Rayovac 2007 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Spectrum Brands, Inc.
SPECTRUM BRANDS | 2007 ANNUAL REPORT 33
tax position that meets the more-likely-than-not recognition
threshold is calculated to determine the amount of benefi t to rec-
ognize in the fi nancial statements. The tax position is measured at
the largest amount of benefi t that is greater than 50% likely of
being realized upon ultimate settlement. The provisions of FIN 48
are effective for fi scal years beginning after December 15, 2006.
Earlier application is permitted as long as the enterprise has not yet
issued fi nancial statements, including interim fi nancial statements,
in the period of adoption. The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of this standard.
Only tax positions that meet the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be
recognized upon adoption of FIN 48. The cumulative effect of
applying the provisions of FIN 48 should be reported as an adjust-
ment to the opening balance of retained earnings (or other appro-
priate components of equity or net assets in the statement of
fi nancial position) for that fi scal year. The Company is required to
adopt FIN 48 in the fi rst quarter of Fiscal 2008, and does not
believe such adoption will have a material effect on its fi nancial
condition, results of operation or cash fl ows.
In June 2006, the EITF issued EITF 06-3, “How Taxes Col-
lected from Customers and Remitted to Governmental Authori-
ties Should Be Presented in the Income Statement (That is, Gross
versus Net Presentation)” (“EITF 06-3”) to clarify diversity in
practice on the presentation of different types of taxes in the
fi nancial statements. The EITF concluded that, for taxes within
the scope of the issue, a company may adopt a policy of present-
ing taxes either gross within revenue or net. That is, it may
include charges to customers for taxes within revenues and the
charge for the taxes from the taxing authority within cost of
sales, or, alternatively, it may net the charge to the customer and
the charge from the taxing authority. If taxes are reported on a
gross basis, and are signifi cant, an entity should disclose the
amounts of those taxes subject to EITF 06-3. The guidance is
effective for interim and annual reporting periods beginning
after December 15, 2006. We currently record our sales net of
any value added or sales tax. Accordingly, the adoption of EITF
06-3 will not have a material impact on our fi nancial position,
results of operations or cash fl ows.
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 fi nancial instruments for purposes other than trading
to mitigate the risk from such exposures.
A discussion of our accounting policies for derivative fi nancial
instruments is included in Note 2(r), Signifi cant Accounting
Policies and Practices – Derivative Financial Instruments, of
Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K.
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
affect 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 adjust-
ment to interest expense from the underlying debt to which the
swap is designated. The related amounts payable to, or receiv-
able 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 cur-
rency sales and purchases are made primarily in Euro, Pounds
Sterling, Brazilian Reals and Canadian Dollars. We manage our
foreign exchange exposure from anticipated sales, accounts
receivable, intercompany loans, fi rm purchase commitments,
accounts payable and credit obligations through the use of natu-
rally 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 counterparties are included in
accounts payable or accounts receivable.
Commodity Price Risk
We are exposed to fl uctuations in market prices for purchases
of zinc, urea and di-ammonium phosphates used in the manu-
facturing 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 pur-
chases of the commodities. The cost of calls, and the premiums
received from the puts, are amortized over the life of the con-
tracts 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, 2007, 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 $8.3 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 $5.3 million. The same hypothetical
shift in interest rates as of September 30, 2006 would have