Emerson Electric Co. (EMR)

Analysis of Income Taxes

Difficulty: Advanced

Income Tax Accounting Policy

The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and tax rates currently enacted in each jurisdiction. Certain income and expense items are recognized in different time periods for financial reporting and income tax filing purposes, and deferred income taxes are provided for the effect of temporary differences. Emerson also provides for U.S. federal income taxes, net of available foreign tax credits, on earnings intended to be repatriated from non-U.S. locations. No provision has been made for U.S. income taxes on approximately $4.9 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2017, as these earnings are considered permanently invested or otherwise indefinitely retained for continuing international operations. Recognition of U.S. taxes on undistributed non-U.S. earnings would be triggered by a management decision to repatriate those earnings. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable.

Source: Emerson Electric Co., Annual Report

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Income Tax Expense (Benefit)

Emerson Electric Co., income tax expense (benefit), continuing operations

USD $ in millions

12 months ended	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
Federal	351	394	904	742	704	750
State and local	40	11	106	59	60	61
Non-U.S.	311	305	447	516	480	466
Current	702	710	1,457	1,317	1,244	1,277
Federal	7	2	31	(129)	(56)	(129)
State and local	4	4	–	(5)	2	(4)
Non-U.S.	(53)	(19)	(60)	(19)	(60)	(53)
Deferred	(42)	(13)	(29)	(153)	(114)	(186)
Income tax expense	660	697	1,428	1,164	1,130	1,091

Source: Based on data from Emerson Electric Co. Annual Reports

Item	Description	The company
Current	The component of income tax expense for the period representing amounts of income taxes paid or payable (or refundable) for the period for all income tax obligations as determined by applying the provisions of relevant enacted tax laws to relevant amounts of taxable income (loss) from continuing operations.	Emerson Electric Co.'s current declined from 2015 to 2016 and from 2016 to 2017.
Deferred	The component of income tax expense for the period representing the net change in the entity's deferred tax assets and liabilities pertaining to continuing operations.	Emerson Electric Co.'s deferred increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Income tax expense	The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to pretax income (loss) from continuing operations; income tax expense (benefit) may include interest and penalties on tax uncertainties based on the entity's accounting policy.	Emerson Electric Co.'s income tax expense declined from 2015 to 2016 and from 2016 to 2017.

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Effective Income Tax Rate (EITR)

Emerson Electric Co., effective income tax rate (EITR) reconciliation

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
Federal statutory tax rate	35.00%	35.00%	35.00%	35.00%	35.00%	35.00%
State and local taxes, net of federal tax benefit	1.20%	0.50%	1.00%	1.00%	1.30%	1.30%
Non-U.S. rate differential	-3.60%	-2.90%	-2.40%	-4.20%	-4.80%	-4.00%
Non-U.S. tax holidays	-1.00%	-1.10%	-1.10%	-1.10%	-1.80%	-1.70%
U.S. manufacturing deduction	-1.70%	-1.80%	-1.20%	-1.50%	-1.60%	-1.40%
Gains on divestitures	–%	–%	1.50%	–%	–%	–%
Non-U.S. subsidiary restructuring	-1.80%	–%	–%	–%	–%	–%
Spinoff-related	–%	–%	1.10%	–%	–%	–%
Goodwill impairment	–%	–%	–%	5.30%	4.80%	4.60%
Artesyn repatriation	–%	–%	–%	–%	2.20%	–%
Other	0.20%	0.40%	0.40%	0.30%	0.20%	1.20%
Effective income tax rate	28.30%	30.10%	34.30%	34.80%	35.30%	35.00%

Source: Based on data from Emerson Electric Co. Annual Reports

Item	Description	The company
Effective income tax rate	A ratio calculated by dividing the reported amount of income tax expense attributable to continuing operations for the period by GAAP-basis pretax income from continuing operations.	Emerson Electric Co.'s effective income tax rate declined from 2015 to 2016 and from 2016 to 2017.

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Components of Deferred Tax Assets and Liabilities

Emerson Electric Co., components of deferred tax assets and liabilities

USD $ in millions

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
Net operating losses and tax credits	444	164	207	238	231	237
Accrued liabilities	319	277	270	311	262	247
Postretirement and postemployment benefits	70	82	86	93	102	135
Employee compensation and benefits	173	206	180	196	256	194
Pensions	72	271	194	28	–	224
Other	196	158	173	137	124	138
Deferred tax assets, gross	1,274	1,158	1,110	1,003	975	1,175
Valuation allowances	(309)	(132)	(160)	(154)	(131)	(113)
Deferred tax assets, net	965	1,026	950	849	844	1,062
Intangibles	(753)	(510)	(648)	(649)	(780)	(780)
Pensions	–	–	–	–	(38)	–
Property, plant and equipment	(265)	(239)	(260)	(258)	(255)	(282)
Undistributed non-U.S. earnings	(249)	(9)	–	–	–	–
Other	(37)	(42)	(51)	(98)	(158)	(110)
Deferred tax liabilities	(1,304)	(800)	(959)	(1,005)	(1,231)	(1,172)
Net deferred income tax asset (liability)	(339)	226	(9)	(156)	(387)	(110)

Source: Based on data from Emerson Electric Co. Annual Reports

Item	Description	The company
Deferred tax assets, gross	The sum of the tax effects as of the balance sheet date of the amounts of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws (before the valuation allowance, if any, to reduce such sum amount to net realizable value). Includes any tax benefit realized in deferred tax assets for significant impacts of tax planning strategies.	Emerson Electric Co.'s deferred tax assets, gross increased from 2015 to 2016 and from 2016 to 2017.
Deferred tax assets, net	The aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; net of deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value.	Emerson Electric Co.'s deferred tax assets, net increased from 2015 to 2016 but then slightly declined from 2016 to 2017 not reaching 2015 level.
Net deferred income tax asset (liability)	For entities that net deferred tax assets and tax liabilities, represents the unclassified net amount of deferred tax assets and liabilities as of the balance sheet date, which result from applying the applicable enacted tax rate to net temporary differences and carryforwards pertaining to assets or liabilities. A temporary difference is a difference between the tax basis of an asset or liability and its carrying amount in the financial statements prepared in accordance with generally accepted accounting principles that will reverse in ensuing periods.	Emerson Electric Co.'s net deferred income tax asset (liability) increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

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Deferred Tax Assets and Liabilities, Classification

Emerson Electric Co., deferred tax assets and liabilities, classification

USD $ in millions

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
Current deferred tax assets, net	–	400	353	354	354	377
Noncurrent deferred tax assets	86	–	–	62	82	105
Noncurrent deferred tax liabilities	425	174	362	572	823	592

Source: Based on data from Emerson Electric Co. Annual Reports

Item	Description	The company
Current deferred tax assets, net	The current portion of the aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. An unrecognized tax benefit that is directly related to a position taken in a tax year that results in a net operating loss carryforward should be presented as a reduction of the related deferred tax asset.	Emerson Electric Co.'s current deferred tax assets, net increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Noncurrent deferred tax assets	The noncurrent portion as of the balance sheet date of the aggregate carrying amount of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after the valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference.
Noncurrent deferred tax liabilities	Represents the noncurrent portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A noncurrent taxable temporary difference is a difference between the tax basis and the carrying amount of a noncurrent asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference.	Emerson Electric Co.'s noncurrent deferred tax liabilities declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

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Analyst Adjustments: Removal of Deferred Taxes

Emerson Electric Co., adjustments to financial data

USD $ in millions

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
Adjustment to Current Assets
Current assets (as reported)	8,252	9,960	10,049	10,867	10,999	10,126
Less: Current deferred tax assets, net	–	400	353	354	354	377
Current assets (adjusted)	8,252	9,560	9,696	10,513	10,645	9,749
Adjustment to Total Assets
Total assets (as reported)	19,589	21,743	22,088	24,177	24,711	23,818
Less: Current deferred tax assets, net	–	400	353	354	354	377
Less: Noncurrent deferred tax assets, net	86	–	–	62	82	105
Total assets (adjusted)	19,503	21,343	21,735	23,761	24,275	23,336
Adjustment to Total Liabilities
Total liabilities (as reported)	10,819	14,125	13,960	14,010	13,993	13,376
Less: Noncurrent deferred tax liabilities, net	425	174	362	572	823	592
Total liabilities (adjusted)	10,394	13,951	13,598	13,438	13,170	12,784
Adjustment to Common Stockholders' Equity
Common stockholders' equity (as reported)	8,718	7,568	8,081	10,119	10,585	10,295
Less: Net deferred tax assets (liabilities)	(339)	226	(9)	(156)	(387)	(110)
Common stockholders' equity (adjusted)	9,057	7,342	8,090	10,275	10,972	10,405
Adjustment to Net Earnings Common Stockholders
Net earnings common stockholders (as reported)	1,518	1,635	2,710	2,147	2,004	1,968
Add: Deferred income tax expense (benefit)	(42)	(13)	(29)	(153)	(114)	(186)
Net earnings common stockholders (adjusted)	1,476	1,622	2,681	1,994	1,890	1,782

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Adjusted Ratios: Removal of Deferred Taxes (Summary)

Emerson Electric Co., adjusted ratios

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
Current Ratio
Reported current ratio	1.64	1.24	1.29	1.29	1.44	1.42
Adjusted current ratio	1.64	1.19	1.24	1.24	1.40	1.37
Net Profit Margin
Reported net profit margin	9.94%	11.26%	12.15%	8.75%	8.12%	8.06%
Adjusted net profit margin	9.67%	11.17%	12.02%	8.13%	7.66%	7.30%
Total Asset Turnover
Reported total asset turnover	0.78	0.67	1.01	1.01	1.00	1.02
Adjusted total asset turnover	0.78	0.68	1.03	1.03	1.02	1.05
Financial Leverage
Reported financial leverage	2.25	2.87	2.73	2.39	2.33	2.31
Adjusted financial leverage	2.15	2.91	2.69	2.31	2.21	2.24
Return on Equity (ROE)
Reported ROE	17.41%	21.60%	33.54%	21.22%	18.93%	19.12%
Adjusted ROE	16.30%	22.09%	33.14%	19.41%	17.23%	17.13%
Return on Assets (ROA)
Reported ROA	7.75%	7.52%	12.27%	8.88%	8.11%	8.26%
Adjusted ROA	7.57%	7.60%	12.33%	8.39%	7.79%	7.64%

Ratio	Description	The company
Adjusted current ratio	A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities.	Emerson Electric Co.'s adjusted current ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by total revenue.	Emerson Electric Co.'s adjusted net profit margin deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Emerson Electric Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Emerson Electric Co.'s adjusted financial leverage increased from 2015 to 2016 but then declined significantly from 2016 to 2017.
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.	Emerson Electric Co.'s adjusted ROE deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Emerson Electric Co.'s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.

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Adjusted Current Ratio

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
As Reported
Current assets (USD $ in millions)	8,252	9,960	10,049	10,867	10,999	10,126
Current liabilities (USD $ in millions)	5,045	8,008	7,800	8,454	7,625	7,133

Current ratio¹	1.64	1.24	1.29	1.29	1.44	1.42
Adjusted for Deferred Taxes
Adjusted current assets (USD $ in millions)	8,252	9,560	9,696	10,513	10,645	9,749

Adjusted current ratio²	1.64	1.19	1.24	1.24	1.40	1.37

2017 Calculations

¹ Current ratio = Current assets ÷ Current liabilities
= 8,252 ÷ 5,045 = 1.64

² Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= 8,252 ÷ 5,045 = 1.64

Ratio	Description	The company
Adjusted current ratio	A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities.	Emerson Electric Co.'s adjusted current ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Net Profit Margin

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
As Reported
Net earnings common stockholders (USD $ in millions)	1,518	1,635	2,710	2,147	2,004	1,968
Net sales (USD $ in millions)	15,264	14,522	22,304	24,537	24,669	24,412

Net profit margin¹	9.94%	11.26%	12.15%	8.75%	8.12%	8.06%
Adjusted for Deferred Taxes
Adjusted net earnings common stockholders (USD $ in millions)	1,476	1,622	2,681	1,994	1,890	1,782

Adjusted net profit margin²	9.67%	11.17%	12.02%	8.13%	7.66%	7.30%

2017 Calculations

¹ Net profit margin = 100 × Net earnings common stockholders ÷ Net sales
= 100 × 1,518 ÷ 15,264 = 9.94%

² Adjusted net profit margin = 100 × Adjusted net earnings common stockholders ÷ Net sales
= 100 × 1,476 ÷ 15,264 = 9.67%

Ratio	Description	The company
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by total revenue.	Emerson Electric Co.'s adjusted net profit margin deteriorated from 2015 to 2016 and from 2016 to 2017.

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Adjusted Total Asset Turnover

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
As Reported
Net sales (USD $ in millions)	15,264	14,522	22,304	24,537	24,669	24,412
Total assets (USD $ in millions)	19,589	21,743	22,088	24,177	24,711	23,818

Total asset turnover¹	0.78	0.67	1.01	1.01	1.00	1.02
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in millions)	19,503	21,343	21,735	23,761	24,275	23,336

Adjusted total asset turnover²	0.78	0.68	1.03	1.03	1.02	1.05

2017 Calculations

¹ Total asset turnover = Net sales ÷ Total assets
= 15,264 ÷ 19,589 = 0.78

² Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= 15,264 ÷ 19,503 = 0.78

Ratio	Description	The company
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Emerson Electric Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Adjusted Financial Leverage

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
As Reported
Total assets (USD $ in millions)	19,589	21,743	22,088	24,177	24,711	23,818
Common stockholders' equity (USD $ in millions)	8,718	7,568	8,081	10,119	10,585	10,295

Financial leverage¹	2.25	2.87	2.73	2.39	2.33	2.31
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in millions)	19,503	21,343	21,735	23,761	24,275	23,336
Adjusted common stockholders' equity (USD $ in millions)	9,057	7,342	8,090	10,275	10,972	10,405

Adjusted financial leverage²	2.15	2.91	2.69	2.31	2.21	2.24

2017 Calculations

¹ Financial leverage = Total assets ÷ Common stockholders' equity
= 19,589 ÷ 8,718 = 2.25

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted common stockholders' equity
= 19,503 ÷ 9,057 = 2.15

Ratio	Description	The company
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Emerson Electric Co.'s adjusted financial leverage increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

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Adjusted Return on Equity (ROE)

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
As Reported
Net earnings common stockholders (USD $ in millions)	1,518	1,635	2,710	2,147	2,004	1,968
Common stockholders' equity (USD $ in millions)	8,718	7,568	8,081	10,119	10,585	10,295

ROE¹	17.41%	21.60%	33.54%	21.22%	18.93%	19.12%
Adjusted for Deferred Taxes
Adjusted net earnings common stockholders (USD $ in millions)	1,476	1,622	2,681	1,994	1,890	1,782
Adjusted common stockholders' equity (USD $ in millions)	9,057	7,342	8,090	10,275	10,972	10,405

Adjusted ROE²	16.30%	22.09%	33.14%	19.41%	17.23%	17.13%

2017 Calculations

¹ ROE = 100 × Net earnings common stockholders ÷ Common stockholders' equity
= 100 × 1,518 ÷ 8,718 = 17.41%

² Adjusted ROE = 100 × Adjusted net earnings common stockholders ÷ Adjusted common stockholders' equity
= 100 × 1,476 ÷ 9,057 = 16.30%

Ratio	Description	The company
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.	Emerson Electric Co.'s adjusted ROE deteriorated from 2015 to 2016 and from 2016 to 2017.

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Adjusted Return on Assets (ROA)

	Sep 30, 2017	Sep 30, 2016	Sep 30, 2015	Sep 30, 2014	Sep 30, 2013	Sep 30, 2012
As Reported
Net earnings common stockholders (USD $ in millions)	1,518	1,635	2,710	2,147	2,004	1,968
Total assets (USD $ in millions)	19,589	21,743	22,088	24,177	24,711	23,818

ROA¹	7.75%	7.52%	12.27%	8.88%	8.11%	8.26%
Adjusted for Deferred Taxes
Adjusted net earnings common stockholders (USD $ in millions)	1,476	1,622	2,681	1,994	1,890	1,782
Adjusted total assets (USD $ in millions)	19,503	21,343	21,735	23,761	24,275	23,336

Adjusted ROA²	7.57%	7.60%	12.33%	8.39%	7.79%	7.64%

2017 Calculations

¹ ROA = 100 × Net earnings common stockholders ÷ Total assets
= 100 × 1,518 ÷ 19,589 = 7.75%

² Adjusted ROA = 100 × Adjusted net earnings common stockholders ÷ Adjusted total assets
= 100 × 1,476 ÷ 19,503 = 7.57%

Ratio	Description	The company
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Emerson Electric Co.'s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.

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