Rayovac 2015 Annual Report Download - page 84

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, when appropriate, use derivative financial instruments to mitigate the risk from such
exposures. A discussion of our accounting policies for derivative financial instruments is included in Note 11,
“Derivatives,” to our Consolidated Financial Statements included elsewhere in this Annual Report.
Interest Rate Risk
A substantial portion of our debt bears interest at variable rates. If market interest rates increase, the interest
rate on our variable rate debt will increase and will create higher debt service requirements, which would
adversely affect our cash flow and could adversely impact our results of operations. We also have bank lines of
credit at variable interest rates. The general levels of U.S. Canadian and European Union interest rates, LIBOR,
CDOR and Euro LIBOR affect interest expense. We periodically 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 counterparties
are included in accrued liabilities or accounts receivable.
At September 30, 2015 we had $1,549.0 million or 39% of our total debt subject to variable interest rates,
the majority related to our term loan of $1,538.4 million subject 0.75% floor. After inclusion of $300.0 million
interest rate swaps fixing a portion of the variable rate debt, $1,249.0 million or 31 % of our debt is subject to
variable rates. Assuming an increase to market rates of 1% as of September 30, 2015, we would incur an increase
to interest expense of $5.6 million.
At September 30, 2015, the potential change in fair value of our outstanding interest rate derivative
instruments assuming a 1 percent decline in interest rates would be a loss of $0.6 million. The net impact on
reported earnings, after also including the effect of the change on one year’s underlying interest rate exposure on
our variable rate Term Loan, would be a net loss of $0.6.million.
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 denominated in foreign currencies.
Foreign currency sales and purchases are made primarily in Euro, Pounds Sterling, Mexican Pesos, Canadian
Dollars, Australian Dollars and Brazilian Reals. We manage our foreign exchange exposure from such sales,
accounts receivable, intercompany loans, firm purchase commitments, accounts payable 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.
At September 30, 2015, we had $350.0 million equivalent of debt denominated in foreign currencies. Other
than our Euro-denominated term loan in the equivalent of $255.8 million recorded in a U.S. Dollar function
entity, the remaining debt is recorded in countries with the same function currency as the debt. The foreign
currency exposure from the Euro-denominated term loan is substantially offset by a Euro-denominated
intercompany loan receivable recorded in a U.S. Dollar-function entity.
At September 30, 2015, the potential change in fair value of outstanding foreign exchange derivative
instruments, assuming a 10% unfavorable change in the underlying exchange rates, would be a loss of
$34.2 million. The net impact on reported earnings, after also including the effect of the change in the underlying
foreign currency-denominated exposures, would be a net gain of $17.2 million.
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