If you look at the $787 billion stimulus program that was authorized under the Obama Administration, only a relatively modest amount of that has actually been released. It's our belief that you probably won't even have 20% of that $787 billion program in that released status before the end of this year. So the great majority of that stimulus is as yet really to be put into the system.
So that will benefit you as a source of growth?
Yes, it will. For us it's clearly a benefit, and for the economy overall it's clearly a benefit. But at the end of the day it's going to act like a pump primer. It's got to prime other economic activity because the government can't continue to simply spend money that it borrows. I mean if you do that for too long, you'll end up with some of the difficulties that countries such as Japan have experienced, where their debt loads have risen to extremely high levels relative to GDP.
Eaton generated $1.6 billion of operating cash flow over the past four quarters. What are you planning to do with all that cash?
Thus far this year, we've just been paying down debt. But we have seen the risk to the financial system. That suggests to me, as it has to many other CFOs, that whatever level of leverage we were comfortable operating at in the past is probably higher than we're now comfortable operating at now. So we're simply taking that cash and paying down debt, which will put us into a [ratio] of debt to total capital that we think is appropriate given the current state of the world economy and of financial institutions.
What's an appropriate ratio of debt to capital?
How we often think about this is net debt to total capital, with net debt defined as debt less cash on hand and total capital defined as net debt plus equity. That gives you an idea of how much you've relied on debt as part of your long-term capital structure. Over the past five years, we've been comfortable with that number on average being somewhere in the neighborhood of 35%. Given the known risks that are out there in the world economy and given a financial sector that still is not repaired from this downturn, we think it's probably prudent to be operating at around 25%.
What do you see on the horizon in terms of genuine revenue growth, rather than growth that comes from such things as cost-cutting?
Your first task is to have a business size such that it can earn attractive returns in whatever market environment you're in. And so we've accomplished that. Even if the market doesn't recover, the returns we earn will be reasonably attractive. But you're right, over the long haul, if you're going to create real value you need to find ways to grow your top line. Based on our assessment of what most economists believe, you're going to have global GDP growth next year on the nature of 3.1 %. Our kind of business is dependent upon global production more than global GDP. Typically, industrial production declines more in the downturn and increases more in an upturn. And the general view of economists is that industrial production next year is likely to grow by something like 6% globally.
Because we have focused on such segments as electrical energy efficiency, we think we are likely to be able to grow faster than the overall market. So, for example, if you assume growth in industrial production of 6% globally, and you assume that we could outgrow that by 50%, that would suggest something just shy of 10% revenue growth next year, absent any currency impact. So the most likely case is moderate revenue growth in 2010. While I think we all would desire a stronger recovery, it's nonetheless going to feel a whole lot better than the past 12 months have felt.
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