01—Abstract
Summary
Summary of the 10-K filed November 18, 2015. Cited figures are marked; the original filing is the authoritative source.
Emerson Electric's fiscal 2015 10-K (year ended September 30, 2015) shows a company in transition.
Reported net sales fell 9% to $22.3 billiona, and underlying sales (excluding currency, divestitures and acquisitions) declined 2%, driven by weak oil and gas capital spending, slowing China and emerging markets, and a strong U.S. dollar. Reported results were flattered by non-recurring items: net earnings to common stockholders rose 26% to $2.71 billion and diluted EPS rose 32% to $3.99, but excluding divestiture gains and spinoff costs, earnings were $2.15 billion ($3.17 per share), down 15% year over year. Operating cash flow fell 32% to $2.5 billion, held down by $424 million of taxes paid on divestiture gains, and free cash flow dropped 37% to $1.8 billion.
The central story is portfolio restructuring. Emerson announced a tax-free spinoff of its Network Power Systems business and is exploring strategic alternatives, including a potential sale, for Power Generation, Motors & Drives, and Residential Storage. Together these represent roughly 29%b of 2015 sales.
The company also sold its mechanical power transmission business to Regal Beloit for $1.4 billionc and its InterMetro commercial storage business for $411 million. Management guided fiscal 2016 net sales down roughly 6% to 8% and reported EPS of $2.50 to $2.85 including $300 to $400 million of separation and transaction costs, with adjusted EPS of $3.05 to $3.25. Investors should note the lower underlying quality of the 2015 EPS increase and the execution risk around the separation.
Balance sheet leverage increased meaningfully. Total debt rose to $6.8 billiond, the total debt-to-capital ratio climbed to 45.8% from 37.3%, and common stockholders' equity fell to $8.1 billion because of heavy buybacks ($2.5 billion repurchased in 2015).
Goodwill of $6.7 billion remains large relative to equity, and the Network Power goodwill ($2.1 billion) sits in the spinoff perimeter, so impairment risk is a watch item. Dividends were held at an annualized $1.90 after a 1% increase.
02—Key points
Key Highlights
- Net sales fell 9% to $22.3 billion; underlying sales declined 2%, with currency subtracting 5% and divestitures 2%.
- Reported diluted EPS of $3.99 (up 32%) was inflated by divestiture gains of about $611 million after tax; excluding certain items, EPS was $3.17, down 15%.
- Operating cash flow fell 32% to $2.5 billion, including $424 million of taxes on divestiture gains; free cash flow dropped 37% to $1.8 billion.
- Planned tax-free spinoff of Network Power Systems, plus strategic review of Power Generation, Motors & Drives, and Residential Storage (about 29% of 2015 sales), reshapes the company into a smaller, more focused business.
- Total debt rose to $6.8 billion and the total debt-to-capital ratio increased to 45.8% from 37.3%, as $2.5 billion of share repurchases reduced common equity to $8.1 billion.
- Fiscal 2016 guidance calls for net sales down 6% to 8% and adjusted EPS of $3.05 to $3.25, versus reported EPS of $2.50 to $2.85 after $300 to $400 million of transaction costs.
- Backlog declined to $6.0 billion from $6.7 billion, led by Process Management, which fell to $3.7 billion from $4.1 billion, signaling weaker near-term demand.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Emerson Electric Co kept $0.17.
- Revenue$16.25B100.0%
- Cost of revenue−$9.24B56.9%
- Gross profit$7.01B43.1%
- Operating costs−$4.49B27.6%
- Operating income$2.52B15.5%
- Interest, other & tax$193.0M1.2%
- Net income$2.71B16.7%
Where FY2015 revenue went
$16.25B- Cost of revenue: $9.24B, 57% of revenue
- SG&A: $3.73B, 23% of revenue
- Operating income: $2.52B, 15% of revenue
- R&D: $336.0M, 2.1% of revenue
- Other operating costs: $420.0M, 2.6% of revenue
Kept 15% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed November 18, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $16.25B$17.73B | −8.4% |
| Cost of Revenue | $9.24B$9.97B | −7.3% |
| Gross Profit | $7.01B$10.16B | −31.0% |
| R&D Expenses | $336.00M$356.00M | −5.6% |
| SG&A Expenses | $3.73B$4.16B | −10.3% |
| Operating Income | $2.52B$2.20B | +14.4% |
| Net Income | $2.71B$2.15B | +26.2% |
| EPS (Basic) | $4.01$3.05 | +31.5% |
| EPS (Diluted) | $3.99$3.03 | +31.7% |
| Shares Outstanding (Basic) | 673.30M700.20M | −3.8% |
| Shares Outstanding (Diluted) | 676.50M704.10M | −3.9% |
05—Questions
Frequently Asked Questions
How much of Emerson's 2015 earnings growth was driven by one-time items?
Most of it. Divestiture gains of $611 million after tax (mainly the power transmission solutions sale) and spinoff-related costs of about $52 million added roughly 45 percentage points to net earnings growth and 47 points to EPS growth. Excluding these items, adjusted net earnings fell 19% to $2.15 billion and adjusted diluted EPS fell 15% to $3.17.
What is the planned Network Power spinoff, and what does it mean for shareholders?
Emerson plans a tax-free distribution of its Network Power Systems business to shareholders, creating two independent public companies. The spinoff is subject to conditions including tax opinions, regulatory approvals, a Form 10 filing and final board approval. Management estimates about $300 to $400 million of costs in 2016 across the spinoff and the potential sales of other businesses. Benefits are not guaranteed, and the combined value of the two companies may be lower than the current value of Emerson stock.
Why did operating cash flow and free cash flow decline so sharply?
Operating cash flow fell to $2.5 billion from $3.7 billion, mainly because of $424 million in income taxes paid on the divestiture gains, lower earnings excluding those gains, and an increase in operating working capital, which reached 7.8% of sales. Capital expenditures were $685 million, so free cash flow fell to $1.8 billion from $2.9 billion.
How has Emerson's balance sheet changed, and is leverage a concern?
Leverage increased. Total debt rose to $6.8 billion, the total debt-to-capital ratio reached 45.8% (from 37.3%), and the operating cash flow-to-debt ratio dropped to 37% from 61%. Share repurchases of $2.5 billion, funded partly by divestiture proceeds and new borrowings, cut common equity to $8.1 billion. Interest coverage remained strong at 21.8x, and the company has a $3.5 billion undrawn revolving credit facility.
What is the outlook for fiscal 2016?
Management expects difficult conditions for the first six to nine months, with net sales down 6% to 8%, including about 2% from currency and 2% from divestitures, and underlying sales down 2% to 5%. Adjusted EPS is guided to $3.05 to $3.25, compared with $3.17 in 2015. Reported EPS is guided to $2.50 to $2.85 after transaction costs. Management expects cost savings from restructuring to partially offset weaker volume.
06—Continue