Rayovac 2007 Annual Report Download - page 47

SPECTRUM BRANDS | 2007 ANNUAL REPORT 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Spectrum Brands, Inc.
The Company periodically enters into forward and swap foreign
exchange contracts to hedge the risk from third-party and inter-
company payments resulting from existing obligations. These
obligations generally require the Company to exchange foreign
currencies for U.S. Dollars, Euros, Pounds Sterling, Brazilian
Reals or Canadian Dollars. These foreign exchange contracts are
fair value hedges of a related liability or asset recorded in the Con-
solidated Balance Sheet. The gain or loss on the derivative hedge
contracts is recorded in earnings as an offset to the change in value
of the related liability or asset at each period end. During Fiscal
2007, 2006 and 2005, $16,485 of pretax derivative losses, $2,128
of pretax derivative gains and $1,331 of pretax derivative losses,
respectively, from such hedges were recorded as an adjustment to
earnings in Other income, net. At September 30, 2007, 2006 and
2005, $125,771 and $129,663 and $0, respectively, of such foreign
exchange derivative contracts were outstanding.
The Company is exposed to risk from fl uctuating prices for
raw materials, including zinc, urea and di-ammonium phos-
phates used in its manufacturing processes. The Company
hedges a portion of the risk associated with these materials
through the use of commodity call options and swaps. The hedge
contracts are designated as cash fl ow hedges with the fair value
changes recorded in AOCI and as a hedge asset or liability, as
applicable. The unrecognized changes in fair value of the hedge
contracts are reclassifi ed from AOCI into earnings when the
hedged purchase of raw materials also affects earnings. The call
options effectively cap the fl oating price on a specifi ed quantity
of raw materials through a specifi ed date. The swaps effectively
fi x the fl oating price on a specifi ed quantity of raw materials
through a specifi ed date. During Fiscal 2007, 2006 and 2005,
$14,012, $2,290 and $4,215, respectively, of pretax derivative
gains were recorded as an adjustment to Cost of goods sold for
swap or option contracts settled at maturity. The hedges are
generally highly effective; however, during Fiscal 2007, 2006
and 2005, $583 and $24 of pretax derivative losses and $162 of
pretax derivative gains, respectively, were recorded as an adjust-
ment to Cost of goods sold for ineffectiveness. At September 30,
2007 the Company had a series of such swap contracts outstand-
ing through September 2009, with a contract value of $64,043.
At September 30, 2006, $43,614 of such commodity contracts
were outstanding. At September 30, 2005, $5,591 of such com-
modity contracts were outstanding. The derivative net loss on
these contracts recorded in AOCI at September 30, 2007 was
$1,107, net of tax benefi t of $529. The derivative net gain on
these contracts recorded in AOCI at September 30, 2006 was
$3,495, net of tax expense of $1,852. The derivative net gain on
these contracts recorded in AOCI at September 30, 2005 was
$299, net of tax expense of $179. At September 30, 2007, the
portion of derivative net losses estimated to be reclassifi ed from
AOCI into earnings over the next 12 months is $874, net of tax.
(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 fi nancial instruments are generally based on quoted
market prices.
The carrying value of fi nancial instruments approximate the
fair value of those instruments due to the applicable interest rates
being substantially at market (“fl oating”), except for $2,873 of
Senior Subordinated Notes due September 30, 2013 with interest
payable semiannually at 8.5%, $347,012 of Senior Subordinated
Notes due October 2, 2013 with interest payable semiannually at
11.25% and $700,000 of Senior Subordinated Notes due Febru-
ary 1, 2015 with interest payable semiannually at 7.375%. The
total fair value of these Notes at September 30, 2007 was approx-
imately $845,733. (See also Note 2(r), Signifi cant Accounting
Policies – Derivative Financial Instruments, and Note 7, Debt).
The carrying amounts and fair values of the Company’s fi nancial
instruments are summarized as follows ((liability)/asset):
September 30,
2007 2006
Carrying Carrying
Amount Fair Value Amount Fair Value
Total debt $(2,460,354) $(2,256,202) $(2,277,171) $(2,121,454)
Interest rate
swap
agreements 1,986 1,986 11,584 11,584
Commodity
swap and
option
agreements (1,636) (1,636) 5,347 5,347
Foreign
exchange
forward
agreements (8,974) (8,974) 963 963
(t) Environmental Expenditures
Environmental expenditures that relate to current ongoing
operations or to conditions caused by past operations are expensed
or capitalized as appropriate. The Company determines its liabil-
ity on a site-by-site basis and records a liability at the time when
it is probable that a liability has been incurred and such liability
can be reasonably estimated. The estimated liability is not reduced
for possible recoveries from insurance carriers. Estimated envi-
ronmental remediation expenditures are included in the determi-
nation of the net realizable value recorded for assets held for sale.