01—Abstract
Summary
Summary of the 10-K filed December 21, 2001. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2001 (year ended September 30, 2001) was a year of sharp earnings deterioration driven by a severe downturn in its Electronics and Telecommunications business and broad weakness in U.S. capital goods markets.
Net sales were essentially flat at $15.5 billiona (down 0.4%), but net earnings fell 27.5% to $1.03 billion, and diluted EPS dropped to $2.40 from $3.30. The decline was amplified by a $377 million pretax repositioning charge recorded in the fourth quarter, which cut EPS by $0.61. Excluding that charge, EPS was $3.01, down 9% year over year.
Fourth-quarter results were particularly weak, with a net loss of $14.7 millionb, as second-half sales in Electronics and Telecommunications fell more than 20%. Balance sheet and cash flow metrics weakened. Total debt rose to $4.7 billion, the debt-to-capital ratio climbed to 43.5% from 41.8%, and the interest coverage ratio fell to 6.2x from 8.6x.
Operating cash flow declined 7% to $1.7 billionc, though capital expenditures fell 20%, which supported free cash flow. Management continued to return capital through a record dividend of $1.53 per share (up 7%), a raised quarterly rate to an annualized $1.55, and a new authorization to repurchase 40 million shares over roughly five years. Return on equity dropped to 16.5% from 22.6%.
Looking forward, the company is repositioning toward faster-growing markets. Subsequent to year-end it agreed to exchange its ENI semiconductor equipment division for 12 million MKS Instruments shares, announced the divestiture of Chromalox, and acquired Avansys Power in China for about $750 milliond.
Process Control was the bright spot, with segment earnings up 28% excluding charges, reflecting strength in PlantWeb and services. Investors should weigh the cyclical exposure of the Electronics and Telecommunications and Industrial Automation segments against the company's strong market positions, high international mix (40% of sales), and disciplined cost management.
02—Key points
Key Highlights
- Net sales were $15.5 billion, down 0.4% year over year, as Process Control growth (+8%) was offset by declines in Industrial Automation (-7%), Electronics and Telecommunications (second-half sales down over 20%), HVAC (-2%), and Appliance and Tools (-8%).
- Net earnings fell 27.5% to $1.03 billion, and diluted EPS fell to $2.40 from $3.30; excluding the $377 million ($0.61/share) fourth-quarter repositioning charge, EPS was $3.01, down 9%.
- Fourth-quarter 2001 net earnings were a loss of $14.7 million, compared with $371 million in the prior-year fourth quarter.
- Total debt rose to $4.7 billion, with the debt-to-capital ratio at 43.5% (vs. 41.8%) and interest coverage down to 6.2x from 8.6x.
- Operating cash flow was $1.7 billion (down 7.2%), while capital expenditures fell 20% to $554 million, supporting free cash flow growth.
- Dividends rose 7% to $1.53 per share (a record $654 million); the quarterly dividend was raised to an annualized $1.55 and a 40 million share repurchase authorization was approved.
- Backlog fell 25% to $2.1 billion, with Electronics and Telecommunications backlog down 62% to $414 million, signaling continued near-term pressure.
03—Questions
Frequently Asked Questions
Why did Emerson's earnings decline so sharply in fiscal 2001 despite nearly flat sales?
Earnings were hit by a sharp drop in second-half demand for network power products in Electronics and Telecommunications, weak U.S. industrial capital goods spending affecting Industrial Automation, lower HVAC demand, and the $377 million pretax repositioning charge recorded in Q4 2001. Higher interest expense of $304 million and a larger 'other deductions' line (mainly the charge) also weighed on results, partly offset by gains of $187 million from divestitures.
What was the repositioning charge and what does it include?
The $377 million pretax charge ($260 million after tax, $0.61 per share) was taken to accelerate cost reductions. It consists of consolidation and rationalization of operations ($136 million), exiting manufacturing of certain product lines ($124 million), writedowns of non-strategic investments and other costs ($52 million), and an inventory writedown of $65 million. It is primarily non-cash and includes the elimination of roughly 2,900 positions, with about 1,100 more to be provided for in 2002.
Is Emerson's balance sheet and dividend safe given the higher leverage?
Leverage increased, with total debt at $4.7 billion and a 43.5% debt-to-capital ratio, driven by acquisitions and share repurchases. The company still has $3 billion in credit lines to support commercial paper and $2 billion of shelf registration capacity, and it issued $500 million of new notes after year-end to refinance commercial paper. Operating cash flow of $1.7 billion comfortably covered dividends of $654 million, and management raised the dividend, indicating confidence in cash generation, though interest coverage has declined materially.
Which business segments are performing well and which are under pressure?
Process Control was the strongest performer, with sales up 8% to $3.3 billion and segment EBIT up 28% excluding charges, driven by PlantWeb and services. Electronics and Telecommunications (sales up 9% but sharply weaker in the second half) and Industrial Automation (sales down 7%, earnings down 14%) face the greatest pressure. HVAC and Appliance and Tools saw declining U.S. demand, with Appliance and Tools earnings down 13%.
What portfolio changes is Emerson making that could affect future results?
Emerson is repositioning toward faster-growing markets. It agreed to exchange its ENI semiconductor equipment division for 12 million shares of MKS Instruments, announced the sale of Chromalox, and acquired Avansys Power Co. Ltd. (China network power products) for about $750 million in Q1 fiscal 2002. Divestitures in 2001 generated $187 million of total gains, and five divested businesses had combined annualized sales of roughly $500 million.
04—Continue