Exhibit 99
Financial Review
Results of Operations
Net Sales
Sales for 2000 were a record $15.5 billion, an increase of $1,275 million, or
8.9 percent, from 1999. The strong sales growth was driven by robust demand for
network power and connectivity products and services, the continued success of
other major growth initiatives, and the contribution of acquisitions. This
growth was achieved despite divestitures, and the impact of a stronger U.S.
dollar that reduced reported sales by more than 2 percent. Underlying sales
grew over 7 percent excluding acquisitions, divestitures and currency exchange.
Excluding the impact of divestitures, all businesses reported sales increases.
U.S. sales increased approximately $1,094 million, or 13 percent, while
international sales increased approximately $181 million, or 3 percent.
Underlying sales growth was led by robust demand in the Electronics and
Telecommunications business worldwide, while the Heating, Ventilating and Air
Conditioning (HVAC) business achieved a very strong performance
internationally. New product sales, from products introduced in the past five
years, increased approximately $614 million, to a record $5.6 billion,
representing 36 percent of sales, a 10 point increase in the past five years.
The Company continued to reposition into faster-growth markets, divesting three
slower-growth operations with combined sales of approximately $600 million, and
acquiring three strategic businesses. Acquisitions completed throughout 2000
had annualized sales of over $1 billion.
In 1999, sales were $14.3 billion, up $822 million, or 6.1 percent, from 1998.
The solid sales increase reflected modest underlying sales growth and the
contribution of acquisitions. Excluding the impact of divestitures, all
businesses reported sales increases. U.S. sales increased approximately $455
million, or 6 percent, while international sales increased approximately $368
million, or 7 percent. Underlying sales growth was led by strong growth in both
the HVAC business and the Electronics and Telecommunications business. New
product sales, from products introduced in the past five years, increased
approximately $570 million, or 13 percent, to $5.0 billion, representing 35
percent of sales.
International Sales
International sales, including U.S. exports, increased over 3 percent to a
record $5.9 billion in 2000, representing 38 percent of the Company's total
sales. U.S. exports increased 9 percent to $1.0 billion. Sales by non-U.S.
subsidiaries were $5.0 billion in 2000, up 3 percent from 1999. International
subsidiary sales increased 8 percent excluding acquisitions, divestitures and
the unfavorable impact of currency translation of approximately $320 million.
Strong growth in Canada, Asia and Latin America and moderate growth in Europe
was dampened by the impact of currency exchange.
In 1999, international sales increased approximately 7 percent to $5.7 billion,
representing 40 percent of the Company's total sales. Underlying growth in
Europe, Asia and other regions more than offset the impact of weakness in Latin
America. Sales by non-U.S. subsidiaries were $4.8 billion in 1999, up 9 percent
from 1998. U.S. exports decreased 1 percent to $960 million, primarily
reflecting weakness in Latin America and Japan. International subsidiary sales
increased approximately 2 percent excluding acquisitions and divestitures.
Business Segment Sales -- 2000 vs. 1999
The Process Control business achieved a 5 percent sales increase to $3.0
billion in 2000. This increase was driven by the Daniel Industries, Inc.
acquisition and customers embracing PlantWeb technology, partially offset by
difficult market conditions, particularly in Asia and Europe, and the impact of
currency exchange. Underlying sales for the year decreased slightly but turned
positive in the fourth quarter, the first organic sales improvement since the
process markets began to cycle down in 1998. Project quotation activity has
improved for several months, which provides confidence that the recent market
improvement can continue. Sales of the Industrial Automation business were $3.5
billion in 2000, down 6 percent. Excluding the impact of the F.G. Wilson and
Krautkramer divestitures, sales of the Industrial Automation business were $3.4
billion in 2000, up 4 percent, negatively impacted by the stronger U.S. dollar.
Solid underlying improvement in Europe and other international regions, the
late-1999 acquisitions of Kato and MagneTek's alternator operations, and
stabilization in U.S. capital goods markets drove the improvement.
A-1
The Electronics and Telecommunications business achieved outstanding
performance, with sales increasing 58 percent, to $3.4 billion. The increase
was the result of underlying growth of nearly 30 percent, reflecting strong
worldwide demand for reliable power and networking products, and two strategic
acquisitions in 2000 - Jordan Telecommunication Products, Inc. and Ericsson
Energy Systems. All product and service areas increased sharply, with
particular strength in large UPS and precision air conditioning systems for
web-hosting centers, and DC/DC embedded modules for applications such as next-
generation routers and telecom switching. Entering fiscal 2001, these
operations will represent the Company's largest segment.
Sales of the HVAC business were $2.5 billion in 2000, a 5 percent increase from
1999, dampened slightly by unfavorable currency exchange. Europe, Asia and
Latin America all achieved very strong underlying sales growth, primarily due
to improved market conditions and continued penetration of Copeland's scroll
compressor technology. Sales of the Appliance and Tools business increased 1
percent to $3.6 billion. Excluding the impact of the Vermont American
divestiture, the Appliance and Tools business sales rose 7 percent to
$3.4 billion, driven by very strong underlying growth in the tools operations.
Tools sales through the rapidly growing home centers channel increased in 2000,
particularly the successful relationship with The Home Depot, which capitalizes
on the RIDGID-branded line of professional quality tools. Underlying appliance-
related sales were relatively flat for the year, due in part to distribution
issues faced by some key customers.
Business Segment Sales -- 1999 vs. 1998
The Process Control business increased sales 7 percent to $2.9 billion in 1999.
This solid sales increase was driven by the strong growth of the PlantWeb
initiative, and the Westinghouse Process Control and Daniel Industries
acquisitions. Underlying sales decreased, reflecting the impact of weak oil
prices on U.S. and Asian demand for process-related equipment, which more than
offset modest growth in Europe. Sales of the Industrial Automation business
decreased to $3.7 billion. Excluding the impact of the F.G. Wilson and
Krautkramer divestitures, sales of the Industrial Automation business were
$3.3 billion in 1999, an increase of 1 percent. Despite widespread softness in
end markets, the Industrial Automation business realized a small increase in
sales due to the contribution of acquisitions. The global weakness in capital
spending, largely due to weak oil pricing earlier in 1999, has had a
substantial impact on this business.
The Electronics and Telecommunications business increased sales 32 percent to
$2.1 billion in 1999. This outstanding performance, particularly in the United
States and Europe, was achieved due to rapid growth in power protection and
Environmental equipment, as well as in the service business that monitors and
maintains this equipment. This business also benefited from a significant
recovery in the market for power supply products, driven by recovery in Asia
and robust growth in the computing and telecommunications infrastructure. The
increase in the Electronics and Telecommunications business sales was also
aided by the 1998 acquisitions of Nortel's Advanced Power Systems operations
and Hiross environmental systems in Europe.
Sales of the HVAC business were $2.4 billion in 1999, an increase of 11 percent
from 1998. Underlying sales of the HVAC business increased substantially,
driven by a dramatic recovery in residential and light commercial construction
in China, a warm summer in the United States, and continued market adoption of
scroll technology. Sales of the Appliance and Tools business were up 1 percent
to $3.5 billion in 1999. Underlying sales of the Appliance and Tools business
grew slightly, with the results varying by geography and product area. In the
United States, strong construction activity drove growth in several consumer-
related areas, while European sales declined due to weakness in appliance
products. During 1999, this business also made substantial gains in home
centers, such as The Home Depot and Lowe's, which are experiencing dramatic
growth. Also in 1999, the Company contributed its Louisville Ladder operations
into a joint venture with Group Imsa SA of Mexico and obtained an equity
interest in the venture.
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Total Costs and Expenses
Cost of sales for 2000 was $10.0 billion, an increase of 8.9 percent, due
primarily to increased sales volume. In 1999, cost of sales was $9.2 billion,
compared with $8.6 billion in 1998, an increase of 7.0 percent. Cost of sales
as a percent of net sales was 64.4 percent in 2000 and 1999, and 63.9 percent
in 1998. Gross profit margins have remained at high levels as a result of the
Company's ongoing commitment to cost reduction and containment efforts and
productivity improvement programs, offset by the effect of recent acquisitions.
Selling, general and administrative (SG&A) expenses were $3.0 billion, $2.8
billion and $2.7 billion in 2000, 1999 and 1998, respectively. As a percent of
net sales, SG&A expenses were 19.2 percent, 19.4 percent and 19.9 percent in
2000, 1999 and 1998, respectively. The decrease in SG&A as a percent of net
sales was primarily the result of volume leverage on sales growth, partially
offset by new product development and other revenue growth programs. The
Company continued its commitment to technology investment by increasing
engineering and development expense 16 percent to a record $594 million in
2000, compared with $510 million in 1999 and $491 million in 1998.
Interest expense increased to $288 million in 2000 from $190 million in 1999,
primarily reflecting an increase in average borrowings due to acquisitions and
higher interest rates. In 1999, interest expense increased from $152 million in
1998, reflecting higher average borrowings resulting from acquisitions and
share repurchases.
Other deductions, net, including amortization of intangibles, were $75 million
in 2000, compared with $95 million and $100 million in 1999 and 1998,
respectively. Fiscal 2000 included a gain of $80 million from the disposition
of the Company's interest in the Krautkramer non-destructive testing business
and a gain of approximately $37 million due to the disposition of the Company's
interest in Vermont American. Fiscal 1999 included a gain of $64 million from
the disposition of the Company's interest in F.G. Wilson. These gains were
substantially offset by other non-recurring items. See note 3 for additional
information.
Income Before Income Taxes
Income before income taxes increased $157 million, or 7.8 percent, to $2.2
billion in 2000, reflecting a strong sales increase, programs to generate
improvement in underlying margins and the negative impact of currency
translation. Earnings before interest and income taxes in the Process Control
business were $274 million in 2000, a decrease from 1999, reflecting weak
demand in the process markets and a stronger U.S. dollar. The Industrial
Automation business earnings were $471 million in 2000, a slight increase from
1999, due to moderate sales growth and acquisitions, offset by divestitures and
currency exchange. Earnings of the Electronics and Telecommunications business
increased $217 million, or 91 percent, to $454 million in 2000, due to robust
sales growth and acquisitions. Earnings of the HVAC business increased $21
million, or 6 percent, to $382 million in 2000, driven by very strong sales
growth in international markets. The Appliance and Tools business earnings
decreased to $576 million in 2000. Excluding the impact of the Vermont
American divestiture, the Appliance and Tools business earnings increased to
$562 million, or $17 million, reflecting increased sales volumes in the tools
operations. See note 12 for additional information by business segment and
geographic area.
Income before income taxes increased $97 million, or 5.1 percent, to $2.0
billion in 1999, reflecting increased sales and improvement in underlying
margins, partially offset by increased interest expense. The base company
(excluding acquisitions and divestitures) realized an outstanding performance
in 1999, increasing underlying operating margins approximately 0.5 points. This
improvement was offset by the acquisition of businesses with lower margins.
Earnings before interest and income taxes in the Process Control business were
$313 million in 1999, a decrease from 1998, reflecting weak demand associated
with lower oil prices and higher expenditures for cost reduction efforts and
productivity improvement programs. The Industrial Automation business earnings
increased $6 million to $470 million in 1999, driven by cost containment
measures that mitigated the impact of a challenging economic environment.
Earnings of the Electronics and Telecommunications business increased $87
million, or 58 percent, to $237 million in 1999, due to strong sales growth and
the acquisition of the Advanced Power Systems business. Earnings of the HVAC
A-3
business increased $45 million, or 14 percent, to $361 million in 1999,
reflecting strong sales growth in both U.S. and international markets. The
Appliance and Tools business earnings increased $11 million to $584 million in
1999, reflecting varying results by geography and product area.
Income Taxes
Income taxes were $756 million, $707 million and $695 million in 2000, 1999 and
1998, respectively. The effective income tax rate was 34.7 percent in 2000,
compared with 35.0 percent in 1999 and 36.1 percent in 1998, reflecting ongoing
global tax planning strategies and the impact of acquisitions and divestitures.
Net Earnings and Return on Equity
Net earnings for 2000 were a record $1.4 billion, up 8.3 percent from $1.3
billion in 1999. Net earnings as a percent of sales was 9.2 percent in 2000 and
1999. Diluted earnings per common share were a record $3.30 in 2000, up 10.0
percent from $3.00 in 1999. Earnings per share excluding goodwill amortization,
a metric that management believes is more indicative of cash operating
performance, were $3.63 in 2000, up 11.0 percent from $3.27 in the prior year.
Emerson achieved a return on average stockholders' equity of 22.6 percent in
2000 and 21.9 percent in 1999 and 1998. Net earnings for 1999 were up 6.9
percent from $1.2 billion in 1998. Diluted earnings per common share in 1999
were up 8.3 percent from $2.77 in 1998. Earnings per share excluding goodwill
amortization in 1999 were up 9.4 percent from $2.99 in the prior year.
Financial Position, Capital Resources and Liquidity
The Company continues to generate substantial cash from operations and remains
in a strong financial position with resources available for reinvestment in
existing businesses, strategic acquisitions and managing the capital structure
on a short- and long-term basis.
Cash Flow
Emerson generated operating cash flow of $1.8 billion in 2000, up 1.6 percent
from the prior year. Operating cash flow in 1999 increased 9.6 percent compared
with $1.7 billion in 1998. Success with lean manufacturing efforts to decrease
inventory and a program to improve the receivable collection cycle resulted in
a reduction of average operating working capital as a percentage of sales, a
measure of working capital efficiency. In 2000, this measure improved to 14.7
percent compared with 15.8 percent and 16.3 percent in 1999 and 1998,
respectively.
The growth in cash flow was negatively impacted by divestitures, taxes paid on
the related gains, and the inclusion of fast-growing acquisitions and
associated working capital not included in the prior year. Underlying cash flow
improved 7 percent in 2000 and can be analyzed as follows (dollars in
millions):
2000 1999 Change
--------- ------- ------
Underlying cash flow $1,884.6 1,755.8 7.3%
Acquisitions/Divestitures (44.8) 54.7
-------- -------
Total cash flow $1,839.8 1,810.5 1.6%
Capital expenditures were $692 million, $592 million and $603 million in 2000,
1999 and 1998, respectively. These expenditures increase the Company's global
capacity to leverage opportunities within the heating, ventilating and air
conditioning and network power and connectivity markets, as well as improve
manufacturing productivity in a number of businesses. Cash paid in connection
with Emerson's purchase acquisitions was $1,972 million, $1,202 million and
$573 million in 2000, 1999 and 1998, respectively.
A-4
Dividends were a record $613 million ($1.43 per share, up 10 percent) in 2000,
compared with $566 million ($1.30 per share) in 1999 and $521 million ($1.18
per share) in 1998. In November 2000, the Board of Directors voted to increase
the quarterly cash dividend 7 percent to an annualized rate of $1.53 per share.
Success with repositioning and internal initiatives to increase underlying
growth has created significant new investment opportunities, and over time, the
Company intends to moderate the dividend payout ratio toward a range of 40-45
percent of prior year earnings, providing greater flexibility to pursue these
opportunities. The cash dividend will continue to be supplemented with the
share repurchase program. The repurchase program, initiated in fiscal 1997,
authorizes the repurchase of up to 40 million shares of the Company's
outstanding common stock, with nearly 30 million shares repurchased through
September 30, 2000. The pace of repurchase has slowed with repositioning, and
this program is anticipated to extend into 2002 or 2003. Net purchases of
treasury stock totaled $376 million and $324 million in 2000 and 1999,
respectively.
Leverage/Capitalization
Total debt increased to $4.6 billion in 2000, from $3.3 billion in 1999 and
$2.6 billion in 1998, reflecting the impact of acquisitions and the Company's
share repurchase program. The total debt-to-capital ratio was 41.8 percent at
year-end 2000, compared with 34.6 percent in 1999 and 30.8 percent in 1998. At
September 30, 2000, net debt (total debt less cash and equivalents and short-
term investments) was 40.2 percent of net capital, compared with 32.7 percent
in 1999 and 29.0 percent in 1998. The Company's interest coverage ratio (income
before income taxes and interest expense divided by interest expense) was 8.6
times in 2000, compared with 11.7 times in 1999 and 13.7 times in 1998, as a
result of higher average borrowings and interest rates in 2000, partially
offset by increased earnings. See notes 3, 4 and 5 for additional information.
At year-end 2000, the Company and its subsidiaries maintained lines of credit
amounting to $3 billion to support commercial paper and had available non-U.S.
bank credit facilities of $560 million to support non-U.S. operations. Lines of
credit totaling $1.5 billion are effective until 2005, with the remainder
through June 2001. These lines of credit and bank credit facilities assure the
availability of funds at prevailing interest rates. In addition, as of
September 30, 2000, the Company could issue up to $500 million of additional
debt securities under its shelf registration with the Securities and Exchange
Commission.
Financial Instruments
The Company is exposed to market risk related to changes in interest rates and
European and other foreign currency exchange rates, and selectively uses
derivative financial instruments, including forwards, swaps and purchased
options, to manage these risks. The Company does not hold derivatives for
trading purposes. The value of market risk sensitive derivative and other
financial instruments is subject to change as a result of movements in market
rates and prices. Sensitivity analysis is one technique used to evaluate these
impacts. Based on a hypothetical ten-percent increase in interest rates or ten-
percent weakening in the U.S. dollar across all currencies, the potential
losses in future earnings, fair value and cash flows are immaterial. This
method has limitations; for example, a weaker U.S. dollar would benefit future
earnings through favorable translation of non-U.S. operating results. See notes
1, 4, 5 and 6.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement, as amended, requires the recognition of
all derivatives at fair value in the balance sheet and establishes new hedge
accounting rules. The adoption of the statement in 2001 is not expected to have
a material effect on the Company's operating results or financial condition.
A-5
Consolidated Statements of Earnings
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
2000 1999 1998
---------- -------- --------
Net sales $15,544.8 14,269.5 13,447.2
---------- -------- --------
Costs and expenses:
Cost of sales 10,016.0 9,193.8 8,595.6
Selling, general and administrative expenses 2,987.9 2,770.2 2,676.7
Interest expense 287.6 189.7 151.7
Other deductions, net 75.0 94.9 99.7
---------- -------- --------
Total costs and expenses 13,366.5 12,248.6 11,523.7
---------- -------- --------
Income before income taxes 2,178.3 2,020.9 1,923.5
Income taxes 755.9 707.3 694.9
---------- -------- --------
Net earnings $ 1,422.4 1,313.6 1,228.6
========== ======== ========
Basic earnings per common share $ 3.33 3.03 2.80
========== ======== ========
Diluted earnings per common share $ 3.30 3.00 2.77
========== ======== ========
See accompanying notes to consolidated financial statements.
A-6
Consolidated Balance Sheets
Emerson Electric Co. and Subsidiaries
September 30
(Dollars in millions except per share amounts)
Assets
2000 1999
--------- --------
Current assets
Cash and equivalents $ 280.8 266.1
Receivables, less allowances of $58.5 in 2000
and $60.5 in 1999 2,705.6 2,516.3
Inventories:
Finished products 861.8 871.5
Raw materials and work in process 1,190.9 1,049.6
--------- --------
Total inventories 2,052.7 1,921.1
Other current assets 443.6 420.9
--------- --------
Total current assets 5,482.7 5,124.4
--------- --------
Property, plant and equipment
Land 174.9 216.5
Buildings 1,261.9 1,287.1
Machinery and equipment 4,558.1 4,497.2
Construction in progress 416.7 377.0
--------- --------
6,411.6 6,377.8
Less accumulated depreciation 3,168.2 3,223.4
--------- --------
Property, plant and equipment, net 3,243.4 3,154.4
--------- --------
Other assets
Goodwill, less accumulated amortization of $852.2 in 2000
and $714.4 in 1999 5,320.0 4,263.0
Other 1,118.2 1,081.7
--------- --------
Total other assets 6,438.2 5,344.7
--------- --------
$15,164.3 13,623.5
========= ========
See accompanying notes to consolidated financial statements.
A-7
Liabilities and Stockholders' Equity
2000 1999
--------- --------
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 2,352.7 1,953.7
Accounts payable 1,210.6 1,068.8
Accrued expenses 1,390.6 1,304.8
Income taxes 264.9 263.1
--------- --------
Total current liabilities 5,218.8 4,590.4
--------- --------
Long-term debt 2,247.7 1,317.1
--------- --------
Other liabilities 1,295.0 1,535.5
--------- --------
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 in
2000 and 1999 238.3 238.3
Additional paid-in capital 53.0 23.9
Retained earnings 8,612.9 7,803.7
Accumulated other nonstockholder changes in equity (578.6) (271.6)
--------- --------
8,325.6 7,794.3
Less cost of common stock in treasury, 49,200,165
shares in 2000 and 43,632,708 shares in 1999 1,922.8 1,613.8
--------- --------
Total stockholders' equity 6,402.8 6,180.5
--------- --------
$15,164.3 13,623.5
========= ========
A-8
Consolidated Statements
of Stockholders' Equity
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
2000 1999 1998
--------- -------- --------
Common stock $ 238.3 238.3 238.3
Additional paid-in capital
Beginning balance 23.9 27.9 3.3
Stock plans 31.5 (3.5) (43.4)
Treasury stock issued for acquisitions and other (2.4) (.5) 68.0
--------- -------- --------
Ending balance 53.0 23.9 27.9
--------- -------- --------
Retained earnings
Beginning balance 7,803.7 7,056.5 6,348.9
Net earnings 1,422.4 1,313.6 1,228.6
Cash dividends (per share: 2000, $1.43;
1999, $1.30; 1998, $1.18) (613.2) (566.4) (521.0)
--------- -------- --------
Ending balance 8,612.9 7,803.7 7,056.5
--------- -------- --------
Accumulated other nonstockholder changes in equity
Beginning balance (271.6) (236.2) (205.9)
Translation adjustments (307.0) (35.4) (30.3)
--------- -------- --------
Ending balance (578.6) (271.6) (236.2)
--------- -------- --------
Treasury stock
Beginning balance (1,613.8) (1,283.2) (963.9)
Acquired (353.8) (361.2) (498.4)
Issued under stock plans 36.9 27.9 108.5
Issued for acquisitions and other 7.9 2.7 70.6
--------- -------- --------
Ending balance (1,922.8) (1,613.8) (1,283.2)
--------- -------- --------
Total stockholders' equity $ 6,402.8 6,180.5 5,803.3
========= ======== ========
Nonstockholder changes in equity
(Net earnings and Translation adjustments) $ 1,115.4 1,278.2 1,198.3
========= ======== ========
See accompanying notes to consolidated financial statements.
A-9
Consolidated Statements of Cash Flows
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions)
2000 1999 1998
--------- -------- --------
Operating activities
Net earnings $ 1,422.4 1,313.6 1,228.6
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 678.5 637.5 562.5
Changes in operating working capital (104.9) 35.7 (81.0)
Gains on divestitures, pension funding and other (156.2) (176.3) (58.5)
--------- -------- --------
Net cash provided by operating activities 1,839.8 1,810.5 1,651.6
--------- -------- --------
Investing activities
Capital expenditures (692.0) (591.6) (602.6)
Purchases of businesses, net of cash and equivalents acquired (1,971.8) (1,202.0) (572.9)
Divestitures of businesses and other, net 168.6 215.5 76.2
--------- -------- --------
Net cash used in investing activities (2,495.2) (1,578.1) (1,099.3)
--------- -------- --------
Financing activities
Net increase in short-term borrowings 514.6 503.5 145.4
Proceeds from long-term debt 1,197.8 470.9 452.0
Principal payments on long-term debt (18.4) (257.0) (132.5)
Net purchases of treasury stock (376.2) (323.7) (499.4)
Dividends paid (613.2) (566.4) (521.0)
--------- -------- --------
Net cash provided by (used in) financing activities 704.6 (172.7) (555.5)
--------- -------- --------
Effect of exchange rate changes on cash and equivalents (34.5) (3.3) (8.2)
--------- -------- --------
Increase (decrease) in cash and equivalents 14.7 56.4 (11.4)
Beginning cash and equivalents 266.1 209.7 221.1
--------- -------- --------
Ending cash and equivalents $ 280.8 266.1 209.7
========= ======== ========
Changes in operating working capital
Receivables $ (235.5) (23.1) (76.1)
Inventories (167.0) 69.0 (27.7)
Other current assets (12.8) (12.2) 19.7
Accounts payable 194.6 (25.4) .9
Accrued expenses 66.1 (31.5) (2.8)
Income taxes 49.7 58.9 5.0
--------- -------- --------
$ (104.9) 35.7 (81.0)
========= ======== ========
See accompanying notes to consolidated financial statements.
A-10
Notes to Consolidated Financial Statements
Emerson Electric Co. and Subsidiaries
(Dollars in millions except per share amounts)
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its controlled affiliates. All significant intercompany transactions, profits
and balances are eliminated in consolidation. Other investments of 20 to 50
percent are accounted for by the equity method. Investments of less than 20
percent are carried at cost.
Foreign Currency Translation
The functional currency of nearly all of the Company's non-U.S. subsidiaries is
the local currency. Adjustments resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities
of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The majority of
Inventory values are based upon standard costs which approximate average costs,
while the remainder are principally valued on a first-in, first-out basis.
Standard costs are revised at the beginning of the fiscal year, and variances
incurred during the year are allocated between inventories and cost of sales.
Property, Plant and Equipment
The Company records investments in land, buildings, and machinery and equipment
at cost. Depreciation is computed principally using the straight-line method
over estimated service lives. Service lives for principal assets are 30 to 40
years for buildings and 8 to 12 years for machinery and equipment.
Goodwill
Assets and liabilities related to business combinations accounted for as
purchase transactions are recorded at their respective fair values. Goodwill is
amortized on a straight-line basis to other deductions over the periods
estimated to be benefited, not exceeding 40 years. Long-lived assets are
reviewed for impairment whenever events and changes in business circumstances
indicate the carrying value of the assets may not be recoverable. Impairment
losses are recognized if expected future cash flows of the related assets are
less than their carrying values.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of
manufactured products as shipped.
Financial Instruments
The net amount to be paid or received under interest rate swap agreements is
accrued over the life of the agreement as a separate component of interest
expense. Gains and losses on purchased currency option and forward exchange
contracts that qualify for deferral accounting are recognized in income with
the underlying hedged transactions; otherwise, the contracts are recorded in
the balance sheet, and changes in fair value are recognized immediately in
other deductions, net. Currency fluctuations on non-U.S. dollar obligations
that have been designated as hedges of non-U.S. net asset exposures are
included in accumulated other nonstockholder changes in equity.
Income Taxes
No provision is made for U.S. income taxes on the undistributed earnings of
non-U.S. subsidiaries (approximately $1,433 at September 30, 2000), primarily
because retention of a significant portion of these earnings is considered
essential for continuing operations. In those cases in which distributions have
been made, additional income taxes, if any, have been minimal due to available
foreign tax credits.
Nonstockholder Changes in Equity
Nonstockholder changes in equity are comprised of net earnings and foreign
currency translation adjustments.
Financial Statement Presentation
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates. Certain prior year amounts have been
reclassified to conform to the current year presentation.
A-11
(2) Weighted Average Common Shares
Basic earnings per common share consider only the weighted average of common
shares outstanding while diluted earnings per common share consider the
dilutive effects of stock options, incentive shares and convertible securities.
Reconciliations of weighted average common shares for basic earnings per common
share and diluted earnings per common share follow (shares in millions):
2000 1999 1998
----- ----- -----
Basic..................................................................... 427.4 433.8 439.2
Dilutive shares........................................................... 4.0 4.6 4.9
----- ----- -----
Diluted................................................................... 431.4 438.4 444.1
===== ===== =====
(3) Acquisitions and Divestitures
Cash paid in connection with the Company's purchase acquisitions follows:
2000 1999 1998
--------- ------- -----
Fair value of assets acquired............................................. $ 2,141.7 1,475.7 947.0
Less liabilities assumed.................................................. 169.9 271.4 214.5
Less notes and common stock issued to sellers............................. -- 2.3 159.6
--------- ------- -----
Cash paid (net of cash and equivalents acquired)........................ $ 1,971.8 1,202.0 572.9
========= ======= =====
During the second quarter of 2000, the Company acquired Jordan
Telecommunication Products, Inc. (renamed Emerson Telecommunication Products)
for approximately $985. Emerson Telecom is a global provider of fiber optic
conduit systems, custom cables and connectors for wireline, wireless and data
communications equipment, CATV components, power protection systems, and
cellular site structures. In the third quarter of 2000, the Company acquired
Ericsson Energy Systems (renamed Emerson Energy Systems), a global provider of
power supplies, power systems, switching equipment, climate control and energy
management systems, and site monitoring services to the telecommunications
industry, for approximately $725. In addition, the Company acquired Knaack, a
manufacturer of professional tool storage equipment, and other smaller
businesses. The companies acquired in 2000 had annualized sales of
approximately $1,160.
During the third quarter of 2000, the Company received $86 from the disposition
of its interest in the Krautkramer non-destructive testing business resulting
in a pretax gain of approximately $80. The second half of 2000 included a gain
of approximately $37 due to the disposition of the Company's interest in
Vermont American ("VA"). The Company also incurred costs for the
rationalization of operations and other items that substantially offset these
gains. Krautkramer, VA and another divestiture, BI Technologies, represent
total annual 1999 sales of nearly $600.
During the first quarter of 1999, the Company purchased the Westinghouse
Process Control Division ("WPC") from CBS Corporation for approximately $260.
WPC is a supplier of process controls for the power generation, water and
Wastewater treatment industries. In addition, in the first and second quarters
of 1999, the Company paid $230 to acquire the remaining ownership interest in
Astec (BSR) Plc. In the third quarter of 1999, the Company acquired Daniel
Industries, Inc. through a cash tender offer of approximately $435 plus assumed
debt. Daniel is a provider of measurement and control products and services for
the oil and gas industry. In addition, the Company acquired MagneTek's
alternator operations; Kato Engineering, an alternator business; and a number
of smaller businesses in 1999. The companies acquired in 1999 had annualized
sales of approximately $760.
During 1999, the Company received $226 from the disposition of its interest in
F.G. Wilson, resulting in a pretax gain of $64 ($30 net of income taxes). The
Company also incurred costs for the rationalization of other operations that
more than offset this gain. In addition, the Company will receive a percentage
of future F.G. Wilson revenue and expects a maximum of $100 by 2002, of which
$48 has been received through 2000. F.G. Wilson had sales of approximately $410
in 1998.
During the first quarter of 1998, the Company purchased Computational Systems,
Inc. ("CSI") for approximately $160, primarily in common stock. CSI is a
supplier of condition monitoring and diagnostic products and services for
motors and other rotational equipment. During the fourth quarter of 1998, Astec
(BSR) Plc, a subsidiary of Emerson, purchased the Advanced Power Systems
("APS") business from Northern Telecom Limited for approximately $325. APS
manufactures power conversion products for a wide variety of telecommunications
applications. In addition, the Company purchased Plaset SpA, a European
manufacturer of appliance drain pumps, and acquired a majority interest in
Hiross, an Italian manufacturer of precision environmental control and site
monitoring products. Several smaller businesses were also purchased in 1998.
The companies acquired in 1998 had annualized sales of approximately $775.
The results of operations of these businesses have been included in the
Company's consolidated results of operations since the respective dates of
acquisition and prior to the respective dates of divestiture.
A-12
(4) Short-term Borrowings and Lines of Credit
Short-term borrowings and current maturities of long-term debt are summarized
as follows:
2000 1999
-------- -------
Commercial paper.......................................... $1,742.8 1,358.3
Payable to banks.......................................... 74.6 83.6
Other..................................................... 535.3 511.8
-------- -------
Total................................................... $2,352.7 1,953.7
======== =======
Weighted average interest rate at year end................ 6.0% 5.2%
======== =======
In 2000, the Company issued $300 of floating rate, one-year notes with an
effective interest rate of 6.7 percent at September 30, 2000. Additionally, the
Company issued 13 billion Japanese yen of commercial paper and simultaneously
entered into a ten-year interest rate swap which fixed the rate at 2.2 percent.
In 1999, the Company issued $250 of 5.125%, one-year notes that were
simultaneously swapped to floating interest rates at a cost less than the
Company's U.S. commercial paper, with an effective interest rate of 5.3 percent
at September 30, 1999. In 1998, the Company entered into an interest rate
agreement which capped the rate on $250 of commercial paper at 6.0 percent
through September 1999. In November 1997, the Company entered into a five-year
interest rate swap which fixed the rate on $250 of commercial paper at 6.1
percent. The Company had 151 million of British pound notes with interest rates
of 6.8 and 5.3 percent at September 30, 2000 and 1999, respectively, swapped to
$256 at U.S. commercial paper rates.
The Company and its subsidiaries maintained lines of credit amounting to $3,000
with various banks at September 30, 2000, to support commercial paper and to
assure availability of funds at prevailing market interest rates. Lines of
credit totaling $1,500 are effective until 2005 with the remainder through June
2001. There were no borrowings against U.S. lines of credit in the last three
years. The Company's non-U.S. subsidiaries maintained bank credit facilities in
various currencies approximating $600 ($560 unused) at September 30, 2000. In
some instances, borrowings against these credit facilities have been guaranteed
by the Company to assure availability of funds at favorable interest rates. In
addition, as of September 30, 2000, the Company could issue up to $500 of
additional debt securities under its shelf registration with the Securities and
Exchange Commission.
(5) Long-term Debt
Long-term debt is summarized as follows:
2000 1999
-------- -------
7 7/8% notes due 2005..................................... $ 600.0 -
6.3% notes due 2006....................................... 250.0 250.0
5 1/2% notes due 2008..................................... 250.0 250.0
5% notes due 2008......................................... 175.0 175.0
5.85% notes due 2009...................................... 250.0 250.0
7 1/8% notes due 2010..................................... 500.0 -
Other..................................................... 235.0 401.2
-------- -------
2,260.0 1,326.2
Less current maturities................................... 12.3 9.1
-------- -------
Total................................................... $2,247.7 1,317.1
======== =======
In 2000, the Company issued $600 of 7 7/8%, five-year notes, of which $400 was
swapped to floating U.S. commercial paper rates, with an effective interest
rate of 7.0 percent at September 30, 2000. In 1999, the Company issued $250 of
5.85%, ten-year notes that were simultaneously swapped to U.S. commercial paper
rates, with effective interest rates of 6.7 and 5.4 percent at September 30,
2000 and 1999, respectively. The Company has the ability to refinance
commercial paper on a long-term basis through its credit lines, of which $254
with a weighted average interest rate of 5.6 percent was included in long-term
debt, other at September 30, 1999.
Long-term debt maturing during each of the four years after 2001 is $31, $9, $5
and $603, respectively. Total interest paid related to short-term borrowings
and long-term debt was approximately $273, $185 and $138 in 2000, 1999 and
1998, respectively.
A-13
(6) Financial Instruments
The Company selectively uses derivative financial instruments to manage
interest costs and minimize currency exchange risk. The Company does not hold
derivatives for trading purposes. No credit loss is anticipated as the
counterparties to these agreements are major financial institutions with high
credit ratings.
As part of its currency hedging strategy, the Company utilizes purchased option
and forward exchange contracts to minimize the impact of currency fluctuations
on transactions, cash flows and firm commitments. The Company and its
subsidiaries had approximately $430 and $405 of contracts outstanding at
September 30, 2000 and 1999, respectively. These contracts for the sale or
purchase of European and other currencies generally mature within one year, and
deferred gains and losses are not material.
Fair values of the Company's financial instruments are estimated by reference
to quoted prices from market sources and financial institutions, as well as
other valuation techniques. The fair values of derivative financial instruments
were not material at September 30, 2000 and 1999, and the estimated fair value
of each of the Company's other classes of financial instruments approximated
the related carrying value at September 30, 2000 and 1999.
(7) Postretirement Plans
The Company sponsors unfunded postretirement benefit plans (primarily health
care) for U.S. retirees and their dependents. Net postretirement plan expense
for the years ended September 30, 2000, 1999 and 1998, follows:
2000 1999 1998
----- ---- ----
Service cost........................................... $ 5.3 4.5 4.1
Interest cost.......................................... 21.8 21.6 20.2
Net amortization....................................... (3.1) (3.1) (3.6)
----- ---- ----
Net postretirement plan expense...................... $24.0 23.0 20.7
===== ==== ====
The reconciliations of the actuarial present value of accumulated
Postretirement benefit obligations follow:
2000 1999
------ -----
Benefit obligation, beginning.......................... $313.1 279.6
Service cost........................................... 5.3 4.5
Interest cost.......................................... 21.8 21.6
Actuarial (gains) losses............................... (8.4) 9.3
Benefits paid.......................................... (25.9) (22.2)
Acquisitions/divestitures and other.................... (1.1) 20.3
------ -----
Benefit obligation, ending............................. 304.8 313.1
Unrecognized net gain.................................. 19.4 16.8
Unrecognized prior service benefit..................... 5.4 6.9
------ -----
Postretirement benefit liability recognized
in the balance sheet............................... $329.6 336.8
====== =====
The assumed discount rates used in measuring the obligations as of
September 30, 2000 and 1999, were 7.75 percent and 7.5 percent, respectively.
The assumed health care cost trend rate for 2001 was 7.0 percent, declining to
4.5 percent in the year 2006. The assumed health care cost trend rate for 2000
was 6.5 percent, declining to 4.5 percent in the year 2004. A one-percentage-
point increase or decrease in the assumed health care cost trend rate for each
year would increase or decrease the obligation as of September 30, 2000, and
the 2000 postretirement plan expense by less than five percent.
A-14
(8) Retirement Plans
Retirement plan expense includes the following components:
U.S. Plans Non-U.S. Plans
---------------------------- -----------------------
2000 1999 1998 2000 1999 1998
------- ------ ------ ----- ----- -----
Defined benefit plans:
Service cost (benefits earned during the period)....... $ 42.2 38.6 33.2 11.7 9.1 7.9
Interest cost.......................................... 118.5 112.5 106.1 19.2 16.9 16.4
Expected return on plan assets......................... (178.9) (161.4) (152.2) (25.3) (19.0) (17.0)
Net amortization....................................... (1.7) 1.6 (2.3) - .2 (.7)
------- ------ ------ ----- ----- -----
Net periodic pension (income) expense................ (19.9) (8.7) (15.2) 5.6 7.2 6.6
Defined contribution and multiemployer plans............. 60.7 59.4 54.6 11.1 8.5 9.4
------- ------ ------ ----- ----- -----
Total retirement plan expense.......................... $ 40.8 50.7 39.4 16.7 15.7 16.0
======= ====== ====== ===== ===== =====
The reconciliations of the actuarial present value of the projected benefit
obligations and of the fair value of plan assets follow:
U.S. Plans Non-U.S. Plans
-------------------- ----------------
2000 1999 2000 1999
-------- ------- ----- -----
Benefit obligation, beginning.................................................. $1,545.8 1,437.9 306.3 263.2
Service cost................................................................... 42.2 38.6 11.7 8.0
Interest cost.................................................................. 118.5 112.5 19.2 15.2
Actuarial (gains) losses....................................................... (16.1) (42.8) (4.0) 25.1
Benefits paid.................................................................. (81.9) (63.5) (12.4) (11.1)
Acquisitions/divestitures, net................................................. (45.7) 61.1 (12.3) 14.2
Foreign currency and other..................................................... 3.4 2.0 (7.8) (8.3)
-------- ------- ----- -----
Benefit obligation, ending..................................................... $1,566.2 1,545.8 300.7 306.3
======== ======= ===== =====
Fair value of plan assets, beginning........................................... $1,635.0 1,513.8 259.7 232.6
Actual return on plan assets................................................... 194.8 78.3 42.6 20.1
Employer contributions......................................................... 23.6 75.5 8.0 6.4
Benefits paid.................................................................. (81.9) (63.5) (12.4) (11.1)
Acquisitions/divestitures, net................................................. (46.9) 29.7 20.9 15.2
Foreign currency and other..................................................... 1.3 1.2 (4.1) (3.5)
-------- ------- ----- -----
Fair value of plan assets, ending.............................................. $1,725.9 1,635.0 314.7 259.7
======== ======= ===== =====
Plan assets in excess of (less than) benefit obligation........................ $ 159.7 89.2 14.0 (46.6)
Unamortized transition amount.................................................. (14.7) (22.0) (2.2) (1.6)
Unrecognized net loss (gain)................................................... 84.4 127.5 (29.3) (10.8)
Unrecognized prior service costs............................................... 17.5 20.4 3.7 2.9
Adjustment for fourth quarter contributions.................................... 2.8 .6 .7 .5
-------- ------- ----- -----
Net pension asset (liability) recognized in the balance sheet.................. $ 249.7 215.7 (13.1) (55.6)
======== ======= ===== =====
Weighted average assumptions:
Discount rate................................................................ 8.00% 7.75% 6.4% 6.1%
Expected return on plan assets............................................... 10.50% 10.50% 8.4% 8.5%
Rate of compensation increase................................................ 4.50% 4.25% 3.9% 3.3%
At September 30, 2000 and 1999, the pension assets recognized in the balance
sheet were $311.2 and $271.3, and the pension liabilities recognized in the
balance sheet were $74.6 and $111.2, respectively. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
the retirement plans with accumulated benefit obligations in excess of plan
assets were $294.0, $270.3 and $174.8, respectively, as of September 30, 2000,
and $380.6, $353.5 and $208.6, respectively, as of September 30, 1999.
A-15
(9) Income Taxes
Income before income taxes consists of the following:
2000 1999 1998
-------- ------- -------
United States.................................... $1,614.9 1,567.7 1,496.4
Non-U.S. ........................................ 563.4 453.2 427.1
-------- ------- -------
Income before income taxes..................... $2,178.3 2,020.9 1,923.5
======== ======= =======
The principal components of income tax expense follow:
2000 1999 1998
-------- ------- -------
Federal:
Current........................................ $ 496.9 417.3 453.4
Deferred....................................... 29.9 77.5 35.9
State and local.................................. 49.7 49.8 51.4
Non-U.S. ........................................ 179.4 162.7 154.2
-------- ------- -------
Income tax expense............................. $ 755.9 707.3 694.9
======== ======= =======
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
2000 1999 1998
------- ------ ------
Federal corporate statutory rate................. 35.0% 35.0% 35.0%
State and local taxes, less federal tax
benefit...................................... 1.4 1.6 1.7
Foreign Sales Corporation benefit and other.... (1.7) (1.6) (.6)
------- ------ ------
Effective income tax rate........................ 34.7% 35.0% 36.1%
======= ====== ======
The principal components of deferred tax assets (liabilities) follow:
2000 1999
------- ------
Property, plant and equipment and intangibles.... $(354.7) (357.0)
Leveraged leases................................. (169.7) (181.0)
Pension.......................................... (105.7) (92.9)
Accrued liabilities.............................. 226.4 249.5
Postretirement and postemployment benefits....... 142.0 145.1
Employee compensation and benefits............... 112.4 109.1
Other............................................ 89.3 81.6
------- ------
Total deferred tax assets (liabilities)........ $ (60.0) (45.6)
======= ======
At September 30, 2000 and 1999, respectively, net current deferred tax assets
were $284.3 and $261.7, and net noncurrent deferred tax liabilities were $344.3
and $307.3. Total income taxes paid were approximately $700, $580 and $665 in
2000, 1999 and 1998, respectively.
(10) Contingent Liabilities and Commitments
At September 30, 2000, there were no known contingent liabilities (including
guarantees, pending litigation, taxes and other claims) that management
believes will be material in relation to the Company's financial position, nor
were there any material commitments outside the normal course of business.
A-16
(11) Common Stock
The Company has various stock option plans that permit certain officers and
employees to purchase common stock at specified prices. Options are granted at
100 percent of the market value of the Company's common stock on the date of
grant, generally vest one-third each year and expire ten years from the date of
grant. At September 30, 2000, approximately 2.7 million options were available
for grant under these plans. Changes in the number of shares subject to option
during 2000, 1999 and 1998, follow (shares in thousands):
2000 1999 1998
---------------- ---------------- ----------------
Average Average Average
Price Shares Price Shares Price Shares
------- ------ ------- ------ ------- ------
Beginning of year........................ $45.48 8,504 $39.02 6,608 $34.77 6,698
Options granted........................ 46.42 3,095 54.95 3,026 57.71 974
Assumed options of acquired company.... -- -- 34.02 71 26.08 330
Options exercised...................... 30.54 (1,093) 29.29 (1,025) 25.91 (1,198)
Options canceled....................... 51.96 (359) 55.25 (176) 45.23 (196)
------ ------ ------
End of year.............................. 47.15 10,147 45.48 8,504 39.02 6,608
====== ====== ======
Exercisable at year end.................. 4,563 3,952 3,479
====== ====== ======
Summarized information regarding stock options outstanding and exercisable at
September 30, 2000, follows (shares in thousands):
Outstanding Exercisable
----------------------------------- ----------------
Range of Average Average Average
Exercise Prices Shares Contractual Life Price Shares Price
- --------------- ------ ---------------- ------- ------ -------
up to $36........... 1,244 3.7 years $29.35 1,195 $29.10
$37 to 49........... 4,644 7.7 43.63 2,288 44.71
$50 to 67........... 4,259 8.2 56.19 1,080 58.31
------ -----
Total............. 10,147 7.4 47.15 4,563 43.84
The Company's Incentive Shares Plans authorize the distribution of common stock
to key management personnel. At September 30, 2000, 1,158,941 shares are
outstanding with restriction periods of three to ten years, including 80,000
shares issued in 2000. In addition, 2,248,074 rights to receive common shares
have been awarded, including 83,090 shares awarded in 2000, which are
contingent upon accomplishing certain objectives by 2001. At September 30,
2000, approximately 6 million shares remained available for award under these
plans.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock plans. The compensation expense charged against income for the
Company's incentive shares plans was immaterial. Had compensation expense for
the Company's stock plans been determined in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," net earnings and diluted earnings per common share,
respectively, would have been $1,401 and $3.25 per share in 2000, $1,293 and
$2.95 per share in 1999, and $1,215 and $2.74 per share in 1998. The fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted average assumptions
used for grants: risk-free interest rate of 6.5 percent, 4.7 percent and 5.7
percent, dividend yield of 2.3 percent, 2.1 percent and 2.0 percent, expected
volatility of 22 percent, 17 percent and 16 percent for 2000, 1999 and 1998,
respectively, and expected life of five years for all years. The weighted
average fair value of options granted was $11.75, $10.38 and $12.01 for 2000,
1999 and 1998, respectively.
At September 30, 2000, 21,315,487 shares of common stock were reserved,
including 21,015,696 shares for issuance under the Company's stock plans and
299,791 shares for conversion of the outstanding 8% convertible subordinated
debentures at a price of $13.49 per share. During 2000, 6,846,316 treasury
shares were acquired, and 1,278,859 treasury shares were issued.
Approximately 1.2 million preferred shares are reserved for issuance under a
Preferred Stock Purchase Rights Plan. Under certain conditions involving
acquisition of or an offer for 20 percent or more of the Company's common
stock, all holders of Rights, except an acquiring entity, would be entitled (i)
to purchase, at an exercise price of $260, common stock of the Company or an
acquiring entity with a value twice the exercise price, or (ii) at the option
of the Board, to exchange each Right for one share of common stock. The Rights
remain in existence until November 1, 2008, unless earlier redeemed (at one-
half cent per Right), exercised or exchanged under the terms of the plan.
A-17
(12) Business Segment Information
The Company is engaged principally in the worldwide design, manufacture and
sale of a broad range of electrical, electromechanical and electronic products
and systems. The divisions of the Company are primarily organized based on the
nature of the products and services provided. The Process Control segment
includes measurement and analytical instrumentation, valves, control systems,
and factory automation software. The Industrial Automation segment includes
integral horsepower industrial motors, variable-speed and index drives,
mechanical power transmission equipment, predictive maintenance systems,
ultrasonic welding and cleaning, solids separation, fluid control, destructive
testing, and heating and lighting equipment. The Electronics and
Telecommunications segment consists of uninterruptible power supplies, power
conditioning equipment, environmental control systems, site monitoring systems,
connectivity systems, and electrical switching equipment. The Heating,
Ventilating and Air Conditioning (HVAC) segment consists of compressors,
hermetic terminals, thermostats, and valves. The Appliance and Tools segment
includes fractional horsepower motors, controls, and heating elements, as well
as hand, plumbing and bench power tools, and disposers. Summarized information
about the Company's operations by business segment and by geographic area
follows:
Business Segments
(See note 3) Sales Earnings Total Assets
-------------------------- --------------------------- ---------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------ ------ ----- ----- ----- ------ ------ ------
Process Control........................ $ 3,023 2,878 2,684 274 313 343 3,391 3,489 2,643
Industrial Automation.................. 3,466 3,706 3,825 471 470 464 2,987 3,269 3,575
Electronics and Telecommunications..... 3,365 2,136 1,617 454 237 150 3,699 1,510 1,328
HVAC................................... 2,500 2,385 2,149 382 361 316 1,840 1,819 1,698
Appliance and Tools.................... 3,565 3,533 3,505 576 584 573 2,299 2,641 2,612
------- ------ ------ ----- ----- ----- ------ ------ ------
15,919 14,638 13,780 2,157 1,965 1,846 14,216 12,728 11,856
Differences in accounting methods...... 190 161 156
Interest income, corporate and other... 119 85 74 948 896 804
Sales eliminations/Interest expense.... (374) (368) (333) (288) (190) (152)
------- ------ ------ ----- ----- ----- ------ ------ ------
Total................................ $15,545 14,270 13,447 2,178 2,021 1,924 15,164 13,624 12,660
======= ====== ====== ===== ===== ===== ====== ====== ======
Depreciation and
Intersegment Sales Amortization Expense Capital Expenditures
------------------------- -------------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------ ------ ----- ----- ----- ------ ------ ------
Process Control........................ $ 5 4 2 173 166 147 97 78 83
Industrial Automation.................. 14 11 13 145 152 143 96 116 153
Electronics and Telecommunications..... 12 11 16 98 59 35 117 54 42
HVAC................................... 31 30 27 104 97 86 184 177 147
Appliance and Tools.................... 312 312 275 149 155 144 189 159 163
Corporate and other.................... 9 9 8 9 8 15
------- ------ ------ ----- ----- ----- ------ ------ ------
Total................................ $ 374 368 333 678 638 563 692 592 603
======= ====== ====== ===== ===== ===== ====== ====== ======
The primary income measure used for assessing performance and making operating
decisions is earnings before interest and income taxes. Intersegment sales
approximate market prices. Accounting method differences between segment
reporting and the consolidated financial statements primarily include
management fees allocated to segments based on a percentage of sales and the
accounting for pension and other retirement plans. Corporate assets primarily
include cash and equivalents, investments, pensions, deferred charges, and
certain fixed assets. Divested businesses (F.G. Wilson, Krautkramer, VA and
other smaller businesses) are included in the applicable segments.
Property, Plant
Geographic Sales by Destination and Equipment
------------------------------- ---------------------------
2000 1999 1998 2000 1999 1998
------- ------ ------ ----- ----- -----
United States............................................. $ 9,651 8,557 8,102 2,394 2,312 2,120
Europe.................................................... 3,026 3,064 2,869 467 527 627
Asia...................................................... 1,256 1,211 1,096 229 205 169
Latin America............................................. 545 458 484 117 88 77
Other regions............................................. 1,067 980 896 36 22 19
------- ------ ------ ----- ----- -----
Total................................................... $15,545 14,270 13,447 3,243 3,154 3,012
======= ====== ====== ===== ===== =====
A-18
(13) Other Financial Data
Items reported in earnings during the years ended September 30, 2000, 1999 and
1998, include the following:
2000 1999 1998
-------- ------- -----
Depreciation and other amortization.............. $ 523.5 508.1 459.4
Goodwill amortization............................ 155.0 129.4 103.1
Research, new product development and product
improvement costs............................... 593.9 510.3 491.3
Rent expense..................................... 201.2 177.4 170.4
Interest revenue................................. 16.3 16.1 25.1
Other assets, other are summarized as follows:
2000 1999
-------- -------
Equity and other investments................... $ 227.0 235.1
Retirement plans............................... 311.2 271.3
Leveraged leases............................... 179.4 185.5
Other.......................................... 400.6 389.8
-------- -------
Total........................................ $1,118.2 1,081.7
======== =======
Other liabilities are summarized as follows:
2000 1999
-------- -------
Minority interest.............................. $ 104.4 297.2
Postretirement plans, excluding current portion 311.3 313.1
Deferred income taxes.......................... 360.6 333.9
Other.......................................... 518.7 591.3
-------- -------
Total........................................ $1,295.0 1,535.5
======== =======
Accrued expenses include employee compensation of $344.3 and $316.8 at
September 30, 2000 and 1999, respectively. The Company leases computers,
transportation equipment and various other property under operating lease
agreements. The minimum annual rentals under noncancelable long-term leases,
exclusive of maintenance, taxes, insurance and other operating costs, will
approximate $99 in 2001 and decline substantially thereafter.
(14) Quarterly Financial Information (Unaudited)
Financial Results Net Sales Gross Profit Net Earnings
-------------------- ----------------- -----------------
2000 1999 2000 1999 2000 1999
--------- -------- ------- ------- ------- -------
First Quarter.... $ 3,543.3 3,426.7 1,254.5 1,215.1 324.9 302.4
Second Quarter... 3,894.7 3,588.7 1,380.4 1,278.9 352.8 325.9
Third Quarter.... 4,041.8 3,634.0 1,436.7 1,294.0 373.7 345.1
Fourth Quarter... 4,065.0 3,620.1 1,457.2 1,287.7 371.0 340.2
--------- -------- ------- ------- ------- -------
Fiscal Year..... $15,544.8 14,269.5 5,528.8 5,075.7 1,422.4 1,313.6
========= ======== ======= ======= ======= =======
Basic Diluted Dividends
Earnings per Earnings per per
Common Share Common Share Common Share
------------- ------------ -------------
2000 1999 2000 1999 2000 1999
----- ---- ---- ---- ----- ----
First Quarter... $ .75 .69 .75 .69 .3575 .325
Second Quarter.. .83 .75 .82 .74 .3575 .325
Third Quarter... .88 .80 .87 .79 .3575 .325
Fourth Quarter.. .87 .79 .86 .78 .3575 .325
----- ---- ---- ---- ----- ----
Fiscal Year... $3.33 3.03 3.30 3.00 1.43 1.30
===== ==== ==== ==== ===== ====
See Note 3 for information regarding non-recurring items and the Company's
acquisition and divestiture activities.
Stock Prices 2000 1999
(per common share) -------------------- -------------------
High Low High Low
--------- ------- -------- -------
First Quarter........ $64 3/8 53 1/16 66 15/16 58 5/16
Second Quarter....... 62 11/16 40 1/2 65 51 7/8
Third Quarter........ 65 1/4 51 1/8 71 7/16 51 7/16
Fourth Quarter....... 70 3/8 58 1/8 65 7/8 59 1/8
Fiscal Year........ $70 3/8 40 1/2 71 7/16 51 7/16
Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock
Exchange and Chicago Stock Exchange.
A-19
Report of Management
The Company's management is responsible for the integrity and accuracy of the
financial statements. Management believes that the financial statements for the
three years ended September 30, 2000, have been prepared in conformity with
U.S. generally accepted accounting principles appropriate in the circumstances.
In preparing the financial statements, management makes informed judgments and
estimates where necessary to reflect the expected effects of events and
transactions that have not been completed.
In meeting its responsibility for the reliability of the financial statements,
management relies on a system of internal accounting control. This system is
designed to provide reasonable assurance that assets are safeguarded and
transactions are executed in accordance with management's authorization and
recorded properly to permit the preparation of financial statements in
accordance with U.S. generally accepted accounting principles. The design of
this system recognizes that errors or irregularities may occur and that
estimates and judgments are required to assess the relative cost and expected
benefits of the controls. Management believes that the Company's accounting
controls provide reasonable assurance that errors or irregularities that could
be material to the financial statements are prevented or would be detected
within a timely period.
The Audit Committee of the Board of Directors, which is composed solely of
Directors who are not employees of the Company, is responsible for monitoring
the Company's accounting and reporting practices. The Audit Committee meets
with management and the internal auditors periodically to review the work of
each and to monitor the discharge by each of its responsibilities. The Audit
Committee also meets periodically with the independent auditors who have free
access to the Audit Committee and the Board of Directors to discuss internal
accounting control, auditing and financial reporting matters, as well as
management advisory services.
The independent auditors are engaged to express an opinion on the Company's
consolidated financial statements. Their opinion is based on procedures which
they believe to be sufficient to provide reasonable assurance that the
financial statements contain no material errors.
Independent Auditors' Report
The Board of Directors and Stockholders
Emerson Electric Co.:
We have audited the accompanying consolidated balance sheets of Emerson
Electric Co. and subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 2000.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
Accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emerson Electric
Co. and subsidiaries as of September 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
- -------------------
St. Louis, Missouri
November 6, 2000
A-20
Safe Harbor Statement
This Annual Report contains various forward-looking statements and includes
assumptions concerning Emerson's operations, future results and prospects.
These forward-looking statements are based on current expectations, are subject
to risk and uncertainties and Emerson undertakes no obligation to update any
such statement to reflect later developments. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
Emerson provides the following cautionary statement identifying important
economic, political and technological factors, among others, the absence of
which could cause the actual results or events to differ materially from those
set forth in or implied by the forward-looking statements and related
assumptions.
Such factors include the following: (i) continuation of the current and
projected future business environment, including interest rates and capital and
consumer spending; (ii) competitive factors and competitor responses to Emerson
initiatives; (iii) successful development and market introductions of
anticipated new products; (iv) stability of government laws and regulations
including taxes; (v) stable governments and business conditions in emerging
economies; (vi) successful penetration of emerging economies; and (vii)
continuation of the favorable environment to make acquisitions, domestic and
foreign, including regulatory requirements and market values of candidates.
A-21