Emerson Electric Co. — Form 10-Q Summary
Business context and period: First quarter of fiscal 2017, the three months ended December 31, 2016, compared with the quarter ended December 31, 2015. Emerson is reshaping its portfolio and reports Automation Solutions, Climate Technologies, and Tools & Home Products; the latter two comprise Commercial & Residential Solutions. Unless noted, financial amounts are in millions of dollars.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change or context |
|---|---|---|---|
| Continuing-operations sales | $3,216 | $3,337 | Down 4%; underlying sales down 3% (volume down 2%, price down 1%) |
| Gross profit margin | 42.4% | 42.4% | Flat |
| SG&A as a share of sales | 25.5% | 26.4% | Improved 0.9 percentage points |
| Continuing-operations pretax earnings | $464 | $434 | Up 7%; margin 14.4% versus 13.0% |
| Continuing-operations earnings attributable to common stockholders | $364 | $303 | Up 20% |
| Diluted EPS from continuing operations | $0.56 | $0.46 | Up 22%; includes a $0.07-per-share tax benefit |
| Net earnings attributable to common stockholders | $309 | $349 | Down 12%; diluted EPS was $0.48 versus $0.53 |
| Operating cash flow from continuing operations | $410 | $386 | Up $24 |
| Free cash flow from continuing operations | $310 | $262 | Up $48; defined as continuing operating cash flow less capital expenditures |
| Total operating cash flow | $238 | $487 | Includes discontinued operations; current-quarter discontinued-operations cash flow was negative $172 |
Liquidity and debt: At December 31, 2016, cash and equivalents were $4,151, short-term borrowings and current maturities were $254, and long-term debt was $3,815. The current ratio was 2.2, working capital was $4,550, total debt-to-total capital was 34.5%, and net debt-to-net capital was negative 1.1% (net cash position). These measures improved from September 30, 2016, primarily because of proceeds from the Network Power Systems sale. Cash dividends were $0.48 per share, compared with $0.475 a year earlier; dividends paid totaled $311.
Material changes and operating trends
- Automation Solutions sales fell 9% to $1,967; earnings declined 4% to $326, while segment margin improved to 16.6% from 15.8%. Weak oil and gas and general industrial spending weighed on results.
- Commercial & Residential Solutions sales rose 6% to $1,252 and earnings rose 14% to $249; margin improved to 19.9% from 18.5%. Climate Technologies sales increased 9%; Tools & Home Products sales were essentially flat.
- Sales declined 3% in the U.S. and 2% internationally overall. Asia increased 7% (China 17%); Latin America declined 19%, Canada 20%, and Europe 2%.
- The effective tax rate was 20%, versus 29%, largely reflecting a $47 tax benefit from restructuring a foreign subsidiary. Management estimated a 29% full-year tax rate, including that benefit.
- Other deductions, net declined to $33 from $54, mainly reflecting a favorable $34 year-over-year swing in foreign-currency transaction effects, partly offset by higher acquisition-related costs.
Outlook, transactions, and risks
- Fiscal 2017 guidance: net sales down 1% to 3%; underlying sales flat to down 2%, excluding approximately 1% unfavorable currency translation. Continuing-operations EPS is expected at $2.47 to $2.62, including the first-quarter $0.07 tax benefit.
- Management expects Automation Solutions sales down 5% to 7% and Commercial & Residential Solutions sales up 3% to 5%. It cited persistent challenges but expected broader market improvement and stronger demand in the second half. Automation Solutions conditions could remain weak in the second quarter, with improvement expected during the year. The outlook excludes the pending Pentair Valves & Controls acquisition.
- Emerson completed the $4 billion Network Power Systems sale on November 30, 2016, subject to post-closing adjustments, and completed the $1.2 billion sale of its power generation, motors and drives business on January 31, 2017, also subject to adjustments. The latter sale followed the quarter-end. Emerson expected approximately $600 million of fiscal 2017 taxes related to the two sales, including about $100 million of tax expense on completion of the second sale.
- Discontinued operations reported a $55 loss, versus $46 earnings a year earlier. Current-period items included an $86 after-tax Network Power Systems divestiture gain, $144 of tax expense related to repatriation of proceeds, a $38 write-down of the power generation, motors and drives business, and $14 of operating earnings.
- Emerson agreed to buy Pentair’s Valves & Controls business for $3.15 billion, subject to adjustments and regulatory review; the filing expected closing by March 31, 2017. The business had approximately $1.6 billion in sales.
- Management expected approximately $50 of restructuring expense for fiscal 2017; $11 had been incurred in the quarter. Stated risks include economic and currency conditions, market demand, pricing, intellectual property protection, competition, and technological factors. Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the sales and earnings recovery anticipated in the second half occurred, particularly in Automation Solutions and energy-related markets.
- Actual fiscal 2017 sales, underlying-sales, EPS, tax, and restructuring outcomes versus guidance and estimates.
- Final proceeds, adjustments, tax costs, and any retained contingent interest associated with the divestitures.
- Completion terms, regulatory status, financing, and subsequent contribution of the Pentair Valves & Controls acquisition.
- Cash conversion and liquidity trends, including the effect of discontinued operations and transaction-related cash taxes and fees.