EMERSON ELECTRIC CO - FORM 8-K - EX-99.1 - 99.1 - August 6, 2013

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Media Contact: Mark Polzin (314) 982-1758

EMERSON REPORTS THIRD QUARTER 2013 RESULTS

•
Sales declined 2 percent to $6.3 billion, with underlying sales down 1 percent
•
Earnings per share of $0.97 excluding $0.70 in charges related to divestiture of embedded computing and power business; reported earnings per share of $0.27
•
Operating cash flow increased 17 percent, with free cash flow up 20 percent

ST. LOUIS, August 6, 2013 – Emerson (NYSE: EMR) today announced that net sales for the third quarter ended June 30, 2013 decreased 2 percent from the prior year to $6.3 billion, reflecting a sluggish economic environment and difficult comparisons, as recovery from the Thailand flooding drove robust third quarter sales in the prior year. Underlying sales declined 1 percent, as divestitures deducted 1 percent and currency translation had a negligible impact, with the U.S. down 3 percent, Asia down 3 percent, and Europe down 6 percent. Emerging market growth of 2 percent was more than offset by weaker demand in mature economies.
"As expected, demand was slow in the quarter as economies around the world struggled for growth," said Chairman and Chief Executive Officer David N. Farr. "Low levels of business investment continue to reflect a cautious climate, particularly in mature markets. Despite some soft pockets, emerging markets were encouraging, as strategic investments generated growth. The near-term is expected to remain slow, but orders growth has resumed, suggesting the economic environment is beginning to stabilize and improve."
In a separate news release today, Emerson announced an agreement to sell a 51 percent stake in the embedded computing and power business to Platinum Equity. Continued weakness in the technology equipment and mobile device markets that this business serves has resulted in lower sales and earnings growth expectations, requiring a noncash pretax goodwill impairment charge of $503 million ($475 million after-tax, $0.65 per share). Additionally, anticipated repatriation of cash from this business resulted in an income tax charge of $33 million ($0.05 per share). Third quarter earnings per share including and excluding these charges were $0.27 and $0.97, respectively. Cash received from the transaction and repatriation will be used for $600 million in additional share repurchase, which is incremental to the current $800 to $900 million of annual share repurchase run rate.
Cash generation continues to be robust. Operating cash flow increased 17 percent to $995 million, driven primarily by working capital improvement, contributing to year-to-date growth of 23 percent.

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Free cash flow grew 20 percent in the quarter to $850 million, reflecting conversion from earnings (excluding charges) of 121 percent, with operating cash flow conversion of 142 percent.
"The economic environment remains difficult to predict, but we are focused on executing on the factors within our control," Farr said. "Our near-term priorities continue to be investing in strategic technologies and markets and cash generation, which exhibited encouraging progress in the quarter, and closing the sale of the embedded computing and power business. The strong cash flow supports the expectation to return at least 60 percent of operating cash flow to shareholders this year through dividends and share repurchases."

Business Segment Highlights
Process Management net and underlying sales increased 3 percent, with the U.S. down 6 percent, Asia up 8 percent, and Europe flat. Solid demand in energy and chemical end markets supported continued growth despite difficult comparisons in the prior year, when recovery from the Thailand flooding drove robust underlying growth. Underlying orders increased 8 percent, led by double digit growth in the systems and solutions business, with the power and water business particularly strong, as well as improvement in North America and double digit growth in China. As expected, segment margin of 21.5 percent declined 160 basis points, also affected by comparisons from the flooding recovery. Global project activity remains robust, with high levels of investment expected to continue. Difficult sales and margin comparisons will continue through the fourth quarter due to the flooding recovery, but end market demand will remain strong, supporting solid growth momentum into next year.
Industrial Automation net and underlying sales decreased 7 percent, with the U.S. down 6 percent, Asia flat, and Europe down 13 percent, as global demand for industrial goods remained weak. The power generating alternators business experienced the sharpest decline, but channel inventory destocking is beginning to slow, and orders should turn positive soon. Segment margin of 16.1 percent decreased 270 basis points due to nonrecurring anti-dumping duty payments received last year. Excluding the dumping duties from the comparison, margin was unchanged from the prior year, as cost containment offset significant volume deleverage. End markets for industrial goods appear to be stabilizing, with order trends improving, but are expected to remain slow in the near term, particularly in Europe.
Network Power net and underlying sales declined 5 percent, with the U.S. down 1 percent, Asia down 13 percent, and Europe down 4 percent, as demand trends were mixed among businesses. The network power systems business declined slightly, as an increase in demand for data center infrastructure was more than offset by weakness in global telecommunications markets. The embedded computing and power business declined at a double digit rate, reflecting challenging end markets and continued product line rationalization. Segment margin of 8.1 percent declined 220 basis points, primarily driven by volume deleverage and unfavorable price. Order trends are improving, as growth resumed in the quarter excluding the embedded computing and power business. End market

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improvement is expected to continue, but a large Australian project completed in the prior year will limit near-term growth.
Climate Technologies net and underlying sales decreased 2 percent, with the U.S. down 3 percent, Asia down 2 percent, and Europe down 5 percent. Residential air conditioning markets paused after strong growth in the previous quarter, as mild weather and inventory destocking affected demand. The global refrigeration business declined slightly but improved sequentially, with recovery from substantial weakness in the transportation business expected to continue. Commercial air conditioning market conditions remained slow, but order trends improved. Segment margin improved 80 basis points to 21.0 percent, as cost containment offset unfavorable product mix. In the near term, growth is expected to resume in the residential and refrigeration businesses, with demand improving in commercial end markets, supporting a stronger growth outlook for the segment.
Commercial & Residential Solutions sales declined 2 percent, reflecting a 6 percent deduction from the Knaack business divestiture. Underlying sales increased 4 percent, driven by 6 percent growth in the U.S., supported by strong demand in residential end markets. Segment margin was unchanged at 20.4 percent. Growth is expected to continue in the near term, supported by solid residential and improving nonresidential demand in the U.S., and stabilization in Europe.

Full Year 2013 Outlook
Business investment remains cautious but appears to be improving, supported by orders growth resuming in June after being down since February. Reported and underlying sales growth are expected to be approximately 1 percent, slightly lower than previous expectations, with EBIT and pretax margin approximately equal to prior year (excluding goodwill impairments). Earnings per share are trending toward the lower end of the range of $3.48 to $3.55, excluding the goodwill and tax charges related to the embedded computing and power business, or $2.78 to $2.85 including charges. Operating cash flow is expected to be approximately $3.4 billion or 14 percent of sales, with free cash flow of approximately $2.7 billion or 11 percent of sales.

Upcoming Investor Events
Today at 2 p.m. ET, Emerson management will discuss the third 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.
 
Forward-Looking and Cautionary Statements
Statements in this press 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 our ability to

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complete the embedded computing and power transaction, as well as 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.
(tables attached)

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Table 1
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
 
 
 
 
 
 
 
Quarter Ended June 30,
 
Percent
 
2012
 
2013
 
Change
 
 
 
 
 
 
Net sales
$
6,484

 
$
6,344

 
(2)%
Costs and expenses:
 
 
 
 
 
     Cost of sales
3,856

 
3,776

 
 
     SG&A expenses
1,338

 
1,396

 
 
     Goodwill impairment
—

 
503

 
 
     Other deductions, net
84

 
107

 
 
     Interest expense, net
51

 
51

 
 
Earnings before income taxes
1,155

 
511

 
(56)%
Income taxes
368

 
297

 
 
Net earnings
787

 
214

 
(73)%
Less: Noncontrolling interests in earnings of subsidiaries
17

 
20

 
 
Net earnings common shareholders
$
770

 
$
194

 
(75)%
 
 
 
 
 
 
Diluted avg. shares outstanding
734.3

 
722.2

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
1.04

 
$
0.27

 
(74)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended June 30,
 
 
 
2012
 
2013
 
 
Other deductions, net
 
 
 
 
 
     Amortization of intangibles
$
67

 
$
53

 
 
     Rationalization of operations
35

 
33

 
 
     Other
25

 
21

 
 
     Gains, net
(43
)
 
—

 
 
          Total
$
84

 
$
107

 
 


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Table 2
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
 
 
 
 
 
 
 
Nine Months Ended June 30,
 
Percent
 
2012
 
2013
 
Change
 
 
 
 
 
 
Net sales
$
17,712

 
$
17,857

 
1%
Costs and expenses:
 
 
 
 
 
     Cost of sales
10,693

 
10,709

 
 
     SG&A expenses
4,051

 
4,216

 
 
     Goodwill impairment
—

 
503

 
 
     Other deductions, net
279

 
252

 
 
     Interest expense, net
167

 
162

 
 
Earnings before income taxes
2,522

 
2,015

 
(20)%
Income taxes
798

 
757

 
 
Net earnings
1,724

 
1,258

 
(27)%
Less: Noncontrolling interests in earnings of subsidiaries
38

 
49

 
 
Net earnings common shareholders
$
1,686

 
$
1,209

 
(28)%
 
 
 
 
 
 
Diluted avg. shares outstanding
736.5

 
724.8

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
2.28

 
$
1.66

 
(27)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30,
 
 
 
2012
 
2013
 
 
Other deductions, net
 
 
 
 
 
     Amortization of intangibles
$
182

 
$
166

 
 
     Rationalization of operations
89

 
65

 
 
     Other
58

 
22

 
 
     Gains, net
(50
)
 
(1
)
 
 
          Total
$
279

 
$
252

 
 

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Table 3
EMERSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, UNAUDITED)
 
 
 
 
 
Quarter Ended June 30,
 
2012
 
2013
Assets
 
 
 
     Cash and equivalents
$
2,292

 
$
2,810

     Receivables, net
4,601

 
4,725

     Inventories
2,367

 
2,304

     Other current assets
743

 
667

          Total current assets
10,003

 
10,506

     Property, plant & equipment, net
3,418

 
3,475

     Goodwill
8,739

 
7,514

     Other intangible assets
1,856

 
1,698

     Other
310

 
320

          Total assets
$
24,326

 
$
23,513

 
 
 
 
Liabilities and equity
 
 
 
     Short-term borrowings and current
 
 
 
        maturities of long-term debt
$
2,060

 
$
1,486

     Accounts payables
2,617

 
2,614

     Accrued expenses
2,561

 
2,783

     Income taxes
158

 
67

          Total current liabilities
7,396

 
6,950

     Long-term debt
3,789

 
4,059

     Other liabilities
2,476

 
2,240

     Total equity
10,665

 
10,264

          Total liabilities and equity
$
24,326

 
$
23,513


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Table 4
EMERSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
 
 
 
 
 
Nine Months Ended June 30,
 
2012
 
2013
Operating activities
 
 
 
     Net earnings
$
1,724

 
$
1,258

     Depreciation and amortization
617

 
612

     Changes in operating working capital
(616
)
 
(316
)
     Pension funding
(122
)
 
(109
)
     Goodwill impairment, net of tax
—

 
475

     Other, net
139

 
226

          Net cash provided by operating activities
1,742

 
2,146

 
 
 
 
Investing activities
 
 
 
     Capital expenditures
(428
)
 
(380
)
     Purchase of businesses, net of cash and equivalents acquired
(178
)
 
(20
)
     Other, net
(40
)
 
(73
)
          Net cash used in investing activities
(646
)
 
(473
)
 
 
 
 
Financing activities
 
 
 
     Net increase in short-term borrowings
902

 
273

     Proceeds from long-term debt
4

 
499

     Principal payments on long-term debt
(259
)
 
(521
)
     Dividends paid
(881
)
 
(888
)
     Purchases of treasury stock
(527
)
 
(573
)
     Other, net
(37
)
 
12

          Net cash used in financing activities
(798
)
 
(1,198
)
 
 
 
 
Effect of exchange rate changes on cash and equivalents
(58
)
 
(32
)
 
 
 
 
Increase in cash and equivalents
240

 
443

 
 
 
 
Beginning cash and equivalents
2,052

 
2,367

 
 
 
 
Ending cash and equivalents
$
2,292

 
$
2,810


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Table 5
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
 
 
 
 
 
Quarter Ended June 30,
 
2012
 
2013
Sales
 
 
 
     Process Management
$
2,122

 
$
2,182

     Industrial Automation
1,378

 
1,277

     Network Power
1,588

 
1,506

     Climate Technologies
1,146

 
1,119

     Commercial & Residential Solutions
481

 
472

 
6,715

 
6,556

     Eliminations
(231
)
 
(212
)
          Net sales
$
6,484

 
$
6,344

 
 
 
 
Earnings
 
 
 
     Process Management
$
490

 
$
470

     Industrial Automation
259

 
206

     Network Power
163

 
122

     Climate Technologies
232

 
235

     Commercial & Residential Solutions
98

 
96

 
1,242

 
1,129

     Differences in accounting methods
59

 
56

     Corporate and other
(95
)
 
(623
)
     Interest expense, net
(51
)
 
(51
)
          Earnings before income taxes
$
1,155

 
$
511

 
 
 
 
Rationalization of operations
 
 
 
     Process Management
$
4

 
$
4

     Industrial Automation
13

 
14

     Network Power
14

 
12

     Climate Technologies
2

 
—

     Commercial & Residential Solutions
2

 
3

          Total
$
35

 
$
33


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Table 6
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
 
 
 
 
 
Nine Months Ended June 30,
 
2012
 
2013
Sales
 
 
 
     Process Management
$
5,518

 
$
6,098

     Industrial Automation
3,891

 
3,627

     Network Power
4,632

 
4,446

     Climate Technologies
2,805

 
2,859

     Commercial & Residential Solutions
1,413

 
1,382

 
18,259

 
18,412

     Eliminations
(547
)
 
(555
)
          Net sales
$
17,712

 
$
17,857

 
 
 
 
Earnings
 
 
 
     Process Management
$
1,021

 
$
1,206

     Industrial Automation
644

 
556

     Network Power
419

 
338

     Climate Technologies
490

 
511

     Commercial & Residential Solutions
295

 
291

 
2,869

 
2,902

     Differences in accounting methods
163

 
160

     Corporate and other
(343
)
 
(885
)
     Interest expense, net
(167
)
 
(162
)
          Earnings before income taxes
$
2,522

 
$
2,015

 
 
 
 
Rationalization of operations
 
 
 
     Process Management
$
13

 
$
11

     Industrial Automation
21

 
24

     Network Power
40

 
21

     Climate Technologies
8

 
2

     Commercial & Residential Solutions
7

 
7

          Total
$
89

 
$
65



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Reconciliations of Non-GAAP Financial Measures
 
Table 7
The following reconciles non-GAAP measures (denoted by *) with the most directly comparable GAAP measure (dollars in millions):
 
 
 
 
 
 
 
Earnings per share
Q3 2012
 
Q3 2013
 
Change
 
Earnings per share
$
1.04

 
$
0.27

 
(74
)%
 
Goodwill impairment
—

 
0.65

 
62
 %
 
Income tax charge
—

 
0.05

 
5
 %
 
Earnings per share excl. charges*
$
1.04

 
$
0.97

 
(7
)%
 
 
 
 
 
 
 
Cash flow
Q3 2012
 
Q3 2013
 
Change
 
Operating cash flow
$
846

 
$
995

 
17
 %
 
Capital expenditures
(141
)
 
(145
)
 
3
 %
 
Free cash flow*
$
705

 
$
850

 
20
 %
 
 
 
 
 
 
 
 
Net earnings common stockholders excl. charges*
 
$
702

 
 
 
EC&P charges
 
 
(508
)
 
 
 
Net earnings common stockholders
 
$
194

 
 
 
 
 
 
 
 
 
 
% of net earnings common stockholders
 
 
 
 
 
   Operating cash flow
 
 
515
 %
 
 
 
   Capital expenditures
 
 
(75
)%
 
 
 
   Free cash flow*
 
 
440
 %
 
 
 
% of net earnings common stockholders excl. charges*
 
 
 
 
   Operating cash flow*
 
 
142
 %
 
 
 
   Capital expenditures*
 
 
(21
)%
 
 
 
   Free cash flow*
 
 
121
 %
 
 
 
 
 
 
 
 
 
Profit margin as % of sales
2012
 
2013E
 
Change
 
EBIT excl. impairment*
16.1
 %
 
~16.1%

 
~0 bps

 
Goodwill impairment
2.4
 %
 
~2.1%

 
~30 bps

 
EBIT*
13.7
 %
 
~14.0%

 
~30 bps

 
Interest expense, net
(0.9
)%
 
(0.9
)%
 
0 bps

 
Pretax
12.8
 %
 
~13.1%

 
~30 bps

 
 
 
 
 
 
 
Earnings per share
2012
 
2013E
 
Change
 
Earnings per share
$
2.67

 
$2.78-2.85

 
4-6%

 
Goodwill impairment/charges
0.72

 
0.70

 
(1
)%
 
Earnings per share excl. charges*
$
3.39

 
$3.48-3.55

 
3-5%

 
 
 
 
 
 
 
Cash flow
 
 
2013E
 
% of Sales
 
Operating cash flow
 
 
~$3,400

 
~14%

 
Capital expenditures
 
 
~(700)

 
~(3)%

 
Free cash flow*


 
~$2,700

 
~11%



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