Emerson Electric Co. — Q1 FY2024 10-Q
Reporting period: Three months ended December 31, 2023. Figures are in millions of dollars except per-share data. Emerson designs and manufactures products and software and provides services for industrial customers. The quarter includes National Instruments (NI), acquired October 11, 2023, as its new Test & Measurement segment.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Net sales | $4,117 | $3,373 |
| Gross margin | 46.5% | 48.0% |
| Earnings from continuing operations attributable to common shareholders | $142 | $329 |
| Diluted EPS from continuing operations | $0.25 | $0.56 |
| Adjusted diluted EPS from continuing operations | $1.22 | $0.78 |
| Adjusted EBITA margin from continuing operations | 23.4% | 19.7% |
- Sales rose 22%; underlying sales increased 10%, reflecting 8% higher volume and 2% higher price. NI added 12 percentage points, foreign currency added 1 point, and the Metran divestiture reduced growth by 1 point.
- Gross margin fell 1.5 percentage points, primarily due to $231 of NI-related inventory step-up amortization, which reduced margin by 5.6 points. Management said margin improved excluding that charge.
- GAAP earnings from continuing operations fell 57% and diluted EPS fell 55%. Adjusted EPS increased 56%, reflecting operating performance and a $0.13 contribution from Test & Measurement. Adjusted measures exclude specified acquisition, amortization, restructuring, transaction and other items.
- Other deductions rose to $487 from $120. Current-quarter items included $274 of intangible amortization, $83 of restructuring, $80 of acquisition/divestiture costs and a $36 loss on the Copeland equity-method investment. The prior-year quarter included a $47 Russia exit charge and a $35 foreign-currency hedge gain.
Cash flow, liquidity and debt
- Cash from continuing operations was $444, versus $302; free cash flow from continuing operations was $367, versus $243. Company-reported free cash flow deducts capital expenditures.
- Cash from operating activities, including discontinued operations, was $415, versus $418. Investing activities used $8,452, principally for the NI acquisition; financing activities provided $2,055, including a $2,647 increase in short-term borrowings.
- Cash and equivalents were $2,076 at December 31, down from $8,051 at September 30, 2023. Total current and long-term debt was $10,859, compared with $8,157 at September 30.
- Current ratio was 1.1, versus 2.7 at September 30; total debt-to-total capital was 34.4%, versus 28.3%. Interest coverage was 2.6x, compared with 7.3x in the prior-year quarter; management reported 10.1x excluding specified NI-related and other items.
- Operating cash flow from continuing operations was negatively affected by approximately $100 of acquisition-related costs and integration activities. Approximately $180 of cash was attributable to AspenTech and, according to the filing, was not available for return to Emerson shareholders.
Business and material changes
- NI was acquired for total purchase consideration of $8,653, including $8,467 paid in cash at closing. Its quarter contribution was $382 of sales and a $326 net loss, including purchase-accounting amortization, inventory step-up, retention, stock compensation and restructuring costs. NI acquisition accounting remains subject to refinement.
- Intelligent Devices sales increased 11% to $2,822; segment earnings rose 15% to $594 and margin improved to 21.0%. Strength in Measurement & Analytical and Final Control was partly offset by lower Discrete Automation earnings.
- Software and Control sales increased 55% to $1,314, including NI. Segment earnings fell to $36 from $74, largely reflecting Test & Measurement’s $78 loss. Adjusted EBITA margin increased to 26.1% from 23.8%.
- Prior-year comparisons include discontinued Climate Technologies and InSinkErator results and a large InSinkErator sale gain. Those businesses are not included in current continuing operations, making total net earnings comparisons especially non-comparable.
- Emerson retained a 40% interest in Copeland and a note receivable. It recorded a $36 equity-method loss and $31 of non-cash related-party interest income in the quarter. The note’s carrying value was $2,124; its estimated fair value was approximately $2,000.
Outlook, risks and other items
- FY2024 guidance: continuing-operations sales growth of 14.5%–17%, including underlying growth of 4.5%–6.5%; diluted EPS of $2.80–$2.95 and adjusted diluted EPS of $5.30–$5.45.
- Management expects continuing-operations operating cash flow of $3.0–$3.1 billion and free cash flow of $2.6–$2.7 billion, based on approximately $0.4 billion of capital spending. The outlook assumes about $500 million of share repurchases and $1.2 billion of dividends.
- Fiscal 2024 restructuring expense and related costs are expected to be approximately $250. Backlog was approximately $8.8 billion; Emerson expects to recognize about 75% of remaining performance obligations as revenue over the next 12 months.
- Risks identified include geopolitical conflicts, economic and currency conditions, demand, pricing, intellectual-property protection, cybersecurity, tariffs, competition, technology and inflation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess the sustainability of adjusted EPS and margins as NI integration and purchase-accounting charges evolve; compare adjusted measures with GAAP results.
- Monitor NI’s profitability, integration costs, final purchase-price allocation and the effect of acquisition financing on liquidity and interest coverage.
- Evaluate cash generation and debt reduction against guidance, including the planned shareholder returns and capital spending.
- Track Copeland’s operating performance and the value and collectability of Emerson’s retained investment and note receivable.
- Reconcile sales figures: the consolidated earnings statement and MD&A report sales of $4,117, while the geographic-sales table totals $4,136. The filing text does not clearly explain this difference.