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Emerson Electric Company 10-K 2009 Exhibit 13
FINANCIAL
REVIEW
Report of Management
The Company’s management is responsible
for the integrity and accuracy of the financial statements. Management believes
that the financial statements for the three years ended September 30, 2009 have
been prepared in conformity with U.S. generally accepted accounting principles
appropriate in the circumstances. In preparing the financial statements,
management makes informed judgments and estimates where necessary to reflect the
expected effects of events and transactions that have not been completed. The
Company’s disclosure controls and procedures ensure that material information
required to be disclosed is recorded, processed, summarized and communicated to
management and reported within the required time periods.
In meeting its responsibility for the
reliability of the financial statements, management relies on a system of
internal accounting control. This system is designed to provide reasonable
assurance that assets are safeguarded and transactions are executed in
accordance with management’s authorization and recorded properly to permit the
preparation of financial statements in accordance with U.S. generally accepted
accounting principles. The design of this system recognizes that errors or
irregularities may occur and that estimates and judgments are required to assess
the relative cost and expected benefits of the controls. Management believes
that the Company’s internal accounting controls provide reasonable assurance
that errors or irregularities that could be material to the financial statements
are prevented or would be detected within a timely period.
The Audit Committee of the Board of
Directors, which is composed solely of independent Directors, is responsible for
overseeing the Company’s financial reporting process. The Audit Committee meets
with management and the Company’s internal auditors periodically to review the
work of each and to monitor the discharge by each of its responsibilities. The
Audit Committee also meets periodically with the independent auditors, who have
free access to the Audit Committee and the Board of Directors, to discuss the
quality and acceptability of the Company’s financial reporting, internal
controls, as well as non-audit-related services.
The independent auditors are engaged to
express an opinion on the Company’s consolidated financial statements and on the
Company’s internal control over financial reporting. Their opinions are based on
procedures that they believe to be sufficient to provide reasonable assurance
that the financial statements contain no material errors and that the Company’s
internal controls are effective.
Management’s Report on Internal Control
Over Financial Reporting
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the Company. With the participation of the Chief Executive Officer
and the Chief Financial Officer, management conducted an evaluation of the
effectiveness of internal control over financial reporting based on the
framework and the criteria established in Internal
Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
has concluded that internal control over financial reporting was effective as of
September 30, 2009.
The
Company’s auditor, KPMG LLP, an independent registered public accounting firm,
has issued an audit report on the effectiveness of the Company’s internal
control over financial reporting.
Emerson
Annual Report 2009
10
Results of
Operations
Years ended September 30 | Dollars in
millions, except per share amounts
OVERVIEW
Fiscal 2009 was a very challenging year
as a significant decline in gross fixed investment worldwide, particularly for
capital goods and nonresidential construction, as well as housing and consumer
spending, adversely impacted sales and earnings for all of the Company’s
business segments. These declines began in the third quarter of fiscal 2008,
continued throughout 2009, and the Company anticipates continued weakness
stemming from these factors for much of fiscal 2010. Given the difficult
economic environment, the Company took aggressive actions and incurred
significant costs to rationalize its businesses to the level appropriate for the
conditions and to improve its cost structure in preparation for the ultimate
recovery. Fiscal 2009 net sales were $20.9 billion, a decrease of 16 percent;
earnings from continuing operations and earnings from continuing operations per
share were $1.7 billion and $2.27, decreases of 30 percent and 27 percent,
respectively; net earnings and net earnings per share were $1.7 billion and
$2.27, decreases of 29 percent and 26 percent, respectively, from fiscal 2008.
Underlying sales declined across all major geographic regions, particularly in
the United States and Europe. Sales in Asia were down slightly but included a 2
percent increase in China. Unfavorable foreign currency translation also
negatively impacted results for the year due to the strength of the U.S. dollar
as compared with 2008. Sales and earnings for fiscal 2009 decreased versus prior
year in all segments, reflecting lower spending and investment by both
businesses and consumers as confidence declined and remained low. Although
operating in a challenging environment, the Company was able to achieve gross
margin consistent with prior year due to the benefits of rationalization actions
and other productivity improvements, as well as higher pricing in certain
markets and materials cost containment. Earnings margins decreased primarily
because of deleverage on lower sales volume and higher rationalization expense.
Despite the economic environment, Emerson’s financial position remains strong
and in 2009 the Company generated cash near the same level as the prior year
with operating cash flow of $3.1 billion and free cash flow (operating cash flow
less capital expenditures) of $2.6 billion. Emerson maintains a conservative
financial structure to provide the strength and flexibility necessary to achieve
its strategic objectives.
NET SALES
Net sales for fiscal 2009 were $20.9
billion, a decrease of approximately $3.9 billion, or 16 percent, from fiscal
2008. Sales declined across all segments as the Company’s businesses continued
to be impacted by the broad slowdown in consumer and capital goods businesses.
Consolidated results reflect an approximate 13 percent ($3,090 million) decrease
in underlying sales (which exclude acquisitions, divestitures and foreign
currency translation), a 4 percent ($933 million) unfavorable impact from
foreign currency translation and a 1 percent ($131 million) contribution from
acquisitions. The underlying sales decrease for fiscal 2009 included an 18
percent decrease in the United States and a 9 percent decrease internationally,
composed of Europe (16 percent), Latin America (7 percent), Middle East/Africa
(6 percent), Asia (2 percent) and Canada (6 percent). The Company estimates that
the underlying sales decline primarily reflects an approximate 14 percent
decline from volume and an approximate 1 percent impact from higher
pricing.
Emerson
Annual Report 2009
11
Net sales for fiscal 2008 were $24.8
billion, an increase of approximately $2.7 billion, or 12 percent, over fiscal
2007, with international sales leading overall growth. Consolidated sales
results reflect increases in four of the Company’s five business segments with
an approximate 7 percent ($1,523 million) increase in underlying sales, a 4
percent ($809 million) favorable impact from foreign currency translation and a
1 percent ($344 million) contribution from acquisitions, net of divestitures.
The Network Power, Process Management and Industrial Automation businesses drove
sales growth, while the Appliance and Tools and Climate Technologies businesses
were impacted by the U.S. consumer spending slowdown. The underlying sales
increase for fiscal 2008 was driven by an international sales increase of more
than 10 percent plus a 3 percent increase in the United States. The
international sales increase primarily reflects growth in Asia (17 percent),
Latin America (18 percent), Middle East/Africa (17 percent) and Europe (3
percent). The Company estimates that the underlying sales growth of
approximately 7 percent primarily reflects an approximate 6 percent gain from
volume, aided by penetration gains, and an approximate 1 percent impact from
higher selling prices.
INTERNATIONAL SALES
Emerson is a global business for which
international sales have grown over the years and now constitute 55 percent
of the Company’s total
sales. The Company expects this trend to continue due to faster economic
growth in emerging markets
in Asia, Latin America and Middle East/Africa.
International destination sales,
including U.S. exports, decreased approximately 14 percent, to $11.6 billion in
2009. U.S. exports of $1,290 million were down 16 percent compared with 2008,
reflecting declines in Industrial Automation, Network Power, Climate
Technologies and Process Management as these businesses were impacted by lower
volume and the stronger U.S. dollar. International subsidiary sales, including
shipments to the United States, were $10.3 billion in 2009, down 14 percent from
2008. Excluding the 7 percent net unfavorable impact from acquisitions and
foreign currency translation, international subsidiary sales decreased 7 percent
compared with 2008. Underlying destination sales declined 16 percent in Europe;
2 percent overall in Asia, including 2 percent growth in China; 7 percent in
Latin America and 6 percent in Middle East/Africa.
International destination sales,
including U.S. exports, increased approximately 20 percent, to $13.5 billion in
2008, representing 54 percent of the Company’s total sales. U.S. exports of
$1,537 million were up 20 percent compared with 2007, reflecting strong growth
in the Network Power, Process Management and Climate Technologies businesses,
aided by the weaker U.S. dollar as well as the benefit from acquisitions.
Underlying destination sales grew 17 percent in Asia during the year, driven
mainly by 21 percent growth in China, while sales grew 18 percent in Latin
America, 17 percent in Middle East/Africa and 3 percent in Europe. International
subsidiary sales, including shipments to the United States, were $12.0 billion
in 2008, up 19 percent over 2007. Excluding the 8 percent net favorable impact
from acquisitions, divestitures and foreign currency translation, international
subsidiary sales increased 11 percent compared with 2007.
ACQUISITIONS AND
DIVESTITURES
The Company acquired Roxar ASA, Trident
Powercraft Private Limited, System Plast S.p.A. and several smaller businesses
during 2009. Roxar supplies measurement solutions and software for reservoir
production optimization, enhanced oil and gas recovery and flow assurance.
Trident Power manufactures and supplies power generating alternators and
associated products. System Plast manufactures engineered modular belts and
custom conveyer components for food processing and packaging industries. Total
cash paid for these businesses was approximately $776 million (net of cash
acquired of approximately $31 million and debt assumed of approximately $230
million). Annualized sales for acquired businesses were approximately $530
million in 2009.
Emerson
Annual Report 2009
12
During the first quarter of fiscal 2010,
the Company entered into a definitive agreement and commenced a tender offer to
acquire Avocent Corporation for approximately $1.2 billion in cash. Avocent is a
leader in delivering information technology operations management solutions that
reduce operating costs, simplify management and increase availability of
critical information technology environments via integrated, centralized
software. Avocent products complement the Network Power segment’s power systems,
energy management and precision cooling solutions. The transaction is expected
to be completed in December 2009 and is subject to acceptance of the tender
offer by a majority of Avocent shareholders, customary closing conditions and
regulatory approvals.
The Company acquired Motorola Inc.’s
Embedded Computing business and several smaller businesses during 2008. Embedded
Computing provides communication platforms and enabling software used by
manufacturers of equipment for telecommunications, medical imaging, defense and
aerospace and industrial automation markets. Total cash paid for these
businesses (net of cash and equivalents acquired of approximately $2 million)
was approximately $561 million.
In the first quarter of fiscal 2008, the
Company divested its Brooks Instrument flow meters and flow controls unit, which
had sales for the first quarter of 2008 of $21 million and net earnings of $1
million. Proceeds from the sale of Brooks were $100 million, resulting in a
pretax gain of $63 million
($42 million after-tax). The net gain on divestiture and Brooks’ results
of operations for fiscal
2008 are classified as discontinued operations; prior year results of operations
were inconsequential. Also in fiscal 2008, the Company received approximately
$101 million from the divestiture of the European appliance motor and pump
business, resulting in a loss of $92 million. The European appliance motor and
pump business had total annual sales of $453 million and $441 million in 2008
and 2007, respectively and
net earnings, excluding the divestiture loss, of $7 million in both years. The
divestiture loss and results of operations are classified as discontinued
operations.
COST OF SALES
Costs of sales for fiscal 2009 and 2008
were $13.2 billion and $15.7 billion, respectively, while gross profit was $7.7
billion in 2009 compared with $9.1 billion for 2008. The decrease in gross
profit primarily reflects lower sales volume and unfavorable foreign currency
translation. As a percent of net sales, cost of sales was 63.2 percent for both
2009 and 2008, resulting in consistent gross margin of 36.8 percent for both
years. The level gross margin compared with 2008 reflects benefits realized from
rationalization actions and other productivity improvements, materials cost
containment and selective price increases, which were offset by deleverage on
lower sales volume, inventory liquidation and unfavorable product mix. In
addition, due to the economic slowdown the Company’s inventory obsolescence
allowance increased approximately $40 million in 2009.
Costs of sales for fiscal 2007 were
$14.1 billion and cost of sales as a percent of net sales was 63.6 percent.
Gross profit was $8.1 billion for 2007, resulting in a gross profit margin of
36.4 percent. The increase in the gross profit margin in 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, together with the benefits received from commodity hedging of
approximately $42 million, were more than offset by higher raw material and wage
costs. The increase in the gross profit amount in 2008 primarily reflects higher
sales volume and foreign currency translation, as well as
acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, general and administrative
(SG&A) expenses for 2009 were $4.5 billion, or 21.7 percent of net sales,
compared with $5.1 billion, or 20.3 percent of net sales for 2008. The $0.6
billion decrease in SG&A was primarily due to lower sales volume, benefits
from rationalization, favorable foreign currency translation and a $28 million
decrease in incentive stock compensation expense (see Note 14). The increase in
SG&A as a percent of sales was primarily the result of deleverage on lower
sales volume, partially offset by cost reduction actions and the lower incentive
stock compensation expense.
SG&A expenses for 2008 were $5.1
billion, or 20.3 percent of net sales, compared with $4.6 billion, or 20.6
percent of net sales for 2007. The increase of approximately $0.5 billion in
2008 was primarily due to an increase in variable costs on higher sales volume,
acquisitions and foreign currency translation, partially offset by a $103
million decrease in incentive stock compensation (see Note 14). The reduction in
SG&A as a percent of sales was primarily the result of lower incentive stock
compensation, leverage on higher sales and benefits realized from cost reduction
actions, particularly in
the Process Management and Network Power businesses.
Emerson
Annual Report 2009
13
OTHER DEDUCTIONS,
NET
Other deductions, net were $530 million
in 2009, a $227 million increase from 2008 that primarily reflects $203 million
of incremental rationalization expense. The Company continuously makes
investments in its operations to improve efficiency and remain competitive on a
global basis, and in 2009 incurred costs of $295 million for actions to
rationalize its businesses to the level appropriate for current economic
conditions and improve its cost structure in preparation for the ultimate
economic recovery. The 2009 increase also includes higher intangible asset
amortization of $27 million due to acquisitions, lower nonrecurring gains of $25
million and other items. Gains in 2009 included the sale of an asset for which
the Company received $41 million and recognized a gain of $25 million ($17
million after-tax). See Notes 4 and 5 for further details regarding other
deductions, net and rationalization costs.
Other deductions, net of $303 million in
2008 represented a $128
million increase from $175 million in 2007. The increase in 2008 versus 2007
includes a $31 million impairment charge related to the North American appliance
control business, higher intangible asset amortization of $18 million due to
acquisitions, incremental rationalization expense of $17 million, a $12 million
charge for in-process research and development in connection with the Embedded
Computing acquisition, $12 million of incremental foreign currency transaction
losses, lower one-time gains of $10 million and other items. In 2008, the
Company received $54 million and recognized a gain of $39 million ($20 million
after-tax) on the sale of its equity investment in Industrial Motion Control
Holdings, a manufacturer of motion control components for automation equipment,
and also recorded a gain of $18 million related to the sale of a facility.
INTEREST EXPENSE,
NET
Interest expense, net was $220 million,
$188 million and $228 million in 2009, 2008 and 2007, respectively. The increase
of $32 million in 2009 was due to lower interest income, driven by lower
worldwide interest rates, and higher average long-term borrowings reflecting a
change in debt mix. The $40 million decrease in interest expense in 2008 was
primarily due to lower interest rates and lower average
borrowings.
INCOME TAXES
Income taxes were $693 million, $1,137
million and $964 million for 2009, 2008 and 2007, respectively, resulting in
effective tax rates of 29 percent, 32 percent and 31 percent. The lower
effective tax rate in 2009 reflects the Company recognizing a benefit from a net
operating loss carryforward at a foreign subsidiary, a credit related to the
repatriation of certain non-U.S. earnings, and a change in the mix of regional
pretax income as operating results declined significantly in the United States
and Europe while declining only slightly in Asia.
EARNINGS FROM CONTINUING
OPERATIONS
Earnings from continuing operations were
$1.7 billion for 2009, while earnings from continuing operations per share were
$2.27, decreases of 30 percent and 27 percent, respectively, compared with $2.5
billion and $3.11 for 2008. The earnings decline is due to decreases in all of
the Company’s business segments and reflects lower sales volume, increased
rationalization expense and unfavorable product mix, partially offset by savings
from cost reduction actions and materials cost containment. Earnings declined
$373 million in Industrial Automation, $238 million in Process Management, $227
million in Network Power, $162 million in Appliance and Tools and $154 million
in Climate Technologies. Earnings per share results reflect the benefit of share
repurchases. See the Business Segments discussion that follows for additional
information.
Earnings from continuing operations and
earnings from continuing operations per share for 2008 increased 15 percent and
17 percent, respectively, compared with $2.1 billion and $2.65 for 2007,
reflecting increases in four of the five business segments, including $240
million in Process Management, $149 million in Network Power and $62 million in
Industrial Automation. The increased earnings reflect leverage from higher
sales, benefits realized from cost containment and higher selling prices,
partially offset by higher raw material and wage costs.
Emerson
Annual Report 2009
14
DISCONTINUED
OPERATIONS
There were no discontinued operations in
fiscal 2009. The $42 million loss from discontinued operations ($0.05 per share)
in fiscal 2008 included the $42 million gain on the divestiture of Brooks, the
$92 million loss related to the divestiture of the European appliance motor and
pump business, and $8 million of combined earnings related to these
divestitures. Fiscal 2007 income from discontinued operations related to the
European appliance motor and pump business was $7 million, or $0.01 per share.
See previous discussion under Acquisitions and Divestitures and Note 3 for
additional information regarding prior year discontinued
operations.
NET EARNINGS, RETURN ON EQUITY AND
RETURN ON TOTAL CAPITAL
Net earnings were $1.7 billion and
earnings per share were $2.27 for 2009, decreases of 29 percent and 26 percent,
respectively, compared with 2008, due to the same factors discussed previously.
Net earnings as a percent of net sales were 8.2 percent and 9.7 percent in 2009
and 2008. Return on stockholders’ equity (net earnings divided by average
stockholders’ equity) was 19.5 percent in 2009 compared with 27.0 percent in
2008. Return on total capital was 16.2 percent in 2009 compared with 21.8
percent in 2008, and is computed as net earnings excluding after-tax net
interest expense, divided by average stockholders’ equity plus short- and
long-term debt less cash and short-term investments.
Net earnings were $2.4 billion and
earnings per share were $3.06 for 2008, increases of 13 percent and 15 percent,
respectively, compared with net earnings and earnings per share of $2.1 billion
and $2.66, respectively, in 2007. Net earnings as a percent of net sales were
9.7 percent in 2008 and 2007. Net earnings in 2008 included the net loss from
discontinued operations discussed previously. Return on stockholders’ equity
reached 27.0 percent in 2008 compared with 25.2 percent in 2007, and the Company
realized a 2008 return on total capital of 21.8 percent compared with 20.1
percent in 2007.
Business Segments
Following is a summary of segment
results for fiscal 2009 compared with fiscal 2008, and also 2008 compared with
fiscal 2007. The Company defines segment earnings as earnings before interest
and taxes.
PROCESS MANAGEMENT
2009
vs. 2008 - Process
Management segment sales were $6.2 billion in 2009, a decrease of $419 million,
or 6 percent, from 2008. Nearly all of the Process businesses reported lower
sales and earnings, particularly for the measurement and flow business resulting
primarily from weakness in the chemical, refining and marine markets. Sales were
down slightly for the valves business while the power and water business had a
small sales increase. The segment sales decrease reflects a 2 percent decline in
underlying sales on lower volume, a 6 percent ($373 million) unfavorable impact
from foreign currency translation and a 2 percent ($94 million) favorable impact
primarily from the Roxar acquisition. Regionally, sales declined 6 percent in
the United States while international sales were flat, as growth in Asia (7
percent) offset decreases in Europe (4 percent), Middle East/Africa (3 percent),
Canada (6 percent) and Latin America (2 percent). Earnings decreased 18 percent
to $1,068 million from $1,306 million in the prior year, reflecting the lower
sales volume, negative product mix, higher rationalization costs of $43 million
and a $12 million negative impact from foreign currency transactions related to
the strengthening of the U.S. dollar in 2009 versus weakening in the prior year,
partially offset by savings from cost reduction actions. The margin decrease
primarily reflects unfavorable product mix (approximately 2 points) and
deleverage on lower volume, which were partially offset by productivity
improvements. Price increases and materials cost containment were substantially
offset by higher wage costs.
Emerson
Annual Report 2009
15
2008
vs. 2007 - Process
Management segment sales were $6.7 billion in 2008, an increase of $953 million,
or 17 percent, over 2007, reflecting higher volume and favorable foreign
currency translation. These results reflect the Company’s continued investment
in next-generation technologies and expanding the global reach of the solutions
and services businesses, as well as the strong worldwide growth in energy and
power markets. All of the Process businesses reported higher revenues, with
sales particularly strong for the valves, measurement and systems businesses.
Underlying sales increased approximately 14 percent, reflecting 13 percent from
volume, which includes an estimated 3 percent from penetration gains, and 1
percent from higher pricing. Foreign currency translation had a 4
percent ($225 million)
favorable impact and the Brooks divestiture, net of acquisitions, had an
unfavorable impact of 1 percent ($35 million). The underlying sales increase
reflects growth in all geographic regions compared with the prior year,
including Asia (21 percent), the United States (12 percent), Europe (7 percent),
Latin America (22 percent), Canada (13 percent) and Middle East/Africa (14
percent). Earnings increased 23 percent to $1,306 million from $1,066 million in
the prior year, reflecting higher sales volume, savings from cost reductions and
materials cost containment and the benefit from foreign currency translation.
The margin increase primarily reflects leverage on the higher volume, price
increases and cost containment actions, which were partially offset by higher
wage costs, unfavorable product mix and strategic investments to support the
growth of these businesses.
INDUSTRIAL
AUTOMATION
2009
vs. 2008 - Industrial
Automation segment sales decreased 24 percent to $3.7 billion in 2009, compared
with $4.9 billion in 2008. Sales results reflect steep declines for all
businesses due to the slowdown in the capital goods markets. Underlying sales
declined 22 percent, unfavorable foreign currency translation subtracted 4
percent ($236 million) and the System Plast and Trident Power acquisitions
contributed 2 percent ($97 million). Underlying sales decreased 25 percent in
the United States and 19 percent internationally, including decreases in Europe
(22 percent) and Asia (15 percent). Underlying sales reflect a 23 percent
decline in volume and an approximate 1 percent positive impact from higher
selling prices. Earnings decreased 51 percent to $354 million for 2009, compared
with $727 million in 2008, primarily reflecting the lower sales volume. The
margin decrease of 5.4 percentage points reflects deleverage on the lower sales
volume (approximately 4 points) with significant inventory reduction
(approximately 1 point) and higher rationalization costs of $28 million,
partially offset by savings from cost reduction actions and price
increases.
2008
vs. 2007 - Industrial
Automation sales increased 14 percent to $4.9 billion in 2008, compared with
$4.3 billion in 2007. Sales grew in all lines of business and in nearly all
geographic regions, reflecting strength in the power generating alternator,
fluid automation, electronic drives, electrical distribution and materials
joining businesses. Underlying sales growth was 7 percent, including 8 percent
in the United States and 6 percent internationally, and favorable foreign
currency translation added 7 percent ($278 million). The U.S. growth
particularly reflects the alternator business, which was driven by increased
demand for backup generators. The international sales growth primarily reflects
increases in Europe (4 percent) and Asia (17 percent). The underlying growth
reflects 6 percent from volume, as well as an approximate 1 percent positive
impact from price. Earnings increased 9 percent to $727 million for 2008,
compared with $665 million in 2007, reflecting higher sales volume and the
benefit from foreign currency translation. The margin decrease reflects a lower
payment received by the power transmission business for dumping duties under the
U.S. Continued Dumping and Subsidy Offset Act. The Company received only $3
million in 2008 versus $24 million received in fiscal 2007. The Company does not
expect to receive any significant payments in the future. Margin was positively
impacted by leverage on the higher sales volume and benefits from prior cost
reduction efforts. Higher sales prices were substantially offset by higher
material and wage costs, as well as unfavorable product mix, which negatively
impacted margin.
NETWORK POWER
2009
vs. 2008 - Sales in the
Network Power segment decreased 15 percent to $5.4 billion in 2009 compared with
$6.3 billion in 2008, reflecting declines in the inbound power, uninterruptible
power supply, precision cooling and embedded power businesses due to the
continued slowdown in customers’ capital spending, partially offset by growth in
the China network power systems business. Underlying sales declined 11 percent,
foreign currency
translation had a 3 percent ($191 million) unfavorable impact and a decline in
sales for the Embedding Computing acquisition had a 1 percent ($101 million)
unfavorable impact. The underlying sales decrease reflects a 10 percent decline
in volume and a 1 percent impact from lower selling prices. Geographically,
underlying sales reflect decreases in the United States (19 percent), Europe (22
percent) and Latin America (3 percent), which were partially offset by increases
in Asia (1 percent), as the Company continues to penetrate the Chinese market,
Canada (9 percent), and Middle East/Africa (6 percent). Earnings decreased 29
percent to $567 million, compared with $794 million in 2008, primarily due to
lower sales volume and higher rationalization costs of $90 million (particularly
for the integration of Embedded Computing), partially offset by solid earnings
growth for the energy systems and China network power businesses. The segment
margin decrease reflects deleverage on lower sales volume and a negative impact
from acquisitions, partially offset by savings from cost reduction actions which
contributed to margin improvement for both the energy systems and China network
power systems businesses. Materials cost containment was partially offset by
lower selling prices and increased wage costs.
Emerson
Annual Report 2009
16
2008
vs. 2007 - Sales in the
Network Power segment increased 23 percent to $6.3 billion in 2008 compared with
$5.2 billion in 2007. The increase in sales reflects continued growth in the
precision cooling, global services, uninterruptible power supply, inbound power
and power systems businesses. Underlying sales grew 11 percent, while the
Embedded Computing and Stratos acquisitions contributed approximately 9 percent
($449 million) and foreign currency translation had a 3 percent ($156 million)
favorable impact. The underlying sales increase of 11 percent reflects higher
volume, which includes an approximate 4 percent impact from penetration gains.
Geographically, underlying sales reflect a 17 percent increase in Asia, an 8
percent increase in the United States, a 14 percent increase in Latin America, a
55 percent increase in Middle East/Africa and a 2 percent increase in Europe.
The U.S. growth reflects continued demand for data room construction,
non-residential computer equipment and telecommunications power.
Internationally, the Company continues to penetrate the Chinese, Indian and
other Asian markets. Earnings increased 23 percent, or $149 million, to $794
million, compared with $645 million in 2007, primarily due to higher sales
volume and savings from cost reduction actions. The margin increase reflects
these savings and leverage on the higher volume, partially offset by a nearly 1
percentage point dilution from the Embedded Computing acquisition and higher
wage costs.
CLIMATE TECHNOLOGIES
2009
vs. 2008 - Climate
Technologies reported sales of $3.2 billion for 2009, a 16 percent decrease from
2008, reflecting declines across all businesses, especially for compressors,
temperature sensors and heater controls. Underlying sales decreased
approximately 15 percent, foreign currency translation had a 2 percent ($92
million) unfavorable impact and acquisitions added 1 percent ($38 million). The
underlying sales decrease reflects an approximate 17 percent decline from lower
volume and an estimated 2 percent positive impact from higher selling prices.
Sales declines in the compressor business reflect the worldwide slowdown in
air-conditioning and refrigeration markets, particularly in the United States
and Asia. The underlying sales decrease reflects a 15 percent decrease in both
the United States and internationally, including declines of 18 percent in Asia,
10 percent in Europe and 15 percent in Latin America. Earnings decreased 28
percent to $397 million compared with $551 million in 2008, primarily due to
lower sales volume, higher rationalization costs of $26 million, a $15 million
commercial litigation charge and a $12 million negative impact from foreign
currency transactions related to the strengthening of the U.S. dollar in 2009
versus weakening in the prior year, partially offset by savings from cost
reduction actions. The margin decrease reflects deleverage on lower sales volume
(approximately 2 points), as well as higher materials costs, which were only
partially offset by price increases.
2008
vs. 2007 - Climate
Technologies reported sales of $3.8 billion for 2008, representing a 6 percent
increase over 2007, as underlying sales increased approximately 3 percent and
foreign currency translation had a 3 percent ($110 million) favorable impact.
The underlying sales increase of 3 percent reflects an approximate 2 percent
positive contribution from price increases and an approximate 1 percent gain
from higher volume, which includes a 2 percent impact from penetration gains.
The underlying sales increase was led by the water-heater controls business,
which primarily reflects penetration in the U.S. water-heater market. The
compressors business grew modestly, primarily in the refrigeration and the U.S.
and Asian air-conditioning markets; while the temperature sensors and flow
controls businesses declined. The growth in refrigeration was driven by the
transport container market. The underlying sales increase reflects a 2 percent
increase in the United States and 4 percent growth internationally, with Asia
growing 9 percent and Europe declining 6 percent. Earnings increased 2 percent
to $551 million in 2008 compared with $538 million in 2007. The margin was
diluted as higher sales prices were more than offset by material inflation and
higher restructuring costs of $13 million.
Emerson
Annual Report 2009
17
APPLIANCE AND TOOLS
2009
vs. 2008 - Sales for the
Appliance and Tools segment were $3.0 billion in 2009, a 22 percent decrease
from 2008. Declines in the storage, tools and appliance businesses were due to
the continued downturn in the U.S. residential and nonresidential markets, while
declines in the motors and appliance and solutions businesses reflect major
customers reducing inventory and production levels due to the difficult economic
conditions. The sales decrease reflects a 21 percent decline in underlying sales
and an unfavorable impact from foreign currency translation of 1 percent ($41
million). Underlying sales
in the United States were down 21 percent while underlying international sales decreased
17 percent. The underlying sales decrease reflects an estimated 23 percent
decline in volume and an approximate 2 percent positive impact from pricing.
Earnings for 2009 were $365 million, a 31 percent decrease from 2008, reflecting
deleverage on lower sales volume and higher rationalization costs of $16
million, which were partially offset by savings from cost reductions, higher
selling prices and a 2008 impairment charge of $31 million in the appliance
control business (see Note 4).
2008
vs. 2007 - Sales in the
Appliance and Tools segment were $3.9 billion in 2008, a 4 percent decrease from
2007. Results for 2008 were mixed, reflecting the different sectors served by
these businesses. The professional tools, commercial storage and hermetic motor
businesses showed increases, while the residential storage, appliance
components, and appliance and commercial motors businesses declined. The growth
in the professional tools business was driven by U.S. and Latin American
markets. The declines in the residential storage and appliance-related
businesses primarily reflect the downturn in the U.S. consumer
appliance and residential end-markets, as the U.S. markets represented more than
80 percent of sales for this segment. Underlying sales in the United States were
down 6 percent from the prior year, while international underlying sales
increased 13 percent in total. The decrease in total sales reflects a 3 percent
decline in underlying sales, an unfavorable impact from divestitures of 2
percent ($65 million) and a favorable impact from foreign currency translation
of 1 percent ($40 million). The underlying sales decrease reflects an estimated
7 percent decline in volume and an approximate 4 percent positive impact from
higher pricing. Earnings for 2008 were $527 million, a 7 percent decrease from
2007. Earnings decreased because of deleverage on lower sales volume and the $31
million impairment charge in the appliance control business (see Note 4), which
was partially offset by savings from cost reduction actions. The increase in
sales prices was substantially offset by higher material (copper and other
commodities) and wage costs. The 2007 sale of the consumer hand tools product
line favorably impacted the margin.
Financial Position, Capital Resources
and Liquidity
The Company continues to generate
substantial cash from operations, is in a strong financial position with total
assets of $20 billion and stockholders’ equity of $9 billion and has the
resources available for reinvestment in existing businesses, strategic
acquisitions and managing its capital structure on a short- and long-term
basis.
Emerson
Annual Report 2009
18
CASH FLOW
Emerson generated operating cash flow of
$3.1 billion in 2009, a 6 percent decrease from 2008 due to lower earnings and
increased pension funding, partially offset by significant savings from
continued improvements in operating working capital management. The cash
operating working capital reduction of $620 million included accounts receivable
and inventory liquidations of $1,011 million and $580 million, respectively,
partially offset by an accounts payable reduction of $709 million. Given the
significant operating working capital reduction in 2009, the Company expects
operating cash flow to decline in fiscal 2010. Operating cash flow was $3.3
billion in 2008, a 9 percent increase from 2007, driven by higher net earnings.
At September 30, 2009, operating working capital as a percent of sales was 8.2
percent, compared with 8.9 percent and 8.5 percent in 2008 and 2007,
respectively. Pension contributions were $303 million, $135 million and $136
million in 2009, 2008 and 2007, respectively.
Free cash flow (operating cash flow less
capital expenditures) was $2.6 billion in both 2009 and 2008, compared with $2.3
billion in 2007. The 10 percent increase in free cash flow in 2008 compared with
2007 reflects the increase in operating cash flow, partially offset by higher
capital spending. Capital expenditures were $531 million, $714 million and $681
million in 2009, 2008 and 2007, respectively. The decrease in capital
expenditures during 2009 compared with the prior year was primarily due to the
overall decline in worldwide business, while the increase in 2008 compared with
2007 was primarily due to capacity expansion in the Process Management and
Industrial Automation segments and construction of a corporate data center. In
2010, the Company is targeting capital spending of approximately $500 million.
Net cash paid in connection with acquisitions was $776 million, $561 million and
$295 million in 2009, 2008 and 2007, respectively.
Dividends were $998 million ($1.32 per
share, up 10 percent) in 2009, compared with $940 million ($1.20 per share) in
2008 and $837 million ($1.05 per share) in 2007. In November 2009, the Board of
Directors voted to increase the quarterly cash dividend 1.5 percent to an
annualized rate of $1.34 per share. In 2008, the Board of Directors approved a
program for the repurchase of up to 80 million common shares to augment an
existing 2002 plan. In 2009, 21.0 million shares were repurchased under the
fiscal 2008 authorization; in 2008, 22.4 million shares were repurchased under
the fiscal 2002 and 2008 authorizations; and in 2007, 18.9 million shares were
repurchased under the 2002 authorization. 51.4 million shares remain available
for repurchase under the 2008 authorization and zero remain available under the
2002 authorization. Purchases of Emerson common stock totaled $695 million,
$1,128 million and $849 million in 2009, 2008 and 2007, respectively, at an
average price paid per share of $33.09, $50.31 and $44.98,
respectively.
LEVERAGE/CAPITALIZATION
Total debt, which includes short-term
borrowings and current maturities of long-term debt, was $4.6 billion, $4.5
billion and $3.8 billion for 2009, 2008 and 2007, respectively. During 2009, the
Company issued $250 million of 4.125% notes due April 2015, $250 million of
5.00% notes due April 2019, $250 million of 6.125% notes due April 2039 and $500
million of 4.875% notes due October 2019, and repaid $175 million of 5% notes
and $250 million of 5.85% notes that had matured. In November 2009, the Company
issued $300 million of 4.25% notes due November 2020 and $300 million of 5.25%
notes due November 2039. During 2008, the Company issued $400 million of 5.25%
notes due October 2018 and repaid $250 million of 5.5% notes that had matured.
During 2007, the Company issued $250 million of 5.125% notes due December 2016
and $250 million of 5.375% notes due October 2017.
The total debt-to-capital ratio was 34.8
percent at year end 2009, compared with 33.1 percent for 2008 and 30.1 percent
for 2007. At September 30, 2009, net debt (total debt less cash and short-term
investments) was 25.7 percent of net capital, compared with 22.7 percent in 2008
and 23.6 percent in 2007. The operating cash flow-to-debt ratio was 67.5
percent, 72.9 percent and 79.9 percent in 2009, 2008 and 2007, respectively. The
Company’s interest coverage ratio (earnings before income taxes plus interest
expense, divided by interest expense) was 10.9 times in 2009, compared with 15.7
times and 12.9 times in 2008 and 2007. The decrease in the interest coverage
ratio from 2008 to 2009 was primarily due to lower earnings and the increase
from 2007 to 2008 reflects higher earnings and lower interest rates. See Notes
3, 8 and 9 for additional information. The Company’s strong financial position
supports long-term debt ratings of A2 by Moody’s Investors Service and A by
Standard and Poor’s. The Company anticipates no change in credit rating due to the Avocent
acquisition discussed in Note 3.
Emerson
Annual Report 2009
19
The Company has a universal shelf
registration statement on file with the U.S. Securities and Exchange Commission
(SEC) under which it can issue debt securities, preferred stock, common stock,
warrants, share purchase contracts and share purchase units without a
predetermined limit. Securities can be sold in one or more separate offerings
with the size, price and terms to be determined at the time of
sale.
At year end 2009, the Company
maintained, but has not drawn upon, a $2.8 billion, five-year, revolving backup
credit facility that expires in April 2011 to support short-term borrowings. The
credit facility contains no financial covenants and is not subject to
termination based on a change in credit ratings or a material adverse change.
The Company expects to renew the backup credit facility in
2010.
Although credit markets in the U.S.,
including the commercial paper market, have stabilized, there remains a risk of
volatility and illiquidity that could affect the Company’s ability to access
those markets. However, despite the adverse market conditions over the past
year, the Company has thus far been able to readily meet all its funding needs
and currently believes that sufficient funds will be available to meet the
Company’s needs in the foreseeable future through existing resources, ongoing
operations, short- and long-term debt or backup credit
lines.
CONTRACTUAL
OBLIGATIONS
At September 30, 2009, the Company’s
contractual obligations, including estimated payments due by period, are as
follows (dollars in millions):
Purchase obligations consist primarily
of inventory purchases made in the normal course of business to meet operational
requirements. The above table does not include $2.3 billion of other noncurrent
liabilities recorded in the
balance sheet and summarized in Note 17, which consist primarily of retirement
and postretirement plan liabilities and deferred income taxes (including
unrecognized tax benefits), because it is not certain when these amounts will
become due. See Notes 10, 11 and 13 for additional
information.
FINANCIAL
INSTRUMENTS
The Company is exposed to market risk
related to changes in interest rates, commodity prices and foreign currency
exchange rates, and selectively uses derivative financial instruments, including
forwards, swaps and purchased options, to manage these risks. The Company does
not hold derivatives for trading purposes. The value of market risk sensitive
derivative and other financial instruments is subject to change as a result of
movements in market rates and prices. Sensitivity analysis is one technique used
to evaluate the impact of these movements. Based on a hypothetical 10 percent
increase in interest rates, 10 percent decrease in commodity prices or 10
percent weakening in the U.S. dollar across all currencies, the potential losses
in future earnings, fair value and cash flows are immaterial. This method has
limitations; for example, a weaker U.S. dollar would benefit future earnings
through favorable translation of non-U.S. operating results, and lower commodity
prices would benefit future earnings through lower cost of sales. See Notes 1,
7, 8 and 9.
Emerson
Annual Report 2009
20
Critical Accounting
Policies
Preparation of the Company’s financial
statements requires management to make judgments, assumptions and estimates
regarding uncertainties that affect reported revenue, expenses, assets,
liabilities and stockholders’ equity. Note 1 describes the significant
accounting policies used in preparation of the Consolidated Financial
Statements. The most significant areas where management judgments and estimates
impact the primary financial statements are described below. Actual results in
these areas could differ materially from management’s estimates under different
assumptions or conditions.
REVENUE RECOGNITION
The Company recognizes nearly all of its
revenues through the sale of manufactured products and records the sale when
products are shipped or delivered and title passes to the customer with
collection reasonably assured. In certain instances, revenue is recognized on
the percentage-of-completion method, when services are rendered, or in
accordance with FASB Accounting Standards Codification (ASC) Subtopic 985-605,
Software: Revenue Recognition. Sales sometimes involve delivering multiple
items, including services such as installation. In these instances, the revenue
assigned to each item is based on that item’s objectively determined fair value,
and revenue is recognized individually for delivered items only if the delivered
items have value to the customer on a stand-alone basis, and the performance of
the undelivered items is probable and substantially in the Company’s
control or the undelivered
items are inconsequential or perfunctory. Management believes that
all relevant criteria and
conditions are considered when recognizing sales.
INVENTORIES
Inventories are stated at the lower of
cost or market. The majority of inventory values are based on standard costs
that approximate average costs, while the remainder are principally valued on a
first-in, first-out basis. Standard costs are revised at the beginning of each
fiscal year. The effects of resetting standards and operating variances incurred
during each period are allocated between inventories and cost of sales. The
Company’s divisions review inventory for obsolescence, make appropriate
provisions and dispose of obsolete inventory on a regular basis. Various factors
are considered in these reviews, including sales history and recent trends,
industry conditions and general economic conditions.
LONG-LIVED ASSETS
Long-lived assets, which include
property, plant and equipment, goodwill and identifiable intangible assets are
reviewed for impairment whenever events or changes in business circumstances
indicate an impairment may exist. If the Company determines that the carrying
value of the long-lived asset may not be recoverable, a permanent impairment
charge is recorded for the amount by which the carrying value of the long-lived
asset exceeds its fair value. Reporting units are also reviewed for possible
goodwill impairment at least annually, in the fourth quarter, by comparing the
fair value of each unit to its carrying value. Fair value is generally measured
based on a discounted future cash flow method using a discount rate judged by
management to be commensurate with the applicable risk. Estimates of future
sales and operating results, and therefore cash flows, as well as discount
rates, are subject to change depending on the economic environment, including
such factors as the general level of interest rates in the credit markets,
expected equity market returns and volatility of markets served, particularly if
the current recessionary economic environment continues for an extended period
of time.
At the end of fiscal 2009, Emerson’s
total market value based on its exchange traded stock price was approximately
$30 billion and stockholders’ equity was $8.6 billion. There are two units in
the Network Power segment with $367 million of goodwill, including recent
acquisitions, where estimated fair value exceeds carrying value by approximately
7 percent. Assumptions used in determining value include successful execution of
business plans, completion of integration and restructuring actions, and
economic recovery in served markets, primarily network communications and
connectivity. There are two units in the Appliance and Tools segment with $249
million of goodwill, where estimated fair value exceeds carrying value by 35
percent and assumes execution of business plan and recovery in residential and
construction-related markets. Management believes the estimates of future cash
flows and fair values are reasonable; however, changes in estimates due to
variance from assumptions could materially affect the
evaluations.
In 2008, the slowdown in consumer
appliance and residential end-markets over the prior two years, along with
strategic decisions in connection with two businesses, resulted in a $31 million
impairment charge in the North American appliance control business and a $92
million loss on the divestiture of the European appliance motor and pump
business. See Notes 1, 3, 4 and 6.
RETIREMENT PLANS
The Company continues to focus on a
prudent long-term investment strategy for its pension-related assets, and the
calculation of defined benefit plan expense and obligations are dependent on
assumptions made regarding these assets. These assumptions include the discount
rate, rate of annual compensation increases and expected annual return on plan
assets. In accordance with U.S. generally accepted accounting principles, actual
results that differ from the assumptions are accumulated and amortized in future
periods. While management believes that the assumptions used are appropriate,
differences versus actual experience or changes in assumptions may affect the
Company’s retirement plan obligations and future expense.
Emerson
Annual Report 2009
21
As of September 30, 2009, U.S. and
non-U.S. retirement plans were underfunded by $380 million and $230 million,
respectively, with the increase in under-funding primarily due to a decline in
the discount rate for U.S. plans from 6.5 percent in 2008 to 5.5 percent in
2009, and the decline in asset values during fiscal 2009. Deferred actuarial
losses, which will be recognized in earnings in future years, were $1,692
million as of September 30, 2009. The Company contributed $303 million to
defined benefit plans in 2009 and expects to contribute approximately $250
million in 2010. Defined benefit pension plan expense for fiscal 2010 is
expected to be approximately $130 million, versus $94 million in 2009. See Notes
10 and 11.
INCOME TAXES
Income tax expense and deferred tax
assets and liabilities reflect management’s assessment of future taxes expected
to be paid on items reflected in the financial statements. Uncertainty exists
regarding tax positions taken in previously filed tax returns still under
examination and positions expected to be taken in future returns. Deferred tax
assets and liabilities arise because of temporary differences between the
consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit
carryforwards. Deferred income taxes are measured using enacted tax rates in
effect for the year in which the temporary differences are expected to be
recovered or settled. The impact on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. Generally, no provision is made for U.S. income taxes on the undistributed
earnings of non-U.S. subsidiaries, as these earnings are considered permanently
invested or otherwise indefinitely retained for continuing international
operations. Determination of the amount of taxes that might be paid on these
undistributed earnings if eventually remitted is not practicable. See Note
13.
NEW ACCOUNTING
PRONOUNCEMENTS
Effective October 1, 2009, the Company
adopted ASC 805, Business Combinations (formerly FAS No. 141(R), “Business
Combinations”). ASC 805 requires assets acquired and liabilities assumed to be
measured at fair value as of the acquisition date, all acquisition costs to be
expensed as incurred and contractual contingencies to be recognized at fair
value as of the acquisition date. The impact of adoption, if any, will depend on
acquisitions completed in the future.
Effective October 1, 2009, the Company
adopted updates to ASC 810, Consolidation (formerly FAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”). The updated portion of ASC 810
requires an entity to separately disclose noncontrolling 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 noncontrolling interests. Adoption is not
expected to have a material impact on the Company’s financial
statements.
Effective October 1, 2009, the Company
adopted updates to ASC 260, Earnings per Share (formerly FASB Staff Position No.
EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities”). The updated portion of ASC 260
clarifies whether instruments granted in share-based payment transactions should
be included in the computation of EPS using the two-class method prior to
vesting. Adoption is not expected to have a material impact on the Company’s
financial statements.
In December 2008, the FASB issued Staff
Position No. FAS 132 (R)-1, “Employers’ Disclosures about Postretirement Benefit
Plan Assets” (now part of ASC 715, Compensation - Retirement Benefits). This
portion of ASC 715 is effective for fiscal 2010 annual disclosure, and expands
disclosure about an entity’s investment policies and strategies for assets held
by defined benefit pension or postretirement plans, including information
regarding major categories of plan assets, inputs and valuation techniques used
to measure the fair value of assets, and significant concentrations of risk
within the plans. Adoption is not expected to have a material impact on the
Company’s financial statements.
Emerson
Annual Report 2009
22
CONSOLIDATED STATEMENTS OF
EARNINGS
EMERSON ELECTRIC CO. &
SUBSIDIARIES
Years ended September 30 | Dollars in
millions, except per share amounts
See accompanying Notes to Consolidated
Financial Statements.
Emerson
Annual Report 2009
23
CONSOLIDATED BALANCE
SHEETS
EMERSON ELECTRIC CO. &
SUBSIDIARIES
September 30 | Dollars in millions,
except per share amounts
See accompanying Notes to Consolidated
Financial Statements.
Emerson
Annual Report 2009
24
Emerson
Annual Report 2009
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
EMERSON ELECTRIC CO. &
SUBSIDIARIES
Years ended September 30 | Dollars in
millions, except per share amounts
See accompanying Notes to Consolidated
Financial Statements.
Emerson
Annual Report 2009
26
CONSOLIDATED STATEMENTS OF CASH
FLOWS
EMERSON ELECTRIC CO. &
SUBSIDIARIES
Years ended September 30 | Dollars in
millions
See accompanying Notes to Consolidated
Financial Statements.
Emerson
Annual Report 2009
27
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
EMERSON ELECTRIC CO. &
SUBSIDIARIES
Years ended September 30 | Dollars in
millions, except per share amounts or where noted
(1) Summary of Significant
Accounting Policies
FINANCIAL STATEMENT
PRESENTATION
The preparation of the financial
statements in conformity with U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect
reported amounts and related disclosures, and actual results could differ from those
estimates. The Company has evaluated subsequent events through November
23, 2009. Certain prior year amounts have
been reclassified to conform to the current year presentation. Operating results
of the European appliance motor and pump business are classified as discontinued
operations for 2008 and earlier periods, while the operating results of Brooks
Instruments are classified as discontinued operations for 2008
only.
Emerson adopted the FASB Accounting
Standards Codification (ASC) in the fourth quarter of fiscal 2009. The
Codification reorganized and consolidated current U.S. GAAP topically and is now
the single authoritative source for GAAP. The adoption had no effect on the
Company’s operations.
PRINCIPLES OF
CONSOLIDATION
The Consolidated Financial Statements
include the accounts of the Company and its controlled affiliates. Intercompany
transactions, profits and balances are eliminated in consolidation. Investments
of 20 percent to 50 percent of the voting shares of other entities are accounted
for by the equity method. Investments in publicly-traded companies of less than
20 percent are carried at fair value, with changes in fair value reflected in
accumulated other comprehensive income. Investments in nonpublicly-traded
companies of less than 20 percent are carried at cost.
FOREIGN CURRENCY
TRANSLATION
The functional currency for most of the
Company’s non-U.S. subsidiaries is the local currency. Adjustments resulting from translating local
currency financial statements into U.S. dollars are reflected in accumulated
other comprehensive income.
FAIR VALUE
MEASUREMENTS
Effective October 1, 2008, the Company
adopted the recognition and disclosure provisions of FAS No. 157, “Fair Value
Measurements” (now part of ASC 820, Fair Value Measurements and Disclosures),
which established a formal hierarchy and framework for measuring fair value, and
expanded disclosure about fair value measurements and the reliability of
valuation inputs. Under ASC 820, measurement assumes the transaction to sell an
asset or transfer a liability occurs in the principal or at least the most
advantageous market for that asset or liability. Within the hierarchy, Level 1
instruments use observable market prices for the identical item in active
markets and have the most reliable valuations. Level 2 instruments are valued
through broker/dealer quotation or through market-observable inputs for similar
items in active markets, including forward and spot prices, interest rates and
volatilities. Level 3 instruments are valued using inputs not observable in an
active market, such as company-developed future cash flow estimates, and are
considered the least reliable. Valuations for all of Emerson’s financial
instruments fall within Level 2. The fair value of the Company’s long-term debt
is estimated using current interest rates and pricing from financial
institutions and other market sources for debt with similar maturities and
characteristics. Due to the high credit quality of Emerson and its
counterparties, the impact of adopting ASC 820 was inconsequential. ASC 820 is
effective for nonfinancial assets and liabilities, including goodwill and
certain other intangible and long-lived assets, beginning in fiscal
2010.
If credit ratings on the Company’s debt
fall below pre-established levels, derivatives counterparties can require
immediate full collateralization on instruments in net liability positions.
Similarly, Emerson can demand full collateralization should any of the Company’s
counterparties’ credit rating fall below certain thresholds. For derivatives in
asset positions, no credit loss is anticipated as the counterparties to these
agreements are companies with high credit ratings. The Company has master
netting arrangements in place with its counterparties that allow the offsetting
of derivative-related amounts receivable and payable when settlement occurs in
the same period. Accordingly, counterparty balances are netted in the
consolidated balance sheet, with the net values of commodity contracts currently
reported in current assets and net values of foreign currency contracts reported
in accrued expenses. See Note 7.
CASH EQUIVALENTS
Cash equivalents consist of highly
liquid investments with original maturities of three months or
less.
INVENTORIES
Inventories are stated at the lower of
cost or market. The majority of inventory values are based on standard costs
that approximate average costs, while the remainder are principally valued on a
first-in, first-out basis. Standard costs are revised at the beginning of each
fiscal year. The effects of resetting standards and operating variances incurred
during each period are allocated between inventories and cost of
sales.
Emerson
Annual Report 2009
28
PROPERTY, PLANT AND
EQUIPMENT
The Company records investments in land,
buildings, and machinery and equipment at cost. Depreciation is computed
principally using the straight-line method over estimated service lives, which
for principal assets are 30 to 40 years for buildings and 8 to 12 years for
machinery and equipment. Long-lived tangible assets are reviewed for impairment
whenever events or changes in business circumstances indicate the carrying value
of the assets may not be recoverable. Impairment losses are recognized based on
fair value if expected future undiscounted cash flows of the related assets are
less than their carrying values.
GOODWILL AND OTHER INTANGIBLE
ASSETS
Assets and liabilities acquired in
business combinations are accounted for using the purchase method and recorded
at their respective fair values. Substantially all goodwill is assigned to the
reporting unit that acquires a business. A reporting unit is an operating
segment as defined in ASC 280, Segment Reporting or a business one level below
an operating segment if discrete financial information for that business unit is
prepared and regularly reviewed by the segment manager. The Company conducts
impairment tests of goodwill on an annual basis and between annual tests if an
event occurs or circumstances change that indicates the fair value of a
reporting unit may be less than its carrying value. If a reporting unit’s
carrying amount exceeds its estimated fair value, goodwill impairment is
recognized to the extent that recorded goodwill exceeds the implied fair value
of that goodwill. Fair values of reporting units are Level 3 measures and are
developed under an income approach that discounts estimated future cash flows
using risk-adjusted interest rates.
All of the Company’s identifiable
intangible assets are subject to amortization. Identifiable intangibles consist
of intellectual property such as patents and trademarks, customer relationships
and capitalized software, and are amortized on a straight-line basis over the
estimated useful life. These intangibles are also subject to evaluation for
potential impairment if an event occurs or circumstances change that indicate
the carrying amount may not be recoverable. See Note 6.
WARRANTY
Product warranties vary by product lines
and are competitive for the markets in which the Company operates. Warranty
generally extends for a period of one to two years from the date of sale or
installation. Provisions for warranty are determined primarily based on
historical warranty cost as a percentage of sales or a fixed amount per unit
sold based on failure rates, adjusted for specific problems that may arise.
Product warranty expense is less than 1 percent of
sales.
REVENUE RECOGNITION
The Company recognizes nearly all of its
revenues through the sale of manufactured products and records the sale when
products are shipped or delivered, title passes to the customer and collection
is reasonably assured. In certain instances, revenue is recognized on the
percentage-of-completion method, when services are rendered, or in accordance
with ASC 985-605, Software: Revenue Recognition. Product sales sometimes also
include services such as installation. In these instances, revenue is assigned
to each item based on that item’s objectively determined fair value, with
revenue recognized individually for delivered items only if the delivered items
have value to the customer on a stand-alone basis and performance of the
undelivered items is probable and substantially in the Company’s control, or if
the undelivered items are inconsequential or perfunctory. Management believes
that all relevant criteria and conditions are considered when recognizing
sales.
DERIVATIVES AND
HEDGING
In the normal course of business, the
Company is exposed to changes in interest rates, foreign currency exchange rates
and commodity prices due to its worldwide presence and diverse business profile.
As part of the Company’s risk management strategy, derivative instruments are
selectively used in an effort to minimize the impact of these exposures. Foreign
exchange forwards and options are utilized to hedge foreign currency exposures
impacting sales or cost of sales transactions, firm commitments and the fair
value of assets and liabilities, while swap and option contracts are used to
minimize the effect of commodity price fluctuations on the cost of sales. All
derivatives are explicitly associated with specific underlying exposures and the
Company does not hold derivatives for trading or speculative purposes. Emerson’s
foreign currency exposures primarily relate to transactions denominated in
euros, Mexican pesos, Canadian dollars and Swedish kroner. Primary commodity
exposures are price fluctuations on forecasted purchases of copper, aluminum and
related products. The duration of hedge positions is generally two years or less
and amounts currently hedged beyond 18 months are not
significant.
All derivatives are accounted for under
ASC 815, Derivatives and Hedging, and are recognized on the balance sheet at
fair value. For derivatives hedging variability in future cash flows, the
effective portion of any gain or loss is deferred in stockholders’ equity and
recognized in earnings only when the underlying hedged transaction occurs. The
majority of the Company’s derivatives that are designated as hedges and qualify
for deferral accounting are cash flow hedges. For derivatives hedging the fair
value of existing assets or liabilities, both the gain or loss on the derivative
and the offsetting loss or gain on the hedged item are recognized in earnings
each period. Currency fluctuations on non-U.S. dollar obligations that have been
designated as hedges of non-U.S. dollar net asset exposures are reported in
stockholders’ equity. To the extent that any hedge is not fully effective at
offsetting cash flow or fair value changes in the underlying hedged item, there
could be a net earnings impact. The Company also uses derivatives to hedge
economic exposures that do not receive deferral accounting under ASC 815. The
underlying exposures for these hedges relate primarily to purchases of
commodity-based components used in the Company’s manufacturing processes, and
the revaluation of certain foreign-currency-denominated assets and
liabilities. Gains or losses from the ineffective portion of any
hedge, as well as any gains or losses on derivative instruments not designated
as hedges, are recognized in the income statement
immediately.
Emerson
Annual Report 2009
29
The majority of hedging gains and losses
deferred as of September 30, 2009 are generally expected to be recognized over
the next 12 months as the underlying forecasted transactions occur. The amounts
ultimately recognized may differ, favorably or unfavorably, from those disclosed
because until the positions are settled they remain subject to ongoing market
price fluctuations. Derivatives receiving deferral accounting are highly
effective, no amounts were excluded from the assessment of hedge effectiveness,
and hedge ineffectiveness was immaterial in 2009, 2008 and 2007, including gains
or losses on derivatives that were discontinued because forecasted transactions
were no longer expected to occur. Effective January 1, 2009, the Company adopted
the expanded disclosure provisions of ASC 815.
INCOME TAXES
No provision has been made for U.S.
income taxes on approximately $4.3 billion of undistributed earnings of non-U.S.
subsidiaries as of September 30, 2009. These earnings are considered permanently
invested or otherwise indefinitely retained for continuing international
operations. Determination of the amount of taxes that might be paid on these
undistributed earnings if eventually remitted is not
practicable.
COMPREHENSIVE INCOME
Comprehensive income is primarily
composed of net earnings plus changes in foreign currency translation, pension
and postretirement adjustments and the effective portion of changes in the fair
value of cash flow hedges. Accumulated other comprehensive income, net of tax,
consists of foreign currency translation credits of $594 and $698, pension and
postretirement charges of $1,096 and $528 and cash flow hedges and other credits
of $6 and charges of $29, respectively, at September 30, 2009 and
2008.
RETIREMENT PLANS
Effective September 30, 2009, the
Company adopted the measurement provision of FAS 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans” (now part of ASC 715,
Compensation – Retirement Benefits). This provision requires employers to
measure defined benefit plan assets and obligations as of the Company’s fiscal
year end. The majority of the Company’s pension and postretirement plans
previously used a June 30 measurement date. To transition to the fiscal year-end
measurement date pursuant to ASC 715, the Company measured its defined benefit
plan assets and obligations as of September 30, 2009 and recorded a $14
after-tax adjustment to ending retained earnings. Previously, as of September
30, 2007, the Company adopted the recognition and disclosure provisions of ASC
715, which required employers to recognize the full funded status of defined
benefit pension and other postretirement plans in the balance sheet and to
recognize changes in the funded status in comprehensive income in the year they
occur. The incremental effect of adopting the recognition and disclosure
provisions was a reduction in other assets of $425, an increase in other
liabilities of $97 and an after-tax charge to stockholders’ equity of $329.
(2) Weighted Average Common
Shares
Basic earnings per common share consider
only the weighted average of common shares outstanding while diluted earnings
per common share consider the dilutive effects of stock options and incentive
shares. Options to purchase approximately 7.6 million, 3.6 million and 1.1
million shares of common stock were excluded from the computation of diluted
earnings per share in 2009, 2008 and 2007, respectively, because their effect
would have been antidilutive. Reconciliations of weighted average shares for
basic and diluted earnings per common share follow:
Emerson
Annual Report 2009
30
(3) Acquisitions and
Divestitures
The Company acquired Roxar ASA during
the third quarter of 2009, Trident Powercraft Private Limited during the second
quarter of 2009 and System Plast S.p.A. during the first quarter of 2009. Roxar
is a leading global supplier of measurement solutions and software for reservoir
production optimization, enhanced oil and gas recovery and flow assurance and is
included in the Process Management segment. Trident Power is a manufacturer and
supplier of power generating alternators and other products and is included in
the Industrial Automation segment. System Plast is a manufacturer of engineered
modular belts and custom conveyer components for the food processing and
packaging industries and is included in the Industrial Automation segment. In
addition to Roxar, Trident Power and System Plast, the Company acquired other
smaller businesses during 2009, mainly in the Climate Technologies, Appliance
and Tools and Process Management segments. Total cash paid for all businesses
was approximately $776 (net of cash acquired of approximately $31 and debt
assumed of approximately $230) and their annualized sales were approximately
$530. Goodwill of $541 ($34 of which is expected to be deductible for tax
purposes) and identifiable intangible assets (primarily customer relationships
and patents and technology) of $365, which have a weighted-average life of 12
years, were recognized from these transactions in 2009. Because valuations of
acquired assets and liabilities are in-process, purchase price allocations for
fiscal year 2009 acquisitions are subject to refinement.
During the first quarter of fiscal 2010,
the Company entered into a definitive agreement and commenced a tender offer to
acquire Avocent Corporation for approximately $1.2 billion in cash. Avocent is a
leader in delivering information technology operations management solutions that
reduce operating costs, simplify management and increase availability of
critical information technology environments via integrated, centralized
software. Avocent products complement the Network Power segment’s power systems,
energy management and precision cooling solutions. The transaction is expected
to be completed in December 2009 and is subject to acceptance of the tender
offer by a majority of Avocent shareholders, customary closing conditions and
regulatory approvals.
The Company acquired Motorola Inc.’s
Embedded Computing business during the first quarter of 2008. Embedded Computing
provides communication platforms and enabling software used by manufacturers of
equipment for telecommunications, medical imaging, defense and aerospace, and
industrial automation markets and is included in the Network Power segment. In
addition to Embedded Computing, the Company acquired several smaller businesses
during 2008, mainly in the Process Management and Network Power segments. Total
cash paid for these businesses was approximately $561 (net of cash acquired of
approximately $2) and their annualized sales were approximately $665. Goodwill
of $273 ($214 of which is expected to be deductible for tax purposes) and
identifiable intangible assets (primarily technology and customer relationships)
of $191, which have a weighted-average life of eight years, were recognized from
these transactions.
In the first quarter of 2008, the
Company divested the Brooks Instrument flow meters and flow controls unit, which
had sales for the first quarter of 2008 of $21 and net earnings of $1. Proceeds
from the sale of Brooks were $100, resulting in a pretax gain of $63 ($42
after-tax). The net gain on divestiture and Brooks’ results of operations for
fiscal 2008 are classified as discontinued operations; prior year results of
operations were inconsequential. This business was previously included in the
Process Management segment. Also in fiscal 2008, the Company received
approximately $101 from the divestiture of the European appliance motor and pump
business, resulting in a loss of $92, which included goodwill impairment of $83
and an additional loss of $9. The European appliance motor and pump business had
total annual sales of $453 and $441 and net earnings, excluding the divestiture
loss, of $7 and $7 in 2008 and 2007, respectively. The divestiture loss and
results of operations are classified as discontinued operations. This business
was previously included in the Appliance and Tools segment.
In fiscal 2007, the Company acquired
Damcos Holding AS during the second quarter and Stratos International, Inc.
during the fourth quarter. Damcos supplies valve remote control systems and tank
monitoring equipment to the marine and shipbuilding industries and is included
in the Process Management segment. Stratos is a designer and manufacturer of
radio-frequency and microwave interconnect products and is included in the
Network Power segment. In addition to Damcos and Stratos, the Company acquired
several smaller businesses during 2007, mainly in the Process Management and
Appliance and Tools segments. Total cash paid for these businesses was
approximately $295 (net of cash acquired of approximately $40 and debt assumed
of approximately $56) and their annualized sales were $240. Goodwill of $189
(none of which is expected to be deductible for tax purposes) and identifiable
intangible assets (primarily technology and customer relationships) of $106,
which have a weighted-average life of nine years, were recognized from these
transactions.
The results of operations of the
businesses discussed above have been included in the Company’s consolidated
results of operations since the respective dates of acquisition or until the
respective dates of divestiture.
Emerson
Annual Report 2009
31
(4) Other Deductions,
Net
Other deductions, net are summarized as
follows:
Other is composed of several items that
are individually immaterial, including minority interest expense, foreign
currency gains and losses, bad debt expense, equity investment income and
losses, as well as one-time items such as litigation and disputed matters,
insurance recoveries and interest refunds. Other decreased in 2009 primarily
because of a $31 impairment charge in 2008 and $27 of lower minority interest
expense, partially offset by $30 of incremental losses on foreign currency
exchange transactions.
Other increased from 2007 to 2008
primarily because of an incremental $12 loss on foreign currency exchange
transactions, an approximate $12 charge to write off in-process research and
development in connection with the Embedded Computing acquisition and a $31
goodwill impairment charge related to the North American appliance control
business due to a slow economic environment for consumer appliance and
residential end-markets and a major customer’s strategy to diversify suppliers
and internalize the production of electronic controls. Subsequent to the
impairment, these operations were restructured and integrated with the North
American appliance motors business.
Gains, net for 2009 includes the sale of
an asset in which the Company received $41 and recognized a gain of $25 ($17
after-tax). In fiscal 2008,
the Company received $54 and recognized a gain of $39 ($20 after-tax) on the
sale of an equity
investment in Industrial Motion Control Holdings, a manufacturer of motion
control components for automation equipment, and also recorded a pretax gain of
$18 related to the sale of a facility. Gains, net for 2007 includes a pretax
gain of approximately $32 related to the sale of the Company’s remaining 4.5
million shares of MKS Instruments and a pretax gain of approximately $24 for
payments received under the U.S. Continued Dumping and Subsidy Offset
Act.
(5) Rationalization of
Operations
Rationalization of operations expense
reflects costs associated with the Company’s efforts to continuously improve
operational efficiency and expand globally, in order to remain competitive on a
worldwide basis. Given the difficult economic environment, the Company incurred
costs of $295 in 2009 for actions to rationalize its businesses to the level
appropriate for current economic conditions and to improve its cost structure in
preparation for the ultimate recovery. Rationalization expenses result from
numerous individual actions implemented across the Company’s various operating
divisions on an ongoing basis and include costs for moving facilities to
best-cost locations, starting up plants after relocation or geographic expansion
to serve local markets, exiting certain product lines, curtailing/downsizing
operations because of changing economic conditions and other costs resulting
from asset redeployment decisions. The change in the liability for the
rationalization of operations during the years ended September 30 follows.
Shutdown costs include severance, benefits, stay bonuses, lease and contract
terminations and asset write-downs. In addition to the costs of moving fixed
assets, start-up and moving costs include employee training and relocation.
Vacant facility costs include security, maintenance, utility and other
costs.
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