Item 1. Financial Statements
Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and nine
months ended
June 30, 2018
and
2019
(Dollars in millions, except per share amounts; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
Net sales
|
$
|
4,456
|
|
|
4,684
|
|
|
12,520
|
|
|
13,401
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
2,514
|
|
|
2,683
|
|
|
7,147
|
|
|
7,714
|
|
|
Selling, general and administrative expenses
|
1,058
|
|
|
1,126
|
|
|
3,088
|
|
|
3,348
|
|
|
Other deductions, net
|
77
|
|
|
65
|
|
|
243
|
|
|
172
|
|
|
Interest expense (net of interest income of $10, $7, $35 and $19, respectively)
|
39
|
|
|
43
|
|
|
113
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
768
|
|
|
767
|
|
|
1,929
|
|
|
2,033
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
49
|
|
|
155
|
|
|
327
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
719
|
|
|
612
|
|
|
1,602
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
Less: Noncontrolling interests in earnings of subsidiaries
|
7
|
|
|
8
|
|
|
16
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings common stockholders
|
$
|
712
|
|
|
604
|
|
|
1,586
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share common stockholders
|
$
|
1.13
|
|
|
0.98
|
|
|
2.50
|
|
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share common stockholders
|
$
|
1.12
|
|
|
0.97
|
|
|
2.49
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
$
|
0.485
|
|
|
0.49
|
|
|
1.455
|
|
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and nine
months ended
June 30, 2018
and
2019
(Dollars in millions; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
|
|
2018
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2019
|
|
|
Net earnings
|
|
$
|
719
|
|
|
|
612
|
|
|
|
1,602
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
(273
|
)
|
|
|
(93
|
)
|
|
|
(118
|
)
|
|
|
(40
|
)
|
|
Pension and postretirement
|
|
22
|
|
|
|
13
|
|
|
|
67
|
|
|
|
38
|
|
|
Cash flow hedges
|
|
(14
|
)
|
|
|
(8
|
)
|
|
|
(22
|
)
|
|
|
2
|
|
|
Total other comprehensive income (loss)
|
|
(265
|
)
|
|
|
(88
|
)
|
|
|
(73
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
454
|
|
|
|
524
|
|
|
|
1,529
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Noncontrolling interests in comprehensive
income of subsidiaries
|
|
7
|
|
|
|
8
|
|
|
|
16
|
|
|
|
16
|
|
|
Comprehensive income common stockholders
|
|
$
|
447
|
|
|
|
516
|
|
|
|
1,513
|
|
|
|
1,588
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES
(Dollars and shares in millions, except per share amounts; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Sept 30, 2018
|
|
June 30, 2019
|
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and equivalents
|
$
|
1,093
|
|
|
1,603
|
|
|
Receivables, less allowances of $113 and $100, respectively
|
3,023
|
|
|
2,901
|
|
|
Inventories
|
1,813
|
|
|
2,061
|
|
|
Other current assets
|
690
|
|
|
785
|
|
|
Total current assets
|
6,619
|
|
|
7,350
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
3,562
|
|
|
3,614
|
|
|
Other assets
|
|
|
|
|
|
Goodwill
|
6,455
|
|
|
6,544
|
|
|
Other intangible assets
|
2,751
|
|
|
2,691
|
|
|
Other
|
1,003
|
|
|
1,118
|
|
|
Total other assets
|
10,209
|
|
|
10,353
|
|
|
Total assets
|
$
|
20,390
|
|
|
21,317
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt
|
$
|
1,623
|
|
|
1,877
|
|
|
Accounts payable
|
1,943
|
|
|
1,785
|
|
|
Accrued expenses
|
2,534
|
|
|
2,453
|
|
|
Income taxes
|
64
|
|
|
103
|
|
|
Total current liabilities
|
6,164
|
|
|
6,218
|
|
|
|
|
|
|
|
Long-term debt
|
3,137
|
|
|
4,336
|
|
|
|
|
|
|
|
Other liabilities
|
2,099
|
|
|
1,959
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 629.2 shares and 615.1 shares, respectively
|
477
|
|
|
477
|
|
|
Additional paid-in-capital
|
348
|
|
|
387
|
|
|
Retained earnings
|
23,072
|
|
|
23,777
|
|
|
Accumulated other comprehensive income (loss)
|
(1,015
|
)
|
|
(1,016
|
)
|
|
Cost of common stock in treasury, 324.2 shares and 338.3 shares, respectively
|
(13,935
|
)
|
|
(14,870
|
)
|
|
Common stockholders’ equity
|
8,947
|
|
|
8,755
|
|
|
Noncontrolling interests in subsidiaries
|
43
|
|
|
49
|
|
|
Total equity
|
8,990
|
|
|
8,804
|
|
|
Total liabilities and equity
|
$
|
20,390
|
|
|
21,317
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES
Nine Months Ended June 30, 2018
and
2019
(Dollars in millions; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
Operating activities
|
|
|
|
|
|
Net earnings
|
|
$
|
1,602
|
|
|
1,604
|
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
557
|
|
|
609
|
|
|
Changes in operating working capital
|
|
(286
|
)
|
|
(352
|
)
|
|
Other, net
|
|
(5
|
)
|
|
(59
|
)
|
|
Cash provided by operating activities
|
|
1,868
|
|
|
1,802
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Capital expenditures
|
|
(314
|
)
|
|
(395
|
)
|
|
Purchases of businesses, net of cash and equivalents acquired
|
|
(770
|
)
|
|
(385
|
)
|
|
Divestitures of businesses
|
|
223
|
|
|
10
|
|
|
Other, net
|
|
(71
|
)
|
|
(91
|
)
|
|
Cash used in investing activities
|
|
(932
|
)
|
|
(861
|
)
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Net increase in short-term borrowings
|
|
1,581
|
|
|
427
|
|
|
Proceeds from long-term debt
|
|
—
|
|
|
1,691
|
|
|
Payments of long-term debt
|
|
(251
|
)
|
|
(655
|
)
|
|
Dividends paid
|
|
(924
|
)
|
|
(909
|
)
|
|
Purchases of common stock
|
|
(1,000
|
)
|
|
(1,000
|
)
|
|
Other, net
|
|
34
|
|
|
21
|
|
|
Cash used in financing activities
|
|
(560
|
)
|
|
(425
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents
|
|
(27
|
)
|
|
(6
|
)
|
|
Increase in cash and equivalents
|
|
349
|
|
|
510
|
|
|
Beginning cash and equivalents
|
|
3,062
|
|
|
1,093
|
|
|
Ending cash and equivalents
|
|
$
|
3,411
|
|
|
1,603
|
|
|
|
|
|
|
|
|
Changes in operating working capital
|
|
|
|
|
|
Receivables
|
|
$
|
27
|
|
|
178
|
|
|
Inventories
|
|
(133
|
)
|
|
(217
|
)
|
|
Other current assets
|
|
(15
|
)
|
|
(74
|
)
|
|
Accounts payable
|
|
(97
|
)
|
|
(156
|
)
|
|
Accrued expenses
|
|
(83
|
)
|
|
(116
|
)
|
|
Income taxes
|
|
15
|
|
|
33
|
|
|
Total changes in operating working capital
|
|
$
|
(286
|
)
|
|
(352
|
)
|
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. & SUBSIDIARIES
(Dollars, euros and shares in millions, except per share amounts or where noted)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2018
. Certain prior year amounts have been reclassified to conform to current year presentation.
On October 1, 2018, the Company adopted ASC 606,
Revenue from Contracts with Customers
, which updated and consolidated revenue recognition guidance from multiple sources into a single, comprehensive standard to be applied for all contracts with customers. The fundamental principle of the revised standard is to recognize revenue based on the transfer of goods and services to customers at the amount the Company expects to be entitled to in exchange for those goods and services. The Company adopted the new standard using the modified retrospective approach and applied the guidance to open contracts which were not completed at the date of adoption. The cumulative effect of adoption resulted in a
$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 ended
June 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 use the optional transition method under which prior periods will not be adjusted. As previously disclosed, the adoption of ASC 842 is expected to impact the Company’s balance sheet due to the recognition of right-of-use assets and related lease liabilities, but is not expected to materially impact its earnings or cash flows. The Company is in the process of implementing changes to its business processes, systems, controls and accounting policies to support recognition and disclosure under the new guidance.
(2) REVENUE RECOGNITION
Emerson is a global manufacturer that combines technology and engineering to provide innovative solutions to its customers, largely in the form of tangible products. The Company evaluates its contracts with customers to identify the promised goods or services and recognizes revenue for the identified performance obligations at the amount the Company expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Revenue is recognized when, or as, performance obligations are satisfied and control has transferred to the customer, typically when products are shipped or delivered, title and risk of loss pass to the customer, and the Company has a present right to payment. The vast majority of the Company's revenues relate to a broad offering of manufactured products which are recognized at the point in time when control transfers, generally in accordance with shipping terms. A portion of the Company's revenues relate to the sale of software and post-contract customer support, parts and labor for repairs, and engineering services. In limited circumstances, contracts include multiple performance obligations, where
revenue is recognized separately for each good or service, as well as contracts where revenue is recognized over time as control transfers to the customer.
Revenue is recognized over time for approximately
5 percent
of the Company's revenues. These contracts largely relate to projects in the Process Control Systems & Solutions product offering within the Automation Solutions segment where revenue is recognized using the percentage-of-completion method to reflect the transfer of control over time, while a small amount is attributable to long-term maintenance and service contracts where revenue is typically recognized on a straight-line basis as the services are provided. Approximately
5 percent
of revenues relate to sales arrangements with multiple performance obligations, principally in the Automation Solutions segment. Tangible products represent a large majority of the delivered items in contracts with multiple performance 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
|
)
|
The majority of the Company's contract balances relate to arrangements where revenue is recognized over time and payments from customers are made according to a contractual billing schedule. The decrease in net contract liabilities was due to revenue recognized for performance completed during the period which exceeded customer billings. Revenue recognized for the three and
nine months ended
June 30, 2019
included approximately
$45
and
$370
, 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
nine months ended June 30, 2018
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
, 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 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,
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding
|
629.4
|
|
|
614.3
|
|
|
633.4
|
|
|
617.4
|
|
|
Dilutive shares
|
3.5
|
|
|
4.7
|
|
|
3.1
|
|
|
4.2
|
|
|
Diluted shares outstanding
|
632.9
|
|
|
619.0
|
|
|
636.5
|
|
|
621.6
|
|
(4) 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, 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
|
|
Other intangible assets include customer relationships of
$1,423
and
$1,517
as of June 30, 2019 and
September 30, 2018
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets include the following:
|
|
|
|
|
Pension assets
|
|
$
|
591
|
|
|
|
701
|
|
|
Asbestos-related insurance receivables
|
|
$
|
124
|
|
|
|
117
|
|
|
Deferred income taxes
|
|
$
|
74
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(5) FINANCIAL INSTRUMENTS
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities
– As of
June 30, 2019
, the notional amount of foreign currency hedge positions was approximately
$2.2 billion
, and commodity hedge contracts totaled approximately
$117
(primarily
45 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, 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. The following gains and losses are included in earnings and other comprehensive income (OCI) for the
three and nine months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Into Earnings
|
|
Into OCI
|
|
|
|
|
|
3rd Quarter
|
|
Nine Months
|
|
3rd Quarter
|
|
Nine Months
|
|
Gains (Losses)
|
|
Location
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
Commodity
|
|
Cost of sales
|
|
$
|
2
|
|
|
(2
|
)
|
|
13
|
|
|
(8
|
)
|
|
(3
|
)
|
|
(8
|
)
|
|
1
|
|
|
(5
|
)
|
|
Foreign currency
|
|
Sales, cost of sales
|
|
(1
|
)
|
|
4
|
|
|
(1
|
)
|
|
10
|
|
|
(15
|
)
|
|
—
|
|
|
(19
|
)
|
|
10
|
|
|
Foreign currency
|
|
Other deductions, net
|
|
28
|
|
|
3
|
|
|
16
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
29
|
|
|
5
|
|
|
28
|
|
|
45
|
|
|
(18
|
)
|
|
(8
|
)
|
|
(18
|
)
|
|
5
|
|
Regardless of whether derivatives receive hedge accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving hedge accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness, including for the net investment hedge described below. Hedge ineffectiveness was immaterial for the
three and nine months ended
June 30, 2019
and
2018
.
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
, the fair value of long-term debt was
$5.3 billion
, which exceeded the carrying value by
$411
.
The fair values of commodity and foreign currency contracts were reported in other current assets and accrued 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
. 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
June 30, 2019
.
(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) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in Accumulated other comprehensive income (loss) 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
|
|
|
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
|
|
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 ended
June 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) BUSINESS SEGMENTS
Summarized information about the Company's results of operations by business segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 decreasing 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 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
|
|
Segment sales by geographic destination are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2018
|
|
2019
|
|
|
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
|
|
|
Asia, Middle East & Africa
|
917
|
|
|
339
|
|
|
1,256
|
|
|
970
|
|
|
313
|
|
|
1,283
|
|
|
Europe
|
552
|
|
|
154
|
|
|
706
|
|
|
607
|
|
|
185
|
|
|
792
|
|
|
Total
|
$
|
2,870
|
|
|
1,592
|
|
|
4,462
|
|
|
3,025
|
|
|
1,662
|
|
|
4,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
2018
|
|
2019
|
|
|
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
|
|
|
Asia, Middle East & Africa
|
2,575
|
|
|
1,027
|
|
|
3,602
|
|
|
2,721
|
|
|
863
|
|
|
3,584
|
|
|
Europe
|
1,579
|
|
|
440
|
|
|
2,019
|
|
|
1,737
|
|
|
545
|
|
|
2,282
|
|
|
Total
|
$
|
8,213
|
|
|
4,327
|
|
|
12,540
|
|
|
8,834
|
|
|
4,561
|
|
|
13,395
|
|
(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. T
he 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.
T
he 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
Net sales for the
third
quarter of 2019 were
$4.7 billion
, up
5 percent
, supported by acquisitions, which added
5 percent
, and 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.
Net earnings common stockholders were
$604 million
, down
15 percent
, and diluted earnings per share were
$0.97
, down
13 percent
, primarily due to an income tax benefit of $150 million ($0.24 per share) from the impacts of U.S. tax reform in the prior year.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30
Following is an analysis of the Company’s operating results for the
third quarter ended June 30, 2019
, compared with the
third quarter ended June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
third
quarter of
2019
were
$4.7 billion
, an increase of
$228 million
, or
5 percent
compared with
$4.5 billion
in
2018
. Underlying sales increased
2 percent
(
$72 million
) on higher price and slightly higher volume. Acquisitions added
5 percent
(
$243 million
) and foreign currency translation subtracted
2 percent
(
$87 million
). Underlying sales were flat in the U.S. and increased
3 percent
internationally. The Americas was up
1 percent
, Europe was up
1 percent
and Asia, Middle East & Africa was up
3 percent
(China up
3 percent
, versus up 15 percent in 2018). 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
third
quarter of
2019
were
$2.7 billion
, an increase of
$169 million
compared with
$2.5 billion
in
2018
, primarily due to acquisitions. Gross margin of
42.7 percent
decreased
0.9
percentage points, reflecting a negative impact from acquisitions of 0.4 percentage points and unfavorable mix.
Selling, general and administrative (SG&A) expenses of
$1.1 billion
increased
$68 million
compared with the prior year, primarily due to acquisitions. SG&A as a percent of sales increased
0.2
percentage points to
24.0 percent
, primarily due to acquisitions, which negatively impacted comparisons by 0.5 percentage points, partially offset by lower incentive stock compensation of $12 million.
Other deductions, net were
$65 million
in
2019
, a decrease of
$12 million
compared with the prior year, reflecting lower acquisition/divestiture-related costs of
$7 million
and a favorable impact from pensions of
$11 million
, partially offset by higher intangibles amortization of
$13 million
. See Note 9.
Pretax earnings of
$767 million
decreased
$1 million
, flat compared to the prior year. Earnings decreased
$17 million
in Automation Solutions and decreased
$16 million
in Commercial & Residential Solutions, while Corporate and other expense decreased $29 million. See Note 12 and the following Business Segments discussion.
Income taxes were
$155 million
for
2019
and
$49 million
for
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 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, while the prior year rate included a tax benefit of
$150 million
(
$0.24
per share), reflecting updates to the Company's initial estimates related to the impact of the Act 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 effective tax rate for full year 2019 is currently expected to be approximately
21 percent
. See Note 11.
Net earnings common stockholders in the
third
quarter of
2019
were
$604 million
, down
15 percent
, compared with
$712 million
in the prior year, and earnings per share were
$0.97
, down
13 percent
, compared with
$1.12
in
2018
.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the
third quarter ended June 30, 2019
, compared with the
third quarter ended June 30, 2018
. The Company defines segment earnings as earnings before interest and taxes. See Note 12 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 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
|
$
|
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 billion
in the
third
quarter, an increase of
$155 million
, or
5 percent
. Underlying sales increased
3 percent
(
$80 million
) on higher volume and slightly higher price. Acquisitions added
5 percent
(
$141 million
) and foreign currency translation had a
3 percent
(
$66 million
) unfavorable impact. Sales for Measurement & Analytical Instrumentation increased
$13 million
, or
1 percent
, supported by favorable trends in most key end markets in Asia, Middle East & Africa, partially offset by a slowdown in upstream oil and gas spending in the Americas. Valves, Actuators & Regulators decreased
$7 million
, or less than
1 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 manufacturing 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
1 percent
in the Americas (U.S. down
1 percent
),
1 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
2 percent
). Earnings were
$371 million
, a decrease of
$16 million
, and margin declined
1.9
percentage points, primarily due to a dilutive impact from the tools and test acquisition of 1.2 percentage points and deleverage on lower volume in the Climate Technologies segment.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30
Following is an analysis of the Company’s operating results for the
nine months ended
June 30, 2019
, compared with the
nine months ended
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
nine
months of
2019
were
$13.4 billion
, an increase of
$881 million
, or
7 percent
compared with
$12.5 billion
in
2018
. Underlying sales were up
3 percent
(
$403 million
) on higher volume and slightly higher price. Acquisitions added
6 percent
(
$731 million
) and foreign currency translation subtracted
2 percent
(
$253 million
). Underlying sales increased
4 percent
in the U.S. and
3 percent
internationally. The Americas was up
5 percent
, Europe was up
2 percent
and Asia, Middle East & Africa was up
1 percent
(China up
1 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
2019
were
$7.7 billion
, an increase of
$567 million
versus
$7.1 billion
in
2018
, primarily due to acquisitions and higher volume, partially offset by the impact of foreign currency translation. Gross margin decreased
0.5
percentage points to
42.4 percent
, reflecting unfavorable mix and the impact of acquisitions.
SG&A expenses of
$3.3 billion
increased
$260 million
primarily due to acquisitions and higher volume. SG&A as a percent of sales increased to
24.9 percent
due to the impact of acquisitions, which negatively impacted comparisons by 0.5 percentage points. Leverage on higher volume and lower incentive stock compensation of
$61 million
, reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year, were partially offset by higher investment spending.
Other deductions, net were
$172 million
in
2019
, a decrease of
$71 million
compared with the prior year, reflecting lower acquisition/divestiture-related costs of
$42 million
, pension expenses of
$33 million
and foreign currency transactions of
$9 million
, partially offset by higher intangibles amortization of
$23 million
. See Note 9.
Pretax earnings of
$2.0 billion
increased
$104 million
, or
5 percent
. Earnings increased
$12 million
in Automation Solutions and decreased
$52 million
in Commercial & Residential Solutions, while Corporate and other expense decreased $140 million. See Note 12 and the following Business Segments discussion.
Income taxes were
$429 million
for
2019
and
$327 million
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 Tax Cuts and Jobs Act (the "Act"). The current year rate also included favorable discrete items which reduced the rate
3
percentage points, while the prior year rate included a net tax benefit of $193 million ($0.30 per share) due to impacts of the Act.
Net earnings common stockholders in
2019
were
$1.6 billion
, flat compared with the prior year, and earnings per share were
$2.55
, up
2 percent
compared with
$2.49
in
2018
.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the
nine months ended
June 30, 2019
, compared with the
nine months ended
June 30, 2018
. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
2018
|
|
2019
|
|
Change
|
|
(dollars in millions)
|
|
|
|
|
|
|
Sales
|
$
|
8,213
|
|
|
8,834
|
|
|
8
|
%
|
|
Earnings
|
$
|
1,316
|
|
|
1,328
|
|
|
1
|
%
|
|
Margin
|
16.0
|
%
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
Automation Solutions sales were
$8.8 billion
in the first
nine months
of
2019
, an increase of
$621 million
, or
8 percent
. Underlying sales increased
5 percent
(
$432 million
) on higher volume and slightly higher price. Acquisitions added
5 percent
(
$382 million
) and foreign currency translation had a
2 percent
(
$193 million
) unfavorable impact. Sales for Measurement & Analytical Instrumentation increased
$166 million
, or
6 percent
, on broad-based demand in global industrial markets. Valves, Actuators & Regulators increased
$20 million
, or
1 percent
, on favorable global oil and gas demand. Industrial Solutions sales increased
$282 million
, or
20 percent
, due to the Aventics acquisition ($292 million), while discrete manufacturing end markets were slow in the U.S. and Europe. Process Control Systems & Solutions increased
$153 million
, or
10 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. Underlying sales increased
6 percent
in the Americas (U.S. up
4 percent
),
2 percent
in Europe and
7 percent
in Asia, Middle East & Africa (China up
10 percent
). Earnings were
$1.3 billion
, an increase of
$12 million
, or
1 percent
, driven by higher volume and price. Margin decreased to
15.0 percent
, reflecting a dilutive impact from acquisitions of 1.0 percentage points.
COMMERCIAL & RESIDENTIAL SOLUTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 billion
in the first
nine
months of
2019
, an increase of
$234 million
, or
5 percent
compared to the prior year. Underlying sales were down
1 percent
(
$31 million
) on lower volume partially offset by higher price. Acquisitions added
8 percent
(
$325 million
) and foreign currency translation subtracted
2 percent
(
$60 million
). Climate Technologies sales were
$3.2 billion
in the first
nine
months of
2019
, a decrease of
$115 million
, or
3 percent
. HVAC sales were down sharply in Asia, Middle East & Africa, particularly in China air conditioning and heating markets, while growth in the U.S. was moderate. Global cold chain sales were up slightly on modest growth in the U.S., partially offset by slower demand in Asia. Tools & Home Products sales were
$1.4 billion
in the first
nine months
of
2019
, up
$349 million
, or
33 percent
compared to the prior year, reflecting the tools and test acquisition and favorable trends in global professional tools markets. Sales for wet/dry vacuums were up moderately while food waste disposers were up slightly. Overall, underlying sales increased
4 percent
in the Americas (U.S. up
3 percent
) and
2 percent
in Europe, while Asia, Middle East & Africa decreased
14 percent
(China down
17 percent
). Earnings were
$936 million
, down
5 percent
compared to the prior year, and margin declined
2.3
percentage points, primarily due to a dilutive impact from the tools and test acquisition of 1.1 percentage points and deleverage on lower volume in the Climate Technologies segment. Unfavorable mix also reduced margin, while comparisons benefited from higher warranty costs of $10 million in the prior year associated with a specific product issue.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the
nine months ended
June 30, 2019
as compared to the year ended
September 30, 2018
follow.
|
|
|
|
|
|
|
|
|
|
|
|
Sept 30, 2018
|
|
|
June 30, 2019
|
|
|
Working capital (in millions)
|
$
|
455
|
|
|
1,132
|
|
|
Current ratio
|
1.1
|
|
|
1.2
|
|
|
Total debt-to-total capital
|
34.7
|
%
|
|
41.5
|
%
|
|
Net debt-to-net capital
|
29.1
|
%
|
|
34.5
|
%
|
|
Interest coverage ratio
|
14.2
|
X
|
|
14.3X
|
|
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
14.3
X for the first
nine months
of
2019
compares to
14.0
X 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
, 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's financial structure provides the flexibility necessary to achieve its strategic objectives. The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. The Company believes that sufficient funds will be available to meet the Company’s needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.
FISCAL 2019 OUTLOOK
Results for the first nine months of 2019 reflected solid trends in process and hybrid end markets and consistent demand for long-cycle projects, partially offset by slower global discrete manufacturing end markets, recent upstream oil and gas softness in North America, and lower demand in air conditioning markets in Asia. The Company anticipates lower global growth in the near-term due to trade tensions and business investment uncertainty. Softness in North America upstream oil and gas markets and global discrete end markets is expected to continue, while the outlook for residential and commercial air conditioning markets is favorable in North America and expected to improve in Asia. For the full year, Automation Solutions net sales are expected to be up approximately 7 percent, with underlying sales up approximately 5 percent excluding a positive impact from acquisitions of 4 percent and unfavorable currency translation of 2 percent. Commercial & Residential Solutions net sales are expected to be up approximately 4 percent, with underlying sales flat excluding a positive impact from acquisitions of 5 percent and unfavorable 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 earnings per share are expected to be $3.60 to $3.70, which includes an expected discrete tax benefit in the fourth quarter of approximately $0.05 per share. Operating cash flow is expected to be approximately $3.1 billion and free cash flow, which excludes targeted capital spending of $600 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, 2018 and in subsequent reports filed with the SEC, which are hereby incorporated by reference.
The United Kingdom (UK) continues to negotiate its withdrawal from the European Union (EU), commonly known as "Brexit." The EU agreed to postpone the withdrawal deadline to October 31, 2019. The Company's net sales in the UK are principally in the Automation Solutions segment and represent less than two percent of consolidated sales. Sales of products manufactured in the UK and sold within the EU are immaterial. The Company is evaluating several potential Brexit scenarios and believes the direct cost of incremental tariffs, logistics and other items would be immaterial.