Emerson Electric Co. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparative period ended December 31, 2021. Unless noted otherwise, financial amounts are in millions of dollars. Emerson reports six continuing-operation segments; Climate Technologies, InSinkErator and Therm-O-Disc are presented as discontinued operations.
Financial performance and position
| Metric | Q1 FY2023 | Prior comparable period / change |
|---|---|---|
| Net sales from continuing operations | $3,373 | $3,156; up 7%. Underlying sales up 6%; AspenTech acquisition added 5 percentage points and currency reduced sales about 4 points. |
| Gross profit / margin | $1,620 / 48.0% | $1,415 / 44.9%; margin up 3.1 points. |
| SG&A / percent of sales | $1,030 / 30.5% | $849 / 27.0%. |
| Continuing-operations earnings attributable to common stockholders | $329; diluted EPS $0.56 | $746; diluted EPS $1.25. Prior period included a $453 pretax Vertiv-related gain ($0.60 per share after tax). |
| Adjusted diluted EPS from continuing operations | $0.78 | $0.79. |
| Net earnings attributable to common stockholders | $2,331; diluted EPS $3.97 | $896; diluted EPS $1.50. Current period includes the InSinkErator sale gain. |
| Adjusted EBITA from continuing operations / margin | $664 / 19.7% | $636 / 20.1%. |
| Cash from continuing operating activities | $302 | $377; lower primarily due to working-capital needs. |
| Free cash flow from continuing operations | $243 | $304; operating cash flow less capital expenditures. |
Continuing-operations sales growth reflected higher volume and pricing, with strong North American performance; Asia, Middle East & Africa was essentially flat and Europe declined modestly, partly due to the Russia exit. Intelligent Devices sales rose 1% and segment earnings rose 9%, with margin improving to 20.4%. Software and Control sales rose 30%, mainly reflecting the Heritage AspenTech acquisition; segment earnings fell to $74, substantially affected by acquisition-related intangible amortization.
At December 31, cash and equivalents were $2,271, total debt was approximately $9,951 (short-term and current maturities $1,792; long-term debt $8,159), and the current ratio was 1.1. Total debt-to-total capital was 48.1%; net debt-to-net capital was 41.7%. Cash included about $450 held by AspenTech, which Emerson said was not readily available for its general liquidity or shareholder returns. Cash from all operating activities was $418, including discontinued operations. Investing activities provided $2,886, principally from the $3.0 billion InSinkErator sale; financing activities used $2,895, including $2.0 billion of share repurchases, net short-term borrowing repayments and dividends. Ending cash increased $467 from September 30, 2022.
Material changes, transactions and unusual items
- Emerson completed the InSinkErator divestiture to Whirlpool on October 31, 2022, for $3.0 billion and recognized a $2.8 billion pretax gain, approximately $2.1 billion after tax. Discontinued-operations earnings were $2,002, versus $149 in the prior period.
- The proposed $14.0 billion sale of a majority stake in Climate Technologies to Blackstone remained pending. At closing, Emerson expected approximately $9.5 billion of upfront pretax cash proceeds, a $2.25 billion note bearing 5% interest payable in kind, and a retained 45% noncontrolling interest. Closing was expected in the first half of calendar 2023, subject to approvals and customary conditions.
- The Heritage AspenTech transaction closed in May 2022; Emerson owns 55% of AspenTech. The acquisition added $168 of current-quarter sales. Higher acquisition-related amortization and stock compensation contributed to increased expenses.
- The quarter included a $47 pretax loss related to Emerson’s planned Russia business exit, with no related tax benefit. Other deductions also included higher intangible amortization, partly offset by a $35 mark-to-market gain on AspenTech foreign-currency forwards related to the Micromine purchase price.
- Emerson’s $82 National Instruments investment was outstanding at quarter-end. On January 17, 2023, Emerson proposed a cash acquisition at $53 per share, implying $7.6 billion enterprise value; National Instruments had announced a strategic review. The proposal was not a completed transaction.
- Backlog for unsatisfied or partially unsatisfied customer performance obligations was approximately $7.8 billion; Emerson expected to recognize about 80% as revenue over the next 12 months.
Outlook, risks and management commentary
For FY2023, management expected continuing-operations sales growth of 8%–10%, including underlying growth of 6.5%–8.5%, an approximately 2% unfavorable currency impact and an approximately 3.5% favorable net acquisition/divestiture impact. Forecast continuing-operations EPS was $3.55–$3.70; adjusted EPS was $4.00–$4.15. The adjusted outlook excluded specified items, including intangible amortization, restructuring, Russia exit costs, the AspenTech Micromine hedge benefit and interest income on divestiture proceeds and the Climate Technologies note. Management forecast discontinued-operations earnings of $10.5–$11.5 billion, or $18–$20 per share, including net gains on 2023 divestitures. The outlook assumed a March 31, 2023 Climate Technologies closing and excluded any potential impact from Emerson’s retained 45% interest in that business.
Management cited supply-chain constraints, higher inventory and working-capital needs, inflation, foreign-exchange effects, the Russia-Ukraine conflict, market demand and transaction execution as uncertainties. The company expected FY2023 restructuring expense and related costs of approximately $90. Management reported effective disclosure controls as of quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Climate Technologies transaction closes, final proceeds and note terms, and the eventual earnings and cash-flow contribution of Emerson’s retained 45% interest.
- Progress against the FY2023 sales and EPS outlook, including underlying growth, currency effects and the assumptions for discontinued operations and divestitures.
- Underlying continuing-operations profitability and cash generation, distinguishing adjusted results from acquisition amortization, stock compensation and one-time transaction gains or charges.
- Liquidity available to Emerson apart from AspenTech cash, working-capital trends, tax payments related to divestitures and the effects of ongoing share repurchases.
- Outcome and funding implications of the National Instruments proposal, which remained subject to the target’s strategic review and potential competing interest.