01—Abstract
Summary
Summary of the 10-K filed November 23, 2010. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's FY2010 10-K (fiscal year ended September 30, 2010) shows a company recovering from a severe 2009 downturn while executing a significant portfolio reshaping.
Net sales rose 5% to $21.0 billiona, but underlying sales (excluding acquisitions, divestitures and currency) fell 1%, so growth came mainly from the Avocent and Chloride acquisitions and favorable FX. Earnings from continuing operations to common stockholders rose 15% to $1.98 billion ($2.60 diluted EPS), helped by lower rationalization expense, cost-reduction savings and a strong second half. Operating margin improved to 39.6% gross margin and 13.7% pretax margin, and return on common equity recovered to 23.6% from 19.5%.
The balance sheet absorbed roughly $2.8 billionb of acquisition spending, funded largely with commercial paper and new long-term debt. Total debt rose to about $5.1 billion, and the total debt-to-capital ratio was 34.1%. Operating cash flow of $3.3 billion and free cash flow of $2.8 billion comfortably covered the $1.0 billion dividend.
Management guided fiscal 2011 to net sales growth of 12% to 15%, with underlying growth of 7% to 10%, and operating cash flow of $3.4 to $3.5 billionc. The key investor questions are whether underlying demand in Process Management and Industrial Automation can sustain the recovery, and whether the newly acquired Network Power businesses can deliver the margins management expects.
02—Key points
Key Highlights
- Net sales of $21.0 billion (+5%), but underlying sales declined 1%; growth was driven by acquisitions (+4%) and favorable currency (+2%).
- Earnings from continuing operations to common stockholders of $1.98 billion, up 15%, with diluted EPS of $2.60; net EPS of $2.84 includes a $0.20 gain on the Motors divestiture.
- Acquisitions of Avocent and Chloride (about $2.8 billion net cash) strengthened Network Power; annualized sales from 2010 acquisitions were about $1.1 billion.
- Operating cash flow of $3.3 billion and free cash flow of $2.8 billion; the quarterly dividend was raised 3% to an annualized $1.38 per share.
- Backlog rose to $5.6 billion from $4.6 billion, with Network Power backlog up 54% and Industrial Automation up 61%.
- Leverage increased: long-term debt reached $4.6 billion, total debt-to-capital was 34.1%, and interest expense rose to $261 million.
- FY2011 guidance: net sales growth of 12% to 15%, operating margin of 17.2% to 17.5%, and operating cash flow of $3.4 to $3.5 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Emerson Electric Co kept $0.10.
- Revenue$21.04B100.0%
- Cost of revenue−$12.71B60.4%
- Gross profit$8.33B39.6%
- Operating costs−$6.35B30.2%
- Operating income$1.98B9.4%
- Interest, other & tax$186.0M0.9%
- Net income$2.16B10.3%
Where FY2010 revenue went
$21.04B- Cost of revenue: $12.71B, 60% of revenue
- SG&A: $4.82B, 23% of revenue
- Operating income: $1.98B, 9.4% of revenue
- R&D: $473.0M, 2.2% of revenue
- Other operating costs: $1.06B, 5.0% of revenue
Kept 9.4% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed November 23, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $21.04B$20.10B | +4.7% |
| Cost of Revenue | $12.71B$12.54B | +1.4% |
| Gross Profit | $8.33B$7.56B | +10.1% |
| R&D Expenses | $473.00M$460.00M | +2.8% |
| SG&A Expenses | $4.82B$4.42B | +9.1% |
| Operating Income | $1.98B$1.72B | +15.3% |
| Net Income | $2.16B$1.72B | +25.5% |
| EPS (Basic) | $2.87$2.29 | +25.3% |
| EPS (Diluted) | $2.84$2.27 | +25.1% |
| Shares Outstanding (Basic) | 750.70M753.70M | −0.4% |
| Shares Outstanding (Diluted) | 757.00M758.70M | −0.2% |
05—Questions
Frequently Asked Questions
How much of Emerson's 2010 sales growth was organic?
Very little. Underlying sales, which exclude acquisitions, divestitures and currency, fell 1% (about $102 million). Acquisitions contributed about 4% ($738 million) and favorable currency about 2% ($301 million). Underlying sales declined in the first half of the year and grew 9% in the second half as capital goods markets began to recover.
Why did earnings grow faster than sales in fiscal 2010?
Earnings from continuing operations rose 15% on a 5% sales increase, reflecting lower rationalization expense ($126 million versus $284 million in 2009), savings from cost-reduction actions and higher gross margin (39.6% versus 37.6%). Earnings improved in every segment, with the largest gains in Climate Technologies (+$280 million) and Network Power (+$221 million). The Avocent and Chloride acquisitions reduced EPS by $0.10.
How did Emerson fund its 2010 acquisitions, and what does that mean for leverage?
The company paid about $2.8 billion net cash for acquisitions, funded through commercial paper, $598 million of new long-term debt (including $300 million each of 4.25% 2020 notes and 5.25% 2039 notes), divestiture proceeds of about $846 million and operating cash flow. Total debt rose to about $5.1 billion, the debt-to-capital ratio was 34.1%, and the interest coverage ratio was 11.3 times. Leverage remains manageable, but it is higher than in 2009.
What are the main risks highlighted in the filing?
The risk factors cover intense competition that could pressure prices and margins; dependence on new product introductions; integration risk from acquisitions; access to capital markets; raw material shortages and price increases (steel, copper, aluminum); exposure to production facilities abroad, with emerging markets over one-third of sales; foreign currency and local regulatory changes; recession and end-market weakness that could trigger goodwill impairments; and litigation and environmental liabilities. Management also reports no known material contingent liabilities at year-end.
What does the fiscal 2011 outlook imply for investors?
Management expects underlying sales growth of 7% to 10%, plus about 5% from acquisitions and currency, for total net sales growth of 12% to 15% from roughly $21 billion. Operating margin is guided to 17.2% to 17.5%, pretax margin to 14.2% to 14.7%, and operating cash flow to $3.4 to $3.5 billion, with capital spending of about $600 million. The guidance depends on continued end-market recovery and on the integration of Avocent and Chloride, and management notes that future currency movements are uncertain.
06—Continue