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 MarchDecember 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 1-278
EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
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Missouri | | 43-0259330 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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8000 W. Florissant Ave. |
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P.O. Box 4100 | |
St. Louis, | Missouri | 63136 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (314) 553-2000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock of $0.50 par value per share | EMR | New York Stock Exchange |
| | NYSE Chicago |
0.375% Notes due 2024 | EMR 24 | New York Stock Exchange |
1.250% Notes due 2025 | EMR 25A | New York Stock Exchange |
2.000% Notes due 2029 | EMR 29 | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ | | | | | |
Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ | |
| | | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at MarchDecember 31, 2021: 599.7594.0 million shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and six months ended MarchDecember 31, 2020 and 2021
(Dollars in millions, except per share amounts; unaudited)
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| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
Net sales | $ | 4,162 | | | 4,431 | | | 8,313 | | | 8,592 | |
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Costs and expenses: | | | | | | | |
Cost of sales | 2,412 | | | 2,569 | | | 4,804 | | | 5,007 | |
Selling, general and administrative expenses | 983 | | | 1,054 | | | 2,106 | | | 2,052 | |
Other deductions, net | 42 | | | 33 | | | 220 | | | 155 | |
Interest expense (net of interest income of $6, $4, $12 and $6, respectively) | 36 | | | 38 | | | 71 | | | 78 | |
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Earnings before income taxes | 689 | | | 737 | | | 1,112 | | | 1,300 | |
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Income taxes | 165 | | | 169 | | | 259 | | | 280 | |
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Net earnings | 524 | | | 568 | | | 853 | | | 1,020 | |
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Less: Noncontrolling interests in earnings of subsidiaries | 7 | | | 7 | | | 10 | | | 14 | |
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Net earnings common stockholders | $ | 517 | | | 561 | | | 843 | | | 1,006 | |
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Basic earnings per share common stockholders | $ | 0.85 | | | 0.94 | | | 1.38 | | | 1.68 | |
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Diluted earnings per share common stockholders | $ | 0.84 | | | 0.93 | | | 1.37 | | | 1.67 | |
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| Three Months Ended December 31, | | |
| 2020 | | | 2021 | | | | | |
Net sales | $ | 4,161 | | | 4,473 | | | | | |
| | | | | | | |
Cost of sales | 2,438 | | | 2,651 | | | | | |
Selling, general and administrative expenses | 998 | | | 1,011 | | | | | |
Gain on subordinated interest | — | | | (453) | | | | | |
Other deductions, net | 122 | | | 51 | | | | | |
Interest expense (net of interest income of $2 and $3, respectively) | 40 | | | 38 | | | | | |
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Earnings before income taxes | 563 | | | 1,175 | | | | | |
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Income taxes | 111 | | | 280 | | | | | |
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Net earnings | 452 | | | 895 | | | | | |
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Less: Noncontrolling interests in subsidiaries | 7 | | | (1) | | | | | |
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Net earnings common stockholders | $ | 445 | | | 896 | | | | | |
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Earnings per share: | | | | | | | |
Basic | $ | 0.74 | | | 1.51 | | | | | |
Diluted | $ | 0.74 | | | 1.50 | | | | | |
| | | | | | | |
Weighted average outstanding shares: | | | | | | | |
Basic | 598.5 | | | 594.6 | | | | | |
Diluted | 601.9 | | | 598.1 | | | | | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and six months ended MarchDecember 31, 2020 and 2021
(Dollars in millions; unaudited)
| | | Three Months Ended March 31, | | Six Months Ended March 31, | | Three Months Ended December 31, | |
| | | 2020 | | | 2021 | | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | |
Net earnings | Net earnings | | $ | 524 | | | | 568 | | | | 853 | | | | 1,020 | | Net earnings | $ | 452 | | | 895 | | |
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | | |
Foreign currency translation | Foreign currency translation | | (281) | | | (21) | | | (182) | | | 168 | | Foreign currency translation | 189 | | | (72) | | |
Pension and postretirement | Pension and postretirement | | 30 | | | 27 | | | 58 | | | 54 | | Pension and postretirement | 27 | | | 18 | | |
Cash flow hedges | Cash flow hedges | | (75) | | | 1 | | | (56) | | | 32 | | Cash flow hedges | 31 | | | 4 | | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | | (326) | | | 7 | | | (180) | | | 254 | | Total other comprehensive income (loss) | 247 | | | (50) | | |
| Comprehensive income | Comprehensive income | | 198 | | | 575 | | | 673 | | | 1,274 | | Comprehensive income | 699 | | | 845 | | |
| Less: Noncontrolling interests in comprehensive income of subsidiaries | | 8 | | | 6 | | | 11 | | | 13 | | |
Less: Noncontrolling interests in subsidiaries | | Less: Noncontrolling interests in subsidiaries | 7 | | | (1) | | |
Comprehensive income common stockholders | Comprehensive income common stockholders | | $ | 190 | | | 569 | | | 662 | | | 1,261 | | Comprehensive income common stockholders | $ | 692 | | | 846 | | |
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 | | Mar 31, 2021 |
ASSETS | | | |
Current assets | | | |
Cash and equivalents | $ | 3,315 | | | 2,342 | |
Receivables, less allowances of $138 and $129, respectively | 2,802 | | | 2,754 | |
Inventories | 1,928 | | | 2,016 | |
Other current assets | 761 | | | 849 | |
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Total current assets | 8,806 | | | 7,961 | |
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Property, plant and equipment, net | 3,688 | | | 3,663 | |
Other assets | | | |
Goodwill | 6,734 | | | 7,787 | |
Other intangible assets | 2,468 | | | 3,095 | |
Other | 1,186 | | | 1,294 | |
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Total other assets | 10,388 | | | 12,176 | |
Total assets | $ | 22,882 | | | 23,800 | |
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LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Short-term borrowings and current maturities of long-term debt | $ | 1,160 | | | 1,456 | |
Accounts payable | 1,715 | | | 1,797 | |
Accrued expenses | 2,910 | | | 3,041 | |
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Total current liabilities | 5,785 | | | 6,294 | |
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Long-term debt | 6,326 | | | 5,823 | |
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Other liabilities | 2,324 | | | 2,503 | |
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Equity | | | |
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 598.0 shares and 599.7 shares, respectively | 477 | | | 477 | |
Additional paid-in-capital | 470 | | | 511 | |
Retained earnings | 24,955 | | | 25,354 | |
Accumulated other comprehensive income (loss) | (1,577) | | | (1,322) | |
Cost of common stock in treasury, 355.4 shares and 353.7 shares, respectively | (15,920) | | | (15,890) | |
Common stockholders’ equity | 8,405 | | | 9,130 | |
Noncontrolling interests in subsidiaries | 42 | | | 50 | |
Total equity | 8,447 | | | 9,180 | |
Total liabilities and equity | $ | 22,882 | | | 23,800 | |
| | | | | | | | | | | |
| Sept 30, 2021 | | Dec 31, 2021 |
ASSETS | | | |
Current assets | | | |
Cash and equivalents | $ | 2,354 | | | 4,726 | |
Receivables, less allowances of $116 and $112, respectively | 2,971 | | | 2,745 | |
Inventories | 2,050 | | | 2,335 | |
Other current assets | 1,057 | | | 1,054 | |
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Total current assets | 8,432 | | | 10,860 | |
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Property, plant and equipment, net | 3,738 | | | 3,685 | |
Other assets | | | |
Goodwill | 7,723 | | | 7,695 | |
Other intangible assets | 2,877 | | | 2,791 | |
Other | 1,945 | | | 1,928 | |
| | | |
Total other assets | 12,545 | | | 12,414 | |
Total assets | $ | 24,715 | | | 26,959 | |
| | | |
LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Short-term borrowings and current maturities of long-term debt | $ | 872 | | | 37 | |
Accounts payable | 2,108 | | | 2,100 | |
Accrued expenses | 3,266 | | | 3,194 | |
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Total current liabilities | 6,246 | | | 5,331 | |
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Long-term debt | 5,793 | | | 8,722 | |
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Other liabilities | 2,753 | | | 2,618 | |
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Equity | | | |
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 595.8 shares and 594.0 shares, respectively | 477 | | | 477 | |
Additional paid-in-capital | 522 | | | 564 | |
Retained earnings | 26,047 | | | 26,636 | |
Accumulated other comprehensive income (loss) | (872) | | | (922) | |
Cost of common stock in treasury, 357.6 shares and 359.4 shares, respectively | (16,291) | | | (16,506) | |
Common stockholders’ equity | 9,883 | | | 10,249 | |
Noncontrolling interests in subsidiaries | 40 | | | 39 | |
Total equity | 9,923 | | | 10,288 | |
Total liabilities and equity | $ | 24,715 | | | 26,959 | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Equity
EMERSON ELECTRIC CO. & SUBSIDIARIES
Three and six months ended MarchDecember 31, 2020 and 2021
(Dollars in millions; unaudited)
| | | Three Months Ended March 31, | | Six Months Ended March 31, | | Three Months Ended December 31, | |
| | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | |
| Common stock | Common stock | $ | 477 | | | 477 | | | 477 | | | 477 | | Common stock | $ | 477 | | | 477 | | |
| Additional paid-in-capital | Additional paid-in-capital | | Additional paid-in-capital | | |
Beginning balance | Beginning balance | 447 | | | 499 | | | 393 | | | 470 | | Beginning balance | 470 | | | 522 | | |
Stock plans | Stock plans | 6 | | | 12 | | | 60 | | | 41 | | Stock plans | 29 | | | 42 | | |
| Ending balance | Ending balance | 453 | | | 511 | | | 453 | | | 511 | | Ending balance | 499 | | | 564 | | |
| Retained earnings | Retained earnings | | Retained earnings | | |
Beginning balance | Beginning balance | 24,220 | | | 25,096 | | | 24,199 | | | 24,955 | | Beginning balance | 24,955 | | | 26,047 | | |
Net earnings common stockholders | Net earnings common stockholders | 517 | | | 561 | | | 843 | | | 1,006 | | Net earnings common stockholders | 445 | | | 896 | | |
Dividends paid (per share: $0.50, $0.505, $1.00 and $1.01, respectively) | (306) | | | (303) | | | (611) | | | (606) | | |
Dividends paid (per share: $0.505 and $0.515, respectively) | | Dividends paid (per share: $0.505 and $0.515, respectively) | (303) | | | (307) | | |
Adoption of accounting standard | Adoption of accounting standard | 0 | | | 0 | | | 0 | | | (1) | | Adoption of accounting standard | (1) | | | — | | |
Ending balance | Ending balance | 24,431 | | | 25,354 | | | 24,431 | | | 25,354 | | Ending balance | 25,096 | | | 26,636 | | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | | |
Beginning balance | Beginning balance | (1,576) | | | (1,330) | | | (1,722) | | | (1,577) | | Beginning balance | (1,577) | | | (872) | | |
Foreign currency translation | Foreign currency translation | (282) | | | (20) | | | (183) | | | 169 | | Foreign currency translation | 189 | | | (72) | | |
Pension and postretirement | Pension and postretirement | 30 | | | 27 | | | 58 | | | 54 | | Pension and postretirement | 27 | | | 18 | | |
Cash flow hedges | Cash flow hedges | (75) | | | 1 | | | (56) | | | 32 | | Cash flow hedges | 31 | | | 4 | | |
Ending balance | Ending balance | (1,903) | | | (1,322) | | | (1,903) | | | (1,322) | | Ending balance | (1,330) | | | (922) | | |
| Treasury stock | Treasury stock | | Treasury stock | | |
Beginning balance | Beginning balance | (15,147) | | | (15,847) | | | (15,114) | | | (15,920) | | Beginning balance | (15,920) | | | (16,291) | | |
Purchases | Purchases | (813) | | | (69) | | | (942) | | | (82) | | Purchases | (13) | | | (258) | | |
Issued under stock plans | Issued under stock plans | 19 | | | 26 | | | 115 | | | 112 | | Issued under stock plans | 86 | | | 43 | | |
Ending balance | Ending balance | (15,941) | | | (15,890) | | | (15,941) | | | (15,890) | | Ending balance | (15,847) | | | (16,506) | | |
| Common stockholders' equity | Common stockholders' equity | 7,517 | | | 9,130 | | | 7,517 | | | 9,130 | | Common stockholders' equity | 8,895 | | | 10,249 | | |
| Noncontrolling interests in subsidiaries | Noncontrolling interests in subsidiaries | | Noncontrolling interests in subsidiaries | | |
Beginning balance | Beginning balance | 38 | | | 44 | | | 40 | | | 42 | | Beginning balance | 42 | | | 40 | | |
Net earnings | Net earnings | 7 | | | 7 | | | 10 | | | 14 | | Net earnings | 7 | | | (1) | | |
Other comprehensive income | 1 | | | (1) | | | 1 | | | (1) | | |
| Dividends paid | Dividends paid | 0 | | | 0 | | | (5) | | | (5) | | Dividends paid | (5) | | | — | | |
| Ending balance | Ending balance | 46 | | | 50 | | | 46 | | | 50 | | Ending balance | 44 | | | 39 | | |
| Total equity | Total equity | $ | 7,563 | | | 9,180 | | | 7,563 | | | 9,180 | | Total equity | $ | 8,939 | | | 10,288 | | |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES
SixThree Months Ended MarchDecember 31, 2020 and 2021
(Dollars in millions; unaudited)
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| | Six Months Ended |
| | March 31, |
| | 2020 | | | 2021 | |
Operating activities | | | | |
Net earnings | | $ | 853 | | | 1,020 | |
| | | | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 422 | | | 483 | |
Stock compensation | | 18 | | | 125 | |
Pension expense | | 34 | | | 16 | |
Changes in operating working capital | | (260) | | | 66 | |
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Other, net | | (55) | | | (95) | |
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Cash provided by operating activities | | 1,012 | | | 1,615 | |
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Investing activities | | | | |
Capital expenditures | | (225) | | | (222) | |
Purchases of businesses, net of cash and equivalents acquired | | (96) | | | (1,611) | |
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Other, net | | (42) | | | 61 | |
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Cash used in investing activities | | (363) | | | (1,772) | |
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Financing activities | | | | |
Net increase in short-term borrowings | | 2,076 | | | 60 | |
Proceeds from short-term borrowings greater than three months | | 433 | | | 0 | |
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Payments of long-term debt | | (502) | | | (301) | |
Dividends paid | | (611) | | | (606) | |
Purchases of common stock | | (942) | | | (78) | |
Other, net | | 39 | | | 83 | |
Cash provided by (used in) financing activities | | 493 | | | (842) | |
| | | | |
Effect of exchange rate changes on cash and equivalents | | (53) | | | 26 | |
Increase (Decrease) in cash and equivalents | | 1,089 | | | (973) | |
Beginning cash and equivalents | | 1,494 | | | 3,315 | |
Ending cash and equivalents | | $ | 2,583 | | | 2,342 | |
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Changes in operating working capital | | | | |
Receivables | | $ | 283 | | | 75 | |
Inventories | | (216) | | | (61) | |
Other current assets | | 32 | | | (16) | |
Accounts payable | | (290) | | | 55 | |
Accrued expenses | | (69) | | | 13 | |
| | | | |
Total changes in operating working capital | | $ | (260) | | | 66 | |
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | December 31, |
| | 2020 | | | 2021 | |
Operating activities | | | | |
Net earnings | | $ | 452 | | | 895 | |
| | | | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 244 | | | 231 | |
Stock compensation | | 64 | | | 41 | |
Pension expense | | 8 | | | 1 | |
Changes in operating working capital | | 71 | | | (185) | |
Gain on subordinated interest | | — | | | (453) | |
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Other, net | | (31) | | | (7) | |
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Cash provided by operating activities | | 808 | | | 523 | |
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Investing activities | | | | |
Capital expenditures | | (122) | | | (116) | |
Purchases of businesses, net of cash and equivalents acquired | | (1,611) | | | (39) | |
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Proceeds from subordinated interest | | — | | | 438 | |
Other, net | | 13 | | | 2 | |
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Cash provided by (used in) investing activities | | (1,720) | | | 285 | |
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Financing activities | | | | |
Net increase (decrease) in short-term borrowings | | 340 | | | (335) | |
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Proceeds from long-term debt | | — | | | 2,975 | |
Payments of long-term debt | | (301) | | | (501) | |
Dividends paid | | (303) | | | (307) | |
Purchases of common stock | | (13) | | | (253) | |
Other, net | | 42 | | | 22 | |
Cash provided by (used in) financing activities | | (235) | | | 1,601 | |
| | | | |
Effect of exchange rate changes on cash and equivalents | | 29 | | | (37) | |
Increase (Decrease) in cash and equivalents | | (1,118) | | | 2,372 | |
Beginning cash and equivalents | | 3,315 | | | 2,354 | |
Ending cash and equivalents | | $ | 2,197 | | | 4,726 | |
| | | | |
Changes in operating working capital | | | | |
Receivables | | $ | 232 | | | 217 | |
Inventories | | (37) | | | (302) | |
Other current assets | | 18 | | | (10) | |
Accounts payable | | (37) | | | 10 | |
Accrued expenses | | (105) | | | (100) | |
| | | | |
Total changes in operating working capital | | $ | 71 | | | (185) | |
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 12.2021.
Effective October 1, 2020,2021, the Company adopted twothree accounting standard updates and one new accounting standard which had no impact or an immaterial impact on the Company's financial statements as of and for the sixthree months ended MarchDecember 31, 2021. These included:
•Updates to ASC 350,805, Intangibles - Goodwill and OtherBusiness Combinations, which eliminateclarify the requirement to measure impairment based on the impliedaccounting for contract assets and liabilities assumed in a business combination. In general, this will result in contract liabilities being recognized at their historical amounts under ASC 606, rather than at fair value in accordance with the general requirements 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.ASC 805.
•Updates to ASC 350,740, Intangibles - Goodwill and OtherIncome Taxes, which alignrequire the requirements for capitalizing implementation costs incurred inrecognition of a software hosting arrangementfranchise tax that is partially based on income as an income-based tax with the requirements for costs incurredany incremental amount as a non-income based tax. These updates also make certain changes to develop or obtain internal-use software.intra-period tax allocation principles and interim tax calculations.
•Adoption ofUpdates to ASC 326, 321,Financial Instruments Equity Securities, ASC 323 Investments - Credit LossesEquity Method and Joint Ventures, and ASC 815, Derivatives and Hedging, which amendsclarify how to account for the impairment model by requiring entities to use a forward-looking approach to estimate lifetime expected credit losses on certain typestransition into and out of financial instruments, including trade receivables.the equity method of accounting when evaluating observable transactions.
(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 1213 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 | | Mar 31, 2021 |
Unbilled receivables (contract assets) | | $ | 458 | | | | 472 | |
Customer advances (contract liabilities) | | (583) | | | | (749) | |
Net contract liabilities | | $ | (125) | | | | (277) | |
| | | | | | | | | | | | | | | | | |
| Sept 30, 2021 | | Dec 31, 2021 |
Unbilled receivables (contract assets) | | $ | 528 | | | | 527 | |
Customer advances (contract liabilities) | | (730) | | | | (851) | |
Net contract liabilities | | $ | (202) | | | | (324) | |
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 MarchDecember 31, 2021 included $105 and $362$348 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 MarchDecember 31, 2021 for performance obligations that were satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material.
were satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material.
As of MarchDecember 31, 2021, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $6.3$7.2 billion. The Company expects to recognize approximately 8085 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 AND SHARE-BASED COMPENSATION
Reconciliations of weighted-average shares for basic and diluted earnings per common share follow. Earnings allocated to participating securities were inconsequential.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | |
Basic shares outstanding | 607.4 | | | 599.4 | | | 608.7 | | | 599.0 | |
Dilutive shares | 3.6 | | | 3.4 | | | 3.9 | | | 3.3 | |
Diluted shares outstanding | 611.0 | | | 602.8 | | | 612.6 | | | 602.3 | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | | 2021 | | | | | |
| | | | | | | |
Basic shares outstanding | 598.5 | | | 594.6 | | | | | |
Dilutive shares | 3.4 | | | 3.5 | | | | | |
Diluted shares outstanding | 601.9 | | | 598.1 | | | | | |
The Company changed the terms of its annual performance share awards issued in the first quarter of fiscal 2022. The new terms meet the criteria for equity classification in accordance with ASC 718, Compensation - Stock Compensation, and therefore expense will be recognized on a fixed basis over the three-year performance period. The terms of the performance share awards issued in fiscal 2020 and 2021 are unchanged and will therefore continue to be accounted for as liability awards and marked-to-market each period based on changes in the stock price.
(4) ACQUISITIONS AND DIVESTITURES
On October 11, 2021, the Company announced that it entered into a definitive agreement with Aspen Technology, Inc. ("AspenTech") to contribute two of Emerson's stand-alone industrial software businesses, Open Systems International, Inc. and the Geological Simulation Software business, along with approximately $6.0 billion in cash to AspenTech stockholders, to create "new AspenTech", a diversified, high-performance industrial software leader with greater scale, capabilities and technologies. Upon closing of the transaction, the Company will own 55 percent of new AspenTech and its results and financial position will be consolidated in Emerson's financial statements.
On October 1, 2020, the Company completed the acquisition of Open Systems International, Inc. (OSI)("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 annualhad net sales of approximately $170$191 in fiscal 2021 and is reported in the Automation Solutions segment, expands the Company's offerings in the power industry to include the digitization and modernization of the electric grid. The Company recognized goodwill of $960 (NaN$967 (none of which is expected to be tax deductible), identifiable intangible assets of $783, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years, and deferred tax liabilities of approximately $185. Valuations of these assets and liabilities are in process and subject to refinement. Results of operations for the three months ended March 31, 2021 included first-year pretax acquisition accounting charges related to backlog amortization and deferred revenue of $6 and $4, respectively, while year-to-date results included $17 and $8, respectively.$193.
On November 17, 2020,As previously disclosed, the Company acquiredsold its network power systems business (rebranded as Vertiv, now a publicly traded company, symbol VRT) in 2017 and retained a subordinated interest contingent upon the equity holders first receiving a threshold cash return on their initial investment. In the first quarter of fiscal 2022, the equity holders' cumulative cash return exceeded the threshold and as a result, the Company received a distribution of $438 in November 2021 (in total, a gain of $453 was recognized in the first quarter). Based on the terms of the agreement and the current calculation, the Company could receive additional distributions of approximately $100 which are expected to be received over the next two years. However, the distributions are contingent on the timing and price at which Vertiv shares are sold by the equity holders and therefore, there can be no assurance as to the amount or timing of the remaining interest of an equity investment for approximately $19, net of cash acquired.distributions to the Company.
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 March 31, | | Six Months Ended March 31, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
Service cost | | $ | 22 | | | | 21 | | | | 44 | | | | 42 | |
Interest cost | | 40 | | | | 32 | | | | 80 | | | | 64 | |
Expected return on plan assets | | (84) | | | | (84) | | | | (168) | | | | (168) | |
Net amortization | | 38 | | | | 35 | | | | 75 | | | | 70 | |
Total | | $ | 16 | | | | 4 | | | | 31 | | | | 8 | |
(5) PENSION & POSTRETIREMENT PLANS
Total periodic pension and postretirement (income) expense is summarized below: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| | 2020 | | | | 2021 | | | | | | | |
Service cost | | $ | 21 | | | | 19 | | | | | | | |
Interest cost | | 32 | | | | 34 | | | | | | | |
Expected return on plan assets | | (84) | | | | (78) | | | | | | | |
Net amortization | | 35 | | | | 23 | | | | | | | |
Total | | $ | 4 | | | | (2) | | | | | | | |
(6) OTHER DEDUCTIONS, NET
Other deductions, net are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
| | | | | | | | | | | |
Amortization of intangibles (intellectual property and customer relationships) | | $ | 59 | | | | 74 | | | | 118 | | | | 152 | |
Restructuring costs | | 31 | | | | 17 | | | | 128 | | | | 83 | |
Special advisory fees | | 0 | | | | 0 | | | | 13 | | | | 0 | |
Other | | (48) | | | | (58) | | | | (39) | | | | (80) | |
Total | | $ | 42 | | | | 33 | | | | 220 | | | | 155 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | | | 2021 | | | | | | | |
| | | | | | | | | | | |
Amortization of intangibles (intellectual property and customer relationships) | | $ | 78 | | | | 63 | | | | | | | |
Restructuring costs | | 66 | | | | 9 | | | | | | | |
| | | | | | | | | | | |
Other | | (22) | | | | (21) | | | | | | | |
Total | | $ | 122 | | | | 51 | | | | | | | |
The increase in intangibles amortization for the three and six months ended March 31, 2021 was due to the OSI acquisition, including backlog amortization of $6 and $17, respectively. The change in Other reflects investment-related gains, including an investment gain of $21 and a gain from the acquisition of the remaining interest of an equity investment of $17 recognized inIn the first quarter of fiscal 2021,2022, the decrease in intangibles amortization was largely due to the backlog amortization of $11 in the prior year related to the OSI acquisition. Other is composed of several items, including acquisition/divestiture costs, foreign currency transaction gains and losses, pension expense and other items. In the first quarter of fiscal 2022, other included transaction costs related to the AspenTech transaction of $23, a gainfavorable impact from foreign currency transactions of $31 on$25 due to losses in the prior year and gains in the current year, and gains from the sales of capital assets of $15. Comparisons were also impacted by prior year investment-related gains, including $21 from an investment sale and $17 from the acquisition of full ownership of an equity investment in the second quarter. Unfavorable foreign currency transactions negatively impacted results for the three and six months ended March 31, 2021 by $22 and $29, respectively.investment.
(7) RESTRUCTURING COSTS
Restructuring expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. Costs incurred in the first sixthree months of fiscal 20212022 relate to the Company's initiatives to improve operating margins that began in the third quarter of fiscal 2019 to improve operating margins and were subsequently increased in response to the effects of the COVID-19 pandemic on demand for the Company's products. Expenses incurred in the first sixthree months of fiscal 2021fiscal 2022 included costs related to workforce reductions of approximately 1,700150 employees. The Company expects fiscal 20212022 restructuring expense and related costs to be approximately $200,$150, including costs to complete actions initiated in the first sixthree months of the year.
Restructuring expense by business segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2020 | | | 2021 | | | 2020 | | | 2021 | |
| | | | | | | | | | | |
Automation Solutions | | $ | 23 | | | | 12 | | | | 106 | | | | 76 | |
| | | | | | | | | | | |
Climate Technologies | | 2 | | | | 3 | | | | 9 | | | | 4 | |
Tools & Home Products | | 5 | | | | 1 | | | | 8 | | | | 2 | |
Commercial & Residential Solutions | | 7 | | | | 4 | | | | 17 | | | | 6 | |
| | | | | | | | | | | |
Corporate | | 1 | | | | 1 | | | | 5 | | | | 1 | |
| | | | | | | | | | | |
Total | | $ | 31 | | | | 17 | | | | 128 | | | | 83 | |
Details of the change in the liability for restructuring costs during the six months ended March 31, 2021 follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sept 30, 2020 | | Expense | | Utilized/Paid | | Mar 31, 2021 |
| | | | | | | | | | | |
Severance and benefits | | $ | 176 | | | | 71 | | | | 71 | | | | 176 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | | 5 | | | | 12 | | | | 13 | | | | 4 | |
Total | | $ | 181 | | | | 83 | | | | 84 | | | | 180 | |
The tables above do not include $9 and $4 of costs related to restructuring actions incurred for the three months ended March 31, 2020 and 2021, respectively, that are required to be reported in cost of sales and selling, general and administrative expenses, while year-to-date amounts are $9 and $7, respectively.
Restructuring expense by business segment follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | | 2021 | | | | | |
| | | | | | | | | | | |
Automation Solutions | | $ | 64 | | | | 5 | | | | | | | |
| | | | | | | | | | | |
Climate Technologies | | 1 | | | | 2 | | | | | | | |
Tools & Home Products | | 1 | | | | 1 | | | | | | | |
Commercial & Residential Solutions | | 2 | | | | 3 | | | | | | | |
| | | | | | | | | | | |
Corporate | | — | | | | 1 | | | | | | | |
| | | | | | | | | | | |
Total | | $ | 66 | | | | 9 | | | | | | | |
Details of the change in the liability for restructuring costs during the three months ended December 31, 2021 follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sept 30, 2021 | | Expense | | Utilized/Paid | | Dec 31, 2021 |
| | | | | | | | | | | |
Severance and benefits | | $ | 172 | | | | 2 | | | | 20 | | | | 154 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | | 4 | | | | 7 | | | | 9 | | | | 2 | |
Total | | $ | 176 | | | | 9 | | | | 29 | | | | 156 | |
The tables above do not include $3 and $9 of costs related to restructuring actions incurred for the three months ended December 31, 2020 and 2021, respectively, that are required to be reported in cost of sales and selling, general and administrative expenses.
(8) TAXES
Income taxes were $169$280 in the secondfirst quarter of fiscal 20212022 and $165$111 in 2020,2021, resulting in effective tax rates of 2324 percent and 2420 percent, respectively. The current year andIncome taxes in the first quarter included expense of $95 related to the Vertiv subordinated interest gain, which benefited the tax rate by approximately 2 percentage points. This was offset by portfolio restructuring activities which negatively impacted the rate by 4 percentage points, while the prior year rate included unfavorable discrete tax itemsbenefits which increaseddecreased the rate 12 percentage point in both years.
points.
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 dueapproximately $37 was paid in December 2021 with the remainderremaining amount due in December 2022.
(9) OTHER FINANCIAL INFORMATION | | | | | | | | | | | | | | | | | |
| Sept 30, 2021 | | Dec 31, 2021 |
Inventories | | | | | |
Finished products | | $ | 616 | | | | 744 | |
Raw materials and work in process | | 1,434 | | | | 1,591 | |
Total | | $ | 2,050 | | | | 2,335 | |
| | | | | | | | | | | | | | | | | |
| Sept 30, 2020 | | Mar 31, 2021 |
Inventories | | | | | |
Finished products | | $ | 584 | | | | 622 | |
Raw materials and work in process | | 1,344 | | | | 1,394 | |
Total | | $ | 1,928 | | | | 2,016 | |
| | | | | | | | | | | | | | | | | |
| | | |
Property, plant and equipment, net | | | |
Property, plant and equipment, at cost | | $ | 9,055 | | | | 9,227 | |
Less: Accumulated depreciation | | 5,367 | | | | 5,564 | |
Total | | $ | 3,688 | | | | 3,663 | |
| | | | | | | | | | | | | | | | | |
| | | |
Goodwill by business segment | | | | | |
Automation Solutions | | $ | 5,583 | | | | 6,603 | |
| | | | | |
Climate Technologies | | 730 | | | | 757 | |
Tools & Home Products | | 421 | | | | 427 | |
Commercial & Residential Solutions | | 1,151 | | | | 1,184 | |
| | | | | |
Total | | $ | 6,734 | | | | 7,787 | |
| | | | | | | | | | | | | | | | | |
| | | |
Other intangible assets | | | |
Gross carrying amount | | $ | 5,106 | | | | 5,963 | |
Less: Accumulated amortization | | 2,638 | | | | 2,868 | |
Net carrying amount | | $ | 2,468 | | | | 3,095 | |
Other intangible assets include customer relationships, net of $1,328 and $1,597 as of September 30, 2020 and March 31, 2021, respectively. The increases in goodwill and other intangible assets reflect the acquisition of OSI. See Note 4.
| | | | | | | | | | | | | | | | | |
| | | |
Other assets include the following: | | | |
Operating lease right-of-use assets | | $ | 508 | | | | 523 | |
Pension assets | | 265 | | | | 374 | |
Deferred income taxes | | 99 | | | | 108 | |
Asbestos-related insurance receivables | | 100 | | | | 97 | |
| | | | | | | | | | | | | | | | | |
| | | |
Property, plant and equipment, net | | | |
Property, plant and equipment, at cost | | $ | 9,427 | | | | 9,442 | |
Less: Accumulated depreciation | | 5,689 | | | | 5,757 | |
Total | | $ | 3,738 | | | | 3,685 | |
| | | | | | | | | | | | | | | | | |
| Sept 30, 2020 | | Mar 31, 2021 |
Accrued expenses include the following: | | | | | |
Customer advances (contract liabilities) | | $ | 583 | | | | 749 | |
Employee compensation | | 577 | | | | 516 | |
Product warranty | | 148 | | | | 152 | |
Operating lease liabilities (current) | | 148 | | | | 150 | |
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | | |
Goodwill by business segment | | | | | | |
Automation Solutions | | $ | 6,552 | | | | 6,534 | | |
| | | | | | |
Climate Technologies | | 753 | | | | 751 | | |
Tools & Home Products | | 418 | | | | 410 | | |
Commercial & Residential Solutions | | 1,171 | | | | 1,161 | | |
| | | | | | |
Total | | $ | 7,723 | | | | 7,695 | | |
| | | | | | | | | | | | | | | | | |
| | | |
Other intangible assets | | | |
Gross carrying amount | | $ | 5,911 | | | | 5,910 | |
Less: Accumulated amortization | | 3,034 | | | | 3,119 | |
Net carrying amount | | $ | 2,877 | | | | 2,791 | |
Other intangible assets include customer relationships, net, of $1,495 and $1,449 as of September 30, 2021 and December 31, 2021, respectively.
| | | | | | | | | | | |
| Three Months Ended |
| Dec 31, 2020 | | Dec 31, 2021 |
Depreciation and amortization expense include the following: | | | |
Depreciation expense | $ | 124 | | | 128 | |
Amortization of intangibles (includes $14 and $14 reported in Cost of Sales for the three months ended December 31, 2020 and 2021, respectively) | 92 | | | 77 | |
Amortization of capitalized software | 28 | | | 26 | |
Total | $ | 244 | | | 231 | |
Amortization of intangibles included backlog amortization of $11 related to the OSI acquisition for the three months ended December 31, 2020.
| | | | | | | | | | | | | | | | | |
| Sept 30, 2021 | | Dec 31, 2021 |
Other assets include the following: | | | |
Pension assets | | $ | 1,015 | | | | 1,042 | |
Operating lease right-of-use assets | | 558 | | | | 536 | |
Deferred income taxes | | 115 | | | | 101 | |
Asbestos-related insurance receivables | | 95 | | | | 91 | |
| | | | | | | | | | | | | | | | | |
| | | |
Accrued expenses include the following: | | | | | |
Customer advances (contract liabilities) | | $ | 730 | | | | 851 | |
Employee compensation | | 690 | | | | 428 | |
Operating lease liabilities (current) | | 155 | | | | 152 | |
Product warranty | | 146 | | | | 136 | |
| | | | | | | | | | | | | | | | | |
Other liabilities include the following: | | | | | |
Deferred income taxes | | $ | 711 | | | | 736 | |
Pension and postretirement liabilities | | 676 | | | | 674 | |
Operating lease liabilities (noncurrent) | | 413 | | | | 395 | |
Asbestos litigation | | 256 | | | | 251 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
Other liabilities include the following: | | | | | |
Pension and postretirement liabilities | | $ | 769 | | | | 781 | |
Deferred income taxes | | 261 | | | | 429 | |
Operating lease liabilities (noncurrent) | | 373 | | | | 389 | |
Asbestos litigation | | 295 | | | | 272 | |
| | | | | |
| | | | | |
10
(10) DEBT
In December 2021, the Company issued $1 billion of 2.0% notes due December 2028, $1 billion of 2.2% notes due December 2031, and $1 billion of 2.8% notes due December 2051. The increaseCompany expects to use the net proceeds from the sale of the notes to pay a portion of its contribution of approximately $6.0 billion to existing stockholders of AspenTech as part of the transaction discussed further in deferred income taxesNote 4. If the transaction with AspenTech is largely duenot completed or is terminated, the Company will be required to redeem the OSI acquisition.notes at a redemption price equal to 101% of the principal amount plus accrued and unpaid interest.
In the first quarter of fiscal 2022, the Company repaid $500 of 2.625% notes that matured.
(10)(11) FINANCIAL INSTRUMENTS
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of MarchDecember 31, 2021, the notional amount of foreign currency hedge positions was approximately $2.1$2.4 billion, and commodity hedge contracts totaled approximately $111$143 (primarily 3940 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 MarchDecember 31, 2021 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 MarchDecember 31, 20212020 and 2020:2021:
| | | Into Earnings | | Into OCI | | Into Earnings | | Into OCI |
| | 2nd Quarter | | Six Months | | 2nd Quarter | | Six Months | | 1st Quarter | | | 1st Quarter | |
Gains (Losses) | Gains (Losses) | | Location | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | Gains (Losses) | | Location | | 2020 | | | 2021 | | | | 2020 | | | 2021 | | |
Commodity | Commodity | | Cost of sales | | $ | (1) | | | 8 | | | (4) | | | 11 | | | (23) | | | 13 | | | (16) | | | 26 | | Commodity | | Cost of sales | | $ | 3 | | | 7 | | | | 13 | | | 13 | | |
Foreign currency | Foreign currency | | Sales | | (1) | | | 1 | | | (3) | | | 2 | | | (8) | | | (2) | | | (5) | | | 3 | | Foreign currency | | Sales | | 1 | | | 1 | | | | 5 | | | — | | |
Foreign currency | Foreign currency | | Cost of sales | | 4 | | | 2 | | | 11 | | | 2 | | | (66) | | | 0 | | | (49) | | | 27 | | Foreign currency | | Cost of sales | | — | | | 2 | | | | 27 | | | 3 | | |
Foreign currency | Foreign currency | | Other deductions, net | | 13 | | | 29 | | | 21 | | | 25 | | | Foreign currency | | Other deductions, net | | (4) | | | 44 | | | | |
| Net Investment Hedges | Net Investment Hedges | | Net Investment Hedges | | | | |
Euro denominated debt | Euro denominated debt | | 57 | | | 53 | | | 31 | | | (27) | | Euro denominated debt | | | | (80) | | | 44 | | |
Total | Total | | | | $ | 15 | | | 40 | | | 25 | | | 40 | | | (40) | | | 64 | | | (39) | | | 29 | | Total | | | | $ | — | | | 54 | | | | (35) | | | 60 | | |
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. As of MarchDecember 31, 2021, the fair value of long-term debt was $6.8$9.2 billion, which exceeded the
carrying value by $425.$411. 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, 2020.2021.
Counterparties to derivatives arrangements are companies with investment-grade credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below pre-established levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The maximum amount that could potentially have been required was immaterial. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. NaNNo collateral was posted with counterparties and NaNnone was held by the Company as of MarchDecember 31, 2021.
(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in Accumulated other comprehensive income (loss) for the three and six months ended March 31, 2021 and 2020 is shown below, net of income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
Foreign currency translation | | | | | | | | | | | |
Beginning balance | | $ | (695) | | | | (522) | | | | (794) | | | | (711) | |
Other comprehensive income (loss), net of tax of $(13), $(13), $(7) and $6, respectively | | (282) | | | | (20) | | | | (183) | | | | 169 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Ending balance | | (977) | | | | (542) | | | | (977) | | | | (542) | |
| | | | | | | | | | | |
Pension and postretirement | | | | | | | | | | | |
Beginning balance | | (900) | | | | (837) | | | | (928) | | | | (864) | |
Amortization of deferred actuarial losses into earnings, net of tax of $(8), $(8), $(17) and $(16), respectively | | 30 | | | | 27 | | | | 58 | | | | 54 | |
| | | | | | | | | | | |
Ending balance | | (870) | | | | (810) | | | | (870) | | | | (810) | |
| | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
Beginning balance | | 19 | | | | 29 | | | | 0 | | | | (2) | |
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 | | (1) | | | | (8) | | | | (3) | | | | (11) | |
Ending balance | | (56) | | | | 30 | | | | (56) | | | | 30 | |
| | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | $ | (1,903) | | | | (1,322) | | | | (1,903) | | | | (1,322) | |
| | | | | | | | | | | |
(12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
Activity in Accumulated other comprehensive income (loss) for the three months ended December 31, 2020 and 2021 is shown below, net of income taxes: | | | | | | |
| Three Months Ended December 31, | | |
| | 2020 | | | | 2021 | | | | | | | |
Foreign currency translation | | | | | | | | | | | |
Beginning balance | | $ | (711) | | | | (629) | | | | | | | |
Other comprehensive income (loss), net of tax of $19 and $(10), respectively | | 189 | | | | (72) | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Ending balance | | (522) | | | | (701) | | | | | | | |
| | | | | | | | | | | |
Pension and postretirement | | | | | | | | | | | |
Beginning balance | | (864) | | | | (259) | | | | | | | |
Amortization of deferred actuarial losses into earnings, net of tax of $(8) and $(5), respectively | | 27 | | | | 18 | | | | | | | |
| | | | | | | | | | | |
Ending balance | | (837) | | | | (241) | | | | | | | |
| | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
Beginning balance | | (2) | | | | 16 | | | | | | | |
Gains deferred during the period, net of taxes of $(11) and $(4), respectively | | 34 | | | | 12 | | | | | | | |
Reclassification of realized (gains) losses to sales and cost of sales, net of tax of $1 and $2, respectively | | (3) | | | | (8) | | | | | | | |
Ending balance | | 29 | | | | 20 | | | | | | | |
| | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | $ | (1,330) | | | | (922) | | | | | | | |
| | | | | | | | | | | |
(13) 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 March 31, | | Six Months Ended March 31, |
| | 2020 | | | | 2021 | | | | 2020 | | | | 2021 | |
| | | | | | | | | | | |
Measurement & Analytical Instrumentation | | $ | 776 | | | | 732 | | | | 1,571 | | | | 1,430 | |
Valves, Actuators & Regulators | | 854 | | | | 836 | | | | 1,767 | | | | 1,642 | |
Industrial Solutions | | 494 | | | | 555 | | | | 1,001 | | | | 1,063 | |
Systems & Software | | 585 | | | | 670 | | | | 1,222 | | | | 1,350 | |
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 March 31, | | Six Months Ended March 31, |
| | 2020 | | | 2021 | | | | 2020 | | | 2020 | |
Automation Solutions | | $ | 138 | | | 156 | | | | 277 | | | 312 | |
| | | | | | | | | |
Climate Technologies | | 45 | | | 47 | | | | 89 | | | 96 | |
Tools & Home Products | | 19 | | | 20 | | | | 38 | | | 39 | |
Commercial & Residential Solutions | | 64 | | | 67 | | | | 127 | | | 135 | |
| | | | | | | | | |
Corporate and other | | 9 | | | 16 | | | | 18 | | | 36 | |
Total | | $ | 211 | | | 239 | | | | 422 | | | 483 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| Sales | | Earnings | | | | |
| 2020 | | | 2021 | | | 2020 | | | 2021 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Automation Solutions | $ | 2,692 | | | 2,805 | | | 361 | | | 526 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Climate Technologies | 1,031 | | | 1,163 | | | 212 | | | 192 | | | | | | | | | |
Tools & Home Products | 445 | | | 508 | | | 98 | | | 107 | | | | | | | | | |
Commercial & Residential Solutions | 1,476 | | | 1,671 | | | 310 | | | 299 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock compensation | | | | | (64) | | | (41) | | | | | | | | | |
Unallocated pension and postretirement costs | | | | | 24 | | | 26 | | | | | | | | | |
Corporate and other | | | | | (28) | | | (50) | | | | | | | | | |
Gain on subordinated interest | | | | | — | | | 453 | | | | | | | | | |
Eliminations/Interest | (7) | | | (3) | | | (40) | | | (38) | | | | | | | | | |
Total | $ | 4,161 | | | 4,473 | | | 563 | | | 1,175 | | | | | | | | | |
Automation Solutions sales by major product offering are summarized below. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| | 2020 | | | | 2021 | | | | | | | |
| | | | | | | | | | | |
Measurement & Analytical Instrumentation | | $ | 698 | | | | 735 | | | | | | | |
Valves, Actuators & Regulators | | 806 | | | | 816 | | | | | | | |
Industrial Solutions | | 508 | | | | 566 | | | | | | | |
Systems & Software | | 680 | | | | 688 | | | | | | | |
Automation Solutions | | $ | 2,692 | | | | 2,805 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Depreciation and amortization (includes intellectual property, customer relationships and capitalized software) by business segment are summarized below: | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| | 2020 | | | 2021 | | | | | | |
Automation Solutions | | $ | 156 | | | 155 | | | | | | |
| | | | | | | | | |
Climate Technologies | | 49 | | | 47 | | | | | | |
Tools & Home Products | | 19 | | | 20 | | | | | | |
Commercial & Residential Solutions | | 68 | | | 67 | | | | | | |
| | | | | | | | | |
Corporate and other | | 20 | | | 9 | | | | | | |
Total | | $ | 244 | | | 231 | | | | | | |
Sales by geographic destination are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, |
| 2020 | | 2021 |
| Automation Solutions | | Commercial & Residential Solutions | | Total | | Automation Solutions | | Commercial & Residential Solutions | | Total |
| | | | | | | | | | | |
Americas | $ | 1,168 | | | 981 | | | 2,149 | | | 1,241 | | | 1,144 | | | 2,385 | |
Asia, Middle East & Africa | 942 | | | 308 | | | 1,250 | | | 1,005 | | | 322 | | | 1,327 | |
Europe | 582 | | | 187 | | | 769 | | | 559 | | | 205 | | | 764 | |
Total | $ | 2,692 | | | 1,476 | | | 4,168 | | | 2,805 | | | 1,671 | | | 4,476 | |
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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 secondfirst quarter of fiscal 2021,2022, net sales were $4.4$4.5 billion, up 68 percent compared with the prior year, supported by foreign currency translation which added 3 percent and the Open Systems International, Inc. (OSI) acquisition which added 1 percent.year. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were also up 28 percent. Automation Solutions underlying sales were down slightly compared toSales growth reflected the continuation of the Company's strong rebound which began in the prior year, but continued to improve sequentially as global markets recover from the impacts of COVID-19. Sales in North America were down 15 percent as automation markets remained weak, but hybridwith favorable results across both business platforms and discrete markets improved sequentially. Sales rebounded sharply in China (up 42 percent) due to easier comparisons and Europe was up 6 percent. Commercial & Residential Solutions underlying sales were up sharply, reflecting growth across all businesses and geographies. Demand for residential-oriented products and solutions in North America and global cold chain end markets were strong, while sales in China rebounded sharply.
Net earnings common stockholders were $561,$896, up 9101 percent, and diluted earnings per share were $0.93,$1.50, up 11103 percent compared with $0.84$0.74 in the prior year. OperatingResults reflected strong operating results increased $0.14and included a pretax gain of $453 ($358 after-tax, $0.60 per share on strong segment margins, reflecting significant savings from the Company's restructuring and cost reset actions. This was largely offset by higher stock compensation expense ($0.12 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 ($0.04 per share), lower restructuring costs ($0.02 per share), a lower tax rate ($0.01 per share) and share repurchases ($0.01 per share), partially offset by first year acquisition accounting charges related to the OSI acquisition ($0.01 per share).Company's subordinated interest in Vertiv.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCHDECEMBER 31
Following is an analysis of the Company’s operating results for the secondfirst quarter ended MarchDecember 31, 2021,2020, compared with the secondfirst quarter ended MarchDecember 31, 2020.
| | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Net sales | $ | 4,162 | | | 4,431 | | | 6 | % |
Gross profit | $ | 1,750 | | | 1,862 | | | 6 | % |
Percent of sales | 42.1 | % | | 42.0 | % | | |
| | | | | |
SG&A | $ | 983 | | | 1,054 | | | 7 | % |
Percent of sales | 23.7 | % | | 23.8 | % | | |
| | | | | |
| | | | | |
| | | | | |
Other deductions, net | $ | 42 | | | 33 | | | |
Amortization of intangibles | $ | 59 | | | 74 | | | |
Restructuring costs | $ | 31 | | | 17 | | | |
| | | | | |
Interest expense, net | $ | 36 | | | 38 | | | |
| | | | | |
Earnings before income taxes | $ | 689 | | | 737 | | | 7 | % |
Percent of sales | 16.6 | % | | 16.6 | % | | |
| | | | | |
Net earnings common stockholders | $ | 517 | | | 561 | | | 9 | % |
Percent of sales | 12.4 | % | | 12.7 | % | | |
| | | | | |
| | | | | |
Diluted earnings per share | $ | 0.84 | | | 0.93 | | | 11 | % |
| | | | | |
2021. | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Net sales | $ | 4,161 | | | 4,473 | | | 8 | % |
Gross profit | $ | 1,723 | | | 1,822 | | | 6 | % |
Percent of sales | 41.4 | % | | 40.7 | % | | |
| | | | | |
SG&A | $ | 998 | | | 1,011 | | | 1 | % |
Percent of sales | 24.0 | % | | 22.6 | % | | |
| | | | | |
| | | | | |
| | | | | |
Gain on subordinated interest | $ | — | | | (453) | | | |
Other deductions, net | $ | 122 | | | 51 | | | |
Amortization of intangibles | $ | 78 | | | 63 | | | |
Restructuring costs | $ | 66 | | | 9 | | | |
| | | | | |
Interest expense, net | $ | 40 | | | 38 | | | |
| | | | | |
Earnings before income taxes | $ | 563 | | | 1,175 | | | 109 | % |
Percent of sales | 13.5 | % | | 26.3 | % | | |
| | | | | |
Net earnings common stockholders | $ | 445 | | | 896 | | | 101 | % |
Percent of sales | 10.7 | % | | 20.0 | % | | |
| | | | | |
| | | | | |
Diluted earnings per share | $ | 0.74 | | | 1.50 | | | 103 | % |
| | | | | |
Net sales for the secondfirst quarter of fiscal 20212022 were $4.4$4.5 billion, up 68 percent compared with 2020.2021. Automation Solutions sales were up 34 percent and Commercial & Residential Solutions sales were up 13 percent. Underlying sales were also up 28 percent ason 5 percent higher volume and 3 percent higher price, while foreign currency translation addedhad a slightly negative impact. Underlying sales were up 10 percent in the U.S. and up 7 percent internationally. The Americas was up 11 percent, Europe was up 3 percent and Asia, Middle East & Africa was up 6 percent (China up 12 percent).
Cost of sales for the OSI acquisition added 1 percent.first quarter of fiscal 2022 were $2,651, an increase of $213 compared with 2021, due to higher sales volume and higher materials costs. Gross margin of 40.7 percent decreased 0.7 percentage points compared with the prior year reflecting unfavorable price-cost in Commercial & Residential Solutions, partially offset by leverage on higher sales volume and favorable mix.
Selling, general and administrative (SG&A) expenses of $1,011 increased $13 compared with the prior year on increased sales volume, partially offset by lower stock compensation expense of $23. SG&A as a percent of sales
Underlying sales were down 5decreased 1.4 percentage points to 22.6 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 second quarter of fiscal 2021 were $2,569, an increase of $157 compared with 2020, due to the impact of foreign currency translation,reflecting leverage on higher sales volume and the OSI acquisition. Gross margin of 42.0 percent decreased 0.1 percentage points compared with the prior year due to unfavorable mix.
Selling, general and administrative (SG&A) expenses of $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 2.2 percentage points, reflecting significant savings from the Company's restructuring and cost reset actions.
As previously disclosed, the Company sold its network power systems business (rebranded as Vertiv, now a publicly traded company, symbol VRT) in 2017 and retained a subordinated interest contingent upon the equity holders first receiving a threshold cash return on their initial investment. In the first quarter of fiscal 2022, the equity holders' cumulative cash return exceeded the threshold and as a result, the Company received a distribution of $438 in November 2021 (in total, a gain of $453 was recognized in the first quarter). Based on the terms of the agreement and the current calculation, the Company could receive additional distributions of approximately $100 which are expected to be received over the next two years. However, the distributions are contingent on the timing and price at which Vertiv shares are sold by the equity holders and therefore, there can be no assurance as to the amount or timing of the remaining distributions to the Company.
Other deductions, net were $33$51 in 2021,2022, a decrease of $9$71 compared with the prior year, reflecting lowera decline in restructuring costs of $14 and$57, a gain on the sale of an equity investment of $31, partially offset by unfavorablefavorable impact from foreign currency transactions of $22$25 due to losses in the prior year and higher intangiblesgains in the current year, and gains from the sales of capital assets of $15, partially offset by transaction costs of $23 related to the AspenTech transaction. Intangibles amortization of $15, primarilywas lower by $11 due to backlog amortization in the prior year related to the OSI acquisition. The prior year also included investment-related gains, including a gain of $21 from an investment sale and a $17 gain from the acquisition of full ownership of an equity investment also impacted comparisons. See Notes 6 and 7.
Pretax earningsearnings of $737$1,175 increased $48,$612, up 7109 percent compared with the prior year.year, reflecting the Vertiv subordinated interest gain of $453 discussed above. Earnings increased $80$165 in Automation Solutions and $51decreased $11 in CommercialCommercial & Residential Solutions. CostsSolutions, while costs reported at Corporate increased $81 primarily due to higher stock compensation expense of $99, partially offset by the gain on sale of an equity investment of $31.decreased $3. See the Business Segments discussion that follows and Note 12.13.
I
ncomeIncome taxes were $169 for$280 in the first quarter of fiscal 2022 and $111 in 2021, and $165 for 2020, resulting in effective tax rates of 2324 percent and 2420 percent, respectively. The current year andIncome taxes in the first quarter included expense of $95 related to the Vertiv subordinated interest gain, which benefited the tax rate by approximately 2 percentage points. This was offset by portfolio restructuring activities which negatively impacted the rate by 4 percentage points, while the prior year rate included unfavorable discrete tax itemsbenefits which increaseddecreased the rate 12 percentage point in both years.points.
Net earnings common stockholders in the secondfirst quarter of fiscal 20212022 were $561,$896, up 9101 percent, compared with $517$445 in the prior year, and earnings per share were $0.93,$1.50, up 11103 percent, compared with $0.84$0.74 in the prior year. See discussion in the Overview above and the analysis below of adjusted earnings per share for further details.
The table below, which shows results on an adjusted EBITA basis, is intended to supplement the Company's discussion of its results of operations herein. The Company defines adjusted EBITA as earnings excluding interest expense, net, income taxes, intangibles amortization expense, restructuring expense, first year purchase accounting related items and transaction fees, and certain gains, losses or impairments. Adjusted EBITA and adjusted EBITA margin are measures used by management and may be useful for investors to evaluate the Company's operational performance.
Business Segments
Following is an analysis of operating results for the Company’s business segments for the second quarter ended March 31, 2021, compared with the second quarter ended March 31, 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 Mar 31 | 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Sales | $ | 2,709 | | | 2,793 | | | 3 | % |
Earnings | $ | 391 | | | 471 | | | 20 | % |
Margin | 14.4 | % | | 16.8 | % | | |
| | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | Change |
Earnings before income taxes | $ | 563 | | | 1,175 | | | 109 | % |
Percent of sales | 13.5 | % | | 26.3 | % | | |
Interest expense, net | 40 | | | 38 | | | |
Restructuring and related costs | 69 | | | 18 | | | |
Amortization of intangibles | 81 | | | 77 | | | |
Gain on subordinated interest | — | | | (453) | | | |
AspenTech transaction costs | — | | | 23 | | | |
Gain on acquisition of full ownership of equity investment | (17) | | | — | | | |
OSI first year acquisition accounting charges and fees | 21 | | | — | | | |
Adjusted EBITA | $ | 757 | | | 878 | | | 16 | % |
Percent of sales | 18.2 | % | | 19.6 | % | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
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 $2.8 billion in the second quarter, an increase of $84 or 3 percent. Underlying sales decreased 2 percent on lower volume, but continued to improve sequentially as global markets recover from the impacts of COVID-19. Foreign currency translation had a 3 percent favorable impact and the OSI acquisition had a 2 percent favorable impact. Underlying sales decreased 12 percent in the Americas (U.S. down 15 percent), while Europe increased 6 percent and Asia, Middle East & Africa increased 9 percent (China up 42 percent). Sales for Measurement & Analytical Instrumentation decreased $44, or 6 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 robust growth in ChinaThe tables below presents the Company's diluted earnings per share on easier comparisons. Industrial Solutions sales were up $61, or 12 percent, reflecting robust demand in China duean adjusted basis to easierfacilitate period-to-period comparisons and strong growth in Europe. North American discrete end markets declined compared toprovide additional insight into the priorunderlying, ongoing operating performance of the Company. Adjusted earnings per share excludes intangibles amortization expense, restructuring expense, first year but improved sequentially. Systems & Software increased $85,purchase accounting related items and transaction fees, and certain gains, losses 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.impairments.
COMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Three Months Ended Mar 31 | 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 1,026 | | | 1,160 | | | 13 | % |
Tools & Home Products | 432 | | | 485 | | | 13 | % |
Total | $ | 1,458 | | | 1,645 | | | 13 | % |
| | | | | |
Earnings: | | | | | |
Climate Technologies | $ | 217 | | | 245 | | | 13 | % |
Tools & Home Products | 89 | | | 112 | | | 25 | % |
Total | $ | 306 | | | 357 | | | 17 | % |
Margin | 21.0 | % | | 21.7 | % | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended Dec 31 |
| | | | 2020 | | 2021 |
Diluted earnings per share | | | | $ | 0.74 | | | 1.50 | |
| | | | | | |
Restructuring and related costs | | | | 0.09 | | | 0.02 | |
Amortization of intangibles | | | | 0.10 | | | 0.10 | |
Gain on subordinated interest | | | | — | | | (0.60) | |
AspenTech transaction costs | | | | — | | | 0.03 | |
Gain on acquisition of full ownership of equity investment | | | | (0.03) | | | — | |
OSI first year acquisition accounting charges and fees | | | | 0.03 | | | — | |
| | | | | | |
Adjusted diluted earnings per share | | | | $ | 0.93 | | | 1.05 |
Commercial & Residential Solutions sales were $1.6 billionThe table below summarizes the changes in adjusted diluted earnings per share. The items identified below are discussed throughout MD&A, see further discussion above and in the secondBusiness Segments and Financial Position sections below.
| | | | | | | | |
| | Three Months Ended |
Adjusted diluted earnings per share - Dec 31, 2020 | | $ | 0.93 | |
| | |
Operations | | 0.10 | |
Stock compensation | | 0.03 | |
Pensions | | 0.01 | |
Gains on sales of investments - prior year | | (0.03) | |
Gains on sales of capital assets - current year | | 0.02 | |
Foreign currency | | 0.03 | |
Income tax rate | | (0.06) | |
Share repurchases | | 0.02 | |
| | |
Adjusted diluted earnings per share - Dec 31, 2021 | | $ | 1.05 | |
Business Segments
Following is an analysis of operating results for the Company’s business segments for the first 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 percentended December 31, 2020, compared with the prior year,first quarter ended December 31, 2021. The Company defines segment earnings as earnings before interest 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.
taxes. See Note 13 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31 | | | | | | | | | | | | | | | | | |
Three Months Ended Dec 31 | 2020 | | 2021 | | Change |
| | | | | |
| | | | | |
Sales | $ | 2,692 | | | 2,805 | | | 4 | % |
Earnings | $ | 361 | | | 526 | | | 45 | % |
Margin | 13.4 | % | | 18.7 | % | | |
| | | | | |
Restructuring and related costs | $ | 64 | | | 12 | | | |
Amortization of intangibles | $ | 68 | | | 65 | | | |
| | | | | |
Adjusted EBITA | $ | 493 | | | 603 | | | 22 | % |
Adjusted EBITA Margin | 18.3 | % | | 21.5 | % | | |
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. | | | | | | | | | | | | | | | | | |
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Sales by Major Product Offering | | | | | |
Measurement & Analytical Instrumentation | $ | 698 | | | 735 | | | 5 | % |
Valves, Actuators & Regulators | 806 | | | 816 | | | 1 | % |
Industrial Solutions | 508 | | | 566 | | | 12 | % |
Systems & Software | 680 | | | 688 | | | 1 | % |
Total | $ | 2,692 | | | 2,805 | | | 4 | % |
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| 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 | % | | |
| | | | | |
SG&A | $ | 2,106 | | | 2,052 | | | (3) | % |
Percent of sales | 25.3 | % | | 23.9 | % | | |
| | | | | |
| | | | | |
Other deductions, net | $ | 220 | | | 155 | | | |
Amortization of intangibles | $ | 118 | | | 152 | | | |
Restructuring costs | $ | 128 | | | 83 | | | |
| | | | | |
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 | % | | |
| | | | | |
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 | % |
| | | | | |
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$2.8 billion in the first quarter, an increase of $113 or 4 percent. Underlying sales were flat, as foreignincreased 5 percent on 4 percent higher volume and 1 percent higher price, reflecting continued recovery in most end markets and world areas. However, sales continued to be unfavorably impacted by supply chain and logistics constraints in the quarter. Foreign currency translation added 2had a 1 percent and acquisitions added 1 percent.unfavorable impact. Underlying sales decreased 6increased 7 percent in the U.S. and increased 5 percent internationally. The Americas was down 5 percent,(U.S. up 4 percent), as process end markets continue to recover, while Europe was up 5 percentflat, and Asia, Middle East & Africa was upincreased 7 percent (China up 2217 percent).
Cost Sales for Measurement & Analytical Instrumentation increased $37, or 5 percent as market conditions continued to improve for North American process industries. Measurement & Analytical sales were strong in Asia, Middle East & Africa, with China up over 20 percent, up moderately in North America, and soft in Europe. Valves, Actuators & Regulators increased $10, or 1 percent as favorable demand in the Americas and China was offset by softness in the rest of Asia, Middle East & Africa. Industrial Solutions sales for 2021 were $5,007,up $58, or 12 percent, reflecting strong global demand in discrete end markets. Systems & Software increased $8, or 1 percent, as strength in process end markets in North America was offset by declines in Europe and Asia, Middle East & Africa, while power end markets were strong in Asia, Middle East & Africa. Earnings were $526, an increase of $203 versus $4,804 in 2020, primarily due to the impact of foreign currency translation$165, or 45 percent, and the OSI acquisition. Gross margin decreased 0.5increased 5.3 percentage points to 41.718.7 percent, reflecting unfavorable mix and deleverageleverage on higher volume, lower sales volume within Automation Solutions.
SG&Arestructuring expenses of $2,052 decreased $54 and SG&A as a percent of sales decreased 1.4which benefited margins 2.0 percentage points, to 23.9 percent, reflecting significant savings from the Company's restructuringcost reduction actions 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 werefavorable mix, partially offset by slightly unfavorable comparisons due to higher intangibles amortization of $34, primarily related toCOVID-related savings in 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.prior year.
Net earnings common stockholdersCOMMERCIAL & RESIDENTIAL SOLUTIONS
| | | | | | | | | | | | | | | | | |
Three Months Ended Dec 31 | 2020 | | 2021 | | Change |
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| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 1,031 | | | 1,163 | | | 13 | % |
Tools & Home Products | 445 | | | 508 | | | 14 | % |
Total | $ | 1,476 | | | 1,671 | | | 13 | % |
| | | | | |
Earnings: | | | | | |
Climate Technologies | $ | 212 | | | 192 | | | (9) | % |
Tools & Home Products | 98 | | | 107 | | | 9 | % |
Total | $ | 310 | | | 299 | | | (3) | % |
Margin | 21.0 | % | | 17.9 | % | | |
| | | | | |
Restructuring and related costs | $ | 3 | | | 4 | | | |
Amortization of intangibles | $ | 13 | | | 12 | | | |
| | | | | |
Adjusted EBITA | $ | 326 | | | 315 | | | (3) | % |
Adjusted EBITA Margin | 22.1 | % | | 18.9 | % | | |
Commercial & Residential Solutions sales were $1.7 billion in 2021the first quarter, up $195, or 13 percent compared to the prior year. Underlying sales increased 13 percent on 8 percent higher volume and 5 percent higher price, reflecting strong growth across all businesses and geographies, especially in commercial and industrial end markets while residential end markets were $1,006,solid. Overall, underlying sales increased 17 percent in the Americas (U.S. up 1916 percent), 13 percent in Europe and 4 percent in Asia, Middle East & Africa (China was flat). Climate Technologies sales were $1.2 billion in the first quarter, an increase of $132, or 13 percent. Air conditioning, heating and refrigeration sales were up, reflecting strong global demand across all end markets, especially food service, food retail and aftermarket. Tools & Home Products sales were $508 in the first quarter, an increase of $63, or 14 percent. Sales of professional tools were up nearly 20 percent, while wet/dry vacuums and food waste disposers sales increased over 10 percent. Earnings were $299, down 3 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 relatedmargin decreased 3.1 percentage points 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
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Six Months Ended Mar 31 | 2020 | | 2021 | | Change |
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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 917.9 percent due to weakness in process industries, particularly in North America,unfavorable price-cost reflecting steel price increases, partially offset by moderate growth in Europeleverage on higher sales volume 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 actionsactions. Unfavorable price-cost is expected to improve and become 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 impactduring the second half of 0.3 percentage points.
fiscal 2022 as price increases are realized.
COMMERCIAL & RESIDENTIAL SOLUTIONS
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Six Months Ended Mar 31 | 2020 | | 2021 | | Change |
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| | | | | |
Sales: | | | | | |
Climate Technologies | $ | 1,899 | | | 2,191 | | | 15 | % |
Tools & Home Products | 862 | | | 930 | | | 8 | % |
Total | $ | 2,761 | | | 3,121 | | | 13 | % |
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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 sixthree months ended MarchDecember 31, 2021 as compared to the year ended September 30, 20202021 and the sixthree months ended MarchDecember 31, 2020 follow.
| | | | | | | | | | | | | | | | | |
| Mar 31, 2020 | | Sept 30, 2020 | | Mar 31, 2021 |
Operating working capital | $ | 1,250 | | | $ | 866 | | | $ | 781 | |
Current ratio | 1.0 | | | 1.5 | | | 1.3 | |
Total debt-to-total capital | 50.6 | % | | 47.1 | % | | 44.4 | % |
Net debt-to-net capital | 40.5 | % | | 33.2 | % | | 35.1 | % |
Interest coverage ratio | 14.4 | X | | 14.4 | X | | 16.6 | X |
| | | | | | | | | | | | | | | | | |
| Dec 31, 2020 | | Sept 30, 2021 | | Dec 31, 2021 |
Operating working capital | $ | 825 | | | $ | 704 | | | $ | 840 | |
Current ratio | 1.2 | | | 1.3 | | | 2.0 | |
Total debt-to-total capital | 46.1 | % | | 40.3 | % | | 46.1 | % |
Net debt-to-net capital | 37.8 | % | | 30.4 | % | | 28.2 | % |
Interest coverage ratio | 14.2 | X | | 18.6 | X | | 29.6 | X |
The Company's operating working capital decreased $469 comparedincreased compared to the same quarter last year largelyand compared to September 30, 2021 due to timing-related reductionshigher inventory levels to support sales growth and reflecting ongoing supply chain and logistics constraints. The increase in the current business conditions.ratio reflects increased cash from the Company's $3 billion of debt issued in the first quarter of fiscal 2022 to support the AspenTech transaction and cash received related to the Vertiv subordinated interest of $438. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 16.629.6X for the first sixthree months of fiscal 20212022 compares to 14.4X14.2X for the sixthree months ended MarchDecember 31, 2020. The increase reflects higher pretax earnings in the current year.quarter, including the Vertiv subordinated interest gain of $453. Excluding the gain, the interest coverage ratio was 18.6X.
In December 2021, the Company issued $1 billion of 2.00% notes due 2028, $1 billion of 2.20% notes due 2031 and $1 billion of 2.80% notes due 2051. The net proceeds from the sale of the notes will be used to pay a portion of the Company's contribution of approximately $6.0 billion to existing stockholders of Aspen Technology, Inc. (“AspenTech”) as part of the AspenTech transaction. The Company expects to finance the remainder of the contribution through existing sources, including cash on hand, short-term debt capacity, and cash from operations. See Note 4 and Note 10.
Operating cash flow for the first sixthree months of fiscal 20212022 was $1.6 billion, an increase$523, a decrease of $603$285 compared with $1.0 billion$808 in the prior year due to favorable operating working capital higher inventory levels to support sales growth and higher earnings.reflecting ongoing supply chain and logistics constraints. Free cash flow of $1.4 billion$407 in the first sixthree months of fiscal 20212022 (operating cash flow of $1.6 billion$523 less capital expenditures of $222) increased $606$116) decreased $279 compared to free cash flow of $0.8 billion$686 in 20202021 (operating cash flow of $1.0 billion$808 less capital expenditures of $225)$122), reflecting the increasedecrease in operating cash flow. Cash used forprovided by investing activities was $1.8 billion largely$285, reflecting cash received related to the Vertiv subordinated interest of $438. Cash provided by financing activities was $1,601, primarily due to proceeds of nearly $3 billion from the OSI acquisition.December 2021 debt issuance, partially offset by the repayment of $500 of long-term debt, dividend payments, and share repurchases.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company deferred $73 of certain payroll taxes through the end of calendar year 2020, half of which is dueapproximately $37 was paid in December 2021 with the remainderremaining amount 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$27 billion and stockholders' equity of $9$10 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 20212022 OUTLOOK
DespiteEmerson continues to see strong demand in both the Automation Solutions and Commercial & Residential Solutions platforms and to manage ongoing pandemicsupply chain constraints and challenges in many parts ofrelated to the world, the Company expects overall continued improvement in industrial and commercial demand over the remainder of 2021. Residential demand is expected to remain robust, but begin to taper in the second half.COVID-19 pandemic. For the full year, consolidated net sales are expected to be up 6 to 98 percent, with underlying sales up 37 to 69 percent excluding a 21 percent favorableunfavorable impact from foreign currency translation and a 1 percent favorable impact from the OSI acquisition.translation. Automation Solutions net sales are expected to be up 35 to 57 percent, with underlying sales down 1up 7 to up 19 percent excluding a 32 percent favorableunfavorable impact from foreign currency translation and a 1 percent favorable impact from the OSI acquisition.translation. Commercial & Residential Solutions net sales are expected to be up 148 to 1610 percent with underlying sales up 129 to 1411 percent excluding a 21 percent unfavorable impact from favorable foreign currency translation. Earnings per share are expected to be $3.55$4.71 to $3.65,$4.86, while adjusted earnings per share whichare expected to be $4.90 to $5.05. Adjusted earnings per share exclude a $0.26 per share$0.20 impact from restructuring actions, a $0.07 per share$0.39 impact from OSI first year acquisition accounting charges and fees,amortization of intangibles, a $0.60 gain from the Vertiv subordinated interest (see Note 4), and a $0.03 per share equity investment gain, are expected to be $3.85 to $3.95.$0.20 impact from Aspen Tech transaction costs and interest expense. Operating cash flow is expected to be approximately $3.3$3.8 billion and free cash flow, which excludes targetedprojected capital spending of $600$650 million, is expected to be approximately $2.7$3.1 billion. Fiscal 2021 shareShare repurchases and acquisition activity are expected to be approximately $250 to $500 million in fiscal 2022.
The guidance above does not include the operational impact of the pending transaction with AspenTech, but does include estimated transaction fees and interest expense on $3 billion of debt already incurred to fund the transaction. Emerson will contribute approximately $6.0 billion in cash related to its definitive agreement with AspenTech, and the transaction is expected to close in the amountsecond calendar quarter of $500 million2022, subject to $1approval by AspenTech shareholders, regulatory approvals and other customary closing conditions. The Company issued $3 billion excluding the OSI acquisition which closed on October 1, 2020. However, future developments related to COVID-19, including further actions taken by governmental authorities, potential shutdowns of our operations, or delayslong-term debt in the stabilizationfirst quarter of fiscal 2022 and recoveryexpects to finance the remainder of economic conditions could further adversely affect our operationsthe contribution through existing sources, including cash on hand, short-term debt capacity, and cash from operations. While the transaction will initially increase the Company's financial results, as well as thoseleverage and debt ratios, Emerson's debt rating agencies reaffirmed the Company's investment-grade long-term debt ratings on the new debt issuances. Further, the Company expects its leverage and debt ratios to improve through strong combined cash flow of our customersthe companies and suppliers.disciplined capital allocation. See Item 1A – “Risk Factors”- "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 Company's ability to successfully complete on the terms and conditions contemplated, and the financial impact of, the proposed AspenTech transaction, 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, 20202021 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).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
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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 2021 | | 870 | | | | $95.51 | | | 870 | | | | 59,375 |
November 2021 | | 382 | | | | $94.70 | | | 382 | | | | 58,993 |
December 2021 | | 1,524 | | | | $91.08 | | | 1,524 | | | | 57,469 |
Total | | 2,776 | | | | $92.97 | | | 2,776 | | | | 57,469 |
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 64.657.5 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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32.1 | | BylawsTransaction Agreement and Plan of Merger, dated as of October 10, 2021, among Emerson Electric Co.Co., as amended through May 4, 2021,Aspen Technology, Inc., EMR Worldwide, Inc., Emersub CX, Inc. and Emersub CXI, Inc., incorporated by reference to the Company'sCompany’s Form 8-K, dated May 4, 2021, filed on May 4,October 12, 2021, File No. 1-278, Exhibit 3.1.2.1. *
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10.1 | | LetterSuspension of Rights Agreement dated February 23,October 12, 2021, by and between Emerson Electric Co. and David N. Farr, incorporated by referenceJPMorgan Chase Bank, N.A., as Agent, under the Credit Agreement dated as of May 23, 2018 (as amended or otherwise modified from time to the Company's Form 8-K dated February 23, 2021, filed on February 26, 2021, File No. 1-278, Exhibit 10.1.time).
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10.3 | | PeLetter Agreement dated February 16, 2021rformance Shares Program Award Agreement 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.(used after November 1, 2021). |
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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 MarchDecember 31, 2021 and 2020, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended MarchDecember 31, 2021 and 2020, (iii) Consolidated Balance Sheets as of September 30, 20202021 and MarchDecember 31, 2021, (iv) Consolidated Statements of Equity for the three and six months ended MarchDecember 31, 2021 and 2020, (v) Consolidated Statements of Cash Flows for the sixthree months ended MarchDecember 31, 2021 and 2020, and (vi) Notes to Consolidated Financial Statements for the three and six months ended ended MarchDecember 31, 2021 and 2020.
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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* | Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Emerson agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).
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** | The Company entered into two global notes for each series of notes (Notes A-1 and A-2), which are identical other than with respect to the note number. |
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/ FrankF. J. Dellaquila | |
| | | Frank J. Dellaquila | |
| | | Senior Executive Vice President and Chief Financial Officer | |
| | | (on behalf of the registrant and as Chief Financial Officer) | |
| | | May 5, 2021February 2, 2022 | |