01—Abstract
Summary
Summary of the 10-K filed November 20, 2012. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2012 (year ended September 30, 2012) was a year of solid top-line stability but sharply lower reported earnings, driven almost entirely by a noncash goodwill impairment.
Net sales rose 1% to $24.4 billiona, with underlying sales up 3% despite a 2% currency headwind from the stronger U.S. dollar. Process Management (+13% sales, +14% earnings) and Commercial & Residential Solutions carried growth, while Network Power (-6% sales, -17% earnings), Climate Technologies (-6% sales) and Industrial Automation (-2% sales) weakened. Diluted EPS from continuing operations fell 18% to $2.67, but excluding the $0.72 per-share charge tied to the embedded computing and power and DC power businesses, EPS was $3.39 versus $3.30 a year earlier, which is the more representative operating baseline.
Cash generation and balance sheet strength remained intact. Operating cash flow was $3.1 billionb and free cash flow was $2.4 billion, both down year over year as operating working capital rose to 8.7% of sales from 7.0%. Management returned substantial capital: dividends of $1.60 per share ($1.2 billion) and $787 million of buybacks, with the quarterly dividend raised 3% to an annualized $1.64.
Long-term debt declined to $3.8 billionc, and the total debt-to-capital ratio held at about 34%. Backlog grew to $6.25 billion, led by Process Management, which supports the company's guidance. The outlook is cautious.
Management expects fiscal 2013 sales growth of only 0 to 5%, with Process Management strong, Industrial Automation sluggish especially in Europe, and Climate Technologies uneven. It guides to 10 to 20 basis points of EBIT margin improvement (excluding the impairment) and EPS growth in the mid-to-high single digits from the $3.39d base. Key watch items for investors are whether the Network Power restructuring, including a potential sale of the embedded computing and power business with about $1.4 billion in revenue, can stabilize that segment and whether working capital normalizes.
02—Key points
Key Highlights
- Net sales of $24.4 billion, up 1%; underlying sales up 3%, with a 2% currency headwind from the stronger U.S. dollar.
- $592 million pretax ($528 million after-tax, $0.72/share) noncash goodwill impairment in Network Power cut GAAP diluted EPS to $2.67 from $3.27 in 2011; excluding the charge, EPS was $3.39.
- Process Management was the standout, with sales up 13% to $7.9 billion and earnings up 14% to $1.6 billion; backlog rose to $3.7 billion.
- Network Power sales fell 6% and earnings fell 17% on telecom and IT weakness; management is pursuing strategic alternatives, including a potential sale of the embedded computing and power business.
- Operating cash flow of $3.1 billion and free cash flow of $2.4 billion, both down as operating working capital rose to 8.7% of sales.
- Shareholder returns of $1.6 billion in dividends and buybacks in 2012; the quarterly dividend was raised 3% to an annualized $1.64.
- Fiscal 2013 guidance calls for 0 to 5% sales growth and mid-to-high single-digit EPS growth from the $3.39 base, with Industrial Automation and Climate Technologies expected to remain sluggish.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Emerson Electric Co kept $0.08.
- Revenue$24.41B100.0%
- Cost of revenue−$14.64B60.0%
- Gross profit$9.77B40.0%
- Operating costs−$7.80B32.0%
- Operating income$1.97B8.1%
- Interest, other & tax$-00.0%
- Net income$1.97B8.1%
Where FY2012 revenue went
$24.41B- Cost of revenue: $14.64B, 60% of revenue
- SG&A: $5.44B, 22% of revenue
- Net income: $1.97B, 8.1% of revenue
- R&D: $547.0M, 2.2% of revenue
- Other operating costs: $1.82B, 7.4% of revenue
Kept 8.1% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed November 20, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $24.41B$24.22B | +0.8% |
| Cost of Revenue | $14.64B$14.66B | −0.1% |
| Gross Profit | $9.77B$9.56B | +2.2% |
| R&D Expenses | $547.00M$555.00M | −1.4% |
| SG&A Expenses | $5.44B$5.33B | +2.0% |
| Operating Income | $1.97B$2.45B | −19.8% |
| Net Income | $1.97B$2.48B | −20.6% |
| EPS (Basic) | $2.68$3.29 | −18.5% |
| EPS (Diluted) | $2.67$3.27 | −18.3% |
| Shares Outstanding (Basic) | 730.60M748.50M | −2.4% |
| Shares Outstanding (Diluted) | 734.60M753.50M | −2.5% |
05—Questions
Frequently Asked Questions
Why did Emerson's reported earnings per share fall 18% in fiscal 2012?
The decline was driven mainly by a noncash goodwill impairment of $592 million pretax ($528 million after-tax, or $0.72 per share) in the Network Power segment's embedded computing and power and DC power businesses. Excluding the charge, EPS was $3.39 versus $3.30 in the prior year, so underlying earnings grew modestly.
How healthy is Emerson's balance sheet and capital structure?
The balance sheet remains conservative. Total assets were $23.8 billion and common equity $10.3 billion. Long-term debt fell to $3.8 billion from $4.3 billion, and the total debt-to-capital ratio was about 34%. A $2.75 billion undrawn revolving credit facility, expiring December 2014, provides backup liquidity, and there were no U.S. credit line borrowings in the past three years.
What is the outlook for fiscal 2013?
Management expects sales growth of 0 to 5%, with strong near-term growth in Process Management and steady improvement in North American residential markets. Industrial Automation, especially in Europe, and Climate Technologies are expected to stay sluggish. Excluding the 2012 impairment, EBIT margin should improve 10 to 20 basis points, and EPS should grow in the mid-to-high single digits from $3.39. Management also flagged that orders have slowed and visibility has deteriorated.
What are the main risks for investors from the Network Power segment?
Network Power faces persistent weakness in telecommunications and IT end markets, plus competitive pricing pressure in China. Its sales fell 6% and earnings fell 17% in 2012. Several Network Power businesses with $1.5 billion of goodwill had fair values only about 10% above carrying value, so further impairments are possible if demand does not recover. The company is evaluating strategic alternatives, including a potential sale of the embedded computing and power business.
How much exposure does Emerson have to international markets and currency?
International sales were $14.4 billion in 2012, or roughly 59% of total sales when including non-U.S. subsidiaries. Currency translation reduced 2012 sales growth by 2 percentage points, and the company hedges selectively with forwards, swaps and options. Management reports that the potential losses from a hypothetical 10% adverse move in rates, commodities or the dollar are immaterial.
06—Continue