Emerson Electric Co. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2024. All dollar amounts are in millions unless stated otherwise. Emerson completed its acquisition of National Instruments (NI) in October 2023; NI is reported as Test & Measurement within Software and Control.
Financial performance
- Second-quarter revenue: $4,376, up 17% year over year. Underlying sales rose 8% (5% higher volume and 3% higher price); NI contributed 10 percentage points and foreign currency reduced growth by 1 point.
- Second-quarter profitability: Gross margin increased to 52.2% from 47.9%. Continuing-operations earnings attributable to common shareholders were $501, down 6%; diluted continuing-operations EPS was $0.87, down 5%. Adjusted diluted EPS, a non-GAAP measure, was $1.36 versus $1.09.
- Six-month results: Revenue was $8,493, up 19%; underlying sales increased 9%. Continuing-operations earnings attributable to common shareholders were $643 versus $859, and diluted continuing-operations EPS was $1.12 versus $1.48. Adjusted diluted EPS was $2.58 versus $1.86.
- Cash flow, six months: Continuing-operations operating cash flow was $1,201, up from $877. Continuing-operations free cash flow was $1,042 versus $756, after capital expenditures of $159 versus $121. Operating cash flow included approximately $170 of negative impact from acquisition-related costs and integration activities.
- Liquidity and debt at March 31: Cash and equivalents were $2,318, down from $8,051 at September 30, 2023. Short-term borrowings and current maturities were $3,155 and long-term debt was $7,614, versus $547 and $7,610, respectively, at fiscal year-end. The current ratio was 1.2 versus 2.7; total debt-to-capital was 34.0% versus 28.3%, and net debt-to-net capital was 28.8% versus 0.5%.
- Other metrics: Backlog was approximately $8.8 billion; Emerson expects to recognize about 75% of remaining performance obligations over the next 12 months. Dividends paid in the six months were $600.
Material changes and notable items
- NI added $367 of second-quarter sales and $749 for the six-month period. Its reported net loss was $80 for the quarter and $406 year to date, including acquisition-related amortization, inventory step-up amortization, retention bonuses, stock compensation and restructuring.
- The NI acquisition drove substantial investing outflows: purchases of businesses, net of cash acquired, were $8,342 for the six months. The acquisition also contributed to higher goodwill and intangible assets.
- Reported earnings were affected by increased amortization and other items. Six-month results included $231 of acquisition-related inventory step-up amortization, $547 of intangible amortization, $113 of restructuring costs, $85 of acquisition/divestiture costs, a $95 loss on the Copeland equity-method investment, and a $39 divestiture loss. Emerson also recorded a $79 gain on its subordinated interest and $62 of non-cash interest income on its Copeland note.
- Second-quarter Intelligent Devices sales increased 5% and segment earnings increased 11%. Software and Control sales rose 56%, largely due to NI, while segment earnings declined 14%; its adjusted EBITA margin rose to 26.7% from 24.1%.
- Prior-year comparisons include discontinued operations: the prior-year quarter included $262 of discontinued-operations earnings, and the prior-year six-month period included $2,264, substantially reflecting the InSinkErator divestiture gain. This makes total net earnings comparisons less representative of continuing operations.
Outlook, commentary and risks
- Fiscal 2024 guidance: continuing-operations sales growth of 15%–16%, including underlying growth of 5.5%–6.5%; continuing-operations diluted EPS of $2.98–$3.08; and adjusted diluted EPS of $5.40–$5.50.
- Management expects approximately $3.1 billion of continuing-operations operating cash flow and $2.7 billion of free cash flow, with capital spending of approximately $0.4 billion. The outlook assumes about $500 million of share repurchases and $1.2 billion of dividends.
- Management cited higher volume, pricing and operating leverage as contributors to performance, while identifying softness in Discrete Automation and acquisition-related costs as offsets. Fiscal 2024 restructuring expense and related costs are expected to be approximately $230.
- Forward-looking risks identified include global conflicts, economic and currency conditions, demand, pricing, intellectual property protection, cybersecurity, tariffs, competition, technology and inflation. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- How NI performs after integration, including its reported losses, amortization burden and contribution to adjusted results.
- Whether operating cash flow, free cash flow and the stated sales and EPS outlook are achieved, and the assumptions underlying adjusted measures.
- Debt maturities, borrowing costs and liquidity following the NI acquisition, given the lower cash balance and higher short-term borrowings.
- The value and recoverability of Emerson’s Copeland equity investment and note receivable; the note’s carrying value was $2,155 and disclosed fair value was approximately $100 lower.
- The extent to which backlog converts to revenue and whether weakness in Discrete Automation or other market risks intensifies.