Emerson 2006 Annual Report Download - page 27

            
Cost of sales for scal 2006 and 2005 were $12.9 billion and
$11.1 billion, respectively. Cost of sales as a percent of net
sales was 64.4 percent for 2006, compared with 64.3 percent
in 2005. Gross prot was $7.2 billion and $6.2 billion for scal
2006 and 2005, respectively, resulting in gross prot margins of
35.6 percent and 35.7 percent. The increase in the gross prot
primarily reects higher sales volume and acquisitions. The gross
prot margin was unfavorably impacted as leverage on higher
sales and benets realized from productivity improvements were
more than offset by higher costs for wages and benets (pension),
negative product mix, as well as the lower prot margin on recent
acquisitions. Sales price increases initiated over the past year,
together with the benets received from commodity hedging
of approximately $130 million, offset the higher level of raw
material costs, but the margin was diluted. Assuming commodity
costs remain at these levels, the Company will need to address
commodity ination pressures (particularly copper and steel)
with additional procurement initiatives and sales price actions.
Cost of sales for scal 2005 and 2004 were $11.1 billion and
$10.0 billion, respectively. Cost of sales as a percent of net sales
was 64.3 percent for 2005, compared with 64.4 percent in 2004.
The gross prot margin increased from 35.6 percent in 2004 to
35.7 percent for 2005 primarily as a result of increased volume
and leverage on higher sales, as well as benets realized from
prior rationalization and productivity improvements. Across
the Company, higher costs for raw materials were substantially
recovered through increases in sales prices, which partially offset
these improvements.
                    
                      
Selling, general and administrative (SG&A) expenses for 2006
were $4.1 billion, or 20.4 percent of net sales, compared with
$3.6 billion, or 20.7 percent of net sales for 2005. The increase
of approximately $0.5 billion was primarily due to the increase in
variable costs on higher sales and acquisitions. The reduction in
SG&A as a percent of sales was primarily the result of leveraging
xed costs on higher sales.
SG&A expenses for 2005 were $3.6 billion compared with
$3.3 billion for 2004. As a percent of net sales, SG&A expenses
were 20.7 percent in 2005 and 21.0 percent in 2004. Leverage
on higher sales and the benets realized from prior rationalization
efforts were partially offset by higher costs for wages and benets.
                    
Other deductions, net were $178 million in 2006, a $52 million
decrease from the $230 million in 2005. The decrease primarily
reects $42 million of higher gains in 2006 compared to 2005
and lower rationalization costs. Gains in 2006 included approxi-
mately $31 million related to the divesture of the materials
testing business and approximately $26 million related to the
sale of shares in MKS Instruments, Inc. (MKS). The Company
expects to continue liquidating its remaining MKS investment
valued at approximately $90 million (cost basis approximately
$70 million). Ongoing costs for the rationalization of opera-
tions were $84 million in 2006, down from $110 million in
2005, reecting lower costs, particularly for the Network Power
segment. The higher gains and lower rationalization costs were
partially offset by higher amortization of intangibles related
to acquisitions.
Other deductions, net were $230 million in 2005 compared
to $223 million in 2004. In 2005, ongoing costs for the
rationalization of operations were $110 million, down from
$129 million in 2004, primarily reecting lower costs in the
Process Management and Appliance and Tools segments. The
decrease in rationalization costs was more than offset by higher
amortization of intangibles, a litigation settlement in 2005 and
a 2004 insurance recovery and interest refund. See Notes 4 and 5
for further details regarding other deductions, net and rational-
ization costs.
                 
Earnings per share was a record $4.48 in 2006, a 32 percent increase
over the prior year.
24 | 25
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