Emerson Electric Co. — Form 10-Q Summary
Business context and reporting period. This filing covers the first quarter of fiscal 2015, the three months ended December 31, 2014, and compares results with the same quarter of 2013. Emerson operates through Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $5.587 billion | $5.606 billion |
| Gross profit / margin | $2.280 billion / 40.8% | $2.236 billion / 39.9% |
| Earnings before income taxes | $765 million | $643 million |
| Net earnings attributable to common stockholders | $525 million | $462 million |
| Diluted EPS | $0.75 | $0.65 |
| Operating cash flow | $571 million | $691 million |
| Capital expenditures / free cash flow | $207 million / $364 million | $236 million / $455 million |
Reported sales were essentially flat. Underlying sales grew 6%, while currency translation reduced sales by 3% and prior-year divestitures by 3%; acquisitions added $6 million. Gross margin improved 0.9 percentage points. The effective tax rate was 31%, versus 26% a year earlier; the prior-year rate benefited from certain items, including the Artesyn divestiture and disposal of an equity investment. Net earnings rose 14% and diluted EPS rose 15%, supported in part by lower noncontrolling interests and share repurchases.
Operating cash flow declined 17%, primarily because of higher working-capital investment. Cash dividends paid were $326 million and common-stock purchases were $509 million. Cash and equivalents were $3.122 billion at quarter-end.
Liquidity, debt, and balance sheet
At December 31, 2014, total assets were $23.724 billion and working capital was $1.606 billion, down from $2.413 billion at September 30, 2014. The current ratio was 1.2, versus 1.3. Short-term borrowings and current maturities of long-term debt were $3.484 billion, and long-term debt was $3.289 billion, for total reported debt of $6.773 billion. Total debt-to-total capital was 41.6%, up from 37.3%; net debt-to-net capital was 27.7%, up from 22.1%. Management said it expects funding needs to be met through operations, existing resources, debt capacity, or credit lines.
Foreign-currency translation produced a $305 million other comprehensive loss for the quarter, contributing to a $300 million decline in common stockholders’ equity to $9.513 billion.
Segment results and material changes
| Segment | Sales | Segment earnings | Year-over-year change in sales |
|---|---|---|---|
| Process Management | $2.099 billion | $392 million | Up 3% |
| Industrial Automation | $1.152 billion | $164 million | Essentially flat |
| Network Power | $1.119 billion | $79 million | Down 14% |
| Climate Technologies | $900 million | $126 million | Up 15% |
| Commercial & Residential Solutions | $480 million | $103 million | Up 3% |
Climate Technologies benefited from strong U.S. air-conditioning demand ahead of regulatory changes. Process Management grew on energy and chemical end-market volume. Network Power sales reflected prior-year divestitures, which reduced the comparison by $164 million; underlying sales rose 1%. Industrial Automation faced mixed regional conditions and foreign-exchange pressure.
Emerson completed three acquisitions during the quarter for $143 million net of cash acquired; their combined annualized sales were approximately $32 million. On January 30, 2015, after quarter-end, it completed the sale of its power transmission solutions business for approximately $1.4 billion. The business had fiscal 2014 sales of $605 million and pretax earnings of $87 million. Emerson expected after-tax proceeds of about $1 billion to fund share repurchases and estimated an after-tax gain of approximately $520 million, or $0.75 per share.
Outlook, risks, and contingencies
For fiscal 2015, management expected underlying sales growth of 3%–5%, currency-related sales reductions of 4%–5%, and a further 2% reduction from the power transmission divestiture, implying reported sales down 1%–4%. Reported EPS guidance was $4.50–$4.60, including the estimated $0.75-per-share divestiture gain and $0.05 per share of accelerated restructuring costs. Full-year rationalization expense was expected to be approximately $100 million. Management expected share repurchases to exceed $2 billion in 2015, including use of the divestiture proceeds.
Management cited uncertainty from the stronger U.S. dollar, lower oil prices, and weakness in Europe and certain emerging markets. Lower oil prices could pressure process-industry demand and upstream-related capital spending. Near-term conditions were expected to remain mixed across several segments. A patent-infringement suit brought by Invensys sought $182 million in damages and injunctive relief; Emerson disputed the claims, and management said it was too early to assess the potential financial impact. The company also disclosed that counterparties could require collateral if specified credit-rating thresholds were breached; no collateral was posted or held at quarter-end, and the maximum amount that could have been required was $49 million.
Management reported that disclosure controls were effective at period-end and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether underlying sales growth and segment demand persist amid currency headwinds, lower oil prices, and uneven regional markets.
- The final sale accounting, after-tax gain, and use of proceeds from the power transmission solutions divestiture.
- Progress against fiscal 2015 sales and EPS guidance, including the impact of restructuring costs and the estimated tax rate of approximately 33%.
- Whether working-capital investment and cash generation improve, given the year-over-year decline in operating and free cash flow.
- Developments in the Invensys patent litigation and any resulting financial exposure.