By Jack Keough
Eaton, the diversified industrial and electrical manufacturer, says it will implement a $145 million restructuring program that will mean eliminating positions, closing a “limited” number of facilities and consolidating internal organizations.
Alexander M. “Sandy” Cutler, chairman, president, and CEO of the company, told financial analysts in a conference call “this is not a variable cost reduction exercise. This is a program aimed at reducing structural costs across the company in anticipation of markets not showing substantially stronger growth in the second half, nor next year.”
The company said that it expects $120 million in restructuring charges in the second half of 2015 and $25 million next year.
Cutler said the restructuring program would provide a “very strong payback” in 2016 and will allow Eaton to realize millions of dollars in savings.
He said the company would be focused not only on cost containment, but also on reducing corporate expenses and improving segment margins.
In releasing its second quarter numbers, the company said sales were “disappointing” in Eaton’s electrical, hydraulics, and aerospace businesses. Eaton had previously forecast that the electrical business volume would increase slightly.
Electrical product margins were hit by currency exchange rates, especially in the Canadian market, and slowness in industrial activity.
“The electrical markets in the second quarter of 2015 were sluggish, with strength in lighting and U.S. residential markets offset by global weakness in oil and gas and other industrial markets,” said Cutler, according to a transcript of the call as provided by www.seekingalpha.com.
“Obviously, organic growth has been slower; it’s been disappointing for us this year. We think the appropriate response to that is take cost out, restructure in terms of corporation, continue the focus on cost containment and margin improvement,” he said.
Sales for the electrical products segment were $1.8 billion, down 3 percent from 2014. Organic sales grew 3 percent, which was more than offset by a 6 percent decline from currency translation. Operating profits were $276 million. Excluding acquisition integration charges of $6 million during the quarter, operating profits were $282 million, down 10 percent from the second quarter of 2014.
Cutler also said the company has a new cash deployment program and is committed to its continued strong expansion of dividends for its shareholders, a share buyback program that begins in the second half of this year, and a possible return to mergers and acquisitions in 2016.
The strategy is recognition of the progress Eaton has made in repaying the debt it incurred as part of the acquisition of the Cooper industries.
Eaton is well known for its acquisition activity over the years. It has been relatively quiet, however, since its huge $13 billion purchase of Cooper Industries was completed in November 2012. Eaton has been rapidly paying down its debts associated with the purchase. It paid $400 million of that debt earlier this year, and will pay another $600 million in November.
Eaton made more than 60 acquisitions from 2001 to 2012.
The Cooper Industries acquisition was by far the largest Eaton has ever made, and one of the largest ever in the electrical industry.
But Cutler pointed out that the odds of completing an acquisition in the immediate future are “fairly low.”
In fact, he said it was a third priority behind dividend increases and stock repurchases.
Cutler said, however, the company would have the cash available to make a deal but that would depend on its “quality and value.”
The well-respected Cutler will retire as chairman and CEO next May due to the company’s mandatory retirement policy at age 65. Cutler has held the posts for 15 years. Craig Arnold, 55, head of the company’s industrial business, will be replacing him. Arnold will take on the transitional roles of president and chief operating officer on Sept 1 and will become chairman and CEO in June 2016.
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