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 June 30, 20202021
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)
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Missouri | | | 43-0259330 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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8000 W. Florissant Ave. | | |
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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:
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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 |
| | NYSE 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.
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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 July 31, 2020:June 30, 2021: 597,591,921597.8 million shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and nine months ended June 30, 20192020 and 20202021
(Dollars in millions, except per share amounts; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
| 2019 | | | 2020 | | | 2019 | | | 2020 | |
Net sales | $ | 4,684 | | | 3,914 | | | 13,401 | | | 12,227 | |
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Costs and expenses: | | | | | | | |
Cost of sales | 2,683 | | | 2,296 | | | 7,714 | | | 7,100 | |
Selling, general and administrative expenses | 1,126 | | | 934 | | | 3,348 | | | 3,040 | |
Other deductions, net | 65 | | | 181 | | | 172 | | | 401 | |
Interest expense (net of interest income of $7, $4, $19 and $16, respectively) | 43 | | | 45 | | | 134 | | | 116 | |
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Earnings before income taxes | 767 | | | 458 | | | 2,033 | | | 1,570 | |
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Income taxes | 155 | | | 51 | | | 429 | | | 310 | |
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Net earnings | 612 | | | 407 | | | 1,604 | | | 1,260 | |
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Less: Noncontrolling interests in earnings of subsidiaries | 8 | | | 8 | | | 15 | | | 18 | |
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Net earnings common stockholders | $ | 604 | | | 399 | | | 1,589 | | | 1,242 | |
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Basic earnings per share common stockholders | $ | 0.98 | | | 0.67 | | | 2.57 | | | 2.05 | |
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Diluted earnings per share common stockholders | $ | 0.97 | | | 0.67 | | | 2.55 | | | 2.04 | |
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| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
Net sales | $ | 3,914 | | | 4,697 | | | 12,227 | | | 13,289 | |
| | | | | | | |
Costs and expenses: | | | | | | | |
Cost of sales | 2,296 | | | 2,715 | | | 7,100 | | | 7,722 | |
Selling, general and administrative expenses | 934 | | | 1,073 | | | 3,040 | | | 3,125 | |
Other deductions, net | 181 | | | 88 | | | 401 | | | 243 | |
Interest expense (net of interest income of $4, $3, $16 and $9, respectively) | 45 | | | 37 | | | 116 | | | 115 | |
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Earnings before income taxes | 458 | | | 784 | | | 1,570 | | | 2,084 | |
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Income taxes | 51 | | | 151 | | | 310 | | | 431 | |
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Net earnings | 407 | | | 633 | | | 1,260 | | | 1,653 | |
| | | | | | | |
Less: Noncontrolling interests in earnings of subsidiaries | 8 | | | 6 | | | 18 | | | 20 | |
| | | | | | | |
Net earnings common stockholders | $ | 399 | | | 627 | | | 1,242 | | | 1,633 | |
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Basic earnings per share common stockholders | $ | 0.67 | | | 1.05 | | | 2.05 | | | 2.73 | |
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Diluted earnings per share common stockholders | $ | 0.67 | | | 1.04 | | | 2.04 | | | 2.71 | |
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See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and nine months ended June 30, 20192020 and 20202021
(Dollars in millions; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
| | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | |
Net earnings | | $ | 612 | | | | 407 | | | | 1,604 | | | | 1,260 | |
| | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Foreign currency translation | | (93) | | | | 134 | | | | (40) | | | | (48) | |
Pension and postretirement | | 13 | | | | 29 | | | | 38 | | | | 87 | |
Cash flow hedges | | (8) | | | | 40 | | | | 2 | | | | (16) | |
Total other comprehensive income (loss) | | (88) | | | | 203 | | | | — | | | | 23 | |
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Comprehensive income | | 524 | | | | 610 | | | | 1,604 | | | | 1,283 | |
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Less: Noncontrolling interests in comprehensive income of subsidiaries | | 8 | | | | 7 | | | | 16 | | | | 18 | |
Comprehensive income common stockholders | | $ | 516 | | | | 603 | | | | 1,588 | | | | 1,265 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
Net earnings | | $ | 407 | | | | 633 | | | | 1,260 | | | | 1,653 | |
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Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Foreign currency translation | | 134 | | | | (5) | | | | (48) | | | | 163 | |
Pension and postretirement | | 29 | | | | 27 | | | | 87 | | | | 81 | |
Cash flow hedges | | 40 | | | | (6) | | | | (16) | | | | 26 | |
Total other comprehensive income (loss) | | 203 | | | | 16 | | | | 23 | | | | 270 | |
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Comprehensive income | | 610 | | | | 649 | | | | 1,283 | | | | 1,923 | |
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Less: Noncontrolling interests in comprehensive income of subsidiaries | | 7 | | | | 7 | | | | 18 | | | | 20 | |
Comprehensive income common stockholders | | $ | 603 | | | | 642 | | | | 1,265 | | | | 1,903 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES
(Dollars and shares in millions, except per share amounts; unaudited)
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| Sept 30, 2019 | | June 30, 2020 |
ASSETS | | | |
Current assets | | | |
Cash and equivalents | $ | 1,494 | | | 2,450 | |
Receivables, less allowances of $112 and $109, respectively | 2,985 | | | 2,512 | |
Inventories | 1,880 | | | 2,102 | |
Other current assets | 780 | | | 815 | |
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Total current assets | 7,139 | | | 7,879 | |
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Property, plant and equipment, net | 3,642 | | | 3,565 | |
Other assets | | | |
Goodwill | 6,536 | | | 6,624 | |
Other intangible assets | 2,615 | | | 2,488 | |
Other | 565 | | | 1,174 | |
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Total other assets | 9,716 | | | 10,286 | |
Total assets | $ | 20,497 | | | 21,730 | |
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LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Short-term borrowings and current maturities of long-term debt | $ | 1,444 | | | 1,725 | |
Accounts payable | 1,874 | | | 1,426 | |
Accrued expenses | 2,658 | | | 2,834 | |
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Total current liabilities | 5,976 | | | 5,985 | |
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Long-term debt | 4,277 | | | 5,500 | |
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Other liabilities | 1,971 | | | 2,367 | |
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Equity | | | |
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 611.0 shares and 597.6 shares, respectively | 477 | | | 477 | |
Additional paid-in-capital | 393 | | | 459 | |
Retained earnings | 24,199 | | | 24,531 | |
Accumulated other comprehensive income (loss) | (1,722) | | | (1,699) | |
Cost of common stock in treasury, 342.4 shares and 355.8 shares, respectively | (15,114) | | | (15,937) | |
Common stockholders’ equity | 8,233 | | | 7,831 | |
Noncontrolling interests in subsidiaries | 40 | | | 47 | |
Total equity | 8,273 | | | 7,878 | |
Total liabilities and equity | $ | 20,497 | | | 21,730 | |
| | | | | | | | | | | |
| Sept 30, 2020 | | June 30, 2021 |
ASSETS | | | |
Current assets | | | |
Cash and equivalents | $ | 3,315 | | | 2,860 | |
Receivables, less allowances of $138 and $124, respectively | 2,802 | | | 2,754 | |
Inventories | 1,928 | | | 2,114 | |
Other current assets | 761 | | | 1,038 | |
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Total current assets | 8,806 | | | 8,766 | |
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Property, plant and equipment, net | 3,688 | | | 3,664 | |
Other assets | | | |
Goodwill | 6,734 | | | 7,777 | |
Other intangible assets | 2,468 | | | 2,993 | |
Other | 1,186 | | | 1,284 | |
| | | |
Total other assets | 10,388 | | | 12,054 | |
Total assets | $ | 22,882 | | | 24,484 | |
| | | |
LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Short-term borrowings and current maturities of long-term debt | $ | 1,160 | | | 1,478 | |
Accounts payable | 1,715 | | | 1,966 | |
Accrued expenses | 2,910 | | | 3,226 | |
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Total current liabilities | 5,785 | | | 6,670 | |
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Long-term debt | 6,326 | | | 5,835 | |
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Other liabilities | 2,324 | | | 2,640 | |
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Equity | | | |
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 598.0 shares and 597.8 shares, respectively | 477 | | | 477 | |
Additional paid-in-capital | 470 | | | 518 | |
Retained earnings | 24,955 | | | 25,678 | |
Accumulated other comprehensive income (loss) | (1,577) | | | (1,307) | |
Cost of common stock in treasury, 355.4 shares and 355.6 shares, respectively | (15,920) | | | (16,075) | |
Common stockholders’ equity | 8,405 | | | 9,291 | |
Noncontrolling interests in subsidiaries | 42 | | | 48 | |
Total equity | 8,447 | | | 9,339 | |
Total liabilities and equity | $ | 22,882 | | | 24,484 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Equity
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and nine months ended June 30, 20192020 and 20202021
(Dollars in millions; unaudited)
| | | Three Months Ended June 30, | | | Nine Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
| Common stock | Common stock | $ | 477 | | | 477 | | | 477 | | | 477 | | Common stock | $ | 477 | | | 477 | | | 477 | | | 477 | |
| Additional paid-in-capital | Additional paid-in-capital | | Additional paid-in-capital | |
Beginning balance | Beginning balance | 380 | | | 453 | | | 348 | | | 393 | | Beginning balance | 453 | | | 511 | | | 393 | | | 470 | |
Stock plans | Stock plans | 7 | | | 6 | | | 39 | | | 66 | | Stock plans | 6 | | | 7 | | | 66 | | | 48 | |
| Ending balance | Ending balance | 387 | | | 459 | | | 387 | | | 459 | | Ending balance | 459 | | | 518 | | | 459 | | | 518 | |
| Retained earnings | Retained earnings | | Retained earnings | |
Beginning balance | Beginning balance | 23,475 | | | 24,431 | | | 23,072 | | | 24,199 | | Beginning balance | 24,431 | | | 25,354 | | | 24,199 | | | 24,955 | |
Net earnings common stockholders | Net earnings common stockholders | 604 | | | 399 | | | 1,589 | | | 1,242 | | Net earnings common stockholders | 399 | | | 627 | | | 1,242 | | | 1,633 | |
Dividends paid (per share: $0.49, $0.50, $1.47, and $1.50, respectively) | (302) | | | (299) | | | (909) | | | (910) | | |
Adoption of accounting standard updates | — | | | — | | | 25 | | | — | | |
Dividends paid (per share: $0.50, $0.505, $1.50 and $1.515, respectively) | | Dividends paid (per share: $0.50, $0.505, $1.50 and $1.515, respectively) | (299) | | | (303) | | | (910) | | | (909) | |
Adoption of accounting standard | | Adoption of accounting standard | 0 | | | 0 | | | 0 | | | (1) | |
Ending balance | Ending balance | 23,777 | | | 24,531 | | | 23,777 | | | 24,531 | | Ending balance | 24,531 | | | 25,678 | | | 24,531 | | | 25,678 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | |
Beginning balance | Beginning balance | (928) | | | (1,903) | | | (1,015) | | | (1,722) | | Beginning balance | (1,903) | | | (1,322) | | | (1,722) | | | (1,577) | |
Foreign currency translation | Foreign currency translation | (93) | | | 135 | | | (41) | | | (48) | | Foreign currency translation | 135 | | | (6) | | | (48) | | | 163 | |
Pension and postretirement | Pension and postretirement | 13 | | | 29 | | | 38 | | | 87 | | Pension and postretirement | 29 | | | 27 | | | 87 | | | 81 | |
Cash flow hedges | Cash flow hedges | (8) | | | 40 | | | 2 | | | (16) | | Cash flow hedges | 40 | | | (6) | | | (16) | | | 26 | |
Ending balance | Ending balance | (1,016) | | | (1,699) | | | (1,016) | | | (1,699) | | Ending balance | (1,699) | | | (1,307) | | | (1,699) | | | (1,307) | |
| Treasury stock | Treasury stock | | Treasury stock | |
Beginning balance | Beginning balance | (14,878) | | | (15,941) | | | (13,935) | | | (15,114) | | Beginning balance | (15,941) | | | (15,890) | | | (15,114) | | | (15,920) | |
Purchases | Purchases | — | | | — | | | (1,000) | | | (942) | | Purchases | 0 | | | (193) | | | (942) | | | (275) | |
Issued under stock plans | Issued under stock plans | 8 | | | 4 | | | 65 | | | 119 | | Issued under stock plans | 4 | | | 8 | | | 119 | | | 120 | |
Ending balance | Ending balance | (14,870) | | | (15,937) | | | (14,870) | | | (15,937) | | Ending balance | (15,937) | | | (16,075) | | | (15,937) | | | (16,075) | |
| Common stockholders' equity | Common stockholders' equity | 8,755 | | | 7,831 | | | 8,755 | | | 7,831 | | Common stockholders' equity | 7,831 | | | 9,291 | | | 7,831 | | | 9,291 | |
| Noncontrolling interests in subsidiaries | Noncontrolling interests in subsidiaries | | Noncontrolling interests in subsidiaries | |
Beginning balance | Beginning balance | 46 | | | 46 | | | 43 | | | 40 | | Beginning balance | 46 | | | 50 | | | 40 | | | 42 | |
Net earnings | Net earnings | 8 | | | 8 | | | 15 | | | 18 | | Net earnings | 8 | | | 6 | | | 18 | | | 20 | |
Other comprehensive income | Other comprehensive income | — | | | (1) | | | 1 | | | — | | Other comprehensive income | (1) | | | 1 | | | 0 | | | 0 | |
Dividends paid | Dividends paid | (5) | | | (6) | | | (10) | | | (11) | | Dividends paid | (6) | | | (9) | | | (11) | | | (14) | |
| Ending balance | Ending balance | 49 | | | 47 | | | 49 | | | 47 | | Ending balance | 47 | | | 48 | | | 47 | | | 48 | |
| Total equity | Total equity | $ | 8,804 | | | 7,878 | | | 8,804 | | | 7,878 | | Total equity | $ | 7,878 | | | 9,339 | | | 7,878 | | | 9,339 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES
Nine Months Ended June 30, 20192020 and 20202021
(Dollars in millions; unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | June 30, |
| | 2020 | | | 2021 | |
Operating activities | | | | |
Net earnings | | $ | 1,260 | | | 1,653 | |
| | | | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 631 | | | 720 | |
Stock compensation | | 69 | | | 191 | |
Pension expense | | 50 | | | 23 | |
Changes in operating working capital | | (86) | | | 246 | |
| | | | |
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Other, net | | (70) | | | (113) | |
| | | | |
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Cash provided by operating activities | | 1,854 | | | 2,720 | |
| | | | |
Investing activities | | | | |
Capital expenditures | | (329) | | | (350) | |
Purchases of businesses, net of cash and equivalents acquired | | (114) | | | (1,611) | |
| | | | |
Other, net | | (65) | | | 53 | |
| | | | |
| | | | |
Cash used in investing activities | | (508) | | | (1,908) | |
| | | | |
Financing activities | | | | |
Net increase in short-term borrowings | | 269 | | | 31 | |
Proceeds from short-term borrowings greater than three months | | 546 | | | 71 | |
Payments of short-term borrowings greater than three months | | (340) | | | 0 | |
Proceeds from long-term debt | | 1,488 | | | 0 | |
Payments of long-term debt | | (502) | | | (305) | |
Dividends paid | | (910) | | | (909) | |
Purchases of common stock | | (942) | | | (268) | |
Other, net | | 28 | | | 89 | |
Cash used in financing activities | | (363) | | | (1,291) | |
| | | | |
Effect of exchange rate changes on cash and equivalents | | (27) | | | 24 | |
Increase (Decrease) in cash and equivalents | | 956 | | | (455) | |
Beginning cash and equivalents | | 1,494 | | | 3,315 | |
Ending cash and equivalents | | $ | 2,450 | | | 2,860 | |
| | | | |
Changes in operating working capital | | | | |
Receivables | | $ | 456 | | | 76 | |
Inventories | | (218) | | | (160) | |
Other current assets | | 40 | | | (69) | |
Accounts payable | | (439) | | | 216 | |
Accrued expenses | | 75 | | | 183 | |
| | | | |
Total changes in operating working capital | | $ | (86) | | | 246 | |
See accompanying Notes to Consolidated Financial Statements. | | | | | | | | | | | | | | |
| | Nine Months Ended | | |
| | June 30, | | |
| | 2019 | | | 2020 | |
Operating activities | | | | |
Net earnings | | $ | 1,604 | | | 1,260 | |
| | | | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 609 | | | 631 | |
Stock compensation | | 83 | | | 69 | |
Pension expense | | (1) | | | 50 | |
Changes in operating working capital | | (352) | | | (86) | |
| | | | |
| | | | |
Other, net | | (141) | | | (70) | |
| | | | |
| | | | |
Cash provided by operating activities | | 1,802 | | | 1,854 | |
| | | | |
Investing activities | | | | |
Capital expenditures | | (395) | | | (329) | |
Purchases of businesses, net of cash and equivalents acquired | | (385) | | | (114) | |
Divestitures of businesses | | 10 | | | — | |
Other, net | | (91) | | | (65) | |
| | | | |
| | | | |
Cash used in investing activities | | (861) | | | (508) | |
| | | | |
Financing activities | | | | |
Net increase in short-term borrowings | | 427 | | | 269 | |
Proceeds from short-term borrowings greater than three months | | — | | | 546 | |
Payments of short-term borrowings greater than three months | | — | | | (340) | |
Proceeds from long-term debt | | 1,691 | | | 1,488 | |
Payments of long-term debt | | (655) | | | (502) | |
Dividends paid | | (909) | | | (910) | |
Purchases of common stock | | (1,000) | | | (942) | |
Other, net | | 21 | | | 28 | |
Cash used in financing activities | | (425) | | | (363) | |
| | | | |
Effect of exchange rate changes on cash and equivalents | | (6) | | | (27) | |
Increase in cash and equivalents | | 510 | | | 956 | |
Beginning cash and equivalents | | 1,093 | | | 1,494 | |
Ending cash and equivalents | | $ | 1,603 | | | 2,450 | |
| | | | |
Changes in operating working capital | | | | |
Receivables | | $ | 178 | | | 456 | |
Inventories | | (217) | | | (218) | |
Other current assets | | (74) | | | 40 | |
Accounts payable | | (156) | | | (439) | |
Accrued expenses | | (83) | | | 75 | |
| | | | |
Total changes in operating working capital | | $ | (352) | | | (86) | |
See accompanying Notes to Consolidated Financial Statements.
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, 2019.2020. Certain prior year amounts have been reclassified to conform to current year presentation.presentation - see Note 12.
OnEffective October 1, 2019,2020, the Company adopted ASC 842, Leases, two accounting standard updates and one new accounting standard which requires rights and obligations related to lease arrangements to be recognizedhad an immaterial impact 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 $500Company's financial statements as of October 1, 2019, but did not materially impact the Company's earnings or cash flowsand for the three and nine months ended June 30, 2020.2021. These included:
•Updates to ASC 350, Intangibles - Goodwill and Other, which eliminate the requirement to measure impairment based on the implied fair value of goodwill compared to the carrying amount of a reporting unit’s goodwill. Instead, goodwill impairment will be measured as the excess of a reporting unit’s carrying amount over its estimated fair value.
On October 1, 2019, the Company adopted updates•Updates to ASC 815,350, DerivativesIntangibles - Goodwill and HedgingOther, which permit hedging certain contractually specified risk components. Additionally,align the updates eliminaterequirements for capitalizing implementation costs incurred in a software hosting arrangement with the requirementrequirements for costs incurred 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 and nine months ended June 30, 2020.develop or obtain internal-use software.
In June 2016, the FASB issued•Adoption of ASC 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses, to estimate lifetime expected credit losses on certain types of financial instruments, including trade receivables. The new standard is effective in the first quarter of fiscal 2021 and is expected to have an immaterial impact on the Company's financial statements.
(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 1412 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 | | | June 30, 2020 | |
Unbilled receivables (contract assets) | | $ | 456 | | | | 409 | |
Customer advances (contract liabilities) | | (519) | | | | (613) | |
Net contract liabilities | | $ | (63) | | | | (204) | |
| | | | | | | | | | | | | | | | | |
| Sept 30, 2020 | | June 30, 2021 |
Unbilled receivables (contract assets) | | $ | 458 | | | | 500 | |
Customer advances (contract liabilities) | | (583) | | | | (774) | |
Net contract liabilities | | $ | (125) | | | | (274) | |
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 and nine months ended June 30, 20202021 included approximately $37$53 and $363, respectively,$415 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 and nine months ended June 30, 2021 for performance obligations that
net contract liabilities were immaterial. Revenue recognized for the nine months ended June 30, 2020 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 June 30, 2020,2021, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $5.6$6.6 billion. The Company expects to recognize approximately 8580 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 June 30, | | | | Nine Months Ended June 30, | | |
| 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | | | | | |
Basic shares outstanding | 614.3 | | | 596.9 | | | 617.4 | | | 604.8 | |
Dilutive shares | 4.7 | | | 3.1 | | | 4.2 | | | 3.6 | |
Diluted shares outstanding | 619.0 | | | 600.0 | | | 621.6 | | | 608.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | |
Basic shares outstanding | 596.9 | | | 598.2 | | | 604.8 | | | 598.7 | |
Dilutive shares | 3.1 | | | 3.9 | | | 3.6 | | | 3.6 | |
Diluted shares outstanding | 600.0 | | | 602.1 | | | 608.4 | | | 602.3 | |
(4) ACQUISITIONS AND DIVESTITURES
During the first nine months ofOn October 1, 2020, the Company completed the acquisition of Open Systems International, Inc. (OSI), a leading operations technology software provider in the global power industry, for approximately $1.6 billion, net of cash acquired. This business, which has annual sales of approximately $170 and is reported in the Automation Solutions segment, expands the Company's offerings in the power industry to include the digitization and modernization of the electric grid. The Company recognized goodwill of $960 (NaN of which is expected to be tax deductible), identifiable intangible assets of $783, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years, and deferred tax liabilities of approximately $185. Results of operations for the three months ended June 30, 2021 included first-year pretax acquisition spending totaled $114,accounting charges related to backlog amortization and deferred revenue of $7 and $3, respectively, while year-to-date results included $24 and $11, respectively.
On November 17, 2020, the Company acquired the remaining interest of an equity investment for approximately $19, net of cash acquired.
The Company acquired 83 businesses in 2019, allfiscal 2020, 2 in the Automation Solutions segment and 1 in the Climate Technologies segment, for $469,$126, net of cash acquired. These eight businesses had combined annual sales of approximately $300. The Company recognized goodwill of $213 ($158 of which is expected to be tax deductible) and other identifiable intangible assets of $155, primarily customer relationships and intellectual property with a weighted-average life of approximately nine years.
ValuationsAs previously disclosed, the Company sold its network power systems business (rebranded as Vertiv, now a publicly traded company, symbol VRT) in 2017 and retained a subordinated interest contingent upon the equity holders first receiving a threshold return on their initial investment. As of certain acquired assetsAugust 4, 2021, the equity holders have received a return on their investment substantially up to the threshold. Based on the terms of the agreement and liabilitiesthe current calculation, the Company could receive approximately $600 on a pretax basis through periodic distributions over the next two years. However, the distributions are in-processcontingent on the timing and subjectprice at which Vertiv shares are sold by the equity holders and therefore, there can be no assurance as to refinement for transactions completed afterthe amount or timing of the distributions to the Company. As of June 30, 2019.2021, no amounts have been recognized in the financial statements related to this gain contingency.
(5) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
| | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | |
Service cost | | $ | 18 | | | | 21 | | | | 54 | | | | 65 | |
Interest cost | | 49 | | | | 40 | | | | 149 | | | | 120 | |
Expected return on plan assets | | (88) | | | | (84) | | | | (264) | | | | (252) | |
Net amortization | | 17 | | | | 38 | | | | 50 | | | | 113 | |
Total | | $ | (4) | | | | 15 | | | | (11) | | | | 46 | |
(5) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
Service cost | | $ | 21 | | | | 21 | | | | 65 | | | | 63 | |
Interest cost | | 40 | | | | 32 | | | | 120 | | | | 96 | |
Expected return on plan assets | | (84) | | | | (84) | | | | (252) | | | | (252) | |
Net amortization | | 38 | | | | 35 | | | | 113 | | | | 105 | |
Total | | $ | 15 | | | | 4 | | | | 46 | | | | 12 | |
(6) OTHER DEDUCTIONS, NET
Other deductions, net are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
| 2019 | | | | | 2020 | | | | 2019 | | | | 2020 | |
| | | | | | | | | | | |
Amortization of intangibles (intellectual property and customer relationships) | | $ | 60 | | | | 60 | | | | 177 | | | | 178 | |
Restructuring costs | | 20 | | | | 88 | | | | 40 | | | | 216 | |
Special advisory fees | | — | | | | — | | | | — | | | | 13 | |
Other | | (15) | | | | 33 | | | | (45) | | | | (6) | |
Total | | $ | 65 | | | | 181 | | | | 172 | | | | 401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
| | | | | | | | | | | |
Amortization of intangibles (intellectual property and customer relationships) | | $ | 60 | | | | 71 | | | | 178 | | | | 223 | |
Restructuring costs | | 88 | | | | 28 | | | | 216 | | | | 111 | |
Special advisory fees | | 0 | | | | 0 | | | | 13 | | | | 0 | |
Other | | 33 | | | | (11) | | | | (6) | | | | (91) | |
Total | | $ | 181 | | | | 88 | | | | 401 | | | | 243 | |
InThe increase in intangibles amortization for the three and nine months ended June 30, 2021 was due to the OSI acquisition, including backlog amortization of $7 and $24, respectively. The change in Other for the third quarter of fiscal 2020, the change in Other2021 included unfavorable impactsa favorable impact from foreign currency transactions of $25 due to losses in the prior year and pensions of $16. On a year-to-date basis,favorable impact from pensions. For the nine months ended June 30, 2021, the change in Other reflects an unfavorablea favorable impact from pensions and investment-related gains, including gains in the first quarter of $46, partially offset by lower litigation costs.fiscal 2021 of $21 from an investment sale and $17 from the acquisition of the remaining interest of an equity investment, and a gain in the second quarter of $31 from the sale of an equity investment.
(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 costsCosts incurred in the first nine months of fiscal 2020 largely2021 relate to the Company's initiatives to improve operating margins that began in the third quarter of fiscal 2019 to improve operating margins and includewere increased in response to the effects of the COVID-19 pandemic on demand for the Company's products. Expenses incurred in the first nine months of fiscal 2021 included costs related to workforce reductions of approximately 3,3001,900 employees. The Company expects fiscal 20202021 restructuring expense and related costs to be approximately $300, an increase of $20 compared to its previous estimate,$200, including costs to complete actions initiated in the first nine months of the year.
Restructuring expense by business segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
| 2019 | | | | 2020 | | | | 2019 | | | | 2020 | | |
| | | | | | | | | | | |
Automation Solutions | | $ | 15 | | | | 76 | | | | 26 | | | | 182 | |
| | | | | | | | | | | |
Climate Technologies | | 4 | | | | 5 | | | | 8 | | | | 14 | |
Tools & Home Products | | 1 | | | | 4 | | | | 5 | | | | 12 | |
Commercial & Residential Solutions | | 5 | | | | 9 | | | | 13 | | | | 26 | |
| | | | | | | | | | | |
Corporate | | — | | | | 3 | | | | 1 | | | | 8 | |
| | | | | | | | | | | |
Total | | $ | 20 | | | | 88 | | | | 40 | | | | 216 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | | | | | |
Automation Solutions | | $ | 76 | | | | 18 | | | | 182 | | | | 94 | |
| | | | | | | | | | | |
Climate Technologies | | 5 | | | | 4 | | | | 14 | | | | 8 | |
Tools & Home Products | | 4 | | | | 2 | | | | 12 | | | | 4 | |
Commercial & Residential Solutions | | 9 | | | | 6 | | | | 26 | | | | 12 | |
| | | | | | | | | | | |
Corporate | | 3 | | | | 4 | | | | 8 | | | | 5 | |
| | | | | | | | | | | |
Total | | $ | 88 | | | | 28 | | | | 216 | | | | 111 | |
Details of the change in the liability for restructuring costs during the nine months ended June 30, 20202021 follow:
| | | Sept 30, 2019 | | | Expense | | | Utilized/Paid | | | June 30, 2020 | | | Sept 30, 2020 | | Expense | | Utilized/Paid | | June 30, 2021 |
| Severance and benefits | Severance and benefits | | $ | 62 | | | 184 | | | 92 | | | 154 | | Severance and benefits | | $ | 176 | | | 87 | | | 95 | | | 168 | |
| Other | Other | | 7 | | | 32 | | | 34 | | | 5 | | Other | | 5 | | | 24 | | | 22 | | | 7 | |
Total | Total | | $ | 69 | | | 216 | | | 126 | | | 159 | | Total | | $ | 181 | | | 111 | | | 117 | | | 175 | |
The tables above do not include $6 and $15$4 of costs related to these restructuring actions incurred infor the three and nine months ended June 30, 2020 and 2021, respectively, that are required to be reported in cost of sales. sales and selling, general and administrative expenses; year-to-date amounts are $15 and $11, respectively.
(8) INCOME TAXES
Income taxes were $51$151 in the third quarter of fiscal 20202021 and $155$51 in 2019,2020, resulting in effective tax rates of 1119 percent and 2011 percent, respectively. The current year rate included $24 of favorable net discrete tax items which decreased the rate 3 percentage points. The prior year rate included $57 ($0.10 per share) of discrete benefits, which decreased the rate 12 percentage points, related to updates to estimates for the prior year U.S. income tax return and the impact of a research and development tax credit study. The prior year rate included favorable discrete tax items, which reduced the rate 3 percentage points, largely due to a tax benefit of $21 ($0.03 per share) from restructuring a foreign subsidiary.
Income taxes were $310$431 for the first nine months of 20202021 and $429$310 for 2019,2020, resulting in effective tax rates of 2021 percent and 2120 percent, respectively. The current year and prior year rates included favorable net discrete items including the items discussed above, which reduced both years'the rates approximately1 percentage point and 3 percentage points.points, respectively.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company expects to defer $75deferred $73 of certain payroll taxes through the end of calendar year 2020.2020, half of which is due in December 2021 with the remainder due in December 2022.
(9) LEASESOTHER FINANCIAL INFORMATION | | | | | | | | | | | | | | | | | |
| Sept 30, 2020 | | June 30, 2021 |
Inventories | | | | | |
Finished products | | $ | 584 | | | | 666 | |
Raw materials and work in process | | 1,344 | | | | 1,448 | |
Total | | $ | 1,928 | | | | 2,114 | |
| | | | | | | | | | | | | | | | | |
| | | |
Property, plant and equipment, net | | | |
Property, plant and equipment, at cost | | $ | 9,055 | | | | 9,318 | |
Less: Accumulated depreciation | | 5,367 | | | | 5,654 | |
Total | | $ | 3,688 | | | | 3,664 | |
The Company leases offices; manufacturing facilities and equipment; and transportation, information technology and office equipment under operating lease arrangements. Finance lease arrangements are immaterial. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recognized on the balance sheet and are recorded as short-term lease expense. The discount rate used to calculate present value is the Company's incremental borrowing rate based on the lease term and the economic environment of the applicable country or region.
Certain leases contain renewal options or options to terminate prior to lease expiration, which are included in the measurement of right-of-use assets and lease liabilities when it is reasonably certain they will be exercised. The Company has elected to account for lease and non-lease components as a single lease component for its offices and manufacturing facilities. Some lease arrangements include payments that are adjusted periodically based on actual charges incurred for common area maintenance, utilities, taxes and insurance, or changes in an index or rate referenced in the lease. The fixed portion of these payments is included in the measurement of right-of-use assets and lease liabilities at lease commencement, while the variable portion is recorded as variable lease expense. The Company's leases typically do not contain material residual value guarantees or restrictive covenants.
The components of lease expense for the three and nine months ended June 30, 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | | Nine Months Ended | |
| June 30, 2020 | | | | |
| | | | | |
Operating lease expense | | $ | 50 | | | | 156 | |
Variable lease expense | | $ | 4 | | | | 14 | |
Short-term lease expense and sublease income were immaterial for the three and nine months ended June 30, 2020. Cash paid for operating leases is classified within operating cash flows and was $155 for the nine months ended June 30, 2020. Operating lease right-of-use asset additions were $172 for the nine months ended June 30, 2020.
The following table summarizes the balances of the Company's operating lease right-of-use assets and operating lease liabilities as of June 30, 2020, the vast majority of which relates to offices and manufacturing facilities: | | | | | | | | | | | | | | | | | | |
| | | | |
| | Sept 30, 2020 | | June 30, 2021 | |
Goodwill by business segment | | | | | | |
Automation Solutions | | $ | 5,583 | | | | 6,594 | | |
| | | | | | |
Climate Technologies | | 730 | | | | 757 | | |
Tools & Home Products | | 421 | | | | 426 | | |
Commercial & Residential Solutions | | 1,151 | | | | 1,183 | | |
| | | | | | |
Total | | $ | 6,734 | | | | 7,777 | | |
| | | | | | | | | | | | | | | | | |
| | | | June 30, 2020 | |
Right-of-use assets (Other assets) | | | | | $ | 500 | |
Current lease liabilities (Accrued expenses) | | | | | $ | 149 | |
Noncurrent lease liabilities (Other liabilities) | | | | | $ | 359 | |
The weighted-average remaining lease term for operating leases was 5.2 years and the weighted-average discount rate was 3.0 percent as of June 30, 2020.
Future maturities of operating lease liabilities as of June 30, 2020 are summarized below:
| | | | | | | | | | | | | | | | | |
| | | | June 30, 2020 | |
Remainder of 2020 | | | | | $ | 44 | |
2021 | | | | | 143 | |
2022 | | | | | 110 | |
2023 | | | | | 83 | |
2024 | | | | | 58 | |
Thereafter | | | | | 115 | |
Total lease payments | | | | | 553 | |
Less: Interest | | | | | 45 | |
Total lease liabilities | | | | | $ | 508 | |
Lease commitments that have not yet commenced were immaterial as of June 30, 2020.
The future minimum annual rentals under noncancelable long-term leases as of September 30, 2019 were as follows: $159 in 2020, $112 in 2021, $82 in 2022, $57 in 2023, $38 in 2024 and $63 thereafter.
(10) OTHER FINANCIAL INFORMATION
| | | | | | | | | | | | | | | | | |
| Sept 30, 2019 | | | June 30, 2020 | |
Inventories | | | | | |
Finished products | | $ | 578 | | | | 624 | |
Raw materials and work in process | | 1,302 | | | | 1,478 | |
Total | | $ | 1,880 | | | | 2,102 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
Property, plant and equipment, net | | | | | |
Property, plant and equipment, at cost | | $ | 8,671 | | | | 8,835 | |
Less: Accumulated depreciation | | 5,029 | | | | 5,270 | |
Total | | $ | 3,642 | | | | 3,565 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
Goodwill by business segment | | | | | |
Automation Solutions | | $ | 5,467 | | | | 5,492 | |
| | | | | |
Climate Technologies | | 668 | | | | 727 | |
Tools & Home Products | | 401 | | | | 405 | |
Commercial & Residential Solutions | | 1,069 | | | | 1,132 | |
| | | | | |
Total | | $ | 6,536 | | | | 6,624 | |
| | | Sept 30, 2019 | | | June 30, 2020 | | |
Other intangible assets | Other intangible assets | | | | | | Other intangible assets | | | |
Gross carrying amount | Gross carrying amount | | $ | 4,872 | | | 5,019 | | Gross carrying amount | | $ | 5,106 | | | 5,971 | |
Less: Accumulated amortization | Less: Accumulated amortization | | 2,257 | | | 2,531 | | Less: Accumulated amortization | | 2,638 | | | 2,978 | |
Net carrying amount | Net carrying amount | | $ | 2,615 | | | 2,488 | | Net carrying amount | | $ | 2,468 | | | 2,993 | |
Other intangible assets include customer relationships, net, of $1,391$1,328 and $1,298$1,554 as of September 30, 20192020 and June 30, 2020,2021, respectively. The increases in goodwill and other intangible assets reflect the acquisition of OSI. See Note 4.
| | Other assets include the following: | Other assets include the following: | | | | | | Other assets include the following: | | | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | $ | — | | | 500 | | Operating lease right-of-use assets | | $ | 508 | | | 503 | |
Pension assets | Pension assets | | 164 | | | 294 | | Pension assets | | 265 | | | 415 | |
Deferred income taxes | | Deferred income taxes | | 99 | | | 110 | |
Asbestos-related insurance receivables | Asbestos-related insurance receivables | | 115 | | | 102 | | Asbestos-related insurance receivables | | 100 | | | 96 | |
Deferred income taxes | | 97 | | | 96 | | |
| | | | | | | | | | | | | | | | | |
| | | |
Accrued expenses include the following: | | | | | |
Customer advances (contract liabilities) | | $ | 583 | | | | 774 | |
Employee compensation | | 577 | | | | 629 | |
Product warranty | | 148 | | | | 155 | |
Operating lease liabilities (current) | | 148 | | | | 151 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
Accrued expenses include the following: | | | | | |
Customer advances (contract liabilities) | | $ | 519 | | | | 613 | |
Employee compensation | | 606 | | | | 570 | |
Operating lease liabilities (current) | | — | | | | 149 | |
Product warranty | | 140 | | | | 138 | |
| | | | | | | | | | | | | | | | | |
Other liabilities include the following: | | | | | |
Pension and postretirement liabilities | | $ | 769 | | | | 781 | |
Deferred income taxes | | 261 | | | | 555 | |
Operating lease liabilities (noncurrent) | | 373 | | | | 366 | |
Asbestos litigation | | 295 | | | | 267 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
Other liabilities include the following: | | | | | |
Pension and postretirement liabilities | | $ | 775 | | | | 781 | |
Operating lease liabilities (noncurrent) | | — | | | | 359 | |
Deferred income taxes | | 327 | | | | 361 | |
Asbestos litigation | | 313 | | | | 302 | |
| | | | | |
| | | | | |
The increase in deferred income taxes is largely due to the OSI acquisition.
(11) LONG-TERM DEBT
In April 2020, the Company issued $500 of 1.8% notes due October 2027, $500 of 1.95% notes due October 2030 and $500 of 2.75% notes due October 2050.
(12)(10) FINANCIAL INSTRUMENTS
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of June 30, 2020,2021, the notional amount of foreign currency hedge positions was approximately $2.2$1.9 billion, and commodity hedge contracts totaled approximately $96$139 (primarily 3942 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, 20202021 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in Other deductions, net reflect hedges of balance sheet exposures that do not receive hedge accounting.
Net Investment Hedge – In fiscal 2019, the Company issued euro-denominated debt of €1.5 billion. The euro notes reduce foreign currency risk associated with the Company's international subsidiaries that use the euro as their functional currency and have been designated as a hedge of a portion of the investment in these operations. Foreign currency gains or losses associated with the euro-denominated debt are deferred in accumulated other comprehensive income (loss) and will remain until the hedged investment is sold or substantially liquidated.
The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and nine months ended June 30, 20202021 and 2019:2020:
| | | Into Earnings | | | Into OCI | | | Into Earnings | | Into OCI |
| | 3rd Quarter | | | Nine Months | | | 3rd Quarter | | | Nine Months | | | 3rd Quarter | | Nine Months | | 3rd Quarter | | Nine Months |
Gains (Losses) | Gains (Losses) | | Location | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | Gains (Losses) | | Location | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
Commodity | Commodity | | Cost of sales | | $ | (2) | | | (4) | | | (8) | | | (8) | | | (8) | | | 17 | | | (5) | | | 1 | | Commodity | | Cost of sales | | $ | (4) | | | 13 | | | (8) | | | 24 | | | 17 | | | 8 | | | 1 | | | 34 | |
Foreign currency | Foreign currency | | Sales | | (2) | | | (2) | | | (5) | | | (5) | | | (3) | | | 6 | | | (5) | | | 1 | | Foreign currency | | Sales | | (2) | | | 0 | | | (5) | | | 2 | | | 6 | | | 0 | | | 1 | | | 3 | |
Foreign currency | Foreign currency | | Cost of sales | | 6 | | | (3) | | | 15 | | | 8 | | | 3 | | | 21 | | | 15 | | | (28) | | Foreign currency | | Cost of sales | | (3) | | | 3 | | | 8 | | | 5 | | | 21 | | | 1 | | | (28) | | | 28 | |
Foreign currency | Foreign currency | | Other deductions, net | | 3 | | | (26) | | | 43 | | | (5) | | | Foreign currency | | Other deductions, net | | (26) | | | 8 | | | (5) | | | 33 | | |
| Net Investment Hedges | Net Investment Hedges | | | Net Investment Hedges | |
Euro denominated debt | Euro denominated debt | | | | | | | | | | 6 | | | (72) | | | 12 | | | (41) | | Euro denominated debt | | (72) | | | 6 | | | (41) | | | (21) | |
Total | Total | | | | $ | 5 | | | (35) | | | 45 | | | (10) | | | (2) | | | (28) | | | 17 | | | (67) | | Total | | | | $ | (35) | | | 24 | | | (10) | | | 64 | | | (28) | | | 15 | | | (67) | | | 44 | |
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.hierarchy. As of June 30, 2020,2021, the fair value of long-term debt was $6.4$6.9 billion, which exceeded the carrying value by $596.$526. 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, 2019.2020.
Counterparties to derivatives arrangementsarrangements 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 $11.immaterial. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. NaN collateral was posted with counterparties and NaN was held by the Company as of June 30, 2020.2021.
(13)(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in Accumulated other comprehensive income (loss) for the three and nine months ended June 30, 20202021 and 20192020 is shown below, net of income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
| | 2019 | | | | 2020 | | | | 2019 | | | | 2020 | |
Foreign currency translation | | | | | | | | | | | |
Beginning balance | | $ | (548) | | | | (977) | | | | (600) | | | | (794) | |
Other comprehensive income (loss), net of tax of $(2), $17, $(3) and $10, respectively | | (93) | | | | 135 | | | | (41) | | | | (48) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Ending balance | | (641) | | | | (842) | | | | (641) | | | | (842) | |
| | | | | | | | | | | |
Pension and postretirement | | | | | | | | | | | |
Beginning balance | | (395) | | | | (870) | | | | (420) | | | | (928) | |
Amortization of deferred actuarial losses into earnings, net of tax of $(4), $(9), $(12) and $(26), respectively | | 13 | | | | 29 | | | | 38 | | | | 87 | |
| | | | | | | | | | | |
Ending balance | | (382) | | | | (841) | | | | (382) | | | | (841) | |
| | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
Beginning balance | | 15 | | | | (56) | | | | 5 | | | | — | |
Deferral of gains (losses) arising during the period, net of tax of $2, $(11), $(1) and $6, respectively | | (6) | | | | 33 | | | | 4 | | | | (20) | |
Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $0, $(2), $0 and $(1), respectively | | (2) | | | | 7 | | | | (2) | | | | 4 | |
Ending balance | | 7 | | | | (16) | | | | 7 | | | | (16) | |
| | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | $ | (1,016) | | | | (1,699) | | | | (1,016) | | | | (1,699) | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
Foreign currency translation | | | | | | | | | | | |
Beginning balance | | $ | (977) | | | | (542) | | | | (794) | | | | (711) | |
Other comprehensive income (loss), net of tax of $17, $(1), $10 and $5, respectively | | 135 | | | | (6) | | | | (48) | | | | 163 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Ending balance | | (842) | | | | (548) | | | | (842) | | | | (548) | |
| | | | | | | | | | | |
Pension and postretirement | | | | | | | | | | | |
Beginning balance | | (870) | | | | (810) | | | | (928) | | | | (864) | |
Amortization of deferred actuarial losses into earnings, net of tax of $(9), $(8), $(26) and $(24), respectively | | 29 | | | | 27 | | | | 87 | | | | 81 | |
| | | | | | | | | | | |
Ending balance | | (841) | | | | (783) | | | | (841) | | | | (783) | |
| | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
Beginning balance | | (56) | | | | 30 | | | | 0 | | | | (2) | |
Deferral of gains (losses) arising during the period, net of tax of $(11), $(2), $6 and $(15), respectively | | 33 | | | | 7 | | | | (20) | | | | 50 | |
Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $(2), $3, $(1) and $7, respectively | | 7 | | | | (13) | | | | 4 | | | | (24) | |
Ending balance | | (16) | | | | 24 | | | | (16) | | | | 24 | |
| | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | $ | (1,699) | | | | (1,307) | | | | (1,699) | | | | (1,307) | |
| | | | | | | | | | | |
(14)(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 | | |
| 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | | | | | | | | | | | | | |
Automation Solutions | $ | 3,025 | | | 2,589 | | | 477 | | | 311 | | | 8,834 | | | 8,150 | | | 1,328 | | | 1,012 | |
| | | | | | | | | | | | | | | |
Climate Technologies | 1,199 | | | 970 | | | 278 | | | 195 | | | 3,171 | | | 2,869 | | | 650 | | | 563 | |
Tools & Home Products | 463 | | | 357 | | | 93 | | | 58 | | | 1,390 | | | 1,219 | | | 286 | | | 233 | |
Commercial & Residential Solutions | 1,662 | | | 1,327 | | | 371 | | | 253 | | | 4,561 | | | 4,088 | | | 936 | | | 796 | |
| | | | | | | | | | | | | | | |
Stock compensation | | | | | (31) | | | (51) | | | | | | | (83) | | | (69) | |
Unallocated pension and postretirement costs | | | | | 27 | | | 12 | | | | | | | 81 | | | 37 | |
Corporate and other | | | | | (34) | | | (22) | | | | | | | (95) | | | (90) | |
Eliminations/Interest | (3) | | | (2) | | | (43) | | | (45) | | | 6 | | | (11) | | | (134) | | | (116) | |
Total | $ | 4,684 | | | 3,914 | | | 767 | | | 458 | | | 13,401 | | | 12,227 | | | 2,033 | | | 1,570 | |
The increase in stock compensation expense for the three months ended June 30, 2020 was due to an increase in the Company's stock price. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| Sales | | Earnings | | Sales | | Earnings |
| 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | | | | | | | | | |
Automation Solutions | $ | 2,589 | | | 2,947 | | | 311 | | | 521 | | | 8,150 | | | 8,432 | | | 1,012 | | | 1,353 | |
| | | | | | | | | | | | | | | |
Climate Technologies | 970 | | | 1,268 | | | 195 | | | 274 | | | 2,869 | | | 3,459 | | | 563 | | | 731 | |
Tools & Home Products | 357 | | | 489 | | | 58 | | | 101 | | | 1,219 | | | 1,419 | | | 233 | | | 311 | |
Commercial & Residential Solutions | 1,327 | | | 1,757 | | | 253 | | | 375 | | | 4,088 | | | 4,878 | | | 796 | | | 1,042 | |
| | | | | | | | | | | | | | | |
Stock compensation | | | | | (51) | | | (66) | | | | | | | (69) | | | (191) | |
Unallocated pension and postretirement costs | | | | | 12 | | | 24 | | | | | | | 37 | | | 71 | |
Corporate and other | | | | | (22) | | | (33) | | | | | | | (90) | | | (76) | |
Eliminations/Interest | (2) | | | (7) | | | (45) | | | (37) | | | (11) | | | (21) | | | (116) | | | (115) | |
Total | $ | 3,914 | | | 4,697 | | | 458 | | | 784 | | | 12,227 | | | 13,289 | | | 1,570 | | | 2,084 | |
In fiscal 2021, the Company reclassified certain software product sales that were previously reported in Measurement and Analytical Instrumentation to Systems & Software (previously described as Process Control Systems & Solutions). Automation Solutions sales by major product offering are summarized below:below, including the reclassification of prior year amounts to reflect this change.
| | | Three Months Ended June 30, | | | Nine Months Ended June 30, | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| | | 2019 | | | 2020 | | | | 2019 | | | 2020 | | | | 2020 | | | 2021 | | | | 2020 | | | 2021 | |
| Measurement & Analytical Instrumentation | Measurement & Analytical Instrumentation | | $ | 945 | | | 735 | | | 2,730 | | | 2,381 | | Measurement & Analytical Instrumentation | | $ | 709 | | | 781 | | | 2,280 | | | 2,211 | |
Valves, Actuators & Regulators | Valves, Actuators & Regulators | | 941 | | | 842 | | | 2,752 | | | 2,609 | | Valves, Actuators & Regulators | | 842 | | | 880 | | | 2,609 | | | 2,522 | |
Industrial Solutions | Industrial Solutions | | 548 | | | 469 | | | 1,664 | | | 1,470 | | Industrial Solutions | | 469 | | | 593 | | | 1,470 | | | 1,656 | |
Process Control Systems & Solutions | | 591 | | | 543 | | | 1,688 | | | 1,690 | | |
Systems & Software | | Systems & Software | | 569 | | | 693 | | | 1,791 | | | 2,043 | |
Automation Solutions | Automation Solutions | | $ | 3,025 | | | 2,589 | | | 8,834 | | | 8,150 | | Automation Solutions | | $ | 2,589 | | | 2,947 | | | 8,150 | | | 8,432 | |
|
Depreciation and amortization (includes intellectual property, customer relationships and capitalized software) by business segment are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | Nine Months Ended June 30, | | | |
| | 2019 | | | 2020 | | | | 2019 | | | 2020 | |
Automation Solutions | | $ | 133 | | | 137 | | | | 393 | | | 414 | |
| | | | | | | | | |
Climate Technologies | | 42 | | | 44 | | | | 132 | | | 133 | |
Tools & Home Products | | 18 | | | 20 | | | | 54 | | | 58 | |
Commercial & Residential Solutions | | 60 | | | 64 | | | | 186 | | | 191 | |
| | | | | | | | | |
Corporate and other | | 10 | | | 8 | | | | 30 | | | 26 | |
Total | | $ | 203 | | | 209 | | | | 609 | | | 631 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| | 2020 | | | 2021 | | | | 2020 | | | 2020 | |
Automation Solutions | | $ | 137 | | | 152 | | | | 414 | | | 464 | |
| | | | | | | | | |
Climate Technologies | | 44 | | | 48 | | | | 133 | | | 144 | |
Tools & Home Products | | 20 | | | 20 | | | | 58 | | | 59 | |
Commercial & Residential Solutions | | 64 | | | 68 | | | | 191 | | | 203 | |
| | | | | | | | | |
Corporate and other | | 8 | | | 17 | | | | 26 | | | 53 | |
Total | | $ | 209 | | | 237 | | | | 631 | | | 720 | |
Sales by geographic destination are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | | | |
| 2019 | | | | | | 2020 | | | | |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 1,448 | | | 1,164 | | | 2,612 | | | 1,159 | | | 915 | | | 2,074 | |
Asia, Middle East & Africa | 970 | | | 313 | | | 1,283 | | | 893 | | | 253 | | | 1,146 | |
Europe | 607 | | | 185 | | | 792 | | | 537 | | | 159 | | | 696 | |
Total | $ | 3,025 | | | 1,662 | | | 4,687 | | | 2,589 | | | 1,327 | | | 3,916 | |
| | | | | | | | | | | |
| Nine Months Ended June 30, | | | | | | | | | | |
| 2019 | | | | | | 2020 | | | | |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 4,376 | | | 3,153 | | | 7,529 | | | 3,915 | | | 2,815 | | | 6,730 | |
Asia, Middle East & Africa | 2,721 | | | 863 | | | 3,584 | | | 2,619 | | | 765 | | | 3,384 | |
Europe | 1,737 | | | 545 | | | 2,282 | | | 1,616 | | | 508 | | | 2,124 | |
Total | $ | 8,834 | | | 4,561 | | | 13,395 | | | 8,150 | | | 4,088 | | | 12,238 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2020 | | 2021 |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 1,159 | | | 915 | | | 2,074 | | | 1,321 | | | 1,190 | | | 2,511 | |
Asia, Middle East & Africa | 893 | | | 253 | | | 1,146 | | | 1,011 | | | 331 | | | 1,342 | |
Europe | 537 | | | 159 | | | 696 | | | 615 | | | 236 | | | 851 | |
Total | $ | 2,589 | | | 1,327 | | | 3,916 | | | 2,947 | | | 1,757 | | | 4,704 | |
| | | | | | | | | | | |
| Nine Months Ended June 30, |
| 2020 | | 2021 |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 3,915 | | | 2,815 | | | 6,730 | | | 3,711 | | | 3,290 | | | 7,001 | |
Asia, Middle East & Africa | 2,619 | | | 765 | | | 3,384 | | | 2,907 | | | 944 | | | 3,851 | |
Europe | 1,616 | | | 508 | | | 2,124 | | | 1,814 | | | 644 | | | 2,458 | |
Total | $ | 8,150 | | | 4,088 | | | 12,238 | | | 8,432 | | | 4,878 | | | 13,310 | |
Items 2 and 3.
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars are in millions, except per share amounts or where noted)
OVERVIEW
The Company's results for the third quarter of fiscal 2020 were negatively impacted by the global outbreak and rapid spread of the novel coronavirus (COVID-19). The outbreak began in the Company's second fiscal quarter and as expected, resulted in a rapid decline in demand which impacted most of the Company's end markets and geographies in the third quarter, particularly in North America. These conditions are expected to negatively impact many of our end markets for the remainder of the fiscal year, but demand has stabilized and the Company has taken actions to protect its operating results and support its financial condition and liquidity. See the "Financial Condition", "Outlook" and "Part II - Other Information, Item 1A, Risk Factors" sections below for additional details.
For the third quarter of fiscal 2020, consolidated2021, net sales were $3.9$4.7 billion, down 16up 20 percent compared with the prior year, adversely affectedsupported by foreign currency translation which deductedadded 4 percent and the Open Systems International, Inc. (OSI) acquisition which added 1 percent. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were downup 15 percent. Automation Solutions underlying sales were up high single digits, as all businesses turned positive and all geographies were up mid-to-high single digits. Commercial & Residential Solutions underlying sales were up sharply, reflecting strong growth across all businesses and geographies including robust demand in North American residential markets and global cold chain markets. Both business platforms also benefited from the impact of COVID-19 on prior year comparisons.
Net earnings common stockholders were $399 million, down 34$627, up 57 percent, and diluted earnings per share were $0.67, down 31$1.04, up 55 percent compared with $0.97$0.67 in the prior year. Operating results declined $0.20increased $0.33 per share, reflecting the sharp decline inhigher sales volumeand strong segment margins due to significant savings from the negative effects of COVID-19Company's restructuring and general decline in economic activity. Higher stock compensation (due to an increase in the Company's stock price)cost reset actions. Third quarter results also benefited from lower restructuring costs ($0.09 per share) and pension expense of $0.05 per share and unfavorablefavorable foreign currency transactions of $0.04 per share also contributedtranslation ($0.06), offset by a higher tax rate compared to the decline. Discrete tax benefitsprior year ($0.10 per share) and share repurchases ($0.02 per share) favorably impacted results, while restructuringfirst year acquisition accounting charges related to the Company's initiatives to improve operating margins reduced earnings $0.13OSI acquisition ($0.01 per share in the current quarter.share).
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, 2020,2021, compared with the third quarter ended June 30, 2019.
| | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | Change |
(dollars in millions, except per share amounts) | | | | | |
| | | | | |
Net sales | $ | 4,684 | | | 3,914 | | | (16) | % |
Gross profit | $ | 2,001 | | | 1,618 | | | (19) | % |
Percent of sales | 42.7 | % | | 41.3 | % | | |
| | | | | |
SG&A | $ | 1,126 | | | 934 | | | (17) | % |
Percent of sales | 24.0 | % | | 23.8 | % | | |
| | | | | |
| | | | | |
Other deductions, net | $ | 65 | | | 181 | | | |
Interest expense, net | $ | 43 | | | 45 | | | |
| | | | | |
Earnings before income taxes | $ | 767 | | | 458 | | | (40) | % |
Percent of sales | 16.4 | % | | 11.7 | % | | |
| | | | | |
Net earnings common stockholders | $ | 604 | | | 399 | | | (34) | % |
Percent of sales | 12.9 | % | | 10.2 | % | | |
| | | | | |
| | | | | |
Diluted earnings per share | $ | 0.97 | | | 0.67 | | | (31) | % |
| | | | | |
2020. | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Net sales | $ | 3,914 | | | 4,697 | | | 20 | % |
Gross profit | $ | 1,618 | | | 1,982 | | | 23 | % |
Percent of sales | 41.3 | % | | 42.2 | % | | |
| | | | | |
SG&A | $ | 934 | | | 1,073 | | | 15 | % |
Percent of sales | 23.8 | % | | 22.9 | % | | |
| | | | | |
| | | | | |
| | | | | |
Other deductions, net | $ | 181 | | | 88 | | | |
Amortization of intangibles | $ | 60 | | | 71 | | | |
Restructuring costs | $ | 88 | | | 28 | | | |
| | | | | |
Interest expense, net | $ | 45 | | | 37 | | | |
| | | | | |
Earnings before income taxes | $ | 458 | | | 784 | | | 71 | % |
Percent of sales | 11.7 | % | | 16.7 | % | | |
| | | | | |
Net earnings common stockholders | $ | 399 | | | 627 | | | 57 | % |
Percent of sales | 10.2 | % | | 13.3 | % | | |
| | | | | |
| | | | | |
Diluted earnings per share | $ | 0.67 | | | 1.04 | | | 55 | % |
| | | | | |
Net sales for the third quarter of fiscal 20202021 were $3.9$4.7 billion, a decrease of $770 million, or 16up 20 percent compared with 2019.2020. Automation Solutions sales were up 14 percent and Commercial & Residential Solutions sales were up 32 percent. Underlying sales were downup 15 percent, ($691 million) on lower volume, as COVID-19 negatively impacted nearly all end markets and geographies. Foreignforeign currency translation subtractedadded 4 percent and the OSI acquisition added 1 percent ($70 million) and divestitures subtracted $9 million. percent. Underlying sales were down 20up 18 percent in the U.S. and 10up 13 percent internationally. The Americas was down 20up 18 percent, Europe was down 9up 13 percent and Asia, Middle East & Africa was down 9up 11 percent (China up 37 percent).
Cost of sales for the third quarter of fiscal 20202021 were $2.3 billion, a decrease$2,715, an increase of $387 million$419 compared with 2019, primarily2020, due to lower volume.higher sales volume, the impact of foreign currency translation and the OSI acquisition. Gross margin of 41.342.2 percent decreased 1.4
increased 0.9 percentage points compared with the prior year reflecting deleverageleverage on lowerhigher sales volume, and unfavorable mix primarily within Automation Solutions,partially offset by favorable price-cost.unfavorable price-cost in Commercial & Residential Solutions.
Selling, general and administrative (SG&A) expenses of $934 million decreased $192 million$1,073 increased $139 compared with the prior year on increased sales volume and higher stock and other performance-based compensation expense. SG&A as a percent of sales decreased 0.20.9 percentage points to 23.822.9 percent primarily due to significantreflecting savings from the Company's restructuring and cost reset actions, which offset deleverage on the lower sales volume. The Company's ongoing restructuring initiatives are expected to yield improved operating margins as sales volumes recover. The Company also benefited from further actions taken in response to the effects of COVID-19 on profitability, including the impact of curtailed travel, meetings and discretionary spending, a salary and hiring freeze, furloughs, and compensation reductions for the Board of Directors and key executives across Emerson.actions.
Other deductions, net were $181 million$88 in 2020, an increase2021, a decrease of $116 million$93 compared with the prior year, reflecting increasedlower restructuring costs of $68 million and unfavorable impacts on comparisons$60, a favorable impact from foreign currency transactions of $25 milliondue to losses in the prior year, and a favorable impact from pensions, partially offset by higher intangibles amortization of $16 million.$11, primarily related to the OSI acquisition. See Notes 6 and 7.
Pretax earningsearnings of $458 million decreased $309 million, or 40$784 increased $326, up 71 percent compared with the prior year. Earnings decreased $166 millionincreased $210 in Automation Solutions and $118 million$122 in CommercialCommercial & Residential Solutions. CostsSolutions, while costs reported at Corporate increased $23 million due to higher stock compensation (reflecting an increase in the Company's stock price) and unallocated pension and postretirement costs which together increased $35 million, offset by a decline of $12 million for all other corporate costs. Pretax earnings margin decreased 4.7 percentage points to 11.7 percent. The decline reflected increased restructuring costs, which negatively impacted comparisons by 2.0 percentage points. Higher stock compensation and pension expense and unfavorable foreign currency transactions also impacted comparisons by 1.8 percentage points.$14. See the Business Segments discussion that follows and Note 14.12.
Income taxes were $151 for 2021 and $51 million for 2020, and $155 million for 2019, resulting in effective tax rates of 19 percent and 11 percent, and 20 percent, respectively. The current year rate included $24 of favorable net discrete tax items which decreased the rate 3 percentage points, while the prior year rate included $57 million ($0.10 per share) of discrete benefits which decreased the rate 12 percentage points, points.related to updates to estimates for the prior year U.S. income tax return and the impact of a research and development tax credit study. The prior year rate included favorable discrete tax items, which reduced the rate 3 percentage points, largely due to a tax benefit of $21 million ($0.03 per share) from restructuring a foreign subsidiary.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company expects to defer $75 million of certain payroll taxes through the end of calendar year 2020.
Net earnings common stockholders in the third quarter of fiscal 20202021 were $399 million, down 34$627, up 57 percent, compared with $604 million$399 in the prior year, and earnings per share were $0.67, down 31$1.04, up 55 percent, compared with $0.97$0.67 in the prior year. See discussion in the Overview above for further details.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the third quarter ended June 30, 2020,2021, compared with the third quarter ended June 30, 2019.2020. The Company defines segment earnings as earnings before interest and taxes. See Note 1412 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
| Three Months Ended June 30 | Three Months Ended June 30 | 2019 | | 2020 | | Change | Three Months Ended June 30 | 2020 | | 2021 | | Change |
(dollars in millions) | | | | | | |
| | Sales | Sales | $ | 3,025 | | | 2,589 | | | (14) | % | Sales | $ | 2,589 | | | 2,947 | | | 14 | % |
Earnings | Earnings | $ | 477 | | | 311 | | | (35) | % | Earnings | $ | 311 | | | 521 | | | 67 | % |
Margin | Margin | 15.7 | % | | 12.0 | % | | | Margin | 12.0 | % | | 17.7 | % | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 709 | | | 781 | | | 10 | % |
Valves, Actuators & Regulators | 842 | | | 880 | | | 5 | % |
Industrial Solutions | 469 | | | 593 | | | 26 | % |
Systems & Software | 569 | | | 693 | | | 22 | % |
Total | $ | 2,589 | | | 2,947 | | | 14 | % |
Automation Solutions sales were $2.9 billion in the third quarter, an increase of $358 or 14 percent. Underlying sales increased 8 percent on 7 percent higher volume and 1 percent higher price, reflecting recovery in global markets from the impacts of COVID-19. Foreign currency translation had a 4 percent favorable impact and the OSI acquisition had a 2 percent favorable impact. Underlying sales turned positive and increased 9 percent in the Americas (U.S. up 9 percent), as process end markets recovered, while Europe increased 6 percent and Asia, Middle East & Africa increased 7 percent (China up 5 percent). Sales for Measurement & Analytical Instrumentation increased $72, or 10 percent, and Valves, Actuators & Regulators increased $38, or 5 percent, as market conditions continued to improve for North American process industries. Measurement & Analytical sales were strong in Asia, Middle East & Africa, while demand in Europe for both businesses was soft. Industrial Solutions sales were up $124, or 26 percent, reflecting strong global demand in discrete end markets. Systems & Software increased $124, or 22 percent, on strength in process end markets in North America and Europe and solid growth in Asia, Middle East & Africa, while power end markets were strong in North America, and the OSI acquisition added $51. Earnings were $521, an increase of $210, or 67 percent, and margin increased 5.7 percentage points to 17.7 percent, reflecting leverage on
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 945 | | | 735 | | | (22) | % |
Valves, Actuators & Regulators | 941 | | | 842 | | | (11) | % |
Industrial Solutions | 548 | | | 469 | | | (14) | % |
Process Control Systems & Solutions | 591 | | | 543 | | | (8) | % |
Total | $ | 3,025 | | | 2,589 | | | (14) | % |
Automation Solutions sales were $2.6 billion in the third quarter, a decrease of $436 million or 14 percent. Underlying sales decreased 13 percent ($380 million) onhigher volume, lower volume. Foreign currency translation had a 1 percent ($56 million) unfavorable impact. All businesses were negatively impacted by the effects of COVID-19, which resulted in continued broad-based industrial weakness. Underlying sales decreased 19 percent in the Americas (U.S. down 20 percent), Europe decreased 8 percent and Asia, Middle East & Africa decreased 6 percent (China up 9 percent). Sales for Measurement & Analytical Instrumentation decreased $210 million, or 22 percent, due to global weakness across most geographies, particularly in North American process industries, while China rebounded from a sharp decline in the previous quarter and was up moderately. Valves, Actuators & Regulators decreased $99 million, or 11 percent, reflecting weakness across most end markets, particularly in North America, partially offset by a sharp rebound in China sales. Industrial Solutions sales decreased $79 million, or 14 percent, on weakness in global discrete end markets, excluding China which was up low double-digits. Process Control Systems & Solutions decreased $48 million, or 8 percent, due to weakness in power end markets in Asia and process end markets in the U.S. Earnings were $311 million, a decrease of $166 million, or 35 percent, primarily due to lower volume, higher restructuring expenses of $65 million and an unfavorable impact on comparisons from foreign currency transactions of $18 million. Margin decreased 3.7 percentage points to 12.0 percent, reflecting a negative impact from restructuring expenses ofwhich benefited margins 2.5 percentage points, and unfavorable foreign currency transactions of 0.7 percentage points. Savings from the restructuring and cost reset actions were significant and largely offset deleverage on the lower sales volume, while favorable price-cost offset unfavorable mix.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Three Months Ended June 30 | 2019 | | 2020 | | Change |
(dollars in millions) | | | | | |
| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 1,199 | | | 970 | | | (19) | % |
Tools & Home Products | 463 | | | 357 | | | (23) | % |
Total | $ | 1,662 | | | 1,327 | | | (20) | % |
| | | | | |
Earnings: | | | | | |
Climate Technologies | $ | 278 | | | 195 | | | (30) | % |
Tools & Home Products | 93 | | | 58 | | | (38) | % |
Total | $ | 371 | | | 253 | | | (32) | % |
Margin | 22.4 | % | | 19.1 | % | | |
Commercial & Residential Solutions sales were $1.3 billion in the third quarter, down $335 million, or 20 percent compared to the prior year. Underlying sales decreased 19 percent ($312 million) due to lower volume, reflecting sharply lower demand due to the effects of COVID-19, especially in North America. Foreign currency translation subtracted 1 percent ($14 million) and the divestiture of two small non-core businesses subtracted $9 million. Overall, underlying sales decreased 20 percent in the Americas (U.S. down 21 percent), Europe decreased 12 percent and Asia, Middle East & Africa was down 18 percent (China down 9 percent). Climate Technologies sales were $970 million in the third quarter, a decrease of $229 million, or 19 percent. Air conditioning and heating sales were down sharply, reflecting significant declines in Asia and North America, with smaller declines in China and Europe. Cold chain sales were down sharply, driven by slower global market conditions. Tools & Home Products sales were $357 million in the third quarter, a decrease of $106 million, or 23 percent. Global professional tools end markets were down sharply, while food waste disposers and wet/dry vacuums decreased in the low-to-mid teens. Earnings were $253 million, down 32 percent compared with the prior year, and margin decreased 3.3 points to 19.1 percent. Significant deleverage on the lower sales volume negatively impacted margins and higher restructuring expenses deducted 0.6 percentage points, partially offset by savings from cost reduction actions and favorable price-cost.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Three Months Ended June 30 | 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 970 | | | 1,268 | | | 31 | % |
Tools & Home Products | 357 | | | 489 | | | 37 | % |
Total | $ | 1,327 | | | 1,757 | | | 32 | % |
| | | | | |
Earnings: | | | | | |
Climate Technologies | $ | 195 | | | 274 | | | 40 | % |
Tools & Home Products | 58 | | | 101 | | | 74 | % |
Total | $ | 253 | | | 375 | | | 48 | % |
Margin | 19.1 | % | | 21.3 | % | | |
Commercial & Residential Solutions sales were $1.8 billion in the third quarter, up $430, or 32 percent compared to the prior year. Underlying sales increased 29 percent due to strong growth across all businesses and geographies while foreign currency translation added 3 percent. Results also benefited from comparisons to prior year results which were negatively impacted by COVID-19. Overall, underlying sales increased 29 percent in the Americas (U.S. up 28 percent), 37 percent in Europe and 25 percent in Asia, Middle East & Africa (China up 15 percent). Climate Technologies sales were $1.3 billion in the third quarter, an increase of $298, or 31 percent. Air conditioning and heating sales were up 20 percent and cold chain sales were up over 40 percent, reflecting strong global demand across all end markets, especially food service, food retail and aftermarket. Tools & Home Products sales were $489 in the third quarter, an increase of $132, or 37 percent. Sales of wet/dry vacuums were robust in part due to competitor outages, while professional tools and food waste disposers were up sharply. Earnings were $375, up 48 percent compared with the prior year, and margin increased 2.2 percentage points to 21.3 percent due to leverage on higher sales volume and savings from cost reduction actions, partially offset by unfavorable price-cost.
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, 2020,2021, compared with the nine months ended June 30, 2019.
| | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | Change |
(dollars in millions, except per share amounts) | | | | | |
| | | | | |
Net sales | $ | 13,401 | | | 12,227 | | | (9) | % |
Gross profit | $ | 5,687 | | | 5,127 | | | (10) | % |
Percent of sales | 42.4 | % | | 41.9 | % | | |
| | | | | |
SG&A | $ | 3,348 | | | 3,040 | | | (9) | % |
Percent of sales | 24.9 | % | | 24.8 | % | | |
| | | | | |
Other deductions, net | $ | 172 | | | 401 | | | |
Interest expense, net | $ | 134 | | | 116 | | | |
| | | | | |
Earnings before income taxes | $ | 2,033 | | | 1,570 | | | (23) | % |
Percent of sales | 15.2 | % | | 12.8 | % | | |
| | | | | |
Net earnings common stockholders | $ | 1,589 | | | 1,242 | | | (22) | % |
Percent of sales | 11.9 | % | | 10.2 | % | | |
| | | | | |
| | | | | |
Diluted earnings per share | $ | 2.55 | | | 2.04 | | | (20) | % |
| | | | | |
2020. | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Net sales | $ | 12,227 | | | 13,289 | | | 9 | % |
Gross profit | $ | 5,127 | | | 5,567 | | | 9 | % |
Percent of sales | 41.9 | % | | 41.9 | % | | |
| | | | | |
SG&A | $ | 3,040 | | | 3,125 | | | 3 | % |
Percent of sales | 24.8 | % | | 23.5 | % | | |
| | | | | |
| | | | | |
Other deductions, net | $ | 401 | | | 243 | | | |
Amortization of intangibles | $ | 178 | | | 223 | | | |
Restructuring costs | $ | 216 | | | 111 | | | |
| | | | | |
Interest expense, net | $ | 116 | | | 115 | | | |
| | | | | |
Earnings before income taxes | $ | 1,570 | | | 2,084 | | | 33 | % |
Percent of sales | 12.8 | % | | 15.7 | % | | |
| | | | | |
Net earnings common stockholders | $ | 1,242 | | | 1,633 | | | 31 | % |
Percent of sales | 10.2 | % | | 12.3 | % | | |
| | | | | |
| | | | | |
Diluted earnings per share | $ | 2.04 | | | 2.71 | | | 33 | % |
| | | | | |
Net sales for the first nine months of 20202021 were $12.2$13.3 billion, a decrease of $1.2 billion, orup 9 percent compared with 2019.2020. Automation Solutions sales were up 3 percent while Commercial & Residential Solutions sales were up 19 percent. Underlying sales were down 8up 5 percent, ($993 million) on lower volume. Divestitures net of acquisitions subtracted $3 million andas foreign currency translation subtractedadded 3 percent and acquisitions added 1 percent ($178 million).percent. Underlying sales decreased 11increased 1 percent in the U.S. and 5increased 8 percent internationally. The Americas was down 10up 2 percent, Europe was down 4up 8 percent and Asia, Middle East & Africa was down 4 percent.up 9 percent (China up 16 percent).
Cost of sales for 20202021 were $7.1 billion, a decrease$7,722, an increase of $614 million$622 versus $7.7 billion$7,100 in 2019,2020, primarily due to lower volume.the impact of higher sales volume in Commercial & Residential Solutions, foreign currency translation, and the OSI acquisition. Gross margin decreased 0.5 percentage points towas 41.9 percent, reflecting deleverageflat compared to the prior year, as leverage on lowerhigher sales volume was offset by unfavorable mix and unfavorable mix primarily within Automation Solutions, partially offset by favorable price-cost.price-cost in Commercial & Residential Solutions.
SG&A expenses of $3.0 billion decreased $308 million and$3,125 increased $85 compared with the prior year on higher stock compensation expense, as well as increased sales volume. SG&A as a percent of sales decreased 0.11.3 percentage points to 24.8 percent. Significant23.5 percent, reflecting significant savings from the Company's restructuring and cost reset actions, partially offset deleverage onby higher stock compensation expense of $122 (0.8 percentage points) due to a higher share price in the lower sales volume.current year.
Other deductions, net were $401 million$243 in 2020, an increase2021, a decrease of $229 million$158 compared with the prior year, reflecting increasedlower restructuring costs of $176 million$105, investment-related gains, including gains in the first quarter of fiscal 2021 of $21 from an investment sale and $17 from the acquisition of the remaining interest of an unfavorableequity investment, and a gain in the second quarter of $31 from the sale of an equity investment, and a favorable impact on comparisons from pensions of $46 million,pensions. These items were partially offset by lower litigation costs. Seehigher intangibles amortization of $45, primarily related to the OSI acquisition. See Notes 6 and 7.
Pretax earnings of $1.6 billion decreased $463 million,$2,084 increased $514, or 2333 percent. Earnings decreased $316 millionincreased $341 in Automation Solutions and $140 million$246 in Commercial & Residential Solutions.Solutions. Costs reported at Corporate increased $25 million due$74, reflecting higher stock compensation expense of $122 and first year acquisition accounting charges and fees related to higherthe OSI acquisition of $41, partially offset by the investment-related gains discussed above and lower unallocated pension and postretirement costs which increased $44 million, partially offsetdecreased by lower stock compensation expense of $14 million and a decline of $5 million for all other corporate costs. Pretax earnings margin decreased 2.4 percentage points to 12.8 percent. The decline was largely due to higher restructuring costs, which negatively impacted comparisons by 1.6 percentage points. Higher pension expense also impacted comparisons by 0.5 percentage points.$34. See the Business Segments discussion that follows and Note 14.12.
Income taxes were $431 for 2021 and $310 million for 2020, and $429 million for 2019, resulting in effective tax rates of 2021 percent and 2120 percent, respectively. The current year and prior year rates included favorable net discrete items which reduced both years'the rates approximately1 percentage point and 3 percentage points. See Note 8.points, respectively.
Net earnings common stockholders in 20202021 were $1.2 billion, down 22$1,633, up 31 percent compared with the prior year, and earnings per share were $2.04, down 20$2.71, up 33 percent compared with $2.55$2.04 in 2019. The decline in2020. Operating results increased $0.54 per share, reflecting significant savings from the Company's restructuring and cost reset actions and leverage on higher sales volume largely attributable to the negative effects of COVID-19in Commercial & Residential Solutions. Lower restructuring and oil price volatility, resulted in a decline inadvisory fees ($0.16 per share), favorable foreign currency translation ($0.05 per share), lower pension expense ($0.03 per share) and share repurchases ($0.02 per share) also benefited operating results, of
$0.27 per share, while restructuring costs and special advisory fees reduced earnings by $0.32 per share in the current year. Higher pension expense partially offset by lowerhigher stock compensation expense negatively affected comparisons by $0.04deducted $0.15 per share and unfavorable foreign currencya higher tax rate deducted $0.03 per share. Results were favorably impacted by discrete tax itemsThe Company recognized several investment-related gains in the current year ($0.090.10 per share), while first year acquisition accounting charges and a combined benefit from share repurchases and lower interest expense of $0.06fees related to the OSI acquisition deducted $0.05 per share.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the nine months ended June 30, 2020,2021, compared with the nine months ended June 30, 2019.2020. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
| | | | | | | | | | | | | | | | | |
Nine Months Ended June 30 | 2019 | | 2020 | | Change |
(dollars in millions) | | | | | |
Sales | $ | 8,834 | | | 8,150 | | | (8) | % |
Earnings | $ | 1,328 | | | 1,012 | | | (24) | % |
Margin | 15.0 | % | | 12.4 | % | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 2,730 | | | 2,381 | | | (13) | % |
Valves, Actuators & Regulators | 2,752 | | | 2,609 | | | (5) | % |
Industrial Solutions | 1,664 | | | 1,470 | | | (12) | % |
Process Control Systems & Solutions | 1,688 | | | 1,690 | | | — | % |
Total | $ | 8,834 | | | 8,150 | | | (8) | % |
AUTOMATION SOLUTIONS | | | | | | | | | | | | | | | | | |
Nine Months Ended June 30 | 2020 | | 2021 | | Change |
| | | | | |
Sales | $ | 8,150 | | | 8,432 | | | 3 | % |
Earnings | $ | 1,012 | | | 1,353 | | | 34 | % |
Margin | 12.4 | % | | 16.0 | % | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 2,280 | | | 2,211 | | | (3) | % |
Valves, Actuators & Regulators | 2,609 | | | 2,522 | | | (3) | % |
Industrial Solutions | 1,470 | | | 1,656 | | | 13 | % |
Systems & Software | 1,791 | | | 2,043 | | | 14 | % |
Total | $ | 8,150 | | | 8,432 | | | 3 | % |
Automation Solutions sales were $8.2$8.4 billion in the first nine months of 2020, a decrease2021, an increase of $684 million,$282, or 83 percent. Underlying sales decreased 71 percent ($591 million) onas lower volume. The Machine Automation Solutionsvolume was partially offset by slightly higher price. Foreign currency translation had a 3 percent favorable impact and the OSI acquisition added 1 percent ($47 million) and foreign currency translation had a 2 percent ($140 million) unfavorable impact.. Underlying sales decreased 119 percent in the Americas, 4while Europe increased 5 percent in Europe and 2 percent in Asia, Middle East & Africa was up 6 percent (China down 1up 14 percent). Sales for Measurement & Analytical Instrumentation decreased $349 million,$69, or 133 percent,, due to weakness in as process industries primarilywere weak in North America.the first half of the year, but have improved sequentially as markets continue to recover from the impacts of COVID-19. Valves, Actuators & Regulators decreased $143 million,$87, or 53 percent, reflecting slower demand in most end markets.markets, particularly in North America and Europe, partially offset by strength in Asia. Industrial Solutions sales decreased $194 million,increased $186, or 1213 percent, on lower global demandstrong growth in Europe and robust growth in China, while North American discrete end markets. Process Controlmarkets were down slightly but continued to improve sequentially. Systems & SolutionsSoftware increased $2 million due to$252, or 14 percent, reflecting the Machine Automation Solutionsimpact of the OSI acquisition which added $47 million, largely$141. Process end markets were strong in Europe and had solid growth in Asia while North America declined. Power end markets were solid in North America, partially offset by weaknesssoftness in power end markets in China and process end markets in the U.S.Asia. Earnings were $1.0 billion, a decrease$1,353, an increase of $316 million,$341, or 2434 percent, primarily due to higher restructuring expenses of $166 million and lower volume. Margin decreased 2.6margin increased 3.6 percentage points to 12.416.0 percent, reflecting a negative impact from restructuring expenses of 2.1 percentage points and unfavorable mix. Savingsas significant savings from cost reduction actions and favorable price-cost more than offset deleverage onunfavorable mix, while lower sales volume.restructuring expense benefited margins 1.3 percentage points.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| Nine Months Ended June 30 | Nine Months Ended June 30 | 2019 | | 2020 | | Change | Nine Months Ended June 30 | 2020 | | 2021 | | Change |
(dollars in millions) | | | | | | |
| | Sales: | Sales: | | Sales: | |
Climate Technologies | Climate Technologies | $ | 3,171 | | | 2,869 | | | (10) | % | Climate Technologies | $ | 2,869 | | | 3,459 | | | 21 | % |
Tools & Home Products | Tools & Home Products | 1,390 | | | 1,219 | | | (12) | % | Tools & Home Products | 1,219 | | | 1,419 | | | 16 | % |
Total | Total | $ | 4,561 | | | 4,088 | | | (10) | % | Total | $ | 4,088 | | | 4,878 | | | 19 | % |
| Earnings: | Earnings: | | Earnings: | |
Climate Technologies | Climate Technologies | $ | 650 | | | 563 | | | (13) | % | Climate Technologies | $ | 563 | | | 731 | | | 30 | % |
Tools & Home Products | Tools & Home Products | 286 | | | 233 | | | (19) | % | Tools & Home Products | 233 | | | 311 | | | 34 | % |
Total | Total | $ | 936 | | | 796 | | | (15) | % | Total | $ | 796 | | | 1,042 | | | 31 | % |
Margin | Margin | 20.5 | % | | 19.5 | % | | | Margin | 19.5 | % | | 21.4 | % | | |
Commercial & Residential Solutions sales were $4.1$4.9 billion in the first nine months of 2020, a decrease2021, an increase of $473 million,$790, or 1019 percent compared to the prior year. Underlying sales were down 9up 17 percent ($402 million) on lower volume. The divestiture of two small non-core businesses subtracted $33 million anddue to strong global demand while foreign currency translation subtracted $38 million, a combined decrease of 1 percent.added 2 percent. Overall, underlying sales decreased 10increased 17 percent in the Americas, 417 percent in Europe and 1018 percent in Asia, Middle East & Africa (China down 11up 22 percent). Climate Technologies sales were $2.9$3.5 billion in the first nine months of 2020, a decrease2021, an increase of $302 million,$590, or 1021 percent. Air conditioning andand heating sales were down sharply,up mid-teens, reflecting significant declinesstrong demand for residential-oriented products and solutions in AsiaNorth America and the U.S. due to the effects of COVID-19. Global coldrobust growth in Europe and China. Cold chain sales were down sharply on significant declinesup over 20 percent, driven by favorable global market conditions and strength in Asiafood retail and Europe, while North America was down moderately.aftermarket. Tools & Home Products sales were $1.2$1.4 billion in the first nine months of 2020, down $171 million,2021, up $200, or 12 percent compared16 percent. Sales of wet/dry vacuums were robust in part due to the prior year, reflecting sharp declines incompetitor outages, while sales were strong for food waste disposers and global professional tools, markets. Sales for wet/dry vacuums and food waste disposers were down moderately.partially due to easier comparisons in the third quarter. Earnings were $796 million, down 15$1,042, up 31 percent compared to the prior year, and margin decreased 1.0increased 1.9 percentage points, due to deleveragereflecting leverage on lower saleshigher volume and higher restructuring expenses which negatively impacted margins by 0.4 percentage points, partially offset by savings from cost reduction actions, partially offset by unfavorable price-cost and favorable price-cost.mix.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the nine months ended June 30,
20202021 as compared to the year ended September 30,
20192020 and the nine months ended June 30, 2020 follow.
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | Sept 30, 2020 | | June 30, 2021 |
Operating working capital | $ | 1,169 | | | $ | 866 | | | $ | 714 | |
Current ratio | 1.3 | | | 1.5 | | | 1.3 | |
Total debt-to-total capital | 48.0 | % | | 47.1 | % | | 44.0 | % |
Net debt-to-net capital | 37.9 | % | | 33.2 | % | | 32.4 | % |
Interest coverage ratio | 12.9 | X | | 14.4 | X | | 17.8 | X |
| | | | | | | | | | | |
| Sept 30, 2019 | | June 30, 2020 |
Working capital (in millions) | $ | 1,163 | | | $ | 1,894 | |
Current ratio | 1.2 | | | 1.3 | |
Total debt-to-total capital | 41.0 | % | | 48.0 | % |
Net debt-to-net capital | 33.9 | % | | 37.9 | % |
Interest coverage ratio | 15.2 | X | | 12.9 | X |
The Company's operating working capital decreased $455 compared to the same quarter last year largely due to timing-related reductions reflecting current business conditions. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 17.8X for the first nine months of fiscal 2021 compares to 12.9X for the nine months ended June 30, 2020. The increase reflects higher pretax earnings in the current year.Operating cash flow for the first nine months of fiscal 2021 was $2.7 billion, an increase of $866 compared with $1.9 billion in the prior year due to higher earnings and favorable operating working capital. Free cash flow of $2.4 billion in the first nine months of fiscal 2021 (operating cash flow of $2.7 billion less capital expenditures of $350) increased $845 compared to free cash flow of $1.5 billion in 2020 (operating cash flow of $1.9 billion less capital expenditures of $329), reflecting the increase in operating cash flow. Cash used for investing activities was $1.9 billion largely due to the OSI acquisition. Cash used for financing activities was $1.3 billion, primarily due to dividends and share repurchases.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company deferred $73 of certain payroll taxes through the end of calendar year 2020, half of which is due in December 2021 with the remainder due in December 2022.
Emerson maintains a conservative financial structure to provide the strength and flexibility necessary to achieve our strategic objectives and has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. During fiscal 2020, the Company increased its cash holdings to support liquidity in response to the potential effects of COVID-19. In April 2020, the Company issued $1.5 billion of long-term debt to further manage its liquidity and balance sheet. The net proceeds were used to reduce commercial paper borrowings and for general corporate purposes. The Company has also taken actions to conservatively manage its cash through planned reductions in capital expenditures for fiscal 2020 and by suspending its share repurchases for the remainder of the fiscal year. No changes have been made to the dividend plan for the year. The Company's long-term debt ratings, which are A2 by Moody's Investors Service and A by Standard and Poor's, remain unchanged. The Company currently believes that sufficient funds will be available to meet its needs for the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity, or its $3.5 billion revolving backup credit facility under which it has not incurred any borrowings.
Emerson is in a strong financial position, with total assets of $22$24 billion and stockholders' equity of $8$9 billion, and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing its capital structure on a short- and long-term basis. The Company continues to generate substantial operating cash flow, with a full-year outlook of approximately $2.8 billion.
The Company's total working capital increased approximately $750 million compared to the same quarter last year, reflecting the net proceeds from the debt issuance in May, while operating working capital declined due to lower business levels. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 12.9X for the first nine months of fiscal 2020 compares to 14.3X for the nine months ended June 30, 2019. The decrease reflects lower pretax earnings in the current year, partially offset by lower interest expense.
Operating cash flow for the first nine months of fiscal 2020 was $1.9 billion, an increase of $52 million compared with $1.8 billion
FISCAL 2021 OUTLOOK
The Company delivered strong financial performance in the prior year, as operating working capital declined due to lower business levels, partially offset by lower earnings. Free cash flowquarter, despite pandemic and operating-related challenges, including material costs, availability, logistics, and labor constraints. Overall, the Company expects continued improvement in industrial and commercial demand over the remainder of $1.5 billion in the first nine months of fiscal 2020 (operating cash flow of $1.9 billion less capital expenditures of $329 million) increased $118 million compared to free cash flow of $1.4 billion in 2019 (operating cash flow of $1.8 billion less capital expenditures of $395 million), reflecting the increase in operating cash flow and lower capital investment.
FISCAL 2020 OUTLOOK
Emerson's operations and2021. Operational, supply chain, stabilized during the quarter, with an emphasis on safety and productivity. The primary focus continues to be keeping employees safe and healthy, and serving customers in their essential industries with the vital technologies and services that they rely upon. The Company has implemented recommended policies and practices to protect its workforce so they can safely and effectively carry out their work. The Company is following guidelines from global health experts and has taken stringent steps to protect its employees.
Our outlook reflects the dynamic demand environment associated with COVID-19 and significant savings from the Company's cost reduction and COVID-19 related cost containment actions. The guidance assumes, among other items, a continued challenging but steadily improving demand environment in the fourth quarter. North Americamaterials inflation is expected to remain challenging through the key challengeremainder of the fiscal year. For the full year, consolidated net sales are expected to be up 9 to 10 percent, with underlying sales up 5 to 6 percent excluding a 3 percent favorable impact from foreign currency translation and a demand perspective. The guidance also assumes no major operational or supply chain disruptions. Lastly,1 percent favorable impact from the outlook assumes no changes in discrete tax itemsOSI acquisition. Automation Solutions net sales are expected to be up 5 to 6 percent, with underlying sales flat to up 1 percent excluding a 3 percent favorable impact from foreign currency translation and assumes oil prices remaina 2 percent favorable impact from the OSI acquisition. Commercial & Residential Solutions net sales are expected to be up 17 to 18 percent, with underlying sales up 15 to 16 percent excluding a 2 percent impact from favorable foreign currency translation. Earnings per share are expected to be $3.78 to $3.80, while adjusted earnings per share, which exclude a $0.24 per share impact from restructuring actions, a $0.07 per share impact from OSI first year acquisition accounting charges and fees, and a $0.03 per share equity investment gain, are expected to be $4.06 to $4.08. Operating cash flow is expected to be approximately $3.6 billion and free cash flow, which excludes targeted capital spending of $600 million, is expected to be approximately $3.0 billion. Fiscal 2021 share repurchases are expected to be in the $35 to $45 range for the same time period.amount of $500 million. However, future developments related to COVID-19, including further actions taken by governmental authorities,authorities, potential shutdowns of our operations, or delays in the stabilization and recovery of economic conditions could further adversely affect our operations and financial results, as well as those of our customers and suppliers. See "Part II - Other Information, Item 1A Risk Factors."
Consolidated fiscal 2020 net sales are expected to be down 9 to 10 percent, with underlying sales down 7.5 to 9 percent excluding a 1 to 1.5 percent unfavorable impact from foreign currency translation. Automation Solutions net sales are expected to be down 8 to 10 percent, with underlying sales down 7 to 9 percent excluding a 1 percent unfavorable impact from foreign currency translation. The midpoint of this outlook assumes a reduction of backlog of approximately $300 million by the end of the fiscal year. Commercial & Residential Solutions net sales are expected to be down 9 to 11 percent, with underlying sales down 8 to 10 percent excluding an impact from unfavorable foreign currency translation of 1 percent. Earnings per share are expected to be $2.80 to $2.95, while adjusted earnings per share, which exclude a $0.40 per share impact from restructuring actions and related costs for the year, are expected to be $3.20 to $3.35. Operating cash flow is expected to be approximately $2.8 billion and free cash flow, which excludes targeted capital spending of $550 million, is expected to be approximately $2.25 billion. The Company's share repurchases for the nine months ended June 30, 2020 were $942 million and additional repurchases have been suspended for the remainder of the fiscal year. The Company has made no changes to its dividend plan for fiscal 2020.
– “Risk Factors” in our Annual Report on Form 10-K.
Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include the scope, duration and ultimate impact of the COVID-19 pandemic, as well as economic and currency conditions, market demand, including related to the pandemic and oil and gas price declines and volatility, pricing, protection of intellectual property, cybersecurity, tariffs, competitive and technological factors, among others, which are set forth in the “Risk Factors” of Part I, Item 1A, and the "Safe Harbor Statement" of Part II, Item 7, to the Company's Annual Report on Form 10-K for the year ended September 30, 2019, "Risk Factors" of Part II - Other Information, Item 1A of the Company's Quarterly Report on Form 10-Q for the three-month period ended June 30, 2020 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 is now in a transition period and has begun negotiatingNegotiations over the terms of a trade agreement and other laws and regulations withtook place during 2020 and an agreement between the EU.EU and the UK was reached on December 24, 2020, which included zero tariffs and quotas on goods. 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 ofWhile there could be certain incremental tariffs,costs for logistics and other items, wouldthe Company expects any impact of these items will be immaterial.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in a timely manner. This system also is designed to ensure information is accumulated and communicated to management, including the Company's certifying officers, to allow timely decisions regarding required disclosure. Based on an evaluation performed, the certifying officers have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
There was no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
The following risk factor supplements the “Risk Factors” section in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (our “Form 10-K). The following risk factor disclosure should be read in conjunction with the other risk factors set out in our Form 10-K.
The Recent Coronavirus (COVID-19) Outbreak Has Adversely Impacted our Business and Could in the Future Have a Material Adverse Impact on our Business, Results of Operation, Financial Condition and Liquidity, the Nature and Extent of Which is Highly Uncertain
The global outbreak of the coronavirus (COVID-19) has significantly increased economic, demand and operational uncertainty. We have global operations, customers and suppliers, including in countries most impacted by COVID-19. Authorities around the world have taken a variety of measures to slow the spread of COVID-19, including travel bans or restrictions, increased border controls or closures, quarantines, shelter-in-place orders and business shutdowns and such authorities may impose additional restrictions. We have also taken actions to protect our employees and to mitigate the spread of COVID-19, including embracing guidelines set by the World Health Organization and the Centers for Disease Control and Prevention on social distancing, good hygiene, restrictions on employee travel and in-person meetings, and changes to employee work arrangements including remote work arrangements. The actions taken around the world to slow the spread of COVID-19 have also impacted our customers and suppliers, and future developments could cause further disruptions to Emerson due to the interconnected nature of our business relationships.
The impact of COVID-19 on the global economy and our customers, as well as recent volatility in commodity markets (including oil prices), has negatively impacted demand for our products and could continue to do so in the future. Its effects could also result in further disruptions to our manufacturing operations, including higher rates of employee absenteeism, and supply chain, which could continue to negatively impact our ability to meet customer demand. Additionally, the potential deterioration and volatility of credit and financial markets could limit our ability to obtain external financing. The extent to which COVID-19 will impact our business, results of operations, financial condition or liquidity is highly uncertain and will depend on future developments, including the spread and duration of the virus, potential actions taken by governmental authorities, and how quickly economic conditions stabilize and recover.
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 |
April 2021 | | 803 | | | | $91.52 | | | 803 | | | | 63,756 |
May 2021 | | 467 | | | | $93.14 | | | 467 | | | | 63,289 |
June 2021 | | 801 | | | | $95.96 | | | 801 | | | | 62,488 |
Total | | 2,071 | | | | $93.60 | | | 2,071 | | | | 62,488 |
In November 2015, the Board of Directors authorized the purchase of up to 70 million shares. In March 2020, the Board of Directors authorized the purchase of an additional 60 million shares and a total of approximately 65.562.5 million shares remain available for purchase under the authorizations. No shares were repurchased in the third quarter of 2020.
Item 6. Exhibits
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).
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43 | | Bylaws of Emerson agrees to furnishElectric Co., as amended through May 4, 2021, incorporated by reference to the Securities and Exchange Commission, upon request, copies of any long-term debt instruments that authorize an amount of securities constituting 10 percent or less of the total assets of Emerson and its subsidiariesCompany's Form 8-K dated May 4, 2021, filed on a consolidated basis.May 4, 2021, File No. 1-278, Exhibit 3.1. |
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101 | | Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three and nine months ended June 30, 20202021 and 2019,2020, (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 20202021 and 2019,2020, (iii) Consolidated Balance Sheets as of September 30, 20192020 and June 30, 2020,2021, (iv) Consolidated Statements of Equity for the three and nine months ended June 30, 20202021 and 2019,2020, (v) Consolidated Statements of Cash Flows for the nine months ended June 30, 20202021 and 2019,2020, and (vi) Notes to Consolidated Financial Statements for the three and nine months ended ended June 30, 20202021 and 2019.2020.
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | EMERSON ELECTRIC CO. | | |
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| | By | /s/ Frank J. Dellaquila | |
| | | Frank J. Dellaquila | |
| | | Senior Executive Vice President and Chief Financial Officer | |
| | | (on behalf of the registrant and as Chief Financial Officer) | |
| | | August 5, 20204, 2021 | |