EMR 10-Q Quarterly Report Dec. 31, 2014 | Alphaminr
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EMR 10-Q Quarter ended Dec. 31, 2014

Balance Sheet
Cash Flow
Income Statement
EMERSON ELECTRIC CO
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10-Q 1 emr-12312014x10q.htm 10-Q EMR-12.31.2014-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

______________________
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

OR

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

For the transition period from ____________________ to __________________

Commission file number 1-278

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at January 31, 2015 : 685,201,890 shares.


1
FORM 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED DECEMBER 31, 2013 AND 2014
(Dollars in millions, except per share amounts; unaudited)
Three Months Ended
December 31,
2013

2014

Net sales
$
5,606

5,587

Costs and expenses:
Cost of sales
3,370

3,307

Selling, general and administrative expenses
1,444

1,405

Other deductions, net
95

64

Interest expense (net of interest income of $7 and $7, respectively)
54

46

Earnings before income taxes
643

765

Income taxes
166

236

Net earnings
477

529

Less: Noncontrolling interests in earnings of subsidiaries
15

4

Net earnings common stockholders
$
462

525

Basic earnings per share common stockholders
$
0.65

0.76

Diluted earnings per share common stockholders
$
0.65

0.75

Cash dividends per common share
$
0.43

0.47




















See accompanying Notes to Consolidated Financial Statements.


2
FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED DECEMBER 31, 2013 AND 2014
(Dollars in millions; unaudited)

Three Months Ended
December 31,
2013


2014

Net earnings
$
477

529

Other comprehensive income (loss), net of tax:
Foreign currency translation
15

(305
)
Pension and postretirement
23

28

Cash flow hedges
3

(24
)
Total other comprehensive income (loss)
41

(301
)
Comprehensive income
518

228

Less: Noncontrolling interests in comprehensive income of subsidiaries
13

3

Comprehensive income common stockholders
$
505

225




































See accompanying Notes to Consolidated Financial Statements.



3
FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts; unaudited)
Sept 30, 2014
Dec 31, 2014
ASSETS
Current assets
Cash and equivalents
$
3,149

3,122

Receivables, less allowances of $114 and $106, respectively
5,019

4,404

Inventories
2,057

2,121

Other current assets
642

836

Total current assets
10,867

10,483

Property, plant and equipment, net
3,802

3,631

Other assets

Goodwill
7,182

6,940

Other intangible assets
1,689

1,649

Other
637

1,021

Total other assets
9,508

9,610

Total assets
$
24,177

23,724

LIABILITIES AND EQUITY


Current liabilities


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

3,484

Accounts payable
2,951

2,468

Accrued expenses
2,876

2,640

Income taxes
162

285

Total current liabilities
8,454

8,877

Long-term debt
3,559

3,289

Other liabilities
1,997

2,002

Equity


Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 696,605,222 shares and 688,677,106 shares, respectively
477

477

Additional paid-in-capital
161

162

Retained earnings
19,867

20,066

Accumulated other comprehensive income (loss)
(575
)
(875
)
Cost of common stock in treasury, 256,748,790 shares and 264,676,906 shares, respectively
(9,811
)
(10,317
)
Common stockholders’ equity
10,119

9,513

Noncontrolling interests in subsidiaries
48

43

Total equity
10,167

9,556

Total liabilities and equity
$
24,177

23,724


See accompanying Notes to Consolidated Financial Statements.


4
FORM 10-Q

EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2013 AND 2014
(Dollars in millions; unaudited)

Three Months Ended
December 31,
2013

2014

Operating activities
Net earnings
$
477

529

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
209

207

Changes in operating working capital
(54
)
(192
)
Other, net
59

27

Net cash provided by operating activities
691

571

Investing activities
Capital expenditures
(236
)
(207
)
Purchases of businesses, net of cash and equivalents acquired
(576
)
(143
)
Divestiture of business
268

—

Other, net
(11
)
(26
)
Net cash used by investing activities
(555
)
(376
)
Financing activities
Net increase (decrease) in short-term borrowings
320

(227
)
Proceeds from short-term borrowings greater than three months
396

1,957

Payments of short-term borrowings greater than three months
(329
)
(731
)
Payments of long-term debt
(314
)
(251
)
Dividends paid
(304
)
(326
)
Purchases of common stock
(390
)
(509
)
Other, net
(54
)
(59
)
Net cash used by financing activities
(675
)
(146
)
Effect of exchange rate changes on cash and equivalents
1

(76
)
Increase (decrease) in cash and equivalents
(538
)
(27
)
Beginning cash and equivalents
3,275

3,149

Ending cash and equivalents
$
2,737

3,122

Changes in operating working capital
Receivables
$
446

434

Inventories
(161
)
(195
)
Other current assets
25

(17
)
Accounts payable
(151
)
(277
)
Accrued expenses
(298
)
(261
)
Income taxes
85

124

Total changes in operating working capital
$
(54
)
(192
)
See accompanying Notes to Consolidated Financial Statements.


5
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q


Notes to Consolidated Financial Statements

1.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2014 . 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.
2.
Reconciliations of weighted average shares for basic and diluted earnings per common share follow (in millions). Earnings allocated to participating securities were inconsequential.
Three Months Ended
December 31,
2013

2014

Basic shares outstanding
703.5

691.4

Dilutive shares
4.6

3.3

Diluted shares outstanding
708.1

694.7


3.
Other Financial Information (in millions):
Sept 30, 2014

Dec 31, 2014

Inventories
Finished products
$
741

767

Raw materials and work in process
1,316

1,354

Total
$
2,057

2,121

Property, plant and equipment, net
Property, plant and equipment, at cost
$
9,411

8,986

Less: Accumulated depreciation
5,609

5,355

Total
$
3,802

3,631


Sept 30, 2014

Dec 31, 2014

Goodwill by business segment
Process Management
$
2,701

2,740

Industrial Automation
1,329

1,079

Network Power
2,218

2,193

Climate Technologies
500

497

Commercial & Residential Solutions
434

431

Total
$
7,182

6,940


The change in goodwill since September 30, 2014 is primarily due to classifying the power transmission solutions business (reported in the Industrial Automation segment) as held-for-sale as of December 31, 2014. See Note 11.


6
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Sept 30, 2014

Dec 31, 2014

Accrued expenses include the following
Employee compensation
$
705

517

Customer advanced payments
$
455

456

Product warranty
$
193

184

Other liabilities
Pension plans
$
564

551

Deferred income taxes
572

555

Postretirement plans, excluding current portion
233

232

Other
628

664

Total
$
1,997

2,002



4.
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of December 31, 2014 , the notional amount of foreign currency hedge positions was approximately $1.8 billion , while commodity hedge contracts totaled approximately 80 million pounds ( $224 million ) of copper and aluminum. All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of December 31, 2014 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting. The following gains and losses are included in earnings and other comprehensive income (OCI) for the three months ended December 31, 2014 and 2013 (in millions):
Into Earnings
1st Quarter
Into OCI
1st Quarter
Gains (Losses)
Location
2013

2014

2013

2014

Commodity
Cost of sales
$
(3
)
(2
)
2

(12
)
Foreign currency
Sales, cost of sales
2

(1
)
1

(31
)
Foreign currency
Other deductions, net
(2
)
(17
)
Total
$
(3
)
(20
)
3

(43
)
Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the three months ended December 31, 2014 and 2013.
Fair Value Measurement – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of December 31, 2014 , the fair value of long-term debt was $4,280 million , which exceeded the carrying value by $449 million . At December 31, 2014 , the fair values of commodity contracts and foreign currency contracts were reported in other current assets and accrued expenses. Valuations of derivative contract positions are summarized below (in millions):
September 30, 2014
December 31, 2014
Assets
Liabilities
Assets
Liabilities
Foreign Currency
$
32

20

31

57

Commodity
$
1

10

—

19




7
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Counterparties to derivatives arrangements are companies with high credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below preestablished levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The Company can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company as of December 31, 2014 . The maximum collateral that could have been required was $49 million .

5.
The change in equity for the first three months of 2015 is shown below (in millions):
Common
Stockholders'
Equity
Noncontrolling Interests in Subsidiaries
Total Equity
Balance at September 30, 2014
$
10,119

48

10,167

Net earnings
525

4

529

Other comprehensive income (loss)
(300
)
(1
)
(301
)
Cash dividends
(326
)
(8
)
(334
)
Net purchases of common stock
(505
)
—

(505
)
Balance at December 31, 2014
$
9,513

43

9,556


6.
Activity in accumulated other comprehensive income (loss) for the three months ended December 31, 2013 and December 31, 2014 is shown below (in millions):
Three Months Ended
December 31,
2013

2014

Foreign currency translation
Beginning balance
$
504

171

Other comprehensive income (loss)
17

(304
)
Ending balance
521

(133
)
Pension and postretirement
Beginning balance
(692
)
(746
)
Amortization of deferred actuarial losses into earnings
23

28

Ending balance
(669
)
(718
)
Cash flow hedges
Beginning balance
(1
)
—

Deferral of gains (losses) arising during the period
2

(26
)
Reclassification of realized (gain) loss to sales and cost of sales
1

2

Ending balance
2

(24
)
Accumulated other comprehensive income (loss)
$
(146
)
(875
)
Activity above is shown net of income taxes for the three months ended December 31, 2013 and 2014, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(13) and $(15); deferral of cash flow hedging gains (losses): $(1) and $17; reclassification of realized cash flow hedging (gains) losses: $0 and $(1).



8
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q


7.     Total periodic pension and postretirement expense is summarized below (in millions):
Three Months Ended
December 31,
2013

2014

Service cost
$
24

27

Interest cost
62

60

Expected return on plan assets
(86
)
(92
)
Net amortization
36

43

Total
$
36

38



8.
Other deductions, net are summarized below (in millions):
Three Months Ended
December 31,
2013

2014

Amortization of intangibles
$
57

55

Rationalization of operations
13

9

Other
25

—

Total
$
95

64


The decrease in other for the first quarter is primarily due to a favorable foreign currency impact of $19 million , resulting from gains in the current year due to the strength of the U.S. dollar, compared to losses in the prior year.

9.    Rationalization of operations expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. Details of the change in the liability for rationalization during the three months ended December 31, 2014 follow (in millions):
Sept 30, 2014

Expense

Paid/Utilized

Dec 31, 2014

Severance and benefits
$
20

5

6

19

Lease and other contract terminations
1

—

1

—

Vacant facility and other shutdown costs
—

1

—

1

Start-up and moving costs
1

3

4

—

Total
$
22

9

11

20


Rationalization of operations expense by segment is provided below (in millions):
Three Months Ended
December 31,
2013

2014

Process Management
$
3

3

Industrial Automation
2

2

Network Power
4

1

Climate Technologies
3

2

Commercial & Residential Solutions
1

1

Total
$
13

9


The Company expects to incur full year 2015 rationalization expense of approximately $100 million . This includes the $9 million incurred to date, as well as costs to complete actions initiated before the end of the first quarter and actions anticipated to be approved and initiated during the remainder of the year. First quarter costs largely relate to deployment of resources to higher growth regions and to directly serve local markets.



9
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

10.
Summarized information about the Company's results of operations by business segment follows (in millions):
Three Months Ended December 31,
Sales
Earnings
2013

2014

2013

2014

Process Management
$
2,041

2,099

373

392

Industrial Automation
1,149

1,152

162

164

Network Power
1,303

1,119

83

79

Climate Technologies
786

900

107

126

Commercial & Residential Solutions
466

480

100

103

5,745

5,750

825

864

Differences in accounting methods
57

58

Corporate and other
(185
)
(111
)
Eliminations/Interest
(139
)
(163
)
(54
)
(46
)
Total
$
5,606

5,587

643

765


Industrial Automation intersegment sales for the three months ended December 31, 2014 and 2013 were $145 million and $116 million , respectively. The decrease in corporate and other primarily reflects lower incentive stock compensation of $27 million , lower inventory costs of $20 million from purchase accounting, and a $30 million favorable comparative impact from accelerating 2014 charitable contributions into the first quarter of last year.

11.
In the first quarter of 2015, the Company completed three acquisitions which are included in Process Management's measurement devices and systems and solutions businesses. Combined annualized sales for these businesses are approximately $32 million . Total cash paid for all businesses was $143 million , net of cash acquired. The Company recognized goodwill of $73 million ( $42 million of which is expected to be tax deductible) and other intangible assets of $61 million , primarily customer relationships and intellectual property with a weighted-average life of approximately 11 years.

In connection with its longer-term strategy to divest selected slower-growth businesses, on January 30, 2015 the Company completed the previously announced sale of its mechanical power transmission solutions business to Regal Beloit Corporation for approximately $1.4 billion . After-tax proceeds of approximately $1 billion are expected to be used for share repurchase. This business is reported in the Industrial Automation segment and had fiscal 2014 sales of $605 million and earnings before income taxes of $87 million . Assets and liabilities for this business were classified as held-for-sale in the consolidated balance sheet at December 31, 2014 as follows: other current assets, $180 million (accounts receivable, inventories, other); other assets, $377 million (property, plant and equipment, goodwill, other noncurrent assets); accrued expenses, $81 million (accounts payable and other current liabilities); and other liabilities, $16 million . The Company will recognize an after-tax gain of approximately $520 million from the sale, $0.75 per share. Power transmission solutions designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions.

In the first quarter of 2014, the Company completed the divestiture of a 51 percent controlling interest in Artesyn and in the fourth quarter of 2014, the Company sold its connectivity solutions business. Both of these businesses had been reported in the Network Power segment. Consolidated operating results for the first quarter of 2014 include combined sales of $164 million and a pretax loss of $10 million (net loss, $8 million ) for these businesses.

12.
On October 22, 2012, Invensys Systems, Inc. filed a suit for patent infringement against the Company and its wholly-owned indirect subsidiary, Micro Motion, Inc., in the Eastern District of Texas captioned Invensys Systems, Inc. v. Emerson Electric Co. and Micro Motion, Inc., USA . The complaint alleges infringement on Invensys patents by Micro Motion's Coriolis flowmeter "Enhanced Core Processors." The Invensys suit seeks damages of $182 million and an injunction preventing the Company and Micro Motion from engaging in future infringement. The Company filed a petition seeking a ruling that the Invensys patents are invalid and a U.S. Patent Office review is in process. It is too early in the litigation to assess any potential financial impact. The Company and Micro Motion believe that the Invensys claims are without merit and that they have strong defenses to the claims, and intend to aggressively defend the suit.


10
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Items 2 and 3.

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

OVERVIEW
First quarter sales were $5.6 billion , essentially flat, as increased currency volatility and prior year divestitures negatively affected reported sales growth. Underlying sales growth of 6 percent reflected mixed global market conditions. Sales growth was led by the U.S. and Asia on strength in energy and air conditioning end markets. Net earnings common stockholders were $525 million , up 14 percent , and diluted earnings per share were $0.75 , up 15 percent .

RESULTS OF OPERATIONS

Following is an analysis of the Company’s operating results for the first quarter ended December 31, 2014 , compared with the first quarter ended December 31, 2013 .
Three Months Ended December 31
2013
2014
Change
(dollars in millions, except per share amounts)


Net sales
$
5,606

5,587

—
%
Gross profit
$
2,236

2,280

2
%
Percent of sales
39.9
%
40.8
%

SG&A
$
1,444

1,405


Percent of sales
25.8
%
25.1
%

Other deductions, net
$
95

64


Interest expense, net
$
54

46


Earnings before income taxes
$
643

765

19
%
Percent of sales
11.5
%
13.7
%

Net earnings common stockholders
$
462

525

14
%
Percent of sales
8.2
%
9.4
%

Diluted earnings per share
$
0.65

0.75

15
%

Net sales for the first quarter of 2015 were $5,587 million , a decrease of $19 million , or essentially flat compared with $5,606 million in 2014. Underlying sales grew 6 percent ( $298 million ) on volume increases, as foreign currency translation deducted 3 percent ( $159 million ), prior year divestitures deducted 3 percent ( $164 million ) and acquisitions added $6 million . Underlying sales increased 8 percent in the U.S. and 4 percent internationally. Europe was up 1 percent , Asia was up 2 percent (China up 1 percent ), Latin America was up 15 percent and Canada was up 21 percent . Middle East/Africa was flat. Sales growth was led by Climate Technologies, which increased $114 million , or 15 percent , due to accelerated demand from regulatory changes, and Process Management, which increased $58 million , or 3 percent . Sales for Network Power decreased $184 million , or 14 percent , due to prior year divestitures.
Cost of sales in 2015 were $3,307 million , a decrease of $63 million compared to $3,370 million in 2014, due to prior year divestitures, partially offset by costs associated with increased volume. Gross profit margin of 40.8 percent increased 0.9 percentage points compared to 39.9 percent in 2014 due to a 0.6 percentage point favorable comparative effect from prior year divestitures and purchase accounting inventory expense of $20 million , slightly offset by unfavorable mix.

Selling, general and administrative (SG&A) expenses of $1,405 million decreased $39 million compared with prior year as costs associated with higher volume were more than offset by decreases due to prior year divestitures and certain other items. SG&A as a percent of sales of 25.1 percent in 2015 decreased 0.7 percentage points, reflecting $30 million of expense in 2014 from the acceleration of charitable contributions and lower incentive stock compensation expense of $27 million in 2015, partially offset by higher other costs.

Other deductions, net were $64 million in 2015, a decrease of $31 million . See Note 8 for additional information.


11
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Pretax earnings of $765 million increased $122 million , or 19 percent . Earnings increased $19 million in both Climate Technologies and Process Management. Corporate and other expense decreased $74 million due to the lower incentive stock compensation expense, purchase accounting related inventory costs in the prior year and the accelerated charitable contributions in 2014. See Note 10.

Income taxes were $236 million for 2015 and $166 million for 2014, resulting in effective tax rates of 31 percent and 26 percent , respectively. The 2014 effective tax rate benefited approximately 5 percentage points from certain items, including 2 percentage points each from the Artesyn divestiture and disposal of an equity investment. The effective tax rate for full year 2015 is estimated at approximately 33 percent, including a 2 percentage point impact from the sale of the power transmission solutions business.

Net earnings common stockholders in 2015 were $525 million , up 14 percent , and earnings per share were $0.75 , up 15 percent , reflecting operating results, lower noncontrolling interests in earnings of subsidiaries compared with prior year and purchases of common stock for treasury.

BUSINESS SEGMENTS
Following is an analysis of operating results for the Company’s business segments for the first quarter ended December 31, 2014 , compared with the first quarter ended December 31, 2013 . The Company defines segment earnings as earnings before interest and taxes.
Process Management
Three Months Ended December 31
2013
2014
Change
(dollars in millions)
Sales
$
2,041

2,099

3
%
Earnings
$
373

392

5
%
Margin
18.3
%
18.7
%


Process Management sales were $2.1 billion in the first quarter, an increase of $58 million or 3 percent , on growth in energy and chemical end markets. Underlying sales increased 6 percent ( $124 million ) on volume growth while acquisitions added $6 million . Foreign currency translation had a 3 percent ( $72 million ) unfavorable impact. The final control and systems and solutions businesses grew moderately and the measurement devices business was up modestly. Underlying sales increased 7 percent in the U.S., 4 percent in Europe and 1 percent in Asia on 3 percent growth in China. Latin America was up 26 percent , Canada was up 24 percent and Middle East/Africa decreased 1 percent . Earnings increased on higher volume, and favorable foreign currency transactions of $19 million which were offset by investment spending and other costs. Although lower oil prices have resulted in a more uncertain outlook for the process industry, backlog remains strong and downstream market momentum is building. Near-term demand is expected to moderate but continue to grow through fiscal 2015.
Industrial Automation
Three Months Ended December 31
2013
2014
Change
(dollars in millions)
Sales
$
1,149

1,152

—
%
Earnings
$
162

164

1
%
Margin
14.1
%
14.2
%


Industrial Automation sales were $1.2 billion in the first quarter, an increase of $3 million . Underlying sales growth of 4 percent ( $41 million ) from higher volume was effectively offset by unfavorable foreign currency translation of 4 percent ( $38 million ). Sales growth was led by hermetic motors, on HVAC compressor demand, and the electrical distribution and power transmission businesses. Power generating alternators and motors and drives declined, with Europe particularly weak. The fluid automation business was down modestly. Underlying sales were up 13 percent in the U.S., down 8 percent in Europe, and up 5 percent in Asia with 6 percent growth in China. Sales were up 7 percent in Latin America and 13 percent in Canada, while Middle East/Africa was down 10 percent . Earnings increased 1 percent , reflecting higher underlying volume largely offset by unfavorable mix and investment spending. Market conditions are expected to remain mixed in the near term as the U.S. and European economies trend in


12
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

opposite directions. Order rates in the power generating alternators business are expected to slow further as increased pressure from lower oil prices reduces capital spending in the upstream oil and gas market. On January 30, 2015, the Company completed the previously announced sale of its power transmission solutions business. See Note 11.
Network Power
Three Months Ended December 31
2013
2014
Change
(dollars in millions)
Sales
$
1,303

1,119

(14
)%
Earnings
$
83

79

(5
)%
Margin
6.4
%
7.1
%

Network Power sales were $1.1 billion in the first quarter, a decrease of $184 million or 14 percent , reflecting prior year divestitures which subtracted 12 percent ( $164 million ). Additionally, underlying sales increased 1 percent ( $12 million ) and foreign currency translation deducted 3 percent ( $32 million ). The underlying sales growth reflects volume of 2 percent partially offset by 1 percent lower price. The data center business was up slightly, led by a large European hyperscale project and increases in power switching and thermal management products. The telecommunications power business declined in the Americas and Europe. Underlying sales decreased 1 percent in the U.S., increased 13 percent in Europe and were flat in Asia. Latin America was down 18 percent and Middle East/Africa was down 8 percent . Canada was up 42 percent . Earnings decreased $4 million as lower price and unfavorable mix were partially offset by materials cost containment and cost reduction actions. The margin increase reflects divestitures, which had sales of $164 million and a pretax loss of $10 million in the prior year. Demand is expected to remain mixed in the near term, with favorable data center market conditions and reduced levels of telecommunications investment.

Climate Technologies
Three Months Ended December 31
2013
2014
Change
(dollars in millions)
Sales
$
786

900

15
%
Earnings
$
107

126

18
%
Margin
13.6
%
14.0
%

Climate Technologies sales were $900 million in the first quarter, an increase of $114 million or 15 percent . Underlying sales increased 17 percent ( $126 million ) on higher volume. Foreign currency translation deducted 2 percent ( $12 million ). The global air conditioning business was up on strong accelerated demand in U.S. residential air conditioning due to regulatory changes that went into effect January 1, 2015. Global refrigeration had modest growth as strength in the U.S. and Asia was partially offset by a decrease in Europe. The solutions business had strong growth. Underlying sales increased 27 percent in the U.S., decreased 3 percent in Europe and increased 2 percent in Asia with China down 3 percent . Latin America was up 39 percent , Canada was up 11 percent and Middle East/Africa was up 31 percent . Earnings increased $19 million and margin increased 40 basis points primarily on higher volume and resulting leverage. Warranty costs were lower while mix was unfavorable. Although growth in the U.S. is expected to slow significantly in the near term as customers consume inventory built in the quarter, end user demand is expected to remain favorable, led by continued momentum in North America and Asia.



13
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Commercial & Residential Solutions
Three Months Ended December 31
2013
2014
Change
(dollars in millions)
Sales
$
466

480

3
%
Earnings
$
100

103

3
%
Margin
21.4
%
21.5
%


Commercial & Residential Solutions sales were $480 million in the first quarter, an increase of $14 million , or 3 percent . Underlying sales increased 4 percent ( $19 million ) on higher volume while foreign currency translation deducted 1 percent ( $5 million ). The sales increase was led by solid growth in professional tools and moderate increases in wet/dry vacuums and food waste disposers. The commercial and residential storage businesses decreased modestly. Sales increased 4 percent in both the U.S. and internationally. Earnings increased 3 percent on higher volume. Favorable momentum in U.S. residential and commercial construction markets is expected to continue in the near term, supporting the outlook for moderate growth in 2015.

FINANCIAL CONDITION

Key elements of the Company's financial condition for the three months ended December 31, 2014 as compared to the year ended September 30, 2014 .
Sept 30, 2014

Dec 31, 2014

Working capital (in millions)
$
2,413

1,606

Current ratio
1.3

1.2

Total debt-to-total capital
37.3
%
41.6
%
Net debt-to-net capital
22.1
%
27.7
%
Interest coverage ratio
16.3
X
15.6X

The Company's interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 15.6 X for the first three months of 2015 compares to 11.6 X for the first three months of 2014. The increase is due to higher pretax earnings and lower interest expense.
Cash provided by operating activities of $571 million decreased $120 million , or 17 percent , compared with $691 million in the prior year, primarily due to increased investment in working capital. Operating cash flow funded capital expenditures of $207 million and dividends of $326 million . Common stock purchases were $509 million and principal payments of long-term debt were $251 million . Free cash flow of $364 million (operating cash flow of $571 million less capital expenditures of $207 million ) was down $91 million , due to the lower operating cash flow in 2015. Free cash flow was $455 million in 2014 (operating cash flow of $691 million less capital expenditures of $236 million ). The Company expects to use the after-tax proceeds of approximately $1 billion from the sale of the power transmission solutions business for share repurchase, which is now expected to exceed $2 billion in 2015.
Emerson maintains a conservative financial structure which provides the strength and flexibility necessary to achieve its strategic objectives. The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet the Company’s needs in the foreseeable future through ongoing operations, existing resources, short- and long-term debt capacity or backup credit lines. These resources allow Emerson to reinvest in existing businesses, pursue strategic acquisitions and manage its capital structure on a short- and long-term basis.
FISCAL 2015 OUTLOOK
The global macroeconomic environment is mixed, with favorable trends in North America contrasting with weakness in Europe, Latin America and Middle East/Africa. The rapid decrease in oil prices and strengthening of the U.S. dollar have contributed to extraordinary business conditions and significant uncertainty. This is especially true in Europe, which has not recovered from the global recession in 2008 and 2009. Despite this environment, orders have been solid and backlog remains high. Full year earnings will be meaningfully affected by several factors, including unfavorable currency translation, continued weakness in Europe and certain emerging markets, expected pressure from lower oil prices, primarily in the second half of the year, and the sale of power transmission solutions business. Overall, the Company’s outlook is for 3 to 5 percent underlying sales growth for 2015. Currency translation is expected to reduce sales by 4 to 5 percent and the divestiture of the power transmission solutions business will deduct an additional 2 percent. Reported sales are therefore expected to decline 1 to 4 percent. Profitability is expected to continue to improve modestly from favorable mix and incremental restructuring, which will be increased to approximately $100 million to selectively reposition the global cost structure. Reported earnings per share are expected to be in the range of $4.50 to $4.60, including a significant reduction from currency translation, an estimated divestiture gain of $0.75 per share and $0.05 per share of accelerated restructuring costs.

Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statements to reflect later developments. These risks and uncertainties include economic and currency conditions, market demand, pricing, protection of intellectual property, and competitive and technological factors, among others, which are set forth in the “Risk Factors”


14
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

of Part I, Item 1, and the "Safe Harbor Statement" of Exhibit 13, to the Company's Annual Report on Form 10-K for the year ended September 30, 2014, which are hereby incorporated by reference.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in a timely manner. This system also is designed to ensure information is accumulated and communicated to management, including the Company's certifying officers, to allow timely decisions regarding required disclosure. Based on an evaluation performed, the certifying officers have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
There was no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (shares in 000s).
Period
Total Number of Shares
Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 2014
3,015
$61.58
3,015
46,114
November 2014
2,225
$64.46
2,225
43,889
December 2014
3,050
$61.96
3,050
40,839
Total
8,290
$62.50
8,290
40,839
The Company’s Board of Directors has authorized the purchase of up to 70 million shares of common stock under a May 2013 program.



15
EMERSON ELECTRIC CO. AND SUBSIDIARIES
FORM 10-Q

Item 6. Exhibits

(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K).
3.1

Bylaws of Emerson Electric Co., as amended through November 4, 2014, incorporated by reference to Emerson Electric Co. Form 8-K filed November 5, 2014, Exhibit 3.1.
12

Ratio of Earnings to Fixed Charges.
31

Certifications pursuant to Exchange Act Rule 13a-14(a).
32

Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.
101

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three months ended December 31, 2013 and 2014, (ii) Consolidated Statements of Comprehensive Income for the three months ended December 31, 2013 and 2014, (iii) Consolidated Balance Sheets at September 30, 2014 and December 31, 2014, (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2014, and (v) Notes to Consolidated Financial Statements for the three months ended December 31, 2014.


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EMERSON ELECTRIC CO.
By
/s/ Frank J. Dellaquila
Frank J. Dellaquila
Executive Vice President and Chief Financial Officer
(on behalf of the registrant and as Chief Financial Officer)
February 4, 2015


INDEX TO EXHIBITS
Exhibit No.
Exhibit
12

Ratio of Earnings to Fixed Charges.
31

Certifications pursuant to Exchange Act Rule 13a-14(a).
32

Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.
101

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Earnings for the three months ended December 31, 2013 and 2014, (ii) Consolidated Statements of Comprehensive Income for the three months ended December 31, 2013 and 2014, (iii) Consolidated Balance Sheets at September 30, 2014 and December 31, 2014, (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2014, and (v) Notes to Consolidated Financial Statements for the three months ended December 31, 2014.




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TABLE OF CONTENTS