Emerson Electric Co. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019. This is an annual report, not a standalone 2019 fourth-quarter filing. Unless noted, amounts are U.S. dollars.
Business context
Emerson is a global industrial technology and engineering company organized around Automation Solutions and Commercial & Residential Solutions, the latter comprising Climate Technologies and Tools & Home Products. Fiscal 2019 sales by destination were 55% Americas, 17% Europe and 28% Asia, Middle East & Africa. The company continued to expand its portfolio through acquisitions, including eight Automation Solutions businesses acquired in 2019 for $469 million net of cash, with approximately $300 million in combined annual sales.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $18.372 billion | $17.408 billion |
| Gross profit / gross margin | $7.815 billion / 42.5% | $7.432 billion / 42.7% |
| Pretax earnings from continuing operations | $2.859 billion | $2.667 billion |
| Net earnings attributable to common stockholders | $2.306 billion | $2.203 billion |
| Diluted EPS from continuing operations | $3.71 | $3.46 |
| Operating cash flow | $3.006 billion | $2.892 billion |
| Free cash flow | $2.412 billion | $2.275 billion |
- Sales rose 6%; acquisitions contributed 5%, underlying sales increased 3%, and foreign currency translation reduced growth by 2%. Gross margin declined 0.2 percentage points, mainly due to mix and acquisitions, partly offset by cost reductions.
- Net earnings increased 5% and diluted EPS increased 7%. Management attributed EPS growth to modest sales growth and lower corporate expenses. The FY2018 comparison included a $189 million, or $0.30-per-share, net tax benefit from U.S. tax reform.
- Operating cash flow increased 4%; free cash flow increased 6%. Capital expenditures were $594 million, and operating working capital was $1.113 billion, or 6.1% of sales, versus 5.7% in FY2018.
- Income tax expense was $531 million and the effective tax rate was 18.6%, compared with 16.6% in FY2018. FY2019 included a $13 million tax benefit from final regulations related to the deemed-repatriation tax.
Segments and material changes
- Automation Solutions: Sales increased 7% to $12.202 billion; segment earnings rose 3% to $1.947 billion. Segment margin fell from 16.5% to 16.0%, reflecting acquisition dilution and higher restructuring expense. Underlying sales grew 5%; acquisitions added 4%.
- Commercial & Residential Solutions: Sales increased 3% to $6.169 billion, but segment earnings declined 6% to $1.271 billion and margin fell from 22.6% to 20.6%. Underlying sales declined 1%. Climate Technologies sales fell 3%, while Tools & Home Products sales rose 22%, substantially reflecting the tools and test equipment acquisition.
- Consolidated backlog was $5.061 billion at year-end, up from $4.966 billion; approximately 85% was expected to become revenue in the next 12 months.
- Shareholder returns included $1.209 billion in dividends ($1.96 per share) and $1.25 billion of share repurchases. In November 2019, the board approved a 2% dividend increase to an annualized $2.00 per share.
Debt, liquidity and financial position
- Cash and equivalents were $1.494 billion; total assets were $20.497 billion and common stockholders’ equity was $8.233 billion.
- Total debt was $5.7 billion, versus $4.8 billion in FY2018. Long-term debt was $4.277 billion, up from $3.137 billion. Total debt-to-total capital increased to 41.0% from 34.7%; management attributed the increase to higher borrowings.
- The company issued euro-denominated notes in 2019 and used the proceeds to reduce commercial paper borrowings and for general corporate purposes. It had a $3.5 billion revolving backup credit facility with no borrowings outstanding and stated that it expected sufficient funding to meet foreseeable needs.
- Contractual obligations totaled $7.528 billion, including long-term debt and interest, operating leases and purchase obligations. The filing also identifies $2.0 billion of other noncurrent liabilities not included in that table, primarily pension and postretirement obligations, asbestos litigation, deferred taxes and unrecognized tax benefits.
Outlook, risks and unusual items
- FY2020 guidance: Consolidated net sales expected to range from down 3% to up 1%; underlying sales from down 2% to up 2%. EPS guidance was $3.48–$3.72, operating cash flow approximately $3.1 billion and free cash flow approximately $2.5 billion. Planned share repurchases were $1.5 billion. Management assumed muted or slightly negative end-market growth; guidance excludes any effects of the board’s ongoing comprehensive review of operations, capital allocation and portfolio initiatives.
- Key risks include competitive and cyclical end markets; acquisition integration and portfolio changes; raw-material costs and supply disruptions; international, currency and trade-policy exposure; cybersecurity and product failures; access to capital markets; and litigation, including product liability and asbestos claims.
- Management considered a material adverse effect from pending litigation unlikely, while acknowledging uncertainty and a remote possibility of material impact. The asbestos reserve is based on projected claims through 2065. The filing states there were no known contingent liabilities management believed material to the financial statements.
- Restructuring expense was $95 million, compared with $65 million in FY2018; FY2019 actions included exiting two facilities and eliminating approximately 1,100 positions. The adoption of ASC 606 increased opening retained earnings by $30 million and did not materially affect FY2019 results. Lease accounting adoption in FY2020 was expected to add approximately $500 million of right-of-use assets and lease liabilities without a material earnings or cash-flow effect.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective internal controls as of September 30, 2019.
Important facts for investors to verify
- Whether underlying demand and sales growth can offset acquisition reliance, currency effects and weakness in Climate Technologies and certain international markets.
- Whether Automation Solutions and Commercial & Residential Solutions can restore or sustain segment margins, given acquisition dilution, mix and restructuring costs.
- How the increase in debt, planned $1.5 billion FY2020 repurchases and dividend commitments affect leverage and financial flexibility.
- Whether FY2020 sales, EPS and cash-flow guidance is achieved—and how the board’s ongoing review may change that outlook.
- The development of asbestos and other litigation exposures, pension funding assumptions, and tax positions subject to examination.