Emerson 2015 Annual Report Download - page 23

2015 Annual Report | 21
ACQUISITIONS AND DIVESTITURES
In June 2015, the Company announced plans to spin off
its network power systems business through a tax-free
distribution to shareholders, and explore strategic
alternatives, including potential sale, for its power
generation and motors, drives, and residential storage
businesses. These businesses together represent
approximately 29 percent of consolidated 2015 sales,
10 percent of pretax earnings and 20 percent of cash
flow, or approximately $6.4 billion, $400 million and
$500 million, respectively. The Company’s strategic
actions will streamline its portfolio, drive growth and
accelerate value creation for shareholders. When
completed, these transactions will result in a smaller
and more focused Company, with leadership positions
in higher-growth end markets that provide significant
opportunities for enhanced growth and improved
profitability. In addition, the Company is bringing its
corporate services and structure into alignment with
its smaller scale and sharper focus. The spinoff of
the network power systems business will create two
independent publicly traded companies and is subject
to certain conditions, including completion of the
Company’s due diligence processes, receipt of favorable
opinions regarding the tax-free status of the transaction
for federal income tax purposes, local regulatory
approvals, review of the Form 10 that will be filed
with the SEC, and final approval by Emerson’s Board
of Directors.
In 2015, the Company incurred $42 million in income
tax expense and $10 million in other fees related to
the planned spinoff (in total, $0.08 per share). The
Company estimates it would incur costs throughout
2016 to effect the entire portfolio repositioning as
follows: approximately $100 to $200 million of income
taxes related to reorganizing the ownership structures
of these businesses; approximately $200 million for
investment banking, legal, consulting and other costs;
and approximately $100 million in capitalized costs,
including debt issuance costs, pension funding and the
separation of information technology systems. The
strategic actions being contemplated are expected to
be substantially completed by the end of 2016. With
regard to the evaluation of strategic alternatives for the
power generation and motors, drives, and residential
storage businesses, there can be no assurance that the
review process will result in any transaction. See Item
1A, “Risk Factors,” in the Company’s Annual Report on
Form 10-K.
The Company completed eight acquisitions in 2015,
seven in Process Management and one in Commercial &
Residential Solutions, which had combined annualized
sales of approximately $115 million. Total cash paid for
all businesses was $324 million, net of cash acquired.
These acquisitions complement the existing segment
portfolios and create incremental growth opportunities.
See Note 3.
In January 2015, the Company completed the sale of its
mechanical power transmission solutions business to
Regal Beloit Corporation for $1.4 billion, and recognized
a pretax gain from the transaction of $939 million
($532 million after-tax, $0.78 per share). Proceeds
from the divestiture were used for share repurchase.
This business was previously reported in the Industrial
Automation segment, and had partial year sales of
$189 million in 2015 and related pretax earnings of
$21 million. Power transmission solutions designs and
manufactures market-leading couplings, bearings,
conveying components and gearing and drive
components, and provides supporting services
and solutions.
On September 30, 2015, the Company sold its
InterMetro commercial storage business to Ali Group of
Italy for $411 million in cash and recognized a pretax
gain from the transaction of $100 million ($79 million
after-tax, $0.12 per share). This business had annual
sales of $288 million and pretax earnings of $42 million
in 2015, and is included in the Commercial & Residential
Solutions segment. InterMetro is a leading manufacturer
and supplier of storage and transport products in the food
service, commercial products and health care industries.
In 2014, the Company acquired Virgo Valves and
Enardo Holdings, manufacturers of engineered valves
and automation systems, and tank and terminal safety
equipment, respectively. Both businesses are reported
in Process Management and complement the existing
portfolio. The Company also acquired four other
smaller businesses in 2014, in Process Management
and Network Power. Combined annualized sales for all
businesses acquired in 2014 were approximately
$376 million. The Company also acquired the remaining
44.5 percent noncontrolling interest in the Appleton
Group electrical distribution business, in the Industrial
Automation segment, in 2014. Sales for this business
were $542 million in 2014. Full ownership of Appleton
provides growth opportunities in oil and gas and
chemicals end markets. See Note 3.
Early in 2014, the Company completed the divestiture
of a 51 percent controlling interest in Artesyn and
received net proceeds of $264 million. The Company
used the sale proceeds and cash repatriated from the
business to purchase common stock. Late in 2014, the
Company sold its connectivity solutions business for
$99 million in cash. See Note 3.
COST OF SALES
Cost of sales for 2015 were $13.3 billion, a decrease
of $1,123 million compared to $14.4 billion in 2014,
primarily due to the impact of foreign currency
translation, divestitures, lower sales volume and the
benefit of cost reduction efforts. Gross profit was
$9.0 billion in 2015 compared to $10.2 billion in 2014.