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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 December 31, 2001
OR
[ ] 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, and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Common stock outstanding at December 31, 2001: 420,703,540 shares.
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PART I. FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial Statements.
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
(Dollars in millions except per share amounts; unaudited)
Three Months
Ended December 31, |
| | 2000 | | 2001 |
Net Sales | | $3,919.5 | | 3,294.8 |
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Interest expense
Other income, net | |
2,531.5
774.0
83.6
(13.7)
| |
2,124.7
747.9
70.1
(16.1) |
Total costs and expenses | | 3,375.4 | | 2,926.6 |
Income before income taxes | | 544.1 | | 368.2 |
Income taxes | | 186.7 | | 113.5 |
Net earnings | | $ 357.4 | | 254.7 |
Basic earnings per common share | | $ .84 | | .61 |
Diluted earnings per common share | | $ .83 | | .61 |
Cash dividends per common share | | $ .3825 | | .3875 |
See accompanying notes to consolidated financial statements.
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<PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share amounts; unaudited)
| September 30,
2001 | | December 31,
2001 |
ASSETS
CURRENT ASSETS
Cash and equivalents
Receivables, less allowances of $79.0 and $83.4
Inventories
Other current assets | $ 355.7
2,551.2
1,896.8
516.4 | | 467.4
2,447.9
1,877.7
465.8 |
Total current assets | 5,320.1 | | 5,258.8 |
PROPERTY, PLANT AND EQUIPMENT, NET | 3,288.0 | | 3,203.6 |
OTHER ASSETS
Goodwill
Other |
5,182.0
1,256.3
| |
5,757.2
1,278.5
|
Total other assets | 6,438.3
$15,046.4 | | 7,035.7
15,498.1 |
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current maturities
of long-term debt
Accounts payable
Accrued expenses
Income taxes |
$ 2,447.5
1,127.5
1,619.4
184.7
| |
2,684.9
986.5
1,374.7
160.0
|
Total current liabilities | 5,379.1 | | 5,206.1 |
LONG-TERM DEBT OTHER LIABILITIES | 2,255.6 1,297.7 | | 2,746.9 1,303.5 |
STOCKHOLDERS' EQUITY
Preferred stock of $2.50 par value per share.
Authorized 5,400,000 shares; issued - none
Common stock of $.50 par value per share.
Authorized 1,200,000,000 shares; issued
476,677,006 shares
Additional paid in capital
Retained earnings
Accumulated other nonstockholder
changes in equity
Cost of common stock in treasury, 57,051,435
shares and 55,973,466 shares |
238.3
30.9
8,990.7
(741.3) (2,404.6) | |
238.3
35.8
9,082.6
(755.2) (2,359.9) |
Total stockholders' equity | 6,114.0
$15,046.4 | | 6,241.6
15,498.1 |
See accompanying notes to consolidated financial statements.
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EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 2001
(Dollars in millions; unaudited)
Three Months
Ended December 31, |
| 2000 | 2001 |
OPERATING ACTIVITIES
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization
Changes in operating working capital
Gains on divestitures and other Net cash provided by operating activities |
$ 357.4
171.4
(199.5)
(52.2)
277.1 |
254.7
130.7
(71.2)
(62.6)
251.6 |
INVESTING ACTIVITIES
Capital expenditures
Purchases of businesses, net of cash and
equivalents acquired
Divestitures of businesses and other, net Net cash used in investing activities |
(150.3)
(55.3)
52.2 (153.4) |
(93.7)
(712.5)
152.5
(653.7)
|
FINANCING ACTIVITIES
Net increase in short-term borrowings
Proceeds from long-term debt
Principal payments on long-term debt
Dividends paid
Treasury stock, net Net cash (used in) provided by financing activities |
86.2
44.8
(11.4)
(164.0)
3.1
(41.3) |
197.4
501.1
(5.7)
(162.8)
(18.0)
512.0 |
Effect of exchange rate changes on cash and equivalents | (3.5) | 1.8 |
INCREASE IN CASH AND EQUIVALENTS | 78.9 | 111.7 |
Beginning cash and equivalents | 280.8 | 355.7 |
ENDING CASH AND EQUIVALENTS | $ 359.7 | 467.4 |
See accompanying notes to consolidated financial statements.
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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 by 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, 2001.
2. Other Financial Information
(Dollars in millions; unaudited)
| September 30,
2001 | | December 31,
2001 |
Inventories
Finished products
Raw materials and work in process |
$ 722.8
1,174.0
$1,896.8
| |
752.3
1,125.4
1,877.7 |
Property, plant and equipment, net
Property, plant and equipment, at cost
Less accumulated depreciation |
$6,664.2
3,376.2
$3,288.0
| |
6,623.9
3,420.3
3,203.6 |
Other assets, other
Retirement plans
Equity and other investments
Leveraged leases
Other |
$ 519.1
163.0
162.9
411.3
$1,256.3
| |
524.9
140.4
159.5
453.7
1,278.5 |
Other liabilities
Deferred taxes
Postretirement plans, excl. current portion
Minority interest
Other |
$ 382.7
307.4
100.1
507.5
$1,297.7
| |
387.3
308.3
98.1
509.8
1,303.5
|
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EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
3. Effective October 1, 2001, Emerson adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The statement requires, among other things, the discontinuation of
goodwill amortization for business combinations before July 1, 2001,
and completion of a transitional goodwill impairment test. If a
reporting unit's carrying amount exceeds its estimated fair value,
a goodwill impairment is recognized to the extent that the reporting
unit's carrying amount of goodwill exceeds the implied fair value of
the goodwill. Emerson is in the process of performing the transitional
impairment test, which is expected to be completed in the second quarter.
An impairment charge totaling around ten percent of goodwill is
anticipated in connection with the adoption of FAS 142. The statement
also requires any such charge be recognized as a cumulative effect of a
change in accounting principle.
For comparison purposes, supplemental net earnings and earnings per share
for the three months ended December 31, 2000, excluding goodwill
amortization of $41.3 million ($37.5 million net of tax), are provided
as follows (dollars in millions, except per share amounts):
Supplemental earnings disclosure:
Net earnings, excluding goodwill amortization |
$ 394.9
| |
Earnings per share, excluding goodwill amortization
Basic
Diluted |
$ 0.92
$ 0.91
| |
4. In the first quarter of 2002, Emerson acquired Avansys Power Co.,
Ltd., a provider of network power products to the telecommunications
industry in China, for $750 million in cash (approximately $710 net
of cash acquired). In addition, Emerson received $165 million from the
divestiture of the Chromalox industrial heating solutions business
resulting in a pre-tax gain of $85 million.
5. The expected long-term rate of return on U.S. retirement plan assets was
changed to 9 percent which will increase pension cost approximately $30
million for 2002.
6. In the fourth quarter of 2001, Emerson recognized a pretax incremental
repositioning charge of $377 million ($260 million after-tax) for the
consolidation and rationalization of operations and exiting of certain
product lines, including $326 million for the writedown of fixed and
intangible assets, non-strategic investments and inventory. Exit costs
for severance and lease terminations utilized during the current quarter
were $10 million and $1 million, with remaining balances of $9 million
and $31 million, respectively.
7. As reflected in the financial statements, nonstockholder changes in equity
for the three months ended December 31, 2000 and 2001, were $312.5 million
and $240.8 million, comprised of net earnings of $357.4 million and $254.7
million and foreign currency translation adjustments and other, net of
$(44.9) million and $(13.9) million, respectively.
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EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
8. The weighted average number of common shares outstanding (in millions) was
427.1 and 418.4 for the three months ended December 31, 2000 and 2001,
respectively. The weighted average number of shares outstanding assuming
dilution (in millions) was 431.6 and 420.4 for the three months ended
December 31, 2000 and 2001, respectively. Dilutive shares primarily relate
to stock plans.
9. Business Segment Information
Summarized information about the Company's operations by business
segment for the three months ended December 31, 2000 and 2001, follows
(dollars in millions):
| Sales
2000 2001 | Earnings
2000 2001 |
Process Control
Industrial Automation
Electronics and Telecommunications
HVAC
Appliance and Tools
Differences in accounting methods
Interest income, corporate and other
Eliminations/Interest expense Net sales/Income before income taxes | $ 774.4
752.7
1,086.6
519.7
880.5
4,013.9
(94.4) $3,919.5 | | 796.4
656.4
634.5
458.5
831.1
3,376.9
(82.1)
3,294.8 | 66.9
107.0
147.6
74.7
135.6
531.8
48.1
47.8
(83.6) 544.1 | | 84.9
84.6
32.6
58.6
103.0
363.7
38.9
35.7
(70.1) 368.2 |
Intersegment sales of the Appliance and Tools segment for the three months
ended December 31, 2000 and 2001, respectively, were $75 million and $66
million. In connection with the adoption of FAS 142, fiscal 2002 segment
earnings exclude goodwill amortization. Fiscal 2001 segment earnings
include goodwill amortization as follows (in millions): Process
Control $14; Industrial Automation $6; Electronics and Telecommunications
$14; HVAC $3; and Appliance and Tools $4.
Items 2 and 3. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Net sales for the quarter ended December 31, 2001, were $3,294.8 million, down 16 percent from net sales of $3,919.5 million for the quarter ended December 31, 2000. Underlying sales decreased 17 percent, excluding the impact of acquisitions, divestitures and currency exchange. Underlying domestic and international sales both declined similarly in the first quarter, reflecting the global economic weakness and the actions of key customers who reduced their inventories and production.
The process control business reported a 3 percent increase in sales, reaching $796.4 million. Underlying sales grew approximately 5 percent, primarily in international regions such as Europe and Latin America. The U.S. and Asian markets also continued to experience modest to moderate growth. PlantWeb technology continues to gain acceptance, with over 2,200 project wins across the oil and gas, pharmaceutical, chemical, pulp and paper, and food
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EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
and beverage industries, and two major contracts awarded during December, each totaling over $25 million.
Sales in the industrial automation business declined from $752.7 million to $656.4 million, as a result of underlying sales declines and the Sweco specialty separation business and the Chromalox industrial heating products division divestitures. Underlying sales declined approximately 10 percent from the prior year, driven by continued weakness in both the North American and European capital goods markets.
Reported sales in the electronics and telecommunications business declined to $634.5 million from $1,086.6 million. Underlying sales declined nearly 50 percent due to the continued worldwide weaknesses in the telecom and computing equipment markets. Emerson's recent acquisition of Avansys, China's leading electronics and telecom company, has provided important infrastructure to strengthen our global market leadership and enables many cost actions.
Sales in the heating, ventilating and air conditioning business decreased by approximately 12 percent, as many key customers took aggressive actions to control their inventory and costs in the quarter. The underlying sales decline during the quarter reflects weak U.S. and international demand. However, this segment is well positioned for future growth, with relatively low channel inventory levels and several new opportunities for the Copeland Scroll compressor technology.
Sales of the appliance and tools business decreased 6 percent, primarily due to weakness in the industrial sector worldwide. Underlying sales decreased approximately 6 percent with the tools and motors businesses down and the appliance component businesses up modestly. Demand for consumer-based products improved throughout the quarter, with In-Sink-Erator waste disposers, ClosetMaid storage solutions and several appliance components products posting modest to strong growth.
Cost of sales for the first quarter of fiscal 2002 and 2001 was $2,124.7 million and $2,531.5 million, respectively. Cost of sales as a percent of sales was 64.5 percent and 64.6 percent in the first quarter of fiscal 2002 and 2001, respectively. Selling, general and administrative expenses for the three months ended December 31, 2001, were $747.9 million, or 22.7 percent of sales, compared to $774.0 million, or 19.7 percent of sales, for the same period a year ago. Other income, net for the first quarter of fiscal 2002 includes a $85 million pre-tax gain from the sale of Chromalox, which was approximately offset by ongoing costs for the rationalization of operations and other items. The first quarter of fiscal 2001 includes a $60 million pre-tax gain from the sale of Sweco, goodwill amortization and other items. The consolidated operating margin declined almost 3 percentage points from a year ago, driven by the overall sales decrease. The Company continues to focus on implementing restructuring actions f or cost structure improvements by reducing salaried headcount, closing and consolidating facilities, and discontinuing certain product areas that have not met growth expectations.
In connection with the adoption of FAS 142, fiscal 2002 earnings exclude goodwill amortization which increases the company's reported fiscal 2002
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EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
earnings by $0.35 per share, or approximately $0.09 per share per quarter. The following discussion excludes goodwill amortization from 2001 earnings for comparative purposes. Earnings before interest and income taxes for the first quarter of 2002 were $368.2 million, a decrease of 37 percent. The decline was primarily due to the deleverage resulting from the decline in sales, reflecting weak economic conditions worldwide. Earnings before interest and income taxes in the process control business increased 6 percent to $84.9 million in the first quarter, building on the earnings growth achieved in fiscal 2001. The electronics and telecommunications business has remained profitable and earned $32.6 million, an 80 percent decrease from the prior year, despite the continued worldwide weakness in the telecom and computing equipment market. Earnings decreases in the industrial automation, heating, ventilating and air conditioning, and appliance and tools businesses were mainly driven by weakness in capital good s in both the United States and Europe which led to many of Emerson's customers taking aggressive actions to control their inventory and production in the quarter.
The effective income tax rate for the first quarter of 2002 decreased to 30.8 percent compared to 34.3 percent for the same period in the prior year, primarily the result of discontinuing goodwill amortization upon the adoption of FAS 142 due to the non-deductible nature of goodwill.
Financial Condition
A comparison of key elements of the Company's financial condition at the end of the first quarter as compared to the end of the prior fiscal year follows:
| | September 30, 2001 | | December 31, 2001 |
Working capital (in millions)
Current ratio
Total debt to total capital
Net debt to net capital | | $ (59.0)
1.0 to 1
43.5%
41.5% | | 52.7
1.0 to 1
46.5%
44.3% |
The Company's interest coverage ratio (earnings before income taxes and interest expense, divided by interest expense) was 6.3 times for the three months ended December 31, 2001, compared to 7.5 times for the same period one year earlier. The decrease in the interest coverage ratio reflects lower earnings and higher average borrowings resulting from the Avansys acquisition, partially offset by lower interest rates. Solid cash generation and lower levels of acquisitions and stock repurchase throughout the remainder of 2002 are expected to decrease the Company's debt position. In the first quarter of fiscal 2002, the Company issued $250 million of 5.75% 10-year notes and $250 million of 5 5/8% 12-year notes.
Cash and equivalents increased by $111.7 million during the three months ended December 31, 2001. Cash flow provided by operating activities of $251.6 million, a net increase in borrowings of $692.8 million, and the cash flow provided by divestitures of businesses and other, net of $152.5 million were used primarily to fund purchases of businesses of $712.5 million, pay dividends of $162.8 million and fund capital expenditures of $93.7 million. Free cash flow increased 25 percent versus the first quarter of fiscal 2001,
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EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
from $127 million to $158 million, driven by improvements in working capital and lower capital spending. Decreases in accounts payable and accrued expenses compared to September 30, 2001, reflect the business downturn, seasonal timing, and distribution of incentive compensation. Balances are comparable with December 31 of the prior year.
The Company is in a strong financial position and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing the capital structure on a short- and long-term basis.
Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties. These include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others which are set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 2001.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item
601 in Regulation S-K).
12 Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K. Pursuant to Item 5, the Company filed a Report on
Form 8-K dated October 21, 2001 to announce the purchase of Avansys
Power Co., Ltd. and the earnings outlook for fiscal 2001. Pursuant to
Item 9, the Company filed Reports on Form 8-K dated November 28, 2001,
and December 20, 2001, furnishing Regulation FD disclosures.
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: February 13, 2002 By /s/ W. J. Galvin
-----------------------
Walter J. Galvin
Executive Vice President
and Chief Financial Officer
(on behalf of the registrant and
as Chief Financial Officer)
10
