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Emerson Reports First Quarter 2018 Results and Raises Full-Year Sales and EPS Guidance
[February 06, 2018]

Emerson Reports First Quarter 2018 Results and Raises Full-Year Sales and EPS Guidance


Emerson (NYSE: EMR) today announced net sales in the first quarter ended December 31, 2017 were up 19 percent, with underlying sales up 7 percent excluding favorable currency of 3 percent and an impact from acquisitions and divestitures of 9 percent. The first quarter results reflected continued favorable global economic conditions as both platforms delivered solid underlying sales growth. Automation Solutions continued to see broad-based growth led by North America and Asia, reflecting favorable trends in energy-related, hybrid and general industrial markets. Growth in Commercial & Residential Solutions was driven by strong demand in Asia in air conditioning and refrigeration markets as well as continued growth of professional tools in oil and gas and construction-related markets.

December trailing three month underlying orders were up 7 percent and the Company expects orders to trend in a range of 5 to 10 percent for the remainder of the year.

Pretax margin of 13.2 percent and EBIT margin of 14.2 percent decreased 120 and 160 basis points, respectively, reflecting dilution from the Valves & Controls acquisition. Excluding Valves & Controls, EBIT margin of 16.5 percent increased 70 basis points driven primarily by leverage on higher sales and benefit of prior year restructuring actions.

Earnings per share from continuing operations increased 9 percent to $0.61, including a $0.03 benefit from the lower enacted U.S. corporate tax rate under the Tax Cuts and Jobs Act (the "Tax Act"). Earnings per share were up 18 percent excluding the current year $0.03 tax rate benefit and a prior year income tax benefit of $0.07. The first quarter results also included a provisional net tax benefit of $0.07 related to adoption of the Tax Act, which was offset by a ($0.03) charge for Valves & Controls first year acquisition accounting and a ($0.04) tax-related loss from the divestiture of the ClosetMaid business.

"We continued to execute our strategic repositioning plans across both business platforms and delivered a stronger first quarter than we had expected a few months ago," said Chairman and Chief Executive Officer David N. Farr. "Our growth in the quarter reflects broad-based momentum across our key end markets and regions, providing solid footing for our teams to deliver earnings and cash flow growth in 2018. We now see a stronger year operationally for Emerson, and combined with the benefit of U.S. tax reform, we are raising our full-year GAAP EPS guidance to $3.05 to $3.15 and net sales growth to 11 to 13 percent, or 5 to 7 percent on an underlying basis."

Farr added, "The positive impact of tax reform in the U.S. cannot be overstated. The legislation levels the global playing field for U.S. companies and will drive our economy by encouraging capital investment and ultimately leading to growth of jobs and wages. We expect increased capital formation to have a favorable impact on Emerson's growth over the next few years as U.S. companies bring home cash and invest in U.S. manufacturing," he said. "As we see it now, Emerson will increase capital spending rates as a percent of sales by approximately 0.5 percent over the next five years to approximately 3.5 percent, on average. We continue to expect 50 to 60 percent of our operating cash flow will be returned to shareholders, who will benefit from higher dividend payouts and share repurchases as our cash flow increases. We also continue to evaluate employee wage and benefit improvements to ensure that Emerson remains competitive in a growing U.S. economy, and we plan to implement these changes over the next few months."

Business Platform Results

Automation Solutions net sales increased 31 percent in the quarter, with underlying sales up 9 percent excluding favorable currency of 3 percent and an impact from acquisitions of 19 percent. Growth continued to be driven by strong MRO demand and small and mid-sized projects focused on expansion and optimization of existing facilities. North American underlying sales were up 14 percent driven by continued favorable trends in energy, life sciences and chemical markets and investment in Western Canada. Asia underlying sales were up 13 percent with China up 22 percent supported by continued strong demand in process and discrete markets. Latin America was up 6 percent reflecting investments in Mexico, Argentina and Chile. Europe was down 1 percent and Middle East/Africa was down 7 percent. Margin decreased 160 basis points to 15.0 percent compared with the prior year. Excluding the dilutive impact of the Valves & Controls acquisition, margin increased 120 basis points to 17.8 percent, driven by leverage on higher sales and restructuring benefits.

Commercial & Residential Solutions first quarter net sales were flat and underlying sales increased 5 percent excluding favorable currency of 2 percent and an impact from divestitures of 7 percent. Underlying sales in North America were up 1 percent as steady demand for professional tools in oil and gas and construction-related markets was offset by difficult prior year comparisons in residential air conditioning markets. Asia grew 17 percent, driven by continued favorable refrigeration and air conditioning demand in China and elsewhere in the region. Europe and Latin America were up 1 percent and Middle East/Africa was up 4 percent. Margin increased 20 basis points to 20.1 percent compared with the prior year.

2018 Outlook

We are increasing our full-year sales and earnings per share guidance based on stronger operational performance, increased share repurchases and the favorable impact of the Tax Act.

Total Emerson net sales are now expected to be up 11 to 13 percent with underlying sales up 5 to 7 percent excluding a 6 percent impact from acquisitions, divestitures and currency translation. Prior guidance was net sales up 8 to 10 percent and underlying sales up 4 to 6 percent. Automation Solutions guidance is increased to 18 to 20 percent net sales growth with underlying sales up 6 to 8 percent. Commercial & Residential Solutions guidance is increased to 1 to 3 percent net sales growth with underlying sales up 4 to 6 percent.

We are increasing our GAAP earnings per share guidance to $3.05 to $3.15 from prior guidance of $2.66 to $2.86. Previously, we also provided adjusted earnings per share guidance of $2.75 to $2.95 which excluded ($0.09) of total estimated charges related to Valves & Controls first year acquisition accounting and a tax-related loss from the divestiture of the ClosetMaid business. Actual results for these two charges totaled ($0.07) in the quarter, which were offset by the net tax benefit related to adoption of the Tax Act. Therefore, we are providing updated earnings per share guidance on a GAAP basis only.

The following table bridges prior adjusted earnings per share guidance to new GAAP guidance.





                      EPS Range
Low     High
Adjusted EPS, Prior Guidance Nov 7, 2017 $ 2.75 $ 2.95
Operational improvement & incr. share repurchases 0.15 0.05
Tax Act, lower U.S. corporate tax rate 0.15 0.15
Tax Act, adoption-related items 0.07 0.07
V&C and ClosetMaid charges   (0.07 )   (0.07 )
GAAP EPS Guidance $ 3.05 $ 3.15
 

Expected GAAP earnings per share guidance of $3.05 to $3.15 reflects increases for improved operational performance and increased share repurchases, the estimated impact of the lower U.S. corporate tax rate and items related to adoption of the Tax Act. These adoption-related items include the revaluation of net deferred income tax liabilities to the lower U.S. corporate tax rate and taxes on repatriation of foreign earnings.

The Tax Act reduces our tax rate and consistent with our updated guidance, we currently expect the 2018 consolidated tax rate to be approximately 25 to 27 percent. In 2019 and thereafter, the tax rate is expected to be approximately 25 percent.

Upcoming Investor Events

Today, beginning at 2:00 p.m. Eastern Time, Emerson management will discuss the first 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.

On Thursday, February 15, 2018, Emerson will host its annual investor conference in New York, NY. The conference will begin Thursday morning with Company presentations from 8:30 a.m. ET to approximately 1:00 p.m. ET. Access to a live webcast of the presentations will be available at www.emerson.com/financial at the time of the event. A replay of the conference will remain available for approximately three months.

Forward-Looking and Cautionary Statements

Given the complexities associated with the Tax Act, the ultimate effects on repatriation cost and other tax items may differ materially from the provisional amounts presented herein due to additional regulatory guidance that may be issued and further evaluation of the Company's actions, assumptions and interpretations.

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, and 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, as well as the impact of the Tax Act as described above.

 
 
 
 
 
   

Table 1

EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
         

Quarter Ended December 31

Percent

2016

2017

Change

 
Net sales $ 3,216 $ 3,816 19 %
Costs and expenses:
Cost of sales 1,851 2,195
SG&A expenses 822 992
Other deductions, net 33 88
Interest expense, net   46     38
Earnings from continuing operations before income taxes 464 503 9 %
Income taxes   94     109
Earnings from continuing operations 370 394 7 %
Discontinued operations, net of tax   (55 )   -
Net earnings 315 394
Less: Noncontrolling interests in earnings of subsidiaries   6     2
Net earnings common stockholders $ 309   $ 392 27 %
 
Diluted avg. shares outstanding 644.3 640.5
 
Diluted earnings per share common stockholders
Earnings from continuing operations $ 0.56 $ 0.61 9 %
Discontinued operations   ($0.08 )   -
Diluted earnings per common share $ 0.48   $ 0.61 27 %
 
 

Quarter Ended December 31

2016

2017

Other deductions, net
Amortization of intangibles $ 22 $ 56
Restructuring costs 11 15
Other   -     17
Total $ 33   $ 88
 
 
 
 
 
 
   

Table 2

EMERSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, UNAUDITED)
     

Quarter Ended December 31

2016

2017

Assets
Cash and equivalents $ 4,151 $ 3,096
Receivables, net 2,426 2,881
Inventories 1,278 1,845
Other current assets 552 330
Current assets held-for-sale   470   -
Total current assets 8,877 8,152
Property, plant & equipment, net 2,861 3,279
Goodwill 3,861 5,616
Other intangible assets 879 2,118
Other 179 693
Noncurrent assets held-for-sale   814   -
Total assets $ 17,471 $ 19,858
 
Liabilities and equity

 

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

$ 254 $ 2,093
Accounts payable 1,335 1,596
Accrued expenses 1,872 2,286
Income taxes 396 217
Current liabilities held-for-sale   289   -
Total current liabilities 4,146 6,192
Long-term debt 3,815 3,375
Other liabilities 1,667 1,903
Noncurrent liabilities held-for-sale 89 -
Total equity   7,754   8,388
Total liabilities and equity $ 17,471 $ 19,858
 
 
 
 
 
 
   

Table 3

EMERSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
     

Quarter Ended December 31

2016

2017

Operating activities
Net earnings $ 315 $ 394
Loss from discontinued operations, net of tax 55 -
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 143 187
Changes in operating working capital (138 ) (160 )
Other, net   35     26  
Cash from continuing operations 410 447
Cash from discontinued operations   (172 )   -  
Cash provided by operating activities   238     447  
 
Investing activities
Capital expenditures (100 ) (96 )
Purchases of businesses, net of cash and equivalents acquired (16 ) (513 )
Divestiture of business - 235
Other, net   (20 )   (18 )
Cash from continuing operations (136 ) (392 )
Cash from discontinued operations   3,894     -  
Cash provided by (used in) investing activities   3,758     (392 )
 
Financing activities
Net increase (decrease) in short-term borrowings (2,225 ) 1,061
Payments of short-term borrowings greater than three months (90 ) -
Payments of long-term debt (251 ) (251 )
Dividends paid (311 ) (311 )
Purchases of common stock - (500 )
Other, net   (43 )   (30 )
Cash used in financing activities   (2,920 )   (31 )
 
Effect of exchange rate changes on cash and equivalents   (107 )   10  
Increase in cash and equivalents 969 34
Beginning cash and equivalents   3,182     3,062  
Ending cash and equivalents $ 4,151   $ 3,096  
 
 
 
 
 
 
 

Table 4

EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
       

Quarter Ended December 31

2016

2017

Sales
Automation Solutions $ 1,967 $ 2,572
 
Climate Technologies 859 922
Tools & Home Products   393     330  
Commercial & Residential Solutions 1,252 1,252
 
Eliminations   (3 )   (8 )
Net sales $ 3,216   $ 3,816  
 
Earnings
Automation Solutions $ 326 $ 386
 
Climate Technologies 161 165
Tools & Home Products   88     87  
Commercial & Residential Solutions 249 252
 
Differences in accounting methods 33 51
Corporate and other (98 ) (148 )
Interest expense, net   (46 )   (38 )
Earnings before income taxes $ 464   $ 503  
 
Restructuring costs
Automation Solutions $ 6 $ 10
 
Climate Technologies 4 5
Tools & Home Products   1     -  
Commercial & Residential Solutions 5 5
   
Total $ 11   $ 15  
 
 
 
 
 
 
Reconciliations of Non-GAAP Financial Measures & Other    

Table 5

         
Reconciliations of Non-GAAP measures (denoted by *) with the most directly comparable GAAP measure (dollars in millions, except per share amounts):
 
Q1 2018 Underlying Sales Change Auto Solns

Comm & Res

Solns

Emerson
Reported (GAAP) 31 % - % 19 %
FX (3 )% (2 )% (3 )%
Acquisitions/Divestitures (19 )% 7 % (9 )%
Underlying* 9 % 5 % 7 %
 
FY 2018E Underlying Sales Change Auto Solns Comm & Res
Solns
Emerson
Reported (GAAP) 18 - 20% 1 - 3% 11 - 13%
FX ~ (3)% ~ (2)% ~ (2)%
Acquisitions/Divestitures ~ (9)% ~ 5% ~ (4)%
Underlying* 6 - 8% 4 - 6% 5 - 7%
 

FY 2018E Prior Guidance Underlying Sales Change

Emerson
Reported (GAAP) 8 - 10%
FX ~ (1)%
Acquisitions/Divestitures ~ (3)%
Underlying* 4 - 6%
 
Q1 2018 Earnings Per Share Q1 FY17 Q1 FY18 Change
Earnings per share from continuing operations (GAAP) $ 0.56 $ 0.61 9 %
Benefit of lower U.S. corporate tax rate - (0.03 )
Prior year income tax benefit (0.07 ) -    

Earnings per share from continuing operations, excluding benefit of lower U.S. corporate tax rate & a prior year income tax benefit*

$ 0.49 $ 0.58 18 %
 
 

FY2018E Prior Guidance Earnings Per Share

FY18E
Earnings per share from continuing operations (GAAP) $2.66 - $2.86
Valves & Controls first year acquisition accounting charges ~ $0.03
Loss on ClosetMaid divestiture ~ $0.06

Earnings per share from continuing operations, excluding Valves & Controls first year acquisition accounting charges & loss on ClosetMaid divestiture*

$2.75 - $2.95
 
 

 

Q1 2018 EBIT Margins Q1 FY17 Q1 FY18 Change
Pretax margin (GAAP) 14.4 % 13.2 % (120) bps
Interest expense, net 1.4 % 1.0 % (40) bps
Earnings before interest and taxes margin* 15.8 % 14.2 % (160) bps
Valves & Controls impact - % 2.3 % 230 bps

Earnings before interest and taxes margin excluding Valves & Controls*

15.8 % 16.5 % 70 bps
 
Automation Solutions Segment EBIT Margin Q1 FY17 Q1 FY18 Change
Automation Solutions Segment EBIT margin (GAAP) 16.6 % 15.0 % (160) bps
Valves & Controls impact - % 2.8 % 280 bps

Automation Solutions Segment EBIT margin excluding Valves & Controls*

16.6 % 17.8 % 120 bps
 
 
 
 
Note: Underlying sales and orders exclude the impact of acquisitions, divestitures and currency translation.
 
 
 
 


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