Earnings Miss at Emerson in 2Q


Emerson Electric Company (EMR) reported second-quarter 2013 results with earnings per share of 77 cents a share falling a penny shy of the Zacks Consensus Estimate. However, earnings improved 4% year over year. Despite a sluggish economy, underlying growth in the emerging markets was strong during the quarter.  

Total Revenue

Total revenue in the quarter was up 1% year over year to $5.9 billion. Organic growth during the quarter was 2% as unfavorable currency translation and divestitures together reduced 1%, with the U.S. increasing 1%, Asia up 2% but Europe down 3%. Top line was impacted by mixed results across the end markets and geographies.

In addition, slow economic growth due to stalled business investment, particularly in mature markets, further affected the top line. Revenues were below the Zacks Consensus Estimate of $6.0 billion.

Segment Results

Process Management sales surged 8%, as global oil and gas, chemical and power industry investment delivered strong results. Underlying sales for the segment grew 9%, (with currency translation impacting 1%) due to 10% growth in the systems and solutions business.

On a geographical basis, the segment generated 14% growth in Asia, benefiting from strong project activity in Australia. Further, investment in the North Sea region and Russia generated 7% growth in Europe. However, revenue from the US declined 1%, as higher natural gas inventories contributed to slower investment.

The Industrial Automation segment reported revenues and underlying sales decline of 6%, with the U.S. down 1%, Europe down 15% and Asia down 3%, as end markets for global capital goods were weak. The power generating alternators and industrial motors and electrical drives businesses were particularly weak, which was partially offset by strength in the hermetic motors business which was driven by HVAC compressor demand.

Network Power revenues as well as underlying sales contracted 5%, with U.S. organic sales down 2%, Asia down 6% and Europe down 3%. In addition, continued weakness in information technology and telecommunications end markets also led to the decline in the top line. The computing and power business also declined double-digits, reflecting weak and unstable demand for technology equipment and mobile devices.

Furthermore, underlying sales declined marginally in the network power systems business, as global investment in data center and telecommunications infrastructure remained low, especially in Europe.

Both revenues and organic revenues in the Climate Technologies division grew 7%, driven by strong demand in the residential air conditioning markets. Geographically, the U.S. and Europe organic sales expanded 8% while Asia grew 4%. The U.S. residential air conditioning business was particularly strong with 23% growth, primarily due to improving residential construction and easier comparisons.

However, commercial air conditioning and refrigeration demand remained weak, with particular weakness in the transportation business.

Revenues in the Commercial & Residential Solutions segment contracted 4%, attributable to a 6% deduction from the Knaack business divestiture. Organic sales inched up 2%, due to a 5% increase in the US, led by the residential storage business.

Income and Expenses

Earnings before taxes for the quarter grew 2.1% to $831 million compared with $814 million in the prior-year quarter. Selling and general cost $1.43 billion compared with $1.36 billion in the prior-year quarter.

EBIT margin during the quarter improved 20 basis points to 14.9%, benefiting primarily from cost containment measures.

Balance Sheet

Exiting the quarter, the company had cash and cash equivalents of $2.6 billion with a long-term debt of $4.1 billion and debt-to-capitalization ratio of 28%. Net cash from operating activities during the quarter were $1.2 billion compared with $896 million a year ago, due to efficient working capital management.  


Concurrent with the earnings release, the company lowered its guidance for fiscal 2013, given the sluggish economic growth. Further, the order trend also had no sign improvement in the previous quarter.

Therefore, Emerson expects earnings to be in the range of $3.48 to $3.58 a share, compared with $3.53 to $3.63 mentioned earlier.

Both revenues and underlying sales growth is now expected to be in the range of 1.5% to 2.5%, with EBIT and pre-tax margin projected to be flat year over year.

Emerson currently has a Zacks Rank # 3 (Hold). However, other companies that can be considered at the moment are Crane Co. (CR), Honeywell International Inc. (HON) and Raven Industries Inc. (RAVN), all having Zacks Rank #2 (Buy). 

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