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 DecemberMarch 31, 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)
| | | | | | | | | | | |
Missouri | | 43-0259330 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
8000 W. Florissant Ave. |
|
P.O. Box 4100 | |
St. Louis, | Missouri | 63136 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (314) 553-2000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock of $0.50 par value per share | EMR | New York Stock Exchange |
| | NYSE Chicago |
0.375% Notes due 2024 | EMR 24 | New York Stock Exchange |
1.250% Notes due 2025 | EMR 25A | New York Stock Exchange |
2.000% Notes due 2029 | EMR 29 | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ | | | | | |
Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ | |
| | | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at JanuaryMarch 31, 2021: 600,029,672599.7 million shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and six months ended DecemberMarch 31, 20192020 and 20202021
(Dollars in millions, except per share amounts; unaudited)
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | 2019 | | | 2020 | | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
Net sales | Net sales | $ | 4,151 | | | 4,161 | | | Net sales | $ | 4,162 | | | 4,431 | | | 8,313 | | | 8,592 | |
| Costs and expenses: | Costs and expenses: | | | Costs and expenses: | |
Cost of sales | Cost of sales | 2,392 | | | 2,438 | | | Cost of sales | 2,412 | | | 2,569 | | | 4,804 | | | 5,007 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 1,123 | | | 998 | | | Selling, general and administrative expenses | 983 | | | 1,054 | | | 2,106 | | | 2,052 | |
Other deductions, net | Other deductions, net | 178 | | | 122 | | | Other deductions, net | 42 | | | 33 | | | 220 | | | 155 | |
Interest expense (net of interest income of $6 and $2, respectively) | 35 | | | 40 | | | |
Interest expense (net of interest income of $6, $4, $12 and $6, respectively) | | Interest expense (net of interest income of $6, $4, $12 and $6, respectively) | 36 | | | 38 | | | 71 | | | 78 | |
| Earnings before income taxes | Earnings before income taxes | 423 | | | 563 | | | Earnings before income taxes | 689 | | | 737 | | | 1,112 | | | 1,300 | |
| Income taxes | Income taxes | 94 | | | 111 | | | Income taxes | 165 | | | 169 | | | 259 | | | 280 | |
| | Net earnings | Net earnings | 329 | | | 452 | | | Net earnings | 524 | | | 568 | | | 853 | | | 1,020 | |
| Less: Noncontrolling interests in earnings of subsidiaries | Less: Noncontrolling interests in earnings of subsidiaries | 3 | | | 7 | | | Less: Noncontrolling interests in earnings of subsidiaries | 7 | | | 7 | | | 10 | | | 14 | |
| Net earnings common stockholders | Net earnings common stockholders | $ | 326 | | | 445 | | | Net earnings common stockholders | $ | 517 | | | 561 | | | 843 | | | 1,006 | |
| | Basic earnings per share common stockholders | Basic earnings per share common stockholders | $ | 0.53 | | | 0.74 | | | Basic earnings per share common stockholders | $ | 0.85 | | | 0.94 | | | 1.38 | | | 1.68 | |
| | Diluted earnings per share common stockholders | Diluted earnings per share common stockholders | $ | 0.53 | | | 0.74 | | | Diluted earnings per share common stockholders | $ | 0.84 | | | 0.93 | | | 1.37 | | | 1.67 | |
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and six months ended DecemberMarch 31, 20192020 and 20202021
(Dollars in millions; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| | 2019 | | | | 2020 | | | | | | | |
Net earnings | | $ | 329 | | | | 452 | | | | | | | |
| | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Foreign currency translation | | 99 | | | | 189 | | | | | | | |
Pension and postretirement | | 28 | | | | 27 | | | | | | | |
Cash flow hedges | | 19 | | | | 31 | | | | | | | |
Total other comprehensive income (loss) | | 146 | | | | 247 | | | | | | | |
| | | | | | | | | | | |
Comprehensive income | | 475 | | | | 699 | | | | | | | |
| | | | | | | | | | | |
Less: Noncontrolling interests in comprehensive income of subsidiaries | | 3 | | | | 7 | | | | | | | |
Comprehensive income common stockholders | | $ | 472 | | | | 692 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
Net earnings | | $ | 524 | | | | 568 | | | | 853 | | | | 1,020 | |
| | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Foreign currency translation | | (281) | | | | (21) | | | | (182) | | | | 168 | |
Pension and postretirement | | 30 | | | | 27 | | | | 58 | | | | 54 | |
Cash flow hedges | | (75) | | | | 1 | | | | (56) | | | | 32 | |
Total other comprehensive income (loss) | | (326) | | | | 7 | | | | (180) | | | | 254 | |
| | | | | | | | | | | |
Comprehensive income | | 198 | | | | 575 | | | | 673 | | | | 1,274 | |
| | | | | | | | | | | |
Less: Noncontrolling interests in comprehensive income of subsidiaries | | 8 | | | | 6 | | | | 11 | | | | 13 | |
Comprehensive income common stockholders | | $ | 190 | | | | 569 | | | | 662 | | | | 1,261 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES
(Dollars and shares in millions, except per share amounts; unaudited)
| | | Sept 30, 2020 | | Dec 31, 2020 | | Sept 30, 2020 | | Mar 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets | Current assets | | | | Current assets | | | |
Cash and equivalents | Cash and equivalents | $ | 3,315 | | | 2,197 | | Cash and equivalents | $ | 3,315 | | | 2,342 | |
Receivables, less allowances of $138 and $140, respectively | 2,802 | | | 2,652 | | |
Receivables, less allowances of $138 and $129, respectively | | Receivables, less allowances of $138 and $129, respectively | 2,802 | | | 2,754 | |
Inventories | Inventories | 1,928 | | | 2,013 | | Inventories | 1,928 | | | 2,016 | |
Other current assets | Other current assets | 761 | | | 819 | | Other current assets | 761 | | | 849 | |
| Total current assets | Total current assets | 8,806 | | | 7,681 | | Total current assets | 8,806 | | | 7,961 | |
| Property, plant and equipment, net | Property, plant and equipment, net | 3,688 | | | 3,693 | | Property, plant and equipment, net | 3,688 | | | 3,663 | |
Other assets | Other assets | | | Other assets | | |
Goodwill | Goodwill | 6,734 | | | 7,832 | | Goodwill | 6,734 | | | 7,787 | |
Other intangible assets | Other intangible assets | 2,468 | | | 3,196 | | Other intangible assets | 2,468 | | | 3,095 | |
Other | Other | 1,186 | | | 1,276 | | Other | 1,186 | | | 1,294 | |
| Total other assets | Total other assets | 10,388 | | | 12,304 | | Total other assets | 10,388 | | | 12,176 | |
Total assets | Total assets | $ | 22,882 | | | 23,678 | | Total assets | $ | 22,882 | | | 23,800 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Current liabilities | Current liabilities | | | | Current liabilities | | | |
Short-term borrowings and current maturities of long-term debt | Short-term borrowings and current maturities of long-term debt | $ | 1,160 | | | 1,717 | | Short-term borrowings and current maturities of long-term debt | $ | 1,160 | | | 1,456 | |
Accounts payable | Accounts payable | 1,715 | | | 1,694 | | Accounts payable | 1,715 | | | 1,797 | |
Accrued expenses | Accrued expenses | 2,910 | | | 2,965 | | Accrued expenses | 2,910 | | | 3,041 | |
| Total current liabilities | Total current liabilities | 5,785 | | | 6,376 | | Total current liabilities | 5,785 | | | 6,294 | |
| Long-term debt | Long-term debt | 6,326 | | | 5,892 | | Long-term debt | 6,326 | | | 5,823 | |
| Other liabilities | Other liabilities | 2,324 | | | 2,471 | | Other liabilities | 2,324 | | | 2,503 | |
| | Equity | Equity | | | | Equity | | | |
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 598.0 shares and 599.8 shares, respectively | 477 | | | 477 | | |
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 598.0 shares and 599.7 shares, respectively | | Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 598.0 shares and 599.7 shares, respectively | 477 | | | 477 | |
Additional paid-in-capital | Additional paid-in-capital | 470 | | | 499 | | Additional paid-in-capital | 470 | | | 511 | |
Retained earnings | Retained earnings | 24,955 | | | 25,096 | | Retained earnings | 24,955 | | | 25,354 | |
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (1,577) | | | (1,330) | | Accumulated other comprehensive income (loss) | (1,577) | | | (1,322) | |
Cost of common stock in treasury, 355.4 shares and 353.6 shares, respectively | (15,920) | | | (15,847) | | |
Cost of common stock in treasury, 355.4 shares and 353.7 shares, respectively | | Cost of common stock in treasury, 355.4 shares and 353.7 shares, respectively | (15,920) | | | (15,890) | |
Common stockholders’ equity | Common stockholders’ equity | 8,405 | | | 8,895 | | Common stockholders’ equity | 8,405 | | | 9,130 | |
Noncontrolling interests in subsidiaries | Noncontrolling interests in subsidiaries | 42 | | | 44 | | Noncontrolling interests in subsidiaries | 42 | | | 50 | |
Total equity | Total equity | 8,447 | | | 8,939 | | Total equity | 8,447 | | | 9,180 | |
Total liabilities and equity | Total liabilities and equity | $ | 22,882 | | | 23,678 | | Total liabilities and equity | $ | 22,882 | | | 23,800 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Equity
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and six months ended DecemberMarch 31, 20192020 and 20202021
(Dollars in millions; unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2019 | | | 2020 | | | | | |
| | | | | | | |
Common stock | $ | 477 | | | 477 | | | | | |
| | | | | | | |
Additional paid-in-capital | | | | | | | |
Beginning balance | 393 | | | 470 | | | | | |
Stock plans | 54 | | | 29 | | | | | |
| | | | | | | |
Ending balance | 447 | | | 499 | | | | | |
| | | | | | | |
Retained earnings | | | | | | | |
Beginning balance | 24,199 | | | 24,955 | | | | | |
Net earnings common stockholders | 326 | | | 445 | | | | | |
Dividends paid (per share: $0.50 and $0.505, respectively) | (305) | | | (303) | | | | | |
Adoption of accounting standard | 0 | | | (1) | | | | | |
Ending balance | 24,220 | | | 25,096 | | | | | |
| | | | | | | |
Accumulated other comprehensive income (loss) | | | | | | | |
Beginning balance | (1,722) | | | (1,577) | | | | | |
Foreign currency translation | 99 | | | 189 | | | | | |
Pension and postretirement | 28 | | | 27 | | | | | |
Cash flow hedges | 19 | | | 31 | | | | | |
Ending balance | (1,576) | | | (1,330) | | | | | |
| | | | | | | |
Treasury stock | | | | | | | |
Beginning balance | (15,114) | | | (15,920) | | | | | |
Purchases | (129) | | | (13) | | | | | |
Issued under stock plans | 96 | | | 86 | | | | | |
Ending balance | (15,147) | | | (15,847) | | | | | |
| | | | | | | |
Common stockholders' equity | 8,421 | | | 8,895 | | | | | |
| | | | | | | |
Noncontrolling interests in subsidiaries | | | | | | | |
Beginning balance | 40 | | | 42 | | | | | |
Net earnings | 3 | | | 7 | | | | | |
| | | | | | | |
Dividends paid | (5) | | | (5) | | | | | |
| | | | | | | |
Ending balance | 38 | | | 44 | | | | | |
| | | | | | | |
Total equity | $ | 8,459 | | | 8,939 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | |
Common stock | $ | 477 | | | 477 | | | 477 | | | 477 | |
| | | | | | | |
Additional paid-in-capital | | | | | | | |
Beginning balance | 447 | | | 499 | | | 393 | | | 470 | |
Stock plans | 6 | | | 12 | | | 60 | | | 41 | |
| | | | | | | |
Ending balance | 453 | | | 511 | | | 453 | | | 511 | |
| | | | | | | |
Retained earnings | | | | | | | |
Beginning balance | 24,220 | | | 25,096 | | | 24,199 | | | 24,955 | |
Net earnings common stockholders | 517 | | | 561 | | | 843 | | | 1,006 | |
Dividends paid (per share: $0.50, $0.505, $1.00 and $1.01, respectively) | (306) | | | (303) | | | (611) | | | (606) | |
Adoption of accounting standard | 0 | | | 0 | | | 0 | | | (1) | |
Ending balance | 24,431 | | | 25,354 | | | 24,431 | | | 25,354 | |
| | | | | | | |
Accumulated other comprehensive income (loss) | | | | | | | |
Beginning balance | (1,576) | | | (1,330) | | | (1,722) | | | (1,577) | |
Foreign currency translation | (282) | | | (20) | | | (183) | | | 169 | |
Pension and postretirement | 30 | | | 27 | | | 58 | | | 54 | |
Cash flow hedges | (75) | | | 1 | | | (56) | | | 32 | |
Ending balance | (1,903) | | | (1,322) | | | (1,903) | | | (1,322) | |
| | | | | | | |
Treasury stock | | | | | | | |
Beginning balance | (15,147) | | | (15,847) | | | (15,114) | | | (15,920) | |
Purchases | (813) | | | (69) | | | (942) | | | (82) | |
Issued under stock plans | 19 | | | 26 | | | 115 | | | 112 | |
Ending balance | (15,941) | | | (15,890) | | | (15,941) | | | (15,890) | |
| | | | | | | |
Common stockholders' equity | 7,517 | | | 9,130 | | | 7,517 | | | 9,130 | |
| | | | | | | |
Noncontrolling interests in subsidiaries | | | | | | | |
Beginning balance | 38 | | | 44 | | | 40 | | | 42 | |
Net earnings | 7 | | | 7 | | | 10 | | | 14 | |
Other comprehensive income | 1 | | | (1) | | | 1 | | | (1) | |
Dividends paid | 0 | | | 0 | | | (5) | | | (5) | |
| | | | | | | |
Ending balance | 46 | | | 50 | | | 46 | | | 50 | |
| | | | | | | |
Total equity | $ | 7,563 | | | 9,180 | | | 7,563 | | | 9,180 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES
ThreeSix Months Ended DecemberMarch 31, 20192020 and 20202021
(Dollars in millions; unaudited)
| | | Three Months Ended | | Six Months Ended |
| | December 31, | | March 31, |
| | | 2019 | | | 2020 | | | | 2020 | | | 2021 | |
Operating activities | Operating activities | | | | | Operating activities | | | | |
Net earnings | Net earnings | | $ | 329 | | | 452 | | Net earnings | | $ | 853 | | | 1,020 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | Adjustments to reconcile net earnings to net cash provided by operating activities: | | Adjustments to reconcile net earnings to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 211 | | | 244 | | Depreciation and amortization | | 422 | | | 483 | |
Stock compensation | Stock compensation | | 56 | | | 64 | | Stock compensation | | 18 | | | 125 | |
Pension expense | Pension expense | | 17 | | | 8 | | Pension expense | | 34 | | | 16 | |
Changes in operating working capital | Changes in operating working capital | | (180) | | | 71 | | Changes in operating working capital | | (260) | | | 66 | |
| Other, net | Other, net | | (9) | | | (31) | | Other, net | | (55) | | | (95) | |
| Cash provided by operating activities | Cash provided by operating activities | | 424 | | | 808 | | Cash provided by operating activities | | 1,012 | | | 1,615 | |
| Investing activities | Investing activities | | Investing activities | |
Capital expenditures | Capital expenditures | | (114) | | | (122) | | Capital expenditures | | (225) | | | (222) | |
Purchases of businesses, net of cash and equivalents acquired | Purchases of businesses, net of cash and equivalents acquired | | 0 | | | (1,611) | | Purchases of businesses, net of cash and equivalents acquired | | (96) | | | (1,611) | |
| Other, net | Other, net | | (17) | | | 13 | | Other, net | | (42) | | | 61 | |
| Cash used in investing activities | Cash used in investing activities | | (131) | | | (1,720) | | Cash used in investing activities | | (363) | | | (1,772) | |
| Financing activities | Financing activities | | Financing activities | |
Net increase in short-term borrowings | Net increase in short-term borrowings | | 754 | | | 340 | | Net increase in short-term borrowings | | 2,076 | | | 60 | |
| Proceeds from short-term borrowings greater than three months | | Proceeds from short-term borrowings greater than three months | | 433 | | | 0 | |
| Payments of long-term debt | Payments of long-term debt | | (502) | | | (301) | | Payments of long-term debt | | (502) | | | (301) | |
Dividends paid | Dividends paid | | (305) | | | (303) | | Dividends paid | | (611) | | | (606) | |
Purchases of common stock | Purchases of common stock | | (129) | | | (13) | | Purchases of common stock | | (942) | | | (78) | |
Other, net | Other, net | | 20 | | | 42 | | Other, net | | 39 | | | 83 | |
Cash used in financing activities | | (162) | | | (235) | | |
Cash provided by (used in) financing activities | | Cash provided by (used in) financing activities | | 493 | | | (842) | |
| Effect of exchange rate changes on cash and equivalents | Effect of exchange rate changes on cash and equivalents | | 10 | | | 29 | | Effect of exchange rate changes on cash and equivalents | | (53) | | | 26 | |
Increase (Decrease) in cash and equivalents | Increase (Decrease) in cash and equivalents | | 141 | | | (1,118) | | Increase (Decrease) in cash and equivalents | | 1,089 | | | (973) | |
Beginning cash and equivalents | Beginning cash and equivalents | | 1,494 | | | 3,315 | | Beginning cash and equivalents | | 1,494 | | | 3,315 | |
Ending cash and equivalents | Ending cash and equivalents | | $ | 1,635 | | | 2,197 | | Ending cash and equivalents | | $ | 2,583 | | | 2,342 | |
| Changes in operating working capital | Changes in operating working capital | | Changes in operating working capital | |
Receivables | Receivables | | $ | 281 | | | 232 | | Receivables | | $ | 283 | | | 75 | |
Inventories | Inventories | | (167) | | | (37) | | Inventories | | (216) | | | (61) | |
Other current assets | Other current assets | | 32 | | | 18 | | Other current assets | | 32 | | | (16) | |
Accounts payable | Accounts payable | | (225) | | | (37) | | Accounts payable | | (290) | | | 55 | |
Accrued expenses | Accrued expenses | | (101) | | | (105) | | Accrued expenses | | (69) | | | 13 | |
| Total changes in operating working capital | Total changes in operating working capital | | $ | (180) | | | 71 | | Total changes in operating working capital | | $ | (260) | | | 66 | |
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, 2020. Certain prior year amounts have been reclassified to conform to current year presentation. See Note 12.
Effective October 1, 2020, the Company adopted two accounting standard updates and one new accounting standard which had an immaterial impact on the Company's financial statements as of and for the threesix months ended DecemberMarch 31, 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.
•Updates to ASC 350, Intangibles - Goodwill and Other, which align the requirements for capitalizing implementation costs incurred in a software hosting arrangement with the requirements for costs incurred to develop or obtain internal-use software.
•Adoption of ASC 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach to estimate lifetime expected credit losses on certain types of financial instruments, including trade receivables.
(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 12 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, 2020 | | Dec 31, 2020 | | Sept 30, 2020 | | Mar 31, 2021 |
Unbilled receivables (contract assets) | Unbilled receivables (contract assets) | | $ | 458 | | | | 503 | | Unbilled receivables (contract assets) | | $ | 458 | | | | 472 | |
Customer advances (contract liabilities) | Customer advances (contract liabilities) | | (583) | | | (699) | | Customer advances (contract liabilities) | | (583) | | | (749) | |
Net contract liabilities | Net contract liabilities | | $ | (125) | | | (196) | | Net contract liabilities | | $ | (125) | | | (277) | |
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 six months ended DecemberMarch 31, 20202021 included approximately $257$105 and $362 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 six months ended DecemberMarch 31, 20202021 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 DecemberMarch 31, 2020,2021, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $6.0$6.3 billion. The Company expects to recognize approximately 80 percent of its remaining performance obligations as revenue over the next 12 months, with the remainder substantially over the subsequent two years thereafter.
(3) WEIGHTED-AVERAGE COMMON SHARES
Reconciliations of weighted-average shares for basic and diluted earnings per common share follow. Earnings allocated to participating securities were inconsequential.
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | 2019 | | | 2020 | | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
| Basic shares outstanding | Basic shares outstanding | 610.0 | | | 598.5 | | | Basic shares outstanding | 607.4 | | | 599.4 | | | 608.7 | | | 599.0 | |
Dilutive shares | Dilutive shares | 4.1 | | | 3.4 | | | Dilutive shares | 3.6 | | | 3.4 | | | 3.9 | | | 3.3 | |
Diluted shares outstanding | Diluted shares outstanding | 614.1 | | | 601.9 | | | Diluted shares outstanding | 611.0 | | | 602.8 | | | 612.6 | | | 602.3 | |
(4) ACQUISITIONS AND DIVESTITURES
On 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, will expandexpands the Company's offerings in the power industry to include the digitization and modernization of the electric grid. The Company recognized goodwill of $966$960 (NaN of which is expected to be tax deductible), identifiable intangible assets of $768,$783, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years, and deferred tax liabilities of approximately $185. Valuations of these assets and liabilities are in-processin process and subject to refinement. Results of operations for the three months ended DecemberMarch 31, 20202021 included first-year pretax acquisition accounting charges related to backlog amortization and deferred revenue of $11$6 and $4, respectively, while year-to-date results included $17 and $8, 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 3 businesses in fiscal 2020, 2 in the Automation Solutions segment and 1 in the Climate Technologies segment, for $126, net of cash acquired.
(5) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below:
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | | 2019 | | | 2020 | | | | | 2020 | | | 2021 | | | | 2020 | | | 2021 | |
Service cost | Service cost | | $ | 22 | | | | 21 | | | Service cost | | $ | 22 | | | | 21 | | | | 44 | | | | 42 | |
Interest cost | Interest cost | | 40 | | | 32 | | | Interest cost | | 40 | | | 32 | | | 80 | | | 64 | |
Expected return on plan assets | Expected return on plan assets | | (84) | | | (84) | | | Expected return on plan assets | | (84) | | | (84) | | | (168) | | | (168) | |
Net amortization | Net amortization | | 37 | | | 35 | | | Net amortization | | 38 | | | 35 | | | 75 | | | 70 | |
Total | Total | | $ | 15 | | | 4 | | | Total | | $ | 16 | | | 4 | | | 31 | | | 8 | |
(6) OTHER DEDUCTIONS, NET
Other deductions, net are summarized below:
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | 2019 | | | 2020 | | | | 2020 | | | 2021 | | | | 2020 | | | 2021 | |
| Amortization of intangibles (intellectual property and customer relationships) | Amortization of intangibles (intellectual property and customer relationships) | | $ | 59 | | | 78 | | | Amortization of intangibles (intellectual property and customer relationships) | | $ | 59 | | | 74 | | | 118 | | | 152 | |
Restructuring costs | Restructuring costs | | 97 | | | 66 | | | Restructuring costs | | 31 | | | 17 | | | 128 | | | 83 | |
Special advisory fees | Special advisory fees | | 13 | | | 0 | | | Special advisory fees | | 0 | | | 0 | | | 13 | | | 0 | |
Other | Other | | 9 | | | (22) | | | Other | | (48) | | | (58) | | | (39) | | | (80) | |
Total | Total | | $ | 178 | | | 122 | | | Total | | $ | 42 | | | 33 | | | 220 | | | 155 | |
In the first quarter of fiscal 2021, theThe increase in intangibles amortization for the three and six months ended March 31, 2021 was due to the OSI acquisition, including backlog amortization of $11$6 an.d $17, respectively. The change in Other includedreflects investment-related gains, including an investment gain of $21 and a gain from acquiringthe acquisition of the remaining interest of an equity investment of $17. The impact$17 recognized in the first quarter of pensions was favorable by $11, offset by fees related tofiscal 2021, and a gain of $31 on the OSI acquisitionsale of $6 and an unfavorable impact fromequity investment in the second quarter. Unfavorable foreign currency transactions of $7.negatively impacted results for the three and six months ended March 31, 2021 by $22 and $29, respectively.
(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. Costs incurred in the first threesix months of fiscal 2021 relate to the Company's initiatives to improve operating margins that began in the third quarter of fiscal 2019 and expanded actionswere increased in response to the effects of the COVID-19 pandemic on demand for the Company's products. Expenses incurred in the first threesix months of fiscal 2021 included workforce reductions of approximately 8001,700 employees. The Company expects fiscal 2021 restructuring expense and related costs to be approximately $200, including costs to complete actions initiated in the first threesix months of the year.
Restructuring expense by business segment follows:
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | 2019 | | | 2020 | | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
| Automation Solutions | Automation Solutions | | $ | 83 | | | 64 | | | Automation Solutions | | $ | 23 | | | 12 | | | 106 | | | 76 | |
| Climate Technologies | Climate Technologies | | 7 | | | 1 | | | Climate Technologies | | 2 | | | 3 | | | 9 | | | 4 | |
Tools & Home Products | Tools & Home Products | | 3 | | | 1 | | | Tools & Home Products | | 5 | | | 1 | | | 8 | | | 2 | |
Commercial & Residential Solutions | Commercial & Residential Solutions | | 10 | | | 2 | | | Commercial & Residential Solutions | | 7 | | | 4 | | | 17 | | | 6 | |
| Corporate | Corporate | | 4 | | | 0 | | | Corporate | | 1 | | | 1 | | | 5 | | | 1 | |
| Total | Total | | $ | 97 | | | 66 | | | Total | | $ | 31 | | | 17 | | | 128 | | | 83 | |
Details of the change in the liability for restructuring costs during the threesix months ended DecemberMarch 31, 20202021 follow:
| | | Sept 30, 2020 | | Expense | | Utilized/Paid | | Dec 31, 2020 | | Sept 30, 2020 | | Expense | | Utilized/Paid | | Mar 31, 2021 |
| Severance and benefits | Severance and benefits | | $ | 176 | | | 61 | | | 28 | | | 209 | | Severance and benefits | | $ | 176 | | | 71 | | | 71 | | | 176 | |
| Other | Other | | 5 | | | 5 | | | 6 | | | 4 | | Other | | 5 | | | 12 | | | 13 | | | 4 | |
Total | Total | | $ | 181 | | | 66 | | | 34 | | | 213 | | Total | | $ | 181 | | | 83 | | | 84 | | | 180 | |
The tables above do not include $3$9 and $4 of costs related to restructuring actions incurred for the three months ended DecemberMarch 31, 2020 and 2021, respectively, that are required to be reported in cost of sales and selling, general and administrative expenses. expenses, while year-to-date amounts are $9 and $7, respectively.
(8) INCOME TAXES
Income taxes were $111$169 in the firstsecond quarter of fiscal 2021 and $94$165 in 2020, resulting in effective tax rates of 2023 percent and 2224 percent, respectively. The current year and prior year ratesrate included favorableunfavorable discrete tax items which reducedincreased the rates 2 percentage points andrate 1 percentage point in both years.
Income taxes were $280 for the first six months of 2021 and $259 for 2020, resulting in effective tax rates of 22 percent and 23 percent, respectively.
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.
(9) OTHER FINANCIAL INFORMATION
|
|
| Sept 30, 2020 | | Dec 31, 2020 |
| Sept 30, 2020 | | Mar 31, 2021 |
Inventories | Inventories | | | | Inventories | | | |
Finished products | Finished products | | $ | 584 | | | 621 | | Finished products | | $ | 584 | | | 622 | |
Raw materials and work in process | Raw materials and work in process | | 1,344 | | | 1,392 | | Raw materials and work in process | | 1,344 | | | 1,394 | |
Total | Total | | $ | 1,928 | | | 2,013 | | Total | | $ | 1,928 | | | 2,016 | |
| | Property, plant and equipment, net | Property, plant and equipment, net | | | | Property, plant and equipment, net | | | |
Property, plant and equipment, at cost | Property, plant and equipment, at cost | | $ | 9,055 | | | 9,196 | | Property, plant and equipment, at cost | | $ | 9,055 | | | 9,227 | |
Less: Accumulated depreciation | Less: Accumulated depreciation | | 5,367 | | | 5,503 | | Less: Accumulated depreciation | | 5,367 | | | 5,564 | |
Total | Total | | $ | 3,688 | | | 3,693 | | Total | | $ | 3,688 | | | 3,663 | |
| | Goodwill by business segment | Goodwill by business segment | | Goodwill by business segment | |
Automation Solutions | Automation Solutions | | $ | 5,583 | | | 6,638 | | Automation Solutions | | $ | 5,583 | | | 6,603 | |
| Climate Technologies | Climate Technologies | | 730 | | | 757 | | Climate Technologies | | 730 | | | 757 | |
Tools & Home Products | Tools & Home Products | | 421 | | | 437 | | Tools & Home Products | | 421 | | | 427 | |
Commercial & Residential Solutions | Commercial & Residential Solutions | | 1,151 | | | 1,194 | | Commercial & Residential Solutions | | 1,151 | | | 1,184 | |
| Total | Total | | $ | 6,734 | | | 7,832 | | Total | | $ | 6,734 | | | 7,787 | |
| | Other intangible assets | Other intangible assets | | | | Other intangible assets | | | |
Gross carrying amount | Gross carrying amount | | $ | 5,106 | | | 5,964 | | Gross carrying amount | | $ | 5,106 | | | 5,963 | |
Less: Accumulated amortization | Less: Accumulated amortization | | 2,638 | | | 2,768 | | Less: Accumulated amortization | | 2,638 | | | 2,868 | |
Net carrying amount | Net carrying amount | | $ | 2,468 | | | 3,196 | | Net carrying amount | | $ | 2,468 | | | 3,095 | |
Other intangible assets include customer relationships, net of $1,328 and $1,635$1,597 as of September 30, 2020 and DecemberMarch 31, 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 | | $ | 508 | | | 534 | | Operating lease right-of-use assets | | $ | 508 | | | 523 | |
Pension assets | Pension assets | | 265 | | | 322 | | Pension assets | | 265 | | | 374 | |
Deferred income taxes | Deferred income taxes | | 99 | | | 102 | | Deferred income taxes | | 99 | | | 108 | |
Asbestos-related insurance receivables | Asbestos-related insurance receivables | | 100 | | | 98 | | Asbestos-related insurance receivables | | 100 | | | 97 | |
| | | Sept 30, 2020 | | Dec 31, 2020 | | Sept 30, 2020 | | Mar 31, 2021 |
Accrued expenses include the following: | Accrued expenses include the following: | | | | Accrued expenses include the following: | | | |
Customer advances (contract liabilities) | Customer advances (contract liabilities) | | $ | 583 | | | 699 | | Customer advances (contract liabilities) | | $ | 583 | | | 749 | |
Employee compensation | Employee compensation | | 577 | | | 443 | | Employee compensation | | 577 | | | 516 | |
Product warranty | Product warranty | | 148 | | | 154 | | Product warranty | | 148 | | | 152 | |
Operating lease liabilities (current) | Operating lease liabilities (current) | | 148 | | | 152 | | Operating lease liabilities (current) | | 148 | | | 150 | |
| Other liabilities include the following: | Other liabilities include the following: | | | | | Other liabilities include the following: | | | | |
Pension and postretirement liabilities | Pension and postretirement liabilities | | $ | 769 | | | 790 | | Pension and postretirement liabilities | | $ | 769 | | | 781 | |
Deferred income taxes | Deferred income taxes | | 261 | | | 411 | | Deferred income taxes | | 261 | | | 429 | |
Operating lease liabilities (noncurrent) | Operating lease liabilities (noncurrent) | | 373 | | | 398 | | Operating lease liabilities (noncurrent) | | 373 | | | 389 | |
Asbestos litigation | Asbestos litigation | | 295 | | | 276 | | Asbestos litigation | | 295 | | | 272 | |
|
The increase in deferred income taxes is largely due to the OSI acquisition.
(10) FINANCIAL INSTRUMENTS
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of DecemberMarch 31, 2020,2021, the notional amount of foreign currency hedge positions was approximately $2.2$2.1 billion, and commodity hedge contracts totaled approximately $81$111 (primarily 3339 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 DecemberMarch 31, 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 six months ended DecemberMarch 31, 20202021 and 2019:2020:
| | | Into Earnings | | Into OCI | | Into Earnings | | Into OCI |
| | 1st Quarter | | | 1st Quarter | | | 2nd Quarter | | Six Months | | 2nd Quarter | | Six Months |
Gains (Losses) | Gains (Losses) | | Location | | 2019 | | | 2020 | | | | 2019 | | | 2020 | | | Gains (Losses) | | Location | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
Commodity | Commodity | | Cost of sales | | $ | (3) | | | 3 | | | | 7 | | | 13 | | | Commodity | | Cost of sales | | $ | (1) | | | 8 | | | (4) | | | 11 | | | (23) | | | 13 | | | (16) | | | 26 | |
Foreign currency | Foreign currency | | Sales | | (2) | | | 1 | | | | 3 | | | 5 | | | Foreign currency | | Sales | | (1) | | | 1 | | | (3) | | | 2 | | | (8) | | | (2) | | | (5) | | | 3 | |
Foreign currency | Foreign currency | | Cost of sales | | 7 | | | 0 | | | | 17 | | | 27 | | | Foreign currency | | Cost of sales | | 4 | | | 2 | | | 11 | | | 2 | | | (66) | | | 0 | | | (49) | | | 27 | |
Foreign currency | Foreign currency | | Other deductions, net | | 8 | | | (4) | | | | | Foreign currency | | Other deductions, net | | 13 | | | 29 | | | 21 | | | 25 | | |
| Net Investment Hedges | Net Investment Hedges | | | | | Net Investment Hedges | |
Euro denominated debt | Euro denominated debt | | | | (26) | | | (80) | | | Euro denominated debt | | 57 | | | 53 | | | 31 | | | (27) | |
Total | Total | | | | $ | 10 | | | 0 | | | | 1 | | | (35) | | | Total | | | | $ | 15 | | | 40 | | | 25 | | | 40 | | | (40) | | | 64 | | | (39) | | | 29 | |
Regardless of whether derivatives and non-derivative financial instruments receive hedge accounting, the Company expects hedging gains or losses to be 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 DecemberMarch 31, 2020,2021, the fair value of long-term debt was $7.1$6.8 billion, which exceeded the
carrying value by $704.$425. 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, 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 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 DecemberMarch 31, 2020.2021.
(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in Accumulated other comprehensive income (loss) for the three and six months ended DecemberMarch 31, 20202021 and 20192020 is shown below, net of income taxes:
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | | 2019 | | | 2020 | | | | | 2020 | | | 2021 | | | | 2020 | | | 2021 | |
Foreign currency translation | Foreign currency translation | | | | | Foreign currency translation | | | | | | | |
Beginning balance | Beginning balance | | $ | (794) | | | (711) | | | Beginning balance | | $ | (695) | | | (522) | | | (794) | | | (711) | |
Other comprehensive income (loss), net of tax of $6 and $19, respectively | | 99 | | | 189 | | | |
Other comprehensive income (loss), net of tax of $(13), $(13), $(7) and $6, respectively | | Other comprehensive income (loss), net of tax of $(13), $(13), $(7) and $6, respectively | | (282) | | | (20) | | | (183) | | | 169 | |
| Ending balance | Ending balance | | (695) | | | (522) | | | Ending balance | | (977) | | | (542) | | | (977) | | | (542) | |
| Pension and postretirement | Pension and postretirement | | | Pension and postretirement | |
Beginning balance | Beginning balance | | (928) | | | (864) | | | Beginning balance | | (900) | | | (837) | | | (928) | | | (864) | |
Amortization of deferred actuarial losses into earnings, net of tax of $(9) and $(8), respectively | | 28 | | | 27 | | | |
Amortization of deferred actuarial losses into earnings, net of tax of $(8), $(8), $(17) and $(16), respectively | | Amortization of deferred actuarial losses into earnings, net of tax of $(8), $(8), $(17) and $(16), respectively | | 30 | | | 27 | | | 58 | | | 54 | |
| Ending balance | Ending balance | | (900) | | | (837) | | | Ending balance | | (870) | | | (810) | | | (870) | | | (810) | |
| Cash flow hedges | Cash flow hedges | | | Cash flow hedges | |
Beginning balance | Beginning balance | | 0 | | | (2) | | | Beginning balance | | 19 | | | 29 | | | 0 | | | (2) | |
Deferral of gains (losses) arising during the period, net of tax of $(6) and $(11), respectively | | 21 | | | 34 | | | |
Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $0 and $1, respectively | | (2) | | | (3) | | | |
Deferral of gains (losses) arising during the period, net of tax of $23, $(2), $17 and $(13), respectively | | Deferral of gains (losses) arising during the period, net of tax of $23, $(2), $17 and $(13), respectively | | (74) | | | 9 | | | (53) | | | 43 | |
Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $1, $3, $1 and $4, respectively | | Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $1, $3, $1 and $4, respectively | | (1) | | | (8) | | | (3) | | | (11) | |
Ending balance | Ending balance | | 19 | | | 29 | | | Ending balance | | (56) | | | 30 | | | (56) | | | 30 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | $ | (1,576) | | | (1,330) | | | Accumulated other comprehensive income (loss) | | $ | (1,903) | | | (1,322) | | | (1,903) | | | (1,322) | |
|
(12) BUSINESS SEGMENTS
Summarized information about the Company's results of operations by business segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| Sales | | Earnings | | | | |
| 2019 | | | 2020 | | | 2019 | | | 2020 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Automation Solutions | $ | 2,852 | | | 2,692 | | | 310 | | | 361 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Climate Technologies | 873 | | | 1,031 | | | 151 | | | 212 | | | | | | | | | |
Tools & Home Products | 430 | | | 445 | | | 86 | | | 98 | | | | | | | | | |
Commercial & Residential Solutions | 1,303 | | | 1,476 | | | 237 | | | 310 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock compensation | | | | | (56) | | | (64) | | | | | | | | | |
Unallocated pension and postretirement costs | | | | | 13 | | | 24 | | | | | | | | | |
Corporate and other | | | | | (46) | | | (28) | | | | | | | | | |
Eliminations/Interest | (4) | | | (7) | | | (35) | | | (40) | | | | | | | | | |
Total | $ | 4,151 | | | 4,161 | | | 423 | | | 563 | | | | | | | | | |
(12) BUSINESS SEGMENTS
Summarized information about the Company's results of operations by business segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| Sales | | Earnings | | Sales | | Earnings |
| 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | | | | | | | | | |
Automation Solutions | $ | 2,709 | | | 2,793 | | | 391 | | | 471 | | | 5,561 | | | 5,485 | | | 701 | | | 832 | |
| | | | | | | | | | | | | | | |
Climate Technologies | 1,026 | | | 1,160 | | | 217 | | | 245 | | | 1,899 | | | 2,191 | | | 368 | | | 457 | |
Tools & Home Products | 432 | | | 485 | | | 89 | | | 112 | | | 862 | | | 930 | | | 175 | | | 210 | |
Commercial & Residential Solutions | 1,458 | | | 1,645 | | | 306 | | | 357 | | | 2,761 | | | 3,121 | | | 543 | | | 667 | |
| | | | | | | | | | | | | | | |
Stock compensation | | | | | 38 | | | (61) | | | | | | | (18) | | | (125) | |
Unallocated pension and postretirement costs | | | | | 12 | | | 23 | | | | | | | 25 | | | 47 | |
Corporate and other | | | | | (22) | | | (15) | | | | | | | (68) | | | (43) | |
Eliminations/Interest | (5) | | | (7) | | | (36) | | | (38) | | | (9) | | | (14) | | | (71) | | | (78) | |
Total | $ | 4,162 | | | 4,431 | | | 689 | | | 737 | | | 8,313 | | | 8,592 | | | 1,112 | | | 1,300 | |
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, including the reclassification of prior year amounts to reflect this change.
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | | 2019 | | | 2020 | | | | | 2020 | | | 2021 | | | | 2020 | | | 2021 | |
| Measurement & Analytical Instrumentation | Measurement & Analytical Instrumentation | | $ | 795 | | | 698 | | | Measurement & Analytical Instrumentation | | $ | 776 | | | 732 | | | 1,571 | | | 1,430 | |
Valves, Actuators & Regulators | Valves, Actuators & Regulators | | 913 | | | 806 | | | Valves, Actuators & Regulators | | 854 | | | 836 | | | 1,767 | | | 1,642 | |
Industrial Solutions | Industrial Solutions | | 507 | | | 508 | | | Industrial Solutions | | 494 | | | 555 | | | 1,001 | | | 1,063 | |
Systems & Software | Systems & Software | | 637 | | | 680 | | | Systems & Software | | 585 | | | 670 | | | 1,222 | | | 1,350 | |
Automation Solutions | Automation Solutions | | $ | 2,852 | | | 2,692 | | | Automation Solutions | | $ | 2,709 | | | 2,793 | | | 5,561 | | | 5,485 | |
|
Depreciation and amortization (includes intellectual property, customer relationships and capitalized software) by business segment are summarized below:
| | | Three Months Ended December 31, | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | | 2019 | | | 2020 | | | | | 2020 | | | 2021 | | | | 2020 | | | 2020 | |
Automation Solutions | Automation Solutions | | $ | 139 | | | 156 | | | Automation Solutions | | $ | 138 | | | 156 | | | 277 | | | 312 | |
| Climate Technologies | Climate Technologies | | 44 | | | 49 | | | Climate Technologies | | 45 | | | 47 | | | 89 | | | 96 | |
Tools & Home Products | Tools & Home Products | | 19 | | | 19 | | | Tools & Home Products | | 19 | | | 20 | | | 38 | | | 39 | |
Commercial & Residential Solutions | Commercial & Residential Solutions | | 63 | | | 68 | | | Commercial & Residential Solutions | | 64 | | | 67 | | | 127 | | | 135 | |
| Corporate and other | Corporate and other | | 9 | | | 20 | | | Corporate and other | | 9 | | | 16 | | | 18 | | | 36 | |
Total | Total | | $ | 211 | | | 244 | | | Total | | $ | 211 | | | 239 | | | 422 | | | 483 | |
Sales by geographic destination are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, |
| 2019 | | 2020 |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 1,410 | | | 863 | | | 2,273 | | | 1,168 | | | 981 | | | 2,149 | |
Asia, Middle East & Africa | 896 | | | 277 | | | 1,173 | | | 942 | | | 308 | | | 1,250 | |
Europe | 546 | | | 163 | | | 709 | | | 582 | | | 187 | | | 769 | |
Total | $ | 2,852 | | | 1,303 | | | 4,155 | | | 2,692 | | | 1,476 | | | 4,168 | |
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Sales by geographic destination are summarized below:
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| Three Months Ended March 31, |
| 2020 | | 2021 |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 1,346 | | | 1,037 | | | 2,383 | | | 1,223 | | | 1,119 | | | 2,342 | |
Asia, Middle East & Africa | 830 | | | 235 | | | 1,065 | | | 953 | | | 305 | | | 1,258 | |
Europe | 533 | | | 186 | | | 719 | | | 617 | | | 221 | | | 838 | |
Total | $ | 2,709 | | | 1,458 | | | 4,167 | | | 2,793 | | | 1,645 | | | 4,438 | |
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| Six Months Ended March 31, |
| 2020 | | 2021 |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 2,756 | | | 1,900 | | | 4,656 | | | 2,390 | | | 2,100 | | | 4,490 | |
Asia, Middle East & Africa | 1,726 | | | 512 | | | 2,238 | | | 1,896 | | | 613 | | | 2,509 | |
Europe | 1,079 | | | 349 | | | 1,428 | | | 1,199 | | | 408 | | | 1,607 | |
Total | $ | 5,561 | | | 2,761 | | | 8,322 | | | 5,485 | | | 3,121 | | | 8,606 | |
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
For the firstsecond quarter of fiscal 2021, net sales were $4.2$4.4 billion, flatup 6 percent compared with the prior year, supported by foreign currency translation which added 13 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 2 percent. Automation Solutions underlying sales were down high single-digits, reflectingslightly compared to the prior year, but continued demand challengesto improve sequentially as global markets recover from the impacts of COVID-19. Sales in North AmericanAmerica were down 15 percent as automation markets remained weak, but hybrid and discrete markets improved sequentially. Sales rebounded sharply in China (up 42 percent) due to COVID-19, with sales down 20 percent, whileeasier comparisons and Europe and Asia, Middle East & Africa improved and werewas up modestly.6 percent. Commercial & Residential Solutions underlying sales were up sharply, reflecting robust demandgrowth across all businesses and geographies. Demand for residential-oriented products and solutions in North America and global cold chain end markets were strong, growthwhile sales in Europe and Asia, Middle East & Africa.China rebounded sharply.
Net earnings common stockholders were $445,$561, up 369 percent, and diluted earnings per share were $0.74,$0.93, up 4011 percent compared with $0.53$0.84 in the prior year. Operating results increased $0.10$0.14 per share ason strong segment margins, reflecting significant savings from the Company's restructuring and cost reset actions more thanactions. This was largely offset deleverage on lower sales volume in Automation Solutions. Lower restructuring and advisory feesby higher stock compensation expense ($0.050.12 per share), reflecting a higher stock price in the current year compared to a sharply lower price in the prior year due to market conditions. Second quarter results also benefited from a gain on the sale of an equity investment gain ($0.030.04 per share), lower restructuring costs ($0.02 per share), a lower tax rate ($0.020.01 per share) and share repurchases ($0.02 per share) also benefited results, while higher interest expense deducted $0.01 per share. In addition, the Company recognized a gain from acquiring the remaining interest of an equity investment ($0.030.01 per share), which waspartially offset by first year acquisition accounting charges and fees related to the OSI acquisition of $0.03($0.01 per share.share).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBERMARCH 31
Following is an analysis of the Company’s operating results for the firstsecond quarter ended DecemberMarch 31, 2020,2021, compared with the firstsecond quarter ended DecemberMarch 31, 2019.2020.
| | | 2019 | | 2020 | | Change | | 2020 | | 2021 | | Change |
| | Net sales | Net sales | $ | 4,151 | | | 4,161 | | | flat | Net sales | $ | 4,162 | | | 4,431 | | | 6 | % |
Gross profit | Gross profit | $ | 1,759 | | | 1,723 | | | (2) | % | Gross profit | $ | 1,750 | | | 1,862 | | | 6 | % |
Percent of sales | Percent of sales | 42.4 | % | | 41.4 | % | | | Percent of sales | 42.1 | % | | 42.0 | % | | |
| SG&A | SG&A | $ | 1,123 | | | 998 | | | (11) | % | SG&A | $ | 983 | | | 1,054 | | | 7 | % |
Percent of sales | Percent of sales | 27.1 | % | | 24.0 | % | | | Percent of sales | 23.7 | % | | 23.8 | % | | |
| | Other deductions, net | Other deductions, net | $ | 178 | | | 122 | | | | Other deductions, net | $ | 42 | | | 33 | | | |
Amortization of intangibles | Amortization of intangibles | $ | 59 | | | 78 | | | Amortization of intangibles | $ | 59 | | | 74 | | |
Restructuring costs | Restructuring costs | $ | 97 | | | 66 | | | Restructuring costs | $ | 31 | | | 17 | | |
| Interest expense, net | Interest expense, net | $ | 35 | | | 40 | | | | Interest expense, net | $ | 36 | | | 38 | | | |
| Earnings before income taxes | Earnings before income taxes | $ | 423 | | | 563 | | | 33 | % | Earnings before income taxes | $ | 689 | | | 737 | | | 7 | % |
Percent of sales | Percent of sales | 10.2 | % | | 13.5 | % | | | Percent of sales | 16.6 | % | | 16.6 | % | | |
| Net earnings common stockholders | Net earnings common stockholders | $ | 326 | | | 445 | | | 36 | % | Net earnings common stockholders | $ | 517 | | | 561 | | | 9 | % |
Percent of sales | Percent of sales | 7.9 | % | | 10.7 | % | | | Percent of sales | 12.4 | % | | 12.7 | % | | |
| | Diluted earnings per share | Diluted earnings per share | $ | 0.53 | | | 0.74 | | | 40 | % | Diluted earnings per share | $ | 0.84 | | | 0.93 | | | 11 | % |
|
Net sales for the firstsecond quarter of fiscal 2021 were $4.2$4.4 billion, essentially flatup 6 percent compared with 2020. Automation Solutions sales were down $160 whileup 3 percent and Commercial & Residential Solutions sales were up $173.13 percent. Underlying sales were downup 2 percent, as foreign currency translation added 13 percent and the OSI acquisition added 1 percent. Underlying sales were down 8 percent in the U.S. and up 2 percent internationally. The Americas was down 7 percent, Europe was up 4 percent and Asia, Middle East & Africa was up 3 percent (China up 7 percent).
Underlying sales were down 5 percent in the U.S. and up 9 percent internationally. The Americas was down 4 percent, Europe was up 7 percent and Asia, Middle East & Africa was up 12 percent (China up 45 percent).
Cost of sales for the firstsecond quarter of fiscal 2021 were $2,438,$2,569, an increase of $46$157 compared with 2020.2020, due to the impact of foreign currency translation, higher sales volume and the OSI acquisition. Gross margin of 41.442.0 percent decreased 1.00.1 percentage points compared with the prior year reflecting deleverage on lower sales volume in Automation Solutions anddue to unfavorable mix.
Selling, general and administrative (SG&A) expenses of $998 decreased $125$1,054 increased $71 compared with the prior year and SG&A as a percent of sales increased 0.1 percentage points to 23.8 percent. Higher stock compensation expense of $99 negatively impacted comparisons by 2.3 percentage points. Excluding the higher stock compensation expense, SG&A as a percent of sales decreased 3.12.2 percentage points, to 24.0 percent, reflecting significant savings from the Company's restructuring and cost reset actions, which more than offset inflation and deleverage on the lower sales volume in Automation Solutions.actions.
Other deductions, net were $122$33 in 2021, a decrease of $56$9 compared with the prior year, reflecting lower restructuring costs of $44 (including special advisory fees in the prior year), an investment gain of $21$14 and a gain fromon the acquisition of the remaining interestsale of an equity investment of $17,$31, partially offset by backlogunfavorable foreign currency transactions of $22 and higher intangibles amortization and feesof $15, primarily related to the OSI acquisition of $17.acquisition. See Notes 6 and 7.
Pretax earnings of $563$737 increased $140, or 33$48, up 7 percent compared with the prior year. Earnings increased $51$80 in Automation Solutions and $73$51 in Commercial & Residential Solutions. Costs reported at Corporate decreased $21increased $81 primarily due to the investment gain noted above, while lower unallocated pension and postretirement costshigher stock compensation expense of $11 were largely$99, partially offset by the gain on sale of an increaseequity investment of $831 in .stock compensation. See the Business Segments discussion that follows and Note 12.
Income taxes were $111$169 for 2021 and $94$165 for 2020, resulting in effective tax rates of 2023 percent and 2224 percent, respectively. The current year and prior year ratesrate included favorableunfavorable discrete tax items which reducedincreased the rates 2 percentage points andrate 1 percentage point respectively.in both years.
Net earnings common stockholders in the firstsecond quarter of fiscal 2021 were $445,$561, up 369 percent, compared with $326$517 in the prior year, and earnings per share were $0.74,$0.93, up 4011 percent, compared with $0.53$0.84 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 firstsecond quarter ended DecemberMarch 31, 2020,2021, compared with the firstsecond quarter ended DecemberMarch 31, 2019.2020. The Company defines segment earnings as earnings before interest and taxes. See Note 12 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
| Three Months Ended Dec 31 | 2019 | | 2020 | | Change | |
Three Months Ended Mar 31 | | Three Months Ended Mar 31 | 2020 | | 2021 | | Change |
| | Sales | Sales | $ | 2,852 | | | 2,692 | | | (6) | % | Sales | $ | 2,709 | | | 2,793 | | | 3 | % |
Earnings | Earnings | $ | 310 | | | 361 | | | 17 | % | Earnings | $ | 391 | | | 471 | | | 20 | % |
Margin | Margin | 10.9 | % | | 13.4 | % | | | Margin | 14.4 | % | | 16.8 | % | | |
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Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 795 | | | 698 | | | (12) | % |
Valves, Actuators & Regulators | 913 | | | 806 | | | (12) | % |
Industrial Solutions | 507 | | | 508 | | | — | % |
Systems & Software | 637 | | | 680 | | | 7 | % |
Total | $ | 2,852 | | | 2,692 | | | (6) | % |
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Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 776 | | | 732 | | | (6) | % |
Valves, Actuators & Regulators | 854 | | | 836 | | | (2) | % |
Industrial Solutions | 494 | | | 555 | | | 12 | % |
Systems & Software | 585 | | | 670 | | | 14 | % |
Total | $ | 2,709 | | | 2,793 | | | 3 | % |
Automation Solutions sales were $2.7$2.8 billion in the firstsecond quarter, a decreasean increase of $160$84 or 63 percent. Underlying sales decreased 92 percent on lower volume.volume, but continued to improve sequentially as global markets recover from the impacts of COVID-19. Foreign currency translation had a 23 percent favorable impact and the OSI acquisition had a 12 percent favorable impact. Underlying sales decreased 2012 percent in the Americas (U.S. down 2215 percent), while Europe increased 26 percent and Asia, Middle East & Africa increased 29 percent (China up 642 percent). Sales for Measurement & Analytical Instrumentation decreased $97,$44, or 126 percent, and Valves, Actuators & Regulators decreased $18, or 2 percent, due to continued weakness in North American process industries, partially offset by moderate growth in Europe and Asia. Valves, Actuators & Regulators decreased $107, or 12 percent, reflecting slower demand in most end markets, particularly in North America and Europe, partially offset by strong growth in Asia. Industrial Solutions sales were flat as weakness in discrete end markets in North America was offset by robust demand in China. Systems & Software increased $43, or 7 percent, due to the OSI acquisition. Strength in power end markets in North America was offset by weakness in Asia, while
process end markets were strong in Europe and Asia, offset by declines in North America and Middle East & Africa. Earnings were $361, an increase of $51, or 17 percent, and margin increased 2.5 percentage points to 13.4 percent, as significant savings from cost reduction actions and favorable price-cost more than offset deleverage on lower volume. Lower restructuring expense also benefited margins (0.5 percentage points), which was offset by unfavorable mix.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Three Months Ended Dec 31 | 2019 | | 2020 | | Change |
| | | | | |
| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 873 | | | 1,031 | | | 18 | % |
Tools & Home Products | 430 | | | 445 | | | 3 | % |
Total | $ | 1,303 | | | 1,476 | | | 13 | % |
| | | | | |
Earnings: | | | | | |
Climate Technologies | $ | 151 | | | 212 | | | 40 | % |
Tools & Home Products | 86 | | | 98 | | | 14 | % |
Total | $ | 237 | | | 310 | | | 31 | % |
Margin | 18.2 | % | | 21.0 | % | | |
Commercial & Residential Solutions sales were $1.5 billion in the first quarter, up $173, or 13 percent compared to the prior year. Underlying sales increased 12 percent due to higher volume and foreign currency translation added 1 percent. Overall, underlying sales increased 14 percent in the Americas (U.S. up 14 percent), Europe increased 8 percent and Asia, Middle East & Africa was up 7 percent (China up 10 percent). Climate Technologies sales were $1.0 billion in the first quarter, an increase of $158, or 18 percent. Air conditioning and heating sales were up significantly, reflecting robust demand for residential-oriented products and solutions in North America and strength in Europe and China. Cold chain sales were strong, driven by favorable global market conditions. Tools & Home Products sales were $445 in the first quarter, an increase of $15, or 3 percent. Sales for wet/dry vacuums were robust due to competitor outages and food waste disposers were up modestly, while global professional tools end markets were down mid single-digits reflecting lower overall industrial activity. Earnings were $310, up 31 percent compared with the prior year, and margin increased 2.8 points to 21.0 percent, due to leverage on higher volume and savings from cost reduction actions, partially offset by unfavorable mix.
moderate growth in Europe and robust growth in China on easier comparisons. Industrial Solutions sales were up $61, or 12 percent, reflecting robust demand in China due to easier comparisons and strong growth in Europe. North American discrete end markets declined compared to the prior year but improved sequentially. Systems & Software increased $85, or 14 percent, reflecting the OSI acquisition, which added $48, and strong demand in Europe, while Asia, Middle East & Africa was up moderately and process end markets were down modestly in North America. Earnings were $471, an increase of $80, or 20 percent, and margin increased 2.4 percentage points to 16.8 percent, as significant savings from cost reduction actions and favorable price-cost more than offset deleverage on lower volume, unfavorable foreign currency transactions and unfavorable mix.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Three Months Ended Mar 31 | 2020 | | 2021 | | Change |
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Sales: | | | | | |
Climate Technologies | $ | 1,026 | | | 1,160 | | | 13 | % |
Tools & Home Products | 432 | | | 485 | | | 13 | % |
Total | $ | 1,458 | | | 1,645 | | | 13 | % |
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Earnings: | | | | | |
Climate Technologies | $ | 217 | | | 245 | | | 13 | % |
Tools & Home Products | 89 | | | 112 | | | 25 | % |
Total | $ | 306 | | | 357 | | | 17 | % |
Margin | 21.0 | % | | 21.7 | % | | |
Commercial & Residential Solutions sales were $1.6 billion in the second quarter, up $187, or 13 percent compared to the prior year. Underlying sales increased 11 percent due to higher volume and reflected growth across all businesses and geographies, while foreign currency translation added 2 percent. Overall, underlying sales increased 8 percent in the Americas (U.S. up 7 percent), 9 percent in Europe and 24 percent in Asia, Middle East & Africa (China up 56 percent). Climate Technologies sales were $1.2 billion in the second quarter, an increase of $134, or 13 percent. Air conditioning and heating sales were up high single-digits, reflecting strong demand for residential-oriented products and solutions in North America and robust growth in Europe and China. Cold chain sales were up mid teens, driven by favorable global market conditions. Tools & Home Products sales were $485 in the second quarter, an increase of $53, or 13 percent. Sales for wet/dry vacuums were robust due to competitor outages, while growth was strong for food waste disposers and solid for professional tools. Earnings were $357, up 17 percent compared with the prior year, and margin increased 0.7 percentage points to 21.7 percent due to savings from cost reduction actions, while leverage on higher volume offset unfavorable price-cost.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31
Following is an analysis of the Company’s operating results for the six months ended March 31, 2021, compared with the six months ended March 31, 2020.
| | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | Change |
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| | | | | |
Net sales | $ | 8,313 | | | 8,592 | | | 3 | % |
Gross profit | $ | 3,509 | | | 3,585 | | | 2 | % |
Percent of sales | 42.2 | % | | 41.7 | % | | |
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SG&A | $ | 2,106 | | | 2,052 | | | (3) | % |
Percent of sales | 25.3 | % | | 23.9 | % | | |
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Other deductions, net | $ | 220 | | | 155 | | | |
Amortization of intangibles | $ | 118 | | | 152 | | | |
Restructuring costs | $ | 128 | | | 83 | | | |
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Interest expense, net | $ | 71 | | | 78 | | | |
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Earnings before income taxes | $ | 1,112 | | | 1,300 | | | 17 | % |
Percent of sales | 13.4 | % | | 15.1 | % | | |
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Net earnings common stockholders | $ | 843 | | | 1,006 | | | 19 | % |
Percent of sales | 10.1 | % | | 11.7 | % | | |
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Diluted earnings per share | $ | 1.37 | | | 1.67 | | | 22 | % |
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Net sales for the first six months of 2021 were $8.6 billion, up 3 percent compared with 2020. Automation Solutions sales were down 1 percent while Commercial & Residential Solutions sales were up 13 percent. Underlying sales were flat, as foreign currency translation added 2 percent and acquisitions added 1 percent. Underlying sales decreased 6 percent in the U.S. and increased 5 percent internationally. The Americas was down 5 percent, Europe was up 5 percent and Asia, Middle East & Africa was up 7 percent (China up 22 percent).
Cost of sales for 2021 were $5,007, an increase of $203 versus $4,804 in 2020, primarily due to the impact of foreign currency translation and the OSI acquisition. Gross margin decreased 0.5 percentage points to 41.7 percent, reflecting unfavorable mix and deleverage on lower sales volume within Automation Solutions.
SG&A expenses of $2,052 decreased $54 and SG&A as a percent of sales decreased 1.4 percentage points to 23.9 percent, reflecting significant savings from the Company's restructuring and cost reset actions, which more than offset higher stock compensation expense of $107 (1.3 percentage points) and deleverage on lower sales volume within Automation Solutions.
Other deductions, net were $155 in 2021, a decrease of $65 compared with the prior year, reflecting lower restructuring costs of $45 and investment-related gains. In the first quarter of fiscal 2021, the Company recognized an investment gain of $21 and a gain from the acquisition of the remaining interest of an equity investment of $17, and in the second quarter recognized a gain of $31 on the sale of an equity investment. These items were partially offset by higher intangibles amortization of $34, primarily related to the OSI acquisition, and unfavorable foreign currency transactions of $29. See Notes 6 and 7.
Pretax earnings of $1,300 increased $188, or 17 percent. Earnings increased $131 in Automation Solutions and $124 in Commercial & Residential Solutions. Costs reported at Corporate increased $60, reflecting higher stock compensation expense of $107 and first year acquisition accounting charges and fees related to the OSI acquisition of $31, partially offset by the investment-related gains discussed above and lower unallocated pension and postretirement costs of $22. See the Business Segments discussion that follows and Note 12.
Income taxes were $280 for 2021 and $259 for 2020, resulting in effective tax rates of 22 percent and 23 percent, respectively.
Net earnings common stockholders in 2021 were $1,006, up 19 percent compared with the prior year, and earnings per share were $1.67, up 22 percent compared with $1.37 in 2020. Operating results increased $0.24 per share, as significant savings from the Company's restructuring and cost reset actions more than offset deleverage on lower sales volume in Automation Solutions. Lower restructuring and advisory fees ($0.07 per share), a lower tax rate ($0.03 per share) and share repurchases ($0.03 per share) also benefited operating results, while higher stock compensation expense deducted $0.13 per share. The Company recognized several investment-related gains in the current year ($0.10 per share), while first year acquisition accounting charges and fees related to the OSI acquisition deducted $0.04 per share.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the six months ended March 31, 2021, compared with the six months ended March 31, 2020. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
| | | | | | | | | | | | | | | | | |
Six Months Ended Mar 31 | 2020 | | 2021 | | Change |
| | | | | |
Sales | $ | 5,561 | | | 5,485 | | | (1) | % |
Earnings | $ | 701 | | | 832 | | | 19 | % |
Margin | 12.6 | % | | 15.2 | % | | |
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Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 1,571 | | | 1,430 | | | (9) | % |
Valves, Actuators & Regulators | 1,767 | | | 1,642 | | | (7) | % |
Industrial Solutions | 1,001 | | | 1,063 | | | 6 | % |
Systems & Software | 1,222 | | | 1,350 | | | 10 | % |
Total | $ | 5,561 | | | 5,485 | | | (1) | % |
Automation Solutions sales were $5.5 billion in the first six months of 2021, a decrease of $76, or 1 percent. Underlying sales decreased 5 percent on lower volume. Foreign currency translation had a 2 percent favorable impact and the OSI acquisition added 2 percent. Underlying sales decreased 16 percent in the Americas, while Europe increased 4 percent and Asia, Middle East & Africa was up 5 percent (China up 21 percent). Sales for Measurement & Analytical Instrumentation decreased $141, or 9 percent, due to weakness in process industries, particularly in North America, partially offset by moderate growth in Europe and Asia. Valves, Actuators & Regulators decreased $125, or 7 percent, reflecting slower demand in most end markets, particularly in North America and Europe, partially offset by strength in Asia. Industrial Solutions sales increased $62, or 6 percent, on moderate growth in Europe and robust growth in China, partially offset by weakness in discrete end markets in North America. Systems & Software increased $128, reflecting the impact of the OSI acquisition which added $90. Power end markets grew moderately in North America offset by softness in Asia, while process end markets were strong in Europe and Asia, offset by declines in North America and Middle East & Africa. Earnings were $832, an increase of $131, or 19 percent, and margin increased 2.6 percentage points to 15.2 percent, as significant savings from cost reduction actions and favorable price-cost more than offset deleverage on lower sales volume and unfavorable mix. Lower restructuring expense benefited margins 0.6 percentage points, while foreign currency transactions had an unfavorable impact of 0.3 percentage points.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Six Months Ended Mar 31 | 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 1,899 | | | 2,191 | | | 15 | % |
Tools & Home Products | 862 | | | 930 | | | 8 | % |
Total | $ | 2,761 | | | 3,121 | | | 13 | % |
| | | | | |
Earnings: | | | | | |
Climate Technologies | $ | 368 | | | 457 | | | 24 | % |
Tools & Home Products | 175 | | | 210 | | | 20 | % |
Total | $ | 543 | | | 667 | | | 23 | % |
Margin | 19.7 | % | | 21.4 | % | | |
Commercial & Residential Solutions sales were $3.1 billion in the first six months of 2021, an increase of $360, or 13 percent compared to the prior year. Underlying sales were up 11 percent on higher volume and foreign currency translation added 2 percent. Overall, underlying sales increased 11 percent in the Americas, 8 percent in Europe and 15 percent in Asia, Middle East & Africa (China up 26 percent). Climate Technologies sales were $2.2 billion in the first six months of 2021, an increase of $292, or 15 percent. Air conditioning and heating sales were up significantly, reflecting strong demand for residential-oriented products and solutions in North America and robust growth in Europe and China. Cold chain sales were strong, driven by favorable global market conditions. Tools & Home Products sales were $930 million in the first six months of 2021, up $68, or 8 percent. Sales for wet/dry vacuums were robust due to competitor outages and were strong for food waste disposers, while global professional tools were up slightly. Earnings were $667, up 23 percent compared to the prior year, and margin increased 1.7 percentage points, reflecting leverage on higher volume and savings from cost reduction actions, partially offset by unfavorable price-cost and mix.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the threesix months ended DecemberMarch 31, 20202021 as compared to the year ended September 30, 2020 and the threesix months ended DecemberMarch 31, 20192020 follow.
| | | Dec 31, 2019 | | Sept 30, 2020 | | Dec 31, 2020 | | Mar 31, 2020 | | Sept 30, 2020 | | Mar 31, 2021 |
Operating working capital | Operating working capital | $ | 1,205 | | | $ | 866 | | | $ | 825 | | Operating working capital | $ | 1,250 | | | $ | 866 | | | $ | 781 | |
Current ratio | Current ratio | 1.1 | | | 1.5 | | | 1.2 | | Current ratio | 1.0 | | | 1.5 | | | 1.3 | |
Total debt-to-total capital | Total debt-to-total capital | 41.6 | % | | 47.1 | % | | 46.1 | % | Total debt-to-total capital | 50.6 | % | | 47.1 | % | | 44.4 | % |
Net debt-to-net capital | Net debt-to-net capital | 34.1 | % | | 33.2 | % | | 37.8 | % | Net debt-to-net capital | 40.5 | % | | 33.2 | % | | 35.1 | % |
Interest coverage ratio | Interest coverage ratio | 11.2 | X | | 14.4 | X | | 14.2 | X | Interest coverage ratio | 14.4 | X | | 14.4 | X | | 16.6 | X |
The Company's operating working capitalcapital decreased nearly $400$469 compared to the same quarter last year largely due to timing-related reductions reflecting current business conditions. The interestinterest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 14.2X16.6 for the first threesix months of fiscal 2021 compares to 11.2X14.4X for the threesix months ended DecemberMarch 31, 2019.2020. The increase reflects higher pretax earnings in the current year.
Operating cash flow for the first threesix months of fiscal 2021 was $808,$1.6 billion, an increase of $384$603 compared with $424$1.0 billion in the prior year due to favorable operating working capital and higher earnings. Free cash flow of $686$1.4 billion in the first threesix months of fiscal 2021 (operating cash flow of $808$1.6 billion less capital expenditures of $122)$222) increased $376$606 compared to free cash flow of $310$0.8 billion in 2020 (operating cash flow of $424$1.0 billion less capital expenditures of $114)$225), reflecting the increase in operating cash flow. Cash used for investing activities was $1.7$1.8 billion largely due to the OSI acquisition.
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. Emerson is in a strong financial position, with total assets of $24 billion and stockholders' equity of $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.
FISCAL 2021 OUTLOOK
As macroeconomic uncertainties related to COVID-19 begin to slowly wane,Despite ongoing pandemic challenges in many parts of the world, the Company expects to see a slow but steadyoverall continued improvement in industrial and commercial demand and continuedover the remainder of 2021. Residential demand is expected to remain robust, demandbut begin to taper in many key residential markets around the world. Key North American markets remain challenged for the Automation Solutions business, but appear to be turning.second half. For the full year, consolidated net sales are expected to be up 46 to 89 percent, with underlying sales flatup 3 to up 46 percent excluding a 32 percent favorable impact from foreign currency translation and a 1 percent favorable impact from the OSI acquisition. Automation Solutions net sales are expected to be up 23 to 65 percent, with underlying sales down 31 to up 1 percent excluding a 3 percent favorable impact from foreign currency translation and a 21 percent favorable impact from the OSI acquisition. Commercial & Residential Solutions net sales are expected to be up 1014 to 1216 percent, with underlying sales up 812 to 1014 percent excluding a 2 percent impact from favorable foreign currency translation. Earnings per share are expected to be $3.29$3.55 to $3.49,$3.65, while adjusted earnings per share, which exclude a $0.27$0.26 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 $3.60$3.85 to $3.80.$3.95. Operating cash flow is expected to be approximately $3.15$3.3 billion and free cash flow, which excludes targeted capital spending of $600 million, is expected to be approximately $2.55$2.7 billion. Fiscal 2021 share repurchases and acquisition activity are expected to be in the amount of $500 million to $1 billion, excluding the OSI acquisition which closed on October 1, 2020. The guidance discussed herein assumes no major operational or supply chain disruptions and oil prices in the $45 to $55 range during this period. However, future developments related to COVID-19, including further actions taken by governmental 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 Item 1A – “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, 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. Negotiations over the terms of trade and other laws and regulations took place during 2020 and an agreement between the 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. While there could be certain incremental costs for logistics and other items, the 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (shares in 000s).
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Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
October 2020 | | 56 | | | | $63.90 | | | 56 | | | | 65,471 |
November 2020 | | 121 | | | | $72.73 | | | 121 | | | | 65,350 |
December 2020 | | 11 | | | | $74.87 | | | 11 | | | | 65,339 |
Total | | 188 | | | | $70.21 | | | 188 | | | | 65,339 |
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Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
January 2021 | | — | | | | $0.00 | | | — | | | | 65,339 |
February 2021 | | 320 | | | | $85.83 | | | 320 | | | | 65,019 |
March 2021 | | 460 | | | | $90.01 | | | 460 | | | | 64,559 |
Total | | 780 | | | | $88.30 | | | 780 | | | | 64,559 |
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 65.364.6 million shares remain available for purchase under the authorizations.
Item 6. Exhibits
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).
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3 | | Bylaws of Emerson Electric Co., as amended through November 3, 2020,May 4, 2021, incorporated by reference to the Company's Form 8-K dated November 6, 2020,May 4, 2021, filed on November 6, 2020,May 4, 2021, File No. 1-278, Exhibit 3.1. |
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10.1 | | Letter Agreement dated February 23, 2021, by and between Emerson Electric Co. and David N. Farr, incorporated by reference to the Company's Form 8-K dated February 23, 2021, filed on February 26, 2021, File No. 1-278, Exhibit 10.1. |
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10.2 | | Consulting Agreement dated February 23, 2021, by and between Emerson Electric Co. and David N. Farr, incorporated by reference to the Company's Form 8-K dated February 23, 2021, filed on February 26, 2021, File No. 1-278, Exhibit 10.2. |
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10.3 | | Letter Agreement dated February 16, 2021 entered into on March 8, 2021, by and between Emerson Electric Co. and Steven J. Pelch, incorporated by reference to the Company's Form 8-K dated March 8, 2021, filed on March 12, 2021, File No. 1-278, Exhibit 10.1. |
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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 six months ended DecemberMarch 31, 20202021 and 2019,2020, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended DecemberMarch 31, 20202021 and 2019,2020, (iii) Consolidated Balance Sheets as of September 30, 2020 and DecemberMarch 31, 2020,2021, (iv) Consolidated Statements of Equity for the three and six months ended DecemberMarch 31, 20202021 and 2019,2020, (v) Consolidated Statements of Cash Flows for the threesix months ended DecemberMarch 31, 20202021 and 2019,2020, and (vi) Notes to Consolidated Financial Statements for the three and six months ended ended DecemberMarch 31, 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) | |
| | | February 3,May 5, 2021 | |