Emerson Electri (EMR)
Q2 2010 Earnings Call
May 04, 2010 2:00 pm ET
Lynne Maxeiner - Director of IR
David Farr - Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee
Scott Davis - Morgan Stanley
John Inch - BofA Merrill Lynch
Nigel Coe - Deutsche Bank AG
Eli Lustgarten - Longbow Research LLC
Tony Boase - AG Edwards
Robert Cornell - Barclays Capital
Terry Darling - Goldman Sachs Group Inc.
Jeffrey Sprague - Citigroup
Steven Winoker - Sanford C. Bernstein & Co., Inc.
Richard Kwas - Wells Fargo Securities, LLC
Previous Statements by EMR
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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Emerson Second Quarter Fiscal 2010 Results Conference Call. [Operator Instructions]
Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K, as filed with the SEC.
At this time, Emerson's management will discuss non-GAAP measures about the company's performance, and the reconciliation of those to the most direct comparable GAAP measures. Content within this presentation is posted on the Investor Relations of Emerson's website at www.emerson.com/financial. I would now like to turn the conference over to our host, Lynne Maxeiner, Director of Investor Relations. Please go ahead.
Thank you, Luke. I am joined today by David Farr, Chairman, Chief Executive Officer and President of Emerson; and Frank Dellaquila, Senior Vice President and Chief Financial Officer. Today's call will summarize Emerson's second quarter 2010 results. A conference call slide presentation will accompany my comments, and is available in the Investor Relations section of Emerson's corporate website. A replay of this conference call and slide presentation will be available on the website after the call for the next three months. I will start with the highlights of the quarter, as shown on Page 2 of the conference call slide presentation.
Second quarter sales were up 1% to $5.1 billion. Underlying sales declined 6%, and underlying sales in the quarter were positive in Climate Technologies and Appliance and Tools. Operating profit margin was 15%, up 90 basis points. We saw a nice increase in business segment EBIT margin, which was up 340 basis points to 14.8%. Earnings per share from continuing operations attributable to Emerson of $0.54, up 10% compared to $0.49 in the prior-year quarter. Another quarter of strong operating cash flow, $632 million, and free cash flow of $543 million. Our free cash flow to net earnings conversion was 134%. Solid trade working capital performance, with trade working capital, as a percent to sales, improving to 17.5%.
Slide 3, the P&L. Again, sales up 1% to $5.144 billion. Underlying sales declined 6%, acquisitions added four points and currency added three points. Operating profit in the quarter of $770 million, or 15% of sales. The increase primarily driven by cost reduction benefits.
We had a negative impact from the strong increase in stock price and one year overlap for retention purposes of two stock compensation programs. Net earnings, up 11% to $414 million. Diluted average shares in the quarter of 757.4 million. We repurchased 0.6 million shares for $27 million in the quarter, which leaves you with an EPS from continuing ops of $0.54, up 10%. A negative $0.01 impact from discontinued operations related to the LANDesk business leaves you with a reported EPS of $0.53.
Next slide, underlying sales by geography. First, in the United States, sales declined 3%; Europe was down 18%; Latin America, down 12%; and Middle East/Africa was down 13%. Asia continued to grow and was up 5%. Total international was down 9%, which gets you to a total underlying sales decrease of 6%. Again, currency added three points and acquisitions added four points, getting you to the consolidated sales growth of 1%.
Slide 5, some income statement detail. Gross profit dollars of $2 billion or 38.9% of sales, up 280 basis points. The improvement driven by cost containment programs, restructuring benefits, acquisitions and favorable new product and innovation mix. SG&A, up 23.9% of sales, which brings you to operating profit of $770 million or 15% of sales.
As previously indicated, we had a negative impact from the stock price change, as well as the overlap of two stock compensation programs. Other deductions, net of $92 million, which includes lower restructuring, lower currency transaction losses and lower bad debt expense, which was partially offset by increased acquisition amortization and lower one-time gains. Interest expense of $67 million in the quarter gets you to the pretax of $611 million or 11.9%. Taxes in the quarter of $184 million, for a tax rate of 30.1%. The tax rate is estimated at approximately 30% for the fiscal year.
Next slide, cash flow and balance sheet. Operating cash flow continues to be strong and was up 27% in the quarter to $632 million, driven by working capital benefits and higher earnings. Capital expenditures of $89 million. We're keeping the capital tight until the recovery absorbs excess global capacity. Free cash flow of $543 million, up 52%. The trade working capital balances at the bottom of the slide show our strong improvement in our trade working capital to sales ratio at 17.5% in the quarter.
Next slide, the business segment P&L. Business segment EBIT of $788 million or 14.8% of sales, a strong increase of 32% or 340 basis points, the improvement driven by cost reduction benefits and lower restructuring costs. Difference in accounting methods of $49 million, corporate and other of $159 million. This includes the negative impact from the strong increase in stock price and one-year overlap for retention purposes of two stock compensation programs and totaled $72 million, and lower one-time gains, $25 million, gets you to the earnings before interests and taxes from continuing ops of $678 million. Interest expense of $67 million, up $18 million, the increase driven by the change in debt mix. We issued $1.35 billion of long-term debt in the last 12 months, which gets you to the pretax line of $611 million.