Emerson Reports First Quarter 2019 Results, Raises Full Year Guidance

ST. LOUIS – Emerson today reported results for the first quarter ended December 31, 2018.

First quarter net sales were up 9 percent, with underlying sales up 4.5 percent excluding unfavorable currency of 1.5 percent and a positive impact from acquisitions of 6 percent. Underlying growth reflected broad-based demand in global industrial markets, steady growth in North American air conditioning markets and favorable trends in global cold chain and professional tools markets. Emerson’s trailing three-month underlying orders growth remained in the 5 to 10 percent range throughout the quarter, with December three-month underlying orders up 7 percent.

First quarter gross profit margin of 42.5 percent improved 20 basis points compared with the prior year, driven by the benefit of cost reduction actions and leverage on higher sales. Pretax margin of 14.2 percent and EBIT margin of 15.3 percent improved 100 basis points and 110 basis points, respectively, reflecting lower incentive compensation expense and prior year acquisition accounting charges, partially offset by dilution from recent acquisitions. GAAP earnings per share were $0.74 in the quarter, up 21 percent compared with the prior year.

First quarter operating cash flow was down $124 million to $323 million, due mainly to timing of accounts payable and accruals, which is expected to reverse this fiscal year. Capital expenditures of $155 million were up $59 million, due to the timing of several previously announced facility expansions and upgrades to support growth and productivity programs in the U.S., China and Southeast Asia. Free cash flow was $168 million, down $183 million.

“Our results in the first quarter provide a solid start to 2019 and confirmed our view of the global macroeconomic backdrop we laid out during our November earnings conference call, including our 4 to 7 percent underlying sales guidance. Importantly, we continue to see strength across our global industrial end markets and demand for our technology, products and expertise. We’re also pleased to have completed $0.8 billion in share repurchases in the quarter and $1 billion through January to reach our full-year target,” said Chairman and Chief Executive Officer David N. Farr.

“As expected, our Commercial & Residential Solutions business felt the crosswinds of weakening consumer demand in China that began in the second half of 2018,” continued Farr. “We continue to watch the situation carefully, and we are optimistic our China Commercial & Residential Solutions team will achieve positive underlying orders and sales in the second half of 2019.”

Business Platform Results

Automation Solutions net sales increased 9 percent in the quarter, with underlying sales up 7 percent excluding unfavorable currency of 2 percent and a positive impact from acquisitions of 4 percent. Continued strong demand across key served markets drove 12 percent growth in the December trailing three-month underlying orders. Growth continued to reflect strong maintenance and repair (MRO) demand and brownfield investment activity focused on expansion and optimization of existing facilities. Underlying orders outpaced underlying sales growth in the quarter, resulting in modest backlog build, primarily due to timing of orders and a successful platform-wide enterprise system upgrade that resulted in the planned loss of a few shipment days in the quarter.

In the Americas, underlying sales increased 8 percent, reflecting broad-based demand and continued strong MRO and small to mid-sized brownfield projects. Investments were led by unconventional oil activity across the region, the build out of midstream infrastructure and metals and mining activity in Latin America.

In Asia, Middle East & Africa, underlying sales were up 8 percent, reflecting infrastructure build out in China and India, metals and mining investments in Australia and upstream brownfield projects in the Middle East. Investment activity continued to be driven in part by sovereign interests’ trend toward greater self-sufficiency in energy, refining and chemical production.

Europe was up 3 percent, with favorable trends across most key end markets. Growth was mainly driven by upstream, chemical and midstream investment activity in Eastern Europe and Russia.

Margin decreased 50 basis points to 14.5 percent and was up 10 basis points to 15.1 percent excluding the Aventics acquisition. Profit leverage on higher sales was in line with management’s expectations and consistent with Emerson’s 2019 segment guidance, considering both the level and timing of engineering and sales investments to support continued growth in the business, as well as the timing of tariff mitigation actions.

For the full year, management expects 7 to 10 percent net sales growth and 5 to 8 percent underlying sales growth.

Commercial & Residential Solutions net sales increased 7 percent in the quarter, with underlying sales down 1 percent excluding unfavorable currency of 1 percent and a positive impact from acquisitions of 9 percent. December trailing three-month underlying orders were down 2 percent due to Asia orders, which were down 24 percent against strong prior year comparisons. However, Asia orders appear to have bottomed and will be aided by easing comparisons going forward.

In the Americas, underlying sales were up 8 percent led by cold chain, residential air conditioning and professional tools markets. Europe was up 3 percent, reflecting favorable trends in professional tools and heating and air conditioning markets. Asia, Middle East & Africa was down 23 percent, with China down 30 percent, reflecting slower air conditioning and heating markets. However, the decline in China is expected to moderate in the coming months as excess channel inventory is absorbed and spending recovers against easier comparisons in the second half of the fiscal year.

Margin decreased 240 basis points to 17.7 percent and was down 150 basis points to 18.6 percent, excluding the Tools & Test acquisition, primarily due to unfavorable price-cost. We continue to expect margins to improve as recent price increases take effect and material cost pressures moderate, especially in the second half of the year.

For the full year, management continues to expect 8 to 10 percent net sales growth and 3 to 5 percent underlying sales growth.

“Full-year orders, underlying sales, profitability and cash flow are on track to deliver a strong 2019. In our EPS guidance, we absorbed 3 cents of acquisition charges within operations and increased the range 5 cents on a stronger first quarter than we had expected,” Farr said. “We have much to accomplish in 2019 across both business platforms, and our teams around the world are poised to continue delivering value to our customers and shareholders.”

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