EX-13 3 exhibit13fy14.htm EXHIBIT 13 Exhibit 13 FY14

Exhibit 13
FINANCIAL REVIEW
Report of Management
The Company's management is responsible for the integrity and accuracy of the financial statements. Management believes that the financial statements for the three years ended September 30, 2014 have been prepared in conformity with U.S. generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of events and transactions that have not been completed. The Company's disclosure controls and procedures ensure that material information required to be disclosed is recorded, processed, summarized and communicated to management and reported within the required time periods.
In meeting its responsibility for the reliability of the financial statements, management relies on a system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The design of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes that the Company's internal accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, is responsible for overseeing the Company's financial reporting process. The Audit Committee meets with management and the Company's internal auditors periodically to review the work of each and to monitor the discharge by each of its responsibilities. The Audit Committee also meets periodically with the independent auditors, who have free access to the Audit Committee and the Board of Directors, to discuss the quality and acceptability of the Company's financial reporting and internal controls, as well as nonaudit-related services.
The independent auditors are engaged to express an opinion on the Company's consolidated financial statements and on the Company's internal control over financial reporting. Their opinions are based on procedures that they believe to be sufficient to provide reasonable assurance that the financial statements contain no material errors and that the Company's internal controls are effective.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria established in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that internal control over financial reporting was effective as of September 30, 2014.
The Company's auditor, KPMG LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting.
/s/ David N. Farr
 
/s/ Frank J. Dellaquila
 
David N. Farr
 
Frank J. Dellaquila
 
Chairman of the Board
 
Executive Vice President
 
and Chief Executive Officer
 
and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Results of Operations
Years ended September 30
(Dollars in millions, except per share amounts)
 
2012

 
2013

 
2014

 
Change
'12 - '13

 
Change
'13 - '14

 
 
 
 
 
 
 
 
 
 
Net sales
$
24,412

 
24,669

 
24,537

 
1
%
 
(1
)%
Gross profit
$
9,768

 
9,952

 
10,158

 
2
%
 
2
 %
Percent of sales
40.0
%
 
40.3
%
 
41.4
%
 
 
 
 

 
 
 
 
 
 
 
 
 
 
SG&A
$
5,436

 
5,648

 
5,715

 
 
 
 

Percent of sales
22.3
%
 
22.9
%
 
23.3
%
 
 
 
 

Goodwill impairment
$
592

 
528

 
508

 
 
 
 
Other deductions, net
$
401

 
362

 
393

 
 
 
 

Interest expense, net
$
224

 
218

 
194

 
 
 
 

 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
$
3,115

 
3,196

 
3,348

 
3
%
 
5
 %
Percent of sales
12.8
%
 
13.0
%
 
13.6
%
 
 
 
 

Net earnings common stockholders
$
1,968

 
2,004

 
2,147

 
2
%
 
7
 %
Percent of sales
8.1
%
 
8.1
%
 
8.7
%
 
 
 
 

Diluted EPS – Net earnings
$
2.67

 
2.76

 
3.03

 
3
%
 
10
 %
 
 
 
 
 
 
 
 
 
 
Return on common stockholders' equity
19.0
%
 
19.2
%
 
20.7
%
 
 
 
 
Return on total capital
15.8
%
 
16.4
%
 
17.5
%
 
 
 
 

OVERVIEW
Emerson's sales for 2014 were $24.5 billion, a decrease of $132 million, or 1 percent compared with prior year as divestitures negatively affected reported sales growth. Underlying sales growth was 3 percent, as global economic conditions remained sluggish for a third consecutive year due to geopolitical instability and structural challenges limiting growth in several emerging markets and in Europe. Sales growth was led by the U.S. and Asia, both of which increased 4 percent (China up 7 percent), while Europe grew 1 percent.

Net earnings common stockholders were $2,147 million in 2014, up 7 percent compared with prior year earnings of $2,004 million. Diluted earnings per share were $3.03, up 10 percent versus $2.76 per share in 2013. Excluding goodwill impairment and income tax charges, 2014 net earnings were $2,655 million, up 3 percent compared with $2,570 million in 2013, while diluted earnings per share were $3.75, up 6 percent versus $3.54 in 2013.

In 2014, the European network power business incurred a goodwill impairment charge of $508 million, $0.72 per share. In 2013, impairment and income tax charges totaling $566 million, $0.78 per share were recognized. These charges primarily related to the embedded computing and power business, which was divested in early 2014. The relatively smaller charges in 2014 aided both reported earnings and net earnings per share comparisons 4 percentage points.

Four of the Company's five operating segments reported increased sales and earnings. Process Management sales increased 7 percent on continued strong energy and chemicals end market demand, and acquisitions. Climate Technologies reported sales growth of 6 percent on demand in the refrigeration and air conditioning businesses. Slowly recovering industrial goods end markets led to a 2 percent sales increase in Industrial Automation, while improvement in U.S. residential and commercial construction markets aided sales growth of 3 percent in Commercial & Residential Solutions. The impact of the embedded computing and power and connectivity solutions divestitures resulted in a sales decrease of 18 percent in Network Power, while underlying sales increased 2 percent.

The Company generated record operating cash flow of $3.7 billion, a slight increase from very strong cash flow in 2013, while free cash flow (operating cash flow less capital expenditures) of $2.9 billion was down slightly due to increased capital spending. Emerson is well positioned moving into next year with its strong financial position, global footprint in both mature and emerging markets, and focus on products, technology and customer solutions.

2


NET SALES
Net sales for 2014 were $24.5 billion, a decrease of $132 million, or 1 percent compared with 2013, due to the divestitures of the embedded computing and power (now Artesyn Embedded Technologies or "Artesyn") and connectivity solutions businesses. Consolidated results reflect a 3 percent ($729 million) increase in underlying sales driven by volume gains. Underlying sales exclude divestitures, acquisitions and foreign currency translation. Divestitures subtracted 5 percent ($1,112 million), acquisitions added 1 percent ($328 million), and foreign currency translation subtracted $77 million. Underlying sales grew 4 percent in the U.S. and 2 percent internationally, while growth rates in emerging markets were slightly stronger than in mature markets. Reported sales growth was led by Process Management, which increased $579 million including acquisitions, and Climate Technologies, which increased $233 million. Sales in Industrial Automation and Commercial & Residential Solutions increased $105 million and $59 million, respectively. Network Power decreased $1,082 million due to divestitures.

Net sales for 2013 were $24.7 billion, an increase of $257 million, or 1 percent compared with 2012. Consolidated
results reflect a 2 percent ($388 million) increase in underlying sales on volume gains. Foreign currency translation ($55 million) and divestitures, net of acquisitions ($76 million) had a combined negative 1 percent impact on net sales. Underlying sales were flat in the U.S. and grew 3 percent internationally as emerging markets growth exceeded that of mature economies. Segment results were mixed as sales in Process Management increased $711 million and Climate Technologies increased $110 million, while sales in Industrial Automation and Network Power decreased $303 million and $244 million, respectively. Commercial & Residential Solutions decreased $12 million due to the 2012 divestiture of Knaack, largely offset by growth in the remaining businesses.
 
INTERNATIONAL SALES
Emerson is a global business with international sales representing 58 percent of total sales, including U.S. exports. The Company generally expects faster economic growth in emerging markets in Asia, Latin America, Eastern Europe and Middle East/Africa.
 
International destination sales, including U.S. exports, decreased 3 percent, to $14.2 billion in 2014, primarily reflecting the divestitures in Network Power, partially offset by increases in Process Management, Climate Technologies and Commercial & Residential Solutions.  U.S. exports of $1.4 billion were down 13 percent compared with 2013 primarily due to the Artesyn divestiture. Underlying international destination sales grew 2 percent on volume, as divestitures, acquisitions and foreign currency translation had a 5 percent unfavorable impact on the comparison. Underlying sales increased 1 percent in Europe, 4 percent in Asia (China up 7 percent), 2 percent in Latin America and 1 percent in Canada, and declined 1 percent in Middle East/Africa. Lingering European economic weakness, as well as recent political instability in Eastern Europe and Middle East/Africa have hampered growth in these regions. Origin sales by international subsidiaries, including shipments to the U.S., totaled $12.9 billion in 2014, down 2 percent compared with 2013 due to divestitures.

International destination sales increased 2 percent in 2013, to $14.7 billion, reflecting increases in Process Management and Climate Technologies, offset by decreases in Network Power, Industrial Automation and Commercial & Residential Solutions. U.S. exports of $1.6 billion were up 2 percent compared with 2012. Underlying international destination sales grew 3 percent on volume, as foreign currency translation had a 1 percent unfavorable impact on the comparison with 2012. Underlying sales increased 2 percent in Asia, 11 percent in Latin America, 13 percent in Middle East/Africa and 4 percent in Canada, and decreased 3 percent in Europe. Sales by international subsidiaries, including shipments to the U.S., totaled $13.1 billion in 2013, up 2 percent compared with 2012.

ACQUISITIONS AND DIVESTITURES
The Company acquired Virgo Valves and Controls Limited and Enardo Holdings in 2014. Virgo manufactures engineered valves and automation systems while Enardo manufactures tank and terminal safety equipment used in oil and gas, chemicals and other industries. Both businesses are reported in Process Management, complement the existing portfolio and create opportunities for additional growth. The Company also acquired four other smaller businesses in 2014, in Process Management and Network Power. Total cash paid for all businesses in 2014 was $610 million, net of cash acquired, and the assumption of debt of $76 million. Combined annualized sales for all businesses acquired in 2014 were approximately $376 million. See Note 3.

Additionally in 2014, the Company acquired the remaining 44.5 percent noncontrolling interest in Appleton Group, in Industrial Automation, for $574 million. Sales for this electrical distribution business were $542 million in 2014. Full ownership of Appleton provides growth opportunities in oil and gas and chemicals end markets by leveraging the Company's Process Management and international distribution channels. The transaction does not affect

3


consolidated results of operations other than eliminating the noncontrolling interest's share of future earnings and distributions from this business.

Early in the fourth quarter of 2014, the Company sold its connectivity solutions business for $99 million in cash. The Network Power segment includes sales in 2014 of $63 million for this business through the closing date.

On November 22, 2013, the Company completed the divestiture of a 51 percent controlling interest in
Artesyn and received proceeds of $264 million, net of working capital adjustments. The Company retained an interest with a fair value of approximately $60 million. Consolidated operating results for 2014 include sales of $146 million and a net loss of $9 million for this business through the closing date. Prior to the divestiture, cash of $376 million ($308 million, after tax provided for in fiscal 2013) was repatriated from this business. In fiscal 2013, the Company initiated the purchase of $600 million of Emerson common stock in anticipation of the sale proceeds and the cash repatriation. The purchase of shares was completed in the first quarter of 2014.

In connection with its longer-term strategy to divest selected slower-growth businesses, management is considering strategic alternatives for the power transmission solutions business, and in the fourth quarter of 2014 received several nonbinding indications of interest. This business is a leader in the design and manufacturing of couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions. In 2014, this business contributed sales of $605 million and earnings of $87 million in Industrial Automation. The Company expects to make a decision and announce plans for this business within the next three months.

COST OF SALES
Cost of sales for 2014 were $14.4 billion, a decrease of $338 million compared to $14.7 billion in 2013, largely due to the Artesyn divestiture partially offset by higher costs associated with increased volume, including acquisitions. Gross profit was $10.2 billion in 2014 compared to $10.0 billion in 2013. Gross margin of 41.4 percent increased 1.1 percentage points versus 40.3 percent in 2013. The increase reflects a 0.7 percentage point favorable comparative impact from the Artesyn divestiture, which had relatively lower gross margin, as well as materials cost containment, cost reduction savings and lower pension expense. Lower price, unfavorable mix and other costs partially offset the increase.

Cost of sales for 2013 and 2012 were $14.7 billion and $14.6 billion, resulting in gross profit of $10.0 billion or 40.3
percent of sales in 2013, and $9.8 billion or 40.0 percent of sales in 2012. The increases in gross profit and gross margin primarily reflected higher volume, particularly in Process Management, and materials cost containment and cost reduction actions across the businesses. Deleverage in Industrial Automation and Network Power, product mix, and pension and other costs were unfavorable.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses of $5.7 billion in 2014 increased $67 million compared with 2013. The increase primarily reflects costs associated with increased volume, including acquisitions, partially offset by the Artesyn divestiture and lower incentive stock compensation expense of $78 million. SG&A as a percent of sales was 23.3 percent in 2014, a 0.4 percentage point increase versus 22.9 percent in 2013. The Artesyn divestiture had an unfavorable 0.3 percentage point impact on the comparison, as this business had relatively lower SG&A requirements. The benefit of cost containment actions was more than offset by business investment spending and other costs.

SG&A expenses of $5.6 billion in 2013 increased $212 million compared with 2012. SG&A as a percent of sales was 22.9 percent in 2013, a 0.6 percentage point increase versus 22.3 percent in 2012. The increases primarily reflected costs associated with higher volume, $121 million of higher incentive stock compensation expense from the overlap of two performance shares programs and a higher stock price, as well as higher pension and other costs. Cost containment and the comparison effect of a $17 million charge in 2012 related to post-65 supplemental retiree medical benefits had a favorable impact.

GOODWILL IMPAIRMENT
The Network Power Europe business, which comprises the 2010 Chloride acquisition and pre-existing businesses, was the focus of the fourth quarter 2014 impairment review. The business has not been able to meet it operating objectives due to a weak Western Europe economy, which had less than 1 percent GDP growth since the acquisition. The weak economic recovery and intense competitive/market pressures have negatively affected the profitability of the combined Emerson and Chloride European network power business. The economics for Europe

4


are uncertain for 2015 and 2016 and the goodwill from the acquisition cannot be supported. A $508 million, $0.72 per share, noncash impairment charge was recognized in the fourth quarter of 2014. The charge was not deductible for tax purposes. This business provides uninterruptible power supplies, thermal management products, and data center services and solutions for Europe, the Middle East and Africa. See Note 6.

The Company had faced persistent challenges in the Artesyn business due to protracted weak demand, structural industry developments and increased competition. These challenges, including weakness in telecommunication and mobile device markets, continued into 2013 and sales and earnings were below expectations. In the third quarter of 2013 the Company recorded a noncash goodwill impairment charge of $503 million ($475 million after-tax, $0.65 per share). Income tax charges of $70 million ($0.10 per share) for the anticipated repatriation of non-U.S. earnings from this business were also recorded in 2013. Additionally, in the fourth quarter the Company's goodwill impairment testing indicated that the carrying value of the connectivity solutions business in Network Power exceeded its fair value due to operating results not meeting forecasted expectations, resulting in a noncash charge to earnings of $25 million ($21 million after-tax, $0.03 per share).

In the fourth quarter of 2012, the Company incurred an impairment charge for the Artesyn business and the DC power systems business after its goodwill impairment testing revealed that the carrying values of these businesses exceeded the fair values. These businesses had been unable to meet operating objectives and the Company anticipated that growth in sales and earnings would be slower than previously expected given the end market circumstances noted above. The carrying value of these businesses was reduced by a noncash charge to earnings totaling $592 million ($528 million after-tax, $0.72 per share).
 
OTHER DEDUCTIONS, NET
Other deductions, net were $393 million in 2014, a $31 million increase from 2013 primarily due to a $34 million loss from the Artesyn equity investment, a $13 million China research incentive credit in 2013 and several other items, partially offset by a $23 million reduction in rationalization expense in 2014 and favorable foreign currency transactions of $20 million. See Notes 4 and 5.

Other deductions, net were $362 million in 2013, a $39 million decrease from 2012 primarily due to a $41 million
reduction in rationalization expense, lower intangibles amortization expense of $21 million and other items, partially
offset by a gain of $43 million in 2012 from the receipt of dumping duties from U.S. Customs.

INTEREST EXPENSE, NET
Interest expense, net was $194 million, $218 million and $224 million in 2014, 2013 and 2012, respectively. The decrease of $24 million in 2014 primarily resulted from the maturity of long-term debt with a relatively higher interest rate in early fiscal 2014. The decrease of $6 million in 2013 was primarily due to a long-term debt issuance in 2013 replacing maturing debt at relatively lower average interest rates.

INCOME TAXES
Income taxes were $1,164 million, $1,130 million and $1,091 million for 2014, 2013 and 2012, respectively, resulting in effective tax rates of 35 percent for all periods presented. The relatively high effective tax rates resulted from the low tax deductibility of impaired goodwill in all years, as well as an income tax charge in 2013 for the repatriation of non-U.S. earnings related to Artesyn. These items had unfavorable impacts on the effective rate of 5 percentage points, 6 percentage points and 4 percentage points, respectively.

NET EARNINGS AND EARNINGS PER SHARE; RETURNS ON EQUITY AND TOTAL CAPITAL
Net earnings attributable to common stockholders in 2014 were $2.1 billion, up 7 percent compared with 2013, and diluted earnings per share were $3.03, up 10 percent. Earnings per share growth benefited from the purchase of common stock for treasury. The goodwill impairment charge in 2014 was $58 million and $0.06 per share lower than goodwill impairment and income tax charges in 2013, which aided both earnings and earnings per share growth 4 percentage points. Segment earnings in 2014 increased $109 million in Process Management, $21 million in Climate Technologies, $25 million in Industrial Automation and $20 million in Commercial & Residential Solutions. Earnings decreased $95 million in Network Power largely due to divestitures. See the Business Segments discussion that follows and Note 17 for additional information.

5


Net earnings attributable to common stockholders of $2.0 billion in 2013 were up 2 percent compared with 2012, and diluted earnings per share were $2.76, up 3 percent versus $2.67. Goodwill impairment and income tax charges in 2013 were $38 million and $0.06 per share higher than in 2012, and reduced earnings and earnings per share growth 1 percentage point. Segment earnings increased $210 million in Process Management, $48 million in Climate Technologies and $8 million in Commercial & Residential Solutions. Earnings decreased $94 million in Industrial Automation and $70 million in Network Power.

Return on common stockholders' equity (net earnings attributable to common stockholders divided by average common stockholders' equity) was 20.7 percent in 2014 compared with 19.2 percent in 2013 and 19.0 percent in 2012. Return on total capital was 17.5 percent in 2014 compared with 16.4 percent in 2013 and 15.8 percent in 2012 (computed as net earnings attributable to common stockholders excluding after-tax net interest expense, divided by average common stockholders' equity plus short- and long-term debt less cash and short-term investments). Goodwill impairment charges reduced the 2014 and 2013 returns on common stockholders' equity and total capital approximately 3 percentage points, and reduced the 2012 returns approximately 4 percentage points.

Business Segments
Following is an analysis of segment results for 2014 compared with 2013, and 2013 compared with 2012.
The Company defines segment earnings as earnings before interest and income taxes.
PROCESS MANAGEMENT
 
 
 
 
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
Change
'12 - '13

 
Change
'13 - '14

 
 
 
 
 
 
 
 
 
 
Sales
$
7,899

 
8,610

 
9,189

 
9
%
 
7
%
Earnings
$
1,599

 
1,809

 
1,918

 
13
%
 
6
%
Margin
20.2
%
 
21.0
%
 
20.9
%
 
 
 
 

2014 vs. 2013 - Process Management reported sales of $9.2 billion in 2014, an increase of $579 million, or 7 percent on continuing solid demand in energy and chemicals end markets and supported by acquisitions. Underlying sales increased 4 percent ($299 million) on volume growth, acquisitions added 4 percent ($328 million) and foreign currency translation subtracted 1 percent ($48 million). The systems and solutions business had solid growth and the measurement devices business was up moderately. The final control business had strong growth due to the Virgo and Enardo acquisitions. Underlying sales increased 8 percent in the U.S., 3 percent in Europe and 2 percent in Asia, with 5 percent growth in China. Latin America decreased 1 percent, Middle East/Africa was down 4 percent and Canada grew 2 percent. Earnings increased $109 million on higher volume, including acquisitions, cost reduction savings and materials cost containment, partially offset by unfavorable mix and other costs. Higher business investment spending was largely offset by favorable foreign currency transactions of $20 million. Margin declined 0.1 percentage points. Recent order trends provide strong momentum into next year.

2013 vs. 2012 - Process Management reported sales of $8.6 billion in 2013, an increase of $711 million or 9
percent, on strong growth in the measurement devices, final control and systems and solutions businesses,
reflecting continued global oil and gas investment and demand in chemicals and power end markets. Underlying
sales increased 9 percent on volume, while foreign currency translation had a $23 million unfavorable impact.
Underlying sales growth was modest in the U.S., up 3 percent, while growth was strong internationally.
Asia was up 12 percent, Europe up 7 percent, Latin America up 22 percent, Middle East/Africa up 19 percent and
Canada up 10 percent. Earnings increased $210 million and margin expanded 0.8 percentage points on higher
volume, leverage and lower materials costs, partially offset by higher other costs. Benefits from cost reductions
were offset by unfavorable product mix. Foreign currency transactions were $23 million favorable compared to 2012. The comparison for 2013 includes incremental costs incurred in the prior year related to Thailand flooding
recovery.


6


INDUSTRIAL AUTOMATION
 
 
 
 
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
Change
'12 - '13

 
Change
'13 - '14

 
 
 
 
 
 
 
 
 
 
Sales
$
5,188

 
4,885

 
4,990

 
(6
)%
 
2
%
Earnings
$
871

 
777

 
802

 
(11
)%
 
3
%
Margin
16.8
%
 
15.9
%
 
16.1
%
 
 
 
 

2014 vs. 2013 - Industrial Automation sales were $5.0 billion in 2014, an increase of $105 million or 2 percent as slowly recovering global industrial goods markets led to mixed results across the segment. Underlying sales increased 2 percent ($86 million) on 3 percent higher volume partially offset by 1 percent lower price. Foreign currency translation added $19 million. Growth was led by the electrical distribution, fluid automation and hermetic motors businesses. Power generating alternators and motors and drives were flat, and power transmission decreased slightly. Underlying sales increased 4 percent in the U.S., decreased 3 percent in Europe and increased 5 percent in Asia on 9 percent growth in China. Sales were up 3 percent in Latin America and 2 percent in Middle East/Africa, while sales were down 3 percent in Canada. Earnings of $802 million were up $25 million and margin increased 0.2 percentage points, reflecting cost reduction benefits and lower rationalization expense of $20 million, partially offset by unfavorable mix and higher warranty. Materials cost containment more than offset lower pricing. Near-term expectations are favorable for North America and Asia, with Europe remaining weak. 

2013 vs. 2012 - Industrial Automation sales were $4.9 billion in 2013, a decrease of $303 million or 6 percent, on weak global demand for industrial goods, particularly in Europe. The power generating alternators and
renewable energy businesses led the decline, largely due to customer inventory destocking in the alternators business for most of the year. Smaller decreases in the motors and drives, power transmission and materials joining businesses were slightly offset by an increase in hermetic motors from improved HVAC compressor demand. Underlying sales decreased 6 percent on lower volume, while foreign currency translation had a $13 million unfavorable impact. Underlying sales decreased 11 percent in Europe and 6 percent in the U.S., while sales increased 4 percent in Latin America and 6 percent in Middle East/Africa. Sales in Asia were flat. Earnings of $777 million were down $94 million and margin decreased 0.9 percentage points on lower volume, deleverage in power generating alternators and motors and drives, and the comparative effect of a $43 million gain in 2012 from the receipt of dumping duties. Savings from cost reduction actions and materials cost containment more than offset the volume decline and associated deleverage. The gain in 2012 had an unfavorable impact of 0.8 percentage points on the margin comparison.

NETWORK POWER
 
 
 
 
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
Change
'12 - '13

 
Change
'13 - '14

 
 
 
 
 
 
 
 
 
 
Sales
$
6,399

 
6,155

 
5,073

 
(4
)%
 
(18
)%
Earnings
$
624

 
554

 
459

 
(11
)%
 
(17
)%
Margin
9.7
%
 
9.0
%
 
9.0
%
 
 
 
 

2014 vs. 2013 - Sales for Network Power were $5.1 billion in 2014, a decrease of $1,082 million or 18 percent due to the Artesyn and connectivity solutions divestitures, which subtracted 19 percent ($1,112 million). Underlying sales increased 2 percent ($73 million) as 3 percent higher volume was partially offset by 1 percent lower price. Foreign currency translation subtracted 1 percent ($43 million). The data center business was up slightly, led by delivery of a large hyperscale data center project and an increase in uninterruptible power supplies products, partially offset by decreases in thermal management and infrastructure products. The global telecommunications power business was flat, on modest increases in the Americas and Asia offset by a decrease in Europe. Geographically, underlying sales increased 2 percent in the U.S., 4 percent in Europe, 2 percent in Asia and 3 percent in Middle East/Africa. Canada was flat and Latin America decreased 6 percent. Earnings of $459 million decreased $95 million, or 17 percent, as lower earnings from the divestitures of $59 million and a $13 million China research credit in 2013 negatively affected the comparison 12 percentage points. The divestitures of the lower margin Artesyn business, and the connectivity solutions business, net of the research credit, improved margin comparisons 0.5 percentage points. Cost containment and lower rationalization expense of $10 million were favorable. Materials cost containment

7


substantially offset lower pricing. Expectations are for gradual near-term improvement in the data center business and inconsistent demand in telecommunication markets.

2013 vs. 2012 - Sales for Network Power were $6.2 billion in 2013, a decrease of $244 million or 4 percent,
reflecting weakness in telecommunications and information technology end markets. The network power
systems business was down modestly as decreases in the telecommunications power, infrastructure
management, thermal management and uninterruptible power supplies businesses were partially offset by an increase in critical power. Comparisons were adversely affected by $110 million of higher sales from the large Australian National Broadband Network project in 2012. The Artesyn business declined sharply due largely to lower end market demand and product rationalization, which had an approximate 2 percentage point negative impact on segment sales growth. Underlying sales were down 4 percent overall on 3 percent lower volume and 1 percent lower price. Foreign currency translation had a $16 million unfavorable impact. Geographically, underlying sales decreased 6 percent in Asia, 5 percent in Europe, 2 percent in the U.S. and 8 percent in Canada, while sales increased 3 percent in Latin America and 5 percent in Middle East/Africa. Earnings of $554 million decreased $70 million and margin decreased 0.7 percentage points primarily due to lower volume, deleverage, higher other costs and an $8 million unfavorable impact from foreign currency transactions. Savings from cost reduction actions and lower rationalization expense of $28 million partially offset the decline. Materials cost containment offset the unfavorable impact of lower prices.

CLIMATE TECHNOLOGIES
 
 
 
 
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
Change
'12 - '13

 
Change
'13 - '14

 
 
 
 
 
 
 
 
 
 
Sales
$
3,766

 
3,876

 
4,109

 
3
%
 
6
%
Earnings
$
668

 
716

 
737

 
7
%
 
3
%
Margin
17.7
%
 
18.5
%
 
17.9
%
 
 
 
 

2014 vs. 2013 - Sales for Climate Technologies were $4.1 billion in 2014, an increase of $233 million, or 6 percent on increased demand in air conditioning and refrigeration. Underlying sales increased 6 percent ($237 million) on volume gains. Foreign currency translation subtracted $4 million. The global air conditioning business had solid growth, on strength in the U.S., Europe and Asia, particularly China. Global refrigeration had strong growth due primarily to transportation. Growth in the solutions business was very strong, although from a much smaller base, while the temperature sensors and controls businesses were mixed. Underlying sales increased 4 percent in the U.S., partially due to recent regulatory changes, 3 percent in Europe, and 10 percent in Asia on 15 percent growth in China. Latin America was up 19 percent, Middle East/Africa was up 6 percent and Canada was flat. Earnings of $737 million increased $21 million on higher volume and materials cost containment. The increase was partially offset by unfavorable mix, increased investment spending, customer accommodation expense and higher rationalization expense of $11 million. Margin declined 0.6 percentage points. North America residential demand will accelerate into the next quarter and then slow in mid-year 2015 as customers work through inventory purchased ahead of regulatory changes. Other market conditions are expected to remain favorable in North America and Asia. 

2013 vs. 2012 - Sales for Climate Technologies were $3.9 billion in 2013, an increase of $110 million, or 3 percent,
primarily due to moderate growth in the compressors business worldwide. The temperature controls and
temperature sensors businesses were up slightly. The increase in compressor sales was driven by solid growth in
global air conditioning while refrigeration sales declined slightly. Underlying segment sales increased 3 percent on
volume growth and foreign currency had a $1 million unfavorable impact. Underlying sales increased in nearly all
geographies, with the U.S. up 2 percent, Asia up 5 percent, Europe up 2 percent and Latin America up 2 percent. Sales decreased 1 percent in Canada. Earnings increased $48 million on higher volume in the compressors business, material cost containment and cost reduction actions. Margin increased 0.8 percentage points on cost reduction actions, materials cost containment and lower rationalization expense of $8 million, partially offset by unfavorable mix.



8


COMMERCIAL & RESIDENTIAL SOLUTIONS
 
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
Change
'12 - '13

 
Change
'13 - '14

 
 
 
 
 
 
 
 
 
 
Sales
$
1,877

 
1,865

 
1,924

 
(1
)%
 
3
%
Earnings
$
396

 
404

 
424

 
2
 %
 
5
%
Margin
21.1
%
 
21.7
%
 
22.1
%
 
 
 
 

2014 vs. 2013 - Commercial & Residential Solutions sales were $1.9 billion in 2014, an increase of $59 million or 3 percent. Underlying sales grew 3 percent ($60 million) on higher volume. Foreign currency translation subtracted $1 million. The sales increase was led by solid growth in the food waste disposers and professional tools businesses and a moderate increase in wet/dry vacuums. The storage businesses were mixed with residential increasing slightly while the commercial business decreased moderately. Underlying sales were up 3 percent in the U.S. and 4 percent internationally. Earnings of $424 million were up $20 million and margin increased 0.4 percentage points, reflecting higher volume, cost containment and a $6 million decrease in rationalization expense, partially offset by unfavorable mix. Solid trends are expected to continue in North American residential and commercial construction markets, supporting the outlook for moderate growth. 

2013 vs. 2012 - Commercial & Residential Solutions sales were $1.9 billion in 2013, a decrease of $12 million or 1 percent, including a negative 4 percent ($76 million) comparative impact from the Knaack divestiture in 2012. Underlying sales grew 3 percent ($64 million) from higher volume, led by strong growth in the food waste disposers business and modest growth in storage and professional tools, partially offset by a slight decrease in the wet/dry vacuums business. Underlying sales increased 6 percent in the U.S. and declined 3 percent internationally. Earnings of $404 million were up $8 million compared to the prior year. The Knaack divestiture in 2012 unfavorably impacted earnings by $11 million. Margin increased 0.6 percentage points on savings from cost reduction actions and materials cost containment, partially offset by unfavorable product mix and higher other costs.

Financial Position, Capital Resources and Liquidity
The Company continues to generate substantial cash from operations, is in a strong financial position with total assets of $24 billion and common stockholders' equity of $10 billion, and has the resources available to reinvest for growth in existing businesses, pursue strategic acquisitions and manage its capital structure on a short- and long-term basis.
CASH FLOW
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
 
 
 
 
 
Operating Cash Flow
$
3,053

 
3,649

 
3,692

     Percent of sales
12.5
%
 
14.8
%
 
15.0
%
Capital Expenditures
$
665

 
678

 
767

     Percent of sales
2.7
%
 
2.7
%
 
3.1
%
Free Cash Flow (Operating Cash Flow less Capital Expenditures)
$
2,388

 
2,971

 
2,925

     Percent of sales
9.8
%
 
12.0
%
 
11.9
%
Operating Working Capital
$
2,132

 
1,686

 
1,729

     Percent of sales
8.7
%
 
6.8
%
 
7.0
%

Emerson generated operating cash flow of $3.7 billion in 2014, a $43 million or 1 percent increase compared to 2013 primarily due to increased earnings, continued improvements in working capital management and lower pension funding. Operating cash flow of $3.6 billion in 2013 was a 20 percent increase compared to $3.1 billion in 2012. At September 30, 2014, operating working capital as a percent of sales was 7.0 percent, compared with 6.8 percent and 8.7 percent in 2013 and 2012, respectively. Operating cash flow funded capital expenditures, dividends, purchases of common stock and acquisitions in all years presented. Contributions to pension plans were $130 million in 2014, $160 million in 2013 and $163 million in 2012. The Company has returned over 60 percent of operating cash flow to stockholders through dividends and purchases of common stock in each of the last four years.

9



Capital expenditures were $767 million, $678 million and $665 million in 2014, 2013 and 2012, respectively. Free cash flow was $2.9 billion in 2014, down 2 percent and primarily reflecting the higher capital expenditures. Free cash flow was $3.0 billion in 2013, compared with $2.4 billion in 2012, on lower operating working capital. The Company is targeting capital spending of approximately $825 million in 2015. Net cash paid in connection with acquisitions was $610 million, $19 million and $187 million in 2014, 2013 and 2012, respectively. In addition, the Company purchased the noncontrolling interest in Appleton Group for $574 million. Proceeds from divestitures in 2014, 2013 and 2012 were $363 million, $3 million and $125 million, respectively.

Dividends were $1,210 million ($1.72 per share) in 2014, compared with $1,181 million ($1.64 per share) in 2013 and $1,171 million ($1.60 per share) in 2012. In November 2014, the Board of Directors voted to increase the quarterly cash dividend 9 percent, to an annualized rate of $1.88 per share.

Purchases of Emerson common stock totaled $971 million, $1,189 million and $787 million in 2014, 2013 and 2012, respectively, at average per share prices of $65.54, $58.51 and $47.94. The Board of Directors authorized the purchase of up to 70 million common shares in May 2013, and 49.1 million shares remain available for purchase under this authorization. The Company purchased 14.8 million shares in 2014. A total of 20.3 million shares were purchased in 2013 under a combination of the May 2013 authorization and the remainder of a May 2008 authorization. In 2012, 16.4 million shares were purchased.
LEVERAGE/CAPITALIZATION
 
 
 
 
 
(dollars in millions)
2012

 
2013

 
2014

 
 
 
 
 
 
Total Assets
$
23,818

 
24,711

 
24,177

Long-term Debt
$
3,787

 
4,055

 
3,559

Common Stockholders' Equity
$
10,295

 
10,585

 
10,119

 
 
 
 
 
 
Total Debt-to-Total Capital Ratio
34.0
%
 
34.8
%
 
37.3
%
Net Debt-to-Net Capital Ratio
22.1
%
 
18.3
%
 
22.1
%
Operating Cash Flow-to-Debt Ratio
57.7
%
 
64.7
%
 
61.3
%
Interest Coverage Ratio
13.9X

 
14.6X

 
16.3X


Total debt, which includes long-term debt, current maturities of long-term debt, commercial paper and other short-term borrowings, was $6.0 billion, $5.6 billion and $5.3 billion for 2014, 2013 and 2012, respectively. The increase in 2014 is due to higher short-term borrowings. During the year, the Company repaid $250 million of 5.625% notes that matured in November 2013. In 2013, the Company repaid $250 million of 4.625% notes that matured in October 2012 and $250 million of 4.5% notes that matured in May 2013, and also issued $500 million of 2.625% notes due February 2023.
 
The total debt-to-capital ratio and the net debt-to-net capital ratio (less cash and short-term investments) increased primarily due to higher total debt from short-term borrowings during the year and lower common stockholders' equity. The operating cash flow-to-debt ratio decreased in 2014 on higher total debt. The interest coverage ratio is computed as earnings before income taxes plus interest expense, divided by interest expense. The increases in interest coverage in 2014 and 2013 reflect higher pretax earnings and lower interest expense in both years.

In April 2014, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replaced the December 2010 $2.75 billion facility. The credit facility is maintained to support general corporate purposes, including commercial paper borrowing. The Company has not incurred any borrowings under this or previous facilities. The credit facility contains no financial covenants and is not subject to termination based on a change of credit rating or material adverse changes. The facility is unsecured and may be accessed under various interest rate and currency denomination alternatives at the Company's option. Fees to maintain the facility are immaterial. The Company also maintains a universal shelf registration statement on file with the SEC under which it can issue debt securities, preferred stock, common stock, warrants, share purchase contracts or share purchase units without a predetermined limit. Securities can be sold in one or more separate offerings with the size, price and terms to be determined at the time of sale.
 

10


Emerson maintains a conservative financial structure which provides the strength and flexibility necessary to achieve its strategic objectives. The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. Substantially all of the Company's cash is held outside the U.S., primarily in Europe and Asia, and is generally available for repatriation to the U.S. Under current tax law, repatriated cash may be subject to U.S. federal income taxes, net of available foreign tax credits. The Company routinely repatriates a portion of its non-U.S. cash from earnings each year, or otherwise when it can be accomplished tax efficiently, and provides for U.S. income taxes as appropriate. The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet the Company's needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.

CONTRACTUAL OBLIGATIONS
At September 30, 2014, the Company's contractual obligations, including estimated payments, are as follows:
 
Amounts Due By Period
(dollars in millions)
Total

 
Less Than 1 Year

 
1 - 3
Years

 
3 - 5
Years

 
More Than
5 Years

 
 
 
 
 
 
 
 
 
 
Long-term Debt (including Interest)
$
5,670

 
700

 
859

 
1,138

 
2,973

Operating Leases
895

 
270

 
324

 
134

 
167

Purchase Obligations
1,107

 
996

 
86

 
20

 
5

     Total
$
7,672

 
1,966

 
1,269

 
1,292

 
3,145


Purchase obligations consist primarily of inventory purchases made in the normal course of business to meet operational requirements. The table above does not include $2.0 billion of other noncurrent liabilities recorded in the balance sheet and summarized in Note 18, which consist primarily of pension and postretirement plan liabilities and deferred income taxes (including unrecognized tax benefits), because it is not certain when these amounts will become due. See Notes 10 and 11 for estimated future benefit payments and Note 13 for additional information on deferred income taxes.

FINANCIAL INSTRUMENTS
The Company is exposed to market risk related to changes in interest rates, commodity prices and foreign currency exchange rates, and selectively uses derivative financial instruments, including forwards, swaps and purchased options to manage these risks. The Company does not hold derivatives for trading purposes. The value of market risk sensitive derivative and other financial instruments is subject to change as a result of movements in market rates and prices. Sensitivity analysis is one technique used to forecast the impact of these movements. Based on a hypothetical 10 percent increase in interest rates, a 10 percent decrease in commodity prices or a 10 percent weakening in the U.S. dollar across all currencies, the potential losses in future earnings, fair value or cash flows are not material. Sensitivity analysis has limitations; for example, a weaker U.S. dollar would benefit future earnings through favorable translation of non-U.S. operating results, and lower commodity prices would benefit future earnings through lower cost of sales. See Notes 1, and 7 through 9.

Critical Accounting Policies
Preparation of the Company's financial statements requires management to make judgments, assumptions and estimates regarding uncertainties that could affect reported revenue, expenses, assets, liabilities and equity. Note 1 describes the significant accounting policies used in preparation of the consolidated financial statements. The most significant areas where management judgments and estimates impact the primary financial statements are described below. Actual results in these areas could differ materially from management's estimates under different assumptions or conditions.


11


REVENUE RECOGNITION
The Company recognizes nearly all revenue through the sale of manufactured products and records the sale when products are shipped or delivered, and title passes to the customer with collection reasonably assured. In certain limited circumstances, revenue is recognized using the percentage-of-completion method, as performance occurs, or in accordance with ASC 985-605 related to software. Sales arrangements sometimes involve delivering multiple elements, including services such as installation. In these instances, the revenue assigned to each element is based on vendor-specific objective evidence, third-party evidence or a management estimate of the relative selling price. Revenue is recognized individually for delivered elements only if they have value to the customer on a stand-alone basis and performance related to the undelivered items is probable and substantially in the Company's control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment. Management believes that all relevant criteria and conditions are considered when recognizing revenue.

INVENTORIES
Inventories are stated at the lower of cost or market. The majority of inventory values are based on standard costs, which approximate average costs, while the remainder are principally valued on a first-in, first-out basis. Cost standards are revised at the beginning of each year. The annual effect of resetting standards plus any operating variances incurred during each period are allocated between inventories and cost of sales. The Company's businesses review inventory for obsolescence, make appropriate provisions and dispose of obsolete inventory on a regular basis. Various factors are considered in these reviews, including sales history and recent trends, industry conditions and general economic conditions.

LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and identifiable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate impairment may exist. If the Company determines that the carrying value of a long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. Reporting units are also reviewed for possible goodwill impairment at least annually, in the fourth quarter. If an initial assessment indicates it is more likely than not an impairment may exist, it is evaluated by comparing the unit's estimated fair value to its carrying value. Fair value is generally estimated using an income approach that discounts estimated future cash flows using discount rates judged by management to be commensurate with the applicable risk. Estimates of future sales, operating results, cash flows and discount rates are subject to changes in the economic environment, including such factors as the general level of market interest rates, expected equity market returns and the volatility of markets served, particularly when recessionary economic circumstances continue for an extended period of time. Management believes the estimates of future cash flows and fair values are reasonable; however, changes in estimates due to variance from assumptions could materially affect the evaluations.

RETIREMENT PLANS
The Company maintains a prudent long-term investment strategy for its pension assets, consistent with the duration of its pension obligations. The determination of defined benefit plan expense and liabilities is dependent on various assumptions, including the expected annual rate of return on plan assets, the discount rate and the rate of annual compensation increases. Management believes that the assumptions used are appropriate; however, actual experience may differ. In accordance with U.S. generally accepted accounting principles, actual results that differ from the Company's assumptions are accumulated as deferred actuarial gains or losses and amortized to expense in future periods.

As of September 30, 2014, the Company's U.S. pension plans were overfunded by $137 million and non-U.S. plans were underfunded by $342 million. The U.S. funded status includes unfunded plans totaling $182 million and the non-U.S. status includes unfunded plans totaling $218 million. The Company contributed a total of $130 million to defined benefit plans in 2014 and expects to contribute approximately $60 million in 2015. At year-end 2014, the discount rate for U.S. plans was 4.25 percent, and was 4.75 percent in 2013. The assumed investment return on plan assets was 7.50 percent in 2014, 7.75 percent in both 2013 and 2012, and is expected to be 7.50 percent for 2015. Deferred actuarial losses to be amortized to expense in future years were $1.3 billion ($854 million after-tax) as of September 30, 2014. Defined benefit pension plan expense for 2015 is expected to be approximately $165 million, compared with $153 million in 2014. See Notes 10 and 11.


12


INCOME TAXES
Income tax expense and tax assets and liabilities reflect management's assessment of taxes paid or expected to be paid (received) on items included in the financial statements. Uncertainty exists regarding tax positions taken in previously filed tax returns still under examination and positions expected to be taken in future returns. Deferred tax assets and liabilities arise because of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred income taxes are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Valuation allowances are provided to reduce deferred tax assets to the amount that will more likely than not be realized.The impact on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company also pays U.S. federal income taxes, net of available foreign tax credits, on cash repatriated from non-U.S. locations. No provision is made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries where these earnings are considered permanently invested or otherwise indefinitely retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. See Notes 1, 3 and 13.

Other Items

LEGAL MATTERS
On October 22, 2012, Invensys Systems, Inc. filed a suit for patent infringement against the Company and its wholly-owned indirect subsidiary, Micro Motion, Inc., in the Eastern District of Texas captioned Invensys Systems, Inc. v. Emerson Electric Co. and Micro Motion, Inc., USA. The complaint alleges infringement on Invensys patents by Micro Motion's Coriolis flowmeter "Enhanced Core Processors." The Invensys suit seeks damages of $182 million and an injunction preventing the Company and Micro Motion from engaging in future infringement. The Company has filed a petition seeking a ruling that the Invensys patents are invalid. It is too early in the litigation to assess any potential financial impact. The Company and Micro Motion believe that the Invensys claims are without merit and that they have strong defenses to the claims, and intend to aggressively defend the suit.

Two subsidiaries of the Company have unrelated judgments against them totaling $50 million which, based on their merits, are expected to be overturned. At September 30, 2014, there were no known contingent liabilities (including guarantees, pending litigation, taxes and other claims) that management believes will be material in relation to the Company's financial statements, nor were there any material commitments outside the normal course of business.

NEW ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board (FASB) issued updates to ASC 205, Presentation of Financial Statements, and ASC 360, Property, Plant and Equipment, regarding the reporting of discontinued operations. These updates raised the threshold for reporting discontinued operations to a strategic business shift having a major effect on an entity's operations and financial results. The updates also added disclosures for disposals of business units qualifying for discontinued presentation, and for some dispositions that do not qualify as discontinued operations but are still considered individually significant components of the entity. The revised standard is effective for the Company in the first quarter of fiscal 2016. Early adoption is permitted.

In May 2014, the FASB amended ASC 606, Revenue from Contracts with Customers, to update and consolidate revenue recognition guidance from multiple sources into a single, comprehensive standard to be applied for all contracts with customers. The fundamental principle of the revised standard is to recognize revenue based on the transfer of goods and services to customers at an amount that the Company expects to be entitled to in exchange for those goods and services.  Also required are additional disclosures regarding the nature, extent, timing and uncertainty of revenues and associated cash flows. The new standard is effective for the Company in the first quarter of fiscal 2018, and may be adopted on either a prospective or retrospective basis. Early adoption is prohibited. The Company is in the process of evaluating the impact of the revised standard on its financial statements and determining its method of adoption.  
 
FISCAL 2015 OUTLOOK
Recent global macroeconomic trends have been mixed but gradually improving, with solid momentum in the NAFTA region and China balanced by increasing uncertainty in Europe and some emerging markets. Based on current conditions, underlying sales growth for 2015 is expected between 4 and 5 percent, slightly better than 2014, with unfavorable currency translation and the potential power transmission divestiture deducting 2 percent each. Reported sales are expected to change 0 to 1 percent.  Profitability is expected to continue to improve modestly.

13


Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions, except per share amounts)

 
2012

 
2013

 
2014

 
 
 
 
 
 
Net sales
$
24,412

 
24,669

 
24,537

Costs and expenses:
 
 
 
 
 
   Cost of sales
14,644

 
14,717

 
14,379

   Selling, general and administrative expenses
5,436

 
5,648

 
5,715

   Goodwill impairment
592

 
528

 
508

   Other deductions, net
401

 
362

 
393

   Interest expense, net of interest income of: 2012, $17; 2013, $16; 2014, $24
224

 
218

 
194

Earnings before income taxes
3,115

 
3,196

 
3,348

Income taxes
1,091

 
1,130

 
1,164

Net earnings
2,024

 
2,066

 
2,184

Less: Noncontrolling interests in earnings of subsidiaries
56

 
62

 
37

Net earnings common stockholders
$
1,968

 
2,004

 
2,147

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share common stockholders
$
2.68

 
2.78

 
3.05

 
 
 
 
 
 
Diluted earnings per share common stockholders
$
2.67

 
2.76

 
3.03




























See accompanying Notes to Consolidated Financial Statements.

14


Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions)

 
 
2012

 
2013

 
2014

Net earnings
 
$
2,024

 
2,066

 
2,184

 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Foreign currency translation
 
(206
)
 
32

 
(344
)
Pension and postretirement
 
(49
)
 
521

 
(54
)
Cash flow hedges
 
85

 
(17
)
 
1

        Total other comprehensive income (loss)
 
(170
)
 
536

 
(397
)
 
 
 
 
 
 
 
Comprehensive income
 
1,854

 
2,602

 
1,787

 
 
 
 
 
 
 
Less: Noncontrolling interests in comprehensive income of subsidiaries
 
55

 
56

 
34

Comprehensive income common stockholders
 
$
1,799

 
2,546

 
1,753






































See accompanying Notes to Consolidated Financial Statements.

15


Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES

September 30
(Dollars in millions, except per share amounts)
 
2013

 
2014

ASSETS
 
 
 
Current assets
 
 
 
     Cash and equivalents
$
3,275

 
3,149

     Receivables, less allowances of $103 in 2013 and $114 in 2014
4,808

 
5,019

     Inventories
1,895

 
2,057

     Other current assets
1,021

 
642

          Total current assets
10,999

 
10,867

 
 
 
 
Property, plant and equipment, net
3,605

 
3,802

 
 
 
 
Other assets
 

 
 
     Goodwill
7,509

 
7,182

     Other intangible assets
1,672

 
1,689

     Other
926

 
637

          Total other assets
10,107

 
9,508

Total assets
$
24,711

 
24,177

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

     Short-term borrowings and current maturities of long-term debt
$
1,587

 
2,465

     Accounts payable
2,725

 
2,951

     Accrued expenses
3,184

 
2,876

     Income taxes
129

 
162

          Total current liabilities
7,625

 
8,454

 
 
 
 
Long-term debt
4,055

 
3,559

 
 
 
 
Other liabilities
2,313

 
1,997

 
 
 
 
Equity
 

 
 

     Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 706,660,259 shares in 2013; 696,605,222 shares in 2014
477

 
477

     Additional paid-in-capital
352

 
161

     Retained earnings
18,930

 
19,867

     Accumulated other comprehensive income (loss)
(189
)
 
(575
)
 
19,570

 
19,930

     Less: Cost of common stock in treasury, 246,693,753 shares in 2013; 256,748,790 shares in 2014
8,985

 
9,811

Common stockholders’ equity
10,585

 
10,119

     Noncontrolling interests in subsidiaries
133

 
48

Total equity
10,718

 
10,167

Total liabilities and equity
$
24,711

 
24,177

 
 
 
 
See accompanying Notes to Consolidated Financial Statements.
 
 
 

16


Consolidated Statements of Equity
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions, except per share amounts)

 
2012

 
2013

 
2014

 
 
 
 
 
 
Common stock
$
477

 
477

 
477

 
 
 
 
 
 
Additional paid-in-capital
 
 
 
 
 
     Beginning balance
317

 
324

 
352

     Stock plans
16

 
37

 
160

     Purchase of noncontrolling interests
(9
)
 
(9
)
 
(351
)
        Ending balance
324

 
352

 
161

 
 
 
 
 
 
Retained earnings
 
 
 
 
 
     Beginning balance
17,310

 
18,107

 
18,930

     Net earnings common stockholders
1,968

 
2,004

 
2,147

     Cash dividends (per share: 2012, $1.60; 2013, $1.64; 2014, $1.72)
(1,171
)
 
(1,181
)
 
(1,210
)
        Ending balance
18,107

 
18,930

 
19,867

 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
     Beginning balance
(562
)
 
(731
)
 
(189
)
     Foreign currency translation
(205
)
 
38

 
(333
)
     Pension and postretirement
(49
)
 
521

 
(54
)
     Cash flow hedges and other
85

 
(17
)
 
1

        Ending balance
(731
)
 
(189
)
 
(575
)
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
     Beginning balance
(7,143
)
 
(7,882
)
 
(8,985
)
     Purchases
(787
)
 
(1,189
)
 
(971
)
     Issued under stock plans
48

 
86

 
145

        Ending balance
(7,882
)
 
(8,985
)
 
(9,811
)
 
 
 
 
 
 
Common stockholders' equity
10,295

 
10,585

 
10,119

 
 
 
 
 
 
Noncontrolling interests in subsidiaries
 
 
 
 
 
     Beginning balance
152

 
147

 
133

     Net earnings
56

 
62

 
37

     Other comprehensive income (loss)
(1
)
 
(6
)
 
(3
)
     Cash dividends
(56
)
 
(69
)
 
(18
)
     Purchase of noncontrolling interests
(4
)
 
(1
)
 
(101
)
        Ending balance
147

 
133

 
48

 
 
 
 
 
 
Total equity
$
10,442

 
10,718

 
10,167

 
 
 
 
 
 










See accompanying Notes to Consolidated Financial Statements.

17


Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions)
 
2012

 
2013

 
2014

Operating activities
 
 
 
 
 
Net earnings
$
2,024

 
2,066

 
2,184

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
823

 
819

 
831

Changes in operating working capital
(340
)
 
42

 
114

Pension funding
(163
)
 
(160
)
 
(130
)
Goodwill impairment, net of tax
528

 
496

 
508

Other, net
181

 
386

 
185

Net cash provided by operating activities
3,053

 
3,649

 
3,692


 
 
 
 
 
Investing activities
 
 
 
 
 
Capital expenditures
(665
)
 
(678
)
 
(767
)
Purchases of businesses, net of cash and equivalents acquired
(187
)
 
(19
)
 
(610
)
Divestitures of businesses
125

 
3

 
363

Other, net
(79
)
 
(95
)
 
(145
)
Net cash used by investing activities
(806
)
 
(789
)
 
(1,159
)
 
 
 
 
 
 
Financing activities
 
 
 
 
 
Net increase in short-term borrowings
348

 
45

 
180

Proceeds from short-term borrowings greater than three months

 
1,530

 
2,952

Payments of short-term borrowings greater than three months

 
(1,201
)
 
(2,510
)
Proceeds from long-term debt
4

 
496

 
1

Payments of long-term debt
(262
)
 
(521
)
 
(329
)
Dividends paid
(1,171
)
 
(1,181
)
 
(1,210
)
Purchases of common stock
(797
)
 
(1,110
)
 
(1,048
)
Purchase of noncontrolling interests
(14
)
 
(10
)
 
(574
)
Other, net
(7
)
 
19

 
(21
)
    Net cash used by financing activities
(1,899
)
 
(1,933
)
 
(2,559
)
 
 
 
 
 
 
Effect of exchange rate changes on cash and equivalents
(33
)
 
(19
)
 
(100
)
Increase (decrease) in cash and equivalents
315

 
908

 
(126
)
Beginning cash and equivalents
2,052

 
2,367

 
3,275

Ending cash and equivalents
$
2,367

 
3,275

 
3,149

 
 
 
 
 
 
 
 
 
 
 
 
Changes in operating working capital
 
 
 
 
 
Receivables
$
(536
)
 
(84
)
 
(263
)
Inventories
(49
)
 
83

 
(132
)
Other current assets
19

 
(32
)
 
59

Accounts payable
143

 
14

 
294

Accrued expenses
91

 
64

 
121

Income taxes
(8
)
 
(3
)
 
35

Total changes in operating working capital
$
(340
)
 
42

 
114

See accompanying Notes to Consolidated Financial Statements.

18


Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions, except per share amounts or where noted)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with current year presentation.

Effective October 2013, the Company adopted revisions to ASC 220, Comprehensive Income, which require entities to disclose reclassifications into earnings from accumulated other comprehensive income (AOCI) and other current period activity. There is no change to the items reported in AOCI or when those items should be reclassified into earnings. The revisions did not materially impact the Company’s financial statements.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its controlled affiliates. Intercompany transactions, profits and balances are eliminated in consolidation. Investments of 20 percent to 50 percent of the voting shares of other entities are accounted for by the equity method. Investments in publicly-traded companies of less than 20 percent are carried at fair value, with changes in fair value reflected in accumulated other comprehensive income. Investments in nonpublicly-traded companies of less than 20 percent are carried at cost.

Foreign Currency Translation
The functional currency for most of the Company's non-U.S. subsidiaries is the local currency. Adjustments resulting from translating local currency financial statements into U.S. dollars are reflected in accumulated other comprehensive income.

Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Inventories
Inventories are stated at the lower of cost or market. The majority of inventory is valued based on standard costs that approximate average costs, while the remainder is principally valued on a first-in, first-out basis. Cost standards are revised at the beginning of each fiscal year. The annual effect of resetting standards plus any operating variances incurred during each period are allocated between inventories and cost of sales. Following are the components of inventory as of September 30:
 
 
2013

 
2014

Finished products
 
$
678

 
741

Raw materials and work in process
 
1,217

 
1,316

    Total inventories
 
$
1,895

 
2,057


Fair Value Measurement
ASC 820, Fair Value Measurement, establishes a formal hierarchy and framework for measuring certain financial statement items at fair value, and requires disclosures about fair value measurements and the reliability of valuation inputs. Under ASC 820, measurement assumes the transaction to sell an asset or transfer a liability occurs in the principal or at least the most advantageous market for that asset or liability. Within the hierarchy, Level 1 instruments use observable market prices for the identical item in active markets and have the most reliable valuations. Level 2 instruments are valued through broker/dealer quotation or other approaches using market-observable inputs for similar items in active markets, including forward and spot prices, interest rates and volatilities. Level 3 instruments are valued using inputs not observable in an active market, such as company-developed future cash flow estimates, and are considered the least reliable. Valuations for all of the Company's financial instruments fall within Level 2. The fair value of the Company's long-term debt is Level 2, estimated using

19


current interest rates and pricing from financial institutions and other market sources for debt with similar maturities and characteristics.

Property, Plant And Equipment
The Company records investments in land, buildings, and machinery and equipment at cost. Depreciation is computed principally using the straight-line method over estimated service lives, which for principal assets are 30 to 40 years for buildings and 8 to 12 years for machinery and equipment. Long-lived tangible assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized based on estimated fair values if the sum of expected future undiscounted cash flows of the related assets is less than their carrying values. The components of property, plant and equipment as of September 30 follow:
 
 
2013

 
2014

Land
 
$
278

 
275

Buildings
 
1,965

 
2,355

Machinery and equipment
 
6,440

 
6,353

Construction in progress
 
409

 
428

    Property, plant and equipment, at cost
 
9,092

 
9,411

Less: Accumulated depreciation
 
5,487

 
5,609

    Property, plant and equipment, net
 
$
3,605

 
3,802


Goodwill and Other Intangible Assets
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A reporting unit is an operating segment as defined in ASC 280, Segment Reporting, or a business one level below an operating segment if discrete financial information for that business unit is prepared and regularly reviewed by the segment manager. The Company conducts annual impairment tests of goodwill in the fourth quarter. If an initial assessment indicates it is more likely than not goodwill might be impaired, it is evaluated by comparing the reporting unit's estimated fair value to its carrying value. Goodwill is also tested for impairment between annual tests if events or circumstances indicate the fair value of a unit may be less than its carrying value. If the carrying amount exceeds the estimated fair value, impairment is recognized to the extent that recorded goodwill exceeds the implied fair value of that goodwill. Estimated fair values of reporting units are Level 3 measures and are developed generally under an income approach that discounts estimated future cash flows using risk-adjusted interest rates.

All of the Company's identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives. Identifiable intangibles consist of intellectual property such as patents and trademarks, customer relationships and capitalized software. Identifiable intangibles are also subject to evaluation for potential impairment if events or circumstances indicate the carrying amount may not be recoverable. See Note 6.

Product Warranty
Warranties vary by product line and are competitive for the markets in which the Company operates. Warranties generally extend for a period of one to two years from the date of sale or installation. Provisions for warranty are determined primarily based on historical warranty cost as a percentage of sales or a fixed amount per unit sold based on failure rates, adjusted for specific problems that may arise. Product warranty expense is less than 1 percent of sales.

Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of manufactured products and records the sale when products are shipped or delivered, and title passes to the customer with collection reasonably assured. In certain limited circumstances, revenue is recognized using the percentage-of-completion method as performance occurs, or in accordance with ASC 985-605 related to software. Management believes that all relevant criteria and conditions are considered when recognizing revenue.

Sales arrangements sometimes involve delivering multiple elements, including services such as installation. In these instances, the revenue assigned to each element is based on vendor-specific objective evidence, third-party evidence or a management estimate of the relative selling price. Revenue is recognized individually for delivered

20


elements only if they have value to the customer on a stand-alone basis and the performance of the undelivered items is probable and substantially in the Company's control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment. Approximately 10 percent of the Company's revenues arise from qualifying sales arrangements that include the delivery of multiple elements, principally in the Network Power and Process Management segments. The vast majority of these deliverables are tangible products, with a small portion attributable to installation, service or maintenance. Generally, contract duration is short term and cancellation, termination or refund provisions apply only in the event of contract breach, and have historically not been invoked.

Derivatives and Hedging
In the normal course of business, the Company is exposed to changes in interest rates, foreign currency exchange rates and commodity prices due to its worldwide presence and diverse business profile. Emerson's foreign currency exposures relate to transactions denominated in currencies that differ from the functional currencies of its business units, primarily in euros, Mexican pesos, Canadian dollars and Singapore dollars. Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum and related products. As part of the Company's risk management strategy, derivative instruments are selectively used in an effort to minimize the impact of these exposures. Foreign exchange forwards and options are utilized to hedge foreign currency exposures impacting sales or cost of sales transactions, firm commitments and the fair value of assets and liabilities, while swap and option contracts may be used to minimize the effect of commodity price fluctuations on the cost of sales. All derivatives are associated with specific underlying exposures and the Company does not hold derivatives for trading or speculative purposes. The duration of hedge positions is generally two years or less.

All derivatives are accounted for under ASC 815, Derivatives and Hedging, and recognized at fair value. For derivatives hedging variability in future cash flows, the effective portion of any gain or loss is deferred in stockholders' equity and recognized when the underlying hedged transaction impacts earnings. The majority of the Company's derivatives that are designated as hedges and qualify for deferral accounting are cash flow hedges. For derivatives hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in earnings each period. Currency fluctuations on non-U.S. dollar obligations that have been designated as hedges of non-U.S. dollar net asset exposures are reported in equity. To the extent that any hedge is not fully effective at offsetting changes in the underlying hedged item, there could be a net earnings impact. The Company also uses derivatives to hedge economic exposures that do not receive deferral accounting under ASC 815. The underlying exposures for these hedges relate primarily to purchases of commodity-based components used in the Company's manufacturing processes, and the revaluation of certain foreign-currency-denominated assets and liabilities. Gains or losses from the ineffective portion of any hedge, as well as any gains or losses on derivative instruments not designated as hedges, are recognized in the income statement immediately.

Counterparties to derivative arrangements are companies with high credit ratings and the Company has bilateral collateral arrangements with them for which credit rating-based posting thresholds vary depending on the arrangement. If credit ratings on the Company's debt fall below preestablished levels, counterparties can require immediate full collateralization on all instruments in net liability positions. No collateral was posted with counterparties and none was held by the Company at year end. The maximum collateral that could have been required was $10. The Company can also demand full collateralization of instruments in net asset positions should any of the Company's counterparties' credit ratings fall below certain thresholds. Risk from credit loss when derivatives are in asset positions is not considered material. The Company has master netting arrangements in place with its counterparties that allow the offsetting of certain derivative-related amounts receivable and payable when settlement occurs in the same period. Accordingly, counterparty balances are netted in the consolidated balance sheet and are reported in other current assets or accrued expenses as appropriate, depending on positions with counterparties as of the balance sheet date. See Note 7.

Income Taxes
The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and tax rates currently enacted in each jurisdiction. Certain income and expense items are recognized in different time periods for financial reporting and income tax filing purposes, and deferred income taxes are provided for the effect of temporary differences. The Company also provides for U.S. federal income taxes, net of available foreign tax credits, on earnings intended to be repatriated from non-U.S. locations. No provision has been made for U.S. income taxes on approximately $7.1 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2014, as these earnings are considered permanently invested or otherwise indefinitely retained for continuing international operations. Recognition of U.S. taxes on undistributed non-U.S. earnings would be triggered by a

21


management decision to repatriate those earnings, although there is no current intention to do so. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. See Note 13.

(2) WEIGHTED-AVERAGE COMMON SHARES

Basic earnings per common share consider only the weighted-average of common shares outstanding while diluted earnings per common share also consider the dilutive effects of stock options and incentive shares. Options to purchase approximately 4.6 million, 0.6 million and 7.7 million shares of common stock were excluded from the computation of diluted earnings per share in 2014, 2013 and 2012, respectively, as the effect would have been antidilutive. Earnings allocated to participating securities were inconsequential for all years presented. Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (shares in millions):

2012

 
2013

 
2014

Basic shares outstanding
730.6

 
717.7

 
700.2

Dilutive shares
4.0

 
5.2

 
3.9

     Diluted shares outstanding
734.6

 
722.9

 
704.1


(3) ACQUISITIONS AND DIVESTITURES

The Company acquired 100 percent of Virgo Valves and Controls Limited and Enardo Holdings, both in the Process Management final control business, during the first quarter of 2014. Virgo is a manufacturer of engineered valves and automation systems and Enardo is a manufacturer of tank and terminal safety equipment. Total cash paid for both businesses was approximately $506, net of cash acquired, and the Company also assumed $76 of debt. Combined sales for Virgo and Enardo in 2014 were $321. Goodwill of $323 (largely nondeductible) and identifiable intangible assets of $178, primarily customer relationships and patents and technology with weighted-average lives of approximately 12 years, were recognized from these transactions. The Company also acquired four other smaller businesses in 2014 for a total of approximately $104, net of cash acquired. Combined annual sales for these four businesses were approximately $55. These smaller acquisitions were complementary to the existing business portfolios. Valuations of certain acquired assets and liabilities are in-process and subject to refinement.

In the second quarter of 2014, the Company acquired the remaining 44.5 percent noncontrolling interest in Appleton Group (formally EGS Electrical Group), which is reported in Industrial Automation, for $574. Full ownership provides growth opportunities in the oil and gas and chemicals end markets by leveraging the Company's Process Management and international distribution channels. The transaction reduced noncontrolling interests $101 and common stockholders equity $343, and increased deferred tax assets $130. The transaction does not affect consolidated results of operations other than eliminating the noncontrolling interest's share of future earnings and distributions from this business. Sales for this electrical distribution business were $542 in 2014.

On November 22, 2013, the Company completed the divestiture of a 51 percent controlling interest in Artesyn and received proceeds of $264, net of working capital adjustment. The Company retained an interest with a fair value of approximately $60, determined using a Level 3 option pricing model. A tax benefit of $20 was recognized on completion of the transaction. Consolidated operating results for 2014 include sales of $146 and a net loss of $9 for this business through the closing date. As the Company retained a noncontrolling interest in this business, it was not classified as discontinued operations. Assets and liabilities held-for-sale at the closing date were: other current assets, $367 (accounts receivable, inventories, other); other assets, $212 (property plant and equipment, goodwill, other noncurrent assets); and accrued expenses, $255 (accounts payable and other liabilities). Prior to the divestiture, cash of $376 ($308, after tax provided for in fiscal 2013) was repatriated from this business. In fiscal 2013, the Company initiated the purchase of $600 of Emerson common stock in anticipation of the sale proceeds and the cash repatriation. The purchase of shares was completed in the first quarter of 2014. The Company recorded goodwill impairment charges in both 2013 and 2012, and income tax charges in 2013, related to this business. See Note 6.

In the fourth quarter of 2014, the Company sold its connectivity solutions business for $99 in cash, and recognized a slight gain. This business reported sales of $63 and net earnings of $3 in 2014. Connectivity solutions offered industry-leading fiber optic, radio-frequency and microwave-coaxial technologies that safeguard network reliability.

22


In connection with its longer-term strategy to divest selected slower-growth businesses, management is considering strategic alternatives for the power transmission solutions business, and in the fourth quarter of 2014 received several nonbinding indications of interest. This business designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions. In 2014, this business contributed sales of $605 and earnings of $87 in Industrial Automation. As of September 30, 2014, this business had working capital of $155 and net other assets of $366, including net property, plant and equipment of $122 and goodwill of $223. The Company expects to make a decision and announce plans for this business within the next three months.

The Company acquired 100 percent of Avtron Loadbank and a marine controls business during the second quarter of 2012. Avtron is a designer and manufacturer of high-quality load banks and testing systems for power equipment industries and is included in Network Power. The marine controls business supplies controls and software solutions for optimal operation of refrigerated sea containers and marine boilers and is included in Climate Technologies. In addition, the Company acquired two smaller businesses during 2012 in Process Management and Network Power. Total cash paid for all businesses was approximately $187, net of cash acquired of $5. Annualized sales for businesses acquired in 2012 were approximately $115. Goodwill of $94 (approximately $36 of which is tax deductible) and identifiable intangible assets of $82, primarily customer relationships and patents and technology with a weighted-average life of approximately 9 years, were recognized from these transactions.

In the fourth quarter of 2012, the Company sold its Knaack business unit for $114, resulting in an after-tax loss of $5 ($3 income tax benefit). Knaack had 2012 sales of $95 and net earnings of $7. Knaack, a leading provider of premium secure storage solutions for job sites and work vehicles, was reported in Commercial & Residential Solutions.  

The results of operations of the acquired businesses discussed above have been included in the Company's consolidated results of operations since the respective dates of acquisition.


(4) OTHER DEDUCTIONS, NET
Other deductions, net are summarized as follows:
 
 
 
 
 
 
2012

 
2013

 
2014

Amortization of intangibles (intellectual property and customer relationships)
$
241

 
220

 
225

Rationalization of operations
119

 
78

 
55

Other
91

 
65

 
113

Gains, net
(50
)
 
(1
)
 

     Total
$
401

 
362

 
393


Other is composed of several items that are individually immaterial, including foreign currency transaction gains and losses, bad debt expense, equity investment income and losses, litigation and other items. Other increased in 2014 primarily due to the Company's $34 share of losses from its equity investment in Artesyn (principally restructuring costs), the impact of a $13 China research credit in 2013 and several other items. Reduced foreign currency transaction losses of $20 partially offset the increase. Other decreased in 2013 due to the research credit, lower foreign currency transaction losses and the comparative impact from a loss on the sale of the Knaack business in 2012. Gains, net in 2012 includes dumping duties of $43 collected from U.S. Customs.


23


(5) RATIONALIZATION OF OPERATIONS

Rationalization of operations expense reflects costs associated with the Company's efforts to continually improve operational efficiency and deploy assets globally to remain competitive on a worldwide basis. Each year the Company incurs costs to size its businesses to levels appropriate for current economic conditions and to improve its cost structure for future growth. Rationalization expenses result from numerous individual actions implemented across the Company's various operating units on an ongoing basis and include costs for moving facilities to best-cost locations, starting up plants after relocation or geographic expansion to serve local markets, exiting certain product lines, curtailing/downsizing operations because of changing economic conditions and other costs resulting from asset redeployment decisions. Shutdown costs include severance and benefits, stay bonuses, lease and contract termination costs and asset write-downs. In addition to the costs of moving fixed assets, start-up and moving costs include employee training and relocation. Vacant facility costs include security, maintenance, utilities and other costs.

Rationalization expenses were $55, $78 and $119, respectively, for 2014, 2013 and 2012. The Company currently expects to incur 2015 rationalization expense of approximately $60, including costs to complete actions initiated before the end of 2014 and for actions anticipated to be approved and initiated during 2015.

The change in the liability for rationalization of operations during the years ended September 30 follows:
 
2013

 
Expense

 
Paid/Utilized

 
2014

Severance and benefits
$
27

 
27

 
34

 
20

Lease and other contract terminations
3

 
3

 
5

 
1

Fixed asset write-downs

 
2

 
2

 

Vacant facility and other shutdown costs
1

 
5

 
6

 

Start-up and moving costs
1

 
18

 
18

 
1

     Total
$
32

 
55

 
65

 
22

 
2012

 
Expense

 
Paid/Utilized

 
2013

Severance and benefits
$
23

 
45

 
41

 
27

Lease and other contract terminations
5

 
3

 
5

 
3

Fixed asset write-downs

 
1

 
1

 

Vacant facility and other shutdown costs
3

 
6

 
8

 
1

Start-up and moving costs
1

 
23

 
23

 
1

     Total
$
32

 
78

 
78

 
32


Rationalization of operations expense by business segment follows:
 
2012

 
2013

 
2014

Process Management
$
19

 
15

 
17

Industrial Automation
27

 
27

 
7

Network Power
53

 
25

 
15

Climate Technologies
11

 
3

 
14

Commercial & Residential Solutions
9

 
8

 
2

      Total
$
119

 
78

 
55


Expenses incurred during 2014, 2013 and 2012 include actions to exit 14, 13 and 20 production, distribution or office facilities, and eliminate approximately 2,000, 3,100 and 2,700 positions, respectively, as well as costs related to start up operations and facilities exited in previous periods. Costs largely relate to deployment of resources to higher growth regions and to directly serve local markets, and in 2014 were concentrated in Process Management, Network Power and Climate Technologies. The majority of costs have been incurred in Asia and Europe and to a lesser extent in North America. In 2013 and 2012, costs were concentrated in Network Power and Industrial Automation due to end market softness for those segments, including Artesyn, and acquisition integration activity in Network Power, and were primarily incurred in Europe, North America and Asia.

24



(6) GOODWILL AND OTHER INTANGIBLES

Purchases of businesses are accounted for under the acquisition method, with substantially all goodwill assigned to the reporting unit that acquires the business. Under an impairment test performed annually, if the carrying amount of a reporting unit exceeds its estimated fair value, impairment is recognized to the extent that the carrying amount of the unit's goodwill exceeds the implied fair value of the goodwill. Fair values of reporting units are Level 3 measures which are estimated generally using an income approach that discounts future cash flows using risk-adjusted interest rates, as well as earnings multiples or other techniques as warranted. Fair values are subject to changes in underlying economic conditions. See Note 3 for further discussion of changes in goodwill related to acquisitions and divestitures.

The Network Power Europe business, which comprises the 2010 Chloride acquisition and pre-existing businesses, was the focus of the fourth quarter 2014 impairment review. The business has not been able to meet it operating objectives due to a weak Western Europe economy, which had less than 1 percent GDP growth since the acquisition. The weak economic recovery and intense competitive/market pressures have negatively affected the profitability of the combined Emerson and Chloride European network power business. The economics for Europe are uncertain for 2015 and 2016 and the goodwill from the acquisition cannot be supported. A $508, $0.72 per share, noncash impairment charge was recognized in the fourth quarter of 2014. The charge was not deductible for tax purposes. This business provides uninterruptible power supplies, thermal management products, and data center services and solutions for Europe, the Middle East and Africa.

The Company had faced persistent challenges in the Artesyn business due to protracted weak demand, structural industry developments and increased competition. These challenges, including weakness in telecommunication and mobile device markets, continued into 2013 and sales and earnings were below expectations. In the third quarter of 2013, the Company recorded a noncash goodwill impairment charge of $503 ($475 after-tax, $0.65 per share). Income tax charges of $70 ($0.10 per share) for the anticipated repatriation of non-U.S. earnings from this business were also recorded in 2013. Additionally, in the fourth quarter the Company's goodwill impairment testing indicated that the carrying value of the connectivity solutions business in Network Power exceeded its fair value due to operating results not meeting forecasted expectations, resulting in a noncash charge to earnings of $25 ($21 after-tax, $0.03 per share). The Company divested both of these businesses in 2014. See Note 3.

In the fourth quarter of 2012, the Company incurred an impairment charge for the Artesyn business and the DC power systems business, after goodwill impairment testing revealed that the carrying values of these businesses exceeded the fair values. These businesses had been unable to meet operating objectives and the Company anticipated that growth in sales and earnings would be slower than previously expected given the end market circumstances noted above. The carrying value of these businesses was reduced by a noncash charge to earnings totaling $592 ($528 after-tax, $0.72 per share).


25


The change in the carrying value of goodwill by business segment follows. Cumulative pretax impairment charges in Network Power total $646 as of September 30, 2014.
 
Process Management

 
Industrial Automation

 
Network Power

 
Climate Technologies

 
Commercial & Residential Solutions

 
 
 
 
 
 
 
 
Total

Balance, September 30, 2012
$
2,379

 
1,338

 
3,367

 
501

 
441

 
8,026

     Acquisitions
11

 


 


 

 

 
11

     Divestitures

 

 
(40
)
 

 
(2
)
 
(42
)
     Impairment


 


 
(528
)
 


 


 
(528
)
     Foreign currency
        translation and other
(7
)
 
14

 
33

 
2

 


 
42

Balance, September 30, 2013
$
2,383

 
1,352

 
2,832

 
503

 
439

 
7,509

     Acquisitions
356

 

 
22

 


 

 
378

     Divestitures

 

 
(70
)
 

 


 
(70
)
     Impairment

 


 
(508
)
 

 

 
(508
)
     Foreign currency
        translation and other
(38
)
 
(23
)
 
(58
)
 
(3
)
 
(5
)
 
(127
)
Balance, September 30, 2014
$
2,701

 
1,329

 
2,218

 
500

 
434

 
7,182


The gross carrying amount and accumulated amortization of identifiable intangible assets by major class follow:
 
Customer Relationships
 
Intellectual Property
 
Capitalized Software
 
Total
 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

 
2013

 
2014

Gross carrying amount
$
1,482

 
1,594

 
1,023

 
1,052

 
1,110

 
1,190

 
3,615

 
3,836

Less: accumulated amortization
533

 
643

 
565

 
613

 
845

 
891

 
1,943

 
2,147

     Net carrying amount
$
949

 
951

 
458

 
439

 
265

 
299

 
1,672

 
1,689


Total intangible asset amortization expense for 2014, 2013 and 2012 was $313, $298 and $318, respectively. Based on intangible asset balances as of September 30, 2014, amortization expense is expected to approximate $330 in 2015, $278 in 2016, $239 in 2017, $195 in 2018 and $163 in 2019.

(7) FINANCIAL INSTRUMENTS

Hedging Activities
As of September 30, 2014, the notional amount of foreign currency hedge positions was approximately $1.7 billion, while commodity hedge contracts totaled approximately 66 million pounds ($190) of copper and aluminum. All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of September 30, 2014 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. Amounts included in earnings and other comprehensive income follow:
 
 
 
Gain (Loss) to Earnings
 
Gain (Loss) to OCI
 
 
 
2012

 
2013

 
2014

 
2012

 
2013

 
2014

 
Location
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
Cost of sales
 
$
(42
)
 
(15
)
 
(12
)
 
43

 
(22
)
 
(16
)
Foreign currency
Sales, cost of sales
 
8

 
24

 
10

 
58

 
4

 
15

Foreign currency
Other deductions, net
 
45

 
(5
)
 
(3
)
 
 
 
 
 
 
     Total
 
 
$
11

 
4

 
(5
)
 
101

 
(18
)
 
(1
)


26


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 in 2014, 2013 and 2012.

Fair Value Measurement
The estimated fair value of long-term debt was $4,492 and $4,727, respectively, as of September 30, 2014 and 2013, which exceeded the carrying value by $411 and $405, respectively. As of September 30, 2014, the fair value of commodity contracts and foreign currency contracts was reported in other current assets and accrued expenses. Valuations of derivative contract positions as of September 30 follow:
 
 
2013
 
2014
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Foreign Currency
 
$
18

 
17

 
32

 
20

Commodity
 
$
2

 
8

 
1

 
10



(8) SHORT-TERM BORROWINGS AND LINES OF CREDIT

Short-term borrowings and current maturities of long-term debt are as follows:
 
 
2013

 
2014

Current maturities of long-term debt
 
$
267

 
522

Commercial paper
 
1,304

 
1,938

Payable to banks
 
16

 
5

     Total
 
$
1,587

 
2,465

 
 
 
 
 
Weighted-average interest rate for short-term borrowings at year end
 
0.2%
 
0.2%

The Company routinely issues commercial paper as a source of short-term financing. In April 2014, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replaced the December 2010 $2.75 billion facility. The credit facility is maintained to support general corporate purposes, including commercial paper borrowing. The Company has not incurred any borrowings under this or previous facilities. The credit facility contains no financial covenants and is not subject to termination based on a change of credit rating or material adverse changes. The facility is unsecured and may be accessed under various interest rate and currency denomination alternatives at the Company's option. Fees to maintain the facility are immaterial.




27


(9) LONG-TERM DEBT

The details of long-term debt follow:
 
2013

 
2014

5.625% notes due November 2013
$
250

 

5.0% notes due December 2014
250

 
250

4.125% notes due April 2015
250

 
250

4.75% notes due October 2015
250

 
250

5.125% notes due December 2016
250

 
250

5.375% notes due October 2017
250

 
250

5.25% notes due October 2018
400

 
400

5.0% notes due April 2019
250

 
250

4.875% notes due October 2019
500

 
500

4.25% notes due November 2020
300

 
300

2.625% notes due February 2023
500

 
500

6.0% notes due August 2032
250

 
250

6.125% notes due April 2039
250

 
250

5.25% notes due November 2039
300

 
300

Other
72

 
81

     Long-term debt
4,322

 
4,081

Less: Current maturities
267

 
522

     Total, net
$
4,055

 
3,559


Long-term debt maturing during each of the four years after 2015 is $304, $251, $251 and $651, respectively. Total interest paid on all debt was approximately $210, $226 and $234 in 2014, 2013 and 2012, respectively. During the year, the Company repaid $250 of 5.625% notes that matured in November 2013. In 2013, the Company repaid $250 of 4.625% notes that matured in October 2012 and $250 of 4.5% notes that matured in May 2013, and also issued $500 of 2.625% notes due February 2023.

The Company maintains a universal shelf registration statement on file with the SEC under which it can issue debt securities, preferred stock, common stock, warrants, share purchase contracts or share purchase units without a predetermined limit. Securities can be sold in one or more separate offerings with the size, price and terms to be determined at the time of sale.

(10) RETIREMENT PLANS

Retirement plans expense includes the following components:
 
U.S. Plans
 
Non-U.S. Plans
 
2012

 
2013

 
2014

 
2012

 
2013

 
2014

Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
     Service cost (benefits earned during the period)
$
55

 
70

 
59

 
27

 
31

 
32

     Interest cost
172

 
167

 
182

 
50

 
46

 
53

     Expected return on plan assets
(275
)
 
(280
)
 
(286
)
 
(43
)
 
(50
)
 
(58
)
     Net amortization and other
168

 
226

 
153

 
19

 
18

 
18

       Net periodic pension expense
120

 
183

 
108

 
53

 
45

 
45

Defined contribution plans
103

 
113

 
119

 
59

 
63

 
59

             Total retirement plans expense
$
223

 
296

 
227

 
112

 
108

 
104



28


The decline in net periodic pension expense in 2014 is attributable to a higher interest rate assumption than in 2013 and favorable pension asset investment performance. Pension expense increased in 2013 primarily due to a lower interest rate assumption. For defined contribution plans, the Company makes cash contributions based on plan requirements, which are expensed as incurred. The Company has two small businesses that participate in multiemployer pension plans. Such participation is insignificant individually and in total. Cash contributed was inconsequential in all years. The Company could potentially incur immaterial liabilities upon withdrawal from these plans, although it has no intention to do so. Additionally, as with participation in any multiemployer plan, there is a theoretical but remote possibility the Company could incur material liabilities should all other participating employers be unable to fund their obligations.

Details of the changes in the actuarial present value of the projected benefit obligation and the fair value of plan assets for defined benefit pension plans follow:
 
U.S. Plans
 
Non-U.S. Plans
 
2013

 
2014

 
2013

 
2014

Projected benefit obligation, beginning
$
4,203

 
3,863

 
1,143

 
1,269

     Service cost
70

 
59

 
31

 
32

     Interest cost
167

 
182

 
46

 
53

     Actuarial (gain) loss
(403
)
 
415

 
85

 
89

     Benefits paid
(176
)
 
(188
)
 
(46
)
 
(47
)
     Foreign currency translation and other
2

 
5

 
10

 
(66
)
Projected benefit obligation, ending
$
3,863

 
4,336

 
1,269

 
1,330

 
 
 
 
 
 
 
 
Fair value of plan assets, beginning
$
3,719

 
4,112

 
809

 
899

     Actual return on plan assets
454

 
461

 
86

 
106

     Employer contributions
113

 
85

 
47

 
45

     Benefits paid
(176
)
 
(188
)
 
(46
)
 
(47
)
     Foreign currency translation and other
2

 
3

 
3

 
(15
)
Fair value of plan assets, ending
$
4,112

 
4,473

 
899

 
988

 
 
 
 
 
 
 
 
     Net amount recognized in the balance sheet
$
249

 
137

 
(370
)
 
(342
)
 
 
 
 
 
 
 
 
Location of net amount recognized in the balance sheet:
 
 
 
 
 
 
 
Noncurrent asset
$
435

 
344

 
3

 
33

Current liability
$
(10
)
 
(10
)
 
(10
)
 
(8
)
Noncurrent liability
$
(176
)
 
(197
)
 
(363
)
 
(367
)
     Net amount recognized in the balance sheet
249

 
137

 
(370
)
 
(342
)
 
 
 
 
 
 
 
 
Pretax accumulated other comprehensive loss
$
(871
)
 
(961
)
 
(343
)
 
(346
)

Approximately $193 of the $1,307 of pretax losses deferred in accumulated other comprehensive income (loss) at September 30, 2014, will be amortized to expense in 2015. As of September 30, 2014, U.S. pension plans were overfunded by $137 and non-U.S. plans were underfunded by $342. The U.S. funded status includes unfunded plans totaling $182 and the non-U.S. status includes unfunded plans totaling $218.

As of the September 30, 2014 and 2013 measurement dates, the plans' total accumulated benefit obligation was $5,277 and $4,782, respectively. Also as of the measurement dates, the total projected benefit obligation, accumulated benefit obligation and fair value of plan assets for individual plans with accumulated benefit obligations in excess of plan assets were $1,028, $928 and $455, respectively, for 2014, and $978, $887 and $464, respectively, for 2013.


29


Future benefit payments by U.S. plans are estimated to be $197 in 2015, $207 in 2016, $217 in 2017, $227 in 2018, $237 in 2019 and $1,304 in total over the five years 2020 through 2024. Based on foreign currency exchange rates as of September 30, 2014, future benefit payments by non-U.S. plans are estimated to be $48 in 2015, $50 in 2016, $56 in 2017, $58 in 2018, $60 in 2019 and $346 in total over the five years 2020 through 2024. The Company expects to contribute approximately $60 to its retirement plans in 2015.

The weighted-average assumptions used in the valuation of pension benefits follow: