OVERVIEW
For the third quarter of fiscal 2021, net sales were $4.7 billion, up 20 percent
compared with the prior year, supported by foreign currency translation which
added 4 percent and the Open Systems International, Inc. (OSI) acquisition which
added 1 percent. Underlying sales, which exclude foreign currency translation,
acquisitions and divestitures, were up 15 percent. Automation Solutions
underlying sales were up high single digits, as all businesses turned positive
and all geographies were up mid-to-high single digits. Commercial & Residential
Solutions underlying sales were up sharply, reflecting strong growth across all
businesses and geographies including robust demand in North American residential
markets and global cold chain markets. Both business platforms also benefited
from the impact of COVID-19 on prior year comparisons.
Net earnings common stockholders were $627, up 57 percent, and diluted earnings
per share were $1.04, up 55 percent compared with $0.67 in the prior year.
Operating results increased $0.33 per share, reflecting higher sales and strong
segment margins due to significant savings from the Company's restructuring and
cost reset actions. Third quarter results also benefited from lower
restructuring costs ($0.09 per share) and favorable foreign currency translation
($0.06), offset by a higher tax rate compared to the prior year ($0.10 per
share) and first year acquisition accounting charges related to the OSI
acquisition ($0.01 per share).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30
Following is an analysis of the Company's operating results for the third
quarter ended June 30, 2021, compared with the third quarter ended June 30,
2020.
2020 2021 Change
Net sales $ 3,914 4,697 20 %
Gross profit $ 1,618 1,982 23 %
Percent of sales 41.3 % 42.2 %
SG&A $ 934 1,073 15 %
Percent of sales 23.8 % 22.9 %
Other deductions, net $ 181 88
Amortization of intangibles $ 60 71
Restructuring costs $ 88 28
Interest expense, net $ 45 37
Earnings before income taxes $ 458 784 71 %
Percent of sales 11.7 % 16.7 %
Net earnings common stockholders $ 399 627 57 %
Percent of sales 10.2 % 13.3 %
Diluted earnings per share $ 0.67 1.04 55 %
Net sales for the third quarter of fiscal 2021 were $4.7 billion, up 20 percent
compared with 2020. Automation Solutions sales were up 14 percent and Commercial
& Residential Solutions sales were up 32 percent. Underlying sales were up 15
percent, as foreign currency translation added 4 percent and the OSI acquisition
added 1 percent. Underlying sales were up 18 percent in the U.S. and up 13
percent internationally. The Americas was up 18 percent, Europe was up 13
percent and Asia, Middle East & Africa was up 11 percent (China up 7 percent).
Cost of sales for the third quarter of fiscal 2021 were $2,715, an increase of
$419 compared with 2020, due to higher sales volume, the impact of foreign
currency translation and the OSI acquisition. Gross margin of 42.2 percent
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increased 0.9 percentage points compared with the prior year reflecting leverage
on higher sales volume, partially offset by unfavorable price-cost in Commercial
& Residential Solutions.
Selling, general and administrative (SG&A) expenses of $1,073 increased $139
compared with the prior year on increased sales volume and higher stock and
other performance-based compensation expense. SG&A as a percent of sales
decreased 0.9 percentage points to 22.9 percent reflecting savings from the
Company's restructuring and cost reset actions.
Other deductions, net were $88 in 2021, a decrease of $93 compared with the
prior year, reflecting lower restructuring costs of $60, a favorable impact from
foreign currency transactions of $25 due to losses in the prior year, and a
favorable impact from pensions, partially offset by higher intangibles
amortization of $11, primarily related to the OSI acquisition. See Notes 6 and
7.
Pretax earnings of $784 increased $326, up 71 percent compared with the prior
year. Earnings increased $210 in Automation Solutions and $122 in Commercial &
Residential Solutions, while costs reported at Corporate increased $14. See the
Business Segments discussion that follows and Note 12.
Income taxes were $151 for 2021 and $51 for 2020, resulting in effective tax
rates of 19 percent and 11 percent, respectively. The current year rate included
$24 of favorable net discrete tax items which decreased the rate 3 percentage
points, while the prior year rate included $57 of discrete benefits which
decreased the rate 12 percentage points.
Net earnings common stockholders in the third quarter of fiscal 2021 were $627,
up 57 percent, compared with $399 in the prior year, and earnings per share were
$1.04, up 55 percent, compared with $0.67 in the prior year. See discussion in
the Overview above for further details.
Business Segments
Following is an analysis of operating results for the Company's business
segments for the third quarter ended June 30, 2021, compared with the third
quarter ended June 30, 2020. The Company defines segment earnings as earnings
before interest and taxes. See Note 12 for a discussion of the Company's
business segments.
AUTOMATION SOLUTIONS
Three Months Ended June 30 2020 2021 Change
Sales $ 2,589 2,947 14 %
Earnings $ 311 521 67 %
Margin 12.0 % 17.7 %
Sales by Major Product Offering
Measurement & Analytical Instrumentation $ 709 781 10 %
Valves, Actuators & Regulators
842 880 5 %
Industrial Solutions 469 593 26 %
Systems & Software 569 693 22 %
Total $ 2,589 2,947 14 %
Automation Solutions sales were $2.9 billion in the third quarter, an increase
of $358 or 14 percent. Underlying sales increased 8 percent on 7 percent higher
volume and 1 percent higher price, reflecting recovery in global markets from
the impacts of COVID-19. Foreign currency translation had a 4 percent favorable
impact and the OSI acquisition had a 2 percent favorable impact. Underlying
sales turned positive and increased 9 percent in the Americas (U.S. up 9
percent), as process end markets recovered, while Europe increased 6 percent and
Asia, Middle East & Africa increased 7 percent (China up 5 percent). Sales for
Measurement & Analytical Instrumentation increased $72, or 10 percent, and
Valves, Actuators & Regulators increased $38, or 5 percent, as market conditions
continued to improve for North American process industries. Measurement &
Analytical sales were strong in Asia, Middle East & Africa, while demand in
Europe for both businesses was soft. Industrial Solutions sales were up $124, or
26 percent, reflecting strong global demand in discrete end markets. Systems &
Software increased $124, or 22 percent, on strength in process end markets in
North America and Europe and solid growth in Asia, Middle East & Africa, while
power end markets were strong in North America, and the OSI acquisition added
$51. Earnings were $521, an increase of $210, or 67 percent, and margin
increased 5.7 percentage points to 17.7 percent, reflecting leverage on
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higher volume, lower restructuring expenses which benefited margins 2.5
percentage points, savings from cost reduction actions and favorable price-cost.
COMMERCIAL & RESIDENTIAL SOLUTIONS
Three Months Ended June 30 2020 2021 Change
Sales:
Climate Technologies $ 970 1,268 31 %
Tools & Home Products 357 489 37 %
Total $ 1,327 1,757 32 %
Earnings:
Climate Technologies $ 195 274 40 %
Tools & Home Products 58 101 74 %
Total $ 253 375 48 %
Margin 19.1 % 21.3 %
Commercial & Residential Solutions sales were $1.8 billion in the third quarter,
up $430, or 32 percent compared to the prior year. Underlying sales increased 29
percent due to strong growth across all businesses and geographies while foreign
currency translation added 3 percent. Results also benefited from comparisons to
prior year results which were negatively impacted by COVID-19. Overall,
underlying sales increased 29 percent in the Americas (U.S. up 28 percent), 37
percent in Europe and 25 percent in Asia, Middle East & Africa (China up 15
percent). Climate Technologies sales were $1.3 billion in the third quarter, an
increase of $298, or 31 percent. Air conditioning and heating sales were up 20
percent and cold chain sales were up over 40 percent, reflecting strong global
demand across all end markets, especially food service, food retail and
aftermarket. Tools & Home Products sales were $489 in the third quarter, an
increase of $132, or 37 percent. Sales of wet/dry vacuums were robust in part
due to competitor outages, while professional tools and food waste disposers
were up sharply. Earnings were $375, up 48 percent compared with the prior year,
and margin increased 2.2 percentage points to 21.3 percent due to leverage on
higher sales volume and savings from cost reduction actions, partially offset by
unfavorable price-cost.
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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, 2020.
2020 2021 Change
Net sales $ 12,227 13,289 9 %
Gross profit $ 5,127 5,567 9 %
Percent of sales 41.9 % 41.9 %
SG&A $ 3,040 3,125 3 %
Percent of sales 24.8 % 23.5 %
Other deductions, net $ 401 243
Amortization of intangibles $ 178 223
Restructuring costs $ 216 111
Interest expense, net $ 116 115
Earnings before income taxes $ 1,570 2,084 33 %
Percent of sales
12.8 % 15.7 %
Net earnings common stockholders $ 1,242 1,633 31 %
Percent of sales 10.2 % 12.3 %
Diluted earnings per share $ 2.04 2.71 33 %
Net sales for the first nine months of 2021 were $13.3 billion, up 9 percent
compared with 2020. Automation Solutions sales were up 3 percent while
Commercial & Residential Solutions sales were up 19 percent. Underlying sales
were up 5 percent, as foreign currency translation added 3 percent and
acquisitions added 1 percent. Underlying sales increased 1 percent in the U.S.
and increased 8 percent internationally. The Americas was up 2 percent, Europe
was up 8 percent and Asia, Middle East & Africa was up 9 percent (China up 16
percent).
Cost of sales for 2021 were $7,722, an increase of $622 versus $7,100 in 2020,
primarily due to the impact of higher sales volume in Commercial & Residential
Solutions, foreign currency translation, and the OSI acquisition. Gross margin
was 41.9 percent, flat compared to the prior year, as leverage on higher sales
volume was offset by unfavorable mix and unfavorable price-cost in Commercial &
Residential Solutions.
SG&A expenses of $3,125 increased $85 compared with the prior year on higher
stock compensation expense, as well as increased sales volume. SG&A as a percent
of sales decreased 1.3 percentage points to 23.5 percent, reflecting significant
savings from the Company's restructuring and cost reset actions, partially
offset by higher stock compensation expense of $122 (0.8 percentage points) due
to a higher share price in the current year.
Other deductions, net were $243 in 2021, a decrease of $158 compared with the
prior year, reflecting lower restructuring costs of $105, investment-related
gains, including gains in the first quarter of fiscal 2021 of $21 from an
investment sale and $17 from the acquisition of the remaining interest of an
equity investment, and a gain in the second quarter of $31 from the sale of an
equity investment, and a favorable impact from pensions. These items were
partially offset by higher intangibles amortization of $45, primarily related to
the OSI acquisition. See Notes 6 and 7.
Pretax earnings of $2,084 increased $514, or 33 percent. Earnings increased $341
in Automation Solutions and $246 in Commercial & Residential Solutions. Costs
reported at Corporate increased $74, reflecting higher stock compensation
expense of $122 and first year acquisition accounting charges and fees related
to the OSI acquisition of $41, partially offset by the investment-related gains
discussed above and lower unallocated pension and postretirement costs which
decreased by $34. See the Business Segments discussion that follows and Note 12.
Income taxes were $431 for 2021 and $310 for 2020, resulting in effective tax
rates of 21 percent and 20 percent, respectively. The current year and prior
year rates included favorable net discrete items which reduced the rates 1
percentage point and 3 percentage points, respectively.
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Net earnings common stockholders in 2021 were $1,633, up 31 percent compared
with the prior year, and earnings per share were $2.71, up 33 percent compared
with $2.04 in 2020. Operating results increased $0.54 per share, reflecting
significant savings from the Company's restructuring and cost reset actions and
leverage on higher sales volume in Commercial & Residential Solutions. Lower
restructuring and advisory fees ($0.16 per share), favorable foreign currency
translation ($0.05 per share), lower pension expense ($0.03 per share) and share
repurchases ($0.02 per share) also benefited operating results, while higher
stock compensation expense deducted $0.15 per share and a higher tax rate
deducted $0.03 per share. The Company recognized several investment-related
gains in the current year ($0.10 per share), while first year acquisition
accounting charges and fees related to the OSI acquisition deducted $0.05 per
share.
Business Segments
Following is an analysis of operating results for the Company's business
segments for the nine months ended June 30, 2021, compared with the nine months
ended June 30, 2020. The Company defines segment earnings as earnings before
interest and taxes.
AUTOMATION SOLUTIONS
Nine Months Ended June 30 2020 2021 Change
Sales $ 8,150 8,432 3 %
Earnings $ 1,012 1,353 34 %
Margin 12.4 % 16.0 %
Sales by Major Product Offering
Measurement & Analytical Instrumentation $ 2,280 2,211 (3) %
Valves, Actuators & Regulators
2,609 2,522 (3) %
Industrial Solutions 1,470 1,656 13 %
Systems & Software 1,791 2,043 14 %
Total $ 8,150 8,432 3 %
Automation Solutions sales were $8.4 billion in the first nine months of 2021,
an increase of $282, or 3 percent. Underlying sales decreased 1 percent as lower
volume was partially offset by slightly higher price. Foreign currency
translation had a 3 percent favorable impact and the OSI acquisition added 1
percent. Underlying sales decreased 9 percent in the Americas, while Europe
increased 5 percent and Asia, Middle East & Africa was up 6 percent (China up 14
percent). Sales for Measurement & Analytical Instrumentation decreased $69, or 3
percent, as process industries were weak in the first half of the year, but have
improved sequentially as markets continue to recover from the impacts of
COVID-19. Valves, Actuators & Regulators decreased $87, or 3 percent, reflecting
slower demand in most end markets, particularly in North America and Europe,
partially offset by strength in Asia. Industrial Solutions sales increased $186,
or 13 percent, on strong growth in Europe and robust growth in China, while
North American discrete end markets were down slightly but continued to improve
sequentially. Systems & Software increased $252, or 14 percent, reflecting the
impact of the OSI acquisition which added $141. Process end markets were strong
in Europe and had solid growth in Asia while North America declined. Power end
markets were solid in North America, partially offset by softness in Asia.
Earnings were $1,353, an increase of $341, or 34 percent, and margin increased
3.6 percentage points to 16.0 percent, as significant savings from cost
reduction actions and favorable price-cost more than offset unfavorable mix,
while lower restructuring expense benefited margins 1.3 percentage points.
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COMMERCIAL & RESIDENTIAL SOLUTIONS
Nine Months Ended June 30 2020 2021 Change
Sales:
Climate Technologies $ 2,869 3,459 21 %
Tools & Home Products 1,219 1,419 16 %
Total $ 4,088 4,878 19 %
Earnings:
Climate Technologies $ 563 731 30 %
Tools & Home Products 233 311 34 %
Total $ 796 1,042 31 %
Margin 19.5 % 21.4 %
Commercial & Residential Solutions sales were $4.9 billion in the first nine
months of 2021, an increase of $790, or 19 percent compared to the prior year.
Underlying sales were up 17 percent due to strong global demand while foreign
currency translation added 2 percent. Overall, underlying sales increased 17
percent in the Americas, 17 percent in Europe and 18 percent in Asia, Middle
East & Africa (China up 22 percent). Climate Technologies sales were $3.5
billion in the first nine months of 2021, an increase of $590, or 21 percent.
Air conditioning and heating sales were up mid-teens, reflecting strong demand
for residential-oriented products and solutions in North America and robust
growth in Europe and China. Cold chain sales were up over 20 percent, driven by
favorable global market conditions and strength in food retail and aftermarket.
Tools & Home Products sales were $1.4 billion in the first nine months of 2021,
up $200, or 16 percent. Sales of wet/dry vacuums were robust in part due to
competitor outages, while sales were strong for food waste disposers and global
professional tools, partially due to easier comparisons in the third quarter.
Earnings were $1,042, up 31 percent compared to the prior year, and margin
increased 1.9 percentage points, reflecting leverage on higher volume and
savings from cost reduction actions, partially offset by unfavorable price-cost
and mix.
FINANCIAL CONDITION
Key elements of the Company's financial condition for the nine months ended
June 30, 2021 as compared to the year ended September 30, 2020 and the nine
months ended June 30, 2020 follow.
June 30, 2020 Sept 30, 2020 June 30, 2021
Operating working capital $ 1,169 $ 866 $ 714
Current ratio 1.3 1.5 1.3
Total debt-to-total capital 48.0 % 47.1 % 44.0 %
Net debt-to-net capital 37.9 % 33.2 % 32.4 %
Interest coverage ratio 12.9 X 14.4 X 17.8 X
The Company's operating working capital decreased $455 compared to the same
quarter last year largely due to timing-related reductions reflecting current
business conditions. The interest coverage ratio (earnings before income taxes
plus interest expense, divided by interest expense) of 17.8X for the first nine
months of fiscal 2021 compares to 12.9X for the nine months ended June 30, 2020.
The increase reflects higher pretax earnings in the current year.
Operating cash flow for the first nine months of fiscal 2021 was $2.7 billion,
an increase of $866 compared with $1.9 billion in the prior year due to higher
earnings and favorable operating working capital. Free cash flow of $2.4 billion
in the first nine months of fiscal 2021 (operating cash flow of $2.7 billion
less capital expenditures of $350) increased $845 compared to free cash flow of
$1.5 billion in 2020 (operating cash flow of $1.9 billion less capital
expenditures of $329), reflecting the increase in operating cash flow. Cash used
for investing activities was $1.9 billion largely due to the OSI acquisition.
Cash used for financing activities was $1.3 billion, primarily due to dividends
and share repurchases.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19
pandemic, and among other things, provides tax relief to businesses. Tax
provisions of the CARES Act include the deferral of certain payroll taxes,
relief for retaining employees, and other provisions. The Company deferred $73
of certain payroll taxes through the end of calendar year 2020, half of which is
due in December 2021 with the remainder due in December 2022.
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Emerson maintains a conservative financial structure to provide the strength and
flexibility necessary to achieve our strategic objectives and has been
successful in efficiently deploying cash where needed worldwide to fund
operations, complete acquisitions and sustain long-term growth. Emerson is in a
strong financial position, with total assets of $24 billion and stockholders'
equity of $9 billion, and has the resources available for reinvestment in
existing businesses, strategic acquisitions and managing its capital structure
on a short- and long-term basis.
FISCAL 2021 OUTLOOK
The Company delivered strong financial performance in the quarter, despite
pandemic and operating-related challenges, including material costs,
availability, logistics, and labor constraints. Overall, the Company expects
continued improvement in industrial and commercial demand over the remainder of
2021. Operational, supply chain, and materials inflation is expected to remain
challenging through the remainder of the fiscal year. For the full year,
consolidated net sales are expected to be up 9 to 10 percent, with underlying
sales up 5 to 6 percent excluding a 3 percent favorable impact from foreign
currency translation and a 1 percent favorable impact from the OSI acquisition.
Automation Solutions net sales are expected to be up 5 to 6 percent, with
underlying sales flat to up 1 percent excluding a 3 percent favorable impact
from foreign currency translation and a 2 percent favorable impact from the OSI
acquisition. Commercial & Residential Solutions net sales are expected to be up
17 to 18 percent, with underlying sales up 15 to 16 percent excluding a 2
percent impact from favorable foreign currency translation. Earnings per share
are expected to be $3.78 to $3.80, while adjusted earnings per share, which
exclude a $0.24 per share impact from restructuring actions, a $0.07 per share
impact from OSI first year acquisition accounting charges and fees, and a $0.03
per share equity investment gain, are expected to be $4.06 to $4.08. Operating
cash flow is expected to be approximately $3.6 billion and free cash flow, which
excludes targeted capital spending of $600 million, is expected to be
approximately $3.0 billion. Fiscal 2021 share repurchases are expected to be in
the amount of $500 million. However, future developments related to COVID-19,
including further actions taken by governmental authorities, potential shutdowns
of our operations, or delays in the stabilization and recovery of economic
conditions could further adversely affect our operations and financial results,
as well as those of our customers and suppliers. See Item 1A - "Risk Factors" in
our Annual Report on Form 10-K.
Statements in this report that are not strictly historical may be
"forward-looking" statements, which involve risks and uncertainties, and Emerson
undertakes no obligation to update any such statements to reflect later
developments. These risks and uncertainties include the scope, duration and
ultimate impact of the COVID-19 pandemic, as well as economic and currency
conditions, market demand, including related to the pandemic and oil and gas
price declines and volatility, pricing, protection of intellectual property,
cybersecurity, tariffs, competitive and technological factors, among others,
which are set forth in the "Risk Factors" of Part I, Item 1A, and the "Safe
Harbor Statement" of Part II, Item 7, to the Company's Annual Report on Form
10-K for the year ended September 30, 2020 and in subsequent reports filed with
the SEC, which are hereby incorporated by reference.
The United Kingdom's (UK) withdrawal from the European Union (EU), commonly
known as "Brexit", was completed on January 31, 2020. Negotiations over the
terms of trade and other laws and regulations took place during 2020 and an
agreement between the EU and the UK was reached on December 24, 2020, which
included zero tariffs and quotas on goods. The Company's net sales in the UK are
principally in the Automation Solutions segment and represent less than two
percent of consolidated sales. While there could be certain incremental costs
for logistics and other items, the Company expects any impact of these items
will be immaterial.
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EMERSON ELECTRIC CO. 
