Business context and reporting period
Emerson Electric Co. filed this Form 10-Q for the first quarter of fiscal 2013, the three months ended December 31, 2012, compared with the three months ended December 31, 2011. The company reported stronger results, led by Process Management; Europe remained soft, while Industrial Automation and Network Power weakened.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $5.553 billion | $5.309 billion | +5% |
| Gross profit / margin | $2.207 billion / 39.7% | $2.055 billion / 38.7% | Margin +1.0 percentage point |
| Pretax earnings | $673 million | $553 million | +22% |
| Net earnings attributable to common stockholders | $454 million | $371 million | +22% |
| Diluted EPS | $0.62 | $0.50 | +24% |
| Operating cash flow | $554 million | $334 million | +66% |
| Capital expenditures | $115 million | $130 million | — |
| Free cash flow | $439 million | $204 million | +$235 million |
Gross margin improvement reflected higher volume, operating leverage and cost savings; unfavorable product mix partly offset these benefits. SG&A was $1.394 billion, or 25.1% of sales, versus $1.354 billion, or 25.5%. The effective tax rate was 31% in both periods. Cash dividends were $0.41 per share, compared with $0.40.
Liquidity and debt
At December 31, 2012, cash and equivalents were $2.527 billion. Short-term borrowings and current maturities were $1.912 billion, and long-term debt was $3.542 billion; combined debt was $5.454 billion. Working capital was $2.883 billion and the current ratio was 1.4:1. Total debt-to-capital was 34.2%, net debt-to-net capital 21.8%, and interest coverage 12.6x. Cash increased $160 million during the quarter. Operating cash flow and $424 million of additional short-term borrowings funded capital spending, dividends, share repurchases and long-term debt payments. The company said it expects sufficient funding for foreseeable needs. The fair value of long-term debt exceeded its carrying value by $701 million.
Changes versus the prior comparable period
Underlying sales increased 6%, including a favorable comparison with the prior-year Thailand flooding supply-chain disruption. Foreign currency translation reduced sales by 0.5% ($28 million), and divestitures reduced them by 0.5% ($22 million). Sales rose 6% in the U.S. and 5% internationally; Latin America and Middle East/Africa grew strongly, while Europe declined 2%.
- Process Management: Sales rose 24% to $1.896 billion; earnings increased 75% to $333 million, with margin up to 17.6%. Growth reflected global energy investment and the favorable prior-year comparison.
- Industrial Automation: Sales fell 7% to $1.137 billion and earnings declined 10% to $164 million, reflecting weakness in capital goods markets and lower volume.
- Network Power: Sales declined 2% to $1.459 billion and earnings fell 14% to $105 million amid telecommunications and IT market weakness, deleverage and unfavorable mix.
- Climate Technologies: Sales increased 2% to $752 million and earnings were nearly flat at $101 million; air conditioning growth was partly offset by weaker refrigeration.
- Commercial & Residential Solutions: Sales decreased 1% to $453 million, while earnings were flat at $97 million. A divestiture reduced reported sales, offsetting underlying growth.
Net treasury stock purchases were $113 million, versus $244 million in the prior-year quarter. The company repurchased 2.14 million shares in November and December under its existing authorization.
Outlook, risks and unusual items
For fiscal 2013, management expected reported and underlying sales growth of 2%–5%, EBIT margin improvement of 10–20 basis points (excluding the 2012 goodwill impairment), and EPS of $3.53–$3.63. The company targeted operating cash flow of approximately $3.3–$3.4 billion and capital expenditures of approximately $0.7 billion. Management expected 70%–80% of full-year EPS improvement, excluding the impairment, in the first half, partly because of the prior-year Thailand disruption comparison.
Management cited cautious global business investment, uncertain European demand and weakness in power-generating alternators. It anticipated steadier near-term demand, supported by energy investment and improving telecommunications and residential markets. Other disclosed risks include economic and currency conditions, demand, pricing, intellectual property, competition and technology. The filing cautions that forward-looking statements are subject to risks and undertakes no obligation to update them.
Rationalization expense was $16 million for the quarter; the company expected full-year 2013 expense of approximately $70–$80 million. Actions included workforce reductions and relocating or redeploying operations. Pension and postretirement expense increased to $57 million from $45 million. The company reported $2.2 billion of foreign-currency hedge notionals and approximately 64 million pounds ($186 million) of copper and aluminum hedges; hedge ineffectiveness was immaterial. No separate material litigation contingency value is provided in the supplied filing text.
Important facts for investors to verify
- Whether forecast sales, margin, EPS and cash-flow targets were achieved, and how much growth depended on the prior-year Thailand disruption comparison.
- Whether Process Management strength can offset continued weakness in Industrial Automation, Network Power and Europe.
- Progress against the $70–$80 million rationalization estimate and the resulting cost savings, including potential execution costs.
- Cash conversion, working-capital trends, borrowing levels and capital returns, including dividends and share repurchases.
- Exposure to currency, commodity prices, demand, pricing and the other risks identified in the filing.