Emerson reported results for the second fiscal quarter ended March 31, 2020, and announced updated guidance for the fiscal year.
Second-quarter net sales of $4.2 billion were down 9% and underlying sales were down 7%, excluding unfavorable currency of 2% and no impact from acquisitions or divestitures. Growth was below management expectations in both business segments due to the unforeseen and rapid deterioration of demand in March.
The spread of the COVID-19 pandemic and associated uncertainty, social distancing and business closure mandate negatively affected nearly all end markets and geographies, particularly in China, the US, and Europe. One exception, however, was the surge in demand for products and solutions that support medical and life science end markets. Additionally, Emerson’s businesses were negatively affected by the dramatic drop in oil and gas prices resulting from geopolitical tensions and a surge in global supply.
Second-quarter gross profit margin of 42.1% was flat compared with the prior year due to effective cost control measures, despite a 9% drop in net sales. Pretax margin of 16.6% and EBIT margin of 17.4% were up 180 bps and 160 bps, respectively. Adjusted EBIT margin, which excludes restructuring and related charges, was 18.4% for the quarter, up 240 basis points, on lower sales. This outcome largely reflected lower stock compensation charges due to a significantly lower stock price as well as benefits from aggressive restructuring actions, which began in the third quarter of 2019.
GAAP earnings per share were $0.84 and adjusted earnings per share, which excludes $0.05 of restructuring and related charges, were $0.89, exceeding management’s guidance of $0.79 to $0.83. This adjusted EPS outcome reflects operational declines due to COVID-19 being more than offset by non-operating tailwinds, which included lower stock compensation costs due to a lower stock price, as well as the benefits of aggressive restructuring actions and favorable foreign exchange gains.
Operating cash flow was $588 million, up to $55 million or 10%, and free cash flow was $477 million, up $63 million or 15%, reflecting free cash flow conversion of 91% in the quarter.
“The past quarter unleashed unprecedented challenges for not only our people, operations, and customers, but also for national and local governments, health care systems, and certainly families as well,” said David N. Farr, Emerson’s chairman and CEO. “The rapid spread and far-reaching impact of the COVID-19 virus has been staggering and will likely alter the trajectory of our global economy for the foreseeable future.
“Our top priority is and always will be the safety and health of our employees, customers, and communities across the globe. We have implemented recommended policies and practices to protect our workforce so they can safely and effectively carry out their vital work with steadfast resolve. While the vast majority of our global office-based team is working from home, we recognize the responsibility we have to support our customers in essential industries that rely on our solutions and services. Such industries include life sciences and medical, water, food and beverage, chemical, energy and power generation. Accordingly, we are driving hard every day to safely and responsibly continue operations to serve our customers in these vital markets. While some of our operating sites remain below full capacity, we are prioritizing the production of Emerson materials and solutions needed on the front lines of the pandemic battle, including solutions used to manufacture respirators, masks and other safety equipment, and life sciences materials.
“The global health crisis, coupled with volatility in the oil markets, has created a significant demand decline in many of our end markets. But we remain confident that our aggressive cost control reset measures already underway, initiated in the third quarter of last year and outlined in detail in February, combined with our strong balance sheet and disciplined operating philosophy, will provide the foundation required to continue to serve our customers and emerge stronger in the long run.”
Management has updated the fiscal year 2020 outlook to reflect the changing demand environment associated with COVID-19 and the concurrent unfolding energy market dynamics. GAAP earnings per share guidance are $2.62 to $2.82. Adjusted earnings per share guidance, which excludes restructuring actions and related costs, is $3.00 to $3.20, compared to prior guidance of $3.55 to $3.80. Share repurchases, now complete for the year, will be approximately $950 million, compared to the previous guidance of $1.5 billion.
