Business context and reporting period
Emerson Electric Co. filed this Form 10-K for the fiscal year ended September 30, 2021. The company supplies industrial automation, climate-control, refrigeration, professional tools and home-appliance products and services worldwide. Its reporting segments are Automation Solutions, Climate Technologies and Tools & Home Products; the latter two comprise Commercial & Residential Solutions. International sales represented 57% of total sales.
Although the filing covers the full fiscal year, it also reports fourth-quarter results. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $18,236 | $16,785 | +9% |
| Gross profit / margin | $7,563 / 41.5% | $7,009 / 41.8% | Margin down 0.3 points |
| Earnings before income taxes | $2,912 | $2,335 | +25% |
| Net earnings attributable to common stockholders | $2,303 | $1,965 | +17% |
| Diluted EPS | $3.82 | $3.24 | +18% |
| Operating cash flow | $3,575 | $3,083 | +16% |
| Free cash flow | $2,994 | $2,545 | +18% |
| Capital expenditures | $581 | $538 |
Underlying sales, excluding currency and acquisitions/divestitures, rose 5%. Currency translation added 3 percentage points to reported sales growth and the OSI acquisition added 1 point. Adjusted diluted EPS, a non-GAAP measure, was $4.10 versus $3.46.
Automation Solutions sales were $11,610, up 4%, with segment earnings of $1,948 and a 16.8% margin. Commercial & Residential Solutions sales rose 18% to $6,653; segment earnings increased 22% to $1,364, with a 20.5% margin. Stronger demand drove growth, particularly in Climate Technologies and Tools & Home Products.
In Q4 FY2021, sales were $4,947 versus $4,558 a year earlier; gross profit was $1,996 versus $1,882. Common-stockholder earnings were $670 versus $723, and diluted EPS was $1.11 versus $1.20.
At year-end, total assets were $24,715 and common stockholders’ equity was $9,883. Cash and equivalents were $2,354, down from $3,315. Total debt was $6,665 versus $7,486; the total debt-to-total-capital ratio was 40.3%, down from 47.1%. The $3.5 billion revolving backup credit facility was undrawn. Management said operating cash flow and available resources were sufficient for foreseeable needs.
Dividends totaled $1,210, or $2.02 per share. The board subsequently raised the annualized dividend to $2.06 per share. Share repurchases were $500.
Material changes versus the prior period
- Sales recovered to approximately fiscal 2019 levels after the COVID-19-driven decline in 2020. FY2020 sales had fallen 9%; FY2021 sales increased 9%.
- Common-stockholder earnings and diluted EPS rebounded, while gross margin edged lower as volume leverage was offset by unfavorable price-cost, steel inflation and mix.
- Automation Solutions earnings rose 28%, recovering from the prior-year decline; Commercial & Residential Solutions earnings rose 22% on strong demand and volume leverage.
- OSI, acquired October 1, 2020 for approximately $1.6 billion net of cash acquired, contributed $191 of FY2021 sales. Acquisition spending was $1,611, compared with $126 in FY2020.
- Cost-reset actions generated approximately $240 of SG&A savings in FY2021. Restructuring expense was $150, down from $284; actions included about 3,600 workforce reductions and exits from eight production facilities.
- Operating cash flow improved to $3,575. Total debt declined, while cash also decreased, in part amid acquisition and shareholder-return spending.
Outlook, commentary and risks
For FY2022, Emerson forecast consolidated sales growth of 5%–7%, underlying sales growth of 6%–8%, diluted EPS of $4.79–$4.94 and adjusted EPS of $4.82–$4.97. It expected operating cash flow of approximately $3.8 billion, free cash flow of approximately $3.1 billion and capital expenditures of approximately $650 million. Share repurchases were expected to be $250–$500 million. Management anticipated strong underlying demand, continued operational challenges through the first half and price-cost becoming a tailwind in the second half. The outlook excludes the AspenTech transaction.
Announced October 11, 2021, the proposed AspenTech combination would contribute Emerson’s OSI and geological simulation software businesses and $6.0 billion in cash to AspenTech shareholders. Emerson expected to own 55% of the combined company and consolidate it. Closing was expected in the second calendar quarter of 2022, subject to approvals and other conditions. Emerson expected to fund the cash contribution with cash on hand and new long-term debt, initially increasing leverage; it expected to retain investment-grade ratings.
Other unusual items include a potential Vertiv-related gain contingency: Emerson received $438 million in November 2021 and said it could receive approximately $600 million pretax in total through periodic distributions over two years, subject to the timing and price of share sales. No amount had been recognized at September 30, 2021.
Key risks include supply-chain disruption and higher steel, materials and freight costs; COVID-19-related demand, workforce and operating uncertainty; competitive and cyclical end markets; cybersecurity and product-failure exposure; foreign-exchange, regulatory and geopolitical risks; and execution, approval and financing risks for the AspenTech transaction. The company disclosed pending litigation, including asbestos matters, but said a material adverse impact was unlikely; a remote possibility remained. KPMG issued unqualified opinions on the financial statements and internal control, and identified audit evidence over net sales as a critical audit matter.
Investor verification points
- Check whether FY2022 sales, EPS and cash-flow guidance was achieved, including the assumed timing of price-cost recovery and operational normalization.
- Verify the AspenTech transaction’s final terms, closing, funding mix, resulting leverage and realized strategic benefits.
- Track steel, freight and component costs, supply availability and their effects on gross margin and segment profitability.
- Reconcile the $438 million Vertiv receipt with any remaining contingent distributions and their timing.
- Review debt maturities, cash availability and capital allocation alongside the planned acquisition funding, dividends and repurchases.
- Monitor material litigation, asbestos reserves and insurance recoveries, as well as cybersecurity and other disclosed operational risks.