01—Abstract
Summary
Summary of the 10-K filed December 23, 1998. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 1998 10-K (year ended September 30, 1998) reports a record year: net sales rose 9.3% to $13.4 billiona, net earnings grew 9.5% to $1.23 billion, and diluted EPS reached $2.77, up 10.8%.
Growth was balanced across both segments and was driven by domestic strength (particularly electronics and fractional motors), acquisitions, and cost reduction. Gross margin improved modestly to 36.1% (cost of sales at 63.9% of sales), and return on average equity rose to 21.9%. Operating cash flow was a record $1.65 billionb (the MD&A cites $1.7 billion), supporting $603 million of capital expenditures and $573 million of acquisitions.
The balance sheet became more leveraged. Total debt rose to $2.6 billionc, the debt-to-capital ratio climbed to 30.8% from 27.1%, and long-term debt more than doubled to $1.06 billion, largely to fund acquisitions and $499 million of share repurchases. Management still characterizes the company as financially strong, citing interest coverage of 13.7 times and roughly $1.8 billion of credit lines.
Year 2000 remediation is more than half complete on critical systems and is expected to be substantially complete by September 1999, with costs described as immaterial. Looking ahead, management expects acquisitions completed in fiscal 1998 and the pending Westinghouse Process Control Division purchase to add about $1 billiond of sales in fiscal 1999.
The company also raised its quarterly dividend 10.2% to an annualized $1.30 per share. Risks to monitor include the stronger dollar, weakness in Asian economies, and the company's reliance on continued acquisitions and buybacks for growth in its per-share results.
02—Key points
Key Highlights
- Record net sales of $13.4 billion, up 9.3%, with domestic sales up about 14% and international sales up about 3%
- Net earnings of $1.23 billion (up 9.5%) and diluted EPS of $2.77 (up 10.8%); return on average equity of 21.9%
- Record operating cash flow of $1.65 billion, but capital expenditures of $603 million and acquisitions of $573 million consumed much of it
- Total debt rose to $2.6 billion; debt-to-capital ratio increased to 30.8% from 27.1%, though interest coverage remained strong at 13.7x
- Commercial and Industrial segment sales of $8.1 billion (+10%) with pretax income of $1.12 billion; Appliance and Construction-Related sales of $5.3 billion (+8.3%) with pretax income of $940 million
- Backlog increased to $2.08 billion from $1.99 billion; new products (introduced in the past five years) reached $4.4 billion, or 33% of sales
- Quarterly dividend raised 10.2% to an annualized $1.30 per share; $499 million of net treasury stock purchases in fiscal 1998
03—Questions
Frequently Asked Questions
How did Emerson's profitability trend in fiscal 1998?
Profitability improved on both top and bottom lines. Net earnings rose 9.5% to $1.23 billion, and net earnings as a percentage of sales held at 9.1%. Cost of sales fell to 63.9% of sales from 64.0%, and income before taxes grew 7.8% to $1.92 billion. The effective tax rate declined to 36.1% from 37.1%.
Has Emerson's balance sheet become riskier?
Leverage increased meaningfully. Long-term debt rose to $1.06 billion from $571 million, and total debt reached $2.6 billion, pushing the debt-to-capital ratio to 30.8%. Management attributes this to acquisitions and share repurchases. Liquidity appears adequate, with about $1.8 billion of U.S. credit lines and $585 million of unused non-U.S. facilities, and interest coverage remains high at 13.7x.
What growth is expected from acquisitions in fiscal 1999?
Management expects acquisitions completed during fiscal 1998, along with the first-quarter 1999 purchase of Westinghouse's Process Control Division, to contribute about $1 billion in sales in fiscal 1999. Acquisitions in 1998 had annualized sales of roughly $775 million, and the company has an ongoing strategy of acquiring businesses, which has been a meaningful source of growth.
What are the main risks to Emerson's international business?
International sales were $5.4 billion, or about 40% of the total. Key risks include currency fluctuations (a stronger dollar reduced reported sales growth by more than 2%), weakness in Asian economies (which reduced U.S. export sales by 8%), nationalization of facilities, and restrictions on moving funds. Management states that these risks have not materially affected its financial position to date.
Is Emerson exposed to material Year 2000 costs or legal liabilities?
Management says Year 2000 compliance costs are not material to operating results or financial position, with substantially all systems expected to be compliant by September 30, 1999. Separately, Emerson is a party to several pending lawsuits seeking substantial damages, but management does not believe any are material. The filing also reports no known material contingent liabilities.
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