Emerson Electric Co. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Emerson is a global industrial and commercial technology manufacturer, reporting Automation Solutions and Commercial & Residential Solutions (Climate Technologies and Tools & Home Products). The filing also provides fourth-quarter results.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $17.408 billion | $15.264 billion | +14% |
| Gross profit / gross margin | $7.460 billion / 42.9% | $6.404 billion / 42.0% | Margin +0.9 percentage points |
| Pretax earnings from continuing operations | $2.667 billion | $2.335 billion | +14% |
| Continuing-operations earnings attributable to common stockholders | $2.203 billion | $1.643 billion | +34% |
| Diluted EPS from continuing operations | $3.46 | $2.54 | +36% |
| Operating cash flow from continuing operations | $2.892 billion | $2.690 billion | +8% |
| Free cash flow | $2.275 billion | $2.214 billion | +3% |
| Cash and equivalents at year-end | $1.093 billion | $3.062 billion | Down $1.969 billion |
| Total debt | $4.8 billion | $4.7 billion | Up modestly |
Fourth-quarter FY2018 sales were $4.888 billion, versus $4.435 billion in Q4 FY2017. Continuing-operations earnings attributable to common stockholders were $617 million versus $496 million; diluted continuing-operations EPS was $0.97 versus $0.77.
FY2018 cash flow funded $617 million of capital expenditures, $1.2 billion of dividends, $1.0 billion of share repurchases, and $2.2 billion of net acquisition spending. Year-end long-term debt was $3.137 billion; total debt also includes short-term borrowings and current maturities. The company reported a 34.7% total debt-to-total capital ratio and 14.2x interest coverage. A $3.5 billion five-year revolving credit facility was available and undrawn. Management said funding should be adequate for foreseeable needs.
Material changes and business drivers
- Underlying sales, excluding acquisitions, divestitures and currency, rose 8%; acquisitions net of the residential storage divestiture contributed 5% and currency translation 1% to reported sales growth.
- Automation Solutions sales increased 21% to $11.441 billion; segment earnings rose 24% to $1.886 billion and margin improved to 16.5%. Growth reflected stronger demand and acquisitions, including Pentair valves & controls, Paradigm and Aventics.
- Commercial & Residential Solutions sales increased 2% to $5.982 billion, while segment earnings were essentially flat at $1.352 billion and margin declined to 22.6%. Climate Technologies sales rose 6%; Tools & Home Products sales fell 7%, largely reflecting the residential storage divestiture.
- Gross margin improved with higher volume and cost-reduction savings, partly offset by acquisition dilution. SG&A rose to 24.5% of sales from 23.7%, reflecting acquisitions, higher stock compensation and increased Automation Solutions investment.
- Cash declined largely as funds were used for acquisitions. Goodwill rose to $6.455 billion from $5.316 billion, primarily due to acquisitions. Long-term debt declined, but short-term borrowings and current maturities increased.
Outlook, commentary and risks
For FY2019, management forecast consolidated sales growth of 6%–9% and underlying sales growth of 4%–7%; reported EPS of $3.55–$3.70; operating cash flow of approximately $3.2 billion; and free cash flow of approximately $2.5 billion, with targeted capital spending of about $650 million. Automation Solutions sales were expected to rise 6%–9%, and Commercial & Residential Solutions sales 8%–10%. Management cited expected demand across mature and emerging markets. It expected Automation growth from maintenance activity and brownfield investment, with greenfield project orders weighted toward the second half of FY2019.
- U.S. tax reform produced a $189 million, or $0.30 per-share, FY2018 net tax benefit; the effective tax rate was 17%, versus 28% in FY2017. The final deemed-repatriation tax estimate remained provisional pending final regulations. The lower tax rate on 2018 earnings also benefited EPS.
- Reported results include acquisition and divestiture effects, restructuring costs, acquisition-accounting charges, and higher stock compensation. The residential storage sale generated an after-tax loss of $24 million, or $0.04 per share.
- Climate Technologies incurred $10 million of higher warranty costs associated with a specific product issue. Restructuring expense was $65 million; actions included exiting six facilities and eliminating about 1,200 positions.
- Principal disclosed risks include competitive and end-market volatility, raw-material shortages or price increases, foreign currency and trade-policy changes, international operating disruptions, acquisition integration, cybersecurity and product failure, tax uncertainty, and litigation including asbestos-related claims. Management stated that no known contingent liabilities were expected to be material, while acknowledging litigation’s inherent uncertainty.
- The company reported effective internal control over financial reporting; management and the auditor excluded the acquired tools and test equipment business and Aventics from the assessment. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate underlying organic growth from acquisition contributions and currency effects, particularly in Automation Solutions.
- Assess whether FY2019 sales, EPS and cash-flow guidance can be achieved and how much depends on acquisitions, currency and market demand.
- Reconcile earnings growth with the $189 million tax-reform benefit, the additional lower-rate benefit, and other acquisition, divestiture and restructuring items.
- Monitor cash conversion, capital spending, dividends, repurchases, and the effect of acquisition funding on cash and net debt.
- Review integration progress, purchase-price allocations and goodwill/intangible balances from recent acquisitions, as well as the disclosed product warranty issue and pending legal and tax exposures.