Emerson Electric Company (EMR) reported third-quarter fiscal 2014 results, ended Jun 30, 2014. Excluding one-time items, earnings for the quarter came in at $1.03 per share compared with 97 cents per share in the year-ago period. Also, quarterly earnings were below the Zacks Consensus Estimate of $1.06.
Despite several macroeconomic headwinds, year-over-year profits benefited from accelerated growth conditions in emerging markets.
Revenues
Total revenue was down a marginal 1% year over year to $6.3 billion. However, organic sales in the quarter increased 3% despite a negative 5% impact from the Artesyn divestiture, which was again partially offset by a favorable 1% impact from an acquisition. The upside in organic sales can be attributed to improved business conditions. Geographically, revenues in the U.S. and Europe grew 4% each and in Asia rose 3%.
Nevertheless, orders increased 5% reflecting stronger market conditions, particularly toward the end of the quarter. However, revenues fell short of the Zacks Consensus Estimate of $6.5 billion.
Segment Results
Net sales at the Process Management segment grew 6% while underlying sales increased by 2%. The revenue growth was primarily driven by mixed market conditions across regions and cautious execution of projects by customers.
Further, acquisitions contributed 4%. Revenues in North America grew 7% as unconventional oil and gas projects remained robust while the same in Europe increased 5% led by strong growth across developing countries. Asia revenues deteriorated 2% owing to softness and difficult comparisons in Australia which hurt continued strength in China.
The Industrial Automation segment reported a 1% increase in revenues while organic sales were flat year over year. On a geographic basis, North America reported flat revenues while sales in Asia was up 3% and down 5% in Europe in the quarter.
Demand for industrial goods is recovering steadily, with underlying orders up 4% in the quarter, albeit trends across markets and geographies were mixed. However, the company reported strong growth in the fluid automation, electrical distribution and materials joining businesses, offset by declines in power generating alternators and motors and drives, with Europe especially weak
Network Power revenues contracted 18% despite a 2% increase in underlying sales. Revenues were lowered by a 20% reduction in sales owing to the Artesyn sale. Organic sales improved 2% in the U.S., 10% in Europe and 6% in Asia. Strong growth in the global telecommunications infrastructure business driven by double-digit gains in Asia was offset by flat Data center market conditions. This was because strength in Europe and Asia was marred by soft demand in North America and weakness in Latin America.
Climate Technologies reported net and underlying sales increase of 6%, as the segment reported balanced growth across all geographies, with North America up 4%, Asia up 9% and Europe up 9%. Further, the global refrigeration business posted double-digit growth as market conditions in China and Europe were strong.
On the other hand, the segment witnessed moderate growth in the U.S. air conditioning business and strong demand in the service business, mid-single-digit growth in residential markets and low-single-digit growth in commercial business. Moreover, Emerson Electric continued to gain traction in the temperature sensors business in China.
Net and underlying revenues in the Commercial & Residential Solutionssegment grew 4%, driven by sequential improvement in demand reflecting the impact of a harsh winter in North America in the previous quarter. The upside in revenues was also supported by strength in the professional tools and residential storage businesses.
Margins
In the third quarter of fiscal 2014, gross profit margin contracted 132 basis points (bps) to 40.5%, owing to portfolio changes and cost-containment efforts. Operating income for the quarter declined 52.3% to $511 million.
Balance Sheet & Cash Flow
Exiting the quarter, the company had cash and cash equivalents of $2.8 billion with a long-term debt of $4.1 billion. Net cash from operating activities were $2.2 million compared with $2.3 million during the prior-year quarter.
Outlook
Along with the earnings release, Emerson Electric has reaffirmed its outlook for fiscal 2014. The company continues to expect earnings per share in the range $3.68−$3.80. Underlying sales are likely to grow in the range of 3−5% while net sales can span anywhere between a decline of 1% to an increase of 1% given the impact of acquisitions, divestitures and currency translation.
Meanwhile, the company expects orders in the fourth quarter to register moderate growth, given the ongoing macroeconomic uncertainties.
Emerson currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include China Merchants (CMHHY), CLARCOR Inc. (CLC) and Federal Signal Corp. (FSS). All three carry a Zacks Rank #2 (Buy).
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