Market Overview

Emerson Reports Strong Third Quarter 2018 Results and Raises Outlook

Share:
  • Net sales of $4.5 billion increased 10 percent, or 8 percent on an
    underlying basis
  • GAAP earnings per share were $1.12, or $0.88 excluding a $0.24 tax
    benefit
  • Operating cash flow from continuing operations of $924 million
    increased 19 percent
  • Raising sales and EPS guidance for strong performance and one-time tax
    benefit
  • Completed $250 million of share repurchases, bringing the year to date
    total to $1 billion
  • Closed Tools & Test and Aventics acquisitions early in the fourth
    quarter

Emerson (NYSE:EMR) today announced net sales were up 10 percent in the
third quarter ended June 30, 2018, with underlying sales up 8 percent
excluding favorable currency of 1 percent and an impact from
acquisitions net of divestitures of 1 percent. Strong global demand
continued in the quarter as both mature and emerging markets delivered
high-single digit underlying growth. Emerson's trailing three-month
underlying orders growth remained in the 5 to 10 percent range
throughout the quarter, with June three-month underlying orders up 9
percent.

All profitability measures improved in the third quarter. Gross profit
margin of 43.7 percent improved 220 basis points compared with the prior
year, driven by leverage on higher sales and the benefit of prior year
restructuring actions. Both pretax margin of 17.2 percent and EBIT
margin of 18.1 percent improved 180 basis points. GAAP earnings per
share from continuing operations increased 78 percent to $1.12, and were
$0.88, up 40 percent, excluding a one-time tax benefit related to the
Tax Cuts and Jobs Act.

Operating cash flow from continuing operations was $924 million in the
quarter, up 19 percent compared with the prior year, and free cash flow
from continuing operations was $804 million, up 20 percent. Year to date
operating cash flow from continuing operations was up 5 percent to $1.9
billion and free cash flow from continuing operations was up 5 percent
to $1.6 billion, reflecting approximately 100 percent conversion of net
earnings from continuing operations.

"Our third quarter results reflect broad-based momentum across our end
markets and the strength of our global competitive position, as Emerson
continues to be the clear industrial partner of choice," said Chairman
and Chief Executive Officer David N. Farr. "This quarter marks our fifth
consecutive quarter of strong net and underlying sales growth and sixth
quarter of positive underlying orders, pointing to a steady trend that
we believe sets Emerson up for a strong fourth quarter and start to
fiscal 2019."

Business Platform Results

Automation Solutions net sales increased 18 percent in the
quarter, with underlying sales up 12 percent excluding favorable
currency of 2 percent and an impact from acquisitions of 4 percent.
Growth continued to reflect strong short cycle repair and maintenance
(MRO) demand and projects focused on expansion and optimization of
existing facilities. Trends were positive across all key market
verticals and world areas, with double digit growth in both mature and
emerging markets.

North American underlying sales were up 16 percent reflecting strong
investment in oil and gas production and midstream infrastructure, as
well as continued favorable trends across process, hybrid and discrete
verticals including chemical, power, life sciences and mining. Asia
underlying sales were up 13 percent, with China up 28 percent, driven by
capital investment in both China and India, as well as continued strong
demand across process, hybrid and discrete markets. Europe was up 6
percent, Latin America was up 5 percent and Middle East/Africa was up 8
percent. Trailing three-month underlying orders growth was very strong
throughout the quarter, with June up 12 percent. Margin increased 170
basis points to 17.2 percent compared with the prior year, driven by
leverage on higher sales, restructuring benefits and favorable
price-cost.

Commercial & Residential Solutions net sales were down 1
percent and underlying sales increased 2 percent excluding favorable
currency of 1 percent and an impact from divestitures net of
acquisitions, which deducted 4 percent. Underlying sales in North
America were up 2 percent as strong demand for professional tools
continued, and air conditioning demand improved compared with the prior
quarter. Underlying economics in air conditioning markets remain
positive, and we expect strong demand through the end of the year. Asia
grew 1 percent, with China down 5 percent, as strong demand in air
conditioning and cold chain markets was offset by lagging heating demand
in China due to the timing of government subsidies. Europe was up 5
percent, reflecting continued favorable demand in air conditioning and
construction-related markets. Trailing three-month underlying orders
growth stayed in the low single digits throughout the quarter, with June
up 3 percent. Margin continues to run at a high level, but decreased 80
basis points to 24.3 percent compared with the prior year. Sequentially
versus the second quarter, margin improved 70 basis points, reflecting
strong leverage on higher sales.

2018 Outlook

The Company is raising full-year sales and earnings per share guidance
based on strong performance, as well as updating for recently closed
acquisitions and certain non-operating items discussed below.

Total Emerson net sales growth is now expected to be approximately 14
percent, with Automation Solutions up 21 percent and Commercial &
Residential Solutions up 3 percent. Excluding a 7 percent impact from
acquisitions, divestitures and currency translation, total Emerson
underlying sales growth is expected to be approximately 7.5 percent,
with Automation Solutions up approximately 9 percent and Commercial &
Residential Solutions up approximately 4.5 percent.

GAAP earnings per share guidance is increased to $3.30 to $3.40 from
prior guidance of $3.10 to $3.20. The following table presents changes
from prior earnings per share guidance.

   
EPS Range
GAAP EPS, Prior Guidance May 1, 2018 $3.10 to $3.20
Stronger performance and growth outlook +0.05
One-time benefit for Tax Cuts and Jobs Act, Q3 +0.24
Tools & Test and Aventics acquisition charges, Q4 (0.06)
Special one-time 401(k) contribution - U.S. Employees, Q4 (0.03)
GAAP EPS Guidance $3.30 to $3.40
 

Expected GAAP earnings per share guidance of $3.30 to $3.40 reflects
improved performance and is supported by continued strong orders trends.
In the third quarter, the Company updated its initial estimates related
to adoption of the Tax Cuts and Jobs Act and increased net foreign tax
credit carryforwards by $150 million, resulting in a $0.24 per share tax
benefit. As a result, management expects the full year tax rate to be
approximately 19 percent. In 2019 and thereafter, the tax rate is
expected to be approximately 25 percent. In the fourth quarter,
management expects Tools & Test and Aventics restructuring and first
year acquisition accounting charges of ($0.06) per share. Lastly, in
response to U.S. tax reform legislation, the Company has made numerous
enhancements to its compensation and benefits packages in the U.S.,
including improvements to health and welfare plans, paid parental leave
and vacation benefits, and retirement savings plans. Most recently, the
company approved a special retirement account contribution in the amount
of one thousand dollars per U.S. employee at a total cost of $24
million, or a ($0.03) per share impact in the fourth quarter.

"As we enter the fourth quarter, we have high confidence in the strength
of our end markets and in the ability of our global teams to execute,
and we have increased our outlook accordingly," said Farr. "Thanks to
the ongoing benefits of U.S. tax reform, which continues to strengthen
the U.S. economy, we've made a number of improvements to our U.S. wage
and benefits packages. As we noted in our first quarter earnings
release, we believe such improvements ensure that Emerson will remain
competitive in a growing economy. I'm pleased to have the opportunity to
enact these changes, including increased wages, health plan enhancements
and improved parental leave and paid time off."

Upcoming Investor Events

Today, beginning at 2 p.m. Eastern Time, Emerson management will discuss
the third quarter results during an investor conference call. Access to
a live webcast of the discussion will be available at www.emerson.com/financial
at the time of the call. A replay of the conference call will remain
available for 90 days.

Forward-Looking and Cautionary Statements

Statements in this press release that are not strictly historical may be
"forward-looking" statements, which involve risks and uncertainties, and
Emerson undertakes no obligation to update any such statements to
reflect later developments. These risks and uncertainties include
economic and currency conditions, market demand, pricing, protection of
intellectual property, competitive and technological factors, and the
impact of the Tax Cuts and Jobs Act, among others, as set forth in the
Company's most recent Annual Report on Form 10-K and subsequent reports
filed with the SEC.

(tables attached)

         
Table 1
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
 
Quarter Ended June 30 Percent
2017 2018 Change
 
Net sales $4,039 $4,456 10%
Costs and expenses:
Cost of sales 2,361 2,507
SG&A expenses 931 1,054
Other deductions, net 87 88
Interest expense, net 39   39  
Earnings from continuing operations before income taxes 621 768 24%
Income taxes 202   49  
Earnings from continuing operations 419 719 72%
Discontinued operations, net of tax 6    
Net earnings 425 719
Less: Noncontrolling interests in earnings of subsidiaries 12   7  
Net earnings common stockholders $413   $712   72%
 
Diluted avg. shares outstanding 643.8 632.9
 
Diluted earnings per share common stockholders
Earnings from continuing operations $0.63 $1.12 78%
Discontinued operations $0.01    
Diluted earnings per common share $0.64   $1.12   75%
                 
 
Quarter Ended June 30
2017 2018
Other deductions, net
Amortization of intangibles $41 $47
Restructuring costs 21 14
Other 25   27  
Total $87   $88  
           
Table 2
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
 
Nine Months Ended June 30 Percent
2017 2018 Change
 
Net sales $10,829 $12,520 16%
Costs and expenses:
Cost of sales 6,229 7,125
SG&A expenses 2,621 3,078
Other deductions, net 203 275
Interest expense, net 126   113  
Earnings from continuing operations before income taxes 1,650 1,929 17%
Income taxes 477   327  
Earnings from continuing operations 1,173 1,602 37%
Discontinued operations, net of tax (133 )  
Net earnings 1,040 1,602
Less: Noncontrolling interests in earnings of subsidiaries 26   16  
Net earnings common stockholders $1,014   $1,586   56%
 
Diluted avg. shares outstanding 644.3 636.5
 
Diluted earnings per share common stockholders
Earnings from continuing operations $1.77 $2.49 41%
Discontinued operations ($0.20 )  
Diluted earnings per common share $1.57   $2.49   59%
                   
 
Nine Months Ended June 30
2017 2018
Other deductions, net
Amortization of intangibles $84 $154
Restructuring costs 45 38
Other 74   83  
Total $203   $275  
       
Table 3
EMERSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, UNAUDITED)
 
Quarter Ended June 30
2017 2018
Assets
Cash and equivalents $3,140 $3,411
Receivables, net 2,926 3,027
Inventories 1,891 1,805
Other current assets 597   333
Total current assets 8,554 8,576
Property, plant & equipment, net 3,304 3,260
Goodwill 5,296 5,745
Other intangible assets 1,868 2,157
Other 380   749
Total assets $19,402   $20,487
 
Liabilities and equity

Short-term borrowings and current maturities of long-term debt

$1,363 $2,862
Accounts payable 1,613 1,647
Accrued expenses 2,175 2,392
Income taxes 219   53
Total current liabilities 5,370 6,954
Long-term debt 3,797 3,126
Other liabilities 2,213   1,947
Total equity 8,022   8,460
Total liabilities and equity $19,402   $20,487
       
Table 4
EMERSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
 
Nine Months Ended June 30
2017 2018
Operating activities
Net earnings $1,040 $1,602
Loss from discontinued operations, net of tax 133
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 454 557
Changes in operating working capital 16 (286 )
Other, net 142   (5 )
Cash from continuing operations 1,785 1,868
Cash from discontinued operations (727 )  
Cash provided by operating activities 1,058   1,868  
 
Investing activities
Capital expenditures (300 ) (314 )
Purchases of businesses, net of cash and equivalents acquired (2,991 ) (770 )
Divestitures of businesses 40 223
Other, net (80 ) (71 )
Cash from continuing operations (3,331 ) (932 )
Cash from discontinued operations 5,022    
Cash provided by (used in) investing activities 1,691   (932 )
 
Financing activities
Net increase (decrease) in short-term borrowings (1,226 ) 1,581
Payments of long-term debt (253 ) (251 )
Dividends paid (930 ) (924 )
Purchases of common stock (400 ) (1,000 )
Other, net 32   34  
Cash used in financing activities (2,777 ) (560 )
 
Effect of exchange rate changes on cash and equivalents (14 ) (27 )
Increase (Decrease) in cash and equivalents (42 ) 349
Beginning cash and equivalents 3,182   3,062  
Ending cash and equivalents $3,140 $3,411
       
Table 5
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
 
Quarter Ended June 30
2017 2018
Sales
Automation Solutions $2,440 $2,870
 
Climate Technologies 1,187 1,236
Tools & Home Products 415   356  
Commercial & Residential Solutions 1,602 1,592
 
Eliminations (3 ) (6 )
Net sales $4,039   $4,456  
 
Earnings
Automation Solutions $378 $494
 
Climate Technologies 305 294
Tools & Home Products 97   93  
Commercial & Residential Solutions 402 387
 
Differences in accounting methods 38 57
Corporate and other (158 ) (131 )
Interest expense, net (39 ) (39 )
Earnings before income taxes $621   $768  
 
Restructuring costs
Automation Solutions $20 $9
 
Climate Technologies 1 4
Tools & Home Products    
Commercial & Residential Solutions 1 4
 
Corporate   1  
Total $21   $14  
       
Table 6
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
 
Nine Months Ended June 30
2017 2018
Sales
Automation Solutions $6,524 $8,213
 
Climate Technologies 3,104 3,286
Tools & Home Products 1,210   1,041  
Commercial & Residential Solutions 4,314 4,327
 
Eliminations (9 ) (20 )
Net sales $10,829   $12,520  
 
Earnings
Automation Solutions $1,032 $1,316
 
Climate Technologies 715 712
Tools & Home Products 281   276  
Commercial & Residential Solutions 996 988
 
Differences in accounting methods 106 163
Corporate and other (358 ) (425 )
Interest expense, net (126 ) (113 )
Earnings before income taxes $1,650   $1,929  
 
Restructuring costs
Automation Solutions $35 $26
 
Climate Technologies 8 11
Tools & Home Products 1    
Commercial & Residential Solutions 9 11
 
Corporate 1   1  
Total $45   $38  
   
Reconciliations of Non-GAAP Financial Measures & Other Table 7
     
Reconciliations of Non-GAAP measures (denoted by *) with the most
directly comparable GAAP measure (dollars in millions, except per
share amounts):
 
Q3 2018 Underlying Sales Change Auto Solns Comm & Res

Solns

Emerson
Reported (GAAP) 18 % (1 )% 10 %
FX (2 )% (1 )% (1 )%
Acquisitions/Divestitures (4 )% 4 % (1 )%
Underlying* 12 % 2 % 8 %
 
FY 2018E Underlying Sales Change Auto Solns Comm & Res
Solns
Emerson
Reported (GAAP) ~ 21% ~ 3% ~ 14%
FX ~ (2)% ~ (1)% ~ (2)%
Acquisitions/Divestitures ~ (10)% ~ 3% ~ (5)%
Underlying* ~ 9% ~ 4.5% ~ 7.5 %
 
Earnings Per Share Q3 FY17 Q3 FY18 Change
Earnings per share from continuing operations (GAAP) $ 0.63 $ 1.12 78 %
Benefit from the Tax Cuts and Jobs Act   (0.24 ) (38 )%

Earnings per share from continuing operations, excluding tax
benefit related to the Tax Cuts and Jobs Act*

$ 0.63 $ 0.88 40 %
 
EBIT Margin Q3 FY17 Q3 FY18 Change
Pretax margin (GAAP) 15.4 % 17.2 % 180 bps
Interest expense, net 0.9 % 0.9 % - bps
Earnings before interest and taxes margin* 16.3 % 18.1 % 180 bps
 
Q3 Cash Flow From Continuing Operations Q3 FY17 Q3 FY18 Change
Operating cash flow from continuing operations (GAAP) $ 774 $ 924 19 %
Capital expenditures (106 ) (120 ) 1 %
Free cash flow from continuing operations* $ 668 $ 804 20 %
 
Cash Flow From Continuing Operations For the 9 Months Ended June
30
FY17 FY18 Change
Operating cash flow from continuing operations (GAAP) $ 1,785 $ 1,868 5 %
Capital expenditures (300 ) (314 ) %
Free cash flow from continuing operations* $ 1,485 $ 1,554 5 %
 
Cash Flow to Net Earnings Conversion For the 9 Months Ended June
30
FY18

Operating cash flow from continuing operations to net earnings
from continuing operations (GAAP)

~ 120%
Capital expenditures ~ (20)%

Free cash flow from continuing operations to net earnings from
continuing operations*

~ 100%
 
Note: Underlying sales and orders exclude the impact of
acquisitions, divestitures and currency translation.

 

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