Emerson Electric Co. — Q3 FY2020 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2020, ended June 30, 2020. All dollar amounts are in millions unless noted. The quarter was materially affected by COVID-19-related demand declines and weaker economic activity.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Change |
|---|---|---|---|
| Net sales | $3,914 | $4,684 | -16% |
| Gross margin | 41.3% | 42.7% | -1.4 percentage points |
| Pretax earnings | $458 | $767 | -40% |
| Net earnings attributable to common shareholders | $399 | $604 | -34% |
| Diluted EPS | $0.67 | $0.97 | -31% |
Q3 underlying sales, excluding currency, acquisitions and divestitures, declined 15%. Pretax margin fell to 11.7% from 16.4%; net margin declined to 10.2% from 12.9%. Lower sales volume drove much of the decline; cost reductions and favorable price-cost partly offset volume deleverage.
For the first nine months, sales were $12,227, down 9%; net earnings attributable to common shareholders were $1,242, down 22%; diluted EPS was $2.04, down 20%. Gross margin was 41.9% versus 42.4%, and pretax margin was 12.8% versus 15.2%.
Segments and cash flow
- Automation Solutions: Q3 sales of $2,589, down 14%; segment earnings of $311, down 35%; margin fell to 12.0% from 15.7%.
- Commercial & Residential Solutions: Q3 sales of $1,327, down 20%; earnings of $253, down 32%; margin fell to 19.1% from 22.4%.
- Cash flow: Nine-month operating cash flow was $1,854 versus $1,802. Capital expenditures were $329 versus $395; company-reported free cash flow was $1.5 billion versus $1.4 billion.
- Cash and liquidity: Cash was $2,450 at June 30, versus $1,494 at September 30, 2019. Working capital was $1,894 and the current ratio was 1.3.
Debt, capital and balance sheet
Short-term borrowings and current debt maturities were $1,725; long-term debt was $5,500. Total debt-to-total capital was 48.0%, up from 41.0% at September 30, 2019; net debt-to-net capital was 37.9%, up from 33.9%. Interest coverage was 12.9x, down from 15.2x at fiscal year-end. In April, Emerson issued $1.5 billion of notes: $500 each at 1.8% due 2027, 1.95% due 2030 and 2.75% due 2050. The $3.5 billion revolving backup credit facility had no borrowings.
Drivers, unusual items and outlook
- COVID-19 reduced demand across most end markets and geographies, particularly North America. Q3 underlying sales declined 20% in the U.S.; China sales improved in some businesses. Management said demand had stabilized, but remained uncertain.
- Q3 other deductions were $181, including $88 of restructuring expense; nine-month restructuring expense was $216. Restructuring and related costs reduced Q3 EPS by $0.13 and were expected to total approximately $300 for FY2020. Initiatives included workforce reductions of approximately 3,300 employees.
- Q3 EPS also reflected $0.10 per share of discrete tax benefits; higher stock compensation and pension expense and unfavorable currency effects were adverse. The nine-month period included $13 of special advisory fees.
- Management’s FY2020 guidance: sales down 9%–10%; EPS of $2.80–$2.95, or adjusted EPS of $3.20–$3.35 excluding $0.40 per share of restructuring and related costs. Operating cash flow was expected to be approximately $2.8 billion and free cash flow approximately $2.25 billion, with targeted capital spending of $550 million.
- Outlook assumed a challenging but steadily improving Q4 demand environment, no major operational or supply-chain disruptions, and oil prices of $35–$45. Management suspended share repurchases for the rest of FY2020, made no change to the dividend plan, and planned approximately $75 of payroll-tax deferrals under the CARES Act.
- Principal risks include the uncertain duration and effects of COVID-19, further restrictions or shutdowns, customer and supplier disruption, oil-price volatility, and possible deterioration in credit markets. Management stated that sufficient funding was expected to be available for foreseeable needs.
Important facts for investors to verify
- Whether demand and operating conditions recover in line with the FY2020 guidance assumptions, especially in North America.
- Whether the planned restructuring costs and savings, including the expected $300 FY2020 expense, materialize as described.
- Whether operating cash flow and free cash flow meet guidance while maintaining the dividend and managing increased debt.
- The extent of any further COVID-19, oil-market, supply-chain or customer-credit effects on results and liquidity.
- The sustainability of reported earnings after the quarter’s $57 tax benefit and the impact of restructuring and other unusual costs.