Emerson Reports Second-Quarter EPS of $0.65; $3.4 Billion In Sales; Operating Cash Flow Up 11 Percent.

Business Editors

ST. LOUIS--(BUSINESS WIRE)--May 2, 2002

Sales, Operating Margins, Earnings, And Cash Flow Increase

Sequentially Versus First Quarter

Emerson (NYSE: EMR) announced today that for the second quarter ended March 31, 2002, the company achieved sales of $3.4 billion, net earnings of $275 million, and earnings per share of $0.65. Operating cash flow was $438 million, an increase of 11 percent over the second quarter of fiscal 2001, driven by strong improvements in working capital. Free cash flow increased 41 percent versus the second quarter of fiscal 2001, from $255 million to $360 million, reflecting the improved operating cash flow and lower capital spending. Year-to-date, operating cash flow increased 2 percent, to $690 million, and free cash flow was $518 million, an increase of 36 percent over the prior year.

In the second quarter of fiscal 2001, Emerson reported sales of $4.1 billion, net earnings of $359 million, earnings per share of $0.83 ($0.92 excluding goodwill amortization), and operating cash flow of $396 million.

Commenting on the results, David N. Farr, chief executive officer, said, "While our end markets remain well below year-ago levels, we achieved a 4 percent sequential improvement in quarterly sales, and order activity over the past few months is encouraging. We are seeing stable-to-increasing demand in industrial automation and electronics and telecommunications, segments that were hardest hit by the downturn. Backlog in the process business remains well above a year ago, and consumer housing-based sales have also remained strong. While no one can predict how the recovery will unfold, continuation of these trends would enable us to achieve further sequential sales improvements as the year progresses.

"We also achieved a 0.8 point operating margin increase versus the first quarter, driven by higher sales volume and restructuring efforts across the company. We are targeting further strong quarterly margin improvements for the remainder of the year as the results of our cost actions continue to flow through. Earnings per share increased 7 percent from the first quarter, and with the improved sales and profitability, we expect continued sequential growth throughout the year. Operating cash flow and free cash flow should also continue at high levels.

"While cost containment has been a key focus over the past year, we have maintained our commitment to strategic technology investments and key growth initiatives. Each of our business segments is strong, and industry data show we are outperforming key competitors. In many cases, this is because of our sustained investment in next-generation technologies that are literally changing their industries, such as PlantWeb process automation architecture and Scroll compressors. This positions Emerson for strong performance as the economy improves."

Business Segment Highlights

Discussing the business segments, Farr said, "The process control business reported sales of $837 million, a reduction of 2 percent versus a year ago. Underlying sales, excluding the Xomox industrial valves divestiture, acquisitions and currency exchange, increased 2 percent on top of a double-digit core increase a year ago.

"The increase in underlying sales was led by strong growth in Asia and Latin America, and solid growth in Europe. PlantWeb (www.EmersonProcess.com/PlantWeb) has been a key factor behind our continued success, enabling us recently to win several large projects. Since the beginning of the year, Emerson Process Management has won more than $180 million in major projects. The vast majority of the revenue for these will be realized later in 2002 and in 2003, providing positive momentum into these periods.

"Sales in the electronics and telecommunications business were $591 million for the quarter, a decline of 7 percent from the first quarter and 42 percent from a year ago. We have taken aggressive restructuring actions to respond to the weakened market environment, allowing us to maintain positive earnings at lower volume levels. This business should realize strong profitability improvement as demand returns.

"During the quarter, Emerson divested its ENI solid-state power supplies business in exchange for 12 million shares of MKS Instruments, resulting in a pretax gain of $93 million. The impact of this gain was approximately offset by ongoing costs for the rationalization of operations and other items.

"Heating, ventilating and air conditioning sales decreased by 6 percent to $641 million, driven by lower commercial and industrial capital spending. In this business, we have excellent visibility into residential inventory levels, which continue at record low levels at customers and distributors. Second-half sales will be driven by inventory replenishment and summer weather, which are expected to provide solid growth.

"Sales in the industrial automation segment declined from $760 million to $600 million in the second quarter of fiscal 2002, reflecting continued weakness in the European and U.S. industrial capital goods markets, divestitures, and unfavorable currency exchange.

"Sales for the appliance and tools business declined 6 percent to $847 million, due primarily to softness in commercial and industrial motors and tools. Sales in appliance components again improved, driven by strong housing growth. Consumer housing-related businesses have continued to show strength, with ClosetMaid storage solutions achieving a double-digit sales increase for the quarter."

Financial Highlights

Farr continued, "Our focus on working capital efficiency and cash flow continues to generate results, and our balance sheet is strong. Inventory and accounts receivable decreased by $461 million and $348 million, respectively, from a year ago, lowering working capital and increasing available cash. Net debt to net capital was 43 percent at the end of the quarter, and interest coverage was at 6.9 times for the six months ended March 31, 2002. We expect to further reduce debt this year, with solid cash generation and lower levels of acquisition."

Earlier this year Emerson adopted FAS 142 regarding goodwill amortization, which increases the company's reported fiscal 2002 earnings by $0.35, or approximately $0.09 per quarter. The change also reduces Emerson's effective tax rate by approximately 2.5 percentage points. As the company has indicated, in conjunction with the adoption of FAS 142, Emerson expects to incur in fiscal 2002 a non-cash accounting charge of approximately 5 percent of total assets.

Statements in this release that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties. These include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others, as set forth in the company's SEC filings.

                       EMERSON AND SUBSIDIARIES
                    CONSOLIDATED OPERATING RESULTS
            (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

                                 Quarter Ended March 31,     Percent
                                    2001        2002         Change

Net sales                        $4,103.3    $3,420.8        (16.6%)
Less: Costs and expenses
 Cost of sales                    2,652.5     2,232.1
 SG&A expenses                      790.0       724.3
 Interest expense                    79.3        61.8
 Other deductions (income), net      36.1        (2.0)
Income before income taxes          545.4       404.6        (25.8%)
Income taxes                        186.7       129.9
Net earnings                     $  358.7    $  274.7        (23.4%)

Basic earnings per common share     $0.84       $0.65        (22.6%)
Diluted earnings per common share   $0.83       $0.65        (21.7%)

                              Six Months Ended March 31,     Percent
                                    2001        2002         Change

Net sales                        $8,022.8    $6,715.6        (16.3%)
Less:  Costs and expenses
 Cost of sales                    5,184.0     4,356.8
 SG&A expenses                    1,564.0     1,472.2
 Interest expense                   162.9       131.9
 Other deductions (income), net      22.4       (18.1)
Income before income taxes        1,089.5       772.8        (29.1%)
Income taxes                        373.4       243.4
Net earnings                     $  716.1    $  529.4        (26.1%)

Basic earnings per common share     $1.68       $1.26        (25.0%)
Diluted earnings per common share   $1.66       $1.26        (24.1%)


                       EMERSON AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEETS
                         (DOLLARS IN MILLIONS)

                                             March 31,
                                         2001        2002
Assets
 Cash and equivalents                 $  403.6    $  448.1
 Receivables, net                      2,879.5     2,531.4
 Inventories                           2,211.8     1,750.6
 Other current assets                    454.4       467.5
  Total current assets                 5,949.3     5,197.6
 Property, plant & equipment, net      3,302.6     3,124.7
 Goodwill                              5,325.4     5,729.4
 Other                                 1,160.0     1,482.1
                                     ---------   ---------
                                     $15,737.3   $15,533.8

Liabilities and Stockholders' Equity
 Short-term borrowings and current
  maturities of long-term debt       $ 2,521.4   $ 2,513.7
 Accounts payable                      1,263.9     1,032.0
 Accrued expenses                      1,462.6     1,363.1
 Income taxes                            260.4       185.4
  Total current liabilities            5,508.3     5,094.2
 Long-term debt                        2,279.2     2,738.4
 Other liabilities                     1,269.3     1,329.6
 Stockholders' equity                  6,680.5     6,371.6
                                     ---------   ---------
                                     $15,737.3   $15,533.8


                       EMERSON AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                         (DOLLARS IN MILLIONS)

                                     Six Months Ended March 31,
                                         2001        2002
Operating Activities
 Net earnings                         $  716.1    $  529.4
 Depreciation and amortization           352.2       268.9
 Changes in operating working capital   (287.8)       (6.9)
 Gains on divestitures and other        (107.0)     (101.4)
  Net cash provided by operating
   activities                            673.5       690.0

Investing Activities
 Capital expenditures                   (291.2)     (172.0)
 Purchases of businesses, net of cash
  and equivalents acquired              (139.0)     (718.3)
 Divestitures of businesses and
  other, net                              42.3       133.0
  Net cash used in investing
   activities                           (387.9)     (757.3)

Financing Activities
 Net increase in short-term borrowings   183.0         5.9
 Proceeds from long-term debt             40.1       500.9
 Principal payments on long-term debt    (21.9)       (9.7)
 Dividends paid                         (328.1)     (325.9)
 Net purchases of treasury stock         (37.2)       (6.7)
  Net cash (used in) provided by
   financing activities                 (164.1)      164.5
 Effect of exchange rate changes on
  cash and equivalents                     1.3        (4.8)

Increase in cash and equivalents         122.8        92.4
Beginning cash and equivalents           280.8       355.7
Ending cash and equivalents           $  403.6    $  448.1


                       EMERSON AND SUBSIDIARIES
                       SEGMENT SALES AND PROFITS
                         (DOLLARS IN MILLIONS)

                                      Quarter Ended March 31,
                                         2001        2002
Sales
 Process Control                      $  849.9    $  836.5
 Industrial Automation                   760.4       600.4
 Electronics and Telecommunications    1,025.2       590.9
 Heating, Ventilating and Air
  Conditioning                           683.1       640.7
 Appliance and Tools                     900.3       847.1
                                       -------     -------
                                       4,218.9     3,515.6
 Eliminations                           (115.6)      (94.8)
  Total Emerson                       $4,103.3    $3,420.8

                                      Quarter Ended March 31,
                                         2001        2002
Earnings
 Process Control                      $   81.2    $   94.9
 Industrial Automation                   106.2        67.8
 Electronics and Telecommunications      131.2        18.2
 Heating, Ventilating and Air
  Conditioning                           106.4        95.1
 Appliance and Tools                     132.2       116.3
                                         -----       -----
                                         557.2       392.3
 Differences in accounting methods        49.6        33.3
 Interest, corporate and other            17.9        40.8
 Interest expense                        (79.3)      (61.8)
  Income before income taxes          $  545.4    $  404.6

      In connection with the adoption of FAS 142, fiscal 2002 segment
earnings exclude goodwill amortization. Second quarter of fiscal 2001
segment earnings include goodwill amortization as follows (in
millions): Process Control $14; Industrial Automation $7; Electronics
and Telecommunications $13; Heating, Ventilating and Air Conditioning
$4; and Appliance and Tools $4.


                       EMERSON AND SUBSIDIARIES
                       SEGMENT SALES AND PROFITS
                         (DOLLARS IN MILLIONS)

                                    Six Months Ended March 31,
                                         2001        2002
Sales
 Process Control                      $1,624.3    $1,632.9
 Industrial Automation                 1,513.1     1,256.8
 Electronics and Telecommunications    2,111.8     1,225.4
 Heating, Ventilating and Air
  Conditioning                         1,202.8     1,099.2
 Appliance and Tools                   1,780.8     1,678.2
                                       -------     -------
                                       8,232.8     6,892.5
 Eliminations                           (210.0)     (176.9)
  Total Emerson                       $8,022.8    $6,715.6

                                     Six Months Ended March 31,
                                         2001        2002
Earnings
 Process Control                      $  148.1    $  179.8
 Industrial Automation                   213.2       152.4
 Electronics and Telecommunications      278.8        50.8
 Heating, Ventilating and Air
  Conditioning                           181.1       153.7
 Appliance and Tools                     267.8       219.3
                                       -------      ------
                                       1,089.0       756.0
 Differences in accounting methods        97.7        72.2
 Interest, corporate and other            65.7        76.5
 Interest expense                       (162.9)     (131.9)
  Income before income taxes          $1,089.5      $772.8

      In connection with the adoption of FAS 142, fiscal 2002 segment
earnings exclude goodwill amortization. First six months of fiscal
2001 segment earnings include goodwill amortization as follows (in
millions): Process Control $28; Industrial Automation $13; Electronics
and Telecommunications $27; Heating, Ventilating and Air Conditioning
$7; and Appliance and Tools $8.

SOURCE: Emerson