Eaton39s Cutler ldquoWe think we are in an environment where cost control operational excellence and structural cost reduction are really criticalrdquo

Eaton's Cutler: “We think we are in an environment where cost control, operational excellence and structural cost reduction are really critical.”

Eaton Puts Focus on Cost Control as Economy Slows

Citing slow growth in the economy and flat bookings in a number of its business lines, Eaton has launched a $145 million restructuring program designed to lower operating costs in the global power management company.

For the second quarter, Eaton (IW 1000/210) announced earnings of $543 million, and earnings per share of $1.16, up 5% compared to the second quarter of 2014. However, sales for the second quarter dipped to $5.4 billion, 7% lower than the same period last year.

“We think we are in an environment where cost control, operational excellence and structural cost reduction are really critical,” Eaton Chairman and CEO Alexander M. Cutler told analysts on an earnings call today. Cutler, who will retire at the end of May 2016, said cost reductions would come from eliminating positions, closing a limited number of facilities, consolidating some internal organizations and eliminating certain activities in the company.

Eaton previously had forecast that its end markets would strengthen after the first quarter but while there was improvement in the second quarter, Cutler said the firm does not expect “further strengthening” during the remainder of the year and project organic revenue growth of between 0% and 1%.

Cutler also said the company would target an “A-“ credit rating, rather than “A.” That would allow Eaton to provide shareholders with a 4% to 5% annual return of its market cap value through dividends and repurchasing shares. Cutler said that Eaton has repaid $400 million of debt derived from its 2012 acquisition of Cooper Industries in the first half of 2015 and will pay off another $600 million by the end of the year. Paying down debt will allow the company to once again look for acquisitions, said Cutler.

Eaton also announced it will reduce its capital expenditures for 2015 by $100 million. That would limit the company’s reduction in free cash flow to $200 million.

For its business segments, Eaton reported the following results for the second quarter:

Electrical Products: Sales were $1.8 billion for the quarter, down 3% from 2014. Organic sales grew 3% but currency translation accounted for a 6% decline. Operating profits were $276 million.

Electrical Systems and Services: Sales were $1.5 billion, down 8% from the second quarter of 2014. Organic sales fell 4% and currency translation led to a further 4% decline.

“The electrical markets in the second quarter of 2015 were sluggish, with strength in lighting and U.S. residential offset by global weakness in oil and gas and other industrial markets,” Cutler commented.

Hydraulics: Sales were $643 million, off 18% from the same period in 2014. Cutler said sales reflected “continued weakness in agricultural equipment globally and construction equipment in China.” He said bookings in the second quarter were down 13% compared to 2014.

Aerospace: Sales were down 7% from 2014 to $454 million while operating profit was up 12% to $77 million. Cutler said bookings in the quarter were down 9%, “principally driven by slower bookings for defense equipment.”

Vehicle: Sales for the second quarter were $989 million, down 4% compared to 2014, while operating profits for the segment improved 23% to $190 million. “North American markets were particularly strong in the quarter while South American and Asian markets were weak,” Cutler noted.

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