Emerson Reports Second Quarter 2020 Results and Updates Full Year 2020 Guidance

Emerson (NYSE: EMR) today reported results for the second fiscal quarter ended March 31, 2020 and announced updated guidance for the fiscal year.

Second quarter net sales were down 9 percent and underlying sales were down 7 percent excluding unfavorable currency of 2 percent and no impact from acquisitions or divestitures. Growth was below management expectations in both business segments due to the unforeseen and rapid deterioration of demand in March. The spread of the COVID-19 pandemic and associated uncertainty, social distancing and business closure mandates negatively affected nearly all of our end markets and geographies, particularly in China, the United States, and Europe. One exception, however, was the surge in demand for products and solutions that support medical and life science end markets. Additionally, our businesses were negatively affected by the dramatic drop in oil and gas prices resulting from geopolitical tensions and a surge in global supply. Second quarter trailing three-month underlying orders were down 3 percent, reflective of customers across industrial, commercial and residential markets cutting costs and spending budgets in response to operating restrictions and a general drop in economic activity from the pandemic.

Second quarter gross profit margin of 42.1 percent was flat compared with the prior year due to effective cost control measures, despite a 9 percent drop in net sales. Pretax margin of 16.6 percent and EBIT margin of 17.4 percent were up 180 bps and 160 bps, respectively. Adjusted EBIT margin, which excludes restructuring and related charges, was 18.4 percent for the quarter, up 240 basis points, on lower sales. This outcome largely reflected lower stock compensation charges due to a significantly lower stock price as well as benefits from aggressive restructuring actions, which began in the third quarter of 2019.

GAAP earnings per share were $0.84 and adjusted earnings per share, which excludes $0.05 of restructuring and related charges, were $0.89, exceeding management’s guidance of $0.79 to $0.83. This adjusted EPS outcome reflects operational declines due to COVID-19 being more than offset by non-operating tailwinds, which included lower stock compensation costs due to a lower stock price, as well as the benefits of aggressive restructuring actions and favorable foreign exchange gains.

Operating cash flow was $588 million, up $55 million or 10 percent, and free cash flow was $477 million, up $63 million or 15 percent, reflecting free cash flow conversion of 91 percent in the quarter.

“The past quarter unleashed unprecedented challenges for not only our people, operations, and customers, but also for national and local governments, health care systems, and certainly families as well,” said Emerson Chairman and Chief Executive Officer David N. Farr. “The rapid spread and far-reaching impact of the COVID-19 virus has been staggering and will likely alter the trajectory of our global economy for the foreseeable future. However, I am tremendously proud of our global team for adapting quickly and executing on difficult - yet necessary - decisions to ensure we are poised for long-term success.

"Our top priority is and always will be the safety and health of our employees, customers, and communities across the globe. We have implemented recommended policies and practices to protect our workforce so they can safely and effectively carry out their vital work with steadfast resolve. While the vast majority of our global office-based team is working from home, we recognize the responsibility we have to support our customers in essential industries that rely on our solutions and services. Such industries include life sciences and medical, water, food and beverage, chemical, energy and power generation. Accordingly, we are driving hard every day to safely and responsibly continue operations to serve our customers in these vital markets. While some of our operating sites remain below full capacity, we are prioritizing the production of Emerson materials and solutions needed on the front lines of the pandemic battle, including solutions used to manufacture respirators, masks and other safety equipment, and life sciences materials.

"As part of our ongoing response to the dynamic market conditions, we maintain regular communications with government officials and other corporate partners involved in the pandemic response. Internally, our leadership team meets daily to review the state of the business, discuss safety, liquidity, and business continuity among other critical management topics.

"The global health crisis, coupled with volatility in the oil markets, has created a significant demand decline in many of our end markets. But we remain confident that our aggressive cost control reset measures already underway, initiated in the third quarter of last year and outlined in detail in February, combined with our strong balance sheet and disciplined operating philosophy, will provide the foundation required to continue to serve our customers and emerge stronger in the long run."

Business Platform Results

Automation Solutions net sales decreased 10 percent, with underlying sales down 8 percent excluding unfavorable currency of 2 percent and no impact from acquisitions. In the Americas, underlying sales were down 11 percent, with the United States down 12 percent reflecting a broad-based drop in demand. Europe underlying sales were down 3 percent, while Asia, Middle East & Africa underlying sales dropped 6 percent, driven by sharp declines in China of over 20 percent.

March trailing three-month underlying orders were down 1 percent, reflecting initial momentum in the early portion of the quarter, particularly in the longer cycle businesses of Final Control and Systems, up 3 percent and 7 percent respectively. In contrast, our instrumentation business was down 9 percent, impacted more severely due to the deteriorating environment driven by COVID-19 and oil demand. Geographically, the Americas and Asia declined 4 percent and 3 percent, respectively, while Europe was flat as early quarter momentum quickly faded in March as the pandemic took hold. Middle East & Africa grew double digits on easy comparisons from the prior year and some previous project wins being booked. China orders dropped by 12 percent. Overall, we saw customers slow their acceptance and approval processes. Sequential backlog grew 3 percent to $5.1 billion.

Segment EBIT margin decreased 40 basis points to 14.4 percent. Adjusted segment EBIT margin, which excludes restructuring and related costs, increased 50 basis points to 15.5 percent while adjusted segment EBITDA margin increased 130 basis points, to 20.6 percent. This outcome reflected previously initiated aggressive restructuring and cost reset actions beginning to take effect. Total restructuring in the quarter was $29 million, and was $112 million in the first half of 2020.

Commercial & Residential Solutions net sales decreased 7 percent with underlying sales down 5 percent excluding unfavorable currency of 1 percent and the impact of divestitures which subtracted 1 percent. In the Americas, underlying sales were down 3 percent, reflecting a broad-based decline in demand as the quarter unfolded. Europe was down 1 percent as air conditioning market weakness more than offset demand in heat pump markets. Finally, Asia, Middle East & Africa was down 15 percent, driven by a significant drop in China of over 30 percent.

March trailing three-month underlying orders were down 5 percent, with the HVAC, Cold Chain, and Tools businesses each down mid-single digits. Geographically, we saw Asia orders drop by over 14 percent, driven by China, which dropped 27 percent. A strong early growth trend in Europe was held to 4 percent as the pandemic spread and businesses reduced operations in March.

Segment EBIT margin was flat at 21.0 percent. Adjusted segment EBIT margin, which excludes restructuring and related costs, increased 40 bps to 21.6 percent, and adjusted segment EBITDA margin was up 90 basis points to 26.1 percent, driven by aggressive restructuring and cost reset actions which began to yield savings as well as favorable price-cost dynamics. Total restructuring in the quarter was $9 million, and was $19 million in the first half of 2020.

2020 Outlook

Management has updated the fiscal year 2020 outlook to reflect the changing demand environment associated with COVID-19 and the concurrent unfolding energy market dynamics. GAAP earnings per share guidance is $2.62 to $2.82. Adjusted earnings per share guidance, which excludes restructuring actions and related costs, is $3.00 to $3.20, compared to prior guidance of $3.55 to $3.80. This drop in guidance reflects the negative impact of reduced global demand, partially offset by aggressive cost containment actions, reduced stock compensation and other non-operating items. Total restructuring actions for the year are now expected to be approximately $280 million, an increase of approximately $65 million compared to the previous plan. Share repurchases, now complete for the year, will be approximately $950 million, compared to the previous guidance of $1.5 billion. There is no change in the dividend plan. Lastly, we expect capital expenditures to be $550 million, compared to the previous guidance of $650 million.

The following table presents the updated 2020 guidance framework:

Sales Growth Guidance			EPS and Cash Flow Guidance
			GAAP EPS	$2.62 - $2.82
Net Sales Growth	(11%) - (9%)		Adjusted EPS	$3.00 - $3.20
Automation Solutions	(10%) - (8%)		Tax Rate	~22%
Commercial & Residential Solutions	(13%) - (11%)		Operating Cash Flow	~$2.75B
Underlying Sales Growth	(9%) - (7%)		Free Cash Flow	~$2.2B
Automation Solutions	(8%) - (6%)		Capital Expenditures	~$550M
Commercial & Residential Solutions	(11%) - (9%)		Share Repurchases	~$950M

This updated guidance assumes, among other items, continued significant demand deterioration in the third quarter, and demand remaining negative through the first half of 2021. It also assumes oil prices stabilize in the $20-$30 range during that time period.

“Despite evolving challenges, we will continue to be proactive and rapidly adapt where needed to ensure we are making the best use of our resources," Mr. Farr concluded. "Everyone at Emerson - our Board of Directors, our leadership team and our teammates around the world - has displayed an unwavering commitment to serving our customers and defeating this common enemy. I thank them for their hard work, agility, dedication, and passion as we all work together in the fight against this horrible disease and to position Emerson for continued future success.”

Upcoming Investor Events

Today, beginning at 9 a.m. Eastern Time, Emerson management will discuss the second quarter 2020 results during an investor conference call. Participants can access a live webcast available at www.emerson.com/financial at the time of the call. A replay of the call will remain available for 90 days. Conference call slides will be posted in advance of the call on the company website.

Forward-Looking and Cautionary Statements

Statements in this press release 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 and volatility, pricing, protection of intellectual property, cybersecurity, tariffs, competitive and technological factors, among others, as set forth in the Company's most recent Annual Report on Form 10-K and subsequent reports filed with the SEC.

							Table 1
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
	Quarter Ended March 31						Percent
	2019			2020			Change
Net sales	$4,570			$4,162			(9)%
Costs and expenses:
Cost of sales	2,645			2,412
SG&A expenses	1,145			983
Other deductions, net	57			42
Interest expense, net	48			36
Earnings before income taxes	675			689			2%
Income taxes	150			165
Net earnings	525			524
Less: Noncontrolling interests in earnings of subsidiaries	5			7
Net earnings common stockholders	$520			$517			(1)%
Diluted avg. shares outstanding	618.1			611.0
Diluted earnings per share common share	$0.84			$0.84			—%
	Quarter Ended March 31
	2019			2020
Other deductions, net
Amortization of intangibles	$60			$59
Restructuring costs	10			31
Other	(13	)		(48	)
Total	$57			$42

							Table 2
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
	Six Months Ended March 31						Percent
	2019			2020			Change
Net sales	$8,717			$8,313			(5)%
Costs and expenses:
Cost of sales	5,031			4,804
SG&A expenses	2,222			2,106
Other deductions, net	107			220
Interest expense, net	91			71
Earnings before income taxes	1,266			1,112			(12)%
Income taxes	274			259
Net earnings	992			853
Less: Noncontrolling interests in earnings of subsidiaries	7			10
Net earnings common stockholders	$985			$843			(14)%
Diluted avg. shares outstanding	622.9			612.6
Diluted earnings per share common share	$1.58			$1.37			(13)%
	Six Months Ended March 31
	2019			2020
Other deductions, net
Amortization of intangibles	$117			$118
Restructuring costs	20			128
Special advisory fees	—			13
Other	(30	)		(39	)
Total	$107			$220

				Table 3
EMERSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, UNAUDITED)
	Quarter Ended March 31
	2019			2020
Assets
Cash and equivalents	$1,384			$2,583
Receivables, net	2,911			2,641
Inventories	2,073			2,058
Other current assets	784			750
Total current assets	7,152			8,032
Property, plant & equipment, net	3,615			3,553
Goodwill	6,509			6,520
Other intangible assets	2,701			2,498
Other	1,094			1,108
Total assets	$21,071			$21,711
Liabilities and equity
Short-term borrowings and current
maturities of long-term debt	$2,551			$3,741
Accounts payable	1,730			1,521
Accrued expenses	2,433			2,678
Total current liabilities	6,714			7,940
Long-term debt	3,786			3,960
Other liabilities	1,999			2,248
Total equity	8,572			7,563
Total liabilities and equity	$21,071			$21,711

				Table 4
EMERSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
	Six Months Ended March 31
		2019			2020
Operating activities
Net earnings		$992			$853
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		406			422
Stock compensation		52			18
Pension expense		—			34
Changes in operating working capital		(530	)		(260	)
Other, net		(64	)		(55	)
Cash provided by operating activities		856			1,012
Investing activities
Capital expenditures		(274	)		(225	)
Purchases of businesses, net of cash and equivalents acquired		(243	)		(96	)
Divestitures of businesses		5			—
Other, net		(65	)		(42	)
Cash used in investing activities		(577	)		(363	)
Financing activities
Net increase in short-term borrowings		851			2,076
Proceeds from short-term borrowings greater than three months		—			433
Proceeds from long-term debt		1,135			—
Payments of long-term debt		(406	)		(502	)
Dividends paid		(607	)		(611	)
Purchases of common stock		(1,000	)		(942	)
Other, net		29			39
Cash provided by financing activities		2			493
Effect of exchange rate changes on cash and equivalents		10			(53	)
Increase in cash and equivalents		291			1,089
Beginning cash and equivalents		1,093			1,494
Ending cash and equivalents		$1,384			$2,583

				Table 5
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
	Quarter Ended March 31
	2019			2020
Sales
Automation Solutions	$3,010			$2,709
Climate Technologies	1,092			1,026
Tools & Home Products	469			432
Commercial & Residential Solutions	1,561			1,458
Eliminations	(1	)		(5	)
Net sales	$4,570			$4,162
Earnings
Automation Solutions	$444			$391
Climate Technologies	226			217
Tools & Home Products	102			89
Commercial & Residential Solutions	328			306
Stock compensation	(59	)		38
Unallocated pension and postretirement costs	27			12
Corporate and other	(17	)		(22	)
Interest expense, net	(48	)		(36	)
Earnings before income taxes	$675			$689
Restructuring costs
Automation Solutions	$6			$23
Climate Technologies	1			2
Tools & Home Products	2			5
Commercial & Residential Solutions	3			7
Corporate	1			1
Total	$10			$31
The table above does not include $9 of costs related to restructuring actions that were reported in cost of sales in the second quarter of fiscal 2020.
Depreciation and Amortization
Automation Solutions	$131			$138
Climate Technologies	45			45
Tools & Home Products	17			19
Commercial & Residential Solutions	62			64
Corporate and other	11			9
Total	$204			$211

				Table 6
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
	Six Months Ended March 31
	2019			2020
Sales
Automation Solutions	$5,809			$5,561
Climate Technologies	1,972			1,899
Tools & Home Products	927			862
Commercial & Residential Solutions	2,899			2,761
Eliminations	9			(9	)
Net sales	$8,717			$8,313
Earnings
Automation Solutions	$851			$701
Climate Technologies	372			368
Tools & Home Products	193			175
Commercial & Residential Solutions	565			543
Stock compensation	(52	)		(18	)
Unallocated pension and postretirement costs	54			25
Corporate and other	(61	)		(68	)
Interest expense, net	(91	)		(71	)
Earnings before income taxes	$1,266			$1,112
Restructuring costs
Automation Solutions	$11			$106
Climate Technologies	4			9
Tools & Home Products	4			8
Commercial & Residential Solutions	8			17
Corporate	1			5
Total	$20			$128
The table above does not include $9 of costs related to restructuring actions that were reported in cost of sales in the second quarter of fiscal 2020.
Depreciation and Amortization
Automation Solutions	$260			$277
Climate Technologies	90			89
Tools & Home Products	36			38
Commercial & Residential Solutions	126			127
Corporate and other	20			18
Total	$406			$422

Reconciliations of Non-GAAP Financial Measures & Other																		Table 7
Reconciliations of Non-GAAP measures (denoted by *) with the most directly comparable GAAP measure (dollars in millions, except per share amounts):
Q2 2020 Underlying Sales Change						Auto Solns				Comm & Res Solns				Emerson
Reported (GAAP)						(10		)%		(7		)%		(9		)%
(Favorable) / Unfavorable FX						2		%		1		%		2		%
Acquisitions / Divestitures						—		%		1		%		—		%
Underlying*						(8		)%		(5		)%		(7		)%
FY 2020E Underlying Sales Change						Auto Solns				Comm & Res Solns				Emerson
Reported (GAAP)						(10)% - (8)%				(13)% - (11)%				(11)% - (9)%
(Favorable) / Unfavorable FX						~ 2%				~ 1%				~ 2%
Acquisitions / Divestitures						~ -%				~ 1%				~ -%
Underlying*						(8)% - (6)%				(11)% - (9)%				(9)% - (7)%
Earnings Per Share						Q2 FY20E				Q2 FY20
Earnings per share (GAAP)						$0.73 - $0.77				$	0.84
Restructuring and related charges						~ 0.06				0.05
Adjusted earnings per share*						$0.79 - $0.83				$	0.89
Earnings Per Share						FY2020E Prior Guidance				FY2020E
Earnings per share (GAAP)						$3.27 - $3.52				$2.62 - $2.82
Restructuring and related charges						~ 0.28				~ 0.38
Adjusted earnings per share*						$3.55 - $3.80				$3.00 - $3.20
EBIT Margin						Q2 FY19				Q2 FY20				Change
Pretax margin (GAAP)						14.8		%		16.6		%		180 bps
Interest expense, net						1.0		%		0.8		%		(20) bps
Earnings before interest and taxes margin*						15.8		%		17.4		%		160 bps
Restructuring and related charges						0.2		%		1.0		%		80 bps
Adjusted earnings before interest and taxes margin*						16.0		%		18.4		%		240 bps
Automation Solutions Segment EBIT Margin						Q2 FY19				Q2 FY20				Change
Automation Solutions Segment EBIT margin (GAAP)						14.8		%		14.4		%		(40) bps
Restructuring charges impact						0.2		%		1.1		%		90 bps
Automation Solutions Adjusted Segment EBIT margin*						15.0		%		15.5		%		50 bps
Depreciation / amortization						4.3		%		5.1		%		80 bps
Automation Solutions Adjusted Segment EBITDA margin*						19.3		%		20.6		%		130 bps
Commercial & Residential EBIT Margin						Q2 FY19				Q2 FY20				Change
Commercial & Residential EBIT margin (GAAP)						21.0		%		21.0		%		- bps
Restructuring charges impact						0.2		%		0.6		%		40 bps
Commercial & Residential Adjusted EBIT margin*						21.2		%		21.6		%		40 bps
Depreciation / amortization						4.0		%		4.5		%		50 bps
Commercial & Residential Adjusted EBITDA margin*						25.2		%		26.1		%		90 bps
Q2 Cash Flow						Q2 FY19				Q2 FY20				Change				% Change
Operating cash flow (GAAP)						$	533			$	588			$	55			10	%
Capital expenditures						(119		)		(111		)		8				5	%
Free cash flow*						$	414			$	477			$	63			15	%
1H Cash Flow						FY 2019				FY 2020				Change				% Change
Operating cash flow (GAAP)						$	856			$	1,012			$	156			18	%
Capital expenditures						(274		)		(225		)		49				17	%
Free cash flow*						$	582			$	787			$	205			35	%
FY 2020E Cash Flow						FY 2020E
Operating cash flow (GAAP)						~ $2,750
Capital expenditures						~ (550)
Free cash flow*						~ $2,200
Cash Flow to Net Earnings Conversion						Q2 FY20
Operating cash flow to net earnings (GAAP)						112		%
Capital expenditures						(21		)%
Free cash flow to net earnings*						91		%
Note: Underlying sales and orders exclude the impact of acquisitions, divestitures and currency translation.

 

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