Emerson Electric Co. — Form 10-Q summary
Reporting period: Second quarter and six months ended March 31, 2023; fiscal 2023. Amounts are in millions of dollars except per-share data.
Business context
Emerson reports six segments across Intelligent Devices and Software and Control. Climate Technologies, InSinkErator and Therm-O-Disc are presented as discontinued operations following portfolio changes. The AspenTech combination closed in May 2022, and Emerson owned 55% of AspenTech. InSinkErator was sold in October 2022; the planned sale of a majority stake in Climate Technologies was still pending at quarter-end.
Key financial metrics
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Continuing-operations sales | $3,756 | $3,291 | $7,129 | $6,447 |
| Gross margin | 47.9% | 44.8% | 48.0% | 44.8% |
| Continuing-operations earnings attributable to common stockholders | $530 | $428 | $859 | $1,174 |
| Diluted EPS from continuing operations | $0.92 | $0.72 | $1.48 | $1.96 |
| Adjusted diluted EPS from continuing operations | $1.09 | $0.87 | $1.86 | $1.65 |
| Net earnings attributable to common stockholders | $792 | $674 | $3,123 | $1,570 |
Q2 continuing-operations sales rose 14%; underlying sales increased 14% on 9% higher volume and 5% higher price. Foreign currency reduced growth by 3 percentage points, AspenTech contributed 4 points, and the Metran divestiture reduced it by 1 point. Q2 pretax margin from continuing operations increased to 17.0% from 15.5%. Adjusted EBITA was $875, or 23.3% of sales, versus $652, or 19.8%.
For the six months, continuing-operations sales increased 11%, while diluted continuing-operations EPS fell 24%, primarily because the prior-year period included a $453 pretax Vertiv subordinated-interest gain. Adjusted EBITA increased 20% to $1,539; adjusted EBITA margin increased to 21.6% from 20.0%. Net earnings and reported EPS also reflect discontinued operations, including the $2.8 billion pretax gain on the InSinkErator sale.
Cash flow and liquidity: Six-month cash from continuing operations was $877, up from $756; continuing-operations free cash flow was $756, up from $616. Total operating cash flow, including discontinued operations, was $486 versus $965, with the current period affected by about $575 of taxes paid related to the InSinkErator gain and Climate Technologies restructurings. Investing cash flow was $2,734, including $3.0 billion of InSinkErator sale proceeds. Financing used $3,036, including $2.0 billion of share repurchases, $742 of long-term debt repayments and dividends.
At March 31, cash and equivalents were $2,046, total debt was approximately $10,133, and the current ratio was 1.2. Total debt-to-total capital was 47.1%; net debt-to-net capital was 41.6%. Cash included $287 held by AspenTech that Emerson said was not readily available for its general purposes. The company reported a $3.5 billion five-year revolving backup credit facility, with no borrowings outstanding.
Material changes, outlook and risks
- Q2 gross margin improved 3.1 percentage points, reflecting favorable price less net material inflation, AspenTech contribution and mix. Management cited operating leverage and strong sales growth; wage and other inflation remained offsets.
- Six-month SG&A rose to $2,030 from $1,737, including higher stock compensation and costs associated with AspenTech. Other deductions increased to $229 from $66, including additional intangible amortization, a $47 Russia exit charge and unfavorable foreign-currency effects.
- Fiscal 2023 guidance: continuing-operations sales growth of 9%–10.5%; continuing-operations EPS of $3.58–$3.68 and adjusted EPS of $4.15–$4.25. Management expected about $2.5 billion of continuing-operations operating cash flow and $2.2 billion of free cash flow. The guidance assumed the Climate Technologies transaction closed March 31, 2023 and excluded any potential impact from Emerson’s retained 45% ownership in that business.
- Management expected the Climate Technologies majority-stake sale to close in Q3 FY2023, subject to approvals and customary conditions. The transaction was valued at $14.0 billion; Emerson expected about $9.5 billion in cash and a $2.25 billion note, while retaining a 45% noncontrolling interest.
- On April 12, 2023, after quarter-end, Emerson announced an agreement to acquire National Instruments for $60 per share in cash, at an equity value of $8.2 billion. Closing was expected in the first half of fiscal 2024, subject to regulatory and NI shareholder approvals. Emerson held a $117 investment in NI at quarter-end and recorded a $35 mark-to-market gain during Q2.
- Outlook and results are exposed to transaction execution and financing risks, regulatory approvals, economic and currency conditions, demand, inflation, supply-chain constraints, cybersecurity, competition, tariffs, and the Russia-Ukraine conflict. The filing also disclosed an asbestos-litigation liability of $194 at March 31, 2023.
Important facts for investors to verify
- Whether and when the Climate Technologies and National Instruments transactions close, and the resulting cash, debt, ownership and earnings effects.
- How much of reported earnings and EPS comes from divestiture gains and other discontinued operations versus ongoing continuing operations.
- Whether sales growth, margins and free cash flow meet fiscal 2023 guidance, particularly given working-capital and supply-chain pressures.
- The cash available for general corporate purposes, including the restriction noted for AspenTech cash, and the funding plan for the NI acquisition.
- The size and timing of remaining contingent Vertiv distributions; the company estimated approximately $75 could be received over the next two to three years, with no assurance of amount or timing.