EMERSON ELECTRIC CO
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
December 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 1-278
EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
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Missouri
(State or other jurisdiction of
incorporation or organization)
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43-0259330
(I.R.S. Employer
Identification No.)
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8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri
(Address of principal executive offices)
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63136
(Zip Code)
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Registrant's telephone number, including area code:
(314) 553-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
ý
No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
ý
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
ý
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
¨
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Emerging growth company
¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of
$0.50
par value per share outstanding at
January 31, 2019
:
614,619,859
shares.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three months ended December 31, 2017 and 2018
(Dollars in millions, except per share amounts; unaudited)
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Three Months Ended
December 31, |
|||||
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2017
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2018
|
|
||
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Net sales
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$
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3,816
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|
4,147
|
|
|
|
Costs and expenses:
|
||||||
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Cost of sales
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2,202
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2,386
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||
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Selling, general and administrative expenses
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995
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1,077
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Other deductions, net
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78
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50
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||
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Interest expense (net of interest income of $11 and $5, respectively)
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38
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43
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Earnings before income taxes
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503
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591
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Income taxes
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109
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124
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Net earnings
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394
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467
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Less: Noncontrolling interests in earnings of subsidiaries
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2
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2
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||
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Net earnings common stockholders
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$
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392
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465
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Basic earnings per share common stockholders
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$
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0.61
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0.74
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Diluted earnings per share common stockholders
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$
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0.61
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0.74
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Cash dividends per common share
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$
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0.485
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0.49
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See accompanying Notes to Consolidated Financial Statements.
2
Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three months ended December 31, 2017 and 2018
(Dollars in millions; unaudited)
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Three Months Ended December 31,
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|||||||
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2017
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2018
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|||
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Net earnings
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$
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394
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467
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|||
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Other comprehensive income (loss), net of tax:
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||||||||
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Foreign currency translation
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7
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(35
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)
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||||
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Pension and postretirement
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23
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13
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||||
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Cash flow hedges
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(3
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)
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(15
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)
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||||
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Total other comprehensive income (loss)
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27
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(37
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)
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||||
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Comprehensive income
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421
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430
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||||
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Less: Noncontrolling interests in comprehensive
income of subsidiaries
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2
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2
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||||
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Comprehensive income common stockholders
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$
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419
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428
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|||
See accompanying Notes to Consolidated Financial Statements.
3
Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES
(Dollars and shares in millions, except per share amounts; unaudited)
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Sept 30, 2018
|
Dec 31, 2018
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||||
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ASSETS
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||||
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Current assets
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||||
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Cash and equivalents
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$
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1,093
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1,248
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Receivables, less allowances of $113 and $105, respectively
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3,023
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2,733
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||
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Inventories
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1,813
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1,980
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||
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Other current assets
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690
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697
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||
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Total current assets
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6,619
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6,658
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||
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Property, plant and equipment, net
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3,562
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3,551
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Other assets
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||||
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Goodwill
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6,455
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6,468
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Other intangible assets
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2,751
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2,714
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Other
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1,003
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1,038
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Total other assets
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10,209
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10,220
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Total assets
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$
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20,390
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20,429
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LIABILITIES AND EQUITY
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Current liabilities
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Short-term borrowings and current maturities of long-term debt
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$
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1,623
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3,320
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Accounts payable
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1,943
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1,794
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||
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Accrued expenses
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2,534
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2,288
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Income taxes
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64
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138
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Total current liabilities
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6,164
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7,540
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Long-term debt
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3,137
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2,641
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Other liabilities
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2,099
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1,972
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Equity
|
|
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Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 629.2 shares and 615.8 shares, respectively
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477
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477
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||
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Additional paid-in-capital
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348
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375
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|
||
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Retained earnings
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23,072
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23,252
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|
||
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Accumulated other comprehensive income (loss)
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(1,015
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)
|
(1,052
|
)
|
||
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Cost of common stock in treasury, 324.2 shares and 337.5 shares, respectively
|
(13,935
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)
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(14,816
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)
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||
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Common stockholders’ equity
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8,947
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8,236
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||
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Noncontrolling interests in subsidiaries
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43
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40
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||
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Total equity
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8,990
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8,276
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|
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Total liabilities and equity
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$
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20,390
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20,429
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|
See accompanying Notes to Consolidated Financial Statements.
4
Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three months ended December 31, 2017 and 2018
(Dollars in millions; unaudited)
|
|
|||||||
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Three Months Ended
|
|||||||
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December 31,
|
|||||||
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2017
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2018
|
|
|||
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Operating activities
|
|
|
|||||
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Net earnings
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$
|
394
|
|
467
|
|
||
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Adjustments to reconcile net earnings to net cash provided by operating activities:
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|||||||
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Depreciation and amortization
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187
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202
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|||
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Changes in operating working capital
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(160
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)
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(310
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)
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|||
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Other, net
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26
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(36
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)
|
|||
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Cash provided by operating activities
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447
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323
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|
|||
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Investing activities
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|||||||
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Capital expenditures
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(96
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)
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(155
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)
|
|||
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Purchases of businesses, net of cash and equivalents acquired
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(513
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)
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(73
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)
|
|||
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Divestitures of businesses
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235
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|
—
|
|
|||
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Other, net
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(18
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)
|
(31
|
)
|
|||
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Cash used in investing activities
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(392
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)
|
(259
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)
|
|||
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Financing activities
|
|||||||
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Net increase in short-term borrowings
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1,061
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|
1,601
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|
|||
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Payments of long-term debt
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(251
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)
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(403
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)
|
|||
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Dividends paid
|
(311
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)
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(305
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)
|
|||
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Purchases of common stock
|
(500
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)
|
(786
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)
|
|||
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Other, net
|
(30
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)
|
(9
|
)
|
|||
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Cash provided by (used in) financing activities
|
(31
|
)
|
98
|
|
|||
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Effect of exchange rate changes on cash and equivalents
|
10
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|
(7
|
)
|
|||
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Increase in cash and equivalents
|
34
|
|
155
|
|
|||
|
Beginning cash and equivalents
|
3,062
|
|
1,093
|
|
|||
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Ending cash and equivalents
|
$
|
3,096
|
|
1,248
|
|
||
|
Changes in operating working capital
|
|||||||
|
Receivables
|
$
|
188
|
|
292
|
|
||
|
Inventories
|
(149
|
)
|
(170
|
)
|
|||
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Other current assets
|
14
|
|
(9
|
)
|
|||
|
Accounts payable
|
(129
|
)
|
(247
|
)
|
|||
|
Accrued expenses
|
(166
|
)
|
(246
|
)
|
|||
|
Income taxes
|
82
|
|
70
|
|
|||
|
Total changes in operating working capital
|
$
|
(160
|
)
|
(310
|
)
|
||
See accompanying Notes to Consolidated Financial Statements.
5
Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. & SUBSIDIARIES
(Dollars, euros and shares in millions, except per share amounts or where noted)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2018
. Certain prior year amounts have been reclassified to conform to current year presentation.
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
$20
increase to beginning retained earnings as of October 1, 2018. This increase primarily relates 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
three months ended
December 31, 2018
.
In the first quarter of fiscal 2019, the Company adopted updates to ASC 715,
Compensation - Retirement Benefits
, which permit only the service cost component of net periodic pension and postretirement expense to be reported with compensation costs, while all other components are required to be reported separately in other deductions. These updates were adopted retrospectively and resulted in the reclassification of
$10
of income in the first quarter of fiscal 2018 from cost of sales and SG&A to other deductions, net. Segment earnings were not impacted by the updates to ASC 715.
(2) REVENUE RECOGNITION
Emerson is a global manufacturer that combines technology and engineering to provide innovative solutions to its customers, largely in the form of tangible products. 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 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 small 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.
Revenue is recognized over time for approximately
5 percent
of the Company's revenues. These contracts largely relate to projects in the Process Control Systems & Solutions product offering within the Automation Solutions segment where revenue is recognized using the percentage-of-completion method to reflect the transfer of control over time, while a small amount is attributable to long-term maintenance and service contracts where revenue is typically recognized on a straight-line basis as the services are provided. Approximately
5 percent
of revenues relate to sales arrangements with multiple performance obligations, principally in the Automation Solutions segment. Tangible products represent a large majority of the delivered items in contracts with multiple performance
6
obligations or where revenue is recognized over time, while a smaller portion is attributable to installation, service and maintenance.
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.
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. Generally, contract duration is short-term, and cancellation, termination or refund provisions apply only in the event of contract breach and are rarely invoked.
Payment terms vary but are generally short-term in nature. The Company's long-term contracts, where revenue is generally recognized over time, are typically billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. The timing of revenue recognition and billings under these contracts results in either unbilled receivables (contract assets) when revenue recognized exceeds billings, or customer advances (contract liabilities) when billings exceed revenue recognized. Unbilled receivables are reclassified to accounts receivable when an unconditional right to consideration exists, typically when a milestone in the contract is achieved. The Company does not evaluate whether the transaction price includes a significant financing component for contracts where the time between cash collection and performance is less than one year.
Certain arrangements with customers include variable consideration, typically in the form of rebates, cash discounts or penalties. In limited circumstances, the Company sells products with a general right of return. In most instances, returns are limited to product quality issues. The Company records a reduction to revenue at the time of sale to reflect the ultimate amount of consideration it expects to receive. The Company's estimates are updated quarterly based on historical experience, trend analysis, and expected market conditions. Variable consideration is typically not constrained at the time revenue is recognized.
The Company offers warranties, which vary by product line and are competitive for the markets in which the Company operates. Warranties are largely offered to provide assurance that the product will function as intended and generally extend for a period of one to two years from the date of sale or installation. Provisions for warranty expense are estimated at the time of sale based on historical experience and adjusted quarterly for any known issues that may arise. Product warranty expense is less than
one percent
of sales.
Capitalized amounts related to incremental costs to obtain customer contracts and costs to fulfill contracts are immaterial.
The following table summarizes the balances of the Company's unbilled receivables (contract assets), which are reported in Other current assets, and its customer advances (contract liabilities), which are reported in Accrued expenses.
|
Sept 30, 2018
|
Dec 31, 2018
|
|||||||
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Unbilled receivables (contract assets)
|
$
|
321
|
|
371
|
|
|||
|
Customer advances (contract liabilities)
|
(510
|
)
|
(490
|
)
|
||||
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Net contract liabilities
|
$
|
(189
|
)
|
(119
|
)
|
|||
The majority of the Company's contract balances relate to arrangements where revenue is recognized over time and payments from customers are made according to a contractual billing schedule. The decrease in net contract liabilities was due to revenue recognized for performance completed during the period which exceeded customer billings. Revenue recognized for the
three months ended
December 31, 2018
included approximately
$220
that was included in the beginning contract liability balance. No other factors materially impacted the change in net contract liabilities. Revenue recognized in the current reporting period for performance obligations that were fully satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material.
7
As of
December 31, 2018
, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was
$5.2 billion
. The Company expects to recognize approximately
85 percent
of its remaining performance obligations as revenue over the next
12 months
, with the remainder substantially over the subsequent two years thereafter.
See Note 12 for additional information about the Company's revenues.
(3) WEIGHTED-AVERAGE COMMON SHARES
Reconciliations of weighted-average shares for basic and diluted earnings per common share follow. Earnings allocated to participating securities were inconsequential.
|
Three Months Ended
December 31, |
|||||
|
|
2017
|
|
2018
|
|
|
|
Basic shares outstanding
|
638.2
|
|
623.9
|
|
|
|
Dilutive shares
|
2.3
|
|
3.9
|
|
|
|
Diluted shares outstanding
|
640.5
|
|
627.8
|
|
|
(4) OTHER FINANCIAL INFORMATION
|
|
Sept 30, 2018
|
Dec 31, 2018
|
||||||
|
Inventories
|
||||||||
|
Finished products
|
$
|
592
|
|
659
|
|
|||
|
Raw materials and work in process
|
1,221
|
|
1,321
|
|
||||
|
Total
|
$
|
1,813
|
|
1,980
|
|
|||
|
Property, plant and equipment, net
|
|
|
||||||
|
Property, plant and equipment, at cost
|
$
|
8,370
|
|
8,451
|
|
|||
|
Less: Accumulated depreciation
|
4,808
|
|
4,900
|
|
||||
|
Total
|
$
|
3,562
|
|
3,551
|
|
|||
|
Goodwill by business segment
|
||||||||
|
Automation Solutions
|
$
|
5,355
|
|
5,369
|
|
|||
|
Climate Technologies
|
670
|
|
670
|
|
||||
|
Tools & Home Products
|
430
|
|
429
|
|
||||
|
Commercial & Residential Solutions
|
1,100
|
|
1,099
|
|
||||
|
Total
|
$
|
6,455
|
|
6,468
|
|
|||
|
Other intangible assets
|
|
|
||||||
|
Gross carrying amount
|
$
|
4,667
|
|
4,716
|
|
|||
|
Less: Accumulated amortization
|
1,916
|
|
2,002
|
|
||||
|
Net carrying amount
|
$
|
2,751
|
|
2,714
|
|
|||
|
Other intangible assets include customer relationships of $1,476 and $1,517 as of December 31, 2018 and September 30, 2018, respectively.
|
||||||||
|
Other assets include the following:
|
||||||||
|
Pension assets
|
$
|
591
|
|
616
|
|
|||
|
Asbestos-related insurance receivables
|
$
|
124
|
|
123
|
|
|||
|
Deferred income taxes
|
$
|
74
|
|
77
|
|
|||
8
|
Sept 30, 2018
|
Dec 31, 2018
|
|||||||
|
Accrued expenses include the following:
|
||||||||
|
Employee compensation
|
$
|
629
|
|
512
|
|
|||
|
Customer advances
|
$
|
510
|
|
490
|
|
|||
|
Product warranty
|
$
|
124
|
|
117
|
|
|||
|
Other liabilities
|
|
|
||||||
|
Pension and postretirement liabilities
|
$
|
625
|
|
623
|
|
|||
|
Deferred income taxes
|
484
|
|
482
|
|
||||
|
Asbestos litigation
|
334
|
|
332
|
|
||||
|
Other
|
656
|
|
535
|
|
||||
|
Total
|
$
|
2,099
|
|
1,972
|
|
|||
(5) FINANCIAL INSTRUMENTS
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities
– As of
December 31, 2018
, the notional amount of foreign currency hedge positions was approximately
$2.3 billion
, and commodity hedge contracts totaled approximately
$126
(primarily
47 million
pounds of copper and aluminum). All derivatives receiving hedge accounting are cash flow hedges. The majority of hedging gains and losses deferred as of
December 31, 2018
are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in Other deductions, net reflect hedges of balance sheet exposures that do not receive hedge accounting. The following gains and losses are included in earnings and other comprehensive income (OCI) for the
three months ended
December 31, 2018
and
2017
:
|
Into Earnings
|
Into OCI
|
||||||||||||||
|
1st Quarter
|
1st Quarter
|
||||||||||||||
|
Gains (Losses)
|
Location
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
||||||
|
Commodity
|
Cost of sales
|
$
|
5
|
|
(3
|
)
|
13
|
|
(7
|
)
|
|||||
|
Foreign currency
|
Sales, cost of sales
|
—
|
|
2
|
|
(12
|
)
|
(12
|
)
|
||||||
|
Foreign currency
|
Other deductions, net
|
—
|
|
11
|
|
||||||||||
|
Total
|
|
$
|
5
|
|
10
|
|
1
|
|
(19
|
)
|
|||||
Regardless of whether derivatives receive hedge accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving hedge accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the
three months ended
December 31, 2018
and
2017
.
Fair Value Measurement
– Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of
December 31, 2018
, the fair value of long-term debt was
$3.6 billion
, which exceeded the carrying value by
$150
. At
December 31, 2018
, the fair values of commodity contracts and foreign currency contracts were reported in other current assets and accrued expenses. Valuations of derivative contract positions are summarized below:
|
|
September 30, 2018
|
December 31, 2018
|
|||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
||||||||||
|
Foreign Currency
|
$
|
35
|
|
11
|
|
14
|
|
21
|
|
||||
|
Commodity
|
$
|
1
|
|
10
|
|
—
|
|
14
|
|
||||
Counterparties to derivatives arrangements are companies with investment-grade credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below pre-established levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The maximum amount that could
9
potentially have been required was
$23
. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds.
No
collateral was posted with counterparties and
none
was held by the Company as of
December 31, 2018
.
(6) EQUITY
The change in equity for the
three months ended
December 31, 2018
and
2017
is shown below:
|
Three Months Ended December 31,
|
||||||
|
2017
|
|
2018
|
|
|||
|
Common stock
|
$
|
477
|
|
477
|
|
|
|
Additional paid-in-capital
|
||||||
|
Beginning balance
|
297
|
|
348
|
|
||
|
Stock plans
|
9
|
|
27
|
|
||
|
Ending balance
|
306
|
|
375
|
|
||
|
Retained earnings
|
||||||
|
Beginning balance
|
21,995
|
|
23,072
|
|
||
|
Net earnings common stockholders
|
392
|
|
465
|
|
||
|
Dividends paid
|
(311
|
)
|
(305
|
)
|
||
|
Adoption of accounting standard updates
|
3
|
|
20
|
|
||
|
Ending balance
|
22,079
|
|
23,252
|
|
||
|
Accumulated other comprehensive income (loss)
|
||||||
|
Beginning balance
|
(1,019
|
)
|
(1,015
|
)
|
||
|
Foreign currency translation
|
7
|
|
(35
|
)
|
||
|
Pension and postretirement
|
23
|
|
13
|
|
||
|
Cash flow hedges
|
(3
|
)
|
(15
|
)
|
||
|
Ending balance
|
(992
|
)
|
(1,052
|
)
|
||
|
Treasury stock
|
||||||
|
Beginning balance
|
(13,032
|
)
|
(13,935
|
)
|
||
|
Purchases
|
(500
|
)
|
(925
|
)
|
||
|
Issued under stock plans
|
11
|
|
44
|
|
||
|
Ending balance
|
(13,521
|
)
|
(14,816
|
)
|
||
|
Common stockholders' equity
|
8,349
|
|
8,236
|
|
||
|
Noncontrolling interests in subsidiaries
|
||||||
|
Beginning balance
|
52
|
|
43
|
|
||
|
Net earnings
|
2
|
|
2
|
|
||
|
Dividends paid
|
(15
|
)
|
(5
|
)
|
||
|
Ending balance
|
39
|
|
40
|
|
||
|
Total equity
|
$
|
8,388
|
|
8,276
|
|
|
10
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in Accumulated other comprehensive income (loss) for the
three months ended
December 31, 2018
and
2017
is shown below:
|
Three Months Ended December 31,
|
||||||||
|
2017
|
|
2018
|
|
|||||
|
Foreign currency translation
|
||||||||
|
Beginning balance
|
$
|
(369
|
)
|
(600
|
)
|
|||
|
Other comprehensive income (loss) before reclassifications
|
24
|
|
(35
|
)
|
||||
|
Reclassified to gain/loss on sale of business
|
(17
|
)
|
—
|
|
||||
|
Ending balance
|
(362
|
)
|
(635
|
)
|
||||
|
Pension and postretirement
|
||||||||
|
Beginning balance
|
(662
|
)
|
(420
|
)
|
||||
|
Amortization of deferred actuarial losses into earnings
|
23
|
|
13
|
|
||||
|
Ending balance
|
(639
|
)
|
(407
|
)
|
||||
|
Cash flow hedges
|
||||||||
|
Beginning balance
|
12
|
|
5
|
|
||||
|
Deferral of gains (losses) arising during the period
|
1
|
|
(14
|
)
|
||||
|
Reclassification of realized (gains) losses to sales and cost of sales
|
(4
|
)
|
(1
|
)
|
||||
|
Ending balance
|
9
|
|
(10
|
)
|
||||
|
Accumulated other comprehensive income (loss)
|
$
|
(992
|
)
|
(1,052
|
)
|
|||
|
Activity above is shown net of income taxes for the three months ended December 31, 2018 and 2017, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(4) and $(8); deferral of cash flow hedging gains (losses): $5 and $-; reclassification of realized cash flow hedging (gains) losses: $- and $1.
|
||||||||
(8) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below:
|
|
Three Months Ended December 31,
|
|||||||
|
|
2017
|
2018
|
||||||
|
Service cost
|
$
|
19
|
|
18
|
|
|||
|
Interest cost
|
46
|
|
50
|
|
||||
|
Expected return on plan assets
|
(87
|
)
|
(88
|
)
|
||||
|
Net amortization
|
31
|
|
17
|
|
||||
|
Total
|
$
|
9
|
|
(3
|
)
|
|||
11
(9) OTHER DEDUCTIONS, NET
Other deductions, net are summarized below:
|
|
Three Months Ended
December 31, |
|||||||
|
|
2017
|
2018
|
|
|||||
|
Amortization of intangibles
|
$
|
56
|
|
57
|
|
|||
|
Restructuring costs
|
15
|
|
10
|
|
||||
|
Other
|
7
|
|
(17
|
)
|
||||
|
Total
|
$
|
78
|
|
50
|
|
|||
For the three months ended December 31, 2018, higher intangibles amortization of
$17
from acquisitions completed in 2018 was largely offset by backlog amortization of
$15
incurred in the prior year related to the valves & controls acquisition. The change in Other is primarily due to a favorable impact on comparisons from foreign currency transactions of
$13
and pensions of
$11
.
(10) RESTRUCTURING COSTS
Restructuring expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. Costs for the
three months ended
December 31, 2018
largely relate to restructuring of the global cost structure consistent with the current level of economic activity, as well as the redeployment of resources for future growth.
Restructuring expense by business segment follows:
|
|
Three Months Ended
December 31, |
|||||||
|
|
2017
|
2018
|
||||||
|
Automation Solutions
|
$
|
10
|
|
5
|
|
|||
|
Climate Technologies
|
5
|
|
3
|
|
||||
|
Tools & Home Products
|
—
|
|
2
|
|
||||
|
Commercial & Residential Solutions
|
5
|
|
5
|
|
||||
|
Total
|
$
|
15
|
|
10
|
|
|||
Details of the change in the liability for restructuring costs during the
three months ended
December 31, 2018
follow:
|
|
Sept 30, 2018
|
Expense
|
Utilized/Paid
|
Dec 31, 2018
|
||||||||||||
|
Severance and benefits
|
$
|
46
|
|
5
|
|
11
|
|
40
|
|
|||||||
|
Lease and other contract terminations
|
3
|
|
—
|
|
1
|
|
2
|
|
||||||||
|
Asset write-downs
|
—
|
|
1
|
|
1
|
|
—
|
|
||||||||
|
Vacant facility and other shutdown costs
|
3
|
|
2
|
|
2
|
|
3
|
|
||||||||
|
Start-up and moving costs
|
—
|
|
2
|
|
2
|
|
—
|
|
||||||||
|
Total
|
$
|
52
|
|
10
|
|
17
|
|
45
|
|
|||||||
12
(11) INCOME TAXES
On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the "Act"), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Act includes a reduction of the U.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 foreign earnings. The Company recognized a net tax benefit of
$43
(
$0.07
per share) in the first quarter of fiscal 2018 and
$189
(
$0.30
per share) for the full year due to impacts of the Act.
Effective in fiscal 2019, the Act also subjects the Company to U.S. tax on global intangible low-taxed income earned by certain of its foreign subsidiaries. The Company has elected to recognize this tax as a period expense when it is incurred.
In the first quarter of fiscal 2019, the Company completed its accounting for the impacts of the Act and recorded a
$100
benefit relating to the one-time tax on deemed repatriation of accumulated foreign earnings, which was offset by a related increase to its unrecognized tax benefits.
Given the complexities associated with the Act, additional regulatory guidance is expected to be issued. Recently, the U.S. Treasury and Internal Revenue Service released proposed regulations relating to the one-time tax on deemed repatriation of accumulated foreign earnings, the utilization of foreign tax credits, the calculation of global intangible low-taxed income, and other provisions of the Act. The proposed regulations were subject to a comment period and final regulations are expected to be issued after consideration of comments received. The Company will include the effects of any final regulations, including those issued on January 15, 2019 related to the one-time tax on deemed repatriation which it is currently assessing, as well as any additional guidance or legislative changes, in the period they are issued.
Income taxes were
$124
for the first quarter of
2019
and
$109
for
2018
, resulting in effective tax rates of
21 percent
and
22 percent
, respectively. The effective tax rates in both years reflect the lower U.S. corporate income tax rate as a result of the Act. The current year rate also included favorable discrete items, which reduced the rate
3
percentage points, while the prior year rate included the net tax benefit discussed above.
(12) BUSINESS SEGMENTS
Summarized information about the Company's results of operations by business segment follows:
|
|
Three Months Ended December 31,
|
|||||||||||
|
|
Sales
|
Earnings
|
||||||||||
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
||||
|
Automation Solutions
|
$
|
2,572
|
|
2,799
|
|
386
|
|
407
|
|
|||
|
Climate Technologies
|
922
|
|
880
|
|
165
|
|
146
|
|
||||
|
Tools & Home Products
|
330
|
|
458
|
|
87
|
|
91
|
|
||||
|
Commercial & Residential Solutions
|
1,252
|
|
1,338
|
|
252
|
|
237
|
|
||||
|
Differences in accounting methods
|
51
|
|
59
|
|
||||||||
|
Corporate and other
|
(148
|
)
|
(69
|
)
|
||||||||
|
Eliminations/Interest
|
(8
|
)
|
10
|
|
(38
|
)
|
(43
|
)
|
||||
|
Total
|
$
|
3,816
|
|
4,147
|
|
503
|
|
591
|
|
|||
The decrease in Corporate and other was primarily due to lower incentive stock compensation of
$63
, reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year. In addition, the prior year included valves & controls first year acquisition accounting charges of
$10
related to inventory and
$15
for backlog amortization.
13
Automation Solutions
sales by major product offering are summarized below:
|
|
Three Months Ended December 31,
|
|||||||
|
|
2017
|
|
2018
|
|
||||
|
Measurement & Analytical Instrumentation
|
$
|
772
|
|
858
|
|
|||
|
Valves, Actuators & Regulators
|
863
|
|
874
|
|
||||
|
Industrial Solutions
|
428
|
|
542
|
|
||||
|
Process Control Systems & Solutions
|
509
|
|
525
|
|
||||
|
Automation Solutions
|
$
|
2,572
|
|
2,799
|
|
|||
Segment sales by geographic destination are summarized below:
|
Three Months Ended December 31,
|
||||||||||||||||||
|
2017
|
2018
|
|||||||||||||||||
|
|
Automation Solutions
|
|
Commercial & Residential Solutions
|
|
Total
|
|
Automation Solutions
|
|
Commercial & Residential Solutions
|
|
Total
|
|
||||||
|
Americas
|
$
|
1,286
|
|
778
|
|
2,064
|
|
1,405
|
|
907
|
|
2,312
|
|
|||||
|
Asia, Middle East & Africa
|
790
|
|
348
|
|
1,138
|
|
841
|
|
265
|
|
1,106
|
|
||||||
|
Europe
|
496
|
|
126
|
|
622
|
|
553
|
|
166
|
|
719
|
|
||||||
|
Total
|
$
|
2,572
|
|
1,252
|
|
3,824
|
|
2,799
|
|
1,338
|
|
4,137
|
|
|||||
(13) ACQUISITIONS AND DIVESTITURES
During the first three months of 2019, the Company acquired
three
businesses in the Automation Solutions segment for
$73
, net of cash acquired. These three businesses had combined annual sales of approximately
$40
.
On July 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 reported in the Industrial Solutions product offering in the Automation Solutions segment. T
he Company recognized goodwill of
$358
(
$20
of which is expected to be tax deductible), and identifiable intangible assets of
$278
, primarily intellectual property and customer relationships with a weighted-average useful life of approximately
12
years.
On July 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.
T
he Company recognized goodwill of
$374
(
$17
of which is expected to be tax deductible), and identifiable intangible assets of
$358
, primarily intellectual property and customer relationships with a weighted-average useful life of approximately
14
years.
Valuations of acquired assets and liabilities are in process and subject to refinement.
On December 1, 2017, the Company acquired Paradigm, a provider of software solutions for the oil and gas industry, for
$505
, net of cash acquired. This business had annual sales of approximately
$140
and is included in the Measurement & Analytical Instrumentation product offering within Automation Solutions. The Company recognized goodwill of
$309
(
$170
of which is expected to be tax deductible), and identifiable intangible assets of
$238
, primarily intellectual property and customer relationships with a weighted-average useful life of approximately
11
years.
During 2018, the Company also acquired
four
smaller businesses,
two
in the Automation Solutions segment and
two
in the Climate Technologies segment.
14
On October 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 the first quarter of 2018 due to income taxes resulting from nondeductible goodwill. The Company realized
$150
in after-tax cash proceeds from the sale.
Pro Forma Financial Information
The following unaudited pro forma consolidated condensed financial results of operations are presented as if the 2018 acquisitions occurred on October 1, 2016 and the acquisition of the valves & controls business occurred on October 1, 2015. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisitions occurred as of that time.
|
|
Three Months Ended
|
|||
|
Dec 31, 2017
|
||||
|
Net sales
|
$
|
4,087
|
|
|
|
Net earnings common stockholders
|
$
|
410
|
|
|
|
Diluted earnings per share
|
$
|
0.64
|
|
|
(14) SUBSEQUENT EVENTS
In January 2019, the Company issued
€500
of
1.25%
notes due October 2025 and
€500
of
2.0%
notes due October 2029. The net proceeds from the sale of the notes were used to repay commercial paper borrowings and for general corporate purposes.
On January 31, 2019, the Company completed the acquisition of Intelligent Platforms, a division of General Electric, for approximately
$160
net of cash acquired. This business, which offers programmable logic controller technologies, will be reported in the Automation Solutions segment.
15
Items 2 and 3.
Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Net sales for the
first
quarter of 2019 were
$4.1 billion
, up
9 percent
, supported by acquisitions which added
6 percent
. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased
4.5 percent
, reflecting broad-based global demand in energy-related and global industrial markets, steady growth in North American air conditioning markets, and favorable global trends for professional tools. Underlying sales were negatively impacted by slower demand in China within the Climate Technologies segment, which reduced comparisons by approximately 2 percentage points.
Net earnings common stockholders were
$465 million
, up
19 percent
, and diluted earnings per share were
$0.74
, up
21 percent
. Comparisons benefited from lower incentive stock compensation expense of
$63 million
($0.08 per share).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31
Following is an analysis of the Company’s operating results for the
first quarter ended December 31, 2018
, compared with the
first quarter ended December 31, 2017
.
|
2017
|
2018
|
Change
|
|||||||
|
(dollars in millions, except per share amounts)
|
|
|
|
|
|
||||
|
Net sales
|
$
|
3,816
|
|
4,147
|
|
9
|
%
|
||
|
Gross profit
|
$
|
1,614
|
|
1,761
|
|
9
|
%
|
||
|
Percent of sales
|
42.3
|
%
|
42.5
|
%
|
|
|
|||
|
SG&A
|
$
|
995
|
|
1,077
|
|
|
|
||
|
Percent of sales
|
26.1
|
%
|
26.0
|
%
|
|
|
|||
|
Other deductions, net
|
$
|
78
|
|
50
|
|
|
|
||
|
Interest expense, net
|
$
|
38
|
|
43
|
|
|
|
||
|
Earnings before income taxes
|
$
|
503
|
|
591
|
|
17
|
%
|
||
|
Percent of sales
|
13.2
|
%
|
14.2
|
%
|
|
|
|||
|
Net earnings common stockholders
|
$
|
392
|
|
465
|
|
19
|
%
|
||
|
Percent of sales
|
10.3
|
%
|
11.2
|
%
|
|
|
|||
|
Diluted earnings per share
|
$
|
0.61
|
|
0.74
|
|
21
|
%
|
||
Net sales for the
first
quarter of
2019
were
$4.1 billion
, an increase of
$331 million
compared with
$3.8 billion
in
2018
. Underlying sales increased
4.5 percent
(
$162 million
) on higher volume and slightly higher price. Acquisitions added
6 percent
(
$232 million
) and foreign currency translation subtracted
1.5 percent
(
$63 million
). Underlying sales increased
7 percent
in the U.S. and
2 percent
internationally. The Americas was up 8 percent and Europe was up
3 percent
, while Asia, Middle East & Africa was down 2 percent (China down
3 percent
). Sales increased
$227 million
in Automation Solutions, supported by acquisitions and continued broad-based global demand. Commercial & Residential Solutions sales increased
$86 million
due to acquisitions, partially offset by slower demand in Asia, driven by China air conditioning and heating markets.
Cost of sales for the
first
quarter of
2019
were
$2.4 billion
, an increase of
$184 million
compared with
$2.2 billion
in
2018
, primarily due to acquisitions and higher volume, partially offset by the impact of foreign currency translation. Gross margin of
42.5 percent
increased 0.2 percentage points, primarily due to savings from cost reduction actions and leverage on higher sales. Comparisons also benefited from prior year valves & controls first year acquisition accounting charges of $10 million related to inventory.
Selling, general and administrative (SG&A) expenses of
$1.1 billion
increased
$82 million
compared with the prior year, primarily due to acquisitions and higher volume. SG&A as a percent of sales decreased slightly to
26.0 percent
,
16
primarily due to leverage on the higher volume and lower incentive stock compensation expense of
$63 million
($0.08 per share), reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year. These items were largely offset by acquisitions, which negatively impacted comparisons by 0.4 percentage points, and higher investment spending.
Other deductions, net were
$50 million
in
2019
, a decrease of
$28 million
compared with the prior year, reflecting a favorable impact on comparisons from foreign currency transactions of
$13 million
and pensions of
$11 million
, and lower restructuring expense of
$5 million
. Higher intangibles amortization of $17 million from acquisitions completed in 2018 was largely offset by backlog amortization of $15 million incurred in the prior year related to the valves & controls acquisition. See Note 9.
Pretax earnings of
$591 million
increased
$88 million
, or
17 percent
. Earnings increased
$21 million
in Automation Solutions and decreased
$15 million
in Commercial & Residential Solutions. See Note 12 and the following Business Segments discussion.
Income taxes were
$124 million
for
2019
and
$109 million
for
2018
, resulting in effective tax rates of
21 percent
and
22 percent
, respectively. The effective tax rates in both years reflect the lower U.S. corporate income tax rate as a result of the Tax Cuts and Jobs Act (the "Act"). The current year rate also included favorable discrete items, which reduced the rate 3 percentage points, while the prior year rate included a net tax benefit of $43 million due to impacts of the Act. The effective tax rate for full year 2019 is currently expected to be approximately
24
to
25 percent
.
Given the complexities associated with the Act, additional regulatory guidance is expected to be issued. The Company will include the effects of any final regulations, as well as any additional guidance or legislative changes, in the period they are issued. See Note 11.
Net earnings common stockholders in the
first
quarter of
2019
were
$465 million
, up
19 percent
, compared with
$392 million
in the prior year, and earnings per share were
$0.74
, up
21 percent
, compared with
$0.61
in
2018
.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the
first quarter ended December 31, 2018
, compared with the
first quarter ended December 31, 2017
. The Company defines segment earnings as earnings before interest and taxes. See Note 12 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
|
Three Months Ended Dec 31
|
2017
|
2018
|
Change
|
||||||
|
(dollars in millions)
|
|
|
|
||||||
|
Sales
|
$
|
2,572
|
|
2,799
|
|
9
|
%
|
||
|
Earnings
|
$
|
386
|
|
407
|
|
5
|
%
|
||
|
Margin
|
15.0
|
%
|
14.5
|
%
|
|
|
|||
|
Sales by Major Product Offering
|
|||||||||
|
Measurement & Analytical Instrumentation
|
$
|
772
|
|
858
|
|
11
|
%
|
||
|
Valves, Actuators & Regulators
|
863
|
|
874
|
|
1
|
%
|
|||
|
Industrial Solutions
|
428
|
|
542
|
|
27
|
%
|
|||
|
Process Control Systems & Solutions
|
509
|
|
525
|
|
3
|
%
|
|||
|
Total
|
$
|
2,572
|
|
2,799
|
|
9
|
%
|
||
Automation Solutions sales were
$2.8 billion
in the
first
quarter, an increase of
$227 million
, or
9 percent
. Underlying sales increased
7 percent
(
$177 million
) on higher volume and slightly higher price. Acquisitions added
4 percent
(
$98 million
) and foreign currency translation had a
2 percent
(
$48 million
) unfavorable impact. Sales for Measurement & Analytical Instrumentation increased
$86 million
, or
11 percent
, on broad-based demand in global industrial markets. Process Control Systems & Solutions increased
$16 million
, or
3 percent
, reflecting favorable demand for small and mid-sized projects focused on expansion and optimization of existing assets, and strong maintenance and repair demand. Valves, Actuators & Regulators increased
$11 million
, or
1 percent
. Industrial Solutions sales increased
$114 million
, or
27 percent
, led by the Aventics acquisition ($98 million) and favorable trends in the U.S. Underlying sales increased 8 percent in the Americas (U.S. up
7 percent
),
3 percent
in Europe and 8 percent in Asia, Middle East & Africa (China up
15 percent
). Earnings were
$407 million
, an increase of
$21 million
, or
5 percent
, due to higher volume and price, savings from cost reduction actions and lower restructuring expense of
$5 million
. Margin decreased
0.5
percentage points to
14.5 percent
, reflecting a dilutive impact from the
17
Aventics acquisition of 0.6 percentage points. Leverage on higher volume and favorable price-cost were largely offset by higher investment spending and the timing of tariff mitigation actions.
COMMERCIAL & RESIDENTIAL SOLUTIONS
|
Three Months Ended Dec 31
|
2017
|
2018
|
Change
|
||||||
|
(dollars in millions)
|
|
|
|
||||||
|
Sales:
|
|||||||||
|
Climate Technologies
|
$
|
922
|
|
880
|
|
(5
|
)%
|
||
|
Tools & Home Products
|
330
|
|
458
|
|
39
|
%
|
|||
|
Total
|
$
|
1,252
|
|
1,338
|
|
7
|
%
|
||
|
Earnings:
|
|||||||||
|
Climate Technologies
|
$
|
165
|
|
146
|
|
(12
|
)%
|
||
|
Tools & Home Products
|
87
|
|
91
|
|
5
|
%
|
|||
|
Total
|
$
|
252
|
|
237
|
|
(6
|
)%
|
||
|
Margin
|
20.1
|
%
|
17.7
|
%
|
|
||||
Commercial & Residential Solutions sales were
$1.3 billion
in the
first
quarter, up
$86 million
, or
7 percent
compared to the prior year. Underlying sales were down
1 percent
(
$16 million
) on lower volume. Underlying sales were negatively impacted by slower demand in China within the Climate Technologies segment, which reduced comparisons by approximately 6 percentage points. Acquisitions added
9 percent
(
$117 million
) and foreign currency translation subtracted
1 percent
(
$15 million
). Climate Technologies sales were
$880 million
in the
first
quarter, a decrease of
$42 million
, or
5 percent
. HVAC sales were down sharply in Asia, reflecting slower demand in China air conditioning and heating markets, while growth in the U.S. was solid. Global cold chain sales were up moderately on solid demand in the U.S. and China. Tools & Home Products sales were
$458 million
in the
first
quarter, an increase of
$128 million
, or
39 percent
, reflecting the tools and test acquisition, which added $107 million, and favorable trends in global professional tools markets. Food waste disposers were up moderately while wet/dry vacuums were down modestly. Overall, underlying sales increased 8 percent in the Americas (U.S. up
8 percent
) and
3 percent
in Europe, while Asia, Middle East & Africa decreased 23 percent (China down
30 percent
). Earnings were
$237 million
, a decrease of
$15 million
, and margin declined 2.4 percentage points. The decrease was largely due to a dilutive impact from the tools and test acquisition of 0.9 percentage points and unfavorable price-cost. The impact of tariffs, unfavorable mix and deleverage on the lower volume also reduced margin, while comparisons benefited from higher warranty costs of $10 million in the prior year associated with a specific product issue.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the
three months ended
December 31, 2018
as compared to the year ended
September 30, 2018
follow.
|
|
Sept 30, 2018
|
|
Dec 31, 2018
|
|
||
|
Working capital (in millions)
|
$
|
455
|
|
(882
|
)
|
|
|
Current ratio
|
1.1
|
|
0.9
|
|
||
|
Total debt-to-total capital
|
34.7
|
%
|
42.0
|
%
|
||
|
Net debt-to-net capital
|
29.1
|
%
|
36.4
|
%
|
||
|
Interest coverage ratio
|
14.2
|
X
|
13.0X
|
|
||
The Company's working capital decreased and debt-to-capital ratios increased primarily due to higher short-term borrowings to support accelerated share repurchases in the first quarter. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of
13.0
X for the first
three months
of
2019
compares to
11.2
X for the first
three months
of
2018
. The increase reflects higher pretax earnings in the current year.
Operating cash flow for the first
three months
of
2019
was
$323 million
, a decrease of
$124 million
compared with
$447 million
in the prior year, due to timing of accounts payable and accruals, partially offset by higher earnings.
18
Free cash flow of
$168 million
(operating cash flow of
$323 million
less capital expenditures of
$155 million
) decreased
$183 million
in
2019
, reflecting the decrease in operating cash flow and an increase in capital investment. Free cash flow was
$351 million
in
2018
(operating cash flow of
$447 million
less capital expenditures of
$96 million
). Free cash flow along with increased short-term borrowings were used to fund dividends of
$305 million
, common stock purchases of
$786 million
, repayments of long-term debt of $403 million, and acquisitions of
$73 million
.
In January 2019, the Company issued €500 million of 1.25% notes due October 2025 and €500 million of 2.0% notes due October 2029. The net proceeds from the sale of the notes were used to repay commercial paper borrowings and for general corporate purposes.
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. The Company 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.
FISCAL 2019 OUTLOOK
The Company's first quarter results provided a solid start to fiscal 2019 and confirmed management's outlook for the global macroeconomic environment. Strength across the Company's global industrial end markets, including China, is expected to continue. Weakening consumer demand in China negatively impacted the Commercial & Residential Solutions business, but is expected to improve in the second half of 2019. For the full year, Automation Solutions net sales are expected to be up 7 to 10 percent, with underlying sales up 5 to 8 percent excluding a positive impact from acquisitions of approximately 4 percent and unfavorable currency translation of 2 percent. Commercial & Residential Solutions net sales are expected to be up 8 to 10 percent, with underlying sales up 3 to 5 percent excluding a positive impact from acquisitions of approximately 6 percent and unfavorable currency translation of 1 percent. Consolidated net sales are expected to be up 7 to 10 percent, with underlying sales up 4 to 7 percent excluding a positive impact from acquisitions of approximately 5 percent and unfavorable currency translation of 2 percent. Reported earnings per share are expected to be $3.60 to $3.75, while operating cash flow is expected to be approximately $3.2 billion and free cash flow, which excludes targeted capital spending of $650 million, is expected to be approximately $2.5 billion.
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 economic and currency conditions, market demand, pricing, protection of intellectual property, cybersecurity, tariffs, competitive and technological factors, and the impact of the Tax Cuts and Jobs Act, 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, 2018 and in subsequent reports filed with the SEC, which are hereby incorporated by reference.
The United Kingdom (UK) continues to negotiate its withdrawal from the European Union (EU), commonly known as "Brexit", with a current withdrawal deadline of March 29, 2019. 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 Brexit scenarios and believes the direct cost of incremental tariffs, logistics and other items would be immaterial.
19
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in a timely manner. This system also is designed to ensure information is accumulated and communicated to management, including the Company's certifying officers, to allow timely decisions regarding required disclosure. Based on an evaluation performed, the certifying officers have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
There was no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
In the first quarter of fiscal 2019, the Company successfully completed upgrades to its Oracle enterprise resource planning system across a majority of its businesses. Separately, the Company also implemented certain internal controls related to the adoption of ASC 606,
Revenue from Contracts with Customers
, to determine and assess the impact of the new standard on its consolidated financial statements.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (shares in 000s).
|
Period
|
Total Number of Shares
Purchased
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
|
|||||||||
|
October 2018
|
2,960
|
|
$72.83
|
2,960
|
|
38,876
|
|||||||
|
November 2018
|
4,137
|
|
$68.74
|
4,137
|
|
34,739
|
|||||||
|
December 2018
|
7,351
|
|
$57.83
|
7,351
|
|
27,388
|
|||||||
|
Total
|
14,448
|
|
$64.03
|
14,448
|
|
27,388
|
|||||||
In November 2015, the Board of Directors authorized the purchase of up to 70 million shares, and approximately
27.4 million
shares remain available.
20
Item 6. Exhibits
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).
|
4
|
|
Emerson agrees to furnish to the Securities and Exchange Commission, upon request, copies of any long-term debt instruments that authorize an amount of securities constituting 10 percent or less of the total assets of Emerson and its subsidiaries on a consolidated basis.
|
|
10.1
|
|
|
|
10.2
|
|
|
|
10.3
|
|
|
|
10.4
|
|
Letter Agreement effective as of October 2, 2018
, by and between Emerson Electric Co. and Edward L. Monser, incorporated by reference to the Emerson Electric Co. Form 8-K filed October 5, 2018, File No. 1-278, Exhibit filed 10.1.
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
32
|
|
|
|
101
|
|
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three months ended December 31, 2018 and 2017, (ii) Consolidated Statements of Comprehensive Income for the three months ended December 31, 2018 and 2017, (iii) Consolidated Balance Sheets as of September 30, 2018 and December 31, 2018, (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2018 and 2017, and (v) Notes to Consolidated Financial Statements for the three months ended December 31, 2018.
|
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
EMERSON ELECTRIC CO.
|
|
|||
|
|
|
|
||
|
By
|
/s/ Frank J. Dellaquila
|
|
||
|
|
|
Frank J. Dellaquila
|
|
|
|
|
|
Senior Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
(on behalf of the registrant and as Chief Financial Officer)
|
|
|
|
February 6, 2019
|
||||
22
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 4. Controls and ProceduresPart II. Other InformationItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits