EMERSON ELECTRIC CO. Safe Harbor Statement
This Annual Report on Form 10-K contains various forward-looking statements and
includes assumptions concerning Emerson's operations, future results and
prospects. These forward-looking statements are based on current expectations
and are subject to risks and uncertainties. Emerson undertakes no obligation to
update any such statements to reflect later developments. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, Emerson provides the cautionary statements set forth under Item 1A - "Risk
Factors," which are hereby incorporated by reference and identify important
economic, political and technological factors, among others, changes in which
could cause the actual results or events to differ materially from those set
forth in or implied by the forward-looking statements and related assumptions.
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Non-GAAP Financial Measures
To supplement the Company's financial information presented in accordance with
U.S. generally accepted accounting principles (U.S. GAAP), management
periodically uses certain "non-GAAP financial measures," as such term is defined
in Regulation G under SEC rules, to clarify and enhance understanding of past
performance and prospects for the future. Generally, a non-GAAP financial
measure is a numerical measure of a company's operating performance, financial
position or cash flows that excludes or includes amounts that are included in or
excluded from the most directly comparable measure calculated and presented in
accordance with U.S. GAAP. For example, non-GAAP measures may exclude the impact
of certain items such as our strategic repositioning actions, acquisitions or
divestitures, U.S. tax reform, changes in reporting segments, gains, losses and
impairments, or items outside of management's control, such as foreign currency
exchange rate fluctuations. Management believes that the following non-GAAP
financial measures provide investors and analysts useful insight into the
Company's financial position and operating performance. Any non-GAAP measure
provided should be viewed in addition to, and not as an alternative to, the most
directly comparable measure determined in accordance with U.S. GAAP, as
identified in italics below. Further, the calculation of these non-GAAP
financial measures may differ from the calculation of similarly titled financial
measures presented by other companies and therefore may not be comparable among
companies.
Underlying sales, which exclude the impact of acquisitions, divestitures and
fluctuations in foreign currency exchange rates during the periods presented,
are provided to facilitate relevant period-to-period comparisons of sales growth
by excluding those items that impact overall comparability (U.S. GAAP measure:
net sales).
Operating profit (defined as net sales less cost of sales and selling, general
and administrative expenses) and operating profit margin (defined as operating
profit divided by net sales) are indicative of short-term operational
performance and ongoing profitability. Management closely monitors operating
profit and operating profit margin of each business to evaluate past performance
and actions required to improve profitability. EBIT (defined as earnings before
deductions for interest expense, net and income taxes) and total segment EBIT,
and EBIT margin (defined as EBIT divided by net sales) and total segment EBIT
margin, are financial measures that exclude the impact of financing on the
capital structure and income taxes. EBITDA (defined as EBIT excluding
depreciation and amortization) and EBITDA margin (defined as EBITDA divided by
net sales) are used as measures of the Company's current operating performance,
as they exclude the impact of capital and acquisition-related investments. All
of these are commonly used financial measures utilized by management to evaluate
performance (U.S. GAAP measures: pretax earnings or pretax profit margin).
Earnings, earnings per share, return on common stockholders' equity and return
on total capital excluding certain gains and losses, impairments, restructuring
costs, impacts of the strategic portfolio repositioning actions and other
acquisitions or divestitures, impacts of U.S. tax reform or other discrete
taxes, or other items provide additional insight into the underlying, ongoing
operating performance of the Company and facilitate period-to-period comparisons
by excluding the earnings impact of these items. Management believes that
presenting earnings, earnings per share, return on common stockholders' equity
and return on total capital excluding these items is more representative of the
Company's operational performance and may be more useful for investors (U.S.
GAAP measures: earnings, earnings per share, return on common stockholders'
equity, return on total capital).
Free cash flow (operating cash flow less capital expenditures) and free cash
flow as a percent of net sales are indicators of the Company's cash generating
capabilities, and dividends as a percent of free cash flow is an indicator of
the Company's ability to support its dividend, after considering investments in
capital assets which are necessary to maintain and enhance existing operations.
The determination of operating cash flow adds back noncash depreciation expense
to earnings and thereby does not reflect a charge for necessary capital
expenditures. Management believes that free cash flow, free cash flow as a
percent of net sales and dividends as a percent of free cash flow are useful to
both management and investors as measures of the Company's ability to generate
cash and support its dividend (U.S. GAAP measures: operating cash flow,
operating cash flow as a percent of net sales, dividends as a percent of
operating cash flow).
15
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FINANCIAL REVIEW
Report of Management
The Company's management is responsible for the integrity and accuracy of the
financial statements. Management believes that the financial statements for each
of the years in the three-year period ended September 30, 2020 have been
prepared in conformity with U.S. generally accepted accounting principles
appropriate in the circumstances. In preparing the financial statements,
management makes informed judgments and estimates where necessary to reflect the
expected effects of events and transactions that have not been completed. The
Company's disclosure controls and procedures ensure that material information
required to be disclosed is recorded, processed, summarized and communicated to
management and reported within the required time periods.
In meeting its responsibility for the reliability of the financial statements,
management relies on a system of internal accounting controls. This system is
designed to provide reasonable assurance that assets are safeguarded and
transactions are executed in accordance with management's authorization and
recorded properly to permit the preparation of financial statements in
accordance with U.S. generally accepted accounting principles. The design of
this system recognizes that errors or irregularities may occur and that
estimates and judgments are required to assess the relative cost and expected
benefits of the controls. Management believes that the Company's internal
accounting controls provide reasonable assurance that errors or irregularities
that could be material to the financial statements are prevented or would be
detected within a timely period.
The Audit Committee of the Board of Directors, which is composed solely of
independent directors, is responsible for overseeing the Company's financial
reporting process. The Audit Committee meets with management and the Company's
internal auditors periodically to review the work of each and to monitor the
discharge by each of its responsibilities. The Audit Committee also meets
periodically with the independent auditors, who have free access to the Audit
Committee and the Board of Directors, to discuss the quality and acceptability
of the Company's financial reporting and internal controls, as well as
nonaudit-related services.
The independent auditors are engaged to express an opinion on the Company's
consolidated financial statements and on the Company's internal control over
financial reporting. Their opinions are based on procedures that they believe to
be sufficient to provide reasonable assurance that the financial statements
contain no material errors and that the Company's internal controls are
effective.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. With the
participation of the Chief Executive Officer and the Chief Financial Officer,
management conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework and the criteria established in
Internal Control - Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission . Based on this evaluation,
management has concluded that internal control over financial reporting was
effective as of September 30, 2020 .
The Company's auditor, KPMG LLP , an independent registered public accounting
firm, has issued an audit report on the effectiveness of the Company's internal
control over financial reporting.
/s/ David N. Farr /s/ Frank J. Dellaquila
David N. Farr Frank J. Dellaquila
Chairman of the Board Senior Executive Vice President
and Chief Executive Officer and Chief Financial Officer
16
-------------------------------------------------------------------------------- Results of Operations Years endedSeptember 30 (Dollars in Item 7 are in millions, except per share amounts or where noted) 2018 2019 2020 19 vs. 18 20 vs. 19 Net sales$ 17,408 18,372 16,785 6 % (9) % Gross profit$ 7,432 7,815 7,009 5 % (10) % Percent of sales 42.7 % 42.5 % 41.8 % SG&A$ 4,269 4,457 3,986 Percent of sales 24.5 % 24.2 % 23.8 % Other deductions, net$ 337 325 532 Amortization of intangibles$ 211 238 239 Restructuring costs$ 65 95 284 Interest expense, net$ 159 174 156 Earnings before income taxes$ 2,667 2,859 2,335 7 % (18) % Percent of sales 15.3 % 15.6 % 13.9 % Net earnings common stockholders$ 2,203 2,306 1,965 5 % (15) % Percent of sales 12.7 % 12.6 % 11.7 % Diluted EPS$ 3.46 3.71 3.24 7 % (13) % Return on common stockholders' equity 24.9 % 26.8 % 23.6 % Return on total capital 20.6 % 19.5 % 16.8 % COVID-19 UPDATE Emerson's business, operations and end markets were negatively impacted in 2020 by the global outbreak and rapid spread of the coronavirus (COVID-19). As the situation rapidly evolved, the Company's leadership and global operations remained focused on safely serving our customers and protecting the health and safety of our employees. In response to the pandemic, the Company took actions aligned with theWorld Health Organization and theCenters for Disease Control and Prevention to protect its workforce so they could more safely and effectively perform their work. The Company embraced guidelines set by these organizations, including social distancing, good hygiene, restrictions on employee travel and in-person meetings, and changes to employee work arrangements including remote work arrangements where appropriate. The outbreak began in the Company's second fiscal quarter and resulted in a rapid decline in demand which impacted most of the Company's end markets and geographies in the second half of the year, particularly inNorth America . Overall, sales declined 9 percent compared with the prior year, consistent with management's guidance provided inApril 2020 . Demand has begun to return in the Commercial & Residential Solutions business and stabilize in the Automation Solutions business. In response to COVID-19, the Company increased its restructuring and cost reset actions that began in the third quarter of fiscal 2019. These incremental efforts and prior actions resulted in fiscal 2020 savings of approximately$220 and supported the Company's profitability despite the headwind from lower sales. The Company also benefited in the second half of the year from a salary and hiring freeze, furloughs, compensation reductions for the Board of Directors and key executives across Emerson, and curtailed travel, meetings and discretionary spending. Overall, selling, general and administrative expenses as a percent of sales decreased 0.9 percentage points in the second half of the year despite the negative impact from deleverage on lower sales, and the restructuring initiatives are expected to yield improved operating margins as sales volumes recover. 17
-------------------------------------------------------------------------------- The Company also increased its cash holdings to support liquidity in response to the potential effects of COVID-19. InApril 2020 , the Company issued$1.5 billion of long-term debt at a weighted-average rate of approximately 2.15% to further manage its liquidity and balance sheet, and inSeptember 2020 , issued an additional$750 of long-term debt at 0.875%, a portion of which was used to fund the acquisition ofOpen Systems International, Inc. , which closed onOctober 1, 2020 . The Company also took actions to conservatively manage its cash through reductions in planned capital expenditures for fiscal 2020 and by suspending its share repurchases in the third quarter. The Company's long-term debt ratings, which are A2 by Moody's Investors Service and A by Standard and Poor's, remain unchanged. Management's actions to adjust to the lower demand caused by COVID-19 supported the Company's commitment to its dividend plan and onNovember 3, 2020 , it approved an increase to its dividend for the 65th consecutive year.
See "Outlook" and Item 1A - "Risk Factors" for additional discussion of the impacts of COVID-19 and the Company's response.
OVERVIEW
Overall, sales for 2020 were$16.8 billion , down 9 percent compared with the prior year, and were adversely impacted by foreign currency translation which deducted 1 percent. During the year, the Company took restructuring and other actions to protect its operating results from the deleverage caused by lower sales. Net earnings common stockholders were$1,965 in 2020, down 15 percent compared with prior year earnings of$2,306 , and diluted earnings per share were$3.24 , down 13 percent versus$3.71 per share in 2019, largely due to higher restructuring charges related to the Company's initiatives to improve operating margins. The Company generated operating cash flow of$3.1 billion in 2020, an increase of$77 , or 3 percent, due in part to lower working capital needs associated with lower demand. The Company also took actions to ensure adequate liquidity and successfully raised over$2.2 billion in the debt markets.NET SALES Net sales for 2020 were$16.8 billion , a decrease of$1.6 billion , or 9 percent compared with 2019. Sales decreased$1,047 in Automation Solutions and$526 in Commercial & Residential Solutions. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, decreased 8 percent ($1.4 billion ) on lower volume. Divestitures net of acquisitions subtracted$11 and foreign currency translation subtracted 1 percent ($161 ). Underlying sales decreased 11 percent in theU.S. and 5 percent internationally. Net sales for 2019 were$18.4 billion , an increase of$1.0 billion , or 6 percent compared with 2018. Sales increased$761 in Automation Solutions and$187 in Commercial & Residential Solutions. Underlying sales increased 3 percent ($526 ) on higher volume and slightly higher price. Acquisitions added 5 percent ($759 ) while foreign currency translation subtracted 2 percent ($321 ). Underlying sales increased 2 percent in theU.S. and 4 percent internationally. INTERNATIONAL SALES Emerson is a global business with international sales representing 56 percent of total sales in 2020, includingU.S. exports. The Company generally expects faster economic growth in emerging markets inAsia ,Latin America ,Eastern Europe andMiddle East /Africa . International destination sales, includingU.S. exports, decreased 6 percent, to$9.4 billion in 2020, reflecting decreases in both the Automation Solutions and Commercial & Residential Solutions businesses.U.S. exports of$1.0 billion were down 10 percent compared with 2019. Underlying international destination sales were down 5 percent, as foreign currency translation had a 1 percent unfavorable impact on the comparison. Underlying sales decreased 4 percent inEurope , 4 percent inAsia ,Middle East &Africa (China down 5 percent), 7 percent inLatin America and 11 percent inCanada . Origin sales by international subsidiaries, including shipments to theU.S. , totaled$8.5 billion in 2020, down 5 percent compared with 2019. International destination sales, includingU.S. exports, increased 5 percent, to$10.0 billion in 2019, reflecting increases in both the Automation Solutions and Commercial & Residential Solutions businesses.U.S. exports of$1.1 billion were up 2 percent compared with 2018. Underlying international destination sales were up 4 percent, as acquisitions had a 5 percent favorable impact, while foreign currency translation had a 4 percent unfavorable impact on the comparison. Underlying sales increased 3 percent inEurope , 2 percent inAsia ,Middle East &Africa (China 18 -------------------------------------------------------------------------------- up 3 percent), 17 percent inLatin America and 4 percent inCanada . Origin sales by international subsidiaries, including shipments to theU.S. , totaled$9.0 billion in 2019, up 5 percent compared with 2018. ACQUISITIONS AND DIVESTITURES OnOctober 1, 2020 , the Company completed the acquisition ofOpen Systems International, Inc. , a leading operations technology software provider in the global power industry, for approximately$1.6 billion , net of cash acquired. This business, which has annual sales of approximately$170 , will be reported in the Automation Solutions segment.
In 2020, the Company acquired three businesses, two in the Automation Solutions
segment and one in the Climate Technologies segment, for
The Company acquired eight businesses in 2019, all in the Automation Solutions segment, for$469 , net of cash acquired. These eight businesses had combined annual sales of approximately$300 . OnJuly 17, 2018 , the Company completed the acquisition of Aventics, a global provider of smart pneumatics technologies that power machine and factory automation applications, for$622 , net of cash acquired. This business, which has annual sales of approximately$425 , is included in the Industrial Solutions product offering within the Automation Solutions segment. OnJuly 2, 2018 , the Company completed the acquisition of Textron's tools and test equipment business for$810 , net of cash acquired. This business, with annual sales of approximately$470 , is a manufacturer of electrical and utility tools, diagnostics, and test and measurement instruments, and is reported in the Tools & Home products segment.
On
In fiscal 2018, the Company also acquired four smaller businesses, two in the Automation Solutions segment and two in the Climate Technologies segment.
OnOctober 2, 2017 , the Company sold its residential storage business for$200 in cash, and recognized a small pretax gain and an after-tax loss of$24 ($0.04 per share) in 2018 due to income taxes resulting from nondeductible goodwill. The Company realized approximately$150 in after-tax cash proceeds from the sale.
See Note 4 for further information on acquisitions and divestitures, including pro forma financial information.
COST OF SALES Cost of sales for 2020 were$9,776 , a decrease of$781 compared with$10,557 in 2019, primarily due to lower volume. Gross profit was$7,009 in 2020 compared to$7,815 in 2019, while gross margin decreased 0.7 percentage points to 41.8 percent, reflecting deleverage on lower sales volume and unfavorable mix within Automation Solutions, partially offset by favorable price-cost. Cost of sales for 2019 were$10,557 , an increase of$581 compared with$9,976 in 2018. The increase is primarily due to acquisitions and higher volume, partially offset by the impact of foreign currency translation. Gross profit was$7,815 in 2019 compared to$7,432 in 2018. Gross margin decreased 0.2 percentage points to 42.5 percent, reflecting unfavorable mix and the impact of acquisitions, partially offset by savings from cost reduction actions. Gross margin was 42.7 percent in 2018. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses of$3,986 in 2020 decreased$471 compared with 2019 and SG&A as a percent of sales decreased 0.4 percentage points to 23.8 percent. Savings of approximately$220 from the Company's restructuring and cost reset actions that began in the third quarter of fiscal 2019 offset deleverage on lower sales volume. The Company's restructuring initiatives are expected to yield improved operating margins as sales volumes recover. The Company also benefited in the second half of the year from a salary and hiring freeze, furloughs, compensation reductions for the Board of Directors and key executives across Emerson, and curtailed travel, meetings and discretionary spending. 19 -------------------------------------------------------------------------------- SG&A expenses of$4,457 in 2019 increased$188 compared with 2018 due to acquisitions and higher volume. SG&A as a percent of sales of 24.2 percent decreased 0.3 percentage points due to leverage on higher volume and lower incentive stock compensation of$96 , reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year, partially offset by a negative impact from acquisitions of 0.4 percentage points and higher investment spending. OTHER DEDUCTIONS, NET Other deductions, net were$532 in 2020, an increase of$207 compared with 2019. The increase reflects increased restructuring costs of$189 and an unfavorable impact on comparisons from pensions of$48 , partially offset by lower acquisition/divestiture and litigation costs. See Note 5. Other deductions, net were$325 in 2019, a decrease of$12 compared with 2018. The decrease primarily reflects lower acquisition/divestiture costs of$29 , pension expenses of$42 and foreign currency transactions of$13 , partially offset by higher intangibles amortization and restructuring expense of$27 and$30 , respectively. INTEREST EXPENSE, NET Interest expense, net was$156 ,$174 and$159 in 2020, 2019 and 2018, respectively. The decrease in 2020 reflects the maturity of long-term debt with relatively higher interest rates, partially offset by lower interest income. The increase in 2019 was due to lower interest income. EARNINGS BEFORE INCOME TAXES Pretax earnings of$2,335 decreased$524 in 2020, down 18 percent compared with 2019. Earnings decreased$424 in Automation Solutions and$153 in Commercial & Residential Solutions. Costs reported at Corporate decreased$35 , as an increase in unallocated pension and postretirement costs of$55 was more than offset by a decline in all other corporate costs of$90 . See the Business discussion that follows and Note 18. Pretax earnings of$2,859 increased$192 in 2019, up 7 percent compared with 2018. Earnings increased$61 in Automation Solutions and decreased$81 in Commercial & Residential Solutions, while costs reported at Corporate decreased$227 . INCOME TAXES OnDecember 22, 2017 , theU.S. government enacted tax reform, the Tax Cuts and Jobs Act (the "Tax Act"), which made comprehensive changes toU.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Tax Act includes a reduction of theU.S. corporate income tax rate from 35 percent to 21 percent in calendar year 2018 along with the elimination of certain deductions and credits, and a one-time "deemed repatriation" of accumulated non-U.S. earnings. During 2018, the Company recognized a net tax benefit of$189 ($0.30 per share) due to impacts of the Tax Act, consisting of a$94 benefit on revaluation of net deferred income tax liabilities to the lower tax rate,$35 of expense for the tax on deemed repatriation of accumulated non-U.S. earnings and withholding taxes, and the reversal of$130 accrued in previous periods for the planned repatriation of non-U.S. cash. The Company completed its accounting for the Tax Act in the first quarter of fiscal 2019. Effective in fiscal 2019, the Tax Act also subjects the Company toU.S. tax on global intangible low-taxed income earned by certain of its non-U.S. subsidiaries. The Company has elected to recognize this tax as a period expense when it is incurred. In the second quarter of fiscal 2019, the Company recorded a$13 ($0.02 per share) tax benefit due to the issuance of final regulations related to the one-time tax on deemed repatriation. OnMarch 27, 2020 , the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company expects to defer$75 of certain payroll taxes through the end of calendar year 2020, of which$48 was deferred throughSeptember 30, 2020 . Income taxes were$345 ,$531 and$443 for 2020, 2019 and 2018, respectively, resulting in effective tax rates of 15 percent, 19 percent and 17 percent in 2020, 2019 and 2018, respectively. The rates in all years include benefits from restructuring subsidiaries of$103 ($0.17 per share),$74 ($0.12 per share) and$53 ($0.08 per share), respectively. The 2020 rate also included the impact of a research and development tax credit study, while 2019 and 2018 included discrete tax benefits due to the impacts of the Tax Act described above. See Note 14. 20
-------------------------------------------------------------------------------- NET EARNINGS AND EARNINGS PER SHARE; RETURNS ON EQUITY AND TOTAL CAPITAL Net earnings attributable to common stockholders in 2020 were$1,965 , down 15 percent compared with 2019, and diluted earnings per share were$3.24 , down 13 percent compared with$3.71 in 2019. The decline in sales volume, largely attributable to the negative effects of COVID-19, resulted in a decline in operating results of$0.27 per share, while restructuring costs and special advisory fees reduced earnings by$0.42 per share in the current year ($0.12 per share in the prior year). Higher pension expense partially offset by lower stock compensation expense negatively affected comparisons by$0.07 per share and unfavorable foreign currency deducted$0.06 per share. Results were favorably impacted by discrete tax items recognized in the fourth quarter ($0.20 per share), which included the subsidiary restructurings discussed above, while other discrete tax items provided a benefit of$0.08 per share. The prior year included discrete tax benefits of$0.12 per share. Share repurchases and lower interest expense provided a combined benefit of$0.09 per share. Net earnings attributable to common stockholders in 2019 were$2,306 , up 5 percent compared with 2018, and diluted earnings per share were$3.71 , up 7 percent, due to modest sales growth and lower corporate expenses. Earnings per share comparisons were also impacted by the prior year net tax benefit due to impacts of the Tax Act of$0.30 per share discussed above, which was partially offset by 2018 first year acquisition accounting charges of$0.09 per share and a$0.04 per share loss on the residential storage business. Return on common stockholders' equity (net earnings attributable to common stockholders divided by average common stockholders' equity) was 23.6 percent in 2020 compared with 26.8 percent in 2019 and 24.9 percent in 2018. Return on total capital was 16.8 percent in 2020 compared with 19.5 percent in 2019 and 20.6 percent in 2018 (computed as net earnings attributable to common stockholders excluding after-tax net interest expense, divided by average common stockholders' equity plus short- and long-term debt less cash and short-term investments). Lower net earnings negatively impacted returns in 2020. In 2019, higher net earnings benefited the returns, while an increase in long-term debt negatively impacted the return on total capital. Business Segments Following is an analysis of segment results for 2020 compared with 2019, and 2019 compared with 2018. The Company defines segment earnings as earnings before interest and income taxes. AUTOMATION SOLUTIONS 2018 2019 2020 19 vs. 18 20 vs. 19 Sales$ 11,441 12,202 11,155 7 % (9) % Earnings$ 1,886 1,947 1,523 3 % (22) % Margin 16.5 % 16.0 % 13.6 % Sales by Major Product Offering Measurement & Analytical Instrumentation$ 3,604 3,807 3,237 6 % (15) % Valves, Actuators & Regulators 3,749 3,794 3,589 1 % (5) % Industrial Solutions 1,967 2,232 2,012 14 % (10) % Process Control Systems & Solutions 2,121 2,369 2,317 12 % (2) % Total$ 11,441 12,202 11,155 7 % (9) % 2020 vs. 2019 - Automation Solutions sales were$11.2 billion in 2020, a decrease of$1,047 , or 9 percent. Underlying sales decreased 8 percent ($963 ) on lower volume. The Machine Automation Solutions acquisition added$47 and foreign currency translation had a 1 percent ($131 ) unfavorable impact. Sales for Measurement & Analytical Instrumentation decreased$570 , or 15 percent, due to weakness in process industries, primarily inNorth America . Valves, Actuators & Regulators decreased$205 , or 5 percent, reflecting slower demand in most end markets. Industrial Solutions sales decreased$220 , or 10 percent, on lower global demand in discrete end markets. Process Control Systems & Solutions decreased$52 , or 2 percent, due to weakness in power end markets inChina and process end markets in theU.S. , partially offset by the Machine Automation Solutions acquisition. Underlying 21 -------------------------------------------------------------------------------- sales decreased 14 percent in theAmericas (U.S. down 14 percent), 5 percent inEurope , and 1 percent inAsia ,Middle East &Africa (China down 2 percent). Earnings of$1,523 decreased$424 from the prior year, primarily due to higher restructuring expenses of$179 and lower volume. Margin decreased 2.4 percentage points to 13.6 percent, reflecting a negative impact from restructuring expenses of 1.7 percentage points and unfavorable mix. Savings from cost reduction actions offset deleverage on lower sales volume. 2019 vs. 2018 - Automation Solutions sales were$12.2 billion in 2019, an increase of$761 , or 7 percent. Underlying sales increased 5 percent ($582 ) on higher volume and slightly higher price. Acquisitions added 4 percent ($426 ) and foreign currency translation had a 2 percent ($247 ) unfavorable impact. Sales for Measurement & Analytical Instrumentation increased$203 , or 6 percent, reflecting broad-based strength across process and hybrid end markets. Valves, Actuators & Regulators increased$45 , or 1 percent, on favorable global oil and gas demand. Industrial Solutions sales increased$265 , or 14 percent, due to the Aventics acquisition ($292 ), while discrete manufacturing end markets were slow in theU.S. andEurope . Process Control Systems & Solutions increased$248 , or 12 percent, driven by greenfield investment and modernization activity, while acquisitions added$134 . Underlying sales increased 4 percent in theAmericas (U.S. up 2 percent), 4 percent inEurope , and 8 percent inAsia ,Middle East &Africa (China up 13 percent), supported by infrastructure investment across the region. Earnings of$1,947 increased$61 from the prior year driven by higher volume and price. Margin decreased 0.5 percentage points to 16.0 percent, reflecting a dilutive impact from acquisitions of 0.7 percentage points and increased restructuring expense of$24 . Excluding these items, margin increased due to leverage on the higher volume. COMMERCIAL & RESIDENTIAL SOLUTIONS 2018 2019 2020 19 vs. 18 20 vs. 19 Sales: Climate Technologies$ 4,454 4,313 3,980 (3) % (8) % Tools & Home Products 1,528 1,856 1,663 22 % (10) % Total$ 5,982 6,169 5,643 3 % (9) % Earnings: Climate Technologies$ 972 883 801 (9) % (9) % Tools & Home Products 380 388 317 2 % (18) % Total$ 1,352 1,271 1,118 (6) % (12) % Margin 22.6 % 20.6 % 19.8 % 2020 vs. 2019 - Commercial & Residential Solutions sales were$5.6 billion in 2020, a decrease of$526 , or 9 percent. Underlying sales decreased 7 percent ($454 ) on lower volume. The divestiture of two small non-core businesses subtracted 1 percent ($42 ) and foreign currency translation deducted 1 percent ($30 ). Climate Technologies sales were$4.0 billion in 2020, a decrease of$333 , or 8 percent. Air conditioning and heating sales declined, reflecting a sharp decline inAsia and moderate decline in theU.S. due to the effects of COVID-19. Global cold chain sales were also down, reflecting double-digit declines inAsia andEurope , whileNorth America was down moderately. Tools & Home Products sales were$1.7 billion in 2020, down$193 or 10 percent compared to the prior year, reflecting sharp declines in global professional tools markets. Sales for wet/dry vacuums were down moderately and food waste disposers were down slightly. Overall, underlying sales decreased 7 percent in theAmericas (U.S. down 8 percent) and 3 percent inEurope , whileAsia ,Middle East &Africa decreased 11 percent (China down 11 percent). Earnings were$1,118 , a decrease of$153 , and margin was down 0.8 percentage points, due to deleverage on lower sales volume and higher restructuring expenses which negatively impacted margins by 0.5 percentage points, partially offset by savings from cost reduction actions and favorable price-cost. 2019 vs. 2018 - Commercial & Residential Solutions sales were$6.2 billion in 2019, an increase of$187 , or 3 percent. Underlying sales decreased 1 percent ($59 ) on lower volume partially offset by higher price. Acquisitions added 5 percent ($320 ) while foreign currency translation subtracted 1 percent ($74 ). Climate Technologies sales were$4.3 billion in 2019, a decrease of$141 , or 3 percent. HVAC sales were down sharply inAsia ,Middle East &Africa , particularly inChina air conditioning and heating markets, while growth in theU.S. was modest. Global cold 22 -------------------------------------------------------------------------------- chain sales were down slightly, as modest growth in theU.S. was more than offset by slower demand inAsia andEurope . Tools & Home Products sales were$1.9 billion in 2019, up$328 or 22 percent compared to the prior year, reflecting the tools and test acquisition and modest growth for professional tools. Sales for wet/dry vacuums were up moderately due to higher price, while food waste disposers were flat. Overall, underlying sales increased 3 percent in theAmericas (U.S. up 2 percent) and 1 percent inEurope , whileAsia ,Middle East &Africa decreased 12 percent (China down 15 percent). Earnings were$1,271 , a decrease of$81 , and margin was down 2.0 percentage points, primarily due to a dilutive impact from the tools and test acquisition of 0.8 percentage points, deleverage on lower volume in the Climate Technologies segment and unfavorable mix.
Financial Position, Capital Resources and Liquidity
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. During fiscal 2020, the Company increased its cash holdings to support liquidity in response to the potential effects of COVID-19. InApril 2020 , the Company issued$1.5 billion of long-term debt at a weighted-average rate of approximately 2.15% to further manage its liquidity and balance sheet, and inSeptember 2020 , issued an additional$750 of long-term debt at 0.875%, a portion of which was used to fund the acquisition ofOpen Systems International, Inc. (OSI), which closed onOctober 1, 2020 . The Company also took actions to conservatively manage its cash through reductions in planned capital expenditures for fiscal 2020 and by suspending its share repurchases in the third quarter. 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. The Company remains committed to its dividend plan and onNovember 3, 2020 , approved an increase to its dividend for the 65th consecutive year. Emerson is in a strong financial position, with total assets of$23 billion and stockholders' equity of$8 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 continues to generate substantial operating cash flow, including over$3.0 billion in each of the last two years. CASH FLOW 2018 2019 2020 Operating Cash Flow$ 2,892 3,006 3,083 Percent of sales 16.6 % 16.4 % 18.4 % Capital Expenditures$ 617 594 538 Percent of sales 3.5 % 3.2 % 3.2 % Free Cash Flow (Operating Cash Flow less Capital Expenditures)$ 2,275 2,412 2,545 Percent of sales 13.1 % 13.1 % 15.2 % Operating Working Capital$ 985 1,113 866 Percent of sales 5.7 % 6.1 % 5.2 % Operating cash flow for 2020 was$3.1 billion , a$77 , or 3 percent increase compared with 2019, as lower working capital needs associated with lower demand more than offset a decrease in earnings. Operating cash flow of$3.0 billion in 2019 increased 4 percent compared to$2.9 billion in 2018, due to higher earnings, partially offset by higher operating working capital. AtSeptember 30, 2020 , operating working capital as a percent of sales was 5.2 percent compared with 6.1 percent in 2019 and 5.7 percent in 2018. Contributions to pension plans were$66 in 2020,$60 in 2019 and$61 in 2018. Capital expenditures were$538 ,$594 and$617 in 2020, 2019 and 2018, respectively. Free cash flow (operating cash flow less capital expenditures) was$2.5 billion in 2020, up 6 percent. Free cash flow was$2.4 billion in 2019, compared with$2.3 billion in 2018. The Company is targeting capital spending of approximately$600 in 2021. Net cash paid in connection with acquisitions was$126 ,$469 and$2.2 billion in 2020, 2019 and 2018, respectively. This 23 --------------------------------------------------------------------------------
does not reflect the OSI acquisition, which closed on
Dividends were$1,209 ($2.00 per share) in 2020, compared with$1,209 ($1.96 per share) in 2019 and$1,229 ($1.94 per share) in 2018. InNovember 2020 , the Board of Directors voted to increase the quarterly cash dividend 1 percent, to an annualized rate of$2.02 per share.
Purchases of Emerson common stock totaled
The Board of Directors authorized the purchase of up to 70 million common shares inNovember 2015 . InMarch 2020 , the Board of Directors authorized the purchase of an additional 60 million shares and a total of 66 million shares remain available for purchase under the authorizations. The Company purchased 16.4 million shares in 2020, 19.9 million shares in 2019 and 15.1 million shares in 2018 under the authorizations. LEVERAGE/CAPITALIZATION 2018 2019 2020 Total Assets$ 20,390 20,497 22,882 Long-term Debt$ 3,137 4,277 6,326 Common Stockholders' Equity$ 8,947 8,233 8,405
Total Debt-to-Total Capital Ratio 34.7 % 41.0 % 47.1 % Net Debt-to-Net Capital Ratio
29.1 % 33.9 % 33.2 %
Operating Cash Flow-to-Debt Ratio 60.7 % 52.5 % 41.2 % Interest Coverage Ratio
14.2X 15.2X 14.4X
Total debt, which includes long-term debt, current maturities of long-term debt,
commercial paper and other short-term borrowings, was $7,486 , $5,721 and $4,760
as of September 30, 2020 , 2019 and 2018, respectively. During the year, the
Company repaid $500 of 4.875% notes that matured in October 2019 . In April 2020 ,
the Company issued $500 of 1.8% notes due October 2027 , $500 of 1.95% notes due
October 2030 and $500 of 2.75% notes due October 2050 . In September 2020 , the
Company issued $750 of 0.875% notes due October 2026 . The net proceeds from the
sale of the notes were used to reduce commercial paper borrowings and for
general corporate purposes. A portion of the proceeds from the notes issued in
September were also used to fund the acquisition of OSI, which closed on October
1, 2020 . In 2019, the Company repaid $400 of 5.25% notes that matured in October
2018 and $250 of 5.0% notes that matured in April 2019 , while $250 of 5.375%
notes that matured in October 2017 were paid in fiscal 2018. In January 2019 ,
the Company issued €500 of 1.25% notes due October 2025 and €500 of 2.0% notes
due October 2029 . In May 2019 , the Company issued €500 of 0.375% notes due May
2024 .
The total debt-to-capital ratio increased in 2020 due to the long-term debt
issuances described above. The net debt-to-net capital ratio (less cash and
short-term investments) decreased slightly, reflecting the timing of the
acquisition of OSI, which closed shortly after year-end. In 2019 the total
debt-to-capital ratio and the net debt-to-net capital ratio increased due to
increased borrowings. The operating cash flow-to-debt ratio decreased in 2020
due to the increased borrowings. The decrease in 2019 was due to the increased
borrowings, partially offset by a modest increase in operating cash flows. The
interest coverage ratio is computed as earnings before income taxes plus
interest expense, divided by interest expense. The decrease in 2020 reflects
lower earnings, partially offset by lower interest expense. The increase in 2019
was due to higher earnings as compared to 2018.
In May 2018 , the Company entered into a $3.5 billion five-year revolving backup
credit facility with various banks, which replaced the April 2014 $3.5 billion
facility. The credit facility is maintained to support general corporate
purposes, including commercial paper borrowings. The Company has not incurred
any borrowings under this or previous facilities. The credit facility contains
no financial covenants and is not subject to termination based on a change of
credit rating or material adverse changes. The facility is unsecured and may be
accessed under various interest rate and currency denomination alternatives at
the Company's option. Fees to maintain the facility are immaterial. The Company
also maintains a universal shelf registration statement on file with the SEC
under which it can issue debt securities, preferred stock, common stock,
warrants, share purchase contracts or share purchase
24
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Emerson's financial structure provides the flexibility necessary to achieve its strategic objectives. The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. AtSeptember 30, 2020 ,$1.7 billion of the Company's cash was held in theU.S. , primarily to fund the OSI acquisition. The remaining$1.6 billion of cash was held outside theU.S. (primarily inEurope andAsia ). The Company routinely repatriates a portion of its non-U.S. cash from earnings each year, or otherwise when it can be accomplished tax efficiently, and provides for withholding taxes and any applicableU.S. income taxes as appropriate. The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet the Company's needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.
CONTRACTUAL OBLIGATIONS
At
Amounts Due By Period
1 - 3 3 - 5 More Than
Total Less Than 1 Year Years Years 5 Years
Long-term Debt (including Interest) $ 8,462 464 1,324 1,327 5,347
Operating Leases 565 159 216 105 85
Purchase Obligations 889 726 121 36 6
Total $ 9,916 1,349 1,661 1,468 5,438
Purchase obligations consist primarily of inventory purchases made in the normal
course of business to meet operational requirements. The table above does not
include the majority of other noncurrent liabilities (except for lease-related
obligations), which total $2,324 and consist primarily of pension and
postretirement plan liabilities, asbestos litigation, deferred income taxes and
unrecognized tax benefits, because it is not certain when these amounts will
become due. See Note 12 for estimated future benefit payments and Note 14 for
additional information on deferred income taxes.
FINANCIAL INSTRUMENTS
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and commodity prices, and selectively uses
derivative financial instruments, including forwards, swaps and purchased
options to manage these risks. The Company does not hold derivatives for trading
or speculative purposes. The value of derivatives and other financial
instruments is subject to change as a result of market movements in rates and
prices. Sensitivity analysis is one technique used to forecast the impact of
these movements. Based on a hypothetical 10 percent increase in interest rates,
a 10 percent decrease in commodity prices or a 10 percent weakening in the U.S.
dollar across all currencies, the potential losses in future earnings, fair
value or cash flows are not material. Sensitivity analysis has limitations; for
example, a weaker U.S. dollar would benefit future earnings through favorable
translation of non-U.S. operating results, and lower commodity prices would
benefit future earnings through lower cost of sales. See Notes 1, and 9 through
11.
Critical Accounting Policies
Preparation of the Company's financial statements requires management to make
judgments, assumptions and estimates regarding uncertainties that could affect
reported revenue, expenses, assets, liabilities and equity. Note 1 describes the
significant accounting policies used in preparation of the consolidated
financial statements. The most significant areas where management judgments and
estimates impact the primary financial statements are described below. Actual
results in these areas could differ materially from management's estimates under
different assumptions or conditions.
REVENUE RECOGNITION
The Company evaluates its contracts with customers to identify the promised
goods or services and recognizes revenue for the identified performance
obligations at the amount the Company expects to be entitled to in exchange for
those goods or services. A performance obligation is a promise in a contract to
transfer a distinct good or service to a customer. Revenue is recognized when,
or as, performance obligations are satisfied and control has transferred
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to the customer, typically when products are shipped or delivered, title and
risk of loss pass to the customer, and the Company has a present right to
payment. The vast majority of the Company's revenues relate to a broad offering
of manufactured products which are recognized at the point in time when control
transfers, generally in accordance with shipping terms. A portion of the
Company's revenues relate to the sale of software and post-contract customer
support, parts and labor for repairs, and engineering services.
In limited circumstances, contracts include multiple performance obligations,
where revenue is recognized separately for each good or service, as well as
contracts where revenue is recognized over time as control transfers to the
customer. Tangible products represent a large majority of the delivered items in
contracts with multiple performance obligations or where revenue is recognized
over time, while a smaller portion is attributable to installation, service and
maintenance. In sales arrangements that involve multiple performance
obligations, revenue is allocated based on the relative standalone selling price
for each performance obligation. Observable selling prices from actual
transactions are used whenever possible. In other instances, the Company
determines the standalone selling price based on third-party pricing or
management's best estimate. For revenues recognized over time, the Company
typically uses an input method to determine progress and recognize revenue,
based on costs incurred. The Company believes costs incurred closely correspond
with its performance under the contract and the transfer of control to the
customer.
LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
identifiable intangible assets, are reviewed for impairment whenever events or
changes in business circumstances indicate impairment may exist. If the Company
determines that the carrying value of a long-lived asset may not be recoverable,
a permanent impairment charge is recorded for the amount by which the carrying
value of the long-lived asset exceeds its estimated fair value. Reporting units
are also reviewed for possible goodwill impairment at least annually, in the
fourth quarter. If an initial assessment indicates it is more likely than not an
impairment may exist, it is evaluated by comparing the unit's estimated fair
value to its carrying value. Fair value is generally estimated using an income
approach that discounts estimated future cash flows using discount rates judged
by management to be commensurate with the applicable risk. Estimates of future
sales, operating results, cash flows and discount rates are subject to changes
in the economic environment, including such factors as the general level of
market interest rates, expected equity market returns and the volatility of
markets served, particularly when recessionary economic circumstances continue
for an extended period of time. Management believes the estimates of future cash
flows and fair values are reasonable; however, changes in estimates due to
variance from assumptions could materially affect the evaluations.
RETIREMENT PLANS
The Company maintains a prudent long-term investment strategy consistent with
the duration of pension obligations. The determination of defined benefit plan
expense and liabilities is dependent on various assumptions, including the
expected annual rate of return on plan assets, the discount rate and the rate of
annual compensation increases. Management believes the assumptions used are
appropriate; however, actual experience may differ. In accordance with U.S.
generally accepted accounting principles, actual results that differ from the
Company's assumptions are accumulated as deferred actuarial gains or losses and
amortized to expense in future periods. The Company's principal U.S. defined
benefit plan is closed to employees hired after January 1, 2016 while
shorter-tenured employees ceased accruing benefits effective October 1, 2016 .
As of September 30, 2020 , the U.S. pension plans were underfunded by $142 in
total, including unfunded plans totaling $223 . The non-U.S. plans were
underfunded by $266 , including unfunded plans totaling $319 . The Company
contributed a total of $66 to defined benefit plans in 2020 and expects to
contribute approximately $50 in 2021. At year-end 2020, the discount rate for
U.S. plans was 2.81 percent, and was 3.22 percent in 2019. The assumed
investment return on plan assets was 6.75 percent in 2020, 7.00 percent in 2019
and 7.00 percent in 2018, and will be 6.50 percent for 2021. Deferred actuarial
losses to be amortized to expense in future years were $1,253 ($950 after-tax)
as of September 30, 2020 . See Notes 12 and 13.
CONTINGENT LIABILITIES
The Company is a party to a number of pending legal proceedings and claims,
including those involving general and product liability (including asbestos) and
other matters, several of which claim substantial amounts of damages. The
Company accrues for such liabilities when it is probable that future costs
(including legal fees and expenses) will be incurred and such costs can be
reasonably estimated. Accruals are based on developments to date; management's
estimates of the outcomes of these matters; and the Company's experience in
contesting, litigating and settling similar matters. The Company engages an
outside expert to develop an actuarial estimate of its expected costs to
26
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resolve all pending and future asbestos claims, including defense costs, as well
as its related insurance receivables. The reserve for asbestos litigation, which
is recorded on an undiscounted basis, is based on projected claims through 2065.
Although it is not possible to predict the ultimate outcome of these matters,
the Company historically has been largely successful in defending itself against
claims and suits that have been brought against it, and will continue to defend
itself vigorously in all such matters. While the Company believes a material
adverse impact is unlikely, given the inherent uncertainty of litigation, a
remote possibility exists that a future development could have a material
adverse impact on the Company. See Note 13.
INCOME TAXES
Income tax expense and tax assets and liabilities reflect management's
assessment of taxes paid or expected to be paid (received) on items included in
the financial statements. Deferred tax assets and liabilities arise from
temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and
consideration of operating loss and tax credit carryforwards. Deferred income
taxes are measured using enacted tax rates in effect for the year in which the
temporary differences are expected to be recovered or settled. The impact on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. Valuation allowances are provided
to reduce deferred tax assets to the amount that will more likely than not be
realized. This requires management to make judgments and estimates regarding the
amount and timing of the reversal of taxable temporary differences, expected
future taxable income, and the impact of tax planning strategies.
Uncertainty exists regarding tax positions taken in previously filed tax returns
which remain subject to examination, along with positions expected to be taken
in future returns. The Company provides for unrecognized tax benefits, based on
the technical merits, when it is more likely than not that an uncertain tax
position will not be sustained upon examination. Adjustments are made to the
uncertain tax positions when facts and circumstances change, such as the closing
of a tax audit; changes in applicable tax laws, including tax case rulings and
legislative guidance; or expiration of the applicable statute of limitations.
On December 22, 2017 , the U.S. government enacted the Tax Cuts and Jobs Act,
which made comprehensive changes to U.S. federal income tax laws by moving from
a global to a modified territorial tax regime. As a result, cash repatriated to
the U.S. is generally no longer subject to U.S. federal income taxes. No
provision is made for withholding taxes and any applicable U.S. income taxes on
the undistributed earnings of non-U.S. subsidiaries where these earnings are
considered indefinitely invested or otherwise retained for continuing
international operations. Determination of the amount of taxes that might be
paid on these undistributed earnings if eventually remitted is not practicable.
See Notes 1 and 14.
Other Items
LEGAL MATTERS
At September 30, 2020 , there were no known contingent liabilities (including
guarantees, pending litigation, taxes and other claims) that management believes
will be material in relation to the Company's financial statements, nor were
there any material commitments outside the normal course of business.
NEW ACCOUNTING PRONOUNCEMENTS
On October 1, 2019 , the Company adopted ASC 842, Leases, which requires rights
and obligations related to lease arrangements to be recognized on the balance
sheet, using the optional transition method under which prior periods were not
adjusted. The Company elected the package of practical expedients for leases
that commenced prior to the adoption date, which included carrying forward the
historical lease classification as operating or finance. The adoption of ASC 842
resulted in the recognition of operating lease right-of-use assets and related
lease liabilities of approximately $500 as of October 1, 2019 , but did not
materially impact the Company's earnings or cash flows for the year ended
September 30, 2020 .
On October 1, 2019 , the Company adopted updates to ASC 815, Derivatives and
Hedging, which permit hedging certain contractually specified risk components.
Additionally, the updates eliminate the requirement to separately measure and
report hedge ineffectiveness and simplify hedge documentation and effectiveness
assessment requirements. These updates were adopted using a modified
retrospective approach and were immaterial to the Company's financial statements
for the year ended September 30, 2020 .
27
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On October 1, 2018 , the Company adopted ASC 606, Revenue from Contracts with
Customers, which updated and consolidated revenue recognition guidance from
multiple sources into a single, comprehensive standard to be applied for all
contracts with customers. The fundamental principle of the revised standard is
to recognize revenue based on the transfer of goods and services to customers at
the amount the Company expects to be entitled to in exchange for those goods and
services. The Company adopted the new standard using the modified retrospective
approach and applied the guidance to open contracts which were not completed at
the date of adoption. The cumulative effect of adoption resulted in a $30
increase to beginning retained earnings as of October 1, 2018 . This increase
primarily related to contracts where a portion of revenue for delivered goods or
services was previously deferred due to contingent payment terms. The adoption
of ASC 606 did not materially impact the Company's consolidated financial
statements as of and for the year ended September 30, 2019 .
In January 2017 , the FASB issued updates to ASC 350, Intangibles - Goodwill and
Other, eliminating the requirement to measure impairment based on the implied
fair value of goodwill compared to the carrying amount of a reporting unit's
goodwill. Instead, goodwill impairment will be measured as the excess of a
reporting unit's carrying amount over its estimated fair value. These updates
are effective prospectively beginning in fiscal 2021 and are not expected to
impact the Company's financial statements unless a potential goodwill impairment
is identified.
In August 2018 , the FASB issued updates to ASC 350, Intangibles - Goodwill and
Other, which align the requirements for capitalizing implementation costs
incurred in a software hosting arrangement with the requirements for costs
incurred to develop or obtain internal-use software. The Company plans to adopt
these updates prospectively in the first quarter of fiscal 2021 and they are not
expected to materially impact the Company's results of operations.
In June 2016 , the FASB issued ASC 326, Financial Instruments - Credit Losses,
which amends the impairment model by requiring entities to use a forward-looking
approach, based on expected losses, to estimate credit losses on certain types
of financial instruments, including trade receivables. The new standard is
effective in the first quarter of fiscal 2021 and is expected to have an
immaterial impact on the Company's financial statements.
In August 2018 , the FASB issued updates to ASC 715, Compensation - Retirement
Benefits, which modify the disclosure requirements for employers that sponsor
defined benefit plans or other postretirement plans. These updates are effective
in fiscal 2021 and must be adopted on a retrospective basis. The updates change
disclosures only and will not impact the Company's results of operations.
FISCAL 2021 OUTLOOK
Despite the uncertainties and challenges from COVID-19, Emerson ended the year
with strong profitability, earnings and cash flow, driven by its ongoing cost
containment and restructuring actions. As the broader macroeconomic outlook
begins to stabilize, the Company is well-positioned with a more agile and lean
cost structure to sustain and build upon its strong profitability, particularly
as late cycle end markets begin their recovery. Although much of the attention
this year was focused on reacting to the pandemic, Emerson also continued to
invest and build on its innovation and technology footprint, including the
strategic acquisition of Open Systems International, Inc. (OSI).
Emerson's outlook for fiscal 2021 assumes a conservative forecast for the
macroeconomic environment given the current uncertainty, with slow-but-steady
improvement in demand over the course of the year as economies, companies and
communities continue to gradually reopen and learn to safely operate with the
virus. Overall, revenue is expected to return to growth in the third quarter of
2021, with Commercial & Residential Solutions returning to growth in the first
quarter and Automation Solutions returning to growth later in the year.
For the full year, consolidated net sales are expected to be up 1 to 4 percent,
with underlying sales down 1 to up 2 percent excluding a 1 percent favorable
impact from foreign currency translation and a 1 percent favorable impact from
the OSI acquisition. Automation Solutions net sales are expected to be down 1 to
up 2 percent, with underlying sales down 1 to 4 percent excluding a 1 percent
favorable impact from foreign currency translation and a 2 percent favorable
impact from the OSI acquisition. Commercial & Residential Solutions net sales
are expected to be up 5 to 8 percent, with underlying sales up 4 to 7 percent
excluding a 1 percent impact from favorable foreign currency translation.
Earnings per share are expected to be $3.06 to $3.16 , while adjusted earnings
per share, which exclude a $0.28 per share impact from restructuring actions and
a $0.06 per share impact from OSI first year acquisition accounting charges, are
expected to be $3.40 to $3.50 . Operating cash flow is expected to be
approximately $3.1 billion and free cash flow, which excludes targeted capital
spending of $600 million , is expected to be approximately $2.5 billion . The
Company intends to resume share repurchases in fiscal 2021 in the amount of $500
million to $1
28
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billion, while concurrently maintaining optionality for further acquisitions
should the opportunity arise. The guidance discussed herein assumes no major
operational or supply chain disruptions and oil prices in the $35 to $50 range
during this period. However, future developments related to COVID-19, including
further actions taken by governmental authorities, 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 Item 1A - "Risk Factors."
Brexit Update
TheUnited Kingdom's (UK ) withdrawal from theEuropean Union (EU), commonly known as "Brexit", was completed onJanuary 31, 2020 . TheUK 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 theUK are principally in the Automation Solutions segment and represent less than two percent of consolidated sales. Sales of products manufactured in theUK and sold within the EU are immaterial. The Company is evaluating several potential outcomes of theUK's negotiations with the EU and believes the direct cost of incremental tariffs, logistics and other items would be immaterial.
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