Emerson 2006 Annual Report Download - page 34

Financial Review
earnings and lower average borrowings. See Notes 3, 8 and 9 for
additional information. The Company’s strong nancial posi-
tion supports long-term debt ratings of A2 by Moody’s Investors
Service and A by Standard and Poor’s.
At year-end 2006, the Company maintained a ve-year revolving
credit facility effective until April 2011 amounting to $2.8 billion
to support short-term borrowings. The credit facility does not
contain any nancial covenants, and is not subject to termina-
tion based upon a change in credit ratings or a material adverse
change. In addition, as of September 30, 2006, the Company
could issue up to $2.25 billion in debt securities, preferred stock,
common stock, warrants, share purchase contracts and share
purchase units under the shelf registration statement led with
the Securities and Exchange Commission.
                      
At September 30, 2006, the Company’s contractual obligations,
including estimated payments due by period, are as follows:
 paymentsduebyperiod
    lessthanmorethan
(dollarsinmillions) total 1year 1-3years 3-5years 5years
Long-term Debt $3,130 2 726 637 1,765
Operating Leases 509 143 174 89 103
Purchase Obligations 815 676 128 11 –
Total $4,454 821 1,028 737 1,868
Purchase obligations consist primarily of inventory purchases
made in the normal course of business to meet operational
requirements. The above table does not include $2.0 billion
of other noncurrent liabilities recorded in the balance sheet,
as summarized in Note 17, which consist primarily of deferred
income tax and retirement and postretirement plan liabilities,
because it is not certain when these liabilities will become due.
See Notes 10, 11 and 13 for additional information.
                    
The Company is exposed to market risk related to changes in
interest rates, copper and other commodity prices and European
and other foreign currency exchange rates, and selectively uses
derivative nancial instruments, including forwards, swaps and
purchased options, to manage these risks. The Company does
not hold derivatives for trading purposes. The value of market
risk sensitive derivative and other nancial instruments is subject
to change as a result of movements in market rates and prices.
Sensitivity analysis is one technique used to evaluate these
impacts. Based on a hypothetical ten-percent increase in interest
rates, ten-percent decrease in commodity prices or ten-percent
weakening in the U.S. dollar across all currencies, the potential
losses in future earnings, fair value and cash ows are immaterial.
This method has limitations; for example, a weaker U.S. dollar
would benet future earnings through favorable translation of
non-U.S. operating results and lower commodity prices would
benet future earnings through lower cost of sales. See Notes 1,
7, 8 and 9.

Preparation of the Company’s nancial statements requires
management to make judgments, assumptions and estimates
regarding uncertainties that affect the reported amounts of
assets, liabilities, stockholders’ equity, revenues and expenses.
Note 1 of the Notes to Consolidated Financial Statements
describes the signicant accounting policies used in preparation
of the Consolidated Financial Statements. The most signicant
areas involving management judgments and estimates are
described in the following paragraphs. Actual results in these
areas could differ materially from management’s estimates
under different assumptions or conditions.
                           
Total debt was 33 percent of total capital and net debt was 28 percent
of net capital at year-end 2006. Emerson maintains a conservative
financial structure to provide the strength and flexibility necessary to
achieve our strategic objectives.
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