Energizer 2015 Annual Report Download - page 47

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Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market Risk Sensitive Instruments and Positions
The market risk inherent in the Company's financial instruments’ positions represents the potential loss arising from
adverse changes in currency rates, commodity prices and interest rates. The following risk management discussion and the
estimated amounts generated from the sensitivity analysis are forward-looking statements of market risk assuming certain
adverse market conditions occur. The Company's derivatives are used only for identifiable exposures, and we have not entered
into hedges for trading purposes where the sole objective is to generate profits.
Derivatives Designated as Cash Flow Hedging Relationships
A significant share of Energizer's product cost is more closely tied to the U.S. dollar than to the local currencies
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 economic or competitive
environment. Conversely, strengthening of currencies relative to the U.S. dollar can improve reported results. The
primary currencies to which Energizer is exposed include the Euro, the British pound, the Canadian dollar and the
Australian dollar.
The Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted
inventory purchases due to short term currency fluctuations. Energizer’s primary foreign affiliates, which are exposed to U.S.
dollar purchases, have the Euro, the British pound, the Canadian dollar and the Australian dollar as their local currencies. These
foreign currencies represent a significant portion of Energizer's foreign currency exposure. At September 30, 2015 and 2014,
Energizer had an unrealized pre-tax gain on these forward currency contracts accounted for as cash flow hedges of $4.5 and
$5.4, respectively, included in Accumulated other comprehensive loss on the Consolidated Balance Sheets. Assuming foreign
exchange rates versus the U.S. dollar remain at September 30, 2015 levels, over the next twelve months, $4.5 of the pre-tax
gain included in Accumulated other comprehensive loss is expected to be included in earnings. Contract maturities for these
hedges extend into fiscal year 2017.
Derivatives Not Designated as Cash Flow Hedging Relationships
Energizer's foreign subsidiaries enter into internal and external transactions that create non-functional currency
balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases,
intercompany loans and to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at
the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the
foreign subsidiary’s local currency results in an exchange gain or loss recorded in Other financing items, net on the
Consolidated Statements of Earnings and Comprehensive Income. The primary currency to which Energizer’s foreign
subsidiaries are exposed is the U.S. dollar.
The Company enters into foreign currency derivative contracts which are not designated as cash flow hedges for
accounting purposes to hedge balance sheet exposures. Any gains or losses on these contracts are expected to be offset by
exchange gains or losses on the underlying exposures, thus they are not subject to significant market risk. The change in
estimated fair value of the foreign currency contracts for the twelve months ended September 30, 2015 resulted in income
of $2.2 for the twelve months ended September 30, 2015 and was recorded in Other financing items, net on the
Consolidated Statements of Earnings and Comprehensive Income.
Commodity Price Exposure
The Company uses raw materials that are subject to price volatility. The Company may in the future use,
hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials
and commodities. At September 30, 2015, there were no open derivative or hedging instruments for future purchases of
raw materials or commodities.
Interest Rate Exposure
The Company has interest rate risk with respect to interest expense on variable rate debt. At September 30, 2015,
Energizer had variable rate debt outstanding with an original principal balance of $400.0 under the Term Loan. During fiscal
year 2015, the Company entered into an interest rate swap agreement with one major financial institution that fixed the variable