Energizer 2008 Annual Report Download - page 18

16 ENERGIZER HOLDINGS, INC. 2008 Annual Report
Management’s Discussion and Analysis of Results of Operations and Financial Condition
(Dollars in millions, except per share and percentage data)
A summary of the Company’s significant contractual obligations at
September 30, 2008 is shown below:
Total
Less than
1 year 1-3 years 3-5 years
More than
5 years
Long-term debt,
including current
maturities $2,695.5 $106.0 $567.0 $ 932.5 $1,090.0
Interest on
long-term debt 805.4 151.1 264.2 194.1 196.0
Operating leases 62.0 18.5 25.4 10.9 7.2
Purchase
obligations
and other (1) 65.0 59.8 5.2 – –
Total $3,627.9 $335.4 $861.8 $1,137.5 $1,293.2
(1) The Company has estimated approximately $1.5 of cash settlements associated with unrecognized
tax benefits within the next year, which are included in the table above. As of September 30, 2008,
the Company’s Consolidated Balance Sheet reflects a liability for unrecognized tax benefits of $47.0,
excluding $6.5 of interest and penalties. The contractual obligations table above does not include this
liability. Due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities
for unrecognized tax benefits beyond one year, a reasonable estimate of the period of cash settlement
for periods beyond the next twelve months cannot be made, and thus is not included in this table.
The Company has contractual purchase obligations for future purchas-
es, which generally extend one to three months. These obligations are
primarily purchase orders at fair value that are part of normal operations
and are reflected in historical operating cash flow trends. In addition,
the Company has various commitments related to service and supply
contracts that contain penalty provisions for early termination. As of
September 30, 2008, we do not believe such purchase obligations or
termination penalties will have a significant effect on our results of opera-
tions, financial position or liquidity position in the future.
The Company believes cash flows from operating activities and periodic
borrowings will be adequate to meet short-term and long-term liquidity
requirements prior to the maturity of the Company’s credit facilities,
although no guarantee can be given in this regard.
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 currency rates, commodity prices, interest 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.
Company policy allows derivatives to be used only for identifiable
exposures and, therefore, the Company does not enter into hedges
for trading purposes where the sole objective is to generate profits.
Currency Rate Exposure A significant portion of Energizer’s product
cost is more closely tied to the U.S. dollar than to the local curren-
cies in which the product is sold. As such, a weakening of currencies
relative to the U.S. dollar results in margin declines unless mitigated
through pricing actions, which are not always available due to the com-
petitive environment. Conversely, a strengthening in currencies relative
to the U.S. dollar can improve margins. This margin impact coupled
with the translation of foreign operating results to the U.S. dollar for
financial reporting purposes may have an impact on reported operating
profits. In the last few months, the U.S. dollar has strengthened con-
siderably versus most foreign currencies. At November 17, 2008 foreign
currency exchange rates, we estimate the impact on segment
profit due to currency translation to be approximately $125 to $140
unfavorable for the Company as compared to the 2008 average
currency translation rate. Changes in the value of local currencies in
relation to the U.S. dollar will continue to impact segment profitability
in the future, and the Company cannot predict the direction or magni-
tude of future changes.
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.
From time to time the Company may employ foreign currency hedging
techniques to mitigate 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 ser-
vice fees with foreign currency risk may also be hedged. The primary
currencies to which the Company’s foreign affiliates are exposed
include the U.S. dollar, the euro, the yen, the British pound, the
Canadian dollar and the Australian dollar.
The Company uses natural hedging techniques, such as offsetting
like foreign currency cash flows, foreign currency derivatives with
durations of generally one year or less including forward exchange
contracts, purchased put and call options and zero-cost option collars.
The Company has not designated any of these types of financial instru-
ments as hedges for accounting purposes in the three years ended
September 30, 2008.
The Company’s foreign currency derivative contracts outstanding at
year-end hedge existing balance sheet exposures. Any losses on these
contracts would be fully offset by exchange gains on the underlying
exposures, thus they are not subject to significant market risk. The
contractual amounts of the Company’s forward exchange contracts
and purchased currency options in U.S. dollar equivalents were $71.1
and $67.1 at September 30, 2008 and 2007, respectively.
In addition, the Company has investments in Venezuela, which cur-
rently require government approval to convert local currency to U.S.
dollars at official government rates. Recently, government approval for
currency conversion to satisfy U.S. dollar liabilities to foreign suppli-
ers has been delayed, resulting in higher cash balances and higher
past due U.S. dollar payables within our Venezuelan subsidiary. If the
Company was forced to settle its Venezuelan subsidiary’s U.S. dollar
liabilities using unofficial, parallel currency exchange mechanisms as
of September 30, 2008, it would result in a currency exchange loss of
approximately $13.
Commodity Price Exposure The Company uses raw materials that
are subject to price volatility. The Company will use hedging instru-
ments as it desires to reduce exposure to variability in cash flows
associated with future purchases of zinc or other commodities.