Emerson Electric Co. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011, compared with the three months ended December 31, 2010, unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Emerson reported a challenging quarter amid weaker U.S. demand, flat European sales, a sharp decline in China, and reduced demand in Network Power and air-conditioning markets. Severe Thailand flooding disrupted supply chains and reduced sales by approximately $300 million. Consolidated sales fell 4% to $5.309 billion; underlying sales declined 4%, reflecting a 5% volume decline partly offset by a 1% increase in selling prices.
Key financial metrics
| Metric | Q1 FY2011 | Q1 FY2012 | Change or note |
|---|---|---|---|
| Net sales | $5,535 | $5,309 | Down 4% |
| Gross profit / margin | $2,163 / 39.1% | $2,055 / 38.7% | Lower volume and flooding-related deleverage |
| SG&A / percent of sales | $1,311 / 23.7% | $1,354 / 25.5% | Expense rose despite lower sales |
| Earnings before income taxes | $713 | $553 | Down 23%; margin fell from 12.9% to 10.4% |
| Net earnings attributable to common stockholders | $480 | $371 | Down 23% |
| Diluted EPS | $0.63 | $0.50 | Down 21% |
| Operating cash flow | $322 | $334 | Up $12 |
| Capital expenditures / free cash flow | $82 / $240 | $130 / $204 | Free cash flow down $36 |
| Cash and equivalents | $2,052 at Sept. 30, 2011 | $2,076 at Dec. 31, 2011 | Quarter-end balance |
| Current ratio | 1.4 to 1 | 1.4 to 1 | Working capital declined from $2,880 to $2,541 |
| Total debt-to-total capital | 33.3% | 35.5% | Net debt-to-net capital rose from 23.2% to 25.8% |
Quarter-end short-term borrowings and current maturities were $1,578 million, and long-term debt was $4,041 million. Net interest expense was $58 million. The interest coverage ratio was 9.9x, versus 11.8x in the prior-year quarter, primarily reflecting lower earnings. Dividends were $0.40 per share, compared with $0.345.
Segments and material changes
- Process Management: Sales declined 1% to $1,527 million; earnings fell 34% to $190 million and margin was 12.4%, versus 18.8%. Flood-related supply disruption hurt higher-margin businesses; management said disruptions were substantially resolved and expected to recover most lost volume during the remainder of the year.
- Industrial Automation: Sales increased 2% to $1,229 million; earnings declined 2% to $182 million. Higher selling prices supported sales, while mix and other costs pressured margins.
- Network Power: Sales fell 10% to $1,495 million; earnings declined 33% to $122 million. Weak telecom and IT demand, flooding-related customer supply disruptions, and lower volume weighed on results.
- Climate Technologies: Sales fell 9% to $733 million; earnings declined 19% to $100 million amid residential-market softness and channel inventory reductions.
- Tools and Storage: Sales increased 2% to $457 million; earnings rose 5% to $97 million, supported by professional tools and food waste disposers.
Cash, debt, outlook, and risks
Operating cash flow and a $666 million increase in short-term borrowings funded dividends of $294 million, long-term debt payments of $251 million, treasury-stock purchases of $244 million, and capital expenditures of $130 million. Cash increased $24 million during the quarter. Management said it expected sufficient funding from operations, existing resources, debt capacity, and backup credit lines to meet foreseeable needs.
Management maintained its FY2012 outlook: underlying sales growth of 4%–6%, with an estimated 2% unfavorable foreign-currency impact; reported net sales growth of 2%–4% against FY2011 sales of $24.2 billion; EPS of $3.45–$3.60; operating cash flow of approximately $3.5 billion; and capital expenditures of approximately $0.7 billion. It forecast an approximately 18% operating profit margin and 15.5% pretax margin. The outlook assumed improvement in telecom and HVAC markets and recovery from flooding disruption, tempered by European economic deterioration and mixed global indicators.
Other notable items included a $19 million charge related to eliminating post-65 supplemental retiree medical benefits for approximately 8,000 active employees, and $23 million of rationalization expense. The company expected full-year FY2012 rationalization expense of approximately $125 million. Other deductions increased to $90 million, principally due to foreign-currency transaction losses and higher rationalization expense. Management identified economic and currency conditions, demand, pricing, competition, and technology as risks. The filing reported disclosure controls were effective as of December 31, 2011 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the expected recovery of flooding-related lost sales and improvement in telecom and HVAC markets materialize, and whether FY2012 guidance remains achievable.
- How continued weakness in Europe, China, residential construction, telecom, and IT affects sales volumes, mix, and margins.
- Whether margin pressure, rationalization costs, foreign-currency losses, and the retiree medical charge affect subsequent earnings.
- How the increased short-term borrowing, higher debt-to-capital ratios, capital spending, dividends, and share repurchases affect liquidity and cash generation.
- Whether inventory growth and working-capital movements convert into operating cash flow as expected.