Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement

This Annual Report on Form 10-K contains various forward-looking statements and includes assumptions concerning Emerson's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risks and uncertainties. Emerson undertakes no obligation to update any such statements to reflect later developments. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Emerson provides the cautionary statements set forth under Item 1A - “Risk Factors,” which are hereby incorporated by reference and identify important economic, political and technological factors, among others, changes in which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Non-GAAP Financial Measures

To supplement the Company’s financial information presented in accordance with U.S. generally accepted accounting principles (U.S. GAAP), management periodically uses certain “non-GAAP financial measures,” as such term is defined in Regulation G under SEC rules, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. For example, non-GAAP measures may exclude the impact of certain items such as our strategic repositioning actions, other acquisitions or divestitures, changes in reporting segments, gains, losses and impairments, or items outside of management’s control, such as foreign currency exchange rate fluctuations. Management believes that the following non-GAAP financial measures provide investors and analysts useful insight into the Company’s financial position and operating performance. Any non-GAAP measure provided should be viewed in addition to, and not as an alternative to, the most directly comparable measure determined in accordance with U.S. GAAP, as identified in italics below. Further, the calculation of these non-GAAP financial measures may differ from the calculation of similarly titled financial measures presented by other companies and therefore may not be comparable among companies.

Underlying sales, which exclude the impact of acquisitions, divestitures and fluctuations in foreign currency exchange rates during the periods presented, are provided to facilitate relevant period-to-period comparisons of sales growth by excluding those items that impact overall comparability (U.S. GAAP measure: net sales).

Operating profit (defined as net sales less cost of sales and selling, general and administrative expenses) and operating profit margin (defined as operating profit divided by net sales) are indicative of short-term operational performance and ongoing profitability. Management closely monitors operating profit and operating profit margin of each business to evaluate past performance and actions required to improve profitability. EBIT (defined as earnings before deductions for interest expense, net and income taxes) and total segment EBIT, and EBIT margin (defined as EBIT divided by net sales) and total segment EBIT margin, are commonly used financial measures that exclude the impact of financing on the capital structure and income taxes. All these measures are utilized by management to evaluate performance (U.S. GAAP measures: pretax earnings or pretax profit margin).

Earnings, earnings per share, return on common stockholders’ equity and return on total capital excluding certain gains and losses, impairments, costs, impacts of the strategic portfolio repositioning actions, or other items provide additional insight into the underlying, ongoing operating performance of the Company and facilitate period-to-period comparisons by excluding the earnings impact of these items. Management believes that presenting earnings, earnings per share, return on common stockholders' equity and return on total capital excluding these items is more representative of the Company’s operational performance and may be more useful for investors (U.S. GAAP measures: earnings, earnings per share, return on common stockholders’ equity, return on total capital).

Free cash flow (operating cash flow less capital expenditures) and free cash flow as a percent of net sales are indicators of the Company’s cash generating capabilities, and dividends as a percent of free cash flow is an indicator of the Company's ability to support its dividend, after considering investments in capital assets which are necessary to maintain and enhance existing operations. The determination of operating cash flow adds back noncash depreciation expense to earnings and thereby does not reflect a charge for necessary capital expenditures. Management believes that free cash flow, free cash flow as a percent of net sales and dividends as a percent of free cash flow are useful to both management and investors as measures of the Company’s ability to generate cash and support its dividend (U.S. GAAP measure: operating cash flow, operating cash flow as a percent of net sales, dividends as a percent of operating cash flow).

FINANCIAL REVIEW

Report of Management

The Company's management is responsible for the integrity and accuracy of the financial statements. Management believes that the financial statements for the three years ended September 30, 2017 have been prepared in conformity with U.S. generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of events and transactions that have not been completed. The Company's disclosure controls and procedures ensure that material information required to be disclosed is recorded, processed, summarized and communicated to management and reported within the required time periods.

In meeting its responsibility for the reliability of the financial statements, management relies on a system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The design of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes that the Company's internal accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, is responsible for overseeing the Company's financial reporting process. The Audit Committee meets with management and the Company's internal auditors periodically to review the work of each and to monitor the discharge by each of its responsibilities. The Audit Committee also meets periodically with the independent auditors, who have free access to the Audit Committee and the Board of Directors, to discuss the quality and acceptability of the Company's financial reporting and internal controls, as well as nonaudit-related services.

The independent auditors are engaged to express an opinion on the Company's consolidated financial statements and on the Company's internal control over financial reporting. Their opinions are based on procedures that they believe to be sufficient to provide reasonable assurance that the financial statements contain no material errors and that the Company's internal controls are effective.

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that internal control over financial reporting was effective as of September 30, 2017.

The valves & controls business was acquired on April 28, 2017. Management has excluded this business from its assessment of internal control over financial reporting as of September 30, 2017. Valves & controls' total assets and revenues excluded from the assessment represented approximately 20 percent and 4 percent, respectively, of the Company's related consolidated financial statement amounts as of and for the year ended September 30, 2017.

The Company's auditor, KPMG LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting.

/s/ David N. Farr		/s/ Frank J. Dellaquila
David N. Farr		Frank J. Dellaquila
Chairman of the Board		Senior Executive Vice President
and Chief Executive Officer		and Chief Financial Officer

Results of Operations

Years ended September 30

(Dollars in millions, except per share amounts)

	2015				2016			2017			16 vs. 15			17 vs. 16
Net sales	$	16,249			14,522			15,264			(11	)%		5	%
Gross profit	$	7,008			6,262			6,404			(11	)%		2	%
Percent of sales	43.1		%		43.1	%		42.0	%
SG&A	$	3,735			3,464			3,618
Percent of sales	23.0		%		23.8	%		23.7	%
Gains on divestitures of businesses	$	1,039			—			—
Other deductions, net	$	330			294			286
Interest expense, net	$	175			188			165
Earnings from continuing operations
before income taxes	$	3,807			2,316			2,335			(39	)%		1	%
Percent of sales	23.4		%		16.0	%		15.3	%
Earnings from continuing operations
common stockholders	$	2,517			1,590			1,643			(37	)%		3	%
Net earnings common stockholders	$	2,710			1,635			1,518			(40	)%		(7	)%
Percent of sales	16.7		%		11.3	%		9.9	%
Diluted EPS – Earnings from continuing operations	$	3.71			2.45			2.54			(34	)%		4	%
Diluted EPS – Net earnings	$	3.99			2.52			2.35			(37	)%		(7	)%
Return on common stockholders' equity	29.8		%		20.9	%		18.6	%
Return on total capital	22.8		%		15.5	%		15.3	%

OVERVIEW

In 2017, Emerson successfully completed the previously announced strategic actions to streamline its portfolio and drive growth in its core businesses. These actions resulted in the divestiture of the network power systems, and power generation, motors and drives businesses, which are reported in discontinued operations for all years presented. Additionally, on April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business.

Sales from continuing operations for 2017 were $15.3 billion, an increase of $742 million, or 5 percent, supported by the acquisition of the valves & controls business, which added 4 percent. Underlying sales were up 1 percent compared with the prior year reflecting improving economic conditions and industrial end markets.

Earnings from continuing operations common stockholders were $1,643 million in 2017, up 3 percent compared with prior year earnings of $1,590 million. Diluted earnings per share from continuing operations were $2.54, up 4 percent versus $2.45 per share in 2016. Earnings per share from continuing operations were $2.64, up 8 percent, excluding first year acquisition accounting charges of $0.10 per share related to the valves & controls business which deducted 4 percentage points.

Discontinued operations in 2017 was a net loss of $125 million, $0.19 per share, reflecting the impact of completing the divestitures. Discontinued operations income in 2016 was $45 million, $0.07 per share. See Note 4 for further information.

Net earnings common stockholders, which includes the impact of discontinued operations, were $1,518 million in 2017, down 7 percent compared with prior year earnings of $1,635 million. Diluted earnings per share were $2.35, down 7 percent versus $2.52 per share in 2016.

Sales increased in both businesses. Automation Solutions sales increased 5 percent due to the acquisition of the valves & controls business, while underlying sales decreased slightly, reflecting weakness in energy-related markets which began to improve in the second half of the year. Commercial & Residential Solutions sales increased 5 percent reflecting favorable conditions in HVAC, refrigeration and construction related markets.

The Company generated operating cash flow from continuing operations of $2.7 billion in 2017, an increase of $191 million, or 8 percent. Total operating cash flow of $1.9 billion was reduced by cash used for discontinued operations of $778 million to execute the repositioning, primarily for income taxes on completion of the divestitures and repatriation of cash.

NET SALES

Net sales for 2017 were $15.3 billion, an increase of $742 million, or 5 percent compared with 2016. Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 1 percent ($168 million) on higher volume and slightly lower price. Acquisitions added 4 percent ($628 million) while foreign currency translation subtracted $54 million. Underlying sales increased 2 percent in the U.S. and were flat internationally. Sales increased $441 million in Automation Solutions and $302 million in Commercial & Residential Solutions.

Net sales for 2016 were $14.5 billion, a decrease of $1,727 million, or 11 percent compared with 2015. Underlying sales decreased 7 percent ($1,046 million) on 6 percent lower volume and 1 percent lower price. Foreign currency translation subtracted 2 percent ($266 million) and divestitures, net of acquisitions subtracted 2 percent ($415 million). Underlying sales decreased 5 percent in the U.S. and 8 percent internationally. Sales in Automation Solutions decreased $1,176 million and Commercial & Residential solutions decreased $76 million.

INTERNATIONAL SALES

Emerson is a global business with international sales representing 52 percent of total sales, including U.S. exports. Although economic conditions are currently soft worldwide, the Company generally expects faster economic growth in emerging markets in Asia, Latin America, Eastern Europe and Middle East/Africa in the future.

International destination sales, including U.S. exports, increased 5 percent, to $8.0 billion in 2017, reflecting increases in both the Automation Solutions and Commercial & Residential Solutions businesses. U.S. exports of $927 million were up 4 percent compared with 2016, reflecting increases in both Automation Solutions, which benefited from the valves & controls acquisition, and Commercial & Residential Solutions. Underlying international destination sales were flat, as foreign currency translation had a 1 percent unfavorable impact, while acquisitions had a 6 percent favorable impact on the comparison. Underlying sales were down 1 percent in Europe and up 6 percent in Asia (China up 15 percent). Underlying sales decreased 12 percent in Latin America, 3 percent in Canada and 6 percent in Middle East/Africa. Origin sales by international subsidiaries, including shipments to the U.S., totaled $7.2 billion in 2017, up 6 percent compared with 2016, primarily reflecting the valves & controls acquisition.

International destination sales, including U.S. exports, decreased 12 percent, to $7.6 billion in 2016, reflecting decreases in all segments, partially due to divestitures. U.S. exports of $888 million were down 25 percent compared with 2015, reflecting reduced spending by global oil and gas customers, weakness in industrial spending and the stronger U.S. dollar. Underlying international destination sales declined 8 percent, as foreign currency translation and divestitures had a 3 percent and a 1 percent unfavorable impact, respectively, on the comparison. Underlying sales were up 2 percent in Europe and decreased 10 percent in both Asia and Latin America. Sales decreased 21 percent in Canada and 15 percent in Middle East/Africa. Weakness in energy-related and industrial end markets and global economic uncertainty challenged growth in these areas. Origin sales by international subsidiaries, including shipments to the U.S., totaled $6.8 billion in 2016, down 10 percent compared with 2015, reflecting the weakness in industrial capital spending, unfavorable foreign currency translation and divestitures.

ACQUISITIONS AND DIVESTITURES

The Company is currently pursuing a potential acquisition of Rockwell Automation, Inc. On November 16, 2017, the Company announced that it proposed to acquire Rockwell for $29 billion, or $225 per share, consisting of $135 per share in cash, financed primarily with newly issued debt, and $90 per share in Emerson stock, which would result in Rockwell shareholders owning approximately 22 percent of the combined company. Rockwell has not engaged with the Company on this or previous proposals. Rockwell had fiscal 2017 sales of approximately $6.3 billion. See Item 1A - "Risk Factors" for additional information.

See information under “Discontinued Operations” for a discussion of the Company’s divestitures related to its portfolio repositioning actions.

On April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business for $2.960 billion, net of cash acquired of $207 million, subject to certain post-closing adjustments. This business, with annualized sales of approximately $1.4 billion, is a manufacturer of control, isolation and pressure relief valves and actuators, and complements the Valves, Actuators & Regulators product offering within Automation Solutions. The Company also acquired two smaller businesses in the Automation Solutions segment. Total cash paid for all businesses was $3.0 billion, net of cash acquired. See Note 3.

On October 2, 2017, the Company sold its residential storage business for $200 million in cash, subject to post-closing adjustments, and expects to recognize a loss of approximately $40 million in 2018 due to income taxes resulting from nondeductible goodwill. The Company expects to realize approximately $140 million in after-tax cash proceeds from the sale. This business, with sales of $298 million and pretax earnings of $15 million in 2017, is a leader in home organization and storage systems, and was reported within the Tools & Home Products segment.

The Company acquired six businesses in 2016, four in Automation Solutions and two in Climate Technologies. Total cash paid for these businesses was $132 million, net of cash acquired. Annualized sales for these businesses were approximately $51 million in 2016. The Company completed eight acquisitions in 2015, seven in Automation Solutions and one in Tools & Home Products, which had combined annualized sales of approximately $115 million. Total cash paid for all businesses was $324 million, net of cash acquired.

In January 2015, the Company completed the sale of its mechanical power transmission solutions business for $1.4 billion, and recognized a pretax gain from the transaction of $939 million ($532 million after-tax, $0.78 per share). Proceeds from the divestiture were used for share repurchase. This business was previously reported in the former Industrial Automation segment, and had partial year sales of $189 million in 2015 and related pretax earnings of $21 million. Power transmission solutions designs and manufactures market-leading couplings, bearings, conveying components and gearing and drive components, and provides supporting services and solutions.

On September 30, 2015, the Company sold its InterMetro commercial storage business for $411 million in cash and recognized a pretax gain from the transaction of $100 million ($79 million after-tax, $0.12 per share). This business was previously reported in the former Commercial & Residential Solutions segment, and had annual sales of $288 million and pretax earnings of $42 million in 2015. InterMetro is a leading manufacturer and supplier of storage and transport products in the food service, commercial products and health care industries.

COST OF SALES

Cost of sales for 2017 were $8.9 billion, an increase of $600 million compared with $8.3 billion in 2016. The increase reflects the acquisition of the valves & controls business and higher volume, partially offset by cost reduction actions and the impact of foreign currency translation. Gross profit was $6.4 billion in 2017 compared to $6.3 billion in 2016. Gross margin of 42.0 percent reflected dilution of 1.2 percentage points due to the valves & controls operations and first year acquisition accounting charges of $74 million related to inventory. Slightly lower price also contributed to the decline, while savings from cost reduction actions partially offset these decreases. Gross profit margin was 43.1 percent in 2016.

Cost of sales for 2016 were $8.3 billion, a decrease of $981 million compared with $9.2 billion in 2015, primarily due to reduced sales volume, the impact of foreign currency translation ($186 million) and prior year divestitures ($273 million). Gross profit was $6.3 billion in 2016 compared with $7.0 billion in 2015. Gross margin of 43.1 percent was flat compared with 2015, as savings from cost reduction and containment actions were offset by deleverage on lower volume and unfavorable mix.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses of $3.6 billion in 2017 increased $154 million compared with 2016, primarily due to the valves & controls acquisition. Savings from cost reduction actions and lower incentive stock compensation of $35 million, reflecting the impact of changes in the stock price, were partially offset by higher other costs. SG&A as a percent of sales of 23.7 percent decreased 0.1 percentage points compared with 2016.

SG&A expenses of $3.5 billion in 2016 decreased $271 million compared with 2015. The decrease reflects savings from cost reduction actions, reduced costs from lower sales volume, and prior year divestitures ($137 million), partially offset by higher incentive stock compensation of $121 million. SG&A as a percent of sales of 23.8 percent increased 0.8 percent in 2016, reflecting deleverage on lower sales volume and higher incentive stock compensation, primarily due to changes in the stock price and overlap of awards, partially offset by savings from restructuring actions.

GAINS ON DIVESTITURES OF BUSINESSES

In 2015, the Company sold its power transmission solutions and commercial storage businesses and recorded pretax gains of $939 million ($532 million after-tax, $0.78 per share) and $100 million ($79 million after-tax, $0.12 per share), respectively. See Note 3.

OTHER DEDUCTIONS, NET

Other deductions, net were $286 million in 2017, a decrease of $8 million compared with 2016. The decrease primarily reflects favorable foreign currency transactions comparisons of $78 million (unfavorable in the prior year) and lower restructuring expense of $18 million. These decreases were substantially offset by intangibles and backlog amortization related to the valves & controls acquisition of $29 million and $19 million, respectively, and higher acquisition/divestiture costs of $24 million. Additionally, 2016 results included a $21 million gain from payments received related to dumping duties. See Note 5.

Other deductions, net were $294 million in 2016, a $36 million decrease from 2015 primarily due to lower restructuring costs of $42 million, decreased litigation costs of $30 million and a $21 million gain on payments received related to dumping duties. The decrease in other deductions was partially offset by unfavorable foreign currency transactions of $67 million.

INTEREST EXPENSE, NET

Interest expense, net was $165 million, $188 million and $175 million in 2017, 2016 and 2015, respectively. The decrease of $23 million in 2017 reflects the maturity of long-term debt with relatively higher interest rates and higher interest income.

INCOME TAXES

Income taxes were $660 million, $697 million and $1,267 million for 2017, 2016 and 2015, respectively, resulting in effective tax rates of 28 percent, 30 percent and 33 percent in 2017, 2016 and 2015, respectively. The 2 percentage point decrease versus the prior year is largely due to tax benefits from restructuring a foreign subsidiary. The 3 percentage point higher rate in 2015 was due to taxes on the gains from the divestitures of the power transmission solutions and commercial storage businesses.

EARNINGS FROM CONTINUING OPERATIONS

Earnings from continuing operations attributable to common stockholders in 2017 were $1,643 million, up 3 percent compared with 2016, and diluted earnings per share were $2.54 in 2017, up 4 percent. Valves & controls reduced both comparisons by 6 percentage points, or $97 million, $0.15 per share, including restructuring expense, intangibles amortization, and first year pretax acquisition accounting charges related to inventory and backlog of $93 million ($65 million after-tax, $0.10 per share) which are reported in Corporate and other. Earnings increased $66 million in the Automation Solutions segment in 2017 and $72 million in Commercial & Residential Solutions. See the Business discussion that follows and Note 18.

Earnings from continuing operations attributable to common stockholders in 2016 were $1,590 million, down 37 percent compared with 2015, and diluted earnings per share were $2.45, down 34 percent. Divestiture gains in the prior year negatively impacted earnings from continuing operations and earnings per share comparisons by 20 and 21 percentage points, respectively. In 2016, earnings decreased $390 million in the Automation Solutions segment and increased $87 million in Commercial & Residential Solutions.

DISCONTINUED OPERATIONS

On November 30, 2016, the Company completed the sale of its network power systems business for $4.0 billion in cash and retained a subordinated interest in distributions, contingent upon the equity holders first receiving a threshold return on their initial investment. This business comprised the former Network Power segment. Additionally, on January 31, 2017, the Company completed the sale of its power generation, motors and drives business for approximately $1.2 billion, subject to post-closing adjustments. This business was previously reported in the former Industrial Automation segment. The results of operations for these businesses were reported in discontinued operations for all years presented, and the assets and liabilities were reflected as held-for-sale. See Note 4 and Item 1A - "Risk Factors."

Discontinued operations was a net loss of $125 million in 2017, and income of $45 million and $193 million for 2016 and 2015, respectively. In 2017, the net loss of $125 million, $0.19 per share, included an after-tax gain on the divestiture of the network power systems business of $125 million, a $173 million after-tax loss on the divestiture of

the power generation, motors and drives business, income tax expense of $109 million for repatriation of sales proceeds, and lower expense of $32 million primarily due to ceasing depreciation and amortization for the discontinued businesses held-for-sale. Operating cash flow used by discontinued operations was $778 million for 2017, which primarily included payments of approximately $700 million for income taxes on completion of the divestitures and repatriation of cash, cash used by operations and other costs. Capital expenditures were $20 million.

Discontinued operations income of $45 million, $0.07 per share, in 2016 included earnings from operations of $344 million and costs to execute the portfolio repositioning of $299 million. These costs are comprised of income tax expense of $143 million for repatriation of cash from these businesses, reorganization of their legal structures prior to sale, and basis differences for book and tax, as well as costs for legal, consulting, investment banking and other expenses of $77 million. In addition, net earnings for 2016 included a loss of $103 million to write down the power generation, motors and drives business to the sales price less costs to sell, and lower expense of $24 million due to ceasing depreciation and amortization for the discontinued businesses held-for-sale. Discontinued operations income of $193 million, $0.28 per share, in 2015 included earnings from operations of $245 million and separation costs of $52 million, comprised of income tax expense of $42 million and fees of $10 million. Operating cash flow from discontinued operations was $382 million (net of payments of $179 million for separation costs) and $489 million for 2016 and 2015, respectively. Capital expenditures were $76 million for 2016 and $97 million for 2015.

NET EARNINGS AND EARNINGS PER SHARE; RETURNS ON EQUITY AND TOTAL CAPITAL

Net earnings attributable to common stockholders in 2017 were $1,518 million, down 7 percent compared with 2016, and diluted earnings per share were $2.35, down 7 percent. These results include the impact of discontinued operations discussed above which negatively impacted net earnings and earnings per share comparisons 10 and 11 percentage points, respectively.

Net earnings attributable to common stockholders in 2016 were $1,635 million, down 40 percent compared with 2015, and diluted earnings per share were $2.52, down 37 percent. Net earnings and earnings per share comparisons were negatively impacted approximately 24 percentage points due to divestiture gains of $611 million ($0.90 per share) in 2015 and discontinued operations in both years.

Return on common stockholders' equity (net earnings attributable to common stockholders divided by average common stockholders' equity) was 18.6 percent in 2017 compared with 20.9 percent in 2016 and 29.8 percent in 2015. Return on total capital was 15.3 percent in 2017 compared with 15.5 percent in 2016 and 22.8 percent in 2015 (computed as net earnings attributable to common stockholders excluding after-tax net interest expense, divided by average common stockholders' equity plus short- and long-term debt less cash and short-term investments). Discontinued operations and the acquisition of the valves & controls business reduced the 2017 return on common stockholders' equity approximately 19 percentage points and return on total capital 11 percentage points. Discontinued operations reduced the 2016 return on common stockholders' equity approximately 23 percentage points and return on total capital 9 percentage points. For 2015, the combined impact of the divestiture gains and discontinued operations reduced the return on common stockholders' equity approximately 12 percentage points and return on total capital 3 percentage points.

Business Segments

Following is an analysis of segment results for 2017 compared with 2016, and 2016 compared with 2015. The Company defines segment earnings as earnings before interest and income taxes. In connection with the strategic portfolio repositioning actions completed in fiscal 2017, the Company began reporting three segments: Automation Solutions, and Climate Technologies and Tools & Home Products which together comprise the Commercial & Residential Solutions business. See Note 18.

AUTOMATION SOLUTIONS
(dollars in millions)	2015				2016			2017			16 vs. 15			17 vs. 16
Sales	$	10,153			8,977			9,418			(12	)%		5	%
Earnings	$	1,846			1,456			1,522			(21	)%		5	%
Margin	18.2		%		16.2	%		16.2	%

Sales by Major Product Offering
Measurement & Analytical Instrumentation	$	3,619			3,137			3,070			(13	)%		(2	)%
Valves, Actuators & Regulators	2,559				2,137			2,668			(16	)%		25	%
Industrial Solutions	1,779				1,621			1,680			(9	)%		4	%
Process Control Systems & Solutions	2,196				2,082			2,000			(5	)%		(4	)%
Total	$	10,153			8,977			9,418			(12	)%		5	%

2017 vs. 2016 - Automation Solutions reported sales of $9.4 billion in 2017, an increase of $441 million, or 5 percent. Underlying sales decreased 1 percent ($128 million) on lower volume and slightly lower price. The valves & controls acquisition added 7 percent ($603 million), while foreign currency translation subtracted 1 percent ($34 million). Sales for Measurement & Analytical Instrumentation decreased 2 percent and Process Control Systems & Solutions decreased 4 percent due to weakness in energy-related markets, but began to improve in the second half of the year as oil prices stabilized. Valves, Actuators & Regulators increased $531 million, or 25 percent, due to the valves & controls acquisition. Industrial Solutions sales increased $59 million, or 4 percent, on improving economic conditions and industrial end markets, especially automotive. Chemical, power and life sciences were favorable. Underlying sales increased 1 percent in the U.S., were down 2 percent in Europe and increased 1 percent in Asia (China up 9 percent). Latin America decreased 20 percent, Canada decreased 6 percent and Middle East/Africa was down 6 percent. Earnings of $1.5 billion increased $66 million from the prior year. Savings from cost reduction actions and favorable foreign currency transactions comparisons of $64 million (unfavorable in the prior year) were partially offset by lower volume, and $25 million of restructuring expense and $29 million of intangibles amortization related to the valves & controls acquisition. Materials cost containment offset lower price. Margin was flat, primarily reflecting the benefit from cost reduction actions offset by dilution from the valves & controls acquisition of 1.5 percentage points. Strong order rates in the second half of the year were supported by broad-based momentum across end markets and regions. Going forward, strong demand for MRO and mid-sized projects together with increasing momentum in international markets supports the outlook for solid underlying growth in fiscal 2018.

2016 vs. 2015 - Automation Solutions reported sales of $9.0 billion in 2016, a decrease of $1.2 billion or 12 percent. Underlying sales decreased 10 percent ($1,027 million) on 9 percent lower volume and 1 percent lower price as global oil and gas customers continued to curtail spending levels in a difficult environment. Foreign currency translation had a 2 percent ($206 million) unfavorable impact, while acquisitions added $57 million. Sales for Measurement & Analytical Instrumentation, Valves, Actuators & Regulators, and Process Control Systems & Solutions decreased 13 percent, 16 percent and 5 percent, respectively, compared with the prior year. These decreases reflect lower capital and operational spending by global oil and gas customers, particularly in upstream markets, while sales growth was positive in life sciences and power. Industrial Solutions sales decreased 9 percent on weakness in industrial spending and upstream oil and gas markets. Underlying sales decreased 10 percent in the U.S., were up 2 percent in Europe and decreased 13 percent in Asia (China down 16 percent). Latin America decreased 13 percent, Canada was down 26 percent and Middle East/Africa decreased 18 percent. Earnings of $1.5 billion decreased $390 million and margin was down 2.0 percentage points due to sharply lower volume, deleverage and unfavorable mix, partially offset by savings from cost reduction actions and lower restructuring costs of $22 million. Materials cost containment offset lower pricing. Results also reflect unfavorable foreign currency transactions of $65 million, partially offset by a favorable comparison from litigation costs of $20 million in 2015.

COMMERCIAL & RESIDENTIAL SOLUTIONS
(dollars in millions)	2015				2016			2017			16 vs. 15			17 vs. 16
Sales:
Climate Technologies	$	4,006			3,944			4,212			(2	)%		7	%
Tools & Home Products	1,625				1,611			1,645			(1	)%		2	%
Total	$	5,631			5,555			5,857			(1	)%		5	%
Earnings:
Climate Technologies	$	835			902			975			8	%		8	%
Tools & Home Products	364				384			383			5	%		—	%
Total	$	1,199			1,286			1,358			7	%		6	%
Margin	21.3		%		23.2	%		23.2	%

2017 vs. 2016 - Commercial & Residential Solutions sales were $5.9 billion in 2017, an increase of $302 million, or 5 percent, reflecting favorable conditions in HVAC and refrigeration markets in the U.S., Asia and Europe, as well as U.S. and Asian construction markets. Underlying sales increased 5 percent ($297 million) on 6 percent higher volume, partially offset by 1 percent lower price. Foreign currency translation deducted $20 million and acquisitions added $25 million. Climate Technologies sales were $4.2 billion in 2017, an increase of $268 million, or 7 percent. Global air conditioning sales were solid, led by strength in the U.S. and Asia and robust growth in China partially due to easier comparisons, while sales were up modestly in Europe and declined moderately in Middle East/Africa. Global refrigeration sales were strong, reflecting robust growth in China on increased adoption of energy-efficient solutions and slight growth in the U.S. Sensors and solutions had strong growth, while temperature controls was up modestly. Tools & Home Products sales were $1.6 billion in 2017, up $34 million compared to the prior year. Professional tools had strong growth on favorable demand from oil and gas customers and in other construction related markets. Wet/dry vacuums sales were up moderately as favorable conditions continued in U.S. construction markets. Food waste disposers increased slightly, while the storage business declined moderately. Overall, underlying sales increased 3 percent in the U.S., 4 percent in Europe and 17 percent in Asia (China up 27 percent). Sales increased 3 percent in Latin America and 4 percent in Canada, while sales decreased 5 percent in Middle East/Africa. Earnings were $1.4 billion, an increase of $72 million driven by Climate Technologies, while margin was flat. Increased volume and resulting leverage, savings from cost reduction actions, and lower customer accommodation costs of $16 million were largely offset by higher materials costs, lower price and unfavorable product mix. In fiscal 2018, global demand is expected to remain favorable in air conditioning, refrigeration and construction markets, supporting the outlook for moderate underlying growth.

2016 vs. 2015 - Commercial & Residential Solutions sales were $5.6 billion in 2016, a decrease of $76 million, or 1 percent. Underlying sales decreased less than 1 percent (down $21 million) on lower price, offset by slightly higher volume. Foreign currency translation deducted 1 percent ($60 million), while acquisitions added $5 million. Climate Technologies sales were $3.9 billion in 2016, a decrease of $62 million, or 2 percent. Global air conditioning sales were down while global refrigeration sales were up modestly, as the U.S. exhibited growth and Europe and China were down, with more significant declines in air conditioning. Sales of temperature controls, sensors and solutions decreased. Tools & Home Products sales were $1.6 billion in 2016, down $14 million compared to the prior year. Food waste disposers had solid sales growth and the wet/dry vacuums business was up modestly, while sales decreased moderately in the professional tools and storage businesses. Overall, underlying sales were up 1 percent in the U.S. and 3 percent in Europe, while Asia decreased 4 percent. Latin America decreased 3 percent, Canada was down 4 percent, and Middle East/Africa decreased 3 percent. Earnings of $1.3 billion increased $87 million and margin improved 1.9 percentage points, primarily due to savings from cost reduction actions, materials cost containment and lower restructuring costs of $24 million, partially offset by lower price and higher customer accommodation costs.

Financial Position, Capital Resources and Liquidity

The Company continues to generate substantial cash from operations and has the resources available to reinvest for growth in existing businesses, pursue strategic acquisitions and manage its capital structure on a short- and long-term basis.

CASH FLOW FROM CONTINUING OPERATIONS
(dollars in millions)	2015				2016			2017
Operating Cash Flow	$	2,040			2,499			2,690
Percent of sales	12.6		%		17.2	%		17.6	%
Capital Expenditures	$	588			447			476
Percent of sales	3.6		%		3.1	%		3.1	%
Free Cash Flow (Operating Cash Flow less Capital Expenditures)	$	1,452			2,052			2,214
Percent of sales	8.9		%		14.1	%		14.5	%
Operating Working Capital	$	1,177			755			1,007
Percent of sales	7.2		%		5.2	%		6.6	%

Operating cash flow from continuing operations for 2017 was $2.7 billion, a $191 million, or 8 percent increase compared with 2016, reflecting higher earnings and favorable changes in working capital. Operating cash flow from continuing operations of $2.5 billion in 2016 was a 23 percent increase compared to $2.0 billion in 2015, as comparisons benefited from income taxes of $424 million paid on the gains from divestitures in 2015. At September 30, 2017, operating working capital as a percent of sales increased to 6.6 percent due to higher levels of working capital in the acquired valves & controls business, compared with 5.2 percent and 7.2 percent in 2016 and 2015, respectively. Operating cash flow from continuing operations funded capital expenditures of $476 million, dividends of $1,239 million, common stock purchases of $400 million, and was also used to partially pay down debt in 2017. Proceeds of $5.1 billion from the sales of the network power systems and power generation, motors and drives businesses funded acquisitions of $2,990 million, cash used for discontinued operations of $778 million and repayments of short-term borrowings and long-term debt of approximately $1.3 billion. Contributions to pension plans were $45 million in 2017, $66 million in 2016 and $53 million in 2015.

Capital expenditures related to continuing operations were $476 million, $447 million and $588 million in 2017, 2016 and 2015, respectively. Free cash flow from continuing operations (operating cash flow less capital expenditures) was $2.2 billion in 2017, up 8 percent. Free cash flow was $2.1 billion in 2016, compared with $1.5 billion in 2015. The Company is targeting capital spending of approximately $550 million in 2018. Net cash paid in connection with acquisitions was $2,990 million, $132 million and $324 million in 2017, 2016 and 2015, respectively. Proceeds from divestitures not classified as discontinued operations were $39 million in 2017 and $1,812 million in 2015.

Dividends were $1,239 million ($1.92 per share) in 2017, compared with $1,227 million ($1.90 per share) in 2016 and $1,269 million ($1.88 per share) in 2015. In November 2017, the Board of Directors voted to increase the quarterly cash dividend 1 percent, to an annualized rate of $1.94 per share.

Purchases of Emerson common stock totaled $400 million, $601 million and $2,487 million in 2017, 2016 and 2015, respectively, at average per share prices of $60.51, $48.11 and $57.68.

The Board of Directors authorized the purchase of up to 70 million common shares in November 2015, and 56.9 million shares remain available for purchase under this authorization. The Company purchased 6.6 million shares in 2017 under the November 2015 authorization. In 2016, the Company purchased 12.5 million shares under a combination of the November 2015 authorization and the remainder of the May 2013 authorization. A total of 43.1 million shares were purchased in 2015 under the May 2013 authorization.

LEVERAGE/CAPITALIZATION
(dollars in millions)	2015				2016			2017
Total Assets	$	22,088			21,732			19,589
Long-term Debt	$	4,289			4,051			3,794
Common Stockholders' Equity	$	8,081			7,568			8,718
Total Debt-to-Total Capital Ratio	45.8		%		46.7	%		34.8	%
Net Debt-to-Net Capital Ratio	31.3		%		31.3	%		15.4	%
Operating Cash Flow-to-Debt Ratio	29.8		%		37.7	%		57.8	%
Interest Coverage Ratio	20.2X				11.8X			12.6X

Total debt, which includes long-term debt, current maturities of long-term debt, commercial paper and other short-term borrowings, was $4.7 billion, $6.6 billion and $6.8 billion for 2017, 2016 and 2015, respectively. During the year, the Company repaid $250 million of 5.125% notes that matured in December 2016. In 2015, the Company issued $500 million of 2.625% notes due December 2021 and $500 million of 3.150% notes due June 2025, and repaid $250 million of 5.0% notes that matured in December 2014 and $250 million of 4.125% notes that matured in April 2015.

The total debt-to-capital ratio and the net debt-to-net capital ratio (less cash and short-term investments) decreased in 2017 due to lower total debt outstanding and higher common stockholders' equity from changes in other comprehensive income. The total debt-to-capital ratio and the net debt-to-net capital ratio (less cash and short-term investments) increased in 2016 due to lower common stockholders' equity from share repurchases and changes in other comprehensive income. The operating cash flow from continuing operations-to-debt ratio increased in 2017 primarily due to lower debt in the current year. The operating cash flow from continuing operations-to-debt ratio increased in 2016 primarily due to taxes paid in 2015 on the divestiture gains and lower debt in 2016. The interest coverage ratio is computed as earnings from continuing operations before income taxes plus interest expense, divided by interest expense. The increase in interest coverage in 2017 reflects lower interest expense in the current year. The decrease in interest coverage in 2016 reflects lower pretax earnings, largely due to the divestiture gains of $1,039 million in 2015, and slightly higher interest expense.

In April 2014, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replaced the 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. The Company also 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.

Emerson's financial structure provides the flexibility necessary to achieve its strategic objectives. The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth. At September 30, 2017, $3.1 billion of the Company's cash was held outside the U.S. (primarily in Europe and Asia), $1.4 billion of which income taxes have been provided for, and was generally available for repatriation to the U.S. Under current tax law, repatriated cash may be subject to U.S. federal income taxes, net of available foreign tax credits. The Company routinely repatriates a portion of its non-U.S. cash from earnings each year, or otherwise when it can be accomplished tax efficiently, and provides for U.S. income taxes as appropriate. The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet the Company's needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.

CONTRACTUAL OBLIGATIONS

At September 30, 2017, the Company's contractual obligations, including estimated payments, are as follows:

	Amounts Due By Period
(dollars in millions)	Total				Less Than 1 Year			1 - 3 Years			3 - 5 Years			More Than 5 Years
Long-term Debt (including Interest)	$	5,342			428			1,434			966			2,514
Operating Leases	536				171			206			80			79
Purchase Obligations	746				655			71			14			6
Total	$	6,624			1,254			1,711			1,060			2,599

Purchase obligations consist primarily of inventory purchases made in the normal course of business to meet operational requirements. The table above does not include $2.0 billion of other noncurrent liabilities recorded in the balance sheet and summarized in Note 19, which consist primarily of pension and postretirement plan liabilities, deferred income taxes and unrecognized tax benefits, because it is not certain when these amounts will become due. See Notes 11 and 12 for estimated future benefit payments and Note 14 for additional information on deferred income taxes.

FINANCIAL INSTRUMENTS

The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and commodity prices, and selectively uses derivative financial instruments, including forwards, swaps and purchased options to manage these risks. The Company does not hold derivatives for trading or speculative purposes. The value of derivatives and other financial instruments is subject to change as a result of market movements in rates and prices. Sensitivity analysis is one technique used to forecast the impact of these movements. Based on a hypothetical 10 percent increase in interest rates, a 10 percent decrease in commodity prices or a 10 percent weakening in the U.S. dollar across all currencies, the potential losses in future earnings, fair value or cash flows are not material. Sensitivity analysis has limitations; for example, a weaker U.S. dollar would benefit future earnings through favorable translation of non-U.S. operating results, and lower commodity prices would benefit future earnings through lower cost of sales. See Notes 1, and 8 through 10.

Critical Accounting Policies

Preparation of the Company's financial statements requires management to make judgments, assumptions and estimates regarding uncertainties that could affect reported revenue, expenses, assets, liabilities and equity. Note 1 describes the significant accounting policies used in preparation of the consolidated financial statements. The most significant areas where management judgments and estimates impact the primary financial statements are described below. Actual results in these areas could differ materially from management's estimates under different assumptions or conditions.

REVENUE RECOGNITION

The Company recognizes a large majority of its revenue 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 circumstances, revenue is recognized using the percentage-of-completion method, as performance occurs, or in accordance with ASC 985-605 related to software. Sales arrangements sometimes involve delivering multiple elements, which requires management judgment that affects the amount and timing of revenue recognized. In these instances, the revenue assigned to each element is based on vendor-specific objective evidence, third-party evidence or a management estimate of the relative selling price. Revenue is recognized for delivered elements if they have value to the customer on a stand-alone basis and performance related to the undelivered items is probable and substantially in the Company's control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment. The vast majority of deliverables are tangible products, with a smaller portion attributable to installation, service or maintenance. Management believes that all relevant criteria and conditions are considered when recognizing revenue.

INVENTORIES

Inventories are stated at the lower of cost or market. The majority of inventory is valued based on standard costs, which approximate average costs, while the remainder is principally valued on a first-in, first-out basis. Cost standards are revised at the beginning of each 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. The Company's businesses review inventory for obsolescence, make appropriate provisions and dispose of obsolete inventory on a regular basis. Various factors are considered in these reviews, including sales history and recent trends, industry conditions and general economic conditions. If actual circumstances indicate a decline in any of these factors, particularly an abrupt change in economic conditions, the Company could incur higher levels of obsolescence expense.

LONG-LIVED ASSETS

Long-lived assets, which include property, plant and equipment, goodwill and identifiable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate impairment may exist. If the Company determines that the carrying value of a long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. Reporting units are also reviewed for possible goodwill impairment at least annually, in the fourth quarter. If an initial assessment indicates it is more likely than not an impairment may exist, it is evaluated by comparing the unit's estimated fair value to its carrying value. Fair value is generally estimated using an income approach that discounts estimated future cash flows using discount rates judged by management to be commensurate with the applicable risk. Estimates of future sales, operating results, cash flows and discount rates are subject to changes in the economic environment, including such factors as the general level of market interest rates, expected equity market returns and the volatility of markets served, particularly when recessionary economic circumstances continue for an extended period of time. Management believes the estimates of future cash flows and fair values are reasonable; however, changes in estimates due to variance from assumptions could materially affect the evaluations.

RETIREMENT PLANS

The Company maintains a prudent long-term investment strategy consistent with the duration of pension obligations. The determination of defined benefit plan expense and liabilities is dependent on various assumptions, including the expected annual rate of return on plan assets, the discount rate and the rate of annual compensation increases. Management believes the assumptions used are appropriate; however, actual experience may differ. In accordance with U.S. generally accepted accounting principles, actual results that differ from the Company's assumptions are accumulated as deferred actuarial gains or losses and amortized to expense in future periods. The Company transitioned from defined benefit to defined contribution retirement plans in 2016. The principal U.S. defined benefit plan is closed to employees hired after January 1, 2016 while shorter-tenured current employees ceased accruing benefits effective October 1, 2016. Affected employees transitioned to an enhanced defined contribution plan. See Notes 11 and 12.

During 2017, the funded status of the Company's pension plans improved by $667 million. As of September 30, 2017, the U.S. pension plans were underfunded by $77 million in total, including unfunded plans totaling $201 million. The non-U.S. plans were underfunded by $253 million, including unfunded plans totaling $215 million. The Company contributed a total of $45 million to defined benefit plans in 2017 and expects to contribute approximately $60 million in 2018. At year-end 2017, the discount rate for U.S. plans was 3.76 percent, and was 3.50 percent in 2016. The assumed investment return on plan assets was 7.25 percent in 2017 and 7.50 percent in 2016 and 2015, and is expected to be 7.0 percent for 2018. Deferred actuarial losses to be amortized to expense in future years were $1,161 million ($753 million after-tax) as of September 30, 2017.

INCOME TAXES

Income tax expense and tax assets and liabilities reflect management's assessment of taxes paid or expected to be paid (received) on items included in the financial statements. Deferred tax assets and liabilities arise from temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and consideration of operating loss and tax credit carryforwards. Deferred income taxes are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided to reduce deferred tax assets to the amount that will more likely than not be realized. This requires management to make judgments and estimates regarding the amount and timing of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies.

Uncertainty exists regarding tax positions taken in previously filed tax returns which remain subject to examination, along with positions expected to be taken in future returns. The Company provides for unrecognized tax benefits, based on the technical merits, when it is more likely than not that an uncertain tax position will not be sustained

upon examination. Adjustments are made to the uncertain tax positions when facts and circumstances change, such as the closing of a tax audit; changes in applicable tax laws, including tax case rulings and legislative guidance; or expiration of the applicable statute of limitations.

The Company also pays U.S. federal income taxes, net of available foreign tax credits, on cash repatriated from non-U.S. locations. No provision is made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries where these earnings are considered permanently invested or otherwise indefinitely retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. See Notes 1 and 14.

Other Items

LEGAL MATTERS

At September 30, 2017, there were no known contingent liabilities (including guarantees, pending litigation, taxes and other claims) that management believes will be material in relation to the Company's financial statements, nor were there any material commitments outside the normal course of business.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB amended ASC 606, Revenue from Contracts with Customers, to update and consolidate revenue recognition guidance from multiple sources into a single, comprehensive standard to be applied for all contracts with customers. The fundamental principle of the revised standard is to recognize revenue based on the transfer of goods and services to customers at an amount that the Company expects to be entitled to in exchange for those goods and services. Also required are additional disclosures regarding the nature, extent, timing and uncertainty of revenues and associated cash flows. The new standard is effective for the Company in the first quarter of fiscal 2019 and may be adopted on either a prospective or retrospective basis. The Company currently expects to adopt the new standard prospectively with the cumulative effect of adoption recognized in retained earnings. The Company continues to evaluate the impact of the revised standard and does not currently expect that the updates will materially impact its financial statements. The Company is also in the process of evaluating and implementing changes to its business processes, systems, controls and accounting policies to support recognition and disclosure under the new guidance.

In February 2016, the FASB amended ASC 842, Leases, to require recognition on the balance sheet of assets and liabilities related to the rights and obligations associated with all lease arrangements. Currently, obligations classified as operating leases are not recorded on the balance sheet but must be disclosed. The new standard is effective for the Company in the first quarter of fiscal 2020. The Company is in the process of evaluating the impact of the revised standard on its financial statements. The Company expects the revised standard to have a material impact on its balance sheet due to the recognition of right-of-use assets and lease liabilities related to operating leases. Contractual obligations related to operating leases totaled $536 million at September 30, 2017. The Company does not expect the new standard will materially impact its results of operations.

In March 2017, the FASB issued updates to ASC 715, Compensation - Retirement Benefits, which only permit the service cost component of net periodic pension and postretirement expense to be reported with other compensation costs, while all other components are required to be reported separately in other deductions. These updates are effective in the first quarter of fiscal 2019, with early adoption permitted, and must be adopted on a retrospective basis. The updates change presentation only and will not impact the Company’s results of operations.

In August 2017, the FASB issued updates to ASC 815, Derivatives and Hedging, which permit hedging contractually specified risk components. The updates also eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates are effective for the Company in the first quarter of fiscal 2020, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the impact of the revised standard on its financial statements.

In January 2017, the FASB issued updates to ASC 350, Intangibles - Goodwill and Other, eliminating the requirement to measure impairment based on the implied fair value of goodwill compared to the carrying amount of a reporting unit’s goodwill. Instead, goodwill impairment will be measured as the excess of a reporting unit’s carrying amount over its estimated fair value. These updates are effective prospectively for impairment tests beginning in fiscal 2021, with early adoption permitted, and are not expected to materially impact the Company’s results of operations.

FISCAL 2018 OUTLOOK

Market conditions began trending favorably in the second half of fiscal 2017 and are expected to continue into 2018. Oil and gas prices are expected to remain stable in a range favorable for energy-related markets, while growth in air conditioning, refrigeration and global construction markets is expected to continue. Automation Solutions net sales are expected to be up 14 to 16 percent, with underlying sales up 5 to 7 percent excluding an approximate 8 percent impact from acquisitions and 1 percent from currency translation. Commercial & Residential Solutions net sales are expected to be down 1 percent to up 1 percent, with underlying sales up 3 to 5 percent excluding an approximate 5 percent negative impact from divestitures and 1 percent from favorable currency translation. Consolidated net sales are expected to be up 8 to 10 percent, with underlying sales up 4 to 6 percent, excluding an approximate 3 percent impact from acquisitions and divestitures and 1 percent from currency translation. Reported earnings per share are expected to be $2.66 to $2.86. Earnings per share are expected to be $2.75 to $2.95, excluding a $0.03 impact from valves & controls first year acquisition accounting charges related to inventory and backlog amortization, and a $0.06 impact from a tax-related loss on the divestiture of the residential storage business.