Emerson Electric Co. — Fiscal 2011 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2010; comparisons are with the three months ended December 31, 2009 unless noted. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial results
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $5,535 | $4,828 | +15% |
| Gross profit / margin | $2,163 / 39.1% | $1,868 / 38.7% | Margin +0.4 percentage points |
| Continuing-operations pretax earnings | $713 | $577 | +24% |
| Continuing-operations earnings attributable to common stockholders | $480 | $417 | +15% |
| Net earnings attributable to common stockholders | $480 | $425 | +13% |
| Diluted EPS, continuing operations / net earnings | $0.63 / $0.63 | $0.55 / $0.56 | +15% / +13% |
| Operating cash flow | $322 | $687 | Down $365 |
| Free cash flow | $240 | $598 | Down 60% |
Net sales increased 11% from underlying growth, 5% from acquisitions, and were reduced 1% by currency translation. Underlying sales rose 10% in the United States and 11% internationally. SG&A was $1,311 million, or 23.7% of sales, versus $1,134 million, or 23.5%. The effective tax rate was 31%, compared with 26%; the prior-year rate benefited from a $30 million tax benefit related to a foreign subsidiary restructuring. The quarterly dividend per share increased to $0.345 from $0.335.
Segment performance
| Segment | Sales change | Earnings change | Reported margin |
|---|---|---|---|
| Process Management | +12% to $1,542 | +34% to $290 | 18.8%, up from 15.6% |
| Industrial Automation | +23% to $1,210 | +70% to $185 | 15.3%, up from 11.1% |
| Network Power | +21% to $1,669 | −12% to $182 | 10.9%, down from 14.9% |
| Climate Technologies | +3% to $810 | +9% to $123 | 15.2%, up from 14.5% |
| Tools and Storage | +3% to $446 | +14% to $93 | 20.8%, up from 18.7% |
Financial position and cash flow
At December 31, 2010, cash and equivalents were $1,493 million; short-term borrowings and current maturities were $800 million, and long-term debt was $4,352 million. Total debt was therefore $5,152 million. Current assets were $8,305 million and current liabilities $5,600 million; working capital was $2,705 million and the current ratio was 1.5 to 1. Total debt-to-total capital was 33.6%, net debt-to-net capital 26.5%, and interest coverage 11.8 times.
Operating cash flow fell primarily because operating working capital used $430 million, versus a $15 million source in the prior-year quarter. Management said working capital reinvestment supports the recovery in growth and expects efficiency to improve during the year. Operating cash flow plus a $116 million increase in short-term borrowings funded dividends of $261 million, capital expenditures of $82 million, and treasury-stock purchases of $51 million. Cash ended the quarter $99 million lower than at September 30, 2010.
In December, Emerson entered a $2.75 billion four-year unsecured revolving backup credit facility, replacing a $2.83 billion facility. It has no financial covenants and had not been drawn on. Management stated that funding should be sufficient for foreseeable needs.
Material changes, outlook, and risks
- Management attributed improved results to stronger sales, volume leverage, acquisitions, and savings from earlier cost-reduction actions. All segments had higher sales, but Network Power earnings declined despite acquisition-driven sales growth. Its margins were affected by $25 million of additional acquisition-related amortization, $15 million of other Chloride-related costs, pricing pressure, material costs, shipment-expediting costs, and investment in data-center technologies. The filing said the other Chloride-related costs should be essentially eliminated by the second half of FY2011.
- FY2010 discontinued operations included $8 million of earnings from the divested Motors and LANDesk businesses; FY2011 reported no discontinued-operations earnings. The Motors businesses were reclassified as discontinued operations following their sale in the fourth quarter of 2010.
- Other deductions declined to $78 million from $92 million, mainly on lower rationalization and acquisition-related expenses and prior-year foreign-exchange losses, partly offset by higher acquired-intangible amortization. Rationalization expense was $17 million for the quarter; management forecast approximately $80–$100 million for FY2011.
- Management forecast FY2011 sales of $24–$24.5 billion, growth of 14–17%; underlying sales growth of 10–13%; diluted EPS of $3.15–$3.30; operating cash flow of approximately $3.3–$3.5 billion; and capital expenditures of approximately $600 million. The forecast assumed estimated favorable contributions of 3% from completed acquisitions and 1% from currency at then-current exchange rates.
- Management cited improving industrial production and manufacturing activity, while residential and nonresidential construction remained weak. Risks identified include economic and currency conditions, market demand, pricing, competition, and technology factors. Climate Technologies reported U.S. air-conditioning weakness, and Tools and Storage noted continued weakness in U.S. residential construction.
- The company prospectively adopted updated multiple-deliverable revenue-recognition guidance effective October 1, 2010; management said the impact was inconsequential. Management reported disclosure controls were effective as of December 31, 2010 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow and free cash flow recover as management expects, given the quarter’s working-capital outflow.
- Whether Network Power margins improve as acquisition-related costs ease, and how pricing and material-cost pressures develop.
- Whether FY2011 sales, EPS, cash-flow, capital-spending, and rationalization forecasts are achieved, including the assumed acquisition and currency contributions.
- How comparable performance is affected by the Motors and LANDesk divestitures and the prior-year tax benefit.
- Whether the company’s debt, liquidity, and capital-allocation position remain consistent with management’s stated funding expectations.