Financial Review Exhibit 13
Results of Operations
Net Sales
Sales for 2001 were $15.5 billion, a decrease of $65 million, or 0.4 percent,
from 2000. Strong sales growth in the Process Control business from PlantWeb and
solutions activities was negated by weakness in the Industrial Automation;
Heating, Ventilating, and Air Conditioning (HVAC); and Appliance and Tools
businesses. In addition, robust gains in the Electronics and Telecommunications
business in the first half of 2001 reversed in the second half. Sales also were
impacted by divestitures and a stronger U.S. dollar, with each reducing reported
sales by more than 2 percent. Underlying sales realized slight growth excluding
acquisitions, divestitures and the unfavorable impact from currency. U.S. sales
decreased by approximately $360 million, or 4 percent, while international sales
increased approximately $295 million, or 5 percent. New product sales, from
products introduced in the past five years, were $5.4 billion, representing 35
percent of sales.
In 2000, sales were $15.5 billion, up $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. 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 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.
International Sales
International sales, including U.S. exports, increased 5 percent, to a record
$6.2 billion in 2001, representing 40 percent of the Company's total sales. U.S.
exports were in line with a year ago, at $1.0 billion. Sales by non-U.S.
subsidiaries were $5.3 billion in 2001, up 7 percent from 2000. International
subsidiary sales increased 8 percent excluding acquisitions, divestitures and
the unfavorable impact of currency translation of approximately $310 million.
Very strong growth in Asia and Latin America and moderate growth in Europe was
slightly offset by the impact of currency exchange.
In 2000, international sales increased over 3 percent to $5.9 billion,
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.
Business Segment Sales - 2001 vs. 2000
The Process Control business sales increased 8 percent to $3.3 billion in 2001,
reflecting continued high customer demand for PlantWeb technology and strong
growth in the solutions and services areas. These capabilities have dramatically
increased the Company's end-market opportunity, and the uniqueness of Emerson's
offerings has allowed the Company to firmly establish a leading position. The
Company's product strength in control systems, valve and measurement devices
also played a key role in the growth, as general maintenance and repair spending
returned to more normalized levels after a challenging 2000 and 1999. Very
strong growth in the United States and Asia and moderate growth in Europe were
dampened by the impact of currency exchange.
Sales of the Industrial Automation business declined 7 percent to $3.0 billion
in 2001, due to a modest decline in underlying sales, unfavorable currency
exchange and the Krautkramer and Sweco divestitures. U.S. capital goods markets
showed considerable weakness, while underlying European sales increased
moderately and Asian sales grew modestly versus 2000.
The Electronics and Telecommunications business reported a 9 percent increase in
sales, to $3.6 billion in 2001, due to the acquisitions of Jordan
Telecommunication Products, Inc. and Ericsson Energy Systems in 2000. Underlying
sales increased modestly, excluding the impact of acquisitions, divestitures and
currency exchange. After a 30 percent underlying increase in the first half of
2001, sales declined over 20 percent in the second half. Fiber-optic and
embedded power products were the first to be impacted by the overall downturn in
computing and communications markets, and systems sales declined as the year
progressed. U.S. sales declined slightly, partially offsetting very strong
growth in Europe, Asia and Latin America, with all regions slowing dramatically
in the second half of the year.
14
Sales of the HVAC business declined 2 percent from the prior year to $2.4
billion, primarily due to lower U.S. demand for air conditioning and
refrigeration products at the residential, commercial and industrial levels.
Underlying sales decreased slightly, excluding the unfavorable impact from
currency exchange, with very strong gains in Asia and solid gains in Europe more
than offset by a moderate decline in U.S. sales, which comprise approximately 65
percent of sales in this business. New growth opportunities for scroll
compressor technology continue to develop, with Copeland Scroll sales reaching
nearly $900 million in 2001.
The Appliance and Tools business reported $3.5 billion in sales in 2001, an 8
percent decrease from 2000. This decline is primarily the result of the Vermont
American divestiture in fiscal 2000, the weak U.S. capital goods environment and
a challenging appliances market. Underlying tools sales were flat versus 2000. A
moderate overall decline in underlying sales was due to softness in both
domestic and international markets.
Business Segment Sales - 2000 vs. 1999
The Process Control business achieved a 5 percent sales increase to $3.1 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.
Sales of the Industrial Automation business were $3.2 billion in 2000, down 7
percent. 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 were negatively impacted by the
stronger U.S. dollar and the F.G. Wilson and Krautkramer divestitures.
The Electronics and Telecommunications business achieved outstanding
performance, with sales increasing 59 percent, to $3.3 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 and Ericsson. 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.
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 $3.8 billion.
Very strong underlying growth in the tools operations was offset by the impact
of the Vermont American divestiture and unfavorable currency exchange. 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.
Acquisitions, Divestitures and Repositioning
The Company continued to reposition into faster-growth markets, acquiring
several businesses, divesting two slower-growth businesses and contributing
another business into a joint venture in 2001. Subsequent to year-end, the
Company agreed to exchange its ENI semiconductor equipment division for an
equity interest in MKS Instruments, Inc. of 12 million common shares. The
Company also announced the divestiture of its Chromalox industrial heating
solutions business. These five divested businesses had combined annualized sales
of approximately $500 million. Additionally, in the first quarter of 2002, the
Company acquired Avansys Power Co., Ltd., a provider of network power products
to the telecommunications industry in China, for approximately $750 million in
cash. The 2001 divestitures and the final F.G. Wilson proceeds resulted in total
gains of $187 million in 2001, which were offset by ongoing costs incurred for
the rationalization of operations and other items.
To accelerate cost reductions and better position the Company for the global
economic environment, in the fourth quarter of 2001, the Company recognized a
pretax incremental repositioning charge of $377 million ($260 million after-tax,
or $0.61 per share). Cost of sales, selling, general and administrative expenses
and other deductions, net include charges of $89 million, $51 million and $237
million, respectively. The charge was primarily non-cash and was mainly
associated with the planned disposition of facilities, exiting the manufacturing
of non-strategic product lines and the writedown of inventory. See note 3 for
additional information.
15
Total Costs and Expenses
Cost of sales was $10.1 billion in 2001, an increase of 1.0 percent. In 2000,
cost of sales was $10.0 billion, compared with $9.2 billion in 1999. Cost of
sales as a percent of net sales was 65.4 percent in 2001 and 64.4 percent in
2000 and 1999. Despite slowing business conditions, the impact of recent
acquisitions and the repositioning charge, gross profit margins have remained at
high levels as a result of a disciplined ongoing focus on cost reductions,
including the companywide intranet-based consolidation of material purchases and
other e-business activities, which continue to drive solid margins.
Selling, general and administrative (SG&A) expenses were $3.1 billion, $3.0
billion and $2.8 billion in 2001, 2000 and 1999, respectively. As a percent of
net sales, SG&A expenses were 19.9 percent, 19.2 percent and 19.4 percent in
2001, 2000 and 1999, respectively. The increase in SG&A as a percent of net
sales in 2001 was primarily due to the impact of recent acquisitions and the
effect of the repositioning charge. The Company continued its commitment to
technology investment with engineering and development expense of $594 million
in 2001 and 2000, and $510 million in 1999.
Interest expense increased to $304 million in 2001 from $288 million in the
prior year. In 2000, interest expense increased from $190 million in 1999. These
increases primarily reflect higher average borrowings resulting from
acquisitions and share repurchases.
Other deductions, net, including amortization of intangibles, were $386 million
in 2001, compared with $75 million and $95 million in 2000 and 1999,
respectively. The increase in 2001 was primarily due to the repositioning charge
discussed above. Fiscal 2001 included a gain of $60 million from the disposition
of the Sweco specialty separation business and a gain of $55 million from the
disposition of the Xomox valve business. Also in 2001, the Company and Crane Co.
formed a joint venture combining Emerson's Commercial Cam Co. subsidiary and
Crane Co.'s Ferguson Company division, which resulted in a gain of $24 million.
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 offset by
costs incurred for the rationalization of operations and other items.
Income Before Income Taxes
Income before income taxes decreased $590 million, or 27.1 percent, to $1.6
billion in 2001. These results were led by a sharp decline in second-half
sales, reflecting an unprecedented decline in customer demand for network
power products in the Electronics and Telecommunications business, and
rationalization and other charges. The following discussions of segment earnings
exclude the incremental repositioning charges. Earnings before interest and
income taxes in the Process Control business were $360 million in 2001, a 28
percent increase from 2000, reflecting broad strength across virtually all areas
of the business and rationalization of the cost structure completed over the
past two years. The Industrial Automation business earnings were $400 million in
2001, a decrease of 14 percent from 2000, due to the steep downturn in
industrial capital goods spending, divestitures and a stronger U.S. dollar.
Earnings of the Electronics and Telecommunications business were $359 million in
2001, a decrease from 2000, reflecting the deleverage impact on profits
resulting from the declining sales volume and higher costs for the
rationalization of operations. Earnings of the HVAC business decreased $35
million, or 9 percent, to $347 million in 2001, due to lower U.S. demand for air
conditioning and refrigeration products in all markets. The Appliance and Tools
business earnings decreased to $503 million, or 13 percent, from 2000, primarily
due to decreases in volume and the Vermont American divestiture. See note 12 for
additional information by business segment and geographic area.
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 $281 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 $466 million in 2000, in line with 1999, due to moderate
sales growth and acquisitions, offset by divestitures and currency exchange.
Earnings of the Electronics and Telecommunications business increased $213
million, or 91 percent, to $447 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 $7 million, to $581
million, with increased underlying sales volume in the tools operations offset
by the Vermont American divestiture.
16
Income Taxes
Income taxes were $557 million, $756 million and $707 million in 2001, 2000 and
1999, respectively. The effective tax rate was 35.1 percent in 2001, compared
with 34.7 percent in 2000 and 35.0 percent in 1999, reflecting the net effect of
ongoing global tax planning strategies and the impact of acquisitions and
divestitures.
Net Earnings and Return on Equity
Net earnings for 2001 were $1.0 billion, down 27.5 percent from $1.4 billion in
2000. Net earnings as a percent of sales was 6.7 percent in 2001 and 9.2 percent
in 2000. Diluted earnings per common share were $2.40 in 2001, down 27.3 percent
from $3.30 in 2000. Excluding the repositioning charge, earnings were $1.3
billion and earnings per share were $3.01 in 2001, both down 9 percent from
2000. Earnings per share excluding the charge and goodwill amortization were
$3.36 in 2001, down 7 percent from $3.63 in 2000. Return on average
stockholders' equity was 16.5 percent, 22.6 percent and 21.9 percent in 2001,
2000 and 1999, respectively. Net earnings for 2000 were up 8.3 percent from $1.3
billion in 1999. Diluted earnings per common share in 2000 were up 10.0 percent
from $3.00 in 1999. Earnings per share excluding goodwill amortization in 2000
were up 11.0 percent from $3.27 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 $1.7 billion in 2001, down 7.2 percent
from the prior year. Operating cash flow in 2000 increased 1.6 percent compared
with 1999. Decreases in operating working capital as a percentage of sales have
been offset by increased pension contributions. In 2001, average operating
working capital as a percentage of sales was 14.1 percent compared with 14.7
percent and 15.8 percent in 2000 and 1999, respectively.
Free cash flow (operating cash flow less capital expenditures) increased in
2001, driven by a 20 percent decrease in capital spending. Capital expenditures
were $554 million, $692 million and $592 million in 2001, 2000 and 1999,
respectively. The Company expects to again reduce capital spending in 2002. Cash
paid in connection with Emerson's purchase acquisitions was $200 million, $1,972
million and $1,202 million in 2001, 2000 and 1999, respectively.
Dividends were a record $654 million ($1.53 per share, up 7 percent) in 2001,
compared with $613 million ($1.43 per share) in 2000, and $566 million ($1.30
per share) in 1999. In November 2001, the Board of Directors voted to increase
the quarterly cash dividend to an annualized rate of $1.55 per share and
authorized an additional 40 million shares of the Company's outstanding common
stock to be repurchased over approximately the next five years. Nearly all of
the 40 million shares, previously authorized in November 1996, were repurchased
by the end of 2001. Net purchases of treasury stock totaled $534 million, $376
million and $324 million in 2001, 2000 and 1999, respectively.
Leverage/Capitalization
Total debt increased to $4.7 billion in 2001, from $4.6 billion in 2000 and $3.3
billion in 1999, reflecting the impact of acquisitions and the Company's share
repurchase program. The total debt-to-capital ratio was 43.5 percent at year-end
2001, compared with 41.8 percent in 2000 and 34.6 percent in 1999. At September
30, 2001, net debt (total debt less cash and equivalents and short-term
investments) was 41.5 percent of net capital, compared with 40.2 percent of net
capital in 2000 and 32.7 percent in 1999. The Company's interest coverage ratio
(income before income taxes and interest expense divided by interest expense)
was 6.2 times in 2001, compared with 8.6 times in 2000 and 11.7 times in 1999,
primarily reflecting lower earnings and higher average borrowings resulting from
acquisitions and share repurchases. See notes 3, 5 and 6 for additional
information.
17
At year-end 2001, 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 $440 million to support non-U.S. operations. Lines of
credit totaling $1.5 billion are effective until 2005, with the remainder
through April 2002. These lines of credit and bank credit facilities assure the
availability of funds at prevailing interest rates. In addition, as of September
30, 2001, the Company could issue up to $2 billion of additional debt securities
under its shelf registration with the Securities and Exchange Commission.
Subsequent to year-end, the Company issued $250 million of 5.75%, 10-year notes
and $250 million of 5 5/8%, 12-year notes which were used to reduce commercial
paper borrowings.
Financial Instruments
The Company is exposed to market risk related to changes in interest rates,
copper and other commodity prices 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, ten-percent decrease in commodity prices 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 and
lower commodity prices would benefit future earnings through lower cost of
sales. See notes 1, 4, 5 and 6.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
FAS 142, which Emerson has the option to adopt in fiscal 2002 or 2003, requires,
among other things, the discontinuance of goodwill amortization for business
combinations before July 1, 2001, and completion of a transitional goodwill
impairment test within six months from the date of adoption. The Company is in
the process of reviewing the provisions of this statement and evaluating its
impact on the financial statements. Goodwill amortization was $164 million in
2001, and will be discontinued upon adoption.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses the impairment or disposal of
long-lived assets and the reporting of discontinued operations. The Company is
in the process of reviewing the provisions of this statement, which must be
adopted by 2003, to evaluate its impact on the financial statements.
18
Consolidated Statements of Earnings
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
2001 2000 1999
------------ ---------- ----------
Net sales $ 15,479.6 15,544.8 14,269.5
Costs and expenses:
Cost of sales 10,118.5 10,016.0 9,193.8
Selling, general and administrative expenses 3,081.9 2,987.9 2,770.2
Interest expense 304.3 287.6 189.7
Other deductions, net 386.3 75.0 94.9
------------ ---------- ----------
Total costs and expenses 13,891.0 13,366.5 12,248.6
------------ ---------- ----------
Income before income taxes 1,588.6 2,178.3 2,020.9
Income taxes 556.8 755.9 707.3
------------ ---------- ----------
Net earnings $ 1,031.8 1,422.4 1,313.6
============ ========== ==========
Basic earnings per common share $ 2.43 3.33 3.03
============ ========== ==========
Diluted earnings per common share $ 2.40 3.30 3.00
============ ========== ==========
See accompanying notes to consolidated financial statements.
19
Consolidated Balance Sheets
Emerson Electric Co. and Subsidiaries
September 30
(Dollars in millions except per share amounts)
Assets
2001 2000
---------- ----------
Current assets
Cash and equivalents $ 355.7 280.8
Receivables, less allowances of $79.0 in 2001
and $58.5 in 2000 2,551.2 2,705.6
Inventories:
Finished products 722.8 861.8
Raw materials and work in process 1,174.0 1,190.9
---------- ----------
Total inventories 1,896.8 2,052.7
Other current assets 516.4 443.6
---------- ----------
Total current assets 5,320.1 5,482.7
---------- ----------
Property, plant and equipment
Land 172.0 174.9
Buildings 1,303.5 1,261.9
Machinery and equipment 4,821.2 4,558.1
Construction in progress 367.5 416.7
---------- ----------
6,664.2 6,411.6
Less accumulated depreciation 3,376.2 3,168.2
---------- ----------
Property, plant and equipment, net 3,288.0 3,243.4
---------- ----------
Other assets
Goodwill, less accumulated amortization of $922.2 in 2001
and $852.2 in 2000 5,182.0 5,320.0
Other 1,256.3 1,118.2
---------- ----------
Total other assets 6,438.3 6,438.2
---------- ----------
$ 15,046.4 15,164.3
========== ==========
See accompanying notes to consolidated financial statements.
20
Liabilities and Stockholders' Equity
2001 2000
-------- ---------
Current liabilities
Short-term borrowings and current
maturities of long-term debt $2,447.5 2,352.7
Accounts payable 1,127.5 1,210.6
Accrued expenses 1,619.4 1,390.6
Income taxes 184.7 264.9
-------- ---------
Total current liabilities 5,379.1 5,218.8
-------- ---------
Long-term debt 2,255.6 2,247.7
-------- ---------
Other liabilities 1,297.7 1,295.0
-------- ---------
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
2001 and 2000 238.3 238.3
Additional paid-in capital 30.9 53.0
Retained earnings 8,990.7 8,612.9
Accumulated other nonstockholder changes in equity (741.3) (578.6)
-------- ---------
8,518.6 8,325.6
Less cost of common stock in treasury, 57,051,435
shares in 2001 and 49,200,165 shares in 2000 2,404.6 1,922.8
-------- ---------
Total stockholders' equity 6,114.0 6,402.8
-------- ---------
$15,046.4 15,164.3
======== =========
21
Consolidated Statements of Stockholders' Equity
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
2001 2000 1999
---------- --------- --------
Common stock $ 238.3 238.3 238.3
--------- --------- --------
Additional paid-in capital
Beginning balance 53.0 23.9 27.9
Stock plans and other (22.1) 29.1 (4.0)
--------- --------- --------
Ending balance 30.9 53.0 23.9
--------- --------- --------
Retained earnings
Beginning balance 8,612.9 7,803.7 7,056.5
Net earnings 1,031.8 1,422.4 1,313.6
Cash dividends (per share: 2001, $1.53;
2000, $1.43; 1999, $1.30) (654.0) (613.2) (566.4)
--------- --------- --------
Ending balance 8,990.7 8,612.9 7,803.7
--------- --------- --------
Accumulated other nonstockholder changes in equity
Beginning balance (578.6) (271.6) (236.2)
Translation adjustments (100.5) (307.0) (35.4)
Cash flow hedges and other (62.2) - -
--------- --------- --------
Ending balance (741.3) (578.6) (271.6)
--------- --------- --------
Treasury stock
Beginning balance (1,922.8) (1,613.8) (1,283.2)
Acquired (562.3) (353.8) (361.2)
Issued under stock plans and other 80.5 44.8 30.6
--------- --------- --------
Ending balance (2,404.6) (1,922.8) (1,613.8)
--------- --------- --------
Total stockholders' equity $ 6,114.0 6,402.8 6,180.5
========= ========= ========
Nonstockholder changes in equity
(Net earnings, Translation adjustments and Other) $ 869.1 1,115.4 1,278.2
========= ======== ========
See accompanying notes to consolidated financial statements.
22
Consolidated Statements of Cash Flows
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions)
2001 2000 1999
---------- -------- --------
Operating activities
Net earnings $ 1,031.8 1,422.4 1,313.6
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 708.5 678.5 637.5
Changes in operating working capital 121.2 (104.9) 35.7
Gains on divestitures, pension funding and other (153.8) (156.2) (176.3)
---------- -------- --------
Net cash provided by operating activities 1,707.7 1,839.8 1,810.5
---------- -------- --------
Investing activities
Capital expenditures (554.2) (692.0) (591.6)
Purchases of businesses, net of cash and equivalents acquired (200.1) (1,971.8) (1,202.0)
Divestitures of businesses and other, net 206.6 168.6 215.5
---------- -------- --------
Net cash used in investing activities (547.7) (2,495.2) (1,578.1)
---------- -------- --------
Financing activities
Net increase in short-term borrowings 97.2 514.6 503.5
Proceeds from long-term debt 35.9 1,197.8 470.9
Principal payments on long-term debt (25.2) (18.4) (257.0)
Net purchases of treasury stock (533.7) (376.2) (323.7)
Dividends paid (654.0) (613.2) (566.4)
---------- -------- --------
Net cash (used in) provided by financing activities (1,079.8) 704.6 (172.7)
---------- -------- --------
Effect of exchange rate changes on cash and equivalents (5.3) (34.5) (3.3)
---------- -------- --------
Increase in cash and equivalents 74.9 14.7 56.4
Beginning cash and equivalents 280.8 266.1 209.7
---------- -------- --------
Ending cash and equivalents $ 355.7 280.8 266.1
---------- -------- --------
Changes in operating working capital
Receivables $ 135.4 (235.5) (23.1)
Inventories 99.4 (167.0) 69.0
Other current assets (6.5) (12.8) (12.2)
Accounts payable (76.6) 194.6 (25.4)
Accrued expenses 43.5 66.1 (31.5)
Income taxes (74.0) 49.7 58.9
---------- -------- --------
$ 121.2 (104.9) 35.7
---------- -------- --------
See accompanying notes to consolidated financial statements.
23
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. The effect of resetting
standards and operating variances incurred during each period 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. 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 based on fair value if expected future cash
flows of the related assets are less than their carrying values.
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. In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 141, "Business Combinations." FAS 141 requires the purchase method of
accounting, eliminates the pooling-of-interests method, and eliminates the
amortization of goodwill for business combinations after June 30, 2001.
Revenue Recognition
The Company recognizes substantially all of its revenues through the sale of
manufactured products and records the sale as products are shipped and title
passes to the customer.
Financial Instruments
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The adoption of FAS 133
did not have a material effect on the Company's financial statements. For
derivative instruments designated as a cash flow hedge, the gain or loss on the
derivative is deferred as a separate component of stockholders' equity until
recognized in earnings with the underlying hedged item. For derivative
instruments designated as a fair value hedge, the gain or loss on the derivative
and the offsetting gain or loss on the hedged item are recognized immediately in
earnings. 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 $1,561 at September 30, 2001), 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 primarily comprised of net earnings and
foreign currency translation adjustments. Accumulated translation adjustments
were $679 and $579 at September 30, 2001 and 2000, respectively.
24
Financial Statement Presentation
The preparation of the financial statements in conformity with U.S. 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.
(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):
2001 2000 1999
----- ------ ------
Basic......................................... 425.4 427.4 433.8
Dilutive shares............................... 4.1 4.0 4.6
----- ------ ------
Diluted....................................... 429.5 431.4 438.4
===== ====== ======
(3) Acquisitions, Divestitures and Repositioning
Cash paid in connection with the Company's purchase acquisitions follows:
2001 2000 1999
------ ------- -------
Fair value of assets acquired................. $243.3 2,141.7 1,475.7
Less liabilities assumed...................... 43.2 169.9 273.7
------ ------- -------
Cash paid (net of cash and equivalents
acquired)................................. $200.1 1,971.8 1,202.0
====== ======= =======
In 2001, the Company acquired Saab Marine Electronics AB, a manufacturer of
radar level gauging equipment, and other smaller businesses. During the first
quarter of 2001, the Company received $75 from the divestiture of the Sweco
specialty separation business resulting in a pretax gain of $60. The Company
sold its Xomox valve business for $145 resulting in a pretax gain of $55 in the
third quarter of 2001. During the fourth quarter of 2001, the Company and Crane
Co. formed a joint venture combining Emerson's Commercial Cam Co. subsidiary and
Crane Co.'s Ferguson Company division. The transaction resulted in a pretax gain
of approximately $24, and the venture is accounted for by the equity method.
These transactions and the final F.G. Wilson proceeds resulted in total gains of
$187 related to divestitures in 2001, which were offset by ongoing costs for the
rationalization of operations and other items. In the first quarter of 2002, the
Company acquired Avansys Power Co., Ltd., a provider of network power products
to the telecommunications industry in China, for approximately $750 in cash.
In the fourth quarter of 2001, the Company recognized a pretax incremental
repositioning charge of $377 ($260 after-tax) for the consolidation and
rationalization of operations of $136, exiting the manufacturing of certain
product lines of $124, and the writedown of certain non-strategic investments
and other costs of $52. In addition, the charge includes the writedown of
inventory to realizable value of $65 associated with the rapid acceleration of
sales growth in 2000 and subsequent sharp decline in mid-year 2001, particularly
in the Electronics and Telecommunications business. These charges were in
addition to the recurring costs of operations and ongoing cost reduction and
productivity improvement programs. Cost of sales, selling, general and
administrative expenses and other deductions, net include charges of $89, $51
and $237, respectively.
Costs associated with the consolidation and rationalization of operations to
improve the cost structure are primarily related to the Electronics and
Telecommunications, Appliance and Tools and Process Control businesses, and
include the writedown of fixed assets to liquidation value of $62, impairment of
intangibles of $30, severance related costs of $22, and lease termination and
other costs of $22. The costs to exit the manufacturing of certain product lines
are principally in the Appliance and Tools business and include the writedown of
fixed assets, investment and inventory related items of $46, impairment of
intangibles of $23, and other obligations of $55. In total, the charge relates
to the exit from over twenty production and office facilities in the United
States, Europe and Asia. The repositioning charge includes the elimination of
approximately 2,900 positions, and an additional 1,100 positions will be
provided for when announced in 2002, along with other period costs for shutdown
and moving. See note 12 for the impact of the charges by business segment.
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.
25
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
during the third quarter of 2000. 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.
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), during 1999. The
Company also incurred costs for the rationalization of other operations that
more than offset this gain. In addition, the Company received a percentage of
future F.G. Wilson revenue and received a total of $98 during 2000 and 2001.
F.G. Wilson had sales of approximately $410 in 1998.
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.
(4) Financial Instruments
The Company selectively uses derivative financial instruments to manage interest
costs, commodity prices and 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.
To efficiently manage interest costs, the Company utilizes interest rate swaps
as cash flow hedges of variable rate debt or fair value hedges of fixed rate
debt. Also as part of its hedging strategy, the Company utilizes purchased
option and forward exchange contracts and commodity swaps as cash flow hedges to
minimize the impact of currency and commodity price fluctuations on
transactions, cash flows and firm commitments. These contracts for the sale or
purchase of European and other currencies and the purchase of copper and other
commodities generally mature within one year, and gains and losses deferred in
accumulated other nonstockholder changes in equity 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 estimated fair value of each of the Company's classes
of financial instruments approximated the related carrying value at September
30, 2001 and 2000.
(5) Short-term Borrowings and Lines of Credit
Short-term borrowings and current maturities of long-term debt are summarized as
follows:
2001 2000
--------- ---------
Commercial paper................................... $ 2,112.0 1,742.8
Payable to banks................................... 91.3 74.6
Other.............................................. 244.2 535.3
--------- -------
Total........................................... $ 2,447.5 2,352.7
========= =======
Weighted average interest rate at year end......... 3.9% 6.0%
========= =======
In 2001, the Company entered into an interest rate swap agreement, which fixed
the rate of $250 of commercial paper at 6.0 percent through December 2010. 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 November 1996, 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 5.2 and
6.8 percent at September 30, 2001 and 2000, 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, 2001, 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 April
2002. 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 $490 ($440 unused) at September 30, 2001. 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, 2001, the Company could issue up to $2,000 of
additional debt securities under its shelf registration with the Securities and
Exchange Commission.
26
(6) Long-term Debt
Long-term debt is summarized as follows:
2001 2000
---------- ----------
7 7/8% notes due 2005 ....................................... $ 600.0 600.0
6.3% notes due 2006 ......................................... 250.0 250.0
5 1/2% notes due 2008 ....................................... 250.0 250.0
5% notes due 2009 ........................................... 175.0 175.0
5.85% notes due 2009 ........................................ 250.0 250.0
7 1/8% notes due 2010 ....................................... 500.0 500.0
Other ....................................................... 252.2 235.0
---------- ----------
2,277.2 2,260.0
Less current maturities ..................................... 21.6 12.3
---------- ----------
Total .................................................... $ 2,255.6 2,247.7
========== ==========
In 2000, the Company issued $600 of 7 7/8%, five-year notes that were
simultaneously swapped to floating U.S. commercial paper rates. The Company
terminated the swap in 2001, establishing an effective interest rate of 6.9
percent at September 30, 2001. In 1999, the Company issued $250 of 5.85%,
ten-year notes that were simultaneously swapped to U.S. commercial paper rates.
The Company terminated the swap in 2001, establishing an effective interest rate
of 5.7 percent at September 30, 2001.
Long-term debt maturing during each of the four years after 2002 is $16, $5,
$603 and $252, respectively. Total interest paid related to short-term
borrowings and long-term debt was approximately $274, $273 and $185 in 2001,
2000 and 1999, respectively.
(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, 2001, 2000 and 1999, follows:
2001 2000 1999
---------- ---------- ----------
Service cost ............................................................. $ 5.4 5.3 4.5
Interest cost ............................................................ 23.7 21.8 21.6
Net amortization ......................................................... (2.1) (3.1) (3.1)
---------- ---------- ----------
Net postretirement plan expense ....................................... $ 27.0 24.0 23.0
========== ========== ===========
The reconciliations of the actuarial present value of accumulated postretirement
benefit obligations follow:
2001 2000
---------- ----------
Benefit obligation, beginning ............................................ $ 304.8 313.1
Service cost ............................................................. 5.4 5.3
Interest cost ............................................................ 23.7 21.8
Actuarial losses (gains) ................................................. 21.4 (8.4)
Benefits paid ............................................................ (28.4) (25.9)
Acquisitions/divestitures and other ...................................... (3.2) (1.1)
---------- ----------
Benefit obligation, ending ............................................... 323.7 304.8
Unrecognized net (loss) gain ............................................. (.8) 19.4
Unrecognized prior service benefit ....................................... 3.7 5.4
---------- ----------
Postretirement benefit liability recognized in the balance sheet ...... $ 326.6 329.6
========== ==========
The assumed discount rates used in measuring the obligations as of September 30,
2001, 2000 and 1999, were 7.50 percent, 7.75 percent and 7.50 percent,
respectively. The assumed health care cost trend rate for 2002 was 7.0 percent,
declining to 4.5 percent in the year 2007. The assumed health care cost trend
rate for 2001 was 7.0 percent, declining to 4.5 percent in the year 2006. 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,
2001, and the 2001 postretirement plan expense by less than five percent.
27
(8) Retirement Plans
Retirement plan expense includes the following components:
U.S. Plans Non-U.S. Plans
---------------------------- ----------------------------
Defined benefit plans: 2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
Service cost (benefits earned during the period) $ 40.8 42.2 38.6 10.6 11.7 9.1
Interest cost ................................ 126.0 118.5 112.5 18.1 19.2 16.9
Expected return on plan assets ............... (186.1) (178.9) (161.4) (23.8) (25.3) (19.0)
Net amortization ............................. (.7) (1.7) 1.6 (.6) - .2
-------- -------- -------- -------- -------- --------
Net periodic pension (income) expense ...... (20.0) (19.9) (8.7) 4.3 5.6 7.2
Defined contribution and multiemployer plans..... 63.8 60.7 59.4 14.6 11.1 8.5
-------- -------- -------- -------- -------- --------
Total retirement plan expense ................ $ 43.8 40.8 50.7 18.9 16.7 15.7
======== ======== ======== ======== ======== ========
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
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- ---------
Benefit obligation, beginning ....................................... $1,566.2 1,545.8 300.7 306.3
Service cost .......................................................... 40.8 42.2 10.6 11.7
Interest cost ......................................................... 126.0 118.5 18.1 19.2
Actuarial losses (gains) .............................................. 72.1 (16.1) 1.5 (4.0)
Benefits paid ......................................................... (85.9) (81.9) (14.5) (12.4)
Acquisitions/divestitures, net ........................................ (1.0) (45.7) (9.7) (12.3)
Foreign currency and other ............................................ 6.7 3.4 (2.1) (7.8)
-------- -------- -------- ---------
Benefit obligation, ending ............................................ $1,724.9 1,566.2 304.6 300.7
-------- -------- -------- ---------
Fair value of plan assets, beginning .................................. $1,725.9 1,635.0 314.7 259.7
Actual return on plan assets .......................................... (57.4) 194.8 (10.4) 42.6
Employer contributions ................................................ 168.6 23.6 8.1 8.0
Benefits paid ......................................................... (85.9) (81.9) (14.5) (12.4)
Acquisitions/divestitures, net ........................................ -- (46.9) (1.9) 20.9
Foreign currency and other ............................................ 1.3 1.3 (2.6) (4.1)
-------- -------- -------- ---------
Fair value of plan assets, ending ..................................... $1,752.5 1,725.9 293.4 314.7
-------- -------- -------- ---------
Plan assets in excess of (less than) benefit obligation as of June 30 .. $ 27.6 159.7 (11.2) 14.0
Unamortized transition amount ......................................... (7.5) (14.7) -- (2.2)
Unrecognized net loss (gain) .......................................... 400.7 84.4 3.7 (29.3)
Unrecognized prior service costs ...................................... 17.5 17.5 .4 3.7
Adjustment for fourth quarter contributions ........................... .3 2.8 .9 .7
-------- -------- -------- ---------
Net amount recognized in the balance sheet ............................ $ 438.6 249.7 (6.2) (13.1)
-------- -------- -------- ---------
U.S. Plans Non-U.S. Plans
---------------------------- ----------------------------
Weighted average assumptions: 2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
Discount rate ................................... 7.75% 8.00% 7.75% 6.4% 6.4% 6.1%
Expected return on plan assets .................. 10.50% 10.50% 10.50% 8.5% 8.4% 8.5%
Rate of compensation increase .................. 4.25% 4.50% 4.25% 3.9% 3.9% 3.3%
At September 30, 2001 and 2000, the pension assets recognized in the balance
sheet were $519.1 and $311.2, and the pension liabilities recognized in the
balance sheet were $132.9 and $74.6, respectively; in addition, $46.2 was
recognized in accumulated other nonstockholder changes in equity in 2001. 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 $329.4, $306.5 and $199.2, respectively, as of
September 30, 2001, and $294.0, $270.3 and $174.8, respectively, as of September
30, 2000.
28
(9) Income Taxes
Income before income taxes consists of the following:
2001 2000 1999
--------- --------- ---------
United States......................................................... $ 1,143.1 1,614.9 1,567.7
Non-U.S............................................................... 445.5 563.4 453.2
--------- --------- ---------
Income before income taxes......................................... $ 1,588.6 2,178.3 2,020.9
--------- --------- ---------
The principal components of income tax expense follow:
2001 2000 1999
--------- ------ -------
Federal:
Current............................................................ $ 426.9 496.9 417.3
Deferred........................................................... (33.8) 29.9 77.5
State and local....................................................... 34.2 49.7 49.8
Non-U.S............................................................... 129.5 179.4 162.7
--------- ------ -------
Income tax expense................................................. $ 556.8 755.9 707.3
--------- ------ -------
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
2001 2000 1999
-------- -------- --------
Federal corporate statutory rate...................................... 35.0% 35.0% 35.0%
State and local taxes, less federal tax benefit.................... 1.4 1.4 1.6
Foreign Sales Corporation benefit and other........................ (1.3) (1.7) (1.6)
-------- -------- --------
Effective income tax rate............................................. 35.1% 34.7% 35.0%
-------- -------- --------
The principal components of deferred tax assets (liabilities) follow:
2001 2000
-------- --------
Property, plant and equipment and intangibles.......................... $ (337.8) (354.7)
Leveraged leases....................................................... (157.4) (169.7)
Pension................................................................ (146.9) (105.7)
Accrued liabilities.................................................... 241.5 226.4
Postretirement and postemployment benefits............................. 127.8 142.0
Employee compensation and benefits..................................... 127.5 112.4
Other.................................................................. 177.9 89.3
-------- -------
Total deferred tax assets (liabilities)............................. $ 32.6 (60.0)
-------- -------
At September 30, 2001 and 2000, respectively, net current deferred tax assets
were $394.5 and $284.3, and net noncurrent deferred tax liabilities were $361.9
and $344.3. Total income taxes paid were approximately $590, $700 and $580 in
2001, 2000 and 1999, respectively.
(10) Contingent Liabilities and Commitments
At September 30, 2001, 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 statements, nor were
there any material commitments outside the normal course of business.
29
(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, 2001, approximately 2.4 million options were
available for grant under these plans. Changes in the number of shares subject
to option during 2001, 2000 and 1999, follow (shares in thousands):
2001 2000 1999
------------------- -------------------- ------------------
Average Average Average
Price Shares Price Shares Price Shares
------- ------ ------- ------ ------- ------
Beginning of year.................. $ 47.15 10,147 $ 45.48 8,504 $ 39.02 6,608
Options granted................. 67.27 451 46.42 3,095 54.95 3,026
Assumed options of acquired company -- -- -- -- 34.02 71
Options exercised................. 44.05 (1,219) 30.54 (1,093) 29.29 (1,025)
Options canceled............... 51.58 (291) 51.96 (359) 55.25 (176)
------ ------ ------
End of year....................... 48.42 9,088 47.15 10,147 45.48 8,504
------ ------ ------
Exercisable at year end........... 4,625 4,563 3,952
------ ------ ------
Summarized information regarding stock options outstanding and exercisable at
September 30, 2001, follows (shares in thousands):
Outstanding Exercisable
-------------------------------------- --------------------
Range of Average Average Average
Exercise Prices Shares Contractual Life Price Shares Price
- --------------- ------ ---------------- ------- ------ -------
up to $41.......................... 894 2.9 years $ 29.92 894 $ 29.92
$42 to 47.......................... 4,010 6.9 43.51 1,790 44.69
$48 to 74.......................... 4,184 7.4 57.12 1,941 56.72
----- -----
Total............................ 9,088 6.7 48.42 4,625 47.03
----- -----
The Company's Incentive Shares Plans authorize the distribution of common stock
to key management personnel. At September 30, 2001, 1,869,364 shares were
outstanding with restriction periods of three to ten years, including 1,177,637
shares issued in 2001. In addition, 3,394,460 rights to receive common shares
have been awarded, including 1,244,147 shares awarded in 2001, which are
contingent upon accomplishing certain objectives by 2002. At September 30, 2001,
approximately 3.6 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 $1,012 and $2.36 per share in 2001, $1,401 and $3.25 per share
in 2000, and $1,293 and $2.95 per share in 1999. 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 5.7 percent, 6.5 percent and 4.7 percent, dividend yield of 2.3
percent, 2.3 percent and 2.1 percent, expected volatility of 25 percent, 22
percent and 17 percent for 2001, 2000 and 1999, respectively, and expected life
of five years for all years. The weighted average fair value of options granted
was $12.03, $11.75 and $10.38 for 2001, 2000 and 1999, respectively.
At September 30, 2001, 18,536,064 shares of common stock were reserved,
including 18,475,481 shares for issuance under the Company's stock plans and
60,583 shares for conversion of the outstanding 8% convertible subordinated
debentures at a price of $13.49 per share. During 2001, 10,118,900 treasury
shares were acquired, and 2,267,630 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.
30
(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, 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 general and special purpose motors,
controls, and heating elements, as well as hand, plumbing and bench power tools,
and disposers.
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.
Summarized information about the Company's operations by business segment and by
geographic area follows:
Business Segments Sales Earnings Total Assets
(See note 3) ---------------------------- ------------------------ ---------------------------
2001 2000 1999 2001(a) 2000 1999 2001 2000 1999
-------- ------ ------ ----- ----- ----- ------ ------ ------
Process Control ....................... $ 3,348 3,100 2,942 360 281 316 3,453 3,446 3,537
Industrial Automation ................. 3,006 3,237 3,464 400 466 466 2,696 2,823 3,082
Electronics and Telecommunications .... 3,590 3,289 2,072 359 447 234 3,303 3,643 1,462
HVAC .................................. 2,438 2,500 2,385 347 382 361 1,920 1,840 1,819
Appliance and Tools ................... 3,500 3,811 3,795 503 581 588 2,357 2,464 2,828
-------- ------ ------ ----- ----- ----- ------ ------ ------
15,882 15,937 14,658 1,969 2,157 1,965 13,729 14,216 12,728
Differences in accounting methods ..... 191 190 161
Interest income, corporate and other .. (267) 119 85 1,317 948 896
Sales eliminations/Interest expense ... (402) (392) (388) (304) (288) (190)
-------- ------ ------ ----- ----- ----- ------ ------ ------
Total .............................. $ 15,480 15,545 14,270 1,589 2,178 2,021 15,046 15,164 13,624
======== ====== ====== ===== ===== ===== ====== ====== ======
(a) Reported 2001 segment earnings exclude the incremental repositioning charge
of $377, which is included in corporate and other. The charges by segment were
Process Control $69, Industrial Automation $22, Electronics and
Telecommunications $83, HVAC $6, and Appliance and Tools $163. Including the
charges, 2001 segment earnings were Process Control $291, Industrial Automation
$378, Electronics and Telecommunications $276, HVAC $341, and Appliance and
Tools $340.
Depreciation and
Intersegment Sales Amortization Expense Capital Expenditures
---------------------- ------------------------- -----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Process Control ......................... $ 4 6 5 181 175 168 76 99 79
Industrial Automation ................... 18 14 11 132 135 142 86 89 110
Electronics and Telecommunications ...... 15 12 11 128 95 57 104 115 52
HVAC .................................... 31 31 30 110 104 97 144 184 177
Appliance and Tools ..................... 334 329 331 148 160 165 135 196 166
Corporate and other ..................... 9 9 9 9 9 8
---- ---- ---- ---- ---- ---- ---- ---- ----
Total ................................ $402 392 388 708 678 638 554 692 592
==== ==== ==== ==== ==== ==== ==== ==== ====
Geographic Property, Plant
Sales by Destination and Equipment
----------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
------- ------ ------ ----- ----- -----
United States ................................................... $ 9,291 9,651 8,557 2,355 2,394 2,312
Europe .......................................................... 3,087 3,026 3,064 492 467 527
Asia ............................................................ 1,412 1,256 1,211 255 229 205
Latin America ................................................... 670 545 458 138 117 88
Other regions ................................................... 1,020 1,067 980 48 36 22
------- ------ ------ ----- ----- -----
Total ....................................................... $15,480 15,545 14,270 3,288 3,243 3,154
======= ====== ====== ===== ===== =====
31
(13) Other Financial Data
Items reported in earnings during the years ended September 30, 2001, 2000 and
1999, include the following:
2001 2000 1999
--------- --------- ---------
Depreciation and other amortization ................................. $ 544.4 523.5 508.1
Goodwill amortization ............................................... 164.1 155.0 129.4
Research, new product development and product improvement costs ..... 593.9 593.9 510.3
Rent expense ........................................................ 218.9 201.2 177.4
Interest revenue .................................................... 18.0 16.3 16.1
Other assets, other are summarized as follows:
2001 2000
--------- ---------
Retirement plans ................................................. $ 519.1 311.2
Equity and other investments ..................................... 163.0 227.0
Leveraged leases ................................................. 162.9 179.4
Other ............................................................ 411.3 400.6
--------- ---------
Total .......................................................... $ 1,256.3 1,118.2
========= =========
Other liabilities are summarized as follows:
2001 2000
--------- ---------
Deferred income taxes ............................................ $ 382.7 360.6
Postretirement plans, excluding current portion .................. 307.4 311.3
Minority interest ................................................ 100.1 104.4
Other ............................................................ 507.5 518.7
--------- ---------
Total .......................................................... $ 1,297.7 1,295.0
========= =========
Accrued expenses include employee compensation of $334.9 and $344.3 at September
30, 2001 and 2000, 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 $95 in
2002 and decline substantially thereafter.
(14) Quarterly Financial Information (Unaudited)
Financial Results Net Sales Gross Profit Net Earnings
---------------------- --------------------- -----------------------
2001 2000 2001 2000 2001 2000
--------- --------- --------- -------- --------- ----------
First Quarter ............................. $ 3,919.5 3,543.3 1,388.0 1,254.5 357.4 324.9
Second Quarter ............................ 4,103.3 3,894.7 1,450.8 1,380.4 358.7 352.8
Third Quarter ............................. 3,904.9 4,041.8 1,364.6 1,436.7 330.4 373.7
Fourth Quarter ............................ 3,551.9 4,065.0 1,157.7 1,457.2 (14.7) 371.0
--------- -------- --------- -------- --------- ----------
Fiscal Year ............................ $15,479.6 15,544.8 5,361.1 5,528.8 1,031.8 1,422.4
========= ======== ========= ======== ========= ==========
Basic Earnings per Diluted Earnings per Dividends per
Common Share Common Share Common Share
--------------------- -------------------- ----------------------
2001 2000 2001 2000 2001 2000
----- ---- ---- ---- ----- -----
First Quarter ............................. $ .84 .75 .83 .75 .3825 .3575
Second Quarter ............................ .84 .83 .83 .82 .3825 .3575
Third Quarter ............................. .77 .88 .77 .87 .3825 .3575
Fourth Quarter ............................ (.03) .87 (.03) .86 .3825 .3575
----- ---- ---- ---- ----- -----
Fiscal Year ............................ $2.43 3.33 2.40 3.30 1.53 1.43
===== ==== ==== ==== ===== =====
See Note 3 for information regarding non-recurring items and the Company's
acquisition and divestiture activities.
Stock Prices 2001 2000
(per common share) --------------- --------------
High Low High Low
------ ----- ----- -----
First Quarter ........................... $78.81 62.25 64.38 53.06
Second Quarter .......................... 77.56 59.81 62.69 40.50
Third Quarter ........................... 71.60 60.00 65.25 51.13
Fourth Quarter .......................... 63.05 45.80 70.38 58.13
Fiscal Year .......................... $78.81 45.80 70.38 40.50
Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock
Exchange and Chicago Stock Exchange.
32
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, 2001, 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
St. Louis, Missouri
November 5, 2001
33
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.
38