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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________________ to __________________

Commission file number 1-278

EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri
logo_emersona12.jpg
43-0259330
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
8000 W. Florissant Ave.
 
 

P.O. Box 4100
 
St. Louis,
Missouri
63136
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (314) 553-2000

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock of $0.50 par value per share
EMR
New York Stock Exchange
 
 
Chicago Stock Exchange
0.375% Notes due 2024
EMR 24
New York Stock Exchange
1.250% Notes due 2025
EMR 25A
New York Stock Exchange
2.000% Notes due 2029
EMR 29
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No






Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at January 31, 2020: 611,841,054 shares.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES

Three months ended December 31, 2018 and 2019
(Dollars in millions, except per share amounts; unaudited)
 
 
Three Months Ended
December 31,
 
2018

 
2019

Net sales
$
4,147

 
4,151

 
 
 
 
Costs and expenses:
 
 
 
Cost of sales
2,386

 
2,392

Selling, general and administrative expenses
1,077

 
1,123

Other deductions, net
50

 
178

Interest expense (net of interest income of $5 and $6, respectively)
43

 
35

 
 
 
 
Earnings before income taxes
591

 
423

 
 
 
 
Income taxes
124

 
94

 
 
 
 
Net earnings
467

 
329

 
 
 
 
Less: Noncontrolling interests in earnings of subsidiaries
2

 
3

 
 
 
 
Net earnings common stockholders
$
465

 
326

 
 
 
 
Basic earnings per share common stockholders
$
0.74

 
0.53

 
 
 
 
Diluted earnings per share common stockholders
$
0.74

 
0.53

 
 
 
 
Cash dividends per common share
$
0.49

 
0.50


 



















See accompanying Notes to Consolidated Financial Statements.

1




Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES

Three months ended December 31, 2018 and 2019
(Dollars in millions; unaudited)

 
Three Months Ended December 31,
 
 
2018


 
2019

Net earnings
 
$
467

 
 
329

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation
 
(35
)
 
 
99

Pension and postretirement
 
13

 
 
28

Cash flow hedges
 
(15
)
 
 
19

        Total other comprehensive income (loss)
 
(37
)
 
 
146

 
 
 
 
 
 
Comprehensive income
 
430

 
 
475

 
 
 
 
 
 
Less: Noncontrolling interests in comprehensive income of subsidiaries
 
2

 
 
3

Comprehensive income common stockholders
 
$
428

 
 
472




































See accompanying Notes to Consolidated Financial Statements.

2




Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES

(Dollars and shares in millions, except per share amounts; unaudited)
 
Sept 30, 2019
 
Dec 31, 2019
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
1,494

 
1,635

Receivables, less allowances of $112 and $115, respectively
2,985

 
2,726

Inventories
1,880

 
2,064

Other current assets
780

 
771

Total current assets
7,139

 
7,196

 
 
 
 
Property, plant and equipment, net
3,642

 
3,633

Other assets
 

 
 
Goodwill
6,536

 
6,578

Other intangible assets
2,615

 
2,567

Other
565

 
1,127

Total other assets
9,716

 
10,272

Total assets
$
20,497

 
21,101

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

Short-term borrowings and current maturities of long-term debt
$
1,444

 
1,984

Accounts payable
1,874

 
1,649

Accrued expenses
2,658

 
2,707

Total current liabilities
5,976

 
6,340

 
 
 
 
Long-term debt
4,277

 
4,018

 
 
 
 
Other liabilities
1,971

 
2,284

 
 
 
 
Equity
 

 
 

Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 611.0 shares and 611.6 shares, respectively
477

 
477

Additional paid-in-capital
393

 
447

Retained earnings
24,199

 
24,220

Accumulated other comprehensive income (loss)
(1,722
)
 
(1,576
)
Cost of common stock in treasury, 342.4 shares and 341.8 shares, respectively
(15,114
)
 
(15,147
)
Common stockholders’ equity
8,233

 
8,421

Noncontrolling interests in subsidiaries
40

 
38

Total equity
8,273

 
8,459

Total liabilities and equity
$
20,497

 
21,101








See accompanying Notes to Consolidated Financial Statements.

3




Consolidated Statements of Equity
EMERSON ELECTRIC CO. & SUBSIDIARIES

Three months ended December 31, 2018 and 2019
(Dollars in millions; unaudited)

 
Three Months Ended December 31,
 
2018

 
2019

 
 
 
 
Common stock
$
477

 
477

 
 
 
 
Additional paid-in-capital
 
 
 
     Beginning balance
348

 
393

     Stock plans
27

 
54

        Ending balance
375

 
447

 
 
 
 
Retained earnings
 
 
 
     Beginning balance
23,072

 
24,199

     Net earnings common stockholders
465

 
326

     Dividends paid
(305
)
 
(305
)
     Adoption of accounting standard updates
20

 

        Ending balance
23,252

 
24,220

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
     Beginning balance
(1,015
)
 
(1,722
)
     Foreign currency translation
(35
)
 
99

     Pension and postretirement
13

 
28

     Cash flow hedges
(15
)
 
19

        Ending balance
(1,052
)
 
(1,576
)
 
 
 
 
Treasury stock
 
 
 
     Beginning balance
(13,935
)
 
(15,114
)
     Purchases
(925
)
 
(129
)
     Issued under stock plans
44

 
96

        Ending balance
(14,816
)
 
(15,147
)
 
 
 
 
Common stockholders' equity
8,236

 
8,421

 
 
 
 
Noncontrolling interests in subsidiaries
 
 
 
     Beginning balance
43

 
40

     Net earnings
2

 
3

     Dividends paid
(5
)
 
(5
)
        Ending balance
40

 
38

 
 
 
 
Total equity
$
8,276

 
8,459












See accompanying Notes to Consolidated Financial Statements.

4




Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES

Three Months Ended December 31, 2018 and 2019
(Dollars in millions; unaudited)

 
 
Three Months Ended
 
 
December 31,
 
 
2018

 
2019

Operating activities
 
 
 
 
Net earnings
 
$
467

 
329

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
        Depreciation and amortization
 
202

 
211

        Stock compensation
 
(7
)
 
56

        Pension expense
 

 
17

        Changes in operating working capital
 
(310
)
 
(180
)
        Other, net
 
(29
)
 
(9
)
            Cash provided by operating activities
 
323

 
424

 
 
 
 
 
Investing activities
 
 
 
 
Capital expenditures
 
(155
)
 
(114
)
Purchases of businesses, net of cash and equivalents acquired
 
(73
)
 

Other, net
 
(31
)
 
(17
)
    Cash used in investing activities
 
(259
)
 
(131
)
 
 
 
 
 
Financing activities
 
 
 
 
Net increase in short-term borrowings
 
1,601

 
754

Payments of long-term debt
 
(403
)
 
(502
)
Dividends paid
 
(305
)
 
(305
)
Purchases of common stock
 
(786
)
 
(129
)
Other, net
 
(9
)
 
20

    Cash provided by (used in) financing activities
 
98

 
(162
)
 
 
 
 
 
Effect of exchange rate changes on cash and equivalents
 
(7
)
 
10

Increase in cash and equivalents
 
155

 
141

Beginning cash and equivalents
 
1,093

 
1,494

Ending cash and equivalents
 
$
1,248

 
1,635

 
 
 
 
 
Changes in operating working capital
 
 
 
 
Receivables
 
$
292

 
281

Inventories
 
(170
)
 
(167
)
Other current assets
 
(9
)
 
32

Accounts payable
 
(247
)
 
(225
)
Accrued expenses
 
(176
)
 
(101
)
Total changes in operating working capital
 
$
(310
)
 
(180
)









See accompanying Notes to Consolidated Financial Statements.

5




Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. & SUBSIDIARIES

(Dollars 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, 2019. Certain prior year amounts have been reclassified to conform to current year presentation.

On October 1, 2019, the Company adopted ASC 842, Leases, which requires rights and obligations related to lease arrangements to be recognized on the balance sheet, using the optional transition method under which prior periods were not adjusted. The Company elected the package of practical expedients for leases that commenced prior to the adoption date, which included carrying forward the historical lease classification as operating or finance. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets and related lease liabilities of approximately $500 as of October 1, 2019, but did not materially impact the Company's earnings or cash flows for the three months ended December 31, 2019.

On October 1, 2019, the Company adopted updates to ASC 815, Derivatives and Hedging, which permit hedging certain contractually specified risk components. Additionally, the updates eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates were adopted using a modified retrospective approach and were immaterial to the Company's financial statements for the three months ended December 31, 2019.
(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 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, while a smaller portion is recognized over time or relates to sales arrangements with multiple performance obligations. See Note 13 for additional information about the Company's revenues.

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, 2019
 
Dec 31, 2019
Unbilled receivables (contract assets)
 
$
456

 
 
422

Customer advances (contract liabilities)
 
(519
)
 
 
(569
)
      Net contract liabilities
 
$
(63
)
 
 
(147
)
    

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 increase in net contract liabilities was due to customer billings which exceeded revenue recognized for performance completed during the period. Revenue recognized for the three months ended December 31, 2019 included approximately $270 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 three months ended December 31, 2019 for performance obligations that were satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material.

As of December 31, 2019, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $5.5 billion. The Company expects to recognize

6




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.     

(3) WEIGHTED-AVERAGE COMMON SHARES

Reconciliations of weighted-average shares for basic and diluted earnings per common share follow. Earnings allocated to participating securities were inconsequential.
 
Three Months Ended
December 31,
 
2018


2019

 
 
 
 
Basic shares outstanding
623.9

 
610.0

Dilutive shares
3.9

 
4.1

Diluted shares outstanding
627.8

 
614.1

 

(4) ACQUISITIONS AND DIVESTITURES

The Company acquired eight businesses in 2019, all in the Automation Solutions segment, for $469, net of cash acquired. These eight businesses had combined annual sales of approximately $300. The Company recognized goodwill of $204 ($168 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.

(5) PENSION & POSTRETIREMENT PLANS

Total periodic pension and postretirement (income) expense is summarized below:
 
Three Months Ended December 31,
 
 
2018
 
 
2019
Service cost
 
$
18

 
 
22

Interest cost
 
50

 
 
40

Expected return on plan assets
 
(88
)
 
 
(84
)
Net amortization
 
17

 
 
37

Total
 
$
(3
)
 
 
15



(6) OTHER DEDUCTIONS, NET

Other deductions, net are summarized below:
 
Three Months Ended
December 31,
 
2018
 
 
 
2019

 
 
 
 
 
 
Amortization of intangibles (intellectual property and customer relationships)
 
$
57

 
 
59

Restructuring costs
 
10

 
 
97

Special advisory fees
 

 
 
13

Other
 
(17
)
 
 
9

Total
 
$
50

 
 
178



In the first quarter of fiscal 2020, Other included an unfavorable impact on comparisons from pensions of $14 and foreign currency transactions of $15.



7





(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 quarter of fiscal 2020 largely relate to workforce reductions of approximately 1,100 employees. The Company expects fiscal 2020 restructuring expense to be approximately $215, which includes costs to complete actions initiated in the first quarter.

Restructuring expense by business segment follows:
 
Three Months Ended
December 31,
 
2018
 
 
2019
 
 
 
 
 
 
 
Automation Solutions
 
$
5

 
 
83

 
 
 
 
 
 
Climate Technologies
 
3

 
 
7

Tools & Home Products
 
2

 
 
3

Commercial & Residential Solutions
 
5

 
 
10

 
 
 
 
 
 
Corporate
 

 
 
4

 
 
 
 
 
 
Total
 
$
10

 
 
97



Details of the change in the liability for restructuring costs during the three months ended December 31, 2019 follow:
 
Sept 30, 2019
 
 
Expense
 
 
Utilized/Paid
 
 
Dec 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance and benefits
 
$
62

 
 
80

 
 
20

 
 
122

Other
 
7

 
 
17

 
 
19

 
 
5

Total
 
$
69

 
 
97

 
 
39

 
 
127

 

(8) INCOME TAXES

Income taxes were $94 in the first quarter of fiscal 2020 and $124 in 2019, resulting in effective tax rates of 22 percent and 21 percent, respectively. The current year and prior year rates included favorable discrete items, which reduced the rates 1 percentage point and 3 percentage points, respectively.

(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.


8





The components of lease expense for the three months ended December 31, 2019 were as follows:
 
Three Months Ended December 31,
 
2019
 
 
 
Operating lease expense
 
$
53

Variable lease expense
 
$
5


Short-term lease expense and sublease income were immaterial for the three months ended December 31, 2019. Cash paid for operating leases is classified within operating cash flows and was $50 for the three months ended December 31, 2019. Operating lease right-of-use asset additions were $64 for the three months ended December 31, 2019.

The following table summarizes the balances of the Company's operating lease right-of-use assets and operating lease liabilities as of December 31, 2019, the vast majority of which relates to offices and manufacturing facilities:
 
 
 
Dec 31, 2019
Right-of-use assets (Other assets)
 
 
 
 
$
505

Current lease liabilities (Accrued expenses)
 
 
 
 
$
155

Noncurrent lease liabilities (Other liabilities)
 
 
 
 
$
361


The weighted-average remaining lease term for operating leases was 5.1 years and the weighted-average discount rate was 2.7% as of December 31, 2019.
Future maturities of operating lease liabilities as of December 31, 2019 are summarized below:
 
 
 
 
Dec 31, 2019
Remainder of 2020
 
 
 
 
$
129

2021
 
 
 
 
129

2022
 
 
 
 
97

2023
 
 
 
 
69

2024
 
 
 
 
48

Thereafter
 
 
 
 
79

Total lease payments
 
 
 
 
551

Less: Interest
 
 
 
 
35

Total lease liabilities
 
 
 
 
$
516


Lease commitments that have not yet commenced were immaterial as of December 31, 2019.

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.



9




(10) OTHER FINANCIAL INFORMATION

Sept 30, 2019

Dec 31, 2019
Inventories
 
 
 
 
 
Finished products
 
$
578

 
 
662

Raw materials and work in process
 
1,302

 
 
1,402

Total
 
$
1,880

 
 
2,064

Property, plant and equipment, net
 
 
 
Property, plant and equipment, at cost
 
$
8,671

 
 
8,845

Less: Accumulated depreciation
 
5,029

 
 
5,212

     Total
 
$
3,642

 
 
3,633


Goodwill by business segment
 
 
 
 
 
Automation Solutions
 
$
5,467

 
 
5,501

 
 
 
 
 
 
Climate Technologies
 
668

 
 
669

Tools & Home Products
 
401

 
 
408

Commercial & Residential Solutions
 
1,069

 
 
1,077

 
 
 
 
 
 
     Total
 
$
6,536

 
 
6,578

Other intangible assets
 
 
 
Gross carrying amount
 
$
4,872

 
 
4,917

Less: Accumulated amortization
 
2,257

 
 
2,350

     Net carrying amount
 
$
2,615

 
 
2,567


Other intangible assets include customer relationships of $1,370 and $1,391 as of December 31, 2019 and September 30, 2019, respectively.
Other assets include the following:
 
 
 
Operating lease right-of-use assets
 
$

 
 
505

Pension assets
 
164

 
 
205

Asbestos-related insurance receivables
 
115

 
 
114

Deferred income taxes
 
97

 
 
105

Accrued expenses include the following:
 
 
 
 
 
Customer advances (contract liabilities)
 
$
519

 
 
569

Employee compensation
 
606

 
 
503

Operating lease liabilities (current)
 

 
 
155

Product warranty
 
140

 
 
138

Other liabilities include the following:
 
 
 
 
 
Pension and postretirement liabilities
 
$
775

 
 
774

Operating lease liabilities (noncurrent)
 

 
 
361

Deferred income taxes
 
327

 
 
329

Asbestos litigation
 
313

 
 
310




10




(11) FINANCIAL INSTRUMENTS

Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of December 31, 2019, the notional amount of foreign currency hedge positions was approximately $2.2 billion, and commodity hedge contracts totaled approximately $105 (primarily 43 million pounds of copper and aluminum). All derivatives receiving hedge accounting are cash flow hedges. The majority of hedging gains and losses deferred as of December 31, 2019 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 months ended December 31, 2019 and 2018:
 
 
 
 
Into Earnings
 
Into OCI
 
 
 
 
1st Quarter
 
1st Quarter
Gains (Losses)
 
Location
 
2018

 
2019

 
2018

 
2019

Commodity
 
Cost of sales
 
$
(3
)
 
(3
)
 
(7
)
 
7

Foreign currency
 
Sales
 
(2
)
 
(2
)
 
(1
)
 
3

Foreign currency
 
Cost of sales
 
4

 
7

 
(11
)
 
17

Foreign currency
 
Other deductions, net
 
11

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Investment Hedges
 
 
 
 
 
 
 
 
Euro denominated debt
 
 
 


 


 

 
(26
)
     Total
 
 
 
$
10

 
10

 
(19
)
 
1


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.

Fair Value Measurement – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of December 31, 2019, the fair value of long-term debt was $4.7 billion, which exceeded the carrying value by $420. The fair values of commodity and foreign currency contracts were reported in Other current assets and Accrued expenses and did not materially change since September 30, 2019.
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 Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company as of December 31, 2019.


11




(12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Activity in Accumulated other comprehensive income (loss) for the three months ended December 31, 2019 and 2018 is shown below:  
 
Three Months Ended December 31,
 
 
2018

 
 
2019

Foreign currency translation
 
 
 
 
 
   Beginning balance
 
$
(600
)
 
 
(794
)
   Other comprehensive income (loss) before reclassifications
 
(35
)
 
 
99

   Ending balance
 
(635
)
 
 
(695
)
 
 
 
 
 
 
Pension and postretirement
 
 
 
 
 
   Beginning balance
 
(420
)
 
 
(928
)
   Amortization of deferred actuarial losses into earnings
 
13

 
 
28

   Ending balance
 
(407
)
 
 
(900
)
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
   Beginning balance
 
5

 
 

   Deferral of gains (losses) arising during the period
 
(14
)
 
 
21

   Reclassification of realized (gains) losses to sales and cost of sales
 
(1
)
 
 
(2
)
   Ending balance
 
(10
)
 
 
19

 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
$
(1,052
)
 
 
(1,576
)
 
 
 
 
 
 

Activity above is shown net of income taxes for the three months ended December 31, 2019 and 2018, respectively, as follows: foreign currency translation: $6 and $0; amortization of pension and postretirement deferred actuarial losses: $(9) and $(4); deferral of cash flow hedging gains (losses): $(6) and $5; reclassification of realized cash flow hedging (gains) losses: $0 and $0.

(13) BUSINESS SEGMENTS

Summarized information about the Company's results of operations by business segment follows:
 
Three Months Ended December 31,
 
Sales
 
Earnings
 
2018

 
2019

 
2018

 
2019

 
 
 
 
 
 
 
 
Automation Solutions
$
2,799

 
2,852

 
407

 
310

 
 
 
 
 
 
 
 
Climate Technologies
880

 
873

 
146

 
151

Tools & Home Products
458

 
430

 
91

 
86

Commercial & Residential Solutions
1,338

 
1,303

 
237

 
237

 
 
 
 
 
 
 
 
Stock compensation
 
 
 
 
7

 
(56
)
Unallocated pension and postretirement costs
 
 
 
 
27

 
13

Corporate and other
 
 
 
 
(44
)
 
(46
)
Eliminations/Interest
10

 
(4
)
 
(43
)
 
(35
)
     Total
$
4,147

 
4,151

 
591

 
423



The increase in stock compensation expense reflects an increasing stock price in the current year compared to a decreasing price in the prior year.

12




Automation Solutions sales by major product offering are summarized below:
 
Three Months Ended December 31,
 
 
2018

 
 
2019

 
 
 
 
 
 
Measurement & Analytical Instrumentation
 
$
858

 
 
830

Valves, Actuators & Regulators
 
874

 
 
913

Industrial Solutions
 
542

 
 
507

Process Control Systems & Solutions
 
525

 
 
602

     Automation Solutions
 
$
2,799

 
 
2,852



Depreciation and amortization (includes intellectual property, customer relationships and capitalized software) by business segment are summarized below:
 
Three Months Ended December 31,
 
 
2018

 
2019

Automation Solutions
 
$
129

 
139

 
 
 
 
 
Climate Technologies
 
45

 
44

Tools & Home Products
 
19

 
19

Commercial & Residential Solutions
 
64

 
63

 
 
 
 
 
Corporate and other
 
9

 
9

     Total
 
$
202

 
211



Sales by geographic destination are summarized below:
 
Three Months Ended December 31,
 
2018
 
2019
 
Automation Solutions

 
Commercial & Residential Solutions

 
Total

 
Automation Solutions

 
Commercial & Residential Solutions

 
Total

 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
1,405

 
907

 
2,312

 
1,410

 
863

 
2,273

Asia, Middle East & Africa
841

 
265

 
1,106

 
896

 
277

 
1,173

Europe
553

 
166

 
719

 
546

 
163

 
709

     Total
$
2,799

 
1,338

 
4,137

 
2,852

 
1,303

 
4,155





13




Items 2 and 3.

Management's Discussion and Analysis of Financial Condition and Results of Operations 

OVERVIEW

Net sales for the first quarter of fiscal 2020 were $4.2 billion, flat compared with the prior year, supported by acquisitions which added 1 percent, and adversely affected by foreign currency translation which deducted 1 percent. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were flat.
Net earnings common stockholders were $326 million, down 30 percent, and diluted earnings per share were $0.53, down 28 percent, primarily due to restructuring costs and special advisory fees of $0.14 per share and higher stock compensation (due to an increasing stock price) and pension expense of $0.10 per share.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31  

Following is an analysis of the Company’s operating results for the first quarter ended December 31, 2019, compared with the first quarter ended December 31, 2018.
 
2018
 
2019
 
Change
(dollars in millions, except per share amounts)
 

 
 

 
 
 
 
 
 
 
 
Net sales
$
4,147

 
4,151

 
 %
Gross profit
$
1,761

 
1,759

 
 %
Percent of sales
42.5
%
 
42.4
%
 
 

 
 
 
 
 
 
SG&A
$
1,077

 
1,123

 
4
 %
Percent of sales
26.0
%
 
27.1
%
 
 

Other deductions, net
$
50

 
178

 
 

Interest expense, net
$
43

 
35

 
 

 
 
 
 
 
 
Earnings before income taxes
$
591

 
423

 
(28
)%
Percent of sales
14.2
%
 
10.2
%
 
 

Net earnings common stockholders
$
465

 
326

 
(30
)%
Percent of sales
11.2
%
 
7.9
%
 
 

 
 
 
 
 
 
Diluted earnings per share
$
0.74

 
0.53

 
(28
)%

Net sales for the first quarter of fiscal 2020 were $4.2 billion, flat (up $4 million) compared with 2019. Underlying sales were flat (up $11 million) on higher price offset by lower volume. Acquisitions net of divestitures added 1 percent ($20 million) and foreign currency translation subtracted 1 percent ($27 million). Underlying sales were down 3 percent in the U.S. and increased 3 percent internationally. The Americas was down 2 percent, Europe was flat and Asia, Middle East & Africa was up 6 percent.

Cost of sales for the first quarter of fiscal 2020 were $2.4 billion, an increase of $6 million compared with 2019. Gross margin of 42.4 percent decreased 0.1 percentage points, reflecting unfavorable mix primarily within Automation Solutions, largely offset by favorable price-cost.

Selling, general and administrative (SG&A) expenses of $1.1 billion increased $46 million compared with the prior year, primarily due to higher stock compensation expense of $63 million, reflecting an increasing stock price in the current year compared to a decreasing price in the prior year. SG&A as a percent of sales increased 1.1 percentage points to 27.1 percent due to a negative impact on comparisons from the higher stock compensation expense of 1.5 percentage points, partially offset by savings from cost reduction actions.

Other deductions, net were $178 million in 2020, an increase of $128 million compared with the prior year, reflecting increased restructuring costs of $87 million, and an unfavorable impact on comparisons from pensions of $14 million, foreign currency transactions of $15 million, and special advisory fees of $13 million. See Note 6.


14




Pretax earnings of $423 million decreased $168 million, or 28 percent compared with the prior year. Earnings decreased $97 million in Automation Solutions and were flat in Commercial & Residential Solutions, while costs reported at corporate increased $79 million. See the Business discussion that follows and Note 13.

Income taxes were $94 million for 2020 and $124 million for 2019, resulting in effective tax rates of 22 percent and 21 percent, respectively. The current year and prior year rates included favorable discrete items, which reduced the rates 1 percentage point and 3 percentage points, respectively. See Note 8.

Net earnings common stockholders in the first quarter of fiscal 2020 were $326 million, down 30 percent, compared with $465 million in the prior year, and earnings per share were $0.53, down 28 percent, compared with $0.74 in 2019. Earnings per share were negatively impacted by restructuring costs and special advisory fees of $0.14 per share and higher stock compensation (due to an increasing stock price) and pension expense of $0.10 per share.

Business Segments
Following is an analysis of operating results for the Company’s business segments for the first quarter ended December 31, 2019, compared with the first quarter ended December 31, 2018. The Company defines segment earnings as earnings before interest and taxes. See Note 13 for a discussion of the Company's business segments.
 
AUTOMATION SOLUTIONS
Three Months Ended Dec 31
2018
 
2019
 
Change
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
2,799

 
2,852

 
2
 %
Earnings
$
407

 
310

 
(24
)%
     Margin
14.5
%
 
10.9
%
 
 

Sales by Major Product Offering
 
 
 
 
 
Measurement & Analytical Instrumentation
$
858

 
830

 
(3
)%
Valves, Actuators & Regulators
874

 
913

 
5
 %
Industrial Solutions
542

 
507

 
(7
)%
Process Control Systems & Solutions
525

 
602

 
15
 %
     Total
$
2,799

 
2,852

 
2
 %

Automation Solutions sales were $2.9 billion in the first quarter, an increase of $53 million, or 2 percent. Underlying sales increased 1 percent ($27 million) on slightly higher volume and price. Acquisitions added 2 percent ($47 million) and foreign currency translation had a 1 percent ($21 million) unfavorable impact. Sales for Measurement & Analytical Instrumentation decreased $28 million, or 3 percent, due to weakness in upstream oil and gas end markets, primarily in North America. Valves, Actuators & Regulators increased $39 million, or 5 percent, reflecting steady trends in process and hybrid end markets. Industrial Solutions sales decreased $35 million, or 7 percent, as global discrete end markets remained soft. Process Control Systems & Solutions increased $77 million, or 15 percent, due to the Machine Automation Solutions acquisition which added $47 million, and favorable maintenance and repair demand and brownfield investment activity. Underlying sales decreased 1 percent in the Americas (U.S. down 2 percent) and 1 percent in Europe while Asia, Middle East & Africa increased 6 percent, supported by continued infrastructure investment, led by China, and strong growth in Middle East & Africa. Earnings were $310 million, a decrease of $97 million, or 24 percent, primarily due to higher restructuring expense of $78 million and an unfavorable impact from foreign currency transactions of $15 million. Margin decreased 3.6 percentage points to 10.9 percent, reflecting a negative impact from restructuring of 2.7 percentage points, unfavorable mix of 0.6 percentage points which included a decline in the more profitable North American upstream and discrete end markets, and unfavorable foreign currency transactions of 0.5 percentage points.


15




COMMERCIAL & RESIDENTIAL SOLUTIONS
Three Months Ended Dec 31
2018
 
2019
 
Change
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
  Climate Technologies
$
880

 
873

 
(1
)%
  Tools & Home Products
458

 
430

 
(6
)%
     Total
$
1,338

 
1,303

 
(3
)%
 
 
 
 
 
 
Earnings:
 
 
 
 
 
  Climate Technologies
$
146

 
151

 
4
 %
  Tools & Home Products
91

 
86

 
(6
)%
     Total
$
237

 
237

 
 %
     Margin
17.7
%
 
18.2
%
 
 

Commercial & Residential Solutions sales were $1.3 billion in the first quarter, down $35 million, or 3 percent compared to the prior year. The divestiture of two small non-core businesses subtracted 1 percent ($14 million) and foreign currency translation subtracted 1 percent ($6 million). Underlying sales decreased 1 percent ($15 million) primarily due to lower volume partially offset by slightly higher price. Climate Technologies sales were $873 million in the first quarter, a decrease of $7 million, or 1 percent. Air conditioning and heating sales were up slightly due to improving conditions in Asia, Middle East & Africa and continued strength in Europe, while North American markets softened. Cold chain sales were down moderately, as slower global conditions persisted. Tools & Home Products sales were $430 million in the first quarter, a decrease of $28 million, or 6 percent. Global professional tools end markets remained soft, while food waste disposers were flat and wet/dry vacuums were up slightly. Overall, underlying sales decreased 3 percent in the Americas (U.S. down 5 percent), while Europe increased 1 percent and Asia, Middle East & Africa increased 5 percent. Earnings were $237 million, flat compared with the prior year, and margin increased 0.5 percentage points, primarily due to favorable price-cost and savings from cost reduction actions, partially offset by higher restructuring expense of $5 million.

FINANCIAL CONDITION

Key elements of the Company's financial condition for the three months ended December 31, 2019 as compared to the year ended September 30, 2019 follow.
 
Sept 30, 2019

 
Dec 31, 2019

Working capital (in millions)
$
1,163

 
856

Current ratio
1.2

 
1.1

Total debt-to-total capital
41.0
%
 
41.6
%
Net debt-to-net capital
33.9
%
 
34.1
%
Interest coverage ratio
15.2
X
 
11.2X

The Company's working capital decreased primarily due to increased short-term borrowings, which supported repayments of long-term debt and share repurchases in the first quarter of 2020. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 11.2X for the first three months of fiscal 2020 compares to 13.0X for the three months ended December 31, 2018. The decrease primarily reflects lower pretax earnings in the current year.

Operating cash flow for the first three months of fiscal 2020 was $424 million, an increase of $101 million compared with $323 million in the prior year, due to lower operating working capital investment. Free cash flow of $310 million in the first quarter of fiscal 2020 (operating cash flow of $424 million less capital expenditures of $114 million) increased $142 million compared to free cash flow of $168 million in 2019 (operating cash flow of $323 million less capital expenditures of $155 million), reflecting the increase in operating cash flow and lower capital investment.

Emerson's financial structure provides the flexibility necessary to achieve its strategic objectives. The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. The Company believes that sufficient funds will be available to meet the Company’s

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needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.

FISCAL 2020 OUTLOOK

The economic environment is expected to remain challenging for the rest of fiscal 2020. The outlook discussed herein excludes any potential impact from the coronavirus. Consolidated net and underlying sales are expected to range between down 2 percent to up 2 percent. Automation Solutions net and underlying sales are expected to be down 1 percent to up 3 percent. Commercial & Residential Solutions net sales are expected to be down 4 percent to flat, with underlying sales down 3 percent to up 1 percent excluding an impact from divestitures of 1 percent. Earnings per share are expected to be $3.27 to $3.52, while adjusted earnings per share, which exclude a $0.28 per share impact from restructuring actions and related costs for the year, are expected to be $3.55 to $3.80. Operating cash flow is expected to be approximately $3.15 billion and free cash flow, which excludes targeted capital spending of $650 million, is expected to be approximately $2.5 billion.
Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, protection of intellectual property, cybersecurity, tariffs, competitive and technological factors, 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, 2019 and in subsequent reports filed with the SEC, which are hereby incorporated by reference.

The United Kingdom's (UK) withdrawal from the European Union (EU), commonly known as "Brexit", was completed on January 31, 2020. The UK has now entered a transition period, during which it will begin negotiating 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 outcomes of the UK's negotiations with the EU and believes the direct cost of incremental tariffs, logistics and other items would be immaterial.


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Item 4. Controls and Procedures 

The Company maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in a timely manner. This system also is designed to ensure information is accumulated and communicated to management, including the Company's certifying officers, to allow timely decisions regarding required disclosure. Based on an evaluation performed, the certifying officers have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
There was no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

In the first quarter of fiscal 2020, the Company implemented certain internal controls related to the adoption of ASC 842, Leases.


PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (shares in 000s).
Period
Total Number of Shares
Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 2019
 
1,956

 
 
$66.09
 
 
1,956

 
 
19,984
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