Seeking Alpha
Research analyst, valuentum
Profile| Send Message| ()  

Emerson Electric (EMR) posted another slow quarter earlier this month. Revenue declined 2% year-over-year to $6.3 billion in its third quarter (ended June), slightly below consensus expectations. Earnings per share, adjusted for one-time charges, declined 7% year-over-year to $0.97. Although headline results were relatively weak, free cash flow increased 20% year-over-year to $850 million, equal to 13% of total revenue.

On the positive side, Emerson announced it was selling 51% of its embedded computing and power business to private equity firm Platinum Equity for $300 million. The deal caused a $0.05 repatriation charge as the firm had to bring back foreign-held cash, but the big charge came from the $503 million goodwill impairment the firm took based on the valuation of the deal. While the deal certainly didn't receive a premium valuation, the embedded computing business is largely viewed as commoditized and doesn't really fit in with the broader scope of businesses at Emerson. The company will use the proceeds from the transaction, both the repatriated cash and value received for the equity stake, to repurchase additional shares.

As for the businesses that Emerson continues to own, we saw relatively weak results across the board. 'Process Management' revenue was the one "bright" spot, growing 3% year-over-year to $2.2 billion. Weak demand in the US (down 3% year-over-year) and Europe (flat year-over-year) was largely offset by an 8% sales increase in Asia. Underlying orders jumped 8% year-over-year in the segment, and order growth in China registered 13%. Management noted that order trends in North America are positive thanks to energy projects under development.

'Process Management' segment operating margins declined 160 basis points year-over-year to 21.5%, which led segment earnings to fall 4% to $470 million. This was expected as the firm had a tough comparison in the year-prior due to robust sales from the recovery of Thailand floods.

'Industrial Automation' performed poorly during the third quarter as revenue declined 7% year-over-year to $1.3 billion, driving operating income down 20% year-over-year to $206 million. Weakness occurred across the board geographically with the US down 6%, Europe down 13%, and Asia flat. Given the amount of sales deleveraging inherent in firm's 'Industrial Automation' segment, we thought Emerson did a relatively good job of containing costs. CEO David Farr provided some detail, saying on the conference call:

"Industrial automation we actually had laid it out a little bit earlier, we saw the European thing coming down quite rapidly, and so we had laid it out, in the last couple of years we've done incrementally so we got ahead of this power curve, and we got a couple of key last restructuring on Europe, and a couple of key ones on United States right before the startup here, so that's been helping us cover this."

Moving to 'Climate Technologies', again, we saw weak performance even though the broader construction market looks stronger in the US. Segment revenue declined 2% year-over-year to $1.1 billion, while operating income was roughly flat at $235 million as the firm continued to focus on cost controls. Management noted that mild weather and inventory destocking weighed on sales but sounded optimistic about the business going forward.

For fiscal year 2013, Emerson sees revenue 1% lower than the previous year, down from its previous prediction of 1.5%-2.5% revenue growth. Additionally, the firm reduced the high-end of its adjusted earnings per share forecast, cutting its overall guidance to $3.48-$3.55 (was $3.58 at the high-end). Free cash flow expectations remain steady at $2.7 billion.

Valuentum's Take

Emerson is dealing with a difficult environment, particularly because the firm is largely leveraged to global economic growth. Nevertheless, cash flow generation remains strong, and we think Emerson will continue to reward its patient shareholders with higher dividends. We continue to hold our position in the portfolio of our Dividend Growth Newsletter, but we could use it as a source of cash if we find more attractive opportunities.

Source: Pay Attention To Emerson Electric's Free Cash Flow