DUBLIN, Ireland—Though the world still is living through a major period of uncertainty caused by the coronavirus pandemic, Eaton Corp. said it believes the second quarter—during which the power management company saw losses across every segment—is expected to be the "trough" of the curve.
Eaton recorded sales of $3.86 billion in the second quarter of 2020, a decline of 30 percent from the second quarter of 2019 at $5.53 billion, according to the company's July 29 quarterly report. Net income stood at $54 million for the quarter, compared to $636 million in the second quarter of 2019.
While organic sales were down 22 percent, acquisitions added 2 percent to sales, which was offset by 8 percent from the divestitures of the lighting and automotive fluid conveyance businesses and 2 percent from negative currency translation.
Over the first six months of 2020, Eaton posted $8.65 billion in sales, down from $10.8 billion over the first six months of 2019. Net income fell by more than half to $492 million.
"I am extremely pleased with the way our teams have executed during this economic downturn," said Craig Arnold, Eaton chairman and chief executive officer. "Despite several of our end markets facing dramatic declines, we were able to post better-than-expected financial results and very strong cash flow."
Arnold noted that operating cash flow came in at $757 million for the second quarter, and free cash flow was $667 million.
"Our operating cash flow over the last six months totaled $1.08 billion, and free cash flow totaled $878 million," he told investors. "We remain on track for 2020 full year free cash flow of between $2.3 billion and $2.7 billion."
Arnold said the pandemic caused customer shutdowns from March through mid-May in many cases, in both OEMs and aftermarket customers, and many of those same customers still are estimating a "slow and prolonged recovery."
Arnold said he expects the third quarter results to post a decline of 13-17 percent over the third quarter of 2019, a good sign from the 30 percent suffered in the second quarter.
"Some of these customers are just now coming back online," Arnold said. "But in absolute terms, markets are still in decline. We are still living through a period of uncertainty, but we do believe Q2 is the trough."
All of Eaton's segments posted significant declines in the second quarter of 2020 over the like period of 2019, according to the quarterly report.
Hydraulics sales were $411 million, down 32 percent from the second quarter of 2019. According to Eaton, this was led by a 30-percent decline in organic sales. Negative currency impact was 2 percent, and organic revenue declined due to continued weakness at both OEMs and distributors.
Operating profits in hydraulics came in at $37 million for the second quarter of 2020, down 30 percent from the second quarter of 2019.
"Operating margins in the second quarter were 9.0 percent, up 20 basis points over the second quarter of 2019," said Arnold. "Orders in the second quarter decreased 33.7 percent from the second quarter of 2019, driven by continued weakness in most of our end markets."
Eaton reached an agreement earlier this year to sell the hydraulics business to Danfoss Co., a Danish firm that works in compressors, AC units, and power and heat exchange assemblies. Eaton and Danfoss are continuing to work on closing transactions, and the sale is set to close at end of the first quarter for 2021.
The delay in finalizing the sale has been due to the coronavirus pandemic, Arnold said.
As Eaton anticipates some of its markets will take time to recover, the company is implementing a restructuring plan. The cost of the program is estimated to be $280 million, including a $187 million charge Eaton took in the second quarter, Arnold said.
"The principal end markets affected are commercial aerospace, oil and gas, NAFTA Class 8 trucks, and North American/European light vehicles. These actions are targeted at structural costs that will enable Eaton to deliver even stronger results when the markets recover. We expect the restructuring program to deliver mature year benefits of $200 million when fully implemented in 2023."
Sales for the Electrical Americas segment were down 29 percent at $1.5 billion from the second quarter of 2019, caused by a 20-percent impact from the divestiture of the lighting business.
Sales for the Electrical Global segment were down 16 percent to $1.1 billion, and aerospace sales fell 27 percent to on the quarter.
Revenues for the automotive segment was down a staggering 59 percent from the second quarter of 2019, to $327 million.
"Our revenue in vehicle declined dramatically in the quarter due to customer plant shutdowns to deal with the COVID-19 pandemic, lower Class 8 OEM production, and global weakness in light vehicle production," said Arnold. "We anticipate much better conditions in the second half of 2020 since customer plants have reopened and demand is returning."
Eaton reported that e-mobility sales were down 33 percent from the second quarter of 2019, to $56 million.
"We remain excited by the future prospects for eMobility," said Arnold. "Since launching this segment in 2018, we have won programs whose mature year annual sales total approximately $500 million."