Energizer 2002 Annual Report Download - page 18

several, meaning that a liable party may be responsible for all of the costs
incurred in investigating and cleaning up contamination at a site. However,
liability in such matters is typically shared by all of the financially viable
responsible parties, through negotiated agreements. Negotiations with the
U.S. Environmental Protection Agency, the state agency that is involved
on the state-designated site, and other PRPs are at various stages with
respect to the sites. Negotiations involve determinations of the actual
responsibility of Energizer and the other PRPs at the site, appropriate
investigatory and/or remedial actions, and allocation of the costs of such
activities among the PRPs and other site users.
The amount of Energizer’s ultimate liability in connection with those sites
may depend on many factors, including the volume and toxicity of material
contributed to the site, the number of other PRPs and their financial viabili-
ty, and the remediation methods and technology to be used.
In addition, Energizer undertook certain programs to reduce or eliminate
the environmental contamination at the rechargeable battery facility in
Gainesville, Florida, which was divested in November 1999. The buyer
assumed responsibility for those programs at the time of the divestiture.
In 2001, the buyer, as well as its operating subsidiary, which owns and
operates the Gainesville facility, filed petitions in bankruptcy. In the event
that the buyer and its affiliates become unable to continue the programs
to reduce or eliminate contamination, Energizer could be required to
bear financial responsibility for such programs as well as for other
known and unknown environmental conditions at the site. Under the
terms of the Reorganization Agreement between Energizer and Ralston
Purina Company, however, which has been assumed by an affiliate of
The Nestlé Corporation, Ralston’s successor is obligated to indemnify
Energizer for 50% of any such liabilities in excess of $3.
Many European countries, as well as the European Union, have been
very active in adopting and enforcing environmental regulations. In
many developing countries in which Energizer operates, there has not
been significant governmental regulation relating to the environment,
occupational safety, employment practices or other business matters
routinely regulated in the United States. As such economies develop, it
is possible that new regulations may increase the risk and expense of
doing business in such countries.
Accruals for environmental remediation are recorded when it is probable
that a liability has been incurred and the amount of the liability can be
reasonably estimated, based on current law and existing technologies.
These accruals are adjusted periodically as assessments take place
and remediation efforts progress, or as additional technical or legal
information becomes available.
It is difficult to quantify with certainty the potential financial impact of
actions regarding expenditures for environmental matters, particularly
remediation, and future capital expenditures for environmental control
equipment. Nevertheless, based upon the information currently
available, Energizer believes that its ultimate liability arising from such
environmental matters, taking into account established accruals of $7.0
for estimated liabilities at September 30, 2002, should not be material to
its financial position. Such liability could, however, be material to results
of operations or cash flows for a particular quarter or year.
Market Risk Sensitive Instruments and
Positions
The market risk inherent in Energizer’s financial instruments and
positions represents the potential loss arising from adverse changes
in interest rates, foreign currency exchange rates and stock price. The
following risk management discussion and the estimated amounts
generated from the sensitivity analyses are forward-looking statements
of market risk assuming certain adverse market conditions occur.
Interest Rates
At September 30, 2002 and 2001, the fair market value of Energizer’s debt
is estimated at $200.0 and $242.2, respectively, using yields obtained from
independent pricing sources for similar types of borrowing arrangements.
The fair value of debt exceeded the carrying value of Energizer’s debt at
September 30, 2002 and 2001 by $25.0 and $17.2, respectively. A 10%
adverse change in interest rates would have increased the fair market
value by $2.5 and $2.3 at September 30, 2002 and 2001, respectively.
Energizer has interest rate risk with respect to interest expense on vari-
able rate debt. At September 30, 2002 and 2001, Energizer had $94.6
and $160.3 variable rate debt outstanding. A hypothetical 10% adverse
change in all interest rates would have had an annual unfavorable
impact of $.4 and $.9 in 2002 and 2001, respectively, on Energizer’s
earnings and cash flows, based upon these year-end debt levels. The
primary interest rate exposures on variable rate debt are with respect to
short-term local currency rates in certain European and Asian countries.
Foreign Currency Exchange Rates
Energizer employs a foreign currency hedging strategy which focuses
on mitigating potential losses in earnings or cash flows on foreign cur-
rency transactions, which primarily consist of anticipated intercompany
purchase transactions and intercompany borrowings. External purchase
transactions and intercompany dividends and service fees with foreign
currency risk are also hedged from time to time. The primary currencies
to which Energizer’s foreign affiliates are exposed include the U.S.
dollar, the Euro and the British pound.
Energizer’s hedging strategy involves the use of natural hedging tech-
niques, where possible, such as the offsetting or netting of like foreign
currency cash flows. Where natural hedging techniques are not possible,
Energizer Holdings, Inc.
Management’s Discussion and Analysis of Results of Operations and Financial Condition Continued
(Dollars in millions except per share and percentage data)
ENR 2002 Annual Report Page 16