01—Abstract
Summary
Summary of the 10-K filed November 25, 2008. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2008 (year ended September 30, 2008) was a record year: net sales rose 12% to $24.8 billiona, earnings from continuing operations rose 15% to $2.5 billion, and diluted EPS from continuing operations reached $3.11, up 17%.
Growth was broad-based, with four of five segments improving. Underlying sales (excluding acquisitions, divestitures and currency) grew about 7%, with a 4% currency tailwind and a 1% acquisition contribution, led by Asia, Latin America and Middle East/Africa. Gross margin widened to 36.8%, and operating cash flow of $3.3 billionb produced free cash flow of $2.6 billion, both up on the prior year.
Return on equity was 27.0% and return on total capital was 21.8%. The filing's main investor concern is the outlook. Management describes 2009 as an uncertain, recessionary environment and forecasts sales of $23.5 billion to $25.5 billionc (down 5% to up 3%) and EPS of $2.80 to $3.20, implying a decline from 2008 at the midpoint.
Weakness in U.S. consumer appliance and residential end markets already hurt the Appliance and Tools and Climate Technologies segments, and the Appliance and Tools segment's sales fell 4%. The company also recorded a $31 milliond impairment on its North American appliance control business and a $92 million loss on the European appliance motor and pump divestiture. Rationalization spending for 2009 is expected at $125 to $150 million.
Balance sheet and capital allocation remain conservative. Total debt was $4.5 billion, the total debt-to-capital ratio was 33.1%, and the interest coverage ratio improved to 15.7 times. Ratings are A2 (Moody's) and A (S&P).
Emerson returned cash through dividends of $940 million (the Board raised the quarterly dividend 10% to an annualized $1.32) and share repurchases of $1.1 billion. An $2.8 billion undrawn revolver supports liquidity, and management says current funding is adequate despite recent credit-market volatility. Pension plans were underfunded by roughly $400 million as of October 31, 2008, after asset declines in the market downturn.
02—Key points
Key Highlights
- Record fiscal 2008: net sales of $24.8B (+12%), earnings from continuing operations of $2.45B (+15%), diluted EPS from continuing operations of $3.11 (+17%).
- Growth was driven by international markets: international destination sales reached $13.5B (54% of sales), with Asia (+17% underlying), Latin America (+18%) and Middle East/Africa (+17%) leading.
- Process Management (26% of sales) and Network Power (25%) were the main growth engines; Process Management sales rose 17% to $6.7B with earnings up 23%, and Network Power sales rose 23% to $6.3B with earnings up 23%.
- Consumer-exposed segments weakened: Appliance and Tools sales fell 4% and segment earnings fell 7%, and the company took a $31M impairment on its North American appliance control business.
- Cash generation remained strong: operating cash flow of $3.3B (+9%) and free cash flow of $2.6B (+10%), with a 10% dividend increase to an annualized $1.32 per share.
- 2009 guidance is cautious: sales of $23.5B to $25.5B (-5% to +3%) and EPS of $2.80 to $3.20, below 2008's $3.11 at the midpoint, with a recessionary backdrop.
- Balance sheet is solid: debt-to-capital of 33.1%, interest coverage of 15.7x, A2/A credit ratings and a $2.8B undrawn revolving credit facility; the company repurchased $1.1B of stock and has 72.4M shares remaining under its 2008 authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Emerson Electric Co kept $0.10.
- Revenue$23.75B100.0%
- Cost of revenue−$14.81B62.4%
- Gross profit$8.94B37.6%
- Operating costs−$6.49B27.3%
- Operating income$2.45B10.3%
- Interest, other & tax−$34.0M0.1%
- Net income$2.41B10.2%
Where FY2008 revenue went
$23.75B- Cost of revenue: $14.81B, 62% of revenue
- SG&A: $4.92B, 21% of revenue
- Net income: $2.41B, 10% of revenue
- R&D: $458.0M, 1.9% of revenue
- Other operating costs: $1.12B, 4.7% of revenue
Kept 10% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed November 25, 2008Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $23.75B$22.13B | +7.3% |
| Cost of Revenue | $14.81B$14.07B | +5.3% |
| Gross Profit | $8.94B$8.06B | +10.8% |
| R&D Expenses | $458.00M— | — |
| SG&A Expenses | $4.92B$4.57B | +7.6% |
| Operating Income | $2.45B$2.13B | +14.9% |
| Net Income | $2.41B$2.14B | +12.9% |
| EPS (Basic) | $3.09$2.69 | +14.9% |
| EPS (Diluted) | $3.06$2.66 | +15.0% |
| Shares Outstanding (Basic) | 780.30M— | — |
| Shares Outstanding (Diluted) | 789.40M— | — |
05—Questions
Frequently Asked Questions
How did Emerson perform financially in fiscal 2008?
Emerson reported record results. Net sales rose 12% to $24.8 billion, earnings from continuing operations rose 15% to $2.45 billion, and diluted EPS from continuing operations rose 17% to $3.11. Roughly 7 percentage points of sales growth were underlying, with currency adding about 4 points and acquisitions about 1. Gross margin improved to 36.8% and operating margin stayed high.
What is management's outlook for fiscal 2009?
Management forecasts 2009 reported sales of $23.5 billion to $25.5 billion, which is -5% to +3% versus 2008, and EPS of $2.80 to $3.20. The company expects a roughly 5% currency headwind, underlying growth of -4% to +4%, and about 4% from acquisitions. Management describes the environment as uncertain and recessionary, and 2009 rationalization expense is expected to be $125 to $150 million.
Which business segments are performing best and worst?
Process Management and Network Power were the strongest, with sales up 17% and 23%, respectively, and earnings up 23% in both. Industrial Automation sales rose 14% with earnings up 9%. Climate Technologies grew sales 6% but earnings only 2%. Appliance and Tools was the weakest, with sales down 4% and earnings down 7%, reflecting the U.S. consumer appliance and residential downturn.
How strong is Emerson's balance sheet and how is it returning capital?
The balance sheet is conservative. Total debt was $4.5 billion, debt-to-capital was 33.1%, net debt-to-net capital was 22.7%, and interest coverage was 15.7 times. Ratings are A2 from Moody's and A from S&P. In 2008 the company paid $940 million in dividends, raised the quarterly dividend 10%, and repurchased $1.1 billion of stock, with 72.4 million shares left under its 2008 authorization.
What are the key risks highlighted in the filing?
Key risks include competitive pricing pressure, the need for successful new product development, acquisition integration, access to capital markets, raw material shortages and price increases (steel, copper, aluminum), disruption at production facilities that are mostly outside the U.S., foreign currency swings, end-market downturns, and litigation and environmental liabilities. The filing also notes recent credit-market volatility and pension plans that became underfunded by about $400 million after the market decline.
06—Continue