By Bob Tita
Eaton Corp. will consider business acquisitions, but not at the
expense of buying back its stock and paying dividends to
shareholders, Chief Executive Alexander Cutler said Wednesday.
The industrial conglomerate has refrained from acquisitions in
recent years as it works down the debt from its $11.8 billion
purchase of Cooper Industries PLC in 2012. With the payment of $1
billion in Cooper-related debt this year, Eaton is resetting its
spending priories for its cash to once again include acquisitions.
But Mr. Cutler cautioned that Eaton won't return to the
acquisition-oriented growth strategy under which Eaton bought more
than 60 companies between 2000 and 2012.
"In terms of the discretionary use of cash, the first calls are
the dividend and share buybacks," Mr. Cutler told analysts
Wednesday during a conference call. "We're committed to a strong
dividend, repurchasing shares, and then the third priority is
mergers and acquisitions."
Mr. Cutler, who plans to retire next May, said slow-growing
economies throughout the world are diminishing the profit and sales
growth potential that typically made business acquisitions
appealing to Eaton. Eaton isn't the only conglomerate throttling
back on purchases. Companies such as Illinois Tool Works Inc.,
Ingersoll-Rand PLC and Emerson Electric Co. that were once regular
buyers have largely avoided significant acquisitions in recent
years to focus on expanding margins and culling businesses from
their portfolios with low prospects for growth.
"The incentive is low for going out and trying to do a deal for
a businesses that has the same challenges as yours," said Mircea
Dobre, an analyst for Robert W. Baird & Co. "It's an
environment where companies have to play defense."
Mr. Cutler said about 38% of Eaton's available cash would be
devoted to acquisitions beginning in 2016, compared with 67% prior
to 2012. The company's annual spending on share buybacks and
dividends would amount to 4% to 5% of its market capitalization, or
about $1.1 billion to $1.4 billion at the current market cap.
Investors view share buybacks as supportive for a stock because the
purchases drive up the price. Moreover, by taking shares out of
circulation, companies limit the dilution of their earnings per
share when additional shares enter the market from stock-based
compensation for executives.
Eaton introduced Wednesday a business-restructuring program
designed to cut overhead costs in response to weakening end-markets
for Eaton's products and anemic economic growth in key geographic
markets for the company. Eaton plans to spend $120 million on
restructuring for the remainder of the year.
"It's our belief that we're not going to see significant
strengthening of economic activity in the second half of [2015],"
Mr. Cutler said. "You can't go through a period where the economy
is sort of stalling a bit globally without taking costs out."
Eaton continued to whittle its growth forecast for organic
sales, which exclude the effects of currency and acquisitions. The
company now expects sales to be either flat or up as much as 1%
after starting the year with a 3% to 4% growth outlook over
2014.
The Dublin-based company -- which makes electrical equipment,
hydraulic components, truck transmissions and gear for the
aerospace industry -- reduced its 2015 earnings guidance to $4.40
to $4.60 a share from $4.65 to $4.95 a share to account for the
restructuring expenses and lower organic growth. Analysts were
expecting the company to earn $4.74 a share this year.
The company managed to top second-quarter earnings expectations
with margin growth aided by about an 18% reduction in expenses
during the quarter. Overall for the quarter ended June 30, Eaton
reported a profit of $535 million, or $1.14 a share, up from $171
million, or 36 cents a share, year earlier. Revenue slid 6.8% to
$5.37 billion. Analysts had expected $1.13 a share from $5.49
billion in sales.
Write to Bob Tita at robert.tita@wsj.com
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