UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended June 30, 2008
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
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer x
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
(Do not check if a smaller reporting company)
|
Smaller
Reporting Company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
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
July 31,
2008: 775,942,990
shares.
FORM
10-Q
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, 2007 AND 2008
(Dollars
in millions, except per share amounts; unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,772
|
|
|
6,568
|
|
|
16,103
|
|
|
18,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
3,677
|
|
|
4,155
|
|
|
10,286
|
|
|
11,446
|
|
Selling,
general and administrative expenses
|
|
|
1,154
|
|
|
1,321
|
|
|
3,334
|
|
|
3,757
|
|
Other
deductions, net
|
|
|
58
|
|
|
100
|
|
|
115
|
|
|
170
|
|
Interest
expense (net of interest income of $7, $15, $21 and $41,
respectively)
|
|
|
61
|
|
|
46
|
|
|
178
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
|
822
|
|
|
946
|
|
|
2,190
|
|
|
2,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
249
|
|
|
299
|
|
|
682
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
|
573
|
|
|
647
|
|
|
1,508
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
1
|
|
|
(35
|
)
|
|
5
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
574
|
|
|
612
|
|
|
1,513
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.72
|
|
|
0.83
|
|
|
1.90
|
|
|
2.25
|
|
Discontinued
operations
|
|
|
-
|
|
|
(0.04
|
)
|
|
-
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.72
|
|
|
0.79
|
|
|
1.90
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.71
|
|
|
0.82
|
|
|
1.87
|
|
|
2.23
|
|
Discontinued
operations
|
|
|
0.01
|
|
|
(0.04
|
)
|
|
0.01
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$
|
0.72
|
|
|
0.78
|
|
|
1.88
|
|
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share
|
|
$
|
0.2625
|
|
|
0.3000
|
|
|
0.7875
|
|
|
0.9000
|
|
See
accompanying Notes to Consolidated Financial Statements.
FORM
10-Q
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in millions, except per share amounts; unaudited)
|
|
September 30,
|
|
June 30,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
1,008
|
|
|
2,057
|
|
Receivables,
less allowances of $86 and $89, respectively
|
|
|
4,260
|
|
|
4,663
|
|
Inventories
|
|
|
2,227
|
|
|
2,562
|
|
Other
current assets
|
|
|
570
|
|
|
812
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,065
|
|
|
10,094
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
3,431
|
|
|
3,458
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
Goodwill
|
|
|
6,412
|
|
|
6,713
|
|
Other
|
|
|
1,772
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
8,184
|
|
|
8,644
|
|
|
|
$
|
19,680
|
|
|
22,196
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
borrowings and current maturities of long-term debt
|
|
$
|
404
|
|
|
1,732
|
|
Accounts
payable
|
|
|
2,501
|
|
|
2,563
|
|
Accrued
expenses
|
|
|
2,337
|
|
|
2,506
|
|
Income
taxes
|
|
|
304
|
|
|
242
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
5,546
|
|
|
7,043
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
3,372
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,990
|
|
|
2,101
|
|
|
|
|
|
|
|
|
|
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 953,354,012 shares; outstanding 788,434,076
shares and 778,360,784 shares, respectively
|
|
|
477
|
|
|
477
|
|
Additional
paid-in capital
|
|
|
31
|
|
|
200
|
|
Retained
earnings
|
|
|
12,536
|
|
|
13,546
|
|
Accumulated
other comprehensive income
|
|
|
382
|
|
|
823
|
|
Cost
of common stock in treasury, 164,919,936 shares and 174,993,228 shares,
respectively
|
|
|
(4,654
|
)
|
|
(5,292
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
8,772
|
|
|
9,754
|
|
|
|
$
|
19,680
|
|
|
22,196
|
|
See
accompanying Notes to Consolidated Financial Statements.
FORM
10-Q
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED JUNE 30, 2007 AND 2008
(Dollars
in millions; unaudited)
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,513
|
|
|
1,724
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
491
|
|
|
530
|
|
Changes
in operating working capital
|
|
|
(281
|
)
|
|
(332
|
)
|
Pension
funding
|
|
|
(100
|
)
|
|
(99
|
)
|
Other
(including gains on sales of assets and impairments, see Notes 6
and
10)
|
|
|
151
|
|
|
175
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,774
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(420
|
)
|
|
(461
|
)
|
Purchases
of businesses, net of cash and equivalents acquired
|
|
|
(187
|
)
|
|
(412
|
)
|
Other
(including sale of assets, see Notes 6 and 10)
|
|
|
72
|
|
|
142
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(535
|
)
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net
increase in short-term borrowings
|
|
|
9
|
|
|
774
|
|
Proceeds
from long-term debt
|
|
|
496
|
|
|
400
|
|
Principal
payments on long-term debt
|
|
|
(3
|
)
|
|
(10
|
)
|
Dividends
paid
|
|
|
(629
|
)
|
|
(708
|
)
|
Purchases
of treasury stock
|
|
|
(628
|
)
|
|
(727
|
)
|
Other
|
|
|
7
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(748
|
)
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and equivalents
|
|
|
30
|
|
|
98
|
|
|
|
|
|
|
|
|
|
Increase
in cash and equivalents
|
|
|
521
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
Beginning
cash and equivalents
|
|
|
810
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
Ending
cash and equivalents
|
|
$
|
1,331
|
|
|
2,057
|
|
|
|
|
|
|
|
|
|
Changes
in operating working capital
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
(252
|
)
|
|
(197
|
)
|
Inventories
|
|
|
(21
|
)
|
|
(205
|
)
|
Other
current assets
|
|
|
(48
|
)
|
|
(1
|
)
|
Accounts
payable
|
|
|
(122
|
)
|
|
25
|
|
Accrued
expenses
|
|
|
116
|
|
|
28
|
|
Income
taxes
|
|
|
46
|
|
|
18
|
|
|
|
$
|
(281
|
)
|
|
(332
|
)
|
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, 2007. The 2007
consolidated statements of earnings have been reclassified for
discontinued operations, see Note
10.
|
|
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
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
791.7
|
|
|
778.6
|
|
|
795.4
|
|
|
782.8
|
|
Dilutive
shares
|
|
|
10.4
|
|
|
9.2
|
|
|
9.8
|
|
|
9.3
|
|
Diluted
|
|
|
802.1
|
|
|
787.8
|
|
|
805.2
|
|
|
792.1
|
|
|
3.
|
Comprehensive
income is summarized as follows (dollars in
millions):
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
574
|
|
|
612
|
|
|
1,513
|
|
|
1,724
|
|
Changes
in foreign currency translation, cash flow hedges and
other
|
|
|
115
|
|
|
118
|
|
|
212
|
|
|
441
|
|
|
|
$
|
689
|
|
|
730
|
|
|
1,725
|
|
|
2,165
|
|
The
increases in comprehensive income for the three and nine months ended June
30,
2008, over the prior year periods primarily reflect net earnings growth and
changes in foreign currency translation.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
|
4. |
Other
Financial Information (dollars in
millions):
|
|
|
September 30,
2007
|
|
June 30,
2008
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
Finished
products
|
|
$
|
884
|
|
|
966
|
|
Raw
materials and work in process
|
|
|
1,343
|
|
|
1,596
|
|
|
|
$
|
2,227
|
|
|
2,562
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
8,434
|
|
|
8,728
|
|
Less
accumulated depreciation
|
|
|
5,003
|
|
|
5,270
|
|
|
|
$
|
3,431
|
|
|
3,458
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
1,985
|
|
|
2,060
|
|
Industrial
Automation
|
|
|
1,070
|
|
|
1,122
|
|
Network
Power
|
|
|
2,259
|
|
|
2,519
|
|
Climate
Technologies
|
|
|
420
|
|
|
417
|
|
Appliance
and Tools
|
|
|
678
|
|
|
595
|
|
|
|
$
|
6,412
|
|
|
6,713
|
|
Changes
in the goodwill balances since September 30, 2007, are primarily due to
additions from acquisitions, particularly in the Network Power segment ($162
million), the classification of the European appliance motor and pump business,
previously in the Appliance and Tools segment, as held for sale (see Note 10),
as well as from the translation of non-U.S. currencies to the U.S. dollar.
Third-party valuations of assets are in-process; purchase price allocations
are
subject to refinement for fiscal year 2008 acquisitions.
Other
assets, other
|
|
|
|
|
|
Pension
plans
|
|
$
|
649
|
|
|
699
|
|
Intellectual
property and customer relationships
|
|
|
544
|
|
|
592
|
|
Capitalized
software
|
|
|
171
|
|
|
175
|
|
Other
|
|
|
408
|
|
|
465
|
|
|
|
$
|
1,772
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
warranty liability
|
|
$
|
197
|
|
|
211
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
519
|
|
|
514
|
|
Postretirement
plans, excluding current portion
|
|
|
451
|
|
|
470
|
|
Retirement
plans
|
|
|
296
|
|
|
313
|
|
Minority
interest
|
|
|
191
|
|
|
184
|
|
Other
|
|
|
533
|
|
|
620
|
|
|
|
$
|
1,990
|
|
|
2,101
|
|
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,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
15
|
|
|
18
|
|
|
47
|
|
|
54
|
|
Interest
cost
|
|
|
49
|
|
|
52
|
|
|
147
|
|
|
156
|
|
Expected
return on plan assets
|
|
|
(62
|
)
|
|
(68
|
)
|
|
(189
|
)
|
|
(205
|
)
|
Net
amortization
|
|
|
24
|
|
|
24
|
|
|
74
|
|
|
72
|
|
|
|
$
|
26
|
|
|
26
|
|
|
79
|
|
|
77
|
|
Net
postretirement plan expense is summarized as follows (dollars in
millions):
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1
|
|
|
2
|
|
|
4
|
|
|
4
|
|
Interest
cost
|
|
|
7
|
|
|
6
|
|
|
21
|
|
|
20
|
|
Net
amortization
|
|
|
7
|
|
|
7
|
|
|
20
|
|
|
22
|
|
|
|
$
|
15
|
|
|
15
|
|
|
45
|
|
|
46
|
|
|
6. |
Other
deductions, net are summarized as follows (dollars in
millions):
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Other
deductions, net
|
|
|
|
|
|
|
|
|
|
Rationalization
of operations
|
|
$
|
18
|
|
|
24
|
|
|
54
|
|
|
49
|
|
Amortization
of intangibles
|
|
|
16
|
|
|
20
|
|
|
46
|
|
|
59
|
|
Other
|
|
|
27
|
|
|
56
|
|
|
84
|
|
|
126
|
|
Gains
|
|
|
(3
|
)
|
|
-
|
|
|
(69
|
)
|
|
(64
|
)
|
|
|
$
|
58
|
|
|
100
|
|
|
115
|
|
|
170
|
|
For
the
three months ended June 30, 2008, Other included approximately $12 million
of
losses on foreign exchange transactions compared with $6 million of gains in
the
prior year period, as well as an impairment charge of $9 million (See Note
10).
During the first nine months of fiscal 2008, Other also included an approximate
$12 million charge for in-process research and development in connection with
the acquisition of Motorola Inc.’s Embedded Computing business.
During
the nine months ended June 30, 2008, the Company received $54 million and
recognized a gain of $39 million ($20 million after-tax) on the sale of an
equity investment in Industrial Motion Control Holdings, LLC (IMC), a
manufacturer of motion control components for automation equipment. The Company
also recorded a gain of $18 million related to the sale of a facility during
the
first quarter of fiscal 2008. For the nine months ended June 30, 2008 and 2007,
the Company recorded gains of approximately $3 million and $24 million,
respectively, for payments received under the U.S. Continued Dumping and Subsidy
Offset Act. During the nine months ended June 30, 2007, the Company sold its
remaining 4.5 million shares of MKS Instruments, Inc. (MKS), a publicly-traded
company, and recorded a pretax gain of $32 million.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
|
7.
|
The
change in the liability for rationalization of operations during
the nine
months ended June 30, 2008, follows (dollars in
millions):
|
|
|
September 30,
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
Expense
|
|
Paid / Utilized
|
|
2008
|
|
Severance
and benefits
|
|
$
|
28
|
|
|
22
|
|
|
28
|
|
|
22
|
|
Lease/contract
terminations
|
|
|
8
|
|
|
1
|
|
|
2
|
|
|
7
|
|
Fixed
asset write-downs
|
|
|
-
|
|
|
2
|
|
|
2
|
|
|
-
|
|
Vacant
facility and other shutdown costs
|
|
|
1
|
|
|
6
|
|
|
6
|
|
|
1
|
|
Start-up
and moving costs
|
|
|
-
|
|
|
22
|
|
|
21
|
|
|
1
|
|
|
|
$
|
37
|
|
|
53
|
|
|
59
|
|
|
31
|
|
Expense
includes $4 million related to the European appliance motor and pump business
classified as discontinued operations.
Rationalization
of operations by business segment is summarized as follows (dollars in
millions):
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
2
|
|
|
4
|
|
|
8
|
|
|
8
|
|
Industrial
Automation
|
|
|
5
|
|
|
5
|
|
|
11
|
|
|
11
|
|
Network
Power
|
|
|
5
|
|
|
8
|
|
|
14
|
|
|
16
|
|
Climate
Technologies
|
|
|
2
|
|
|
5
|
|
|
9
|
|
|
10
|
|
Appliance
and Tools
|
|
|
4
|
|
|
2
|
|
|
12
|
|
|
4
|
|
|
|
$
|
18
|
|
|
24
|
|
|
54
|
|
|
49
|
|
Rationalization
actions during the first nine months of fiscal 2007 and 2008 included the
following. Industrial Automation included severance and start-up and moving
costs related to the consolidation of certain power transmission facilities
in
Asia and North America to obtain operational efficiencies and serve Asian and
North American markets. Network Power included severance related to the closure
of certain power conversion facilities acquired with Artesyn, and severance
and
start-up and moving costs related to the shifting of certain power systems
production from the United States and Europe to Mexico, as well as consolidating
certain production in North America, to remain competitive on a global basis.
Climate Technologies included start-up costs related to capacity expansion
in
Mexico and Eastern Europe to improve profitability and to serve these markets,
and severance and shutdown costs related to the consolidation of certain
production facilities in the United States and Europe to obtain operational
efficiencies. Appliance and Tools included severance and start-up and moving
costs related to the shifting of certain production from Canada to Mexico and
severance related to the closure of certain motor production in Europe to remain
competitive on a global basis.
Including
the $53 million of rationalization costs incurred during the nine months ended
June 30, 2008, the Company expects rationalization expense for the entire 2008
fiscal year to total approximately $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.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
|
8.
|
Summarized
information about the Company's operations by business segment follows
(dollars in millions):
|
|
|
Sales
|
|
Earnings
|
|
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
1,471
|
|
|
1,731
|
|
|
269
|
|
|
346
|
|
Industrial
Automation
|
|
|
1,095
|
|
|
1,271
|
|
|
161
|
|
|
186
|
|
Network
Power
|
|
|
1,322
|
|
|
1,672
|
|
|
178
|
|
|
212
|
|
Climate
Technologies
|
|
|
1,043
|
|
|
1,087
|
|
|
174
|
|
|
169
|
|
Appliance
and Tools
|
|
|
1,005
|
|
|
998
|
|
|
143
|
|
|
138
|
|
|
|
|
5,936
|
|
|
6,759
|
|
|
925
|
|
|
1,051
|
|
Differences
in accounting methods
|
|
|
|
|
|
|
|
|
56
|
|
|
62
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
(121
|
)
|
Eliminations/Interest
|
|
|
(164
|
)
|
|
(191
|
)
|
|
(61
|
)
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,772
|
|
|
6,568
|
|
|
822
|
|
|
946
|
|
Intersegment
sales of the Appliance and Tools segment for the three months ended June 30,
2008 and 2007, respectively, were $162 million and $140 million. Corporate
and
other includes increase in commodity hedging-related mark-to-market expense
of $11 million, higher environmental costs and other items in the third
quarter of 2008.
|
|
Sales
|
|
Earnings
|
|
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Process
Management
|
|
$
|
4,034
|
|
|
4,764
|
|
|
725
|
|
|
890
|
|
Industrial
Automation
|
|
|
3,146
|
|
|
3,572
|
|
|
478
|
|
|
528
|
|
Network
Power
|
|
|
3,712
|
|
|
4,598
|
|
|
441
|
|
|
579
|
|
Climate
Technologies
|
|
|
2,676
|
|
|
2,809
|
|
|
405
|
|
|
413
|
|
Appliance
and Tools
|
|
|
2,993
|
|
|
2,886
|
|
|
406
|
|
|
409
|
|
|
|
|
16,561
|
|
|
18,629
|
|
|
2,455
|
|
|
2,819
|
|
Differences
in accounting methods
|
|
|
|
|
|
|
|
|
156
|
|
|
172
|
|
Corporate
and other
|
|
|
|
|
|
|
|
|
(243 |
) |
|
(253 |
) |
Eliminations/Interest
|
|
|
(458
|
)
|
|
(518
|
)
|
|
(178
|
)
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,103
|
|
|
18,111
|
|
|
2,190
|
|
|
2,591
|
|
Intersegment
sales of the Appliance and Tools segment for the nine months ended June 30,
2008
and 2007, respectively, were $439 million and $392 million.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
|
9.
|
Effective
October 1, 2007, the Company adopted the recognition and disclosure
provisions of Financial Accounting Standards Board Interpretation
No. 48,
“Accounting for Uncertainty in Income Taxes – an Interpretation of
FASB Statement 109” (FIN 48). FIN 48 addresses the accounting for
uncertain tax positions that a company has taken or expects to take
on a
tax return. As of October 1, 2007, the Company had total unrecognized
tax
benefits of $149 million before recoverability of cross-jurisdictional
tax
credits (U.S., state and non-U.S.) and temporary differences, and
including amounts related to acquisitions that would reduce goodwill.
If
none of these liabilities are ultimately paid, the tax provision
and tax
rate would be favorably impacted by $90 million. As a result of adoption,
the Company recorded a charge of $6 million to beginning retained
earnings. The amount of unrecognized tax benefits is not materially
different as of June 30, 2008, and is not expected to significantly
increase or decrease within the next 12
months.
|
The
Company accrues interest and penalties related to income taxes in income tax
expense. As of October 1, 2007, total accrued interest and penalties was $24
million.
The
major
jurisdiction for which the Company files income tax returns is the United
States. U.S. federal examinations by the Internal Revenue Service are
substantially complete through 2005. The status of non-U.S. and state tax
examinations varies by the numerous legal entities and jurisdictions in which
the Company operates.
|
10.
|
In
connection with a longer-term strategy to divest selective slower-growth
businesses, the Company had been actively pursuing the sale of its
European appliance motor and pump business. The forecast for this
business
was lower than originally planned due to a slow economic environment
for
this consumer market, increasing competition from Asia, higher commodity
costs, and loss of a customer. As a result, the carrying value of
this
business exceeded its estimated realizable value, and a goodwill
impairment charge of $52 million was recorded in the second quarter
of
2008. This business has continued to weaken in a difficult global
appliance market. During the third quarter of fiscal 2008, the Company
entered into a definitive agreement to sell the business for €72 million
($113 million) which resulted in an additional loss of $36 million.
The
sale is expected to close during this fiscal year and is subject
only to
routine review by certain European competition authorities. For the
third
quarter and first nine months of fiscal 2008, sales were $121 million
and
$349 million, respectively, and net losses, including the charges,
were
$(35) million and $(83) million, respectively. For the third quarter
and
first nine months of fiscal 2007, sales were $102 million and $335
million, respectively, and net earnings were $1 million and $5 million,
respectively. This business was previously included in the Appliance
and
Tools segment. As of June 30, 2008, this business had current assets
of
$0.2 billion, noncurrent assets of $0.1 billion and total liabilities
of
$0.2 billion. The results for the third quarter and first nine months
of
fiscal 2008 and 2007 were classified as discontinued operations.
|
During
the first quarter of fiscal 2008, the Company received $100 million from the
sale of the Brooks Instrument (Brooks) flow meters and flow controls unit,
which
resulted in a pretax gain of $63 million ($42 million after-tax). Sales for
the
first quarter of 2008 were $21 million and net earnings were $1 million. The
net
gain and results of operations for the first quarter of fiscal 2008 were
classified as discontinued operations; prior year results of operations were
inconsequential.
On
December 31, 2007, the Company acquired Motorola Inc.’s Embedded Computing
business for approximately $350 million in cash. This business is a
leading provider of embedded computing products to equipment manufacturers
in
telecommunications, medical imaging, defense and aerospace, and industrial
automation and is included in the Network Power segment. Embedded Computing
had
calendar 2007 revenue of approximately $560 million.
During
the third quarter of fiscal 2008, the Company recorded a goodwill impairment
charge of $9 million related to the North American appliance control business
due to a slow economic environment for housing and consumer related end-markets
and a major customer’s strategy to internalize electronic controls. Also, the
Company is considering the potential sale of this business in connection with
a
longer term strategy to consider the divestiture of selective slower growth
businesses. This business has annual sales of approximately $150 million and
is
included in the Appliance and Tools segment.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Items
2 and 3. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company’s 2007 Annual Report on
Form 10-K.
OVERVIEW
The
Company’s results for the first nine months of fiscal 2008 were strong, with
earnings increasing for all five business segments and sales increasing for
four
of the five business segments over the prior year period. The Process
Management, Network Power and Industrial Automation businesses had strong
performances and drove gains as international gross fixed investment expanded
during the first nine months of fiscal 2008. Strong growth in Asia, Latin
America and Middle East/Africa, favorable foreign currency translation, and
acquisitions contributed to the third quarter and first nine months’ results.
Profit margins remained at high levels, primarily due to leverage on increased
sales volume, benefits from previous rationalization actions and business mix.
Emerson's financial position remains strong and the Company continues to
generate substantial cash flow.
THREE
MONTHS ENDED JUNE 30, 2008, COMPARED WITH THREE MONTHS ENDED JUNE 30,
2007
RESULTS
OF OPERATIONS
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,772
|
|
|
6,568
|
|
|
14
|
%
|
Gross
profit
|
|
$
|
2,095
|
|
|
2,413
|
|
|
15
|
%
|
Percent
of sales
|
|
|
36.3
|
%
|
|
36.7
|
%
|
|
|
|
SG&A
|
|
$
|
1,154
|
|
|
1,321
|
|
|
|
|
Percent
of sales
|
|
|
20.0
|
%
|
|
20.1
|
%
|
|
|
|
Other
deductions, net
|
|
$
|
58
|
|
|
100
|
|
|
|
|
Interest
expense, net
|
|
$
|
61
|
|
|
46
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
$
|
822
|
|
|
946
|
|
|
15
|
%
|
Earnings
from continuing operations
|
|
$
|
573
|
|
|
647
|
|
|
13
|
%
|
Net
earnings
|
|
$
|
574
|
|
|
612
|
|
|
7
|
%
|
Percent
of sales
|
|
|
9.9
|
%
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
– Continuing operations
|
|
$
|
0.71
|
|
|
0.82
|
|
|
15
|
%
|
EPS
– Net earnings
|
|
$
|
0.72
|
|
|
0.78
|
|
|
8
|
%
|
Net
sales
for the quarter ended June 30, 2008 were $6,568 million, an increase of $796
million, or 14 percent, over net sales of $5,772 million for the quarter ended
June 30, 2007, with international sales aiding the overall growth. The
consolidated results reflect increases in four of the five business segments,
with a 7 percent ($402 million) increase in underlying sales (which exclude
acquisitions, divestitures and foreign currency translation), a 5 percent ($263
million) favorable impact from foreign currency translation and a 2 percent
($131 million) favorable impact from acquisitions, net of divestitures. The
underlying sales increase for the third quarter reflects 10 percent growth
in
total international sales, while growth in the United States increased 4
percent. The international sales growth included increases in Asia (16 percent),
Latin America (16 percent), Middle East/Africa (15 percent) and Europe (3
percent). The Company estimates that the underlying sales growth primarily
reflects an approximate 6 percent gain from volume, which includes an estimated
2 percent impact from penetration gains, and an approximate 1 percent increase
from higher sales prices.
Costs
of
sales for the third quarters of fiscal 2008 and 2007 were $4,155 million and
$3,677 million, respectively. Cost of sales as a percent of net sales was 63.3
percent in the third quarter of 2008, compared with 63.7 percent in the third
quarter of 2007. Gross profit was $2,413 million and $2,095 million for the
third quarters ended June 30, 2008 and 2007, respectively, resulting in gross
profit margins of 36.7 percent and 36.3 percent. The increase in the gross
profit margin during the third quarter primarily reflects leverage on the higher
sales volume and savings from cost reduction efforts. Higher sales prices were
offset by higher material costs and wages. The increase in the gross profit
amount primarily reflects higher sales volume and foreign currency translation.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Selling,
general and administrative (SG&A) expenses for the third quarter of 2008
were $1,321 million, or 20.1 percent of net sales, compared with $1,154 million,
or 20.0 percent of net sales, for the third quarter of 2007. The increase of
$167 million was largely due to the increase in variable costs on higher sales
and acquisitions.
Other
deductions, net were $100 million for the third quarter of 2008, a $42 million
increase from the $58 million for the same period in the prior year.
The
three
months ended June 30, 2008, included approximately $12 million of losses on
foreign exchange transactions compared with $6 million of gains in the prior
year period. The
third
quarter of fiscal 2008 also included a $9 million impairment charge in the
appliance control business (See Note 10), and higher restructuring and
amortization expense. For the three months ended June 30, 2008, amortization
of
intangibles increased $4 million compared with the prior year period due to
acquisitions, while rationalization costs increased $6 million. See Notes 6
and
7 for further details regarding other deductions, net and rationalization
costs.
Earnings
from continuing operations before income taxes for the third quarter of 2008
increased $124 million, or 15 percent, to $946 million, compared with $822
million for the third quarter of 2007. The earnings results primarily reflect
increases of $77 million in the Process Management, $34 million in the Network
Power and $25 million in the Industrial Automation business
segments.
Income
taxes were $299 million and $249 million for the three months ended June 30,
2008 and 2007, respectively. The effective tax rate was 32 percent in the third
quarter of 2008 compared with 30 percent in the prior year period. The effective
tax rate for the entire fiscal year 2008 is expected to be approximately 32
percent.
Earnings
from continuing operations were $647 million and earnings per share from
continuing operations were $0.82 for the three months ended June 30, 2008,
increases of 13 percent and 15 percent, respectively, compared with $573 million
and $0.71 for the three months ended June 30, 2007.
Net
earnings were $612 million and earnings per share were $0.78 for the three
months ended June 30, 2008, increases of 7 percent and 8 percent, respectively,
compared with $574 million and $0.72 for the three months ended June 30, 2007.
Earnings for the third quarter of fiscal 2008 included a loss from discontinued
operations of $35 million, or $0.04 per share, related to an additional
write-down of the European appliance motor and pump business based on a
definitive agreement to sell this unit (See Note 10). The 8 percent increase
in
earnings per share also reflects the purchase of treasury shares.
BUSINESS
SEGMENTS
Process
Management
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,471
|
|
|
1,731
|
|
|
18
|
%
|
Earnings
|
|
$
|
269
|
|
|
346
|
|
|
29
|
%
|
Margin
|
|
|
18.3
|
%
|
|
20.0
|
%
|
|
|
|
Process
Management sales were $1,731 million in the third quarter of fiscal 2008, an
increase of 18 percent over the prior year period. Nearly all of the businesses
in this segment reported higher sales, with sales particularly strong for the
valves, measurement and systems businesses, reflecting continued worldwide
demand in the energy and power markets. Underlying sales increased approximately
13 percent, reflecting an estimated 12 percent from volume, which includes
approximately 2 percent from penetration gains, and an estimated 1 percent
from
higher sales prices. Favorable foreign currency translation added 6 percent
($81
million) and the Brooks divestiture, net of an acquisition, had an unfavorable
impact of 1 percent ($17 million). The underlying sales increase reflects growth
in Asia (21 percent), the United States (12 percent), Latin America (28
percent), Middle East/Africa (14 percent) and Europe (5 percent). Third quarter
earnings (defined as earnings before interest and taxes for the business
segments discussion) increased 29 percent to $346 million from $269 million
in
the prior year period, reflecting higher sales volume and the benefit from
foreign currency translation. The margin increase primarily reflects leverage
on
the higher volume and an $11 million litigation charge in the prior year. The
increase in sales prices was more than offset by higher wage costs.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Industrial
Automation
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,095
|
|
|
1,271
|
|
|
16
|
%
|
Earnings
|
|
$
|
161
|
|
|
186
|
|
|
15
|
%
|
Margin
|
|
|
14.7
|
%
|
|
14.6
|
%
|
|
|
|
Sales
grew 16 percent to $1,271 million in the Industrial Automation segment for
the
three months ended June 30, 2008, reflecting sales growth in all of the
businesses and in all of the major geographic regions. Third quarter results
were driven by particular strength in the power generating alternator, fluid
automation and industrial equipment businesses. Third quarter underlying sales
grew 8 percent, reflecting global industrial demand, and included the benefit
of
an estimated more than 1 percent positive impact from price. Foreign currency
translation had an 8 percent ($87 million) favorable impact. The underlying
sales increase reflects growth in all of the major geographic regions, including
11 percent in the United States and 6 percent internationally. The international
sales growth included a 4 percent increase in Europe and a 16 percent increase
in Asia. Earnings increased 15 percent over the prior year period to $186
million, reflecting the higher sales volume and foreign currency translation.
The margin was diluted as higher sales prices were offset by material inflation
and higher wage costs.
Network
Power
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,322
|
|
|
1,672
|
|
|
26
|
%
|
Earnings
|
|
$
|
178
|
|
|
212
|
|
|
19
|
%
|
Margin
|
|
|
13.4
|
%
|
|
12.7
|
%
|
|
|
|
Network
Power sales increased 26 percent to $1,672 million during the third quarter
of
2008 compared with the prior year period, reflecting continued strength in
the
power systems, precision cooling and telecommunications businesses and
acquisitions. The sales increase reflects an underlying sales growth of 10
percent, a 12 percent ($161 million) increase from the Embedded Computing and
Stratos acquisitions and a 4 percent ($51 million) favorable impact from foreign
currency translation. The underlying sales growth reflects higher volume of
10
percent, which includes approximately 3 percent from penetration gains.
Geographically, the underlying sales increase reflects growth in the United
States (10 percent), Asia (13 percent), Europe (3 percent) and Latin America
(8
percent). The growth in the United States reflects substantial customer
investment in data room construction and non-residential computer equipment
as
well as segments of the telecommunications power market. The Company’s market
penetration gains in China and other Asian markets continued. Earnings of $212
million increased $34 million, or 19 percent, from the prior year period
primarily reflecting higher sales volume. The margin was negatively impacted
approximately 1.5 percentage points from acquisitions.
Climate
Technologies
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,043
|
|
|
1,087
|
|
|
4
|
%
|
Earnings
|
|
$
|
174
|
|
|
169
|
|
|
(3
|
%)
|
Margin
|
|
|
16.6
|
%
|
|
15.5
|
%
|
|
|
|
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Sales
in
the Climate Technologies segment increased 4 percent to $1,087 million for
the
quarter ended June 30, 2008.
The
increase was driven by a 3 percent ($34 million) favorable impact from foreign
currency translation and a 1 percent increase in underlying sales. The
underlying sales increase of 1 percent was comprised of a 1 percent decline
in
volume, which includes an approximate 2 percent benefit from penetrations gains,
and an estimated 2 percent positive impact from higher sales prices. The
underlying sales increase was led by a strong increase in the water-heater
controls business, primarily reflecting further penetration in the U.S.
water-heater market, while the compressor business sales were flat compared
to
the prior year. Sales in the United States decreased 1 percent reflecting the
downturn in the U.S. residential market. International sales increased 4 percent
reflecting growth in Asia (14 percent), partially offset by a decline in Europe
(6 percent). Europe primarily reflects the result of lower heat pump compressor
sales. Earnings of $169 million decreased 3 percent from the prior year period.
The profit margin declined as sales price increases were not enough to offset
higher material costs. In addition, the margin was negatively impacted compared
to the prior year due to lower foreign currency transaction gains and higher
restructuring costs.
Appliance
and Tools
Three
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,005
|
|
|
998
|
|
|
(1
|
%)
|
Earnings
|
|
$
|
143
|
|
|
138
|
|
|
(4
|
%)
|
Margin
|
|
|
14.3
|
%
|
|
13.8
|
%
|
|
|
|
The
Appliance and Tools segment sales decreased 1 percent to $998 million in the
third quarter of 2008. The sales decrease represents a 1 percent decline in
underlying sales, a 1 percent ($13 million) unfavorable impact from
a divestiture and a 1 percent ($10 million) favorable contribution from
foreign currency translation. Results were mixed across the businesses as the
hermetic and professional tools businesses showed strong growth, offset by
weakness in the storage, appliance components and commercial motors businesses.
The growth in the professional tools business was driven by demand in the U.S.
non-residential markets and in Europe, including new technology products. The
declines in the storage and appliance-related businesses primarily reflect
the
continued downturn in the U.S. residential market. The underlying sales decrease
of 1 percent reflects an estimated 4 percent decline in volume and a more than
3
percent positive impact from price. Total international underlying sales
increased approximately 14 percent during the quarter, while underlying sales
in
the U.S. decreased 3 percent. Earnings decreased 4 percent to $138 million
for
the third quarter primarily reflecting a $9 million impairment charge in the
appliance control business, which reduced the margin nearly 1 percentage point
(See Note 10). The margin also reflects deleverage on the lower volume and
savings from cost reduction actions. Higher sale prices were offset by higher
material and wage costs.
NINE
MONTHS ENDED JUNE 30, 2008, COMPARED WITH NINE MONTHS ENDED JUNE 30,
2007
RESULTS
OF OPERATIONS
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
16,103
|
|
|
18,111
|
|
|
12
|
%
|
Gross
profit
|
|
$
|
5,817
|
|
|
6,665
|
|
|
15
|
%
|
Percent
of sales
|
|
|
36.1
|
%
|
|
|
|
|
|
|
SG&A
|
|
$
|
3,334
|
|
|
3,757
|
|
|
|
|
Percent
of sales
|
|
|
20.7
|
%
|
|
|
|
|
|
|
Other
deductions, net
|
|
$
|
115
|
|
|
170
|
|
|
|
|
Interest
expense, net
|
|
$
|
178
|
|
|
147
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
$
|
2,190
|
|
|
2,591
|
|
|
18
|
%
|
Earnings
from continuing operations
|
|
$
|
1,508
|
|
|
1,764
|
|
|
17
|
%
|
Net
earnings
|
|
$
|
1,513
|
|
|
1,724
|
|
|
14
|
%
|
Percent
of sales
|
|
|
9.4
|
%
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
– Continuing operations
|
|
$
|
1.87
|
|
|
2.23
|
|
|
19
|
%
|
EPS
– Net earnings
|
|
$
|
1.88
|
|
|
2.18
|
|
|
16
|
%
|
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Net
sales
for the nine months ended June 30, 2008 increased $2,008 million, or 12 percent,
to $18,111 million, over net sales of $16,103 million for the nine months ended
June 30, 2007, with international sales leading the overall growth.
The Network Power, Process Management and Industrial Automation businesses
drove
the sales growth, while the
Appliance and Tools businesses continued to be impacted by the U.S. consumer
slowdown. The consolidated results reflect a 7 percent ($1,082 million) increase
in underlying sales, a 4 percent ($676 million) favorable impact from foreign
currency translation and a 1 percent ($250 million) positive impact from
acquisitions, net of divestitures. The underlying sales increase of 7 percent
for the first nine months was driven by an increase of 10 percent in total
international sales and a 3 percent increase in the United States. The
international sales increase primarily reflects growth in Asia (17 percent),
Middle East/Africa (19 percent), Latin America (15 percent) and Europe (2
percent). The Company estimates that the underlying sales growth primarily
reflects an estimated 6 percent gain from volume, which includes an estimated
2
percent impact from penetration gains, and an approximate 1 percent impact
from
higher sales prices.
Costs
of
sales for the first nine months of fiscal 2008 and 2007 were $11,446 million
and
$10,286 million, respectively. Cost of sales as a percent of net sales was
63.2
percent for the first nine months of fiscal 2008, compared with 63.9 percent
in
the prior year period. Gross profit was $6,665 million and $5,817 million for
the nine months ended June 30, 2008 and 2007, respectively, resulting in gross
profit margins of 36.8 percent and 36.1 percent. The increase in the gross
profit margin during the first nine months of fiscal 2008 primarily reflects
leverage on higher sales volume and benefits realized from productivity
improvements, which were partially offset by negative product mix. Higher sales
prices were offset by higher raw material and wage costs. The increase in the
gross profit amount primarily reflects higher sales volume and foreign currency
translation.
Selling,
general and administrative expenses for the nine months ended June 30, 2008
were
$3,757 million, or 20.7 percent of net sales, compared with $3,334 million,
or
20.7 percent of net sales, for the nine months ended June 30, 2007. The increase
of $423 million was largely due to the increase in variable costs on higher
sales.
Other
deductions, net were $170 million for the first nine months of fiscal 2008,
a
$55 million increase from the $115 million for the same period in the prior
year. The nine months ended June 30, 2008, included approximately $18 million
of
losses on foreign exchange transactions compared with $1 million of gains in
the
prior year period. The first nine months of fiscal 2008, also included a $12
million charge for in-process research and development in connection with the
acquisition of Motorola Inc.’s Embedded Computing business, a $9 million
impairment charge in the appliance control business (See Note 10), and higher
amortization expense. For the nine months ended June 30, 2008, amortization
of
intangibles increased $13 million compared with the prior year period due to
acquisitions. See Notes 6 and 7 for further details regarding other deductions,
net and rationalization costs.
Earnings
from continuing operations before income taxes for the first nine months of
2008
increased $401 million, or 18 percent, to $2,591 million, compared with $2,190
million for the nine months ended June 30, 2007. The earnings results
predominantly reflect increases of $165 million in Process Management, $138
million in Network Power and $50 million in Industrial Automation business
segments.
Income
taxes were $827 million and $682 million for the nine months ended June 30,
2008
and 2007, respectively. The effective tax rate was 32 percent for the first
nine
months of 2008 compared with 31 percent in the prior year period. The effective
tax rate for the entire fiscal year 2008 is expected to be approximately 32
percent.
Earnings
from continuing operations were $1,764 million and earnings per share from
continuing operations were $2.23 for the nine months ended June 30, 2008,
increases of 17 percent and 19 percent, respectively, compared with $1,508
million and $1.87 for the nine months ended June 30, 2007.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Net
earnings were $1,724 million and earnings per share were $2.18 for the nine
months ended June 30, 2008, increases of 14 percent and 16 percent,
respectively, compared with $1,513 million and $1.88 for the nine months ended
June 30, 2007. Earnings for the first nine months of fiscal 2008 included a
loss
from discontinued operations of $40 million, or $0.05 per share, which included
a gain of $42 million, or $0.05 per share, related to the divestiture of the
Brooks unit, and a loss of $88 million, or $0.11 per share, related to the
write-down of the European appliance motor and pump business (See Note 10).
The
16 percent increase in earnings per share also reflects the purchase of treasury
shares.
BUSINESS
SEGMENTS
Process
Management
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,034
|
|
|
4,764
|
|
|
18
|
%
|
Earnings
|
|
$
|
725
|
|
|
890
|
|
|
23
|
%
|
Margin
|
|
|
18.0
|
%
|
|
18.7
|
%
|
|
|
|
During
the first nine months of fiscal 2008, Process Management sales increased 18
percent, on higher volume and foreign currency translation, to $4,764 million,
and earnings increased 23 percent. All of the businesses reported sales
increases compared to the prior year period. Sales and earnings were
particularly strong for the systems, measurement, and valves businesses due
to
worldwide growth in energy and power markets. Underlying sales increased 14
percent, reflecting 13 percent from volume, which includes approximately 3
percent from penetration gains, and an estimated 1 percent from higher sales
prices. Foreign currency translation had a 5 percent ($197 million) favorable
impact, while the Brooks divestiture, net of acquisitions, had a 1 percent
($23
million) unfavorable impact. The underlying sales increase reflects growth
in
all of the major geographic regions, including the United States (13 percent),
Asia (20 percent), Europe (7 percent), Middle East/Africa (18 percent) and
Latin
America (23 percent), compared with the prior year period. Earnings for the
first nine months of fiscal 2008 increased 23 percent to $890 million from
$725
million in the prior year period, reflecting higher sales volume and the benefit
from foreign currency translation. The margin increase primarily reflects
leverage on the higher volume, which was partially offset by unfavorable product
mix. The increase in sales prices was more than offset by higher wage costs.
Industrial
Automation
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,146
|
|
|
3,572
|
|
|
14
|
%
|
Earnings
|
|
$
|
478
|
|
|
528
|
|
|
10
|
%
|
Margin
|
|
|
15.2
|
%
|
|
14.8
|
%
|
|
|
|
Sales
in
the Industrial Automation segment increased 14 percent to $3,572 million for
the
nine months ended June
30,
2008. Sales grew in all of the businesses and in all of the major geographic
regions, reflecting the strength in the power generating alternator, fluid
automation and industrial equipment businesses. Underlying sales grew 7 percent
and foreign currency translation had a 7 percent ($221 million) favorable
impact. The underlying sales growth reflects 5 percent from volume, primarily
due to increased global capital goods investment, as well as an estimated less
than 2 percent positive impact from price. The increase in underlying sales
reflects 7 percent growth in the United States and 6 percent growth
internationally, primarily reflecting increases in Europe (4 percent) and Asia
(16 percent). Earnings increased 10 percent over the prior year nine month
period to $528 million, reflecting higher sales volume and benefit from foreign
currency translation. The margin decrease reflects a lower payment received
by
the power transmission business from dumping duties related to the U.S.
Continued Dumping and Subsidy Offset Act. A $24 million payment was received
in
the first quarter of fiscal 2007 while only a $3 million payment was received
in
the first quarter of fiscal 2008. The Company does not expect to receive any
significant payments in the future. The margin decrease was partially offset
by
leverage on the higher sales volume and benefits from prior cost reductions
efforts. Higher sales prices were substantially offset by higher material and
wage costs.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
Network
Power
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,712
|
|
|
4,598
|
|
|
24
|
%
|
Earnings
|
|
$
|
441
|
|
|
579
|
|
|
31
|
%
|
Margin
|
|
|
11.9
|
%
|
|
12.6
|
%
|
|
|
|
The
Network Power segment sales increased 24 percent to $4,598 million for the
first
nine months of 2008 compared with the prior year period, reflecting continued
strength in the power systems and precision cooling businesses. Underlying
sales
grew 11 percent, the Embedded Computing and Stratos acquisitions contributed
9
percent ($328 million) and foreign currency translation had a 4 percent ($137
million) favorable impact. The underlying sales increase of 11 percent reflects
an 11 percent gain from higher volume, which includes an estimated 4 percent
impact from penetration gains. Geographically, underlying sales reflect a 16
percent increase in Asia and an 11 percent increase in the United States, while
Europe increased 1 percent. The U.S. growth reflects strong demand for data
room
construction and non-residential computer equipment as well as in the
telecommunications power market. The Company’s market penetration gains in China
and other Asian markets continued. Earnings for the nine months ended June
30,
2008 of $579 million increased $138 million, or 31 percent, from the prior
year
period primarily due to the higher sales volume and savings from cost reduction
actions, partially offset by higher wage costs. The margin increase reflects
the
cost savings and leverage on the higher volume, partially offset by dilution
from acquisitions.
Climate
Technologies
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,676
|
|
|
2,809
|
|
|
5
|
%
|
Earnings
|
|
$
|
405
|
|
|
413
|
|
|
2
|
%
|
Margin
|
|
|
15.1
|
%
|
|
14.7
|
%
|
|
|
|
Sales
in
the Climate Technologies segment increased 5 percent to $2,809 million for
the
nine months ended June
30,
2008. Underlying sales increased 2 percent, while foreign currency translation
had a 3 percent ($85 million) favorable impact. Total sales volume was flat,
after the consideration of an approximate 2 percent positive impact from
penetration gains, and sales price increases contributed an approximate 2
percent positive impact. The underlying sales increase was led by the
water-heater controls business which primarily reflects further penetration
in
the U.S. water-heater market. The compressors business grew slightly, primarily
in the U.S. and Asian air-conditioning markets. The underlying sales increase
reflects a 1 percent increase in the United States and 13 percent growth in
Asia, while sales in Europe declined 12 percent. Earnings of $413 million for
the first nine months of fiscal 2008 increased 2 percent when compared with
the
prior year period. The margin was diluted as higher sales prices were more
than
offset by material inflation and higher wage costs.
Appliance
and Tools
Nine
months ended June 30,
|
|
2007
|
|
2008
|
|
Change
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,993
|
|
|
2,886
|
|
|
(4
|
%)
|
Earnings
|
|
$
|
406
|
|
|
409
|
|
|
1
|
%
|
Margin
|
|
|
13.6
|
%
|
|
14.2
|
%
|
|
|
|
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
The
Appliance and Tools segment sales decreased 4 percent to $2,886 million for
the
first nine months of 2008. This decrease reflects a 3 percent decline in
underlying sales, a 2 percent ($50 million) unfavorable impact from divestitures
and a 1 percent ($36 million) favorable impact from foreign currency
translation. The results for the first nine months show declines across most
of
the businesses. Strong growth in the professional tools business and moderate
growth in the hermetic motors business was more than offset by declines in
the
storage, appliance components,
and appliance and commercial motors businesses. The strong growth in the
professional tools business was driven by the U.S. non-residential and European
markets. The declines in the storage and appliance-related businesses primarily
reflect the continued downturn in the U.S. residential market. The underlying
sales decrease of 3 percent reflects an estimated 6 percent decline in volume
and an approximate 3 percent positive impact from higher sales prices. Total
international underlying sales increased 12 percent and sales in the United
States decreased approximately 6 percent during the first nine months of 2008.
Earnings increased 1 percent to $409 million for the current nine month period.
Earnings and margin improvements reflect savings from prior period cost
reduction actions and lower rationalization costs during the current period,
offset by deleverage on the lower sales volume and an impairment charge of
$9
million in the appliance control business (See Note 10). The increase in sales
prices was substantially offset by higher material and wage costs. The 2007
sale
of the consumer hand tools product line also favorably impacted the 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,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
Working
capital (in millions)
|
|
$
|
2,519
|
|
|
3,051
|
|
Current
ratio
|
|
|
1.5
to 1
|
|
|
1.4
to 1
|
|
Total
debt to total capital
|
|
|
30.1
|
%
|
|
34.0
|
%
|
Net
debt to net capital
|
|
|
23.6
|
%
|
|
22.9
|
%
|
The
ratio
of total debt to total capital was 34.0 percent as of June 30, 2008, or 0.5
percentage points below the 34.5 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 14.8 times
for the nine months ended June 30, 2008, compared with 12.0 times for the same
period in the prior year, primarily due to higher earnings during the first
nine
months of fiscal 2008.
Cash
and
equivalents increased by $1,049 million during the nine months ended June 30,
2008. During the second quarter of 2008, the Company issued $400 million of
5.250% notes due October 2018, under a shelf registration statement filed with
the Securities and Exchange Commission. Cash flow provided by operating
activities of $1,998 million was up $224 million compared with $1,774 million
in
the prior year period. Operating cash flow, the net increase in short-term
borrowings of $774 million and the $400 million of proceeds from long-term
debt
were used primarily to fund purchases of treasury stock of $727 million, pay
dividends of $708 million, fund capital expenditures of $461 million and fund
purchases of businesses of $412 million. For the nine months ended June 30,
2008, free cash flow of $1,537 million (operating cash flow of $1,998 million
less capital expenditures of $461 million) was up 14 percent from free cash
flow
of $1,354 million (operating cash flow of $1,774 million less capital
expenditures of $420 million) for the same period in the prior year, primarily
due to higher earnings in the nine months ended June 30, 2008, as compared
to
the prior year period.
The
Company is in a strong financial position, with total assets of $22 billion
and
stockholders' equity of $10
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
Effective
October 1, 2007, the Company adopted the recognition and disclosure provisions
of Financial Accounting Standards Board Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (FIN 48).
FIN 48 addresses the accounting for uncertain tax positions that a company
has
taken or expects to take on a tax return. See note 9 for further discussion
on
the impact of FIN 48 on the financial statements.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141(R), “Business Combinations” (FAS 141(R)).
FAS 141(R) requires assets acquired and liabilities assumed to be measured
at
fair value as of the acquisition date, acquisition related costs incurred prior
to the acquisition to be expensed and contractual contingencies to be recognized
at fair value as of the acquisition date. The Company is in the process of
analyzing the impact of FAS 141(R), which is effective for fiscal years
beginning after December 15, 2008.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (FAS 160). FAS
160 requires an entity to separately disclose non-controlling interests as
a
separate component of equity in the balance sheet and clearly identify on the
face of the income statement net income related to non-controlling interests.
The Company is in the process of analyzing the impact of FAS 160, which is
effective for fiscal years beginning after December 15, 2008.
In
March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 161, “Disclosures about Derivative Instruments and
Hedging Activities” (FAS 161). FAS 161 requires additional derivative
disclosures, including objectives and strategies for using derivatives, fair
value amounts of and gains and losses on derivative instruments, and
credit-risk-related contingent features in derivative agreements. The Company
is
in the process of analyzing the impact of FAS 161, which is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. The Company does not expect the adoption of FAS 161 to have
a
material impact on the financial statements.
OUTLOOK
Based
on
the Company’s performance in the first nine months of fiscal 2008 and continued
order strength, underlying sales growth for fiscal 2008 is expected to be
approximately 6 percent, which excludes approximately 6 percent favorable impact
from foreign currency translation, acquisitions and divestitures. Reported
sales
are expected to be approximately $25 billion, an increase of 11 percent to
13
percent over fiscal 2007 sales of $22.1 billion, excluding discontinued
operations. Based on this level of sales, the Company expects to generate 2008
earnings per share from continuing operations of $3.05 to $3.10 compared with
$2.65 per share in fiscal 2007 and return on total capital of approximately
21
percent. Rationalization of operations expense is estimated to be approximately
$90 million for fiscal 2008. Operating cash flow is targeted at approximately
$3.3 billion and capital expenditures are estimated to be $0.8 billion for
2008.
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 statements to reflect later developments. These
risks and uncertainties 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, 2007, 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, 2008, 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.
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
There
was
no change in the Company's internal control over financial reporting during
the
quarter ended June 30, 2008, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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
2008
|
|
|
1,760
|
|
|
|
|
|
1,760
|
|
|
3,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
2008
|
|
|
1,320
|
|
|
|
|
|
1,320
|
|
|
82,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
2008
|
|
|
1,540
|
|
|
$53.63
|
|
|
1,540
|
|
|
81,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,620
|
|
|
$53.91
|
|
|
4,620
|
|
|
81,002
|
|
The
Company’s Board of Directors authorized the repurchase of up to 80 million
shares under the November 2001 program, as adjusted for the Company’s December
2006 two-for-one stock split. The Board of Directors approved a new
program on May 6, 2008, for the repurchase of up to 80 million additional
shares. The maximum number of shares that may yet be purchased under these
programs was 81.0 million as of June 30, 2008.
Item
6. Exhibits.
(a) Exhibits
(Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation
S-K).
|
10.1 |
Amendment
to the Emerson Electric Co. 2006 Incentive Shares Plan
|
|
10.2 |
Summary
of Changes to Compensation Arrangements with Non-Management
Directors
|
|
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.
|
EMERSON
ELECTRIC CO. AND SUBSIDIARIES
|
FORM
10-Q
|
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 6, 2008
|
|
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)
|
INDEX
TO EXHIBITS
Exhibits
are listed by numbers corresponding to the Exhibit Table of Item 601 in
Regulation S-K.
Exhibit No.
|
|
Exhibit
|
|
|
|
10.1
|
|
Amendment
to the Emerson Electric Co. 2006 Incentive Shares Plan
|
|
|
|
10.2
|
|
Summary
of Changes to Compensation Arrangements with Non-Management
Directors
|
|
|
|
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.
|