Energizer 2008 Annual Report Download - page 30

28 ENERGIZER HOLDINGS, INC. 2008 Annual Report
Notes to Consolidated Financial Statements
(Dollars in millions, except per share and percentage data)
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 liabilities,
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses. On an ongoing basis, the Company evalu-
ates 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 postre-
tirement 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 present-
ed, 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 accounted for
under the equity method.
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 aver-
age exchange rates during the period for results of operations. Related
translation adjustments are reported as a component within accumu-
lated 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 depre-
ciation 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 instru-
ment to mitigate the risk of its deferred compensation liabilities, as
discussed further in Note 14. The Company has not designated these
financial instruments as hedges for accounting purposes in the three
years ended September 30, 2008.
The Company uses raw materials that are subject to price volatility. The
Company uses hedging instruments as it desires to reduce exposure to
variability in cash flows associated with future purchases of zinc or other
commodities. For further discussion of such instruments, see Note 14.
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 receivables
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.
As part of the Playtex acquisition, the Company recorded a fair value
adjustment of $27.5 to bring the carrying value of the inventory pur-
chased in the Playtex acquisition to an amount which approximated
the estimated selling price of the finished goods on hand at the closing
date less the sum of (a) costs of disposal and (b) a reasonable profit
allowance for the selling effort of the acquiring entity. As the inventory
was sold during the first and second quarters of fiscal 2008, the $27.5
adjustment was charged to cost of products sold.
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 Property, plant and equipment is
stated at historical costs. Property, plant and equipment acquired as
part of the Playtex acquisition was recorded at fair value on the date of
acquisition. Fair value was established using a cost approach for the
operating fixed assets and comparable sales and property assess-
ment data for the valuation of land. 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 earn-
ings. 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 $121.4, $104.6 and $109.1 in 2008, 2007 and 2006, respectively.
Estimated useful lives are periodically reviewed and, when appropri-
ate, changes are made prospectively. When certain events or changes
in operating conditions occur, asset lives may be adjusted and an
impairment assessment may be performed on the recoverability of the
carrying amounts.