Business context and reporting period
Emerson Electric Co. filed this unaudited Form 10-Q for the third quarter and nine months ended June 30, 2021. The company operates through Automation Solutions and Commercial & Residential Solutions. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended June 30, 2021 | Change vs. 2020 | Nine months ended June 30, 2021 | Change vs. 2020 |
|---|---|---|---|---|
| Net sales | $4,697 | +20% | $13,289 | +9% |
| Gross margin | 42.2% | +0.9 percentage points | 41.9% | Flat |
| Earnings before income taxes | $784 | +71% | $2,084 | +33% |
| Net earnings attributable to common stockholders | $627 | +57% | $1,633 | +31% |
| Diluted EPS | $1.04 | +55% | $2.71 | +33% |
Quarterly sales growth included 15% underlying growth, a 4% favorable currency effect and a 1% contribution from the OSI acquisition. Nine-month sales growth included 5% underlying growth, 3% from currency and 1% from acquisitions. Quarterly net earnings margin was 13.3%, versus 10.2% a year earlier; nine-month margin was 12.3%, versus 10.2%.
For the quarter, Automation Solutions sales were $2,947 (+14%) and segment earnings were $521 (+67%), with a 17.7% margin versus 12.0%. Commercial & Residential Solutions sales were $1,757 (+32%) and earnings were $375 (+48%), with a 21.3% margin versus 19.1%. Nine-month segment sales and earnings were $8,432 and $1,353 for Automation Solutions (+3% and +34%), and $4,878 and $1,042 for Commercial & Residential Solutions (+19% and +31%).
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $2,720, up $866 year over year; capital expenditures were $350 and free cash flow, as defined by the company, was $2,370. Investing activities used $1,908, largely reflecting the $1.6 billion net OSI acquisition; financing activities used $1,291, mainly for dividends and share repurchases. Cash and equivalents were $2,860 at June 30, 2021, down $455 from September 30, 2020.
At June 30, short-term borrowings and current maturities were $1,478 and long-term debt was $5,835, for total debt of $7,313. The current ratio was 1.3; total debt-to-total capital was 44.0%, net debt-to-net capital 32.4%, and interest coverage 17.8x. Compared with September 30, 2020, total debt was lower, while current liabilities rose to $6,670 from $5,785. Management described the company as financially strong, with $24 billion in assets and $9 billion in stockholders’ equity.
Material changes, outlook and risks
- Results benefited from higher volumes and cost-reduction actions, lower restructuring costs, favorable currency and, year to date, investment-related gains. Quarterly gross margin expanded, while nine-month gross margin was unchanged as higher volume was offset by unfavorable mix and price-cost, particularly in Commercial & Residential Solutions.
- Other deductions were $88 for the quarter and $243 year to date, down from $181 and $401, respectively. Nine-month restructuring expense was $111; the company expected approximately $200 of fiscal 2021 restructuring expense and related costs. Workforce-reduction actions affected approximately 1,900 employees.
- OSI, acquired October 1, 2020 for approximately $1.6 billion net of cash acquired, added goodwill and intangible assets and generated first-year acquisition-accounting charges. The company estimated about $170 in annual OSI sales.
- Fiscal 2021 guidance: consolidated sales growth of 9%–10%, underlying growth of 5%–6%, diluted EPS of $3.78–$3.80 and adjusted EPS of $4.06–$4.08. Adjusted EPS excludes $0.24 per share of restructuring impacts, $0.07 of OSI charges and fees, and a $0.03 investment gain. Management projected operating cash flow of about $3.6 billion, free cash flow of about $3.0 billion, and $500 million of share repurchases.
- Management expected continued improvement in industrial and commercial demand but warned that materials inflation, supply availability, logistics and labor constraints would remain challenging. Risks also include COVID-19 developments, economic and market demand conditions, currency, pricing, cybersecurity, tariffs and competition. The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
- A potential pretax distribution of approximately $600 million related to the company’s retained Vertiv interest was not recognized; amount and timing depend on share sales and are uncertain. The filing also reports asbestos litigation liabilities of $267 million and related insurance receivables of $96 million.
Important facts for investors to verify
- Whether full-year sales, EPS and cash-flow guidance remains achievable given persistent supply-chain, labor and materials-cost pressures.
- How much reported growth and margin improvement reflects underlying demand versus currency, acquisitions, restructuring savings and favorable comparisons with the pandemic-affected prior year.
- The cash, debt and return implications of the OSI acquisition, planned share repurchases and the timing of deferred payroll taxes.
- The ultimate amount and timing, if any, of Vertiv-related distributions, and developments in asbestos claims and insurance recovery.