EMERSON ELECTRIC CO annual report, FY2017

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Emerson Electric Co. — FY2017 Form 10-K

Reporting period: Fiscal year ended September 30, 2017. Emerson is a diversified global manufacturer and technology provider, reporting Automation Solutions and Commercial & Residential Solutions (Climate Technologies and Tools & Home Products). Figures are in U.S. dollars unless stated otherwise.

Financial performance

  • Sales: $15.264 billion, up 5% from $14.522 billion. Underlying sales rose 1%; acquisitions added 4% and currency translation reduced sales by $54 million. Gross profit was $6.404 billion; gross margin fell to 42.0% from 43.1%.
  • Earnings: Continuing-operations earnings attributable to common stockholders were $1.643 billion, up 3%; diluted continuing-operations EPS was $2.54, up 4%. Net earnings attributable to common stockholders, including discontinued operations, declined 7% to $1.518 billion; diluted EPS declined 7% to $2.35.
  • Segments: Automation Solutions sales were $9.418 billion (+5%) and segment earnings were $1.522 billion, with a 16.2% margin. Commercial & Residential Solutions sales were $5.857 billion (+5%) and segment earnings were $1.358 billion, with a 23.2% margin. Automation sales growth was acquisition-led; underlying sales fell 1%. Commercial & Residential underlying sales rose 5%.
  • Cash flow and capital allocation: Operating cash flow from continuing operations was $2.690 billion, up 8%; capital expenditures were $476 million; free cash flow was $2.214 billion, up 8%. The company paid $1.239 billion in dividends ($1.92 per share) and repurchased $400 million of stock. It announced a 1% dividend increase in November 2017.
  • Debt and liquidity: Cash and equivalents were $3.062 billion. Total debt was $4.7 billion, including $3.794 billion of long-term debt; total debt-to-capital was 34.8%, down from 46.7%. Current assets were $8.252 billion and current liabilities $5.045 billion. Emerson reported a $3.5 billion revolving backup credit facility with no borrowings under it.
  • Other metrics: Effective tax rate was 28.3% versus 30.1%, primarily reflecting a tax benefit from restructuring a foreign subsidiary. Order backlog rose to $4.894 billion from $3.925 billion, primarily due to the valves & controls acquisition. International sales represented 52% of total sales.

Material changes and unusual items

  • Emerson completed the $2.960 billion net-cash acquisition of Pentair’s valves & controls business on April 28, 2017. It contributed $600 million of reported 2017 sales, while acquisition-related restructuring, amortization and first-year accounting charges weighed on earnings.
  • The company sold its network power systems business in November 2016 for $4.0 billion cash and its power generation, motors and drives business in January 2017 for approximately $1.2 billion. Both are reported as discontinued operations. Discontinued operations recorded a $125 million net loss in FY2017, including sale-related impacts and $109 million of tax expense associated with repatriation of proceeds. Cash used by discontinued operations was $778 million, primarily reflecting approximately $700 million of taxes and related costs.
  • The residential storage business was sold on October 2, 2017, after year-end, for $200 million cash subject to adjustments. Emerson expected approximately $140 million of after-tax proceeds and a roughly $40 million tax-related loss in FY2018.
  • Portfolio realignment changed the reported segment structure in FY2017; prior-year segment information was recast. The 2015 comparison includes $1.039 billion of pretax divestiture gains, limiting comparability with later years.

Outlook, commentary and risks

  • For FY2018, management forecast consolidated sales growth of 8%–10%, underlying sales growth of 4%–6%, and reported EPS of $2.66–$2.86. EPS excluding specified acquisition-accounting and residential-storage tax impacts was forecast at $2.75–$2.95. Management expected Automation Solutions underlying sales growth of 5%–7% and Commercial & Residential underlying growth of 3%–5%.
  • Management cited improving conditions in the second half of FY2017, with stable oil and gas prices, and continued growth expected in HVAC, refrigeration and construction markets. It targeted approximately $550 million in FY2018 capital spending and expected approximately $80 million of restructuring expense.
  • Risks include cyclical industrial and energy demand, competitive and pricing pressures, integration of acquisitions and execution of divestitures, raw-material availability and prices, foreign exchange and geopolitical exposure, cyber and IT security, litigation and environmental matters, and access to capital markets.
  • Emerson disclosed a proposed $29 billion acquisition of Rockwell Automation, announced November 16, 2017. Rockwell had not engaged with Emerson. Any transaction was uncertain and could increase debt and share count; completion, terms, costs and anticipated benefits were not assured.
  • Management reported no known contingent liabilities it believed would be material to the financial statements, while noting that litigation outcomes remain uncertain. KPMG issued unqualified opinions on the financial statements and internal controls; the acquired valves & controls business was excluded from the year-end internal-control assessment.

Investor verification checklist

  • Verify the FY2018 outlook against subsequent reported results, especially underlying growth, EPS and the stated adjustments.
  • Track acquisition integration, realized synergies and margins in Automation Solutions, including the impact of acquisition accounting and acquired backlog.
  • Reconcile continuing-operations cash generation with total cash flow, taxes and costs related to discontinued operations and divestitures.
  • Review the status and financing implications of the proposed Rockwell Automation transaction, which was not agreed or completed as of the filing.
  • Monitor leverage, working capital and liquidity following the acquisition; inventories and operating working capital increased with the acquired business.
  • Assess asbestos and other litigation exposure: the filing reports increased asbestos liabilities following the acquisition, partly offset by insurance receivables.