JRo’s Notes: Eaton Q3:2025 Earnings

Key quotes from the call…

(note: bold and underline are my own)

“On a rolling 12-month basis, our orders accelerated in Electrical Americas, up 7%, from up 2% in Q2. Our Electrical Americas backlog grew 20% year-over-year, hitting an all-time record. Demand in Aerospace business remains very strong as well. We posted order growth of 11% on a rolling 12-month basis and backlog expansion of 15% year-over-year. As a result, our book-to-bill for the combined segments was 1.2 on a quarterly basis and 1.1 on a rolling 12-month basis. As we continued to deliver robust growth in data center market, our orders accelerated 70% and our sales were up 40% versus Q3 2024. This strong demand picture gives us confidence in our ability to deliver sustained growth and add value to shareholders.”

“Yesterday, we announced the acquisition of Boyd, the global leader in liquid cooling technologies for critical markets like data centers, aerospace and defense and industrial. This is a high-growth business playing in a high-growth market, and we expect it to generate $1.7 billion in sales next year at an adjusted EBITDA margin of 25%. This level of sales represents significant year-over-year growth, demonstrating how the business is benefiting from strong customer demand, especially in data centers. And the business itself has a large global presence with over 5,200 employees and 16 manufacturing locations. This global presence is critical to Boyd’s success as they are able to support customers almost anywhere in the world as they build out their data center infrastructure. Of those 5,200 employees, over 500 are engineers, which is another important part of Boyd’s success. These engineers work directly with the customer teams designing the next chip platforms to understand the thermal characteristics of this next generation. And then this knowledge gets translated into Boyd’s own designs. Boyd’s manufacturing engineering teams are also involved in the design of the cooling systems to ensure the highest reliability and the production can be rapidly scaled to meet customer needs anywhere in the world. This deep application engineering expertise combined with world-class manufacturing and supply chain create a powerful flywheel for Boyd to always stay ahead of the competition in terms of technology, reliability and scalability.”

“As we talked about previously, the chips used to power AI models and other high-performance compute applications are getting more and more powerful. If you look at the data, before the advent of GenAI, the power used in a typical rack was in the 10 to 15-kilowatt range. At this level, you can cool this chip using air cooling, which is a pretty mature technology and has been around for many years. 

Now, the introduction of more and more powerful AI chips, the power in each one of those racks is just skyrocketing. Take NVIDIA for example. Its GB200 chip unveiled in 2024 uses 120 kilowatts per rack. Fast forward a year to 2025 and NVIDIA’s GB300 chip now uses 180 kilowatts per rack. And it’s only increasing from there. NVIDIA’s Rubin chip is expected to use 600 kilowatts per rack, and its Feynman chip, 1,000 kilowatts per rack. Now in addition to these higher power chips requiring more and more electrical equipment, which is a great thing for our business, once you get above roughly 50 kilowatts per rack, traditional air cooling is replaced by liquid cooling. The physics of these power levels require liquid-cooling the chip, otherwise performance is degraded, chips don’t last as long or they just might not work at all. So all the demand that you are seeing for GenAI chips will drive commensurate demand for liquid cooling solutions to cool those chips. The growth goes hand in hand. Market estimates vary, but we believe that the global liquid cooling market will grow around 35% annually through 2028, just tremendous growth that is supported by long-term underlying factors. And to go back to my point from the prior slide, Boyd is the global leader in liquid cooling, which is why we are so excited about this business.”

“With the acquisition of Boyd, Eaton’s data center portfolio will now be even bigger than before, shown in more detail on Page 7. We can now provide solutions for all major power and cooling systems from the chip to the grid. This includes all of our traditional power distribution, power quality and infrastructure products in the data center gray space. And here you can see our other 2 recent acquisitions of Fibrebond, modular parts; and Resilient Power, medium-voltage solid-state transformers. And in the data center white space, we can provide everything from power distribution units, remote power panels and busway, to racks, enclosures, cable tray and, in 2026, liquid cooling.

And of course, I need to mention our software and services capabilities, which we historically have been focused on the gray space and the white space power distribution and power quality equipment only, and now we added the same service capabilities for liquid cooling, which we view as a really attractive avenue for growth. Truly an impressive portfolio of solutions for data centers.”

“Starting from the chip out, there are really 5 main technology blocks that work outwards toward the utility grid. There is a thermal management system to handle heat loads, primarily from the chip, but also from other heat-generating assets like storage devices and power supplies. There is white space power distribution and infrastructure equipment to get that power to the racks. There is the grid equipment to distribute, transform and condition medium-voltage AC power down to low-voltage AC and then low-voltage DC power. There is Eaton assets to connect the data center to the grid. And finally, there is software and services to monitor and manage all these power and IT assets. So with this acquisition of Boyd, Eaton now plays a leading position in each one of those technology blocks. One reason this is important is that we can now offer our data center customers a greater share of wallet. This is important as they seek to consolidate their supply base among a smaller set of stronger, more globally capable players. And the other important reason is that customers are increasingly looking to integrate these various systems to drive increased technical performance and more rapid deployments. This is especially true in data center white space, which is exactly where Boyd plays.”

“These are key leading indicators in Electrical Americas [segment]. This segment is clearly the head of our portfolio, and we have an execution plan to grow it even stronger and with increased margins. All leading indicators on this page are proof points of the generational growth opportunity ahead of us. They also show that our team is executing well to capture this growth. The visibility is unprecedented. So let me walk you through what we are seeing. Over the last 2 years, the mega-project announcements have increased a staggering 185%.”

“For data centers specifically, the 2-year stack of rolling 12-month orders are up more than 100% and the data center book-to-bill is 1.7. Electrical Americas backlog is up 51% over the last 2 years, of which data center backlog extends over 2 years. On a 2-year stack, Electrical Americas has grown 23% organically, and we think that data centers have grown 104%. So the demand indicators clearly support why we are so bullish for this business.”

“Our position of strength in the Americas keeps resonating across the market. We are proud to have the broadest portfolio of electrical products in the market, to cultivate strong and trustworthy relationships and to be the partner of choice to co-design the technologies of the future together with our key customers.”

“We are reaffirming our growth guidance range of 8.5% to 9.5%. We’ll likely end up at the low end of this range in total, primarily due to market dynamics in our Vehicle and eMobility businesses.”

“And for the year, we are reaffirming our adjusted EPS guidance at $11.97 to $12.17, which includes our near-term investments to position us for sustained long-term growth. And this represents 12% growth in earnings per share at the midpoint, which I promised you in March.”

“We are seeing unprecedented demand reflected in continued order acceleration and growing backlogs. Our strategy to lead, invest and execute for growth is positioning us to capture generational demand and deliver lasting value for our shareholders.”

“I would like to remind you and the whole team why we are winning businesses at this pace. I think it’s important we talk about it. We have this success because we have the broadest portfolio of electrical products in Electrical Americas. We have all the solutions and services. We count on strong channels. And we also have deep customer intimacy, so we co-design future technologies with our customers. And this allows us to be a leader in several end markets. I’m not talking only about data centers, but we also lead in utilities…I’ll just conclude by saying that we are beating every competitor in the market in orders. And part of this is attributable to the portfolio and our sales channels and the relationships. But partially is also to the fact we are investing in our footprint [capacity expansion], and our customers feel comfortable and confident in giving us more orders versus other competitors. So I think that’s also a point that I would like to stress.”

“But starting with the white space products. The white space is centered around the chips. And moving to the gray space, we have all this power distribution, power quality products, and all the way to the front of the meter where we have our utility grid products. So we have a very extensive portfolio. And the recent acquisitions we made, made our position so much stronger. And as you know, the data centers exist to support the chips ultimately. And as these chips become more and more powerful, especially in support of AI workloads as you mentioned, data center operators are moving towards direct current. Why is that? Because direct current offers advantages in terms of reduced power losses, fewer conversions with alternate current, and the ability to offer direct integration with other sources of power just like renewables and battery storage. And Eaton is extremely well-positioned for this change, not only because today our products touch every conversion of AC and DC in the data center, but also because we have decade-long experience with dealing with DC power in other segments, like machinery, industrial facilities and also eMobility, we’re dealing with DC power for a while. So this is another example that makes Eaton unique in this space. And the Resilient Power acquisition we made a couple of quarters ago actually accelerates our readiness for DC integration right from the utility feed down to the chips.”

“We are working with a number of customers. We’re also working with institutions and governments, and we have a seat on the table to decide on the codes for the new systems. And we also, as you probably know, we are partnering with NVIDIA, so we design the data centers from the chip out.”

“On your specific question on the dollars per megawatt, our range was between $1.2 million to $2.4 million per megawatt, being the lower end cloud and being the higher end AI loads for the portfolio we have today. And with the acquisition of Boyd, we’re going to add another $500,000, so it will be close to $3 million per megawatt at the high end of the guide here for construction.”

“We are excited about the data center market. We all know it’s growing at a very fast pace. But if you look at liquid cooling in particular, it’s growing at an even faster pace than the average of the data center market. So you saw in your chart, in the low point, projection of the market is 35% CAGR. So market will be between $6 billion and $9 billion already in ’28. In 2030, we expect the market to be between $15 billion and $18 billion. So it will be a massive market.”

“Then, why Boyd? I would say I would start with this. Firstly, they really have similar DNA that Eaton, which means that they lead with technology and innovation. Second, they are the market leader, so that provides us with a scaled entry into the market, not the suboptimum assets we saw on the market before. This is a market leader. They have a global footprint, which is impressive, in all 3 continents, and a best-in-class engineering team because they have around 500 engineers and they are the best cooling experts on the market. So we like what we see. And we also like the way they sell it because they work through technical sales, meaning they work intimately connected with all the chip companies. So think about the merchant chips like NVIDIA, AMD, but they also work on the captive proprietary custom silicon developers which are the hyperscalers. So they are in those development projects for the long run. So they know 2 or 3 generations ahead of what is commercial today, what’s going to be delivered, because they are part of those projects. So talking about synergies here, first of all, Eaton, in our power portfolio, we can leverage this connectivity they have with the chip manufacturers and the hyperscalers on their own chips to leverage our power system designs as well. So they have the customer intimacy. On the other end, we believe we can help them grow their co-location, multi-tenant market. We have better access and better relationships than them. And then we also can help them reduce their cost position given our purchasing power at Eaton. So this business is growing really, really fast. And this year, they’re going to reach $1 billion in revenue. Next year, they’re going to reach $1.7 billion in revenue, which is a staggering 70% growth. We double-clicked on that during diligence, and their Q4 exit rate is already $400 million, which gives $1.6 billion if you multiply it by 4, making this $1.7 billion plan not only achievable, but there is upside next year. So I mean, everything we saw from that angle made us believe that was the right asset to go after. And we also know that we keep our discipline with the returns between 200, 300 points, being accretive on year 2. So all the good stuff. So the asset is fantastic.”

“You should think about Boyd as over 80% of their revenues are in the data center space and the other 20% are divided between aerospace and industrial applications. So the data center part is growing at a much faster pace, as you know. But the aerospace part is also interesting.”

“They are the cooling experts on the market. When you have 500 engineers and you are embedded into 2 or 3 generations of chips ahead of what’s commercial today, you know what’s going to happen in the next 5 years and you are designed in. And it’s almost like the same behavior we have in the Aerospace selling. You get to develop something with your customers, you win, and you are in the platform. The difference here is that the aerospace platforms change every 30 years and the chips change every 18 months. So they are ahead of the curve for the new designs to come to reality, which gives them a lot of advantages. I’m going to explain what I mean by that. When solutions are stable, people will try to copy and do it cheaper. When the design is changing every 18 months, there is no way a company can catch up with them, unless you have a seat on the table, you’re working with the engineering teams of your customers.”

“One thing is for sure, I want to share with you, we will start 2026 with record backlogs and enormous — just enormous visibility into the fiscal year. That’s a guarantee.”

“I want to say, which is really important for this [aerospace] business, they landed historical wins on new platforms that were available, defense platforms. So those historical wins will give us a lot of revenue decades to come. So the long-term view of this business is fantastic and incredibly strong.”

“The Ultra PCS announced deal is a great example of an [aerospace] asset we will acquire that will add to the top line in terms of growth acceleration and will start adding to the margin, being accretive to margins right away. So it’s a great asset. And we expect now to close this year, in Q4, rather than beginning or the first half of next year, which is also great news.”

“It’s too early to talk about 2026 margins, but I think Q3 was a good proxy where the top line didn’t come to the levels expected and the business could produce very good margins. And why was this possible? First, because we had a backlog we could deliver on. Second, because the team now covers for all the tariff costs and is not a drag on the margins. So it’s not only recovering on the dollar-by-dollar basis by the end of the year now, but also it’s not dilutive to margins, which is great news. Where are we now in Electrical Americas? That’s exactly the discussion we should be having. Think about a business that has been growing consistently with the same portfolio of plants, and all of a sudden, now they’re expanding 12 facilities at the same time. So 6 are built and they start to ramp. Other 6 are in building phase. So it’s a lot of activity in that business, preparing us to start a new S curve, a new chapter of growth for the business. That’s the way to think about Electrical Americas. Our customers trust that, and it’s proven by the amount of orders they are giving us, which is just fascinating to see that quarter after quarter. So that business is exactly getting ready for all this demand that we announced the expansions at the right time. And we realized, with all this order momentum we have, we need to accelerate investments, get the people ready so we can produce on this backlog that we count on today. And with all that, we have over 100 basis points of inefficiencies, minimum, that we have, by dealing with those inefficiencies and all this turmoil, are ramping 6 facilities at the same time. So we’re going to give you full guidance in February for 2026. But in ’26, you should expect that we continue to ramp, so some of those inefficiencies are still going to be there. But they’re going to disappear over time, and then we can print even better margins for Electrical Americas.”

“I’ll go back to the deal criteria so it’s clear that we remain disciplined. This year is delivering between 200, 300 basis points [ROIC] over cost of capital, is going to be accretive on year 2. And I said before, we didn’t need to use the synergies to make the business case work given all the growth that they have in the pipe. But if you look at the synergy, the multiple after the synergies, the multiple goes down to high single digit. So there are synergies that we can play here. The most — the quickest and the easiest to implement is, on the cost side, we look at what they buy and we compare to our purchasing volumes and our purchasing power, we believe we can help them a great deal. And then again, the other part on synergies, about sales, that we see as a great opportunity, and we work towards that. But once again, we could even take this out of the model and the math will still work fine. Olivier can give you more details on how we’re going to run the financing, et cetera. We also checked our leverage point, and we believe that after the deal, we’re going to still be at the same credit rating as today. So that would not be affected.”

“We are dealing with those 4 different deals and we are investing. And we don’t regret doing that because that makes our position so much stronger. We cannot continue acquiring companies at that pace. You shouldn’t expect that next year, right? We need to digest those deals. They were the right deals in the right time, the right place, but we cannot continue to make acquisitions at that pace per year. It’s not what we’re going to do. So that addresses the first part of your question…But directionally, think about this, less deals next year. We focus to digest what we acquired this year.”

“So in Q3, the mega-project announcements reached — sorry, $239 billion, which is up 18% year-over-year. And if you think about the sequential growth from Q2, it’s almost 50%. So a very, very, very strong quarter. You look at the composition of those mega-projects, you would expect a big portion of it to be data centers. And it’s true, it’s almost half of the total. But the other half is not data center, which is also great and diversifies the end market. And if you look at what’s happening, I gave you data about starts and announcements last quarter, if you look through September, and you look back from January to September, average announcements per month are reaching $65 billion, and the starts for all 9 months are only $100 billion. So there are a lot of things to still come to the markets, a long runway. And the backlog today is around $2.6 trillion. So it’s up 29% from last year. So astronomical numbers. And if you translate to us, we won around $2 billion in orders. We have a negotiation pipeline now, we are active on negotiating other $4 billion-ish in products and solutions. And we win around 40% of what we bid on. So that’s a very strong win rate. With all those numbers and you compare the potential to what we booked so far, I hope you’re going to get to the same conclusion I got, which is those large projects typically take between 3 and 5 years from announcement to our revenues. So think about this as a great, great tailwind for extended duration of the market growth that we have for even a longer period of time.”

“So we will be higher in CapEx in ’26 versus ’25. We have said that constant — in a consistent manner. We think we’re going to have leverage — you go back to the question from Paulo on the CapEx we have deployed in ’25, ’26 would be a peak, and then we’ll go back to the historical CapEx as a proportion of revenue you had at Eaton [starting in 2027].”