Business context and reporting period
Emerson Electric Co. filed this unaudited Form 10-Q for the quarter ended June 30, 2010, covering its fiscal third quarter and first nine months of fiscal 2010. Management reported improving markets and higher sales and earnings in all five business segments in the quarter, while year-to-date results still reflected weak first-quarter conditions.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2009 period.
| Metric | Three months ended June 30, 2010 | Nine months ended June 30, 2010 |
|---|---|---|
| Net sales | $5,641; up 11% | $15,796; up 1% |
| Gross margin | 39.2%, versus 36.1% | 38.7%, versus 36.4% |
| Continuing-operations pretax earnings | $883; up 59% | $2,078; up 16% |
| Continuing earnings attributable to Emerson | $594; up 53% | $1,430; up 17% |
| Net earnings attributable to Emerson | $585; up 51% | $1,415; up 16% |
| Diluted EPS, continuing operations | $0.78; up 53% | $1.88; up 18% |
| Diluted EPS, net earnings | $0.77; up 51% | $1.86; up 16% |
Quarterly revenue growth included 7% underlying growth, 3% from acquisitions and less than 1% from currency. For the nine months, underlying sales declined 5%, offset by acquisitions (+4%) and currency (+2%). Year-to-date SG&A was $3,585 (22.7% of sales, versus 21.8%); management cited acquisitions and $113 of higher incentive stock compensation, partly offset by cost savings. The nine-month effective tax rate was 29%, and management estimated approximately 30% for the full year.
Cash flow and liquidity: Nine-month operating cash flow was $2,022, up from $1,734; capital expenditures were $300, making reported free cash flow $1,722 versus $1,346. Dividends paid were $756; acquisitions used $1,372. Cash rose to $3,424 from $1,560 at September 30, 2009, including funds set aside for the planned Chloride purchase. At June 30, current assets were $9,958 and current liabilities $7,257; working capital was $2,701 and the current ratio 1.4, versus 1.5 at fiscal year-end.
Total debt, comprising short-term borrowings/current maturities and long-term debt, was $6,876 at June 30, versus $4,575 at September 30, 2009. Total debt-to-capital rose to 43.5% from 34.8%; net debt-to-net capital rose to 27.9% from 25.7%. Interest coverage was 10.9x. The company said increased borrowing primarily funded acquisitions. Long-term debt fair value was $5,628, $511 above carrying value.
Material changes and management commentary
- Third-quarter sales rose across all segments. Climate Technologies grew 29% in sales and 64% in earnings; Industrial Automation grew 18% and 165%, respectively. Network Power sales rose 7%, largely reflecting Avocent; underlying sales declined 1%. Process Management sales rose 2% while underlying sales declined 1%. Appliance and Tools sales rose 10%.
- For the nine months, Climate Technologies had the strongest growth: sales up 22% and earnings up 93%. Process Management sales declined 4%, Industrial Automation declined 6%, while Network Power and Appliance and Tools sales rose 1% and 3%, respectively. Restructuring savings and lower restructuring expense supported earnings across segments.
- Management said industrial production and manufacturing were increasing, but residential and nonresidential construction remained weak. It expected recovery to continue gradually, with economic uncertainty and potential volatility or illiquidity in credit markets among the risks.
Outlook, transactions and unusual items
- Fiscal 2010 guidance: sales of $21.7–$21.9 billion, or 4%–5% growth; underlying sales flat to down 1%; diluted EPS of $2.60–$2.70; operating cash flow of $3.1–$3.2 billion; capital expenditures of approximately $0.5 billion; and rationalization costs of $125–$135. EPS guidance excludes any impact from the planned Chloride acquisition and potential divestitures.
- Emerson agreed to an all-cash offer for Chloride Group PLC valued at approximately £997 million ($1.5 billion). Closing was subject to an August 9, 2010 shareholder vote and regulatory approvals; the company expected completion by year-end. The June cash balance included funds for the offer.
- LANDesk, acquired with Avocent, was classified as discontinued operations; it contributed losses of $9 for the quarter and $15 year to date. Emerson expected to sell it in 2010; reported assets were approximately $0.4 billion and liabilities approximately $0.1 billion.
- The company was considering selling its appliance motors and U.S. commercial and industrial motors businesses, with combined annual sales above $800 million, but had made no final decision. Avocent and LANDesk purchase-price allocations remained preliminary.
- Rationalization charges were $101 year to date and involved approximately 2,500 position eliminations. Third-quarter foreign-currency translation reduced comprehensive income, primarily due to a stronger U.S. dollar. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improving quarterly sales and margins continue, particularly given year-to-date underlying sales declines and weak construction markets.
- Progress against full-year sales, EPS, cash-flow, capital-spending and rationalization guidance, and the assumptions excluded from EPS guidance.
- Chloride shareholder and regulatory approvals, purchase funding and closing timing; also the status and proceeds of the LANDesk and motors-business sale processes.
- Acquisition integration, preliminary purchase-price allocations, and the effect of higher borrowings and leverage on liquidity and interest coverage.
- Exposure to currency, pricing, materials costs, competitive and technological pressures, and the gradual and uncertain economic recovery.