E-Z-GO 2007 Annual Report Download - page 20

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18
The following notes and calculation pertain to the table contained within the Chairman’s Letter:
(1) Segment profi t is an important measure used for evaluating performance and for decision-making purposes. Segment profi t for manufacturing
segments excludes interest expense and certain corporate expenses. The measurement for the Finance segment includes interest income
and expense.
(2) Free cash fl ow is a generally accepted measure of cash fl ow used by investors and analysts to gauge a company’s ability to generate cash from busi-
ness operations in excess of that necessary to be reinvested to sustain and grow the business. Our defi nition of free cash fl ow for the Manufacturing
group uses net cash provided by operating activities of continuing operations, less capital expenditures, including those fi nanced with capital leases,
and adds back proceeds from the sale of plant, property and equipment. Free cash fl ow in 2007 includes the Manufacturing group’s net cash pro-
vided by operating activities of continuing operations of $1.2 billion and proceeds from the sale of property, plant and equipment of $23 million, less
capital expenditures of $391 million and capital lease additions of $22 million. Free cash fl ow in 2006 includes the Manufacturing group’s net cash
provided by operating activities of continuing operations of $1.1 billion and proceeds from the sale of property, plant and equipment of $7 million,
less capital expenditures of $419 million and capital lease additions of $16 million.
(3) We measure performance based on our return on invested capital (ROIC), which is calculated by dividing ROIC income by average invested
capital. ROIC income includes income from continuing operations, adds back after-tax interest expense for the Manufacturing group and eliminates
operating income from 2007 acquisitions. ROIC is a non-GAAP fi nancial measure that our management believes is useful to investors as a measure
of performance and of the effectiveness of the use of capital in our operations. Management uses ROIC as one measure to monitor and evaluate the
performance of the company, including for executive compensation purposes.
At the beginning of the year, our invested capital represents total shareholders’ equity and Manufacturing group debt, less its cash and cash
equivalents. At the end of the year, we typically adjust ending invested capital for signifi cant events unrelated to our normal operations for the year.
In 2007 and 2006, we adjusted invested capital to eliminate the net cash used by the Manufacturing group for acquisitions. In 2006, we also
adjusted invested capital to eliminate the impact of the adoption of Statement of Financial Accounting Standards (SFAS) No. 158 and to eliminate the
net cash proceeds from the sale of the Fastening Systems business.
Our calculation of ROIC is as follows:
(Dollars in millions) 2007 2006
ROIC Income
Income from continuing operations $ 915 $ 706
Interest expense for Manufacturing group 56 58
Operating income from 2007 acquisitions (2) —
ROIC Income $ 969 $ 764
Invested Capital at end of year
Total shareholders’ equity $ 3,507 $ 2,649
Total Manufacturing group debt 2,148 1,800
Cash and cash equivalents for Manufacturing group (471) (733)
Net cash used by Manufacturing group for acquisitions (1,092) (338)
Adjustment to shareholders’ equity related to adoption of SFAS No. 158 — 647
Eliminate net cash proceeds from the sale of Fastening Systems business — 644
Invested Capital at end of year, as adjusted 4,092 4,669
Invested Capital at beginning of year 3,716 4,412
Average Invested Capital $ 3,904 $ 4,541
Return on Invested Capital 24.8% 16.8%