Emerson Electric Co. — Form 10-Q Summary
Business context and reporting period: The filing covers the quarter and six months ended March 31, 2012, Emerson’s fiscal second quarter and first half. Emerson operates through Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions.
Financial performance
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Net sales | $5.919 billion, up 1% year over year | $11.228 billion, down 1% |
| Gross margin | 39.5%, versus 39.4% | 39.1%, versus 39.2% |
| Pretax earnings | $814 million, down 2% | $1.367 billion, down 12% |
| Net earnings attributable to common stockholders | $545 million, down 2% | $916 million, down 12% |
| Diluted EPS | $0.74, versus $0.73 | $1.24, down 9% |
| Operating cash flow | Not presented for the quarter alone | $896 million, versus $1.075 billion |
| Free cash flow | Not presented for the quarter alone | $609 million, versus $867 million |
Quarterly sales growth reflected 2% underlying growth, partly offset by unfavorable currency translation. First-half underlying sales declined 0.5%; volume was down 1%, approximately offset by higher prices. Quarterly EPS benefited from share repurchases. The quarterly effective tax rate was 32%; the first-half rate was 31%.
At March 31, 2012, cash and equivalents were $2.153 billion. Current assets were $9.544 billion and current liabilities $6.925 billion, with working capital of $2.619 billion and a current ratio of 1.4 to 1. Short-term borrowings and current maturities totaled $1.828 billion; long-term debt was $4.018 billion. Total debt was therefore approximately $5.846 billion, compared with $5.201 billion at September 30, 2011. Total debt-to-total capital rose to 35.7% from 33.3%; net debt-to-net capital rose to 26.0% from 23.2%. The reported interest coverage ratio was 12.0x.
First-half cash flow included $287 million of capital expenditures, $588 million of dividends paid, $329 million of treasury stock purchases, and $249 million of long-term debt principal payments. Cash increased $101 million. Working capital changes used $482 million, including higher inventory.
Material changes and operating drivers
- Process Management: Second-quarter sales rose 13% to $1.869 billion and segment earnings rose 15% to $341 million. First-half sales increased 6%, but earnings fell 9% to $531 million, reflecting Thailand-related disruption and costs, deleverage, and higher rationalization expense.
- Industrial Automation: Second-quarter sales fell 2% and earnings fell 3%. First-half sales were flat and earnings declined 2%, amid lower volumes and unfavorable mix.
- Network Power: Second-quarter sales fell 4% and earnings fell 12%. First-half sales declined 7% and earnings 23%, reflecting weak embedded computing and power, telecommunications and IT demand, lower volumes, and higher rationalization costs.
- Climate Technologies: Second-quarter sales fell 9% and earnings 15%; first-half sales fell 9% and earnings 17%, amid weakness in residential markets, Europe, and China.
- Commercial & Residential Solutions: Second-quarter sales increased 4% and earnings 9%; first-half sales rose 3% and earnings 7%, supported by storage, professional tools, and food waste disposers.
Quarterly operating performance improved sequentially from the first quarter as demand strengthened in the U.S., Asia, and Middle East/Africa and Thailand flooding effects eased. Europe remained weak; China sales declined, though at a slower rate. For the quarter, gross margin edged up, while SG&A as a percentage of sales increased to 23.0% from 22.5%. First-half SG&A rose to 24.2% of sales from 23.0%.
Outlook, risks, and unusual items
- Fiscal 2012 guidance: underlying sales growth of 3%–5%, excluding an estimated 1% unfavorable currency impact; reported net sales growth of 2%–4% versus fiscal 2011 sales of $24.2 billion.
- Management forecast operating profit margin of approximately 17.5%–17.8% (excluding approximately 2.5% for other deductions and interest), pretax margin of 15.0%–15.3%, EPS of $3.35–$3.50, operating cash flow of $3.4–$3.5 billion, and capital expenditures of approximately $0.7 billion.
- Management expected second-half underlying growth to improve, but noted slower-than-previously-anticipated improvement in Europe, China, and HVAC, telecommunications, and IT markets. Risks cited include economic and currency conditions, market demand, pricing, competition, and technology.
- Emerson expected approximately $125 million of fiscal 2012 rationalization expense; $54 million had been incurred in the first half. Costs included workforce reductions, facility shutdowns, and moving and start-up costs.
- In March 2012, Emerson acquired Avtron Loadbank and a marine controls business for a combined $170 million; their 2011 combined annual sales were approximately $100 million. Emerson also began the process to divest Knaack, with annual sales of approximately $100 million.
- First-half SG&A included a $17 million charge related to eliminating post-65 supplemental retiree medical benefits for approximately 8,000 active employees. The filing also notes that Thailand flooding disrupted supply chains and increased inventory investment, which management expected to bring back in line by year end.
Important facts for investors to verify
- Whether the expected second-half recovery and full-year sales, margin, EPS, and cash-flow targets were achieved.
- Whether Network Power and Climate Technologies stabilized, and whether European and Chinese demand improved as forecast.
- Whether elevated inventory and working capital normalized, and operating cash flow recovered from the first-half decline.
- How debt, leverage, and interest coverage evolved after the increase in short-term borrowings.
- Final acquisition purchase-price allocations, integration results, and progress and terms of the planned Knaack divestiture.
- Actual rationalization costs and savings, and any ongoing effects of the retiree medical benefit change or Thailand supply disruption.