Emerson Electric's (EMR 0.62%) fourth-quarter results capped off a very difficult year for the diversified industrial company. Emerson started its fiscal year struggling with weak energy capital spending and a strong U.S. dollar. Unfortunately, adding insult to injury, the year got worse. As the year progressed, issues like weakening emerging market growth and slowing industrial spending joined the party. Despite recent travails, the company continues to be well respected by dividend investors for being a Dividend Aristocrat -- 2015 marked the 59th consecutive year of increased dividends -- so let's take a look at the results and how management is dealing with difficult markets.
Emerson Electric's fourth quarter
A brief rundown of the key numbers from the fourth quarter and full year:
- Fourth-quarter sales declined 15% to $6.8 billion compared to last year's fourth quarter while underlying sales fell 7%
- Fourth-quarter adjusted EPS declined 29% to $0.93
- Restructuring expenses were increased to $128 million in the quarter -- a figure some $40 million above that forecast in the third-quarter earnings presentation
- Full-year net sales decreased 9% with underlying sales down 2%
- Full-year adjusted EPS declined 15% to $3.17
- Full-year free cash flow of $1.84 billion covered dividends paid of $1.27 billion by 1.5 times
The fact that the fourth-quarter sales and earnings were worse than the full year tells you how the company's year got progressively worse. However, the company remains cash generative and, even in a year of declining earnings, free cash flow easily covered dividends. Moreover, it should be noted that management intends to increase the dividend yet again.
- Full-year 2016 guidance for sales to fall 6% to 8% with underlying sales expected to decline 2% to 5%
- Full-year 2016 adjusted EPS guidance range of $3.05 to $3.17 implying a decline of 3.8% to 0%
- Company expects "difficult market conditions in first six to nine months of fiscal 2016"
- Dividend intended to be increased to a run-rate of $1.90 per share in the first quarter
In short, end markets are expected to remain difficult, but management is restructuring the company in order to strip out costs and the dividend remains well covered.
A more detailed look
While the company is reasonably diversified, but the problem this year is it doesn't have major exposure to areas like aerospace or aviation, which have performed relatively well on a global basis in 2015. There have been pockets of strength for the company, such as U.S. construction, but the commercial and residential solution segment is the company's smallest. In short, Emerson has not been favorably exposed to trends in the global economy in 2015 -- on a geographic and industry basis.
|
Net Sales Growth |
Underlying Sales Growth |
Earnings ($m) |
Earnings Growth | |
|---|---|---|---|---|
|
Process Management |
-16% |
-10% |
429 |
-38% |
|
Industrial Automation |
-28% |
-12% |
136 |
-43% |
|
Network Power |
-10% |
-4% |
81 |
-53% |
|
Climate Tech |
-8% |
-5% |
180 |
-7% |
|
Comm & Res Solutions |
-1% |
3% |
111 |
-5% |
Date source: Emerson Electric presentations.
As the reader can see, the most important segments for the company -- process management and industrial automation -- have been the most affected in 2015.
Management's outlook
The near-term prognosis is not good, with management expecting difficult market conditions to continue. Upstream oil and gas capital spending remains constrained and management expects sales growth to be under pressure for process management in fiscal 2016. Industrial automation market conditions are expected to be "challenging in the near term" with expectations for improvement in the second half of fiscal 2016.
The network power spinoff is expected to be substantially complete by the end of the fiscal year. On a brighter note, both climate technologies and commercial and residential solutions have a moderate growth outlook.
Looking ahead
It's notable that the segments with the best outlooks happen to be traditionally the smallest for Emerson Electric. In truth, the company's fortunes will be tied to general industrial-spending conditions and, in particular, energy capital spending. Meanwhile, China's growth prospects loom large with any company exposed to infrastructural spending.
Management is engaging in several initiatives via restructuring and the network power spinoff, and dividend investors will appreciate the dividend hike, but in reality Emerson Electric will continue to face difficult markets in the near term.
