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EMR > SEC Filings for EMR > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for EMERSON ELECTRIC CO

Form 10-Q for EMERSON ELECTRIC CO


6-Aug-2014

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
Third quarter sales were $6.3 billion, a decrease of 1 percent as a divestiture, net of acquisitions, negatively affected comparisons 4 percentage points. Underlying sales grew 3 percent as global economic conditions continued to improve, although slowly and unevenly across end markets and geographies.

Net earnings common stockholders were $728 million, up 277 percent compared to prior year earnings of $194 million. Diluted earnings per share were $1.03, up 281 percent versus $0.27 per share in 2013. The increases in earnings and earnings per share reflect the $508 million, or $0.70 per share Artesyn charges in the prior year which aided comparisons 273 percent and 275 percent, respectively. Excluding charges, net earnings increased 4 percent in the third quarter of 2014 compared with prior year earnings of $702 million, while earnings per share were up 6 percent compared with $0.97 in the prior year.

RESULTS OF OPERATIONS

Following is an analysis of the Company's operating results for the third
quarter ended June 30, 2014, compared with the third quarter ended June 30,
2013.
Three Months Ended June 30                        2013       2014     Change
(dollars in millions, except per share amounts)

Net sales                                       $ 6,344     6,312       (1 )%
Gross profit                                    $ 2,568     2,638        3  %
Percent of sales                                   40.5 %    41.8 %
SG&A                                            $ 1,396     1,424
Percent of sales                                   22.0 %    22.6 %
Goodwill impairment                             $   503         -
Other deductions, net                           $   107        96
Interest expense, net                           $    51        46
Earnings before income taxes                    $   511     1,072      110  %
Percent of sales                                    8.1 %    17.0 %
Net earnings common stockholders                $   194       728      277  %
Percent of sales                                    3.0 %    11.5 %

Diluted earnings per share                      $  0.27      1.03      281  %

Net sales for the third quarter of 2014 were $6,312 million, a decrease of $32 million, or 1 percent compared with $6,344 million in 2013 due to the Artesyn divestiture ("the divestiture") which subtracted 5 percent ($287 million). Underlying sales grew 3 percent ($159 million) on volume increases, acquisitions added 1 percent ($78 million) and foreign currency translation added $18 million. Underlying sales increased 5 percent in the U.S. and 1 percent internationally. Europe was up 4 percent, Asia was up 3 percent (China up 8 percent) and Latin America was up 1 percent. Canada was down 3 percent and Middle East/Africa was down 9 percent. Sales growth was led by Process Management, which increased $135 million, or 6 percent, aided by acquisitions, and Climate Technologies, which increased $72 million, or 6 percent. Sales for Network Power decreased $269 million, or 18 percent, due to the divestiture.

Cost of sales in 2014 were $3,674 million, a decrease of $102 million compared to $3,776 million in 2013, largely due to the divestiture, partially offset by higher costs associated with increased volume, including acquisitions. Gross profit margin of 41.8 percent in 2014 increased 1.3 percentage points compared to 40.5 percent in 2013. The increase is due to a 0.7 percentage point favorable comparative impact from the divestiture, which had relatively lower gross profit margin, as well as materials cost containment, cost reduction savings and lower pension. Unfavorable mix and lower price partially offset the increase.


EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

Selling, general and administrative (SG&A) expenses of $1,424 million increased $28 million compared with prior year, primarily reflecting costs associated with increased volume, partially offset by the divestiture. SG&A as a percent of sales of 22.6 percent in 2014 increased 0.6 percentage points versus 2013. The divestiture, which had relatively lower SG&A requirements, had an unfavorable 0.2 percentage point impact on the comparison.

In the third quarter of 2013, the Company recorded a noncash, pretax impairment charge of $503 million related to the Artesyn business. See Note 11. The Company performs its annual goodwill impairment review in the fourth quarter. See Note
3. Other deductions, net were $96 million in 2014, a decrease of $11 million, reflecting lower rationalization expense of $22 million, partially offset by other immaterial items. See Notes 8 and 9 for further details.

Pretax earnings of $1,072 million increased $561 million, or 110 percent. The increase reflects the goodwill impairment charge in 2013, which aided the comparison by 104 percentage points. Earnings increased $15 million in Climate Technologies, $8 million in Industrial Automation, $12 million in Commercial & Residential Solutions, partially offset by a decrease of $15 million in Network Power due to the divestiture.

Income taxes were $334 million for 2014, resulting in an effective tax rate of 31 percent, which is also the approximate rate expected for full fiscal year 2014. Income taxes of $297 million for the third quarter of 2013 yielded a 58 percent effective tax rate, due to an unfavorable 23 percentage point impact from the goodwill impairment charge (only a small portion of the goodwill was tax deductible), a net tax charge of $33 million (6 percentage point impact) primarily related to the repatriation of non-U.S. earnings from Artesyn, and the impact of other tax versus book basis differences.

Net earnings common stockholders in 2014 were $728 million, up 277 percent, while earnings per share were $1.03, up $0.76, or 281 percent. The increase in earnings and earnings per share reflect the $508 million, or $0.70 per share Artesyn charges in the prior year, which aided comparisons 273 percent and 275 percent, respectively. Earnings in 2014 also benefited from lower noncontrolling interests in earnings of subsidiaries. Earnings per share benefited from purchases of common stock for treasury.

BUSINESS SEGMENTS
Following is an analysis of operating results for the Company's business
segments for the third quarter ended June 30, 2014, compared with the third
quarter ended June 30, 2013. The Company defines segment earnings as earnings
before interest and taxes.

Process Management
Three Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                      $ 2,182     2,317       6 %
Earnings                   $   470       473       1 %
Margin                        21.5 %    20.4 %

Process Management sales were $2.3 billion in the third quarter, an increase of $135 million or 6 percent, on stable and sustained demand in global energy and chemical end markets and supported by acquisitions. Underlying sales increased 2 percent ($52 million) on volume growth due to continued cautious project execution by customers, and 4 percent ($78 million) from acquisitions. Foreign currency translation had a $5 million favorable impact. The systems and solutions business had solid growth and the measurement devices business was up modestly. The final control business increased due to the Virgo and Enardo acquisitions. Demand was mixed across regions as underlying sales increased 9 percent in the U.S. and 5 percent in Europe, while Asia was down 2 percent as difficult comparisons in Australia offset 7 percent growth in China. Latin America was up 5 percent and Canada and Middle East/Africa were down 5 percent and 11 percent. Earnings increased $3 million due to acquisitions and cost containment actions. The increase was substantially offset by unfavorable foreign currency transactions of $6 million, mix and other costs, which resulted in a margin decline of 110 basis points.


EMERSON ELECTRIC CO. AND SUBSIDIARIES       FORM 10-Q



Industrial Automation
Three Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                      $ 1,277     1,289       1 %
Earnings                   $   206       214       4 %
Margin                        16.1 %    16.6 %

Industrial Automation sales were $1.3 billion in the third quarter, an increase of $12 million or 1 percent. Underlying sales were essentially flat ($3 million unfavorable) as 1 percent higher volume was offset by 1 percent lower price. Foreign currency translation added 1 percent ($15 million). Slowly recovering global industrial goods markets led to mixed results across the segment. The fluid automation, electrical distribution, materials joining and power transmission businesses were up, while power generating alternators and motors and drives declined, with Europe particularly weak. Underlying sales were up 1 percent in the U.S., down 5 percent in Europe, and up 3 percent in Asia on 7 percent growth in China. Sales were up 6 percent in Latin America and 4 percent in Middle East/Africa, while Canada was down 13 percent. Earnings increased 4 percent and margin expanded 50 basis points, reflecting a $12 million decrease in rationalization expense, while lower pricing was more than offset by materials cost containment.

Network Power
Three Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                      $ 1,506     1,237      (18 )%
Earnings                   $   122       107      (12 )%
Margin                         8.1 %     8.7 %

Network Power sales were $1.2 billion in the third quarter, a decrease of $269 million or 18 percent, reflecting the Artesyn divestiture, which subtracted 20 percent ($287 million). Underlying sales increased 2 percent ($22 million) as 3 percent higher volume was partially offset by 1 percent lower price. Foreign currency translation deducted $4 million. Growth was led by the telecommunications-related power business and by a large European data center solutions project. A decrease in the thermal management business partially offset the increase. The uninterruptible power supplies and power switching businesses were effectively flat. Underlying sales were up 2 percent in the U.S., 10 percent in Europe and 6 percent in Asia. Latin America was down 22 percent, Middle East/Africa was down 16 percent and Canada was flat. Earnings decreased $15 million, or 12 percent, as the divestiture contributed $16 million to earnings in the prior year, negatively impacting the comparison by 13 percentage points. The divestiture of the lower margin Artesyn business increased the margin 60 basis points. Lower price and other costs were offset by materials cost containment and reduced rationalization expense of $9 million.

Climate Technologies
Three Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                      $ 1,119     1,191       6 %
Earnings                   $   235       250       7 %
Margin                        21.0 %    21.0 %

Climate Technologies sales were $1.2 billion in the third quarter, an increase of $72 million or 6 percent. Underlying sales increased 6 percent ($71 million) on 7 percent higher volume slightly offset by 1 percent lower price. Foreign currency translation added $1 million. The global refrigeration and solutions businesses had strong growth and air conditioning was up moderately, on strength in the U.S., Europe and Asia. Temperature sensors and controls were up moderately. Underlying sales increased 4 percent in the U.S., 9 percent in Europe and in Asia, on 16 percent growth in China. Latin America was up 16 percent, Canada was up 13 percent and Middle East/Africa was up 2 percent. Earnings increased $15 million on volume and resulting leverage, partially offset by unfavorable mix. Lower pricing was more than offset by materials cost containment.


EMERSON ELECTRIC CO. AND SUBSIDIARIES       FORM 10-Q



Commercial & Residential Solutions
Three Months Ended June 30  2013      2014    Change
(dollars in millions)

Sales                      $ 472      492        4 %
Earnings                   $  96      108       12 %
Margin                      20.4 %   22.1 %

Commercial & Residential Solutions sales were $492 million in the third quarter, an increase of $20 million, or 4 percent, on 3 percent higher volume as markets recovered from harsh winter weather in North America during the second quarter, and 1 percent higher price. The residential storage and professional tools businesses had solid growth, while wet/dry vacuums and food waste disposers grew modestly. The commercial storage business declined modestly. Sales increased 4 percent in both the U.S. and internationally. Earnings increased $12 million and margin increased 170 basis points on the higher volume and price, and lower rationalization expense of $2 million.

RESULTS OF OPERATIONS

Following is an analysis of the Company's operating results for the nine months
ended June 30, 2014, compared with the nine months ended June 30, 2013.
Nine Months Ended June 30                          2013        2014     Change
(dollars in millions, except per share amounts)

Net sales                                       $ 17,857     17,730      (1 )%
Gross profit                                    $  7,148      7,269       2  %
Percent of sales                                    40.0 %     41.0 %
SG&A                                            $  4,216      4,262
Percent of sales                                    23.6 %     24.0 %
Goodwill impairment                             $    503          -
Other deductions, net                           $    252        328
Interest expense, net                           $    162        147
Earnings before income taxes                    $  2,015      2,532      26  %
Percent of sales                                    11.3 %     14.3 %
Net earnings common stockholders                $  1,209      1,737      44  %
Percent of sales                                     6.8 %      9.8 %

Diluted earnings per share                      $   1.66       2.45      48  %

Net sales for the first nine months of 2014 were $17,730 million, a decrease of $127 million, or 1 percent compared with $17,857 million in 2013 and due to the divestiture, which deducted 5 percent ($767 million). Underlying sales increased 3 percent ($448 million) on volume gains, acquisitions added 1 percent ($220 million) and foreign currency translation was $28 million unfavorable. Underlying sales increased 3 percent in the U.S. and 2 percent internationally. Underlying sales increased 2 percent in Europe, 5 percent in Asia (China up 10 percent) and 1 percent in Latin America. Middle East/Africa was down 4 percent and Canada was down 2 percent. Sales for Process Management were up $368 million, or 6 percent, aided by acquisitions, and Climate Technologies was up $159 million, or 6 percent. Network Power decreased $735 million, or 17 percent, due to the divestiture.

Cost of sales for 2014 were $10,461 million, a decrease of $248 million versus $10,709 million in 2013, largely due to the divestiture, partially offset by higher costs associated with increased volume, including acquisitions. Gross profit margin was 41.0 percent for 2014, versus 40.0 percent for 2013. The increase is due to a 0.7 percentage point favorable comparative impact from the divestiture, materials cost containment, cost reduction savings and lower pension. Unfavorable mix and lower price partially offset the increase.


EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

SG&A expenses of $4,262 million increased $46 million compared with prior year, primarily reflecting costs associated with increased volume, partially offset by the divestiture and lower incentive stock compensation expense of $24 million. SG&A as a percent of sales of 24.0 percent in 2014 increased 0.4 percentage points versus 2013. The divestiture had an unfavorable 0.3 percentage point impact on the comparison.

In the third quarter of 2013, the Company recorded a noncash, pretax impairment charge of $503 million related to the Artesyn business. See Note 11. Other deductions, net were $328 million in 2014, an increase of $76 million. The increase primarily reflects a $34 million loss from the Artesyn equity investment in the second quarter, unfavorable foreign currency transactions of $23 million versus 2013 and a China research incentive credit of $13 million in the prior year, partially offset by a $20 million decrease in rationalization expense. See Notes 8 and 9.

Pretax earnings of $2,532 million increased $517 million, or 26 percent, primarily due to the goodwill impairment charge in 2013, which affects the comparison 25 percentage points. Year-to-date segment results increased slightly, with earnings increases of $32 million in Climate Technologies, $23 million in Process Management and $16 million in Commercial & Residential Solutions, partially offset by a decrease of $52 million in Network Power due largely to the divestiture.

Income taxes were $763 million for 2014 and $757 million for 2013, resulting in effective tax rates of 30 percent and 38 percent, respectively. The current year effective tax rate benefited approximately 2 percentage points from certain items, including 1 percentage point each from the divestiture and the disposal of an investment. The higher effective tax rate for the prior year was the result of an 8 percentage point unfavorable impact from the impairment and net tax charges.

Net earnings common stockholders for 2014 were $1,737 million, up 44 percent, compared to $1,209 million in 2013. Earnings per share were $2.45, up 48 percent, compared to $1.66 in prior year. The increases in earnings and earnings per share reflect the $508 million, or $0.70 per share Artesyn charges in the prior year which aided comparisons 43 percent and 44 percent, respectively. Additionally, the Artesyn equity investment loss deducted $34 million from current year earnings, $(0.03) per share. Earnings in 2014 also benefited from lower noncontrolling interests in earnings of subsidiaries. Earnings per share benefited from purchases of common stock for treasury.

BUSINESS SEGMENTS
Following is an analysis of operating results for the Company's business
segments for the nine months ended June 30, 2014, compared with the nine months
ended June 30, 2013. The Company defines segment earnings as earnings before
interest and taxes.

Process Management
Nine Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                     $ 6,098     6,466       6 %
Earnings                  $ 1,206     1,229       2 %
Margin                       19.8 %    19.0 %

Process Management sales were $6.5 billion for the first nine months of 2014, an increase of $368 million or 6 percent, on continued energy and chemical end market demand and acquisitions. Underlying sales increased 3 percent ($171 million) on volume growth, acquisitions added 4 percent ($220 million) and foreign currency translation deducted less than 1 percent ($23 million). The systems and solutions business had solid growth and the measurement devices business was up modestly. Growth in final control was due to the Virgo and Enardo acquisitions. Underlying sales increased 8 percent in the U.S., 4 percent in Europe, and 3 percent in Asia on 10 percent growth in China. Sales decreased 2 percent in Latin America, 8 percent in Middle East/Africa and 4 percent in Canada. Earnings increased $23 million on volume, including acquisitions and cost reduction actions.The increase was partially offset by unfavorable foreign currency transactions of $26 million, mix and other costs, which resulted in a margin decline of 80 basis points.


EMERSON ELECTRIC CO. AND SUBSIDIARIES       FORM 10-Q



Industrial Automation
Nine Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                     $ 3,627     3,670       1 %
Earnings                  $   556       563       1 %
Margin                       15.3 %    15.3 %

Industrial Automation sales were $3.7 billion for the first nine months of 2014, an increase of $43 million or 1 percent. Underlying sales increased 0.5 percent ($19 million) as higher volume more than offset lower price. Foreign currency translation added 0.5 percent ($24 million). Growth in the electrical distribution, fluid automation, materials joining and motors and drives businesses was offset by declines in the power transmission and power generating alternators businesses. Underlying sales increased 1 percent in the U.S. and decreased 3 percent in Europe. Asia was up 5 percent on 10 percent growth in China. Sales were up 5 percent in Latin America and 7 percent in Middle East/Africa, while sales in Canada were down 3 percent. Earnings increased 1 percent and margin was flat, reflecting lower rationalization expense of $17 million, largely offset by higher warranty and mix. Materials cost containment more than offset lower pricing.

Network Power
Nine Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                     $ 4,446     3,711      (17 )%
Earnings                  $   338       286      (15 )%
Margin                        7.6 %     7.7 %

Network Power sales were $3.7 billion for the first nine months of 2014, a decrease of $735 million, or 17 percent, reflecting the divestiture which subtracted 18 percent ($767 million). Underlying sales increased 2 percent ($60 million) as 3 percent higher volume was partially offset by 1 percent lower price. Foreign currency translation subtracted 1 percent ($28 million). Strong growth in the telecommunications-related power business and a large data center project led the slight increase in underlying sales. Decreases in thermal management partially offset the increase. Underlying sales increased 2 percent in the U.S., 2 percent in Europe and 5 percent in Asia. Sales were down 8 percent in Latin America, up 1 percent in Middle East/Africa and up 3 percent in Canada. Earnings decreased $52 million, or 15 percent, as lower Artesyn earnings of $30 million and a $13 million research credit in the prior year negatively impacted the comparison 13 percentage points. The divestiture of the lower margin Artesyn business, net of the research credit, favorably impacted the margin comparison 40 basis points. Lower price and other costs were offset by materials cost containment and reduced rationalization expense of $8 million.

Climate Technologies
Nine Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                     $ 2,859     3,018       6 %
Earnings                  $   511       543       6 %
Margin                       17.9 %    18.0 %

Climate Technologies sales were $3.0 billion for the first nine months of 2014, an increase of $159 million or 6 percent. Underlying sales also increased 6 percent ($160 million), on higher volume. Foreign currency translation subtracted $1 million. The global refrigeration and solutions businesses had strong growth and air conditioning increased modestly, on growth in the U.S., Europe and Asia. Temperature sensors and controls had solid growth. Overall, underlying sales were up 2 percent in the U.S., 6 percent in Europe and 11 percent in Asia (China up 19 percent). Sales increased 20 percent in Latin America, 1 percent in Middle East/Africa and 2 percent in Canada. Earnings increased $32 million and margin increased 10 basis points on volume and materials cost containment, partially offset by unfavorable mix and a $9 million increase in rationalization expense.


EMERSON ELECTRIC CO. AND SUBSIDIARIES       FORM 10-Q



Commercial & Residential Solutions
Nine Months Ended June 30   2013       2014     Change
(dollars in millions)

Sales                     $ 1,382     1,418       3 %
Earnings                  $   291       307       5 %
Margin                       21.1 %    21.7 %

Commercial & Residential Solutions sales were $1.4 billion for the first nine months of 2014, an increase of $36 million, or 3 percent, on higher volume. The sales increase was led by strong growth in professional tools and a solid increase in food waste disposers. The wet/dry vacuums business was up modestly, while sales decreased for both residential and commercial storage. Sales increased 2 percent in the U.S. and 6 percent internationally. Earnings increased $16 million and margin increased 60 basis points, reflecting higher volume and a $5 million decrease in rationalization expense, partially offset by unfavorable mix.

FINANCIAL CONDITION

Key elements of the Company's financial condition for the nine months ended
June 30, 2014 as compared to the year ended September 30, 2013.
                                Sept 30, 2013     June 30, 2014
Working capital (in millions) $         3,374             2,280
Current ratio                             1.4               1.3
Total debt-to-total capital              34.8 %            37.7 %
Net debt-to-net capital                  18.3 %            24.4 %
Interest coverage ratio                  14.6 X           16.3X

The Company's interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 16.3X for the first nine months of 2014 compares to 12.6X for the first nine months of 2013. The increase is due to higher pretax earnings, partially attributed to the Artesyn goodwill impairment charge in the prior year, which negatively impacted the ratio by 2.9X, and lower interest expense.
Cash provided by operating activities of $2,284 million increased $81 million, or 4 percent, compared with $2,203 million in the prior year, primarily due to a smaller increase in working capital. Operating cash flow funded capital expenditures of $573 million, dividends of $910 million and purchases of common stock. Total common stock purchases of $783 million were supported by proceeds of $264 million from the Artesyn divestiture. Full year purchases of common stock are expected to approximate $1 billion, including use of proceeds from the divestiture of the connectivity solutions business. Cash on hand and a $1,133 million increase in short-term borrowings funded acquisitions of $610 million, the purchase of the noncontrolling interest in Appleton Group for $574 million, and principal payments on long-term debt of $323 million. For the first nine months of 2014, free cash flow of $1,711 million (operating cash flow of $2,284 million less capital expenditures of $573 million) was down $55 million, due to increased capital spending, compared to 2013 free cash flow of $1,766 million (operating cash flow of $2,203 million less capital expenditures of $437 million).

In April 2014, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replaced the December 2010 $2.75 billion facility. The credit facility is maintained to support general corporate purposes, including commercial paper borrowing. The Company has not . . .

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