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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 March 31, 2022:i594.0
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.
Effective October 1, 2021, the Company adopted three accounting standard updates which had no impact or an immaterial
impact on the Company's financial statements as of and for the six months ended March 31, 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 current assets, and its customer advances (contract liabilities), which are reported in Accrued expenses.
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 March 31, 2022 included $i108
and $i456 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 March 31, 2022 for performance obligations that were satisfied in previous periods, including cumulative catchup adjustments on
the Company's long-term contracts, was not material.
6
As of March 31, 2022, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts
with its customers was approximately $i7.8 billion. The Company expects to recognize approximately i85
percent of its remaining performance obligations as revenue over the next i12 months, with the remainder substantially over the subsequent two years thereafter.
(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.
(4) iACQUISITIONS
AND DIVESTITURES
On March 3, 2022the Company announced an agreement to sell its Therm-O-Disc sensing and protection technologies business, which is reported in the Climate Technologies segment, to an affiliate of One Rock Capital Partners, LLC. Assets and liabilities for this business are reported as held-for-sale as of March 31, 2022 and included in other current assets, accrued expenses, other assets and other liabilities in the consolidated balance sheet. The transaction is expected to close in the third quarter subject to regulatory approvals and other customary closing conditions.
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 $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, the
Company will own i55 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"), 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 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 $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 of approximately i11
years, and deferred tax liabilities of approximately $i193. Results of operations for the three months ended March 31, 2021 included first year pre-tax acquisition accounting charges related to backlog amortization and deferred revenue of $i6
and $i4, respectively, while year-to-date results included $i17 and $i8,
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
7
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)
$
i74
i62
i152
i125
Restructuring
costs
i17
i10
i83
i19
Other
(i58)
(i32)
(i80)
(i53)
Total
$
i33
i40
i155
i91
/
In
the second quarter of fiscal 2022, the decrease in intangibles amortization for the three and six months ended March 31, 2022 was largely due to backlog amortization of $i6 and $i17,
respectively, 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. For the three and six months ended March 31, 2022, the change in other included acquisition/divestiture costs of $i13 and $i36,
respectively, and a favorable impact from foreign currency transactions of $i9 and $i35, respectively. In the first quarter
of fiscal 2022, other also included gains from the sales of capital assets of $i15. Comparisons were also impacted by prior year investment-related gains, including $i21 from an investment sale and $i17
from the acquisition of full ownership of an equity investment in the first quarter of fiscal 2021, and a gain of $i31 from the sale of an equity investment in the second quarter of fiscal 2021.
(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. Costs incurred in the first six months of fiscal 2022 relate to the Company's initiatives 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 six months of fiscal 2022 included costs related to workforce reductions of approximately i200
employees. The Company expects fiscal 2022 restructuring expense and related costs to be approximately $i150, including costs to complete actions initiated in the first six months of the year.
8
iRestructuring
expense by business segment follows:
Details
of the change in the liability for restructuring costs during the six months ended March 31, 2022 follow:
Sept
30, 2021
Expense
Utilized/Paid
Mar 31, 2022
Severance and benefits
$
i172
i5
i32
i145
Other
i4
i14
i17
i1
Total
$
i176
i19
i49
i146
/
The
tables above do not include $i4 and $i5 of costs related to restructuring actions incurred for the three months ended March 31, 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 $i7 and $i14, respectively.
(8)
iTAXES
Income taxes were $i136 in the second quarter of fiscal 2022 and $i169
in 2021, resulting in effective tax rates of i17 percent and i23 percent, respectively.
The current year rate included a i6 percentage point benefit related to the completion of tax examinations, while both years included unfavorable discrete items which increased the rates ii1/
percentage point.
Income taxes were $i416 for the first six months of 2022 and $i280 for 2021, resulting in effective tax rates of i21
percent and i22 percent, respectively. The current year rate included a i3 percentage point benefit related to the completion of tax examinations, partially
offset by portfolio restructuring activities which negatively impacted the rate by i2 percentage points.
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.
(9) iOTHER
FINANCIAL INFORMATIONi
Sept 30, 2021
Mar
31, 2022
Inventories
Finished products
$
i616
i764
Raw
materials and work in process
i1,434
i1,635
Total
$
i2,050
i2,399
/
9
i
Sept
30, 2021
Mar 31, 2022
Property, plant and equipment, net
Property, plant and equipment, at cost
$
i9,427
i9,198
Less:
Accumulated depreciation
i5,689
i5,631
Total
$
i3,738
i3,567
/
i
Goodwill
by business segment
Automation Solutions
$
i6,552
i6,504
Climate
Technologies
i753
i723
Tools
& Home Products
i418
i404
Commercial
& Residential Solutions
i1,171
i1,127
Total
$
i7,723
i7,631
/
i
Other
intangible assets
Gross carrying amount
$
i5,911
i5,897
Less:
Accumulated amortization
i3,034
i3,198
Net
carrying amount
$
i2,877
i2,699
/
Other
intangible assets include customer relationships, net, of $i1,495 and $i1,401 as of September 30, 2021 and March 31,
2022, respectively.
Depreciation and amortization expense include the following:
Depreciation
expense
$
i122
i121
i246
i249
Amortization
of intangibles (includes $i14, $i14, $i28,
and $i28 reported in Cost of Sales, respectively)
i88
i76
i180
i153
Amortization
of capitalized software
i29
i24
i57
i50
Total
$
i239
i221
i483
i452
Amortization
of intangibles included backlog amortization of $i6 and $i17 related to the OSI acquisition for the three and six months ended March 31, 2021, respectively.
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 expects to use the net proceeds from the sale of the notes to pay a portion of its contribution of approximately $i6.0
billion to existing stockholders of AspenTech as part of the transaction discussed further in Note 4. If the transaction with AspenTech is not completed or is terminated, the Company will be required to redeem the notes at a redemption price equal to i101% of the principal amount plus accrued and unpaid interest.
In the second quarter of fiscal 2022, the Company increased
its commercial paper borrowings by approximately $i2.2 billion to generate additional cash to fund the AspenTech transaction.
In the first quarter of fiscal 2022, the Company repaid $i500
of i2.625% notes that matured.
(11) iFINANCIAL
INSTRUMENTS
Hedging Activities – As of March 31, 2022, the notional amount of foreign currency hedge positions was approximately $i2.6 billion, and commodity hedge contracts totaled approximately $i120
(primarily i32 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 March 31, 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.
The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and six months endedMarch 31, 2021 and 2022:i
Into
Earnings
Into OCI
2nd Quarter
Six Months
2nd Quarter
Six Months
Gains (Losses)
Location
2021
2022
2021
2022
2021
2022
2021
2022
Commodity
Cost
of sales
$
i8
i6
i11
i13
i13
i10
i26
i23
Foreign
currency
Sales
i1
i—
i2
i1
(i2)
(i2)
i3
(i2)
Foreign
currency
Cost of sales
i2
i9
i2
i11
i—
i14
i27
i17
Foreign
currency
Other deductions, net
i29
i8
i25
i52
Net
Investment Hedges
Euro denominated debt
i53
i35
(i27)
i79
Total
$
i40
i23
i40
i77
i64
i57
i29
i117
/
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.
11
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 March 31, 2022, the fair value of long-term debt was $i8.5 billion, which exceeded the carrying value by $i230.
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 March 31, 2022.
(12) iACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
i
Activity
in Accumulated other comprehensive income (loss) for the three and six months ended March 31, 2021 and 2022 is shown below, net of income taxes:
Depreciation
and amortization (includes intellectual property, customer relationships and capitalized software) by business segment are summarized below:
On May 4, 2022, Emerson announced its intention to exit business operations in Russia and is exploring strategic options to divest Metran, its Russia-based manufacturing subsidiary. Emerson is committed to an orderly transfer of these assets and will support its employees through this process. Emerson's historical net sales in Russia were principally in the Automation Solutions segment and in total, represent approximately i1.5
percent of consolidated annual sales. As of March 31, 2022, Emerson's Russian operations had net assets of approximately $i50 and accumulated foreign currency translation losses of approximately $i145
(which will be recognized as a non-cash charge when the exit is completed). The Company is currently unable to estimate the full financial consequences of the exit due to uncertainty regarding the commercial terms of the exit and related tax impacts.
14
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 second quarter of fiscal 2022, net sales were $4.8 billion, up 8 percent compared with the prior year. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were up 10 percent. Foreign currency translation had a 2 percent unfavorable impact. Sales growth continued to be strong in the quarter with favorable results across both business platforms and all geographies.
Net earnings common stockholders were $674, up 20 percent, and diluted
earnings per share were $1.13, up 22 percent compared with $0.93 in the prior year. Adjusted diluted earnings per share were $1.29 compared with $1.07 in the prior year, reflecting strong operating results and a lower effective tax rate in the quarter.
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 Mar 31
2021
2022
Diluted earnings per share
$
0.93
1.13
Restructuring
and related costs
0.03
0.02
Amortization of intangibles
0.10
0.10
Acquisition/divestiture
costs and interest on AspenTech debt
—
0.04
OSI first year acquisition accounting charges
0.01
—
Adjusted
diluted earnings per share
$
1.07
1.29
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.
Three
Months Ended
Adjusted diluted earnings per share - Mar 31, 2021
$
1.07
Operations
0.11
Stock compensation
0.02
Pensions
0.01
Gain
on sale of investment - prior year
(0.04)
Foreign currency
0.01
Lower effective tax rate
0.08
Share repurchases
0.03
Adjusted
diluted earnings per share - Mar 31, 2022
$
1.29
15
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31
Following is an analysis
of the Company’s operating results for the second quarter ended March 31, 2021, compared with the second quarter ended March 31, 2022.
2021
2022
Change
Net
sales
$
4,431
4,791
8
%
Gross profit
$
1,862
1,952
5
%
Percent of sales
42.0
%
40.7
%
SG&A
$
1,054
1,049
—
%
Percent
of sales
23.8
%
21.9
%
Other
deductions, net
$
33
40
Amortization of intangibles
$
74
62
Restructuring costs
$
17
10
Interest
expense, net
$
38
52
Earnings before income taxes
$
737
811
10
%
Percent
of sales
16.6
%
16.9
%
Net earnings common stockholders
$
561
674
20
%
Percent
of sales
12.7
%
14.1
%
Diluted earnings per share
$
0.93
1.13
22
%
Net
sales for the second quarter of fiscal 2022 were $4.8 billion, up 8 percent compared with 2021. Automation Solutions sales were up 5 percent and Commercial & Residential Solutions sales were up 13 percent. Underlying sales were up 10 percent on 6 percent higher volume and 4 percent higher price, while foreign currency translation had a 2 percent negative impact. Underlying sales were up 14 percent in the U.S. and up 6 percent internationally. The Americas was up 14 percent, Europe was up 2 percent and Asia, Middle East & Africa was up 7 percent (China up 11 percent).
Cost of sales for the second quarter of fiscal 2022 were $2,839, an increase of $270 compared with 2021, due to higher sales volume and higher materials costs. Gross margin of 40.7 percent decreased
1.3 percentage points compared with the prior year as price increases were largely offset by higher material costs, and other inflation negatively impacted margins.
Selling, general and administrative (SG&A) expenses of $1,049 decreased $5 and SG&A as a percent of sales decreased 1.9 percentage points to 21.9 percent compared with the prior year, reflecting leverage on higher sales, lower stock compensation expense of $11 and savings from the Company's cost reset actions, partially offset by wage and other inflation.
Other deductions, net were $40 in 2022, an increase of $7 compared with the prior year, reflecting acquisition/divestiture costs of $13, a decline in restructuring costs of $7 and a favorable impact from foreign
currency transactions of $9. Intangibles amortization was lower by $12, partially due to backlog amortization of $6 in the prior year related to the OSI acquisition. The prior year also included a gain on the sale of an equity investment of $31. See Notes 6 and 7.
Pretax earnings of $811 increased $74, up 10 percent compared with the prior year. Earnings increased $85 in Automation Solutions and increased $8 in Commercial & Residential Solutions, while costs reported at Corporate increased $5. See the Business Segments discussion that follows and Note 13.
Income taxes were $136 in the second quarter of fiscal 2022 and $169 in 2021, resulting in effective tax rates of 17 percent and 23 percent, respectively. The current year rate included a 6 percentage point benefit related to the completion of tax examinations, while
both years included unfavorable discrete items which increased the rates 1 percentage point.
16
Net earnings common stockholders in the second quarter of fiscal 2022 were $674, up 20 percent, compared with $561 in the prior year, and earnings per share were $1.13, up 22 percent, compared with $0.93 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 Mar 31
2021
2022
Change
Earnings before income taxes
$
737
811
10
%
Percent
of sales
16.6
%
16.9
%
Interest expense, net
38
52
Restructuring and related costs
21
15
Amortization
of intangibles
82
76
Acquisition/divestiture costs
—
13
OSI
first year acquisition accounting charges
10
—
Adjusted EBITA
$
888
967
9
%
Percent of sales
20.0
%
20.2
%
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, 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 Mar 31
2021
2022
Change
Sales
$
2,793
2,937
5
%
Earnings
$
471
556
18
%
Margin
16.8
%
18.9
%
Restructuring
and related costs
$
14
11
Amortization of intangibles
$
69
64
Adjusted EBITA
$
554
631
15
%
Adjusted
EBITA Margin
19.8
%
21.5
%
Sales
by Major Product Offering
Measurement & Analytical Instrumentation
$
732
767
5
%
Valves, Actuators & Regulators
836
883
6
%
Industrial
Solutions
555
602
8
%
Systems & Software
670
685
2
%
Total
$
2,793
2,937
5
%
Automation
Solutions sales were $2.9 billion in the second quarter, an increase of $144 or 5 percent. Foreign currency translation had a 2 percent unfavorable impact. Underlying sales increased 7 percent on 5 percent higher volume and 2 percent higher price, reflecting strength in North America and China and favorable results in all major end markets. Supply chain and logistics constraints continued to unfavorably impact sales in the second quarter. Underlying sales
17
increased 13 percent in the Americas (U.S. up
14 percent), as process end markets continue to recover, while Europe was down 3 percent, and Asia, Middle East & Africa increased 6 percent (China up 17 percent). Sales for Measurement & Analytical Instrumentation increased $35, or 5 percent as market conditions continued to improve for North American process industries. Measurement & Analytical sales were strong in North America and Asia, Middle East & Africa, with China up over 25 percent, while Europe was down over 10 percent due to supply chain issues and lower project activity. Valves, Actuators & Regulators increased $47, or 6 percent, reflecting strength in power and chemical end markets. Demand was favorable in the Americas (up mid-teens) and China (up over 20 percent), while sales increased modestly in the rest of Asia, Middle East & Africa and were down mid-single digits in Europe. Industrial Solutions sales were up $47, or 8 percent, on continued strength in discrete end markets. Systems
& Software increased $15, or 2 percent, reflecting strength in process end markets in North America and China, partially offset by weakness in Europe, while power end markets were strong in North America. Earnings were $556, an increase of $85, or 18 percent, and margin increased 2.1 percentage points to 18.9 percent, reflecting leverage on higher volume, favorable mix, savings from cost reduction actions and a 0.3 percentage point benefit from foreign currency transactions. Price-cost was neutral while freight and other inflation was slightly negative.
COMMERCIAL & RESIDENTIAL SOLUTIONS
Three
Months Ended Mar 31
2021
2022
Change
Sales:
Climate Technologies
$
1,160
1,341
16
%
Tools
& Home Products
485
516
6
%
Total
$
1,645
1,857
13
%
Earnings:
Climate
Technologies
$
245
262
7
%
Tools & Home Products
112
103
(7)
%
Total
$
357
365
2
%
Margin
21.7
%
19.7
%
Restructuring
and related costs
$
5
3
Amortization of intangibles
$
13
12
Adjusted EBITA
$
375
380
1
%
Adjusted
EBITA Margin
22.8
%
20.5
%
Commercial & Residential Solutions sales were $1.9 billion in the second quarter, up $212, or 13 percent compared to the prior year. Foreign currency translation had a 1 percent unfavorable impact. Underlying sales increased 14 percent on 5 percent higher volume and 9 percent higher price, reflecting growth across nearly all businesses and geographies, with strength in commercial and industrial end markets. Overall, underlying sales increased 15 percent in the Americas (U.S. up 15 percent),
14 percent in Europe and 11 percent in Asia, Middle East & Africa (China down 6 percent). Climate Technologies sales were $1.3 billion in the second quarter, an increase of $181, or 16 percent. Air conditioning, heating and refrigeration sales were strong, reflecting global demand across all end markets. Tools & Home Products sales were $516 in the second quarter, an increase of $31, or 6 percent. Sales of food waste disposers and professional tools were both up approximately 10 percent, while wet/dry vacuums sales decreased 9 percent. Earnings were $365, up 2 percent compared with the prior year driven by slightly favorable price-cost due to higher prices. Margin decreased 2.0 percentage points to 19.7 percent, as the benefit from higher prices was mostly offset by higher materials costs. Freight and other inflation also negatively impact margin, partially offset by leverage on higher sales volume and savings from cost reduction actions.
18
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31
Net
sales for the first six months of 2022 were $9.3 billion, up 8 percent compared with 2021. Automation Solutions sales were up 5 percent while Commercial & Residential Solutions sales were up 13 percent. Underlying sales were up 9 percent on 5 percent higher volume and 4 percent higher price, and foreign currency translation subtracted 1 percent. Underlying sales increased 12 percent in the U.S. and increased 6 percent internationally. The Americas was up 13 percent, Europe was up 2 percent and Asia, Middle East & Africa was up 7 percent (China up 11 percent).
Cost of sales for 2022 were $5,490, an increase of $483 versus $5,007 in 2021, primarily due to higher sales volume and higher materials costs. Gross margin of 40.7 percent decreased 1.0 percentage point compared to the prior year, reflecting unfavorable price-cost in Commercial & Residential Solutions, partially offset
by leverage on higher sales volume and favorable mix.
SG&A expenses of $2,060 increased $8 compared with the prior year on increased sales volume, partially offset by lower stock compensation expense of $34. SG&A as a percent of sales decreased 1.7 percentage points to 22.2 percent, reflecting leverage on higher sales, lower stock compensation expense, and 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 $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.
Other deductions, net were $91 in 2022, a decrease of $64 compared with the prior year, reflecting a decline in restructuring costs of $64, a favorable impact from foreign currency transactions of $35 due to losses in the prior year and gains in the current year, and gains from the sales of capital assets of $15 in the first quarter of fiscal 2022, partially offset by acquisition/divestiture costs of $36. Intangibles amortization decreased $27 largely due to backlog
19
amortization
in the prior year of $17 related to the OSI acquisition. 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. See Notes 6 and 7.
Pretax earnings of $1,986 increased $686, or 53 percent. Earnings increased $250 in Automation Solutions and decreased $3 in Commercial & Residential Solutions, while costs reported at Corporate increased $2. See the Business Segments discussion that follows and Note 13.
Income taxes were $416 for 2022 and $280 for 2021, resulting in effective tax rates of 21 percent and 22 percent, respectively. The current year rate included a 3 percentage point benefit related to the completion of tax examinations, partially
offset by portfolio restructuring activities which negatively impacted the rate by 2 percentage points.
Net earnings common stockholders in 2022 were $1,570, up 56 percent compared with the prior year, and earnings per share were $2.63, up 57 percent compared with $1.67 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. 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.
Six Months Ended Mar 31
2021
2022
Change
Earnings
before income taxes
$
1,300
1,986
53
%
Percent of sales
15.1
%
21.4
%
Interest expense, net
78
90
Restructuring
and related costs
90
33
Amortization of intangibles
163
153
Gain on subordinated interest
—
(453)
Acquisition/divestiture
costs
—
36
Gain on acquisition of full ownership of equity investment
(17)
—
OSI first year acquisition accounting charges and fees
31
—
Adjusted
EBITA
$
1,645
1,845
12
%
Percent of sales
19.2
%
19.9
%
20
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.
Six Months Ended Mar 31
2021
2022
Diluted
earnings per share
$
1.67
2.63
Restructuring and related costs
0.12
0.04
Amortization
of intangibles
0.20
0.20
Gain on subordinated interest
—
(0.60)
Acquisition/divestiture costs and interest on AspenTech debt
—
0.07
Gain
on acquisition of full ownership of equity investment
(0.03)
—
OSI first year acquisition accounting charges and fees
0.04
—
Adjusted
diluted earnings per share
$
2.00
2.34
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.
Six
Months Ended
Adjusted diluted earnings per share - Mar 31, 2021
$
2.00
Operations
0.21
Stock compensation
0.05
Pensions
0.03
Gains
on sales of investments - prior year
(0.07)
Gains on sales of capital assets - current year
0.02
Foreign currency
0.03
Lower effective tax rate
0.02
Share
repurchases
0.05
Adjusted diluted earnings per share - Mar 31, 2022
$
2.34
21
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, 2022. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
Six
Months Ended Mar 31
2021
2022
Change
Sales
$
5,485
5,742
5
%
Earnings
$
832
1,082
30
%
Margin
15.2
%
18.8
%
Restructuring
and related costs
$
78
23
Amortization of intangibles
$
137
129
Adjusted EBITA
$
1,047
1,234
18
%
Adjusted
EBITA Margin
19.1
%
21.5
%
Sales
by Major Product Offering
Measurement & Analytical Instrumentation
$
1,430
1,502
5
%
Valves, Actuators & Regulators
1,642
1,699
3
%
Industrial
Solutions
1,063
1,168
10
%
Systems & Software
1,350
1,373
2
%
Total
$
5,485
5,742
5
%
Automation
Solutions sales were $5.7 billion in the first six months of 2022, an increase of $257, or 5 percent. Foreign currency translation had a 1 percent unfavorable impact. Underlying sales increased 6 percent on 5 percent higher volume and 1 percent higher price, reflecting continued recovery in most end markets and world areas despite supply chain and logistics constraints which unfavorably impacted sales. Underlying sales increased 10 percent in the Americas, while Europe decreased 2 percent and Asia, Middle East & Africa was up 6 percent (China up 17 percent). Sales for Measurement & Analytical Instrumentation increased $72, or 5 percent. Sales were strong in Asia, Middle East & Africa and up moderately in North America on continued improvement for North American process industries, while sales were down moderately in Europe due to supply chain constraints. Valves, Actuators & Regulators increased $57, or 3
percent, reflecting strong demand in the Americas and China, partially offset by softness in the rest of Asia, Middle East & Africa and Europe. Industrial Solutions sales increased $105, or 10 percent, reflecting strong global demand in discrete end markets. Systems & Software increased $23, or 2 percent, reflecting strength in process end markets in North America and China, partially offset by weakness in Europe, while power end markets were strong in Asia, Middle East & Africa and up modestly in North America. Earnings were $1,082, an increase of $250, or 30 percent, and margin increased 3.6 percentage points to 18.8 percent, reflecting leverage on higher volume, lower restructuring expense which benefited margins 1.0 percentage point, savings from cost reduction actions and favorable mix, partially offset by higher inflation. Foreign currency transactions also benefited margins by 0.4 percentage points.
22
COMMERCIAL
& RESIDENTIAL SOLUTIONS
Six Months Ended Mar 31
2021
2022
Change
Sales:
Climate
Technologies
$
2,191
2,504
14
%
Tools & Home Products
930
1,024
10
%
Total
$
3,121
3,528
13
%
Earnings:
Climate
Technologies
$
457
454
(1)
%
Tools & Home Products
210
210
—
%
Total
$
667
664
—
%
Margin
21.4
%
18.8
%
Restructuring
and related costs
$
8
7
Amortization of intangibles
$
26
24
Adjusted EBITA
$
701
695
(1)
%
Adjusted
EBITA Margin
22.4
%
19.7
%
Commercial & Residential Solutions sales were $3.5 billion in the first six months of 2022, an increase of $407, or 13 percent compared to the prior year. Underlying sales were up 14 percent on 6 percent higher volume and 8 percent higher price, while foreign currency translation subtracted 1 percent. Overall, underlying sales increased 16 percent in the Americas, 14 percent in Europe and 7 percent in Asia, Middle East & Africa (China down 3 percent). Climate Technologies sales were $2.5 billion in the first six months of 2022, an
increase of $313, or 14 percent. Air conditioning, heating and refrigeration sales were strong, reflecting global demand across all end markets. Tools & Home Products sales were $1.0 billion in the first six months of 2022, up $94, or 10 percent. Sales of professional tools were up nearly 15 percent and food waste disposers were up 10 percent, while wet/dry vacuums were up slightly. Earnings were $664, flat compared to the prior year, and margin decreased 2.6 percentage points, due to unfavorable price-cost reflecting steel prices, partially offset by leverage on higher volume 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. The increase in the current 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 in the first quarter related to the Vertiv subordinated interest of $438. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 21.5X for the first six months of fiscal 2022 compares to 16.6X for the six months ended March 31,
2021. The increase reflects higher pretax earnings in the current year, including the Vertiv subordinated interest gain of $453. Excluding the gain, the interest coverage ratio was 16.8X.
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. In the second quarter of fiscal 2022, the Company increased its commercial
paper borrowings by approximately $2.2 billion to generate additional cash to fund 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 six months of fiscal 2022 was $965, a decrease of $650 compared with $1,615 in the prior year due to higher inventory levels to support sales growth and reflecting ongoing supply chain and logistics constraints. Operating cash flow was also negatively impacted by approximately $45 of taxes paid in the second quarter of fiscal 2022 on the Vertiv subordinated interest gain. The remaining taxes owed on the gain are approximately $45 and are expected to be paid by the end
of fiscal 2022. Free cash flow of $740 in the first six months of fiscal 2022 (operating cash flow of $965 less capital expenditures of $225) decreased $653 compared to free cash flow of $1,393 in 2021 (operating cash flow of $1,615 less capital expenditures of $222), reflecting the decrease in operating cash flow. Cash provided by investing activities was $159, reflecting cash received related to the Vertiv subordinated interest of $438. Cash provided by financing activities was $3,499, primarily due to proceeds of nearly $3 billion from the December 2021 debt issuance and increased commercial paper borrowings of $2.2 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 $29 billion and stockholders' equity of $11 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.
24
FISCAL 2022 OUTLOOK
Emerson continues to see strong overall business performance while managing continued macroeconomic and geopolitical uncertainty, supply chain constraints and challenges related to COVID-19. For
the full year, consolidated net sales are expected to be up 8 to 10 percent, with underlying sales up 9 to 11 percent excluding a 1 percent unfavorable impact from foreign currency translation. Automation Solutions net sales are expected to be up 6 to 8 percent, with underlying sales up 7 to 9 percent excluding a 1 percent unfavorable impact from foreign currency translation. Commercial & Residential Solutions net sales are expected to be up 11 to 13 percent with underlying sales up 12 to 14 percent excluding a 1 percent unfavorable impact from foreign currency translation. Earnings per share are expected to be $4.77 to $4.92, while adjusted earnings per share are expected to be $4.95 to $5.10. Adjusted earnings per share exclude a $0.20 impact from restructuring actions, a $0.39 impact from amortization of intangibles, a $0.60 gain from the Vertiv subordinated interest (see Note 4), and a $0.19 impact from transaction and Aspen Tech pre-closing costs. Operating
cash flow is expected to be approximately $3.6 billion and free cash flow, which excludes projected capital spending of $600 million, is expected to be approximately $3.0 billion. Share repurchases are expected to be approximately $250 to $500 million in fiscal 2022. Emerson's guidance excludes the operational impact of the transaction with AspenTech, which is expected to close in the second calendar quarter of 2022, but does include estimated transaction fees and interest expense on $3 billion of debt already issued to fund the transaction. The guidance also excludes the effect of the Therm-O-Disc sale, expected to close in the second calendar quarter of 2022. The guidance includes the operational impact of exiting the Russia business, discussed below, but excludes any potential charges or other costs associated with the exit.
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, 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.
On May 4, 2022, Emerson announced its intention to exit business operations in Russia and is exploring strategic options to divest Metran, its Russia-based manufacturing subsidiary. Emerson is committed to an orderly transfer of these assets and will support its employees through this process. Emerson's historical net sales in Russia were principally in the Automation Solutions segment and in total, represent approximately 1.5 percent of consolidated annual sales. As of March 31, 2022, Emerson's Russian operations had net assets of approximately $50 and accumulated
foreign currency translation losses of approximately $145 (which will be recognized as a non-cash charge when the exit is completed). The Company is currently unable to estimate the full financial consequences of the exit due to uncertainty regarding the commercial terms of the exit and related tax impacts.
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.
25
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 2022
268
$91.45
268
57,201
February
2022
25
$91.83
25
57,176
March 2022
—
—
—
57,176
Total
293
$91.48
293
57,176
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 57.2 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 six months ended March 31,
2022 and 2021, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2022 and 2021, (iii) Consolidated Balance Sheets as of September 30, 2021 and March 31, 2022, (iv) Consolidated Statements of Equity for the three and six months ended March 31, 2022 and 2021, (v) Consolidated Statements of Cash Flows for the six months ended March 31, 2022 and 2021, and (vi) Notes to Consolidated Financial Statements for the three and six months ended March 31,
2022 and 2021.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
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).
26
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.
