Market Overview

Emerson Reports Third Quarter 2019 Results

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  • Net sales of $4.7 billion increased 5 percent, or 2 percent on an underlying basis
  • GAAP earnings per share were $0.97, down 13 percent versus prior year, and were $0.94, up 7 percent, excluding discrete tax benefits in both years
  • Operating cash flow was $946 million; Free cash flow was $825 million, reflecting net earnings conversion of 135 percent
  • $1.9 billion returned to shareholders year-to-date, including $1 billion of share repurchases
  • Targeting additional $250 million share repurchases in fiscal 2019
  • Maintained 2019 EPS guidance range of $3.60 to $3.70

Emerson (NYSE:EMR) today reported results for the third quarter ended June 30, 2019.

Third quarter net sales were up 5 percent, with underlying sales up 2 percent excluding unfavorable currency of 2 percent and a positive impact from acquisitions of 5 percent. Growth was below management expectations across both business platforms due to softer conditions in global discrete manufacturing end markets and cooler, wet weather conditions in North America that unfavorably impacted air conditioning and construction markets. These factors also weighed on Emerson's trailing three-month underlying orders growth, which moderated to 2 percent in June.

Third quarter gross profit margin of 42.7 percent was down 90 basis points compared with the prior year, primarily reflecting dilution from recent acquisitions and unfavorable mix. Pretax margin of 16.4 percent and EBIT margin of 17.3 percent were both down 80 basis points, reflecting dilution from recent acquisitions. Pretax margin was up 160 basis points compared with the second quarter of 2019, as solid operating execution mitigated the profit impact of slower than expected sales growth. Total segment margin of 18.1 percent was down 160 basis points compared with the prior year, and was up 120 basis points compared with the second quarter of 2019, reflecting strong sequential leverage of 65 percent, above management expectations.

GAAP earnings per share were $0.97 in the quarter, down 13 percent versus the prior year, and were $0.94, up 7 percent, excluding a discrete tax benefit of $0.03 this year and a prior year one-time tax benefit of $0.24 related to the Tax Cuts and Jobs Act.

Third quarter operating cash flow was up 2 percent to $946 million, and free cash flow was up 3 percent to $825 million. Conversion of net earnings to free cash flow was 135 percent in the quarter.

"Trends remain solid in our global process and hybrid markets, and we continue to see consistent growth in our long-cycle businesses. Global discrete end markets decelerated in the third quarter, and our North America growth was further hampered by subdued upstream oil and gas demand," said Chairman and Chief Executive Officer David N. Farr. "In our Commercial & Residential Solutions business, cooler, wet weather negatively affected North America air conditioning sales and orders growth; however, we remain optimistic that demand will recover, supported by a solid macroeconomic backdrop and improving weather patterns early in the fiscal fourth quarter. Demand in Asia, which bottomed in December 2018, continued to improve through the quarter.

"For our shareholders, we've returned $1.9 billion year-to-date, including $1 billion of share repurchases. In light of our strong cash flow profile and lower planned acquisition spend this year, we will opportunistically repurchase up to $250 million of shares in the fourth quarter of 2019."

Business Platform Results

Automation Solutions net sales increased 5 percent in the quarter, with underlying sales up 3 percent excluding unfavorable currency of 3 percent and a positive impact from acquisitions of 5 percent. June trailing three-month underlying orders were up 4 percent, below management expectations. North American upstream oil and gas investment activity remained soft, and global discrete end markets slowed. Demand in process and hybrid end markets was stable in North America and continued to be robust elsewhere. Growth continued to reflect maintenance and repair (MRO) demand and brownfield investment activity focused on expansion and optimization of existing facilities. Our power systems and solutions business for conventional power generation markets accelerated in the quarter and was positive across all world areas, reflecting strong upgrade demand, competitive migration activity and growth of power plant digital twin projects. Large, long-cycle project bookings continued in the quarter, driving the June backlog up 6 percent year-over-year to $4.9 billion, providing visibility into early 2020.

In the Americas, underlying sales increased 1 percent, reflecting slower discrete end markets and soft upstream oil and gas activity. The industrial solutions business, which primarily serves discrete manufacturing end markets through distribution, was down mid-single digits on an underlying basis, reflecting softer short-cycle demand and some rebalancing of channel inventory. Upstream oil and gas investment activity remained muted, while midstream and downstream end markets trended favorably. The systems business was up mid-single digits, reflecting steady MRO spending and project activity.

Asia, Middle East & Africa underlying sales growth was up 7 percent, supported by continued infrastructure investment across Asia and mid-single digit growth in Middle East & Africa. Europe was up 1 percent, reflecting steady demand in most key end markets, including oil and gas, chemicals and life sciences.

Margin decreased 150 basis points to 15.7 percent and was down 10 basis points to 17.1 percent excluding the Aventics and GE Intelligent Platforms acquisitions. Compared with the second quarter, margin improved 90 basis points, reflecting strong operating execution on slower than expected sales growth.

For the full year, management expects approximately 7 percent net sales growth and 5 percent underlying sales growth, reflecting a lower outlook for global discrete end markets and continued softness in North American upstream oil and gas markets. For the full year, margin is expected to be approximately 16 percent, including higher restructuring investments in the fourth quarter. We continue to increase planned restructuring investments and other actions appropriate for a slower growth environment in the near-term.

Commercial & Residential Solutions net sales increased 4 percent in the quarter, with underlying sales down 1 percent excluding unfavorable currency of 1 percent and a positive impact from acquisitions of 6 percent. June trailing three-month underlying orders were down 1 percent, below management expectations. North American air conditioning markets slowed sharply late in the quarter as cooler weather and heavy precipitation in key regions slowed demand.

In the Americas, underlying sales were up 1 percent, reflecting stable professional tools end markets and the impact of unfavorable weather conditions in air conditioning markets. Europe was up 1 percent, supported by stable demand in professional tools markets, partially offset by softer cold chain and commercial air conditioning demand. The Asia, Middle East & Africa region was down 6 percent. China was down 2 percent in the quarter and continued a trend of steady improvement since underlying sales growth bottomed in the first quarter, down 30 percent.

Margin decreased 190 basis points to 22.4 percent and was down 70 basis points to 23.6 percent, excluding the Tools & Test acquisition. Compared with the second quarter of 2019, price-cost trended favorably and helped the business deliver over 40 percent sequential leverage on incremental sales. We expect strong operational execution to drive year-over-year improvement in fourth quarter profitability, further aided by easing material cost pressures and the lapping of Section 301 Tariffs in July.

For the full year, management expects approximately 4 percent net sales growth with flat underlying sales growth, reflecting continued improvement in Asia and a favorable outlook in North American residential and commercial air conditioning markets. Margin is expected to be approximately 21 percent, including higher planned restructuring investments in the fourth quarter.

2019 Outlook

The following table presents the updated 2019 guidance framework. The GAAP earnings per share range is expected to be $3.60 to $3.70, which reflects lower sales expectations and higher levels of planned restructuring investments in the fourth quarter, offset by improvement in the estimated full-year tax rate and lower corporate expenses. We expect full year restructuring spend and other actions of approximately $100 million, which is up approximately $30 million since short-cycle end markets began to soften in the second fiscal quarter.

In the fourth quarter, we expect a discrete tax benefit of approximately $0.05 and full-year tax rate of approximately 21 percent, including the benefit of discrete items. We estimate our operational tax rate will settle at approximately 23.5 percent going forward as we continue to optimize our global two-platform operating structure.

Sales Growth Guidance

 

 

 

EPS and Cash Flow Guidance

Net Sales Growth

 

~6%

   

 

GAAP EPS

 

$3.60 – $3.70

Acquisitions Impact

 

5%

   

 

Tax Rate

 

~21%

Foreign Currency Translation Impact

 

(2%)

   

 

Operating Cash Flow

 

~$3.1B

Underlying Sales Growth

 

~3%

   

 

Free Cash Flow

 

~$2.5B

Automation Solutions

 

~5%

   

 

 

 

 

Commercial & Residential Solutions

 

~Flat

   

 

 

 

 

 

"Trends around the world indicate a somewhat slower growth environment in the near-term, with gross fixed investment growth moderating to a range of 2 to 3 percent. We are prioritizing restructuring investments to align our cost base with these lower near-term growth expectations and to position for continued strong profitability and cash flow across both business platforms in 2020," Farr said. "We believe this slowdown is caused by many factors, including trade tensions, that have contributed to an uncertain business investment climate, and not by an overbuilt industrial asset base in this cycle. Consequently, a lifting of geopolitical uncertainties and easing of tensions could re-accelerate global business investment spending back to levels we had anticipated at our February Investor Conference.

"Like Emerson, our customers need to invest in their businesses to prepare to meet the needs of the global economy in 2021 and 2022, and they, like Emerson, are reviewing capital projects to prioritize spending in a slower environment. In some cases, we see a delay in the timing of certain projects, but we do not see projects being canceled.

"The capital spending cycle remains intact. We anticipate the cycle stretching out a bit given the current dynamics, but our project funnel remains healthy and we continue to steadily convert projects to orders and sales, as evidenced by the strength of our long-cycle businesses."

Upcoming Investor Events

Today, beginning at 2 p.m. Eastern Time, Emerson management will discuss the third quarter 2019 results during an investor conference call. Participants can access a live webcast available at www.emerson.com/financial at the time of the call. A replay of the 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, cybersecurity, tariffs, competitive and technological factors, among others, as set forth in the Company's most recent Annual Report on Form 10-K and subsequent reports filed with the SEC.

 
 
 

 

 

 

 

 

Table 1

EMERSON AND SUBSIDIARIES

CONSOLIDATED OPERATING RESULTS

(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)

 

 

 

 

 

 

 

Quarter Ended June 30

 

Percent

 

2018

 

2019

 

Change

 

 

 

 

 

 

Net sales

$4,456

 

 

$4,684

 

 

5%

Costs and expenses:

 

 

 

 

 

Cost of sales

2,514

 

 

2,683

 

 

 

SG&A expenses

1,058

 

 

1,126

 

 

 

Other deductions, net

77

 

 

65

 

 

 

Interest expense, net

39

 

 

43

 

 

 

Earnings before income taxes

768

 

 

767

 

 

—%

Income taxes

49

 

 

155

 

 

 

Net earnings

719

 

 

612

 

 

 

Less: Noncontrolling interests in earnings of subsidiaries

7

 

 

8

 

 

 

Net earnings common stockholders

$712

 

 

$604

 

 

(15)%

 

 

 

 

 

 

Diluted avg. shares outstanding

632.9

 

 

619.0

 

 

 

 

 

 

 

 

 

Diluted earnings per share common share

$1.12

 

 

$0.97

 

 

(13)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30

 

 

 

2018

 

2019

 

 

Other deductions, net

 

 

 

 

 

Amortization of intangibles

$47

 

 

$60

 

 

 

Restructuring costs

14

 

 

20

 

 

 

Other

16

 

 

(15

)

 

 

Total

$77

 

 

$65

 

 

 

 
 
 

 

 

 

 

 

Table 2

EMERSON AND SUBSIDIARIES

CONSOLIDATED OPERATING RESULTS

(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)

 

 

 

 

 

 

 

Nine Months Ended June 30

 

Percent

 

2018

 

2019

 

Change

 

 

 

 

 

 

Net sales

$12,520

 

 

$13,401

 

 

7%

Costs and expenses:

 

 

 

 

 

Cost of sales

7,147

 

 

7,714

 

 

 

SG&A expenses

3,088

 

 

3,348

 

 

 

Other deductions, net

243

 

 

172

 

 

 

Interest expense, net

113

 

 

134

 

 

 

Earnings before income taxes

1,929

 

 

2,033

 

 

5%

Income taxes

327

 

 

429

 

 

 

Net earnings

1,602

 

 

1,604

 

 

 

Less: Noncontrolling interests in earnings of subsidiaries

16

 

 

15

 

 

 

Net earnings common stockholders

$1,586

 

 

$1,589

 

 

—%

 

 

 

 

 

 

Diluted avg. shares outstanding

636.5

 

 

621.6

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$2.49

 

 

$2.55

 

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30

 

 

 

2018

 

2019

 

 

Other deductions, net

 

 

 

 

 

Amortization of intangibles

$154

 

 

$177

 

 

 

Restructuring costs

38

 

 

40

 

 

 

Other

51

 

 

(45

)

 

 

Total

$243

 

 

$172

 

 

 

   
   
   

 

 

 

 

Table 3

EMERSON AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS, UNAUDITED)

 

 

 

 

 

 

 

Quarter Ended June 30

 

 

2018

 

2019

Assets

 

 

 

 

Cash and equivalents

 

$3,411

 

 

$1,603

 

Receivables, net

 

2,730

 

 

2,901

 

Inventories

 

1,805

 

 

2,061

 

Other current assets

 

630

 

 

785

 

Total current assets

 

8,576

 

 

7,350

 

Property, plant & equipment, net

 

3,260

 

 

3,614

 

Goodwill

 

5,745

 

 

6,544

 

Other intangible assets

 

2,157

 

 

2,691

 

Other

 

749

 

 

1,118

 

Total assets

 

$20,487

 

 

$21,317

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

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

 

$2,862

 

 

$1,877

 

Accounts payable

 

1,647

 

 

1,785

 

Accrued expenses

 

2,392

 

 

2,453

 

Income taxes

 

53

 

 

103

 

Total current liabilities

 

6,954

 

 

6,218

 

Long-term debt

 

3,126

 

 

4,336

 

Other liabilities

 

1,947

 

 

1,959

 

Total equity

 

8,460

 

 

8,804

 

Total liabilities and equity

 

$20,487

 

 

$21,317

 

   
   
   

 

 

 

 

 

Table 4

EMERSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS, UNAUDITED)

 

 

 

 

 

 

 

 

Nine Months Ended June 30

 

 

 

2018

 

2019

Operating activities

 

 

 

 

 

Net earnings

 

 

$

1,602

 

 

$

1,604

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

 

 

557

 

 

 

609

 

Changes in operating working capital

 

 

 

(286

)

 

 

(352

)

Other, net

 

 

 

(5

)

 

 

(59

)

Net cash provided by operating activities

 

 

 

1,868

 

 

 

1,802

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

 

 

(314

)

 

 

(395

)

Purchases of businesses, net of cash and equivalents acquired

 

 

 

(770

)

 

 

(385

)

Divestitures of businesses

 

 

 

223

 

 

 

10

 

Other, net

 

 

 

(71

)

 

 

(91

)

Cash used in investing activities

 

 

 

(932

)

 

 

(861

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Net increase in short-term borrowings

 

 

 

1,581

 

 

 

427

 

Proceeds from long-term debt

 

 

 

 

1,691

 

Payments of long-term debt

 

 

 

(251

)

 

 

(655

)

Dividends paid

 

 

 

(924

)

 

 

(909

)

Purchases of common stock

 

 

 

(1,000

)

 

 

(1,000

)

Other, net

 

 

 

34

 

 

 

21

 

Cash used in financing activities

 

 

 

(560

)

 

 

(425

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and equivalents

 

 

 

(27

)

 

 

(6

)

Increase in cash and equivalents

 

 

 

349

 

 

 

510

 

Beginning cash and equivalents

 

 

 

3,062

 

 

 

1,093

 

Ending cash and equivalents

 

 

$

3,411

 

 

$

1,603

 

 

 

 

 

 

 

   
   
   

 

 

 

 

Table 5

EMERSON AND SUBSIDIARIES

SEGMENT SALES AND EARNINGS

(DOLLARS IN MILLIONS, UNAUDITED)

 

 

 

 

 

 

 

Quarter Ended June 30

 

 

2018

 

2019

Sales

 

 

 

 

Automation Solutions

 

$2,870

 

 

$3,025

 

 

 

 

 

 

Climate Technologies

 

1,236

 

 

1,199

 

Tools & Home Products

 

356

 

 

463

 

Commercial & Residential Solutions

 

1,592

 

 

1,662

 

 

 

 

 

 

Eliminations

 

(6

)

 

(3

)

Net sales

 

$4,456

 

 

$4,684

 

 

 

 

 

 

Earnings

 

 

 

 

Automation Solutions

 

$494

 

 

$477

 

 

 

 

 

 

Climate Technologies

 

294

 

 

278

 

Tools & Home Products

 

93

 

 

93

 

Commercial & Residential Solutions

 

387

 

 

371

 

 

 

 

 

 

Differences in accounting methods

 

57

 

 

64

 

Corporate and other

 

(131

)

 

(102

)

Interest expense, net

 

(39

)

 

(43

)

Earnings before income taxes

 

$768

 

 

$767

 

 

 

 

 

 

Restructuring costs

 

 

 

 

Automation Solutions

 

$9

 

 

$15

 

 

 

 

 

 

Climate Technologies

 

4

 

 

4

 

Tools & Home Products

 

 

 

1

 

Commercial & Residential Solutions

 

4

 

 

5

 

 

 

 

 

 

Corporate

 

1

 

 

 

Total

 

$14

 

 

$20

 

   
   
   

 

 

 

 

Table 6

EMERSON AND SUBSIDIARIES

SEGMENT SALES AND EARNINGS

(DOLLARS IN MILLIONS, UNAUDITED)

 

 

 

 

 

 

 

Nine Months Ended June 30

 

 

2018

 

2019

Sales

 

 

 

 

Automation Solutions

 

$8,213

 

 

$8,834

 

 

 

 

 

 

Climate Technologies

 

3,286

 

 

3,171

 

Tools & Home Products

 

1,041

 

 

1,390

 

Commercial & Residential Solutions

 

4,327

 

 

4,561

 

 

 

 

 

 

Eliminations

 

(20

)

 

6

 

Net sales

 

$12,520

 

 

$13,401

 

 

 

 

 

 

Earnings

 

 

 

 

Automation Solutions

 

$1,316

 

 

$1,328

 

 

 

 

 

 

Climate Technologies

 

712

 

 

650

 

Tools & Home Products

 

276

 

 

286

 

Commercial & Residential Solutions

 

988

 

 

936

 

 

 

 

 

 

Differences in accounting methods

 

163

 

 

188

 

Corporate and other

 

(425

)

 

(285

)

Interest expense, net

 

(113

)

 

(134

)

Earnings before income taxes

 

$1,929

 

 

$2,033

 

 

 

 

 

 

Restructuring costs

 

 

 

 

Automation Solutions

 

$26

 

 

$26

 

 

 

 

 

 

Climate Technologies

 

11

 

 

8

 

Tools & Home Products

 

 

 

 

5

 

Commercial & Residential Solutions

 

11

 

 

13

 

 

 

 

 

 

Corporate

 

1

 

 

1

 

Total

 

$38

 

 

$40

 

 
 
 

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 2019 Underlying Sales Change

Auto Solns

 

Comm & Res

Solns

 

Emerson

 

Reported (GAAP)

 

5

%

 

4

%

 

5

%

 

(Favorable) / Unfavorable FX

3

%

 

1

%

 

2

%

 

Acquisitions

 

(5

)%

 

(6

)%

 

(5

)%

 

Underlying*

 

3

%

 

(1

)%

 

2

%

 

 

 

 

 

 

 

 

 

 

 

FY 2019E Underlying Sales Change

Auto Solns

 

Comm & Res

Solns

 

Emerson

 

Reported (GAAP)

 

~ 7%

 

~ 4%

 

~6%

 

(Favorable) / Unfavorable FX

~ 2%

 

~ 1%

 

~ 2%

 

Acquisitions

 

~ (4)%

 

~ (5)%

 

~ (5)%

 

Underlying*

 

~ 5%

 

~ -%

 

~ 3%

 

 

 

 

 

 

 

 

 

 

 

EBIT Margin

Q3 FY18

 

Q3 FY19

 

Change

 

Pretax margin (GAAP)

17.2

%

 

16.4

%

 

(80) bps

 

Interest expense, net

0.9

%

 

0.9

%

 

- bps

 

Earnings before interest and taxes margin*

18.1

%

 

17.3

%

 

(80) bps

 

 

Q3 Business Segment EBIT

Q3 FY18

 

Q3 FY19

 

Change

 

Pretax margin (GAAP)

17.2

%

 

16.4

%

 

(80) bps

 

Corp. & other, differences in accounting methods & interest expense, net % of sales

2.5

%

 

1.7

%

 

(80) bps

 

Business segment EBIT margin*

19.7

%

 

18.1

%

 

(160) bps

 

 

FY19 Business Segment EBIT

Q2 FY19

 

Q3 FY19

 

Change

 

Pretax margin (GAAP)

14.8

%

 

16.4

%

 

160 bps

 

Corp. & other, differences in accounting methods & interest expense, net % of sales 

2.1

%

 

1.7

%

 

(40 bps)

 

Business segment EBIT margin*

16.9

%

 

18.1

%

 

120 bps

 

 

 

 

 

 

 

 

Automation Solutions Segment EBIT Margin

Q3 FY18

 

Q3 FY19

 

Change

 

Automation Solutions Segment EBIT margin (GAAP)

17.2

%

 

15.7

%

 

(150) bps

 

Aventics & GE Intelligent Platforms impact

%

 

1.4

%

 

140 bps

 

Automation Solutions Segment EBIT margin, excluding Aventics and GE Intelligent Platforms*

17.2

%

 

17.1

%

 

(10) bps

 

 

 

 

 

 

 

 

 

 

 

Commercial & Residential EBIT Margin

Q3 FY18

 

Q3 FY19

 

Change

 

Commercial & Residential EBIT margin (GAAP)

24.3

%

 

22.4

%

 

(190) bps

 

Tools & Test impact

%

 

1.2

%

 

120 bps

 

Commercial & Residential EBIT margin, excluding Tools & Test*

24.3

%

 

23.6

%

 

(70) bps

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

Q3 FY18

 

Q3 FY19

 

Change

 

Earnings per share (GAAP)

$

1.12

 

 

$

0.97

 

 

(13

)%

 

Discrete tax benefits

(0.24

)

 

(0.03

)

 

20

%

 

Earnings per share excluding discrete tax benefits*

$

0.88

 

 

$

0.94

 

 

7

%

 

 

 

 

 

 

 

 

 

 

Q3 Cash Flow

 

 

Q3 FY18

 

Q3 FY19

 

Change

 

Operating cash flow (GAAP)

$

924

 

 

$

946

 

 

2

%

 

Capital expenditures

(120

)

 

(121

)

 

1

%

 

Free cash flow*

$

804

 

 

$

825

 

 

3

%

 

 

FY 2019E Cash Flow

FY 2019E

 

 

 

 

 

Operating cash flow (GAAP)

$

3,100

 

 

 

 

 

 

Capital expenditures

~ (600)

 

 

 

 

 

Free cash flow*

$

2,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow to Net Earnings Conversion

Q3 FY19

 

 

 

 

 

Operating cash flow to net earnings (GAAP)

155

%

 

 

 

 

Capital expenditures

(20

)%

 

 

 

 

 

Free cash flow to net earnings*

135

%

 

 

 

 

 

 

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

 

 

 

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