Emerson 2011 Annual Report Download - page 17

Annual Report | 15
Group GmbH and several smaller businesses during
2010. SSB designs and manufactures electrical pitch
systems and controls used in wind turbine generators
for the alternative energy market. Total cash paid for all
businesses in 2010 was approximately $2,843 million.
Additionally, the Company assumed debt of $169 million.
Annualized sales for businesses acquired in 2010 were
approximately $1,100 million. Also see Note 3.
COST OF SALES
Costs of sales for 2011 and 2010 were $14.7 billion and
$12.7 billion, respectively. Gross profit of $9.6 billion
and $8.3 billion, respectively, resulted in gross margins
of 39.5 percent and 39.6 percent. The increase in gross
profit primarily reflects higher volume and leverage,
acquisitions, and savings from cost reduction actions
in prior periods. Higher materials costs were only
partially offset by price increases, diluting margins.
Materials cost pressures persisted throughout the
year. The Company continues working to balance
cost increases with pricing actions.
Costs of sales for 2010 and 2009 were $12.7 billion and
$12.5 billion, respectively. Gross profit of $8.3 billion
and $7.6 billion, respectively, resulted in gross margins
of 39.6 percent and 37.6 percent. The increase in gross
profit primarily reflected acquisitions, savings from ratio-
nalization and other cost reduction actions and favorable
foreign currency translation, partially offset by a decline in
volume. The two percentage point gross margin increase
primarily reflected savings from cost reduction actions
and materials cost containment. The Company’s provi-
sion for inventory obsolescence decreased $29 million in
2010 due to improving economic conditions and a lower
average inventory balance.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses
for 2011 were $5.3 billion, or 22.0 percent of net sales,
compared with $4.8 billion, or 22.9 percent of net sales
for 2010. The $511 million increase was primarily due
to higher sales volume and the impact of acquisitions.
The decrease as a percent of sales was due to volume
leverage, cost reduction savings and a $96 million
decrease in incentive stock compensation expense
reflecting changes in the Company’s stock price and
a reduced impact from incentive stock plans overlap
compared to prior year (see Note 14), partially offset by
acquisitions and higher wage and other costs.
SG&A expenses for 2010 were $4.8 billion, or 22.9 percent
of net sales, compared with $4.4 billion, or 22.0 percent
of net sales for 2009. The $401 million increase was
primarily due to acquisitions and higher incentive stock
compensation expense of $163 million related to an
increase in the Company’s stock price and the overlap of
two stock plans in 2010, partially offset by cost reduction
savings. The increase as a percent of sales was primarily the
result of higher incentive stock compensation expense,
partially offset by savings from cost reduction actions.
OTHER DEDUCTIONS, NET
Other deductions, net were $375 million in 2011, a
$6 million increase from 2010 that primarily reflects
higher amortization expense of $85 million and a
$19 million impairment charge, partially offset by a
decrease in rationalization expense of $45 million, lower
acquisition-related costs and a $15 million gain related
to the acquisition of full ownership of a Process Manage-
ment joint venture in India. See Notes 4 and 5 for further
details regarding other deductions, net and rationaliza-
tion costs, respectively.
Other deductions, net were $369 million in 2010, a
$105 million decrease from 2009 that primarily reflected
decreased rationalization expense of $158 million and
lower foreign currency transaction losses compared to the
prior year, partially offset by higher amortization expense
of $68 million and lower gains versus the prior year.
INTEREST EXPENSE, NET
Interest expense, net was $223 million, $261 million
and $220 million in 2011, 2010 and 2009, respectively.
The decrease of $38 million in 2011 was primarily due
to lower average long-term borrowings. The $41 million
increase in 2010 was primarily due to higher average
long-term borrowings, reflecting acquisitions.
INCOME TAXES
Income taxes were $1,127 million, $848 million and
$688 million for 2011, 2010 and 2009, respectively,
resulting in effective tax rates of 31 percent, 29 percent
and 28 percent. The higher 2011 effective tax rate
primarily reflects a change in the mix of regional pretax
income due to stronger earnings growth in the United
States, where tax rates are generally higher than interna-
tionally, and lower benefits versus 2010 from non-U.S.
tax holidays and a $30 million capital loss tax benefit from
restructuring at a foreign subsidiary. The higher effective
tax rate in 2010 compared with 2009 primarily reflects
changes in the mix of pretax income which increased in
the United States and Europe, and the $30 million capital
loss benefit in 2010 compared to a $44 million net oper-
ating loss carryforward benefit in 2009.