Emerson 2004 Annual Report Download - page 31

Contractual Obligations
At September 30, 2004, the Company’s contractual obligations, including estimated payments due by period,
are as follows (dollars in millions):
Payments Due By Period
Less than More Than
Total 1 year 1-3 years 3-5 years 5 years
Long-term Debt $3,758 622 253) 731) 2,152)
Operating Leases 384 117 137) 64) 66)
Purchase Obligations 1,037 771 240) 26) –)
Total $5,179 1,510 630) 821) 2,218)
Purchase obligations consist primarily of inventory purchases made in the normal course of business to meet
operational requirements. The above table does not include $1.7 billion of other noncurrent liabilities recorded
in the balance sheet, as summarized in note 16, which primarily consist 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.
Financial Instruments
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 financial 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 financial 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 flows are immaterial. This method has limitations; for example, a weaker U.S. dollar
would benefit future earnings through favorable translation of non-U.S. operating results and lower commodity
prices would benefit future earnings through lower cost of sales. See notes 1, 7, 8 and 9.
CRITICAL ACCOUNTING POLICIES
Preparation of the Company’s financial 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
significant accounting policies used in preparation of the Consolidated Financial Statements. The most
significant areas involving management judgments and estimates are described below. Actual results in these
areas could differ materially from management’s estimates under different assumptions or conditions.
Revenue Recognition
The Company recognizes substantially all of its revenues through the sale of manufactured products and records
the sale when products are shipped and title passes to the customer and collection is reasonably assured. In
certain instances, revenue is recognized on the percentage-of-completion method, when services are rendered,
or in accordance with SOP No. 97-2, “Software Revenue Recognition.” Sales sometimes include multiple items
including services such as installation. In such instances, revenue assigned to each item is based on that item’s
objectively determined fair value, and revenue is recognized individually for delivered items only if the delivered
items have value to the customer on a standalone basis, performance of the undelivered items is probable
and substantially in the Company’s control and the undelivered items are inconsequential or perfunctory.
Management believes that all relevant criteria and conditions are considered when recognizing sales.
Inventories
Inventories are stated at the lower of cost or market. The majority of inventory values are based upon
standard costs which approximate average costs, while the remainder are principally valued on a first-in, first-
out basis. Standard costs are revised at the beginning of each fiscal year. The effects of resetting standards
and operating variances incurred during each period are allocated between inventories and cost of sales.
29
Total debt was 36 percent of
total capital and net debt was
27 percent of net capital at year-
end 2004. Emerson maintains a
conservative financial structure
to provide the strength and
flexibility necessary to achieve
our strategic objectives.
Debt as a Percent
of Capital
99 04030201
48%
24%
36%
00
12%