Emerson Electric Co. — Form 10-Q summary
Business context and reporting period. This unaudited filing covers the quarter and six months ended March 31, 2010 (fiscal 2010 Q2), compared with the same 2009 periods. Emerson operates across Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended March 31, 2010 | Six months ended March 31, 2010 |
|---|---|---|
| Net sales | $5,144; +1% year over year | $10,155; -3% |
| Gross profit / margin | $2,000 / 38.9% (36.1% in 2009) | $3,903 / 38.4% (36.5% in 2009) |
| Continuing earnings before tax | $611; +9% | $1,195; -4% |
| Continuing earnings attributable to Emerson | $414; +11% | $836; +1% |
| Net earnings attributable to Emerson | $405; +9% | $830; approximately flat |
| Diluted EPS | $0.54 from continuing operations; $0.53 net | $1.10 from continuing operations; $1.09 net |
| Operating cash flow / capital expenditures | Not separately presented | $1,319 / $178 |
| Free cash flow | Not separately presented | $1,141, up from $546 |
Quarterly sales included a 6% decline in underlying sales, offset by a 4% acquisition contribution and 3% favorable currency translation. For the first half, underlying sales fell 10%, offset in part by acquisitions (+4%) and currency (+3%). The quarter’s discontinued-operations loss was $9, related to LANDesk; the six-month loss was $6.
Business segments
Second-quarter sales and segment earnings: Process Management $1,428 and $241 (sales -5%, earnings -6%); Industrial Automation $867 and $94 (-10%, -9%); Network Power $1,351 and $157 (+4%, +47%); Climate Technologies $908 and $163 (+24%, +136%); Appliance and Tools $760 and $133 (+4%, +117%). Segment earnings are before interest and taxes. Strength in Climate Technologies, Network Power, and Appliance and Tools was offset by continued weakness in Process Management and Industrial Automation.
For the first half, segment earnings rose in Network Power ($363, +40%), Climate Technologies ($276, +124%), and Appliance and Tools ($244, +74%); they declined in Process Management ($457, -18%) and Industrial Automation ($179, -33%).
Balance sheet, liquidity, and debt
- Cash and equivalents were $2,159 at March 31, up from $1,560 at September 30, 2009. Working capital was $2,509 and the current ratio was 1.4:1, versus 1.5:1.
- Short-term borrowings and current maturities were $1,269; long-term debt was $4,581, for total reported debt of $5,850. Debt-to-total capital rose to 39.8% from 34.8%; net debt-to-net capital rose to 29.4% from 25.7%, primarily reflecting acquisition financing.
- First-half cash from operations increased $501 to $1,319, primarily due to improved working capital. Cash used for acquisitions was $1,340; dividends paid were $504. Borrowings increased, including $725 of net short-term borrowing and $596 in long-term debt proceeds.
- Interest coverage was 9.5x, compared with 12.1x in the prior-year period, primarily due to higher average borrowings. Long-term debt was rated A2 by Moody’s and A by S&P.
Material changes, outlook, and risks
- Margins and costs: Gross margin improved year over year, helped by cost reductions, acquisitions, currency, and product mix, partly offset by lower volume and pricing. SG&A rose to 23.9% of quarterly sales from 22.0%, including higher incentive stock compensation ($72 for the quarter; $110 for the half), acquisition costs, and lower-sales deleverage.
- Restructuring: First-half rationalization expense was $74; actions eliminated 1,800 positions. Full-year expense was expected to be approximately $145–$170.
- Fiscal 2010 outlook: Management forecast sales of $21.3–$21.9 billion, or +2% to +5%; underlying sales flat to down 3%; diluted EPS of $2.40–$2.55; operating cash flow of $2.9–$3.1 billion; and capital expenditures of $0.4–$0.5 billion. Management expected economic conditions to improve gradually, while noting construction remained weak and the recovery outlook was uncertain.
- Acquisitions and strategic actions: Emerson acquired SSB for about $145 and Avocent for $1.2 billion in cash. It intended to sell Avocent’s LANDesk unit, expected to complete in 2010; LANDesk assets and liabilities were approximately $0.5 billion and $0.2 billion. The company was evaluating strategic options for its appliance motors and commercial and industrial motors businesses, without a sale decision. After quarter-end, Chloride rejected Emerson’s indicative proposal of 275 pence per share, approximately £723 million ($1.1 billion); Emerson said it planned to engage Chloride shareholders.
- Other risks and items: The first-half effective tax rate was 28%, including a $30 capital-loss tax benefit; the full-year rate was estimated at 30%. Management cited potential economic, currency, demand, pricing, competitive, and technology risks, as well as possible credit-market volatility or illiquidity. Acquisition purchase-price allocations remained preliminary.
Important facts for investors to verify
- Whether underlying demand and pricing improve enough to support the sales and EPS outlook, particularly in Process Management and Industrial Automation.
- Whether margin gains and cash generation persist as working-capital benefits become harder to maintain and acquisition-related costs, debt, and interest expense remain elevated.
- Progress and final proceeds from the LANDesk divestiture, and any decision regarding the motors businesses or the Chloride proposal.
- Final acquisition valuations and purchase-price allocations, including goodwill and intangible assets, and the timing and cash costs of remaining rationalization actions.