01—Abstract
Summary
Summary of the 10-K filed November 19, 2013. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2013 (year ended September 30, 2013) results show modest top-line growth, a sharp rebound in cash generation, and a meaningful non-cash charge tied to its embedded computing and power business.
Net sales rose 1% to $24.7 billiona, with underlying sales up 2%, led by Process Management (sales up 9% to $8.6 billion, earnings up 13%). Industrial Automation (down 6%) and Network Power (down 4%) remained weak, reflecting softness in industrial goods and telecom/IT end markets. Diluted EPS was $2.76, up 3%, but this includes $566 million ($0.78 per share) of goodwill impairment and income tax charges.
Excluding those items, EPS was $3.54b, up 4%. Cash flow was the standout. Operating cash flow reached a record $3.6 billion (up 20%) and free cash flow reached $3.0 billion (up 24%), driven mainly by a reduction in operating working capital to 6.8% of sales.
The balance sheet remains conservative: the total debt-to-capital ratio rose to 34.8%, while the net debt-to-net capital ratio improved to 18.3%, and cash on hand increased to $3.3 billionc. The board raised the quarterly dividend 5% to an annualized $1.72, and the company repurchased 20.3 million shares for $1.19 billion. Looking ahead, management guides to fiscal 2014 underlying sales growth of 3% to 5% and reported sales of (1)% to +1%.
Reported EPS is expected to rise 33%d to 38%, or 4% to 7% excluding roughly 30 percentage points of impairment and repatriation effects. The pending sale of a 51% stake in embedded computing and power, plus an accelerated buyback, is expected to be roughly neutral to 2014 EPS. Key risks include continued weakness in Europe and in telecom/IT end markets, a patent infringement suit from Invensys against Micro Motion, and the goodwill exposure of the European network power systems business, whose fair value exceeded carrying value by less than 10%.
02—Key points
Key Highlights
- Net sales of $24.7 billion, up 1% (underlying sales up 2%); Process Management was the growth engine at +9%, while Industrial Automation (-6%) and Network Power (-4%) declined.
- GAAP diluted EPS of $2.76 (up 3%) includes $566 million ($0.78/share) of goodwill impairment and tax charges; excluding these, EPS was $3.54, up 4%.
- Record operating cash flow of $3.6 billion (up 20%) and free cash flow of $3.0 billion (up 24%), aided by operating working capital falling to 6.8% of sales.
- Net debt-to-net capital improved to 18.3% from 22.1%, with cash of $3.3 billion; total debt-to-capital rose to 34.8% after $500 million of new 2.625% notes due 2023.
- Shareholder returns: $1.18 billion in dividends ($1.64/share) and $1.19 billion in buybacks (20.3 million shares); the quarterly dividend was raised 5% to an annualized $1.72.
- Pending sale of a 51% controlling interest in embedded computing and power (about $300 million in cash, roughly $1.2 billion in revenue), with $600 million of accelerated buybacks; expected to be roughly EPS-neutral in 2014.
- Fiscal 2014 guidance: underlying sales growth of 3% to 5%, with reported EPS up 33% to 38% (4% to 7% excluding impairment and repatriation charges).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Emerson Electric Co kept $0.08.
- Revenue$24.67B100.0%
- Cost of revenue−$14.72B59.7%
- Gross profit$9.95B40.3%
- Operating costs−$7.95B32.2%
- Operating income$2.00B8.1%
- Interest, other & tax$-00.0%
- Net income$2.00B8.1%
Where FY2013 revenue went
$24.67B- Cost of revenue: $14.72B, 60% of revenue
- SG&A: $5.65B, 23% of revenue
- Net income: $2.00B, 8.1% of revenue
- R&D: $576.0M, 2.3% of revenue
- Other operating costs: $1.72B, 7.0% of revenue
Kept 8.1% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed November 19, 2013Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $24.67B$24.41B | +1.1% |
| Cost of Revenue | $14.72B$14.64B | +0.5% |
| Gross Profit | $9.95B$9.77B | +1.9% |
| R&D Expenses | $576.00M$547.00M | +5.3% |
| SG&A Expenses | $5.65B$5.44B | +3.9% |
| Operating Income | $2.00B$1.97B | +1.8% |
| Net Income | $2.00B$1.97B | +1.8% |
| EPS (Basic) | $2.78$2.68 | +3.7% |
| EPS (Diluted) | $2.76$2.67 | +3.4% |
| Shares Outstanding (Basic) | 717.70M730.60M | −1.8% |
| Shares Outstanding (Diluted) | 722.90M734.60M | −1.6% |
05—Questions
Frequently Asked Questions
Why did reported earnings per share grow only 3% in fiscal 2013 when operating performance was stronger?
Reported EPS of $2.76 was held back by $566 million ($0.78 per share) of goodwill impairment and income tax charges, mainly tied to the embedded computing and power business in Network Power, plus a $25 million impairment at connectivity solutions. Excluding these charges, EPS rose 4% to $3.54. Results were also helped by share repurchases that reduced the diluted share count.
Which segments are driving growth, and which are struggling?
Process Management is driving growth, with sales up 9% to $8.6 billion and earnings up 13% to $1.8 billion, on strong oil and gas, chemical, and power demand. Climate Technologies (+3%) and Commercial & Residential Solutions (-1% reported, +3% underlying) were stable. Industrial Automation sales fell 6% to $4.9 billion, mainly on European industrial weakness and alternator destocking, and Network Power sales fell 4% to $6.2 billion on telecom and IT softness.
How strong is Emerson's cash generation and balance sheet?
Cash generation improved sharply. Operating cash flow rose 20% to a record $3.6 billion, and capex was steady at $678 million, leaving free cash flow of $3.0 billion. Cash rose to $3.3 billion, and net debt-to-net capital improved to 18.3%. Total debt was $5.2 billion, and the company holds a $2.75 billion undrawn backup credit facility. Most cash is held outside the U.S., which creates repatriation tax costs.
What are the key risks investors should monitor?
Key risks include persistent weakness in European industrial markets and in telecom/IT end markets served by Network Power, the continued challenges of the embedded computing business (which is being partly sold), and goodwill impairment exposure, especially in the European network power systems business, whose fair value exceeded carrying value by less than 10%. Other items include an Invensys patent infringement suit against Micro Motion, raw material cost volatility (copper, aluminum), currency exposure, and rising pension expense in 2013 ($228 million, expected to fall to about $155 million in 2014).
What does the fiscal 2014 outlook imply for shareholders?
Management expects underlying sales growth of 3% to 5% and reported sales change of (1)% to +1%, after excluding about 4 points from acquisitions and the divestiture. Reported EPS is expected to rise 33% to 38%, but underlying EPS growth is only 4% to 7% once the roughly 30-point impairment and repatriation effects are removed. Capex is targeted at about $750 million, and an accelerated buyback is expected to offset the earnings loss from the embedded computing sale, leaving EPS roughly neutral from that transaction.
06—Continue