Energizer 2008 Annual Report Download - page 19

ENERGIZER HOLDINGS, INC. 2008 Annual Report 17
These hedging instruments are accounted for as cash flow hedges.
At September 30, 2008, the fair market value of the Company’s out-
standing hedging instruments was an unrealized pre-tax loss of $9.8.
Contract maturities for these hedges extend into fiscal year 2010.
Interest Rate Exposure At September 30, 2008 and 2007, the fair
market value of the Company’s fixed rate debt is estimated at $2,078.5
and $1,423.1, respectively, using yields obtained from independent
pricing sources for similar types of borrowing arrangements. The year
over year increase in fixed rate debt is due primarily to borrowings
related to the Playtex acquisition. The fair value of debt is lower than
the carrying value of the Company’s debt at September 30, 2008 and
2007 by $151.5 and $51.9, respectively. A 10% decrease in interest
rates on fixed-rate debt would have increased the fair market value
by $90.0 and $40.4 at September 30, 2008 and 2007, respectively.
See Note 11 to the Consolidated Financial Statements for additional
information regarding the Company’s debt.
The Company has interest rate risk with respect to interest expense
on variable rate debt. At September 30, 2008 and 2007, the Company
had $729.9 and $150.0 variable rate debt outstanding, respectively.
The book value of the Company’s variable rate debt approximates fair
value. A hypothetical 10% increase in variable interest rates would
have had an annual unfavorable impact of $3.5 and $0.9 in 2008 and
2007, respectively, on the Company’s earnings before taxes and cash
flows, based upon these year-end debt levels. The increase in the
potential impact of a 10% increase in variable interest rates for 2008 as
compared to 2007 is the result of the increased debt level due to the
purchase of Playtex.
Stock Price Exposure At September 30, 2007, the Company held
a net-cash settled prepaid share option with a major multinational
financial institution to mitigate the impact of changes in the Company’s
deferred compensation liabilities. In December 2007, the prepaid
feature was removed from the transaction and the Company received
cash of $60.5, which was used to repay existing debt. Of the $60.5
received, $46.0 was a return of investment and was classified within
investing activities on the Statement of Cash Flows. The remaining
$14.5 was a return on investment and was classified as a cash inflow
from operating activities on the Statement of Cash Flows. As a result
of this change in the share option, the Company will incur yearly fees
at LIBOR plus 230 basis points until the contract is settled. The fair
market value of the share option was $2.4, as included in other current
liabilities, and $59.3, as included in other current assets, at September
30, 2008 and 2007, respectively. The change in fair value of the total
share option for the twelve months ended September 30, 2008 and
2007 resulted in expense of $16.2 and income of $23.2, respectively,
and was recorded in SG&A.
SEASONAL FACTORS
The Company’s Household Products segment results are significantly
impacted in the first quarter of the fiscal year by the additional sales
volume associated with the December holiday season, particularly in
North America. First quarter sales accounted for 32%, 30% and 31%
of total Household Products net sales in 2008, 2007 and 2006, respec-
tively. In addition, natural disasters, such as hurricanes, can create
conditions that drive exceptional needs for portable power and spike
battery and lighting products sales.
Customer orders for the Company’s Sun Care products are highly
seasonal, which has historically resulted in higher Sun Care sales in
the second and third quarters of the fiscal year and lower sales in the
first and fourth quarters of the fiscal year. As a result, sales, operating
income, working capital and cash flows for the Personal Care segment
can vary significantly between quarters of the same and different years
due to the seasonality of orders for Sun Care products.
Other factors may also have an impact on the timing and amounts of
sales, operating income, working capital and cash flows. They include:
the timing of new product launches by competitors or by the Company,
the timing of advertising, promotional, merchandising or other marketing
activities by competitors or by the Company, and the timing of retailer
merchandising decisions and actions.
ENVIRONMENTAL MATTERS
The operations of the Company, like those of other companies are subject
to various federal, state, foreign and local laws and regulations intended
to protect the public health and the environment. These regulations relate
primarily to worker safety, air and water quality, underground fuel storage
tanks and waste handling and disposal. The Company has received
notices from the U.S. Environmental Protection Agency, state agencies
and/or private parties seeking contribution, that it has been identified as a
“potentially responsible party” (PRP) under the Comprehensive Environ-
mental Response, Compensation and Liability Act, and may be required
to share in the cost of cleanup with respect to seven federal “Superfund”
sites. It may also be required to share in the cost of cleanup with respect
to two state-designated sites or other sites outside of the U.S.
Accrued environmental costs at September 30, 2008 were $11.8, of
which $1.7 is expected to be spent in fiscal 2009. 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
capital 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.
INFLATION
Management recognizes that inflationary pressures may have an
adverse effect on the Company, through higher material, labor and
transportation costs, asset replacement costs and related deprecia-
tion, and other costs. In general, the Company has been able to
offset or minimize inflation effects through other cost reductions and
productivity improvements through mid-2005, thus inflation was not a
significant factor to that point. In recent years, the cost of zinc, nickel,
steel, oil and other commodities used in the Company’s production
and distribution have increased to levels well above those of prior
years. Looking forward, we expect commodities, raw materials and
other inflationary input costs for Household Products and Personal
Care to be unfavorable in 2009 as compared to average costs paid in
2008 by an amount ranging from $65 to $75 based on current market
conditions. Implemented price increases, other product cost savings
and incremental synergies from the Playtex acquisition are expected to
offset this estimated increase.