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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM i10-Q
i☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
(Exact name of registrant as specified in its charter)
iMissouri
i43-0259330
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i8000 W. Florissant Ave.
iP.O.
Box 4100
iSt. Louis,
iMissouri
i63136
(Address
of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (i314)i553-2000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock of $0.50 par value per share
iEMR
iNew
York Stock Exchange
NYSE Chicago
i0.375% Notes due 2024
iEMR 24
iNew
York Stock Exchange
i1.250% Notes due 2025
iEMR 25A
iNew
York Stock Exchange
i2.000% Notes due 2029
iEMR 29
iNew
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. iYes☒ 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).
iYes☒
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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at July 31, 2022:i591.3
million shares.
(Dollars and shares in millions, except per share amounts or where
noted)
(1) iBASIS 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, 2021. Certain prior year amounts have been reclassified to conform to the current year presentation to reflect the business combination with AspenTech (see Note 4), which is reported as a new segment and includes the historical results of Open Systems International, Inc. and the Geological Simulation Software business.
These businesses were previously reported in the Automation Solutions segment (see Note 13).
Effective October 1, 2021, the Company adopted three accounting standard updates which had an immaterial or no impact on the Company's financial statements as of and for the nine months ended June 30, 2022. These included:
•Updates to ASC 805, Business Combinations, which clarify the accounting 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 ASC 805.
•Updates to ASC 740, Income Taxes, which require the recognition of a franchise tax that is partially based on income as an income-based tax with any incremental amount as a non-income based tax. These updates also make certain changes to intra-period tax allocation principles and interim tax calculations.
•Updates to ASC 321, Equity Securities, ASC 323 Investments
- Equity Method and Joint Ventures, and ASC 815, Derivatives and Hedging, which clarify how to account for the transition into and out of the equity method of accounting when evaluating observable transactions.
(2) iREVENUE 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 13 for additional information about the Company's revenues.
iThe
following table summarizes the balances of the Company's unbilled receivables (contract assets), which are reported in Other assets (current and noncurrent), and its customer advances (contract liabilities), which are reported in Accrued expenses and Other liabilities.
The
majority of the Company's contract balances relate to (1) arrangements where revenue is recognized over time and payments from customers are made according to a contractual billing schedule, and (2) revenue from term software license arrangements sold by AspenTech where the license revenue is recognized upfront upon delivery. The change in the net contract balance was due to the AspenTech acquisition, which added net contract assets of approximately $i700,
partially offset by an increase in net contract liabilities for the Company's existing businesses due to customer billings exceeding revenue recognized for performance completed during the period.
6
Revenue recognized for the three and nine months ended June 30, 2022 included $i63
and $i519 that was included in the beginning contract liability balance. Other factors that impacted the change in net contract liabilities were immaterial. Revenue recognized for the three and nine months ended June 30, 2022 for performance obligations that were satisfied in previous periods, including cumulative catchup adjustments on
the Company's long-term contracts, was not material.
As of June 30, 2022, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $i8.5
billion, which includes approximately $i700 related to the AspenTech acquisition. AspenTech's remaining performance obligations primarily relate to software maintenance in long-term contracts for unspecified future software updates provided on a when-and-if available basis. The Company expects to recognize approximately i80
percent of its remaining performance obligations as revenue over the next i12 months, with the remainder substantially over the following two years.
(3) iCOMMON
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.i
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.
As discussed in Note 4, Emerson completed the acquisition of AspenTech in the third quarter of fiscal 2022. New AspenTech, as defined in Note 4, operates as a separate publicly traded company and has various stock-based compensation plans, including stock options and restricted stock units,
which are settled in their own common stock and are accounted for as equity awards. Stock compensation expense for New AspenTech was $ii15/
for the three and nine months ended June 30, 2022.
(4) iACQUISITIONS AND DIVESTITURES
Aspen Technology
On May 16, 2022, the
Companycompleted the transactions contemplated by its 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 (collectively, the “Emerson Industrial Software Business”), along with approximately $i6.0 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, Emerson beneficially owned i55 percent of the outstanding shares of New AspenTech common stock (on a fully diluted basis) and former AspenTech stockholders owned the remaining outstanding shares of New AspenTech common stock. New AspenTech and its subsidiaries now operate under AspenTech’s
previous name “Aspen Technology, Inc.” and New AspenTech common stock is traded on NASDAQ under AspenTech’s previous stock ticker symbol “AZPN.”
The business combination has been accounted for using the acquisition method of accounting with Emerson considered the accounting acquirer of AspenTech. The net assets of AspenTech were recorded at their estimated fair value and the Emerson Industrial Software Business continues at its historical basis. The Company recorded a noncontrolling interest of $i5.9
billion for the i45 percent ownership interest of former AspenTech stockholders in New AspenTech. The noncontrolling interest associated with the AspenTech acquired net assets was recorded at fair value determined using the closing market price per share of AspenTech as of May 16, 2022, while the portion attributable
7
to
the Emerson Industrial Software business was recorded at its historical carrying amount. The impact of recognizing the noncontrolling interest in the Emerson Industrial Software Business resulted in a decrease to additional paid-in-capital of $i550.
i
The
following table summarizes the components of the purchase consideration reflected in the acquisition accounting using AspenTech's shares outstanding and closing market price per share as of May 16, 2022 (in millions except share and per share data):
AspenTech shares outstanding
i66,662,482
AspenTech
share price
$
i166.30
Purchase price
$
i11,086
Value
of stock-based compensation awards attributable to pre-combination service
i102
Total purchase consideration
$
i11,188
/
i
The
total purchase consideration for AspenTech was preliminarily allocated to assets and liabilities as follows. Valuations of acquired assets and liabilities are in-process and subject to refinement.
Cash and equivalents
$
i274
Receivables
i61
Other
current assets
i262
Property, plant equipment
i4
Goodwill
($i34 expected to be tax-deductible)
i7,223
Other
intangible assets
i4,390
Other assets
i511
Total
assets
i12,725
Short-term borrowings
i27
Accounts
payable
i8
Accrued expenses
i113
Long-term
debt
i253
Deferred taxes and other liabilities
i1,136
Total
purchase consideration
$
i11,188
/
Emerson's
cash contribution of approximately $i6.0 billion was paid out at approximately $i87.69 per share (on a fully diluted basis) to holders of issued and outstanding shares of
AspenTech common stock as of the closing of the transactions, with $i168 of cash remaining on New AspenTech's balance sheet as of the closing which is not included in the allocation of purchase consideration above.
i
The
estimated intangible assets attributable to the transaction are comprised of the following (in millions):
Amount
Estimated Weighted Average Life (Years)
Developed technology
$
i1,350
i10
Customer
relationships
i2,300
i15
Trade
names
i430
Indefinite-lived
Backlog
i310
i3
Total
$
i4,390
/
Results
of operations for the third quarter of 2022 attributable to the AspenTech acquisition include sales of $i173 while the impact to GAAP net earnings was not material.
8
Pro
Forma Financial Information
i
The following unaudited proforma consolidated condensed financial results of operations are presented as if the acquisition of AspenTech occurred on October 1, 2020. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition occurred as of that time ($ in millions, except per share amounts).
The
pro forma results for the nine months ended June 30, 2021 include $i159 of transaction costs which were assumed to be incurred in the first fiscal quarter of 2021. Of these transaction costs, $i61
and $i91 were included in the Company's reported results for the three and nine months ended June 30, 2022, respectively, but have been excluded from the fiscal 2022 pro forma results above. In addition, AspenTech incurred $i68
of transaction costs prior to the completion of the acquisition that were not included in Emerson's reported results. The pro forma results for the three and nine months ended June 30, 2021 include estimated interest expense of $i37 and $i110,
respectively, related to the issuance of $i3 billion of term debt and increased commercial paper borrowings to fund the acquisition, while results for the nine months ended June 30, 2022 include additional interest expense of $i56
to reflect the increased borrowings as if they were outstanding for the entire fiscal year.
Other Transactions
On August 8, 2022the Company announced an agreement to sell its InSinkErator business, which manufactures food waste disposers and is reported in the Tools & Home Products segment, to Whirlpool Corporation for $i3.0 billion. This business
had sales and pretax earnings of $i565 and $i143 in fiscal 2021 and $i480
and $i117 for the nine months ended June 30, 2022. The assets and liabilities of InSinkErator were classified as held-for-sale as of June 30, 2022 and are included in other current assets, other assets, accrued expenses and other liabilities in the consolidated balance sheet. The transaction is expected to close in fiscal 2023, subject to regulatory approvals and other customary closing conditions.
On July
27, 2022, New AspenTech entered into an agreement to acquire Micromine, a global leader in design and operational solutions for the mining industry, for AU$i900 (approximately $i623 USD). The transaction is expected to close by the end of calendar 2022, subject to various regulatory approvals.
On
May 31, 2022the Company completed the divestiture of its Therm-O-Disc sensing and protection technologies business, which was reported in the Climate Technologies segment, to an affiliate of One Rock Capital Partners, LLC. The Company recognized a pretax gain of $i483 ($i428
after-tax, $i0.72 per share).
On May 4, 2022, Emerson announced its intention to exit business operations in Russia and divest Metran, its Russia-based manufacturing subsidiary. Emerson's historical net sales in Russia were principally in the Automation Solutions segment and in total, represented approximately i1.5
percent of consolidated annual sales. In the third quarter of fiscal 2022, the Company recognized a pretax loss of $i162 ($i174
after-tax, in total $i0.29 per share) related to its exit of business operations in Russia. This charge, which included a loss of $i32
in operations and $i130 reported in Other deductions ($i9 of which
is reported in restructuring costs), is primarily non-cash. Emerson is committed to an orderly transfer of these assets and will support its employees through this process.
On October 1, 2020, the Company completed the acquisition of Open Systems International, Inc. ("OSI"), a leading operations technology software provider in the global power industry, for approximately $i1.6
billion, net of cash acquired. This business, which had net sales of $i191 in fiscal 2021 and is now reported in the AspenTech segment, expanded the Company's offerings in the power industry to include the digitization and modernization of the electric grid. The Company recognized goodwill of $i967
(inone of which is expected to be tax deductible), identifiable intangible assets of $i783,
primarily intellectual property and customer relationships with a weighted-average useful life
9
of approximately i11
years, and deferred tax liabilities of approximately $i193. Results of operations for the three months ended June 30, 2021 included first year pre-tax acquisition accounting charges related to backlog amortization and deferred revenue of $i7
and $i3, respectively, while year-to-date results included $i24 and $i11,
respectively.
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 $i438
in November 2021 (in total, a gain of $i453 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 $i75
which are expected to be received over the next two-to-three 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.
(5) iPENSION
& POSTRETIREMENT PLANS
iTotal periodic pension and postretirement (income) expense is summarized below:
Amortization
of intangibles (intellectual property and customer relationships)
$
i71
i98
i223
i223
Restructuring
costs
i28
i31
i111
i50
Acquisition/divestiture
costs
i2
i61
i11
i97
Foreign
currency transaction (gains) losses
i1
(i13)
i7
(i41)
Investment-related
gains & gains from sales of capital
assets
i—
i—
(i69)
(i15)
Russia
business exit
i—
i121
i—
i121
Other
(i14)
(i15)
(i40)
(i61)
Total
$
i88
i283
i243
i374
/
In
the third quarter of fiscal 2022, intangibles amortization for the three and nine months ended June 30, 2022 included $ii32/
related to the AspenTech acquisition, while the prior year included backlog amortization related to the OSI acquisition of $i7 and $i24, respectively. Other is composed of several items, including pension expense, litigation
costs, provision for bad debt and other items, none of which is individually significant.
10
(7) iRESTRUCTURING
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. Expenses incurred in the first nine months of fiscal 2022 included costs related to workforce reductions of approximately i1,400 employees. The
Company expects fiscal 2022 restructuring expense and related costs to be approximately $i150, including costs to complete actions initiated in the first nine months of the year.
iRestructuring
expense by business segment follows:
The
tables above do not include $i4 and $i12 of costs related to restructuring actions incurred for the three months ended June 30, 2021 and 2022, respectively, that are required
to be reported in cost of sales and selling, general and administrative expenses; year-to-date amounts are $i11 and $i26, respectively.
(8)
iTAXES
Income taxes were $i243 in the third quarter of fiscal 2022 and $i151
in 2021, resulting in effective tax rates of i20 percent and i19 percent, respectively.
Favorable net discrete tax items decreased the tax rates by i2 and i3 percentage points, respectively.
Income taxes were $i659
for the first nine months of 2022 and $i431 for 2021, resulting in effective tax rates of i21 percent and i21
percent, respectively. The current year rate included a i2 percentage point benefit related to the completion of tax examinations, partially offset by portfolio restructuring activities which negatively impacted the rate by i1
percentage points, while the prior year had favorable net discrete items which reduced the rate i1 percentage point.
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 $i73 of certain payroll taxes through the end of calendar year 2020, of which approximately $i37 was paid in December 2021 with the remaining amount due in December 2022.
Depreciation and amortization expense include the following:
Depreciation
expense
$
i123
i117
i369
i366
Amortization
of intangibles (includes $i14, $i31, $i42,
and $i59 reported in Cost of Sales, respectively)
i86
i129
i266
i282
Amortization
of capitalized software
i28
i24
i85
i74
Total
$
i237
i270
i720
i722
/
Amortization
of intangibles included $ii49/ related to the AspenTech acquisition for the three and nine months
ended June 30, 2021, while the prior year included backlog amortization of $i7 and $i24 related to the OSI acquisition for the three and nine months ended June
30, 2021, respectively. For the three and nine months ended June 30, 2022, $ii5/
of amortization of intangibles included in the table above is reported as a restructuring related cost.
The
increases in Unbilled receivables and Deferred income taxes were primarily due to the AspenTech acquisition. See Notes 2 and 4.
(10) iDEBT
In December 2021, the Company issued $i1
billion of i2.0% notes due December 2028, $i1 billion of i2.2%
notes due December 2031, and $i1 billion of i2.8% notes due December 2051. The Company's
commercial paper borrowings also increased by approximately $i2.4 billion compared to September 30, 2021. The Company used the net proceeds from the sale of the notes and the increased commercial paper borrowings to fund the majority of its contribution of approximately $i6.0
billion to existing stockholders of AspenTech as part of the transaction discussed further in Note 4.
In the first quarter of fiscal 2022, the Company repaid $i500 of i2.625%
notes that matured.
In the third quarter of fiscal 2022, the acquisition of AspenTech increased the Company's long-term debt by approximately $i250. See Note 4.
(11) iFINANCIAL
INSTRUMENTS
Hedging Activities – As of June 30, 2022, the notional amount of foreign currency hedge positions was approximately $i2.1 billion, and commodity hedge contracts totaled approximately $i170
(primarily i45 million pounds of copper and aluminum). All derivatives receiving hedge accounting are cash flow hedges. The majority of hedging gains and losses deferred as of June 30, 2022 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 €i1.5 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.
13
The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and nine months endedJune 30, 2021 and 2022:i
Into
Earnings
Into OCI
3rd Quarter
Nine Months
3rd Quarter
Nine Months
Gains (Losses)
Location
2021
2022
2021
2022
2021
2022
2021
2022
Commodity
Cost
of sales
$
i13
i5
i24
i18
i8
(i32)
i34
(i9)
Foreign
currency
Sales
i—
(i1)
i2
i—
i—
(i3)
i3
(i5)
Foreign
currency
Cost of sales
i3
i10
i5
i21
i1
i15
i28
i32
Foreign
currency
Other deductions, net
i8
i56
i33
i108
Net
Investment Hedges
Euro denominated debt
i6
i84
(i21)
i163
Total
$
i24
i70
i64
i147
i15
i64
i44
i181
/
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 June 30,
2022, the fair value of long-term debt was $i8.1 billion, which was lower than the carrying value by $i816. 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, 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. iNo collateral was posted with counterparties and inone
was held by the Company as of June 30, 2022.
14
(12) iACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
i
Activity
in Accumulated other comprehensive income (loss) for the three and nine months ended June 30, 2021 and 2022 is shown below, net of income taxes:
Other
comprehensive income (loss), net of tax of $(i1), $(i20),
$i5 and $(i38), respectively
(i6)
(i186)
i163
(i317)
Ending
balance
(i548)
(i946)
(i548)
(i946)
Pension
and postretirement
Beginning balance
(i810)
(i223)
(i864)
(i259)
Amortization
of deferred actuarial losses into earnings, net of tax of $(i8), $(i5),
$(i24) and $(i15),
respectively
i27
i18
i81
i54
Ending
balance
(i783)
(i205)
(i783)
(i205)
Cash
flow hedges
Beginning balance
i30
i26
(i2)
i16
Gains
deferred during the period, net of taxes of $(i2), $i5,
$(i15) and $(i4),
respectively
i7
(i15)
i50
i14
Reclassification
of realized (gains) losses to sales and cost of sales, net of tax of $i3, $i4,
$i7 and $i10, respectively
(i13)
(i12)
(i24)
(i31)
Ending
balance
i24
(i1)
i24
(i1)
Accumulated
other comprehensive income (loss)
$
(i1,307)
(i1,152)
(i1,307)
(i1,152)
/
(13)
iBUSINESS SEGMENTS
As a result of the AspenTech acquisition, the Company identified one additional segment in the third quarter of fiscal 2022. The new segment, referred to as "AspenTech," reflects the combined results of AspenTech and the Emerson Industrial Software Business (see Note 4 for further details). The results for this new segment include the historical results of the Emerson Industrial Software Business
(which were previously reported in the Automation Solutions segment), while results related to the AspenTech business only include periods subsequent to the close of the transaction. Prior year amounts for the Automation Solutions segment have been reclassified to conform to the current year presentation.
15
iSummarized
information about the Company's results of operations by business segment follows:
Three
Months Ended June 30,
Nine Months Ended June 30,
Sales
Earnings
Sales
Earnings
2021
2022
2021
2022
2021
2022
2021
2022
Automation
Solutions
$
i2,865
i2,872
i519
i530
i8,193
i8,451
i1,354
i1,618
AspenTech
i82
i239
i2
i57
i239
i405
(i1)
i51
Climate
Technologies
i1,268
i1,380
i274
i300
i3,459
i3,884
i731
i754
Tools
& Home Products
i489
i522
i101
i107
i1,419
i1,546
i311
i317
Commercial
& Residential Solutions
i1,757
i1,902
i375
i407
i4,878
i5,430
i1,042
i1,071
Stock
compensation
(i66)
(i16)
(i191)
(i107)
Unallocated
pension and postretirement costs
i24
i25
i71
i76
Corporate
and other
(i33)
(i241)
(i76)
(i324)
Gain
on subordinated interest
i—
i—
i—
i453
Gain
on sale of business
i—
i483
i—
i483
Eliminations/Interest
(i7)
(i8)
(i37)
(i50)
(i21)
(i17)
(i115)
(i140)
Total
$
i4,697
i5,005
i784
i1,195
i13,289
i14,269
i2,084
i3,181
/
Corporate
and other for the three and nine months ended June 30, 2022 includes a loss of $ii162/
related to the Company's exit of business operations in Russia and acquisition/divestiture costs of $i61 and $i97,
respectively.
iAutomation Solutions sales by major product offering are summarized below.
Depreciation
and amortization (includes intellectual property, customer relationships and capitalized software) by business segment are summarized below:
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 third quarter of fiscal 2022, net sales were $5.0 billion, up 7 percent compared with the prior year. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were up 7 percent. The AspenTech acquisition added 4 percent and divestitures deducted 1 percent, while foreign currency translation had a 3 percent unfavorable impact. Sales growth continued to be strong in the quarter, benefiting
from strong results in North America, despite headwinds due to the impact of lockdowns in China and supply chain and logistics constraints.
Net earnings common stockholders were $921, up 47 percent, and diluted earnings per share were $1.54, up 48 percent compared with $1.04 in the prior year. Adjusted diluted earnings per share were $1.38 compared with $1.19 in the prior year, reflecting strong operating results and a $0.08 benefit related to the AspenTech acquisition.
The table below presents the Company's diluted earnings per share on an adjusted basis to facilitate period-to-period comparisons and provide additional insight into the underlying, ongoing operating performance of the Company. Adjusted
diluted earnings per share excludes intangibles amortization expense, restructuring expense, first year purchase accounting related items and transaction and AspenTech pre-closing costs, and certain gains, losses or impairments.
Three Months Ended June 30
2021
2022
Diluted
earnings per share
$
1.04
1.54
Restructuring and related costs
0.04
0.05
Amortization
of intangibles
0.10
0.13
Gain on sale of business
—
(0.72)
Russia business exit
—
0.29
Acquisition/divestiture
costs and pre-acquisition interest on AspenTech debt
—
0.09
OSI first year acquisition accounting charges
0.01
—
Adjusted
diluted earnings per share
$
1.19
1.38
The 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 Business Segments and Financial Position sections below.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30
Following is an analysis of the Company’s operating results for the third quarter ended June 30, 2021, compared with the third quarter ended June 30, 2022.
2021
2022
Change
(dollars
in millions, except per share amounts)
Net sales
$
4,697
5,005
7
%
Gross profit
$
1,982
2,097
6
%
Percent
of sales
42.2
%
41.9
%
(0.3) pts
SG&A
$
1,073
1,052
(2)
%
Percent
of sales
22.9
%
21.0
%
(1.9) pts
Gain on sale of business
$
—
(483)
Other
deductions, net
$
88
283
Amortization of intangibles
$
71
98
Restructuring costs
$
28
31
Interest
expense, net
$
37
50
Earnings before income taxes
$
784
1,195
52
%
Percent
of sales
16.7
%
23.9
%
7.2 pts
Net earnings common stockholders
$
627
921
47
%
Percent
of sales
13.3
%
18.4
%
5.1 pts
Diluted earnings per share
$
1.04
1.54
48
%
Net
sales for the third quarter of fiscal 2022 were $5.0 billion, up 7 percent compared with 2021. Automation Solutions sales were flat, Commercial & Residential Solutions sales were up 8 percent and AspenTech sales were up 189 percent. Underlying sales were up 7 percent on 1 percent higher volume and 6 percent higher price, while foreign currency translation had a 3 percent negative impact. The AspenTech acquisition added 4 percent, while divestitures deducted 1 percent. Underlying sales were up 15 percent in the U.S. and up 1 percent internationally. The Americas was up 14 percent, Europe was flat and Asia, Middle East & Africa was down 1 percent (China down 6 percent due to the impact of lockdowns).
Cost of sales for the third quarter of fiscal 2022 were $2,908,
an increase of $193 compared with 2021, due to higher sales volume and higher materials costs. Gross margin of 41.9 percent decreased 0.3 percentage points, as freight and other inflation negatively impacted margins, while price less net material inflation was favorable but had a dilutive impact on margins. The AspenTech acquisition benefited gross margin by 1.6 percentage points, while the Russia business exit negatively impacted gross margin by 0.6 percentage points.
Selling, general and administrative (SG&A) expenses of $1,052 decreased $21 and SG&A as a percent of sales decreased 1.9 percentage points to 21.0 percent compared with the prior year, reflecting leverage on higher sales and lower stock compensation expense of $50, partially offset by higher wage and other inflation.
On May
31, 2022, the Company completed the sale of its Therm-O-Disc sensing and protection technologies business to an affiliate of One Rock Capital Partners, LLC. The Company recognized a pretax gain of $483 ($428 after-tax, $0.72 per share). See Note 4.
Other deductions, net were $283 in 2022, an increase of $195 compared with the prior year, reflecting a charge of $130 related to the Company exiting its business in Russia ($9 of which is reported in restructuring costs). Acquisition/divestiture costs of $61 and a favorable
impact from foreign currency transactions of $14 also impacted comparisons. Intangibles amortization was higher by $27, as the current year included $32 related to the AspenTech acquisition, while the prior year included backlog amortization of $7 related to the OSI acquisition. See Notes 6 and 7.
19
Pretax earnings of $1,195 increased $411, up 52 percent compared with the prior year. Earnings increased $11 in Automation Solutions, $55 in AspenTech and $32 in Commercial
& Residential Solutions, while costs reported at Corporate increased $157 largely due to the Russia business exit loss. See the Business Segments discussion that follows and Note 13.
Income taxes were $243 in the third quarter of fiscal 2022 and $151 in 2021, resulting in effective tax rates of 20 percent and 19 percent, respectively. Favorable net discrete tax items decreased the tax rates by 2 and 3 percentage points, respectively.
Net earnings common stockholders in the third quarter of fiscal 2022 were $921, up 47 percent, compared with $627 in the prior year, and earnings per share were $1.54, up 48 percent, compared with $1.04 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.
Three
Months Ended June 30
2021
2022
Change
Earnings before income taxes
$
784
1,195
52
%
Percent
of sales
16.7
%
23.9
%
7.2 pts
Interest expense, net
37
50
Restructuring and related costs
32
34
Amortization
of intangibles
79
124
Gain on sale of business
—
(483)
Russia business exit
—
162
Acquisition/divestiture
costs
—
61
OSI first year acquisition accounting charges
10
—
Adjusted EBITA
$
942
1,143
21
%
Percent
of sales
20.1
%
22.8
%
2.7 pts
20
Business
Segments
Following is an analysis of operating results for the Company’s business segments for the third quarter ended June 30, 2021, compared with the third quarter ended June 30, 2022. The Company defines segment earnings as earnings before interest and taxes. See Note 13 for a discussion of the Company's business segments.
AUTOMATION SOLUTIONS
Three
Months Ended June 30
2021
2022
Change
Sales
$
2,865
2,872
—
%
Earnings
$
519
530
2
%
Margin
18.1
%
18.5
%
0.4
pts
Restructuring and related costs
$
20
31
Amortization of intangibles
$
44
41
Adjusted
EBITA
$
583
602
3%
Adjusted EBITA Margin
20.3
%
21.0
%
0.7 pts
Sales
by Major Product Offering
Measurement & Analytical Instrumentation
$
781
785
1
%
Valves, Actuators & Regulators
880
905
3
%
Industrial
Solutions
593
575
(3)
%
Systems & Software
611
607
(1)
%
Total
$
2,865
2,872
—
%
Automation
Solutions sales were $2,872 in the third quarter, essentially flat compared with the prior year. Foreign currency translation had a 4 percent unfavorable impact. Underlying sales increased 4 percent on 1 percent higher volume and 3 percent higher price, reflecting strength in North America partially offset by softness in Asia, Middle East & Africa. Overall, demand remained steady during the quarter, but lockdowns in China, electronic component shortages, and other supply chain and logistics constraints unfavorably impacted sales. Underlying sales increased 12 percent in the Americas (U.S. up 14 percent), as process end markets remained strong, while Europe, which was negatively impacted by the business exit from Russia, was down 2 percent, and Asia, Middle East & Africa decreased 3 percent (China down 2 percent). Sales for Measurement & Analytical Instrumentation increased $4, or 1 percent as market conditions remained strong for North
American process industries, offset by weakness in Asia, Middle East & Africa due to component shortages and other supply chain constraints. Valves, Actuators & Regulators increased $25, or 3 percent, reflecting strength in chemical end markets, partially offset by the impact of lockdowns in China. Industrial Solutions sales were down $18, or 3 percent, reflecting unfavorable currency translation and the impact of lockdowns in China, partially offset by strength in North America. Systems & Software decreased $4, or 1 percent, reflecting unfavorable currency translation and the impact of component shortages. Results were strong in North America, offset by weakness in Europe. Earnings were $530, an increase of $11, or 2 percent, and margin increased 0.4 percentage points to 18.5 percent, reflecting leverage on higher volume, favorable mix and savings from cost reduction actions. Price less net material inflation was slightly favorable, while freight and other
inflation negatively impacted margin.
21
ASPENTECH
Three
Months Ended June 30
2021
2022
Change
Sales
$
82
239
189
%
Earnings
$
2
57
2,950
%
Margin
2.2
%
23.7
%
21.5
pts
Restructuring and related costs
$
(2)
1
Amortization of intangibles
$
22
71
Adjusted
EBITA
$
22
129
483%
Adjusted EBITA Margin
26.7
%
53.8
%
27.1 pts
As a result of the AspenTech acquisition, the
Company identified one additional segment in the third quarter of fiscal 2022. The new segment, referred to as "AspenTech," reflects the combined results of AspenTech and the Emerson Industrial Software Business (see Note 4 for further details). The results for this new segment include the historical results of the Emerson Industrial Software Business (which were previously reported in the Automation Solutions segment), while results related to the AspenTech business include only periods subsequent to the close of the transaction on May 16, 2022.
AspenTech sales were $239 in the third quarter, an increase of $157 or 189% due to the acquisition of AspenTech. Earnings were $57, an increase of $55, and margin improved to 23.7 percent, reflecting the impact of the AspenTech acquisition. Results for the third quarter of fiscal 2022 included intangibles
amortization of $49 related to the AspenTech acquisition ($17 of which was reported in Cost of sales). See Note 4.
COMMERCIAL & RESIDENTIAL SOLUTIONS
Three Months Ended June 30
2021
2022
Change
Sales:
Climate
Technologies
$
1,268
1,380
9
%
Tools & Home Products
489
522
7
%
Total
$
1,757
1,902
8
%
Earnings:
Climate
Technologies
$
274
300
10
%
Tools & Home Products
101
107
5
%
Total
$
375
407
8
%
Margin
21.3
%
21.4
%
0.1
pts
Restructuring and related costs
$
7
1
Amortization of intangibles
$
13
12
Adjusted
EBITA
$
395
420
6
%
Adjusted EBITA Margin
22.5
%
22.0
%
(0.5) pts
Commercial & Residential Solutions sales were $1.9 billion in the third quarter,
up $145, or 8 percent compared to the prior year. Foreign currency translation had a 2 percent unfavorable impact and divestitures deducted 3 percent. Underlying sales increased 13 percent on 1 percent higher volume and 12 percent higher price. Overall, underlying sales increased 16 percent in the Americas (U.S. up 16 percent), 6 percent in Europe and 5 percent in Asia, Middle East & Africa (China down 18 percent). Climate Technologies sales were $1.4 billion in the third quarter, an increase of $112, or 9 percent. Air conditioning, heating and refrigeration sales were strong across all end markets except for China which was negatively impacted by lockdowns. Tools & Home Products sales were $522 in the third quarter, an increase of $33, or 7 percent. Sales of food waste disposers and professional tools were strong while wet/dry vacuums sales decreased modestly due to
difficult comparisons. Earnings were $407, up 8 percent compared with the prior year, and margin increased 0.1 percentage points to 21.4 percent, as favorable price less net material inflation and savings from cost reduction actions were mostly offset by freight and other inflation and unfavorable mix.
22
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30
Following
is an analysis of the Company’s operating results for the nine months ended June 30, 2021, compared with the nine months ended June 30, 2022.
2021
2022
Change
Net
sales
$
13,289
14,269
7
%
Gross profit
$
5,567
5,871
5
%
Percent of sales
41.9
%
41.1
%
(0.8)
pts
SG&A
$
3,125
3,112
—
%
Percent of sales
23.5
%
21.8
%
(1.7)
pts
Gain on subordinated interest
$
—
(453)
Gain on sale of business
$
—
(483)
Other
deductions, net
$
243
374
Amortization of intangibles
$
223
223
Restructuring costs
$
111
50
Interest
expense, net
$
115
140
Earnings before income taxes
$
2,084
3,181
53
%
Percent
of sales
15.7
%
22.3
%
6.6 pts
Net earnings common stockholders
$
1,633
2,491
53
%
Percent
of sales
12.3
%
17.5
%
5.2 pts
Diluted earnings per share
$
2.71
4.17
54
%
Net
sales for the first nine months of 2022 were $14.3 billion, up 7 percent compared with 2021. Automation Solutions sales were up 3 percent, Commercial & Residential Solutions sales were up 11 percent and AspenTech sales were up 69 percent. Underlying sales were up 9 percent on 5 percent higher volume and 4 percent higher price, and foreign currency translation subtracted 2 percent. Underlying sales increased 14 percent in the U.S. and increased 1 percent internationally. The Americas was up 13 percent, Europe was up 1 percent and Asia, Middle East & Africa was up 4 percent (China up 6 percent).
Cost of sales for 2022 were $8,398, an increase of $676 versus $7,722 in 2021, primarily due to higher sales volume and higher materials costs. Gross margin of 41.1 percent decreased 0.8 percentage points compared to the prior year, as price less net material inflation was slightly favorable
but had a dilutive impact on margins and higher freight and other inflation also negatively impacted margins, partially offset by favorable mix. The AspenTech acquisition benefited gross margin by 0.6 percentage points, while the Russia business exit negatively impacted gross margin by 0.2 percentage points.
SG&A expenses of $3,112 decreased $13 compared with the prior year, reflecting lower stock compensation expense of $84, partially offset by the impact of higher sales. SG&A as a percent of sales decreased 1.7 percentage points to 21.8 percent, reflecting leverage on higher sales and lower stock compensation expense.
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 $75 which are expected to be received over the next two-to-three 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.
23
On May 31, 2022, the Company completed the sale of its Therm-O-Disc sensing and protection technologies business to an affiliate of One Rock Capital Partners, LLC. The
Company recognized a pretax gain of $483 ($428 after-tax, $0.72 per share). See Note 4
Other deductions, net were $374 in 2022, an increase of $131 compared with the prior year, reflecting a charge of $130 related to the Company exiting its business in Russia ($9 of which is reported in restructuring costs) and acquisition/divestiture costs of $97. These items were partially offset by a favorable impact from foreign currency transactions of $48 and gains from the sales of capital assets of $15 in the first quarter of fiscal 2022. The prior year also included investment-related gains, including a gain of $21
from an investment sale, a $17 gain from the acquisition of full ownership of an equity investment and a gain of $31 on the sale of an equity investment. Intangibles amortization was flat as the current year included $32 related to the AspenTech acquisition, while the prior year included backlog amortization of $24 related to the OSI acquisition. See Notes 6 and 7.
Pretax earnings of $3,181 increased $1,097, or 53 percent. Earnings increased $264 in Automation Solutions, $52 in AspenTech and $29 in Commercial & Residential Solutions, while costs reported at Corporate increased $159 largely due to the Russia business exit loss. See the Business Segments discussion that follows and Note 13.
Income taxes were $659 for the first nine months of 2022 and $431 for 2021, resulting in effective
tax rates of 21 percent and 21 percent, respectively. The current year rate included a 2 percentage point benefit related to the completion of tax examinations, partially offset by portfolio restructuring activities which negatively impacted the rate by 1 percentage points, while the prior year had favorable net discrete items which reduced the rate 1 percentage point.
Net earnings common stockholders in 2022 were $2,491, up 53 percent compared with the prior year, and earnings per share were $4.17, up 54 percent compared with $2.71 in 2021. Results reflected strong operating results and included a pretax gain of $453 ($358 after-tax, $0.60 per share) related to the Company's subordinated interest in Vertiv and a pretax gain of $483 ($428 after-tax, $0.72 per share) related to
the Therm-O-Disc divestiture. See 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.
Nine Months Ended June 30
2021
2022
Change
Earnings
before income taxes
$
2,084
3,181
53
%
Percent of sales
15.7
%
22.3
%
6.6 pts
Interest expense, net
115
140
Restructuring
and related costs
122
67
Amortization of intangibles
242
277
Gain on subordinated interest
—
(453)
Gain
on sale of business
—
(483)
Russia business exit
—
162
Acquisition/divestiture costs
—
97
Gain
on acquisition of full ownership of equity investment
(17)
—
OSI first year acquisition accounting charges and fees
41
—
Adjusted EBITA
$
2,587
2,988
16
%
Percent
of sales
19.5
%
20.9
%
1.4 pts
24
The table below presents the Company's
diluted earnings per share on an adjusted basis to facilitate period-to-period comparisons and provide additional insight into the underlying, ongoing operating performance of the Company.
Nine Months Ended June 30
2021
2022
Diluted
earnings per share
$
2.71
4.17
Restructuring and related costs
0.16
0.09
Amortization
of intangibles
0.30
0.33
Gain on subordinated interest
—
(0.60)
Gain on sale of business
—
(0.72)
Russia
business exit
—
0.29
Acquisition/divestiture costs and pre-acquisition interest on AspenTech debt
—
0.16
Gain on acquisition of full ownership of equity investment
(0.03)
—
OSI
first year acquisition accounting charges and fees
0.05
—
Adjusted diluted earnings per share
$
3.19
3.72
The
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 Business Segments and Financial Position sections below.
Following is an analysis of operating results for the
Company’s business segments for the nine months ended June 30, 2021, compared with the nine months ended June 30, 2022. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
Nine Months Ended June 30
2021
2022
Change
Sales
$
8,193
8,451
3
%
Earnings
$
1,354
1,618
19
%
Margin
16.5
%
19.1
%
2.6
pts
Restructuring and related costs
$
94
54
Amortization of intangibles
$
136
125
Adjusted
EBITA
$
1,584
1,797
14
%
Adjusted EBITA Margin
19.3
%
21.3
%
2.0 pts
Sales
by Major Product Offering
Measurement & Analytical Instrumentation
$
2,211
2,287
3
%
Valves, Actuators & Regulators
2,522
2,604
3
%
Industrial
Solutions
1,656
1,743
5
%
Systems & Software
1,804
1,817
1
%
Total
$
8,193
8,451
3
%
Automation
Solutions sales were $8.5 billion in the first nine months of 2022, an increase of $258, or 3 percent. Foreign currency translation had a 2 percent unfavorable impact. Underlying sales increased 5 percent on 3 percent higher volume and 2 percent higher price, reflecting strength in process end markets and sustained demand in discrete and hybrid end markets, despite supply chain and logistics constraints and the impact of lockdowns in China which unfavorably impacted sales. Underlying sales increased 11 percent in the Americas, while Europe, which was negatively impacted by the business exit from Russia, decreased 2 percent and Asia, Middle East & Africa was up 3 percent (China up 10 percent). Sales for Measurement & Analytical Instrumentation increased $76, or 3 percent. Sales were strong in China and North America, while sales were down moderately in Europe due to supply chain constraints. Valves, Actuators & Regulators increased
$82, or 3 percent, reflecting strong demand in the Americas and China, partially offset by softness in the rest of Asia, Middle East & Africa. Industrial Solutions sales increased $87, or 5 percent, reflecting strong demand in North America and Europe. Systems & Software increased $13, or 1 percent, reflecting strength in process end markets in North America and China, partially offset by weakness in Europe, while power end markets were solid in North America. Earnings were $1,618, an increase of $264, or 19 percent, and margin increased 2.6 percentage points to 19.1 percent, reflecting leverage on higher volume, favorable mix, lower restructuring expense which benefited margins 0.4 percentage points, and savings from cost reduction actions, partially offset by higher inflation. Price less net material inflation was slightly favorable and foreign currency transactions benefited margins by
0.3 percentage points.
26
ASPENTECH
Nine Months Ended
June 30
2021
2022
Change
Sales
$
239
405
69
%
Earnings
$
(1)
51
(3,687)
%
Margin
(0.6)
%
12.5
%
13.1
pts
Restructuring and related costs
$
2
1
Amortization of intangibles
$
67
116
Adjusted
EBITA
$
68
168
149
%
Adjusted EBITA Margin
28.0
%
41.2
%
13.2 pts
AspenTech sales were $405 in the first nine months of 2022, an increase of $166, or
69 percent due to the acquisition of AspenTech. Earnings were $51, an increase of $52, and margin improved to 12.5 percent, reflecting the impact of the AspenTech acquisition. Results for fiscal 2022 included intangibles amortization of $49 related to the AspenTech acquisition ($17 of which was reported in Cost of sales). See Note 4.
COMMERCIAL & RESIDENTIAL SOLUTIONS
Nine
Months Ended June 30
2021
2022
Change
Sales:
Climate Technologies
$
3,459
3,884
12
%
Tools
& Home Products
1,419
1,546
9
%
Total
$
4,878
5,430
11
%
Earnings:
Climate
Technologies
$
731
754
3
%
Tools & Home Products
311
317
2
%
Total
$
1,042
1,071
3
%
Margin
21.4
%
19.7
%
(1.7)
pts
Restructuring and related costs
$
15
8
Amortization of intangibles
$
39
36
Adjusted
EBITA
$
1,096
1,115
2
%
Adjusted EBITA Margin
22.5
%
20.5
%
(2.0) pts
Commercial & Residential Solutions sales were $5.4 billion in the first nine months
of 2022, an increase of $552, or 11 percent compared to the prior year. Foreign currency translation had a 1 percent unfavorable impact and divestitures deducted 2 percent. Underlying sales were up 14 percent on 6 percent higher volume and 8 percent higher price. Overall, underlying sales increased 16 percent in the Americas, 11 percent in Europe and 7 percent in Asia, Middle East & Africa (China down 7 percent). Climate Technologies sales were $3.9 billion in the first nine months of 2022, an increase of $425, or 12 percent. Air conditioning, heating and refrigeration sales were strong, reflecting global demand across all end markets. Tools & Home Products sales were $1.5 billion in the first nine months of 2022, up $127, or 9 percent. Sales of professional tools and food
waste disposers were both up low teens, while wet/dry vacuums were flat due to difficult comparisons. Earnings were $1,071, up 3 percent, and margin decreased 1.7 percentage points, as price less net material inflation was favorable but had a dilutive impact on margins and higher freight and other inflation also negatively impacted margins, partially offset by leverage on higher sales and savings from cost reduction actions.
The
Company's operating working capital increased compared to the same quarter last year and compared to September 30, 2021 due to higher inventory levels to support sales growth and reflecting ongoing supply chain and logistics constraints. In addition, the AspenTech acquisition increased operating working capital by approximately $250. As of June 30, 2022, Emerson's cash and equivalents totaled $2,529, which included $450 attributable to New AspenTech. The cash held by New AspenTech is intended to be used for its own purposes and is not a readily available source of liquidity for other Emerson general business purposes or to return to Emerson shareholders.
The decrease in the current ratio reflects the increase in commercial paper borrowings discussed
below. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 21.1X for the first nine months of fiscal 2022 compares to 17.8X for the nine months ended June 30, 2021. The increase reflects higher pretax earnings in the current year, which included the Vertiv subordinated interest gain of $453, the gain on the Therm-O-Disc divestiture of $483, and the Russia business exit loss of $162. Excluding these items, the interest coverage ratio was 16.2X, reflecting higher interest expense due to the increased long-term debt and commercial paper borrowings to fund the AspenTech acquisition.
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 Company's commercial paper borrowings also increased by approximately $2.4 billion compared to September 30, 2021. The Company used the net proceeds from the sale of the notes and the increased commercial paper borrowings to fund the majority of its contribution of approximately $6.0 billion to existing stockholders of AspenTech as part of the transaction. See Note 4 and Note 10.
Operating cash flow for the first nine months of fiscal 2022 was $1,705, a decrease of $1,015 compared with $2,720 in the prior year, reflecting higher working capital due to increased
sales and continued supply chain constraints. Operating cash flow was also negatively impacted by approximately $68 of taxes paid on the Vertiv subordinated interest gain. The remaining taxes owed on the gain are approximately $27 and are expected to be paid by the end of fiscal 2022. Free cash flow of $1,370 in the first nine months of fiscal 2022 (operating cash flow of $1,705 less capital expenditures of $335) decreased $1,000 compared to free cash flow of $2,370 in 2021 (operating cash flow of $2,720 less capital expenditures of $350), reflecting the decrease in operating cash flow. Cash used in investing activities was $4,975, reflecting $5.6 billion of cash paid, net of cash acquired related to the AspenTech acquisition, partially offset by the Vertiv gain and proceeds from the Therm-O-Disc divestiture. Cash provided by financing activities was $3,557, primarily due to proceeds of nearly $3 billion from the December 2021 debt issuance and
increased commercial paper borrowings of $2.4 billion to fund the AspenTech transaction, 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, of which approximately $37 was paid in December 2021 with the remaining 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 $37 billion and stockholders' equity of $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.
28
FISCAL
2022 OUTLOOK
Emerson continues to see strong demand for the Company's technology, software and solutions. The outlook for fiscal 2022 reflects the impacts of the AspenTech and Therm-O-Disc transactions and write-offs associated with the Russia business exit, and considers continued macroeconomic and geopolitical uncertainty, supply chain constraints, exchange rate fluctuations and challenges related to COVID-19. For the full year, consolidated net sales are expected to be up 7 to 8 percent, with underlying sales up 9 to 10 percent excluding a 2 to 3 percent unfavorable impact from foreign currency translation, a 1 to 2 percent favorable impact from acquisitions and a 1 percent deduction from divestitures. Automation Solutions net sales are expected to be up 4 to 5 percent, with underlying sales up 6 to 7 percent excluding a 2 percent unfavorable
impact from foreign currency translation. Commercial & Residential Solutions net sales are expected to be up 9 to 10 percent with underlying sales up 13 to 14 percent excluding a 1 percent unfavorable impact from foreign currency translation and a 3 percent negative impact from divestitures. Earnings per share are expected to be $5.25 to $5.35, while adjusted earnings per share are expected to be $5.05 to $5.15. Adjusted earnings per share exclude a $0.20 impact from restructuring actions, a $0.47 impact from amortization of intangibles, a $0.60 gain from the Vertiv subordinated interest (see Note 4), a $0.72 gain from the sale of Therm-O-Disc (see Note 4), a $0.29 loss from the Company exiting business in Russia (see Note 4) and a $0.16 impact from transaction and AspenTech pre-closing costs. Operating cash flow is expected to be approximately $3.0 billion and free cash flow, which
excludes projected capital spending of $525 million, is expected to be approximately $2.5 billion. Share repurchases are expected to be approximately $500 million in fiscal 2022.
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 the Company's ability to successfully complete on the terms and conditions contemplated, and the financial impact of, the proposed sale of its InSinkErator food waste disposal business, the financial impact of the AspenTech acquisition, the scope, duration and ultimate impacts of the COVID-19 pandemic and the Russia-Ukraine conflict, 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, inflation, 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, 2021 and in subsequent reports filed with the SEC, which are hereby incorporated by reference.
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.
29
PART
II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (shares in 000s).
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 2022
17
$89.97
17
57,159
May
2022
845
$84.02
845
56,315
June 2022
891
$81.41
891
55,423
Total
1,753
$82.75
1,753
55,423
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 55.4 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).
Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three and nine months ended June 30,
2022 and 2021, (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2022 and 2021, (iii) Consolidated Balance Sheets as of September 30, 2021 and June 30, 2022, (iv) Consolidated Statements of Equity for the three and nine months ended June 30, 2022 and 2021, (v) Consolidated Statements of Cash Flows for the nine months ended June 30, 2022 and 2021, and (vi) Notes to Consolidated Financial Statements for the three and nine months ended June 30,
2022 and 2021.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
30
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.