Eaton Reports 1Q Net Loss of $50 million

April 21, 2009
Eaton Corporation (NYSE:ETN) today announced a net loss per share of $0.30 for the first quarter of 2009. This compares to net income per share of $1.64 in the first quarter of 2008

Eaton Corporation (NYSE:ETN) today announced a net loss per share of $0.30 for the first quarter of 2009. This compares to net income per share of $1.64 in the first quarter of 2008. Sales in the quarter were $2.8 billion, 20 percent below the same period in 2008, reflecting the impact of the global recession. Net income was a loss of $50 million.

Net income in both periods included charges for integration of acquisitions. Before acquisition integration charges, the operating loss per share in the first quarter of 2009 was $0.22 versus operating earnings per share of $1.70 in 2008. The operating loss for the first quarter of 2009 was $36 million compared to operating earnings of $256 million in 2008.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our first quarter results reflect the impact of the severe downturn in many of our end markets and the expenses associated with personnel reductions made in the first quarter. Weaker than expected markets were partially offset by lower than originally anticipated severance expense. The lower severance expense was primarily due to the length of time it has taken to conclude severance plans in several countries. The sales decline in the first quarter of 20 percent consisted of a 20 percent decline in organic growth, an 8 percent decline due to lower foreign exchange rates, and 8 percent growth from acquisitions. Our end markets declined 21 percent in the quarter.

“We generated strong cash flow in the first quarter, with operating cash flow totaling $107 million and free cash flow totaling $59 million, the second highest free cash flow for the first quarter we have ever had. In addition, we issued $550 million of term debt in March, at attractive rates. The combination of our strong cash flow and the term debt issuance allowed us to reduce commercial paper at the end of March to $172 million, a substantial reduction from the $767 million of commercial paper outstanding at the end of December.

“We have been very pleased with our cash generation over the last six months, the two most challenging quarters of the current recession. Our operating cash flow over the last six months totaled $731 million.”

He said he anticipates that Eaton’s end markets for all of 2009 will decline 15-16% as the recovery in the U.S. and Western European economies will be pushed out one quarter, with the recovery now more likely to begin in the first quarter of 2010.

“Given the uncertain end market demand, it is very difficult to provide guidance for the second quarter,” he said. “Assuming our sales in the second quarter total between $3.0 billion and $3.1 billion, coupled with the additional charges we expect in the quarter, we anticipate net income per share for the second quarter of 2009 to be approximately $0.15 and operating earnings per share, which exclude charges to integrate our recent acquisitions, to be approximately $0.25.

As a result of our lower market forecast for 2009, we are lowering our full-year guidance to net income per share of between $2.10 and $2.60 and operating earnings per share of between $2.50 and $3.00. Our second half 2009 and full year 2010 results will be strengthened by the savings from the resource adjustment actions taken during the first half of 2009.”

Hydraulics segment sales were $430 million, down 35 percent compared to the first quarter of 2008. Global hydraulics markets were down approximately 30 percent in the quarter.

Operating profits in the first quarter were $6 million. Excluding acquisition integration charges of $1 million during the quarter, operating profits totaled $7 million, a decrease of 91 percent from the first quarter of 2008.

“The hydraulics markets in the first quarter suffered from prolonged shutdowns and cancellations of orders by many OEM customers. In addition, our distributor channel partners also significantly curtailed their level of orders,” said Cutler. “For all of 2009, we now believe hydraulics markets are likely to decline by 25 percent.”

The Truck segment posted sales of $292 million, down 49 percent compared to the first quarter of 2008. The segment reported an operating loss in the first quarter of $34 million.

Truck production in the first quarter is forecasted to have declined by 27 percent, with U.S. markets down 32 percent and non-U.S. markets down 20 percent. While it is difficult to determine precisely, it appears that purchases of components by global truck OEMs and aftermarket channel partners declined even more severely than truck production, as significant destocking occurred throughout the channel.