Emerson Electric Co. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where disclosed. Emerson is a global automation, industrial technology and software company. Its continuing operations are reported in Intelligent Devices and Software and Control.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales from continuing operations | $15.165 billion | $13.804 billion | +10% |
| Gross profit / gross margin | $7.427 billion / 49.0% | $6.306 billion / 45.7% | Margin +3.3 pts |
| Continuing-operations earnings attributable to common shareholders | $2.152 billion | $1.886 billion | +14% |
| Diluted EPS from continuing operations | $3.72 | $3.16 | +18% |
| Adjusted diluted EPS from continuing operations | $4.44 | $3.64 | +22% |
| Continuing-operations operating cash flow | $2.726 billion | $2.048 billion | +33% |
| Free cash flow from continuing operations | $2.363 billion | $1.749 billion | +35% |
Underlying sales rose 10%, driven by 6% higher volume and 4% higher price. Foreign currency translation reduced reported growth by 2%; the Heritage AspenTech acquisition added 3%, while the Metran divestiture reduced growth by 1%. Adjusted EBITA was $3.556 billion, or 23.4% of sales, versus $3.016 billion and 21.8% in FY2022. The effective tax rate was 22%, compared with 23%.
FY2023 diluted EPS from continuing operations was $3.72; adjusted EPS was $4.44. Total net earnings attributable to common shareholders were $13.219 billion, or $22.88 per diluted share, but this figure includes substantial divestiture gains recorded in discontinued operations and is not representative of recurring operating earnings.
Quarterly and segment results
In the fourth quarter of FY2023, net sales were $4.090 billion, gross profit was $2.012 billion, and earnings attributable to common shareholders from continuing operations were $701 million. Diluted continuing-operations EPS was $1.22.
Intelligent Devices sales increased 7% to $11.588 billion, and segment earnings rose 21% to $2.616 billion; segment margin improved to 22.6%. Software and Control sales increased 20% to $3.648 billion, including the Heritage AspenTech acquisition. Segment earnings fell 6% to $422 million and margin declined to 11.6%, primarily reflecting higher acquisition-related intangible amortization. Adjusted EBITA margins improved in both business groups.
Liquidity, debt and capital allocation
At September 30, 2023, cash and equivalents were $8.051 billion, total assets were $42.746 billion, and common stockholders’ equity was $20.689 billion. Total debt was $8.157 billion, down from $10.374 billion a year earlier. The reported total debt-to-total capital ratio was 28.3%; the net debt-to-net capital ratio was 0.5%, reflecting divestiture proceeds and gains. After the subsequent NI acquisition, management estimated the net debt-to-net capital ratio at approximately 29%.
Operating cash flow from continuing operations was $2.726 billion; capital expenditures were $363 million. Cash at year-end included proceeds from the Copeland transaction and was subsequently used, along with other liquidity, to fund the NI acquisition. Emerson cited a $3.5 billion undrawn revolving credit facility and said available funding should meet requirements for at least the next 12 months. Dividends paid were $1.198 billion; the company repurchased $2.0 billion of its shares. In November 2023, the board increased the annualized dividend rate to $2.10 per share.
Portfolio changes, unusual items and outlook
- On May 31, 2023, Emerson sold a majority stake in Climate Technologies, now Copeland, in a $14.0 billion transaction. It received approximately $9.7 billion in pretax cash proceeds and a $2.25 billion face-value note accruing 5% interest in kind, and retained a 40% noncontrolling equity interest. Emerson recognized an approximately $10.6 billion pretax gain and an $8.4 billion after-tax gain.
- The October 2022 InSinkErator sale generated an approximately $2.8 billion pretax gain, or $2.1 billion after tax, recognized in FY2023. Together, the Copeland and InSinkErator gains drove FY2023 discontinued-operations earnings attributable to common shareholders to $11.067 billion.
- Emerson recorded a $177 million loss on its Copeland equity-method investment in FY2023. Copeland’s post-divestiture FY2023 reported net loss was $442 million. The Copeland note and equity investment had carrying values of $2.093 billion and $1.162 billion, respectively, at year-end.
- Emerson completed the $8.2 billion equity-value acquisition of National Instruments (NI) on October 11, 2023, after fiscal year-end. NI had approximately $1.7 billion in revenue and $170 million in pretax earnings for the 12 months ended September 30, 2023. It is to become the Test & Measurement segment in FY2024. Purchase accounting was not complete when the filing was issued.
- Other notable items included $161 million of Vertiv subordinated-interest gains, a $47 million Russia-exit loss, and a $56 million mark-to-market gain on Emerson’s NI investment. The company paid approximately $2.3 billion in taxes related to the Copeland and InSinkErator gains and related restructurings.
FY2024 outlook: Management projected continuing-operations net sales growth of 13%–15.5%, including a 10%–10.5% contribution from NI; underlying sales growth of 4%–6%, with approximately 1% unfavorable currency impact; diluted EPS of $3.82–$4.02; and adjusted diluted EPS of $5.15–$5.35. Expected operating cash flow was $3.0–$3.1 billion and free cash flow $2.6–$2.7 billion, based on approximately $400 million of capital spending. Guidance excluded NI purchase-accounting amortization and related costs from its GAAP EPS estimate because those amounts could not yet be estimated. The company expected approximately $500 million of share repurchases and $1.2 billion of dividends.
Management cited broad sales growth, pricing and operating leverage as contributors to improved continuing-operations results. It also noted elevated working capital: operating working capital was 8.5% of sales, up from 7.2%, as inventory and receivables remained higher. Backlog was $7.773 billion, up from $6.988 billion; approximately 75% was expected to convert to revenue over the next 12 months.
Risks, contingencies and controls
Key disclosed risks include competition and end-market downturns; successful integration of NI and other acquisitions and realization of expected benefits; execution and valuation risks related to the retained Copeland note and equity interest; international operations, foreign exchange and trade-policy exposure; supply-chain and raw-material disruption; cybersecurity, data privacy and product failure; talent retention; and evolving environmental, climate and ESG requirements. The company also faces tax audits and legal matters, including asbestos, product-liability and environmental claims. Management said a material adverse impact from pending litigation was unlikely and reported no known contingent liabilities it believed material to the financial statements.
Emerson’s and its auditor’s reports concluded that internal control over financial reporting was effective as of September 30, 2023; the auditor issued an unqualified opinion on the financial statements. KPMG identified the sufficiency of audit evidence over net sales as a critical audit matter. The filing also notes AspenTech implemented a new revenue management system in the fourth quarter and modified certain related controls.
Important facts for investors to verify
- How NI integration, purchase accounting, financing and the new segment affect FY2024 reported and adjusted results.
- Whether underlying sales, margins, cash generation and backlog conversion meet management’s FY2024 outlook, particularly after separating acquisition and currency effects.
- The performance, fair value and cash proceeds ultimately realized from the Copeland note receivable and retained 40% equity interest.
- Whether working capital improves and cash conversion remains strong after the acquisition and large divestiture-related tax payments.
- How much of FY2023 reported net earnings and returns reflects nonrecurring divestiture and investment gains rather than continuing operations.