Energizer 2004 Annual Report Download - page 40

ENR 2004 Annual Report
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earnings or cash flows on foreign currency transactions. The Company
has not designated any financial instruments as hedges for accounting
purposes. Foreign currency exposures are primarily related to anticipated
intercompany purchase transactions and intercompany borrowings.
Other foreign currency transactions to which the Company is exposed
include external purchase transactions and intercompany receivables,
dividends and service fees.
The table below summarizes by instrument the contractual amounts
of the Company’s forward exchange contracts and purchased currency
options in U.S. dollar equivalents at year-end. These contractual
amounts represent transaction volume outstanding and do not represent
the amount of the Company’s exposure to credit or market loss. Foreign
currency contracts are generally for one year or less.
2004 2003
INSTRUMENT
Forwards $ 43.2 $ 16.4
Prepaid Share Option Transaction A portion of the Company’s deferred
compensation liabilities is based on Company stock price and is subject
to market risk. In May 2002, the Company entered into a prepaid share
option transaction with a financial institution to mitigate this risk. The
change in fair value of the prepaid share option is recorded in selling, gen-
eral and administrative expense in the Consolidated Statement of Earnings.
Changes in value of the prepaid share option offset changes in the deferred
compensation liabilities tied to the Company’s stock price. In July 2004,
a portion of the prepaid share option was liquidated in order to realign
the Company’s investment with its after-tax exposure to share price, which
reduced the prepaid share option from 1.1 million shares to 0.5 million
shares. Market value of the prepaid share options was $22.1 and $39.7
at September 30, 2004 and 2003, respectively, with approximately
0.5 and 1.1 million prepaid share options outstanding at September 30,
2004 and 2003, respectively. The settlement date of the options
outstanding at 2004 year-end is September 30, 2005. The change in
fair value of the prepaid share option for the year ended September 30,
2004 and 2003 resulted in income of $8.8 and $5.1, respectively.
Concentration of Credit Risk The counterparties to foreign currency
contracts consist of a number of major international financial institutions
and are generally institutions with which the Company maintains lines of
credit. The Company does not enter into foreign exchange contracts
through brokers nor does it trade foreign exchange contracts on any other
exchange or over-the-counter markets. Risk of currency positions and
mark-to-market valuation of positions are strictly monitored at all times.
The Company continually monitors positions with, and credit ratings of,
counterparties both internally and by using outside rating agencies. The
Company has implemented policies that limit the amount of agreements
it enters into with any one party. While nonperformance by these coun-
terparties exposes the Company to potential credit losses, such losses are
not anticipated due to the control features mentioned.
The Company sells to a large number of customers primarily in the retail
trade, including those in mass merchandising, drugstore, supermarket
and other channels of distribution throughout the world. The Company
performs ongoing evaluations of its customers’ financial condition and
creditworthiness, but does not generally require collateral. The
Company’s largest customer had obligations to the Company with a car-
rying value of $70.5 at September 30, 2004. While the competitiveness
of the retail industry presents an inherent uncertainty, the Company does
not believe a significant risk of loss from a concentration of credit risk
exists with respect to accounts receivable.
Financial Instruments The Company’s financial instruments include
cash and cash equivalents, short-term and long-term debt, foreign cur-
rency contracts and interest rate swap agreements. Due to the nature of
cash and cash equivalents and short-term borrowings, including notes
payable, carrying amounts on the balance sheet approximate fair value.
At September 30, 2004 and 2003, the fair market value of fixed rate
long-term debt was $358.4 and $336.9, respectively, compared to its
carrying value of $375.0 for both periods. The book value of the
Company’s variable rate debt approximates fair value. The fair value of
the long-term debt is estimated using yields obtained from independent
pricing sources for similar types of borrowing arrangements.
The fair value of foreign currency contracts is the amount that the
Company would receive or pay to terminate the contracts, considering
first, quoted market prices of comparable agreements, or in the absence
of quoted market prices, such factors as interest rates, currency exchange
rates and remaining maturities. Based on these considerations, the
Company would make a total net payment of $0.7 and $0.2 for out-
standing foreign currency contracts at September 30, 2004 and 2003,
respectively. However, these payments are unlikely due to the fact that
the Company enters into foreign currency contracts to hedge identifiable
foreign currency exposures, and as such would generally not terminate
such contracts.
19. Environmental and Legal Matters
Government Regulation and Environmental Matters The operations of
the Company, like those of other companies engaged in the battery and
ENERGI ZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCI AL STATEMENTS Continued
(Dollars in millions, except per share data)