Rayovac 2012 Annual Report Download - page 80

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, the impact of environmental matters and
pending or potential examinations by various taxing authorities are examples of situations evaluated 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 our business, financial condition or results of operations.
See further discussion in Item 3, Legal Proceedings, and Note 12, “Commitments and Contingencies”, of
Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
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 included in this Annual Report on
Form 10-K. The Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K
contain additional information related to our accounting policies, including recent accounting pronouncements,
and should be read in conjunction with this discussion.
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 Note 7, 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
EURIBOR affect interest expense. We have historically used 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. As of September 30, 2012, there were no outstanding
interest rate derivative instruments.
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.
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