Emerson 2012 Annual Report Download - page 23

2012 Annual Report | 21
acquisitions in 2012 was approximately $187 million, and
annualized sales for these businesses were approximately
$115 million. See Note 3 for additional information.
The Company acquired several small businesses during
2011, mainly in the Process Management and Climate
Technologies segments, all of which were complemen-
tary to the existing business portfolio. Total cash paid
for businesses in 2011 was approximately $232 million.
Annualized sales for businesses acquired in 2011 were
approximately $100 million.
COST OF SALES
Costs of sales for 2012 and 2011 were $14.6 billion and
$14.7 billion, respectively, resulting in gross profit and
gross margin of $9.8 billion and 40.0 percent, and
$9.6 billion and 39.5 percent, respectively. Cost of sales
was essentially flat due to savings from cost reduction
actions offset by higher wage and other costs, and
incremental costs related to the Thailand supply chain
disruption. The increase in gross margin primarily reflects
leverage on higher volume and selling prices. Additionally,
gross profit was negatively impacted by foreign currency
translation due to the stronger U.S. dollar.
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 2011.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses
for 2012 were $5.4 billion, or 22.3 percent of net sales,
an increase of $108 million and 0.3 percentage points
compared with $5.3 billion and 22.0 percent for 2011.
The increase in SG&A as a percent of sales was largely
due to the business mix impact from higher Process
Management volume and deleverage on lower volume
in Network Power, Climate Technologies and Industrial
Automation, partially offset by significant cost reduction
actions. In addition, SG&A increased on costs associ-
ated with incremental volume and a $17 million charge
related to the elimination of post-65 supplemental
retiree medical benefits for approximately 8,000 active
employees, mostly offset by foreign currency translation
and lower incentive stock compensation expense of
$21 million.
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, partially offset by acquisitions
and higher wage and other costs.
GOODWILL IMPAIRMENT
In the fourth quarter of 2012, the Company’s annual
goodwill impairment testing revealed that carrying value
exceeded fair value for the embedded computing and
power business and the DC power systems business,
both of which are in the Network Power segment. The
Company anticipates that growth in sales and earnings
for these businesses will be slower than previously
expected due to protracted weak demand and structural
industry challenges in telecommunications and information
technology end markets, and increased competition. As a
consequence, the carrying value of these businesses was
reduced by a noncash, pretax charge to earnings totaling
$592 million ($528 million after-tax, or $0.72 per share).
Management and the Board of Directors have discussed
the unique market and technology challenges facing
the embedded computing and power business and will
pursue strategic alternatives, including a potential sale of
this business with annual revenue of $1.4 billion. In 2011,
the Company recorded a $19 million ($0.03 per share)
noncash impairment charge related to the Industrial
Automation wind turbine pitch control business. See
Note 6 for additional information.
OTHER DEDUCTIONS, NET
Other deductions, net were $401 million in 2012, a
$45 million increase from 2011, primarily due to an
unfavorable impact from foreign currency transactions
reflecting volatile exchange rates, higher rationalization
expense of $38 million and a small loss on the sale of the
Knaack storage business. These items were partially offset
by higher current year gains, including a $43 million gain
on payments received related to dumping duties, and
lower amortization expense of $20 million. Gains in 2011
included a $15 million Process Management India joint
venture acquisition gain. See Notes 4 and 5 for further
details regarding other deductions, net and rationalization
costs, respectively.