Energizer 2002 Annual Report Download - page 19

foreign currency derivatives with a duration of generally one year or less
may be used, including forward exchange contracts, purchased put and
call options, and zero-cost option collars. Energizer policy allows foreign
currency derivatives to be used only for identifiable foreign currency expo-
sures and, therefore, Energizer does not enter into foreign currency con-
tracts for trading purposes where the sole objective is to generate profits.
Energizer has not designated any financial instruments as hedges for
accounting purposes in the three years ended September 30, 2002.
Market risk of foreign currency derivatives is the potential loss in fair value
of net currency positions for outstanding foreign currency contracts at fis-
cal year-end, resulting from a hypothetical 10% adverse change in all
foreign currency exchange rates. Market risk does not include foreign
currency derivatives that hedge existing balance sheet exposures, as any
losses on these contracts would be fully offset by exchange gains on the
underlying exposures for which the contracts are designated as hedges.
Accordingly, the market risk of Energizer’s foreign currency derivatives at
September 30, 2002 and 2001 amounts to $.9 and $1.9, respectively.
Energizer generally views as long-term its investments in foreign sub-
sidiaries with a functional currency other than the U.S. dollar. As a
result, Energizer does not generally hedge these net investments.
Capital structuring techniques are used to manage the net investment
in foreign currencies as considered necessary. Additionally, Energizer
attempts to limit its U.S. dollar net monetary liabilities in countries with
unstable currencies. In March 2002, Energizer contributed $8.4 of capi-
tal to its Argentine subsidiary sufficient to repay all U.S. dollar liabilities
in order to mitigate exposure to currency exchange losses.
In terms of foreign currency translation risk, Energizer is exposed to the
Swiss franc, the Euro and other European currencies; the Mexican and
Argentine peso and other Latin American currencies; and the Singapore
dollar, Chinese renminbi, Australian and Hong Kong dollars, and other
Asian currencies. Energizer’s net foreign currency investment in foreign
subsidiaries and affiliates translated into U.S. dollars using year-end
exchange rates was $279.5 and $329.2 at September 30, 2002 and 2001,
respectively. The potential loss in value of Energizer’s net foreign currency
investment in foreign subsidiaries resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates at September 30, 2002
and 2001 amounts to $28.0 and $32.9, respectively.
Stock Price
A portion of Energizer’s deferred compensation liabilities is based on
Energizer stock price and is subject to market risk. In May 2002,
Energizer entered into a prepaid share option transaction to mitigate this
risk. Energizer invested $22.9 in the prepaid share option transaction
covering 840,000 share equivalents in Energizer deferred compensation
plans. The change in fair value of these options for the year resulted in
income of $2.6, which was substantially offset by an increase in the
deferred compensation liability tied to the Energizer stock price.
Critical Accounting Policies
Energizer identified the policies below as critical to its business operations
and the understanding of its results of operations. The following discussion
is presented as recommended by Financial Reporting Release No. 60,
“Cautionary Advice Regarding Disclosure About Critical Accounting
Policies.” The impact and any associated risks related to these policies on
its business operations is discussed throughout Management’s Discussion
and Analysis of Financial Condition and Results of Operations where such
policies affect the reported and expected financial results.
Preparation of the financial statements in conformity with generally
accepted accounting principles in the United States requires Energizer to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. On an ongoing basis,
Energizer evaluates its estimates, including those related to customer
programs and incentives, product returns, bad debts, inventories, intangible
assets and other long-lived assets, income taxes, financing operations,
restructuring, pensions and other postretirement benefits, and contingen-
cies. Actual results could differ from those estimates. This listing is not
intended to be a comprehensive list of all of Energizer’s accounting policies.
Revenue Recognition Energizer provides its customers a variety of pro-
grams designed to promote sales of its products, many of which require
periodic payments and allowances based on estimated results of specific
programs. Such payments and allowances are recorded as a reduction to
net sales. Energizer accrues at the time of sale the estimated total pay-
ments and allowances associated with each sale and continually assesses
the adequacy of accruals for program costs not yet paid. To the extent total
program payments differ from estimates, adjustments may be necessary.
Allowance for Doubtful Accounts Energizer maintains an allowance for
doubtful accounts receivable for estimated losses resulting from customers
that are unable to meet their financial obligations. The financial condition of
specific customers is considered when establishing the allowance.
Provisions to increase the allowance for doubtful accounts are included in
selling, general and administrative expenses. If actual bad debt losses
exceed estimates, additional provisions may be required in the future.
Pension Plans and Other Postretirement Benefits The determination of
Energizer’s obligation and expense for pension and other postretirement
benefits is dependent on certain assumptions developed by Energizer and
used by actuaries in calculating such amounts. Assumptions include,
among others, the discount rate, future salary increases and the expected
long-term rate of return on plan assets. Actual results that differ from
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