Emerson Electric Co. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017. Amounts are U.S. dollars; financial figures are in millions except per-share data. Emerson reports Automation Solutions and Commercial & Residential Solutions, the latter comprising Climate Technologies and Tools & Home Products. Strategic portfolio actions included sales of Network Power Systems and Power Generation, Motors & Drives, and the acquisition of Pentair’s valves & controls business.
Financial performance
- Third-quarter sales: $4,039, up 10% year over year. Underlying sales rose 4%; the acquisition added 7% and foreign currency reduced sales by 1%.
- Third-quarter earnings: Continuing-operations earnings attributable to common stockholders were $407, down 8%; diluted continuing-operations EPS was $0.63, down 7%. Net earnings attributable to common stockholders were $413 and diluted EPS was $0.64, both down 14%.
- Margins: Third-quarter gross margin was 41.5%, versus 43.4%; continuing-operations pretax margin was 15.4%, versus 17.8%. SG&A was 23.0% of sales, compared with 23.2%.
- Nine-month results: Sales were $10,829, up 2%; continuing-operations earnings attributable to common stockholders were $1,147, up 3%, and diluted EPS was $1.77, up 4%. Net earnings attributable to common stockholders were $1,014, down 15%, and diluted EPS was $1.57, down 15%.
- Cash flow: Nine-month operating cash flow from continuing operations was $1,785, up from $1,644; free cash flow from continuing operations was $1,485, up from $1,343. Total operating cash flow, including discontinued operations, was $1,058 versus $1,924, reflecting $727 of cash used by discontinued operations. Capital expenditures were $300.
- Liquidity and debt: Cash and equivalents were $3,140 at June 30. Short-term borrowings and current maturities were $1,363, and long-term debt was $3,797. Working capital was $3,184 and the current ratio was 1.6, versus $1,353 and 1.2 at September 30, 2016. Total debt-to-capital was 39.3%, down from 46.7%; net debt-to-net capital was 20.2%, down from 31.3%.
- Dividends: Cash dividends were $0.48 per share for the quarter and $1.44 per share for the nine months.
Material changes and notable items
- The valves & controls acquisition closed April 28 for $2,960 net of acquired cash. It contributed $241 of third-quarter sales, but recorded a $35 net loss, including acquisition-related amortization and restructuring, and reduced third-quarter continuing-operations EPS by approximately $0.05. First-year inventory and backlog accounting charges were $37 pretax.
- Automation Solutions third-quarter sales increased 12% to $2,440, primarily from the acquisition; segment earnings rose 7% to $378, while margin declined to 15.5% from 16.2%. Commercial & Residential Solutions sales increased 7% to $1,602 and earnings rose 5% to $402; margin declined to 25.1% from 25.6%.
- Nine-month discontinued operations recorded a $133 net loss, including a $180 after-tax loss on the Power Generation, Motors & Drives sale, a $114 after-tax gain on the Network Power Systems sale, and $103 of tax expense related to repatriation. This drove the divergence between growth in continuing-operations EPS and the decline in total net earnings.
- Other deductions were $87 in the quarter and $203 year to date. They included higher acquisition/divestiture costs, restructuring, and acquisition-related amortization; year-to-date amounts also included higher bad-debt expense. The company reported $45 of restructuring expense through June and expected approximately $85 for full-year 2017.
- Management attributed improving sales to energy-related, general industrial, global construction, HVAC, and refrigeration markets. Oil and gas customer spending remained weak or mixed in several markets.
Outlook, risks, and controls
- FY2017 guidance was net sales growth of approximately 5%, with underlying sales up approximately 1% and acquisitions contributing 4%. Automation Solutions sales were expected to rise 4%–5%, with underlying sales down 1%–2%; Commercial & Residential Solutions sales and underlying sales were each expected to rise 5%–6%.
- Continuing-operations EPS guidance was $2.48–$2.52, including approximately $0.05 of impact from valves & controls and $0.10 of first-year acquisition accounting charges; excluding those charges, guidance was $2.58–$2.62. Outlook excluded discontinued operations and any impact from a planned residential storage business divestiture.
- Management cited expected improvement in market demand and economic conditions into Q4, stronger order rates, and a growing Automation Solutions project pipeline. Forward-looking results remain subject to economic and currency conditions, demand, pricing, intellectual-property protection, competition, and technology risks.
- The filing reported effective disclosure controls at period end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the acquired valves & controls business meets expected sales, margin, and integration targets after the initial acquisition-accounting charges.
- Whether FY2017 sales and EPS guidance is achieved, including the expected underlying growth and acquisition contribution.
- The sustainability of continuing-operations cash generation and the effects of divestiture-related taxes and other discontinued-operations cash outflows.
- Progress and costs of restructuring, acquisition integration, and the planned residential storage divestiture.
- Exposure to weak oil and gas spending, foreign currency movements, and regional demand differences.