Business Context and Reporting Period
Company: Emerson Electric Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009 (Second Quarter of Fiscal 2009)
Business Overview: Emerson is a global technology and engineering company operating through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The reporting period was characterized by a significant global economic downturn, resulting in declines in business investment, consumer spending, and construction, which adversely impacted sales and earnings across most segments.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2009 |
|---|---|---|
| Net Sales | $5,087 | $10,502 |
| Gross Profit | $1,837 | $3,833 |
| Gross Margin | 36.1% | 36.5% |
| Net Earnings | $373 | $831 |
| Diluted EPS (Continuing Ops) | $0.49 | $1.09 |
| Operating Cash Flow | N/A | $818 |
| Free Cash Flow | N/A | $546 |
| Cash and Equivalents (Ending) | $1,507 | $1,507 |
| Total Debt (Short-term + Long-term) | $5,418 | $5,418 |
| Working Capital | $2,185 | $2,185 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales for the three months ended March 31, 2009, decreased 16% ($936 million) compared to the prior year. For the six-month period, sales decreased 9% ($1,041 million). This was driven by an 11% decline in underlying sales (excluding acquisitions and currency) and a 5% unfavorable impact from foreign currency translation due to a stronger U.S. dollar.
- Earnings Compression: Net earnings for the quarter dropped 32% to $373 million. Earnings from continuing operations before taxes fell 37% to $547 million. The six-month net earnings decreased 25% to $831 million.
- Margin Pressure: Gross profit margins declined from 37.2% to 36.1% in the quarter, primarily due to deleverage on lower sales volume, unfavorable product mix, and lower commodity hedging gains. SG&A expenses as a percentage of sales increased to 22.0% from 20.8% due to volume deleverage.
- Increased Rationalization Costs: "Other deductions, net" increased significantly to $121 million for the quarter (from $67 million) and $212 million for the six months (from $70 million). This was primarily due to higher rationalization expenses ($64 million for the quarter; $107 million for six months) related to operational restructuring and facility consolidations.
- Balance Sheet: Total assets decreased to $19.99 billion from $21.04 billion. Stockholders' equity declined to $8.21 billion, largely due to a $573 million decrease in accumulated other comprehensive income driven by foreign currency translation losses.
Guidance, Outlook, and Risks
- 2009 Sales Forecast: Management forecasts full-year 2009 sales in the range of $21.0 billion to $21.7 billion, representing a decline of 13% to 15% compared to 2008. Underlying sales growth is expected to be negative 9% to negative 11%.
- 2009 EPS Forecast: Earnings per share for fiscal 2009 are forecast in the range of $2.40 to $2.60.
- Expense Outlook: Rationalization of operations expense is estimated at $200 million to $250 million for the full fiscal year 2009. Operating cash flow is estimated at $3.1 billion to $3.3 billion.
- Acquisitions: The company completed acquisitions of Roxar ASA ($190 million cash + debt), Trident Power ($125 million cash), and System Plast ($200 million cash) during the period, which are expected to contribute to future growth.
- Risks and Contingencies:
- Economic Conditions: Continued weakness in GDP, business investment, and consumer spending poses a significant risk to demand.
- Currency: A strong U.S. dollar continues to negatively impact reported sales and earnings.
- Pension Funding: The company estimates a $1 billion deficit in its pension plans as of March 31, 2009, and anticipates contributions of approximately $300 million for fiscal 2009.
- Credit Markets: While the company maintains a strong financial position, further deterioration in credit markets could adversely affect customers, suppliers, and financing availability.
Key Facts for Investor Verification
- Underlying Sales Trend: Verify the sustainability of the 11% decline in underlying sales and whether the geographic growth in Asia and Canada can offset continued weakness in the U.S. and Europe.
- Rationalization Execution: Monitor the execution of the $200-$250 million rationalization plan to ensure cost savings materialize as projected to offset volume declines.
- Pension Liability Impact: Assess the impact of the estimated $1 billion pension deficit on future cash flows and the potential for increased pension expense in fiscal 2010 under FAS 158.
- Acquisition Integration: Evaluate the integration progress and financial contribution of recent acquisitions (Roxar, Trident, System Plast) to the respective segments.
- Debt Structure: Review the company's debt maturity profile and interest coverage ratio (12.1x for the six months) in the context of tightening credit markets.