Emerson 2006 Annual Report Download

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2 0 0 6 a n n u a l r e p o r t
Portraits of Leadership

Table of contents

  • Page 1
    Portraits of Leadership 2006 annual report

  • Page 2
    ... Emerson leaders throughout the company apply our management process to help meet and exceed operational objectives. This strategic process allows us to address global opportunities and continue to invest in next-generation innovation and technologies to the benefit of shareholders, customers...

  • Page 3
    ... the impact of acquisitions, divestitures, and foreign currency translation), well above the long-term target of achieving 5 to 7 percent average underlying growth through the business cycles. Emerson's performance this year reflects a strong industrial economy and continued execution of our eight...

  • Page 4
    ...i e f o p e r at i n g o f f i c e r e d wa r d l . m o n s e r d av i d n . fa r r chairman, chief executive officer, and president senior executive vice president and chief financial officer wa lt e r j . g a lv i n senior executive vice president charles a. peters Letter to Shareholders

  • Page 5
    ...for acquisitions. These investments are key to maintaining a healthy portfolio of businesses capable of delivering acceptable growth and returns over the long term. In 2006, Emerson purchased a number of solid companies across the Network Power, Industrial Automation, and Process Management segments...

  • Page 6
    ... storage business that continues to push into new markets and develop new technologies while outperforming the competition. • Tom Bettcher and his Emerson Climate Technologies team are developing an important new heat pump using industryleading scroll technology while creating an electronics core...

  • Page 7
    ..., this group of leaders is forging the path for Emerson. They are developing new technologies and solutions that are Forward Thinking. They're tapping into skills and experience around the world to offer customers the benefit of our Global Focus. They're demonstrating our Sustained Innovation...

  • Page 8
    pat s ly [ l e f t ] emerson tools and stor age j o h n b e r r a [r i g h t] emerson process management Forward Thinking

  • Page 9
    ...the process industries from Emerson Process Management, led by John Berra. A far cry from the wireless Internet access commonly found in coffee shops and public libraries, this wireless technology was developed specifically for the challenging world of refineries, power plants, and other large-scale...

  • Page 10
    by the year production must 2030 of oil b y 3 8 m i l l i o n b a r r e l s p e r d ay t o meet the demand. increase Forward Thinking

  • Page 11
    ...food service, and health care storage solutions, identified an industry trend in the convergence of information technology with traditional mobile storage products for improved patient care, safety, and record-keeping. The company seized an opportunity to strengthen its position with the acquisition...

  • Page 12
    tom bet tcher e m e r s o n c l i m at e t ec h n o lo g i e s Global Focus

  • Page 13
    ... than 160 engineers, representing seven different Emerson operating units, are working here to add value to our customers and products through our global industry expertise. We are now adapting this new heat pump scroll technology for the European market, where many homes use hot-water radiators for...

  • Page 14
    a n e s t i m at e d of and c h i n a's 80% new b y h o m e s a r e h e a t e d cooled h e at p u m p t e c h n o l o g i e s energy -efficient . Global Focus

  • Page 15
    ...to remotely monitor and control energy consumption, comfort levels, equipment maintenance, and even food quality. The suite of products provides maintenance, energy, and reliability gains for owners and operators. Emerson's global reach is in itself a big factor in our success around the world. With...

  • Page 16
    ... this, Emerson Network Power technologies deliver the precision cooling and backup power systems used in these critical data centers, where hundreds of servers and storage systems access trillions of megabytes of information. As these data centers continue to evolve and as centralized computing re...

  • Page 17
    b o b b a u e r [l e f t] emerson network power j ay g e l d m a c h e r [ m i d d l e ] emerson network power e d f e e n e y [r i g h t] e m e r s o n n e t w o r k p o w e r 14 | 15

  • Page 18
    in the next 1b i l l i o n voice and t h e r e w i l l b e o v e r n e w 2 ye ar s d a t a communic ators . Sustained Innovation

  • Page 19
    ... centers are also in a state of constant change. New equipment is being installed to replace old equipment almost daily. High-density computing has led to high heat density loads, creating unique combinations of traditional cooling needs and hot spots that require more-advanced solutions. Emerson...

  • Page 20
    ...Jean-Paul Montupet; and Emerson Appliance Solutions, led by Jim Lindemann. Emerson Industrial Automation, for example, worked closely with Ingersoll-Rand to develop a unique variable-speed motor for the company's air compressors, commonly used in industrial plants to power pneumatic machinery. Since...

  • Page 21
    j i m l i n d e m a n n [l e f t] emerson appliance solutions j e a n - pa u l m o n t u p e t [ r i g h t ] e m e r s o n i n d us t r i a l au to m at i o n 18 | 19

  • Page 22
    200% t h e w o r l d ' s p o w e r d e m a n d s w i l l g r o w s t e a d i l y t o n e a r l y o f c u r r e n t global c a pa c i t y. by the year 2030 Customer Results

  • Page 23
    ..., for example, engineering, marketing, and sales, share their experiences so that when a solution is developed for one place, we can share it with the world. In fact, Emerson has specific teams that meet regularly to track technologies and solutions across different product lines. This has...

  • Page 24
    ...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...

  • Page 25
    ... in the United States and Asia, solid growth in Europe and acquisitions contributed to these results. Profit margins remained strong primarily due to leverage on higher sales volume and benefits derived from previous cost reduction actions. Emerson's financial position remains strong and the Company...

  • Page 26
    ... 2006. Artesyn is a global manufacturer of advanced power conversion equipment and board-level &* computing solutions for infrastructure applications in tele- &* &#- communication and data-communication systems. Knürr is a &% manufacturer of indoor and outdoor enclosure systems and cooling...

  • Page 27
    ...more than offset by higher costs for wages and benefits (pension), negative product mix, as well as the lower profit margin on recent acquisitions. Sales price increases initiated over the past year, together with the benefits received from commodity hedging of approximately $130 million, offset the...

  • Page 28
    ... segments, including $207 million in Process Management, $111 million in Network Power and $105 million in Industrial Automation. The higher earnings also reflect leverage from higher sales, benefits realized from productivity improvements, and higher sales prices, partially offset by higher raw...

  • Page 29
    ... Management segment were $4.2 billion in 2005, up $497 million, or 13 percent, over 2004, reflecting stronger market demand for capital goods (including process automation products and systems), penetration gains in excess of 1 percent and acquisitions. Nearly all of the businesses reported sales...

  • Page 30
    ... and data-center markets, which led to strong growth in the AC power system and precision cooling businesses. The sales increase reflects 21 percent growth in underlying sales and a 10 percent ($341 million) contribution from the Artesyn and Knürr acquisitions. The underlying sales increase...

  • Page 31
    ...embedded power business, as well as integration costs related to the Marconi acquisition, impacted profitability. impacted as the higher sales prices were more than offset by higher material costs. The Company has begun capacity expansion in Mexico where the next generation scroll compressor design...

  • Page 32
    ... profit was partially offset by declines in certain tools, storage and motors businesses, reflecting new product introduction costs in the disposer business, foreign currency losses in the tools and residential storage businesses and restructuring inefficiencies, including costs related to plant...

  • Page 33
    ... capacity expansion &* and acquisitions in the Network Power segment, while the increase in 2005 compared to 2004 was primarily driven by % unitary air-conditioning scroll compressor capacity expansion in %& %' In%( %* %+ is targeting the United States and Asia. 2007,%) the Company )* leverAge...

  • Page 34
    ... 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 :6G C>C < H  E : G for H= 6 G : purposes. The value of market not hold...

  • Page 35
    ...long-lIveD Assets &#* Long-lived assets, which include primarily &*% goodwill and property, plant and equipment, are reviewed for impairment whenever events or changes in business circumstances indicate tions and future expense. Effective for 2007, the discount rate for the U.S. retirement plans...

  • Page 36
    ... 15, 2007. In September 2006, the Financial Accounting Standards Board issued FAS 158. FAS 158 requires employers to recognize the over- or under-funded status of defined benefit plans and other postretirement plans in the statement of financial position and to recognize changes in the funded status...

  • Page 37
    ... Statements of Earnings emerson electrIc co. & subsIDIArIes Years ended September 30 | Dollars in millions, except per share amounts 2004 $15,615 10,049 3,281 223 210 1,852 595 $ 1,257 2005 17,305 11,122 3,595 230 209 2,149 727 1,422 2006 20,133 12,965 4,099 178 207 2,684 839 1,845 net sales...

  • Page 38
    ... Inventories: Finished products Raw materials and work in process Total inventories Other current assets Total current assets 711 1,102 1,813 535 6,837 887 1,335 2,222 582 7,330 $ 1,233 3,256 810 3,716 2005 2006 property, plant and equipment Land Buildings Machinery and equipment Construction in...

  • Page 39
    ...liabilities Short-term borrowings and current maturities of long-term debt Accounts payable Accrued expenses Income taxes Total current liabilities long-...other comprehensive income 238 120 10,199 (65) 10,492 Less cost of common stock in treasury, 66,025,442 shares in 2005 and 74,330,107 shares in ...

  • Page 40
    Consolidated Statements of Stockholders' Equity emerson electrIc co. & subsIDIArIes Years ended September 30 | Dollars in millions, except per share amounts $ 2004 238 2005 238 2006 238 common stock Additional paid-in capital Beginning balance Stock plans and other Ending balance retained ...

  • Page 41
    ... expenditures Purchases of businesses, net of cash and equivalents acquired Other Net cash used in investing activities financing activities Net increase (decrease) in short-term borrowings Proceeds from long-term debt Principal payments on long-term debt Dividends paid Purchases of treasury stock...

  • Page 42
    ... 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 Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," or a business...

  • Page 43
    ... their fair value at date of grant over the vesting period, generally three years. Previously, the Company accounted for options pursuant to Accounting Principles Board Opinion No. 25, and no expense was recognized. Effective July 1, 2005, Emerson adopted Statement of Financial Accounting Standards...

  • Page 44
    ...and measurement equipment for oil and gas, water and wastewater, and power industries and is included in the Process Management segment. In addition to Artesyn, Knürr and Bristol, the Company acquired several smaller businesses during 2006 mainly in the Industrial Automation and Appliance and Tools...

  • Page 45
    ...-average useful life of ten years, were recognized from these transactions in 2005. In the fourth quarter of 2004, the Company acquired the outside plant and power systems business of Marconi Corporation PLC, a leading provider of DC power products and engineering and installation services to major...

  • Page 46
    ... certain motor production in Western Europe to Eastern Europe, China and Mexico to leverage costs and remain competitive on a global basis. Network Power includes severance related to the closure of certain power conversion facilities acquired with Artesyn, severance, start-up and vacant facility...

  • Page 47
    ... Europe in order to leverage product platforms and lower production and engineering costs to remain competitive on a global basis. Climate Technologies included severance costs related to workforce reductions in the European temperature sensors and controls operations due to weakness in market...

  • Page 48
    ... 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 49
    ..., common stock, warrants, share purchase contracts and share purchase units under the shelf registration statement filed with the Securities and Exchange Commission. The Company may sell securities in one or more separate offerings with the size, price and terms to be determined at the time of sale...

  • Page 50
    ... 19 32 (32) 16 35 25 60 Defined benefit plans: Service cost (benefits earned during the period) $ 49 Interest cost 136 Expected return on plan assets (196) Net amortization 65 Net periodic pension expense Defined contribution and multiemployer plans Total retirement plan expense 54 66 $ 120 The...

  • Page 51
    ...for 2007, the discount rate for the U.S. retirement plans was adjusted to 6.5 percent based on the changes in market interest rates. Defined benefit pension plan expense is expected to decrease approximately $20 in 2007. In September 2006, the Financial Accounting Standards Board issued Statement of...

  • Page 52
    (11) postretirement plans The Company sponsors unfunded postretirement benefit plans (primarily health care) for U.S. retirees and their dependents. Net postretirement plan expense for the years ended September 30 follows: 2004 $ 5 25 19 $49 2005 6 27 21 54 2006 5 26 32 63 Service cost...

  • Page 53
    ... (including guarantees, pending litigation, taxes and other claims) that management believes will be material in relation to the Company's financial statements, nor were there any material commitments outside the normal course of business. (13) Income taxes Earnings before income taxes consist of...

  • Page 54
    ...tax assets: Accrued liabilities Postretirement and postemployment benefits Employee compensation and benefits NOL and tax credits Capital loss benefit Other Total Valuation allowance Deferred tax liabilities: Property, plant and equipment Leveraged leases Pension Intangibles Other Total Net deferred...

  • Page 55
    ... 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 of grant, generally vest one-third each year and expire ten years from the date of grant. Compensation...

  • Page 56
    ... power supplies, power conditioning and electrical switching equipment, and precision cooling and site monitoring systems. The Climate Technologies segment consists of compressors, temperature sensors and controls, thermostats, flow controls, and remote monitoring services. The Appliance...

  • Page 57
    ... 136 22 518 2006 101 87 103 148 149 13 601 Process Management Industrial Automation Network Power Climate Technologies Appliance and Tools Corporate and other Total $448 geogrApHIc sales by destination property, plant and equipment 2004 $ 8,262 3,649 2,085 533 1,086 $15,615 2005 9,126...

  • Page 58
    ... Research and development Rent expense 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 and other operating costs, will...

  • Page 59
    ... 4 for information regarding the Company's acquisition and divestiture activities and non-recurring items. Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock Exchange and the Chicago Stock Exchange. (19) subsequent event In November 2006, the Company's Board of Directors...

  • Page 60
    ... September 30, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Emerson Electric Co.'s internal control over financial reporting as of...

  • Page 61
    ...). We also have audited, in accordance 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, 2006 and 2005, and the related consolidated statements of earnings, stockholders...

  • Page 62
    ... of net sales Property, plant and equipment, net Total assets Long-term debt Stockholders' equity Total debt to total capital Net debt to net capital other Data Capital expenditures Depreciation Total taxes, including income taxes Salaries and wages Average number of employees Approximate number...

  • Page 63
    ... 3,003 111,800 37,200 444,121 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% 514 339 963 2,569 86,400...

  • Page 64
    ... of Directors August A. busch III St. Louis, Missouri Director and Former Chairman of the Board, Anheuser-Busch Companies, Inc. gerald A. lodge Saddle Brook, New Jersey Retired General Partner, Innocal Venture Firms cHAIrmAn emerItus c.f. Knight Former Chairman and Chief Executive Officer Emerson...

  • Page 65
    ... Vice PresidentManufacturing r.J. schlueter Vice President and Chief Accounting Officer operAtIng mAnAgement J.m. berra Executive Vice President r.e. browning Vice PresidentDevelopment D.A. Kubly Vice President and Associate General Counsel p. sen PresidentEmerson India f.K. burdell III Vice...

  • Page 66
    ...selling Emerson common stock. The Plan is not sponsored or administered by Emerson. For further information and an authorization form, contact the Registrar and Transfer Agent. ceo AnD cfo certIfIcAtIons As required by the New York Stock Exchange ("NYSE") listing rules, the Company timely filed its...

  • Page 67
    ... acquisitions; (xii) favorable access to capital markets; and (xiii) execution of cost-reduction efforts. ; Emerson; Emerson Network Power; Emerson Industrial Automation; Emerson Process Management; Emerson Climate Technologies; Emerson Appliance Solutions; Emerson Tools & Storage; Emerson Storage...

  • Page 68
    emerson World Headquarters 8000 W. Florissant Ave. P.O. Box 4100 St. Louis, MO 63136 www.GoToEmerson.com