What drove Emerson's record fiscal 2006 results?

Growth was broad-based across all five segments, led by strong global industrial and energy-related demand. Underlying sales rose more than 12%, mainly from volume (about 9 points) and market penetration gains. The Artesyn, Knürr and Bristol acquisitions added about 4 points. Operating leverage on higher volume, plus productivity gains from prior cost reductions, lifted earnings faster than sales.

What are the main risks to margins and earnings growth?

Management highlights commodity inflation, particularly copper and steel, which it says will require additional procurement initiatives and price actions. Rising wage, benefit and pension costs also pressured margins, as did negative product mix and lower margins on recently acquired businesses. The filing notes a potential $800 million pretax charge to equity under FAS 158 and expected 2007 pension contributions of $100-150 million.

How strong is Emerson's balance sheet and cash flow profile?

Total assets were $18.7 billion and stockholders' equity $8.2 billion. Total debt was about $4.0 billion, with a total debt-to-capital ratio of 33.1% and a net debt-to-net capital ratio of 28.1%. Credit ratings are A2 (Moody's) and A (S&P). The company has a $2.8 billion revolving credit facility, and the $2.25 billion shelf registration provides additional flexibility.

What does the stock split and dividend increase mean for shareholders?

The board declared a two-for-one stock split (100% stock dividend) for shareholders of record as of November 17, 2006, with post-split trading starting December 12, 2006. Post-split diluted EPS for fiscal 2006 would be $2.24. The quarterly dividend rose 18%, to an annualized $2.10 per share, and 16.8 million shares remain authorized for repurchase.

What is management's outlook for fiscal 2007?

Management expects underlying sales growth of 5-7%, with an additional 2-4% from currency, acquisitions and divestitures, for reported sales growth of 7-11%. It expects EPS growth of 12-15% above the $4.48 earned in fiscal 2006. The company also expects a moderation in growth rates from fiscal 2006's elevated levels, and it targets capital spending of about 3% of sales and rationalization expense of roughly $100 million.

EMR 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 21, 2006. Cited figures are marked; the original filing is the authoritative source.

Emerson Electric's fiscal 2006 10-K (fiscal year ended September 30, 2006) reports a record year: net sales rose 16% to $20.1 billion^a, net earnings rose 30% to $1.85 billion, and diluted EPS rose 32% to $4.48.

All five business segments grew sales and earnings. Underlying sales (excluding acquisitions, divestitures and currency) grew more than 12%^b, with roughly 9 points from volume and about 4 points from acquisitions, mainly Artesyn, Knürr and Bristol. Gross margin held near 35.6%, and operating leverage on higher volume offset higher wage, pension and raw material costs.

Return on average equity improved to 23.7% from 19.4%. Cash generation and balance sheet strength remained solid. Operating cash flow reached $2.5 billion^c (up 15%), and free cash flow was $1.9 billion.

Total debt-to-capital fell to 33.1% from 35.6%, interest coverage rose to 12.9x, and the company returned cash through $730 million^d in dividends and $871 million in share repurchases. Management guides fiscal 2007 underlying sales growth of 5-7%, reported sales growth of 7-11%, and EPS growth of 12-15% above $4.48. Risks flagged include commodity inflation (copper and steel), pension cost pressures, and the expected $800 million pretax FAS 158 charge to equity.

The board also approved a 100% stock dividend (two-for-one split, effective December 2006) and an 18% increase in the quarterly dividend to an annualized $2.10 per share. Together these signal confidence in sustained growth and a continued capital return policy.

02—Key points

Key Highlights

Record fiscal 2006 net sales of $20.1B (+16%), with underlying sales up more than 12% and acquisitions contributing about 4%
Net earnings of $1.85B (+30%) and diluted EPS of $4.48 (+32%); net margin expanded to 9.2% from 8.2%
Network Power was the fastest-growing segment (sales +31% to $4.35B), while Process Management delivered the largest profit gain ($878M earnings, +31%)
Operating cash flow of $2.5B (+15%) and free cash flow of $1.9B (+15%) reflect strong cash generation
Debt-to-capital improved to 33.1% from 35.6%, and interest coverage rose to 12.9x from 9.8x
Board approved a two-for-one stock split and an 18% dividend increase to an annualized $2.10 per share
FY2007 guidance: underlying sales growth of 5-7% and EPS growth of 12-15% above $4.48, with commodity inflation and pension costs as key watch items

03—Questions

Frequently Asked Questions

What drove Emerson's record fiscal 2006 results?
Growth was broad-based across all five segments, led by strong global industrial and energy-related demand. Underlying sales rose more than 12%, mainly from volume (about 9 points) and market penetration gains. The Artesyn, Knürr and Bristol acquisitions added about 4 points. Operating leverage on higher volume, plus productivity gains from prior cost reductions, lifted earnings faster than sales.
What are the main risks to margins and earnings growth?
Management highlights commodity inflation, particularly copper and steel, which it says will require additional procurement initiatives and price actions. Rising wage, benefit and pension costs also pressured margins, as did negative product mix and lower margins on recently acquired businesses. The filing notes a potential $800 million pretax charge to equity under FAS 158 and expected 2007 pension contributions of $100-150 million.
How strong is Emerson's balance sheet and cash flow profile?
Total assets were $18.7 billion and stockholders' equity $8.2 billion. Total debt was about $4.0 billion, with a total debt-to-capital ratio of 33.1% and a net debt-to-net capital ratio of 28.1%. Credit ratings are A2 (Moody's) and A (S&P). The company has a $2.8 billion revolving credit facility, and the $2.25 billion shelf registration provides additional flexibility.
What does the stock split and dividend increase mean for shareholders?
The board declared a two-for-one stock split (100% stock dividend) for shareholders of record as of November 17, 2006, with post-split trading starting December 12, 2006. Post-split diluted EPS for fiscal 2006 would be $2.24. The quarterly dividend rose 18%, to an annualized $2.10 per share, and 16.8 million shares remain authorized for repurchase.
What is management's outlook for fiscal 2007?
Management expects underlying sales growth of 5-7%, with an additional 2-4% from currency, acquisitions and divestitures, for reported sales growth of 7-11%. It expects EPS growth of 12-15% above the $4.48 earned in fiscal 2006. The company also expects a moderation in growth rates from fiscal 2006's elevated levels, and it targets capital spending of about 3% of sales and rationalization expense of roughly $100 million.

04—Continue

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