Business context and reporting period
Emerson Electric Co. filed this unaudited Form 10-Q for its first quarter of fiscal 2021, the three months ended December 31, 2020. Emerson is a global manufacturer of technology and engineering solutions. The comparable period is the three months ended December 31, 2019. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $4,161 | $4,151 | Flat |
| Gross profit / margin | $1,723 / 41.4% | $1,759 / 42.4% | Down 2% / 1.0 percentage point |
| Earnings before income taxes | $563 | $423 | Up 33% |
| Net earnings attributable to common stockholders | $445 | $326 | Up 36% |
| Diluted EPS | $0.74 | $0.53 | Up 40% |
| Operating cash flow | $808 | $424 | Up $384 |
| Free cash flow | $686 | $310 | Up $376 |
SG&A fell 11% to $998, or 24.0% of sales versus 27.1%. Pretax margin rose to 13.5% from 10.2%, and common-stockholder net margin rose to 10.7% from 7.9%. The effective tax rate was 20%, compared with 22%; favorable discrete tax items reduced the rates by 2 and 1 percentage points, respectively.
Operating cash flow benefited from higher earnings and a $71 working-capital source, compared with a $180 use in the prior-year quarter. Capital expenditures were $122. Investing cash outflow was $1,720, principally reflecting the $1.6 billion OSI acquisition. Cash and equivalents were $2,197 at December 31, down from $3,315 at September 30, 2020.
At December 31, short-term borrowings and current maturities were $1,717 and long-term debt was $5,892. The current ratio was 1.2; total debt-to-total capital was 46.1%, net debt-to-net capital was 37.8%, and interest coverage was 14.2x. The company reported total assets of $23,678 and total equity of $8,939.
Material changes and business drivers
- Consolidated sales were flat as foreign currency translation and OSI each contributed approximately 1%, offsetting a 2% decline in underlying sales. Underlying sales fell 8% in the U.S. and rose 2% internationally.
- Automation Solutions sales declined 6% to $2,692; underlying sales were down 9%, including a 20% decline in the Americas. Segment earnings increased 17% to $361 and margin expanded to 13.4% from 10.9%, driven by cost savings and favorable price-cost, partly offset by lower-volume deleverage and mix.
- Commercial & Residential Solutions sales rose 13% to $1,476, with underlying sales up 12%. Segment earnings increased 31% to $310 and margin improved to 21.0% from 18.2%, reflecting higher volume and cost savings, partly offset by unfavorable mix. Residential-oriented demand was strong; professional tools markets remained weaker.
- SG&A savings from restructuring and cost-reset actions more than offset inflation and Automation Solutions deleverage. Other deductions declined to $122 from $178, including lower restructuring costs, a $21 investment gain and a $17 gain on acquiring the remaining interest in an equity investment. These benefits were partly offset by OSI-related amortization and fees.
- Emerson completed the approximately $1.6 billion OSI acquisition on October 1, 2020. OSI contributed about 1% to quarterly sales; the purchase accounting included $966 of goodwill and $768 of identifiable intangible assets. First-year acquisition accounting charges and fees affected quarterly results.
Outlook, risks and other notable items
For fiscal 2021, management forecast consolidated sales growth of 4%–8%, including favorable currency and OSI contributions; underlying sales were expected to be flat to up 4%. Automation Solutions sales were forecast up 2%–6% (underlying down 3% to up 1%), while Commercial & Residential Solutions sales were forecast up 10%–12% (underlying up 8%–10%). EPS guidance was $3.29–$3.49; adjusted EPS was $3.60–$3.80, excluding specified restructuring, OSI charges and fees, and the equity investment gain. Operating cash flow was expected to be approximately $3.15 billion and free cash flow approximately $2.55 billion, based on targeted capital spending of $600 million.
Management anticipated gradual improvement in industrial demand and continued robust demand in many residential markets, while North American Automation Solutions markets remained challenged. Guidance assumed no major operational or supply-chain disruptions and oil prices of $45–$55. COVID-19 developments, shutdowns, slower economic recovery, demand, currency, oil and gas prices, cybersecurity, tariffs, competition and technology were identified as risks. Management stated Brexit’s expected impact was immaterial.
Fiscal 2021 restructuring expense and related costs were expected to be approximately $200; the quarter included restructuring expense of $66 and workforce reductions of approximately 800 employees. The company deferred $73 of payroll taxes under the CARES Act, with half due in December 2021 and the remainder in December 2022. The balance sheet reported an asbestos litigation liability of $276 and asbestos-related insurance receivables of $98.
Important facts for investors to verify
- Whether underlying sales and North American Automation Solutions demand improve in line with management’s fiscal-year assumptions.
- How much reported earnings growth is sustained by operating improvement versus restructuring savings, investment-related gains, tax items and other unusual benefits.
- OSI’s subsequent sales, integration progress, purchase-accounting adjustments and contribution to earnings and cash flow.
- Cash conversion and leverage after the acquisition, including execution of the operating and free-cash-flow outlook.
- Potential effects of COVID-19, supply-chain disruption and other disclosed market risks on guidance and customer demand.