Rayovac 2003 Annual Report Download - page 31

expenses include, but are not limited to, termination and related costs, any asset impairments relating to the functional area
described above, and other costs directly related to the initiatives implemented.
See Note 2(x) and Note 15 to the Consolidated Financial Statements for a more complete discussion of recent restructuring
initiatives and related costs.
Loss Contingencies
Loss contingencies are recorded as liabilities when it is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The outcome of existing litigation and the impact of environmental matters are examples of situations evalu-
ated as loss contingencies. Estimating the probability and magnitude of losses is often dependent upon management’s judgment of
potential actions by third parties and regulators. It is possible that changes in estimates or an increased probability of an unfavorable
outcome could materially affect future results of operations.
See further discussion in Note 13 to the Consolidated Financial Statements.
Other Significant Accounting Policies
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed above, are also critical to
understanding the Consolidated Financial Statements. Notes to the Consolidated Financial Statements contain additional informa-
tion related to our accounting policies and should be read in conjunction with this discussion.
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 com-
modity prices. We use derivative financial instruments for purposes other than trading to mitigate the risk from such exposures.
Interest Rate Risk We have bank lines of credit at variable interest rates. The general level of U.S. interest rates, LIBOR, and Euro
LIBOR primarily 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, respectively, denominated in foreign currencies.
Foreign currency sales are made primarily in Euros, Pounds Sterling, Colombian Pesos, and Mexican Pesos. Foreign currency pur-
chases are made primarily in Euros, Pounds Sterling, Guatemalan Quetzals, Colombian Pesos, and Mexican Pesos. We also have
foreign currency sales and purchases in other currencies throughout the world. We manage our foreign exchange exposure from
anticipated sales, accounts receivable, inter-company loans, firm purchase commitments 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 fluctuations in market prices for purchases of zinc used in the manufacturing
process. We use commodity swaps, calls and puts to manage 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 receivable from, the counterparties 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.
As of September 30, 2003, the potential change in fair value of outstanding interest rate derivative instruments, assuming a 1%
unfavorable shift in the underlying interest rates would be a loss of $3.9 million. The net impact on reported earnings, after also
including the reduction in one year’s interest expense on the related debt due to the same shift in interest rates, would be a net loss
of $0.8 million.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rayovac Corporation and Subsidiaries