Emerson Electric Co. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013, compared with the three months ended December 31, 2012. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and results
Emerson reported sales of $5.606 billion, up 1%. Underlying sales rose 3%, while the divestiture of a controlling interest in embedded computing and power reduced reported comparisons by 3%; acquisitions added 1%, and currency translation reduced sales by about $11 million. Management cited slightly improving but uncertain economic conditions, with strong sales growth in Asia and the Middle East/Africa.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $5.606 billion | $5.553 billion | +1% |
| Gross profit margin | 39.9% | 39.7% | +0.2 percentage points |
| SG&A as % of sales | 25.8% | 25.1% | +0.7 percentage points |
| Earnings before income taxes | $643 million | $673 million | -4% |
| Net earnings attributable to common stockholders | $462 million | $454 million | +2% |
| Diluted EPS | $0.65 | $0.62 | +5% |
| Cash dividends per common share | $0.43 | $0.41 | +5% |
Cash flow, liquidity and debt
- Operating cash flow was $691 million, up $52 million year over year. Capital expenditures were $236 million; management-defined free cash flow was $455 million, versus $439 million.
- Cash and equivalents were $2.737 billion at December 31, down $538 million from September 30. Investing activities used $555 million, including $576 million for acquisitions, partly offset by $268 million of divestiture proceeds. Financing activities used $675 million, including $390 million of share repurchases and $304 million of dividends.
- Total debt was approximately $5.792 billion, up $150 million from September 30. Total debt-to-total capital was 35.0% (34.8% at September 30); net debt-to-net capital was 22.1% (18.3%). Current ratio remained 1.4; working capital was $2.891 billion, down from $3.374 billion.
- Interest coverage was 11.6x, compared with 12.6x in the year-ago quarter; management attributed the decline primarily to lower pretax earnings. Management said existing resources, borrowing capacity and credit lines should be sufficient for foreseeable needs.
Segments and material changes
| Segment | Sales change | Earnings change | Reported context |
|---|---|---|---|
| Process Management | +8% to $2.041 billion | +12% to $373 million | Higher volume and acquisitions; margin rose to 18.3% from 17.6%. |
| Industrial Automation | +1% to $1.149 billion | -1% to $162 million | Flat underlying sales; margin declined to 14.1% from 14.4%, reflecting mix and warranty costs. |
| Network Power | -11% to $1.303 billion | -21% to $83 million | Divestiture reduced sales; underlying sales grew 2%. Prior-year research credit and divested-business earnings also affected comparison. |
| Climate Technologies | +5% to $786 million | +6% to $107 million | Margin increased to 13.6% from 13.4%. |
| Commercial & Residential Solutions | +3% to $466 million | +2% to $100 million | Margin was 21.4%, versus 21.5%. |
Pretax earnings fell $30 million despite higher sales. The effective tax rate declined to 26% from 31%, benefiting by approximately five percentage points from certain items, including the embedded computing and power divestiture and an equity-investment item. Management estimated a full-year fiscal 2014 tax rate of approximately 31%. SG&A increased by $50 million, including a $22 million comparative effect from an accelerated charitable contribution; corporate and other costs also included a $30 million pretax contribution of an equity investment, with all fiscal 2014 contributions accelerated into the quarter.
Outlook, transactions and risks
- For fiscal 2014, management forecast underlying sales growth of 3% to 5%, excluding the stated net 4% impact from completed acquisitions and the embedded computing and power divestiture; reported sales were expected to change -1% to +1%. Margin was expected to improve approximately 0.5 percentage points, with portfolio and volume benefits partly offset by accelerated strategic investment.
- Management expected EPS to increase 4% to 7% excluding an approximate 30% impact from impairment and repatriation charges, or 33% to 38% on a reported basis. These are forward-looking estimates, not guarantees.
- Fiscal 2014 rationalization expense was expected to be approximately $80 million to $90 million; $13 million was recorded in the quarter. First-quarter actions largely involved shifting resources to higher-growth regions and serving local markets.
- Emerson completed the sale of a 51% controlling interest in its embedded computing and power business for $268 million net proceeds and retained an interest valued at approximately $60 million. There was no pretax gain or loss; a $12 million tax benefit was recognized.
- Quarterly acquisitions included Virgo and Enardo, acquired for $506 million net of cash, with $76 million of debt assumed, plus two smaller businesses acquired for approximately $70 million net. In January 2014, Emerson acquired the remaining 44.5% of EGS Electrical Group for $574 million; the transaction was expected to eliminate the noncontrolling interest’s share of future earnings and distributions.
- A patent-infringement suit brought by Invensys concerning Micro Motion flowmeters seeks unspecified damages and an injunction. Emerson said it believed the claims were without merit and intended to defend the case; the potential financial impact could not yet be assessed.
- Cash flow reporting was revised to record capital expenditures when paid rather than when equipment was received. The first-quarter 2013 comparative was adjusted by $85 million; management said the revision was not material and did not affect full-year 2013 operating or investing cash flow.
- Management identified economic and currency conditions, market demand, pricing, intellectual property, competition and technology among forward-looking risks. Disclosure controls were deemed effective at quarter-end; no material change in internal control over financial reporting was reported.
Investor verification points
- Reconcile underlying versus reported sales growth, especially the effects of the divestiture, acquisitions and segment mix.
- Assess whether margin improvement and EPS growth are sustainable given higher SG&A, lower pretax earnings, tax benefits and one-time corporate items.
- Track acquisition integration, purchase accounting, goodwill and intangible valuations, and the results of the subsequent EGS buyout.
- Monitor cash conversion, working capital, debt and repurchases, as cash declined while acquisitions and shareholder returns were funded.
- Evaluate delivery against fiscal 2014 sales, margin, tax-rate, rationalization and EPS outlook, including the stated impairment and repatriation-charge effects.
- Follow the Invensys litigation and any developments that could clarify potential exposure.