Emerson Electric Co. — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015; comparisons are with the three months ended December 31, 2014, unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Emerson reported lower sales amid weak industrial capital spending, particularly in oil and gas and other energy-related markets, soft emerging-market demand, currency headwinds, and the effect of divestitures. Management also continued plans to reposition the portfolio, including a planned Network Power systems spin-off and reviews of other businesses for possible sale.
| Metric | Q1 FY2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $4.713 billion | $5.587 billion | Down 16% |
| Underlying sales | Down 9% | Currency reduced sales 4%; divestitures reduced sales 3% | |
| Gross profit margin | 40.1% | 40.8% | Down 0.7 percentage points |
| SG&A as a share of sales | 26.0% | 25.1% | Up 0.9 percentage points |
| Pretax earnings | $503 million | $765 million | Down 34% |
| Net earnings attributable to common stockholders | $349 million | $525 million | Down 34% |
| Diluted EPS | $0.53 | $0.75 | Down 29% |
| Adjusted EPS | $0.56 | $0.75 | Down 25% |
Lower volume, deleverage, and unfavorable mix pressured gross margin; cost-reduction actions partly offset the impact. Higher other deductions included $27 million of unfavorable foreign-currency transactions and $24 million of portfolio-separation costs. The reported effective tax rate was 30%, versus 31% a year earlier.
Segment performance
| Segment | Sales | Sales change | Earnings | Margin |
|---|---|---|---|---|
| Process Management | $1.806 billion | Down 14% | $271 million, down 31% | 15.0%, versus 18.7% |
| Industrial Automation | $808 million | Down 30% | $95 million, down 42% | 11.8%, versus 14.2% |
| Network Power | $1.051 billion | Down 6% | $84 million, up 7% | 8.0%, versus 7.1% |
| Climate Technologies | $787 million | Down 13% | $109 million, down 14% | 13.8%, versus 14.0% |
| Commercial & Residential Solutions | $392 million | Down 18% | $85 million, down 18% | 21.7%, versus 21.5% |
Process Management was hurt by reduced oil-and-gas spending; Industrial Automation also faced weak industrial and commodity markets and divestiture effects. Network Power earnings and margin improved on cost savings despite lower sales. Climate Technologies faced a difficult comparison with prior-year U.S. air-conditioning demand; Commercial & Residential Solutions sales also reflected divestitures.
Cash flow, balance sheet, and capital allocation
- Operating cash flow was $487 million, down from $571 million; capital expenditures were $145 million, producing free cash flow of $342 million versus $364 million.
- Cash dividends paid were $310 million and share repurchases were $507 million. The company also paid $251 million of long-term debt; short-term borrowings increased.
- Cash and equivalents were $3.109 billion at December 31, 2015. Total debt was approximately $7.452 billion, comprising $3.409 billion of short-term borrowings and current maturities and $4.043 billion of long-term debt.
- Current assets were $9.694 billion and current liabilities $8.202 billion; working capital was $1.492 billion and the current ratio was 1.2, versus 1.3 at September 30, 2015.
- Total debt-to-total capital was 50.0%, up from 45.8% at September 30; net debt-to-net capital was 36.3%, up from 31.3%. Interest coverage was 10.3x, versus 15.6x in the prior-year quarter.
Management said available cash, ongoing operations, debt capacity, and backup credit lines should provide sufficient funding for foreseeable needs. Foreign-currency translation reduced other comprehensive income by $153 million during the quarter.
Outlook, risks, and unusual items
- For fiscal 2016, management forecast reported sales down approximately 6%–9%, including underlying sales down 2%–5%, currency headwinds of about 2%, and a 2% deduction from completed divestitures. Q2 reported sales were forecast down 8%–10%.
- Fiscal 2016 adjusted EPS guidance was $3.05–$3.25; reported EPS guidance was $2.55–$2.90, including estimated portfolio-repositioning expenses of $250–$350 million ($0.35–$0.50 per share). Q2 adjusted EPS guidance was $0.60–$0.65 and reported EPS guidance $0.49–$0.54.
- Operating cash flow was expected to be approximately $3 billion for fiscal 2016. Management anticipated difficult served-market conditions; it expected modest growth in Climate Technologies and Commercial & Residential Solutions, and difficult Industrial Automation conditions in Q2 with improvement in the second half.
- The company estimated portfolio-repositioning costs of $250–$350 million in expenses and about $100 million in capitalized costs. It cautioned that a separation could result in goodwill impairment or a loss on sale, and that strategic reviews might not result in transactions.
- Rationalization expense was $13 million in the quarter; full-year 2016 expense was estimated at $60–$70 million. A prospective change in the method for measuring U.S. pension service and interest costs was expected to reduce fiscal 2016 expense by $38 million, or $0.04 per share.
- Other stated risks include economic and currency conditions, market demand, pricing, competition, technology, and successful completion and financial effects of the portfolio actions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weak industrial, oil-and-gas, and emerging-market demand persists, and whether the stated sales and EPS outlook is achieved.
- Progress, timing, costs, financing, and potential impairment or sale effects of the Network Power separation and other portfolio reviews.
- Cash conversion and liquidity, including the effect of repurchases, dividends, and increased short-term borrowing on leverage and interest coverage.
- Underlying segment trends and whether cost reductions can offset lower volume, unfavorable mix, currency effects, and divestitures.
- The filing reports quarter-end outstanding shares of 643,099,581 on the balance sheet and 643,115,792 as of January 31, 2016 in the cover-page disclosure; verify the relevant share count for any per-share analysis.