Emerson 2005 Annual Report Download

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ications revolution...Resources for the world...Business without borders...Ene
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ion...Resources for the world...Business without borders...Energy efficiency..
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ons revolution...Resources for the world...Business without borders...Energy
WHAT’S NE XT
Emerson
World Headquarters
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, MO 63136
www.gotoemerson.com 2 0 0 5 A N N U A L R E P O R T

Table of contents

  • Page 1
    ......Energy y...Communications revolution...Reso world...Business without borders...En ergy efficiency...Communications rev olution...Resources for the world...Bus s without borders...Energy efficiency. mmunications revolution...Resources ld...Business without borders...Energy 2005 ANNUAL REPORT

  • Page 2
    ... of steadily growing dividends, Emerson delivers exceptional total return to shareholders. Earnings and Dividends Per Common Share Earnings per share (EPS): 10 percent compound annual growth rate Dividends: 11 percent compound annual growth rate EPS excluding the $63 million tax expense ($0.15 per...

  • Page 3
    ..., air conditioning, and refrigeration solutions. Network Power Providing reliable power with mission-critical backup systems, embedded power technology, and cooling equipment for data centers and telecommunications networks. manage through intelligent control systems and software, measurement...

  • Page 4
    ... with mechanical, electrical, and electronic motion control products, fluid automation, electrical distribution, and material-joining equipment. Appliance and Tools Organizing homes and businesses with storage solutions and delivering innovative appliance and professional tool technologies.

  • Page 5
    ... consecutive annual improvement. Emerson's commitment to generating returns for shareholders continues with 2005 marking the 49th consecutive year of increased dividends. Dividends in 2005 were $1.66 per share, and in November 2005 the board of directors increased the dividend to an annualized rate...

  • Page 6
    ...term returns for shareholders. Process Management and Industrial Automation purchased companies that bring complementary product offerings and expand Emerson's offering of key technologies to the industrial marketplace. Network Power acquired businesses that serve the telecom and data center markets...

  • Page 7
    ... day. Emerson is well-positioned to play a critical role and grow the company as these trends continue to shape our world. We conduct business without borders, deliver energy efficiency, tap the opportunities of the communications revolution, and help customers provide resources for the world. The...

  • Page 8
    ... see how we support infrastructure investments in these regions by equipping electric power generation facilities with the latest innovation and technology. Emerson grows its leadership position in global markets by establishing strong manufacturing, engineering, sales, and service positions to meet...

  • Page 9

  • Page 10
    ... require that we deliver the best possible solution, whatever the project is and wherever it resides. For the Coyhaique project, we identified the best people and resources available and then united them for the customer." Claude Henry Emerson Industrial Automation A hydroelectric power station...

  • Page 11

  • Page 12
    ... the Emerson motors used inside the compressor, this program has been a true winner for Emerson and the industry. Additionally, Emerson Climate Technologies has developed the Intelligent StoreTM architecture, which gathers critical HVAC, refrigeration, and lighting system data for better management...

  • Page 13

  • Page 14
    ... superior products and strategies that support this dramatic change by providing benefits throughout the marketplace." Scott Barbour Emerson Climate Technologies In 2005 Emerson launched an improved generation of our industryD E TA I L S leading air-conditioning compressor technology, the Copeland...

  • Page 15

  • Page 16
    ..., data centers, and other businesses. In addition to supporting the infrastructure of the communications revolution, Emerson is also a participant. Emerson Process Management is pioneering a wireless environment for process control applications, a technology that could dramatically save businesses...

  • Page 17

  • Page 18
    ...data is on everyone's mind today, and our job is to provide businesses with an uninterrupted power supply, whatever the application. By keeping mission-critical systems up and running all the time, we're helping to ensure businesscritical continuity around the world." Bob Bauer Emerson Network Power...

  • Page 19

  • Page 20
    ... is there to support these customers, anywhere in the world, as they upgrade existing facilities or construct new ones. 10 EMERSON 2005 Emerson Process Management plays a critical role in the mining of nickel and cobalt in Western Australia. Emerson solutions like PlantWeb® architecture are at...

  • Page 21

  • Page 22
    ... operate more efficiently than ever before in these and other energyproducing applications." Dave Hunter Emerson Process Management Emerson Process Management is using the latest D E TA I L S digital plant technology to help extract valuable oil from a complex mixture of bitumen, sand, water, and...

  • Page 23

  • Page 24
    ... that the resources for the world are limited, and demand for those resources grows. And while it's a big planet, the world continues to get smaller as companies engage in business without borders. To fulfill Emerson's role as a member of the global community, we direct technology investments to...

  • Page 25
    ... for the company for nearly 30 years, who recently retired as president of Emerson, business leader over Emerson Network Power, and board member. We are grateful for Jim's contributions, which are highlighted on page 54. We also thank the shareholders and board of directors for their support and...

  • Page 26
    ... to support for and partnerships with numerous colleges, universities, and scholarships. Health and Human Services are fundamental to improving our way of life, and Emerson support ranges from international health organizations to research, hospitals, care centers, and hospices around the world. We...

  • Page 27
    Emerson's community support is broad-based and farreaching. Contributions range from the Special Olympics World Games, coming to China in 2007, to music scholarships at Michigan's Interlochen Arts Camp, benefiting youth across the United States.

  • Page 28
    ...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 internal auditors periodically to review the work of each and to...

  • Page 29
    ...previous rationalization actions. The Company continues to manage commodity cost inflation pressures through sourcing initiatives, productivity improvements and sales price. Emerson's financial position remains strong and the Company continues to generate substantial cash flow. Sales $17.0 $12.75...

  • Page 30
    ...during 2005. Total cash paid for these businesses (including assumed debt of approximately $100 million, which was repaid in October 2005) was approximately $466 million. During 2004, the Company acquired the North American outside plant and power systems business of Marconi Corporation PLC, as well...

  • Page 31
    ..., and higher sales prices, partially offset by higher raw material costs, higher wage and benefit costs, the tax expense related to the repatriation of foreign earnings, and other items. Process Management Industrial Automation Network Power Climate Technologies Appliance and Tools EMERSON 2005 19

  • Page 32
    ...particularly in the Network Power, Process Management and Climate Technologies businesses. The higher earnings also reflect increased volume and leverage from the higher sales, savings from cost reduction efforts, partially offset by lower sales prices and other items. The increase also reflects the...

  • Page 33
    ... by the power transmission business from dumping duties related to the Byrd Amendment in the current year, compared with a $2 million payment received in 2004, partially offset by a litigation settlement related to the electrical products business. Sales increases in most businesses drove a 13...

  • Page 34
    ... Management Industrial Automation Network Power Climate Technologies Appliance and Tools Network Power segment sales increased 23 percent to $3.3 billion in 2005 compared to $2.7 billion in 2004, reflecting acquisitions and continued demand for power systems and precision cooling products, as well...

  • Page 35
    ..., as well as decreased wholesaler exports from Europe due to the strong Euro. Sales results for 2005 were mixed across the businesses, with strong growth in U.S. air-conditioning compressors during the 3.0% fourth quarter driving the overall increase. The growth in the compressor business reflects...

  • Page 36
    ... the appliance motor and component businesses. Strong growth in the storage businesses primarily resulted from continued strength in new and existing home markets as reflected in U.S. residential investment in 2005, and increased demand at major retailers. Earnings of the Appliance and Tools segment...

  • Page 37
    .... The increase in capital expenditures during 2005 was primarily driven by unitary air-conditioning scroll compressor capacity expansion in the United States and Asia. In 2006, the Company is targeting capital spending of approximately 3 percent of net sales. Cash paid in connection with Emerson...

  • Page 38
    ... exposed to market risk related to changes in interest rates, copper and other commodity prices and European and other foreign currency exchange rates, and selectively uses derivative financial instruments, including forwards, swaps and purchased options, to manage these risks. The Company does not...

  • Page 39
    ...are subject to change due to the economic environment, including such factors as interest rates, expected market returns and volatility of markets served. For those businesses monitored by management for impairment, their fair value would have to be lower by more than 20 percent before an impairment...

  • Page 40
    ...2005, representing the 49th consecutive year of increases. New Accounting Pronouncements Effective October 1, 2002, Emerson adopted the fair value method provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and began expensing options granted...

  • Page 41
    Consolidated Statements of Earnings EMERSON ELECTRIC CO. AND SUBSIDIARIES Years ended September 30 (Dollars in millions except per share amounts) 2003 2004 2005 Net sales Costs and expenses: Cost of sales Selling, general and administrative expenses Other deductions, net Interest expense (net of ...

  • Page 42
    ... Balance Sheets EMERSON ELECTRIC CO. AND SUBSIDIARIES September 30 (Dollars in millions except per share amounts) ASSETS Current assets Cash and equivalents Receivables, less allowances of $78 in 2004 and $76 in 2005 Inventories: Finished products Raw materials and work in process Total inventories...

  • Page 43
    ...Short-term borrowings and current maturities of long-term debt Accounts payable Accrued expenses Income taxes Total current liabilities Long-term debt Other liabilities $ 2004 2005... cost of common stock in treasury, 57,248,459 shares in 2004 and 66,025,442 shares in 2005 Total stockholders' equity...

  • Page 44
    ...' Equity EMERSON ELECTRIC CO. AND SUBSIDIARIES Years ended September 30 (Dollars in millions except per share amounts) 2003 2004 2005 Common stock Additional paid-in capital Beginning balance Stock plans and other Ending balance Retained earnings Beginning balance Net earnings Cash dividends...

  • Page 45
    ... on long-term debt Net issuances (purchases) of treasury stock Dividends paid Net cash used in financing activities Effect of exchange rate changes on cash and equivalents Increase (decrease) in cash and equivalents Beginning cash and equivalents Ending cash and equivalents $ (1,232) 746 (17) 11...

  • Page 46
    ... be recoverable. Warranty The Company's product warranties vary by each of its product lines and are competitive for the markets in which it 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...

  • Page 47
    ... awards in each period. 2003 2004 2005 Net earnings, as reported Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net...

  • Page 48
    ... Management and Appliance and Tools segments. Total cash paid (including assumed debt of approximately $100, which was repaid in October 2005) and annualized sales for these businesses were approximately $466 and $430, respectively. Goodwill of $236 ($58 of which is expected to be deductible for tax...

  • Page 49
    ... 37 135 23 18 - 3 2 46 Rationalization of operations by segment is summarized as follows: 2003 2004 2005 Process Management Industrial Automation Network Power Climate Technologies Appliance and Tools Corporate Discontinued operations Total (a) (a) $ 36 20 39 20 36 (2) (8) $141 31 14 26 17 47...

  • Page 50
    ... and Europe. Network Power segment includes severance costs related to European power systems operations. Appliance and Tools segment includes plant closure and start-up and moving costs related to relocating certain industrial motor manufacturing primarily from the United States to Mexico and...

  • Page 51
    ... credit ratings. To efficiently manage interest costs, the Company utilizes interest rate swaps as cash flow hedges of variable rate debt or fair value hedges of fixed rate debt. Also as part of its hedging strategy, the Company utilizes purchased option and forward exchange contracts and commodity...

  • Page 52
    ...foreign earnings under the American Jobs Creation Act, the Company's non-U.S. subsidiaries had $500 committed bank credit facilities in various currencies, approximately $30 of which was unused at September 30, 2005. The higher weighted-average short-term borrowing interest rate at year end reflects...

  • Page 53
    ... 2004 2005 Projected benefit obligation, beginning Service cost Interest cost Actuarial loss (gain) Benefits paid Acquisitions/divestitures, net Foreign currency translation and other Projected benefit obligation, ending Fair value of plan assets, beginning Actual return on plan assets Employer...

  • Page 54
    ... be required to record an after-tax charge to equity of approximately $530. Effective for 2006, the Company adjusted the discount rate for the U.S. retirement plans to 5.25 percent and adjusted the expected long-term rate of return on plan assets to 8.0 percent. Defined benefit pension plan expense...

  • Page 55
    ...year 2013. A one-percentage-point increase or decrease in the assumed health care cost trend rate for each year would increase or decrease the obligation as of September 30, 2005, and the 2005 postretirement plan expense by less than 5 percent. The Company estimates that future benefit payments will...

  • Page 56
    ... 727 The federal corporate statutory rate is reconciled to the Company's effective income tax rate as follows: 2003 2004 2005 Federal corporate statutory rate State and local taxes, less federal tax benefit Export benefit Repatriation - American Jobs Creation Act Foreign rate differential Goodwill...

  • Page 57
    ... stock-based compensation plans include stock options and incentive shares. Stock Options The Company's Stock Option Plans permit key officers and employees to purchase common stock at specified prices. Options are granted at 100 percent of the market value of the Company's common stock on the date...

  • Page 58
    ... stock to key management personnel subject to service periods ranging from three to ten years. The fair value of these awards is determined by the market price of the Company's stock at the date of grant. Compensation cost is recognized over the applicable service period. As of September 30, 2005...

  • Page 59
    ..., power conditioning and electrical switching equipment, and precision cooling, site monitoring and connectivity systems. The Climate Technologies segment consists of compressors, temperature sensors and controls, thermostats, flow controls, and remote monitoring services. The Appliance and Tools...

  • Page 60
    ... Rent expense $463 $ 71 $261 $227 478 79 280 233 472 90 303 241 The Company leases computers, transportation equipment and various other property under operating lease agreements. The minimum annual rentals under noncancelable long-term leases, exclusive of maintenance, taxes, insurance...

  • Page 61
    ... 64.02 59.08 1.02 1.01 .4150 72.04 61.47 3.00 2.98 1.60 68.46 52.73 3.43 3.40 1.66 72.04 60.69 Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock Exchange and the Chicago Stock Exchange. EMERSON 2005 49

  • Page 62
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Emerson Electric Co. We have audited the accompanying consolidated balance sheets of Emerson Electric Co. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of ...

  • Page 63
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Emerson Electric Co. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the...

  • Page 64
    ... Summary EMERSON ELECTRIC CO. AND SUBSIDIARIES Years ended September 30 (Dollars in millions except per share amounts) 2005 2004 2003 Summary of Operations Net sales Gross profit Interest expense Earnings from continuing operations Percent of net sales Net earnings Operating cash flow Return on...

  • Page 65
    ... 444,121 2.50 2.50 1.08 12.30 2,098 17.1% 2,735 11,463 571 5,421 27.1% 24.9% 575 369 1,034 2,771 100,700 35,900 449,501 2.25 2.25 0.98 11.96 1,984 17.8% 2,451 10,481 773 5,353 24.5% 22.9% 514 339 ...773 17.7% 2,135 9,399 209 4,871 24.7% 23.3% 421 303 862 2,380 78,900 31,000 451,946 EMERSON 2005 53

  • Page 66
    ... board of directors and president of Emerson since 1999, retired from his post November 1, 2005. After nearly 30 years with the company, Jim decided it was time for him to pursue personal interests. Jim began his career at Emerson as manager of inventory control and held key positions in the motor...

  • Page 67
    Management Senior Management D.N. Farr Chairman, Chief Executive Officer, and President Corporate Management L.C. Barrett PresidentEmerson Canada C.G. Heath Vice PresidentExecutive Compensation S.C. Roemer Vice PresidentFinancial Planning W.J. Galvin Senior Executive Vice President and Chief ...

  • Page 68
    ... other inquiries should be addressed to: Investor Relations Department, Station 2197 Emerson 8000 W. Florissant Ave. P.O. Box 4100 St. Louis, MO 63136-8506 Telephone: (314) 553-2197 10-K Report A copy of the Company's 2005 Annual Report filed with the Securities and Exchange Commission on Form 10...

  • Page 69
    ...; Emerson; Emerson Process Management; Emerson Climate Technologies; Emerson Network Power; Emerson Industrial Automation; Emerson Appliance Solutions; Emerson Professional Tools; RIDGID; Copeland and Copeland Scroll; PlantWeb; Emerson Motor Technologies; Intelligent Store; and their related designs...

  • Page 70
    ......Resources for the world...Business without borders...En ergy efficiency...Communications revo on...Resources for the world...Busines thout borders...Energy efficiency...Com ons revolution...Resources for the wor Emerson World Headquarters 8000 W. Florissant Ave. P.O. Box 4100 St. Louis, MO...