EXHIBIT 13
28
FINANCIAL REVIEW
RESULTS OF OPERATIONS
Net Sales
Sales for 1999 were a record $14.3 billion, an increase of $822 million, or 6.1
percent, from 1998. The solid sales increase reflected modest underlying sales
growth and the contribution of acquisitions. All businesses reported sales
increases. United States sales increased approximately $455 million, or 6
percent, while international sales increased approximately $368 million, or 7
percent. Underlying sales growth in the consumer-related businesses continued at
a moderate pace in the U.S. and internationally, led by strong growth in the
Heating, Ventilating and Air Conditioning (HVAC) business. Underlying sales of
the capital goods-related businesses were flat in 1999. Strong sales growth in
the Electronics and Telecommunications business was offset by global weakness in
the Industrial Automation and Process Control businesses. New product sales,
from products introduced in the past five years, increased approximately $570
million, or 13 percent, to a record $5.0 billion, representing 35 percent of
sales. Acquisitions completed throughout fiscal 1999 are expected to have total
sales of nearly $800 million in fiscal 2000.
In 1998, sales were $13.4 billion, up $1.1 billion, or 9.3 percent, from 1997.
The strong sales growth reflected underlying gains from all businesses and the
contribution of acquisitions. This growth was achieved despite the impact of a
stronger dollar that reduced reported sales growth by more than 2 percent.
Slightly more than half of the sales increase was attributable to solid
underlying U.S. growth and modest international demand. U.S. sales increased
approximately $1.0 billion, or 14 percent, benefiting from very strong gains in
Electronics and Telecommunications and HVAC and acquisitions. International
sales increased approximately $137 million, or 3 percent. Demand was solid
throughout the year in the United States and Europe, which account for more than
three-quarters of consolidated revenue. New product sales increased
approximately $490 million, or 13 percent, to $4.4 billion, representing 33
percent of sales.
International Sales
International sales, including U.S. exports, increased approximately 7 percent
to a record $5.7 billion in 1999, representing 40 percent of the Company's total
sales. Underlying growth in Europe, Asia and other regions more than offset the
impact of weakness in Latin America. Sales by non-U.S. subsidiaries were $4.8
billion in 1999, up 9 percent from 1998. U.S. exports decreased 1 percent to
$960 million, primarily reflecting weakness in Latin America and Japan.
International subsidiary sales increased approximately 2 percent excluding
acquisitions and divestitures.
In 1998, international sales increased 3 percent to $5.3 billion, representing
40 percent of total sales. Solid demand in Europe and the strong growth in other
regions of the world, led by Latin America, more than offset the impact of
significant weakness in Asian economies. Sales by non-U.S. subsidiaries were
$4.4 billion in 1998, up 5 percent from 1997. U.S. exports decreased 8 percent
to $968 million in 1998 compared with 1997, reflecting weakness in Asia.
International subsidiary sales increased approximately 6 percent excluding
acquisitions and the unfavorable impact of currency translation of approximately
$250 million.
29
Business Segment Sales - 1999 vs. 1998
The Process Control business increased sales 7 percent to $2.9 billion in 1999.
This solid sales increase was driven by the strong growth of the PlantWeb
initiative, and the Westinghouse Process Control and Daniel Industries
acquisitions. Underlying sales decreased, reflecting the impact of weak oil
prices on U.S. and Asian demand for process-related equipment, which more than
offset modest growth in Europe. Sales of the Industrial Automation business were
$3.4 billion in 1999. Despite widespread softness in end markets, the Industrial
Automation business realized a small increase in sales due to the contribution
of acquisitions. The global weakness in capital spending, largely due to weak
oil pricing earlier this year, has had a substantial impact on this business.
These results exclude the impact of the F.G. Wilson divestiture. The Electronics
and Telecommunications business increased sales 32 percent, to $2.1 billion in
1999. This outstanding performance, particularly in the U.S. and Europe, was
achieved due to rapid growth in power protection and environmental equipment, as
well as in the service business that monitors and maintains this equipment. This
business also benefited from a significant recovery in the market for power
supply products, driven by recovery in Asia and robust growth in the computing
and telecommunications infrastructure. The increase in the Electronics and
Telecommunications business sales was also aided by the 1998 acquisitions of
Nortel's Advanced Power Systems operations and Hiross environmental systems in
Europe. Sales of the HVAC business were $2.4 billion in 1999, an increase of 11
percent from 1998. Underlying sales of the HVAC business increased
substantially, driven by a dramatic recovery in residential and light commercial
construction in China, a warm summer in the United States, and continued market
adoption of scroll technology. Sales of the Appliance and Tools business were
$3.5 billion in 1999, compared with $3.4 billion in 1998. Underlying sales of
the Appliance and Tools business grew slightly, with the results varying by
geography and product area. In the United States, strong construction activity
drove growth in several consumer-related areas, while European sales declined
due to weakness in appliance products. During 1999, this business also made
substantial gains in sales to home centers, such as The Home Depot and Lowe's,
which are experiencing dramatic growth. Also in 1999, the Company contributed
its Louisville Ladder operations into a joint venture with Grupo Imsa SA of
Mexico and obtained an equity interest in the venture.
Business Segment Sales - 1998 vs. 1997
The Process Control business increased sales to $2.7 billion in 1998 from $2.6
billion in 1997. Excluding the effects of currency translation, this business
reported moderate sales growth as demand was balanced across the major
geographic regions it serves. Sales of the Industrial Automation business were
$3.3 billion in 1998, an increase of 9 percent from 1997. The Industrial
Automation business increase was the result of modest underlying sales growth on
a fixed rate basis, the majority-owned joint venture formed with General
Signal's Electrical Group in September 1997, and the Computational Systems, Inc.
acquisition. The Electronics and Telecommunications business increased sales 30
percent to $1.6 billion in 1998. This business showed very strong underlying
sales growth, reflecting broad strength across product lines and service
offerings. In addition, sales of the business benefited from the acquisition of
Hiross, an Italian manufacturer of precision environmental control and site
monitoring products. Sales of the HVAC business were $2.1 billion in 1998. The
HVAC business reported modest sales growth, as very strong demand in the U.S.
and Europe was partially offset by the impact of weak Asian economies on U.S.
export sales. Sales of the Appliance and Tools business were up 12 percent to
$3.4 billion in 1998. Sales of the underlying Appliance and Tools business grew
solidly, benefiting from solid demand in the U.S. and Europe. The increase in
sales also reflected the 1997 acquisition of InterMetro Industries.
30
Total Costs and Expenses
Cost of sales for 1999 was $9.2 billion, an increase of 7.0 percent, due
primarily to increased sales volume. In 1998, cost of sales was $8.6 billion,
compared with $7.9 billion in 1997, an increase of 9.3 percent. Cost of sales as
a percent of net sales was 64.4 percent in 1999 compared to 63.9 percent and
64.0 percent in 1998 and 1997, respectively. The 1999 gross profit margin was
impacted by the effect of recent acquisitions, partially offset by the Company's
ongoing commitment to cost reduction and containment efforts and productivity
improvement programs.
Selling, general and administrative (SG&A) expenses were $2.8 billion, $2.7
billion, and $2.5 billion in 1999, 1998, and 1997, respectively. As a percent of
net sales, SG&A expenses were 19.4 percent in 1999, and 19.9 percent in 1998 and
1997. The decrease in SG&A as a percent of net sales was the result of ongoing
cost reduction efforts, partially offset by new product development and other
revenue growth programs and acquisitions. The Company continued its commitment
to new product development by increasing engineering and development expense 4
percent to a record $510 million in 1999, compared to $491 million in 1998 and
$445 million in 1997.
Interest expense increased to $190 million in 1999 from $152 million in 1998,
reflecting higher average borrowings resulting from acquisitions and share
repurchases. In 1998, interest expense increased from $121 million in 1997,
reflecting higher average borrowings.
Other deductions, net, including amortization of intangibles, were $95 million
in 1999, compared with $100 million and $78 million in 1998 and 1997,
respectively. Fiscal 1999 included a gain of $64 million from the disposition of
the Company's interest in F.G. Wilson. The fourth quarter of 1997 included a
gain of approximately $80 million from the formation of the joint venture
between Emerson's Appleton Electric division and General Signal's Electrical
Group. These gains were offset by other non-recurring items. See note 2 for
additional information.
Income Before Income Taxes
Income before income taxes increased $97 million, or 5.1 percent, to $2.0
billion in 1999, reflecting increased sales and improvement in underlying
margins, partially offset by increased interest expense. The base company
(excluding acquisitions and divestitures) realized an outstanding performance in
1999, increasing underlying operating margins approximately 0.5 points. This
improvement was offset by the acquisition of businesses with lower margins.
Earnings before interest and income taxes in the Process Control business were
$313 million in 1999, a decrease from 1998, reflecting weak demand associated
with lower oil prices and higher expenditures for cost reduction efforts and
productivity improvement programs. The Industrial Automation business income
increased $17 million to $448 million in 1999, driven by cost containment
measures that mitigated the impact of a challenging economic environment. Income
of the Electronics and Telecommunications business increased $87 million, or 58
percent, to $237 million in 1999, due to strong sales growth and the acquisition
of the Advanced Power Systems business. Income of the HVAC business increased
$45 million, or 14 percent, to $361 million in 1999, reflecting strong sales
growth in both U.S. and international markets. The Appliance and Tools business
income increased $16 million to $577 million in 1999, reflecting varying results
by geography and product area.
Income before income taxes increased $140 million, or 7.8 percent, to $1.9
billion in 1998, reflecting increased sales and improvement in underlying
margins, partially offset by increased interest expense. Earnings before
interest and income taxes in the Process Control business increased $24 million,
or 8 percent, to $343 million in 1998, due to moderate worldwide sales growth.
Income of the Industrial Automation business was $431 million in 1998, a
decrease from 1997, due to non-recurring costs in this business. Income of the
Electronics and Telecommunications business increased $34 million, or 29
percent, from 1997 to 1998, reflecting strong underlying sales growth. The HVAC
business increased income to $316 million in 1998, due to modest sales growth.
Income of the Appliance and Tools business increased $81 million, or 17 percent,
to $561 million in 1998, reflecting solid U.S. demand and acquisitions. See note
12 for additional information by business segment and geographic area.
31
Income Taxes
Income taxes were $707 million, $695 million and $662 million in 1999, 1998 and
1997, respectively. The effective income tax rate was 35.0 percent in 1999,
compared with 36.1 percent in 1998 and 37.1 percent in 1997, reflecting the
continued implementation of global tax planning strategies and the impact of
acquisitions and divestitures.
Net Earnings and Return on Equity
Net earnings for 1999 were a record $1.3 billion, up 6.9 percent from $1.2
billion in 1998. Net earnings as a percent of sales was 9.2 percent in 1999
compared with 9.1 percent in 1998. Diluted earnings per common share were a
record $3.00 in 1999, up 8.3 percent from $2.77 in 1998. Earnings per share
excluding goodwill amortization, a metric that management believes is more
indicative of cash operating performance, were $3.27 in 1999, up 9.4 percent
from $2.99 in the prior year. Emerson achieved a return on average stockholders'
equity of 21.9 percent in 1999 and 1998 compared to 20.8 percent in 1997. Net
earnings for 1998 were up 9.5 percent from $1.1 billion in 1997. Diluted
earnings per common share in 1998 increased 10.8 percent from $2.50 in 1997.
Earnings per share excluding goodwill amortization in 1998 were up 11.2 percent
from $2.69 in the prior year.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
The Company continues to generate substantial cash from operations and remains
in a strong financial position with resources available for reinvestment in
existing businesses, strategic acquisitions and managing the capital structure
on a short- and long-term basis.
Cash Flow
Emerson generated record operating cash flow of $1.8 billion in 1999, an
increase of 10 percent compared to 1998. Operating cash flows were $1.7 billion
and $1.5 billion in 1998 and 1997, respectively. Operating working capital was
approximately 16 percent of sales in 1999, and 17 percent of sales in 1998 and
1997.
Capital expenditures were $592 million, $603 million and $575 million in 1999,
1998 and 1997, respectively. These expenditures increase the Company's global
capacity to leverage opportunities within the heating, ventilating and air
conditioning industries, as well as improve manufacturing productivity in a
number of our businesses. In 1999, construction of a ninth scroll production
facility was completed. This plant, located in China, will become operational in
early fiscal 2000. Cash paid in connection with Emerson's purchase acquisitions
was $1,202 million, $573 million and $319 million in 1999, 1998 and 1997,
respectively.
Dividends were a record $566 million ($1.30 per share) in 1999, compared with
$521 million ($1.18 per share) in 1998 and $481 million ($1.08 per share) in
1997. In November 1999, the Board of Directors voted to increase the quarterly
cash dividend 10 percent to an annualized rate of $1.43 per share.
Leverage/Capitalization
Total debt increased to $3.3 billion in 1999, from $2.6 billion in 1998 and $2.0
billion in 1997, reflecting the impact of acquisitions and the Company's share
repurchase program. The repurchase program, initiated in fiscal 1997, authorizes
the repurchase of up to 40 million shares of the Company's outstanding common
stock, with nearly 23 million shares repurchased through September 30, 1999. Net
purchases of treasury stock totaled $324 million and $499 million in 1999 and
1998, respectively. See notes 2, 3 and 4 for additional information.
The total debt-to-capital ratio was 34.6 percent at year-end 1999, compared with
30.8 percent in 1998 and 27.1 percent in 1997. At September 30, 1999, net debt
(total debt less cash and equivalents and short-term investments) was 32.7
percent of net capital, compared with 29.0 percent in 1998 and 24.9 percent in
1997. The Company's interest coverage ratio (income before income taxes, non-
recurring items and interest expense divided by interest expense) was 11.7 times
in 1999, compared with 13.7 times in 1998 and 15.8 times in 1997, as a result of
higher average borrowings in 1999, partially offset by increased earnings.
32
At year-end 1999, the Company and its subsidiaries maintained lines of credit
amounting to $2.4 billion to support commercial paper and had available non-U.S.
bank credit facilities of $630 million to support non-U.S. operations. Lines of
credit totaling $900 million are effective until 2003, with the remainder
through June 2000. These lines of credit and bank credit facilities assure the
availability of funds at prevailing interest rates. In addition, as of September
30, 1999, the Company could issue up to $2 billion of additional debt securities
under its shelf registration with the Securities and Exchange Commission.
Financial Instruments
The Company is exposed to market risk related to changes in interest rates and
European and other foreign currency exchange rates, and selectively uses
derivative financial instruments, including forwards, swaps and purchased
options, to manage these risks. The Company does not hold derivatives for
trading purposes. The value of market risk sensitive derivative and other
financial instruments is subject to change as a result of movements in market
rates and prices. Sensitivity analysis is one technique used to evaluate these
impacts. Based on a hypothetical ten-percent increase in interest rates or ten-
percent weakening in the U.S. dollar across all currencies, the potential losses
in future earnings, fair value and cash flows are immaterial. This 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.
Year 2000 Readiness
The Company developed a comprehensive Year 2000 plan that includes assessment,
hardware and software remediation, and testing. The Company's divisions have
completed all phases of the plan, which addressed internal computer applications
and information systems, products, facilities and equipment, as well as products
and services provided by third parties. Numerous third parties were contacted to
assess and monitor their compliance and remediation efforts, with particular
emphasis placed on more than 3,000 key suppliers. The estimated costs of the
Year 2000 compliance program are not material to the Company's operating results
or financial condition.
The Company has supplemented existing emergency recovery plans to mitigate the
impact of any unsuccessful remediation or third-party failures. These
contingency plans include the identification of alternative suppliers, possible
increases in inventory levels, and other backup procedures. In addition, the
Company has established global, regional and divisional command centers to
address Year 2000-related issues that may arise and respond, as appropriate, to
minimize the potential impact. Management believes that the diversity of the
Company's operations and systems reduces overall exposure and expects that the
consequences of any unsuccessful remediation will not be significant. However,
there can be no assurance that the Company's efforts or those of other entities
will be successful, or that any potential failure would not have a material
adverse effect on the Company's operating results or financial condition.
33
CONSOLIDATED STATEMENTS OF EARNINGS
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
1999 1998 1997
--------- -------- --------
Net sales $14,269.5 13,447.2 12,298.6
--------- -------- --------
Costs and expenses:
Cost of sales 9,193.8 8,595.6 7,865.6
Selling, general and administrative expenses 2,770.2 2,676.7 2,450.9
Interest expense 189.7 151.7 120.9
Other deductions, net 94.9 99.7 77.6
--------- -------- --------
Total costs and expenses 12,248.6 11,523.7 10,515.0
--------- -------- --------
Income before income taxes 2,020.9 1,923.5 1,783.6
Income taxes 707.3 694.9 661.7
--------- -------- --------
Net earnings $ 1,313.6 1,228.6 1,121.9
========= ======== ========
Basic earnings per common share $ 3.03 2.80 2.52
========= ======== ========
Diluted earnings per common share $ 3.00 2.77 2.50
========= ======== ========
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED BALANCE SHEETS
Emerson Electric Co. and Subsidiaries
September 30
(Dollars in millions except per share amounts)
Assets
1999 1998
--------- --------
Current assets
Cash and equivalents $ 266.1 209.7
Receivables, less allowances of $60.5 in 1999
and $54.6 in 1998 2,516.3 2,416.1
Inventories:
Finished products 871.5 858.6
Raw materials and work in process 1,049.6 1,137.9
--------- --------
Total inventories 1,921.1 1,996.5
Other current assets 420.9 379.0
--------- --------
Total current assets 5,124.4 5,001.3
--------- --------
Property, plant and equipment
Land 216.5 173.4
Buildings 1,287.1 1,205.5
Machinery and equipment 4,497.2 4,373.5
Construction in progress 377.0 318.3
--------- --------
6,377.8 6,070.7
Less accumulated depreciation 3,223.4 3,059.1
--------- --------
Property, plant and equipment, net 3,154.4 3,011.6
--------- --------
Other assets
Goodwill, less accumulated amortization of $714.4 in 1999
and $617.5 in 1998 4,263.0 3,702.7
Other 1,081.7 944.2
--------- --------
Total other assets 5,344.7 4,646.9
--------- --------
$13,623.5 12,659.8
========= ========
See accompanying notes to consolidated financial statements.
35
Liabilities and Stockholders' Equity
1999 1998
--------- ---------
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 1,953.7 1,524.4
Accounts payable 1,068.8 1,036.7
Accrued expenses 1,304.8 1,252.7
Income taxes 263.1 207.9
--------- ---------
Total current liabilities 4,590.4 4,021.7
--------- ---------
Long-term debt 1,317.1 1,056.6
--------- ---------
Other liabilities 1,535.5 1,778.2
--------- ---------
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
1999 and 1998 238.3 238.3
Additional paid-in capital 23.9 27.9
Retained earnings 7,803.7 7,056.5
Accumulated other nonstockholder changes in equity (271.6) (236.2)
--------- ---------
7,794.3 7,086.5
Less cost of common stock in treasury, 43,632,708
shares in 1999 and 38,452,823 shares in 1998 1,613.8 1,283.2
--------- ---------
Total stockholders' equity 6,180.5 5,803.3
--------- ---------
$13,623.5 12,659.8
========= =========
36
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions except per share amounts)
1999 1998 1997
--------- -------- -------
Common stock $ 238.3 238.3 238.3
--------- -------- -------
Additional paid-in capital
Beginning balance 27.9 3.3 12.3
Stock plans (3.5) (43.4) (2.8)
Treasury stock issued for acquisitions and other (.5) 68.0 (6.2)
--------- -------- -------
Ending balance 23.9 27.9 3.3
--------- -------- -------
Retained earnings
Beginning balance 7,056.5 6,348.9 5,707.7
Net earnings 1,313.6 1,228.6 1,121.9
Cash dividends (per share: 1999, $1.30;
1998, $1.18; 1997, $1.08) (566.4) (521.0) (480.7)
--------- -------- -------
Ending balance 7,803.7 7,056.5 6,348.9
--------- -------- -------
Accumulated other nonstockholder changes in equity
Beginning balance (236.2) (205.9) (29.2)
Translation adjustments (35.4) (30.3) (176.7)
--------- -------- -------
Ending balance (271.6) (236.2) (205.9)
--------- -------- -------
Treasury stock
Beginning balance (1,283.2) (963.9) (575.7)
Acquired (361.2) (498.4) (427.2)
Issued under stock plans 27.9 108.5 18.3
Issued for acquisitions and other 2.7 70.6 20.7
--------- -------- -------
Ending balance (1,613.8) (1,283.2) (963.9)
--------- -------- -------
Total stockholders' equity $ 6,180.5 5,803.3 5,420.7
========= ======== =======
Nonstockholder changes in equity
(Net earnings and Translation adjustments) $ 1,278.2 1,198.3 945.2
========= ======== =======
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Emerson Electric Co. and Subsidiaries
Years ended September 30
(Dollars in millions)
1999 1998 1997
--------- ------- -------
Operating activities
Net earnings $ 1,313.6 1,228.6 1,121.9
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 637.5 562.5 511.6
Changes in operating working capital 35.7 (81.0) (42.6)
Gains on divestitures, pension funding and other (176.3) (58.5) (92.3)
--------- ------- -------
Net cash provided by operating activities 1,810.5 1,651.6 1,498.6
--------- ------- -------
Investing activities
Capital expenditures (591.6) (602.6) (575.4)
Purchases of businesses, net of cash and equivalents acquired (1,202.0) (572.9) (319.2)
Divestiture of businesses and other, net 215.5 76.2 34.0
--------- ------- -------
Net cash used in investing activities (1,578.1) (1,099.3) (860.6)
--------- ------- -------
Financing activities
Net increase in short-term borrowings 503.5 145.4 321.8
Proceeds from long-term debt 470.9 452.0 5.8
Principal payments on long-term debt (257.0) (132.5) (13.1)
Net purchases of treasury stock (323.7) (499.4) (376.6)
Dividends paid (566.4) (521.0) (480.7)
--------- ------- -------
Net cash used in financing activities (172.7) (555.5) (542.8)
--------- ------- -------
Effect of exchange rate changes on cash and equivalents (3.3) (8.2) (23.1)
--------- ------- -------
Increase (decrease) in cash and equivalents 56.4 (11.4) 72.1
Beginning cash and equivalents 209.7 221.1 149.0
--------- ------- -------
Ending cash and equivalents $ 266.1 209.7 221.1
========= ======= =======
Changes in operating working capital
Receivables $ (23.1) (76.1) (117.3)
Inventories 69.0 (27.7) (64.4)
Other current assets (12.2) 19.7 (19.5)
Accounts payable (25.4) .9 28.0
Accrued expenses (31.5) (2.8) 88.6
Income taxes 58.9 5.0 42.0
--------- ------- -------
$ 35.7 (81.0) (42.6)
========= ======= =======
See accompanying notes to consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Emerson Electric Co. and Subsidiaries
(Dollars in millions except per share amounts)
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its controlled affiliates. All significant intercompany transactions, profits
and balances are eliminated in consolidation. Other investments of 20 to 50
percent are accounted for by the equity method. Investments of less than 20
percent are carried at cost.
Foreign Currency Translation
The functional currency of nearly all of the Company's non-U.S. subsidiaries is
the local currency. Adjustments resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities
of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The majority of inventory
values are based upon standard costs which approximate average costs, while the
remainder are principally valued on a first-in, first-out basis. Standard costs
are revised at the beginning of the fiscal year, and variances incurred during
the year are allocated between inventories and cost of sales.
Property, Plant and Equipment
The Company records investments in land, buildings, and machinery and equipment
at cost. Depreciation is computed principally using the straight-line method
over estimated service lives. Service lives for principal assets are 30 to 40
years for buildings and 8 to 12 years for machinery and equipment.
Goodwill
Assets and liabilities related to business combinations accounted for as
purchase transactions are recorded at their respective fair values. Goodwill is
amortized on a straight-line basis to other deductions over the periods
estimated to be benefited, not exceeding 40 years. Long-lived assets are
reviewed for impairment whenever events and changes in business circumstances
indicate the carrying value of the assets may not be recoverable. Impairment
losses are recognized if expected future cash flows of the related assets are
less than their carrying values.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of
manufactured products as shipped.
Financial Instruments
The net amount to be paid or received under interest rate swap agreements is
accrued over the life of the agreement as a separate component of interest
expense. Gains and losses on purchased currency option and forward exchange
contracts that qualify for deferral accounting are recognized in income with the
underlying hedged transactions; otherwise, the contracts are recorded in the
balance sheet, and changes in fair value are recognized immediately in other
deductions, net. Currency fluctuations on non-U.S. dollar obligations that have
been designated as hedges of non-U.S. net asset exposures are included in
accumulated other nonstockholder changes in equity.
Income Taxes
No provision is made for U.S. income taxes on the undistributed earnings of non-
U.S. subsidiaries (approximately $1,140 at September 30, 1999), 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
In 1999, the Company adopted Statement of Financial Accounting Standards No.
130, which requires the reporting of changes in stockholders' equity that do not
result from transactions with stockholders. Nonstockholder changes in equity
are comprised of net earnings and foreign currency translation adjustments. The
adoption of this statement had no impact on the Company's results of operations
or financial condition.
39
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.
(2) Acquisitions and Divestitures
Cash paid in connection with the Company's purchase acquisitions, which include
several smaller businesses, follows:
1999 1998 1997
-------- ----- -----
Fair value of assets acquired...................... $1,475.7 947.0 359.4
Less liabilities assumed........................... 271.4 214.5 38.2
Less notes and common stock issued to sellers...... 2.3 159.6 2.0
-------- ----- -----
Cash paid (net of cash and equivalents acquired).. $1,202.0 572.9 319.2
======== ===== =====
During the first quarter of 1999, the Company purchased the Westinghouse Process
Control Division ("WPC") from CBS Corporation for approximately $260. WPC is a
supplier of process controls for the power generation, water and wastewater
treatment industries. In addition, in the first and second quarters of 1999, the
Company paid $230 to acquire the remaining ownership interest in Astec (BSR)
Plc. In the third quarter of 1999, the Company acquired Daniel Industries, Inc.
through a cash tender offer of approximately $435 plus assumed debt. Daniel is a
provider of measurement and control products and services for the oil and gas
industry. In addition, the Company acquired MagneTek's alternator operations;
Kato Engineering, an alternator business; and a number of smaller businesses in
1999. The companies acquired in 1999 had annualized sales of approximately $760.
During 1999, the Company received $226 from the disposition of its interest in
F.G. Wilson, resulting in a pretax gain of $64 ($30 net of income taxes). The
Company also incurred costs for the rationalization of other operations that
more than offset this gain. In addition, the Company will receive a percentage
of future F.G. Wilson revenue and expects a maximum of $100 by 2002. F.G. Wilson
had sales of approximately $410 in 1998.
During the first quarter of 1998, the Company purchased Computational Systems,
Inc. ("CSI") for approximately $160, primarily in common stock. CSI is a
supplier of condition monitoring and diagnostic products and services for motors
and other rotational equipment. During the fourth quarter of 1998, Astec (BSR)
Plc, a subsidiary of Emerson, purchased the Advanced Power Systems ("APS")
business from Northern Telecom Limited for approximately $325. APS manufactures
power conversion products for a wide variety of telecommunications applications.
In addition, the Company purchased Plaset SpA, a European manufacturer of
appliance drain pumps, and acquired a majority interest in Hiross, an Italian
manufacturer of precision environmental control and site monitoring products.
Several smaller businesses were also purchased in 1998. The companies acquired
in 1998 had annualized sales of approximately $775.
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. InterMetro and Clairson had 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.
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 and current maturities of long-term debt are summarized as
follows:
1999 1998
-------- -------
Commercial paper......................................... $1,358.3 992.7
Payable to banks......................................... 83.6 258.3
Other.................................................... 511.8 273.4
-------- -------
Total................................................... $1,953.7 1,524.4
======== =======
Weighted average interest rate at year end............... 5.2% 5.3%
======== =======
40
In 1999, the Company issued $250 of 5.125%, one-year notes that were
simultaneously swapped to floating interest rates at a cost less than the
Company's U.S. commercial paper, with an effective interest rate of 5.3 percent
at September 30, 1999. In 1998, the Company entered into an interest rate
agreement which capped the rate on $250 of commercial paper at 6.0 percent
through September 1999. In 1997, the Company entered into a five-year interest
rate swap which fixed the rate on $250 of commercial paper at 6.1 percent. The
Company had 151 million and 152 million of British pound notes with interest
rates of 5.3 and 7.5 percent swapped to $256 and $257 at U.S. commercial paper
rates at September 30, 1999 and 1998, respectively.
The Company and its subsidiaries maintained lines of credit amounting to $2,375
with various banks at September 30, 1999, to support commercial paper and to
assure availability of funds at prevailing market interest rates. Lines of
credit totaling $900 are effective until 2003 with the remainder through June
2000. 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 $700 ($630 unused) at September 30, 1999. 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, 1999, the Company could issue up to $2,000 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:
1999 1998
-------- -------
Commercial paper with a weighted average interest rate of
5.6 percent at September 30, 1999.............................. $ 254.0 252.6
6.3% notes due 2006............................................. 250.0 250.0
5 1/2% notes due 2008........................................... 250.0 250.0
5% notes due 2008............................................... 175.0 -
5.85% notes due 2009............................................ 250.0 -
Term loan with a weighted average interest rate of 6.0 percent
at September 30, 1998.......................................... - 200.0
Other........................................................... 147.2 117.9
-------- -------
1,326.2 1,070.5
Less current maturities......................................... 9.1 13.9
-------- -------
Total.......................................................... $1,317.1 1,056.6
======== =======
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. In
1999, the Company issued $250 of 5.85%, ten-year notes that were simultaneously
swapped to U.S. commercial paper rates, with an effective interest rate of 5.4
percent at September 30, 1999.
Long-term debt maturing during each of the four years after 2000 is $24, $23,
$262 and $4, respectively. Total interest paid related to short-term borrowings
and long-term debt was approximately $185, $138 and $108 in 1999, 1998 and 1997,
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 $405 and $335 of contracts outstanding at
September 30, 1999 and 1998, 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, 1999 and 1998, the Company had
outstanding 8% convertible subordinated debentures due through 2011 with a
market value of $40 and $44, compared to the related carrying value of $9 and
$10, respectively. Common stock has been reserved for the conversion of these
debentures (see note 9). The fair values of derivative financial instruments
were not material at September 30, 1999 and 1998, and the estimated fair value
of each of the Company's other classes of financial instruments approximated the
related carrying value at September 30, 1999 and 1998.
41
(6) Retirement Plans
Retirement plan expense includes the following components:
U.S. Plans Non-U.S. Plans
----------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- -------
Defined benefit plans:
Service cost (benefits earned during the period).. $ 38.6 33.2 31.7 9.1 7.9 8.0
Interest cost..................................... 112.5 106.1 94.3 16.9 16.4 16.3
Expected return on plan assets.................... (161.4) (152.2) (134.6) (19.0) (17.0) (16.0)
Net amortization.................................. 1.6 (2.3) (3.6) 0.2 (.7) (.1)
Settlement gains.................................. - - - - - (2.0)
------- ------- ------- ------- ------- -------
Net periodic pension (income) expense........... (8.7) (15.2) (12.2) 7.2 6.6 6.2
Defined contribution and multiemployer plans....... 59.4 54.6 48.5 8.5 9.4 8.1
------- ------- ------- ------- ------- -------
Total retirement plan expense..................... $ 50.7 39.4 36.3 15.7 16.0 14.3
======= ======= ======= ======= ======= =======
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
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------ ------
Benefit obligation, beginning................................... $1,437.9 1,248.4 263.2 231.1
Service cost.................................................... 38.6 25.2 8.0 7.3
Interest cost................................................... 112.5 80.3 15.2 14.3
Actuarial (gains) losses........................................ (42.8) 100.1 25.1 13.1
Benefits paid................................................... (63.5) (44.4) (11.1) (11.3)
Acquisitions/divestitures, net.................................. 61.1 28.3 14.2 -
Foreign currency and other...................................... 2.0 - (8.3) 8.7
-------- -------- ------ ------
Benefit obligation, ending...................................... $1,545.8 1,437.9 306.3 263.2
======== ======== ====== ======
Fair value of plan assets, beginning............................ $1,513.8 1,544.1 232.6 205.3
Actual return on plan assets.................................... 78.3 (20.9) 20.1 26.9
Employer contributions.......................................... 75.5 6.0 6.4 6.2
Benefits paid................................................... (63.5) (44.4) (11.1) (11.3)
Acquisitions/divestitures, net.................................. 29.7 29.0 15.2 -
Foreign currency and other...................................... 1.2 - (3.5) 5.5
-------- -------- ------ ------
Fair value of plan assets, ending............................... $1,635.0 1,513.8 259.7 232.6
======== ======== ====== ======
Plan assets in excess of (less than) benefit obligation......... $ 89.2 75.9 (46.6) (30.6)
Unamortized transition amount................................... (22.0) (29.2) (1.6) (2.0)
Unrecognized net loss (gain).................................... 127.5 89.3 (10.8) (32.4)
Unrecognized prior service costs................................ 20.4 23.7 2.9 1.6
Adjustment for fourth quarter contributions..................... .6 1.7 .5 -
-------- -------- ------ ------
Net pension asset (liability) recognized in the balance sheet.. $ 215.7 161.4 (55.6) (63.4)
======== ======== ====== ======
Weighted average assumptions:
Discount rate.................................................. 7.75% 7.50% 6.1% 6.8%
Expected return on plan assets................................. 10.50% 10.50% 8.5% 8.6%
Rate of compensation increase.................................. 4.25% 4.00% 3.3% 3.7%
At September 30, 1999 and 1998, the pension assets recognized in the balance
sheet were $271.3 and $205.9 and the pension liabilities recognized in the
balance sheet were $111.2 and $107.9, respectively. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
the retirement plans with accumulated benefit obligations in excess of plan
assets were $380.6, $353.5, and $208.6, respectively, as of September 30, 1999,
and $301.0, $284.6, and $160.9, respectively, as of September 30, 1998.
42
In 1998, the Company changed the measurement date for the defined benefit
pension plans from September 30 to June 30 to improve administrative
efficiencies and the timeliness and accuracy of its financial reporting and
planning process. The effect of the change on retirement plan expense was
immaterial. The fair value of plan assets decreased approximately $145 in the
quarter ended September 30, 1998, reflecting the impact of the equity market
decline; this change was offset by an increase in the unrecognized net loss. The
1998 reconciliations of benefit obligations and of the fair value of plan assets
include nine months of activity.
(7) Postretirement Plans
The Company sponsors unfunded postretirement benefit plans (primarily health
care) for U.S. retirees and their dependents. Net postretirement plan expense
for the years ended September 30, 1999, 1998 and 1997, follows:
1999 1998 1997
------ ------ ------
Service cost........................................................... $ 4.5 4.1 3.6
Interest cost.......................................................... 21.6 20.2 19.0
Net amortization....................................................... (3.1) (3.6) (4.2)
------ ------ ------
Net postretirement plan expense....................................... $ 23.0 20.7 18.4
====== ====== ======
The reconciliations of the actuarial present value of accumulated postretirement
benefit obligations follow:
1999 1998
------ ------
Benefit obligation, beginning.......................................... $279.6 260.0
Service cost........................................................... 4.5 4.1
Interest cost.......................................................... 21.6 20.2
Actuarial losses....................................................... 6.0 12.8
Benefits paid.......................................................... (20.4) (20.3)
Acquisitions/divestitures and other.................................... 21.8 2.8
------ ------
Benefit obligation, ending............................................. 313.1 279.6
Unrecognized net gain.................................................. 17.8 25.0
Unrecognized prior service benefit..................................... 5.9 8.2
------ ------
Postretirement benefit liability recognized in the balance sheet...... $336.8 312.8
====== ======
The assumed discount rates used in measuring the obligations as of September 30,
1999 and 1998, were 7.5 percent and 7.25 percent, respectively. The assumed
health care cost trend rate for 2000 was 6.5 percent, declining to 4.5 percent
in the year 2004. A one-percentage-point increase or decrease in the assumed
health care cost trend rate for each year would increase or decrease the
obligation as of September 30, 1999, and the 1999 postretirement plan expense by
less than 5 percent.
(8) Earnings Per Common Share
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 basic earnings per common share and diluted earnings per
common share follow (shares in millions):
1999 1998 1997
-------------------------------- ------------------------------- -------------------------------
Weighted Earnings Weighted Earnings Weighted Earnings
Average Per Average Per Average Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
-------- -------- -------- -------- -------- -------- -------- -------- --------
Basic............. $1,313.6 433.8 $ 3.03 $1,228.6 439.2 $ 2.80 $1,121.9 445.0 $ 2.52
======== ======== ========
Convertible debt.. .5 .7 .6 .9 .9 1.3
Stock plans....... 3.9 4.0 3.2
-------- -------- -------- -------- -------- --------
Diluted........... $1,314.1 438.4 $ 3.00 $1,229.2 444.1 $ 2.77 $1,122.8 449.5 $ 2.50
======== ======== ======== ======== ======== ======== ======== ======== ========
43
(9) Common Stock
The Company has various stock option plans that permit certain officers and
employees to purchase common stock at specified prices. Options are granted at
100 percent of the market value of the Company's common stock on the date of
grant, generally vest one-third each year and expire ten years from the date of
grant. At September 30, 1999, 5.4 million options were available for grant
under these plans. Changes in the number of shares subject to option during
1999, 1998 and 1997, follow (shares in thousands):
1999 1998 1997
-------------------- -------------------- --------------------
Average Average Average
Price Shares Price Shares Price Shares
------- ------ ------- ------ ------- ------
Beginning of year........................................ $39.02 6,608 $34.77 6,698 $25.47 4,523
Options granted......................................... 54.95 3,026 57.71 974 45.09 3,398
Assumed options of acquired company..................... 34.02 71 26.08 330 - -
Options exercised....................................... 29.29 (1,025) 25.91 (1,198) 22.55 (794)
Options canceled........................................ 55.25 (176) 45.23 (196) 41.02 (429)
------ ------ ------
End of year.............................................. 45.48 8,504 39.02 6,608 34.77 6,698
====== ====== ======
Exercisable at year end.................................. 3,952 3,479 2,727
====== ====== ======
Summarized information regarding stock options outstanding and exercisable at
September 30, 1999, follows (shares in thousands):
Outstanding Exercisable
------------------------------------- ----------------------
Range of Average Average Average
Exercise Prices Shares Contractual Life Price Shares Price
- --------------- ------ ---------------- ------- ------ -------
up to $25............................................... 554 1.8 years $16.91 554 $16.91
$26 to 43............................................... 1,495 5.0 31.15 1,442 31.00
$44 to 65............................................... 6,455 8.2 51.25 1,956 46.96
------ ------
Total............................................... 8,504 7.3 45.48 3,952 36.92
====== ======
The Company's Incentive Shares Plans authorize the distribution of common stock
to key management personnel. At September 30, 1999, 1,916,549 shares are
outstanding with restriction periods of three to ten years, including 59,500
shares issued in 1999. In addition, 2,292,440 rights to receive common shares
have been awarded, including 57,147 shares awarded in 1999, which are contingent
upon accomplishing certain objectives by 2001. At September 30, 1999,
approximately 6 million shares remained available for award under these plans.
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
its stock plans. The compensation expense charged against income for the
Company's incentive shares plans was immaterial. Had compensation expense for
the Company's stock plans been determined in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," net earnings and diluted earnings per common share, respectively,
would have been $1,293 and $2.95 per share in 1999, $1,215 and $2.74 per share
in 1998, and $1,110 and $2.47 per share in 1997. 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 4.7 percent, 5.7 percent and 6.4 percent, dividend yield
of 2.1 percent, 2.0 percent and 2.4 percent, expected volatility of 17 percent,
16 percent and 16 percent for 1999, 1998 and 1997, respectively, and expected
life of 5 years for all years. The weighted average fair value of options
granted was $10.38, $12.01 and $9.46 for 1999, 1998 and 1997, respectively.
At September 30, 1999, 22,834,153 shares of common stock were reserved,
including 22,201,609 shares for issuance under the Company's stock plans and
632,544 shares for conversion of the outstanding 8% convertible subordinated
debentures at a price of $13.49 per share. During 1999, 6,097,200 treasury
shares were acquired, and 917,315 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.
44
(10) Income Taxes
Income before income taxes consists of the following:
1999 1998 1997
-------- ------- -------
United States...................................................................................... $1,567.7 1,496.4 1,357.1
Non-U.S............................................................................................ 453.2 427.1 426.5
-------- ------- -------
Income before income taxes........................................................................ $2,020.9 1,923.5 1,783.6
======== ======= =======
The principal components of income tax expense follow:
1999 1998 1997
-------- ------- -------
Federal:
Current........................................................................................... $ 417.3 453.4 447.8
Deferred.......................................................................................... 77.5 35.9 10.1
State and local.................................................................................... 49.8 51.4 48.2
Non-U.S............................................................................................ 162.7 154.2 155.6
-------- ------- -------
Income tax expense................................................................................ $ 707.3 694.9 661.7
======== ======= =======
The federal corporate statutory rate is reconciled to the Company's effective income tax rate as
follows:
1999 1998 1997
-------- ------- -------
Federal corporate statutory rate................................................................... 35.0% 35.0% 35.0%
State and local taxes, less federal tax benefit................................................... 1.6 1.7 1.8
Foreign Sales Corporation benefit and other....................................................... (1.6) (.6) .3
-------- ------- -------
Effective income tax rate.......................................................................... 35.0% 36.1% 37.1%
======== ======= =======
The principal components of deferred tax assets (liabilities) follow:
1999 1998
--------- -------
Property, plant and equipment and intangibles...................................................... $ (357.0) (344.1)
Leveraged leases................................................................................... (181.0) (185.4)
Pension............................................................................................ (92.9) (69.3)
Accrued liabilities................................................................................ 249.5 255.9
Postretirement and postemployment benefits......................................................... 145.1 129.1
Employee compensation and benefits................................................................. 109.1 99.4
Other.............................................................................................. 81.6 84.0
-------- -------
Total deferred tax assets (liabilities)........................................................... $ (45.6) (30.4)
======== =======
At September 30, 1999 and 1998, respectively, net current deferred tax assets
were $261.7 and $248.3, and net noncurrent deferred tax liabilities were $307.3
and $278.7. Total income taxes paid were approximately $580, $665 and $645 in
1999, 1998 and 1997, respectively.
(11) Contingent Liabilities and Commitments
At September 30, 1999, 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.
45
(12) Business Segment Information
The Company is engaged principally in the worldwide design, manufacture and sale
of a broad range of electrical, electromechanical and electronic products and
systems. In 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments and
related disclosures. The divisions of the Company are primarily organized based
on the nature of the products and services provided. The Process Control segment
includes measurement and analytical instrumentation, valves, control systems,
and factory automation software. The Industrial Automation segment includes
integral horsepower industrial motors, variable-speed and index drives,
mechanical power transmission equipment, predictive maintenance systems,
ultrasonic welding and cleaning, solids separation, fluid control, materials
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,
and electrical switching equipment. The Heating, Ventilating and Air
Conditioning (HVAC) segment consists of compressors, hermetic terminals,
thermostats, and valves. The Appliance and Tools segment includes fractional
horsepower motors, controls, and heating elements, as well as hand, plumbing and
bench power tools and accessories, and disposers. Summarized information about
the Company's operations by business segment and by geographic area follows:
Business Segments Earnings Before Interest
(See note 2) Sales and Income Taxes Total Assets
------------------------ ------------------------ --------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------ ------ ------- ----- ------ ------- ------ ------
Process Control....................... $ 2,878 2,684 2,645 313 343 319 3,489 2,643 2,654
Industrial Automation................. 3,380 3,346 3,084 448 431 438 3,269 3,067 2,721
Electronics and Telecommunications.... 2,136 1,617 1,246 237 150 116 1,510 1,328 823
HVAC.................................. 2,385 2,149 2,122 361 316 312 1,819 1,698 1,568
Appliance and Tools................... 3,533 3,440 3,060 577 561 480 2,641 2,589 2,410
------- ------ ------ ------- ----- ------ ------- ------ ------
14,312 13,236 12,157 1,936 1,801 1,665 12,728 11,325 10,176
Divested businesses................... 343 557 464 29 45 50 - 531 450
Differences in accounting methods..... 161 156 138
Interest income, corporate and other.. 85 74 52 896 804 837
Sales eliminations/Interest expense... (385) (346) (322) (190) (152) (121)
------- ------ ------ ------- ----- ------ ------- ------ ------
Total................................ $14,270 13,447 12,299 2,021 1,924 1,784 13,624 12,660 11,463
======= ====== ====== ======= ===== ====== ======= ====== ======
Depreciation and
Intersegment Sales Amortization Expense Capital Expenditures
--------------------- -------------------- -----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----- ---- ---- ---- ---- ---- ---- ---- ----
Process Control....................... $ 4 2 1 166 147 146 78 83 85
Industrial Automation................. 28 25 17 144 130 115 99 115 116
Electronics and Telecommunications.... 11 16 3 59 35 28 54 42 31
HVAC.................................. 30 27 26 97 86 81 177 147 155
Appliance and Tools................... 312 275 273 155 143 124 159 162 149
Divested businesses................... - 1 2 8 14 12 17 39 21
Corporate and other................... 9 8 6 8 15 18
----- --- --- --- --- --- --- --- ---
Total................................ $ 385 346 322 638 563 512 592 603 575
===== === === === === === === === ===
The primary income measure used for assessing performance and making operating
decisions is earnings before interest and income taxes. Intersegment sales
approximate market prices. Accounting method differences between segment
reporting and the consolidated financial statements primarily include management
fees allocated to segments based on a percentage of sales and the accounting for
pension and other retirement plans. Corporate assets primarily include cash and
equivalents, investments, pensions, deferred charges, and certain fixed assets.
Divested businesses include F.G. Wilson and other smaller businesses.
Geographic Sales by Destination Property, Plant and Equipment
---------------------- -----------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
United States.................................... $ 8,557 8,102 7,091 2,312 2,120 1,980
Europe........................................... 3,064 2,869 2,647 527 627 534
Asia............................................. 1,211 1,096 1,328 205 169 138
Latin America.................................... 458 484 402 88 77 65
Other regions.................................... 980 896 831 22 19 18
------- ------ ------ ------ ------ ------
Total........................................... $14,270 13,447 12,299 3,154 3,012 2,735
======= ====== ====== ====== ====== ======
46
(13) Other Financial Data
Items reported in earnings during the years ended September 30, 1999, 1998 and
1997, included the following:
1999 1998 1997
-------- ------ ------
Depreciation and other amortization...................................................................... $ 508.1 459.4 421.0
Goodwill amortization.................................................................................... 129.4 103.1 90.6
Research, new product development and product improvement costs.......................................... 510.3 491.3 445.1
Rent expense............................................................................................. 177.4 170.4 156.9
Interest revenue......................................................................................... 16.1 25.1 18.4
Other assets, other are summarized as follows: 1999 1998
-------- ------
Equity and other investments............................................................................ $ 235.1 187.9
Retirement plans........................................................................................ 271.3 205.9
Leveraged leases........................................................................................ 185.5 187.5
Other................................................................................................... 389.8 362.9
-------- ------
Total................................................................................................ $1,081.7 944.2
======== ======
Other liabilities are summarized as follows: 1999 1998
-------- ------
Minority interest....................................................................................... $ 297.2 619.9
Postretirement plans, excluding current portion......................................................... 313.1 292.7
Deferred taxes.......................................................................................... 333.9 306.6
Other................................................................................................... 591.3 559.0
-------- -------
Total................................................................................................ $1,535.5 1,778.2
======== =======
Accrued expenses include employee compensation of $316.8 and $295.2 at September
30, 1999 and 1998, 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 $83 in
2000 and decline substantially thereafter.
(14) Quarterly Financial Information (Unaudited)
Financial Results Net Sales Gross Profit Net Earnings
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
--------- -------- -------- -------- -------- --------
First Quarter.................................... $ 3,426.7 3,171.5 1,215.1 1,141.7 302.4 282.3
Second Quarter................................... 3,588.7 3,382.4 1,278.9 1,222.7 325.9 307.6
Third Quarter.................................... 3,634.0 3,465.2 1,294.0 1,254.1 345.1 324.8
Fourth Quarter................................... 3,620.1 3,428.1 1,287.7 1,233.1 340.2 313.9
--------- -------- -------- -------- ------- -------
Fiscal Year..................................... $14,269.5 13,447.2 5,075.7 4,851.6 1,313.6 1,228.6
========= ======== ======== ======== ======= =======
Basic Earnings per Diluted Earnings per Dividends per
Common Share Common Share Common Share
------------------ -------------------- --------------
1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ---- ----
First Quarter.................................... $ .69 .64 .69 .64 .325 .295
Second Quarter................................... .75 .70 .74 .69 .325 .295
Third Quarter.................................... .80 .74 .79 .73 .325 .295
Fourth Quarter................................... .79 .72 .78 .71 .325 .295
------ ------ ------ ------ ---- ----
Fiscal Year..................................... $ 3.03 2.80 3.00 2.77 1.30 1.18
====== ====== ====== ====== ==== ====
See Note 2 for information regarding non-recurring items and the Company's
acquisition and divestiture activities.
- -----------------------------------------------------------------------------
Stock Prices
(per common share) 1999 1998
-------------------- -------------------
High Low High Low
--------- ------- -------- -------
First Quarter.......................................................... $66 15/16 58 5/16 58 1/4 49 3/4
Second Quarter......................................................... 65 51 7/8 66 1/4 55 1/2
Third Quarter.......................................................... 71 7/16 51 7/16 67 7/16 58 9/16
Fourth Quarter......................................................... 65 7/8 59 1/8 63 3/4 54 1/2
Fiscal Year........................................................... $71 7/16 51 7/16 67 7/16 49 3/4
Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock
Exchange and Chicago Stock Exchange.
47
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
St. Louis, Missouri
November 1, 1999
52
SAFE HARBOR STATEMENT
This Annual Report contains various forward-looking statements and includes
assumptions concerning Emerson's operations, future results and prospects. These
forward-looking statements are based on current expectations, are subject to
risk and uncertainties and Emerson undertakes no obligation to update any such
statement to reflect later developments. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, Emerson
provides the following cautionary statement identifying important economic,
political and technological factors, among others, the absence of which could
cause the actual results or events to differ materially from those set forth in
or implied by the forward-looking statements and related assumptions.
Such factors include the following: (i) continuation of the current and
projected future business environment, including interest rates and capital and
consumer spending; (ii) competitive factors and competitor responses to Emerson
initiatives; (iii) successful development and market introductions of
anticipated new products; (iv) stability of government laws and regulations,
including taxes; (v) stable governments and business conditions in emerging
economies; (vi) successful penetration of emerging economies; (vii) continuation
of the favorable environment to make acquisitions, domestic and foreign,
including regulatory requirements and market values of candidates and
(viii) timely resolution of the Year 2000 issues by the Company, its customers
and suppliers.