- Sales of $5.9 billion increased slightly compared with the prior year
- Strong sequential profitability improvement from supply chain disruption recovery
- Earnings per share of $0.74 increased 1 percent over the prior year and 48 percent from the prior quarter
ST. LOUIS, May 1, 2012 – Emerson (NYSE: EMR) today announced that net sales for the second quarter ended March 31, 2012, increased 1 percent to $5.9 billion, with mixed results across businesses and geographies. Underlying sales increased 2 percent and currency translation deducted 1 percent, with the U.S. up 3 percent, Asia up 2 percent, and Europe down 4 percent. Restoration of the supply chain disrupted by Thailand flooding, along with robust global oil and gas investment, drove a strong recovery in Process Management compared with the first quarter. Soft economic conditions in Europe and China, and continued weakness in HVAC, telecommunications, and information technology end markets contributed to the overall slow growth. Operating profit margin of 16.5 percent declined 40 basis points from the prior year but expanded 330 basis points from the first quarter, as the recovery in Process Management drove the sequential improvement. Incremental operating profit leverage of 45 percent from the first to the second quarter supports the expectation for record profitability in 2012. Pretax earnings margin declined 40 basis points from the prior year to 13.8 percent, but expanded 340 basis points sequentially with 43 percent incremental pretax earnings leverage. Earnings per share of $0.74 represented an increase of 1 percent compared with the prior year and 48 percent from the first quarter.
“Operations recovered very well from an exceedingly difficult first quarter. The sequential profitability improvement demonstrated our ability to move beyond the challenges we faced last quarter,” said Chairman and Chief Executive Officer David N. Farr. “While trending in the right direction, growth was slow as certain end markets and regions remained under pressure – particularly Europe, China, and Brazil. Underlying growth will accelerate in the second half, but Europe and China will not improve to the degree we expected 90 days ago.”
Business Segment Highlights
Process Management sales grew 13 percent, as strong global oil and gas investment, along with solid chemical industry end markets, continued to drive demand. Underlying sales increased 14 percent and currency translation deducted 1 percent, with the U.S. up 24 percent, Asia up 10 percent, and Europe up 4 percent. Segment margin of 18.3 percent increased 40 basis points from the prior year quarter, primarily driven by volume leverage and cost reductions. The strong results were achieved despite increased costs and other lingering effects from the supply chain disruption that are nearing complete resolution. Recovery of delayed sales should occur by the end of the calendar year. Even with the supply chain restoration, backlog continued to increase as underlying orders, which grew 18 percent excluding unfavorable currency of 4 percent, remained very strong. Process Management is poised for an exceptionally strong second half of 2012 and first half of 2013, as backlog conversion and the restored supply chain will drive robust sales growth and operational leverage.
Industrial Automation sales declined 2 percent during the quarter, as demand among businesses varied. Underlying sales decreased 1 percent and currency translation deducted 1 percent, with the U.S. down 1 percent, Asia down 1 percent, and Europe flat. In the U.S., weakness in the hermetic motors business was driven by the decline in HVAC compressor demand. Strong growth in the electrical distribution and ultrasonic welding businesses was offset by softness in the electrical drives and fluid automation businesses, as well as by continued challenges in the solar and wind energy industries. Segment margin decreased 20 basis points to 15.8 percent, primarily due to volume deleverage, while margin improved 100 basis points sequentially. Higher selling prices offset materials cost increases. We expect improved second half sales and profitability despite weakness in Europe.
Network Power sales decreased 4 percent, with mixed results across businesses and geographies. Underlying sales declined 3 percent and currency translation deducted 1 percent, with the U.S. down 4 percent, Asia up 3 percent, and Europe down 13 percent. Sales volume in the embedded computing and power business remained below prior year levels, as weakness in telecommunications and information technology end markets persisted and product line rationalization continued. These end market conditions resulted in decreased sales in the telecommunications-related energy systems and infrastructure management businesses as well. Sales in the global uninterruptible power supply and precision cooling business grew slightly, as robust growth in the U.S. and solid growth in Asia offset weakness in Europe and Latin America. Segment margin of 8.6 percent decreased 70 basis points from the prior year, as volume deleverage, unfavorable product mix, higher restructuring expense, and other cost increases were partially offset by cost reductions and materials cost containment. Sequential improvement of 40 basis points positions the business for higher profitability when sales growth resumes. Profitability improved over the prior year quarter in the network power systems business, while the embedded computing and power business – which returned to profitability – reflected lower margin compared to the prior year due to volume deleverage and restructuring.
Climate Technologies sales declined 9 percent during the quarter, as global HVAC industry weakness persisted. Underlying sales also decreased 9 percent, with the U.S. down 11 percent, Asia down 9 percent, and Europe down 12 percent. In the U.S., weak residential demand more than offset solid growth in the commercial air conditioning and refrigeration businesses, but March orders suggest improving trends. Similarly, while sales in China were soft, order trends have turned favorable, and sales growth in broader Asia was strong. Economic conditions in Europe remained weak in the quarter and will likely remain under pressure through 2012. Robust growth in the transportation refrigeration business continued. Segment margin of 17.1 percent decreased 130 basis points, primarily due to volume deleverage, while margin improved 350 basis points sequentially. Higher selling prices offset materials cost increases, but not enough to maintain margin. The orders improvement in the U.S. and China supports the outlook for solid sales and profitability performance in the second half of 2012.
Commercial & Residential Solutions sales grew 4 percent in the quarter on broad strength across the segment driven by commercial construction. Underlying sales increased 8 percent and the divestiture of the heating products business deducted 4 percent. Segment margin of 21.0 percent expanded 90 basis points from the prior year quarter, as higher selling prices, cost reductions, and divestiture mix benefit offset materials and other cost increases. Improving residential markets should support continued solid growth in the second half of 2012.
Balance Sheet / Cash Flow
Operating cash flow of $562 million in the quarter decreased 25 percent, primarily due to a decline in earnings and higher investment in working capital related to sales timing, the supply chain disruption in Process Management, and to support the growth outlook for the second half of 2012. Inventory declined in March from a peak in February, and should continue to decrease through the rest of the year. Trade working capital of 18.1 percent of sales declined 100 basis points from the first quarter and will also continue to improve through the second half of 2012 as sales volume accelerates. Continued investments in technology and capacity to support growth drove capital expenditures of $157 million, with resulting free cash flow of $405 million down 35 percent.
“Our pace of aggressive investment in capacity and technology continued in the quarter, consistent with our strategy to pursue long-term growth opportunities despite temporary weakness in certain end markets,” Farr said. “In addition to funding internal growth programs, we acquired two strategic businesses to expand our solutions offerings in Network Power and Climate Technologies. These businesses provide technologies that, when integrated with our existing capabilities, will enhance the value we bring to our customers and create sustainable value for our shareholders.”
Second quarter results continue to support the expectation that Emerson will generate record sales, profitability, and earnings in 2012. Recovery of HVAC, telecommunications, and information technology end markets remains likely, but improvement is occurring at a slower pace than previously expected. Additionally, Europe weakness has persisted, and while orders and sales have improved in China, its economy has been and will remain softer than anticipated. Based on the current end market and economic conditions, the revised 2012 outlook is as follows:
- Underlying sales and orders growth rates reduced to 3 to 5 percent
- Reported sales growth 2 to 4 percent
- Operating profit margin 17.5 to 17.8 percent, and pretax margin 15.0 to 15.3 percent
- Restructuring expense approximately $125 million
- Tax rate approximately 32 percent
- Earnings per share of $3.35 to $3.50
- Operating cash flow approximately $3.4 to 3.5 billion
- Capital expenditures approximately $700 million
Upcoming Investor Events
Today at 2:00 p.m. ET (1:00 p.m. CT), Emerson management will discuss the second 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.
On Wednesday, May 23, 2012, Emerson Chairman and Chief Executive Officer David N. Farr will present at the Electrical Products Group Conference in Longboat Key, Florida, at 10:00 a.m. ET. The presentation will be posted at the time of the event on Emerson’s website at www.Emerson.com/financial and remain available for approximately three months after the event.
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, and competitive and technological factors, among others, as set forth in the Company's most recent Form 10-K filed with the SEC.
View Q2 2012 Financial Tables
Mark Polzin (314) 982-1758