Emerson Electric Co. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended March 31, 2021. Dollar amounts are in millions except per-share data. Emerson is a global manufacturer of technology and engineering solutions, reporting Automation Solutions and Commercial & Residential Solutions.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $4,431; up 6% year over year | $8,592; up 3% |
| Underlying sales | Up 2% | Flat |
| Gross margin | 42.0%, down 0.1 percentage point | 41.7%, down 0.5 point |
| Pretax earnings | $737; up 7% | $1,300; up 17% |
| Net earnings attributable to common stockholders | $561; up 9% | $1,006; up 19% |
| Diluted EPS | $0.93; up 11% | $1.67; up 22% |
Q2 sales growth included a 3% favorable foreign-currency impact and a 1% contribution from OSI. Six-month growth included 2% from currency and 1% from acquisitions. Q2 net margin was 12.7%, versus 12.4% a year earlier; six-month net margin was 11.7%, versus 10.1%. SG&A was 23.8% of sales in Q2 (up 0.1 point) and 23.9% for the half (down 1.4 points). Six-month gross margin pressure reflected unfavorable mix and lower-volume deleverage in Automation Solutions.
Segments
- Automation Solutions: Q2 sales of $2,793, up 3%; earnings of $471, up 20%, with margin improving to 16.8% from 14.4%. Six-month sales declined 1% to $5,485, while earnings rose 19% to $832 and margin increased to 15.2%. Q2 underlying sales fell 2%; North America remained weak, while China and Europe improved.
- Commercial & Residential Solutions: Q2 sales rose 13% to $1,645; earnings increased 17% to $357, with margin of 21.7% versus 21.0%. Six-month sales increased 13% to $3,121 and earnings rose 23% to $667, with margin improving to 21.4%. Residential demand and cold-chain markets were strong.
Cash flow, liquidity and debt
For the six months, operating cash flow was $1,615, versus $1,012 a year earlier; free cash flow, as defined by the company, was $1.4 billion, up $606. Capital expenditures were $222. Investing activities used $1,772, principally reflecting the $1.6 billion OSI acquisition. Financing activities used $842, including $606 of dividends and $78 of share repurchases. Cash and equivalents were $2,342 at March 31, down $973 from September 30, 2020.
Current assets were $7,961 and current liabilities $6,294; the current ratio was 1.3, compared with 1.5 at September 30. Short-term borrowings and current maturities were $1,456 and long-term debt was $5,823, for total debt of $7,279. Total debt-to-capital was 44.4% (47.1% at September 30); net debt-to-net capital was 35.1% (33.2%). Interest coverage was 16.6x, versus 14.4x a year earlier.
Material changes and unusual items
- Emerson acquired OSI on October 1, 2020, for approximately $1.6 billion net of cash acquired. OSI added $48 to Q2 Systems & Software sales and $90 to six-month sales. The acquisition increased goodwill by $960 and identifiable intangible assets by $783; purchase accounting valuations remained subject to refinement.
- Cost reductions and restructuring supported segment margins. Six-month restructuring expense was $83, down from $128; the company expected FY2021 restructuring expense and related costs of approximately $200. First-half initiatives included workforce reductions of about 1,700 employees.
- Q2 included a $31 gain on the sale of an equity investment; first-quarter results included a $21 investment gain and a $17 gain tied to acquiring a remaining equity interest. These gains, lower restructuring costs and lower taxes benefited comparisons. Higher stock compensation was a significant offset: it increased Q2 SG&A by $99 and reduced six-month EPS by $0.13, according to management.
- Unfavorable foreign-currency transactions reduced Q2 results by $22 and six-month results by $29. OSI-related acquisition accounting charges and fees reduced six-month EPS by $0.04.
Guidance, risks and other disclosures
For FY2021, management forecast consolidated sales growth of 6%–9%, underlying growth of 3%–6%, and EPS of $3.55–$3.65. Adjusted EPS guidance was $3.85–$3.95, excluding stated impacts of restructuring ($0.26 per share), OSI first-year acquisition accounting charges and fees ($0.07), and an equity investment gain ($0.03). Expected operating cash flow was approximately $3.3 billion and free cash flow approximately $2.7 billion, excluding targeted capital spending of $600. Planned share repurchases and acquisition activity were $500–$1 billion, excluding OSI.
Management expected continued industrial and commercial demand improvement, robust residential demand that would begin tapering in the second half, and continued pandemic-related uncertainty. Risks cited include COVID-19 developments and shutdowns, economic and currency conditions, market demand, oil and gas volatility, pricing, cybersecurity, tariffs, competition and technology. UK sales were less than 2% of consolidated sales; expected Brexit-related incremental costs were considered immaterial. The filing reports asbestos litigation liabilities of $272 and related insurance receivables of $97 at March 31, 2021, but the supplied text does not provide further detail on the matters or their potential outcomes. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether FY2021 sales, EPS, cash-flow and capital-allocation guidance remained achievable amid pandemic and market uncertainty.
- How much reported growth and earnings depended on currency, OSI and investment gains versus underlying demand and recurring operations.
- Whether restructuring savings can continue to offset weak Automation Solutions markets, unfavorable mix and higher stock compensation.
- OSI purchase-accounting valuations, integration progress and the expected contribution from the acquired business.
- Developments in asbestos-related claims and insurance recoveries, and any changes in the company’s liquidity or debt position.