Emerson Electric Co. — Form 10-Q Summary
Business context and reporting period. The filing covers the fiscal second quarter and six months ended March 31, 2011, compared with the corresponding 2010 periods. Emerson reported across Process Management, Industrial Automation, Network Power, Climate Technologies, and Tools and Storage. Management described improving industrial and manufacturing conditions, while residential construction remained weak.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $5.854 billion, up 18% | $11.389 billion, up 16% |
| Underlying sales growth | 14%; 3% acquisitions and 1% currency also contributed | 12%; 4% acquisitions and a small favorable currency impact also contributed |
| Gross margin | 39.4%, versus 39.6% | 39.2%, unchanged |
| Pretax earnings from continuing operations | $833 million, up 38% | $1.546 billion, up 31% |
| Net earnings attributable to common stockholders | $556 million, versus $405 million | $1.036 billion, versus $830 million |
| Diluted EPS from continuing operations | $0.73, up 35% | $1.36, up 25% |
| Operating cash flow | Not separately reported for the quarter | $1.075 billion, down from $1.319 billion |
| Free cash flow | Not separately reported for the quarter | $867 million, down 24% |
Quarterly gross profit increased to $2.306 billion, but material costs and unfavorable product mix slightly reduced gross margin. SG&A declined to 22.5% of sales from 24.3%, reflecting volume leverage, cost savings, and lower incentive stock compensation. The quarterly effective tax rate was 32%, versus 30%; the first-half rate was 32%, versus 28%.
Segments: second quarter
| Segment | Sales | Segment earnings | Margin |
|---|---|---|---|
| Process Management | $1.653 billion, +16% | $296 million, +23% | 17.9%, versus 16.9% |
| Industrial Automation | $1.308 billion, +30% | $210 million, +61% | 16.0%, versus 12.8% |
| Network Power | $1.616 billion, +20% | $150 million, down 5% | 9.3%, versus 11.7% |
| Climate Technologies | $1.014 billion, +12% | $187 million, +15% | 18.4%, versus 17.9% |
| Tools and Storage | $455 million, +8% | $91 million, +3% | 20.1%, versus 21.0% |
Financial position and cash flows
At March 31, 2011, cash was $1.593 billion, total current assets were $8.798 billion, and current liabilities were $5.934 billion. Working capital was $2.864 billion and the current ratio was 1.5 to 1, up from 1.4 to 1 at September 30, 2010. Short-term borrowings and current maturities of long-term debt were $771 million, and long-term debt was $4.353 billion, for total reported debt of $5.124 billion. Total debt-to-total capital was 32.5%, and net debt-to-net capital was 24.9%.
First-half operating cash flow fell primarily because operating working capital used $447 million, compared with a $33 million source in the prior-year period. Cash from operations and $107 million of increased short-term borrowings funded $522 million of dividends, $208 million of capital expenditures, $186 million of business purchases, and $176 million of treasury-stock purchases. Interest coverage was 13.0x, versus 9.3x in the prior-year period. Emerson stated it expected adequate funding from operations, existing resources, debt capacity, and backup credit lines.
Changes, outlook, and risks
- Sales rose across all segments. Industrial Automation and Process Management led earnings improvement; Network Power earnings declined despite sales growth, largely due to acquisition-related amortization and costs, integration inefficiencies, mix, pricing, and higher costs.
- Fiscal 2011 guidance: sales of $24.3–$24.8 billion; underlying sales growth of 10%–13%; diluted EPS from continuing operations of $3.20–$3.30; operating cash flow of approximately $3.3–$3.5 billion; and capital expenditures of approximately $600 million. Management estimated full-year rationalization costs of $80–$100 million and an effective tax rate of approximately 31%.
- Management said material-cost pressures were expected to persist and that pricing actions were being used to mitigate them. It expected the U.S. Climate Technologies market to remain solid, while China growth was expected to slow. Management identified Japan’s natural disasters, China interest-rate increases, Middle East conflicts, the European debt crisis, and the U.S. budget deficit as potential threats to global growth.
- Unusual items included a $15 million gain from acquiring full ownership of a Process Management joint venture in India; $20 million of unfavorable foreign-currency transaction effects in Process Management for the quarter; and increased amortization and other costs associated with recent Network Power acquisitions. Full-year rationalization costs were forecast at $80–$100 million.
- The company reported effective disclosure controls as of March 31, 2011, and no material change in internal control over financial reporting during the quarter. The filing’s forward-looking statements are subject to economic, currency, market-demand, pricing, competitive, and technology risks.
Important facts for investors to verify
- Whether Network Power’s margin pressure eases as acquisition-related costs and integration actions subside, and whether pricing offsets inflation and other cost increases.
- Whether working-capital investment normalizes and cash generation meets the $3.3–$3.5 billion full-year operating cash flow target.
- Whether full-year sales and EPS guidance remains achievable given the listed geopolitical, macroeconomic, and market risks.
- How acquisitions, currency movements, and the $80–$100 million rationalization program affect reported growth, margins, and cash flow.