- Net sales of $4.6 billion increased 8
percent, or 4 percent on an underlying basis
- GAAP earnings per share were $0.84, up
11 percent versus prior year
- Operating cash flow was up 7 percent to
$533 million
- Returned $1.6 billion to shareholders
through the first half, including $1.0 billion of share
repurchases
- Updated full-year GAAP EPS guidance to
$3.60 to $3.70
Emerson (NYSE: EMR) today reported results for the second
quarter ended March 31, 2019.
Second quarter net sales were up 8 percent, with
underlying sales up 4 percent excluding unfavorable currency
of 2 percent and a positive impact from acquisitions of 6 percent.
Underlying growth reflected broad-based global demand in process
and hybrid end markets and continued strength in North American air
conditioning and global professional tools markets. This was
partially offset by softer conditions in global discrete
manufacturing end markets and a slower than expected recovery in
the Commercial & Residential Solutions Asia, Middle East &
Africa business. Emerson's trailing three-month underlying
orders growth remained in the 5 to 10 percent range in the
first two months of the quarter but moderated to 4 percent in March
as North America upstream oil and gas customers paused to assess
full-year investment plans in light of oil price volatility, and
discrete manufacturing end markets slowed globally. We expect
growth to improve modestly through the second half of the year with
underlying orders returning to the 5 to 10 percent range, supported
by a strong macroeconomic backdrop for energy investment and
continued improvement in the Commercial & Residential Solutions
Asia, Middle East & Africa business.
Second quarter gross profit margin of 42.1 percent was
down 70 basis points, reflecting unfavorable mix, modest dilution
from recent acquisitions and $7 million of first year acquisition
accounting charges related to the GE Intelligent Platforms
business. Pretax margin of 14.8 percent and EBIT
margin of 15.8 percent were down 70 basis points and 50 basis
points, respectively, reflecting dilution from recent acquisitions.
GAAP earnings per share were $0.84 in the quarter, up 11
percent compared with the prior year.
Second quarter operating cash flow was up 7 percent to
$533 million, and free cash flow was up 3 percent to $414
million.
“Demand in the second quarter was healthy across the world
areas. Automation Solutions continued to drive healthy mix across
its three kinds of business – maintenance and repair spending,
brownfield projects and greenfield investments,” said Chairman and
Chief Executive Officer David N. Farr. “Trends in our Commercial
& Residential Solutions end markets improved overall, and we
are optimistic about returning to solid growth in the second half.
We remain confident in the cycle and the mid-term and long-term
growth outlook we discussed at our February investor
conference.”
Business Platform
Results
Automation Solutions net sales increased 9 percent in the
quarter, with underlying sales up 7 percent excluding unfavorable
currency of 3 percent and a positive impact from acquisitions of 5
percent. Continued broad-based demand across process and hybrid end
markets drove 7 percent growth in the March trailing three-month
underlying orders. Growth continued to reflect strong maintenance
and repair (MRO) demand and brownfield investment activity focused
on expansion and optimization of existing facilities. Large,
long-cycle projects drove the March backlog up 5 percent
year-over-year to $4.9 billion, providing good visibility into the
second half of 2019 and early 2020.
In the Americas, underlying sales increased 9 percent,
reflecting broad-based demand and continued strong MRO and small
and mid-sized brownfield projects. The Industrial Solutions
business, which primarily serves discrete manufacturing end markets
through distribution, was positive but slowed compared with the
first quarter, reflecting softer short-cycle demand and some
rebalancing of channel inventory from last year's tariff impact and
price increases.
Asia, Middle East & Africa underlying sales were up 6
percent, supported by continued infrastructure investment activity
across the region. Europe was up 1 percent, reflecting steady
demand in most key end markets, including oil and gas, chemicals
and life sciences.
Margin decreased 90 basis points to 14.8 percent and was down 10
basis points to 15.6 percent excluding the Aventics and GE
Intelligent Platforms acquisitions due to higher investment
spending, foreign exchange losses and unfavorable mix.
For the full year, management reduced the high end of the
expected growth range by one point to 7 to 9 percent net sales
growth and 5 to 7 percent underlying sales growth, reflecting a
lower outlook in North American upstream oil and gas markets and
global discrete manufacturing end markets, partially offset by
stronger expectations in Asia and Latin America. Given the lower
2019 sales expectation, we are taking actions to protect our
full-year margin target and support strong profitability in the
second half of the year – including right-sizing investment
spending and accelerating some acquisition restructuring. For the
full year, margin is expected to be approximately 16.5 percent,
consistent with our discussion at the February investor
conference.
Commercial & Residential Solutions net sales
increased 5 percent in the quarter, with underlying sales flat
excluding unfavorable currency of 2 percent and a positive impact
from acquisitions of 7 percent. March trailing three-month
underlying orders were flat, below our February investor conference
forecast of positive growth in the quarter. China has continued to
improve as expected, and North American air conditioning demand
remains solid, but these dynamics were offset by slower demand in
Asia outside of China and weather and channel inventory adjustments
that unfavorably impacted some markets in North America.
In the Americas, underlying sales were up 4 percent led by solid
growth in residential and commercial air conditioning. Europe was
up 2 percent, reflecting steady trends in professional tools and
heating and air conditioning markets. Asia, Middle East &
Africa was down 15 percent. China was down 16 percent, but is
improving in line with our previous expectations. Softer than
expected trends in southeast Asia and the Middle East have put the
region two to three months behind the forecast laid out at our
February investor conference.
Margin decreased 260 basis points to 21.0 percent and was down
150 basis points to 22.1 percent, excluding the Tools & Test
acquisition. Compared with the first quarter, price-cost trended
favorably and helped the business deliver over 40 percent
sequential leverage on incremental sales – in line with our
expectations. We expect the same level of sequential leverage in
the third quarter and strong fourth quarter profitability with
further easing of material cost pressures expected through the
second half of the year, the lapping of Section 301 Tariffs in
July, and the benefits of several cost actions.
For the full year, management expects approximately 7 percent
net sales growth and approximately 2 percent underlying sales
growth, reflecting continued improvement in Asia and a favorable
outlook in the North American residential and commercial air
conditioning markets. Given the lower 2019 sales expectation, we
have slowed incremental growth investments and accelerated some
cost actions to protect our full-year margin target. Margin is
expected to be approximately 22 percent, consistent with the plan
we laid out at our February investor conference.
2019 Outlook
The following table presents the updated 2019 guidance
framework. The high end of the GAAP earnings per share range is
reduced 5 cents to $3.60 to $3.70, which reflects lowered sales
expectations, somewhat offset by improvement in the estimated
full-year tax rate.
Sales Growth Guidance EPS and Cash
Flow Guidance Net Sales Growth 7 – 8.5%
GAAP EPS $3.60 – $3.70 Acquisitions Impact 5%
Tax Rate ~23% Foreign Currency Translation Impact
(2%)
Operating Cash Flow ~$3.2B Underlying Sales
Growth 4 – 5.5% Free Cash Flow ~$2.5B
Automation Solutions 5 – 7% Commercial & Residential Solutions
~2%
“Our end markets are healthy around the world and we have
momentum heading into the second half of the year, despite some
crosswinds which we had embedded in our full year outlook in
November and discussed at our February investor conference. Our
very focused management process enhances our ability to adapt and
deliver profitability targets,” Farr said. “Given the slower first
half sales growth, we are reducing the pace of investments and
hiring as we continue to carefully track our end markets, and we
are more quickly integrating acquisitions in both business
platforms to set up a better cost structure in 2020.
“The capital spending cycle remains intact. The project funnel
continues to grow even as we steadily convert long-cycle projects
into backlog, which provides us improved visibility into the second
half of 2019 and early 2020.”
Upcoming Investor Events
Today, beginning at 2 p.m. Eastern Time, Emerson management will
discuss the second 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. In addition
to the usual participating members of Emerson senior management,
Lal Karsanbhai, executive president of Automation Solutions, and
Bob Sharp, executive president of Commercial & Residential
Solutions, will join the call to give a brief update from their
February investor day presentation. 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 March
31
Percent
2018
2019
Change
Net sales $4,248 $4,570 8% Costs and expenses: Cost
of sales 2,431 2,645 SG&A expenses 1,035 1,145 Other
deductions, net 88 57 Interest expense, net 36 48
Earnings before income taxes 658 675 3% Income taxes 169
150
Net earnings 489 525 Less: Noncontrolling
interests in earnings of subsidiaries 7 5
Net
earnings common stockholders $482 $520 8%
Diluted avg. shares outstanding 636.0 618.1
Diluted
earnings per share common share $0.76 $0.84 11%
Quarter Ended March
31
2018
2019
Other deductions, net Amortization of intangibles $51 $60
Restructuring costs 9 10 Other 28 (13 ) Total $88 $57
Table
2
EMERSON AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS (AMOUNTS IN
MILLIONS EXCEPT PER SHARE, UNAUDITED)
Six Months Ended
March 31
Percent
2018
2019
Change
Net sales $8,064 $8,717 8% Costs and expenses: Cost
of sales 4,633 5,031 SG&A expenses 2,030 2,222 Other
deductions, net 166 107 Interest expense, net 74 91
Earnings before income taxes 1,161 1,266 9% Income taxes 278
274
Net earnings 883 992 Less: Noncontrolling
interests in earnings of subsidiaries 9 7
Net
earnings common stockholders $874 $985 13%
Diluted avg. shares outstanding 638.3 622.9
Diluted earnings per common share $1.37 $1.58
15%
Six Months Ended
March 31
2018
2019
Other deductions, net Amortization of intangibles $107 $117
Restructuring costs 24 20 Other 35 (30 ) Total $166
$107
Table
3
EMERSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN
MILLIONS, UNAUDITED)
Quarter Ended March
31
2018
2019
Assets Cash and equivalents $2,444 $1,384 Receivables, net
2,741 2,911 Inventories 1,897 2,073 Other current assets 643
784 Total current assets 7,725 7,152 Property, plant &
equipment, net 3,299 3,615 Goodwill 5,821 6,509 Other intangible
assets 2,203 2,701 Other 737 1,094
Total assets
$19,785 $21,071
Liabilities and equity
Short-term borrowings and current
maturities of long-term debt
$1,833 $2,551 Accounts payable 1,603 1,730 Accrued expenses 2,362
2,349 Income taxes 147 84 Total current liabilities 5,945
6,714 Long-term debt 3,357 3,786 Other liabilities 1,946 1,999
Total equity 8,537 8,572
Total liabilities and equity
$19,785 $21,071
Table
4
EMERSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
Six Months Ended
March 31
2018
2019
Operating activities Net earnings $883 $992 Adjustments to
reconcile net earnings to net cash provided by operating
activities: Depreciation and amortization 378 406 Changes in
operating working capital (363 ) (530 ) Other, net 46 (12 )
Net cash provided by operating activities 944 856
Investing activities Capital expenditures (194 ) (274 )
Purchases of businesses, net of cash and equivalents acquired (770
) (243 ) Divestitures of businesses 221 5 Other, net (42 ) (65 )
Cash used in investing activities (785 ) (577 )
Financing
activities Net increase in short-term borrowings 782 851
Proceeds from long-term debt — 1,135 Payments of long-term debt
(251 ) (406 ) Dividends paid (618 ) (607 ) Purchases of common
stock (750 ) (1,000 ) Other, net (6 ) 29 Cash provided by
(used in) financing activities (843 ) 2 Effect of
exchange rate changes on cash and equivalents 66 10
Increase (Decrease) in cash and equivalents (618 ) 291
Beginning cash and equivalents 3,062 1,093
Ending
cash and equivalents $2,444 $1,384
Table
5
EMERSON AND SUBSIDIARIES SEGMENT SALES AND EARNINGS (DOLLARS IN
MILLIONS, UNAUDITED)
Quarter Ended March
31
2018
2019
Sales Automation Solutions $2,771 $3,010
Climate Technologies 1,128 1,092 Tools & Home Products 355
469
Commercial & Residential Solutions
1,483 1,561 Eliminations (6 ) (1 ) Net sales $4,248
$4,570
Earnings Automation Solutions
$436 $444 Climate Technologies 253 226 Tools & Home
Products 96 102
Commercial & Residential
Solutions 349 328 Differences in accounting methods 55
65 Corporate and other (146 ) (114 ) Interest expense, net (36 )
(48 ) Earnings before income taxes $658 $675
Restructuring costs Automation Solutions $7 $6
Climate Technologies 2 1 Tools & Home Products — 2
Commercial & Residential Solutions 2 3
Corporate — 1 Total $9 $10
Table
6
EMERSON AND SUBSIDIARIES SEGMENT SALES AND EARNINGS (DOLLARS IN
MILLIONS, UNAUDITED)
Six Months Ended
March 31
2018
2019
Sales Automation Solutions $5,343 $5,809
Climate Technologies 2,050 1,972 Tools & Home Products 685
927
Commercial & Residential Solutions
2,735 2,899 Eliminations (14 ) 9 Net sales $8,064
$8,717
Earnings Automation
Solutions $822 $851 Climate Technologies 418 372 Tools
& Home Products 183 193
Commercial &
Residential Solutions 601 565 Differences in accounting
methods 106 124 Corporate and other (294 ) (183 ) Interest expense,
net (74 ) (91 ) Earnings before income taxes $1,161 $1,266
Restructuring costs Automation
Solutions $17 $11 Climate Technologies 7 4 Tools &
Home Products — 4
Commercial & Residential
Solutions 7 8
Corporate — 1 Total
$24 $20
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):
Q2 2019 Underlying
Sales Change Auto Solns Comm &
ResSolns Emerson Reported (GAAP) 9 % 5 % 8 %
(Favorable) / Unfavorable FX 3 % 2 % 2 % Acquisitions (5 )% (7 )%
(6 )%
Underlying*
7
%
–
%
4
%
FY 2019E Underlying Sales Change Auto Solns
Comm & ResSolns Emerson Reported (GAAP) 7
- 9% ~ 7% 7 - 8.5% (Favorable) / Unfavorable FX ~ 2% ~ 1% ~ 2%
Acquisitions ~ (4)% ~ (6)% ~ (5)% Underlying* 5 - 7% ~ 2% 4 - 5.5%
EBIT Margin Q2 FY18 Q2 FY19
Change Pretax margin (GAAP) 15.5 % 14.8 % (70) bps Interest
expense, net 0.8 % 1.0 % 20 bps Earnings before interest and taxes
margin* 16.3 % 15.8 % (50) bps
Automation Solutions
Segment EBIT Margin Q2 FY18 Q2 FY19 Change
Automation Solutions Segment EBIT margin (GAAP) 15.7 % 14.8 % (90)
bps Aventics & GE Intelligent Platforms impact — % 0.8 % 80 bps
Automation Solutions Segment EBIT margin,
excluding Aventics and GE Intelligent Platforms*
15.7 % 15.6 % 10 bps
Commercial & Residential EBIT
Margin Q2 FY18 Q2 FY19 Change Commercial
& Residential EBIT margin (GAAP) 23.6 % 21.0 % (260) bps Tools
& Test impact — % 1.1 % 110 bps
Commercial & Residential EBIT margin,
excluding Tools & Test*
23.6 % 22.1 % (150) bps
Q2 Cash Flow Q2 FY18
Q2 FY19 Change Operating cash flow (GAAP) $ 497 $ 533
7 % Capital expenditures (98 ) (119 ) (4 )% Free cash flow* $ 399 $
414 3 %
FY 2019E Cash Flow FY 2019E Operating
cash flow (GAAP) $ 3,200
Capital expenditures
~ (650
)
Free cash flow* $ 2,500 Note: Underlying sales and orders
exclude the impact of acquisitions, divestitures and currency
translation.
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EmersonInvestor Contact: Tim Reeves (314) 553-2197Media Contact:
Casey Murphy (314) 982-6220
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