Emerson 2004 Annual Report Download - page 43

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(7) FINANCIAL INSTRUMENTS
The Company selectively uses derivative financial instruments to manage interest costs, commodity prices and currency exchange risk. The
Company does not hold derivatives for trading purposes. No credit loss is anticipated as the counterparties to these agreements are major
financial institutions with high credit ratings.
To efficiently manage interest costs, the Company utilizes interest rate swaps as cash flow hedges of variable rate debt or fair value hedges
of fixed rate debt. Also as part of its hedging strategy, the Company utilizes purchased option and forward exchange contracts and
commodity swaps as cash flow hedges to minimize the impact of currency and commodity price fluctuations on transactions, cash flows
and firm commitments. These contracts for the sale or purchase of European and other currencies and the purchase of copper and other
commodities generally mature within one year.
Notional transaction amounts and fair values for the Company’s outstanding derivatives, by risk category and instrument type, as of
September 30, 2003 and 2004, are summarized as follows. Fair values of the derivatives do not consider the offsetting underlying
hedged item.
2003 2004
Notional Fair Notional Fair
Amount Value Amount Value
Foreign currency:
Forwards $1,193 9 1,033 13
Options $ 52 – 22 –
Interest rate swaps $ 338 (1) 853 (7)
Commodity contracts $ 95 8 130 18
Fair values of the Company’s financial instruments are estimated by reference to quoted prices from market sources and financial institutions,
as well as other valuation techniques. The estimated fair value of long-term debt (including current maturities) exceeded the related
carrying value by $223 and $335 at September 30, 2004 and 2003, respectively. The fair value and carrying value of an equity investment
in MKS Instruments, Inc., a publicly traded company, were $260 and $183, respectively, at September 30, 2003. The estimated fair value of
each of the Company’s other classes of financial instruments approximated the related carrying value at September 30, 2004 and 2003.
(8) SHORT-TERM BORROWINGS AND LINES OF CREDIT
Short-term borrowings and current maturities of long-term debt are summarized as follows:
2003 2004
Current maturities of long-term debt $ 4 622
Commercial paper 117 118
Payable to banks 41 24
Other 229 138
Total $391 902
Weighted average short-term borrowing interest rate at year end 1.6% 2.4%
In 2000, the Company issued 13 billion Japanese yen of commercial paper and simultaneously entered into a ten-year interest rate swap
which fixed the rate at 2.2 percent. The Company had 76 million and 138 million of British pound notes with interest rates of 4.7 percent
and 3.6 percent, swapped to $134 and $222 at U.S. commercial paper rates at September 30, 2004 and 2003, respectively.
The Company and its subsidiaries maintained lines of credit amounting to $2,750 with various banks at September 30, 2004, to support
short-term borrowings and to assure availability of funds at prevailing interest rates. Lines of credit totaling $1,833 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. 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. There were no borrowings against U.S. lines of credit in the
last three years. The Company’s subsidiaries maintained uncommitted bank credit facilities in various currencies of which approximately
$420 was unused at September 30, 2004. In some instances, borrowings against these credit facilities have been guaranteed by the
Company to facilitate funding at favorable interest rates.