Emerson Reports Second Quarter 2013 Results

Emerson Reports Second Quarter 2013 Results

  • Sales increased slightly to $6.0 billion, as underlying sales grew 2 percent

  • EBIT margin expansion of 20 basis points to 14.9 percent

  • Earnings per share increased 4 percent to $0.77

ST. LOUIS--(BUSINESS WIRE)-- Emerson (NYS: EMR) today announced that net sales for the second quarter ended March 31, 2013, increased 1 percent from the prior year to $6.0 billion. Underlying sales grew 2 percent as unfavorable currency translation and divestitures together deducted 1 percent, with the U.S. up 1 percent, Asia up 2 percent, and Europe down 3 percent. Sales reflected mixed results across end markets and geographies, but slow economic growth overall as business investment stalled, particularly in mature markets. EBIT margin of 14.9 percent improved 20 basis points, benefiting primarily from cost containment. Pretax margin expanded 10 basis points to 13.9 percent. Earnings per share of $0.77 increased 4 percent from the prior year.

"Economies around the world are struggling for momentum," said Chairman and Chief Executive Officer David N. Farr. "Demand slowed in the second half of the quarter as overall global business confidence deteriorated. We do not see a catalyst to economic growth over the next six to nine months. In light of the current business environment, I was pleased with our underlying growth, especially in emerging markets, which grew 6 percent. We will continue to target investment in growing regions, while remaining cautious in mature markets until the economy accelerates."


Operating cash flow increased 6 percent to $597 million, driven primarily by higher earnings. Working capital performance improved from a slow start to the year, with a 140 basis point reduction from the first quarter to 18.6 percent of sales. Capital expenditures of $120 million were lower than the prior year by $37 million, contributing to free cash flow growth of 18 percent to $477 million. Year-to-date cash generation has been strong, with operating cash flow up 29 percent and free cash flow up 51 percent compared to the prior year.

"Despite the slow economic climate, we continue to expect a record year for operating cash flow," Farr said. "With very strong cash generation through the second quarter compared to the first half of 2012, we are well positioned to achieve that target. Our priority this year remains returning at least 60 percent of operating cash flow to shareholders through dividends and share repurchases. Supporting this commitment, later today we expect the Board of Directors to approve a new program authorizing the repurchase of 70 million shares over the next several years."

Business Segment Highlights

Process Management sales grew 8 percent, as global oil and gas, chemical, and power industry investment remained solid. Underlying sales increased 9 percent with currency translation deducting 1 percent, led by 10 percent growth in the systems and solutions business. By region, 14 percent growth in Asia benefited from strong project activity in Australia; investment in the North Sea region and Russia drove 7 percent growth in Europe; and the U.S. decreased 1 percent, as higher natural gas inventories contributed to slower investment. Segment margin of 20.0 percent increased 170 basis points, as volume leverage, cost containment, and currency gains offset unfavorable mix from lower maintenance investment by customers. Growth is expected to remain stable in the near term despite difficult comparisons and moderating end markets, particularly North America.

Industrial Automation reported and underlying sales decreased 6 percent, with the U.S. down 1 percent, Europe down 15 percent, and Asia down 3 percent, as end markets for global capital goods remained under pressure. The power generating alternators and industrial motors and electrical drives businesses were particularly weak, partially offset by strength in the hermetic motors business which was driven by HVAC compressor demand. Segment margin of 15.4 percent decreased 40 basis points, as cost containment actions partially offset volume deleverage. Demand for industrial goods is expected to remain challenging in the second half of 2013, particularly in Europe.

Network Power reported and underlying sales declined 4 percent, with U.S. underlying sales down 2 percent, Asia down 6 percent, and Europe down 3 percent, as weakness in information technology and telecommunications end markets persisted. The embedded computing and power business declined at a double-digit rate, reflecting weak and volatile demand for technology equipment and mobile devices, and continued product line rationalization. Underlying sales declined slightly in the network power systems business, as global investment in data center and telecommunications infrastructure remained sluggish, especially in Europe. Segment margin declined 110 basis points to 7.5 percent, primarily driven by volume deleverage and higher other costs. Near term end market demand is expected to reflect the uncertainty and caution in the broader macroeconomic environment.

Climate Technologies reported and underlying sales grew 7 percent, as residential air conditioning markets reflected strong demand and comparisons eased. By geography, U.S. and Europe underlying sales increased 8 percent and Asia grew 4 percent. The U.S. residential air conditioning business was particularly strong with 23 percent growth, benefiting from improving residential construction and easier comparisons. Commercial air conditioning and refrigeration demand remained soft, with the transportation business particularly weak. Segment margin of 17.7 percent improved 60 basis points, as volume leverage and cost containment offset unfavorable mix from lower-margin residential growth. Industry trends suggest slower growth in the near term, with moderating residential air conditioning growth and continued soft demand in commercial air conditioning and refrigeration markets.

Commercial & Residential Solutions sales declined 4 percent, reflecting a 6 percent deduction from the Knaack business divestiture. Underlying sales grew 2 percent, benefiting from a 5 percent increase in the U.S., which was led by the residential storage business. Segment margin expanded 30 basis points to 21.3 percent, primarily due to cost reductions and the divestiture mix benefit. Modest growth is expected to continue in North America residential end markets in the near term.

Outlook

After a weaker than expected February and March, orders in April continued to trend downward, reflecting further deterioration in business confidence. There is no clear catalyst to improve global economic growth over the next six to nine months. Based on the current business environment, reported and underlying sales growth is now expected to be only 1.5 to 2.5 percent, with EBIT and pretax margin approximately equal to the prior year. Earnings per share are expected to be between $3.48 and $3.58, 5 cents lower than previous estimates and up 3 to 6 percent over last year. (Prior year comparisons exclude the impact of the goodwill impairment in 2012.)

Upcoming Investor Events

Today at 2 p.m. ET, Emerson management will discuss the second quarter results during a conference call. Interested parties may listen to the live conference call via the Internet by visiting Emerson's website at www.Emerson.com/financial and completing a brief registration form. A replay of the conference call will remain available for approximately three months.

On Monday, May 20, 2013, Emerson Chairman and Chief Executive Officer David N. Farr will speak at the Electrical Products Group Conference in Longboat Key, Florida, at 10:45 a.m. ET, and an updated outlook by segment will be provided. The presentation will be posted on Emerson's website at www.Emerson.com/financial at the time of the event and remain available for approximately three months.

Forward-Looking and Cautionary Statements

Statements in this Current Report on Form 8-K that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, protection of intellectual property, and competitive and technological factors, among others, as set forth in the Company's most recent Annual Report on Form 10-K and subsequent reports filed with the SEC.

TABLE 1

EMERSON AND SUBSIDIARIES

CONSOLIDATED OPERATING RESULTS

(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)

Quarter Ended March 31,

Percent

2012

2013

Change

Net sales

$

5,919

$

5,960

1

%

Costs and expenses:

Cost of sales

3,583

3,587

SG&A expenses

1,359

1,426

Other deductions, net

105

59

Interest expense, net

58

57

Earnings before income taxes

814

831

2

%

Income taxes

258

253

Net earnings

556

578

4

%

Less: Noncontrolling interests in earnings of subsidiaries

11

17

Net earnings common shareholders

$

545

$

561

3

%

Diluted avg. shares outstanding

736.8

725.3

Diluted earnings per common share

$

0.74

$

0.77

4

%

Quarter Ended March 31,

2012

2013

Other deductions, net

Amortization of intangibles

$

57

$

54

Rationalization of operations

31

16

Other

22

(10

)

Gains, net

(5

)

(1

)

Total

$

105

$

59

TABLE 2

EMERSON AND SUBSIDIARIES

CONSOLIDATED OPERATING RESULTS

(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)

Six Months Ended March 31,

Percent

2012

2013

Change

Net sales

$

11,228

$

11,513

3

%

Costs and expenses:

Cost of sales

6,837

6,933

SG&A expenses

2,713

2,820

Other deductions, net

195

145

Interest expense, net

116

111

Earnings before income taxes

1,367

1,504

10

%

Income taxes

430

460

Net earnings

937

1,044

11

%

Less: Noncontrolling interests in earnings of subsidiaries

21

29

Net earnings common shareholders

$

916

$

1,015

11

%

Diluted avg. shares outstanding

737.5

726.1

Diluted earnings per common share

$

1.24

$

1.39

12

%

Six Months Ended March 31,

2012

2013

Other deductions, net

Amortization of intangibles

$

115

$

113

Rationalization of operations

54

32

Other

33

1

Gains, net

(7

)

(1

)

Total

$

195

$

145

TABLE 3

EMERSON AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS, UNAUDITED)

Quarter Ended March 31,

2012

2013

Assets

Cash and equivalents

$

2,153

$

2,615

Receivables, net

4,319

4,559

Inventories

2,402

2,327

Other current assets

670

688

Total current assets

9,544

10,189

Property, plant & equipment, net

3,449

3,481

Goodwill

8,866

8,007

Other intangible assets

1,936

1,734

Other

339

313

Total assets

$

24,134

$

23,724

Liabilities and equity

Short-term borrowings and current

maturities of long-term debt

$

1,828

$

1,485

Accounts payables

2,419

2,460

Accrued expenses

2,500

2,651

Income taxes

178

48

Total current liabilities

6,925

6,644

Long-term debt

4,018

4,059

Other liabilities

2,481

2,347

Total equity

10,710

10,674

Total liabilities and equity

$

24,134

$

23,724

TABLE 4

EMERSON AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(DOLLARS IN MILLIONS, UNAUDITED)

Six Months Ended March 31,

2012

2013

Operating activities

Net earnings

$

937

$

1,044

Depreciation and amortization

406

411

Changes in operating working capital

(482

)

(399

)

Other, net

35

95

Net cash provided by operating activities

896

1,151

Investing activities

Capital expenditures

(287

)

(235

)

Purchase of businesses, net of cash and equivalents acquired

(167

)

Other, net

(43

)

(45

)

Net cash used in investing activities

(497

)

(280

)

Financing activities

Net increase in short-term borrowings

891

21

Proceeds from long-term debt

499

Principal payments on long-term debt

(249

)

(270

)

Dividends paid

(588

)

(593

)

Purchases of treasury stock

(329

)

(271

)

Other, net

(29

)

14

Net cash used in financing activities

(304

)

(600

)

Effect of exchange rate changes on cash and equivalents

6

(23

)

Increase in cash and equivalents

101

248

Beginning cash and equivalents

2,052

2,367

Ending cash and equivalents

$

2,153

$

2,615

Table 5

EMERSON AND SUBSIDIARIES

SEGMENT SALES AND EARNINGS

(DOLLARS IN MILLIONS, UNAUDITED)

Quarter Ended March 31,