Jul 20, 2009
Executives
Alexander Cutler – CEO Richard Fearon – CFO William Hartman – VP IR
Analysts
Ann Duignan - JPMorgan Robert Cornell - Barclays Capital Eli Lustgarten - Longbow Research Robert Wertheimer - Morgan Stanley Jamie Cook - Credit Suisse Jeffrey Hammond - Keybanc Capital Markets Nigel Coe - Deutsche Bank Securities Terry Darling - Goldman Sachs Andrew Casey - Wells Fargo Securities David Raso - Isi Group Dan Dowd – Sanford Bernstein Christopher Glynn - Oppenheimer & Co. Jason Feldman – UBS Unspecified Analyst Unspecified Analyst Mark Koznarek - Cleveland Research Company
Operator
Welcome to the Eaton Corporation second quarter earnings conference call. (Operator Instructions) I will now turn the conference over to your host, Mr.
William Hartman; please go ahead, sir.
William Hartman
Good morning all. Welcome to Eaton's second quarter 2009 earnings conference call.
Joining me this morning are Alexander Cutler, Chairman and CEO, and Richard Fearon, Vice Chairman and Chief Financial Officer. As been our practice, we will begin today's call with comments from Alexander, followed by a question-and-answer session.
Please note that the information provided in our call today will include forward-looking statements concerning the third quarter 2009 and full year 2009, net income per share and operating earnings per share, third quarter full year revenues, comments our worldwide markets, our growth in relationship to these markets, and our growth from acquisitions. All of these statements should be used with caution and are subject to various risks and uncertainties.
Factors that could cause actual results to differ materially from those in our forward-looking statements are set forth in today's press release and related Form 8-K filing. As a reminder, we have included a presentation on the second quarter results which can be accessed on the Investor Relations page.
Additional information is available in today's press release, which is located on Eaton's home page at www.eaton.com. With that, I would like to turn the session over to Alexander Cutler.
Alexander Cutler
Thanks William and good morning everyone, thanks for joining us this morning. I’m going to be working from the presentation that William mentioned as posted on our Investor page, and I’m currently looking at page three as we start this presentation this morning, entitled The Highlights of Second Quarter Results.
You’ve all had a chance to read our press release I assume by now, our operating earnings per share of about $0.23 was about equal to our guidance when we began the quarter but as many of you heard us talk about at sessions we attended in the May timeframe, we had been seeing our volumes weaken during the second quarter and we did come in about $100 million short of the guidance for revenue that we had provided for the second quarter. We’re very pleased that in spite of that reduction in volume that we were able to deliver the kind of earnings that we have and we think it’s a real testimony to the cost reduction activities that we’ve been able to put in place across the corporation.
Sales for the second quarter were down by some 32% from a year ago, end markets down by a whopping 26% and foreign exchange has continued to impact us negatively this year by about six points. We’re very pleased with our operating cash flow of $361 million and free cash flow of $313 million.
The free cash flow was actually higher as you can see, $68 million above a year ago. We think that’s really a great reflection of the strong management of working capital.
Our inventory days on hand are now down a full 10 days from year end. And we’ve been working we think prudently to constrain our capital spending this year during a period of the weaker demand, some $48 million in the second quarter, a total of $96 million for the first half of.
As you can see quite a difference from our run rate of just a year ago. And looking back now at this quarter and the two previous quarters our operating cash flow has totaled $1.1 billion, obviously very important in terms of our liquidity picture.
We announced that we’re maintaining our quarterly dividend rate of $0.50 per share, that’s no change. And during the quarter as we have surveyed these weaker market conditions and I’ll speak more to that in just a couple of slides, we initiated really two sets of additional cost savings that totaled $120 million impact here in 2009.
About $65 million came from further improvements from our reductions in force and about $55 million from additional ongoing reductions in spending levels across the corporation. If we move to chart four, a quick reconciliation of our performance against our original guidance.
You’ll recall our original guidance we said we’d be approximately $0.25 for the second quarter. We did have lower reduction in force on charges or expenses in the quarter of about $69 million versus what we had mentioned as we began the quarter in expectation of about $85 million, that’s a $0.10 positive impact.
We actually had higher savings from all of the implementation of those reduction in force activities of about $109 million versus the $77 million we had expected. That drives about a $0.20 benefit.
As you can see the big news in terms of markets was all about lower end markets. We had come into the quarter expecting that our markets would drop on the order of 19% to 20%.
They actually dropped 26% and that drove a negative $0.70 and then that was offset by a slightly lower tax rate, that’s the credit of 5% versus the 15% we had originally anticipated. And then improved performance really across the company in terms of really maintaining much tighter cost levels and improving our margins.
Overall as you can see a $0.23 achievement which we think is very strong performance in these really terribly market conditions. Chart five is a quick summary of much of what you read in the press release.
You can see sales down some 32%. Net income did drop by a whopping 91% but still better than we had expected and we’re very pleased that we returned to the black here in the second quarter and basically have had pretty much of a break-even first half if you step back from it.
So you can again market growth down 26%, Forex about 6% for an overall down 32%. If we move to chart six and we move into the segments to give you a little color on our performance in our individual businesses, our electrical segment for the Americas, sales down some 14%, operating profit while down 8% I think you can see the very attractive margin at 16.6%.
In the yellow section of this chart you can see some annotation about end markets. Obviously weak when you’ve got the non-residential markets down, power quality markets down both in the high teens, the same pattern on the [components] side of the business, this would be product that’s flowing through distributors had continued on the order of 30% market declines.
Our own bookings down some 33% and while we did outgrow the end markets by about $100 million you can see we still were fighting a weak market here. We’re pleased that we netted about $13 million of net operating income savings.
That’s the net of charges, the end benefits in the quarter and that worth about a point and a half improvement if you divide that number by the $881 million of sales for the quarter. So we think very, very strong performance in weakening markets.
If we turn to the next page, chart seven, this is electrical segment for the rest of the world. First time that we’re giving you a good visibility in terms of the quarterly performance last year.
You can see this business has come down about 35% from a year ago reflecting the really significant downturns in these end markets as well as the impact of Forex which you can see on the left side, about 11 points of that reduction actually being in the exchange. The business did almost double in profitability from the first quarter, we’re up to 4.4% and you can see a year ago in healthier markets, this is a very attractive group of businesses that have been largely assembled through acquisition over the last couple of years.
No net operating income from the reductions in force really because the charges were incurred later in the quarter due to regional regulations and we didn’t have as much time in the quarter obviously to achieve savings but this should go positive here as we get into the second half. We turn to the hydraulics section, its on chart eight, you can see top line sales down 39%, market down 39%, really just an enormous retrenchment of this market around the world.
Our business did achieve profitability in the quarter but if you’ll drop down to the very last bullet on the page, the $23 million of net operating income savings from the reduction in force net of charges was about 5.4%. So you can see how important the restructuring of this business and lowering the break-even point has been.
Bookings continue to be challenged, down some 28% as we look at the near-term bookings out over the next several months so that we don’t see signs here of a significant upturn anywhere in the near future. The aerospace market, this is chart nine, you can see a 12% reduction in sales, very attractive operating margins at 17.8%.
Overall markets down about 8%. And if we look at the growth in shipments, clearly the trends that we’re seeing at this point is a lot of pressure in the commercial after market where you’re seeing year on year significant decline in shipments.
And real inventory reduction activities at the large OEMs, whether this is in the commercial transport business, whether it’s the regional jets or the business jet areas, all working hard to bring inventories down. Bookings declined by some 32%.
I think the big news here again is after market down double-digit, much more significantly on the commercial side than the military side. But real pull back again the commercial regional business jet areas and really the only area that we’ve been seeing significant growth has been in some of the sub segments of the military side.
Again benefit from the restructuring activities, almost $5 million, about 1.2 points in terms of that very attractive margin. Truck segment, not too much new in terms of the end market, perfectly awful conditions continue.
You can see the top line sales down some 49%, market down 33%, big impact from Forex. We’re continuing to struggle with trying to quantify this end market as you can see, we’re seeing a negative out growth of seven points.
We think a lot of that is related to what’s going on in the after market where its very hard to get good numbers to approximate the market but all the issues we talked about at the end of the first quarter are continuing with cannibalization of trucks and after market inventories being brought down significantly. While the business wasn’t a loss, $3 million, you can see the big impact of $8 million of benefit from the, all the restructuring activity relative to headcounts in this business and we’re really pleased at this level of operation.
The business has come this close to breaking even. If you move to the automotive segment, that’s on page 11, you can see sales down a whopping 51%.
The market growth around the world, a decline of 33%. You could see the big impact of the US being down some 48%.
Our expectation and I think generally most students of the industry’s expectation is that we ought to see US production levels increase in the second half as General Motors and Chrysler come back off these prolonged downturns. Our view is that we’ll see production rise about 25% in the third quarter compared to the second quarter.
It does appear that the various different international customer stimulus programs, many of these are to try to get some of the older vehicles off the road have been pretty successful. We’ve not yet seen that pop here in the US.
And you can see in the bottom point, $15 million of net operating income benefit from the reductions in force and obviously a major piece of bringing the loss in the segment down to the lower level it is in this quarter compared to the first quarter. If we turn to page 12, we commented in our press release that our overall end market weighted average end market expectation for Eaton has declined from what we had provided in April of negative 15% to negative 16%, now to a negative 21% to 22%.
And a big part of this you have to really step back and start in terms of recalibration of the first quarter when we did come out of the first quarter our best estimate was that the markets were down about 21%. As you actually have seen all the final data come in from around the world the first quarter was actually a negative 23%.
Recall that I shared just a moment ago we thought the second quarter would be down between 19% and 20%, it actually ended up being down 26%. And that pattern continues as we go through this year.
So as we work down this page electrical Americas we’re now forecasting a negative 20%. We had thought that would be a negative 12%.
The electrical rest of world is negative 17%. In April we had thought it would be a negative 9%.
In hydraulics, a negative 33%, in April we thought it would be a negative 24%. In aerospace no change, negative 5%, that is what our expectation was in April.
Truck, we now believe it will be down negative 27%. We had felt it would be down negative 22%.
In the automotive index we now feel it down 25%. We had thought it would be down 23%.
When you put all that together, that’s how you get to negative 21% to 22%. And what we’re saying without getting too tied up in the numbers here is that we’re seeing a very slow recovery.
We’re seeing stabilization here in the US, some signs of the rate of decline decelerating in Europe and modest expectations of improvement in Asia. But we don’t really foresee there’s going to be much of an economic recovery through the balance of 2009 in our markets.
If we turn to chart 13 we’ve tried to give you an update on our employment reductions, not much new. Obviously the first quarter the numbers we shared with you, second quarter I covered earlier, a $40 million impact.
The third quarter we expect $109 million of net benefits. That’s a $69 million increase over the second quarter, so that’s very important in terms of our increased earnings in the second half.
The fourth quarter a net of $133 million of benefits, that’s $93 million above the second quarter so of course very important in terms of that full year impact for us. The two blocks at the bottom of the chart are 2009 year to year pre-tax income, $270 million improvement from these actions.
In April when we shared that with you that was $205 million, so that’s an increase of $65 million this year. And the 2010 increase over 2009 was $210 million in April, its now $220 million so positive improvements in both those numbers as we’re really working the cost reduction side of things to help offset the weaker markets.
If we turn to page 14 we had shared with you in April and there you see the $205 million for the employment changes that now turns into the $270 million, so an increase of $65 million. We had also shared that there were $170 million of other actions that included programs that we had pulled back this year that we would expect if the economy improves would flow back into costs next year so we would encourage you not to necessarily build them into next year as a savings.
And the majority of that $170 million, those savings were incurred pretty ratably over the second, third and fourth quarter of 2009. The additional $55 million that I spoke to you in my initial comments about, you could also expect would be in incurred ratably or saved ratably over the second, third, and fourth quarter.
And that’s what gets you up to this total then of $495 million of cost actions this year against the significant volume decreases we’ve had. Page 15 I’m not going to go through on a line by line item but hopefully it provides you in the same format we have been providing you a reconciliation of how our mid point of our operating earnings per share guidance of $2.10 compares to last year’s achievement of $6.83 and I think you’ll find each of those earlier numbers ties into this particular chart.
And that leads us to chart 16 which is our revised guidance for this year, mid point in terms of operating earnings per share of $2.10 for net income of $1.75 and than you can see our guidance for the third quarter of $0.95 mid point for operating earnings and $0.85 for net income. Chart 17 is just a quick synopsis of our overall guidance, no change in our market outgrowth expectation of $200 million.
No change in our incremental sales from acquisitions of $300 million. Operating EPS obviously that and the fully diluted, I just updated those provisions for you.
Operating cash flow is down by $100 million from our previous guidance and free cash flow as a result of further reductions in our CapEx has not changed. If we turn to 2010 obviously its been very, very difficult to forecast markets accurately through 2009.
We’re obviously not going to go out and forecast 2010 either but what we have found useful is to sort of survey some of the consensus forecast for global GDP and they seem to be centering in around 2.5% with industrial production likely to grow a multiple of that. Our own expectation from where we sit today is that incrementals on the order of 30% to 35% are still appropriate from where we are and the last point I think is worth bringing out as you try to think about puts and takes for 2010 for Eaton versus 2009, that the $225 million of savings that we show on chart 14 which are called the Other Actions, if our volumes do begin to come back to a more reasonable level, its reasonable to assume those savings would not carry over into next year.
But they are almost totally offset by the $220 million of year to year [RIF] savings that we will get improvements in 2010 over 2009. So I just wanted to point those two items out to you as you kind of consider prospects for 2010.
With that I’ll turn things back to William. I would describe where our thinking is about 2009 is that we remain very confident of our products and our services and our competitive positioning.
We’re obviously very cautious about markets and we think that’s the right place to be with the environment still uncertain out there.
Operator
(Operator Instructions) Your first question comes from the line of Ann Duignan - JPMorgan
Ann Duignan - JPMorgan
My first question is on your tax rate, if you look at the swing between last quarter and this quarter, last quarter you were expecting a higher tax rate to have a negative $0.60 impact on your outlook. Now that’s swung to a positive $0.31, so that’s almost a $1.00 swing.
We got a number of calls this morning just trying to understand exactly what’s going on in the tax line and what you’re outlook for the back half tax rate is, maybe you could address that.
Alexander Cutler
Let’s talk a little bit about the market and then I’ll ask Richard to talk specifically about the tax rate, I think the large issue to keep in mind here is we’ve dropped our market forecast from 15 to 16% negative in both those numbers, down to this much larger number now of 21 to 22. In doing so we’ve obviously reduced our base of operations and as a result have reduced our profitability and that has some fairly specific impacts on a regional basis.
As a result of that I’ll ask Richard just to comment on what that does to us in terms of our tax outlook.
Richard Fearon
If you look at our expectation for the US market now, its down 25% and what that means is, is that our profitability in the United States we now believe will be at a loss and it’s at a loss because the markets are at very low levels of activity and we have a high percentage of our corporate costs in the United States and so with the US operating at a loss the US has a very high corporate tax rate relative to other parts of the world. That generates a significant credit and that credit overwhelms the income taxes you pay on the profits outside the United States and of course the tax rates outside the United States are much lower so what does that mean for the tax rate over the balance of the year.
We think the tax rate in Q3 and Q4 will be a credit rate of about 15% in each of those two quarters and so if you roll it all together and it is a little complicated because you stated the year with a loss in the first quarter and then you have relatively modest profits in the second quarter, much better profits in the third and fourth quarter, we think it will overall be at a credit rate of about 20 to 25% for the year.
Ann Duignan - JPMorgan
Okay that’s help me get to your guidance number a lot easier, that’s for sure. My follow-up question then is really on electrical North America, the margins were very strong there, significantly better than we might have anticipated.
How sustainable do you think those margins are, is that one of the areas where if the markets start to improve next year we could see pressure on margins as you have to recall people and add back overhead.
Alexander Cutler
I think our best guidance for full year this year is kind of 15 to 16% and I think the issue that we had tried to share with investors during the second quarter when we had the chance to talk at several forums is that a lot of people has speculated that the non-residential market could be an area of real pressure in 2010. What we were particularly pleased by is as we’ve been able to work through opportunities in the US stimulus bill, that we’re quite confident that we will get on the order of an incremental $500 million of volume in 2010 and then again in 2011.
And we’ve gotten out of the box quite quickly on that. We’ve booked now approaching almost $50 million of business and are active in about a quarter of a billion dollars in negotiations and that is way ahead of our expectation because being involved that quickly, we think it just raises the likelihood that that will be very shippable volume in 2010.
Ann Duignan - JPMorgan
And that’s still mostly electrical equipment for retrofitting government buildings, is that still where you’re seeing it.
Alexander Cutler
It’s a pretty broad array of whether it’s a government office buildings, military bases, wastewater treatment, educational facilities, its actually spreading out fairly broadly. And so we were quite pleased with that.
Operator
Your next question comes from the line of Robert Cornell - Barclays Capital
Robert Cornell - Barclays Capital
Pretty tough conditions, one of the things in many of the companies when they talk about the costs, they don’t talk about some of the facility take out, maybe you could just give us an idea of ballpark some of the structural costs you’re taking out, some of the facilities, and give us some idea of proportionality.
Alexander Cutler
When we had entered into our work this year, we had noted that Eaton unlike many other companies did not have a big number of facility reductions this year because we had done that work under our excel 2007 program so that from a risk point of view and I think you see it well in our inventory reductions of 10 days from year end, we’re not challenged with the additional issue of moving large facilities, having to build inventory banks in a year when you’ve got volumes declining. So the numbers we’re quoting you are really reductions in terms of people, they’re not facility take outs.
We had been quite aggressive on doing that two years ago.
Robert Cornell - Barclays Capital
The other comment you made I think is a surprise to many is the comment about auto production up 25% in this quarter, I know economists are looking for like a much bigger pop. I mean could you give us some calibration.
Is that feedback you’ve gotten from the auto companies. How did you get to 25%.
Alexander Cutler
I think you saw some initial surveys that were published that suggested it might be as high as 33% and that is third quarter compared to second quarter. As we’ve all watched the actual production schedules roll out we think that number is a little too bullish, that that’s not what we’ve seen so far.
So our best guidance that we can give you at this point, it looks more on the order of 25%.
Robert Cornell - Barclays Capital
Is that a US number or a global number.
Alexander Cutler
That’s just a US number. That’s the US comparison of third quarter versus second quarter and it’s a large reflection of really the fact that you had a lot of factories down during these bankruptcy processes.
Robert Cornell - Barclays Capital
Another question, how are you doing with regard to the synergies in both quality and electrical. We saw you took the margins look okay given all the market declines, but in terms of the cost out and, the structural cost out of combining those businesses relative to expectations how are you doing.
Alexander Cutler
We’re still on the page where we try to break out for you the line items, that reconciliation, we still are very comfortable with the $0.30 and that is an area where I maybe misstated in my earlier answer to you, in our integration activities and that would be the integration as you mentioned of Phoenix Tech and Molar, we have actually pulled some of those activities ahead during the period of weakness and so we’re getting through the process a little quicker on an annum basis than we would have. But feeling very good about both the continued potential and the actual achievement of those in both franchises so we’re confident of the $0.30 this year.
Robert Cornell - Barclays Capital
On de-stocking, a lot of people thought that the US de-stocking would be through by mid year and now I’m hearing people talking about end year, given your market projection changes, that would imply de-stocking would extend further into the year as well.
Alexander Cutler
I think and perhaps I think the bigger piece is that distributors don’t have the confidence to begin to build inventories at this point and I think with the pressure on credit, the uncertainty around a large number of policies that will effect business and the uncertainties about when the recovery will occur, there’s just our view is there’s much less willingness on the part of distributors or dealers to want to book that next big stocking program which is what you need to do to start to turn things around. I think the second issue is that if you look broadly in the economy and the durable inventories as a percent of sales, they’re still too high and so if you call them de-stocking or you call them further tuning, there’s more work to be done to get inventories properly in line so we think this is continuing to push.
Robert Cornell - Barclays Capital
So one company management mentioned end of year, type of January type of timeframe when the de-stocking would be done and the pressure on [inaudible] do you have a thought there.
Alexander Cutler
Our thought also is watching many of the other surveys of economic activity and I think people have been talking about year end as an important inflection point, no one is really wanting to be very precise about 2010 since it’s a long way out but I would say at this point, we wouldn’t expect any significant pressure off of inventories the remainder of this year. So we think that overhang continues through that time period.
Robert Cornell - Barclays Capital
Obviously electrical was doing well but what are you seeing in terms of pricing relative to cost actions broadly. These kind of market declines one would imagine, I’m starting to hear some people talk about lower gross profit margin business going into backlog, is that the case for Eaton.
Alexander Cutler
I think the big thing we continue to see is that the commodity prices are amazingly stubborn through this cycle and you’ve seen some of them bop up and down a little bit during the second quarter but I think generally people have the view that we’re going to see commodity prices begin to move up again and that is giving I think some spine to the markets in and around more pricing stability then we have historically seen in these kind of downturns.
Operator
Your next question comes from the line of Eli Lustgarten - Longbow Research
Eli Lustgarten - Longbow Research
A couple of clarifications, you said this year would be a tax credit of 20, 25%, do we go back to 15% for 2010, we do have to model that.
Richard Fearon
It’s a little early to be forecasting tax rates, but certainly it will go back to a more normal kind of tax rate next year.
Eli Lustgarten - Longbow Research
And we should use the 15 to 17% range as usual at this point.
Richard Fearon
That’s what we’ve given out in the past and at this stage, I don’t really have any reason to change that.
Eli Lustgarten - Longbow Research
And I think you said the electrical margins this year should be 15 to 16%, can you give, can you take us through the rest of the group, with orders down 33% in the electrical Americas I expect volume is going to be coming down sharply in the forecast, can you go through the rest of the sectors for us. Will truck loose money, and will automotive finally make a little money as these volumes come back.
Can we just get some sense of what we’re looking at in the second half of the year.
Alexander Cutler
This is an extraordinarily I think complex year to try to understand how all these moving pieces may effect things, as I mentioned electrical Americas, our best expectation at this point is somewhere in that 15 to 16% range. Electrical rest of world probably in this 4.5% to 5.5% range.
Aerospace staying at very attractive levels, 17.5% to 18.5%. Hydraulics and others we think probably now at 4% to 5% range.
Truck we do think will be in the black, just narrowly, probably 1% to 2% because we’re really not anticipating really much of any rebound, pre-buy is not even a word you hear used any more. And then automotive we think is likely to be negative for the year with a very tough start it had in the first quarter and then obviously the second quarter was rugged so maybe 2% to 3% negative.
Now what all that means obviously is when you step back from the segment level for Eaton, segment profitability in terms of percent of sales almost doubled in the second quarter versus the first quarter. It probably means that you’re getting another point up in the third quarter and it probably means you’re up on the order of maybe two, maybe a little bit more than that in the fourth quarter compared to the second quarter.
So that’s generally the best kind of range I think we can give you in terms of a feel for it at this point.
Eli Lustgarten - Longbow Research
We had a very peculiar pension charge that contributed $31 million to the reduction in force but you had something you couldn’t pay out in lump sum, you wound up with a $51 million increase there and alternatively you had accounting adjustment upwards in the corporate charges from the inventory adjustment, can you go through what should we expect in the second half of that year for both of those numbers.
Richard Fearon
Yes, you’re right to point out that our pension costs in Q2 was quite unusual. It really came about from two factors, from the fact that we had a large amount of lump sum settlements both because of the RIF actions we took but because other employees elected to retire and take advantage of full lump sum payments and then because we had had such a reduction in the headcount we undertook a re measurement of the pension obligation and expense and that’s what through off that $14 million curtailment charge.
Looking at the second half of the year we think each quarter is likely to be in the range of about $38 million, $38, $39 million for each of the two quarters so it will come back to a much more normal level in the second half of the year.
Eli Lustgarten - Longbow Research
And the corporate charge is the same thing, you have the inventory adjustment, that’s a one-time shot.
Richard Fearon
Well that was last year’s inventory adjustment. If you look at corporate charges we, our general corporate expense in Q2 was about 11, it was a little lower than it had been.
We have of course been constraining costs very markedly. We think it will average about 20 for each of the next two quarters.
Operator
Your next question comes from the line of Robert Wertheimer - Morgan Stanley
Robert Wertheimer - Morgan Stanley
First I wanted to ask sort of structural question on the auto environment, with increasing fuel economy standards, are you seeing any sort of design wins or secular change to super chargers.
Alexander Cutler
We have had a number, as always is true with these things, they go into production out more, several years out then they do right now. We’ve had a number of really exciting wins outside of the US.
I would say here in the US there’s still a bit of a race on to redeploy and reorder individual programs. But there’s no question, we’ve had our first significant wins in Japan on super chargers.
We continue to do very well in China and Europe. I’d say the US market is the one where there are some opportunities not yet fully vetted.
Robert Wertheimer - Morgan Stanley
And just to circle back on the pricing issue particularly in electrical segment, that’s the one where its sort of lighter cycle and its headed down now, how far out do you have confidence in the pricing and are you seeing any of your competitors start to wobble.
Alexander Cutler
There’s quoting activity going on every day in these businesses. I guess what I can tell you is what we’ve seen so far but I think the other thing to keep in mind here is you’ve got a couple of commodities that are quite important in terms of the costs of those products.
Copper is a big one, steel is a big one, and you watch the forward looking activity in those areas and I think people are watching those commodities are well aware that they’re important to the costs. As a result we’ve seen better than I would have called historic price stability under these conditions.
Operator
Your next question comes from the line of Jamie Cook - Credit Suisse
Jamie Cook - Credit Suisse
Just one follow-up question on Eli’s, the $51 million in pension expense you talked about, the lump sum stuff and all the other reasons, but were you expecting that in the quarter when you initially gave guidance.
Richard Fearon
Yes, we expected that we would have a pick up in lump sum settlements. Its of course very hard to exactly know what that number is.
But we knew it was going to be higher.
Jamie Cook - Credit Suisse
And then on the $225 million in cutbacks which you said we shouldn’t assume you get in 2010 can you just walk me through what segments are most impacted by this because I’m just trying to figure out which segments margins are being helped in 2009 and what the implications are for 2010.
Alexander Cutler
We’ve not provided guidance in terms of particular segments. I think that if you want a rule of thumb you can take the relative size of the businesses and apply it that way and you won’t go very far wrong.
Jamie Cook - Credit Suisse
And just on hydraulics, you talked about bookings but you said near-term bookings down 20%, what was it for the quarter and that was just US and what were, how were bookings overseas.
Alexander Cutler
I think what we’re seeing is pretty similar activity around the world. The reason we’re monitoring the closer in stuff is there’s so much noise out in the bookings that are out much further then that, OEMs have been kind of trying to recalibrate what their own business plans are looking forward.
We think the much more relevant numbers are the ones we’ve provided. It’s the stuff you’ll see kind of in the next 90 days is where people are paying a lot more attention to their business planning.
Jamie Cook - Credit Suisse
And then overseas.
Alexander Cutler
Pretty similar.
Operator
Your next question comes from the line of Jeffrey Hammond - Keybanc Capital Markets
Jeffrey Hammond - Keybanc Capital Markets
If you could come back, you had called out the better operating performance contributing $0.34 can you just maybe speak to maybe what’s driving that and within what businesses you’re seeing that. Is that just simply productivity or—
Alexander Cutler
I think it comes out of two issues, one is very broadly based across all the businesses. We were really pleased with the additional profitability that we’ve seen come off each of the businesses and a lot of it is in this very broad based expense reduction of just really keeping a tight handle on everything going on through the company and it isn’t in any one segment.
It is broadly spread and so we saw as we were recalibrating first quarter markets because as I mentioned to you they came in a couple percent lower that we actually we thought they were at the end of April, each of our businesses and our corporate departments really started in the process of how do we take down costs even tighter. So that’s why I say very broad based and its much more of an issue of lots of nickels then it is to say its all in one spot.
Jeffrey Hammond - Keybanc Capital Markets
And then it seems like first half of this year kind of worst, the earnings run rate and you called out specifically maintaining the dividend, any scenarios where you’d revisit the dividend payout for good or for bad.
Alexander Cutler
I addressed this question a number of times in May and early June in a number of different investor forums when I commented and it’s the same place that we are now that we’re comfortable with our dividend at this point and its obviously something that our Board looks at on a quarterly basis but we’re comfortable with the dividend, we’re comfortable with our kind of look forward and that’s the way we always try to think about the dividend policy. So I imagine there’s some scenario but its not in our high probability planning.
Operator
Your next question comes from the line of Nigel Coe - Deutsche Bank Securities
Nigel Coe - Deutsche Bank Securities
My question is on the margin and margins were a big surprise especially given the mix shift got going on in that segment, would you say that price inflation was particularly beneficial in aerospace this quarter.
Alexander Cutler
No, I don’t think that’s really the source of, we’re on long-term contracts so our pricing is established over long time periods. I think what we’re seeing that in spite of lower volumes that the operating efficiencies in our business are continuing to improve and then as you saw on that last line item on that particular chart in our packet, you saw that we had a beneficial impact from some of the reductions that we’ve been doing as well.
That should continue.
Nigel Coe - Deutsche Bank Securities
And you’ve cautioned that the other costs savings, if sales come back, those will come back as well but if sales, let’s say sales flat line here, God forbid, but if sales do flat line, do you think you can keep a lid on those cost savings for 2010.
Alexander Cutler
Yes, they’re obviously a lever we have to utilize. Our own feeling is that we’ve gone through and are going through just a dramatic reduction in industrial market volumes and that’s what we’re feeling across all of our franchises whether they’ve been early or late cycle.
We do believe at some point you will see our early cycle businesses start to come back and how much that percentage is and when is the $64.00 question if you will and very hard to call but if we see those markets coming back in 2010, we’ll have to use fewer of those levers. If they don’t we may have to use more of those levers.
I think what’s unusual for Eaton in this respect though is because of this very broad based reduction in force that we’ve unfortunately had to enact this year, the incremental year to year reduction in force of benefits virtually totally offset that $170 plus the $55, the $225 of what we called other. So as you model through what you think will happen in 2010 obviously your call on what you think happens to volumes we think there’s an attractive incremental of 30 to 35% on that.
We totally offset the other costs that may or may not be able to be held out of the equation next year by these incremental risk savings and we’re coming up off of very low volumes. So hard to call 2010 but we think we’ve got enough different levers in hand that we’ll be able to manage 2010 successfully as well.
Nigel Coe - Deutsche Bank Securities
And then just in terms of 3Q revenues, do you have any range for 3Q revenues.
Alexander Cutler
No, we did not provide a specific 3Q revenue guidance at this point.
Nigel Coe - Deutsche Bank Securities
And then just on page 15 the EPS bridge, just so I understand, the market decline the $8.00 negative, that’s post tax, for the tax offset it that just a mix issue. Is that how we should read that in terms of US business versus rest of world.
That’s obviously a net number, the $0.31 that’s more the mix impact on, you talked about US--
Richard Fearon
No what we’ve done, we calculated all of the items based on last year’s tax rate and then we put the whole benefit of moving to this credit rate into the $0.31.
Operator
Your next question comes from the line of Terry Darling - Goldman Sachs
Terry Darling - Goldman Sachs
Just a follow-up on that last one, decremental margin assumptions on that market decline item on the page 15 bridge, did that change at all.
Alexander Cutler
No, not from what we showed last time.
Terry Darling - Goldman Sachs
It just looks like it got a little more negative relative to the tax benefit and the revenue decline, that must mix.
Alexander Cutler
I don’t believe so, no. It should, William can talk to you offline but it should be quite similar to how we did it last time.
Terry Darling - Goldman Sachs
And appreciate the preliminary comments on 2010, I’m wondering if we can have you comment on how you’re feeling on non-res excluding the stimulus. I think you had AIA put out a survey of consensus forecast that showed kind of down 12% for next year and I’m wondering if you have any thoughts on that one maybe relative to Eaton mix or any thoughts in general there.
Alexander Cutler
I think the only guidance we’re just not prepared really to try to be specific about 2010 at this point. I think the only guidance, and we tried to provide it a couple of times here during the second quarter is that regardless what you’re previous forecast had been for 2010, we think in non-res you have to slightly have to improve it for whatever the impact is collectively you believe on the economy of the stimulus activity.
Because a lot of these projects are projects that may be quoted and booked this year but they’re, big parts of the shipments are going to start in 2010 and 2011. In our own case we believe its about $500 million of incremental revenue for us in both 2010 and 2011.
Terry Darling - Goldman Sachs
And then I guess also on 2010 truck outlook, wonder if you have any comments there. You put the industrial production numbers in the back of the deck which if those are right history would suggest you get a pretty sharp snapback there, anything in terms of truck orders in the US particularly in the higher end, anything structural going on in the market.
Obviously credit could be one of those things that suggests a more muted recovery there. I wonder if you have any thoughts.
Alexander Cutler
I think our general view building out of this year is that any historical view of what we’ve been through in the third and fourth quarter of last year and first and second quarter this year would of said that you would have expected a little bit more of a rebound at the backend. I think the muted word is a very appropriate word for what we’ve seeing and the prospects of recovery.
Having said that, we have all watched capital goods cycles and typically what happens is that we underestimate the upturn. I’m not trying to say that we think there’s a big number sitting out there at this point, but at some point all this capital equipment starts to get older and its got to be replaced and you’ve seen the figures on how old trucks are.
You’ve seen how old cars are, all the equipment hydraulic equipment is on has aged another year and a half and that’s happening in the electrical segments as well so we do believe off of this very depressed level in 2009 at some point we’re going to start to see a recovery albeit more muted than perhaps the last several cycles.
Terry Darling - Goldman Sachs
And just wondering if you had any thoughts on potential impact of issues at CIT, I would imagine its more suppliers and smaller customers you might have, any thoughts on CIT impact.
Alexander Cutler
I’m actually encouraged because obviously the news last Wednesday, Thursday looked more dour and CIT as you know is the second largest loaner in the United States behind the small business administration to small and mid sized businesses so when you go out and talk about dealers and distributors and small businesses that need credit, my hope is is that this deal that’s announced coming over the weekend this morning, will indeed keep that credit active in the marketplace because our own concern that we’ve talked about in several forums is that while credit has generally been available to larger firms, you get down to the smaller firms who have a need for working capital loans particularly as they start to entertain ideas of increasing their business whether it be the second half of this year, early next year, having that credit available is a critical element of increasing confidence and getting people to start to move forward. So I would read CIT as having hopefully found a solution here that keeps all those loans in place as a net positive.
Terry Darling - Goldman Sachs
Just last clarification, you have not changed the $300 million of revenues from acquisitions yet the electrical non-res index obviously is down a lot and you’re showing that you under grew the market there, I’m just trying to reconcile that.
Richard Fearon
The reason is due to the timing of when the acquisitions occurred. The largest acquisition Molar occurred right at the beginning of April last year and Phoenix Tech in February so basically all of the revenues from acquisitions, the incremental revenues were done by the end of the first quarter.
Terry Darling - Goldman Sachs
Okay so you’re full year expectation is probably off but just because of the way the comp worked, that explains it.
Alexander Cutler
And just to elaborate on that the big market down that we have would include those acquisitions that are part of the company also impacted the market down, so that’s where that’s imbedded.
Operator
Your next question comes from the line of Andrew Casey - Wells Fargo Securities
Andrew Casey - Wells Fargo Securities
Couple of detailed questions, on the pension expense outlook for the year did that remain neutral given the unusual charge you had that you’ve already gone through.
Richard Fearon
When you go ahead and do a re measurement having removed a fair number of employees, then that usually changes the number just slightly but it was not changed very much. It went down a couple of million dollars.
Andrew Casey - Wells Fargo Securities
And would that be included in the other cost benefit for the year.
Richard Fearon
No.
Andrew Casey - Wells Fargo Securities
Could you help us, I know its small, but where would it fall.
Richard Fearon
We didn’t specifically call it out. Its simply one of the line items in the segment income statement and if you look at your last, the very last item on page 15, which is the charts here, that’s where we have all of the impact of the variety of corporate costs.
Andrew Casey - Wells Fargo Securities
And then if we can go to the hydraulic segment the 28% decline that you cited in Americas orders, what was that in Q1, the global that you called out in Q1 was about 30%. I’m just wondering if it was that slight or if there was a—
Richard Fearon
The bookings number was 33% down for electrical Americas.
Andrew Casey - Wells Fargo Securities
No hydraulics.
Richard Fearon
I’m sorry, it was near-term bookings were down 28%.
Andrew Casey - Wells Fargo Securities
Yes in Q2, I’m just wondering what that was in Q1.
Richard Fearon
In Q1 we had a number that was down 30%.
Andrew Casey - Wells Fargo Securities
At that point that was global, I’m just so, it would be 30% to 28% in the Americas too.
Richard Fearon
Yes. But broadly as Alexander indicated, whether you look in the Americas or globally, the trends have been very similar all year.
Alexander Cutler
And I would just say I wouldn’t take a lot of significance out of the difference of 1% or 2%, I think the takeaway is the that the conditions are pretty similar.
Andrew Casey - Wells Fargo Securities
I get that. I’m wondering within that 28% did you see any moderation related to distribution, because some of the other companies that participate in that space have somewhat indicated they’re seeing that.
Alexander Cutler
I would say not conclusive. We watch the specific line items that are actually ordered to try to get a sense for that because I think you actually get your better sense seeing what the fast and slower mover pieces are, and we’ve not seen definitive evidence of a turn yet.
I think everybody is so hopeful that they’re looking for a little bright spot and I guess we’re trying to be careful and not getting carried away with one month’s piece of data.
Operator
Your next question comes from the line of David Raso - Isi Group
David Raso - Isi Group
My question centers around really the truck and auto margin potential for 2010 and clearly the stock is looking for some big earnings growth next year but with the detail on the tax rate for this year so clearly a big drag 2010 versus 2009, in electrical Americas and aerospace, could be down next year and they’ve been over 100% of the segment earnings the first half of this year. You’ve got a lot running the cost savings truck and auto margins recovering next year and I agree the revenue numbers could be very strong on the growth side for auto and truck next year, I’m just trying to think through if you could even just give some parameters for auto and truck when it comes to incremental margins knowing that the cost savings initiatives you’ve gone through this year.
Those are businesses that before wouldn’t be that hard to fathom double-digit margins with some very heady top line growth but how quickly from the cost savings initiatives could you see truck and auto margins really improve that dramatically. Is there, just trying to think through the stock is looking for.
You need some very heady margin improvement truck and auto next year.
Alexander Cutler
I think it really gets into a forecast of volumes by the segments and we’re just not prepared at this point to go there. I think the best way to think about it is perhaps look back at some of these time periods when you’ve seen global industrial production snap back how quickly clearly truck comes back and whether you buy into the thesis or not that you will continue to see auto be an early cycle business particularly coming off of a very I think anybody’s description would be a very rugged year here in this particular year.
David Raso - Isi Group
The auto, when you quote some of the key auto plants or high cost, you can see how those margins hopefully some volume increases next year could snap back. Its just now with the new color on the tax rate, that’s another hurdle to overcome 2010 versus 2009 again just putting a little more pressure on the truck and auto margins.
I’m just trying to give those businesses credit as you said, history suggests you can go from break-even in truck in 2001 and be back to 13% two years later. I’m just trying to give credit where credit is do on cost saving initiatives in auto and truck that I’m not fully appreciating that even with this tax rate drag, which is not going to be immaterial, 2010 versus 2009, that auto and truck really could go from a standstill of kind of break-even for the year in 2009 up to 8, 9, 10, 11% in 12 months.
Alexander Cutler
I think the best guidance we could give you is there is nothing we’ve seen in the business that would materially change the ability of the incrementals in those businesses in terms of leveraging back up and we think we’ve got them, the resources pulled back so tightly in those businesses that margins will come up quickly as soon as we can see some volume. The critical question is when you bet the volume comes.
David Raso - Isi Group
In truck, hopefully in Mexico has a little more of the production today then we did coming out of the last cycle, your auto in the high cost plants that got shuttered in Europe should help. Those two things I can look for that might you give you a little more up side.
Alexander Cutler
There’s no question that the moves we taken should improve the cost position but I think again the only reason I’m cautious on this is just the volume we think may be a little bit more muted coming up then perhaps it has been historically but we’ll get quite a snapback when we do see the volume.
David Raso - Isi Group
And lastly 2010 versus 2009, on the pension obviously the funded status was relatively poor going into this year but you do have some incremental this year with the layoffs and the curtailments, how should I think about 2010 versus 2009 pension, I know its hard to nail right now but just given the funded status going into the year and how much of the pension assets were equity, obviously the equity markets perform the rest of the year should have some influence on that. But how should I think about year over year right now pension expense, just up or down, how would you characterize it.
Richard Fearon
I’ll be honest, the calculation is so complex and so dependent upon for example what the discount rate turns out to be at the end of this year that you really have a hard time pinning down the precise number. I do think its fair to say that as we’ve reduced headcount and hence the pension obligation that there is quite a reasonable chance that the pension expense next year even taking out these lump sum settlement items and the curtailment that the expense remains the same or may even improve some.
But again you can sketch a wide variety of scenarios depending on what happens to the discount rate.
Operator
Your next question comes from the line of Dan Dowd – Sanford Bernstein
Dan Dowd – Sanford Bernstein
Let me just ask about the debt to cap, obviously that’s come down to about 0.38, where do you see that netting out by the end of the year.
Richard Fearon
We will continue over the course of the year to use our cash flow to pay down debt. Now we have paid our commercial paper down to a very small sum, less than $100 million, which we will most likely keep in place simply because its useful to have continued credit work done by commercial paper buyers and then over the balance of the year we do have a term debt maturity in August which we will deploy cash to and then potentially that $281 million debt that has a maturity next year, it is possibly to pay that early and so we will continue to deploy cash to pay down debt and so that’s going to take the ratios down from the levels that at the end of the second quarter at.
I don’t have a formal forecast at this stage, but with net debt to capital at 34% in Q2, it will clearly come down several points from that level by the end of the year.
Dan Dowd – Sanford Bernstein
Is there a number below which you wouldn’t go.
Richard Fearon
Well not given where we are there is but we’re not close to it.
Dan Dowd – Sanford Bernstein
And I think we’ve touched on pieces of this on an off, but can you just lay out what you think the key risks are to the guidance for the remainder of the year in terms of end markets, so which end markets do you think present the greatest risk to your estimates and which aspects of your cost structure present the greatest risks.
Alexander Cutler
I think in terms of trying to parse through the individual market forecast at this point, I think you’d have to say take the size of the business and that has the biggest impact upon the individual earnings potential for the company. So I think you have to then look into the electrical business as forecasted because they’re the biggest individual portion when you put the two of them together.
Having said that we’ve worked pretty hard again on this economic forecast really trying to understand it from a bottom up basis. Some of these markets are down at such low levels that people say well gee its hard to think of them going worse, well that was a mistake early in the year and so we’re not about to make that same error.
I’d have a hard time pulling them apart. It seems the automotive piece at this point generally most people around the world feel you can start to see a bit of a rebound.
We’ve taken most of the growth or recovery out of virtually everything else as we go through this year. So I’d have a hard time parsing them into individual pieces of risk at this point.
Dan Dowd – Sanford Bernstein
And on the cost side you don’t think there’s anything in particular that can really reach up and bite you in the last half.
Alexander Cutler
I think the very good news on both the costs and the working capital here in the second quarter is that in spite of significantly weaker end markets we were very successful in doing the high probability actions that we talked about early in the year. It is painful, its hard to take people out of a franchise but we’ve gotten it done ahead of schedule and we’ve actually increased the savings and on the working capital side we’ve gotten more money out than we thought.
And we think those are the actions the management’s have got to prove themselves capable of doing for this time period when you just can’t forecast when the markets are going to snap back.
Operator
Your next question comes from the line of Christopher Glynn - Oppenheimer & Co.
Christopher Glynn - Oppenheimer & Co.
Just want to take another look at the margin improvement from a sequential basis, if you look at the sales increase versus the first quarter and the segment profits well north of 100% conversion of that and even if you back out the sequential RIF savings and some others you still may be looking at 50% or so. What’s going on there.
Any other major pieces versus the first quarter.
Alexander Cutler
I think what you’re seeing is that obviously we had as you mentioned, we had higher RIF costs and the net benefits quarter to quarter are substantial. The other, remember the original $170 million of other cost items we detailed as well, that not much of that really was [inaudible] until we got toward the second quarter, so really that is split over these last three quarters of the year so said another way, you’re getting the big impact of each of the cost actions in the second quarter versus the first quarter.
Even if you compare second quarter this year to a year ago, I think you find that the decrimental margins as a result of all these cost benefits as well are much lower than what we would normally run and we’ve often talked this 30 to 35% range and when you get the kind of volume changes that we’ve had, you would go out of that range to a higher number and the decrimental numbers are much more in the low 20’s which we think are a reflection of very good cost control.
Christopher Glynn - Oppenheimer & Co.
Okay and on 2010 prospectively, you’ve talked about the other actions being sensitive to going away with early cycle volumes, but the RIFs would be there, just wondering why some bigger proportion of the RIFs wouldn’t also be of a more variable character.
Alexander Cutler
Everything has got steps that you correctly note and at some point if volumes were to ascend dramatically we’ll have to increase employment but that’s not our view in this quote what I would call a muted recovery. We think its more likely to be a slower recovery and is not going to force us through major volume steps.
Christopher Glynn - Oppenheimer & Co.
Okay so the trigger on that is just not as sensitive as the other actions.
Alexander Cutler
Correct.
Christopher Glynn - Oppenheimer & Co.
Looking at the bookings in electrical Americas and aerospace versus much higher order of magnitude of declines versus the market outlooks there, I guess just what proportion of those segments electrical North America and aerospace do the bookings speak to and why such a discrepancy.
Alexander Cutler
Well I think when we talk about aerospace for a moment, you’ve got a major activity going on around the world with the large OEMs trying to reduce inventory so actually their inventory purchases are less than their actual shipments and so that’s the disconnect that you’re seeing there and so its not just after market, its also production activities and so I think readying themselves for a little flatter time period out ahead of themselves. On the electrical side we’ve been talking for some time that the component side or the portion of the business that flows through distributors has been weak on this same level we’ve been talking about.
What we were having masked that, were very strong project bookings and some of that came out of the non-residential construction side as well as the power quality side. And that part has as we’ve been indicating all through the quarter has definitely slowed down and that’s why you’re seeing that rate of bookings come down.
Now we’re shipping out a backlog this year as we pointed out in January in some of our big project activities. We entered the year with record backlogs and that is helping us on the shipment side versus the booking side.
Operator
Your next question comes from the line of Jason Feldman – UBS
Jason Feldman – UBS
You commented a minute or two ago that you do intend to keep reducing debt levels, have you had any discussions with the rating agencies about the current rating through the downturn given the guidance reduction.
Richard Fearon
We had our meetings with the agencies, we sit down with them once a year. We did that in mid June so not very long ago and laid out our views on what we thought the likely outlook was so yes, we’ve had recent discussions.
Jason Feldman – UBS
And I know this has been discussed before but as of today are there any covenants on the debt that we should be aware of or that, or of any potential issues going forward.
Richard Fearon
No, we have, we simply have one covenant that’s a covenant of debt to capital. We are miles away from that covenant.
It would be almost impossible to hit that covenant in any near-term timeframe and in fact I believe that the details of that covenant are outlined in the last 10-Q so you can refer to that.
Jason Feldman – UBS
You talked about commodity cost before and the mix between that and pricing pressure, are there any particular areas of commodity costs or particular commodities that have been more, you characterized them as being stubborn, that are more stubborn or that have been more problematic then others.
Alexander Cutler
I guess I would turn it and say where its having the biggest impact on our customers because its part of what’s happening in terms of demand level and I would say that that’s watching energy costs and if you think about virtually everything that we do at Eaton its about helping our customers deal with their energy costs and so we’ve seen oil back at $64, we’re watching the prospect of significantly higher electrical costs as the result of various different legislation around clean air and other environmental issues. And it convinces us that not only this year but going into these next couple of years we’re going to see a significant increase in energy costs really of all kinds and while that can be a negative for some of our customers in terms of their demand it also becomes quite a positive for Eaton in terms of the technologies that we offer.
Operator
Your next question comes from the line of Unspecified Analyst
Unspecified Analyst
I just want to understand on the cost side a little bit in terms of raw material, you did touch on the steel and the copper and the expectations for those prices to go up, but where you seeing any benefit from declining raw material costs in the improved performance number we saw in the quarter and I guess does that reverse out as we see some of these commodity prices potentially tick back up again.
Alexander Cutler
No it was not the source of driving that and generally on commodity prices, we’re not seeing, when you put the whole basket of them together for us, we’re not seeing much variance from what we had planned our original guidance in January upon.
Operator
Your next question comes from the line of Unspecified Analyst
Unspecified Analyst
The question I have regards the merger and acquisition restructuring charges, the guidance for the year has gone down from $0.50 impact to $0.35 impact and you I think mentioned during the call that you’re restructuring efforts are being accelerated how does that square that the costs should be going down even as you’re accelerating activity or moving it forward.
Alexander Cutler
A number of the projects simply said, a number of the projects that we had planned on doing have turned out to be less costly than we thought they were going to be so good news.
Operator
Your final question comes from the line of Mark Koznarek - Cleveland Research Company
Mark Koznarek - Cleveland Research Company
I was wondering if you could go through the elements of the cash flow and also detail what the inventory and receivables reduction targets are for the year.
Richard Fearon
Let me give you just a quick snapshot of the cash flows, roughly speaking you can think of $30 million from net income, think about $145 million from depreciation and amortization, and about $190 million from working capital so that gets you right in that $360 to $365 operating cash flow range. And looking at our targets, our expectation for the year is that we would be able to take our DOA’s down by a day and also receivables down by a day, that’s what we’ve been targeting this year.
Our inventories climbed a little higher in Q1 than we thought but we made very good progress in Q2 and we expect to be able to make further progress on the inventory side in particular over the balance of the year.
William Hartman
Thanks everyone for their interest and participation and as always we’re here for the rest of the day to continue to dialogue. Thank you much.