Emerson 2004 Annual Report Download - page 27

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Acquisitions and Divestitures
In the third quarter of 2003, the Company sold the Dura-Line fiber-optic conduit business, which is reported
as discontinued operations. In the first quarter of 2002, the Company acquired Avansys Power Co., Ltd.,
a provider of network power products to the telecommunications industry in China, for approximately
$750 million in cash. The Company also divested the Chromalox industrial heating solutions business and
the Daniel Valve business. Also in 2002, Emerson exchanged its ENI semiconductor equipment division for
an equity interest in MKS Instruments, Inc. of 12 million common shares.
Costs and Expenses
Cost of sales for fiscal 2003 and 2002 were $9.1 billion and $8.9 billion, respectively, an increase of 1 percent.
Cost of sales as a percent of net sales was 64.9 percent in 2003, compared with 65.0 percent in 2002. The
improvement in the gross profit margin in 2003 was primarily the result of the Company’s cost reduction
efforts and productivity improvement programs despite a negative impact of 0.2 points from higher
pension expense.
Selling, general and administrative expenses were $2.9 billion in both 2003 and 2002. As a percent of net
sales, SG&A expenses were 21.0 percent and 21.1 percent in 2003 and 2002, respectively.
Research and development expense was $464 million in 2003, compared with $474 million in 2002. Research
and development as a percent of net sales was 3.3 percent in 2003 and 3.4 percent in 2002, reflecting
Emerson’s continuing investment in technology to improve the Company’s competitive position.
Other deductions, net were $318 million in 2003, compared with $82 million in 2002. Fiscal 2003 increased
$236 million over the prior year due to $207 million of lower divestiture gains in 2003 and a 2003 goodwill
impairment charge of $54 million related to the businesses in the network power segment. Fiscal 2002
included gains of $85 million and $42 million from the divestitures of the Chromalox and Daniel Valve
businesses, respectively, and a $93 million gain from the ENI transaction. Also included in other deductions,
net were ongoing costs for the rationalization of operations of $141 million and $190 million in 2003 and
2002, respectively. Higher levels of rationalization in 2002 related to cost structure improvements in response
to the difficult economic environment. See notes 4 and 5 for further details regarding other deductions, net
and rationalization costs.
Interest expense, net of $231 million in 2003 was down slightly from the prior year of $233 million. During
2003, the Company issued $750 million of long-term debt to decrease commercial paper borrowings.
Income Taxes
Income taxes were $401 million and $514 million in 2003 and 2002, respectively. The 2003 effective tax rate
was 28.3 percent, compared with 32.3 percent in 2002. In 2003, income taxes and the effective tax rate were
reduced $68 million and 4 percent, respectively, by the tax benefits from the restructuring of the ETP business
net of the impairment charge. Excluding these items, the rate is more indicative of the ongoing tax rate and is
comparable to the effective tax rate in the prior year.
Earnings From Continuing Operations
Earnings from continuing operations were $1.0 billion, or $2.41 per share, in 2003, down from $1.1 billion,
or $2.56 per share, in 2002. Lower income taxes in 2003 and $159 million of higher profits contributed by
the business segments were more than offset by lower divestiture gains in 2003 and the impairment charge,
discussed above in other deductions, net.
Cumulative Effect of Change in Accounting Principle
Effective October 1, 2001, Emerson adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” The
transitional goodwill impairment recognized upon adoption of FAS 142 is a required change in accounting
principle, and the cumulative effect of adopting this standard resulted in a non-cash, after-tax decrease to
2002 net earnings and diluted earnings per share of $938 million and $2.23, respectively. Also as a result
of the adoption of this standard, goodwill is no longer subject to amortization. See note 6 for additional
information.
Annual dividends increased to a
record $1.60 per share in 2004,
representing the 48th consecutive
year of increases.
Dividends Per Share
99 04030201
$1.80
$0.90
$1.35
00
$0.45