the ability today to re-enter the M&A market,” Arnold reported. “And today I can tell you that we are looking at more opportunities than we have in quite some time. But having said that, we’ll be disciplined as we think about how we value and price these transactions. We talk about a cost of capital of being 8% to 9% and saying we want a minimum of 300 basis points over our cost of capital. So we intend to be disciplined as we look at these opportunities. But having said that, we will not allow cash to build up on the balance sheet. To the extent that we’re not able to land acquisitions, which we would hope to do, we’ll certainly look for other ways of returning cash to shareholders.”
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