AC-345 Ljohnson Final project submission

Running Head: EMERSON ELECTRIC CO. 1

Emerson Electric Co. Financial Analysis and Valuation

Lori Johnson

Southern New Hampshire University

2EMERSON ELECTRIC CO.

Abstract

This paper provides an analysis of the financial health of Emerson Electric Company. The

historical financial statements and annual report from 2014 were utilized to obtain a baseline and

to create projected financials for Emerson. The analysis revealed that Emerson moved from a

highly debt leveraged position to a more moderate level with long term liabilities accounting for

59 percent of debt. Emerson had a free cash flow of 1.71Billion dollars in 2014 and 2.4Billion in

working capital. This income was generated only from operations, both investing and financing

produced negative cash flow. Emerson purchased two other companies which contributed to the

negative cash from investing and paid down a large amount of long term debt which caused the

negative cash from financing. The projected valuation indicates that Emerson has a sustainable

business model and that the value of the stock may be currently undervalued. Overall this

company is a good investment for the long term. They pay dividends regularly and would offer

stability to an otherwise volatile portfolio.


ContentsPart 1................................................................................................................................................4Contingent Liabilities......................................................................................................................4Deferred taxes and pension expenses..............................................................................................5Nonrecurring items..........................................................................................................................5Current Assets and Liabilities..........................................................................................................6Liquidity Ratios...............................................................................................................................6Capital Structure and solvency........................................................................................................7Turnover Ratios related to asset utilization.....................................................................................7Operating Performance....................................................................................................................8Intangible Assets..............................................................................................................................8Part 2..............................................................................................................................................10Cash Flows and Capital Structure..................................................................................................10Cash flow from operations.............................................................................................................10Cash flow from investing...............................................................................................................12Cash flow from financing..............................................................................................................13Horizontal analysis 2013 to 2014..................................................................................................14Part 3..............................................................................................................................................16Prospective Analysis......................................................................................................................16Projected Balance Sheet................................................................................................................16Forecasted Income Statement........................................................................................................17Valuation of Company Stock.........................................................................................................18Risks..............................................................................................................................................19Conclusion.....................................................................................................................................19Financial Exhibits..........................................................................................................................21

Table 1 Balance Sheet...............................................................................................................21Table 2 Income Statement.........................................................................................................22Table 3 Statement of Cash Flows..............................................................................................23Table 4 Chart of Ratios..............................................................................................................24Table 5 Stock Valuation............................................................................................................25Table 6 Equity Valuation Projections........................................................................................25Table 7 Forecasted income statement 2015...............................................................................25Table 8 Projected Balance Sheet...............................................................................................26

References......................................................................................................................................27


Part 1

To analyze the value of Emerson Electric Company, I began with the balance sheet and

the annual report. I have examined the annual report and financial statements of Emerson

Electric Company which uses the symbol EMR on the NASDAQ. Emerson has a calculated

Book value (total assets – intangible assets – liabilities) of about $8.43 Billion. During this

analysis I determined that Emerson changed its capital structure from a highly debt leveraged

model to a more moderate debt level. I find the mix of long and short term debt and equity ratios

to be indicative of solvency and good management use of capital. Emerson is a good long term

investment option for the investor looking for predictable, moderate returns from a stable

company that has been in business for over 100 years.

Contingent Liabilities

Emerson Electric states on p.46 of its 2014 annual report (Emerson Electric Co., 2014)

that it is party to pending legal proceedings but that management believes that the outcomes will

not have material negative impact on finances. The company supports this claim by referencing

the fact that it has substantial experience in responding to legal claims and warranty claims that

have been periodically brought against the company over the last century. The company does

have an accrual account in place to fund the legal costs and potential judgements, should the

need occur. The company also states that it has no other contingent liabilities of material effect

on the finances. With net earnings before taxes over 3 billion dollars, an immaterial number

could still be in the millions of dollars. After thorough investigation of the financial statements

and the attached notes, it is concluded that Emerson does not have significant contingent

liabilities that should be of concern for lenders or investors.


Operating Leases

Emerson Electric discloses its operating leases on pages 26 and 53 of the annual report.

(Emerson Electric Co., 2014) In 2015 they expect operating rent expense for buildings,

equipment and other items to be about 270 million dollars or around 2.7% of gross profit. This is

not a significant off-book liability.

Deferred taxes and pension expenses

Other liabilities reported on page 53 of the annual report include deferred taxes of $572

Million, pension plans of $564 Million and $861 Million of other items that total to nearly

$2Billion. These items are purported to be reported in the other accumulated expenses on the

balance sheet on page 31. It is not clear from reading the notes how much of the listed liabilities

are not accounted for on the balance sheet. The liability for pension plans is a substantial

number, if the whole of it is not included in the balance sheet, it could portray the company being

in better financial health than it is. The company is still posting pre-tax earnings of over 3

Billion dollars for 2014 which appears to place it in a reasonably stable position.

Nonrecurring items

According to Emerson Electric Company’s 10-K filing for 2014 14 facilities were exited

with $1M lease and contract terminations, and 2000 positions were eliminated, creating

severance and benefits costs of $20M. (Electric, 2014)Emerson’s Income statement on the

NASDAQ.com site lists 508M of nonrecurring expense (EMR company financials Income

Statement, 2015) which shows in the statement of operations in the annual report on page 17 as

related to impairment of goodwill due to the divestment of the embedded computing and power


business. (Emerson Electric Co., 2014) I did not find any other places where management or an

outside source identified any items as unusual or recurring. With over 24B in net sales and 10B

gross profit, even the goodwill impairment would be considered immaterial as it is about 5% of

gross profit.

Current Assets and Liabilities

Emerson has $2.41 Billion in working capital, the difference between their current assets

and current liabilities. They show 10.86 Billion dollars in current assets, half of which is

receivables and the other half is comprised of inventory and cash or equivalents. They are also

showing 8.45 Billion dollars in current liabilities, most of which is in accounts payable. The

current ratio (current assets/current liabilities) is then 1.29 which indicates that Emerson is in a

position to pay all the current debts without depleting all of its ready assets or taking out

additional financing. This ability to pay also does not rely on the forecasted revenue to be

realized, indicating that the company is immune to minor revenue fluctuations.

Liquidity Ratios

The relevant liquidity ratios are shown in Table 4 Chart of Ratios and have been stable for the

past 3 years. The quick ratio{current assets-inventories/Current liabilities} 1.04, shows that

Emerson does not need to liquidate inventory in order to pay current debt but that they would

need to collect all the outstanding receivables if they did not liquidate any inventory. This is

reaffirmed with the acid test ratio of .97. The debt ratio {liabilities/assets} of .58, indicates that

the company would not need to liquidate much more than half of its assets to cover all

outstanding debts. The debt to equity ratio of 1.39 indicates that more of the assets are financed

with debt rather than shareholder equity. If the debt to equity ratio rises continually it is an

indicator that the company needs to borrow more and becoming financially unstable. For


Emerson, the rate has been steady and is not a current concern. Another important part of the

liquidity of a company is the ability to convert inventory to cash. The Table 4 Chart of Ratios

shows the relevant cash conversion ratios. Days of sales outstanding, days of inventory

outstanding, days of payable outstanding, and the cash conversion cycle. These ratios have been

relatively stable for the past three years with the inventory outstanding ratio having had a slight

reduction in 2013 but normalized back to 52 days. The cash conversion data shows that

Emerson is very efficient using working capital. They typically get paid before having to pay for

the materials used. The long payable period of 140 days is most likely tolerated by vendors due

to the volume of purchases and long history of company success.

Capital Structure and solvency

In 2014 Emerson had $2.41 Billion in working capital and 59% of debt was long term

debt. The long term debt to equity ratio was .35 and the times interest earned ratio of 18.26.

(Table 4 Chart of Ratios) Emerson has slightly more of its debt as long term debt but when

compared to equity, the company is not highly leveraged. In the event Emerson wanted to obtain

financing, they would not be considered a high risk borrower. The Long term debt has been

reduced from the two prior years where it was 72% of total debt.

Turnover Ratios related to asset utilization

Receivable turnoverRevenue/ avg. AR

4.99 Inventory turnoverCOGS/ avg. inventory

7.28

Return on assets(NI +int. exp.*(1-taxrate))/avg. revenue

9.3% Return on equityNet income/ equity

20.74%

Cash turnoverSales/avg. cash & equivalent

7.64 Total asset turnoverRevenue/avg. assets

1

2014 ratios depicted, but have been stable for last 3 years, see Table 4 Chart of Ratios

Emerson has a reasonable AR turnover ratio at nearly 5. Instead of stating receivables in

terms of days to collect, it is a measure of how many times a year the receivables are turning


over. Similarly, the inventory is turning over or being sold completely just over 7 times a year.

The return on equity of over 20 percent indicates that Emerson utilizes shareholder investments

more than debt or assets to create profits.

Operating Performance

In the Table 4 Chart of Ratios we see the gross profit margin is 41.40%, the operating

profit margin is 14.44% and the net profit margin is 8.75%. These ratios indicate that after

deducting the direct cost of the product Emerson has about forty cents of every sales dollar

available to pay taxes and other expenses to running the business. Approximately nine cents of

every sales dollar is pure profit, while this sounds small, when we look at the total sales, this

number becomes significant at over two Billion dollars in 2014. (EMR company financials

Income Statement, 2015)

Intangible Assets

Intangible assets (EMR Company financials Balance Sheet, 2015) make up about 20% of

the Book Value (intangibles/book value) of Emerson Electric Company. This number has

remained essentially the same for the last three years.(Table 4) The intangible assets used in this

valuation are shown on the balance sheet which indicates that they have been acquired through

purchase of license, copyright or patent as stated on page 35 of the annual report. (Emerson

Electric Co., 2014) The percentage of intangible assets makes it easier to believe in the valuation

of the company, even if the intangibles were suddenly worth nothing, there would be enough

value in the remaining assets to keep the company viable in the eyes of its shareholders and

creditors. This is an important aspect to take into account when choosing a company to buy or to

invest in.


Market Measures

The price to earnings ratios for the last three years in Table 4 indicate that shareholders

are willing to invest around $20 for each $1 of earnings. The price to book value indicates that

the market price is about 5 times the book value for each share. The earnings per share and the

price to book having a higher value than last year would encourage investors to remain

shareholders and potentially attract new investors.

Emerson Electric Company has shown relative stability over the last three years. They

made a change in leverage strategy to reduce long term debt without making significant

reductions to assets or equity. The company continues to have steady income and the balance

sheet evaluation proves them to be on solid financial footing.


Part 2

Cash Flows and Capital Structure

To analyze the cash flow management of Emerson Electric Company I looked at the cash

flows generated from operations investing and financing. While Emerson has negative cash

flows from both investing and financing, they appear to be financially stable and should be able

to maintain operations for the foreseeable future. The areas of greatest concern are the operating

cash flow ratio and the high day’s payable outstanding. With careful monitoring of these areas

and maximizing the strength of their cash conversion cycle and steady cash from operations,

Emerson is a good stable investment hold.

Cash flow from operations

Cash from operations for the past three years was, $3.69B, $3.64B, and $3.05B.

In 2014 Emerson had a $508 Million impairment to goodwill from the divestiture of a division,

Embedded Computing and Power. (Emerson Electric Co., 2014) The main component of income

has been sales with 2014 international sales at $13.28B and domestic sales of $11.26B.

Free cash flow

Free cash flow is the amount of cash left over after accounting for maintaining or

expanding its assets (Free Cash Flow, n.d.). The free cash flow for Emerson in 2014 was $1.71B

up from $1.22B in 2012. This translates into free cash flow per share of about $2.46 Table 4.

Free cash flow per share gives an indication of how much cash a company generates and can be a

better indicator of continued growth than earnings per share. The operating cash flow Ratio,

(cash from ops/current liabilities) for Emerson is a disturbing .44. This indicates that they do not

generate enough cash from operations to cover short term liabilities and would need to liquidate

some assets if all current liabilities were called due immediately. Investors should pay attention


to this ratio but look to other indicators and view the entire financial picture to make informed

investment decisions. One such measure to look at is working capital.

Working capital

Working capital is the difference between current assets and current liabilities. Emerson

had $2,413,000,000 of working capital in 2014, $3,374,000,000 in 2013 and $2,993,000,000 in

2012. This means that if they should liquidate all current assets, including some inventory, they

would have enough to pay all current debts. Another measure is the NOPAT or net operating

profit less adjusted taxes. The calculation is Operating income before interest and tax expense

multiplied by 1-tax rate. For Emerson, the effective tax rate is 35% (tax expense/ income before

tax). NOPAT for 2014 was 3,542,000,000. Because financing expenses are not included,

NOPAT gives an unleveraged view of profitability. The cash conversion cycle is usually the

measure of the time it takes a company to turn capital into cash. For Emerson, they have a

negative cash conversion cycle, specifically the numbers for the last three years beginning in

2014 are -24.81,-31.18, and -12.61. Emerson’s negative numbers do not mean that it turns

capital into cash before it receives it, the numbers are negative because they have a very high

payables turnover ratio. If they were paying invoices in 45 days average, the 2014 number

would be 80.14. Investors should take note of the inputs into this calculation and not take it at

face value.

Liquidity

The cash flow adequacy ratio is calculated as cash from operations / annual current

maturities (Cash Flow Adequacy Definition and Explanation, 2015)Table 4 Chart of Ratios. The

current maturities for 2014 was $2,465,000,000 (Emerson Electric Co. (EMR) Statement of

Financial Position, 2015) when plugged into the formula the calculation yields a ratio of 1.50.


The indications are that cash from operations is enough to cover current debt and current portion

of long term debt one and a half times. Emerson will not have to make additional borrowing to

meet these obligations. The quick ratio, acid test ratio and current ratios are also used to

determine the liquidity of a company. For Emerson Table 4 shows these ratios for the past three

years. The quick ratio has remained just above 1 and the current ratio has remained above 1.25

for all three years. These two ratios indicate that Emerson should have no issue paying current

debt from current assets. The Acid test ratio only includes cash, marketable securities and

receivables over the current liabilities. For Emerson, 2014 the number is just below 1 with the

other two years being just above. This indicates that they would need to sell some inventory in

addition to the quick turn assets if all current debt were called payable. These ratios all reinforce

the belief that Emerson is not in danger of default on obligations.

Survival revenue

I used the formula SG&A+ Interest expense/ (1- COGS/SALES) to calculate

survival revenue as shown in Table 4. The average calculated result for Emerson over the past

three years is 15.3 Billion dollars. This amount is about 62 percent of the average revenues for

the past three years. It is reasonable to assume that Emerson will continue to cover these

expenses even if they were to experience a decline in revenues. The survival revenue needed has

been stable for the last few years. Survival revenue is also referred to as break even revenue.

Cash flow from investing

Emerson has had negative cash flows from investing over the past three years. The

figures shown in Table 3 indicate that the net amount of cash put into investments nearly doubled

from 2013 to 2014 resulting in a negative net cash flow of $1.15 Billion. Emerson had a large

increase in acquisitions from the previous year with the purchase of two companies, Virgo


Valves and Controls and Enardo Holdings. (Emerson Electric Co., 2014) They also acquired the

remaining 44.5% noncontrolling interest in Appleton Group. This accounts for the additional

cash expended in investing from prior years. The cash reinvestment ratio indicates the amount

that management reinvests into the business, for Emerson that number is -.73 which is calculated

with (increase in fixed assets + increase in working capital) / (net income + noncash expenses –

noncash sales – dividends). The negative number indicates that Emerson is not putting a lot into

the maintenance or addition of capital assets. This could be due to assets that are still productive

without much maintenance or Emerson could be holding off on major investment in anticipation

of a technology or manufacturing change that would require new equipment entirely. Emerson

invested $767 Million in capital expenditures and a levered free cash flow of $2.93 Billion

dollars. The return on assets for 2014 was 9.30% which is higher than competitor ABB who had

5.37%. The levered free cash flow (cash from operations – CAPEX) for the past three years

beginning in 2012 was $2.34B, $2.97B, and $2.93B, these numbers indicate that Emerson is in a

good position to make additional investment in equipment when they need to.

Cash flow from financing

Cash flows from financing for 2014 through 2012 were all negative, those numbers were

$-2.56B, $-1.93B, and $-1.9B respectively (EMR Company financials Cash Flows, 2015). In the

last two years Emerson has spent just over a Billion dollars each year in stock repurchasing and a

similar amount was paid out in dividends. These are the main components in the negative cash

from financing. The ROCE is a respectable 20.74% which is higher than competitor ABB,

according to Yahoo! Finance. The price to cash flow ratio (share price/op cash flow per share)

was 24.83 in 2014 and 24.31 in 2013. Investors use the ratio to compare how much free cash is

being generated relative to the price of each share. Emerson has approximately 12.1 Billion


dollars of debt with Long term debt accounting for 59% of it. See Table 1. In previous years,

long term debt has been more than 70% of the debt. With the divestiture of Embedded

Computing and Power and other strategic maneuvers, Emerson would be considered more

solvent. Using financing increases the financial leverage ratio which was 2.39 for 2014. This

means that for every dollar of debt, they have 2.39 dollars of assets. Investors will want to look

closely at what the financing is being used to fund. When money is borrowed to cover operating

expenses, it can signal trouble for the company, it means the company is not making enough

money from conducting business to pay the bills associated with that business. It is acceptable to

borrow at inception but over the long term, it is not sustainable. Short term borrowing can put a

strain on finances if the company doesn’t have enough income as with the long term borrowing.

Emerson has a good mix of long and short term debt for the types of revenue that it generates.

Calculating the return on long term debt we find that for 2014 Emerson had a 60% return on

debt, or .60 is earned for every dollar of long term debt.

Horizontal analysis 2013 to 2014

From 2013 to 2014 total revenues have decreased about a half a percent, but gross profit

increased 2%. This tells us that even though revenue was down overall the profitability of each

sale was increased. An increase of 3.75% was experienced in operating income and an overall

increase of net income of 7.14% or about 143 Million dollars. Notable changes in expenses were

a 40.32% decrease in minority interest deduction and an 11% decrease in interest expense. See

Table 2. The decrease in interest expense is related to the decrease in long term debt while the

stake in the other companies was increased so the deduction for minority interest of income was

reduced.


Emerson has significantly decreased its long term debt and increased its times interest

earned without making an appreciable change to the debt ratio by shifting the financing to

shorter term options. Emerson has a strong cash conversion cycle, a trend of increasing profit

margins, and good liquidity. The revenues and level of returns for shareholders should be

sustainable for a long while. Management is using wise management of cash with the time to

pay vendors much longer than the time to collect from customers. I recommend this stock as an

investment to hold.


Part 3

Prospective Analysis

Utilizing a few different projection methods, Emerson appears to be in a good financial

place moving forward. The projections indicate that there will be enough money to cover

liabilities and that stockowner equity will grow. While the following analysis is only a potential,

there is good evidence to support the assumptions made. Most of the assumptions were made

using conservative measures whenever possible to avoid inflated valuations.

Projected Balance Sheet

Using the methodology from pages 510 through 513 of the textbook (Subramanyam,

2011) I calculated the projected balance sheet for 2015 Table 8. The resulting projected book

value of the company is $8.68 Billion. This reflects an increase from the 2014 actual by

approximately $250 Million. The historical growth in value has been in excess of $400 Million a

year. I expect the stark difference to be from the limitations presented in creating a projected

statement. Some of the calculations I utilized for the projections were different from the book in

order to present a more conservative outlook. The book did not suggest calculations for

Goodwill or Intangible asset valuation. I used an average of the previous year percentages of

change for each as there had been no clear trend of increase or decrease. I also had to use a

similar method of estimation for the Long term debt as the annual report did not clearly indicate

what portion of the debt would be due as current debt in 2015. The cash position in the

projected balance sheet is 312% lower than the previous years, which were relatively stable. It is

difficult to have confidence in this number given the disparity. A review of the rest of the

projected balance sheet reveals a projected significant reduction in the accounts payable. The

text book (Subramanyam, 2011) suggests using the sales forecast and ratio of cost of goods sold


to payables to figure this number. I would have to conclude that payables for Emerson are not as

heavily weighted toward the costs of sales and must include some consulting or the cost of leased

property that is not otherwise captured in this estimation. The overall balance sheet equation is

not thrown off as a result of the lower cash position and lower payables as the two would cancel

out given that they appear to be lower than expected by similar dollar amounts.

Forecasted Income Statement

The Forecasted income statement for Emerson in Table 7 was created using the

methodology in the textbook on page 510. (Subramanyam, 2011) I used the suggested method

of average sales and average cost of revenue to compute the gross profit percentage. The

resulting cost of revenue is lower than expected. This is probably due to fewer directly related

variable costs in the production of revenue. Emerson has reduced its interest payments and other

expenses in each of the last few years. Some of these reductions were due to the selling or

closing of underproductive businesses. In order to provide a more conservative analysis, I used

the same value as the current year for interest expense and for “other” expenses for the

forecasted statement instead of anticipating continued reductions. The forecast predicts a Net

Income of $2.4 Billion dollars, which is higher than the historical average increase. The net

income projection from the stock valuation table is more conservative. When making investment

decisions, it would be recommended to use the more conservative of the two estimates. The

company would want to use the higher projections when applying for credit or to attract other

investors. This disparity highlights the subjectivity of projected statements. For the stock

valuation projection I used projected sales multiplied by profit margin. The Forecasted income

statement is an attempt to project certain costs and expenses that are difficult to estimate based

on the information available to the general public. If Emerson were a more goods centric


business, rather than making much of their profit from services and from strategic purchasing

and selling of other companies, the forecasted statement method would likely provide better

result. Taking the conservative approach in projecting future income helps to prevent the

analysis from appearing more optimistic than feasible. This valuation is better suited for the

investor than it is for potential lenders.

Valuation of Company Stock

Because future money has less value than money in the bank, discounted cash flow

analysis should be done for valuation purposes. I used projections for five years, 2015 to 2019,

to determine the valuation of Emerson’s stock. The methodology employed was taken from

page 628 in the text. (Subramanyam, 2011) Residual income was calculated with a factor of

19%, which is a conservative approximation of the average return on equity from Table 4. The

resulting present value of equity was $7.8 Billion dollars. Price to book value of equity as

calculated in the valuation Table 6 came out at 3.83 which reflects significant difference from the

2014 price to book show in the table of ratios Table 4. This indicates that either the company

must have had substantial one-time events to give the higher price to book values or that there is

a flaw in the calculations utilized to project the price to book value. The value of equity per

share of $24.10 as calculated in Table 5 is significantly higher than the actual 2014 value of

$14.52 (equity/shares). This suggests that the value per share is expected to increase. The

investment should yield a good return on value if all assumptions are correct. The PE ratio from

the valuation projection was 3.9. Table 6 According to the textbook the stock is “overpriced if

the expected growth in EPS is less than 20%” (Subramanyam, 2011, p. 631) according to this

metric, Emerson’s stock is overpriced. All other valuation methods indicate that the stock is


somewhat undervalued. Based on all the valuation methods, I conclude that the stock is

undervalued.

Risks

The biggest risk to the long term growth sustainability is the future global political climate. With

a growth in sales to the global market, the stability of the global market is important to

Emerson’s sales. The continued crisis situation in the Middle East and Africa could derail much

of the previous increased sales growth. Capital expenditure is also a potential weakness for the

company. Emerson has a cash reinvestment ratio of -.73. This negative number indicates that

Emerson is not investing a lot of money into the maintenance of or expansion of capital assets.

While this is not a concern for the short term, if management does not invest in maintaining or

growing the assets, it could lead to a decline in business. It is an accepted belief that, “a business

has to spend money to make money”. A smaller but real potential risk is potential warranty

claims and litigation that Emerson is a party to. In the annual statement (Emerson Electric Co.,

2014) Emerson indicates that any judgements are expected to be immaterial. The company has

over a century of demonstrated experience with these matters. I believe that the potential risks

have been mitigated as possible and that there should be minimal impact on earnings potential.

It is difficult to predict catastrophic events such as war or natural disaster but, Emerson Electric

has a globally diverse operation encompassing several sectors. This diversification should

insulate them from catastrophic failure due to any single event.

Conclusion

An examination of the annual report and financial statements reveals that Emerson

Electric Company is a financially sound company that has been in business for over one hundred

years. Analysis provides basis for the presumption that management has made changes to the


financing plan to reduce long term debt without making significant reductions to assets or equity.

I find the mix of long and short term debt and equity ratios to be indicative of solvency and good

management use of capital. Revenues declined while overall profit increased as a result of good

financial leadership and reducing costs. Some of the cost reductions came from selling off the

embedded computing and power business. Analysis of cash flows reveals that the company has

a high day’s payable outstanding. So far, the vendors appear willing to accept the longer

payment term, it will be an important aspect to monitor moving forward. The breakeven revenue

has been stable at around 15 Billion dollars per year and revenues have been averaging around

$24.5 Billion. The revenue to breakeven relationship indicates that Emerson has adequate sales

and profit margins to be sustainable. It appears that will continue to be the case despite having

negative cash flows from both investing and from financing. The projections for future earnings

indicate the possibility that the stock is currently undervalued. Emerson had a calculated Book

value of about $8.43 Billion at the end of 2014 and a projected book value of $8.68. The

indication of the comparison of book values reinforces the notion that the company will continue

to grow in value. The revenues and returns for shareholders appear to be sustainable for the long

term. This is a good company to invest in as they regularly pay dividends and it is projected that

the value of the stock will continue to grow, ceteris paribus.


Financial ExhibitsTable 1 Balance SheetPeriod Ending 30-Sep-14 30-Sep-13 30-Sep-12

AssetsCurrent Assets

Cash And Cash Equivalents 3,149,000 3,275,000 2,367,000Short Term Investments - - - Net Receivables 5,019,000 4,808,000 4,983,000Inventory 2,057,000 1,895,000 2,125,000Other Current Assets 642,000 1,021,000 651,000

Total Current Assets 10,867,000 10,999,000 10,126,000Long Term Investments - - - Property Plant and Equipment 3,802,000 3,605,000 3,509,000Goodwill 7,182,000 7,509,000 8,026,000Intangible Assets 1,689,000 1,672,000 1,838,000Accumulated Amortization - - - Other Assets 637,000 926,000 319,000Deferred Long Term Asset Charges - - -

Total Assets 24,177,000 24,711,000 23,818,000

LiabilitiesCurrent Liabilities

Accounts Payable 5,989,000 6,038,000 5,627,000Short/Current Long Term Debt 2,465,000 1,587,000 1,506,000Other Current Liabilities - - -

Total Current Liabilities 8,454,000 7,625,000 7,133,000Long Term Debt 3,559,000 4,055,000 3,787,000Other Liabilities 1,997,000 2,313,000 2,456,000Deferred Long Term Liability Charges - - - Minority Interest 48,000 133,000 147,000Negative Goodwill - - -

Total Liabilities 14,058,000 14,126,000 13,523,000

Stockholders' EquityMisc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 477,000 477,000 477,000Retained Earnings 19,867,000 18,930,000 18,107,000Treasury Stock -9,811,000 -8,985,000 -7,882,000Capital Surplus 161,000 352,000 324,000Other Stockholder Equity -575,000 -189,000 -731,000

Total Stockholder Equity 10,119,000 10,585,000 10,295,000

Net Tangible Assets 1,248,000 1,404,000 431,000


Table 2 Income StatementINCOME STATEMENT

Period Ending 30-Sep-14 30-Sep-13 30-Sep-12Total Revenue 24,537,000 24,669,000 24,412,000Cost of Revenue 14,379,000 14,717,000 14,644,000

Gross Profit 10,158,000 9,952,000 9,768,000

Operating ExpensesResearch Development - - - Selling General and Administrative 6,108,000 6,010,000 5,837,000Non Recurring 508,000 528,000 592,000Others - - -

Total Operating Expenses - - -

Operating Income or Loss 3,542,000 3,414,000 3,339,000

Income from Continuing OperationsTotal Other Income/Expenses Net - - - Earnings Before Interest And Taxes 3,542,000 3,414,000 3,339,000Interest Expense 194,000 218,000 224,000Income Before Tax 3,348,000 3,196,000 3,115,000Income Tax Expense 1,164,000 1,130,000 1,091,000Minority Interest -37,000 -62,000 -56,000

Net Income From Continuing Ops 2,147,000 2,004,000 1,968,000

Non-recurring EventsDiscontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - -

Net Income 2,147,000 2,004,000 1,968,000Preferred Stock And Other Adjustments - - -

Net Income Applicable To Common Shares 2,147,000 2,004,000 1,968,000


Table 3 Statement of Cash FlowsStatement of Cash FlowsPeriod Ending 30-Sep-14 30-Sep-13 30-Sep-12Net Income 2,147,000 2,004,000 1,968,000

Operating Activities, Cash Flows Provided By or Used InDepreciation 831,000 819,000 823,000Adjustments To Net Income 563,000 722,000 546,000Changes In Accounts Receivables 263,000 84,000 536,000Changes In Liabilities 450,000 75,000 226,000Changes In Inventories 132,000 -83,000 49,000Changes In Other Operating Activities -731,000 -34,000 -1,151,000

Total Cash Flow From Operating Activities 3,692,000 3,649,000 3,053,000

Investing Activities, Cash Flows Provided By or Used InCapital Expenditures -767,000 -678,000 -665,000Investments - - - Other Cash flows from Investing Activities -392,000 -111,000 -141,000

Total Cash Flows From Investing Activities -1,159,000 -789,000 -806,000

Financing Activities, Cash Flows Provided By or Used InDividends Paid -1,210,000 -1,181,000 -1,171,000Sale Purchase of Stock -1,622,000 -1,120,000 -811,000Net Borrowings 294,000 349,000 90,000Other Cash Flows from Financing Activities -21,000 19,000 -7,000

Total Cash Flows From Financing Activities -2,559,000 -1,933,000 -1,899,000Effect Of Exchange Rate Changes -100,000 -19,000 -33,000

Change In Cash and Cash Equivalents -126,000 908,000 315,000


Table 4 Chart of Ratiosin 000s except per share values and ratios 2014 2013 2012Book Value 8,430,000 8,913,000 8,457,000Book value / share 12.10 12.61 11.68EPS 3.08 2.84 2.72Quick Ratio 1.04 1.19 1.12Acid Test 0.97 1.06 1.03Debt to Equity 1.39 1.33 1.31Current Ratio 1.29 1.44 1.42Debt Ratio 0.58 0.57 0.57Days Sales outstanding 73.64 70.16 73.48Days Inventory outstanding 51.50 46.35 52.24Days Payable outstanding 149.94 147.70 138.33cash conversion cycle -24.81 -31.18 -12.61working capital 2,413,000 3,374,000 2,993,000LTD % of invest capital NO INVESTMENTS NO INVESTMENTS NO INVESTMENTSSTD % of invest capital NO INVESTMENTS NO INVESTMENTS NO INVESTMENTSLTD % of debt 59% 72% 72%STD % of debt 41% 28% 28%LTD to equity 0.35 0.38 0.37times interest earned 18.26 15.66 14.91Receivable Turnover 4.99 5.04 4.99Inventory Turnover 7.28 7.32 7.29ROA 9.30% 8.85% 8.88%RoCommon Equity 20.74% 19.20% 19.12%Cash turnover 7.64 8.74 8.65total asset turnover 1.00 1.02 1.02gross profit margin 41.40% 40.34% 40.01%operating profit margin (pretax) 14.44% 13.84% 13.68%net profit margin 8.75% 8.12% 8.06%Intangible to book value 20.04% 18.76% 21.73%Price to earnings 19.84 21.71 16.42earnings yield 5.04% 4.61% 6.09%price to book 5.05 4.88 3.82price to cash flow (share price/ fcf p share) 24.83 24.31Free cash flow 1,715,000 1,790,000 1,217,000free cash flow per share 2.462 2.533 1.68Levered free cash flow 2,925,000 2,971,000 2,388,000operating cash flow ratio 0.44 0.48 0.43survival revenue (breakeven) 15,222,699 15,437,955 15,147,536


Table 5 Stock ValuationTerm Year

2013 2014 2015 2016 2017 2018 2019 2020salesCY-PY/CY Sales growth 1.05% -0.54% 0.26% 0.26% 0.26% 0.26% 0.26% 0.25%NI/Sales Net profit margin 8.12% 8.75% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22%Sales/work cap Net working capital turnover 7.31 10.17 10.17 10.17 10.17 10.17 10.17 10.17sales/fixed assets Fixed asset turnover 6.84 6.45 6.45 6.45 6.45 6.45 6.45 6.45op assets/stock equity Total operating assets/Total equity[AE] 2.39 2.34 2.34 2.34 2.34 2.34 2.34 2.34

Number of shares outstanding 706660000 696610000 696610000 696610000 696610000 696610000 696610000 696610000in thousands

py sales * rate + py sales Sales 24,669,000 24,537,000 24,600,511 24,664,187 24,728,027 24,792,033 24,856,204 24,918,344 sales * profit margin Net Income 2,004,000 2,147,000 2,021,840 2,027,073 2,032,320 2,037,581 2,042,855 2,047,962 cy sales/py work cp/pysales Net Working capital 3,374,000 2,413,000 2,419,246 2,425,508 2,431,786 2,438,080 2,444,391 2,450,502 sales/fixed ass turnover Fixed assets 3,605,000 3,802,000 3,814,033 3,823,905 3,833,803 3,843,726 3,853,675 3,863,309 work cap + fixed assets Total operating assets 6,979,000 6,215,000 6,233,278 6,249,413 6,265,588 6,281,806 6,298,066 6,313,811 op assets-stock equity Long-term liabilities 4,055,000 3,559,000 3,569,467 3,578,706 3,587,969 3,597,256 3,606,568 3,615,584 op assets/ [AE] Total stockholders' equity 2,924,000 2,656,000 2,663,811 2,670,706 2,677,619 2,684,550 2,691,498 2,698,227

inflation rate 3.5%sales * profit margin Net Income 2,021,840 2,027,073 2,032,320 2,037,581 2,042,855 2,047,962 prev yr total equity Beginning equity 2,656,000 2,663,811 2,670,706 2,677,619 2,684,550 2,691,498

Required equity return 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%Return * begin equity Expected earning 504,640 506,124 507,434 508,748 510,064 511,385 NI- Expected earning Residual income 1,517,200 1,520,949 1,524,886 1,528,833 1,532,790 1,536,577

Discount factor 1/(1+rate)^n 0.84 0.71 0.59 0.50 0.42

residual * factor Present Value of residual income 1,274,958 1,074,041 904,891 762,381 642,315 Cumalitive PV of residual income 1,274,958 2,348,999 3,253,890 4,016,271 4,658,586 Terminal value of residual income 9474346

begin equity of horiz yr 1 Begin book value of equity 2,656,000 Value of equity 16,788,932

Common shares outstanding 696610000Value of equity per share 24.10

Historical figures Forecast Horizon

term resid inc/(rate-inflation)*(1+rate^n of PY)

cum PV of rsid+Term of rsid+begin book val

value of equty/common shares

Table 6 Equity Valuation Projections2013 2014 2015 2016 2017 2018 2019

Net Income 2,004,000 2,147,000 2,021,840 2,027,073 2,032,320 2,037,581 2,042,855 Beg Book Value 2,036,836 2,924,000 2,656,000 2,663,811 2,670,706 2,677,619 2,684,550

19%NI-(rate*beg book val) Residual income 1617001 1591440 1517200 1520949 1524886 1528833 1532790Discount factor 1/(1+rate) n̂ PV factor (19%) 0.840 0.706 0.593 0.499 0.419 0.352 0.296Factor * residual PV residual income 1358825 1123819 900330 758450 639003 538367 453580cum begin + resids Year 1 value as of year 7 7809209value/begin bk value PB ratio 3.83value/net income PE ratio 3.90

Table 7 Forecasted income statement 2015Revenues 24,600,511 24,669,000 24,537,000 24,412,000 24539333.3COGS 13062871 14,717,000 14,379,000 14,644,000 14580000.0SG&A 7024200.0 3 year average 59.4%other exp 470919 SG&Aother unclassified 6,108,000 6,010,000 98000 0.016interest exp 180723 % increaseeff tax rate 34.8% PY other exp %increase

508,000 -0.07PY interest expense %increase

Revenues 24600511 194,000 -0.06844COGS 13062871 effective tax rateSG&A 7024200 3,348,000 1,164,000 0.347670Other expenses 508000Interest 194000Total cost & expense 20789071Income from ops 3811440Income taxes 1325124Income before disc 2486316Other unclassifiedNet Income 2,486,316

COGS

Forecasted Income Statement 2015


Table 8 Projected Balance SheetPeriod Ending in 000's 30-Sep-12 30-Sep-13 30-Sep-14 30-Sep-15

sales 24,412,000 24,669,000 24,537,000 24,600,511 AssetsCurrent Assets

Cash &equiv 2,367,000 3,275,000 3,149,000 764,791 Net Receivables 4,983,000 4,808,000 5,019,000 4,929,962 Inventory 2,125,000 1,895,000 2,057,000 1,794,350 Other Curr Assets 651,000 1,021,000 642,000 642,000

Total Current Assets 10,126,000 10,999,000 10,867,000 8,131,104 PP&E 3,509,000 3,605,000 3,802,000 3,957,890 Goodwill 8,026,000 7,509,000 7,182,000 6,794,303 Intangible Assets 1,838,000 1,672,000 1,689,000 1,733,000 Other Assets 319,000 926,000 637,000 637,000

Total Assets 23,818,000 24,711,000 24,177,000 21,253,297 LiabilitiesCurrent Liabilities

Accounts Payable 5,627,000 6,038,000 5,989,000 2,652,822 Current of LTD 1,506,000 1,587,000 2,465,000 3,309,000

Total Curr Liabilty 7,133,000 7,625,000 8,454,000 5,961,822 Long Term Debt 3,787,000 4,055,000 3,559,000 3,123,734 Other Liabilities 2,456,000 2,313,000 1,997,000 1,724,172 Minority Interest 147,000 133,000 48,000 30,376

Total Liabilities 13,523,000 14,126,000 14,058,000 10,840,104

Stockholders' EquityCommon Stock 477,000 477,000 477,000 477,000Retained Earnings 18,107,000 18,930,000 19,867,000 20,649,128 Treasury Stock -7,882,000 -8,985,000 -9,811,000 (10,712,935) Capital Surplus 324,000 352,000 161,000Other equity -731,000 -189,000 -575,000

Total stock equity 10,295,000 10,585,000 10,119,000 10,413,193 Book Value 8,680,193


References

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Hub: http://financialanalysishub.com/cash-flow-adequacy/

Electric, E. (2014, 9 30). Emerson Electric 2014 10-K filing. Retrieved from SEC:

http://www.sec.gov/Archives/edgar/data/32604/000003260414000048/emr930201410-

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Analysis on Net: https://www.stock-analysis-on.net/NYSE/Company/Emerson-Electric-

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Emerson Electric Co. (2014). Annual Report 2014. Retrieved from Emerson:

http://www.emerson.com/en-us/Investors/Pages/annual-reports.aspx

EMR Company financials Balance Sheet. (2015, July). Retrieved from NASDAQ.com:

http://www.nasdaq.com/symbol/emr/financials?query=balance-sheet

EMR Company financials Cash Flows. (2015, July). Retrieved from NASDAQ.com:

http://www.nasdaq.com/symbol/emr/financials?query=cash-flow

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http://www.nasdaq.com/symbol/emr/financials?query=income-statement

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http://www.investopedia.com/terms/f/freecashflow.asp

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