Michael Willar (M.W.) and Taofeek Sowemimo (T.S.) Term Project: Emerson Electric (EMR: NYSE) 09-25-2013 Professor.

Kranisky

1. Industry Economics and Strategies: (M.W.) Emerson was incorporated in Missouri in 1890, and has grown from a regional manufacturer of electric motors and fans into a diversified global technology company. Having expanded its product lines through internal growth and acquisitions, Emerson today is designing and supplying products and technology, and delivering engineering services and solutions in a wide range of industrial, commercial and consumer markets around the world. 1 Emerson Electric operates in five main units, namely, Process Management (31% of sales), Industrial Automation (21%), Network Power (25%), Climate Technologies (15%) and Commercial & Residential Solutions (8%). Emersons sales by geographic location in 2012 were Unites States and Canada, 45%; Asia, 24%; Europe, 20%; Latin America, 6%; and Middle East/Africa, 5%. Porters 5 Forces Model: Rivalry Among existing Firms: Emerson operates in a highly competitive market. The main competitors include; Hitachi Ltd, Raytheon Co. Illinois Tool, ABB Ltd and General Electric. Threat of new entrants: Competitors are attempting to take advantage of the opportunities in emerging markets, namely, in Asia and parts of Europe. Emerson holds strong barriers to entry, with a well-fortified intellectual property portfolio including patents, licenses and trademarks. 2 Emersons continued number of acquisitions will ensure a reduced number of new entrants into the marketplace. Threat of Substitutes: Emersons principal competitive strategy is to deliver solutions/products to customers by manufacturing high quality products at the lowest cost compared to their peers within the industry. The low cost eliminates much of the propensity of customers to switch to alternative firms. Supplier Power: Emerson has multiple suppliers for each of its business units, and thus not significantly dependent on any one. This eliminates any one supplier demanding higher prices. Emerson exposes itself to market related risk relative to foreign currency, commodity prices and interest rates. Emerson uses financial derivative instruments such as swaps, forward contracts and options to hedge markets risks. Buyer Power: Buyers have the advantage that Emerson competes in a concentrated industry, whereby there is low product differentiation, although not all the firms compete in the same business units, and thus buyers can put firms under pressure to lower prices. Emersons market leadership in each individual product line makes it difficult for buyers to dictate terms and prices. Value Chain Analysis: The main basic raw materials that Emerson requires are steel, copper, cast iron and rare earth metals. Emerson has secured multiple sources of sources for each raw material, as to avoid any significance on any one supplier. 1 Emerson deploys various
1 Annual Report. Form 10-K 2 Emerson Electric Investor Relations. 1

production operations and methods mainly; electronics assembly, metal stamping, forming and heat treating. Emersons principal worldwide distribution for all business units is primarily through a direct sales force. In United States, approximately 50% of sales are conducted through a direct sales force, while the remainder are made through independent sales. In Asia and Europe, sales are predominately made through direct sales force. Emersons Competitive Strategy: The Industrial Equipment and Components industry is driven by continual technological advancements and innovation. Emersons success hinges upon their ability to identify key business opportunities that will increase energy efficiency and global presence. Emersons maintains their competitive advantage with four strategic initiatives, namely; Business without borders, Energy efficiency, Resources for the World and Communications Revolution. 1

2. Assessing Quality of Financial Statements. (M.W.) To assess Emersons quality of earnings I calculated the aggregate accruals with the Balance-Sheet and Cash-Flow based accrual ratio methods. I used aggregate accruals to assess whether management is manipulating accruals, and as a proxy for earnings
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quality. In theory, the higher the total accruals as a percentage of assets, the greater the likelihood that earnings quality is low.

Balance-Sheet Based Accruals Ratio

Emersons Balance sheet-based accrual ratio decreased from 2.02% in 2011 to -2.45% in 2012, implying Emersons earnings were of higher quality than the year before. Emerson relied less on accruals to show a profit in 2012.

Cash-Flow-Statement-Based Accruals Ratio:

Emersons Cash-Flow-Statement Accrual Ratio decreased from .70 % in 2011 to -2.06% in 2012, suggesting that the cash flow component of the ratio was higher than net income. Emersons earnings were based more on cash items than non-cash items, such as the accrual items that are part of net income. Based on this assessment, Emersons earnings were of higher quality than the prior year, and exceedingly higher than that of the Industry average.

Work-Citation: Emerson Electric. (2012, September 30). Annual Report. Form 10-K. Available from Mergent Online Database. Emerson Electric. (2012,November). Investor Relations. Retrieved from http://www.emerson.com/en-US/about/investor-relations/emerson-businesses/Pages/ default.aspx