Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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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 and shares in millions, except per share amounts)


	2019		2020	2021

Net sales	$	18,372	16,785	18,236
Costs and expenses:
Cost of sales	10,557		9,776	10,673
Selling, general and administrative expenses	4,457		3,986	4,179

Other deductions, net	325		532	318
Interest expense, net of interest income of: 2019, $27; 2020, $19; 2021, $12	174		156	154
Earnings before income taxes	2,859		2,335	2,912
Income taxes	531		345	585


Net earnings	2,328		1,990	2,327
Less: Noncontrolling interests in earnings of subsidiaries	22		25	24
Net earnings common stockholders	$	2,306	1,965	2,303

Earnings per share:








Basic	$	3.74	3.26	3.85



Diluted	$	3.71	3.24	3.82

Weighted average outstanding shares:
Basic	616.2		602.9	598.1
Diluted	620.6		606.6	601.8

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30

(Dollars in millions)


	2019		2020	2021
Net earnings	$	2,328	1,990	2,327

Other comprehensive income (loss), net of tax:
Foreign currency translation	(194)		85	81
Pension and postretirement	(508)		64	605
Cash flow hedges	(5)		(2)	18
Total other comprehensive income (loss)	(707)		147	704

Comprehensive income	1,621		2,137	3,031

Less: Noncontrolling interests in comprehensive income of subsidiaries	22		27	23
Comprehensive income common stockholders	$	1,599	2,110	3,008

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)


	2020		2021
ASSETS
Current assets
Cash and equivalents	$	3,315	2,354
Receivables, less allowances of $138 in 2020 and $116 in 2021	2,802		2,971
Inventories	1,928		2,050
Other current assets	761		1,057

Total current assets	8,806		8,432

Property, plant and equipment, net	3,688		3,738

Other assets
Goodwill	6,734		7,723
Other intangible assets	2,468		2,877
Other	1,186		1,945

Total other assets	10,388		12,545
Total assets	$	22,882	24,715

LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt	$	1,160	872
Accounts payable	1,715		2,108
Accrued expenses	2,910		3,266


Total current liabilities	5,785		6,246

Long-term debt	6,326		5,793

Other liabilities	2,324		2,753



Equity

Common stock, $0.50 par value; authorized, 1,200.0 shares; issued, 953.4 shares; outstanding, 598.0 shares in 2020; 595.8 shares in 2021	477		477
Additional paid-in-capital	470		522
Retained earnings	24,955		26,047
Accumulated other comprehensive income (loss)	(1,577)		(872)
	24,325		26,174
Less: Cost of common stock in treasury, 355.4 shares in 2020; 357.6 shares in 2021	15,920		16,291
Common stockholders’ equity	8,405		9,883
Noncontrolling interests in subsidiaries	42		40
Total equity	8,447		9,923
Total liabilities and equity	$	22,882	24,715







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)


	2019		2020	2021

Common stock	$	477	477	477

Additional paid-in-capital
Beginning balance	348		393	470
Stock plans	45		77	52

Ending balance	393		470	522

Retained earnings
Beginning balance	23,072		24,199	24,955
Net earnings common stockholders	2,306		1,965	2,303
Dividends paid (per share: 2019, $1.96; 2020, $2.00; 2021, $2.02)	(1,209)		(1,209)	(1,210)
Adoption of accounting standard updates	30		—	(1)
Ending balance	24,199		24,955	26,047

Accumulated other comprehensive income (loss)
Beginning balance	(1,015)		(1,722)	(1,577)
Foreign currency translation	(194)		83	82
Pension and postretirement	(508)		64	605
Cash flow hedges	(5)		(2)	18
Ending balance	(1,722)		(1,577)	(872)

Treasury stock
Beginning balance	(13,935)		(15,114)	(15,920)
Purchases	(1,250)		(942)	(500)
Issued under stock plans	71		136	129
Ending balance	(15,114)		(15,920)	(16,291)

Common stockholders' equity	8,233		8,405	9,883

Noncontrolling interests in subsidiaries
Beginning balance	43		40	42
Net earnings	22		25	24
Other comprehensive income	—		2	(1)
Dividends paid	(25)		(25)	(25)

Ending balance	40		42	40

Total equity	$	8,273	8,447	9,923

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

EMERSON ELECTRIC CO. & SUBSIDIARIES

Years ended September 30 (Dollars in millions)


	2019		2020	2021
Operating activities
Net earnings	$	2,328	1,990	2,327

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	822		854	969
Stock compensation expense	120		110	224
Pension expense	2		67	28
Pension funding	(60)		(66)	(41)
Changes in operating working capital	(150)		148	203
Other, net	(56)		(20)	(135)


Cash provided by operating activities	3,006		3,083	3,575

Investing activities
Capital expenditures	(594)		(538)	(581)
Purchases of businesses, net of cash and equivalents acquired	(469)		(126)	(1,611)
Divestitures of businesses	14		—	34
Other, net	(125)		(76)	38


Cash used in investing activities	(1,174)		(740)	(2,120)

Financing activities
Net decrease in short-term borrowings	(6)		(90)	(504)
Proceeds from short-term borrowings greater than three months	—		1,043	71
Payments of short-term borrowings greater than three months	—		(1,043)	(71)
Proceeds from long-term debt	1,691		2,233	—
Payments of long-term debt	(656)		(503)	(308)
Dividends paid	(1,209)		(1,209)	(1,210)
Purchases of common stock	(1,250)		(942)	(500)

Other, net	39		2	100
Cash used in financing activities	(1,391)		(509)	(2,422)

Effect of exchange rate changes on cash and equivalents	(40)		(13)	6
Increase (Decrease) in cash and equivalents	401		1,821	(961)
Beginning cash and equivalents	1,093		1,494	3,315
Ending cash and equivalents	$	1,494	3,315	2,354

Changes in operating working capital
Receivables	$	51	207	(165)
Inventories	(87)		(6)	(126)
Other current assets	(87)		33	(99)
Accounts payable	(37)		(196)	370
Accrued expenses	10		110	223

Total changes in operating working capital	$	(150)	148	203

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.

Effective October 1, 2020, the Company adopted two accounting standard updates and one new accounting standard, and in fiscal 2020 adopted updates to ASC 815, all of which had an immaterial impact on the Company's financial statements. These included:

Updates to ASC 350, Intangibles - Goodwill and Other, which eliminate the requirement to measure impairment based on the implied fair value of goodwill compared to the carrying amount of a reporting unit’s goodwill. Instead, goodwill impairment will be measured as the excess of a reporting unit’s carrying amount over its estimated fair value.
Updates to ASC 350, Intangibles - Goodwill and Other, which align the requirements for capitalizing implementation costs incurred in a software hosting arrangement with the requirements for costs incurred to develop or obtain internal-use software.
Adoption of ASC 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach to estimate lifetime expected credit losses on certain types of financial instruments, including trade receivables.
Updates to ASC 815, Derivatives and Hedging, which permit hedging certain contractually specified risk components. The updates also eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements.

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 2019 continue to be reported in accordance with the Company's historical accounting under ASC 840, Leases.

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.

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:


	2020		2021
Finished products	$	584	616
Raw materials and work in process	1,344		1,434
Total inventories	$	1,928	2,050

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:


	2020		2021
Land	$	350	359
Buildings	2,335		2,493
Machinery and equipment	5,907		6,097
Construction in progress	463		478
Property, plant and equipment, at cost	9,055		9,427
Less: Accumulated depreciation	5,367		5,689
Property, plant and equipment, net	$	3,688	3,738

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. An impairment charge would be recorded for the amount by which the carrying value of the reporting unit exceeds the estimated fair 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. 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-half of 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 Systems & Software product offering within the Automation Solutions segment where revenue is recognized using the percentage-of-completion method to reflect the transfer of control over time, while a small amount is attributable to long-term maintenance and service contracts where revenue is typically recognized on a straight-line basis as the services are provided. Approximately 5 percent of revenues relate to sales arrangements with multiple performance obligations, principally in the Automation Solutions segment. Tangible products represent a large majority of the delivered items in contracts with multiple performance obligations or where revenue is recognized over time, while a smaller portion is attributable to installation, service and maintenance.

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

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

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

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

Derivatives and Hedging

In the normal course of business, the Company is exposed to changes in interest rates, foreign currency exchange rates and commodity prices due to its worldwide presence and diverse business profile. The Company's foreign currency exposures relate to transactions denominated in currencies that differ from the functional currencies of its business units, primarily in euros, Mexican pesos, and Singapore dollars. Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum and related products. As part of the Company's risk

management strategy, derivative instruments are selectively used in an effort to minimize the impact of these exposures. Foreign exchange forwards and options are utilized to hedge foreign currency exposures impacting sales or cost of sales transactions, firm commitments and the fair value of assets and liabilities, while swap and option contracts may be used to minimize the effect of commodity price fluctuations on the cost of sales. Non-U.S. dollar obligations are utilized to reduce foreign currency risk associated with the Company's net investments in foreign operations. All derivatives are associated with specific underlying exposures and the Company does not hold derivatives for trading or speculative purposes. The duration of hedge positions is generally two years or less, except for the Company's net investment hedges.

All derivatives are accounted for under ASC 815, Derivatives and Hedging, and recognized at fair value. For derivatives hedging variability in future cash flows, 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 investment-grade credit ratings. The Company has bilateral collateral arrangements with counterparties with credit rating-based posting thresholds that vary depending on the arrangement. If credit ratings on the Company's debt fall below pre-established levels, counterparties can require immediate full collateralization on all derivatives in net liability positions. The maximum amount that could potentially have been required was immaterial. The Company also can demand full collateralization of derivatives in net asset positions should any counterparty credit ratings fall below certain thresholds. No collateral was posted with counterparties and none was held by the Company at year end. 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. Effective in fiscal 2019, the Tax Cuts and Jobs Act 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. 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 $5.5 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2021, 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.


	2020		2021
Unbilled receivables (contract assets)	$	458	528
Customer advances (contract liabilities)	(583)		(730)
Net contract liabilities	$	(125)	(202)

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 2021 included approximately $460 that was included in the beginning contract liability balance. Other factors that impacted the change in net contract liabilities were immaterial.

Revenue recognized for 2021 for performance obligations that were 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, 2021, the Company's backlog relating to unsatisfied (or partially unsatisfied) performance obligations in contracts with its customers was approximately $6.5 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 2021, 2020 and 2019 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):


	2019	2020	2021
Basic shares outstanding	616.2	602.9	598.1
Dilutive shares	4.4	3.7	3.7
Diluted shares outstanding	620.6	606.6	601.8

(4) ACQUISITIONS AND DIVESTITURES

On October 11, 2021, the Company announced that it entered into a definitive agreement with Aspen Technology, Inc. ("AspenTech") to combine two of Emerson's stand-alone industrial software businesses, Open Systems International, Inc. ("OSI") and the geological simulation software business, along with a contribution of $6.0 billion in cash to AspenTech shareholders, to create "new AspenTech", a diversified, high-performance industrial software leader with greater scale, capabilities and technologies. Upon closing of the transaction, the Company will own 55 percent of new AspenTech and its results and financial position will be fully consolidated in Emerson's financial statements.

On October 1, 2020, the Company completed the acquisition of Open Systems International, Inc. (OSI), a leading operations technology software provider in the global power industry, for approximately $1.6 billion, net of cash acquired. This business, which had net sales of $191 in fiscal 2021 and is reported in the Automation Solutions segment, expands the Company's offerings in the power industry to include the digitization and modernization of the

electric grid. The Company recognized goodwill of $967 (none of which is expected to be tax deductible), identifiable intangible assets of $783, primarily intellectual property and customer relationships with a weighted-average useful life of approximately 11 years, and deferred tax liabilities of $193. Results of operations for the year ended September 30, 2021 included first year pretax acquisition accounting charges related to backlog amortization and deferred revenue of $30 and $14, respectively, and fees of $6.

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. These three businesses had combined annual sales of approximately $50.

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.

As previously disclosed, the Company sold its network power systems business (rebranded as Vertiv, now a publicly traded company, symbol VRT) in 2017 and retained a subordinated interest contingent upon the equity holders first receiving a threshold return on their initial investment. Subsequent to September 30, 2021, the equity holders received a return on their investment in excess of the threshold. Based on the terms of the agreement and the current calculation, the Company could receive approximately $600 on a pretax basis through periodic distributions over the next two years, of which $438 was received in November 2021. However, the remaining distributions are contingent on the timing and price at which Vertiv shares are sold by the equity holders and therefore, there can be no assurance as to the amount or timing of the remaining distributions to the Company. As of September 30, 2021, no amounts have been recognized in the financial statements related to this gain contingency.

(5) OTHER DEDUCTIONS, NET


Other deductions, net are summarized below:
	2019		2020	2021
Amortization of intangibles (intellectual property and customer relationships)	$	238	239	300
Restructuring costs	95		284	150
Other	(8)		9	(132)
Total	$	325	532	318

The increase in intangibles amortization expense for 2021 was due to the OSI acquisition, including backlog amortization of $30. 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 2021 was primarily due to a favorable impact from pensions and investment-related gains, including gains in the first quarter of fiscal 2021 of $21 from an investment sale and $17 from the acquisition of full ownership of an equity investment, and a gain in the second quarter of $31 from the sale of an equity investment. The change in 2020 was primarily due to special advisory fees 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 $150, $284 and $95 for 2021, 2020 and 2019, respectively. The Company expects fiscal year 2022 restructuring expense to be approximately $150.

Restructuring costs by business segment follows:


	2019		2020	2021
Automation Solutions	$	65	232	123

Climate Technologies	20		23	15
Tools & Home Products	7		21	7
Commercial & Residential Solutions	27		44	22

Corporate	3		8	5

Total	$	95	284	150

Costs incurred in 2021 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 2021 included workforce reductions of approximately 3,600 positions and the exit of eight production facilities worldwide. Costs incurred in 2020 and 2019 primarily 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. Expenses incurred in 2020 and 2019 included actions to exit six and two facilities, and eliminate approximately 5,400 and 1,100 positions, respectively.

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


	2020		Expense		Utilized/Paid		2021
Severance and benefits	$	176		112		116	172
Other	5			38		39	4
Total	$	181		150		155	176


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

The tables above do not include $38 and $20 of costs related to restructuring actions incurred for the year ended September 30, 2021 and 2020, respectively, that are required to be reported in cost of sales and selling, general and administrative expenses.

(7) LEASES

The components of lease expense for the years ended September 30 were as follows:


	2020		2021
Operating lease expense	$	207	195
Variable lease expense	$	19	17

Short-term lease expense and sublease income were immaterial for the years ended September 30, 2021 and September 30, 2020. Cash paid for operating leases is classified within operating cash flows and was $192 and $201 for the years ended September 30, 2021 and 2020, respectively. Operating lease right-of-use asset additions was $194 and $210 for the years ended September 30, 2021 and 2020, respectively.

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 and 2021, the vast majority of which relates to offices and manufacturing facilities:


	2020		2021
Right-of-use assets (Other assets)	$	508	558
Current lease liabilities (Accrued expenses)	$	148	155
Noncurrent lease liabilities (Other liabilities)	$	373	413

The weighted-average remaining lease term for operating leases was 5.8 years, and 4.6 years and the weighted-average discount rate was 2.6 percent and 2.8 percent as of September 30, 2021 and September 30, 2020, respectively.

Future maturities of operating lease liabilities as of September 30, 2021 are summarized below:


	2021
2022	$	166
2023	131
2024	97
2025	62
2026	39
Thereafter	125
Total lease payments	620
Less: Interest	52
Total lease liabilities	$	568

Lease commitments that have not yet commenced were immaterial as of September 30, 2021.

(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, 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
Acquisitions	967		23	—	23	990

Foreign currency translation and other	2		—	(3)	(3)	(1)
Balance, September 30, 2021	$	6,552	753	418	1,171	7,723

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


	Customer Relationships			Intellectual Property		Capitalized Software		Total
	2020		2021	2020	2021	2020	2021	2020	2021
Gross carrying amount	$	2,059	2,391	1,628	2,062	1,419	1,458	5,106	5,911
Less: Accumulated amortization	731		896	773	923	1,134	1,215	2,638	3,034
Net carrying amount	$	1,328	1,495	855	1,139	285	243	2,468	2,877

Intangible asset amortization expense for the major classes included above for 2021, 2020 and 2019 was $470, $369 and $359, respectively. Based on intangible asset balances as of September 30, 2021, amortization expense is expected to approximate $408 in 2022, $379 in 2023, $347 in 2024, $306 in 2025 and $274 in 2026. The increase in goodwill and intangible assets reflect the acquisition of Open Systems International, Inc.

(9) FINANCIAL INSTRUMENTS

Following is a discussion regarding the Company’s use of financial instruments:

Hedging Activities

As of September 30, 2021, the notional amount of foreign currency hedge positions was approximately $2.0 billion, and commodity hedge contracts totaled approximately $137 (primarily 39 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, 2021 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.

The following gains and losses are included in earnings and other comprehensive income (OCI):


		Gain (Loss) to Earnings				Gain (Loss) to OCI
		2019		2020	2021	2019	2020	2021
	Location
Commodity	Cost of sales	$	(11)	(8)	33	(10)	10	29
Foreign currency	Sales	(7)		(5)	3	(8)	4	3
Foreign currency	Cost of sales	20		4	8	14	(25)	34
Foreign currency	Other deductions, net	66		(40)	53

Net Investment Hedge
Euro denominated debt						70	(123)	21
Total		$	68	(49)	97	66	(134)	87

Regardless of whether derivatives and non-derivative financial instruments receive hedge accounting, the Company expects hedging gains or losses to be 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

Valuations for all derivatives and the Company's long-term debt fall within Level 2 of the GAAP valuation hierarchy. The fair value of long-term debt was $6.8 billion and $7.3 billion, respectively, as of September 30, 2021 and 2020, which exceeded the carrying value by $485 and $629, respectively. The fair values of commodity and foreign currency contracts were reported in Other current assets and Accrued expenses as summarized below:


	2020				2021
	Assets			Liabilities	Assets	Liabilities
Commodity		$	11	—	12	6
Foreign currency		$	26	25	36	6

(10) SHORT-TERM BORROWINGS AND LINES OF CREDIT

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


	2020		2021
Current maturities of long-term debt	$	322	538
Commercial paper	838		334
Total	$	1,160	872

Interest rate for weighted-average short-term borrowings at year end	0.1%		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 alternatives at the Company’s option. Fees to maintain the facility are immaterial.

(11) LONG-TERM DEBT

The details of long-term debt follow:


	2020		2021
4.25% notes due November 2020	$	300	—
2.625% notes due December 2021	500		500
2.625% notes due February 2023	500		500
0.375% euro notes due May 2024	586		579
3.15% notes due June 2025	500		500
1.25% euro notes due October 2025	586		579
0.875% notes due October 2026	750		750
1.8% notes due October 2027	500		500
2.0% euro notes due October 2029	586		579
1.95% notes due October 2030	500		500
6.0% notes due August 2032	250		250
6.125% notes due April 2039	250		250
5.25% notes due November 2039	300		300
2.75% notes due October 2050	500		500
Other	40		44
Long-term debt	6,648		6,331
Less: Current maturities	322		538
Total, net	$	6,326	5,793

Long-term debt maturing during each of the four years after 2022 is $505, $592, $497 and $577, respectively. Total interest paid on long-term debt was approximately $156, $163 and $195 in 2021, 2020 and 2019, respectively. During the year, the Company repaid $300 of 4.25% notes that matured in November 2020. In 2020, 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.

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
	2019		2020	2021	2019	2020	2021
Defined benefit plans:
Service cost (benefits earned during the period)	$	47	57	54	24	30	29
Interest cost	155		125	94	38	30	32
Expected return on plan assets	(281)		(268)	(264)	(68)	(72)	(74)
Net amortization and other	81		148	143	6	17	14
Net periodic pension expense	2		62	27	—	5	1
Defined contribution plans	125		112	114	56	56	52
Total retirement plans expense	$	127	174	141	56	61	53

Net periodic pension expense decreased in 2021 primarily due to lower interest cost. 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
	2020		2021	2020	2021
Projected benefit obligation, beginning	$	4,410	4,525	1,584	1,633
Service cost	57		54	30	29
Interest cost	125		94	30	32
Actuarial loss (gain)	260		(13)	3	(101)
Benefits paid	(202)		(218)	(37)	(39)
Settlements	(111)		(105)	(46)	(35)

Foreign currency translation and other	(14)		1	69	43
Projected benefit obligation, ending	$	4,525	4,338	1,633	1,562

Fair value of plan assets, beginning	$	4,208	4,383	1,284	1,367
Actual return on plan assets	466		771	58	100
Employer contributions	20		12	46	29
Benefits paid	(202)		(218)	(37)	(39)
Settlements	(111)		(105)	(46)	(35)

Foreign currency translation and other	2		1	62	52
Fair value of plan assets, ending	$	4,383	4,844	1,367	1,474

Net amount recognized in the balance sheet	$	(142)	506	(266)	(88)

Location of net amount recognized in the balance sheet:
Noncurrent asset	$	140	732	125	283
Current liability	(11)		(13)	(15)	(16)
Noncurrent liability	(271)		(213)	(376)	(355)

Net amount recognized in the balance sheet	$	(142)	506	(266)	(88)

Pretax accumulated other comprehensive loss	$	(937)	(274)	(316)	(182)

Actuarial gains in 2021 were largely due to an increase in the discount rates used to estimate the benefit obligations for the U.S. and non-U.S. plans, which were 2.92% and 2.2% at September 30, 2021 compared to 2.81% and 1.9% at September 30, 2020, respectively. Actuarial losses in 2020 were largely due to a decrease in the discount rate used to estimate the benefit obligations for the U.S. plan, which was 2.81% at September 30, 2020 compared to 3.22% at September 30, 2019. As of September 30, 2021, U.S. pension plans were overfunded by $506 in total, including unfunded plans totaling $220. The non-U.S. plans were underfunded by $88, including unfunded plans totaling $318.

As of the September 30, 2021 and 2020 measurement dates, the plans' total accumulated benefit obligation was $5,634 and $5,859, respectively. The total projected benefit obligation, accumulated benefit obligation and fair value of plan assets for individual plans with projected benefit obligations in excess of plan assets were $1,142, $1,016 and $544, respectively, for 2021, and $1,200, $1,055 and $527, respectively, for 2020. 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 $711, $626 and $123, respectively, for 2021, and $1,153, $1,034 and $492, respectively, for 2020.

Future benefit payments by U.S. plans are estimated to be $212 in 2022, $217 in 2023, $222 in 2024, $227 in 2025, $231 in 2026 and $1,192 in total over the five years 2027 through 2031. Based on foreign currency exchange rates as of September 30, 2021, future benefit payments by non-U.S. plans are estimated to be $68 in 2022, $66 in 2023, $70 in 2024, $71 in 2025, $74 in 2026 and $415 in total over the five years 2027 through 2031. The Company expects to contribute approximately $50 to its retirement plans in 2022.

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


	U.S. Plans						Non-U.S. Plans
	2019		2020		2021		2019		2020		2021
Net pension expense

Discount rate used to determine service cost	4.33	%	3.40	%	3.16	%	2.7	%	1.9	%	1.9	%
Discount rate used to determine interest cost	3.98	%	2.87	%	2.10	%	2.7	%	1.9	%	1.9	%
Expected return on plan assets	7.00	%	6.75	%	6.50	%	6.1	%	5.8	%	5.6	%
Rate of compensation increase	3.25	%	3.25	%	3.25	%	3.5	%	3.7	%	3.6	%

Benefit obligations
Discount rate	3.22	%	2.81	%	2.92	%	1.9	%	1.9	%	2.2	%
Rate of compensation increase	3.25	%	3.25	%	3.25	%	3.7	%	3.6	%	3.7	%

The discount rate for the U.S. retirement plans was 2.92 percent as of September 30, 2021. 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, 2021 and 2020, and weighted-average target allocations follow:


	U.S. Plans					Non-U.S. Plans
	2020		2021		Target	2020		2021		Target
Equity securities	49	%	39	%	35-45%	41	%	35	%	30-40%
Debt securities	45		55		50-60	48		55		50-60
Other	6		6		0-10	11		10		5-15
Total	100	%	100	%	100%	100	%	100	%	100%

The primary objective for the investment of pension assets is to secure participant retirement benefits by earning a reasonable rate of return. Plan assets are invested consistent with the provisions of the prudence and diversification rules of ERISA and with a long-term investment horizon. The Company continuously monitors the value of assets by class and routinely rebalances to remain within target allocations. The equity strategy is to minimize concentrations of risk by investing primarily in a mix of companies that are diversified across geographies, market capitalization, style, sectors and industries worldwide. The approach for bonds emphasizes investment-grade corporate and government debt with maturities matching a portion of the longer duration pension liabilities. The bonds strategy also includes a high-yield element which is generally shorter in duration. For diversification, a small portion of U.S. plan assets is allocated to private equity partnerships and real asset fund investments, providing opportunities for above market returns. Leveraging techniques are not used and the use of derivatives in any fund is limited and inconsequential.

The fair values of defined benefit pension assets as of September 30, organized by asset class and by the fair value hierarchy of ASC 820, Fair Value Measurement, follow. Investments valued based on the net asset value (NAV) of fund units held, as derived from the fair value of the underlying assets, are excluded from the fair value hierarchy.


	Level 1		Level 2	Level 3	Measured at NAV	Total	%
2021
U.S. equities	$	591	9	—	670	1,270	20	%
International equities	356		17	—	563	936	15	%
Emerging market equities	—		1	—	212	213	3	%
Corporate bonds	—		1,516	—	565	2,081	33	%
Government bonds	—		642	—	730	1,372	22	%

Other	46		8	135	257	446	7	%
Total	$	993	2,193	135	2,997	6,318	100	%

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	%

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 $270 at September 30, 2021. 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 $119 and $135 as of September 30, 2021 and 2020, respectively, and included deferred actuarial gains in accumulated other comprehensive income of $98 and $106, 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 $15 for 2021 and $12 for 2020 and 2019. Benefits paid were

$9 and $12 for 2021 and 2020, respectively, and the Company estimates that future health care benefit payments will be approximately $10 per year for 2022 through 2026, and $38 in total over the five years 2027 through 2031.

(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. See Note 19 for additional information about the Company's asbestos liabilities and related insurance receivables.

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, 2021, 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:


	2019		2020	2021
United States	$	1,771	1,360	1,491
Non-U.S.	1,088		975	1,421
Total pretax earnings	$	2,859	2,335	2,912

The principal components of income tax expense follow:


	2019		2020	2021
Current:
U.S. federal	$	247	123	152
State and local	24		15	26
Non-U.S.	308		288	355

Deferred:
U.S. federal	(2)		(44)	81
State and local	12		1	(2)
Non-U.S.	(58)		(38)	(27)
Income tax expense	$	531	345	585

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


	2019		2020		2021
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State and local taxes, net of U.S. federal tax benefit	1.0		0.6		0.7
Non-U.S. rate differential	1.8		1.7		2.0
Non-U.S. tax holidays	(1.1)		(1.1)		(0.8)
Research and development credits	(0.3)		(1.8)		(0.6)

Foreign derived intangible income	(1.1)		(1.2)		(1.4)

Subsidiary restructuring	(2.6)		(4.4)		(0.5)

Other	(0.1)		—		(0.3)
Effective income tax rate	18.6	%	14.8	%	20.1	%

The tax rates for 2021, 2020 and 2019 include benefits from restructuring subsidiaries of $13, $103 and $74, respectively. The increase in research and development credits in 2020 was due to the impact of a research and development tax credit study.

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 deferred $73 of certain payroll taxes through the end of calendar year 2020, half of which is due in December 2021 with the remainder due in December 2022.

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

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 expected to be reduced by approximately $50 in the next 12 months.


	2020		2021
Unrecognized tax benefits, beginning	$	159	195
Additions for current year tax positions	25		27
Additions for prior year tax positions	29		17
Reductions for prior year tax positions	(8)		(6)
Acquisitions and divestitures	—		1
Reductions for settlements with tax authorities	—		(5)
Reductions for expiration of statutes of limitations	(10)		(10)
Unrecognized tax benefits, ending	$	195	219

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 $185, 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 expense (income) recognized from interest and penalties was $(4), $1 and $4 in 2021, 2020 and 2019, respectively. As of September 30, 2021 and 2020, total accrued interest and penalties were $24 and $29, respectively.

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


	2020		2021
Deferred tax assets:
Net operating losses, capital losses and tax credits	$	487	316
Accrued liabilities	219		216
Postretirement and postemployment benefits	33		29
Employee compensation and benefits	119		149
Pensions	69		—
Other	137		128
Total	$	1,064	838

Valuation allowances	$	(293)	(236)

Deferred tax liabilities:
Intangibles	$	(652)	(787)
Pensions	—		(107)
Property, plant and equipment	(212)		(212)
Undistributed non-U.S. earnings	(36)		(38)
Other	(33)		(54)
Total	$	(933)	(1,198)

Net deferred income tax liability	$	(162)	(596)

Total income taxes paid were approximately $680, $400 and $650 in 2021, 2020 and 2019, respectively. Approximately half of the $316 of net operating losses and tax credits expire over the next 10 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.


	2019		2020	2021
Performance shares	$	96	98	203
Restricted stock and restricted stock units	21		11	21
Stock options	3		1	—
Total stock compensation expense	$	120	110	224

Income tax benefits recognized	$	20	18	27

As of September 30, 2021, total unrecognized compensation expense related to unvested shares awarded under these plans was $164, which is expected to be recognized over a weighted-average period of 1.8 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 terms and 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, 2020 and 2021 follows (shares in thousands):


	2020		2021
Performance period	2017 - 2019		2018 - 2020
Percent payout	107	%	100	%
Total shares earned	2,008		1,535
Shares distributed in cash, primarily for tax withholding	883		672

As of September 30, 2021, approximately 1,327,000 shares awarded primarily in 2019 were outstanding, contingent on the Company achieving its performance objectives through 2021. The objectives for these shares were met at the 101 percent level and the shares will be distributed in early 2022.

Additionally, the rights to receive approximately 1,547,000 and 1,497,000 common shares awarded in 2021 and 2020, respectively, are outstanding and contingent upon the Company achieving its performance objectives through 2023 and 2022, 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 2021, approximately 87,000 shares of restricted stock vested as a result of participants fulfilling the applicable service requirements. Consequently, approximately 57,000 shares were issued while 30,000 shares were withheld for income taxes in accordance with minimum withholding requirements. As of September 30, 2021, there were approximately 1,269,000 shares of unvested restricted stock and restricted stock units outstanding.

In addition to the employee stock option and incentive shares plans, in 2021 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, 2021, approximately 99,000 shares were available for issuance under this plan.

As of September 30, 2021, 5.1 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, 2021 follow (shares in thousands; assumes 100 percent payout of unvested awards):


	Shares	Average Grant Date Fair Value Per Share
Beginning of year	5,916		$	67.22
Granted	2,095		$	71.75

Earned/vested	(1,867)		$	63.28
Canceled	(503)		$	67.54
End of year	5,641		$	70.22

Information related to incentive shares plans follows:


	2019		2020	2021
Total fair value of shares earned/vested	$	145	164	131
Share awards distributed in cash, primarily for tax withholding	$	73	81	58

Stock Options

There were no stock option grants in 2021, 2020 and 2019. The Company's stock option plans expired in fiscal year 2021. Previously awarded stock options allow 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.

Changes in shares subject to options during the year ended September 30, 2021 follow (shares in thousands):


	Weighted- Average Exercise Price Per Share			Shares	Total Intrinsic Value of Shares			Average Remaining Life (Years)
Beginning of year		$	58.42	4,133
Options granted		$	—	—
Options exercised		$	58.85	(2,071)
Options canceled		$	61.19	(45)
End of year		$	57.96	2,017		$	75		3.1
Exercisable at end of year		$	57.96	2,017		$	75		3.1

Information related to stock options follows:


	2019		2020	2021
Cash received for option exercises	$	40	126	114
Intrinsic value of options exercised	$	16	47	53
Tax benefits related to option exercises	$	8	8	6

(16) COMMON AND PREFERRED STOCK

At September 30, 2021, 13.7 million shares of common stock were reserved for issuance under the Company's stock-based compensation plans. During 2021, 5.3 million common shares were purchased and 3.1 million treasury shares were reissued. In 2020, 16.4 million common shares were purchased and 3.4 million treasury shares were reissued.

At September 30, 2021 and 2020, 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, net of income taxes:

Foreign currency translation	2019		2020	2021
Beginning balance	$	(600)	(794)	(711)
Other comprehensive income (loss), net of taxes of $(16), $29 and $(5), respectively	(194)		83	82


Ending balance	(794)		(711)	(629)

Pension and postretirement
Beginning balance	(420)		(928)	(864)
Actuarial gains (losses) deferred during the period, net of taxes of $165, $15 and $(150), respectively	(560)		(49)	499
Amortization of deferred actuarial losses into earnings, net of taxes of $(15), $(34) and $(34), respectively	52		113	106

Ending balance	(928)		(864)	(259)

Cash flow hedges
Beginning balance	5		—	(2)
Gains (Losses) deferred during the period, net of taxes of $1, $2 and $(15), respectively	(3)		(9)	51
Reclassifications of realized (gains) losses to sales and cost of sales, net of taxes of $0, $(2) and $11, respectively	(2)		7	(33)
Ending balance	—		(2)	16

Accumulated other comprehensive income (loss)	$	(1,722)	(1,577)	(872)

(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. In fiscal 2021, the Company reclassified certain software product sales that were previously reported in Measurement and Analytical Instrumentation to Systems & Software (previously described as Process Control Systems & Solutions). 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 and gases, smart actuation and control technologies, pressure management products, and industrial and residential regulators that reduce the pressure of fluids and gases 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.
Systems & Software 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 and sustainability, 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 cash 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
	2019		2020	2021	2019		2020	2021	2019		2020	2021
Automation Solutions	$	12,202	11,155	11,610	$	1,947	1,523	1,948	$	13,996	14,250	15,823

Climate Technologies	4,313		3,980	4,748	883		801	965	2,885		3,065	3,269
Tools & Home Products	1,856		1,663	1,905	388		317	399	1,462		1,491	1,598
Commercial & Residential Solutions	6,169		5,643	6,653	1,271		1,118	1,364	4,347		4,556	4,867

Corporate items:
Stock compensation			—		(120)		(110)	(224)	—		—
Unallocated pension and postretirement costs					108		53	94
Corporate and other					(173)		(93)	(116)	2,154		4,076	4,025
Eliminations/Interest	1		(13)	(27)	(174)		(156)	(154)
Total	$	18,372	16,785	18,236	$	2,859	2,335	2,912	$	20,497	22,882	24,715

Automation Solutions sales by major product offering are summarized below, including the reclassification of prior year amounts to reflect this change.


	2019		2020	2021

Measurement & Analytical Instrumentation	$	3,615	3,108	3,071
Valves, Actuators & Regulators	3,794		3,589	3,483
Industrial Solutions	2,232		2,012	2,266
Systems & Software	2,561		2,446	2,790
Total	$	12,202	11,155	11,610


	Depreciation and Amortization				Capital Expenditures
	2019		2020	2021	2019		2020	2021
Automation Solutions	$	535	557	632	$	297	308	325

Climate Technologies	176		184	191	222		158	143
Tools & Home Products	71		77	76	59		58	94
Commercial & Residential Solutions	247		261	267	281		216	237

Corporate and other	40		36	70	16		14	19
Total	$	822	854	969	$	594	538	581

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

Geographic Information

Sales by major geographic destination are summarized below:


	Automation Solutions				Commercial & Residential Solutions				Total
	2019		2020	2021	2019		2020	2021	2019		2020	2021
Americas	$	5,850	5,051	5,100	$	4,253	3,896	4,513	$	10,103	8,947	9,613
Asia, Middle East & Africa	3,891		3,801	4,046	1,192		1,053	1,277	5,083		4,854	5,323
Europe	2,461		2,303	2,464	724		694	863	3,185		2,997	3,327
Total	$	12,202	11,155	11,610	$	6,169	5,643	6,653	$	18,371	16,798	18,263

Sales in the U.S. were $7,952, $7,420 and $8,390 for 2021, 2020 and 2019, respectively, while Asia, Middle East & Africa includes sales in China of $2,252, $1,845 and $1,962 in those years.


	Property, Plant and Equipment
	2019		2020	2021
Americas	$	2,339	2,345	2,375
Asia, Middle East & Africa	671		679	678
Europe	632		664	685
Total	$	3,642	3,688	3,738

Property, plant and equipment located in the U.S. was $2,141 in 2021, $2,124 in 2020 and $2,128 in 2019.

(19) OTHER FINANCIAL DATA

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


	2019		2020	2021
Research and development expense	$	454	439	485
Rent expense	$	285	239	228

The components of depreciation and amortization expense reported for the years ended September 30 included the following:


	2019		2020	2021
Depreciation expense	$	463	485	499
Amortization of intangibles (includes $15, $17 and $57 reported in Cost of Sales in 2019, 2020 and 2021, respectively) (a)	253		256	357
Amortization of capitalized software	106		113	113
Total	$	822	854	969

(a) Amortization of intangibles includes backlog amortization of $30 related to the OSI acquisition for the year ended September 30, 2021.

Items reported in other noncurrent assets included the following:


	2020		2021
Pension assets	$	265	1,015
Operating lease right-of-use assets	$	508	558
Deferred income taxes	$	99	115
Asbestos-related insurance receivables	$	100	95

Items reported in accrued expenses included the following:


	2020		2021
Customer advances (contract liabilities)	$	583	730
Employee compensation	$	577	690
Operating lease liabilities (current)	$	148	155
Product warranty	$	148	146

Other liabilities are summarized as follows:


	2020		2021
Deferred income taxes	$	261	711
Pension and postretirement liabilities	769		676
Operating lease liabilities (noncurrent)	373		413
Asbestos litigation	295		256
Other	626		697
Total	$	2,324	2,753

(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)


	First Quarter			Second Quarter		Third Quarter		Fourth Quarter		Full Year
	2020		2021	2020	2021	2020	2021	2020	2021	2020	2021
Net sales	$	4,151	4,161	4,162	4,431	3,914	4,697	4,558	4,947	16,785	18,236
Gross profit	$	1,759	1,723	1,750	1,862	1,618	1,982	1,882	1,996	7,009	7,563



Net earnings common stockholders	$	326	445	517	561	399	627	723	670	1,965	2,303





Net earnings per common share:
Basic	$	0.53	0.74	0.85	0.94	0.67	1.05	1.21	1.12	3.26	3.85
Diluted	$	0.53	0.74	0.84	0.93	0.67	1.04	1.20	1.11	3.24	3.82

Dividends per common share	$	0.50	0.505	0.50	0.505	0.50	0.505	0.50	0.505	2.00	2.02

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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2021, 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, 2021 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 Standard 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 $18.2 billion of net sales in 2021.

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 15, 2021

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