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OFFON

EMERSON ELECTRIC CO.

(EMR)
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Emerson Electric : Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars are in millions, except per share amounts or where noted)

05/05/2021 | 02:33pm EDT

OVERVIEW

For the second quarter of fiscal 2021, net sales were $4.4 billion, up 6 percent compared with the prior year, supported by foreign currency translation which added 3 percent and the Open Systems International, Inc. (OSI) acquisition which added 1 percent. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were up 2 percent. Automation Solutions underlying sales were down slightly compared to the prior year, but continued to improve sequentially as global markets recover from the impacts of COVID-19. Sales in North America were down 15 percent as automation markets remained weak, but hybrid and discrete markets improved sequentially. Sales rebounded sharply in China (up 42 percent) due to easier comparisons and Europe was up 6 percent. Commercial & Residential Solutions underlying sales were up sharply, reflecting growth across all businesses and geographies. Demand for residential-oriented products and solutions in North America and global cold chain end markets were strong, while sales in China rebounded sharply. Net earnings common stockholders were $561, up 9 percent, and diluted earnings per share were $0.93, up 11 percent compared with $0.84 in the prior year. Operating results increased $0.14 per share on strong segment margins, reflecting significant savings from the Company's restructuring and cost reset actions. This was largely offset by higher stock compensation expense ($0.12 per share), reflecting a higher stock price in the current year compared to a sharply lower price in the prior year due to market conditions. Second quarter results also benefited from a gain on the sale of an equity investment ($0.04 per share), lower restructuring costs ($0.02 per share), a lower tax rate ($0.01 per share) and share repurchases ($0.01 per share), partially offset by first year acquisition accounting charges related to the OSI acquisition ($0.01 per share).

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,
2020.
                                      2020         2021        Change

Net sales                          $ 4,162        4,431           6  %
Gross profit                       $ 1,750        1,862           6  %
Percent of sales                      42.1  %      42.0  %

SG&A                               $   983        1,054           7  %
Percent of sales                      23.7  %      23.8  %

Other deductions, net              $    42           33
Amortization of intangibles        $    59           74
Restructuring costs                $    31           17

Interest expense, net              $    36           38

Earnings before income taxes       $   689          737           7  %
Percent of sales                      16.6  %      16.6  %

Net earnings common stockholders   $   517          561           9  %
Percent of sales                      12.4  %      12.7  %

Diluted earnings per share         $  0.84         0.93          11  %


Net sales for the second quarter of fiscal 2021 were $4.4 billion, up 6 percent compared with 2020. Automation Solutions sales were up 3 percent and Commercial & Residential Solutions sales were up 13 percent. Underlying sales were up 2 percent, as foreign currency translation added 3 percent and the OSI acquisition added 1 percent.





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Underlying sales were down 5 percent in the U.S. and up 9 percent internationally. The Americas was down 4 percent, Europe was up 7 percent and Asia, Middle East & Africa was up 12 percent (China up 45 percent).


Cost of sales for the second quarter of fiscal 2021 were $2,569, an increase of
$157 compared with 2020, due to the impact of foreign currency translation,
higher sales volume and the OSI acquisition. Gross margin of 42.0 percent
decreased 0.1 percentage points compared with the prior year due to unfavorable
mix.
Selling, general and administrative (SG&A) expenses of $1,054 increased $71
compared with the prior year and SG&A as a percent of sales increased 0.1
percentage points to 23.8 percent. Higher stock compensation expense of $99
negatively impacted comparisons by 2.3 percentage points. Excluding the higher
stock compensation expense, SG&A as a percent of sales decreased 2.2 percentage
points, reflecting significant savings from the Company's restructuring and cost
reset actions.
Other deductions, net were $33 in 2021, a decrease of $9 compared with the prior
year, reflecting lower restructuring costs of $14 and a gain on the sale of an
equity investment of $31, partially offset by unfavorable foreign currency
transactions of $22 and higher intangibles amortization of $15, primarily
related to the OSI acquisition. See Notes 6 and 7.
Pretax earnings of $737 increased $48, up 7 percent compared with the prior
year. Earnings increased $80 in Automation Solutions and $51 in Commercial &
Residential Solutions. Costs reported at Corporate increased $81 primarily due
to higher stock compensation expense of $99, partially offset by the gain on
sale of an equity investment of $31. See the Business Segments discussion that
follows and Note 12.
Income taxes were $169 for 2021 and $165 for 2020, resulting in effective tax
rates of 23 percent and 24 percent, respectively. The current year and prior
year rate included unfavorable discrete tax items which increased the rate 1
percentage point in both years.
Net earnings common stockholders in the second quarter of fiscal 2021 were $561,
up 9 percent, compared with $517 in the prior year, and earnings per share were
$0.93, up 11 percent, compared with $0.84 in the prior year. See discussion in
the Overview above for further details.

Business Segments Following is an analysis of operating results for the Company's business segments for the second quarter ended March 31, 2021, compared with the second quarter ended March 31, 2020. The Company defines segment earnings as earnings before interest and taxes. See Note 12 for a discussion of the Company's business segments.


AUTOMATION SOLUTIONS
Three Months Ended Mar 31        2020         2021        Change

Sales                         $ 2,709        2,793           3  %
Earnings                      $   391          471          20  %
   Margin                        14.4  %      16.8  %


Sales by Major Product Offering Measurement & Analytical Instrumentation $ 776 732 (6) % Valves, Actuators & Regulators

                   854         836        (2) %
Industrial Solutions                             494         555        12  %
Systems & Software                               585         670        14  %
   Total                                     $ 2,709       2,793         3  %

Automation Solutions sales were $2.8 billion in the second quarter, an increase of $84 or 3 percent. Underlying sales decreased 2 percent on lower volume, but continued to improve sequentially as global markets recover from the impacts of COVID-19. Foreign currency translation had a 3 percent favorable impact and the OSI acquisition had a 2 percent favorable impact. Underlying sales decreased 12 percent in the Americas (U.S. down 15 percent), while Europe increased 6 percent and Asia, Middle East & Africa increased 9 percent (China up 42 percent). Sales for Measurement & Analytical Instrumentation decreased $44, or 6 percent, and Valves, Actuators & Regulators decreased $18, or 2 percent, due to continued weakness in North American process industries, partially offset by





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moderate growth in Europe and robust growth in China on easier comparisons. Industrial Solutions sales were up $61, or 12 percent, reflecting robust demand in China due to easier comparisons and strong growth in Europe. North American discrete end markets declined compared to the prior year but improved sequentially. Systems & Software increased $85, or 14 percent, reflecting the OSI acquisition, which added $48, and strong demand in Europe, while Asia, Middle East & Africa was up moderately and process end markets were down modestly in North America. Earnings were $471, an increase of $80, or 20 percent, and margin increased 2.4 percentage points to 16.8 percent, as significant savings from cost reduction actions and favorable price-cost more than offset deleverage on lower volume, unfavorable foreign currency transactions and unfavorable mix.


COMMERCIAL & RESIDENTIAL SOLUTIONS
Three Months Ended Mar 31        2020         2021        Change

Sales:
 Climate Technologies         $ 1,026        1,160          13  %
 Tools & Home Products            432          485          13  %
   Total                      $ 1,458        1,645          13  %

Earnings:
 Climate Technologies         $   217          245          13  %
 Tools & Home Products             89          112          25  %
   Total                      $   306          357          17  %
   Margin                        21.0  %      21.7  %


Commercial & Residential Solutions sales were $1.6 billion in the second quarter, up $187, or 13 percent compared to the prior year. Underlying sales increased 11 percent due to higher volume and reflected growth across all businesses and geographies, while foreign currency translation added 2 percent. Overall, underlying sales increased 8 percent in the Americas (U.S. up 7 percent), 9 percent in Europe and 24 percent in Asia, Middle East & Africa (China up 56 percent). Climate Technologies sales were $1.2 billion in the second quarter, an increase of $134, or 13 percent. Air conditioning and heating sales were up high single-digits, reflecting strong demand for residential-oriented products and solutions in North America and robust growth in Europe and China. Cold chain sales were up mid teens, driven by favorable global market conditions. Tools & Home Products sales were $485 in the second quarter, an increase of $53, or 13 percent. Sales for wet/dry vacuums were robust due to competitor outages, while growth was strong for food waste disposers and solid for professional tools. Earnings were $357, up 17 percent compared with the prior year, and margin increased 0.7 percentage points to 21.7 percent due to savings from cost reduction actions, while leverage on higher volume offset unfavorable price-cost.






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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31

Following is an analysis of the Company's operating results for the six months ended March 31, 2021, compared with the six months ended March 31, 2020.

                                      2020         2021        Change

Net sales                          $ 8,313        8,592           3  %
Gross profit                       $ 3,509        3,585           2  %
Percent of sales                      42.2  %      41.7  %

SG&A                               $ 2,106        2,052          (3) %
Percent of sales                      25.3  %      23.9  %

Other deductions, net              $   220          155
Amortization of intangibles        $   118          152
Restructuring costs                $   128           83

Interest expense, net              $    71           78

Earnings before income taxes       $ 1,112        1,300          17  %
Percent of sales                      13.4  %      15.1  %

Net earnings common stockholders   $   843        1,006          19  %
Percent of sales                      10.1  %      11.7  %

Diluted earnings per share         $  1.37         1.67          22  %


Net sales for the first six months of 2021 were $8.6 billion, up 3 percent compared with 2020. Automation Solutions sales were down 1 percent while Commercial & Residential Solutions sales were up 13 percent. Underlying sales were flat, as foreign currency translation added 2 percent and acquisitions added 1 percent. Underlying sales decreased 6 percent in the U.S. and increased 5 percent internationally. The Americas was down 5 percent, Europe was up 5 percent and Asia, Middle East & Africa was up 7 percent (China up 22 percent).

Cost of sales for 2021 were $5,007, an increase of $203 versus $4,804 in 2020, primarily due to the impact of foreign currency translation and the OSI acquisition. Gross margin decreased 0.5 percentage points to 41.7 percent, reflecting unfavorable mix and deleverage on lower sales volume within Automation Solutions.

SG&A expenses of $2,052 decreased $54 and SG&A as a percent of sales decreased 1.4 percentage points to 23.9 percent, reflecting significant savings from the Company's restructuring and cost reset actions, which more than offset higher stock compensation expense of $107 (1.3 percentage points) and deleverage on lower sales volume within Automation Solutions.

Other deductions, net were $155 in 2021, a decrease of $65 compared with the prior year, reflecting lower restructuring costs of $45 and investment-related gains. In the first quarter of fiscal 2021, the Company recognized an investment gain of $21 and a gain from the acquisition of the remaining interest of an equity investment of $17, and in the second quarter recognized a gain of $31 on the sale of an equity investment. These items were partially offset by higher intangibles amortization of $34, primarily related to the OSI acquisition, and unfavorable foreign currency transactions of $29. See Notes 6 and 7.

Pretax earnings of $1,300 increased $188, or 17 percent. Earnings increased $131 in Automation Solutions and $124 in Commercial & Residential Solutions. Costs reported at Corporate increased $60, reflecting higher stock compensation expense of $107 and first year acquisition accounting charges and fees related to the OSI acquisition of $31, partially offset by the investment-related gains discussed above and lower unallocated pension and postretirement costs of $22. See the Business Segments discussion that follows and Note 12.

Income taxes were $280 for 2021 and $259 for 2020, resulting in effective tax rates of 22 percent and 23 percent, respectively.






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Net earnings common stockholders in 2021 were $1,006, up 19 percent compared with the prior year, and earnings per share were $1.67, up 22 percent compared with $1.37 in 2020. Operating results increased $0.24 per share, as significant savings from the Company's restructuring and cost reset actions more than offset deleverage on lower sales volume in Automation Solutions. Lower restructuring and advisory fees ($0.07 per share), a lower tax rate ($0.03 per share) and share repurchases ($0.03 per share) also benefited operating results, while higher stock compensation expense deducted $0.13 per share. The Company recognized several investment-related gains in the current year ($0.10 per share), while first year acquisition accounting charges and fees related to the OSI acquisition deducted $0.04 per share.


Business Segments
Following is an analysis of operating results for the Company's business
segments for the six months ended March 31, 2021, compared with the six months
ended March 31, 2020. The Company defines segment earnings as earnings before
interest and taxes.

AUTOMATION SOLUTIONS
Six Months Ended Mar 31       2020         2021        Change

Sales                      $ 5,561        5,485          (1) %
Earnings                   $   701          832          19  %
   Margin                     12.6  %      15.2  %


Sales by Major Product Offering Measurement & Analytical Instrumentation $ 1,571 1,430 (9) % Valves, Actuators & Regulators

                 1,767       1,642        (7) %
Industrial Solutions                           1,001       1,063         6  %
Systems & Software                             1,222       1,350        10  %
   Total                                     $ 5,561       5,485        (1) %


Automation Solutions sales were $5.5 billion in the first six months of 2021, a decrease of $76, or 1 percent. Underlying sales decreased 5 percent on lower volume. Foreign currency translation had a 2 percent favorable impact and the OSI acquisition added 2 percent. Underlying sales decreased 16 percent in the Americas, while Europe increased 4 percent and Asia, Middle East & Africa was up 5 percent (China up 21 percent). Sales for Measurement & Analytical Instrumentation decreased $141, or 9 percent, due to weakness in process industries, particularly in North America, partially offset by moderate growth in Europe and Asia. Valves, Actuators & Regulators decreased $125, or 7 percent, reflecting slower demand in most end markets, particularly in North America and Europe, partially offset by strength in Asia. Industrial Solutions sales increased $62, or 6 percent, on moderate growth in Europe and robust growth in China, partially offset by weakness in discrete end markets in North America. Systems & Software increased $128, reflecting the impact of the OSI acquisition which added $90. Power end markets grew moderately in North America offset by softness in Asia, while process end markets were strong in Europe and Asia, offset by declines in North America and Middle East & Africa. Earnings were $832, an increase of $131, or 19 percent, and margin increased 2.6 percentage points to 15.2 percent, as significant savings from cost reduction actions and favorable price-cost more than offset deleverage on lower sales volume and unfavorable mix. Lower restructuring expense benefited margins 0.6 percentage points, while foreign currency transactions had an unfavorable impact of 0.3 percentage points.








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COMMERCIAL & RESIDENTIAL SOLUTIONS
Six Months Ended Mar 31       2020         2021        Change

Sales:
 Climate Technologies      $ 1,899        2,191          15  %
 Tools & Home Products         862          930           8  %
   Total                   $ 2,761        3,121          13  %

Earnings:
 Climate Technologies      $   368          457          24  %
 Tools & Home Products         175          210          20  %
   Total                   $   543          667          23  %
   Margin                     19.7  %      21.4  %


Commercial & Residential Solutions sales were $3.1 billion in the first six months of 2021, an increase of $360, or 13 percent compared to the prior year. Underlying sales were up 11 percent on higher volume and foreign currency translation added 2 percent. Overall, underlying sales increased 11 percent in the Americas, 8 percent in Europe and 15 percent in Asia, Middle East & Africa (China up 26 percent). Climate Technologies sales were $2.2 billion in the first six months of 2021, an increase of $292, or 15 percent. Air conditioning and heating sales were up significantly, reflecting strong demand for residential-oriented products and solutions in North America and robust growth in Europe and China. Cold chain sales were strong, driven by favorable global market conditions. Tools & Home Products sales were $930 million in the first six months of 2021, up $68, or 8 percent. Sales for wet/dry vacuums were robust due to competitor outages and were strong for food waste disposers, while global professional tools were up slightly. Earnings were $667, up 23 percent compared to the prior year, and margin increased 1.7 percentage points, reflecting leverage on higher volume and savings from cost reduction actions, partially offset by unfavorable price-cost and mix.

FINANCIAL CONDITION Key elements of the Company's financial condition for the six months ended March 31, 2021 as compared to the year ended September 30, 2020 and the six months ended March 31, 2020 follow.

                                Mar 31, 2020      Sept 30, 2020      Mar 31, 2021
Operating working capital     $     1,250       $        866       $      781
Current ratio                         1.0                1.5              1.3
Total debt-to-total capital          50.6  %            47.1  %          44.4   %
Net debt-to-net capital              40.5  %            33.2  %          35.1   %
Interest coverage ratio              14.4  X            14.4  X          16.6   X

The Company's operating working capital decreased $469 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 16.6 for the first six months of fiscal 2021 compares to 14.4X for the six months ended March 31, 2020. The increase reflects higher pretax earnings in the current year. Operating cash flow for the first six months of fiscal 2021 was $1.6 billion, an increase of $603 compared with $1.0 billion in the prior year due to favorable operating working capital and higher earnings. Free cash flow of $1.4 billion in the first six months of fiscal 2021 (operating cash flow of $1.6 billion less capital expenditures of $222) increased $606 compared to free cash flow of $0.8 billion in 2020 (operating cash flow of $1.0 billion less capital expenditures of $225), reflecting the increase in operating cash flow. Cash used for investing activities was $1.8 billion largely due to the OSI acquisition. On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company deferred $73 of certain payroll taxes through the end of calendar year 2020, half of which is due in December 2021 with the remainder due in December 2022. Emerson maintains a conservative financial structure to provide the strength and flexibility necessary to achieve our strategic objectives and has been successful in efficiently deploying cash where needed worldwide to fund operations,





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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 Despite ongoing pandemic challenges in many parts of the world, the Company expects overall continued improvement in industrial and commercial demand over the remainder of 2021. Residential demand is expected to remain robust, but begin to taper in the second half. For the full year, consolidated net sales are expected to be up 6 to 9 percent, with underlying sales up 3 to 6 percent excluding a 2 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 3 to 5 percent, with underlying sales down 1 to up 1 percent excluding a 3 percent favorable impact from foreign currency translation and a 1 percent favorable impact from the OSI acquisition. Commercial & Residential Solutions net sales are expected to be up 14 to 16 percent, with underlying sales up 12 to 14 percent excluding a 2 percent impact from favorable foreign currency translation. Earnings per share are expected to be $3.55 to $3.65, while adjusted earnings per share, which exclude a $0.26 per share impact from restructuring actions, a $0.07 per share impact from OSI first year acquisition accounting charges and fees, and a $0.03 per share equity investment gain, are expected to be $3.85 to $3.95. Operating cash flow is expected to be approximately $3.3 billion and free cash flow, which excludes targeted capital spending of $600 million, is expected to be approximately $2.7 billion. Fiscal 2021 share repurchases and acquisition activity are expected to be in the amount of $500 million to $1 billion, excluding the OSI acquisition which closed on October 1, 2020. 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.

© Edgar Online, source Glimpses

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