Business context and reporting period
Emerson Electric Co.’s unaudited Form 10-Q covers its fiscal third quarter and nine months ended June 30, 2015. The company operates across Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Unless noted, amounts are in U.S. dollars.
Financial performance
- Third quarter: Sales were $5.503 billion, down 13% year over year; underlying sales declined 5%. Net earnings attributable to common stockholders were $564 million, down 23%, and diluted EPS was $0.84, down 18%.
- Margins: Gross margin fell to 40.6% from 41.8%; net earnings were 10.3% of sales versus 11.5%. Lower volume, unfavorable mix, currency effects, and restructuring costs pressured results.
- Nine months: Sales were $16.490 billion, down 7%. Net earnings attributable to common stockholders were $2.062 billion and diluted EPS was $3.01, both increased versus the prior year because of the power transmission business divestiture gain. Excluding its $528 million after-tax gain ($0.77 per share), net earnings were $1.534 billion, down 12%, and EPS was $2.24, down 9%. Gross margin was 40.5% versus 41.0%.
- Cash flow: Nine-month operating cash flow was $1.428 billion, down 37%; capital expenditures were $516 million and free cash flow was $912 million, down from $1.711 billion. Operating cash flow reflected lower earnings excluding the divestiture gain, $360 million of taxes paid on the gain, and increased working capital.
- Liquidity and debt: June 30 cash and equivalents were $3.393 billion. Current assets were $10.644 billion and current liabilities $8.312 billion; the current ratio was 1.3. Short-term borrowings/current maturities were $3.179 billion and long-term debt was $4.290 billion, totaling $7.469 billion. Total debt-to-total capital rose to 46.1% from 37.3% at September 30, 2014. The company issued $1 billion of notes during the quarter, using proceeds to repay commercial paper and for general corporate purposes.
- Capital returns: Nine-month dividends paid were $960 million and common stock purchases were $2.041 billion. The company said after-tax proceeds from the divestiture supported repurchases.
Material changes and operating drivers
- Quarterly sales declines reflected 5% unfavorable currency translation and 3% from divestitures, partly offset by acquisitions. Underlying sales fell 7% in the U.S. and 4% internationally; China sales were down 14%.
- All five segments reported lower third-quarter earnings. Network Power earnings fell 65% to $37 million, with margin down to 3.6%; Process Management earnings declined 21%, Industrial Automation 27%, Climate Technologies 11%, and Commercial & Residential Solutions 9%.
- Oil-and-gas weakness, especially upstream, pressured Process Management and Industrial Automation. Network Power faced weak telecom and data-center demand. Climate Technologies cited customer inventory drawdown, weather, mix, and higher warranty costs; Commercial & Residential Solutions had modest underlying growth but lower earnings.
- Working capital changes used $530 million of cash in the first nine months, versus $157 million in the prior-year period. Cash increased $244 million from September 30, 2014 to $3.393 billion at June 30, 2015.
Outlook, risks, and unusual items
- Management forecast fiscal 2015 sales to decline about 9%, including approximately 5% adverse currency translation and a 2% deduction from divestitures; underlying sales were expected to decline about 2%. Reported EPS guidance was $3.97–$4.07, including the $0.77-per-share divestiture gain.
- Management expected difficult market conditions for the next three to four quarters. Process Management demand was expected to remain weak through at least the first half of fiscal 2016, with no significant oil-and-gas recovery anticipated before 2017. Other segment commentary described near-term challenges, with selected opportunities in data centers, telecom, construction, and some climate markets.
- Emerson announced plans to spin off Network Power through a proposed tax-free distribution and to explore alternatives, including potential sales, for motors and drives, power generation, and remaining storage businesses. Transactions were expected to be substantially completed by September 30, 2016, subject to approvals and other conditions; no assurance was given that all reviews would result in transactions. Management warned of significant implementation costs and possible impairment or separation-related losses.
- The January 2015 sale of power transmission solutions generated $1.4 billion in proceeds and a $932 million pretax gain ($528 million after tax). The after-tax proceeds were used for share repurchases. Six acquisitions during 2015 cost $250 million net of acquired cash.
- Year-to-date rationalization expense was $89 million; full-year expense was estimated at $160–$180 million. Actions included closing eight facilities and reducing headcount by about 2,300. Forward-looking results remain exposed to market demand, currencies, pricing, competition, and execution of portfolio changes.
Key facts for investors to verify
- Whether sales, margins, and segment earnings stabilize amid weak industrial, energy, and telecom markets.
- How reported earnings and cash generation compare after excluding the one-time divestiture gain and related tax payments.
- Progress, approvals, costs, tax treatment, and eventual terms of the Network Power separation and other portfolio reviews.
- Debt levels, working-capital requirements, restructuring costs, and the sustainability of repurchases and dividends.
- Whether fiscal 2015 sales and EPS guidance was achieved; the filing provides management’s forecast, not subsequent results.