ST. LOUIS–(BUSINESS WIRE)–Emerson (NYSE: EMR) today reported results for the second fiscal quarter ended March 31, 2021.
“I remain proud, humbled, and energized by the exceptional advances and adaptability I’m seeing across the enterprise,” said Emerson President and CEO Lal Karsanbhai. “We have two major concurrent themes building momentum within the organization. First, the enthusiasm and progress around modernizing our culture is palpable, particularly with regard to diversity and inclusion, work practices, and talent management. These initiatives are not just good practice, but are expected to be key business enablers for Emerson’s outperformance and value creation going forward. We will share more details on this vital work and our overall sustainability progress in our upcoming ESG Report which will be published in June.
“Secondly, economic recovery momentum is building across most of our key end markets, which resulted in better than expected top line results this quarter. Trailing three month underlying orders ended on the high side of the guided range, and underlying sales came in above guidance – a strong signal for broadening recovery. Residential markets and shorter cycle automation markets continue to show strength, while commercial and longer cycle automation markets should continue their steady recovery during the second half of the year. Importantly, we will continue to drive the remaining elements of our comprehensive cost reset plan as we target achieving record margins. Lastly, we are accelerating investment in innovation and key technologies that drive differentiation, create value for our customers, and are aligned with global macrotrends such as sustainability and digital transformation.”
Second quarter Net Sales were up 6 percent and Underlying Sales were up 2 percent, excluding favorable currency of 3 percent and an impact from acquisitions of 1 percent. Revenue for the quarter was ahead of management’s February guidance, with both business platforms finishing above expectations. The Americas improved sequentially, but was down 4 percent year over year, as residential and cold chain strength was more than offset by a more sluggish process automation recovery. Europe was up 7 percent, while Asia, Middle East & Africa grew by 12 percent, driven by China which recovered sharply by 45 percent.
March Trailing Three-Month Underlying Orders were up 4 percent (improved from down 2 percent in February), in the upper portion of guidance, as strength in residential, cold chain, professional tools, hybrid and discrete automation markets more than offset later cycle process automation markets.
Second quarter Gross Profit Margin of 42.0 percent was down 10 basis points from the previous year primarily due to business mix, as the recovery in Commercial & Residential Solutions outpaced Automation Solutions. Pretax Margin of 16.6 percent was flat while EBIT Margin of 17.5 percent was up 10 basis points, as ongoing comprehensive cost reduction actions were largely offset by higher costs due to the mark-to-market stock compensation plan, which produced an unfavorable impact of 230 basis points. The stock price in the prior year was sharply lower than current year as a result of the pandemic induced drop. Adjusted EBIT Margin, which excludes restructuring and first year purchase accounting charges, was 18.2 percent for the quarter, down 20 basis points.
Earnings Per Share were $0.93 for the quarter, up 11 percent, and Adjusted Earnings Per Share were $0.97, up 9 percent. Earnings in the quarter exceeded management guidance, benefiting from better volume and ongoing cost reduction actions.
Operating Cash Flow was $807 million for the quarter, up 37 percent, and $1.6 billion year-to-date, up 60 percent. Free Cash Flow was $707 million, up 48 percent for the quarter, resulting in strong free cash flow conversion of 125 percent. Year-to-date, Free Cash Flow was $1.4 billion, up 77 percent. Cash flow results reflected higher earnings due to operational execution across the two business platforms and favorable trade working capital.
Business Platform Results
Automation Solutions net sales increased 3 percent in the quarter, with underlying sales down 2 percent, which was ahead of February guidance. Results reflected ongoing strength across discrete and hybrid markets, and improvement across MRO and installed base programs (KOB3). Discrete oriented businesses grew high single digits, while systems and software grew low single digits. Recovery in the Americas continues to lag, but exceeded our expectations and showed sequential improvement with underlying sales down 12 percent compared to down 20 percent in Q1. Continued momentum in life sciences, food & beverage, and medical markets paired with lagging but stabilizing trends across most process industries. Europe underlying sales were up 6 percent, driven by power and biofuels demand. Asia, Middle East & Africa underlying sales grew 9 percent, as recovery in China (up 42 percent), more than offset softness in SE Asia and the Middle East.
March trailing three-month underlying orders were down 5 percent (improvement from down 9 percent in February), reflecting an ongoing lagging recovery in many process automation markets, partially offset by strength across most discrete and hybrid automation markets. Importantly, however, process automation MRO and installed base targeted programs (KOB3) showed sequential improvement. The Americas improved, but continues to be the trailing geography, down 10 percent. Asia, Middle East & Africa declined modestly by 4 percent, supported by China orders increasing sharply by 19 percent, largely driven by demand in discrete markets. Europe was up by 7 percent, also supported by discrete businesses. Backlog was unchanged from the prior quarter at $5.3 billion, but was up 14 percent year-to-date.
Segment EBIT margin increased 240 basis points to 16.8 percent, on down sales, as savings from cost actions and favorable price-cost more than offset volume deleverage and mix. Adjusted segment EBIT margin, which excludes restructuring and related costs, increased 180 basis points to 17.3 percent. Total restructuring and related actions in the quarter totaled $14 million.
Commercial & Residential Solutions net sales increased 13 percent in the quarter, with underlying sales up 11 percent, at the top end of previous guidance. Underlying sales in the Americas were up 8 percent, reflecting continued strong demand in residential markets and improvement in cold chain and professional tools businesses. Similarly, Europe was up 9 percent as heat pump demand was driven by sustainability regulations and customer technology preferences. Asia, Middle East & Africa was up 24 percent, bolstered by China, up 56 percent due to strong commercial HVAC and cold chain demand.
March trailing three-month underlying orders were up 21 percent (improvement from up 14 percent in February), with high single digit or double digit growth across all businesses and geographies. Ongoing strength in residential facing markets was bolstered by cold chain and professional tools momentum. The Americas was up 19 percent, while Europe was up 15 percent, driven by demand for heat pumps and other energy efficient appliance technologies. Asia, Middle East & Africa orders increased by 32 percent, driven by growth in China of over 60 percent. Backlog increased by approximately $200 million in the quarter, ending at a record $1.0 billion. Backlog was up 58 percent year-to-date.
Segment EBIT margin increased 70 basis points to 21.7 percent as leverage and cost reductions were somewhat offset by price-cost headwinds. Adjusted segment EBIT margin, which excludes restructuring and related costs, increased 40 basis points to 22.0 percent. Total restructuring and related actions in the quarter totaled $5 million.
2021 Updated Outlook
Despite ongoing pandemic challenges in some parts of the world, we expect overall continued improvement in industrial and commercial demand over the remainder of 2021. We also expect that residential demand will remain robust, but begin to taper in the second half.
The following table summarizes the updated 2021 guidance framework:
2021 Guidance
Net Sales Growth
6% – 9%
Operating Cash Flow
~$3.3B
Automation Solutions
3% – 5%
Capital Spend
~$600M
Commercial & Residential Solutions
14% – 16%
Free Cash Flow
~$2.7B
Dividend
~$1.2B
Underlying Sales Growth
3% – 6%
Share Repurchase
Automation Solutions
(1%) – 1%
/ M&A (excl. OSI)1
$500M – $1.0B
Commercial & Residential Solutions
12% – 14%
Pretax Margin
~15.5%
Tax Rate
~22%
Adjusted EBIT
~17.5%
Restructuring Actions
~$200M
Adjusted EBITDA
22.5%+
GAAP EPS
$3.60 +/- $.05
Adjusted EPS
$3.90 +/- $.05
Note 1: OSI Inc. closed on Oct. 1, 2020, the first day of the fiscal year.
Upcoming Investor Events
Today, beginning at 8:30 a.m. Central Time / 9:30 a.m. Eastern Time, Emerson management will discuss the second quarter 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 be 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
2020
2021
Change
Net sales
$4,162
$4,431
6%
Costs and expenses:
Cost of sales
2,412
2,569
SG&A expenses
983
1,054
Other deductions, net
42
33
Interest expense, net
36
38
Earnings before income taxes
689
737
7%
Income taxes
165
169
Net earnings
524
568
Less: Noncontrolling interests in earnings of subsidiaries
7
7
Net earnings common stockholders
$517
$561
9%
Diluted avg. shares outstanding
611.0
602.8
Diluted earnings per share common share
$0.84
$0.93
11%
Quarter Ended March 31
2020
2021
Other deductions, net
Amortization of intangibles
$59
$74
Restructuring costs
31
17
Other
(48)
(58)
Total
$42
$33
Table 2
EMERSON AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
(AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)
Six Months Ended March 31
Percent
2020
2021
Change
Net sales
$8,313
$8,592
3%
Costs and expenses:
Cost of sales
4,804
5,007
SG&A expenses
2,106
2,052
Other deductions, net
220
155
Interest expense, net
71
78
Earnings before income taxes
1,112
1,300
17%
Income taxes
259
280
Net earnings
853
1,020
Less: Noncontrolling interests in earnings of subsidiaries
10
14
Net earnings common stockholders
$843
$1,006
19%
Diluted avg. shares outstanding
612.6
602.3
Diluted earnings per share common share
$1.37
$1.67
22%
Six Months Ended March 31
2020
2021
Other deductions, net
Amortization of intangibles
$118
$152
Restructuring costs
128
83
Special advisory fees
13
—
Other
(39)
(80)
Total
$220
$155
Table 3
EMERSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, UNAUDITED)
Quarter Ended March 31
2020
2021
Assets
Cash and equivalents
$2,583
$2,342
Receivables, net
2,641
2,754
Inventories
2,058
2,016
Other current assets
750
849
Total current assets
8,032
7,961
Property, plant & equipment, net
3,553
3,663
Goodwill
6,520
7,787
Other intangible assets
2,498
3,095
Other
1,108
1,294
Total assets
$21,711
$23,800
Liabilities and equity
Short-term borrowings and current maturities of long-term debt
$3,741
$1,456
Accounts payable
1,521
1,797
Accrued expenses
2,678
3,041
Total current liabilities
7,940
6,294
Long-term debt
3,960
5,823
Other liabilities
2,248
2,503
Total equity
7,563
9,180
Total liabilities and equity
$21,711
$23,800
Table 4
EMERSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, UNAUDITED)
Six Months Ended March 31
2020
2021
Operating activities
Net earnings
$853
$1,020
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
422
483
Stock compensation
18
125
Pension expense
34
16
Changes in operating working capital
(260)
66
Other, net
(55)
(95)
Cash provided by operating activities
1,012
1,615
Investing activities
Capital expenditures
(225)
(222)
Purchases of businesses, net of cash and equivalents acquired
(96)
(1,611)
Other, net
(42)
61
Cash used in investing activities
(363)
(1,772)
Financing activities
Net increase in short-term borrowings
2,076
60
Proceeds from short-term borrowings greater than three months
433
—
Payments of long-term debt
(502)
(301)
Dividends paid
(611)
(606)
Purchases of common stock
(942)
(78)
Other, net
39
83
Cash provided by (used in) financing activities
493
(842)
Effect of exchange rate changes on cash and equivalents
(53)
26
Increase (Decrease) in cash and equivalents
1,089
(973)
Beginning cash and equivalents
1,494
3,315
Ending cash and equivalents
$2,583
$2,342
Table 5
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
Quarter Ended March 31
2020
2021
Sales
Measurement & Analytical Instrumentation
$776
$732
Valves, Actuators & Regulators
854
836
Industrial Solutions
494
555
Systems & Software
585
670
Automation Solutions
2,709
2,793
Climate Technologies
1,026
1,160
Tools & Home Products
432
485
Commercial & Residential Solutions
1,458
1,645
Eliminations
(5)
(7)
Net sales
$4,162
$4,431
Earnings
Automation Solutions
$391
$471
Climate Technologies
217
245
Tools & Home Products
89
112
Commercial & Residential Solutions
306
357
Stock compensation
38
(61)
Unallocated pension and postretirement costs
12
23
Corporate and other
(22)
(15)
Interest expense, net
(36)
(38)
Earnings before income taxes
$689
$737
Restructuring costs
Automation Solutions
$23
$12
Climate Technologies
2
3
Tools & Home Products
5
1
Commercial & Residential Solutions
7
4
Corporate
1
1
Total
$31
$17
The table above does not include $9 and $4 of costs related to restructuring actions that were reported in cost of sales and selling, general and administrative expenses for the three months ended March 31, 2020 and 2021, respectively.
Depreciation and Amortization
Automation Solutions
$138
$156
Climate Technologies
45
47
Tools & Home Products
19
20
Commercial & Residential Solutions
64
67
Corporate and other
9
16
Total
$211
$239
Table 6
EMERSON AND SUBSIDIARIES
SEGMENT SALES AND EARNINGS
(DOLLARS IN MILLIONS, UNAUDITED)
Six Months Ended March 31
2020
2021
Sales
Measurement & Analytical Instrumentation
$1,571
$1,430
Valves, Actuators & Regulators
1,767
1,642
Industrial Solutions
1,001
1,063
Systems & Software
1,222
1,350
Automation Solutions
5,561
5,485
Climate Technologies
1,899
2,191
Tools & Home Products
862
930
Commercial & Residential Solutions
2,761
3,121
Eliminations
(9)
(14)
Net sales
$8,313
$8,592
Earnings
Automation Solutions
$701
$832
Climate Technologies
368
457
Tools & Home Products
175
210
Commercial & Residential Solutions
543
667
Stock compensation
(18)
(125)
Unallocated pension and postretirement costs
25
47
Corporate and other
(68)
(43)
Interest expense, net
(71)
(78)
Earnings before income taxes
$1,112
$1,300
Restructuring costs
Automation Solutions
$106
$76
Climate Technologies
9
4
Tools & Home Products
8
2
Commercial & Residential Solutions
17
6
Corporate
5
1
Total
$128
$83
The table above does not include $9 and $7 of costs related to restructuring actions that were reported in cost of sales and selling, general and administrative expenses for the six months ended March 31, 2020 and 2021, respectively.
Depreciation and Amortization
$277
$312
Automation Solutions
Climate Technologies
89
96
Tools & Home Products
38
39
Commercial & Residential Solutions
127
135
Corporate and other
18
36
Total
$422
$483
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 2021 Underlying Sales Change
Auto Solns
Comm & Res Solns
Emerson
Reported (GAAP)
3
%
13
%
6
%
(Favorable) / Unfavorable FX
(3)
%
(2)
%
(3)
%
Acquisitions / Divestitures
(2)
%
—
%
(1)
%
Underlying*
(2)
%
11
%
2
%
FY 2021E Underlying Sales Change
Auto Solns
Comm & Res Solns
Emerson
Reported (GAAP)
3% – 5%
14% – 16%
6% – 9%
(Favorable) / Unfavorable FX
~ (3)%
~ (2)%
~(2)%
Acquisitions / Divestitures
~ (1)%
~ – %
~(1)%
Underlying*
(1)% – 1%
12% – 14%
3% – 6%
Q2 Earnings Per Share
Q2 FY20
Q2 FY21
Change
Earnings per share (GAAP)
$
0.84
$
0.93
11
%
Restructuring
0.05
0.03
(3)
%
OSI purchase accounting items
—
0.01
1
%
Adjusted earnings per share*
$
0.89
$
0.97
9
%
Earnings Per Share
FY2021E
Earnings per share (GAAP)
$3.55 – $3.65
Restructuring
~ 0.26
OSI purchase accounting items & fees
~ 0.07
Equity investment gain
~ (0.03)
Adjusted earnings per share*
$3.85 – $3.95
EBIT Margin
Q2 FY20
Q2 FY21
Change
FY21E
Pretax margin (GAAP)
16.6
%
16.6
%
– bps
~15.5%
Interest expense, net
0.8
%
0.9
%
10 bps
1.0%
Earnings before interest and taxes margin*
17.4
%
17.5
%
10 bps
~16.5%
Restructuring
1.0
%
0.5
%
(50) bps
1.0%
OSI purchase accounting items
—
%
0.2
%
20 bps
0.1%
Equity investment gain
—
%
—
%
– bps
(0.1)%
Adjusted earnings before interest and taxes margin*
18.4
%
18.2
%
(20) bps
~17.5%
Depreciation and amortization expense
5.0%
Adjusted earnings before interest, taxes, depreciation and amortization margin*
~22.5%+
Automation Solutions Segment EBIT Margin
Q2 FY20
Q2 FY21
Change
Automation Solutions Segment EBIT margin (GAAP)
14.4
%
16.8
%
240 bps
Restructuring and related charges impact
1.1
%
0.5
%
(6) bps
Automation Solutions Adjusted Segment EBIT margin*
15.5
%
17.3
%
180 bps
Commercial & Residential EBIT Margin
Q2 FY20
Q2 FY21
Change
Commercial & Residential EBIT margin (GAAP)
21.0
%
21.7
%
70 bps
Restructuring and related charges impact
0.6
%
0.3
%
(30) bps
Commercial & Residential Adjusted EBIT margin*
21.6
%
22.0
%
40 bps
Q2 Cash Flow
Q2 FY20
Q2 FY21
Change
Operating cash flow (GAAP)
$
588
$
807
37%
Capital expenditures
(111)
(100)
11%
Free cash flow*
$
477
$
707
48%
Cash Flow
Q2 YTD
FY20
Q2 YTD
FY21
% Change
Operating cash flow (GAAP)
$
1,012
$
1,615
60%
Capital expenditures
(225)
(222)
17%
Free cash flow*
$
787
$
1,393
77%
FY 2021E Cash Flow
FY 2021E
Operating cash flow (GAAP)
~ $3,300
Capital expenditures
~ (600)
Free cash flow*
~ $2,700
Cash Flow to Net Earnings Conversion
Q2 FY21
Operating cash flow to net earnings (GAAP)
142
%
Capital expenditures
(17)
%
Free cash flow to net earnings*
125
%
Note: Underlying sales and orders exclude the impact of acquisitions, divestitures and currency translation.