01—Abstract
Summary
Summary of the 10-K filed November 23, 2009. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2009 (year ended September 30, 2009) was a sharp cyclical downturn.
Net sales fell 16% to $20.9 billiona from $24.8 billion, driven by an approximately 13% decline in underlying sales (about 14% from volume), a 4% unfavorable currency impact, and a 1% contribution from acquisitions. Earnings from continuing operations fell 30% to $1.7 billion, and diluted EPS dropped 27% to $2.27. Every segment declined, with Industrial Automation hit hardest (sales down 24%, earnings down 51%).
Operating margin compressed as deleverage on lower volume and $295 millionb of rationalization costs outweighed gross margin, which held flat at 36.8% thanks to cost actions and pricing. Management reported that roughly 20,000 positions were eliminated and about 25 facilities exited. Balance sheet and cash flow remained solid despite the downturn.
Operating cash flow was $3.1 billionc and free cash flow was $2.6 billion, supported by a $620 million working capital release. Total debt rose to about $4.6 billion, with a total debt-to-capital ratio of 34.8% and a net debt-to-capital ratio of 25.7%. Credit ratings remain A2/A.
The company paid $998 milliond in dividends ($1.32 per share, up 10%), raised the quarterly dividend 1.5% to an annualized $1.34 in November 2009, and repurchased $695 million of stock, leaving 51.4 million shares authorized. Backlog declined 16% to $4.6 billion. Looking ahead, management guided fiscal 2010 underlying sales down 5% to 7%, with reported sales between down 2% and up 2% after favorable currency and acquisition effects.
Operating margin is expected to be flat to slightly down, operating cash flow is expected to decline after the working capital release, and rationalization expense is projected at $125 to $175 million. The pending $1.2 billion Avocent acquisition, expected to close in December 2009, extends the Network Power franchise. The central investor question is how quickly volume recovers in capital goods, nonresidential construction, and housing, and whether Emerson's cost actions and balance sheet strength can protect earnings until that recovery arrives.
02—Key points
Key Highlights
- Net sales fell 16% to $20.9 billion; underlying sales declined about 13%, with volume down roughly 14% and currency a 4% headwind.
- Diluted EPS from continuing operations fell 27% to $2.27 and earnings from continuing operations fell 30% to $1.7 billion; all five segments posted lower earnings.
- Industrial Automation was the weakest segment, with sales down 24% and earnings down 51% to $354 million; Process Management sales fell 6% and Network Power sales fell 15%.
- Gross margin held at 36.8% through rationalization savings and pricing, but operating margin compressed on deleverage and $295 million of rationalization expense (up from $92 million).
- Operating cash flow was $3.1 billion and free cash flow was $2.6 billion, aided by a $620 million working capital reduction; the company expects operating cash flow to decline in fiscal 2010.
- Balance sheet remains conservative with a 34.8% total debt-to-capital ratio, A2/A credit ratings, and a $2.8 billion undrawn revolving credit facility; dividends rose 10% to $1.32 per share and the quarterly dividend was increased again in November 2009.
- Fiscal 2010 guidance calls for underlying sales down 5% to 7%, reported sales between down 2% and up 2%, and a flat to slightly lower operating margin; the pending $1.2 billion Avocent acquisition is expected to close in December 2009.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Emerson Electric Co kept $0.09.
- Revenue$20.10B100.0%
- Cost of revenue−$12.54B62.4%
- Gross profit$7.56B37.6%
- Operating costs−$5.84B29.1%
- Operating income$1.72B8.5%
- Interest, other & tax$9.0M0.0%
- Net income$1.72B8.6%
Where FY2009 revenue went
$20.10B- Cost of revenue: $12.54B, 62% of revenue
- SG&A: $4.42B, 22% of revenue
- Operating income: $1.72B, 8.5% of revenue
- R&D: $460.0M, 2.3% of revenue
- Other operating costs: $969.0M, 4.8% of revenue
Kept 8.5% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed November 23, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $20.10B$23.75B | −15.4% |
| Cost of Revenue | $12.54B$14.81B | −15.3% |
| Gross Profit | $7.56B$8.94B | −15.4% |
| R&D Expenses | $460.00M$458.00M | +0.4% |
| SG&A Expenses | $4.42B$4.92B | −10.2% |
| Operating Income | $1.72B$2.45B | −29.9% |
| Net Income | $1.72B$2.41B | −28.5% |
| EPS (Basic) | $2.29$3.09 | −25.9% |
| EPS (Diluted) | $2.27$3.06 | −25.8% |
| Shares Outstanding (Basic) | 753.70M780.30M | −3.4% |
| Shares Outstanding (Diluted) | 758.70M789.40M | −3.9% |
05—Questions
Frequently Asked Questions
How severely did the recession affect Emerson's sales and earnings in fiscal 2009?
Net sales declined 16% to $20.9 billion, and underlying sales fell about 13% on volume declines of roughly 14%. Earnings from continuing operations fell 30% to $1.7 billion, and diluted EPS fell 27% to $2.27. Every segment declined, with Industrial Automation and Appliance and Tools the hardest hit.
Did Emerson maintain its profitability through cost actions?
Partially. Gross margin was stable at 36.8% due to rationalization savings, materials cost containment, and pricing. However, SG&A deleveraged to 21.7% of sales from 20.3%, and rationalization expense rose to $295 million from $92 million, so earnings margin fell to 8.2% from 9.7%. Management eliminated about 20,000 positions and exited about 25 facilities in 2009.
Is Emerson's balance sheet and dividend at risk?
The balance sheet remains strong for the cycle. Total debt rose to about $4.6 billion, but the debt-to-capital ratio is 34.8%, interest coverage was 10.9 times, and the company has a $2.8 billion undrawn credit facility with A2/A ratings. Free cash flow of $2.6 billion covered $998 million of dividends. The board raised the quarterly dividend again in November 2009, although operating cash flow is expected to decline in 2010.
What does the fiscal 2010 outlook imply for investors?
Management expects underlying sales to decline 5% to 7%, with currency and acquisitions adding roughly 5 to 7 points, leaving reported sales between down 2% and up 2%. Operating margin is expected to be flat to slightly down, and rationalization expense is projected at $125 to $175 million. Visibility is limited, and management did not commit to a timing for demand recovery.
What is the status of backlog and acquisitions?
Consolidated backlog fell 16% to $4.6 billion at September 30, 2009, with Industrial Automation down about 49% and Process Management down about 10%. Nearly all of it is expected to ship within one year. In 2009 Emerson acquired Roxar, Trident Power, and System Plast for about $776 million net. In November 2009 it agreed to acquire Avocent for about $1.2 billion in cash, expected to close in December 2009.
06—Continue