EMERSON ELECTRIC CO - 10-Q Quarterly Report

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 March 31, 2004

[ ] 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, and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )

Common stock outstanding at April 30, 2004: 421,873,082 shares.

FORM 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2003 AND 2004
(Dollars in millions except per share amounts; unaudited)

	Three Months Ended March 31,		Six Months Ended March 31,
	2003	2004	2003	2004
Net Sales Costs and expenses: Cost of sales Selling, general and administrative expenses Other deductions, net Interest expense (net of interest income of $4, $7, $8 and $12, respectively)	$ 3,465 2,254 731 67 57	3,859 2,503 807 30 53	6,691 4,337 1,448 112 115	7,459 4,821 1,597 108 110
Earnings from continuing operations before income taxes	356	466	679	823
Income taxes	115	148	220	261
Earnings from continuing operations	241	318	459	562
Net loss from discontinued operations	5	-	6	-
Net earnings	$ 236	318	453	562
Basic earnings per common share: Earnings from continuing operations Discontinued operations	$ 0.58 (0.02)	0.76 -	1.10 (0.02)	1.34 -
Basic earnings per common share	$ 0.56	0.76	1.08	1.34
Diluted earnings per common share: Earnings from continuing operations Discontinued operations	$ 0.57 (0.01)	0.75 -	1.09 (0.01)	1.33 -
Diluted earnings per common share	$ 0.56	0.75	1.08	1.33
Cash dividends per common share	$0.3925	0.4000	0.7850	0.8000

See accompanying notes to consolidated financial statements.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share amounts; unaudited)

	September 30, 2003	March 31, 2004
ASSETS CURRENT ASSETS Cash and equivalents Receivables, less allowances of $82 and $81, respectively Inventories Other current assets	$ 696 2,650 1,558 596	1,165 2,874 1,631 638
Total current assets	5,500	6,308
PROPERTY, PLANT AND EQUIPMENT, NET	2,962	2,906
OTHER ASSETS Goodwill Other	4,942 1,790	5,022 1,785
Total other assets	6,732 $15,194	6,807 16,021
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings and current maturities of long-term debt Accounts payable Accrued expenses Income taxes	$ 391 1,397 1,513 116	504 1,400 1,556 152
Total current liabilities	3,417	3,612
LONG-TERM DEBT OTHER LIABILITIES	3,733 1,584	3,756 1,648
STOCKHOLDERS' EQUITY Preferred stock of $2.50 par value per share. Authorized 5,400,000 shares; issued - none Common stock of $.50 par value per share. Authorized 1,200,000,000 shares; issued 476,677,006 shares Additional paid in capital Retained earnings Accumulated other comprehensive income Cost of common stock in treasury, 55,522,542 shares and 54,855,954 shares, respectively	- 238 65 8,889 (386) (2,346)	- 238 73 9,114 (99) (2,321)
Total stockholders' equity	6,460 $15,194	7,005 16,021

See accompanying notes to consolidated financial statements.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2003 AND 2004
(Dollars in millions; unaudited)

	Six Months Ended March 31,
	2003	2004
OPERATING ACTIVITIES Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization Changes in operating working capital Gains from divestitures and other Net cash provided by operating activities	$ 453 264 (67) 31 681	562 270 (130) 33 735
INVESTING ACTIVITIES Capital expenditures Divestitures of businesses and other, net Net cash used in investing activities	(131) 35 (96)	(147) 33 (114)
FINANCING ACTIVITIES Net (decrease) increase in short-term borrowings Proceeds from long-term debt Principal payments on long-term debt Dividends paid Treasury stock, net Net cash used in financing activities	(532) 493 (7) (330) 4 (372)	105 28 (7) (337) 21 (190)
Effect of exchange rate changes on cash and equivalents	12	38
INCREASE IN CASH AND EQUIVALENTS Beginning cash and equivalents ENDING CASH AND EQUIVALENTS	225 381 $ 606	469 696 1,165
CHANGES IN OPERATING WORKING CAPITAL Receivables Inventories Other current assets Accounts payable Accrued expenses Income taxes	$ 25 (14) 1 (83) (7) 11 $ (67)	(136) (33) (3) (38) 30 50 (130)

See accompanying notes to consolidated financial statements.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

Notes to Consolidated Financial Statements

1.	The accompanying unaudited consolidated financial statements, in the opinion of management, 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 by 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, 2003.
2.	In the third quarter of fiscal 2003, the Company sold the Dura-Line fiber-optic conduit business, which is reported as a discontinued operation. The consolidated statements of earnings for the three and six months ended March 31, 2003, have been restated to reflect discontinued operations.
3.	The Company recognizes substantially all of its revenues through the sale of manufactured products and records the sale when products are shipped and title passes to the customer and collection is reasonably assured. In certain instances, revenue is recognized on the percentage-of-completion method, when services are rendered, or in accordance with SOP No. 97-2, "Software Revenue Recognition." Management believes that all relevant criteria and conditions are considered when recognizing sales.
4.	Reconciliations of weighted average common shares for basic earnings per common share and diluted earnings per common share follow (shares in millions):
		Three Months Ended March 31,		Six Months Ended March 31,
		2003	2004	2003	2004
	Basic Dilutive shares Diluted	419.1 1.5 420.6	420.0 3.0 423.0	419.0 1.6 420.6	419.8 2.8 422.6
5.	Comprehensive income is summarized as follows (dollars in millions):

Three Months Ended
March 31,

Six Months Ended
March 31,

2003

2004

2003

2004

Net earnings
Foreign currency translation
adjustments and other

$  236

      81
$  317

318

112
430

453

161
614

562

287
849

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

6.	Other Financial Information (Dollars in millions; unaudited)	September 30, 2003	March 31, 2004
	Inventories Finished products Raw materials and work in process	$ 628 930 $ 1,558	661 970 1,631
	Property, plant and equipment, net Property, plant and equipment, at cost Less accumulated depreciation	$ 6,864 3,902 $ 2,962	7,041 4,135 2,906
	Goodwill Process Control Industrial Automation Electronics and Telecommunications HVAC Appliance and Tools	$ 1,603 836 1,543 378 582 $ 4,942	1,622 878 1,555 380 587 5,022
	Changes in the goodwill balances since September 30, 2003, are due to the translation of non-U.S. currencies to the U.S. dollar.
	Other assets, other Pension plans Equity and other investments Capitalized software Leveraged leases Intellectual property Other	$ 843 336 147 139 104 221 $ 1,790	820 381 143 136 95 210 1,785
	Product warranty liability	$ 148	154
	Other liabilities Deferred income taxes Retirement plans Postretirement plans, excluding current portion Minority interest Other	$ 503 356 309 114 302 $ 1,584	512 370 290 121 355 1,648

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

As of March 31, 2004, the Company estimates that the funded status of its primary U.S. pension plan has improved to approximately $200 million from $50 million as of September 30, 2003, based on the accumulated benefit obligation and the fair value of plan assets. The Company expects to contribute $100 million to its pension plans in 2004. Net periodic pension expense for the three and six months ended March 31, 2003 and 2004, is summarized as follows (dollars in millions):

		Three Months Ended March 31,			Six Months Ended March 31,
		2003		2004	2003			2004
	Service cost Interest cost Expected return on plan assets Net amortization	$ 13 40 (52) 9 $ 10		17 41 (54) 20 24	26 80 (104) 18 20			34 82 (108) 40 48
The increase in pension expense is primarily due to the market trends of the past few years (i.e., lower interest rates and asset returns). Net postretirement plan expense for the three and six months ended March 31, 2003 and 2004, is summarized as follows (dollars in millions):
			2003	2004		2003	2004
Service cost Interest cost Net amortization			$ 2 7 2 $ 11	2 6 4 12		4 14 4 22	4 12 8 24
The Company expects to pay benefits of $45 million related to its postretirement plans in 2004.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

Effective October 1, 2002, Emerson adopted the fair value method provisions of FAS 123. Options granted after September 30, 2002, are expensed based on their fair value at date of grant over the vesting period, generally three years. Previously, the Company accounted for options pursuant to APB 25 and no expense was recognized. The following table illustrates the effect on net earnings and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in millions, except per-share amounts).

		Three Months Ended March 31,		Six Months Ended March 31,
		2003	2004	2003	2004
	Net earnings, as reported Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Pro forma net earnings	$ 236 2 6 $ 232	318 3 5 316	453 8 16 445	562 15 18 559
	Earnings per share: Basic - as reported Basic - pro forma Diluted - as reported Diluted - pro forma	$0.56 $0.55 $0.56 $0.55	0.76 0.75 0.75 0.74	1.08 1.06 1.08 1.06	1.34 1.33 1.33 1.32
9.	Other deductions, net are summarized as follows (dollars in millions):
		Three Months Ended March 31,		Six Months Ended March 31,
		2003	2004	2003	2004
	Other deductions, net Gains from divestitures of business interests Rationalization of operations Amortization of intangibles Other	$ - 30 3 34 $ 67	(27) 28 4 25 30	(15) 57 8 62 112	(27) 61 10 64 108
	In January 2004, the Company sold 2 million shares of MKS Instruments, Inc., a publicly-traded company, and continues to hold 10 million shares; the Company also sold its investment in the Louisville Ladder joint venture. The Company recorded a pretax gain of $27 million in the second quarter from these transactions.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

10.	The change in the liability for rationalization of operations during the six months ended March 31, 2004, follows (dollars in millions):
		September 30, 2003	Expense	Paid / Utilized	March 31, 2004
	Severance and benefits Lease/contract terminations Fixed asset writedowns Vacant facility and other shutdown costs Start-up and moving costs	$ 20 25 - 2 5 $ 52	27 6 3 10 15 61	22 6 3 10 14 55	25 25 - 2 6 58

Rationalization of operations by business segment is summarized as follows (dollars in millions):
	Three Months Ended March 31,		Six Months Ended March 31,
	2003	2004	2003	2004
Process Control Industrial Automation Electronics and Telecommunications HVAC Appliance and Tools Corporate Discontinued operations (a)	$ 7 4 18 7 6 (6) (6) $ 30	9 3 5 1 11 (1) - 28	12 9 25 11 12 (4) (8) 57	17 7 17 8 17 (5) - 61
(a) Discontinued operations eliminates the operating results of discontinued operations related to Dura-Line, which are included in the Electronics and Telecommunications segment amounts.
Rationalization of operations comprises expenses associated with the Company's efforts to continuously improve operational efficiency and to expand globally in order to remain competitive on a worldwide basis. These expenses result from a multitude of small, individual actions taken across the divisions on a routine, ongoing basis and are not part of a large, company-wide program. Rationalization of operations includes ongoing costs for moving facilities, starting up plants from relocation as well as business expansion, exiting product lines, curtailing/downsizing operations due to changing economic conditions, and other one-time items resulting from asset redeployment decisions. Shutdown costs include severance, benefits, stay bonuses, lease/contract terminations and asset writedowns. Start-up and moving costs include employee training and relocation, moving of assets and unabsorbed overhead. Vacant facility costs include security, maintenance and utility costs associated with facilities that are no longer being utilized. During the first six months of 2004, rationalization of operations primarily related to the exit of over 10 production, distribution or office facilities including the elimination of approximately 1,000 positions, as well as costs related to facilities exited in previous periods. Noteworthy rationalization actions during the first six months of 2004 are as follows. Process control segment includes severance and plant closure costs related to the closing of a valve plant due to consolidating operations within North America in response to weak market demand, severance costs related to the consolidation of European measurement operations in order to obtain operational synergies, and several other reduction and consolidation actions. Electronics and telecommunications segment includes severance and lease termination costs related to certain Emerson Energy Systems operations in Western Europe shifting to China and Eastern Europe in order to leverage product platforms and lower production and engineering costs to remain competitive on a global basis.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

	HVAC segment includes severance costs related to workforce reductions in the European temperature sensors and controls operations due to weakness in market demand. Appliance and tools segment includes severance and start-up and moving costs related to shifting certain industrial motor manufacturing primarily from the United States to Mexico and China in order to consolidate facilities and improve profitability, and severance related to consolidating manufacturing operations in the professional tools business for operational efficiency. Noteworthy rationalization actions during the first six months of 2003 are as follows. Process control segment includes plant closure and severance costs related to several reduction and consolidation actions primarily in North America and Europe. Electronics and telecommunications segment includes severance costs related to Emerson Energy Systems' European operations. Appliance and tools segment includes plant closure and start-up and moving costs related to relocating certain industrial motor manufacturing primarily from the United States to Mexico and China. These actions were taken to expand in global markets and to increase overall profitability by obtaining synergies and increasing operational efficiency.
11.	Business Segment Information Summarized information about the Company's operations by business segment for the three and six months ended March 31, 2003 and 2004, follows (dollars in millions):
	Three months ended March 31,	Sales 2003 2004		Earnings 2003 2004
	Process Control Industrial Automation Electronics and Telecommunications HVAC Appliance and Tools Discontinued operations (a) Differences in accounting methods Corporate and other Eliminations/Interest Net sales/Earnings from continuing operations before income taxes	$ 819 646 554 693 870 3,582 (13) (104) $ 3,465	905 723 628 770 950 3,976 (117) 3,859	89 81 21 104 121 416 8 33 (44) (57) 356	100 95 58 125 135 513 30 (24) (53) 466
	Corporate and other decreased $20 million for the three months ended March 31, 2004, compared to the prior year period primarily due to $27 million of higher gains from divestitures. Intersegment sales of the appliance and tools segment for the three months ended March 31, 2003 and 2004, respectively, were $95 million and $104 million.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

	Six months ended March 31,	Sales 2003 2004		Earnings 2003 2004
	Process Control Industrial Automation Electronics and Telecommunications HVAC Appliance and Tools Discontinued operations (a) Differences in accounting methods Corporate and other Eliminations/Interest Net sales/Earnings from continuing operations before income taxes	$ 1,591 1,269 1,123 1,205 1,722 6,910 (28) (191) $ 6,691	1,754 1,418 1,285 1,366 1,851 7,674 (215) 7,459	164 163 58 173 239 797 10 64 (77) (115) 679	190 181 128 205 262 966 59 (92) (110) 823
(a) Discontinued operations eliminates the operating results of discontinued operations related to Dura-Line, which are included in the electronics and telecommunications segment amounts. Corporate and other increased $15 million for the six months ended March 31, 2004, compared to the prior year period primarily due to $27 million of increased costs for the incentive share plans due to Emerson's increased stock price, corporate initiatives and litigation and disputed matters, partially offset by $12 million of higher gains from divestitures. Intersegment sales of appliance and tools segment for the six months ended March 31, 2003 and 2004, respectively, were $168 million and $186 million.

12.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law on December 8, 2003. In accordance with FASB Staff Position 106-1, neither the amount of postretirement benefit expense nor the accumulated postretirement benefit obligation in the financial statements and accompanying notes reflect the effects of the Act on the Company's postretirement benefit plans. Specific authoritative guidance on the accounting for the effects of the Act is pending and that guidance, when issued, could require a change to previously reported information. The Company does not expect the effects of the Act to have a material impact on the financial statements.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

Items 2 and 3. Management's Discussion and Analysis of Results of Operations and Financial Condition.

OVERVIEW

The second quarter and first six months of fiscal 2004 were strong, with sales, earnings and earnings per share up over the prior year periods. The HVAC and appliance and tools businesses drove U.S. gains as domestic manufacturing continued to recover in the second quarter due to an increase in consumer-related spending. However, U.S. industrial fixed investment continued to lag. International sales growth was driven by the process control, industrial automation and electronics and telecommunications businesses. Strong growth in Asia, moderate gains in the United States, Europe and Latin America and favorable exchange rates contributed to these three- and six-months results. The Company's profit margins improved primarily due to leverage on higher sales volume and benefits from previous rationalization actions. However, these benefits were partially offset by competitive pressure on price. Emerson's financial position remains strong and the Company continues to generate substantial cash flow.

THREE MONTHS ENDED MARCH 31, 2004, COMPARED WITH THREE MONTHS ENDED MARCH 31, 2003

RESULTS OF OPERATIONS

Three months ended March 31,
(dollars in millions, except per share amounts)

2003

2004

Change

Sales
Gross Profit
% of sales
SG&A
% of sales
Other deductions, net
Interest expense, net
Pretax earnings
Net earnings

Diluted EPS

$ 3,465
$ 1,211
34.9%
$    731
21.0%
$      67
$      57
$    356
$    236

$ 0.56

3,859
1,356
35.2%
807
21.0%
30
53
466
318

0.75

11%
12%

31%
35%

34%

Net sales for the quarter ended March 31, 2004, were $3,859 million, an increase of $394 million, or 11 percent, over net sales of $3,465 million for the quarter ended March 31, 2003. Both U.S. and international sales contributed to this growth. The consolidated results were balanced, reflecting very strong sales increases in each of the business segments, with an increase in underlying sales (which exclude acquisitions, divestitures and the impact of translation of non-U.S. currencies to the U.S. dollar) of 7 percent ($255 million), a 5 percentage point ($160 million) favorable impact from the strengthening Euro and other currencies and a nearly 1 percentage point negative impact from divestitures, net of acquisitions. The components of the underlying sales increase of 7 percent for the second quarter were the United States increasing 7 percent and total international sales increasing nearly 8 percent, primarily reflecting growth of 15 percent in Asia and 4 percent in Europe. The Company estimates that the underlying growth reflects the net result of an approximately 6 percentage point gain from volume and an approximately 2 percentage point impact from market penetration gains, partially offset by an approximately 1 percentage point negative impact from price.

Cost of sales for the second quarter of fiscal 2004 and 2003 were $2,503 million and $2,254 million, respectively. Cost of sales as a percent of net sales was 64.8 percent in the second quarter of 2004, compared with 65.1 percent in the second quarter of 2003. The increase in the gross profit margin from 34.9 percent in the prior year to 35.2 percent in the second quarter of 2004 primarily reflects increased volume and leverage on the higher sales, and benefits realized from prior rationalization and other cost reduction efforts. These improvements, however, were partially offset by negative impacts from sales prices, wages and benefits (including higher pension and medical costs) and

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

the higher mix of international businesses contributing to growth. The absence of leverage on foreign currency translation dilutes the margin improvement resulting from real growth in volume over prior periods. Additionally, when products are manufactured in the United States but sold through our foreign subsidiaries, a substantial portion of the profit is captured and reported in the United States. Certain international businesses also have slightly lower profit margins due to the nature of their business mix.

Selling, general and administrative expenses for the second quarter of 2004 were $807 million compared with $731 million for the second quarter of 2003, with both amounts representing 21.0 percent of sales. The benefits from leverage on higher sales and cost reductions from prior rationalization and other efforts were offset by higher costs for wages and benefits.

Other deductions, net were $30 million for the second quarter of 2004, a $37 million decrease from the $67 million for the same period in the prior year. The decrease in other deductions, net was primarily due to a gain of $27 million from the sale of 2 million shares of MKS Instruments, Inc. and the sale of the Louisville Ladder investment included in the three months ended March 31, 2004, while the three months ended March 31, 2003, had no such gains. Additionally, for the three months ended March 31, 2004, ongoing costs for the rationalization of operations were $28 million, compared to $30 million in the prior year. See notes 9 and 10 for further details regarding other deductions, net and rationalization costs.

Net earnings were $318 million and diluted earnings per common share were $0.75 for the three months ended March 31, 2004, increases of 35 percent and 34 percent, respectively, compared to net earnings and earnings per share of $236 million and $0.56, respectively, for the three months ended March 31, 2003. These earnings results reflect increases for all of the business segments, particularly in the electronics and telecommunications, and heating, ventilating and air conditioning businesses. The higher earnings also reflect increased volume and leverage from the higher sales, savings from cost reduction efforts and $27 million of gains (discussed above in other deductions), partially offset by lower sales prices and other items during the quarter.

BUSINESS SEGMENTS

Process Control

Three months ended March 31, (dollars in millions)		2003	2004	Change
	Sales Earnings Margin	$ 819 89 10.9%	905 100 11.0%	10% 12%

Process control segment sales of $905 million in the second quarter of fiscal 2004 were up 10 percent from $819 million for the same period a year ago, as this segment continues growing in international markets and to win large projects and displace competitors. Underlying sales increased 5 percent, excluding an almost 1 percentage point negative impact from divestitures, net of acquisitions, and a 6 percentage point ($45 million) positive impact from currency translation. The underlying sales gain reflects 18 percent growth in Asia, more than 5 percent growth in Europe and very strong gains in the Middle East/Africa region, partially offset by a 5 percent decline in the United States, particularly in the control valves businesses. The decline in the U.S. market reflects our customers' continued shift of production to lower cost areas, particularly in the refining and chemical industries. Underlying results were also due to growth in almost all businesses, particularly the measurement business in all major regions, and the systems/solutions business due to increased project activity in the United States, Asia and the Middle East. Increased volume and leverage from these higher sales as well as savings from prior cost reduction actions, partially offset by higher costs for wages and benefits, resulted in an increase in earnings of 12 percent, to $100 million from $89 million in the prior year.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

Industrial Automation

Three months ended March 31, (dollars in millions)		2003	2004	Change
	Sales Earnings Margin	$ 646 81 12.5%	723 95 13.2%	12% 18%

Industrial automation segment sales increased 12 percent to $723 million for the three months ended March 31, 2004, reflecting increases in most of the businesses, particularly power generating alternators, as well as the materials joining and fluid power and control businesses. Currency translation had an 8 percentage point ($50 million) favorable impact during the quarter. The 4 percent increase in underlying sales reflects a 1 percent increase in the United States and 6 percent international sales growth, with 24 percent growth in Asia and 3 percent growth in Europe. Earnings increased 18 percent over the prior year quarter to $95 million, primarily reflecting benefits from prior cost reduction efforts and increased volume and leverage from higher sales.

Electronics and Telecommunications

Three months ended March 31, (dollars in millions)		2003	2004	Change
	Sales Earnings Margin	$ 554 21 3.9%	628 58 9.3%	13% 171%

Electronics and telecommunications segment sales of $628 million were up 13 percent over the prior year period. Underlying sales improved 11 percent, excluding a 4 percentage point favorable impact from currency and a 2 percentage point negative impact from the Dura-Line divestiture in the prior year. Penetration gains, particularly in the OEM power business, are estimated to have contributed approximately 3 percentage points of the underlying sales growth in the quarter. Sales also benefited from the underlying gains in the climate and power systems business; however, these benefits were partially offset by an estimated 5 percentage point impact from lower prices, which includes the introduction of next generation products at lower price points. Underlying sales also reflect a 20 percent increase in Asia (primarily China), a 9 percent increase in Europe and an 8 percent increase in the United States. Strong demand for servers and network equipment drove worldwide demand for AC-to-DC and DC-to-DC power modules used in those products. In Asia, telecommunications providers have increased spending on wireline and wireless equipment that requires the power systems that Emerson sells. In the United States and Europe, backup power and data computing power systems grew as institutions invested for increased reliability, redundancy and capacity. Earnings of $58 million increased $37 million, or 171 percent, over the prior year quarter, reflecting higher sales volume and leverage, lower material costs, benefits from prior cost reduction efforts, and $13 million of lower rationalization costs. Rationalization costs during the second quarter included severance and lease termination costs related to certain Emerson Energy Systems operations in Western Europe shifting to China and Eastern Europe in order to leverage product platforms and lower production and engineering costs to remain competitive on a global basis.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

HVAC

Three months ended March 31, (dollars in millions)		2003	2004	Change
	Sales Earnings Margin	$ 693 104 15.0%	770 125 16.2%	11% 20%

Sales of the heating, ventilating and air conditioning segment increased 11 percent to $770 million with gains in all of the businesses. Continued penetration gains are estimated to have contributed approximately 5 percentage points of the underlying growth of 8 percent. Sales also benefited from solid underlying market growth and a 3 percentage point favorable impact from currency translation. The underlying sales increase of 8 percent was driven by 17 percent growth in the United States, which was partially offset by international sales declines of 5 percent reflecting down sales for all regions except Asia, which had a slight increase. This decline in second quarter international sales primarily reflects unusually high demand in the first quarter of 2004. Earnings from HVAC operations increased 20 percent during the quarter to $125 million, reflecting higher sales volume and leverage, benefits from prior cost reduction efforts and a $6 million reduction in rationalization costs versus the prior year quarter.

Appliance and Tools

Three months ended March 31, (dollars in millions)		2003	2004	Change
	Sales Earnings Margin	$ 870 121 14.0%	950 135 14.2%	9% 11%

Appliance and tools segment sales increased 9 percent to $950 million in the second quarter. This increase reflects a nearly 9 percent increase in underlying sales and a 3 percentage point favorable impact from currency, partially offset by a more than 2 percentage point negative impact related to exiting the manufacturing of bench top and stationary power tools. Underlying sales grew in all of the businesses, with continued growth in the residential-related businesses and an improvement in the professional tools, storage and motor businesses. Residential storage and disposer increases reflected a strong U.S. residential construction market and higher demand at major retailers. Sales in the United States grew 10 percent while total international sales grew almost 3 percent. Earnings of the appliance and tools segment increased 11 percent to $135 million, primarily due to increased volume and leverage from higher sales, partially offset by $5 million of higher rationalization costs during the quarter compared to the prior year and the impact of the U.S. dollar weakening against the Canadian dollar. Rationalization costs in the second quarter included severance and start-up and moving costs related to shifting certain industrial motor manufacturing primarily from the United States to Mexico and China in order to consolidate facilities and improve profitability, and severance related to consolidating manufacturing operations in the professional tools business for operational efficiency.

EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q

SIX MONTHS ENDED MARCH 31, 2004, COMPARED WITH SIX MONTHS ENDED MARCH 31, 2003

RESULTS OF OPERATIONS

Six months ended March 31,
(dollars in millions, except per share amounts)

2003

2004

Change

Sales
Gross Profit
% of sales
SG&A
% of sales
Other deductions, net
Interest expense, net
Pretax earnings
Net earnings

Diluted EPS

$ 6,691
$ 2,354
35.2%
$ 1,448
21.7%
$    112
$    115
$    679
$    453

$ 1.08

7,459
2,638
35.4%
1,597
21.4%
108
110
823
562

1.33

11%
12%

21%
24%

23%

Net sales for the six months ended March 31, 2004, were $7,459 million, an increase of $768 million, or 11 percent, over net sales of $6,691 million for the six months ended March 31, 2003, with both U.S. and international sales contributing to this growth. The consolidated results reflect improving markets and increases in all five business segments, with an underlying sales increase of 7 percent ($490 million), an approximate 5 percentage point ($330 million) favorable impact from the strengthening Euro and other currencies, partially offset by a nearly 1 percentage point negative impact from divestitures, net of acquisitions. The elements of the underlying sales increase of 7 percent for the first six months were the United States increasing 6 percent and total international sales increasing 9 percent, primarily reflecting 4 percent growth in Europe and 19 percent growth in Asia. The Company estimates that the underlying growth reflects the net result of an approximately 6 percentage point gain from volume and an approximately 2 percentage point impact from market penetration gains, partially offset by an approximately 1 percentage point negative impact from price.

Cost of sales for the first six months of fiscal 2004 and 2003 were $4,821 million and $4,337 million, respectively. Cost of sales as a percent of net sales was 64.6 percent for the first six months of 2004, compared with 64.8 percent in the prior year period. The increase in the gross profit margin from 35.2 percent in the prior year to 35.4 percent for the first six months of 2004 primarily reflects increased volume and leverage on higher sales and benefits realized from prior rationalization and other cost reduction efforts. These improvements, however, were partially offset by negative impacts from sales prices, wages and benefits (including higher pension and medical costs) and the higher mix of international businesses contributing to the growth.

Selling, general and administrative expenses for the first six months of 2004 were $1,597 million, or 21.4 percent of sales, compared with $1,448 million, or 21.7 percent of sales, for the six months ending March 31, 2003. The decreases in these costs as a percent of sales primarily reflect leverage on higher sales and the benefits realized from prior rationalization efforts that improved the Company's cost structure. These improvements, however, were partially offset by higher costs for wages an