The challenge right now is to ensure that as volume comes back into the system, we realize the full economic benefits of that volume. That we don't allow costs that we just took out of the system at relatively great expense and pain to creep back into the system without an explicit agreement that that's appropriate to do so.
Number two, as we begin to see the outline of this recovery, [is] trying to get enough visibility into it to decide to what extent there are any fundamental changes needed to the strategy we had been pursuing, going forward. For example, as you look at the six segments we're in, have any been impacted in a way that suggests that the fundamentals of those segments going forward are not going to be the same as they have been. There may be more opportunities in some segments and fewer in others.
How were you able to get your liquidity in hand?
I would characterize it as an attempt focused on working capital management. We have made it a great rallying cry around Eaton to pull working capital out of the system as our sales declined. Through a series of meetings and metrics and just constant focus we have achieved great progress. To give you an illustration, since the end of last year we've pulled about 13 days on hand of inventory out of the system. In addition to the inventory simply coming out because sales are going down, we've greatly improved our inventory efficiency by pulling down the days on hand.
To give another illustration, in the fourth quarter of last year through this third quarter, our operating cash flow has been about $1.6 billion. That's actually the highest operating cash flow we've ever had in a four-quarter period. And it is made up of a whole lot more working capital liquidation than would be typical in a four-quarter period. We've made up for the shortfall in earnings by pulling substantial amounts of working capital out of the system.
How did you pull that inventory and decrease your working capital like that?
Through a very systematic month-in-month-out focus on it. For example, we've instituted a whole series of reviews, in some cases a monthly and other cases a literally weekly basis. We review incoming orders, inventory levels, and at what point we should be reordering raw materials. In some cases, we've elected to look at order levels and even adjust them because we didn't believe that they were really going to come to pass at the end of the day; i.e., we believed that there might be cancellations in orders that had already been made. Through what I call an almost nitty-gritty tactical approach to managing inventory, we've been able to get the kinds of efficiencies that I just outlined.
What would you say would be your biggest nightmare now; the worst thing that could happen?
The biggest risk we face is that the economic rebound will be followed by another leg down, where we see that there isn't sustainability in the recovery. [That might be] because the recovery was too much based upon stimulus; at some point, these governments around the world which have taken on so much leverage to provide the stimulus are going to not be able to keep indebting themselves to the extent they have been. Whether it's due to the stimulus going away or simply because the household balance sheets around the world are not sufficiently robust to convince households to stop husbanding their resources, you might have another letdown.
Then there's a longer-term risk we all need to be cognizant of. I don't think it's a very likely scenario. But any of us who have lived through the episode of high inflation in the '80s knows that you have to always be vigilant about whether these highly stimulative policies could unintentionally result in a bout of much higher inflation than we've seen over the past 15 or 20 years. And you know, that would certainly be a concern. Inflation is a very distorting condition under which to run large, capital-intensive businesses, and it creates a great deal of complexity.
But haven't the stimulus programs of various countries benefited Eaton? If so, how as CFO are you making them work best for the company?
You're certainly correct that the stimulus offers opportunities. It is new sales, and we have put a very concerted focus on realizing at least our fair share and hopefully beyond our fair share of the stimulus programs. We've created separate, dedicated teams — one in the electrical sector, one in the industrial sector — made up of a series of individuals, some of whom are full time. Their focus is on identifying spending authorized under stimulus programs in the whole variety of countries that we operate in, ensuring that we participate in marketing our products into those programs. And the results thus far have been quite positive for us.
For example, in the United States, we have a whole tracking system [that shows] those contracts we have been awarded. Thus far, we've been awarded $95 million of contracts in our electrical business from the U.S. stimulus program. Another area where we've had significant wins is in our hybrid commercial-vehicles line in the industrial sector, where we've won very significant contracts in many countries around the world — China being our largest set of stimulus sales.
Of course, hybrid vehicles have been a focus of certain countries' stimulus programs, particularly in those countries that have had significant environmental issues, like China, and we've been able to take advantage of stimulus dollars that have gone into those programs. Our expectation for 2010 and 2011 is that we're likely to generate revenues of about $500 million in each of those years in our American electrical business from the stimulus program in the States.
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