Emerson Electric Co. — Q1 FY2020 10-Q
Reporting period: Three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018 unless noted. Emerson is a global manufacturer of technology and engineering products and solutions.
Financial performance
| Metric | Q1 FY2020 | Prior period / change |
|---|---|---|
| Net sales | $4.151 billion | $4.147 billion; essentially flat |
| Gross profit / margin | $1.759 billion / 42.4% | $1.761 billion / 42.5% |
| Earnings before income taxes | $423 million | $591 million; down 28% |
| Net earnings attributable to common stockholders | $326 million | $465 million; down 30% |
| Diluted EPS | $0.53 | $0.74; down 28% |
| Operating cash flow / capital expenditures | $424 million / $114 million | $323 million / $155 million |
| Free cash flow | $310 million | $168 million |
Underlying sales were flat: higher price was offset by lower volume. Acquisitions added 1% to reported sales, while foreign currency translation reduced sales by 1%. Underlying sales were down 3% in the U.S. and up 3% internationally. SG&A rose 4% to $1.123 billion, or 27.1% of sales versus 26.0%. Interest expense declined to $35 million from $43 million; the effective tax rate was 22% versus 21%.
Balance sheet and liquidity
At December 31, 2019, cash and equivalents were $1.635 billion. Short-term borrowings and current maturities of long-term debt were $1.984 billion, and long-term debt was $4.018 billion. Total reported debt was therefore approximately $6.002 billion, versus $5.721 billion at September 30, 2019. Working capital was $856 million, down from $1.163 billion; the current ratio was 1.1 versus 1.2. Total debt-to-total capital was 41.6% versus 41.0%, and net debt-to-net capital was 34.1% versus 33.9%.
Operating cash flow improved primarily because of lower working-capital investment. Investing cash outflow was $131 million; financing cash outflow was $162 million, including $502 million of long-term debt repayments, $305 million of dividends and $129 million of share repurchases. Management stated it expects sufficient funds to meet foreseeable needs through operating cash flow, existing resources, debt capacity and credit lines.
Material changes and segment results
- Automation Solutions sales increased 2% to $2.852 billion, but segment earnings fell 24% to $310 million and margin declined to 10.9% from 14.5%. Restructuring costs, weaker North American upstream oil and gas and discrete markets, and unfavorable currency effects weighed on results.
- Commercial & Residential Solutions sales declined 3% to $1.303 billion; earnings were unchanged at $237 million and margin improved to 18.2% from 17.7%. Climate Technologies sales decreased 1%; Tools & Home Products sales decreased 6%.
- Net earnings were pressured by $97 million of restructuring costs, $13 million of special advisory fees, and unfavorable pension and foreign-currency comparison impacts. Management attributed $0.14 per diluted share of the year-over-year EPS impact to restructuring and advisory fees, and $0.10 to higher stock compensation and pension expense.
Outlook, risks and unusual items
For FY2020, management expects consolidated net and underlying sales from down 2% to up 2%; EPS of $3.27–$3.52; and adjusted EPS of $3.55–$3.80, excluding an expected $0.28 per-share impact from restructuring actions and related costs. Operating cash flow is expected to be approximately $3.15 billion and free cash flow approximately $2.5 billion, with targeted capital spending of $650 million. The outlook assumes a challenging economic environment and explicitly excludes any potential coronavirus impact.
Fiscal 2020 restructuring expense is expected to be approximately $215 million. First-quarter actions largely involved workforce reductions of approximately 1,100 employees. Emerson adopted lease accounting on October 1, 2019, recognizing approximately $500 million of operating lease right-of-use assets and related liabilities; management said adoption did not materially affect quarterly earnings or cash flows. Brexit-related direct costs were expected to be immaterial, while outcomes of UK-EU negotiations remained uncertain. The filing identifies economic and currency conditions, demand, pricing, cybersecurity, tariffs, competition and technology among forward-looking risks. It also reports $310 million of asbestos-litigation liabilities and $114 million of related insurance receivables at December 31, 2019.
Important facts for investors to verify
- Whether sales and margins meet the full-year outlook, particularly given the stated exclusion of potential coronavirus effects.
- Whether restructuring delivers expected savings and whether total FY2020 costs remain near the approximately $215 million estimate.
- How Automation Solutions performance and end-market weakness affect consolidated earnings.
- Whether the increase in short-term borrowing and debt ratios reverses, and whether cash-flow and free-cash-flow targets are achieved.
- Developments in asbestos litigation and recoverability of associated insurance receivables.