10-QPeriod: Q1 FY2002

EMERSON ELECTRIC CO Quarterly Report for Q1 Ended Dec 31, 2001

Filed February 14, 2002For Securities:EMR

Summary

Emerson Electric Co. reported its fiscal first quarter 2002 results for the period ending December 31, 2001, demonstrating resilience amidst a challenging global economic environment. Net sales saw a notable decline of 16% year-over-year, reflecting reduced customer demand and inventory adjustments across key sectors. Despite lower sales, the company managed its cost of sales effectively, with it remaining relatively stable as a percentage of sales. However, selling, general, and administrative expenses as a percentage of sales increased, impacting overall profitability. Profitability metrics showed a significant decrease, with net earnings falling by approximately 28.7% and basic and diluted earnings per share declining from $0.84 and $0.83 in the prior year to $0.61. This was partly influenced by a $377 million repositioning charge recognized in the prior quarter and a $750 million acquisition of Avansys Power Co. Ltd. during the current quarter. The company is also in the process of adopting new accounting standards for goodwill, anticipating a potential impairment charge. Despite these headwinds, Emerson maintained a strong cash position and generated positive cash flow from operations, with a notable increase in free cash flow.

Key Highlights

  • 1Net sales for the quarter decreased by 16% to $3.3 billion compared to $3.9 billion in the prior year, driven by global economic weakness and inventory reductions by customers.
  • 2Net earnings declined significantly by approximately 28.7% to $254.7 million, resulting in basic and diluted earnings per share of $0.61, down from $0.84 and $0.83, respectively.
  • 3The company acquired Avansys Power Co., Ltd. for $750 million in cash and divested its Chromalox industrial heating solutions business for $165 million, resulting in a pre-tax gain.
  • 4Adoption of SFAS No. 142 regarding Goodwill and Other Intangible Assets is underway, with an anticipated impairment charge of approximately 10% of goodwill expected in the second quarter.
  • 5A significant repositioning charge of $377 million (pre-tax) was recognized in the prior quarter (fourth quarter of fiscal 2001) related to operational consolidation and exiting certain product lines.
  • 6Cash and equivalents increased by $111.7 million, and free cash flow saw a 25% increase driven by working capital improvements and lower capital spending.
  • 7The effective income tax rate decreased to 30.8% from 34.3% in the prior year, partly due to the non-deductible nature of goodwill under the new accounting standard.

Frequently Asked Questions

The decrease in net sales of 16% was primarily attributed to the global economic weakness and aggressive inventory reduction strategies by key customers. This led to reduced demand and production levels across various industries served by Emerson.

Emerson adopted SFAS No. 142 effective October 1, 2001. While the transitional impairment test is still in progress, the adoption requires the discontinuation of goodwill amortization, which is expected to increase reported earnings by $0.35 per share for fiscal 2002. A potential impairment charge is anticipated, which will be recognized as a cumulative effect of a change in accounting principle.

The acquisition of Avansys Power Co., Ltd. for $750 million in cash in the first quarter of fiscal 2002 significantly increased Emerson's cash outflow for investing activities. While this acquisition aims to strengthen global market leadership, it also contributed to higher average borrowings and a slight decrease in the interest coverage ratio.

Emerson is focusing on restructuring actions to improve its cost structure. These actions include reducing salaried headcount, consolidating facilities, and discontinuing underperforming product areas. The company also managed its cost of sales effectively, keeping it stable as a percentage of sales, although SG&A expenses as a percentage of sales increased.