Emerson (EMR) Q2 Earnings Top Estimates, Sales Fall Y/Y

Emerson Electric Co. EMR reported second-quarter fiscal 2016 adjusted earnings of 66 cents per share, which beat the Zacks Consensus Estimate of 63 cents, increasing 1.5% from the year-ago quarter tally.

The healthy beat was attributable to restructuring benefits and an improved operational performance, in the face of all-pervasive weakness and a dismal top line growth.

Inside the Headlines

Net sales continued to show weakness, as they decreased 9% year over year to $4,928 million, but beat the Zacks Consensus Estimate of $4,891 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 11% in the quarter to $1,828 million, with underlying sales slipping 9%, 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 just Kuwait standing out as a bright spot.

Industrial Automation reported a 16% decline in year-over-year net sales to $870 million, with an underlying sales decrease of 10% 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 quite significantly.

Net sales in Network Power contracted 4% year over year to $1,018 million, with a decrease of 1% in underlying sales. The segment witnessed mixed performance geographically, but recent order trends for data center infrastructure and telecommunications investments suggest improving conditions.

Climate Technologies stood out as the only one with positive year-over-year sales growth, as its net sales edged up 1% year over year in the quarter to $995 million, with a 2% increase in underlying sales. The segment benefited from a robust demand in the U.S. residential and commercial air conditioning market. North America, Latin America and Europe also charted a strong growth, while Asia declined quite a bit.

Commercial & Residential Solutions' net sales dipped 15% year over year to $394 million, driven largely by the divestiture of the commercial storage business. Underlying sales actually increased 2% year over year. Improving trends in the U.S. construction market bode well for the segment's outlook in the coming quarters.

Liquidity & Cash Flow

Exiting the quarter, the company had cash and cash equivalents of $3.3 billion with long-term debt of $4 billion. Net cash provided by operating activities in the quarter rose 29.8% over the prior-year quarter to $1,206 million, driven by superior working capital management.

Outlook

Emerson expects the unfavorable operating environment to continue, although it is seeing signs of stabilization in demand, coupled with improving order trends. Thus, the company reiterated that it expects net sales for fiscal 2016 to decline 5% to 8%. Further, Emerson projects adjusted earnings per share for fiscal 2016 to be in the range of $3.05 to $3.25.

For the third quarter of fiscal 2016, the company expects adjusted earnings per share to come in at about 85 cents, while revenues are expected to decline around 2% year over year.

Further, Emerson expects around $250 to $350 million in expenses related to the spinoff of Network Power and proposed divestitures of the Motors and Drives and Power Generation businesses.The company also expects to incur restructuring expenses of around $70 to $80 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, robust margins and remarkable cash flow improvement in the reported quarter were huge positives. Also, Emerson's cost cutting and restructuring initiatives are expected to benefit the company, going forward. Moreover, the company is seeing positive order trends, which will support sales in the coming quarters.

Emerson currently has a Zacks Rank #2 (Buy). Other stocks in the electrical machinery space include Franklin Electric Co., Inc. FELE, SPX FLOW, Inc. FLOW and Eaton Corporation plc ETN, each carrying the same rank as Emerson.

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