Emerson 2004 Annual Report Download - page 32

30 Emerson 2004
Management regularly reviews inventory for obsolescence to determine whether a write-down is necessary.
Various factors are considered in making this determination, including recent sales history and predicted
trends, industry market conditions and general economic conditions. See note 1.
Long-lived Assets
Long-lived assets, which primarily include goodwill and property, plant and equipment, are reviewed for
impairment whenever events and changes in business circumstances indicate the carrying value of the assets
may not be recoverable. If the Company determines that the carrying value of the long-lived asset may not
be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of
the long-lived asset exceeds its fair value. In 2002, the Company adopted FAS 142 and recorded a transitional
impairment charge as a cumulative effect of change in accounting principle. In 2003, a goodwill impairment
charge related to the network power segment was recorded. Fair value is generally measured based on a
discounted cash flow method using a discount rate determined by management to be commensurate with the
risk inherent in the Company’s current business model. The estimates of cash flows and discount rate are subject
to change due to the economic environment, including such factors as interest rates, expected market returns
and volatility of markets served. Management believes that the estimates of future cash flows and fair value are
reasonable; however, changes in estimates could materially affect the evaluations. See notes 1, 3 and 6.
Retirement Plans
Defined benefit plan expense and obligations are dependent on assumptions used in calculating such
amounts. These assumptions include discount rate, rate of compensation increases and expected return on
plan assets. In accordance with U.S. generally accepted accounting principles, actual results that differ from
the assumptions are accumulated and amortized over future periods. While management believes that the
assumptions used are appropriate, differences in actual experience or changes in assumptions may affect
the Company’s retirement plan obligations and future expense. In 2002, the Company adjusted the expected
long-term rate of return on plan assets to 9.0 percent, down from 10.5 percent, which increased retirement
plan expense approximately $30 million in 2003. In 2003, the Company adjusted the expected long-term
rate of return on plan assets to 8.5 percent and adjusted the discount rate for the U.S. retirement plans to 6.0
percent, which increased retirement plan expense approximately $50 million in 2004. Effective for 2005, the
Company adjusted the discount rate for the U.S. retirement plans to 6.25 percent. Defined benefit pension
plan expense is expected to be approximately $90 million in 2005. As of the June 30, 2004, measurement
date, the fair value of plan assets exceeded the accumulated benefit obligation for the primary defined benefit
pension plan by approximately $250 million, and an additional $50 million was contributed to the plan in the
fourth quarter of 2004. If the performance of the equity and bond markets in 2005 eliminates the $300 million
excess, the Company could be required to record an after-tax charge to equity of approximately $550 million.
The Company expects to contribute less than $100 million to defined benefit plans in 2005. See note 10.
Income Taxes
Income tax expense and deferred tax assets and liabilities reflect management’s assessment of actual future
taxes to be paid on items reflected in the financial statements. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which the temporary differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. No
provision is made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries. These earnings
are permanently invested or indefinitely retained for continuing international operations. In those cases in
which distributions have been made, additional income taxes have not been significant. See note 13.
The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. The new law repeals
an export tax benefit, provides for a 9 percent deduction on U.S. manufacturing income, and allows the
repatriation of foreign earnings at a reduced rate for one year, subject to certain limitations. Based on fiscal
year 2004 and when fully phased-in, management estimates that the repeal of the export tax benefit will
increase income tax expense approximately $25 million per year but expects a significant portion of this cost
to be offset by the deduction on manufacturing income. The Company is also considering the implications of
the new law on repatriation of foreign earnings, which reduces the Federal income tax rate to 5.25 percent on
earnings distributed from non-U.S. subsidiaries for a one-year period.
Strong cash flow performance
in 2004 improved the ratio of
operating cash flow to total debt
to 55 percent.
Operating Cash Flow
to Total Debt
99 04030201
60%
30%
45%
00
15%