EMERSON ELECTRIC CO. & SUBSIDIARIES
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, 2018.2019. Certain prior year amounts have been reclassified to conform to current year presentation.
On October 1, 2018,2019, 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 $25 increase to beginning retained earnings as of October 1, 2018. This increase primarily related to contracts where a portion of revenue for delivered goods or services was previously deferred due to contingent payment terms. The adoption of ASC 606 did not materially impact the Company's consolidated financial statements as of and for the three and nine months endedJune 30, 2019.
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 income for the three and nine months ended June 30, 2018 of $11 and $32, respectively, from cost of sales and SG&A to other deductions, net. Segment earnings were not impacted by the updates to ASC 715.
In February 2016, the FASB issued ASC 842, Leases,, which requires rights and obligations related to lease arrangements to be recognized on the balance sheet. Also required are additional disclosures regarding the amount, timing and uncertainty of cash flows resulting from lease arrangements. Currently, obligations classified as operating leases are not recorded on the balance sheet, but must be disclosed. The Company is required to adopt the new standard on October 1, 2019 and expects to useusing the optional transition method under which prior periods willwere not be adjusted. As previously disclosed,The Company elected the package of practical expedients for leases that commenced prior to the adoption date, which included carrying forward the historical lease classification as operating or finance. The adoption of ASC 842 is expected to impact the Company’s balance sheet due toresulted in the recognition of operating lease right-of-use assets and related lease liabilities of approximately $500 as of October 1, 2019, but isdid not expected to materially impact itsthe Company's earnings or cash flows. Theflows for the three and six months ended March 31, 2020.
On October 1, 2019, the Company is inadopted updates to ASC 815, Derivatives and Hedging, which permit hedging certain contractually specified risk components. Additionally, the process of implementing changesupdates eliminate the requirement to its business processes, systems, controlsseparately measure and accounting policiesreport hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates were adopted using a modified retrospective approach and were immaterial to support recognitionthe Company's financial statements for the three and disclosure under the new guidance.six months ended March 31, 2020.
(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. Awhile a smaller 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 relateor relates to sales arrangements with multiple performance obligations, principally inobligations. See Note 13 for additional information about the Automation Solutions segment. Tangible products represent a large majority of the delivered items in contracts with multiple performance obligations or where revenue is recognized over time, while a smaller portion is attributable to installation, service and maintenance.
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 | | June 30, 2019 |
| Unbilled receivables (contract assets) | | $ | 321 |
| | | 438 |
|
| Customer advances (contract liabilities) | | (510 | ) | | | (539 | ) |
| Net contract liabilities | | $ | (189 | ) | | | (101 | ) |
| | | | | | | | | | | | | | | | | |
| Sept 30, 2019 | | | Mar 31, 2020 | |
| Unbilled receivables (contract assets) | | $ | 456 | | | | 397 | |
| Customer advances (contract liabilities) | | (519) | | | | (587) | |
| Net contract liabilities | | $ | (63) | | | | (190) | |
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 decreaseincrease in net contract liabilities was due to customer billings which exceeded revenue recognized for performance completed during the period which exceeded customer billings.period. Revenue recognized for the three and ninesix months endedJune 30, 2019 March 31, 2020 included approximately $45$56 and $370,$326, respectively, that was included in the beginning contract liability balance. Other factors that impacted the change in net contract liabilities were immaterial. Revenue recognized for the ninesix months ended June 30, 2018March 31, 2020 for performance obligations that were fully satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material.
As of June 30, 2019,March 31, 2020, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $5.5$5.7 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
June 30, | | Nine Months Ended
June 30, | | Three Months Ended
March 31, | | | Six Months Ended
March 31, | |
| | 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
| | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | | | | | |
| Basic shares outstanding | 629.4 |
| | 614.3 |
| | 633.4 |
| | 617.4 |
| Basic shares outstanding | 614.0 | | | 607.4 | | | 619.0 | | | 608.7 | |
| Dilutive shares | 3.5 |
| | 4.7 |
| | 3.1 |
| | 4.2 |
| Dilutive shares | 4.1 | | | 3.6 | | | 3.9 | | | 3.9 | |
| Diluted shares outstanding | 632.9 |
| | 619.0 |
| | 636.5 |
| | 621.6 |
| Diluted shares outstanding | 618.1 | | | 611.0 | | | 622.9 | | | 612.6 | |
(4) ACQUISITIONS AND DIVESTITURES
During the first six months of 2020, the Company's acquisition spending totaled $96, net of cash acquired. (4)
The Company acquired 8 businesses in 2019, all in the Automation Solutions segment, for $469, net of cash acquired. These eight businesses had combined annual sales of approximately $300. The Company recognized goodwill of $213 ($158 of which is expected to be tax deductible) and other identifiable intangible assets of $155, primarily customer relationships and intellectual property with a weighted-average life of approximately nine years.
Valuations of certain acquired assets and liabilities are in-process and subject to refinement for transactions completed after March 31, 2019.
(5) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | Six Months Ended March 31, | | | | |
| | | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | |
| Service cost | | $ | 18 | | | | 22 | | | | $ | 36 | | | | 44 | |
| Interest cost | | 50 | | | | 40 | | | | 100 | | | | 80 | |
| Expected return on plan assets | | (88) | | | | (84) | | | | (176) | | | | (168) | |
| Net amortization | | 16 | | | | 38 | | | | 33 | | | | 75 | |
| Total | | $ | (4) | | | | 16 | | | | $ | (7) | | | | 31 | |
(6) OTHER DEDUCTIONS, NET
Other deductions, net are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | | | Six Months Ended
March 31, | | | | |
| | 2019 | | | | | 2020 | | | | 2019 | | | | 2020 | |
| | | | | | | | | | | |
Amortization of intangibles (intellectual property and customer
relationships) | | $ | 60 | | | | 59 | | | | $ | 117 | | | | 118 | |
| Restructuring costs | | 10 | | | | 31 | | | | 20 | | | | 128 | |
| Special advisory fees | | — | | | | — | | | | — | | | | 13 | |
| Other | | (13) | | | | (48) | | | | (30) | | | | (39) | |
| Total | | $ | 57 | | | | 42 | | | | $ | 107 | | | | 220 | |
In the second quarter of fiscal 2020, the change in Other included favorable impacts from foreign currency transactions of $36 and supplemental retirement plans of $16, partially offset by an unfavorable impact from pensions of $16. On a year-to-date basis, the change in Other reflects a favorable impact from foreign currency transactions of $22 and lower litigation costs, partially offset by an unfavorable impact from pensions of $30.
(7) 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. The costs incurred in the first half of fiscal 2020 largely relate to the Company's initiatives to improve operating margins that began in the third quarter of fiscal 2019 and include workforce reductions of approximately 1,800 employees. The Company expects fiscal 2020 restructuring expense and related costs to be approximately $280, an increase of $65 compared to its previous estimate, including costs to complete actions initiated in the first half of the year.
Restructuring expense by business segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | | | Six Months Ended
March 31, | | | | |
| | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | | |
| | | | | | | | | | | |
| Automation Solutions | | $ | 6 | | | | 23 | | | | 11 | | | | 106 | |
| | | | | | | | | | | |
| Climate Technologies | | 1 | | | | 2 | | | | 4 | | | | 9 | |
| Tools & Home Products | | 2 | | | | 5 | | | | 4 | | | | 8 | |
| Commercial & Residential Solutions | | 3 | | | | 7 | | | | 8 | | | | 17 | |
| | | | | | | | | | | |
| Corporate | | 1 | | | | 1 | | | | 1 | | | | 5 | |
| | | | | | | | | | | |
| Total | | $ | 10 | | | | 31 | | | | 20 | | | | 128 | |
Details of the change in the liability for restructuring costs during the six months ended March 31, 2020 follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sept 30, 2019 | | | | Expense | | | | Utilized/Paid | | | | Mar 31, 2020 | | |
| | | | | | | | | | | |
| Severance and benefits | | $ | 62 | | | | 105 | | | | 57 | | | | 110 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other | | 7 | | | | 23 | | | | 26 | | | | 4 | |
| Total | | $ | 69 | | | | 128 | | | | 83 | | | | 114 | |
The tables above do not include $9 of costs related to these restructuring actions incurred in the second quarter of fiscal 2020 that U.S. GAAP requires to be reported in cost of sales.
(8) INCOME TAXES
Income taxes were $165 in the second quarter of fiscal 2020 and $150 in 2019, resulting in effective tax rates of 24 percent and 22 percent, respectively. The current year rate included unfavorable discrete items, which increased the rate 1 percentage point, while the prior year rate included favorable discrete tax items, which reduced the rate 2 percentage points.
Income taxes were $259 for the first six months of 2020 and $274 for 2019, resulting in effective tax rates of 23 percent and 22 percent, respectively. The prior year rate included favorable discrete items, which reduced the rate 2 percentage points.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company is evaluating the impact of the Act and currently expects to benefit from the deferral of certain payroll taxes through the end of calendar year 2020.
(9) LEASES
The Company leases offices; manufacturing facilities and equipment; and transportation, information technology and office equipment under operating lease arrangements. Finance lease arrangements are immaterial. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recognized on the balance sheet and are recorded as short-term lease expense. The discount rate used to calculate present value is the Company's incremental borrowing rate based on the lease term and the economic environment of the applicable country or region.
Certain leases contain renewal options or options to terminate prior to lease expiration, which are included in the measurement of right-of-use assets and lease liabilities when it is reasonably certain they will be exercised. The Company has elected to account for lease and non-lease components as a single lease component for its offices and manufacturing facilities. Some lease arrangements include payments that are adjusted periodically based on actual charges incurred for common area maintenance, utilities, taxes and insurance, or changes in an index or rate referenced in the lease. The fixed portion of these payments is included in the measurement of right-of-use assets and lease liabilities at lease commencement, while the variable portion is recorded as variable lease expense. The Company's leases typically do not contain material residual value guarantees or restrictive covenants.
The components of lease expense for the three and six months ended March 31, 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| March 31, 2020 | | | | |
| | | | | |
| Operating lease expense | | $ | 53 | | | | 106 | |
| Variable lease expense | | $ | 5 | | | | 10 | |
Short-term lease expense and sublease income were immaterial for the three and six months ended March 31, 2020. Cash paid for operating leases is classified within operating cash flows and was $101 for the six months ended March 31, 2020. Operating lease right-of-use asset additions were $123 for the six months ended March 31, 2020.
The following table summarizes the balances of the Company's operating lease right-of-use assets and operating lease liabilities as of March 31, 2020, the vast majority of which relates to offices and manufacturing facilities:
| | | | | | | | | | | | | | | | | |
| | | | Mar 31, 2020 | |
| Right-of-use assets (Other assets) | | | | | $ | 496 | |
| Current lease liabilities (Accrued expenses) | | | | | $ | 148 | |
| Noncurrent lease liabilities (Other liabilities) | | | | | $ | 353 | |
The weighted-average remaining lease term for operating leases was 5.2 years and the weighted-average discount rate was 2.8 percent as of March 31, 2020.
Future maturities of operating lease liabilities as of March 31, 2020 are summarized below:
| | | | | | | | | | | | | | | | | |
| | | | Mar 31, 2020 | |
| Remainder of 2020 | | | | | $ | 84 | |
| 2021 | | | | | 132 | |
| 2022 | | | | | 100 | |
| 2023 | | | | | 73 | |
| 2024 | | | | | 51 | |
| Thereafter | | | | | 94 | |
| Total lease payments | | | | | 534 | |
| Less: Interest | | | | | 33 | |
| Total lease liabilities | | | | | $ | 501 | |
Lease commitments that have not yet commenced were immaterial as of March 31, 2020.
The future minimum annual rentals under noncancelable long-term leases as of September 30, 2019 were as follows: $159 in 2020, $112 in 2021, $82 in 2022, $57 in 2023, $38 in 2024 and $63 thereafter.
(10) OTHER FINANCIAL INFORMATION |
| | | | | | | | |
| Sept 30, 2018 | | June 30, 2019 |
| Inventories | | | | | |
| Finished products | | $ | 592 |
| | | 636 |
|
| Raw materials and work in process | | 1,221 |
| | | 1,425 |
|
| Total | | $ | 1,813 |
| | | 2,061 |
|
|
| | | | | | | | |
| Property, plant and equipment, net | | | |
| Property, plant and equipment, at cost | | $ | 8,370 |
| | | 8,687 |
|
| Less: Accumulated depreciation | | 4,808 |
| | | 5,073 |
|
| Total | | $ | 3,562 |
| | | 3,614 |
|
| | | | | | | | | | | | | | | | | |
| Sept 30, 2019 | | | Mar 31, 2020 | |
| Inventories | | | | | |
| Finished products | | $ | 578 | | | | 641 | |
| Raw materials and work in process | | 1,302 | | | | 1,417 | |
| Total | | $ | 1,880 | | | | 2,058 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Property, plant and equipment, net | | | | | |
| Property, plant and equipment, at cost | | $ | 8,671 | | | | 8,734 | |
| Less: Accumulated depreciation | | 5,029 | | | | 5,181 | |
| Total | | $ | 3,642 | | | | 3,553 | |
|
| | | | | | | | |
| | Sept 30, 2018 | | June 30, 2019 |
| Goodwill by business segment | | | | | |
| Automation Solutions | | $ | 5,355 |
| | | 5,462 |
|
| | | | | | |
| Climate Technologies | | 670 |
| | | 670 |
|
| Tools & Home Products | | 430 |
| | | 412 |
|
| Commercial & Residential Solutions | | 1,100 |
| | | 1,082 |
|
| | | | | | |
| Total | | $ | 6,455 |
| | | 6,544 |
|
|
| | | | | | | | |
| Other intangible assets | | | |
| Gross carrying amount | | $ | 4,667 |
| | | 4,854 |
|
| Less: Accumulated amortization | | 1,916 |
| | | 2,163 |
|
| Net carrying amount | | $ | 2,751 |
| | | 2,691 |
|
| | | | | | | | | | | | | | | | | |
| | | | | |
| Goodwill by business segment | | | | | |
| Automation Solutions | | $ | 5,467 | | | | 5,404 | |
| | | | | |
| Climate Technologies | | 668 | | | | 726 | |
| Tools & Home Products | | 401 | | | | 390 | |
| Commercial & Residential Solutions | | 1,069 | | | | 1,116 | |
| | | | | |
| Total | | $ | 6,536 | | | | 6,520 | |
| | | | | | | | | | | | | | | | | |
| Other intangible assets | | | | | |
| Gross carrying amount | | $ | 4,872 | | | | 4,916 | |
| Less: Accumulated amortization | | 2,257 | | | | 2,418 | |
| Net carrying amount | | $ | 2,615 | | | | 2,498 | |
Other intangible assets include customer relationships of $1,423$1,305 and $1,517$1,391 as of June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively.
|
| | | | | | | | |
| Other assets include the following: | | | |
| Pension assets | | $ | 591 |
| | | 701 |
|
| Asbestos-related insurance receivables | | $ | 124 |
| | | 117 |
|
| Deferred income taxes | | $ | 74 |
| | | 87 |
|
10
|
| | | | | | | | |
| Accrued expenses include the following: | | | | | |
| Employee compensation | | $ | 629 |
| | | 598 |
|
| Customer advances (contract liabilities) | | $ | 510 |
| | | 539 |
|
| Product warranty | | $ | 124 |
| | | 127 |
|
|
| | | | | | | | |
| Other liabilities | | | | | |
| Pension and postretirement liabilities | | $ | 625 |
| | | 627 |
|
| Deferred income taxes | | 484 |
| | | 435 |
|
| Asbestos litigation | | 334 |
| | | 324 |
|
| Other | | 656 |
| | | 573 |
|
| Total | | $ | 2,099 |
| | | 1,959 |
|
| | | | | | | | | | | | | | | | | |
| Sept 30, 2019 | | | Mar 31, 2020 | |
| Other assets include the following: | | | | | |
| Operating lease right-of-use assets | | $ | — | | | | 496 | |
| Pension assets | | 164 | | | | 230 | |
| Asbestos-related insurance receivables | | 115 | | | | 105 | |
| Deferred income taxes | | 97 | | | | 83 | |
(5)
| | | | | | | | | | | | | | | | | |
| | | | | |
| Accrued expenses include the following: | | | | | |
| Customer advances (contract liabilities) | | $ | 519 | | | | 587 | |
| Employee compensation | | 606 | | | | 512 | |
| Operating lease liabilities (current) | | — | | | | 148 | |
| Product warranty | | 140 | | | | 134 | |
| | | | | | | | | | | | | | | | | |
| Other liabilities include the following: | | | | | |
| Pension and postretirement liabilities | | $ | 775 | | | | 770 | |
| Operating lease liabilities (noncurrent) | | — | | | | 353 | |
| Deferred income taxes | | 327 | | | | 339 | |
| Asbestos litigation | | 313 | | | | 305 | |
| | | | | |
| | | | | |
(11) FINANCIAL INSTRUMENTS
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of June 30, 2019,March 31, 2020, the notional amount of foreign currency hedge positions was approximately $2.2 billion, and commodity hedge contracts totaled approximately $117$122 (primarily 4550 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 June 30, 2019March 31, 2020 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.
Net Investment Hedge – In fiscal 2019, the Company issued euro-denominated debt of €1.5 billion. The euro notes reduce foreign currency risk associated with the Company's international subsidiaries that use the euro as their functional currency and have been designated as a hedge of a portion of the investment in these operations. Foreign currency gains or losses associated with the euro-denominated debt are deferred in accumulated other comprehensive income (loss) and will remain until the hedged investment is sold or substantially liquidated.
The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and ninesix months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | | Into Earnings | | Into OCI | | Into Earnings | | | Into OCI | |
| | | 3rd Quarter | | Nine Months | | 3rd Quarter | | Nine Months | | 2nd Quarter | | | Six Months | | | 2nd Quarter | | | Six Months | |
| Gains (Losses) | | Location | | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
| Gains (Losses) | | Location | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| Commodity | | Cost of sales | | $ | 2 |
| | (2 | ) | | 13 |
| | (8 | ) | | (3 | ) | | (8 | ) | | 1 |
| | (5 | ) | Commodity | | Cost of sales | | $ | (3) | | | (1) | | | (6) | | | (4) | | | 10 | | | (23) | | | 3 | | | (16) | |
| Foreign currency | | Sales, cost of sales | | (1 | ) | | 4 |
| | (1 | ) | | 10 |
| | (15 | ) | | — |
| | (19 | ) | | 10 |
| Foreign currency | | Sales | | (1) | | | (1) | | | (3) | | | (3) | | | (1) | | | (8) | | | (2) | | | (5) | |
| Foreign currency | | Other deductions, net | | 28 |
| | 3 |
| | 16 |
| | 43 |
| | | | | | | | | Foreign currency | | Cost of sales | | 5 | | | 4 | | | 9 | | | 11 | | | 23 | | | (66) | | | 12 | | | (49) | |
| Foreign currency | | Foreign currency | | Other deductions, net | | 29 | | | 13 | | | 40 | | | 21 | | |
| | Net Investment Hedges | | Net Investment Hedges | | |
| Euro denominated debt | | Euro denominated debt | | | | | | | | | | | | | 6 | | | 57 | | | 6 | | | 31 | |
| Total | | | | $ | 29 |
| | 5 |
| | 28 |
| | 45 |
| | (18 | ) | | (8 | ) | | (18 | ) | | 5 |
| Total | | | | $ | 30 | | | 15 | | | $ | 40 | | | 25 | | | 38 | | | (40) | | | 19 | | | (39) | |
11
Regardless of whether derivatives and non-derivative financial instruments 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, including for the net investment hedge described below. Hedge ineffectiveness was immaterial for the three and nine months ended June 30, 2019and 2018.effectiveness.
Net Investment Hedge – In January 2019, the Company issued €500 of 1.25% notes due October 2025 and €500 of 2.0% notes due October 2029. In May 2019, the Company issued €500 of 0.375% notes due May 2024. The net proceeds from the sale of the notes were used to repay commercial paper borrowings and for general corporate purposes. The euro notes reduce foreign currency risk associated with the Company's international subsidiaries that use the euro as their functional currency and have been designated as a hedge of a portion of the investment in these operations. Pretax gains of $6 ($4 after-tax) and $12 ($9 after-tax) were recognized in other comprehensive income (loss) related to the net investment hedge for the three and nine months ended June 30, 2019, respectively. Amounts deferred in accumulated other comprehensive income (loss) will remain until the hedged investment is sold or substantially liquidated.
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 June 30, 2019,March 31, 2020, the fair value of long-term debt was $5.3$4.5 billion, which exceeded the carrying value by $411.
$280. The fair values of commodity and foreign currency contracts were reported in otherOther current assets and accruedAccrued expenses as summarized below: |
| | | | | | | | | | | | | |
| | September 30, 2018 | | June 30, 2019 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Commodity | | $ | 1 |
| | 10 |
| | 1 |
| | 7 |
|
| Foreign Currency | | $ | 35 |
| | 11 |
| | 35 |
| | 9 |
|
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 potentially have been required was $6.$53. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. NoNaN collateral was posted with counterparties and noneNaN was held by the Company as of June 30, 2019.March 31, 2020.
(6) EQUITY
The change in equity for the three and nine months ended June 30, 2018 and 2019 is shown below:
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
|
| | | | | | | | |
| Common stock | $ | 477 |
| | 477 |
| | 477 |
| | 477 |
|
| | | | | | | | |
| Additional paid-in-capital | | | | | | | |
| Beginning balance | 323 |
| | 380 |
| | 297 |
| | 348 |
|
| Stock plans | 9 |
| | 7 |
| | 35 |
| | 39 |
|
| Ending balance | 332 |
| | 387 |
| | 332 |
| | 387 |
|
| | | | | | | | |
| Retained earnings | | | | | | | |
| Beginning balance | 22,254 |
| | 23,475 |
| | 21,995 |
| | 23,072 |
|
| Net earnings common stockholders | 712 |
| | 604 |
| | 1,586 |
| | 1,589 |
|
| Dividends paid | (306 | ) | | (302 | ) | | (924 | ) | | (909 | ) |
| Adoption of accounting standard updates | — |
| | — |
| | 3 |
| | 25 |
|
| Ending balance | 22,660 |
| | 23,777 |
| | 22,660 |
| | 23,777 |
|
| | | | | | | | |
| Accumulated other comprehensive income (loss) | | | | | | | |
| Beginning balance | (827 | ) | | (928 | ) | | (1,019 | ) | | (1,015 | ) |
| Foreign currency translation | (273 | ) | | (93 | ) | | (118 | ) | | (41 | ) |
| Pension and postretirement | 22 |
| | 13 |
| | 67 |
| | 38 |
|
| Cash flow hedges | (14 | ) | | (8 | ) | | (22 | ) | | 2 |
|
| Ending balance | (1,092 | ) | | (1,016 | ) | | (1,092 | ) | | (1,016 | ) |
| | | | | | | | |
| Treasury stock | | | | | | | |
| Beginning balance | (13,735 | ) | | (14,878 | ) | | (13,032 | ) | | (13,935 | ) |
| Purchases | (250 | ) | | — |
| | (1,000 | ) | | (1,000 | ) |
| Issued under stock plans | 21 |
| | 8 |
| | 68 |
| | 65 |
|
| Ending balance | (13,964 | ) | | (14,870 | ) | | (13,964 | ) | | (14,870 | ) |
| | | | | | | | |
| Common stockholders' equity | 8,413 |
| | 8,755 |
| | 8,413 |
| | 8,755 |
|
| | | | | | | | |
| Noncontrolling interests in subsidiaries | | | | | | | |
| Beginning balance | 45 |
| | 46 |
| | 52 |
| | 43 |
|
| Net earnings | 7 |
| | 8 |
| | 16 |
| | 15 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 1 |
|
| Dividends paid | (5 | ) | | (5 | ) | | (21 | ) | | (10 | ) |
| Ending balance | 47 |
| | 49 |
| | 47 |
| | 49 |
|
| | | | | | | | |
| Total equity | $ | 8,460 |
| | 8,804 |
| | 8,460 |
| | 8,804 |
|
(7)(12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in Accumulated other comprehensive income (loss) for the three and ninesix months ended June 30, 2018March 31, 2020 and 2019 is shown below:below, net of income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | Six Months Ended March 31, | | | | |
| | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | |
| Foreign currency translation | | | | | | | | | | | |
| Beginning balance | | $ | (635) | | | | (695) | | | | (600) | | | | (794) | |
Other comprehensive income (loss), net of tax of $(1), $(13), $(1) and $(7), respectively | | 87 | | | | (282) | | | | 52 | | | | (183) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Ending balance | | (548) | | | | (977) | | | | (548) | | | | (977) | |
| | | | | | | | | | | |
| Pension and postretirement | | | | | | | | | | | |
| Beginning balance | | (407) | | | | (900) | | | | (420) | | | | (928) | |
Amortization of deferred actuarial losses into earnings, net of tax of $(4), $(8), $(8) and $(17), respectively | | 12 | | | | 30 | | | | 25 | | | | 58 | |
| | | | | | | | | | | |
| Ending balance | | (395) | | | | (870) | | | | (395) | | | | (870) | |
| | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | |
| Beginning balance | | (10) | | | | 19 | | | | 5 | | | | — | |
Deferral of gains (losses) arising during the period, net of tax of $(8), $23, $(3) and $17, respectively | | 24 | | | | (74) | | | | 10 | | | | (53) | |
Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $0, $1, $0 and $1, respectively | | 1 | | | | (1) | | | | — | | | | (3) | |
| Ending balance | | 15 | | | | (56) | | | | 15 | | | | (56) | |
| | | | | | | | | | | |
| Accumulated other comprehensive income (loss) | | $ | (928) | | | | (1,903) | | | | (928) | | | | (1,903) | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | | 2018 |
| | | 2019 |
| | | 2018 |
| | | 2019 |
|
| Foreign currency translation | | | | | | | | | | | |
| Beginning balance | | $ | (214 | ) | | | (548 | ) | | | (369 | ) | | | (600 | ) |
| Other comprehensive income (loss) before reclassifications | | (273 | ) | | | (93 | ) | | | (101 | ) | | | (41 | ) |
| Reclassified to gain/loss on sale of business | | — |
| | | — |
| | | (17 | ) | | | — |
|
| Ending balance | | (487 | ) | | | (641 | ) | | | (487 | ) | | | (641 | ) |
| | | | | | | | | | | | |
| Pension and postretirement | | | | | | | | | | | |
| Beginning balance | | (617 | ) | | | (395 | ) | | | (662 | ) | | | (420 | ) |
| Amortization of deferred actuarial losses into earnings | | 22 |
| | | 13 |
| | | 67 |
| | | 38 |
|
| Ending balance | | (595 | ) | | | (382 | ) | | | (595 | ) | | | (382 | ) |
| | | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | |
| Beginning balance | | 4 |
| | | 15 |
| | | 12 |
| | | 5 |
|
| Deferral of gains (losses) arising during the period | | (13 | ) | | | (6 | ) | | | (13 | ) | | | 4 |
|
| Reclassification of realized (gains) losses to sales and cost of sales | | (1 | ) | | | (2 | ) | | | (9 | ) | | | (2 | ) |
| Ending balance | | (10 | ) | | | 7 |
| | | (10 | ) | | | 7 |
|
| | | | | | | | | | | | |
| Accumulated other comprehensive income (loss) | | $ | (1,092 | ) | | | (1,016 | ) | | | (1,092 | ) | | | (1,016 | ) |
| | | | | | | | | | | | |
| Activity above is shown net of income taxes for the three and nine months ended June 30, 2019 and 2018, respectively, as follows: foreign currency translation: $(2), $-, $(3), and $-; amortization of pension and postretirement deferred actuarial losses: $(4), $(8), $(12), and $(24); deferral of cash flow hedging gains (losses): $2, $5, $(1), and $5; reclassification of realized cash flow hedging (gains) losses: $-, $-, $-, and $3. |
(8) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | | 2018 | | | 2019 | | | 2018 |
| | | 2019 |
| Service cost | | $ | 19 |
| | | 18 |
| | | 57 |
| | | 54 |
|
| Interest cost | | 46 |
| | | 49 |
| | | 139 |
| | | 149 |
|
| Expected return on plan assets | | (87 | ) | | | (88 | ) | | | (262 | ) | | | (264 | ) |
| Net amortization | | 30 |
| | | 17 |
| | | 91 |
| | | 50 |
|
| Total | | $ | 8 |
| | | (4 | ) | | | 25 |
| | | (11 | ) |
(9) OTHER DEDUCTIONS, NET
Other deductions, net are summarized below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| | 2018 | | | | 2019 |
| | | 2018 |
| | | 2019 |
|
| | | | | | | | | | | | |
| Amortization of intangibles | | $ | 47 |
| | | 60 |
| | | 154 |
| | | 177 |
|
| Restructuring costs | | 14 |
| | | 20 |
| | | 38 |
| | | 40 |
|
| Other | | 16 |
| | | (15 | ) | | | 51 |
| | | (45 | ) |
| Total | | $ | 77 |
| | | 65 |
| | | 243 |
| | | 172 |
|
12
The increase in amortization for the nine months ended June 30, 2019 is due to higher intangibles amortization of $42, which largely relates to acquisitions completed in 2018, partially offset by backlog amortization of $19 incurred in the prior year related to the valves & controls acquisition. In the third quarter of 2019, Other included lower acquisition/divestiture-related costs of $7 and a favorable impact on comparisons from pensions of $11. On a year-to-date basis, Other reflects lower acquisition/divestiture-related costs of $42, pension expenses of $33 and foreign currency transactions of $9.
(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 and nine months endedJune 30, 2019 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
June 30, | | Nine Months Ended
June 30, |
| | 2018 | | | 2019 | | | 2018 | | | 2019 | |
| | | | | | | | | | | | |
| Automation Solutions | | $ | 9 |
| | | 15 |
| | | 26 |
| | | 26 |
|
| | | | | | | | | | | | |
| Climate Technologies | | 4 |
| | | 4 |
| | | 11 |
| | | 8 |
|
| Tools & Home Products | | — |
| | | 1 |
| | | — |
| | | 5 |
|
| Commercial & Residential Solutions | | 4 |
| | | 5 |
| | | 11 |
| | | 13 |
|
| | | | | | | | | | | | |
| Corporate | | 1 |
| | | — |
| | | 1 |
| | | 1 |
|
| | | | | | | | | | | | |
| Total | | $ | 14 |
| | | 20 |
| | | 38 |
| | | 40 |
|
Details of the change in the liability for restructuring costs during the nine months ended June 30, 2019 follow: |
| | | | | | | | | | | | | | | | |
| | Sept 30, 2018 | | | Expense | | | Utilized/Paid | | | June 30, 2019 | |
| | | | | | | | | | | | |
| Severance and benefits | | $ | 46 |
| | | 25 |
| | | 35 |
| | | 36 |
|
| Lease and other contract terminations | | 3 |
| | | — |
| | | 1 |
| | | 2 |
|
| Asset write-downs | | — |
| | | 2 |
| | | 2 |
| | | — |
|
| Vacant facility and other shutdown costs | | 3 |
| | | 6 |
| | | 8 |
| | | 1 |
|
| Start-up and moving costs | | — |
| | | 7 |
| | | 7 |
| | | — |
|
| Total | | $ | 52 |
| | | 40 |
| | | 53 |
| | | 39 |
|
(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 in the third quarter recognized a benefit of $150 ($0.24 per share) due to additional guidance issued by the U.S. Treasury Department and the Internal Revenue Service and as a result of actions taken by the Company. The Company completed its accounting for the Act in the first quarter of fiscal 2019.
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 elected to recognize this tax as a period expense when it is incurred.
In the second quarter of fiscal 2019, the Company recorded a $13 tax benefit due to the issuance of final regulations related to the one-time tax on deemed repatriation. In the third quarter of fiscal 2019, final regulations related to the calculation of global intangible low-taxed income were issued, which resulted in the Company reversing a $100 benefit and related reserve associated with the one-time tax on deemed repatriation, originally recorded in the first quarter of fiscal 2019. This change had no impact on the Company's results of operations for the three and nine months ended June 30, 2019.
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.
Income taxes were $155 in the third quarter of 2019 and $49 in 2018, resulting in effective tax rates of 20 percent and 6 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 a tax benefit of $21 ($0.03 per share) from restructuring a foreign subsidiary, while the prior year rate included the $150 ($0.24 per share) tax benefit related to the Act discussed above.
Income taxes were $429 for the first nine months of 2019 and $327 for 2018, resulting in effective tax rates of 21 percent and 17 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 approximately 3 percentage points, while the prior year rate included a net tax benefit of $193 due to impacts of the Act.
(12)(13) BUSINESS SEGMENTS
Summarized information about the Company's results of operations by business segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | | | Six Months Ended March 31, | | | | | | |
| | Sales | | | | Earnings | | | | Sales | | | | Earnings | | |
| | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | | | | |
| Automation Solutions | $ | 3,010 | | | 2,709 | | | 444 | | | 391 | | | 5,809 | | | 5,561 | | | 851 | | | 701 | |
| | | | | | | | | | | | | | | |
| Climate Technologies | 1,092 | | | 1,026 | | | 226 | | | 217 | | | 1,972 | | | 1,899 | | | 372 | | | 368 | |
| Tools & Home Products | 469 | | | 432 | | | 102 | | | 89 | | | 927 | | | 862 | | | 193 | | | 175 | |
| Commercial & Residential Solutions | 1,561 | | | 1,458 | | | 328 | | | 306 | | | 2,899 | | | 2,761 | | | 565 | | | 543 | |
| | | | | | | | | | | | | | | |
| Stock compensation | | | | | (59) | | | 38 | | | | | | | (52) | | | (18) | |
Unallocated pension and
postretirement costs | | | | | 27 | | | 12 | | | | | | | 54 | | | 25 | |
| Corporate and other | | | | | (17) | | | (22) | | | | | | | (61) | | | (68) | |
| Eliminations/Interest | (1) | | | (5) | | | (48) | | | (36) | | | 9 | | | (9) | | | (91) | | | (71) | |
| Total | $ | 4,570 | | | 4,162 | | | 675 | | | 689 | | | 8,717 | | | 8,313 | | | 1,266 | | | 1,112 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | Sales | | Earnings | | Sales | | Earnings |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2019 |
|
| | | | | | | | | | | | | | | | |
| Automation Solutions | $ | 2,870 |
| | 3,025 |
| | 494 |
| | 477 |
| | 8,213 |
| | 8,834 |
| | 1,316 |
| | 1,328 |
|
| | | | | | | | | | | | | | | | |
| Climate Technologies | 1,236 |
| | 1,199 |
| | 294 |
| | 278 |
| | 3,286 |
| | 3,171 |
| | 712 |
| | 650 |
|
| Tools & Home Products | 356 |
| | 463 |
| | 93 |
| | 93 |
| | 1,041 |
| | 1,390 |
| | 276 |
| | 286 |
|
| Commercial & Residential Solutions | 1,592 |
| | 1,662 |
| | 387 |
| | 371 |
| | 4,327 |
| | 4,561 |
| | 988 |
| | 936 |
|
| | | | | | | | | | | | | | | | |
| Differences in accounting methods | | | | | 57 |
| | 64 |
| | | | | | 163 |
| | 188 |
|
| Corporate and other | | | | | (131 | ) | | (102 | ) | | | | | | (425 | ) | | (285 | ) |
| Eliminations/Interest | (6 | ) | | (3 | ) | | (39 | ) | | (43 | ) | | (20 | ) | | 6 |
| | (113 | ) | | (134 | ) |
| Total | $ | 4,456 |
| | 4,684 |
| | 768 |
| | 767 |
| | 12,520 |
| | 13,401 |
| | 1,929 |
| | 2,033 |
|
The decrease in Corporate and other expense for the three and nine months ended June 30, 2019 was primarily due to lower acquisition/divestiture-related costs of $7 and $42, respectively, and lower incentive stock compensation of $12 and $61, respectively, reflecting a decreasingexpense reflects the decline in the Company's stock price in the current year compared to an increasing stock price in the prior year. On a year-to-date basis, the prior year also included valves & controls first year acquisition accounting charges of $10 related to inventory and $19 for backlog amortization.
Automation Solutions sales by major product offering are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | Six Months Ended March 31, | | | | |
| | | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | |
| | | | | | | | | | | |
| Measurement & Analytical Instrumentation | | $ | 927 | | | | 816 | | | | 1,785 | | | | 1,646 | |
| Valves, Actuators & Regulators | | 937 | | | | 854 | | | | 1,811 | | | | 1,767 | |
| Industrial Solutions | | 574 | | | | 494 | | | | 1,116 | | | | 1,001 | |
| Process Control Systems & Solutions | | 572 | | | | 545 | | | | 1,097 | | | | 1,147 | |
| Automation Solutions | | $ | 3,010 | | | | 2,709 | | | | 5,809 | | | | 5,561 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | | 2018 |
| | | 2019 |
| | | 2018 |
| | | 2019 |
|
| | | | | | | | | | | | |
| Measurement & Analytical Instrumentation | | $ | 932 |
| | | 945 |
| | | 2,564 |
| | | 2,730 |
|
| Valves, Actuators & Regulators | | 948 |
| | | 941 |
| | | 2,732 |
| | | 2,752 |
|
| Industrial Solutions | | 470 |
| | | 548 |
| | | 1,382 |
| | | 1,664 |
|
| Process Control Systems & Solutions | | 520 |
| | | 591 |
| | | 1,535 |
| | | 1,688 |
|
| Automation Solutions | | $ | 2,870 |
| | | 3,025 |
| | | 8,213 |
| | | 8,834 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | Six Months Ended March 31, | | | |
| | 2019 | | | 2020 | | | | 2019 | | | 2020 | |
| Automation Solutions | | $ | 131 | | | 138 | | | | $ | 260 | | | 277 | |
| | | | | | | | | |
| Climate Technologies | | 45 | | | 45 | | | | 90 | | | 89 | |
| Tools & Home Products | | 17 | | | 19 | | | | 36 | | | 38 | |
| Commercial & Residential Solutions | | 62 | | | 64 | | | | 126 | | | 127 | |
| | | | | | | | | |
| Corporate and other | | 11 | | | 9 | | | | 20 | | | 18 | |
| Total | | $ | 204 | | | 211 | | | | $ | 406 | | | 422 | |
Segment sales
Sales by geographic destination are summarized below:
| | | | Three Months Ended June 30, | | Three Months Ended March 31, | |
| | 2018 | | 2019 | | 2019 | | | 2020 | |
| | Automation Solutions |
| | Commercial & Residential Solutions |
| | Total |
| | Automation Solutions |
| | Commercial & Residential Solutions |
| | Total |
| | Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Americas | $ | 1,401 |
| | 1,099 |
| | 2,500 |
| | 1,448 |
| | 1,164 |
| | 2,612 |
| Americas | $ | 1,523 | | | 1,082 | | | 2,605 | | | 1,346 | | | 1,037 | | | 2,383 | |
| Asia, Middle East & Africa | 917 |
| | 339 |
| | 1,256 |
| | 970 |
| | 313 |
| | 1,283 |
| Asia, Middle East & Africa | 910 | | | 285 | | | 1,195 | | | 830 | | | 235 | | | 1,065 | |
| Europe | 552 |
| | 154 |
| | 706 |
| | 607 |
| | 185 |
| | 792 |
| Europe | 577 | | | 194 | | | 771 | | | 533 | | | 186 | | | 719 | |
| Total | $ | 2,870 |
| | 1,592 |
| | 4,462 |
| | 3,025 |
| | 1,662 |
| | 4,687 |
| Total | $ | 3,010 | | | 1,561 | | | 4,571 | | | 2,709 | | | 1,458 | | | 4,167 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended June 30, | | Six Months Ended March 31, | |
| | 2018 | | 2019 | | 2019 | | | 2020 | |
| | Automation Solutions |
| | Commercial & Residential Solutions |
| | Total |
| | Automation Solutions |
| | Commercial & Residential Solutions |
| | Total |
| | Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Americas | $ | 4,059 |
| | 2,860 |
| | 6,919 |
| | 4,376 |
| | 3,153 |
| | 7,529 |
| Americas | $ | 2,928 | | | 1,989 | | | 4,917 | | | 2,756 | | | 1,900 | | | 4,656 | |
| Asia, Middle East & Africa | 2,575 |
| | 1,027 |
| | 3,602 |
| | 2,721 |
| | 863 |
| | 3,584 |
| Asia, Middle East & Africa | 1,751 | | | 550 | | | 2,301 | | | 1,726 | | | 512 | | | 2,238 | |
| Europe | 1,579 |
| | 440 |
| | 2,019 |
| | 1,737 |
| | 545 |
| | 2,282 |
| Europe | 1,130 | | | 360 | | | 1,490 | | | 1,079 | | | 349 | | | 1,428 | |
| Total | $ | 8,213 |
| | 4,327 |
| | 12,540 |
| | 8,834 |
| | 4,561 |
| | 13,395 |
| Total | $ | 5,809 | | | 2,899 | | | 8,708 | | | 5,561 | | | 2,761 | | | 8,322 | |
(13) ACQUISITIONS AND DIVESTITURES
During the first nine months of 2019, the Company acquired seven businesses in the Automation Solutions segment for $385, net of cash acquired, which included the acquisition of Machine Automation Solutions (General Electric's former Intelligent Platforms business). These seven businesses had combined annual sales of approximately $280.
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. The Company recognized goodwill of $354 ($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. The Company recognized goodwill of $365 ($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 for transactions completed after June 30, 2018.
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.
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 | | Nine Months Ended |
| | June 30, 2018 |
| | | | | | |
| Net sales | | $ | 4,693 |
| | | $ | 13,281 |
|
| Net earnings common stockholders | | $ | 716 |
| | | $ | 1,619 |
|
| Diluted earnings per share | | $ | 1.13 |
| | | $ | 2.54 |
|
Items 2 and 3.
Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
NetThe Company's results for the second quarter of fiscal 2020 were negatively impacted by the global outbreak and rapid spread of the novel coronavirus (COVID-19). The actions taken around the world to slow the spread of COVID-19 resulted in a rapid decline in demand which impacted most of the Company's end markets and geographies, particularly in China, the U.S. and Europe. In addition, the dramatic drop in the price of oil due to geopolitical tensions and a surge in global supply also negatively impacted results. These conditions accelerated into April and are expected to be more pronounced in the third quarter, especially in the U.S. Although these conditions are expected to negatively impact demand in many of our end markets for the remainder of the fiscal year, the Company has taken actions to protect its operating results and support its financial condition and liquidity. See the "Financial Condition", "Outlook" and "Part II - Other Information, Item 1A, Risk Factors" sections below for additional details.
Overall, net sales for the thirdsecond quarter of 2019fiscal 2020 were $4.7$4.2 billion, up 5down 9 percent supported by acquisitions, which added 5 percent, andcompared with the prior year, adversely affected by foreign currency translation which deducted 2 percent. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 2 percent, reflecting strong project activity and maintenance and repair spending in Automation Solutions, partially offset by lower demand in air conditioning markets in Asia.were down 7 percent.
Net earnings common stockholders were $604$517 million, down 151 percent, and diluted earnings per share were $0.97, down 13 percent, primarily$0.84, flat compared with the prior year. Operating results were negatively impacted by the effects of COVID-19 and lower oil prices ($0.12 per share), while restructuring costs reduced earnings by $0.05 per share. These results were largely offset by the net impact of lower stock compensation expense due to an income tax benefit of $150 milliona declining share price and slightly higher pension costs ($0.240.11 per share) from the impactsand favorable foreign currency transactions of U.S. tax reform in the prior year.$0.05 per share.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30MARCH 31
Following is an analysis of the Company’s operating results for the thirdsecond quarter ended June 30, 2019,March 31, 2020, compared with the thirdsecond quarter ended June 30, 2018.March 31, 2019.
| | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | Change |
| (dollars in millions, except per share amounts) | | | | | |
| | | | | |
| Net sales | $ | 4,570 | | | 4,162 | | | (9) | % |
| Gross profit | $ | 1,925 | | | 1,750 | | | (9) | % |
| Percent of sales | 42.1 | % | | 42.1 | % | | |
| | | | | |
| SG&A | $ | 1,145 | | | 983 | | | (14) | % |
| Percent of sales | 25.0 | % | | 23.7 | % | | |
| | | | | |
| | | | | |
| Other deductions, net | $ | 57 | | | 42 | | | |
| Interest expense, net | $ | 48 | | | 36 | | | |
| | | | | |
| Earnings before income taxes | $ | 675 | | | 689 | | | 2 | % |
| Percent of sales | 14.8 | % | | 16.6 | % | | |
| | | | | |
| Net earnings common stockholders | $ | 520 | | | 517 | | | (1) | % |
| Percent of sales | 11.4 | % | | 12.4 | % | | |
| | | | | |
| | | | | |
| Diluted earnings per share | $ | 0.84 | | | 0.84 | | | — | % |
| | | | | |
|
| | | | | | | | | |
| | 2018 | | 2019 | | Change |
| (dollars in millions, except per share amounts) | |
| | |
| | |
| | | | | | |
| Net sales | $ | 4,456 |
| | 4,684 |
| | 5 | % |
| Gross profit | $ | 1,942 |
| | 2,001 |
| | 3 | % |
| Percent of sales | 43.6 | % | | 42.7 | % | | |
|
| | | | | | |
| SG&A | $ | 1,058 |
| | 1,126 |
| | 6 | % |
| Percent of sales | 23.8 | % | | 24.0 | % | | |
|
| Other deductions, net | $ | 77 |
| | 65 |
| | |
|
| Interest expense, net | $ | 39 |
| | 43 |
| | |
|
| | | | | | |
| Earnings before income taxes | $ | 768 |
| | 767 |
| | — | % |
| Percent of sales | 17.2 | % | | 16.4 | % | | |
|
| Net earnings common stockholders | $ | 712 |
| | 604 |
| | (15 | )% |
| Percent of sales | 16.0 | % | | 12.9 | % | | |
|
| | | | | | |
| Diluted earnings per share | $ | 1.12 |
| | 0.97 |
| | (13 | )% |
Net sales for the thirdsecond quarter of 2019fiscal 2020 were $4.7$4.2 billion, an increasea decrease of $228$408 million, or 59 percent compared with $4.5 billion in 2018.2019. Underlying sales increased 2were down 7 percent ($72313 million) on higher price and slightly higher lower volume. Acquisitions added 5 percent ($243 million) and foreignForeign currency translation subtracted 2 percent ($8781 million). and divestitures subtracted $14 million. Underlying sales were flatdown 8 percent in the U.S. and increased 36 percent internationally. The Americas was up 1down 8 percent, Europe was up 1down 2 percent and Asia, Middle East & Africa was up 3down 8 percent (China up 3 percent, versus up 15 percent in 2018)down 24 percent). Sales increased $155 million in Automation Solutions, supported by acquisitions, strong project activity, and maintenance and repair spending. Commercial & Residential Solutions sales increased $70 million due to acquisitions, partially offset by lower demand in Asia, Middle East & Africa.
Cost of sales for the thirdsecond quarter of 2019fiscal 2020 were $2.7$2.4 billion, an increasea decrease of $169$233 million compared with $2.5 billion in 2018,2019, primarily due to acquisitions.lower volume and the impact of foreign currency translation. Gross margin of 42.742.1 percent decreased 0.9 percentage points,was flat compared with prior year, reflecting a negative impact from acquisitions of 0.4 percentage pointsdeleverage on lower sales volume and unfavorable mix.
Selling, general and administrative (SG&A) expenses of $1.1$1.0 billion increased $68decreased $162 million compared with the prior year, primarily due to acquisitions.lower stock compensation expense of $97 million due to a declining share price and savings from cost reduction actions. SG&A as a percent of sales increased 0.2decreased 1.3 percentage points to 24.023.7 percent primarily due to acquisitions, which negatively impacteda favorable impact on comparisons by 0.5from the lower stock compensation expense of 2.1 percentage points and savings from cost reduction actions, partially offset by deleverage on the lower incentive stock compensation of $12 million.
Other deductions, net were $65$42 million in 2019,2020, a decrease of $12$15 million compared with the prior year, reflecting lower acquisition/divestiture-related costsfavorable impacts on comparisons from foreign currency transactions of $7$36 million and a favorable impact from pensionssupplemental retirement plans of $11$16 million, partially offset by higher intangibles amortizationincreased restructuring costs of $13$21 million and an unfavorable impact on comparisons from pensions of $16 million. See Note 9.
Pretax earnings of $767$689 million decreased $1increased $14 million, flator 2 percent compared towith the prior year. Earnings decreased $17$53 million in Automation Solutions and decreased $16$22 million in Commercial & Residential Solutions, while Corporate and other expensecosts reported at corporate decreased $29$77 million. See the Business discussion that follows and Note 12 and the following Business Segments discussion.
Income taxes were $155$165 million for 20192020 and $49$150 million for 2018,2019, resulting in effective tax rates of 2024 percent and 622 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 a tax benefit of $21 million ($0.03 per share) from restructuring a foreign subsidiary,unfavorable discrete items, which increased the rate 1 percentage point, while the prior year rate included afavorable discrete tax benefit of $150 million ($0.24 per share), reflecting updatesitems, which reduced the rate 2 percentage points.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the Company's initial estimates relatedCOVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company is evaluating the impact of the Act dueand currently expects to additional guidance issued bybenefit from the U.S. Treasury Department anddeferral of certain payroll taxes through the Internal Revenue Service and as a resultend of actions taken by the Company. The effective tax rate for fullcalendar year 2019 is currently expected to be approximately 21 percent. See Note 11.2020.
Net earnings common stockholders in the thirdsecond quarter of 2019fiscal 2020 were $604$517 million, down 151 percent, compared with $712$520 million in the prior year, and earnings per share were $0.97, down 13 percent,$0.84, or flat compared with $1.12in 2018.the prior year. Operating results were negatively impacted by the effects of COVID-19 and lower oil prices ($0.12 per share), while restructuring costs reduced earnings by $0.05 per share. These results were largely offset by the net impact of lower stock compensation expense due to a declining share price and slightly higher pension costs ($0.11 per share) and favorable foreign currency transactions of $0.05 per share.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the thirdsecond quarter ended June 30, 2019,March 31, 2020, compared with the thirdsecond quarter ended June 30, 2018.March 31, 2019. The Company defines segment earnings as earnings before interest and taxes. See Note 1213 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
| | | | | | | | | | | | | | | | | |
| Three Months Ended Mar 31 | 2019 | | 2020 | | Change |
| (dollars in millions) | | | | | |
| | | | | |
| Sales | $ | 3,010 | | | 2,709 | | | (10) | % |
| Earnings | $ | 444 | | | 391 | | | (12) | % |
| Margin | 14.8 | % | | 14.4 | % | | |
|
| | | | | | | | | |
| Three Months Ended June 30 | 2018 | | 2019 | | Change |
| (dollars in millions) | | | | | |
| | | | | | |
| Sales | $ | 2,870 |
| | 3,025 |
| | 5 | % |
| Earnings | $ | 494 |
| | 477 |
| | (4 | )% |
| Margin | 17.2 | % | | 15.7 | % | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Sales by Major Product Offering | | | | | |
| Measurement & Analytical Instrumentation | $ | 927 | | | 816 | | | (12) | % |
| Valves, Actuators & Regulators | 937 | | | 854 | | | (9) | % |
| Industrial Solutions | 574 | | | 494 | | | (14) | % |
| Process Control Systems & Solutions | 572 | | | 545 | | | (5) | % |
| Total | $ | 3,010 | | | 2,709 | | | (10) | % |
|
| | | | | | | | | |
| Sales by Major Product Offering | | | | | |
| Measurement & Analytical Instrumentation | $ | 932 |
| | 945 |
| | 1 | % |
| Valves, Actuators & Regulators | 948 |
| | 941 |
| | (1 | )% |
| Industrial Solutions | 470 |
| | 548 |
| | 16 | % |
| Process Control Systems & Solutions | 520 |
| | 591 |
| | 14 | % |
| Total | $ | 2,870 |
| | 3,025 |
| | 5 | % |
Automation Solutions sales were $3.0$2.7 billion in the thirdsecond quarter, an increasea decrease of $155$301 million or 510 percent. Underlying sales increased 3decreased 8 percent ($80238 million) on higher volume and slightly higher price. Acquisitions added 5 percent ($141 million) and foreignlower volume. Foreign currency translation had a 32 percent ($6663 million) unfavorable impact. All businesses were negatively impacted by the effects of COVID-19 and lower oil prices. Sales for Measurement & Analytical Instrumentation increased $13decreased $111 million, or 112 percent, supported by favorable trends in most key end markets in Asia, Middle East & Africa, partially offset by a slowdowndue to weakness in upstream oil and gas spendingend markets, primarily in the Americas.North America, and a sharp decline in China. Valves, Actuators & Regulators decreased $7$83 million, or less than 19 percent, reflecting slower demand in power, chemical and oil and gas end markets. Industrial Solutions sales decreased $80 million, or 14 percent, on weakness in global discrete end markets. Process Control Systems & Solutions decreased $27 million, or 5 percent, due to currency translation. Industrial Solutions sales increased $78 million, or 16 percent, due to the Aventics acquisition ($95 million), partially offset by slow discrete manufacturingweakness in power end markets in China and process end markets in the U.S. and Europe, reflecting softer short-cycle demand and some rebalancing of channel inventory. Process Control Systems & Solutions increased $71 million, or 14 percent, due to strong project activity and maintenance and repair spending, as well as the Machine Automation Solutions acquisition which added $46 million. Underlying sales increased 1decreased 11 percent in the Americas (U.S. down 112 percent), 1 while Europe decreased 3 percent in Europe and 7 percent in Asia, Middle East & Africa (China up 5 percent). Earnings were $477 million, a decrease of $17 million, or 4 percent, due to acquisitions, unfavorable mix and increased restructuring expense of $6 million. Margin decreased 1.5 percentage points to 15.7 percent, reflecting a dilutive impact from acquisitions of 1.4 percentage points.
COMMERCIAL & RESIDENTIAL SOLUTIONS
|
| | | | | | | | | |
| Three Months Ended June 30 | 2018 | | 2019 | | Change |
| (dollars in millions) | | | | | |
| | | | | | |
| Sales: | | | | | |
| Climate Technologies | $ | 1,236 |
| | 1,199 |
| | (3 | )% |
| Tools & Home Products | 356 |
| | 463 |
| | 30 | % |
| Total | $ | 1,592 |
| | 1,662 |
| | 4 | % |
| | | | | | |
| Earnings: | | | | | |
| Climate Technologies | $ | 294 |
| | 278 |
| | (5 | )% |
| Tools & Home Products | 93 |
| | 93 |
| | — | % |
| Total | $ | 387 |
| | 371 |
| | (4 | )% |
| Margin | 24.3 | % | | 22.4 | % | | |
Commercial & Residential Solutions sales were $1.7 billion in the third quarter, up $70 million, or 4 percent compared to the prior year. Acquisitions added 6 percent ($100 million) and foreign currency translation subtracted 1 percent ($21 million). Underlying sales decreased 1 percent ($9 million) primarily due to lower volume partially offset by higher price. Climate Technologies sales were $1.2 billion in the third quarter, a decrease of $37 million, or 3 percent. HVAC sales were down in Asia, Middle East & Africa due to lower demand, particularly outside of China, while the U.S. was up slightly, reflecting an unfavorable impact from cooler, wet weather conditions. Cold chain sales were down slightly, reflecting stable global demand. Tools & Home Products sales were $463 million in the third quarter, an increase of $107 million, or 30 percent, due to the tools and test acquisition. Sales were robust for wet/dry vacuums and up slightly for professional tools, while food waste disposers were flat. Overall, underlying sales increased 1 percent in the Americas (U.S. up 1 percent) and 1 percent in Europe, while Asia, Middle East & Africa decreased 6 percent (China down 221 percent). Earnings were $371$391 million, a decrease of $16$53 million, and margin declined 1.9 percentage points,or 12 percent, primarily due to lower volume and higher restructuring expenses of $23 million, partially offset by a dilutivefavorable impact on comparisons from foreign currency transactions of $31 million. Margin decreased 0.4 percentage points to 14.4 percent, reflecting a negative impact from restructuring expenses of 0.9 percentage points. Excluding the tools and test acquisitionincreased restructuring expense, margin improved due to savings from cost reduction actions which helped offset deleverage on the lower sales volume, while favorable foreign currency transactions of 1.21.1 percentage points were partially offset by unfavorable mix.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
| Three Months Ended Mar 31 | 2019 | | 2020 | | Change |
| (dollars in millions) | | | | | |
| | | | | |
| Sales: | | | | | |
| Climate Technologies | $ | 1,092 | | | 1,026 | | | (6) | % |
| Tools & Home Products | 469 | | | 432 | | | (8) | % |
| Total | $ | 1,561 | | | 1,458 | | | (7) | % |
| | | | | |
| Earnings: | | | | | |
| Climate Technologies | $ | 226 | | | 217 | | | (4) | % |
| Tools & Home Products | 102 | | | 89 | | | (12) | % |
| Total | $ | 328 | | | 306 | | | (7) | % |
| Margin | 21.0 | % | | 21.0 | % | | |
Commercial & Residential Solutions sales were $1.5 billion in the second quarter, down $103 million, or 7 percent compared to the prior year. The divestiture of two small non-core businesses subtracted 1 percent ($10 million) and foreign currency translation subtracted 1 percent ($18 million). Underlying sales decreased 5 percent ($75 million) due to lower volume, reflecting weakening demand due to the effects of COVID-19, especially in China. Climate Technologies sales were $1.0 billion in the second quarter, a decrease of $66 million, or 6 percent. Air conditioning and heating sales were down moderately, reflecting a sharp decline in China due to the effects of COVID-19 and softness in North America. Cold chain sales were down moderately, driven by slower market conditions in Asia, Middle East & Africa and Europe, while North American markets grew slightly. Tools & Home Products sales were $432 million in the second quarter, a decrease of $37 million, or 8 percent. Global professional tools end markets softened further, while food waste disposers were down slightly and wet/dry vacuums were down high double-digits. Overall, underlying sales decreased 3 percent in the Americas (U.S. down 3 percent), while Europe decreased 1 percent and Asia, Middle East & Africa was down 15 percent (China down 33 percent). Earnings were $306 million, down 7 percent compared with the prior year, and margin was flat. Excluding a 0.4 percentage point impact from higher restructuring expense of $6 million, margin was up slightly as savings from cost reduction actions and favorable price-cost more than offset deleverage on the lower volume in the Climate Technologies segment.sales volume.
RESULTS OF OPERATIONS FOR THE NINESIX MONTHS ENDED JUNE 30MARCH 31
Following is an analysis of the Company’s operating results for the ninesix months ended June 30, 2019,March 31, 2020, compared with the ninesix months ended June 30, 2018.March 31, 2019.
| | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | Change |
| (dollars in millions, except per share amounts) | | | | | |
| | | | | |
| Net sales | $ | 8,717 | | | 8,313 | | | (5) | % |
| Gross profit | $ | 3,686 | | | 3,509 | | | (5) | % |
| Percent of sales | 42.3 | % | | 42.2 | % | | |
| | | | | |
| SG&A | $ | 2,222 | | | 2,106 | | | (5) | % |
| Percent of sales | 25.5 | % | | 25.3 | % | | |
| | | | | |
| Other deductions, net | $ | 107 | | | 220 | | | |
| Interest expense, net | $ | 91 | | | 71 | | | |
| | | | | |
| Earnings before income taxes | $ | 1,266 | | | 1,112 | | | (12) | % |
| Percent of sales | 14.5 | % | | 13.4 | % | | |
| | | | | |
| Net earnings common stockholders | $ | 985 | | | 843 | | | (14) | % |
| Percent of sales | 11.3 | % | | 10.1 | % | | |
| | | | | |
| | | | | |
| Diluted earnings per share | $ | 1.58 | | | 1.37 | | | (13) | % |
| | | | | |
|
| | | | | | | | | |
| | 2018 | | 2019 | | Change |
| (dollars in millions, except per share amounts) | |
| | |
| | |
| | | | | | |
| Net sales | $ | 12,520 |
| | 13,401 |
| | 7 | % |
| Gross profit | $ | 5,373 |
| | 5,687 |
| | 6 | % |
| Percent of sales | 42.9 | % | | 42.4 | % | | |
|
| | | | | | |
| SG&A | $ | 3,088 |
| | 3,348 |
| | 8 | % |
| Percent of sales | 24.6 | % | | 24.9 | % | | |
|
| Other deductions, net | $ | 243 |
| | 172 |
| | |
|
| Interest expense, net | $ | 113 |
| | 134 |
| | |
|
| | | | | | |
| Earnings before income taxes | $ | 1,929 |
| | 2,033 |
| | 5 | % |
| Percent of sales | 15.4 | % | | 15.2 | % | | |
|
| Net earnings common stockholders | $ | 1,586 |
| | 1,589 |
| | — | % |
| Percent of sales | 12.7 | % | | 11.9 | % | | |
|
| | | | | | |
| Diluted earnings per share | $ | 2.49 |
|
| 2.55 |
|
| 2 | % |
Net sales for the first ninesix months of 20192020 were $13.4$8.3 billion, an increasea decrease of $881$404 million, or 75 percent compared with $12.5 billion in 2018.2019. Underlying sales were up 3down 4 percent ($403302 million) on higherlower volume andpartially offset by slightly higher price. Acquisitions net of divestitures added 6 percent ($731 million)$6 million and foreign currency translation subtracted 21 percent ($253108 million). Underlying sales increased 4decreased 6 percent in the U.S. and 31 percent internationally. The Americas was updown 5 percent, Europe was up 2down 1 percent and Asia, Middle EastEast & Africa was updown 1 percent (China up 1down 9 percent). Sales increased $621 million in Automation Solutions, supported by acquisitions and broad-based demand across energy-related and general industrial markets. Commercial & Residential Solutions sales increased $234 million due to acquisitions, partially offset by slower demand in Asia, Middle East & Africa, particularly in China air conditioning and heating markets.
Cost of sales for 20192020 were $7.7$4.8 billion, an increasea decrease of $567$227 million versus $7.1$5.0 billion in 2018,2019, primarily due to acquisitionslower volume and higher volume, partially offset by the impact of foreign currency translation. Gross margin decreased 0.50.1 percentage points to 42.442.2 percent, reflecting deleverage on lower sales volume and unfavorable mix and the impact of acquisitions.primarily within Automation Solutions, largely offset by favorable price-cost.
SG&A expenses of $3.3$2.1 billion increased $260decreased $116 million primarily due to acquisitionssavings from cost reduction actions and higher volume.lower stock compensation expense of $34 million due to a declining share price. SG&A as a percent of sales increaseddecreased 0.2 percentage points to 24.925.3 percent due to a favorable impact on comparisons from the impact of acquisitions, which negatively impacted comparisons by 0.5 percentage points. Leverage on higher volume and lower incentive stock compensation expense of $61 million, reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year, were0.4 percentage points and savings from cost reduction actions, partially offset by higher investment spending.deleverage on the lower sales volume.
Other deductions, net were $172$220 million in 2019, a decrease2020, an increase of $71$113 million compared with the prior year, reflecting lower acquisition/divestiture-relatedincreased restructuring costs of $42$108 million pension expensesand an unfavorable impact on comparisons from pensions of $33$30 million, andpartially offset by a favorable impact on comparisons from foreign currency transactions of $9$22 million partially offset by higher intangibles amortization of $23 million.and lower litigation costs. See Note 9.6.
Pretax earnings of $2.0$1.1 billion increased $104decreased $154 million, or 512 percent. Earnings increased $12decreased $150 million in Automation Solutions and decreased $52$22 million in Commercial & Residential Solutions, while Corporate and other expense decreased $140 million.Solutions. See Note 1213 and the following Business Segments discussion.
Income taxes were $429$259 million for 20192020 and $327$274 million for 2018,2019, resulting in effective tax rates of 2123 percent and 1722 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 currentprior year rate also included favorable discrete items, which reduced the rate 32 percentage points, while the prior year rate included a net tax benefit of $193 million ($0.30 per share) due to impacts of the Act.points.
Net earnings common stockholders in 20192020 were $1.6 billion, flat$843 million, down 14 percent compared with the prior year, and earnings per share were $2.55, up 2$1.37, down 13 percent compared with $2.49$1.58 in 2018.2019. Earnings per share were negatively
impacted by restructuring costs and special advisory fees of $0.19 per share, while the effects of COVID-19 and lower oil prices began to negatively impact earnings in the second quarter ($0.12 per share).
Business Segments
Following is an analysis of operating results for the Company’s business segments for the ninesix months ended June 30, 2019,March 31, 2020, compared with the ninesix months ended June 30, 2018.March 31, 2019. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
| | | Nine Months Ended June 30 | 2018 | | 2019 | | Change | |
| Six Months Ended Mar 31 | | Six Months Ended Mar 31 | 2019 | | 2020 | | Change |
| (dollars in millions) | | | | | | (dollars in millions) | | | | | |
| Sales | $ | 8,213 |
| | 8,834 |
| | 8 | % | Sales | $ | 5,809 | | | 5,561 | | | (4) | % |
| Earnings | $ | 1,316 |
| | 1,328 |
| | 1 | % | Earnings | $ | 851 | | | 701 | | | (18) | % |
| Margin | 16.0 | % | | 15.0 | % | | |
| Margin | 14.7 | % | | 12.6 | % | | |
| | | | | | | |
|
| | | | | | | | | |
| Sales by Major Product Offering | | | | | |
| Measurement & Analytical Instrumentation | $ | 2,564 |
| | 2,730 |
| | 6 | % |
| Valves, Actuators & Regulators | 2,732 |
| | 2,752 |
| | 1 | % |
| Industrial Solutions | 1,382 |
| | 1,664 |
| | 20 | % |
| Process Control Systems & Solutions | 1,535 |
| | 1,688 |
| | 10 | % |
| Total | $ | 8,213 |
| | 8,834 |
| | 8 | % |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Sales by Major Product Offering | | | | | |
| Measurement & Analytical Instrumentation | $ | 1,785 | | | 1,646 | | | (8) | % |
| Valves, Actuators & Regulators | 1,811 | | | 1,767 | | | (2) | % |
| Industrial Solutions | 1,116 | | | 1,001 | | | (10) | % |
| Process Control Systems & Solutions | 1,097 | | | 1,147 | | | 5 | % |
| Total | $ | 5,809 | | | 5,561 | | | (4) | % |
Automation Solutions sales were $8.8$5.6 billion in the first ninesix months of 2019, an increase2020, a decrease of $621$248 million, or 84 percent. Underlying sales increased 5decreased 4 percent ($432211 million) on higherlower volume andpartially offset by slightly higher price. AcquisitionsThe Machine Automation Solutions acquisition added 51 percent ($38247 million) and foreign currency translation had a 21 percent ($19384 million) unfavorable impact. Sales for Measurement & Analytical Instrumentation increased $166decreased $139 million, or 68 percent, on broad-based demanddue to weakness in global industrial markets.upstream oil and gas end markets, primarily in North America, and a sharp decline in China in the second quarter due to the effects of COVID-19. Valves, Actuators & Regulators increased $20decreased $44 million, or 12 percent, onas favorable globalfirst quarter results were more than offset by weakness in the second quarter, reflecting slowing demand in power, chemical and oil and gas demand.end markets. Industrial Solutions sales increased $282decreased $115 million, or 2010 percent, due to the Aventics acquisition ($292 million), whileon softness in global discrete manufacturing end markets were slow in the U.S. and Europe.markets. Process Control Systems & Solutions increased $153$50 million, or 105 percent, due to the Machine Automation Solutions acquisition ($90 million), favorable demand for small and mid-sized projects focused on expansion and optimization of existing assets, and strong maintenance and repair demand.which added $47 million. Underlying sales increaseddecreased 6 percent in the Americas (U.S. up 4down 7 percent), and 2 percent in Europe, and 7 percent inwhile Asia, Middle East & Africa was flat (China up 10down 7 percent). Earnings were $1.3 billion, an increase$701 million, a decrease of $12$150 million, or 118 percent, drivenprimarily due to higher restructuring expenses of $100 million and lower volume, partially offset by higher volume and price.a favorable impact on comparisons from foreign currency transactions of $16 million. Margin decreased 2.1 percentage points to 15.012.6 percent, reflecting a dilutivenegative impact from acquisitionsrestructuring expenses of 1.01.8 percentage points.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
| Six Months Ended Mar 31 | 2019 | | 2020 | | Change |
| (dollars in millions) | | | | | |
| | | | | |
| Sales: | | | | | |
| Climate Technologies | $ | 1,972 | | | 1,899 | | | (4) | % |
| Tools & Home Products | 927 | | | 862 | | | (7) | % |
| Total | $ | 2,899 | | | 2,761 | | | (5) | % |
| | | | | |
| Earnings: | | | | | |
| Climate Technologies | $ | 372 | | | 368 | | | (1) | % |
| Tools & Home Products | 193 | | | 175 | | | (9) | % |
| Total | $ | 565 | | | 543 | | | (4) | % |
| Margin | 19.5 | % | | 19.7 | % | | |
|
| | | | | | | | | |
| Nine Months Ended June 30 | 2018 | | 2019 | | Change |
| (dollars in millions) | | | | | |
| | | | | | |
| Sales: | | | | | |
| Climate Technologies | $ | 3,286 |
| | 3,171 |
| | (3 | )% |
| Tools & Home Products | 1,041 |
| | 1,390 |
| | 33 | % |
| Total | $ | 4,327 |
| | 4,561 |
| | 5 | % |
| | | | | | |
| Earnings: | | | | | |
| Climate Technologies | $ | 712 |
| | 650 |
| | (9 | )% |
| Tools & Home Products | 276 |
| | 286 |
| | 4 | % |
| Total | $ | 988 |
| | 936 |
| | (5 | )% |
| Margin | 22.8 | % | | 20.5 | % | | |
Commercial & Residential Solutions sales were $4.6$2.8 billion in the first ninesix months of 2019, an increase2020, a decrease of $234$138 million, or 5 percent compared to the prior year. Underlying sales were down 13 percent ($3190 million) on lower volume partially offset by slightly higher price. Acquisitions added 8The divestiture of two small non-core businesses subtracted 1 percent ($32524 million) and foreign currency translation subtracted 21 percent ($6024 million). Climate Technologies sales were $3.2$1.9 billion in the first ninesix months of 2019,2020, a decrease of $115$73 million, or 34 percent. HVACAir conditioning and heating sales were down sharply in Asia, Middle East & Africa, particularlymoderately, reflecting a sharp decline in China air conditioning and heating markets,due to the effects of COVID-19, while growthsales in the U.S. was moderate.were down modestly. Global cold chain sales were up slightlydown modestly on modest growth in the U.S., partially offset by slower demand in Asia.Asia (particularly China) and Europe, while North America was essentially flat. Tools & Home Products sales were $1.4 billion$862 million in the first ninesix months of 2019, up $3492020, down $65 million, or 337 percent compared to the prior year, reflecting the tools and test acquisition and favorable trendssoftness in global professional tools markets. Sales for wet/dry vacuums were up moderatelyessentially flat while food waste disposers were updown slightly. Overall, underlying sales increased 4decreased 3 percent in the Americas (U.S. up 3down 4 percent) and 2 percent inwhile Europe whilewas flat and Asia, Middle East & Africa decreased 145 percent (China down 1713 percent). Earnings were $936$543 million, down 54 percent compared to the prior year, and margin declined 2.3increased 0.2 percentage points, primarily due to a dilutive impactas savings from the toolscost reduction actions and test acquisition of 1.1 percentage points andfavorable price-cost more than offset deleverage on the lower sales volume in the Climate Technologies segment. Unfavorable mix also reduced margin, while comparisons benefited fromand higher warranty costsrestructuring expense of $10 million in the prior year associated with a specific product issue.$11 million.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the ninesix months ended June 30, 2019March 31, 2020 as compared to the year ended September 30, 20182019 follow. | | | | Sept 30, 2018 |
| | June 30, 2019 |
| | Sept 30, 2019 | | | Mar 31, 2020 | |
| Working capital (in millions) | $ | 455 |
| | 1,132 |
| Working capital (in millions) | $ | 1,163 | | | $ | 92 | |
| Current ratio | 1.1 |
| | 1.2 |
| Current ratio | 1.2 | | | 1.0 | |
| Total debt-to-total capital | 34.7 | % | | 41.5 | % | Total debt-to-total capital | 41.0 | % | | 50.6 | % |
| Net debt-to-net capital | 29.1 | % | | 34.5 | % | Net debt-to-net capital | 33.9 | % | | 40.5 | % |
| Interest coverage ratio | 14.2 | X | | 14.3X |
| Interest coverage ratio | 15.2 | X | | 14.4 | X |
The Company's debt-to-capital ratios increased primarily due to increased borrowings to support accelerated share repurchases completed in the second quarter of 2019. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 14.3X for the first nine months of 2019 compares to 14.0X for the nine months ended June 30, 2018. The increase reflects higher pretax earnings in the current year.
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. In May 2019, the Company issued €500 million of 0.375% notes due May 2024. The net proceeds from the sale of the notes were used to reduce commercial paper borrowings and for general corporate purposes.
Operating cash flow for the first nine months of 2019 was $1.8 billion,Emerson maintains a decrease of $66 million compared with $1.9 billion in the prior year, due to higher operating working capital. Other, net in 2019 primarily consists of non-cash
items included in net earnings including deferred taxes, stock compensation and pension expense. Free cash flow of $1.4 billion in 2019 (operating cash flow of $1.8 billion less capital expenditures of $395 million) decreased $147 million compared to free cash flow of $1.6 billion in 2018 (operating cash flow of $1.9 billion less capital expenditures of $314 million), reflecting the decrease in operating cash flow and an increase in capital investment. Free cash flow along with increased short- and long-term borrowings were used to fund dividends of $909 million, common stock purchases of $1.0 billion, repayments of long-term debt of $655 million, and acquisitions of $385 million.
Emerson'sconservative financial structure providesto provide the strength and flexibility necessary to achieve itsour strategic objectives. The Companyobjectives and has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. In the second quarter of fiscal 2020, the Company increased its short-term borrowings and cash holdings by over $1 billion compared to its planned holdings under normal conditions to support liquidity in response to the potential effects of COVID-19, resulting in an increase in the debt-to-capital ratios. The Company has also taken actions to conservatively manage its cash through planned reductions in capital expenditures for fiscal 2020 and by suspending its share repurchases for the remainder of the fiscal year. No changes have been made to the dividend plan for the year. The Company's long-term debt ratings, which are A2 by Moody's Investors Service and A by Standard and Poor's, remain unchanged. The Company currently believes that sufficient funds will be available to meet the Company’sits needs infor the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity, or its $3.5 billion revolving backup credit lines.facility under which it has not incurred any borrowings. Depending on market conditions, the Company may issue additional long-term debt in the near future to further manage its liquidity and balance sheet. However, the Company could be adversely affected if credit market conditions deteriorate or customers, suppliers and financial institutions are unable to meet their commitments to the
ResultsThe Company's working capital declined approximately $350 million compared to the same quarter last year, reflecting lower business levels. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 14.4X for the first ninesix months of 2019 reflected solid trendsfiscal 2020 compares to 13.3X for the six months ended March 31, 2019. The increase reflects lower interest expense in process and hybrid end markets and consistent demand for long-cycle projects,the current year, partially offset by slower global discrete manufacturing end markets, recent upstream oil and gas softnesslower pretax earnings.
Operating cash flow for the first six months of fiscal 2020 was $1.0 billion, an increase of $156 million compared with $856 million in North America,the prior year, as operating working capital declined due to lower business levels, partially offset by lower earnings. Free cash flow of $787 million in the first six months of fiscal 2020 (operating cash flow of $1.0 billion less capital expenditures of $225 million) increased $205 million compared to free cash flow of $582 million in 2019 (operating cash flow of $856 million less capital expenditures of $274 million), reflecting the increase in operating cash flow and lower demand in air conditioning markets in Asia.capital investment.
FISCAL 2020 OUTLOOK
Emerson's top priority is the safety and health of its employees, customers, and communities around the world. The Company anticipates lowerhas implemented recommended policies and practices to protect its workforce so they can safely and effectively carry out their vital work. Employees who are able to work remotely are doing so. The Company is following guidelines from global growthhealth experts and has taken stringent steps to protect its employees going to work in facilities that manufacture critical technologies and equipment. The Company's employees and facilities have a key role in the near-term dueeffort to trade tensionsboth combat the COVID-19 crisis and business investment uncertainty. Softnessto keep essential infrastructure and industries operating, including life sciences and medical, water, food and beverage, chemical, energy, and power generation. While some operating sites remain below full capacity and we have experienced some disruptions in North America upstream oilour supply chain, the majority of our sites are operating. Further, the Company is prioritizing the production of materials and gas marketssolutions needed on the front lines of the pandemic battle, including solutions used in the manufacturing of respirators, masks and global discrete end marketsother safety equipment.
The outlook discussed herein reflects the changing demand environment associated with COVID-19 and the concurrent unfolding energy market dynamics. The guidance assumes, among other items, continued significant demand deterioration for the remainder of the fiscal year, particularly in the third quarter, with demand remaining negative through the first half of 2021. The decline in demand is expected to continue, whilebe particularly pronounced in the U.S., with a longer recovery period compared to Europe and Asia, Middle East & Africa. The outlook also assumes oil prices stabilize in the $20 to $30 range for residentialthe same time period. However, future developments such as a longer duration than assumed or a rebound in the spread of COVID-19, further actions taken by governmental authorities, including potential shutdowns of our operations, or delays in the stabilization and commercial air conditioning markets is favorable in North Americarecovery of economic conditions could further adversely affect our operations and financial results, as well as those of our customers and suppliers. See "Part II - Other Information, Item 1A, Risk Factors."
Consolidated fiscal 2020 net sales are expected to improve in Asia. For the full year,be down 9 to 11 percent, with underlying sales down 7 to 9 percent excluding a 2 percent unfavorable impact from foreign currency translation. Automation Solutions net sales are expected to be up approximately 7down 8 to 10 percent, with underlying sales up approximately 5down 6 to 8 percent excluding a positive2 percent unfavorable impact from acquisitionsforeign currency translation. The midpoint of 4 percent and unfavorable currency translationthis outlook assumes a reduction of 2 percent.backlog of approximately $300 million by the end of the fiscal year. Commercial & Residential Solutions net sales are expected to be up approximately 4down 11 to 13 percent, with underlying sales flatdown 9 to 11 percent excluding a positivean impact from acquisitionsdivestitures of 51 percent and unfavorable foreign currency translation of 1 percent. Consolidated net sales are expected to be up approximately 6 percent, with underlying sales up approximately 3 percent excluding a positive impact from acquisitions of 5 percent and unfavorable currency translation of 2 percent. Segment EBIT margin is expected to be approximately 16 percent for Automation Solutions and approximately 21 percent for Commercial & Residential Solutions, including higher restructuring investments in the fourth quarter. Reported earningsEarnings per share are expected to be $3.60$2.62 to $3.70,$2.82, while adjusted earnings per share, which includes anexclude a $0.38 per share impact from restructuring actions and related costs for the year, are expected discrete tax benefit in the fourth quarter of approximately $0.05 per share.to be $3.00 to $3.20. Operating cash flow is expected to be approximately $3.1$2.75 billion and free cash flow, which excludes targeted capital spending of $600$550 million, is expected to be approximately $2.5$2.2 billion. The Company's share repurchases for the six months ended March 31, 2020 were $942 million and additional repurchases have been suspended for the remainder of the fiscal year. The Company has made no changes to its dividend plan for fiscal 2020.
Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include the scope, duration and ultimate impact of the COVID-19 pandemic, as well as economic and currency conditions, market demand, including related to the pandemic and oil and gas price declines
and volatility, pricing, protection of intellectual property, cybersecurity, tariffs, competitive and technological factors, among others, which are set forth in the “Risk Factors” of Part I, Item 1A, and the "Safe Harbor Statement" of Part II, Item 7, to the Company's Annual Report on Form 10-K for the year ended September 30, 20182019, "Risk Factors" of Part II - Other Information, Item 1A of the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 2020, and in subsequent reports filed with the SEC, which are hereby incorporated by reference.
The United KingdomKingdom's (UK) continues to negotiate its withdrawal from the European Union (EU), commonly known as "Brexit.""Brexit", was completed on January 31, 2020. The EU agreed to postponeUK is now in a transition period and has begun negotiating the withdrawal deadline to October 31, 2019.terms of a trade agreement and other laws and regulations with the EU. The Company's net sales in the UK are principally in the Automation Solutions segment and represent less than two percent of consolidated sales. Sales of products manufactured in the UK and sold within the EU are immaterial. The Company is evaluating several potential Brexit scenariosoutcomes of the UK's negotiations with the EU and believes the direct cost of incremental tariffs, logistics and other items would be immaterial.
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.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
The following risk factor supplements the “Risk Factors” section in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (our “Form 10-K). The following risk factor disclosure should be read in conjunction with the other risk factors set out in our Form 10-K.
The Recent Coronavirus (COVID-19) Outbreak Has Adversely Impacted our Business and Could in the Future Have a Material Adverse Impact on our Business, Results of Operation, Financial Condition and Liquidity, the Nature and Extent of Which is Highly Uncertain
The global outbreak of the coronavirus (COVID-19) has significantly increased economic, demand and operational uncertainty. We have global operations, customers and suppliers, including in countries most impacted by COVID-19. Authorities around the world have taken a variety of measures to slow the spread of COVID-19, including travel bans or restrictions, increased border controls or closures, quarantines, shelter-in-place orders and business shutdowns and such authorities may impose additional restrictions. We have also taken actions to protect our employees and to mitigate the spread of COVID-19, including embracing guidelines set by the World Health Organization and the Centers for Disease Control and Prevention on social distancing, good hygiene, restrictions on employee travel and in-person meetings, and changes to employee work arrangements including remote work arrangements where feasible. The actions taken around the world to slow the spread of COVID-19 have also impacted our customers and suppliers, and future developments could cause further disruptions to Emerson due to the interconnected nature of our business relationships.
The impact of COVID-19 on the global economy and our customers, as well as recent volatility in commodity markets (including oil prices), has negatively impacted demand for our products and could continue to do so in the future. Its effects could also result in further disruptions to our manufacturing operations, including higher rates of employee absenteeism, and supply chain, which could continue to negatively impact our ability to meet customer demand. Additionally, the potential deterioration and volatility of credit and financial markets could limit our ability to obtain
external financing. The extent to which COVID-19 will impact our business, results of operations, financial condition or liquidity is highly uncertain and will depend on future developments, including the spread and duration of the virus, potential actions taken by governmental authorities, and how quickly economic conditions stabilize and recover.
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 |
| January 2020 | | — | | | | $0.00 | | | — | | | | 19,984 |
| February 2020 | | 3,842 | | | | $68.80 | | | 3,842 | | | | 16,142 |
| March 2020 | | 10,615 | | | | $51.68 | | | 10,615 | | | | 65,527 |
| Total | | 14,457 | | | | $56.23 | | | 14,457 | | | | 65,527 |
In November 2015, the Board of Directors authorized the purchase of up to 70 million shares. In March 2020, the Board of Directors authorized the purchase of an additional 60 million shares and a total of approximately 26.165.5 million shares remain available. No shares were purchased in the third quarter of 2019.
Item 6. Exhibits
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).
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410.1 |
| Emerson agrees to furnish |
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3110.2 |
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| 31 | | |
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| 32 |
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| 101 |
| Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three and ninesix months ended June 30,March 31, 2020 and 2019, and 2018, (ii) Consolidated Statements of Comprehensive Income for the three and ninesix months ended June 30,March 31, 2020 and 2019, and 2018, (iii) Consolidated Balance Sheets as of September 30, 20182019 and June 30,March 31, 2020, (iv) Consolidated Statements of Equity for the three and six months ended March 31, 2020 and 2019, (iv)(v) Consolidated Statements of Cash Flows for the ninesix months ended June 30,March 31, 2020 and 2019, and 2018, and (v)(vi) Notes to Consolidated Financial Statements for the three and ninesix months ended June 30,March 31, 2020 and 2019.
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| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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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. | | |
| | | | |
| | EMERSON ELECTRIC CO. | | |
| | By | |
| | | |
| | 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) | |
| | | August 7, 2019April 24, 2020 | |
