Emerson Electric Co. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Amounts are in millions of dollars except per-share data and percentages. The quarter’s results are compared with the three months ended March 31, 2021; year-to-date results with the six months ended March 31, 2021.
Financial results and key metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $4,791 | $4,431 | $9,264 | $8,592 |
| Net earnings attributable to common stockholders | $674 | $561 | $1,570 | $1,006 |
| Diluted EPS | $1.13 | $0.93 | $2.63 | $1.67 |
| Adjusted diluted EPS | $1.29 | $1.07 | $2.34 | $2.00 |
| Gross margin | 40.7% | 42.0% | 40.7% | 41.7% |
| Adjusted EBITA margin | 20.2% | 20.0% | 19.9% | 19.2% |
Q2 underlying sales grew 10% (6% volume and 4% price); reported sales rose 8%, including a 2% unfavorable foreign-currency effect. For the six months, underlying sales grew 9% (5% volume and 4% price), while reported sales rose 8% with a 1% unfavorable currency effect. Adjusted EPS and adjusted EBITA are company-defined non-GAAP measures.
- Q2 segments: Automation Solutions sales were $2,937, up 5%, and earnings were $556, up 18%; segment margin rose to 18.9% from 16.8%. Commercial & Residential Solutions sales were $1,857, up 13%, while earnings rose 2% to $365 and margin fell to 19.7% from 21.7%.
- Six-month segments: Automation Solutions sales grew 5% to $5,742 and earnings increased 30% to $1,082. Commercial & Residential Solutions sales grew 13% to $3,528, but earnings were essentially flat at $664.
- Cash flow, six months: Operating cash flow was $965, versus $1,615; capital expenditures were $225, versus $222; reported free cash flow was $740, versus $1,393. Working capital used $588 of cash, mainly reflecting higher inventory.
- Liquidity and debt at March 31: Cash and equivalents were $6,929, compared with $2,354 at September 30, 2021. Current assets were $13,539 and current liabilities $8,072 (current ratio 1.7). Short-term borrowings and current maturities were $2,762; long-term debt was $8,203. Total debt-to-total capital was 50.9%, and net debt-to-net capital was 27.6%.
Material changes and unusual items
- First-half GAAP earnings included a $453 pretax gain ($358 after tax, or $0.60 per diluted share) from Emerson’s retained subordinated interest in Vertiv. Emerson received $438 cash and said it could receive approximately $75 more over two to three years, contingent on Vertiv-share sale timing and price. Excluding the gain, adjusted diluted EPS was $2.34, up from $2.00.
- Q2 gross margin declined 1.3 percentage points as price increases were largely offset by materials and other inflation. SG&A as a percentage of sales improved to 21.9% from 23.8%, reflecting sales leverage, lower stock compensation and cost-reset savings.
- Operating cash flow and free cash flow fell year over year, primarily due to inventory investment amid sales growth and supply-chain constraints; cash flow also included approximately $45 of taxes paid on the Vertiv gain.
- Emerson issued $3.0 billion of notes in December 2021 (2.0% due 2028, 2.2% due 2031 and 2.8% due 2051) and increased commercial-paper borrowings by approximately $2.2 billion in Q2 to help fund its planned AspenTech transaction. The notes are subject to redemption at 101% of principal plus accrued interest if that transaction is not completed or is terminated.
- Emerson agreed to contribute two software businesses and approximately $6.0 billion in cash to AspenTech in exchange for 55% ownership of the combined company; the transaction was expected to close in the second calendar quarter of 2022. It also agreed to sell Therm-O-Disc, with closing subject to approvals and other customary conditions.
Outlook, risks and contingencies
Fiscal 2022 guidance was consolidated sales growth of 8%–10% (underlying growth of 9%–11%), EPS of $4.77–$4.92 and adjusted EPS of $4.95–$5.10. Adjusted EPS guidance excludes identified restructuring, intangible-amortization, Vertiv-gain and transaction/pre-closing items. Management expected operating cash flow of approximately $3.6 billion and free cash flow of approximately $3.0 billion, assuming $600 million of capital spending, and planned share repurchases of $250–$500 million. Guidance excluded AspenTech’s operational contribution and the Therm-O-Disc sale’s effect, but included estimated AspenTech transaction fees and interest on the debt already issued. It included the operational impact of the Russia exit, but excluded potential exit charges.
Management cited ongoing inflation, supply-chain and logistics constraints, COVID-19 effects, macroeconomic and geopolitical uncertainty, and the Russia-Ukraine conflict. On May 4, 2022, Emerson announced it intended to exit Russia and explore strategic options for Metran. Russian operations represented approximately 1.5% of consolidated annual sales and had $50 of net assets and $145 of accumulated currency-translation losses at March 31; the losses are expected to be recognized as a non-cash charge on exit. Emerson said it could not yet estimate the full financial consequences, including tax effects. Management also forecast approximately $150 of FY2022 restructuring expense and related costs.
Important facts for investors to verify
- Whether the AspenTech transaction closed as planned, its final financing and ownership terms, and any resulting impact on Emerson’s debt and earnings.
- Whether sales growth, pricing and cost actions can offset materials, freight, wage and other inflation, particularly given margin declines in Commercial & Residential Solutions.
- Whether inventory and supply-chain conditions improve and operating cash flow recovers toward management’s annual forecast.
- The eventual financial, tax and non-cash currency-translation effects of exiting Russia, and the terms and timing of the Therm-O-Disc divestiture.
- The amount and timing of any remaining Vertiv distributions; these are contingent and not assured.