Business Context and Reporting Period
Company: Emerson Electric Co.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended March 31, 2003 (Fiscal Year 2003, Q2).
Business Overview: A global manufacturer of process control, industrial automation, electronics and telecommunications, HVAC, and appliance and tools products.
Key Financial Metrics
| Metric ($ millions) | Three Months Ended Mar 31, 2003 |
Six Months Ended Mar 31, 2003 |
Six Months Ended Mar 31, 2002 |
|---|---|---|---|
| Net Sales | $3,478 | $6,719 | $6,716 |
| Net Earnings | $236 | $453 | $(408) |
| Diluted EPS | $0.56 | $1.08 | $(0.97) |
| Operating Cash Flow | N/A | $681 | $690 |
| Free Cash Flow | N/A | $550 | $518 |
| Cash and Equivalents | $606 | $606 | $448 |
| Total Debt | $4,531 | $4,531 | $4,550 |
| Working Capital | $1,417 | $1,417 | $561 |
| Current Ratio | 1.4 to 1 | 1.4 to 1 | 1.1 to 1 |
Note: Total Debt calculated as Short-term borrowings ($1,045) + Long-term debt ($3,486). Prior year debt calculated as Short-term ($1,560) + Long-term ($2,990).
Material Changes vs. Prior Period
- Revenue: Net sales for the quarter increased 2% to $3,478 million. For the six-month period, sales were flat at $6,719 million compared to $6,716 million in the prior year. Underlying sales (excluding currency, acquisitions, and divestitures) decreased 2% for the quarter.
- Profitability: Net earnings for the quarter were $236 million, a 14% decrease from the prior year. This decline is largely attributed to lower gains from divestitures in the current period compared to a $93 million pre-tax gain from the ENI transaction in the prior year. Earnings before the cumulative effect of accounting changes were $236 million.
- Segment Performance:
- Process Control: Sales declined 2% due to weaker maintenance spending and delayed projects.
- Industrial Automation: Sales increased 8%, driven by currency impacts; underlying sales were flat.
- Electronics & Telecommunications: Sales decreased 6% due to declines in most regions except Asia.
- HVAC: Sales increased 8% driven by market growth and penetration gains.
- Appliance & Tools: Sales increased 3%.
- Cost Structure: Cost of sales as a percentage of net sales remained stable at 65.1% for the quarter and 64.9% for the six months. Selling, general, and administrative expenses decreased slightly as a percentage of sales (21.1% vs 21.2% for the quarter).
- Balance Sheet: Working capital improved significantly to $1,417 million from $561 million at the prior fiscal year-end, aided by long-term debt issuances. Cash and equivalents increased by $225 million.
Outlook, Risks, and Unusual Items
- Accounting Changes: The company adopted FAS 123 (fair value method for stock options) effective October 1, 2002. The impact on EPS for the current quarter was approximately one cent. The prior year results included a cumulative effect of a change in accounting principle (FAS 142) related to goodwill impairment, which is not present in the current period.
- Divestitures and Impairments:
- The company is evaluating strategies for its Emerson Telecommunication Products (Jordan) business, which had a $647 million goodwill impairment in 2002. A plan to divest a portion of this business was approved in May 2003.
- A loss is reasonably possible on the sale of Dura-Line (fiber-optic conduit business), and an appraisal is underway to determine potential impairment of the remaining business.
- The company expects to realize income tax benefits of $200 million to $275 million from the divestiture of the Jordan business.
- Strategic Shifts: Emerson decided to discontinue manufacturing bench top and stationary woodworking power tools and will license the RIDGID brand to fulfill Home Depot requirements, while remaining a manufacturer of wet/dry vacuums and hand tools.
- Pension Obligations: As of March 31, 2003, the accumulated benefit obligation for defined benefit pension plans exceeded plan assets by $325 million. Management estimates a potential charge to stockholders' equity of approximately $900 million ($600 million after-tax) if equity market trends continue.
- Liquidity: The company maintains a strong financial position with an interest coverage ratio of 6.4 times for the six months ended March 31, 2003. Free cash flow increased 6% year-over-year to $550 million.
Investor Verification Checklist
- Divestiture Impact: Verify the final terms and financial impact of the planned divestiture of the Emerson Telecommunication Products (Jordan) business and the Dura-Line sale.
- Pension Liability: Monitor the status of the defined benefit pension plans and the potential $600 million after-tax charge to equity if market conditions do not improve.
- Underlying Sales Trends: Assess the sustainability of the 2% decline in underlying sales, particularly in the Process Control and Electronics segments, amidst global economic conditions.
- Goodwill Impairment: Review the results of the appraisal for the remaining Jordan business to determine if further impairment charges are necessary.
- Currency Sensitivity: Evaluate the impact of favorable currency fluctuations (4 percentage points for the quarter) on reported sales and the risk of reversal in future periods.