Emerson Reports Full Year, 4Q 2016 Results That Exceed Expectations

Emerson reported results for the fourth quarter and fiscal year ended Sept. 30, 2016. As a result of pending divestitures, results for the 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.
 
Fiscal year sales of $20.2 billion declined 9% as the company faced difficult conditions in key served markets, which have continued for seven consecutive quarters. Underlying sales declined 6% excluding unfavorable currency translation of 2% and an impact from divestitures, net of acquisitions of 1%. 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%, 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% was equal to the prior year, while pretax earnings margin was 13.9%, down 10 basis points.
 
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% to $2.98, as Emerson quickly reacted to the continuing weak economic conditions with the appropriate level of restructuring actions and expense controls.
 
Fiscal year 2016 net sales of $14.5 billion declined 11% versus the prior year. Underlying sales decreased 7% excluding unfavorable currency translation and the impact from divestitures, net of acquisitions of 2% each. Pretax margin was 16.0%, down 740 basis points. Reported earnings per share decreased 37% to $2.52. Earnings per share from continuing operations decreased 34% to $2.45. T
 
“Fiscal 2016 was a significantly more challenging year than expected,” said David N. Farr, chairman and CEO. “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.”
 
Net sales in the fourth quarter of $5.5 billion were down 6%. Underlying sales declined 5% excluding a 1% 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 US and China, which were flat.
 
Fourth quarter gross profit margin of 41.7% was up 100 basis points, despite the 6% sales decline, reflecting materials cost containment and the benefits from significant restructuring actions. EBIT margin of 16.8% was up 60 basis points versus the prior year. Pretax earnings margin was 15.9%, up 40 basis points. Adjusted earnings per share of $0.96 increased 3%, 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 sales of $3.9 billion decreased 6% with underlying sales down 5%, excluding a 1% impact of divestitures, net of acquisitions. Gross profit margin was 43.6%, up 20 basis points and pretax margin was 17.2%, down 390 basis points. Reported earnings per share decreased 31% to $0.68. Fourth quarter earnings per share from continuing operations decreased 22% to $0.74.
 
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, Emerson expects net and underlying sales in the Automation Solutions platform to be down 4% to 7%. The Automation Solutions platform will include its current Process Management segment and the remaining businesses in the 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%. The Commercial & Residential Solutions platform will include the current Climate Technologies and Commercial & Residential Solutions segments.
 
Total Emerson net and underlying sales are expected to be down 1% to 3%. 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.”