Emerson Electric Co. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023; unaudited. Amounts below are in U.S. dollars. The filing reports continuing operations separately from divested businesses classified as discontinued operations.
Business context and key financial results
Emerson’s continuing businesses comprise Intelligent Devices and Software and Control. Portfolio changes during the period included the May 31 sale of a majority stake in Climate Technologies, renamed Copeland, and the prior sale of InSinkErator. Emerson retained a 40% noncontrolling interest in Copeland. Results for Climate Technologies, InSinkErator, and Therm-O-Disc are reported as discontinued operations.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Continuing-operations sales | $3.946 billion, up 14% | $11.075 billion, up 12% |
| Underlying sales growth | 14% | 12% |
| Gross margin | 50.5%, versus 45.8% | 48.9%, versus 45.2% |
| Continuing-operations earnings attributable to common shareholders | $592 million, versus $226 million | $1.451 billion, versus $1.400 billion |
| Diluted continuing-operations EPS | $1.03, versus $0.38 | $2.51, versus $2.34 |
| Adjusted diluted continuing-operations EPS | $1.29, versus $0.92 | $3.15, versus $2.57 |
Quarterly gross-margin improvement reflected favorable pricing relative to net material inflation, mix, and the AspenTech acquisition. Quarterly adjusted EBITA margin rose to 26.0% from 23.1%; nine-month adjusted EBITA margin rose to 23.2% from 21.1%. Management attributed performance primarily to sales growth, operating leverage, and pricing, partly offset by inflation and higher stock compensation.
GAAP net earnings attributable to common shareholders were $9.352 billion for the quarter and $12.475 billion for the nine months. These totals were dominated by discontinued-operations gains, including the Copeland transaction and InSinkErator sale; they should not be interpreted as recurring operating earnings. Copeland’s sale generated an approximately $10.6 billion pretax gain (about $8.4 billion after tax), while InSinkErator generated an approximately $2.8 billion pretax gain (about $2.1 billion after tax).
Cash flow, debt, and liquidity
- Nine-month cash from continuing operating activities was $1.719 billion, versus $1.235 billion; continuing free cash flow was $1.525 billion, versus $1.036 billion. Capital expenditures were $194 million.
- Total operating cash flow, including discontinued operations, was $1.280 billion, down from $1.705 billion. The current-period figure reflected about $750 million of taxes paid related to divestitures and subsidiary restructurings.
- Cash and equivalents were $9.957 billion at June 30, 2023, including about $9.7 billion of Copeland transaction proceeds. The filing says $289 million held by AspenTech was intended for its own purposes and was not readily available for Emerson’s general use.
- Short-term borrowings and current maturities were $667 million; long-term debt was $7.642 billion. Total debt-to-total capital was 28.9%, versus 50.0% at September 30, 2022. The current ratio was 2.4, versus 1.1.
- Cash was expected to help fund the proposed National Instruments acquisition. Emerson reported a $3.5 billion revolving backup credit facility, with no borrowings under it.
- Cash used in financing activities was $6.302 billion, including $2.0 billion of Emerson share repurchases, $900 million of dividends, debt repayments, and a net reduction in short-term borrowings.
Material changes, outlook, and risks
- Divestitures and retained Copeland interests: Emerson received about $9.7 billion in upfront pretax cash proceeds and a note with a $2.25 billion face value, while retaining a 40% Copeland equity interest. At quarter-end, the note and equity investment had carrying values of $2.063 billion and $1.296 billion, respectively. Emerson recorded a $61 million share of Copeland losses for the post-divestiture period.
- National Instruments: Emerson agreed to acquire NI for $60 per share in cash, at an announced equity value of $8.2 billion. NI shareholders approved the transaction on June 29, 2023; closing was expected in the first half of fiscal 2024, subject to customary conditions and regulatory approvals. Emerson held an NI investment valued at $128 million at quarter-end.
- FY2023 outlook: Management expected continuing-operations sales growth of approximately 10.5%, underlying sales growth of approximately 10%, diluted continuing-operations EPS of $3.54–$3.59, and adjusted diluted continuing-operations EPS of $4.40–$4.45. Continuing-operations operating cash flow was forecast at $2.5–$2.6 billion and free cash flow at $2.2–$2.3 billion. Management expected discontinued-operations earnings to change immaterially from the amount reported through June 30.
- Taxes and unusual items: About $1.5 billion of income taxes payable related to Copeland and InSinkErator gains was largely expected to be paid by fiscal year-end. Adjusted earnings exclude specified items, including intangible amortization, restructuring and transaction costs, and Copeland investment gains or losses; these non-GAAP measures are not substitutes for GAAP results.
- Risks and contingencies: The filing identifies risks involving completion and financial effects of the NI transaction, economic and currency conditions, demand, inflation, competition, technology, cybersecurity, tariffs, and geopolitical developments. AspenTech’s market capitalization was below the carrying value of its stockholders’ equity; Emerson reported no goodwill impairment but said a sustained share-price decline could require further assessment. Potential additional Vertiv distributions of about $150 million were contingent on timing and sale prices, with no assurance of amount or timing.
- Subsequent event: On August 1, 2023, AspenTech announced termination of its Micromine acquisition agreement after uncertainty around required Russian regulatory approval; no termination fee was due.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the large divestiture gains included in GAAP net earnings.
- Track the timing, financing, regulatory approvals, and integration implications of the proposed NI acquisition.
- Assess Copeland’s performance and the valuation, interest accrual, and collectability of Emerson’s retained note and equity investment.
- Monitor realization of FY2023 sales, EPS, and cash-flow guidance, including the impact of taxes payable on liquidity.
- Review AspenTech goodwill impairment sensitivity and the effect of acquisition-related amortization on reported earnings.