Emerson Electric Co. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2009 (Emerson’s third fiscal quarter); the filing also reports results for the nine months ended June 30, 2009. The company’s five segments are Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. Management attributed weaker results to the broad economic downturn, lower customer spending and inventory reductions, with foreign-currency translation also weighing on sales.
Key financial metrics
| Metric | Three months ended June 30, 2009 | Nine months ended June 30, 2009 |
|---|---|---|
| Net sales | $5.091 billion, down 22% | $15.593 billion, down 14% |
| Gross margin | 36.1%, versus 36.7% | 36.4%, versus 36.8% |
| Pretax earnings from continuing operations | $544 million, down 43%; 10.7% of sales | $1.760 billion, down 32%; 11.3% of sales |
| Continuing-operations diluted EPS | $0.51, versus $0.82 | $1.60, versus $2.23 |
| Net earnings | $387 million, versus $612 million | $1.218 billion, versus $1.724 billion |
| Operating cash flow | Not separately reported for the quarter | $1.734 billion, versus $1.998 billion |
| Free cash flow | Not separately reported for the quarter | $1.346 billion, down 12% |
For the nine months, capital expenditures were $388 million, dividends paid were $749 million, and cash declined $395 million to $1.382 billion. At June 30, current assets were $7.718 billion and current liabilities $4.993 billion; working capital was $2.725 billion and the current ratio 1.5. Short-term borrowings and current maturities totaled $837 million, with long-term debt of $4.464 billion. Total debt to total capital was 38.0%, compared with 33.1% at September 30, 2008; net debt to net capital was 30.9%, compared with 22.7%.
Material changes versus prior periods
Sales fell across all segments in the quarter and nine-month period. Quarterly underlying sales declined 19%; currency translation reduced sales by 4%, while acquisitions added 1%. For the nine months, underlying sales declined 10%, currency translation reduced sales by 5%, and acquisitions added 1%. Quarterly gross margin weakened due mainly to lower-volume deleverage, inventory reductions and unfavorable mix. SG&A declined in dollars but rose as a percentage of sales, to 21.4% for the quarter and 21.8% year to date.
All segments reported lower quarterly sales and earnings. Industrial Automation was particularly pressured in the quarter: sales fell 36% and segment earnings fell 78%. For the nine months, Industrial Automation earnings fell 45%; Network Power, Climate Technologies, and Appliance and Tools earnings fell 33%, 39%, and 39%, respectively. Process Management’s nine-month sales increased on an underlying basis, but reported sales and earnings declined, in part due to currency effects.
Outlook, management commentary, risks and unusual items
- Management forecast fiscal 2009 sales of $20.8–$21.1 billion, diluted EPS of $2.20–$2.30, operating cash flow of approximately $3 billion, and capital expenditures of $0.5–$0.6 billion. Full-year underlying sales were expected to decline 12%–13%.
- For the first half of fiscal 2010, management forecast reported sales to decline 10%–13% and underlying sales to decline 14%–17%, citing continued weakness in served markets.
- Fiscal 2009 rationalization costs were expected to total approximately $280–$300 million; $190 million was recorded in the first nine months. The company reported actions to reduce its workforce by 20,000 positions and exit or consolidate approximately 20 facilities.
- The company estimated its pension plans had a funded deficit of approximately $600 million at June 30, 2009, and anticipated fiscal 2009 pension contributions of approximately $300 million. Fiscal 2010 pension expense was expected to increase; the amount was not yet determined.
- Fiscal 2009 acquisitions included Roxar, Trident Power, and System Plast. Cash paid for businesses, net of cash acquired, was $735 million for the nine months; Roxar also involved $222 million of assumed debt. Purchase-price allocations remained subject to refinement.
- Management said funding should be sufficient for the foreseeable future through existing resources, operations, commercial paper and backup credit lines, but warned that prolonged or worsening credit-market conditions could affect the company and its customers, suppliers, or financial institutions. Debt ratings were A2 by Moody’s and A by S&P.
- Derivatives were used for hedging, not speculation. A downgrade could trigger collateral requirements; maximum incremental collateral the company could have been required to post was $40 million. Management reported no collateral posted at June 30, 2009.
- Controls and procedures were deemed effective as of June 30, 2009, and no material change in internal control over financial reporting was reported during the quarter. The supplied filing text does not provide a clear quantified litigation or other contingency exposure.
Important facts for investors to verify
- Whether actual fiscal 2009 sales, EPS, operating cash flow, capital expenditures, and rationalization costs met management’s forecasts.
- How demand, customer inventory reductions, pricing, currency movements, and segment margins evolved after quarter-end.
- Debt levels, refinancing needs, credit ratings, and availability of commercial paper and backup credit lines.
- Pension-plan funded status, planned contributions, and the effect of the anticipated increase in fiscal 2010 pension expense.
- Acquisition integration, final purchase-price allocations, and goodwill and intangible-asset valuation.