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 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. These updates were adopted on a retrospective basis and did not materially impact the Company’s financial statements.
In the fourth quarter of 2017, the Company adopted updates to ASC 718,
Compensation - Stock Compensation
,
which require all excess tax benefits and deficiencies related to share-based payments to be recognized in income tax expense rather than through additional paid-in-capital, and to be presented as operating cash flows instead of financing. These updates did not materially impact the Company's financial statements.
In the fourth quarter of 2017, the Company adopted updates to ASC 740,
Income Taxes
, which require noncurrent presentation of all deferred tax assets and liabilities on the balance sheet. These updates were adopted on a prospective basis and resulted in the reclassification of current deferred tax assets and liabilities to noncurrent presentation.
In the fourth quarter of 2017, the Company adopted updates to ASC 820,
Fair Value Measurement
, which require investments measured using the net asset value per share practical expedient to be removed from the fair value hierarchy and separately reported when making disclosures. These updates did not change the determination of fair value for any investments. Adoption affected disclosure presentation only; there was no impact on the Company’s financial results.
In the first quarter of 2015, the Company adopted updates to ASC 205,
Presentation of Financial Statements
, and ASC 360,
Property, Plant and Equipment
, regarding the reporting of discontinued operations. These updates raised the threshold for reporting discontinued operations to a strategic business shift having a major effect on an entity's operations and financial results. The updates also added disclosures for disposals of business units qualifying for discontinued presentation, and for some dispositions that do not qualify as discontinued operations but are still considered individually significant components of the entity. In 2017, the Company completed the divestitures of its network power systems, and power generation, motors and drives businesses. The results of operations for these businesses were reported within discontinued operations for all years presented, and the assets and liabilities were reflected as held-for-sale. See Note 4.
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, which 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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|
|
|
|
|
|
2016
|
|
|
2017
|
|
Finished products
|
|
$
|
382
|
|
|
560
|
|
Raw materials and work in process
|
|
826
|
|
|
1,136
|
|
Total inventories
|
|
$
|
1,208
|
|
|
1,696
|
|
The increase is primarily due to the valves & controls acquisition. See Note 3.
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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|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Land
|
|
$
|
210
|
|
|
295
|
|
Buildings
|
|
1,867
|
|
|
2,043
|
|
Machinery and equipment
|
|
4,932
|
|
|
5,175
|
|
Construction in progress
|
|
318
|
|
|
360
|
|
Property, plant and equipment, at cost
|
|
7,327
|
|
|
7,873
|
|
Less: Accumulated depreciation
|
|
4,396
|
|
|
4,552
|
|
Property, plant and equipment, net
|
|
$
|
2,931
|
|
|
3,321
|
|
The increase is primarily due to the valves & controls acquisition. See Note 3.
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
one percent
of sales.
Revenue Recognition
The Company recognizes a large majority 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. Less than
ten percent
of the Company's revenues are recognized using the percentage-of-completion method as performance occurs, and revenue from software sales is recognized in accordance with ASC 985-605. 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 for delivered elements if they have value to the customer on a stand-alone basis and performance related to the undelivered items is probable and substantially in the Company's control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment. Approximately
five percent
of the Company's revenues from continuing operations arise from qualifying sales arrangements that include the delivery of multiple elements, principally in the Automation Solutions 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
$4
. 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
$4.9 billion
of undistributed earnings of non-U.S. subsidiaries as of
September 30, 2017
, 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
4.5 million
,
13.3 million
and
5.9 million
shares of common stock were excluded from the computation of diluted earnings per share in
2017
,
2016
and
2015
, 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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|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Basic shares outstanding
|
673.3
|
|
|
644.0
|
|
|
642.1
|
|
Dilutive shares
|
3.2
|
|
|
2.8
|
|
|
1.3
|
|
Diluted shares outstanding
|
676.5
|
|
|
646.8
|
|
|
643.4
|
|
(3) ACQUISITIONS AND DIVESTITURES
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
, subject to certain post-closing adjustments. This business, with annualized sales of approximately
$1.4 billion
, 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
$1,472
(
none
of which is expected to be tax deductible), and other identifiable intangible assets of
$1,045
, primarily customer relationships and intellectual property with a weighted-average life of approximately
fifteen
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.
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
|
|
$
|
350
|
|
Inventory
|
|
525
|
|
Property, plant & equipment
|
|
355
|
|
Goodwill
|
|
1,472
|
|
Intangibles
|
|
1,045
|
|
Other assets
|
|
289
|
|
Total assets
|
|
4,036
|
|
|
|
|
Accounts payable
|
|
119
|
|
Other current liabilities
|
|
300
|
|
Deferred taxes and other liabilities
|
|
657
|
|
Cash paid, net of cash acquired
|
|
$
|
2,960
|
|
Results of operations for 2017 included sales of
$600
and a net loss of
$97
, $
0.15
per share, including restructuring expense of
$25
and intangibles amortization of
$29
.
These results also included first year pretax acquisition accounting charges related to inventory of
$74
and backlog of
$19
, or a total of
$93
(
$65
after-tax, $
0.10
per share),
which are reported in Corporate and other. See Note 18.
Pro Forma Financial Information
The following pro forma 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.
|
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|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
Net sales
|
|
$
|
16,201
|
|
|
16,112
|
|
Net earnings from continuing operations common stockholders
|
|
$
|
1,482
|
|
|
1,692
|
|
Diluted earnings per share from continuing operations
|
|
$
|
2.28
|
|
|
2.62
|
|
The pro forma results for 2016 were adjusted to include first year acquisition accounting charges related to inventory and backlog of $
122
in 2017. The pro forma 2016 results also include acquisition costs of $
52
, while the 2017 pro forma results were adjusted to exclude these charges.
On October 2, 2017, the Company sold its residential storage business for
$200
in cash, subject to post-closing adjustments, and expects to recognize a loss of approximately
$40
in 2018 due to income taxes resulting from nondeductible goodwill. The Company expects to realize approximately
$140
in after-tax cash proceeds from the sale. This business, with sales of
$298
and pretax earnings of
$15
in 2017, is a leader in home organization and storage systems, and was reported within the Tools & Home Products segment. Assets and liabilities were classified as held-for-sale as of September 30, 2017.
The Company acquired
six
businesses in 2016,
four
in Automation Solutions 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
nine
years.
The Company completed
eight
acquisitions in 2015,
seven
in Automation Solutions and
one
in Tools & Home Products, 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
ten
years.
In January 2015, the Company completed the sale of its mechanical power transmission solutions business 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 former 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 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 former 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.
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
In 2017, the Company completed the previously announced strategic actions to streamline its portfolio and drive growth in its core businesses. On November 30, 2016, the Company completed the sale of its network power systems business for
$4.0 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 reported within discontinued operations for all years presented, and the assets and liabilities were reflected as held-for-sale.
The financial results of the network power systems business and power generation, motors and drives business reported as discontinued operations for the years ending September 30,
2017
,
2016
and
2015
, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Power Systems
|
|
Power Generation, Motors and Drives
|
|
Total
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
|
$
|
4,426
|
|
|
4,378
|
|
|
630
|
|
|
1,668
|
|
|
1,368
|
|
|
407
|
|
|
6,094
|
|
|
5,746
|
|
|
1,037
|
|
Cost of sales
|
|
2,810
|
|
|
2,708
|
|
|
394
|
|
|
1,244
|
|
|
1,033
|
|
|
307
|
|
|
4,054
|
|
|
3,741
|
|
|
701
|
|
SG&A
|
|
1,143
|
|
|
1,101
|
|
|
180
|
|
|
306
|
|
|
269
|
|
|
83
|
|
|
1,449
|
|
|
1,370
|
|
|
263
|
|
Other deductions, net
|
|
222
|
|
|
172
|
|
|
(515
|
)
|
|
15
|
|
|
149
|
|
|
42
|
|
|
237
|
|
|
321
|
|
|
(473
|
)
|
Earnings (Loss) before income taxes
|
|
251
|
|
|
397
|
|
|
571
|
|
|
103
|
|
|
(83
|
)
|
|
(25
|
)
|
|
354
|
|
|
314
|
|
|
546
|
|
Income taxes
|
|
134
|
|
|
218
|
|
|
577
|
|
|
27
|
|
|
51
|
|
|
94
|
|
|
161
|
|
|
269
|
|
|
671
|
|
Earnings (Loss), net of tax
|
|
$
|
117
|
|
|
179
|
|
|
(6
|
)
|
|
76
|
|
|
(134
|
)
|
|
(119
|
)
|
|
193
|
|
|
45
|
|
|
(125
|
)
|
In 2017, the net loss from discontinued operations of
$125
,
$0.19
per share, included an after-tax gain on the divestiture of the network power systems business of
$125
(
$519
pretax), a
$173
after-tax loss (
$36
pretax loss) on the divestiture of the power generation, motors and drives business, income tax expense of
$109
for repatriation of sales proceeds, and lower expense of
$32
primarily due to ceasing depreciation and amortization for the discontinued businesses held-for-sale.
Discontinued operations income of
$45
,
$0.07
per share, in 2016 included earnings from operations of
$344
and costs to execute the portfolio repositioning of
$299
. These costs are comprised of income tax expense of
$143
for repatriation of cash from these businesses, reorganization of their legal structures prior to sale, and basis differences for book and tax, as well as costs for legal, consulting, investment banking and other expenses of
$77
. In addition, net earnings for 2016 included a loss of
$103
to write down the power generation, motors and drives
business 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. Discontinued operations income of
$193
,
$0.28
per share, in 2015 included earnings from operations of
$245
and separation costs of
$52
, comprised of income tax expense of
$42
and fees of
$10
.
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
|
|
|
|
2016
|
|
|
|
2016
|
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, less allowances
|
|
|
$
|
1,202
|
|
|
|
|
290
|
|
|
|
|
1,492
|
|
|
Inventories
|
|
|
381
|
|
|
|
|
197
|
|
|
|
|
578
|
|
|
Property, plant & equipment, net
|
|
|
352
|
|
|
|
|
259
|
|
|
|
|
611
|
|
|
Goodwill
|
|
|
2,111
|
|
|
|
|
580
|
|
|
|
|
2,691
|
|
|
Other assets
|
|
|
581
|
|
|
|
|
77
|
|
|
|
|
658
|
|
|
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
|
|
|
The net cash from operating activities and from investing activities for the network power systems business and the power generation, motors and drives business for the years ending September 30,
2017
,
2016
and
2015
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Power Systems
|
|
Power Generation,
Motors and Drives
|
|
Total
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Cash from operating activities
|
|
$
|
378
|
|
|
343
|
|
|
(615
|
)
|
|
111
|
|
|
39
|
|
|
(163
|
)
|
|
489
|
|
|
382
|
|
|
(778
|
)
|
Cash from investing activities
|
|
$
|
(48
|
)
|
|
(33
|
)
|
|
3,952
|
|
|
(40
|
)
|
|
(44
|
)
|
|
1,095
|
|
|
(88
|
)
|
|
(77
|
)
|
|
5,047
|
|
Operating cash flow used by discontinued operations was
$778
for 2017, which primarily included payments of approximately
$700
for income taxes on completion of the divestitures and repatriation of cash, cash used by operations and other costs. Operating cash flow from discontinued operations in 2016 was net of payments of
$179
for separation costs.
(5) OTHER DEDUCTIONS, NET
|
|
|
|
|
|
|
|
|
|
|
Other deductions, net are summarized as follows:
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Amortization of intangibles (intellectual property and customer relationships)
|
$
|
94
|
|
|
84
|
|
|
136
|
|
Restructuring costs
|
138
|
|
|
96
|
|
|
78
|
|
Other
|
98
|
|
|
114
|
|
|
72
|
|
Total
|
$
|
330
|
|
|
294
|
|
|
286
|
|
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 decrease in other for
2017
is due to favorable foreign currency transactions comparisons of
$78
(unfavorable in the prior year), partially offset by higher acquisition/divestiture costs of
$24
and the comparative impact of a
$21
gain from payments received related to
dumping duties in 2016. The increase in
2016
is primarily due to an unfavorable foreign currency transactions impact of
$67
, partially offset by lower litigation costs of
$30
and the dumping duties gain.
(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
$78
,
$96
and
$138
, respectively, for
2017
,
2016
and
2015
. The 2017 restructuring expense included
$25
related to the acquired valves & controls business. Restructuring activity in 2015 and 2016 was initiated in connection with the slowdown in global capital spending and the Company's strategic portfolio repositioning activities. The Company currently expects
2018
restructuring expense to be approximately
$80
, including costs to complete actions initiated before the end of
2017
and for actions anticipated to be approved and initiated during
2018
.
Restructuring costs by business segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Automation Solutions
|
$
|
102
|
|
|
80
|
|
|
63
|
|
|
|
|
|
|
|
Climate Technologies
|
20
|
|
|
5
|
|
|
10
|
|
Tools & Home Products
|
11
|
|
|
2
|
|
|
2
|
|
Commercial & Residential Solutions
|
31
|
|
|
7
|
|
|
12
|
|
|
|
|
|
|
|
Corporate
|
5
|
|
|
9
|
|
|
3
|
|
|
|
|
|
|
|
Total
|
$
|
138
|
|
|
96
|
|
|
78
|
|
Costs incurred in
2017
primarily related to the deployment of resources to better serve local markets and higher growth areas, and the integration of the valves & controls business. In
2016
and
2015
costs primarily 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 Automation Solutions. In
2017
, restructuring activities included actions to exit
10
production or office facilities worldwide and eliminate approximately
1,200
positions. Expenses incurred in 2016 and 2015 included actions to exit
19
and
12
facilities, and eliminate approximately
1,900
and
3,100
positions, respectively.
The change in the liability for restructuring costs during the years ended September 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Expense
|
|
Utilized/Paid
|
|
2017
|
|
Severance and benefits
|
$
|
44
|
|
|
|
49
|
|
|
|
|
33
|
|
|
|
60
|
|
Lease and other contract terminations
|
5
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
4
|
|
Asset write-downs
|
—
|
|
|
|
7
|
|
|
|
|
7
|
|
|
|
—
|
|
Vacant facility and other shutdown costs
|
3
|
|
|
|
5
|
|
|
|
|
7
|
|
|
|
1
|
|
Start-up and moving costs
|
2
|
|
|
|
13
|
|
|
|
|
15
|
|
|
|
—
|
|
Total
|
$
|
54
|
|
|
|
78
|
|
|
|
|
67
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(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.
The change in the carrying value of goodwill by business segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automation Solutions
|
|
|
Climate Technologies
|
|
|
Tools & Home Products
|
|
|
Commercial & Residential Solutions
|
|
|
|
|
|
|
|
|
Total
|
|
Balance, September 30, 2015
|
$
|
3,138
|
|
|
513
|
|
|
196
|
|
|
709
|
|
|
3,847
|
|
Acquisitions
|
39
|
|
|
44
|
|
|
—
|
|
|
44
|
|
|
83
|
|
Foreign currency
translation and other
|
(17
|
)
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
(21
|
)
|
Balance, September 30, 2016
|
3,160
|
|
|
553
|
|
|
196
|
|
|
749
|
|
|
3,909
|
|
Acquisitions
|
1,486
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,486
|
|
Divestitures
|
—
|
|
|
—
|
|
|
(142
|
)
|
|
(142
|
)
|
|
(142
|
)
|
Foreign currency
translation and other
|
58
|
|
|
2
|
|
|
3
|
|
|
5
|
|
|
63
|
|
Balance, September 30, 2017
|
$
|
4,704
|
|
|
555
|
|
|
57
|
|
|
612
|
|
|
5,316
|
|
The gross carrying amount and accumulated amortization of identifiable intangible assets by major class follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
Intellectual Property
|
|
Capitalized Software
|
|
Total
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Gross carrying amount
|
$
|
580
|
|
|
1,392
|
|
|
730
|
|
|
1,012
|
|
|
1,071
|
|
|
1,137
|
|
|
2,381
|
|
|
3,541
|
|
Less: Accumulated amortization
|
286
|
|
|
361
|
|
|
393
|
|
|
435
|
|
|
800
|
|
|
855
|
|
|
1,479
|
|
|
1,651
|
|
Net carrying amount
|
$
|
294
|
|
|
1,031
|
|
|
337
|
|
|
577
|
|
|
271
|
|
|
282
|
|
|
902
|
|
|
1,890
|
|
Intangible asset amortization expense for
2017
,
2016
and
2015
was
$222
,
$177
and
$174
, respectively. Based on intangible asset balances as of
September 30, 2017
, amortization expense is expected to approximate
$261
in
2018
,
$226
in
2019
,
$201
in
2020
,
$168
in
2021
and
$148
in
2022
.
The increase in goodwill and intangibles is primarily due to the valves & controls acquisition. See Note 3.
(8) FINANCIAL INSTRUMENTS
Hedging Activities
As of
September 30, 2017
, the notional amount of foreign currency hedge positions was approximately
$1.8 billion
, while commodity hedge contracts totaled approximately
$115
(primarily
49 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
September 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.
Amounts included in earnings and other comprehensive income follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) to Earnings
|
|
Gain (Loss) to OCI
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
Cost of sales
|
|
$
|
(24
|
)
|
|
(35
|
)
|
|
10
|
|
|
(43
|
)
|
|
(9
|
)
|
|
25
|
|
Foreign currency
|
Sales, cost of sales
|
|
(12
|
)
|
|
(41
|
)
|
|
(15
|
)
|
|
(61
|
)
|
|
(38
|
)
|
|
30
|
|
Foreign currency
|
Other deductions, net
|
|
14
|
|
|
(27
|
)
|
|
(39
|
)
|
|
|
|
|
|
|
Total
|
|
|
$
|
(22
|
)
|
|
(103
|
)
|
|
(44
|
)
|
|
(104
|
)
|
|
(47
|
)
|
|
55
|
|
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
$4,385
and
$4,806
, respectively, as of
September 30, 2017
and
2016
, which exceeded the carrying value by
$321
and
$488
, respectively. As of
September 30, 2017
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Foreign currency
|
|
|
$
|
7
|
|
|
|
49
|
|
|
26
|
|
|
18
|
|
Commodity
|
|
|
$
|
2
|
|
|
|
4
|
|
|
12
|
|
|
—
|
|
(9) SHORT-TERM BORROWINGS AND LINES OF CREDIT
Short-term borrowings and current maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Current maturities of long-term debt
|
|
$
|
267
|
|
|
270
|
|
Commercial paper
|
|
2,317
|
|
|
592
|
|
Total
|
|
$
|
2,584
|
|
|
862
|
|
|
|
|
|
|
Interest rate for weighted-average short-term borrowings at year end
|
|
0.5%
|
|
1.1%
|
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:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
5.125% notes due December 2016
|
$
|
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
|
68
|
|
|
64
|
|
Long-term debt
|
4,318
|
|
|
4,064
|
|
Less: Current maturities
|
267
|
|
|
270
|
|
Total, net
|
$
|
4,051
|
|
|
3,794
|
|
Long-term debt maturing during each of the four years after
2018
is
$683
,
$516
,
$299
and
$500
, respectively. Total interest paid on all debt was approximately
$192
,
$209
and
$196
in
2017
,
2016
and
2015
, respectively. During the year, the Company repaid
$250
of
5.125%
notes that matured in December 2016. In
2016
, the Company repaid
$250
of
4.75%
notes that matured in October 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
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost (benefits earned during the period)
|
$
|
69
|
|
|
59
|
|
|
60
|
|
|
37
|
|
|
26
|
|
|
19
|
|
Interest cost
|
182
|
|
|
148
|
|
|
134
|
|
|
46
|
|
|
39
|
|
|
30
|
|
Expected return on plan assets
|
(303
|
)
|
|
(296
|
)
|
|
(290
|
)
|
|
(58
|
)
|
|
(52
|
)
|
|
(56
|
)
|
Net amortization and other
|
174
|
|
|
166
|
|
|
211
|
|
|
20
|
|
|
17
|
|
|
22
|
|
Net periodic pension expense
|
122
|
|
|
77
|
|
|
115
|
|
|
45
|
|
|
30
|
|
|
15
|
|
Defined contribution plans
|
111
|
|
|
104
|
|
|
96
|
|
|
61
|
|
|
56
|
|
|
47
|
|
Total retirement plans expense
|
$
|
233
|
|
|
181
|
|
|
211
|
|
|
106
|
|
|
86
|
|
|
62
|
|
The increase in net periodic pension expense in 2017 is attributable to higher amortization compared to the prior year. 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 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 beginning with 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. Net periodic pension expense includes
$3
,
$12
and
$14
and defined contribution expense includes
$6
,
$34
and
$33
, for
2017
,
2016
and
2015
, 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 is 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 for all years presented. 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
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Projected benefit obligation, beginning
|
$
|
4,263
|
|
|
4,696
|
|
|
1,248
|
|
|
1,320
|
|
Service cost
|
59
|
|
|
60
|
|
|
26
|
|
|
19
|
|
Interest cost
|
148
|
|
|
134
|
|
|
39
|
|
|
30
|
|
Actuarial (gain) loss
|
565
|
|
|
(144
|
)
|
|
275
|
|
|
(83
|
)
|
Benefits paid
|
(191
|
)
|
|
(201
|
)
|
|
(31
|
)
|
|
(29
|
)
|
Settlements
|
(151
|
)
|
|
(125
|
)
|
|
(82
|
)
|
|
(25
|
)
|
Acquisitions (Divestitures), net
|
—
|
|
|
(55
|
)
|
|
(6
|
)
|
|
163
|
|
Foreign currency translation and other
|
3
|
|
|
4
|
|
|
(149
|
)
|
|
94
|
|
Projected benefit obligation, ending
|
$
|
4,696
|
|
|
4,369
|
|
|
1,320
|
|
|
1,489
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning
|
$
|
3,928
|
|
|
4,110
|
|
|
935
|
|
|
909
|
|
Actual return on plan assets
|
491
|
|
|
516
|
|
|
155
|
|
|
61
|
|
Employer contributions
|
31
|
|
|
20
|
|
|
35
|
|
|
25
|
|
Benefits paid
|
(191
|
)
|
|
(201
|
)
|
|
(31
|
)
|
|
(29
|
)
|
Settlements
|
(151
|
)
|
|
(125
|
)
|
|
(82
|
)
|
|
(25
|
)
|
Acquisitions (Divestitures), net
|
—
|
|
|
(30
|
)
|
|
—
|
|
|
232
|
|
Foreign currency translation and other
|
2
|
|
|
2
|
|
|
(103
|
)
|
|
63
|
|
Fair value of plan assets, ending
|
$
|
4,110
|
|
|
4,292
|
|
|
909
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
Net amount recognized in the balance sheet
|
$
|
(586
|
)
|
|
(77
|
)
|
|
(411
|
)
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
Location of net amount recognized in the balance sheet:
|
|
|
|
|
|
|
|
Noncurrent asset
|
$
|
—
|
|
|
154
|
|
|
1
|
|
|
43
|
|
Current liability
|
(11
|
)
|
|
(11
|
)
|
|
(7
|
)
|
|
(11
|
)
|
Noncurrent liability
|
(565
|
)
|
|
(220
|
)
|
|
(279
|
)
|
|
(285
|
)
|
Net liability held-for-sale
|
(10
|
)
|
|
—
|
|
|
(126
|
)
|
|
—
|
|
Net amount recognized in the balance sheet
|
(586
|
)
|
|
(77
|
)
|
|
(411
|
)
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
Pretax accumulated other comprehensive loss
|
$
|
(1,527
|
)
|
|
(923
|
)
|
|
(389
|
)
|
|
(238
|
)
|
Approximately
$142
of the
$1,161
of pretax losses deferred in accumulated other comprehensive income (loss) at
September 30, 2017
will be amortized to expense in
2018
. As of
September 30, 2017
, U.S. pension plans were underfunded by
$77
in total, including unfunded plans totaling
$201
. The non-U.S. plans were underfunded by
$253
, including unfunded plans totaling
$215
.
As of the
September 30, 2017
and
2016
measurement dates, the plans' total accumulated benefit obligation was
$5,607
and
$5,729
, respectively. Also as of the measurement dates, the total projected benefit obligation, accumulated benefit obligation and fair value of plan assets for individual plans with accumulated benefit obligations in excess of plan assets were
$1,182
,
$1,088
and
$663
, respectively, for
2017
, and
$5,951
,
$5,678
and
$4,958
, respectively, for
2016
.
Future benefit payments by U.S. plans are estimated to be
$212
in
2018
,
$220
in
2019
,
$228
in
2020
,
$235
in
2021
,
$241
in
2022
and
$1,272
in total over the five years 2023 through 2027. Based on foreign currency exchange rates as of
September 30, 2017
, future benefit payments by non-U.S. plans are estimated to be
$56
in 2018,
$57
in 2019,
$59
in 2020,
$63
in 2021,
$68
in 2022 and
$390
in total over the five years 2023 through 2027. The Company expects to contribute approximately
$60
to its retirement plans in
2018
.
The weighted-average assumptions used in the valuation of pension benefits follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net pension expense
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate used to determine service cost
|
4.25
|
%
|
|
4.60
|
%
|
|
3.75
|
%
|
|
3.6
|
%
|
|
3.3
|
%
|
|
2.3
|
%
|
Discount rate used to determine interest cost
|
4.25
|
%
|
|
3.50
|
%
|
|
2.90
|
%
|
|
3.6
|
%
|
|
3.3
|
%
|
|
2.3
|
%
|
Expected return on plan assets
|
7.50
|
%
|
|
7.50
|
%
|
|
7.25
|
%
|
|
6.6
|
%
|
|
6.4
|
%
|
|
6.2
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
3.25
|
%
|
|
3.4
|
%
|
|
3.4
|
%
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.35
|
%
|
|
3.50
|
%
|
|
3.76
|
%
|
|
3.3
|
%
|
|
2.3
|
%
|
|
2.6
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
3.25
|
%
|
|
3.4
|
%
|
|
3.2
|
%
|
|
3.4
|
%
|
The discount rate for the U.S. retirement plans was
3.76 percent
as of
September 30, 2017
. 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, 2017
and
2016
, and weighted-average target allocations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2016
|
|
|
2017
|
|
|
Target
|
|
2016
|
|
|
2017
|
|
|
Target
|
Equity securities
|
66
|
%
|
|
67
|
%
|
|
60-70%
|
|
51
|
%
|
|
52
|
%
|
|
50-60%
|
Debt securities
|
29
|
|
|
28
|
|
|
25-35
|
|
36
|
|
|
38
|
|
|
25-35
|
Other
|
5
|
|
|
5
|
|
|
3-10
|
|
13
|
|
|
10
|
|
|
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 equity strategy is to minimize concentrations of risk by investing primarily in a mix of companies that are diversified across geographies, market capitalization, style, sectors and industries worldwide. 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. Investments valued based on the net asset value (NAV) of fund units held, as derived from the fair value of the underlying assets, are excluded from the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measured at NAV
|
|
Total
|
|
|
%
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
$
|
1,059
|
|
|
5
|
|
|
338
|
|
|
357
|
|
|
1,759
|
|
|
32
|
%
|
International equities
|
724
|
|
|
6
|
|
|
—
|
|
|
739
|
|
|
1,469
|
|
|
27
|
%
|
Emerging market equities
|
—
|
|
|
—
|
|
|
—
|
|
|
276
|
|
|
276
|
|
|
5
|
%
|
Corporate bonds
|
—
|
|
|
514
|
|
|
—
|
|
|
283
|
|
|
797
|
|
|
14
|
%
|
Government bonds
|
3
|
|
|
369
|
|
|
—
|
|
|
399
|
|
|
771
|
|
|
14
|
%
|
High-yield bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
132
|
|
|
132
|
|
|
2
|
%
|
Other
|
132
|
|
|
6
|
|
|
113
|
|
|
73
|
|
|
324
|
|
|
6
|
%
|
Total
|
$
|
1,918
|
|
|
900
|
|
|
451
|
|
|
2,259
|
|
|
5,528
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
$
|
1,081
|
|
|
4
|
|
|
292
|
|
|
301
|
|
|
1,678
|
|
|
33
|
%
|
International equities
|
627
|
|
|
8
|
|
|
—
|
|
|
599
|
|
|
1,234
|
|
|
25
|
%
|
Emerging market equities
|
—
|
|
|
—
|
|
|
—
|
|
|
257
|
|
|
257
|
|
|
5
|
%
|
Corporate bonds
|
—
|
|
|
476
|
|
|
—
|
|
|
172
|
|
|
648
|
|
|
13
|
%
|
Government bonds
|
3
|
|
|
392
|
|
|
—
|
|
|
357
|
|
|
752
|
|
|
15
|
%
|
High-yield bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
122
|
|
|
122
|
|
|
2
|
%
|
Other
|
144
|
|
|
2
|
|
|
113
|
|
|
69
|
|
|
328
|
|
|
7
|
%
|
Total
|
$
|
1,855
|
|
|
882
|
|
|
405
|
|
|
1,877
|
|
|
5,019
|
|
|
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. 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. 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 asset funds are Level 2, and U.S. life insurance contracts and non-U.S. general fund investments and insurance arrangements are Level 3. Investments measured at net asset value are primarily nonexchange-traded commingled or collective funds where the underlying securities have observable prices available from active markets.
Details of the changes in value for Level 3 assets follow:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Level 3, beginning
|
$
|
371
|
|
|
405
|
|
Gains (Losses) on assets held
|
18
|
|
|
49
|
|
Gains (Losses) on assets sold
|
(20
|
)
|
|
(28
|
)
|
Purchases, sales and settlements, net
|
36
|
|
|
25
|
|
Level 3, ending
|
$
|
405
|
|
|
451
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Service cost
|
$
|
1
|
|
|
1
|
|
|
1
|
|
Interest cost
|
9
|
|
|
8
|
|
|
6
|
|
Net amortization
|
(22
|
)
|
|
(21
|
)
|
|
(19
|
)
|
Net postretirement expense
|
$
|
(12
|
)
|
|
(12
|
)
|
|
(12
|
)
|
Details of the changes in actuarial present value of accumulated postretirement benefit obligations follow:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Benefit obligation, beginning
|
$
|
213
|
|
|
206
|
|
Service cost
|
1
|
|
|
1
|
|
Interest cost
|
8
|
|
|
6
|
|
Actuarial (gain) loss
|
—
|
|
|
(24
|
)
|
Benefits paid
|
(16
|
)
|
|
(13
|
)
|
Divestitures
|
—
|
|
|
(2
|
)
|
Benefit obligation, ending (recognized in balance sheet)
|
$
|
206
|
|
|
174
|
|
As of
September 30, 2017
there were
$141
of deferred actuarial gains in accumulated other comprehensive income, of which approximately
$19
will be amortized into earnings in
2018
. The discount rates used to measure the benefit obligation as of
September 30, 2017
,
2016
and
2015
were
3.45 percent
,
3.10 percent
and
3.80 percent
, respectively. The health care cost trend rate used for both
2018
and
2017
is assumed to be
7.5 percent
initially, and declining to
5.0 percent
over the subsequent
eleven
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
$14
per year for
2018
through
2022
, and
$60
in total over the five years
2023
through
2027
.
(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 (including asbestos) 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, 2017
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
United States
|
$
|
2,688
|
|
|
1,312
|
|
|
1,350
|
|
Non-U.S.
|
1,119
|
|
|
1,004
|
|
|
985
|
|
Total pretax earnings
|
$
|
3,807
|
|
|
2,316
|
|
|
2,335
|
|
The principal components of income tax expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
831
|
|
|
394
|
|
|
351
|
|
State and local
|
86
|
|
|
11
|
|
|
40
|
|
Non-U.S.
|
398
|
|
|
305
|
|
|
311
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
12
|
|
|
2
|
|
|
7
|
|
State and local
|
(1
|
)
|
|
4
|
|
|
4
|
|
Non-U.S.
|
(59
|
)
|
|
(19
|
)
|
|
(53
|
)
|
Income tax expense
|
$
|
1,267
|
|
|
697
|
|
|
660
|
|
Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
0.7
|
|
|
0.5
|
|
|
1.2
|
|
Non-U.S. rate differential
|
(2.4
|
)
|
|
(2.9
|
)
|
|
(3.6
|
)
|
Non-U.S. tax holidays
|
(0.9
|
)
|
|
(1.1
|
)
|
|
(1.0
|
)
|
U.S. manufacturing deduction
|
(1.2
|
)
|
|
(1.8
|
)
|
|
(1.7
|
)
|
Gains on divestitures
|
1.8
|
|
|
—
|
|
|
—
|
|
Non-U.S. subsidiary restructuring
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
Other
|
0.3
|
|
|
0.4
|
|
|
0.2
|
|
Effective income tax rate
|
33.3
|
%
|
|
30.1
|
%
|
|
28.3
|
%
|
Non-U.S. tax holidays reduce tax rates in certain foreign jurisdictions and are expected to expire over the next
five
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.
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Unrecognized tax benefits, beginning
|
$
|
84
|
|
|
86
|
|
Additions for current year tax positions
|
12
|
|
|
54
|
|
Additions for prior year tax positions
|
16
|
|
|
4
|
|
Reductions for prior year tax positions
|
(13
|
)
|
|
(6
|
)
|
Acquisitions and divestitures
|
—
|
|
|
9
|
|
Reductions for settlements with tax authorities
|
(4
|
)
|
|
(4
|
)
|
Reductions for expiration of statutes of limitations
|
(9
|
)
|
|
(11
|
)
|
Unrecognized tax benefits, ending
|
$
|
86
|
|
|
132
|
|
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
$100
, 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
$(1)
,
$2
and
$(4)
in
2017
,
2016
and
2015
, respectively. As of
September 30, 2017
and
2016
, total accrued interest and penalties were
$16
and
$21
, respectively.
The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed through 2013. 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:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
Net operating losses and tax credits
|
$
|
164
|
|
|
444
|
|
Accrued liabilities
|
277
|
|
|
319
|
|
Postretirement and postemployment benefits
|
82
|
|
|
70
|
|
Employee compensation and benefits
|
206
|
|
|
173
|
|
Pensions
|
271
|
|
|
72
|
|
Other
|
158
|
|
|
196
|
|
Total
|
$
|
1,158
|
|
|
1,274
|
|
|
|
|
|
Valuation allowances
|
$
|
(132
|
)
|
|
(309
|
)
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangibles
|
$
|
(510
|
)
|
|
(753
|
)
|
Property, plant and equipment
|
(239
|
)
|
|
(265
|
)
|
Undistributed non-U.S. earnings
|
(9
|
)
|
|
(249
|
)
|
Other
|
(42
|
)
|
|
(37
|
)
|
Total
|
$
|
(800
|
)
|
|
(1,304
|
)
|
|
|
|
|
Net deferred income tax asset (liability)
|
$
|
226
|
|
|
(339
|
)
|
As of September 30, 2017, all deferred tax assets and liabilities were presented as noncurrent. As of September 30, 2016, current deferred tax assets, net were
$400
and noncurrent deferred tax liabilities, net were
$174
. Total income taxes paid were approximately
$1,420
,
$950
and
$1,590
in
2017
,
2016
and
2015
, respectively. Approximately
one-third
of the
$444
of net operating losses and tax credits can be carried forward indefinitely,
one-third
expire in ten years, and 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, 2017
,
11.5 million
options were available for grant under the plans.
Changes in shares subject to options during the year ended
September 30, 2017
follow (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- Average Exercise Price Per Share
|
|
Shares
|
|
Total
Intrinsic Value of Shares
|
|
Average Remaining Life (Years)
|
Beginning of year
|
|
$
|
54.87
|
|
|
|
15,276
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
$
|
53.71
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
$
|
51.09
|
|
|
|
(3,812
|
)
|
|
|
|
|
|
|
|
|
Options canceled
|
|
$
|
61.48
|
|
|
|
(1,091
|
)
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
55.49
|
|
|
|
10,759
|
|
|
|
$
|
87
|
|
|
|
|
5.8
|
|
Exercisable at end of year
|
|
$
|
56.73
|
|
|
|
8,222
|
|
|
|
$
|
58
|
|
|
|
|
5.1
|
|
The weighted-average grant date fair value per option was
$8.36
,
$9.02
and
$12.48
in
2017
,
2016
and
2015
, respectively. Cash received for option exercises was
$148
in
2017
,
$31
in
2016
and
$36
in
2015
. The total intrinsic value of options exercised in
2017
,
2016
and
2015
was
$36
,
$9
and
$16
, respectively, while the tax benefit realized by the Company from tax deductions related to option exercises was
$2
,
$2
and
$10
, 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
2017
,
2016
and
2015
are, respectively: risk-free interest rate, based on U.S. Treasury yields,
1.7 percent
,
1.9 percent
and
1.9 percent
; dividend yield,
3.6 percent
,
3.8 percent
and
3.1 percent
; and expected volatility, based on historical volatility,
24 percent
,
27 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,
2,549,083
shares were distributed in early 2017 as follows:
1,393,715
issued as shares,
944,002
withheld for income taxes, and the value of
211,366
paid in cash. An additional
1,691,986
shares were distributed at the end of 2017 to employees who provided one additional year of service as follows:
1,070,264
issued as shares,
616,734
withheld for income taxes, and the value of
4,988
paid in cash. There were
11,266
shares canceled and not distributed. Additionally, the rights to receive a maximum of
2,388,125
and
2,178,388
common shares awarded in
2017
and 2016, under the new performance shares program, are outstanding and contingent upon the Company achieving its performance objectives through 2019 and 2018, respectively.
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
2017
,
130,641
shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently,
84,398
shares were issued while
46,243
shares were withheld for income taxes in accordance with minimum withholding requirements. As of
September 30, 2017
, there were
1,194,500
shares of unvested restricted stock outstanding.
The total fair value of shares vested under incentive shares plans was
$245
,
$11
and
$9
, respectively, in
2017
,
2016
and
2015
, of which
$101
,
$4
and
$5
was paid in cash, primarily for tax withholding. As of
September 30, 2017
,
12.9 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, 2017
follow (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Average Grant Date
Fair Value Per Share
|
Beginning of year
|
7,328
|
|
|
|
$
|
49.17
|
|
|
Granted
|
2,134
|
|
|
|
$
|
51.91
|
|
|
Earned/vested
|
(4,372
|
)
|
|
|
$
|
49.14
|
|
|
Canceled
|
(91
|
)
|
|
|
$
|
51.18
|
|
|
End of year
|
4,999
|
|
|
|
$
|
50.33
|
|
|
Total compensation expense for stock options and incentive shares was
$115
,
$159
and
$30
for
2017
,
2016
and
2015
, respectively, of which
$5
,
$14
and
$6
was included in discontinued operations. The decrease in expense for 2017 reflects the impact of changes in the stock price. 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. Income tax benefits recognized in the income statement for these compensation arrangements during
2017
,
2016
and
2015
were
$33
,
$45
and
$2
, respectively. As of
September 30, 2017
, total unrecognized compensation expense related to unvested shares awarded under these plans was
$149
, which is expected to be recognized over a weighted-average period of
1.5
years.
In addition to the employee stock option and incentive shares plans, in
2017
the Company awarded
17,984
shares of restricted stock and
2,248
restricted stock units under the restricted stock plan for non-management directors. As of
September 30, 2017
,
174,335
shares were available for issuance under this plan.
(16) COMMON AND PREFERRED STOCK
At
September 30, 2017
,
40.0 million
shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During
2017
,
6.6 million
common shares were purchased and
5.5 million
treasury shares were reissued. In
2016
,
12.5 million
common shares were purchased and
0.7 million
treasury shares were reissued.
At
September 30, 2017
and
2016
, 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
|
2015
|
|
|
2016
|
|
|
2017
|
|
Beginning balance
|
$
|
171
|
|
|
(622
|
)
|
|
(812
|
)
|
Other comprehensive income (loss)
|
(793
|
)
|
|
(190
|
)
|
|
58
|
|
Reclassified to gain/loss on sale of businesses
|
—
|
|
|
—
|
|
|
385
|
|
Ending balance
|
(622
|
)
|
|
(812
|
)
|
|
(369
|
)
|
|
|
|
|
|
|
Pension and postretirement
|
|
|
|
|
|
Beginning balance
|
(746
|
)
|
|
(952
|
)
|
|
(1,162
|
)
|
Actuarial gains (losses) deferred during the period
|
(315
|
)
|
|
(310
|
)
|
|
315
|
|
Amortization of deferred actuarial losses into earnings
|
109
|
|
|
100
|
|
|
135
|
|
Reclassified to gain/loss on sale of businesses
|
—
|
|
|
—
|
|
|
50
|
|
Ending balance
|
(952
|
)
|
|
(1,162
|
)
|
|
(662
|
)
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
Beginning balance
|
—
|
|
|
(43
|
)
|
|
(25
|
)
|
Gains (Losses) deferred during the period
|
(66
|
)
|
|
(30
|
)
|
|
34
|
|
Reclassifications of realized (gains) losses to sales and cost of sales
|
23
|
|
|
48
|
|
|
3
|
|
Ending balance
|
(43
|
)
|
|
(25
|
)
|
|
12
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
$
|
(1,617
|
)
|
|
(1,999
|
)
|
|
(1,019
|
)
|
Activity above is shown net of income taxes for
2017
,
2016
and
2015
, respectively, as follows: deferral of pension and postretirement actuarial gains (losses):
$(170)
,
$159
and
$192
; amortization of pension and postretirement deferred actuarial losses:
$(75)
,
$(59)
and
$(59)
; deferral of cash flow hedging gains (losses):
$(21)
,
$17
and
$38
; reclassification of realized cash flow hedging (gains) losses:
$(2)
,
$(28)
and
$(13)
.
(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.
In connection with the strategic portfolio repositioning actions undertaken to transform the Company into a more focused enterprise, its businesses and organization were realigned. In fiscal 2017, the Company began reporting three segments:
Automation Solutions
, and
Climate Technologies
and
Tools & Home Products
which together comprise the
Commercial & Residential Solutions
business. Prior year information has been reclassified to conform with the current year presentation. 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 and 2015.
The
Automation Solutions
segment enables process, hybrid and discrete manufacturers to maximize production, protect personnel and the environment, and optimize their energy efficiency and operating costs through a broad offering of integrated solutions and products, including measurement and analytical instrumentation, industrial valves and equipment, and process control systems. Significant end markets serviced include oil and gas, refining, chemicals and power generation, as well as pharmaceuticals, food and beverage, automotive, pulp and paper, metals and mining, and municipal water supplies. 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 or other software applications, 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, smart actuation and control technologies, pressure management products, 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 solutions to customers.
|
|
|
•
|
Process Control Systems & Solutions
provides a digital ecosystem 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, services and solutions for all areas of the climate control industry, including residential heating and cooling, commercial air conditioning, commercial and industrial refrigeration, and cold chain management. Products include compressors, temperature sensors and controls, thermostats, flow controls, and stationary and mobile remote monitoring technologies 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 and appliance solutions. Products include professional pipe-working tools, residential and commercial food waste disposers, and wet-dry vacuums.
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 including the stability of governments and business conditions in foreign countries which could result in adverse changes in exchange rates, changes in regulation or disruption of operations.
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 corporate operations, stock compensation expense, acquisition related costs and other items. 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
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Automation Solutions
|
$
|
10,153
|
|
|
8,977
|
|
|
9,418
|
|
|
$
|
1,846
|
|
|
1,456
|
|
|
1,522
|
|
|
$
|
8,817
|
|
|
8,759
|
|
|
12,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate Technologies
|
4,006
|
|
|
3,944
|
|
|
4,212
|
|
|
835
|
|
|
902
|
|
|
975
|
|
|
2,455
|
|
|
2,489
|
|
|
2,547
|
|
Tools & Home Products
|
1,625
|
|
|
1,611
|
|
|
1,645
|
|
|
364
|
|
|
384
|
|
|
383
|
|
|
817
|
|
|
809
|
|
|
830
|
|
Commercial & Residential Solutions
|
5,631
|
|
|
5,555
|
|
|
5,857
|
|
|
1,199
|
|
|
1,286
|
|
|
1,358
|
|
|
3,272
|
|
|
3,298
|
|
|
3,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested businesses (a)
|
477
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences in accounting methods
|
|
|
|
|
|
|
174
|
|
|
189
|
|
|
148
|
|
|
|
|
|
|
|
Corporate and other (b)
|
|
|
|
|
|
|
705
|
|
|
(427
|
)
|
|
(528
|
)
|
|
9,999
|
|
|
9,675
|
|
|
3,631
|
|
Eliminations/Interest
|
(12
|
)
|
|
(10
|
)
|
|
(11
|
)
|
|
(175
|
)
|
|
(188
|
)
|
|
(165
|
)
|
|
|
|
|
|
|
Total
|
$
|
16,249
|
|
|
14,522
|
|
|
15,264
|
|
|
$
|
3,807
|
|
|
2,316
|
|
|
2,335
|
|
|
$
|
22,088
|
|
|
21,732
|
|
|
19,589
|
|
(a) Divested businesses includes sales and earnings related to the power transmission solutions and commercial storage businesses, which were reported in the former Industrial Automation and Commercial & Residential Solutions segments, respectively.
(b) Corporate and other in 2017 includes first year pretax acquisition accounting charges related to inventory and backlog of
$93
(
$65
after-tax,
$0.10
per share), and in 2015 includes pretax gains on divestitures of
$1,039
(
$611
after-tax,
$0.90
per share) related to the power transmission solutions and commercial storage businesses. See Note 3. Assets held-for-sale of
$6,030
and
$6,222
are included in Corporate and other for 2016 and 2015, respectively. See Note 4.
Automation Solutions
sales by major product offering are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Measurement & Analytical Instrumentation
|
|
$
|
3,619
|
|
|
3,137
|
|
|
3,070
|
|
Valves, Actuators & Regulators
|
|
2,559
|
|
|
2,137
|
|
|
2,668
|
|
Industrial Solutions
|
|
1,779
|
|
|
1,621
|
|
|
1,680
|
|
Process Control Systems & Solutions
|
|
2,196
|
|
|
2,082
|
|
|
2,000
|
|
Total
|
|
$
|
10,153
|
|
|
8,977
|
|
|
9,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
Capital
Expenditures
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Automation Solutions
|
$
|
311
|
|
|
330
|
|
|
400
|
|
|
$
|
298
|
|
|
246
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate Technologies
|
149
|
|
|
150
|
|
|
156
|
|
|
154
|
|
|
133
|
|
|
182
|
|
Tools & Home Products
|
42
|
|
|
44
|
|
|
45
|
|
|
46
|
|
|
44
|
|
|
45
|
|
Commercial & Residential Solutions
|
191
|
|
|
194
|
|
|
201
|
|
|
200
|
|
|
177
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
71
|
|
|
44
|
|
|
35
|
|
|
90
|
|
|
24
|
|
|
15
|
|
Total
|
$
|
573
|
|
|
568
|
|
|
636
|
|
|
$
|
588
|
|
|
447
|
|
|
476
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Destination
|
|
Property, Plant and Equipment
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
United States and Canada
|
$
|
8,370
|
|
|
7,505
|
|
|
7,854
|
|
|
$
|
1,756
|
|
|
1,780
|
|
|
1,852
|
|
Asia
|
3,363
|
|
|
2,926
|
|
|
3,253
|
|
|
481
|
|
|
459
|
|
|
525
|
|
Europe
|
2,381
|
|
|
2,300
|
|
|
2,434
|
|
|
426
|
|
|
435
|
|
|
626
|
|
Latin America
|
981
|
|
|
834
|
|
|
767
|
|
|
216
|
|
|
203
|
|
|
203
|
|
Middle East/Africa
|
1,154
|
|
|
957
|
|
|
956
|
|
|
50
|
|
|
54
|
|
|
115
|
|
Total
|
$
|
16,249
|
|
|
14,522
|
|
|
15,264
|
|
|
$
|
2,929
|
|
|
2,931
|
|
|
3,321
|
|
Sales in the U.S. were
$7,273
,
$6,940
and
$7,608
for 2017, 2016 and 2015, respectively, while Asia includes sales in China of
$1,540
,
$1,320
and
$1,575
in those years. Assets located in the U.S. were
$1,840
in 2017,
$1,772
in 2016 and
$1,746
in 2015.
(19) OTHER FINANCIAL DATA
Items reported in earnings from continuing operations during the years ended September 30 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Research and development expense
|
$
|
336
|
|
|
320
|
|
|
340
|
|
Depreciation expense
|
$
|
399
|
|
|
391
|
|
|
414
|
|
Rent expense
|
$
|
287
|
|
|
273
|
|
|
289
|
|
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
$171
in
2018
,
$125
in
2019
,
$81
in
2020
,
$49
in
2021
and
$31
in
2022
.
Items reported in accrued expenses included the following:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Employee compensation
|
$
|
431
|
|
|
531
|
|
Customer advanced payments
|
$
|
433
|
|
|
505
|
|
Product warranty
|
$
|
106
|
|
|
120
|
|
Other liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Pension and postretirement liabilities
|
$
|
1,037
|
|
|
664
|
|
Deferred income taxes
|
210
|
|
|
425
|
|
Asbestos litigation
|
52
|
|
|
340
|
|
Other
|
430
|
|
|
546
|
|
Total
|
$
|
1,729
|
|
|
1,975
|
|
The increase in asbestos litigation primarily reflects the valves & controls acquisition, which added approximately
$240
of asbestos liabilities. In addition, other long-term assets include
$133
of related insurance receivables,
$95
of which were acquired with valves & controls.
Other operating cash flow is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Pension expense
|
$
|
153
|
|
|
95
|
|
|
127
|
|
Stock compensation expense
|
24
|
|
|
145
|
|
|
110
|
|
Deferred income taxes and other
|
19
|
|
|
45
|
|
|
27
|
|
Total
|
$
|
196
|
|
|
285
|
|
|
264
|
|
(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Full Year
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
$
|
3,337
|
|
|
3,216
|
|
|
3,579
|
|
|
3,574
|
|
|
3,674
|
|
|
4,039
|
|
|
3,932
|
|
|
4,435
|
|
|
14,522
|
|
|
15,264
|
|
Gross profit
|
$
|
1,414
|
|
|
1,365
|
|
|
1,542
|
|
|
1,557
|
|
|
1,593
|
|
|
1,678
|
|
|
1,713
|
|
|
1,804
|
|
|
6,262
|
|
|
6,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations common stockholders
|
$
|
303
|
|
|
364
|
|
|
367
|
|
|
376
|
|
|
441
|
|
|
407
|
|
|
479
|
|
|
496
|
|
|
1,590
|
|
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings common stockholders
|
$
|
349
|
|
|
309
|
|
|
369
|
|
|
292
|
|
|
479
|
|
|
413
|
|
|
438
|
|
|
504
|
|
|
1,635
|
|
|
1,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.47
|
|
|
0.56
|
|
|
0.57
|
|
|
0.58
|
|
|
0.68
|
|
|
0.63
|
|
|
0.74
|
|
|
0.77
|
|
|
2.46
|
|
|
2.54
|
|
Diluted
|
$
|
0.46
|
|
|
0.56
|
|
|
0.57
|
|
|
0.58
|
|
|
0.68
|
|
|
0.63
|
|
|
0.74
|
|
|
0.77
|
|
|
2.45
|
|
|
2.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.54
|
|
|
0.48
|
|
|
0.57
|
|
|
0.45
|
|
|
0.74
|
|
|
0.64
|
|
|
0.68
|
|
|
0.78
|
|
|
2.53
|
|
|
2.35
|
|
Diluted
|
$
|
0.53
|
|
|
0.48
|
|
|
0.57
|
|
|
0.45
|
|
|
0.74
|
|
|
0.64
|
|
|
0.68
|
|
|
0.78
|
|
|
2.52
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
$
|
0.475
|
|
|
0.48
|
|
|
0.475
|
|
|
0.48
|
|
|
0.475
|
|
|
0.48
|
|
|
0.475
|
|
|
0.48
|
|
|
1.90
|
|
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
51.47
|
|
|
58.28
|
|
|
55.54
|
|
|
64.36
|
|
|
56.82
|
|
|
61.63
|
|
|
56.72
|
|
|
64.18
|
|
|
56.82
|
|
|
64.36
|
|
Low
|
$
|
42.21
|
|
|
49.22
|
|
|
41.25
|
|
|
55.40
|
|
|
48.45
|
|
|
56.77
|
|
|
50.41
|
|
|
57.81
|
|
|
41.25
|
|
|
49.22
|
|
Earnings per share are computed independently each period; as a result, the quarterly amounts may not sum to the calculated annual figure.
Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock Exchange and the Chicago Stock Exchange.