Energizer 2015 Annual Report Download - page 75

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
71
(16) Financial Instruments and Risk Management
The market risk inherent in the Company's operations creates potential earnings volatility arising from changes in currency
rates, interest rates and commodity prices. The Company's policy allows derivatives to be used only for identifiable exposures
and, therefore, the Company does not enter into hedges for trading or speculative purposes where the sole objective is to
generate profits.
Concentration of Credit Risk-The counterparties to derivative contracts consist of a number of major financial institutions and
are generally institutions with which the Company maintains lines of credit. The Company does not enter into derivative
contracts through brokers nor does it trade derivative contracts on any other exchange or over-the-counter markets. Risk of
currency positions and mark-to-market valuation of positions are strictly monitored at all times.
The Company continually monitors positions with, and credit ratings of, counterparties both internally and by using outside
rating agencies. While nonperformance by these counterparties exposes Energizer to potential credit losses, such losses are not
anticipated.
The Company sells to a large number of customers primarily in the retail trade, including those in mass merchandising,
drugstore, supermarket and other channels of distribution throughout the world. Wal-Mart Stores, Inc. and its subsidiaries
accounted for 10.0%, 8.5%, and 13.3% of total net sales in fiscal 2015, 2014 and 2013, respectively, primarily in North
America. The Company performs ongoing evaluations of its customers’ financial condition and creditworthiness, but does not
generally require collateral. While the competitiveness of the retail industry presents an inherent uncertainty, the Company does
not believe a significant risk of loss from a concentration of credit risk exists with respect to accounts receivable.
In the ordinary course of business, the Company enters into contractual arrangements (derivatives) to reduce its exposure to
commodity price and foreign currency risks. The section below outlines the types of derivatives that existed at September 30,
2015 and 2014, as well as the Company's objectives and strategies for holding these derivative instruments.
Commodity Price Risk – Energizer uses raw materials that are subject to price volatility. At times, the Company has used, and
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 and September 30, 2014, there were no open derivative
or hedging instruments for future purchases of raw materials or commodities.
Foreign Currency Risk – A significant portion 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, a strengthening in currencies relative to the U.S. dollar can improve margins.
Additionally, Energizer’s foreign subsidiaries enter into internal and external transactions that create nonfunctional
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 a transaction 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.
Interest Rate Risk - Energizer 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 benchmark component (LIBOR) on $200.0 of the Company's variable rate debt through June 2022 at an interest rate of
2.22%.
Cash Flow Hedges - 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