Emerson 2010 Annual Report Download - page 23

2010 Annual Report
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During 2009, the Company acquired Roxar ASA, Trident
Powercraft Private Limited, System Plast S.p.A. and
several smaller businesses. Roxar supplies measure-
ment solutions and software for reservoir production
optimization, enhanced oil and gas recovery and flow
assurance. Trident Power manufactures and supplies
power generating alternators and associated products.
System Plast manufactures engineered modular belts and
custom conveyer components for food processing and
packaging industries. Total cash paid for these businesses
was approximately $776 million, net of cash acquired of
$31 million. Additionally, the Company assumed debt of
$230 million. Annualized sales for businesses acquired in
2009 were approximately $530 million.
COST OF SALES
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 reflects acquisitions, savings from ratio-
nalization and other cost reduction actions and favorable
foreign currency translation, partially offset by a decline
in volume. The gross margin increase primarily reflects
savings from cost reduction actions, materials cost
containment and acquisitions, partially offset by lower
prices. Additionally, the Company’s provision for inven-
tory obsolescence decreased $29 million in 2010 due
to improving economic conditions and a lower average
inventory balance.
Costs of sales for 2009 and 2008 were $12.5 billion and
$14.8 billion, respectively. Gross profit of $7.6 billion
and $8.9 billion, respectively, resulted in gross margins
of 37.6 percent in both years. The decrease in gross
profit primarily reflects lower sales volume and unfavor-
able foreign currency translation. The level gross margin
compared with 2008 reflected benefits realized from
rationalization actions and other productivity improve-
ments, materials cost containment and selective price
increases, which were offset by deleverage on lower
sales volume, inventory liquidation and unfavorable
product mix. In addition, due to the economic slowdown
the Company’s provision for inventory obsolescence
increased approximately $40 million in 2009.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling, general and administrative (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 in SG&A was primarily
due to acquisitions and higher incentive stock compensa-
tion expense of $163 million related to an increase in the
Company’s stock price and the overlap of two incentive
stock compensation plans in the current year (see Note 14),
partially offset by cost reduction savings. The increase in
SG&A as a percent of sales was primarily the result of higher
incentive stock compensation expense, partially offset by
savings from cost reduction actions.
SG&A expenses for 2009 were $4.4 billion, or 22.0 percent
of net sales, compared with $4.9 billion, or 20.7 percent
of net sales for 2008. The $499 million decrease in SG&A
was primarily due to lower sales volume, benefits from
rationalization, favorable foreign currency translation and
a $28 million decrease in incentive stock compensation
expense. The increase in SG&A as a percent of sales was
primarily the result of deleverage on lower sales volume,
partially offset by cost reduction actions and the lower
incentive stock compensation expense.
OTHER DEDUCTIONS, NET
Other deductions, net were $369 million in 2010, a
$105 million decrease from 2009 that primarily reflects
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 nonrecurring gains. See
Notes 4 and 5 for further details regarding other deduc-
tions, net and rationalization costs, respectively.
Other deductions, net were $474 million in 2009, a
$284 million increase from 2008 that primarily reflects
$195 million of incremental rationalization expense. The
Company continuously makes investments in its opera-
tions to improve efficiency and remain competitive on a
global basis, and in 2009 incurred costs of $284 million
for actions to rationalize its businesses to the level appro-
priate for current economic conditions and improve its
cost structure in preparation for the ultimate economic
recovery. The 2009 increase in other deductions
also includes higher intangible asset amortization of
$28 million due to acquisitions and lower nonrecurring
gains of $25 million. Gains in 2009 included the sale of
an asset for which the Company received $41 million and
recognized a gain of $25 million ($17 million after-tax).
INTEREST EXPENSE, NET
Interest expense, net was $261 million, $220 million
and $188 million in 2010, 2009 and 2008, respectively.
The increase of $41 million in 2010 was primarily due to
higher average long-term borrowings reflecting acquisi-
tions. The $32 million increase in 2009 was due to lower
interest income, driven by lower worldwide interest rates,
and higher average long-term borrowings reflecting a
change in debt mix.