10-Q 1 emr-3312017x10q.htm 10-Q Document
                                                

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________________ to __________________

Commission file number 1-278

EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction of
incorporation or organization)
logo_emersona07.gif
43-0259330
(I.R.S. Employer
Identification No.)
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri
(Address of principal executive offices)
 
 
63136
(Zip Code)
    

Registrant's telephone number, including area code: (314) 553-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Emerging growth company ¨

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at April 30, 2017: 644,480,132 shares.


1

FORM 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE AND SIX MONTHS ENDED MARCH 31, 2016 AND 2017
(Dollars in millions, except per share amounts; unaudited)
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016

 
2017

 
2016

 
2017

Net sales
$
3,579

 
3,574

 
6,916

 
6,790

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
2,037

 
2,017

 
3,960

 
3,868

Selling, general and administrative expenses
878

 
868

 
1,757

 
1,690

Other deductions, net
66

 
83

 
120

 
116

Interest expense (net of interest income of $8, $9, $14 and $15, respectively)
46

 
41

 
93

 
87

 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
552

 
565

 
986

 
1,029

 
 
 
 
 
 
 
 
Income taxes
177

 
181

 
304

 
275

 
 
 
 
 
 
 
 
Earnings from continuing operations
375

 
384

 
682

 
754

 
 
 
 
 
 
 
 
Discontinued operations, net of tax
2

 
(84
)
 
48

 
(139
)
 
 
 
 
 
 
 
 
Net earnings
377

 
300

 
730

 
615

 
 
 
 
 
 
 
 
Less: Noncontrolling interests in earnings of subsidiaries
8

 
8

 
12

 
14

 
 
 
 
 
 
 
 
Net earnings common stockholders
$
369

 
292

 
718

 
601

 
 
 
 
 
 
 
 
Earnings common stockholders:
 
 
 
 
 
 
 
     Earnings from continuing operations
$
367

 
376

 
670

 
740

     Discontinued operations, net of tax
2

 
(84
)
 
48

 
(139
)
Net earnings common stockholders
$
369

 
292

 
718

 
601

 
 
 
 
 
 
 
 
Basic earnings per share common stockholders:
 
 
 
 
 
 
 
     Earnings from continuing operations
$
0.57

 
0.58

 
1.04

 
1.14

     Discontinued operations

 
(0.13
)
 
0.07

 
(0.21
)
Basic earnings per common share
$
0.57

 
0.45

 
1.11

 
0.93

 
 
 
 
 
 
 
 
Diluted earnings per share common stockholders:
 
 
 
 
 
 
 
     Earnings from continuing operations
$
0.57

 
0.58

 
1.03

 
1.14

     Discontinued operations

 
(0.13
)
 
0.07

 
(0.21
)
Diluted earnings per common share
$
0.57

 
0.45

 
1.10

 
0.93

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.475

 
0.48

 
0.95

 
0.96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See accompanying Notes to Consolidated Financial Statements.


2

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED MARCH 31, 2016 AND 2017
(Dollars in millions; unaudited)

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
 
2016


 
2017

 
 
2016

 
 
2017

Net earnings
 
$
377

 
 
300

 
 
730

 
 
615

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
125

 
 
259

 
 
(28
)
 
 
156

Pension and postretirement
 
27

 
 
65

 
 
53

 
 
120

Cash flow hedges
 
5

 
 
17

 
 
11

 
 
32

        Total other comprehensive income
 
157

 
 
341

 
 
36

 
 
308

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
534

 
 
641

 
 
766

 
 
923

 
 
 
 
 
 
 
 
 
 
 
 
Less: Noncontrolling interests in comprehensive
income of subsidiaries
 
9

 
 
9

 
 
13

 
 
13

Comprehensive income common stockholders
 
$
525

 
 
632

 
 
753

 
 
910




































See accompanying Notes to Consolidated Financial Statements.


3

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts; unaudited)
 
Sept 30, 2016
 
Mar 31, 2017
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
3,182

 
5,039

Receivables, less allowances of $92 and $112, respectively
2,701

 
2,479

Inventories
1,208

 
1,331

Other current assets
669

 
597

Current assets held-for-sale
2,200

 

Total current assets
9,960

 
9,446

 
 
 
 
Property, plant and equipment, net
2,931

 
2,880

Other assets
 

 
 
Goodwill
3,909

 
3,891

Other intangible assets
902

 
869

Other
200

 
191

Noncurrent assets held-for-sale
3,830

 

Total other assets
8,841

 
4,951

Total assets
$
21,732

 
17,277

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

Short-term borrowings and current maturities of long-term debt
$
2,584

 
252

Accounts payable
1,517

 
1,368

Accrued expenses
2,126

 
1,952

Income taxes
180

 
199

Current liabilities held-for-sale
1,601

 

Total current liabilities
8,008

 
3,771

 
 
 
 
Long-term debt
4,051

 
3,816

 
 
 
 
Other liabilities
1,729

 
1,633

 
 
 
 
Noncurrent liabilities held-for-sale
326

 

 
 
 
 
Equity
 

 
 

Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 642,796,490 shares and 644,380,547 shares, respectively
477

 
477

Additional paid-in-capital
205

 
337

Retained earnings
21,716

 
21,696

Accumulated other comprehensive income (loss)
(1,999
)
 
(1,690
)
Cost of common stock in treasury, 310,557,522 shares and 308,973,465 shares, respectively
(12,831
)
 
(12,814
)
Common stockholders’ equity
7,568

 
8,006

Noncontrolling interests in subsidiaries
50

 
51

Total equity
7,618

 
8,057

Total liabilities and equity
$
21,732

 
17,277


See accompanying Notes to Consolidated Financial Statements. 


4

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2016 AND 2017
(Dollars in millions; unaudited)
 
 
Six Months Ended
 
 
March 31,
 
 
2016

 
2017

Operating activities
 
 
 
 
Net earnings
 
$
730

 
615

(Earnings) Loss from discontinued operations, net of tax
 
(48
)
 
139

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
        Depreciation and amortization
 
286

 
283

        Changes in operating working capital
 
(100
)
 
(126
)
        Other, net
 
148

 
100

            Cash from continuing operations
 
1,016

 
1,011

            Cash from discontinued operations
 
190

 
(601
)
            Cash provided by operating activities
 
1,206

 
410

 
 
 
 
 
Investing activities
 
 
 
 
Capital expenditures
 
(210
)
 
(194
)
Purchases of businesses, net of cash and equivalents acquired
 
(11
)
 
(16
)
Other, net
 
71

 
(50
)
    Cash from continuing operations
 
(150
)
 
(260
)
    Cash from discontinued operations
 
(38
)
 
5,051

    Cash provided by (used in) investing activities
 
(188
)
 
4,791

 
 
 
 
 
Financing activities
 
 
 
 
Net increase (decrease) in short-term borrowings
 
357

 
(2,228
)
Proceeds from short-term borrowings greater than three months
 
1,174

 

Payments of short-term borrowings greater than three months
 
(827
)
 
(90
)
Payments of long-term debt
 
(253
)
 
(252
)
Dividends paid
 
(616
)
 
(621
)
Purchases of common stock
 
(555
)
 
(120
)
Other, net
 
(5
)
 
29

    Cash used in financing activities
 
(725
)
 
(3,282
)
 
 
 
 
 
Effect of exchange rate changes on cash and equivalents
 
(25
)
 
(62
)
Increase in cash and equivalents
 
268

 
1,857

Beginning cash and equivalents
 
3,054

 
3,182

Ending cash and equivalents
 
$
3,322

 
5,039

 
 
 
 
 
Changes in operating working capital
 
 
 
 
Receivables
 
$
312

 
190

Inventories
 
(78
)
 
(137
)
Other current assets
 

 
11

Accounts payable
 
(125
)
 
(100
)
Accrued expenses
 
(168
)
 
(98
)
Income taxes
 
(41
)
 
8

Total changes in operating working capital
 
$
(100
)
 
(126
)

See accompanying Notes to Consolidated Financial Statements.


5

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Notes to Consolidated Financial Statements

1.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2016. Certain prior year amounts have been reclassified to conform to current year presentation.
In connection with the strategic portfolio repositioning actions undertaken over the last eighteen months to transform the Company into a more focused enterprise, its businesses and organization were realigned. Beginning in fiscal 2017, the Company now reports three segments: Automation Solutions, and Climate Technologies and Tools & Home Products which together comprise the Commercial & Residential Solutions business. The Automation Solutions segment includes the former Process Management segment and the remaining businesses in the former Industrial Automation segment, except for the hermetic motors business, which is now included in the Climate Technologies segment. The new Tools & Home Products segment consists of the businesses previously reported in the Commercial & Residential Solutions segment in fiscal 2016. See Notes 10 and 12.
In the first quarter of 2017, the Company adopted updates to ASC Subtopic 835-30, Interest-Imputation of Interest, which require presentation of debt issuance costs as a deduction from the related debt liability rather than within other assets. This update was adopted on a retrospective basis and did not materially impact the Company’s financial statements.
2.    Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (in millions). Earnings allocated to participating securities were inconsequential.
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
Basic shares outstanding
642.0

 
643.6

 
646.0

 
643.2

Dilutive shares
2.7

 
1.2

 
2.6

 
1.3

Diluted shares outstanding
644.7

 
644.8

 
648.6

 
644.5

 

3.    Other Financial Information (in millions):

Sept 30,
2016
 
Mar 31,
2017
Inventories
 
 
 
 
 
Finished products
 
$
382

 
 
434

Raw materials and work in process
 
826

 
 
897

Total
 
$
1,208

 
 
1,331

 
Property, plant and equipment, net
 
 
 
Property, plant and equipment, at cost
 
$
7,327

 
 
7,405

Less: Accumulated depreciation
 
4,396

 
 
4,525

     Total
 
$
2,931

 
 
2,880

Goodwill by business segment
 
 
 
Automation Solutions
 
$
3,160

 
 
3,146

 
 
 
 
 
 
Climate Technologies
 
553

 
 
550

Tools & Home Products
 
196

 
 
195

Commercial & Residential Solutions
 
749

 
 
745

 
 
 
 
 
 
     Total
 
$
3,909

 
 
3,891



6

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

 
Sept 30,
2016
 
Mar 31,
2017
Accrued expenses include the following
 
 
 
 
 
Employee compensation
 
$
431

 
 
375

Customer advanced payments
 
$
433

 
 
471

Product warranty
 
$
106

 
 
97

 
Sept 30,
2016
 
Mar 31,
2017
Other liabilities
 
 
 
 
 
Pension liabilities
 
$
844

 
 
762

Deferred income taxes
 
210

 
 
182

Postretirement liabilities, excluding current portion
 
193

 
 
190

Other
 
482

 
 
499

     Total
 
$
1,729

 
 
1,633


4.
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of March 31, 2017, the notional amount of foreign currency hedge positions was approximately $1.1 billion, and commodity hedge contracts totaled approximately $85 million (primarily 41 million pounds of copper and aluminum). All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of March 31, 2017 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting. The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and six months ended March 31, 2017 and 2016 (in millions):
 
 
 
 
Into Earnings
 
Into OCI
 
 
 
 
2nd Quarter
 
Six Months
 
2nd Quarter
 
Six Months
Gains (Losses)
 
Location
 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity
 
Cost of sales
 
$
(12
)
 
4

 
(20
)
 
2

 
1

 
5

 
(10
)
 
15

Foreign currency
 
Sales, cost of sales
 
(9
)
 
(7
)
 
(15
)
 
(17
)
 
(13
)
 
20

 
(7
)
 
22

Foreign currency
 
Other deductions, net
 
(10
)
 
(6
)
 
(7
)
 

 
 
 
 
 
 
 
 
     Total
 
 
 
$
(31
)
 
(9
)
 
(42
)
 
(15
)
 
(12
)
 
25

 
(17
)
 
37

Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the three and six months ended March 31, 2017 and 2016.
Fair Value Measurement – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of March 31, 2017, the fair value of long-term debt was $4,375 million, which exceeded the carrying value by $307 million. At March 31, 2017, the fair values of commodity contracts and foreign currency contracts were reported in other current assets and accrued expenses. Valuations of derivative contract positions are summarized below (in millions):  
 
September 30, 2016
 
March 31, 2017
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Foreign Currency
 
$
7

 
49

 
20

 
14

Commodity
 
$
2

 
4

 
12

 




7

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Counterparties to derivatives arrangements are companies with investment-grade credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below preestablished levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The maximum amount that could potentially have been required was $3 million. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company as of March 31, 2017.

5.
The change in equity for the first six months of 2017 is shown below (in millions):  
 
Common
Stockholders'
Equity
 
Noncontrolling
Interests in Subsidiaries
 
Total Equity
Balance at September 30, 2016
 
$
7,568

 
 
50

 
 
7,618

Net earnings
 
601

 
 
14

 
 
615

Other comprehensive income (loss)
 
309

 
 
(1
)
 
 
308

Cash dividends
 
(621
)
 
 
(12
)
 
 
(633
)
Stock plans
 
149

 
 

 
 
149

Balance at March 31, 2017
 
$
8,006

 
 
51

 
 
8,057


6.
Activity in accumulated other comprehensive income (loss) for the three and six months ended March 31, 2017 and 2016 is shown below (in millions):  
 
Three Months Ended March 31,
 
 
Six Months Ended
March 31,
 
 
2016

 
 
2017

 
 
2016

 
 
2017

Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
   Beginning balance
 
$
(775
)
 
 
(913
)
 
 
(622
)
 
 
(812
)
   Other comprehensive income (loss) before reclassifications
 
124

 
 
139

 
 
(29
)
 
 
(228
)
   Reclassified to gain/loss on sale of businesses
 

 
 
119

 
 

 
 
385

   Ending balance
 
(651
)
 
 
(655
)
 
 
(651
)
 
 
(655
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement
 
 
 
 
 
 
 
 
 
 
 
   Beginning balance
 
(926
)
 
 
(1,107
)
 
 
(952
)
 
 
(1,162
)
   Amortization of deferred actuarial losses into earnings
 
27

 
 
35

 
 
53

 
 
70

   Reclassified to gain/loss on sale of businesses
 

 
 
30

 
 

 
 
50

   Ending balance
 
(899
)
 
 
(1,042
)
 
 
(899
)
 
 
(1,042
)
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
   Beginning balance
 
(37
)
 
 
(10
)
 
 
(43
)
 
 
(25
)
   Deferral of gains (losses) arising during the period
 
(8
)
 
 
15

 
 
(11
)
 
 
23

   Reclassification of realized (gains) losses to sales and cost of sales
 
13

 
 
2

 
 
22

 
 
9

   Ending balance
 
(32
)
 
 
7

 
 
(32
)
 
 
7

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
$
(1,582
)
 
 
(1,690
)
 
 
(1,582
)
 
 
(1,690
)
 
 
 
 
 
 
 
 
 
 
 
 
Activity above is shown net of income taxes for the three and six months ended March 31, 2017 and 2016, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(18), $(14), $(36) and $(28); pension and postretirement divestiture: $(15), $ - , $(22) and $ -; deferral of cash flow hedging gains (losses): $(10), $4, $(14) and $6; reclassification of realized cash flow hedging (gains) losses: $(1), $(8), $(6) and $(13).



8

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

7.
Total periodic pension and postretirement expense is summarized below (in millions):
 
Three Months Ended March 31,
 
Six Months Ended
March 31,
 
 
2016
 
 
2017
 
 
2016

 
 
2017

Service cost
 
$
23

 
 
21

 
 
45

 
 
42

Interest cost
 
49

 
 
42

 
 
99

 
 
84

Expected return on plan assets
 
(88
)
 
 
(86
)
 
 
(176
)
 
 
(172
)
Net amortization
 
41

 
 
53

 
 
81

 
 
106

Total
 
$
25

 
 
30

 
 
49

 
 
60


8.
Other deductions, net are summarized below (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2016
 
 
 
2017

 
 
2016

 
 
2017

 
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangibles
 
$
22

 
 
21

 
 
44

 
 
43

Restructuring costs
 
11

 
 
13

 
 
18

 
 
24

Other
 
33

 
 
49

 
 
58

 
 
49

Total
 
$
66

 
 
83

 
 
120

 
 
116


Other includes higher acquisition/divestiture costs of $11 million in the second quarter and $21 million year-to-date, and an increase in bad debt expense of $13 million and $11 million, respectively. The comparative impact of foreign currency transactions was favorable by $12 million in the second quarter and $46 million year-to-date.

9.
Restructuring expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. The Company expects full year 2017 restructuring expense to be approximately $50 million. This includes $24 million incurred to date, as well as costs to complete actions initiated before the end of the second quarter and actions anticipated to be approved and initiated during the remainder of the year. Costs for the three and six months ended March 31, 2017 largely relate to restructuring of the global cost structure consistent with the current level of economic activity, as well as the redeployment of resources for future growth.

Restructuring expense by business segment follows (in millions):
 
Three Months Ended March 31,
 
Six Months Ended
March 31,
 
2016
 
 
2017
 
 
2016
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Automation Solutions
 
$
8

 
 
9

 
 
13

 
 
15

 
 
 
 
 
 
 
 
 
 
 
 
Climate Technologies
 
2

 
 
3

 
 
3

 
 
7

Tools & Home Products
 
1

 
 

 
 
2

 
 
1

Commercial & Residential Solutions
 
3

 
 
3

 
 
5

 
 
8

 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 

 
 
1

 
 

 
 
1

 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11

 
 
13

 
 
18

 
 
24




9

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Details of the change in the liability for restructuring costs during the six months ended March 31, 2017 follow (in millions):
 
Sept 30, 2016
 
 
Expense
 
 
Utilized/Paid
 
 
Mar 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance and benefits
 
$
44

 
 
13

 
 
35

 
 
22

Lease and other contract terminations
 
5

 
 
1

 
 
1

 
 
5

Asset write-downs
 

 
 
1

 
 
1

 
 

Vacant facility and other shutdown costs
 
3

 
 
2

 
 
3

 
 
2

Start-up and moving costs
 
2

 
 
7

 
 
5

 
 
4

Total
 
$
54

 
 
24

 
 
45

 
 
33

 

10.
Business Segments – The Company designs and manufactures products and delivers services that bring technology and engineering together to provide innovative solutions for customers in a wide range of industrial, commercial and consumer markets around the world.
The Automation Solutions segment provides measurement, control, diagnostic capabilities and integrated manufacturing solutions for automated industrial processes, and serves oil and gas, refining, chemical, power generation, pharmaceutical, food and beverage, automotive and other end markets. The segment's major product offerings are described below.
Measurement & Analytical Instrumentation products measure the physical properties of liquids or gases in a process stream and communicate this information to a process control system, and analyze the chemical composition of process fluids and emissions to enhance quality and efficiency, as well as environmental compliance.
Valves, Actuators & Regulators consists of control valves which respond to commands from a control system to continuously and precisely modulate the flow of process fluids, valve actuators and controllers, and industrial and residential regulators that reduce the pressure of fluids moving from high-pressure supply lines into lower pressure systems.
Industrial Solutions provides fluid power and control mechanisms, electrical distribution equipment, and materials joining and precision cleaning products which are used in a variety of manufacturing operations to provide integrated manufacturing solutions to customers.
Process Control Systems & Solutions includes digital plant architecture that controls plant processes by communicating with and adjusting the "intelligent" plant devices described above to provide precision measurement, control, monitoring, asset optimization, and plant safety and reliability for plants that produce power, or process fluids or other items.
The Commercial & Residential Solutions business consists of the Climate Technologies and Tools & Home Products segments. This business provides products and solutions that promote energy efficiency, enhance household and commercial comfort, and protect food quality and sustainability through heating, air conditioning and refrigeration technology, as well as a broad range of tools and appliance solutions.
The Climate Technologies segment provides products and services for all areas of the climate control industry, including residential heating and cooling, commercial air conditioning, and commercial and industrial refrigeration. Products include compressors, temperature sensors and controls, thermostats, flow controls and remote monitoring technology and services that enable homeowners and businesses to better manage their heating, air conditioning and refrigeration systems for improved control and comfort, and lower energy costs.
The Tools & Home Products segment offers tools for professionals and homeowners, residential storage products and appliance solutions. Products include professional pipe-working tools, residential and commercial food waste disposers, wet-dry vacuums, and home shelving and closet organization systems.


10

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Summarized information about the Company's results of operations by business segment follows (in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
Sales
 
Earnings
 
Sales
 
Earnings
 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automation Solutions
$
2,194

 
2,117

 
342

 
328

 
4,356

 
4,084

 
683

 
654

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Climate Technologies
993

 
1,058

 
226

 
249

 
1,779

 
1,917

 
359

 
410

Tools & Home Products
394

 
402

 
92

 
96

 
786

 
795

 
177

 
184

Commercial & Residential Solutions
1,387

 
1,460

 
318

 
345

 
2,565

 
2,712

 
536

 
594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Differences in accounting methods
 
 
 
 
47

 
35

 
 
 
 
 
91

 
68

Corporate and other
 
 
 
 
(109
)
 
(102
)
 
 
 
 
 
(231
)
 
(200
)
Eliminations/Interest
(2
)
 
(3
)
 
(46
)
 
(41
)
 
(5
)
 
(6
)
 
(93
)
 
(87
)
     Total
$
3,579

 
3,574

 
552

 
565

 
6,916

 
6,790

 
986

 
1,029

Corporate and other in 2017 includes lower incentive stock compensation of $17 million for the second quarter and $43 million year-to-date, which reflects the impact of changes in the Company's stock price. Corporate and other also includes higher acquisition/divestiture costs of $11 million for the second quarter and $21 million year-to-date.

Automation Solutions sales by major product offering are summarized below (in millions):
 
Three Months Ended March 31,
 
 
Six Months Ended March 31,
 
 
2016

 
 
2017

 
 
2016

 
 
2017

 
 
 
 
 
 
 
 
 
 
 
 
Measurement & Analytical Instrumentation
 
$
766

 
 
736

 
 
1,523

 
 
1,418

Valves, Actuators & Regulators
 
532

 
 
497

 
 
1,030

 
 
946

Industrial Solutions
 
398

 
 
419

 
 
783

 
 
786

Process Control Systems & Solutions
 
498

 
 
465

 
 
1,020

 
 
934

     Total
 
$
2,194

 
 
2,117

 
 
4,356

 
 
4,084


11.
On April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business for $3.15 billion, subject to certain post-closing adjustments. This business, with sales of approximately $1.6 billion for the trailing twelve months ended March 2017, is a manufacturer of control, isolation and pressure relief valves and actuators, and complements the Valves, Actuators & Regulators product offering within Automation Solutions. The initial accounting and pro forma disclosures will be provided in the Company's Form 10-Q for the third quarter of 2017 as the timing of the closure has not afforded the Company sufficient time to fully incorporate the impact of this business.

12.
Discontinued Operations – The Company previously announced strategic actions to streamline its portfolio, drive growth and accelerate value creation for shareholders. On November 30, 2016, the Company completed the sale of its network power systems business for $4 billion in cash, subject to certain post-closing adjustments, and retained a subordinated interest in distributions, contingent upon the equity holders first receiving a threshold return on their initial investment. This business comprised the former Network Power segment. Additionally, on January 31, 2017, the Company completed the sale of its power generation, motors and drives business for approximately $1.2 billion, subject to post-closing adjustments. This business was previously reported in the former Industrial Automation segment. The results of operations for these businesses were reclassified into discontinued operations, and the assets and liabilities were reflected as held-for-sale.


11

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q


The financial results of the network power systems and power generation, motors and drives businesses reported as discontinued operations for the three and six months ended March 31, 2017 and 2016 were as follows:
 
 
Three Months Ended March 31,
 
 
Network Power Systems
 
Power Generation, Motors and Drives
 
Total
 
 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,015

 

 
341

 
97

 
1,356

 
97

Cost of sales
 
639

 

 
263

 
75

 
902

 
75

SG&A
 
270

 

 
71

 
21

 
341

 
21

Other (income) deductions, net
 
44

 

 
11

 
4

 
55

 
4

Earnings (Loss) before income taxes
 
62

 

 
(4
)
 
(3
)
 
58

 
(3
)
Income taxes
 
56

 
(14
)
 

 
95

 
56

 
81

Earnings (Loss), net of tax
 
$
6

 
14

 
(4
)
 
(98
)
 
2

 
(84
)

In the second quarter of 2017, the loss of $(84) million consists of income tax expense of $134 million recognized on completion of the sale of the power generation, motors and drives business, an income tax benefit of $41 million for planned repatriation of sales proceeds and cash from the business, an additional after-tax gain of $14 million related to the divestiture of the network power systems business, lower expense of $3 million due to ceasing depreciation and amortization for the discontinued business held-for-sale, and a loss from operations of $8 million. In 2016, earnings of $2 million included net earnings from operations of $58 million, $28 million of income tax expense for repatriation of cash, and $28 million after-tax for professional fees and other costs.

Discontinued operations for the remainder of fiscal 2017 will reflect the impact of any post-closing adjustments, and professional fees and other costs.
 
 
Six Months Ended March 31,
 
 
Network Power Systems
 
Power Generation, Motors and Drives
 
Total
 
 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,063

 
630

 
679

 
407

 
2,742

 
1,037

Cost of sales
 
1,289

 
394

 
524

 
307

 
1,813

 
701

SG&A
 
549

 
180

 
137

 
83

 
686

 
263

Other (income) deductions, net
 
92

 
(461
)
 
23

 
44

 
115

 
(417
)
Earnings (Loss) before income taxes
 
133

 
517

 
(5
)
 
(27
)
 
128

 
490

Income taxes
 
80

 
540

 

 
89

 
80

 
629

Earnings (Loss), net of tax
 
$
53

 
(23
)
 
(5
)
 
(116
)
 
48

 
(139
)

In 2017, the loss of $(139) million consists of an after-tax loss of $172 million ($38 million pretax loss) on the divestiture of the power generation, motors and drives business, an after-tax gain on the divestiture of the network power systems business of $100 million ($465 million pretax), income tax expense of $103 million for repatriation of sales proceeds and cash from the businesses, lower expense of $30 million due to ceasing depreciation and amortization for the discontinued businesses held-for-sale, and net earnings from operations of $6 million. In 2016, earnings of $48 million included net earnings from operations of $126 million, $28 million of income tax expense for repatriation of cash, and $50 million after-tax for professional fees and other costs.



12

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

The aggregate carrying amounts of the major classes of assets and liabilities classified as held-for-sale as of September 30, 2016 are summarized as follows:
 
Network Power Systems
 
Power Generation,
Motors and Drives
 
Total
 
Sept 30, 2016
 
Sept 30, 2016
 
Sept 30, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
   Receivables
 
$
1,202

 
 
 
290

 
 
 
1,492

 
   Inventories
 
381

 
 
 
197

 
 
 
578

 
   Other current assets
 
108

 
 
 
22

 
 
 
130

 
   Property plant & equipment, net
 
352

 
 
 
259

 
 
 
611

 
   Goodwill
 
2,111

 
 
 
580

 
 
 
2,691

 
   Other noncurrent assets
 
473

 
 
 
55

 
 
 
528

 
Total assets held-for-sale
 
$
4,627

 
 
 
1,403

 
 
 
6,030

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
   Accounts payable
 
$
664

 
 
 
176

 
 
 
840

 
   Other current liabilities
 
620

 
 
 
141

 
 
 
761

 
   Deferred taxes and other noncurrent liabilities
 
227

 
 
 
99

 
 
 
326

 
Total liabilities held-for-sale
 
$
1,511

 
 
 
416

 
 
 
1,927

 
    
Net cash from operating and investing activities for the network power systems and power generation, motors and drives businesses for the six months ended March 31, 2017 and 2016 were as follows:            
 
 
Network Power Systems
 
Power Generation,
Motors and Drives
 
Total
 
 
Mar 31, 2016
 
Mar 31, 2017
 
Mar 31, 2016
 
Mar 31, 2017
 
Mar 31, 2016
 
Mar 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash from operating activities
 
$
163

 
(572
)
 
27

 
(29
)
 
190

 
(601
)
Cash from investing activities
 
$
(15
)
 
5,063

 
(23
)
 
(12
)
 
(38
)
 
5,051


Cash used for operating activities was $601 million for the six months ended March 31, 2017, which primarily includes payments for income taxes on completion of the divestitures and repatriation of cash, and professional fees and other costs. Cash from operations for the six months ended March 31, 2016 of $190 million included operating cash flow of the divested businesses, net of income taxes, and professional fees and other costs paid related to the transactions of $57 million.

The Company expects total discontinued operations cash used for operating activities in fiscal 2017 to be approximately $750 million, which primarily consists of income tax payments related to the divestitures.



13

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Items 2 and 3.

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

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

Second quarter results reflected continued improvement in served markets across the Company's businesses. Sales from continuing operations were $3,574 million, flat compared with the prior year, as spending in energy related markets remained at low levels but improved compared to the first quarter, while demand was favorable in HVAC, refrigeration and construction related markets.
Earnings from continuing operations common stockholders were $376 million, up 2 percent, and diluted earnings per share from continuing operations were $0.58, up 2 percent. Net earnings common stockholders were $292 million, down 21 percent, and diluted earnings per share were $0.45, down 21 percent, reflecting the impact of discontinued operations.
RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the second quarter ended March 31, 2017, compared with the second quarter ended March 31, 2016.
Three Months Ended Mar 31
2016
 
2017
 
Change
(dollars in millions, except per share amounts)
 

 
 

 
 
 
 
 
 
 
 
Net sales
$
3,579

 
3,574

 
 %
Gross profit
$
1,542

 
1,557

 
1
 %
Percent of sales
43.1
%
 
43.6
%
 
 

 
 
 
 
 
 
SG&A
$
878

 
868

 
 

Percent of sales
24.6
%
 
24.3
%
 
 

Other deductions, net
$
66

 
83

 
 

Interest expense, net
$
46

 
41

 
 

 
 
 
 
 
 
Earnings from continuing operations before income taxes
$
552

 
565

 
2
 %
Percent of sales
15.4
%
 
15.8
%
 
 

Earnings from continuing operations common stockholders
$
367

 
376

 
2
 %
Net earnings common stockholders
$
369

 
292

 
(21
)%
Percent of sales
10.3
%
 
8.2
%
 
 

 
 
 
 
 
 
Diluted EPS - Earnings from continuing operations
$
0.57

 
0.58

 
2
 %
Diluted EPS - Net earnings
$
0.57

 
0.45

 
(21
)%

Net sales for the second quarter of 2017 were $3,574 million, essentially flat (down $5 million) compared with $3,579 million in 2016. Underlying sales were also flat (up $5 million) as 1 percent higher volume was offset by 1 percent lower price. Foreign currency translation subtracted $17 million and acquisitions added $7 million. Underlying sales increased 2 percent in the U.S. and decreased 1 percent internationally. Asia was up 3 percent (China up 13 percent) and Europe increased 2 percent. Latin America, Canada and Middle East/Africa all decreased 8 to 9 percent. Sales decreased $77 million in Automation Solutions as capital spending in energy related markets continued to reflect the impact of low oil prices, while general industrial markets showed improvement. Commercial & Residential Solutions sales increased $73 million, reflecting favorable conditions in global HVAC, refrigeration and construction related markets.



14

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Cost of sales for the second quarter of 2017 were $2,017 million, a decrease of $20 million compared with $2,037 million in 2016 primarily due to cost reduction actions and the impact of foreign currency translation. Gross profit margin of 43.6 percent increased 0.5 percentage points compared with 43.1 percent in 2016, as savings from cost reduction actions more than offset lower price.

Selling, general and administrative (SG&A) expenses of $868 million decreased $10 million compared with the prior year and SG&A as a percent of sales of 24.3 percent improved 0.3 percentage points, primarily due to savings from cost reduction actions and lower incentive stock compensation of $17 million, partially offset by deleverage on lower volume in the Automation Solutions segment.

Other deductions, net were $83 million in 2017, an increase of $17 million due to higher acquisition/divestiture costs of $11 million and an increase in bad debt expense of $13 million, partially offset by a favorable foreign currency transactions impact of $12 million. See Note 8.

Pretax earnings from continuing operations of $565 million increased $13 million, or 2 percent. Earnings increased $27 million in Commercial & Residential Solutions and decreased $14 million in Automation Solutions. See Note 10 and the following Business Segments discussion.

Income taxes were $181 million for 2017 and $177 million for 2016, resulting in effective tax rates of 32 percent for both years. The tax rate for full year 2017 is estimated at 30 percent, which reflects a $47 million tax benefit from restructuring a foreign subsidiary in the first quarter of 2017.

Earnings from continuing operations attributable to common stockholders were $376 million, up 2 percent, and diluted earnings per share were $0.58, up 2 percent.

Net earnings common stockholders in the second quarter of 2017 were $292 million, down 21 percent, compared with $369 million in the prior year, and earnings per share were $0.45, down 21 percent compared with $0.57 in 2016. These results include the impact of discontinued operations which is discussed below.

Discontinued Operations

Discontinued operations for the second quarter of 2017 includes a net loss of $(84) million ($0.13 per share), consisting of separation costs of $76 million, primarily for income taxes related to the divestiture of the power generation, motors and drives business, and a loss from operations of $8 million. In 2016, discontinued operations included net earnings of $2 million, which consisted of earnings from operations of $58 million and separation costs related to the divestitures of $56 million. See Note 12.

BUSINESS SEGMENTS
Following is an analysis of operating results for the Company’s business segments for the second quarter ended March 31, 2017, compared with the second quarter ended March 31, 2016. The Company defines segment earnings as earnings before interest and taxes. See Notes 1 and 10 for a discussion of the Company's business segments.
 


15

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Automation Solutions
Three Months Ended Mar 31
2016
 
2017
 
Change
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
2,194

 
2,117

 
(3
)%
Earnings
$
342

 
328

 
(4
)%
     Margin
15.6
%
 
15.5
%
 
 

Sales by Major Product Offering
 
 
 
 
 
Measurement & Analytical Instrumentation
$
766

 
736

 
(4
)%
Valves, Actuators & Regulators
532

 
497

 
(7
)%
Industrial Solutions
398

 
419

 
5
 %
Process Control Systems & Solutions
498

 
465

 
(6
)%
     Total
$
2,194

 
2,117

 
(3
)%

Automation Solutions sales were $2.1 billion in the second quarter, a decrease of $77 million, or 3 percent. Underlying sales also decreased 3 percent ($67 million) on 2 percent lower volume and approximately 1 percent lower price. Foreign currency translation had a $10 million unfavorable impact. Sales for Measurement & Analytical Instrumentation, Valves, Actuators & Regulators and Process Control Systems & Solutions decreased $98 million, or 5 percent compared with the prior year as capital spending by global oil and gas customers continued to be impacted by low oil prices, but improved compared to the first quarter. Downstream markets, including power and life sciences, and MRO activity in energy related markets were favorable. Industrial Solutions sales increased $21 million, or 5 percent, as general industrial end markets improved, especially automotive, while upstream oil and gas markets remained under pressure. Underlying sales decreased 1 percent in the U.S. and were flat in Europe. Sales decreased 2 percent in Asia (China up 10 percent), while Latin America decreased 16 percent, Canada decreased 11 percent and Middle East/Africa was down 9 percent. Earnings were $328 million, a decrease of $14 million, and margin decreased 0.1 percentage points due to deleverage on lower volume and higher bad debt expense of $12 million, largely offset by savings from cost reduction actions. Slightly lower price was substantially offset by materials cost containment. Based on current and expected order trends, results are expected to continue to improve in the second half of the fiscal year with underlying sales turning positive driven by MRO and small project activity.

Commercial & Residential Solutions
Three Months Ended Mar 31
2016
 
2017
 
Change
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
Climate Technologies
$
993

 
1,058

 
7
%
Tools & Home Products
394

 
402

 
2
%
     Total
$
1,387

 
1,460

 
5
%
 
 
 
 
 
 
Earnings:
 
 
 
 
 
Climate Technologies
$
226

 
249

 
10
%
Tools & Home Products
92

 
96

 
6
%
     Total
$
318

 
345

 
9
%
     Margin
22.9
%
 
23.7
%
 
 

Commercial & Residential Solutions sales were $1.5 billion in the second quarter, an increase of $73 million, or 5 percent, reflecting favorable conditions in global HVAC, refrigeration and construction related markets. Underlying sales were also up 5 percent ($73 million) on 6 percent higher volume, partially offset by approximately 1 percent lower price. Foreign currency translation deducted 1 percent ($7 million) and acquisitions added 1 percent ($7 million). Climate Technologies sales were $1,058 million in the second quarter, an increase of $65 million, or 7 percent. Global air conditioning sales were solid on steady growth in the U.S. and strength in Asia, particularly China, while Europe was down moderately. Global refrigeration sales were up moderately led by robust growth in China and modest growth in the U.S. and Europe. Sensors and solutions had strong growth, while temperature


16

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

controls was up moderately. Tools & Home Products sales were $402 million in the second quarter (up $8 million). Sales for professional tools were up modestly on favorable demand from oil and gas customers. Food waste disposers were up modestly and the storage business was up slightly, reflecting favorable demand from big box retailers. The wet/dry vacuums business was down slightly. Overall, underlying sales increased 4 percent in the U.S., 6 percent in Europe and 13 percent in Asia (China up 20 percent). Sales increased 7 percent in Latin America, decreased 4 percent in Canada and were down 3 percent in Middle East/Africa. Earnings were $345 million, an increase of $27 million including $23 million in Climate Technologies, and margin improved 0.8 percentage points due to increased volume and resulting leverage. Earnings were also aided by savings from cost reduction actions and lower customer accommodation costs of $8 million compared with the prior year. Slightly lower price and higher materials costs partially offset the increase. A favorable outlook for global demand within the Company's served markets supports the expectation for mid-single digit growth in fiscal 2017.

RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the six months ended March 31, 2017, compared with the six months ended March 31, 2016.
Six Months Ended Mar 31
2016
 
2017
 
Change
(dollars in millions, except per share amounts)
 

 
 

 
 
 
 
 
 
 
 
Net sales
$
6,916

 
6,790

 
(2
)%
Gross profit
$
2,956

 
2,922

 
(1
)%
Percent of sales
42.7
%
 
43.0
%
 
 

 
 
 
 
 
 
SG&A
$
1,757

 
1,690

 
 

Percent of sales
25.4
%
 
24.8
%
 
 

Other deductions, net
$
120

 
116

 
 

Interest expense, net
$
93

 
87

 
 

 
 
 
 
 
 
Earnings from continuing operations before income taxes
$
986

 
1,029

 
4
 %
Percent of sales
14.3
%
 
15.2
%
 
 

Earnings from continuing operations common stockholders
$
670

 
740

 
10
 %
Net earnings common stockholders
$
718

 
601

 
(16
)%
Percent of sales
10.4
%
 
8.8
%
 
 

 
 
 
 
 
 
Diluted EPS - Earnings from continuing operations
$
1.03

 
1.14

 
11
 %
Diluted EPS - Net earnings
$
1.10


0.93


(15
)%

Net sales for the first six months of 2017 were $6,790 million, a decrease of $126 million, or 2 percent compared with $6,916 million in 2016. Underlying sales were down 1 percent ($83 million) on slightly lower volume and price. Foreign currency translation deducted 1 percent ($57 million) while acquisitions added $14 million. Underlying sales decreased 1 percent in the U.S. and 2 percent internationally. Europe was flat and Asia increased 5 percent (China up 15 percent), while Latin America was down 13 percent. Canada decreased 14 percent and Middle East/Africa was down 6 percent. Sales decreased $272 million in Automation Solutions due to lower capital spending in energy related markets, primarily reflecting the impact of low oil prices. Commercial & Residential Solutions sales increased $147 million reflecting favorable conditions in HVAC, refrigeration and construction related markets.

Cost of sales for 2017 were $3,868 million, a decrease of $92 million versus $3,960 million in 2016, primarily due to cost reduction actions and the impact of foreign currency translation. Gross profit margin was 43.0 percent in 2017 compared with 42.7 percent in 2016, as savings from cost reduction and containment actions more than offset deleverage on the lower volume and lower price.

SG&A expenses of $1,690 million decreased $67 million and SG&A as a percent of sales of 24.8 percent improved 0.6 percentage points compared with the prior year, primarily due to savings from cost reduction actions, lower incentive stock compensation of $43 million and the impact of foreign currency translation, partially offset by deleverage on lower volume.



17

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Other deductions, net were $116 million in 2017, a decrease of $4 million primarily due to a favorable foreign currency transactions impact of $46 million, partially offset by higher acquisition/divestiture costs of $21 million, an increase in bad debt expense of $11 million and higher restructuring expense of