EMERSON ELECTRIC CO. Safe Harbor Statement
This Annual Report on Form 10-K contains various forward-looking statements and includes assumptions concerning Emerson's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risks and uncertainties. Emerson undertakes no obligation to update any such statements to reflect later developments. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Emerson provides the cautionary statements set forth under Item 1A - "Risk Factors," which are hereby incorporated by reference and identify important economic, political and technological factors, among others, changes in which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Non-GAAP Financial Measures To supplement the Company's financial information presented in accordance withU.S. generally accepted accounting principles (U.S. GAAP), management periodically uses certain "non-GAAP financial measures," as such term is defined in Regulation G underSEC rules, to clarify and enhance understanding of past performance and 15 -------------------------------------------------------------------------------- prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company's operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance withU.S. GAAP. For example, non-GAAP measures may exclude the impact of certain items such as acquisitions or divestitures, amortization of intangibles, restructuring costs, discrete taxes, changes in reporting segments, gains, losses and impairments, or items outside of management's control, such as foreign currency exchange rate fluctuations. Management believes that the following non-GAAP financial measures provide investors and analysts useful insight into the Company's financial position and operating performance. Any non-GAAP measure provided should be viewed in addition to, and not as an alternative to, the most directly comparable measure determined in accordance withU.S. GAAP, as identified in italics below. Further, the calculation of these non-GAAP financial measures may differ from the calculation of similarly titled financial measures presented by other companies and therefore may not be comparable among companies. Underlying sales, which exclude the impact of acquisitions, divestitures and fluctuations in foreign currency exchange rates during the periods presented, are provided to facilitate relevant period-to-period comparisons of sales growth by excluding those items that impact overall comparability (U.S. GAAP measure: net sales). Operating profit (defined as net sales less cost of sales and selling, general and administrative expenses) and operating profit margin (defined as operating profit divided by net sales) are indicative of short-term operational performance and ongoing profitability. Management closely monitors operating profit and operating profit margin of each business to evaluate past performance and actions required to improve profitability. EBIT (defined as earnings before deductions for interest expense, net and income taxes) and total segment EBIT, and EBIT margin (defined as EBIT divided by net sales) and total segment EBIT margin, are financial measures that exclude the impact of financing on the capital structure and income taxes. EBITDA (defined as EBIT excluding depreciation and amortization) and EBITDA margin (defined as EBITDA divided by net sales) are used as measures of the Company's current operating performance, as they exclude the impact of capital and acquisition-related investments. All of these are commonly used financial measures utilized by management to evaluate performance (U.S. GAAP measures: pretax earnings or pretax profit margin). Earnings, earnings per share, return on common stockholders' equity and return on total capital excluding certain gains and losses, impairments, restructuring costs, impacts of acquisitions or divestitures, amortization of intangibles, discrete taxes, or other items provide additional insight into the underlying, ongoing operating performance of the Company and facilitate period-to-period comparisons by excluding the earnings impact of these items. Management believes that presenting earnings, earnings per share, return on common stockholders' equity and return on total capital excluding these items is more representative of the Company's operational performance and may be more useful for investors (U.S. GAAP measures: earnings, earnings per share, return on common stockholders' equity, return on total capital). Free cash flow (operating cash flow less capital expenditures) and free cash flow as a percent of net sales are indicators of the Company's cash generating capabilities, and dividends as a percent of free cash flow is an indicator of the Company's ability to support its dividend, after considering investments in capital assets which are necessary to maintain and enhance existing operations. The determination of operating cash flow adds back noncash depreciation expense to earnings and thereby does not reflect a charge for necessary capital expenditures. Management believes that free cash flow, free cash flow as a percent of net sales and dividends as a percent of free cash flow are useful to both management and investors as measures of the Company's ability to generate cash and support its dividend (U.S. GAAP measures: operating cash flow, operating cash flow as a percent of net sales, dividends as a percent of operating cash flow). 16 -------------------------------------------------------------------------------- FINANCIAL REVIEW Report of Management The Company's management is responsible for the integrity and accuracy of the financial statements. Management believes that the financial statements for each of the years in the three-year period endedSeptember 30, 2021 have been prepared in conformity withU.S. generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of events and transactions that have not been completed. The Company's disclosure controls and procedures ensure that material information required to be disclosed is recorded, processed, summarized and communicated to management and reported within the required time periods. In meeting its responsibility for the reliability of the financial statements, management relies on a system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance withU.S. generally accepted accounting principles. The design of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes that the Company's internal accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. The Audit Committee of the Board of Directors, which is composed solely of independent directors, is responsible for overseeing the Company's financial reporting process. The Audit Committee meets with management and the Company's internal auditors periodically to review the work of each and to monitor the discharge by each of its responsibilities. The Audit Committee also meets periodically with the independent auditors, who have free access to the Audit Committee and the Board of Directors, to discuss the quality and acceptability of the Company's financial reporting and internal controls, as well as nonaudit-related services. The independent auditors are engaged to express an opinion on the Company's consolidated financial statements and on the Company's internal control over financial reporting. Their opinions are based on procedures that they believe to be sufficient to provide reasonable assurance that the financial statements contain no material errors and that the Company's internal controls are effective. Management's Report on Internal Control Over Financial ReportingThe Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria established in Internal Control - Integrated Framework (2013), issued by theCommittee of Sponsoring Organizations of theTreadway Commission . Based on this evaluation, management has concluded that internal control over financial reporting was effective as ofSeptember 30, 2021 . The Company's auditor,KPMG LLP , an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting. /s/ S. L. Karsanbhai /s/Frank J. Dellaquila S. L. KarsanbhaiFrank J. Dellaquila Chief Executive Officer Senior Executive Vice President and President and Chief Financial Officer 17
-------------------------------------------------------------------------------- Results of Operations Years endedSeptember 30 (Dollars in Item 7 are in millions, except per share amounts or where noted) 2019 2020 2021 20 vs. 19 21 vs. 20 Net sales$ 18,372 16,785 18,236 (9) % 9 % Gross profit$ 7,815 7,009 7,563 (10) % 8 % Percent of sales 42.5 % 41.8 % 41.5 % SG&A$ 4,457 3,986 4,179 Percent of sales 24.2 % 23.8 % 22.9 % Other deductions, net$ 325 532 318 Amortization of intangibles$ 238 239 300 Restructuring costs$ 95 284 150 Interest expense, net$ 174 156 154 Earnings before income taxes$ 2,859 2,335 2,912 (18) % 25 % Percent of sales 15.6 % 13.9 % 16.0 % Net earnings common stockholders$ 2,306 1,965 2,303 (15) % 17 % Percent of sales 12.6 % 11.7 % 12.6 % Diluted EPS$ 3.71 3.24 3.82 (13) % 18 % Return on common stockholders' equity 26.8 % 23.6 % 25.2 % Return on total capital 19.5 % 16.8 % 18.1 % OVERVIEW Overall, sales for 2021 were$18.2 billion , up 9 percent compared with the prior year, supported by foreign currency translation which added 3 percent and theOpen Systems International, Inc. ("OSI") acquisition which added 1 percent. Sales recovered to the levels achieved in 2019 prior to the outbreak and spread of COVID-19, reflecting the Company's strong rebound from the broad challenges faced in fiscal 2020. Further, the Company's restructuring and cost reset actions that began in the third quarter of fiscal 2019 and which were increased in response to COVID-19 contributed to strong profitability and a significant decrease in SG&A expenses as a percent of sales. Net earnings common stockholders were$2,303 in 2021, up 17 percent compared with prior year earnings of$1,965 , and diluted earnings per share were$3.82 , up 18 percent versus$3.24 per share in 2020, reflecting strong operating results.
The Company generated operating cash flow of
NET SALES Net sales for 2021 were$18.2 billion , an increase of$1.5 billion , or 9 percent compared with 2020. Sales increased$455 in Automation Solutions and$1,010 in Commercial & Residential Solutions. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 5 percent on higher volume and slightly higher price. The OSI acquisition added 1 percent and foreign currency translation added 3 percent. Underlying sales increased 5 percent in theU.S. and 5 percent internationally. Net sales for 2020 were$16.8 billion , a decrease of$1.6 billion , or 9 percent compared with 2019, as the global outbreak and spread of COVID-19 resulted in a rapid decline in demand which impacted most of the Company's end markets and geographies in the second half of the year. Sales decreased$1,047 in Automation Solutions and 18 --------------------------------------------------------------------------------$526 in Commercial & Residential Solutions. Underlying sales decreased 8 percent on lower volume, while foreign currency translation subtracted 1 percent. Underlying sales decreased 11 percent in theU.S. and 5 percent internationally. INTERNATIONAL SALES Emerson is a global business with international sales representing 57 percent of total sales in 2021, includingU.S. exports. The Company generally expects faster economic growth in emerging markets inAsia ,Latin America ,Eastern Europe andMiddle East /Africa . International destination sales, includingU.S. exports, increased 10 percent, to$10.3 billion in 2021, reflecting increases in both the Automation Solutions and Commercial & Residential Solutions businesses.U.S. exports of$1.1 billion were up 12 percent compared with 2020. Underlying international destination sales were up 5 percent, as foreign currency translation had a 4 percent favorable impact on the comparison and the OSI acquisition added 1 percent. Underlying sales increased 5 percent inEurope , 5 percent inAsia ,Middle East &Africa (China up 15 percent), 9 percent inLatin America and 1 percent inCanada . Origin sales by international subsidiaries, including shipments to theU.S. , totaled$9.3 billion in 2021, up 9 percent compared with 2020. International destination sales, includingU.S. exports, decreased 6 percent, to$9.4 billion in 2020, reflecting decreases in both the Automation Solutions and Commercial & Residential Solutions businesses.U.S. exports of$1.0 billion were down 10 percent compared with 2019. Underlying international destination sales were down 5 percent, as foreign currency translation had a 1 percent unfavorable impact on the comparison. Underlying sales decreased 4 percent inEurope , 4 percent inAsia ,Middle East &Africa (China down 5 percent), 7 percent inLatin America and 11 percent inCanada . Origin sales by international subsidiaries, including shipments to theU.S. , totaled$8.5 billion in 2020, down 5 percent compared with 2019. ACQUISITIONS AND DIVESTITURES OnOctober 11, 2021 , the Company announced that it entered into a definitive agreement with Aspen Technology, Inc. ("AspenTech") to combine two of Emerson's stand-alone industrial software businesses,Open Systems International, Inc. ("OSI") and the geological simulation software business, along with a contribution of$6.0 billion in cash toAspenTech shareholders, to create "newAspenTech ", a diversified, high-performance industrial software leader with greater scale, capabilities and technologies. Upon closing of the transaction, the Company will own 55 percent of newAspenTech and its results and financial position will be fully consolidated in Emerson's financial statements. On a pro forma basis, newAspenTech is expected to have fiscal 2022 revenues of$1.1 billion . The transaction is expected to close in the second calendar quarter of 2022 and is subject to approval byAspenTech shareholders, regulatory approvals and other customary closing conditions. See Item 1A - "Risk Factors" for additional information.
On
In 2020, the Company acquired three businesses, two in the Automation Solutions
segment and one in the Climate Technologies segment, for
The Company acquired eight businesses in 2019, all in the Automation Solutions segment, for$469 , net of cash acquired. These eight businesses had combined annual sales of approximately$300 .
See Note 4 for further information on acquisitions and divestitures.
COST OF SALES Cost of sales for 2021 were$10,673 , an increase of$897 compared with$9,776 in 2020, primarily due to higher sales volume in Commercial & Residential Solutions, foreign currency translation, and the OSI acquisition which added$112 including intangibles amortization of$39 . Gross profit was$7,563 in 2021 compared to$7,009 in 2020, while gross margin decreased 0.3 percentage points to 41.5 percent, as leverage on higher sales volume was offset 19 -------------------------------------------------------------------------------- by unfavorable price-cost in Commercial & Residential Solutions primarily driven by higher steel prices, intangibles amortization from the OSI acquisition which deducted 0.2 percentage points, and unfavorable mix. Cost of sales for 2020 were$9,776 , a decrease of$781 compared with$10,557 in 2019, primarily due to lower volume. Gross profit was$7,009 in 2020 compared to$7,815 in 2019, while gross margin decreased 0.7 percentage points to 41.8 percent, reflecting deleverage on lower sales volume and unfavorable mix within Automation Solutions, partially offset by favorable price-cost. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses of$4,179 in 2021 increased$193 compared with 2020 on higher stock compensation expense, as well as increased sales volume. SG&A as a percent of sales decreased 0.9 percentage points to 22.9 percent, reflecting increased savings of approximately$240 from the Company's restructuring and cost reset actions, partially offset by higher stock compensation expense of$114 (0.6 percentage points) due to a higher share price in the current year. SG&A expenses of$3,986 in 2020 decreased$471 compared with 2019 and SG&A as a percent of sales decreased 0.4 percentage points to 23.8 percent. Savings of approximately$220 from the Company's restructuring and cost reset actions that began in the third quarter of fiscal 2019 offset deleverage on lower sales volume. The Company also benefited in the second half of the year from a salary and hiring freeze, furloughs, compensation reductions for the Board of Directors and key executives across Emerson, and curtailed travel, meetings and discretionary spending. OTHER DEDUCTIONS, NET Other deductions, net were$318 in 2021, a decrease of$214 compared with 2020, reflecting lower restructuring costs of$134 , investment-related gains, including gains in the first quarter of fiscal 2021 of$21 from an investment sale and$17 from the acquisition of full ownership of an equity investment, and a gain in the second quarter of$31 from the sale of an equity investment, a favorable impact from pensions, and favorable foreign currency transactions of$17 . These items were partially offset by higher intangibles amortization of$61 , primarily related to the OSI acquisition. See Notes 5 and 6. Other deductions, net were$532 in 2020, an increase of$207 compared with 2019. The increase reflects increased restructuring costs of$189 and special advisory fees of$13 . INTEREST EXPENSE, NET Interest expense, net was$154 ,$156 and$174 in 2021, 2020 and 2019, respectively. The decreases in 2021 and 2020 reflect the maturity of long-term debt with relatively higher interest rates, partially offset by lower interest income. EARNINGS BEFORE INCOME TAXES Pretax earnings of$2,912 increased$577 in 2021, up 25 percent compared with 2020. Earnings increased$425 in Automation Solutions and$246 in Commercial & Residential Solutions. Costs reported at Corporate increased$96 , reflecting higher stock compensation expense of$114 and first year acquisition accounting charges and fees related to the OSI acquisition of$50 , partially offset by the investment-related gains discussed above and lower unallocated pension and postretirement costs which decreased by$41 . See the Business Segments discussion that follows and Note 18. Pretax earnings of$2,335 decreased$524 in 2020, down 18 percent compared with 2019. Earnings decreased$424 in Automation Solutions and$153 in Commercial & Residential Solutions. Costs reported at Corporate decreased$35 , as an increase in unallocated pension and postretirement costs of$55 was more than offset by a decline in all other corporate costs of$90 . INCOME TAXES Income taxes were$585 ,$345 and$531 for 2021, 2020 and 2019, respectively, resulting in effective tax rates of 20 percent, 15 percent and 19 percent in 2021, 2020 and 2019, respectively. The tax rates for 2021, 2020 and 2019 included benefits from restructuring subsidiaries of$13 ,$103 and$74 , respectively. The 2020 rate also included the impact of a research and development tax credit study, while 2019 included a$13 discrete tax benefit due to the issuance of final regulations related to the one-time tax on deemed repatriation. See Note 14. 20 -------------------------------------------------------------------------------- NET EARNINGS AND EARNINGS PER SHARE Net earnings attributable to common stockholders in 2021 were$2,303 , up 17 percent compared with 2020, and diluted earnings per share were$3.82 , up 18 percent compared with$3.24 in 2020 due to improved operating results reflecting significant savings from the Company's restructuring and cost reset actions and leverage on higher sales volume in Commercial & Residential Solutions. Net earnings attributable to common stockholders in 2020 were$1,965 , down 15 percent compared with 2019, and diluted earnings per share were$3.24 , down 13 percent compared with$3.71 in 2019. Reduced operating results reflected a decline in sales volume largely attributable to the negative effects of COVID-19, while restructuring expense increased significantly due to the Company's cost reset actions that began in the third quarter of fiscal 2019. The tables below present the Company's diluted earnings per share on an adjusted basis to facilitate period-to-period comparisons and provide additional insight into the underlying, ongoing operating performance of the Company. Certain non-operational items are excluded from the calculation of adjusted earnings per share as noted below. In addition, adjusted earnings per share excludes the impact of restructuring expense due to the Company's significant cost reset actions that began in the third quarter of fiscal 2019. 2019 2020 2021 Diluted earnings per share$ 3.71 3.24 3.82 Restructuring and advisory fees 0.12 0.42 0.24 OSI first year acquisition accounting charges and fees - - 0.07 Gain on acquisition of full ownership of equity Investment - - (0.03) Discrete tax benefits (0.14) (0.20) - Adjusted diluted earnings per share$ 3.69
3.46 4.10
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.
2020 2021
Adjusted diluted earnings per share - prior year
Operations (0.27) 0.59 Stock compensation 0.01 (0.16) Pensions (0.08) 0.05 Gains on sales of investments - 0.06 Foreign currency (0.06) 0.09 Interest expense 0.02 - Income tax rate 0.08 (0.02) Share repurchases 0.07 0.03
Adjusted diluted earnings per share - current year
RETURNS ON EQUITY AND TOTAL CAPITAL
Return on common stockholders' equity (net earnings attributable to common
stockholders divided by average common stockholders' equity) was 25.2 percent in
2021 compared with 23.6 percent in 2020 and 26.8 percent in 2019. Return on
total capital (computed as net earnings attributable to common stockholders
excluding after-tax net interest expense, divided by average common
stockholders' equity plus short- and long-term debt less cash and short-term
investments) was 18.1 percent in 2021 compared with 16.8 percent in 2020 and
19.5 percent in 2019. Returns in 2021 reflected higher net earnings, while lower
net earnings negatively impacted returns in 2020.
21
--------------------------------------------------------------------------------
Business Segments
Following is an analysis of segment results for 2021 compared with 2020, and
2020 compared with 2019. In fiscal 2021, the Company reclassified certain
software product sales that were previously reported in Measurement and
Analytical Instrumentation to Systems & Software (previously described as
Process Control Systems & Solutions). The Company defines segment earnings as
earnings before interest and income taxes.
AUTOMATION SOLUTIONS
2019 2020 2021 20 vs. 19 21 vs. 20
Sales $ 12,202 11,155 11,610 (9) % 4 %
Earnings $ 1,947 1,523 1,948 (22) % 28 %
Margin 16.0 % 13.6 % 16.8 %
Sales by Major Product Offering
Measurement & Analytical Instrumentation $ 3,615 3,108 3,071 (14) % (1) %
Valves, Actuators & Regulators 3,794 3,589 3,483 (5) % (3) %
Industrial Solutions 2,232 2,012 2,266 (10) % 13 %
Systems & Software 2,561 2,446 2,790 (4) % 14 %
Total $ 12,202 11,155 11,610 (9) % 4 %
2021 vs. 2020 - Automation Solutions sales were $11.6 billion in 2021, an
increase of $455 , or 4 percent. Underlying sales were flat as higher prices
offset slightly lower volume. Discrete and hybrid markets exhibited strength
throughout the year while longer cycle process automation markets began to
recover in the second half of the year, including a sharp recovery in core North
American automation markets. The OSI acquisition added 2 percent and foreign
currency translation had a 2 percent favorable impact. Sales for Measurement &
Analytical Instrumentation decreased $37 , or 1 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 $106 , or 3 percent, reflecting slower demand in most end
markets, particularly in North America and Europe , partially offset by modest
growth in Asia . Industrial Solutions sales increased $254 , or 13 percent, on
strong growth in Europe and robust growth in China , while North American
discrete end markets were up moderately. Systems & Software increased $344 , or
14 percent, reflecting the impact of the OSI acquisition which added $191 .
Process end markets were strong in Europe and had moderate growth in Asia while
North America was flat. Power generation end markets were solid in North America
and strong in Europe , partially offset by softness in Asia . Underlying sales
decreased 2 percent in the Americas (U.S. down 3 percent), increased 1 percent
in Europe and 2 percent in Asia , Middle East & Africa (China up 14 percent).
Earnings of $1,948 increased $425 from the prior year, and margin increased 3.2
percentage points to 16.8 percent, as significant savings from cost reduction
actions and favorable price-cost more than offset higher performance-based
compensation expense. Lower restructuring expense benefited margins 0.9
percentage points, while intangibles amortization of $66 from the OSI
acquisition reduced margin 0.6 percentage points.
2020 vs. 2019 - Automation Solutions sales were $11.2 billion in 2020, a
decrease of $1,047 , or 9 percent, reflecting the negative effects of COVID-19
which impacted most end markets and geographies in the second half of the year,
particularly in North America . Underlying sales decreased 8 percent on lower
volume. The Machine Automation Solutions acquisition added $47 and foreign
currency translation had a 1 percent unfavorable impact. Sales for Measurement &
Analytical Instrumentation decreased $507 , or 14 percent, due to weakness in
process industries, primarily in North America . Valves, Actuators & Regulators
decreased $205 , or 5 percent, reflecting slower demand in most end markets.
Industrial Solutions sales decreased $220 , or 10 percent, on lower global demand
in discrete end markets. Systems & Software decreased $115 , or 4 percent, due to
weakness in power generation end markets in China and process end markets in the
U.S. , partially offset by the Machine Automation Solutions acquisition.
Underlying sales decreased 14 percent in the Americas (U.S. down 14 percent), 5
percent in Europe , and 1 percent in Asia , Middle East & Africa (China down 2
percent). Earnings of $1,523 decreased $424 from the prior year, primarily due
to higher restructuring expenses of $179 and lower volume. Margin decreased 2.4
percentage points
22
--------------------------------------------------------------------------------
to 13.6 percent, reflecting a negative impact from restructuring expenses of 1.7
percentage points and unfavorable mix. Savings from cost reduction actions
offset deleverage on lower sales volume.
COMMERCIAL & RESIDENTIAL SOLUTIONS
2019 2020 2021 20 vs. 19 21 vs. 20
Sales:
Climate Technologies $ 4,313 3,980 4,748 (8) % 19 %
Tools & Home Products 1,856 1,663 1,905 (10) % 15 %
Total $ 6,169 5,643 6,653 (9) % 18 %
Earnings:
Climate Technologies $ 883 801 965 (9) % 20 %
Tools & Home Products 388 317 399 (18) % 26 %
Total $ 1,271 1,118 1,364 (12) % 22 %
Margin 20.6 % 19.8 % 20.5 %
2021 vs. 2020 - Commercial & Residential Solutions sales were $6.7 billion in
2021, an increase of $1,010 , or 18 percent. Underlying sales increased 16
percent on strong global demand, as nearly all businesses achieved double-digit
growth each quarter, while foreign currency translation added 2 percent. Climate
Technologies sales were $4.7 billion in 2021, an increase of $768 , or 19
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 $1.9 billion in 2021, up $242 or
15 percent compared to the prior year. Sales of wet/dry vacuums were robust in
part due to competitor outages, while sales were strong for global professional
tools and solid for food waste disposers. Overall, underlying sales increased 16
percent in the Americas (U.S. up 15 percent) and 17 percent in Europe , while
Asia , Middle East & Africa increased 17 percent (China up 17 percent). Earnings
were $1,364 , an increase of $246 , and margin was up 0.7 percentage points,
reflecting leverage on higher volume and savings from cost reduction actions,
partially offset by unfavorable price-cost primarily due to steel price
increases which negatively impacted the second half of the fiscal year.
2020 vs. 2019 - Commercial & Residential Solutions sales were $5.6 billion in
2020, a decrease of $526 , or 9 percent. Underlying sales decreased 7 percent on
lower volume. The divestiture of two small non-core businesses subtracted 1
percent and foreign currency translation deducted 1 percent. Climate
Technologies sales were $4.0 billion in 2020, a decrease of $333 , or 8 percent.
Air conditioning and heating sales declined, reflecting a sharp decline in Asia
and moderate decline in the U.S. due to the effects of COVID-19. Global cold
chain sales were also down, reflecting double-digit declines in Asia and Europe ,
while North America was down moderately. Tools & Home Products sales were $1.7
billion in 2020, down $193 or 10 percent compared to the prior year, reflecting
sharp declines in global professional tools markets. Sales for wet/dry vacuums
were down moderately and food waste disposers were down slightly. Overall,
underlying sales decreased 7 percent in the Americas (U.S. down 8 percent) and 3
percent in Europe , while Asia , Middle East & Africa decreased 11 percent (China
down 11 percent). Earnings were $1,118 , a decrease of $153 , and margin was down
0.8 percentage points, due to deleverage on lower sales volume and higher
restructuring expenses which negatively impacted margins by 0.5 percentage
points, partially offset by savings from cost reduction actions and favorable
price-cost.
Financial Position, Liquidity and Capital Resources
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$25 billion and stockholders' equity of$10 billion , and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing its capital structure on a short- and long-term basis. 23 -------------------------------------------------------------------------------- The Company continues to generate substantial operating cash flow, including significant growth in fiscal 2021 and over$3.0 billion in each of the last three years. Cash flows have been and are expected to be sufficient for at least the next 12 months to meet the Company's operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations. The Company also has certain contractual obligations, primarily long-term debt and operating leases (see Notes 7, 10 and 11). The Company currently believes that sufficient funds will be available to meet its needs for the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity, or its$3.5 billion revolving backup credit facility under which it has not incurred any borrowings. CASH FLOW 2019 2020 2021 Operating Cash Flow$ 3,006 3,083 3,575 Percent of sales 16.4 % 18.4 % 19.6 % Capital Expenditures$ 594 538 581 Percent of sales 3.2 % 3.2 % 3.2 % Free Cash Flow (Operating Cash Flow less Capital Expenditures)$ 2,412 2,545 2,994 Percent of sales 13.1 % 15.2 % 16.4 % Operating Working Capital$ 1,113 866 704 Percent of sales 6.1 % 5.2 % 3.9 % Operating cash flow for 2021 was$3.6 billion , a$492 , or 16 percent increase compared with 2020, due to higher earnings. Operating cash flow of$3.1 billion in 2020 increased 3 percent compared to$3.0 billion in 2019, as lower working capital needs associated with lower demand more than offset a decrease in earnings. AtSeptember 30, 2021 , operating working capital as a percent of sales was 3.9 percent compared with 5.2 percent in 2020 and 6.1 percent in 2019. Contributions to pension plans were$41 in 2021,$66 in 2020 and$60 in 2019. Capital expenditures were$581 ,$538 and$594 in 2021, 2020 and 2019, respectively. Free cash flow (operating cash flow less capital expenditures) was$3.0 billion in 2021, up 18 percent. Free cash flow was$2.5 billion in 2020, compared with$2.4 billion in 2019. The Company is targeting capital spending of approximately$650 in 2022. Net cash paid in connection with acquisitions was$1,611 ,$126 and$469 in 2021, 2020 and 2019, respectively. OnMarch 27, 2020 , the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provided tax relief to businesses. Tax provisions of the CARES Act included 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 inDecember 2021 with the remainder due inDecember 2022 . Dividends were$1,210 ($2.02 per share) in 2021, compared with$1,209 ($2.00 per share) in 2020 and$1,209 ($1.96 per share) in 2019. InNovember 2021 , the Board of Directors voted to increase the quarterly cash dividend 2 percent, to an annualized rate of$2.06 per share.
Purchases of Emerson common stock totaled
The Board of Directors authorized the purchase of up to 70 million common shares inNovember 2015 . InMarch 2020 , the Board of Directors authorized the purchase of an additional 60 million shares and a total of approximately 60 million shares remain available for purchase under the authorizations. The Company purchased 5.3 million shares in 2021, 16.4 million shares in 2020 and 19.9 million shares in 2019 under the authorizations. 24 --------------------------------------------------------------------------------
LEVERAGE/CAPITALIZATION
2019 2020 2021
Total Assets $ 20,497 22,882 24,715
Long-term Debt $ 4,277 6,326 5,793
Common Stockholders' Equity $ 8,233 8,405 9,883
Total Debt-to-Total Capital Ratio 41.0 % 47.1 % 40.3 % Net Debt-to-Net Capital Ratio
33.9 % 33.2 % 30.4 %
Operating Cash Flow-to-Debt Ratio 52.5 % 41.2 % 53.6 % Interest Coverage Ratio
15.2X 14.4X 18.6X
Total debt, which includes long-term debt, current maturities of long-term debt,
commercial paper and other short-term borrowings, was $6,665 , $7,486 and $5,721
as of September 30, 2021 , 2020 and 2019, respectively. During the year, the
Company repaid $300 of 4.25% notes that matured in November 2020 . In 2020, the
Company repaid $500 of 4.875% notes that matured in October 2019 , while $400 of
5.25% notes that matured in October 2018 and $250 of 5.0% notes that matured in
April 2019 were paid in fiscal 2019. In April 2020 , the Company issued $500 of
1.8% notes due October 2027 , $500 of 1.95% notes due October 2030 and $500 of
2.75% notes due October 2050 , and in September 2020 , the Company issued $750 of
0.875% notes due October 2026 . In January 2019 , the Company issued €500 of 1.25%
notes due October 2025 and €500 of 2.0% notes due October 2029 , and in May 2019 ,
the Company issued €500 of 0.375% notes due May 2024 . The net proceeds from the
sale of the notes were used to reduce commercial paper borrowings and for
general corporate purposes. A portion of the proceeds from the notes issued in
September 2020 were also used to fund the acquisition of OSI, which closed on
October 1, 2020 .
The total debt-to-total capital ratio and net debt-to-net capital ratio (less
cash and short-term investments) decreased in 2021 due to lower long-term debt
and higher equity compared to the prior year. In 2020 the total debt-to-total
capital ratio increased due to the long-term debt issuances described above. The
net debt-to-net capital ratio decreased slightly, reflecting the timing of the
acquisition of OSI, which closed shortly after fiscal 2020 year-end. The
operating cash flow-to-debt ratio increased in 2021 due to higher cash flow and
lower debt. The decrease in 2020 was due to the increased borrowings. The
interest coverage ratio is computed as earnings before income taxes plus
interest expense, divided by interest expense. The increase in 2021 reflects
higher earnings and slightly lower interest expense. The decrease in 2020
reflects lower earnings, partially offset by lower interest expense.
In May 2018 , the Company entered into a $3.5 billion five-year revolving backup
credit facility with various banks, which replaced the April 2014 $3.5 billion
facility. The credit facility is maintained to support general corporate
purposes, including commercial paper borrowings. The Company has not incurred
any borrowings under this or previous facilities. The credit facility contains
no financial covenants and is not subject to termination based on a change of
credit rating or material adverse changes. The facility is unsecured and may be
accessed under various interest rate alternatives at the Company's option. Fees
to maintain the facility are immaterial. The Company also maintains a universal
shelf registration statement on file with the SEC under which it can issue debt
securities, preferred stock, common stock, warrants, share purchase contracts or
share purchase units without a predetermined limit. Securities can be sold in
one or more separate offerings with the size, price and terms to be determined
at the time of sale.
Emerson's financial structure provides the flexibility necessary to achieve its
strategic objectives. The Company has been successful in efficiently deploying
cash where needed worldwide to fund operations, complete acquisitions and
sustain long-term growth. At September 30, 2021 , substantially all of the
Company's cash was held outside of the U.S. (primarily in Europe and Asia ). The
Company routinely repatriates a portion of its non-U.S. cash from earnings each
year, or otherwise when it can be accomplished tax efficiently, and provides for
withholding taxes and any applicable U.S. income taxes as appropriate. The
Company has been able to readily meet all its funding requirements and currently
believes that sufficient funds will be available to meet the Company's needs in
the foreseeable future through operating cash flow, existing resources, short-
and long-term debt capacity or backup credit lines.
25
--------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and commodity prices, and selectively uses
derivative financial instruments, including forwards, swaps and purchased
options to manage these risks. The Company does not hold derivatives for trading
or speculative purposes. The value of derivatives and other financial
instruments is subject to change as a result of market movements in rates and
prices. Sensitivity analysis is one technique used to forecast the impact of
these movements. Based on a hypothetical 10 percent increase in interest rates,
a 10 percent decrease in commodity prices or a 10 percent weakening in the U.S.
dollar across all currencies, the potential losses in future earnings, fair
value or cash flows are not material. Sensitivity analysis has limitations; for
example, a weaker U.S. dollar would benefit future earnings through favorable
translation of non-U.S. operating results, and lower commodity prices would
benefit future earnings through lower cost of sales. See Notes 1, and 9 through
11.
Critical Accounting Policies
Preparation of the Company's financial statements requires management to make
judgments, assumptions and estimates regarding uncertainties that could affect
reported revenue, expenses, assets, liabilities and equity. Note 1 describes the
significant accounting policies used in preparation of the consolidated
financial statements. The most significant areas where management judgments and
estimates impact the primary financial statements are described below. Actual
results in these areas could differ materially from management's estimates under
different assumptions or conditions.
REVENUE RECOGNITION
The Company evaluates its contracts with customers to identify the promised
goods or services and recognizes revenue for the identified performance
obligations at the amount the Company expects to be entitled to in exchange for
those goods or services. A performance obligation is a promise in a contract to
transfer a distinct good or service to a customer. Revenue is recognized when,
or as, performance obligations are satisfied and control has transferred to the
customer, typically when products are shipped or delivered, title and risk of
loss pass to the customer, and the Company has a present right to payment. 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, generally in accordance with shipping terms. A portion of the
Company's revenues relate to the sale of software and post-contract customer
support, parts and labor for repairs, and engineering services.
In limited circumstances, contracts include multiple performance obligations,
where revenue is recognized separately for each good or service, as well as
contracts where revenue is recognized over time as control transfers to the
customer. Tangible products represent a large majority of the delivered items in
contracts with multiple performance obligations or where revenue is recognized
over time, while a smaller portion is attributable to installation, service and
maintenance. In sales arrangements that involve multiple performance
obligations, revenue is allocated based on the relative standalone selling price
for each performance obligation. Observable selling prices from actual
transactions are used whenever possible. In other instances, the Company
determines the standalone selling price based on third-party pricing or
management's best estimate. For revenues recognized over time, the Company
typically uses an input method to determine progress and recognize revenue,
based on costs incurred. The Company believes costs incurred closely correspond
with its performance under the contract and the transfer of control to the
customer.
LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
identifiable intangible assets, are reviewed for impairment whenever events or
changes in business circumstances indicate impairment may exist. If the Company
determines that the carrying value of a long-lived asset may not be recoverable,
a permanent impairment charge is recorded for the amount by which the carrying
value of the long-lived asset exceeds its estimated fair value. Reporting units
are also reviewed for possible goodwill impairment at least annually, in the
fourth quarter. If an initial assessment indicates it is more likely than not an
impairment may exist, it is evaluated by comparing the reporting unit's
estimated fair value to its carrying value. Fair value is generally estimated
using an income approach that discounts estimated future cash flows using
discount rates judged by management to be commensurate with the applicable risk.
Estimates of future sales, operating results, cash flows and discount rates are
subject to changes in the economic environment, including such factors as the
general level of market interest rates, expected equity market returns and the
volatility of markets served, particularly when recessionary economic
circumstances continue for an extended period of time.
26
--------------------------------------------------------------------------------
RETIREMENT PLANS
The Company maintains a prudent long-term investment strategy consistent with
the duration of pension obligations. The determination of defined benefit plan
expense and liabilities is dependent on various assumptions, including the
expected annual rate of return on plan assets, the discount rate and the rate of
annual compensation increases. In accordance with U.S. generally accepted
accounting principles, actual results that differ from the Company's assumptions
are accumulated as deferred actuarial gains or losses and amortized to expense
in future periods. The Company's principal U.S. defined benefit plan is closed
to employees hired after January 1, 2016 while shorter-tenured employees ceased
accruing benefits effective October 1, 2016 .
As of September 30, 2021 , the U.S. pension plans were overfunded by $506 in
total (approximately 12 percent in excess of the projected benefit obligation),
including unfunded plans totaling $220 . The substantial improvement in the
funded status reflects strong asset returns in fiscal 2021. The non-U.S. plans
were underfunded by $88 , including unfunded plans totaling $318 . The Company
contributed a total of $41 to defined benefit plans in 2021 and expects to
contribute approximately $50 in 2022. At year-end 2021, the discount rate for
U.S. plans was 2.92 percent, and was 2.81 percent in 2020. The assumed
investment return on plan assets was 6.50 percent in 2021, 6.75 percent in 2020
and 7.00 percent in 2019, and will be 6.00 percent for 2022. While management
believes its assumptions used are appropriate, actual experience may differ. A
0.25 percentage point decrease in the U.S. and non-U.S. discount rates would
have increased the total projected benefit obligation at September 30, 2021 by
$200 and increased fiscal 2022 pension expense by $15 . A 0.25 percentage point
decrease in the expected return on plan assets would increase fiscal 2022
pension expense by $15 . See Note 12.
CONTINGENT LIABILITIES
The Company is a party to a number of pending legal proceedings and claims,
including those involving general and product liability (including asbestos) and
other matters, several of which claim substantial amounts of damages. The
Company accrues for such liabilities when it is probable that future costs
(including legal fees and expenses) will be incurred and such costs can be
reasonably estimated. Accruals are based on developments to date; management's
estimates of the outcomes of these matters; and the Company's experience in
contesting, litigating and settling similar matters. The Company engages an
outside expert to develop an actuarial estimate of its expected costs to resolve
all pending and future asbestos claims, including defense costs, as well as its
related insurance receivables. The reserve for asbestos litigation, which is
recorded on an undiscounted basis, is based on projected claims through 2065.
Although it is not possible to predict the ultimate outcome of these matters,
the Company historically has been largely successful in defending itself against
claims and suits that have been brought against it, and will continue to defend
itself vigorously in all such matters. While the Company believes a material
adverse impact is unlikely, given the inherent uncertainty of litigation, a
remote possibility exists that a future development could have a material
adverse impact on the Company. See Note 13.
INCOME TAXES
Income tax expense and tax assets and liabilities reflect management's
assessment of taxes paid or expected to be paid (received) on items included in
the financial statements. Deferred tax assets and liabilities arise from
temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and
consideration of operating loss and tax credit carryforwards. Deferred income
taxes are measured using enacted tax rates in effect for the year in which the
temporary differences are expected to be recovered or settled. The impact on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. Valuation allowances are provided
to reduce deferred tax assets to the amount that will more likely than not be
realized. This requires management to make judgments and estimates regarding the
amount and timing of the reversal of taxable temporary differences, expected
future taxable income, and the impact of tax planning strategies.
Uncertainty exists regarding tax positions taken in previously filed tax returns
which remain subject to examination, along with positions expected to be taken
in future returns. The Company provides for unrecognized tax benefits, based on
the technical merits, when it is more likely than not that an uncertain tax
position will not be sustained upon examination. Adjustments are made to the
uncertain tax positions when facts and circumstances change, such as the closing
of a tax audit; changes in applicable tax laws, including tax case rulings and
legislative guidance; or expiration of the applicable statute of limitations.
Cash repatriated to the U.S. is generally not subject to U.S. federal income
taxes. No provision is made for withholding taxes and any applicable U.S. income
taxes on the undistributed earnings of non-U.S. subsidiaries
27
--------------------------------------------------------------------------------
where these earnings are considered indefinitely invested or otherwise retained
for continuing international operations. Determination of the amount of taxes
that might be paid on these undistributed earnings if eventually remitted is not
practicable. See Notes 1 and 14.
Other Items
LEGAL MATTERS AtSeptember 30, 2021 , there were no known contingent liabilities (including guarantees, pending litigation, taxes and other claims) that management believes will be material in relation to the Company's financial statements, nor were there any material commitments outside the normal course of business. NEW ACCOUNTING PRONOUNCEMENTS EffectiveOctober 1, 2020 , the Company adopted two accounting standard updates and one new accounting standard, and in fiscal 2020 adopted updates to ASC 815, all of which had an immaterial impact on the Company's financial statements. These included: •Updates to ASC 350, Intangibles -Goodwill and Other, which eliminate the requirement to measure impairment based on the implied fair value of goodwill compared to the carrying amount of a reporting unit's goodwill. Instead, goodwill impairment will be measured as the excess of a reporting unit's carrying amount over its estimated fair value.
•Updates to ASC 350, Intangibles -
•Adoption of ASC 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach to estimate lifetime expected credit losses on certain types of financial instruments, including trade receivables.
•Updates to ASC 815, Derivatives and Hedging, which permit hedging certain contractually specified risk components. The updates also eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. OnOctober 1, 2019 , the Company adopted ASC 842, Leases, which requires rights and obligations related to lease arrangements to be recognized on the balance sheet, using the optional transition method under which prior periods were not adjusted. The Company elected the package of practical expedients for leases that commenced prior to the adoption date, which included carrying forward the historical lease classification as operating or finance. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets and related lease liabilities of approximately$500 as ofOctober 1, 2019 , but did not materially impact the Company's earnings or cash flows for the year endedSeptember 30, 2020 . The Company's financial statements for 2019 continue to be reported in accordance with the Company's historical accounting under ASC 840, Leases. OnOctober 1, 2018 , the Company adopted ASC 606, Revenue from Contracts with Customers, which updated and consolidated revenue recognition guidance from multiple sources into a single, comprehensive standard to be applied for all contracts with customers. The fundamental principle of the revised standard is to recognize revenue based on the transfer of goods and services to customers at the amount the Company expects to be entitled to in exchange for those goods and services. The Company adopted the new standard using the modified retrospective approach and applied the guidance to open contracts which were not completed at the date of adoption. The cumulative effect of adoption resulted in a$30 increase to beginning retained earnings as ofOctober 1, 2018 . This increase primarily related to contracts where a portion of revenue for delivered goods or services was previously deferred due to contingent payment terms. The adoption of ASC 606 did not materially impact the Company's consolidated financial statements as of and for the year endedSeptember 30, 2019 . FISCAL 2022 OUTLOOK Emerson expects fiscal 2022 to be characterized by strong underlying demand. Strength in discrete and hybrid automation markets, further recovery in process markets and expanding opportunities in sustainability projects is expected to drive Automation Solutions full year net sales growth. For Commercial & Residential Solutions, residential demand is expected to moderate while the commercial and industrial environment is expected to further 28 --------------------------------------------------------------------------------
improve. The Company expects operational challenges to continue through the first half of the year, but price-cost is expected to turn to a tailwind during the second half.
For the full year, consolidated net sales are expected to be up 5 to 7 percent, with underlying sales up 6 to 8 percent excluding a 1 percent unfavorable impact from foreign currency translation. Automation Solutions net sales are expected to be up 5 to 7 percent, with underlying sales up 6 to 8 percent excluding a 1 percent unfavorable impact from foreign currency translation. Commercial & Residential Solutions net and underlying sales are expected to be up 6 to 9 percent. Earnings per share are expected to be$4.79 to$4.94 , while adjusted earnings per share, which exclude a$0.19 per share impact from restructuring actions, a$0.42 per share impact from amortization of intangibles, and a$0.58 gain from proceeds received inNovember 2021 related to the Vertiv transaction, are expected to be$4.82 to$4.97 (see Note 4 for further details on the Vertiv gain). Operating cash flow is expected to be approximately$3.8 billion and free cash flow, which excludes projected capital spending of$650 million , is expected to be approximately$3.1 billion . Share repurchases are expected to be approximately$250 to$500 million in fiscal 2022. The guidance discussed herein does not include the impact of theAspenTech transaction. Emerson will contribute$6.0 billion in cash related to its definitive agreement withAspenTech , and the transaction is expected to close in the second calendar quarter of 2022. The Company expects to finance the transaction through a combination of cash on-hand and the issuance of new long-term debt. While the transaction will initially increase the Company's financial leverage and debt ratios, Emerson expects to retain its investment-grade long-term debt ratings. Further, the Company expects its leverage and debt ratios to improve rapidly through strong combined cash flow of the companies and disciplined capital allocation.
Brexit Update
TheUnited Kingdom's (UK ) withdrawal from theEuropean Union (EU), commonly known as "Brexit", was completed onJanuary 31, 2020 . Negotiations over the terms of trade and other laws and regulations took place during 2020 and an agreement between the EU and theUK was reached onDecember 24, 2020 , which included zero tariffs and quotas on goods. The Company's net sales in theUK 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
