OVERVIEW
The Company's results for the second quarter of fiscal 2020 were negatively
impacted by the global outbreak and rapid spread of the novel coronavirus
(COVID-19). The actions taken around the world to slow the spread of COVID-19
resulted in a rapid decline in demand which impacted most of the Company's end
markets and geographies, particularly in China, the U.S. and Europe. In
addition, the dramatic drop in the price of oil due to geopolitical tensions and
a surge in global supply also negatively impacted results. These conditions
accelerated into April and are expected to be more pronounced in the third
quarter, especially in the U.S. Although these conditions are expected to
negatively impact demand in many of our end markets for the remainder of the
fiscal year, the Company has taken actions to protect its operating results and
support its financial condition and liquidity. See the "Financial Condition",
"Outlook" and "Part II - Other Information, Item 1A, Risk Factors" sections
below for additional details.
Overall, net sales for the second quarter of fiscal 2020 were $4.2 billion, down
9 percent compared with the prior year, adversely affected by foreign currency
translation which deducted 2 percent. Underlying sales, which exclude foreign
currency translation, acquisitions and divestitures, were down 7 percent.
Net earnings common stockholders were $517 million, down 1 percent, and diluted
earnings per share were $0.84, flat compared with the prior year. Operating
results were negatively impacted by the effects of COVID-19 and lower oil prices
($0.12 per share), while restructuring costs reduced earnings by $0.05 per
share. These results were largely offset by the net impact of lower stock
compensation expense due to a declining share price and slightly higher pension
costs ($0.11 per share) and favorable foreign currency transactions of $0.05 per
share.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31
Following is an analysis of the Company's operating results for the second
quarter ended March 31, 2020, compared with the second quarter ended March 31,
2019.
2019 2020 Change
(dollars in millions, except per share amounts)
Net sales $ 4,570 4,162 (9) %
Gross profit $ 1,925 1,750 (9) %
Percent of sales 42.1 % 42.1 %
SG&A $ 1,145 983 (14) %
Percent of sales 25.0 % 23.7 %
Other deductions, net $ 57 42
Interest expense, net $ 48 36
Earnings before income taxes $ 675 689 2 %
Percent of sales 14.8 % 16.6 %
Net earnings common stockholders $ 520 517 (1) %
Percent of sales 11.4 % 12.4 %
Diluted earnings per share $ 0.84 0.84 - %
Net sales for the second quarter of fiscal 2020 were $4.2 billion, a decrease of
$408 million, or 9 percent compared with 2019. Underlying sales were down 7
percent ($313 million) on lower volume. Foreign currency translation subtracted
2 percent ($81 million) and divestitures subtracted $14 million. Underlying
sales were down 8 percent in the U.S. and 6 percent internationally. The
Americas was down 8 percent, Europe was down 2 percent and Asia, Middle East &
Africa was down 8 percent (China down 24 percent).
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Cost of sales for the second quarter of fiscal 2020 were $2.4 billion, a
decrease of $233 million compared with 2019, primarily due to lower volume and
the impact of foreign currency translation. Gross margin of 42.1 percent was
flat compared with prior year, reflecting deleverage on lower sales volume and
unfavorable mix primarily within Automation Solutions, offset by favorable
price-cost.
Selling, general and administrative (SG&A) expenses of $1.0 billion decreased
$162 million compared with the prior year, primarily due to lower stock
compensation expense of $97 million due to a declining share price and savings
from cost reduction actions. SG&A as a percent of sales decreased 1.3 percentage
points to 23.7 percent primarily due to a favorable impact on comparisons from
the lower stock compensation expense of 2.1 percentage points and savings from
cost reduction actions, partially offset by deleverage on the lower sales
volume.
Other deductions, net were $42 million in 2020, a decrease of $15 million
compared with the prior year, reflecting favorable impacts on comparisons from
foreign currency transactions of $36 million and supplemental retirement plans
of $16 million, partially offset by increased restructuring costs of $21 million
and an unfavorable impact on comparisons from pensions of $16 million. See Note
6.
Pretax earnings of $689 million increased $14 million, or 2 percent compared
with the prior year. Earnings decreased $53 million in Automation Solutions and
$22 million in Commercial & Residential Solutions, while costs reported at
corporate decreased $77 million. See the Business discussion that follows and
Note 13.
Income taxes were $165 million for 2020 and $150 million for 2019, resulting in
effective tax rates of 24 percent and 22 percent, respectively. The current year
rate included unfavorable discrete items, which increased the rate 1 percentage
point, while the prior year rate included favorable discrete tax items, which
reduced the rate 2 percentage points.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the
COVID-19 pandemic, and among other things, provides tax relief to businesses.
Tax provisions of the Act include the deferral of certain payroll taxes, relief
for retaining employees, and other provisions. The Company is evaluating the
impact of the Act and currently expects to benefit from the deferral of certain
payroll taxes through the end of calendar year 2020.
Net earnings common stockholders in the second quarter of fiscal 2020 were $517
million, down 1 percent, compared with $520 million in the prior year, and
earnings per share were $0.84, or flat compared with the prior year. Operating
results were negatively impacted by the effects of COVID-19 and lower oil prices
($0.12 per share), while restructuring costs reduced earnings by $0.05 per
share. These results were largely offset by the net impact of lower stock
compensation expense due to a declining share price and slightly higher pension
costs ($0.11 per share) and favorable foreign currency transactions of $0.05 per
share.
Business Segments
Following is an analysis of operating results for the Company's business
segments for the second quarter ended March 31, 2020, compared with the second
quarter ended March 31, 2019. The Company defines segment earnings as earnings
before interest and taxes. See Note 13 for a discussion of the Company's
business segments.
AUTOMATION SOLUTIONS
Three Months Ended Mar 31 2019 2020 Change
(dollars in millions)
Sales $ 3,010 2,709 (10) %
Earnings $ 444 391 (12) %
Margin 14.8 % 14.4 %
Sales by Major Product Offering
Measurement & Analytical Instrumentation $ 927 816 (12) %
Valves, Actuators & Regulators
937 854 (9) %
Industrial Solutions 574 494 (14) %
Process Control Systems & Solutions 572 545 (5) %
Total $ 3,010 2,709 (10) %
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Automation Solutions sales were $2.7 billion in the second quarter, a decrease
of $301 million or 10 percent. Underlying sales decreased 8 percent ($238
million) on lower volume. Foreign currency translation had a 2 percent ($63
million) unfavorable impact. All businesses were negatively impacted by the
effects of COVID-19 and lower oil prices. Sales for Measurement & Analytical
Instrumentation decreased $111 million, or 12 percent, due to weakness in
upstream oil and gas end markets, primarily in North America, and a sharp
decline in China. Valves, Actuators & Regulators decreased $83 million, or 9
percent, reflecting slower demand in power, chemical and oil and gas end
markets. Industrial Solutions sales decreased $80 million, or 14 percent, on
weakness in global discrete end markets. Process Control Systems & Solutions
decreased $27 million, or 5 percent, due to weakness in power end markets in
China and process end markets in the U.S. Underlying sales decreased 11 percent
in the Americas (U.S. down 12 percent) while Europe decreased 3 percent and
Asia, Middle East & Africa decreased 6 percent (China down 21 percent). Earnings
were $391 million, a decrease of $53 million, or 12 percent, primarily due to
lower volume and higher restructuring expenses of $23 million, partially offset
by a favorable impact on comparisons from foreign currency transactions of $31
million. Margin decreased 0.4 percentage points to 14.4 percent, reflecting a
negative impact from restructuring expenses of 0.9 percentage points. Excluding
the increased restructuring expense, margin improved due to savings from cost
reduction actions which helped offset deleverage on the lower sales volume,
while favorable foreign currency transactions of 1.1 percentage points were
partially offset by unfavorable mix.
COMMERCIAL & RESIDENTIAL SOLUTIONS
Three Months Ended Mar 31 2019 2020 Change
(dollars in millions)
Sales:
Climate Technologies $ 1,092 1,026 (6) %
Tools & Home Products 469 432 (8) %
Total $ 1,561 1,458 (7) %
Earnings:
Climate Technologies $ 226 217 (4) %
Tools & Home Products 102 89 (12) %
Total $ 328 306 (7) %
Margin 21.0 % 21.0 %
Commercial & Residential Solutions sales were $1.5 billion in the second
quarter, down $103 million, or 7 percent compared to the prior year. The
divestiture of two small non-core businesses subtracted 1 percent ($10 million)
and foreign currency translation subtracted 1 percent ($18 million). Underlying
sales decreased 5 percent ($75 million) due to lower volume, reflecting
weakening demand due to the effects of COVID-19, especially in China. Climate
Technologies sales were $1.0 billion in the second quarter, a decrease of $66
million, or 6 percent. Air conditioning and heating sales were down moderately,
reflecting a sharp decline in China due to the effects of COVID-19 and softness
in North America. Cold chain sales were down moderately, driven by slower market
conditions in Asia, Middle East & Africa and Europe, while North American
markets grew slightly. Tools & Home Products sales were $432 million in the
second quarter, a decrease of $37 million, or 8 percent. Global professional
tools end markets softened further, while food waste disposers were down
slightly and wet/dry vacuums were down high double-digits. Overall, underlying
sales decreased 3 percent in the Americas (U.S. down 3 percent), while Europe
decreased 1 percent and Asia, Middle East & Africa was down 15 percent (China
down 33 percent). Earnings were $306 million, down 7 percent compared with the
prior year, and margin was flat. Excluding a 0.4 percentage point impact from
higher restructuring expense of $6 million, margin was up slightly as savings
from cost reduction actions and favorable price-cost more than offset deleverage
on the lower sales volume.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31
Following is an analysis of the Company's operating results for the six months
ended March 31, 2020, compared with the six months ended March 31, 2019.
2019 2020 Change
(dollars in millions, except per share amounts)
Net sales $ 8,717 8,313 (5) %
Gross profit $ 3,686 3,509 (5) %
Percent of sales 42.3 % 42.2 %
SG&A $ 2,222 2,106 (5) %
Percent of sales 25.5 % 25.3 %
Other deductions, net $ 107 220
Interest expense, net $ 91 71
Earnings before income taxes $ 1,266 1,112 (12) %
Percent of sales 14.5 % 13.4 %
Net earnings common stockholders $ 985 843 (14) %
Percent of sales 11.3 % 10.1 %
Diluted earnings per share $ 1.58 1.37 (13) %
Net sales for the first six months of 2020 were $8.3 billion, a decrease of $404
million, or 5 percent compared with 2019. Underlying sales were down 4 percent
($302 million) on lower volume partially offset by slightly higher price.
Acquisitions net of divestitures added $6 million and foreign currency
translation subtracted 1 percent ($108 million). Underlying sales decreased 6
percent in the U.S. and 1 percent internationally. The Americas was down 5
percent, Europe was down 1 percent and Asia, Middle East & Africa was down 1
percent (China down 9 percent).
Cost of sales for 2020 were $4.8 billion, a decrease of $227 million versus $5.0
billion in 2019, primarily due to lower volume and the impact of foreign
currency translation. Gross margin decreased 0.1 percentage points to 42.2
percent, reflecting deleverage on lower sales volume and unfavorable mix
primarily within Automation Solutions, largely offset by favorable price-cost.
SG&A expenses of $2.1 billion decreased $116 million primarily due to savings
from cost reduction actions and lower stock compensation expense of $34 million
due to a declining share price. SG&A as a percent of sales decreased 0.2
percentage points to 25.3 percent due to a favorable impact on comparisons from
the lower stock compensation expense of 0.4 percentage points and savings from
cost reduction actions, partially offset by deleverage on the lower sales
volume.
Other deductions, net were $220 million in 2020, an increase of $113 million
compared with the prior year, reflecting increased restructuring costs of $108
million and an unfavorable impact on comparisons from pensions of $30 million,
partially offset by a favorable impact on comparisons from foreign currency
transactions of $22 million and lower litigation costs. See Note 6.
Pretax earnings of $1.1 billion decreased $154 million, or 12 percent. Earnings
decreased $150 million in Automation Solutions and $22 million in Commercial &
Residential Solutions. See Note 13 and the following Business Segments
discussion.
Income taxes were $259 million for 2020 and $274 million for 2019, resulting in
effective tax rates of 23 percent and 22 percent, respectively. The prior year
rate included favorable discrete items, which reduced the rate 2 percentage
points.
Net earnings common stockholders in 2020 were $843 million, down 14 percent
compared with the prior year, and earnings per share were $1.37, down 13 percent
compared with $1.58 in 2019. Earnings per share were negatively
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impacted by restructuring costs and special advisory fees of $0.19 per share,
while the effects of COVID-19 and lower oil prices began to negatively impact
earnings in the second quarter ($0.12 per share).
Business Segments
Following is an analysis of operating results for the Company's business
segments for the six months ended March 31, 2020, compared with the six months
ended March 31, 2019. The Company defines segment earnings as earnings before
interest and taxes.
AUTOMATION SOLUTIONS
Six Months Ended Mar 31 2019 2020 Change
(dollars in millions)
Sales $ 5,809 5,561 (4) %
Earnings $ 851 701 (18) %
Margin 14.7 % 12.6 %
Sales by Major Product Offering
Measurement & Analytical Instrumentation $ 1,785 1,646 (8) %
Valves, Actuators & Regulators
1,811 1,767 (2) %
Industrial Solutions 1,116 1,001 (10) %
Process Control Systems & Solutions 1,097 1,147 5 %
Total $ 5,809 5,561 (4) %
Automation Solutions sales were $5.6 billion in the first six months of 2020, a
decrease of $248 million, or 4 percent. Underlying sales decreased 4 percent
($211 million) on lower volume partially offset by slightly higher price. The
Machine Automation Solutions acquisition added 1 percent ($47 million) and
foreign currency translation had a 1 percent ($84 million) unfavorable impact.
Sales for Measurement & Analytical Instrumentation decreased $139 million, or 8
percent, due to weakness in upstream oil and gas end markets, primarily in North
America, and a sharp decline in China in the second quarter due to the effects
of COVID-19. Valves, Actuators & Regulators decreased $44 million, or 2 percent,
as favorable first quarter results were more than offset by weakness in the
second quarter, reflecting slowing demand in power, chemical and oil and gas end
markets. Industrial Solutions sales decreased $115 million, or 10 percent, on
softness in global discrete end markets. Process Control Systems & Solutions
increased $50 million, or 5 percent, due to the Machine Automation Solutions
acquisition which added $47 million. Underlying sales decreased 6 percent in the
Americas (U.S. down 7 percent) and 2 percent in Europe, while Asia, Middle East
& Africa was flat (China down 7 percent). Earnings were $701 million, a decrease
of $150 million, or 18 percent, primarily due to higher restructuring expenses
of $100 million and lower volume, partially offset by a favorable impact on
comparisons from foreign currency transactions of $16 million. Margin decreased
2.1 percentage points to 12.6 percent, reflecting a negative impact from
restructuring expenses of 1.8 percentage points, deleverage on lower sales
volume, and unfavorable mix. Savings from cost reduction actions and favorable
foreign currency transactions of 0.2 percentage points partially offset the
decrease.
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COMMERCIAL & RESIDENTIAL SOLUTIONS
Six Months Ended Mar 31 2019 2020 Change
(dollars in millions)
Sales:
Climate Technologies $ 1,972 1,899 (4) %
Tools & Home Products 927 862 (7) %
Total $ 2,899 2,761 (5) %
Earnings:
Climate Technologies $ 372 368 (1) %
Tools & Home Products 193 175 (9) %
Total $ 565 543 (4) %
Margin 19.5 % 19.7 %
Commercial & Residential Solutions sales were $2.8 billion in the first six
months of 2020, a decrease of $138 million, or 5 percent compared to the prior
year. Underlying sales were down 3 percent ($90 million) on lower volume
partially offset by slightly higher price. The divestiture of two small non-core
businesses subtracted 1 percent ($24 million) and foreign currency translation
subtracted 1 percent ($24 million). Climate Technologies sales were $1.9 billion
in the first six months of 2020, a decrease of $73 million, or 4 percent. Air
conditioning and heating sales were down moderately, reflecting a sharp decline
in China due to the effects of COVID-19, while sales in the U.S. were down
modestly. Global cold chain sales were down modestly on slower demand in Asia
(particularly China) and Europe, while North America was essentially flat. Tools
& Home Products sales were $862 million in the first six months of 2020, down
$65 million, or 7 percent compared to the prior year, reflecting softness in
global professional tools markets. Sales for wet/dry vacuums were essentially
flat while food waste disposers were down slightly. Overall, underlying sales
decreased 3 percent in the Americas (U.S. down 4 percent) while Europe was flat
and Asia, Middle East & Africa decreased 5 percent (China down 13 percent).
Earnings were $543 million, down 4 percent compared to the prior year, and
margin increased 0.2 percentage points, as savings from cost reduction actions
and favorable price-cost more than offset deleverage on the lower sales volume
and higher restructuring expense of $11 million.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the six months ended
March 31, 2020 as compared to the year ended September 30, 2019 follow.
Sept 30, 2019 Mar 31, 2020
Working capital (in millions) $ 1,163 $ 92
Current ratio 1.2 1.0
Total debt-to-total capital 41.0 % 50.6 %
Net debt-to-net capital 33.9 % 40.5 %
Interest coverage ratio 15.2 X 14.4 X
Emerson maintains a conservative financial structure to provide the strength and
flexibility necessary to achieve our strategic objectives and has been
successful in efficiently deploying cash where needed worldwide to fund
operations, complete acquisitions and sustain long-term growth. In the second
quarter of fiscal 2020, the Company increased its short-term borrowings and cash
holdings by over $1 billion compared to its planned holdings under normal
conditions to support liquidity in response to the potential effects of
COVID-19, resulting in an increase in the debt-to-capital ratios. The Company
has also taken actions to conservatively manage its cash through planned
reductions in capital expenditures for fiscal 2020 and by suspending its share
repurchases for the remainder of the fiscal year. No changes have been made to
the dividend plan for the year. The Company's long-term debt ratings, which are
A2 by Moody's Investors Service and A by Standard and Poor's, remain unchanged.
The Company currently believes that sufficient funds will be available to meet
its needs for the foreseeable future through operating cash flow, existing
resources, short- and long-term debt capacity, or its $3.5 billion revolving
backup credit facility under which it has not incurred any borrowings. Depending
on market conditions, the Company may issue additional long-term debt in the
near future to further manage its liquidity and balance sheet. However, the
Company could be adversely affected if credit market conditions deteriorate or
customers, suppliers and financial institutions are unable to meet their
commitments to the
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Company. Emerson is in a strong financial position, with total assets of $22
billion and stockholders' equity of $7.5 billion, and has the resources
available for reinvestment in existing businesses, strategic acquisitions and
managing its capital structure on a short- and long-term basis.
The Company's working capital declined approximately $350 million compared to
the same quarter last year, reflecting lower business levels. The interest
coverage ratio (earnings before income taxes plus interest expense, divided by
interest expense) of 14.4X for the first six months of fiscal 2020 compares to
13.3X for the six months ended March 31, 2019. The increase reflects lower
interest expense in the current year, partially offset by lower pretax earnings.
Operating cash flow for the first six months of fiscal 2020 was $1.0 billion, an
increase of $156 million compared with $856 million in the prior year, as
operating working capital declined due to lower business levels, partially
offset by lower earnings. Free cash flow of $787 million in the first six months
of fiscal 2020 (operating cash flow of $1.0 billion less capital expenditures of
$225 million) increased $205 million compared to free cash flow of $582 million
in 2019 (operating cash flow of $856 million less capital expenditures of $274
million), reflecting the increase in operating cash flow and lower capital
investment.
FISCAL 2020 OUTLOOK
Emerson's top priority is the safety and health of its employees, customers, and
communities around the world. The Company has implemented recommended policies
and practices to protect its workforce so they can safely and effectively carry
out their vital work. Employees who are able to work remotely are doing so. The
Company is following guidelines from global health experts and has taken
stringent steps to protect its employees going to work in facilities that
manufacture critical technologies and equipment. The Company's employees and
facilities have a key role in the effort to both combat the COVID-19 crisis and
to keep essential infrastructure and industries operating, including life
sciences and medical, water, food and beverage, chemical, energy, and power
generation. While some operating sites remain below full capacity and we have
experienced some disruptions in our supply chain, the majority of our sites are
operating. Further, the Company is prioritizing the production of materials and
solutions needed on the front lines of the pandemic battle, including solutions
used in the manufacturing of respirators, masks and other safety equipment.
The outlook discussed herein reflects the changing demand environment associated
with COVID-19 and the concurrent unfolding energy market dynamics. The guidance
assumes, among other items, continued significant demand deterioration for the
remainder of the fiscal year, particularly in the third quarter, with demand
remaining negative through the first half of 2021. The decline in demand is
expected to be particularly pronounced in the U.S., with a longer recovery
period compared to Europe and Asia, Middle East & Africa. The outlook also
assumes oil prices stabilize in the $20 to $30 range for the same time period.
However, future developments such as a longer duration than assumed or a rebound
in the spread of COVID-19, further actions taken by governmental authorities,
including potential shutdowns of our operations, or delays in the stabilization
and recovery of economic conditions could further adversely affect our
operations and financial results, as well as those of our customers and
suppliers. See "Part II - Other Information, Item 1A, Risk Factors."
Consolidated fiscal 2020 net sales are expected to be down 9 to 11 percent, with
underlying sales down 7 to 9 percent excluding a 2 percent unfavorable impact
from foreign currency translation. Automation Solutions net sales are expected
to be down 8 to 10 percent, with underlying sales down 6 to 8 percent excluding
a 2 percent unfavorable impact from foreign currency translation. The midpoint
of this outlook assumes a reduction of backlog of approximately $300 million by
the end of the fiscal year. Commercial & Residential Solutions net sales are
expected to be down 11 to 13 percent, with underlying sales down 9 to 11 percent
excluding an impact from divestitures of 1 percent and unfavorable foreign
currency translation of 1 percent. Earnings per share are expected to be $2.62
to $2.82, while adjusted earnings per share, which exclude a $0.38 per share
impact from restructuring actions and related costs for the year, are expected
to be $3.00 to $3.20. Operating cash flow is expected to be approximately $2.75
billion and free cash flow, which excludes targeted capital spending of $550
million, is expected to be approximately $2.2 billion. The Company's share
repurchases for the six months ended March 31, 2020 were $942 million and
additional repurchases have been suspended for the remainder of the fiscal year.
The Company has made no changes to its dividend plan for fiscal 2020.
Statements in this report that are not strictly historical may be
"forward-looking" statements, which involve risks and uncertainties, and Emerson
undertakes no obligation to update any such statements to reflect later
developments. These risks and uncertainties include the scope, duration and
ultimate impact of the COVID-19 pandemic, as well as economic and currency
conditions, market demand, including related to the pandemic and oil and gas
price declines
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and volatility, pricing, protection of intellectual property, cybersecurity,
tariffs, competitive and technological factors, among others, which are set
forth in the "Risk Factors" of Part I, Item 1A, and the "Safe Harbor Statement"
of Part II, Item 7, to the Company's Annual Report on Form 10-K for the year
ended September 30, 2019, "Risk Factors" of Part II - Other Information, Item 1A
of the Company's Quarterly Report on Form 10-Q for the three-month period ended
March 31, 2020, and in subsequent reports filed with the SEC, which are hereby
incorporated by reference.
The United Kingdom's (UK) withdrawal from the European Union (EU), commonly
known as "Brexit", was completed on January 31, 2020. The UK is now in a
transition period and has begun negotiating the terms of a trade agreement and
other laws and regulations with the EU. The Company's net sales in the UK are
principally in the Automation Solutions segment and represent less than two
percent of consolidated sales. Sales of products manufactured in the UK and sold
within the EU are immaterial. The Company is evaluating several potential
outcomes of the UK's negotiations with the EU and believes the direct cost of
incremental tariffs, logistics and other items would be immaterial.
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EMERSON ELECTRIC CO. 
