Energizer 2004 Annual Report Download - page 19

ENR 2004 Annual Report 17
developing countries in which the Company operates, there has not been
significant governmental regulation relating to the environment, occupational
safety, employment practices or other business matters routinely regulated
in the U.S. 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.
Accrued environmental costs at September 30, 2004 were $7.5, of
which $1.8 is expected to be spent in fiscal 2005. This accrual is not
measured on a discounted basis. It is difficult to quantify with certainty
the cost of environmental matters, particularly remediation and future cap-
ital expenditures for environmental control equipment. Nevertheless, based
on information currently available, the Company believes the possibility of
material environmental costs in excess of the accrued amount is remote.
Market Risk Sensitive Instruments and Positions
The market risk inherent in the Company’s financial instruments and
positions represents the potential loss arising from adverse changes in
interest rates, foreign currency exchange rates and stock price. The fol-
lowing 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, 2004 and 2003, the fair market value of the
Company’s fixed rate debt is estimated at $358.4 and $336.9, respec-
tively, using yields obtained from independent pricing sources for similar
types of borrowing arrangements. The fair value of debt is lower than
the carrying value of the Company’s debt at September 30, 2004 and
2003 by $16.6 and $38.1, respectively. A 10% adverse change in
interest rates on fixed-rate debt would have decreased the fair market
value by $1.7 and $3.8 at September 30, 2004 and 2003, respectively.
The Company has interest rate risk with respect to interest expense on
variable rate debt. At September 30, 2004 and 2003, the Company had
$866.9 and $624.7 variable rate debt outstanding, respectively. The book
value of the Company’s variable rate debt approximates fair value. A hypo-
thetical 10% adverse change in all interest rates would have had an annual
unfavorable impact of $2.4 and $1.3 in 2004 and 2003, respectively, on
the Company’s earnings before taxes and cash flows, based upon these
year-end debt levels. The primary interest rate exposures on variable
rate debt are short-term rates in the U.S. and certain Asian countries.
Foreign Currency Exchange Rates
The Company employs a foreign currency hedging strategy which focuses
on mitigating potential losses in earnings or cash flows on foreign currency
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 the
Company’s foreign affiliates are exposed include the U.S. dollar, the
euro, the yen and the British pound.
The Company’s hedging strategy involves the use of natural hedging
techniques, where possible, such as the offsetting or netting of like
foreign currency cash flows. Where natural hedging techniques are not
possible, foreign currency derivatives with a duration of generally one
year or less may be used, including forward exchange contracts, pur-
chased put and call options, and zero-cost option collars. The Company
policy allows foreign currency derivatives to be used only for identifiable
foreign currency exposures and, therefore, the Company does not enter
into foreign currency contracts for trading purposes where the sole
objective is to generate profits. The Company has not designated any
financial instruments as hedges for accounting purposes in the three
years ended September 30, 2004.
Market risk of foreign currency derivatives is the potential loss in fair value
of net currency positions for outstanding foreign currency contracts at fiscal
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 the Company’s foreign currency derivatives at
September 30, 2004 and 2003 amounts to $5.7 and $1.7, respectively.
The Company generally views its investments in foreign subsidiaries
with a functional currency other than the U.S. dollar as long-term. As a
result, the Company does not generally hedge these net investments.
Capital structuring techniques are used to manage the net investment in
foreign currencies as necessary. Additionally, the Company attempts to
limit its U.S. dollar net monetary liabilities in countries with unstable
currencies. In March 2002, the Company contributed $8.4 of capital to
its Argentine subsidiary sufficient to repay all U.S. dollar liabilities in
order to mitigate exposure to currency exchange losses.
Stock Price
A portion of the Company’s deferred compensation liabilities is based on
the Company’s stock price and is subject to market risk. The Company