Emerson Electric Co. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2017. Amounts are in millions of dollars except per-share data. Emerson reports Automation Solutions and Commercial & Residential Solutions, the latter comprising Climate Technologies and Tools & Home Products. Results exclude businesses presented as discontinued operations.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $3,574 | $3,579 | $6,790 | $6,916 |
| Gross margin | 43.6% | 43.1% | 43.0% | 42.7% |
| Continuing-operations earnings attributable to common stockholders | $376 | $367 | $740 | $670 |
| Diluted EPS from continuing operations | $0.58 | $0.57 | $1.14 | $1.03 |
| Net earnings attributable to common stockholders | $292 | $369 | $601 | $718 |
| Diluted EPS | $0.45 | $0.57 | $0.93 | $1.10 |
Q2 continuing-operations pretax earnings were $565, up 2%; the effective tax rate was 32%. For the six months, pretax earnings were $1,029, up 4%, and the tax rate was 27%, compared with 31% a year earlier. The year-to-date tax rate benefited from a $47 tax benefit related to restructuring a foreign subsidiary.
Continuing-operations cash from operations was $1,011 for the six months, versus $1,016; capital expenditures were $194, yielding free cash flow of $817 versus $806. Total operating cash flow, including discontinued operations, was $410, down from $1,206, primarily reflecting $601 of cash used by discontinued operations. Investing activities provided $4,791, including $5,051 of cash from discontinued operations; financing activities used $3,282. Ending cash was $5,039, up from $3,182 at September 30, 2016.
At March 31, 2017, total debt was approximately $4,068 ($252 current and $3,816 long-term), versus approximately $6,635 at September 30, 2016. The current ratio was 2.5 versus 1.2; working capital was $5,675 versus $1,353; total debt-to-total capital was 33.7% versus 46.7%; and net debt-to-net capital was negative 13.8% versus 31.3%. These improvements largely reflect divestiture proceeds. The interest coverage ratio was 11.1x, compared with 10.2x for the prior-year six-month period.
Material changes and business drivers
- Q2 sales were essentially flat: underlying sales were flat, with 1% higher volume offset by 1% lower price; currency reduced sales by $17 and acquisitions added $7. Six-month sales declined 2%, with underlying sales down 1%.
- Automation Solutions Q2 sales declined 3% to $2,117 and earnings fell 4% to $328; margin was 15.5% versus 15.6%. Weak energy-related spending remained a drag, though management reported improvement versus Q1. Six-month sales declined 6% to $4,084, while margin increased to 16.0% from 15.7%.
- Commercial & Residential Solutions Q2 sales rose 5% to $1,460 and earnings rose 9% to $345; margin improved to 23.7% from 22.9%. Six-month sales rose 6% to $2,712 and earnings rose 11% to $594. HVAC, refrigeration, and construction-related markets were favorable.
- Cost reductions helped lift gross margin in both comparison periods. Q2 SG&A declined to $868, while other deductions increased to $83, including higher acquisition/divestiture costs and bad debt expense. Six-month SG&A declined to $1,690.
Portfolio actions, outlook, and risks
- Emerson sold its Network Power Systems business for about $4 billion in cash in November 2016 and its power generation, motors and drives business for about $1.2 billion in January 2017. Discontinued operations recorded a Q2 loss of $84, including separation costs primarily related to taxes; the six-month discontinued-operations loss was $139, reflecting divestiture gains and losses, repatriation taxes, and other items. Management estimated fiscal 2017 cash use from discontinued operations at about $750, primarily for taxes related to the divestitures.
- On April 28, 2017, after quarter-end, Emerson completed its $3.15 billion acquisition of Pentair’s valves and controls business. The acquisition was not incorporated into fiscal 2017 guidance; the company said further impact information would be provided in a subsequent filing.
- Fiscal 2017 outlook: net sales approximately flat, with underlying sales up 1% excluding approximately 1% unfavorable currency translation; diluted EPS from continuing operations of $2.55–$2.65. Automation Solutions sales were expected to decline 3%–4%; Commercial & Residential Solutions sales were expected to increase 5%–6%.
- Management expected Automation Solutions underlying sales to turn positive in the second half, supported by MRO and small-project activity, and expected mid-single-digit fiscal-year growth in Commercial & Residential Solutions. Full-year restructuring expense was estimated at approximately $50.
- Risks identified include economic and currency conditions, market demand, pricing, intellectual-property protection, and competitive and technological factors. Management stated it believed funding would be sufficient for foreseeable needs. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether fiscal 2017 sales and continuing-operations EPS guidance was achieved, particularly given that it excluded the Pentair acquisition.
- The acquired business’s contribution to sales, earnings, debt, and cash flow, and the final purchase-price adjustments and acquisition accounting.
- Actual cash costs and tax effects from the divestitures, including the estimated $750 of fiscal 2017 discontinued-operations operating cash use and any post-closing adjustments.
- Whether energy-related demand and Automation Solutions orders recovered as expected, and whether Commercial & Residential Solutions growth and margins were sustained.
- How cash, debt, and leverage changed after the acquisition and continued dividends, and whether restructuring savings offset ongoing costs.