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Emerson (EMR) Q3 Earnings Miss on Weak Sales, View Down

Emerson Electric Co.EMR reported third-quarter fiscal 2016 adjusted earnings of 80 cents per share, lagging the Zacks Consensus Estimate of 84 cents, and reflecting a 4.8% decline from the year-ago tally.

Emerson Electric Company (EMR) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

The dismal earnings miss was attributable to challenging demand conditions in key markets, coupled with global economic uncertainty. However, restructuring benefits and solid margin improvement in the Network Power, Commercial & Residential Solutions and Climate Technologies segments somewhat boosted the bottom line.

Inside the Headlines

Net sales continued to show significant weakness, as they decreased 7% year over year to $5,126 million, and also lagged the Zacks Consensus Estimate of $5,309 million. Underlying sales growth for the quarter was negative globally, except a flat Europe, and was down 5% in aggregate. Sustained challenging macroeconomic conditions and significant decline in spending by global customers in the oil & gas and industrial markets were the primary drivers of the dismal top-line performance.

Segment-wise, Process Management 's net sales fell about 13.4% in the quarter to $1,804 million, with underlying sales slipping 13%, attributable to low order rates stemming from weak global spending in the oil and gas industry. The segment saw weakness across North America, Asia, Canada, Middle East and Latin America, with a flat Europe.

Industrial Automation reported a 10.8% decline in year-over-year net sales to $883 million, with an underlying sales decrease of 11% due to persistent weakness in industrial spending and upstream oil and gas markets. Geographically, this segment too saw an all-round weakness, with sales in North America, Asia and Middle East/Africa down significantly.

Network Power stood out as the only one with positive year-over-year sales growth, as its net sales surged 8.1% year over year to $1,111 million, with an increase of 10% in underlying sales. Strong performance in both data center and telecommunications infrastructure spending drove growth, and North America and China charted robust growth.

Net sales in Climate Technologies contracted 2% year over year to $1,102 million, with a 1% decrease in underlying sales. The segment benefited from robust demand in the U.S. air conditioning and commercial refrigeration market. North America and Europe also charted a strong growth, while Asia declined quite a bit.

Commercial & Residential Solutions ' net sales dipped 16.1% year over year to $400 million, driven largely by the divestiture of the commercial storage business. Underlying sales decreased 1% year over year, dragged by declines in the professional tools, wet/dry vacuums and storage businesses. Improving trends in the U.S. construction market bode well for the segment's outlook in the coming quarters.

Other Developments

Concurrent with the earnings release, Emerson announced agreements to sell Network Power, Leroy-Somer and Control Techniques businesses for an aggregate value of $5.2 billion. The deals are a part of the company's portfolio repositioning strategy, as it seeks to enhance focus on its core Automation Solutions and Commercial & Residential Solutions businesses. The restructuring will help Emerson leverage its growth platforms and drive profitable growth.

Liquidity & Cash Flow

Exiting the quarter, the company had cash and cash equivalents of $3.5 billion with long-term debt of $4.1 billion. Net cash provided by operating activities in the quarter rose 34.7% from the prior-year quarter to $1,924 million, driven by superior working capital management.

EMERSON ELEC CO Price and EPS Surprise

EMERSON ELEC CO Price and EPS Surprise | EMERSON ELEC CO Quote

Outlook

Emerson expects the unfavorable operating environment to continue, with oil and gas markets showing significantly depressed spending levels.

Thus, the company reiterated that it expects net sales for fiscal 2016 to decline 9% to 10% (down from previous projections of 5% to 8%). Further, Emerson projects adjusted earnings per share for fiscal 2016 to be in the range of $2.90 to $3.00 (down from previous projections of $3.05 to $3.25 per share).

Further, Emerson expects around $200 to $250 million in expenses related to the spinoff of Network Power and proposed divestitures of the Motors and Drives and Power Generation businesses. Also, the company will book a loss of about $100 million in the fourth quarter, in relation to the sale of the Leroy-Somer and Control Techniques business units. The company also expects to incur restructuring expenses of around $90 to $100 million in 2016.

To Conclude

Emerson's persisting problems continue to hurt its operations. The company expects the global market environment to remain challenging, with a strong U.S. dollar, low industrial spending and weakness in emerging and mature economies among the major concerns. Further, Emerson foresees a decrease in profitability in the near term owing to the volume deleverage stemming from weakness in underlying sales and impact of restructuring initiatives.

However, Emerson's cost cutting and restructuring initiatives are expected to benefit the company, going forward. Moreover, strong order trends in both data center and telecommunications infrastructure markets will likely support sales in the coming quarters.

Emerson currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the broader sector include Franklin Electric Co., Inc. FELE , AO Smith Corp. AOS and Proto Labs, Inc. PRLB , each carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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