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Ladies and gentlemen, thank you for standing by and welcome to the Eaton Third Quarter 2021 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Senior Vice President of Investor Relations, Yan Jin. Please go ahead.
Good morning, guys. I'm Yan Jin, Eaton Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's Third Quarter 2021 Earning Call. With me today are Craig Arnold, our Chairman and CEO, and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, highlighting the Company's performance in the third quarter. As we have done our past calls, we'll be taking questions at the end of the Craig 's comments. The price release and presentation we will go through today have been posted on our website @www. eaton.com.
This presentation, including the adjusted earnings per share, adjusted and free cash flow, and other non - GAAP measures. There are recon sales in the appendix. An EV cost of this call is accessible on our website and it will be available for replay. I would like to remind you that our comments today will including statements related to the expected future results of the Company and are therefore forward-looking statements. Our actual results may differ materially from our projected future due to a wide range of risks and uncertainties that are described in our earnings release and presentation. With that, I will turn it over to Craig.
Okay. Thank you. It will start on page 3 with highlights for the quarter, and by noting that our team delivered record results in Q3, despite the well-publicized supply chain challenges in this environment, we had strong execution across all of our businesses. And as we focused on controlling what we could control. And as you can see, we posted an all-time record for adjusted EPS of $1.75. Supply chain constraint did have an impact on our revenue, but we still posted 8% growth in the quarter. And for the third quarter in a row, we delivered record segment margins at 19.9% in Q3. It was an all-time record and an increase of 230 basis points over prior year.
On top of record margin is our -- we're also pleased with our incremental margins, which were 46% in the quarter due to actions that we took to mitigate inflationary cost, the portfolio changes that we'd have undertaken, and savings from restructuring programs. We did have a bit of help from favorable mix as well in the quarter. And while revenues were lighter than expected in our Electrical America segment, we're very pleased to see the strength in orders in the growing backlog. Overall demand rein, remains very strong. For the electrical businesses overall, orders were up 17% rolling 12-month basis and our backlog was up more than 50%, another all-time record. Next on Page 4, we summarize our Q3 results and I'll note just a few points here.
First, our 9% revenue growth, we increased our operating profits by 23%, which reflects strong operating leverage and benefits from our portfolio actions. Second, our acquisitions increased revenues by 7%, which was fully offset by the sale of hydraulics. We're naturally pleased to have replaced the hydraulic revenue with a collection of businesses that are I'd say higher growth, higher margin, and have more earnings consistency. And last, our margins of 19.9% were well above our guidance range of 19 to 19.4 as our team did an outstanding job of executing, despite the lower-than-expected revenues. Moving to page 5, we have the results of our Electrical America n segment.
Revenues were up 9%, including 1% organic and 8% from the acquisition of Tripp Lite. Organic sales growth was driven by strength in data centers and residential markets, partially offset by weakness in large industrial projects and sales to utilities. As I mentioned earlier, revenues were impacted by supply chain constraints. Our Electrical America segments separate from the general supply chain constraints that we're all feeling. but was actually disproportionately impacted by a few unique suppliers who were especially impactful to this business. We're naturally addressing these and other supply challenges and expect to do better in Q4.
Operating margins continued to be strong at 21.7%, and were up 40 basis points from Q2. This is consistent with our expectations and we're doing a good job of getting price to offset inflation. I'd say the biggest highlight in this segment is to continued growth in orders and in backlog. On a rolling 12-month basis, orders were up 17% organically and this was an acceleration from up 13% in Q2. The strongest segments were utility and residential markets. And the backlog is up more than 50% from last year and up 9% from Q2. Both I'd say are encouraging signs in support to our expectations that the mis shipments will simply be pushed into future quarters.
Turning to page 6, we summarize our electrical global segments results, which I'd say were just strong across the board. Organic growth was 18% with broad strength in really all end markets and currency added 1%. We also posted all-time record operating margins of 20.1% and had very strong incremental margins of nearly 40%. The margin performance was driven by volume leverage, strong cost control, and savings, once again, from restructuring actions. Orders were very strong, up 17% organically on a rolling 12-month basis, with particular strength in the quarter in industrial, commercial, and institutional markets. Like our America segment, the backlog is up more than 50% and at record levels.
Before we move to the industrial businesses, here's the way I'd summarize the performance of our electrical businesses. When you add the two together, they delivered solid organic growth of 8%, built a sizable backlog, which strengthens our outlook for future quarters and improved margins by a 110 basis points. So on balance, I'd say a very strong set of quarterly results for our electrical businesses. Moving to page 7, we have the financial results of our aerospace segment. Revenues were up 38%, 4% organic, and 33% from the acquisition of Cobham Mission Systems, and 1% from currency. Organic growth was primarily due to higher sales in commercial markets, partially offset by weakness in military markets. Operating margins were 22% up 350 basis points from last year, and 100 basis points sequentially. This strong performance gives us confidence that as aerospace markets continue to recover, we'll meet or exceed the 24% margin targets that have been set for this segment. In the quarter, we also had strong organic incremental margins which were driven by favorable mix primarily from the growth of commercial aftermarket business. And as a result, once again, from savings from the restructuring actions that we've taken. And by the way, Q3 was the first full quarter where Cobham Mission Systems, were part of the Company. And we're very pleased with the financial performance of the business and the integration process is going very smoothly.
As we look to the future, we're seeing encouraging signs of recovery in this segment with both orders and backlog now trending positively. On a rolling 12-month basis, orders were up 4% primarily with strength in the business jet segment and our backlog has increased by 5%. Next, on page 8, we have result of our vehicle segment. Organic revenues increased 11% with solid growth in North America class 8 truck business and strength in South America that more than offset the weakness in North America like vehicle markets. And as you're all well aware of light vehicle production, it has been severely impacted by supply chain constraints.
Operating margins were 18% and we generated very strong incremental margins of more than 50%. In addition to strong execution, we also had some favorable mix in the quarter, specifically and of North America, the truck business benefited from strong aftermarket, where sales were up some 40% at attractive aftermarket margins. And our North America light vehicle motor vehicle business also benefited from favorable mix as customers, prior borrower ties programs with more of our content, more full-size pickups and SUVs -- SUVs and fewer small cars. So good mix, good volume growth and savings from the multiyear. restructuring program all contributed to very strong quarterly operating results here.
Turning to page 9, you will see the financial results of our eMobility segment, where revenues increased 6% organically. Like our vehicle business, customer production levels will reduce by supply chain constraints here as well. And given the nature of the products that we sell in this segment, that they were more significantly impacted by the semiconductor shortages that we've all read about. As a result, our backlog is up significantly here. Operating margins were a negative 9.5%, once again, due to heavy IRD investments and startup costs associated with new programs. We continue to be pleased with the progress in this business, which has one programs worth nearly $600 million of mature year revenue. And we expect to see a significant ramp up in revenues in 2023, which positions us well to achieve our long-term revenue targets of $2 to $4 billion by 2030.
On page 10, we provide an update at our organic growth and operating margins for the year. With supply chain constraints in Q3 continuing into Q4, we now expect overall organic revenue growth of 9% to 11% for 2021. For Electrical America we expect 5% to 7% growth. You'll note the implied guidance for Q4 is actually 7% to 9%, which is a solid step up from the 1% in Q3. Organic revenues in aerospace are expected to be roughly flat with strength in commercial markets being offset by weakness in military markets. And the other segments had some minor reductions in revenue as well, but just minor. Despite slightly lower organic revenue growth outlook, we're increasing our operating margin guard guidance by 20 basis points, from 18.6% to 19%.
And I'd note that, with this guidance we're on track to generate strong incremental margins of approximately 40% for 2021, which we see naturally is outstanding performance given the current inflationary environment. Moving to page 11, we have the remaining items of our guidance for the year. We expect full-year adjusted EPS between $6.69 to $60.69. At the midpoint, this represents 35% growth over 2020. We're also delivering significant margin improvement up 240 basis points from last year at the midpoint of our increased margin guidance. I'm pleased as we have strong operating performance in the face of what we call historic supply chain challenges. And the businesses are doing well. Next, given more active M&A activities, we now expect share repurchase to be between $375 million and $425 million.
And lastly, our Q4 guidance includes earnings between $1.6 and $1.78, organic revenue growth between 7% and 9%, and segment margins between 18.8% and 19.2%, an increase of 160 basis points at the midpoint versus prior year. Overall, once again, a strong 2021 with solid revenue growth, strong orders and good execution, allowing us to deliver record margins. Next on page 12, we did want to provide some preliminary assumptions for our end-market for 2022. And as you can see, that we're expecting attractive growth in nearly all of our markets, with very good growth and data-centers and elect -- industrial facilities, and in our electrical business, and in our commercial aerospace business.
And certainly in all vehicle markets. We'll provide more detailed color on organic revenue growth assumptions when we provide our 2022 guidance in February. But we did want to share some of our preliminary thinking here. We would also expect to see carryover benefits from pricing actions taken, which should also help our year-over-year growth next year. And lastly on page 13, we provide just some summary thoughts here and I'd say, first I'm proud of the record quarter results, and particularly our strong margin performance. Our team has demonstrated that, we can manage through a challenging operating environment, supply chain constraint, inflationary pressures, and still improve margins and EPS.
And the long-term secular growth trends of electrification, energy transition, and digitalization are playing out just as we expected, or maybe even better. We also see 2021 as a transformative year for Eaton in terms of Portfolio Management. We're higher-growth, higher-margin, and less cyclical Company today. And with strong year-to-date performance, we're well on our track to deliver very strong 2021 with double-digit organic revenue growth, and 35% adjusted EPS growth. And I'd also add, we have great momentum going into the Q4 and into next year. We have strong order growth, we have a full backlog, and many of our end markets are poised for recovery.
And you'll recall that at the beginning of the year, we said medium-term targets of 4 to 6% organic revenue growth annually, 400 to 500 basis points improvement in margins, and 11 to 13% annual growth in adjusted EPS. And so evaluating our progress about 1-year in, I'd say that we're running ahead of expectations. And with that summary, I'm pleased to turn it back over to Yan and to open the session up for Q&A.
Okay, great. Thanks, Craig. For the Q&A section today, please limit your question to one question and one follow-up. Thanks everyone for your corporation. With that, I will turn it over to the operator to give you the instructions.
[Operator Instructions]. Our first question comes from the line of Joe Ritchie, with Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Joe.
Craig, I know you want to give us some commentary or way to give us exact commentary on 2022 organic growth expectations in February. I guess, this -- in the context of the long-term framework of 4 to 6 and with your backlog in the Electrical business being up 30%,. I mean, is it fair to assume that, just the Electrical business should be at a very minimum, at the 4% to 6% range for next year, or maybe slightly better just given what you are seeing across our business?
I appreciate the question, Joe. And certainly, if you take a look at the performance of the business this year and the backlog that we're building in 17% order intake, you can certainly make a case for that business performing better than the 4% to 6% numbers that we laid out. And you'll also recall by the way as we laid up those targets for growth for the Company, that the businesses are all running towards higher growth numbers. And we hedge those numbers back at the corporate level, recognizing that things happen in the world that you don't often anticipate and expect.
I mean, Q3 is a great example of that with some of these supply chain constraints and there's always a number of uncertainties out there. And so I think, yes, there's certainly a possibility that the electrical segments could perform better than that. And we have internal plans that would suggest better performance in that. But once again, given the number of uncertainties that we're dealing with, especially in today's supply chain environment, we still think for planning purposes, those are still reasonable assumptions to make. But you could be upright.
That's fair. And I guess maybe just following up there in just talking about pricing, Obviously, key topic the conversation across the conference call this far. And as you think about your own pricing mechanisms and how this plays out for you in 2022, maybe talk a little bit about how much prices we can expect to come through the system. Thank you.
Pricing as we talked about a little bit at the Laguna Conferences as well. And we our expectation continues to be that our businesses will fully offset inflation with price. We are living in an environment today where I'd say it's never easy to get price, but it's probably easier today given some of the supply chain constraints that we're all dealing with and it's probably evident, certainly in my professional career and so I'd say that our thinking really hasn't changed with respect to pricing. We have good mechanisms in place. Our pricing typically lags inflation by a quarter or 2 depending upon which segment of the market we're serving.
We naturally have experienced more inflation as we came through Q3 than we originally anticipated. And as a result, we like others, have had to go to the market for additional price. But by and large, this pattern continues and we would expect that. As we look forward to 2022, we would expect to once again, more than fully offset the inflationary pressure that we experienced this year. And maybe it's going to add a little bit of a tailwind next year. By and large, our long-term expectation on price versus inflation is to fully offset it. And that's what we're tracking to for this year.
Thank, you. Our next question comes from Andrew Obin with Bank of America. Please go ahead.
Good morning.
Good morning.
Just to build on Joe's question. How much supply chain challenge impact your revenue in the third quarter, particularly in North America? I think you alluded to it, but if you could care to quantify it.
Yeah. I appreciate the question, Joe. Certainly if you take a look at on balance our electrical business grew some 8% in the quarter. We combined t; but very different performance in our Electrical Global versus the Americas business, which is where we had clearly our biggest supply chain constraints. And I'd mentioned in my opening commentary, we have a number of unique suppliers in that business that really resulted in revenues being below what we anticipated. And so as we think about it and you try to quantify the impact in the quarter. Our backlog grew in the quarter by $280 million.
If you look at the shippable piece of that piece that -- in the quarter, we could say its order magnitude, something north of $100 million, let's call it $130 million of revenue, if you simply look at the shippable back log in the quarter itself. So we could have very easily posted, I would say, a 9% growth number in the Electrical America business in the quarter but for the supply chain constraints.
Wow, thank you. And then just how should we think about just backlog versus normal because we actually had a number of companies in our coverage that normally know for more of a short-cycle focus talked about backlog is up 40%, 50%, 30%. As you guys think about the world, does it mean, more visibility or actually more uncertainty? Because of so unusual for our business like yours to care so much in terms of backlog. How do you guys think about it internally? Thank you.
We clearly see that it has more visibility. If you think about in a typical year, we would go into, let's say, the year with 25% to 35% of our orders for the upcoming year in the backlog. And we're certainly running today at the very high end of that. And so we clearly see it as a better visibility. We test that, you can imagine the quality of the backlog and whether or not the backlog is solid in terms of these orders. And we're testing our customers and channel partners and the indication that we're getting, although you never a 100% certain there probably is a little bit of order play so that's second place and get your position in line. But by and large, the backlog field is extremely solid.
Thanks so much, Craig.
Thank you.
Thank you. Our next question comes from the line of Jeff Sprague with Vertical Research. Please go ahead.
Thank you. Good morning, everyone.
Good morning.
Morning. Just back on the supply chain, Craig, the 1% growth really does jump out, right relative to Hobo and then Schneider really everyone else. And I just wonder if you could elaborate a little bit more on what the issues were in the quarter, and just your confidence level that they're resolved. Just think as the market leader in the U.S., if anybody could get the stuff, it would be you and that didn't seem to happen in the quarter.
I appreciate the question, Jeff. And we are a market leader in North America. And as you know, our North America electrical business has really posted probably 10 years in a role of share gain. And so we do have a very strong position in the market. And we have great supplier relationships in general. I'd say that in our case, what was a little bit unique is that they were a few suppliers that we have that support our Electrical America business. Who were surprised that we have that are perhaps not suppliers to others in the industry that had some challenges that we're working through together. And so as I talked about, if you see it in the growth in the backlog, what sales easily been.
But for the supply chain challenges, I think that number 1 becomes a 9% number, which I think you'd agree is much more in line with what you've seen from some of the others in the industry. And so we're absolutely confident that it's timing. It -- It's tied is very specific supplier issues that we're clearly focused on and working. We generally speaking like that, have very supportive and strong supplier relationships and it's not about one of our competitors being over-allocated and us being under-allocated. These are just suppliers that are unique to our business, that are working through some particular issues in their own kind of operations that they need to be worked through.
And so yes, I'd say by and large, it's timing. We'll get through this and we're talking about growth numbers of around 8% or so in Q4, and we're setting up well for 2022. And you could see it in our Electrical global business, they grew 18% in the quarter. And so I think that, I don't want to aggregate when you look at our global Electrical business, our growth is very much in line with others in the industry, and we would've been better. But for the supply chain issues that we're having in North America. So the franchise is in good shape, nothing to worry about. We really just see it as timing.
Great. Thanks for that caller. And then just on price, I think you've been a little reluctant to be specific on price, but I would assume you're in the same zip code is what we're seeing out there. Mid, even high type single-digit price increases. Is that that kind of directionally correct? And I don't know -- could you just maybe share just a little bit more thought on what the wrap around price impact might be in 2022?
Okay. And I appreciate the question on price and why you asked for more transparency on it. It varies widely by customers in different markets that we're in and so we're not going to provide more transparency than we provided other than say that we're getting price to offset inflation. We'll be about neutral this year. We think it will be slightly positive next year. But beyond that, we'd rather not comment on price as it -- obviously you have lots of different customers to have different end markets, you have different supply chain factors affecting different parts of the business, and so, overall, our teams are doing well, we're getting price to offset inflation and there will be a net neutral this year, maybe a net positive next year.
We will clearly have a wrap impact as you mentioned, Jeff, just given the timing of the execution of the pricing in 2021.
Thanks. I'll leave it there. Thank you.
Thank you. Our next question comes from the line of Nicole Deblase with Deutsche Bank. Please go ahead.
Yeah. Thanks. Good morning, guys.
Good morning, Nicole.
Just to take you back on Jeff's question. I guess, you guys are embedding like a snap back in Electrical America in 4Q. So like as you progressed through the beginning of the fourth quarter, have you seen some of those supply-chain issues go away just to give us some confidence about the achievability of getting back to 79% organic?
Appreciate the question, Nicole, and obviously as a part of providing guidance externally, we were looking at our internal forecasts from our operations. We're obviously been in a number of very direct conversations with suppliers who have made commitments to us and our improvements. And so, you can rest assured that that forecast is very much grounded in what we're hearing from our suppliers and what we're getting specifically from our businesses in terms of their expectations. And so, we're confident in that forecast based upon what we're hearing from our suppliers. We're not --
Got it. Thanks.
Let's say we're not completely out of the woods, we still have some challenges. Once again, Q4 could be better if we were completely resolved from some of the slight change. We're not assuming that all of the problems are resolved in Q4, but certainly much better than in Q3.
Okay, I got it. And then just maybe to follow up on that thinking about how you guys took positioned margins for the fourth quarter, you do have a bit of a step-down coming from these record levels in the third quarter, is that just some of this favorable mix dynamics that you experienced in 3Q. Are you assuming that that goes away just trying to understand the puts and takes because think normally for the seasonal perspective, margins would be more like flattish Q-on-Q.
We did as I mentioned in my commentary, we had some favorable mix in Q3 for sure. And when we have a little bit of unfavorable mix in Q4. A lot of these big projects that essentially have been built in the backlog as we grow in the backlog during the course of the year, are expected to be shipped in Q4 and a lot of these big projects is carry slightly lower margins than the components business. So I'd say it's really, once again, nothing to worry about it's really just a function of mix in the quarter.
Thanks, Craig. I'll pass it on.
Thank you.
Thank you. Our next question comes from the line of Josh Pokrzywinski, with Morgan Stanley. Please go ahead.
Hi. Good morning, guys.
Good morning, Josh.
Could I just -- I guess everyone is standing on everyone else's shoulders for questions this morning. So I think I'm on Joe Ritchie for this one. But on the backlog commentary, I mean, if I'm kind of following the pattern versus last year, you guys look like you're going to end the year up, at the corporate level, maybe $4 billion or maybe $5 billion on backlog. I guess, first question, does that 2022 Q kind of preliminary color that's market demand and then anything on price and backlog consumption, sort of incremental? And then follow on to that, In other kind of cyclical environments, what would you view it's kind of the bandwidth to be able to convert backlog in any given year, because that's something that is kind of natural, we stage gated by throughput even without supply chain constraints. Thanks.
I appreciate your question. I will tell you that as we think about the market outlook in our economic forecast. The economic forecasts of markets will generally include price. So price would be baked in, you can debate whether it should be more or less than, than what we're assuming, but it should be generally baked in. Backlog reduction it's clearly something that we're trying to think through right now as we develop our plan for next year and we -- it's too early to make a call and give you specific guidance around, what our assumptions are around burning down backlog and getting to more of an historical level.
A lot of that will be highly dependent upon the supply chain environment and how that unfolds during the course of Q4 and into the first part of next year. I will say that, as we think about the supply chain challenges in general, we think we'll probably be dealing with supply chain challenges through the first half of next year. And if you think about semiconductors or some of the electronic components we think it's -- maybe it's more like a 2023, before those issues become fully resolved. And so we'll give you more guidance in February when we lay out our plan for the year. But at this juncture, we're not -- in those market outlooks, it does not necessarily assume burned down in backlog, but it would include price.
Helpful, appreciate it. Good luck, guys.
Yes, thank you.
Thank you. Our next question comes from the line of Scott Davis Melius Research, please go ahead.
Good morning, everybody.
Morning.
Is there -- other customer segments that you're selling into that you're concerned about double ordering or folks just perhaps taking product that they don't need right now and given the shortages that are out there in general?
No. I appreciate that question, Scott Davis it's one that we spent a lot of time pushing on, thinking about as well because when you are dealing with backlog that these levels that's a natural concern. As I mentioned in my commentary earlier, as we tested this specifically with our customers and where you would typically would find it is largely in the distribution channel. And today I'd say that distributors, they want more inventory; they would take more inventory if we could ship it to them and their inventory levels are in actually reasonably good shape and lower than they'd like them to be, certainly in a number of end markets. And so we can't be completely certain and it would be reasonable to assume that there is a little bit of double ordering going on. But I can tell you as we talk to our customers, it's tough to find it.
Okay. That's helpful. And then for Tom, this new minimum tax treaty / compromise or whatever that's been talked about in the press. I know the fine details aren't probably there yet on how to enforce it, but is there any sense of how that impacts Eaton on overall tax rate?
No, I appreciate the questions, Scott. Obviously, we're following it very closely, very well connected with what's going on. What I would caution you on is, you look at the headlines and the devil is really in the detail in terms of what the tax code is going to be. The Legislation that's going to get passed, etc. What I can leave you with is we're very confident relative to our peers that we will maintain our relative advantage and strong position as it relates to tax. But more to come on it for sure.
Okay. Good. I'll pass it on. Thank you. Good luck, guys.
Thank you.
Thank you. Our next question comes from the line of Ann Duignan with JPMorgan. Please go ahead.
Yeah. Hi. Thank you. Perhaps we can turn to 2022 and your outlook by end markets. I appreciate the color, but it is funny to see no red arrows at all across any of your sectors. If you could just talk about where the risks might align for a market that could potentially be down. I would think maybe military aerospace. And then residential, you have a flat and yet I think you called it out Craig, as orders in residential were very strong. So if you could just reconcile that, maybe this page reflects Global and you were talking about North America. But if you could just talk through some of those end market assumptions that would be helpful. Thank you.
Thanks Ann. Appreciate the question and I -- to your -- to your opening commentary, it is an unusual year where you have all of your end markets that you're expecting to see some growth in and so we're feeling very good about next year as a result of that. And I'd say that if you think about specifically whether its residential markets, orders are strong. If you look at some of the macro indicators around whether it's housing stats or the affordability index of housing, there are some macro indicators that would suggest that these markets should naturally slowdown. That you can't keep posting these huge double-digit growth numbers for an indefinite period of time.
And so I'd say it's really more the macro indicators that we're looking at in residential that would have us suggesting that the market is flatish in 2022. Not at all consistent with the order growth that we're seeing today, which continues to be strong and not all consistent with the back-order growth in the back log -- in the back-order growth is also quite strong in residential.. And so we'll have to see how it plays out. But certainly at some point that market will slow down. And that's what's reflected in kind of that outlook for the year. And I'd say in general, the data centers continue to be extraordinarily strong, and there's no reason for that would suggest that data centers would in any way backup.
And so, we're comfortable with the data center forecasts around the world. As people continue to consume, process, and store increasing amounts of data. Utility markets -- we think utility markets are poised for growth, as well as they continue to invest in grid hardening and weather hardening and all these events that we're seeing around the world. Weather-related events that will continue to drive investments in utility markets. If you think about today, what's going on today in the industrial markets as we all deal with these labor shortages around the world, there is certainly going to be an increased appetite we believe for investing in automation and factories and equipment.
And so can you give -- we talk about these broader trends around energy transition and investments in the electric vehicle charging infrastructure to support all these electric vehicles that are going to ultimately be produced and sold around the world and so I think we are in this little bit of a cover of Goldilocks period with respect to a number of our end markets that most of the indicators are pointing positive as we think about the future. Global vehicle market, we thinking about the challenges that they've experienced this year and all the demand that was unmet. I mean, that's another market that's just well position to grow next year and commercial aerospace will come back.
Military markets, should we say, what could go wrong? What you're worried about? We continue to be worried about supply chain constraint that still a bit of an unknown and uncertain. We worry a little bit about what's happening in Washington. But by and large, we think that's net positive in terms of these infrastructure bills that once again having been baked into our thinking in terms of whether or not we get these big infrastructure spending bills that will come out, that will certainly support many of our end markets. And so we can certainly talk ourselves into maybe a scenario that's less optimistic. But by and large, looking at the macro indicators and how our Company's position, we feel very good about not just '22, but really the medium-term outlook.
Thank you for the clarity and Craig, just a follow-up to that, do you worry at all? I mean, if you're right about this outlook, and additionally, automotive production comes back strongly. Is there any risk that we just exacerbate the supply chain problem, because we haven't really sorted that out. Particularly, if we get the semiconductor issue sorted, and that's suddenly there are plenty of chips available. But we haven't sorted out the labor and the freight and all the rest. Is there any risk to next year's revenues as supply chain issues continue for longer than anticipated, that's something that you talk about internally and I'll leave it there. Thank you.
Okay. No, it's absolutely -- we -- as you can imagine, we're spending an extraordinary amount of time right now talking exactly about that issue in terms of all the potential supply chain bottlenecks. Not only the bottlenecks today, but what becomes the bottleneck tomorrow, when you resolve this bottleneck and it is -- has been today a little bit of -- we're playing whack-a-mole because there have been a number of unforeseen supply chain challenges that have popped up, whether relates to raw materials or whether it relates to labor availability. As you've all read about in the newspaper, as we all challenge to fill open jobs in our production operations. And so I think that risk is out there. I think the risk is out there, but I think will it be worse than in 2021? I don't think so. I think 2022 will be a better year than 2021. How much better? You could debate based upon the rate at which the industry is able to resolve some of these supply chain constraints.
Thank you [Indiscernible]
Thank you. Our next question comes from the line of Mig Dobre with Baird, please go ahead.
Thank you and good morning.
Morning.
I'm just looking for maybe a little more perspective on the various items on a cost structure that you had to adjust in the back half of this year when you obviously cut 200 basis points from your top-line. But you raised your margin outlook. So you mentioned [indiscernible] helped you in the third quarter. I'm wondering if there are other puts and takes here in terms of what allowed for this, obviously very good margin performance that we need to be aware of.
I'd say that other than the things make that we've laid out, the one that was probably outside of our control kind of the good guy that we got was on the mix front. We're obviously on the billing dealing with a lot of other, I'd say extraordinary costs that we would normally not have in the business around. The money we're spending to expedite materials and labor inefficiencies in our factories, and so I think in any business there's always a balance of goods and bads, and we did call out mix as a positive.
But there's also, as I mentioned, a lot of other challenges that we're dealing with as we try to keep our factory, fully staffed, fully running and productive, given some of these supply chain constraints that we've had and so I know, I'd say that mostly it's just been good execution. Our teams, as you know, we called it relatively early, we anticipated that we're going to have a revenue issue due to supply chain, and our teams at that point went to work on the things that we can control, the things that we can do to maximize our performance and deliver our earnings despite the supply chain challenges. And so I think we've really just seeing good execution, the other place that we're seeing better benefits, quite frankly than we originally anticipated was in our restructuring programs.
We're running ahead of schedule and some of the benefits associated with restructuring. You'll see in the queue that we filed that we've taken the spending up on restructuring by about $40 million and it's going deliver $30 million more benefits than we originally anticipated. And so our teams are really good, laser focused on executing, controlling the things that we don't -- we can't -- we can't control and then managing the things that we can't to the best of our ability. So I'd say it's just really good execution in the quarter and for the year it will be a very strong year.
I see. But in terms of items like variable compensation or some other component of your expense structure is variable, nothing [Indiscernible]
I mean, sure. Certainly, it's going to be a very good year. So the comp plan is higher than what we spend. Whatever originally planned for, which is good thing. So no, the comp plan is higher not lower. And we haven't offset that as well.
Okay. Then my follow-up, I'm just looking to clarify in terms of the supply chain, are things getting less bad in the fourth quarter relative to the third, your supplier catching up and that's how you dig your way out of this hole as it were? Or are you doing some things proactively in terms of qualifying new suppliers, making adjustments to your supply chain, given all that transpired in 2021? Thank you.
And I have to say it make it's really all of the above. And in many cases, some of the supplier constraints that we've had are getting better. We're also working hard to -- where we have the ability to change materials, qualify different materials. We're working on that, where we've had some labor constraints, whether it's in our own shops or with our suppliers, in some cases we're actually sending some of our people to supplier’s operation sales may in their lines. So we're really -- it's a whole host of things that we're working on and really pulling every lever that's within our control to improve the supply chain situation. So not one thing, it's really a whole multitude of different initiatives that are being undertaken by our teams around the world to improve the outlook.
Got it. Thanks.
Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.
Hi. Good morning, maybe just a first question on the portfolio, which I don't think has been addressed yet in the Q&A. Intrigued that you took down the buyback guide, because of heightened M&A appetites, so maybe help us understand what's changing there. Is it just because it's such a buoyant M&A environment, you're seeing a lot more assets for sale coming to market than you'd expected, maybe 6 or 12
months ago. And also, I suppose it tells us that you think valuations for M&A look reasonable. So maybe help us understand, has anything changed on your returns hurdles or is it just the volume of assets coming to market is what makes it so appealing. And also then on the divestment side, if you're getting more intrigued to do M&A, should we expect divestment's perhaps to also pick up again next year?
Thanks, Julian. I would not read too much into the level of buybacks that we've done year-to-date. It's about a $123 million. What I draw your attention to is the beginning of the year with the big acquisitions that we've done related to carbon as well as Tripp Lite. We're always on the lookout for very good quality strategic acquisitions, which these 2 have certainly proved to be, and therefore, we just took more of our capital dollars and put them back acquisitions as opposed to buybacks. So I wouldn't read anything into it in terms of capital allocation, strategy changes.
And as it relates to divestitures, as Craig has said many times, we're always on the lookout to grow the head and shrink the tail. So whether it's a part of our business, it's not performing, we're always going to look at pruning it and adding on the upside, but nothing specific to report here.
And the only thing I would add to what Tom said, I completely agree with all that we have been more active this year than we anticipated. There are obviously the big headline deals of Cobham and Tripp Lite. But we've done a number of other deals during the course of the year as well. In our electrical business, JVs that we've signed in the China market, where we acquired a green motion business in Europe, and so we have been very active this year in M&A market. I'd say from a portfolio transformation, I think it's one of the most transformational in the history of the Company. And so we continue to be focused on opportunities. We are in fact seeing a better deal flow today than we certainly have in the last couple of years. Valuations in many cases are still stretched. What I would we'll commit to you and promises that we'll -- we'll remain disappointed. You've seen the kind of multiples that we're paying for acquisitions and the type of assets that we're acquiring and -- and we won't lose our way, we'll continue to be focused on those kind of assets, focusing in our electrical business, focusing in our eMobility segment, focusing in our aerospace business. But we are seeing a better deal flow today and given the trade-off between our value creating acquisition of highly strategic, and buying back shares, we're obviously, leaning in towards spending those M&A dollars to grow the portfolio.
That's reassuring. Thank you. And then maybe -- there's been a lot of questions on the revenue and EBITDA and so forth. Maybe just on the free cash flow. Year-to-date, your EPS is up, adjusted 40% the cash flow -- free cash flows down in the mid-teens. Realize there are some one time driving a wage between the 2 metrics? So when we look at 2022, should we expect conversions to be closer to 100%, maybe any initial thoughts on, does CapEx have more of a lead on it next year than this year. Any context around that free cash outlook from here?
Wait. I think it's important Julian, to note that our -- in the quarter, our free cash flow conversion was approximately 100% and free cash flow as a percentage of net sales was 12.4%. Our midterm outlook, I think was 14%, so we're on that trajectory. As it relates to next year and going forward, we would certainly want to be at that 100% or higher our free cash flow conversion. And as it relates to CapEx, we're always going to have our first priority and our capital allocation to invest in growth in the business. So we'd be looking for those opportunities.
Great. Thank you.
Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.
Thank. Good morning.
Good morning, Nigel?
I just wanted to go back -- hi. Good morning. I just want to back to Electrical America. You did have a tough comp in the prior year with some inventory. We saw benefits from 3Q '20. So I'm curious, any comments on where inventories are trending right now when you channel them? I'm guessing, it wasn't helpful. And then just one more crack at the supply chain. You do have a pretty complex supply chain down in Puerto Rico and I think, Dominican Republic. I am just wondering if that was a factor behind some of these supply change nappies?
Okay. On the latter question and I don't know, not at all. I mean, the -- we do have a number of our facilities in the Dominican Republic in Puerto Rico, and that was in no way related to the pricing challenges that we're dealing with. It really was a third-party supplier, is outside of our four walls where the issues were largely centered. And I missed this the first part of your question, Nigel. What was -- I missed the statement around the first part of your question, what was the first part of it?
Yes, just -- you are comping some inventory restock benefits in the prior year. So just curious, what you're seeing in the inventories within channels this quarter. I'm guessing, it wasn't helpful, but income [indiscernible]
Yeah, I'd say as we talked a little bit in the opening commentary, as we've done these channel checks and talk to our distributor partners and they would tell you today that own balance inventories are either in line with where they like them to be, or in many cases, below, where they like them to be. And unfortunately today, given some of the demand in the market and some of the supply chain challenges, we're probably disappointing more distributors than we certainly care to with our inability to ship due to supply chain constraints. And so total inventories at this juncture, I'd say by a merger are well in control and in many cases below where they need to be.
Yes, that's what I expected. And then a quick follow-on with pension out. You got a $0.2 billion of pension obligations this year. We've seen some nice benefits from discount rates rising up see macro trends being positive. Just curious, the best view on pension funding for the next 2 or 3 years based on the current funding levels.
Yeah. Our pension, as you know is almost fully funded. We don't anticipate making any additional contributions to it. How the pension plays out in the next year, obviously, it's going to depend on the returns and the discount rates at the end of the year. And more to come on that specifically when we talk in February.
Okay. Thanks Tom.
Thank you. Our next question comes from the line of David Raso with Evercore. Please go ahead.
Thank you. My question relates to incremental margins next year in Electrical, just trying to get some sense. When you look at your Slide 12, the end market assumptions, just from what you know about what's in the backlog and also how these businesses are structurally. When you look at that mix, is that a positive for incremental margins, neutral, negative, just trying to get a sense of how you think about those businesses. And of course what you know is in the backlog price cost, and everything else.
I appreciate the question and I'd say that there is nothing specifically in the backlog that we think is going to drive any changes in terms of the incremental performance of our business going into 2022, as we kind of articulate in the past that you really want to think about, the Company is delivering about 30% incremental. We're obviously delivering a bit better than that this year. There's been a lot of great work done inside the business. We're getting some earlier benefits from restructuring. We are getting some benefits from the portfolio moves that we made this year. But I think for planning purposes, I think a 30% incremental is really the right way to think about the incremental store for the electrical business and really for the entire Company.
And also this month, Siemens, the way they price, they are playing a little catch-up. But you heard even low double-digit increases on the resi products, high-single for non - resi, seems like [indiscernible] at least 5% to 10%. It appears by the first quarter of next year versus the end of last year, pricing might be up as much as almost 20% in aggregate. I'm not hearing you, but I'm just curious, maybe I missed it, are you hearing any demand destruction at all with this pricing?
No, we're really not hearing any demand destruction at all. And as I said it's been an extraordinary period of time where pricing is as seems to be seamlessly pass-through to the marketplace and the demand remained strong. I mean, to your point around incremental margins when clearly what we're dealing with in this environment we're hyperinflationary environment where you have really big pricing going into market, but you have big cost increases that you typically don't get. Your normal margins on the commodity increase, and so there has been this year and a little bit of pressure on margins and as a result of not recovering the full margin on the commodity cost increase. And so that is certainly something that's hold -- held margins back a bit.
Remember, it's not just commodities increasing, we're also seeing obviously, labor increases. We're seeing logistics increases and those are likely sticky. Somewhat going into 2022 as well, which gets you back to a 30% incremental for planning purposes.
Which is nice. It just doesn't seem like at least we don't find any demand destruction at all. So even if hopefully, a year from now, the year-over-year costs are not up as much, even come down a little bit. I mean, this is price, this is not surcharge, so it should be pretty sticky. It should hold off in the back half of the year. Help incremental even more or so.
Yes. I mean, [Indiscernible] we're hoping it plays through exactly the way you articulated.
Alright, thanks a lot. Appreciate it.
Thank you.
Thank you. And our last question will come from the line of John Walsh with Credit Suisse, please go ahead.
Good morning, everyone. Thanks for fitting me.
Good morning.
Maybe just a clarification question obviously, we all want to take the sales from the supply chain and Electrical America is this quarter and run them through into next year. I just want to confirm that these are truly deferred sales and none of it was a lost sale in some of the low voltage, faster book and ship stuff that goes through distribution?
Yes, I think and once again, this is one of the things John, where you can -- and I would never say that, a 100%, right? There's always going to be on the margin, perhaps in order or 2 that you've lost, as a result of your inability to deliver. But by and large, the fact that the backlog is up more than 50%. By and large we typically have in the Americas. Especially, we have dedicated distributors who are essentially Eaton distributors who are committed to our relationship, and essentially through our business. Once again, we feel very confident that with our order growth and backlog growth that, we're going to hold this business
And the loss miss shipment today become simply a future deliveries. And so that's kind of what we think is the case for the vast majority of the delta. Let's say in growth that we've experienced in the quarter.
Great. Just wanted to make sure I understood it correctly.
Keep in mind also, these are typically projects. So much of this business goes into projects and on a project where you specify a particular supplier for your Electrical switchgear. It's very difficult once a project has been specified in one buyer, particular supplier, or the other for that to just simply be changed out to another supplier. So I'd say that, yeah, we feel fairly confident.
Great. And then maybe can we just get a little color on what you're seeing in China specifically, maybe around data center, industrial, commercial, more of those industrial verticals?
I think we're all reading the same headlines with respect to what's going on in China today. In an economy that has certainly slowed a bit this year and more than anyone anticipated with special pressures, let's say on the residential segment of the market, I will tell you that in our own business that our China team just had an outstanding quarter. They are certainly part of the electrical global segment, whereas you can see that segment post an 18% growth. I would tell you that our Asia business numbers weren't terribly different than that, until we had a very strong quarter in China.
I think we're starting to see some of these real benefits of the joint ventures that we put in place. And we're seeing a lot more opportunities today than we have historically. Our data center business in the Asia-Pacific region, in China, it's doing well. And so we're obviously watching the headlines and reading them as well as anyone, but today what we've seen in both orders and in revenue out of our China business, our Asia business is doing quite well.
Great. Appreciate the color. Thank you.
Thank you.
Okay. Hey, thanks, guys. We have reached to the end of the call and we do appreciate everybody's participation and questions. As always, Craig and I will be available to address your follow-up questions. Thank you again, and have a great day.
Thank you, ladies and gentlemen. That does conclude our conference for today. We thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.