Emerson Electric Co. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021, compared with the three months ended December 31, 2020. Emerson is a global manufacturer of technology and engineering products and solutions.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $4.473 billion | $4.161 billion | Up 8% |
| Gross margin | 40.7% | 41.4% | Down 0.7 percentage points |
| SG&A as a percentage of sales | 22.6% | 24.0% | Down 1.4 percentage points |
| Earnings before income taxes | $1.175 billion | $563 million | Up 109% |
| Net earnings attributable to common stockholders | $896 million | $445 million | Up 101% |
| Diluted EPS | $1.50 | $0.74 | Up 103% |
| Adjusted diluted EPS | $1.05 | $0.93 | Up $0.12 |
| Adjusted EBITA | $878 million | $757 million | Up 16% |
| Operating cash flow | $523 million | $808 million | Down $285 million |
| Free cash flow | $407 million | $686 million | Down $279 million |
Underlying sales rose 8%, reflecting 5% higher volume and 3% higher price; foreign currency translation was slightly unfavorable. Gross margin declined mainly because of unfavorable price-cost in Commercial & Residential Solutions, partly offset by volume leverage and favorable mix. SG&A benefited from higher-volume leverage and restructuring and cost-reset savings.
Segments: Automation Solutions sales grew 4% to $2.805 billion; earnings increased 45% to $526 million and margin rose to 18.7%. Commercial & Residential Solutions sales grew 13% to $1.671 billion, while earnings fell 3% to $299 million and margin declined to 17.9%, largely due to steel-cost pressure.
Financial position and liquidity
At December 31, 2021, cash and equivalents were $4.726 billion, total debt was approximately $8.759 billion, and total assets were $26.959 billion. The current ratio was 2.0; total debt-to-total capital was 46.1% and net debt-to-net capital was 28.2%. Long-term debt increased to $8.722 billion from $5.793 billion at September 30, 2021.
Operating cash flow fell year over year, primarily because of higher inventory to support sales and ongoing supply-chain and logistics constraints. Capital expenditures were $116 million. Financing cash flow included nearly $3.0 billion of new long-term debt; investing cash flow included $438 million received from the Vertiv subordinated interest. Emerson paid $307 million in dividends and repurchased $253 million of shares during the quarter.
Material changes and unusual items
- A $453 million pretax gain ($358 million after tax, or $0.60 per diluted share) from Emerson’s subordinated interest in Vertiv materially boosted reported earnings. The company received a $438 million distribution and said it could receive approximately $100 million more over two years, subject to Vertiv share-sale timing and price.
- Excluding the Vertiv gain and other specified items, adjusted diluted EPS increased to $1.05 from $0.93, and adjusted EBITA margin increased to 19.6% from 18.2%.
- In December 2021, Emerson issued $3.0 billion of notes: $1.0 billion due 2028 at 2.0%, $1.0 billion due 2031 at 2.2%, and $1.0 billion due 2051 at 2.8%. Proceeds are intended to fund part of the proposed AspenTech transaction. If that transaction does not close or is terminated, the notes must be redeemed at 101% of principal plus accrued interest.
- Restructuring expense was $9 million for the quarter. Management expects fiscal 2022 restructuring expense and related costs of approximately $150 million.
- Income tax expense was $280 million and the effective tax rate was 24%, compared with $111 million and 20% a year earlier. The Vertiv gain, portfolio restructuring activities, and prior-year discrete tax benefits affected the comparison.
Outlook, risks, and contingencies
For fiscal 2022, management forecast net sales growth of 6%–8%, underlying sales growth of 7%–9%, reported EPS of $4.71–$4.86, and adjusted EPS of $4.90–$5.05. Adjusted EPS guidance excludes specified restructuring, intangible-amortization, Vertiv-gain, and AspenTech-related impacts. Expected operating cash flow is approximately $3.8 billion and free cash flow approximately $3.1 billion, with projected capital spending of $650 million. Planned share repurchases were approximately $250 million–$500 million.
The proposed AspenTech transaction, announced in October 2021, would combine two Emerson industrial-software businesses with AspenTech; Emerson expects to own 55% of the combined company and consolidate its results. Emerson expects to contribute approximately $6.0 billion in cash, with closing anticipated in the second calendar quarter of 2022, subject to shareholder and regulatory approvals and other customary conditions. Guidance excludes the transaction’s operational impact but includes estimated fees and interest on the $3 billion already borrowed. Management expects leverage initially to rise and later improve through combined cash flow and disciplined capital allocation.
Management cited strong demand alongside continuing supply-chain and logistics constraints and COVID-19-related challenges. Other identified uncertainties include transaction completion and financial effects, economic and currency conditions, market demand, pricing, oil and gas volatility, cybersecurity, tariffs, competition, and technology changes. The filing also reports $7.2 billion of customer backlog; approximately 85% of remaining performance obligations were expected to be recognized as revenue within 12 months.
Important facts for investors to verify
- How much of the earnings and EPS increase reflects recurring operations versus the $453 million Vertiv gain; review adjusted measures and their exclusions.
- Whether the AspenTech transaction closes on the stated terms and timetable, and how the cash contribution affects debt, leverage, and future results.
- Whether price increases offset materials inflation, particularly in Commercial & Residential Solutions, and whether supply-chain constraints ease.
- Whether working-capital demands, especially inventory, allow cash flow to meet management’s fiscal-year outlook.
- Whether the contingent additional Vertiv distributions are received; their amount and timing are not assured.
- Progress against fiscal 2022 sales, adjusted EPS, cash-flow, restructuring, and capital-allocation guidance.