10-Q 1 emr-6302017x10q.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 June 30, 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_emersona08.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 July 31, 2017: 640,019,616 shares.


1

FORM 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE AND NINE MONTHS ENDED JUNE 30, 2016 AND 2017
(Dollars in millions, except per share amounts; unaudited)
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2016

 
2017

 
2016

 
2017

Net sales
$
3,674

 
4,039

 
10,590

 
10,829

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
2,081

 
2,361

 
6,041

 
6,229

Selling, general and administrative expenses
852

 
931

 
2,609

 
2,621

Other deductions, net
39

 
87

 
159

 
203

Interest expense (net of interest income of $7, $10, $21 and $25, respectively)
46

 
39

 
139

 
126

 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
656

 
621

 
1,642

 
1,650

 
 
 
 
 
 
 
 
Income taxes
205

 
202

 
509

 
477

 
 
 
 
 
 
 
 
Earnings from continuing operations
451

 
419

 
1,133

 
1,173

 
 
 
 
 
 
 
 
Discontinued operations, net of tax
38

 
6

 
86

 
(133
)
 
 
 
 
 
 
 
 
Net earnings
489

 
425

 
1,219

 
1,040

 
 
 
 
 
 
 
 
Less: Noncontrolling interests in earnings of subsidiaries
10

 
12

 
22

 
26

 
 
 
 
 
 
 
 
Net earnings common stockholders
$
479

 
413

 
1,197

 
1,014

 
 
 
 
 
 
 
 
Earnings common stockholders:
 
 
 
 
 
 
 
     Earnings from continuing operations
$
441

 
407

 
1,111

 
1,147

     Discontinued operations, net of tax
38

 
6

 
86

 
(133
)
Net earnings common stockholders
$
479

 
413

 
1,197

 
1,014

 
 
 
 
 
 
 
 
Basic earnings per share common stockholders:
 
 
 
 
 
 
 
     Earnings from continuing operations
$
0.68

 
0.63

 
1.72

 
1.77

     Discontinued operations
0.06

 
0.01

 
0.13

 
(0.20
)
Basic earnings per common share
$
0.74

 
0.64

 
1.85

 
1.57

 
 
 
 
 
 
 
 
Diluted earnings per share common stockholders:
 
 
 
 
 
 
 
     Earnings from continuing operations
$
0.68

 
0.63

 
1.71

 
1.77

     Discontinued operations
0.06

 
0.01

 
0.13

 
(0.20
)
Diluted earnings per common share
$
0.74

 
0.64

 
1.84

 
1.57

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.475

 
0.48

 
1.425

 
1.44

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See accompanying Notes to Consolidated Financial Statements.


2

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED JUNE 30, 2016 AND 2017
(Dollars in millions; unaudited)

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


 
2017

 
 
2016

 
 
2017

Net earnings
 
$
489

 
 
425

 
 
1,219

 
 
1,040

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
(9
)
 
 
74

 
 
(37
)
 
 
230

Pension and postretirement
 
25

 
 
35

 
 
78

 
 
155

Cash flow hedges
 
3

 
 
5

 
 
14

 
 
37

        Total other comprehensive income
 
19

 
 
114

 
 
55

 
 
422

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
508

 
 
539

 
 
1,274

 
 
1,462

 
 
 
 
 
 
 
 
 
 
 
 
Less: Noncontrolling interests in comprehensive
income of subsidiaries
 
11

 
 
11

 
 
24

 
 
24

Comprehensive income common stockholders
 
$
497

 
 
528

 
 
1,250

 
 
1,438




































See accompanying Notes to Consolidated Financial Statements.


3

FORM 10-Q

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

 
3,140

Receivables, less allowances of $92 and $93, respectively
2,701

 
2,926

Inventories
1,208

 
1,891

Other current assets
669

 
597

Current assets held-for-sale
2,200

 

Total current assets
9,960

 
8,554

 
 
 
 
Property, plant and equipment, net
2,931

 
3,304

Other assets
 

 
 
Goodwill
3,909

 
5,296

Other intangible assets
902

 
1,868

Other
200

 
380

Noncurrent assets held-for-sale
3,830

 

Total other assets
8,841

 
7,544

Total assets
$
21,732

 
19,402

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

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

 
1,363

Accounts payable
1,517

 
1,613

Accrued expenses
2,126

 
2,175

Income taxes
180

 
219

Current liabilities held-for-sale
1,601

 

Total current liabilities
8,008

 
5,370

 
 
 
 
Long-term debt
4,051

 
3,797

 
 
 
 
Other liabilities
1,729

 
2,213

 
 
 
 
Noncurrent liabilities held-for-sale
326

 

 
 
 
 
Equity
 

 
 

Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 642,796,490 shares and 639,966,841 shares, respectively
477

 
477

Additional paid-in-capital
205

 
350

Retained earnings
21,716

 
21,800

Accumulated other comprehensive income (loss)
(1,999
)
 
(1,575
)
Cost of common stock in treasury, 310,557,522 shares and 313,387,171 shares, respectively
(12,831
)
 
(13,086
)
Common stockholders’ equity
7,568

 
7,966

Noncontrolling interests in subsidiaries
50

 
56

Total equity
7,618

 
8,022

Total liabilities and equity
$
21,732

 
19,402


See accompanying Notes to Consolidated Financial Statements. 


4

FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2016 AND 2017
(Dollars in millions; unaudited)
 
 
Nine Months Ended
 
 
June 30,
 
 
2016

 
2017

Operating activities
 
 
 
 
Net earnings
 
$
1,219

 
1,040

(Earnings) Loss from discontinued operations, net of tax
 
(86
)
 
133

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
        Depreciation and amortization
 
426

 
454

        Changes in operating working capital
 
(79
)
 
16

        Pension funding
 
(30
)
 
(14
)
        Other, net
 
194

 
156

            Cash from continuing operations
 
1,644

 
1,785

            Cash from discontinued operations
 
280

 
(727
)
            Cash provided by operating activities
 
1,924

 
1,058

 
 
 
 
 
Investing activities
 
 
 
 
Capital expenditures
 
(301
)
 
(300
)
Purchases of businesses, net of cash and equivalents acquired
 
(62
)
 
(2,991
)
Divestiture of business
 

 
40

Other, net
 
45

 
(80
)
    Cash from continuing operations
 
(318
)
 
(3,331
)
    Cash from discontinued operations
 
(55
)
 
5,022

    Cash provided by (used in) investing activities
 
(373
)
 
1,691

 
 
 
 
 
Financing activities
 
 
 
 
Net increase (decrease) in short-term borrowings
 
692

 
(1,136
)
Proceeds from short-term borrowings greater than three months
 
1,174

 

Payments of short-term borrowings greater than three months
 
(1,174
)
 
(90
)
Payments of long-term debt
 
(252
)
 
(253
)
Dividends paid
 
(922
)
 
(930
)
Purchases of common stock
 
(555
)
 
(400
)
Other, net
 
(13
)
 
32

    Cash used in financing activities
 
(1,050
)
 
(2,777
)
 
 
 
 
 
Effect of exchange rate changes on cash and equivalents
 
(39
)
 
(14
)
Increase (Decrease) in cash and equivalents
 
462

 
(42
)
Beginning cash and equivalents
 
3,054

 
3,182

Ending cash and equivalents
 
$
3,516

 
3,140

 
 
 
 
 
Changes in operating working capital
 
 
 
 
Receivables
 
$
253

 
119

Inventories
 
(84
)
 
(125
)
Other current assets
 
20

 
(24
)
Accounts payable
 
(93
)
 
(7
)
Accrued expenses
 
(138
)
 
(17
)
Income taxes
 
(37
)
 
70

Total changes in operating working capital
 
$
(79
)
 
16


See accompanying Notes to Consolidated Financial Statements.


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 to transform the Company into a more focused enterprise, its businesses and organization were realigned. Beginning in fiscal 2017, the Company now reports three segments: Automation Solutions, and Climate Technologies and Tools & Home Products which together comprise the Commercial & Residential Solutions business. The Automation Solutions segment includes the former Process Management segment and the remaining businesses in the former Industrial Automation segment, except for the hermetic motors business, which is now included in the Climate Technologies segment. The new Tools & Home Products segment consists of the businesses previously reported in the Commercial & Residential Solutions segment in fiscal 2016. See Notes 10 and 12.
In the first quarter of 2017, the Company adopted updates to ASC Subtopic 835-30, Interest-Imputation of Interest, which require presentation of debt issuance costs as a deduction from the related debt liability rather than within other assets. This update was adopted on a retrospective basis and did not materially impact the Company’s financial statements.
2.    Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (in millions). Earnings allocated to participating securities were inconsequential.
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
Basic shares outstanding
642.2

 
642.8

 
644.7

 
643.1

Dilutive shares
3.0

 
1.0

 
2.7

 
1.2

Diluted shares outstanding
645.2

 
643.8

 
647.4

 
644.3

 

3.    Other Financial Information (in millions)

Sept 30, 2016
 
June 30, 2017
Inventories
 
 
 
 
 
Finished products
 
$
382

 
 
678

Raw materials and work in process
 
826

 
 
1,213

Total
 
$
1,208

 
 
1,891

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

 
 
7,921

Less: Accumulated depreciation
 
4,396

 
 
4,617

     Total
 
$
2,931

 
 
3,304

Goodwill by business segment
 
 
 
Automation Solutions
 
$
3,160

 
 
4,545

 
 
 
 
 
 
Climate Technologies
 
553

 
 
555

Tools & Home Products
 
196

 
 
196

Commercial & Residential Solutions
 
749

 
 
751

 
 
 
 
 
 
     Total
 
$
3,909

 
 
5,296



6

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

The increase in the balances above, including goodwill, is primarily due to the valves & controls acquisition. See Note 11.
 
Sept 30, 2016
 
June 30, 2017
Accrued expenses include the following
 
 
 
 
 
Employee compensation
 
$
431

 
 
506

Customer advanced payments
 
$
433

 
 
531

Product warranty
 
$
106

 
 
111

 
Sept 30, 2016
 
June 30, 2017
Other liabilities
 
 
 
 
 
Pension and postretirement liabilities
 
$
1,037

 
 
941

Deferred income taxes
 
210

 
 
426

Other
 
482

 
 
846

     Total
 
$
1,729

 
 
2,213


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

4.
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of June 30, 2017, the notional amount of foreign currency hedge positions was approximately $1.4 billion, and commodity hedge contracts totaled approximately $98 million (primarily 45 million pounds of copper and aluminum). All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of June 30, 2017 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting. The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and nine months ended June 30, 2017 and 2016 (in millions):
 
 
 
 
Into Earnings
 
Into OCI
 
 
 
 
3rd Quarter
 
Nine Months
 
3rd Quarter
 
Nine Months
Gains (Losses)
 
Location
 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

Commodity
 
Cost of sales
 
$
(10
)
 
4

 
(30
)
 
6

 

 
2

 
(10
)
 
17

Foreign currency
 
Sales, cost of sales
 
(12
)
 

 
(27
)
 
(17
)
 
(18
)
 
10

 
(25
)
 
32

Foreign currency
 
Other deductions, net
 
(9
)
 
(22
)
 
(16
)
 
(22
)
 
 
 
 
 
 
 
 
     Total
 
 
 
$
(31
)
 
(18
)
 
(73
)
 
(33
)
 
(18
)
 
12

 
(35
)
 
49

Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the three and nine months ended June 30, 2017 and 2016.
Fair Value Measurement – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of June 30, 2017, the fair value of long-term debt was $4,388 million, which exceeded the carrying value by $320 million. At June 30, 2017, the fair values of commodity contracts and foreign currency contracts were reported in other current assets and accrued expenses. Valuations of derivative contract positions are summarized below (in millions):  
 
September 30, 2016
 
June 30, 2017
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Foreign Currency
 
$
7

 
49

 
20

 
10

Commodity
 
$
2

 
4

 
9

 



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 pre-established levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The maximum amount that could potentially have been required was $3 million. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company as of June 30, 2017.

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

 
 
50

 
 
7,618

Net earnings
 
1,014

 
 
26

 
 
1,040

Other comprehensive income (loss)
 
424

 
 
(2
)
 
 
422

Cash dividends
 
(930
)
 
 
(18
)
 
 
(948
)
Stock plans
 
(110
)
 
 

 
 
(110
)
Balance at June 30, 2017
 
$
7,966

 
 
56

 
 
8,022


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

 
 
2017

 
 
2016

 
 
2017

Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
   Beginning balance
 
$
(651
)
 
 
(655
)
 
 
(622
)
 
 
(812
)
   Other comprehensive income (loss) before reclassifications
 
(10
)
 
 
75

 
 
(39
)
 
 
(153
)
   Reclassified to gain/loss on sale of businesses
 

 
 

 
 

 
 
385

   Ending balance
 
(661
)
 
 
(580
)
 
 
(661
)
 
 
(580
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement
 
 
 
 
 
 
 
 
 
 
 
   Beginning balance
 
(899
)
 
 
(1,042
)
 
 
(952
)
 
 
(1,162
)
   Amortization of deferred actuarial losses into earnings
 
25

 
 
35

 
 
78

 
 
105

   Reclassified to gain/loss on sale of businesses
 

 
 

 
 

 
 
50

   Ending balance
 
(874
)
 
 
(1,007
)
 
 
(874
)
 
 
(1,007
)
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
   Beginning balance
 
(32
)
 
 
7

 
 
(43
)
 
 
(25
)
   Deferral of gains (losses) arising during the period
 
(11
)
 
 
7

 
 
(22
)
 
 
30

   Reclassification of realized (gains) losses to sales and cost of sales
 
14

 
 
(2
)
 
 
36

 
 
7

   Ending balance
 
(29
)
 
 
12

 
 
(29
)
 
 
12

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
$
(1,564
)
 
 
(1,575
)
 
 
(1,564
)
 
 
(1,575
)
 
 
 
 
 
 
 
 
 
 
 
 
Activity above is shown net of income taxes for the three and nine months ended June 30, 2017 and 2016, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(18), $(15), $(54) and $(43); pension and postretirement divestiture: $-, $- , $(22) and $- ; deferral of cash flow hedging gains (losses): $(5), $7, $(19) and $13; reclassification of realized cash flow hedging (gains) losses: $2, $(8), $(4) and $(21).


8

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

7.
Total periodic pension and postretirement expense is summarized below (in millions):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2016
 
 
2017
 
 
2016

 
 
2017

Service cost
 
$
22

 
 
21

 
 
67

 
 
63

Interest cost
 
50

 
 
42

 
 
149

 
 
126

Expected return on plan assets
 
(88
)
 
 
(86
)
 
 
(264
)
 
 
(258
)
Net amortization
 
40

 
 
53

 
 
121

 
 
159

Total
 
$
24

 
 
30

 
 
73

 
 
90


8.
Other deductions, net are summarized below (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2016
 
 
 
2017

 
 
2016

 
 
2017

 
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangibles
 
$
22

 
 
34

 
 
66

 
 
77

Restructuring costs
 
13

 
 
21

 
 
31

 
 
45

Other
 
4

 
 
32

 
 
62

 
 
81

Total
 
$
39

 
 
87

 
 
159

 
 
203


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

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 $85 million, of which approximately $35 million relates to the valves & controls business. The full year expense includes $45 million incurred to date, as well as costs to complete actions initiated before the end of the third quarter and actions anticipated to be approved and initiated during the remainder of the year. Costs for the three and nine months ended June 30, 2017 largely relate to restructuring of the global cost structure consistent with the current level of economic activity, as well as the redeployment of resources for future growth.

Restructuring expense by business segment follows (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2016
 
 
2017
 
 
2016
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Automation Solutions
 
$
9

 
 
20

 
 
22

 
 
35

 
 
 
 
 
 
 
 
 
 
 
 
Climate Technologies
 
1

 
 
1

 
 
4

 
 
8

Tools & Home Products
 

 
 

 
 
2

 
 
1

Commercial & Residential Solutions
 
1

 
 
1

 
 
6

 
 
9

 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
3

 
 

 
 
3

 
 
1

 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13

 
 
21

 
 
31

 
 
45


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



9

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

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

 
 
26

 
 
22

 
 
48

Lease and other contract terminations
 
5

 
 

 
 
2

 
 
3

Asset write-downs
 

 
 
2

 
 
2

 
 

Vacant facility and other shutdown costs
 
3

 
 
4

 
 
5

 
 
2

Start-up and moving costs
 
2

 
 
13

 
 
11

 
 
4

Total
 
$
54

 
 
45

 
 
42

 
 
57

 

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


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

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automation Solutions
$
2,176

 
2,440

 
354

 
378

 
6,532

 
6,524

 
1,037

 
1,032

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Climate Technologies
1,101

 
1,187

 
287

 
305

 
2,880

 
3,104

 
646

 
715

Tools & Home Products
400

 
415

 
97

 
97

 
1,186

 
1,210

 
274

 
281

Commercial & Residential Solutions
1,501

 
1,602

 
384

 
402

 
4,066

 
4,314

 
920

 
996

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Differences in accounting methods
 
 
 
 
47

 
38

 
 
 
 
 
138

 
106

Corporate and other
 
 
 
 
(83
)
 
(158
)
 
 
 
 
 
(314
)
 
(358
)
Eliminations/Interest
(3
)
 
(3
)
 
(46
)
 
(39
)
 
(8
)
 
(9
)
 
(139
)
 
(126
)
     Total
$
3,674

 
4,039

 
656

 
621

 
10,590

 
10,829

 
1,642

 
1,650

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

Automation Solutions sales by major product offering are summarized below (in millions):
 
Three Months Ended June 30,
 
 
Nine Months Ended June 30,
 
 
2016

 
 
2017

 
 
2016

 
 
2017

 
 
 
 
 
 
 
 
 
 
 
 
Measurement & Analytical Instrumentation
 
$
747

 
 
744

 
 
2,270

 
 
2,162

Valves, Actuators & Regulators
 
522

 
 
772

 
 
1,552

 
 
1,718

Industrial Solutions
 
403

 
 
430

 
 
1,186

 
 
1,216

Process Control Systems & Solutions
 
504

 
 
494

 
 
1,524

 
 
1,428

     Total
 
$
2,176

 
 
2,440

 
 
6,532

 
 
6,524


11.
On April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business for $2.960 billion, net of cash acquired of $207 million, subject to certain post-closing adjustments. This business, with sales of approximately $1.6 billion for the trailing twelve months ended March 2017, is a manufacturer of control, isolation and pressure relief valves and actuators, and complements the Valves, Actuators & Regulators product offering within Automation Solutions. The Company recognized goodwill of $1,373 million (none of which is expected to be tax deductible), and other identifiable intangible assets of $988 million, primarily customer relationships and intellectual property with a weighted-average life of approximately 15 years. The Company also acquired two smaller businesses in the Automation Solutions segment. Total cash paid for all businesses was $3.0 billion, net of cash acquired.



11

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

The purchase price of the valves & controls business was preliminarily allocated to assets and liabilities as follows. Valuations of acquired assets and liabilities are in-process and subject to refinement.
Accounts receivable
 
$
363

Inventory
 
562

Other current assets
 
27

Property, plant & equipment
 
405

Goodwill
 
1,373

Intangibles
 
988

Other assets
 
287

Assets held-for-sale, including deferred taxes
 
38

Total assets
 
4,043

 
 
 
Accounts payable
 
119

Other current liabilities
 
308

Deferred taxes and other liabilities
 
656

Cash paid, net of cash acquired
 
$
2,960


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

Pro Forma Financial Information
The following unaudited proforma consolidated condensed financial results of operations are presented as if the acquisition of the valves & controls business occurred on October 1, 2015. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition occurred as of that time ($ in millions, except per share amounts).     
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
Net sales
$
4,101

 
4,132

 
11,864

 
11,677

Net earnings from continuing operations common stockholders
$
436

 
426

 
972

 
1,155

Diluted earnings per share from continuing operations
$
0.67

 
0.66

 
1.50

 
1.78

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

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


12

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

The financial results of the network power systems and power generation, motors and drives businesses reported as discontinued operations for the three and nine months ended June 30, 2017 and 2016 were as follows:
 
 
Three Months Ended June 30,
 
 
Network
Power Systems
 
Power
Generation, Motors and Drives
 
Total
 
 
2016
 
2016
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
$
1,108

 
 
 
351

 
 
 
1,459

 
Cost of sales
 
 
693

 
 
 
268

 
 
 
961

 
SG&A
 
 
280

 
 
 
71

 
 
 
351

 
Other (income) deductions, net
 
 
49

 
 
 
13

 
 
 
62

 
Earnings (Loss) before income taxes
 
 
86

 
 
 
(1
)
 
 
 
85

 
Income taxes
 
 
45

 
 
 
2

 
 
 
47

 
Earnings (Loss), net of tax
 
 
$
41

 
 
 
(3
)
 
 
 
38

 

Discontinued operations for the third quarter of 2017 included net earnings of $6 million, primarily reflecting post-closing adjustments. In 2016, earnings of $38 million included net earnings from operations of $75 million, $13 million of income tax expense for repatriation of cash, and $24 million after-tax for professional fees and other costs.
 
 
Nine Months Ended June 30,
 
 
Network Power Systems
 
Power Generation, Motors and Drives
 
Total
 
 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,171

 
630

 
1,030

 
407

 
4,201

 
1,037

Cost of sales
 
1,982

 
394

 
792

 
307

 
2,774

 
701

SG&A
 
829

 
180

 
208

 
83

 
1,037

 
263

Other (income) deductions, net
 
141

 
(482
)
 
36

 
53

 
177

 
(429
)
Earnings (Loss) before income taxes
 
219

 
538

 
(6
)
 
(36
)
 
213

 
502

Income taxes
 
125

 
547

 
2

 
88

 
127

 
635

Earnings (Loss), net of tax
 
$
94

 
(9
)
 
(8
)
 
(124
)
 
86

 
(133
)

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



13

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

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

 
 
 
290

 
 
 
1,492

 
   Inventories
 
381

 
 
 
197

 
 
 
578

 
   Other current assets
 
108

 
 
 
22

 
 
 
130

 
   Property plant & equipment, net
 
352

 
 
 
259

 
 
 
611

 
   Goodwill
 
2,111

 
 
 
580

 
 
 
2,691

 
   Other noncurrent assets
 
473

 
 
 
55

 
 
 
528

 
Total assets held-for-sale
 
$
4,627

 
 
 
1,403

 
 
 
6,030

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
   Accounts payable
 
$
664

 
 
 
176

 
 
 
840

 
   Other current liabilities
 
620

 
 
 
141

 
 
 
761

 
   Deferred taxes and other noncurrent liabilities
 
227

 
 
 
99

 
 
 
326

 
Total liabilities held-for-sale
 
$
1,511

 
 
 
416

 
 
 
1,927

 
    
Net cash from operating and investing activities for the network power systems and power generation, motors and drives businesses for the nine months ended June 30, 2017 and 2016 were as follows:            
 
 
Network Power Systems
 
Power Generation,
Motors and Drives
 
Total
 
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash from operating activities
 
$
245

 
(572
)
 
35

 
(155
)
 
280

 
(727
)
Cash from investing activities
 
$
(23
)
 
3,927

 
(32
)
 
1,095

 
(55
)
 
5,022


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




14

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Items 2 and 3.

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

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

Third quarter results reflected favorable trends in key served markets across the Company's businesses. Sales from continuing operations were $4,039 million, up 10 percent, supported by the acquisition of the valves & controls business, which added 7 percent. Underlying sales increased 4 percent reflecting favorable trends in energy related, general industrial and global construction markets, as well as strong demand in HVAC and refrigeration markets.
Earnings from continuing operations common stockholders were $407 million, down 8 percent, and diluted earnings per share from continuing operations were $0.63, down 7 percent. The valves & controls business deducted 7 percent ($0.05 per share), primarily due to first year acquisition accounting charges. Net earnings common stockholders were $413 million, down 14 percent, and diluted earnings per share were $0.64, down 14 percent, including the impact of discontinued operations.
RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the third quarter ended June 30, 2017, compared with the third quarter ended June 30, 2016.
Three Months Ended June 30
2016
 
2017
 
Change
(dollars in millions, except per share amounts)
 

 
 

 
 
 
 
 
 
 
 
Net sales
$
3,674

 
4,039

 
10
 %
Gross profit
$
1,593

 
1,678

 
5
 %
Percent of sales
43.4
%
 
41.5
%
 
 

 
 
 
 
 
 
SG&A
$
852

 
931

 
 

Percent of sales
23.2
%
 
23.0
%
 
 

Other deductions, net
$
39

 
87

 
 

Interest expense, net
$
46

 
39

 
 

 
 
 
 
 
 
Earnings from continuing operations before income taxes
$
656

 
621

 
(5
)%
Percent of sales
17.8
%
 
15.4
%
 
 

Earnings from continuing operations common stockholders
$
441

 
407

 
(8
)%
Net earnings common stockholders
$
479

 
413

 
(14
)%
Percent of sales
13.0
%
 
10.2
%
 
 

 
 
 
 
 
 
Diluted EPS - Earnings from continuing operations
$
0.68

 
0.63

 
(7
)%
Diluted EPS - Net earnings
$
0.74

 
0.64

 
(14
)%

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


15

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

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

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

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

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

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

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

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

Discontinued Operations

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

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


16

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

Automation Solutions
Three Months Ended June 30
2016
 
2017
 
Change
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales
$
2,176

 
2,440

 
12
%
Earnings
$
354

 
378

 
7
%
     Margin
16.2
%
 
15.5
%
 
 

Sales by Major Product Offering
 
 
 
 
 
Measurement & Analytical Instrumentation
$
747

 
744

 
(1
)%
Valves, Actuators & Regulators
522

 
772

 
48
 %
Industrial Solutions
403

 
430

 
7
 %
Process Control Systems & Solutions
504

 
494

 
(2
)%
     Total
$
2,176

 
2,440

 
12
 %

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

Commercial & Residential Solutions
Three Months Ended June 30
2016
 
2017
 
Change
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
Climate Technologies
$
1,101

 
1,187

 
8
%
Tools & Home Products
400

 
415

 
4
%
     Total
$
1,501

 
1,602

 
7
%
 
 
 
 
 
 
Earnings:
 
 
 
 
 
Climate Technologies
$
287

 
305

 
6
%
Tools & Home Products
97

 
97

 
%
     Total
$
384

 
402

 
5
%
     Margin
25.6
%
 
25.1
%
 
 

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


17

EMERSON ELECTRIC CO. AND SUBSIDIARIES
 FORM 10-Q

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

RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the nine months ended June 30, 2017, compared with the nine months ended June 30, 2016.
Nine Months Ended June 30
2016
 
2017
 
Change
(dollars in millions, except per share amounts)
 

 
 

 
 
 
 
 
 
 
 
Net sales
$
10,590

 
10,829

 
2
 %
Gross profit
$
4,549

 
4,600

 
1
 %
Percent of sales
43.0
%
 
42.5
%
 
 

 
 
 
 
 
 
SG&A
$
2,609

 
2,621

 
 

Percent of sales
24.7
%
 
24.2
%
 
 

Other deductions, net
$
159

 
203