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Emerson Reports First Quarter 2013 Results

Emerson (NYSE: EMR) today announced that net sales for the first quarter ended December 31, 2012, increased 5 percent from the prior year to $5.6 billion. Underlying sales grew 6 percent, as currency translation and divestitures together deducted 1 percent, with the U.S. up 6 percent, Asia up 6 percent, and Europe down 2 percent. Sales reflected mixed results across end markets, and favorable comparisons from the supply chain disruption in the prior year. EBIT margin of 13.1 percent improved 160 basis points, as volume leverage and cost reduction benefits offset unfavorable product mix. Pretax margin expanded 170 basis points to 12.1 percent. Earnings per share of $0.62 improved 24 percent from the prior year.

“Results for the quarter reflected solid performance amid what remains a challenging and uncertain global economy,” said Chairman and Chief Executive Officer David N. Farr. “The pockets of growth our businesses captured were encouraging even though the level of total investment in our end markets continues to be slow. Recent order trends suggest market conditions have stabilized and may be poised for improvement, particularly in the emerging markets.”

Operating cash flow of $554 million grew 66 percent from the prior year, reflecting earnings growth and lower working capital growth. Capital expenditures of $115 million declined compared with the prior year by $15 million. Free cash flow of $439 million increased 115 percent, reflecting conversion from earnings of 97 percent.

“The growth in cash flow provided an excellent start to the year and was consistent with our expectation for strong receivables collection during the quarter,” Farr said. “As suggested by lower capital expenditures, we remain guarded with investments until economic visibility improves. At the same time, we are investing in key strategic programs to ensure we are well-positioned when global economic growth accelerates.”

Business Segment Highlights

Process Management sales increased 24 percent, as robust growth resulted from global energy investment and favorable comparisons from the supply chain disruption in the prior year. Underlying sales increased 24 percent as well, with the U.S. up 26 percent, Asia up 25 percent, and Europe up 11 percent. Large project activity remained strong, while higher-margin maintenance investments slowed, particularly in the U.S., as customers became more cautious with capital budgets. Segment margin of 17.6 percent expanded 520 basis points, primarily driven by volume leverage. Continued investment in the oil and gas, chemical, and power industries is expected to support solid end market demand in the near term.

Industrial Automation sales declined 7 percent during the quarter, as industrial investment in capital goods remained weak. Underlying sales decreased 6 percent, as currency translation deducted 1 percent, with the U.S. down 7 percent, Asia down 7 percent, and Europe down 9 percent. The electrical drives and power generating alternators and industrial motors businesses reflected the most pronounced weakness, which was partially offset by strength in the hermetic motors business driven by HVAC compressor demand. Segment margin of 14.4 percent contracted 40 basis points, primarily due to volume deleverage. In the near term, demand is expected to remain under pressure, especially in Europe and in the power generating alternators business.

Network Power sales decreased 2 percent, as telecommunications and information technology end market weakness persisted. Underlying sales also declined 2 percent, with the U.S. flat, Asia down 3 percent, and Europe down 8 percent. End market demand was mixed within the network power systems business, with strength led by the uninterruptible power supply business in North America, and weakness most severe in Europe. Sales were unchanged in the embedded computing and power business. Segment margin of 7.2 percent decreased 100 basis points, primarily due to volume deleverage and unfavorable product mix, but remains on track for solid improvement in 2013. Order trends support the expectation for improving market conditions in the near term for the network power systems business, led by increased investment in telecommunications end markets.

Climate Technologies sales grew 2 percent, reflecting growth for the first time in six quarters. Underlying sales increased 3 percent, as currency translation deducted 1 percent, with the U.S. up 1 percent, Asia up 7 percent, and Europe up 2 percent. Segment margin of 13.4 percent declined 20 basis points, as strong growth in Asia and improvement in the U.S. primarily came from lower-margin residential air conditioning end markets. Global refrigeration demand remained weak, particularly in the transportation business. Growth is expected to continue in the near term with an outlook for steady demand in residential end markets in Asia and the U.S., and potentially continued improvement in Europe.

Commercial & Residential Solutions sales declined 1 percent, reflecting a 5 percent deduction from the Knaack business divestiture. Underlying sales grew 4 percent, driven by a 7 percent increase in U.S. sales, which was supported by strong demand in residential end markets, in particular the food waste disposer business. Segment margin of 21.5 percent expanded 30 basis points, primarily driven by cost reductions and the divestiture mix benefit. Recovery in North America residential end markets is expected to continue in the near term.

Outlook

Business investment remains slow and cautious globally, particularly in Europe, but there have been indications of thawing demand in certain markets. Visibility remains challenging, but based on current market conditions, reported and underlying sales in 2013 are expected to grow 2 to 5 percent, with EBIT margin expansion of 10 to 20 basis points1. Earnings per share are expected to be between $3.53 and $3.63, with the continued expectation that 70 to 80 percent of the growth will occur in the first half of the year. Business segment forecasts for 2013 will be provided at the annual investor conference next week in Columbus, Ohio.

1 Excludes the effect of the goodwill impairment of 240 basis points in 2012. Reported pretax earnings margin is expected to expand 250 to 260 basis points.

Upcoming Investor Events

Today at 2:00 p.m. ET, Emerson management will discuss first quarter results during an investor 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 after the call.

Emerson will host its 2013 Investor Conference in Columbus, Ohio, beginning at 3:00 p.m. ET on Monday, February 11, and ending at 1:00 p.m. ET on Tuesday, February 12. Management will provide a company overview and a detailed review of Emerson Network Power, including tours of two nearby facilities. Access to a webcast of select conference material, as well as related presentation slides, will be available by visiting Emerson’s website at www.Emerson.com/financial at the time of the event. A replay of the webcast and the presentation slides will be available for approximately three months after the conference.

Forward-Looking and Cautionary Statements

Statements in this release 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 December 31,

Percent

2011

2012

Change

 
Net sales $ 5,309 $ 5,553 5 %
Costs and expenses:
Cost of sales 3,254 3,346
SG&A expenses 1,354 1,394
Other deductions, net 90 86
Interest expense, net   58     54
Earnings before income taxes 553 673 22 %
Income taxes   172     207
Net earnings 381 466 22 %

Less: Noncontrolling interests in earnings of subsidiaries

  10     12
Net earnings common stockholders $ 371   $ 454 22 %
 
Diluted avg. shares outstanding 738.3 726.9
 
Diluted earnings per common share $ 0.50   $ 0.62 24 %
 
 

Quarter Ended December 31,

2011

2012

Other deductions, net
Amortization of intangibles $ 58 $ 59
Rationalization of operations 23 16
Other 11 11
Gains, net   (2 )   -
Total $ 90   $ 86
 
 
 
 
 
 

TABLE 2

EMERSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, UNAUDITED)
       

Quarter Ended December 31,

2011

2012

Assets
Cash and equivalents $ 2,076 $ 2,527
Receivables, net 4,040 4,556
Inventories 2,317 2,308
Other current assets   642   695
Total current assets 9,075 10,086
Property, plant & equipment, net 3,415 3,503
Goodwill 8,723 8,068
Other intangible assets 1,893 1,798
Other   338   316
 
Total assets $ 23,444 $ 23,771
 
Liabilities and Equity

Short-term borrowings and current maturities of long-term debt

$ 1,578 $ 1,912
Accounts payables 2,302 2,431
Accrued expenses 2,484 2,648
Income taxes   170   212
Total current liabilities 6,534 7,203
Long-term debt 4,041 3,542
Other liabilities 2,509 2,408
Total equity   10,360   10,618
 
Total liabilities and equity $ 23,444 $ 23,771
 
 
 
 
 
 

TABLE 3

EMERSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
       

Quarter Ended December 31,

2011

2012

Operating activities
Net earnings $ 381 $ 466
Depreciation and amortization 204 206
Changes in operating working capital (293 ) (204 )
Other   42     86  
Net cash provided by operating activities   334     554  
 
Investing activities
Capital expenditures (130 ) (115 )
Other, net   (10 )   (19 )
Net cash used in investing activities   (140 )   (134 )
 
Financing activities
Net increase in short-term borrowings 666 424
Principal payments on long-term debt (250 ) (264 )
Dividends paid (294 ) (297 )
Purchases of treasury stock (244 ) (113 )
Other   (48 )   (8 )
Net cash used in financing activities   (170 )   (258 )
 

Effect of exchange rate changes on cash and equivalents

  -     (2 )
 
Increase in cash and equivalents 24 160
 
Beginning cash and equivalents   2,052     2,367  
 
Ending cash and equivalents $ 2,076   $ 2,527  
 
 
 
 
 
 

TABLE 4

EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
     

Quarter Ended December 31,

2011

2012

Sales
Process Management $ 1,527 $ 1,896
Industrial Automation 1,229 1,137
Network Power 1,495 1,459
Climate Technologies 733 752
Commercial & Residential Solutions   457     453  
5,441 5,697
Eliminations   (132 )   (144 )
Net Sales $ 5,309   $ 5,553  
 
Earnings
Process Management $ 190 $ 333
Industrial Automation 182 164
Network Power 122 105
Climate Technologies 100 101
Commercial & Residential Solutions   97     97  
691 800
Differences in accounting methods 49 50
Corporate and other (129 ) (123 )
Interest expense, net   (58 )   (54 )
Earnings before income taxes $ 553   $ 673  
 
Rationalization of operations
Process Management $ 5 $ 3
Industrial Automation 4 5
Network Power 10 4
Climate Technologies 2 1
Commercial & Residential Solutions   2     3  
$ 23   $ 16  
 
 
 
 
 
 

TABLE 5

Reconciliations of Non-GAAP Financial Measures

The following reconciles Non-GAAP measures (denoted by *) with the most directly

comparable GAAP measure (dollars in millions):

 
 
 

Q1 2012

 

Q1 2013

 

Change

Profit margin
  EBIT* $611 $727
EBIT margin* 11.5 % 13.1 % 160 bps
Interest expense, net 58   54  
Pretax earnings $553 $673
Pretax earnings margin 10.4 % 12.1 % 170 bps
 
 

2012

2013E

Change

Profit margin as % of sales
EBIT excluding impairment* 16.1 % 16.2-16.3 % 10-20 bps
Goodwill impairment (2.4 %) 0.0 % 240 bps  
EBIT* 13.7 % 16.2-16.3 % 250-260 bps
Interest expense, net (0.9 %) (0.9 %) 0 bps  
Pretax earnings 12.8 % 15.3-15.4 % 250-260 bps
 
Earnings per share
Net earnings per share $2.67 $3.53-3.63 32-36 %
Goodwill impairment $0.72   $0.00   (28-29 %)
Normalized earnings per share* $3.39 $3.53-3.63 4-7 %
 
 

Q1 2013

Cash Flow
Operating cash flow $554
Capital expenditures ($115 )
Free cash flow* $439
 
Net earnings common stockholders $454
  % of net earnings
Operating cash flow 122 %
Capital expenditures (25 %)
Free cash flow* 97 %
 
 
 

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