After releasing its third quarter earnings, Eaton, the power management and electrical manufacturer, said it is reducing its headcount by about 2,900 and closing eight plants. The company says it will implement a second restructuring program in 2016, and also announced that it had purchased Ephesus Lighting of Syracuse, NY.
“Clearly, the reason we’re undertaking an even larger set of additional actions prospectively here and in 2016 is the fact that markets have fallen off more than we had anticipated at the middle of this year,” said Alexander M. “Sandy” Cutler, chairman and CEO of Eaton, in a Q3 earnings call with financial analysts.
The company began its restructuring in the third quarter, continuing those efforts this quarter, and now will institute a second restructuring program beginning in 2016.
“We had been planning on this second restructuring program in addition to the $145 million program we announced in the second quarter of 2015 to be on the order of $50 million to $60 million. But in light of current market weakness we are expanding the program to between $90 million and $100 million,” Cutler said.
“The very prudent actions that we kicked off earlier this year are going to allow us to have a net restructuring benefit between the third quarter and the fourth quarter of $123 million,” he added.
Cutler said the company has been engaged in a “difficult, frustrating, grinding environment.”
Revenue for Eaton in the third quarter was $5.2 billion, down 9 percent from the same period in 2014. The sales decline consisted of 6 percent from negative currency translation and 3 percent from a decline in organic sales. Sales for the quarter were down $300 million from what the company had expected.
The company also reported that it had a record quarter in operating cash flow of $973 million.
“We’re not going to change the markets, but we can get our costs down and we can drive superlative cash flow performance that gives us the ability, both to maintain a strong dividend, buy back shares and invest in the business selectively where it makes sense,” he added.
Eaton also revealed in the earnings call that it had acquired Ephesus Lighting, a leader in LED lighting for stadiums and other high lumen outdoor and industrial applications. Its sales over the last twelve months were $22 million.
Ephesus LED lights were used at this year’s Super Bowl held at the University of Phoenix Stadium. It was the first time LED lighting was used for the football championship game. The company is now in the process of installing LED lighting at the new future home of the Minnesota Vikings, U.S. Bank Stadium.
Eaton, which made the huge $11 billion acquisition of Cooper Industries three years ago, is not forecasting much improvement in its end markets in 2016.
“We think we’re likely to see continued shrinkage of our markets in 2016. So, we are working hard to get out ahead of these reductions in markets with these very aggressive, and I think well led out and being very well executed, restructuring programs,” he said.
Sales for the Electrical Systems and Services segment were $1.5 billion, down 10 percent from the third quarter of 2014. Half of the sales decline was due to negative currency translation and half due to a decline in organic sales.
Sales for the Electrical Products segment were $1.8 billion, down 6 percent from 2014.The sales decline was almost entirely due to negative currency translation.
“I think the biggest issue to think about in electrical is what’s happened in the second half in terms of distributors destocking. And at some point we all know that that comes to a conclusion and you get rid of that negative impact,” he added.
Eaton’s other business units were down as well.
Its hydraulics segment sales, for example, were $599 million, down 18 percent from the third quarter of 2014. Organic sales declined 10 percent and negative currency translation contributed 8 percent. Operating profits in the third quarter were $44 million, a decrease of 49 percent.
Its vehicle segment was down 11 percent in sales while aerospace was down one percent.
Eaton has been hit hard, as have many companies, by the downturn in the oil and gas business, especially in Canada, and the strong dollar. In Eaton’s case, the oil and gas sectors make up about six percent of its sales. That business was down 25 percent, about what Eaton had expected.
Eaton was also impacted by weakness in industrial construction.
But despite the slower growth of its markets, Cutler pointed out that there are significant projects that will be built next year and beyond, meaning greater opportunities for a diversified manufacturer such as Eaton.
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