01—Abstract
Summary
Summary of the 10-K filed November 19, 2014. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2014 (year ended September 30, 2014) was a year of portfolio reshaping rather than headline growth.
Net sales declined 1% to $24.5 billiona as divestitures of the Artesyn embedded computing and power business and the connectivity solutions business subtracted 5 points, while underlying sales (excluding acquisitions, divestitures, and currency) grew 3%, led by Process Management (+7% reported) and Climate Technologies (+6%). Reported earnings were flattered by a smaller goodwill impairment than the prior year: net earnings to common stockholders rose 7% to $2.15 billion and diluted EPS rose 10% to $3.03. Excluding goodwill impairment and tax charges, diluted EPS was $3.75, up 6%.
The $508 millionb non-cash impairment in European Network Power is the key item to watch, as management said that goodwill cannot be supported given weak Western European economics. Cash generation remained strong, with record operating cash flow of $3.7 billion and free cash flow of $2.9 billion. Emerson returned more than 60% of operating cash flow to shareholders through dividends ($1.2 billion) and buybacks ($971 million).
The company also spent about $1.2 billionc on acquisitions and the buyout of the Appleton noncontrolling interest, while total debt rose to $6.0 billion, mainly from short-term commercial paper. Balance sheet quality remains solid, with a 37.3% total debt-to-capital ratio and an interest coverage ratio of 16.3x. Management guided 2015 underlying sales growth of 4% to 5% and signaled a strategic review of the Power Transmission Solutions business, a potential divestiture.
02—Key points
Key Highlights
- Net sales fell 1% to $24.5B, but underlying sales grew 3%; divestitures subtracted 5 points and acquisitions added 1 point.
- Diluted EPS rose 10% to $3.03; excluding goodwill impairment and tax charges, EPS was $3.75 (up 6%).
- A $508M non-cash goodwill impairment hit European Network Power, which management says is driven by weak Western European economics and uncertain 2015-2016 prospects.
- Record operating cash flow of $3.7B and free cash flow of $2.9B; over 60% of operating cash flow returned to shareholders via dividends and buybacks.
- Dividend raised 9% to an annualized $1.88 per share; 49.1M shares remain under the buyback authorization.
- Portfolio reshaping: acquired Appleton's 44.5% minority stake for $574M, bought Virgo and Enardo, and divested Artesyn and connectivity solutions; Power Transmission Solutions (about $605M sales) is under strategic review.
- Total debt increased to $6.0B from $5.6B, mainly through commercial paper; the total debt-to-capital ratio rose to 37.3%, though interest coverage improved to 16.3x.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Emerson Electric Co kept $0.12.
- Revenue$17.73B100.0%
- Cost of revenue−$7.58B42.7%
- Gross profit$10.16B57.3%
- Operating costs−$7.96B44.9%
- Operating income$2.20B12.4%
- Interest, other & tax−$54.0M0.3%
- Net income$2.15B12.1%
Where FY2014 revenue went
$17.73B- Cost of revenue: $9.97B, 56% of revenue
- SG&A: $4.16B, 23% of revenue
- Net income: $2.15B, 12% of revenue
- R&D: $356.0M, 2.0% of revenue
- Other operating costs: $1.04B, 5.9% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed November 19, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $17.73B$24.67B | −28.1% |
| Cost of Revenue | $9.97B$14.72B | −32.2% |
| Gross Profit | $10.16B$9.95B | +2.1% |
| R&D Expenses | $356.00M$576.00M | −38.2% |
| SG&A Expenses | $4.16B$5.65B | −26.3% |
| Operating Income | $2.20B$2.00B | +9.8% |
| Net Income | $2.15B$2.00B | +7.1% |
| EPS (Basic) | $3.05$2.78 | +9.7% |
| EPS (Diluted) | $3.03$2.76 | +9.8% |
| Shares Outstanding (Basic) | 700.20M717.70M | −2.4% |
| Shares Outstanding (Diluted) | 704.10M722.90M | −2.6% |
05—Questions
Frequently Asked Questions
Why did reported sales decline if underlying growth was positive?
Reported net sales fell $132M (1%) to $24.5B because the divestitures of Artesyn (embedded computing and power) and the connectivity solutions business removed about $1.1B of sales from Network Power. Underlying sales, which exclude divestitures, acquisitions, and currency, grew 3% on volume, with Process Management, Climate Technologies, and Commercial & Residential Solutions leading.
How much of the 2014 earnings growth was driven by one-time items?
The comparison was flattered by lower charges. In 2013 the company recorded $566M of goodwill impairment and tax charges ($0.78 per share), versus $508M of impairment in 2014 ($0.72 per share). Management estimated this smaller charge added about 4 percentage points to EPS growth. Excluding these items, diluted EPS was $3.75, up 6%, which is a better gauge of underlying earnings momentum.
What is the risk from the European Network Power goodwill impairment?
The $508M charge is non-cash and was not tax-deductible, but it signals that the Network Power Europe business (the Chloride acquisition and related operations) is not meeting its objectives. Management said the economics are uncertain for 2015 and 2016 and the acquisition goodwill cannot be supported. Further impairments are possible if European conditions do not improve, and the goodwill balance of this unit is now $2.2B across Network Power.
Is Emerson's balance sheet and shareholder return sustainable?
Operating cash flow of $3.7B comfortably covered capital expenditures ($767M), dividends ($1.2B), and buybacks ($1.0B) in 2014, with free cash flow of $2.9B. Leverage increased, with total debt at $6.0B and a 37.3% debt-to-capital ratio, largely from short-term borrowings, but interest coverage is strong at 16.3x. The company has a $3.5B undrawn revolving credit facility, and management is targeting approximately $825M of capital spending in 2015.
What should investors expect for 2015?
Management guided underlying sales growth of 4% to 5%, with currency translation and a potential power transmission divestiture each deducting about 2 points, so reported sales are expected to change between 0% and 1%. Profitability is expected to improve modestly. Investors should also watch the decision on the Power Transmission Solutions business, expected within three months, which generated $605M of sales and $87M of earnings in 2014.
06—Continue