Emerson 2015 Annual Report Download - page 24

22 | 2015 Annual Report
Gross margin of 40.6 percent decreased 0.8 percentage
points versus 41.4 percent in 2014, due to deleverage
on the lower volume, unfavorable mix and the impact of
the stronger dollar on product costs, partially offset by
savings from restructuring actions. Divestitures had a
0.2 percentage point favorable impact on margin.
Cost of sales for 2014 were $14.4 billion, a decrease of
$338 million compared to $14.7 billion in 2013, largely
due to the Artesyn divestiture partially offset by higher
costs associated with increased volume, including
acquisitions. Gross profit was $10.2 billion in 2014
compared to $10.0 billion in 2013. Gross margin of
41.4 percent increased 1.1 percentage points versus
40.3 percent in 2013. The increase reflects a 0.7 percentage
point favorable comparative impact from the Artesyn
divestiture, which had relatively lower gross margin, as
well as materials cost containment, cost reduction savings
and lower pension expense. Lower price, unfavorable
mix and other costs partially offset the increase.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses of
$5.2 billion in 2015 decreased $531 million compared
with 2014. The decrease primarily reflects the impact of
foreign currency translation, reduced costs from lower
sales volume, divestitures and lower incentive stock
compensation of $113 million. SG&A as a percent of
sales was 23.3 percent in 2015, flat compared with 2014
as deleverage on the lower volume was offset by savings
from restructuring actions and lower incentive stock
compensation expense.
SG&A expenses of $5.7 billion in 2014 increased
$67 million compared with 2013. The increase primarily
reflects costs associated with increased volume,
including acquisitions, partially offset by the Artesyn
divestiture and lower incentive stock compensation
expense of $78 million. SG&A as a percent of sales was
23.3 percent in 2014, a 0.4 percentage point increase
versus 22.9 percent in 2013. The Artesyn divestiture
had an unfavorable 0.3 percentage point impact on the
comparison, as this business had relatively lower SG&A
requirements. The benefit of cost containment actions
was more than offset by business investment spending
and other costs.
GAINS ON DIVESTITURES OF BUSINESSES
During 2015, the Company sold its power transmission
solutions and commercial storage businesses and
recorded pretax gains of $939 million ($532 million
after-tax, $0.78 per share) and $100 million ($79 million
after-tax, $0.12 per share), respectively. See Note 3.
GOODWILL IMPAIRMENT
In 2015, the Company announced strategic actions,
including the planned spinoff of the network power
systems business, as well as evaluation of alternatives,
including potential sale, for the power generation
and motors, and drives businesses. These units had
goodwill of $2.1 billion, $430 million and $232 million,
respectively. Based on the Company’s fourth quarter
analysis, the estimated fair values of the network power
systems and power generation and motors businesses
exceeded carrying value by more than 20 percent, while
the estimated fair value of the drives business exceeded
carrying value by approximately 10 percent. These
businesses experienced declining sales and profitability
in 2015 amid challenging market conditions and the
strength of the U.S. dollar. There can be no assurance
that the Company will not recognize an impairment
charge on the ultimate spinoff of the network power
systems business, or incur a loss on the potential sale of
the other businesses. Assumptions used in determining
fair value include successful execution of business plans,
including adoption of new products and expansion
of services, and the completion of restructuring
actions initiated in 2015 to improve productivity
through consolidation and rationalization of the cost
structure. Additional assumptions include gradual
improvement in served markets beginning in the latter
half of 2016, particularly recovery in the demand for
telecommunications networks and data centers, an
expansion of industrial capital spending, and improving
economic conditions in Europe and Asia.
In 2014, the Company recognized a noncash goodwill
impairment charge of $508 million ($0.72 per share)
related to the network power systems business in
Europe. The business had been unable to meet its
operating objectives due to a weak Western Europe
economy, and the 2015 and 2016 outlook for Europe
was uncertain. In 2013, challenges persisted in the
Artesyn business, sales and earnings were below
expectations, and the Company recorded a noncash
goodwill impairment charge of $503 million
($475 million after-tax, $0.65 per share) and income tax
charges of $70 million ($0.10 per share). Additionally
in 2013, the Company recorded a noncash goodwill
impairment charge of $25 million ($21 million after-tax,
$0.03 per share) related to its connectivity solutions
business, due to not meeting forecasted expectations.
See Note 6.
OTHER DEDUCTIONS, NET
Other deductions, net were $571 million in 2015, a
$178 million increase from 2014 primarily due to an
increase in rationalization expense of $156 million,
higher litigation costs of $33 million, unfavorable
foreign currency transactions of $14 million and
$10 million in fees related to the planned spinoff of