Business context and reporting period
Emerson Electric Co. is a global industrial technology and manufacturing company. This Form 10-K covers the fiscal year ended September 30, 2020; the filing also reports unaudited fourth-quarter results. Its businesses are Automation Solutions and Commercial & Residential Solutions, the latter comprising Climate Technologies and Tools & Home Products. Fiscal 2020 was materially affected by COVID-19, weaker demand and oil-market volatility.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $16.785 billion | $18.372 billion | Down 9% |
| Gross margin | 41.8% | 42.5% | Down 0.7 percentage points |
| Earnings before income taxes | $2.335 billion | $2.859 billion | Down 18% |
| Net earnings attributable to common stockholders | $1.965 billion | $2.306 billion | Down 15% |
| Diluted EPS | $3.24 | $3.71 | Down 13% |
| Operating cash flow | $3.083 billion | $3.006 billion | Up 3% |
| Free cash flow | $2.545 billion | $2.412 billion | Up 6% |
| Cash and equivalents at year-end | $3.315 billion | $1.494 billion | Up $1.821 billion |
| Total debt, including current debt and short-term borrowings | $7.486 billion | $5.721 billion | Up $1.765 billion |
Operating cash flow was 18.4% of sales; free cash flow was 15.2% of sales. Capital expenditures were $538 million. Year-end total assets were $22.882 billion and common stockholders’ equity was $8.405 billion. Total debt-to-capital increased to 47.1% from 41.0%; net debt-to-net capital was 33.2%, versus 33.9%. The company reported a $3.5 billion revolving backup credit facility with no borrowings and stated that available liquidity was sufficient for foreseeable needs.
By segment, Automation Solutions sales fell 9% to $11.155 billion and earnings fell 22% to $1.523 billion; its margin declined to 13.6% from 16.0%. Commercial & Residential Solutions sales fell 9% to $5.643 billion and earnings fell 12% to $1.118 billion; its margin declined to 19.8% from 20.6%.
In the fourth quarter, sales were $4.558 billion versus $4.971 billion a year earlier; common-stockholder earnings were $723 million versus $717 million, and diluted EPS was $1.20 versus $1.16.
Material changes versus the prior period
- Underlying sales declined 8% for the year; foreign currency translation reduced sales by 1%, while acquisitions net of divestitures had a minimal effect.
- COVID-19-driven volume declines, especially in the second half and in North America, contributed to lower sales and earnings. Gross margin declined due to volume deleverage and unfavorable Automation Solutions mix, partly offset by favorable price-cost.
- Restructuring costs rose to $284 million from $95 million; restructuring costs and special advisory fees reduced FY2020 EPS by $0.42 per share. Restructuring and cost-reset actions generated approximately $220 million in savings.
- Cash and debt both increased as Emerson raised long-term debt to bolster liquidity. It issued $2.25 billion of notes during 2020 and suspended share repurchases in the third quarter; full-year share repurchases totaled $942 million.
- The annual dividend increased to $2.00 per share from $1.96. After year-end, the board approved a further increase to an annualized $2.02 per share.
Outlook, risks and unusual items
For fiscal 2021, management forecast net sales growth of 1%–4%, with underlying sales ranging from down 1% to up 2%. It expected reported EPS of $3.06–$3.16 and adjusted EPS of $3.40–$3.50; the adjustment excludes $0.28 per share of restructuring impacts and $0.06 per share of OSI first-year acquisition accounting charges. Operating cash flow was forecast at approximately $3.1 billion and free cash flow at approximately $2.5 billion, assuming about $600 million of capital spending. Planned share repurchases were $500 million–$1 billion. Management expected revenue to return to growth in the third quarter, with Commercial & Residential Solutions recovering earlier than Automation Solutions.
The forecast assumed gradual economic improvement, no major operational or supply-chain disruptions and oil prices of $35–$50 per barrel. Management cautioned that further COVID-19 disruption or a slower recovery could worsen results. Emerson completed its approximately $1.6 billion acquisition of Open Systems International on October 1, 2020, after fiscal year-end; it expected the business to contribute approximately $170 million in annual sales.
Other risks include competitive and end-market volatility, international operations and currency exposure, cybersecurity and product failure, raw-material and supply-chain disruption, tax uncertainty, and litigation and environmental obligations. The company reported asbestos-related litigation reserves and insurance receivables, but stated that no known contingent liability was expected to be material to the financial statements; it also noted that litigation outcomes remain uncertain. Fiscal 2021 restructuring expense was expected to exceed $200 million.
Key facts for investors to verify
- Whether demand and segment margins recover in line with the fiscal 2021 sales and EPS outlook, particularly given the stated COVID-19 and supply-chain assumptions.
- OSI’s integration, actual contribution to growth and cash flow, and acquisition-related costs and debt impact.
- Progress and recurring benefits from restructuring, alongside the expected fiscal 2021 charges.
- Debt, cash and capital-allocation trends, including planned buybacks, dividend coverage and the effect of higher borrowing.
- Developments in asbestos and other litigation, pension funding assumptions, and potential tax or regulatory changes.