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Item 7. Management’s Discussion and Analysis

2022-11-14 compared with 2021-11-15 · 279 added, 190 removed, 278 unchanged (63% of the section changed)

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generally accepted accounting principles (U.S.

GAAP), management periodically uses certain “non-GAAP financial measures,” as such term is defined in Regulation G under SEC rules, to clarify and enhance understanding of past performance and

prospects for the future.

GAAP), management periodically uses certain “non-GAAP financial measures,” as such term is defined in Regulation G under SEC rules, to clarify and enhance understanding of past performance and prospects for the future.

Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with U.S.

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Management closely monitors operating profit and operating profit margin of each business to evaluate past performance and actions required to improve profitability.

EBIT (defined as earnings before deductions for interest expense, net and income taxes) and total segment EBIT, and EBIT margin (defined as EBIT divided by net sales) and total segment EBIT margin, are financial measures that exclude the impact of financing on the capital structure and income taxes.

EBITDA (defined as EBIT excluding depreciation and amortization) and EBITDA margin (defined as EBITDA divided by net sales) are used as measures of the Company's current operating performance, as they exclude the impact of capital and acquisition-related investments.

EBIT (defined as earnings

before deductions for interest expense, net and income taxes) and total segment EBIT, and EBIT margin (defined as EBIT divided by net sales) and total segment EBIT margin, are financial measures that exclude the impact of financing on the capital structure and income taxes .

Adjusted EBITA and adjusted segment EBITA (defined as earnings excluding interest expense, net, income taxes, intangibles amortization expense, restructuring expense, first year purchase accounting related items and transaction fees, and certain gains, losses or impairments) and adjusted EBITA margin and adjusted segment EBITA margin (defined as adjusted EBITA divided by net sales) are measures used by management to evaluate the Company's operational performance, as they exclude the impact of acquisition-related investments and non-operational items.

EBITDA (defined as EBIT excluding depreciation and amortization) and EBITDA margin (defined as EBITDA divided by net sales) are also used as measures of the Company's current operating performance, as they exclude the impact of capital and acquisition-related investments.

All of these are commonly used financial measures utilized by management to evaluate performance (U.S.

GAAP measures:

pretax earnings or pretax profit margin ).

pretax earnings or pretax profit margin, segment earnings or segment margin ).

Earnings, earnings per share, return on common stockholders’ equity and return on total capital excluding certain gains and losses, impairments, restructuring costs, impacts of acquisitions or divestitures, amortization of intangibles, discrete taxes, or other items provide additional insight into the underlying, ongoing operating performance of the Company and facilitate period-to-period comparisons by excluding the earnings impact of these items.

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generally accepted accounting principles.

The design of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls.

Management believes that the Company's internal accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period.

Although the design of this system recognizes that errors or irregularities may occur, management believes that the Company's internal accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, is responsible for overseeing the Company's financial reporting process.

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The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.

With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the frame work and the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, management has concluded that internal control over financial reporting was effective as of September 30, 2022.

The Company acquired a controlling interest in Aspen Technology, Inc.

during fiscal 2022, and management has excluded this business from its assessment of internal control over financial reporting as of September 30, 2022.

Total assets and revenues of this business excluded from the assessment represented approximately 36 percent and 2 percent, respectively, of the Company's related consolidated financial statement amounts as of and for the year ended September 30, 2022.

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

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Karsanbhai Frank J.

Chief Executive Officer Senior Executive Vice President

and President and Chief Financial Officer

President Senior Executive Vice President

and Chief Executive Officer and Chief Financial Officer

Results of Operations

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Gross profit $ 7,009 7,563 8,188 8 % 8 %

Percent of sales 42.5 % 41.8 % 41.5 %

Percent of sales 41.8 % 41.5 % 41.7 % (0.3) pts 0.2 pts

SG&A $ 3,986 4,179 4,248

Percent of sales 24.2 % 23.8 % 22.9 %

Percent of sales 23.8 % 22.9 % 21.6 % (0.9) pts (1.3) pts

Gain on subordinated interest $ — — (453)

Gain on sale of business $ — — (486)

Other deductions, net $ 532 318 601

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Earnings before income taxes $ 2,335 2,912 4,085 25 % 40 %

Percent of sales 15.6 % 13.9 % 16.0 %

Percent of sales 13.9 % 16.0 % 20.8 % 2.1 pts 4.8 pts

Net earnings common stockholders $ 1,965 2,303 3,231 17 % 40 %

Percent of sales 12.6 % 11.7 % 12.6 %

Percent of sales 11.7 % 12.6 % 16.5 % 0.9 pts 3.9 pts

Diluted EPS $ 3.24 3.82 5.41 18 % 42 %

Return on common stockholders' equity 26.8 % 23.6 % 25.2 %

Return on total capital 19.5 % 16.8 % 18.1 %

Overall, sales for 2021 were $18.2 billion, up 9 percent compared with the prior year, supported by foreign currency translation which added 3 percent and the Open Systems International, Inc.

("OSI") acquisition which added 1 percent.

Sales recovered to the levels achieved in 2019 prior to the outbreak and spread of COVID-19, reflecting the Company's strong rebound from the broad challenges faced in fiscal 2020.

Further, the Company's restructuring and cost reset actions that began in the third quarter of fiscal 2019 and which were increased in response to COVID-19 contributed to strong profitability and a significant decrease in SG&A expenses as a percent of sales.

Net earnings common stockholders were $2,303 in 2021, up 17 percent compared with prior year earnings of $1,965, and diluted earnings per share were $3.82, up 18 percent versus $3.24 per share in 2020, reflecting strong operating results.

The Company generated operating cash flow of $3.6 billion in 2021, an increase of $492, or 16 percent, due to higher earnings.

Return on common stockholders' equity 23.6 % 25.2 % 31.9 % 1.6 pts 6.7 pts

Return on total capital 16.8 % 18.1 % 20.4 % 1.3 pts 2.3 pts

Overall, sales for 2022 were $19.6 billion, up 8 percent compared with the prior year, reflecting strong growth across both platforms and favorable results across all geographies despite headwinds due to the impact of lockdowns in China and supply chain and logistics constraints.

Net earnings common stockholders were $3,231 in 2022, up 40 percent compared with prior year earnings of $2,303, and diluted earnings per share were $5.41, up 42 percent versus $3.82 per share in 2021.

Adjusted diluted earnings per share were $5.25 co m pared wi th $4.51 in the prior year, reflecting strong operating results and a $0.12 benefit related to the AspenTech acquisition.

The Company generated operating cash flow of $2.9 billion in 2022, a decrease of $653, or 18 percent, reflecting higher working capital due to increased sales and continued supply chain constraints.

The table below presents the Company's diluted earnings per share on an adjusted basis to facilitate period-to-period comparisons and provide additional insight into the underlying, ongoing operating performance of the Company.

Adjusted diluted earnings per share excludes intangibles amortization expense, restructuring expense, first year purchase accounting related items and transaction and AspenTech pre-closing costs, and certain gains, losses or impairments.

2020 2021 2022

Diluted earnings per share $ 3.24 3.82 5.41

Restructuring and related costs 0.42 0.24 0.15

Amortization of intangibles 0.32 0.41 0.48

Gain on subordinated interest — — (0.60)

Gain on sale of business — — (0.72)

Russia business exit — — 0.32

Acquisition/divestiture costs and pre-acquisition interest on AspenTech debt — — 0.19

AspenTech Micromine purchase price hedge — — 0.04

OSI first year acquisition accounting charges and fees — 0.07 —

Investment-related gains — (0.03) (0.02)

Discrete tax benefits (0.20) — —

Adjusted diluted earnings per share $ 3.78 4.51 5.25

The table below summarizes the changes in adjusted diluted earnings per share.

The items identified below are discussed throughout MD&A, see further discussion above and in the Business Segments and Financial Position sections below.

Adjusted diluted earnings per share - prior year $ 3.78 4.51

Operations 0.68 0.56

AspenTech acquisition — 0.12

Stock compensation (0.16) 0.13

Pensions 0.05 0.04

Gains on sales of investments - prior year — (0.07)

Gains on sales of investments - current year 0.07 —

Gains on sales of capital assets - current year — 0.02

Foreign currency 0.09 (0.03)

Higher effective tax rate (0.02) (0.05)

Share repurchases/other 0.02 0.02

Adjusted diluted earnings per share - current year $ 4.51 5.25

Net sales for 2022 were $19.6 billion, an increase of $1.4 billion, or 8 percent compared with 2021.

Sales increased $455 in Automation Solutions and $1,010 in Commercial & Residential Solutions.

Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 5 percent on higher volume and slightly higher price.

The OSI acquisition added 1 percent and foreign currency translation added 3 percent.

Sales increased $466 in Automation Solutions, $337 in AspenTech and $580 in Commercial & Residential Solutions.

Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 9 percent on 4 percent higher volume and 5 percent higher price.

The AspenTech acquisition added 2 percent, foreign currency translation deducted 2 percent and the Therm-O-Disc divestiture deducted 1 percent.

Underlying sales increased 14 percent in the U.S.

and 6 percent internationally.

Net sales for 2020 were $16.8 billion, a decrease of $1.6 billion, or 9 percent compared with 2019, as the global outbreak and spread of COVID-19 resulted in a rapid decline in demand which impacted most of the Company's end markets and geographies in the second half of the year.

Sales decreased $1,047 in Automation Solutions and

$526 in Commercial & Residential Solutions.

Underlying sales decreased 8 percent on lower volume, while foreign currency translation subtracted 1 percent.

Underlying sales decreased 11 percent in the U.S.

Net sales for 2021 were $18.2 billion, an increase of $1.5 billion, or 9 percent compared with 2020.

Sales increased $266 in Automation Solutions.

$188 in AspenTech and $1,010 in Commercial & Residential Solutions.

Underlying sales, which exclude foreign currency translation, acquisitions and divestitures, increased 5 percent on higher volume and slightly higher price.

The Open Systems International Inc.

("OSI") acquisition added 1 percent and foreign currency translation added 3 percent.

Underlying sales increased 5 percent in the U.S.

and 5 percent internationally.

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International destination sales, including U.S.

exports, increased 2 percent, to $10.6 billion in 2022, reflecting the impact of the Heritage AspenTech acquisition and an increase in the Commercial & Residential Solutions business.

exports of $1.5 billion were up 33 percent compared with 2021, including an increase of approximately $200 due to the Heritage AspenTech acquisition.

Underlying international destination sales were up 6 percent, as foreign currency translation had a 5 percent unfavorable impact on the comparison, the AspenTech acquisition added 2 percent and the Therm-O-Disc divestiture subtracted 1 percent.

Underlying sales increased 2 percent in Europe, 5 percent in Asia, Middle East & Africa (China up 7 percent), 19 percent in Latin America and 15 percent in Canada.

Origin sales by international subsidiaries, including shipments to the U.S., totaled $9.2 billion in 2022, down 1 percent compared with 2021.

International destination sales, including U.S.

exports, increased 10 percent, to $10.3 billion in 2021, reflecting increases in both the Automation Solutions and Commercial & Residential Solutions businesses.

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Origin sales by international subsidiaries, including shipments to the U.S., totaled $9.3 billion in 2021, up 9 percent compared with 2020.

International destination sales, including U.S.

exports, decreas ed 6 percent, to $9.4 billion in 2020 , reflecting decreases in both the Automation Solutions and Commercial & Residential Solutions businesses.

exports of $1.0 billion were down 10 percent compared with 2019.

Underlying international destination sales were down 5 percent, as foreign currency translation had a 1 percent unfavorable impact on the comparison.

Underlyi ng sales decreased 4 percent in Europe, 4 percent in Asia, Middle East & Africa (China down 5 percent), 7 percent in Latin America and 11 percent in Canada.

Origin sales by international subsidiaries, including shipments to the U.S., totaled $8.5 billion in 2020 , down 5 percent compared with 2019.

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 a pro forma basis, new AspenTech is expected to have fiscal 2022 revenues of $1.1 billion.

The transaction is expected to close in the second calendar quarter of 2022 and is subject to approval by AspenTech shareholders, regulatory approvals and other customary closing conditions.

See Item 1A - "Risk Factors" for additional information.

On October 1, 2020, the Company completed the acquisition of OSI, a leading operations technology software provider in the global power industry, for approximately $1.6 billion, net of cash acquired.

This business had net sales of $191 in fiscal 2021 and is reported in the Automation Solutions segment.

Portfolio management is an integral component of Emerson's growth and value creation strategy.

Over the past 18 months, Emerson has taken significant actions to accelerate the transformation of its portfolio through the completion of strategic acquisitions and divestitures of non-core businesses.

These actions were undertaken to create a higher growth and cohesive industrial technology portfolio as a global automation leader serving a diversified set of end markets with differentiated capabilities in intelligent devices and software.

The Company’s recent portfolio actions include the following transactions.

On October 31, 2022, the Company announced an agreement to sell a majority stake in its Climate Technologies business (which constitutes the Climate Technologies segment, excluding Therm-O-Disc which was divested earlier in fiscal 2022) to private equity funds managed by Blackstone ("Blackstone") in a transaction valued at $14.0 billion.

Emerson will receive upfront, pre-tax cash proceeds of approximately $9.5 billion and a note of $2.25 billion at close (which will accrue 5 percent interest payable in kind by capitalizing interest), while retaining a 45 percent non-controlling common equity ownership interest in a new standalone joint venture between Emerson and Blackstone.

The Climate Technologies business, which includes the Copeland compressor business and the entire portfolio of products and services across all residential and commercial HVAC and refrigeration end-markets, had fiscal 2022 net sales of approximately $5.0 billion and pretax earnings of $1.0 billion.

The transaction is expected to close in the first half of calendar year 2023, subject to regulatory approvals and customary closing conditions.

The Company expects to recognize a pretax gain of approximately $10 billion (approximately $8 billion after-tax) in fiscal 2023 upon the completion of the transaction.

On October 31, 2022, the Company completed the divestiture of its InSinkErator business, which manufactures food waste disposers, to Whirlpool Corporation for $3.0 billion.

This business had net sales of $630 and pretax earnings of $152 in fiscal 2022 and is reported in the Tools & Home Products segment.

The assets and liabilities of InSinkErator were classified as held-for-sale as of September 30, 2022 and are included in other current assets, other assets, accrued expenses and other liabilities in the consolidated balance sheet.

The Company expects to recognize a pretax gain of approximately $2.8 billion (approximately $2.1 billion after-tax) in the first quarter of fiscal 2023.

On May 16, 2022, the Company completed the transactions contemplated by its definitive agreement with Aspen Technology, Inc.

("Heritage AspenTech") to contribute two of Emerson's stand-alone industrial software businesses, Open Systems International, Inc.

and the Geological Simulation Software business (collectively, the “Emerson Industrial Software Business”), along with approximately $6.0 billion in cash to Heritage AspenTech stockholders, to create "New AspenTech", a diversified, high-performance industrial software leader with greater scale, capabilities and technologies (hereinafter referred to as "AspenTech").

Upon closing of the transaction, Emerson beneficially owned 55 percent of the outstanding shares of AspenTech common stock (on a fully diluted basis) and former Heritage AspenTech stockholders owned the remaining outstanding shares of AspenTech common stock.

AspenTech and its subsidiaries now operate under Heritage AspenTech’s previous name “Aspen Technology, Inc.” and AspenTech common stock is traded on NASDAQ under Heritage AspenTech’s previous stock ticker symbol “AZPN.” On a pro forma basis, AspenTech had fiscal 2022 net sales of $1.1 billion.

On July 27, 2022, AspenTech entered into an agreement to acquire Micromine, a global leader in design and operational solutions for the mining industry, for AU $900 (approximately $623 USD based on exchange rates when the transaction was announced).

The transaction is expected to close by the end of calendar 2022, subject to various regulatory approvals.

On May 31, 2022 the Company completed the divestiture of its Therm-O-Disc sensing and protection technologies business, which was reported in the Climate Technologies segment, to an affiliate of One Rock Capital Partners, LLC.

The Company recognized a pretax gain of $486 ($429 after-tax, $0.72 per share).

On May 4, 2022, Emerson announced its intention to exit business operations in Russia and divest Metran, its Russia-based manufacturing subsidiary, and on September 27, 2022, announced an agreement to sell the business to the local management group.

Emerson's historical net sales in Russia were principally in the Automation Solutions segment and in total, represented approximately 1.5 percent of consolidated annual sales.

The Company recognized a pretax loss of $181 ($190 after-tax, in total $0.32 per share) related to its exit of business operations in Russia.

This charge, which included a loss o f $36 in operations and $145 reported in Other deductions ($10 of which is reported in restructuring costs), is primarily non-cash.

The transaction will be subject to regulatory and government approvals, and other customary closing conditions.

Emerson will work closely with the local Russia management group to help ensure a smooth transition for employees through the sale process.

In 2022, the Company acquired three other businesses, two in the Automation Solutions segment and one in the AspenTech segment, for $130, net of cash acquired.

The three businesses had combined annual sales of approximately $40.

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 had net sales of $191 in fiscal 2021 and is now reported in the AspenTech segment .

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.

See Note 4 for further information on acquisitions and divestitures.

See Note 4 and Item 1A - "Risk Factors" for further information on acquisitions and divestitures.

COST OF SALES

Cost of sales for 2022 were $11,441, an increase of $768 compared with $10,673 in 2021, primarily due to higher sales volume and higher materials costs.

Gross profit was $8,188 in 2022 compared to $7,563 in 2021, while gross margin increased 0.2 percentage points to 41.7 percent.

The Heritage AspenTech acquisition benefited gross margin 0.7 percentage points, while price less net material inflation was favorable but had a dilutive impact on margins.

Higher freight and other inflation also negatively impacted margins, partially offset by favorable mix.

Cost of sales for 2021 were $10,673, an increase of $897 compared with $9,776 in 2020, primarily due to higher sales volume in Commercial & Residential Solutions, foreign currency translation, and the OSI acquisition which added $112 including intangibles amortization of $39.

Gross profit was $7,563 in 2021 compared to $7,009 in 2020, while gross margin decreased 0.3 percentage points to 41.5 percent, as leverage on higher sales volume was offset

by unfavorable price-cost in Commercial & Residential Solutions primarily driven by higher steel prices, intangibles amortization from the OSI acquisition which deducted 0.2 percentage points, and unfavorable mix.

Cost of sales for 2020 were $9,776, a decrease of $781 compared with $10,557 in 2019, primarily due to lower volume.

Gross profit was $7,009 in 2020 compared to $7,815 in 2019, while gross margin decreased 0.7 percentage points to 41.8 percent, reflecting deleverage on lower sales volume and unfavorable mix within Automation Solutions, partially offset by favorable price-cost.

Gross profit was $7,563 in 2021 compared to $7,009 in 2020, while gross margin decreased 0.3 percentage points to 41.5 percent, as leverage on higher sales volume was offset by unfavorable price-cost in Commercial & Residential Solutions primarily driven by higher steel prices, intangibles amortization from the OSI acquisition which deducted 0.2 percentage points, and unfavorable mix.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A expenses of $4,248 in 2022 increased $69 compared with 2021, reflecting the impact of higher sales and higher wage and other inflation.

SG&A as a percent of sales decreased 1.3 percentage points to 21.6 percent, reflecting leverage on higher sales and lower stock compensation expense of $80 due to a lower share price in the current year (0.5 percentage points).

SG&A expenses of $4,179 in 2021 increased $193 compared with 2020 on higher stock compensation expense, as well as increased sales volume.

SG&A as a percent of sales decreased 0.9 percentage points to 22.9 percent, reflecting increased savings of approximately $240 from the Company's restructuring and cost reset actions, partially offset by higher stock compensation expense of $114 (0.6 percentage points) due to a higher share price in the current year.

SG&A expenses of $3,986 in 2020 decreased $471 compared with 2019 and SG&A as a percent of sales decreased 0.4 percentage points to 23.8 percent.

Savings of approximately $220 from the Company's restructuring and cost reset actions that began in the third quarter of fiscal 2019 offset deleverage on lower sales volume.

The Company also benefited in the second half of the year from a salary and hiring freeze, furloughs, compensation reductions for the Board of Directors and key executives across Emerson, and curtailed travel, meetings and discretionary spending.

SG&A as a percent of sales decreased 0.9 percentage points to 22.9 percent, reflecting increased savings of approximately $240 from the Company's restructuring and cost reset actions, partially offset by higher stock compensation expense of $144 (0.6 percentage points) due to a higher share price in 2021.

INVESTMENT AND DIVESTITURE GAINS

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 cash return on their initial investment.

In the first quarter of fiscal 2022, the equity holders' cumulative cash return exceeded the threshold and as a result, the Company received a distribution of $438 in November 2021 (in total, a pretax gain of $453 was recognized in the first quarter).

Based on the terms of the agreement and the current calculation, the Company could receive additional distributions of approximately $75 which are expected to be received over the next two-to-three years.

However, the 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.

On May 31, 2022, the Company completed the sale of its Therm-O-Disc sensing and protection technologies business to an affiliate of One Rock Capital Partners, LLC.

The Company recognized a pretax gain o f $486 ($429 after-tax, $0.72 per share).

OTHER DEDUCTIONS, NET

Other deductions, net were $318 in 2021, a decrease of $214 compared with 2020, reflecting lower restructuring costs of $134, 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, a favorable impact from pensions, and favorable foreign currency transactions of $17.

These items were partially offset by higher intangibles amortization of $61, primarily related to the OSI acquisition.

Other deductions, net were $601 in 2022, an increase of $283 compared with 2021, reflecting a charge of $145 related to the Company exiting its business in Russia ($10 of which is reported in restructuring costs), acquisition/divestiture costs of $110, higher intangibles amortization of $57, primarily related to the Heritage AspenTech acquisition, and a mark-to-market loss of $50 related to foreign currency forward contracts entered into by AspenTech to mitigate the impact of foreign currency exchange associated with the Micromine purchase price.

These items were partially offset by lower restructuring costs of $64 , gains from the sales of capital assets of $15, and a $14 gain from the acquisition of full ownership of an equity investment.

The prior year also had several investment-related gains which are described below.

See Notes 5 and 6.

Other deductions, net were $532 in 2020, an increase of $207 compared with 2019.

The increase reflects increased restructuring costs of $189 and special advisory fees of $13.

Other deductions, net were $318 in 2021, a decrease of $214 compared with 2020, reflecting lower restructuring costs of $134, investment-related gains, including gains of $21 from an investment sale and $17 from the acquisition of full ownership of an equity investment, and a gain of $31 from the sale of an equity investment, a favorable impact from pensions, and favorable foreign currency transactions of $17.

These items were partially offset by higher intangibles amortization of $61, primarily related to the OSI acquisition.

INTEREST EXPENSE, NET

Interest expense, net was $193 , $154 and $156 in 2022, 2021 and 2020, respectively.

The decreases in 2021 and 2020 reflect the maturity of long-term debt with relatively higher interest rates, partially offset by lower interest income.

The increase in 2022 reflects the issuance of $3 billion of long-term debt in December 2021 to support the AspenTech transaction, partially offset by $500 of notes that matured in the first quarter of fiscal 2022.

EARNINGS BEFORE INCOME TAXES

Pretax earnings of $4,085 increased $1,173 in 2022, up 40 percent compared with 2021 reflecting the impact of the Vertiv and Therm-O-Disc gains discussed above.

Earnings increased $401 in Automation Solutions, $19 in AspenTech and $76 in Commercial & Residential Solutions.

Costs reported at Corporate increased $223, largely due to the Russia business exit loss and acquisition/divestiture costs, offset by lower stock compensation expense of $80.

See the Business Segments discussion that follows and Note 18.

Pretax earnings of $2,912 increased $577 in 2021, up 25 percent compared with 2020.

Earnings increased $425 in Automation Solutions and $246 in Commercial & Residential Solutions.

Earnings increased $416 in Automation Solutions, $9 in AspenTech and $246 in Commercial & Residential Solutions.

Costs reported at Corporate increased $96, reflecting higher stock compensation expense of $114 and first year acquisition accounting charges and fees related to the OSI acquisition of $50, partially offset by the investment-related gains discussed above and lower unallocated pension and postretirement costs which decreased by $41.

See the Business Segments discussion that follows and Note 18.

Pretax earnings of $2,335 decreased $524 in 2020, down 18 percent compared with 2019.

Earnings decreased $424 in Automation Solutions and $153 in Commercial & Residential Solutions.

Costs reported at Corporate decreased $35, as an increase in unallocated pension and postretirement costs of $55 was more than offset by a decline in all other corporate costs of $90.

In come taxes were $855, $585 and $345 for 2022, 2021 and 2020, respectively, resulting in effective tax rates of 21 percent, 20 percent and 15 percent in 2022, 2021 and 2020, respectively.

The tax rates for 2021, 2020 and 2019 included benefits from restructuring subsidiaries of $13, $103 and $74, respectively.

The 2020 rate also included the impact of a research and development tax credit study, while 2019 included a $13 discrete tax benefit due to the issuance of final regulations related to the one-time tax on deemed repatriation.

The tax rates for 2022, 2021 and 2020 include benefits from restructuring subsidiaries of $11, $13 and $103, respectively.

The impact on the 2022 tax rate from the gain on divestiture of the Therm-O-Disc business and the Russia business exit in 2022 essentially offset.

The lower rate in 2020 included the impact of a research and development tax credit study.

NET EARNINGS AND EARNINGS PER SHARE

Net earnings attributable to common stockholders in 2022 were $3,231, up 40 percent compared with 2021, and diluted earnings per share were $5.41, up 42 percent compared with $3.82 in 2021.

Results reflected strong operating results and included a pretax gain of $453 ($358 after-tax, $0.60 per share) related to the Company's subordinated interest in Vertiv and a pretax gain of $486 ($429 after-tax, $0.72 per share) related to the Therm-O-Disc divestiture.

See the analysis of adjusted earnings per share in the Overview section for further details.

Net earnings attributable to common stockholders in 2021 were $2,303, up 17 percent compared with 2020, and diluted earnings per share were $3.82, up 18 percent compared with $3.24 in 2020 due to improved operating results reflecting significant savings from the Company's restructuring and cost reset actions and leverage on higher sales volume in Commercial & Residential Solutions.

Net earnings attributable to common stockholders in 2020 were $1,965, down 15 percent compared with 2019, and diluted earnings per share were $3.24, down 13 percent compared with $3.71 in 2019.

Reduced operating results reflected a decline in sales volume largely attributable to the negative effects of COVID-19, while restructuring expense increased significantly due to the Company's cost reset actions that began in the third quarter of fiscal 2019.

The tables below present the Company's diluted earnings per share on an adjusted basis to facilitate period-to-period comparisons and provide additional insight into the underlying, ongoing operating performance of the Company.

Certain non-operational items are excluded from the calculation of adjusted earnings per share as noted below.

In addition, adjusted earnings per share excludes the impact of restructuring expense due to the Company's significant cost reset actions that began in the third quarter of fiscal 2019.

2019 2020 2021

Diluted earnings per share $ 3.71 3.24 3.82

Restructuring and advisory fees 0.12 0.42 0.24

OSI first year acquisition accounting charges and fees — — 0.07

Gain on acquisition of full ownership of equity Investment — — (0.03)

Discrete tax benefits (0.14) (0.20) —

Adjusted diluted earnings per share $ 3.69 3.46 4.10

The table below summarizes the changes in adjusted diluted earnings per share.

The items identified below are discussed throughout MD&A, see further discussion above and in the Business Segments and Financial Position sections below.

Adjusted diluted earnings per share - prior year $ 3.69 3.46

Operations (0.27) 0.59

Stock compensation 0.01 (0.16)

Pensions (0.08) 0.05

Gains on sales of investments — 0.06

Foreign currency (0.06) 0.09

Interest expense 0.02 —

Income tax rate 0.08 (0.02)

Share repurchases 0.07 0.03

Adjusted diluted earnings per share - current year $ 3.46 4.10

The table below, which shows results on an adjusted EBITA basis, is intended to supplement the Company's discussion of its results of operations herein.

The Company defines adjusted EBITA as earnings excluding interest expense, net, income taxes, intangibles amortization expense, restructuring expense, first year purchase accounting related items and transaction fees, and certain gains, losses or impairments.

Adjusted EBITA and adjusted EBITA margin are measures used by management and may be useful for investors to evaluate the Company's operational performance.

Twelve Months Ended September 30 2021 2022 Change

Earnings before income taxes $ 2,912 4,085 40 %

Percent of sales 16.0 % 20.8 % 4.8 pts

Interest expense, net 154 193

Restructuring and related costs 188 119

Amortization of intangibles 327 451

Gain on subordinated interest — (453)

Gain on sale of Therm-O-Disc — (486)

Russia business exit — 181

Acquisition/divestiture costs — 110

AspenTech Micromine purchase price hedge — 50

Investment-related gains (17) (14)

OSI first year acquisition accounting charges 50 —

Adjusted EBITA $ 3,614 4,236 17 %

Percent of sales 19.8 % 21.6 % 1.8 pts

RETURNS ON EQUITY AND TOTAL CAPITAL

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Return on total capital (computed as net earnings attributable to common stockholders excluding after-tax net interest expense, divided by average common stockholders' equity plus short- and l ong-term debt less cash and short-term investments) was 20.4 percent in 2022 compared with 18.1 percent in 2021 and 16.8 percent in 2020 .

Returns in 2021 reflected higher net earnings, while lower net earnings negatively impacted returns in 2020.

The higher returns in 2022 included the impact of the Vertiv subordinated interest after-tax gain of $358, the after-tax gain on the Therm-O-Disc divestiture of $429, after-tax acquisition/divestiture costs of $93, and the Russia business exit after-tax loss of $190 .

Excluding these items, return on common stockholders' equity and return on total capital were 26.9 percent and 17.4 percent, respectively.

Business Segments

Following is an analysis of segment results for 2022 compared with 2021, and 2021 compared with 2020.

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 Company defines segment earnings as earnings before interest and income taxes.

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Earnings $ 1,539 1,955 2,356 27 % 20 %

Margin 16.0 % 13.6 % 16.8 %

Margin 14.0 % 17.3 % 20.0 % 3.3 pts 2.7 pts

Restructuring and related costs $ 238 146 89

Amortization of intangibles $ 184 186 167

Adjusted EBITA $ 1,961 2,287 2,612 17 % 14 %

Adjusted EBITA Margin 17.8 % 20.3 % 22.2 % 2.5 pts 1.9 pts

Sales by Major Product Offering

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2021 - Automation Solutions sales were $11.8 billion in 2022, an increase of $466, or 4 percent.

Underlying sales increased 7 percent on 5 percent higher volume and 2 percent higher price, reflecting strength in process end markets and sustained demand in discrete and hybrid end markets, despite supply chain and logistics constraints which unfavorably impacted sales.

Foreign currency translation had a 3 percent unfavorable impact.

Sales for Measurement & Analytical Instrumentation increased $135 or 4 percent.

Sales were strong in China and North America, while sales were down moderately in Europe due to supply chain constraints.

Valves, Actuators & Regulators increased $121, or 3 percent, reflecting strong demand in the Americas and China, partially offset by softness in the rest of Asia, Middle East & Africa.

Industrial Solutions sales increased $137, or 6 percent, reflecting strong demand across all geographies.

Systems & Software increased $73, or 3 percent, reflecting strength in process end markets in North America and China, partially offset by weakness in Europe, while power end markets were strong in North America and Europe.

Underlying sales increased 14 percent in the Americas (U.S.

up 13 percent), while Europe, which was negatively impacted by 5 percentage points due to the business exit from Russia, decreased 1 percent, and Asia, Middle East & Africa was up 5 percent (China up 11 percent).

Earnings of $2,356 increased $401 from the prior year, and margin increased 2.7 percentage points to 20.0 percent, reflecting leverage on higher volume, favorable mix, lower restructuring expenses which benefited margins 0.4 percentage points, savings from cost reduction actions and favorable price less net material inflation, partially offset by higher freight and other inflation.

2020 - Automatio n Solutions sales were $11.3 billion in 2021, an increase of $266, or 2 percent.

Underlying sales were flat as higher prices offset slightly lower volume.

Discrete and hybrid markets exhibited strength throughout the year while longer cycle process automation markets began to recover in the second half of the year, including a sharp recovery in core North American automation markets.

The OSI acquisition added 2 percent and foreign currency translation had a 2 percent favorable impact.

Foreign currency translation had a 2 percent favorable impact.

Sales for Measurement & Analytical Instrumentation decreased $37, or 1 percent, as process industries were weak in the first half of the year, but have improved sequentially as markets continue to recover from the impacts of COVID-19.

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Industrial Solutions sales increased $254, or 13 percent, on strong growth in Europe and robust growth in China, while North American discrete end markets were up moderately.

Systems & Software increased $344, or 14 percent, reflecting the impact of the OSI acquisition which added $191.

Systems & Software increased $155, or 6 percent.

Process end markets were strong in Europe and had moderate growth in Asia while North America was flat.

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down 3 percent), increased 1 percent in Europe and 2 percent in Asia, Middle East & Africa (China up 14 percent).

Earnings of $1,948 increased $425 from the prior year, and m argin increased 3.2 percentage points to 16.8 percent, as significant savings from cost reduction actions and favorable price-cost more than offset higher performance-based compensation expense.

Lower restructuring expense benefited margins 0.9 percentage points, while intangibles amortization of $66 from the OSI acquisition reduced margin 0.6 percentage points.

2019 - Automation Solutions sales were $11.2 billion in 2020, a decrease of $1,047, or 9 percent, reflecting the negative effects of COVID-19 which impacted most end markets and geographies in the second half of the year, particularly in North America.

Underlying sales decreased 8 percent on lower volume.

The Machine Automation Solutions acquisition added $47 and foreign currency translation had a 1 percent unfavorable impact.

Sales for Measurement & Analytical Instrumentation decreased $507, or 14 percent, due to weakness in process industries, primarily in North America.

Valves, Actuators & Regulators decreased $205, or 5 percent, reflecting slower demand in most end markets.

Industrial Solutions sales decreased $220, or 10 percent, on lower global demand in discrete end markets.

Systems & Software decreased $115, or 4 percent, due to weakness in power generation end markets in China and process end markets in the U.S., partially offset by the Machine Automation Solutions acquisition.

Underlying sales decreased 14 percent in the Americas (U.S.

down 14 percent), 5 percent in Europe, and 1 percent in Asia, Middle East & Africa (China down 2 percent).

Earnings of $1,523 decreased $424 from the prior year, primarily due to higher restructuring expenses of $179 and lower volume.

Margin decreased 2.4 percentage points

to 13.6 percent, reflecting a negative impact from restructuring expenses of 1.7 percentage points and unfavorable mix.

Savings from cost reduction actions offset deleverage on lower sales volume.

Earnings of $1,955 increased $416 from the prior year, and m argin increased 3.3 percentage points to 17.3 percent, as significant savings from cost reduction actions

and favorable price-cost more than offset higher performance-based compensation expense.

Lower restructuring expense benefited margins 0.9 percentage points.

2020 2021 2022 21 vs.

Sales $ 131 319 656 145 % 106 %

Earnings (loss) $ (16) (7) 12 56 % 269 %

Margin (12.8) % (2.3) % 1.9 % 10.5 pts 4.2 pts

Restructuring and related costs $ 6 2 —

Amortization of intangibles $ 23 89 237

Adjusted EBITA $ 13 84 249 535 % 198 %

Adjusted EBITA Margin 10.1 % 26.2 % 38.0 % 16.1 pts 11.8 pts

As a result of the Heritage AspenTech acquisition, the Company identified one additional segment in fiscal 2022.

The new segment reflects the combined results of Heritage AspenTech and the Emerson Industrial Software Business.

The results for this new segment include the historical results of the Emerson Industrial Software Business (which was previously reported in the Automation Solutions segment), while results related to the Heritage AspenTech business include only periods subsequent to the close of the transaction on May 16, 2022.

See Note 4 for further details.

2021 - AspenTech sales were $656 in 2022, an increase of $337, or 106 percent due to the acquisition of Heritage AspenTec h.

Earnings were $12, an increase of $19, and margin improved to 1.9 percent, reflecting the impact of the Heritage AspenTech acquisition.

Resul ts for fiscal 2022 included intangibles amortization of $148 related to the Heritage AspenTech acquisition ($51 of which was reported in Cost of sales).

2020 - AspenTech sales were $319 in 2021, an increase of $188, or 145 percent due to the Open Systems International, Inc.

("OSI") acquisition.

The segment had a loss $7, an improvement of $9 compared to 2020 , and margin improve d to (2.3) percent, reflecting the impact of the OSI acquisition.

Results for fiscal 2021 included intangibles amortization of $66 related to the OSI acquisition.

COMMERCIAL & RESIDENTIAL SOLUTIONS

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Total $ 1,118 1,364 1,440 22 % 6 %

Margin 20.6 % 19.8 % 20.5 %

Margin 19.8 % 20.5 % 19.9 % 0.7 pts (0.6) pts

Restructuring and related costs $ 52 26 24

Amortization of intangibles $ 49 52 47

Adjusted EBITA $ 1,219 1,442 1,511 18 % 5 %

Adjusted EBITA Margin 21.6 % 21.6 % 20.9 % - pts (0.7) pts

2021 - Commercial & Residential Solutions sales were $7.2 billion in 2022, an increase of $580, or 9 percent.

Foreign currency translation had a 2 percent unfavorable impact and divestitures deducted 2 percent.

Underlying sales increased 13 percent on 3 percent higher volume and 10 percent higher price .

Climate Technologies sales were $5.2 billion in 2022, an increase of $452, or 10 percent.

Air conditioning, heating and refrigeration sales were strong, reflecting global demand across all end markets.

Tools & Home Products sales were $2.0 billion in 2022, up $128 or 7 percent compared to the prior year.

Sales of professional tools and food waste disposers were strong, while wet/dry vacuums decreased moderately due to difficult comparisons .

Overall, underlying sales increased 15 percent in the Americas (U.S.

up 14 percent) and 11 percent in Europe, while Asia, Middle East & Africa increased 5 percent (China down 7 percent).

Earnings were $1,440, an increase of $76, and margin was down 0.6 percentage points, as price less net material in flation was favorable but had a slightly dilutive impact on margins and higher freight and other inflation also negatively impacted margins, partially offset by leverage on higher sales and savings from cost reduction actions.

2020 - Commercial & Residential Solutions sales were $6.7 billion in 2021, an increase of $1,010, or 18 percent.

Underlying sales increased 16 percent on strong global demand, as nearly all businesses achieved double-digit growth each quarter, while foreign currency translation added 2 percent.

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Earnings were $1,364, an increase of $246, and margin was up 0.7 percentage points, reflecting leverage on higher volume and savings from cost reduction actions, partially offset by unfavorable price-cost primarily due to steel price increases which negatively impacted the second half of the fiscal year.

2019 - Commercial & Residential Solutions sales were $5.6 billion in 2020, a decrease of $526, or 9 percent.

Underlying sales decreased 7 percent on lower volume.

The divestiture of two small non-core businesses subtracted 1 percent and foreign currency translation deducted 1 percent.

Climate Technologies sales were $4.0 billion in 2020, a decrease of $333, or 8 percent.

Air conditioning and heating sales declined, reflecting a sharp decline in Asia and moderate decline in the U.S.

due to the effects of COVID-19.

Global cold chain sales were also down, reflecting double-digit declines in Asia and Europe, while North America was down moderately.

Tools & Home Products sales were $1.7 billion in 2020, down $193 or 10 percent compared to the prior year, reflecting sharp declines in global professional tools markets.

Sales for wet/dry vacuums were down moderately and food waste disposers were down slightly.

Overall, underlying sales decreased 7 percent in the Americas (U.S.

down 8 percent) and 3 percent in Europe, while Asia, Middle East & Africa decreased 11 percent (China down 11 percent).

Earnings were $1,118, a decrease of $153, and margin was down 0.8 percentage points, due to deleverage on lower sales volume and higher restructuring expenses which negatively impacted margins by 0.5 percentage points, partially offset by savings from cost reduction actions and favorable price-cost.

Financial Position, Liquidity and Capital Resources

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Emerson is in a strong financial position, with total assets of $36 billion and stockholders' equity of $10 billion, and has the resources available for reinvestment in existing businesses, strategic acquisitions and managing its capital structure on a short- and long-term basis.

The Company continues to generate substantial operating cash flow, including significant growth in fiscal 2021 and over $3.0 billion in each of the last three years.

Cash flows have been and are expected to be sufficient for at least the next 12 months to meet the Company’s operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations.

The Co mpany continues to generate substantial operating cash flow with over $2.9 billion in each of the last three years.

Cash flows have been and are expected to be sufficient for at least the next 12 months to meet the Company’s operating requir ements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations.

The Company also has certain contractual obligations, primarily long-term debt and operating leases (see Notes 7, 10 and 11).

The Company currently believes that sufficient funds will be available to meet its needs for the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity, or its $3.5 billion revolving backup credit facility under which it has not incurred any borrowings.

The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet its needs for the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity, or its $3.5 billion revolving backup credit facility under which it has not incurred any borrowings.

2020 2021 2022

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Percent of sales 5.2 % 3.9 % 5.3 %

Operating cash flow for 2021 was $3.6 billion, a $492, or 16 percent increase compared with 2020, due to higher earnings.

Operating cash flow of $3.1 billion in 2020 increased 3 percent compared to $3.0 billion in 2019, as lower working ca pital needs associated with lower demand more than offset a decrease in earnings.

Operating cash flow for 2022 was $2.9 billion, a $653, or 18 percent decrease compared with 2021, reflecting higher working capital due to increased sales and ongoing supply chain constraints.

Operating cash flow of $3.6 billion in 2021 increased 16 percent compared to $3.1 billion in 2020, due to higher earnings.

At September 30, 2022, operating working capital as a percent of sales was 5.3 percent compared with 3.9 percent in 2021 and 5.2 percent in 2020.

The increase for 2022 compared to the prior year is due to higher inventory levels to support sales growth and reflecting ongoing supply chain constraints.

In addition, the Heritage AspenTech acquisition increased operating working capital by approximately $250.

As of September 30, 2022, Emerson's cash and equivalents totaled $1.8 billion, which included approximately $380 attributable to AspenTech.

The cash held by AspenTech is intended to be used for its own purposes and is not a readily available source of liquidity for other Emerson general business purposes or to return to Emerson shareholders.

Contributions to pension plans were $43 in 2022, $41 in 2021 and $66 in 2020.

Capital expenditures were $531, $581 and $538 in 2022, 2021 and 2020, respectively.

Free cash flow (operating cash flow less capital expenditures) was $3.0 billion in 2021, up 18 percent.

Free cash flow (operating cash flow less capital expenditures) was $2.4 billion in 2022, down 20 percent.

Free cash flow was $3.0 billion in 2021, compared with $2.5 billion in 2020.

The Company is targeting capital spending of approximately $650 in 2022.

The Company is targeting capital spending from continuing operations of approximately $350 in 2023.

Net cash paid in connection with acquisitions was $5,702, $1,611 and $126 in 2022, 2021 and 2020, respectively.

The Company's agreement to sell a majority stake in its Climate Technologies business will impact its cash flows in future periods after the transaction is completed.

In 2022, this business had operating cash flow of approximately $875, capital expenditures of approximately $200, and free cash flow of approximately $675.

The Company expects its remaining businesses will continue to generate significant cash flows that will be available to support the return of cash to shareholders and to reinvest for future growth.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, and among other things, provided tax relief to businesses.

Tax provisions of the CARES Act included 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.

The Company deferred $73 of certain payroll taxes through the end of calendar year 2020, of which approximately $37 was paid in December 2021 with the remaining amount due in December 2022.

Dividends were $1,223 ($2.06 per share) in 2022, compared with $1,210 ($2.02 per share) in 2021 and $1,209 ($2.00 per share) in 2020.

In November 2021, the Board of Directors voted to increase the quarterly cash dividend 2 percent, to an annualized rate of $2.06 per share.

In October 2022 , the Board of Directors voted to increase the quarterly cash dividend 1 percent, to an annualized rate of $2.08 per share.

Purchases of Emerson common stock totaled $500, $500 and $942 in 2022, 2021 and 2020, respectively, at average per share prices of $87.64, $94.65 and $57.41.

The Board of Directors authorized the purchase of up to 70 million common shares in November 2015.

In March 2020, the Board of Directors authorized the purchase of an additional 60 million shares and a total of approximately 60 million shares remain available for purchase under the authorizations.

In November 2015, the Board of Directors authorized the purchase of up to 70 million shares, and during fiscal 2022, the remaining shares available under this authorization were purchased.

In March 2020, the Board of Directors authorized the purchase of an additional 60 million shares and a tot al of approximately 55 million shares remain available.

The Company purchase d 5.7 mi llion shares in 2022, 5.3 million shares in 2021 and 16.4 million shares in 2020 under the authorizations.

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Interest Coverage Ratio 14.4X 18.6X 18.9X

Total debt, which includes long-term debt, current maturities of long-term debt, commercial paper and other short-term borrowings, was $6,665, $7,486 an d $5,721 as of September 30, 2021, 2020 and 2019, respectively.

During the year, the Company repaid $300 of 4.25% notes tha t matured in November 2020 .

In 2020, the Company repaid $500 of 4.875% notes that matured in October 2019, while $400 of 5.25% notes that matured in October 2018 and $250 of 5.0% notes that matured in April 2019 were paid in fiscal 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, and in September 2020, the Company issued $750 of 0.875% notes due October 2026.

In January 2019, the Company issued €500 of 1.25% notes due October 2025 and €500 of 2.0% notes due October 2029, and in May 2019, the Company issued €500 of 0.375% notes due May 2024.

Total debt, which includes long-term debt, current maturities of long-term debt, commercial paper and other short-term borrowings, was $10,374, $6,665 and $7,486 as of September 30, 2022, 2021 and 2020, respectively.

The increased debt was due to the issuance of $3 billion of long-term debt and increased commercial paper borrowings of approximately $1.3 billion compared to September 30, 2021.

The Company used the net proceeds from the sale of the notes and the increased commercial paper borrowings to fund the majority of its contribution of approximately $6.0 billion to existing stockholders of Heritage AspenTech as part of the transaction.

Long-term debt was issued i n December 2021 as follows:

$1 billion of 2.0% notes due December 2028, $1 billion of 2.2% notes due December 2031, and $1 billion of 2.8% notes due December 2051.

Additionally, the Company repaid $500 of 2.625% notes that matured.

See Note 4 and Note 11.

In fiscal 2021, the Company repaid $300 of 4.25% notes that matured and in fiscal 2020 repaid $500 of 4.875% notes that matured.

Additionally, in fiscal 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, and in September 2020, the Company issued $750 of 0.875% notes due October 2026.

The net proceeds from the sale of the notes were used to reduce commercial paper borrowings and for general corporate purposes.

A portion of the proceeds from the notes issued in September 2020 were also used to fund the acquisition of OSI, which closed on October 1, 2020.

The total debt-to-total capi tal ratio and net debt-to-net capital ratio (less cash and short-term investments) decreased in 2021 due to lower long-term debt and higher equity compared to the prior year.

In 2020 the total debt-to-total capital ratio increased due to the long-term debt issuances described above.

The net debt-to-net capital ratio decreased slightly, reflecting the timing of the acquisition of OSI, which closed shortly after fiscal 2020 year-end.

The operating cash flow-to-debt ratio increased in 2021 due to higher cash flow and lower debt.

The decrease in 2020 was due to the increased borrowings.

The total debt-to-total capital ratio and net debt-to-net capital ratio (less cash and short-term investments) increased in 2022 due to the increased borrowings to support the AspenTech transaction discussed above, while it decreased in 2021 due to lower long-term debt and higher equity compared to the prior year.

The interest coverage ratio is computed as earnings before income taxes plus interest expense, divided by interest expense.

The increase in 2022 reflects higher pretax earnings in the current year, which included the Vertiv subordinated interest gain of $453, the gain on the Therm-O-Disc divestiture of $486, and the Russia business exit loss of $181.

Excluding these items, the interest coverage ratio was 15.6, reflecting higher interest expense due to the increased long-term debt and commercial paper borrowings to fund the Heritage AspenTech acquisition.

The increase in 2021 reflects higher earnings and slightly lower interest expense.

The decrea se in 2020 reflects lower earnings, partially offset by lower interest expense.

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.

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Fees to maintain the facility are immaterial.

The Company expects to be able to renew its revolving backup credit facility in fiscal 2023 on substantially the same terms as the current facility.

The Company also maintains a universal shelf registration statement on file with the SEC under which it can issue debt securities, preferred stock, common stock, warrants, share purchase contracts or share purchase units without a predetermined limit.

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The Company has been successful in efficiently deploying cash where needed worldwide to fund operations, complete acquisitions and sustain long-term growth.

At September 30, 2021, substantially all of the Company's cash was held outside of the U.S.

At September 30, 2022, the majority of the Company's cash was held outside of the U.S.

(primarily in Europe and Asia).

The Company routinely repatriates a portion of its no n-U.S.

cash from earnings each year, or otherwise when it can be accomplished tax efficiently, and provides for withholding taxes and any applicable U.S.

The Company routinely repatriates a portion of its non-U.S.

cash from earnings each

year, or otherwise when it can be accomplished tax efficiently, and provides for withholding taxes and any applicable U.S.

income taxes as appropriate.

The Company has been able to readily meet all its funding requirements and currently believes that sufficient funds will be available to meet the Company's needs in the foreseeable future through operating cash flow, existing resources, short- and long-term debt capacity or backup credit lines.

FINANCIAL INSTRUMENTS

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The value of derivatives and other financial instruments is subject to change as a result of market movements in rates and prices.

Sensitivity analysis is one technique used to forecast the impact of these movements.

Sensitivity analysis is one technique used to fo recast the impact of these movements.

Based on a hypothetical 10 percent increase in interest rates, a 10 percent decrease in commodity prices or a 10 percent weakening in the U.S.

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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.

The 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.

In some 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.

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.

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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.

In other instances, the Company determines the standalone selling price based on thi rd-party pricing or management's best estimate.

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.

VALUATION OF ASSETS AND LIABILITIES ACQUIRED IN A BUSINESS COMBINATION

Assets and liabilities acquired in business combinations, including intangible assets, are accounted for using the acquisition method and recorded at their respective fair values.

In fiscal 2022, the Company completed the acquisition of Aspen Technology, Inc.

and engaged an independent third-party valuation specialist to assist in the determination of the fair value of intangible assets.

This included the use of certain assumptions and estimates, including the projected revenue for the customer relationship and developed technology intangible asset and the obsolescence rate for the developed technology intangible asset.

Although we believe the assumptions and estimates to be reasonable and appropriate, they require judgement and are based on experience and historical information obtained from Aspen Technology, Inc.

LONG-LIVED ASSETS

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pension plans were overfunded by $513 in total (approximately 16 percent in excess of the projected benefit obligation), including unfunded plans totaling $162.

The substantial improvement in the funded status reflects strong asset returns in fiscal 2021.

plans were underfunded by $57, including unfunded plans totaling $236.

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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.

T he 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.

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The impact on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

Valuation allowances are provided to reduce deferred tax assets to the amount that will more likely than not be realized.

Valuation allowances are provided to reduce deferred tax assets to the

amount that will more likely than not be realized.

This requires management to make judgments and estimates regarding the amount and timing of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies.

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income taxes on the undistributed earnings of non-U.S.

where these earnings are considered indefinitely invested or otherwise retained for continuing international operations.

subsidiaries where these earnings are considered indefinitely invested or otherwise retained for continuing international operations.

Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable.

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NEW ACCOUNTING PRONOUNCEMENTS

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.

Effective October 1, 2021, the Company adopted three accounting standard updates which had an immaterial or no impact on the Company's financial statements for the year ended September 30, 2022.

These included:

• Updates to Accounting Standards Codification ("ASC") 805, Business Combinations , which clarify the accounting for contract assets and liabilities assumed in a business combination.

In general, this will result in contract liabilities being recognized at their historical amounts under ASC 606, rather than at fair value in accordance with the general requirements of ASC 805.

• Updates to ASC 740, Income Taxes , which require the recognition of a franchise tax that is partially based on income as an income-based tax with any incremental amount as a non-income based tax.

These updates also make certain changes to intra-period tax allocation principles and interim tax calculations.

• Updates to ASC 321, Equity Securities , ASC 323 Investments - Equity Method and Joint Ventures , and ASC 815, Derivatives and Hedging , which clarify how to account for the transition into and out of the equity method of accounting when evaluating observable transactions.

In fiscal 2021, 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.

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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.

FISCAL 2023 OUTLOOK

Emerson expects fiscal 2022 to be characterized by strong underlying demand.

Strength in discrete and hybrid automation markets, further recovery in process markets and expanding opportunities in sustainability projects is expected to drive Automation Solutions full year net sales growth.

For Commercial & Residential Solutions, residential demand is expected to moderate while the commercial and industrial environment is expected to further

The Company expects operational challenges to continue through the first half of the year, but price-cost is expected to turn to a tailwind during the second half.

For the full year, consolidated net sales are expected to be up 5 to 7 percent, with underlying sales up 6 to 8 percent excluding a 1 percent unfavorable impact from foreign currency translation.

Automation Solutions net sales are expected to be up 5 to 7 percent, with underlying sales up 6 to 8 percent excluding a 1 percent unfavorable impact from foreign currency translation.

Commercial & Residential Solutions net and underlying sales are expected to be up 6 to 9 percent.

Earnings per share are expected to be $4.79 to $4.94, while adjusted earnings per share, which exclude a $0.19 per share impact from restructuring actions, a $0.42 per share impact from amortization of intangibles, and a $0.58 gain from proceeds received in November 2021 related to the Vertiv transaction, are expected to be $4.82 to $4.97 (see Note 4 for further details on the Vertiv gain).

Operating cash flow is expected to be approximately $3.8 billion and free cash flow, which excludes projected capital spending of $650 million, is expected to be approximately $3.1 billion.

Share repurchases are expected to be approximately $250 to $500 million in fiscal 2022.

The guidance discussed herein does not include the impact of the AspenTech transaction.

Emerson will contribute $6.0 billion in cash related to its definitive agreement with AspenTech, and the transaction is expected to close in the second calendar quarter of 2022.

The Company expects to finance the transaction through a combination of cash on-hand and the issuance of new long-term debt.

While the transaction will initially increase the Company's financial leverage and debt ratios, Emerson expects to retain its investment-grade long-term debt ratings.

Further, the Company expects its leverage and debt ratios to improve rapidly through strong combined cash flow of the companies and disciplined capital allocation.

Brexit Update

The United Kingdom's (UK) withdrawal from the European Union (EU), commonly known as "Brexit", was completed on January 31, 2020.

Negotiations over the terms of trade and other laws and regulations took place during 2020 and an agreement between the EU and the UK was reached on December 24, 2020, which included zero tariffs and quotas on goods.

The Company's net sales in the UK are principally in the Automation Solutions segment and represent less than two percent of consolidated sales.

While there could be certain incremental costs for logistics and other items, the Company expects any impact of these items will be immaterial.

Following the announcement of its Climate Technologies divestiture, Emerson will report financial results for Climate Technologies, InSinkErator and Therm-O-Disc as discontinued operations for all periods presented, beginning in 2023.

The earnings from discontinued operations for 2023 are expected to be $10 billion to $11 billion, or $17 to $19 per share, including the net gains on 2023 divestitures.

Emerson expects order strength and backlog to support fiscal 2023 sales growth.

For the full year, consolidated net sales from continuing operations are expected to be up 7 to 9 percent, with underlying sales up 6.5 to 8.5 percent excluding a 3.5 percent unfavorable impact from foreign currency translation and a 4 percent favorable impact from acquisitions net of divestitures.

Earnings per share from continuing operations are expected to be $3.51 to $3.66 (which excludes any potential impact from the 45 percent common equity ownership in Climate Technologies' income or loss post-close), while adjusted earnings per share are expected to be $4.00 to $4.15, excluding a $0.13 per share impact from restructuring actions, a $0.61 per share impact from amortization of intangibles, $0.10 per share from interest income on the Climate Technologies note receivable, and $0.15 per share of interest income on undeployed proceeds from the Climate Technologies and InSinkErator divestitures.

The Company's fiscal 2023 results from continuing operations after the Climate Technologies divestiture (assumed to close March 31, 2023 for purposes of the guidance above) will include interest income from the $2.25 billion note receivable from Climate Technologies and reflect the 45 percent common equity ownership in the income, or loss, of Climate Technologies.

Emerson will not control Climate Technologies post-closing and is therefore unable to estimate the amount of its 45 percent share of Climate Technologies' post-close results.

The Company will exclude the interest income from the note receivable from Climate Technologies and its 45 percent share of Climate Technologies' operations in its calculation of fiscal 2023 adjusted earnings per share.

Also excluded from adjusted earnings per share is the interest income on any undeployed net proceeds.

The effect of Emerson's 45 percent share of Climate Technologies is expected to be immaterial to post-closing cash flows.

The fiscal 2023 outlook assumes approximately $1.2 billion of dividend payments and approximately $2 billion to be returned to shareholders through share repurchases.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 7. Management’s Discussion and Analysis