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Key Contributors to Emerson Electric’s Improving Margins in Q3

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Aug. 5 2016, Updated 8:05 a.m. ET

Contributors to Emerson Electric’s 3Q16 margin expansion

Emerson’s (EMR) operating margins expanded by 20 basis points YoY (year-over-year) to 13.9% in 3Q16. This was due to an improvement in gross profit margins of 20 basis points. Restructuring actions undertaken last year offset the impact of volume deleveraging. The company maintained its margins despite lower volumes and sales.

Consolidated business segment margins rose by 50 basis points to 16%, led by a margin expansion in the Network Power, Climate Technologies, and Commercial and Residential segments.

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Emerson’s segment margins

The Network Power segment benefited the most from restructuring actions. Its segment margins expanded by 550 basis points to 9.1% in 3Q16. The segment contributed 21% to total sales and 11.9% to total segment profits in 3Q16. Emerson has announced that it has sold this segment to Platinum Equity for $4 billion. We’ll take a closer look at that in a later part of this series.

In the Commercial and Residential Solutions segment, benefits from restructuring actions, divestiture of the lower margin commercial storage business, and material cost containment led to a 380-basis-point improvement in segment margins to 24.4%. The segment generated 7.5% of the company’s total sales in 3Q16. It generated 11.5% of total segment profits due to its high margins. In 2015, Emerson divested its low-margin Commercial Storage business, InterMetro, within the segment.

In the Climate Technologies segment, which houses the air conditioning business, segment margins expanded by 270 basis points to 22.4% on material cost containment and efficiency gains from restructuring.

Key ETFs

Investors interested in trading in the industrial space could look into the Guggenheim S&P 500 Equal Weight Industrials ETF (RGI). Those interested in trading in dividend-based ETFs could consider the ProShares S&P 500 Dividend Aristocrats (NOBL). Major holdings in NOBL are AT&T (T) and Sysco (SYY), each with weights of 2.2%.

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