Emerson Reports Second Quarter 2019 Results

Emerson (NYSE: EMR) today reported results for the second quarter ended
March 31, 2019.

Second quarter net sales were up 8 percent, with underlying
sales up 4 percent excluding unfavorable currency of 2 percent
and a positive impact from acquisitions of 6 percent. Underlying growth
reflected broad-based global demand in process and hybrid end markets
and continued strength in North American air conditioning and global
professional tools markets. This was partially offset by softer
conditions in global discrete manufacturing end markets and a slower
than expected recovery in the Commercial & Residential Solutions Asia,
Middle East & Africa business. Emerson’s trailing three-month underlying
orders growth remained in the 5 to 10 percent range in the first
two months of the quarter but moderated to 4 percent in March as North
America upstream oil and gas customers paused to assess full-year
investment plans in light of oil price volatility, and discrete
manufacturing end markets slowed globally. We expect growth to improve
modestly through the second half of the year with underlying orders
returning to the 5 to 10 percent range, supported by a strong
macroeconomic backdrop for energy investment and continued improvement
in the Commercial & Residential Solutions Asia, Middle East & Africa
business.

Second quarter gross profit margin of 42.1 percent was
down 70 basis points, reflecting unfavorable mix, modest dilution from
recent acquisitions and $7 million of first year acquisition accounting
charges related to the GE Intelligent Platforms business. Pretax
margin of 14.8 percent and EBIT margin of 15.8
percent were down 70 basis points and 50 basis points, respectively,
reflecting dilution from recent acquisitions. GAAP earnings per
share were $0.84 in the quarter, up 11 percent compared with the
prior year.

Second quarter operating cash flow was up 7 percent to
$533 million, and free cash flow was up 3 percent to $414
million.

“Demand in the second quarter was healthy across the world areas.
Automation Solutions continued to drive healthy mix across its three
kinds of business – maintenance and repair spending, brownfield projects
and greenfield investments,” said Chairman and Chief Executive Officer
David N. Farr. “Trends in our Commercial & Residential Solutions end
markets improved overall, and we are optimistic about returning to solid
growth in the second half. We remain confident in the cycle and the
mid-term and long-term growth outlook we discussed at our February
investor conference.”

Business Platform Results

Automation Solutions net sales increased 9 percent in the
quarter, with underlying sales up 7 percent excluding unfavorable
currency of 3 percent and a positive impact from acquisitions of 5
percent. Continued broad-based demand across process and hybrid end
markets drove 7 percent growth in the March 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. Large, long-cycle
projects drove the March backlog up 5 percent year-over-year to $4.9
billion, providing good visibility into the second half of 2019 and
early 2020.

In the Americas, underlying sales increased 9 percent, reflecting
broad-based demand and continued strong MRO and small and mid-sized
brownfield projects. The Industrial Solutions business, which primarily
serves discrete manufacturing end markets through distribution, was
positive but slowed compared with the first quarter, reflecting softer
short-cycle demand and some rebalancing of channel inventory from last
year’s tariff impact and price increases.

Asia, Middle East & Africa underlying sales were up 6 percent, supported
by continued infrastructure investment activity across the region.
Europe was up 1 percent, reflecting steady demand in most key end
markets, including oil and gas, chemicals and life sciences.

Margin decreased 90 basis points to 14.8 percent and was down 10 basis
points to 15.6 percent excluding the Aventics and GE Intelligent
Platforms acquisitions due to higher investment spending, foreign
exchange losses and unfavorable mix.

For the full year, management reduced the high end of the expected
growth range by one point to 7 to 9 percent net sales growth and 5 to 7
percent underlying sales growth, reflecting a lower outlook in North
American upstream oil and gas markets and global discrete manufacturing
end markets, partially offset by stronger expectations in Asia and Latin
America. Given the lower 2019 sales expectation, we are taking actions
to protect our full-year margin target and support strong profitability
in the second half of the year – including right-sizing investment
spending and accelerating some acquisition restructuring. For the full
year, margin is expected to be approximately 16.5 percent, consistent
with our discussion at the February investor conference.

Commercial & Residential Solutions net sales increased 5
percent in the quarter, with underlying sales flat excluding unfavorable
currency of 2 percent and a positive impact from acquisitions of 7
percent. March trailing three-month underlying orders were flat, below
our February investor conference forecast of positive growth in the
quarter. China has continued to improve as expected, and North American
air conditioning demand remains solid, but these dynamics were offset by
slower demand in Asia outside of China and weather and channel inventory
adjustments that unfavorably impacted some markets in North America.

In the Americas, underlying sales were up 4 percent led by solid growth
in residential and commercial air conditioning. Europe was up 2 percent,
reflecting steady trends in professional tools and heating and air
conditioning markets. Asia, Middle East & Africa was down 15 percent.
China was down 16 percent, but is improving in line with our previous
expectations. Softer than expected trends in southeast Asia and the
Middle East have put the region two to three months behind the forecast
laid out at our February investor conference.

Margin decreased 260 basis points to 21.0 percent and was down 150 basis
points to 22.1 percent, excluding the Tools & Test acquisition. Compared
with the first quarter, price-cost trended favorably and helped the
business deliver over 40 percent sequential leverage on incremental
sales – in line with our expectations. We expect the same level of
sequential leverage in the third quarter and strong fourth quarter
profitability with further easing of material cost pressures expected
through the second half of the year, the lapping of Section 301 Tariffs
in July, and the benefits of several cost actions.

For the full year, management expects approximately 7 percent net sales
growth and approximately 2 percent underlying sales growth, reflecting
continued improvement in Asia and a favorable outlook in the North
American residential and commercial air conditioning markets. Given the
lower 2019 sales expectation, we have slowed incremental growth
investments and accelerated some cost actions to protect our full-year
margin target. Margin is expected to be approximately 22 percent,
consistent with the plan we laid out at our February investor conference.

2019 Outlook

The following table presents the updated 2019 guidance framework. The
high end of the GAAP earnings per share range is reduced 5 cents to
$3.60 to $3.70, which reflects lowered sales expectations, somewhat
offset by improvement in the estimated full-year tax rate.

“Our end markets are healthy around the world and we have momentum
heading into the second half of the year, despite some crosswinds which
we had embedded in our full year outlook in November and discussed at
our February investor conference. Our very focused management process
enhances our ability to adapt and deliver profitability targets,” Farr
said. “Given the slower first half sales growth, we are reducing the
pace of investments and hiring as we continue to carefully track our end
markets, and we are more quickly integrating acquisitions in both
business platforms to set up a better cost structure in 2020.

“The capital spending cycle remains intact. The project funnel continues
to grow even as we steadily convert long-cycle projects into backlog,
which provides us improved visibility into the second half of 2019 and
early 2020.”

Upcoming Investor Events

Today, beginning at 2 p.m. Eastern Time, Emerson management will discuss
the second quarter 2019 results during an investor conference call.
Participants can access a live webcast available at www.emerson.com/financial
at the time of the call. In addition to the usual participating members
of Emerson senior management, Lal Karsanbhai, executive president of
Automation Solutions, and Bob Sharp, executive president of Commercial &
Residential Solutions, will join the call to give a brief update from
their February investor day presentation. A replay of the call will
remain available for 90 days.

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, cybersecurity, tariffs, 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.

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