EMERSON ELECTRIC CO quarterly report, Q2 FY2013

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Emerson Electric Co. — Q2 FY2013 Form 10-Q

Reporting period: Quarter and six months ended March 31, 2013; unaudited results compared with the corresponding 2012 periods. Emerson reported sluggish global economic conditions, with softness in Europe and modest growth in the U.S. and Asia.

Financial performance

  • Quarter: Sales were $5.960 billion, up 1%; underlying sales rose 2%. Net earnings attributable to common shareholders were $561 million, up 3%, and diluted EPS was $0.77, up 4%.
  • Six months: Sales were $11.513 billion, up 3%; underlying sales increased 4%. Common earnings were $1.015 billion, up 11%, and diluted EPS was $1.39, up 12%.
  • Margins: Gross margin improved to 39.8% from 39.5% for the quarter and to 39.8% from 39.1% year to date. SG&A as a share of sales rose to 23.9% from 23.0% for the quarter and 24.5% from 24.2% year to date. Net margin attributable to common shareholders was 9.4% for the quarter and 8.8% year to date.
  • Cash flow: Six-month operating cash flow was $1.151 billion, versus $896 million; capital expenditures were $235 million, versus $287 million. Free cash flow, as defined by Emerson as operating cash flow less capital expenditures, was $916 million, versus $609 million. Cash increased $248 million to $2.615 billion.
  • Liquidity and debt: Working capital was $3.545 billion and the current ratio was 1.5:1, compared with $2.993 billion and 1.4:1 at September 30, 2012. Total debt was $5.544 billion, versus $5.293 billion; total debt-to-capital was 34.5%, and net debt-to-net capital was 21.8%. Six-month interest coverage was 13.8x. Emerson issued $500 million of 2.625% notes due February 2023.
  • Shareholder returns: Six-month dividends paid were $593 million and treasury-stock purchases were $271 million. The quarterly dividend per share increased to $0.41 from $0.40.

Changes and segment performance

  • Process Management was the strongest contributor: quarterly sales rose 8% to $2.020 billion and earnings increased 18% to $403 million, supported by energy-market demand. Six-month sales rose 15% and earnings 39%.
  • Climate Technologies quarterly sales increased 7% to $988 million and earnings rose 11% to $175 million, led by air-conditioning and compressor demand.
  • Industrial Automation quarterly sales fell 6% to $1.213 billion and earnings declined 8% to $186 million, reflecting weak capital-goods markets, particularly in Europe.
  • Network Power quarterly sales fell 4% to $1.481 billion and earnings declined 17% to $111 million; weakness included a sharp decline in embedded computing and power.
  • Commercial & Residential Solutions quarterly sales declined 4% to $457 million, mainly due to the prior-year Knaack divestiture; underlying sales increased 2%.

Outlook, risks and unusual items

  • For FY2013, Emerson expected reported and underlying sales growth of 1.5%–2.5%, EBIT and pretax margins approximately equal to the prior year excluding the 2012 goodwill impairment’s 240-basis-point impact, and EPS of $3.48–$3.58. It targeted operating cash flow of approximately $3.3–$3.4 billion and capital expenditures of approximately $0.7 billion.
  • Management cited cautious global business investment, no clear near-term catalyst for growth, and continued challenges in capital goods, especially Europe. Modest residential-market growth was expected.
  • Management expected FY2013 rationalization expense of approximately $75–$85 million; $32 million had been incurred in the first six months. Costs included workforce reductions and moving or redeploying operations.
  • Emerson had recorded a $450 million impairment in Q4 2012 for its embedded computing and power business. A sale process was under consideration; a potential additional impairment or sale loss, and a tax charge related to possible repatriation of earnings, remained possible.
  • Other reported factors included higher incentive stock compensation, unfavorable product mix and pension expense. Pension and postretirement expense increased to $116 million for the six months from $88 million, primarily reflecting a lower discount rate.
  • Management said available operations, cash, borrowing capacity and credit lines were expected to meet foreseeable funding needs. Forward-looking results remain subject to economic, currency, demand, pricing, competitive, intellectual-property and technology risks.

Investor facts to verify

  • Whether the embedded computing and power business is sold and whether further impairment, sale-loss or tax charges result.
  • Whether sales growth, EPS and cash-flow targets are achieved amid weak global investment and European demand.
  • Whether Network Power and Industrial Automation stabilize, and whether Process Management growth persists.
  • Whether rationalization costs, pension expense and incentive compensation affect forecast margins and earnings.
  • How the $500 million debt issuance and ongoing dividends and buybacks affect leverage and cash deployment.