Emerson Electric Co. — Form 10-Q Summary
Business context and period. The filing covers the third quarter and first nine months of fiscal 2013, ended June 30, 2013. Emerson operates through Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $6.344 billion | $6.484 billion | $17.857 billion | $17.712 billion |
| Gross margin | 40.5% | 40.5% | 40.0% | 39.6% |
| Earnings before income taxes | $511 million | $1.155 billion | $2.015 billion | $2.522 billion |
| Net earnings attributable to common stockholders | $194 million | $770 million | $1.209 billion | $1.686 billion |
| Diluted EPS | $0.27 | $1.04 | $1.66 | $2.28 |
Q3 reported earnings included $503 million pretax ($475 million after tax) of noncash goodwill impairment and a $33 million net tax charge related primarily to anticipated repatriation of earnings. Together, these reduced EPS by $0.70. Excluding these charges, Q3 net earnings were $702 million and EPS was $0.97; nine-month net earnings were $1.717 billion and EPS was $2.36.
- Cash flow: Nine-month operating cash flow was $2.146 billion, up 23%; capital expenditures were $380 million, making free cash flow $1.766 billion. Cash dividends were $888 million and treasury-stock purchases were $573 million.
- Liquidity and debt: Cash and equivalents were $2.810 billion at June 30, up from $2.367 billion at September 30, 2012. Working capital was $3.556 billion and the current ratio was 1.5:1. Short-term borrowings/current maturities were $1.486 billion and long-term debt was $4.059 billion, totaling $5.545 billion. Total debt-to-total capital was 35.4%; net debt-to-net capital was 21.3%.
- Dividends and shares: Dividends per share were $0.41 in Q3 and $1.23 for the first nine months. The company repurchased 5.35 million shares in April–June.
Changes versus comparable periods
- Q3 sales fell 2%, with underlying sales down 1%; nine-month sales increased 1%, with underlying sales up 2%. Q3 sales were down 3% in the U.S. and flat internationally; declines in Europe and Asia were offset by growth in Latin America and Middle East/Africa.
- Q3 reported earnings fell sharply, primarily because of the impairment and tax charges. Excluding the charges, Q3 EPS declined 7% year over year. Nine-month adjusted EPS increased 4%.
- Q3 segment sales and earnings were mixed: Process Management sales rose 3% while earnings fell 4%; Industrial Automation sales fell 7% and earnings 20%; Network Power sales fell 5% and earnings 25%; Climate Technologies sales fell 2% while earnings rose 1%; Commercial & Residential Solutions sales and earnings each fell 2%.
- For the first nine months, Process Management sales and earnings rose 11% and 18%, respectively. Industrial Automation fell 7% in sales and 14% in earnings; Network Power fell 4% and 19%. Climate Technologies sales rose 2% and earnings 4%; Commercial & Residential Solutions sales fell 2% and earnings 1%.
Outlook, commentary, risks and unusual items
- Management described global investment as cautious, with weak near-term industrial-goods demand, particularly in Europe. Energy demand remained solid; residential air conditioning and refrigeration were expected to resume growth, and information technology and telecommunications markets were expected to improve near term.
- Fiscal 2013 reported and underlying sales growth were forecast at approximately 1%. EBIT and pretax margins were expected to be approximately equal to the prior year, excluding the impairment impacts specified by management. EPS was expected toward the lower end of $3.48–$3.55 excluding $0.70 of charges, or $2.78–$2.85 including charges. Operating cash flow was targeted at approximately $3.4 billion and capital expenditures at approximately $0.7 billion.
- On July 31, 2013, Emerson agreed to sell a 51% controlling interest in its embedded computing and power business. The company expected approximately $300 million in cash proceeds, to retain a noncontrolling interest, and to close in three to six months subject to regulatory approval. Emerson planned an additional $600 million of share repurchases using transaction proceeds and cash repatriation, on top of its $800–$900 million annual run rate.
- The embedded computing and power business had faced weak demand, structural industry changes and increased competition. Other risks cited include economic and currency conditions, market demand, pricing, intellectual property, competition, technology and completion of the transaction. Management said sufficient funding was available for foreseeable needs.
- Other items affecting comparability included the prior-year $37 million Q3 and $43 million year-to-date U.S. customs dumping-duty gains, higher incentive stock compensation, and higher pension expense, partly offset by cost reductions. Full-year 2013 rationalization expense was expected to be approximately $80–$85 million; $65 million had been incurred through June.
Important facts for investors to verify
- Whether the embedded computing and power sale closed on the anticipated timetable and at terms consistent with the estimated proceeds and retained interest valuation.
- Whether the goodwill impairment and related tax charge are fully reflected in reported results, and how the business’s eventual disposal affects subsequent financial statements.
- Whether fiscal 2013 sales, margin, EPS, operating cash flow and capital-expenditure targets were achieved.
- Whether weakness in Industrial Automation and Network Power, including telecommunications and industrial-goods demand, persisted, and whether the impairment review identified further goodwill risk.
- How repurchases, dividends and debt levels affected liquidity and capital structure; long-term debt’s stated fair value exceeded carrying value by $443 million at June 30, 2013.