Rayovac 2009 Annual Report Download - page 84

Table of Contents
Index to Financial Statements
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, Canadian Dollars, Australian Dollars 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 and calls 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 are amortized over the life of the contracts and are recorded in cost of goods sold, along with the effects of the swap 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, 2009, there were no interest rate derivative instruments outstanding. As of September 30, 2008, 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 have resulted in a
loss of $4.0 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 $10.3 million.
As of September 30, 2009, the potential change in fair value of outstanding foreign exchange derivative instruments, assuming a 10% unfavorable
change in the underlying exchange rates would be a loss of $10.8 million. The net impact on reported earnings, after also including the effect of the change
in the underlying foreign currency−denominated exposures, would be a net gain of $10.8 million. The same hypothetical shift in exchange rates as of
September 30, 2008 would have resulted in a loss of $25.0 million in the fair value of outstanding foreign exchange derivative instruments, and the net
impact on reported earnings, after also including the effect of the change in the underlying foreign currency−denominated exposures, would have been a net
gain of $5.0 million.
As of September 30, 2009, the potential change in fair value of outstanding commodity price derivative instruments, assuming a 10% unfavorable
change in the underlying commodity prices would be a loss of $1.5 million. The net impact on reported earnings, after also including the reduction in cost of
one year’s purchases of the related commodities due to the same change in commodity prices, would be a net gain of $.8 million. The same hypothetical
shift in commodity prices as of September 30, 2008 would have resulted in a loss of $4.7 million in the fair value of outstanding commodity price derivative
instruments, and the net impact on reported earnings, after also including the reduction in cost of one year’s purchases of the related commodities due to the
same change in commodity prices, would have been a net gain of $3.5 million.
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