Exhibit 13
FINANCIAL REVIEW
RESULTS OF OPERATIONS
NET SALES
Sales for 1997 were a record $12.3 billion, an increase of $1,149 million or
10.3 percent from 1996. Approximately half of the sales increase was
attributable to solid international demand and modest domestic growth with the
remainder due to acquisitions (see note 2). All businesses reported sales growth
in 1997. Domestic sales increased approximately $770 million or 12 percent,
benefiting from acquisitions, solid gains in the tools business, very strong
gains in the electronics business and slight price increases. International
sales increased approximately $380 million, reflecting moderate growth in
Europe, continued strength in Asia-Pacific and Latin America, strong growth in
Canada and acquisitions, partially offset by unfavorable foreign currency
translation of approximately $235 million. New product sales, from products
introduced in the past five years, increased approximately $520 million or 15
percent to a record $3.9 billion, representing 32 percent of sales.
In 1996, sales were $11.1 billion, up $1.1 billion or 11.4 percent from 1995.
More than half of the sales increase was attributable to strong international
demand and moderate domestic growth with the remainder due to acquisitions.
International sales increased approximately $480 million due to solid growth in
Europe, rapid growth in Asia-Pacific and acquisitions, partially offset by
unfavorable foreign currency translation. Domestic sales increased approximately
$655 million, benefiting from solid gains in the heating, ventilating and air
conditioning business, very strong gains in the electronics business,
acquisitions and slight price increases. New product sales increased
approximately $815 million or 32 percent to $3.4 billion, representing 30
percent of sales.
INTERNATIONAL SALES
International sales, including U.S. exports, increased approximately 8 percent
to a record $5.2 billion in 1997, representing 43 percent of the Company's total
sales. Sales by non-U.S. subsidiaries were $4.2 billion in 1997, up $209 million
or 5 percent from 1996. U.S. exports exceeded $1 billion for the first time in
1997, increasing 19 percent to $1,054 million, reflecting strong sales gains in
the process and the heating, ventilating and air conditioning businesses and
acquisitions. International sales increased approximately 7 percent excluding
acquisitions and the unfavorable impact of currency translation as all major
geographic regions achieved sales growth, with particular strength in Asia-
Pacific, Latin America and Canada.
In 1996, international sales increased 11 percent to $4.9 billion, representing
approximately 44 percent of the Company's total sales. Sales by non-U.S.
subsidiaries were $4.0 billion in 1996, up $364 million or 10 percent from 1995.
International sales increased more than 7 percent excluding acquisitions and the
unfavorable impact of currency. All major geographic regions except Canada
reported solid sales growth, highlighted by very strong performance in Asia-
Pacific and Latin America. U.S. exports increased $117 million, or 15 percent,
to $885 million, led by continued strong sales gains in the process and heating,
ventilating and air conditioning businesses.
20
INDUSTRY SEGMENT SALES
Sales in the Commercial and Industrial segment were $7.4 billion, up $730
million or 11.0 percent from 1996, reflecting solid international demand,
moderate domestic gains and acquisitions. The electronics business achieved very
strong underlying sales growth, reflecting broad strength across product lines
and service offerings. During the second quarter of 1997, the Company increased
its ownership and began consolidating the results of Astec (BSR) Plc. The
process business reported modest sales gains as solid international demand was
limited by the impact of the strengthening dollar. Sales of the industrial
motors and drives business increased moderately over a very strong prior year,
as the contribution of 1996 acquisitions helped offset the effects of sluggish
European economies and unfavorable currency translation. The industrial
components and equipment business reported modest sales gains, as solid
international demand was offset by unfavorable exchange rates.
Sales in the Appliance and Construction-Related segment were $4.9 billion, up
$419 million or 9.3 percent from 1996, reflecting slight domestic gains, strong
international demand, the impact of the 1996 Vermont American consolidation and
other acquisitions. Sales of the underlying tools business increased solidly,
reflecting strong domestic demand and the success of new products. The heating,
ventilating and air conditioning business reported slight sales gains as strong
international demand offset the significant impact of cool weather on U.S.
markets. Sales of the fractional motors and appliance components business
increased slightly as the cool weather reduced demand for motors used in room
air-conditioners and fans.
In 1996, sales in the Commercial and Industrial segment were $6.6 billion, up
$623 million or 10.4 percent from 1995, reflecting strong international demand,
modest domestic growth and acquisitions. The process business reported very
strong sales gains due to excellent international demand and product line
acquisitions. The electronics business experienced excellent sales growth,
reflecting very strong domestic markets, the success of new products and recent
acquisitions that enhanced service offerings. The industrial motors and drives
business achieved very strong sales growth benefiting from strong performances
by F.G. Wilson and Control Techniques. The industrial components and equipment
business reported modest sales gains reflecting solid international demand.
In 1996, sales in the Appliance and Construction-Related segment were $4.5
billion, up $514 million, or 12.8 percent from 1995 due to solid international
growth, moderate domestic demand and Vermont American, consolidated into the
Company's financial statements beginning in 1996. The heating, ventilating and
air conditioning business reported strong sales gains driven by worldwide demand
and acceptance of new Copeland Compliant Scroll products. Sales of the
underlying tools business increased moderately, reflecting the continued
acceptance of new products. The fractional motors and appliance components
business increased modestly due to a strong domestic household appliance
industry during the second half of the fiscal year.
TOTAL COSTS AND EXPENSES
Cost of sales for 1997 was $7.9 billion, an increase of 9.8 percent, due
primarily to increased sales volume. In 1996, cost of sales was $7.2 billion,
compared to $6.5 billion in 1995, an increase of 10.6 percent. Cost of sales as
a percent of net sales was 64.0 percent in 1997 compared to 64.3 percent and
64.7 percent in 1996 and 1995, respectively. Gross profit margins have improved
as a result of the Company's ongoing commitment to cost reduction efforts and
productivity improvement programs.
21
Selling, general and administrative (SG&A) expenses were $2.5 billion, $2.2
billion and $1.9 billion in 1997, 1996 and 1995, respectively. As a percent of
net sales, SG&A expenses were 19.9 percent in 1997 compared to 19.6 percent and
19.3 percent in 1996 and 1995, respectively. The increase in SG&A expenses as a
percent of net sales reflects increased investment in new product development
and other revenue growth programs and acquisitions, partially offset by ongoing
cost reduction efforts. The Company continued its commitment to new product
development by increasing engineering and development expense approximately 12
percent to a record $445 million in 1997, compared to $399 million and $354
million in 1996 and 1995, respectively.
Interest expense decreased to $121 million in 1997 from $127 million in 1996,
reflecting lower interest rates. In 1996, interest expense increased from $111
million in 1995 due to acquisitions.
In the fourth quarter of 1997, the Company and General Signal formed a joint
venture combining Emerson's Appleton Electric operations and General Signal's
Electrical Group. Emerson holds a controlling interest in this venture, and the
transaction resulted in a pretax gain of approximately $80 million. The fourth
quarter of 1996 included a $78 million gain from the disposition of Emerson's
interest in the S-B Power Tool joint venture ("S-B"). These gains were
substantially offset by other non-recurring items. See note 2 for additional
information. Other deductions, net, were $78 million in 1997, compared to $57
million and $29 million in 1996 and 1995, respectively. Earnings in 1995
included a $41 million preferential distribution from S-B.
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Income before income taxes increased $175 million, or 10.9 percent, to $1.8
billion in 1997, reflecting increased sales and improved margins. Income
before interest expense and income taxes in the Commercial and Industrial
segment increased $103 million, or 11.3 percent, to $1,013 million in 1997.
This improvement is primarily a result of solid international demand, moderate
domestic sales growth and acquisitions. Income of the segment was 13.8 percent
and 13.7 percent of net sales in 1997 and 1996. Income in the Appliance and
Construction-Related segment increased $71 million, or 9.6 percent, to $813
million in 1997. As a percent of net sales, income of the segment was 16.5
percent in 1997 and 16.4 percent in 1996. These results reflect increased
worldwide sales volume, acquisitions and ongoing cost reduction efforts.
Income before income taxes and cumulative effect of accounting change increased
$149 million, or 10.2 percent, to $1.6 billion in 1996. Excluding non-recurring
items, income before income taxes increased approximately 13 percent in 1996,
reflecting worldwide sales volume, improved margins and acquisitions, partially
offset by higher interest expense. Income before interest expense, income taxes
and accounting change in the Commercial and Industrial segment increased $90
million, or 11.0 percent, to $910 million in 1996. This improvement was
primarily a result of underlying strength in international markets, modest
domestic growth and acquisitions. Income of the segment was 13.7 percent and
13.6 percent of net sales in 1996 and 1995. Income in the Appliance and
Construction-Related segment increased $90 million, or 13.8 percent, to $742
million in 1996. As a percent of net sales, income of the segment was 16.4
percent in 1996 and 16.3 percent in 1995. These results reflect solid underlying
growth, acquisitions and ongoing cost reduction efforts. See note 12 for
additional information by industry segment and geographic area.
22
INCOME TAXES
Income taxes before accounting change were $662 million, $590 million, and $531
million in 1997, 1996 and 1995, respectively. The effective income tax rate was
37.1 percent in 1997, compared to 36.7 percent in 1996 and 36.4 percent in 1995,
reflecting acquisitions.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits," which
establishes accounting standards for workers' compensation, disability and
severance benefits. The Company recognized the obligation in the first quarter
of 1995 as a cumulative effect of change in accounting principle which decreased
1995 net earnings and earnings per common share by $21.3 million and $.05,
respectively. The adoption of the statement does not have a material impact on
the Company's ongoing results of operations.
NET EARNINGS AND RETURN ON EQUITY
Net earnings for 1997 were a record $1.1 billion, up 10.2 percent from $1.0
billion in 1996. Net earnings as a percent of sales was 9.1 percent in 1997 and
1996. Earnings per common share were a record $2.52 in 1997, up 11.0 percent
from $2.27 in 1996. Emerson achieved a return on average stockholders' equity of
20.8 percent compared to 19.9 percent and 19.7 percent in 1996 and 1995,
respectively. Net earnings for 1996 were up 12.2 percent from $908 million in
1995. Earnings per common share in 1996 were up 12.1 percent from $2.03 in 1995.
The Company consummated a two-for-one stock split in March 1997. All per share
amounts included in this discussion have been restated to give effect to the
split.
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 record operating cash flow of $1.5 billion in 1997, an
increase of 14 percent compared to 1996. Operating cash flows were $1.3 billion
and $1.1 billion in 1996 and 1995, respectively. Operating working capital was
approximately 17 percent of sales in 1997 and 18 percent of sales in 1996 and
1995. Increases in total assets, debt and other liabilities reflect sales
growth and acquisitions.
Capital expenditures were $575 million in 1997, up 12 percent from $514 million
in 1996. In 1996, capital expenditures increased 22 percent from $421 million in
1995. These funds increase the Company's global capacity to leverage
opportunities within the heating, ventilating and air conditioning and stand-by
power generation industries, as well as improve manufacturing productivity in a
number of our businesses. In addition, the Company began work on a $200 million
project focused on a new compressor and motor plant in Suzhou, China. Cash
paid in connection with Emerson's purchase acquisitions was $319 million, $300
million and $236 million in 1997, 1996 and 1995, respectively.
Dividends were a record $481 million ($1.08 per share) in 1997, compared with
$439 million ($.98 per share) in 1996 and $398 million ($.89 per share) in 1995.
In November 1997, the Board of Directors voted to increase the quarterly cash
dividend 9.3 percent to an annualized rate of $1.18 per share.
23
LEVERAGE/CAPITALIZATION
Total debt increased to $2.0 billion in 1997 from $1.7 billion in 1996,
reflecting the impact of acquisitions and the Company's share repurchase
program, which authorizes the repurchase of up to 40 million shares of the
Company's outstanding common stock. Net purchases of treasury stock totaled
approximately $377 million in 1997. In 1996, total debt increased to $1.7
billion from $1.6 billion, reflecting the impact of acquisitions. See notes 2, 3
and 4 for additional information.
The total debt-to-capital ratio was 27.1 percent at year-end 1997, compared to
24.5 percent in 1996 and 24.7 percent in 1995. At September 30, 1997, net debt
(total debt less cash and equivalents and short-term investments) was 24.9
percent of net capital, compared to 22.9 percent in 1996 and 23.3 percent in
1995. The Company's interest coverage ratio (income before income taxes, non-
recurring items and interest expense divided by interest expense) increased to
15.8 times in 1997, compared to 13.7 times in 1996 and 13.9 times in 1995, as a
result of earnings growth and a reduction in interest rates.
At year-end 1997, the Company and its subsidiaries maintained lines of credit
amounting to $1.3 billion to support commercial paper and had available non-U.S.
bank credit facilities of $455 million to support non-U.S. operations. Lines of
credit totaling $660 million are effective until 2002, with the remainder
through various dates in 1998. These lines of credit and bank credit facilities
assure the availability of funds at prevailing interest rates. In addition, as
of September 30, 1997, the Company could issue up to $750 million of additional
debt securities under its shelf registration with the Securities and Exchange
Commission.
FINANCIAL INSTRUMENTS
The Company is exposed to market risk related to changes in interest rates and
European and other foreign currency exchange rates, and selectively uses
derivative financial instruments 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 one-percentage-point increase
in interest rates or ten-percent weakening in the U.S. dollar across all
currencies, the potential losses in future earnings, fair value and cash flows
are immaterial. This methodology has limitations; for example, a weaker U.S.
dollar would benefit future earnings through favorable translation of non-U.S.
operating results. See notes 1, 3, 4 and 5.
24
Consolidated Statements of Earnings
EMERSON ELECTRIC CO. AND SUBSIDIARIES
Years ended September 30
(Dollars in millions except per share amounts)
1997 1996 1995
---------- ---------- ----------
Net sales $ 12,298.6 11,149.9 10,012.9
---------- ---------- ----------
Costs and expenses:
Cost of sales 7,865.6 7,165.0 6,480.4
Selling, general and administrative expenses 2,450.9 2,192.0 1,933.2
Interest expense 120.9 126.9 110.6
Other deductions, net 77.6 57.0 28.8
---------- ---------- ----------
Total costs and expenses 10,515.0 9,540.9 8,553.0
---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 1,783.6 1,609.0 1,459.9
Income taxes 661.7 590.5 530.9
---------- ---------- ----------
Income before cumulative effect of change
in accounting principle 1,121.9 1,018.5 929.0
Cumulative effect of change in accounting principle,
$.05 per common share -- -- (21.3)
---------- ---------- ----------
Net earnings $ 1,121.9 1,018.5 907.7
========== ========== ==========
Earnings per common share $ 2.52 2.27 2.03
========== ========== ==========
See accompanying notes to consolidated financial statements.
25
Consolidated Balance Sheets
EMERSON ELECTRIC CO. AND SUBSIDIARIES
September 30
(Dollars in millions except per share amounts)
ASSETS
1997 1996
---------- ----------
Current assets
Cash and equivalents $ 221.1 149.0
Receivables, less allowances of $54.0 in 1997
and $50.3 in 1996 2,200.2 1,979.8
Inventories:
Finished products 789.6 720.7
Raw materials and work in process 1,092.0 1,023.2
---------- ----------
Total inventories 1,881.6 1,743.9
Other current assets 413.9 314.5
---------- ----------
Total current assets 4,716.8 4,187.2
---------- ----------
Property, plant and equipment
Land 167.0 166.2
Buildings 1,066.0 1,043.2
Machinery and equipment 3,928.9 3,391.1
Construction in progress 271.8 265.1
---------- ----------
5,433.7 4,865.6
Less accumulated depreciation 2,698.3 2,414.8
---------- ----------
Property, plant and equipment, net 2,735.4 2,450.8
---------- ----------
Other assets
Excess of cost over net assets of purchased businesses,
less accumulated amortization of $509.5 in 1997 and $443.7 in 1996 3,116.0 2,779.2
Other 895.1 1,063.8
---------- ----------
Total other assets 4,011.1 3,843.0
---------- ----------
$ 11,463.3 10,481.0
========== ==========
See accompanying notes to consolidated financial statements.
26
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---------- ----------
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 1,445.1 967.0
Accounts payable 942.1 791.3
Accrued expenses 1,241.9 1,063.3
Income taxes 213.3 199.5
---------- ----------
Total current liabilities 3,842.4 3,021.1
---------- ----------
Long-term debt 570.7 772.6
---------- ----------
Other liabilities 1,629.5 1,333.9
---------- ----------
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
1997 and 1996 238.3 238.3
Additional paid-in capital 3.3 12.3
Retained earnings 6,348.9 5,707.7
Cumulative translation adjustments (205.9) (29.2)
---------- ----------
6,384.6 5,929.1
Less cost of common stock in treasury, 35,873,321
shares in 1997 and 29,237,152 shares in 1996 963.9 575.7
---------- ----------
Total stockholders' equity 5,420.7 5,353.4
---------- ----------
$ 11,463.3 10,481.0
========== ==========
27
Consolidated Statements of Stockholders' Equity
EMERSON ELECTRIC CO. AND SUBSIDIARIES
Years ended September 30
(Dollars in millions except per share amounts)
1997 1996 1995
-------- -------- --------
Common stock $ 238.3 238.3 238.3
-------- -------- --------
Additional paid-in capital
Beginning balance 12.3 15.0 --
Stock plans (2.8) .1 (4.7)
Treasury stock issued for acquisitions and other (6.2) (2.8) 19.7
-------- -------- --------
Ending balance 3.3 12.3 15.0
-------- -------- --------
Retained earnings
Beginning balance 5,707.7 5,128.3 4,619.1
Net earnings 1,121.9 1,018.5 907.7
Cash dividends (per share: 1997, $1.08;
1996, $.98; 1995, $.89) (480.7) (439.1) (398.5)
-------- -------- --------
Ending balance 6,348.9 5,707.7 5,128.3
-------- -------- --------
Cumulative translation adjustments
Beginning balance (29.2) 17.0 8.7
Translation adjustments (176.7) (46.2) 8.3
-------- -------- --------
Ending balance (205.9) (29.2) 17.0
-------- -------- --------
Treasury stock
Beginning balance (575.7) (527.8) (524.3)
Acquired (427.2) (99.5) (81.1)
Issued under stock plans 18.3 14.2 17.5
Issued for acquisitions and other 20.7 37.4 60.1
-------- -------- --------
Ending balance (963.9) (575.7) (527.8)
-------- -------- --------
Total stockholders' equity $5,420.7 5,353.4 4,870.8
======== ======== ========
See accompanying notes to consolidated financial statements.
28
Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. AND SUBSIDIARIES
Years ended September 30
(Dollars in millions)
1997 1996 1995
-------- -------- --------
Operating activities
Net earnings $1,121.9 1,018.5 907.7
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 511.6 464.6 408.9
Changes in operating working capital (42.6) (131.6) (190.9)
Other (92.3) (34.2) 16.7
-------- -------- --------
Net cash provided by operating activities 1,498.6 1,317.3 1,142.4
-------- -------- --------
Investing activities
Capital expenditures (575.4) (513.5) (420.7)
Purchases of businesses, net of cash and equivalents acquired (319.2) (299.8) (235.5)
Divestiture of business interests and other, net 34.0 272.3 28.9
-------- -------- --------
Net cash used in investing activities (860.6) (541.0) (627.3)
-------- -------- --------
Financing activities
Net increase (decrease) in short-term borrowings 321.8 (363.8) 149.0
Proceeds from long-term debt 5.8 249.9 2.4
Principal payments on long-term debt (13.1) (77.0) (217.2)
Net purchases of treasury stock (376.6) (120.3) (51.3)
Dividends paid (480.7) (439.1) (398.5)
-------- -------- --------
Net cash used in financing activities (542.8) (750.3) (515.6)
-------- -------- --------
Effect of exchange rate changes on cash and equivalents (23.1) 5.7 4.5
-------- -------- --------
Increase in cash and equivalents 72.1 31.7 4.0
Beginning cash and equivalents 149.0 117.3 113.3
-------- -------- --------
Ending cash and equivalents $ 221.1 149.0 117.3
======== ======== ========
Changes in operating working capital
Receivables $ (117.3) (124.3) (85.2)
Inventories (64.4) (18.0) (100.2)
Other current assets (19.5) 7.8 (32.1)
Accounts payable 28.0 43.7 47.2
Accrued expenses 88.6 (16.5) (47.3)
Income taxes 42.0 (24.3) 26.7
-------- -------- --------
$ (42.6) (131.6) (190.9)
======== ======== ========
See accompanying notes to consolidated financial statements.
29
Notes To Consolidated Financial Statements
EMERSON ELECTRIC CO. AND SUBSIDIARIES
(Dollars in millions except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its controlled affiliates. All significant intercompany transactions, profits
and balances are eliminated in consolidation. Other investments of 20 to 50
percent are accounted for by the equity method. Investments of less than 20
percent are carried at cost.
Foreign Currency Translation
The functional currency of nearly all of the Company's non-U.S. subsidiaries is
the local currency. Adjustments resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities
of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The majority of inventory
values are based upon standard costs which approximate average costs, while the
remainder are principally valued on a first-in, first-out basis. Standard costs
are revised at the beginning of the fiscal year and variances incurred during
the year are allocated between inventories and cost of sales.
Property, Plant and Equipment
The Company records investments in land, buildings, and machinery and equipment
at cost. Depreciation is computed principally using the straight-line method
over estimated service lives. Service lives for principal assets are 30 to 40
years for buildings and 8 to 12 years for machinery and equipment.
Excess of Cost Over Net Assets of Purchased Businesses
Assets and liabilities related to business combinations accounted for as
purchase transactions are recorded at their respective fair values. Excess of
cost over net assets of purchased businesses is amortized on a straight-line
basis to other deductions over the periods estimated to be benefited, not
exceeding 40 years. Long-lived assets are reviewed for impairment whenever
events and changes in business circumstances indicate the carrying value of the
assets may not be recoverable. Impairment losses are recognized if expected
future cash flows of the related assets are less than their carrying values.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of
manufactured products as shipped.
Financial Instruments
The net amount to be paid or received under interest rate swap agreements is
accrued over the life of the agreement as a separate component of interest
expense. Gains and losses on purchased currency option and forward exchange
contracts that qualify for deferral accounting are recognized in income with the
underlying hedged transactions; otherwise, the contracts are recorded in the
balance sheet and changes in fair value are recognized immediately in other
deductions, net. Currency fluctuations on non-U.S. dollar obligations that have
been designated as hedges of non-U.S. net asset exposures are included in
cumulative translation adjustments.
Income Taxes
No provision is made for U.S. income taxes on the undistributed earnings of non-
U.S. subsidiaries (approximately $750 at September 30, 1997), 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.
Earnings Per Common Share
Earnings per common share is computed by dividing net earnings by the weighted
average number of common shares outstanding during the applicable periods. The
weighted average number of common shares outstanding (in thousands) was 445,020
shares, 448,095 shares, and 447,506 shares in 1997, 1996 and 1995, respectively.
Financial Statement Presentation
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates. Certain prior year amounts have been
reclassified to conform to the current year presentation.
30
(2) ACQUISITIONS AND DIVESTITURES
Cash paid in connection with the Company's purchase acquisitions, which include
several smaller businesses, follows:
1997 1996 1995
------ ------ ------
Fair value of assets acquired.................................. $359.4 402.1 855.7
Less liabilities assumed....................................... 38.2 79.3 227.0
Less notes and common stock issued to sellers.................. 2.0 23.0 393.2
------ ------ ------
Cash paid (net of cash and equivalents acquired)............. $319.2 299.8 235.5
====== ====== ======
During the second quarter of 1997, Emerson acquired a majority interest in Astec
(BSR) Plc through additional share purchases and began consolidating its
results. Astec had annual sales of approximately $600 in calendar 1996. During
the fourth quarter of 1997, the Company purchased InterMetro Industries for
approximately $275 and acquired Clairson International Corporation. These two
companies produce free-standing and wall-mounted ventilated shelving and
specialty storage products. Emerson previously owned a controlling interest in
Clairson through Vermont American Corporation ("V.A."), the Company's joint
venture with Robert Bosch GmbH. InterMetro and Clairson have combined annual
sales of more than $300. Several smaller businesses were also purchased or sold
in 1997.
In addition, in the fourth quarter of 1997, the Company and General Signal
Corporation formed a joint venture combining Emerson's Appleton Electric
operations and General Signal's Electrical Group. Emerson holds a controlling
interest in this venture, and the transaction resulted in a pretax gain of
approximately $80, which was substantially offset by costs arising from
relocation of several production facilities, asset impairments and litigation.
Emerson began consolidating V.A. in the second quarter of 1996 as a result of an
agreement in which Emerson acquired control over the venture. At September 30,
1997, Emerson had guaranteed V.A.'s indebtedness of approximately $255. If
required to perform under the guarantee, the Company will be indemnified for up
to approximately $90 by Bosch. In addition, the Company purchased Kop-Flex,
Inc., a manufacturer of flexible couplings, and Dieterich Standard, a
manufacturer of flow measurement sensors, along with several smaller businesses
in 1996.
In the fourth quarter of 1996, Emerson received $200 from the disposition of its
fifty-percent interest in the S-B Power Tool Company joint venture. The
transaction resulted in a pretax gain of $78 in 1996, which was substantially
offset by costs arising from divestiture of operations, write-off of
discontinued product line assets and relocation of several production
facilities.
The Company purchased United Kingdom-based manufacturer F.G. Wilson
(Engineering) Ltd. in 1995 for approximately $274, and Caterpillar Inc.
subsequently took an equity position in F.G. Wilson. Emerson completed the
acquisition of the remaining shares of Control Techniques, plc, a United
Kingdom-based manufacturer of variable speed drives used for motor applications,
in 1995 for approximately $227.
The results of operations of these businesses have been included in the
Company's consolidated results of operations since the respective dates of the
acquisitions and prior to the dates of divestiture.
(3) SHORT-TERM BORROWINGS AND LINES OF CREDIT
Short-term borrowings consist of commercial paper, notes issued to sellers in
connection with business combinations and non-U.S. bank borrowings as follows:
United States Non-U.S.
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
Borrowings at year end................................. $907.1 479.0 411.1 475.5
Weighted average interest rate at year end............. 5.9% 5.6% 4.1% 4.1%
In 1997, the Company entered into a five-year interest rate swap which fixed the
rate on $250 of commercial paper at 6.1 percent. The 1995 F.G. Wilson and
Control Techniques acquisitions were partially financed by issuing notes to the
sellers totaling 203 million British pounds, of which 163 million British pounds
remain outstanding at September 30, 1997. The Company had swapped 163 million
and 141 million British pounds with a weighted average interest rate of 6.7
percent and 6.0 percent to $260 and $221 at U.S. commercial paper rates at
September 30, 1997 and 1996, respectively.
31
The Company and its subsidiaries maintained lines of credit amounting to $1,320
with various banks at September 30, 1997, to support commercial paper and to
assure availability of funds at prevailing market interest rates. Lines of
credit totaling $660 are effective until 2002 with the remainder through various
dates in 1998. 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 $615 ($455 unused) at September
30, 1997. 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, 1997, the Company could issue
up to $750 of additional debt securities under its shelf registration with the
Securities and Exchange Commission.
(4) LONG-TERM DEBT
Long-term debt is summarized as follows:
1997 1996
------ ------
Commercial paper with a weighted average interest rate of
5.6 percent at September 30, 1997........................ $255.5 336.3
6.3% notes due 2006........................................ 250.0 250.0
7-7/8% Eurodollar notes due 1998.......................... 100.0 100.0
8% convertible subordinated debentures due through 2011.... 14.0 26.8
Other...................................................... 78.1 72.0
------ ------
697.6 785.1
Less current maturities.................................... 126.9 12.5
------ ------
Total.................................................... $570.7 772.6
====== ======
The Company has the ability to refinance commercial paper on a long-term basis
through its credit lines, and the obligation is included in long-term debt.
The 7-7/8% Eurodollar notes and $55 of U.S. commercial paper have effectively
been exchanged for non-U.S. dollar obligations due in 1998. The non-U.S. dollar
obligations have an effective weighted average interest rate of 4.7 percent and
4.3 percent at September 30, 1997 and 1996, respectively, and are composed of
136 million Dutch guilders, 5 billion Japanese yen and 27 million Swiss francs.
These non-U.S. dollar obligations have been designated as a partial hedge of the
Company's non-U.S. dollar net asset exposure.
Long-term debt maturing during each of the four years after 1998 is $10.2, $4.2,
$6.3 and $257.6, respectively. Total interest paid related to short-term
borrowings and long-term debt was approximately $108, $120 and $121 in 1997,
1996 and 1995, respectively.
(5) FINANCIAL INSTRUMENTS
The Company selectively uses derivative financial instruments to manage interest
costs and minimize currency exchange risk. The Company does not hold derivatives
for trading purposes. No credit loss is anticipated as the counterparties to
these agreements are major financial institutions with high credit ratings.
As part of its currency hedging strategy, the Company utilizes purchased option
and forward exchange contracts to minimize the impact of currency fluctuations
on transactions, cash flows and firm commitments. The Company and its
subsidiaries had approximately $575 and $280 of contracts (primarily options)
outstanding at September 30, 1997 and 1996, respectively. These contracts for
the sale or purchase of European and other currencies generally mature within
one year, and deferred gains and losses are not material.
Fair values of the Company's financial instruments are estimated by reference to
quoted prices from market sources and financial institutions, as well as other
valuation techniques. At September 30, 1997 and 1996, respectively, the market
value of the Company's convertible debentures was $60 and $89, compared to the
related carrying value of $14 and $27. Common stock has been reserved for the
conversion of these debentures (see note 8). The fair values of derivative
financial instruments were not material at September 30, 1997 and 1996, and the
estimated fair value of each of the Company's other classes of financial
instruments approximated the related carrying value at September 30, 1997 and
1996.
32
(6) RETIREMENT PLANS
The Company sponsors retirement plans covering substantially all employees.
Benefits are provided to employees under defined benefit pay-related and flat-
dollar plans which are primarily noncontributory. Annual contributions to
retirement plans equal or exceed the minimum funding requirements of the
Employee Retirement Income Security Act or applicable local regulations.
The Company also sponsors defined contribution plans and participates in
multiemployer plans for certain union employees. Benefits are determined and
funded annually based on terms of the plans or as stipulated in collective
bargaining agreements.
Retirement plan expense for the years ended September 30, 1997, 1996 and 1995,
follows:
U.S. Plans Non-U.S. Plans
------------------------------ ------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
Defined benefit plans:
Service cost (benefits earned during the period).. $ 31.7 30.1 28.0 8.0 8.3 7.7
Interest cost..................................... 94.3 88.1 80.8 16.3 15.9 15.2
Actual return on plan assets...................... (182.3) (185.0) (221.6) (37.8) (25.4) (18.4)
Net amortization and deferral..................... 44.1 60.1 113.5 19.7 9.2 5.1
-------- -------- -------- -------- -------- --------
Net periodic pension expense (income)........... (12.2) (6.7) .7 6.2 8.0 9.6
Defined contribution and multiemployer plans....... 48.5 43.4 39.4 8.1 7.4 7.5
-------- -------- -------- -------- -------- --------
Total retirement plan expense..................... $ 36.3 36.7 40.1 14.3 15.4 17.1
======== ======== ======== ======== ======== ========
The actuarial present value of benefit obligations and the funded status of the
Company's defined benefit pension plans as of September 30, 1997 and 1996,
follow:
U.S. Plans Non-U.S. Plans
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Accumulated benefit obligation........................................ $1,065.1 991.9 199.0 196.5
-------- -------- -------- --------
Vested benefits included in accumulated benefit obligation............ $1,003.9 931.0 167.6 165.9
-------- -------- -------- --------
Projected benefit obligation.......................................... $1,248.4 1,173.4 231.1 229.0
Plan assets at fair value (primarily corporate equity
and fixed income securities)......................................... 1,544.1 1,410.5 205.3 183.3
-------- -------- -------- --------
Plan assets in excess of (less than) projected benefit obligation.. 295.7 237.1 (25.8) (45.7)
Unamortized transition amount......................................... (36.4) (43.6) (2.4) (2.2)
Unrecognized net loss (gain).......................................... (143.3) (96.5) (31.4) (17.4)
Unrecognized prior service costs...................................... 20.2 20.6 1.9 1.2
-------- -------- -------- --------
Pension asset (liability) recognized in the balance sheet............ $ 136.2 117.6 (57.7) (64.1)
======== ======== ======== ========
For 1997, the assumed discount rate, rate of increase in compensation levels and
expected long-term rate of return on plan assets used in the actuarial
calculations were, respectively, 8.0 percent, 5.0 percent and 10.5 percent for
U.S. plans; and an average of 7.4 percent, 4.1 percent and 8.7 percent for non-
U.S. plans. For 1996, the assumed discount rate, rate of increase in
compensation levels and expected long-term rate of return on plan assets were,
respectively, 8.0 percent, 5.0 percent and 10.5 percent for U.S. plans; and an
average of 7.5 percent, 4.1 percent and 8.8 percent for non-U.S. plans.
33
(7) POSTRETIREMENT PLANS AND POSTEMPLOYMENT BENEFITS
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, 1997, 1996 and 1995 follows:
1997 1996 1995
------ ------ ------
Service cost................... $ 3.6 4.0 4.1
Interest cost.................. 19.0 18.4 19.6
Net amortization and deferral.. (4.2) (4.4) (3.5)
------ ------ ------
$ 18.4 18.0 20.2
====== ====== ======
The actuarial present value of accumulated postretirement benefit obligations as
of September 30, 1997 and 1996 follows:
1997 1996
------ ------
Retirees.............................................................. $167.0 152.1
Fully eligible active plan participants............................... 18.7 17.2
Other active plan participants........................................ 74.3 68.4
------ ------
Accumulated postretirement benefit obligation....................... 260.0 237.7
Unrecognized net gain................................................. 39.9 61.1
Unrecognized prior service benefit.................................... 9.6 11.0
------ ------
Postretirement benefit liability recognized in the balance sheet.... $309.5 309.8
====== ======
The assumed discount rate used in measuring the obligation as of September 30,
1997, was 7.75 percent; the initial assumed health care cost trend rate was 8.0
percent, declining to 5.0 percent in the year 2004. The assumed discount rate
used in measuring the obligation as of September 30, 1996, was 7.75 percent; the
initial assumed health care cost trend rate was 8.5 percent, declining to 5.0
percent in the year 2004. A one-percentage-point increase in the assumed health
care cost trend rate for each year would increase the obligation as of September
30, 1997, by approximately 5 percent and increase the 1997 postretirement plan
expense by approximately 6 percent.
Effective October 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits," which
establishes accounting standards for workers' compensation, disability and
severance benefits. The Company recognized the obligation in the first quarter
of 1995 as a cumulative effect of change in accounting principle of $21.3 (net
of $13.7 in related income tax benefits). The adoption of the statement does not
have a material impact on the Company's ongoing results of operations.
(8) COMMON STOCK
In February 1997, stockholders approved increasing the authorized common stock
from 400 million to 1.2 billion shares and decreasing the par value from $1 to
$.50 per share. On March 10, 1997, the Company consummated a two-for-one split,
and stockholders received one additional share of common stock for each share
held. The accompanying financial statements and notes thereto have been
restated to give effect to the split.
The Company has various stock option plans which permit certain officers and
employees to purchase common stock at specified prices. Options are granted at
100% of the market value of the Company's common stock on the date of grant,
vest one-third each year and expire ten years from the date of grant. At
September 30, 1997, 1,038,504 options were available for grant under these
plans. Changes in the number of shares subject to option during 1997, 1996 and
1995 follow (shares in thousands):
1997 1996 1995
---------------- ---------------- ----------------
Average Average Average
Price Shares Price Shares Price Shares
------- ------- ------- ------- ------- -------
Beginning of year..................... $25.47 4,523 $22.39 4,483 $21.80 4,061
Options granted...................... 45.09 3,398 38.54 791 29.12 816
Assumed options of acquired company.. -- -- -- -- 8.16 417
Options exercised.................... 22.55 (794) 19.60 (662) 17.65 (712)
Options canceled..................... 41.02 (429) 30.20 (89) 27.90 (99)
------- ------- -------
End of year........................... 34.77 6,698 25.47 4,523 22.39 4,483
------- ------- -------
Exercisable at year end............... 2,727 2,614 2,370
======= ======= =======
34
Summarized information regarding stock options outstanding and exercisable at
September 30, 1997 follows (shares in thousands):
Outstanding Exercisable
----------------------------------- ---------------
Range of Average Average Average
Exercise Prices Shares Contractual Life Price Shares Price
- --------------- ------ ---------------- ------- ------ -------
up to $20............. 1,070 3.6 years $ 13.70 917 $ 14.93
$21 to 40............. 2,233 6.5 29.30 1,752 28.42
$41 to 60............. 3,395 9.0 45.02 58 43.43
------ ------
Total............. 6,698 7.3 34.77 2,727 24.21
====== ======
The 1993 and 1997 Incentive Shares Plans each authorize the distribution of a
maximum of 6 million shares of common stock to key management personnel. At
September 30, 1997, 714,000 shares had been issued under the 1993 plan with
restriction periods of three to ten years, including 70,000 shares issued in
1997. In addition, 4,893,802 rights to receive common shares had been awarded,
including 2,181,960 shares awarded in 1997 which are contingent upon
accomplishing certain objectives by 2001. Rights awarded prior to 1997 will be
distributed in 1998, with certain shares subject to a three-year restriction
period.
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 is 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 earnings per common share would not materially
differ from reported amounts.
At September 30, 1997, 14,197,711 shares of common stock were reserved,
including 13,158,734 shares for issuance under the Company's stock plans and
1,038,977 shares for conversion of the outstanding 8% convertible subordinated
debentures at a price of $13.49 per share. During 1997, 8,278,440 treasury
shares were acquired and 1,642,271 treasury shares were issued.
Approximately 2.5 million preferred shares are reserved for issuance under a
Preferred Share 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 $120, 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, 1998, unless earlier redeemed (at one cent
per Right), exercised or exchanged under the terms of the plan.
(9) INCOME TAXES
The principal components of income tax expense follow:
1997 1996 1995
------ ------ ------
Federal:
Current................................................................................... $447.8 393.0 301.5
Deferred.................................................................................. 10.1 7.4 46.3
State and local.............................................................................. 48.2 53.0 49.8
Non-U.S...................................................................................... 155.6 137.1 133.3
------ ------ ------
Income tax expense........................................................................ $661.7 590.5 530.9
====== ====== ======
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
1997 1996 1995
------ ------ ------
Federal corporate statutory rate............................................................. 35.0% 35.0% 35.0%
State and local taxes, less federal tax benefit........................................... 1.8 2.1 2.2
Other..................................................................................... .3 (.4) (.8)
------ ------ ------
Effective income tax rate.................................................................... 37.1% 36.7% 36.4%
====== ====== ======
35
The principal components of deferred tax assets (liabilities) follow:
1997 1996
------- -------
Property, plant and equipment and intangibles................ $(321.3) (281.7)
Leveraged leases............................................. (191.1) (194.9)
Pension...................................................... (62.2) (53.5)
Accrued liabilities.......................................... 237.6 226.0
Postretirement and postemployment benefits................... 128.9 130.4
Employee compensation and benefits........................... 108.8 101.8
Other........................................................ 92.7 75.0
------- -------
Total deferred tax assets (liabilities).................. $ (6.6) 3.1
======= =======
At September 30, 1997 and 1996, respectively, net current deferred tax assets
were $268.3 and $230.0, and net noncurrent deferred tax liabilities were $274.9
and $226.9. Total income taxes paid were approximately $645, $575 and $485 in
1997, 1996 and 1995, respectively.
(10) OTHER FINANCIAL DATA
Items charged to earnings during the years ended September 30, 1997, 1996 and
1995, included the following:
1997 1996 1995
------ ------ ------
Research, new product development and product improvement costs............ $445.1 398.7 354.2
Rent expense............................................................... 156.9 144.8 129.2
Amortization of intangibles................................................ 114.0 104.1 86.5
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 $78 in 1998 and decline substantially
thereafter.
Other assets at September 30, 1997 and 1996, included the following:
1997 1996
------ ------
Equity investments.......................... $128.3 276.2
Investment in leveraged leases.............. 190.9 194.0
The market value of the Company's equity investments in publicly traded
companies exceeded the related carrying value by approximately $215 at September
30, 1996.
Accrued expenses include employee compensation of $344.2 and $259.9, and other
liabilities include minority interests in consolidated subsidiaries of $523.1
and $274.8 at September 30, 1997 and 1996, respectively.
(11) CONTINGENT LIABILITIES AND COMMITMENTS
At September 30, 1997, there were no known contingent liabilities (including
guarantees, pending litigation, taxes and other claims) that management believes
will be material in relation to the Company's financial position, nor were there
any material commitments outside the normal course of business.
36
(12) INDUSTRY 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 products manufactured by the Company are classified into the
following industry segments: Commercial and Industrial Components and Systems,
and Appliance and Construction-Related Components. The Commercial and Industrial
segment includes process control instrumentation, valves and systems; industrial
motors and drives; industrial machinery, equipment and components; and
electronics. Products of this segment are sold to commercial and industrial
distributors and end-users for manufacturing and commercial applications. The
Appliance and Construction-Related segment consists of fractional motors and
appliance components; heating, ventilating and air conditioning components; and
tools. This segment includes components sold to distributors and original
equipment manufacturers for inclusion in end products and systems (ultimately
sold through commercial and residential building construction channels), and
construction-related products which retain their identity and are sold through
distributors to consumers and the professional trades. Summarized information
about the Company's operations in each industry segment and geographic area
follows:
Industry Segments
(See note 2)
Net Sales to Income Before Income
Unaffiliated Customers Taxes and Accounting Change Total Assets
---------------------------- ---------------------------- ----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- -------- -------- -------- --------
Commercial and Industrial........... $ 7,365 6,635 6,012 1,013 910 820 6,879 6,336 5,998
Appliance and Construction-
Related........................... 4,934 4,515 4,001 813 742 652 4,100 3,544 2,671
Corporate and other items........... -- -- -- 79 84 99 484 601 730
Interest expense.................... -- -- -- (121) (127) (111) -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................. $ 12,299 11,150 10,013 1,784 1,609 1,460 11,463 10,481 9,399
======== ======== ======== ======== ======== ======== ======== ======== ========
Depreciation and Capital
Amortization Expense Expenditures
---------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
Commercial and Industrial............................................. $ 300 280 254 252 236 214
Appliance and Construction-Related.................................... 206 179 149 305 246 195
Corporate and other items............................................. 6 6 6 18 32 12
-------- -------- -------- -------- -------- --------
Total............................................................... $ 512 465 409 575 514 421
======== ======== ======== ======== ======== ========
Geographic Areas
(By origin)
Net Sales to Income Before Income
Unaffiliated Customers Taxes and Accounting Change Total Assets
---------------------------- ---------------------------- ----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- -------- -------- -------- --------
United States....................... $ 8,108 7,168 6,395 1,342 1,193 1,064 7,147 6,159 4,994
Europe.............................. 2,951 2,919 2,668 318 316 274 2,947 3,023 2,974
Other areas......................... 1,240 1,063 950 166 143 134 1,199 913 886
Corporate and other items........... -- -- -- 79 84 99 484 601 730
Interest expense.................... -- -- -- (121) (127) (111) -- -- --
Eliminations........................ -- -- -- -- -- -- (314) (215) (185)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................. $ 12,299 11,150 10,013 1,784 1,609 1,460 11,463 10,481 9,399
======== ======== ======== ======== ======== ======== ======== ======== ========
37
(13) QUARTERLY FINANCIAL INFORMATION (Unaudited)
Financial Results
Net Sales Gross Profit Net Earnings
---------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
First Quarter............... $ 2,830.6 2,565.8 1,025.2 915.4 254.9 230.5
Second Quarter.............. 3,103.5 2,819.8 1,116.1 998.7 280.4 254.9
Third Quarter............... 3,208.4 2,896.8 1,141.4 1,037.0 296.6 266.9
Fourth Quarter.............. 3,156.1 2,867.5 1,150.3 1,033.8 290.0 266.2
---------- ---------- ---------- ---------- ---------- ----------
Fiscal Year............ $ 12,298.6 11,149.9 4,433.0 3,984.9 1,121.9 1,018.5
========== ========== ========== ========== ========== ==========
Earnings Per Dividends Per
Common Share Common Share
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
First Quarter............................................... $ .57 .51 .27 .245
Second Quarter.............................................. .63 .57 .27 .245
Third Quarter............................................... .67 .60 .27 .245
Fourth Quarter.............................................. .65 .59 .27 .245
------ ------ ------ ------
Fiscal Year............................................ $2.52 2.27 1.08 .98
====== ====== ====== ======
All per share data reflect the 1997 two-for-one stock split.
See Note 2 for information regarding non-recurring items and the Company's
acquisition and divestiture activities.
- --------------------------------------------------------------------------------
Stock Prices
Price Range Per Common Share
--------------------------------------------
1997 1996
-------------------- --------------------
High Low High Low
-------- -------- -------- --------
First Quarter............................................... $51 3/4 43 3/4 40 7/8 34 5/16
Second Quarter.............................................. 52 5/8 45 43 3/8 38 7/8
Third Quarter............................................... 57 1/2 45 45 3/16 38 3/4
Fourth Quarter.............................................. 60 3/8 52 5/16 45 13/16 39 3/8
Fiscal Year............................................ $60 3/8 43 3/4 45 13/16 34 5/16
Emerson Electric Co. common stock (Symbol EMR) is listed on the New York Stock
Exchange and Chicago Stock Exchange.
38
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, 1997 and 1996, 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, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 7 to the consolidated financial statements, effective
October 1, 1994, the Company changed its method of accounting for postemployment
benefits.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
November 3, 1997
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 and are
subject to risk and uncertainties. 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; (vii) con-
tinuation of the favorable environment to make acquisitions, domestic and
foreign, including regulatory requirements and market values of candidates.
48