Emerson Electric Co. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended June 30, 2022. Emerson is a global manufacturer of technology, software and engineering solutions. The quarter reflects the May 16 acquisition combination with AspenTech and the sale of Therm-O-Disc.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $5.005 billion | $4.697 billion | $14.269 billion | $13.289 billion |
| Net earnings attributable to common stockholders | $921 million | $627 million | $2.491 billion | $1.633 billion |
| Diluted EPS | $1.54 | $1.04 | $4.17 | $2.71 |
| Adjusted diluted EPS | $1.38 | $1.19 | $3.72 | $3.19 |
| Gross margin | 41.9% | 42.2% | 41.1% | 41.9% |
Quarterly sales grew 7%; underlying sales also rose 7%, with 1% higher volume and 6% higher price. Acquisition contribution was 4%, divestitures reduced sales 1%, and currency translation reduced sales 3%. Quarterly adjusted EBITA was $1.143 billion, or 22.8% of sales, versus $942 million, or 20.1%. For the first nine months, adjusted EBITA was $2.988 billion, or 20.9% of sales, versus $2.587 billion, or 19.5%.
Quarterly segment sales/earnings were: Automation Solutions $2.872 billion/$530 million; AspenTech $239 million/$57 million; and Commercial & Residential Solutions $1.902 billion/$407 million. Commercial & Residential sales increased 8%, while Automation sales were essentially flat. AspenTech results include the acquired business only after closing; reported comparisons are therefore not fully like-for-like.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1.705 billion, down from $2.720 billion. Capital expenditures were $335 million, producing free cash flow of $1.370 billion versus $2.370 billion.
- Operating cash flow was pressured by a $706 million use of operating working capital, including higher inventory, and approximately $68 million of taxes paid on the Vertiv gain.
- At June 30, cash and equivalents were $2.529 billion. Current assets were $9.375 billion and current liabilities $8.812 billion; the current ratio was 1.1 versus 1.3 at September 30, 2021.
- Short-term borrowings and current debt maturities were $3.227 billion, with long-term debt of $8.367 billion, compared with total debt of $6.665 billion at September 30, 2021. Total debt-to-total capital was 52.9%, up from 40.3%.
- Cash includes $450 million held by New AspenTech, which Emerson said is not readily available for Emerson’s general liquidity or shareholder returns.
Material changes and unusual items
- AspenTech transaction: Emerson contributed approximately $6.0 billion in cash and its industrial software businesses; it owns 55% of New AspenTech, with former AspenTech shareholders holding 45%. The preliminary purchase accounting included $7.223 billion of goodwill and $4.390 billion of identifiable intangible assets; valuations remained subject to refinement.
- Q3 earnings included a $483 million pretax gain ($428 million after tax) on the Therm-O-Disc sale, a $162 million pretax Russia-exit loss, and $61 million of acquisition/divestiture costs. The nine-month results also included a $453 million pretax gain on the Vertiv subordinated interest. These items materially affect reported earnings; adjusted EPS excludes specified gains, losses and expenses.
- Debt increased to fund the AspenTech transaction, including $3.0 billion of notes issued in December 2021 and increased commercial-paper borrowings. Interest expense for the nine months rose to $140 million from $115 million.
- Emerson agreed on August 8, 2022 to sell InSinkErator for $3.0 billion; the transaction was expected to close in FY2023 subject to approvals and customary conditions. Its assets and liabilities were classified as held for sale at June 30.
- Management reported a $8.5 billion backlog, including approximately $700 million related to AspenTech, and expected to recognize about 80% of remaining performance obligations within 12 months.
Outlook, commentary and risks
Management’s FY2022 outlook was net sales growth of 7%–8%, underlying sales growth of 9%–10%, EPS of $5.25–$5.35 and adjusted EPS of $5.05–$5.15. It expected operating cash flow of approximately $3.0 billion, free cash flow of approximately $2.5 billion, and share repurchases of approximately $500 million. These are forward-looking estimates, not guarantees.
Management cited strong demand, particularly in North America, while noting China lockdowns, supply-chain and logistics constraints, inflation, currency headwinds and geopolitical uncertainty. The filing identifies risks relating to the Russia-Ukraine conflict, COVID-19, market demand, pricing, foreign exchange, cybersecurity, tariffs, competition and technology, as well as execution and financial effects of the AspenTech transaction and proposed InSinkErator sale. Management expected FY2022 restructuring expense and related costs of approximately $150 million; actions in the first nine months included workforce reductions of about 1,400 employees.
Important facts for investors to verify
- How much reported earnings growth reflects ongoing operations versus the Vertiv and Therm-O-Disc gains, the Russia-exit charge and transaction costs; review the company’s adjusted-measure reconciliations.
- Whether working-capital needs and supply constraints improve enough to support the FY2022 cash-flow outlook, given the decline in operating and free cash flow.
- Debt maturities, commercial-paper funding and liquidity available to Emerson, distinguishing Emerson cash from New AspenTech’s restricted-purpose cash.
- Integration results and final purchase-accounting valuations for AspenTech, including goodwill, acquired intangibles and ongoing amortization.
- Completion, proceeds and financial effects of the InSinkErator sale, which was pending after quarter-end, and the timing and amount of any remaining Vertiv distributions.