Emerson Electric Co. — Form 10-Q Summary
Business context and period: The filing covers the fiscal quarter and six months ended March 31, 2018. Emerson reports Automation Solutions and Commercial & Residential Solutions, including Climate Technologies and Tools & Home Products. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results
| Metric | Three months ended Mar. 31, 2018 | Six months ended Mar. 31, 2018 |
|---|---|---|
| Net sales | $4,248; up 19% | $8,064; up 19% |
| Underlying sales growth | 8% | 8% |
| Continuing-operations earnings attributable to common stockholders | $482; up 28% | $874; up 18% |
| Diluted EPS from continuing operations | $0.76; up 31% | $1.37; up 20% |
| Gross margin | 43.0%, versus 43.6% | 42.7%, versus 43.0% |
| Pretax earnings from continuing operations | $658; up 16% | $1,161; up 13% |
Quarterly net earnings attributable to common stockholders were $482, versus $292 a year earlier; the prior-year quarter included a $84 discontinued-operations loss. Six-month net earnings were $874, versus $601, with the prior-year period including a $139 discontinued-operations loss. Thus, continuing-operations results provide the more comparable earnings measure.
Quarterly sales growth reflected 8% underlying growth, 10% from acquisitions, 3% from currency and a 2% reduction from the residential storage divestiture. For the six-month period, the respective effects were 8%, 11%, 3% and a 3% reduction. Automation Solutions led growth: quarterly sales rose 31% to $2,771 and segment earnings rose 33% to $436. Commercial & Residential Solutions sales rose 2% to $1,483 and earnings rose 1% to $349.
Cash flow, liquidity and balance sheet
- Six-month cash from continuing operations was $944, down from $1,011; operating working capital used $363. Capital expenditures were $194, leaving continuing-operations free cash flow of $750, down from $817.
- Operating cash flow funded $618 of dividends and $194 of capital expenditures. Investing cash use was $785, including $770 for acquisitions; financing cash use was $843, including $750 of share repurchases and $618 of dividends.
- Cash and equivalents were $2,444 at March 31, versus $3,062 at September 30, 2017. Working capital fell to $1,780 from $3,207, and the current ratio declined to 1.3 from 1.6.
- Short-term borrowings and current maturities were $1,833 and long-term debt was $3,357, for total reported debt of $5,190, versus $4,656 at September 30. Total debt-to-total capital increased to 37.9% from 34.8%; net debt-to-net capital rose to 24.4% from 15.4%. Interest coverage was 12.7x.
- Management said $800 of non-U.S. cash was repatriated in the quarter; repatriated funds, borrowings and divestiture proceeds supported acquisitions and repurchases. Management expects sufficient funds from operating cash flow, existing resources, debt capacity and credit lines to meet foreseeable needs.
Material changes, outlook and notable items
- Management attributed broad-based demand to favorable energy-related, general industrial, HVAC and refrigeration markets. Acquisitions materially boosted reported growth, notably the valves & controls business acquired in April 2017. Its acquisition-related margin dilution was 2.2 percentage points in quarterly Automation Solutions results and 2.5 points for the six-month period.
- Full-year fiscal 2018 guidance: net sales growth of approximately 13%, underlying sales growth of approximately 7%, diluted EPS of $3.10–$3.20, operating cash flow of approximately $2.9 billion and capital spending of $575. Automation Solutions sales were projected to rise about 20%; Commercial & Residential Solutions sales about 2%. Guidance excludes the pending Textron tools and test equipment acquisition.
- On April 18, 2018, Emerson agreed to acquire Textron’s tools and test equipment business for $810, subject to adjustments and approvals; it had annual sales of approximately $470 and was expected to close in the fourth quarter. The company also acquired Paradigm for $505 and Cooper-Atkins for $247 during the period.
- Tax reform produced a $43 net tax benefit in the first fiscal quarter, or $0.07 per share, based on provisional estimates. The company said the ultimate tax effects may differ as it evaluates the law and awaits further guidance. Management expected a 25%–27% effective tax rate for fiscal 2018 and approximately 25% in 2019 and thereafter.
- Restructuring expense was $24 year to date; full-year expense was expected to be approximately $65. A specific Climate Technologies product issue resulted in $10 of higher warranty costs year to date. Other deductions included higher amortization, primarily related to acquisitions; quarterly acquisition/divestiture costs increased $27.
- Other disclosed exposures include asbestos litigation liabilities of $333 and asbestos-related insurance receivables of $131. The filing cites economic and currency conditions, market demand, pricing, intellectual property, competition, technology and tax-reform impacts as risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- How much of future growth and earnings depends on acquired businesses versus underlying demand, and whether acquisition-related dilution and amortization persist.
- Whether cash conversion improves after the working-capital investment, and how debt, repurchases, dividends and acquisition spending affect liquidity and leverage.
- Whether fiscal 2018 sales, EPS, operating cash flow and capital-spending guidance remains achievable; the guidance excludes the pending Textron transaction.
- How final tax-reform interpretations affect tax expense, repatriation costs and the expected effective tax rate.
- The status, cost and insurance recovery associated with asbestos claims, and the warranty-cost trend related to the identified product issue.