Energizer 2006 Annual Report Download - page 28

ENERGIZER HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share and percentage data)
26 ENR 2006 ANNUAL REPORT
1. Basis of Presentation
Preparation of the financial statements in conformity with generally
accepted accounting principles in the U.S. (GAAP) requires Energizer
Holdings, Inc. and its subsidiaries (the Company) to make estimates
and assumptions that affect the reported amounts of assets and liabili-
ties, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. On an ongoing basis, the Company
evaluates its estimates, including those related to customer programs
and incentives, product returns, bad debts, inventories, intangible and
other long-lived assets, income taxes, financing, pensions and other
postretirement benefits, contingencies and acquisitions. Actual results
could differ from those estimates.
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies, which conform to GAAP
and are applied on a consistent basis among all years presented,
except as indicated, are described below.
Principles of Consolidation The financial statements include
the accounts of the Company and its majority-owned subsidiaries. All
significant intercompany transactions are eliminated. Investments in
affiliated companies, 20% through 50% owned, are carried at equity.
Foreign Currency Translation Financial statements of foreign opera-
tions where the local currency is the functional currency are translated
using end-of-period exchange rates for assets and liabilities, and
average exchange rates during the period for results of operations.
Related translation adjustments are reported as a component within
accumulated other comprehensive income in the shareholders equity
section of the Consolidated Balance Sheets.
For foreign operations where the U.S. dollar is the functional
currency and for countries that are considered highly inflationary,
translation practices differ in that inventories, properties, accumulated
depreciation and depreciation expense are translated at historical rates
of exchange, and related translation adjustments are included in
earnings. Gains and losses from foreign currency transactions are
generally included in earnings.
Financial Instruments and Derivative Securities The Company
uses financial instruments, from time to time, in the management of
foreign currency, interest rate and other risks that are inherent to
its business operations. Such instruments are not held or issued for
trading purposes.
Foreign exchange (F/X) instruments, including currency forwards,
purchased options and zero-cost option collars, are used primarily to
reduce transaction exposures and, to a lesser extent, to manage other
translation exposures. F/X instruments used are selected based on
their risk reduction attributes and the related market conditions. The
Company also holds a contract with an embedded derivative instrument
to mitigate the risk of its deferred compensation liabilities, as discussed
further in Note 13. The Company has not designated these financial
instruments as hedges for accounting purposes in the three years
ended September 30, 2006.
The company uses raw materials that are subject to price volatility.
The Company will use hedging instruments as it desires to reduce expo-
sure to variability in cash flows associated with future purchases of zinc
or other commodities. At September 30, 2006, the fair market value of the
Company’s hedging instruments is insignificant. There were no market
instruments designated as cash flow hedges in fiscal 2005 or 2004.
Cash Equivalents For purposes of the Consolidated Statements of
Cash Flows, cash equivalents are all considered to be highly liquid
investments with a maturity of three months or less when purchased.
Accounts Receivable Valuation Accounts receivable are stated at
their net realizable value. The allowance for doubtful accounts reflects
the Company’s best estimate of probable losses inherent in the receiv-
ables portfolio determined on the basis of historical experience, specific
allowances for known troubled accounts and other currently available
information. Bad debt expense is included in selling, general and admin-
istrative (SG&A) expense in the Consolidated Statements of Earnings.
Inventories Inventories are valued at the lower of cost or market, with
cost generally being determined using average cost or the first-in, first-
out (FIFO) method.
Capitalized Software Costs Capitalized software costs are included
in Other Assets. These costs are amortized using the straight-line method
over periods of related benefit ranging from three to seven years.
Expenditures related to capitalized software are included in the capital
expenditures caption in the Consolidated Statements of Cash Flows.
Property Plant and Equipment Expenditures for new facilities and
expenditures that substantially increase the useful life of property,
including interest during construction, are capitalized and reported in
the capital expenditures caption in the Consolidated Statements of
Cash Flows. Maintenance, repairs and minor renewals are expensed as
incurred. When property is retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts,
and gains or losses on the disposition are reflected in earnings.
Depreciation Depreciation is generally provided on the straight-line
basis by charges to costs or expenses at rates based on estimated
useful lives. Estimated useful lives range from two to 25 years for
machinery and equipment and three to 30 years for buildings.
Depreciation expense was $109.1, $111. 0 an d $ 110.0 in 2006, 2005
and 2004, respectively.
Goodwill and Other Intangible Assets Goodwill and indefinite-lived
intangibles are not amortized, but are evaluated annually for impairment
as part of the Company’s annual business planning cycle in the fourth
quarter. The fair value of each reporting unit is estimated using the
discounted cash flow method. Intangible assets with finite lives are
amortized on a straight-line basis over expected lives of five to 15 years.
Such intangibles are also evaluated for impairment annually.
Impairment of Long-Lived Assets The Company reviews long-lived
assets, other than goodwill and other intangible assets for impairment,
when events or changes in business circumstances indicate that the
remaining useful life may warrant revision or that the carrying amount
of the long-lived asset may not be fully recoverable. The Company