Emerson 2015 Annual Report Download - page 44

42 | 2015 Annual Report
Rationalization of operations expense by business segment follows:
2013 2014 2015
Process Management $15 17 89
Industrial Automation 27 7 22
Network Power 25 15 64
Climate Technologies 3 14 20
Commercial & Residential Solutions 8 2 11
Corporate — — 5
Total $78 55 211
Costs incurred in 2015 primarily relate to the reduction and selective repositioning of the Company’s cost structure
to address global economic weakness through facilities and forcecount rationalization in Europe, Asia and North
America, primarily in Process Management and Network Power. Rationalization activities included actions to
exit 15 production or office facilities worldwide and eliminate approximately 4,400 positions. In 2014, costs
primarily related to the deployment of resources to better serve local markets and higher growth areas, and were
concentrated in Process Management, Network Power and Climate Technologies, in Asia and Europe and to a
lesser extent North America. In 2013, activity was focused in Network Power and Industrial Automation due to
end market softness and acquisition integration activity in Network Power, in Europe, North America and Asia.
Expenses incurred in 2014 and 2013 include actions to exit 14 and 13 facilities, and eliminate approximately 2,000
and 3,100 positions, respectively.
(6) Goodwill and Other Intangibles
Purchases of businesses are accounted for under the acquisition method, with substantially all goodwill assigned
to the reporting unit that acquires the business. Under an impairment test performed annually, if the carrying
amount of a reporting unit exceeds its estimated fair value, impairment is recognized to the extent that the carrying
amount of the unit’s goodwill exceeds the implied fair value of the goodwill. Fair values of reporting units are
Level 3 measures which are estimated generally using an income approach that discounts future cash flows using
risk-adjusted interest rates, as well as earnings multiples or other techniques as warranted. Fair values are subject
to changes in underlying economic conditions. See Note 3 for further discussion of changes in goodwill related to
acquisitions and divestitures.
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 and $232, 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 network power systems business in Europe, which comprises the 2010 Chloride acquisition and
pre-existing businesses, had not been able to meet its operating objectives due to a weak Western Europe
economy, which had less than 1 percent average annual GDP growth since the acquisition. The weak economic
recovery and intense competitive/market pressures negatively affected the profitability of the combined Emerson
and Chloride European network power business. The economics for Europe were uncertain for 2015 and 2016 and
the goodwill from the acquisition could not be supported. A $508, $0.72 per share, noncash impairment charge was
recognized in the fourth quarter of 2014. The charge was not deductible for tax purposes. This business provides
uninterruptible power supplies, thermal management products, and data center services and solutions for Europe,
the Middle East and Africa.