Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Company's consolidated financial statements and accompanying notes and the report thereon of KPMG LLP that follow.

Consolidated Statements of Earnings

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions, except per share amounts)

	2016				2017			2018
Net sales	$	14,522			15,264			17,408
Costs and expenses:
Cost of sales	8,260				8,860			9,948
Selling, general and administrative expenses	3,464				3,618			4,258
Other deductions, net	294				286			376
Interest expense, net of interest income of: 2016, $27; 2017, $36; 2018, $43	188				165			159
Earnings from continuing operations before income taxes	2,316				2,335			2,667
Income taxes	697				660			443
Earnings from continuing operations	1,619				1,675			2,224
Discontinued operations, net of tax: 2016, $269; 2017, $671; 2018, $0	45				(125	)		—
Net earnings	1,664				1,550			2,224
Less: Noncontrolling interests in earnings of subsidiaries	29				32			21
Net earnings common stockholders	$	1,635			1,518			2,203
Earnings common stockholders:
Earnings from continuing operations	$	1,590			1,643			2,203
Discontinued operations, net of tax	45				(125	)		—
Net earnings common stockholders	$	1,635			1,518			2,203
Basic earnings per share common stockholders:
Earnings from continuing operations	$	2.46			2.54			3.48
Discontinued operations	0.07				(0.19	)		—
Basic earnings per common share	$	2.53			2.35			3.48
Diluted earnings per share common stockholders:
Earnings from continuing operations	$	2.45			2.54			3.46
Discontinued operations	0.07				(0.19	)		—
Diluted earnings per common share	$	2.52			2.35			3.46

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions)

		2016				2017			2018
Net earnings		$	1,664			1,550			2,224
Other comprehensive income (loss), net of tax:
Foreign currency translation		(188		)		441			(231	)
Pension and postretirement		(210		)		500			242
Cash flow hedges		18				37			(7	)
Total other comprehensive income (loss)		(380		)		978			4
Comprehensive income		1,284				2,528			2,228
Less: Noncontrolling interests in comprehensive income of subsidiaries		31				30			21
Comprehensive income common stockholders		$	1,253			2,498			2,207

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

EMERSON ELECTRIC CO. & SUBSIDIARIES

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

	2017				2018
ASSETS
Current assets
Cash and equivalents	$	3,062			1,093
Receivables, less allowances of $91 in 2017 and $113 in 2018	3,072				3,344
Inventories	1,696				1,813
Other current assets	422				369
Total current assets	8,252				6,619
Property, plant and equipment, net	3,321				3,562
Other assets
Goodwill	5,316				6,455
Other intangible assets	1,890				2,751
Other	810				1,003
Total other assets	8,016				10,209
Total assets	$	19,589			20,390
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt	$	862			1,623
Accounts payable	1,776				1,943
Accrued expenses	2,342				2,534
Income taxes	65				64
Total current liabilities	5,045				6,164
Long-term debt	3,794				3,137
Other liabilities	1,980				2,099
Equity
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 641.7 shares in 2017; 629.2 shares in 2018	477				477
Additional paid-in-capital	297				348
Retained earnings	21,995				23,072
Accumulated other comprehensive income (loss)	(1,019		)		(1,015	)
	21,750				22,882
Less: Cost of common stock in treasury, 311.7 shares in 2017; 324.2 shares in 2018	13,032				13,935
Common stockholders’ equity	8,718				8,947
Noncontrolling interests in subsidiaries	52				43
Total equity	8,770				8,990
Total liabilities and equity	$	19,589			20,390
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)

	2016				2017			2018
Common stock	$	477			477			477
Additional paid-in-capital
Beginning balance	170				205			297
Stock plans	35				92			51
Ending balance	205				297			348
Retained earnings
Beginning balance	21,308				21,716			21,995
Net earnings common stockholders	1,635				1,518			2,203
Dividends paid (per share: 2016, $1.90; 2017, $1.92; 2018, $1.94)	(1,227		)		(1,239	)		(1,229	)
Adoption of accounting standard updates	—				—			103
Ending balance	21,716				21,995			23,072
Accumulated other comprehensive income (loss)
Beginning balance	(1,617		)		(1,999	)		(1,019	)
Foreign currency translation	(190		)		443			(231	)
Pension and postretirement	(210		)		500			242
Cash flow hedges	18				37			(7	)
Ending balance	(1,999		)		(1,019	)		(1,015	)
Treasury stock
Beginning balance	(12,257		)		(12,831	)		(13,032	)
Purchases	(601		)		(400	)		(1,000	)
Issued under stock plans	27				199			97
Ending balance	(12,831		)		(13,032	)		(13,935	)
Common stockholders' equity	7,568				8,718			8,947
Noncontrolling interests in subsidiaries
Beginning balance	47				50			52
Net earnings	29				32			21
Other comprehensive income (loss)	2				(2	)		—
Dividends paid	(28		)		(28	)		(30	)
Ending balance	50				52			43
Total equity	$	7,618			8,770			8,990

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30 (Dollars in millions)

	2016				2017			2018
Operating activities
Net earnings	$	1,664			1,550			2,224
(Earnings) Loss from discontinued operations, net of tax	(45		)		125			—
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	568				636			758
Changes in operating working capital	93				160			(83	)
Pension funding	(66		)		(45	)		(61	)
Other, net	285				264			54
Cash from continuing operations	2,499				2,690			2,892
Cash from discontinued operations	382				(778	)		—
Cash provided by operating activities	2,881				1,912			2,892
Investing activities
Capital expenditures	(447		)		(476	)		(617	)
Purchases of businesses, net of cash and equivalents acquired	(132		)		(2,990	)		(2,203	)
Divestitures of businesses	—				39			201
Other, net	30				(106	)		(101	)
Cash from continuing operations	(549		)		(3,533	)		(2,720	)
Cash from discontinued operations	(77		)		5,047			—
Cash provided by (used in) investing activities	(626		)		1,514			(2,720	)
Financing activities
Net increase (decrease) in short-term borrowings	(34		)		(1,635	)		343
Proceeds from short-term borrowings greater than three months	1,264				—			—
Payments of short-term borrowings greater than three months	(1,174		)		(90	)		—
Payments of long-term debt	(254		)		(254	)		(241	)
Dividends paid	(1,227		)		(1,239	)		(1,229	)
Purchases of common stock	(601		)		(400	)		(1,000	)
Other, net	(19		)		27			35
Cash used in financing activities	(2,045		)		(3,591	)		(2,092	)
Effect of exchange rate changes on cash and equivalents	(82		)		45			(49	)
Increase (Decrease) in cash and equivalents	128				(120	)		(1,969	)
Beginning cash and equivalents	3,054				3,182			3,062
Ending cash and equivalents	$	3,182			3,062			1,093
Changes in operating working capital
Receivables	$	162			(25	)		(189	)
Inventories	58				32			17
Other current assets	(4		)		(12	)		(28	)
Accounts payable	(22		)		135			115
Accrued expenses	(57		)		74			17
Income taxes	(44		)		(44	)		(15	)
Total changes in operating working capital	$	93			160			(83	)

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 fourth quarter of 2018, the Company adopted updates to ASC 220, Comprehensive Income, which permit reclassification of stranded tax effects resulting from U.S. tax reform from accumulated other comprehensive income to retained earnings. The Company reclassified $100 of stranded tax effects from accumulated other comprehensive income to retained earnings upon adoption of these updates. See Note 17.

In the first quarter of 2018, the Company adopted updates to ASC 740, Income Taxes, which require recognition of the income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs, on a modified retrospective basis. The adoption of these updates resulted in an increase of $3 to retained earnings.

In the first quarter of 2018, the Company adopted updates to ASC 330, Inventory, which changed the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. These updates were adopted prospectively and did not materially impact the Company's financial statements.

In the fourth quarter of 2017, the Company adopted updates to ASC 718, Compensation - Stock Compensation, which require all excess tax benefits and deficiencies related to share-based payments to be recognized in income tax expense rather than through additional paid-in-capital, and to be presented as operating cash flows instead of financing. These updates did not materially impact the Company's financial statements.

In the fourth quarter of 2017, the Company adopted updates to ASC 740, Income Taxes, which require noncurrent presentation of all deferred tax assets and liabilities on the balance sheet. These updates were adopted on a prospective basis and resulted in the reclassification of current deferred tax assets and liabilities to noncurrent presentation.

In the fourth quarter of 2017, the Company adopted updates to ASC 820, Fair Value Measurement, which require investments measured using the net asset value per share practical expedient to be removed from the fair value hierarchy and separately reported when making disclosures. These updates did not change the determination of fair value for any investments. Adoption affected disclosure presentation only; there was no impact on the Company’s financial results.

In the first quarter of 2017, the Company adopted updates to ASC Subtopic 835-30, Interest-Imputation of Interest, which require presentation of debt issuance costs as a deduction from the related debt liability rather than within other assets. These updates were adopted on a retrospective basis and 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 and net realizable value. 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. Following are the components of inventory as of September 30:

		2017				2018
Finished products		$	560			592
Raw materials and work in process		1,136				1,221
Total inventories		$	1,696			1,813

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:

		2017				2018
Land		$	295			316
Buildings		2,043				2,145
Machinery and equipment		5,175				5,470
Construction in progress		360				439
Property, plant and equipment, at cost		7,873				8,370
Less: Accumulated depreciation		4,552				4,808
Property, plant and equipment, net		$	3,321			3,562

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 one percent of sales.

Revenue Recognition

The Company recognizes a large majority 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. Less than ten percent of the Company's revenues are recognized using the percentage-of-completion method as performance occurs, and revenue from software sales is recognized in accordance with ASC 985-605. 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 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. Approximately five percent of the Company's revenues from continuing operations arise from qualifying sales arrangements that include the delivery of multiple elements, principally in the Automation Solutions 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 and Singapore dollars. 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 $11. 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 foreign withholding taxes and any applicable U.S. income taxes on earnings intended to be repatriated from non-U.S. locations. No provision has been made for these taxes on approximately $3.4 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2018, as these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Recognition of foreign withholding taxes and any applicable U.S. income 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. An inconsequential number of shares of common stock were excluded from the computation of dilutive earnings per in 2018 as the effect would have been antidilutive, while 4.5 million and 13.3 million shares of common stock were excluded in 2017 and 2016, respectively. 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):

	2016			2017			2018
Basic shares outstanding	644.0			642.1			632.0
Dilutive shares	2.8			1.3			3.3
Diluted shares outstanding	646.8			643.4			635.3

(3) ACQUISITIONS AND DIVESTITURES

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

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

On December 1, 2017, the Company acquired Paradigm, a provider of software solutions for the oil and gas industry, for $505, net of cash acquired. This business had annual sales of approximately $140 and is included in the Measurement & Analytical Instrumentation product offering within Automation Solutions. The Company recognized goodwill of $328 ($160 of which is expected to be tax deductible), and identifiable intangible assets of $238, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years.

During 2018, the Company also acquired four smaller businesses, two in the Automation Solutions segment and two in the Climate Technologies segment.

Total cash paid for all businesses for the fiscal year ended 2018 was $2.2 billion, net of cash acquired. The purchase price of the 2018 acquisitions was preliminarily allocated to assets and liabilities as follows. Valuations of acquired assets and liabilities are in process and subject to refinement.

Accounts receivable		$	154
Inventory		196
Property, plant and equipment		129
Goodwill		1,188
Intangibles		1,012
Other assets		45
Total assets		2,724
Accounts payable		73
Other current liabilities		112
Deferred taxes and other liabilities		320
Cash paid, net of cash acquired		$	2,219

Results of operations for the 2018 acquisitions included sales of $365 and a net loss of $3, including intangibles amortization of $40 and restructuring expense of $3. These results also included first year pretax acquisition accounting charges related to inventory and deferred revenue of $39 and $11, respectively, which are reported in Corporate and other. See Note 18.

On April 28, 2017, the Company completed the acquisition of Pentair's valves & controls business for $2.96 billion, net of cash acquired of $207, 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 recognized goodwill of $1.5 billion (none of which is expected to be tax deductible), and other identifiable intangible assets of $1.1 billion, primarily customer relationships and intellectual property with a weighted-average life of approximately 14 years. 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.

The purchase price of the valves & controls business was allocated to assets and liabilities as follows.

Accounts receivable		$	349
Inventory		516
Property, plant and equipment		339
Goodwill		1,476
Intangibles		1,076
Other assets		282
Total assets		4,038
Accounts payable		119
Other current liabilities		306
Deferred taxes and other liabilities		671
Cash paid, net of cash acquired		$	2,942

Results of operations for 2017 included sales of $600 and a net loss of $97, $0.15 per share, including restructuring expense of $25 and intangibles amortization of $29. These results also included first year pretax acquisition accounting charges related to inventory of $74 and backlog of $19, or a total of $93 ($65 after-tax, $0.10 per share), which are reported in Corporate and other in 2017. See Note 18.

On October 2, 2017, the Company sold its residential storage business for $200 in cash, and recognized a small pretax gain and an after-tax loss of $24 ($0.04 per share) in the first quarter of 2018 due to income taxes resulting from nondeductible goodwill. The Company realized $150 in after-tax cash proceeds from the sale. This business, with sales of $298 and pretax earnings of $15 in 2017, is a leader in home organization and storage systems, and was reported within the Tools & Home Products segment. Assets and liabilities for this business were classified as held-for-sale in the consolidated balance sheet at September 30, 2017 as follows: current assets, $73; other assets, $176; and accrued expenses and other liabilities, $61.

The Company acquired six businesses in 2016, four in Automation Solutions 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 nine years.

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.

Pro Forma Financial Information (Unaudited)

The following pro forma consolidated condensed financial results of operations are presented as if the 2018 acquisitions occurred on October 1, 2016 and the acquisition of the valves & controls business occurred on October 1, 2015. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisitions occurred as of that time.

		2017				2018
Net sales		$	17,148			18,186
Net earnings from continuing operations common stockholders		$	1,638			2,269
Diluted earnings per share from continuing operations		$	2.53			3.56

The 2018 pro forma results exclude acquisition costs and first year acquisition accounting charges related to inventory, backlog and deferred revenue of $102. Of these charges, $73 related to businesses acquired in 2018 and $29 related to the valves & controls acquisition. The 2017 pro forma results include the charges related to the 2018 acquisitions. The 2017 pro forma results exclude first year acquisition accounting charges related to the valves & controls business of $93 and acquisition costs of $52.

(4) DISCONTINUED OPERATIONS

In 2017, the Company completed the previously announced strategic actions to streamline its portfolio and drive growth in its core businesses. On November 30, 2016, the Company completed the sale of its network power systems business for $4.0 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 within discontinued operations and the assets and liabilities were reflected as held-for-sale for periods presented until disposal.

The financial results of the network power systems business and power generation, motors and drives business reported as discontinued operations for the years ending September 30, 2017 and 2016, were as follows:

		Network Power Systems							Power Generation, Motors and Drives						Total
		2016				2017			2016			2017			2016			2017
Net sales		$	4,378			630			1,368			407			5,746			1,037
Cost of sales		2,708				394			1,033			307			3,741			701
SG&A		1,101				180			269			83			1,370			263
Other deductions, net		172				(515	)		149			42			321			(473	)
Earnings (Loss) before income taxes		397				571			(83	)		(25	)		314			546
Income taxes		218				577			51			94			269			671
Earnings (Loss), net of tax		$	179			(6	)		(134	)		(119	)		45			(125	)

In 2017, the net loss from discontinued operations of $125, $0.19 per share, included an after-tax gain on the divestiture of the network power systems business of $125 ($519 pretax), a $173 after-tax loss ($36 pretax loss) on the divestiture of the power generation, motors and drives business, income tax expense of $109 for repatriation of sales proceeds, and lower expense of $32 primarily due to ceasing depreciation and amortization for the discontinued businesses held-for-sale.

Discontinued operations income of $45, $0.07 per share, in 2016 included earnings from operations of $344 and costs to execute the portfolio repositioning of $299. These costs are comprised of income tax expense of $143 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. In addition, net earnings for 2016 included a loss of $103 to write down the power generation, motors and drives business 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.

Net cash from operating activities and from investing activities for the network power systems business and the power generation, motors and drives business for the years ending September 30, 2017 and 2016, were as follows:

		Network Power Systems							Power Generation, Motors and Drives						Total
		2016				2017			2016			2017			2016			2017
Cash from operating activities		$	343			(615	)		39			(163	)		382			(778	)
Cash from investing activities		$	(33	)		3,952			(44	)		1,095			(77	)		5,047

Operating cash flow used by discontinued operations was $778 for 2017, which primarily included payments of approximately $700 for income taxes on completion of the divestitures and repatriation of cash, cash used by operations and other costs. Operating cash flow from discontinued operations in 2016 was net of payments of $179 for separation costs.

(5) OTHER DEDUCTIONS, NET

Other deductions, net are summarized as follows:
	2016				2017			2018
Amortization of intangibles (intellectual property and customer relationships)	$	84			136			211
Restructuring costs	96				78			65
Other	114				72			100
Total	$	294			286			376

The increase in amortization for 2018 is due to acquisitions. Other, which is composed of several items, including acquisition/divestiture costs, foreign currency transaction gains and losses, bad debt expense, litigation and other items, increased in 2018 primarily due to higher acquisition/divestiture costs of $18. The decrease in 2017 is primarily due to favorable foreign currency transactions comparisons of $78 (unfavorable in 2016), partially offset by higher acquisition/divestiture costs of $24 and the comparative impact of a $21 gain from payments received related to dumping duties in 2016.

(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 $65, $78 and $96, respectively, for 2018, 2017 and 2016. The 2018 and 2017 restructuring expense included $19 and $25 related to acquisitions, respectively.

Restructuring costs by business segment follows:

	2016				2017			2018
Automation Solutions	$	80			63			41
Climate Technologies	5				10			20
Tools & Home Products	2				2			3
Commercial & Residential Solutions	7				12			23
Corporate	9				3			1
Total	$	96			78			65

Costs incurred in 2018 and 2017 primarily related to the deployment of resources to better serve local markets and higher growth areas, and the integration of acquisitions. In 2016 costs primarily 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 Automation Solutions. In 2018, restructuring activities included actions to exit six production or office facilities worldwide and eliminate approximately 1,200 positions. Expenses incurred in 2017 and 2016 included actions to exit 10 and 19 facilities, and eliminate approximately 1,200 and 1,900 positions, respectively.

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

	2017				Expense					Utilized/Paid					2018
Severance and benefits	$	60				43					57				46
Lease and other contract terminations	4					3					4				3
Asset write-downs	—					4					4				—
Vacant facility and other shutdown costs	1					6					4				3
Start-up and moving costs	—					9					9				—
Total	$	65				65					78				52

	2016				Expense					Utilized/Paid					2017
Severance and benefits	$	44				49					33				60
Lease and other contract terminations	5					4					5				4
Asset write-downs	—					7					7				—
Vacant facility and other shutdown costs	3					5					7				1
Start-up and moving costs	2					13					15				—
Total	$	54				78					67				65

(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.

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

	Automation Solutions				Climate Technologies			Tools & Home Products			Commercial & Residential Solutions
					Total
Balance, September 30, 2016	$	3,160			553			196			749			3,909
Acquisitions	1,486				—			—			—			1,486
Divestitures	0				—			(142	)		(142	)		(142	)
Foreign currency translation and other	58				2			3			5			63
Balance, September 30, 2017	4,704				555			57			612			5,316
Acquisitions	696				118			374			492			1,188
Foreign currency translation and other	(45		)		(3	)		(1	)		(4	)		(49	)
Balance, September 30, 2018	$	5,355			670			430			1,100			6,455

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

	Customer Relationships							Intellectual Property						Capitalized Software						Total
	2017				2018			2017			2018			2017			2018			2017			2018
Gross carrying amount	$	1,392			1,968			1,012			1,469			1,137			1,230			3,541			4,667
Less: Accumulated amortization	361				451			435			544			855			921			1,651			1,916
Net carrying amount	$	1,031			1,517			577			925			282			309			1,890			2,751

Intangible asset amortization expense for the major classes included above for 2018, 2017 and 2016 was $314, $222 and $177, respectively. Based on intangible asset balances as of September 30, 2018, amortization expense is expected to approximate $338 in 2019, $308 in 2020, $280 in 2021, $235 in 2022 and $222 in 2023.

The increase in goodwill and intangibles is primarily due to acquisitions. See Note 3.

(8) FINANCIAL INSTRUMENTS

Hedging Activities

As of September 30, 2018, the notional amount of foreign currency hedge positions was approximately $1.9 billion, while commodity hedge contracts totaled approximately $140 (primarily 52 million pounds 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, 2018 are expected to be recognized over the next 12 months as the underlying forecasted transactions occur. Gains and losses on foreign currency derivatives reported in other deductions, net reflect hedges of balance sheet exposures that do not receive deferral accounting.

Amounts included in earnings and other comprehensive income follow:

			Gain (Loss) to Earnings										Gain (Loss) to OCI
			2016				2017			2018			2016			2017			2018
	Location
Commodity	Cost of sales		$	(35	)		10			13			(9	)		25			(7	)
Foreign currency	Sales, cost of sales		(41		)		(15	)		2			(38	)		30			9
Foreign currency	Other deductions, net		(27		)		(39	)		(15	)
Total			$	(103	)		(44	)		—			(47	)		55			2

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 $4.0 billion and $4.4 billion, respectively, as of September 30, 2018 and 2017, which exceeded the carrying value by $135 and $321, respectively. As of September 30, 2018, 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:

		2017									2018
		Assets						Liabilities			Assets			Liabilities
Foreign currency			$	26				18			35			11
Commodity			$	12				—			1			10

(9) SHORT-TERM BORROWINGS AND LINES OF CREDIT

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

		2017				2018
Current maturities of long-term debt		$	270			688
Commercial paper		592				935
Total		$	862			1,623
Interest rate for weighted-average short-term borrowings at year end		1.1%				2.1%

In May 2018, the Company entered into a $3.5 billion five-year revolving backup credit facility with various banks, which replaced the April 2014 $3.5 billion facility. The credit facility is maintained to support general corporate purposes, including commercial paper borrowings. The Company has not incurred any borrowings under this or previous facilities. The credit facility contains no financial covenants and is not subject to termination based on a change of credit rating or material adverse changes. The facility is unsecured and may be accessed under various interest rate and currency denomination alternatives at the Company’s option. Fees to maintain the facility are immaterial.

(10) LONG-TERM DEBT

The details of long-term debt follow:

	2017				2018
5.375% notes due October 2017	$	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	64				75
Long-term debt	4,064				3,825
Less: Current maturities	270				688
Total, net	$	3,794			3,137

Long-term debt maturing during each of the four years after 2019 is $512, $319, $500 and $501, respectively. Total interest paid on all debt was approximately $193, $192 and $209 in 2018, 2017 and 2016, respectively. During the year, the Company repaid $250 of 5.375% notes that matured in October 2017. In 2017, the Company repaid $250 of 5.125% notes that matured in December 2016.

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
	2016				2017			2018			2016			2017			2018
Defined benefit plans:
Service cost (benefits earned during the period)	$	59			60			52			26			19			24
Interest cost	148				134			141			39			30			39
Expected return on plan assets	(296		)		(290	)		(283	)		(52	)		(56	)		(67	)
Net amortization and other	166				211			129			17			22			14
Net periodic pension expense	77				115			39			30			15			10
Defined contribution plans	104				96			132			56			47			52
Total retirement plans expense	$	181			211			171			86			62			62

The decrease in net periodic pension expense in 2018 is primarily attributable to lower amortization expense compared to the prior year. Net periodic pension expense includes $3 and $12 and defined contribution expense includes $6 and $34, for 2017 and 2016, 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 is 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 for all years presented. 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
	2017				2018			2017			2018
Projected benefit obligation, beginning	$	4,696			4,369			1,320			1,489
Service cost	60				52			19			24
Interest cost	134				141			30			39
Actuarial (gain) loss	(144		)		(262	)		(83	)		(51	)
Benefits paid	(201		)		(205	)		(29	)		(36	)
Settlements	(125		)		(152	)		(25	)		(49	)
Acquisitions (Divestitures), net	(55		)		13			163			54
Foreign currency translation and other	4				1			94			(28	)
Projected benefit obligation, ending	$	4,369			3,957			1,489			1,442
Fair value of plan assets, beginning	$	4,110			4,292			909			1,236
Actual return on plan assets	516				265			61			69
Employer contributions	20				20			25			41
Benefits paid	(201		)		(205	)		(29	)		(36	)
Settlements	(125		)		(152	)		(25	)		(49	)
Acquisitions (Divestitures), net	(30		)		12			232			10
Foreign currency translation and other	2				1			63			(28	)
Fair value of plan assets, ending	$	4,292			4,233			1,236			1,243
Net amount recognized in the balance sheet	$	(77	)		276			(253	)		(199	)
Location of net amount recognized in the balance sheet:
Noncurrent asset	$	154			465			43			126
Current liability	(11		)		(10	)		(11	)		(13	)
Noncurrent liability	(220		)		(179	)		(285	)		(312	)
Net amount recognized in the balance sheet	$	(77	)		276			(253	)		(199	)
Pretax accumulated other comprehensive loss	$	(923	)		(548	)		(238	)		(164	)

Approximately $85 of the $712 of pretax losses deferred in accumulated other comprehensive income (loss) at September 30, 2018 will be amortized to expense in 2019. As of September 30, 2018, U.S. pension plans were

overfunded by $276 in total, including unfunded plans totaling $182. The non-U.S. plans were underfunded by $199, including unfunded plans totaling $270.

As of the September 30, 2018 and 2017 measurement dates, the plans' total accumulated benefit obligation was $5,154 and $5,607, respectively. 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 $585, $508 and $87, respectively, for 2018, and $1,182, $1,088 and $663, respectively, for 2017.

Future benefit payments by U.S. plans are estimated to be $214 in 2019, $221 in 2020, $228 in 2021, $234 in 2022, $239 in 2023 and $1,252 in total over the five years 2024 through 2028. Based on foreign currency exchange rates as of September 30, 2018, future benefit payments by non-U.S. plans are estimated to be $83 in both 2019 and 2020, $88 in 2021, $95 in 2022, $99 in 2023 and $569 in total over the five years 2024 through 2028. The Company expects to contribute approximately $60 to its retirement plans in 2019.

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

	U.S. Plans									Non-U.S. Plans
	2016			2017			2018			2016			2017			2018
Net pension expense
Discount rate used to determine service cost	4.60	%		3.75	%		3.95	%		3.3	%		2.3	%		2.6	%
Discount rate used to determine interest cost	3.50	%		2.90	%		3.25	%		3.3	%		2.3	%		2.6	%
Expected return on plan assets	7.50	%		7.25	%		7.00	%		6.4	%		6.2	%		5.7	%
Rate of compensation increase	3.25	%		3.25	%		3.25	%		3.4	%		3.2	%		3.4	%
Benefit obligations
Discount rate	3.50	%		3.76	%		4.26	%		2.3	%		2.6	%		2.7	%
Rate of compensation increase	3.25	%		3.25	%		3.25	%		3.2	%		3.4	%		3.5	%

The discount rate for the U.S. retirement plans was 4.26 percent as of September 30, 2018. An actuarially developed, company-specific yield curve is used to determine the discount rate. To determine the service and interest cost components of pension expense for its U.S. retirement plans, the Company applies the specific spot rates along the yield curve, rather than the single weighted-average rate, to the projected cash flows to provide more precise measurement of these costs. 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, 2018 and 2017, and weighted-average target allocations follow:

	U.S. Plans								Non-U.S. Plans
	2017			2018			Target		2017			2018			Target
Equity securities	67	%		62	%		60-70%		52	%		52	%		45-55%
Debt securities	28			34			25-35		38			38			35-45
Other	5			4			3-10		10			10			5-15
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 equity strategy is to minimize concentrations of risk by investing primarily in a mix of companies that are diversified across geographies, market capitalization, style, sectors and industries worldwide. 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. Investments valued based on the net asset value (NAV) of fund units held, as derived from the fair value of the underlying assets, are excluded from the fair value hierarchy.

	Level 1				Level 2			Level 3			Measured at NAV			Total			%
2018
U.S. equities	$	968			5			350			320			1,643			30	%
International equities	595				21			—			745			1,361			25	%
Emerging market equities	—				—			—			243			243			5	%
Corporate bonds	—				696			—			423			1,119			20	%
Government bonds	0				350			—			438			788			14	%
High-yield bonds	—				—			—			10			10			—	%
Other	107				6			121			78			312			6	%
Total	$	1,670			1,078			471			2,257			5,476			100	%
2017
U.S. equities	$	1,059			5			338			357			1,759			32	%
International equities	724				6			—			739			1,469			27	%
Emerging market equities	—				—			—			276			276			5	%
Corporate bonds	—				514			—			283			797			14	%
Government bonds	3				369			—			399			771			14	%
High-yield bonds	—				—			—			132			132			2	%
Other	132				6			113			73			324			6	%
Total	$	1,918			900			451			2,259			5,528			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. 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. 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 asset funds are Level 2, and U.S. life insurance contracts and non-U.S. general fund investments and insurance arrangements are Level 3. Investments measured at net asset value are primarily nonexchange-traded commingled or collective funds where the underlying securities have observable prices available from active markets.

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

	2017				2018
Level 3, beginning	$	405			451
Gains (Losses) on assets held	49				1
Gains (Losses) on assets sold	(28		)		37
Purchases, sales and settlements, net	25				(18	)
Level 3, ending	$	451			471

(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:

	2016				2017			2018
Service cost	$	1			1			1
Interest cost	8				6			6
Net amortization	(21		)		(19	)		(19	)
Net postretirement expense	$	(12	)		(12	)		(12	)

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

	2017				2018
Benefit obligation, beginning	$	206			174
Service cost	1				1
Interest cost	6				6
Actuarial (gain) loss	(24		)		(19	)
Benefits paid	(13		)		(13	)
Divestitures	(2		)		—
Benefit obligation, ending (recognized in balance sheet)	$	174			149

As of September 30, 2018 there were $141 of deferred actuarial gains in accumulated other comprehensive income, of which approximately $18 will be amortized into earnings in 2019. The discount rates used to measure the benefit obligation as of September 30, 2018, 2017 and 2016 were 4.08 percent, 3.45 percent and 3.10 percent, respectively. The health care cost trend rate used for 2019 is assumed to be 7.2 percent initially and was assumed to be 7.5 percent in 2018, declining to 5.0 percent over the subsequent 10 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 $13 per year for 2019 through 2023, and $54 in total over the five years 2024 through 2028.

(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 (including asbestos) 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, 2018, 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:

	2016				2017			2018
United States	$	1,312			1,350			1,652
Non-U.S.	1,004				985			1,015
Total pretax earnings	$	2,316			2,335			2,667

The principal components of income tax expense follow:

	2016				2017			2018
Current:
U.S. federal	$	394			351			341
State and local	11				40			52
Non-U.S.	305				311			300
Deferred:
U.S. federal	2				7			(224	)
State and local	4				4			(11	)
Non-U.S.	(19		)		(53	)		(15	)
Income tax expense	$	697			660			443

Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow. For fiscal 2018, the U.S. federal statutory rate was 35 percent for one quarter and 21 percent for three quarters.

	2016			2017			2018
U.S. federal statutory rate	35.0	%		35.0	%		24.5	%
State and local taxes, net of U.S. federal tax benefit	0.5			1.2			1.2
Non-U.S. rate differential	(2.9	)		(3.6	)		0.8
Non-U.S. tax holidays	(1.1	)		(1.0	)		(0.8	)
U.S. manufacturing deduction	(1.8	)		(1.7	)		(1.1	)
Gain on divestiture	—			—			1.0
Subsidiary restructuring	—			(1.8	)		(2.0	)
Transition impact of Tax Act	—			—			(7.1	)
Other	0.4			0.2			0.1
Effective income tax rate	30.1	%		28.3	%		16.6	%

On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the “Act”), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Act includes a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent in calendar year 2018 along with the elimination of certain deductions and credits, and a one-time “deemed repatriation” of accumulated foreign earnings. During 2018, the Company recognized a net tax benefit of $189 ($0.30 per share) due to impacts of the Act, consisting of a $94 benefit on revaluation of net deferred income tax liabilities to the lower tax rate, $35 of expense for the tax on deemed repatriation of accumulated foreign earnings and withholding taxes, and the reversal of $130 accrued in previous periods for the planned repatriation of non-U.S. cash.

On August 1, 2018, the U.S. Treasury and Internal Revenue Service released proposed regulations relating to the one-time tax on deemed repatriation of accumulated foreign earnings. The proposed regulations were subject to a 60-day comment period and final regulations are expected to be issued after consideration of comments received. The Company is currently evaluating the impact of the proposed regulations and anticipates finalizing its provisional estimates after fully evaluating the final regulations.

The changes made by the Act are broad and complex. As such, the final one-time deemed repatriation tax may differ materially from these provisional amounts due to additional regulatory guidance expected to be issued, changes in interpretations, or any legislative actions to address questions arising from the Act, as well as further evaluation of the Company’s actions, assumptions and interpretations.

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

Following are changes in unrecognized tax benefits before considering recoverability of any cross-jurisdictional tax credits (U.S. 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.

	2017				2018
Unrecognized tax benefits, beginning	$	86			132
Additions for current year tax positions	54				13
Additions for prior year tax positions	4				8
Reductions for prior year tax positions	(6		)		(8	)
Acquisitions and divestitures	9				21
Reductions for settlements with tax authorities	(4		)		(3	)
Reductions for expiration of statutes of limitations	(11		)		(5	)
Unrecognized tax benefits, ending	$	132			158

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 $117, 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, $(1) and $2 in 2018, 2017 and 2016, respectively. As of September 30, 2018 and 2017, total accrued interest and penalties were $23 and $16, respectively.

The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed through 2013. 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:

	2017				2018
Deferred tax assets:
Net operating losses and tax credits	$	444			396
Accrued liabilities	319				238
Postretirement and postemployment benefits	70				37
Employee compensation and benefits	173				119
Pensions	72				—
Other	196				151
Total	$	1,274			941
Valuation allowances	$	(309	)		(341	)
Deferred tax liabilities:
Intangibles	$	(753	)		(693	)
Pensions	—				(43	)
Property, plant and equipment	(265		)		(187	)
Undistributed non-U.S. earnings	(249		)		(52	)
Other	(37		)		(35	)
Total	$	(1,304	)		(1,010	)
Net deferred income tax liability	$	(339	)		(410	)

As of September 30, 2017 and 2018, all deferred tax assets and liabilities were presented as noncurrent. Total income taxes paid were approximately $680, $1,420 and $950 in 2018, 2017 and 2016, respectively. More than half of the $396 of net operating losses and tax credits expire over varying periods within the next 20 years, while the remainder can be carried forward indefinitely.

(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, 2018, 11.6 million options were available for grant under the plans.

Changes in shares subject to options during the year ended September 30, 2018 follow (shares in thousands):

	Weighted- Average Exercise Price Per Share						Shares			Total Intrinsic Value of Shares						Average Remaining Life (Years)
Beginning of year		$	55.49				10,759
Options granted		$	66.49				21
Options exercised		$	53.20				(2,869	)
Options canceled		$	54.95				(110	)
End of year		$	56.37				7,801				$	160					5.1
Exercisable at end of year		$	57.30				6,680				$	131					4.8

The weighted-average grant date fair value per option was $12.13, $8.36 and $9.02 in 2018, 2017 and 2016, respectively. Cash received for option exercises was $143 in 2018, $148 in 2017 and $31 in 2016. The total intrinsic value of options exercised in 2018, 2017 and 2016 was $53, $36 and $9, while the tax benefit from tax deductions related to option exercises was $7, $2 and $2, 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 2018, 2017 and 2016 are, respectively: risk-free interest rate, based on U.S. Treasury yields, 2.4 percent, 1.7 percent and 1.9 percent; dividend yield, 2.9 percent, 3.6 percent and 3.8 percent; and expected volatility, based on historical volatility, 23 percent, 24 percent and 27 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, 2,549,083 shares were distributed in early 2017 as follows: 1,393,715 issued as shares, 944,002 withheld for income taxes, and the value of 211,366 paid in cash. An additional 1,691,986 shares were distributed at the end of 2017 to employees who provided one additional year of service as follows: 1,070,264 issued as shares, 616,734 withheld for income taxes, and the value of 4,988 paid in cash. There were 11,266 shares canceled and not distributed.

As of September 30, 2018, 1,874,750 shares awarded primarily in 2016 were outstanding, contingent on the Company achieving its performance objectives through 2018. The objectives for these shares were met at the 97 percent level at the end of 2018 and 1,818,508 shares will be distributed in early 2019. Additionally, the rights to receive a maximum of 2,261,700 and 2,375,313 common shares were awarded in 2018 and 2017, respectively, under the new performance shares program, and are outstanding and contingent upon the Company achieving its performance objectives through 2020 and 2019, respectively.

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 2018, 310,000 shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently, 167,837 shares were issued while 142,163 shares were withheld for income taxes in accordance with minimum withholding requirements. As of September 30, 2018, there were 1,276,200 shares of unvested restricted stock outstanding.

The total fair value of shares distributed under incentive shares plans was $20, $245 and $11, respectively, in 2018, 2017 and 2016, of which $9, $101 and $4 was paid in cash, primarily for tax withholding. As of September 30, 2018, 10.3 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, 2018 follow (shares in thousands; assumes 100 percent payout of unvested awards):

	Shares			Average Grant Date Fair Value Per Share
Beginning of year	4,999				$	50.33
Granted	2,295				$	63.79
Earned/vested	(310	)			$	51.27
Canceled	(86	)			$	56.53
End of year	6,898				$	54.69

Total compensation expense for stock options and incentive shares was $216, $115 and $159 for 2018, 2017 and 2016, respectively, of which $5 and $14 was included in discontinued operations for 2017 and 2016, respectively. The increase in expense for 2018 reflects an increase in the Company's stock price and progress toward achieving its performance objectives. The decrease in expense for 2017 reflects the impact of changes in the stock price. Income tax benefits recognized in the income statement for these compensation arrangements during 2018, 2017 and 2016 were $42, $33 and $45, respectively. As of September 30, 2018, total unrecognized compensation expense related to unvested shares awarded under these plans was $182, which is expected to be recognized over a weighted-average period of 1.1 years.

In addition to the employee stock option and incentive shares plans, in 2018 the Company awarded 12,228 shares of restricted stock and 2,038 restricted stock units under the restricted stock plan for non-management directors. As of September 30, 2018, 159,965 shares were available for issuance under this plan.

(16) COMMON AND PREFERRED STOCK

At September 30, 2018, 37.0 million shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During 2018, 15.1 million common shares were purchased and 2.6 million treasury shares were reissued. In 2017, 6.6 million common shares were purchased and 5.5 million treasury shares were reissued.

At September 30, 2018 and 2017, 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) is shown below:
Foreign currency translation	2016				2017			2018
Beginning balance	$	(622	)		(812	)		(369	)
Other comprehensive income (loss)	(190		)		58			(214	)
Reclassified to gain/loss on sale of businesses	—				385			(17	)
Ending balance	(812		)		(369	)		(600	)
Pension and postretirement
Beginning balance	(952		)		(1,162	)		(662	)
Actuarial gains (losses) deferred during the period	(310		)		315			250
Amortization of deferred actuarial losses into earnings	100				135			94
Reclassified to gain/loss on sale of businesses	—				50			—
Adoption of accounting standard update	—				—			(102	)
Ending balance	(1,162		)		(662	)		(420	)
Cash flow hedges
Beginning balance	(43		)		(25	)		12
Gains (Losses) deferred during the period	(30		)		34			2
Reclassifications of realized (gains) losses to sales and cost of sales	48				3			(11	)
Adoption of accounting standard update	—				—			2
Ending balance	(25		)		12			5
Accumulated other comprehensive income (loss)	$	(1,999	)		(1,019	)		(1,015	)

Activity above is shown net of income taxes for 2018, 2017 and 2016, respectively, as follows: deferral of pension and postretirement actuarial gains (losses): $(76), $(170) and $159; amortization of pension and postretirement deferred actuarial losses: $(29), $(75) and $(59); deferral of cash flow hedging gains (losses): $0, $(21) and $17; reclassification of realized cash flow hedging (gains) losses: $4, $(2) and $(28).

(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.

In connection with the strategic portfolio repositioning actions undertaken to transform the Company into a more focused enterprise, the Company realigned its businesses. Starting 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. Fiscal 2016 results were reclassified in the prior year to conform to the current presentation.

The Automation Solutions segment enables process, hybrid and discrete manufacturers to maximize production, protect personnel and the environment, reduce project costs, and optimize their energy efficiency and operating costs through a broad offering of integrated solutions and products, including measurement and analytical instrumentation, industrial valves and equipment, and process control systems. Significant markets served include oil and gas, refining, chemicals and power generation, as well as pharmaceuticals, food and beverage, automotive, pulp and paper, metals and mining, and municipal water supplies. The segment's major product offerings are described below.

•	Measurement & Analytical Instrumentation products measure the physical properties of liquids or gases in a process stream and communicate this information to a process control system or other software applications, and analyze the chemical composition of process fluids and emissions to enhance quality and efficiency, as well as environmental compliance.

•

Valves, Actuators & Regulators consists of control, isolation and pressure relief valves which respond to commands from a control system to continuously and precisely modulate the flow of process fluids, smart actuation and control technologies, pressure management products, and industrial and residential regulators that reduce the pressure of fluids moving from high-pressure supply lines into lower pressure systems.

•	Industrial Solutions provides fluid control and pneumatic mechanisms, electrical distribution equipment, and materials joining and precision cleaning products which are used in a variety of manufacturing operations to provide integrated solutions to customers.

•	Process Control Systems & Solutions provides a digital ecosystem that controls plant processes by communicating with and adjusting the "intelligent" plant devices described above to provide precision measurement, control, monitoring, asset optimization, and plant safety and reliability for plants that produce power, or process fluids or other items.

The Commercial & Residential Solutions business consists of the Climate Technologies and Tools & Home Products segments. This business provides products and solutions that promote energy efficiency, enhance household and commercial comfort, and protect food quality and sustainability through heating, air conditioning and refrigeration technology, as well as a broad range of tools and appliance solutions.

The Climate Technologies segment provides products, services and solutions for all areas of the climate control industry, including residential heating and cooling, commercial air conditioning, commercial and industrial refrigeration, and cold chain management. Products include compressors, temperature sensors and controls, thermostats, flow controls, and stationary and mobile remote monitoring technologies and services that enable homeowners and businesses to better manage their heating, air conditioning and refrigeration systems for improved control and comfort, and lower energy costs.

The Tools & Home Products segment offers tools for professionals and homeowners and appliance solutions. Products include professional pipe-working tools, electrical and utility tools, residential and commercial food waste disposers, and wet-dry vacuums.

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 including the stability of governments and business conditions in foreign countries which could result in adverse changes in exchange rates, changes in regulations or disruption of operations.

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 corporate operations, stock compensation expense, acquisition related costs and other items. 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
	2016				2017			2018			2016				2017			2018			2016				2017			2018
Automation Solutions	$	8,977			9,418			11,441			$	1,456			1,522			1,886			$	8,759			12,581			13,720
Climate Technologies	3,944				4,212			4,454			902				975			972			2,489				2,547			2,936
Tools & Home Products	1,611				1,645			1,528			384				383			380			809				830			1,560
Commercial & Residential Solutions	5,555				5,857			5,982			1,286				1,358			1,352			3,298				3,377			4,496
Differences in accounting methods											189				148			218
Corporate and other (a)											(427		)		(528	)		(630	)		9,675				3,631			2,174
Eliminations/Interest	(10		)		(11	)		(15	)		(188		)		(165	)		(159	)
Total	$	14,522			15,264			17,408			$	2,316			2,335			2,667			$	21,732			19,589			20,390

(a) Corporate and other in 2018 includes higher stock compensation expense of $106 and first year pretax acquisition accounting charges of $79 ($58 after-tax, $0.09 per share). The increase in 2017 compared to 2016 was due to valves & controls first year pretax acquisition accounting charges related to inventory and backlog of $93 ($65 after-tax, $0.10 per share). See Note 3. Assets held-for-sale of $6,030 are included in Corporate and other for 2016. See Note 4.

Automation Solutions sales by major product offering are summarized below:

		2016				2017			2018
Measurement & Analytical Instrumentation		$	3,137			3,070			3,604
Valves, Actuators & Regulators		2,137				2,668			3,769
Industrial Solutions		1,621				1,680			1,947
Process Control Systems & Solutions		2,082				2,000			2,121
Total		$	8,977			9,418			11,441

	Depreciation and Amortization										Capital Expenditures
	2016				2017			2018			2016				2017			2018
Automation Solutions	$	330			400			507			$	246			234			295
Climate Technologies	150				156			171			133				182			209
Tools & Home Products	44				45			44			44				45			64
Commercial & Residential Solutions	194				201			215			177				227			273
Corporate and other	44				35			36			24				15			49
Total	$	568			636			758			$	447			476			617

Geographic Information

	Sales by Destination										Property, Plant and Equipment
	2016				2017			2018			2016				2017			2018
United States and Canada	$	7,505			7,854			8,620			$	1,780			1,852			2,036
Asia	2,926				3,253			3,936			459				525			547
Europe	2,300				2,434			2,898			435				626			676
Latin America	834				767			849			203				203			198
Middle East/Africa	957				956			1,105			54				115			105
Total	$	14,522			15,264			17,408			$	2,931			3,321			3,562

Sales in the U.S. were $7,939, $7,273 and $6,940 for 2018, 2017 and 2016, respectively, while Asia includes sales in China of $1,955, $1,540 and $1,320 in those years. Assets located in the U.S. were $2,027 in 2018, $1,840 in 2017 and $1,772 in 2016.

(19) OTHER FINANCIAL DATA

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

	2016				2017			2018
Research and development expense	$	320			340			436
Depreciation expense	$	391			414			444
Rent expense	$	273			289			279

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 $204 in 2019, $146 in 2020, $97 in 2021, $66 in 2022 and $41 in 2023.

Items reported in other noncurrent assets included the following:

	2017				2018
Pension assets	$	197			591
Asbestos-related insurance receivables	$	133			124
Deferred income taxes	$	86			74

Items reported in accrued expenses included the following:

	2017				2018
Employee compensation	$	531			629
Customer advanced payments	$	505			453
Product warranty	$	120			124

Other liabilities are summarized as follows:

	2017				2018
Pension and postretirement liabilities	$	664			625
Deferred income taxes	425				484
Asbestos litigation	340				334
Other	551				656
Total	$	1,980			2,099

Other operating cash flow is comprised of the following:

	2016				2017			2018
Pension expense	$	95			127			49
Stock compensation expense	145				110			216
Transition impact of Tax Act	—				—			(189	)
Deferred income taxes and other	45				27			(22	)
Total	$	285			264			54

(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	First Quarter							Second Quarter						Third Quarter						Fourth Quarter						Full Year
	2017				2018			2017			2018			2017			2018			2017			2018			2017			2018
Net sales	$	3,216			3,816			3,574			4,248			4,039			4,456			4,435			4,888			15,264			17,408
Gross profit	$	1,365			1,621			1,557			1,825			1,678			1,949			1,804			2,065			6,404			7,460
Earnings from continuing operations common stockholders	$	364			392			376			482			407			712			496			617			1,643			2,203
Net earnings common stockholders	$	309			392			292			482			413			712			504			617			1,518			2,203
Earnings per common share from continuing operations:
Basic	$	0.56			0.61			0.58			0.76			0.63			1.13			0.77			0.98			2.54			3.48
Diluted	$	0.56			0.61			0.58			0.76			0.63			1.12			0.77			0.97			2.54			3.46
Net earnings per common share:
Basic	$	0.48			0.61			0.45			0.76			0.64			1.13			0.78			0.98			2.35			3.48
Diluted	$	0.48			0.61			0.45			0.76			0.64			1.12			0.78			0.97			2.35			3.46
Dividends per common share	$	0.48			0.485			0.48			0.485			0.48			0.485			0.48			0.485			1.92			1.94

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

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

Earnings from continuing operations and diluted earnings per share include an income tax benefit of $43 ($0.07 per share) and $150 ($0.24 per share) in the first quarter and third quarter of 2018, respectively, from the impacts of U.S. tax reform. The full-year impact for fiscal 2018 was an income tax benefit of $189 ($0.30 per share). See Note 14.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Emerson Electric Co.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Emerson Electric Co. and subsidiaries (the Company) as of September 30, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company acquired the tools and test equipment business and Aventics during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2018, the tools and test equipment business' and Aventics' internal control over financial reporting associated with total assets and revenues of 9 percent and 1 percent, respectively, included in the consolidated financial statements of the Company as of and for the year ended September 30, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the tools and test equipment business and Aventics.

Basis for Opinions

The Company’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 the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ KPMG LLP

We or our predecessor firms have served as the Company’s auditor since 1938.

St. Louis, Missouri

November 19, 2018