Emerson 2008 Annual Report Download - page 26

A Powerful Force for Innovation [ 19 ]
these businesses (net of cash and equivalents acquired
of approximately $40 million, and debt assumed of
approximately $56 million) was approximately
$295 million. Annualized sales for acquired businesses
were $240 million in 2007.
In 2007, the Company divested two small business units
that had total annual sales of $113 million and $115 million
for scal years 2006 and 2005, respectively. These busi-
nesses were not reclassied as discontinued operations
because of immateriality. See Note 3 for additional
information regarding acquisitions and divestitures.

Costs of sales for scal 2008 and 2007 were $15.7 billion
and $14.1 billion, respectively. Cost of sales as a percent
of net sales was 63.2 percent for 2008, compared with
63.6 percent in 2007. Gross prot was $9.1 billion
and $8.1 billion for scal 2008 and 2007, respectively,
resulting in gross prot margins of 36.8 percent and
36.4 percent. The increase in the gross prot margin
primarily reects leverage on higher sales volume and
benets realized from productivity improvements, which
were partially offset by negative product mix. Higher
sales prices, together with the benets received from
commodity hedging of approximately $42 million, were
more than offset by higher raw material and wage costs.
The increase in the gross prot amount primarily reects
higher sales volume and foreign currency translation, as
well as acquisitions.
Costs of sales for scal 2007 and 2006 were $14.1 billion
and $12.6 billion, respectively. Cost of sales as a percent
of net sales was 63.6 percent for 2007, compared with
63.9 percent in 2006. Gross prot was $8.1 billion
and $7.1 billion for scal 2007 and 2006, respectively,
resulting in gross prot margins of 36.4 percent and
36.1 percent. The gross prot margin improvement
was diminished as higher sales prices, together with the
benets received from commodity hedging of approxi-
mately $115 million, were substantially offset by higher
material costs and wages. The increase in the gross prot
amount primarily reects higher sales volume, acquisi-
tions, foreign currency translation and savings from cost
reduction actions.
                   

Selling, general and administrative (SG&A) expenses
for 2008 were $5.1 billion, or 20.3 percent of net sales,
compared with $4.6 billion, or 20.6 percent of net sales
for 2007. The increase of approximately $0.5 billion
was primarily due to an increase in variable costs on
higher sales volume, acquisitions and foreign currency
translation, partially offset by a $103 million decrease in
incentive stock compensation reecting the overlap of
two performance share programs in the prior year and
the decrease in Emerson’s stock price in the current year
(see Note 14). The reduction in SG&A as a percent of sales
was primarily the result of lower incentive stock compen-
sation, leveraging xed costs on higher sales and benets
realized from cost reduction actions, particularly in the
Process Management and Network Power businesses.
SG&A expenses for 2007 were $4.6 billion, or
20.6 percent of net sales, compared with $4.1 billion,
or 20.6 percent of net sales for 2006. The increase
of approximately $0.5 billion was primarily due to an
increase in variable costs on higher sales volume, acquisi-
tions, foreign currency translation and a $104 million
increase in incentive stock compensation reecting the
increase in Emerson’s stock price and the overlap of two
performance share programs (see Note 14).

Other deductions, net were $303 million in 2008, a
$128 million increase from the $175 million in 2007. The
increase reects numerous items including a $31 million
impairment charge related to the North American appli-
ance control business due to a slow economic environ-
ment for consumer appliance and residential end-markets
and a major customer’s strategy to diversify suppliers and
transition to and internalize the production of electronic
controls. As a result, the operations of this business will
be restructured and integrated into the North American
appliance motors business to leverage the combined cost
structure and improve protability on the lower volume,
including elimination of redundant manufacturing
capacity and a substantial reduction in overhead.
Higher rationalization costs of $17 million in 2008 also
contributed to the increase in other deductions, net.
Rationalization expense, including amounts reported in
discontinued operations, was $98 million, $83 million
and $84 million in 2008, 2007 and 2006, respectively,
or a total of $265 million over the three-year period.
The Company continuously makes investments in the
rationalization of operations to improve operational
efciency and remain competitive on a global basis, and
to position the Company for difcult economic conditions
that may arise. These actions include relocating facilities
to best cost locations and geographic expansion to serve
local markets. During the past three years, approxi-
mately 45 production, warehouse or ofce facilities have
been exited and more than 6,000 positions have been
eliminated. Based on the current economic conditions,
the Company expects rationalization expense, including
start-up and moving, severance and shutdown costs, to
be approximately $125 million to $150 million in 2009.
The increase in other deductions, net in 2008 also
includes higher amortization of intangibles related to
acquisitions of $18 million, a $12 million charge for
in-process research and development in connection with
the acquisition of Embedded Computing, $12 million