UPDATE 3-Emerson to sell embedded computing unit as charge hits profit

Tue Aug 6, 2013 10:05am EDT

By Lewis Krauskopf

Aug 6 (Reuters) - Emerson Electric Co reported a 75 percent drop in quarterly earnings on Tuesday, hurt by an impairment charge for its embedded computing and power business, and said it was selling a majority stake in the unit for about $300 million.

Profit and sales missed Wall Street targets. The diversified U.S. manufacturer of industrial controls, power supplies and home-storage equipment said earnings were trending toward the low end of its forecast, which it had cut in May.

Emerson shares fell 1 percent in morning trading.

Parker Hannifin Corp dropped more than 4 percent after the smaller industrial manufacturer reported quarterly earnings far below estimates.

Emerson said it would sell 51 percent of the embedded business to private equity firm Platinum Equity and retain a noncontrolling interest. The business makes a range of power conversion products, including adapters for mobile devices and computers, and embedded computer systems used by medical, defense and other industries.

"Continued weakness in the technology equipment and mobile device markets that this business serves has resulted in lower sales and earnings growth expectations," Emerson said in a statement.

The St. Louis-based company is taking a $503 million pretax goodwill impairment charge for the business, which it said was no longer a strategic fit.

Emerson also plans to increase its share buybacks by $600 million to offset earnings dilution from the deal, which it expects to close in three to six months.

The deal valuation was "unimpressive," said Mike Wood, an analyst with Macquarie Research, but "it was ultimately a good thing that they found a buyer." The business clashed with Emerson's focus on products that support large capital projects, Wood said.

"This has become a commoditized electronic product, and that's something that Emerson cannot overcome with its good execution and cost control," Wood said.

Earlier this month, Samsung Electronics supplier Audience Inc, which makes chips that improve voice quality in mobile devices, warned it faced a loss in the current quarter.

REVENUE FALLS 2.2 PERCENT

Emerson's net income fell to $194 million, or 27 cents per share, in the third quarter ended June 30, from $770 million, or $1.04 per share, a year earlier.

Excluding charges for goodwill impairment and repatriating cash from the embedded computing unit, Emerson reported earnings of 97 cents per share. That was a penny below the analysts' average estimate, according to Thomson Reuters I/B/E/S.

Revenue was off 2.2 percent to $6.34 billion, about $100 million below Wall Street's target.

U.S. sales were down 3 percent, while revenue in Europe slumped 6 percent.

"Low levels of business investment continue to reflect a cautious climate, particularly in mature markets," Chief Executive David Farr said in a statement.

The company expects fiscal-year earnings, excluding items, around the lower end of its target range of $3.48 to $3.55 per share. Analysts targeted $3.49.

Emerson forecast a rise of about 1 percent in fiscal-year sales, slightly below prior expectations.

Emerson shares were down 62 cents at $61.72 in morning trading on the New York Stock Exchange. Through Monday, the stock had risen about 18 percent this year, just below the performance of the broader U.S. market.

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