Rayovac 2002 Annual Report Download - page 45

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rayovac Corporation and Subsidiaries
(In thousands, except per share amounts)
The Company enters into forward and swap foreign exchange contracts to hedge the risk from forecasted settlement in local currencies of inter-company
purchases and sales, trade sales, and trade purchases. These contracts generally require the Company to exchange foreign currencies for U.S. dollars or
Pounds Sterling. These contracts are designated as cash flow hedges with the fair value recorded as a hedge asset or liability, as applicable, with changes
in fair value recorded in OCI. Once the forecasted transaction has been recognized as a purchase or sale and a related liability or asset recorded in the
balance sheet, the gain or loss on the related derivative hedge contract is reclassified from OCI into earnings as an offset to the change in value of the lia-
bility or asset. During 2002, $17 of pretax derivative losses were recorded as an adjustment to earnings for cash flow hedges related to an asset or liabil-
ity. During 2002, $61 of pretax derivative gains were recorded as an adjustment to earnings for forward and swap contracts settled at maturity. At
September 30, 2002, the Company had a series of swap contracts outstanding with a contract value of $247. The derivative net loss on these contracts
at September 30, 2002 was immaterial.
The Company periodically enters into forward foreign exchange contracts to hedge the risk from changes in fair value from unrecognized firm purchase
commitments. These firm purchase commitments generally require the Company to exchange U.S. dollars for foreign currencies. These hedge contracts are
designated as fair value hedges with the fair value recorded as a hedge asset or liability, as applicable, with changes in fair value recorded in earnings on
a pretax basis. To the extent effective, changes in the value of the forward contracts recorded in earnings will be offset by changes in the value of the hedged
item, also recorded in earnings on a pretax basis and as an asset or liability, as applicable. Once the firm purchase commitment has been consummated,
the firm commitment asset or liability balance will be reclassified as an addition to or subtraction from the carrying value of the purchased asset. The
Company previously entered into a series of forward contracts through October 2001 to hedge the exposure from a firm commitment to purchase cer-
tain battery manufacturing equipment denominated in Japanese Yen. During 2002, $63 of pretax derivative gains were recorded as an adjustment to
earnings for fair value hedges of this firm purchase commitment and $63 of pretax losses were recorded as an adjustment to earnings for changes in fair
value of this firm purchase commitment. During 2002, $78 of pretax derivative losses were recorded as an adjustment to earnings for fair value hedges
of this firm purchase commitment that were settled at maturity and $78 of pretax gains were recorded as an adjustment to earnings for payments made
against this firm purchase commitment. No forward exchange contracts were held by the Company at September 30, 2002.
The Company is exposed to risk from fluctuating prices for zinc used in the manufacturing process. The Company hedges a portion of this risk through
the use of commodity swaps. The swaps are designated as cash flow hedges with the fair value recorded in OCI and as a hedge asset or liability, as appli-
cable. The fair value of the swaps is reclassified from OCI into earnings when the hedged purchase of zinc metal-based items also affects earnings. The
swaps effectively fix the floating price on a specified quantity of zinc through a specified date. During 2002, $2,645 of pretax derivative losses were
recorded as an adjustment to cost of sales for swap contracts settled at maturity. At September 30, 2002, the Company had a series of swap contracts
outstanding through August 2003 with a contract value of $6,350. The derivative net losses on these contracts recorded in OCI at September 30, 2002
was an after-tax loss of $328.
(s) Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and short-
term debt approximate fair value. The fair values of long-term debt and derivative financial instruments are generally based on quoted market prices.
(t) Environmental Expenditures Environmental expenditures which relate to current ongoing operations or to conditions caused by past operations are
expensed. The Company determines its liability on a site-by-site basis and records a liability at the time when it is probable and can be reasonably esti-
mated. The estimated liability is not reduced for possible recoveries from insurance carriers.
(u) Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation.