Emerson Electric Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012; filed August 8, 2012. Comparisons are with the corresponding 2011 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Net sales | $6.484 billion, up 3% | $17.712 billion, essentially flat |
| Gross margin | 40.5%, versus 39.7% | 39.6%, versus 39.4% |
| Earnings before income taxes | $1.155 billion, up 16% | $2.522 billion, down 1% |
| Net earnings attributable to common stockholders | $770 million, up 13% | $1.686 billion, down 2% |
| Diluted EPS | $1.04, up 16% | $2.28, up 1% |
| Operating cash flow | Not separately presented for the quarter | $1.742 billion, down from $1.978 billion |
Quarterly operating improvement reflected higher volume and leverage, pricing, cost containment, and lower SG&A as a percentage of sales. The quarter’s effective tax rate was 32%, compared with 30%; the nine-month rates were 32% and 31%, respectively. Nine-month SG&A rose to $4.051 billion, or 22.8% of sales, from $3.989 billion, or 22.6%.
Segments and material comparisons
- Process Management: Third-quarter sales rose 19% to $2.122 billion and earnings rose 34% to $490 million; nine-month sales increased 11% and earnings 7%. Oil and gas, chemical, and power demand supported growth; the segment recovered sales delayed by Thailand flooding.
- Industrial Automation: Third-quarter sales fell 1%, while earnings rose 12%; nine-month sales were essentially flat and earnings increased 3%. Quarterly earnings benefited from a $37 million dumping-duty payment.
- Network Power: Third-quarter sales and earnings declined 6% and 7%; nine-month sales declined 7% and earnings 18%. Weak telecommunications, IT, and embedded computing demand contributed to lower volume and deleverage. Management expected sequential margin expansion to continue into the fourth quarter.
- Climate Technologies: Third-quarter sales declined 2%, with earnings up 1%; nine-month sales and earnings declined 6% and 9%, respectively. Residential air-conditioning weakness and Europe were notable drags.
- Commercial & Residential Solutions: Third-quarter sales and earnings increased 2% and 3%; nine-month sales and earnings increased 3% and 6%.
For the quarter, underlying sales grew 6% (5% volume and an estimated 1% price), while currency translation reduced sales by 3%. For the nine months, underlying sales increased 2%, offset by a 2% unfavorable currency impact. The stronger U.S. dollar also reduced comprehensive income, primarily through foreign currency translation.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $1.742 billion; capital expenditures were $428 million, producing free cash flow of $1.314 billion, down $261 million year over year. Working-capital changes used $616 million, versus $469 million in the prior-year period; management cited elevated inventory, including inventory associated with Thailand flooding.
- Cash and equivalents were $2.292 billion at June 30, 2012, up $240 million from September 30, 2011. The company paid $881 million in dividends, repurchased $527 million of treasury stock, and paid down $255 million of long-term debt during the nine months.
- Current assets were $10.003 billion and current liabilities $7.396 billion; working capital was $2.607 billion and the current ratio was 1.4 to 1. Short-term borrowings and current maturities rose to $2.060 billion from $877 million, while long-term debt declined to $3.789 billion from $4.324 billion. Total debt was therefore approximately $5.849 billion, versus $5.201 billion at September 30, 2011.
- Total debt-to-total capital increased to 35.7% from 33.3%; net debt-to-net capital rose to 25.3% from 23.2%. Management said funding needs could be met through operations, existing resources, debt capacity, and backup credit lines.
Outlook, risks, and unusual items
- Fiscal 2012 guidance: underlying sales growth of approximately 3%–4%, excluding an estimated 2% unfavorable currency effect; reported net sales growth of 1%–2%; operating profit margin of approximately 17.5%–17.8%; pretax margin of 15.0%–15.3%; diluted EPS of $3.35–$3.40; operating cash flow of $3.3–$3.4 billion; and capital expenditures of approximately $0.7 billion. Currency and slower-than-expected underlying growth prompted a downward adjustment to the prior outlook’s upper end.
- Management cited mixed macroeconomic conditions, including European financial weakness, slower Chinese growth, and a decelerating U.S. recovery. Demand and foreign-exchange movements, pricing, competition, and technology were identified as forward-looking risks.
- The company recorded $89 million of rationalization expense in the first nine months and expected approximately $125 million for full-year 2012. Actions included workforce reductions and moving or redeploying operations.
- Other deductions included a $43 million nine-month gain from dumping-duty payments, including $37 million received in the third quarter. The payments relate to duties subject to legal challenges; the filing does not establish the ultimate resolution.
- Management identified goodwill impairment assessment focus areas with more than $1 billion of goodwill, including Network Power’s embedded computing and power business and Process Management’s subsea oil and gas devices and software business. Weaker end-market demand and small prior-year fair-value cushions were noted.
- Emerson acquired Avtron Loadbank and a marine controls business for a combined $170 million; their combined 2011 sales were approximately $100 million. The company expected to complete the Knaack divestiture in the fourth quarter; its annual sales were approximately $100 million.
Most important facts for investors to verify
- Whether fiscal 2012 sales, margin, EPS, and cash-flow guidance was achieved, particularly given currency headwinds and macroeconomic uncertainty.
- Whether Network Power demand and margins recovered as management anticipated, and whether Climate Technologies weakness persisted.
- Whether working capital and cash conversion improved as Thailand-related inventory was brought back in line.
- Potential goodwill impairment exposure in the identified businesses and the outcome of the dumping-duty legal challenges.
- Execution and financial effects of rationalization actions, acquisitions, and the planned Knaack divestiture.