Rayovac 2006 Annual Report Download - page 56

44 SPECTRUM BRANDS | 2006 ANNUAL REPORT
fi nancial position) for that fi scal year. We are currently evaluating
the impact that FIN 48 will have on our fi nancial condition, results
of operations or cash fl ows.
In November 2005, the FASB issued FASB Staff Position (“FSP”)
FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” (“FSP FAS 115-1
and FAS 124-1”). FSP FAS 115-1 and FAS 124-1 address the deter-
mination as to when an impairment in equity securities (including
cost method investments) and debt securities that can contractu-
ally be prepaid or otherwise settled in such a way that the investor
would not recover substantially all of its cost should be deemed
other-than-temporary. FSP FAS 115-1 and FAS 124-1 nullify cer-
tain requirements under EITF Issue No. 03-01, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments,” that required the investor to make an evidence-based
judgment as to whether it has the ability and intent to hold an
investment for a reasonable period of time suffi cient for a fore-
casted recovery of fair value up to (or beyond) the cost of the
investment in determining whether the impairment was other-
than-temporary, and the measurement of the impairment loss.
The guidance in FSP FAS 115-1 and FAS 124-1 is effective for
reporting periods beginning after December 15, 2005. We do
not believe the adoption of FSP FAS 115-1 and FAS 124-1 will
have a material impact on our fi nancial position, results of opera-
tions or cash fl ows.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market Risk Factors
We have market risk exposure from changes in interest
rates, foreign currency exchange rates and commodity prices.
We use derivative fi nancial instruments to mitigate the risk
from such exposures.
A discussion of our accounting policies for derivative fi nancial
instruments is included in Note 2(r), Signifi cant Accounting
Policies—Derivative Financial Instruments, of Notes to
Consolidated Financial Statements included in this Annual Report
on Form 10-K.
Interest Rate Risk
We have bank lines of credit at variable interest rates. The
general level of U.S. interest rates, LIBOR, Euro LIBOR and
Canadian LIBOR affects interest expense. We use interest rate
swaps to manage such risk. The net amounts to be paid or received
under interest rate swap agreements are accrued as interest rates
change, and are recognized over the life of the swap agreements
as an adjustment to interest expense from the underlying debt to
which the swap is designated. The related amounts payable to, or
receivable from, the contract counter-parties are included in
accrued liabilities or accounts receivable.
Foreign Exchange Risk
We are subject to risk from sales and loans to and from our
subsidiaries as well as sales to, purchases from, and bank lines of
credit with third-party customers, suppliers and creditors, respec-
tively, denominated in foreign currencies. Foreign currency sales
and purchases are made primarily in Euros, Pounds Sterling,
Canadian Dollars and Brazilian Reals. We manage our foreign
exchange exposure from anticipated sales, accounts receivable,
intercompany loans, fi rm purchase commitments, accounts pay-
able and credit obligations through the use of naturally occurring
offsetting positions (borrowing in local currency), forward foreign
exchange contracts, foreign exchange rate swaps and foreign
exchange options. The related amounts payable to, or receivable
from, the contract counter-parties are included in accounts payable
or accounts receivable.
Commodity Price Risk
We are exposed to fl uctuations in market prices for purchases
of zinc, urea and di-ammonium phosphates used in the manufac-
turing process. We use commodity swaps, calls and puts to man-
age such risk. The maturity of, and the quantities covered by, the
contracts are closely correlated to our anticipated purchases of
the commodities. The cost of calls, and the premiums received
from the puts, are amortized over the life of the contracts and are
recorded in cost of goods sold, along with the effects of the swap,
put and call contracts. The related amounts payable to, or receiv-
able from, the counter-parties are included in accounts payable
or accounts receivable.
Sensitivity Analysis
The analysis below is hypothetical and should not be considered
a projection of future risks. Earnings projections are before tax.
2006 Form 10-K Annual Report
Spectrum Brands, Inc.