UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended June 30, 2006
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the
transition period from ____________________ to __________________
Commission
file number 1-278
EMERSON
ELECTRIC CO.
(Exact
name of registrant as specified in its charter)
Missouri
(State
or other jurisdiction of
incorporation
or organization)
|
43-0259330
(I.R.S.
Employer
Identification
No.)
|
|
|
8000
W. Florissant Ave.
P.O.
Box 4100
St.
Louis, Missouri
(Address
of principal executive offices)
|
63136
(Zip
Code)
|
Registrant's
telephone number, including area code: (314)
553-2000
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer x Accelerated
Filer o Non-Accelerated
Filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. Common stock of $0.50 par value per
share outstanding at June 30, 2006: 407,696,546 shares.
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EARNINGS
THREE
MONTHS AND NINE MONTHS ENDED JUNE 30, 2005 AND 2006
(Dollars
in millions except per share amounts; unaudited)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
4,465
|
|
|
5,217
|
|
|
12,662
|
|
|
14,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,865
|
|
|
3,361
|
|
|
8,148
|
|
|
9,434
|
|
Selling,
general and administrative expenses
|
|
|
907
|
|
|
1,037
|
|
|
2,672
|
|
|
2,992
|
|
Other
deductions, net
|
|
|
43
|
|
|
54
|
|
|
154
|
|
|
131
|
|
Interest
expense (net of interest income of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10,
$5, $27 and $14, respectively)
|
|
|
52
|
|
|
51
|
|
|
158
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
|
598
|
|
|
714
|
|
|
1,530
|
|
|
1,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (Three and nine months 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
include
a $58 expense for repatriation under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
American Jobs Creation Act)
|
|
|
240
|
|
|
228
|
|
|
527
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
358
|
|
|
486
|
|
|
1,003
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.86
|
|
|
1.19
|
|
|
2.41
|
|
|
3.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$
|
0.86
|
|
|
1.18
|
|
|
2.39
|
|
|
3.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share
|
|
$
|
0.415
|
|
|
0.445
|
|
|
1.245
|
|
|
1.335
|
|
See
accompanying Notes to Consolidated Financial Statements.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in millions except per share amounts; unaudited)
|
|
September
30,
2005
|
|
June
30,
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
1,233
|
|
|
695
|
|
Receivables,
less allowances of $76 and $76, respectively
|
|
|
3,256
|
|
|
3,668
|
|
Inventories
|
|
|
1,813
|
|
|
2,212
|
|
Other
current assets
|
|
|
535
|
|
|
592
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,837
|
|
|
7,167
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
3,003
|
|
|
3,076
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,479
|
|
|
6,005
|
|
Other
|
|
|
1,908
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
7,387
|
|
|
8,141
|
|
|
|
$
|
17,227
|
|
|
18,384
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
borrowings and current maturities of long-term debt
|
|
$
|
970
|
|
|
984
|
|
Accounts
payable
|
|
|
1,841
|
|
|
2,031
|
|
Accrued
expenses
|
|
|
1,839
|
|
|
1,892
|
|
Income
taxes
|
|
|
281
|
|
|
303
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,931
|
|
|
5,210
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
3,128
|
|
|
3,132
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,768
|
|
|
1,946
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
Preferred
stock of $2.50 par value per share
|
|
|
|
|
|
|
|
Authorized
5,400,000 shares; issued - none
|
|
|
-
|
|
|
-
|
|
Common
stock of $0.50 par value per share
|
|
|
|
|
|
|
|
Authorized
1,200,000,000 shares; issued 476,677,006 shares;
|
|
|
|
|
|
|
|
outstanding
410,651,564 shares and 407,696,546 shares, respectively
|
|
|
238
|
|
|
238
|
|
Additional
paid in capital
|
|
|
120
|
|
|
155
|
|
Retained
earnings
|
|
|
10,199
|
|
|
10,968
|
|
Accumulated other comprehensive income
|
|
|
(65
|
)
|
|
158
|
|
Cost
of common stock in treasury, 66,025,442 shares and 68,980,460 shares,
respectively
|
|
|
(3,092
|
)
|
|
(3,423
|
)
|
Total
stockholders' equity
|
|
|
7,400
|
|
|
8,096
|
|
|
|
$
|
17,227
|
|
|
18,384
|
|
See
accompanying Notes to Consolidated Financial Statements.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED JUNE 30, 2005 AND 2006
(Dollars
in millions; unaudited)
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,003
|
|
|
1,319
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
420
|
|
|
454
|
|
Changes
in operating working capital
|
|
|
(159
|
)
|
|
(373
|
)
|
Pension
funding
|
|
|
(101
|
)
|
|
(100
|
)
|
Other
|
|
|
145
|
|
|
188
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,308
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(350
|
)
|
|
(354
|
)
|
Purchases
of businesses, net of cash and equivalents acquired
|
|
|
(192
|
)
|
|
(708
|
)
|
Other
|
|
|
(21
|
)
|
|
28
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(563
|
)
|
|
(1,034
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net
increase in short-term borrowings
|
|
|
1,072
|
|
|
172
|
|
Proceeds
from long-term debt
|
|
|
3
|
|
|
5
|
|
Principal
payments on long-term debt
|
|
|
(620
|
)
|
|
(260
|
)
|
Dividends
paid
|
|
|
(522
|
)
|
|
(550
|
)
|
Purchases
of treasury stock
|
|
|
(469
|
)
|
|
(411
|
)
|
Other
|
|
|
10
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(526
|
)
|
|
(1,006
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and equivalents
|
|
|
(1
|
)
|
|
14
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and equivalents
|
|
|
218
|
|
|
(538
|
)
|
|
|
|
|
|
|
|
|
Beginning
cash and equivalents
|
|
|
1,346
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
Ending
cash and equivalents
|
|
$
|
1,564
|
|
|
695
|
|
|
|
|
|
|
|
|
|
Changes
in operating working capital
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
(177
|
)
|
|
(225
|
)
|
Inventories
|
|
|
(58
|
)
|
|
(269
|
)
|
Other
current assets
|
|
|
(7
|
)
|
|
26
|
|
Accounts
payable
|
|
|
(58
|
)
|
|
60
|
|
Accrued
expenses
|
|
|
5
|
|
|
30
|
|
Income
taxes
|
|
|
136
|
|
|
5
|
|
|
|
$
|
(159
|
)
|
|
(373
|
)
|
See
accompanying Notes to Consolidated Financial Statements.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Notes
to Consolidated Financial Statements
|
1. |
The
accompanying unaudited consolidated financial statements, in
the opinion
of management, include all adjustments necessary for a fair presentation
of the results for the interim periods presented. These adjustments
consist of normal recurring accruals. The consolidated financial
statements are presented in accordance with the requirements
of Form 10-Q
and consequently do not include all the disclosures required
for annual
financial statements presented in conformity with U.S. generally
accepted
accounting principles. For further information refer to the consolidated
financial statements and notes thereto included in the Company's
Annual
Report on Form 10-K for the year ended September 30, 2005. Certain
prior
year amounts have been reclassified to conform to the current
year
presentation.
|
|
2. |
Reconciliations
of weighted average common shares for basic earnings per common
share and
diluted earnings per common share follow (shares in
millions):
|
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
413.8
|
|
|
408.8
|
|
|
416.3
|
|
|
409.7
|
|
Dilutive
shares
|
|
|
3.9
|
|
|
4.1
|
|
|
3.9
|
|
|
4.0
|
|
Diluted
|
|
|
417.7
|
|
|
412.9
|
|
|
420.2
|
|
|
413.7
|
|
|
3. |
Comprehensive
income is summarized as follows (dollars in
millions):
|
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
358
|
|
|
486
|
|
|
1,003
|
|
|
1,319
|
|
Changes
in foreign currency translation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
flow hedges and other
|
|
|
(244
|
)
|
|
128
|
|
|
19
|
|
|
223
|
|
|
|
$
|
114
|
|
|
614
|
|
|
1,022
|
|
|
1,542
|
|
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
4.
Other
Financial Information (dollars in millions):
|
|
September
30,
2005
|
|
June
30,
2006
|
|
Inventories
|
|
|
|
|
|
Finished
products
|
|
$
|
711
|
|
|
882
|
|
Raw
materials and work in process
|
|
|
1,102
|
|
|
1,330
|
|
|
|
$
|
1,813
|
|
|
2,212
|
|
During
the second quarter of fiscal 2006, the Company recorded an $11 million reduction
in cost of sales related to achieving consistency in methods for capitalizing
plant overhead into inventory.
Property,
plant and equipment, net
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
7,356
|
|
|
7,736
|
|
Less
accumulated depreciation
|
|
|
4,353
|
|
|
4,660
|
|
|
|
$
|
3,003
|
|
|
3,076
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
1,699
|
|
|
1,795
|
|
Industrial
Automation
|
|
|
997
|
|
|
1,037
|
|
Network
Power
|
|
|
1,780
|
|
|
2,135
|
|
Climate
Technologies
|
|
|
380
|
|
|
389
|
|
Appliance
and Tools
|
|
|
623
|
|
|
649
|
|
|
|
$
|
5,479
|
|
|
6,005
|
|
Changes
in the goodwill balances since September 30, 2005, are primarily due to
additions from acquisitions in the Network Power segment ($328 million), the
Process Management segment ($79 million), and the Appliance and Tools segment
($20 million), as well as from the translation of non-U.S. currencies to the
U.S. dollar. Third-party valuations of assets are in-process; thus, the
allocations of the purchase prices are subject to refinement.
Other
assets, other
|
|
|
|
|
|
Pension
plans
|
|
$
|
925
|
|
|
954
|
|
Intellectual
property and customer relationships
|
|
|
310
|
|
|
514
|
|
Equity
and other investments
|
|
|
248
|
|
|
232
|
|
Capitalized
software
|
|
|
157
|
|
|
152
|
|
Leveraged
leases
|
|
|
116
|
|
|
111
|
|
Other
|
|
|
152
|
|
|
173
|
|
|
|
$
|
1,908
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
Product
warranty liability
|
|
$
|
174
|
|
|
190
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
567
|
|
|
612
|
|
Retirement
plans
|
|
|
336
|
|
|
321
|
|
Postretirement
plans, excluding current portion
|
|
|
325
|
|
|
354
|
|
Minority
interest
|
|
|
142
|
|
|
169
|
|
Other
|
|
|
398
|
|
|
490
|
|
|
|
$
|
1,768
|
|
|
1,946
|
|
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
5. Net
periodic pension expense is summarized as follows (dollars in
millions):
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
17
|
|
|
20
|
|
|
50
|
|
|
61
|
|
Interest
cost
|
|
|
44
|
|
|
43
|
|
|
132
|
|
|
136
|
|
Expected
return on plan assets
|
|
|
(58
|
)
|
|
(57
|
)
|
|
(176
|
)
|
|
(171
|
)
|
Net
amortization
|
|
|
19
|
|
|
30
|
|
|
59
|
|
|
90
|
|
|
|
$
|
22
|
|
|
36
|
|
|
65
|
|
|
116
|
|
Net
periodic pension expense for the nine months ended June 30, 2006, includes
a
pretax charge of $9 million that occurred during the second quarter related
to
statutorily mandated Mexican termination benefits.
Net
postretirement plan expense is summarized as follows (dollars in
millions):
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2
|
|
|
3
|
|
|
5
|
|
|
7
|
|
Interest
cost
|
|
|
6
|
|
|
7
|
|
|
18
|
|
|
20
|
|
Net
amortization
|
|
|
5
|
|
|
8
|
|
|
16
|
|
|
25
|
|
|
|
$
|
13
|
|
|
18
|
|
|
39
|
|
|
52
|
|
Net
postretirement plan expense for the nine months ended June 30, 2006, includes
a
pretax charge of $5 million that occurred during the second quarter related
to a
division’s retiree medical plan design and a pretax charge of $3 million that
occurred during the third quarter related to two divisions’ retiree medical
plans design.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
6.
Effective
October 1, 2002, Emerson adopted the fair value method provisions of Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation.” Under the Standard’s prospective method of adoption, options
granted, modified or settled after September 30, 2002, are expensed based on
their fair value at date of grant over the vesting period, generally three
years. Previously, the Company accounted for options pursuant to Accounting
Principles Board Opinion No. 25, and no expense was recognized. Effective July
1, 2005, Emerson adopted Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment” (FAS 123R), under the Standard’s modified
prospective method, and FAS 123R did not have a material impact on the financial
statements. The following table illustrates the effect on net earnings and
earnings per share if the fair value based method had been applied to all
outstanding and unvested awards for the three and nine months ended June 30,
2005 (dollars in millions, except per share amounts):
|
|
Three
Months Ended
June
30, 2005
|
|
Nine
Months Ended
June
30, 2005
|
|
|
|
|
|
|
|
|
|
Net
earnings, as reported
|
|
$
|
358
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included in reported
net
earnings, net of related tax effects
|
|
|
10
|
|
|
41
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
10
|
|
|
43
|
|
|
|
|
|
|
|
|
|
Pro
forma net earnings
|
|
$
|
358
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.86
|
|
|
2.41
|
|
Basic
- pro forma
|
|
$
|
0.86
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.86
|
|
|
2.39
|
|
Diluted
- pro forma
|
|
$
|
0.86
|
|
|
2.39
|
|
7.
Other
deductions, net are summarized as follows (dollars in millions):
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Other
deductions, net
|
|
|
|
|
|
|
|
|
|
Rationalization
of operations
|
|
$
|
25
|
|
|
19
|
|
|
82
|
|
|
53
|
|
Amortization
of intangibles
|
|
|
8
|
|
|
13
|
|
|
21
|
|
|
32
|
|
Other
|
|
|
10
|
|
|
34
|
|
|
77
|
|
|
88
|
|
Gains
|
|
|
-
|
|
|
(12
|
)
|
|
(26
|
)
|
|
(42
|
)
|
|
|
$
|
43
|
|
|
54
|
|
|
154
|
|
|
131
|
|
For
the
three months ended June 30, 2006, Other included approximately $7 million of
losses on foreign exchange transactions compared to $11 million of gains in
the
prior year period. The nine months ended June 30, 2006, included approximately
$14 million of losses on foreign exchange transactions compared to approximately
$2 million of losses in the prior year period. For the nine months ended June
30, 2006 and 2005, the Company recorded gains of approximately $18 million
and
$13 million, respectively, for payments received under the U.S. Continued
Dumping and Subsidy Offset Act (Byrd Amendment). During the nine months ended
June 30, 2006, the Company sold approximately 2.6 million shares of MKS
Instruments, Inc. (MKS), a publicly-traded company, and continues to hold
approximately 6.5 million shares; the Company recorded pretax
gains on these sales of $6 million and $12 million during the second and third
quarters, respectively. For the nine months ended June 30, 2005, the Company
recorded a pretax gain of $13 million related to the sale of a manufacturing
facility which was vacated in 2004.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
8.
The
change in the liability for rationalization of operations during the nine months
ended June 30, 2006, follows (dollars in millions):
|
|
September
30,
2005
|
|
Expense
|
|
Acquisitions
|
|
Paid
/ Utilized
|
|
June
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and benefits
|
|
$
|
22
|
|
|
21
|
|
|
21
|
|
|
32
|
|
|
32
|
|
Lease/contract
terminations
|
|
|
11
|
|
|
4
|
|
|
3
|
|
|
6
|
|
|
12
|
|
Vacant
facility and other shutdown costs
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
6
|
|
|
1
|
|
Start-up
and moving costs
|
|
|
-
|
|
|
21
|
|
|
-
|
|
|
20
|
|
|
1
|
|
|
|
$
|
33
|
|
|
53
|
|
|
24
|
|
|
64
|
|
|
46
|
|
The
opening balance sheets associated with acquisitions included $24 million of
rationalization of operations liabilities, primarily related to the Artesyn
acquisition.
Rationalization
of operations by business segment is summarized as follows (dollars in
millions):
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
5
|
|
|
3
|
|
|
14
|
|
|
6
|
|
Industrial
Automation
|
|
|
4
|
|
|
4
|
|
|
12
|
|
|
9
|
|
Network
Power
|
|
|
7
|
|
|
3
|
|
|
29
|
|
|
9
|
|
Climate
Technologies
|
|
|
4
|
|
|
2
|
|
|
9
|
|
|
11
|
|
Appliance
and Tools
|
|
|
5
|
|
|
7
|
|
|
17
|
|
|
18
|
|
Corporate
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
|
$
|
25
|
|
|
19
|
|
|
82
|
|
|
53
|
|
Rationalization
of operations decreased for the nine months ended June 30, 2006, compared to
the
prior year period as the costs were related primarily to completing actions
initiated in prior periods. Industrial Automation segment includes start-up
and
moving costs related to shifting certain motor production in Western Europe
to
Eastern Europe, China and Mexico to leverage costs and remain competitive on
a
global basis. Network Power segment primarily includes severance, start-up
and
vacant facility costs related to the consolidation of certain power systems
operations in North America and the consolidation of administrative operations
in Europe to obtain operational synergies. Climate Technologies segment includes
severance related to the movement of temperature sensors and controls production
from Western Europe to China and start-up and moving costs related to a new
compressor plant in Eastern Europe in order to improve profitability. Appliance
and Tools segment includes primarily severance and start-up and moving costs
related to the shifting of certain tool and motor manufacturing operations
from
the United States and Western Europe to China and Mexico in order to consolidate
facilities and improve profitability.
Including
the $53 million of rationalization costs incurred during the nine months ended
June 30, 2006, the Company expects rationalization expense for the entire 2006
fiscal year to total approximately $80 million to $90 million, including the
costs to complete actions initiated before the end of the third quarter and
actions anticipated to be approved and initiated during the remainder of the
year.
Rationalization
actions during the first nine months of 2005 included the following. Process
Management segment included severance and plant closure costs related to
consolidation of instrumentation plants within Europe and consolidation of
valve
operations within North America, the movement of major distribution facilities
to Asia, as well as several other cost reduction actions. Network Power segment
included severance and lease termination costs related to certain power systems
operations in Western Europe shifting to China and Eastern Europe in order
to
leverage product platforms and lower production and engineering costs to remain
competitive on a global basis. This segment also included severance and start-up
and moving costs related to the consolidation of North American power systems
operations into the Marconi operations acquired in 2004. Appliance and Tools
segment included severance, plant closure costs and start-up and moving costs
related to consolidating various industrial and hermetic motor manufacturing
facilities for operational efficiency. Severance costs in this segment also
related to shifting certain appliance control operations from the United States
to Mexico and China in order to consolidate facilities and improve
profitability.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
9.
Summarized
information about the Company's operations by business segment follows
(dollars
in millions):
|
|
Sales
|
|
Earnings
|
|
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
1,061
|
|
|
1,233
|
|
|
184
|
|
|
221
|
|
Industrial
Automation
|
|
|
826
|
|
|
968
|
|
|
118
|
|
|
142
|
|
Network
Power
|
|
|
838
|
|
|
1,155
|
|
|
98
|
|
|
139
|
|
Climate
Technologies
|
|
|
837
|
|
|
923
|
|
|
131
|
|
|
155
|
|
Appliance
and Tools
|
|
|
1,039
|
|
|
1,099
|
|
|
144
|
|
|
141
|
|
|
|
|
4,601
|
|
|
5,378
|
|
|
675
|
|
|
798
|
|
Differences
in accounting methods
|
|
|
|
|
|
|
|
|
39
|
|
|
46
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
(64
|
)
|
|
(79
|
)
|
Eliminations/Interest
|
|
|
(136
|
)
|
|
(161
|
)
|
|
(52
|
)
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales/Earnings before income taxes
|
|
$
|
4,465
|
|
|
5,217
|
|
|
598
|
|
|
714
|
|
Intersegment
sales of the Appliance and Tools segment for the three months ended June 30,
2006 and 2005, respectively, were $142 million and $119 million.
|
|
Sales
|
|
Earnings
|
|
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
3,032
|
|
|
3,473
|
|
|
468
|
|
|
587
|
|
Industrial
Automation
|
|
|
2,421
|
|
|
2,759
|
|
|
344
|
|
|
416
|
|
Network
Power
|
|
|
2,376
|
|
|
3,098
|
|
|
242
|
|
|
366
|
|
Climate
Technologies
|
|
|
2,216
|
|
|
2,523
|
|
|
338
|
|
|
382
|
|
Appliance
and Tools
|
|
|
2,988
|
|
|
3,211
|
|
|
397
|
|
|
412
|
|
|
|
|
13,033
|
|
|
15,064
|
|
|
1,789
|
|
|
2,163
|
|
Differences
in accounting methods
|
|
|
|
|
|
|
|
|
107
|
|
|
128
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
(208
|
)
|
|
(231
|
)
|
Eliminations/Interest
|
|
|
(371
|
)
|
|
(447
|
)
|
|
(158
|
)
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales/Earnings before income taxes
|
|
$
|
12,662
|
|
|
14,617
|
|
|
1,530
|
|
|
1,909
|
|
Intersegment
sales of the Appliance and Tools segment for the nine months ended June 30,
2006
and 2005, respectively, were $391 million and $324 million.
The
increases in Corporate and other for the three and
nine months ended June 30, 2006, compared to the prior year periods, reflect
higher costs for corporate programs, acquisitions and litigation, partially
offset by gains on sales of MKS shares.
10.
During
the third quarter of fiscal 2006, the Company acquired Artesyn Technologies,
Inc. for approximately $483 million in cash (net of cash acquired and including
assumed debt of approximately $84 million). Artesyn is a global manufacturer
of
advanced power conversion equipment and board-level computing solutions for
infrastructure applications in telecommunication and data-communication systems.
Artesyn has annual revenue of approximately $425 million and is included in
the
Network Power segment.
During
the second quarter of fiscal 2006, the Company acquired Knürr
AG of
Germany for approximately $96 million (including assumed debt). Knürr is a
manufacturer of indoor and outdoor enclosure systems and cooling technologies
for telecommunications, electronics and computing equipment. Knürr has annual
revenue of approximately $150 million and is included in the Network Power
segment.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Also,
during the second quarter of fiscal 2006, the Company acquired Bristol Babcock
for approximately $121 million. Bristol is a manufacturer of control and
measurement equipment for oil and gas, water and wastewater, and power
industries. Bristol has annual revenue of approximately $80 million and is
included in the Process Management segment.
Items
2 and 3. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
OVERVIEW
The
Company’s results for the third quarter and the first nine months of fiscal
2006 were
strong. All of the business segments generated higher sales and earnings for
the
first nine months of fiscal 2006 compared to the prior year period. The Network
Power, Process Management and Industrial Automation businesses drove gains
in a
favorable economic environment as gross fixed investment expanded in the first
nine months of fiscal 2006. Strong growth in the United States, Asia and Europe
and acquisitions contributed to the third quarter results. Profit margins
remained strong, primarily due to leverage on higher sales volume and benefits
derived from previous rationalization actions. Emerson's financial position
remains strong and the Company continues to generate substantial cash
flow.
THREE
MONTHS ENDED JUNE 30, 2006, COMPARED WITH THREE MONTHS ENDED JUNE 30,
2005
RESULTS
OF OPERATIONS
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,465
|
|
|
5,217
|
|
|
17
|
%
|
Gross
profit
|
|
$
|
1,600
|
|
|
1,856
|
|
|
16
|
%
|
Percent
of sales
|
|
|
35.8
|
%
|
|
35.6
|
%
|
|
|
|
SG&A
|
|
$
|
907
|
|
|
1,037
|
|
|
|
|
Percent
of sales
|
|
|
20.3
|
%
|
|
19.9
|
%
|
|
|
|
Other
deductions, net
|
|
$
|
43
|
|
|
54
|
|
|
|
|
Interest
expense, net
|
|
$
|
52
|
|
|
51
|
|
|
|
|
Pretax
earnings
|
|
$
|
598
|
|
|
714
|
|
|
19
|
%
|
Net
earnings
|
|
$
|
358
|
|
|
486
|
|
|
36
|
%
|
Percent
of sales
|
|
|
8.0
|
%
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
$
|
0.86
|
|
|
1.18
|
|
|
37
|
%
|
Net
earnings and EPS for 2005 include a $58 million tax expense ($0.14 per share)
for repatriation under the American Jobs Creation Act.
Net
sales
for the quarter ended June 30, 2006, increased $752 million, or 17 percent,
to
$5,217 million, over net sales of $4,465 million for the quarter ended June
30,
2005, with growth in both the U.S. and international markets. Increases in
the
Network Power, Process Management and Industrial Automation business segments
drove the consolidated results, with an approximate 12 percent ($502 million)
increase in underlying sales (which exclude acquisitions and the impact of
translation of non-U.S. currencies to the U.S. dollar), an approximate 5 percent
($240 million) contribution from acquisitions and a slight favorable impact
($10
million) from foreign currency translation. The underlying sales increase for
the third quarter was driven by 10 percent growth in the United States and
13
percent growth in total international sales. The international sales growth
was
led by increases in Asia (19 percent) and Europe
(8
percent).
The
Company estimates that the underlying growth primarily reflects an approximate
8
percent gain from volume, an approximate 4 percent impact from market
penetration gains and a less than 1 percent increase from higher sales prices.
Cost
of
sales for the third quarter of fiscal 2006 and 2005 were $3,361 million and
$2,865 million, respectively. Cost of sales as a percent of net sales was 64.4
percent in the third quarter of 2006, compared with 64.2 percent in the third
quarter of 2005. Gross profit was $1,856 million and $1,600 million for the
third quarters ended June 30, 2006 and 2005, respectively, resulting in gross
profit margins of 35.6 percent and 35.8 percent. The increase in the gross
profit
for the third quarter of fiscal 2006 primarily reflects higher sales volume
and
acquisitions. The gross profit margin for the period was impacted as leverage
on
higher sales and benefits realized from productivity improvements were more
than
offset by higher costs for wages and benefits (pension), as well as the lower
profit margin on recent acquisitions. The Company continues to address commodity
inflationary pressures (particularly copper and steel) with procurement
initiatives and sales price actions as required.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Selling,
general and administrative (SG&A) expenses for the third quarter of 2006
were $1,037 million, or 19.9 percent of net sales, compared with $907 million,
or 20.3 percent of net sales, for the third quarter of 2005. The increase of
$130 million was primarily due to the increase in variable costs on higher
sales
and acquisitions. The reduction in SG&A as a percent of sales was primarily
the result of leveraging fixed costs on higher sales.
Other
deductions, net were $54 million for the third quarter of 2006, an $11 million
increase from the $43 million for the same period in the prior year. The three
months ended June 30, 2006, included approximately $7 million of losses on
foreign exchange transactions compared to $11 million of gains in the prior
year
period. For the three months ended June 30, 2006, the Company recorded a pretax
gain of approximately $12 million related to the sale of shares of MKS. See
notes 7 and 8 for further details regarding other deductions, net and
rationalization costs.
Earnings
before income taxes for the third quarter of 2006 increased $116 million, or
19
percent, to $714 million, compared
to $598 million for the third quarter of 2005. The
earnings results primarily reflect increases of $41
million in the Network Power, $37 million in the Process Management and $24
million in the Industrial Automation business segments.
Income
taxes were $228
million and
$240
million for the three months ended June 30, 2006 and 2005, respectively,
resulting in effective tax rates of 32 percent and 40 percent, respectively.
The
three months ended June 30, 2005, included $58 million, or $0.14 per share,
of
income taxes related to the one-time opportunity during 2005 to repatriate
foreign earnings at a favorable rate under the American Jobs Creation Act,
which
raised the effective tax rate nearly 10 percentage points for the third quarter
of 2005. The effective tax rate for the entire fiscal year 2006 is expected
to
be approximately 31 percent.
Net
earnings were $486 million and earnings per share were $1.18 for the three
months ended June 30, 2006, increases of 36 percent and 37 percent,
respectively, compared to net earnings and earnings per share of $358 million
and $0.86, (including the $0.14 per share impact from taxes related to
repatriating earnings in 2005 discussed above) respectively, for the three
months ended June 30, 2005. The
37
percent increase in earnings per share also reflects the purchase of treasury
shares.
BUSINESS
SEGMENTS
Process
Management
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,061
|
|
|
1,233
|
|
|
16
|
%
|
Earnings
|
|
$
|
184
|
|
|
221
|
|
|
20
|
%
|
Margin
|
|
|
17.4
|
%
|
|
17.9
|
%
|
|
|
|
During
the third quarter of fiscal 2006, sales in the Process Management segment
increased 16 percent to $1,233 million driven primarily by higher volume and
acquisitions. All of the businesses in this segment achieved higher sales,
with
the systems, measurement and valves businesses leading the overall sales
increase. Sales and earnings (defined as earnings before interest and income
taxes) were notably strong for these businesses as the global energy markets
continue to spend capital at high levels. The third quarter growth also reflects
a positive impact of approximately 2 percent from market penetration gains
and
less than 1 percent from higher sales prices. The increase in sales reflects
11
percent growth in underlying sales, a nearly 5 percent ($49 million)
contribution from the Bristol, Tescom and Mobrey acquisitions and a favorable
impact of less than 1 percent ($7 million) from foreign currency translation.
The underlying sales increase reflects growth in nearly all of the major
geographic regions compared with the prior year period, including the United
States (13 percent), Asia (16 percent), Latin America (17 percent) and Europe
(3
percent). Third quarter earnings increased 20 percent to $221 million from
$184
million in the prior year period, reflecting higher sales volume and prices,
as
well as acquisitions. The margin increase was primarily due to leverage on
higher sales and material cost containment, which were partially offset by
higher project costs, including higher wages and benefits
(pension).
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Industrial
Automation
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
826
|
|
|
968
|
|
|
17
|
%
|
Earnings
|
|
$
|
118
|
|
|
142
|
|
|
19
|
%
|
Margin
|
|
|
14.4
|
%
|
|
14.6
|
%
|
|
|
|
Sales
in
the Industrial Automation segment increased 17 percent to $968 million for
the
three months ended June
30,
2006. Nearly all of the businesses in the segment reported higher sales,
reflecting the favorable economic environment for capital goods. Robust activity
in the oil, gas, mining and metals markets drove growth in the power generating
alternator and the electrical distribution businesses. The third quarter growth
reflects increased global industrial demand, as well as an estimated 2 percent
positive impact from higher sales prices and an approximate 1 percent impact
from market penetration gains. The sales increase reflects approximately 11
percent growth in underlying sales, a nearly 7 percent ($56 million)
contribution from the Numatics and Saftronics acquisitions and an unfavorable
impact of approximately 1 percent from foreign currency translation. The
underlying sales increase reflects growth in nearly all of the major geographic
regions, including 11 percent growth in the United States and 11 percent growth
internationally. The international sales growth was led by an increase of 14
percent in Europe. Earnings increased 19 percent over the prior year period
to
$142 million, due to higher sales volume and prices. The margin improvement
also
reflected leverage on higher sales and benefits from prior cost reduction
efforts, which were offset by higher material, wage and benefit (pension) costs.
Network
Power
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
838
|
|
|
1,155
|
|
|
38
|
%
|
Earnings
|
|
$
|
98
|
|
|
139
|
|
|
41
|
%
|
Margin
|
|
|
11.7
|
%
|
|
12.0
|
%
|
|
|
|
The
Network Power segment sales increased 38 percent to $1,155 million during the
third quarter of 2006 compared to the prior year period, reflecting continued
demand in the power systems, embedded power and precision cooling businesses.
The increase in sales reflects approximately 21 percent growth in underlying
sales, a 16 percent ($135 million) contribution from the Artesyn and Knürr
acquisitions and a favorable impact of 1 percent ($5 million) from foreign
currency translation. The third quarter growth reflects an approximate 12
percent gain from higher volume and an estimated more than 10 percent impact
from market penetration gains, while lower sales prices had a 1 percent impact.
Geographically, the underlying sales increase reflects growth primarily in
the
United States (20 percent), Asia (40 percent) and Europe (5 percent). Growth
in
the United States reflects strong demand in the computing and telecommunications
markets and market penetration gains by the uninterruptible power supply and
embedded power businesses. The Company also continues to build upon its Emerson
Network Power China business resulting in market penetration in China and other
Asian markets. Earnings of $139 million increased $41 million, or 41 percent,
from the prior year period driven by higher sales volume. The margin increase
was due to leverage on higher sales volume, partially offset by dilution from
acquisitions. Sales price decreases were offset by lower material costs.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Climate
Technologies
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
837
|
|
|
923
|
|
|
10
|
%
|
Earnings
|
|
$
|
131
|
|
|
155
|
|
|
19
|
%
|
Margin
|
|
|
15.6
|
%
|
|
16.8
|
%
|
|
|
|
Sales
in
the Climate Technologies segment increased 10 percent to $923 million for the
quarter ended June
30,
2006. The third quarter results reflect continued demand in the air-conditioning
business, as well as an estimated 5 percent impact from market penetration
gains
and a less than 1 percent positive impact from higher sales prices. The
air-conditioning compressor business continued to be strong in the third quarter
primarily due to demand in the residential and commercial markets in the United
States. The increase also reflects growth in the refrigeration and services
businesses. Underlying sales grew 10 percent, which reflects 12 percent growth
in the United States and 8 percent growth internationally. The international
sales growth was led by a 21 percent increase in Europe, while Asia was down
4
percent. Earnings increased 19 percent during the quarter to $155 million due
to
higher volume. Higher material costs more than offset the higher sales prices.
The margin increase reflects leverage on higher sales and savings from prior
period cost reduction efforts, partially offset by higher wages and benefits
(pension).
Appliance
and Tools
Three
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,039
|
|
|
1,099
|
|
|
6
|
%
|
Earnings
|
|
$
|
144
|
|
|
141
|
|
|
(2
|
)%
|
Margin
|
|
|
13.8
|
%
|
|
12.9
|
%
|
|
|
|
Sales
in
the Appliance and Tools segment increased 6 percent to $1,099 million during
the
third quarter of 2006. The sales increase reflects approximately 5 percent
growth in underlying sales and a less than 1 percent positive impact from
foreign currency translation. The third quarter results were mixed across the
businesses with most experiencing moderate to strong growth. The tools and
hermetic motors businesses continued to show strong growth, driven primarily
by
the U.S. market, however, this growth was partially offset by softness in the
appliance motor and component businesses. The hermetic motors business was
strong due to the air-conditioning demand discussed above, while the growth
in
the tools businesses was driven by demand in the North American non-residential
construction markets. The sales increase also reflects strength in the
commercial storage business and the launch of the Evolution Series™ of
disposers. The underlying sales increase of 5 percent reflects an estimated
2
percent growth from volume, an approximate 2 percent positive impact from higher
sales prices and an approximate 1 percent impact from market penetration gains.
Geographically, underlying sales grew 5 percent in the United States while
international sales grew 9 percent during the quarter. Earnings decreased from
$144 million in the prior year period to $141 million for the third quarter
of
2006. The overall decrease in profit was due to declines in certain tools,
motors and storage businesses, reflecting restructuring inefficiencies,
including costs related to plant shutdown and ramp up of Mexican capacity in
the
motors and tools businesses, and the weakening of the U.S. dollar against the
Canadian dollar. Overall, increases in sales prices were more than offset by
higher material (copper, steel and plastics), wage and benefit (pension) costs
and negative product mix, diluting the profit margin.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
NINE
MONTHS ENDED JUNE 30, 2006, COMPARED WITH NINE MONTHS ENDED JUNE 30,
2005
RESULTS
OF OPERATIONS
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
12,662
|
|
|
14,617
|
|
|
15
|
%
|
Gross
profit
|
|
$
|
4,514
|
|
|
5,183
|
|
|
15
|
%
|
Percent
of sales
|
|
|
35.6
|
%
|
|
35.5
|
%
|
|
|
|
SG&A
|
|
$
|
2,672
|
|
|
2,992
|
|
|
|
|
Percent
of sales
|
|
|
21.1
|
%
|
|
20.5
|
%
|
|
|
|
Other
deductions, net
|
|
$
|
154
|
|
|
131
|
|
|
|
|
Interest
expense, net
|
|
$
|
158
|
|
|
151
|
|
|
|
|
Pretax
earnings
|
|
$
|
1,530
|
|
|
1,909
|
|
|
25
|
%
|
Net
earnings
|
|
$
|
1,003
|
|
|
1,319
|
|
|
31
|
%
|
Percent
of sales
|
|
|
7.9
|
%
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
$
|
2.39
|
|
|
3.19
|
|
|
33
|
%
|
Net
earnings and EPS for 2005 include a $58 million tax expense ($0.14 per share)
for repatriation under the American Jobs Creation Act.
Net
sales
for the nine months ended June 30, 2006, increased $1,995 million, or 15 percent
to $14,617 million, over net sales of $12,662 million for the nine months ended
June 30, 2005, with both U.S. and international sales contributing to this
growth. The consolidated results reflect increases in all five business segments
with an approximate 13 percent ($1,599 million) increase in underlying sales,
a
nearly 4 percent ($485 million) contribution from acquisitions and a 1 percent
($129 million) unfavorable impact from foreign currency translation. The
underlying sales increase of 13 percent for the first nine months
was driven
by
a 14 percent increase in the United States and a total international sales
increase of 11 percent. The international sales increase primarily reflects
growth in Asia (18 percent), Europe (6 percent) and Latin America (22 percent).
The Company estimates that the underlying growth primarily reflects an
approximate 9 percent gain from volume, an approximate 3 percent impact from
market penetration gains and an approximate 1 percent impact from higher sales
prices.
Cost
of
sales for the first nine months of fiscal 2006 and 2005 were $9,434 million
and
$8,148 million, respectively. Cost of sales as a percent of net sales was 64.5
percent in the first nine months of 2006, compared with 64.4 percent in the
prior year period. Gross profit was $5,183 million and $4,514 million for the
nine months ended June 30, 2006 and 2005, respectively, resulting in gross
profit margins of 35.5 and 35.6 percent. The increase in the gross profit during
the first nine months of 2006 primarily reflects higher sales volume and
acquisitions. Sales price increases initiated over the past year are now
offsetting the higher level of raw material costs.
Selling,
general and administrative expenses for the nine months ended June 30, 2006,
were $2,992 million, or 20.5 percent of net sales, compared with $2,672 million,
or 21.1 percent of net sales, for the nine months ended June 30, 2005. The
increase of $320 million was primarily due to higher sales and acquisitions.
The
reduction in SG&A as a percent of sales was primarily the result of
leveraging fixed costs on higher sales.
Other
deductions, net were $131 million for the first nine months of fiscal 2006,
a
$23 million decrease from the $154 million for the same period in the prior
year. The first nine months of 2006 included an approximate $18
million gain for a payment received under the Byrd Amendment, compared with
a
$13 million payment received in the prior year period. Payments under the Byrd
Amendment are expected for at least another year. The first nine months of
2006
included gains totaling $18 million related to the sale of shares in MKS. The
first nine months of 2006 also included approximately $12 million of higher
losses on foreign exchange transactions compared to the prior period. For the
nine months ended June 30, 2006, ongoing costs for the rationalization of
operations were $53 million, compared to $82 million in the prior year period.
See notes 7 and 8 for further details regarding other deductions, net and
rationalization costs.
Earnings
before income taxes for the first nine months of 2006 increased $379 million,
or
25 percent, to $1,909 million, compared to $1,530 million for the nine months
ended June 30, 2005. The earnings results reflect increases in all five business
segments, including $124 million in Network Power, $119 million in Process
Management and $72 million in Industrial Automation.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Income
taxes were $590 million and $527 million for the nine months ended June 30,
2006
and 2005, respectively. The effective tax rate decreased from 34 percent in
the
prior year period to 31 percent for the first nine months of 2006. The higher
tax rate in 2005 is primarily due to a nearly 4 percentage point increase
resulting from the $58 million tax impact in the third quarter of 2005 related
to the one-time opportunity during 2005 to repatriate foreign earnings at a
favorable rate under the American Jobs Creation Act.
Net
earnings were
$1,319 million and earnings per share were $3.19 for the nine months ended
June
30, 2006, increases
of 31 percent and 33 percent compared
to net earnings and earnings per share of $1,003 million and $2.39 (including
the $0.14 per share impact from taxes related to repatriating earnings in 2005
discussed above), respectively, for the nine months ended June 30, 2005. The
33
percent increase in earnings per share also reflects the purchase of treasury
shares.
BUSINESS
SEGMENTS
Process
Management
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,032
|
|
|
3,473
|
|
|
15
|
%
|
Earnings
|
|
$
|
468
|
|
|
587
|
|
|
25
|
%
|
Margin
|
|
|
15.4
|
%
|
|
16.9
|
%
|
|
|
|
During
the first nine months of fiscal 2006, the Process Management segment sales
increased 15 percent, on higher volume and acquisitions, to $3,473 million,
and
earnings increased 25 percent. Nearly all of the businesses reported sales
increases compared to the prior year period. Sales and earnings were
particularly strong for the measurement, valves and regulators businesses due
to
worldwide growth in oil and gas and power projects and expansion in China.
The
results for the first nine months of 2006 reflect an approximate 1 percent
impact from market penetration gains and a less than 1 percent impact from
higher sales prices. The increase in sales reflects approximately 12 percent
growth in underlying sales, a 4 percent ($116 million) contribution from the
Bristol, Tescom and Mobrey acquisitions and a negative impact of 1 percent
from
foreign currency translation. The underlying sales increase reflects growth
in
all major geographic regions, including the United States (16 percent), Asia
(14
percent), Latin America (25 percent) and Europe (3 percent), compared with
the
prior year period. Earnings for the first nine months of fiscal 2006 increased
25 percent to $587 million from $468 million in the prior year period,
reflecting higher sales volume and prices, as well as acquisitions. The margin
increase was due to leverage on higher sales and material cost containment,
which were partially offset by higher project costs, including higher wages
and
benefits (pension).
Industrial
Automation
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,421
|
|
|
2,759
|
|
|
14
|
%
|
Earnings
|
|
$
|
344
|
|
|
416
|
|
|
21
|
%
|
Margin
|
|
|
14.2
|
%
|
|
15.1
|
%
|
|
|
|
Sales
in
the Industrial Automation segment increased 14 percent to $2,759 million for
the
nine months ended June 30, 2006. Sales grew in nearly all of the businesses
and
in all of the major geographic regions, reflecting the favorable economic
environment for capital goods. The first nine months’ results reflect growth in
nearly all of the businesses, with particular strength in the power generating
alternator, electrical distribution and power transmission businesses reflecting
both increased global industrial demand and an approximate 2 percent positive
impact from higher sales prices. The sales increase reflects 11 percent growth
in underlying sales, a 6 percent ($139 million) contribution from the Numatics
and Saftronics acquisitions and a negative impact of 3 percent ($59 million)
from foreign currency translation. Underlying sales grew 14 percent in the
United States and 9 percent internationally. The increase in international
sales
primarily reflects growth in Europe (8 percent) and Asia (11 percent). Earnings
increased 21 percent over the prior year nine month period to $416 million,
reflecting higher sales
prices and volume. The margin increase was due to leverage on higher sales
and
benefits from prior cost reduction efforts. The earnings increase was also
aided
by an approximate $18 million payment received by the power transmission
business from dumping duties related to the Byrd Amendment in the current nine
month period, compared with a $13 million payment received in the prior year
period. Payments under the Byrd Amendment are expected for at least another
year. These benefits to earnings and margin were partially offset by higher
material, wage and benefit (pension) costs.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Network
Power
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,376
|
|
|
3,098
|
|
|
30
|
%
|
Earnings
|
|
$
|
242
|
|
|
366
|
|
|
51
|
%
|
Margin
|
|
|
10.2
|
%
|
|
11.8
|
%
|
|
|
|
The
Network Power segment sales increased 30 percent to $3,098 million for the
first
nine months of 2006 compared to the prior year period, reflecting continued
demand in the power systems, embedded power and precision cooling businesses.
The sales increase reflects 23 percent growth in underlying sales and a 7
percent ($176 million) contribution from the Artesyn and Knürr acquisitions. The
underlying sales increase of 23 percent reflects an approximate 15 percent
gain
from higher volume and an estimated 10 percent impact from market penetration
gains, which were partially offset by an estimated 2 percent impact from
lower
sales prices. Geographically, underlying sales reflect a 27 percent increase
in
the United States, a 39 percent increase in Asia and a 3 percent increase
in
Europe. The U.S. growth reflects strong demand for communications and
non-residential computer equipment. The Company also continues to build upon
its
Emerson Network Power China division resulting in market penetration in China
and other Asian markets. Earnings for the nine months ended June 30, 2006,
increased 51 percent, from $242 million in the prior year period to $366
million, primarily due to higher sales volume. The margin improvement reflects
leverage on higher sales volume and a $20 million reduction in rationalization
costs versus the prior year period. The margin increase was impacted by dilution
from acquisitions and negative sales prices, partially offset by material
cost
containment.
Climate
Technologies
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,216
|
|
|
2,523
|
|
|
14
|
%
|
Earnings
|
|
$
|
338
|
|
|
382
|
|
|
13
|
%
|
Margin
|
|
|
15.3
|
%
|
|
15.1
|
%
|
|
|
|
Sales
in
the Climate Technologies segment increased 14 percent to $2,523 million for
the
nine months ended June 30, 2006, compared to $2,216 million for the nine
months
ended June 30, 2005. The sales increase reflects more than 14 percent growth
in
underlying sales and a negative impact of less than 1 percent from foreign
currency translation. The underlying sales growth was largely due to strong
demand in the air-conditioning business, increased demand in the refrigeration
business, an approximate 3 percent impact from market penetration gains and
an
estimated 1 percent positive impact from higher sales prices. The
air-conditioning compressor business was very strong in the first nine months
of
fiscal 2006 primarily due to demand relating to the transition in the United
States to higher efficiency standards that became effective January 23, 2006.
The underlying sales reflect a 19 percent increase in the United States and
a 7
percent increase in international sales, including 19 percent growth in Europe.
Earnings increased 13 percent during the first nine months of 2006 to $382
million due to higher volume. The margin was negatively impacted as higher
material costs and shortages, and higher wage costs due to very strong demand
in
air-conditioning compressors more than offset sales price increases. Leverage
on
higher sales and prior cost reduction efforts partially offset the margin
decline. The Company approved plans for capacity expansion in Mexico that
will
produce the next generation scroll compressor design and hermetic motors
for the
North American market.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Appliance
and Tools
Nine
months ended June 30,
|
|
2005
|
|
2006
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,988
|
|
|
3,211
|
|
|
7
|
%
|
Earnings
|
|
$
|
397
|
|
|
412
|
|
|
4
|
%
|
Margin
|
|
|
13.3
|
%
|
|
12.8
|
%
|
|
|
|
The
Appliance and Tools segment sales increased 7 percent to $3,211 million for
the
first nine months of 2006. This increase reflects approximately 6 percent
growth
in underlying sales, a nearly 2 percent contribution from the Do+Able
acquisition and a 1 percent negative impact from foreign currency translation.
The results for the first nine months were mixed across the businesses with
most
experiencing moderate to strong growth. Particular strength in the tools
and
hermetic motors businesses was partially offset by softness in the appliance
motor and component businesses. The hermetic motors business was very strong
due
to the air-conditioning demand discussed above. In addition, the storage
businesses showed strong growth driven by the U.S. market. Growth in the
storage
businesses resulted from continued strength in U.S. residential investment,
higher demand at major retailers and market penetration gains. The underlying
sales increase reflects an estimated 3 percent growth from volume, an
approximate 2 percent positive impact from higher sales prices and an estimated
market penetration gain of 1 percent. Underlying sales in the United States
grew
6 percent and international sales grew 8 percent during the first nine months
of
2006. Earnings increased 4 percent to $412 million from the prior year period.
The overall increase in profit was partially offset by declines in certain
tools
and motors businesses, reflecting restructuring inefficiencies, including
costs
related to plant shutdown and ramp up of Mexican capacity in the motors and
tools businesses. Overall, increases in sales prices were offset by higher
material (particularly copper, steel and plastics), wage and benefit (pension)
costs and negative product mix, diluting the profit margin.
FINANCIAL
CONDITION
A
comparison of key elements of the Company's financial condition at the end
of
the third quarter as compared to the end of the prior fiscal year
follows:
|
|
September
30,
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Working
capital (in millions)
|
|
$
|
1,906
|
|
|
1,958
|
|
Current
ratio
|
|
|
1.4
to 1
|
|
|
1.4
to 1
|
|
Total
debt to total capital
|
|
|
35.6
|
%
|
|
33.7
|
%
|
Net
debt to net capital
|
|
|
27.7
|
%
|
|
29.5
|
%
|
The
ratio
of total debt to total capital has decreased to 33.7 percent, or 4.4 percentage
points below the 38.1 percent ratio for the prior year third quarter. The
Company's long-term debt is rated A2 by Moody's Investors Service and A by
Standard and Poor's. The Company's interest coverage ratio (earnings before
income taxes and interest expense, divided by interest expense) was 12.6
times
for the nine months ended June 30, 2006, compared to 9.3 times for the same
period in the prior year primarily due to higher earnings.
In
April
2006, the Company entered into a $2.8 billion five-year revolving credit
facility with various banks, which replaced a $1 billion five-year revolving
credit facility and a $1.83 billion revolving credit facility. There are
no
outstanding loans or letters of credit under this facility. The Company has
not
previously incurred any borrowings under this or prior similar facilities,
and
has no current intention to do so now or in the foreseeable future. This
facility, and similar past facilities, are kept in place by the Company to
support general corporate purposes, including commercial paper borrowings.
The
credit facility does not contain any financial covenants and is not subject
to
termination based on a change in credit ratings or a material adverse change.
Cash
and
equivalents decreased by $538 million during the nine months ended June 30,
2006. Cash flow provided by operating activities of $1,488 million was up
$180
million, or 14 percent, compared to $1,308 million in the prior year period,
reflecting higher net earnings. The increases in receivables, inventories,
intangibles and accounts payable from September 30, 2005 to June 30, 2006,
reflect the impact from acquisitions during this period. The overall increase
in
working capital also reflects increases necessary to support the higher level
of
sales. Operating cash flow of $1,488 million and the net increase in short-term
borrowings of $172 million were used primarily to pay dividends of $550 million,
fund capital expenditures of $354 million, fund purchases of businesses of
$708
million, make payments on long-term debt of $260 million and fund treasury
stock
purchases of $411 million. For the nine months ended June 30, 2006, free
cash
flow of $1,134 million (operating cash flow of $1,488 million less capital
expenditures of $354 million) was up 18 percent from free cash flow of $958
million (operating cash flow of $1,308 million less capital expenditures
of $350
million) for the same period in the prior year, primarily due to higher net
earnings.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
The
Company is in a strong financial position, with total assets of $18 billion
and
stockholders' equity of $8 billion, and has the resources available for
reinvestment in existing businesses, strategic acquisitions and managing
the
capital structure on a short- and long-term basis.
New
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board issued Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109.” FIN 48 addresses the accounting for uncertain tax positions that
a company has taken or expects to take on a tax return. The Company is in
the
process of analyzing the impact of FIN 48, which is required to be adopted
by
the first quarter of fiscal 2008. FIN 48 is not expected to have a material
impact on the financial statements.
OUTLOOK
Based
on
the continued strength of the June 2006 orders coupled with the strong financial
results in the first nine months of the year, sales for the year are expected
to
be approximately $20 billion. Earnings per share for fiscal 2006 is expected
to
be in the range of $4.33 to $4.38. Rationalization of operations expense
is
estimated to be approximately $80 million to $90 million for fiscal 2006.
Operating cash flow is estimated to be $2.5 billion and capital expenditures
are
estimated to be $0.6 billion for 2006. The Company is considering the
divestiture of several small units that have annual sales of approximately
$500
million.
Statements
in this report that are not strictly historical may be "forward-looking"
statements, which involve risks and uncertainties, and Emerson undertakes
no
obligation to update any such statement to reflect later developments. These
include economic and currency conditions, market demand, pricing, and
competitive and technological factors, among others which are set forth in
the
“Risk Factors” of Part I, Item 1, and the "Safe Harbor Statement" of Exhibit 13,
to the Company's Annual Report on Form 10-K for the year ended September
30,
2005, which are hereby incorporated by reference.
Item
4. Controls and Procedures.
Emerson
maintains a system of disclosure controls and procedures which are designed
to
ensure that information required to be disclosed by the Company in the reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and is accumulated and communicated to management,
including the Company’s certifying officers, as appropriate to allow timely
decisions regarding required disclosure. Based on an evaluation performed,
the
Company's certifying officers have concluded that the disclosure controls
and
procedures were effective as of June 30, 2006, to provide reasonable assurance
of the achievement of these objectives.
Notwithstanding
the foregoing, there can be no assurance that the Company's disclosure controls
and procedures will detect or uncover all failures of persons within the
Company
and its consolidated subsidiaries to report material information otherwise
required to be set forth in the Company's reports.
There
was
no change in the Company's internal control over financial reporting during
the
quarter ended June 30, 2006, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
PART
II. OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Issuer
Purchases of Equity Securities.
Period
|
|
(a)
Total Number of Shares Purchased
(000s)
|
|
(b)
Average Price Paid per
Share
|
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Plans
or Programs (000s)
|
|
(d)
Maximum Number of Shares that May Yet Be Purchased Under the
Plans
or Programs (000s)
|
|
April
2006
|
|
|
791
|
|
$
|
83.08
|
|
|
791
|
|
|
25,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
2006
|
|
|
1,150
|
|
$
|
82.33
|
|
|
1,150
|
|
|
24,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
2006
|
|
|
1,800
|
|
$
|
81.06
|
|
|
1,800
|
|
|
22,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,741
|
|
$
|
81.88
|
|
|
3,741
|
|
|
22,462
|
|
The
Company's Board of Directors authorized the repurchase of up to 40 million
shares under the November 2001 program. The maximum number of shares that
may
yet be purchased under this program is 22.5 million as of June 30, 2006.
The Company anticipates repurchasing approximately 9 million shares under
this
program throughout the entire fiscal year 2006, depending on market conditions,
the Company’s level of acquisition activity and other factors.
Item
6. Exhibits.
(a) Exhibits
(Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation
S-K).
10.1 Long-Term
Credit Agreement dated as of April 28, 2006, incorporated by reference to
Emerson Electric Co. Form 8-K dated May 2, 2006, Exhibit 10.1.
12
Ratio
of
Earnings to Fixed Charges.
31
Certifications
pursuant to Exchange Act Rule 13a-14(a).
32
Certifications
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
EMERSON
ELECTRIC CO. |
|
|
|
Date:
August 2, 2006 |
By: |
/s/ Walter
J.
Galvin |
|
Walter
J. Galvin |
|
Senior
Executive Vice President
and Chief Financial Officer
|
|
(on behalf of the registrant and as Chief Financial
Officer) |