Emerson Electric Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2019; comparative periods ended June 30, 2018. The interim financial statements are unaudited. Amounts are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $4,684 | $4,456 | $13,401 | $12,520 |
| Gross margin | 42.7% | 43.6% | 42.4% | 42.9% |
| Earnings before income taxes | $767 | $768 | $2,033 | $1,929 |
| Net earnings attributable to common stockholders | $604 | $712 | $1,589 | $1,586 |
| Diluted EPS | $0.97 | $1.12 | $2.55 | $2.49 |
| Operating cash flow | Not separately provided | Not separately provided | $1,802 | $1,868 |
Quarterly sales rose 5%, but underlying sales—excluding acquisitions, divestitures and currency—grew 2%. Acquisitions contributed 5% and currency reduced sales by 2%. Quarterly common-stockholder earnings fell 15%, largely because the prior-year quarter included a $150 tax benefit related to U.S. tax reform. Nine-month sales increased 7% (underlying growth of 3%); common-stockholder earnings were essentially flat and diluted EPS increased 2%.
Quarterly gross margin declined 0.9 percentage points; SG&A was 24.0% of sales versus 23.8%. Nine-month gross margin declined 0.5 points and SG&A increased to 24.9% of sales from 24.6%. The filing attributes margin pressure principally to acquisition dilution and unfavorable mix.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $1.802 billion, down $66 million year over year, primarily due to higher operating working capital. Capital expenditures were $395 million; management reported free cash flow of $1.4 billion, down $147 million.
- At June 30, cash and equivalents were $1.603 billion. Current assets were $7.350 billion and current liabilities $6.218 billion; working capital was $1.132 billion and the current ratio 1.2.
- Short-term borrowings and current maturities totaled $1.877 billion; long-term debt was $4.336 billion. Total debt was approximately $6.213 billion, versus $4.760 billion at September 30, 2018. Management said higher debt-to-capital ratios primarily reflected borrowing to support accelerated share repurchases.
- Nine-month financing included $1.0 billion of common-stock purchases, $909 million of dividends, $655 million of long-term debt repayments and $385 million for acquisitions. The company issued €1.5 billion of notes during the period, using proceeds to reduce commercial paper and for general corporate purposes.
Segments and operating trends
- Automation Solutions: Q3 sales rose 5% to $3.025 billion, while segment earnings fell 4% to $477 million and margin declined to 15.7% from 17.2%. Nine-month sales increased 8% to $8.834 billion; earnings rose 1% to $1.328 billion, with margin down to 15.0% from 16.0%. Acquisitions supported sales; quarterly earnings and margins were pressured by acquisition dilution, mix and restructuring.
- Commercial & Residential Solutions: Q3 sales increased 4% to $1.662 billion, but earnings declined 4% to $371 million and margin fell to 22.4% from 24.3%. Nine-month sales rose 5% to $4.561 billion, while earnings declined 5% to $936 million and margin fell to 20.5% from 22.8%. Tools and test acquisitions lifted sales; Climate Technologies faced weaker demand, particularly in Asian air-conditioning markets.
Outlook, risks and notable items
- Fiscal 2019 guidance: consolidated sales growth of approximately 6%, underlying sales growth of approximately 3%, and reported EPS of $3.60–$3.70, including an expected fourth-quarter discrete tax benefit of about $0.05 per share. Expected operating cash flow is approximately $3.1 billion and free cash flow approximately $2.5 billion; targeted capital spending is $600 million.
- Management cited trade tensions and investment uncertainty, continuing softness in North American upstream oil and gas and global discrete manufacturing, and weaker Asian air-conditioning demand. It expected favorable North American air-conditioning trends and improvement in Asia.
- Q3 effective tax rates were 20% in 2019 and 6% in 2018; the prior-year rate included the $150 million tax-reform benefit, while the current year included a $21 million benefit from restructuring a foreign subsidiary. Full-year 2019 effective tax rate was expected to be approximately 21%.
- Restructuring expense was $20 million in Q3 and $40 million for the first nine months of 2019. The company said it expects the October 1, 2019 adoption of lease accounting guidance to increase recognized assets and liabilities, without a material earnings or cash-flow impact.
- Brexit-related UK sales were less than 2% of consolidated sales; management expected direct incremental tariff, logistics and related costs to be immaterial. Forward-looking results remain exposed to economic and currency conditions, demand, pricing, tariffs, competition, technology and cybersecurity risks.
Important facts for investors to verify
- Whether underlying demand and margins sustain or weaken, particularly in Automation Solutions, Asian air conditioning and discrete manufacturing.
- How acquisitions affect future revenue growth, margins, integration costs, amortization and debt levels.
- Progress toward full-year EPS, sales, operating cash flow and free-cash-flow guidance, including the expected discrete tax benefit and capital spending.
- Debt and liquidity trends following the share repurchases, dividends, acquisitions and euro-note issuance.
- The status and financial exposure of asbestos litigation: the balance sheet lists $324 million of asbestos litigation liabilities and $117 million of related insurance receivables at June 30, 2019.