News Column

Emerson Reports Third Quarter 2014 Results

August 5, 2014

  • Reported sales of $6.3 billion declined slightly, with underlying sales up 3 percent
  • Strong profitability improvement, with gross profit margin up 130 basis points
  • Earnings per share of $1.03, up 6 percent excluding prior year charges
  • Record backlog, up over 20 percent year-to-date, excluding divestitures

    ST. LOUIS--(BUSINESS WIRE)-- Emerson (NYSE: EMR) today announced that sales for the third quarter ended June 30, 2014 decreased 1 percent, with the Artesyn divestiture deducting 5 percent and acquisitions adding 1 percent. Underlying sales grew 3 percent, with North America and Europe up 4 percent and Asia up 3 percent, as business conditions continued to improve, albeit slowly and unevenly across markets and geographies. Growth in mature markets was stronger than in emerging regions, reflecting global political instability and economic uncertainty in some developing countries. Underlying orders have grown 5 percent year-to-date, increasing backlog to a record level.

    Profitability expansion continued, with strong improvement in gross profit and EBIT margin reflecting portfolio changes and operational efficiencies. Earnings per share of $1.03 grew 6 percent excluding Artesyn related charges in the prior year despite a $0.03 headwind from difficult tax rate comparisons, with reported earnings per share up 281 percent.

    Operating cash flow of just over $1 billion exceeded expectations, supported by solid conversion from earnings and on track for another strong year. Strategic growth and productivity investments increased capital expenditures versus the prior year, resulting in slightly lower free cash flow. Share repurchase activity remained high, with over $700 million completed year-to-date. Proceeds from the completion of the Connectivity Solutions business unit divestiture in the fourth quarter will augment share repurchase by approximately $100 million, increasing the full year to approximately $1 billion. Cash returned to shareholders through share repurchase and dividends remains on track to exceed 60 percent of operating cash flow for the full year.

    “Underlying sales growth improved, increasing 3 percent from the prior year despite the global business environment struggling to sustain growth momentum,” said Chairman and Chief Executive Officer David N. Farr. “Fundamentals continue to gradually strengthen, but persisting economic challenges in some markets and rising geopolitical tension have hampered growth, which is not expected to improve in the near term. In light of the sluggish conditions, operations executed well in the quarter, driving margin expansion, generating robust cash and maintaining focus on strategic investment programs, emphasizing our commitment to investing for long-term growth.”

    Business Segment Highlights

    Process Management net sales grew 6 percent, supported by stable and sustained levels of investment in the global energy and chemical industries. Underlying sales increased 2 percent, reflecting mixed market conditions across regions and continued cautious project execution by customers. Acquisitions added 4 percent. North America grew 7 percent, as unconventional oil and gas projects remained robust, and Europe increased 5 percent, led by strong growth in developing countries. Asia decreased 2 percent, as softness and difficult comparisons in Australia offset continued strength in China. Segment margin remained solid at 20.4 percent, declining from the prior year as strategic investments continued to support future profitable growth. Solid near term growth is expected, supported by strengthening in North America, anticipated recovery in Asia, and record backlog.

    Industrial Automation net sales increased 1 percent and underlying sales were flat, with North America flat, Asia up 3 percent, and Europe down 5 percent. Demand for industrial goods continued to recover slowly, with underlying orders up 4 percent in the quarter, but trends across markets and geographies was mixed. Growth was strongest in the fluid automation, electrical distribution and materials joining business, offset by declines in power generating alternators and motors and drives, with Europe particularly weak. Segment margin of 16.6 percent improved 50 basis points. Market conditions are expected to continue to recover, but with slow improvement due to uneven economic trends and demand, especially in Europe and the Middle East.

    Network Power net sales declined 18 percent, reflecting the Artesyn divestiture impact of 20 percent. Underlying sales grew 2 percent, with North America up 2 percent, Asia up 6 percent, and Europe up 10 percent. Growth was strong in the global telecommunications infrastructure business, led by double-digit gains in Asia. Data center market conditions remained mixed but flat overall, as strength in Europe and Asia was offset by slow demand in North America and weakness in Latin America. Segment margin expanded 60 basis points to 8.7 percent, reflecting portfolio changes and continued investment in strategic programs. Backlog strength and improving market conditions support the outlook for modest growth and improving profitability into next year.

    Climate Technologies net and underlying sales increased 6 percent, as growth was balanced across all geographies, with North America up 4 percent, Asia up 9 percent, and Europe up 9 percent. The global refrigeration business remained strong, with double-digit growth, as market conditions in China and Europe were particularly robust. Moderate growth in the U.S. air conditioning business reflected strong demand in the service business, mid-single-digit growth in residential markets, and low-single-digit growth in commercial. Gains continued in the temperature sensors business, particularly in China. Segment margin remained strong at 21.0 percent. Favorable market conditions are expected to continue globally, led by improvement in U.S. air conditioning demand.

    Commercial & Residential Solutions net and underlying sales grew 4 percent, with sequential improvement reflecting the impact of harsh winter weather in North America in the previous quarter. Growth was led by the professional tools and residential storage businesses. Segment margin improved 170 basis points to 22.1 percent. Recovery momentum is expected to continue in the near term, benefiting from improvement in U.S. residential and commercial construction markets.

    2014 Outlook

    Despite areas of ongoing uncertainty around the world, economic momentum continues to improve gradually but unevenly. Order trends are expected to improve modestly in the fourth quarter to between 5 and 7 percent underlying growth, led by better conditions in emerging markets and firming demand in the U.S. As the end of the fiscal year approaches, the slower than expected economic environment year-to-date is expected to result in financial performance trending to the low end of previously communicated expectations of 3 to 5 percent underlying sales growth, (1) to 1 percent net sales change, and earnings per share of $3.68 to $3.80. Strong cash generation year-to-date supports the outlook for operating cash flow of approximately $3.5 billion.

    “We see the pace of growth improving through the fourth quarter, as global business confidence improves and investment levels recover,” Farr said. “Robust orders growth in the spring has driven backlog to a record level, supported by large projects with long lead times, and strategic investment programs continue to progress well, providing a foundation for a more favorable growth environment next year.”

    Upcoming Investor Events

    Today at 2 p.m. ET, Emerson management will discuss the third quarter results during a conference call. Access to a live webcast of the discussion will be available at www.emerson.com/financial at the time of the call. A replay of the conference call will remain available for approximately three months.

    On Thursday, September 4, 2014, Emerson President and Chief Operating Officer Edward L. Monser will present at the Vertical Research Partners Industrials Conference in Westbrook, Connecticut. The presentation will be posted on Emerson's website at www.emerson.com/financial and remain available for approximately three months after the event.

    On Tuesday, September 16, 2014, Emerson Chairman and Chief Executive Officer David N. Farr will present at the Morgan Stanley Laguna Conference in Dana Point, California. The presentation will be posted on Emerson's website at www.emerson.com/financial and remain available for approximately three months after the event.

    Forward-Looking and Cautionary Statements

    Statements in this press release that are not strictly historical may be “forward-looking” statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, protection of intellectual property, and competitive and technological factors, among others, as set forth in the Company's most recent Annual Report on Form 10-K and subsequent reports filed with the SEC.

    (tables attached)

     
     
     
     
     

    Table 1

    EMERSON AND SUBSIDIARIES
    CONSOLIDATED OPERATING RESULTS
    (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
         

    Quarter Ended June 30,

    Percent

    2013

    2014

    Change

     
    Net sales $ 6,344 $ 6,312 (1 )%
    Costs and expenses:
    Cost of sales 3,776 3,674
    SG&A expenses 1,396 1,424
    Goodwill impairment 503
    Other deductions, net 107 96
    Interest expense, net   51   46
    Earnings before income taxes 511 1,072 110 %
    Income taxes   297   334
    Net earnings 214 738 245 %
    Less: Noncontrolling interests in earnings of subsidiaries   20   10
    Net earnings common shareholders $ 194 $ 728 277 %
     
    Diluted avg. shares outstanding 722.2 703.3
     
    Diluted earnings per common share $ 0.27 $ 1.03 281 %
     
     

    Quarter Ended June 30,

    2013

    2014

    Other deductions, net
    Amortization of intangibles $ 53 $ 55
    Rationalization of operations 33 11
    Other   21   30
    Total $ 107 $ 96
     
     
     
     
     
     

    Table 2

    EMERSON AND SUBSIDIARIES
    CONSOLIDATED OPERATING RESULTS
    (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
         

    Nine Months Ended June 30,

    Percent

    2013

    2014

    Change

     
    Net sales $ 17,857 $ 17,730 (1 )%
    Costs and expenses:
    Cost of sales 10,709 10,461
    SG&A expenses 4,216 4,262
    Goodwill impairment 503
    Other deductions, net 252 328
    Interest expense, net   162   147
    Earnings before income taxes 2,015 2,532 26 %
    Income taxes   757   763
    Net earnings 1,258 1,769 41 %
    Less: Noncontrolling interests in earnings of subsidiaries   49   32
    Net earnings common shareholders $ 1,209 $ 1,737 44 %
     
    Diluted avg. shares outstanding 724.8 705.6
     
    Diluted earnings per common share $ 1.66 $ 2.45 48 %
     
     

    Nine Months Ended June 30,

    2013

    2014

    Other deductions, net
    Amortization of intangibles $ 166 $ 170
    Rationalization of operations 65 45
    Artesyn equity loss 34
    Other   21   79
    Total $ 252 $ 328
     
     
     
     
     
     

    Table 3

    EMERSON AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    (DOLLARS IN MILLIONS, UNAUDITED)
       

    Quarter Ended June 30,

    2013

    2014

    Assets
    Cash and equivalents $ 2,810 $ 3,049
    Receivables, net 4,725 4,772
    Inventories 2,304 2,253
    Other current assets   667   739
    Total current assets 10,506 10,813
    Property, plant & equipment, net 3,475 3,737
    Goodwill 7,514 7,917
    Other intangible assets 1,698 1,768
    Other   320   880
    Total assets $ 23,513 $ 25,115
     
    Liabilities and equity

    Short-term borrowings and current maturities of long-term debt

    $ 1,486 $ 2,975
    Accounts payables 2,614 2,645
    Accrued expenses 2,783 2,736
    Income taxes   67   177
    Total current liabilities 6,950 8,533
    Long-term debt 4,059 3,565
    Other liabilities 2,240 2,144
    Total equity   10,264   10,873
    Total liabilities and equity $ 23,513 $ 25,115
     
     
     
     
     
     

    Table 4

    EMERSON AND SUBSIDIARIES
    CONSOLIDATED STATEMENT OF CASH FLOWS
    (DOLLARS IN MILLIONS, UNAUDITED)
       

    Nine Months Ended June 30,

    2013

    2014

    Operating activities
    Net earnings $ 1,258 $ 1,769
    Depreciation and amortization 612 623
    Changes in operating working capital (259 ) (157 )
    Pension funding (109 ) (90 )
    Goodwill impairment, net of tax 475
    Other, net   226     139  
    Net cash provided by operating activities   2,203     2,284  
     
    Investing activities
    Capital expenditures (437 ) (573 )
    Purchase of businesses, net of cash and equivalents acquired (20 ) (610 )
    Divestiture of business 3 264
    Other, net   (76 )   (107 )
    Net cash used by investing activities   (530 )   (1,026 )
     
    Financing activities
    Net increase in short-term borrowings 273 1,133
    Proceeds from long-term debt 499 1
    Principal payments on long-term debt (521 ) (323 )
    Dividends paid (888 ) (910 )
    Purchases of treasury stock (573 ) (783 )
    Purchase of noncontrolling interest (574 )
    Other, net   12     (19 )
    Net cash used by financing activities   (1,198 )   (1,475 )
     
    Effect of exchange rate changes on cash and equivalents   (32 )   (9 )
     
    Increase (decrease) in cash and equivalents 443 (226 )
     
    Beginning cash and equivalents   2,367     3,275  
     
    Ending cash and equivalents $ 2,810   $ 3,049  
     
     
     
     
     
     

    Table 5

    EMERSON AND SUBSIDIARIES
    SEGMENT SALES AND EARNINGS
    (DOLLARS IN MILLIONS, UNAUDITED)
       

    Quarter Ended June 30,

    2013

    2014

    Sales
    Process Management $ 2,182 $ 2,317
    Industrial Automation 1,277 1,289
    Network Power 1,506 1,237
    Climate Technologies 1,119 1,191
    Commercial & Residential Solutions   472     492  
    6,556 6,526
    Eliminations   (212 )   (214 )
    Net sales $ 6,344   $ 6,312  
     
    Earnings
    Process Management $ 470 $ 473
    Industrial Automation 206 214
    Network Power 122 107
    Climate Technologies 235 250
    Commercial & Residential Solutions   96     108  
    1,129 1,152
    Differences in accounting methods 56 63
    Corporate and other (623 ) (97 )
    Interest expense, net   (51 )   (46 )
    Earnings before income taxes $ 511   $ 1,072  
     
    Rationalization of operations
    Process Management $ 4 $ 4
    Industrial Automation 14 2
    Network Power 12 3
    Climate Technologies 1
    Commercial & Residential Solutions   3     1  
    Total $ 33   $ 11  
     
     
     
     
     
     

    Table 6

    EMERSON AND SUBSIDIARIES
    SEGMENT SALES AND EARNINGS
    (DOLLARS IN MILLIONS, UNAUDITED)
       

    Nine Months Ended June 30,

    2013

    2014

    Sales
    Process Management $6,098$6,466
    Industrial Automation 3,627 3,670
    Network Power 4,446 3,711
    Climate Technologies 2,859 3,018
    Commercial & Residential Solutions 1,382   1,418  
    18,412 18,283
    Eliminations (555 ) (553 )
    Net sales $17,857   $17,730  
     
    Earnings
    Process Management $1,206$1,229
    Industrial Automation 556 563
    Network Power 338 286
    Climate Technologies 511 543
    Commercial & Residential Solutions 291   307  
    2,902 2,928
    Differences in accounting methods 160 180
    Corporate and other (885 ) (429 )
    Interest expense, net (162 ) (147 )
    Earnings before income taxes $2,015   $2,532  
     
    Rationalization of operations
    Process Management $11$12
    Industrial Automation 24 7
    Network Power 21 13
    Climate Technologies 2 11
    Commercial & Residential Solutions 7   2  
    Total $65   $45  
     
     
     
     
     
     
    Reconciliations of Non-GAAP Financial Measures & Other

    Table 7

     
    The following reconciles non-GAAP measures (denoted by *) with the most directly comparable GAAP measure (dollars in millions, except per share amounts):
     
      Process   Industrial   Network   Climate   Comm &
    Q3 Sales growth

    Mgmt

    Auto

    Power

    Tech

    Res Solns

    Total

    Underlying* 2 % % 2 % 6 % 4 % 3 %
    Acq/Div 4 % % (20 )% % % (4 )%
    FX   %     1 %   %   %   %   %
    Net 6 % 1 % (18 )% 6 % 4 % (1 )%
     
    Q3 Earnings per share

    2013

    2014

    Change

    Excluding charges* $ 0.97 $ 1.03 6 %
    Artesyn charges   (0.70 )         275 %
    Reported $ 0.27 $ 1.03 281 %
     
    2014E Sales growth
    Underlying* 3-5 %
    Acq/Div/FX   (4 )%
    Net

    (1)-1

    %

     
     
    Note: Underlying sales and orders exclude the impact of acquisitions, divestitures and currency translation.
     
     
     
     





    for Emerson

    Mark Polzin, 314-982-1758

    Source: Emerson


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