Exhibit 13
FINANCIAL REVIEW
RESULTS OF OPERATIONS
Net Sales
Sales for 2002 were $13.8 billion, a decrease of $1.7 billion, or 10.7 percent,
from 2001. The sharp decline in the telecommunications industry and continued
weakness in the European and U.S. industrial goods markets negatively affected
reported results. Sales benefited from acquisitions and a weaker U.S. dollar,
which were offset by the impact of divestitures. Underlying sales (which exclude
acquisitions, divestitures and currency) decreased 11 percent from the prior
year, with U.S. sales down $1 billion, or 12 percent, and an international sales
decline of $667 million, or 11 percent, driven by weakness in all major
geographic regions. Underlying sales of the Electronics and Telecommunications
business declined 38 percent while the Industrial Automation business declined
11 percent. A modest underlying increase in the Process Control business was
more than offset by modest sales declines in both the Heating, Ventilating, and
Air Conditioning (HVAC) and the Appliance and Tools businesses, reflecting the
challenging economic environment. New product sales, from products introduced in
the past five years, were $4.5 billion, representing 33 percent of sales.
In 2001, sales were $15.5 billion, down $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, 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 were $5.4 billion, representing 35 percent of sales.
International Sales
International destination sales, including U.S. exports, decreased 7 percent, to
$5.8 billion in 2002, representing 42 percent of the Company's total sales. U.S.
exports were down 6 percent from a year ago, at $946 million. International
subsidiary sales, including shipments to the United States, were $5.0 billion in
2002, down 6 percent from 2001. All major geographic regions showed significant
declines for the year, except Asia, which includes the impact of the Avansys
acquisition. Emerson continues to expand in Asia, particularly in China, to
capitalize on the market opportunities and further improve the Company's cost
position. Excluding acquisitions, divestitures and the favorable impact of
currency translation of approximately $45 million, international subsidiary
sales decreased 11 percent from the prior year.
In 2001, international sales increased 5 percent, to a record $6.2 billion,
representing 40 percent of the Company's total sales. U.S. exports were in line
with 2000 at $1.0 billion. Sales by non-U.S. subsidiaries were $5.3 billion in
2001, up 7 percent from the prior year. Underlying international subsidiary
sales increased 8 percent over 2000, 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 were
slightly offset by the impact of currency exchange.
Business Segment Sales - 2002 vs. 2001
The Process Control business achieved sales of $3.4 billion in 2002, in line
with the strong prior-year performance, a result of strong gains in the systems
and solutions businesses despite the persistently challenging economy and the
impact of the Xomox and Daniel Valve divestitures. Offsetting the strong growth
in systems and solutions was an overall reduction in general maintenance and
repair activity affecting the measurement and control device business, due to
the broad reduction in capital spending. Underlying sales excluding the impact
of acquisitions, divestitures and a favorable impact from currency exchange
improved modestly compared to the prior year. Very strong growth in Latin
America and moderate growth in Europe were partially offset by declines in the
United States and Canada. Nearly $290 million in major projects were won during
the year, signaling the acceptance of PlantWeb, Delta V, and solutions and
engineering services in the market. Recent project activity has been strong,
with nearly a third of these wins occurring in the last three months.
Sales of the Industrial Automation business fell to $2.5 billion in 2002 from
$3.0 billion last year, as a result of underlying sales declines and the 2002
divestiture of the Chromalox industrial heating solutions business as well as
the Sweco divestiture and the contribution of Camco into a joint venture in
2001. Underlying sales declined 11 percent from the prior year, reflecting the
reduction in capital expenditures and excess capacity across the industrial
sector in the United States and Europe. Although this segment experienced the
greatest impact of reduced industrial spending, the business has recently shown
signs of stabilizing at lower operating levels.
16
In the Electronics and Telecommunications business, sales fell 31 percent during
the year to $2.5 billion. Excluding acquisitions, divestitures and currency
exchange, underlying sales declined 38 percent from 2001 with significant sales
declines in all geographic regions. Restructuring actions were taken during this
demand reduction to improve profitability and expand international presence for
future market share gains. Emerson acquired Avansys, the power business of
Huawei Technologies in China, which was renamed Emerson Network Power China.
This key acquisition provides access to the China market and a base for low-cost
manufacturing and engineering resources, which will help drive sales growth,
reduce costs and expand product development.
Sales of the HVAC business were $2.4 billion, down 2 percent from 2001. Softness
in the first quarter from customers reducing inventory levels was partially
offset by an improvement in the fourth quarter due to an upturn in U.S.
residential air conditioning orders from the late summer heat. A modest decline
in underlying sales resulted from declines in all major geographic regions
versus the prior year. Emerson is rapidly developing a strong position as a
provider of services and solutions to the commercial refrigeration market, as
evidenced by agreements to provide energy efficiency and site monitoring
services to Tesco PLC, the largest food retailer in the United Kingdom, and A &
P food stores. Copeland Scroll compressor sales continued to grow during the
year, reflecting new product platforms that expand our served market. Recent
U.S. legislation to raise residential energy efficiency ratings and to phase-out
chlorine refrigerants will stimulate increased market penetration and
accelerated growth rates.
The Appliance and Tools business sales decreased 2 percent to $3.4 billion in
2002. Underlying sales declined modestly, with strong sales growth in the
housing-related consumer businesses offset by broad declines in the commercial
and industrial tools and motor businesses. Residential storage achieved very
strong sales growth during the year, reflecting expanded customer offerings,
innovative Web-enabled design and support services, and favorable market
conditions.
Business Segment Sales - 2001 vs. 2000
The Process Control business achieved an 8 percent sales increase to
$3.4 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. 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.
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.
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 decline in underlying sales was due to softness
in both domestic and international markets.
Acquisitions, Divestitures and Repositioning
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 Company also divested the Chromalox
industrial heating solutions business and the Daniel Valve business. Also in
2002, Emerson exchanged its ENI semiconductor equipment division for an equity
interest in MKS Instruments, Inc. of 12 million common shares.
17
In 2001, 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. 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, in 2001. 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 notes 3 and 4
for additional information.
Total Costs and Expenses
Cost of sales was $9.0 billion in 2002, a decrease of 11 percent. In 2001, cost
of sales was $10.1 billion, compared with $10.0 billion in 2000. Cost of sales
as a percent of net sales was 65.1 percent in 2002, compared with 65.4 percent
in 2001 and 64.4 percent in 2000. Despite continued market weakness, gross
profit margins have remained at high levels, reflecting the benefits of the
rationalization initiatives put into place and Emerson's continued focus on cost
control through many e-business initiatives and material containment efforts.
Selling, general and administrative (SG&A) expenses were $2.9 billion,
$3.1 billion and $3.0 billion in 2002, 2001 and 2000, respectively. As a percent
of net sales, SG&A expenses were 21.1 percent, 19.9 percent and 19.2 percent in
2002, 2001 and 2000, respectively. The increase in SG&A as a percent of net
sales in 2002 was primarily due to the lower sales volume. Engineering and
development expense was $530 million in 2002, compared with $594 million in 2001
and 2000. Engineering and development as a percent of net sales was 3.8 percent
in 2002, 2001 and 2000, reflecting Emerson's continuing investment in technology
to improve the Company's competitive position.
Interest expense, net decreased to $233 million in 2002 from $286 million in the
prior year, reflecting the impact of lower interest rates, which was partially
offset by higher average borrowings due to acquisitions. In 2001, interest
expense, net increased from $271 million in 2000, reflecting the impact of
higher average borrowings resulting from acquisitions and share repurchases.
Other deductions, net, including amortization of intangibles, were $104 million
in 2002, compared with $404 million and $92 million in 2001 and 2000,
respectively (see note 4). In connection with the adoption of FAS 142 (see
discussion below), the amortization of goodwill was discontinued beginning with
fiscal 2002. Other deductions, net includes goodwill amortization of $164
million and $155 million in 2001 and 2000, respectively. Fiscal 2002 included
gains of $85 million and $42 million from the divestitures of the Chromalox and
Daniel Valve businesses, respectively, and a $93 million gain from the ENI
transaction. The increase in 2001 over 2000 is primarily due to the 2001
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. Also included in other deductions, net
were ongoing costs for the rationalization of operations of $207 million,
$111 million and $78 million in 2002, 2001 and 2000, respectively. Higher levels
of rationalization in 2002 related to cost structure improvements in response to
the difficult economic environment.
Income Before Income Taxes and Cumulative Effect of Change in Accounting
Principle
Income before income taxes and cumulative effect of change in accounting
principle decreased $24 million from 2001, or 1 percent, to $1.6 billion in
2002. These results were primarily due to the continued market weaknesses
affecting all of the Company's segments, and rationalization and other charges.
For comparative purposes, the following discussions of segment earnings exclude
the 2001 incremental repositioning charges and goodwill amortization for 2001.
Earnings in the Process Control business of $387 million were down 7 percent in
2002 compared to the prior year, primarily reflecting the impact of
divestitures. Aggressive restructuring actions in response to the sharp market
decline have allowed the Electronics and Telecommunications business to remain
profitable, with $119 million of earnings in 2002, a 71 percent decrease from
the prior year. The underlying sales declines resulting from the steep downturn
in industrial goods spending and the impact of divestitures led to a 31 percent
decrease in Industrial Automation earnings to $297 million in 2002. Earnings
decreases of 8 percent and 12 percent, respectively, in the HVAC and Appliance
and Tools businesses were mainly driven by lower sales volume and higher
rationalization costs for the year. See note 14 for additional information by
business segment and geographic area.
In 2001, income before income taxes decreased $589 million from 2000, or 27
percent, to $1.6 billion. 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. For comparative purposes, the following
discussions of segment earnings exclude the 2001 incremental repositioning
charges and goodwill amortization for 2001 and 2000.
18
Earnings before interest and income taxes in the Process Control business were
$414 million in 2001, a 24 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 $428 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 $410 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 $361 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 $520 million, or
14 percent, from 2000, primarily due to decreases in volume and the Vermont
American divestiture.
Income Taxes
Income taxes were $505 million, $557 million and $756 million in 2002, 2001 and
2000, respectively. The effective tax rate was 32.3 percent, compared with 35.1
percent in 2001 and 34.7 percent in 2000. The decrease in the effective tax rate
in 2002 was primarily the result of discontinuing goodwill amortization upon the
adoption of FAS 142 due to the non-deductible nature of goodwill and lower
taxation of foreign earnings, partially offset by higher taxes associated with
divestitures.
Cumulative Effect of Change in Accounting Principle
Effective October 1, 2001, Emerson adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." The transitional goodwill impairment recognized upon
adoption of FAS 142 is a required change in accounting principle, and the
cumulative effect of adopting this standard resulted in a non-cash, after-tax
decrease to 2002 net earnings and diluted earnings per common share of
$938 million and $2.23, respectively. Also as a result of the adoption of this
standard, goodwill is no longer subject to amortization, resulting in an
increase to reported fiscal 2002 earnings of $0.35 per share. See note 5 for
additional information.
Net Earnings and Return on Equity
Net earnings were $122 million and diluted earnings per common share were $0.29
for 2002. Return on average stockholders' equity was 17.9 percent (excluding the
accounting change), 16.5 percent and 22.6 percent in 2002, 2001 and 2000,
respectively.
The following discussion excludes the impact of the cumulative effect of
accounting change of $938 million ($2.23 per share) in 2002. Earnings were $1.1
billion in 2002, down 18 percent from $1.3 billion in 2001, and diluted earnings
per share were $2.52, down 16 percent from $3.01 in 2001, excluding the
incremental repositioning charge. Earnings as a percent of sales were 7.7
percent in 2002, compared to 8.3 percent in 2001 and 9.2 percent in 2000.
Excluding the 2001 incremental repositioning charge and goodwill amortization in
2001 and 2000, earnings were $1.1 billion in 2002, compared to $1.4 billion and
$1.6 billion in 2001 and 2000, respectively. Excluding these items, diluted
earnings per share were $2.52, $3.36 and $3.63 in 2002, 2001 and 2000,
respectively.
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 2002, a 6.5 percent
increase over the prior year. Operating cash flow in 2001 decreased 7.2 percent
compared with 2000. At September 30, 2002, operating working capital as a
percentage of sales was 12.6 percent, compared with 13.1 percent and 15.0
percent in 2001 and 2000, respectively. Operating working capital improved
primarily due to a reduction in inventory, reflecting the Company's ability to
control inventory levels while operations slowed during the business downturn.
Decreases in operating working capital as a percent of sales have been partially
offset by pension contributions of $169 million, $174 million and $34 million in
2002, 2001 and 2000, respectively.
Free cash flow (operating cash flow less capital expenditures) increased to a
record $1.4 billion in 2002, led by a 31 percent decrease in capital spending.
Capital expenditures were $384 million, $554 million and $692 million in 2002,
2001 and 2000, respectively. In 2003, the Company is targeting capital spending
of approximately 3 percent of net sales. Cash paid in connection with Emerson's
acquisitions was $754 million, $200 million and $1,972 million in 2002, 2001 and
2000, respectively.
19
Dividends were $652 million ($1.55 per share, up 1.3 percent) in 2002, compared
with $654 million ($1.53 per share) in 2001, and $613 million ($1.43 per share)
in 2000. In November 2002, the Board of Directors voted to increase the
quarterly cash dividend to an annualized rate of $1.57 per share. In fiscal
2002, the Company repurchased approximately 360,000 shares under the fiscal 1997
Board of Directors' authorization; 228,000 shares remain available for
repurchase. Net purchases of treasury stock totaled $20 million, $534 million
and $376 million in 2002, 2001 and 2000, respectively. In fiscal 2002, the Board
of Directors authorized a share repurchase program for the repurchase of up to
40 million shares of the Company's outstanding common stock. No shares have been
repurchased under this authorization.
Leverage/Capitalization
Total debt decreased to $4.6 billion at the end of 2002. Total debt in 2001
increased to $4.7 billion from $4.6 billion in 2000, reflecting the impact of
acquisitions. The total debt-to-capital ratio was 44.2 percent at year-end 2002,
compared with 43.5 percent in 2001 and 41.8 percent in 2000. At September 30,
2002, net debt (total debt less cash and equivalents and short-term investments)
was 42.0 percent of net capital, compared with 41.5 percent of net capital in
2001 and 40.2 percent of net capital in 2000. The cumulative effect of change in
accounting principle in 2002 increased these ratios by almost 4 percentage
points. The operating cash flow-to-debt ratio was 39.9 percent, 36.3 percent and
40.0 percent in 2002, 2001 and 2000, respectively. The Company's interest
coverage ratio (income before income taxes and cumulative effect of change in
accounting principle and interest expense, divided by interest expense) was 7.3
times in 2002, compared with 6.2 times in 2001 and 8.6 times in 2000. The
increase in the interest coverage ratio from 2001 to 2002 primarily reflects
lower interest rates, partially offset by higher average borrowings. See notes
3, 7 and 8 for additional information.
At year-end 2002, the Company and its subsidiaries maintained lines of credit
amounting to $3.1 billion to support short-term borrowings, and had uncommitted
bank credit facilities to support non-U.S. operations for which approximately
$300 million was unused at September 30, 2002. Lines of credit totaling $1.5
billion are effective until 2005, with the remainder effective until March 2003.
These bank credit facilities and lines of credit facilitate funding at
prevailing interest rates. In addition, as of September 30, 2002, the Company
could issue up to $1.25 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 4.625%, 10-year notes from the
shelf, 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,
6, 7 and 8.
CRITICAL ACCOUNTING POLICIES
Preparation of the Company's financial statements requires management to make
judgments, assumptions, and estimates regarding uncertainties that affect the
reported amounts of assets, liabilities, stockholders' equity, revenues and
expenses. Note 1 of the Notes to Consolidated Financial Statements describes the
significant accounting policies used in preparation of the Consolidated
Financial Statements. The most significant areas involving management judgments
and estimates are described below. Actual results in these areas could differ
materially from management's estimates under different assumptions or
conditions.
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 and collection is reasonably assured. In certain
instances, revenue is recognized on the percentage-of-completion method, when
services are rendered, or in accordance with SOP No. 97-2, "Software Revenue
Recognition." Management believes that all relevant criteria and conditions are
considered when recognizing sales.
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 each fiscal year.
20
The effect of resetting standards and operating variances incurred during each
period are allocated between inventories and cost of sales. Management regularly
reviews inventory for obsolescence to determine whether a write-down is
necessary. Various factors are considered in making this determination,
including recent sales history and predicted trends, industry market conditions
and general economic conditions. In 2002 and 2001, higher than average inventory
obsolescence was incurred in connection with slowing business conditions. See
notes 1 and 4.
Long-lived Assets
Long-lived assets, which primarily include goodwill and property, plant and
equipment, are reviewed for impairment whenever events and changes in business
circumstances indicate the carrying value of the assets may not be recoverable.
If the Company determines that the carrying value of the long-lived asset may
not be recoverable, a permanent impairment charge is recorded for the amount by
which the carrying value of the long-lived asset exceeds its fair value. Fair
value is generally measured based on a discounted cash flow method using a
discount rate determined by management to be commensurate with the risk inherent
in the Company's current business model. Management believes that the estimates
of future cash flows and fair value are reasonable; however, changes in
estimates of such cash flows and fair value could materially affect the
evaluations. In 2002, the Company adopted FAS 142 and recorded a transitional
impairment charge as a cumulative effect of change in accounting principle. See
notes 1 and 5.
Retirement Plans
Retirement plan expense and obligations are dependent on assumptions used in
calculating such amounts. These assumptions include discount rate, rate of
compensation increases and expected return on plan assets. In accordance with
U.S. generally accepted accounting principles, actual results that differ from
the assumptions are accumulated and amortized over future periods. While
management believes that the assumptions used are appropriate, differences in
actual experience or changes in assumptions may affect the Company's retirement
plan obligations and future expense. In 2002, the Company adjusted the expected
long-term rate of return on plan assets to 9.0 percent, down from 10.5 percent,
which increased retirement plan expense approximately $30 million. Pension
expense in 2003 is expected to increase by approximately $20 million primarily
due to amortization of differences between actual and expected returns on plan
assets. If the equity markets continue recent trends, the Company could be
required to record a material charge to accumulated other nonstockholder changes
in equity. See note 9.
Income Taxes
Income tax expense and deferred tax assets and liabilities reflect management's
assessment of actual future taxes to be paid on items reflected in the financial
statements. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which the temporary differences between the
consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. No provision is made for U.S. income taxes on
the undistributed earnings of non-U.S. subsidiaries, 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. See note 12.
Accounting Standards
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. This statement,
which must be adopted in 2003, is not expected to have a material impact on the
financial statements.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses financial accounting and reporting
for costs associated with exit or disposal activities, and must be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company is in the process of reviewing the provisions of this statement to
evaluate its impact on the financial statements.
Beginning in fiscal 2003, the Company plans to adopt the accounting provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," for grants awarded after September 30, 2002. This
standard requires stock awards be expensed (over the vesting period) based on
the fair value of the award on the date of grant. Had compensation expense for
stock options been determined in accordance with FAS 123, earnings per share
would have been reduced approximately $0.04 in 2002. See note 13 for further
discussion of FAS 123 and its impact.
21
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As described in Note 5 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" in the year ending September 30, 2002.
/s/ KPMG LLP
St. Louis, Missouri
November 4, 2002
22
Consolidated Statements of Earnings
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
2000 2001 2002
------- ------ ------
Net sales $15,545 15,480 13,824
------- ------ ------
Costs and expenses:
Cost of sales 10,016 10,119 9,000
Selling, general and administrative expenses 2,988 3,082 2,922
Interest expense, net 271 286 233
Other deductions, net 92 404 104
------- ------ ------
Total costs and expenses 13,367 13,891 12,259
------- ------ ------
Income before income taxes and cumulative effect
of change in accounting principle 2,178 1,589 1,565
Income taxes 756 557 505
------- ------ ------
Earnings before cumulative effect of change in accounting principle 1,422 1,032 1,060
Cumulative effect of change in accounting principle, net of tax -- -- (938)
------- ------ ------
Net earnings $ 1,422 1,032 122
======= ====== ======
Basic earnings per common share:
Before cumulative effect of change in accounting principle $ 3.33 2.43 2.53
Cumulative effect of change in accounting principle -- -- (2.24)
------- ------ ------
Basic earnings per common share $ 3.33 2.43 0.29
======= ====== ======
Diluted earnings per common share:
Before cumulative effect of change in accounting principle $ 3.30 2.40 2.52
Cumulative effect of change in accounting principle -- -- (2.23)
------- ------ ------
Diluted earnings per common share $ 3.30 2.40 0.29
======= ====== ======
See accompanying notes to consolidated financial statements.
23
Consolidated Balance Sheets
Emerson Electric Co. and Subsidiaries
September 30
(Dollars in millions except per share amounts)
Assets
2001 2002
------- ------
Current assets
Cash and equivalents $ 356 381
Receivables, less allowances of $79 in 2001
and $90 in 2002 2,551 2,513
Inventories:
Finished products 723 662
Raw materials and work in process 1,174 962
------- ------
Total inventories 1,897 1,624
Other current assets 516 443
------- ------
Total current assets 5,320 4,961
------- ------
Property, plant and equipment
Land 172 172
Buildings 1,303 1,318
Machinery and equipment 4,821 4,878
Construction in progress 368 281
------- ------
6,664 6,649
Less accumulated depreciation 3,376 3,533
------- ------
Property, plant and equipment, net 3,288 3,116
------- ------
Other assets
Goodwill 5,182 4,910
Other 1,256 1,558
------- ------
Total other assets 6,438 6,468
------- ------
$15,046 14,545
======= ======
See accompanying notes to consolidated financial statements.
24
Liabilities and Stockholders' Equity
2001 2002
------- ------
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 2,447 1,560
Accounts payable 1,127 1,268
Accrued expenses 1,620 1,448
Income taxes 185 124
------- ------
Total current liabilities 5,379 4,400
------- ------
Long-term debt 2,256 2,990
------- ------
Other liabilities 1,297 1,414
------- ------
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 2002 238 238
Additional paid-in capital 31 52
Retained earnings 8,991 8,461
Accumulated other nonstockholder changes in equity (741) (647)
------- ------
8,519 8,104
Less cost of common stock in treasury, 57,051,435
shares in 2001 and 55,967,097 shares in 2002 2,405 2,363
------- ------
Total stockholders' equity 6,114 5,741
------- ------
$15,046 14,545
======= ======
25
Consolidated Statements of Stockholders' Equity
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
2000 2001 2002
------- ------ ------
Common stock $ 238 238 238
------- ------ ------
Additional paid-in capital
Beginning balance 24 53 31
Stock plans and other 29 (22) 21
------- ------ ------
Ending balance 53 31 52
------- ------ ------
Retained earnings
Beginning balance 7,804 8,613 8,991
Net earnings 1,422 1,032 122
Cash dividends (per share: 2000, $1.43;
2001, $1.53; 2002, $1.55) (613) (654) (652)
------- ------ ------
Ending balance 8,613 8,991 8,461
------- ------ ------
Accumulated other nonstockholder changes in equity
Beginning balance (271) (578) (741)
Translation adjustments (307) (101) 132
Cash flow hedges and other, net of tax benefit
(2001, $38; 2002, $23) -- (62) (38)
------- ------ ------
Ending balance (578) (741) (647)
------- ------ ------
Treasury stock
Beginning balance (1,614) (1,923) (2,405)
Acquired (354) (562) (17)
Issued under stock plans and other 45 80 59
------- ------ ------
Ending balance (1,923) (2,405) (2,363)
------- ------ ------
Total stockholders' equity $ 6,403 6,114 5,741
======= ====== ======
Nonstockholder changes in equity
(Net earnings, Translation adjustments and Other) $ 1,115 869 216
======= ====== ======
See accompanying notes to consolidated financial statements.
26
Consolidated Statements of Cash Flows
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions)
2000 2001 2002
------- ------ -----
Operating activities
Net earnings $ 1,422 1,032 122
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- -- 938
Depreciation and amortization 678 708 541
Changes in operating working capital (105) 121 432
Gains on divestitures, pension funding and other (155) (153) (215)
------- ------ -----
Net cash provided by operating activities 1,840 1,708 1,818
------- ------ -----
Investing activities
Capital expenditures (692) (554) (384)
Purchases of businesses, net of cash and equivalents acquired (1,972) (200) (754)
Divestitures of businesses and other, net 169 206 257
------- ------ -----
Net cash used in investing activities (2,495) (548) (881)
------- ------ -----
Financing activities
Net increase (decrease) in short-term borrowings 515 97 (975)
Proceeds from long-term debt 1,198 36 751
Principal payments on long-term debt (19) (25) (38)
Net purchases of treasury stock (376) (534) (20)
Dividends paid (613) (654) (652)
------- ------ -----
Net cash provided by (used in) financing activities 705 (1,080) (934)
------- ------ -----
Effect of exchange rate changes on cash and equivalents (35) (5) 22
------- ------ -----
Increase in cash and equivalents 15 75 25
Beginning cash and equivalents 266 281 356
------- ------ -----
Ending cash and equivalents $ 281 356 381
======= ====== =====
Changes in operating working capital
Receivables $ (236) 135 155
Inventories (167) 99 265
Other current assets (13) (6) 12
Accounts payable 195 (77) 101
Accrued expenses 66 44 (72)
Income taxes 50 (74) (29)
------- ------ -----
$ (105) 121 432
======= ====== =====
See accompanying notes to consolidated financial statements.
27
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 in accumulated other nonstockholder changes in 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 each 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 and Intangible Assets
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. Assets and liabilities related to business combinations
accounted for as purchase transactions are recorded at their respective fair
values. Effective October 1, 2001, Emerson adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and
therefore ceased amortizing goodwill as of that date. Prior to the adoption of
FAS 142, goodwill was amortized on a straight-line basis to other deductions
over the periods estimated to be benefited, not exceeding 40 years. Accumulated
amortization was $922 as of September 30, 2001. The Company conducts a formal
impairment test of goodwill on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value.
All of the Company's intangible assets (other than goodwill) are subject to
amortization. Capitalized software is being amortized on a straight-line basis
with a remaining weighted-average life of three years. Intellectual property
consists primarily of patents which are being amortized on a straight-line basis
with a remaining weighted-average life of four years.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of
manufactured products and records the sale as products are shipped and title
passes to the customer and collection is reasonably assured.
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 each
derivative instrument 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 each derivative
instrument 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 on non-U.S. net asset exposures are included in accumulated
other nonstockholder changes in equity.
28
Income Taxes
No provision is made for U.S. income taxes on the undistributed earnings of
non-U.S. subsidiaries (approximately $1,531 at September 30, 2002), 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 $547, pension adjustments were $29 and $59, and cash flow hedges
were $33 and $41 at September 30, 2001 and 2002, respectively.
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):
2000 2001 2002
----- ----- -----
Basic .................................................. 427.4 425.4 418.9
Dilutive shares ........................................ 4.0 4.1 2.0
----- ----- -----
Diluted ................................................ 431.4 429.5 420.9
===== ===== =====
(3) Acquisitions and Divestitures
Cash paid in connection with the Company's purchase acquisitions follows:
2000 2001 2002
------ ---- ----
Fair value of assets acquired .......................... $2,142 243 821
Less liabilities assumed ............................... 170 43 67
------ ---- ----
Cash paid (net of cash and equivalents acquired) .... $1,972 200 754
====== ==== ====
During the first quarter of 2002, Emerson acquired Avansys Power Co., Ltd.
(renamed Emerson Network Power China), a provider of network power products to
the telecommunications industry in China, for $750 in cash (approximately $710
net of cash acquired), resulting in $624 of goodwill. Avansys and several other
smaller businesses acquired during the year had annualized sales of
approximately $270.
In the first quarter of 2002, Emerson received $165 from the divestiture of the
Chromalox industrial heating solutions business, resulting in a pretax gain of
$85. In the second quarter, Emerson exchanged its ENI semiconductor equipment
business for an equity interest in MKS Instruments, Inc. of 12 million common
shares, resulting in a pretax gain of approximately $93. During the third
quarter, Emerson received $73 from the divestiture of the Daniel Valve business,
resulting in a pretax gain of $42. Chromalox, ENI and Daniel Valve represent
total annual 2001 sales of approximately $300.
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.
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.
29
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"). Krautkramer, VA and another divestiture, BI Technologies,
represent total annual 1999 sales of nearly $600.
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) Other Deductions, Net
Other deductions, net are summarized as follows:
2000 2001 2002
----- ---- ----
Gains from divestitures of businesses ................. $(191) (187) (231)
Amortization of intangibles ........................... 178 191 28
Rationalization of operations ......................... 78 111 207
Repositioning ......................................... -- 237 --
Other ................................................. 27 52 100
----- ---- ----
Total .............................................. $ 92 404 104
===== ==== ====
Rationalization of operations includes ongoing costs for start-up, shutdown and
moving of facilities, asset writedowns, severance and other costs in connection
with improving the cost structure of operations. Rationalization of operations
by segment is summarized as follows:
2000 2001 2002
---- ---- ----
Process Control ....................................... $ 39 25 27
Industrial Automation ................................. 12 20 33
Electronics & Telecommunications ...................... 13 39 71
HVAC .................................................. 16 20 26
Appliance and Tools ................................... 23 21 49
Corporate ............................................. (25) (14) 1
---- ---- ----
Total .............................................. $ 78 111 207
==== ==== ====
In addition, operations for 2002 were impacted by higher than average inventory
obsolescence, unabsorbed overhead on inventory reductions and bad debts of $70.
Rationalization of operations and these costs totaled $277 ($187 after-tax),
while gains from divestitures of businesses were $231 ($135 after-tax) in 2002.
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, along with other period costs for shutdown and
moving. Exit costs for severance and lease terminations utilized during 2002
were $19 and $14, respectively. The remaining balance of lease termination costs
for vacated facilities of $18 will be utilized over the remaining terms of the
applicable lease or when the leases are terminated. See Note 14 for the impact
of the charges by business segment.
30
(5) Goodwill and Intangible Assets
Effective October 1, 2001, Emerson adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." The statement
requires, among other things, the discontinuation of goodwill amortization for
business combinations before July 1, 2001, and completion of a transitional
goodwill impairment test. Under the impairment test, if a reporting unit's
carrying amount exceeds its estimated fair value, a goodwill impairment is
recognized to the extent that the reporting unit's carrying amount of goodwill
exceeds the implied fair value of the goodwill. Fair value of reporting units
were estimated using discounted cash flows and market multiples.
Emerson completed the transitional impairment test and recorded a non-cash,
after-tax charge of $938 (net of $17 tax benefit), as a cumulative effect of a
change in accounting principle. The primary factors resulting in the impairment
charge were the change in the goodwill impairment criteria from an undiscounted
to a discounted cash flow method and the sharp decline in the telecommunication
and computing equipment markets. The after-tax charge by segment was Electronics
and Telecommunications $831, Industrial Automation $59, and Process Control $48.
As of the adoption date, the Company estimated that if the reporting units with
an impairment charge were actually sold, earnings could have been further
decreased up to $200 due to realization of currency translation. In addition,
earnings could have been increased for the potential realization of unrecognized
tax benefits upon sale in excess of $250.
For comparison purposes, supplemental net earnings and earnings per share for
the years ended September 30, 2000 and 2001, excluding goodwill amortization of
$155 ($141 net of tax) and $164 ($149 net of tax), respectively, are provided as
follows:
2000 2001
------ -----
Net earnings, excluding goodwill amortization ................. $1,563 1,181
Earnings per share, excluding goodwill amortization:
Basic ...................................................... $ 3.66 2.78
Diluted .................................................... $ 3.63 2.75
(6) 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.
Notional transaction amounts and fair values for the Company's outstanding
derivatives, by risk category and instrument type, as of September 30, 2001 and
2002, are summarized as follows. Fair values of the derivatives do not consider
the offsetting underlying hedged item.
2001 2002
---------------- ----------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- ----- -------- -----
Foreign currency:
Forwards ............................. $1,099 4 1,001 (14)
Options .............................. $ 54 2 57 1
Interest rate swaps ..................... $ 865 (61) 324 5
Commodity contracts ..................... $ 218 (28) 156 (11)
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 long-term debt (including
current maturities) exceeded the related carrying value by $296 at September 30,
2002. The carrying value of an equity investment in a publicly-traded company
exceeded the related fair value by approximately $59 at September 30, 2002. The
estimated fair value of each of the Company's other classes of financial
instruments approximated the related carrying value at September 30, 2001 and
2002.
31
(7) Short-term Borrowings and Lines of Credit
Short-term borrowings and current maturities of long-term debt are summarized as
follows:
2001 2002
------ -----
Commercial paper ............................................. $2,112 1,262
Payable to banks ............................................. 91 56
Other ........................................................ 244 242
------ -----
Total ..................................................... $2,447 1,560
====== =====
Weighted average interest rate at year end 3.9% 2.5%
====== =====
In 2001, the Company entered into an interest rate swap agreement, which fixed
the rate on $250 of commercial paper at 6.0 percent through December 2010. The
Company terminated the swap in 2002. 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 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 and 149 million of British pound
notes with interest rates of 5.2 percent and 4.4 percent, swapped to $256 and
$217 at U.S. commercial paper rates at September 30, 2001 and 2002,
respectively.
The Company and its subsidiaries maintained lines of credit amounting to $3,100
with various banks at September 30, 2002, to support short-term borrowings and
to assure availability of funds at prevailing interest rates. Lines of credit
totaling $1,500 are effective until 2005 with the remainder until March 2003.
There were no borrowings against U.S. lines of credit in the last three years.
The Company's subsidiaries maintained uncommitted bank credit facilities in
various currencies for which approximately $300 was unused at September 30,
2002. In some instances, borrowings against these credit facilities have been
guaranteed by the Company to facilitate funding at favorable interest rates. In
addition, as of September 30, 2002, the Company could issue up to $1,250 of
additional debt securities under its shelf registration with the Securities and
Exchange Commission.
(8) Long-term Debt
Long-term debt is summarized as follows:
2001 2002
------ -----
7 7/8% notes due 2005 ......................................... $ 600 600
6.3% notes due 2006 ........................................... 250 250
5 1/2% notes due 2008 ......................................... 250 250
5% notes due 2009 ............................................. 175 175
5.85% notes due 2009 .......................................... 250 250
7 1/8% notes due 2010 ......................................... 500 500
5.75% notes due 2012 .......................................... -- 250
5 5/8% notes due 2014 ......................................... -- 250
6% notes due 2032 ............................................. -- 250
Other ......................................................... 252 224
------ -----
2,277 2,999
Less current maturities ....................................... 21 9
------ -----
Total ...................................................... $2,256 2,990
====== =====
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. 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.
Long-term debt maturing during each of the four years after 2003 is $4, $613,
$252 and $1, respectively. Total interest paid related to short-term borrowings
and long-term debt was approximately $273, $274 and $283 in 2000, 2001 and 2002,
respectively.
32
(9) Retirement Plans
Retirement plan expense includes the following components:
U.S. Plans Non-U.S. Plans
------------------- ------------------
2000 2001 2002 2000 2001 2002
----- ---- ---- ---- ---- ----
Defined benefit plans:
Service cost (benefits earned during the period) ... $ 42 41 41 12 11 9
Interest cost ...................................... 119 126 134 19 18 16
Expected return on plan assets ..................... (179) (186) (178) (25) (24) (21)
Net amortization ................................... (2) (1) 9 -- (1) --
----- ---- ---- --- --- ---
Net periodic pension (income) expense ........... (20) (20) 6 6 4 4
Defined contribution and multiemployer plans .......... 61 64 58 11 15 18
----- ---- ---- --- --- ---
Total retirement plan expense ...................... $ 41 44 64 17 19 22
===== ==== ==== === === ===
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 2002 2001 2002
------ ----- ---- ----
Benefit obligation, beginning ........................................... $1,566 1,725 301 304
Service cost ............................................................ 41 41 11 9
Interest cost ........................................................... 126 134 18 16
Actuarial losses ........................................................ 72 63 1 8
Benefits paid ........................................................... (86) (93) (15) (15)
Acquisitions/divestitures, net .......................................... (1) (2) (10) (1)
Foreign currency and other .............................................. 7 3 (2) 21
------ ----- --- ---
Benefit obligation, ending .............................................. $1,725 1,871 304 342
====== ===== === ===
Fair value of plan assets, beginning .................................... $1,726 1,753 315 293
Actual return on plan assets ............................................ (57) (119) (10) (24)
Employer contributions .................................................. 169 161 8 9
Benefits paid ........................................................... (86) (93) (15) (15)
Acquisitions/divestitures, net .......................................... -- -- (2) --
Foreign currency and other .............................................. 1 1 (3) 16
------ ----- --- ---
Fair value of plan assets, ending ....................................... $1,753 1,703 293 279
====== ===== === ===
Plan assets in excess of (less than) benefit obligation as of June 30 ... $ 28 (168) (11) (63)
Unamortized transition amount ........................................... (8) (1) -- --
Unrecognized net loss ................................................... 401 748 4 66
Unrecognized prior service costs ........................................ 17 14 -- (6)
Adjustment for fourth quarter contributions ............................. -- -- 1 --
------ ----- --- ---
Net amount recognized in the balance sheet .............................. $ 438 593 (6) (3)
====== ===== === ===
U.S. Plans Non-U.S. Plans
-------------------- ------------------
2000 2001 2002 2000 2001 2002
----- ----- ----- ---- ---- ----
Weighted average assumptions:
Discount rate ................... 8.00% 7.75% 7.25% 6.4% 6.4% 5.8%
Expected return on plan assets .. 10.50% 10.50% 9.00% 8.4% 8.5% 8.3%
Rate of compensation increase ... 4.50% 4.25% 3.75% 3.9% 3.9% 3.4%
33
At September 30, 2001 and 2002, the pension assets recognized in the balance
sheet were $519 and $636, and the pension liabilities recognized in the balance
sheet were $133 and $141, respectively; in addition, $46 and $95 were included
in accumulated other nonstockholder changes in equity at September 30, 2001 and
2002, respectively. As of the plans' June 30 measurement date, 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, $307 and $199, respectively, for 2001, and $328, $312
and $210, respectively, for 2002. As of October 2002, the Company estimates that
the accumulated benefit obligation for the primary defined benefit pension plans
exceeded the fair value of plan assets by $180. If the equity markets continue
the trend experienced subsequent to the measurement date, the Company estimates
that a charge to accumulated other nonstockholder changes in equity of
approximately $700 ($450 after-tax) could be required.
(10) 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, 2001 and 2002, follows:
2000 2001 2002
---- ---- ----
Service cost ......................... $ 5 5 6
Interest cost ........................ 22 24 26
Net amortization ..................... (3) (2) --
--- -- --
Net postretirement plan expense ... $24 27 32
=== == ==
The reconciliations of the actuarial present value of accumulated postretirement
benefit obligations follow:
2001 2002
---- ----
Benefit obligation, beginning ......................................... $305 324
Service cost .......................................................... 5 6
Interest cost ......................................................... 24 26
Actuarial losses ...................................................... 21 54
Benefits paid ......................................................... (28) (35)
Acquisitions/divestitures and other ................................... (3) 2
---- ---
Benefit obligation, ending ............................................ 324 377
Unrecognized net loss ................................................. (1) (53)
Unrecognized prior service benefit .................................... 4 2
---- ---
Postretirement benefit liability recognized in the balance sheet ... $327 326
==== ===
The assumed discount rates used in measuring the obligations as of September 30,
2000, 2001 and 2002, were 7.75 percent, 7.50 percent and 7.00 percent,
respectively. The assumed health care cost trend rate for 2003 was 9.0 percent,
declining to 5.0 percent in the year 2011. The assumed health care cost trend
rate for 2002 was 7.0 percent, declining to 4.5 percent in the year 2007. 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,
2002, and the 2002 postretirement plan expense by less than five percent.
(11) Contingent Liabilities and Commitments
At September 30, 2002, 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.
34
(12) Income Taxes
Income before income taxes consists of the following:
2000 2001 2002
------ ----- -----
United States ................... $1,615 1,143 1,110
Non-U.S. ........................ 563 446 455
------ ----- -----
Income before income taxes ... $2,178 1,589 1,565
====== ===== =====
The principal components of income tax expense follow:
2000 2001 2002
---- ---- ----
Current:
Federal ................. $497 429 198
State and local ......... 47 33 7
Non-U.S ................. 199 172 108
Deferred:
Federal ................. 30 (36) 175
State and local ......... 3 1 26
Non-U.S ................. (20) (42) (9)
---- ---- ----
Income tax expense ... $756 557 505
==== ==== ====
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
2000 2001 2002
---- ---- ----
Federal corporate statutory rate ..................... 35.0% 35.0% 35.0%
State and local taxes, less federal tax benefit ... 1.4 1.4 1.4
Export benefit .................................... (1.0) (1.4) (1.7)
Foreign rate differential ......................... (.7) (1.3) (3.0)
Goodwill .......................................... 1.6 2.3 --
Other ............................................. (1.6) (.9) .6
---- ---- ----
Effective income tax rate ............................ 34.7% 35.1% 32.3%
==== ==== ====
The principal items that gave rise to deferred tax assets (liabilities) follow:
2001 2002
----- ----
Property, plant and equipment ................ $(229) (270)
Leveraged leases ............................. (157) (144)
Pension ...................................... (147) (193)
Intangibles .................................. (109) (128)
Accrued liabilities .......................... 241 249
Postretirement and postemployment benefits ... 128 131
Employee compensation and benefits ........... 128 82
NOL and tax credit carryforwards ............. 95 133
Valuation allowance .......................... (30) (80)
Other ........................................ 113 99
----- ----
Total deferred tax assets (liabilities) ... $ 33 (121)
===== ====
At September 30, 2001 and 2002, respectively, net current deferred tax assets
were $395 and $325, and net noncurrent deferred tax liabilities were $362 and
$446. Total income taxes paid were approximately $700, $590 and $320 in 2000,
2001 and 2002, respectively.
35
(13) Common Stock
The Company has various stock option plans that permit key 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, 2002, approximately 10.5 million options were available
for grant under these plans. Changes in the number of shares subject to option
during 2000, 2001 and 2002, follow (shares in thousands):
2000 2001 2002
---------------- ---------------- ----------------
Average Average Average
Price Shares Price Shares Price Shares
------- ------ ------- ------ ------- ------
Beginning of year ......... $45.48 8,504 $47.15 10,147 $48.42 9,088
Options granted ........ 46.42 3,095 67.27 451 52.85 2,112
Options exercised ...... 30.54 (1,093) 44.05 (1,219) 40.86 (591)
Options canceled ....... 51.96 (359) 51.58 (291) 52.85 (196)
------ ------ ------
End of year ............... 47.15 10,147 48.42 9,088 49.66 10,413
====== ====== ======
Exercisable at year end ... 4,563 4,625 6,016
====== ====== ======
Summarized information regarding stock options outstanding and exercisable at
September 30, 2002, follows (shares in thousands):
Outstanding Exercisable
----------------------------------- ----------------
Average Average Average
Range of Exercise Prices Shares Contractual Life Price Shares Price
- ------------------------ ------ ---------------- ------- ------ -------
up to $44 ................. 4,352 5.3 years $41.36 2,981 $40.80
$45 to 54 ................. 3,885 8.0 52.62 1,250 52.37
$55 to 74 ................. 2,176 6.3 60.97 1,785 59.84
------ -----
Total .................. 10,413 6.5 49.66 6,016 48.85
====== =====
The Company's Incentive Shares Plans authorize the distribution of common stock
to key management personnel subject to certain conditions and restrictions. Upon
accomplishment of the five-year performance objectives, 2,085,314 shares were
distributed to participants in 2002, including 1,216,985 shares paid in cash;
additionally, participants elected to defer 97,604 shares for future
distribution. At September 30, 2002, 1,897,922 shares were outstanding with
restriction periods of three to ten years, including 169,627 shares issued in
2002. In addition, 1,124,612 rights to receive common shares have been awarded,
including 26,441 shares awarded in 2002, which are contingent upon accomplishing
certain objectives by 2006. At September 30, 2002, approximately 3.5 million
shares remained available for award under these plans. Compensation expense
charged against income for the Company's Incentive Shares Plans was $43, $36 and
$27 for 2000, 2001 and 2002, respectively.
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
its stock plans. 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, $1,012 and $2.36 per share in 2001, and $1,043 and $2.48 per
share ($105 and $0.25 per share including the cumulative effect of accounting
change) in 2002. 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, 5.7
percent and 4.2 percent, dividend yield of 2.3 percent, 2.3 percent and 2.9
percent, expected volatility of 22 percent, 25 percent and 25 percent for 2000,
2001 and 2002, respectively, and expected life of five years for all years. The
weighted average fair value of options granted was $11.75, $12.03 and $11.03 for
2000, 2001 and 2002, respectively. The Company plans to adopt the accounting
provisions of FAS 123 in fiscal 2003 for grants awarded after September 30,
2002.
At September 30, 2002, 25,704,892 shares of common stock were reserved,
including 25,646,901 shares for issuance under the Company's stock plans and
57,991 shares for conversion of the outstanding 8% convertible subordinated
debentures at a price of $13.49 per share. During 2002, 361,300 treasury shares
were acquired and 1,445,638 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.
36
(14) 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 predictive maintenance systems. The Industrial Automation segment includes
integral horsepower industrial motors, variable-speed and index drives,
mechanical power transmission equipment, 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 and controls, 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
(See Notes 3, 4 and 5)
Sales Earnings Total Assets
------------------------- ------------------------------------- ------------------------
2000 2001 2002 2000 <F1> 2001 <F1><F2> 2002 2000 2001 2002
------- ------ ------ ----------- --------------- ----- ------ ------ ------
Process Control ..................... $ 3,156 3,398 3,396 280 358 387 3,575 3,573 3,506
Industrial Automation ............... 3,181 2,956 2,500 467 402 297 2,685 2,567 2,354
Electronics & Telecommunications .... 3,289 3,590 2,465 447 359 119 3,643 3,303 2,878
HVAC ................................ 2,500 2,438 2,389 382 347 333 1,840 1,920 1,876
Appliance and Tools ................. 3,811 3,500 3,437 581 503 456 2,473 2,366 2,393
------- ------ ------ ----- ----- ----- ------ ------ ------
15,937 15,882 14,187 2,157 1,969 1,592 14,216 13,729 13,007
Differences in accounting methods ... 190 191 149
Repositioning charge ................ -- (377) --
Corporate and other ................. 102 92 57 948 1,317 1,538
Sales eliminations / Interest ....... (392) (402) (363) (271) (286) (233)
------- ------ ------ ----- ----- ----- ------ ------ ------
Total ............................ $15,545 15,480 13,824 2,178 1,589 1,565 15,164 15,046 14,545
======= ====== ====== ===== ===== ===== ====== ====== ======
<FN>
<F1> In connection with the adoption of FAS 142, fiscal 2002 segment earnings
exclude goodwill amortization. Fiscal 2000 segment earnings include goodwill
amortization of $155 as follows: Process Control $53; Industrial Automation $27;
Electronics and Telecommunications $40; HVAC $14; and Appliance and Tools $21.
Fiscal 2001 segment earnings include goodwill amortization of $164 as follows:
Process Control $56; Industrial Automation $26; Electronics and
Telecommunications $51; HVAC $14; and Appliance and Tools $17.
<F2> Reported 2001 segment earnings exclude the incremental repositioning
charge of $377. 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 $289, Industrial Automation $380, Electronics and Telecommunications
$276, HVAC $341, and Appliance and Tools $340.
</FN>
Depreciation and
Intersegment Sales Amortization Expense Capital Expenditures
------------------ -------------------- --------------------
2000 2001 2002 2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ----
Process Control .................... $ 6 4 3 182 188 124 100 77 76
Industrial Automation .............. 14 18 12 128 125 93 88 85 67
Electronics & Telecommunications ... 12 15 14 95 128 81 115 104 33
HVAC ............................... 31 31 25 104 110 99 184 144 85
Appliance and Tools ................ 329 334 309 160 148 134 196 135 105
Corporate and other ................ 9 9 10 9 9 18
---- --- --- --- --- --- --- --- ---
Total ........................... $392 402 363 678 708 541 692 554 384
==== === === === === === === === ===
37
Changes in the goodwill balances since September 30, 2001, are primarily due to
the transitional impairment charge and the addition of goodwill associated with
the Avansys acquisition. Goodwill balances by business segment follow:
2001 2002
------ -----
Process Control .................... $1,626 1,591
Industrial Automation .............. 831 788
Electronics & Telecommunications ... 1,805 1,590
HVAC ............................... 376 377
Appliance and Tools ................ 544 564
------ -----
Total ........................... $5,182 4,910
====== =====
Geographic
Property, Plant
Sales by Destination and Equipment
------------------------- ---------------------
2000 2001 2002 2000 2001 2002
------- ------ ------ ----- ----- -----
United States ... $ 9,651 9,291 8,073 2,394 2,355 2,162
Europe .......... 3,026 3,087 2,766 467 492 489
Asia ............ 1,256 1,412 1,563 229 255 280
Latin America ... 545 670 525 117 138 130
Other regions ... 1,067 1,020 897 36 48 55
------- ------ ------ ----- ----- -----
Total ........ $15,545 15,480 13,824 3,243 3,288 3,116
======= ====== ====== ===== ===== =====
(15) Other Financial Data
Items reported in earnings during the years ended September 30, 2000, 2001 and
2002, include the following:
2000 2001 2002
---- ---- ----
Depreciation ........................... $454 462 457
Goodwill amortization .................. 155 164 --
Intangible asset amortization .......... 69 82 84
Research, new product development and
product improvement costs ........... 594 594 530
Rent expense ........................... 201 219 216
Interest expense ....................... 288 304 250
Interest income ........................ 17 18 17
Other assets, other are summarized as follows:
2001 2002
------ -----
Retirement plans ............... $ 519 636
Equity and other investments ... 163 326
Leveraged leases ............... 163 145
Capitalized software ........... 146 147
Intellectual property .......... 127 113
Other .......................... 138 191
------ -----
Total ....................... $1,256 1,558
====== =====
Other liabilities are summarized as follows:
2001 2002
------ -----
Deferred income taxes ............................. $ 383 514
Postretirement plans, excluding current portion ... 307 306
Minority interest ................................. 100 104
Other ............................................. 507 490
------ -----
Total .......................................... $1,297 1,414
====== =====
38
Accrued expenses include employee compensation of $335 and $344 at September 30,
2001 and 2002, 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 $110
in 2003 and decline substantially thereafter.
(16) Quarterly Financial Information (Unaudited)
Financial Results
Net Sales Gross Profit Net Earnings
---------------- ------------- ------------------
2001 2002 2001 2002 2001 2002
------- ------ ----- ----- ----- -----
First Quarter .... $ 3,920 3,295 1,388 1,170 357 255<F2>
Second Quarter ... 4,103 3,421 1,451 1,189 359 275
Third Quarter .... 3,905 3,570 1,364 1,230 331 281
Fourth Quarter ... 3,552 3,538 1,158 1,235 (15)<F1> 249
------- ------ ----- ----- ----- -----
Fiscal Year ... $15,480 13,824 5,361 4,824 1,032 1,060
======= ====== ===== ===== ===== =====
Basic Earnings per Diluted Earnings per Dividends per
Common Share Common Share Common Share
------------------ -------------------- -------------
2001 2002 2001 2002 2001 2002
----- ---- ---- ---- ----- -----
First Quarter .... $ .84 .61<F2> .83 .61<F2> .3825 .3875
Second Quarter ... .84 .65 .83 .65 .3825 .3875
Third Quarter .... .77 .68 .77 .67 .3825 .3875
Fourth Quarter ... (.03)<F1> .59 (.03)<F1> .59 .3825 .3875
----- ---- ---- ---- ----- -----
Fiscal Year ... $2.43 2.53 2.40 2.52 1.53 1.55
===== ==== ==== ==== ===== =====
<FN>
<F1> Fourth quarter and fiscal 2001 include a charge of $260 ($0.61 per share).
See Note 4 for additional information.
<F2> First quarter and fiscal 2002 exclude a cumulative effect of a change in
accounting principle of $938 ($2.24 per basic share, or $2.23 per diluted
share). Including the cumulative effect of a change in accounting
principle, net earnings for the first quarter and fiscal 2002 were ($683),
($1.63) per basic share, or ($1.62) per diluted share, and $122, $0.29 per
basic share, or $0.29 per diluted share, respectively. See Note 5 for
additional information.
</FN>
See Notes 3 and 4 for information regarding other non-recurring items and the
Company's acquisition and divestiture activities.
Stock Prices
(per common share)
2001 2002
-------------- -------------
High Low High Low
------ ----- ----- -----
First Quarter .... $78.81 62.25 58.14 45.57
Second Quarter ... 77.56 59.81 65.51 52.00
Third Quarter .... 71.60 60.00 59.40 51.59
Fourth Quarter ... 63.05 45.80 54.15 43.20
Fiscal Year ... $78.81 45.80 65.51 43.20
Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock
Exchange and Chicago Stock Exchange.
39
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, changes 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) current and future business environment,
including interest rates and capital and consumer spending; (ii) volatility of
the end markets served, as demonstrated by the recent decline in the electronics
and telecommunications market; (iii) competitive factors and competitor
responses to Emerson initiatives; (iv) development and market introduction of
anticipated new products; (v) availability of raw materials and purchased
components; (vi) government laws and regulations, including taxes; (vii) outcome
of pending and future litigation, including environmental compliance;
(viii) stable governments and business conditions in emerging economies;
(ix) penetration of emerging economies; (x) favorable environment for
acquisitions, domestic and foreign, including regulatory requirements and market
values of candidates; (xi) integration of acquisitions; (xii) favorable access
to capital markets; and (xiii) execution of cost-reduction efforts.
44