Emerson Electric Co. — Form 10-Q summary
Reporting period: Second quarter and six months ended March 31, 2015; comparisons are with the corresponding 2014 periods. Amounts are in millions of dollars except per-share data and percentages.
Business context and results
Emerson operates five reporting segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Results faced a stronger U.S. dollar, lower oil prices, and weaker industrial spending. The quarter’s reported earnings included a substantial gain from the sale of its power transmission solutions business.
| Metric | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2015 |
|---|---|---|
| Net sales | $5,400; down 7% | $10,987; down 4% |
| Underlying sales | Essentially flat | Up 3% |
| Gross margin | 40.1%, versus 41.2% | 40.5%, versus 40.6% |
| Net earnings attributable to common stockholders | $973; up 78% | $1,498; up 48% |
| Diluted EPS | $1.42; versus $0.77 | $2.17; versus $1.42 |
| Operating cash flow | Not separately presented for the quarter | $929, down 27% |
| Free cash flow | Not separately presented for the quarter | $570, versus $869 |
Excluding the after-tax divestiture gain of $528 ($0.77 per share), second-quarter net earnings were $445, down 19%, and EPS was $0.65, down 16%. For the six months, excluding that gain, net earnings were $970, down 4%, and EPS was $1.40, down 1%. Currency translation reduced second-quarter sales by 5%; divestitures reduced them by 2%. For the six-month period, currency reduced sales by 4% and divestitures by 3%, partly offset by 3% underlying growth.
Segments and material changes
- Second quarter: Sales declined in Process Management (3%), Industrial Automation (16%), Network Power (9%), and Climate Technologies (6%); Commercial & Residential Solutions rose 1%. Segment earnings fell across all five segments. Network Power earnings declined 65%, reflecting weak telecom demand, lower volume, pricing, and mix.
- Six months: Network Power sales fell 12% and earnings 37%; Industrial Automation sales fell 8% and earnings 12%. Process Management sales were essentially flat, but earnings declined 9%. Climate Technologies sales rose 3% and earnings 1%; Commercial & Residential Solutions sales rose 2% while earnings fell 2%.
- Second-quarter gross margin fell 1.1 percentage points, with unfavorable mix, currency effects on operations, and deleverage partly offset by cost reductions. Six-month gross margin was nearly flat year over year.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $929, down $337, principally because working capital used $530 versus $273 in the prior-year period. Capital expenditures were $359 and dividends paid were $647.
- Investing activities provided $801, including $1,391 of divestiture proceeds, and included $145 for acquisitions. Financing activities used $1,415, including $1,351 of common-stock purchases and $251 of long-term debt repayments.
- At March 31, cash and equivalents were $3,256; short-term borrowings and current maturities were $3,358, and long-term debt was $3,272. Working capital was $1,574, current ratio 1.2, total debt-to-total capital 42.6%, and net debt-to-net capital 27.4%.
- Management said existing resources, operating cash generation, debt capacity, and backup credit lines were expected to meet foreseeable funding needs. The company used after-tax sale proceeds to support share repurchases.
Outlook, commentary, and unusual items
- Fiscal 2015 outlook: reported sales expected to decline 5%–7%; underlying sales growth expected at 0%–2%, with approximately 5% currency headwind and a 2% divestiture deduction. Reported EPS guidance was $4.17–$4.32, including the $0.77-per-share sale gain and an estimated $0.09-per-share impact from incremental restructuring costs.
- Management expected challenging conditions from lower oil prices, the strong dollar, and slower industrial spending, particularly in North America and China. It expected weak Process Management demand for the next 12 months and continued telecom-power weakness; Climate Technologies and Commercial & Residential Solutions anticipated modest or moderate second-half growth.
- Full-year 2015 rationalization expense was expected to exceed $140; $53 had been incurred in the first six months. Management said restructuring would align costs with minimal underlying growth and position the company for improved profit growth in 2016.
- On January 30, 2015, Emerson sold power transmission solutions for $1.4 billion and recognized a $932 pretax gain. It also completed three small acquisitions for $145 cash. Emerson began evaluating strategic alternatives, including a possible sale, for InterMetro, which had 2014 annual sales of $284.
- Other notable factors included a $732 six-month foreign-currency translation loss in other comprehensive income and increased rationalization expense. The company reported that the related patent litigation with Invensys had been resolved amicably. Management identified economic and currency conditions, demand, pricing, intellectual-property protection, competition, and technology as risks.
Important facts for investors to verify
- Whether underlying sales and margins develop in line with fiscal 2015 guidance, given currency, oil-market, and industrial-demand pressures.
- How much reported earnings and cash generation depend on the one-time divestiture gain and proceeds, versus ongoing operations.
- Whether working-capital demands ease and operating cash flow supports dividends, buybacks, acquisitions, and debt obligations.
- Progress on restructuring, its costs and savings, and the outlook for weaker segments—especially Network Power and Process Management.
- The outcome of the strategic review of InterMetro and the company’s capital-allocation plans following the power transmission sale.