Rayovac 2006 Annual Report Download - page 84

72 SPECTRUM BRANDS | 2006 ANNUAL REPORT
The Company’s interest rate swap derivative fi nancial instru-
ments are summarized as follows:
2006 2005
Notional Remaining Notional Remaining
Amount Term Amount Term
Interest rate
swaps–fixed $100,000 0.58 years $ 70,000 0.03 years
Interest rate
swaps–fixed $251,200 1.00 years $100,000 0.13 years
Interest rate
swaps–fixed $279,400 2.00 years $175,000 2.03 years
Interest rate
swaps–fixed $170,000 2.08 years $100,000 3.04 years
The Company periodically enters into forward foreign
exchange contracts to hedge the risk from forecasted foreign
denominated third party and intercompany sales or payments.
These obligations generally require the Company to exchange
foreign currencies for U.S. Dollars, Euros, Pounds Sterling,
Australian Dollars, Brazilian Reals, Canadian Dollars or
Japanese Yen. These foreign exchange contracts are cash fl ow
hedges of fl uctuating foreign exchange related to sales or prod-
uct or raw material purchases. Until the sale or purchase is rec-
ognized, the fair value of the related hedges is recorded in
AOCI and as a derivative hedge asset or liability, as applicable.
At the time the sale or purchase is recognized, the fair value of
the related hedge is reclassifi ed as an adjustment to Net sales or
purchase price variance in cost of goods sold. During 2006 and
2005, $51 and $0, respectively, of pretax derivative gains from
such hedges were recorded as an adjustment to Net sales.
During 2006 and 2005, $334 of pretax derivative losses and
$445 of pretax derivative gains, respectively, from such hedges
were recorded as an adjustment to cost of goods sold. Following
the sale or purchase, subsequent changes in the fair value of the
derivative hedge contracts are recorded as a gain or loss in
earnings as an offset to the change in value of the related asset
or liability recorded in the Consolidated Balance Sheet. During
2006 and 2005, $258 of pretax derivative losses and $149 of
pretax derivative gains, respectively, from such hedges were
recorded as an adjustment to earnings in other income, net.
The pretax derivative adjustment to earnings for ineffective-
ness from these contracts for 2006 and 2005 was $0. At
September 30, 2006 and 2005, respectively, the Company had
$97,932 and $0 of such foreign exchange derivative contracts
outstanding. The derivative net gain on these contracts recorded
in AOCI at September 30, 2006 was $647, net of tax expense
of $326. The derivative net gain on these contracts recorded in
AOCI at September 30, 2005 was $0. At September 30, 2006,
the portion of derivative net gains estimated to be reclassifi ed
from AOCI into earnings over the next 12 months is $647, net
of tax.
The Company periodically enters into forward and swap for-
eign exchange contracts to hedge the risk from third party and
intercompany payments resulting from existing obligations.
These obligations generally require the Company to exchange
foreign currencies for U.S. Dollars, Euros, Pounds Sterling,
Brazilian Reals or Canadian Dollars. These foreign exchange con-
tracts are fair value hedges of a related liability or asset recorded
in the Consolidated Balance Sheet. The gain or loss on the deriva-
tive hedge contracts is recorded in earnings as an offset to the
change in value of the related liability or asset. During 2006 and
2005, $2,128 of pretax derivative gains and $1,331 of pretax
derivative losses, respectively, from such hedges were recorded
as an adjustment to earnings in other income, net. The pretax
derivative adjustment to earnings for ineffectiveness from these
contracts for 2006 and 2005 was $0. At September 30, 2006 and
2005, $129,663 and $0, respectively, of such foreign exchange
derivative contracts were outstanding.
The Company is exposed to risk from fl uctuating prices for
raw materials, including zinc, urea and di-ammonium phosphates
used in its manufacturing processes. The Company hedges a por-
tion of the risk associated with these materials through the use of
commodity call options and swaps. The hedge contracts are des-
ignated as cash fl ow hedges with the fair value changes recorded
in AOCI and as a hedge asset or liability, as applicable. The unrec-
ognized changes in fair value of the hedge contracts are reclassifi ed
from AOCI into earnings when the hedged purchase of raw materi-
als also affects earnings. The call options effectively cap the fl oating
price on a specifi ed quantity of raw materials through a specifi ed
date. The swaps effectively fi x the fl oating price on a specifi ed
quantity of raw materials through a specifi ed date. During 2006
and 2005, $2,290 and $4,215, respectively, of pretax derivative
gains were recorded as an adjustment to cost of goods sold for
swap or option contracts settled at maturity. The hedges are gen-
erally highly effective; however, during 2006 and 2005, $24 of
pretax derivative losses and $162 of pretax derivative gains,
respectively, were recorded as an adjustment to cost of goods sold
for ineffectiveness. At September 30, 2006 the Company had a
series of such swap contracts outstanding through September 2007
with a contract value of $43,614. At September 30, 2005 $5,591
of such commodity contracts were outstanding. The derivative net
gain on these contracts recorded in AOCI at September 30, 2006
was $3,495, net of tax expense of $1,852. The derivative net gain
on these contracts recorded in AOCI at September 30, 2005 was
$299, net of tax expense of $179. At September 30, 2006,
the portion of derivative net gains estimated to be reclassifi ed
from AOCI into earnings over the next 12 months is $3,495, net
of tax.
2006 Form 10-K Annual Report
Spectrum Brands, Inc.