UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2008
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 1-278
EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri (State or other jurisdiction of incorporation or organization) | | 43-0259330 (I.R.S. Employer Identification No.) |
| | |
8000 W. Florissant Ave. P.O. Box 4100 St. Louis, Missouri (Address of principal executive offices) | | 63136 (Zip Code) |
Registrant's telephone number, including area code: (314) 553-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x | Accelerated Filer o¨ |
Non-Accelerated Filer o¨ (Do not check if a smaller reporting company) | Smaller Reporting Company o¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at April 30,July 31, 2008: 780,767,964775,942,990 shares.
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND SIXNINE MONTHS ENDED MARCH 31,JUNE 30, 2007 AND 2008
(Dollars in millions, except per share amounts; unaudited)
| | | Three Months Ended | | Nine Months Ended | |
| | Three Months Ended March 31, | | Six Months Ended March 31, | | | June 30, | | June 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | | | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 5,394 | | | 6,023 | | | 10,331 | | | 11,543 | | | $ | 5,772 | | | 6,568 | | | 16,103 | | | 18,111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales | | | 3,455 | | | 3,781 | | | 6,609 | | | 7,291 | | | | 3,677 | | | 4,155 | | | 10,286 | | | 11,446 | |
Selling, general and administrative expenses | | | 1,109 | | | 1,252 | | | 2,180 | | | 2,436 | | | | 1,154 | | | 1,321 | | | 3,334 | | | 3,757 | |
Other deductions, net | | | 39 | | | 67 | | | 57 | | | 70 | | | | 58 | | | 100 | | | 115 | | | 170 | |
Interest expense (net of interest income of | | | | | | | | | | | | | | |
$7, $12, $14 and $26, respectively) | | | 58 | | | 51 | | | 117 | | | 101 | | |
Interest expense (net of interest income of $7, $15, $21 and $41, respectively) | | | | 61 | | | 46 | | | 178 | | | 147 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations before | | | | | | | | | | | | | | |
income taxes | | | 733 | | | 872 | | | 1,368 | | | 1,645 | | |
Earnings from continuing operations before income taxes | | | | 822 | | | 946 | | | 2,190 | | | 2,591 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income taxes | | | 240 | | | 274 | | | 433 | | | 528 | | | | 249 | | | 299 | | | 682 | | | 827 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | | 493 | | | 598 | | | 935 | | | 1,117 | | | | 573 | | | 647 | | | 1,508 | | | 1,764 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations, net of tax | | | 1 | | | (51 | ) | | 4 | | | (5 | ) | | | 1 | | | (35 | ) | | 5 | | | (40 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 494 | | | 547 | | | 939 | | | 1,112 | | | $ | 574 | | | 612 | | | 1,513 | | | 1,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 0.62 | | | 0.76 | | | 1.17 | | | 1.42 | | | $ | 0.72 | | | 0.83 | | | 1.90 | | | 2.25 | |
Discontinued operations | | | - | | | (0.06 | ) | | - | | | (0.01 | ) | | | - | | | (0.04 | ) | | - | | | (0.05 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | 0.62 | | | 0.70 | | | 1.17 | | | 1.41 | | | $ | 0.72 | | | 0.79 | | | 1.90 | | | 2.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Dilutive earnings per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 0.61 | | | 0.75 | | | 1.16 | | | 1.41 | | | $ | 0.71 | | | 0.82 | | | 1.87 | | | 2.23 | |
Discontinued operations | | | - | | | (0.06 | ) | | - | | | (0.01 | ) | | | 0.01 | | | (0.04 | ) | | 0.01 | | | (0.05 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per common share | | $ | 0.61 | | | 0.69 | | | 1.16 | | | 1.40 | | | $ | 0.72 | | | 0.78 | | | 1.88 | | | 2.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends per common share | | $ | 0.2625 | | | 0.3000 | | | 0.5250 | | | 0.6000 | | | $ | 0.2625 | | | 0.3000 | | | 0.7875 | | | 0.9000 | |
See accompanying Notes to Consolidated Financial Statements.
FORM 10-Q
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts; unaudited)
| | | September 30, | | June 30, | |
| | | 2007 | | 2008 | |
| | September 30, 2007 | | March 31, 2008 | | | | | | |
ASSETS | | | | | | | | | | |
Current assets | | | | | | | | | | |
Cash and equivalents | | $ | 1,008 | | | 1,767 | | | $ | 1,008 | | | 2,057 | |
Receivables, less allowances of $86 and $90, respectively | | | 4,260 | | | 4,377 | | |
Receivables, less allowances of $86 and $89, respectively | | | | 4,260 | | | 4,663 | |
Inventories | | | 2,227 | | | 2,532 | | | | 2,227 | | | 2,562 | |
Other current assets | | | 570 | | | 762 | | | | 570 | | | 812 | |
| | | | | | | | | | | | | | |
Total current assets | | | 8,065 | | | 9,438 | | | | 8,065 | | | 10,094 | |
| | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 3,431 | | | 3,413 | | | | 3,431 | | | 3,458 | |
| | | | | | | | | | | | | | |
Other assets | | | | | | | | | | | | | | |
Goodwill | | | 6,412 | | | 6,658 | | | | 6,412 | | | 6,713 | |
Other | | | 1,772 | | | 1,941 | | | | 1,772 | | | 1,931 | |
| | | | | | | | |
Total other assets | | | 8,184 | | | 8,599 | | | | 8,184 | | | 8,644 | |
| | $ | 19,680 | | | 21,450 | | | $ | 19,680 | | | 22,196 | |
| | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | |
Short-term borrowings and current | | | | | | | | |
maturities of long-term debt | | $ | 404 | | | 1,609 | | |
Short-term borrowings and current maturities of long-term debt | | | $ | 404 | | | 1,732 | |
Accounts payable | | | 2,501 | | | 2,403 | | | | 2,501 | | | 2,563 | |
Accrued expenses | | | 2,337 | | | 2,342 | | | | 2,337 | | | 2,506 | |
Income taxes | | | 304 | | | 234 | | | | 304 | | | 242 | |
| | | | | | | | | | | | | | |
Total current liabilities | | | 5,546 | | | 6,588 | | | | 5,546 | | | 7,043 | |
| | | | | | | | | | | | | | |
Long-term debt | | | 3,372 | | | 3,338 | | | | 3,372 | | | 3,298 | |
| | | | | | | | | | | | | | |
Other liabilities | | | 1,990 | | | 2,044 | | | | 1,990 | | | 2,101 | |
| | | | | | | | | | | | | | |
Stockholders’ equity | | | | | | | | | | | | | | |
Preferred stock of $2.50 par value per share | | | | | | | | |
Authorized 5,400,000 shares; issued - none | | | - | | | - | | |
Common stock of $0.50 par value per share | | | | | | | | |
Authorized 1,200,000,000 shares; issued 953,354,012 shares; | | | | | | | | |
outstanding 788,434,076 shares and 782,377,732 shares, respectively | | | 477 | | | 477 | | |
Preferred stock of $2.50 par value per share Authorized 5,400,000 shares; issued – none | | | | - | | | - | |
Common stock of $0.50 par value per share Authorized 1,200,000,000 shares; issued 953,354,012 shares; outstanding 788,434,076 shares and 778,360,784 shares, respectively | | | | 477 | | | 477 | |
Additional paid-in capital | | | 31 | | | 188 | | | | 31 | | | 200 | |
Retained earnings | | | 12,536 | | | 13,169 | | | | 12,536 | | | 13,546 | |
Accumulated other comprehensive income | | | 382 | | | 705 | | | | 382 | | | 823 | |
Cost of common stock in treasury, 164,919,936 shares | | | | | | | | |
and 170,976,280 shares, respectively | | | (4,654 | ) | | (5,059 | ) | |
Cost of common stock in treasury, 164,919,936 shares and 174,993,228 shares, respectively | | | | (4,654 | ) | | (5,292 | ) |
| | | | | | | | | | | | | | |
Total stockholders' equity | | | 8,772 | | | 9,480 | | | | 8,772 | | | 9,754 | |
| | $ | 19,680 | | | 21,450 | | | $ | 19,680 | | | 22,196 | |
See accompanying Notes to Consolidated Financial Statements.
FORM 10-Q
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIXNINE MONTHS ENDED MARCH 31,JUNE 30, 2007 AND 2008
(Dollars in millions; unaudited)
| | | Nine Months Ended | |
| | | June 30, | |
| | Six Months Ended March 31, | | | 2007 | | 2008 | |
| | 2007 | | 2008 | | | | | | |
Operating activities | | | | | | | | | | |
Net earnings | | $ | 939 | | | 1,112 | | | $ | 1,513 | | | 1,724 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | | |
Depreciation and amortization | | | 328 | | | 350 | | | | 491 | | | 530 | |
Changes in operating working capital | | | (464 | ) | | (319 | ) | | | (281 | ) | | (332 | ) |
Pension funding | | | | (100 | ) | | (99 | ) |
Other (including gains on sales of assets and impairments, see Notes 6 and 10) | | | 72 | | | 28 | | | | 151 | | | 175 | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 875 | | | 1,171 | | | | 1,774 | | | 1,998 | |
| | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | |
Capital expenditures | | | (276 | ) | | (306 | ) | | | (420 | ) | | (461 | ) |
Purchases of businesses, net of cash and equivalents acquired | | | (172 | ) | | (440 | ) | | | (187 | ) | | (412 | ) |
Other (including sale of assets, see Notes 6 and 10) | | | 86 | | | 168 | | | | 72 | | | 142 | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (362 | ) | | (578 | ) | | | (535 | ) | | (731 | ) |
| | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | |
Net increase in short-term borrowings | | | 398 | | | 688 | | | | 9 | | | 774 | |
Proceeds from long-term debt | | | 248 | | | 399 | | | | 496 | | | 400 | |
Principal payments on long-term debt | | | (3 | ) | | (1 | ) | | | (3 | ) | | (10 | ) |
Dividends paid | | | (421 | ) | | (473 | ) | | | (629 | ) | | (708 | ) |
Purchases of treasury stock | | | (478 | ) | | (483 | ) | | | (628 | ) | | (727 | ) |
Other | | | 6 | | | (45 | ) | | | 7 | | | (45 | ) |
| | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (250 | ) | | 85 | | |
Net cash used in financing activities | | | | (748 | ) | | (316 | ) |
| | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and equivalents | | | 21 | | | 81 | | | | 30 | | | 98 | |
| | | | | | | | | | | | | | |
Increase in cash and equivalents | | | 284 | | | 759 | | | | 521 | | | 1,049 | |
| | | | | | | | | | | | | | |
Beginning cash and equivalents | | | 810 | | | 1,008 | | | | 810 | | | 1,008 | |
| | | | | | | | | | | | | | |
Ending cash and equivalents | | $ | 1,094 | | | 1,767 | | | $ | 1,331 | | | 2,057 | |
| | | | | | | | | | | | | | |
Changes in operating working capital | | | | | | | | | | | | | | |
Receivables | | $ | (105 | ) | | 30 | | | $ | (252 | ) | | (197 | ) |
Inventories | | | (122 | ) | | (203 | ) | | | (21 | ) | | (205 | ) |
Other current assets | | | (21 | ) | | 56 | | | | (48 | ) | | (1 | ) |
Accounts payable | | | (212 | ) | | (120 | ) | | | (122 | ) | | 25 | |
Accrued expenses | | | (51 | ) | | (94 | ) | | | 116 | | | 28 | |
Income taxes | | | 47 | | | 12 | | | | 46 | | | 18 | |
| | $ | (464 | ) | | (319 | ) | | $ | (281 | ) | | (332 | ) |
See accompanying Notes to Consolidated Financial Statements.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Notes to Consolidated Financial Statements
| 1. | The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation of the results for the interim periods presented. These adjustments consist of normal recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007. The 2007 consolidated statements of earnings have been reclassified for discontinued operations, see Note 10. |
| 2. | Reconciliations of weighted average common shares for basic earnings per common share and diluted earnings per common share follow (shares in millions): |
| | | Three Months Ended | | Nine Months Ended | |
| | | June 30, | | June 30, | |
| | Three Months Ended March 31, | | Six Months Ended March 31, | | | 2007 | | 2008 | | 2007 | | 2008 | |
| | 2007 | | 2008 | | 2007 | | 2008 | | | | | | | | | | |
Basic | | | 795.3 | | | 783.4 | | | 797.3 | | | 784.9 | | | | 791.7 | | | 778.6 | | | 795.4 | | | 782.8 | |
Dilutive shares | | | 9.6 | | | 8.6 | | | 9.4 | | | 9.3 | | | | 10.4 | | | 9.2 | | | 9.8 | | | 9.3 | |
Diluted | | | 804.9 | | | 792.0 | | | 806.7 | | | 794.2 | | | | 802.1 | | | 787.8 | | | 805.2 | | | 792.1 | |
| 3. | Comprehensive income is summarized as follows (dollars in millions): |
| | Three Months Ended March 31, | | Six Months Ended March 31, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
Net earnings | | $ | 494 | | | 547 | | | 939 | | | 1,112 | |
Changes in foreign currency translation, | | | | | | | | | | | | | |
cash flow hedges and other | | | 27 | | | 261 | | | 97 | | | 323 | |
| | $ | 521 | | | 808 | | | 1,036 | | | 1,435 | |
| | Three Months Ended | | Nine Months Ended | |
| | June 30, | | June 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | |
Net earnings | | $ | 574 | | | 612 | | | 1,513 | | | 1,724 | |
Changes in foreign currency translation, cash flow hedges and other | | | 115 | | | 118 | | | 212 | | | 441 | |
| | $ | 689 | | | 730 | | | 1,725 | | | 2,165 | |
The increases in comprehensive income for the three and sixnine months ended March 31,June 30, 2008, over the prior year periods primarily reflect net earnings growth and changes in foreign currency translation.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
| 4. | Other Financial Information (dollars in millions): |
| | | September 30, 2007 | | June 30, 2008 | |
| | September 30, 2007 | | March 31, 2008 | | | | | | |
Inventories | | | | | | | | | | |
Finished products | | $ | 884 | | | 977 | | | $ | 884 | | | 966 | |
Raw materials and work in process | | | 1,343 | | | 1,555 | | | | 1,343 | | | 1,596 | |
| | $ | 2,227 | | | 2,532 | | | $ | 2,227 | | | 2,562 | |
| | | | | | | | | | | | | | |
Property, plant and equipment, net | | | | | | | | | | | | | | |
Property, plant and equipment, at cost | | $ | 8,434 | | | 8,568 | | | $ | 8,434 | | | 8,728 | |
Less accumulated depreciation | | | 5,003 | | | 5,155 | | | | 5,003 | | | 5,270 | |
| | $ | 3,431 | | | 3,413 | | | $ | 3,431 | | | 3,458 | |
| | | | | | | | | | | | | | |
Goodwill | | | | | | | | | | | | | | |
Process Management | | $ | 1,985 | | | 2,033 | | | $ | 1,985 | | | 2,060 | |
Industrial Automation | | | 1,070 | | | 1,100 | | | | 1,070 | | | 1,122 | |
Network Power | | | 2,259 | | | 2,501 | | | | 2,259 | | | 2,519 | |
Climate Technologies | | | 420 | | | 420 | | | | 420 | | | 417 | |
Appliance and Tools | | | 678 | | | 604 | | | | 678 | | | 595 | |
| | $ | 6,412 | | | 6,658 | | | $ | 6,412 | | | 6,713 | |
Changes in the goodwill balances since September 30, 2007, are primarily due to additions from acquisitions, particularly in the Network Power segment ($167162 million), the classification of the European appliance motor and pump business, previously in the Appliance and Tools segment, as held for sale (see Note 10), as well as from the translation of non-U.S. currencies to the U.S. dollar. Third-party valuations of assets are in-process; purchase price allocations are subject to refinement for fiscal year 2008 acquisitions.
Other assets, other | | | | | | | | | | |
Pension plans | | $ | 649 | | | 617 | | | $ | 649 | | | 699 | |
Intellectual property and customer relationships | | | 544 | | | 662 | | | | 544 | | | 592 | |
Capitalized software | | | 171 | | | 166 | | | | 171 | | | 175 | |
Other | | | 408 | | | 496 | | | | 408 | | | 465 | |
| | | $ | 1,772 | | | 1,931 | |
| | $ | 1,772 | | | 1,941 | | | | | | | | |
| | | | | | | | | | | | | | |
Product warranty liability | | $ | 197 | | | 204 | | | $ | 197 | | | 211 | |
| | | | | | | | | | | | | | |
Other liabilities | | | | | | | | | | | | | | |
Deferred income taxes | | $ | 519 | | | 500 | | | $ | 519 | | | 514 | |
Postretirement plans, excluding current portion | | | 451 | | | 465 | | | | 451 | | | 470 | |
Retirement plans | | | 296 | | | 305 | | | | 296 | | | 313 | |
Minority interest | | | 191 | | | 181 | | | | 191 | | | 184 | |
Other | | | 533 | | | 593 | | | | 533 | | | 620 | |
| | $ | 1,990 | | | 2,044 | | | $ | 1,990 | | | 2,101 | |
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
| 5. | Net periodic pension expense is summarized as follows (dollars in millions): |
| | Three Months Ended June 30, | | Nine Months Ended June 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | |
Service cost | | $ | 15 | | | 18 | | | 47 | | | 54 | |
Interest cost | | | 49 | | | 52 | | | 147 | | | 156 | |
Expected return on plan assets | | | (62 | ) | | (68 | ) | | (189 | ) | | (205 | ) |
Net amortization | | | 24 | | | 24 | | | 74 | | | 72 | |
| | $ | 26 | | | 26 | | | 79 | | | 77 | |
| | Three Months Ended March 31, | | Six Months Ended March 31, | |
| | 2007 | | 2008 | | 2007 | | 2008 | |
Service cost | | $ | 16 | | | 18 | | | 32 | | | 36 | |
Interest cost | | | 49 | | | 52 | | | 98 | | | 104 | |
Expected return on plan assets | | | (64 | ) | | (69 | ) | | (127 | ) | | (137 | ) |
Net amortization | | | 25 | | | 24 | | | 50 | | | 48 | |
| | $ | 26 | | | 25 | | | 53 | | | 51 | |
Net postretirement plan expense is summarized as follows (dollars in millions):
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | |
| | Three Months Ended March 31, | | Six Months Ended March 31, | | | 2007 | | 2008 | | 2007 | | 2008 | |
| | 2007 | | 2008 | | 2007 | | 2008 | | | | | | | | | | |
Service cost | | $ | 2 | | | 1 | | | 3 | | | 2 | | | $ | 1 | | | 2 | | | 4 | | | 4 | |
Interest cost | | | 7 | | | 7 | | | 14 | | | 14 | | | | 7 | | | 6 | | | 21 | | | 20 | |
Net amortization | | | 6 | | | 8 | | | 13 | | | 15 | | | | 7 | | | 7 | | | 20 | | | 22 | |
| | $ | 15 | | | 16 | | | 30 | | | 31 | | | $ | 15 | | | 15 | | | 45 | | | 46 | |
| 6. | Other deductions, net are summarized as follows (dollars in millions): |
| | Three Months Ended March 31, | | Six Months Ended March 31, | | | Three Months Ended June 30, | | Nine Months Ended June 30, | |
| | 2007 | | 2008 | | 2007 | | 2008 | | | 2007 | | 2008 | | 2007 | | 2008 | |
Other deductions, net | | | | | | | | | | | | | | | | | | | | | | |
Rationalization of operations | | $ | 20 | | | 16 | | | 36 | | | 25 | | | $ | 18 | | | 24 | | | 54 | | | 49 | |
Amortization of intangibles | | | 16 | | | 22 | | | 30 | | | 39 | | | | 16 | | | 20 | | | 46 | | | 59 | |
Other | | | 27 | | | 29 | | | 57 | | | 70 | | | | 27 | | | 56 | | | 84 | | | 126 | |
Gains | | | (24 | ) | | - | | | (66 | ) | | (64 | ) | | | (3 | ) | | - | | | (69 | ) | | (64 | ) |
| | $ | 39 | | | 67 | | | 57 | | | 70 | | | $ | 58 | | | 100 | | | 115 | | | 170 | |
For the three months ended June 30, 2008, Other includesincluded approximately $12 million of losses on foreign exchange transactions compared with $6 million of gains in the prior year period, as well as an impairment charge of $9 million (See Note 10). During the first nine months of fiscal 2008, Other also included an approximate $15$12 million charge for in-process research and development in connection with the acquisition of Motorola Inc.’s Embedded Communications Computing business during December of fiscal 2008.business.
During the sixnine months ended March 31,June 30, 2008, the Company received $54 million and recognized a gain of $39 million ($20 million after-tax) on the sale of an equity investment in Industrial Motion Control Holdings, LLC (IMC), a manufacturer of motion control components for automation equipment. The Company also recorded a gain of $18 million related to the sale of a facility during the first quarter of fiscal 2008. For the sixnine months ended March 31,June 30, 2008 and 2007, the Company recorded gains of approximately $3 million and $24 million, respectively, for payments received under the U.S. Continued Dumping and Subsidy Offset Act. During the sixnine months ended March 31,June 30, 2007, the Company sold its remaining 4.5 million shares of MKS Instruments, Inc. (MKS), a publicly-traded company, and recorded a pretax gain of $32 million.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
| 7. | The change in the liability for rationalization of operations during the sixnine months ended March 31,June 30, 2008, follows (dollars in millions): |
| | | September 30, | | | | | | June 30, | |
| | September 30, 2007 | | Expense | | Paid / Utilized | | March 31, 2008 | | | 2007 | | Expense | | Paid / Utilized | | 2008 | |
Severance and benefits | | $ | 28 | | | 10 | | | 20 | | | 18 | | | $ | 28 | | | 22 | | | 28 | | | 22 | |
Lease/contract terminations | | | 8 | | | 1 | | | 1 | | | 8 | | | | 8 | | | 1 | | | 2 | | | 7 | |
Fixed asset write-downs | | | - | | | 1 | | | 1 | | | - | | | | - | | | 2 | | | 2 | | | - | |
Vacant facility and other shutdown costs | | | 1 | | | 4 | | | 4 | | | 1 | | | | 1 | | | 6 | | | 6 | | | 1 | |
Start-up and moving costs | | | - | | | 12 | | | 12 | | | - | | | | - | | | 22 | | | 21 | | | 1 | |
| | $ | 37 | | | 28 | | | 38 | | | 27 | | | $ | 37 | | | 53 | | | 59 | | | 31 | |
Expense includes $3$4 million related to the European appliance motor and pump business classified as discontinued operations.
Rationalization of operations by business segment is summarized as follows (dollars in millions):
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | |
| | Three Months Ended March 31, | | Six Months Ended March 31, | | | 2007 | | 2008 | | 2007 | | 2008 | |
| | 2007 | | 2008 | | 2007 | | 2008 | | | | | | | | | | |
Process Management | | $ | 4 | | | 3 | | | 6 | | | 4 | | | $ | 2 | | | 4 | | | 8 | | | 8 | |
Industrial Automation | | | 3 | | | 3 | | | 6 | | | 6 | | | | 5 | | | 5 | | | 11 | | | 11 | |
Network Power | | | 5 | | | 5 | | | 9 | | | 8 | | | | 5 | | | 8 | | | 14 | | | 16 | |
Climate Technologies | | | 4 | | | 4 | | | 7 | | | 5 | | | | 2 | | | 5 | | | 9 | | | 10 | |
Appliance and Tools | | | 4 | | | 1 | | | 8 | | | 2 | | | | 4 | | | 2 | | | 12 | | | 4 | |
| | $ | 20 | | | 16 | | | 36 | | | 25 | | | $ | 18 | | | 24 | | | 54 | | | 49 | |
Rationalization actions during the first sixnine months of fiscal 2007 and 2008 included the following. Industrial Automation included severance and start-up and moving costs related to the consolidation of certain power transmission facilities in Asia and North America to obtain operational efficiencies and serve Asian and North American markets. Network Power included severance related to the closure of certain power conversion facilities acquired with Artesyn, and severance and start-up and moving costs related to the shifting of certain power systems production from the United States and Europe to Mexico, as well as consolidating certain production in North America, to remain competitive on a global basis. Climate Technologies included start-up costs related to capacity expansion in Mexico and Eastern Europe to improve profitability and to serve these markets, and start-upseverance and movingshutdown costs related to the consolidation of certain production facilities in the United States and Europe to obtain operational efficiencies. Appliance and Tools included severance and start-up and moving costs related to the shifting of certain production from Canada to Mexico and severance related to the closure of certain motor production in Europe to remain competitive on a global basis.
Including the $28$53 million of rationalization costs incurred during the sixnine months ended March 31,June 30, 2008, the Company expects rationalization expense for the entire 2008 fiscal year to total approximately $85 million to $95$90 million, including the costs to complete actions initiated before the end of the secondthird quarter and actions anticipated to be approved and initiated during the remainder of the year.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
| 8. | Summarized information about the Company's operations by business segment follows (dollars in millions): |
| | Sales | | Earnings | | | Sales | | Earnings | |
Three months ended March 31, | | 2007 | | 2008 | | 2007 | | 2008 | | |
Three months ended June 30, | | | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | | |
Process Management | | $ | 1,345 | | | 1,597 | | | 239 | | | 286 | | | $ | 1,471 | | | 1,731 | | | 269 | | | 346 | |
Industrial Automation | | | 1,057 | | | 1,176 | | | 151 | | | 171 | | | | 1,095 | | | 1,271 | | | 161 | | | 186 | |
Network Power | | | 1,191 | | | 1,520 | | | 146 | | | 187 | | | | 1,322 | | | 1,672 | | | 178 | | | 212 | |
Climate Technologies | | | 945 | | | 956 | | | 141 | | | 142 | | | | 1,043 | | | 1,087 | | | 174 | | | 169 | |
Appliance and Tools | | | 1,014 | | | 956 | | | 134 | | | 139 | | | | 1,005 | | | 998 | | | 143 | | | 138 | |
| | | 5,552 | | | 6,205 | | | 811 | | | 925 | | | | 5,936 | | | 6,759 | | | 925 | | | 1,051 | |
Differences in accounting methods | | | | | | | | | 52 | | | 57 | | | | | | | | | | 56 | | | 62 | |
Corporate and other | | | | | | | | | (72 | ) | | (59 | ) | | | | | | | | | (98 | ) | | (121 | ) |
Eliminations/Interest | | | (158 | ) | | (182 | ) | | (58 | ) | | (51 | ) | | | (164 | ) | | (191 | ) | | (61 | ) | | (46 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 5,394 | | | 6,023 | | | 733 | | | 872 | | | $ | 5,772 | | | 6,568 | | | 822 | | | 946 | |
Intersegment sales of the Appliance and Tools segment for the three months ended March 31,June 30, 2008 and 2007, respectively, were $155$162 million and $139$140 million. Corporate and other includes increase in commodity hedging-related gainsmark-to-market expense of $30$11 million, higher environmental costs and other items in the secondthird quarter of 2008 which were substantially offset by hedging losses recorded in the first quarter of 2008 due to volatility in the commodity markets.2008.
| | Sales | | Earnings | | | Sales | | Earnings | |
Six months ended March 31, | | 2007 | | 2008 | | 2007 | | 2008 | | |
Nine months ended June 30, | | | 2007 | | 2008 | | 2007 | | 2008 | |
| | | | | | | | | | |
Process Management | | $ | 2,563 | | | 3,033 | | | 456 | | | 544 | | | $ | 4,034 | | | 4,764 | | | 725 | | | 890 | |
Industrial Automation | | | 2,051 | | | 2,301 | | | 317 | | | 342 | | | | 3,146 | | | 3,572 | | | 478 | | | 528 | |
Network Power | | | 2,390 | | | 2,926 | | | 263 | | | 367 | | | | 3,712 | | | 4,598 | | | 441 | | | 579 | |
Climate Technologies | | | 1,633 | | | 1,722 | | | 231 | | | 244 | | | | 2,676 | | | 2,809 | | | 405 | | | 413 | |
Appliance and Tools | | | 1,988 | | | 1,888 | | | 263 | | | 271 | | | | 2,993 | | | 2,886 | | | 406 | | | 409 | |
| | | 10,625 | | | 11,870 | | | 1,530 | | | 1,768 | | | | 16,561 | | | 18,629 | | | 2,455 | | | 2,819 | |
Differences in accounting methods | | | | | | | | | 100 | | | 110 | | | | | | | | | | 156 | | | 172 | |
Corporate and other | | | | | | | | | (145 | ) | | (132 | ) | | | | | | | | | (243 | ) | | (253 | ) |
Eliminations/Interest | | | (294 | ) | | (327 | ) | | (117 | ) | | (101 | ) | | | (458 | ) | | (518 | ) | | (178 | ) | | (147 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 10,331 | | | 11,543 | | | 1,368 | | | 1,645 | | | $ | 16,103 | | | 18,111 | | | 2,190 | | | 2,591 | |
Intersegment sales of the Appliance and Tools segment for the sixnine months ended March 31,June 30, 2008 and 2007, respectively, were $277$439 million and $252$392 million.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
| 9. | Effective October 1, 2007, the Company adopted the recognition and disclosure provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -– an Interpretation of FASB Statement 109” (FIN 48). FIN 48 addresses the accounting for uncertain tax positions that a company has taken or expects to take on a tax return. As of October 1, 2007, the Company had total unrecognized tax benefits of $149 million before recoverability of cross-jurisdictional tax credits (U.S., state and non-U.S.) and temporary differences, and including amounts related to acquisitions that would reduce goodwill. If none of these liabilities are ultimately paid, the tax provision and tax rate would be favorably impacted by $90 million. As a result of adoption, the Company recorded a charge of $6 million to beginning retained earnings. The amount of unrecognized tax benefits is not materially different as of March 31,June 30, 2008, and is not expected to significantly increase or decrease within the next 12 months. |
The Company accrues interest and penalties related to income taxes in income tax expense. As of October 1, 2007, total accrued interest and penalties was $24 million.
The major jurisdiction for which the Company files income tax returns is the United States. U.S. federal examinations by the Internal Revenue Service are substantially complete through 2005. The status of non- U.S.non-U.S. and state tax examinations varies by the numerous legal entities and jurisdictions in which the Company operates.
| 10. | In connection with a longer-term strategy to divest selective slower-growth businesses, the Company ishad been actively pursuing the sale of its European appliance motor and pump business and expects to complete the sale within the next twelve months.business. The forecast for this business iswas lower than originally planned due to a slow economic environment for this consumer market, increasing competition from Asia, higher commodity costs, and loss of a customer. As a result, the carrying value of this business exceeded its estimated realizable value, and a goodwill impairment charge of $52 million was recorded in the second quarter of 2008. SalesThis business has continued to weaken in a difficult global appliance market. During the third quarter of fiscal 2008, the Company entered into a definitive agreement to sell the business for €72 million ($113 million) which resulted in an additional loss of $36 million. The sale is expected to close during this fiscal year and is subject only to routine review by certain European competition authorities. For the secondthird quarter and first sixnine months of fiscal 2008, sales were $111$121 million and $228$349 million, respectively, and net loss,losses, including the charge, was $(51)charges, were $(35) million and $(48)$(83) million, respectively. Sales forFor the secondthird quarter and first sixnine months of fiscal 2007, sales were $119$102 million and $233$335 million, respectively, and net earnings were $1 million and $4$5 million, respectively. This business was previously included in the Appliance and Tools segment. As of March 31,June 30, 2008, this business had current assets of $0.2 billion, noncurrent assets of $0.1 billion and total liabilities of $0.1$0.2 billion. The results for the secondthird quarter and first sixnine months of fiscal 2008 and 2007 were classified as discontinued operations. |
During the first quarter of fiscal 2008, the Company received $100 million from the sale of the Brooks Instrument (Brooks) flow meters and flow controls unit, which resulted in a pretax gain of $63 million ($42 million after-tax). Sales for the first quarter of 2008 were $21 million and net earnings were $1 million. The net gain and results of operations for the first quarter of fiscal 2008 were classified as discontinued operations; prior year results of operations were inconsequential.
On December 31, 2007, the Company acquired Motorola Inc.’s Embedded Communications Computing (ECC) business for approximately $350 million in cash. ECCThis business is a leading provider of embedded computing products to equipment manufacturers in telecommunications, medical imaging, defense and aerospace, and industrial automation and will beis included in the Network Power segment. ECCEmbedded Computing had calendar 2007 revenue of approximately $560 million.
During the third quarter of fiscal 2008, the Company recorded a goodwill impairment charge of $9 million related to the North American appliance control business due to a slow economic environment for housing and consumer related end-markets and a major customer’s strategy to internalize electronic controls. Also, the Company is considering the potential sale of this business in connection with a longer term strategy to consider the divestiture of selective slower growth businesses. This business has annual sales of approximately $150 million and is included in the Appliance and Tools segment.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Items 2 and 3. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2007 Annual Report on Form 10-K.
OVERVIEW
The Company’s results for the second quarter and first sixnine months of fiscal 2008 were strong, with earnings increasing for all five business segments and sales increasing for four of the five business segments over the prior year periods.period. The Process Management, Network Power Process Management and Industrial Automation businesses had strong performances and drove gains as international gross fixed investment expanded during the first sixnine months of fiscal 2008. Strong growth in Asia, Latin America and Middle East/Africa, favorable foreign currency translation, and acquisitions contributed to the secondthird quarter and first sixnine months’ results. Profit margins remained at high levels, primarily due to leverage on increased sales volume, and benefits from previous rationalization actions.actions and business mix. Emerson's financial position remains strong and the Company continues to generate substantial cash flow.
THREE MONTHS ENDED MARCH 31,JUNE 30, 2008, COMPARED WITH THREE MONTHS ENDED MARCH 31,JUNE 30, 2007
RESULTS OF OPERATIONS
Three months ended March 31, | | 2007 | | 2008 | | Change | | |
Three months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions, except per share amounts) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net sales | | $ | 5,394 | | | 6,023 | | | 12 | % | | $ | 5,772 | | | 6,568 | | | 14 | % |
Gross profit | | $ | 1,939 | | | 2,242 | | | 16 | % | | $ | 2,095 | | | 2,413 | | | 15 | % |
Percent of sales | | | 35.9 | % | | 37.2 | % | | | | | | 36.3 | % | | 36.7 | % | | | |
SG&A | | $ | 1,109 | | | 1,252 | | | | | | $ | 1,154 | | | 1,321 | | | | |
Percent of sales | | | 20.5 | % | | 20.8 | % | | | | | | 20.0 | % | | 20.1 | % | | | |
Other deductions, net | | $ | 39 | | | 67 | | | | | | $ | 58 | | | 100 | | | | |
Interest expense, net | | $ | 58 | | | 51 | | | | | | $ | 61 | | | 46 | | | | |
Earnings from continuing operations | | | | | | | | | | | |
before income taxes | | $ | 733 | | | 872 | | | 19 | % | |
Earnings from continuing operations before income taxes | | | $ | 822 | | | 946 | | | 15 | % |
Earnings from continuing operations | | $ | 493 | | | 598 | | | 21 | % | | $ | 573 | | | 647 | | | 13 | % |
Net earnings | | $ | 494 | | | 547 | | | 11 | % | | $ | 574 | | | 612 | | | 7 | % |
Percent of sales | | | 9.2 | % | | 9.1 | % | | | | | | 9.9 | % | | 9.3 | % | | | |
| | | | | | | | | | | | | | | | | | | | |
EPS - Continuing operations | | $ | 0.61 | | | 0.75 | | | 23 | % | |
EPS - Net earnings | | $ | 0.61 | | | 0.69 | | | 13 | % | |
EPS – Continuing operations | | | $ | 0.71 | | | 0.82 | | | 15 | % |
EPS – Net earnings | | | $ | 0.72 | | | 0.78 | | | 8 | % |
Net sales for the quarter ended March 31,June 30, 2008 were $6,023$6,568 million, an increase of $629$796 million, or 1214 percent, over net sales of $5,394$5,772 million for the quarter ended March 31,June 30, 2007, with international sales aiding the overall growth. The consolidated results reflect increases in four of the five business segments, with a 67 percent ($306402 million) increase in underlying sales (which exclude acquisitions, divestitures and foreign currency translation), a 45 percent ($211263 million) favorable impact from foreign currency translation and a 2 percent ($112131 million) favorable impact from acquisitions, net of divestitures. The underlying sales increase for the secondthird quarter reflects 10 percent growth in total international sales, while growth in the United States increased 14 percent. The international sales growth was led byincluded increases in Asia (18(16 percent), Latin America (18(16 percent), Middle East/Africa (19(15 percent) and Europe (2(3 percent). The Company estimates that the underlying sales growth primarily reflects an approximate 36 percent gain from volume, which includes an estimated 2 percent impact from penetration gains, and an approximate 1 percent increase from higher sales prices.
Costs of sales for the secondthird quarters of fiscal 2008 and 2007 were $3,781$4,155 million and $3,455$3,677 million, respectively. Cost of sales as a percent of net sales was 62.863.3 percent in the secondthird quarter of 2008, compared with 64.163.7 percent in the secondthird quarter of 2007. Gross profit was $2,242$2,413 million and $1,939$2,095 million for the secondthird quarters ended March 31,June 30, 2008 and 2007, respectively, resulting in gross profit margins of 37.236.7 percent and 35.936.3 percent. The increase in the gross profit margin during the secondthird quarter primarily reflects leverage on the higher sales volume and savings from cost reduction efforts and commodity hedging gains.efforts. Higher sales prices were offset by higher material costs and wages. The increase in the gross profit amount primarily reflects higher sales volume and foreign currency translation.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Selling, general and administrative (SG&A) expenses for the secondthird quarter of 2008 were $1,252$1,321 million, or 20.820.1 percent of net sales, compared with $1,109$1,154 million, or 20.520.0 percent of net sales, for the secondthird quarter of 2007. The increase of $143$167 million was largely due to the increase in variable costs on higher sales and acquisitions. The increase in SG&A as a percent of sales was primarily the result of acquisition costs.
Other deductions, net were $67$100 million for the secondthird quarter of 2008, a $28$42 million increase from the $39$58 million for the same period in the prior year. The three months ended June 30, 2008, included approximately $12 million of losses on foreign exchange transactions compared with $6 million of gains in the prior year period. The third quarter of fiscal 2008 also included a $9 million impairment charge in the appliance control business (See Note 10), and higher restructuring and amortization expense. For the three months ended March 31, 2007,June 30, 2008, amortization of intangibles increased $4 million compared with the Company recorded pretax gains of $24 million, including $19 million relatedprior year period due to the sale of shares of MKS.acquisitions, while rationalization costs increased $6 million. See notesNotes 6 and 7 for further details regarding other deductions, net and rationalization costs.
Earnings from continuing operations before income taxes for the secondthird quarter of 2008 increased $139$124 million, or 1915 percent, to $872$946 million, compared to $733with $822 million for the secondthird quarter of 2007. The earnings results primarily reflect increases of $47$77 million in the Process Management, $41$34 million in the Network Power and $20$25 million in the Industrial Automation business segments.
Income taxes were $274$299 million and $240$249 million for the three months ended March 31,June 30, 2008 and 2007, respectively. The effective tax rate was 3132 percent in the secondthird quarter of 2008 compared with 3330 percent in the prior year period. The effective tax rate for the entire fiscal year 2008 is expected to be approximately 32 percent.
Earnings from continuing operations were $598$647 million and earnings per share from continuing operations were $0.75$0.82 for the three months ended March 31,June 30, 2008, increases of 2113 percent and 2315 percent, respectively, compared with $493$573 million and $0.61$0.71 for the three months ended March 31,June 30, 2007.
Net earnings were $547$612 million and earnings per share were $0.69$0.78 for the three months ended March 31,June 30, 2008, increases of 117 percent and 138 percent, respectively, compared with $494$574 million and $0.61$0.72 for the three months ended March 31,June 30, 2007. Earnings for the secondthird quarter of fiscal 2008 included a loss from discontinued operations of $51$35 million, or $0.06$0.04 per share, related to thean additional write-down of the European appliance motor and pump business.business based on a definitive agreement to sell this unit (See Note 10). The 138 percent increase in earnings per share also reflects the purchase of treasury shares.
BUSINESS SEGMENTS
Process Management
Three months ended March 31, | | 2007 | | 2008 | | Change | | |
Three months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | | | |
Sales | | $ | 1,345 | | | 1,597 | | | 19 | % | | $ | 1,471 | | | 1,731 | | | 18 | % |
Earnings | | $ | 239 | | | 286 | | | 20 | % | | $ | 269 | | | 346 | | | 29 | % |
Margin | | | 17.7 | % | | 17.9 | % | | | | | | 18.3 | % | | 20.0 | % | | | |
Process Management sales were $1,597$1,731 million in the secondthird quarter of fiscal 2008, an increase of 1918 percent over the prior year period. AllNearly all of the businesses in this segment reported higher sales, with sales particularly strong for the systems,valves, measurement and valvessystems businesses, reflecting continued worldwide demand in the energy and power markets. Underlying sales increased approximately 1613 percent, reflecting 11an estimated 12 percent from volume, which includes approximately 42 percent from penetration gains, and less thanan estimated 1 percent from higher sales prices. Favorable foreign currency translation added 56 percent ($6381 million) and the Brooks divestiture, net of an acquisition, had an unfavorable impact of 21 percent ($17 million). The underlying sales increase reflects growth in Asia (21 percent), the United States (13 percent), Asia (20 percent), Europe (12 percent), Latin America (33(28 percent), Middle East/Africa (14 percent) and Middle East/Africa (15Europe (5 percent). SecondThird quarter earnings (defined as earnings before interest and taxes for the business segments discussion) increased 2029 percent to $286$346 million from $239$269 million in the prior year period, reflecting higher sales volume.volume and the benefit from foreign currency translation. The margin increase primarily reflects leverage on the higher volume which was partially offset by negative product mix.and an $11 million litigation charge in the prior year. The increase in sales prices was more than offset by higher wage costs.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Industrial Automation
Three months ended March 31, | | 2007 | | 2008 | | Change | | |
Three months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 1,057 | | | 1,176 | | | 11 | % | | $ | 1,095 | | | 1,271 | | | 16 | % |
Earnings | | $ | 151 | | | 171 | | | 13 | % | | $ | 161 | | | 186 | | | 15 | % |
Margin | | | 14.3 | % | | 14.5 | % | | | | | | 14.7 | % | | 14.6 | % | | | |
Sales grew 1116 percent to $1,176$1,271 million in the Industrial Automation segment for the three months ended March 31,June 30, 2008, reflecting sales growth in all of the businesses and in nearly all of the major geographic regions. SecondThird quarter results were driven by particular strength in the power generating alternator, fluid automation electronic drives and industrial equipment businesses. SecondThird quarter underlying sales grew 58 percent, reflecting global industrial demand, and included the benefit of an estimated more than 1 percent positive impact from price. Foreign currency translation had a 6an 8 percent ($6687 million) favorable impact. The underlying sales increase reflects growth in nearly all of the major geographic regions, including 411 percent in the United States and 56 percent internationally. The international sales growth was led byincluded a 4 percent increase in Europe and a 16 percent increase in Asia, particularly in the fluid automation business.Asia. Earnings increased 1315 percent over the prior year period to $171$186 million, reflecting the higher sales volume and related leverage and foreign currency translation, partially offset by negative product mix. Highertranslation. The margin was diluted as higher sales prices were partially offset by higher material inflation and higher wage costs.
Network Power
Three months ended March 31, | | 2007 | | 2008 | | Change | | |
Three months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 1,191 | | | 1,520 | | | 27 | % | | $ | 1,322 | | | 1,672 | | | 26 | % |
Earnings | | $ | 146 | | | 187 | | | 28 | % | | $ | 178 | | | 212 | | | 19 | % |
Margin | | | 12.3 | % | | 12.3 | % | | | | | | 13.4 | % | | 12.7 | % | | | |
Network Power sales increased 2726 percent to $1,520$1,672 million during the secondthird quarter of 2008 compared towith the prior year period, reflecting continued strength in the telecommunications,power systems, precision cooling and power systemstelecommunications businesses and acquisitions. The sales increase reflects an underlying sales growth of 1110 percent, a 12 percent ($149161 million) increase from the Embedded Communications Computing (ECC) and Stratos acquisitions and a 4 percent ($4451 million) favorable impact from foreign currency translation. The underlying sales growth of 11 percent reflects higher volume of 710 percent, and a net 4which includes approximately 3 percent from penetration gains and a slight decrease in sales prices.gains. Geographically, the underlying sales increase reflects growth in the United States (10 percent), Asia (22(13 percent), Europe (3 percent) and Latin America (12(8 percent), while sales in Europe decreased 1 percent.. The growth in the United States reflects substantial customer investment in data room construction and non-residential computer equipment as well as segments of the telecommunications power market. Weakness in Europe reflects slower demand, some embedded power products share loss and customers shifting production to Asia. The Company’s market penetration gains in China and other Asian markets continued. Earnings of $187$212 million increased $41$34 million, or 2819 percent, from the prior year period.period primarily reflecting higher sales volume. The margin was flat as the higher sales volume and savings from cost reduction actions were offset by higher wage costs, lower sales prices, and a more than 1negatively impacted approximately 1.5 percentage point dilutive impactpoints from acquisitions.
Climate Technologies
Three months ended June 30, | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | |
| | | | | | | | | | |
Sales | | $ | 1,043 | | | 1,087 | | | 4 | % |
Earnings | | $ | 174 | | | 169 | | | (3 | %) |
Margin | | | 16.6 | % | | 15.5 | % | | | |
Three months ended March 31, | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | |
| | | | | | | |
Sales | | $ | 945 | | | 956 | | | 1 | % |
Earnings | | $ | 141 | | | 142 | | | - | |
Margin | | | 15.0 | % | | 14.9 | % | | | |
13
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Sales in the Climate Technologies segment increased 14 percent to $956$1,087 million for the quarter ended March 31,June 30, 2008. The increase was driven by a 3 percent ($2634 million) favorable impact from foreign currency translation whileand a 1 percent increase in underlying sales decreased 2 percent.sales. The underlying sales decreaseincrease of 21 percent includedwas comprised of a 51 percent decline in volume, which includes an approximate 2 percent benefit from penetrations gains, and an estimated 2 percent positive impact from higher sales prices and an approximate 1 percent benefit from penetration gains.prices. The underlying sales declineincrease was led by a slight decrease in the compressor business, partially offset by a strong increase in the water-heater controls business, primarily reflecting further penetration in the U.S. water-heater market.market, while the compressor business sales were flat compared to the prior year. Sales in the United States decreased 31 percent reflecting the downturn in the U.S. residential market. International sales increased 14 percent reflecting growth in Asia (10(14 percent), partially offset by a decline in Europe (14(6 percent). Europe primarily reflects the result of lower heat pump compressor sales. Earnings of $142$169 million were consistent withdecreased 3 percent from the prior year period. The profit margin declined slightly as sales price increases were not enough to offset by higher material costs. In addition, the margin was negatively impacted compared to the prior year due to lower foreign currency transaction gains and wagehigher restructuring costs.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Appliance and Tools
Three months ended March 31, | | 2007 | | 2008 | | Change | | |
Three months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 1,014 | | | 956 | | | (6 | %) | | $ | 1,005 | | | 998 | | | (1 | %) |
Earnings | | $ | 134 | | | 139 | | | 5 | % | | $ | 143 | | | 138 | | | (4 | %) |
Margin | | | 13.2 | % | | 14.6 | % | | | | | | 14.3 | % | | 13.8 | % | | | |
The Appliance and Tools segment sales decreased 61 percent to $956$998 million in the secondthird quarter of 2008. The sales decrease represents a 61 percent decline in underlying sales, a 1 percent ($1513 million) unfavorable contributionimpact from divestituresa divestiture and a 1 percent ($1210 million) favorable impactcontribution from foreign currency translation. All ofResults were mixed across the businesses were down foras the second quarter, except for thehermetic and professional tools businesses showed strong growth, offset by weakness in the storage, appliance components and hermeticcommercial motors businesses. The growth in the professional tools business was driven by demand in the U.S. non-residential markets and in Europe, including new technology products. The declines in the storage and appliance-related businesses primarily reflect the continued downturn in the U.S. residential market. The underlying sales decrease of 61 percent reflects an estimated 94 percent decline in volume and a more than 3 percent positive impact from price. Total international underlying sales increased approximately 914 percent during the quarter, while underlying sales in the U.S. decreased 83 percent. Earnings increaseddecreased 4 percent to $139$138 million for the second quarter. Earnings reflectthird quarter primarily reflecting a $9 million impairment charge in the appliance control business, which reduced the margin nearly 1 percentage point (See Note 10). The margin also reflects deleverage on the lower volume and savings from restructuring actions in 2007 across the segment and hedging gains, partially offset by the lower volume.cost reduction actions. Higher sale prices were substantially offset by higher material and wage costs. The 2007 sale of the hand tools product line also favorably impacted the margin.
SIXNINE MONTHS ENDED MARCH 31,JUNE 30, 2008, COMPARED WITH SIXNINE MONTHS ENDED MARCH 31,JUNE 30, 2007
RESULTS OF OPERATIONS
Six months ended March 31, | | 2007 | | 2008 | | Change | | |
Nine months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions, except per share amounts) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net sales | | $ | 10,331 | | | 11,543 | | | 12 | % | | $ | 16,103 | | | 18,111 | | | 12 | % |
Gross profit | | $ | 3,722 | | | 4,252 | | | 14 | % | | $ | 5,817 | | | 6,665 | | | 15 | % |
Percent of sales | | | 36.0 | % | | 36.8 | % | | | | | | 36.1 | % | | | | | | |
SG&A | | $ | 2,180 | | | 2,436 | | | | | | $ | 3,334 | | | 3,757 | | | | |
Percent of sales | | | 21.1 | % | | 21.1 | % | | | | | | 20.7 | % | | | | | | |
Other deductions, net | | $ | 57 | | | 70 | | | | | | $ | 115 | | | 170 | | | | |
Interest expense, net | | $ | 117 | | | 101 | | | | | | $ | 178 | | | 147 | | | | |
Earnings from continuing operations | | | | | | | | | | | |
before income taxes | | $ | 1,368 | | | 1,645 | | | 20 | % | |
Earnings from continuing operations before income taxes | | | $ | 2,190 | | | 2,591 | | | 18 | % |
Earnings from continuing operations | | $ | 935 | | | 1,117 | | | 19 | % | | $ | 1,508 | | | 1,764 | | | 17 | % |
Net earnings | | $ | 939 | | | 1,112 | | | 18 | % | | $ | 1,513 | | | 1,724 | | | 14 | % |
Percent of sales | | | 9.1 | % | | 9.6 | % | | | | | | 9.4 | % | | 9.5 | % | | | |
| | | | | | | | | | | | | | | | | | | | |
EPS - Continuing operations | | $ | 1.16 | | | 1.41 | | | 22 | % | |
EPS - Net earnings | | $ | 1.16 | | | 1.40 | | | 21 | % | |
EPS – Continuing operations | | | $ | 1.87 | | | 2.23 | | | 19 | % |
EPS – Net earnings | | | $ | 1.88 | | | 2.18 | | | 16 | % |
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Net sales for the sixnine months ended March 31,June 30, 2008 increased $1,212$2,008 million, or 12 percent, to $11,543$18,111 million, over net sales of $10,331$16,103 million for the sixnine months ended March 31,June 30, 2007, with international sales leading the overall growth. The Network Power, Process Management and Industrial Automation businesses drove the sales growth, while the Appliance and Tools businesses continued to be impacted by the U.S. consumer slowdown. The consolidated results reflect a 7 percent ($6801,082 million) increase in underlying sales, a 4 percent ($413676 million) favorable impact from foreign currency translation and a 1 percent ($119250 million) positive impact from acquisitions, net of divestitures. The underlying sales increase of 7 percent for the first sixnine months was driven by an increase of 10 percent in total international sales and a 3 percent increase in the United States. The international sales increase primarily reflects growth in Asia (17 percent), Latin America (14 percent), Europe (2 percent) and Middle East/Africa (22(19 percent), Latin America (15 percent) and Europe (2 percent). The Company estimates that the underlying sales growth primarily reflects an estimated greater than 36 percent gain from volume, which includes an estimated nearly 32 percent impact from penetration gains, and an approximate 1 percent impact from higher sales prices.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Costs of sales for the first sixnine months of fiscal 2008 and 2007 were $7,291$11,446 million and $6,609$10,286 million, respectively. Cost of sales as a percent of net sales was 63.2 percent infor the first halfnine months of fiscal 2008, compared with 64.063.9 percent in the prior year period. Gross profit was $4,252$6,665 million and $3,722$5,817 million for the sixnine months ended March 31,June 30, 2008 and 2007, respectively, resulting in gross profit margins of 36.8 percent and 36.036.1 percent. The increase in the gross profit margin during the first halfnine months of fiscal 2008 primarily reflects leverage on higher sales volume and benefits realized from productivity improvements, which were partially offset by negative product mix. Higher sales prices were offset by higher raw material and wage costs. The increase in the gross profit amount primarily reflects higher sales volume and foreign currency translation.
Selling, general and administrative expenses for the sixnine months ended March 31,June 30, 2008 were $2,436$3,757 million, or 21.120.7 percent of net sales, compared with $2,180$3,334 million, or 21.120.7 percent of net sales, for the sixnine months ended March 31,June 30, 2007. The increase of $256$423 million was largely due to the increase in variable costs on higher sales.
Other deductions, net were $70$170 million for the first halfnine months of fiscal 2008, a $13$55 million increase from the $57$115 million for the same period in the prior year. In the first half of fiscalThe nine months ended June 30, 2008, the Company recognized gains of $39 million ($20 million after-tax) on the sale of an equity investment in IMC andincluded approximately $18 million of losses on the sale of a facility. In addition, the first six months of 2008 included a gain of approximately $3 million for a payment received under the U.S. Continued Dumping and Subsidy Offset Act,foreign exchange transactions compared with a $24$1 million payment receivedof gains in the prior year period. The first sixnine months of 2007fiscal 2008, also included a gain of approximately $32$12 million related to the sale of shares of MKS. A $15 million charge was recorded in the first half of fiscal 2008 for in-process research and development in connection with the acquisition of Motorola Inc.’s Embedded Communications Computing business, a $9 million impairment charge in December 2007.the appliance control business (See Note 10), and higher amortization expense. For the sixnine months ended March 31,June 30, 2008, amortization of intangibles increased $9$13 million compared with the prior year period due to acquisitions, offset by an $11 million decrease in rationalization costs.acquisitions. See notesNotes 6 and 7 for further details regarding other deductions, net and rationalization costs.
Earnings from continuing operations before income taxes for the first sixnine months of 2008 increased $277$401 million, or 2018 percent, to $1,645$2,591 million, compared with $1,368$2,190 million for the sixnine months ended March 31,June 30, 2007. The earnings results predominantly reflect increases of $104$165 million in Process Management, $138 million in Network Power and $88$50 million in Process ManagementIndustrial Automation business segments.
Income taxes were $528$827 million and $433$682 million for the sixnine months ended March 31,June 30, 2008 and 2007, respectively. The effective tax rate was 32 percent for both the first halfnine months of fiscal 2008 and 2007.compared with 31 percent in the prior year period. The effective tax rate for the entire fiscal year 2008 is expected to be approximately 32 percent.
Earnings from continuing operations were $1,117$1,764 million and earnings per share from continuing operations were $1.41$2.23 for the sixnine months ended March 31,June 30, 2008, increases of 1917 percent and 2219 percent, respectively, compared with $935$1,508 million and $1.16$1.87 for the sixnine months ended March 31,June 30, 2007.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Net earnings were $1,112$1,724 million and earnings per share were $1.40$2.18 for the sixnine months ended March 31,June 30, 2008, increases of 1814 percent and 2116 percent, respectively, compared with $939$1,513 million and $1.16$1.88 for the sixnine months ended March 31,June 30, 2007. Earnings for the first sixnine months of fiscal 2008 included a loss from discontinued operations of $5$40 million, or $0.01$0.05 per share, which included a gain of $42 million, or $0.05 per share, related to the divestiture of the Brooks unit, offset byand a loss of $52$88 million, or $0.06$0.11 per share, related to the write-down of the European appliance motor and pump business.business (See Note 10). The 2116 percent increase in earnings per share also reflects the purchase of treasury shares.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
BUSINESS SEGMENTS
Process Management
Six months ended March 31, | | 2007 | | 2008 | | Change | | |
Nine months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 2,563 | | | 3,033 | | | 18 | % | | $ | 4,034 | | | 4,764 | | | 18 | % |
Earnings | | $ | 456 | | | 544 | | | 19 | % | | $ | 725 | | | 890 | | | 23 | % |
Margin | | | 17.8 | % | | 17.9 | % | | | | | | 18.0 | % | | 18.7 | % | | | |
During the first sixnine months of fiscal 2008, Process Management sales increased 18 percent, on higher volume and acquisitions,foreign currency translation, to $3,033$4,764 million, and earnings increased 1923 percent. Nearly allAll of the businesses reported sales increases compared to the prior year period. Sales and earnings were particularly strong for the systems, measurement, and valves businesses due to worldwide growth in energy and power markets. Underlying sales increased 14 percent, reflecting 1013 percent from volume, which includes approximately 3 percent from penetration gains, and an estimated 1 percent from higher sales prices. Foreign currency translation had a 5 percent ($116197 million) favorable impact, while the Brooks divestiture, net of acquisitions, had a 1 percent ($623 million) unfavorable impact. The underlying sales increase reflects growth in all of the major geographic regions, including the United States (13 percent), Asia (20 percent), Europe (8(7 percent), Middle East/Africa (18 percent) and Latin America (21 percent), as well as Middle East/Africa (20(23 percent), compared with the prior year period. Earnings for the first sixnine months of fiscal 2008 increased 1923 percent to $544$890 million from $456$725 million in the prior year period, reflecting higher sales volume.volume and the benefit from foreign currency translation. The margin increase primarily reflects leverage on the higher volume, which was partially offset by unfavorable product mix. The increase in sales prices was more than offset by higher wage costs.
Industrial Automation
Six months ended March 31, | | 2007 | | 2008 | | Change | | |
Nine months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 2,051 | | | 2,301 | | | 12 | % | | $ | 3,146 | | | 3,572 | | | 14 | % |
Earnings | | $ | 317 | | | 342 | | | 8 | % | | $ | 478 | | | 528 | | | 10 | % |
Margin | | | 15.5 | % | | 14.9 | % | | | | | | 15.2 | % | | 14.8 | % | | | |
Sales in the Industrial Automation segment increased 1214 percent to $2,301$3,572 million for the sixnine months ended March 31,June 30, 2008. Sales grew in all of the businesses and in nearly all of the major geographic regions, reflecting the strength in the power generating alternator, electronic drivesfluid automation and fluid automationindustrial equipment businesses. Underlying sales grew 57 percent and foreign currency translation had a 7 percent ($134221 million) favorable impact. The underlying sales growth reflects 45 percent from volume, primarily due to increased global capital goods investment, as well as an estimated 1less than 2 percent positive impact from price. The increase in underlying sales reflects 7 percent growth in the United States and 6 percent growth internationally, primarily reflecting increases in Europe (5(4 percent) and Asia (16 percent), and sales growth in the United States was 5 percent.. Earnings increased 810 percent over the prior year sixnine month period to $342$528 million, reflecting leverage from higher sales volume and benefitsbenefit from prior cost reduction efforts.foreign currency translation. The margin decrease reflects a lower payment received by the power transmission business from dumping duties related to the U.S. Continued Dumping and Subsidy Offset Act. A $24 million payment was received in the first quarter of fiscal 2007 while only a $3 million payment was received in the first quarter of fiscal 2008. The Company does not expect to receive any significant payments in the future. ThisThe margin decrease was partially offset by leverage on the higher sales volume and leverage, as well as foreign currency translation.benefits from prior cost reductions efforts. Higher sales prices were substantially offset by higher material and wage costs.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Network Power
Six months ended March 31, | | 2007 | | 2008 | | Change | | |
Nine months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 2,390 | | | 2,926 | | | 22 | % | | $ | 3,712 | | | 4,598 | | | 24 | % |
Earnings | | $ | 263 | | | 367 | | | 39 | % | | $ | 441 | | | 579 | | | 31 | % |
Margin | | | 11.0 | % | | 12.5 | % | | | | | | 11.9 | % | | 12.6 | % | | | |
The Network Power segment sales increased 2224 percent to $2,926$4,598 million for the first sixnine months of 2008 compared with the prior year period, reflecting continued strength in the power systems and precision cooling businesses. Underlying sales grew 11 percent, the ECCEmbedded Computing and Stratos acquisitions contributed 79 percent ($167328 million) and foreign currency translation had a 4 percent ($86137 million) favorable impact. The underlying sales increase of 11 percent reflects a 7an 11 percent gain from higher volume, andwhich includes an estimated 54 percent impact from penetration gains, which were partially offset by an approximate less than 1 percent decline in sales prices.gains. Geographically, underlying sales reflect an 18a 16 percent increase in Asia and a 12an 11 percent increase in the United States, while Europe was flat.increased 1 percent. The U.S. growth reflects strong demand for data room construction and non-residential computer equipment as well as in the telecommunications power market. The Company’s market penetration gains in China and other Asian markets continued. Earnings for the sixnine months ended March 31,June 30, 2008 of $367$579 million increased $104$138 million, or 3931 percent, from the prior year period primarily due to the higher sales volume and savings from cost reduction actions, partially offset by higher wage costs. The margin increase reflects the cost savings and leverage on the higher volume.volume, partially offset by dilution from acquisitions.
Climate Technologies
Six months ended March 31, | | 2007 | | 2008 | | Change | | |
Nine months ended June 30, | | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Sales | | $ | 1,633 | | | 1,722 | | | 5 | % | | $ | 2,676 | | | 2,809 | | | 5 | % |
Earnings | | $ | 231 | | | 244 | | | 6 | % | | $ | 405 | | | 413 | | | 2 | % |
Margin | | | 14.2 | % | | 14.2 | % | | | | | | 15.1 | % | | 14.7 | % | | | |
Sales in the Climate Technologies segment increased 5 percent to $1,722$2,809 million for the sixnine months ended March 31,June 30, 2008. Underlying sales increased 2 percent, while foreign currency translation had a 3 percent ($5185 million) favorable impact. LowerTotal sales volume of 2 percent was offset byflat, after the consideration of an approximate 2 percent positive impact from penetration gains, and sales price increases andcontributed an approximate 2 percent from penetration gains.positive impact. The underlying sales increase was led by the water-heater controls business which primarily reflects further penetration in the U.S. water-heater market. The compressors business grew slightly, primarily in the U.S. and Asian air-conditioning markets. The underlying sales increase reflects a 31 percent increase in the United States and 13 percent growth in Asia, while sales in Europe declined 1512 percent. Earnings of $244$413 million for the first sixnine months of fiscal 2008 increased 62 percent when compared towith the prior year period, reflecting savings from prior cost reduction efforts, whichperiod. The margin was diluted as higher sales prices were partiallymore than offset by negative product mix. The profit margin was flat asmaterial inflation and higher material and wage costs offset higher sales prices.costs.
Appliance and Tools
Nine months ended June 30, | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | | | | |
| | | | | | | | | | |
Sales | | $ | 2,993 | | | 2,886 | | | (4 | %) |
Earnings | | $ | 406 | | | 409 | | | 1 | % |
Margin | | | 13.6 | % | | 14.2 | % | | | |
Six months ended March 31, | | 2007 | | 2008 | | Change | |
(dollars in millions) | | | | | | | |
| | | | | | | |
Sales | | $ | 1,988 | | | 1,888 | | | (5 | %) |
Earnings | | $ | 263 | | | 271 | | | 3 | % |
Margin | | | 13.2 | % | | 14.4 | % | | | |
17
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
The Appliance and Tools segment sales decreased 54 percent to $1,888$2,886 million for the first sixnine months of 2008. This decrease reflects a 53 percent decline in underlying sales, a 2 percent ($3750 million) unfavorable impact from divestitures and a 21 percent ($2636 million) favorable impact from foreign currency translation. The results for the first sixnine months show declines across most of the businesses. Strong growth in the professional tools business and moderate growth in the hermetic motors businessesbusiness was more than offset by declines in the storage, appliance components, and appliance and commercial motors businesses. The strong growth in the professional tools business was driven by the U.S. non-residential and European markets. The declines in the storage and appliance-related businesses primarily reflect the continued downturn in the U.S. residential market. The underlying sales decrease of 53 percent reflects an estimated 6 percent decline in volume and an approximate 3 percent positive impact from higher sales prices, offset by an estimated 8 percent decline in volume.prices. Total international underlying sales increased 1112 percent and sales in the United States decreased approximately 76 percent during the first halfnine months of 2008. Earnings increased 31 percent to $271$409 million for the current sixnine month period. Earnings and margin improvements reflect savings from prior period restructuringcost reduction actions and hedging gains, partiallylower rationalization costs during the current period, offset by deleverage on the lower sales volume.volume and an impairment charge of $9 million in the appliance control business (See Note 10). The increase in sales prices was substantially offset by higher material and wage costs. The 2007 sale of the consumer hand tools product line also favorably impacted the margin.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
FINANCIAL CONDITION
A comparison of key elements of the Company's financial condition at the end of the secondthird quarter as compared to the end of the prior fiscal year follows:
| | | September 30, | | June 30, | |
| | September 30, | | March 31, | | | 2007 | | 2008 | |
| | 2007 | | 2008 | | | | | | | | |
Working capital (in millions) | | $ | 2,519 | | | 2,850 | | | $ | 2,519 | | | 3,051 | |
Current ratio | | | 1.5 to 1 | | | 1.4 to 1 | | | | 1.5 to 1 | | | 1.4 to 1 | |
Total debt to total capital | | | 30.1 | % | | 34.3 | % | | | 30.1 | % | | 34.0 | % |
Net debt to net capital | | | 23.6 | % | | 24.7 | % | | | 23.6 | % | | 22.9 | % |
The ratio of total debt to total capital was 34.334.0 percent as of March 31,June 30, 2008, or 1.80.5 percentage points below the 36.134.5 percent ratio for the prior year secondthird quarter. The Company's long-term debt is rated A2 by Moody's Investors Service and A by Standard and Poor's. The Company's interest coverage ratio (earnings before income taxes and interest expense, divided by interest expense) was 13.914.8 times for the sixnine months ended March 31,June 30, 2008, compared with 11.512.0 times for the same period in the prior year, primarily due to higher earnings during the first sixnine months of fiscal 2008.
Cash and equivalents increased by $759$1,049 million during the sixnine months ended March 31,June 30, 2008. During the second quarter of 2008, the Company issued $400 million of 5.250% notes due October 2018, under a shelf registration statement filed with the Securities and Exchange Commission. Cash flow provided by operating activities of $1,171$1,998 million was up $296$224 million compared with $875$1,774 million in the prior year period. Operating cash flow, the net increase in short-term borrowings of $688$774 million and the $399$400 million of proceeds from long-term debt were used primarily to fund purchases of treasury stock of $483$727 million, pay dividends of $473$708 million, fund capital expenditures of $461 million and fund purchases of businesses of $440 million and fund capital expenditures of $306$412 million. For the sixnine months ended March 31,June 30, 2008, free cash flow of $865$1,537 million (operating cash flow of $1,171$1,998 million less capital expenditures of $306$461 million) was up 4514 percent from free cash flow of $599$1,354 million (operating cash flow of $875$1,774 million less capital expenditures of $276$420 million) for the same period in the prior year, primarily due to higher earnings in the sixnine months ended March 31,June 30, 2008, as compared to the prior year period.
The Company is in a strong financial position, with total assets of $21$22 billion and stockholders' equity of $9$10 billion, and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing the capital structure on a short- and long-term basis.
New Accounting Pronouncements
Effective October 1, 2007, the Company adopted the recognition and disclosure provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -– an Interpretation of FASB Statement 109” (FIN 48). FIN 48 addresses the accounting for uncertain tax positions that a company has taken or expects to take on a tax return. See note 9 for further discussion on the impact of FIN 48 on the financial statements.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (FAS 141(R)). FAS 141(R) requires assets acquired and liabilities assumed to be measured at fair value as of the acquisition date, acquisition related costs incurred prior to the acquisition to be expensed and contractual contingencies to be recognized at fair value as of the acquisition date. The Company is in the process of analyzing the impact of FAS 141(R), which is effective for fiscal years beginning after December 15, 2008.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements -– an amendment of ARB No. 51” (FAS 160). FAS 160 requires an entity to separately disclose non-controlling interests as a separate component of equity in the balance sheet and clearly identify on the face of the income statement net income related to non-controlling interests. The Company is in the process of analyzing the impact of FAS 160, which is effective for fiscal years beginning after December 15, 2008.
In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (FAS 161). FAS 161 requires additional derivative disclosures, including objectives and strategies for using derivatives, fair value amounts of and gains and losses on derivative instruments, and credit-risk-related contingent features in derivative agreements. The Company is in the process of analyzing the impact of FAS 161, which is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of FAS 161 to have a material impact on the financial statements.
OUTLOOK
Based on the Company’s performance in the first halfnine months of fiscal 2008 and continued order strength, underlying sales growth for fiscal 2008 is expected to be in the range of 5 percent to 7approximately 6 percent, which excludes approximately 6 percent favorable impact from foreign currency translation, acquisitions and divestitures. Reported sales are expected to be approximately $25 billion, an increase of 11 percent to 13 percent over fiscal 2007 sales of $22.1 billion, excluding discontinued operations. Based on this level of sales, the Company expects to generate 2008 earnings per share from continuing operations of $3.00$3.05 to $3.10 compared with $2.65 per share in fiscal 2007.2007 and return on total capital of approximately 21 percent. Rationalization of operations expense is estimated to be approximately $85 million to $95$90 million for fiscal 2008. Operating cash flow is estimatedtargeted at approximately $3.2$3.3 billion and capital expenditures are estimated to be $0.8 billion for 2008.
Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statementstatements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others which are set forth in the “Risk Factors” of Part I, Item 1, and the "Safe Harbor Statement" of Exhibit 13, to the Company's Annual Report on Form 10-K for the year ended September 30, 2007, which are hereby incorporated by reference.
Item 4. Controls and Procedures
Emerson maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including the Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company's certifying officers have concluded that the disclosure controls and procedures were effective as of March 31,June 30, 2008, to provide reasonable assurance of the achievement of these objectives.
Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
There was no change in the Company's internal control over financial reporting during the quarter ended March 31,June 30, 2008, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Issuer Purchases of Equity Securities.
Period | | (a) Total Number of Shares Purchased (000s) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (000s) | | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (000s) | |
January 2008 | | | 1,860 | | $ | 51.26 | | | 1,860 | | | 9,482 | |
February 2008 | | | 1,760 | | $ | 51.85 | | | 1,760 | | | 7,722 | |
March 2008 | | | 2,100 | | $ | 50.17 | | | 2,100 | | | 5,622 | |
Total | | | 5,720 | | $ | 51.04 | | | 5,720 | | | 5,622 | |
Period | | (a) Total Number of Shares Purchased (000s) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (000s) | | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (000s) | |
April 2008 | | | 1,760 | | | | | | 1,760 | | | 3,862 | |
| | | | | | | | | | | | | |
May 2008 | | | 1,320 | | | | | | 1,320 | | | 82,542 | |
| | | | | | | | | | | | | |
June 2008 | | | 1,540 | | | $53.63 | | | 1,540 | | | 81,002 | |
| | | | | | | | | | | | | |
Total | | | 4,620 | | | $53.91 | | | 4,620 | | | 81,002 | |
The Company’s Board of Directors authorized the repurchase of up to 80 million shares under the November 2001 program, as adjusted for the Company’s December 2006 two-for-one stock split. The maximum number of shares that may yet be purchased under this program was 5.6 million as of March 31, 2008. The above table does not reflect the new program approved by the Board of Directors approved a new program on May 6, 2008, for the repurchase of up to 80 million additional shares. The maximum number of shares that may yet be purchased under these programs was 81.0 million as of June 30, 2008.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders on February 5, 2008, matters described in the Notice of Annual Meeting of Stockholders dated December 14, 2007, were voted upon.
1.The directors listed below were elected for terms ending in 2011, with voting for each as follows:
DIRECTOR | | FOR | | WITHHELD | |
D. N. Farr | | | 682,970,402 | | | 16,891,799 | |
R. B. Horton | | | 684,577,743 | | | 15,284,458 | |
C. A. Peters | | | 684,198,481 | | | 15,663,720 | |
J. W. Prueher | | | 686,359,933 | | | 13,502,268 | |
2.The proposal to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm was approved by a vote of 685,311,564 in favor to 12,407,405 against, with 2,143,232 abstaining.
There were no broker non-votes on the matters that were voted upon.
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
Item 6. Exhibits.
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).
3.1 | | Bylaws of Emerson Electric Co., as amended through February 5, 2008. |
| | |
4 | | Emerson agrees to furnish to the Securities and Exchange Commission, upon request, copies of any long-term debt instruments that authorize an amount of securities constituting 10 percent or less of the total assets of Emerson and its subsidiaries on a consolidated basis. |
| | |
10.1 | | First Amendment to the Emerson Electric Co. Savings Investment Restoration Plan.2006 Incentive Shares Plan |
| 10.2 | Summary of Changes to Compensation Arrangements with Non-Management Directors |
12 | 12 | Ratio of Earnings to Fixed Charges. |
| | |
31 | | Certifications pursuant to Exchange Act Rule 13a-14(a). |
| | |
32 | | Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350. |
EMERSON ELECTRIC CO. AND SUBSIDIARIES | FORM 10-Q |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| EMERSON ELECTRIC CO. |
|
| |
Date: May 7,August 6, 2008 | By | /s/ By /s/ Walter J. Galvin |
| | Walter J. Galvin |
|
Walter J. Galvin
| Senior Executive Vice President |
| | and Chief Financial Officer |
| Senior Executive Vice President
and Chief Financial Officer
| |
| | (on behalf of the registrant and |
| | as Chief Financial Officer) |
Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K.
Exhibit No. | | Exhibit |
| | |
3.1 | | Bylaws of Emerson Electric Co., as amended through February 5, 2008. |
| | |
10.1 | | First Amendment to the Emerson Electric Co. Savings Investment Restoration Plan.2006 Incentive Shares Plan |
| | |
10.2 | | Summary of Changes to Compensation Arrangements with Non-Management Directors |
| | |
12 | | Ratio of Earnings to Fixed Charges. |
| | |
31 | | Certifications pursuant to Exchange Act Rule 13a-14(a). |
| | |
32 | | Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350. |