Emerson Electric Co. — Form 10-Q Summary
Reporting period: Fiscal 2010 first quarter, three months ended December 31, 2009; comparisons are with the three months ended December 31, 2008 unless stated otherwise. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Net sales | $5,011 | $5,415 | -7% |
| Gross profit / margin | $1,903 / 38.0% | $1,996 / 36.9% | Profit -5%; margin +1.1 points |
| SG&A / percent of sales | $1,161 / 23.2% | $1,193 / 22.1% | Expense down; sales ratio up |
| Continuing pretax earnings | $584 | $681 | -14% |
| Net earnings attributable to common stockholders | $425 | $458 | -7% |
| Diluted EPS | $0.56 | $0.60 | -7% |
| Operating cash flow / capital expenditures | $687 / $89 | $319 / $132 | Free cash flow: $598 vs. $187 |
Sales fell primarily because of lower volume: underlying sales declined 13%, partly offset by favorable currency translation of 3% and acquisitions of 3%. The gross margin improved through materials cost containment and prior cost-reduction savings, despite lower volume and unfavorable mix. The effective tax rate was 26%, versus 31%, including a $30 million capital-loss tax benefit related to a foreign-subsidiary restructuring. The company estimated a 30% full-year tax rate.
Segments
| Segment | Sales | Segment earnings | Key comparison |
|---|---|---|---|
| Process Management | $1,382 | $216 | Sales -9%; earnings -28%; margin 15.6% vs. 19.6% |
| Industrial Automation | $876 | $85 | Sales -21%; earnings -48%; margin 9.8% vs. 14.9% |
| Network Power | $1,381 | $206 | Sales -5%; earnings +35%; margin 14.9% vs. 10.4% |
| Climate Technologies | $784 | $113 | Sales +13%; earnings +108%; margin 14.5% vs. 7.9% |
| Appliance and Tools | $731 | $111 | Sales -5%; earnings +41%; margin 15.2% vs. 10.2% |
Management attributed weakness broadly to reduced capital-goods, construction, housing, and consumer spending. China and other Asian markets were comparatively strong; Climate Technologies also benefited from U.S. refrigerant-standard changes and customer inventory build. Cost reductions helped earnings in Network Power, Climate Technologies, and Appliance and Tools.
Cash, debt, and liquidity
- Cash and equivalents were $1,840 at December 31, 2009, up $280 from September 30, 2009. Operating cash flow was $687; investing used $1,352, including $1,301 for business acquisitions; financing provided $956.
- Total debt was approximately $5,798 at quarter-end ($1,240 short-term/current maturities and $4,558 long-term), versus $4,575 at September 30. Cash-adjusted debt was approximately $3,958.
- Working capital was $2,258 and the current ratio was 1.4 to 1, compared with $2,697 and 1.5 to 1 at September 30. Total debt-to-total capital was 39.7%, up from 34.8%; net debt-to-net capital was 31.0%, up from 25.7%.
- Interest coverage was 9.6 times, versus 13.4 times in the prior-year quarter, reflecting higher average borrowings and lower earnings. Emerson issued $600 of long-term notes during the quarter. Management said funding remained available, while noting potential volatility and illiquidity in credit markets.
- Cash flow more than covered dividends of $251 and capital expenditures of $89. The quarterly dividend was $0.335 per share, compared with $0.330 a year earlier.
Material developments, outlook, and risks
- Emerson acquired SSB Group for approximately $145 cash and Avocent for $1.2 billion cash. Avocent, excluding LANDesk, was assigned to Network Power; Emerson began pursuing a sale of LANDesk and expected completion in 2010. LANDesk was reported in discontinued operations, contributing $3 after tax in the quarter. Acquisition purchase-price allocations remained preliminary.
- Rationalization expense was $38 for the quarter. Management forecast fiscal 2010 costs of approximately $150–$175, including actions involving workforce reductions and facility consolidation; 800 positions were eliminated in the quarter.
- Fiscal 2010 outlook: reported sales of $20.9–$21.5 billion (flat to +3% versus 2009); underlying sales down 3%–6%; diluted EPS of $2.20–$2.40; operating cash flow of approximately $2.7–$3.0 billion; capital expenditures of $500–$550. Management expected at least another quarter of economic weakness, a gradual recovery, and slightly lower full-year operating cash flow than in 2009.
- Principal stated uncertainties include economic and currency conditions, market demand, pricing, competition, and technology. Management also noted expected working-capital needs as conditions improve. No material change in internal control over financial reporting was reported, and disclosure controls were considered effective as of quarter-end.
Important facts for investors to verify
- Whether the sales and EPS outlook is being met, especially given the forecast decline in underlying sales and continuing weakness in capital-goods markets.
- Acquisition integration, realized contribution from Avocent and SSB, final purchase-price allocations, and timing and proceeds of the LANDesk sale.
- Progress and cash costs of restructuring, and whether savings offset lower volume and higher corporate expenses.
- Debt, interest coverage, and liquidity after acquisition-related borrowing, alongside the expected increase in working-capital requirements.
- The sustainability of Climate Technologies’ strong quarter, including the effects of China stimulus, refrigerant-standard timing, and customer inventory build.