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

For the quarterly period ended June 30,December 31, 2018

OR

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

For the transition period from ____________________ to __________________

Commission file number 1-278

EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction of
incorporation or organization)
logo_emersona05.jpg
43-0259330
(I.R.S. Employer
Identification No.)
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri
(Address of principal executive offices)
 
 
63136
(Zip Code)
    

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock of $0.50 par value per share outstanding at JulyJanuary 31, 2018:2019: 628,465,551614,619,859 shares.


1

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Consolidated Statements of Earnings
EMERSON ELECTRIC CO. & SUBSIDIARIES

Three and nine months ended June 30,December 31, 2017 and 2018
(Dollars in millions, except per share amounts; unaudited)
 
 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2017
 2018
 2017
 2018
Net sales$4,039
 4,456
 10,829
 12,520
        
Costs and expenses:       
Cost of sales2,361
 2,507
 6,229
 7,125
Selling, general and administrative expenses931
 1,054
 2,621
 3,078
Other deductions, net87
 88
 203
 275
Interest expense (net of interest income of $10, $10, $25 and $35, respectively)39
 39
 126
 113
        
Earnings from continuing operations before income taxes621
 768
 1,650
 1,929
        
Income taxes202
 49
 477
 327
        
Earnings from continuing operations419
 719
 1,173
 1,602
        
Discontinued operations, net of tax6
 —
 (133) —
        
Net earnings425
 719
 1,040
 1,602
        
Less: Noncontrolling interests in earnings of subsidiaries12
 7
 26
 16
        
Net earnings common stockholders$413
 712
 1,014
 1,586
        
Earnings common stockholders:       
     Earnings from continuing operations$407
 712
 1,147
 1,586
     Discontinued operations, net of tax6
 —
 (133) —
Net earnings common stockholders$413
 712
 1,014
 1,586
        
Basic earnings per share common stockholders:       
     Earnings from continuing operations$0.63
 1.13
 1.77
 2.50
     Discontinued operations0.01
 —
 (0.20) —
Basic earnings per common share$0.64
 1.13
 1.57
 2.50
        
Diluted earnings per share common stockholders:       
     Earnings from continuing operations$0.63
 1.12
 1.77
 2.49
     Discontinued operations0.01
 —
 (0.20) —
Diluted earnings per common share$0.64
 1.12
 1.57
 2.49
        
Cash dividends per common share$0.48
 0.485
 1.44
 1.455
        
        
        
 Three Months Ended
December 31,
 2017
 2018
Net sales$3,816
 4,147
    
Costs and expenses:   
Cost of sales2,202
 2,386
Selling, general and administrative expenses995
 1,077
Other deductions, net78
 50
Interest expense (net of interest income of $11 and $5, respectively)38
 43
    
Earnings before income taxes503
 591
    
Income taxes109
 124
    
Net earnings394
 467
    
Less: Noncontrolling interests in earnings of subsidiaries2
 2
    
Net earnings common stockholders$392
 465
    
Basic earnings per share common stockholders$0.61
 0.74
    
Diluted earnings per share common stockholders$0.61
 0.74
    
Cash dividends per common share$0.485
 0.49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying Notes to Consolidated Financial Statements.


2

Consolidated Statements of Comprehensive Income
EMERSON ELECTRIC CO. & SUBSIDIARIES

Three and nine months ended June 30,December 31, 2017 and 2018
(Dollars in millions; unaudited)

Three Months Ended June 30, Nine Months Ended June 30,Three Months Ended December 31,
 2017

 2018
  2017
  2018
 2017

 2018
Net earnings $425
 719
  1,040
 1,602
 $394
 467
            
Other comprehensive income (loss), net of tax:            
Foreign currency translation 74
 (273) 230
 (118) 7
 (35)
Pension and postretirement 35
 22
 155
 67
 23
 13
Cash flow hedges 5
 (14) 37
 (22) (3) (15)
Total other comprehensive income 114
 (265) 422
 (73)
Total other comprehensive income (loss) 27
 (37)
            
Comprehensive income 539
 454
 1,462
 1,529
 421
 430
            
Less: Noncontrolling interests in comprehensive
income of subsidiaries
 11
 7
 24
 16
 2
 2
Comprehensive income common stockholders $528
 447
 1,438
 1,513
 $419
 428


































See accompanying Notes to Consolidated Financial Statements.


3

Consolidated Balance Sheets
EMERSON ELECTRIC CO. & SUBSIDIARIES

(Dollars and shares in millions, except per share amounts; unaudited)
Sept 30, 2017 June 30, 2018Sept 30, 2018 Dec 31, 2018
ASSETS      
Current assets      
Cash and equivalents$3,062
 3,411
$1,093
 1,248
Receivables, less allowances of $91 and $98, respectively3,072
 3,027
Receivables, less allowances of $113 and $105, respectively3,023
 2,733
Inventories1,696
 1,805
1,813
 1,980
Other current assets422
 333
690
 697
Total current assets8,252
 8,576
6,619
 6,658
      
Property, plant and equipment, net3,321
 3,260
3,562
 3,551
Other assets 
   
  
Goodwill5,316
 5,745
6,455
 6,468
Other intangible assets1,890
 2,157
2,751
 2,714
Other810
 749
1,003
 1,038
Total other assets8,016
 8,651
10,209
 10,220
Total assets$19,589
 20,487
$20,390
 20,429
      
LIABILITIES AND EQUITY 
  
 
  
Current liabilities 
  
 
  
Short-term borrowings and current maturities of long-term debt$862
 2,862
$1,623
 3,320
Accounts payable1,776
 1,647
1,943
 1,794
Accrued expenses2,342
 2,392
2,534
 2,288
Income taxes65
 53
64
 138
Total current liabilities5,045
 6,954
6,164
 7,540
      
Long-term debt3,794
 3,126
3,137
 2,641
      
Other liabilities1,980
 1,947
2,099
 1,972
      
Equity 
  
 
  
Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 641,691,971 shares and 628,411,667 shares, respectively477
 477
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 629.2 shares and 615.8 shares, respectively477
 477
Additional paid-in-capital297
 332
348
 375
Retained earnings21,995
 22,660
23,072
 23,252
Accumulated other comprehensive income (loss)(1,019) (1,092)(1,015) (1,052)
Cost of common stock in treasury, 311,662,041 shares and 324,942,345 shares, respectively(13,032) (13,964)
Cost of common stock in treasury, 324.2 shares and 337.5 shares, respectively(13,935) (14,816)
Common stockholders’ equity8,718
 8,413
8,947
 8,236
Noncontrolling interests in subsidiaries52
 47
43
 40
Total equity8,770
 8,460
8,990
 8,276
Total liabilities and equity$19,589
 20,487
$20,390
 20,429






See accompanying Notes to Consolidated Financial Statements. 


4

Consolidated Statements of Cash Flows
EMERSON ELECTRIC CO. & SUBSIDIARIES

NineThree months ended June 30,December 31, 2017 and 2018
(Dollars in millions; unaudited)

 Nine Months Ended Three Months Ended
 June 30, December 31,
 2017
 2018
 2017
 2018
Operating activities        
Net earnings $1,040
 1,602
 $394
 467
Loss from discontinued operations, net of tax 133
 —
Adjustments to reconcile net earnings to net cash provided by operating activities:        
Depreciation and amortization 454
 557
 187
 202
Changes in operating working capital 16
 (286) (160) (310)
Other, net 142
 (5) 26
 (36)
Cash from continuing operations 1,785
 1,868
Cash from discontinued operations (727) —
Cash provided by operating activities 1,058
 1,868
 447
 323
        
Investing activities        
Capital expenditures (300) (314) (96) (155)
Purchases of businesses, net of cash and equivalents acquired (2,991) (770) (513) (73)
Divestitures of businesses 40
 223
 235
 —
Other, net (80) (71) (18) (31)
Cash from continuing operations (3,331) (932)
Cash from discontinued operations 5,022
 —
Cash provided by (used in) investing activities 1,691
 (932)
Cash used in investing activities (392) (259)
        
Financing activities        
Net increase (decrease) in short-term borrowings (1,136) 1,581
Payments of short-term borrowings greater than three months (90) —
Net increase in short-term borrowings 1,061
 1,601
Payments of long-term debt (253) (251) (251) (403)
Dividends paid (930) (924) (311) (305)
Purchases of common stock (400) (1,000) (500) (786)
Other, net 32
 34
 (30) (9)
Cash used in financing activities (2,777) (560)
Cash provided by (used in) financing activities (31) 98
        
Effect of exchange rate changes on cash and equivalents (14) (27) 10
 (7)
Increase (Decrease) in cash and equivalents (42) 349
Increase in cash and equivalents 34
 155
Beginning cash and equivalents 3,182
 3,062
 3,062
 1,093
Ending cash and equivalents $3,140
 3,411
 $3,096
 1,248
        
Changes in operating working capital        
Receivables $119
 39
 $188
 292
Inventories (125) (133) (149) (170)
Other current assets (24) (27) 14
 (9)
Accounts payable (7) (97) (129) (247)
Accrued expenses (17) (83) (166) (246)
Income taxes 70
 15
 82
 70
Total changes in operating working capital $16
 (286) $(160) (310)









See accompanying Notes to Consolidated Financial Statements.


5

Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. & SUBSIDIARIES

(Dollars, euros and shares in millions, except per share amounts or where noted)

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, 2017. Certain prior year amounts have been reclassified to conform to current year presentation.
(1) BASIS OF PRESENTATION

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, 2018. Certain prior year amounts have been reclassified to conform to current year presentation.

On December 22, 2017,October 1, 2018, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the “Act”)Company adopted ASC 606, Revenue from Contracts with Customers, which madeupdated and consolidated revenue recognition guidance from multiple sources into a single, comprehensive changesstandard to federal income tax laws by moving from a global to a modified territorial tax regime.be applied for all contracts with customers. The Act includes a reductionfundamental principle of the U.S. corporate income tax rate from 35 percentrevised standard is to 21 percent along withrecognize revenue based on the eliminationtransfer of certain deductionsgoods and credits, and a one-time “deemed repatriation” of accumulated foreign earnings. Inservices to customers at the first fiscal quarter,amount the Company recognized a net tax benefitexpects to be entitled to in exchange for those goods and services. The Company adopted the new standard using the modified retrospective approach and applied the guidance to open contracts which were not completed at the date of $43 ($0.07 per share) due to impactsadoption. The cumulative effect of the Act, consisting of a $98 benefit on revaluation of net deferred income tax liabilities to the lower tax rate, and $185 of expense for the tax on deemed repatriation of accumulated foreign earnings and withholding taxes partially offset by $130 accrued in previous periods for the planned repatriation of non-U.S. cash. Subsequent to the enactment of the Act, the U.S. Treasury Department and the Internal Revenue Service issued additional guidance, particularly with respect to the calculation of the tax on deemed repatriation of accumulated foreign earnings. As a result of the additional guidance and actions taken in the third fiscal quarter, the Company updated its initial estimates and recognized a benefit of $150 ($0.24 per share), primarily related to an increase in foreign tax credit carryforwards. These updatesadoption resulted in a net tax benefit$20 increase to beginning retained earnings as of October 1, 2018. This increase primarily relates to contracts where a portion of revenue for delivered goods or services was previously deferred due to the impactscontingent payment terms. The adoption of the Act of $193 ($0.30 per share) for the nine months ended June 30, 2018.

The Company continues to review the impacts of the Act and subsequent interpretations. Given its complexities, the ultimate effects on repatriation cost and other tax items may differ from these provisional amounts due to additional regulatory guidance expected to be issued and further evaluation of the Company’s actions, assumptions and interpretations.

The effective tax rate for full year 2018 is currently expected to be approximately 19 percent, which includes 7 percentage points of benefit from the Act. In 2019 and thereafter, the tax rate is expected to be approximately 25 percent.

In February 2018, the FASB issued updates to ASC 220, Comprehensive Income, which permit reclassification of stranded tax effects resulting from the Act from accumulated other comprehensive income to retained earnings. These updates are effective in the first quarter of fiscal 2020, with early adoption permitted, and are606 did not expected to materially impact the Company's consolidated financial statements.statements as of and for the three months endedDecember 31, 2018.

In the first quarter of fiscal 2018,2019, the Company adopted updates to ASC 330,715, InventoryCompensation - Retirement Benefits, which changedpermit only the measurement principle for inventory from the lowerservice cost component of cost or marketnet periodic pension and postretirement expense to the lower of cost and net realizable value.be reported with compensation costs, while all other components are required to be reported separately in other deductions. These updates did not materially impactwere adopted retrospectively and resulted in the Company's financial statements.

Inreclassification of $10 of income in the first quarter of fiscal 2018 from cost of sales and SG&A to other deductions, net. Segment earnings were not impacted by the Company adopted updates to ASC 740, 715.Income Taxes, requiring recognition

(2) REVENUE RECOGNITION

Emerson is a global manufacturer that combines technology and engineering to provide innovative solutions to its customers, largely in the form of tangible products. The Company evaluates its contracts with customers to identify the promised goods or services and recognizes revenue for the identified performance obligations at the amount the Company expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Revenue is recognized when, or as, performance obligations are satisfied and control has transferred to the customer, typically when products are shipped or delivered, title and risk of loss pass to the customer, and the Company has a present right to payment. The vast majority of the income tax effectsCompany's revenues relate to a broad offering of intra-entitymanufactured products which are recognized at the point in time when control transfers, generally in accordance with shipping terms. A small portion of assets other than inventory whenthe Company's revenues relate to the sale of software and post-contract customer support, parts and labor for repairs, and engineering services. In limited circumstances, contracts include multiple performance obligations, where revenue is recognized separately for each good or service, as well as contracts where revenue is recognized over time as control transfers to the customer.
Revenue is recognized over time for approximately 5 percent of the Company's revenues. These contracts largely relate to projects in the Process Control Systems & Solutions product offering within the Automation Solutions segment where revenue is recognized using the percentage-of-completion method to reflect the transfer occurs. These updates were adoptedof control over time, while a small amount is attributable to long-term maintenance and service contracts where revenue is typically recognized on a modified retrospectivestraight-line basis and did not materially impactas the Company's financial statements.

services are provided. Approximately 5 percent of revenues relate to sales arrangements with multiple performance obligations, principally in the Automation Solutions segment. Tangible products represent a large majority of the delivered items in contracts with multiple performance


6

obligations or where revenue is recognized over time, while a smaller portion is attributable to installation, service and maintenance.

For revenues recognized over time, the Company typically uses an input method to determine progress and recognize revenue, based on costs incurred. The Company believes costs incurred closely correspond with its performance under the contract and the transfer of control to the customer.
In sales arrangements that involve multiple performance obligations, revenue is allocated based on the relative standalone selling price for each performance obligation. Observable selling prices from actual transactions are used whenever possible. In other instances, the Company determines the standalone selling price based on third-party pricing or management's best estimate. Generally, contract duration is short-term, and cancellation, termination or refund provisions apply only in the event of contract breach and are rarely invoked.    
Payment terms vary but are generally short-term in nature. The Company's long-term contracts, where revenue is generally recognized over time, are typically billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. The timing of revenue recognition and billings under these contracts results in either unbilled receivables (contract assets) when revenue recognized exceeds billings, or customer advances (contract liabilities) when billings exceed revenue recognized. Unbilled receivables are reclassified to accounts receivable when an unconditional right to consideration exists, typically when a milestone in the contract is achieved. The Company does not evaluate whether the transaction price includes a significant financing component for contracts where the time between cash collection and performance is less than one year.     
Certain arrangements with customers include variable consideration, typically in the form of rebates, cash discounts or penalties. In limited circumstances, the Company sells products with a general right of return. In most instances, returns are limited to product quality issues. The Company records a reduction to revenue at the time of sale to reflect the ultimate amount of consideration it expects to receive. The Company's estimates are updated quarterly based on historical experience, trend analysis, and expected market conditions. Variable consideration is typically not constrained at the time revenue is recognized.
The Company offers warranties, which vary by product line and are competitive for the markets in which the Company operates. Warranties are largely offered to provide assurance that the product will function as intended and generally extend for a period of one to two years from the date of sale or installation. Provisions for warranty expense are estimated at the time of sale based on historical experience and adjusted quarterly for any known issues that may arise. Product warranty expense is less than one percent of sales.
Capitalized amounts related to incremental costs to obtain customer contracts and costs to fulfill contracts are immaterial.
The following table summarizes the balances of the Company's unbilled receivables (contract assets), which are reported in Other current assets, and its customer advances (contract liabilities), which are reported in Accrued expenses.     
 Sept 30, 2018 Dec 31, 2018
Unbilled receivables (contract assets) $321
  371
Customer advances (contract liabilities) (510)  (490)
      Net contract liabilities $(189)  (119)

2.    The majority of the Company's contract balances relate to arrangements where revenue is recognized over time and payments from customers are made according to a contractual billing schedule. The decrease in net contract liabilities was due to revenue recognized for performance completed during the period which exceeded customer billings. Revenue recognized for the three months endedDecember 31, 2018 included approximately $220 that was included in the beginning contract liability balance. No other factors materially impacted the change in net contract liabilities. Revenue recognized in the current reporting period for performance obligations that were fully satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material.



7

As of December 31, 2018, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was $5.2 billion. The Company expects to recognize approximately 85 percent of its remaining performance obligations as revenue over the next 12 months, with the remainder substantially over the subsequent two years thereafter.     

See Note 12 for additional information about the Company's revenues.

(3) WEIGHTED-AVERAGE COMMON SHARES

Reconciliations of weighted-average shares for basic and diluted earnings per common share follow. Earnings allocated to participating securities were inconsequential.
Three Months Ended
June 30,		 Nine Months Ended
June 30,		Three Months Ended
December 31,
2017
 2018
 2017
 2018
2017
 2018
          
Basic shares outstanding642.8
 629.4
 643.1
 633.4
638.2
 623.9
Dilutive shares1.0
 3.5
 1.2
 3.1
2.3
 3.9
Diluted shares outstanding643.8
 632.9
 644.3
 636.5
640.5
 627.8
 


(4) OTHER FINANCIAL INFORMATION

Sept 30, 2018 Dec 31, 2018
Inventories     
Finished products $592
  659
Raw materials and work in process 1,221
  1,321
Total $1,813
  1,980
3.    Other Financial Information
Property, plant and equipment, net   
Property, plant and equipment, at cost $8,370
  8,451
Less: Accumulated depreciation 4,808
  4,900
     Total $3,562
  3,551

Sept 30, 2017 June 30, 2018
Inventories     
Finished products $560
  610
Raw materials and work in process 1,136
  1,195
Total $1,696
  1,805
Goodwill by business segment     
Automation Solutions $5,355
  5,369
      
Climate Technologies 670
  670
Tools & Home Products 430
  429
Commercial & Residential Solutions 1,100
  1,099
      
     Total $6,455
  6,468
Other intangible assets   
Gross carrying amount $4,667
  4,716
Less: Accumulated amortization 1,916
  2,002
     Net carrying amount $2,751
  2,714
Other intangible assets include customer relationships of $1,476 and $1,517 as of December 31, 2018 and September 30, 2018, respectively.
 Sept 30, 2017 June 30, 2018
Property, plant and equipment, net   
Property, plant and equipment, at cost $7,873
  8,066
Less: Accumulated depreciation 4,552
  4,806
     Total $3,321
  3,260
 Sept 30, 2017 June 30, 2018
Goodwill by business segment     
Automation Solutions $4,704
  5,018
      
Climate Technologies 555
  671
Tools & Home Products 57
  56
Commercial & Residential Solutions 612
  727
      
     Total $5,316
  5,745
The increase in goodwill reflects the acquisitions of Paradigm and Cooper-Atkins. See Note 11.
 Sept 30, 2017 June 30, 2018
Accrued expenses include the following     
Employee compensation $531
  578
Customer advanced payments $505
  503
Product warranty $120
  122
 Sept 30, 2017 June 30, 2018
Other liabilities     
Pension and postretirement liabilities $664
  647
Deferred income taxes 425
  274
Asbestos litigation 340
  346
Other 551
  680
     Total $1,980
  1,947
Other long-term assets include $136 of asbestos-related insurance receivables.
Other assets include the following:     
Pension assets $591
  616
Asbestos-related insurance receivables $124
  123
Deferred income taxes $74
  77


78

 Sept 30, 2018 Dec 31, 2018
Accrued expenses include the following:     
Employee compensation $629
  512
Customer advances $510
  490
Product warranty $124
  117
Other liabilities     
Pension and postretirement liabilities $625
  623
Deferred income taxes 484
  482
Asbestos litigation 334
  332
Other 656
  535
     Total $2,099
  1,972

(5) FINANCIAL INSTRUMENTS

4.Following is a discussion regarding the Company’s use of financial instruments:
Following is a discussion regarding the Company’s use of financial instruments:
Hedging Activities – As of June 30,December 31, 2018, the notional amount of foreign currency hedge positions was approximately $2.3$2.3 billion,, and commodity hedge contracts totaled approximately $142$126 (primarily 5347 million pounds of copper and aluminum). All derivatives receiving deferralhedge accounting are cash flow hedges. The majority of hedging gains and losses deferred as of June 30,December 31, 2018 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 deferralhedge accounting. The following gains and losses are included in earnings and other comprehensive income (OCI) for the three and nine months ended June 30,December 31, 2018 and 2017:
 Into Earnings Into OCI Into Earnings Into OCI
 3rd Quarter Nine Months 3rd Quarter Nine Months 1st Quarter 1st Quarter
Gains (Losses) Location 2017
 2018
 2017
 2018
 2017
 2018
 2017
 2018
 Location 2017
 2018
 2017
 2018
Commodity Cost of sales $4
 2
 6
 13
 2
 (3) 17
 1
 Cost of sales $5
 (3) 13
 (7)
Foreign currency Sales, cost of sales —
 (1) (17) (1) 10
 (15) 32
 (19) Sales, cost of sales —
 2
 (12) (12)
Foreign currency Other deductions, net (22) 28
 (22) 16
         Other deductions, net —
 11
    
Total   $(18) 29
 (33) 28
 12
 (18) 49
 (18)   $5
 10
 1
 (19)
Regardless of whether derivatives receive deferralhedge 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 deferralhedge accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial for the three and nine months ended June 30,December 31, 2018 and 2017.
Fair Value Measurement – Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. As of June 30,December 31, 2018, the fair value of long-term debt was $4.0$3.6 billion,, which exceeded the carrying value by $152.$150. At June 30,December 31, 2018, 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:  
September 30, 2017 June 30, 2018September 30, 2018 December 31, 2018
Assets Liabilities Assets LiabilitiesAssets Liabilities Assets Liabilities
Foreign Currency $26
 18
 27
 24
 $35
 11
 14
 21
Commodity $12
 —
 3
 4
 $1
 10
 —
 14

Counterparties to derivatives arrangements are companies with investment-grade credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below pre-established levels, counterparties can require immediate full collateralization of all derivatives in net liability positions. The maximum amount that could


9

potentially have been required was $13.$23. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company as of June 30,December 31, 2018.

5.The change in equity for the first nine months of 2018 is shown below:  
(6) EQUITY

The change in equity for the three months ended December 31, 2018 and 2017 is shown below:  
 
Common
Stockholders'
Equity
 
Noncontrolling
Interests in Subsidiaries
 Total Equity
Balance at September 30, 2017 $8,718
  52
  8,770
Net earnings 1,586
  16
  1,602
Other comprehensive income (loss) (73)  —
  (73)
Cash dividends (924)  (21)  (945)
Purchases of treasury stock, net of issuances (897)  —
  (897)
Adoption of accounting standard update 3
  —
  3
Balance at June 30, 2018 $8,413
  47
  8,460
 Three Months Ended December 31,
 2017
 2018
    
Common stock$477
 477
    
Additional paid-in-capital   
     Beginning balance297
 348
     Stock plans9
 27
        Ending balance306
 375
    
Retained earnings   
     Beginning balance21,995
 23,072
     Net earnings common stockholders392
 465
     Dividends paid(311) (305)
     Adoption of accounting standard updates3
 20
        Ending balance22,079
 23,252
    
Accumulated other comprehensive income (loss)   
     Beginning balance(1,019) (1,015)
     Foreign currency translation7
 (35)
     Pension and postretirement23
 13
     Cash flow hedges(3) (15)
        Ending balance(992) (1,052)
    
Treasury stock   
     Beginning balance(13,032) (13,935)
     Purchases(500) (925)
     Issued under stock plans11
 44
        Ending balance(13,521) (14,816)
    
Common stockholders' equity8,349
 8,236
    
Noncontrolling interests in subsidiaries   
     Beginning balance52
 43
     Net earnings2
 2
     Dividends paid(15) (5)
        Ending balance39
 40
    
Total equity$8,388
 8,276
    



810

6.Activity in Accumulated other comprehensive income (loss) for the three and nine months ended June 30, 2018 and 2017 is shown below:  
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Activity in Accumulated other comprehensive income (loss) for the three months ended December 31, 2018 and 2017 is shown below:  
Three Months Ended
June 30,
 Nine Months Ended
June 30,		Three Months Ended December 31,
 2017
  2018
  2017
  2018
 2017
  2018
Foreign currency translation            
Beginning balance $(655) (214) (812) (369) $(369) (600)
Other comprehensive income (loss) before reclassifications 75
 (273) (153) (101) 24
 (35)
Reclassified to gain/loss on sale of businesses —
 —
 385
 (17)
Reclassified to gain/loss on sale of business (17) —
Ending balance (580) (487) (580) (487) (362) (635)
            
Pension and postretirement            
Beginning balance (1,042) (617) (1,162) (662) (662) (420)
Amortization of deferred actuarial losses into earnings 35
 22
 105
 67
 23
 13
Reclassified to gain/loss on sale of businesses —
 —
 50
 —
Ending balance (1,007) (595) (1,007) (595) (639) (407)
            
Cash flow hedges            
Beginning balance 7
 4
 (25) 12
 12
 5
Deferral of gains (losses) arising during the period 7
 (13) 30
 (13) 1
 (14)
Reclassification of realized (gains) losses to sales and cost of sales (2) (1) 7
 (9) (4) (1)
Ending balance 12
 (10) 12
 (10) 9
 (10)
            
Accumulated other comprehensive income (loss) $(1,575) (1,092) (1,575) (1,092) $(992) (1,052)
            
Activity above is shown net of income taxes for the three and nine months ended June 30, 2018 and 2017, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(8), $(18), $(24), and $(54); pension and postretirement divestiture: $-, $-, $-, and $(22); deferral of cash flow hedging gains (losses): $5, $(5), $5, and $(19); reclassification of realized cash flow hedging (gains) losses: $-, $2, $3 and $(4).
Activity above is shown net of income taxes for the three months ended December 31, 2018 and 2017, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(4) and $(8); deferral of cash flow hedging gains (losses): $5 and $-; reclassification of realized cash flow hedging (gains) losses: $- and $1.Activity above is shown net of income taxes for the three months ended December 31, 2018 and 2017, respectively, as follows: amortization of pension and postretirement deferred actuarial losses: $(4) and $(8); deferral of cash flow hedging gains (losses): $5 and $-; reclassification of realized cash flow hedging (gains) losses: $- and $1.

7.Total periodic pension and postretirement expense is summarized below:
(8) PENSION & POSTRETIREMENT PLANS

Total periodic pension and postretirement (income) expense is summarized below:
Three Months Ended June 30, Nine Months Ended June 30,Three Months Ended December 31,
 2017  2018  2017
  2018 2017  2018
Service cost $21
 19
 63
 57
 $19
 18
Interest cost 42
 46
 126
 139
 46
 50
Expected return on plan assets (86) (87) (258) (262) (87) (88)
Net amortization 53
 30
 159
 91
 31
 17
Total $30
 8
 90
 25
 $9
 (3)



911

8.Other deductions, net are summarized below:
(9) OTHER DEDUCTIONS, NET

Other deductions, net are summarized below:
Three Months Ended
June 30,		 Nine Months Ended
June 30,		Three Months Ended
December 31,
2017   2018
  2017
  2018
2017   2018
            
Amortization of intangibles $41
 47
 84
 154
 $56
 57
Restructuring costs 21
 14
 45
 38
 15
 10
Other 25
 27
 74
 83
 7
 (17)
Total $87
 88
 203
 275
 $78
 50

The increase in amortization forFor the three and nine months ended June 30,December 31, 2018, higher intangibles amortization of $17 from acquisitions completed in 2018 was largely offset by backlog amortization of $15 incurred in the prior year related to the valves & controls acquisition. The change in Other is primarily due to acquisitions. On a year-to-date basis, Other included higher acquisition/divestiture-related costsfavorable impact on comparisons from foreign currency transactions of $16, partially offset by lower bad debt expense$13 and pensions of $11.

9.
Restructuring expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. The Company expects full year 2018 restructuring expense to be approximately $80, which includes costs related to the Tools & Test and Aventics acquisitions. See Note 13. The full year expense includes $38 incurred to date, as well as costs to complete actions initiated before the end of the third quarter and actions anticipated to be approved and initiated during the remainder of the year. Costs for the three and nine months endedJune 30,
(10) RESTRUCTURING COSTS

Restructuring expense reflects costs associated with the Company’s ongoing efforts to improve operational efficiency and deploy assets globally in order to remain competitive on a worldwide basis. Costs for the three months endedDecember 31, 2018 largely relate to restructuring of the global cost structure consistent with the current level of economic activity, as well as the redeployment of resources for future growth.

Restructuring expense by business segment follows:
Three Months Ended
June 30,		 Nine Months Ended
June 30,		Three Months Ended
December 31,
2017  2018  2017  2018 2017  2018 
            
Automation Solutions $20
 9
 35
 26
 $10
 5
            
Climate Technologies 1
 4
 8
 11
 5
 3
Tools & Home Products —
 —
 1
 —
 —
 2
Commercial & Residential Solutions 1
 4
 9
 11
 5
 5
            
Corporate —
 1
 1
 1
        
Total $21
 14
 45
 38
 $15
 10

Details of the change in the liability for restructuring costs during the ninethree months ended June 30,December 31, 2018 follow:
Sept 30, 2017  Expense  Utilized/Paid  June 30, 2018 Sept 30, 2018  Expense  Utilized/Paid  Dec 31, 2018 
                
Severance and benefits $60
 24
 48
 36
 $46
 5
 11
 40
Lease and other contract terminations 4
 2
 2
 4
 3
 —
 1
 2
Asset write-downs —
 1
 1
 —
 —
 1
 1
 —
Vacant facility and other shutdown costs 1
 4
 3
 2
 3
 2
 2
 3
Start-up and moving costs —
 7
 6
 1
 —
 2
 2
 —
Total $65
 38
 60
 43
 $52
 10
 17
 45
 

10.
Business Segments – The Company designs and manufactures products and delivers services that bring technology and engineering together to provide innovative solutions for customers in a wide range of industrial, commercial and consumer markets around the world.
The Automation Solutions segment 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


1012

(11) INCOME TAXES

On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the "Act"), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Act includes a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent in calendar year 2018 along with the elimination of certain deductions and credits, and a one-time "deemed repatriation" of accumulated foreign earnings. The Company recognized a net tax benefit of $43 ($0.07 per share) in the first quarter of fiscal 2018 and $189 ($0.30 per share) for the full year due to impacts of the Act.

Effective in fiscal 2019, the Act also subjects the Company to U.S. tax on global intangible low-taxed income earned by certain of its foreign subsidiaries. The Company has elected to recognize this tax as a period expense when it is incurred.

In the first quarter of fiscal 2019, the Company completed its accounting for the impacts of the Act and recorded a $100 benefit relating to the one-time tax on deemed repatriation of accumulated foreign earnings, which was offset by a related increase to its unrecognized tax benefits.

Given the complexities associated with the Act, additional regulatory guidance is expected to be issued. Recently, the U.S. Treasury and Internal Revenue Service released proposed regulations relating to the one-time tax on deemed repatriation of accumulated foreign earnings, the utilization of foreign tax credits, the calculation of global intangible low-taxed income, and other provisions of the Act. The proposed regulations were subject to a comment period and final regulations are expected to be issued after consideration of comments received. The Company will include oil and gas, refining, chemicals and power generation,the effects of any final regulations, including those issued on January 15, 2019 related to the one-time tax on deemed repatriation which it is currently assessing, as well as pharmaceuticals, foodany additional guidance or legislative changes, in the period they are issued.

Income taxes were $124 for the first quarter of 2019 and beverage, automotive, pulp$109 for 2018, resulting in effective tax rates of 21 percent and paper, metals and mining, and municipal water supplies.22 percent, respectively. The segment's major product offerings are described below.
Measurement & Analytical Instrumentation products measureeffective tax rates in both years reflect the physical properties of liquids or gases inlower U.S. corporate income tax rate as 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 consistsresult 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.Act. The current year rate also included favorable discrete items, which reduced the rate 3 percentage points, while the prior year rate included the net tax benefit discussed above.
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.
(12) BUSINESS SEGMENTS

Summarized information about the Company's results of operations by business segment follows:
Three Months Ended June 30, Nine Months Ended June 30,Three Months Ended December 31,
Sales Earnings Sales EarningsSales Earnings
2017
 2018
 2017
 2018
 2017
 2018
 2017
 2018
2017
 2018
 2017
 2018
                      
Automation Solutions$2,440
 2,870
 378
 494
 6,524
 8,213
 1,032
 1,316
$2,572
 2,799
 386
 407
                      
Climate Technologies1,187
 1,236
 305
 294
 3,104
 3,286
 715
 712
922
 880
 165
 146
Tools & Home Products415
 356
 97
 93
 1,210
 1,041
 281
 276
330
 458
 87
 91
Commercial & Residential Solutions1,602
 1,592
 402
 387
 4,314
 4,327
 996
 988
1,252
 1,338
 252
 237
                      
Differences in accounting methods    38
 57
     106
 163
    51
 59
Corporate and other    (158) (131)     (358) (425)    (148) (69)
Eliminations/Interest(3) (6) (39) (39) (9) (20) (126) (113)(8) 10
 (38) (43)
Total$4,039
 4,456
 621
 768
 10,829
 12,520
 1,650
 1,929
$3,816
 4,147
 503
 591





11

For the third quarter of 2018,The decrease in Corporate and other included higher incentive stock compensation expense of $14, while 2017 included first year acquisition accounting charges for valves & controls of $30relatedwas primarily due to inventory and $7 for backlog amortization. Year-to-date results included higherlower incentive stock compensation of $65 and higher acquisition/divestiture-related costs of $16, partially offset by lower$63, reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year. In addition, the prior year included valves & controls first year acquisition accounting charges of $8$10 related to inventory and $15 for backlog amortization.


13

Automation Solutions sales by major product offering are summarized below:
Three Months Ended June 30,  Nine Months Ended June 30,Three Months Ended December 31,
 2017
  2018
  2017
  2018
 2017
  2018
              
Measurement & Analytical Instrumentation $744
 932
 2,162
 2,564
 $772
 858
Valves, Actuators & Regulators 772
 953
 1,718
 2,746
 863
 874
Industrial Solutions 430
 465
 1,216
 1,368
 428
 542
Process Control Systems & Solutions 494
 520
 1,428
 1,535
 509
 525
Total $2,440
 2,870
 6,524
 8,213
Automation Solutions $2,572
 2,799

Segment sales by geographic destination are summarized below:
 Three Months Ended December 31,
 2017 2018
 Automation Solutions
 Commercial & Residential Solutions
 Total
 Automation Solutions
 Commercial & Residential Solutions
 Total
            
Americas$1,286
 778
 2,064
 1,405
 907
 2,312
Asia, Middle East & Africa790
 348
 1,138
 841
 265
 1,106
Europe496
 126
 622
 553
 166
 719
     Total$2,572
 1,252
 3,824
 2,799
 1,338
 4,137

11.On January 10, 2018, the Company completed the acquisition of Cooper-Atkins for $247, net of cash acquired. This business, which manufactures temperature management and monitoring products for foodservice markets, is reported in the Climate Technologies segment. The Company recognized goodwill of $114 (all of which is expected to be tax deductible), and identifiable intangible assets of $127, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 12 years. During the first nine months of 2018, the Company also acquired three smaller business, two in the Automation Solutions segment and one in the Climate Technologies segment. These four businesses had combined annual sales of approximately $70.
(13) ACQUISITIONS AND DIVESTITURES

During the first three months of 2019, the Company acquired three businesses in the Automation Solutions segment for $73, net of cash acquired. These three businesses had combined annual sales of approximately $40.

On July 17, 2018, the Company completed the acquisition of Aventics, a global provider of smart pneumatics technologies that power machine and factory automation applications, for $622, net of cash acquired. This business, which has annual sales of approximately $425, is reported in the Industrial Solutions product offering in the Automation Solutions segment. The Company recognized goodwill of $358 ($20 of which is expected to be tax deductible), and identifiable intangible assets of $278, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 12 years.

On July 2, 2018, the Company completed the acquisition of Textron's tools and test equipment business for $810, net of cash acquired. This business, with annual sales of approximately $470, is a manufacturer of electrical and utility tools, diagnostics, and test and measurement instruments, and is reported in the Tools & Home products segment. The Company recognized goodwill of $374 ($17 of which is expected to be tax deductible), and identifiable intangible assets of $358, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 14 years.

Valuations of acquired assets and liabilities are in process and subject to refinement.

On December 1, 2017, the Company acquired Paradigm, a provider of software solutions for the oil and gas industry, for $505, net of cash acquired. This business had annual sales of approximately $140 and is included in the Measurement & Analytical Instrumentation product offering within Automation Solutions. The Company recognized goodwill of $332$309 ($160170 of which is expected to be tax deductible), and identifiable intangible assets of $238, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years.

Valuations ofDuring 2018, the Company also acquired assetsfour smaller businesses, two in the Automation Solutions segment and liabilities aretwo in process and subject to refinement. Total cash paid for all businesses for the first nine months of 2018 was $770, net of cash acquired.Climate Technologies segment.

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. 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.

14

On October 2, 2017, the Company sold its residential storage business for $200 in cash, and recognized a small pretax gain and an after-tax loss of $24 ($0.04 per share) in the first quarter of 2018 due to income taxes resulting from nondeductible goodwill. The Company realized $150 in after-tax cash proceeds from the sale. Assets and liabilities for this business were classified as held-for-sale in the consolidated balance sheet at September 30, 2017 as follows: current assets, $73; other assets, $176; and accrued expenses and other liabilities, $61. This business was previously reported within the Tools & Home Products segment.

Pro Forma Financial Information
The following unaudited pro forma consolidated condensed financial results of operations are presented as if the 2018 acquisitions occurred on October 1, 2016 and 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 acquisitionacquisitions occurred as of that time.


12

 Three Months Ended Nine Months Ended
 June 30, 2017
      
Net sales $4,132
  $11,677
Net earnings from continuing operations common stockholders $426
  $1,155
Diluted earnings per share from continuing operations $0.66
  $1.78
 Three Months Ended
 Dec 31, 2017
   
Net sales $4,087
Net earnings common stockholders $410
Diluted earnings per share $0.64

12.
Discontinued Operations – In fiscal 2017, the Company completed the previously announced strategic repositioning 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 billion in cash and retained a subordinated interest in distributions, contingent upon the equity holders first receiving a threshold return on their initial investment. 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.

The financial results of the network power systems and power generation, motors and drives businesses reported as discontinued operations for the nine months ended June 30, 2017 were as follows:
  
Nine Months Ended
June 30, 2017
   
Net sales $1,037
Cost of sales 701
SG&A 263
Other (income) deductions, net (429)
Earnings (Loss) before income taxes 502
Income taxes 635
Earnings (Loss), net of tax $(133)
(14) SUBSEQUENT EVENTS

In January 2019, the Company issued €500 of 1.25% notes due October 2025 and €500 of 2.0% notes due October 2029. The 2017 loss of $133 consisted of an after-tax loss of $180 ($47 pretax loss) onnet proceeds from the divestituresale of the power generation, motorsnotes were used to repay commercial paper borrowings and drives business, an after-tax gain on the divestiture of the network power systems business of $114 ($486 pretax), income tax expense of $103 for the planned repatriation of sales proceeds and existing cash from the businesses, lower expense of $30 due to ceasing depreciation and amortization for the discontinued businesses held-for-sale, and net earnings from operations of $6.general corporate purposes.

NetOn January 31, 2019, the Company completed the acquisition of Intelligent Platforms, a division of General Electric, for approximately $160 net of cash from operating and investing activities foracquired. This business, which offers programmable logic controller technologies, will be reported in the network power systems and power generation, motors and drives businesses for the nine months ended June 30, 2017 were as follows:    
  
Nine Months Ended
June 30, 2017
   
Cash from operating activities $(727)
Cash from investing activities $5,022
Automation Solutions segment.

Operating cash flow used by discontinued operations of $727 for the nine months ended June 30, 2017 primarily included payments for income taxes on completion of the divestitures and repatriation of cash, and professional fees and other costs.

13.
Subsequent Events– On July 2, 2018, the Company completed the acquisition of Textron's tools and test equipment business for $807, net of cash acquired. This business, with annual sales of approximately $470, is a manufacturer of electrical and utility tools, diagnostics, and test and measurement instruments, and will be reported in the Tools & Home Products segment. On July 17, 2018, the Company completed the acquisition of Aventics, a global provider of smart pneumatics technologies that power machine and factory automation applications, for $622, net of cash acquired. This business, which has annual sales of approximately$425, will be included in the Industrial Solutions product offering within the Automation Solutions segment. The initial accounting for these transactions is not yet complete.



1315

Items 2 and 3.

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

OVERVIEW

Net sales for the thirdfirst quarter of 20182019 were $4.5$4.1 billion, up 109 percent, supported by acquisitions which added 6 percent. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 84.5 percent, asreflecting broad-based global demand in energy-related and global industrial markets, steady growth in North American air conditioning markets, and favorable global trends continuedfor professional tools. Underlying sales were negatively impacted by slower demand in energy-related, general industrial, HVAC and refrigeration markets.China within the Climate Technologies segment, which reduced comparisons by approximately 2 percentage points.
Earnings from continuing operationsNet earnings common stockholders were $712$465 million, up 7519 percent, and diluted earnings per share were $0.74, up 21 percent. Comparisons benefited from continuing operations were $1.12, up 78 percent, due to strong sales growth and operational performance, as well as an income tax benefitlower incentive stock compensation expense of $150$63 million ($0.240.08 per share) from the impacts of U.S. tax reform..
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30DECEMBER 31  

Following is an analysis of the Company’s operating results for the thirdfirst quarter ended June 30,December 31, 2018, compared with the thirdfirst quarter ended June 30,December 31, 2017.
2017 2018 Change2017 2018 Change
(dollars in millions, except per share amounts) 
  
   
  
  
          
Net sales$4,039
 4,456
 10%$3,816
 4,147
 9%
Gross profit$1,678
 1,949
 16%$1,614
 1,761
 9%
Percent of sales41.5% 43.7%  
42.3% 42.5%  
          
SG&A$931
 1,054
  
$995
 1,077
  
Percent of sales23.0% 23.6%  
26.1% 26.0%  
Other deductions, net$87
 88
  
$78
 50
  
Interest expense, net$39
 39
  
$38
 43
  
          
Earnings from continuing operations before income taxes$621
 768
 24%
Earnings before income taxes$503
 591
 17%
Percent of sales15.4% 17.2%  
13.2% 14.2%  
Earnings from continuing operations common stockholders$407
 712
 75%
Net earnings common stockholders$413
 712
 72%$392
 465
 19%
Percent of sales10.2% 16.0%  
10.3% 11.2%  
          
Diluted EPS - Earnings from continuing operations$0.63
 1.12
 78%
Diluted EPS - Net earnings$0.64
 1.12
 75%
Diluted earnings per share$0.61
 0.74
 21%

Net sales for the thirdfirst quarter of 20182019 were $4.5$4.1 billion, an increase of $417$331 million compared with $4.0$3.8 billion in 2017.2018. Underlying sales which exclude foreign currency translation, acquisitions and divestitures, increased 84.5 percent ($305162 million) on higher volume.volume and slightly higher price. Acquisitions added 36 percent ($129232 million) and foreign currency translation added 1subtracted 1.5 percent ($58 million), while the divestiture of the residential storage business subtracted 2 percent ($7563 million). Underlying sales increased 97 percent in the U.S. and 72 percent internationally. AsiaThe Americas was up 9 percent (China up 15 percent), and sales in Europe were up 6 percent. Canada increased 13 percent, Latin America increased 78 percent and Middle East/AfricaEurope was up 3 percent.percent, while Asia, Middle East & Africa was down 2 percent (China down 3 percent). Sales increased $430$227 million in Automation Solutions, supported by acquisitions and continued broad-based demand across energy-related and general industrial markets.global demand. Commercial & Residential Solutions sales decreased $10increased $86 million as the divestiture of the residential storage businessdue to acquisitions, partially offset favorableby slower demand in global HVACAsia, driven by China air conditioning and refrigerationheating markets.

Cost of sales for the thirdfirst quarter of 20182019 were $2.5$2.4 billion, an increase of $146$184 million compared with $2.4$2.2 billion in 2017,2018, primarily due to acquisitions and higher volume, acquisitions andpartially offset by the impact of foreign currency translation. Gross margin of 43.742.5 percent increased 2.20.2 percentage points, primarily due to leverage on higher volume and savings from cost reduction actions partially offset by lower margins in Commercial & Residential Solutions.and leverage on higher sales. Comparisons also benefited from prior year valves & controls first year acquisition accounting charges of $30$10 million related to inventory in 2017.inventory.

Selling, general and administrative (SG&A) expenses of $1.1 billion increased $123$82 million compared with the prior year, primarily due to acquisitions and higher volume and acquisitions.volume. SG&A as a percent of sales was 23.6 percent, up 0.6decreased slightly to 26.0 percent,


1416

versus the prior year, primarily due to leverage on the impact of acquisitionshigher volume and higherlower incentive stock compensation expense of $14$63 million partially($0.08 per share), reflecting a decreasing stock price in the current year compared to an increasing stock price in the prior year. These items were largely offset by leverage on theacquisitions, which negatively impacted comparisons by 0.4 percentage points, and higher volume.investment spending.

Other deductions, net were $88$50 million in 2018, an increase2019, a decrease of $1$28 million compared with the prior year, reflecting higher intangibles amortizationa favorable impact on comparisons from foreign currency transactions of $13 million and otherpensions of $2$11 million, offset byand lower restructuring expense of $7$5 million. Higher intangibles amortization of $17 million andfrom acquisitions completed in 2018 was largely offset by backlog amortization of $15 million incurred in the prior year backlog amortization related to the valves & controls of $7 million.acquisition. See Note 8.9.

Pretax earnings from continuing operations of $768$591 million increased $147$88 million, or 2417 percent. Earnings increased $116$21 million in Automation Solutions and decreased $15 million in Commercial & Residential Solutions. See Note 1012 and the following Business Segments discussion.

Income taxes were $49$124 million for 20182019 and $202$109 million for 2017,2018, resulting in effective tax rates of 621 percent and 3322 percent, respectively. The decreaseeffective tax rates in both years reflect the effective rate is largely due to the impact of U.S. tax reform, which included a reduction of thelower U.S. corporate income tax. Additionally, subsequent to the enactment of U.S. tax reform, the U.S. Treasury Department and the Internal Revenue Service issued additional guidance, particularly with respect to the calculation of the tax on deemed repatriation of accumulated foreign earnings. Asrate as a result of the additional guidanceTax Cuts and actions taken inJobs Act (the "Act"). The current year rate also included favorable discrete items, which reduced the third fiscal quarter,rate 3 percentage points, while the Company updated its initial estimatesprior year rate included a net tax benefit of $43 million due to impacts of the impacts of U.S. tax reform and recognized a benefit of $150 million ($0.24 per share), primarily related to an increase in foreign tax credit carryforwards. See Note 1.Act. The effective tax rate for full year 20182019 is currently expected to be approximately 19 percent, which includes 7 percentage points of benefit from U.S. tax reform. In 2019 and thereafter,24 to 25 percent. 

Given the tax ratecomplexities associated with the Act, additional regulatory guidance is expected to be approximately 25 percent.

Earnings from continuing operations attributable to common stockholders were $712 million, up 75 percent, and diluted earnings per share were $1.12, up 78 percent, includingissued. The Company will include the $0.24 per share impact from the increased foreign tax credit carryforwardseffects of any final regulations, as well as any additional guidance or legislative changes, in the third quarter. Results for 2017 included valves & controls first year acquisition accounting charges related to inventory and backlog of $(0.04) per share.period they are issued. See Note 11.

Net earnings common stockholders in the thirdfirst quarter of 20182019 were $712$465 million, up 7219 percent, compared with $413$392 million in the prior year, and earnings per share were $1.12,$0.74, up 7521 percent, compared with $0.64$0.61 in 2017. Results for 2017 included the impact of discontinued operations, which was a net loss of $6 million ($0.01 per share). See Note 12.2018.

Business Segments
Following is an analysis of operating results for the Company’s business segments for the thirdfirst quarter ended June 30,December 31, 2018, compared with the thirdfirst quarter ended June 30,December 31, 2017. The Company defines segment earnings as earnings before interest and taxes. See Notes 1 and 10Note 12 for a discussion of the Company's business segments.
 
AUTOMATION SOLUTIONS
Three Months Ended June 302017 2018 Change
Three Months Ended Dec 312017 2018 Change
(dollars in millions)          
          
Sales$2,440
 2,870
 18%$2,572
 2,799
 9%
Earnings$378
 494
 31%$386
 407
 5%
Margin15.5% 17.2%  
15.0% 14.5%  
Sales by Major Product Offering          
Measurement & Analytical Instrumentation$744
 932
 25%$772
 858
 11%
Valves, Actuators & Regulators772
 953
 23%863
 874
 1%
Industrial Solutions430
 465
 8%428
 542
 27%
Process Control Systems & Solutions494
 520
 5%509
 525
 3%
Total$2,440
 2,870
 18%$2,572
 2,799
 9%

Automation Solutions sales were $2.9$2.8 billion in the thirdfirst quarter, an increase of $430$227 million, or 189 percent. Underlying sales increased 127 percent ($271177 million) on higher volume.volume and slightly higher price. Acquisitions added 4 percent ($12098 million) and foreign currency translation had a 2 percent ($3948 million) favorableunfavorable impact. Sales for Measurement & Analytical Instrumentation increased $188$86 million, or 2511 percent, on continued favorablebroad-based demand fromin global oil and gas


15

customers.industrial markets. Process Control Systems & Solutions increased $26$16 million, or 53 percent, reflecting favorable demand for MROsmall and mid-sized projects focused on expansion and optimization of existing facilities.assets, and strong maintenance and repair demand. Valves, Actuators & Regulators increased $181$11 million, or 231 percent. Industrial Solutions sales increased $114 million, or 27 percent, led by the Valves & ControlsAventics acquisition ($9398 million) and broad-based demand across end markets, including chemical, power, life sciences and mining. Industrial Solutions sales increased $35 million, or 8 percent, driven by favorable global trends in general industrial end markets.the U.S. Underlying sales increased 158 percent in the U.S. and 6Americas (U.S. up 7 percent), 3 percent in Europe. Sales increased 13Europe and 8 percent in Asia, as China wasMiddle East & Africa (China up 28 percent, driven by capital investment and strong demand in process automation, hybrid and discrete markets. Sales increased 18 percent in Canada, while Latin America increased 5 percent and Middle East/Africa was up 8 percent.15 percent). Earnings were $494$407 million, an increase of $116$21 million, or 315 percent, due to higher volume and price, savings from cost reduction actions and lower restructuring expense of $11$5 million. Margin increased 1.7decreased 0.5 percentage points to 17.214.5 percent, reflecting leveragea dilutive impact from the


17

Aventics acquisition of 0.6 percentage points. Leverage on higher volume and favorable price-cost partiallywere largely offset by higher investment spending.spending and the timing of tariff mitigation actions.

COMMERCIAL & RESIDENTIAL SOLUTIONS
Three Months Ended June 302017 2018 Change
Three Months Ended Dec 312017 2018 Change
(dollars in millions)          
          
Sales:          
Climate Technologies$1,187
 1,236
 4 %$922
 880
 (5)%
Tools & Home Products415
 356
 (14)%330
 458
 39 %
Total$1,602
 1,592
 (1)%$1,252
 1,338
 7 %
          
Earnings:          
Climate Technologies$305
 294
 (4)%$165
 146
 (12)%
Tools & Home Products97
 93
 (4)%87
 91
 5 %
Total$402
 387
 (4)%$252
 237
 (6)%
Margin25.1% 24.3%  20.1% 17.7%  

Commercial & Residential Solutions sales were $1.6$1.3 billion in the thirdfirst quarter, down $10up $86 million, or 17 percent compared to the prior year. Underlying sales were up 2 percent ($35 million) on higher volume and slightly higher price. Foreign currency translation addeddown 1 percent ($1916 million) on lower volume. Underlying sales were negatively impacted by slower demand in China within the Climate Technologies segment, which reduced comparisons by approximately 6 percentage points. Acquisitions added 9 percent ($117 million) and the divestiture of the residential storage business, net of acquisitions, deducted 4foreign currency translation subtracted 1 percent ($6415 million). Climate Technologies sales were $1.2 billion$880 million in the thirdfirst quarter, an increasea decrease of $49$42 million, or 45 percent. Global HVAC sales were up modestlydown sharply in Asia, reflecting growth in U.S. and Europe commercial and residential air conditioning, partially offset by lower heatingslower demand in China due toair conditioning and heating markets, while growth in the timing of government subsides and a decline in Middle East/Africa.U.S. was solid. Global refrigerationcold chain sales were up moderately on growth in China and Europe, while sales were down modestlysolid demand in the U.S. Sensors had solid growth, while temperature controls was down modestly.and China. Tools & Home Products sales were $356$458 million in the thirdfirst quarter, a decreasean increase of $59$128 million, or 1439 percent, reflecting the impact of the residential storage divestiture ($75 million). Sales fortools and test acquisition, which added $107 million, and favorable trends in global professional tools were strong on favorable demand in oil and gas and construction-related markets. Wet/dry vacuumsFood waste disposers were up moderately while saleswet/dry vacuums were down slightly for food waste disposers.modestly. Overall, underlying sales increased 28 percent in the U.S., 5Americas (U.S. up 8 percent) and 3 percent in Europe, and 1while Asia, Middle East & Africa decreased 23 percent in Asia (China down 530 percent). Sales were flat in Canada, increased 10 percent in Latin America and decreased 11 percent in Middle East/Africa. Earnings were $387$237 million, a decrease of $15 million, and margin declined 0.82.4 percentage points, reflecting higher costs and unfavorable mix, partially offset by savings from cost reduction actions and leverage on higher volume. Higher pricepoints. The decrease was largely offset increased materials costs. In addition, the residential storage divestiture reduced earnings by $4 million, but benefited margin comparisons 0.9 percentage points.



16


RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30

Following is an analysis of the Company’s operating results for the nine months ended June 30, 2018, compared with the nine months ended June 30, 2017.
 2017 2018 Change
(dollars in millions, except per share amounts) 
  
  
      
Net sales$10,829
 12,520
 16%
Gross profit$4,600
 5,395
 17%
Percent of sales42.5% 43.1%  
      
SG&A$2,621
 3,078
  
Percent of sales24.2% 24.6%  
Other deductions, net$203
 275
  
Interest expense, net$126
 113
  
      
Earnings from continuing operations before income taxes$1,650
 1,929
 17%
Percent of sales15.2% 15.4%  
Earnings from continuing operations common stockholders$1,147
 1,586
 38%
Net earnings common stockholders$1,014
 1,586
 56%
Percent of sales9.4% 12.7%  
      
Diluted EPS - Earnings from continuing operations$1.77
 2.49
 41%
Diluted EPS - Net earnings$1.57

2.49

59%

Net sales for the first nine months of 2018 were $12.5 billion, an increase of $1.7 billion, or 16 percent compared with $10.8 billion in 2017. Underlying sales were up 8 percent ($816 million) on higher volume. Acquisitions added 8 percent ($859 million) and foreign currency translation added 2 percent ($243 million), while the divestiture of the residential storage business subtracted 2 percent ($227 million). Underlying sales increased 9 percent in the U.S. and 7 percent internationally. Sales were up 2 percent in Europe, 11 percent in Asia (China up 19 percent) and increased 2 percent in Latin America. Canada and Middle East/Africa were up 13 percent and 7 percent, respectively. Sales increased $1.7 billion in Automation Solutions supported by acquisitions and broad-based demand across energy-related and general industrial markets. Commercial & Residential Solutions sales increased $13 million reflecting favorable demand in global HVAC and refrigeration markets, largely offset by the divestiture of the residential storage business.

Cost of sales for 2018 were $7.1 billion, an increase of $896 million versus $6.2 billion in 2017, primarily due to acquisitions, higher volume and the impact of foreign currency translation. Gross margin increased 0.6 percentage points to 43.1 percent, reflecting leverage on higher volume and savings from cost reduction actions, partially offset by a dilutive impact on comparisons of 0.5 percentage points from the valves & controls acquisition.

SG&A expenses of $3.1 billion increased $457 million primarily due to acquisitionstools and an increase in volume. SG&A as a percent of sales of 24.6 percent increased 0.4 percentage points due to higher incentive stock compensation of $65 million, reflecting an increase in the Company's stock price and progress towards achieving its performance objectives, and the impact of acquisitions, partially offset by leverage on higher volume.
Other deductions, net were $275 million in 2018, an increase of $72 million compared with the prior year, reflecting higher intangibles amortization of $58 million and backlog amortization of $12 million due to acquisitions. Higher acquisition/divestiture-related costs of $16 million were more than offset by lower bad debt expense of $11 million and a decrease in restructuring expense of $7 million. See Note 8.

Pretax earnings from continuing operations of $1.9 billion increased $279 million, or 17 percent. Earnings increased $284 million in Automation Solutions and decreased $8 million in Commercial & Residential Solutions. See Note 10 and the following Business Segments discussion.

On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the "Act"), which made comprehensive changes to federal income tax laws by moving from a global to a modified territorial tax regime. The


17


Act includes a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent along with the elimination of certain deductions and credits, and a one-time “deemed repatriation” of accumulated foreign earnings. In the first quarter of fiscal year 2018, the Company recognized a net tax benefit of $43 million ($0.07 per share) due to impacts of the Act, consisting of a $98 million benefit on revaluation of net deferred income tax liabilities to the lower tax rate, and $185 million of expense for the tax on deemed repatriation of accumulated foreign earnings and withholding taxes partially offset by $130 million accrued in previous periods for the planned repatriation of non-U.S. cash. Subsequent to the enactment of the Act, the U.S. Treasury Department and the Internal Revenue Service issued additional guidance, particularly with respect to the calculation of the tax on deemed repatriation of accumulated foreign earnings. As a result of the additional guidance and actions taken in the third fiscal quarter, the Company updated its initial estimates and recognized a benefit of $150 million ($0.24 per share), primarily related to an increase in foreign tax credit carryforwards. These updates resulted in a net tax benefit due to the impacts of the Act of $193 million ($0.30 per share) for the nine months ended June 30, 2018.

The Company continues to review the impacts of the Act and subsequent interpretations. Given its complexities, the ultimate effects on repatriation cost and other tax items may differ from these provisional amounts due to additional regulatory guidance expected to be issued and further evaluation of the Company’s actions, assumptions and interpretations.

Income taxes were $327 million for 2018 and $477 million for 2017, resulting in effective tax rates of 17 percent and 29 percent, respectively. The decrease in the effective rate is largely due to the impact of the Act. The effective tax rate for 2017 included a $47 million ($0.07 per share) income tax benefit from restructuring a foreign subsidiary.

Earnings from continuing operations attributable to common stockholders for 2018 were $1.6 billion, up 38 percent, and diluted earnings per share were $2.49, up 41 percent. Earnings per share include the net tax benefit due to impacts of the Act of $0.30 discussed above. Results also include a $0.12 per share benefit from the lower corporate federal income tax rate on 2018 earnings, partially offset by a $0.04 per share loss on the residential storage divestiture.

Net earnings common stockholders in 2018 were $1.6 billion, up 56 percent, compared with $1.0 billion in the prior year, and earnings per share were $2.49, up 59 percent compared with $1.57 in 2017. Results for 2017 included the impact of discontinued operations, which was a net loss of $133 million ($0.20 per share). See Note 12.

Business Segments
Following is an analysis of operating results for the Company’s business segments for the nine months ended June 30, 2018, compared with the nine months ended June 30, 2017. The Company defines segment earnings as earnings before interest and taxes.
AUTOMATION SOLUTIONS
Nine Months Ended June 302017 2018 Change
(dollars in millions)     
Sales$6,524
 8,213
 26%
Earnings$1,032
 1,316
 28%
     Margin15.8% 16.0%  
      
Sales by Major Product Offering     
Measurement & Analytical Instrumentation$2,162
 2,564
 19%
Valves, Actuators & Regulators1,718
 2,746
 60%
Industrial Solutions1,216
 1,368
 12%
Process Control Systems & Solutions1,428
 1,535
 8%
     Total$6,524
 8,213
 26%

Automation Solutions sales were $8.2 billion in the first nine months of 2018, an increase of $1.7 billion, or 26 percent. Underlying sales increased 10 percent ($668 million) on higher volume. Acquisitions added 13 percent ($847 million) and foreign currency translation had a 3 percent ($174 million) favorable impact. Sales for


18


Measurement & Analytical Instrumentation increased 19 percent and Process Control Systems & Solutions increased 8 percent due to increased spending by global oil and gas customers, strong MRO demand and growth of small and mid-sized projects focused on facility expansion and optimization. Valves, Actuators & Regulators increased $1.0 billion, or 60 percent, led by the valves & controls acquisition ($771 million) and broad-based demand across end markets, including energy, power and life sciences. Industrial Solutions sales increased $152 million, or 12 percent, driven by favorable global trends in general industrial end markets. Underlying sales increased 15 percent in the U.S. and 1 percent in Europe. Sales increased 11 percent in Asia as China was up 24 percent, supported by strong demand in process automation and discrete markets. Sales increased 11 percent in Middle East/Africa and 16 percent in Canada, while Latin America was flat. Earnings were $1.3 billion, an increase of $284 million, or 28 percent. The increase was driven by higher volume and leverage, cost reduction savings and lower bad debt expense of $12 million. Margin increased 0.2 percentage points to 16.0 percent. These results reflect a dilutive impact on comparisons from the valves & controlstest acquisition of 1.6 percentage points, which included higher intangibles amortization of $45 million, or 0.6 percentage points.

COMMERCIAL & RESIDENTIAL SOLUTIONS
Nine Months Ended June 302017
2018
Change
(dollars in millions)     
      
Sales:     
  Climate Technologies$3,104
 3,286
 6 %
  Tools & Home Products1,210
 1,041
 (14)%
     Total$4,314
 4,327
 — %
      
Earnings:     
  Climate Technologies$715
 712
 — %
  Tools & Home Products281
 276
 (2)%
     Total$996
 988
 (1)%
     Margin23.1% 22.8%  

Commercial & Residential Solutions sales were $4.3 billion in the first nine months of 2018, an increase of $13 million, or essentially flat compared to the prior year. Underlying sales were up 4 percent ($149 million) on higher volume and slightly higher price. Foreign currency translation added 2 percent ($69 million) and the divestiture of the residential storage business, net of acquisitions, subtracted 6 percent ($205 million). Climate Technologies sales were $3.3 billion in the first nine months of 2018, an increase of $182 million, or 6 percent. Global HVAC sales were up moderately, reflecting robust growth in China, while sales were up moderately in Europe and slightly in the U.S. Global refrigeration sales were strong, led by robust growth in China, while sales in the U.S. were flat. Sensors had strong growth, while temperature controls was down slightly. Tools & Home Products sales were $1.0 billion in the first nine months of 2018, down $169 million or 14 percent compared to the prior year, reflecting the impact of the residential storage divestiture ($227 million). Sales for professional tools were strong on favorable demand in oil and gas and construction-related markets. Wet/dry vacuums also had strong sales growth and food waste disposers were up slightly. Overall, underlying sales increased 1 percent in the U.S., 4 percent in Europe and 12 percent in Asia (China up 13 percent). Sales increased 4 percent in both Latin America and Canada, while sales decreased 5 percent in Middle East/Africa. Earnings were $988 million, down 1 percent compared to the prior year, and margin declined 0.3 percentage points. Higher materials costs and unfavorable mix were partially offset by leverage on higher volume, favorable price and savings from cost reduction actions. In addition, the residential storage divestiture reduced earnings by $16 million, but benefited margin comparisons 0.9 percentage points and unfavorable price-cost. The impact of tariffs, unfavorable mix and deleverage on the lower volume also reduced margin, while comparisons benefited from higher warranty costs of $10 million in the prior year associated with a specific product issue in Climate Technologies partially offset this benefit.
issue.


19


FINANCIAL CONDITION

Key elements of the Company's financial condition for the ninethree months ended June 30,December 31, 2018 as compared to the year ended September 30, 20172018 follow.
Sept 30, 2017
 June 30, 2018
Sept 30, 2018
 Dec 31, 2018
Working capital (in millions)$3,207
 1,622
$455
 (882)
Current ratio1.6
 1.2
1.1
 0.9
Total debt-to-total capital34.8% 41.6%34.7% 42.0%
Net debt-to-net capital15.4% 23.4%29.1% 36.4%
Interest coverage ratio12.6X 14.0X
14.2X 13.0X
The Company's working capital decreased and debt-to-capital ratios increased primarily due to higher short-term borrowings to support acquisitions andaccelerated share repurchases.repurchases in the first quarter. The interest coverage ratio (earnings before income taxes plus interest expense, divided by interest expense) of 14.0X13.0X for the first ninethree months of 20182019 compares to 11.9X11.2X for the first ninethree months of 2017.2018. The increase reflects higher pretax earnings in the current year.

Operating cash flow from continuing operations for the first ninethree months of 20182019 was $1.9 billion, an increase$323 million, a decrease of $83$124 million compared with $1.8 billion$447 million in the prior year, reflecting higher earningsdue to timing of accounts payable and accruals, partially offset by an investment in working capital to support higher levels of sales activity and income taxes paid on the residential storage divestiture. Operating cash flow from continuing operations funded dividends of $924 million and capital expenditures of $314 million. earnings.


18


Free cash flow from continuing operations of $1.6 billion$168 million (operating cash flow of $1.9 billion$323 million less capital expenditures of $314$155 million) increased $69decreased $183 million in 2018.2019, reflecting the decrease in operating cash flow and an increase in capital investment. Free cash flow from continuing operations was $1.5 billion$351 million in 20172018 (operating cash flow of $1.8 billion$447 million less capital expenditures of $300$96 million). In the second quarter of 2018, the Company repatriated $800 million ofFree cash held by non-U.S. subsidiaries, which was part of the Company's previously announced plans. These fundsflow along with increased short-term borrowings and divestiture proceeds supported acquisitionswere used to fund dividends of $770$305 million, and common stock purchases of $1 billion. Short-term borrowings$786 million, repayments of long-term debt of $403 million, and cash also increased to support the acquisitions which closed in the fourth quarter. See Note 13.of $73 million.

In May 2018,January 2019, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replacedissued €500 million of 1.25% notes due October 2025 and €500 million of 2.0% notes due October 2029. The net proceeds from the April 2014 $3.5 billion facility. The credit facility is maintainedsale of the notes were used to supportrepay commercial paper borrowings and for general corporate purposes, including commercial paper borrowings. 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.purposes.

Emerson's financial structure provides the flexibility necessary to achieve its strategic objectives. The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. The Company believes that sufficient funds will be available to meet the Company’s needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.

FISCAL 20182019 OUTLOOK

ResultsThe Company's first quarter results provided a solid start to fiscal 2019 and confirmed management's outlook for the first nine monthsglobal macroeconomic environment. Strength across the Company's global industrial end markets, including China, is expected to continue. Weakening consumer demand in China negatively impacted the Commercial & Residential Solutions business, but is expected to improve in the second half of 2018 reflected favorable global demand, broad-based momentum across served markets and strong operational performance.2019. For the full year, consolidatedAutomation Solutions net sales are expected to increase approximately 14be up 7 to 10 percent, with underlying sales up approximately 7.55 to 8 percent excluding a 5 percentpositive impact from acquisitions of approximately 4 percent and divestitures andunfavorable currency translation of 2 percent from currency translation. Automationpercent. Commercial & Residential Solutions fiscal 2018 net sales are expected to increase approximately 21be up 8 to 10 percent, with underlying sales up approximately 93 to 5 percent excluding a 10 percentpositive impact from acquisitions of approximately 6 percent and 2 percent fromunfavorable currency translation. Commercial & Residential Solutions full yeartranslation of 1 percent. Consolidated net sales are expected to increase approximately 3be up 7 to 10 percent, with underlying sales up approximately 4.54 to 7 percent excluding a 3 percent negativepositive impact from acquisitions of approximately 5 percent and divestitures and 1 percent from favorableunfavorable currency translation. The Company expects full yeartranslation of 2 percent. Reported earnings per share are expected to be $3.30$3.60 to $3.40, which includes the $0.30 per share net tax benefit due to impacts of the Tax Cuts and Jobs Act. The outlook also reflects expected fourth quarter charges of $(0.06) per share for Tools & Test and Aventics restructuring and first year acquisition accounting charges, and $(0.03) per share related to a special retirement account contribution to U.S. employees.


20


Operating$3.75, while operating cash flow is expected to be approximately $2.9$3.2 billion and free cash flow, which excludes targeted capital spending of $650 million, is expected to be approximately $575 million for the full year 2018.$2.5 billion.

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, andcybersecurity, tariffs, competitive and technological factors, and the impact of the Tax Cuts and Jobs Act, among others, which are set forth in the “Risk Factors” of Part I, Item 1A, and the "Safe Harbor Statement" of Part II, Item 7, to the Company's Annual Report on Form 10-K for the year ended September 30, 20172018 and in subsequent reports filed with the SEC, which are hereby incorporated by reference,reference.

The United Kingdom (UK) continues to negotiate its withdrawal from the European Union (EU), commonly known as well as"Brexit", with a current withdrawal deadline of March 29, 2019. The Company's net sales in the impactUK are principally in the Automation Solutions segment and represent less than two percent of U.S. tax reform as discussedconsolidated sales. Sales of products manufactured in Note 1the UK and sold within the EU are immaterial. The Company is evaluating several potential Brexit scenarios and believes the direct cost of Notes to Consolidated Financial Statements set forth in Part I, Item 1, of this Quarterly Report on Form 10-Q.incremental tariffs, logistics and other items would be immaterial.



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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.

In the first quarter of fiscal 2019, the Company will implementsuccessfully completed upgrades to its Oracle enterprise resource planning system across a majority of its businesses. Separately, the Company also implemented certain internal controls related to the adoption of ASC 606, Revenue from Contracts with Customers, to determine and assess the impact of the new standard on its consolidated financial statements.

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
April 2018 1,496
  $66.84  1,496
  43,993
May 2018 13
  $66.96  13
  43,980
June 2018 2,144
  $69.56  2,144
  41,836
     Total 3,653
  $68.44  3,653
  41,836
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 2018 2,960
  $72.83  2,960
  38,876
November 2018 4,137
  $68.74  4,137
  34,739
December 2018 7,351
  $57.83  7,351
  27,388
     Total 14,448
  $64.03  14,448
  27,388
In November 2015, the Board of Directors authorized the purchase of up to 70 million shares, and 41.8approximately 27.4 million shares remain available.



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Item 6. Exhibits

(a) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K). 
3.14
BylawsEmerson agrees to furnish to the Securities and Exchange Commission, upon request, copies of any long-term debt instruments that authorize an amount of securities constituting 10 percent or less of the total assets of Emerson Electric Co., as amended through June 5, 2018, incorporated by reference to the Company's Form 8-K dated June 5, 2018, filedand its subsidiaries on June 11, 2018, Exhibit 3.1.
a consolidated basis.
  
10.1
Emerson Electric Co. Savings Investment Restoration Plan II.Restricted Shares Award Agreement
  
10.2
Credit Agreement dated as of May 23, 2018, incorporated by reference to Emerson Electric Co. Form 8-K dated May 23, 2018 and filed May 29, 2018, Exhibit 10.1.Restricted Stock Units Program Acceptance of Award
  
1210.3
RatioEmerson Electric Co. Performance Share Program Acceptance of EarningsAward
10.4
Letter Agreement effective as of October 2, 2018, by and between Emerson Electric Co. and Edward L. Monser, incorporated by reference to Fixed Charges.the Emerson Electric Co. Form 8-K filed October 5, 2018, File No. 1-278, Exhibit filed 10.1.
  
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 and nine months ended June 30,December 31, 2018 and 2017, (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended June 30,December 31, 2018 and 2017, (iii) Consolidated Balance Sheets as of September 30, 20172018 and June 30,December 31, 2018, (iv) Consolidated Statements of Cash Flows for the ninethree months ended June 30,December 31, 2018 and 2017, and (v) Notes to Consolidated Financial Statements for the three and nine months ended June 30,December 31, 2018.  


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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 
   Senior Executive Vice President and Chief Financial Officer 
   (on behalf of the registrant and as Chief Financial Officer) 
   August 8, 2018February 6, 2019 



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