Ladies and gentlemen, thank you for standing by, and welcome to the Eaton fourth quarter earnings conference call. For the conference, all the participant lines are in a listen-only mode. There will be an opportunity for your questions, and instructions will be given at that time. If you need any assistance during the call, please press star zero and operator will assist you offline. I'll turn the call now over to Mr. Don Bullock, Senior Vice President of Investor Relations. Please go ahead, sir.
Good morning. For those of you, I'm Don Bullock, Eaton Senior Vice President of Investor Relations. Thank you to all of you for joining us for Eaton's fourth quarter 2018 earnings call. With me today are Craig Arnold, our Chairman and CEO, and Rick Fearon, our Vice Chairman, Chief Financial and Planning Officer. The agenda for today's call includes our opening remarks by Craig, highlighting the performance in the fourth quarter, our outlook and our guidance for 2019. As we've done on our prior calls, we'll be taking questions at the end of Craig's comments today. Before we dive into that, I do want to make a couple of quick passing comments. The press release for our earnings announcement this morning and the presentation we'll go through have been posted on our website at www.eaton.com.
Please note that the press release and the presentation include reconciliations to any non-GAAP measures, and a webcast of the call will be accessible on our website and available for replay after today's call. Before we get started, I do need to remind you that the comments today do include statements related to expected future results of the company and are therefore forward-looking statements. Any results that might differ materially from our forecast could be due to a wide range of risk and uncertainties, and those are described in the earnings release and the presentation, and they'll be also outlined in our related 10-Q filing. With that, I'll turn it over to Craig.
Okay. Hey, thanks, Don. I'll start on page three with highlights of our Q4 results, and I'll start by saying that I'm very pleased naturally with the report this morning, and another very strong quarter performance, which really rounded out a solid year overall. Earnings per share of $1.46 a share, up 13% from last year and above the midpoint of our guidance. This was driven by both strong growth in sales as well as higher margins. Sales were actually $5.5 billion in the quarter, an increase of 5%, and this includes 7% organic growth, and this was above our guidance of 6% for the quarter. Bookings growth in the quarter was also strong, led by double-digit growth in both Electrical Systems and Services and in aerospace. We continue to be pleased with our margin performance as well, which increased 100 basis points to 17.4%.
We had solid margin performance really across all of the segments and all-time record margins in Electrical Systems and Services and in aerospace. We also generated very strong operating cash flows of $1.1 billion, up 27% and a quarterly record if you exclude the $300 million arbitration payment that we made earlier this year. Lastly, we reported and repurchased $700 million of shares in the quarter, taking advantage of what we saw as a significant pullback in financial markets. If you'll recall, we had planned to purchase $200 million-$400 million in the quarter to achieve our target of $800 million-$1 billion for the year. I'd say for now, you can think about this as an acceleration of purchases that we were planning to make in 2019. However, if markets remain weak, we'll certainly take advantage of those opportunities as well and buy at higher levels.
Moving to page four, you'll see our financial summary for the quarter. You can read these numbers for sure, but I'll provide maybe just a bit of context here. First, our operating segment profits increased 11%, and we generated strong incrementals of almost 40%. Second, segment margins of 17.4% were at the high end of our guidance range and 100 basis points above Q4 2017. Finally, our net income as reported, was flat with prior year, and prior year included income related to the U.S. tax bill. Excluding this one-time benefit from Q4 2017, our net income increased 10%. On page five, we'll start our segment overviews with Electrical Products. Revenues grew 3% in Q4. This includes 5% of organic growth, offset by 2% in currency.
This was really a strong finish to the year, and it was actually our highest organic growth rate for Electrical Products since Q4 of 2014. As we expected, growth in our lighting business turned positive and was up mid-single digits. Orders increased 3%, and this was led by solid growth in the Americas. I'd also note here that our backlog increased 15%, and while we generally think about this as a book and bill business, this increase does suggest that we didn't see any unusual pre-buying at the end of the quarter. Segment margins were 18.2%, flat with prior year, and this was largely a result of some unfavorable product mix between the businesses. Next, we can move to page six and a summary of our Electrical Systems and Services segment. As I noted in my opening commentary, this segment posted excellent results for the quarter.
The business continued to strengthen. We posted 10% organic growth in the quarter with strength across all major end markets. The 10% growth represented an acceleration of growth, which was above our Q3 growth rate of 9% and above the Q2 growth rate, which was up 7%. As you can see, we did have some negative impact from foreign exchange and a small divestiture during the course of last year. Orders were even stronger, up 12% on strong growth in all major end markets in the Americas and in EMEA. I'd say that this strong growth in Q4 was against a very strong comp from last year, where orders were up 12%. You'll recall from our Q3 earnings call that we noted a pause in orders during the month of September.
We had expected that this was largely project timing and temporary, things really played out as we expected in this segment. In addition, our backlog continued to increase and was up 13%. Overall, the segment is performing very consistent with what we would expect from this long cycle business. Lastly, segment operating profits were up 19%, and we generated all-time record margins in this segment of 16.6%, so a very strong quarter across the board. If you turn to page seven, we'll summarize the results of our hydraulics business. Here, we had another strong quarter of revenue growth, with sales up 6%, 8% organic growth offset by 2% negative currency. We continued to see strength really in mobile and with industrial OEMs, in construction and ag markets, and in the distribution channel, so pretty broad-based.
Orders were down 4%, I would say here on tough comps, and if you recall Q4 2017, our orders were up 25%. In the quarter, we did, however, see continued strength in Asia, with orders up 10%. Orders in the Americas were flat, but at very high levels. We continued to see order weakness in EMEA, with orders down some 24% as lead times continue to improve. I'd also add here, but this was the region where we had our most difficult comp. Orders in Q4 of 2017 were actually up 38%. We feel, once again, pretty good overall about the activity levels in the hydraulics business. Our backlog does remain strong. It increased 6% from last year. Turning to operating profits, we increased profit by 15%, and our operating margins increased 90 basis points to 13%.
I think the right conclusion here is that now we made solid progress in this business, which was held back in some prior quarters by some supply chain issues, but that progress needs to continue and is expected to continue going into 2019. On page eight, we move to aerospace, the business here is clearly firing on all cylinders. Now I'll begin by noting that growth continued to accelerate in Q4 with organic revenue growth up 13%, and this is up from 9% growth in Q3 and 6% growth in Q2. Orders also accelerated, increasing 17%, with strength in commercial transport, military fighters, and both commercial and military aftermarket. Our backlog continued to grow, up some 13% in the quarter. Now, the business here also demonstrated very strong operating leverage with profits increasing 30% and delivering record operating margins of 22.9%.
I would add that favorable mix certainly contributed to these record margins as aftermarket revenues continued to perform well, but our team also is doing an outstanding job of executing. Moving to the vehicle segment on page nine, we're also very pleased with how this segment performed in the quarter. Our revenues were down 2% with flat organic revenues and 2% negative FX. The NAFTA Class 8 truck market remained very strong in the quarter and reached 324,000 units for 2018, and this is up some 27%. You'll recall here that revenues for our automated truck transmission business are now included in the Eaton-Cummins joint venture and are not consolidated in our financials. The JV actually had revenue growth up 45% in the quarter, our business overall is performing extremely well.
On the other hand, global light vehicle production was down in Q4, with North America up modestly, offset by slight declines in Europe, and particular weakness, as you've all heard, in China. Despite flat organic revenues, operating profits increased 4%, and our operating margins increased 90 basis points to 17.9%. Finishing up our segment summaries, eMobility is on page 10. Organic revenue growth was 11%, offset by 1% negative currency. Not unexpected, operating margins declined to 11.3% as we continue to ramp up our R&D spending. You'll recall that this new segment was created in Q1 of last year. At last year's investors meeting, we told you that eMobility would become a new $2 billion-$4 billion segment of our company, and I'm pleased to say that we're on track. 2018 was a busy year, and a year where we ended ahead of schedule.
We're in ongoing discussions with a large number of customers on new programs, and we remain very optimistic about the long-term growth outlook for the business overall. We're ahead of schedule on new product developments. These new products are allowing us to quote on a broader range of opportunities and, quite frankly, to move from selling only components to selling systems. We remain very excited about the future of this segment and the work that our team is doing and what this represents as a growth opportunity for Eaton as we move forward. Before we turn our attention to 2019, I would like to just take a moment to recap some of the key highlights from 2018, which we see as a strong year of progress.
First, end markets improved, allowing us to generate 6% organic revenue growth, and this was double the growth rate of 2017 and above our initial estimate for the year, which was 4%. We continue to make good progress on enhancing our margin performance with 100 basis point improvement and setting an all-time record for the company at 16.8%. As a result, our net income per share of $5.39, when you exclude the $0.48 impact from the legacy Cooper arbitration decision, was up 16% over 2017. Our teams very effectively offset both the impact of tariffs and commodity inflation with incremental price. We generated $3 billion of operating cash flow, and this would exclude the $300 million impact from the arbitration payment. This allowed us to return $2.45 billion to shareholders, $1.15 billion in dividends and another $1.3 billion of share repurchases.
The $1.3 billion represents 4% of our shares outstanding at the beginning of the year. Overall, very proud of the team. We exceeded our financial commitment to shareholders. We invested in the future of the business and really are building a stronger company. Turning to 2019. Let me begin by summarizing our growth outlook. Overall, we're expecting 4%-5% organic growth, and this is consistent with the outlook that we provided in Q3 2018 during our conference call. As we take a look at our individual businesses, we expect 4%-5% organic growth in Electrical Products, with continued strength in industrial and large commercial projects. We expect modest growth in lighting, and also modest growth in single-phase power quality and small commercial projects. For Electrical Systems and Services, we see 5%-6% organic growth. Here our backlog is very strong.
We expect continued market strength in power distribution assemblies in the Americas and in the data center markets globally. We also see modest growth in both the utility and harsh and hazardous markets. For Hydraulics, growth is expected to be 5%-6% on revenue levels that are already very strong, but we see continued strength in mobile markets in Asia and in North America. Aerospace markets really are universally strong, and we expect to see 8%-9% growth on strength in OEM and aftermarket, and really with both military and commercial customers. Vehicle markets are expected to be flat for both North America heavy-duty truck and for global light vehicles, but both are running at, I'd say, very high levels. We expect to see strong growth in the Brazilian truck market. Overall, our organic revenues are expected to be down 2%-1% for the year.
Once again, keep in mind that our revenues for automated truck transmissions are expected to grow and are now a part and reported as a part of the Eaton Cummins joint venture. Finally, we expect eMobility to grow 11%-12%, organically, consistent with the level of growth that we experienced in 2018. While we're still a few years away from what we call a major growth inflection point, our optimism for this segment continues to grow as we look forward. Moving on to page 13, we lay out our margin expectations for 2019. For Eaton overall, we expect segment margins to be between 17% and 17.4%. At the midpoint, this represents a 40 basis point improvement over 2018, and it really places us solidly within the 17%-18% range that we set as a 2020 goal, and I would add one year ahead of schedule.
With the exception of eMobility, where we're investing heavily in product development, margins are expected to increase in each of our segments. Specifically Electrical Products at 18.6%-19.2%, a 50 basis point improvement, and Electrical Systems and Services at 15.2%-15.8%, up 60 basis points. Hydraulics at 14%-14.6%, up 90 basis points. Aerospace at a very strong level already, but at 21.4%-22%, up 70 basis points, and Vehicle at 17.4%-18%, up 20 basis points. eMobility, as we noted, we're investing heavily in this segment. Margins will be down to 6.1%-6.7%, some 70 basis points, really just as a function of heavy R&D investment. On page 14, we pick up the balance of our guidance for 2019. We expect our full-year EPS to be $5.70-$6 a share.
At the midpoint, this represents a 9% increase, excluding the impact of the arbitration decision that reduced 2018 earnings by some $0.48. As we discussed, organic revenue is expected to be up 4%-5%, but this growth is expected to be partially offset by some $250 million of negative currency translation. We expect our corporate costs, including pension and interest and other corporate items, to be flat for 2018, and our tax rate to be between 14% and 16%. This will result in operating cash flows coming in between $3.1 billion and $3.3 billion, and we expect CapEx to be $600 million. As I noted, we accelerated some $400 million of share repurchases into Q4. The target purchases for 2019 are now at $400 million. For Q1, we expect EPS to be between $1.18 and $1.28, a 12% increase at the midpoint.
For Q1, we also expect organic growth to be approximately 4%, to have segment margins between 15.5% and 15.9%, and a tax rate of between 13% and 14%. Overall, we expect another strong year. I'd say, Don, this concludes my opening comments, and I'll hand it back to you, and you can open the line for Q&A.
Thanks, Craig.
Before we hand it to the operator to open it up for questions, I do want to make a couple of comments. First, we do acknowledge today is the day that has an enormous number of peers out there on earnings announcements. We are going to hold our call to an hour. To do that, it's important that you limit your questions to a question and a follow-up, if you would, so we can be sure to cover everyone's questions. With that, I'll turn it over to the operator to give you instructions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one. You'll hear a tone indicating you've been placed in the queue. If your question gets answered or you wish to remove yourself from the queue, please press the pound key. Again, star one if you have a question.
Our first question today comes from Jeff Sprague with Vertical Research.
Thank you. Good morning. Very solid, Craig. I was wondering if you could provide a little bit of additional color on how you saw things play out during the quarter. Obviously, the quarter itself was very strong, but we did have that peculiar slowdown in September. Did you see people tapping the brakes in December as the market got wobbly? What are you seeing here in January?
Yeah, Jeff, I guess you're referencing largely what we talked about on the Q3 earnings call in Electrical Systems and Services, where we did see this pause during the month of September. We'd indicated at the time that we thought that was a temporary pause, that these projects do sometimes tend to be lumpy, and we thought that that would come back in Q4, which it certainly did. Now, I'd say Q4 was really pretty much a consistent quarter. We saw high level of economic activity really across the quarter, pretty consistent across each of our businesses. As I noted, with no real significant, no measurable pre-buy at all, as evidenced by the growth in our backlog. I think it was a solid, clean quarter across the board. Despite the level of economic uncertainty that's out there, activity levels are fairly good.
In through the month of January, we've really seen kind of a continuation of that performance. Certainly, in the context of our guidance for Q1, which is a little lighter than the growth rate that we saw in Q4, we do think there is some economic uncertainty out there, which is essentially what we have reflected in our guidance. By and large, activity levels across our businesses are still quite positive and quite strong.
Thanks. Unrelated, just on tax, Rick, your guidance is pretty straightforward, we've seen a couple of companies getting hit by this IRS change in deductibility of interest. Is that an issue for you or a wild card, or is that fully encapsulated in your guide?
It's fully baked into our guide. One of the reasons that the tax rate jumps from roughly around 13% to 15% in 2019 is because we're reflecting the implications of all these regulations that came out last year, some of which I think surprised some companies. We had anticipated that they would come out largely as they did. That's why we're comfortable with this 14% to 16% range for 2019.
Great. Thank you.
Our next question comes from Joe Ritchie with Goldman Sachs.
Thanks. Good morning, guys.
Morning.
Craig, maybe just on the EPS range, $0.30 wide versus kind of like typical is closer to $0.20. Maybe can you just give us some insight into why you expanded the range and what market conditions have to be in place to drive you towards the higher end or the lower end of the range?
I would suggest, Joe, that don't really overread or read much into the fact that the range is a little bit wider. I think as our EPS in absolute dollar terms increases, the percentage and the range will naturally widen a little bit. I'd say that for us, the big variables as we look forward into 2019 that could potentially influence whether you're on the low end or the high end of the range is largely a function of what happens with our end markets. Right now, as I said, we're feeling fairly good. It was a strong fourth quarter, coming in stronger than what most had expected, ourselves included.
I think it's really a function of how end markets perform going into 2019, and to what extent some of the geopolitical kind of concerns that we're dealing with in various kind of countries around the world get resolved. I wouldn't read anything into the fact that the range has been opened up a little bit. We're feeling very good about kind of the company's performance overall and degrees of freedom that we have around things that we can do in the event of a little bit of an economic slowdown. I would not overread that at all.
Okay. That's good to hear. I guess my follow on, you guys cited power distribution assemblies and data centers as strong growers in 2019. I think data centers are up high single-digits. This is, though, a little at odds with some of the announcements we've heard from some of the chip makers. Maybe talk a little bit about the strength that you're seeing in data centers that makes you feel good about the prospects for 2019.
Yeah. The data center market, I'd say, if you look at the long-term trend of what we've been seeing in generalized, the whole world generates and consumes more and more data, I think is pretty compelling for the long-term growth prospects. We saw strong double-digit growth in 2018, as well as a lot of major projects being announced. As we think about data centers in general, while on the hyperscale side of the market, it can be somewhat lumpy, we do think that what we're looking at in the form of an existing backlog and projects that are in the pipeline, that the numbers that we're talking about for 2019, which is kind of mid-single-digit growth, are very much in line with what we have visibility to.
I think the chip maker piece is perhaps one that's a little bit more nuanced in terms of whether or not that's a direct proxy for what we're seeing specifically in the data center markets, as a lot of the big data center companies are actually, in many cases, vertically integrating and doing a lot of this work themselves as opposed to relying upon third parties. Now we feel very good about the data center market and about how we're positioned and about the number of projects that have already been announced. We think it's going to be another strong year.
Great. Thanks, Craig.
Our next question comes from Nicole DeBlase at Deutsche Bank.
Morning, guys.
Hi. Morning, Nicole.
I guess maybe starting with the 1Q outlook, it seems to me like the step down to 4% organic growth could be a little bit of conservatism, reading between the lines with what you said in response to Jeff's question. I guess maybe thinking about from a segment-by-segment perspective, where the step down is coming from?
Yeah, I'd say that as we take a look at Q1, we're certainly seeing a step down in the growth rate. I'd say principally in Electrical Systems and Services, is one of the big drivers. Hydraulics, I'd say, would be another one, then also in aerospace. Those would be the three big ones that I'd say there's a relative step down in the growth rate. I think, largely the way we think about it, Nicole, is the way I answered the question earlier, is that there is a lot of economic uncertainty out there, whether it's Brexit or the funding the U.S. government or trade disputes with China.
We think, given the level of uncertainty that's still out there in Q1, that you could largely see a little bit of a pause in economic activity until some of these major structural issues are resolved. That's kind of what's baked into our forecast. Could it be conservative? It could be. Given kind of just a level of economic uncertainty out there, we think it's prudent to plan for these issues to at least extend through Q1 and be resolved at some point. We think all of that logic is baked into our guidance for the year of growing some 4%-5%.
Okay, understood. Thanks, Craig. I guess maybe my second one just around hydraulics. One of your big distributors talked about fluid power demand stepping down a bit in the last two weeks of December. Curious about that, as well as the confidence in the outlook for China mobile market to remain strong, just because I think CAT is looking for more like kind of a flattish equipment environment in China in 2019.
Yeah, China has continued to, maybe I'll deal with that one first before I get to the distributor one. China has continued to form extremely well. If you take a look at excavator sales in Q4 and wheel loader sales, excavator sales are up more than 20% in Q4. Wheel loader sales up more than 10%. The China construction equipment market, at least in terms of looking at the public data, continues to perform extremely well, and our business does as well. We think as we look into 2019, we do think that growth rates moderate, but we still think that we see growth in the China mobile market specifically going into 2019. That's kind of consistent with what we're hearing from many of our customers.
Quite frankly, Eaton in the region, we've done extremely well in terms of new wins and gaining some market share on platforms, and that also influences our thinking as well. In terms of the distribution market, I can't really speak to one distributor in one part of the region. I would say that our hydraulics business in Q4, we had organic growth of 8%, and that growth was pretty even throughout the quarter. We felt very good about the growth rates, and we did not see, generally speaking, or hear, generally speaking, of any slowdown that took place at the end of the year. It wouldn't surprise me that there's a distributor someplace who saw a slowdown someplace. More broadly speaking, our business continued to perform well.
Understood. Thanks, Craig.
Our next question comes from Ann Duignan with JP Morgan.
Yeah. Hi, good morning.
Hi.
Craig, maybe you could dig a little bit deeper into some of your end markets and give us some color in terms of where you're seeing the strength. I'm looking particularly maybe Electrical Products, which specific industrial markets, which sub-segment of commercial projects, and then likewise maybe power distribution, just so we get some color as to what's going on out there.
Yeah. I'd say that in the beginning with Electrical Products, one of the things we noted, Ann, was that our lighting business returned to growth. It's been a business that obviously we were taking some strategic steps to work through some specific market segment issues. That business for us returned to growth in Q4. We think the outlook for lighting going into 2019 is that business will continue to grow low to mid-single digits. We think that the single-phase power quality business, another business that grew mid-single digits in Q4. We had order growth that was a little better than that actually in Q4. That market continued to do well. Largely the power distribution components, a lot of what we sell in the component side goes into small and large commercial projects in general.
When you think about some of the growth that we see today in our Electrical Systems and Services businesses, most of the components that support that business come through our Electrical Products business. Some of that goes to distribution and aftermarket as well. That business continues to do well. We saw, generally speaking, pretty decent growth. As I mentioned, the strongest growth that we've seen since 2014 in Electrical Products. The orders are performing solidly. We think that market continues to have a decent year in 2019. In Electrical Systems and Services, it's really, as I mentioned, almost strength across the board. Large industrial projects, commercial projects, those markets continue to perform extremely well, and you see many of the same data streams that we see. Non-res construction numbers continue to be up strongly, mid to high single digits.
The Dodge non-res contracts were up 23% in dollars in Q4, on a square footage basis, up 10%. We're really seeing strength in most of the non-res construction markets. As we talked about in data centers, hyperscale and data centers in general had very strong results, up strong double digits in 2018, and we think a little bit of moderation in that growth rate as we move into 2019, but still strong growth. We think in general, these businesses continue to perform very well, and that no real evidence of any economic slowdown at this point. We're feeling very good about 2019. Crouse-Hinds in oil and gas is another one of those segments that's been a lot of stuff talked about, but we had very good growth in Q4 in our Crouse-Hinds business, up strong single digits, high single digits.
That business as well, despite a little bit of pullback in oil and gas prices at the end of the year, we saw some recovery in December. We think that market also continues to grow going into 2019.
Okay. That's good color. I appreciate that. Just to follow up on the sustainability of aerospace margins. We know it's great to have high margins in aerospace, but we also know we have to be investing in the future. Can you just talk, Craig, maybe about the near term, maybe positive mix versus the longer term, you need to be on the next platform in order to sustain those high margins?
Yeah, absolutely, and appreciate the question. I'd say there's two things that are really driving the high margins in aerospace. I think, one, it is the fact that aftermarket is continuing to perform extremely well, and as you know, Ann, better than most, at the end of the day, you make most of your money in aerospace and aftermarket, and aftermarket is performing extremely well, both in commercial and on the military side. The other thing that I'd say that we and others are getting a real benefit from right now is really what you alluded to, Ann, is the fact that we're in a bit of a pause period as an industry in terms of new programs. We went through a massive refresh over the last 10 years, and most of these new programs are actually going into service at this point in time.
By the time you get to the next generation, the next refresh, you're probably five to 10 years out. I do think that our aerospace margins will continue to be at very high levels for the next number of years, until we get to the point where we have the next round of major investments required for the next generation of commercial and/or military aircraft. We are investing in the future. We're doing a lot of investments in offline technology development to be ready for insertion to get to a technology readiness level that says that we're ready to participate on the new platforms. I'd say it's really those two things that are really benefiting our business, as well as very strong execution by our operational teams.
Great. Thank you. I'll leave it there. Appreciate it.
Thank you.
Our next question comes from Nigel Coe with Wolfe Research.
Thanks, guys. Good morning.
Hi.
What a different three months makes, huh? I'm just trying to understand the turnaround in ESS because it feels like there's probably more economic uncertainty in the U.S. than there was back in September and October. I'm wondering, what are you hearing from the field yourselves, engineers, customers, whatever, in terms of what caused the pause and why the release now? Maybe just in terms of commenting on pre-buy activity this quarter, pull ahead of price increase, et cetera. Did you see any of that, and could that explain some of this pressure?
I'd say, Nigel, appreciate the question. We spent a fair amount of time talking about it on the Q3 earnings call. I think the way we characterized it at the time was we said the business we thought was in fine shape. We said we saw a specific pause in the month of September. The business tends to be lumpy anyway. We tried to encourage everyone to look through September and said everything's going to be fine, which is the way it turned out. I wish I could give you the exact answer to why we saw this pause in the month of September, other than saying that sometimes it does happen in these big systems businesses where orders tend to be lumpy.
By and large, I think what we characterized in Q3 was that our Electrical Systems and Services business was doing great. It was in fine shape. We expected that we would continue to post strong growth in that long cycle business. That's essentially what's happened. Now, to the point around pull aheads, no, we're not really seeing any pull aheads at all. We talked about we continue to build backlog in that business. It's up some 13% from last year. I would say the way I characterize Electrical Systems and Services is, once again, very much like long cycle businesses. It's performing as expected. You will occasionally find a month or so where things tend to be lumpy.
Okay. That's great color. Thanks, Craig. Just maybe just address price and in particular lighting price. It feels like lighting price is getting a lot better. I just appreciate your comments in terms of what you're seeing in terms of demand for lighting. Obviously, up low single digits in 2019, specifically the price component of that, what are you seeing in the market?
I'd say that lighting prices in general, and some of this could be as a function of trade and other things that are perhaps putting a little bit of a floor underneath some of the pressures that have been coming historically from some of the Chinese imports. Yeah, I would say that the pressures in and around lighting have somewhat abated. It still remains a very competitive industry, and historically speaking, if you recall, in this business, a lot of the lighting price giveback was really a function of the fact that the price of semiconductors and electronics in general continued to fall, and those prices were essentially passed on to our customers and to the consumers in the form of lower prices of LEDs.
Some of that is also the price of the core electronic components is not falling at the rate that it has historically, and we've reached a little bit of a bottom on some of that. I think that's also influencing the fact that lighting prices are firming somewhat. We did have a much better Q4 with the mid-single-digit growth. Our outlook going forward is low to mid-single digits. We do think that the lighting business performs better for sure, going into 2019 for Eaton. It becomes no longer a headwind for the business. It becomes a little bit of a tailwind with respect to growth. We're enthused by that.
Okay, I'll leave it there. Thanks, Craig.
Our next question comes from Julian Mitchell with Barclays.
Hi. Good morning.
Morning, Julian.
Morning. Maybe just the first question around the hydraulics business and the margin profile. You said you'd had some operating inefficiencies in 2017 and 2018. If you could quantify at all, what kind of margin headwind they comprised in 2018, and how quickly you catch up from those in 2019, and maybe any other respects in which you're changing how you sort of manage the productivity and the manufacturing pull through in that business.
Yeah, I appreciate the question, Julian, this has obviously been one of the segments that we spent quite a bit of time talking about during the course of our earnings calls and one of the segments where we did, in fact, reduce our guidance for the year. The way we characterized it then, and I think it's still largely the case, Julian, is that this industry went through a very significant ramp, a V-shaped recovery. The supply chain and our suppliers, in many cases, were just not ready for the ramp. So we had a lot of inefficiencies in the business as a function of having to expedite parts. We had some challenges in ramping up hiring, not only in our facilities, but our suppliers had the same issues.
There was just a whole host of inefficiencies associated with an industry that went through a V-shaped recovery, and we were all caught a little bit flat-footed. As a result of that, those inefficiencies, I'd say, if you think about the reduction in our margin guidance for hydraulics during the course of the year, you can largely say that is about equivalent to the level of inefficiencies that we saw in the business. One of the reasons why, as we look at the guidance for 2019, we think most of those efficiencies come out of the system, and we get to a business, once again, that's performing more like what we would expect.
I'd say that while we're not 100% out of the woods, most of the issues that we dealt with during the course of 2018, and the efficiencies therein, are largely behind us now.
Thank you. My second question, I think a lot of the Q&A so far has been on demand dynamics, maybe switch to talking about capital deployment a little bit. You did some accelerated share buyback spend in Q4 when the price was down, obviously, you've seen a good rebound since, the timing looks very good on that. Maybe flesh out a little bit how you're thinking about buybacks versus M&A, and what kind of M&A appetite you have looking out this year.
Yeah. Appreciate the question. We did, like you articulated, we saw the overdone Q4 pullback as a real buying opportunity, we did take that opportunity to accelerate some planned purchases into the end of the year. I'd say, if you think about our capital deployment strategy, I think we've laid that out historically, we talked about as we think about capital deployment, the first call on cash will always be reinvesting in each of our businesses and making sure that every one of our businesses has the capital that they need to be successful and to win in the marketplace. With respect to M&A versus share buyback, we have been out of the M&A market for the last several years. I would say that the environment today is such that we're looking at perhaps more opportunities and more deals than ever.
Pricing continues, in some cases, to still be a challenge. We've agreed that we're going to maintain our pricing discipline through this period of perhaps pricing being above what we think is reasonable. We've said that our cost of capital is anywhere from 8% to 9%. We want a minimum of 300 basis points over our cost of capital. So we're going to be disciplined through this period. Having said that, we would like to get back into the M&A market. The way I would think about it is, our priority will be largely in and around bolt-on acquisitions where you get a lot of leverage within our existing businesses, and therefore we can deliver synergies and value in these acquisitions that we acquire.
Having said that, in the event that we're not able to put capital to work through M&A. We will generate, as I mentioned, a lot of free cash flow in 2019. We won't let capital build up on the balance sheet. So we'll certainly, in the event that we're not successful in the M&A market, we'll certainly be more aggressive in buying back our shares.
Julian, if I might add, as you know, we brought our debt levels actually even a little bit lower than we had originally anticipated after Cooper. If you just do a quick little math of our midpoint of $3.2 billion operating cash flow and take out CapEx, take out of about $600 million, take out dividends, take out the $400 million repurchases, it leaves us with about $1 billion of just excess cash to use on acquisitions, or if we don't find them, presumably raising our repurchase amount.
I'd add to that, Rick. We've been quite aggressive, quite frankly. If you take a look over the last four years, in aggregate, we've bought back some 13% of our shares over the last four years. So we are certainly willing to step in when we see these opportunities of weakness and buy the stock back. Given our dividend yield and the current stock prices, we think that it's a tremendous value to buy Eaton at these levels.
Great. Thank you very much.
Our next question comes from David Raso with Evercore.
Hi, good morning. Apologize. Had phone issues earlier, so I apologize if this has been asked. Just trying to figure out the first quarter organic is slower than the full year, so obviously there's some assumption of some re-acceleration as the year goes on. The comps don't really get any easier. You mentioned ESS starts the year a little bit slower on a step down, but the backlog for that business has been up double-digit for three quarters. The orders have been obviously lumpy in the third quarter, but two of the three quarters have been strong. A, I'm just maybe trying to dig into a little bit more why ESS organic slows that much in the first quarter.
If we think of the businesses that you said maybe they start a little bit of a pause period, the acceleration in growth as the year goes on, is that more ESS? Is it aerospace? Just trying to understand so that we have the cadence correct.
I appreciate the question, David, we did talk about this a little bit earlier, I think it's really, we talked about just the level of economic uncertainty that exists in the marketplace right now across so many parts of the world that's really giving us a little bit of a pause with respect to how aggressive we are on this Q1 number. I'd say it's really that issue more than anything that has been baked into our thinking around an acceleration. You have Brexit coming up. You have trade disputes with China. You have debt issues in the U.S. There's just so many, I'd say, let's call them geopolitical issues that we're dealing with around the world, that we thought that it would potentially have an impact on Q1 activity levels, that's really what's baked into our thinking.
Well, I guess more directly, I'm just trying to figure out, is there something you're actually seeing, meaning anything reflective of what we saw in September? Maybe the backlogs that you have, they're a little bit further out than traditional. I'm just trying to understand how much is, again, prudent understanding of some economic uncertainty right now versus something you're actually seeing. That's all I'm trying to dig into.
Yeah. No, I'd say that if you characterize the backlog, there's really been nothing in terms of the characterization of the backlog, whether that's in Electrical Systems and Services or hydraulics or the other businesses where we build big backlog. The characterization and delivery timeframe of our backlog does not look significantly different than it's looked historically.
Okay. No, I appreciate the color. Thank you.
Our next question comes from Steve Bolton with Jefferies.
Hi. Good morning, guys. Thanks for fitting me in. Just maybe related to that, historically, I guess when ESS orders start to ramp up and backlog stretches out a little bit, there's an opportunity to be a little bit more aggressive with pricing. Can you just talk about what pricing looks like in your order book in ESS and how much that might have some upside going forward?
Yeah, I think the way we generally think about pricing in general, Steve, is that it's neither a net positive or net negative as we tend to, over time, offset commodity-driven cost increases with price in the marketplace. I would say today, the pricing environment overall on Electrical Systems and Services is better than it's been, better than it's been largely because the level of economic activity overall has been better over the last 12 months or so.
I'd say as we think about price in general, I wouldn't really think about it being a big contributor to pricing, but I think the overall environment today makes it a little bit easier as we think about negotiating on large projects and with customers, simply because from a capacity standpoint in many cases, we're sold out, our competitors are sold out. Lead times in some cases have pushed out. I do think the environment overall is a little better as a function of volume more than anything else in our factories.
Okay. All right. Fair enough. Maybe I'll ask the only eMobility question. Obviously, there's lots of platforms that are getting announced for the early 2020s. Is it too early for you guys to have actually signed any contracts for any of those platforms, or is that actually happening?
Yeah. I'd say that we have signed some contracts already. Most of what we signed to date has been relatively small. I'd ask you to stay tuned.
I will stay tuned. Thank you.
The next question comes from Jeff Hammond with KeyBanc.
Hey, morning, guys.
Hi.
Hey, just a couple finer point questions. One, your margins in EPG looked a little bit lighter on the incrementals. Anything there to point out?
Yeah. What I tried to comment on that one, Jeff, appreciate the question because, as you mentioned, margins were a little bit lighter than we anticipated as well. It is largely a function of product mix. As you think about that, it's a very large segment, and when you have some of the segments that have lower overall margins growing a little faster, lighting, for example, that tends to have an impact on your margins overall. I'd say, overall, absolutely nothing to worry about there. The margins in EP are at very high levels. As you saw in our guidance going forward, we feel very good about 2019.
Okay. Then vehicle, looks like you're calling for the markets to be flat to up, and yet organic decline. Is anything to read into that in terms of share shift, or is that just the Cummins JV moving around?
Yeah. It's really the Cummins JV, it's another question I appreciate, Jeff, because there has been a little bit of confusion around the way the JV impacts Eaton. As the JV increases, as the world continues to consume and move from more manual transmissions to automated transmissions, that revenue ends up showing up in the joint venture. As I mentioned, just the JV revenues grew 45% in Q4. We obviously get a piece of the profits. You'll find that as we move forward, the revenues for our business really have to be looked at, I'd say, largely in combination with the joint venture if you really want to get a sense for how we're doing in the marketplace. It's really that issue that is driving essentially the flat revenues.
Okay, great. Thanks, Craig.
Next question comes from Andy Casey with Wells Fargo.
Good morning, everybody.
Hi.
Question on the margin outlook and price cost. Does the 2019 guide embed neutral price cost? I'm wondering because you're probably going to have carryover pricing benefit that spills into 2019, and you may see raw material cost declines as the year progresses.
Yeah, I'd say that what we generally do build in, Andy, to exactly your point, is we build in neutral. There's always a little bit of timing on the upside and downside, depending upon what's happening with commodity prices. Typically speaking, as commodity in a commodity increase environment, we tend to be a quarter or two behind it. In a deflationary environment, we tend to be maybe a quarter or so or two above it. Over the period of, say, a 12-month period, it kind of washes out to be neutral. That's really what we baked into our plan. Specifically as it relates to tariffs, and what we said in the Q3 earnings call was that we expected $110 million of headwind associated with tariffs.
As you know, since then, the implementation had been delayed by two months, we think that number is now at $100 million. Our base assumption today still would assume that the phase three tariffs moving from 10% to 25% go into effect, and that our teams essentially go out and offset that with incremental price, but don't necessarily get a normal incremental margin on the additional tariff-driven cost increases.
Okay, thank you, Craig. On that Forex impact, the $250 million for the year, is that heavily weighted to the first quarter?
Yeah, it would be more heavily weighted towards the first quarter. Just given how currencies have performed during the course of 2018, that would be largely true.
Okay, does that weigh on the margin for the first quarter at all?
Yeah, I'd say not really. It really doesn't in terms of the margins itself. I mean, it really doesn't weigh on the margins. It certainly weighs on EPS, for sure, but it really doesn't necessarily weigh on the margin rates.
Okay. Thank you very much.
Next question comes from Mig Dobre with Baird.
Hi. Good morning, guys. Going back to EP, maybe trying to understand your growth guidance a little bit better. I'm trying to figure out exactly how you're thinking about getting to 4%-5% growth. We really haven't seen order growth to that extent yet. Is this simply a factor of lighting no longer being a headwind and everything else pretty much staying the same, or some other end market acceleration in there?
I think you kind of hit the nail on the head, Mig, with that one. If you think about what we talked about during the course of 2018, where we'd made some very specific decisions around our lighting business and walking away from business that wasn't profitable. During the course of 2018, that business actually contracted some low to mid-single digits. As we look forward, that goes from a negative to a positive. That's really what's driving the big difference in the relative growth rate in our EP business.
All right. That's helpful. Then back on vehicle, you're expecting some margin expansion there, even though obviously revenues not so much. What exactly is generating that? As you look maybe beyond 2019, presumably this business is going to start to see some volume deterioration. How do you plan on managing that?
I'd say one of the things that we talk about is the fact that we set this joint venture up, obviously, with Cummins, we don't consolidate the revenue, but we obviously get half of the earnings. The JV will see revenue growth, earnings growth in 2019, that will help us with margin expansion. I would say more broadly, this is just a business and a management team that has just done an outstanding job over decades of very efficiently running our business. Operational improvements, efficiency improvements, cost out is something that we do extraordinarily well as a company and even better within our vehicle business. We would fully expect that this business continues to operate at very high levels of margins even in the event of an economic downturn of somewhat.
Thank you.
Our next question comes from Andrew Obin with BofA Merrill Lynch.
Hey, good morning. Thanks for fitting me in.
Hi.
Just with the economic cycle being so healthy and you guys executing well, how do you think about your capacity overall and North American capacity specifically? How do you deal with these higher volumes?
Yeah, no, I'd say that it's one of the reasons, Andrew, and I appreciate the question, that our incremental rates as we provided in our guidance in 2019 are perhaps a little bit less than what we experienced in 2018. It's because we are having to make some investments in a lot of our businesses that are running at very high levels, whether that's Electrical Systems and Services, whether it's in aerospace. We made some really big investments in hydraulics during the course of 2018. So we are having to reinvest in capacity expansion in many of our businesses that are running at very high levels.
I think that's really the way you deal with it, is you spend the dollars, and you make the investments, and in some cases, you look at your business models as well around what you invest in and what you rely upon your supply base to do. By and large, we are making investments to expand our capacity.
Are you rethinking your global footprint? I mean, the ratio where you're investing, that's what I mean
What we've always tried to do is really manufacture in zone of currency. We try to minimize the amount of goods that we ship around the world. What we today sell in Europe, we largely make in Europe, and what we today sell in Asia, we largely produce in Asia. From a footprint standpoint, there was a lot of work that we've done over, let's say, the last 15-20 years around making sure that we have manufacturing capability and facilities in the right regions of the world. Most of that work is largely done. Today it's really expanding where we need to in those regions of the world where we have capacity constraints.
Just to follow up, if I can. What's your cadence in China through the year? What are you expecting?
I'm sorry, your cadence around-
Oh, just cadence of revenue growth in China in 2019 through the year, seasonality, however you want to address it. Thank you.
Yeah. I'd have to probably go take a look at that question specifically as it relates to China. I don't have that level of detail in front of me. I would say that in general, what our belief is that the Chinese government will likely stimulate at some point. We saw, as you saw as well, the significant slowdown in the economy in Q4, specifically highlighted by what took place in the light vehicle markets, which were down some 16%. We believe, and I think it's largely believed, that the Chinese government will stimulate at some point during the course of the year. We do think that the second half of the year is stronger than the first half. Beyond that, it's difficult to really estimate at this point.
Thank you very much.
At this point in time, we'll have time for one last question. Rob McCarthy with Stephens, please.
Thanks for fitting me in for the buzzer beater. Can you hear me?
Yep.
Yep.
Sure. Yeah, two questions. One, just on oil and gas. How do you think about your exposure there, given the fact that you've seen the experience not only of your explicit oil and gas exposure, but the implied bleeding of that oil and gas exposure into your industrial business? How do we think about the outer bound of that as we kind of think about your portfolio going forward and assessing the risk of what could be a continued downdraft here?
Yeah, I appreciate the question, Rob, especially given what I think we all experienced during the last kind of cyclical downturn in the oil and gas market. I'd say, the first thing I just remind the group that we tend to be more downstream focused than we are upstream focused, so it has a much longer cycle. We saw a little bit of a pullback in oil prices in the fourth quarter, but they came rebounding in December. I would say by and large, our business performed well through Q4, and we've not really seen today any, let's say, significant changes in our business in terms of the outlook. The rig count actually for 2018, that actually ended up some 20% for the year when you compare the year overall.
We think that oil and gas is always a bit of a wild card, and tough to predict exactly where it's going. Given that we're really coming off of, let's call it a three or four-year pretty significant downdraft in oil and gas markets, and we've just now got our legs underneath us, we think oil and gas holds up over the next number of years. Difficult to say for certain, but I think our base case would be that we don't see a significant retrenchment in capital spending around oil and gas.
I'll leave it there. Thanks.
Thank you.
With that, ladies and gentlemen, we're going to wrap up the call. As always, we will be available for follow-up and questions following the call. Thank you.