Emerson Electric NYSE: EMR reported second-quarter fiscal 2026 results that executives said reflected resilient demand and strong profitability, even as operations in the Middle East were disrupted by a regional conflict that weighed on sales. Management also updated full-year guidance to incorporate the impact of the disruption while raising the bottom and midpoint of its adjusted earnings outlook.
Quarterly performance and updated outlook
President and CEO Lal Karsanbhai said underlying orders grew 5% in the quarter, led by Software & Systems, while underlying sales rose 0.5%, coming in “below expectations due to a 1 point impact from the Middle East conflict.” He highlighted continued strength in Test & Measurement, which increased 12% year over year, and said the Ovation business was up “mid-teens” on power-related demand. Adjusted segment EBITDA margin was 27.6%, which he said exceeded expectations, and adjusted EPS came in at $1.54 near the top end of guidance.
CFO Mike Baughman added that the quarter’s results were also affected by what he called a “software contract renewal dynamic” that impacted second-quarter sales growth by about 2 percentage points, adjusted segment EBITDA margin expansion by 90 basis points, and earnings per share growth by $0.09. Excluding those headwinds and the Middle East disruption, he said underlying sales growth would have been about 3%.
For the full year, Karsanbhai said the company now expects sales growth of 4.5% with underlying growth of 3%, reflecting the Middle East impact. Emerson reaffirmed expectations for adjusted segment EBITDA margin of approximately 28% and raised the adjusted EPS range to $6.45 to $6.55. Baughman said free cash flow is expected to be $3.5 billion to $3.6 billion, with the company still planning to return about $2.2 billion to shareholders through $1.2 billion in dividends and $1 billion of share repurchases. Karsanbhai said Emerson completed $542 million of share repurchases in the first half.
For the third quarter, Baughman guided to sales growth of about 5.5% and underlying sales growth of about 5%, with adjusted segment EBITDA margin around 28% and adjusted EPS of $1.65 to $1.70.
Demand trends: growth verticals, regions, and China
Management repeatedly pointed to “growth verticals” as a key driver. Karsanbhai said Software & Systems orders grew 18% year over year, with Test & Measurement and control systems and software both up 18%. He also cited robust power investment, noting Ovation orders rose 41% and annual contract value (ACV) in AspenTech’s Digital Grid Management suite increased 31%. The company’s project funnel grew to $11.2 billion, driven by new opportunities in power, and Emerson “won approximately $450 million from our project funnel in the quarter,” with 85% tied to growth verticals led by power, life sciences and LNG.
On regional performance, Baughman said underlying sales in the Americas rose 5%, including 9% growth in the U.S., which he said is now expected to grow at a high single-digit rate for the year. Europe declined 4%, which he described as “soft,” while the Middle East and Africa fell 5% due to conflict-driven customer curtailments. He said China has been “slower than expected,” and Emerson now expects China to be down mid-single digits for the year.
In the Q&A, Karsanbhai attributed China weakness to the company’s exposure to the chemical industry, calling the sector “over-capacitized and very weak in terms of spend.”
Middle East conflict: disruption, recovery actions, and rebuild opportunity
Karsanbhai said the Middle East represents a $1.2 billion business for Emerson, about 7% of sales, with an $8.5 billion installed base and more than 1,400 employees in the region. He said the conflict drove a 1 point impact to underlying sales in the quarter, as Emerson temporarily shut down manufacturing to protect employees and field service engineers operated at less than 50% of pre-conflict levels in March.
He also described logistics challenges related to the closure of the Strait of Hormuz, which restricted the company’s ability to import components for instruments and valves. Karsanbhai said 47 customer sites were identified as having been damaged “in some capacity,” contributing to a slowdown in MRO and project activity, though he said activity improved in April.
Looking ahead, Karsanbhai said Emerson expects the conflict to reduce full-year fiscal 2026 underlying sales by 1 point. He said customer sites were largely operational by mid-April but running at about 75% capacity due to constrained ability to move product, and Emerson’s field service engineers were operating at 80% of pre-conflict levels. He estimated a “future rebuild and restart opportunity of approximately $100 million” that would unfold over several quarters, while noting freight expenses have increased but the cost impact is “manageable.”
In response to analyst questions, Baughman said the disruption was about $50 million in the quarter and that Emerson expects roughly another $100 million of disruption in the back half of the year, describing the situation as uncertain. He added that management does not view the revenues as permanently lost over the long term and said there “should be opportunity” as rebuild and restart activity plays out, which he estimated could take six quarters.
When asked about potential for a larger rebuild opportunity tied to LNG capacity coming back online, Baughman said Emerson has not scoped that and is only quantifying near-term lifecycle services tied to damage at the 47 impacted sites.
Business group results and margin drivers
Baughman said price contributed 3.5 points to growth in the quarter, and MRO represented 65% of sales. Backlog ended the quarter at $8.2 billion, up 9% year over year, with a book-to-bill of 1.07. He attributed margin performance to price/cost and cost reductions that more than offset inflation, plus favorable segment and geographic mix.
- Software & Systems: Underlying sales growth of 1%, with a 4.5% sales headwind from the software contract renewal dynamic. Test & Measurement was up 12%. Segment margin was 29.2%, down 250 basis points year over year, which Baughman said included a 300-basis-point drag from the renewal dynamic.
- Intelligent Devices: Underlying sales down 1%, including a 2-point impact from the Middle East conflict. Segment margin rose 80 basis points to 27.9% on “strong price cost and cost reductions,” according to Baughman.
- Safety & Productivity: Underlying sales up 2%, driven by electrical products and stable project activity in North America, with soft Europe. Margin was 21.7%, down 10 basis points, with lower volume offset by price and cost reduction.
On guidance by group, Baughman said Emerson increased full-year expectations for Software & Systems to up 5% and raised Test & Measurement expectations to low-teens growth for the full year, up from prior expectations of high single digits. He said Emerson still expects ACV growth of 10%+ in 2026.
AI and software positioning, plus governance update
Karsanbhai addressed broader software-market concerns around AI, arguing Emerson’s industrial software is built on “decades of deep domain expertise” in regulated, mission-critical applications. He cited a recent deployment of an AI-driven optimization solution for Aramco that integrated Aspen Hybrid Models into refinery planning to create “one of the world’s largest multi-site optimization models.”
During Q&A, COO Ram Krishnan said customer interest in AI capabilities across NI, Ovation, DeltaV, and AspenTech is strong, but he called it “a little early” for AI to translate into “meaningful revenue opportunities” today, adding that the impact could be more significant in 2027 and beyond.
Separately, Karsanbhai announced a board update: Jennifer Newstead, senior vice president and general counsel of Apple and former chief legal officer at Meta, was elected to Emerson’s board and is set to join officially on Aug. 3, 2026, expanding the board to 11 members.
About Emerson Electric NYSE: EMR
Emerson Electric Co is a global technology and engineering company that designs and manufactures products and provides services for industrial, commercial and consumer markets. Founded in 1890, the company is headquartered in St. Louis, Missouri, and has built a long-standing presence in automation, control and climate-related technologies. Emerson's offerings are aimed at improving productivity, energy efficiency and reliability for a wide range of end markets.
Emerson operates through two principal platforms—Automation Solutions and Commercial & Residential Solutions—providing process automation systems, measurement and analytical instrumentation, valves and actuators, control software, and related aftermarket services, alongside products for heating, ventilation and refrigeration, residential and commercial climate controls, tools and storage solutions.
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