Intrapreneurial Project Iba. Emerson Electric Company

BABEȘ-BOLYAI UNIVERSITY

FACULTY OF BUSINESS

Intrapreneurial Project IBA

Emerson Electric Company

Scientific coordinator,

Conf. dr. Dragos Paun

[anonimizat]

Cluj-Napoca

Year 2016

Introduction

I am currently an employee at Emerson SRL situated on 5 Emerson street, Cluj-Napoca. I have been working as Customer Administrator for the Spanish and Portuguese team for two and a half years and in the present I am Order Administration Coordinator for Spain, Portugal, the Northern Europe and Business unit. Due to my employment within Emerson Company, I followed my internship and professional development within the same company.

Emerson is a multinational company having its headquarter in USA and continuously expanding worldwide by acquiring new acquisitions and opening more factories with the aim of offering the faster and most qualitative services to its customers.

The paper aims at revealing the company’s overview and foundation as well as its development around the globe. In addition to this, the chapters that follow shall describe the company’s latest mergers and acquisitions, emphasizing on a brief comparison between the accounting treatment under Romanian accounting regulations and the accounting treatment according the International Financial Reporting Standards.

Moreover, we shall discover the kind of markets that the company is doing business in and to what extent in Emerson the result of a Foreign Direct Investment in Romania. We shall also explain the way in which the company is dealing with the foreign exchange risk and international taxation that is arising due to its international transactions.

In the end, we shall describe the marketing strategy the company used when entering the Romanian market and the criteria that led Emerson to invest in certain assets of even companies that acquired on the way to becoming one of the leading companies in Oil and Gas or Power area.

Company overview

Emerson has settled like independent company in 1890 in St. Louis and pinpointed on the regional market as a manufacturer of fans and electric motors. From then, Emerson developed into a global technology solutions powerhouse.

The first step in establishing this company was made in 1890, when Charles and Alexander Meston, two brothers from Scotland, believed that developing a steady electric motor would be a real opportunity. Therefore, they established The Emerson Electric Manufacturing Company with the financial help of John Wesley, a former officer of the Union army.

Two years later, the company manufactures and sells the first fan from North America using the technology of AC motors. This is the first year when Emerson begins to make a reputation in providing high quality products, prestige achieved under the new president of the company, Herbert L. Parker. The net sales of Emerson in 1892 reached almost $ 60.000.

In 1897, Emerson introduces the ceiling fan into the business and this soon becomes half of the business on which relies the company. In order to improve the business and the quality of the products, two years later, the Parker scalloped blade design is introduced, in order to the air to be moved more efficiently and quietly. In 1903, Emerson Motors is upgraded to a ½ horsepower by an ingenious design, used for effort-saving devices.

By the end of World War I, Emerson becomes a stronger company with $3 million dollars in annual sales. Just one year later, the company starts to expand. During the leadership of Thomas Meston, Emerson transforms into an eight-story factory building.

The power is passed to Herbert I. Finch in 1922, when the company’s two-thirds of the total sales are lost due to the Great Depression of those times. After this regress, in 1933, the new president decides to switch the company to a mass production of motors and add more fan lines in order to have a broader consumers which to appeal to, trying in this way to stabilize the balance sheet of the company.

By 1938, the fan sales seem to languish and Emerson starts to build arc welder in the wake of a new contract, won by the new president Stuart Symington, moment when Sears starts selling new products provided by Emerson.

Slowly, the company begins to expand, when in 1939 Emerson starts the construction of a new plant in St. Louis. This plant was meant to add another type of pieces of equipment to those already existing in the line provided by Emerson. These should have been the hermetic motors, but since this was the period of World War II, the situation takes another turn and the new plant starts focusing to the production of shell casings.

In 1940, Emerson commences to support the U.S. Army Ordinance Department due to the company’s capability to work with big quantities of metal. Therefore the next five years become a flourishing period for the company with a production of brass shell casings that exceeded 10 million pieces. The dramatic growth in Emerson’s history was owed to the fact that during the World War II, the government decides to build airplane gun turrets and contracts Emerson for this job. „Model 127” was one of the most important piece build during this period and was mounted on the B-24 bomber.

By the end of the war, Truman, the president of Emerson at the time, resigns from his function and the new president elected is to be Oscar Schmitt. The period that comes will demonstrate to be kind of critical because the company faces a transition point despite of the bench saw and the defense business introduced at the beginning of Schmitt’s leadership.

In 1953, Oscar Schmitt suddenly dies and the next to come to the presidency will be William Snead. The long-term management finally gets secured in 1954, when W.R. Buck Person is recruited as president. This is the era when Emerson is reborn due to Person’s focus on creating and developing foreign markets. So, in order to achieve these goals, he decentralizes the base manufacturing of the company and establishes the diversification process. So Person’s bigot target for the next 15 years is to diversify the business portfolio of Emerson, managing to acquire 36 companies such as: U.S. Electrical Motors, InSinkErator, Therm-O-Disc, Ridge Tool and White-Rodgers. From now on, Person establishes a solid target on the quality improvement of all the items provided, on cost reductions and a more formal planning of all the process. In this way, Person’s leadership seems to take the company to a next level since from a start of 2 plants, 4.000 employees and $56 million in 1954, 20 years later, Emerson is known as an emerging global company with 82 plants, 31.000 employees and $800 million in sales.

In 1973, Charles F. Knight, as the new CEO of Emerson, adopts a new corporate strategy, meaning he tries to focus on technology development, the adoption of new products and new acquisitions, new joint ventures and he wants to make Emerson grow not only globally but internationally. In the view of this to happen, in the next 20 years, Emerson manages to expand by purchasing Rosemount in 1976, Copeland in 1986, Liebert, just a year later in 1987, the last of the acquisitions of that period being Fisher Controls in 1992.

Knight also manages to make himself known due to his capability of developing the best cost producer strategy of the company in order to take the low-cost offshore competition aback.

In 1989 the Emerson Motor Technology Center decides to support engineering and innovate within the design of the advanced motor. It was one of the first advanced technology centers opened by the company so that the new product development could be supported.

In the 90’s Knight invests $2.5 billion in a series of acquisitions meant to establish the fact that Emerson is one of the most reliable backup power provider and that the intentions of this already well known provider were to expand telecommunications industry and create and reliable infrastructure so that it could back up Internet Protocol-based communications.

2000 was one of the years in the Emerson history that screamed that the company is becoming more and more successful. Even thought it was the year of Knight’s retirement as CEO, during his presidency he managed to bring over $15 billion to the company. This is also the time when, the company achieves an unprecedented record: Emerson makes a merit of the fact that it has 43 consecutive years of earnings growth and 44 years of dividend growth.

After Knight’s retirement, David Farr is the one elected as CEO continuing his leadership until our days. This is the time of changes and prosperity; the company name is shortened, from Emerson Electric Manufacturing, Farr decides it is better to remain only with „Emerson”. Moreover, a new brand strategy is launched, being followed by a new corporate logo which will stand for cross-divisional collaboration commitment. Al these raised the annual sales of the company to $15.5 billion.

2001 Emerson invades the Asian markets through the acquisition of the leading network power provider from China, Avansys. This is how Emerson Network Power India Private Ltd. is formed.

One year later, in 2002, Emerson innovates by launching its first corporate advertising campaign. From then until the present, Emerson is known by its motto: „Emerson. Consider It Solved”.

In 2004 after Farr becoming chairman of the board of directors, Emerson purchases Marconi’s plant and power system. In the same year, Business Ethics magazine includes Emerson among the 100 Best Corporate Citizens, with sales of $15.6 billion.

In 2005, Emerson’s sales increase with 11% in comparison with the previous year, reaching to $17.1 billion. A year later, the first TV commercial pinpoints the company’s global capabilities. After acquiring Knürr AG from Germany and Artesyn Technologies from Florida, the company strengthens its network power sector, the dividends increasing for the 50th successive year and 2006 being the year that brought $20.1 billion from sales.

In 2007 the network power sector develops even more by the acquisition of Motorola’s communications business and Lionville Systems, a manufacturer of point-of-care carts.

With $2 billion surpass, Emerson meets a new record with a total sales of $22 billion and by surpassing U.S. sales by an international total sale of 52%.

Present Snap shot of the company

At present Emerson is a global manufacturing company, doing business in more than 150 that wishes to provide innovative solutions to its customers. With 220 manufacturing locations worldwide, 150 of which are located outside the U.S., its headquarter is still in St. Louis and the company David N. Farr is Chairman and Chief Executive Officer still in the present.

The company revenue in the fiscal year 2014 was of $24.5 billion. The international sales reached $14.2 billion, meaning 58% of the company sales, including the U.S. exports.

With over 115.000 employees worldwide, Emerson’s employees were awarded 1.900 patents in 2014.

Global operations in 2014

Business Segments

The corporate brand platforms of Emerson are:

Emerson Process Management

Emerson Industrial Automation

Emerson Network Power

Emerson Climate Technologies

Emerson Commercial and Residential Solutions

Mergers and Acquisitions

In order to have an overview upon the most recent activity of the company, we shall also point out some of the most recent acquisitions Emerson had, acquisitions through which it aims at expanding on markets that the company is not that well known. Therefore, at the very beginning of year 2015, Emerson Process Management decides to make minimum investments in the area of critical assets protection by using the system protection CSI 6500. This system is meant to determine the functionality rate of the sleeve bearings incorporated in turbo machinery.

Later on at the end of February, the company decides to expand its educational services to Romania, were the site established in Cluj-Napoca builts and starts making use of the first technical training laboratory. This action is conducted in order to support the need of more reliable operations in regard to the equipments that we work with. Thereby, the center is already used for developing employees’ aptitudes of dealing with quoting the right configurations, machinery and materials to the customers, but it also helping in discovering and remediating any process operation, troubleshoot and diagnostic of a wide range of Micromotion, Roxar, Rosemount Measurement and Analytical equipments. The continuous growth of the company in Cluj-Napoca made possible the creation of this new technical facility, due to allocated budgets of 16 million US dollars for the engineering and 60 million US dollars for the manufacturing facility.

Due to the above mentioned, at the beginning of the summer, Emerson Process Management starts increasing its strengths even more by searching for more allies on the market and acquiring more and small companies and suppliers. On June 1st, Emerson makes the official announcement that the global supplier Energy Solutions International Holdings, Inc. that till then was only doing business with, has been acquired by the company, this acquisition being meant to bring in more operational efficiency in the field of software and services and. This merger intends to increase the number of the customers in the gas industry due to ESI’s applications regarding the gas pipelines systems.

Just a month later, on July 2nd, the Norwegian company Yggdrasil became another asset of Emerson Process Management, due to the need of the company to offer more support to the customers interested in the flow items and optimize the existent software portfolio. But the process of adding more strength to the company did not stop there. In September, Emerson starts thinking at monitoring safety in the gas industry and adds to its portfolio a 34 years old leader in gas and flame detection. Therefore, Spectrex, the leader in this area, becomes one more of Emerson’s assets from September 8.

Last acquisition taken to an end in 2015, was the purchase of IntelliSAW, Inc. an electric power provider that managed in serve the users various solutions in reducing alimentation costs and increase the level of the service quality. This move of Emerson purchasing IntelliSAW, represents in fact the company need of expanding on more areas and domains at a time and from a globally known provider of oil and gas adjacent equipments, solutions and technical assistance to become market leader on other markets to.

Emerging Markets

Emerson Process Management is proud to be one of the multinational companies doing business in emerging markets. It is well known that the term of emerging markets stands for less developed countries that begin to meet a certain degree of economy development and gain importance as trade partners, while in the case of a saturated market every forecast already got its substitute and therefore the chances to sell that product are less probable. The reason for which Emerson chose to do business in emerging markets is because of the small capital the company had to invest. Moreover, Emerson met an increasing demand in power investments in emerging markets. One of the emerging markets that Emerson is doing much business with is China. With a GDP increase of 45,9% from 2013 until 2017, and an inflation rate of 3,0%, China has committed driving one of the most important project funnel in the Nuclear area. Emerson states that China shall meet an increase of 2% by 2019 due to the business they are currently conducting. In addition to this, Emerson is a leader in heating, ventilating and air conditioning technology and food cold chains due to the expansion of the middle class emerging markets the company is active in.

International Investments

The company I am working for is the result of FDI in Romania due to the fact that Emerson is an American company that invests in the sites is has in Cluj-Napoca, Oradea and the office from Bucharest. Therefore, the entity Emerson based in USA invests in the subsidiary it has worldwide, including those established in Romania. The company became the most important non EU member investor from Transylvania and also the biggest foreign investor from Cluj-Napoca. The company started investing 75 million Euros in Cluj in 2006 when the Emerson SRL was established in Cluj. The American company continued investing even in the period when the economic crisis culminated in Romania and in 2014 a new factory was inaugurated in Cluj-Napoca, with a total investment of 76 million dollars. Due to the investment made over the years, currently the number of employees from Emerson SLR from Cluj exceeded 2.000. About 90% from the equipments made in Cluj are intended for export business. In addition to the investment made in Cluj-Napoca, Emerson invested another 50 million Euros in a new factory in Oradea that is in a continuous development since its official opening in 2015.

International Finance

As many of the multinational companies, Emerson also has special departments focused on managing its forex operations and hedging the risk that comes fluctuating exchange rates. Since we are talking about a multinational company, we understand that Emerson is continuously confronting with various financial risks like foreign exchange and interest rates, as well as commodity prices; thereby, the company makes se of secondary financial instruments as trades and forwards as well as purchased alternatives meant to handle the risks. One of the techniques used in such situations is the sensitivity analysis, through which the impact of these kinds of movements can be predicted. Hypothetically speaking, if there were a certain percentage increase in the interest rates, while the same percentage shall constitute the weakening of the US dollar or the decrease in the commodity prices, the cash flows and the potential losses will not be material. Despite this, using the sensitivity analysis has its limitations; if there were decreased commodity prices, the company would also benefit of earnings in the future by diminishing the cost of sales.

International Taxation

Emerson is one of the companies involved in various international transactions due to its subsidiaries’ establishment worldwide and due to the fact that the company is maintaining business relationships with customers around the globe.

The plan for income taxes depends on pretax income recorded in earning and tax rates reports decreed by each jurisdiction. Emerson is one of the companies that also provides its foreign tax credits to U.S. federal income taxes.

Current income tax expense represents the paid or payable income taxes of the company, which in case of Emerson have met a continuous increase from 2013 to 2015. Despite this, the deferred, meaning the net change of the tax resources and liabilities of the company have seen a decrease from 2013 to 2014 in order to exceed the level reached in 2013, by year 2015.

Therefore the income tax expense, which refers to the sum of the current and deferred tax expenses, has increased in the last 2 years.

As we can observe in the report above, the Effective income tax rate started deteriorating from 2013 to 2015.

In order to understand how is Emerson involved in the international taxation we shall once again mention the company’s background in closely working with plants that use fuel from tanker ships or pipeline for example, not to mention the long lasting relationships between refineries and pharmaceutical companies, industries in which every raw material is carefully measured due to the exchange payments that are made within these industries. Therefore, either if we talk about oil, gas or chemicals, the tiniest error in measuring the flow of the materials that are being transferred can cumulate costs of million dollars to a certain company. Thereby, the custody transfer that takes place can prove itself quite expensive if the measurements are not accurate. This is when a change in ownership takes place and the government regulation and taxation takes place. Since Emerson is the company providing the customer the measurement equipment, the company must meet certain requirements set by industry bodies.

International Marketing

Emerson Electric Company entered the Romanian market in 2006, when the company decided to invest in opening the first Emerson factory in Cluj-Napoca, Romania. This is when Emerson decided to bring more of the work force from Europe to Romania, due to lower costs and higher quality of the services provided.

Financial management

Capital Budgeting process

As company, Emerson’s investment decision criteria is based on the focus on area that are considered to be solid return, therefore, most of the investments made by Emerson are returns on investment, which means that the company is firstly evaluating the efficiency of any investments that is to be done and according to this, the company also measures the magnitude and the investment time as well as the investment costs. Thereby, the best investment in case of Emerson is the one that reduces the production costs involved in the process of a certain business function performance.

In the case of any company, there arises the obligation of increasing the financial value of the corporation for its shareholders. The main way of doing this when talking about Emerson is the Return on Invested Capital. ROIC is the profit gained after the tax net income at the end of the year, which is divided by the capital that was invested at the beginning of the year.

When the investments are made according to the profitability index, in the figure below, the sequence of investments and the cash flows resulting from them are presented. As a company that often invests in the automation projects, Emerson analyses the time that the discounted cumulative cash flow takes to get cross into the positive region. For a favorable investment, the investment should have a higher risk adjusted profitability index that others and the discounted payback period should be shorter.

Working Capital Management

The strategies that Emerson are mainly short term investments in the raw materials domain from countries that are rapidly disperse their cold chain industry. For example, India and China are continuously expanding their cold chain industries by adding more and more supermarkets to the existing ones. They think that buying from supermarkets is safer and cleaner, but despite this, they do not want this benefit to be more expensive than buying right from the streets or from markets. Due to the markets needs, supermarkets meet challenges on this respect, because they want to meet the food-safety expectations and remain competitive at the same time, without increasing their operating costs. Thereby, Emerson provided them a solution through the Emerson Climate Technologies that combine both the food safety process improvement and the decrease of the costs by an energy saving average of 24%

Bibliography

https://www.stock-analysis-on.net/NYSE/Company/Emerson-Electric-Co/Analysis/Income-Taxes

http://www.emerson.com/SiteCollectionImages/investors/documents/InvestorPresentations/2016%20Investor%20Conf-DNF%20Strategic%20Review-Webcast-vFINAL2.pdf

http://www.emerson.com/SiteCollectionDocuments/AnnualReport2015/Emerson_2015_Annual_Report.pdf

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