EMERSON ELECTRIC CO. OVERVIEW
As previously disclosed, inOctober 2022 , the Board of Directors approved the Company's announced agreement to sell a majority stake in its Climate Technologies business (which constitutes the historical Climate Technologies segment, excludingTherm-O-Disc which was divested in fiscal 2022) to private equity funds managed byBlackstone in a$14.0 billion transaction. The transaction is expected to close in the first half of calendar year 2023, subject to regulatory approvals and customary closing conditions. Additionally, onOctober 31, 2022 , the Company completed the divestiture of its InSinkErator business, which manufactures food waste disposers, to Whirlpool Corporation for$3.0 billion , and the Company recognized a pretax gain of$2.8 billion (approximately$2.1 billion after-tax) in the first quarter of fiscal 2023.
Climate Technologies,
OnMay 16, 2022 , the Company completed the transactions contemplated by its definitive agreement with Aspen Technology, Inc. ("Heritage AspenTech") to contribute two of Emerson's stand-alone industrial software businesses,Open Systems International, Inc. and theGeological Simulation Software business, along with approximately$6.0 billion in cash to Heritage AspenTech stockholders, to create "New AspenTech" (hereinafter referred to as "AspenTech"). Upon closing of the transaction, Emerson owned 55 percent of the outstanding shares of New AspenTech common stock (on a fully diluted basis). See Note 4. Due to the timing of the acquisition in the prior year, the results for the first quarter of fiscal 2022 do not include the results of HeritageAspenTech . For the first quarter of fiscal 2023, net sales from continuing operations were$3.4 billion , up 7 percent compared with the prior year. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, were up 6 percent. TheAspenTech acquisition added 5 percent, while foreign currency translation had a 4 percent unfavorable impact. Sales growth continued to be strong inNorth America , whileAsia ,Middle East &Africa was essentially flat andEurope was down modestly due to the negative impact of the business exit fromRussia . Earnings from continuing operations attributable to common stockholders were$329 , down 56 percent, and diluted earnings per share from continuing operations were$0.56 , down 55 percent compared with$1.25 in the prior year. The prior year included a$0.60 gain related to the Company's subordinated interest in Vertiv. Adjusted diluted earnings per share from continuing operations were$0.78 compared with$0.79 in the prior year, reflecting strong operating results offset by higher stock compensation expense due to an increasing stock price in the current year. The table below presents the Company's diluted earnings per share from continuing operations on an adjusted basis to facilitate period-to-period comparisons and provide additional insight into the underlying, ongoing operating performance of the Company. Adjusted diluted earnings per share from continuing operations excludes intangibles amortization expense, restructuring expense, first year purchase accounting related items and transaction-related costs, and certain gains, losses or impairments. Three Months EndedDec 31
2021 2022
Diluted earnings from continuing operations per share
Amortization of intangibles 0.09 0.15 Restructuring and related costs 0.02 0.02 Gain on subordinated interest (0.60) - Acquisition/divestiture costs 0.03 - Russia business exit - 0.08 AspenTech Micromine purchase price hedge
- (0.03)
Adjusted diluted earnings from continuing operations per share$ 0.79 0.78 19
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The table below summarizes the changes in adjusted diluted earnings per share
from continuing operations. The items identified below are discussed throughout
MD&A, see further discussion above and in the Business Segments and Financial
Position sections below.
Three Months Ended
Adjusted diluted earnings from continuing operations per share -
$ 0.79
Operations excluding impact of acquisitions 0.10
Heritage AspenTech acquisition 0.05
Stock compensation (0.09)
Foreign currency (0.09)
Pensions 0.02
Interest expense, net (0.01)
Share repurchases 0.01
Adjusted diluted earnings from continuing operations per share -
$ 0.78
2022
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Following is an analysis of the Company's operating results for the first
quarter ended
2021 2022 Change
(dollars in millions, except per share amounts)
Net sales$ 3,156 3,373 7 % Gross profit$ 1,415 1,620 14 % Percent of sales 44.9 % 48.0 % 3.1 pts SG&A$ 849 1,030 21 % Percent of sales 27.0 % 30.5 % 3.5 pts Gain on subordinated interest$ (453) - Other deductions, net$ 38 120 Amortization of intangibles$ 57 118 Restructuring costs$ 6 10 Interest expense, net$ 39 48
Earnings from continuing operations before income taxes
422 (55) % Percent of sales 29.8 % 12.5 % (17.3) pts
Earnings from continuing operations common stockholders
329 (56) % Percent of sales 23.6 % 9.8 % (13.8) pts Net earnings common stockholders$ 896 2,331 160 %
Diluted EPS - Earnings from continuing operations
0.56 (55) % Diluted EPS - Net Earnings$ 1.50 3.97 165 % Net sales for the first quarter of fiscal 2023 were$3.4 billion , up 7 percent compared with 2022. Intelligent Devices sales were up 1 percent, while Software and Control sales were up 30 percent, which included the impact of the HeritageAspenTech acquisition. Underlying sales were up 6 percent on 2 percent higher volume and 4 percent higher price, while foreign currency translation had a 4 percent negative impact. The Heritage AspenTech acquisition added 5 percent. Underlying sales were up 12 percent in theU.S. and up 2 percent internationally. TheAmericas was up 13 percent, whileAsia ,Middle East &Africa was flat (China down 7 percent).Europe decreased 2 percent, but was up 7 percent excluding the negative impact of the business exit fromRussia . 20
-------------------------------------------------------------------------------- Cost of sales for the first quarter of fiscal 2023 were$1,753 , an increase of$12 compared with 2022. Gross margin of 48.0 percent increased 3.1 percentage points due to favorable price less net material inflation, the impact of the Heritage AspenTech acquisition which benefited margins by 1.3 percentage points, and favorable mix. Selling, general and administrative (SG&A) expenses of$1,030 increased$181 and SG&A as a percent of sales increased 3.5 percentage points to 30.5 percent compared with the prior year, reflecting the Heritage AspenTech acquisition and higher stock compensation expense of$68 , of which$45 related to Emerson stock plans due to an increasing stock price in the current year and$23 was attributable toAspenTech stock plans. In the first quarter of fiscal 2022, the Company received a distribution of$438 related to its subordinated interest in Vertiv (in total, a gain of$453 was recognized in the first quarter,$358 after-tax,$0.60 per share). Based on the terms of the agreement and the current calculation, the Company could receive additional distributions of approximately$75 which are expected to be received over the next two-to-three years. However, the distributions are contingent on the timing and price at which Vertiv shares are sold by the equity holders and therefore, there can be no assurance as to the amount or timing of the remaining distributions to the Company. Other deductions, net were$120 in 2023, an increase of$82 compared with the prior year, reflecting higher intangibles amortization of$61 primarily related to the Heritage AspenTech acquisition and a charge of$47 related to the Company exiting its business inRussia , partially offset by lower acquisition/divestiture costs of$23 . The current year also included a mark-to-market gain of$35 related to foreign currency forward contracts entered into byAspenTech to mitigate the impact of foreign currency exchange associated with theMicromine purchase price, which was largely offset by unfavorable foreign currency transaction losses compared to gains in the prior year. See Note 7. Pretax earnings from continuing operations of$422 decreased$520 , down 55 percent compared with the prior year largely due to the Vertiv gain discussed above. Earnings increased$40 in Intelligent Devices and decreased$40 in Software and Control, while costs reported at Corporate increased$58 largely due to higher stock compensation expense of$68 and the$47 Russia business exit loss, partially offset by the$35 gain on theMicromine foreign currency forward contracts. See the Business Segments discussion that follows and Note 13. Income taxes were$98 in the first quarter of fiscal 2023 and$196 in 2022, resulting in effective tax rates of 23 percent and 21 percent, respectively. The current year rate included a 2 percentage point unfavorable impact related to theRussia charge, which had no related tax benefit. Earnings from continuing operations attributable to common stockholders were$329 , down 56 percent, and diluted earnings per share from continuing operations were$0.56 , down 55 percent compared with$1.25 in the prior year. The prior year included a$0.60 gain related to the Company's subordinated interest in Vertiv. Adjusted diluted earnings per share from continuing operations were$0.78 compared with$0.79 in the prior year, reflecting strong operating results offset by higher stock compensation expense due to an increasing stock price in the current year. See the analysis above of adjusted earnings per share for further details. Earnings from discontinued operations were$2,002 ($3.41 per share) which included the$2.1 billion after-tax gain on the divestiture of InSinkErator, compared to$149 ($0.25 per share) in the prior year. Earnings from discontinued operations were negatively impacted in the current year by approximately$275 of income taxes within Climate Technologies related to subsidiary restructurings and$27 of transaction-related costs. See Note 5.
Net earnings common stockholders in the first quarter of fiscal 2023 were
The table below, which shows results from continuing operations on an adjusted
EBITA basis, is intended to supplement the Company's discussion of its results
of operations herein. The Company defines adjusted EBITA as earnings from
continuing operations excluding interest expense, net, income taxes, intangibles
amortization expense, restructuring expense, first year purchase accounting
related items and transaction-related costs, and certain gains, losses or
impairments. Adjusted EBITA and adjusted EBITA margin are measures used by
management and may be useful for investors to evaluate the Company's operational
performance.
21
-------------------------------------------------------------------------------- Three Months EndedDec 31 2021
2022 Change
Earnings from continuing operations before income taxes$ 942 422 (55) % Percent of sales 29.8 % 12.5 % (17.3) pts Interest expense, net 39 48 Amortization of intangibles 71 167 Restructuring and related costs 14
15
Gain on subordinated interest (453) - Acquisition/divestiture costs 23 - Russia business exit -
47
AspenTech Micromine purchase price hedge -
(35)
Adjusted EBITA from continuing operations$ 636 664 5 % Percent of sales 20.1 % 19.7 % (0.4) pts Other Items The Company has an equity investment in National Instruments, valued at$82 as ofDecember 31, 2022 . OnJanuary 17, 2023 , the Company announced a proposal to acquire National Instruments for$53 per share in cash at an implied enterprise value of$7.6 billion . National Instruments, which had fiscal 2021 sales of approximately$1.5 billion , announced onJanuary 13, 2023 it was undertaking a strategic review which could include the solicitation of interest from other potential acquirors. Business Segments Following is an analysis of operating results for the Company's business segments for the three months endedDecember 31, 2021 , compared with the three months endedDecember 31, 2022 . The Company defines segment earnings as earnings before interest and taxes. As a result of the Company's portfolio transformation, the Company has realigned its business segments and now reports six segments and two business groups. See Note 13. 22
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INTELLIGENT DEVICES
2021 2022 Change FX Acq/Div U/L
Sales:
Final Control $ 817 862 6 % 4 % - % 10 %
Measurement & Analytical 737 749 2 % 4 % - % 6 %
Discrete Automation 617 618 - % 6 % - % 6 %
Safety & Productivity 351 310 (12) % 2 % - % (10) %
Total $ 2,522 2,539 1 % 4 % - % 5 %
Earnings:
Final Control $ 122 158 30 %
Measurement & Analytical 170 175 3 %
Discrete Automation 120 121 1 %
Safety & Productivity 65 63 (3) %
Total $ 477 517 9 %
Margin 18.9 % 20.4 % 1.5 pts
Amortization of intangibles:
Final Control $ 24 22
Measurement & Analytical 6 5
Discrete Automation 8 7
Safety & Productivity 6 6
Total $ 44 40
Restructuring and related costs:
Final Control $ 7 4
Measurement & Analytical 2 1
Discrete Automation 2 1
Safety & Productivity 1 -
Total $ 12 6
Adjusted EBITA $ 533 563 6 %
Adjusted EBITA Margin 21.1 % 22.2 % 1.1 pts
Intelligent Devices sales were $2.5 billion in the first three months of 2023,
an increase of $17 , or 1 percent. Underlying sales increased 5 percent on higher
price, while volume was flat overall reflecting lagging performance in Safety &
Productivity. Underlying sales increased 14 percent in the Americas , while Asia ,
Middle East & Africa was down 3 percent (China down 12 percent). Europe
decreased 5 percent, but was up moderately excluding the negative impact of the
business exit from Russia . Final Control sales increased $45 , or 6 percent.
Underlying sales were up 10 percent, reflecting strength in chemical, energy and
power end markets, particularly in the Americas . Europe was up slightly
excluding the impact from Russia and Asia was down slightly. Sales for
Measurement & Analytical increased $12 , or 2 percent. Underlying sales were up 6
percent, reflecting strength in North America and solid growth in Europe
excluding the impact from Russia . Sales were down 16 percent in Asia reflecting
the negative impact from continued supply chain constraints. Discrete Automation
sales were flat while underlying sales increased 6 percent, reflecting
broad-based demand across most end markets and all geographies despite continued
supply chain constraints. Safety & Productivity sales decreased $41 , or 12
percent, reflecting weakness across all end markets, particularly in the
Americas . Earnings were $517 , an increase of $40 , or 9 percent, and margin
increased 1.5 percentage points to 20.4 percent, reflecting favorable price less
net material inflation and favorable mix, partially offset by higher wage and
other inflation and unfavorable foreign currency transactions which negatively
impacted margins 0.6 percentage points. Adjusted EBITA margin was 22.2 percent,
an increase of 1.1 percentage points.
23
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SOFTWARE AND CONTROL
2021 2022 Change FX Acq/Div U/L
Sales:
Control Systems & Software $ 570 606 6 % 4 % - % 10 %
AspenTech 82 243 197 % - % (197) % - %
Total $ 652 849 30 % 4 % (24) % 10 %
Earnings:
Control Systems & Software $ 116 107 (8) %
AspenTech (2) (33) (1668) %
Total $ 114 74 (36) %
Margin 17.6 % 8.7 % (8.9) pts
Amortization of intangibles:
Control Systems & Software $ 5 6
AspenTech 22 121
Total $ 27 127
Restructuring and related costs:
Control Systems & Software $ 1 1
AspenTech - -
Total $ 1 1
Adjusted EBITA $ 142 202 42 %
Adjusted EBITA Margin 21.8 % 23.8 % 2.0 pts
Software and Control sales were $849 in the first three months of 2023, an
increase of $197 , or 30 percent compared to the prior year, reflecting the
impact of the Heritage AspenTech acquisition. Underlying sales were up 10
percent on 8 percent higher volume and 2 percent higher price. Overall,
underlying sales increased 11 percent in the Americas , 6 percent in Europe and
15 percent in Asia , Middle East & Africa (China up 26 percent). Control Systems
& Software sales increased $36 , or 6 percent. Underlying sales increased 10
percent, reflecting strength in process end markets in North America , Europe
(excluding the impact of the business exit from Russia ) and Asia , which
benefited from improved electronic component availability, while power end
markets were up modestly. AspenTech sales increased $161 , or 197 percent, due to
the acquisition of Heritage AspenTech. Earnings decreased $40 , down 36 percent,
and margin decreased 8.9 percentage points, reflecting the impact from $99 of
incremental intangibles amortization ($35 of which was reported in Cost of
Sales) related to the Heritage AspenTech acquisition. Adjusted EBITA margin
increased 2.0 percentage points, reflecting the impact of the Heritage AspenTech
acquisition, partially offset by lower margins within Control Systems & Software
due to higher inflation and unfavorable foreign currency transactions.
24
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FINANCIAL CONDITION
Key elements of the Company's financial condition for the three months endedDecember 31, 2022 as compared to the year endedSeptember 30, 2022 and the three months endedDecember 31, 2021 follow. Dec 31, 2021 Sept 30, 2022 Dec 31, 2022 Operating working capital$ 780 $ 990 $ 351 Current ratio 2.4 1.1 1.1 Total debt-to-total capital 46.1 % 50.0 % 48.1 % Net debt-to-net capital 28.2 % 45.3 % 41.7 % Interest coverage ratio 23.9 X 11.7 X 7.3 X The Company's operating working capital as ofDecember 31, 2022 includes income taxes payable of approximately$660 related to the gain on the InSinkErator divestiture, which is expected to be paid over the next three quarters, and approximately$275 related to subsidiary restructurings at Climate Technologies, approximately$230 of which was paid inJanuary 2023 with the remainder expected to be paid by the end of fiscal 2023. Excluding these income taxes payable related to discontinued operations, operating working capital increased compared to the same quarter last year and compared toSeptember 30, 2022 due to higher inventory levels to support sales growth and reflecting ongoing supply chain and logistics constraints. As ofDecember 31, 2022 , Emerson's cash and equivalents totaled$2,271 , which included approximately$450 attributable toAspenTech . Subsequent to the end of the quarter, inJanuary 2023 AspenTech paid off the outstanding balance of its existing term loan facility of$264 , plus accrued interest. The cash held byAspenTech is intended to be used for its own purposes and is not a readily available source of liquidity for other Emerson general business purposes or to return to Emerson shareholders. The current ratio was unchanged compared toSeptember 30, 2022 . The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 7.3X for the first three months of fiscal 2023 compares to 23.9X for the three months endedDecember 31, 2021 , reflecting lower pretax earnings and higher interest expense. Pretax earnings in the prior year included the Vertiv subordinated interest gain of$453 . Excluding the gain, the interest coverage ratio was 12.9X in the prior year. Operating cash flow from continuing operations for the first three months of fiscal 2023 was$302 , a decrease of$75 compared with$377 in the prior year, reflecting higher working capital due to ongoing supply chain constraints. Operating cash flow included approximately$50 generated byAspenTech . Free cash flow from continuing operations of$243 in the first three months of fiscal 2023 (operating cash flow of$302 less capital expenditures of$59 ) decreased$61 compared to free cash flow of$304 in 2022 (operating cash flow of$377 less capital expenditures of$73 ), reflecting the decrease in operating cash flow. Cash used in investing activities from continuing operations was$67 . Cash used in financing activities from continuing operations was$2,895 , reflecting share repurchases of$2.0 billion , net repayments of short-term borrowings of$539 , and dividend payments.
Total cash provided by operating activities was
OnMarch 27, 2020 , the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company deferred$73 of certain payroll taxes through the end of calendar year 2020, of which approximately$37 was paid inDecember 2021 and the remainder paid inDecember 2022 . Emerson maintains a conservative financial structure to provide the strength and flexibility necessary to achieve our strategic objectives and has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. Emerson is in a strong financial position, with total assets of$36 billion and common stockholders' equity of$11 billion , and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing its capital structure on a short- and long-term basis. 25
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FISCAL 2023 OUTLOOK
For the full year, consolidated net sales from continuing operations are expected to be up 8 to 10 percent, with underlying sales up 6.5 to 8.5 percent excluding a 2 percent unfavorable impact from foreign currency translation and an approximately 3.5 percent favorable impact from acquisitions net of divestitures. Earnings per share from continuing operations are expected to be$3.55 to$3.70 (which excludes any potential impact from the 45 percent common equity ownership in Climate Technologies' income or loss post-close), while adjusted earnings per share are expected to be$4.00 to$4.15 , excluding a$0.60 per share impact from amortization of intangibles,$0.12 per share from restructuring actions,$0.08 per share from theRussia business exit, a$0.03 per share benefit from the AspenTech Micromine purchase price hedge,$0.09 per share from interest income on the Climate Technologies note receivable, and$0.23 per share of interest income on undeployed proceeds from the Climate Technologies and InSinkErator divestitures. Earnings from discontinued operations are expected to be$10.5 billion to$11.5 billion , or$18 to$20 per share, including the net gains on 2023 divestitures. The fiscal 2023 outlook includes$2 billion returned to shareholders through share repurchases completed in the first quarter and approximately$1.2 billion of dividend payments. The Company's fiscal 2023 results from continuing operations after the Climate Technologies divestiture (assumed to closeMarch 31, 2023 for the purposes of guidance) will reflect a 45 percent common equity ownership in the income, or loss, of Climate Technologies. Emerson will not control Climate Technologies post-closing and is therefore unable to estimate the amount of its 45 percent share of Climate Technologies' post-close results. The effect of Emerson's 45 percent share of Climate Technologies is expected to be immaterial to post-closing cash flows. Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include the the Company's ability to successfully complete on the terms and conditions contemplated, and the financial impact of, the proposed Climate Technologies transaction, the potential National Instruments transaction, the scope, duration and ultimate impacts of the COVID-19 pandemic and theRussia -Ukraine conflict, as well as economic and currency conditions, market demand, including related to the pandemic and oil and gas price declines and volatility, pricing, protection of intellectual property, cybersecurity, tariffs, competitive and technological factors, inflation, among others, which are set forth in the "Risk Factors" of Part I, Item 1A, and the "Safe Harbor Statement" of Part II, Item 7, to the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2022 and in subsequent reports filed with theSEC , which are hereby incorporated by reference.
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