December 4, 2012, 1:05 p.m. ET
Top U.S. Firms Are Cash-Rich Abroad, Cash-Poor at Home
By KATE LINEBAUGH
Emerson Electric Co. has $2 billion of cash in the bank. But this year it had to borrow money in the U.S. to help buy back shares, distribute dividends and even pay its taxes.
That's because "substantially all" of Emerson's cash is in Europe and Asia, according to the company's filings with securities regulators. The maker of power-plant and data-center equipment could always bring that cash back home, but it would be taxed at the 35% rate on corporate profits minus whatever tax it has already paid overseas.
As a result, Emerson says, it brings its foreign cash holdings back to the U.S. only if that can be "accomplished tax efficiently." In its most recent fiscal year, that meant bringing back just $500 million, then using debt to cover other obligations.
At a time when American companies hold near record amounts of cash, many are surprisingly cash-poor at home. That doesn't mean they could suddenly run out of money to pay their bills. But it does mean there could be unseen limits on their ability to pay dividends and buy back shares.
With billions of dollars overseas that may never come back, the Securities and Exchange Commission is concerned that companies haven't been presenting investors with an honest appraisal of their liquidity. As a result, regulators are pressing companies to more clearly lay out how much of their cash is in the U.S. and how much is overseas and potentially encumbered by U.S. taxes.
Those disclosures are rolling in, and they are revealing the extent to which U.S. tax policies—along with corporations' efforts to get around them—have distorted American companies' balance sheets.
Illinois Tool Works Inc., a diversified manufacturer, had $2.1 billion in cash at the end of September, but none of that was in the U.S., where it generates more than 40% of its revenue. At the end of last year, Johnson & Johnson kept all of its $24.5 billion in cash outside of the U.S., which accounted for 46% of its revenue generation. General Electric Co. had only about a third of its $85.5 billion in cash in the U.S. at the end of September, even though the U.S. accounted for about 45% of the conglomerate's revenue.
Whirlpool Corp. had 85% of its cash offshore at the end of last year, and Microsoft Corp. had about 87% overseas as of Sept. 30. Truck-parts supplier Wabco Holdings Inc. had only 3% of its cash in the U.S. at the end of last year and is buying back shares with borrowed money, but 91% of its sales are generated overseas.
Each of these companies is grappling with a growing problem that comes from keeping Uncle Sam away from their foreign income: How to round up enough cash in the U.S. to cover items like dividends, share repurchases, debt repayments and pension contributions.
For now, easy borrowing terms give companies some ready options for closing the gap. But having to resort to such workarounds introduces extra risk and expense, that makes some chief financial officers uncomfortable.
"You end up with the really peculiar result where you are borrowing money in the U.S. while you show cash on the balance sheet that is trapped overseas," said Bruce Nolop, former chief financial officer of Pitney Bowes and E-Trade Financial and now a director at Marsh & McLennan . "It is a totally inefficient capital structure."
Illinois Tool Works, Johnson & Johnson, GE, Whirlpool, Microsoft and Wabco declined to comment.
With lawmakers and the White House working to come up with a package of tax increases and spending cuts to trim the deficit and head off the "fiscal cliff," there is new impetus to change the corporate tax structure. There is also broad agreement that the current system, in which foreign earnings are kept offshore and untaxed, isn't working. But lawmakers and businesses disagree on a fix.
The businesses want to pay taxes only in the country where profits are earned. They argue that being able to move their funds back to the U.S. freely would spur capital spending and help create jobs. As part of its proposal to lower the corporate tax rate to 28%, the Obama administration wants to expand the tax on foreign income to all income earned overseas.
In a report earlier this year, J.P. Morgan Chase & Co. analyst Dane Mott found that only about 600 of 1,000 U.S. multinationals that have retained foreign profits overseas broke out how much cash they held outside the U.S. For those companies, it was about $588 billion, or about 60% of their total cash. Meanwhile, America's biggest companies generate only about a third of their revenue outside the U.S., according to Thomson Reuters.
"If shareholders are thinking about cash balances being theirs, they may need to haircut those cash balances," Mr. Mott said. "Cash balances are not necessarily all there—available for dividends and buybacks."
The heavy imbalance between overseas and domestic cash at many U.S. companies in part reflects international expansion into new and sometimes more lucrative markets. Businesses may choose to pile up foreign cash to expand globally, paying for new facilities and overseas acquisitions.
Yet the percentage of cash that companies hold overseas often exceeds the percentage of revenue they generate outside the U.S. Enter the U.S. tax system, which is structured so that companies can cut their tax bill by shifting income offshore to lower-tax countries. The system also discourages companies from bringing home profits earned overseas because of the tax cost.
Emerson has expanded globally and says that 59% of its revenue now comes from outside the U.S. Its sales and earnings fell late last year but have recovered. While virtually all of its cash is overseas, the bulk of its expenses are at home and use all the cash it generates in the U.S.
In the fiscal year that ended Sept. 30, the company spent $2.4 billion on dividends, share buybacks, debt repayment and pension contributions, based on calculations from its regulatory filings. It also paid out $800 million in federal and state taxes, a spokesman said. To cover the obligations, the company increased its commercial paper borrowings to $936 million from $588 million a year earlier and added long-term debt.
"Were it not for a combination of additional debt and repatriated earnings, EMR would likely be facing a shortfall in U.S. cash," J.P. Morgan analyst Steve Tusa wrote recently, referring to Emerson by its stock symbol.
Emerson said it has a "conservative financial structure" that provides strength and flexibility. Keeping cash outside the U.S. doesn't "impede our ability to fund our growth initiatives and cash returns to shareholders," a spokesman said in a written reply to questions.
The SEC is pressing companies on their cash holdings. In a June exchange with Whirlpool, the SEC said that disclosing how much cash is overseas "would illustrate that some investments are not presently available to fund domestic operations such as corporate expenditures or acquisitions without paying a significant amount of taxes upon their repatriation."
In response, Whirlpool, which holds 85% of its cash in foreign subsidiaries, said its intent is to "permanently reinvest these funds outside of the U.S." If the funds were to be repatriated, Whirlpool said, it "would be required to accrue and pay applicable U.S. taxes."
Diversified manufacturer Dover Corp. has about two-thirds of its cash abroad, while 60% of its revenue comes from the U.S. "Using domestic cash to fund things like debt, dividends, and to grow—sometimes there are constraints," said Brad Cerepak, Dover's chief financial officer.
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Originally Posted by Dreadnaught
my point is that as long as you have an effective corporate tax rate over zero there will be countries who will be more attractive to MNCs for storing cash. I don't mean the EU, I mean places like Puerto Rico. I'm not worried, I'm saying that you're not going to accomplish what you want to accomplish simply by adjusting your approach to these taxes a little. 
Tax reform isn't just common sense, it's clearly been needed for decades. Neither Minx nor I have said otherwise.