Financial Instruments and Risk Management

At times, the Company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The section below outlines the types of derivatives that existed at December 31, 2012 and September 30, 2012 as well as the Company’s objectives and strategies for holding these derivative instruments.

Commodity Price Risk The Company uses raw materials that are subject to price volatility. At times, hedging instruments may be used by the Company to reduce exposure to variability in cash flows associated with future purchases of certain commodities. In September 2012, the Company discontinued hedge accounting treatment for its then existing zinc contracts and reclassified the ineffective portion of the de-designated contracts from Accumulated other comprehensive loss into income. In November 2012, all remaining zinc contracts were settled and a $1.9 loss was included in Other financing items, net in the Consolidated Statements of Earnings and Comprehensive Income (Condensed) for the first fiscal quarter of 2013.

Foreign Currency Risk A significant portion of the Company’s product cost is more closely tied to the U.S. dollar than to the local currencies in which the product is sold. As such, a weakening of currencies relative to the U.S. dollar results in margin declines unless mitigated through pricing actions, which are not always available due to the competitive environment. Conversely, a strengthening in currencies relative to the U.S. dollar, and to a lesser extent, the Euro, can improve margins. As a result, the Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted inventory purchases due to short term currency fluctuations. The Company’s primary foreign affiliates, which are exposed to U.S. dollar purchases, have the Euro, the Yen, the British pound, the Canadian dollar and the Australian dollar as their local currencies. At December 31, 2012 and September 30, 2012, the Company had an unrealized pre-tax gain and unrealized pre-tax loss on these forward currency contracts accounted for as cash flow hedges of $1.8 and $5.9, respectively, included in Accumulated other comprehensive loss on the Consolidated Balance Sheets (Condensed). Assuming foreign exchange rates versus the U.S. dollar remain at December 31, 2012 levels over the next twelve months, approximately $1.6 of the pre-tax gain included in Accumulated other comprehensive loss is expected to be included in earnings. Contract maturities for these hedges extend into fiscal year 2014. There were 64 open foreign currency contracts at December 31, 2012 with a total notional value of approximately $353.

Interest Rate Risk Through December 2012, the Company had specific interest rate risk with respect to interest expense on the Company's term loan, which was repaid by the end of the quarter. As a result, the interest rate swap agreement in place to hedge this specific risk was settled on November 30, 2012 for a $0.3 loss. This loss was included in interest expense in the Consolidated Statements of Earnings and Comprehensive Income (Condensed). At December 31, 2012 the Company had $289.2 of variable rate debt outstanding.

Cash Flow Hedges At December 31, 2012, the Company maintains a cash flow hedging program related to foreign currency risk. These derivative instruments have a high correlation to the underlying exposure being hedged and have been deemed highly effective for accounting purposes in offsetting the associated risk.

Derivatives not Designated in Hedging Relationships The Company holds a share option with a major financial institution to mitigate the impact of changes in certain of the Company’s deferred compensation liabilities, which are tied to the Company’s common stock price. Period activity related to the share option is classified in the same category in the cash flow statement as the period activity associated with the Company’s deferred compensation liability, which is cash flow from operations.

In addition, the Company enters into foreign currency derivative contracts which are not designated as cash flow hedges for accounting purposes to hedge existing balance sheet exposures. Any losses on these contracts would be offset by exchange gains on the underlying exposures; thus, they are not subject to significant market risk.

The following table provides estimated fair values as of December 31, 2012 and September 30, 2012, and the amounts of gains and losses on derivative instruments classified as cash flow hedges for the quarter ended December 31, 2012 and 2011.



	At December 31, 2012			For the Three Months Ended December 31, 2012
Derivatives designated as Cash Flow Hedging Relationships	Estimated Fair Value, Asset (Liability) (1) (2)			Gain/(Loss) Recognized in OCI (3)			Gain/(Loss) Reclassified From OCI into Income(Effective Portion) (4) (5)
Foreign currency contracts	$	1.8		$	6.7		$	(1.0	)
Interest rate contracts	—			—			(0.3		)
Total	$	1.8		$	6.7		$	(1.3	)

	At September 30, 2012			For the Three Months Ended December 31, 2011
Derivatives designated as Cash Flow Hedging Relationships	Estimated Fair Value, Asset (Liability) (1) (2)			Gain/(Loss) Recognized in OCI (3)			Gain/(Loss) Reclassified From OCI into Income(Effective Portion) (4) (5)
Foreign currency contracts	$	(5.9	)	$	(3.7	)	$	(2.1	)
Commodity contracts	—			(0.4		)	0.2
Interest rate contracts	(0.3		)	1.4			—
Total	$	(6.2	)	$	(2.7	)	$	(1.9	)


(1)	All derivative assets are presented in other current assets or other assets.


(2)	All derivative liabilities are presented in other current liabilities or other liabilities.


(3)	OCI is defined as other comprehensive income.


(4)	Gain/(Loss) reclassified to Income was recorded as follows: Foreign currency contracts in other financing and commodity contracts in Cost of products sold.


(5)	Each of these derivative instruments had a high correlation to the underlying exposure being hedged for the periods indicated and had been deemed highly effective in offsetting associated risk.

The following table provides estimated fair values as of December 31, 2012 and September 30, 2012, and the amounts of gains and losses on derivative instruments not classified as cash flow hedges for the quarter ended December 31, 2012 and 2011, respectively.



	At December 31, 2012			For the Three Months Ended December 31, 2012
Derivatives not designated as Cash Flow Hedging Relationships	Estimated Fair Value Asset (Liability)			Gain/(Loss) Recognized in Income (1)
Share option	$	3.6		$	3.8
Commodity contracts	$	—		$	(1.9	)
Foreign currency contracts	(0.4		)	0.3
Total	$	3.2		$	2.2

	At September 30, 2012			For the Three Months Ended December 31, 2011
Derivatives not designated as Cash Flow Hedging Relationships	Estimated Fair Value Asset (Liability)			Gain/(Loss) Recognized in Income (1)
Share option	$	2.5		$	7.9
Commodity contracts	1.6			—
Foreign currency contracts	(0.7		)	(0.9		)
Total	$	3.4		$	7.0


(1)	Gain/(Loss) recognized in Income was recorded as follows: Share option in Selling, general and administrative expense and foreign currency contracts in other financing.

Fair Value Hierarchy Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.

Under the fair value accounting guidance hierarchy, an entity is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The following table sets forth the Company’s financial assets and liabilities, which are carried at fair value, as of December 31, 2012 and September 30, 2012 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:



	Level 2
	December 31, 2012			September 30, 2012
Assets/(Liabilities) at estimated fair value:
Deferred Compensation	$	(160.2	)	$	(161.6	)
Derivatives - Foreign Exchange	1.4			(6.6		)
Derivatives - Commodity	—			1.6
Derivatives - Interest Rate Swap	—			(0.3		)
Share Option	3.6			2.5
Net Liabilities at estimated fair value	$	(155.2	)	$	(164.4	)

At December 31, 2012 and September 30, 2012, the Company had no level 1 or level 3 financial assets or liabilities.

At December 31, 2012 and September 30, 2012, the fair market value of fixed rate long-term debt was $2,424.9 and $2,438.0, respectively, compared to its carrying value of $2,263.7 and $2,263.6, respectively. The estimated fair value of the long-term debt is estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements. The estimated fair value of fixed rate long-term debt has been determined based on level 2 inputs.

Due to the nature of cash and cash equivalents and short-term borrowings, including notes payable, carrying amounts on the balance sheets approximate fair value. The estimated fair value of cash and cash equivalents and short-term borrowings have been determined based on level 2 inputs.

At December 31, 2012, the estimated fair value of foreign currency, interest rate swap and commodity contracts is the amount that the Company would receive or pay to terminate the contracts, considering first, quoted market prices of comparable agreements, or in the absence of quoted market prices, such factors as interest rates, currency exchange rates and remaining maturities. The estimated fair value of the deferred compensation liability is determined based upon the quoted market prices of the Energizer Common Stock Unit Fund as well as other investment options that are offered under the plan.

Venezuela Currency Risk The Company has investments in Venezuelan affiliates. Venezuela is considered highly inflationary under GAAP as of January 1, 2010. In addition, the conversion of local monetary assets to U.S. dollars is restricted by the Venezuelan government. We continue to monitor this situation including the impact such restrictions may have on our future business operations. At this time, we are unable to predict with any degree of certainty how recent and future developments in Venezuela will affect our Venezuela operations, if at all. At December 31, 2012, the Company had approximately $42 in net monetary assets in Venezuela. Due to the level of uncertainty in Venezuela, we cannot predict the exchange rate that will ultimately be used to convert our local currency net monetary assets to U.S. dollars in the future.