Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Earnings

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions, except per share amounts)

	2014				2015			2016
Net sales	$	17,733			16,249			14,522
Costs and expenses:
Cost of sales	9,971				9,241			8,260
Selling, general and administrative expenses	4,164				3,735			3,464
Gains on divestitures of businesses	—				1,039			—
Other deductions, net	211				330			294
Interest expense, net of interest income of: 2014, $18; 2015, $23; 2016, $27	196				175			188
Earnings from continuing operations before income taxes	3,191				3,807			2,316
Income taxes	953				1,267			697
Earnings from continuing operations	2,238				2,540			1,619
Discontinued operations, net of tax: 2014, $211; 2015, $161; 2016, $269	(54		)		193			45
Net earnings	2,184				2,733			1,664
Less: Noncontrolling interests in earnings of subsidiaries	37				23			29
Net earnings common stockholders	$	2,147			2,710			1,635
Earnings common stockholders:
Earnings from continuing operations	$	2,201			2,517			1,590
Discontinued operations, net of tax	(54		)		193			45
Net earnings common stockholders	$	2,147			2,710			1,635
Basic earnings per share common stockholders:
Earnings from continuing operations	$	3.13			3.72			2.46
Discontinued operations	(0.08		)		0.29			0.07
Basic earnings per common share	$	3.05			4.01			2.53
Diluted earnings per share common stockholders:
Earnings from continuing operations	$	3.11			3.71			2.45
Discontinued operations	(0.08		)		0.28			0.07
Diluted earnings per common share	$	3.03			3.99			2.52

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions)

		2014				2015			2016
Net earnings		$	2,184			2,733			1,664
Other comprehensive income (loss), net of tax:
Foreign currency translation		(344		)		(794	)		(188	)
Pension and postretirement		(54		)		(206	)		(210	)
Cash flow hedges		1				(43	)		18
Total other comprehensive income (loss)		(397		)		(1,043	)		(380	)
Comprehensive income		1,787				1,690			1,284
Less: Noncontrolling interests in comprehensive income of subsidiaries		34				22			31
Comprehensive income common stockholders		$	1,753			1,668			1,253

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

EMERSON ELECTRIC CO. & SUBSIDIARIES

September 30 (Dollars in millions, except per share amounts)

	2015				2016
ASSETS
Current assets
Cash and equivalents	$	3,054			3,182
Receivables, less allowances of $89 in 2015 and $92 in 2016	2,870				2,701
Inventories	1,265				1,208
Other current assets	724				669
Current assets held-for-sale	2,136				2,200
Total current assets	10,049				9,960
Property, plant and equipment, net	2,929				2,931
Other assets
Goodwill	3,847				3,909
Other intangible assets	938				902
Other	239				211
Noncurrent assets held-for-sale	4,086				3,830
Total other assets	9,110				8,852
Total assets	$	22,088			21,743
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt	$	2,552			2,584
Accounts payable	1,537				1,517
Accrued expenses	2,058				2,126
Income taxes	87				180
Current liabilities held-for-sale	1,566				1,601
Total current liabilities	7,800				8,008
Long-term debt	4,289				4,062
Other liabilities	1,539				1,729
Noncurrent liabilities held-for-sale	332				326
Equity
Common stock, $0.50 par value; authorized, 1,200,000,000 shares; issued, 953,354,012 shares; outstanding, 654,608,521 shares in 2015; 642,796,490 shares in 2016	477				477
Additional paid-in-capital	170				205
Retained earnings	21,308				21,716
Accumulated other comprehensive income (loss)	(1,617		)		(1,999	)
	20,338				20,399
Less: Cost of common stock in treasury, 298,745,491 shares in 2015; 310,557,522 shares in 2016	12,257				12,831
Common stockholders’ equity	8,081				7,568
Noncontrolling interests in subsidiaries	47				50
Total equity	8,128				7,618
Total liabilities and equity	$	22,088			21,743
See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Equity

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions, except per share amounts)

	2014				2015			2016
Common stock	$	477			477			477
Additional paid-in-capital
Beginning balance	352				161			170
Stock plans	160				31			35
Purchase of noncontrolling interests	(351		)		(22	)		—
Ending balance	161				170			205
Retained earnings
Beginning balance	18,930				19,867			21,308
Net earnings common stockholders	2,147				2,710			1,635
Dividends paid (per share: 2014, $1.72; 2015, $1.88; 2016, $1.90)	(1,210		)		(1,269	)		(1,227	)
Ending balance	19,867				21,308			21,716
Accumulated other comprehensive income (loss)
Beginning balance	(189		)		(575	)		(1,617	)
Foreign currency translation	(333		)		(793	)		(190	)
Pension and postretirement	(54		)		(206	)		(210	)
Cash flow hedges	1				(43	)		18
Ending balance	(575		)		(1,617	)		(1,999	)
Treasury stock
Beginning balance	(8,985		)		(9,811	)		(12,257	)
Purchases	(971		)		(2,487	)		(601	)
Issued under stock plans	145				41			27
Ending balance	(9,811		)		(12,257	)		(12,831	)
Common stockholders' equity	10,119				8,081			7,568
Noncontrolling interests in subsidiaries
Beginning balance	133				48			47
Net earnings	37				23			29
Other comprehensive income (loss)	(3		)		(1	)		2
Dividends paid	(18		)		(23	)		(28	)
Purchase of noncontrolling interests	(101		)		—			—
Ending balance	48				47			50
Total equity	$	10,167			8,128			7,618

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30 (Dollars in millions)

	2014				2015			2016
Operating activities
Net earnings	$	2,184			2,733			1,664
(Earnings) Loss from discontinued operations, net of tax	54				(193	)		(45	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	569				573			568
Changes in operating working capital	159				(181	)		93
Pension funding	(130		)		(53	)		(66	)
Gains on divestitures of businesses, after tax	—				(611	)		—
Income taxes paid on divestiture gains	—				(424	)		—
Other, net	163				196			285
Cash from continuing operations	2,999				2,040			2,499
Cash from discontinued operations	693				489			382
Cash provided by operating activities	3,692				2,529			2,881
Investing activities
Capital expenditures	(651		)		(588	)		(447	)
Purchases of businesses, net of cash and equivalents acquired	(610		)		(324	)		(132	)
Divestitures of businesses	363				1,812			—
Other, net	(155		)		(221	)		30
Cash from continuing operations	(1,053		)		679			(549	)
Cash from discontinued operations	(106		)		(88	)		(77	)
Cash provided by (used in) investing activities	(1,159		)		591			(626	)
Financing activities
Net increase (decrease) in short-term borrowings	180				1,116			(34	)
Proceeds from short-term borrowings greater than three months	2,952				2,515			1,264
Payments of short-term borrowings greater than three months	(2,510		)		(3,286	)		(1,174	)
Proceeds from long-term debt	1				1,000			—
Payments of long-term debt	(329		)		(504	)		(254	)
Dividends paid	(1,210		)		(1,269	)		(1,227	)
Purchases of common stock	(1,048		)		(2,501	)		(601	)
Purchase of noncontrolling interests	(574		)		—			—
Other, net	(21		)		(19	)		(19	)
Cash used in financing activities	(2,559		)		(2,948	)		(2,045	)
Effect of exchange rate changes on cash and equivalents	(100		)		(267	)		(82	)
Increase (Decrease) in cash and equivalents	(126		)		(95	)		128
Beginning cash and equivalents	3,275				3,149			3,054
Ending cash and equivalents	$	3,149			3,054			3,182
Changes in operating working capital
Receivables	$	(163	)		241			162
Inventories	(103		)		(11	)		58
Other current assets	61				(140	)		(4	)
Accounts payable	232				(256	)		(22	)
Accrued expenses	85				(4	)		(57	)
Income taxes	47				(11	)		(44	)
Total changes in operating working capital	$	159			(181	)		93

See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles

(U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with current year presentation.

In the first quarter of 2015, the Company adopted updates to ASC 205, Presentation of Financial Statements, and ASC 360, Property, Plant and Equipment, regarding the reporting of discontinued operations. These updates raised the threshold for reporting discontinued operations to a strategic business shift having a major effect on an entity's operations and financial results. The updates also added disclosures for disposals of business units qualifying for discontinued presentation, and for some dispositions that do not qualify as discontinued operations but are still considered individually significant components of the entity. The Company's previously announced strategic portfolio repositioning actions resulted in agreements to sell the network power systems business and the power generation, motors and drives businesses. The results of operations for these businesses have been reclassified into discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented. See Note 4.

In the first quarter of 2014, the Company adopted revisions to ASC 220, Comprehensive Income, which require disclosure of reclassifications into earnings from accumulated other comprehensive income (AOCI) and other current period activity. There is no change to the items reported in AOCI or when those items should be reclassified into earnings. The revisions did not materially impact the Company’s financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its controlled affiliates. Intercompany transactions, profits and balances are eliminated in consolidation. Investments of 20 percent to 50 percent of the voting shares of other entities are accounted for by the equity method. Investments in publicly traded companies of less than 20 percent are carried at fair value, with changes in fair value reflected in accumulated other comprehensive income. Investments in nonpublicly traded companies of less than 20 percent are carried at cost.

Foreign Currency Translation

The functional currency for most of the Company's non-U.S. subsidiaries is the local currency. Adjustments resulting from translating local currency financial statements into U.S. dollars are reflected in accumulated other comprehensive income.

Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Inventories

Inventories are stated at the lower of cost or market. The majority of inventory is valued based on standard costs that approximate average costs, while the remainder is principally valued on a first-in, first-out basis. Cost standards are revised at the beginning of each fiscal year. The annual effect of resetting standards plus any operating variances incurred during each period are allocated to inventories and recognized in cost of sales as product is sold. Following are the components of inventory as of September 30:

		2015				2016
Finished products		$	418			382
Raw materials and work in process		847				826
Total inventories		$	1,265			1,208

Fair Value Measurement

ASC 820, Fair Value Measurement, establishes a formal hierarchy and framework for measuring certain financial statement items at fair value, and requires disclosures about fair value measurements and the reliability of valuation inputs. Under ASC 820, measurement assumes the transaction to sell an asset or transfer a liability occurs in the principal or at least the most advantageous market for that asset or liability. Within the hierarchy, Level 1 instruments use observable market prices for an identical item in active markets and have the most reliable valuations. Level 2 instruments are valued through broker/dealer quotation or other approaches using market-observable inputs for similar items in active markets, including forward and spot prices, interest rates and volatilities. Level 3 instruments are valued using inputs not observable in an active market, such as company-developed future cash flow estimates, and are considered the least reliable. Valuations for all of the Company's financial instruments fall within Level 2. The fair value of the Company's long-term debt is Level 2, estimated using current interest rates and pricing from financial institutions and other market sources for debt with similar maturities and characteristics.

Property, Plant And Equipment

The Company records investments in land, buildings, and machinery and equipment at cost. Depreciation is computed principally using the straight-line method over estimated service lives, which for principal assets are 30 to 40 years for buildings and 8 to 12 years for machinery and equipment. Long-lived tangible assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized based on estimated fair values if the sum of estimated future undiscounted cash flows of the related assets is less than the carrying values. The components of property, plant and equipment as of September 30 follow:

		2015				2016
Land		$	190			210
Buildings		1,762				1,867
Machinery and equipment		4,774				4,932
Construction in progress		379				318
Property, plant and equipment, at cost		7,105				7,327
Less: Accumulated depreciation		4,176				4,396
Property, plant and equipment, net		$	2,929			2,931

Goodwill and Other Intangible Assets

Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A reporting unit is an operating segment as defined in ASC 280, Segment Reporting, or a business one level below an operating segment if discrete financial information for that business unit is prepared and regularly reviewed by the segment manager. The Company conducts annual impairment tests of goodwill in the fourth quarter. If an initial assessment indicates it is more likely than not goodwill might be impaired, it is evaluated by comparing the reporting unit's estimated fair value to its carrying value. Goodwill is also tested for impairment between annual tests if events or circumstances indicate the fair value of a unit may be less than its carrying value. If the carrying amount exceeds the estimated fair value, impairment is recognized to the extent that recorded goodwill exceeds the implied fair value of that goodwill. Estimated fair values of reporting units are Level 3 measures and are developed generally under an income approach that discounts estimated future cash flows using risk-adjusted interest rates.

All of the Company's identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives. Identifiable intangibles consist of intellectual property such as patents and trademarks, customer relationships and capitalized software. Identifiable intangibles are also subject to evaluation for potential impairment if events or circumstances indicate the carrying amount may not be recoverable. See Note 7.

Product Warranty

Warranties vary by product line and are competitive for the markets in which the Company operates. Warranties generally extend for a period of one to two years from the date of sale or installation. Provisions for warranty are determined primarily based on historical warranty cost as a percentage of sales or a fixed amount per unit sold based on failure rates, adjusted for specific problems that may arise. Product warranty expense is less than 1 percent of sales.

Revenue Recognition

The Company recognizes nearly all of its revenues through the sale of manufactured products and records the sale when products are shipped or delivered, title and risk of loss pass to the customer, and collection is reasonably assured. In certain limited circumstances, revenue is recognized using the percentage-of-completion method as performance occurs, or in accordance with ASC 985-605 related to software. Management believes that all relevant criteria and conditions are considered when recognizing revenue.

Sales arrangements sometimes involve delivering multiple elements. In these instances, the revenue assigned to each element is based on vendor-specific objective evidence, third-party evidence or a management estimate of the relative selling price. Revenue is recognized individually for delivered elements if they have value to the customer on a stand-alone basis and the performance of the undelivered items is probable and substantially in the Company's control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment. Approximately 5 percent of the Company's revenues from continuing operations arise from qualifying sales arrangements that include the delivery of multiple elements, principally in the Process Management segment. The vast majority of these deliverables are tangible products, with a smaller portion attributable to installation, service or maintenance. Generally, contract duration is short term, and cancellation, termination or refund provisions apply only in the event of contract breach and have historically not been invoked.

Derivatives and Hedging

In the normal course of business, the Company is exposed to changes in interest rates, foreign currency exchange rates and commodity prices due to its worldwide presence and diverse business profile. The Company's foreign currency exposures relate to transactions denominated in currencies that differ from the functional currencies of its business units, primarily in euros, Mexican pesos, Singapore dollars and Indian rupees. Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum and related products. As part of the Company's risk management strategy, derivative instruments are selectively used in an effort to minimize the impact of these exposures. Foreign exchange forwards and options are utilized to hedge foreign currency exposures impacting sales or cost of sales transactions, firm commitments and the fair value of assets and liabilities, while swap and option contracts may be used to minimize the effect of commodity price fluctuations on the cost of sales. All derivatives are associated with specific underlying exposures and the Company does not hold derivatives for trading or speculative purposes. The duration of hedge positions is generally two years or less.

All derivatives are accounted for under ASC 815, Derivatives and Hedging, and recognized at fair value. For derivatives hedging variability in future cash flows, the effective portion of any gain or loss is deferred in stockholders' equity and recognized when the underlying hedged transaction impacts earnings. The majority of the Company's derivatives that are designated as hedges and qualify for deferral accounting are cash flow hedges. For derivatives hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in earnings each period. Currency fluctuations on non-U.S. dollar obligations that have been designated as hedges of non-U.S. dollar net asset exposures are reported in equity. To the extent that any hedge is not fully effective at offsetting changes in the underlying hedged item, there could be a net earnings impact. The Company also uses derivatives to hedge economic exposures that do not receive deferral accounting under ASC 815. The underlying exposures for these hedges relate primarily to purchases of commodity-based components used in the Company's manufacturing processes, and the revaluation of certain foreign-currency-denominated assets and liabilities. Gains or losses from the ineffective portion of any hedge, as well as any gains or losses on derivative instruments not designated as hedges, are recognized in the income statement immediately.

Counterparties to derivative arrangements are companies with high credit ratings, and the Company has bilateral collateral arrangements with them for which credit rating-based posting thresholds vary depending on the arrangement. If credit ratings on the Company's debt fall below preestablished levels, counterparties can require immediate full collateralization on all instruments in net liability positions. No collateral was posted with counterparties and none was held by the Company at year end. If contractual thresholds had been exceeded, the maximum collateral the Company could have been required to post was $47. The Company can also demand full collateralization of instruments in net asset positions should any of the Company's counterparties' credit ratings fall below certain thresholds. Risk from credit loss when derivatives are in asset positions is not considered material. The Company has master netting arrangements in place with its counterparties that allow the offsetting of certain derivative-related amounts receivable and payable when settlement occurs in the same period. Accordingly, counterparty balances are netted in the consolidated balance sheet and are reported in other current assets or accrued expenses as appropriate, depending on positions with counterparties as of the balance sheet date. See Note 8.

Income Taxes

The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and tax rates currently enacted in each jurisdiction. Certain income and expense items are recognized in different time periods for financial reporting and income tax filing purposes, and deferred income taxes are provided for the effect of temporary differences. The Company also provides for U.S. federal income taxes, net of available foreign tax credits, on earnings intended to be repatriated from non-U.S. locations. No provision has been made for U.S. income taxes on approximately $5.2 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2016, as these earnings are considered permanently invested or otherwise indefinitely retained for continuing international operations. Recognition of U.S. taxes on undistributed non-U.S. earnings would be triggered by a management decision to repatriate those earnings. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. See Note 14.

(2) WEIGHTED-AVERAGE COMMON SHARES

Basic earnings per common share consider only the weighted-average of common shares outstanding while diluted earnings per common share also consider the dilutive effects of stock options and incentive shares. Options to purchase approximately 13.3 million, 5.9 million and 4.6 million shares of common stock were excluded from the computation of diluted earnings per share in 2016, 2015 and 2014, respectively, as the effect would have been antidilutive. Earnings allocated to participating securities were inconsequential for all years presented. Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (shares in millions):

	2014			2015			2016
Basic shares outstanding	700.2			673.3			644.0
Dilutive shares	3.9			3.2			2.8
Diluted shares outstanding	704.1			676.5			646.8

(3) ACQUISITIONS AND DIVESTITURES

The Company acquired six businesses in 2016, four in Process Management's final control and measurement devices businesses and two in Climate Technologies. Total cash paid for these businesses was $132, net of cash acquired. Annualized sales for these businesses were approximately $51 in 2016. The Company recognized goodwill of $83 ($27 of which is expected to be tax deductible) and other identifiable intangible assets of $50, primarily customer relationships and intellectual property with a weighted-average life of approximately 9 years. Valuations of certain acquired assets and liabilities are in-process and subject to refinement. These acquisitions complement the existing segment portfolios and create incremental growth opportunities.

In the fourth quarter of 2016, the Company entered into an agreement to purchase Pentair's Valves & Controls business for $3.15 billion, subject to certain post-closing adjustments. This business, with sales of approximately $1.6 billion, is a manufacturer of control, isolation and pressure relief valves and actuators, and complements the Process Management segment's final control business. The transaction is expected to close by the end of calendar year 2016 or shortly thereafter, subject to customary closing conditions and various regulatory approvals.

The Company completed eight acquisitions in 2015, seven in Process Management and one in Commercial & Residential Solutions, which had combined annualized sales of approximately $115. Total cash paid for all businesses was $324, net of cash acquired. The Company recognized goodwill of $178 ($42 of which is expected to be tax deductible) and other intangible assets of $128, primarily customer relationships and intellectual property with a weighted-average life of approximately 10 years.

In January 2015, the Company completed the sale of its mechanical power transmission solutions business to Regal Beloit Corporation for $1.4 billion, and recognized a pretax gain from the transaction of $939 ($532 after-tax, $0.78 per share). Assets and liabilities sold were as follows: current assets, $182 (accounts receivable, inventories, other current assets); other assets, $374 (property, plant and equipment, goodwill, other noncurrent assets); accrued expenses, $56 (accounts payable, other current liabilities); and other liabilities, $41. Proceeds from the divestiture were used for share repurchase. This business was previously reported in the Industrial Automation segment, and had partial year sales in 2015 of $189 and related pretax earnings of $21. Power transmission

solutions designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions.

On September 30, 2015, the Company sold its InterMetro commercial storage business to Ali Group of Italy for $411 in cash and recognized a pretax gain from the transaction of $100 ($79 after-tax, $0.12 per share). This business had annual sales of $288 and pretax earnings of $42 in 2015 and was reported in the Commercial & Residential Solutions segment. Assets and liabilities sold were as follows: current assets, $62 (accounts receivable, inventories, other current assets); other assets, $292 (property, plant and equipment, goodwill, other noncurrent assets); current liabilities, $34 (accounts payable, other current liabilities); and other liabilities, $9. InterMetro is a leading manufacturer and supplier of storage and transport products in the food service, commercial products and health care industries.

In the first quarter of 2014, the Company acquired 100 percent of Virgo Valves and Controls Limited and Enardo Holdings, both in the Process Management final control business. Virgo is a manufacturer of engineered valves and automation systems and Enardo is a manufacturer of tank and terminal safety equipment. Total cash paid for both businesses was approximately $506, net of cash acquired, and the Company also assumed $76 of debt. Combined sales for Virgo and Enardo in 2014 were $321. Goodwill of $323 (largely nondeductible) and identifiable intangible assets of $178, primarily customer relationships and patents and technology with weighted-average lives of approximately 12 years, were recognized from these transactions. The Company also acquired four other smaller businesses in 2014 for a total of approximately $104, net of cash acquired. Combined annual sales for these four businesses were approximately $55. These acquisitions were complementary to the existing business portfolio.

In the second quarter of 2014, the Company acquired the remaining 44.5 percent noncontrolling interest in Appleton Group (formally EGS Electrical Group), which is reported in Industrial Automation, for $574. Full ownership provides growth opportunities in the oil and gas and chemicals end markets by leveraging the Company's Process Management and international distribution channels. The transaction reduced noncontrolling interests $101 and common stockholders' equity $343, and increased deferred tax assets $130. The transaction did not affect consolidated results of operations other than eliminating the noncontrolling interest's share of future earnings and distributions from this business. Sales for this electrical distribution business were $542 in 2014.

In November 2013, the Company completed the divestiture of a 51 percent controlling interest in Artesyn and received proceeds of $264, net of working capital adjustments. The Company retained an interest with a fair value of approximately $60, determined using a Level 3 option pricing model. A tax benefit of $20 was recognized on completion of the transaction. Consolidated operating results for 2014 include sales of $146 and a net loss of $9 for this business through the closing date. As the Company retained a noncontrolling interest in this business, it was not classified as discontinued operations. Assets and liabilities held-for-sale at the closing date were: other current assets, $367 (accounts receivable, inventories, other current assets); other assets, $212 (property plant and equipment, goodwill, other noncurrent assets); and accrued expenses, $255 (accounts payable and other liabilities). Prior to the divestiture, cash of $376 ($308, after tax provided for in fiscal 2013) was repatriated from this business. In fiscal 2013, the Company initiated the purchase of $600 of Emerson common stock in anticipation of the sale proceeds and the cash repatriation. The purchase of shares was completed in the first quarter of 2014.

In the fourth quarter of 2014, the Company sold its connectivity solutions business for $99 in cash, and recognized a slight gain. This business reported 2014 sales of $63 and pretax earnings of $3. Connectivity solutions offered industry-leading fiber optic, radio-frequency and microwave-coaxial technologies that safeguard network reliability.

The results of operations of the acquired businesses discussed above have been included in the Company's consolidated results of operations since the respective dates of acquisition.

(4) DISCONTINUED OPERATIONS

The Company previously announced strategic actions to streamline its portfolio, drive growth and accelerate value creation for shareholders. These plans consisted of divesting its network power systems business through a spinoff to shareholders or sale, and also exploring strategic alternatives, including potential sale, of its power generation, motors and drives businesses. As of July 29, 2016, the Company entered into an agreement to sell its network power systems business for $4.0 billion in cash, subject to certain post-closing adjustments, and will retain a subordinated interest in distributions, contingent upon the equity holders first receiving a threshold return on their initial investment. This business comprised the former Network Power segment and provides mission-critical infrastructure products and solutions and life cycle management services for vital applications in data centers,

communication networks, and commercial/industrial environments. Also, on July 30, 2016, the Company entered into an agreement to sell its power generation, motors and drives businesses for a value of $1.2 billion, representing cash plus assumption of certain postretirement liabilities by the buyer, subject to post-closing adjustments. These businesses were previously reported in the Industrial Automation segment, and provide low, medium and high voltage alternators and other power generation equipment and commercial and industrial motors and drives, which are used in a wide variety of manufacturing and industrial applications. Both transactions are expected to close by the end of calendar year 2016 or shortly thereafter, subject to customary closing conditions and regulatory approvals. The results of operations for these businesses have been reclassified into discontinued operations and the assets and liabilities are reflected as held-for-sale for all periods presented.

The financial results of the network power systems business and the power generation, motors and drives businesses reported as discontinued operations for the years ending September 30, 2016, 2015 and 2014, were as follows:

		Network Power Systems										Power Generation, Motors and Drives									Total
		2014				2015			2016			2014			2015			2016			2014			2015			2016
Net sales		$	4,868			4,426			4,378			1,974			1,668			1,368			6,842			6,094			5,746
Cost of sales		3,012				2,810			2,708			1,434			1,244			1,033			4,446			4,054			3,741
SG&A		1,205				1,143			1,101			346			306			269			1,551			1,449			1,370
Other deductions, net		668				222			172			20			15			149			688			237			321
Earnings (Loss) before income taxes		(17		)		251			397			174			103			(83	)		157			354			314
Income taxes		163				134			218			48			27			51			211			161			269
Earnings (Loss), net of tax		$	(180	)		117			179			126			76			(134	)		(54	)		193			45

Net earnings from discontinued operations include separation costs to execute the portfolio repositioning of $220 and $52 for 2016 and 2015, respectively. These costs include income tax expense of $143 in 2016 and $42 in 2015 for repatriation of cash from these businesses, reorganization of their legal structures prior to sale, and basis differences for book and tax. Separation costs also include legal, consulting, investment banking and other expenses of $77 and $10 for 2016 and 2015, respectively. In addition, net earnings for 2016 include a loss of $103 to write down the power generation, motors and drives businesses to the sales price less costs to sell, and lower expense of $24 due to ceasing depreciation and amortization for the discontinued businesses held-for-sale. Earnings for 2014 include a noncash goodwill impairment charge of $508 related to the network power systems business in Europe, which had been unable to meet its operating objectives due to a weak Western Europe economy and had an uncertain outlook.

Upon completion of the transactions, the Company preliminarily expects to recognize a pretax gain of approximately $500 and to break even after-tax, subject to finalization of several matters including separation costs to complete the transactions. In addition, the Company may incur U.S. tax costs of approximately $200 for repatriation of estimated sales proceeds of $1.5 billion expected to be received offshore in connection with the transactions. The Company's decision whether to repatriate these proceeds will be determined in connection with funding needs for the acquisition of Pentair's Valves & Controls non-U.S. operations.

The aggregate carrying amounts of the major classes of assets and liabilities classified as held-for-sale as of September 30, 2016 and 2015 are summarized as follows:

		Network Power Systems							Power Generation, Motors and Drives						Total
		2015				2016			2015			2016			2015			2016
Assets
Receivables, less allowances		$	1,121			1,202			328			290			1,449			1,492
Inventories		386				381			196			197			582			578
Other current assets		90				108			15			22			105			130
Property plant & equipment, net		362				352			294			259			656			611
Goodwill		2,144				2,111			662			580			2,806			2,691
Other noncurrent assets		557				473			67			55			624			528
Total assets held-for-sale		$	4,660			4,627			1,562			1,403			6,222			6,030
Liabilities
Accounts payable		$	611			664			210			176			821			840
Other current liabilities		599				620			146			141			745			761
Deferred taxes and other noncurrent liabilities		245				227			87			99			332			326
Total liabilities held-for-sale		$	1,455			1,511			443			416			1,898			1,927

The net cash provided by operating activities and net cash provided (used) by investing activities for the network power systems business and the power generation, motors and drives businesses for the years ending September 30, 2016, 2015 and 2014, were as follows:

		Network Power Systems										Power Generation, Motors and Drives									Total
		2014				2015			2016			2014			2015			2016			2014			2015			2016
Cash provided by operating activities		$	507			378			343			186			111			39			693			489			382
Cash used in investing activities		$	(57	)		(48	)		(33	)		(49	)		(40	)		(44	)		(106	)		(88	)		(77	)

Cash provided by operating activities in 2016 was reduced by payments of $179 for separation costs.

(5) OTHER DEDUCTIONS, NET

Other deductions, net are summarized as follows:
	2014				2015			2016
Amortization of intangibles (intellectual property and customer relationships)	$	95			94			84
Restructuring costs	39				138			96
Other	77				98			114
Total	$	211			330			294

Other is composed of several items, including foreign currency transaction gains and losses, bad debt expense, equity investment income and losses, litigation and other items. The increase in other for 2016 is primarily due to an unfavorable foreign currency transaction impact of $67, partially offset by lower litigation costs of $30 and a $21 gain on payments received related to dumping duties collected by U.S. Customs from 2006 through 2010, but not distributed to affected domestic producers until resolution of certain legal challenges to the U.S. Continued Dumping and Subsidy Offset Act. The increase in 2015 is primarily due to higher litigation costs of $29 and an unfavorable foreign currency transaction impact of $15, partially offset by a favorable comparative effect from the $34 Artesyn equity investment loss in 2014.

(6) RESTRUCTURING COSTS

Each year the Company incurs costs to size its businesses to levels appropriate for current economic conditions and to continually improve its cost structure and operational efficiency, deploy assets globally, and remain competitive on a worldwide basis. Costs result from numerous individual actions implemented across the Company's various operating units on an ongoing basis and can include costs for moving facilities to best-cost locations, restarting plants after relocation or geographic expansion to better serve local markets, reducing forcecount or the number of facilities, exiting certain product lines, and other costs resulting from asset deployment decisions. By category, shutdown costs include severance and benefits, stay bonuses, lease and other contract termination costs and asset write-downs. Vacant facility costs include security, maintenance, utilities and other costs. Start-up and moving costs include the costs of relocating fixed assets and employee training and relocation.

Restructuring expenses were $96, $138 and $39, respectively, for 2016, 2015 and 2014. Restructuring activity accelerated in 2015 to address the slowdown in global capital spending and remained elevated in 2016 due to continued weakness globally and in connection with the Company's strategic portfolio repositioning activities. The Company currently expects 2017 restructuring expense to be approximately $50, including costs to complete actions initiated before the end of 2016 and for actions anticipated to be approved and initiated during 2017.

The change in the liability for restructuring costs during the years ended September 30 follows:

	2015				Expense					Utilized/Paid					2016
Severance and benefits	$	64				66					86				44
Lease and other contract terminations	1					9					5				5
Asset write-downs	—					4					4				—
Vacant facility and other shutdown costs	3					7					7				3
Start-up and moving costs	2					10					10				2
Total	$	70				96					112				54

	2014				Expense					Utilized/Paid					2015
Severance and benefits	$	16				110					62				64
Lease and other contract terminations	—					2					1				1
Asset write-downs	—					3					3				—
Vacant facility and other shutdown costs	—					9					6				3
Start-up and moving costs	1					14					13				2
Total	$	17				138					85				70

Restructuring costs by business segment follows:

	2014				2015			2016
Process Management	$	17			89			74
Industrial Automation	4				13			6
Climate Technologies	14				20			5
Commercial & Residential Solutions	2				11			2
Corporate	2				5			9
Total	$	39			138			96

Costs incurred in 2016 and 2015 related to the reduction and selective repositioning of the Company’s cost structure to address global economic weakness and in connection with the portfolio repositioning through facilities and forcecount rationalization in Europe and North America, primarily in Process Management. In 2014, costs primarily related to the deployment of resources to better serve local markets and higher growth areas, and were concentrated in Process Management and Climate Technologies in Asia and Europe. In 2016, restructuring activities included actions to exit 19 production or office facilities worldwide and eliminate approximately 1,900 positions. Expenses incurred in 2015 and 2014 included actions to exit 12 and 8 facilities, and eliminate approximately 3,100 and 1,600 positions, respectively.

(7) GOODWILL AND OTHER INTANGIBLES

Purchases of businesses are accounted for under the acquisition method, with substantially all goodwill assigned to the reporting unit that acquires the business. Under an impairment test performed annually, if the carrying amount of a reporting unit exceeds its estimated fair value, impairment is recognized to the extent that the carrying amount of the unit's goodwill exceeds the implied fair value of the goodwill. Fair values of reporting units are Level 3 measures which are estimated generally using an income approach that discounts future cash flows using risk-adjusted interest rates, as well as earnings multiples or other techniques as warranted. Fair values are subject to changes in underlying economic conditions. See Note 3 for further discussion of changes in goodwill related to acquisitions and divestitures.

The change in the carrying value of goodwill by business segment follows:

	Process Management				Industrial Automation			Climate Technologies			Commercial & Residential Solutions
					Total
Balance, September 30, 2014	$	2,701			607			500			430			4,238
Acquisitions	176				—			—			2			178
Divestitures	0				(213	)		0			(228	)		(441	)
Foreign currency translation and other	(87		)		(25	)		(8	)		(8	)		(128	)
Balance, September 30, 2015	2,790				369			492			196			3,847
Acquisitions	39				—			44			—			83
Foreign currency translation and other	(19		)		2			(4	)		—			(21	)
Balance, September 30, 2016	$	2,810			371			532			196			3,909

The gross carrying amount and accumulated amortization of identifiable intangible assets by major class follow:

	Customer Relationships							Intellectual Property						Capitalized Software						Total
	2015				2016			2015			2016			2015			2016			2015			2016
Gross carrying amount	$	591			580			675			730			1,018			1,071			2,284			2,381
Less: Accumulated amortization	247				286			361			393			738			800			1,346			1,479
Net carrying amount	$	344			294			314			337			280			271			938			902

Intangible asset amortization expense for 2016, 2015 and 2014 was $177, $174 and $167, respectively. Based on intangible asset balances as of September 30, 2016, amortization expense is expected to approximate $172 in 2017, $154 in 2018, $128 in 2019, $105 in 2020 and $88 in 2021.

(8) FINANCIAL INSTRUMENTS

Hedging Activities

As of September 30, 2016, the notional amount of foreign currency hedge positions was approximately $1.4 billion, while commodity hedge contracts totaled approximately 51 million pounds ($103) of copper and aluminum. All derivatives receiving deferral accounting are cash flow hedges. The majority of hedging gains and losses deferred as of September 30, 2016 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting.

Amounts included in earnings and other comprehensive income follow:

			Gain (Loss) to Earnings										Gain (Loss) to OCI
			2014				2015			2016			2014			2015			2016
	Location
Commodity	Cost of sales		$	(12	)		(24	)		(35	)		(16	)		(43	)		(9	)
Foreign currency	Sales, cost of sales		10				(12	)		(41	)		15			(61	)		(38	)
Foreign currency	Other deductions, net		(3		)		14			(27	)
Total			$	(5	)		(22	)		(103	)		(1	)		(104	)		(47	)

Regardless of whether derivatives receive deferral accounting, the Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized will differ from those presented above for open positions, which remain subject to ongoing market price fluctuations until settlement. Derivatives receiving deferral accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness. Hedge ineffectiveness was immaterial in all years shown.

Fair Value Measurement

The estimated fair value of long-term debt was $4,806 and $4,936, respectively, as of September 30, 2016 and 2015, which exceeded the carrying value by $477 and $356, respectively. As of September 30, 2016, the fair value of commodity contracts and foreign currency contracts was reported in other current assets and accrued expenses. Valuations of derivative contract positions as of September 30 follow:

		2015							2016
		Assets				Liabilities			Assets			Liabilities
Foreign currency		$	30			65			7			49
Commodity		$	—			29			2			4

(9) SHORT-TERM BORROWINGS AND LINES OF CREDIT

Short-term borrowings and current maturities of long-term debt are as follows:

		2015				2016
Current maturities of long-term debt		$	291			267
Commercial paper		2,261				2,317
Total		$	2,552			2,584
Interest rate for weighted-average short-term borrowings at year end		0.2%				0.5%

The Company routinely issues commercial paper as a source of short-term financing. In April 2014, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replaced a December 2010 $2.75 billion facility. The credit facility is maintained to support general corporate purposes, including commercial paper borrowing. The Company has not incurred any borrowings under this or previous facilities. The credit facility contains no financial covenants and is not subject to termination based on a change of credit rating or material adverse changes. The facility is unsecured and may be accessed under various interest rate and currency denomination alternatives at the Company's option. Fees to maintain the facility are immaterial.

(10) LONG-TERM DEBT

The details of long-term debt follow:

	2015				2016
4.75% notes due October 2015	$	250			—
5.125% notes due December 2016	250				250
5.375% notes due October 2017	250				250
5.25% notes due October 2018	400				400
5.0% notes due April 2019	250				250
4.875% notes due October 2019	500				500
4.25% notes due November 2020	300				300
2.625% notes due December 2021	500				500
2.625% notes due February 2023	500				500
3.15% notes due June 2025	500				500
6.0% notes due August 2032	250				250
6.125% notes due April 2039	250				250
5.25% notes due November 2039	300				300
Other	80				79
Long-term debt	4,580				4,329
Less: Current maturities	291				267
Total, net	$	4,289			4,062

Long-term debt maturing during each of the four years after 2017 is $270, $690, $502 and $300, respectively. Total interest paid on all debt was approximately $209, $196 and $210 in 2016, 2015 and 2014, respectively. During the year, the Company repaid $250 of 4.75% notes that matured in October 2015. In 2015, the Company repaid $250 of 5.0% notes that matured in December 2014 and $250 of 4.125% notes that matured in April 2015.

The Company maintains a universal shelf registration statement on file with the SEC under which it can issue debt securities, preferred stock, common stock, warrants, share purchase contracts or share purchase units without a predetermined limit. Securities can be sold in one or more separate offerings with the size, price and terms to be determined at the time of sale.

(11) RETIREMENT PLANS

Retirement plans expense includes the following components:

	U.S. Plans										Non-U.S. Plans
	2014				2015			2016			2014			2015			2016
Defined benefit plans:
Service cost (benefits earned during the period)	$	59			69			59			32			37			26
Interest cost	182				182			148			53			46			39
Expected return on plan assets	(286		)		(303	)		(296	)		(58	)		(58	)		(52	)
Net amortization and other	153				174			166			18			20			17
Net periodic pension expense	108				122			77			45			45			30
Defined contribution plans	119				111			104			59			61			56
Total retirement plans expense	$	227			233			181			104			106			86

Beginning in 2016, the Company refined the method used to determine the service and interest cost components of pension expense for its U.S. retirement plans. The specific spot rates along the yield curve, rather than the single weighted-average rate previously used, are now applied to the projected cash flows to provide more precise measurement of these costs. This is a change in estimate which has been accounted for prospectively in the 2016

financial statements. The change reduced the 2016 service and interest cost by a total of $38 compared with the cost measured using the weighted-average approach. The increase in net periodic pension expense in 2015 is attributable to higher service costs and amortization compared to the prior year. Net periodic pension expense includes $12, $14 and $11 and defined contribution expense includes $34, $33 and $33, for 2016, 2015 and 2014, respectively, related to discontinued operations. For defined contribution plans, the Company makes cash contributions based on plan requirements, which are expensed as incurred.

The Company transitioned from defined benefit to defined contribution retirement plans in 2016. The principal U.S. defined benefit pension plan closed to employees hired after January 1, 2016, and current employees not meeting combined age and years of service criteria ceased accruing benefits effective October 1, 2016. Affected employees were enrolled in an enhanced defined contribution plan. The impact of these actions had an inconsequential impact on the Company's financial statements at September 30, 2016. Over time, defined benefit plan expense will decline while defined contribution plan expense will increase, with an expectation of reduced earnings volatility.

All of the following tables include defined benefit plans related to continuing and discontinued operations.

Details of the changes in the actuarial present value of the projected benefit obligation and the fair value of plan assets for defined benefit pension plans follow:

	U.S. Plans							Non-U.S. Plans
	2015				2016			2015			2016
Projected benefit obligation, beginning	$	4,336			4,263			1,330			1,248
Service cost	69				59			37			26
Interest cost	182				148			46			39
Actuarial (gain) loss	137				565			44			275
Benefits paid	(181		)		(191	)		(36	)		(31	)
Settlements	(205		)		(151	)		(25	)		(82	)
Acquisitions (Divestitures), net	(70		)		—			(4	)		(6	)
Foreign currency translation and other	(5		)		3			(144	)		(149	)
Projected benefit obligation, ending	$	4,263			4,696			1,248			1,320
Fair value of plan assets, beginning	$	4,473			3,928			988			935
Actual return on plan assets	(137		)		491			49			155
Employer contributions	20				31			33			35
Benefits paid	(181		)		(191	)		(36	)		(31	)
Settlements	(205		)		(151	)		(25	)		(82	)
Acquisitions (Divestitures), net	(44		)		—			(2	)		—
Foreign currency translation and other	2				2			(72	)		(103	)
Fair value of plan assets, ending	$	3,928			4,110			935			909
Net amount recognized in the balance sheet	$	(335	)		(586	)		(313	)		(411	)
Location of net amount recognized in the balance sheet:
Noncurrent asset	$	—			—			30			1
Current liability	(11		)		(11	)		(6	)		(7	)
Noncurrent liability	(316		)		(565	)		(227	)		(279	)
Net liability held-for-sale	(8		)		(10	)		(110	)		(126	)
Net amount recognized in the balance sheet	(335		)		(586	)		(313	)		(411	)
Pretax accumulated other comprehensive loss	$	(1,322	)		(1,527	)		(306	)		(389	)

Approximately $234 of the $1,916 of pretax losses deferred in accumulated other comprehensive income (loss) at September 30, 2016 will be amortized to expense in 2017. As of September 30, 2016, U.S. pension plans were underfunded by $586 and non-U.S. plans were underfunded by $411. The U.S. funded status includes unfunded plans totaling $216 and the non-U.S. status includes unfunded plans totaling $237.

As of the September 30, 2016 and 2015 measurement dates, the plans' total accumulated benefit obligation was $5,729 and $5,254, respectively. Also as of the measurement dates, the total projected benefit obligation, accumulated benefit obligation and fair value of plan assets for individual plans with accumulated benefit obligations in excess of plan assets were $5,951, $5,678 and $4,958, respectively, for 2016, and $1,245, $1,139 and $648, respectively, for 2015.

Future benefit payments by U.S. plans are estimated to be $215 in 2017, $224 in 2018, $233 in 2019, $241 in 2020, $249 in 2021 and $1,326 in total over the five years 2022 through 2026. Based on foreign currency exchange rates as of September 30, 2016, future benefit payments by non-U.S. plans are estimated to be $41 in 2017, $42 in 2018, $45 in 2019, $47 in 2020, $51 in 2021 and $306 in total over the five years 2022 through 2026. The Company expects to contribute approximately $40 to its retirement plans in 2017.

The weighted-average assumptions used in the valuation of pension benefits follow:

	U.S. Plans									Non-U.S. Plans
	2014			2015			2016			2014			2015			2016
Net pension expense
Discount rate used to determine service cost	4.75	%		4.25	%		4.60	%		4.2	%		3.6	%		3.3	%
Discount rate used to determine interest cost	4.75	%		4.25	%		3.50	%		4.2	%		3.6	%		3.3	%
Expected return on plan assets	7.50	%		7.50	%		7.50	%		6.6	%		6.6	%		6.4	%
Rate of compensation increase	3.25	%		3.25	%		3.25	%		3.2	%		3.4	%		3.4	%
Benefit obligations
Discount rate	4.25	%		4.35	%		3.50	%		3.6	%		3.3	%		2.3	%
Rate of compensation increase	3.25	%		3.25	%		3.25	%		3.4	%		3.4	%		3.2	%

The discount rate for the U.S. retirement plans was 3.50 percent as of September 30, 2016. An actuarially developed, company-specific yield curve is used to determine the discount rate. The expected return on plan assets assumption is determined by reviewing the investment returns of the plans for the past 10 years plus longer-term historical returns of an asset mix approximating the Company's asset allocation targets, and periodically comparing these returns to expectations of investment advisors and actuaries to determine whether long-term future returns are expected to differ significantly from the past.

The Company's asset allocations at September 30, 2016 and 2015, and weighted-average target allocations follow:

	U.S. Plans								Non-U.S. Plans
	2015			2016			Target		2015			2016			Target
Equity securities	65	%		66	%		60-70%		55	%		51	%		50-60%
Debt securities	30			29			25-35		32			36			25-35
Other	5			5			3-10		13			13			10-20
Total	100	%		100	%		100%		100	%		100	%		100%

The primary objective for the investment of pension assets is to secure participant retirement benefits by earning a reasonable rate of return. Plan assets are invested consistent with the provisions of the prudence and diversification rules of ERISA and with a long-term investment horizon. The Company continuously monitors the value of assets by class and routinely rebalances to remain within target allocations. The strategy for equity assets is to minimize concentrations of risk by investing primarily in companies in a diversified mix of industries worldwide, while targeting neutrality in exposure to market capitalization levels, growth versus value profile, global versus regional markets, fund types and fund managers. The approach for bonds emphasizes investment-grade corporate and government debt with maturities matching a portion of the longer duration pension liabilities. The bonds strategy also includes a

high-yield element which is generally shorter in duration. For diversification, a small portion of U.S. plan assets is allocated to private equity partnerships and real asset fund investments, providing opportunities for above market returns. Leveraging techniques are not used and the use of derivatives in any fund is limited and inconsequential.

The fair values of defined benefit pension assets as of September 30, organized by asset class and by the fair value hierarchy of ASC 820, Fair Value Measurement, follow:

	Level 1				Level 2			Level 3			Total			%
2016
U.S. equities	$	1,081			305			292			1,678			33	%
International equities	627				607			—			1,234			25	%
Emerging market equities	—				257			—			257			5	%
Corporate bonds	—				648			—			648			13	%
Government bonds	3				749			—			752			15	%
High-yield bonds	—				122			—			122			2	%
Other	144				71			113			328			7	%
Total	$	1,855			2,759			405			5,019			100	%
2015
U.S. equities	$	956			460			257			1,673			34	%
International equities	502				677			—			1,179			24	%
Emerging market equities	—				211			—			211			4	%
Corporate bonds	—				628			—			628			13	%
Government bonds	2				674			—			676			14	%
High-yield bonds	—				175			—			175			4	%
Other	140				67			114			321			7	%
Total	$	1,600			2,892			371			4,863			100	%

Asset Classes

U.S. equities reflect companies domiciled in the U.S., including multinational companies. International equities are comprised of companies domiciled in developed nations outside the U.S. Emerging market equities are comprised of companies domiciled in portions of Asia, Eastern Europe and Latin America. Corporate bonds represent investment-grade debt of issuers primarily from the U.S. Government bonds include investment-grade instruments issued by federal, state and local governments, primarily in the U.S. High-yield bonds include noninvestment-grade debt from a diverse group of developed market issuers. Other includes cash, interests in mixed asset funds investing in commodities, natural resources, agriculture, real estate and infrastructure funds, life insurance contracts (U.S.), and shares in certain general investment funds of financial institutions or insurance arrangements (non-U.S.) that typically ensure no market losses or provide for a small minimum return guarantee.

Fair Value Hierarchy Categories

Valuations of Level 1 assets for all classes are based on quoted closing market prices from the principal exchanges where the individual securities are traded. Cash is valued at cost, which approximates fair value. Equity securities categorized as Level 2 assets are primarily nonexchange-traded commingled or collective funds where the underlying securities have observable prices available from active markets. Valuation is based on the net asset value of fund units held as derived from the fair value of the underlying assets. Debt securities categorized as Level 2 assets are generally valued based on independent broker/dealer bids or by comparison to other debt securities having similar durations, yields and credit ratings. Other Level 2 assets are valued based on a net asset value of fund units held, which is derived from either market-observed pricing for the underlying assets or broker/dealer

quotation. U.S. equity securities classified as Level 3 are fund investments in private companies. Valuation techniques and inputs for these assets include discounted cash flow analysis, earnings multiple approaches, recent transactions, transfer restrictions, prevailing discount rates, volatilities, credit ratings and other factors. In the Other class, interests in mixed assets funds are Level 2, and U.S. life insurance contracts and non-U.S. general fund investments and insurance arrangements are Level 3.

Details of the changes in value for Level 3 assets follow:

	2015				2016
Level 3, beginning	$	308			371
Gains (Losses) on assets held	18				18
Gains (Losses) on assets sold	(20		)		(20	)
Purchases, sales and settlements, net	65				36
Level 3, ending	$	371			405

(12) POSTRETIREMENT PLANS

The Company sponsors unfunded postretirement benefit plans (primarily health care) for certain U.S. retirees and their dependents. The components of net postretirement benefits expense for the years ended September 30 follow:

	2014				2015			2016
Service cost	$	1			1			1
Interest cost	11				9			8
Net amortization	(21		)		(22	)		(21	)
Net postretirement expense	$	(9	)		(12	)		(12	)

Details of the changes in actuarial present value of accumulated postretirement benefit obligations follow:

	2015				2016
Benefit obligation, beginning	$	248			213
Service cost	1				1
Interest cost	9				8
Actuarial (gain) loss	(12		)		—
Benefits paid	(18		)		(16	)
Divestitures	(15		)		—
Benefit obligation, ending (recognized in balance sheet)	$	213			206

As of September 30, 2016 there were $133 of deferred actuarial gains in accumulated other comprehensive income, of which approximately $19 will be amortized into earnings in 2017. The discount rates used to measure the benefit obligation as of September 30, 2016, 2015 and 2014 were 3.10 percent, 3.80 percent and 3.75 percent, respectively. The health care cost trend rate used for both 2017 and 2016 is assumed to be 6.5 percent initially, and declining to 5.0 percent over the subsequent three years. A one percentage point increase or decrease in the health care cost trend rate assumption for either year would have an inconsequential impact on postretirement benefits expense and the benefit obligation. The Company estimates that future health care benefit payments will be approximately $20 per year for 2017 through 2021, and $70 in total over the five years 2022 through 2026.

(13) CONTINGENT LIABILITIES AND COMMITMENTS

The Company is a party to a number of pending legal proceedings and claims, including those involving general and product liability and other matters, several of which claim substantial amounts of damages. The Company accrues for such liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. Accruals are based on developments to date; management's estimates of the outcomes of these matters; the Company's experience in contesting, litigating and settling similar matters; and any related insurance coverage. Although it is not possible to predict the ultimate outcome of these matters, the Company historically has been largely successful in defending itself against claims and suits that have been brought against it, and will continue to defend itself vigorously in all such matters. While the Company believes a material adverse impact is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future development could have a material adverse impact on the Company. The Company enters into certain indemnification agreements in the ordinary course of business in which the indemnified party is held harmless and

is reimbursed for losses incurred from claims by third parties, usually up to a prespecified limit. In connection with divestitures of certain assets or businesses, the Company often provides indemnities to the buyer with respect to certain matters including, for example, environmental or unidentified tax liabilities related to periods prior to the disposition. Because of the uncertain nature of the indemnities, the maximum liability cannot be quantified. As such, contingent liabilities are recorded when they are both probable and reasonably estimable. Historically, payments under indemnity arrangements have been inconsequential.

At September 30, 2016, there were no known contingent liabilities (including guarantees, pending litigation, taxes and other claims) that management believes will be material in relation to the Company's financial statements, nor were there any material commitments outside the normal course of business.

(14) INCOME TAXES

Pretax earnings from continuing operations consist of the following:

	2014				2015			2016
United States	$	1,736			2,688			1,312
Non-U.S.	1,455				1,119			1,004
Total pretax earnings	$	3,191			3,807			2,316

The principal components of income tax expense follow:

	2014				2015			2016
Current:
Federal	$	623			831			394
State and local	47				86			11
Non-U.S.	416				398			305
Deferred:
Federal	(132		)		12			2
State and local	(7		)		(1	)		4
Non-U.S.	6				(59	)		(19	)
Income tax expense	$	953			1,267			697

Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow:

	2014			2015			2016
Federal statutory rate	35.0	%		35.0	%		35.0	%
State and local taxes, net of federal tax benefit	0.8			0.7			0.5
Non-U.S. rate differential	(3.6	)		(2.4	)		(2.9	)
Non-U.S. tax holidays	(0.8	)		(0.9	)		(1.1	)
U.S. manufacturing deduction	(1.5	)		(1.2	)		(1.8	)
Gains on divestitures	—			1.8			—
Other	—			0.3			0.4
Effective income tax rate	29.9	%		33.3	%		30.1	%

Non-U.S. tax holidays reduce tax rates in certain foreign jurisdictions and are expected to expire over the next two years.

Following are changes in unrecognized tax benefits before considering recoverability of any cross-jurisdictional tax credits (federal, state and non-U.S.) and temporary differences. The amount of unrecognized tax benefits is not expected to change significantly within the next 12 months.

	2015				2016
Unrecognized tax benefits, beginning	$	120			84
Additions for current year tax positions	7				12
Additions for prior year tax positions	8				16
Reductions for prior year tax positions	(9		)		(13	)
Reductions for settlements with tax authorities	—				(4	)
Reductions for expiration of statutes of limitations	(42		)		(9	)
Unrecognized tax benefits, ending	$	84			86

If none of the unrecognized tax benefits shown is ultimately paid, the tax provision and the calculation of the effective tax rate would be favorably impacted by $48, which is net of cross-jurisdictional tax credits and temporary differences. The Company accrues interest and penalties related to income taxes in income tax expense. Total interest and penalties recognized were $2, $(4) and $3 in 2016, 2015 and 2014, respectively. As of September 30, 2016 and 2015, total accrued interest and penalties were $21 and $20, respectively.

The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed through 2012. The status of state and non-U.S. tax examinations varies due to the numerous legal entities and jurisdictions in which the Company operates.

The principal items that gave rise to deferred income tax assets and liabilities follow:

	2015				2016
Deferred tax assets:
Net operating losses and tax credits	$	138			164
Accrued liabilities	245				277
Postretirement and postemployment benefits	86				82
Employee compensation and benefits	168				206
Pensions	164				271
Other	161				158
Total	$	962			1,158
Valuation allowances	$	(109	)		(132	)
Deferred tax liabilities:
Intangibles	$	(500	)		(510	)
Property, plant and equipment	(236		)		(239	)
Other	(51		)		(51	)
Total	$	(787	)		(800	)
Net deferred income tax asset	$	66			226

Current deferred tax assets, net were $400 and $305 as of September 30, 2016 and 2015, respectively, and noncurrent deferred tax liabilities, net were $174 and $239. Total income taxes paid were approximately $950, $1,590 and $1,310 in 2016, 2015 and 2014, respectively. Approximately half of the $164 of net operating losses and tax credits can be carried forward indefinitely, while the remainder expire over varying periods.

(15) STOCK-BASED COMPENSATION

The Company's stock-based compensation plans include stock options, performance shares, restricted stock and restricted stock units. Although the Company has discretion, shares distributed under these plans are issued from treasury stock.

Stock Options

The Company's stock option plans permit key officers and employees to purchase common stock at specified prices, which are equal to 100 percent of the closing market price of the Company's stock on the date of grant. Options generally vest one-third in each of the three years subsequent to grant and expire 10 years from the date of grant. Compensation expense is recognized ratably over the vesting period based on the number of options expected to vest. As of September 30, 2016, 10.9 million options were available for grant under the plans.

Changes in shares subject to options during the year ended September 30, 2016 follow (shares in thousands):

	Weighted- Average Exercise Price Per Share				Shares			Total Intrinsic Value of Shares						Average Remaining Life (Years)
Beginning of year	$	55.40			13,646
Options granted	$	49.68			3,077
Options exercised	$	40.14			(701	)
Options canceled	$	56.78			(746	)
End of year	$	54.87			15,276				$	43					5.8
Exercisable at end of year	$	54.56			10,105				$	30					4.4

The weighted-average grant date fair value per option was $9.02, $12.48 and $14.83 in 2016, 2015 and 2014, respectively. Cash received for option exercises was $31 in 2016, $36 in 2015 and $77 in 2014. The total intrinsic value of options exercised in 2016, 2015 and 2014 was $9, $16 and $61, respectively, while the tax benefit realized by the Company from tax deductions related to option exercises was $2, $10 and $14, respectively.

The grant date fair value of options is estimated using the Black-Scholes option-pricing model. The weighted-average assumptions used in valuations for 2016, 2015 and 2014 are, respectively: risk-free interest rate, based on U.S. Treasury yields, 1.9 percent, 1.9 percent and 2.0 percent; dividend yield, 3.8 percent, 3.1 percent and 2.6 percent; and expected volatility, based on historical volatility, 27 percent, 28 percent and 28 percent. The expected life of each option awarded is seven years based on historical experience and expected future exercise patterns.

Performance Shares, Restricted Stock and Restricted Stock Units

The Company's incentive shares plans include performance shares awards which distribute the value of common stock to key management employees subject to certain operating performance conditions and other restrictions. The form of distribution is primarily shares of common stock, with a portion in cash. Compensation expense for performance shares is recognized over the service period based on the number of shares ultimately expected to be earned. Performance shares awards are accounted for as liabilities in accordance with ASC 718, Compensation - Stock Compensation, with compensation expense adjusted at the end of each reporting period to reflect the change in fair value of the awards.

As of September 30, 2016, 4,944,575 performance shares awarded primarily in 2013 were outstanding, contingent on the Company achieving its performance objectives through 2016 and the provision of additional service by employees. The objectives for these shares were met at the 86 percent level at the end of 2016, or 4,252,335 shares. Of these, 2,552,949 shares will be distributed in early 2017 while 1,699,386 shares remain subject to employees providing one additional year of service. Additionally, the rights to receive a maximum of 2,186,150 common shares awarded in 2016, under the new performance shares program, are outstanding and contingent upon the Company achieving its performance objectives through 2018. As a result of the Company's level of achievement of its performance shares objective at the end of 2013 for performance shares awarded primarily in 2010, and employees providing an additional year of service, rights to receive 4,823,045 common shares vested and were distributed to participants in 2014 as follows: 2,782,143 issued as shares, 1,829,617 withheld for income taxes and the value of 211,285 paid in cash. 14,694 shares were canceled and not distributed.

Incentive shares plans also include restricted stock awards which involve distribution of common stock to key management employees subject to cliff vesting at the end of service periods ranging from three to ten years. The fair value of restricted stock awards is determined based on the average of the high and low market prices of the Company's common stock on the date of grant, with compensation expense recognized ratably over the applicable service period. In 2016, 235,000 shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently, 139,436 shares were issued while 95,564 shares were withheld for income taxes in accordance with minimum withholding requirements. As of September 30, 2016, there were 1,174,500 shares of unvested restricted stock outstanding.

The total fair value of shares vested under incentive shares plans was $11, $9 and $315, respectively, in 2016, 2015 and 2014, of which $4, $5 and $134 was paid in cash, primarily for tax withholding. As of September 30, 2016, 15.4 million shares remained available for award under incentive shares plans.

Changes in shares outstanding but not yet earned under incentive shares plans during the year ended September 30, 2016 follow (shares in thousands):

	Shares			Average Grant Date Fair Value Per Share
Beginning of year	6,377				$	48.97
Granted	2,126				$	49.20
Earned/vested	(235	)			$	44.12
Canceled	(940	)			$	49.15
End of year	7,328				$	49.17

Total compensation expense for stock options and incentive shares was $159, $30 and $143 for 2016, 2015 and 2014, respectively, of which $14, $6 and $20 was included in discontinued operations. The increase in expense for 2016 reflects an increasing stock price in the current year compared with a decreasing price in 2015, and overlap of awards. The decrease in expense for 2015 reflects a stock option award in 2014 and no incentive stock plan overlap in 2015, and a lower stock price in 2015. Income tax benefits recognized in the income statement for these compensation arrangements during 2016, 2015 and 2014 were $45, $2 and $39, respectively. As of September 30, 2016, total unrecognized compensation expense related to unvested shares awarded under these plans was $133, which is expected to be recognized over a weighted-average period of 1.8 years.

In addition to the employee stock option and incentive shares plans, in 2016 the Company awarded 24,336 shares of restricted stock and 3,042 restricted stock units under the restricted stock plan for nonmanagement directors. As of September 30, 2016, 194,577 shares were available for issuance under this plan.

(16) COMMON AND PREFERRED STOCK

At September 30, 2016, 48.3 million shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During 2016, 12.5 million common shares were purchased and 0.7 million treasury shares were reissued. In 2015, 43.1 million common shares were purchased and 1.1 million treasury shares were reissued.

At September 30, 2016 and 2015, the Company had 5.4 million shares of $2.50 par value preferred stock authorized, with none issued.

(17) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Activity in accumulated other comprehensive income (loss) attributable to common stockholders is shown below:
Foreign currency translation	2014				2015			2016
Beginning balance	$	504			171			(622	)
Other comprehensive income (loss)	(341		)		(793	)		(190	)
Purchase of noncontrolling interest	8				—			—
Ending balance	171				(622	)		(812	)
Pension and postretirement
Beginning balance	(692		)		(746	)		(952	)
Actuarial gains (losses) deferred during the period	(152		)		(315	)		(310	)
Amortization of deferred actuarial losses into earnings	98				109			100
Ending balance	(746		)		(952	)		(1,162	)
Cash flow hedges
Beginning balance	(1		)		—			(43	)
Gains (Losses) deferred during the period	(1		)		(66	)		(30	)
Reclassifications of realized (gains) losses to sales and cost of sales	2				23			48
Ending balance	—				(43	)		(25	)
Accumulated other comprehensive income (loss)	$	(575	)		(1,617	)		(1,999	)

Activity above is shown net of income taxes for 2016, 2015 and 2014, respectively, as follows: deferral of pension and postretirement actuarial gains (losses): $159, $192 and $87; amortization of pension and postretirement deferred actuarial losses: $(59), $(59) and $(52); deferral of cash flow hedging gains (losses): $17, $38 and $-; reclassification of realized cash flow hedging (gains) losses: $(28), $(13) and $-. Amortization of deferred actuarial losses includes $(3), $(3) and $(2) in 2016, 2015 and 2014, respectively, related to discontinued operations.

(18) BUSINESS SEGMENTS INFORMATION

The Company designs and manufactures products and delivers services that bring technology and engineering together to provide innovative solutions for customers in a wide range of industrial, commercial and consumer markets around the world. The business segments of the Company are organized primarily by the nature of the products and services they sell.

The Process Management segment provides systems and software, measurement and analytical instrumentation, valves, actuators and regulators, services and solutions and reliability consulting including digital plant architecture that allows communication of devices with centralized systems, to provide precision measurement, control, monitoring, asset optimization, and plant safety and reliability for plants that produce power or process fluids or items such as petroleum, chemicals, food and beverages, pulp and paper, pharmaceuticals and municipal water supplies. The Industrial Automation segment provides fluid power and control mechanisms, electrical distribution equipment, and materials joining and precision cleaning products which are used in a wide variety of manufacturing operations to provide integrated manufacturing solutions to customers. The Climate Technologies segment supplies compressors, temperature sensors and controls, thermostats, flow controls and remote monitoring technology and services to all areas of the climate control industry, including residential heating and cooling, commercial air conditioning, commercial and industrial refrigeration and marine controls. The Commercial & Residential Solutions segment provides tools for professionals and homeowners, home storage systems and appliance solutions. The principal distribution method for each segment is direct sales forces, although the Company also uses independent sales representatives and distributors. Due to its global presence, certain of the Company's international operations are subject to risks such as significant currency exchange rate fluctuations, restrictions on the movement of funds and potential nationalization of operations. See Notes 3 through 7.

The primary income measure used for assessing segment performance and making operating decisions is earnings before interest and income taxes. Intersegment selling prices approximate market prices. Accounting method differences between segment reporting and the consolidated financial statements are primarily management fees

allocated to segments based on a percentage of sales and the accounting for pension and other retirement plans. Corporate and other includes stock compensation expense, and goodwill impairment charges when applicable. Corporate assets are primarily comprised of cash and equivalents, investments and certain fixed assets. Summarized below is information about the Company's operations by business segment and by geography.

Business Segments

	Sales										Earnings										Total Assets
	2014				2015			2016			2014				2015			2016			2014				2015			2016
Process Management	$	9,189			8,516			7,484			$	1,918			1,493			1,131			$	7,771			7,704			7,622
Industrial Automation	3,004				2,448			2,072			640				509			458			1,810				1,254			1,276
Climate Technologies	4,109				4,011			3,949			737				698			769			2,378				2,314			2,350
Commercial &
Residential Solutions	1,891				1,913			1,611			421				403			384			1,152				817			809
	18,193				16,888			15,116			3,716				3,103			2,742			13,111				12,089			12,057
Differences in
accounting methods											197				174			189
Corporate and other (a)	209										(526		)		705			(427	)		11,066				9,999			9,686
Sales eliminations/
interest (b)	(669		)		(639	)		(594	)		(196		)		(175	)		(188	)
Total	$	17,733			16,249			14,522			$	3,191			3,807			2,316			$	24,177			22,088			21,743

(a) Corporate and other in 2015 includes gains on divestitures of $1,039, and in 2014 includes combined sales and earnings of $209 and $(6), respectively, related to the Artesyn and Connectivity Solutions businesses, which were reported in the former Network Power segment. See Note 3. Assets held-for-sale of $6,030, $6,222 and $6,904 are included in Corporate and other for 2016, 2015 and 2014, respectively. See Note 4.

(b) Industrial Automation intersegment sales for the years ended September 30, 2016, 2015 and 2014 were $578, $622 and $650, respectively.

	Depreciation and Amortization										Capital Expenditures
	2014				2015			2016			2014				2015			2016
Process Management	$	249			276			297			$	300			244			181
Industrial Automation	74				59			50			71				79			79
Climate Technologies	132				132			133			145				134			119
Commercial &
Residential Solutions	52				51			44			49				52			44
Corporate and other	62				55			44			86				79			24
Total	$	569			573			568			$	651			588			447

Geographic Information

	Sales by Destination										Property, Plant and Equipment
	2014				2015			2016			2014				2015			2016
United States and Canada	$	8,753			8,370			7,505			$	1,803			1,756			1,780
Asia	3,737				3,363			2,926			504				481			459
Europe	2,896				2,381			2,300			441				426			435
Latin America	1,194				981			834			266				216			203
Middle East/Africa	1,153				1,154			957			48				50			54
Total	$	17,733			16,249			14,522			$	3,062			2,929			2,931

Sales in the U.S. were $6,940, $7,608 and $7,929 for 2016, 2015 and 2014, respectively, while Asia includes sales in China of $1,320, $1,575 and $1,831 in those years. Assets located in the U.S. were $1,772 in 2016, $1,746 in 2015 and $1,789 in 2014.

(19) OTHER FINANCIAL DATA

Items reported in earnings from continuing operations during the years ended September 30 include the following:

	2014				2015			2016
Research and development expense	$	356			336			320
Depreciation expense	$	402			399			391
Rent expense	$	304			287			273

The Company leases certain facilities, transportation and office equipment, and various other items under operating lease agreements. Minimum annual rentals under noncancelable long-term leases, exclusive of maintenance, taxes, insurance and other operating costs, will approximate $183 in 2017, $130 in 2018, $94 in 2019, $57 in 2020 and $36 in 2021.

At September 30, 2015, other current assets included short-term investments of $99, which matured in 2016.

Items reported in accrued expenses include the following:

	2015				2016
Employee compensation	$	448			431
Customer advanced payments	$	400			433
Product warranty	$	101			106

Other liabilities are summarized as follows:

	2015				2016
Pension liabilities	$	543			844
Deferred income taxes	270				210
Postretirement liabilities, excluding current portion	199				193
Other	527				482
Total	$	1,539			1,729

Other operating cash flow is comprised of the following:

	2014				2015			2016
Pension expense	$	142			153			95
Stock compensation expense	123				24			145
Deferred income taxes and other	(102		)		19			45
Total	$	163			196			285

(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	First Quarter						Second Quarter					Third Quarter					Fourth Quarter					Full Year
	2015			2016			2015		2016			2015		2016			2015		2016			2015		2016
Net sales	$	4,026		3,337			3,934		3,579			4,085		3,674			4,204		3,932			16,249		14,522
Gross profit	$	1,740		1,414			1,686		1,542			1,759		1,593			1,823		1,713			7,008		6,262
Earnings from continuing operations common stockholders	$	452		303			936		367			502		441			627		479			2,517		1,590
Net earnings common stockholders	$	525		349			973		369			564		479			648		438			2,710		1,635
Earnings per common share from continuing operations:
Basic	$	0.65		0.47			1.37		0.57			0.75		0.68			0.95		0.74			3.72		2.46
Diluted	$	0.65		0.46			1.36		0.57			0.75		0.68			0.95		0.74			3.71		2.45
Net earnings per common share:
Basic	$	0.76		0.54			1.42		0.57			0.84		0.74			0.98		0.68			4.01		2.53
Diluted	$	0.75		0.53			1.42		0.57			0.84		0.74			0.98		0.68			3.99		2.52
Dividends per common share	$	0.47		0.475			0.47		0.475			0.47		0.475			0.47		0.475			1.88		1.90
Common stock prices:
High	$	65.94		51.47			62.25		55.54			62.75		56.82			56.12		56.72			65.94		56.82
Low	$	57.76		42.21			54.95		41.25			55.23		48.45			42.80		50.41			42.80		41.25

Earnings per share are computed independently each period; as a result, the quarterly amounts may not sum to the calculated annual figure.

Earnings from continuing operations and diluted earnings per share, respectively, include the following: a gain on the divestiture of a business of $528 and $0.77 in the second quarter of 2015; and gains on divestitures of businesses of $83 and $0.13 in the fourth quarter of 2015.

Emerson Electric Co. common stock (symbol EMR) is listed on the New York Stock Exchange and the Chicago Stock Exchange.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Emerson Electric Co.:

We have audited the accompanying consolidated balance sheets of Emerson Electric Co. and subsidiaries as of September 30, 2016 and 2015, and the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the years in the three-year period ended September 30, 2016. We also have audited Emerson Electric Co.'s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Emerson Electric Co.'s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emerson Electric Co. and subsidiaries as of September 30, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Emerson Electric Co. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

St. Louis, Missouri

November 16, 2016