Emerson 4Q Earnings Beat Expectations, Revenue Falls Short

ST. LOUIS — Emerson today reported results for the fourth quarter and fiscal year ended September 30, 2018.

Strong global demand continued in the quarter as both mature and emerging markets delivered high-single digit underlying growth. Fourth quarter net sales were up 10 percent, with underlying sales up 8 percent excluding unfavorable currency of 2 percent and a positive impact from acquisitions net of divestitures of 4 percent. Emerson’s trailing three-month underlying orders growth remained in the 5 to 10 percent range throughout the quarter, with September three-month underlying orders up 8 percent. For the full year, net sales were up 14 percent, with underlying sales up 8 percent.

Fourth quarter gross profit margin of 42.2 percent improved 150 basis points compared with the prior year, driven by the benefit of restructuring actions, favorable mix and leverage on higher sales. Pretax margin of 15.1 percent and EBIT margin of 16.0 percent decreased 40 basis points and 30 basis points, respectively, reflecting dilution from recent acquisitions and the impact of a special one-time 401(k) contribution to U.S. employees in the fourth quarter. GAAP earnings per share were $0.97 in the quarter and $3.46 for the full year, and were $0.89 and $3.38, respectively, excluding an $0.08 discrete tax benefit.

Fourth quarter operating cash flow from continuing operations was $1.0 billion, up 13 percent compared with the prior year, and free cash flow from continuing operations was $0.7 billion, down 1 percent. Full year operating cash flow from continuing operations was up 8 percent to $2.9 billion and free cash flow from continuing operations was up 3 percent to $2.3 billion, reflecting 103 percent conversion of net earnings, or 114 percent excluding discrete, non-cash tax benefits recognized in net earnings. Capital expenditures of $0.6 billion were up 29 percent, reflecting global investments to support future growth.

“The fourth quarter capped a year of exceptional results for our company,” said Chairman and Chief Executive Officer David N. Farr. “In 2018, we drove strong operational performance while continuing to build a firm foundation for our future, including funding $2.2 billion of bolt-on acquisitions and delivering results ahead of plan for the integration of Valves & Controls into our Final Control business – evidence of our focus on seamlessly integrating acquired businesses to achieve our long-term strategic and financial goals.

“For our shareholders, we returned more than $2.2 billion through dividends and share repurchases and drove improvement in dividends paid as a share of free cash flow, an important indicator of our financial strength and ability to continue increasing our annual dividend, as we have done every year since 1956. This unblemished 62-year track record is a testament to the extraordinary commitment of our employees, of our global management teams and of our board to deliver value to our shareholders.”

Business Platform Results

Automation Solutions net sales increased 11 percent in the quarter, with underlying sales up 9 percent excluding unfavorable currency of 2 percent and a positive impact from acquisitions of 4 percent. Growth continued to reflect strong maintenance and repair (MRO) demand and brownfield investment activity focused on expansion and optimization of existing facilities. Trends were positive across all key market verticals and world areas.

North America underlying sales increased 11 percent, reflecting strong investment in oil and gas production and midstream infrastructure, as well as continued favorable trends across most key verticals. Asia underlying sales were up 11 percent driven by strong investment activity in China and India as well as in most developed countries. Latin America was up 12 percent, reflecting strengthened investment activity in Brazil and Chile. Europe was up 2 percent and Middle East/Africa was up 7 percent. Trailing three-month underlying orders growth was strong throughout the quarter, with September up 11 percent. Margin increased 80 basis points to 17.7 percent and was up 140 basis points to 18.3 percent excluding the results of the Aventics acquisition, which closed early in the quarter. Margin improvement was driven by leverage on higher sales, restructuring actions and favorable mix.

Commercial & Residential Solutions net sales were up 7 percent in the quarter, and underlying sales increased 5 percent excluding unfavorable currency of 1 percent and a positive impact from acquisitions net of divestitures of 3 percent. Growth by strong demand in North American commercial and residential air conditioning markets as well as strong demand in global professional tools and cold chain markets. Underlying sales in North America were up 8 percent on strong demand across all key end markets. Europe was up 4 percent, reflecting favorable trends in cold chain and professional tools markets. Latin America grew 5 percent and Asia increased 3 percent, driven by 8 percent growth in China. Middle East/Africa was down 16 percent. September trailing three-month underlying orders were up 3 percent. Margin decreased 150 basis points to 22.0 percent. Excluding the Tools & Test acquisition, which closed early in the fourth quarter, margin was 23.1 percent.

2019 Outlook

The following information reflects the 2019 guidance framework and does not include the impact of the GE Intelligent Platforms acquisition, which is expected to close in the first half of 2019.

Automation Solutions growth will continue to be driven by MRO activity, as well as brownfield capital investments in existing assets to expand capacity or to improve the efficiency, safety and uptime of those facilities. In addition, Emerson expects to continue seeing steady progress in greenfield capital projects across upstream, midstream infrastructure, natural gas, chemical and hybrid markets, including life sciences and food and beverage. Such projects are anticipated to convert to orders in 2019, weighted toward the second half of the year.

Commercial & Residential Solutions growth will be supported by continued strong demand in residential and commercial air conditioning markets in the U.S., as well as cold chain and professional tools demand in the U.S., Asia and Europe.

“Our strong performance this year positions us for ongoing success, providing momentum as we head into the new fiscal year. Globally, we expect continued demand in both mature and emerging markets and across industries,” Farr said.

“We have much to do in 2019 across both business platforms to integrate new acquisitions – including Aventics, Tools & Test and GE Intelligent Platforms. For Valves & Controls, the largest acquisition in Emerson’s history, we will build on strong first-year results to continue accelerating sales, margin improvement and cash flow performance. We’re also investing in our businesses to drive long-term outperformance in our markets. For example, Automation Solutions is enhancing our after-market and lifecycle service capabilities by adding engineering personnel and field offices to bolster Emerson’s local presence in key markets. Likewise, Commercial & Residential Solutions is investing in our global innovation infrastructure, adding a new research facility in Suzhou to enhance cold chain and solutions engineering capabilities for China and across our markets in Asia, as well as a new headquarters and engineering center in Racine, Wis., for the InSinkErator waste disposal business,” Farr continued.

“We look forward to executing against key milestones and driving higher sales, margins and cash flow versus strong 2018 results. In 2019, Emerson is positioned to deliver 4 to 7 percent underlying sales growth and EPS growth of 3 to 7 percent, despite an expected reduction from foreign currency translation and more than 20 cents of net headwinds from discrete tax benefits and other one-time items recognized in 2018.”

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