Manufacturers

Emerson Dips on ‘Challenging Fiscal 2020’

ST. LOUIS — Emerson today reported results for the fourth quarter and fiscal year ended Sept. 30, 2019.

Fourth-quarter net sales were up 2 percent, with underlying sales up 3 percent excluding unfavorable currency of 2 percent and a positive impact from acquisitions of 1 percent. Growth was in line with management expectations for Automation Solutions but below expectations for Commercial & Residential Solutions due to cooler weather conditions in North America that unfavorably impacted air conditioning and construction markets and continued sluggishness in Asian markets. Emerson finished the year with trailing three-month underlying orders growth of 1 percent, or 2 percent excluding two prior year fleetwide modernization projects for large North American power customers, in line with the Company’s recent communications regarding slowing global economic growth.

Fourth-quarter gross profit margin of 42.8 percent was up 70 basis points compared with the prior year, primarily due to solid operational execution and favorable price-cost. Pretax margin of 16.6 percent and EBIT margin of 17.4 percent were up 150 and 140 basis points, respectively. Total segment margin of 19.2 percent was up 10 basis points and was up 50 basis points to 20.2 percent excluding restructuring charges, reflecting year-over-year leverage exceeding 40 percent.

GAAP earnings per share were $1.16 in the quarter, up 20 percent versus the prior year, and were $1.07, up 20 percent, excluding discrete tax benefits of $0.09 this year and $0.08 in the prior year.

Fourth-quarter operating cash flow was up 18 percent to $1.2 billion, and free cash flow was up 40 percent to $1.0 billion. Full year operating cash flow was up 4 percent to $3.0 billion and free cash flow was up 6 percent to $2.4 billion, reflecting 105 percent conversion of net earnings.

“Emerson delivered a solid year, despite a lower growth environment than we anticipated,” said Emerson Chairman and CEO David N. Farr. “We grew above our markets, delivered strong earnings and cash flow, and returned $2.5 billion to our shareholders. We plan to announce a 4-cent dividend increase for 2020, which is higher than recent increases, and we plan greater increases as our dividend to free cash flow ratio improves below 50 percent in future years.

“The year required our organization to be nimble, as we shifted from a growth mindset at our Investor Conference last February to an increasing focus through the second half of our fiscal year on setting up the right cost position for what we expect will be a low or no-growth environment.

“Emerson knows how to do this: We announced restructuring plans mid-year and increased the effort again in August. We drove hard through the fourth quarter to finish strong operationally while achieving $55 million in restructuring actions. We are not done – we will pursue further cost actions over the next couple of years.

“Our teams have worked hard and accomplished much in a short time during a challenging and dynamic year across the globe,” Farr said. “We believe this will help set the cost structure and the company up for continued success going into 2020.”

Business Platform Results

Automation Solutions net sales increased 4 percent in the quarter, with underlying sales up 5 percent excluding unfavorable currency of 2 percent and a positive impact from acquisitions of 1 percent. September trailing three-month underlying orders were up 3 percent and were up 4 percent excluding two prior year fleetwide modernization projects for large North American power customers.

Demand in process and hybrid end markets was steady in the Americas and Europe and was robust in AsiaMiddle East & Africa. North American upstream oil and gas investment activity and global discrete end markets remained negative in the quarter. Programs focused on our installed base, including shutdowns and turnarounds and digital transformation solutions, contributed to steady growth of maintenance and repair (MRO) and brownfield investment activity. These programs drove an overall higher level of MRO growth and business mix in 2019 than we had expected at the outset of the year. Long-cycle businesses continued steady growth in the quarter, with Final Control underlying sales up mid-single digits and the Systems business up low-double digits. The September ending backlog for these businesses was up 6 percent compared to the prior year.

In the Americas, underlying sales were flat, reflecting slow discrete end markets and soft upstream oil and gas activity. The Industrial Solutions business, which primarily serves discrete manufacturing end markets through distribution, was down high-single digits on an underlying basis, reflecting continued soft short-cycle demand and some rebalancing of channel inventory. The Systems business was up high-single digits, reflecting steady MRO spending and project activity.

AsiaMiddle East & Africa underlying sales growth was up 10 percent, supported by continued infrastructure investment, led by China, and strong growth in Middle East & AfricaEurope was up 7 percent, reflecting strong backlog conversion and steady demand in most key end markets.

Segment margin increased 70 basis points to 18.4 percent and was up 140 basis points to 19.5 percent excluding restructuring charges, reflecting year-over-year leverage exceeding 50 percent. Strong profitability in the quarter was driven by fixed cost leverage and the benefit of prior year restructuring actions.

For the full year, net sales were up 7 percent, or up 5 percent on an underlying basis. Segment margin decreased 50 basis points to 16.0 percent and was up 50 basis points to 17.3 percent excluding restructuring charges and the dilutive impact of the Aventics and GE Intelligent Platforms acquisitions, reflecting year-over-year leverage exceeding 30 percent.

Commercial & Residential Solutions net sales decreased 3 percent in the quarter, with underlying sales down 2 percent excluding unfavorable currency of 1 percent. September trailing three-month underlying orders were down 2 percent due to cooler weather in North American air conditioning markets and slower conditions in global professional tools and cold chain markets.

In the Americas, underlying sales were flat, reflecting modest growth in residential air conditioning markets offset by slower commercial and aftermarket demand and softer professional tools and cold chain end markets. Europe was down 2 percent, and AsiaMiddle East & Africa was down 7 percent as sluggish conditions persisted across the region.

Margin decreased 120 basis points to 20.8 percent and was down 110 basis points to 21.6 percent excluding the impact of restructuring charges. Lower profitability primarily reflected deleverage on lower volume and unfavorable mix, partially offset by favorable price-cost.

For the full year, net sales were up 3 percent, or down 1 percent on an underlying basis. Segment margin decreased 200 basis points to 20.6 percent and was down 110 basis points to 21.9 percent excluding restructuring charges and the dilutive impact of the Tools & Test acquisition, primarily reflecting deleverage on lower sales volume and unfavorable mix.

2020 Outlook

Consistent with Emerson’s disciplined management approach, the Company’s Board of Directors is leading a comprehensive review of operational, capital allocation and portfolio initiatives. As announced on Oct. 1, this review was triggered earlier in fiscal 2019 by slowing macroeconomic conditions and geopolitical tensions that weigh on the Company’s demand outlook. The outlook does not include any impact from the Board’s ongoing review. We expect to present the Board’s conclusions and updated 2020 guidance at our February Investor Conference.

The 2020 guidance assumes that end market growth is muted, or even slightly negative, with Emerson net sales down 3 percent to up 1 percent and underlying sales down 2 percent to up 2 percent.

The 2020 adjusted earnings per share guidance excludes significant discrete tax items and restructuring charges, which will not be known until finalization of the Board’s review. The following table bridges 2019 GAAP earnings per share guidance to the new adjusted basis.

2019 GAAP EPS $3.71
Less: Discrete tax benefits (0.14)
Add: Restructuring charges 0.12
2019 Adjusted EPS $3.69
2020 Adjusted EPS Range $3.48 to $3.72

The 2020 adjusted earnings per share guidance includes headwinds of $0.29 related to increased pension expense driven by lower discount rates, higher stock compensation expense due to a higher assumed stock price in 2020, a higher tax rate and an unfavorable foreign currency impact. These headwinds are partially mitigated by lower interest expense and planned share repurchases of $1.5 billion in 2020.

The following table presents the 2020 guidance framework.

Sales Growth Guidance EPS and Cash Flow Guidance
Net Sales Growth (3%) – 1% Adjusted EPS $3.60 +/- $0.12
Automation Solutions (2%) to 2% Tax Rate ~23%
Commercial & Residential Solutions (5%) to (1%) Operating Cash Flow ~$3.1B
Underlying Sales Growth (2%) – 2% Free Cash Flow ~$2.5B
Automation Solutions (1%) to 3% Capital Expenditures ~$600M
Commercial & Residential Solutions (3%) to 1% Share Repurchases $1.5B

“We are planning for a challenging economic environment in fiscal 2020,” Farr said. “The U.S. presidential election, continued trade tensions, and an increasing wave of corporate restructuring announcements will pressure global economies, leaving the large capital project cycle – which really hasn’t yet begun in our end markets – stalled.

“Fortunately, our businesses have proved they are resilient. Automation Solutions’ estimated $115 billion installed base offers secular growth levers, such as digital transformation upgrade projects and targeted MRO service programs that leverage our unique global service center infrastructure. Similarly, Commercial & Residential Solutions’ global position, diverse end markets and leading technology provide opportunities to grow above the market and a buffer against downside risk.

“Over the last few years, we’ve executed $6 billion of bolt-on acquisitions which provide runway for earnings growth, margin and cash flow improvement across both business platforms. Our Board of Directors continues its operations, portfolio and capital allocation review, and we expect to fully outline these plans and reset our 2020 and long-term guidance at our February 2020 Investor Conference.

“I want to thank the Board of Directors for their continued guidance and our company’s leaders and employees for their dedication as we navigate an uncertain macroeconomic environment.”

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