Emerson Reports Third Quarter 2016 Results

  • Reached agreements to sell Network Power, Leroy-Somer and Control Techniques 
  • Quarterly net sales of $5.1 billion decreased 7 percent, with underlying sales down 5 percent 
  • Reported earnings per share decreased 12 percent to $0.74. 
  • Adjusted earnings per share decreased 5 percent to $0.80 excluding ($0.06) for separation costs 
  • Improved cost structure resulting from restructuring actions supported the generation of $718 million of operating cash flow

ST. LOUIS, August 2, 2016 – Emerson (NYSE: EMR) today announced net sales in the third quarter ended June 30, 2016 were down 7 percent, with underlying sales down 5 percent excluding unfavorable currency translation and an impact from a divestiture, net of acquisitions of 1 percent each. The Company's third quarter results reflect the continuation of challenging demand conditions in our key served markets in addition to an environment of global economic uncertainty. Sales were down in all segments except Network Power, which was up 8 percent on the strength of both data center and telecommunications infrastructure spending. Emerson underlying sales were negative in all regions, except Europe which was flat. Our expectation coming into the quarter for improvement in our core North American automation businesses did not materialize as anticipated.

Despite lower than expected sales in the quarter, EBIT margin increased 20 basis points versus the prior year driven by the benefits from restructuring actions and solid margin improvement in the Network Power, Commercial & Residential Solutions and Climate Technologies segments. Pretax earnings margin was flat at 14.5 percent. Total segment margin was up 50 basis points to 16.0 percent. Adjusted earnings per share of $0.80, excluding separation costs of ($0.06) decreased 5 percent versus the prior year. Reported earnings per share were $0.74. Operating cash flow of $718 million increased 44 percent versus the prior year.

"Our businesses executed in a quarter characterized by unpredictable economic conditions, especially in the North American oil and gas markets," said Chairman and Chief Executive Officer David N. Farr. "Operational execution as well as the benefits from our restructuring activities resulted in improved margins in three of our five segments in the quarter, two of which were achieved despite lower volumes. And while the overall results were below expectations, I am extremely proud of our employees across all of our businesses who are driving Emerson forward and undertaking significant business repositioning actions in this difficult environment."

"This morning we announced agreements for the sales of our Network Power, Leroy-Somer and Control Techniques businesses for a combined value of $5.2 billion," Farr continued. "These agreements represent a significant step forward in the overall portfolio repositioning strategy we announced last year in June. Management and the Board will continue to focus on where best to allocate the proceeds to bolster our presence within our core Automation Solutions and Commercial & Residential Solutions business platforms in order to drive growth, profitability and shareholder value."

Business Segment Highlights

Process Management net sales decreased 13 percent. Underlying sales were down 13 percent excluding unfavorable currency translation of 1 percent and an impact from acquisitions of 1 percent. Spending in the energy sector remains at depressed levels as customers evaluate the stability of current oil and gas prices. Underlying sales in North America were down 14 percent, with the U.S. down 10 percent. While seasonal MRO activity has increased in some areas, overall spending levels remain well below expectations and reflected a significant slowdown in June. Europe was flat as growth was mixed across the region, with power and life sciences markets providing support. In other regions, Asia was down 16 percent, Middle East/Africa was down 21 percent and Latin America was down 14 percent. Segment margin decreased 290 basis points to 15.0 percent, primarily due to a sharp volume reduction and the resulting deleverage, partially offset by savings from restructuring actions. Fourth quarter sales growth is expected to be negative, in line with third quarter results, as oil and gas markets, particularly North America, are expected to remain challenging into fiscal 2017.

Industrial Automation net sales were down 11 percent, while underlying sales were also down 11 percent. Segment results continue to reflect weakness in general industrial spending and upstream oil and gas. Underlying sales were down in all regions except Europe, which was up 1 percent. All businesses were down, except for the drives business which continues to reflect solid growth in wind projects. Segment margin was down 110 basis points to 14.7 percent. Volume deleverage and negative price were the main drivers of the decline, partially offset by savings from restructuring actions and materials cost containment. Mixed demand forecasts among the businesses are expected to result in improved levels of sales growth and profitability in the fourth quarter.

Network Power net sales increased 8 percent, with underlying sales up 10 percent as currency translation deducted 2 percent. Strong order trends in both data center and telecommunications infrastructure markets translated into positive growth in the quarter. Underlying sales in North America were up 16 percent reflecting strong growth in telecommunications power systems. Europe was down 6 percent as generally favorable conditions in western mature markets were offset by difficult prior year comparisons, which benefited from large project revenue. Asia was up 13 percent as strong growth in China, up 26 percent, was partially offset by mixed growth across the rest of the region. Segment margin improved 550 basis points to 9.1 percent, driven by volume leverage and savings from restructuring actions. Benefits from restructuring actions and new product programs support the expectation of continued margin improvement in the fourth quarter.

Climate Technologies net sales decreased 2 percent, with underlying sales down 1 percent as currency translation deducted 1 percent. Underlying sales in North America were up 2 percent, with both U.S. air conditioning and commercial refrigeration growing low single digits. Europe was up 4 percent reflecting growth in both the air conditioning and refrigeration businesses. Asia decreased 11 percent, reflecting weak demand conditions across the region. Segment margin increased 270 basis points to 22.4 percent, primarily due to savings from restructuring actions and materials cost containment, partially offset by lower pricing. The near-term outlook for global demand in air conditioning and refrigeration supports the expectation for modest sales growth in the fourth quarter and establishes a solid pace of business for the start of fiscal 2017.

Commercial & Residential Solutions net sales decreased 16 percent, with underlying sales down 1 percent as the prior year divestiture of the commercial storage business deducted 15 percent. Growth in food waste disposers was more than offset by declines in the professional tools, wet/dry vacuums and storage businesses. Segment margin increased 380 basis points to 24.4 percent, reflecting materials cost containment and savings from restructuring actions as well as the impact of the divestiture. Favorable conditions in U.S. construction markets are expected to support the outlook for modest levels of underlying growth in the fourth quarter and a better start to fiscal 2017.

2016 Outlook

The third quarter results continued to reflect the low growth global environment facing our businesses today. Oil and gas served markets in particular have remained at significantly depressed spending levels with no expectation for recovery to occur until the second half of 2017. The second and third quarter improvement in order rates that the Company had expected at our February investor conference did not materialize. Based on recent trends, it appears that underlying orders and sales have bottomed in a range of negative 4.5 to 5 percent. Considering these tough market conditions, the Company now expects fiscal year 2016 underlying sales to be down 5 to 6 percent excluding negative currency translation and an impact from completed divestitures of approximately 2 percent each. Reported sales are expected to be down 9 to 10 percent. Fiscal year guidance for reported earnings per share is now expected to be $2.37 to $2.55. Adjusted earnings per share has been revised to $2.90 to $3.00, which excludes our current estimate of separation costs of $200 to $250 million related to the Company's portfolio repositioning activities and a loss of approximately $100 million expected to be recognized in the fourth quarter related to the agreement to sell our Leroy-Somer and Control Techniques business units. The revision to earnings per share takes into account the previously communicated increase to restructuring spending, which is now expected to be $90 to $100 million for the fiscal year. The Company also expects to spend an additional $50 to $60 million in fiscal 2017.

"We continue to operate in a market defined by a heightened level of uncertainty due to economic and political conditions around the world, making the efficient execution of our strategic plans even more critical," said Farr. "With the majority of our restructuring programs complete, we remain keenly focused on the completion of our outstanding initiatives for 2016 while continuing to face these challenges head-on. The progress we've made on the restructuring programs and the strategic portfolio repositioning is further proof of Emerson's ability to remake itself in order to meet the evolving needs of our customers and to drive profitability and growth across our businesses."

Upcoming Investor Events
Today at 2:00 p.m. ET, Emerson management will discuss the third quarter results during a conference call. Access to a live webcast of the discussion will be available at www.emerson.com/financial at the time of the call. A replay of the conference call will remain available for approximately three months.

Forward-Looking and Cautionary Statements
Statements in this press release that are not strictly historical may be “forward-looking” statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include the Company's ability to successfully complete on the terms and conditions contemplated, and the financial impact of, its strategic repositioning actions, as well as economic and currency conditions, market demand, pricing, protection of intellectual property, and competitive and technological factors, among others, as set forth in the Company's most recent Annual Report on Form 10-K and subsequent reports filed with the SEC. The outlook contained herein represents the Company's expectations for its consolidated results, including the expected full year results for the businesses that are the subject of the portfolio repositioning actions, and does not include any gains or losses related to the ultimate disposition of these businesses, except as otherwise set forth herein.

View Q3 2016 Financial Tables

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