01—Abstract
Summary
Summary of the 10-K filed December 19, 1997. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 1997 (year ended September 30, 1997) was a record year.
Net sales rose 10.3% to $12.3 billiona, with roughly half of the increase from international demand and the remainder from acquisitions, while domestic sales grew about 12%. Net earnings reached a record $1.12 billion (up 10.2%), and earnings per share rose 11.0% to $2.52 (post the March 1997 two-for-one split). Return on average equity improved to 20.8% from 19.9%, and gross margin improved as cost of sales fell to 64.0% of sales from 64.3%.
Operating cash flow was a record $1.5 billionb, up 14%, comfortably funding $575 million of capital expenditures, $319 million of acquisitions, and $481 million of dividends, with the balance supporting about $377 million of net share repurchases. Balance sheet leverage rose modestly. Total debt increased to $2.0 billion, and the total debt-to-capital ratio climbed to 27.1% from 24.5%, though interest coverage improved to 15.8 times.
Backlog grew to $1.99 billionc from $1.81 billion. Management reported record new product sales of $3.9 billion (32% of sales) and R&D spending of $445 million. The company also formed a joint venture with General Signal, producing a pretax gain of about $80 million that was largely offset by related restructuring and other charges.
Income before taxes rose 10.9% to $1.78 billiond. The filing describes a diversified industrial portfolio across two segments: Commercial and Industrial ($7.4 billion in sales, 13.8% margin) and Appliance and Construction-Related ($4.9 billion, 16.5% margin). The company has about 360 manufacturing locations, 190 of them outside the U.S., and international sales were 43% of the total.
Management noted that foreign currency translation reduced sales by about $235 million, and a weaker dollar was a headwind in certain segments. Management stated that no pending legal proceedings are expected to be material and that no material environmental capital expenditures are anticipated.
02—Key points
Key Highlights
- Record net sales of $12.3 billion, up 10.3% from $11.1 billion, with roughly half of growth from international demand and the rest from acquisitions and domestic gains
- Record net earnings of $1.12 billion (up 10.2%) and EPS of $2.52 (up 11.0%), with return on average equity of 20.8%
- Record operating cash flow of $1.5 billion (up 14%) funded capex of $575 million, acquisitions of $319 million, and dividends of $481 million
- Dividend raised 9.3% in November 1997 to an annualized $1.18 per share; $377 million in net share repurchases during the year
- Total debt rose to $2.0 billion and debt-to-capital increased to 27.1% from 24.5%, though interest coverage improved to 15.8x
- Consolidated backlog grew to $1.99 billion from $1.81 billion; new product sales reached a record $3.9 billion (32% of sales)
- Foreign currency translation reduced international sales by about $235 million, and international sales were 43% of the total
03—Questions
Frequently Asked Questions
What drove Emerson's revenue growth in fiscal 1997?
Sales grew 10.3% to $12.3 billion. About half of the increase came from solid international demand, particularly in Asia-Pacific, Latin America and Canada, and the rest came from acquisitions and domestic growth, led by tools and electronics. Currency translation was a $235 million drag on international sales.
How profitable is Emerson and is margin improving?
Net earnings were a record $1.12 billion, or 9.1% of sales, the same margin as in 1996. Cost of sales fell to 64.0% of sales from 64.3%, reflecting cost reduction and productivity programs, while SG&A rose to 19.9% of sales from 19.6% due to investment in new products and growth initiatives. Return on average equity was 20.8%.
Is Emerson's balance sheet becoming more leveraged?
Modestly, yes. Total debt increased to $2.0 billion, and the debt-to-capital ratio rose to 27.1% from 24.5%, driven by acquisitions and share repurchases. Interest coverage nonetheless improved to 15.8 times from 13.7 times, and the company reports ample credit lines, including $1.3 billion of lines of credit supporting commercial paper.
What were the one-time items affecting 1997 results?
A joint venture with General Signal combining Appleton Electric and General Signal's Electrical Group produced a pretax gain of about $80 million in the fourth quarter. This gain was substantially offset by costs from relocating production facilities, asset impairments and litigation, so the net effect on earnings was small.
What are the main risks investors should consider?
Key risks include exposure to foreign currency and interest rate movements (management considers the impact of a 10% dollar move or 1-point rate change immaterial), a weaker dollar's effect on translated earnings, slower European economies, and rising debt levels from acquisitions. Management also flagged risks in foreign operations such as nationalization and restrictions on funds, and noted that several pending lawsuits seek substantial damages, though none are expected to be material.
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