Emerson 2004 Annual Report Download - page 30

Cash Flow
Emerson generated record operating cash flow of $2.2 billion in 2004, a 28 percent increase from the prior
year. Operating cash flow was $1.7 billion in 2003, a decrease of 5 percent compared with $1.8 billion in 2002.
Cash flow in 2004 reflects continued improvements in operating working capital, particularly an 8 percent
increase in days payable outstanding and a 3 percent decrease in days sales outstanding. At September 30,
2004, operating working capital as a percentage of sales was 10.5 percent, compared with 12.7 percent and
12.6 percent in 2003 and 2002, respectively. Operating working capital as a percentage of sales for 2003 was
negatively impacted 1 percentage point by approximately $140 million of tax benefits received in cash in 2004
due to the carryback of a capital loss against prior capital gains. Operating cash flow was decreased by pension
contributions of $167 million, $308 million and $169 million in 2004, 2003 and 2002, respectively. Pension
contributions are expected to be less than $100 million in 2005.
Free cash flow (operating cash flow less capital expenditures) was $1.8 billion in 2004, compared to $1.4 billion
in 2003 and 2002. The 30 percent increase in 2004 was driven by higher net earnings, improved operating
working capital and lower pension contributions, which were partially offset by higher capital spending. The
slight decrease in 2003 was primarily due to the higher pension contribution made during the year and changes
in working capital, offset by lower capital expenditures. Capital expenditures were $400 million, $337 million
and $384 million in 2004, 2003 and 2002, respectively. In 2005, the Company is targeting capital spending of
approximately 3 percent of net sales. Cash paid in connection with Emerson’s acquisitions was $414 million,
$6 million and $754 million in 2004, 2003 and 2002, respectively.
Dividends were $675 million ($1.60 per share, up 1.9 percent) in 2004, compared with $661 million ($1.57 per
share) in 2003, and $652 million ($1.55 per share) in 2002. In November 2004, the Board of Directors voted to
increase the quarterly cash dividend to an annualized rate of $1.66 per share. In 2004 and 2002, approximately
2,630,000 and 360,000 shares, respectively, were repurchased under the fiscal 1997 and 2002 Board of
Directors’ authorizations; 37.6 million shares remain available for repurchase under the 2002 authorization and
none remain available under the 1997 authorization. The Company did not repurchase any shares during 2003
under these plans. Net purchases of treasury stock totaled $121 million and $20 million in 2004 and 2002,
respectively, compared to net issuances of $11 million in 2003.
Leverage/Capitalization
Total debt decreased to $4.0 billion at the end of 2004. Total debt in 2003 decreased to $4.1 billion from
$4.6 billion in 2002. The total debt-to-capital ratio was 35.8 percent at year-end 2004, compared with
39.0 percent for 2003 and 44.2 percent for 2002. At September 30, 2004, net debt (total debt less cash and
equivalents and short-term investments) was 27.0 percent of net capital (net debt plus stockholders’ equity),
compared with 34.5 percent of net capital in 2003 and 42.0 percent of net capital in 2002. The cumulative
effect of change in accounting principle in 2002 increased these ratios by almost 4 percentage points. The
operating cash flow-to-debt ratio was 54.9 percent, 42.0 percent and 39.9 percent in 2004, 2003 and 2002,
respectively. The Company’s interest coverage ratio (earnings from continuing operations before income taxes
and interest expense, divided by interest expense) was 8.9 times in 2004, compared with 6.7 times in 2003 and
7.4 times in 2002. The increase in the interest coverage ratio in 2004 from 2003 reflects higher earnings and
lower average borrowings, partially offset by higher interest rates. The decrease in the interest coverage ratio
from 2002 to 2003 reflects lower earnings and higher interest rates on new issuances of long-term debt that
replaced commercial paper, which were partially offset by lower average borrowings. See notes 3, 8 and 9 for
additional information.
At year-end 2004, the Company and its subsidiaries maintained lines of credit amounting to $2,750 million to
support short-term borrowings, and had uncommitted bank credit facilities to support non-U.S. operations of
which approximately $420 million was unused at September 30, 2004. Two-thirds of the credit lines ($1,833
million) are effective until March 2009, with the remainder effective until March 2005. The 364-day credit lines do
not contain any financial covenants, while the five-year credit lines require the Company to maintain minimum
stockholders’ equity of $4,000 million. The 364-day credit lines may be converted to a one-year term loan within
60 days prior to maturity in March 2005 at the Company’s option. The credit line agreements are not subject to
termination based upon a change in credit ratings or a material adverse change. In addition, as of September 30,
2004, the Company could issue up to $2.5 billion in debt securities, preferred stock, common stock, warrants,
share purchase contracts and share purchase units under the shelf registration with the Securities and Exchange
Commission. The Company’s long-term debt is rated A2 by Moody’s Investors Service and A by Standard and Poor’s.
28 Emerson 2004
Operating working capital has
improved from 16 percent of sales
in 1999 to 11 percent in 2004.
Operating
Working Capital
as a Percent of Sales
99 04030201
16%
8%
12%
00
4%