Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. & SUBSIDIARIES
Years ended September 30
(Dollars in millions, except per share amounts or where noted)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with current year presentation.
In the first quarter of 2015, the Company adopted updates to ASC 205,
Presentation of Financial Statements
, and ASC 360,
Property, Plant and Equipment
, regarding the reporting of discontinued operations. These updates raised the threshold for reporting discontinued operations to a strategic business shift having a major effect on an entity's operations and financial results. The updates also added disclosures for disposals of business units qualifying for discontinued presentation, and for some dispositions that do not qualify as discontinued operations but are still considered individually significant components of the entity. The Company's previously announced strategic portfolio repositioning actions resulted in agreements to sell the network power systems business and the power generation, motors and drives businesses. The results of operations for these businesses have been reclassified into discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. See Note 4.
In the first quarter of 2014, the Company adopted revisions to ASC 220,
Comprehensive Income
, which require disclosure of reclassifications into earnings from accumulated other comprehensive income (AOCI) and other current period activity. There is no change to the items reported in AOCI or when those items should be reclassified into earnings. The revisions did not materially impact the Company’s financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its controlled affiliates. Intercompany transactions, profits and balances are eliminated in consolidation. Investments of
20 percent
to
50 percent
of the voting shares of other entities are accounted for by the equity method. Investments in publicly traded companies of less than
20 percent
are carried at fair value, with changes in fair value reflected in accumulated other comprehensive income. Investments in nonpublicly traded companies of less than
20 percent
are carried at cost.
Foreign Currency Translation
The functional currency for most of the Company's non-U.S. subsidiaries is the local currency. Adjustments resulting from translating local currency financial statements into U.S. dollars are reflected in accumulated other comprehensive income.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The majority of inventory is valued based on standard costs that approximate average costs, while the remainder is principally valued on a first-in, first-out basis. Cost standards are revised at the beginning of each fiscal year. The annual effect of resetting standards plus any operating variances incurred during each period are allocated to inventories and recognized in cost of sales as product is sold. Following are the components of inventory as of September 30:
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|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Finished products
|
|
$
|
418
|
|
|
382
|
|
Raw materials and work in process
|
|
847
|
|
|
826
|
|
Total inventories
|
|
$
|
1,265
|
|
|
1,208
|
|
Fair Value Measurement
ASC 820,
Fair Value Measurement
, establishes a formal hierarchy and framework for measuring certain financial statement items at fair value, and requires disclosures about fair value measurements and the reliability of valuation inputs. Under ASC 820, measurement assumes the transaction to sell an asset or transfer a liability occurs in the principal or at least the most advantageous market for that asset or liability. Within the hierarchy, Level 1 instruments use observable market prices for an identical item in active markets and have the most reliable valuations. Level 2 instruments are valued through broker/dealer quotation or other approaches using market-observable inputs for similar items in active markets, including forward and spot prices, interest rates and volatilities. Level 3 instruments are valued using inputs not observable in an active market, such as company-developed future cash flow estimates, and are considered the least reliable. Valuations for all of the Company's financial instruments fall within Level 2. The fair value of the Company's long-term debt is Level 2, estimated using current interest rates and pricing from financial institutions and other market sources for debt with similar maturities and characteristics.
Property, Plant And Equipment
The Company records investments in land, buildings, and machinery and equipment at cost. Depreciation is computed principally using the straight-line method over estimated service lives, which for principal assets are
30
to
40 years
for buildings and
8
to
12 years
for machinery and equipment. Long-lived tangible assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized based on estimated fair values if the sum of estimated future undiscounted cash flows of the related assets is less than the carrying values. The components of property, plant and equipment as of September 30 follow:
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|
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|
|
|
|
|
|
2015
|
|
|
2016
|
|
Land
|
|
$
|
190
|
|
|
210
|
|
Buildings
|
|
1,762
|
|
|
1,867
|
|
Machinery and equipment
|
|
4,774
|
|
|
4,932
|
|
Construction in progress
|
|
379
|
|
|
318
|
|
Property, plant and equipment, at cost
|
|
7,105
|
|
|
7,327
|
|
Less: Accumulated depreciation
|
|
4,176
|
|
|
4,396
|
|
Property, plant and equipment, net
|
|
$
|
2,929
|
|
|
2,931
|
|
Goodwill and Other Intangible Assets
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A reporting unit is an operating segment as defined in ASC 280,
Segment Reporting
, or a business one level below an operating segment if discrete financial information for that business unit is prepared and regularly reviewed by the segment manager. The Company conducts annual impairment tests of goodwill in the fourth quarter. If an initial assessment indicates it is more likely than not goodwill might be impaired, it is evaluated by comparing the reporting unit's estimated fair value to its carrying value. Goodwill is also tested for impairment between annual tests if events or circumstances indicate the fair value of a unit may be less than its carrying value. If the carrying amount exceeds the estimated fair value, impairment is recognized to the extent that recorded goodwill exceeds the implied fair value of that goodwill. Estimated fair values of reporting units are Level 3 measures and are developed generally under an income approach that discounts estimated future cash flows using risk-adjusted interest rates.
All of the Company's identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives. Identifiable intangibles consist of intellectual property such as patents and trademarks, customer relationships and capitalized software. Identifiable intangibles are also subject to evaluation for potential impairment if events or circumstances indicate the carrying amount may not be recoverable. See Note 7.
Product Warranty
Warranties vary by product line and are competitive for the markets in which the Company operates. Warranties generally extend for a period of
one
to
two
years from the date of sale or installation. Provisions for warranty are determined primarily based on historical warranty cost as a percentage of sales or a fixed amount per unit sold based on failure rates, adjusted for specific problems that may arise. Product warranty expense is less than
1 percent
of sales.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of manufactured products and records the sale when products are shipped or delivered, title and risk of loss pass to the customer, and collection is reasonably assured. In certain limited circumstances, revenue is recognized using the percentage-of-completion method as performance occurs, or in accordance with ASC 985-605 related to software. Management believes that all relevant criteria and conditions are considered when recognizing revenue.
Sales arrangements sometimes involve delivering multiple elements. In these instances, the revenue assigned to each element is based on vendor-specific objective evidence, third-party evidence or a management estimate of the relative selling price. Revenue is recognized individually for delivered elements if they have value to the customer on a stand-alone basis and the performance of the undelivered items is probable and substantially in the Company's control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment. Approximately
5 percent
of the Company's revenues from continuing operations arise from qualifying sales arrangements that include the delivery of multiple elements, principally in the Process Management segment. The vast majority of these deliverables are tangible products, with a smaller portion attributable to installation, service or maintenance. Generally, contract duration is short term, and cancellation, termination or refund provisions apply only in the event of contract breach and have historically not been invoked.
Derivatives and Hedging
In the normal course of business, the Company is exposed to changes in interest rates, foreign currency exchange rates and commodity prices due to its worldwide presence and diverse business profile. The Company's foreign currency exposures relate to transactions denominated in currencies that differ from the functional currencies of its business units, primarily in euros, Mexican pesos, Singapore dollars and Indian rupees. Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum and related products. As part of the Company's risk management strategy, derivative instruments are selectively used in an effort to minimize the impact of these exposures. Foreign exchange forwards and options are utilized to hedge foreign currency exposures impacting sales or cost of sales transactions, firm commitments and the fair value of assets and liabilities, while swap and option contracts may be used to minimize the effect of commodity price fluctuations on the cost of sales. All derivatives are associated with specific underlying exposures and the Company does not hold derivatives for trading or speculative purposes. The duration of hedge positions is generally
two years
or less.
All derivatives are accounted for under ASC 815,
Derivatives and Hedging
, and recognized at fair value. For derivatives hedging variability in future cash flows, the effective portion of any gain or loss is deferred in stockholders' equity and recognized when the underlying hedged transaction impacts earnings. The majority of the Company's derivatives that are designated as hedges and qualify for deferral accounting are cash flow hedges. For derivatives hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in earnings each period. Currency fluctuations on non-U.S. dollar obligations that have been designated as hedges of non-U.S. dollar net asset exposures are reported in equity. To the extent that any hedge is not fully effective at offsetting changes in the underlying hedged item, there could be a net earnings impact. The Company also uses derivatives to hedge economic exposures that do not receive deferral accounting under ASC 815. The underlying exposures for these hedges relate primarily to purchases of commodity-based components used in the Company's manufacturing processes, and the revaluation of certain foreign-currency-denominated assets and liabilities. Gains or losses from the ineffective portion of any hedge, as well as any gains or losses on derivative instruments not designated as hedges, are recognized in the income statement immediately.
Counterparties to derivative arrangements are companies with high credit ratings, and the Company has bilateral collateral arrangements with them for which credit rating-based posting thresholds vary depending on the arrangement. If credit ratings on the Company's debt fall below preestablished levels, counterparties can require immediate full collateralization on all instruments in net liability positions.
No
collateral was posted with counterparties and
none
was held by the Company at year end. If contractual thresholds had been exceeded, the maximum collateral the Company could have been required to post was
$47
. The Company can also demand full collateralization of instruments in net asset positions should any of the Company's counterparties' credit ratings fall below certain thresholds. Risk from credit loss when derivatives are in asset positions is not considered material. The Company has master netting arrangements in place with its counterparties that allow the offsetting of certain derivative-related amounts receivable and payable when settlement occurs in the same period. Accordingly, counterparty balances are netted in the consolidated balance sheet and are reported in other current assets or accrued expenses as appropriate, depending on positions with counterparties as of the balance sheet date. See Note 8.
Income Taxes
The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and tax rates currently enacted in each jurisdiction. Certain income and expense items are recognized in different time periods for financial reporting and income tax filing purposes, and deferred income taxes are provided for the effect of temporary differences. The Company also provides for U.S. federal income taxes, net of available foreign tax credits, on earnings intended to be repatriated from non-U.S. locations. No provision has been made for U.S. income taxes on approximately
$5.2 billion
of undistributed earnings of non-U.S. subsidiaries as of September 30, 2016, as these earnings are considered permanently invested or otherwise indefinitely retained for continuing international operations. Recognition of U.S. taxes on undistributed non-U.S. earnings would be triggered by a management decision to repatriate those earnings. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. See Note 14.
(2) WEIGHTED-AVERAGE COMMON SHARES
Basic earnings per common share consider only the weighted-average of common shares outstanding while diluted earnings per common share also consider the dilutive effects of stock options and incentive shares. Options to purchase approximately
13.3 million
,
5.9 million
and
4.6 million
shares of common stock were excluded from the computation of diluted earnings per share in 2016, 2015 and 2014, respectively, as the effect would have been antidilutive. Earnings allocated to participating securities were inconsequential for all years presented. Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (shares in millions):
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|
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|
|
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2014
|
|
|
2015
|
|
|
2016
|
|
Basic shares outstanding
|
700.2
|
|
|
673.3
|
|
|
644.0
|
|
Dilutive shares
|
3.9
|
|
|
3.2
|
|
|
2.8
|
|
Diluted shares outstanding
|
704.1
|
|
|
676.5
|
|
|
646.8
|
|
(3) ACQUISITIONS AND DIVESTITURES
The Company acquired
six
businesses in 2016,
four
in Process Management's final control and measurement devices businesses and
two
in Climate Technologies. Total cash paid for these businesses was
$132
, net of cash acquired. Annualized sales for these businesses were approximately
$51
in 2016. The Company recognized goodwill of
$83
(
$27
of which is expected to be tax deductible) and other identifiable intangible assets of
$50
, primarily customer relationships and intellectual property with a weighted-average life of approximately
9
years. Valuations of certain acquired assets and liabilities are in-process and subject to refinement. These acquisitions complement the existing segment portfolios and create incremental growth opportunities.
In the fourth quarter of 2016, the Company entered into an agreement to purchase Pentair's Valves & Controls business for
$3.15 billion
, subject to certain post-closing adjustments. This business, with sales of approximately
$1.6 billion
, is a manufacturer of control, isolation and pressure relief valves and actuators, and complements the Process Management segment's final control business. The transaction is expected to close by the end of calendar year 2016 or shortly thereafter, subject to customary closing conditions and various regulatory approvals.
The Company completed
eight
acquisitions in 2015,
seven
in Process Management and
one
in Commercial & Residential Solutions, which had combined annualized sales of approximately
$115
. Total cash paid for all businesses was
$324
, net of cash acquired. The Company recognized goodwill of
$178
(
$42
of which is expected to be tax deductible) and other intangible assets of
$128
, primarily customer relationships and intellectual property with a weighted-average life of approximately
10
years.
In January 2015, the Company completed the sale of its mechanical power transmission solutions business to Regal Beloit Corporation for
$1.4 billion
, and recognized a pretax gain from the transaction of
$939
(
$532
after-tax,
$0.78
per share). Assets and liabilities sold were as follows: current assets,
$182
(accounts receivable, inventories, other current assets); other assets,
$374
(property, plant and equipment, goodwill, other noncurrent assets); accrued expenses,
$56
(accounts payable, other current liabilities); and other liabilities,
$41
. Proceeds from the divestiture were used for share repurchase. This business was previously reported in the Industrial Automation segment, and had partial year sales in 2015 of
$189
and related pretax earnings of
$21
. Power transmission
solutions designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions.
On September 30, 2015, the Company sold its InterMetro commercial storage business to Ali Group of Italy for
$411
in cash and recognized a pretax gain from the transaction of
$100
(
$79
after-tax,
$0.12
per share). This business had annual sales of
$288
and pretax earnings of
$42
in 2015 and was reported in the Commercial & Residential Solutions segment. Assets and liabilities sold were as follows: current assets,
$62
(accounts receivable, inventories, other current assets); other assets,
$292
(property, plant and equipment, goodwill, other noncurrent assets); current liabilities,
$34
(accounts payable, other current liabilities); and other liabilities,
$9
. InterMetro is a leading manufacturer and supplier of storage and transport products in the food service, commercial products and health care industries.
In the first quarter of 2014, the Company acquired
100 percent
of Virgo Valves and Controls Limited and Enardo Holdings, both in the Process Management final control business. Virgo is a manufacturer of engineered valves and automation systems and Enardo is a manufacturer of tank and terminal safety equipment. Total cash paid for both businesses was approximately
$506
, net of cash acquired, and the Company also assumed
$76
of debt. Combined sales for Virgo and Enardo in 2014 were
$321
. Goodwill of
$323
(largely nondeductible) and identifiable intangible assets of
$178
, primarily customer relationships and patents and technology with weighted-average lives of approximately
12
years, were recognized from these transactions. The Company also acquired
four
other smaller businesses in 2014 for a total of approximately
$104
, net of cash acquired. Combined annual sales for these
four
businesses were approximately
$55
.
These acquisitions were complementary to the existing business portfolio.
In the second quarter of 2014, the Company acquired the remaining
44.5 percent
noncontrolling interest in Appleton Group (formally EGS Electrical Group), which is reported in Industrial Automation, for
$574
. Full ownership provides growth opportunities in the oil and gas and chemicals end markets by leveraging the Company's Process Management and international distribution channels. The transaction reduced noncontrolling interests
$101
and common stockholders' equity
$343
, and increased deferred tax assets
$130
. The transaction did not affect consolidated results of operations other than eliminating the noncontrolling interest's share of future earnings and distributions from this business. Sales for this electrical distribution business were
$542
in 2014.
In November 2013, the Company completed the divestiture of a
51 percent
controlling interest in Artesyn and received proceeds of
$264
, net of working capital adjustments. The Company retained an interest with a fair value of approximately
$60
, determined using a Level 3 option pricing model. A tax benefit of
$20
was recognized on completion of the transaction. Consolidated operating results for 2014 include sales of
$146
and a net loss of
$9
for this business through the closing date. As the Company retained a noncontrolling interest in this business, it was not classified as discontinued operations. Assets and liabilities held-for-sale at the closing date were: other current assets,
$367
(accounts receivable, inventories, other current assets); other assets,
$212
(property plant and equipment, goodwill, other noncurrent assets); and accrued expenses,
$255
(accounts payable and other liabilities). Prior to the divestiture, cash of
$376
(
$308
, after tax provided for in fiscal 2013) was repatriated from this business. In fiscal 2013, the Company initiated the purchase of
$600
of Emerson common stock in anticipation of the sale proceeds and the cash repatriation. The purchase of shares was completed in the first quarter of 2014.
In the fourth quarter of 2014, the Company sold its connectivity solutions business for
$99
in cash, and recognized a slight gain. This business reported 2014 sales of
$63
and pretax earnings of
$3
. Connectivity solutions offered industry-leading fiber optic, radio-frequency and microwave-coaxial technologies that safeguard network reliability.
The results of operations of the acquired businesses discussed above have been included in the Company's consolidated results of operations since the respective dates of acquisition.
(4) DISCONTINUED OPERATIONS
The Company previously announced strategic actions to streamline its portfolio, drive growth and accelerate value creation for shareholders. These plans consisted of divesting its network power systems business through a spinoff to shareholders or sale, and also exploring strategic alternatives, including potential sale, of its power generation, motors and drives businesses. As of July 29, 2016, the Company entered into an agreement to sell its network power systems business for
$4.0 billion
in cash, subject to certain post-closing adjustments, and will retain 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 and provides mission-critical infrastructure products and solutions and life cycle management services for vital applications in data centers,
communication networks, and commercial/industrial environments. Also, on July 30, 2016, the Company entered into an agreement to sell its power generation, motors and drives businesses for a value of
$1.2 billion
, representing cash plus assumption of certain postretirement liabilities by the buyer, subject to post-closing adjustments. These businesses were previously reported in the Industrial Automation segment, and provide low, medium and high voltage alternators and other power generation equipment and commercial and industrial motors and drives, which are used in a wide variety of manufacturing and industrial applications. Both transactions are expected to close by the end of calendar year 2016 or shortly thereafter, subject to customary closing conditions and regulatory approvals. The results of operations for these businesses have been reclassified into discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented.
The financial results of the network power systems business and the power generation, motors and drives businesses reported as discontinued operations for the years ending September 30, 2016, 2015 and 2014, were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Power Systems
|
|
Power Generation, Motors and Drives
|
|
Total
|
|
|
2014
|
|
2015
|
|
2016
|
|
2014
|
|
2015
|
|
2016
|
|
2014
|
|
2015
|
|
2016
|
Net sales
|
|
$
|
4,868
|
|
|
4,426
|
|
|
4,378
|
|
|
1,974
|
|
|
1,668
|
|
|
1,368
|
|
|
6,842
|
|
|
6,094
|
|
|
5,746
|
|
Cost of sales
|
|
3,012
|
|
|
2,810
|
|
|
2,708
|
|
|
1,434
|
|
|
1,244
|
|
|
1,033
|
|
|
4,446
|
|
|
4,054
|
|
|
3,741
|
|
SG&A
|
|
1,205
|
|
|
1,143
|
|
|
1,101
|
|
|
346
|
|
|
306
|
|
|
269
|
|
|
1,551
|
|
|
1,449
|
|
|
1,370
|
|
Other deductions, net
|
|
668
|
|
|
222
|
|
|
172
|
|
|
20
|
|
|
15
|
|
|
149
|
|
|
688
|
|
|
237
|
|
|
321
|
|
Earnings (Loss) before income taxes
|
|
(17
|
)
|
|
251
|
|
|
397
|
|
|
174
|
|
|
103
|
|
|
(83
|
)
|
|
157
|
|
|
354
|
|
|
314
|
|
Income taxes
|
|
163
|
|
|
134
|
|
|
218
|
|
|
48
|
|
|
27
|
|
|
51
|
|
|
211
|
|
|
161
|
|
|
269
|
|
Earnings (Loss), net of tax
|
|
$
|
(180
|
)
|
|
117
|
|
|
179
|
|
|
126
|
|
|
76
|
|
|
(134
|
)
|
|
(54
|
)
|
|
193
|
|
|
45
|
|
Net earnings from discontinued operations include separation costs to execute the portfolio repositioning of
$220
and
$52
for 2016 and 2015, respectively. These costs include income tax expense of
$143
in 2016 and
$42
in 2015 for repatriation of cash from these businesses, reorganization of their legal structures prior to sale, and basis differences for book and tax. Separation costs also include legal, consulting, investment banking and other expenses of
$77
and
$10
for 2016 and 2015, respectively. In addition, net earnings for 2016 include a loss of
$103
to write down the power generation, motors and drives businesses to the sales price less costs to sell, and lower expense of
$24
due to ceasing depreciation and amortization for the discontinued businesses held-for-sale. Earnings for 2014 include a noncash goodwill impairment charge of
$508
related to the network power systems business in Europe, which had been unable to meet its operating objectives due to a weak Western Europe economy and had an uncertain outlook.
Upon completion of the transactions, the Company preliminarily expects to recognize a pretax gain of approximately
$500
and to break even after-tax, subject to finalization of several matters including separation costs to complete the transactions. In addition, the Company may incur U.S. tax costs of approximately
$200
for repatriation of estimated sales proceeds of
$1.5 billion
expected to be received offshore in connection with the transactions. The Company's decision whether to repatriate these proceeds will be determined in connection with funding needs for the acquisition of Pentair's Valves & Controls non-U.S. operations.
The aggregate carrying amounts of the major classes of assets and liabilities classified as held-for-sale as of September 30, 2016 and 2015 are summarized as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Power Systems
|
|
Power Generation,
Motors and Drives
|
|
Total
|
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, less allowances
|
|
$
|
1,121
|
|
|
1,202
|
|
|
328
|
|
|
290
|
|
|
1,449
|
|
|
1,492
|
|
Inventories
|
|
386
|
|
|
381
|
|
|
196
|
|
|
197
|
|
|
582
|
|
|
578
|
|
Other current assets
|
|
90
|
|
|
108
|
|
|
15
|
|
|
22
|
|
|
105
|
|
|
130
|
|
Property plant & equipment, net
|
|
362
|
|
|
352
|
|
|
294
|
|
|
259
|
|
|
656
|
|
|
611
|
|
Goodwill
|
|
2,144
|
|
|
2,111
|
|
|
662
|
|
|
580
|
|
|
2,806
|
|
|
2,691
|
|
Other noncurrent assets
|
|
557
|
|
|
473
|
|
|
67
|
|
|
55
|
|
|
624
|
|
|
528
|
|
Total assets held-for-sale
|
|
$
|
4,660
|
|
|
4,627
|
|
|
1,562
|
|
|
1,403
|
|
|
6,222
|
|
|
6,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
611
|
|
|
664
|
|
|
210
|
|
|
176
|
|
|
821
|
|
|
840
|
|
Other current liabilities
|
|
599
|
|
|
620
|
|
|
146
|
|
|
141
|
|
|
745
|
|
|
761
|
|
Deferred taxes and other noncurrent liabilities
|
|
245
|
|
|
227
|
|
|
87
|
|
|
99
|
|
|
332
|
|
|
326
|
|
Total liabilities held-for-sale
|
|
$
|
1,455
|
|
|
1,511
|
|
|
443
|
|
|
416
|
|
|
1,898
|
|
|
1,927
|
|
The net cash provided by operating activities and net cash provided (used) by investing activities for the network power systems business and the power generation, motors and drives businesses for the years ending September 30, 2016, 2015 and 2014, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Power Systems
|
|
Power Generation,
Motors and Drives
|
|
Total
|
|
|
2014
|
|
2015
|
|
2016
|
|
2014
|
|
2015
|
|
2016
|
|
2014
|
|
2015
|
|
2016
|
Cash provided by operating activities
|
|
$
|
507
|
|
|
378
|
|
|
343
|
|
|
186
|
|
|
111
|
|
|
39
|
|
|
693
|
|
|
489
|
|
|
382
|
|
Cash used in investing activities
|
|
$
|
(57
|
)
|
|
(48
|
)
|
|
(33
|
)
|
|
(49
|
)
|
|
(40
|
)
|
|
(44
|
)
|
|
(106
|
)
|
|
(88
|
)
|
|
(77
|
)
|
Cash provided by operating activities in 2016 was reduced by payments of
$179
for separation costs.
(5) OTHER DEDUCTIONS, NET
|
|
|
|
|
|
|
|
|
|
|
Other deductions, net are summarized as follows:
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Amortization of intangibles (intellectual property and customer relationships)
|
$
|
95
|
|
|
94
|
|
|
84
|
|
Restructuring costs
|
39
|
|
|
138
|
|
|
96
|
|
Other
|
77
|
|
|
98
|
|
|
114
|
|
Total
|
$
|
211
|
|
|
330
|
|
|
294
|
|
Other is composed of several items, including foreign currency transaction gains and losses, bad debt expense, equity investment income and losses, litigation and other items. The increase in other for 2016 is primarily due to an unfavorable foreign currency transaction impact of
$67
, partially offset by lower litigation costs of
$30
and a
$21
gain on payments received related to dumping duties collected by U.S. Customs from 2006 through 2010, but not distributed to affected domestic producers until resolution of certain legal challenges to the U.S. Continued Dumping and Subsidy Offset Act. The increase in 2015 is primarily due to higher litigation costs of
$29
and an unfavorable foreign currency transaction impact of
$15
, partially offset by a favorable comparative effect from the
$34
Artesyn equity investment loss in 2014.
(6) RESTRUCTURING COSTS
Each year the Company incurs costs to size its businesses to levels appropriate for current economic conditions and to continually improve its cost structure and operational efficiency, deploy assets globally, and remain competitive on a worldwide basis. Costs result from numerous individual actions implemented across the Company's various operating units on an ongoing basis and can include costs for moving facilities to best-cost locations, restarting plants after relocation or geographic expansion to better serve local markets, reducing forcecount or the number of facilities, exiting certain product lines, and other costs resulting from asset deployment decisions. By category, shutdown costs include severance and benefits, stay bonuses, lease and other contract termination costs and asset write-downs. Vacant facility costs include security, maintenance, utilities and other costs. Start-up and moving costs include the costs of relocating fixed assets and employee training and relocation.
Restructuring expenses were
$96
,
$138
and
$39
, respectively, for
2016
,
2015
and
2014
. Restructuring activity accelerated in 2015 to address the slowdown in global capital spending and remained elevated in 2016 due to continued weakness globally and in connection with the Company's strategic portfolio repositioning activities. The Company currently expects
2017
restructuring expense to be approximately
$50
, including costs to complete actions initiated before the end of
2016
and for actions anticipated to be approved and initiated during
2017
.
The change in the liability for restructuring costs during the years ended September 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Expense
|
|
Utilized/Paid
|
|
2016
|
Severance and benefits
|
$
|
64
|
|
|
|
66
|
|
|
|
|
86
|
|
|
|
44
|
|
Lease and other contract terminations
|
1
|
|
|
|
9
|
|
|
|
|
5
|
|
|
|
5
|
|
Asset write-downs
|
—
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
—
|
|
Vacant facility and other shutdown costs
|
3
|
|
|
|
7
|
|
|
|
|
7
|
|
|
|
3
|
|
Start-up and moving costs
|
2
|
|
|
|
10
|
|
|
|
|
10
|
|
|
|
2
|
|
Total
|
$
|
70
|
|
|
|
96
|
|
|
|
|
112
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
Expense
|
|
Utilized/Paid
|
|
2015
|
Severance and benefits
|
$
|
16
|
|
|
|
110
|
|
|
|
|
62
|
|
|
|
64
|
|
Lease and other contract terminations
|
—
|
|
|
|
2
|
|
|
|
|
1
|
|
|
|
1
|
|
Asset write-downs
|
—
|
|
|
|
3
|
|
|
|
|
3
|
|
|
|
—
|
|
Vacant facility and other shutdown costs
|
—
|
|
|
|
9
|
|
|
|
|
6
|
|
|
|
3
|
|
Start-up and moving costs
|
1
|
|
|
|
14
|
|
|
|
|
13
|
|
|
|
2
|
|
Total
|
$
|
17
|
|
|
|
138
|
|
|
|
|
85
|
|
|
|
70
|
|
Restructuring costs by business segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Process Management
|
$
|
17
|
|
|
89
|
|
|
74
|
|
Industrial Automation
|
4
|
|
|
13
|
|
|
6
|
|
Climate Technologies
|
14
|
|
|
20
|
|
|
5
|
|
Commercial & Residential Solutions
|
2
|
|
|
11
|
|
|
2
|
|
Corporate
|
2
|
|
|
5
|
|
|
9
|
|
Total
|
$
|
39
|
|
|
138
|
|
|
96
|
|
Costs incurred in
2016
and
2015
related to the reduction and selective repositioning of the Company’s cost structure to address global economic weakness and in connection with the portfolio repositioning through facilities and forcecount rationalization in Europe and North America, primarily in Process Management. In 2014, costs primarily related to the deployment of resources to better serve local markets and higher growth areas, and were concentrated in Process Management and Climate Technologies in Asia and Europe. In
2016
, restructuring activities included actions to exit
19
production or office facilities worldwide and eliminate approximately
1,900
positions. Expenses incurred in 2015 and 2014 included actions to exit
12
and
8
facilities, and eliminate approximately
3,100
and
1,600
positions, respectively.
(7) GOODWILL AND OTHER INTANGIBLES
Purchases of businesses are accounted for under the acquisition method, with substantially all goodwill assigned to the reporting unit that acquires the business. Under an impairment test performed annually, if the carrying amount of a reporting unit exceeds its estimated fair value, impairment is recognized to the extent that the carrying amount of the unit's goodwill exceeds the implied fair value of the goodwill. Fair values of reporting units are Level 3 measures which are estimated generally using an income approach that discounts future cash flows using risk-adjusted interest rates, as well as earnings multiples or other techniques as warranted. Fair values are subject to changes in underlying economic conditions. See Note 3 for further discussion of changes in goodwill related to acquisitions and divestitures.
The change in the carrying value of goodwill by business segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Process Management
|
|
|
Industrial Automation
|
|
|
Climate Technologies
|
|
|
Commercial & Residential Solutions
|
|
|
|
|
|
|
|
|
Total
|
|
Balance, September 30, 2014
|
$
|
2,701
|
|
|
607
|
|
|
500
|
|
|
430
|
|
|
4,238
|
|
Acquisitions
|
176
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
178
|
|
Divestitures
|
0
|
|
(213
|
)
|
|
0
|
|
(228
|
)
|
|
(441
|
)
|
Foreign currency
translation and other
|
(87
|
)
|
|
(25
|
)
|
|
(8
|
)
|
|
(8
|
)
|
|
(128
|
)
|
Balance, September 30, 2015
|
2,790
|
|
|
369
|
|
|
492
|
|
|
196
|
|
|
3,847
|
|
Acquisitions
|
39
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
83
|
|
Foreign currency
translation and other
|
(19
|
)
|
|
2
|
|
|
(4
|
)
|
|
—
|
|
|
(21
|
)
|
Balance, September 30, 2016
|
$
|
2,810
|
|
|
371
|
|
|
532
|
|
|
196
|
|
|
3,909
|
|
The gross carrying amount and accumulated amortization of identifiable intangible assets by major class follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
Intellectual Property
|
|
Capitalized Software
|
|
Total
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Gross carrying amount
|
$
|
591
|
|
|
580
|
|
|
675
|
|
|
730
|
|
|
1,018
|
|
|
1,071
|
|
|
2,284
|
|
|
2,381
|
|
Less: Accumulated amortization
|
247
|
|
|
286
|
|
|
361
|
|
|
393
|
|
|
738
|
|
|
800
|
|
|
1,346
|
|
|
1,479
|
|
Net carrying amount
|
$
|
344
|
|
|
294
|
|
|
314
|
|
|
337
|
|
|
280
|
|
|
271
|
|
|
938
|
|
|
902
|
|
Intangible asset amortization expense for
2016
,
2015
and
2014
was
$177
,
$174
and
$167
, respectively. Based on intangible asset balances as of
September 30, 2016
, amortization expense is expected to approximate
$172
in
2017
,
$154
in
2018
,
$128
in
2019
,
$105
in
2020
and
$88
in
2021
.
(8) FINANCIAL INSTRUMENTS
Hedging Activities
As of
September 30, 2016
, the notional amount of foreign currency hedge positions was approximately
$1.4 billion
, while commodity hedge contracts totaled approximately
51 million
pounds (
$103
) of copper and aluminum. All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of
September 30, 2016
are expected to be recognized over the next
12 months
as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting.
Amounts included in earnings and other comprehensive income follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) to Earnings
|
|
Gain (Loss) to OCI
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
Cost of sales
|
|
$
|
(12
|
)
|
|
(24
|
)
|
|
(35
|
)
|
|
(16
|
)
|
|
(43
|
)
|
|
(9
|
)
|
Foreign currency
|
Sales, cost of sales
|
|
10
|
|
|
(12
|
)
|
|
(41
|
)
|
|
15
|
|
|
(61
|
)
|
|
(38
|
)
|
Foreign currency
|
Other deductions, net
|
|
(3
|
)
|
|
14
|
|
|
(27
|
)
|
|
|
|
|
|
|
Total
|
|
|
$
|
(5
|
)
|
|
(22
|
)
|
|
(103
|
)
|
|
(1
|
)
|
|
(104
|
)
|
|
(47
|
)
|
Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial in all years shown.
Fair Value Measurement
The estimated fair value of long-term debt was
$4,806
and
$4,936
, respectively, as of
September 30, 2016
and
2015
, which exceeded the carrying value by
$477
and
$356
, respectively. As of
September 30, 2016
, the fair value of commodity contracts and foreign currency contracts was reported in other current assets and accrued expenses. Valuations of derivative contract positions as of September 30 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2016
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Foreign currency
|
|
$
|
30
|
|
|
65
|
|
|
7
|
|
|
49
|
|
Commodity
|
|
$
|
—
|
|
|
29
|
|
|
2
|
|
|
4
|
|
(9) SHORT-TERM BORROWINGS AND LINES OF CREDIT
Short-term borrowings and current maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Current maturities of long-term debt
|
|
$
|
291
|
|
|
267
|
|
Commercial paper
|
|
2,261
|
|
|
2,317
|
|
Total
|
|
$
|
2,552
|
|
|
2,584
|
|
|
|
|
|
|
Interest rate for weighted-average short-term borrowings at year end
|
|
0.2%
|
|
0.5%
|
The Company routinely issues commercial paper as a source of short-term financing. In April 2014, the Company entered into a
$3.5 billion
five-year revolving backup credit facility with various banks, which replaced a December 2010
$2.75 billion
facility. The credit facility is maintained to support general corporate purposes, including commercial paper borrowing. The Company has not incurred any borrowings under this or previous facilities. The credit facility contains no financial covenants and is not subject to termination based on a change of credit rating or material adverse changes. The facility is unsecured and may be accessed under various interest rate and currency denomination alternatives at the Company's option. Fees to maintain the facility are immaterial.
(10) LONG-TERM DEBT
The details of long-term debt follow:
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
4.75% notes due October 2015
|
$
|
250
|
|
|
—
|
|
5.125% notes due December 2016
|
250
|
|
|
250
|
|
5.375% notes due October 2017
|
250
|
|
|
250
|
|
5.25% notes due October 2018
|
400
|
|
|
400
|
|
5.0% notes due April 2019
|
250
|
|
|
250
|
|
4.875% notes due October 2019
|
500
|
|
|
500
|
|
4.25% notes due November 2020
|
300
|
|
|
300
|
|
2.625% notes due December 2021
|
500
|
|
|
500
|
|
2.625% notes due February 2023
|
500
|
|
|
500
|
|
3.15% notes due June 2025
|
500
|
|
|
500
|
|
6.0% notes due August 2032
|
250
|
|
|
250
|
|
6.125% notes due April 2039
|
250
|
|
|
250
|
|
5.25% notes due November 2039
|
300
|
|
|
300
|
|
Other
|
80
|
|
|
79
|
|
Long-term debt
|
4,580
|
|
|
4,329
|
|
Less: Current maturities
|
291
|
|
|
267
|
|
Total, net
|
$
|
4,289
|
|
|
4,062
|
|
Long-term debt maturing during each of the four years after
2017
is
$270
,
$690
,
$502
and
$300
, respectively. Total interest paid on all debt was approximately
$209
,
$196
and
$210
in
2016
,
2015
and
2014
, respectively. During the year, the Company repaid
$250
of
4.75%
notes that matured in October 2015. In 2015, the Company repaid
$250
of
5.0%
notes that matured in December 2014 and
$250
of
4.125%
notes that matured in April 2015.
The Company maintains a universal shelf registration statement on file with the SEC under which it can issue debt securities, preferred stock, common stock, warrants, share purchase contracts or share purchase units without a predetermined limit. Securities can be sold in one or more separate offerings with the size, price and terms to be determined at the time of sale.
(11) RETIREMENT PLANS
Retirement plans expense includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost (benefits earned during the period)
|
$
|
59
|
|
|
69
|
|
|
59
|
|
|
32
|
|
|
37
|
|
|
26
|
|
Interest cost
|
182
|
|
|
182
|
|
|
148
|
|
|
53
|
|
|
46
|
|
|
39
|
|
Expected return on plan assets
|
(286
|
)
|
|
(303
|
)
|
|
(296
|
)
|
|
(58
|
)
|
|
(58
|
)
|
|
(52
|
)
|
Net amortization and other
|
153
|
|
|
174
|
|
|
166
|
|
|
18
|
|
|
20
|
|
|
17
|
|
Net periodic pension expense
|
108
|
|
|
122
|
|
|
77
|
|
|
45
|
|
|
45
|
|
|
30
|
|
Defined contribution plans
|
119
|
|
|
111
|
|
|
104
|
|
|
59
|
|
|
61
|
|
|
56
|
|
Total retirement plans expense
|
$
|
227
|
|
|
233
|
|
|
181
|
|
|
104
|
|
|
106
|
|
|
86
|
|
Beginning in 2016, the Company refined the method used to determine the service and interest cost components of pension expense for its U.S. retirement plans. The specific spot rates along the yield curve, rather than the single weighted-average rate previously used, are now applied to the projected cash flows to provide more precise measurement of these costs. This is a change in estimate which has been accounted for prospectively in the 2016
financial statements. The change reduced the 2016 service and interest cost by a total of
$38
compared with the cost measured using the weighted-average approach. The increase in net periodic pension expense in 2015 is attributable to higher service costs and amortization compared to the prior year. Net periodic pension expense includes
$12
,
$14
and
$11
and defined contribution expense includes
$34
,
$33
and
$33
, for
2016
,
2015
and
2014
, respectively, related to discontinued operations. For defined contribution plans, the Company makes cash contributions based on plan requirements, which are expensed as incurred.
The Company transitioned from defined benefit to defined contribution retirement plans in 2016. The principal U.S. defined benefit pension plan closed to employees hired after January 1, 2016, and current employees not meeting combined age and years of service criteria ceased accruing benefits effective October 1, 2016. Affected employees were enrolled in an enhanced defined contribution plan. The impact of these actions had an inconsequential impact on the Company's financial statements at September 30, 2016. Over time, defined benefit plan expense will decline while defined contribution plan expense will increase, with an expectation of reduced earnings volatility.
All of the following tables include defined benefit plans related to continuing and discontinued operations.
Details of the changes in the actuarial present value of the projected benefit obligation and the fair value of plan assets for defined benefit pension plans follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Projected benefit obligation, beginning
|
$
|
4,336
|
|
|
4,263
|
|
|
1,330
|
|
|
1,248
|
|
Service cost
|
69
|
|
|
59
|
|
|
37
|
|
|
26
|
|
Interest cost
|
182
|
|
|
148
|
|
|
46
|
|
|
39
|
|
Actuarial (gain) loss
|
137
|
|
|
565
|
|
|
44
|
|
|
275
|
|
Benefits paid
|
(181
|
)
|
|
(191
|
)
|
|
(36
|
)
|
|
(31
|
)
|
Settlements
|
(205
|
)
|
|
(151
|
)
|
|
(25
|
)
|
|
(82
|
)
|
Acquisitions (Divestitures), net
|
(70
|
)
|
|
—
|
|
|
(4
|
)
|
|
(6
|
)
|
Foreign currency translation and other
|
(5
|
)
|
|
3
|
|
|
(144
|
)
|
|
(149
|
)
|
Projected benefit obligation, ending
|
$
|
4,263
|
|
|
4,696
|
|
|
1,248
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning
|
$
|
4,473
|
|
|
3,928
|
|
|
988
|
|
|
935
|
|
Actual return on plan assets
|
(137
|
)
|
|
491
|
|
|
49
|
|
|
155
|
|
Employer contributions
|
20
|
|
|
31
|
|
|
33
|
|
|
35
|
|
Benefits paid
|
(181
|
)
|
|
(191
|
)
|
|
(36
|
)
|
|
(31
|
)
|
Settlements
|
(205
|
)
|
|
(151
|
)
|
|
(25
|
)
|
|
(82
|
)
|
Acquisitions (Divestitures), net
|
(44
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Foreign currency translation and other
|
2
|
|
|
2
|
|
|
(72
|
)
|
|
(103
|
)
|
Fair value of plan assets, ending
|
$
|
3,928
|
|
|
4,110
|
|
|
935
|
|
|
909
|
|
|
|
|
|
|
|
|
|
Net amount recognized in the balance sheet
|
$
|
(335
|
)
|
|
(586
|
)
|
|
(313
|
)
|
|
(411
|
)
|
|
|
|
|
|
|
|
|
Location of net amount recognized in the balance sheet:
|
|
|
|
|
|
|
|
Noncurrent asset
|
$
|
—
|
|
|
—
|
|
|
30
|
|
|
1
|
|
Current liability
|
(11
|
)
|
|
(11
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Noncurrent liability
|
(316
|
)
|
|
(565
|
)
|
|
(227
|
)
|
|
(279
|
)
|
Net liability held-for-sale
|
(8
|
)
|
|
(10
|
)
|
|
(110
|
)
|
|
(126
|
)
|
Net amount recognized in the balance sheet
|
(335
|
)
|
|
(586
|
)
|
|
(313
|
)
|
|
(411
|
)
|
|
|
|
|
|
|
|
|
Pretax accumulated other comprehensive loss
|
$
|
(1,322
|
)
|
|
(1,527
|
)
|
|
(306
|
)
|
|
(389
|
)
|
Approximately
$234
of the
$1,916
of pretax losses deferred in accumulated other comprehensive income (loss) at
September 30, 2016
will be amortized to expense in
2017
. As of
September 30, 2016
, U.S. pension plans were underfunded by
$586
and non-U.S. plans were underfunded by
$411
. The U.S. funded status includes unfunded plans totaling
$216
and the non-U.S. status includes unfunded plans totaling
$237
.
As of the
September 30, 2016
and
2015
measurement dates, the plans' total accumulated benefit obligation was
$5,729
and
$5,254
, respectively. Also as of the measurement dates, the total projected benefit obligation, accumulated benefit obligation and fair value of plan assets for individual plans with accumulated benefit obligations in excess of plan assets were
$5,951
,
$5,678
and
$4,958
, respectively, for
2016
, and
$1,245
,
$1,139
and
$648
, respectively, for
2015
.
Future benefit payments by U.S. plans are estimated to be
$215
in
2017
,
$224
in
2018
,
$233
in
2019
,
$241
in
2020
,
$249
in
2021
and
$1,326
in total over the five years 2022 through 2026. Based on foreign currency exchange rates as of
September 30, 2016
, future benefit payments by non-U.S. plans are estimated to be
$41
in
2017
,
$42
in
2018
,
$45
in
2019
,
$47
in
2020
,
$51
in
2021
and
$306
in total over the five years 2022 through 2026. The Company expects to contribute approximately
$40
to its retirement plans in
2017
.
The weighted-average assumptions used in the valuation of pension benefits follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net pension expense
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate used to determine service cost
|
4.75
|
%
|
|
4.25
|
%
|
|
4.60
|
%
|
|
4.2
|
%
|
|
3.6
|
%
|
|
3.3
|
%
|
Discount rate used to determine interest cost
|
4.75
|
%
|
|
4.25
|
%
|
|
3.50
|
%
|
|
4.2
|
%
|
|
3.6
|
%
|
|
3.3
|
%
|
Expected return on plan assets
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
6.6
|
%
|
|
6.6
|
%
|
|
6.4
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
3.25
|
%
|
|
3.2
|
%
|
|
3.4
|
%
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.25
|
%
|
|
4.35
|
%
|
|
3.50
|
%
|
|
3.6
|
%
|
|
3.3
|
%
|
|
2.3
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
3.25
|
%
|
|
3.4
|
%
|
|
3.4
|
%
|
|
3.2
|
%
|
The discount rate for the U.S. retirement plans was
3.50 percent
as of September 30, 2016. An actuarially developed, company-specific yield curve is used to determine the discount rate. The expected return on plan assets assumption is determined by reviewing the investment returns of the plans for the past
10 years
plus longer-term historical returns of an asset mix approximating the Company's asset allocation targets, and periodically comparing these returns to expectations of investment advisors and actuaries to determine whether long-term future returns are expected to differ significantly from the past.
The Company's asset allocations at
September 30, 2016
and
2015
, and weighted-average target allocations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2015
|
|
|
2016
|
|
|
Target
|
|
2015
|
|
|
2016
|
|
|
Target
|
Equity securities
|
65
|
%
|
|
66
|
%
|
|
60-70%
|
|
55
|
%
|
|
51
|
%
|
|
50-60%
|
Debt securities
|
30
|
|
|
29
|
|
|
25-35
|
|
32
|
|
|
36
|
|
|
25-35
|
Other
|
5
|
|
|
5
|
|
|
3-10
|
|
13
|
|
|
13
|
|
|
10-20
|
Total
|
100
|
%
|
|
100
|
%
|
|
100%
|
|
100
|
%
|
|
100
|
%
|
|
100%
|
The primary objective for the investment of pension assets is to secure participant retirement benefits by earning a reasonable rate of return. Plan assets are invested consistent with the provisions of the prudence and diversification rules of ERISA and with a long-term investment horizon. The Company continuously monitors the value of assets by class and routinely rebalances to remain within target allocations. The strategy for equity assets is to minimize concentrations of risk by investing primarily in companies in a diversified mix of industries worldwide, while targeting neutrality in exposure to market capitalization levels, growth versus value profile, global versus regional markets, fund types and fund managers. The approach for bonds emphasizes investment-grade corporate and government debt with maturities matching a portion of the longer duration pension liabilities. The bonds strategy also includes a
high-yield element which is generally shorter in duration. For diversification, a small portion of U.S. plan assets is allocated to private equity partnerships and real asset fund investments, providing opportunities for above market returns. Leveraging techniques are not used and the use of derivatives in any fund is limited and inconsequential.
The fair values of defined benefit pension assets as of September 30, organized by asset class and by the fair value hierarchy of ASC 820,
Fair Value Measurement,
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
%
|
|
2016
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
$
|
1,081
|
|
|
305
|
|
|
292
|
|
|
1,678
|
|
|
33
|
%
|
International equities
|
627
|
|
|
607
|
|
|
—
|
|
|
1,234
|
|
|
25
|
%
|
Emerging market equities
|
—
|
|
|
257
|
|
|
—
|
|
|
257
|
|
|
5
|
%
|
Corporate bonds
|
—
|
|
|
648
|
|
|
—
|
|
|
648
|
|
|
13
|
%
|
Government bonds
|
3
|
|
|
749
|
|
|
—
|
|
|
752
|
|
|
15
|
%
|
High-yield bonds
|
—
|
|
|
122
|
|
|
—
|
|
|
122
|
|
|
2
|
%
|
Other
|
144
|
|
|
71
|
|
|
113
|
|
|
328
|
|
|
7
|
%
|
Total
|
$
|
1,855
|
|
|
2,759
|
|
|
405
|
|
|
5,019
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
$
|
956
|
|
|
460
|
|
|
257
|
|
|
1,673
|
|
|
34
|
%
|
International equities
|
502
|
|
|
677
|
|
|
—
|
|
|
1,179
|
|
|
24
|
%
|
Emerging market equities
|
—
|
|
|
211
|
|
|
—
|
|
|
211
|
|
|
4
|
%
|
Corporate bonds
|
—
|
|
|
628
|
|
|
—
|
|
|
628
|
|
|
13
|
%
|
Government bonds
|
2
|
|
|
674
|
|
|
—
|
|
|
676
|
|
|
14
|
%
|
High-yield bonds
|
—
|
|
|
175
|
|
|
—
|
|
|
175
|
|
|
4
|
%
|
Other
|
140
|
|
|
67
|
|
|
114
|
|
|
321
|
|
|
7
|
%
|
Total
|
$
|
1,600
|
|
|
2,892
|
|
|
371
|
|
|
4,863
|
|
|
100
|
%
|
Asset Classes
U.S. equities reflect companies domiciled in the U.S., including multinational companies. International equities are comprised of companies domiciled in developed nations outside the U.S. Emerging market equities are comprised of companies domiciled in portions of Asia, Eastern Europe and Latin America. Corporate bonds represent investment-grade debt of issuers primarily from the U.S. Government bonds include investment-grade instruments issued by federal, state and local governments, primarily in the U.S. High-yield bonds include noninvestment-grade debt from a diverse group of developed market issuers. Other includes cash, interests in mixed asset funds investing in commodities, natural resources, agriculture, real estate and infrastructure funds, life insurance contracts (U.S.), and shares in certain general investment funds of financial institutions or insurance arrangements (non-U.S.) that typically ensure no market losses or provide for a small minimum return guarantee.
Fair Value Hierarchy Categories
Valuations of Level 1 assets for all classes are based on quoted closing market prices from the principal exchanges where the individual securities are traded. Cash is valued at cost, which approximates fair value. Equity securities categorized as Level 2 assets are primarily nonexchange-traded commingled or collective funds where the underlying securities have observable prices available from active markets. Valuation is based on the net asset value of fund units held as derived from the fair value of the underlying assets. Debt securities categorized as Level 2 assets are generally valued based on independent broker/dealer bids or by comparison to other debt securities having similar durations, yields and credit ratings. Other Level 2 assets are valued based on a net asset value of fund units held, which is derived from either market-observed pricing for the underlying assets or broker/dealer
quotation. U.S. equity securities classified as Level 3 are fund investments in private companies. Valuation techniques and inputs for these assets include discounted cash flow analysis, earnings multiple approaches, recent transactions, transfer restrictions, prevailing discount rates, volatilities, credit ratings and other factors. In the Other class, interests in mixed assets funds are Level 2, and U.S. life insurance contracts and non-U.S. general fund investments and insurance arrangements are Level 3.
Details of the changes in value for Level 3 assets follow:
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Level 3, beginning
|
$
|
308
|
|
|
371
|
|
Gains (Losses) on assets held
|
18
|
|
|
18
|
|
Gains (Losses) on assets sold
|
(20
|
)
|
|
(20
|
)
|
Purchases, sales and settlements, net
|
65
|
|
|
36
|
|
Level 3, ending
|
$
|
371
|
|
|
405
|
|
(12) POSTRETIREMENT PLANS
The Company sponsors unfunded postretirement benefit plans (primarily health care) for certain U.S. retirees and their dependents. The components of net postretirement benefits expense for the years ended September 30 follow:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Service cost
|
$
|
1
|
|
|
1
|
|
|
1
|
|
Interest cost
|
11
|
|
|
9
|
|
|
8
|
|
Net amortization
|
(21
|
)
|
|
(22
|
)
|
|
(21
|
)
|
Net postretirement expense
|
$
|
(9
|
)
|
|
(12
|
)
|
|
(12
|
)
|
Details of the changes in actuarial present value of accumulated postretirement benefit obligations follow:
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Benefit obligation, beginning
|
$
|
248
|
|
|
213
|
|
Service cost
|
1
|
|
|
1
|
|
Interest cost
|
9
|
|
|
8
|
|
Actuarial (gain) loss
|
(12
|
)
|
|
—
|
|
Benefits paid
|
(18
|
)
|
|
(16
|
)
|
Divestitures
|
(15
|
)
|
|
—
|
|
Benefit obligation, ending (recognized in balance sheet)
|
$
|
213
|
|
|
206
|
|
As of
September 30, 2016
there were
$133
of deferred actuarial gains in accumulated other comprehensive income, of which approximately
$19
will be amortized into earnings in
2017
. The discount rates used to measure the benefit obligation as of
September 30, 2016
,
2015
and
2014
were
3.10 percent
,
3.80 percent
and
3.75 percent
, respectively. The health care cost trend rate used for both
2017
and
2016
is assumed to be
6.5 percent
initially, and declining to
5.0 percent
over the subsequent three years. A one percentage point increase or decrease in the health care cost trend rate assumption for either year would have an inconsequential impact on postretirement benefits expense and the benefit obligation. The Company estimates that future health care benefit payments will be approximately
$20
per year for
2017
through
2021
, and
$70
in total over the five years
2022
through
2026
.
(13) CONTINGENT LIABILITIES AND COMMITMENTS
The Company is a party to a number of pending legal proceedings and claims, including those involving general and product liability and other matters, several of which claim substantial amounts of damages. The Company accrues for such liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. Accruals are based on developments to date; management's estimates of the outcomes of these matters; the Company's experience in contesting, litigating and settling similar matters; and any related insurance coverage. Although it is not possible to predict the ultimate outcome of these matters, the Company historically has been largely successful in defending itself against claims and suits that have been brought against it, and will continue to defend itself vigorously in all such matters. While the Company believes a material adverse impact is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future development could have a material adverse impact on the Company. The Company enters into certain indemnification agreements in the ordinary course of business in which the indemnified party is held harmless and
is reimbursed for losses incurred from claims by third parties, usually up to a prespecified limit. In connection with divestitures of certain assets or businesses, the Company often provides indemnities to the buyer with respect to certain matters including, for example, environmental or unidentified tax liabilities related to periods prior to the disposition. Because of the uncertain nature of the indemnities, the maximum liability cannot be quantified. As such, contingent liabilities are recorded when they are both probable and reasonably estimable. Historically, payments under indemnity arrangements have been inconsequential.
At
September 30, 2016
, there were
no
known contingent liabilities (including guarantees, pending litigation, taxes and other claims) that management believes will be material in relation to the Company's financial statements, nor were there any material commitments outside the normal course of business.
(14) INCOME TAXES
Pretax earnings from continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
United States
|
$
|
1,736
|
|
|
2,688
|
|
|
1,312
|
|
Non-U.S.
|
1,455
|
|
|
1,119
|
|
|
1,004
|
|
Total pretax earnings
|
$
|
3,191
|
|
|
3,807
|
|
|
2,316
|
|
The principal components of income tax expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
623
|
|
|
831
|
|
|
394
|
|
State and local
|
47
|
|
|
86
|
|
|
11
|
|
Non-U.S.
|
416
|
|
|
398
|
|
|
305
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(132
|
)
|
|
12
|
|
|
2
|
|
State and local
|
(7
|
)
|
|
(1
|
)
|
|
4
|
|
Non-U.S.
|
6
|
|
|
(59
|
)
|
|
(19
|
)
|
Income tax expense
|
$
|
953
|
|
|
1,267
|
|
|
697
|
|
Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
0.8
|
|
|
0.7
|
|
|
0.5
|
|
Non-U.S. rate differential
|
(3.6
|
)
|
|
(2.4
|
)
|
|
(2.9
|
)
|
Non-U.S. tax holidays
|
(0.8
|
)
|
|
(0.9
|
)
|
|
(1.1
|
)
|
U.S. manufacturing deduction
|
(1.5
|
)
|
|
(1.2
|
)
|
|
(1.8
|
)
|
Gains on divestitures
|
—
|
|
|
1.8
|
|
|
—
|
|
Other
|
—
|
|
|
0.3
|
|
|
0.4
|
|
Effective income tax rate
|
29.9
|
%
|
|
33.3
|
%
|
|
30.1
|
%
|
Non-U.S. tax holidays reduce tax rates in certain foreign jurisdictions and are expected to expire over the next
two
years.
Following are changes in unrecognized tax benefits before considering recoverability of any cross-jurisdictional tax credits (federal, state and non-U.S.) and temporary differences. The amount of unrecognized tax benefits is not expected to change significantly within the next
12
months.
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Unrecognized tax benefits, beginning
|
$
|
120
|
|
|
84
|
|
Additions for current year tax positions
|
7
|
|
|
12
|
|
Additions for prior year tax positions
|
8
|
|
|
16
|
|
Reductions for prior year tax positions
|
(9
|
)
|
|
(13
|
)
|
Reductions for settlements with tax authorities
|
—
|
|
|
(4
|
)
|
Reductions for expiration of statutes of limitations
|
(42
|
)
|
|
(9
|
)
|
Unrecognized tax benefits, ending
|
$
|
84
|
|
|
86
|
|
If none of the unrecognized tax benefits shown is ultimately paid, the tax provision and the calculation of the effective tax rate would be favorably impacted by
$48
, which is net of cross-jurisdictional tax credits and temporary differences. The Company accrues interest and penalties related to income taxes in income tax expense. Total interest and penalties recognized were
$2
,
$(4)
and
$3
in
2016
,
2015
and
2014
, respectively. As of
September 30, 2016
and
2015
, total accrued interest and penalties were
$21
and
$20
, respectively.
The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed through 2012. The status of state and non-U.S. tax examinations varies due to the numerous legal entities and jurisdictions in which the Company operates.
The principal items that gave rise to deferred income tax assets and liabilities follow:
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
Net operating losses and tax credits
|
$
|
138
|
|
|
164
|
|
Accrued liabilities
|
245
|
|
|
277
|
|
Postretirement and postemployment benefits
|
86
|
|
|
82
|
|
Employee compensation and benefits
|
168
|
|
|
206
|
|
Pensions
|
164
|
|
|
271
|
|
Other
|
161
|
|
|
158
|
|
Total
|
$
|
962
|
|
|
1,158
|
|
|
|
|
|
Valuation allowances
|
$
|
(109
|
)
|
|
(132
|
)
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangibles
|
$
|
(500
|
)
|
|
(510
|
)
|
Property, plant and equipment
|
(236
|
)
|
|
(239
|
)
|
Other
|
(51
|
)
|
|
(51
|
)
|
Total
|
$
|
(787
|
)
|
|
(800
|
)
|
|
|
|
|
Net deferred income tax asset
|
$
|
66
|
|
|
226
|
|
Current deferred tax assets, net were
$400
and
$305
as of
September 30, 2016
and
2015
, respectively, and noncurrent deferred tax liabilities, net were
$174
and
$239
. Total income taxes paid were approximately
$950
,
$1,590
and
$1,310
in
2016
,
2015
and
2014
, respectively. Approximately half of the
$164
of net operating losses and tax credits can be carried forward indefinitely, while the remainder expire over varying periods.
(15) STOCK-BASED COMPENSATION
The Company's stock-based compensation plans include stock options, performance shares, restricted stock and restricted stock units. Although the Company has discretion, shares distributed under these plans are issued from treasury stock.
Stock Options
The Company's stock option plans permit key officers and employees to purchase common stock at specified prices, which are equal to
100 percent
of the closing market price of the Company's stock on the date of grant. Options generally vest
one-third
in each of the three years subsequent to grant and expire
10 years
from the date of grant. Compensation expense is recognized ratably over the vesting period based on the number of options expected to vest. As of
September 30, 2016
,
10.9 million
options were available for grant under the plans.
Changes in shares subject to options during the year ended
September 30, 2016
follow (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- Average Exercise Price Per Share
|
|
Shares
|
|
Total
Intrinsic Value of Shares
|
|
Average Remaining Life (Years)
|
Beginning of year
|
$
|
55.40
|
|
|
13,646
|
|
|
|
|
|
|
|
|
|
Options granted
|
$
|
49.68
|
|
|
3,077
|
|
|
|
|
|
|
|
|
|
Options exercised
|
$
|
40.14
|
|
|
(701
|
)
|
|
|
|
|
|
|
|
|
Options canceled
|
$
|
56.78
|
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
End of year
|
$
|
54.87
|
|
|
15,276
|
|
|
|
$
|
43
|
|
|
|
|
5.8
|
|
Exercisable at end of year
|
$
|
54.56
|
|
|
10,105
|
|
|
|
$
|
30
|
|
|
|
|
4.4
|
|
The weighted-average grant date fair value per option was
$9.02
,
$12.48
and
$14.83
in
2016
,
2015
and
2014
, respectively. Cash received for option exercises was
$31
in
2016
,
$36
in
2015
and
$77
in
2014
. The total intrinsic value of options exercised in
2016
,
2015
and
2014
was
$9
,
$16
and
$61
, respectively, while the tax benefit realized by the Company from tax deductions related to option exercises was
$2
,
$10
and
$14
, respectively.
The grant date fair value of options is estimated using the Black-Scholes option-pricing model. The weighted-average assumptions used in valuations for
2016
,
2015
and
2014
are, respectively: risk-free interest rate, based on U.S. Treasury yields,
1.9 percent
,
1.9 percent
and
2.0 percent
; dividend yield,
3.8 percent
,
3.1 percent
and
2.6 percent
; and expected volatility, based on historical volatility,
27 percent
,
28 percent
and
28 percent
. The expected life of each option awarded is seven years based on historical experience and expected future exercise patterns.
Performance Shares, Restricted Stock and Restricted Stock Units
The Company's incentive shares plans include performance shares awards which distribute the value of common stock to key management employees subject to certain operating performance conditions and other restrictions. The form of distribution is primarily shares of common stock, with a portion in cash. Compensation expense for performance shares is recognized over the service period based on the number of shares ultimately expected to be earned. Performance shares awards are accounted for as liabilities in accordance with ASC 718,
Compensation - Stock Compensation
, with compensation expense adjusted at the end of each reporting period to reflect the change in fair value of the awards.
As of September 30, 2016,
4,944,575
performance shares awarded primarily in 2013 were outstanding, contingent on the Company achieving its performance objectives through 2016 and the provision of additional service by employees. The objectives for these shares were met at the
86 percent
level at the end of 2016, or
4,252,335
shares. Of these,
2,552,949
shares will be distributed in early 2017 while
1,699,386
shares remain subject to employees providing one additional year of service. Additionally, the rights to receive a maximum of
2,186,150
common shares awarded in 2016, under the new performance shares program, are outstanding and contingent upon the Company achieving its performance objectives through 2018. As a result of the Company's level of achievement of its performance shares objective at the end of 2013 for performance shares awarded primarily in 2010, and employees providing an additional year of service, rights to receive
4,823,045
common shares vested and were distributed to participants in 2014 as follows:
2,782,143
issued as shares,
1,829,617
withheld for income taxes and the value of
211,285
paid in cash.
14,694
shares were canceled and not distributed.
Incentive shares plans also include restricted stock awards which involve distribution of common stock to key management employees subject to cliff vesting at the end of service periods ranging from three to ten years. The fair value of restricted stock awards is determined based on the average of the high and low market prices of the Company's common stock on the date of grant, with compensation expense recognized ratably over the applicable service period. In 2016,
235,000
shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently,
139,436
shares were issued while
95,564
shares were withheld for income taxes in accordance with minimum withholding requirements. As of
September 30, 2016
, there were
1,174,500
shares of unvested restricted stock outstanding.
The total fair value of shares vested under incentive shares plans was
$11
,
$9
and
$315
, respectively, in
2016
,
2015
and
2014
, of which
$4
,
$5
and
$134
was paid in cash, primarily for tax withholding. As of
September 30, 2016
,
15.4 million
shares remained available for award under incentive shares plans.
Changes in shares outstanding but not yet earned under incentive shares plans during the year ended
September 30, 2016
follow (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Average Grant Date
Fair Value Per Share
|
Beginning of year
|
6,377
|
|
|
|
$
|
48.97
|
|
|
Granted
|
2,126
|
|
|
|
$
|
49.20
|
|
|
Earned/vested
|
(235
|
)
|
|
|
$
|
44.12
|
|
|
Canceled
|
(940
|
)
|
|
|
$
|
49.15
|
|
|
End of year
|
7,328
|
|
|
|
$
|
49.17
|
|
|
Total compensation expense for stock options and incentive shares was
$159
,
$30
and
$143
for
2016
,
2015
and
2014
, respectively, of which
$14
,
$6
and
$20
was included in discontinued operations. The increase in expense for 2016 reflects an increasing stock price in the current year compared with a decreasing price in 2015, and overlap of awards. The decrease in expense for 2015 reflects a stock option award in 2014 and no incentive stock plan overlap in 2015, and a lower stock price in 2015. Income tax benefits recognized in the income statement for these compensation arrangements during
2016
,
2015
and
2014
were
$45
,
$2
and
$39
, respectively. As of
September 30, 2016
, total unrecognized compensation expense related to unvested shares awarded under these plans was
$133
, which is expected to be recognized over a weighted-average period of
1.8
years.
In addition to the employee stock option and incentive shares plans, in
2016
the Company awarded
24,336
shares of restricted stock and
3,042
restricted stock units under the restricted stock plan for nonmanagement directors. As of
September 30, 2016
,
194,577
shares were available for issuance under this plan.
(16) COMMON AND PREFERRED STOCK
At
September 30, 2016
,
48.3 million
shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During
2016
,
12.5 million
common shares were purchased and
0.7 million
treasury shares were reissued. In
2015
,
43.1 million
common shares were purchased and
1.1 million
treasury shares were reissued.
At
September 30, 2016
and
2015
, the Company had
5.4 million
shares of
$2.50
par value preferred stock authorized, with
none
issued.
(17) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
Activity in accumulated other comprehensive income (loss) attributable to common stockholders is shown below:
|
|
|
|
|
|
|
Foreign currency translation
|
2014
|
|
|
2015
|
|
|
2016
|
|
Beginning balance
|
$
|
504
|
|
|
171
|
|
|
(622
|
)
|
Other comprehensive income (loss)
|
(341
|
)
|
|
(793
|
)
|
|
(190
|
)
|
Purchase of noncontrolling interest
|
8
|
|
|
—
|
|
|
—
|
|
Ending balance
|
171
|
|
|
(622
|
)
|
|
(812
|
)
|
|
|
|
|
|
|
Pension and postretirement
|
|
|
|
|
|
Beginning balance
|
(692
|
)
|
|
(746
|
)
|
|
(952
|
)
|
Actuarial gains (losses) deferred during the period
|
(152
|
)
|
|
(315
|
)
|
|
(310
|
)
|
Amortization of deferred actuarial losses into earnings
|
98
|
|
|
109
|
|
|
100
|
|
Ending balance
|
(746
|
)
|
|
(952
|
)
|
|
(1,162
|
)
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
Beginning balance
|
(1
|
)
|
|
—
|
|
|
(43
|
)
|
Gains (Losses) deferred during the period
|
(1
|
)
|
|
(66
|
)
|
|
(30
|
)
|
Reclassifications of realized (gains) losses to sales and cost of sales
|
2
|
|
|
23
|
|
|
48
|
|
Ending balance
|
—
|
|
|
(43
|
)
|
|
(25
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
$
|
(575
|
)
|
|
(1,617
|
)
|
|
(1,999
|
)
|
Activity above is shown net of income taxes for
2016
,
2015
and
2014
, respectively, as follows: deferral of pension and postretirement actuarial gains (losses):
$159
,
$192
and
$87
; amortization of pension and postretirement deferred actuarial losses:
$(59)
,
$(59)
and
$(52)
; deferral of cash flow hedging gains (losses):
$17
,
$38
and $-; reclassification of realized cash flow hedging (gains) losses:
$(28)
,
$(13)
and $-. Amortization of deferred actuarial losses includes
$(3)
,
$(3)
and
$(2)
in
2016
,
2015
and
2014
, respectively, related to discontinued operations.
(18) BUSINESS SEGMENTS INFORMATION
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 business segments of the Company are organized primarily by the nature of the products and services they sell.
The
Process Management
segment provides systems and software, measurement and analytical instrumentation, valves, actuators and regulators, services and solutions and reliability consulting including digital plant architecture that allows communication of devices with centralized systems, to provide precision measurement, control, monitoring, asset optimization, and plant safety and reliability for plants that produce power or process fluids or items such as petroleum, chemicals, food and beverages, pulp and paper, pharmaceuticals and municipal water supplies. The
Industrial Automation
segment provides fluid power and control mechanisms, electrical distribution equipment, and materials joining and precision cleaning products which are used in a wide variety of manufacturing operations to provide integrated manufacturing solutions to customers. The
Climate Technologies
segment supplies compressors, temperature sensors and controls, thermostats, flow controls and remote monitoring technology and services to all areas of the climate control industry, including residential heating and cooling, commercial air conditioning, commercial and industrial refrigeration and marine controls. The
Commercial & Residential Solutions
segment provides tools for professionals and homeowners, home storage systems and appliance solutions. The principal distribution method for each segment is direct sales forces, although the Company also uses independent sales representatives and distributors. Due to its global presence, certain of the Company's international operations are subject to risks such as significant currency exchange rate fluctuations, restrictions on the movement of funds and potential nationalization of operations. See Notes 3 through 7.
The primary income measure used for assessing segment performance and making operating decisions is earnings before interest and income taxes. Intersegment selling prices approximate market prices. Accounting method differences between segment reporting and the consolidated financial statements are primarily management fees
allocated to segments based on a percentage of sales and the accounting for pension and other retirement plans. Corporate and other includes stock compensation expense, and goodwill impairment charges when applicable. Corporate assets are primarily comprised of cash and equivalents, investments and certain fixed assets. Summarized below is information about the Company's operations by business segment and by geography.
Business Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Earnings
|
|
Total Assets
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Process Management
|
$
|
9,189
|
|
|
8,516
|
|
|
7,484
|
|
|
$
|
1,918
|
|
|
1,493
|
|
|
1,131
|
|
|
$
|
7,771
|
|
|
7,704
|
|
|
7,622
|
|
Industrial Automation
|
3,004
|
|
|
2,448
|
|
|
2,072
|
|
|
640
|
|
|
509
|
|
|
458
|
|
|
1,810
|
|
|
1,254
|
|
|
1,276
|
|
Climate Technologies
|
4,109
|
|
|
4,011
|
|
|
3,949
|
|
|
737
|
|
|
698
|
|
|
769
|
|
|
2,378
|
|
|
2,314
|
|
|
2,350
|
|
Commercial &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Solutions
|
1,891
|
|
|
1,913
|
|
|
1,611
|
|
|
421
|
|
|
403
|
|
|
384
|
|
|
1,152
|
|
|
817
|
|
|
809
|
|
|
18,193
|
|
|
16,888
|
|
|
15,116
|
|
|
3,716
|
|
|
3,103
|
|
|
2,742
|
|
|
13,111
|
|
|
12,089
|
|
|
12,057
|
|
Differences in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting methods
|
|
|
|
|
|
|
197
|
|
|
174
|
|
|
189
|
|
|
|
|
|
|
|
Corporate and other (a)
|
209
|
|
|
|
|
|
|
(526
|
)
|
|
705
|
|
|
(427
|
)
|
|
11,066
|
|
|
9,999
|
|
|
9,686
|
|
Sales eliminations/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest (b)
|
(669
|
)
|
|
(639
|
)
|
|
(594
|
)
|
|
(196
|
)
|
|
(175
|
)
|
|
(188
|
)
|
|
|
|
|
|
|
Total
|
$
|
17,733
|
|
|
16,249
|
|
|
14,522
|
|
|
$
|
3,191
|
|
|
3,807
|
|
|
2,316
|
|
|
$
|
24,177
|
|
|
22,088
|
|
|
21,743
|
|
(a) Corporate and other in
2015
includes gains on divestitures of
$1,039
, and in 2014 includes combined sales and earnings of
$209
and
$(6)
, respectively, related to the Artesyn and Connectivity Solutions businesses, which were reported in the former Network Power segment. See Note 3. Assets held-for-sale of
$6,030
,
$6,222
and
$6,904
are included in Corporate and other for 2016, 2015 and 2014, respectively. See Note 4.
(b) Industrial Automation intersegment sales for the years ended September 30, 2016, 2015 and 2014 were
$578
,
$622
and
$650
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
Capital
Expenditures
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Process Management
|
$
|
249
|
|
|
276
|
|
|
297
|
|
|
$
|
300
|
|
|
244
|
|
|
181
|
|
Industrial Automation
|
74
|
|
|
59
|
|
|
50
|
|
|
71
|
|
|
79
|
|
|
79
|
|
Climate Technologies
|
132
|
|
|
132
|
|
|
133
|
|
|
145
|
|
|
134
|
|
|
119
|
|
Commercial &
|
|
|
|
|
|
|
|
|
|
|
|
Residential Solutions
|
52
|
|
|
51
|
|
|
44
|
|
|
49
|
|
|
52
|
|
|
44
|
|
Corporate and other
|
62
|
|
|
55
|
|
|
44
|
|
|
86
|
|
|
79
|
|
|
24
|
|
Total
|
$
|
569
|
|
|
573
|
|
|
568
|
|
|
$
|
651
|
|
|
588
|
|
|
447
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Destination
|
|
Property, Plant and Equipment
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
United States and Canada
|
$
|
8,753
|
|
|
8,370
|
|
|
7,505
|
|
|
$
|
1,803
|
|
|
1,756
|
|
|
1,780
|
|
Asia
|
3,737
|
|
|
3,363
|
|
|
2,926
|
|
|
504
|
|
|
481
|
|
|
459
|
|
Europe
|
2,896
|
|
|
2,381
|
|
|
2,300
|
|
|
441
|
|
|
426
|
|
|
435
|
|
Latin America
|
1,194
|
|
|
981
|
|
|
834
|
|
|
266
|
|
|
216
|
|
|
203
|
|
Middle East/Africa
|
1,153
|
|
|
1,154
|
|
|
957
|
|
|
48
|
|
|
50
|
|
|
54
|
|
Total
|
$
|
17,733
|
|
|
16,249
|
|
|
14,522
|
|
|
$
|
3,062
|
|
|
2,929
|
|
|
2,931
|
|
Sales in the U.S. were
$6,940
,
$7,608
and
$7,929
for
2016
,
2015
and
2014
, respectively, while Asia includes sales in China of
$1,320
,
$1,575
and
$1,831
in those years. Assets located in the U.S. were
$1,772
in
2016
,
$1,746
in
2015
and
$1,789
in
2014
.
(19) OTHER FINANCIAL DATA
Items reported in earnings from continuing operations during the years ended September 30 include the following:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Research and development expense
|
$
|
356
|
|
|
336
|
|
|
320
|
|
Depreciation expense
|
$
|
402
|
|
|
399
|
|
|
391
|
|
Rent expense
|
$
|
304
|
|
|
287
|
|
|
273
|
|
The Company leases certain facilities, transportation and office equipment, and various other items under operating lease agreements. Minimum annual rentals under noncancelable long-term leases, exclusive of maintenance, taxes, insurance and other operating costs, will approximate
$183
in
2017
,
$130
in
2018
,
$94
in
2019
,
$57
in
2020
and
$36
in
2021
.
At September 30, 2015, other current assets included short-term investments of
$99
, which matured in 2016.
Items reported in accrued expenses include the following:
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Employee compensation
|
$
|
448
|
|
|
431
|
|
Customer advanced payments
|
$
|
400
|
|
|
433
|
|
Product warranty
|
$
|
101
|
|
|
106
|
|
Other liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Pension liabilities
|
$
|
543
|
|
|
844
|
|
Deferred income taxes
|
270
|
|
|
210
|
|
Postretirement liabilities, excluding current portion
|
199
|
|
|
193
|
|
Other
|
527
|
|
|
482
|
|
Total
|
$
|
1,539
|
|
|
1,729
|
|
Other operating cash flow is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Pension expense
|
$
|
142
|
|
|
153
|
|
|
95
|
|
Stock compensation expense
|
123
|
|
|
24
|
|
|
145
|
|
Deferred income taxes and other
|
(102
|
)
|
|
19
|
|
|
45
|
|
Total
|
$
|
163
|
|
|
196
|
|
|
285
|
|
(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Full Year
|
|
2015
|
|
2016
|
|
|
2015
|
|
2016
|
|
|
2015
|
|
2016
|
|
|
2015
|
|
2016
|
|
|
2015
|
|
2016
|
|
Net sales
|
$
|
4,026
|
|
3,337
|
|
|
3,934
|
|
3,579
|
|
|
4,085
|
|
3,674
|
|
|
4,204
|
|
3,932
|
|
|
16,249
|
|
14,522
|
|
Gross profit
|
$
|
1,740
|
|
1,414
|
|
|
1,686
|
|
1,542
|
|
|
1,759
|
|
1,593
|
|
|
1,823
|
|
1,713
|
|
|
7,008
|
|
6,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations common stockholders
|
$
|
452
|
|
303
|
|
|
936
|
|
367
|
|
|
502
|
|
441
|
|
|
627
|
|
479
|
|
|
2,517
|
|
1,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings common stockholders
|
$
|
525
|
|
349
|
|
|
973
|
|
369
|
|
|
564
|
|
479
|
|
|
648
|
|
438
|
|
|
2,710
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.65
|
|
0.47
|
|
|
1.37
|
|
0.57
|
|
|
0.75
|
|
0.68
|
|
|
0.95
|
|
0.74
|
|
|
3.72
|
|
2.46
|
|
Diluted
|
$
|
0.65
|
|
0.46
|
|
|
1.36
|
|
0.57
|
|
|
0.75
|
|
0.68
|
|
|
0.95
|
|
0.74
|
|
|
3.71
|
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.76
|
|
0.54
|
|
|
1.42
|
|
0.57
|
|
|
0.84
|
|
0.74
|
|
|
0.98
|
|
0.68
|
|
|
4.01
|
|
2.53
|
|
Diluted
|
$
|
0.75
|
|
0.53
|
|
|
1.42
|
|
0.57
|
|
|
0.84
|
|
0.74
|
|
|
0.98
|
|
0.68
|
|
|
3.99
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
$
|
0.47
|
|
0.475
|
|
|
0.47
|
|
0.475
|
|
|
0.47
|
|
0.475
|
|
|
0.47
|
|
0.475
|
|
|
1.88
|
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
65.94
|
|
51.47
|
|
|
62.25
|
|
55.54
|
|
|
62.75
|
|
56.82
|
|
|
56.12
|
|
56.72
|
|
|
65.94
|
|
56.82
|
|
Low
|
$
|
57.76
|
|
42.21
|
|
|
54.95
|
|
41.25
|
|
|
55.23
|
|
48.45
|
|
|
42.80
|
|
50.41
|
|
|
42.80
|
|
41.25
|
|
Earnings per share are computed independently each period; as a result, the quarterly amounts may not sum to the calculated annual figure.
Earnings from continuing operations and diluted earnings per share, respectively, include the following: a gain on the divestiture of a business of
$528
and
$0.77
in the second quarter of 2015; and gains on divestitures of businesses of
$83
and
$0.13
in the fourth quarter of 2015.
Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock Exchange and the Chicago Stock Exchange.