Why did GAAP earnings fall sharply even though adjusted EPS rose 11%?

GAAP EPS from continuing operations fell to $0.60 from $1.12 mainly because of a $279M pretax ($217M after-tax) loss on the sale of the Copeland note receivable, which is excluded from adjusted EPS. Amortization of intangibles also rose to $313M from $169M, largely due to acquisitions, and restructuring costs increased to $60M. Adjusted EPS strips out these items to show the underlying operating performance.

How much of the reported sales growth is organic?

Very little. Reported net sales grew 11%, but underlying sales grew only 3%. Acquisitions contributed about 9 points, with the NI acquisition in Test & Measurement the main driver, and currency added about 1 point. Full-year guidance shows the same pattern: roughly 15% reported growth versus about 6% underlying growth.

What is the financial impact of exiting Copeland, and what will the proceeds be used for?

Emerson sold the Copeland note receivable for $1.9B pretax cash (completed August 2, 2024) and expects to sell its 40% equity stake to Blackstone-managed funds for $1.5B pretax by the end of August. About $2.9B in after-tax proceeds will be used to pay down existing debt. Both transactions are expected to generate a net pretax gain of about $0.2B. Copeland equity results will be reported as discontinued operations, which will make future continuing-operations results more focused on automation.

Is the company's underlying demand healthy?

Demand is steady rather than accelerating. Underlying orders grew 3% in the quarter, and management described demand in process and hybrid markets, supported by a constructive capital expenditure cycle, as meeting expectations. Intelligent Devices underlying sales grew 2%, Software and Control grew 7% (AspenTech 7%, Control Systems & Software 7%), and Discrete Automation declined 6%, so the segment mix is uneven.

What should investors watch going forward?

Key items include whether the Copeland proceeds are fully applied to debt reduction and the timing of the Blackstone equity sale closing by end of August; the ongoing integration of NI and its contribution to Test & Measurement; whether underlying growth can reach the approximately 6% full-year guidance; and cash conversion, since guidance calls for about $2.8B of free cash flow for 2024. Given the heavy amortization burden from acquisitions, adjusted EPS and free cash flow are better guides to operating performance than GAAP EPS.

EMR 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed August 7, 2024. Cited figures are marked; the original filing is the authoritative source.

Emerson Electric (NYSE: EMR) reported fiscal Q3 2024 results (quarter ended June 30, 2024) that were mixed on the headline but solid on the operating metrics that matter most for the core business.

Reported net sales rose 11% to $4,380M^a, with underlying sales up 3% and underlying orders up 3%. Adjusted segment EBITA margin expanded 20 bps to 27.1%, and adjusted EPS grew 11% to $1.43, both ahead of management's expectations. Free cash flow increased 27% to $975M, and management reaffirmed a strong operating profile led by Measurement & Analytical, Control Systems & Software, and AspenTech.

The quarter's GAAP picture was distorted by a $279M^b pretax loss on the Copeland note receivable, a surge in intangibles amortization ($313M versus $169M a year earlier, largely from the NI acquisition), and higher restructuring costs, which pushed GAAP EPS from continuing operations down 46% to $0.60. The bigger strategic event is Emerson's decision to completely exit its Copeland joint venture. The Copeland note receivable was sold on August 2, 2024 for $1.9B in pretax cash, and the sale of the 40% equity stake to Blackstone-managed funds ($1.5B pretax) is expected to close by the end of August.

Together, the roughly $2.9B^c of after-tax proceeds is earmarked for debt paydown, and both transactions are expected to produce a net pretax gain of about $0.2B. Copeland equity results will be reported as discontinued operations beginning in Q3 2024, which simplifies the go-forward profile toward automation. Management also raised its full-year reported net sales growth outlook to roughly 15% (reflecting the NI and Test & Measurement acquisitions) and guided adjusted EPS to $5.45-$5.50, with free cash flow of about $2.8B.

Investors should note that underlying sales growth guidance is only about 6%^d, and that a large share of reported growth comes from acquisitions rather than organic demand. Overall, the filing shows an operating business improving its margins and cash generation while management executes a balance-sheet-strengthening portfolio simplification. Near-term GAAP earnings will remain noisy because of acquisition amortization, restructuring, and one-time Copeland items, so investors should focus on adjusted EBITA, underlying orders, and free cash flow trends.

02—Key points

Key Highlights

Net sales rose 11% to $4,380M, but underlying sales growth was only 3%; the gap reflects acquisitions, principally the NI (National Instruments) acquisition now in Test & Measurement, and currency.
Adjusted segment EBITA grew to $1,189M with margin up 20 bps to 27.1%; adjusted EPS increased 11% to $1.43, ahead of expectations.
GAAP EPS from continuing operations fell 46% to $0.60 due to a $279M pretax loss on the Copeland note receivable, amortization of intangibles rising to $313M, and higher restructuring costs of $60M.
Free cash flow increased 27% to $975M, and operating cash flow rose to $1,067M; nine-month operating cash flow was $2,248M.
Copeland exit: the $1.9B pretax note sale closed August 2, 2024, and the $1.5B pretax sale of the 40% equity stake is expected to close by end of August; about $2.9B of after-tax proceeds will be used to pay down debt, with a net pretax gain of roughly $0.2B expected.
FY2024 guidance updated: adjusted EPS of $5.45-$5.50, operating cash flow of about $3.2B, free cash flow of about $2.8B, and underlying sales growth of about 6% versus reported net sales growth of about 15%.
Quarterly dividend declared at $0.525 per share, payable September 10, 2024, with ~$1.2B of dividends and ~$300M of buybacks planned for the year.

03—Questions

Frequently Asked Questions

Why did GAAP earnings fall sharply even though adjusted EPS rose 11%?
GAAP EPS from continuing operations fell to $0.60 from $1.12 mainly because of a $279M pretax ($217M after-tax) loss on the sale of the Copeland note receivable, which is excluded from adjusted EPS. Amortization of intangibles also rose to $313M from $169M, largely due to acquisitions, and restructuring costs increased to $60M. Adjusted EPS strips out these items to show the underlying operating performance.
How much of the reported sales growth is organic?
Very little. Reported net sales grew 11%, but underlying sales grew only 3%. Acquisitions contributed about 9 points, with the NI acquisition in Test & Measurement the main driver, and currency added about 1 point. Full-year guidance shows the same pattern: roughly 15% reported growth versus about 6% underlying growth.
What is the financial impact of exiting Copeland, and what will the proceeds be used for?
Emerson sold the Copeland note receivable for $1.9B pretax cash (completed August 2, 2024) and expects to sell its 40% equity stake to Blackstone-managed funds for $1.5B pretax by the end of August. About $2.9B in after-tax proceeds will be used to pay down existing debt. Both transactions are expected to generate a net pretax gain of about $0.2B. Copeland equity results will be reported as discontinued operations, which will make future continuing-operations results more focused on automation.
Is the company's underlying demand healthy?
Demand is steady rather than accelerating. Underlying orders grew 3% in the quarter, and management described demand in process and hybrid markets, supported by a constructive capital expenditure cycle, as meeting expectations. Intelligent Devices underlying sales grew 2%, Software and Control grew 7% (AspenTech 7%, Control Systems & Software 7%), and Discrete Automation declined 6%, so the segment mix is uneven.
What should investors watch going forward?
Key items include whether the Copeland proceeds are fully applied to debt reduction and the timing of the Blackstone equity sale closing by end of August; the ongoing integration of NI and its contribution to Test & Measurement; whether underlying growth can reach the approximately 6% full-year guidance; and cash conversion, since guidance calls for about $2.8B of free cash flow for 2024. Given the heavy amortization burden from acquisitions, adjusted EPS and free cash flow are better guides to operating performance than GAAP EPS.

04—Continue

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