EX-13 6 exhibit13fy15.htm EXHIBIT 13 Exhibit


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, 2015 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 (2013), 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, 2015.
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)
 
2013

 
2014

 
2015

 
Change
'13 - '14

 
Change
'14 - '15

 
 
 
 
 
 
 
 
 
 
Net sales
$
24,669

 
24,537

 
22,304

 
(1
)%
 
(9
)%
Gross profit
$
9,952

 
10,158

 
9,048

 
2
 %
 
(11
)%
Percent of sales
40.3
%
 
41.4
%
 
40.6
%
 
 
 
 

 
 
 
 
 
 
 
 
 
 
SG&A
$
5,648

 
5,715

 
5,184

 
 
 
 

Percent of sales
22.9
%
 
23.3
%
 
23.3
%
 
 
 
 

Gains on divestitures of businesses
$

 

 
1,039

 
 
 
 
Goodwill impairment
$
528

 
508

 

 
 
 
 
Other deductions, net
$
362

 
393

 
571

 
 
 
 

Interest expense, net
$
218

 
194

 
171

 
 
 
 

 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
$
3,196

 
3,348

 
4,161

 
5
 %
 
24
 %
Percent of sales
13.0
%
 
13.6
%
 
18.7
%
 
 
 
 

Net earnings common stockholders
$
2,004

 
2,147

 
2,710

 
7
 %
 
26
 %
Percent of sales
8.1
%
 
8.7
%
 
12.2
%
 
 
 
 

Diluted EPS – Net earnings
$
2.76

 
3.03

 
3.99

 
10
 %
 
32
 %
 
 
 
 
 
 
 
 
 
 
Return on common stockholders' equity
19.2
%
 
20.7
%
 
29.8
%
 
 
 
 
Return on total capital
16.4
%
 
17.5
%
 
22.8
%
 
 
 
 

OVERVIEW
Emerson's sales for 2015 were $22.3 billion, a decrease of $2,233 million, or 9 percent in a very challenging environment. Underlying sales were down 2 percent compared with prior year due to a slowdown in industrial capital spending, particularly in oil and gas and energy-related markets, and slowing economic activity in China and other emerging markets. In addition, the significant strength of the U.S. dollar and divestitures reduced sales by 7 percent.

Net earnings common stockholders were $2,710 million in 2015, up 26 percent compared with prior year earnings of $2,147 million. Diluted earnings per share were $3.99, up 32 percent versus $3.03 per share in 2014. Excluding certain items, net earnings were $2,151 million, down 19 percent compared with $2,655 million in 2014, while diluted earnings per share were $3.17, down 15 percent versus $3.75 in 2014.

Excluded items in 2015 include gains of $532 million, $0.78 per share, and $79 million, $0.12 per share, from the divestitures of the power transmission solutions and commercial storage businesses, respectively, and costs of $52 million for fees and income tax expense, ($0.08) per share, related to the planned spinoff of the network power systems business. Excluded from 2014 is a goodwill impairment charge of $508 million, $0.72 per share, related to the network power systems business in Europe. These items collectively benefited 2015 net earnings and earnings per share growth 45 and 47 percentage points, respectively.

Sales declined in four of the Company's five operating segments. Process Management sales decreased 7 percent, primarily due to unfavorable foreign currency translation of 5 percent, and the slowdown in oil and gas capital spending. Industrial Automation was down 17 percent, due to a negative impact from a divestiture of 7 percent and unfavorable foreign currency translation of 6 percent, as well as reduced industrial capital spending and weakness in Europe. Sales for Network Power decreased 12 percent on unfavorable foreign currency translation of 5 percent, divestitures of 4 percent, and lower customer capital spending. Climate Technologies sales decreased 2 percent due to the impact of foreign currency translation, while underlying sales were flat. Commercial & Residential Solutions sales were also flat.


2



The Company generated operating cash flow of $2.5 billion and free cash flow (operating cash flow less capital expenditures) of $1.8 billion. Operating cash flow was reduced $424 million in 2015 for the payment of income taxes on the divestiture gains.
 
NET SALES
Net sales for 2015 were $22.3 billion, a decrease of $2,233 million, or 9 percent compared with 2014. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, decreased 2 percent ($511 million) on volume declines. Foreign currency translation subtracted 5 percent ($1,123 million), divestitures subtracted 2 percent ($628 million) and acquisitions added $29 million. Underlying sales decreased 2 percent in both the U.S. and internationally. Sales in Process Management decreased $673 million, Industrial Automation decreased $869 million, Network Power decreased $632 million and Climate Technologies decreased $98 million. Commercial & Residential Solutions sales were flat.

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. 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. 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.
 
INTERNATIONAL SALES
Emerson is a global business with international sales representing 56 percent of total sales, including U.S. exports. Although economic conditions are currently soft worldwide, the Company generally expects faster economic growth in emerging markets in Asia, Latin America, Eastern Europe and Middle East/Africa in the future.
 
International destination sales, including U.S. exports, decreased 12 percent, to $12.5 billion in 2015, primarily reflecting decreases in Process Management and Industrial Automation, partially due to the power transmission solutions divestiture, and prior year divestitures in Network Power. These decreases were partially offset by growth in Climate Technologies and Commercial & Residential Solutions. U.S. exports of $1.3 billion were down 5 percent compared with 2014. Underlying international destination sales declined 2 percent on lower volume, as foreign currency translation and divestitures had an 8 and 2 percent unfavorable impact, respectively, on the comparison. Underlying sales were flat in Europe, decreased 5 percent in Asia (China down 10 percent) and 9 percent in Latin America, and increased 2 percent in Canada and 3 percent in Middle East/Africa. The slowdown in industrial capital spending, particularly in oil and gas, has hampered growth in these areas. Origin sales by international subsidiaries, including shipments to the U.S., totaled $11.3 billion in 2015, down 12 percent compared with 2014, reflecting the slowdown in industrial capital spending, unfavorable foreign currency translation and divestitures.

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. 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.

ACQUISITIONS AND DIVESTITURES
In June 2015, the Company announced plans to spin off its network power systems business through a tax-free distribution to shareholders, and explore strategic alternatives, including potential sale, for its power generation and motors, drives, and residential storage businesses. These businesses together represent approximately 29 percent of consolidated 2015 sales, 10 percent of pretax earnings and 20 percent of cash flow, or approximately $6.4 billion, $400 and $500, respectively. The Company's strategic actions will streamline its portfolio, drive growth and accelerate value creation for shareholders. When completed, these transactions will result in a smaller and more focused Company, with leadership positions in higher-growth end markets that provide significant opportunities for enhanced growth and improved profitability. In addition, the Company is bringing its corporate services and

3



structure into alignment with its smaller scale and sharper focus. The spinoff of the network power systems business will create two independent publicly traded companies and is subject to certain conditions, including completion of the Company's due diligence processes, receipt of favorable opinions regarding the tax-free status of the transaction for federal income tax purposes, local regulatory approvals, review of the Form 10 that will be filed with the SEC, and final approval by Emerson’s Board of Directors.

In 2015, the Company incurred $42 million in income tax expense and $10 million in other fees related to the planned spinoff (in total, $0.08 per share). The Company estimates it would incur costs throughout 2016 to effect the entire portfolio repositioning as follows: approximately $100 to $200 million of income taxes related to reorganizing the ownership structures of these businesses; approximately $200 million for investment banking, legal, consulting and other costs; and approximately $100 million in capitalized costs, including debt issuance costs, pension funding and the separation of information technology systems. The strategic actions being contemplated are expected to be substantially completed by the end of 2016. With regard to the evaluation of strategic alternatives for the power generation and motors, drives, and residential storage businesses, there can be no assurance that the review process will result in any transaction. See Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K.

The Company completed eight acquisitions in 2015, seven in Process Management and one in Commercial & Residential Solutions, which had combined annualized sales of approximately $115 million. Total cash paid for all businesses was $324 million, net of cash acquired. These acquisitions complement the existing segment portfolios and create incremental growth opportunities. See Note 3.

In January 2015, the Company completed the sale of its mechanical power transmission solutions business to Regal Beloit Corporation for $1.4 billion, and recognized a pretax gain from the transaction of $939 million ($532 million after-tax, $0.78 per share). Proceeds from the divestiture were used for share repurchase. This business was previously reported in the Industrial Automation segment, and had partial year sales of $189 million in 2015 and related pretax earnings of $21 million. Power transmission solutions designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions.

On September 30, 2015, the Company sold its InterMetro commercial storage business to Ali Group of Italy for $411 million in cash and recognized a pretax gain from the transaction of $100 million ($79 million after-tax, $0.12 per share). This business had annual sales of $288 million and pretax earnings of $42 million in 2015, and is included in the Commercial & Residential Solutions segment. InterMetro is a leading manufacturer and supplier of storage and transport products in the food service, commercial products and health care industries.

In 2014, the Company acquired Virgo Valves and Enardo Holdings, manufacturers of engineered valves and automation systems, and tank and terminal safety equipment, respectively. Both businesses are reported in Process Management and complement the existing portfolio. The Company also acquired four other smaller businesses in 2014, in Process Management and Network Power. Combined annualized sales for all businesses acquired in 2014 were approximately $376 million. The Company also acquired the remaining 44.5 percent noncontrolling interest in the Appleton Group electrical distribution business, in the Industrial Automation segment, in 2014. Sales for this business were $542 million in 2014. Full ownership of Appleton provides growth opportunities in oil and gas and chemicals end markets. See Note 3.

Early in 2014, the Company completed the divestiture of a 51 percent controlling interest in Artesyn and received net proceeds of $264 million. The Company used the sale proceeds and cash repatriated from the business to purchase common stock. Late in 2014, the Company sold its connectivity solutions business for $99 million in cash. See Note 3.

COST OF SALES
Cost of sales for 2015 were $13.3 billion, a decrease of $1,123 million compared to $14.4 billion in 2014, primarily due to the impact of foreign currency translation, divestitures, lower sales volume and the benefit of cost reduction efforts. Gross profit was $9.0 billion in 2015 compared to $10.2 billion in 2014. Gross margin of 40.6 percent decreased 0.8 percentage points versus 41.4 percent in 2014, due to deleverage on the lower volume, unfavorable mix and the impact of the stronger dollar on product costs, partially offset by savings from restructuring actions. Divestitures had a 0.2 percentage point favorable impact on margin.


4



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.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses of $5.2 billion in 2015 decreased $531 million compared with 2014. The decrease primarily reflects the impact of foreign currency translation, reduced costs from lower sales volume, divestitures and lower incentive stock compensation of $113 million. SG&A as a percent of sales was 23.3 percent in 2015, flat compared with 2014 as deleverage on the lower volume was offset by savings from restructuring actions and lower incentive stock compensation expense.

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.

GAINS ON DIVESTITURES OF BUSINESSES
During 2015, the Company sold its power transmission solutions and commercial storage businesses and recorded pretax gains of $939 million ($532 million after-tax, $0.78 per share) and $100 million ($79 million after-tax, $0.12 per share), respectively. See Note 3.

GOODWILL IMPAIRMENT
In 2015, the Company announced strategic actions, including the planned spinoff of the network power systems business, as well as evaluation of alternatives, including potential sale, for the power generation and motors, and drives businesses. These units had goodwill of $2.1 billion, $430 million and $232 million, respectively.  Based on the Company’s fourth quarter analysis, the estimated fair values of the network power systems and power generation and motors businesses exceeded carrying value by more than 20 percent, while the estimated fair value of the drives business exceeded carrying value by approximately 10 percent. These businesses experienced declining sales and profitability in 2015 amid challenging market conditions and the strength of the U.S. dollar. There can be no assurance that the Company will not recognize an impairment charge on the ultimate spinoff of the network power systems business, or incur a loss on the potential sale of the other businesses. Assumptions used in determining fair value include successful execution of business plans, including adoption of new products and expansion of services, and the completion of restructuring actions initiated in 2015 to improve productivity through consolidation and rationalization of the cost structure. Additional assumptions include gradual improvement in served markets beginning in the latter half of 2016, particularly recovery in the demand for telecommunications networks and data centers, an expansion of industrial capital spending, and improving economic conditions in Europe and Asia. 

In 2014, the Company recognized a noncash goodwill impairment charge of $508 million ($0.72 per share) related to the network power systems business in Europe. The business had been unable to meet its operating objectives due to a weak Western Europe economy, and the 2015 and 2016 outlook for Europe was uncertain. In 2013, challenges persisted in the Artesyn business, sales and earnings were below expectations, and the Company recorded a noncash goodwill impairment charge of $503 million ($475 million after-tax, $0.65 per share) and income tax charges of $70 million ($0.10 per share). Additionally in 2013, the Company recorded a noncash goodwill impairment charge of $25 million ($21 million after-tax, $0.03 per share) related to its connectivity solutions business, due to not meeting forecasted expectations. See Note 6.


5



OTHER DEDUCTIONS, NET
Other deductions, net were $571 million in 2015, a $178 million increase from 2014 primarily due to an increase in rationalization expense of $156 million, higher litigation costs of $33 million, unfavorable foreign currency transactions of $(14) million and $10 million in fees related to the planned spinoff of the network power systems business, partially offset by a favorable comparative effect from a $34 million equity investment loss in the prior year. The Company accelerated restructuring activity in 2015 to address the global slowdown in capital spending and position itself for future growth. See Notes 4 and 5.

Other deductions, net were $393 million in 2014, a $31 million increase from 2013 primarily due to the $34 million Artesyn equity investment loss, 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.

INTEREST EXPENSE, NET
Interest expense, net was $171 million, $194 million and $218 million in 2015, 2014 and 2013, respectively. The decrease of $23 million in 2015 and $24 million in 2014 primarily resulted from the maturity of long-term debt with relatively higher interest rates.

INCOME TAXES
Income taxes were $1,428 million, $1,164 million and $1,130 million for 2015, 2014 and 2013, respectively, resulting in effective tax rates of 34 percent in 2015, and 35 percent for 2014 and 2013. The underlying effective rates in these years were 31 percent, 30 percent and 29 percent, respectively. The 3 percentage point unfavorable impact on the 2015 rate is due to divestitures and income taxes provided for the planned spinoff. The effective rates in 2014 and 2013 include 5 and 6 percentage point unfavorable impacts, respectively, from the low tax deductibility of impaired goodwill, as well as an income tax charge in 2013 for the repatriation of non-U.S. earnings.

NET EARNINGS AND EARNINGS PER SHARE; RETURNS ON EQUITY AND TOTAL CAPITAL
Net earnings attributable to common stockholders in 2015 were $2,710 million, up 26 percent compared with 2014, and diluted earnings per share were $3.99, up 32 percent. Combined, the gains from divestitures and spinoff- related costs in 2015, and the goodwill impairment charge in 2014, benefited net earnings and earnings per share comparisons 45 and 47 percentage points, respectively. Earnings per share growth also benefited from the purchase of common stock for treasury. Segment earnings in 2015 decreased $425 million in Process Management, $228 million in Network Power, $202 million in Industrial Automation, partially due to the power transmission solutions divestiture, $39 million in Climate Technologies and $21 million in Commercial & Residential Solutions. See the Business Segments discussion that follows and Note 17.

Net earnings attributable to common stockholders in 2014 were $2,147 million, 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.

Return on common stockholders' equity (net earnings attributable to common stockholders divided by average common stockholders' equity) was 29.8 percent in 2015 compared with 20.7 percent in 2014 and 19.2 percent in 2013. Return on total capital was 22.8 percent in 2015 compared with 17.5 percent in 2014 and 16.4 percent in 2013 (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). Combined, the impact of divestitures and the spinoff-related costs increased the 2015 returns on common stockholders' equity and total capital approximately 6 and 5 percentage points, respectively. Goodwill impairment charges in 2014 and 2013 reduced the returns on common stockholders' equity and total capital approximately 3 percentage points in each year.



6



Business Segments
Following is an analysis of segment results for 2015 compared with 2014, and 2014 compared with 2013.
The Company defines segment earnings as earnings before interest and income taxes.
PROCESS MANAGEMENT
 
 
 
 
 
 
 
 
 
(dollars in millions)
2013

 
2014

 
2015

 
Change
'13 - '14

 
Change
'14 - '15

 
 
 
 
 
 
 
 
 
 
Sales
$
8,610

 
9,189

 
8,516

 
7
%
 
(7
)%
Earnings
$
1,809

 
1,918

 
1,493

 
6
%
 
(22
)%
Margin
21.0
%
 
20.9
%
 
17.5
%
 
 
 
 

2015 vs. 2014 - Process Management reported sales of $8.5 billion in 2015, a decrease of $673 million or 7 percent. Underlying sales decreased 2 percent ($221 million) as persistent low oil and gas prices reduced capital and operating spending, especially in upstream markets. Foreign currency translation had an additional 5 percent ($481 million) unfavorable impact while acquisitions ($29 million) provided a slight benefit. The measurement devices, final control and systems and solutions businesses all declined. Underlying sales were flat in the U.S., up 1 percent in Europe and decreased 6 percent in Asia (China down 9 percent). Latin America decreased 14 percent and Canada decreased 1 percent, while Middle East/Africa was up 2 percent. Earnings decreased $425 million and margin was down 3.4 percentage points due to lower volume and deleverage, unfavorable mix and the impact of a stronger dollar on operations. Increased rationalization of $72 million, higher costs related to growth investments initiated in the prior year and other items were offset by savings from cost reduction actions. Underlying sales will remain under pressure as the expectation of low oil prices will keep industrial spending at reduced levels for most of fiscal 2016.

2014 vs. 2013 - Process Management reported sales of $9.2 billion in 2014, an increase of $579 million, or 7 percent on 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.

INDUSTRIAL AUTOMATION
 
 
 
 
 
 
 
 
 
(dollars in millions)
2013

 
2014

 
2015

 
Change
'13 - '14

 
Change
'14 - '15

 
 
 
 
 
 
 
 
 
 
Sales
$
4,885

 
4,990

 
4,121

 
2
%
 
(17
)%
Earnings
$
777

 
802

 
600

 
3
%
 
(25
)%
Margin
15.9
%
 
16.1
%
 
14.6
%
 
 
 
 

2015 vs. 2014 - Industrial Automation sales were $4.1 billion in 2015, a decrease of $869 million or 17 percent. Underlying sales decreased 4 percent ($192 million) on lower volume, reflecting weakness in Europe and reduced industrial spending, particularly in energy-related and commodity markets. Additionally, the power transmission solutions divestiture deducted 7 percent ($418 million) and foreign currency translation subtracted 6 percent ($259 million). Sales decreased in the power generation and motors, drives, electrical distribution and fluid automation businesses. Hermetic motors decreased moderately while the materials joining business was flat. Underlying sales decreased 6 percent in the U.S., 4 percent in Europe and 2 percent in Asia (China down 3 percent). Sales decreased 7 percent in Latin America, 4 percent in Canada and 10 percent in Middle East/Africa. Earnings of $600 million were down $202 million and margin decreased 1.5 percentage points, due to the power transmission

7



solutions divestiture, which negatively impacted the earnings comparison $67 million, lower volume and deleverage, and unfavorable mix, partially offset by cost containment actions. Higher rationalization expense of $15 million contributed to the decrease. Market conditions will remain challenging in the near term, with an expectation of moderately improving conditions in the second half of fiscal 2016.

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.

NETWORK POWER
 
 
 
 
 
 
 
 
 
(dollars in millions)
2013

 
2014

 
2015

 
Change
'13 - '14

 
Change
'14 - '15

 
 
 
 
 
 
 
 
 
 
Sales
$
6,155

 
5,073

 
4,441

 
(18
)%
 
(12
)%
Earnings
$
554

 
459

 
231

 
(17
)%
 
(50
)%
Margin
9.0
%
 
9.0
%
 
5.2
%
 
 
 
 

2015 vs. 2014 - Sales for Network Power were $4.4 billion in 2015, a decrease of $632 million or 12 percent. Underlying sales were down 3 percent ($179 million) on 2 percent lower volume and 1 percent lower price, while foreign currency translation deducted 5 percent ($243 million) and prior year divestitures subtracted 4 percent ($210 million). Telecommunications power products decreased sharply on lower demand in all geographies. Data center products were down as thermal management was flat, and an increase from a large European hyperscale project was more than offset by decreases in uninterruptible power supply and infrastructure management products. Underlying sales decreased 8 percent in the U.S. and 7 percent in Asia (China down 13 percent), and increased 5 percent in Europe. Sales were down 4 percent in Latin America and 2 percent in Middle East/Africa, and up 15 percent in Canada. Earnings of $231 million decreased $228 million, or 50 percent, and margin declined 3.8 percentage points, due to lower volume and deleverage, particularly in telecommunications power products, and unfavorable mix. Higher rationalization expense of $49 million, litigation and bad debts also contributed to the decrease, while cost reduction actions mitigated the decline. Materials cost containment offset lower pricing. Demand is expected to remain mixed by geography, with opportunities for growth in both data center infrastructure and telecommunications power products over the course of the year.

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 supply 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 substantially offset lower pricing.

8



CLIMATE TECHNOLOGIES
 
 
 
 
 
 
 
 
 
(dollars in millions)
2013

 
2014

 
2015

 
Change
'13 - '14

 
Change
'14 - '15

 
 
 
 
 
 
 
 
 
 
Sales
$
3,876

 
4,109

 
4,011

 
6
%
 
(2
)%
Earnings
$
716

 
737

 
698

 
3
%
 
(5
)%
Margin
18.5
%
 
17.9
%
 
17.4
%
 
 
 
 

2015 vs. 2014 - Sales for Climate Technologies were $4.0 billion in 2015, a decrease of $98 million, or over 2 percent due to unfavorable foreign currency translation ($112 million). Underlying sales were up slightly ($14 million) as an increase in the global refrigeration business was essentially offset by a decrease in air conditioning. The temperature controls and sensors businesses were flat. Air conditioning sales in the U.S., Europe and China decreased while the rest of the world had strong growth. Global refrigeration was up modestly with growth in the U.S. and Asia and weakness in Europe. Overall, underlying sales were flat in the U.S., down 2 percent in Asia (China down 12 percent) and decreased 1 percent in Europe. Latin America was down 4 percent, Middle East/Africa was up 26 percent and Canada increased 13 percent. Earnings of $698 million decreased $39 million and margin declined 0.5 percentage points primarily due to unfavorable mix. Growth investments, and higher rationalization and unfavorable foreign currency transactions of $6 million each, were more than offset by cost reduction savings. Global demand in the air conditioning and refrigeration markets is expected to remain favorable in 2016, supporting an outlook for modest growth.

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.

COMMERCIAL & RESIDENTIAL SOLUTIONS
 
 
 
 
 
 
(dollars in millions)
2013

 
2014

 
2015

 
Change
'13 - '14

 
Change
'14 - '15

 
 
 
 
 
 
 
 
 
 
Sales
$
1,865

 
1,924

 
1,924

 
3
%
 

Earnings
$
404

 
424

 
403

 
5
%
 
(5
)%
Margin
21.7
%
 
22.1
%
 
21.0
%
 
 
 
 

2015 vs. 2014 - Commercial & Residential Solutions sales were $1.9 billion in 2015, flat compared with the prior year. Underlying sales increased 2 percent ($48 million) on higher volume from favorable U.S. construction markets, while foreign currency translation ($28 million) and the transfer of a small product line ($20 million) each deducted 1 percent. The sales increase was led by strong growth in wet/dry vacuums and modest growth in food waste disposers. The professional tools and commercial storage businesses decreased. Underlying sales were up 3 percent in the U.S. and 1 percent internationally. Earnings of $403 million were down $21 million and margin declined 1.1 percentage points as higher volume and resulting leverage was more than offset by unfavorable mix, higher rationalization expense of $9 million, and investments in growth programs. Favorable trends in U.S. construction markets are expected to continue, supporting expectations for moderate sales growth and profit improvement in 2016.
 

9



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.

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 $22 billion and common stockholders' equity of $8 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)
2013

 
2014

 
2015

 
 
 
 
 
 
Operating Cash Flow
$
3,649

 
3,692

 
2,529

     Percent of sales
14.8
%
 
15.0
%
 
11.3
%
Capital Expenditures
$
678

 
767

 
685

     Percent of sales
2.7
%
 
3.1
%
 
3.1
%
Free Cash Flow (Operating Cash Flow less Capital Expenditures)
$
2,971

 
2,925

 
1,844

     Percent of sales
12.0
%
 
11.9
%
 
8.3
%
Operating Working Capital
$
1,686

 
1,729

 
1,748

     Percent of sales
6.8
%
 
7.0
%
 
7.8
%

The Company generated operating cash flow of $2.5 billion in 2015, a $1,163 million or 32 percent decrease compared to 2014 primarily due to decreased earnings (excluding after-tax gains from divestitures in 2015 and the goodwill impairment in 2014), income taxes of $424 million paid on the gains from divestitures, and an increase in operating working capital. Operating cash flow of $3.7 billion in 2014 was a 1 percent increase compared to $3.6 billion in 2013. At September 30, 2015, operating working capital as a percent of sales was 7.8 percent, compared with 7.0 percent and 6.8 percent in 2014 and 2013, respectively. In addition to the tax payments for divestiture gains, operating cash flow funded capital expenditures of $685 million, dividends of $1,269 million and acquisitions of $324 million in 2015. Common stock purchases of $2,487 million were supported by after-tax proceeds from a divestiture and increased borrowings. Contributions to pension plans were $53 million in 2015, $130 million in 2014 and $160 million in 2013. 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 five years.

Capital expenditures were $685 million, $767 million and $678 million in 2015, 2014 and 2013, respectively. Free cash flow was $1.8 billion in 2015, down 37 percent and primarily reflecting lower operating cash flow. Free cash flow was $2.9 billion in 2014, compared with $3.0 billion in 2013, reflecting higher capital expenditures. The Company is targeting capital spending of approximately $625 million in 2016. Net cash paid in connection with acquisitions was $324 million, $610 million and $19 million in 2015, 2014 and 2013, respectively. In 2014, the Company also purchased the noncontrolling interest in Appleton Group for $574 million. Proceeds from divestitures in 2015, 2014 and 2013 were $1,812 million, $363 million and $3 million, respectively.

Dividends were $1,269 million ($1.88 per share) in 2015, compared with $1,210 million ($1.72 per share) in 2014 and $1,181 million ($1.64 per share) in 2013. In November 2015, the Board of Directors voted to increase the quarterly cash dividend 1 percent, to an annualized rate of $1.90 per share.

Purchases of Emerson common stock totaled $2,487 million, $971 million and $1,189 million in 2015, 2014 and 2013, respectively, at average per share prices of $57.68, $65.54 and $58.51. The Board of Directors authorized the purchase of up to 70 million common shares in May 2013, and 6.0 million shares remain available for purchase

10



under this authorization. The Company purchased 43.1 million shares in 2015 and 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 November 2015, the Board of Directors authorized the purchase of an additional 70 million common shares.

LEVERAGE/CAPITALIZATION
 
 
 
 
 
(dollars in millions)
2013

 
2014

 
2015

 
 
 
 
 
 
Total Assets
$
24,711

 
24,177

 
22,088

Long-term Debt
$
4,055

 
3,559

 
4,289

Common Stockholders' Equity
$
10,585

 
10,119

 
8,081

 
 
 
 
 
 
Total Debt-to-Total Capital Ratio
34.8
%
 
37.3
%
 
45.8
%
Net Debt-to-Net Capital Ratio
18.3
%
 
22.1
%
 
31.3
%
Operating Cash Flow-to-Debt Ratio
64.7
%
 
61.3
%
 
37.0
%
Interest Coverage Ratio
14.6X

 
16.3X

 
21.8X


Total debt, which includes long-term debt, current maturities of long-term debt, commercial paper and other short-term borrowings, was $6.8 billion, $6.0 billion and $5.6 billion for 2015, 2014 and 2013, respectively. During the year, the Company issued $500 million of 2.625% notes due December 2021 and $500 million of 3.150% notes due June 2025, and repaid $250 million of 5.0% notes that matured in December 2014 and $250 million of 4.125% notes that matured in April 2015. In 2014, 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 the issuance of long-term debt and lower common stockholders' equity. The operating cash flow-to-debt ratio decreased in 2015 on higher total debt and lower operating cash flow. The interest coverage ratio is computed as earnings before income taxes plus interest expense, divided by interest expense. The increases in interest coverage in 2015 and 2014 reflect higher pretax earnings (including divestiture gains of $1,039 million in 2015) 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.

Emerson's financial structure provides the 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. At September 30, 2015, $3.0 billion of the Company's cash was held outside the U.S., primarily in Europe and Asia, and was 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.


11



CONTRACTUAL OBLIGATIONS
At September 30, 2015, 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)
$
6,169

 
477

 
871

 
1,388

 
3,433

Operating Leases
855

 
263

 
304

 
135

 
153

Purchase Obligations
1,021

 
873

 
104

 
36

 
8

     Total
$
8,045

 
1,613

 
1,279

 
1,559

 
3,594


Purchase obligations consist primarily of inventory purchases made in the normal course of business to meet operational requirements. The table above does not include $1.9 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 derivatives and other financial instruments is subject to change as a result of market movements in 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.

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.


12



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. The Company will begin transitioning from defined benefit to defined contribution retirement plans in 2016. The principal U.S. defined benefit plan will close to newly-hired employees while shorter-tenured current employees will cease accruing benefits. Affected employees will transition to an enhanced defined contribution plan. See Notes 10 and 11.

As of September 30, 2015, the Company's U.S. pension plans were underfunded by $335 million and non-U.S. plans were underfunded by $313 million. The U.S. funded status includes unfunded plans totaling $191 million and the non-U.S. status includes unfunded plans totaling $215 million. The Company contributed a total of $53 million to defined benefit plans in 2015 and expects to contribute at a similar level in 2016. At year-end 2015, the discount rate for U.S. plans was 4.35 percent, and was 4.25 percent in 2014. The assumed investment return on plan assets was 7.50 percent in both 2015 and 2014, and was 7.75 percent in 2013, and is expected to be 7.50 percent for 2016. Deferred actuarial losses to be amortized to expense in future years were $1,628 million ($1,052 million after-tax) as of September 30, 2015.

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

13



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 and 13.

Other Items

LEGAL MATTERS
At September 30, 2015, 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 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. Required adoption of the new standard has been deferred by the FASB for one year and it is now effective for the Company in the first quarter of fiscal 2019. The new rules may be adopted on either a prospective or retrospective basis. Early adoption is available to the Company in the first quarter of fiscal 2018, the original effective date. The Company is in the process of evaluating the impact of the revised standard on its financial statements and determining its method of adoption.  

In May 2015, the FASB issued updates to ASC 820, Fair Value Measurement, requiring investments measured using the net asset value per share practical expedient to be removed from the fair value hierarchy and separately reported when making disclosures. The updates have no impact on operations and do not change the determination of fair value for any investments. These updates are effective for the Company in fiscal 2017 and must be adopted on a retrospective basis. Adoption will affect disclosure only; there will be no impact on the Company’s financial results.
 
FISCAL 2016 OUTLOOK
The Company expects difficult market conditions to persist through the first six to nine months of fiscal 2016, as headwinds in served markets from low oil prices and the slowdown in industrial spending will reduce underlying sales growth across the Company’s businesses. Net sales for 2016 are expected to decline approximately 6 to 8 percent. Underlying sales are expected to be down approximately 2 to 5 percent, excluding deductions from negative currency translation and completed divestitures of approximately 2 percent each. Profitability will be negatively impacted by lower underlying growth but supported by cost savings generated by the Company’s restructuring programs. Adjusted earnings per share are expected to be approximately $3.05 to $3.25 in 2016, versus $3.17 in 2015. The Company currently estimates it would incur expenses of $300 to $400 million (approximately $0.40 to $0.55 per share) related to the planned network power systems spinoff and potential sales of the power generation and motors, and drives businesses. Reported earnings per share in 2016 would be approximately $2.50 to $2.85 including these costs, compared with $3.99 in 2015.



14



Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES

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

 
2013

 
2014

 
2015

 
 
 
 
 
 
Net sales
$
24,669

 
24,537

 
22,304

Costs and expenses:
 
 
 
 
 
   Cost of sales
14,717

 
14,379

 
13,256

   Selling, general and administrative expenses
5,648

 
5,715

 
5,184

   Gains on divestitures of businesses

 

 
1,039

   Goodwill impairment
528

 
508

 

   Other deductions, net
362

 
393

 
571

   Interest expense, net of interest income of: 2013, $16; 2014, $24; 2015, $29
218

 
194

 
171

Earnings before income taxes
3,196

 
3,348

 
4,161

Income taxes
1,130

 
1,164

 
1,428

Net earnings
2,066

 
2,184

 
2,733

Less: Noncontrolling interests in earnings of subsidiaries
62

 
37

 
23

Net earnings common stockholders
$
2,004

 
2,147

 
2,710

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share common stockholders
$
2.78

 
3.05

 
4.01

 
 
 
 
 
 
Diluted earnings per share common stockholders
$
2.76

 
3.03

 
3.99



























See accompanying Notes to Consolidated Financial Statements.

15



Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions)

 
 
2013

 
2014

 
2015

Net earnings
 
$
2,066

 
2,184

 
2,733

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

 
(344
)
 
(794
)
Pension and postretirement
 
521

 
(54
)
 
(206
)
Cash flow hedges
 
(17
)
 
1

 
(43
)
        Total other comprehensive income (loss)
 
536

 
(397
)
 
(1,043
)
 
 
 
 
 
 
 
Comprehensive income
 
2,602

 
1,787

 
1,690

 
 
 
 
 
 
 
Less: Noncontrolling interests in comprehensive income of subsidiaries
 
56

 
34

 
22

Comprehensive income common stockholders
 
$
2,546

 
1,753

 
1,668







































See accompanying Notes to Consolidated Financial Statements.

16



Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES

September 30
(Dollars in millions, except per share amounts)
 
2014

 
2015

ASSETS
 
 
 
Current assets
 
 
 
     Cash and equivalents
$
3,149

 
3,054

     Receivables, less allowances of $114 in 2014 and $128 in 2015
5,019

 
4,319

     Inventories
2,057

 
1,847

     Other current assets
642

 
829

          Total current assets
10,867

 
10,049

 
 
 
 
Property, plant and equipment, net
3,802

 
3,585

 
 
 
 
Other assets
 

 
 
     Goodwill
7,182

 
6,653

     Other intangible assets
1,689

 
1,526

     Other
637

 
275

          Total other assets
9,508

 
8,454

Total assets
$
24,177

 
22,088

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

     Short-term borrowings and current maturities of long-term debt
$
2,465

 
2,553

     Accounts payable
2,951

 
2,358

     Accrued expenses
2,876

 
2,803

     Income taxes
162

 
86

          Total current liabilities
8,454

 
7,800

 
 
 
 
Long-term debt
3,559

 
4,289

 
 
 
 
Other liabilities
1,997

 
1,871

 
 
 
 
Equity
 

 
 

     Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 696,605,222 shares in 2014; 654,608,521 shares in 2015
477

 
477

     Additional paid-in-capital
161

 
170

     Retained earnings
19,867

 
21,308

     Accumulated other comprehensive income (loss)
(575
)
 
(1,617
)
 
19,930

 
20,338

     Less: Cost of common stock in treasury, 256,748,790 shares in 2014; 298,745,491 shares in 2015
9,811

 
12,257

Common stockholders’ equity
10,119

 
8,081

     Noncontrolling interests in subsidiaries
48

 
47

Total equity
10,167

 
8,128

Total liabilities and equity
$
24,177

 
22,088

 
 
 
 
See accompanying Notes to Consolidated Financial Statements.
 
 
 

17



Consolidated Statements of Equity
EMERSON ELECTRIC CO. & SUBSIDIARIES

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

 
2013

 
2014

 
2015

 
 
 
 
 
 
Common stock
$
477

 
477

 
477

 
 
 
 
 
 
Additional paid-in-capital
 
 
 
 
 
     Beginning balance
324

 
352

 
161

     Stock plans
37

 
160

 
31

     Purchase of noncontrolling interests
(9
)
 
(351
)
 
(22
)
        Ending balance
352

 
161

 
170

 
 
 
 
 
 
Retained earnings
 
 
 
 
 
     Beginning balance
18,107

 
18,930

 
19,867

     Net earnings common stockholders
2,004

 
2,147

 
2,710

     Dividends paid (per share: 2013, $1.64; 2014, $1.72; 2015, $1.88)
(1,181
)
 
(1,210
)
 
(1,269
)
        Ending balance
18,930

 
19,867

 
21,308

 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
     Beginning balance
(731
)
 
(189
)
 
(575
)
     Foreign currency translation
38

 
(333
)
 
(793
)
     Pension and postretirement
521

 
(54
)
 
(206
)
     Cash flow hedges
(17
)
 
1

 
(43
)
        Ending balance
(189
)
 
(575
)
 
(1,617
)
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
     Beginning balance
(7,882
)
 
(8,985
)
 
(9,811
)
     Purchases
(1,189
)
 
(971
)
 
(2,487
)
     Issued under stock plans
86

 
145

 
41

        Ending balance
(8,985
)
 
(9,811
)
 
(12,257
)
 
 
 
 
 
 
Common stockholders' equity
10,585

 
10,119

 
8,081

 
 
 
 
 
 
Noncontrolling interests in subsidiaries
 
 
 
 
 
     Beginning balance
147

 
133

 
48

     Net earnings
62

 
37

 
23

     Other comprehensive income (loss)
(6
)
 
(3
)
 
(1
)
     Dividends paid
(69
)
 
(18
)
 
(23
)
     Purchase of noncontrolling interests
(1
)
 
(101
)
 

        Ending balance
133

 
48

 
47

 
 
 
 
 
 
Total equity
$
10,718

 
10,167

 
8,128

 
 
 
 
 
 










See accompanying Notes to Consolidated Financial Statements.

18



Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30
(Dollars in millions)
 
2013

 
2014

 
2015

Operating activities
 
 
 
 
 
Net earnings
$
2,066

 
2,184

 
2,733

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
819

 
831

 
815

Changes in operating working capital
42

 
114

 
(142
)
Pension funding
(160
)
 
(130
)
 
(53
)
Gains on divestitures of businesses, after tax

 

 
(611
)
Income taxes paid on divestiture gains

 

 
(424
)
Goodwill impairment, after tax
496

 
508

 

Other, net
386

 
185

 
211

Net cash provided by operating activities
3,649

 
3,692

 
2,529


 
 
 
 
 
Investing activities
 
 
 
 
 
Capital expenditures
(678
)
 
(767
)
 
(685
)
Purchases of businesses, net of cash and equivalents acquired
(19
)
 
(610
)
 
(324
)
Divestitures of businesses
3

 
363

 
1,812

Other, net
(95
)
 
(145
)
 
(212
)
Net cash provided (used) by investing activities
(789
)
 
(1,159
)
 
591

 
 
 
 
 
 
Financing activities
 
 
 
 
 
Net increase in short-term borrowings
45

 
180

 
1,116

Proceeds from short-term borrowings greater than three months
1,530

 
2,952

 
2,515

Payments of short-term borrowings greater than three months
(1,201
)
 
(2,510
)
 
(3,286
)
Proceeds from long-term debt
496

 
1

 
1,000

Payments of long-term debt
(521
)
 
(329
)
 
(504
)
Dividends paid
(1,181
)
 
(1,210
)
 
(1,269
)
Purchases of common stock
(1,110
)
 
(1,048
)
 
(2,501
)
Purchase of noncontrolling interests
(10
)
 
(574
)
 

Other, net
19

 
(21
)
 
(19
)
Net cash used by financing activities
(1,933
)
 
(2,559
)
 
(2,948
)
 
 
 
 
 
 
Effect of exchange rate changes on cash and equivalents
(19
)
 
(100
)
 
(267
)
Increase (Decrease) in cash and equivalents
908

 
(126
)
 
(95
)
Beginning cash and equivalents
2,367

 
3,275

 
3,149

Ending cash and equivalents
$
3,275

 
3,149

 
3,054

 
 
 
 
 
 
Changes in operating working capital
 
 
 
 
 
Receivables
$
(84
)
 
(263
)
 
304

Inventories
83

 
(132
)
 
(16
)
Other current assets
(32
)
 
59

 
(101
)
Accounts payable
14

 
294

 
(287
)
Accrued expenses
64

 
121

 
32

Income taxes
(3
)
 
35

 
(74
)
Total changes in operating working capital
$
42

 
114

 
(142
)


See accompanying Notes to Consolidated Financial Statements.

19



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.

In the first quarter of 2015, the Company adopted 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. 

In the first quarter of 2014, the Company adopted revisions to ASC 220, Comprehensive Income, which require disclosure of 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:
 
 
2014

 
2015

Finished products
 
$
741

 
680

Raw materials and work in process
 
1,316

 
1,167

    Total inventories
 
$
2,057

 
1,847



20



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 an 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 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 estimated future undiscounted cash flows of the related assets is less than the carrying values. The components of property, plant and equipment as of September 30 follow:
 
 
2014

 
2015

Land
 
$
275

 
251

Buildings
 
2,355

 
2,254

Machinery and equipment
 
6,353

 
6,011

Construction in progress
 
428

 
415

    Property, plant and equipment, at cost
 
9,411

 
8,931

Less: Accumulated depreciation
 
5,609

 
5,346

    Property, plant and equipment, net
 
$
3,802

 
3,585


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.

21



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 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. The Company'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 $68. 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.

22



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 $6.4 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2015, 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 management decision to repatriate those earnings. 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 5.9 million, 4.6 million and 0.6 million shares of common stock were excluded from the computation of diluted earnings per share in 2015, 2014 and 2013, 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):

2013

 
2014

 
2015

Basic shares outstanding
717.7

 
700.2

 
673.3

Dilutive shares
5.2

 
3.9

 
3.2

     Diluted shares outstanding
722.9

 
704.1

 
676.5


(3) ACQUISITIONS AND DIVESTITURES

The Company completed eight acquisitions in 2015, seven in Process Management and one in Commercial & Residential Solutions, which had combined annualized sales of approximately $115. Total cash paid for all businesses was $324, net of cash acquired. The Company recognized goodwill of $178 ($42 of which is expected to be tax deductible) and other intangible assets of $128, primarily customer relationships and intellectual property with a weighted-average life of approximately 10 years. These acquisitions complement the existing segment portfolios and create incremental growth opportunities. Valuations of certain acquired assets and liabilities are in-process and subject to refinement.

In June 2015, the Company announced plans to spin off its network power systems business through a tax-free distribution to shareholders and to explore strategic alternatives, including potential sale, for its power generation and motors, drives, and residential storage businesses. These businesses together represent approximately 29 percent of consolidated 2015 sales, 10 percent of pretax earnings and 20 percent of cash flow, or approximately $6.4 billion, $400 and $500, respectively. In addition, the Company is bringing its corporate services and structure into alignment with its smaller scale and sharper focus.  The spinoff of the network power systems business will create two independent publicly traded companies and is subject to certain conditions, including completion of the Company's due diligence processes, receipt of favorable opinions regarding the tax-free status of the transaction for federal income tax purposes, local regulatory approvals, review of the Form 10 that will be filed with the SEC, and final approval by Emerson’s Board of Directors.

In 2015, the Company incurred $42 in income tax expense and $10 in other fees related to the planned spinoff (in total, $0.08 per share). The Company estimates it would incur costs throughout 2016 to effect the entire portfolio repositioning as follows: approximately $100 to $200 of income taxes related to reorganizing the ownership structures of these businesses; approximately $200 for investment banking, legal, consulting and other costs; and approximately $100 in capitalized costs, including debt issuance costs, pension funding and the separation of information technology systems. The strategic actions being contemplated are expected to be substantially completed by the end of 2016. With regard to the evaluation of strategic alternatives for the power generation and motors, drives, and residential storage businesses, there can be no assurance that the review process will result in any transaction.

23



In January 2015, the Company completed the sale of its mechanical power transmission solutions business to Regal Beloit Corporation for $1.4 billion, and recognized a pretax gain from the transaction of $939 ($532 after-tax, $0.78 per share). Assets and liabilities sold were as follows: current assets, $182 (accounts receivable, inventories, other current assets); other assets, $374 (property, plant and equipment, goodwill, other noncurrent assets); accrued expenses, $56 (accounts payable, other current liabilities); and other liabilities, $41. Proceeds from the divestiture were used for share repurchase. This business was previously reported in the Industrial Automation segment, and had partial year sales in 2015 of $189 and related pretax earnings of $21. Power transmission solutions designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions.

On September 30, 2015, the Company sold its InterMetro commercial storage business to Ali Group of Italy for $411 in cash and recognized a pretax gain from the transaction of $100 ($79 after-tax, $0.12 per share). This business had annual sales of $288 and pretax earnings of $42 in 2015 and is reported in the Commercial & Residential Solutions segment. Assets and liabilities sold were as follows: current assets, $62 (accounts receivable, inventories, other current assets); other assets, $292 (property, plant and equipment, goodwill, other noncurrent assets); current liabilities, $34 (accounts payable, other current liabilities); and other liabilities, $9. InterMetro is a leading manufacturer and supplier of storage and transport products in the food service, commercial products and health care industries.

In the first quarter of 2014, the Company acquired 100 percent of Virgo Valves and Controls Limited and Enardo Holdings, both in the Process Management final control business. 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 acquisitions were complementary to the existing business portfolio.

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 did 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.

In November 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 current assets); 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 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 2014 sales of $63 and pretax earnings of $3. Connectivity solutions offered industry-leading fiber optic, radio-frequency and microwave-coaxial technologies that safeguard network reliability.

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.



24



(4) OTHER DEDUCTIONS, NET
Other deductions, net are summarized as follows:
 
 
 
 
 
 
2013

 
2014

 
2015

Amortization of intangibles (intellectual property and customer relationships)
$
220

 
225

 
214

Rationalization of operations
78

 
55

 
211

Other
64

 
113

 
146

     Total
$
362

 
393

 
571


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. The increase in 2015 is primarily due to higher litigation costs of $33, an unfavorable foreign currency transaction impact of $14 and fees related to the planned spinoff of the network power systems business of $10, partially offset by a favorable comparative effect from the $34 Artesyn equity investment loss in 2014. Other increased in 2014 primarily due to the equity investment loss, the comparative impact of a $13 China research credit in 2013 and several other items. Reduced foreign currency transaction losses of $20 partially offset the increase.


25



(5) RATIONALIZATION OF OPERATIONS

Each year the Company incurs costs to size its businesses to levels appropriate for current economic conditions and to continually improve its cost structure and operational efficiency, deploy assets globally, and remain competitive on a worldwide basis. Costs result from numerous individual actions implemented across the Company's various operating units on an ongoing basis and can include costs for moving facilities to best-cost locations, re-starting plants after relocation or geographic expansion to better serve local markets, reducing forcecount or the number of facilities, exiting certain product lines, and other costs resulting from asset deployment decisions. By category, shutdown costs include severance and benefits, stay bonuses, lease and other contract termination costs and asset write-downs. Vacant facility costs include security, maintenance, utilities and other costs. Start-up and moving costs include the costs of relocating fixed assets and employee training and relocation.

Rationalization expenses were $211, $55 and $78, respectively, for 2015, 2014 and 2013. The significant increase in 2015 is due to the acceleration of activity to address the slowdown in global capital spending. The Company also incurred $10 of rationalization expense in 2015 that was reported in cost of sales, primarily related to exiting production facilities in Brazil and China. The Company currently expects 2016 rationalization expense to be approximately $60, including costs to complete actions initiated before the end of 2015 and for actions anticipated to be approved and initiated during 2016.

The change in the liability for rationalization of operations during the years ended September 30 follows:
 
2014

 
Expense

 
Paid/Utilized

 
2015

Severance and benefits
$
20

 
174

 
89

 
105

Lease and other contract terminations
1

 
3

 
3

 
1

Asset write-downs

 
3

 
3

 

Vacant facility and other shutdown costs

 
12

 
9

 
3

Start-up and moving costs
1

 
19

 
17

 
3

     Total
$
22

 
211

 
121

 
112

 
2013

 
Expense

 
Paid/Utilized

 
2014

Severance and benefits
$
27

 
27

 
34

 
20

Lease and other contract terminations
3

 
3

 
5

 
1

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


26



Rationalization of operations expense by business segment follows:
 
2013

 
2014

 
2015

Process Management
$
15

 
17

 
89

Industrial Automation
27

 
7

 
22

Network Power
25

 
15

 
64

Climate Technologies
3

 
14

 
20

Commercial & Residential Solutions
8

 
2

 
11

Corporate

 

 
5

      Total
$
78

 
55

 
211


Costs incurred in 2015 primarily relate to the reduction and selective repositioning of the Company’s cost structure to address global economic weakness through facilities and forcecount rationalization in Europe, Asia and North America, primarily in Process Management and Network Power. Rationalization activities included actions to exit 15 production or office facilities worldwide and eliminate approximately 4,400 positions. In 2014, costs primarily related to the deployment of resources to better serve local markets and higher growth areas, and were concentrated in Process Management, Network Power and Climate Technologies, in Asia and Europe and to a lesser extent North America. In 2013, activity was focused in Network Power and Industrial Automation due to end market softness and acquisition integration activity in Network Power, in Europe, North America and Asia. Expenses incurred in 2014 and 2013 include actions to exit 14 and 13 facilities, and eliminate approximately 2,000 and 3,100 positions, respectively.

(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.

In 2015, the Company announced strategic actions, including the planned spinoff of the network power systems business, as well as evaluation of alternatives, including potential sale, for the power generation and motors, and drives businesses. These units had goodwill of $2.1 billion, $430 and $232, respectively.  Based on the Company’s fourth quarter analysis, the estimated fair values of the network power systems and power generation and motors businesses exceeded carrying value by more than 20 percent, while the estimated fair value of the drives business exceeded carrying value by approximately 10 percent. These businesses experienced declining sales and profitability in 2015 amid challenging market conditions and the strength of the U.S. dollar. There can be no assurance that the Company will not recognize an impairment charge on the ultimate spinoff of the network power systems business, or incur a loss on the potential sale of the other businesses. Assumptions used in determining fair value include successful execution of business plans, including adoption of new products and expansion of services, and the completion of restructuring actions initiated in 2015 to improve productivity through consolidation and rationalization of the cost structure. Additional assumptions include gradual improvement in served markets beginning in the latter half of 2016, particularly recovery in the demand for telecommunications networks and data centers, an expansion of industrial capital spending, and improving economic conditions in Europe and Asia.

In 2014, the network power systems business in Europe, which comprises the 2010 Chloride acquisition and pre-existing businesses, had not been able to meet its operating objectives due to a weak Western Europe economy, which had less than 1 percent average annual GDP growth since the acquisition. The weak economic recovery and intense competitive/market pressures negatively affected the profitability of the combined Emerson and Chloride European network power business. The economics for Europe were uncertain for 2015 and 2016 and the goodwill from the acquisition could not 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.
In prior years, 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.

The change in the carrying value of goodwill by business segment follows:
 
Process Management

 
Industrial Automation

 
Network Power

 
Climate Technologies

 
Commercial & Residential Solutions

 
 
 
 
 
 
 
 
Total

Gross goodwill
$
2,383

 
1,352

 
2,995

 
503

 
439

 
7,672

Accumulated impairment

 

 
(163
)
 

 

 
(163
)
Balance, September 30, 2013
2,383

 
1,352

 
2,832

 
503

 
439

 
7,509

     Acquisitions
356

 

 
22

 

 
0
 
378

     Divestitures
0
 

 
(70
)
 
0
 

 
(70
)
     Impairment

 

 
(508
)
 

 

 
(508
)
     Foreign currency
        translation and other
(38
)
 
(23
)
 
(58
)
 
(3
)
 
(5
)
 
(127
)
Gross goodwill
2,701

 
1,329

 
2,864

 
500

 
434

 
7,828

Accumulated impairment

 

 
(646
)
 

 

 
(646
)
Balance, September 30, 2014
2,701

 
1,329

 
2,218

 
500

 
434

 
7,182

     Acquisitions
176

 

 

 

 
2

 
178

     Divestitures

 
(213
)
 

 

 
(228
)
 
(441
)
     Foreign currency
        translation and other
(87
)
 
(85
)
 
(74
)
 
(8
)
 
(12
)
 
(266
)
Gross goodwill
2,790

 
1,031

 
2,790

 
492

 
196

 
7,299

Accumulated impairment

 

 
(646
)
 

 

 
(646
)
Balance, September 30, 2015
$
2,790

 
1,031

 
2,144

 
492

 
196

 
6,653


The gross carrying amount and accumulated amortization of identifiable intangible assets by major class follow:
 
Customer Relationships
 
Intellectual Property
 
Capitalized Software
 
Total
 
2014

 
2015

 
2014

 
2015

 
2014

 
2015

 
2014

 
2015

Gross carrying amount
$
1,594

 
1,508

 
1,052

 
1,051

 
1,190

 
1,178

 
3,836

 
3,737

Less: Accumulated amortization
643

 
693

 
613

 
649

 
891

 
869

 
2,147

 
2,211

     Net carrying amount
$
951

 
815

 
439

 
402

 
299

 
309

 
1,689

 
1,526


Total intangible asset amortization expense for 2015, 2014 and 2013 was $308, $313 and $298, respectively. Based on intangible asset balances as of September 30, 2015, amortization expense is expected to approximate $286 in 2016, $267 in 2017, $236 in 2018, $194 in 2019 and $161 in 2020.



27



(7) FINANCIAL INSTRUMENTS

Hedging Activities
As of September 30, 2015, the notional amount of foreign currency hedge positions was approximately $1.6 billion, while commodity hedge contracts totaled approximately 71 million pounds ($174) 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, 2015 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
 
 
 
2013

 
2014

 
2015

 
2013

 
2014

 
2015

 
Location
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
Cost of sales
 
$
(15
)
 
(12
)
 
(24
)
 
(22
)
 
(16
)
 
(43
)
Foreign currency
Sales, cost of sales
 
24

 
10

 
(12
)
 
4

 
15

 
(61
)
Foreign currency
Other deductions, net
 
(5
)
 
(3
)
 
14

 
 
 
 
 
 
     Total
 
 
$
4

 
(5
)
 
(22
)
 
(18
)
 
(1
)
 
(104
)

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 all years shown.

Fair Value Measurement
The estimated fair value of long-term debt was $4,936 and $4,492, respectively, as of September 30, 2015 and 2014, which exceeded the carrying value by $356 and $411, respectively. As of September 30, 2015, 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:
 
 
2014
 
2015
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Foreign Currency
 
$
32

 
20

 
30

 
65

Commodity
 
$
1

 
10

 

 
29


(8) SHORT-TERM BORROWINGS AND LINES OF CREDIT

Short-term borrowings and current maturities of long-term debt are as follows:
 
 
2014

 
2015

Current maturities of long-term debt
 
$
522

 
291

Commercial paper
 
1,938

 
2,261

Payable to banks
 
5

 
1

     Total
 
$
2,465

 
2,553

 
 
 
 
 
Interest rate for weighted-average 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 a 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.

28



(9) LONG-TERM DEBT

The details of long-term debt follow:
 
2014

 
2015

5.0% notes due December 2014
250

 

4.125% notes due April 2015
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 December due 2021

 
500

2.625% notes due February 2023
500

 
500

3.15% notes due June 2025

 
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
81

 
80

     Long-term debt
4,081

 
4,580

Less: Current maturities
522

 
291

     Total, net
$
3,559

 
4,289


Long-term debt maturing during each of the four years after 2016 is $265, $271, $652 and $501, respectively. Total interest paid on all debt was approximately $196, $210 and $226 in 2015, 2014 and 2013, respectively. During the year, the Company repaid $250 of 5.0% notes that matured in December 2014 and $250 of 4.125% notes that matured in April 2015. In 2014, the Company repaid $250 of 5.625% notes that matured in November 2013.

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
 
2013

 
2014

 
2015

 
2013

 
2014

 
2015

Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
     Service cost (benefits earned during the period)
$
70

 
59

 
69

 
31

 
32

 
37

     Interest cost
167

 
182

 
182

 
46

 
53

 
46

     Expected return on plan assets
(280
)
 
(286
)
 
(303
)
 
(50
)
 
(58
)
 
(58
)
     Net amortization and other
226

 
153

 
174

 
18

 
18

 
20

       Net periodic pension expense
183

 
108

 
122

 
45

 
45

 
45

Defined contribution plans
113

 
119

 
111

 
63

 
59

 
61

             Total retirement plans expense
$
296

 
227

 
233

 
108

 
104

 
106



29



The increase in net periodic pension expense in 2015 is attributable to higher service costs and amortization compared to the prior year. 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. For defined contribution plans, the Company makes cash contributions based on plan requirements, which are expensed as incurred. The Company has one small business that participates 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.

The Company will begin transitioning from defined benefit to defined contribution retirement plans in 2016. The principal U.S. defined benefit pension plan has been closed to employees hired after January 1, 2016, and current employees not meeting combined age and years of service criteria will cease accruing benefits effective October 1, 2016. Affected employees will be enrolled in an enhanced defined contribution plan. The impact of these actions had an inconsequential impact on the Company's financial statements at September 30, 2015. Over time, defined benefit plan expense will decline while defined contribution plan expense will increase, with an expectation of reduced earnings volatility.

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
 
2014

 
2015

 
2014

 
2015

Projected benefit obligation, beginning
$
3,863

 
4,336

 
1,269

 
1,330

     Service cost
59

 
69

 
32

 
37

     Interest cost
182

 
182

 
53

 
46

     Actuarial (gain) loss
415

 
137

 
89

 
44

     Benefits paid
(174
)
 
(181
)
 
(36
)
 
(36
)
     Settlements
(14
)
 
(205
)
 
(14
)
 
(25
)
     Acquisitions (Divestitures), net

 
(70
)
 
(28
)
 
(4
)
     Foreign currency translation and other
5

 
(5
)
 
(35
)
 
(144
)
Projected benefit obligation, ending
$
4,336

 
4,263

 
1,330

 
1,248

 
 
 
 
 
 
 
 
Fair value of plan assets, beginning
$
4,112

 
4,473

 
899

 
988

     Actual return on plan assets
461