Business Context and Reporting Period
Company: Emerson Electric Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2006
Headquarters: St. Louis, Missouri
Emerson is a diversified global technology company organized into five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The company designs and supplies product technology and engineering services for industrial, commercial, and consumer markets. As of September 30, 2006, the company employed approximately 127,800 people and operated roughly 275 manufacturing locations worldwide.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Net Sales | $20,133 million | $17,305 million |
| Earnings from Continuing Operations | $1,845 million | $1,422 million |
| Earnings Per Share (Diluted) | $4.48 | $3.40 |
| Long-Term Debt | $3,128 million | $3,128 million |
| Total Assets | $18,672 million | $17,227 million |
| Order Backlog | $4,054 million | $3,229 million |
| Research & Development Costs | $356 million | $303 million |
| Cash Dividends Per Share | $1.78 | $1.66 |
Note: The filing text does not provide specific values for operating cash flow, free cash flow, or specific profit margins for the period, though these are discussed as non-GAAP measures in the MD&A section.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by approximately 16.3% year-over-year, rising from $17.3 billion in 2005 to $20.1 billion in 2006.
- Profitability: Earnings from continuing operations grew by approximately 29.7%, increasing from $1.422 billion to $1.845 billion.
- Backlog Expansion: The consolidated order backlog increased by 25.6% to $4.054 billion, with nearly all expected to be shipped within one year.
- Geographic Mix: International sales totaled $9.545 billion in 2006, representing a significant portion of total revenue. Sales by segment remained relatively stable, with Process Management (23%), Network Power (21%), and Appliance and Tools (21%) being the largest contributors.
Guidance, Outlook, and Risks
Fiscal 2007 Outlook
Management expects a positive outlook for fiscal 2007, though with a moderation in growth rates compared to 2006.
- Sales Growth: Underlying sales growth is expected to be 5% to 7%, excluding a 2% to 4% favorable impact from foreign currency, acquisitions, and divestitures. Reported sales growth is projected at 7% to 11%.
- Earnings Per Share: EPS growth is expected to be in the range of 12% to 15% above the $4.48 earned in 2006.
Key Risks and Contingencies
- Market Competition: Highly competitive markets may impact prices and demand, affecting profit margins.
- Global Operations: A majority of production facilities are outside the U.S., exposing the company to risks of disrupted production due to natural disasters, labor strikes, or political unrest.
- Currency Fluctuations: Significant foreign sales subject results to economic risks from currency exchange rate changes.
- Raw Materials: Shortages or price increases in steel, copper, and other materials could increase operating costs.
- Acquisition Integration: Difficulties in integrating acquired businesses may prevent realization of anticipated benefits.
Investor Verification Checklist
- Verify the specific breakdown of "underlying sales" versus reported sales to understand the impact of currency and M&A on the 16% revenue growth.
- Review the detailed segment performance in Note 16 of the 2006 Annual Report to confirm which segments drove the backlog increase.
- Confirm the status of the $16.8 million share repurchase program remaining under the 2001 authorization.
- Assess the impact of the 2005 one-time tax expense ($63 million) on year-over-year earnings comparisons.
- Monitor the execution of the 2007 guidance, specifically the 12-15% EPS growth target, given the expected moderation in end-market growth.