Rayovac 2004 Annual Report Download - page 48

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 financial instruments for purposes other than trading to mitigate the risk
from such exposures.
A discussion of our accounting policies for derivative financial instruments is included in Derivative
Financial Instruments, Note 2(r) of the Notes to Consolidated Financial Statements.
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 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 and purchases are made primarily in Euro, Pounds Sterling and Brazilian
Reals. We manage our foreign exchange exposure from anticipated 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.
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 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.
As of September 30, 2004, the potential change in fair value of outstanding interest rate derivative
instruments, assuming a 1 percentage point unfavorable shift in the underlying interest rates would be a loss of
$2.2 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 gain of $0.8 million.
As of September 30, 2004, the potential change in fair value of outstanding foreign exchange derivative
instruments, assuming a 10% unfavorable change in the underlying exchange rates would be immaterial. The net
impact on reported earnings, after also including the effect of the change in the underlying foreign currency-
denominated exposures, would be immaterial.
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