PORTIONS OF 1995 ANNUAL REPORT TO STOCKHOLDERS
Published on December 21, 1995
Financial Review Exhibit 13
RESULTS OF OPERATIONS
NET SALES
Emerson achieved record sales in fiscal 1995 of $10.0 billion, up $1.4 billion
or 16.3 percent from 1994. The 1995 sales comparison reflects strong demand,
impact of acquisitions and favorable exchange rates. Excluding the impact of
acquisitions and currency, international sales increased nearly $500 million
in 1995, or 15 percent, reflecting strong sales volume in all international
regions. Domestic sales increased approximately $265 million, primarily due
to moderate volume growth and slight price increases. New product sales,
from products introduced in the past five years, increased approximately $460
million or 21.7 percent to a record $2.6 billion, representing nearly 26
percent of sales. See note 2 for additional discussion of the Company's
acquisition and divestiture activity, which includes the U.K.-based F.G.
Wilson and Control Techniques acquisitions in 1995.
The joint ventures in which Emerson is a partner had combined annual sales
of $2.3 billion, $2.2 billion and $2.0 billion in 1995, 1994 and 1993,
respectively, which were not consolidated in Emerson's financial statements.
Emerson's proportionate share of the sales of its equity investees was $1.1
billion, $1 billion and $900 million, respectively. Joint ventures reported
double-digit sales growth excluding the contribution of Control Techniques in
1994. Equity earnings were $63 million in 1995, up from $48 million and $38
million in 1994 and 1993, respectively, reflecting increased volume and margin
improvement.
In 1994, sales were $8.6 billion, up $433 million or 5.3 percent from $8.2
billion in 1993. This sales performance was primarily attributable to a $358
million increase in domestic sales. Excluding acquisitions and divestitures,
domestic sales increased more than 8 percent, reflecting strong sales volume
and slight price increases. International sales increased approximately $135
million, excluding the impact of unfavorable exchange rates in 1994 of
approximately $60 million. Several minor acquisitions, which contributed
approximately $75 million to sales in 1994, were more than offset by the impact
of the divestiture of the Aerospace unit of Rosemount Inc. New product sales
increased $167 million or 8.6 percent to $2.1 billion, representing 24.6
percent of sales.
INTERNATIONAL SALES
International sales, including U.S. exports, increased 35 percent to a record
$4.4 billion in 1995, representing nearly 44 percent of the Company's total
sales. All major international regions achieved double-digit sales growth,
highlighted by strong demand in Europe and continued rapid growth in Asia
Pacific. International sales benefited from strong worldwide markets, favorable
currency translation and acquisitions. Sales by non-U.S. subsidiaries were $3.6
billion in 1995, up $964 million or 36 percent from 1994. Excluding the impacts
of acquisition and divestiture activity and currency, non-U.S. subsidiary sales
increased 11 percent due to strong growth in all regions. U.S. exports
increased $179 million, or 30 percent, to a record $768 million in 1995,
reflecting strong export sales in the heating, ventilating and air conditioning
and process control businesses.
In 1994, international sales increased $75 million, or 2.4 percent to $3.2
billion, representing approximately 38 percent of the Company's total sales.
Asia Pacific sales, excluding Japan, experienced double-digit increases, with
sales to China up approximately 20 percent. Sales by non-U.S. subsidiaries were
$2.7 billion in 1994, up $48 million or 1.8 percent from 1993, despite
unfavorable currency translation. European and
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Canadian markets strengthened in the second half of the year, and continued
solid growth in Latin American and other Asia Pacific subsidiaries more than
offset the impact of the continued recession in Japan. U.S. exports increased
$27 million to $589 million in 1994, while underlying export sales were up more
than 8 percent despite the stronger dollar.
INDUSTRY SEGMENT SALES
Sales in the Commercial and Industrial segment were $6.0 billion in 1995, up
$1.1 billion or 21.5 percent from 1994. Excluding acquisitions and
divestitures, underlying sales of the segment increased approximately 13
percent, reflecting robust international demand, solid domestic growth, new
products and favorable exchange rates. The underlying industrial motors and
drives business achieved double-digit growth due to strong domestic and
international capital goods demand, while total industrial motors and drives
sales were further aided by the acquisition of F.G. Wilson and Control
Techniques. The industrial components and equipment business realized a
double-digit sales increase due to worldwide strength in the capital goods
market. The process business also reported double-digit sales growth due to
strengthening international demand for measurement, distributed control system
and control valve products. Strong sales growth in the electronics business
resulted from new product acceptance and strong domestic market demand.
Sales in the Appliance and Construction-Related segment were $4.0 billion in
1995, an increase of $341 million or 9.3 percent from 1994, primarily
reflecting double-digit underlying international growth. Double-digit sales
growth by the heating, ventilating and air conditioning business reflected
strong international demand, further acceptance of new products and market
penetration gains. The tools business reported strong sales growth due to
domestic demand for hand tools, global demand for professional plumbing tools
and an acquisition. The appliance components business reported strong sales
growth due to international appliance market strength and an acquisition. Sales
growth in the fractional horsepower motors business benefited from strength in
the domestic market during the first half of the fiscal year.
In 1994, sales in the Appliance and Construction-Related segment increased $377
million, or 11.5 percent, to $3.7 billion, primarily reflecting strong domestic
volume growth in all businesses. The largest sales gain was achieved by the
heating, ventilating and air conditioning business, as it experienced a double-
digit sales increase resulting from hot summer weather, strong demand for new
products and market penetration gains. The fractional horsepower motors
business realized a double-digit sales increase due to strong domestic end-
market demand. The appliance components business also reported double-digit
growth due to strong domestic demand, market penetration gains and an
acquisition. Sales of the tools business increased moderately with double-digit
sales gains in the second half of the year.
In 1994, sales in the Commercial and Industrial segment increased $56 million,
or 1.1 percent, to $4.9 billion. Excluding acquisitions, the divestiture of the
Aerospace unit of Rosemount Inc. and foreign exchange, sales of the segment
increased approximately 3 percent, reflecting modest domestic sales volume
gains, slight price increases and improved international sales in the second
half of the year. The electronics business experienced double-digit growth
primarily as a result of the introduction of new products and sales of
environmental systems in the U.S. and Asia Pacific. Sales of the industrial
components and equipment business increased modestly as European economies
strengthened in the second half of the year. Sales of the industrial motors and
drives business increased slightly as domestic gains were offset by weak
international sales, which were impacted by unfavorable exchange rates. Sales
of the underlying process control business increased slightly while total
process control sales were negatively impacted by the divestiture.
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TOTAL COSTS AND EXPENSES
Cost of sales for 1995 was $6.5 billion, an increase of 16.7 percent over 1994,
due primarily to increased sales volume. In 1994, cost of sales was $5.6
billion compared to $5.3 billion in 1993, an increase of 5.0 percent. Cost of
sales as a percent of net sales was 64.7 percent in 1995 compared to 64.5
percent and 64.7 percent in 1994 and 1993, respectively. Gross profit margins
have remained at high levels as a result of the Company's ongoing commitments
to cost reduction efforts and productivity improvement programs.
Selling, general and administrative (SG&A) expenses were $1.9 billion, $1.7
billion and $1.6 billion in 1995, 1994 and 1993, respectively. As a percent of
net sales, SG&A expenses were 19.3 percent in 1995 compared to 19.5 percent and
19.7 percent in 1994 and 1993, respectively. The decreases in SG&A expenses as
a percent of net sales in 1995 and 1994 are due primarily to higher volume and
ongoing cost reduction efforts, partially offset by increased investment in new
product development and other revenue growth programs. The Company continued
its commitment to new product development by increasing engineering and
development expense 18.8 percent to a record $354 million in 1995, compared to
$298 million and $272 million in 1994 and 1993, respectively.
Interest expense increased to $111 million in 1995 from $89 million in 1994
primarily due to additional debt issued to finance the F.G. Wilson and Control
Techniques acquisitions. In 1994, interest expense decreased from $119 million
in 1993 due to debt reduction resulting from strong operating cash flow.
The first quarter of 1995 included a $41 million preferential distribution from
the S-B Power Tool joint venture and other non-recurring items. The net
earnings impact of the non-recurring items was substantially offset by the
adoption of SFAS No. 112. The first quarter of 1994 included a gain on sale of
the Aerospace unit of Rosemount Inc. of $242 million and other non-recurring
items of $50 million. Other non-recurring items principally consisted of
severance and related costs arising from relocation of several operations, or
workforce reductions, primarily in the Company's European process control and
heating, ventilating and air conditioning businesses. The net earnings impact
of these non-recurring items was substantially offset by the adoption of SFAS
No. 106. See notes 2 and 7 for additional information.
Other deductions, net, was $63 million in 1995, compared to $50 million and $46
million in 1994 and 1993, respectively. The increase in other deductions, net,
in 1995 is primarily due to additional goodwill amortization.
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGES
Income before income taxes and cumulative effects of changes in accounting
principles included the S-B Power Tool distribution in 1995, the gain on sale
of the Aerospace unit of Rosemount Inc. in 1994 and other non-recurring items
in both years. Excluding these items, income increased approximately 15
percent, reflecting increased worldwide sales volume, acquisitions and improved
international margins, partially offset by higher interest expense.
Income before interest expense, income taxes and accounting changes in the
Commercial and Industrial segment increased $161 million, or 23.9 percent, to
$836 million in 1995. This improvement is primarily a result of underlying
strength in international markets, solid domestic growth and the F.G. Wilson
and Control Techniques acquisitions. Income of the segment was 13.9 percent and
13.6 percent of net sales in 1995 and 1994, respectively, reflecting the
increase in volume and ongoing cost reduction efforts.
Income in the Appliance and Construction-Related segment increased $82 million,
or 13.6 percent, to $684
24
million in 1995. As a percent of net sales, income of the segment was 17.1
percent in 1995 and 16.4 percent in 1994. These results reflect the increase in
international sales volume and effect of prior year non-recurring items. See
note 12 for additional information by industry segment and geographic area.
Excluding non-recurring items, income before income taxes and cumulative effect
of accounting change increased 11 percent in 1994, reflecting increased
domestic sales volume, improved underlying domestic and international operating
margins and reduced interest expense. Income before interest expense, income
taxes and accounting change in the Appliance and Construction-Related segment
increased $44 million, or 7.9 percent, to $602 million in 1994, reflecting a
solid increase in domestic sales volume in all businesses, partially offset by
non-recurring items. Income in the Commercial and Industrial segment increased
$19 million, or 2.9 percent, to $675 million in 1994, primarily resulting from
a modest increase in domestic sales volume and ongoing cost reduction efforts.
Excluding non-recurring items, margins improved in both segments.
INCOME TAXES
Income taxes before accounting changes were $531 million, $523 million and $404
million in 1995, 1994 and 1993, respectively. The effective income tax rate was
36.4 percent in 1995, compared to 36.7 percent in 1994 and 36.3 percent in
1993. The higher 1994 rate primarily reflects $95 million of income taxes on
the divestiture of the Aerospace unit of Rosemount Inc.
CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
Effective October 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment
Benefits," which establishes accounting standards for workers' compensation,
disability and severance benefits. The Company recognized the obligation in the
first quarter as a cumulative effect of change in accounting principle which
decreased 1995 net earnings and earnings per common share by $21.3 million and
$.10, respectively. The adoption of the statement does not have a material
impact on the Company's ongoing results of operations.
Effective October 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This statement
requires that other postretirement benefits (primarily health care) be accrued
over the service lives of employees. The Company recognized the transition
obligation arising from service prior to adoption in the first quarter of 1994
as a cumulative effect of change in accounting principle which decreased 1994
net earnings and earnings per common share by $115.9 million and $.52,
respectively. In addition, ongoing expense for these benefits increased to $27
million in 1994, compared to $16 million in 1993.
NET EARNINGS AND RETURN ON EQUITY
Net earnings for 1995 were a record $908 million, up 15.1 percent from $789
million in 1994. Net earnings as a percent of sales was 9.1 percent, compared
to 9.2 percent in 1994 which represented the highest level achieved during the
Company's consecutive years of increased earnings. Earnings per common share
were a record $4.06 in 1995, up 15.3 percent from $3.52 in 1994. The 1995
acquisitions made a small contribution to earnings per share. Emerson achieved
a return on average stockholders' equity of 19.7 percent compared to 19.1
percent in 1994 and 18.5 percent in 1993, respectively.
Net earnings for 1994 were up 11.4 percent from $708 million in 1993. Earnings
per common share were up 11.7 percent from $3.15 in 1993.
25
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
The Company continues to generate substantial cash from operations and remains
in a strong financial position with resources available for reinvestment in
existing businesses, strategic acquisitions and managing the capital structure.
CASH FLOW
Emerson generated record operating cash flow of $1,142 million in 1995,
compared to $1,097 million and $1,075 million in 1994 and 1993, respectively.
Operating working capital was approximately 18 percent of sales in 1995, 1994
and 1993. Accounts receivable and inventories increased from September 30, 1994
due primarily to stronger 1995 operations, acquisitions and the impact of
foreign exchange.
Capital expenditures were $421 million in 1995, up approximately 27 percent
from $332 million in 1994. Capital expenditures increased 8.7 percent in 1994
from $306 million in 1993. Emphasis continues to be placed on programs designed
to improve productivity by incorporating advanced processes and technology into
existing facilities, cost reduction projects and new products. The Board of
Directors has approved funding to nearly double the Company's worldwide
production capacity of Copeland Compliant Scroll compressors, including
construction of new facilities in Asia and Europe and expansion of U.S.
capacity.
Dividends were a record $398 million ($1.78 per share) in 1995, compared with
$350 million ($1.56 per share) in 1994 and $324 million ($1.44 per share) in
1993. During the fourth quarter, the Board of Directors voted to increase the
quarterly cash dividend 14 percent to an annualized rate of $1.96 per share, an
amount consistent with the Company's long-standing target payout ratio of 45 to
50 percent of prior year earnings.
Cash paid in connection with Emerson's purchase acquisitions was $236 million,
$58 million and $1,263 million in 1995, 1994 and 1993, respectively. See note 2
for additional information.
LEVERAGE/CAPITALIZATION
Total debt increased to $1.6 billion from $1.2 billion in 1994, reflecting the
acquisitions of F.G. Wilson and Control Techniques. See notes 2 and 3 for
additional information. In 1994, strong operating cash flow and the net
proceeds from the divestiture of the Aerospace unit of Rosemount Inc. of $206
million enabled the Company to reduce total debt $449 million from $1.6 billion
in 1993 and fund net treasury stock purchases of $111 million.
The total debt to total capital ratio was 24.7 percent at year-end 1995,
compared to 21.7 percent in 1994 and 29.3 percent in 1993. At September 30,
1995, net debt (total debt less cash and equivalents and short-term
investments) was 23.3 percent of net capital, compared to 20.0 percent in 1994
and 27.9 percent in 1993. The Company's interest coverage ratio (income before
income taxes, non-recurring items and interest expense divided by interest
expense) was 13.9 times in 1995 compared to 15.0 times in 1994 and 10.3 times
in 1993.
At year-end 1995, the Company maintained lines of credit of $975 million to
support commercial paper and had available non-U.S. bank credit facilities of
$500 million to support non-U.S. operations. In addition, as of September 30,
1995, the Company could issue up to $1 billion of debt securities under its
shelf registration with the Securities and Exchange Commission. Subsequent to
year end, the Company issued $250 million of 6.3%, 10-year notes which were
used to reduce outstanding U.S. commercial paper.
26
27
See accompanying notes to consolidated financial statements.
28
29
See accompanying notes to consolidated financial statements.
30
See accompanying notes to consolidated financial statements.
31
Notes To Consolidated Financial Statements
EMERSON ELECTRIC CO. AND SUBSIDIARIES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany transactions,
profits and balances are eliminated in consolidation. Investments of 20 to 50
percent are accounted for by the equity method. Investments of less than 20
percent are carried at cost.
Foreign Currency Translation
The functional currency of nearly all of the Company's non-U.S. subsidiaries is
the local currency. Adjustments resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
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 upon standard costs which approximate average costs,
while the remainder are principally valued on a first-in, first-out basis.
Standard costs are revised at the beginning of the fiscal year and variances
incurred during the year are allocated between inventories and cost of sales.
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. Service lives for principal assets are 30 to 40
years for buildings and 8 to 12 years for machinery and equipment.
Excess of Cost Over Net Assets of Purchased Businesses
Assets and liabilities related to business combinations accounted for as
purchase transactions are recorded at their respective fair values.
Excess of cost over net assets of purchased businesses is amortized on a
straight-line basis over the periods estimated to be benefited, not exceeding
40 years.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of
manufactured products as shipped.
Financial Instruments
The net amount to be paid or received under interest rate swap agreements is
accrued over the life of the agreements as a separate component of interest
expense. Gains and losses on currency option and forward exchange contracts are
generally recognized in income with the underlying hedged transactions.
Currency fluctuations on non-U.S. dollar obligations that have been designated
as hedges of non-U.S. net asset exposures are included in cumulative
translation adjustments.
Income Taxes
No provision is made for U.S. income taxes on the undistributed earnings of
non-U.S. subsidiaries (approximately $620 million at September 30, 1995),
primarily because retention of a significant portion of these earnings is
considered essential for continuing operations. In those cases where
distributions have been made, additional income taxes, if any, have been
minimal due to available foreign tax credits.
Earnings Per Common Share
Earnings per common share is computed by dividing net earnings by the weighted
average number of common shares outstanding during the applicable periods. The
weighted average number of common shares outstanding was 223,753,018 shares,
224,232,225 shares, and 225,082,844 shares in 1995, 1994 and 1993, respectively.
Financial Presentation Changes
Certain prior year amounts have been reclassified to conform to the current
year presentation.
32
(2) BUSINESS COMBINATIONS AND DIVESTITURE
In the first quarter of 1995, the Company purchased F.G. Wilson (Engineering)
Ltd., a United Kingdom-based manufacturer of diesel generator sets, for
approximately $274 million. Emerson completed the acquisition of the remaining
shares of Control Techniques, plc, a United Kingdom-based manufacturer of
variable speed drives used for motor applications, in the second quarter of
1995 for approximately $227 million. F.G. Wilson and Control Techniques had
combined annual sales of approximately $425 million in 1994. The 1995 increases
in excess of cost over net assets of purchased businesses, receivables,
inventories, and short-term borrowings reflect the impact of these
acquisitions. In 1993, the Company purchased Fisher Controls International,
Inc., and related operations for $1,254.7 million. Fisher is a worldwide
manufacturer of control valves and control systems for major process
industries.
Cash paid in connection with the Company's purchase acquisitions, which include
several smaller businesses, follows (dollars in millions):
Earnings in the first quarter of fiscal 1995 included a $41.3 million
preferential distribution from the S-B Power Tool Company joint venture
("S-B") which was substantially offset by other non-recurring items and the
adoption of SFAS No. 112 (see note 7). Emerson has entered into an agreement
for Robert Bosch GmbH to acquire Emerson's fifty-percent interest in S-B,
subject to regulatory approvals, in late calendar 1996 and expects to recognize
a gain upon completion of the transaction.
On December 14, 1993, the Company sold the Aerospace unit of its Rosemount Inc.
subsidiary (fiscal 1993 sales of approximately $130 million) for $301 million
($206 million net of income taxes). The transaction resulted in a pretax gain
of $242 million. The net earnings impact of this gain was substantially offset
in the first quarter of 1994 by other non-recurring items ($50 million pretax
impact) and the adoption of SFAS No. 106 (see note 7). Other non-recurring
items principally consist of severance and related costs arising from
relocation of several operations, or work force reductions, primarily in the
Company's European process control and heating, ventilating and air
conditioning businesses.
The results of operations of these businesses have been included in the
Company's consolidated results of operations since the respective dates of the
acquisitions and prior to the divestiture date.
(3) SHORT-TERM BORROWINGS AND LINES OF CREDIT
Short-term borrowings consist of commercial paper, notes issued to sellers in
connection with business combinations and non-U.S. bank borrowings as follows
(dollars in millions):
The 1995 F.G. Wilson and Control Techniques acquisitions were partially
financed by issuing notes to the sellers totaling 203 million British pounds.
The Company has swapped 141 million British pounds with a weighted average
interest rate of 6.9 percent to $223 million at U.S. commercial paper rates.
The remaining British pound obligations have been designated as a partial hedge
of the Company's U.K. net asset exposure.
In October 1992, in connection with the Fisher acquisition, the Company issued
$1.275 billion of U.S. commercial paper and swapped these borrowings to a
weighted average fixed rate of 4.6 percent. At September 30, 1994, approximately
$650 million of the Company's floating interest rate borrowings remained
swapped for periods expiring during 1995.
Excluding the impact of these swaps, interest expense would have been $120
million and $83 million, and the U.S. year-end weighted average interest rate
would have been 6.3 percent and 4.9 percent in 1995 and 1994, respectively. At
September 30, 1995, the Company had $700 million of floating interest rate
obligations which have been capped at 7 percent throughout 1996.
33
Lines of credit amounting to $975 million were maintained with various banks at
September 30, 1995, to support commercial paper and to assure availability of
funds. These lines of credit are effective through various dates in 1996. There
were no borrowings against U.S. lines of credit in the last three years. The
Company's non-U.S. subsidiaries maintained bank credit facilities in various
currencies approximating $635 million ($500 million unused) at September 30,
1995. In some instances, borrowings against these credit facilities have been
guaranteed by the Company to assure the availability of funds at favorable
interest rates. In addition, as of September 30, 1995, the Company could issue
up to $1 billion of debt securities under its shelf registration with the
Securities and Exchange Commission.
(4) LONG-TERM DEBT
Long-term debt is summarized as follows (dollars in millions):
The 7 7/8% Eurodollar notes and $55 million of U.S. commercial paper have
effectively been exchanged for non-U.S. dollar obligations due in 1998. The
non-U.S. dollar obligations have an effective weighted average interest rate of
5.0 percent and 5.5 percent at September 30, 1995 and 1994, respectively, and
are composed of 136 million Dutch guilders, 5 billion Japanese yen and 27
million Swiss francs. These non-U.S. dollar obligations have been designated as
a partial hedge of the Company's non-U.S. dollar net asset exposure.
Long-term debt maturing during each of the four years after 1996 is $10.3
million, $130.2 million, $6.4 million and $1.9 million, respectively. Total
interest paid related to short-term borrowings and long-term debt was
approximately $121 million, $90 million and $126 million in 1995, 1994 and
1993, respectively.
(5) FINANCIAL INSTRUMENTS
The Company selectively uses derivative financial instruments to manage
interest costs and minimize currency exchange risk. The Company does not hold
derivatives for trading purposes. No credit loss is anticipated as the
counterparties to these agreements are major financial institutions with high
credit ratings.
As part of its currency hedging strategy, the Company utilizes option and
forward exchange contracts to minimize the impact of currency fluctuations on
transactions, cash flows and firm commitments. The Company and its subsidiaries
had approximately $390 million and $225 million of contracts outstanding at
September 30, 1995 and 1994, respectively. These contracts for the sale or
purchase of European and other currencies generally mature within one year, and
deferred gains and losses are not material.
Fair values of the Company's financial instruments are estimated by reference
to quoted prices from market sources and financial institutions, as well as
other valuation techniques. At September 30, 1995 and 1994, respectively, the
market value of the Company's convertible debentures was $102 million and $101
million, compared to the related carrying value of $38.5 million and $45.6
million. Common stock has been reserved for the conversion of these debentures
(see note 8). The fair values of derivative financial instruments were not
material at September 30, 1995, and the estimated fair value of each of the
Company's other classes of financial instruments approximated the related
carrying value at September 30, 1995 and 1994.
34
(6) RETIREMENT PLANS
The Company sponsors retirement plans covering substantially all employees.
Benefits are provided to employees under defined benefit pay-related and flat-
dollar plans which are primarily noncontributory. Annual contributions to
retirement plans equal or exceed the minimum funding requirements of the
Employee Retirement Income Security Act or applicable local regulations.
The Company also sponsors defined contribution plans and participates in
multiemployer plans for certain union employees. Benefits are determined and
funded annually based on terms of the plans or as stipulated in collective
bargaining agreements.
Retirement plan expense for the years ended September 30, 1995, 1994 and 1993,
follows (dollars in millions):
The actuarial present value of benefit obligations and the funded status of the
Company's defined benefit pension plans as of September 30, 1995 and 1994,
follow (dollars in millions):
For 1995, the assumed discount rate, rate of increase in compensation levels
and expected long-term rate of return on plan assets used in the actuarial
calculations were, respectively, 8.0 percent, 5.0 percent and 10.5 percent for
U.S. plans; and an average of 7.6 percent, 4.2 percent and 8.8 percent for non-
U.S. plans. For 1994, the assumed discount rate, rate of increase in
compensation levels and expected long-term rate of return on plan assets were,
respectively, 8.0 percent, 5.0 percent and 10.5 percent for U.S. plans; and an
average of 7.6 percent, 4.4 percent and 9.1 percent for non-U.S. plans.
35
(7) POSTRETIREMENT PLANS AND POSTEMPLOYMENT BENEFITS
The Company sponsors unfunded postretirement benefit plans (primarily health
care) for U.S. retirees and their dependents. Effective October 1, 1993, the
Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (OPEB),
which requires that these costs be accrued over the service lives of employees.
The Company recognized the transition obligation arising from service prior to
adoption in the first quarter of 1994 as a cumulative effect of change in
accounting principle of $115.9 million (net of $74.1 million in related income
tax benefits). In addition, prior to adoption the Company had recorded OPEB
liabilities of approximately $100 million in accordance with Accounting
Principles Board Opinion No. 16. The adoption of the statement does not have a
material impact on the Company's ongoing results of operations.
Net postretirement plan expense for the years ended September 30, 1995 and 1994
follows (dollars in millions):
Prior to the adoption of SFAS No. 106, postretirement plan expense was
approximately $16 million in 1993. The actuarial present value of accumulated
postretirement benefit obligations as of September 30, 1995 and 1994 follows
(dollars in millions):
The assumed discount rate used in measuring the obligation as of September 30,
1995 was 7.75 percent; the initial assumed health care cost trend rate was 9.0
percent, declining to 5.0 percent in the year 2004. The assumed discount rate
used in measuring the obligation as of September 30, 1994 was 7.75 percent; the
initial assumed health care cost trend rate was 11.0 percent, declining to 5.0
percent in the year 2001. A one-percentage-point increase in the assumed health
care cost trend rate for each year would increase the obligation as of
September 30, 1995 by approximately 5 percent and increase the 1995
postretirement plan expense by approximately 6 percent.
Effective October 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," which establishes accounting standards for workers' compensation,
disability and severance benefits. The Company recognized the obligation in the
first quarter of 1995 as a cumulative effect of change in accounting principle
of $21.3 million (net of $13.7 million in related income tax benefits). The
adoption of the statement does not have a material impact on the Company's
ongoing results of operations.
(8) COMMON STOCK
The Company has various stock option plans which permit certain officers and
employees to purchase common stock at specified prices. At September 30, 1995,
2,356,177 options were available for grant under these plans. Changes in the
number of shares subject to option during 1995 follow:
36
The 1993 Incentive Shares Plan authorizes the distribution of a maximum of 3
million shares of common stock to key management personnel. At September 30,
1995, 307,000 incentive shares had been issued and 1,455,382 rights to receive
common shares had been awarded, contingent upon accomplishing certain
objectives by 1997.
At September 30, 1995, 8,785,076 shares of common stock were reserved,
including 7,358,750 shares for issuance under the Company's stock plans and
1,426,326 shares for conversion of the outstanding 8% convertible subordinated
debentures at a price of $26.97 per share. During 1995, 1,229,900 treasury
shares were acquired and 1,542,688 treasury shares were issued.
Approximately 2.5 million preferred shares are reserved for issuance under a
Preferred Share Purchase Rights Plan. Under certain conditions involving
acquisition of or an offer for 20 percent or more of the Company's common
stock, all holders of Rights, except an acquiring entity, would be entitled (i)
to purchase, at an exercise price of $120, common stock of the Company or an
acquiring entity with a value twice the exercise price, or (ii) at the option
of the Board, to exchange each Right for one share of common stock. The Rights
remain in existence until November 1, 1998, unless earlier redeemed (at one
cent per Right), exercised or exchanged under the terms of the plan.
(9) INCOME TAXES
In the fourth quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," effective October
1, 1992. The adoption of this standard changed the Company's method of
accounting for income taxes from the deferred method to the liability method.
The effect of the change was not material to the financial statements.
The principal components of income tax expense follow (dollars in millions):
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
The principal components of deferred tax assets (liabilities) follow (dollars
in millions):
At September 30, 1995 and 1994, respectively, net current deferred tax assets
were $232.8 million and $244.0 million, and net noncurrent deferred tax
liabilities were $226.2 million and $232.8 million. Total income taxes paid
were approximately $485 million, $535 million and $365 million in 1995, 1994
and 1993, respectively.
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(10) OTHER FINANCIAL DATA
Items charged to earnings during the years ended September 30, 1995, 1994 and
1993, included the following (dollars in millions):
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 approximate $63 million in 1996 and decline
substantially thereafter.
Other assets at September 30, 1995 and 1994, included the following (dollars in
millions):
The market value of the Company's equity investments in publicly traded
companies exceeded the related carrying value by approximately $149 million and
$108 million at September 30, 1995 and 1994, respectively.
Selected accrued expenses at September 30, 1995 and 1994, follow (dollars in
millions):
(11) CONTINGENT LIABILITIES AND COMMITMENTS
At September 30, 1995, the Company had guaranteed $370 million of indebtedness
of a 50-percent-owned joint venture, Vermont American Corporation. If required
to perform under the guarantee, the Company will be indemnified for up to $147
million by its joint venture partner, Robert Bosch GmbH.
At September 30, 1995, there were no other known contingent liabilities
(including guarantees, pending litigation, taxes and other claims) that, in the
opinion of management, are expected to be material in relation to the Company's
financial position, nor were there any material commitments outside the normal
course of business.
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(12) INDUSTRY SEGMENT INFORMATION
The Company is engaged principally in the design, manufacture and sale of a
broad range of electrical, electromechanical and electronic products and
systems. The products manufactured by the Company are classified into the
following industry segments: Commercial and Industrial Components and Systems;
and Appliance and Construction-Related Components. The Commercial and
Industrial segment includes process control instrumentation, valves and
systems; industrial motors and drives; industrial machinery, equipment and
components; and electronics. The Appliance and Construction-Related segment
consists of fractional horsepower motors; appliance components; heating,
ventilating and air conditioning components; and tools. Summarized information
about the Company's operations in each industry segment and geographic area
follows (dollars in millions):
*Income includes $41 million S-B Power Tool preferential distribution in 1995
and $242 million gain on sale of the Aerospace unit of Rosemount Inc. in 1994.
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(13) QUARTERLY FINANCIAL INFORMATION (Unaudited)
(Dollars in millions except per share amounts)
*Income before cumulative effects of changes in accounting principles was $224.7
($1.01 per common share) and $293.9 ($1.31 per common share) in the first
quarter of 1995 and 1994, respectively, reflecting non-recurring items (see
notes 2 and 7).
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Stock Prices
Emerson Electric Co. common stock (Symbol EMR) is listed on the New York Stock
Exchange and Chicago Stock Exchange.
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Independent Auditors' Report
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, 1995 and 1994, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emerson Electric
Co. and subsidiaries as of September 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 7 to the consolidated financial statements, effective
October 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions and effective October 1, 1994, the
Company changed its method of accounting for postemployment benefits.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
November 1, 1995
41