Emerson Reports First-Quarter 2007 Sales Up 11 Percent To $5.1 Billion; 15 Percent Increase In Earnings Per Share To $0.55

Emerson (NYSE: EMR) announced net sales for the first quarter ended December 31, 2006 were $5.1 billion, an increase of 11 percent over the $4.5 billion reported in the same period last year. Net earnings for the first quarter increased 12 percent to $445 million, or $0.55 per share. This represents a 15 percent increase in earnings per share from the $0.48 earned in the same period last year. All per share amounts reflect the 2-for-1 stock split in the form of a stock dividend that was paid on December 11, 2006. Underlying sales grew 4 percent in the quarter, which excludes the net impact of growth from acquisitions and divestitures (5 percent) and favorable exchange rates (2 percent). Underlying international sales increased 11 percent, including strong growth in Europe, Asia and Latin America. This quarter marked the first time that international sales were over 50 percent of total sales. As expected, underlying growth in the United States was down 2 percent driven primarily by weakness in the residential air-conditioning markets for the Climate Technologies segment, which experienced exceptionally strong growth last year as the industry converted to 13-SEER energy standards. "Emerson's first quarter demonstrates the strength of the global balance across our portfolio of businesses," said Emerson Chairman, Chief Executive Officer and President David N. Farr. "The Company's performance in the first quarter represents a solid start to what is expected to be another year of strong sales and earnings growth for Emerson." Segment Highlights Process Management delivered another quarter of strong sales and earnings performance. Reported sales grew by 11 percent which included an underlying sales increase of 6 percent and the favorable impact of currency translation (3 percent) and acquisitions (2 percent). Orders grew at a double digit rate in the quarter as strong capital spending in global energy markets continued to support the growth. The margin for this segment expanded by 170 basis points to 17.8 percent driven by leverage on the sales volume increase, benefits from new products and benefits from prior cost reduction activities. Industrial Automation achieved sales growth of 16 percent in the quarter. Underlying sales growth was 11 percent, which excludes the favorable impact of currency translation (4 percent) and acquisitions, net of divestitures (1 percent). Growth was led by Europe and Asia, which saw underlying growth of 15 percent and 18 percent, respectively. The capital spending environment continued to drive growth in these markets. Also, global demand for both primary and back-up power generation capacity continued to drive strong growth for the power generating alternator business. The profit margin for this segment was 16.7 percent, an increase of 10 basis points from the prior year quarter. Network Power sales grew 28 percent in the quarter, which included a favorable impact of 17 percent from acquisitions, net of divestitures, and 2 percent from currency translation. Growth remained strong in the core uninterruptible power supply (UPS), precision cooling and China power systems businesses which offset weakness in the North American telecom power business. The margin for this segment was 9.8 percent versus 11.5 percent in the prior year quarter driven primarily by dilution from acquisitions and deleverage on significantly lower sales volumes in the North American telecom business. Climate Technologies sales decreased 8 percent in the first quarter of 2007. Underlying sales decreased 11 percent, which excludes the favorable impact of acquisitions (2 percent) and currency translation (1 percent). The sales decrease is primarily attributable to the North American residential air-conditioning market, where sales in the prior year quarter were exceptionally strong because of pending 13-SEER energy efficiency standards. Business was strong in Europe and Asia for this segment, with underlying sales growth of 33 percent and 11 percent, respectively. The margin for this business declined by 70 basis points, mainly due to deleverage on the North American sales volume declines, capacity expansion investments and margin dilution from acquisitions. Appliance and Tools had sales growth of 5 percent in the quarter which included more than 1 percent of favorable currency translation and more than 1 percent from acquisitions. Strong growth from the tools and storage businesses was offset by a decline from the motors and appliance components businesses. Profitability for this segment improved by 70 basis points to 12.2 percent, driven primarily by benefits from prior cost reduction activities. Balance Sheet / Cash Flow Operating cash flow was $327 million in the first quarter of 2007, an increase of 2 percent from the first quarter of 2006. The cash flow increase was driven by increased earnings, which were mostly offset by increased working capital. The Company's financial position is strong, evidenced by the ratio of operating cash flow to debt at over 55 percent on a trailing 12 month basis. "Despite a slower start to the year, Emerson remains committed to generating significant amounts of cash flow in the current growth environment," Farr said. "We expect to generate approximately $2.7 billion of operating cash flow and $2.0 billion of free cash flow in fiscal 2007. The key priorities for using this cash will continue to be funding internal growth and new products, dividends, share repurchases and acquisitions that strengthen our businesses." 2007 Outlook The first quarter provided a solid start to the year. Earnings performance slightly exceeded expectations and order trends remained healthy during the quarter. Based on these factors Emerson expects full year earnings per share in the range of $2.50 to $2.60, which would represent growth in the range of 12 percent to 16 percent. This earnings performance is predicated on underlying sales growth in the range of 5 percent to 7 percent and reported sales growth in the range of 8 percent to 11 percent. Upcoming Investor Events On February 6, 2007, at 2:30 p.m. EST (1:30 p.m. CST), Emerson senior management will discuss the quarterly results during an investor conference call. All interested parties may listen to the live conference call via the Internet by going to the Investor Relations area of Emerson's Web site at www.gotoemerson.com/financial and completing a brief registration form. A replay of the conference call will be available for the next three months at the same location on the Web site. On February 9, 2007, Emerson senior management will host the Company's annual investment community update meeting in New York. The meeting will discuss expectations for the Company's performance in 2007 as well as updates of long-term initiatives being pursued to create value for shareholders. The presentations will begin at 8:30 a.m. EST and conclude at approximately 11:30 a.m. EST. All interested parties may listen to the webcast via the Internet by going to the Investor Relations area of Emerson's Web site at www.gotoemerson.com/financial and completing a brief registration form. A replay of the webcast will be available for approximately one week at the same location on the Web site. Details of upcoming events will be posted as they occur in the Investor Relations Calendar of Events on the corporate Web site. Forward-Looking and Cautionary Statements Statements in this release that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others, as set forth in the Company's most recent Form 10-K filed with the SEC. TABLE 1 EMERSON AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Quarter Ended December 31, Percent 2005 2006 Change Net sales $4,548 $5,051 11% Less: Costs and expenses Cost of sales 2,955 3,256 SG&A expenses 950 1,078 Other deductions, net 23 19 Interest expense, net 50 58 Earnings before income taxes 570 640 12% Income taxes 171 195 Net earnings $ 399 $ 445 12% Diluted avg. shares outstanding (millions) 827.2 808.5 Diluted earnings per common share $ 0.48 $ 0.55 15% Quarter Ended December 31, 2005 2006 Other deductions, net Rationalization of operations $ 12 $ 16 Amortization of intangibles 9 14 Other 26 31 Gains (24) (42) Total $ 23 $ 19 TABLE 2 EMERSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS) December 31, 2005 2006 Assets Cash and equivalents $ 624 $ 1,090 Receivables, net 3,222 3,673 Inventories 1,942 2,410 Other current assets 501 573 Total current assets 6,289 7,746 Property, plant & equipment, net 2,969 3,220 Goodwill 5,477 6,077 Other 1,891 2,060 $16,626 $19,103 Liabilities and Stockholders' Equity Short-term borrowings and current maturities of long-term debt $ 453 $ 1,167 Accounts payable 1,738 2,086 Accrued expenses 1,648 1,951 Income taxes 260 322 Total current liabilities 4,099 5,526 Long-term debt 3,128 3,375 Other liabilities 1,782 1,996 Stockholders' equity 7,617 8,206 $16,626 $19,103 TABLE 3 EMERSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) Quarter Ended December 31, 2005 2006 Operating Activities Net earnings $ 399 $ 445 Depreciation and amortization 141 161 Changes in operating working capital (263) (327) Other 42 48 Net cash provided by operating activities 319 327 Investing Activities Capital expenditures (101) (121) Purchases of businesses, net of cash and equivalents acquired (57) - Other (5) 43 Net cash used in investing activities (163) (78) Financing Activities Net increase (decrease) in short-term borrowings (262) 270 Proceeds from long-term debt - 248 Principal payments on long-term debt (254) (1) Dividends paid (183) (211) Purchases of treasury stock (41) (283) Other (17) (6) Net cash provided by (used in) financing activities (757) 17 Effect of exchange rate changes on cash and equivalents (8) 14 Increase (decrease) in cash and equivalents (609) 280 Beginning cash and equivalents 1,233 810 Ending cash and equivalents $ 624 $1,090 TABLE 4 EMERSON AND SUBSIDIARIES SEGMENT SALES AND EARNINGS (DOLLARS IN MILLIONS) Quarter Ended December 31, 2005 2006 Sales Process Management $1,097 $1,218 Industrial Automation 860 994 Network Power 939 1,199 Climate Technologies 748 688 Appliance and Tools 1,040 1,088 4,684 5,187 Eliminations (136) (136) Net Sales $4,548 $5,051 Quarter Ended December 31, 2005 2006 Earnings Process Management $ 176 $ 217 Industrial Automation 143 166 Network Power 108 117 Climate Technologies 102 90 Appliance and Tools 120 133 649 723 Differences in accounting methods 40 48 Corporate and other (69) (73) Interest expense, net (50) (58) Earnings before income taxes $ 570 $ 640 Quarter Ended December 31, 2005 2006 Rationalization of operations Process Management $ 2 $ 2 Industrial Automation 2 3 Network Power 3 4 Climate Technologies 1 3 Appliance and Tools 4 4 Total Emerson $ 12 $ 16 TABLE 5 Reconciliations of Non-GAAP Financial Measures The following reconciles each Non-GAAP measure with the most directly comparable GAAP measure (dollars in millions): Full Year 2007 Expected Cash Flow Operating Cash Flow approx. $ 2,700 Capital Expenditures approx. 700 Free Cash Flow (Non-GAAP) approx. $ 2,000 Expected Net Sales Fiscal 2007 Underlying Sales (Non-GAAP) 5% to 7% Currency Translation / Acq. / Divest. +3 to +4 pts Net Sales 8% to 11%