|--Sales in Emerging Markets Up More Than 20 Percent|
--Operating Profit Increased 19 Percent
--Pretax Profit Increased 51 Percent
--Continued Improvement in Working Capital Management
Emerson (NYSE:EMR) announced that net sales for the third quarter of fiscal 2004, which ended June 30, 2004, increased 13 percent to $4,036 million, from $3,573 million in the third quarter of fiscal 2003. Underlying sales, which exclude the impact of exchange rates, acquisitions, and divestitures, were up 11 percent for the quarter, with solid gains in every major region and strength in the United States, Latin America, and Asia.
Earnings from continuing operations for the third quarter increased 23 percent to $341 million, or $0.81 per share, from $278 million, or $0.66 per share, for the third quarter of 2003. Net earnings per share were $0.81 for the three months ended June 30, 2004, compared to net earnings per share of $0.85 for the prior year period, which included a net gain from discontinued operations of $82 million, or $0.19 per share.
Operating cash flow for the third quarter of 2004 increased 258 percent to $755 million from $210 million in the prior-year period, and free cash flow (operating cash flow minus capital expenditures) increased 423 percent to $672 million. These increases reflect strong operational performance, as well as the $140 million tax refund from the sale of the Jordan stock including its Dura-Line operations, lower pension funding of $185 million in the current year, and continued improvements in working capital even with the strong sales growth. The ratio of trade working capital to sales improved to 19.2 percent in the third quarter from 21.8 percent in the prior year third quarter and sequentially from the second quarter ratio of 20.1 percent, further demonstrating the continued success of Emerson's capital efficiency initiatives.
"This was an outstanding quarter, with strong performance across all businesses and all geographies," said Chief Executive David N. Farr. "Emerson continued to outperform the competition with 13 percent sales growth, driven by the combination of strong market demand and the success of our growth initiatives. Sales increased in every major region of the world, led by more than 20 percent growth in emerging markets in Asia, Latin America, and Eastern Europe, and helped by increasing strength in the United States, where sales grew 12 percent during the quarter.
"Our strategy in emerging markets has been to establish broad global positions that enable us to leverage the strength of Emerson's business platforms to provide services, systems, products, and solutions for local customers around the world. During the quarter we added to our leading worldwide position in the process control business with the $18 million acquisition of Metran Industrial Group, one of the top suppliers of flow products and services for the process industry in Russia and Eastern Europe.
"Sales growth in the United States was driven by strong residential air-conditioning demand, solid consumer spending, and an upturn in industrial fixed investment. Sales growth in Europe was moderate despite sluggish market growth and tougher prior-year comparisons. Sales in Asia increased nearly 24 percent with double-digit increases in every business segment, and more than 40 percent growth in China. Latin America sales grew nearly 16 percent, led by robust sales in process control, HVAC, and the electronics and telecommunications business.
"Each of Emerson's segments delivered significant earnings growth during the quarter, led by strong improvements in the electronics and telecommunications business and the HVAC business. Our operating profit margin improved 80 basis points, with margin increases in each of our businesses, delivering the payoff of all the restructuring performed by Emerson's employees across the company in the last three years. Of all our accomplishments, we are especially pleased with our ability to continue taking tough actions to improve profitability despite pressure from materials and pension costs.
"In addition to the profitability improvements, Emerson also excelled on its operational efficiency/lean initiatives and cash flow performance. The average 'days-in-the-cash-cycle' dropped to 76 days in the quarter from 86 days in the prior year, driving further improvements in working capital, which was a net contributor to operating cash flow during the quarter. The triple-digit operating and free cash flow improvements achieved during this quarter should allow us to exceed our previous stretch targets of $2 billion and $1.6 billion for operating cash flow and free cash flow, respectively, in fiscal 2004.
"We are very excited about our recently announced acquisition of the Marconi power business. We expect to close this transaction by the end of Emerson's fourth fiscal quarter, having recently received regulatory approval. The Marconi power business expands our North American presence in DC products, solutions, and services, and enhances our position as a global leader in DC power systems.
"Our June underlying orders improved, driven by solid demand across the company, particularly in the industrial automation, process control, and electronics and telecommunications markets. Based on the outstanding performance this quarter in conjunction with continued strong order rates, we expect our fiscal year 2004 earnings per share to be approximately $2.90. This is an increase from our previous earnings per share guidance of $2.75 to $2.85."
Sales of the heating, ventilating, and air conditioning segment increased 19 percent to $873 million, with gains in all of the businesses. Penetration gains and strong demand for Emerson's Copeland Scroll compressor and related technologies contributed approximately 10 percentage points of the sales growth during the quarter. Sales also benefited from solid underlying market growth and a more than 1 percent favorable impact from currency translation. Underlying sales growth of 18 percent was driven by 22 percent growth in the United States and 10 percent growth in international sales, reflecting more than 12 percent growth in Asia and very strong growth in the Middle East/Africa regions. This increase in third-quarter U.S. sales was primarily due to residential air conditioning compressors from the continued strong housing market, while international sales primarily reflect growth in China and the Middle East. The underlying sales increase also reflects volume and penetration gains in the temperature sensor and controls business. Earnings from HVAC operations increased 33 percent during the quarter to $149 million, reflecting higher sales volume and leverage, as well as benefits from prior cost reduction efforts.
Electronics and telecommunications segment sales of $670 million were up 17 percent over the prior-year period. Underlying sales, excluding a more than 1 percent favorable impact from currency and a more than 2 percent negative impact from the Dura-Line divestiture in the prior year, improved nearly 18 percent. Underlying sales reflect a 29 percent increase in Asia (primarily China), a 15 percent increase in Europe, and a 13 percent increase in the United States. Three distinct trends continued in this market: 1) strong sales of servers and network equipment drove demand for embedded power modules; 2) continued spending by telecommunications providers in Asia drove the DC power systems business; and 3) increased investment in data computing systems, primarily in the United States and Europe, boosted demand for uninterruptible power supplies and precision air-conditioning. Earnings increased $38 million, or 97 percent, to $78 million, reflecting higher sales volume and leverage as well as benefits from prior cost reduction efforts.
Process control segment sales increased 9 percent to $925 million, from $850 million for the same period a year ago, as this segment continues to grow in international markets and to win large projects and displace competitors. During the quarter Emerson Process Management was awarded a $32 million contract by Petrobras, one of the world's largest integrated oil and gas companies, to ensure reliable measurement of offshore oil and gas production units in Brazil. Also in the quarter, significant progress was made on completion of automation with PlantWeb(R) architecture and FOUNDATION(TM) Fieldbus for the Shell Deer Park Refining Company, the sixth largest oil refinery in the U.S. - a $32 million project announced in 2002. Underlying sales increased 7 percent, excluding the impact of divestitures, net of acquisitions, and a 2 percent positive impact from currency translation. Underlying results reflect growth in almost all businesses, particularly measurement and analytical instrumentation, and power and water and systems/solutions. The underlying sales gain also reflects 26 percent growth in Asia, 1 percent growth in Europe and very strong gains in Latin America, as well as a nearly 3 percent increase in U.S. sales. Earnings increased 27 percent to $119 million due to the increased volume and leverage from higher sales, as well as savings from prior cost reduction actions and lower rationalization costs.
Industrial automation segment sales increased 13 percent to $744 million for the three months ended June 30, 2004, with underlying sales increasing 9 percent and a nearly 4 percent favorable impact from currency translation. The 9 percent increase in underlying sales reflects a 13 percent increase in the United States and international sales growth of nearly 7 percent, with 31 percent growth in Asia and 2 percent growth in Europe. The underlying sales increase was due to growth in all businesses, with particular strength in power generating alternators, as well as in the power transmission and fluid power and control businesses, reflecting the rebound in the U.S. industrial production and manufacturing construction. Earnings increased 16 percent to $99 million, primarily reflecting benefits from prior cost reduction efforts and increased volume and leverage from higher sales.
Appliance and tools segment sales increased 10 percent to $955 million. This increase reflects a 10 percent increase in underlying sales and a 1 percent favorable impact from currency, partially offset by a less than 1 percent negative impact related to exiting the manufacturing of bench top and stationary power tools. Underlying sales grew in all of the businesses, with continued growth in the residential-related businesses and in the professional tools, storage, and motor businesses. Disposer increases reflect a strong U.S. residential construction market and higher demand at major retailers. The increase in sales of hermetic motors was primarily due to demand for residential air conditioning units. The professional tools business benefited from the upturn in U.S. capital spending by manufacturers. Sales in the United States grew over 7 percent while total international sales grew nearly 6 percent. Earnings of the appliance and tools segment increased 20 percent to $137 million, primarily due to increased volume and leverage from higher sales.
Upcoming Investor Events
On Tuesday, August 3, 2004, at 2:00 p.m. EDT (1:00 p.m. CDT), Emerson senior management will discuss the quarterly results during an investor conference call. All interested parties may listen to the live conference call via the Internet by going to the Investor Relations area of Emerson's Web site at www.gotoemerson.com/financial and completing a brief registration form. A replay of the conference call will be available for the next three months at the same location on the Web site. Details of upcoming events will be posted as they occur in the Investor Relations Calendar of Events on the corporate Web site.
Forward-Looking and Cautionary Statements
Statements in this release that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties. These 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.
Emerson and Subsidiaries Consolidated Operating Results (Dollars In Millions Except Per Share Amounts) Quarter Ended June 30, Percent 2003 2004 Change Net sales $3,573 $4,036 13% Less: Costs and expenses Cost of sales 2,323 2,597 SG&A expenses 734 824 Other deductions, net 127 66 Interest expense, net 60 50 Earnings from continuing operations before income taxes 329 499 51% Income taxes 51 158 Earnings from continuing operations 278 341 23% Net gain from discontinued operations 82 - Net earnings $ 360 $ 341 (5%) Diluted earnings per common share: Earnings from continuing operations $ 0.66 $ 0.81 23% Discontinued operations 0.19 - Diluted earnings per common share $ 0.85 $ 0.81 (5%) Quarter Ended June 30, 2003 2004 Other deductions, net Gains from divestitures of business interests $ (9) $ - Impairment 54 - Rationalization of operations 43 31 Amortization of intangibles 4 4 Other 35 31 Total $ 127 $ 66 Emerson and Subsidiaries Consolidated Operating Results (Dollars In Millions Except Per Share Amounts) Nine Months Ended June 30, Percent 2003 2004 Change Net sales $10,264 $11,495 12% Less: Costs and expenses Cost of sales 6,660 7,418 SG&A expenses 2,182 2,421 Other deductions, net 239 174 Interest expense, net 175 160 Earnings from continuing operations before income taxes 1,008 1,322 31% Income taxes 271 419 Earnings from continuing operations 737 903 22% Net loss from discontinued operations 76 - Net earnings $ 813 $ 903 11% Diluted earnings per common share: Earnings from continuing operations $ 1.75 $ 2.14 22% Discontinued operations 0.18 - Diluted earnings per common share $ 1.93 $ 2.14 11% Nine Months Ended June 30, 2003 2004 Other deductions, net Gains from divestitures of business interests $ (24) $ (27) Impairment 54 - Rationalization of operations 100 92 Amortization of intangibles 12 14 Other 97 95 Total $ 239 $ 174 Emerson and Subsidiaries Consolidated Balance Sheets (Dollars In Millions) June 30, 2003 2004 Assets Cash and equivalents $ 709 $ 1,386 Receivables, net 2,668 2,874 Inventories 1,656 1,608 Other current assets 581 475 Total current assets 5,614 6,343 Property, plant & equipment, net 2,993 2,844 Goodwill 4,956 5,024 Other 1,820 1,726 $15,383 $15,937 Liabilities and Stockholders' Equity Short-term borrowings and current maturities of long-term debt $ 936 $ 878 Accounts payable 1,214 1,387 Accrued expenses 1,522 1,662 Income taxes 61 186 Total current liabilities 3,733 4,113 Long-term debt 3,735 3,149 Other liabilities 1,431 1,673 Stockholders' equity 6,484 7,002 $15,383 $15,937 Emerson and Subsidiaries Consolidated Statements Of Cash Flow (Dollars In Millions) Nine Months Ended June 30, 2003 2004 Operating Activities Net earnings $ 813 $ 903 Depreciation and amortization 406 410 Changes in operating working capital (89) 149 Pension funding (286) (101) Gains from divestitures and other 47 129 Net cash provided by operating activities 891 1,490 Investing Activities Capital expenditures (213) (230) Purchases of businesses, net of cash and equivalents acquired (1) (18) Divestitures of businesses and other, net 40 102 Net cash used in investing activities (174) (146) Financing Activities Net decrease in short-term borrowings (673) (102) Proceeds from long-term debt 746 27 Principal payments on long-term debt (13) (14) Dividends paid (496) (506) Treasury stock, net 7 (81) Net cash used in financing activities (429) (676) Effect of exchange rate changes on cash and equivalents 40 22 Increase in cash and equivalents 328 690 Beginning cash and equivalents 381 696 Ending cash and equivalents $ 709 $1,386 Emerson and Subsidiaries Segment Sales And Earnings (Dollars In Millions) Quarter Ended June 30, 2003 2004 Sales Process Control $ 850 $ 925 Industrial Automation 660 744 Electronics and Telecommunications 574 670 Heating, Ventilating, and Air Conditioning 733 873 Appliance and Tools 869 955 3,686 4,167 Discontinued operations (13) - Eliminations (100) (131) Net Sales $ 3,573 $ 4,036 Quarter Ended June 30, 2003 2004 Earnings Process Control $ 94 $ 119 Industrial Automation 85 99 Electronics and Telecommunications 40 78 Heating, Ventilating, and Air Conditioning 112 149 Appliance and Tools 115 137 446 582 Discontinued operations 2 - Differences in accounting methods 32 33 Corporate and other (91) (66) Interest expense, net (60) (50) Earnings from continuing operations before income taxes $ 329 $ 499 Quarter Ended June 30, 2003 2004 Rationalization of operations Process Control $ 13 $ 7 Industrial Automation 5 4 Electronics and Telecommunications 7 4 Heating, Ventilating, and Air Conditioning 6 5 Appliance and Tools 16 14 Corporate (4) (3) Total Emerson $ 43 $ 31 Emerson and Subsidiaries Segment Sales and Earnings (Dollars in Millions) Nine Months Ended June 30, 2003 2004 Sales Process Control $ 2,441 $ 2,679 Industrial Automation 1,929 2,162 Electronics and Telecommunications 1,697 1,955 Heating, Ventilating, and Air Conditioning 1,938 2,239 Appliance and Tools 2,591 2,806 10,596 11,841 Discontinued operations (41) - Eliminations (291) (346) Net Sales $ 10,264 $ 11,495 Nine Months Ended June 30, 2003 2004 Earnings Process Control $ 258 $ 309 Industrial Automation 248 280 Electronics and Telecommunications 98 206 Heating, Ventilating, and Air Conditioning 285 354 Appliance and Tools 354 399 1,243 1,548 Discontinued operations 12 - Differences in accounting methods 96 92 Corporate and other (168) (158) Interest expense, net (175) (160) Earnings from continuing operations before income taxes $ 1,008 $ 1,322 Nine Months Ended June 30, 2003 2004 Rationalization of operations Process Control $ 25 $ 24 Industrial Automation 14 11 Electronics and Telecommunications 32 21 Heating, Ventilating, and Air Conditioning 17 13 Appliance and Tools 28 31 Corporate (8) (8) Discontinued operations (8) - Total Emerson $ 100 $ 92 Reconciliations of Non-GAAP Financial Measures The following reconciles each non-GAAP measure with the most directly comparable GAAP measure (dollars in millions): Percent 2003 2004 Change Third-Quarter Cash Flow Operating Cash Flow $ 210 $ 755 258% Capital Expenditures 82 83 Free Cash Flow (Non-GAAP) $ 128 $ 672 423% 2004E Cash Flow Operating Cash Flow ~$2B Capital Expenditures ~$0.4B Free Cash Flow (Non-GAAP) ~$1.6B 2003 2004 Third-Quarter Operating Profit Net Sales $ 3,573 $ 4,036 13% Cost of Sales 2,323 2,597 SG&A Expenses 734 824 Operating Profit (Non-GAAP) 516 615 19% OP % (Non-GAAP) 14.4% 15.2% Other Deductions, Net 127 66 Interest Expense, Net 60 50 Pre-Tax Earnings $ 329 $ 499 51% Pre-Tax Earnings % 9.2% 12.4% 3Q 2004 Net Sales Underlying Sales (Non-GAAP) 11% Currency Translation 2 pts Acquisitions/Divestitures - Net Sales 13% All amounts above are GAAP financial measures except as noted.