Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2009
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from ____________________ to __________________
 
Commission file number 1-278
 
EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
 
Missouri
(State or other jurisdiction of
incorporation or organization)
 
43-0259330
(I.R.S. Employer
Identification No.)
     
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri
(Address of principal executive offices)
 
63136
(Zip Code)
 
Registrant's telephone number, including area code: (314) 553-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerated Filer x
Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock of $0.50 par value per share outstanding at July 31, 2009: 751,589,725 shares.
 
 
 

 
 
FORM 10-Q
 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2009
(Dollars in millions, except per share amounts; unaudited)
 
   
Three Months
   
Nine Months
 
  
 
Ended June 30,
   
Ended June 30,
 
  
 
2008
   
2009
   
2008
   
2009
 
                                 
Net sales
 
$
6,568
     
5,091
     
18,111
     
15,593
 
                                 
Costs and expenses:
                               
                                 
Cost of sales
   
4,155
     
3,253
     
11,446
     
9,922
 
Selling, general and administrative expenses
   
1,321
     
1,089
     
3,757
     
3,401
 
Other deductions, net
   
100
     
141
     
170
     
353
 
Interest expense (net of interest income of $15, $3, $41 and $19, respectively)
   
46
     
64
     
147
     
157
 
                                 
Earnings from continuing operations before income taxes
   
946
     
544
     
2,591
     
1,760
 
                                 
Income taxes
   
299
     
157
     
827
     
542
 
                                 
Earnings from continuing operations
   
647
     
387
     
1,764
     
1,218
 
                                 
Discontinued operations, net of tax
   
(35
)
   
-
     
(40
)
   
-
 
                                 
Net earnings
 
$
612
     
387
     
1,724
     
1,218
 
                                 
Basic earnings per common share:
                               
Earnings from continuing operations
 
$
0.83
     
0.52
     
2.25
     
1.61
 
Discontinued operations
   
(0.04
)
   
-
     
(0.05
)
   
-
 
                                 
Basic earnings per common share
 
$
0.79
     
0.52
     
2.20
     
1.61
 
                                 
Diluted earnings per common share:
                               
Earnings from continuing operations
 
$
0.82
     
0.51
     
2.23
     
1.60
 
Discontinued operations
   
(0.04
)
   
-
     
(0.05
)
   
-
 
                                 
Diluted earnings per common share
 
$
0.78
     
0.51
     
2.18
     
1.60
 
                                 
Cash dividends per common share
 
$
0.30
     
0.33
     
0.90
     
0.99
 
 
See accompanying Notes to Consolidated Financial Statements.
 
 
2

 
 
FORM 10-Q
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share; unaudited)
 
   
September 30,
   
June 30,
 
   
2008
   
2009
 
             
ASSETS
           
Current assets
           
Cash and equivalents
 
$
1,777
     
1,382
 
Receivables, less allowances of $90 and $92, respectively
   
4,618
     
3,720
 
Inventories
   
2,348
     
2,062
 
Other current assets
   
588
     
554
 
                 
Total current assets
   
9,331
     
7,718
 
                 
Property, plant and equipment, net
   
3,507
     
3,475
 
                 
Other assets
               
Goodwill
   
6,562
     
6,976
 
Other
   
1,640
     
2,155
 
                 
Total other assets
   
8,202
     
9,131
 
  
 
$
21,040
     
20,324
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Short-term borrowings and current maturities of long-term debt
 
$
1,221
     
837
 
Accounts payable
   
2,699
     
1,824
 
Accrued expenses
   
2,480
     
2,308
 
Income taxes
   
173
     
24
 
                 
Total current liabilities
   
6,573
     
4,993
 
                 
Long-term debt
   
3,297
     
4,464
 
                 
Other liabilities
   
2,057
     
2,207
 
                 
Stockholders’ equity
               
Preferred stock of $2.50 par value per share
               
Authorized 5.4 shares; issued – none
   
-
     
-
 
Common stock of $0.50 par value per share
               
Authorized 1,200.0 shares; issued 953.4 shares; outstanding
               
771.2 shares and 751.5 shares, respectively
   
477
     
477
 
Additional paid-in capital
   
146
     
152
 
Retained earnings
   
14,002
     
14,471
 
Accumulated other comprehensive income
   
141
     
(133
)
Cost of common stock in treasury, 182.2 shares and
               
201.9 shares, respectively
   
(5,653
)
   
(6,307
)
                 
Total stockholders' equity
   
9,113
     
8,660
 
   
$
21,040
     
20,324
 
 
See accompanying Notes to Consolidated Financial Statements. 
 
 
3

 
 
FORM 10-Q
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2008 AND 2009
(Dollars in millions; unaudited)
 
   
Nine Months Ended
 
  
 
June 30,
 
   
2008
   
2009
 
Operating activities
           
Net earnings
 
$
1,724
     
1,218
 
Adjustments to reconcile net earnings to net cash
               
provided by operating activities:
               
Depreciation and amortization
   
530
     
542
 
Changes in operating working capital
   
(346
)
   
69
 
Pension funding
   
(99
   
(263
)
Pension deferred tax benefit
   
47
     
130
 
Other
   
142
     
38
 
                 
Net cash provided by operating activities
   
1,998
     
1,734
 
                 
Investing activities
               
Capital expenditures
   
(461
)
   
(388
)
Purchases of businesses, net of cash and equivalents acquired
   
(412
)
   
(735
)
Other
   
142
     
18
 
                 
Net cash used in investing activities
   
(731
)
   
(1,105
)
                 
Financing activities
               
Net increase in short-term borrowings
   
774
     
40
 
Proceeds from long-term debt
   
400
     
1,254
 
Principal payments on long-term debt
   
(10
)
   
(680
)
Dividends paid
   
(708
)
   
(749
)
Purchases of treasury stock
   
(727
)
   
(718
)
Other
   
(45
)
   
(94
)
                 
Net cash used in financing activities
   
(316
)
   
(947
)
                 
Effect of exchange rate changes on cash and equivalents
   
98
     
(77
)
                 
Increase (decrease) in cash and equivalents
   
1,049
     
(395
)
                 
Beginning cash and equivalents
   
1,008
     
1,777
 
                 
Ending cash and equivalents
 
$
2,057
     
1,382
 
                 
Changes in operating working capital
               
Receivables
 
$
(197
   
839
 
Inventories
   
(205
)
   
328
 
Other current assets
   
(1
   
16
 
Accounts payable
   
25
     
(800
)
Accrued expenses
   
28
     
(148
)
Income taxes
   
4
     
(166
)
   
$
(346
)
   
69
 
 
See accompanying Notes to Consolidated Financial Statements.
 
 
4

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
Notes to Consolidated Financial Statements
 
 
1.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented.  These adjustments consist of normal recurring accruals.  The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles.  For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2008.  Certain prior year amounts have been reclassified to conform to the current year presentation.  The Company has evaluated subsequent events through August 5, 2009.

 
2.
Reconciliations of weighted average common shares for basic and diluted earnings per common share follow (shares in millions):

   
Three Months Ended
   
Nine Months Ended
 
  
 
June 30,
   
June 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Basic shares outstanding
    778.6       749.6       782.8       755.0  
Dilutive shares
    9.2       5.1       9.3       4.8  
Diluted shares outstanding
    787.8       754.7       792.1       759.8  
 
 
3.
Comprehensive income (loss), net of applicable income taxes, is summarized as follows (dollars in millions):

   
Three Months Ended
   
Nine Months Ended
 
  
 
June 30,
   
June 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Net earnings
  $ 612       387       1,724       1,218  
Foreign currency translation
    124       237       442       (280 )
Cash flow hedges and other
    (6 )     60       (1 )     6  
    $ 730       684       2,165       944  

The change in foreign currency translation during the third quarter of 2009 is primarily due to the weakening of the U.S. dollar and the change during the nine month period ended June 30, 2009 is due to the stronger U.S. dollar.
 
 
5

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
4.
Net periodic pension expense is summarized as follows (dollars in millions):
 
   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
  
 
2008
   
2009
   
2008
   
2009
 
                         
Service cost
 
$
18
     
16
     
54
     
51
 
Interest cost
   
52
     
51
     
156
     
163
 
Expected return on plan assets
   
(68
)
   
(67
)
   
(205
)
   
(210
)
Net amortization
   
24
     
20
     
72
     
61
 
   
$
26
     
20
     
77
     
65
 
 
Net postretirement plan expense is summarized as follows (dollars in millions):

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
  
 
2008
   
2009
   
2008
   
2009
 
                         
Service cost
 
 $
2
     
1
     
4
     
3
 
Interest cost
   
6
     
8
     
20
     
22
 
Net amortization
   
7
     
1
     
22
     
5
 
   
$
15
     
10
     
46
     
30
 
 
 
5.
 Other deductions, net are summarized as follows (dollars in millions):
 
   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
  
 
2008
   
2009
   
2008
   
2009
 
Other deductions, net
                       
Rationalization of operations
 
 $
24
     
83
     
49
     
190
 
Amortization of intangibles
   
20
     
31
     
59
     
78
 
Other
   
56
     
33
     
126
     
120
 
Gains
   
-
     
(6
   
(64
   
(35
   
$
100
     
141
     
170
     
353
 

Other deductions, net increased for the three and nine months ended June 30, 2009, primarily due to higher rationalization costs (see Note 6 for further details) and higher amortization expense on acquired intangible assets.

During the nine months ended June 30, 2009, the Company received $41 million from the sale of an asset and recognized a pretax gain of $25 million.  During the nine months ended June 30, 2008, the Company received $54 million and recognized a pretax gain of $39 million on the sale of its equity investment in Industrial Motion Control Holdings and also recorded a pretax gain of $18 million related to the sale of a facility.

6

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
6.
The change in the liability for rationalization of operations during the nine months ended June 30, 2009, follows (dollars in millions):
 
   
September 30,
               
June 30,
 
   
2008
   
Expense
   
Paid / Utilized
   
2009
 
Severance and benefits
  $ 33       149       99       83  
Lease/contract terminations
    5       4       4       5  
Fixed asset write-downs
    -       7       7       -  
Vacant facility and other shutdown costs
    1       10       9       2  
Start-up and moving costs
    1       20       19       2  
    $ 40       190       138       92  

 
Rationalization of operations expense summarized by business segment follows (dollars in millions):

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
  
 
2008
   
2009
   
2008
   
2009
 
                         
Process Management
 
 $
4
     
18
     
8
     
26
 
Industrial Automation
   
5
     
13
     
11
     
25
 
Network Power
   
8
     
32
     
16
     
82
 
Climate Technologies
   
5
     
14
     
10
     
36
 
Appliance and Tools
   
2
     
6
     
4
     
21
 
   
$
24
     
83
     
49
     
190
 

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.  These expenses result from numerous individual actions implemented across the Company’s various operating divisions on an ongoing basis.  Rationalization of operations includes costs for moving facilities, starting up plants after relocation or business expansion, exiting product lines, curtailing/downsizing operations because of changing economic conditions and other costs resulting from asset redeployment decisions.

Given the difficult environment, the Company expects to incur full year costs of approximately $280 million to $300 million for actions to rationalize its businesses to the level appropriate for current economic conditions, and to improve the cost structure in preparation for the ultimate recovery.  This total includes the $190 million for the nine months shown above, as well as costs to complete actions initiated before the end of the third quarter and actions anticipated to be approved and initiated during the remainder of the year.  During the nine months ended June 30, 2009, the Company’s divisions have taken action in numerous locations worldwide to reduce force count by 20,000 positions, with approximately one-half of those from restructuring actions and the remainder through layoffs and attrition.  Additionally, the Company took action to exit and consolidate approximately 20 production, distribution or office facilities.

Noteworthy rationalization actions during the first nine months of 2009 included Process Management incurring severance and benefits related to worldwide workforce reductions; Industrial Automation incurring severance, benefits, start-up and moving costs related to consolidation of certain production facilities within North America, and severance costs related to workforce reductions; Network Power incurring severance, benefits, start-up and moving costs related to the consolidation of certain power systems production into lower cost areas in North America and Europe, severance, start-up and moving costs related to shifting certain production and engineering capabilities from Europe to Asia, and integration costs related to the Embedded Computing acquisition; Climate Technologies incurring severance related to the consolidation of production facilities in Europe and the downsizing of operations in North America and Asia; and Appliance and Tools incurring severance related to salaried workforce reductions and consolidation and downsizing of certain production facilities in North America.
 
 
7

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
 
7.
Other Financial Information (dollars in millions):
 
   
September 30,
   
June 30,
 
   
2008
   
2009
 
             
Inventories
           
Finished products
  $ 884       799  
Raw materials and work in process
    1,464       1,263  
    $ 2,348       2,062  
                 
Property, plant and equipment, net
               
Property, plant and equipment, at cost
  $ 8,691       8,783  
Less accumulated depreciation
    5,184       5,308  
    $ 3,507       3,475  
                 
Goodwill
               
Process Management
  $ 2,043       2,227  
Industrial Automation
    1,107       1,307  
Network Power
    2,432       2,387  
Climate Technologies
    412       473  
Appliance and Tools
    568       582  
    $ 6,562       6,976  

Inventories of companies acquired in fiscal 2009 totaled approximately $84 million.  Changes in the goodwill balances since September 30, 2008, are primarily due to additions from acquisitions, particularly in the Process Management ($223 million) and Industrial Automation ($219 million) segments, as well as foreign currency translation.  Because valuations of certain assets are in-process, purchase price allocations for acquisitions are subject to refinement.

Other assets, other
           
Intellectual property and customer relationships
  $ 627       943  
Pension plans
    436       659  
Capitalized software
    192       205  
Other
    385       348  
    $ 1,640       2,155  

Intellectual property and customer relationships of companies acquired in fiscal 2009 totaled $370 million, primarily in the Process Management and Industrial Automation segments.  The increase in the pension plans asset primarily reflects contributions net of pension expense for the period.
 
Product warranty liability
  $ 204       182  
                 
Other liabilities
               
Deferred income taxes
  $ 533       713  
Postretirement plans, excluding current portion
    417       436  
Retirement plans
    325       326  
Minority interest
    188       150  
Other
    594       582  
    $ 2,057       2,207  

8

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
8.
Summarized information about the Company’s operations by business segment follows (dollars in millions):
 
   
Sales
   
Earnings
 
Three months ended June 30,
 
2008
   
2009
   
2008
   
2009
 
                         
Process Management
  $ 1,731       1,505       346       222  
Industrial Automation
    1,271       813       186       41  
Network Power
    1,672       1,306       212       135  
Climate Technologies
    1,087       859       169       131  
Appliance and Tools
    998       771       138       108  
      6,759       5,254       1,051       637  
Differences in accounting methods
                    62       48  
Corporate and other
                    (121 )     (77
Eliminations/Interest
    (191 )     (163     (46 )     (64
                                 
    $ 6,568       5,091       946       544  
 
Intersegment sales of the Appliance and Tools segment for the three months ended June 30, 2009 and 2008, respectively, were $146 million and $162 million.  The change in Corporate and other for 2009 reflects lower stock compensation expense of $12 million, lower commodity mark-to-market losses of $10 million and higher one-time gains in fiscal 2009 of $6 million.

   
Sales
   
Earnings
 
Nine months ended June 30,
 
2008
   
2009
   
2008
   
2009
 
                         
Process Management
  $ 4,764       4,588       890       782  
Industrial Automation
    3,572       2,876       528       291  
Network Power
    4,598       4,021       579       389  
Climate Technologies
    2,809       2,284       413       250  
Appliance and Tools
    2,886       2,269       409       248  
      18,629       16,038       2,819       1,960  
Differences in accounting methods
                    172       145  
Corporate and other
                    (253 )     (188
Eliminations/Interest
    (518 )     (445     (147 )     (157
                                 
    $ 18,111       15,593       2,591       1,760  
 
Intersegment sales of the Appliance and Tools segment for the nine months ended June 30, 2009 and 2008, respectively, were $380 million and $439 million.  Compared to the prior year, Corporate and other for fiscal 2009 primarily reflects lower stock compensation expense of $66 million.

 
9.
Following is a discussion regarding the Company’s use of financial instruments.

 
Hedging Activities

 
The Company’s derivative instruments are accounted for under FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and, accordingly, are recognized at fair value.  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 hedging strategy, derivative instruments are selectively used to manage these risks and minimize their impact.  Forward exchange and option derivatives 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 cost of sales.  Emerson’s foreign currency hedges primarily relate to transactions denominated in euros and Mexican pesos, and to a lesser extent Canadian dollars and Swedish kroner.  The notional value of foreign currency hedge positions totaled approximately $1,942 million as of June 30, 2009.  Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum, and related products, of which the Company had approximately 51 million pounds hedged as of June 30, 2009.  The Company does not hold derivatives for trading or speculative purposes.  Effective January 1, 2009, the Company adopted the disclosure provisions of FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which expanded disclosures regarding derivatives use, including hedging objectives and strategies, fair values, gains and losses and credit-risk-related contingent features.

 
9

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
The majority of the Company’s derivatives are designated as hedges and qualify for deferral accounting under FAS 133.  Cash flow hedges of forecasted transactions minimize the exposure arising from variability in expected future cash flows attributable to a particular risk.  The effective portion of gains or losses for cash flow hedges is deferred in accumulated other comprehensive income (a component of stockholders’ equity) until it is recognized in earnings together with the underlying hedged item.  A fully effective hedge will result in no net earnings impact while the derivative is outstanding.  Gains and losses arising from the ineffective portion of any hedge are recognized in the income statement immediately.  The duration of hedge positions is generally two years or less and amounts currently hedged beyond eighteen months are not significant.  Hedging gains and losses deferred as of June 30, 2009 are generally expected to be recognized over the next twelve months as the underlying forecasted transactions occur.  However, the amounts ultimately recognized may differ, favorably or unfavorably, from those shown because until the positions are settled they remain subject to ongoing market price fluctuations.  Derivatives receiving deferral accounting under FAS 133 are highly effective and hedge ineffectiveness was immaterial during both the three and nine month periods ended June 30, 2009, including gains or losses on any derivatives that were discontinued because the forecasted transaction was no longer expected to occur.  No amounts were excluded from the assessment of hedge effectiveness.  The Company also uses derivatives to hedge economic exposures which do not receive deferral accounting under FAS 133.  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 and losses on derivatives that do not receive deferral accounting are recognized in the income statement immediately.

Shown below for the three and nine month periods ended June 30, 2009 are amounts reclassified from accumulated other comprehensive income into earnings, amounts recognized in other comprehensive income and amounts recognized in earnings for derivatives not receiving deferral accounting (dollars in millions):
 
 
Gain (Loss) Reclassified into
Earnings
 
Location
 
Gain (Loss) Recognized in
Other Comprehensive Income
 
Derivatives Receiving
Deferral Accounting
Three Months
Ended 6/30/09
   
Nine Months
Ended 6/30/09
     
Three Months
Ended 6/30/09
   
Nine Months
Ended 6/30/09
 
Cash Flow Hedges
                       
Foreign currency
  $ (6 )     (21 )    
Sales
  $ 13       (21 )    
Foreign currency
    (6     (26 )
Cost of sales
    21       (38 )    
Commodity
    (28     (85 )
Cost of sales
    20       (66 )    
    $ (40 )     (132 )     $ 54       (125 )    
                       
Derivatives Not Receiving
Deferral Accounting
Gain (Loss) Recognized in
Earnings
                   
Foreign currency
  $ (38 )     (62 )
Other income (deductions)
 
Commodity
    1       (9 )
Cost of sales
 
    $ (37 )     (71 )    
 
 
10

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Fair Value Measurements

Effective October 1, 2008, the Company adopted the recognition and disclosure provisions of FAS No. 157, “Fair Value Measurements.”  FAS 157 defines fair value, establishes a formal hierarchy and framework for measuring fair value, and expands disclosures about fair value measurements and the reliability of valuation inputs.  Under FAS 157, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for that asset or liability or, in the absence of a principal market, the most advantageous market available.  Within the hierarchy, Level 1 instruments are measured using observable market prices for the identical item in active markets and have the most reliable valuations; Level 2 instruments have fair value determined through market-observable inputs for similar items in active markets, including forward and spot prices, interest rates and volatilities for currencies or commodities; and Level 3 instruments are valued using inputs not observable in an active market, such as company-developed future cash flow estimates, which are considered the least reliable.  Valuations for all of Emerson’s derivatives fall within Level 2.  Due to the high credit quality of Emerson and its counterparties, the impact on the fair value of the Company’s derivative assets and liabilities due to the adoption of FAS 157 was inconsequential.  FAS 157 is effective for nonfinancial assets and liabilities, including goodwill and certain other intangible and long-lived assets, beginning in fiscal 2010.

The Company has in place bilateral collateral agreements with posting thresholds indexed to credit ratings that limit Emerson’s and its counterparties’ exposure in the event of default, and under which the Company has posted no collateral as of June 30, 2009.  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 could demand full collateralization should any of the Company’s counterparties’ credit rating fall below certain thresholds.  The maximum incremental collateral the Company could be required to post under these contingent features as of June 30, 2009 is $40 million.  For derivatives in asset positions, no credit loss is anticipated as the counterparties to these agreements are companies with high credit ratings.  A summary of the fair values of derivative contracts outstanding as of June 30, 2009 follows (dollars in millions).  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 all derivative contracts currently recognized in accrued expenses.

   
Assets
   
Liabilities
 
Derivatives Receiving Deferral Accounting
           
Foreign currency
  $ 17       46  
Commodity
  $ 18       29  
                 
Derivatives Not Receiving Deferral Accounting
               
Foreign currency
  $ 14       4  
Commodity
  $ 2       3  

The fair value of the Company's long-term debt (including current maturities) is estimated using prices from market sources and financial institutions for debt with similar maturities and characteristics, as well as other valuation techniques.  As of June 30, 2009, the fair value of long-term debt was $4,739 million, which exceeded the carrying value by $173 million.

10.
In April 2009, the Company acquired Roxar ASA, a leading global supplier of measurement solutions and software for reservoir production optimization, enhanced oil and gas recovery and flow assurance, for approximately $190 million in cash and $222 million in assumed debt.  Roxar has annual revenues of approximately $200 million and is reported in the Process Management business segment.

In February 2009, the Company acquired Trident Powercraft Private, Limited (Trident Power), a manufacturer and supplier of alternators, generators and other products, for approximately $125 million in cash.  Trident has annual revenues of approximately $40 million and is reported in the Industrial Automation business segment.
 
11

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
In December 2008, the Company acquired System Plast S.p.A, a manufacturer of engineered modular belts and custom conveyer components for the bottling, baking, food processing and packaging industries, for approximately $200 million in cash.  System Plast has annual revenues of approximately $100 million and is reported in the Industrial Automation business segment.
 
Items 2 and 3. Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
OVERVIEW
 
The third quarter and first nine months of fiscal 2009 were very challenging as significant declines in gross fixed investment, particularly capital goods and nonresidential construction, as well as housing and consumer spending, adversely impacted sales and earnings for most of the Company’s businesses.  These declines began in the third quarter of fiscal 2008 and have continued into 2009.  The Company anticipates continued weakness stemming from these factors for at least the remainder of this year and into the next.  The Company’s diverse international presence helped mitigate the adverse economic conditions as underlying sales grew fiscal year to date in Asia and Canada while declining in the United States and Europe.  Third quarter sales declined in all regions, although less severely in Asia.  Unfavorable foreign currency translation also negatively impacted results for the quarter and nine months ended June 30, 2009 due to the strength of the U.S. dollar.  Overall, sales and earnings for the third quarter and nine months decreased versus prior year for all segments on reductions in customer inventories and resulting lower spending levels as business and consumer confidence levels remained low.  Despite the economic downturn, Emerson's financial position remains strong and the Company continues to generate substantial operating cash flow.
 
THREE MONTHS ENDED JUNE 30, 2009, COMPARED WITH THREE MONTHS ENDED JUNE 30, 2008
 
RESULTS OF OPERATIONS
 
Three months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions, except per share amounts)
                 
                   
Net sales
 
$
6,568
     
5,091
     
(22
)%
Gross profit
 
$
2,413
     
1,838
     
(24
)%
Percent of sales
   
36.7
%
   
36.1
%
       
SG&A
 
$
1,321
     
1,089
         
Percent of sales
   
20.1
%
   
21.4
%
       
Other deductions, net
 
$
100
     
141
         
Interest expense, net
 
$
46
     
64
         
Earnings from continuing operations before income taxes
 
$
946
     
544
     
(43
)%
Percent of sales
    14.4 %     10.7 %        
Earnings from continuing operations
 
$
647
     
387
     
(40
)%
Net earnings
 
$
612
     
387
     
(37
)%
Percent of sales
   
9.3
%
   
7.6
%
       
                         
EPS – Continuing operations
 
$
0.82
     
0.51
     
(38
)%
EPS – Net earnings
 
$
0.78
     
0.51
     
(35
)%

Net sales for the quarter ended June 30, 2009 were $5,091 million, a decrease of $1,477 million, or 22 percent, compared with net sales of $6,568 million for the quarter ended June 30, 2008.  The consolidated results reflect a 19 percent ($1,179 million) decrease in underlying sales (which exclude acquisitions, divestitures and foreign currency translation), a 4 percent ($304 million) unfavorable impact from foreign currency translation and a 1 percent ($6 million) positive impact from acquisitions.  Underlying sales reflect a 19 percent loss from volume.  Underlying sales for the third quarter decreased 23 percent in the United States and 15 percent internationally.  The international sales decrease included declines across all major geographic regions, including Europe (25 percent), Asia (5 percent), Latin America (15 percent), Middle East/Africa (13 percent) and Canada (13 percent).  All segments incurred significant declines and continue to be impacted by the broad slowdown in the consumer and capital goods businesses.

 
12

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
Costs of sales for the third quarters of fiscal 2009 and 2008 were $3,253 million and $4,155 million, respectively.  Cost of sales as a percent of net sales was 63.9 percent in the third quarter of 2009, compared with 63.3 percent in the third quarter of 2008.  Gross profit was $1,838 million and $2,413 million for the third quarters ended June 30, 2009 and 2008, respectively, resulting in gross profit margins of 36.1 percent and 36.7 percent.  The decrease in gross profit margin during the third quarter of 2009 primarily reflects deleverage on the lower sales volume with inventory liquidation and unfavorable product mix, partially offset by material cost containment and savings from cost reduction actions.  Foreign currency translation negatively impacted the gross profit amount.
 
Selling, general and administrative (SG&A) expenses for the third quarter of 2009 were $1,089 million, or 21.4 percent of net sales, compared with $1,321 million, or 20.1 percent of net sales, for the third quarter of 2008.  The decrease of $232 million was largely due to lower sales volume, foreign currency translation and cost reduction actions.  The increase in SG&A as a percent of sales was primarily the result of deleverage on lower sales volume, partially offset by cost reductions and lower incentive stock compensation expense.
 
Other deductions, net were $141 million for the third quarter of 2009, a $41 million increase from the same period in the prior year, primarily due to a $59 million increase in rationalization expense.  See Notes 5 and 6 for further details regarding other deductions, net and rationalization costs.
 
Pretax earnings from continuing operations of $544 million for the third quarter of 2009 decreased $402 million, or 43 percent, compared with $946 million for the prior year.  This decrease was primarily due to lower sales, lower gross profit and higher SG&A relative to sales, and an increase in other deductions, net.  Earnings results predominantly reflect decreases of $145 million in Industrial Automation, $124 million in Process Management and $77 million in Network Power. Third quarter pretax margin decreased 3.7 percentage points versus the prior year to 10.7 percent of sales. Major drivers of the margin decline were deleverage from operations running below capacity due to lower sales volume (approximately 3 points), negative $55 million due to under absorption from inventory reduction (approximately 1 point), and unfavorable mix (approximately 1 point), which were partially offset by savings from cost reductions (approximately 2 points) and other favorable items (approximately 1 point). In addition, increased rationalization expense (approximately 1 point) and interest and other items (approximately 1 point) adversely impacted the pretax margin.
 
Income taxes were $157 million and $299 million for the three months ended June 30, 2009 and 2008, respectively, resulting in effective tax rates of 29 percent and 32 percent, respectively.  The lower effective tax rate reflects a credit from the repatriation of certain non-U.S. earnings and a benefit from a prior net operating loss at a foreign subsidiary.
 
Earnings and earnings per share from continuing operations were $387 million and $0.51 for the three months ended June 30, 2009, decreases of 40 percent and 38 percent, respectively, compared with $647 million and $0.82 for the quarter ended June 30, 2008.  Higher restructuring expenses in 2009 versus the prior year negatively impacted earnings per share comparisons by $0.05 per share.
 
As there were no discontinued operations in the third quarter of fiscal 2009, net earnings were also $387 million and earnings per share were also $0.51 for the three months ended June 30, 2009, decreases of 37 percent and 35 percent, respectively, compared with the $612 million and $0.78 for the three months ended June 30, 2008.  Net earnings for the third quarter of fiscal 2008 included a loss from discontinued operations of $35 million, or $0.04 per share, related to the European appliance motor and pump business.
 
BUSINESS SEGMENTS
 
Following is a summary of operating results for the Company’s business segments for the third quarter ended June 30, 2009, compared with the third quarter ended June 30, 2008.  The Company defines segment earnings as earnings before interest and taxes.

Process Management

Three months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
 
$
1,731
     
1,505
     
(13
)%
Earnings
 
$
346
     
222
     
(36
)%
Margin
   
20.0
%
   
14.8
%
     

 
13

 
 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
Process Management reported third quarter sales of $1,505 million, a decrease of 13 percent from the prior year.  Nearly all of the businesses reported lower sales and earnings, led by the measurement and flow business, primarily as a result of weakness in the chemical, refining and marine markets.  The decline was slightly offset by growth in the power and water business.  Underlying sales decreased 9 percent, reflecting a decline in volume, with a 7 percent ($121 million) unfavorable impact from foreign currency translation and a 3 percent ($42 million) positive contribution from the Roxar acquisition.  The decrease in underlying sales reflects declines in the United States (18 percent) and Latin America (19 percent) and moderate decreases in Europe (3 percent) and Middle East/Africa (5 percent), which were partially offset by an increase in Asia (3 percent).  Earnings decreased 36 percent for the period, to $222 million from $346 million in the prior year, while margins decreased 5.2 percentage points primarily reflecting unfavorable product mix (approximately 2 points of margin) with measurement and flow declines greater than in the systems business, deleverage on the lower sales volume and significant inventory reductions (approximately 1 point of margin each) and higher restructuring costs of $14 million, which were partially offset by savings from cost reductions.
 
Industrial Automation
 
Three months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
 
$
1,271
     
813
     
(36
)%
Earnings
 
$
186
     
41
     
(78
)%
Margin
   
14.6
%
   
5.0
%
     
 
Sales decreased 36 percent to $813 million in the Industrial Automation segment for the third quarter.  Sales results reflect significant declines across the segment due to the severe slowdown in the capital goods markets.  All businesses declined, particularly power generating alternators, as well as fluid automation, electronic drives and electrical distribution.  Underlying sales decreased 34 percent, foreign currency translation had a 5 percent ($81 million) unfavorable impact while the System Plast and Trident Power acquisitions added a 3 percent ($28 million) positive contribution.  Underlying sales decreased 32 percent internationally, with all regions down, including a 37 percent decline in Europe and a 36 percent decline in the United States.  The underlying sales decrease reflects an approximate 35 percent decline from volume, as well as an estimated 1 percent positive impact from price.  Earnings were $41 million compared with $186 million in the prior year period, and margins decreased 9.6 percentage points primarily reflecting deleverage on the lower sales volume (approximately 7 points of margin) with significant inventory reduction (approximately 1 point of margin) and higher restructuring costs of $8 million, partially offset by savings from cost reduction actions and higher sales prices.
 
Network Power
 
Three months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
 
$
1,672
     
1,306
     
(22
)%
Earnings
 
$
212
     
135
     
(36
)%
Margin
   
12.7
%
   
10.3
%
     

Sales in the Network Power segment decreased 22 percent to $1,306 million for the third quarter 2009 compared with the prior year, reflecting declines in the uninterruptible power supply, precision cooling and embedded power businesses due to the slowdown in customers’ capital spending, and a slight decline in the China network power business.  The sales decrease reflects an underlying sales decline of 15 percent, a 4 percent ($59 million) unfavorable impact from foreign currency translation, and a 3 percentage points ($80 million) unfavorable impact from the decline in sales for the Embedded Computing acquisition.  The underlying sales decrease reflects a volume decline of 14 percent and a 1 percent negative impact from lower selling prices.  Geographically, underlying sales reflect decreases of 23 percent in the United States, 30 percent in Europe, and 8 percent in Latin America, while sales in Asia were flat.  Earnings of $135 million decreased 36 percent compared to the prior year primarily due to lower sales volume and higher restructuring costs of $24 million (including acquisition integration costs).  The margin decrease reflects deleverage from the lower sales volume, with decreases in inventory, and a negative impact from acquisitions which was partially offset by savings from cost reduction actions.

 
14

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
Climate Technologies
 
Three months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
  $ 1,087       859       (21 )%
Earnings
  $ 169       131       (22 )%
Margin
    15.5 %     15.2 %        
 
Climate Technologies sales decreased 21 percent in the third quarter to $859 million, reflecting broad declines across all of the businesses, with steep declines in the temperature sensors, compressor and heater controls businesses.  The sales decrease reflects a 20 percent decline in underlying sales, a 3 percent ($31 million) unfavorable impact from foreign currency translation and a 2 percent ($16 million) favorable impact from acquisitions.  The underlying sales decrease includes an estimated 21 percent decline from lower volume and a 1 percent positive impact from higher pricing.  Sales declines in the compressor business reflect the slowdown in the worldwide air-conditioning and refrigeration markets.  Sales in the United States decreased 16 percent and international sales decreased 25 percent, including declines in Asia (23 percent) and Europe (30 percent).  Earnings decreased 22 percent to $131 million, primarily on lower sales volume.  The decrease in margin reflects deleverage on the lower sales volume and higher restructuring costs of $9 million, partially offset by savings from cost reductions.  Sales price increases were slightly offset by an increase in wage costs.
 
Appliance and Tools
 
Three months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
  $ 998       771       (23 )%
Earnings
  $ 138       108       (21 )%
Margin
    13.8 %     14.0 %        
 
Appliance and Tools segment sales decreased 23 percent to $771 million in the third quarter of 2009, reflecting a 22 percent decline in underlying sales and a 1 percent ($12 million) unfavorable impact from foreign currency translation.  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 solutions businesses reflect major customers reducing inventory and production levels due to the difficult economic conditions.  The underlying sales decrease of 22 percent reflects an estimated 24 percent decline in volume and an approximate 2 percent positive impact from price.  Underlying international sales declined approximately 24 percent during the quarter, while underlying sales in the United States decreased 21 percent.  Earnings were $108 million, a decrease of 21 percent compared with the prior year period, primarily due to lower sales volume.  The margin increase reflects the benefit from the $9 million impairment charge in the appliance control business in the prior year, savings from cost reductions, sales prices increases and material cost containment which were substantially offset by deleverage on the lower sales volume.
 
15

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
NINE MONTHS ENDED JUNE 30, 2009, COMPARED WITH NINE MONTHS ENDED JUNE 30, 2008
 
RESULTS OF OPERATIONS
 
Nine months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions, except per share amounts)
                 
                   
Net sales
  $ 18,111       15,593       (14 )%
Gross profit
  $ 6,665       5,671       (15 )%
Percent of sales
    36.8 %     36.4 %        
SG&A
  $ 3,757       3,401          
Percent of sales
    20.7 %     21.8 %        
Other deductions, net
  $ 170       353          
Interest expense, net
  $ 147       157          
Earnings from continuing operations before income taxes
  $ 2,591       1,760       (32 )%
Percent of sales
    14.3 %     11.3 %        
Earnings from continuing operations
  $ 1,764       1,218       (31 )%
Net earnings
  $ 1,724       1,218       (29 )%
Percent of sales
    9.5 %     7.8 %        
                         
EPS – Continuing operations
  $ 2.23       1.60       (28 )%
EPS – Net earnings
  $ 2.18       1.60       (27 )%
 
Net sales for the nine months ended June 30, 2009 were $15,593 million, a decrease of $2,518 million, or 14 percent, compared with net sales of $18,111 million for the nine months ended June 30, 2008.  The consolidated results reflect a 10 percent ($1,793 million) decline in underlying sales, a 5 percent ($793 million) unfavorable impact from foreign currency translation and a 1 percent ($68 million) positive contribution from acquisitions.  The decline in underlying sales for the nine months of fiscal 2009 reflects a 17 percent decrease in the United States and a 4 percent decrease in international sales, including decreases in Europe (11 percent), Middle East/Africa (3 percent) and Latin America (1 percent), partially offset by increases in Asia (1 percent) and Canada (3 percent).  Underlying sales reflect an approximate 11 percent loss from volume and a 1 percent positive impact from higher pricing.  Sales declined across all segments as the Company’s businesses continued to be impacted by the broad slowdown in consumer and capital goods businesses.
 
Costs of sales for the nine months of fiscal 2009 and 2008 were $9,922 million and $11,446 million, respectively.  Cost of sales as a percent of net sales was 63.6 percent in the nine months of 2009, compared with 63.2 percent in the nine months of 2008.  Gross profit was $5,671 million and $6,665 million for the nine months ended June 30, 2009 and 2008, respectively, resulting in gross profit margins of 36.4 percent and 36.8 percent.  The decrease in gross profit margin during the nine months of 2009 primarily reflects deleverage on the lower sales volume and negative product mix, which were partially offset by savings from productivity improvements.  The negative impact of foreign currency translation and lower sales volume reduced the gross profit amount.  Higher sales prices were partially offset by higher wage costs.
 
Selling, general and administrative (SG&A) expenses for the nine months of 2009 were $3,401 million, or 21.8 percent of net sales, compared with $3,757 million, or 20.7 percent of net sales for the nine months of 2008.  The decrease of $356 million was largely due to lower sales volume, foreign currency translation and cost reductions.  The increase in SG&A as a percent of sales was primarily the result of deleverage on the lower sales volume, partially offset by cost reductions and lower incentive stock compensation expense.
 
Other deductions, net were $353 million for the nine months of 2009, a $183 million increase from the $170 million for the same period in the prior year, due to higher rationalization costs in 2009 and lower nonrecurring gains.  For the nine months ended June 30, 2009, costs for the rationalization of operations were $190 million, compared with $49 million in the prior year period.  Gains were $35 million in the nine months of fiscal 2009, including the $25 million asset sale benefit in the second quarter, compared with gains of $64 million in the prior year.  In the nine months of fiscal 2008, the Company recognized pretax gains of $39 million on the sale of its equity investment in Industrial Motion Control Holdings and $18 million on the sale of a facility.  See Notes 5 and 6 for further details regarding other deductions, net and rationalization costs.
 
16

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
Pretax earnings from continuing operations decreased $831 million for the nine months of 2009, or 32 percent to $1,760 million, compared with $2,591 million for the prior year.  This decrease was primarily due to lower sales, lower gross profit and higher SG&A relative to sales, and an increase in other deductions, net.  The earnings decline predominantly reflects decreases of $237 million in Industrial Automation, $190 million in Network Power, $163 million in Climate Technologies and $161 million in Appliance and Tools. Year-to-date pretax margin declined 3.0 percentage points, to 11.3 percent, primarily due to the factors cited in the discussion of third quarter results.
 
Income taxes were $542 million and $827 million for the nine months ended June 30, 2009 and 2008, respectively, resulting in effective tax rates of 31 percent and 32 percent, respectively.  The effective tax rate for fiscal year 2009 is currently estimated to be 30 percent.
 
Earnings and earnings per share from continuing operations were $1,218 million and $1.60, respectively, for the nine months ended June 30, 2009, decreases of 31 percent and 28 percent, compared with $1,764 million and $2.23 for the nine months ended June 30, 2008.  Higher restructuring expenses in 2009 combined with lower gains versus the prior year negatively impacted earnings per share comparisons by $0.15 per share.  The 28 percent decrease in earnings per share also reflects the benefit of treasury share purchases.
 
As there were no discontinued operations in the nine months of fiscal 2009, net earnings were also $1,218 million and earnings per share were also $1.60 for the nine months ended June 30, 2009, decreases of 29 percent and 27 percent, respectively, compared with $1,724 million and $2.18 for the nine months ended June 30, 2008.  Net earnings for the nine months of fiscal 2008 included a loss from discontinued operations of $40 million, or $0.05 per share, consisting of a $42 million gain from the sale of the Brooks Instrument unit, an $88 million loss related to the European appliance motor and pump business and combined earnings of $6 million related to these businesses.
 
BUSINESS SEGMENTS
 
Following is a summary of segment results for the nine months ended June 30, 2009 compared with the nine months ended June 30, 2008.  The Company defines segment earnings as earnings before interest and taxes.

Process Management

Nine months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
  $ 4,764       4,588       (4 )%
Earnings
  $ 890       782       (12 )%
Margin
    18.7 %     17.1 %        
 
Process Management sales were $4,588 million, a decrease of 4 percent from the prior year.  Results were mixed across the segment with sales down for the measurement and flow and the systems and solutions businesses, reflecting weakness in the chemical, refining and marine markets, and modest sales growth for the valves business.  Underlying sales increased 2 percent, reflecting volume gains, while foreign currency translation had an unfavorable impact of 7 percent ($318 million) and the Roxar acquisition had a favorable impact of 1 percent ($42 million).  The underlying sales increase reflects growth in Asia (15 percent), Europe (3 percent), Latin America (3 percent) and Canada (11 percent), partially offset by decreases in the United States (6 percent) and Middle East/Africa (2 percent).  Earnings for the first nine months decreased 12 percent, to $782 million from $890 million.  The margin decrease reflects negative product mix and higher restructuring costs of $18 million, which were partially offset by savings from productivity improvements.  Price increases and material cost containment were more than offset by higher wage costs.
 
17

 
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q
 
Industrial Automation
 
Nine months ended June 30,
 
2008
   
2009
   
Change
 
(dollars in millions)
                 
                   
Sales
  $ 3,572       2,876       (19 ) %
Earnings
  $ 528       291       (45 ) %
Margin
    14.8 %     10.1<