Emerson - 10-Q quarterly report FY

 

 

 

 

 

 

OR

 

 

For the transition period from ____________________ to __________________

 

Commission file number 1-278

 

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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FORM 10-Q

 

 

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2007 AND 2008

(Dollars in millions, except per share amounts; unaudited)

 

See accompanying Notes to Consolidated Financial Statements.

 

 

FORM 10-Q

 

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts; unaudited)

 

See accompanying Notes to Consolidated Financial Statements. 

 

 

FORM 10-Q

 

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2007 AND 2008

(Dollars in millions; unaudited)

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s results for the second quarter and first six months of fiscal 2008 were strong, with earnings increasing for all five business segments and sales increasing for four of the five business segments over the prior year periods. The Network Power, Process Management and Industrial Automation businesses had strong performances and drove gains as international gross fixed investment expanded during the first six months of fiscal 2008. Strong growth in Asia, Latin America and Middle East/Africa, favorable foreign currency translation and acquisitions contributed to the second quarter and first six months’ results. Profit margins remained at high levels, primarily due to leverage on increased sales volume and benefits from previous rationalization actions. Emerson's financial position remains strong and the Company continues to generate substantial cash flow.

 

 

Net sales for the quarter ended March 31, 2008 were $6,023 million, an increase of $629 million, or 12 percent, over net sales of $5,394 million for the quarter ended March 31, 2007, with international sales aiding the overall growth. The consolidated results reflect increases in four of the five business segments, with a 6 percent ($306 million) increase in underlying sales (which exclude acquisitions, divestitures and foreign currency translation), a 4 percent ($211 million) favorable impact from foreign currency translation and a 2 percent ($112 million) favorable impact from acquisitions, net of divestitures. The underlying sales increase for the second quarter reflects 10 percent growth in total international sales, while growth in the United States increased 1 percent. The international sales growth was led by increases in Asia (18 percent), Latin America (18 percent), Middle East/Africa (19 percent) and Europe (2 percent). The Company estimates that the underlying sales growth primarily reflects an approximate 3 percent gain from volume, an estimated 2 percent impact from penetration gains and an approximate 1 percent increase from higher sales prices.

 

Costs of sales for the second quarters of fiscal 2008 and 2007 were $3,781 million and $3,455 million, respectively. Cost of sales as a percent of net sales was 62.8 percent in the second quarter of 2008, compared with 64.1 percent in the second quarter of 2007. Gross profit was $2,242 million and $1,939 million for the second quarters ended March 31, 2008 and 2007, respectively, resulting in gross profit margins of 37.2 percent and 35.9 percent. The increase in the gross profit margin during the second quarter primarily reflects leverage on the higher sales volume, savings from cost reduction efforts and commodity hedging gains. Higher sales prices were offset by higher material costs and wages.

 

 

 

Selling, general and administrative (SG&A) expenses for the second quarter of 2008 were $1,252 million, or 20.8 percent of net sales, compared with $1,109 million, or 20.5 percent of net sales, for the second quarter of 2007. The increase of $143 million was largely due to the increase in variable costs on higher sales and acquisitions. The increase in SG&A as a percent of sales was primarily the result of acquisition costs.

 

 

Earnings from continuing operations before income taxes for the second quarter of 2008 increased $139 million, or 19 percent, to $872 million, compared to $733 million for the second quarter of 2007. The earnings results primarily reflect increases of $47 million in the Process Management, $41 million in the Network Power and $20 million in the Industrial Automation business segments.

 

Income taxes were $274 million and $240 million for the three months ended March 31, 2008 and 2007, respectively. The effective tax rate was 31 percent in the second quarter of 2008 compared with 33 percent in the prior year period. The effective tax rate for the entire fiscal year 2008 is expected to be approximately 32 percent.

 

Earnings from continuing operations were $598 million and earnings per share from continuing operations were $0.75 for the three months ended March 31, 2008, increases of 21 percent and 23 percent, respectively, compared with $493 million and $0.61 for the three months ended March 31, 2007.

 

Net earnings were $547 million and earnings per share were $0.69 for the three months ended March 31, 2008, increases of 11 percent and 13 percent, respectively, compared with $494 million and $0.61 for the three months ended March 31, 2007. Earnings for the second quarter of fiscal 2008 included a loss from discontinued operations of $51 million, or $0.06 per share, related to the write-down of the European appliance motor and pump business. The 13 percent increase in earnings per share also reflects the purchase of treasury shares.

 

 

 

Process Management sales were $1,597 million in the second quarter of fiscal 2008, an increase of 19 percent over the prior year period. All of the businesses in this segment reported higher sales, with sales particularly strong for the systems, measurement and valves businesses, reflecting continued worldwide demand in the energy and power markets. Underlying sales increased approximately 16 percent, reflecting 11 percent from volume, approximately 4 percent from penetration gains and less than 1 percent from higher sales prices. Favorable foreign currency translation added 5 percent ($63 million) and the Brooks divestiture, net of an acquisition, had an unfavorable impact of 2 percent ($17 million). The underlying sales increase reflects growth in the United States (13 percent), Asia (20 percent), Europe (12 percent), Latin America (33 percent) and Middle East/Africa (15 percent). Second quarter earnings (defined as earnings before interest and taxes for the business segments discussion) increased 20 percent to $286 million from $239 million in the prior year period, reflecting higher sales volume. The margin increase reflects leverage on the higher volume which was partially offset by negative product mix. The increase in sales prices was more than offset by higher wage costs.

 

 

 

Sales grew 11 percent to $1,176 million in the Industrial Automation segment for the three months ended March 31, 2008, reflecting sales growth in all of the businesses and in nearly all of the major geographic regions. Second quarter results were driven by particular strength in the power generating alternator, fluid automation, electronic drives and industrial equipment businesses. Second quarter underlying sales grew 5 percent, reflecting global industrial demand, and included the benefit of an estimated 1 percent positive impact from price. Foreign currency translation had a 6 percent ($66 million) favorable impact. The underlying sales increase reflects growth in nearly all of the major geographic regions, including 4 percent in the United States and 5 percent internationally. The international sales growth was led by a 16 percent increase in Asia, particularly in the fluid automation business. Earnings increased 13 percent over the prior year period to $171 million, reflecting the higher sales volume and related leverage and foreign currency translation, partially offset by negative product mix. Higher sales prices were partially offset by higher material and wage costs.

 

Network Power sales increased 27 percent to $1,520 million during the second quarter of 2008 compared to the prior year period, reflecting continued strength in the telecommunications, precision cooling and power systems businesses and acquisitions. The sales increase reflects an underlying sales growth of 11 percent, a 12 percent ($149 million) increase from the Embedded Communications Computing (ECC) and Stratos acquisitions and a 4 percent ($44 million) favorable impact from foreign currency translation. The underlying sales growth of 11 percent reflects higher volume of 7 percent and a net 4 percent from penetration gains and a slight decrease in sales prices. Geographically, the underlying sales increase reflects growth in the United States (10 percent), Asia (22 percent) and Latin America (12 percent), while sales in Europe decreased 1 percent. The growth in the United States reflects substantial customer investment in data room construction and non-residential computer equipment as well as the telecommunications power market. Weakness in Europe reflects slower demand, some embedded power products share loss and customers shifting production to Asia. The Company’s market penetration gains in China and other Asian markets continued. Earnings of $187 million increased $41 million, or 28 percent, from the prior year period. The margin was flat as the higher sales volume and savings from cost reduction actions were offset by higher wage costs, lower sales prices, and a more than 1 percentage point dilutive impact from acquisitions.

 

 

 

 

 

The Appliance and Tools segment sales decreased 6 percent to $956 million in the second quarter of 2008. The sales decrease represents a 6 percent decline in underlying sales, a 1 percent ($15 million) unfavorable contribution from divestitures and a 1 percent ($12 million) favorable impact from foreign currency translation. All of the businesses were down for the second quarter, except for the professional tools and hermetic motors businesses. The growth in the professional tools business was driven by demand in the U.S. non-residential markets and in Europe, including new technology products. The declines in the storage and appliance-related businesses primarily reflect the continued downturn in the U.S. residential market. The underlying sales decrease of 6 percent reflects an estimated 9 percent decline in volume and a 3 percent positive impact from price. Total international underlying sales increased approximately 9 percent during the quarter, while underlying sales in the U.S. decreased 8 percent. Earnings increased to $139 million for the second quarter. Earnings reflect savings from restructuring actions in 2007 across the segment and hedging gains, partially offset by the lower volume. Higher sale prices were substantially offset by higher material and wage costs. The 2007 sale of the hand tools product line also favorably impacted the margin.

 

 

 

Costs of sales for the first six months of fiscal 2008 and 2007 were $7,291 million and $6,609 million, respectively. Cost of sales as a percent of net sales was 63.2 percent in the first half of 2008, compared with 64.0 percent in the prior year period. Gross profit was $4,252 million and $3,722 million for the six months ended March 31, 2008 and 2007, respectively, resulting in gross profit margins of 36.8 percent and 36.0 percent. The increase in the gross profit margin during the first half of 2008 primarily reflects leverage on higher sales volume and benefits realized from productivity improvements, which were partially offset by negative product mix. Higher sales prices were offset by higher raw material and wage costs. The increase in the gross profit amount primarily reflects higher sales volume and foreign currency translation.

 

Selling, general and administrative expenses for the six months ended March 31, 2008 were $2,436 million, or 21.1 percent of net sales, compared with $2,180 million, or 21.1 percent of net sales, for the six months ended March 31, 2007. The increase of $256 million was largely due to the increase in variable costs on higher sales.

 

Other deductions, net were $70 million for the first half of fiscal 2008, a $13 million increase from the $57 million for the same period in the prior year. In the first half of fiscal 2008, the Company recognized gains of $39 million ($20 million after-tax) on the sale of an equity investment in IMC and $18 million on the sale of a facility. In addition, the first six months of 2008 included a gain of approximately $3 million for a payment received under the U.S. Continued Dumping and Subsidy Offset Act, compared with a $24 million payment received in the prior year period. The first six months of 2007 included a gain of approximately $32 million related to the sale of shares of MKS. A $15 million charge was recorded in the first half of fiscal 2008 for in-process research and development in connection with the acquisition of Motorola Inc.’s Embedded Communications Computing business in December 2007. For the six months ended March 31, 2008, amortization of intangibles increased $9 million compared with the prior year period due to acquisitions, offset by an $11 million decrease in rationalization costs. See notes 6 and 7 for further details regarding other deductions, net and rationalization costs.

 

Earnings from continuing operations before income taxes for the first six months of 2008 increased $277 million, or 20 percent, to $1,645 million, compared with $1,368 million for the six months ended March 31, 2007. The earnings results predominantly reflect increases of $104 million in Network Power and $88 million in Process Management business segments.

 

Income taxes were $528 million and $433 million for the six months ended March 31, 2008 and 2007, respectively. The effective tax rate was 32 percent for both the first half of fiscal 2008 and 2007. The effective tax rate for the entire fiscal year 2008 is expected to be approximately 32 percent.

 

Earnings from continuing operations were $1,117 million and earnings per share from continuing operations were $1.41 for the six months ended March 31, 2008, increases of 19 percent and 22 percent, respectively, compared with $935 million and $1.16 for the six months ended March 31, 2007.

 

Net earnings were $1,112 million and earnings per share were $1.40 for the six months ended March 31, 2008, increases of 18 percent and 21 percent, respectively, compared with $939 million and $1.16 for the six months ended March 31, 2007. Earnings for the first six months of fiscal 2008 included a loss from discontinued operations of $5 million, or $0.01 per share, which included a gain of $42 million, or $0.05 per share, related to the divestiture of the Brooks unit, offset by a loss of $52 million, or $0.06 per share, related to the write-down of the European appliance motor and pump business. The 21 percent increase in earnings per share also reflects the purchase of treasury shares.

 

 

 

 

During the first six months of fiscal 2008, Process Management sales increased 18 percent, on higher volume and acquisitions, to $3,033 million, and earnings increased 19 percent. Nearly all of the businesses reported sales increases compared to the prior year period. Sales and earnings were particularly strong for the systems, measurement, and valves businesses due to worldwide growth in energy and power markets. Underlying sales increased 14 percent, reflecting 10 percent from volume, approximately 3 percent from penetration gains and an estimated 1 percent from higher sales prices. Foreign currency translation had a 5 percent ($116 million) favorable impact, while the Brooks divestiture, net of acquisitions, had a 1 percent ($6 million) unfavorable impact. The underlying sales increase reflects growth in all of the major geographic regions, including the United States (13 percent), Asia (20 percent), Europe (8 percent) and Latin America (21 percent), as well as Middle East/Africa (20 percent), compared with the prior year period. Earnings for the first six months of fiscal 2008 increased 19 percent to $544 million from $456 million in the prior year period, reflecting higher sales volume. The margin increase reflects leverage on the higher volume, which was partially offset by unfavorable product mix. The increase in sales prices was more than offset by higher wage costs.

 

 

 

 

The Network Power segment sales increased 22 percent to $2,926 million for the first six months of 2008 compared with the prior year period, reflecting continued strength in the power systems and precision cooling businesses. Underlying sales grew 11 percent, the ECC and Stratos acquisitions contributed 7 percent ($167 million) and foreign currency translation had a 4 percent ($86 million) favorable impact. The underlying sales increase of 11 percent reflects a 7 percent gain from higher volume and an estimated 5 percent impact from penetration gains, which were partially offset by an approximate less than 1 percent decline in sales prices. Geographically, underlying sales reflect an 18 percent increase in Asia and a 12 percent increase in the United States, while Europe was flat. The U.S. growth reflects strong demand for data room construction and non-residential computer equipment as well as in the telecommunications power market. The Company’s market penetration gains in China and other Asian markets continued. Earnings for the six months ended March 31, 2008 of $367 million increased $104 million, or 39 percent, from the prior year period primarily due to the higher sales volume and savings from cost reduction actions, partially offset by higher wage costs. The margin increase reflects the cost savings and leverage on the higher volume.

 

 

 

 

 

A comparison of key elements of the Company's financial condition at the end of the second quarter as compared to the end of the prior fiscal year follows:

 

The ratio of total debt to total capital was 34.3 percent as of March 31, 2008, or 1.8 percentage points below the 36.1 percent ratio for the prior year second quarter. The Company's long-term debt is rated A2 by Moody's Investors Service and A by Standard and Poor's. The Company's interest coverage ratio (earnings before income taxes and interest expense, divided by interest expense) was 13.9 times for the six months ended March 31, 2008, compared with 11.5 times for the same period in the prior year, primarily due to higher earnings during the first six months of fiscal 2008.

 

Cash and equivalents increased by $759 million during the six months ended March 31, 2008. During the second quarter of 2008, the Company issued $400 million of 5.250% notes due October 2018, under a shelf registration statement filed with the Securities and Exchange Commission. Cash flow provided by operating activities of $1,171 million was up $296 million compared with $875 million in the prior year period. Operating cash flow, the net increase in short-term borrowings of $688 million and the $399 million of proceeds from long-term debt were used primarily to fund purchases of treasury stock of $483 million, pay dividends of $473 million, fund purchases of businesses of $440 million and fund capital expenditures of $306 million. For the six months ended March 31, 2008, free cash flow of $865 million (operating cash flow of $1,171 million less capital expenditures of $306 million) was up 45 percent from free cash flow of $599 million (operating cash flow of $875 million less capital expenditures of $276 million) for the same period in the prior year, primarily due to higher earnings in the six months ended March 31, 2008, as compared to the prior year period.

 

 

 

Effective October 1, 2007, the Company adopted the recognition and disclosure provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (FIN 48). FIN 48 addresses the accounting for uncertain tax positions that a company has taken or expects to take on a tax return. See note 9 for further discussion on the impact of FIN 48 on the financial statements.

 

 

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (FAS 160). FAS 160 requires an entity to separately disclose non-controlling interests as a separate component of equity in the balance sheet and clearly identify on the face of the income statement net income related to non-controlling interests. The Company is in the process of analyzing the impact of FAS 160, which is effective for fiscal years beginning after December 15, 2008.

 

In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (FAS 161). FAS 161 requires additional derivative disclosures, including objectives and strategies for using derivatives, fair value amounts of and gains and losses on derivative instruments, and credit-risk-related contingent features in derivative agreements. The Company is in the process of analyzing the impact of FAS 161, which is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of FAS 161 to have a material impact on the financial statements.

 

 

Based on the Company’s performance in the first half of fiscal 2008 and continued order strength, underlying sales growth for fiscal 2008 is expected to be in the range of 5 percent to 7 percent, which excludes approximately 6 percent favorable impact from foreign currency translation, acquisitions and divestitures. Reported sales are expected to be approximately $25 billion, an increase of 11 percent to 13 percent over fiscal 2007 sales of $22.1 billion, excluding discontinued operations. Based on this level of sales, the Company expects to generate 2008 earnings per share from continuing operations of $3.00 to $3.10 compared with $2.65 per share in fiscal 2007. Rationalization of operations expense is estimated to be approximately $85 million to $95 million for fiscal 2008. Operating cash flow is estimated at approximately $3.2 billion and capital expenditures are estimated to be $0.8 billion for 2008.

 

Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statement to reflect later developments. These include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others which are set forth in the “Risk Factors” of Part I, Item 1, and the "Safe Harbor Statement" of Exhibit 13, to the Company's Annual Report on Form 10-K for the year ended September 30, 2007, which are hereby incorporated by reference.

 

 

Emerson maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including the Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company's certifying officers have concluded that the disclosure controls and procedures were effective as of March 31, 2008, to provide reasonable assurance of the achievement of these objectives.

 

Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.

 

 

 

 

 

The Company’s Board of Directors authorized the repurchase of up to 80 million shares under the November 2001 program, as adjusted for the Company’s December 2006 two-for-one stock split.  The maximum number of shares that may yet be purchased under this program was 5.6 million as of March 31, 2008. The above table does not reflect the new program approved by the Board of Directors on May 6, 2008, for the repurchase of up to 80 million additional shares. 

 

 

At the Annual Meeting of Stockholders on February 5, 2008, matters described in the Notice of Annual Meeting of Stockholders dated December 14, 2007, were voted upon.

 

 

 

 

There were no broker non-votes on the matters that were voted upon.

 

 

(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

 

 

Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K.