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)

			2018						2019						2020
Net sales			$	17,408					18,372						16,785
Costs and expenses:
Cost of sales			9,976						10,557						9,776
Selling, general and administrative expenses			4,269						4,457						3,986
Other deductions, net			337						325						532
Interest expense, net of interest income of: 2018, $43; 2019, $27; 2020, $19			159						174						156
Earnings before income taxes			2,667						2,859						2,335
Income taxes			443						531						345
Net earnings			2,224						2,328						1,990
Less: Noncontrolling interests in earnings of subsidiaries			21						22						25
Net earnings common stockholders			$	2,203					2,306						1,965
Basic earnings per common share			$	3.48					3.74						3.26
Diluted earnings per common share			$	3.46					3.71						3.24

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions)

						2018						2019						2020
Net earnings						$	2,224					2,328						1,990
Other comprehensive income (loss), net of tax:
Foreign currency translation						(231)						(194)						85
Pension and postretirement						242						(508)						64
Cash flow hedges						(7)						(5)						(2)
Total other comprehensive income (loss)						4						(707)						147
Comprehensive income						2,228						1,621						2,137
Less: Noncontrolling interests in comprehensive income of subsidiaries						21						22						27
Comprehensive income common stockholders						$	2,207					1,599						2,110

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)

			2019						2020
ASSETS
Current assets
Cash and equivalents			$	1,494					3,315
Receivables, less allowances of $112 in 2019 and $138 in 2020			2,985						2,802
Inventories			1,880						1,928
Other current assets			780						761
Total current assets			7,139						8,806
Property, plant and equipment, net			3,642						3,688
Other assets
Goodwill			6,536						6,734
Other intangible assets			2,615						2,468
Other			565						1,186
Total other assets			9,716						10,388
Total assets			$	20,497					22,882
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt			$	1,444					1,160
Accounts payable			1,874						1,715
Accrued expenses			2,658						2,910
Total current liabilities			5,976						5,785
Long-term debt			4,277						6,326
Other liabilities			1,971						2,324
Equity
Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 611.0 shares in 2019; 598.0 shares in 2020			477						477
Additional paid-in-capital			393						470
Retained earnings			24,199						24,955
Accumulated other comprehensive income (loss)			(1,722)						(1,577)
			23,347						24,325
Less: Cost of common stock in treasury, 342.4 shares in 2019; 355.4 shares in 2020			15,114						15,920
Common stockholders’ equity			8,233						8,405
Noncontrolling interests in subsidiaries			40						42
Total equity			8,273						8,447
Total liabilities and equity			$	20,497					22,882
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)

			2018						2019						2020
Common stock			$	477					477						477
Additional paid-in-capital
Beginning balance			297						348						393
Stock plans			51						45						77
Ending balance			348						393						470
Retained earnings
Beginning balance			21,995						23,072						24,199
Net earnings common stockholders			2,203						2,306						1,965
Dividends paid (per share: 2018, $1.94; 2019, $1.96; 2020, $2.00)			(1,229)						(1,209)						(1,209)
Adoption of accounting standard updates			103						30						—
Ending balance			23,072						24,199						24,955
Accumulated other comprehensive income (loss)
Beginning balance			(1,019)						(1,015)						(1,722)
Foreign currency translation			(231)						(194)						83
Pension and postretirement			242						(508)						64
Cash flow hedges			(7)						(5)						(2)
Ending balance			(1,015)						(1,722)						(1,577)
Treasury stock
Beginning balance			(13,032)						(13,935)						(15,114)
Purchases			(1,000)						(1,250)						(942)
Issued under stock plans			97						71						136
Ending balance			(13,935)						(15,114)						(15,920)
Common stockholders' equity			8,947						8,233						8,405
Noncontrolling interests in subsidiaries
Beginning balance			52						43						40
Net earnings			21						22						25
Other comprehensive income			—						—						2
Dividends paid			(30)						(25)						(25)
Ending balance			43						40						42
Total equity			$	8,990					8,273						8,447

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30 (Dollars in millions)

			2018						2019						2020
Operating activities
Net earnings			$	2,224					2,328						1,990
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			758						822						854
Stock compensation expense			216						120						110
Pension expense			49						2						67
Pension funding			(61)						(60)						(66)
Transition impact of Tax Act			(189)						—						—
Changes in operating working capital			(83)						(150)						148
Other, net			(22)						(56)						(20)
Cash provided by operating activities			2,892						3,006						3,083
Investing activities
Capital expenditures			(617)						(594)						(538)
Purchases of businesses, net of cash and equivalents acquired			(2,203)						(469)						(126)
Divestitures of businesses			201						14						—
Other, net			(101)						(125)						(76)
Cash used in investing activities			(2,720)						(1,174)						(740)
Financing activities
Net increase (decrease) in short-term borrowings			343						(6)						(90)
Proceeds from short-term borrowings greater than three months			—						—						1,043
Payments of short-term borrowings greater than three months			—						—						(1,043)
Proceeds from long-term debt			—						1,691						2,233
Payments of long-term debt			(241)						(656)						(503)
Dividends paid			(1,229)						(1,209)						(1,209)
Purchases of common stock			(1,000)						(1,250)						(942)
Other, net			35						39						2
Cash used in financing activities			(2,092)						(1,391)						(509)
Effect of exchange rate changes on cash and equivalents			(49)						(40)						(13)
Increase (Decrease) in cash and equivalents			(1,969)						401						1,821
Beginning cash and equivalents			3,062						1,093						1,494
Ending cash and equivalents			$	1,093					1,494						3,315
Changes in operating working capital
Receivables			$	(175)					51						207
Inventories			17						(87)						(6)
Other current assets			(42)						(87)						33
Accounts payable			115						(37)						(196)
Accrued expenses			2						10						110
Total changes in operating working capital			$	(83)					(150)						148

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, 2019, the Company adopted ASC 842, Leases, which requires rights and obligations related to lease arrangements to be recognized on the balance sheet, using the optional transition method under which prior periods were not adjusted. The Company elected the package of practical expedients for leases that commenced prior to the adoption date, which included carrying forward the historical lease classification as operating or finance. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets and related lease liabilities of approximately $500 as of October 1, 2019, but did not materially impact the Company's earnings or cash flows for the year ended September 30, 2020. The Company's financial statements for 2018 and 2019 continue to be reported in accordance with the Company's historical accounting under ASC 840, Leases.

On October 1, 2019, the Company adopted updates to ASC 815, Derivatives and Hedging, which permit hedging certain contractually specified risk components. Additionally, the updates eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates were adopted using a modified retrospective approach and were immaterial to the Company's financial statements for the year ended September 30, 2020.

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 year ended September 30, 2018 continue to be reported in accordance with the Company's historical 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 in 2018 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.

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:

						2019						2020
Finished products						$	578					584
Raw materials and work in process						1,302						1,344
Total inventories						$	1,880					1,928

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:

						2019						2020
Land						$	336					350
Buildings						2,219						2,335
Machinery and equipment						5,645						5,907
Construction in progress						471						463
Property, plant and equipment, at cost						8,671						9,055
Less: Accumulated depreciation						5,029						5,367
Property, plant and equipment, net						$	3,642					3,688

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 8.

Leases

The Company leases offices; manufacturing facilities and equipment; and transportation, information technology and office equipment under operating lease arrangements. Finance lease arrangements are immaterial. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. Right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recognized on the balance sheet and are recorded as short-term lease expense. The discount rate used to calculate present value is the Company's incremental borrowing rate based on the lease term and the economic environment of the applicable country or region.

Certain leases contain renewal options or options to terminate prior to lease expiration, which are included in the measurement of right-of-use assets and lease liabilities when it is reasonably certain they will be exercised. The Company has elected to account for lease and non-lease components as a single lease component for its offices and manufacturing facilities. Some lease arrangements include payments that are adjusted periodically based on actual charges incurred for common area maintenance, utilities, taxes and insurance, or changes in an index or rate referenced in the lease. The fixed portion of these payments is included in the measurement of right-of-use assets and lease liabilities at lease commencement, while the variable portion is recorded as variable lease expense. The Company's leases typically do not contain material residual value guarantees or restrictive covenants.

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 designs and manufactures products and delivers services that bring technology and engineering together to provide innovative solutions for 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 and Mexican pesos. 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, 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 or substantially liquidated 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 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 immaterial. 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 9.

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 $4.6 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2020, 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.

						2019						2020
Unbilled receivables (contract assets)						$	456					458
Customer advances (contract liabilities)						(519)						(583)
Net contract liabilities						$	(63)					(125)

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 increase in net contract liabilities was due to customer billings which exceeded revenue recognized for performance completed during the period. Revenue recognized for 2020 included approximately $420 that was included in the beginning contract liability balance. Other factors that impacted the change in net contract liabilities were immaterial.

Revenue recognized for 2020 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, 2020, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $5.3 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 2020, 2019 and 2018 as the effect would have been antidilutive. Earnings allocated to participating securities were inconsequential for all years presented.

Reconciliations of weighted-average shares for basic and diluted earnings per common share follow (shares in millions):

			2018						2019						2020
Basic shares outstanding			632.0						616.2						602.9
Dilutive shares			3.3						4.4						3.7
Diluted shares outstanding			635.3						620.6						606.6

(4) ACQUISITIONS AND DIVESTITURES

On October 1, 2020, the Company completed the acquisition of Open Systems International, Inc., a leading operations technology software provider in the global power industry, for approximately $1.6 billion, net of cash acquired. This business, which has annual sales of approximately $170 will be reported in the Automation Solutions segment. Based upon preliminary estimates, the Company expects to recognize goodwill of approximately $1,000 (none of which is expected to be tax deductible), identifiable intangible assets of approximately $800, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years, and deferred tax liabilities of approximately $180.

In 2020, the Company acquired three businesses, two in the Automation Solutions segment and one in the Climate Technologies segment, for $126, net of cash acquired. Valuations of certain acquired assets and liabilities are in-process and subject to refinement.

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 $209 ($155 of which is expected to be tax deductible) and other identifiable intangible assets of $158, primarily customer relationships and intellectual property with a weighted-average useful life of approximately nine years.

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.

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.

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.

In 2017, the Company sold its network power systems business and retained a subordinated interest in distributions which is contingent upon the equity holders first receiving a threshold return on their initial investment. The Company has not received any distributions through the year ended September 30, 2020.

Pro Forma Financial Information (Unaudited)

Pro forma net sales, net earnings common stockholders and diluted earnings per share for 2018 were approximately $18.2 billion, $2.3 billion and $3.56 per share, respectively. These results are presented as if the 2018 acquisitions occurred on October 1, 2016 and the 2017 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.

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.

(5) OTHER DEDUCTIONS, NET

Other deductions, net are summarized as follows:
			2018						2019						2020
Amortization of intangibles (intellectual property and customer relationships)			$	211					238						239
Restructuring costs			65						95						284
Special advisory fees			—						—						13
Other			61						(8)						(4)
Total			$	337					325						532

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 2018 related to the valves & controls acquisition. Other is composed of several items, including acquisition/divestiture costs, foreign currency transaction gains and losses, litigation, pension expense and other items. The change in 2020 was primarily due to an unfavorable impact from pensions of $48 offset by lower acquisition/divestiture and litigation costs. The decrease in 2019 is primarily due to lower acquisition/divestiture costs of $29, pension expenses of $42 and foreign currency transactions of $13.

(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 $284, $95 and $65 for 2020, 2019 and 2018, respectively, and included $7 and $19 related to acquisitions in 2019 and 2018. The Company expects fiscal year 2021 restructuring expense to exceed $200.

Restructuring costs by business segment follows:

			2018						2019						2020
Automation Solutions			$	41					65						232
Climate Technologies			20						20						23
Tools & Home Products			3						7						21
Commercial & Residential Solutions			23						27						44
Corporate			1						3						8
Total			$	65					95						284

Costs incurred in 2020 relate to the Company's initiatives to improve operating margins that began in the third quarter of fiscal 2019 and were expanded in the third quarter of fiscal 2020 in response to the effects of COVID-19 on demand for the Company's products. Actions taken in 2020 included workforce reductions of approximately 5,400 positions and the exit of six production facilities worldwide. Costs incurred in 2019 and 2018 primarily relate to the deployment of resources to better serve local markets and higher growth areas, and the integration of acquisitions. Expenses incurred in 2019 and 2018 included actions to exit two and six facilities, and eliminate approximately 1,100 and 1,200 positions, respectively.

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

			2019						Expense												Utilized/Paid												2020
Severance and benefits			$	62								239												125									176
Other			7									45												47									5
Total			$	69								284												172									181

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

The tables above do not include $20 of costs related to restructuring actions incurred for the year ended September 30, 2020 that are required to be reported in cost of sales.

(7) LEASES

The components of lease expense for the year ended September 30, 2020 were as follows:

			2020
Operating lease expense						$	207
Variable lease expense						$	19

Short-term lease expense and sublease income were immaterial for the year ended September 30, 2020. Cash paid for operating leases is classified within operating cash flows and was $201 for the year ended September 30, 2020. Operating lease right-of-use asset additions were $210 for the year ended September 30, 2020.

The following table summarizes the balances of the Company's operating lease right-of-use assets and operating lease liabilities as of September 30, 2020, the vast majority of which relates to offices and manufacturing facilities:

												2020
Right-of-use assets (Other assets)															$	508
Current lease liabilities (Accrued expenses)															$	148
Noncurrent lease liabilities (Other liabilities)															$	373

The weighted-average remaining lease term for operating leases was 4.6 years and the weighted-average discount rate was 2.8 percent as of September 30, 2020.

Future maturities of operating lease liabilities as of September 30, 2020 are summarized below:

												2020
2021															$	159
2022															122
2023															94
2024															66
2025															39
Thereafter															85
Total lease payments															565
Less: Interest															44
Total lease liabilities															$	521

Lease commitments that have not yet commenced were immaterial as of September 30, 2020.

The future minimum annual rentals under noncancelable long-term leases as of September 30, 2019 were as follows: $159 in 2020, $112 in 2021, $82 in 2022, $57 in 2023, $38 in 2024 and $63 thereafter.

(8) 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, 2018			$	5,355					670						430						1,100						6,455
Acquisitions			210						—						—						—						210
Foreign currency translation and other			(98)						(2)						(29)						(31)						(129)
Balance, September 30, 2019			5,467						668						401						1,069						6,536
Acquisitions			23						59						—						59						82
Foreign currency translation and other			93						3						20						23						116
Balance, September 30, 2020			$	5,583					730						421						1,151						6,734

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

			Customer Relationships												Intellectual Property												Capitalized Software												Total
			2019						2020						2019						2020						2019						2020						2019						2020
Gross carrying amount			$	1,973					2,059						1,565						1,628						1,334						1,419						4,872						5,106
Less: Accumulated amortization			582						731						650						773						1,025						1,134						2,257						2,638
Net carrying amount			$	1,391					1,328						915						855						309						285						2,615						2,468

Intangible asset amortization expense for the major classes included above for 2020, 2019 and 2018 was $369, $359 and $314, respectively. Based on intangible asset balances as of September 30, 2020, amortization expense is expected to approximate $352 in 2021, $316 in 2022, $291 in 2023, $256 in 2024 and $236 in 2025. These amounts do not include the impact of the acquisition of Open Systems International, Inc., which closed on October 1, 2020.

(9) FINANCIAL INSTRUMENTS

Hedging Activities

As of September 30, 2020, the notional amount of foreign currency hedge positions was approximately $2.2 billion, while commodity hedge contracts totaled approximately $80 (primarily 34 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, 2020 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.

Net Investment Hedge

In fiscal 2019, the Company issued euro-denominated debt of €1.5 billion. 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. Foreign currency gains or losses associated with the euro-denominated debt are deferred in accumulated other comprehensive income (loss) and will remain until the hedged investment is sold or substantially liquidated.

Amounts included in earnings and other comprehensive income follow:

									Gain (Loss) to Earnings																		Gain (Loss) to OCI
									2018						2019						2020						2018						2019						2020
			Location
Commodity			Cost of sales						$	13					(11)						(8)						(7)						(10)						10
Foreign currency			Sales						(2)						(7)						(5)						(11)						(8)						4
Foreign currency			Cost of sales						4						20						4						20						14						(25)
Foreign currency			Other deductions, net						(15)						66						(40)
Net Investment Hedge
Euro denominated debt																											—						70						(123)
Total									$	—					68						(49)						2						66						(134)

Regardless of whether derivatives and non-derivative financial instruments 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.

Fair Value Measurement

The estimated fair value of long-term debt was $7.3 billion and $5.3 billion, respectively, as of September 30, 2020 and 2019, which exceeded the carrying value by $629 and $469, respectively. The fair values of commodity and foreign currency contracts were reported in Other current assets and Accrued expenses as summarized below:

						2019																		2020
						Assets												Liabilities						Assets						Liabilities
Commodity									$	—								8						11						—
Foreign currency									$	29								12						26						25

(10) SHORT-TERM BORROWINGS AND LINES OF CREDIT

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

						2019						2020
Current maturities of long-term debt						$	515					322
Commercial paper						929						838
Total						$	1,444					1,160
Interest rate for weighted-average short-term borrowings at year end						2.1%						0.1%

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.

(11) LONG-TERM DEBT

The details of long-term debt follow:

			2019						2020
4.875% notes due October 2019			$	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						586
3.15% notes due June 2025			500						500
1.25% notes due October 2025			545						586
0.875% notes due October 2026			—						750
1.8% notes due October 2027			—						500
2.0% notes due October 2029			545						586
1.95% notes due October 2030			—						500
6.0% notes due August 2032			250						250
6.125% notes due April 2039			250						250
5.25% notes due November 2039			300						300
2.75% notes due October 2050			—						500
Other			57						40
Long-term debt			4,792						6,648
Less: Current maturities			515						322
Total, net			$	4,277					6,326

Long-term debt maturing during each of the four years after 2021 is $525, $511, $582 and $497, respectively. Total interest paid on long-term debt was approximately $163, $195 and $193 in 2020, 2019 and 2018, respectively. During the year, the Company repaid $500 of 4.875% notes that matured in October 2019. In April 2020, the Company issued $500 of 1.8% notes due October 2027, $500 of 1.95% notes due October 2030 and $500 of 2.75% notes due October 2050. In September 2020, the Company issued $750 of 0.875% notes due October 2026.

In 2019, 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 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 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.

(12) PENSION AND POSTRETIREMENT PLANS

Retirement plans expense includes the following components:

			U.S. Plans																		Non-U.S. Plans
			2018						2019						2020						2018						2019						2020
Defined benefit plans:
Service cost (benefits earned during the period)			$	52					47						57						24						24						30
Interest cost			141						155						125						39						38						30
Expected return on plan assets			(283)						(281)						(268)						(67)						(68)						(72)
Net amortization and other			129						81						148						14						6						17
Net periodic pension expense			39						2						62						10						—						5
Defined contribution plans			132						125						112						52						56						56
Total retirement plans expense			$	171					127						174						62						56						61

Net periodic pension expense increased in 2020 primarily due to higher amortization expense. 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
			2019						2020						2019						2020
Projected benefit obligation, beginning			$	3,957					4,410						1,442						1,584
Service cost			47						57						24						30
Interest cost			155						125						38						30
Actuarial loss			608						260						216						3
Benefits paid			(206)						(202)						(36)						(37)
Settlements			(152)						(111)						(41)						(46)
Foreign currency translation and other			1						(14)						(59)						69
Projected benefit obligation, ending			$	4,410					4,525						1,584						1,633
Fair value of plan assets, beginning			$	4,233					4,208						1,243						1,284
Actual return on plan assets			316						466						135						58
Employer contributions			16						20						44						46
Benefits paid			(206)						(202)						(36)						(37)
Settlements			(152)						(111)						(41)						(46)
Foreign currency translation and other			1						2						(61)						62
Fair value of plan assets, ending			$	4,208					4,383						1,284						1,367
Net amount recognized in the balance sheet			$	(202)					(142)						(300)						(266)
Location of net amount recognized in the balance sheet:
Noncurrent asset			$	67					140						97						125
Current liability			(11)						(11)						(14)						(15)
Noncurrent liability			(258)						(271)						(383)						(376)
Net amount recognized in the balance sheet			$	(202)					(142)						(300)						(266)
Pretax accumulated other comprehensive loss			$	(1,040)					(937)						(307)						(316)

Approximately $159 of the $1,253 of pretax losses deferred in accumulated other comprehensive income (loss) at September 30, 2020 will be amortized to expense in 2021. As of September 30, 2020, U.S. pension plans were underfunded by $142 in total, including unfunded plans totaling $223. The non-U.S. plans were underfunded by $266, including unfunded plans totaling $319.

As of the September 30, 2020 and 2019 measurement dates, the plans' total accumulated benefit obligation was $5,859 and $5,682, 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 $1,153, $1,034 and $492, respectively, for 2020, and $1,113, $991 and $456, respectively, for 2019.

Future benefit payments by U.S. plans are estimated to be $212 in 2021, $219 in 2022, $225 in 2023, $231 in 2024, $235 in 2025 and $1,219 in total over the five years 2026 through 2030. Based on foreign currency exchange rates as of September 30, 2020, future benefit payments by non-U.S. plans are estimated to be $72 in 2021, $72 in 2022, $72 in 2023, $78 in 2024, $79 in 2025 and $441 in total over the five years 2026 through 2030. The Company expects to contribute approximately $50 to its retirement plans in 2021.

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

			U.S. Plans																		Non-U.S. Plans
			2018						2019						2020						2018						2019						2020
Net pension expense
Discount rate used to determine service cost			3.95		%				4.33		%				3.40		%				2.6		%				2.7		%				1.9		%
Discount rate used to determine interest cost			3.25		%				3.98		%				2.87		%				2.6		%				2.7		%				1.9		%
Expected return on plan assets			7.00		%				7.00		%				6.75		%				5.7		%				6.1		%				5.8		%
Rate of compensation increase			3.25		%				3.25		%				3.25		%				3.4		%				3.5		%				3.7		%
Benefit obligations
Discount rate			4.26		%				3.22		%				2.81		%				2.7		%				1.9		%				1.9		%
Rate of compensation increase			3.25		%				3.25		%				3.25		%				3.5		%				3.7		%				3.6		%

The discount rate for the U.S. retirement plans was 2.81 percent as of September 30, 2020. 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, 2020 and 2019, and weighted-average target allocations follow:

			U.S. Plans																		Non-U.S. Plans
			2019						2020						Target						2019						2020						Target
Equity securities			53		%				49		%				45-55%						42		%				41		%				40-50%
Debt securities			46						45						40-50						47						48						45-55
Other			1						6						0-10						11						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						%
2020
U.S. equities			$	785					10						—						536						1,331						23		%
International equities			513						16						—						635						1,164						20		%
Emerging market equities			—						—						—						237						237						4		%
Corporate bonds			—						1,202						—						446						1,648						29		%
Government bonds			—						450						—						531						981						17		%
Other			4						8						133						244						389						7		%
Total			$	1,302					1,686						133						2,629						5,750						100		%
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			—						512						—						540						1,052						19		%
Other			1						8						129						64						202						3		%
Total			$	1,249					1,548						515						2,180						5,492						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. 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. 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 NAV are primarily nonexchange-traded commingled or collective funds where the underlying securities have observable prices available from active markets and typically provide liquidity daily or within a few days. The NAV category also includes fund investments in private equities, real estate and infrastructure where the fair value of the underlying assets is determined by the investment manager. Total unfunded commitments for the private equity funds were approximately $240 at September 30, 2020. These investments cannot be redeemed, but instead the funds will make distributions through liquidation of the underlying assets, which is expected to occur over approximately the next 10 years. The real estate and infrastructure funds typically offer quarterly redemption.

Postretirement Plans

The Company also sponsors unfunded postretirement benefit plans (primarily health care) for certain U.S. retirees and their dependents. The Company’s principal U.S. postretirement plan has been frozen to new employees since 1993. The postretirement benefit liability for all plans was $135 and $147 as of September 30, 2020 and 2019, respectively, and included deferred actuarial gains in accumulated other comprehensive income of $106 and $118, respectively. Service and interest costs are negligible and more than offset by the amortization of deferred actuarial gains, which resulted in net postretirement income of $12 for each of the last three years. Benefits paid were $12

and $13 for 2020 and 2019, respectively, and the Company estimates that future health care benefit payments will be approximately $12 per year for 2021 through 2025, and $42 in total over the five years 2026 through 2030.

(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, 2020, 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 consist of the following:

			2018						2019						2020
United States			$	1,652					1,771						1,360
Non-U.S.			1,015						1,088						975
Total pretax earnings			$	2,667					2,859						2,335

The principal components of income tax expense follow:

			2018						2019						2020
Current:
U.S. federal			$	341					247						123
State and local			52						24						15
Non-U.S.			300						308						288
Deferred:
U.S. federal			(224)						(2)						(44)
State and local			(11)						12						1
Non-U.S.			(15)						(58)						(38)
Income tax expense			$	443					531						345

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.

			2018						2019						2020
U.S. federal statutory rate			24.5		%				21.0		%				21.0		%
State and local taxes, net of U.S. federal tax benefit			1.2						1.0						0.6
Non-U.S. rate differential			0.8						1.8						1.7
Non-U.S. tax holidays			(0.8)						(1.1)						(1.1)
Research and development credits			(0.2)						(0.3)						(1.8)
U.S. manufacturing deduction			(1.1)						—						—
Foreign derived intangible income			—						(1.1)						(1.2)
Gain on divestiture			1.0						—						—
Subsidiary restructuring			(2.0)						(2.6)						(4.4)
Transition impact of Tax Act			(7.1)						—						—
Other			0.3						(0.1)						—
Effective income tax rate			16.6		%				18.6		%				14.8		%

The tax rates for 2020, 2019 and 2018 include benefits from restructuring subsidiaries of $103 ($0.17 per share), $74 ($0.12 per share) and $53 ($0.08 per share), respectively. The increase in research and development credits in the current year was due to the impact of a research and development tax credit study.

On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the “Tax Act”), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Tax 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 Tax 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 Tax Act in the first quarter of fiscal 2019.

Effective in fiscal 2019, the Tax 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.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company expects to defer $75 of certain payroll taxes through the end of calendar year 2020, of which $48 was deferred through September 30, 2020.

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

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

			2019						2020
Unrecognized tax benefits, beginning			$	158					159
Additions for current year tax positions			15						25
Additions for prior year tax positions			18						29
Reductions for prior year tax positions			(22)						(8)
Acquisitions and divestitures			4						—
Reductions for settlements with tax authorities			(5)						—
Reductions for expiration of statutes of limitations			(9)						(10)
Unrecognized tax benefits, ending			$	159					195

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 $163, 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 $1, $4 and $2 in 2020, 2019 and 2018, respectively. As of September 30, 2020 and 2019, total accrued interest and penalties were $29 and $27, respectively.

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

			2019						2020
Deferred tax assets:
Net operating losses, capital losses and tax credits			$	407					487
Accrued liabilities			228						219
Postretirement and postemployment benefits			36						33
Employee compensation and benefits			110						119
Pensions			95						69
Other			121						137
Total			$	997					1,064
Valuation allowances			$	(307)					(293)
Deferred tax liabilities:
Intangibles			$	(637)					(652)
Property, plant and equipment			(195)						(212)
Undistributed non-U.S. earnings			(49)						(36)
Other			(39)						(33)
Total			$	(920)					(933)
Net deferred income tax liability			$	(230)					(162)

Total income taxes paid were approximately $400, $650 and $680 in 2020, 2019 and 2018, respectively. Net operating losses, capital losses and tax credits include $126 of capital losses expected to be recovered in the next 12 months. More than half of the remaining $361 of net operating losses and tax credits expire over the next 9 years, while most of the remainder can be carried forward indefinitely.

(15) STOCK-BASED COMPENSATION

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

Total compensation expense and income tax benefits for stock options and incentive shares follows. The Company's performance shares awards are marked-to-market each period based on changes in the stock price.

			2018						2019						2020
Performance shares			$	192					96						98
Restricted stock and restricted stock units			17						21						11
Stock options			7						3						1
Total stock compensation expense			$	216					120						110
Income tax benefits recognized			$	42					20						18

As of September 30, 2020, total unrecognized compensation expense related to unvested shares awarded under these plans was $127, which is expected to be recognized over a weighted-average period of 1.7 years.

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 at the conclusion of a three-year period subject to certain operating performance conditions and other restrictions. The form of distribution is primarily shares of common stock, with a portion in cash in the first quarter following the end of the applicable three-year performance period. Dividend equivalents are only paid on earned awards after the performance period has concluded. 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.

Information related to performance share payouts for the years ended September 30, 2019 and 2020 follows (shares in thousands):

			2019						2020
Performance period			2016 - 2018						2017 - 2019
Percent payout			97		%				107		%
Total shares earned			1,819						2,008
Shares distributed in cash, primarily for tax withholding			795						883

As of September 30, 2020, approximately 1,538,000 shares awarded primarily in 2018 were outstanding, contingent on the Company achieving its performance objectives through 2020. The objectives for these shares were met at the 100 percent level and the shares will be distributed in early 2021.

Additionally, the rights to receive approximately 1,592,000 and 1,381,000 common shares were awarded in 2020 and 2019, respectively, under the new performance shares program, and are outstanding and contingent upon the Company achieving its performance objectives through 2022 and 2021, respectively.

Incentive shares plans also include restricted stock awards and restricted stock units. Restricted stock awards 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 while restricted stock units granted to employees cliff vest at the end of a three-year period. The fair value of restricted stock awards and restricted stock units 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 vesting period. In 2020, approximately 173,000 shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently, approximately

100,000 shares were issued while 73,000 shares were withheld for income taxes in accordance with minimum withholding requirements. As of September 30, 2020, there were approximately 1,405,000 shares of unvested restricted stock and restricted stock units outstanding.

In addition to the employee stock option and incentive shares plans, in 2020 the Company awarded approximately 19,000 shares of restricted stock and 2,000 restricted stock units under the restricted stock plan for non-management directors. As of September 30, 2020, approximately 119,000 shares were available for issuance under this plan.

As of September 30, 2020, 7.0 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, 2020 follow (shares in thousands; assumes 100 percent payout of unvested awards):

			Shares						Average Grant Date Fair Value Per Share
Beginning of year			6,325									$	60.63
Granted			1,949									$	72.42
Adjustment for performance results achieved			131									$	51.98
Earned/vested			(2,259)									$	52.42
Canceled			(230)									$	67.59
End of year			5,916									$	67.22

Information related to incentive shares plans follows:

			2018						2019						2020
Total fair value of shares earned/vested			$	20					145						164
Share awards distributed in cash, primarily for tax withholding			$	9					73						81

Stock Options

There were no stock option grants in 2020 and 2019, and options granted in 2018 were immaterial. 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, 2020, 11.6 million options were available for grant under the plans.

Changes in shares subject to options during the year ended September 30, 2020 follow (shares in thousands):

			Weighted- Average Exercise Price Per Share												Shares						Total Intrinsic Value of Shares												Average Remaining Life (Years)
Beginning of year						$	57.23								6,915
Options granted						$	—								—
Options exercised						$	55.43								(2,743)
Options canceled						$	58.21								(39)
End of year						$	58.42								4,133									$	31											3.9
Exercisable at end of year						$	58.41								4,126									$	31											3.9

Information related to stock options follows:

			2018						2019						2020
Cash received for option exercises			$	143					40						126
Intrinsic value of options exercised			$	53					16						47
Tax benefits related to option exercises			$	7					8						8

(16) COMMON AND PREFERRED STOCK

At September 30, 2020, 29.4 million shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During 2020, 16.4 million common shares were purchased and 3.4 million treasury shares were reissued. In 2019, 19.9 million common shares were purchased and 1.8 million treasury shares were reissued.

At September 30, 2020 and 2019, 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			2018						2019						2020
Beginning balance			$	(369)					(600)						(794)
Other comprehensive income (loss), net of taxes of $0, $(16) and $29, respectively			(214)						(194)						83
Reclassified to gain/loss on sale of business			(17)						—						—
Ending balance			(600)						(794)						(711)
Pension and postretirement
Beginning balance			(662)						(420)						(928)
Actuarial gains (losses) deferred during the period, net of taxes of $(76), $165 and $15, respectively			250						(560)						(49)
Amortization of deferred actuarial losses into earnings, net of taxes of $(29), $(15) and $(34), respectively			94						52						113
Adoption of accounting standard update			(102)						—						—
Ending balance			(420)						(928)						(864)
Cash flow hedges
Beginning balance			12						5						—
Gains (Losses) deferred during the period, net of taxes of $0, $1 and $2, respectively			2						(3)						(9)
Reclassifications of realized (gains) losses to sales and cost of sales, net of taxes of $4, $0 and $(2), respectively			(11)						(2)						7
Adoption of accounting standard update			2						—						—
Ending balance			5						—						(2)
Accumulated other comprehensive income (loss)			$	(1,015)					(1,722)						(1,577)

(18) BUSINESS SEGMENTS INFORMATION

The Company designs and manufactures products and delivers services that bring technology and engineering together to provide innovative solutions for customers in a wide range of industrial, commercial and consumer markets around the world. The Company reports 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. Markets served include oil and gas, refining, chemicals, power generation, life sciences, 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 mechanical, electrical, utility and do-it-yourself 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
			2018						2019						2020						2018						2019						2020						2018						2019						2020
Automation Solutions			$	11,441					12,202						11,155						$	1,886					1,947						1,523						$	13,720					13,996						14,250
Climate Technologies			4,454						4,313						3,980						972						883						801						2,936						2,885						3,065
Tools & Home Products			1,528						1,856						1,663						380						388						317						1,560						1,462						1,491
Commercial & Residential Solutions			5,982						6,169						5,643						1,352						1,271						1,118						4,496						4,347						4,556
Corporate items:
Stock compensation									—												(216)						(120)						(110)						—						—
Unallocated pension and postretirement costs																					79						108						53
Corporate and other																					(275)						(173)						(93)						2,174						2,154						4,076
Eliminations/Interest			(15)						1						(13)						(159)						(174)						(156)
Total			$	17,408					18,372						16,785						$	2,667					2,859						2,335						$	20,390					20,497						22,882

Automation Solutions sales by major product offering are summarized below:

						2018						2019						2020
Measurement & Analytical Instrumentation						$	3,604					3,807						3,237
Valves, Actuators & Regulators						3,749						3,794						3,589
Industrial Solutions						1,967						2,232						2,012
Process Control Systems & Solutions						2,121						2,369						2,317
Total						$	11,441					12,202						11,155

			Depreciation and Amortization																		Capital Expenditures
			2018						2019						2020						2018						2019						2020
Automation Solutions			$	488					535						557						$	295					297						308
Climate Technologies			171						176						184						209						222						158
Tools & Home Products			44						71						77						64						59						58
Commercial & Residential Solutions			215						247						261						273						281						216
Corporate and other			55						40						36						49						16						14
Total			$	758					822						854						$	617					594						538

Depreciation and amortization includes intellectual property, customer relationships and capitalized software.

Geographic Information

			Automation Solutions																		Commercial & Residential Solutions																		Total
			2018						2019						2020						2018						2019						2020						2018						2019						2020
Americas			$	5,517					5,850						5,051						$	3,967					4,253						3,896						$	9,484					10,103						8,947
Asia, Middle East & Africa			3,657						3,891						3,801						1,384						1,192						1,053						5,041						5,083						4,854
Europe			2,267						2,461						2,303						631						724						694						2,898						3,185						2,997
Total			$	11,441					12,202						11,155						$	5,982					6,169						5,643						$	17,423					18,371						16,798

Sales in the U.S. were $7,420, $8,390 and $7,939 for 2020, 2019 and 2018, respectively, while Asia, Middle East & Africa includes sales in China of $1,845, $1,962 and $1,955 in those years.

						Property, Plant and Equipment
						2018						2019						2020
Americas						$	2,234					2,339						2,345
Asia, Middle East & Africa						652						671						679
Europe						676						632						664
Total						$	3,562					3,642						3,688

Assets located in the U.S. were $2,124 in 2020, $2,128 in 2019 and $2,027 in 2018.

(19) OTHER FINANCIAL DATA

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

			2018						2019						2020
Research and development expense			$	436					454						439
Depreciation expense			$	444					463						485
Rent expense			$	279					285						239

Items reported in other noncurrent assets included the following:

			2019						2020
Operating lease right-of-use assets			$	—					508
Pension assets			$	164					265
Asbestos-related insurance receivables			$	115					100
Deferred income taxes			$	97					99

Items reported in accrued expenses included the following:

			2019						2020
Customer advances (contract liabilities)			$	519					583
Employee compensation			$	606					577
Operating lease liabilities (current)			$	—					148
Product warranty			$	140					148

Other liabilities are summarized as follows:

			2019						2020
Pension and postretirement liabilities			$	775					769
Operating lease liabilities (noncurrent)			—						373
Deferred income taxes			327						261
Asbestos litigation			313						295
Other			556						626
Total			$	1,971					2,324

(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

			First Quarter												Second Quarter												Third Quarter												Fourth Quarter												Full Year
			2019						2020						2019						2020						2019						2020						2019						2020						2019						2020
Net sales			$	4,147					4,151						4,570						4,162						4,684						3,914						4,971						4,558						18,372						16,785
Gross profit			$	1,761					1,759						1,925						1,750						2,001						1,618						2,128						1,882						7,815						7,009
Net earnings common stockholders			$	465					326						520						517						604						399						717						723						2,306						1,965
Net earnings per common share:
Basic			$	0.74					0.53						0.85						0.85						0.98						0.67						1.17						1.21						3.74						3.26
Diluted			$	0.74					0.53						0.84						0.84						0.97						0.67						1.16						1.20						3.71						3.24
Dividends per common share			$	0.49					0.50						0.49						0.50						0.49						0.50						0.49						0.50						1.96						2.00

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 NYSE Chicago.

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, 2020 and 2019, 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, 2020, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2020, 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, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of October 1, 2019, due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases.

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.

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 statement of earnings, the Company recorded $16.8 billion of net sales in 2020.

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 following are the primary procedures we performed to address this critical audit matter. We 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:

• Evaluated the design and tested the operating effectiveness of 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.

We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed.

/s/ KPMG LLP

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

St. Louis, Missouri

November 16, 2020