Emerson Electric Company
) released its second quarter 2012 earnings results, reporting
earnings per share from continuing operations of 74 cents, which
was below the Zacks Consensus Estimate of 81 cents. Earnings for
the quarter were almost flat year over year, increasing 1%. Profits
continue to be impacted by damage caused by Thailand floods.
Total revenue was $5.9 billion, up just 1% year over year.
Underlying sales also increased only marginally by 2% (which
included an unfavorable currency impact of 1%) with U.S. sales up
3%, Asia up 2% and Europe down 4%.
Weak economic conditions in Europe and China and continued
weakness in HVAC, telecommunications, and information technology
end markets contributed to the overall slow growth of the top line.
However, this was partially offset by revival of the supply chain
disrupted by Thailand flooding, coupled with robust global oil and
gas investment that drove a strong recovery in Process Management
compared to the first quarter of 2012.
segment reported sales decline of 2% primarily due to unstable
demand of capital goods across its end markets. Underlying sales
also contracted 1% and unfavorable currency translation was 1%,
with U.S. down 1%, Asia down 1% while revenues from Europe were
flat year over year.
Sales were flat in the U.S., due to weakness in the hermetic
motors business driven by a sharp decline in compressor demand.
Further, strong growth in the electrical distribution and
ultrasonic welding businesses was offset by softness in the
electrical drives and fluid automation businesses, as well as by
continued challenges in the solar and wind energy industries.
Sales in the
segment declined 4%, primarily attributable to mixed results across
its businesses. Underlying sales also decreased 3%, with the U.S.
contracting 4% and Europe down 13%, while Asia was up 3%.
Demand in the embedded computing and power business also
declined substantially, as global customers were significantly
affected by Thailand flooding, telecommunications and information
technology end markets reflected broad weakness, and product line
rationalization. Moreover, sales in the global uninterruptible
power supply and precision cooling business grew slightly, as
robust growth in the U.S. and solid growth in Asia was fully offset
by weakness in Europe and Latin America.
Revenue in the
segment increased 13% year over year driven by strong global oil
and gas investment. Further, strong chemical industry end markets,
continued to drive demand for its business.
Underlying sales increased 14% and currency translation reduced
revenue by 1%, with the U.S. up 24%, Asia up 10% and Europe up
4%. Strong results were accomplished despite increased
costs and other lingering effects from the supply chain disruption
that are almost nearing complete recovery, which are expected to be
complete by the end of fiscal 2012.
Even with the supply chain restoration, backlog continued to
increase as underlying orders grew 18%, excluding unfavorable
currency of 4%. Emerson's Process Management division is
poised for an exceptionally strong second half of 2012 and first
half of 2013, as backlog conversion and the restored supply chain
are expected to drive robust sales growth and operational
sales declined 9% during the quarter, due to global HVAC industry
weakness. Underlying sales also decreased 9%, with the U.S. down
11%, Europe down 12% and Asia declining 9%. U.S. and China
residential air conditioning end-market weakness was due to channel
inventory reductions, while European markets were a challenge
because of the economic headwind in the region.
China residential and light commercial construction has weakened
in the last five months, as the government has curtailed
investments to restrain inflation. However, the segment witnessed
strong growth in its transport refrigeration business.
Operating cash flow for the second quarter declined 25% year
over year to $562 million, due to decline in earnings and higher
investment in working capital related to sales timing, supply chain
disruption in Process Management. The company had a long term
debt of $4.3 billion with a debt to capitalization ratio of 28.7%
compared to a ratio od 30% in the previous quarter.
Although, Emerson is optimistic about its outlook for 2012, the
company had a tough start to the year. The positive outlook is
based on the company's strong fundamentals in the industrial
businesses and management expectations for improvement in
telecommunications and HVAC end markets and recovery from the
Thailand flooding disruptions. Further, the strengthening business
in the Process Management division is also a major driving
However, these partially offset by the impact of deterioration
in the European economy and mixed global economic indicators.
Therefore, the company has lowered its outlook for fiscal 2012.
Emerson now expects Underlying sales and orders growth of 3% to 5%
compared to 4% to 6%, while reiterated its sales growth in the
range of 2% to 4%. The operating profit margin is expected to be in
the range of 17.5% to 17.8% compared to 18% while pretax margin is
expected to be in the range of 15.0% to 15.3% compared to 15.5%
For fiscal 2012, earnings are expected to be in the range of
$3.35 to $3.50 compared to $3.45 to $3.60 a share, mentioned
earlier. Operating cash flow for 2012 is now expected to be in the
range of $3.4 billion to $3.5 billion while capital expenditures
are reiterated at $700 million.
Emerson currently holds a Zacks Rank #3 which implies a
short-term Hold rating on the stock.
EMERSON ELEC CO (EMR): Free Stock Analysis
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