Why did reported EPS look strong while continuing-operations EPS declined?

Diluted EPS of $2.59 includes a $0.18 per-share gain from discontinued operations tied to the sale of the Dura-Line business. Excluding that gain, EPS from continuing operations was $2.41, down from $2.56, mainly because divestiture gains were $207 million lower than in 2002 and a $54 million goodwill impairment was recorded.

How healthy is Emerson's balance sheet and debt position?

The balance sheet improved in 2003. Total debt fell to about $4.1 billion, the debt-to-capital ratio dropped to 39.0% from 44.2%, and the operating cash flow-to-debt ratio rose to 42.0%. Interest coverage was 6.7 times, down from 7.4 times, and the company had $2.9 billion in credit lines to support short-term borrowing.

Which business segments are driving growth and which are weakening?

HVAC and Industrial Automation drove earnings growth, and Electronics & Telecommunications improved its margins after restructuring despite falling sales. Process Control earnings were flat due to weakness in the valve business. The U.S. market remained weak, with U.S. sales down 4%, while Asia and Latin America grew in several segments.

What risks and cost pressures should investors watch in fiscal 2004?

Key pressures include pension costs, which are expected to rise about $60 million in 2004 because of lower discount rates and asset returns. A further decline in the discount rate could require a significant charge to equity, roughly $550 million after tax for a 10% decrease. Other risks include goodwill impairment exposure in Electronics & Telecommunications, where a 15% fair value decline could trigger an additional impairment of about $100 million, and the continuing weakness of the U.S. industrial and telecom markets.

Is Emerson's dividend secure, and how is capital being deployed?

The dividend is well supported. Dividends paid were $661 million in 2003, and the board raised the quarterly rate to an annualized $1.60 per share. Emerson did not repurchase shares in 2003, and capital spending was $337 million, which the company expects to be about 3% of sales in 2004. Free cash flow of about $1.4 billion comfortably covers the dividend.

EMR 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 14, 2003. Cited figures are marked; the original filing is the authoritative source.

Emerson Electric's fiscal 2003 10-K (year ended September 30, 2003) shows a company that held sales roughly flat and protected profitability through cost reductions, while its balance sheet improved meaningfully.

Net sales were $13.96 billion^a, up 2% reported but down 1% on an underlying basis, with a roughly 4-point currency tailwind offsetting weakness in the U.S. Net earnings rose to $1.09 billion, or $2.59 per diluted share, versus $122 million in fiscal 2002, which was depressed by a $938 million non-cash goodwill impairment. Continuing-operations EPS was $2.41, down from $2.56, reflecting lower divestiture gains, a $54 million goodwill impairment in Electronics & Telecommunications, and higher pension costs. The 2003 results were also helped by a $76 million gain from discontinued operations, tied to the sale of the Dura-Line business, and a $68 million tax benefit from the restructuring of the retained ETP business.

Segment performance was mixed. HVAC was the standout, with underlying sales up nearly 7% and earnings up 16% to $386 million^b. Industrial Automation earnings rose 11% to $330 million, and Electronics & Telecommunications earnings jumped 41% to $168 million despite a 7% underlying sales decline, helped by restructuring.

Process Control was flat at $388 million^c in earnings, and Appliance & Tools earnings grew 5% to $479 million. Backlog grew to $2.36 billion from $2.07 billion, led by Process Control and Electronics & Telecommunications, which supports near-term revenue visibility. Financially, Emerson strengthened its position.

Total debt fell to about $4.1 billion^d, and the debt-to-capital ratio improved to 39.0% from 44.2%. Operating cash flow was $1.73 billion and free cash flow was $1.4 billion, although pension contributions of $308 million weighed on cash generation.

The company raised its quarterly dividend to an annualized $1.60 per share and did not repurchase shares during 2003. Management's stated focus for 2004 includes capital spending of about 3% of sales and an expected increase in retirement plan expense of roughly $60 million.

02—Key points

Key Highlights

Net sales of $13.96 billion, up 2% reported but down 1% underlying; U.S. sales fell 4% while international sales rose 2%, led by Asia.
Net earnings of $1.09 billion ($2.59 diluted EPS) versus $122 million in 2002, which included a $938 million goodwill impairment; continuing-operations EPS was $2.41, down from $2.56.
HVAC was the strongest segment, with underlying sales up nearly 7% and earnings up 16% to $386 million; Industrial Automation earnings rose 11% to $330 million.
Electronics & Telecommunications earnings rose 41% to $168 million despite a 7% underlying sales decline, aided by restructuring; the segment still recorded a $54 million goodwill impairment.
Total debt fell to about $4.1 billion and the debt-to-capital ratio improved to 39.0% from 44.2%; long-term debt was rated A2/A.
Operating cash flow was $1.73 billion and free cash flow was about $1.4 billion, although pension contributions of $308 million reduced cash generation.
Backlog rose to $2.36 billion from $2.07 billion, and the quarterly dividend was increased to an annualized $1.60 per share.

03—Questions

Frequently Asked Questions

Why did reported EPS look strong while continuing-operations EPS declined?
Diluted EPS of $2.59 includes a $0.18 per-share gain from discontinued operations tied to the sale of the Dura-Line business. Excluding that gain, EPS from continuing operations was $2.41, down from $2.56, mainly because divestiture gains were $207 million lower than in 2002 and a $54 million goodwill impairment was recorded.
How healthy is Emerson's balance sheet and debt position?
The balance sheet improved in 2003. Total debt fell to about $4.1 billion, the debt-to-capital ratio dropped to 39.0% from 44.2%, and the operating cash flow-to-debt ratio rose to 42.0%. Interest coverage was 6.7 times, down from 7.4 times, and the company had $2.9 billion in credit lines to support short-term borrowing.
Which business segments are driving growth and which are weakening?
HVAC and Industrial Automation drove earnings growth, and Electronics & Telecommunications improved its margins after restructuring despite falling sales. Process Control earnings were flat due to weakness in the valve business. The U.S. market remained weak, with U.S. sales down 4%, while Asia and Latin America grew in several segments.
What risks and cost pressures should investors watch in fiscal 2004?
Key pressures include pension costs, which are expected to rise about $60 million in 2004 because of lower discount rates and asset returns. A further decline in the discount rate could require a significant charge to equity, roughly $550 million after tax for a 10% decrease. Other risks include goodwill impairment exposure in Electronics & Telecommunications, where a 15% fair value decline could trigger an additional impairment of about $100 million, and the continuing weakness of the U.S. industrial and telecom markets.
Is Emerson's dividend secure, and how is capital being deployed?
The dividend is well supported. Dividends paid were $661 million in 2003, and the board raised the quarterly rate to an annualized $1.60 per share. Emerson did not repurchase shares in 2003, and capital spending was $337 million, which the company expects to be about 3% of sales in 2004. Free cash flow of about $1.4 billion comfortably covers the dividend.

04—Continue

← View all 10-K filings