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)

	2017				2018			2019
Net sales	$	15,264			17,408			18,372
Costs and expenses:
Cost of sales	8,833				9,976			10,557
Selling, general and administrative expenses	3,607				4,269			4,457
Other deductions, net	324				337			325
Interest expense, net of interest income of: 2017, $36; 2018, $43; 2019, $27	165				159			174
Earnings from continuing operations before income taxes	2,335				2,667			2,859
Income taxes	660				443			531
Earnings from continuing operations	1,675				2,224			2,328
Discontinued operations, net of tax of $671	(125		)		—			—
Net earnings	1,550				2,224			2,328
Less: Noncontrolling interests in earnings of subsidiaries	32				21			22
Net earnings common stockholders	$	1,518			2,203			2,306
Earnings common stockholders:
Earnings from continuing operations	$	1,643			2,203			2,306
Discontinued operations, net of tax	(125		)		—			—
Net earnings common stockholders	$	1,518			2,203			2,306
Basic earnings per share common stockholders:
Earnings from continuing operations	$	2.54			3.48			3.74
Discontinued operations	(0.19		)		—			—
Basic earnings per common share	$	2.35			3.48			3.74
Diluted earnings per share common stockholders:
Earnings from continuing operations	$	2.54			3.46			3.71
Discontinued operations	(0.19		)		—			—
Diluted earnings per common share	$	2.35			3.46			3.71

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions)

		2017				2018			2019
Net earnings		$	1,550			2,224			2,328
Other comprehensive income (loss), net of tax:
Foreign currency translation		441				(231	)		(194	)
Pension and postretirement		500				242			(508	)
Cash flow hedges		37				(7	)		(5	)
Total other comprehensive income (loss)		978				4			(707	)
Comprehensive income		2,528				2,228			1,621
Less: Noncontrolling interests in comprehensive income of subsidiaries		30				21			22
Comprehensive income common stockholders		$	2,498			2,207			1,599

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)

	2018				2019
ASSETS
Current assets
Cash and equivalents	$	1,093			1,494
Receivables, less allowances of $113 in 2018 and $112 in 2019	3,023				2,985
Inventories	1,813				1,880
Other current assets	690				780
Total current assets	6,619				7,139
Property, plant and equipment, net	3,562				3,642
Other assets
Goodwill	6,455				6,536
Other intangible assets	2,751				2,615
Other	1,003				565
Total other assets	10,209				9,716
Total assets	$	20,390			20,497
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt	$	1,623			1,444
Accounts payable	1,943				1,874
Accrued expenses	2,598				2,658
Total current liabilities	6,164				5,976
Long-term debt	3,137				4,277
Other liabilities	2,099				1,971
Equity
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 629.2 shares in 2018; 611.0 shares in 2019	477				477
Additional paid-in-capital	348				393
Retained earnings	23,072				24,199
Accumulated other comprehensive income (loss)	(1,015		)		(1,722	)
	22,882				23,347
Less: Cost of common stock in treasury, 324.2 shares in 2018; 342.4 shares in 2019	13,935				15,114
Common stockholders’ equity	8,947				8,233
Noncontrolling interests in subsidiaries	43				40
Total equity	8,990				8,273
Total liabilities and equity	$	20,390			20,497
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)

	2017				2018			2019
Common stock	$	477			477			477
Additional paid-in-capital
Beginning balance	205				297			348
Stock plans	92				51			45
Ending balance	297				348			393
Retained earnings
Beginning balance	21,716				21,995			23,072
Net earnings common stockholders	1,518				2,203			2,306
Dividends paid (per share: 2017, $1.92; 2018, $1.94; 2019, $1.96)	(1,239		)		(1,229	)		(1,209	)
Adoption of accounting standard updates	—				103			30
Ending balance	21,995				23,072			24,199
Accumulated other comprehensive income (loss)
Beginning balance	(1,999		)		(1,019	)		(1,015	)
Foreign currency translation	443				(231	)		(194	)
Pension and postretirement	500				242			(508	)
Cash flow hedges	37				(7	)		(5	)
Ending balance	(1,019		)		(1,015	)		(1,722	)
Treasury stock
Beginning balance	(12,831		)		(13,032	)		(13,935	)
Purchases	(400		)		(1,000	)		(1,250	)
Issued under stock plans	199				97			71
Ending balance	(13,032		)		(13,935	)		(15,114	)
Common stockholders' equity	8,718				8,947			8,233
Noncontrolling interests in subsidiaries
Beginning balance	50				52			43
Net earnings	32				21			22
Other comprehensive income (loss)	(2		)		—			—
Dividends paid	(28		)		(30	)		(25	)
Ending balance	52				43			40
Total equity	$	8,770			8,990			8,273

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30 (Dollars in millions)

	2017				2018			2019
Operating activities
Net earnings	$	1,550			2,224			2,328
Loss from discontinued operations, net of tax	125				—			—
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	636				758			822
Stock compensation expense	110				216			120
Pension expense	127				49			2
Pension funding	(45		)		(61	)		(60	)
Transition impact of Tax Act	—				(189	)		—
Changes in operating working capital	160				(83	)		(150	)
Other, net	27				(22	)		(56	)
Cash from continuing operations	2,690				2,892			3,006
Cash from discontinued operations	(778		)		—			—
Cash provided by operating activities	1,912				2,892			3,006
Investing activities
Capital expenditures	(476		)		(617	)		(594	)
Purchases of businesses, net of cash and equivalents acquired	(2,990		)		(2,203	)		(469	)
Divestitures of businesses	39				201			14
Other, net	(106		)		(101	)		(125	)
Cash from continuing operations	(3,533		)		(2,720	)		(1,174	)
Cash from discontinued operations	5,047				—			—
Cash provided by (used in) investing activities	1,514				(2,720	)		(1,174	)
Financing activities
Net increase (decrease) in short-term borrowings	(1,635		)		343			(6	)
Payments of short-term borrowings greater than three months	(90		)		—			—
Proceeds from long-term debt	—				—			1,691
Payments of long-term debt	(254		)		(241	)		(656	)
Dividends paid	(1,239		)		(1,229	)		(1,209	)
Purchases of common stock	(400		)		(1,000	)		(1,250	)
Other, net	27				35			39
Cash used in financing activities	(3,591		)		(2,092	)		(1,391	)
Effect of exchange rate changes on cash and equivalents	45				(49	)		(40	)
Increase (Decrease) in cash and equivalents	(120		)		(1,969	)		401
Beginning cash and equivalents	3,182				3,062			1,093
Ending cash and equivalents	$	3,062			1,093			1,494
Changes in operating working capital
Receivables	$	(25	)		(175	)		51
Inventories	32				17			(87	)
Other current assets	(12		)		(42	)		(87	)
Accounts payable	135				115			(37	)
Accrued expenses	30				2			10
Total changes in operating working capital	$	160			(83	)		(150	)

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.

On October 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, which updated and consolidated revenue recognition guidance from multiple sources into a single, comprehensive standard to be applied for all contracts with customers. The fundamental principle of the revised standard is to recognize revenue based on the transfer of goods and services to customers at the amount the Company expects to be entitled to in exchange for those goods and services. The Company adopted the new standard using the modified retrospective approach and applied the guidance to open contracts which were not completed at the date of adoption. The cumulative effect of adoption resulted in a $30 increase to beginning retained earnings as of October 1, 2018. This increase primarily related to contracts where a portion of revenue for delivered goods or services was previously deferred due to contingent payment terms. The adoption of ASC 606 did not materially impact the Company's consolidated financial statements as of and for the year ended September 30, 2019. Amounts reported for the years ended September 30, 2018 and 2017 continue to be reported in accordance with the Company's historic accounting under ASC 605, Revenue Recognition.

In the first quarter of fiscal 2019, the Company adopted updates to ASC 715, Compensation - Retirement Benefits, which permit only the service cost component of net periodic pension and postretirement expense to be reported with compensation costs, while all other components are required to be reported separately in other deductions. These updates were adopted retrospectively and resulted in the reclassification of $40 of income and $38 of expense in 2018 and 2017, respectively, from cost of sales and SG&A to other deductions, net. Segment earnings were not impacted by the updates to ASC 715.

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 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.

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, minus impairment, and adjusted for observable price changes in orderly transactions.

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:

		2018				2019
Finished products		$	592			578
Raw materials and work in process		1,221				1,302
Total inventories		$	1,813			1,880

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:

		2018				2019
Land		$	316			336
Buildings		2,145				2,219
Machinery and equipment		5,470				5,645
Construction in progress		439				471
Property, plant and equipment, at cost		8,370				8,671
Less: Accumulated depreciation		4,808				5,029
Property, plant and equipment, net		$	3,562			3,642

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, as well as earnings multiples or other techniques as warranted. Fair values are subject to changes in underlying economic conditions.

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 are largely offered to provide assurance that the product will function as intended and generally extend for a period of one to two years from the date of sale or installation. Provisions for warranty expense are estimated at the time of sale based on historical experience and adjusted quarterly for any known issues that may arise. Product warranty expense is less than one percent of sales.

Revenue Recognition

Emerson is a global manufacturer that combines technology and engineering to provide innovative solutions to its customers, largely in the form of tangible products. The Company evaluates its contracts with customers to identify the promised goods or services and recognizes revenue for the identified performance obligations at the amount the Company expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Revenue is recognized when, or as, performance obligations are satisfied and control has transferred to the customer, typically when products are shipped or delivered, title and risk of loss pass to the customer, and the Company has a present right to payment. The vast majority of the Company's revenues relate to a broad offering of manufactured products which are recognized at the point in time when control transfers, generally in accordance with shipping terms. A portion of the Company's revenues relate to the sale of software and post-contract customer support, parts and labor for repairs, and engineering services. In limited circumstances, contracts include multiple performance obligations, where revenue is recognized separately for each good or service, as well as contracts where revenue is recognized over time as control transfers to the customer.

Revenue is recognized over time for approximately 5 percent of the Company's revenues. These contracts largely relate to projects in the Process Control Systems & Solutions product offering within the Automation Solutions segment where revenue is recognized using the percentage-of-completion method to reflect the transfer of control over time, while a small amount is attributable to long-term maintenance and service contracts where revenue is

typically recognized on a straight-line basis as the services are provided. Approximately 5 percent of revenues relate to sales arrangements with multiple performance obligations, principally in the Automation Solutions segment. Tangible products represent a large majority of the delivered items in contracts with multiple performance obligations or where revenue is recognized over time, while a smaller portion is attributable to installation, service and maintenance.

For revenues recognized over time, the Company typically uses an input method to determine progress and recognize revenue, based on costs incurred. The Company believes costs incurred closely correspond with its performance under the contract and the transfer of control to the customer.

In sales arrangements that involve multiple performance obligations, revenue is allocated based on the relative standalone selling price for each performance obligation. Observable selling prices from actual transactions are used whenever possible. In other instances, the Company determines the standalone selling price based on third-party pricing or management's best estimate. Generally, contract duration is short-term, and cancellation, termination or refund provisions apply only in the event of contract breach and are rarely invoked.

Payment terms vary but are generally short-term in nature. The Company's long-term contracts, where revenue is generally recognized over time, are typically billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. The timing of revenue recognition and billings under these contracts results in either unbilled receivables (contract assets) when revenue recognized exceeds billings, or customer advances (contract liabilities) when billings exceed revenue recognized. Unbilled receivables are reclassified to accounts receivable when an unconditional right to consideration exists, typically when a milestone in the contract is achieved. The Company does not evaluate whether the transaction price includes a significant financing component for contracts where the time between cash collection and performance is less than one year.

Certain arrangements with customers include variable consideration, typically in the form of rebates, cash discounts or penalties. In limited circumstances, the Company sells products with a general right of return. In most instances, returns are limited to product quality issues. The Company records a reduction to revenue at the time of sale to reflect the ultimate amount of consideration it expects to receive. The Company's estimates are updated quarterly based on historical experience, trend analysis, and expected market conditions. Variable consideration is typically not constrained at the time revenue is recognized. See Notes 2 and 18 for additional information about the Company's revenues.

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. Non-U.S. dollar obligations are utilized to reduce foreign currency risk associated with the Company's net investments in foreign operations. 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, except for the Company's net investment hedges.

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 hedge 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 net investments in foreign operations are recognized in accumulated other comprehensive income (loss) and reclassified to income in the same period when a foreign operation is sold and the gain or loss related to the sale is included in income. 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 hedge 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 $8. 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 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 $4.0 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2019, as these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Recognition of 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) REVENUE RECOGNITION

The following table summarizes the balances of the Company's unbilled receivables (contract assets), which are reported in Other current assets, and its customer advances (contract liabilities), which are reported in Accrued expenses.

		2018				2019
Unbilled receivables (contract assets)		$	321			456
Customer advances (contract liabilities)		(510		)		(519	)
Net contract liabilities		$	(189	)		(63	)

The majority of the Company's contract balances relate to arrangements where revenue is recognized over time and payments from customers are made according to a contractual billing schedule. The decrease in net contract liabilities was due to revenue recognized for performance completed during the period which exceeded customer billings. Revenue recognized for 2019 included approximately $400 that was included in the beginning contract liability balance. Other factors that impacted the change in net contract liabilities were immaterial.

Revenue recognized for 2019 for performance obligations that were fully satisfied in previous periods, including cumulative catchup adjustments on the Company's long-term contracts, was not material. Capitalized amounts related to incremental costs to obtain customer contracts and costs to fulfill contracts are immaterial.

As of September 30, 2019, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $5.1 billion. The Company expects to recognize approximately 85 percent of its remaining performance obligations as revenue over the next 12 months, with the remainder substantially over the subsequent two years thereafter.

See Note 18 for additional information about the Company's revenues.

(3) 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 share in 2019 and 2018 as the effect would have been antidilutive, while 4.5 million shares of common stock were excluded in 2017. 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):

	2017			2018			2019
Basic shares outstanding	642.1			632.0			616.2
Dilutive shares	1.3			3.3			4.4
Diluted shares outstanding	643.4			635.3			620.6

(4) ACQUISITIONS AND DIVESTITURES

The Company acquired eight businesses in 2019, all in the Automation Solutions segment, for $469, net of cash acquired. These eight businesses had combined annual sales of approximately $300. The Company recognized goodwill of $210 ($173 of which is expected to be tax deductible) and other identifiable intangible assets of $155, primarily customer relationships and intellectual property with a weighted-average life of approximately nine years. Valuations of certain acquired assets and liabilities are in-process and subject to refinement.

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 $372 ($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 $366 ($11 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 $309 ($170 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 allocated to assets and liabilities as follows.

Accounts receivable		$	153
Inventory		187
Property, plant and equipment		140
Goodwill		1,176
Intangibles		1,013
Other assets		77
Total assets		2,746
Accounts payable		73
Other current liabilities		134
Deferred taxes and other liabilities		325
Cash paid, net of cash acquired		$	2,214

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.

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 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.

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.

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

						2017
Net sales						$	1,037
Cost of sales						701
SG&A						263
Other deductions, net						(473		)
Earnings (Loss) before income taxes						546
Income taxes						671
Earnings (Loss), net of tax						$	(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.

Operating cash flow used by discontinued operations 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.

(5) OTHER DEDUCTIONS, NET

Other deductions, net are summarized as follows:
	2017				2018			2019
Amortization of intangibles (intellectual property and customer relationships)	$	136			211			238
Restructuring costs	78				65			95
Other	110				61			(8	)
Total	$	324			337			325

The increase in amortization for 2019 is due to higher intangibles amortization of $46 which largely relates to acquisitions completed in 2018, partially offset by backlog amortization of $19 incurred in the prior year related to the valves & controls acquisition. Other, which is composed of several items, including acquisition/divestiture costs, foreign currency transaction gains and losses, bad debt expense, litigation, pension expense and other items, decreased in 2019 primarily due to lower acquisition/divestiture costs of $29, pension expenses of $42 and foreign currency transactions of $13. The decrease in 2018 is primarily due to lower pension expenses of $78, partially offset by higher acquisition/divestiture costs of $18.

(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 (such as contract termination costs, asset write-downs and vacant facility costs).

Restructuring expenses were $95, $65 and $78 for 2019, 2018 and 2017, respectively, and included $7, $19 and $25 related to acquisitions, respectively.

Restructuring costs by business segment follows:

	2017				2018			2019
Automation Solutions	$	63			41			65
Climate Technologies	10				20			20
Tools & Home Products	2				3			7
Commercial & Residential Solutions	12				23			27
Corporate	3				1			3
Total	$	78			65			95

Costs incurred in 2019, 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 2019, restructuring activities included actions to exit two production facilities worldwide and eliminate approximately 1,100 positions. Expenses incurred in 2018 and 2017 included actions to exit six and ten facilities, and eliminate approximately 1,200 and 1,200 positions, respectively.

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

	2018				Expense					Utilized/Paid					2019
Severance and benefits	$	46				72					56				62
Other	6					23					22				7
Total	$	52				95					78				69

	2017				Expense					Utilized/Paid					2018
Severance and benefits	$	60				43					57				46
Other	5					22					21				6
Total	$	65				65					78				52

(7) GOODWILL AND OTHER INTANGIBLES

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, 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
Acquisitions	210				—			—			—			210
Divestitures	—				—			(2	)		(2	)		(2	)
Foreign currency translation and other	(98		)		(2	)		(27	)		(29	)		(127	)
Balance, September 30, 2019	$	5,467			668			401			1,069			6,536

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

	Customer Relationships							Intellectual Property						Capitalized Software						Total
	2018				2019			2018			2019			2018			2019			2018			2019
Gross carrying amount	$	1,968			1,973			1,469			1,565			1,230			1,334			4,667			4,872
Less: Accumulated amortization	451				582			544			650			921			1,025			1,916			2,257
Net carrying amount	$	1,517			1,391			925			915			309			309			2,751			2,615

Intangible asset amortization expense for the major classes included above for 2019, 2018 and 2017 was $359, $314 and $222, respectively. Based on intangible asset balances as of September 30, 2019, amortization expense is expected to approximate $366 in 2020, $329 in 2021, $292 in 2022, $265 in 2023 and $242 in 2024.

The increase in goodwill and intangibles is primarily due to acquisitions. See Note 4.

(8) FINANCIAL INSTRUMENTS

Hedging Activities

As of September 30, 2019, the notional amount of foreign currency hedge positions was approximately $2.3 billion, while commodity hedge contracts totaled approximately $117 (primarily 48 million pounds of copper and aluminum). All derivatives receiving hedge accounting are cash flow hedges. The majority of hedging gains and losses deferred as of September 30, 2019 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 hedge accounting.

Amounts included in earnings and other comprehensive income follow:

			Gain (Loss) to Earnings										Gain (Loss) to OCI
			2017				2018			2019			2017			2018			2019
	Location
Commodity	Cost of sales		$	10			13			(11	)		25			(7	)		(10	)
Foreign currency	Sales, cost of sales		(15		)		2			13			30			9			6
Foreign currency	Other deductions, net		(39		)		(15	)		66
Total			$	(44	)		—			68			55			2			(4	)

Regardless of whether derivatives receive hedge 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 hedge accounting are highly effective and no amounts were excluded from the assessment of hedge effectiveness, including for the net investment hedge described below. Hedge ineffectiveness was immaterial in all years shown.

Net Investment Hedge

In January 2019, the Company issued €500 of 1.25% notes due October 2025 and €500 of 2.0% notes due October 2029. In May 2019, the Company issued €500 of 0.375% notes due May 2024. The net proceeds from the sale of the notes were used to repay commercial paper borrowings and for general corporate purposes. The euro notes reduce foreign currency risk associated with the Company's international subsidiaries that use the euro as their functional currency and have been designated as a hedge of a portion of the investment in these operations. A pretax gain of $70 ($54 after-tax) was recognized in other comprehensive income (loss) related to the net investment hedge during 2019. Amounts deferred in accumulated other comprehensive income (loss) will remain until the hedged investment is sold or substantially liquidated.

Fair Value Measurement

The estimated fair value of long-term debt was $5.3 billion and $4.0 billion, respectively, as of September 30, 2019 and 2018, which exceeded the carrying value by $469 and $135, respectively. The fair values of commodity and foreign currency contracts were reported in Other current assets and Accrued expenses as summarized below:

		2018									2019
		Assets						Liabilities			Assets			Liabilities
Commodity			$	1				10			—			8
Foreign currency			$	35				11			29			12

(9) SHORT-TERM BORROWINGS AND LINES OF CREDIT

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

		2018				2019
Current maturities of long-term debt		$	688			515
Commercial paper		935				929
Total		$	1,623			1,444
Interest rate for weighted-average short-term borrowings at year end		2.1%				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:

	2018				2019
5.25% notes due October 2018	400				—
5.0% notes due April 2019	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
0.375% notes due May 2024	—				545
3.15% notes due June 2025	500				500
1.25% notes due October 2025	—				545
2.0% notes due October 2029	—				545
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	75				57
Long-term debt	3,825				4,792
Less: Current maturities	688				515
Total, net	$	3,137			4,277

Long-term debt maturing during each of the four years after 2020 is $314, $533, $498 and $544, respectively. Total interest paid on all debt was approximately $195, $193 and $192 in 2019, 2018 and 2017, respectively. In January 2019, the Company issued €500 of 1.25% notes due October 2025 and €500 of 2.0% notes due October 2029. In May 2019, the Company issued €500 of 0.375% notes due May 2024. During the year, the Company repaid $400 of 5.25% notes that matured in October 2018 and $250 of 5.0% notes that matured in April 2019. In 2018, the Company repaid $250 of 5.375% notes that matured in October 2017.

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
	2017				2018			2019			2017			2018			2019
Defined benefit plans:
Service cost (benefits earned during the period)	$	60			52			47			19			24			24
Interest cost	134				141			155			30			39			38
Expected return on plan assets	(290		)		(283	)		(281	)		(56	)		(67	)		(68	)
Net amortization and other	211				129			81			22			14			6
Net periodic pension expense	115				39			2			15			10			—
Defined contribution plans	96				132			125			47			52			56
Total retirement plans expense	$	211			171			127			62			62			56

The decrease in net periodic pension expense in 2019 is primarily attributable to lower amortization expense compared to the prior year. In 2017, net periodic pension expense and defined contribution expense included $3

and $6, 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's principal U.S. defined benefit plan is closed to employees hired after January 1, 2016 while shorter-tenured employees ceased accruing benefits effective October 1, 2016.

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
	2018				2019			2018			2019
Projected benefit obligation, beginning	$	4,369			3,957			1,489			1,442
Service cost	52				47			24			24
Interest cost	141				155			39			38
Actuarial (gain) loss	(262		)		608			(51	)		216
Benefits paid	(205		)		(206	)		(36	)		(36	)
Settlements	(152		)		(152	)		(49	)		(41	)
Acquisitions (Divestitures), net	13				—			54			2
Foreign currency translation and other	1				1			(28	)		(61	)
Projected benefit obligation, ending	$	3,957			4,410			1,442			1,584
Fair value of plan assets, beginning	$	4,292			4,233			1,236			1,243
Actual return on plan assets	265				316			69			135
Employer contributions	20				16			41			44
Benefits paid	(205		)		(206	)		(36	)		(36	)
Settlements	(152		)		(152	)		(49	)		(41	)
Acquisitions (Divestitures), net	12				—			10			—
Foreign currency translation and other	1				1			(28	)		(61	)
Fair value of plan assets, ending	$	4,233			4,208			1,243			1,284
Net amount recognized in the balance sheet	$	276			(202	)		(199	)		(300	)
Location of net amount recognized in the balance sheet:
Noncurrent asset	$	465			67			126			97
Current liability	(10		)		(11	)		(13	)		(14	)
Noncurrent liability	(179		)		(258	)		(312	)		(383	)
Net amount recognized in the balance sheet	$	276			(202	)		(199	)		(300	)
Pretax accumulated other comprehensive loss	$	(548	)		(1,040	)		(164	)		(307	)

Approximately $162 of the $1,347 of pretax losses deferred in accumulated other comprehensive income (loss) at September 30, 2019 will be amortized to expense in 2020. As of September 30, 2019, U.S. pension plans were underfunded by $202 in total, including unfunded plans totaling $211. The non-U.S. plans were underfunded by $300, including unfunded plans totaling $311.

As of the September 30, 2019 and 2018 measurement dates, the plans' total accumulated benefit obligation was $5,682 and $5,154, 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 $1,113, $991 and $456, respectively, for 2019, and $585, $508 and $87, respectively, for 2018.

Future benefit payments by U.S. plans are estimated to be $208 in 2020, $215 in 2021, $222 in 2022, $228 in 2023, $234 in 2024 and $1,233 in total over the five years 2025 through 2029. Based on foreign currency exchange

rates as of September 30, 2019, future benefit payments by non-U.S. plans are estimated to be $74 in 2020, $72 in 2021, $78 in 2022, $80 in 2023, $84 in 2024 and $462 in total over the five years 2025 through 2029. The Company expects to contribute approximately $60 to its retirement plans in 2020.

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

	U.S. Plans									Non-U.S. Plans
	2017			2018			2019			2017			2018			2019
Net pension expense
Discount rate used to determine service cost	3.75	%		3.95	%		4.33	%		2.3	%		2.6	%		2.7	%
Discount rate used to determine interest cost	2.90	%		3.25	%		3.98	%		2.3	%		2.6	%		2.7	%
Expected return on plan assets	7.25	%		7.00	%		7.00	%		6.2	%		5.7	%		6.1	%
Rate of compensation increase	3.25	%		3.25	%		3.25	%		3.2	%		3.4	%		3.5	%
Benefit obligations
Discount rate	3.76	%		4.26	%		3.22	%		2.6	%		2.7	%		1.9	%
Rate of compensation increase	3.25	%		3.25	%		3.25	%		3.4	%		3.5	%		3.7	%

The discount rate for the U.S. retirement plans was 3.22 percent as of September 30, 2019. 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, 2019 and 2018, and weighted-average target allocations follow:

	U.S. Plans								Non-U.S. Plans
	2018			2019			Target		2018			2019			Target
Equity securities	62	%		53	%		50-60%		52	%		42	%		40-50%
Debt securities	34			46			40-50		38			47			45-55
Other	4			1			0-10		10			11			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			%
2019
U.S. equities	$	789			5			386			284			1,464			27	%
International equities	459				15			—			615			1,089			20	%
Emerging market equities	—				—			—			213			213			4	%
Corporate bonds	—				1,008			—			464			1,472			27	%
Government bonds	0				512			—			540			1,052			19	%
High-yield bonds	—				—			—			—			—			—	%
Other	1				8			129			64			202			3	%
Total	$	1,249			1,548			515			2,180			5,492			100	%
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	—				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	%

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:

	2018				2019
Level 3, beginning	$	451			471
Gains (Losses) on assets held	1				—
Gains (Losses) on assets sold	37				34
Purchases, sales and settlements, net	(18		)		10
Level 3, ending	$	471			515

(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:

	2017				2018			2019
Service cost	$	1			1			1
Interest cost	6				6			5
Net amortization	(19		)		(19	)		(18	)
Net postretirement expense	$	(12	)		(12	)		(12	)

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

	2018				2019
Benefit obligation, beginning	$	174			149
Service cost	1				1
Interest cost	6				5
Actuarial (gain) loss	(19		)		5
Benefits paid	(13		)		(13	)
Benefit obligation, ending (recognized in balance sheet)	$	149			147

As of September 30, 2019 there were $118 of deferred actuarial gains in accumulated other comprehensive income, of which approximately $13 will be amortized into earnings in 2020. The discount rates used to measure the benefit obligation as of September 30, 2019, 2018 and 2017 were 2.99 percent, 4.08 percent and 3.45 percent, respectively. The health care cost trend rate used for 2020 is assumed to be 7.0 percent initially and was assumed to be 7.2 percent in 2019, declining to 5.0 percent over the subsequent nine 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 $12 per year for 2020 through 2024, and $49 in total over the five years 2025 through 2029.

(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; and the Company's experience in contesting, litigating and settling similar matters. The Company engages an outside expert to develop an actuarial estimate of its expected costs to resolve all pending and future asbestos claims, including defense costs, as well as its related insurance receivables. The reserve for asbestos litigation, which is recorded on an undiscounted basis, is based on projected claims through 2065.

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, 2019, 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:

	2017				2018			2019
United States	$	1,350			1,652			1,771
Non-U.S.	985				1,015			1,088
Total pretax earnings	$	2,335			2,667			2,859

The principal components of income tax expense follow:

	2017				2018			2019
Current:
U.S. federal	$	351			341			247
State and local	40				52			24
Non-U.S.	311				300			308
Deferred:
U.S. federal	7				(224	)		(2	)
State and local	4				(11	)		12
Non-U.S.	(53		)		(15	)		(58	)
Income tax expense	$	660			443			531

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.

	2017			2018			2019
U.S. federal statutory rate	35.0	%		24.5	%		21.0	%
State and local taxes, net of U.S. federal tax benefit	1.2			1.2			1.0
Non-U.S. rate differential	(3.6	)		0.8			1.8
Non-U.S. tax holidays	(1.0	)		(0.8	)		(1.1	)
U.S. manufacturing deduction	(1.7	)		(1.1	)		—
Foreign derived intangible income	—			—			(1.1	)
Gain on divestiture	—			1.0			—
Subsidiary restructuring	(1.8	)		(2.0	)		(2.6	)
Transition impact of Tax Act	—			(7.1	)		—
Other	0.2			0.1			(0.4	)
Effective income tax rate	28.3	%		16.6	%		18.6	%

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 non-U.S. 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 non-U.S. earnings and withholding taxes, and the reversal of $130 accrued in previous periods for the planned repatriation of non-U.S. cash. The Company completed its accounting for the Act in the first quarter of fiscal 2019.

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

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

	2018				2019
Unrecognized tax benefits, beginning	$	132			158
Additions for current year tax positions	13				15
Additions for prior year tax positions	8				18
Reductions for prior year tax positions	(8		)		(22	)
Acquisitions and divestitures	21				4
Reductions for settlements with tax authorities	(3		)		(5	)
Reductions for expiration of statutes of limitations	(5		)		(9	)
Unrecognized tax benefits, ending	$	158			159

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 $124, 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 $4, $2 and $(1) in 2019, 2018 and 2017, respectively. As of September 30, 2019 and 2018, total accrued interest and penalties were $27 and $23, 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:

	2018				2019
Deferred tax assets:
Net operating losses and tax credits	$	396			407
Accrued liabilities	238				228
Postretirement and postemployment benefits	37				36
Employee compensation and benefits	119				110
Pensions	—				95
Other	151				121
Total	$	941			997
Valuation allowances	$	(341	)		(307	)
Deferred tax liabilities:
Intangibles	$	(693	)		(637	)
Pensions	(43		)		—
Property, plant and equipment	(187		)		(195	)
Undistributed non-U.S. earnings	(52		)		(49	)
Other	(35		)		(39	)
Total	$	(1,010	)		(920	)
Net deferred income tax liability	$	(410	)		(230	)

Total income taxes paid were approximately $650, $680 and $1,420 in 2019, 2018 and 2017, respectively. Approximately half of the $407 of net operating losses and tax credits expire over the next 5 years, while most of 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, 2019, 11.6 million options were available for grant under the plans.

Changes in shares subject to options during the year ended September 30, 2019 follow (shares in thousands):

	Weighted- Average Exercise Price Per Share						Shares			Total Intrinsic Value of Shares						Average Remaining Life (Years)
Beginning of year		$	56.37				7,801
Options granted		$	—				—
Options exercised		$	49.35				(854	)
Options canceled		$	57.85				(32	)
End of year		$	57.23				6,915				$	67					4.2
Exercisable at end of year		$	57.27				6,795				$	66					4.2

The weighted-average grant date fair value per option was $12.13 and $8.36 in 2018 and 2017, respectively. Cash received for option exercises was $40 in 2019, $143 in 2018 and $148 in 2017. The total intrinsic value of options exercised in 2019, 2018 and 2017 was $16, $53 and $36, while the tax benefit from tax deductions related to option exercises was $8, $7 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 and 2017 are, respectively: risk-free interest rate, based on U.S. Treasury yield, 2.4 percent and 1.7 percent; dividend yield, 2.9 percent and 3.6 percent; and expected volatility, based on historical volatility, 23 percent and 24 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 1,818,510 shares were distributed in early 2019 as follows: 1,023,789 issued as shares, 588,094 withheld for income taxes, and the value of 206,627 paid in cash.

As of September 30, 2019, 1,877,650 shares awarded primarily in 2017 were outstanding, contingent on the Company achieving its performance objectives through 2019. The objectives for these shares were met at the 107 percent level at the end of 2019 and 2,009,085 shares will be distributed in early 2020.

Additionally, the rights to receive a maximum of 1,811,605 and 2,125,954 common shares were awarded in 2019 and 2018, respectively, under the new performance shares program, and are outstanding and contingent upon the Company achieving its performance objectives through 2021 and 2020, 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 2019, 250,000 shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently, 148,707 shares were issued while 101,293 shares were withheld for income taxes in accordance with minimum withholding requirements. As of September 30, 2019, there were 1,262,700 shares of unvested restricted stock outstanding.

The total fair value of shares distributed under incentive shares plans was $145, $20 and $245, respectively, in 2019, 2018 and 2017, of which $73, $9 and $101 was paid in cash, primarily for tax withholding. As of September 30, 2019, 8.8 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, 2019 follow (shares in thousands; assumes 100 percent payout of unvested awards):

	Shares			Average Grant Date Fair Value Per Share
Beginning of year	6,898				$	54.69
Granted	1,740				$	68.99
Earned/vested	(2,068	)			$	47.93
Canceled	(245	)			$	59.85
End of year	6,325				$	60.63

Total compensation expense for stock options and incentive shares was $120, $216 and $115 for 2019, 2018 and 2017, respectively, of which $5 was included in discontinued operations for 2017. The decrease in expense in 2019 reflects a decreasing stock price in the current year compared to an increasing stock price in the prior year. The increase in expense for 2018 reflects an increase in the Company's stock price and progress toward achieving its performance objectives. Income tax benefits recognized in the income statement for these compensation arrangements during 2019, 2018 and 2017 were $20, $42 and $33, respectively. As of September 30, 2019, total unrecognized compensation expense related to unvested shares awarded under these plans was $138, which is expected to be recognized over a weighted-average period of 1.6 years.

In addition to the employee stock option and incentive shares plans, in 2019 the Company awarded 17,466 shares of restricted stock and 2,264 restricted stock units under the restricted stock plan for non-management directors. As of September 30, 2019, 139,635 shares were available for issuance under this plan.

(16) COMMON AND PREFERRED STOCK

At September 30, 2019, 34.3 million shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During 2019, 19.9 million common shares were purchased and 1.8 million treasury shares were reissued. In 2018, 15.1 million common shares were purchased and 2.6 million treasury shares were reissued.

At September 30, 2019 and 2018, 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	2017				2018			2019
Beginning balance	$	(812	)		(369	)		(600	)
Other comprehensive income (loss)	58				(214	)		(194	)
Reclassified to gain/loss on sale of businesses	385				(17	)		—
Ending balance	(369		)		(600	)		(794	)
Pension and postretirement
Beginning balance	(1,162		)		(662	)		(420	)
Actuarial gains (losses) deferred during the period	315				250			(560	)
Amortization of deferred actuarial losses into earnings	135				94			52
Reclassified to gain/loss on sale of businesses	50				—			—
Adoption of accounting standard update	—				(102	)		—
Ending balance	(662		)		(420	)		(928	)
Cash flow hedges
Beginning balance	(25		)		12			5
Gains (Losses) deferred during the period	34				2			(3	)
Reclassifications of realized (gains) losses to sales and cost of sales	3				(11	)		(2	)
Adoption of accounting standard update	—				2			—
Ending balance	12				5			—
Accumulated other comprehensive income (loss)	$	(1,019	)		(1,015	)		(1,722	)

Activity above is shown net of income taxes for 2019, 2018 and 2017, respectively, as follows: foreign currency translation: $(16), $0 and $0; deferral of pension and postretirement actuarial gains (losses): $165, $(76) and $(170); amortization of pension and postretirement deferred actuarial losses: $(15), $(29) and $(75); deferral of cash flow hedging gains (losses): $1, $0 and $(21); reclassification of realized cash flow hedging (gains) losses: $0, $4 and $(2).

(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.

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, software, services and products, including measurement and analytical instrumentation, industrial valves and equipment, and process control software and 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. Certain expenses are reported at Corporate, including stock compensation expense and a portion of pension and postretirement benefit costs. Corporate and other includes unallocated corporate expenses, acquisition/divestiture costs, first year acquisition accounting charges (which include fair value adjustments related to inventory, backlog and deferred revenue) 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
	2017				2018			2019			2017				2018			2019			2017				2018			2019
Automation Solutions	$	9,418			11,441			12,202			$	1,522			1,886			1,947			$	12,581			13,720			13,996
Climate Technologies	4,212				4,454			4,313			975				972			883			2,547				2,936			2,885
Tools & Home Products	1,645				1,528			1,856			383				380			388			830				1,560			1,462
Commercial & Residential Solutions	5,857				5,982			6,169			1,358				1,352			1,271			3,377				4,496			4,347
Corporate items:
Stock compensation					—						(110		)		(216	)		(120	)		—				—
Pension and postretirement costs											27				79			108
Corporate and other											(297		)		(275	)		(173	)		3,631				2,174			2,154
Eliminations/Interest	(11		)		(15	)		1			(165		)		(159	)		(174	)
Total	$	15,264			17,408			18,372			$	2,335			2,667			2,859			$	19,589			20,390			20,497

Automation Solutions sales by major product offering are summarized below:

		2017				2018			2019
Measurement & Analytical Instrumentation		$	3,070			3,604			3,807
Valves, Actuators & Regulators		2,659				3,749			3,794
Industrial Solutions		1,689				1,967			2,232
Process Control Systems & Solutions		2,000				2,121			2,369
Total		$	9,418			11,441			12,202

	Depreciation and Amortization										Capital Expenditures
	2017				2018			2019			2017				2018			2019
Automation Solutions	$	381			488			535			$	234			295			297
Climate Technologies	156				171			176			182				209			222
Tools & Home Products	45				44			71			45				64			59
Commercial & Residential Solutions	201				215			247			227				273			281
Corporate and other	54				55			40			15				49			16
Total	$	636			758			822			$	476			617			594

Geographic Information

	Automation Solutions										Commercial & Residential Solutions										Total
	2017				2018			2019			2017				2018			2019			2017				2018			2019
Americas	$	4,581			5,517			5,850			$	4,051			3,967			4,253			$	8,632			9,484			10,103
Asia, Middle East & Africa	2,936				3,657			3,891			1,273				1,384			1,192			4,209				5,041			5,083
Europe	1,901				2,267			2,461			533				631			724			2,434				2,898			3,185
Total	$	9,418			11,441			12,202			$	5,857			5,982			6,169			$	15,275			17,423			18,371

Sales in the U.S. were $8,390, $7,939 and $7,273 for 2019, 2018 and 2017, respectively, while Asia, Middle East & Africa includes sales in China of $1,962, $1,955 and $1,540 in those years.

		Property, Plant and Equipment
		2017				2018			2019
Americas		$	2,055			2,234			2,339
Asia, Middle East & Africa		640				652			671
Europe		626				676			632
Total		$	3,321			3,562			3,642

Assets located in the U.S. were $2,128 in 2019, $2,027 in 2018 and $1,840 in 2017.

(19) OTHER FINANCIAL DATA

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

	2017				2018			2019
Research and development expense	$	340			436			454
Depreciation expense	$	414			444			463
Rent expense	$	289			279			285

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 $159 in 2020, $112 in 2021, $82 in 2022, $57 in 2023, $38 in 2024 and $63 thereafter.

Items reported in other noncurrent assets included the following:

	2018				2019
Pension assets	$	591			164
Asbestos-related insurance receivables	$	124			115
Deferred income taxes	$	74			97

Items reported in accrued expenses included the following:

	2018				2019
Employee compensation	$	629			606
Customer advances (contract liabilities)	$	510			519
Product warranty	$	124			140

Other liabilities are summarized as follows:

	2018				2019
Pension and postretirement liabilities	$	625			775
Deferred income taxes	484				327
Asbestos litigation	334				313
Other	656				556
Total	$	2,099			1,971

(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	First Quarter							Second Quarter						Third Quarter						Fourth Quarter						Full Year
	2018				2019			2018			2019			2018			2019			2018			2019			2018			2019
Net sales	$	3,816			4,147			4,248			4,570			4,456			4,684			4,888			4,971			17,408			18,372
Gross profit	$	1,614			1,761			1,817			1,925			1,942			2,001			2,059			2,128			7,432			7,815
Net earnings common stockholders	$	392			465			482			520			712			604			617			717			2,203			2,306
Net earnings per common share:
Basic	$	0.61			0.74			0.76			0.85			1.13			0.98			0.98			1.17			3.48			3.74
Diluted	$	0.61			0.74			0.76			0.84			1.12			0.97			0.97			1.16			3.46			3.71
Dividends per common share	$	0.485			0.49			0.485			0.49			0.485			0.49			0.485			0.49			1.94			1.96

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 included 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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2019, 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, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the Sufficiency of Audit Evidence over Net Sales

As discussed in Notes 1, 2 and 18 to the Company’s consolidated financial statements, and disclosed in the consolidated statements of earnings, the Company recorded $18.4 billion of net sales in 2019.

We identified the evaluation of the sufficiency of audit evidence over net sales as a critical audit matter. Net sales are recognized primarily from the sale of tangible products from hundreds of Company locations around the world. Evaluating the sufficiency of audit evidence obtained required especially subjective auditor judgment because of the geographical dispersion of the Company’s net sales generating activities. This included determining the Company locations at which procedures were performed and the supervision and review of procedures performed at those locations.

The primary procedures we performed to address this critical audit matter included the following. We performed risk assessment procedures and applied auditor judgment to determine the nature and extent of procedures to be performed over net sales, including the determination of the Company locations at which those procedures were to be performed. At each Company location where procedures were performed, we:

•	Tested certain internal controls over the Company’s net sales processes, including the Company’s controls over the accurate recording of amounts.

•	Assessed the recorded net sales by selecting a sample of transactions and compared the amounts recognized for consistency with underlying documentation, including contracts with customers and shipping documentation.

After completion of these procedures, we evaluated the overall sufficiency of audit evidence over net sales.

/s/ KPMG LLP

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

St. Louis, Missouri

November 18, 2019