ST. LOUIS — Emerson reported results for the fourth quarter and fiscal year ended September 30, 2016. As a result of pending divestitures, results for our historical Network Power segment and for the Leroy-Somer and Control Techniques businesses previously included in our historical Industrial Automation segment are now being reported as discontinued operations. The financial tables included in this release provide Emerson’s full reported results on the new continuing operations basis. Sections detailing Emerson’s full reported results on that new basis for the fiscal year and fourth quarter can be found later in this financial release under “Reported Results from Continuing Operations.” The results indicated below as “Results on an Adjusted Basis” include these discontinued businesses and exclude repositioning items and prior year divestiture gains. The Adjusted Basis results are being provided to facilitate comparisons with our results for the first three quarters of fiscal 2016, our guidance for fourth quarter and fiscal year 2016 and the prior year.
Fiscal Year Results on an Adjusted Basis
Fiscal year sales of $20.2 billion declined 9 percent as the Company faced difficult conditions in key served markets, which have continued for seven consecutive quarters. Underlying sales declined 6 percent excluding unfavorable currency translation of 2 percent and an impact from divestitures, net of acquisitions of 1 percent. The fourth quarter and full year results reflected the negative impact of low oil and gas prices, weak industrial and emerging market business spending, and global economic uncertainty. Sales were down in all segments and all regions.
Despite significant deleverage on the sales reduction, fiscal year operating margin remained high at 16.9 percent, down only 40 basis points from the prior year. The ability to minimize decremental impact on margin was driven by the benefits from restructuring actions and solid margin improvement in the Network Power, Commercial & Residential Solutions and Climate Technologies segments. EBIT margin of 14.8 percent was equal to the prior year, while pretax earnings margin was 13.9 percent, down 10 basis points. As conditions remained challenging into the fourth quarter, full year restructuring expense totaled $112 million, which exceeded prior guidance of $90 to $100 million as we protect our profitability in preparation for a challenging 2017. Solid earnings conversion and improved trade working capital performance resulted in operating cash flow generation of $2.9 billion, or $3.1 billion excluding $179 million of separation costs. Adjusted earnings per share decreased only 6 percent to $2.98, as we quickly reacted to the continuing weak economic conditions with the appropriate level of restructuring actions and expense controls.
Fiscal Year Reported Results from Continuing Operations
Fiscal year 2016 net sales of $14.5 billion declined 11 percent versus the prior year. Underlying sales decreased 7 percent excluding unfavorable currency translation and the impact from divestitures, net of acquisitions of 2 percent each. Pretax margin was 16.0 percent, down 740 basis points. Reported earnings per share decreased 37 percent to $2.52. Earnings per share from continuing operations decreased 34 percent to $2.45. This will be the base earnings per share used to measure Emerson’s performance on a go-forward basis as we return to growth after execution of the repositioning actions in 2016.
Discussion of Fiscal Year Results
“Fiscal 2016 was a significantly more challenging year than expected,” said Chairman and Chief Executive Officer David N. Farr. “When we determined the anticipated second half recovery in our businesses would not materialize, we took the necessary, and often difficult, actions required to bring our cost structure in line with current business conditions and trends. In 2016, we spent $112 million for restructuring which increased our two-year total restructuring spend to $333 million. By focusing on the things under our control we were able to limit the impact on operating margin to 40 basis points during this difficult year.”
“We also achieved a number of significant milestones in the strategic portfolio repositioning plan,” Farr continued. “Entering into agreements to sell Network Power, Leroy-Somer and Control Techniques at favorable values was an important first step, which we quickly followed with an agreement for the strategic acquisition of the Pentair Valves & Controls business. Together, these actions serve to position Emerson to deliver long-term growth, profitability, and value for our shareholders.”
Fourth Quarter Results on an Adjusted Basis
Net sales in the fourth quarter of $5.5 billion were down 6 percent. Underlying sales declined 5 percent excluding a 1 percent impact from divestitures. Demand conditions were mixed as mid-single digit growth in Climate Technologies and flat underlying results in the Network Power and Commercial & Residential Solutions segments were more than offset by declines in Industrial Automation and Process Management. All regions were down, except the United States and China, which were flat.
Fourth quarter gross profit margin of 41.7 percent was up 100 basis points, despite the 6 percent sales decline, reflecting materials cost containment and the benefits from significant restructuring actions. EBIT margin of 16.8 percent was up 60 basis points versus the prior year. Pretax earnings margin was 15.9 percent, up 40 basis points. Adjusted earnings per share of $0.96 increased 3 percent, excluding ($0.28) for repositioning items. Operating cash flow of $957 million reflected solid trade working capital performance. Operating cash flow excluding separation costs of $66 million was slightly above $1 billion.
Fourth Quarter Reported Results from Continuing Operations
Fourth quarter sales of $3.9 billion decreased 6 percent with underlying sales down 5 percent, excluding a 1 percent impact of divestitures, net of acquisitions. Gross profit margin was 43.6 percent, up 20 basis points and pretax margin was 17.2 percent, down 390 basis points. Reported earnings per share decreased 31 percent to $0.68. Fourth quarter earnings per share from continuing operations decreased 22 percent to $0.74.
Business Segment Fourth Quarter Results
Note: Fourth quarter business segment results are comparable on both an adjusted and continuing operations basis for all segments other than Industrial Automation.
Process Management net and underlying sales decreased 11 percent. Decreased levels of spending in energy related markets continued to be a challenge during the quarter. Underlying sales in North America were down 15 percent, with the U.S. down 13 percent. Automation spending in North America continues to be a significant headwind, most notably in MRO activity. Europe was up 5 percent as chemical and life sciences markets provided support. In other regions, Asia was down 12 percent, Middle East/Africa was down 21 percent and Latin America was down 9 percent. Segment margin decreased 280 basis points to 15.9 percent, primarily due to volume deleverage partially offset by savings from restructuring actions. As a result of an expectation of continued weakness in key served markets, particularly upstream oil and gas, the business will remain under pressure through the majority of fiscal 2017. Activity in life sciences and power, which grew in 2016, should continue to be a bright spot as we expect continued growth in 2017.
Industrial Automation net and underlying sales decreased 7 percent on an adjusted basis including discontinued operations. Segment results continue to reflect low levels of spending in upstream oil and gas, as well as weak, but slightly improving conditions in general industrial spending. Underlying sales were down in all regions. Business results were mixed, but generally down with the materials joining business up high-single digits. Segment margin was up 190 basis points to 16.3 percent. Business mix, benefits from restructuring actions and lower restructuring spending were the main drivers of the increased margin. Served market conditions are expected to remain challenging in 2017, with the best opportunity for orders growth in the second half of the fiscal year. Excluding the Leroy-Somer and Control Techniques businesses, reported and underlying sales for the segment were flat, and segment margin was 23.4 percent, up 200 basis points.
Network Power net sales decreased 2 percent, with underlying sales flat as currency translation deducted 2 percent. Growth in power products, thermal management and service was offset by declines in other businesses. Underlying sales in North America were up 17 percent reflecting strong growth in all products and services driven by the co-location and cloud-based customers as well as telecommunications providers servicing mobile and broadband. Sales in all other regions were down. Segment margin improved 650 basis points to 13.1 percent, driven by savings from restructuring actions, favorable mix, gross profit improvement programs and lower restructuring expense. The entire Network Power segment is being reported as discontinued operations.
Climate Technologies net and underlying sales increased 6 percent. Underlying sales in North America were up 8 percent led by strong growth in U.S. residential and commercial air conditioning. Asia increased 10 percent, as strong growth in China refrigeration and residential air conditioning more than offset mixed demand across the region. Segment margin increased 320 basis points to 21.1 percent, primarily due to volume leverage, savings from restructuring actions and materials cost containment, partially offset by lower pricing. A favorable outlook for global demand in air conditioning and refrigeration supports the expectation for low-single digit growth in fiscal 2017.
Commercial & Residential Solutions net sales decreased 15 percent, with underlying sales flat as the prior year divestiture of the commercial storage business deducted 15 percent. Growth in food waste disposers and wet/dry vacuums business offset declines in the professional tools and residential storage business. Segment margin increased 370 basis points to 25.9 percent, reflecting savings from restructuring actions as well as the impact of the divestiture. The expectation for favorable U.S. construction markets supports the outlook for low-single digit growth in fiscal 2017.
2017 Outlook
Fiscal 2017 will remain difficult, particularly for the automation businesses. Low growth economic conditions coupled with political uncertainty will continue to dampen both operational and capital spending across multiple end markets. Considering these factors, we expect net and underlying sales in the Automation Solutions platform to be down 4 to 7 percent. The Automation Solutions platform will include our current Process Management segment and the remaining businesses in our Industrial Automation segment. The Commercial & Residential Solutions platform is expected to have support from more favorable global HVAC and U.S. construction markets resulting in net and underlying sales growth of 2 to 4 percent. The Commercial & Residential Solutions platform will include our current Climate Technologies and Commercial & Residential Solutions segments.
Total Emerson net and underlying sales are expected to be down 1 to 3 percent. Reported earnings per share from continuing operations are expected to be $2.35 to $2.50, compared against the equivalent 2016 EPS of $2.45. This outlook excludes any impact related to the pending acquisition of the Pentair Valves & Controls business.
“We expect 2017 to be another challenging year in what has become an unprecedentedly long industrial downturn characterized by market volatility, economic uncertainty and lower industrial spending,” said Farr. “Despite these conditions, our focus remains on driving premium value for our customers, employees and shareholders; and I firmly believe we have undertaken the right initiatives to position Emerson to deliver. We will accomplish this goal by balancing restructuring against required investment in core technologies, targeting increased earnings per share, driving top-line sales through organic gains and acquisitions, and delivering a consistent, dependable and growing dividend supported by strong cash flow generation.”
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