Manufacturers

Emerson Beats Forecasts, Ups Guidance

ST. LOUIS – Emerson today announced net sales in the first quarter ended December 31, 2017 were up 19 percent, with underlying sales up 7 percent excluding favorable currency of 3 percent and an impact from acquisitions and divestitures of 9 percent. The first quarter results reflected continued favorable global economic conditions as both platforms delivered solid underlying sales growth. Automation Solutions continued to see broad-based growth led by North America and Asia, reflecting favorable trends in energy-related, hybrid and general industrial markets. Growth in Commercial & Residential Solutions was driven by strong demand in Asia in air conditioning and refrigeration markets as well as continued growth of professional tools in oil and gas and construction-related markets.

December trailing three month underlying orders were up 7 percent and the Company expects orders to trend in a range of 5 to 10 percent for the remainder of the year.

Pretax margin of 13.2 percent and EBIT margin of 14.2 percent decreased 120 and 160 basis points, respectively, reflecting dilution from the Valves & Controls acquisition.  Excluding Valves & Controls, EBIT margin of 16.5 percent increased 70 basis points driven primarily by leverage on higher sales and benefit of prior year restructuring actions.

Earnings per share from continuing operations increased 9 percent to $0.61, including a $0.03 benefit from the lower enacted U.S. corporate tax rate under the Tax Cuts and Jobs Act (the “Tax Act”).  Earnings per share were up 18 percent excluding the current year $0.03 tax rate benefit and a prior year income tax benefit of $0.07.  The first quarter results also included a provisional net tax benefit of $0.07 related to adoption of the Tax Act, which was offset by a ($0.03) charge for Valves & Controls first year acquisition accounting and a ($0.04) tax-related loss from the divestiture of the ClosetMaid business.

“We continued to execute our strategic repositioning plans across both business platforms and delivered a stronger first quarter than we had expected a few months ago,” said Chairman and Chief Executive Officer David N. Farr.  “Our growth in the quarter reflects broad-based momentum across our key end markets and regions, providing solid footing for our teams to deliver earnings and cash flow growth in 2018.  We now see a stronger year operationally for Emerson, and combined with the benefit of U.S. tax reform, we are raising our full-year GAAP EPS guidance to $3.05 to $3.15 and net sales growth to 11 to 13 percent, or 5 to 7 percent on an underlying basis.”

Farr added, “The positive impact of tax reform in the U.S. cannot be overstated.  The legislation levels the global playing field for U.S. companies and will drive our economy by encouraging capital investment and ultimately leading to growth of jobs and wages.  We expect increased capital formation to have a favorable impact on Emerson’s growth over the next few years as U.S. companies bring home cash and invest in U.S. manufacturing,” he said.  “As we see it now, Emerson will increase capital spending rates as a percent of sales by approximately 0.5 percent over the next five years to approximately 3.5 percent, on average.  We continue to expect 50 to 60 percent of our operating cash flow will be returned to shareholders, who will benefit from higher dividend payouts and share repurchases as our cash flow increases.  We also continue to evaluate employee wage and benefit improvements to ensure that Emerson remains competitive in a growing U.S. economy, and we plan to implement these changes over the next few months.”

Business Platform Results
Automation Solutions
 net sales increased 31 percent in the quarter, with underlying sales up 9 percent excluding favorable currency of 3 percent and an impact from acquisitions of 19 percent.  Growth continued to be driven by strong MRO demand and small and mid-sized projects focused on expansion and optimization of existing facilities.  North American underlying sales were up 14 percent driven by continued favorable trends in energy, life sciences and chemical markets and investment in Western Canada.  Asia underlying sales were up 13 percent with China up 22 percent supported by continued strong demand in process and discrete markets.  Latin America was up 6 percent reflecting investments in Mexico, Argentina and Chile.  Europe was down 1 percent and Middle East/Africa was down 7 percent.  Margin decreased 160 basis points to 15.0 percent compared with the prior year.  Excluding the dilutive impact of the Valves & Controls acquisition, margin increased 120 basis points to 17.8 percent, driven by leverage on higher sales and restructuring benefits.

Commercial & Residential Solutions first quarter net sales were flat and underlying sales increased 5 percent excluding favorable currency of 2 percent and an impact from divestitures of 7 percent.  Underlying sales in North America were up 1 percent as steady demand for professional tools in oil and gas and construction-related markets was offset by difficult prior year comparisons in residential air conditioning markets.  Asia grew 17 percent, driven by continued favorable refrigeration and air conditioning demand in China and elsewhere in the region.  Europe and Latin America were up 1 percent and Middle East/Africa was up 4 percent.  Margin increased 20 basis points to 20.1 percent compared with the prior year.

2018 Outlook
We are increasing our full-year sales and earnings per share guidance based on stronger operational performance, increased share repurchases and the favorable impact of the Tax Act.

Total Emerson net sales are now expected to be up 11 to 13 percent with underlying sales up 5 to 7 percent excluding a 6 percent impact from acquisitions, divestitures and currency translation.  Prior guidance was net sales up 8 to 10 percent and underlying sales up 4 to 6 percent.  Automation Solutions guidance is increased to 18 to 20 percent net sales growth with underlying sales up 6 to 8 percent.  Commercial & Residential Solutions guidance is increased to 1 to 3 percent net sales growth with underlying sales up 4 to 6 percent.

We are increasing our GAAP earnings per share guidance to $3.05 to $3.15 from prior guidance of $2.66 to $2.86.  Previously, we also provided adjusted earnings per share guidance of $2.75 to $2.95 which excluded ($0.09) of total estimated charges related to Valves & Controls first year acquisition accounting and a tax-related loss from the divestiture of the ClosetMaid business.  Actual results for these two charges totaled ($0.07) in the quarter, which were offset by the net tax benefit related to adoption of the Tax Act.  Therefore, we are providing updated earnings per share guidance on a GAAP basis only.

The following table bridges prior adjusted earnings per share guidance to new GAAP guidance.

EPS Range
Low High
Adjusted EPS, Prior Guidance Nov 7, 2017 $2.75 $2.95
  Operational improvement & incr. share repurchases 0.15 0.05
  Tax Act, lower U.S. corporate tax rate 0.15 0.15
  Tax Act, adoption-related items 0.07 0.07
  V&C and ClosetMaid charges (0.07)   (0.07)  
GAAP EPS Guidance $3.05 $3.15

Expected GAAP earnings per share guidance of $3.05 to $3.15 reflects increases for improved operational performance and increased share repurchases, the estimated impact of the lower U.S. corporate tax rate and items related to adoption of the Tax Act.  These adoption-related items include the revaluation of net deferred income tax liabilities to the lower U.S. corporate tax rate and taxes on repatriation of foreign earnings.

The Tax Act reduces our tax rate and consistent with our updated guidance, we currently expect the 2018 consolidated tax rate to be approximately 25 to 27 percent.  In 2019 and thereafter, the tax rate is expected to be approximately 25 percent.

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