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EMERSON ELECTRIC CO - Quarter Report: 2013 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

______________________
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________________ to __________________

Commission file number 1-278

EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction of
incorporation or organization)
 
43-0259330
(I.R.S. Employer
Identification No.)
 
 
 
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri
(Address of principal executive offices)
 
63136
(Zip Code)

Registrant's telephone number, including area code: (314) 553-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No £
 
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):
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at April 30, 2013: 718,862,630 shares.


1

FORM 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE AND SIX MONTHS ENDED MARCH 31, 2012 AND 2013
(Dollars in millions, except per share amounts; unaudited)
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2012

 
2013

 
2012

 
2013

Net sales
$
5,919

 
5,960

 
11,228

 
11,513

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
3,583

 
3,587

 
6,837

 
6,933

Selling, general and administrative expenses
1,359

 
1,426

 
2,713

 
2,820

Other deductions, net
105

 
59

 
195

 
145

Interest expense (net of interest income of $5, $3, $9 and $7, respectively)
58

 
57

 
116

 
111

 
 
 
 
 
 
 
 
Earnings before income taxes
814

 
831

 
1,367

 
1,504

 
 
 
 
 
 
 
 
Income taxes
258

 
253

 
430

 
460

 
 
 
 
 
 
 
 
Net earnings
556

 
578

 
937

 
1,044

 
 
 
 
 
 
 
 
Less: Noncontrolling interests in earnings of subsidiaries
11

 
17

 
21

 
29

 
 
 
 
 
 
 
 
Net earnings common stockholders
$
545

 
561

 
916

 
1,015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share common stockholders
$
0.74

 
0.77

 
1.24

 
1.40

 
 
 
 
 
 
 
 
Diluted earnings per share common stockholders
$
0.74

 
0.77

 
1.24

 
1.39

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.40

 
0.41

 
0.80

 
0.82

 




















See accompanying Notes to Consolidated Financial Statements.


2

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED MARCH 31, 2012 AND 2013
(Dollars in millions; unaudited)

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2012


2013

 
2012

 
2013

Net earnings
$
556

 
578

 
937

 
1,044

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
90

 
(131
)
 
(6
)
 
(52
)
Cash flow hedges
43

 
(2
)
 
70

 
(5
)
Pension and postretirement
28

 
37

 
55

 
74

        Total other comprehensive income (loss)
161

 
(96
)
 
119

 
17

 
 
 
 
 
 
 
 
Comprehensive income
717

 
482

 
1,056

 
1,061

 
 
 
 
 
 
 
 
Less: Noncontrolling interests in comprehensive income of subsidiaries
11

 
12

 
19

 
23

Comprehensive income common stockholders
$
706

 
470

 
1,037

 
1,038




































See accompanying Notes to Consolidated Financial Statements.



3

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except shares and per share amounts; unaudited)
  
 
Sept 30, 2012

 
Mar 31, 2013

ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
2,367

 
2,615

Receivables, less allowances of $109 and $105, respectively
4,983

 
4,559

Inventories
2,125

 
2,327

Other current assets
651

 
688

Total current assets
10,126

 
10,189

 
 
 
 
Property, plant and equipment, net
3,509

 
3,481

Other assets
 

 
 
Goodwill
8,026

 
8,007

Other intangible assets
1,838

 
1,734

Other
319

 
313

Total other assets
10,183

 
10,054

Total assets
$
23,818

 
23,724

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

Short-term borrowings and current maturities of long-term debt
$
1,506

 
1,485

Accounts payable
2,767

 
2,460

Accrued expenses
2,732

 
2,651

Income taxes
128

 
48

Total current liabilities
7,133

 
6,644

 
 
 
 
Long-term debt
3,787

 
4,059

 
 
 
 
Other liabilities
2,456

 
2,347

 
 
 
 
Equity
 

 
 

Preferred stock, $2.50 par value per share;
     Authorized, 5,400,000 shares; issued, none

 

Common stock, $0.50 par value per share;
     Authorized, 1,200,000,000 shares; issued, 953,354,012 shares;
     outstanding, 724,113,291 shares and 720,709,585 shares, respectively
477

 
477

Additional paid-in capital
324

 
336

Retained earnings
18,107

 
18,529

Accumulated other comprehensive income
(731
)
 
(708
)
Cost of common stock in treasury, 229,240,721 shares and 232,644,427 shares, respectively
(7,882
)
 
(8,102
)
Common stockholders’ equity
10,295

 
10,532

Noncontrolling interests in subsidiaries
147

 
142

Total equity
10,442

 
10,674

Total liabilities and equity
$
23,818

 
23,724


See accompanying Notes to Consolidated Financial Statements. 


4

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2012 AND 2013
(Dollars in millions; unaudited)

 
Six Months Ended March 31,
 
2012

 
2013

Operating activities
 
 
 
Net earnings
$
937

 
1,044

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
406

 
411

Changes in operating working capital
(482
)
 
(399
)
Other, net
35

 
95

Net cash provided by operating activities
896

 
1,151

 
 
 
 
Investing activities
 
 
 
Capital expenditures
(287
)
 
(235
)
Purchases of businesses, net of cash and equivalents acquired
(167
)
 

Other, net
(43
)
 
(45
)
Net cash used in investing activities
(497
)
 
(280
)
 
 
 
 
Financing activities
 
 
 
Net increase in short-term borrowings
891

 
21

Proceeds from long-term debt

 
499

Principal payments on long-term debt
(249
)
 
(270
)
Dividends paid
(588
)
 
(593
)
Purchases of treasury stock
(329
)
 
(271
)
Other, net
(29
)
 
14

Net cash used in financing activities
(304
)
 
(600
)
 
 
 
 
Effect of exchange rate changes on cash and equivalents
6

 
(23
)
Increase in cash and equivalents
101

 
248

Beginning cash and equivalents
2,052

 
2,367

Ending cash and equivalents
$
2,153

 
2,615

 
 
 
 
Changes in operating working capital
 
 
 
Receivables
$
187

 
418

Inventories
(296
)
 
(202
)
Other current assets
(1
)
 
(9
)
Accounts payable
(231
)
 
(301
)
Accrued expenses
(178
)
 
(238
)
Income taxes
37

 
(67
)
Total changes in operating working capital
$
(482
)
 
(399
)
 

See accompanying Notes to Consolidated Financial Statements.


5

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q


Notes to Consolidated Financial Statements

1.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2012.

Effective October 1, 2012, the Company adopted updates to ASC 220, Comprehensive Income, and now presents comprehensive income as a separate financial statement immediately following the statement of earnings. This update does not change the items reported in other comprehensive income or when those items should be reclassified into earnings. Effective first quarter 2014, additional disclosures will be required for the Statement of Comprehensive Income, including presenting reclassifications out of accumulated other comprehensive income by income statement line items.


2.
Reconciliations of weighted average shares for basic and diluted earnings per common share follow (in millions). Earnings allocated to participating securities were inconsequential.
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2012

 
2013

 
2012

 
2013

Basic shares outstanding
732.7

 
720.5

 
733.5

 
721.4

Dilutive shares
4.1

 
4.8

 
4.0

 
4.7

Diluted shares outstanding
736.8

 
725.3

 
737.5

 
726.1

 

3.
Other Financial Information (in millions):
 
Sept 30, 2012

 
Mar 31, 2013

Inventories
 
 
 
Finished products
$
747

 
848

Raw materials and work in process
1,378

 
1,479

Total
$
2,125

 
2,327

 
Property, plant and equipment, net
 
 
 
Property, plant and equipment, at cost
$
8,934

 
9,083

Less: Accumulated depreciation
5,425

 
5,602

     Total
$
3,509

 
3,481

Goodwill by business segment
 
 
 
Process Management
$
2,379

 
2,366

Industrial Automation
1,338

 
1,347

Network Power
3,367

 
3,354

Climate Technologies
501

 
503

Commercial & Residential Solutions
441

 
437

     Total
$
8,026

 
8,007


Changes in goodwill since September 30, 2012 are primarily due to foreign currency translation.


6

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

 
Sept 30, 2012

 
Mar 31, 2013

Accrued expenses include the following:
 

 
 

Employee compensation
$
642

 
553

Customer advanced payments
$
380

 
413

Product warranty
$
187

 
176

Other liabilities
 
 
 
Pension plans
$
818

 
716

Deferred income taxes
592

 
629

Postretirement plans, excluding current portion
337

 
334

Other
709

 
668

     Total
$
2,456

 
2,347



4.
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of March 31, 2013, the notional amount of foreign currency hedge positions was approximately $1.5 billion while commodity hedge contracts totaled approximately 68 million pounds ($195 million) of copper and aluminum. All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of March 31, 2013 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting. The following amounts are included in earnings and other comprehensive income (OCI) for the three and six months ended March 31, 2013 and 2012 (in millions):
 
 
Gain (Loss) to Earnings
 
Gain (Loss) to OCI
 
 
2nd Quarter
 
Six Months
 
2nd Quarter
 
Six Months
 
 
2012

 
2013

 
2012

 
2013

 
2012

 
2013

 
2012

 
2013

 
Location
 

 
 
 
 

 
 
 
 
 
 
 
 
 
 
Commodity
Cost of sales
$
(11
)
 
(1
)
 
(22
)
 
(4
)
 
29

 
(11
)
 
50

 
(16
)
Foreign currency
Sales, cost of sales
4

 
7

 
4

 
11

 
30

 
13

 
41

 
15

Foreign currency
Other deductions, net
8

 
(9
)
 
15

 

 
 
 
 
 
 
 
 
     Total
 
$
1

 
(3
)
 
(3
)
 
7

 
59

 
2

 
91

 
(1
)
Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the three and six months ended March 31, 2013 and 2012.
Fair Value Measurements – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. At March 31, 2013, the fair value of commodity contracts and foreign currency contracts were reported in other current assets and accrued expenses. There was no collateral posted with counterparties as of March 31, 2013. The maximum collateral that could have been required was $11 million. As of March 31, 2013, the fair value of long-term debt was $5,232 million which exceeded the carrying value by $656 million. Valuations of derivative contract positions are summarized below (in millions):  
 
September 30, 2012
 
March 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Foreign Currency
$
31

 
8

 
39

 
8

Commodity
$
9

 
7

 

 
11





7

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

5.
The change in equity for the first six months of 2013 is shown below (in millions):  
 
Common Stockholders' Equity
 
Noncontrolling Interests in Subsidiaries
 
Total Equity
September 30, 2012
$
10,295

 
147

 
10,442

Net earnings
1,015

 
29

 
1,044

Other comprehensive income (loss)
23

 
(6
)
 
17

Cash dividends
(593
)
 
(28
)
 
(621
)
Net treasury stock purchases and other
(208
)
 

 
(208
)
March 31, 2013
$
10,532

 
142

 
10,674


 
6.     Total periodic pension and postretirement expense is summarized below (in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2012

 
2013

 
2012

 
2013

Service cost
$
20

 
27

 
42

 
53

Interest cost
59

 
57

 
119

 
113

Expected return on plan assets
(79
)
 
(83
)
 
(159
)
 
(166
)
Net amortization
43

 
58

 
86

 
116

Total
$
43

 
59

 
88

 
116


Higher expense reflects a lower discount rate at the end of 2012.


7.
Other deductions, net are summarized below (in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2012

 
2013

 
2012

 
2013

Amortization of intangibles
$
57

 
54

 
115

 
113

Rationalization of operations
31

 
16

 
54

 
32

Other
22

 
(10
)
 
33

 
1

Gains, net
(5
)
 
(1
)
 
(7
)
 
(1
)
Total
$
105

 
59

 
195

 
145


The decreases in Other for the second quarter and six months ended March 31, 2013 are primarily due to foreign currency transaction losses in the prior year compared to gains in the current year.


8.
Rationalization of operations expense reflects costs associated with the Company’s efforts to continually improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. Details of the change in the liability for rationalization during the six months ended March 31, 2013 follow (in millions):
 
Sept 30, 2012

 
Expense

 
Paid/Utilized

 
Mar 31, 2013

Severance and benefits
$
23

 
13

 
17

 
19

Lease and other contract terminations
5

 
2

 
2

 
5

Vacant facility and other shutdown costs
3

 
4

 
5

 
2

Start-up and moving costs
1

 
13

 
13

 
1

Total
$
32

 
32

 
37

 
27

 


8

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Rationalization of operations expense by segment is summarized below (in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2012

 
2013

 
2012

 
2013

Process Management
$
4

 
4

 
9

 
7

Industrial Automation
4

 
5

 
8

 
10

Network Power
16

 
5

 
26

 
9

Climate Technologies
4

 
1

 
6

 
2

Commercial & Residential Solutions
3

 
1

 
5

 
4

Total
$
31

 
16

 
54

 
32


The Company expects to incur full year 2013 rationalization expense of approximately $75 million to $85 million. This includes the $32 million incurred to date, as well as costs to complete actions initiated before the end of the second quarter and actions anticipated to be approved and initiated during the remainder of the year. Severance and benefits costs are associated with forcecount reduction, mainly for Industrial Automation in Asia and North America and Network Power in Asia. Start-up and moving costs to redeploy assets to best cost locations and expand geographically to directly serve local markets were incurred in all segments.


9.
Summarized information about the Company's results of operations by business segment follows (in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
Sales
 
Earnings
 
Sales
 
Earnings
 
2012

 
2013

 
2012

 
2013

 
2012

 
2013

 
2012

 
2013

Process Management
$
1,869

 
2,020

 
341

 
403

 
3,396

 
3,916

 
531

 
736

Industrial Automation
1,284

 
1,213

 
203

 
186

 
2,513

 
2,350

 
385

 
350

Network Power
1,549

 
1,481

 
134

 
111

 
3,044

 
2,940

 
256

 
216

Climate Technologies
926

 
988

 
158

 
175

 
1,659

 
1,740

 
258

 
276

Commercial & Residential Solutions
475

 
457

 
100

 
98

 
932

 
910

 
197

 
195

 
6,103

 
6,159

 
936

 
973

 
11,544

 
11,856

 
1,627

 
1,773

Differences in accounting methods
 
 
 
 
55

 
54

 
 
 
 
 
104

 
104

Corporate and other
 
 
 
 
(119
)
 
(139
)
 
 
 
 
 
(248
)
 
(262
)
Eliminations/Interest
(184
)
 
(199
)
 
(58
)
 
(57
)
 
(316
)
 
(343
)
 
(116
)
 
(111
)
     Total
$
5,919

 
5,960

 
814

 
831

 
11,228

 
11,513

 
1,367

 
1,504

 
Industrial Automation intersegment sales for the second quarters ended March 31, 2013 and 2012 were $177 million and $163 million, respectively, and year-to-date, $298 million and $273 million. The increase in corporate and other for both the second quarter and year-to-date reflects higher incentive stock compensation expense due to the overlap of two performance shares plans.


10.
In the fourth quarter of 2012, the Company recognized an impairment charge of $450 million due to protracted weak demand and structural industry developments in the embedded computing and power business which had annual sales of $1.4 billion. Management considered strategic alternatives, initiated a sale process, and non-binding indications of interest were received in the third quarter of 2013. The Company will pursue negotiation of a transaction and a decision will be made whether to sell the business, subject to Board approval. Depending on the ultimate outcome of the process, it is possible the Company could recognize an impairment charge, or loss on the sale of the business along with an income tax charge related to potential repatriation of earnings which have been permanently reinvested in the business.



9

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q


Items 2 and 3.

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

OVERVIEW
Second quarter sales were $6 billion, up 1 percent, and net earnings were $561 million, up 3 percent, reflecting slight growth in the U.S. and modest growth in Asia. Europe remained soft. Growth was strong in Middle East/Africa and Latin America. Overall, results reflect a sluggish global economy struggling to gain momentum and direction. Forecasts are for modest growth in global gross fixed investment, while weakness in Europe is expected to persist.

Process Management reported sales and earnings growth largely driven by demand in global energy markets. Sales and earnings increased for Climate Technologies, primarily reflecting U.S. and Asia air conditioning growth. Demand in U.S. residential end markets supported underlying sales growth in Commercial & Residential Solutions. Sales and earnings decreased for Industrial Automation on weakness in capital goods end markets, particularly in Europe. Network Power sales decreased due to a sharp decline in embedded computing and power and softness in the network power systems business.
RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the second quarter ended March 31, 2013, compared with the second quarter ended March 31, 2012.
Three Months Ended March 31
2012

 
2013

 
Change

(dollars in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
5,919

 
5,960

 
1
%
Gross profit
$
2,336

 
2,373

 
2
%
Percent of sales
39.5
%
 
39.8
%
 
 

SG&A
$
1,359

 
1,426

 
 

Percent of sales
23.0
%
 
23.9
%
 
 

Other deductions, net
$
105

 
59

 
 

Interest expense, net
$
58

 
57

 
 

Earnings before income taxes
$
814

 
831

 
2
%
Percent of sales
13.8
%
 
13.9
%
 
 

Net earnings common stockholders
$
545

 
561

 
3
%
Percent of sales
9.2
%
 
9.4
%
 
 

 
 
 
 
 
 
Diluted EPS – Net earnings
$
0.74

 
0.77

 
4
%

Net sales for the second quarter of 2013 were $5,960 million, an increase of $41 million or 1 percent, compared with $5,919 million in 2012. Underlying sales increased 2 percent ($92 million) from volume growth and exclude the negative impact from divestitures of 0.5 percent or $27 million, and foreign currency translation of 0.5 percent or $24 million. Sales increased 1 percent in the U.S. and 2 percent internationally. Asia was up 2 percent, Middle East/Africa was up 19 percent and Latin America was up 8 percent. Europe declined 3 percent and Canada was flat. Segment results were mixed as sales grew $151 million in Process Management and $62 million in Climate Technologies, and decreased $71 million in Industrial Automation, $68 million in Network Power, and $18 million in Commercial & Residential Solutions due to the prior year divestiture of Knaack.

Cost of sales in 2013 were $3,587 million, resulting in gross profit of $2,373 million and gross margin of 39.8 percent. Cost of sales in 2012 were $3,583 million, resulting in gross profit of $2,336 million and gross margin of 39.5 percent. Gross profit and margin increases primarily reflect higher volume, savings from cost reduction actions and materials cost containment. Product mix and pension expense were unfavorable.

Selling, general and administrative (SG&A) expenses of $1,426 million increased $67 million compared with prior year. SG&A as a percent of sales was 23.9 percent in 2013, a 0.9 percentage point increase versus 2012. The


10

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

increase in SG&A primarily reflects costs associated with higher volume, an increase in incentive stock compensation of $16 million from the overlap of two performance shares plans, and other costs. SG&A as a percent of sales increased due to deleverage on volume declines in Network Power and Industrial Automation, and the higher other costs.

Other deductions, net were $59 million in 2013, a decrease of $46 million versus prior year due to lower rationalization expense and favorable foreign currency transaction costs. See Notes 7 and 8 for details regarding other deductions, net and rationalization.

Pretax earnings of $831 million increased $17 million, or 2 percent. Earnings primarily reflect increases of $62 million in Process Management and $17 million in Climate Technologies, partially offset by decreases of $23 million in Network Power and $17 million in Industrial Automation.

Income taxes were $253 million for 2013 and $258 million for 2012, resulting in effective tax rates of 31 percent and 32 percent, respectively. The effective tax rate for full year 2013 is estimated at approximately 31 percent.

Net earnings common stockholders in 2013 were $561 million, an increase of 3 percent. Net earnings per share were $0.77, an increase of 4 percent. The increases in earnings and earnings per share reflect operating results and the repurchase of common shares.

BUSINESS SEGMENTS
Following is an analysis of operating results for the Company’s business segments for the second quarter ended March 31, 2013, compared with the second quarter ended March 31, 2012. The Company defines segment earnings as earnings before interest and taxes.
 
Process Management
Three Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
1,869

 
2,020

 
8
%
Earnings
$
341

 
403

 
18
%
Margin
18.3
%
 
20.0
%
 
 


Process Management sales increased $151 million, reflecting continued demand in global oil and gas, chemicals and power end markets. Strong growth across the measurement and control, final controls, and systems and solutions businesses was aided by favorable comparisons from the supply chain disruption in the prior year. Underlying sales grew 9 percent on higher volume, and foreign currency translation subtracted 1 percent ($8 million). Internationally, underlying growth was strong, with Asia up 14 percent and Europe up 7 percent, while Middle East/Africa was up 36 percent, Latin America up 13 percent and Canada up 10 percent. Sales in the U.S. were down 1 percent. Earnings increased $62 million and margin expanded 170 basis points, benefiting from higher volume and related leverage, partially offset by unfavorable product mix. Foreign currency transactions were $43 million favorable due to gains in 2013 compared to losses in the prior year.

Industrial Automation
Three Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
1,284

 
1,213

 
(6
)%
Earnings
$
203

 
186

 
(8
)%
Margin
15.8
%
 
15.4
%
 
 


Industrial Automation sales decreased $71 million on declines in most businesses reflecting weakness in capital goods end markets, particularly in Europe. The decrease was most pronounced in the power generating alternators and industrial motors business and electrical drives. Growth was strong in the hermetic motors business, driven by HVAC compressor demand. Reported and underlying sales were both down 6 percent on lower volume. Underlying


11

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

sales decreased 15 percent in Europe, 1 percent in the U.S. and 3 percent in Asia. Sales were up 11 percent in Latin America and flat in Middle East/Africa. Earnings decreased $17 million and margin declined 40 basis points on the lower volume and related deleverage and prior year payments received related to dumping duties, partially offset by materials cost containment.
 
Network Power
Three Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
1,549

 
1,481

 
(4
)%
Earnings
$
134

 
111

 
(17
)%
Margin
8.6
%
 
7.5
%
 
 

Sales for Network Power decreased $68 million or 4 percent, due to softness in global telecommunications and information technology end markets. The sales decrease included 3 percent lower volume and 1 percent from lower pricing. These results were primarily due to a sharp decline in embedded computing and power, reflecting product line rationalization and lower end market demand. The network power systems business was down slightly, with decreases in the uninterruptible power supplies, telecommunications-related power and precision cooling businesses partially offset by growth in inbound power. Underlying segment sales were down 6 percent in Asia (on the decline in embedded computing and power), 2 percent in the U.S., 3 percent in Europe, 23 percent in Canada and 10 percent in Middle East/Africa, partially offset by 8 percent growth in Latin America. Earnings decreased $23 million and margin contracted 110 basis points on the lower sales, deleverage and higher other costs, partially offset by materials cost containment and $11 million lower rationalization expense.

Climate Technologies
Three Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
926

 
988

 
7
%
Earnings
$
158

 
175

 
11
%
Margin
17.1
%
 
17.7
%
 
 

Climate Technologies sales increased $62 million driven by strong growth in the compressors business and solid growth in temperature controls and sensors. Global air conditioning sales growth was strong, particularly in the U.S., Asia and Europe. Refrigeration sales declined sharply, primarily from weakness in transportation. Overall, underlying sales increased 7 percent on volume growth. The increase was led by 8 percent growth in the U.S., 8 percent in Europe, 4 percent in Asia and 26 percent in Middle East/Africa. Sales decreased 5 percent in Latin America. Earnings increased $17 million on higher volume in the compressors business. Margin increased 60 basis points on volume leverage, savings from cost reduction actions and materials cost containment. Product mix was unfavorable.

Commercial & Residential Solutions
Three Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
475

 
457

 
(4
)%
Earnings
$
100

 
98

 
(3
)%
Margin
21.0
%
 
21.3
%
 
 


Sales for Commercial & Residential Solutions decreased 4 percent ($18 million), reflecting a negative 6 percent ($27 million) impact from the prior year Knaack divestiture. Underlying sales grew 2 percent ($9 million) on volume increases. Growth in the storage and food waste disposers businesses was slightly offset by a small decrease in professional tools. Underlying sales increased 5 percent in the U.S. and decreased 7 percent internationally.


12

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Earnings declined $2 million as the benefits from higher volume and cost containment actions were more than offset by the comparative effect of $4 million of Knaack earnings in the prior year. Margin increased 30 basis points.

RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the six months ended March 31, 2013, compared with the six months ended March 31, 2012.
Six Months Ended March 31
2012

 
2013

 
Change

(dollars in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
11,228

 
11,513

 
3
%
Gross profit
$
4,391

 
4,580

 
4
%
Percent of sales
39.1
%
 
39.8
%
 
 

SG&A
$
2,713

 
2,820

 
 

Percent of sales
24.2
%
 
24.5
%
 
 

Other deductions, net
$
195

 
145

 
 

Interest expense, net
$
116

 
111

 
 

Earnings before income taxes
$
1,367

 
1,504

 
10
%
Percent of sales
12.2
%
 
13.1
%
 
 

Net earnings common stockholders
$
916

 
1,015

 
11
%
Percent of sales
8.2
%
 
8.8
%
 
 

 
 
 
 
 
 
Diluted EPS – Net earnings
$
1.24

 
1.39

 
12
%

Net sales for the first six months of 2013 were $11,513 million, an increase of $285 million or 3 percent, compared with $11,228 million in 2012. Sales growth was flat excluding the estimated impact of the supply chain disruption from Thailand flooding in the prior year. Underlying sales increased 4 percent ($386 million) from volume growth. Foreign currency translation subtracted 0.5 percent ($52 million) and divestitures had a negative 0.5 percent ($49 million) impact. Sales increased 3 percent in the U.S. and 4 percent internationally. Asia was up 4 percent, including China up 2 percent. Middle East/Africa was up 20 percent, Latin America was up 13 percent and Canada was up 3 percent. Europe was down 3 percent. Segment results were mixed as sales grew $520 million in Process Management and $81 million in Climate Technologies, and decreased $163 million in Industrial Automation, $104 million in Network Power, and $22 million in Commercial & Residential Solutions due to the Knaack divestiture.

Cost of sales for 2013 were $6,933 million, resulting in gross profit of $4,580 million and gross margin of 39.8 percent. Cost of sales for 2012 were $6,837 million, resulting in gross profit of $4,391 million and gross margin of 39.1 percent. The increases in gross profit and margin primarily reflect higher volume, savings from cost reduction actions and materials cost containment. Product mix and pension expense were unfavorable.

SG&A expenses of $2,820 million increased $107 million compared with prior year. SG&A as a percent of sales was 24.5 percent in 2013, a 0.3 percentage point increase versus 24.2 percent in 2012. The increase in SG&A primarily reflects costs associated with higher volume and $38 million of higher incentive stock compensation from the overlap of two performance shares plans, partially offset by a $17 million charge in 2012 related to post-65 supplemental retiree medical benefits. SG&A as a percent of sales increased due to business mix and the other costs.

Other deductions, net were $145 million in 2013, a decrease of $50 million versus prior year. See Notes 7 and 8 for details regarding other deductions, net and rationalization costs.

Pretax earnings of $1,504 million increased $137 million, or 10 percent. Earnings primarily reflect increases of $205 million in Process Management and $18 million in Climate Technologies, partially offset by decreases of $40 million in Network Power and $35 million in Industrial Automation.



13

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Income taxes were $460 million for 2013 and $430 million for 2012, resulting in effective tax rates of 31 percent for both periods.

Net earnings common stockholders in 2013 were $1,015 million, an increase of 11 percent. Net earnings per share were $1.39, an increase of 12 percent. The increases in earnings and earnings per share reflect improved operating results and the repurchase of common shares.

BUSINESS SEGMENTS
Following is an analysis of operating results for the Company’s business segments for the six months ended March 31, 2013, compared with the six months ended March 31, 2012. The Company defines segment earnings as earnings before interest and taxes.
 
Process Management
Six Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
3,396

 
3,916

 
15
%
Earnings
$
531

 
736

 
39
%
Margin
15.6
%
 
18.8
%
 
 

Process Management sales increased $520 million, reflecting continued demand in global oil and gas, chemicals and power markets. Robust growth across the measurement and control, systems and solutions, and final controls businesses includes favorable comparisons due to the supply chain disruption in the prior year and solid end market demand. Underlying sales increased 16 percent and foreign currency translation subtracted 1 percent ($10 million). Underlying growth was strong in all regions, including 11 percent in the U.S., 9 percent in Europe, 19 percent in Asia, 36 percent in Middle East/Africa, 27 percent in Latin America and 15 percent in Canada. Earnings increased $205 million and margin expanded 320 basis points, benefiting from the higher volume and significant leverage. The benefit of cost reduction actions was offset by unfavorable product mix. Foreign currency transactions were $36 million favorable compared to the prior year.

Industrial Automation
Six Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
2,513

 
2,350

 
(6
)%
Earnings
$
385

 
350

 
(9
)%
Margin
15.3
%
 
14.9
%
 
 

Industrial Automation sales decreased $163 million, reflecting weakness in capital goods end markets, particularly Europe. Declines in the power generating alternators and industrial motors business and electrical drives were partially offset by strong growth in the hermetic motors business on HVAC compressor demand. Underlying sales were down 5 percent on lower volume, including 12 percent in Europe, 4 percent in the U.S. and 5 percent in Asia. Sales were up 10 percent in Latin America and 2 percent in Middle East/Africa. Foreign currency translation deducted 1 percent ($23 million). Earnings decreased $35 million and margin decreased 40 basis points on the lower volume, deleverage and other costs. Savings from cost reduction actions and materials cost containment partially offset the earnings decline.



14

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Network Power
Six Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
3,044

 
2,940

 
(3
)%
Earnings
$
256

 
216

 
(16
)%
Margin
8.4
%
 
7.3
%
 
 

Sales for Network Power decreased $104 million or 3 percent, reflecting continued softness in global telecommunications and information technology end markets. The sales decrease includes 2 percent from lower volume and 1 percent from price. These results were primarily due to a sharp decline in embedded computing and power, reflecting product line rationalization and lower end market demand. The network power systems business was down modestly on mixed results. Decreases in the precision cooling, uninterruptible power supplies and telecommunications-related power businesses were partially offset by growth in inbound power. Underlying segment sales grew 8 percent in Latin America. Sales were down 1 percent in the U.S., 4 percent in Asia, 6 percent in Europe, 19 percent in Canada and 7 percent in Middle East/Africa. Earnings decreased $40 million and margin contracted 110 basis points. The lower sales, deleverage and higher other costs were partially offset by savings from cost reduction actions, materials cost containment and $17 million lower rationalization expense.

Climate Technologies
Six Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
1,659

 
1,740

 
5
%
Earnings
$
258

 
276

 
7
%
Margin
15.5
%
 
15.9
%
 
 

Climate Technologies sales increased $81 million as a solid increase in the compressors business was partially offset by a decrease in temperature controls. The temperature sensors business was flat. Global air conditioning sales growth was strong, particularly in the U.S. and Asia. Europe air conditioning was up moderately. Refrigeration sales declined sharply. Underlying sales grew 5 percent on volume increases, including 5 percent in the U.S., 6 percent in both Asia and Europe, and 28 percent in Middle East/Africa. Sales decreased 5 percent in Latin America. Earnings increased $18 million on higher volume in the compressors business. Margin increased 40 basis points on savings from cost reduction actions and materials cost containment, partially offset by unfavorable product mix.

Commercial & Residential Solutions
Six Months Ended March 31
2012

 
2013

 
Change

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
932

 
910

 
(2
)%
Earnings
$
197

 
195

 
(1
)%
Margin
21.1
%
 
21.4
%
 
 

Sales for Commercial & Residential Solutions decreased 2 percent ($22 million), reflecting a negative 5 percent ($49 million) impact from the prior year Knaack divestiture. Underlying sales grew 3 percent ($27 million) on volume increases. Moderate sales growth in storage and food waste disposers was partially offset by a slight decrease in the tools businesses. Underlying sales increased 6 percent in the U.S. and decreased 6 percent internationally. Earnings decreased $2 million, while margin increased 30 basis points. Earnings from higher volume and savings from cost reduction actions were offset by $5 million of prior year Knaack earnings and other costs.


15

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

FINANCIAL CONDITION

Key elements of the Company's financial condition for the six months ended March 31, 2013 as compared to the year ended September 30, 2012.
 
Sept 30, 2012

 
Mar 31, 2013

Working capital (in millions)
$
2,993

 
3,545

Current ratio
1.4 to 1

 
1.5 to 1

Total debt-to-total capital
34.0
%
 
34.5
%
Net debt-to-net capital
22.1
%
 
21.8
%
Interest coverage ratio
13.9X

 
13.8X

The Company's interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) was 13.8X for the first six months of 2013 compared to 12.0X in the prior year. The increase is primarily due to higher earnings.
During the second quarter of 2013, the Company issued $500 million of 2.625% notes due February 2023 under an automatic shelf registration statement on file with the Securities and Exchange Commission. The net proceeds from the sale of the notes were used for general corporate purposes and to repay commercial paper borrowings.
Cash provided by operating activities of $1,151 million increased $255 million, or 29 percent, compared with $896 million in the prior year period, primarily due to higher earnings and lower working capital growth. Operating cash flow funded capital expenditures of $235 million, dividends of $593 million and treasury stock purchases of $271 million. Long-term debt payments were $270 million. For the first six months of 2013, free cash flow of $916 million (operating cash flow of $1,151 million less capital expenditures of $235 million) was up $307 million from free cash flow of $609 million (operating cash flow of $896 million less capital expenditures of $287 million) in 2012. Overall, cash and equivalents increased $248 million during the first six months of 2013.
Emerson maintains a conservative financial structure which provides the strength and flexibility necessary to achieve its strategic objectives. The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet the Company’s needs in the foreseeable future through ongoing operations, existing resources, short- and long-term debt capacity or backup credit lines. These resources allow Emerson to reinvest in existing businesses, pursue strategic acquisitions and manage its capital structure on a short- and long-term basis.

FISCAL 2013 OUTLOOK
Business investment remains slow and cautious globally, and there is no clear catalyst to improve global economic growth over the next 6 to 9 months. Near term end market demand is expected to reflect this uncertainty. Demand for capital goods is expected to remain challenging in the second half of 2013, particularly in Europe. Modest growth is expected to continue in residential end markets. Based on the current business environment, reported and underlying sales growth in 2013 is now expected to be only 1.5 percent to 2.5 percent, with EBIT and pretax margin approximately equal to the prior year (excluding the 2012 goodwill impairment impact of 240 basis points). Earnings per share are expected to be in the range of $3.48 to $3.58. The Company is targeting operating cash flow of approximately $3.3 billion to $3.4 billion and capital expenditures of approximately $0.7 billion. 

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 statements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, protection of intellectual property, 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, 2012, which are hereby incorporated by reference.



16

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Item 4. Controls and Procedures 

The Company maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in a timely manner. This system also is designed to ensure information is accumulated and communicated to management, including the Company's certifying officers, to allow timely decisions regarding required disclosure. Based on an evaluation performed, the certifying officers have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
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.
There was no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.  

PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (shares in 000s).
Period
Total Number of Shares
Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 2013
870
 
$55.49
 
870
 
11,235
February 2013
850
 
$57.52
 
850
 
10,385
March 2013
1,050
 
$56.40
 
1,050
 
9,335
     Total
2,770
 
$56.46
 
2,770
 
9,335
 
The Company’s Board of Directors authorized the repurchase of up to 80 million shares under the May 2008 program. The above table does not reflect a new program approved by the Board of Directors on May 7, 2013 for the repurchase of up to 70 million additional shares.



17

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Item 6. Exhibits

(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K). 
3.1

Bylaws of Emerson Electric Co., as amended through April 2, 2013, incorporated by reference to the Company's Form 8-K dated April 2, 2013, filed on April 8, 2013, Exhibit 3.1.
 
 
4

Emerson agrees to furnish to the Securities and Exchange Commission, upon request, copies of any long term debt instruments that authorize an amount of securities constituting 10% or less of the total assets of Emerson and its subsidiaries on a consolidated basis.

 
 
10.1

Letter Agreement effective as of February 5, 2013 by and between Emerson Electric Co. and Walter J. Galvin, incorporated by reference to the Company's Form 8-K dated February 5, 2013 and filed February 8, 2013, Exhibit 10.1.

 
 
10.2

Consulting Agreement made and entered into as of February 5, 2013 by and between Emerson Electric Co. and Walter J. Galvin, incorporated by reference to the Company's Form 8-K dated February 5, 2013 and filed February 8, 2013, Exhibit 10.2.

 
 
12

Ratio of Earnings to Fixed Charges.
 
 
31

Certifications pursuant to Exchange Act Rule 13a-14(a).
 
 
32

Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
 
101

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three and six months ended March 31, 2012 and 2013, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2012 and 2013, (iii) Consolidated Balance Sheets at September 30, 2012 and March 31, 2013, (iv) Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2013, and (v) Notes to Consolidated Financial Statements for the three and six months ended March 31, 2013.  



18

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

SIGNATURE
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. 
 
 
EMERSON ELECTRIC CO.
 
 
 
 
 
 
 
 
 
Date:
May 8, 2013
By
/s/ Frank J. Dellaquila
 
 
 
 
Frank J. Dellaquila
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(on behalf of the registrant and as Chief Financial Officer)
 


INDEX TO EXHIBITS
Exhibit No.
Exhibit 
 
 
 
12

 
Ratio of Earnings to Fixed Charges.
 
 
 
31

 
Certifications pursuant to Exchange Act Rule 13a-14(a).
 
 
 
32

 
Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
 
 
101

 
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three and six months ended March 31, 2012 and 2013, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2012 and 2013, (iii) Consolidated Balance Sheets at September 30, 2012 and March 31, 2013, (iv) Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2013, and (v) Notes to Consolidated Financial Statements for the three and six months ended March 31, 2013.  



19