Edgar Filing: EMERSON ELECTRIC CO

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

¨ 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 ý 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 ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ý	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

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, 2017: 640,019,616 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, 2016 AND 2017

(Dollars in millions, except per share amounts; unaudited)



	Three Months Ended June 30,			Nine Months Ended June 30,
	2016		2017	2016	2017
Net sales	$	3,674	4,039	10,590	10,829

Costs and expenses:
Cost of sales	2,081		2,361	6,041	6,229
Selling, general and administrative expenses	852		931	2,609	2,621
Other deductions, net	39		87	159	203
Interest expense (net of interest income of $7, $10, $21 and $25, respectively)	46		39	139	126

Earnings from continuing operations before income taxes	656		621	1,642	1,650

Income taxes	205		202	509	477

Earnings from continuing operations	451		419	1,133	1,173

Discontinued operations, net of tax	38		6	86	(133	)

Net earnings	489		425	1,219	1,040

Less: Noncontrolling interests in earnings of subsidiaries	10		12	22	26

Net earnings common stockholders	$	479	413	1,197	1,014

Earnings common stockholders:
Earnings from continuing operations	$	441	407	1,111	1,147
Discontinued operations, net of tax	38		6	86	(133	)
Net earnings common stockholders	$	479	413	1,197	1,014

Basic earnings per share common stockholders:
Earnings from continuing operations	$	0.68	0.63	1.72	1.77
Discontinued operations	0.06		0.01	0.13	(0.20	)
Basic earnings per common share	$	0.74	0.64	1.85	1.57

Diluted earnings per share common stockholders:
Earnings from continuing operations	$	0.68	0.63	1.71	1.77
Discontinued operations	0.06		0.01	0.13	(0.20	)
Diluted earnings per common share	$	0.74	0.64	1.84	1.57

Cash dividends per common share	$	0.475	0.48	1.425	1.44

See accompanying Notes to Consolidated Financial Statements.

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED JUNE 30, 2016 AND 2017

(Dollars in millions; unaudited)



	Three Months Ended June 30,					Nine Months Ended June 30,
		2016			2017		2016		2017
Net earnings		$	489		425		1,219		1,040

Other comprehensive income (loss), net of tax:
Foreign currency translation		(9		)	74		(37	)	230
Pension and postretirement		25			35		78		155
Cash flow hedges		3			5		14		37
Total other comprehensive income		19			114		55		422

Comprehensive income		508			539		1,274		1,462

Less: Noncontrolling interests in comprehensive income of subsidiaries		11			11		24		24
Comprehensive income common stockholders		$	497		528		1,250		1,438

See accompanying Notes to Consolidated Financial Statements.

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts; unaudited)



	Sept 30, 2016			June 30, 2017
ASSETS
Current assets
Cash and equivalents	$	3,182		3,140
Receivables, less allowances of $92 and $93, respectively	2,701			2,926
Inventories	1,208			1,891
Other current assets	669			597
Current assets held-for-sale	2,200			—
Total current assets	9,960			8,554

Property, plant and equipment, net	2,931			3,304
Other assets
Goodwill	3,909			5,296
Other intangible assets	902			1,868
Other	200			380
Noncurrent assets held-for-sale	3,830			—
Total other assets	8,841			7,544
Total assets	$	21,732		19,402

LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt	$	2,584		1,363
Accounts payable	1,517			1,613
Accrued expenses	2,126			2,175
Income taxes	180			219
Current liabilities held-for-sale	1,601			—
Total current liabilities	8,008			5,370

Long-term debt	4,051			3,797

Other liabilities	1,729			2,213

Noncurrent liabilities held-for-sale	326			—

Equity
Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 642,796,490 shares and 639,966,841 shares, respectively	477			477
Additional paid-in-capital	205			350
Retained earnings	21,716			21,800
Accumulated other comprehensive income (loss)	(1,999		)	(1,575	)
Cost of common stock in treasury, 310,557,522 shares and 313,387,171 shares, respectively	(12,831		)	(13,086	)
Common stockholders’ equity	7,568			7,966
Noncontrolling interests in subsidiaries	50			56
Total equity	7,618			8,022
Total liabilities and equity	$	21,732		19,402

See accompanying Notes to Consolidated Financial Statements.

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED JUNE 30, 2016 AND 2017

(Dollars in millions; unaudited)



	Nine Months Ended
	June 30,
	2016			2017
Operating activities
Net earnings	$	1,219		1,040
(Earnings) Loss from discontinued operations, net of tax	(86		)	133
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	426			454
Changes in operating working capital	(79		)	16
Pension funding	(30		)	(14	)
Other, net	194			156
Cash from continuing operations	1,644			1,785
Cash from discontinued operations	280			(727	)
Cash provided by operating activities	1,924			1,058

Investing activities
Capital expenditures	(301		)	(300	)
Purchases of businesses, net of cash and equivalents acquired	(62		)	(2,991	)
Divestiture of business	—			40
Other, net	45			(80	)
Cash from continuing operations	(318		)	(3,331	)
Cash from discontinued operations	(55		)	5,022
Cash provided by (used in) investing activities	(373		)	1,691

Financing activities
Net increase (decrease) in short-term borrowings	692			(1,136	)
Proceeds from short-term borrowings greater than three months	1,174			—
Payments of short-term borrowings greater than three months	(1,174		)	(90	)
Payments of long-term debt	(252		)	(253	)
Dividends paid	(922		)	(930	)
Purchases of common stock	(555		)	(400	)
Other, net	(13		)	32
Cash used in financing activities	(1,050		)	(2,777	)

Effect of exchange rate changes on cash and equivalents	(39		)	(14	)
Increase (Decrease) in cash and equivalents	462			(42	)
Beginning cash and equivalents	3,054			3,182
Ending cash and equivalents	$	3,516		3,140

Changes in operating working capital
Receivables	$	253		119
Inventories	(84		)	(125	)
Other current assets	20			(24	)
Accounts payable	(93		)	(7	)
Accrued expenses	(138		)	(17	)
Income taxes	(37		)	70
Total changes in operating working capital	$	(79	)	16

See accompanying Notes to Consolidated Financial Statements.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Notes to Consolidated Financial Statements

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles (GAAP). 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, 2016. Certain prior year amounts have been reclassified to conform to current year presentation.

In connection with the strategic portfolio repositioning actions undertaken to transform the Company into a more focused enterprise, its businesses and organization were realigned. Beginning in fiscal 2017, the Company now reports three segments: Automation Solutions, and Climate Technologies and Tools & Home Products which together comprise the Commercial & Residential Solutions business. The Automation Solutions segment includes the former Process Management segment and the remaining businesses in the former Industrial Automation segment, except for the hermetic motors business, which is now included in the Climate Technologies segment. The new Tools & Home Products segment consists of the businesses previously reported in the Commercial & Residential Solutions segment in fiscal 2016. See Notes 10 and 12.

In the first quarter of 2017, the Company adopted updates to ASC Subtopic 835-30, Interest-Imputation of Interest, which require presentation of debt issuance costs as a deduction from the related debt liability rather than within other assets. This update was adopted on a retrospective basis and did not materially impact the Company’s financial statements.

2. Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (in millions). Earnings allocated to participating securities were inconsequential.



	Three Months Ended June 30,		Nine Months Ended June 30,
	2016	2017	2016	2017

Basic shares outstanding	642.2	642.8	644.7	643.1
Dilutive shares	3.0	1.0	2.7	1.2
Diluted shares outstanding	645.2	643.8	647.4	644.3

3. Other Financial Information (in millions)



	Sept 30, 2016			June 30, 2017
Inventories
Finished products		$	382		678
Raw materials and work in process		826			1,213
Total		$	1,208		1,891



Property, plant and equipment, net
Property, plant and equipment, at cost	$	7,327	7,921
Less: Accumulated depreciation	4,396		4,617
Total	$	2,931	3,304



Goodwill by business segment
Automation Solutions	$	3,160	4,545

Climate Technologies	553		555
Tools & Home Products	196		196
Commercial & Residential Solutions	749		751

Total	$	3,909	5,296



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

The increase in the balances above, including goodwill, is primarily due to the valves & controls acquisition. See Note 11.



	Sept 30, 2016			June 30, 2017
Accrued expenses include the following
Employee compensation		$	431		506
Customer advanced payments		$	433		531
Product warranty		$	106		111



	Sept 30, 2016			June 30, 2017
Other liabilities
Pension and postretirement liabilities		$	1,037		941
Deferred income taxes		210			426
Other		482			846
Total		$	1,729		2,213

The increase in other liabilities primarily reflects the valves & controls acquisition, including approximately $245 million of asbestos liabilities. In addition, approximately $100 million of related insurance receivables were acquired and included in other assets.


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

Hedging Activities – As of June 30, 2017, the notional amount of foreign currency hedge positions was approximately $1.4 billion, and commodity hedge contracts totaled approximately $98 million (primarily 45 million pounds of copper and aluminum). All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of June 30, 2017 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting. The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and nine months ended June 30, 2017 and 2016 (in millions):



		Into Earnings									Into OCI
		3rd Quarter					Nine Months				3rd Quarter			Nine Months
Gains (Losses)	Location	2016			2017		2016		2017		2016		2017	2016		2017
Commodity	Cost of sales	$	(10	)	4		(30	)	6		—		2	(10	)	17
Foreign currency	Sales, cost of sales	(12		)	—		(27	)	(17	)	(18	)	10	(25	)	32
Foreign currency	Other deductions, net	(9		)	(22	)	(16	)	(22	)
Total		$	(31	)	(18	)	(73	)	(33	)	(18	)	12	(35	)	49

Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the three and nine months ended June 30, 2017 and 2016.

Fair Value Measurement – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of June 30, 2017, the fair value of long-term debt was $4,388 million, which exceeded the carrying value by $320 million. At June 30, 2017, the fair values of commodity contracts and foreign currency contracts were reported in other current assets and accrued expenses. Valuations of derivative contract positions are summarized below (in millions):



	September 30, 2016				June 30, 2017
	Assets			Liabilities	Assets	Liabilities
Foreign Currency		$	7	49	20	10
Commodity		$	2	4	9	—



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Counterparties to derivatives arrangements are companies with investment-grade credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below pre-established levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The maximum amount that could potentially have been required was $3 million. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company as of June 30, 2017.


5.	The change in equity for the first nine months of 2017 is shown below (in millions):



	Common Stockholders' Equity				Noncontrolling Interests in Subsidiaries			Total Equity
Balance at September 30, 2016		$	7,568			50			7,618
Net earnings		1,014				26			1,040
Other comprehensive income (loss)		424				(2	)		422
Cash dividends		(930		)		(18	)		(948	)
Stock plans		(110		)		—			(110	)
Balance at June 30, 2017		$	7,966			56			8,022


6.	Activity in accumulated other comprehensive income (loss) for the three and nine months ended June 30, 2017 and 2016 is shown below (in millions):



	Three Months Ended June 30,						Nine Months Ended June 30,
		2016			2017			2016		2017
Foreign currency translation
Beginning balance		$	(651	)	(655	)		(622	)	(812	)
Other comprehensive income (loss) before reclassifications		(10		)	75			(39	)	(153	)
Reclassified to gain/loss on sale of businesses		—			—			—		385
Ending balance		(661		)	(580	)		(661	)	(580	)

Pension and postretirement
Beginning balance		(899		)	(1,042	)		(952	)	(1,162	)
Amortization of deferred actuarial losses into earnings		25			35			78		105
Reclassified to gain/loss on sale of businesses		—			—			—		50
Ending balance		(874		)	(1,007	)		(874	)	(1,007	)

Cash flow hedges
Beginning balance		(32		)	7			(43	)	(25	)
Deferral of gains (losses) arising during the period		(11		)	7			(22	)	30
Reclassification of realized (gains) losses to sales and cost of sales		14			(2	)		36		7
Ending balance		(29		)	12			(29	)	12

Accumulated other comprehensive income (loss)		$	(1,564	)	(1,575	)		(1,564	)	(1,575	)

Activity above is shown net of income taxes for the three and nine months ended June 30, 2017 and 2016, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(18), $(15), $(54) and $(43); pension and postretirement divestiture: $-, $- , $(22) and $- ; deferral of cash flow hedging gains (losses): $(5), $7, $(19) and $13; reclassification of realized cash flow hedging (gains) losses: $2, $(8), $(4) and $(21).



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q


7.	Total periodic pension and postretirement expense is summarized below (in millions):



	Three Months Ended June 30,						Nine Months Ended June 30,
		2016			2017			2016		2017
Service cost		$	22		21			67		63
Interest cost		50			42			149		126
Expected return on plan assets		(88		)	(86	)		(264	)	(258	)
Net amortization		40			53			121		159
Total		$	24		30			73		90


8.	Other deductions, net are summarized below (in millions):



	Three Months Ended June 30,				Nine Months Ended June 30,
	2016			2017		2016	2017

Amortization of intangibles		$	22	34		66	77
Restructuring costs		13		21		31	45
Other		4		32		62	81
Total		$	39	87		159	203

Other for 2017 includes higher acquisition/divestiture costs of $13 million in the third quarter and $34 million year-to-date, and a favorable foreign currency transactions impact of $10 million and $56 million, respectively. The increase in the third quarter of 2017 also reflects backlog amortization of $7 million related to the valves & controls acquisition and the comparative impact of an $18 million gain on payments received in the prior year related to dumping duties. In addition, the year-to-date increase includes higher bad debt expense of $10 million.

Restructuring expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. The Company expects full year 2017 restructuring expense to be approximately $85 million, of which approximately $35 million relates to the valves & controls business. The full year expense includes $45 million incurred to date, 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. Costs for the three and nine months ended June 30, 2017 largely relate to restructuring of the global cost structure consistent with the current level of economic activity, as well as the redeployment of resources for future growth.

Restructuring expense by business segment follows (in millions):



	Three Months Ended June 30,					Nine Months Ended June 30,
	2016			2017		2016		2017

Automation Solutions		$	9		20		22		35

Climate Technologies		1			1		4		8
Tools & Home Products		—			—		2		1
Commercial & Residential Solutions		1			1		6		9

Corporate		3			—		3		1

Total		$	13		21		31		45

The increase in restructuring expense largely relates to the valves & controls business which incurred costs of $9 million in the third quarter.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Details of the change in the liability for restructuring costs during the nine months ended June 30, 2017 follow (in millions):



	Sept 30, 2016			Expense		Utilized/Paid		June 30, 2017

Severance and benefits		$	44		26		22		48
Lease and other contract terminations		5			—		2		3
Asset write-downs		—			2		2		—
Vacant facility and other shutdown costs		3			4		5		2
Start-up and moving costs		2			13		11		4
Total		$	54		45		42		57


10.	Business Segments – The Company designs and manufactures products and delivers services that bring technology and engineering together to provide innovative solutions for customers in a wide range of industrial, commercial and consumer markets around the world.

The Automation Solutions segment provides measurement, control, diagnostic capabilities and integrated manufacturing solutions for automated industrial processes, and serves oil and gas, refining, chemical, power generation, pharmaceutical, food and beverage, automotive and other end markets. The segment's major product offerings are described below.


•	Measurement & Analytical Instrumentation products measure the physical properties of liquids or gases in a process stream and communicate this information to a process control system, and analyze the chemical composition of process fluids and emissions to enhance quality and efficiency, as well as environmental compliance.


•	Valves, Actuators & Regulators consists of control, isolation and pressure relief valves which respond to commands from a control system to continuously and precisely modulate the flow of process fluids, valve actuators and controllers, and industrial and residential regulators that reduce the pressure of fluids moving from high-pressure supply lines into lower pressure systems.


•	Industrial Solutions provides fluid power and control mechanisms, electrical distribution equipment, and materials joining and precision cleaning products which are used in a variety of manufacturing operations to provide integrated manufacturing solutions to customers.


•	Process Control Systems & Solutions includes digital plant architecture that controls plant processes by communicating with and adjusting the "intelligent" plant devices described above to provide precision measurement, control, monitoring, asset optimization, and plant safety and reliability for plants that produce power, or process fluids or other items.

The Commercial & Residential Solutions business consists of the Climate Technologies and Tools & Home Products segments. This business provides products and solutions that promote energy efficiency, enhance household and commercial comfort, and protect food quality and sustainability through heating, air conditioning and refrigeration technology, as well as a broad range of tools and appliance solutions.

The Climate Technologies segment provides products and services for all areas of the climate control industry, including residential heating and cooling, commercial air conditioning, and commercial and industrial refrigeration. Products include compressors, temperature sensors and controls, thermostats, flow controls and remote monitoring technology and services that enable homeowners and businesses to better manage their heating, air conditioning and refrigeration systems for improved control and comfort, and lower energy costs.

The Tools & Home Products segment offers tools for professionals and homeowners, residential storage products and appliance solutions. Products include professional pipe-working tools, residential and commercial food waste disposers, wet-dry vacuums, and home shelving and closet organization systems.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Summarized information about the Company's results of operations by business segment follows (in millions):



	Three Months Ended June 30,									Nine Months Ended June 30,
	Sales					Earnings				Sales				Earnings
	2016			2017		2016		2017		2016		2017		2016		2017

Automation Solutions	$	2,176		2,440		354		378		6,532		6,524		1,037		1,032

Climate Technologies	1,101			1,187		287		305		2,880		3,104		646		715
Tools & Home Products	400			415		97		97		1,186		1,210		274		281
Commercial & Residential Solutions	1,501			1,602		384		402		4,066		4,314		920		996

Differences in accounting methods						47		38						138		106
Corporate and other						(83	)	(158	)					(314	)	(358	)
Eliminations/Interest	(3		)	(3	)	(46	)	(39	)	(8	)	(9	)	(139	)	(126	)
Total	$	3,674		4,039		656		621		10,590		10,829		1,642		1,650

Corporate and other for 2017 includes first year acquisition accounting charges for valves & controls of $30 million related to inventory and $7 million for backlog amortization, as well as higher acquisition/divestiture costs of $13 million in the third quarter and $34 million year-to-date. Corporate and other for 2017 also includes higher incentive stock compensation of $8 million in third quarter, while incentive stock compensation was lower by $35 million year-to-date, reflecting the impact of changes in the Company's stock price, and 2016 included an $18 million gain on payments received related to dumping duties.

Automation Solutions sales by major product offering are summarized below (in millions):



	Three Months Ended June 30,				Nine Months Ended June 30,
		2016		2017	2016	2017

Measurement & Analytical Instrumentation		$	747	744	2,270	2,162
Valves, Actuators & Regulators		522		772	1,552	1,718
Industrial Solutions		403		430	1,186	1,216
Process Control Systems & Solutions		504		494	1,524	1,428
Total		$	2,176	2,440	6,532	6,524

11.

On April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business for $2.960 billion, net of cash acquired of $207 million, subject to certain post-closing adjustments. This business, with sales of approximately $1.6 billion for the trailing twelve months ended March 2017, is a manufacturer of control, isolation and pressure relief valves and actuators, and complements the Valves, Actuators & Regulators product offering within Automation Solutions. The Company recognized goodwill of $1,373 million (none of which is expected to be tax deductible), and other identifiable intangible assets of $988 million, primarily customer relationships and intellectual property with a weighted-average life of approximately 15 years. The Company also acquired two smaller businesses in the Automation Solutions segment. Total cash paid for all businesses was $3.0 billion, net of cash acquired.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

The purchase price of the valves & controls business was preliminarily allocated to assets and liabilities as follows. Valuations of acquired assets and liabilities are in-process and subject to refinement.



Accounts receivable	$	363
Inventory	562
Other current assets	27
Property, plant & equipment	405
Goodwill	1,373
Intangibles	988
Other assets	287
Assets held-for-sale, including deferred taxes	38
Total assets	4,043

Accounts payable	119
Other current liabilities	308
Deferred taxes and other liabilities	656
Cash paid, net of cash acquired	$	2,960

Results of operations for the third quarter of 2017 include sales of $241 million and a net loss of $(35) million, $(0.05) per share, including intangibles amortization and restructuring expense. These results also include first year pretax acquisition accounting charges related to inventory and backlog of $(37) million, $(26) million after-tax, $(0.04) per share.

Pro Forma Financial Information

The following unaudited proforma consolidated condensed financial results of operations are presented as if the acquisition of the valves & controls business occurred on October 1, 2015. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition occurred as of that time ($ in millions, except per share amounts).



	Three Months Ended June 30,			Nine Months Ended June 30,
	2016		2017	2016	2017

Net sales	$	4,101	4,132	11,864	11,677
Net earnings from continuing operations common stockholders	$	436	426	972	1,155
Diluted earnings per share from continuing operations	$	0.67	0.66	1.50	1.78

The pro forma results for 2016 were adjusted to include first year acquisition accounting charges related to inventory and backlog of $11 million in the third quarter and $120 million year-to-date. The pro forma year-to-date 2016 results also include acquisition costs of $50 million which were assumed to be incurred in the first quarter. 2017 pro forma results were adjusted to exclude these charges.

12.

Discontinued Operations – The Company previously announced strategic actions to streamline its portfolio, drive growth and accelerate value creation for shareholders. On November 30, 2016, the Company completed the sale of its network power systems business for $4 billion in cash and retained a subordinated interest in distributions, contingent upon the equity holders first receiving a threshold return on their initial investment. This business comprised the former Network Power segment. Additionally, on January 31, 2017, the Company completed the sale of its power generation, motors and drives business for approximately $1.2 billion, subject to post-closing adjustments. This business was previously reported in the former Industrial Automation segment. The results of operations for these businesses were reclassified into discontinued operations, and the assets and liabilities were reflected as held-for-sale.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

The financial results of the network power systems and power generation, motors and drives businesses reported as discontinued operations for the three and nine months ended June 30, 2017 and 2016 were as follows:



	Three Months Ended June 30,
	Network Power Systems			Power Generation, Motors and Drives			Total
	2016			2016			2016

Net sales		$	1,108		351			1,459
Cost of sales		693			268			961
SG&A		280			71			351
Other (income) deductions, net		49			13			62
Earnings (Loss) before income taxes		86			(1	)		85
Income taxes		45			2			47
Earnings (Loss), net of tax		$	41		(3	)		38

Discontinued operations for the third quarter of 2017 included net earnings of $6 million, primarily reflecting post-closing adjustments. In 2016, earnings of $38 million included net earnings from operations of $75 million, $13 million of income tax expense for repatriation of cash, and $24 million after-tax for professional fees and other costs.



	Nine Months Ended June 30,
	Network Power Systems				Power Generation, Motors and Drives				Total
	2016		2017		2016		2017		2016	2017

Net sales	$	3,171	630		1,030		407		4,201	1,037
Cost of sales	1,982		394		792		307		2,774	701
SG&A	829		180		208		83		1,037	263
Other (income) deductions, net	141		(482	)	36		53		177	(429	)
Earnings (Loss) before income taxes	219		538		(6	)	(36	)	213	502
Income taxes	125		547		2		88		127	635
Earnings (Loss), net of tax	$	94	(9	)	(8	)	(124	)	86	(133	)

In 2017, the net loss of $(133) million consisted of a $180 million after-tax loss ($47 million pretax loss) on the divestiture of the power generation, motors and drives business, an after-tax gain on the divestiture of the network power systems business of $114 million ($486 million pretax), income tax expense of $103 million for repatriation of sales proceeds and cash from the businesses, lower expense of $30 million due to ceasing depreciation and amortization for the discontinued businesses held-for-sale, and net earnings from operations of $6 million. In 2016, net earnings of $86 million included after-tax earnings from operations of $201 million, $41 million of income tax expense for repatriation of cash, and $74 million after-tax for professional fees and other costs.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

The aggregate carrying amounts of the major classes of assets and liabilities classified as held-for-sale as of September 30, 2016 are summarized as follows:



	Network Power Systems			Power Generation, Motors and Drives		Total
	Sept 30, 2016			Sept 30, 2016		Sept 30, 2016
Assets
Receivables		$	1,202		290		1,492
Inventories		381			197		578
Other current assets		108			22		130
Property plant & equipment, net		352			259		611
Goodwill		2,111			580		2,691
Other noncurrent assets		473			55		528
Total assets held-for-sale		$	4,627		1,403		6,030

Liabilities
Accounts payable		$	664		176		840
Other current liabilities		620			141		761
Deferred taxes and other noncurrent liabilities		227			99		326
Total liabilities held-for-sale		$	1,511		416		1,927

Net cash from operating and investing activities for the network power systems and power generation, motors and drives businesses for the nine months ended June 30, 2017 and 2016 were as follows:



	Network Power Systems					Power Generation, Motors and Drives				Total
	June 30, 2016			June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016		June 30, 2017

Cash from operating activities	$	245		(572	)	35		(155	)	280		(727	)
Cash from investing activities	$	(23	)	3,927		(32	)	1,095		(55	)	5,022

Cash used for operating activities was $727 million for the nine months ended June 30, 2017, which primarily included payments for income taxes on completion of the divestitures and repatriation of cash, and professional fees and other costs. Cash from operations for the nine months ended June 30, 2016 of $280 million included operating cash flow of the divested businesses, net of income taxes, and professional fees and other costs paid related to the transactions of $113 million.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Items 2 and 3.

Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The Company's previously announced strategic repositioning actions resulted in the sale of the network power systems business which closed in the first quarter of 2017, and the sale of the power generation, motors and drives business which closed in the second quarter of 2017. These businesses have been reported within discontinued operations for all periods presented. Additionally, on April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business.

Third quarter results reflected favorable trends in key served markets across the Company's businesses. Sales from continuing operations were $4,039 million, up 10 percent, supported by the acquisition of the valves & controls business, which added 7 percent. Underlying sales increased 4 percent reflecting favorable trends in energy related, general industrial and global construction markets, as well as strong demand in HVAC and refrigeration markets.

Earnings from continuing operations common stockholders were $407 million, down 8 percent, and diluted earnings per share from continuing operations were $0.63, down 7 percent. The valves & controls business deducted 7 percent ($0.05 per share), primarily due to first year acquisition accounting charges. Net earnings common stockholders were $413 million, down 14 percent, and diluted earnings per share were $0.64, down 14 percent, including the impact of discontinued operations.

RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the third quarter ended June 30, 2017, compared with the third quarter ended June 30, 2016.



Three Months Ended June 30	2016			2017		Change
(dollars in millions, except per share amounts)

Net sales	$	3,674		4,039		10	%
Gross profit	$	1,593		1,678		5	%
Percent of sales	43.4		%	41.5	%

SG&A	$	852		931
Percent of sales	23.2		%	23.0	%
Other deductions, net	$	39		87
Interest expense, net	$	46		39

Earnings from continuing operations before income taxes	$	656		621		(5	)%
Percent of sales	17.8		%	15.4	%
Earnings from continuing operations common stockholders	$	441		407		(8	)%
Net earnings common stockholders	$	479		413		(14	)%
Percent of sales	13.0		%	10.2	%

Diluted EPS - Earnings from continuing operations	$	0.68		0.63		(7	)%
Diluted EPS - Net earnings	$	0.74		0.64		(14	)%

Net sales for the third quarter of 2017 were $4,039 million, an increase of $365 million compared with $3,674 million in 2016. Underlying sales increased 4 percent ($144 million) on higher volume. Acquisitions added 7 percent ($249 million) while foreign currency translation subtracted 1 percent ($28 million). Underlying sales increased 6 percent in the U.S. and 2 percent internationally. Asia was up 10 percent (China up 20 percent) and Canada increased 6 percent, while sales decreased 4 percent in Europe, 3 percent in Middle East/Africa and 8 percent in Latin America. Sales increased $264 million in Automation Solutions, largely driven by the acquisition of the valves & controls business, and favorable trends in energy related, hybrid and general industrial markets. Commercial & Residential Solutions sales increased $101 million, reflecting strong demand in global HVAC and refrigeration markets, and favorable construction markets in North America, Asia and Europe.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Cost of sales for the third quarter of 2017 were $2,361 million, an increase of $280 million compared with $2,081 million in 2016, primarily due to the acquisition of the valves & controls business and higher volume. Gross profit margin of 41.5 percent reflected dilution of 1.8 percentage points due to the valves & controls operations and first year acquisition accounting charges of $30 million related to inventory. Gross profit margin was 43.4 percent in 2016.

Selling, general and administrative (SG&A) expenses of $931 million increased $79 million compared with the prior year, primarily due to the valves & controls acquisition, an increase in volume and higher incentive stock compensation of $8 million. SG&A as a percent of sales of 23.0 percent improved 0.2 percentage points, reflecting leverage on higher volume and savings from costs reduction actions.

Other deductions, net were $87 million in 2017, an increase of $48 million due to intangibles and backlog amortization related to the valves & controls acquisition of $12 million and $7 million, respectively, higher acquisition/divestiture costs of $13 million, and higher restructuring expense of $8 million. These increases were partially offset by favorable foreign currency transactions of $10 million. Additionally, 2016 results included an $18 million gain on payments received related to dumping duties. See Note 8.

Pretax earnings from continuing operations of $621 million decreased $35 million, or 5 percent. Valves & controls reduced pretax earnings comparisons by 7 percentage points, primarily due to first year acquisition accounting charges. Earnings increased $24 million in Automation Solutions and $18 million in Commercial & Residential Solutions. See Note 10 and the following Business Segments discussion.

Income taxes were $202 million for 2017 and $205 million for 2016, resulting in effective tax rates of 33 percent and 31 percent, respectively. The tax rate for full year 2017 is estimated at 30 percent, which reflects a $47 million tax benefit from restructuring a foreign subsidiary in the first quarter of 2017.

Earnings from continuing operations attributable to common stockholders were $407 million, down 8 percent, and diluted earnings per share were $0.63, down 7 percent. Valves & controls reduced earnings and earnings per share comparisons by 8 and 7 percentage points, respectively, or $(35) million, $(0.05) per share, primarily due to first year acquisition accounting charges related to inventory and backlog of $(0.04) per share.

Net earnings common stockholders in the third quarter of 2017 were $413 million, down 14 percent, compared with $479 million in the prior year, and earnings per share were $0.64, down 14 percent, compared with $0.74 in 2016. These results include the impact of discontinued operations which is discussed below.

Discontinued Operations

Discontinued operations for 2017 included net earnings of $6 million ($0.01 per share), which primarily reflected post-closing adjustments. In 2016, discontinued operations included net earnings of $38 million ($0.06 per share), which consisted of net earnings from operations of $75 million and separation costs related to the divestitures of $37 million after-tax. See Note 12.

BUSINESS SEGMENTS

Following is an analysis of operating results for the Company’s business segments for the third quarter ended June 30, 2017, compared with the third quarter ended June 30, 2016. The Company defines segment earnings as earnings before interest and taxes. See Notes 1 and 10 for a discussion of the Company's business segments.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Automation Solutions



Three Months Ended June 30	2016			2017		Change
(dollars in millions)

Sales	$	2,176		2,440		12	%
Earnings	$	354		378		7	%
Margin	16.2		%	15.5	%



Sales by Major Product Offering
Measurement & Analytical Instrumentation	$	747	744	(1	)%
Valves, Actuators & Regulators	522		772	48	%
Industrial Solutions	403		430	7	%
Process Control Systems & Solutions	504		494	(2	)%
Total	$	2,176	2,440	12	%

Automation Solutions sales were $2.4 billion in the third quarter, an increase of $264 million, or 12 percent. Underlying sales increased 2 percent ($41 million) on higher volume. The valves & controls acquisition added 11 percent ($241 million), while foreign currency translation had a 1 percent ($18 million) unfavorable impact. Sales for Measurement & Analytical Instrumentation decreased 1 percent and Process Control Systems & Solutions decreased 2 percent as spending by global oil and gas customers was mixed, while strength in North American markets was led by small optimization projects and MRO activity, and renewed activity in unconventional oil and gas, particularly in Western Canada. Valves, Actuators & Regulators increased $250 million, or 48 percent, primarily due to the valves & controls acquisition. Industrial Solutions sales increased $27 million, or 7 percent, driven by favorable trends in general industrial end markets, especially automotive. Underlying sales increased 6 percent in the U.S. and decreased 5 percent in Europe. Sales increased 6 percent in Asia (China up 13 percent) on momentum across all major product offerings, including robust demand in discrete markets, while Canada was up 5 percent. Sales were down 2 percent in Middle East/Africa, and 17 percent in Latin America due to lower demand from national oil companies. Earnings were $378 million, an increase of $24 million led by increased volume, leverage and savings from cost reduction actions. The margin decline of 0.7 percentage points reflected dilution of 2.4 percentage points from the valves & controls acquisition, including $12 million of intangibles amortization and $9 million of restructuring expense. Materials cost containment more than offset slightly lower price. Overall, the mix of business has started to shift to mid-sized projects, with larger project bookings anticipated in 2018. Continued improvement in order trends and a growing project pipeline support the outlook for favorable underlying sales in the fourth quarter and solid momentum heading into fiscal 2018.

Commercial & Residential Solutions



Three Months Ended June 30	2016			2017		Change
(dollars in millions)

Sales:
Climate Technologies	$	1,101		1,187		8	%
Tools & Home Products	400			415		4	%
Total	$	1,501		1,602		7	%

Earnings:
Climate Technologies	$	287		305		6	%
Tools & Home Products	97			97		—	%
Total	$	384		402		5	%
Margin	25.6		%	25.1	%

Commercial & Residential Solutions sales were $1.6 billion in the third quarter, an increase of $101 million, or 7 percent. Underlying sales were also up 7 percent ($103 million) on higher volume. Foreign currency translation deducted 1 percent ($10 million) and acquisitions added 1 percent ($8 million). Climate Technologies sales were $1,187 million in the third quarter, an increase of $86 million, or 8 percent. Global air conditioning sales were strong, reflecting robust growth in China and solid growth in the U.S., including robust growth in residential air conditioning.



EMERSON ELECTRIC CO. AND SUBSIDIARIES			FORM 10-Q

Global refrigeration sales were also strong led by robust growth in China and solid growth in the U.S. Solutions had very strong growth in the quarter, sensors was solid and temperature controls was up slightly. Tools & Home Products sales were $415 million in the third quarter (up $15 million). Sales for professional tools were solid on favorable demand in oil and gas and construction related markets. Wet/dry vacuums and food waste disposers had moderate growth, while sales for the storage business decreased modestly. Overall, underlying sales increased 6 percent in the U.S., 1 percent in Europe and 17 percent in Asia (China up 32 percent). Sales increased 7 percent in Latin America and 8 percent in Canada, while sales decreased 6 percent in Middle East/Africa. Earnings were $402 million, an increase of $18 million due to increased volume and resulting leverage. Margin decreased 0.5 percentage points reflecting higher materials costs, unfavorable product line mix and slightly lower price. Market demand is expected to remain favorable and margin trends support full year expectations.

RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the nine months ended June 30, 2017, compared with the nine months ended June 30, 2016.



Nine Months Ended June 30	2016			2017		Change
(dollars in millions, except per share amounts)

Net sales	$	10,590		10,829		2	%
Gross profit	$	4,549		4,600		1	%
Percent of sales	43.0		%	42.5	%

SG&A	$	2,609		2,621
Percent of sales	24.7		%	24.2	%