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, 2013 and September 30, 2013, as well as the Company’s objectives and strategies for holding derivative instruments.

Commodity Price Risk The Company uses raw materials that are subject to price volatility. At times, the Company has used, and may in the future use, hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities. At December 31, 2013, there were no open derivative or hedging instruments for future purchases of raw materials or commodities.

Foreign Currency Risk A significant share of the Company’s sales are tied to currencies other than the U.S. dollar, the Company’s reporting currency. As such, a weakening of currencies relative to the U.S. dollar can have a negative impact to reported earnings. Conversely, strengthening of currencies relative to the U.S. dollar can improve reported results. The primary currencies to which the Company is exposed include the Euro, the Japanese Yen, the British pound, the Canadian dollar and the Australian dollar.

Additionally, the Company’s foreign subsidiaries enter into internal and external transactions that create non-functional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency results in an exchange gain or loss recorded in Other financing items, net on the Consolidated Statements of Earnings and Comprehensive Income (Condensed). The primary currency to which the Company’s foreign subsidiaries are exposed is the U.S. dollar.

Interest Rate Risk The Company has interest rate risk with respect to interest expense on variable rate debt. At December 31, 2013, the Company had $161.1 of variable rate debt outstanding, which was primarily outstanding borrowings under the Company's receivable securitization program and its Revolving Credit Agreement.

Cash Flow Hedges At December 31, 2013, 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.

The Company enters into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted inventory purchases due to currency fluctuations. These transactions are accounted for as cash flow hedges. At December 31, 2013 and September 30, 2013, the Company had an unrealized pre-tax gain on these forward currency contracts accounted for as cash flow hedges of $3.8 and $1.5, 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, 2013 levels over the next twelve months, approximately $3.7 of the pre-tax gain included in Accumulated other comprehensive loss at December 31, 2013, is expected to be included in earnings. Contract maturities for these hedges extend into fiscal year 2015. There were 78 open foreign currency contracts at December 31, 2013 with a total notional value of approximately $306.

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. The contract is renewed on an annual basis and will expire again in November 2014. 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.

The Company enters into foreign currency derivative contracts which are not designated as cash flow hedges for accounting purposes to hedge balance sheet exposures. Any gains or losses on these contracts are expected to be offset by exchange gains or losses on the underlying exposures, thus they are not subject to significant market risk. The change in estimated fair value of the foreign currency contracts for quarter ended December 31, 2013 and December 31, 2012 resulted in income of $8.8 and $0.3, respectively, and was recorded in Other financing items, net on the Consolidated Statements of Earnings and Comprehensive Income (Condensed). There were 18 open foreign currency derivative contracts which are not designated as cash flow hedges at December 31, 2013, with a total notional value of approximately $311.

The following table provides estimated fair values as of December 31, 2013 and September 30, 2013, and the amounts of gains and losses on derivative instruments classified as cash flow hedges for the three months ended December 31, 2013 and 2012.



	At December 31, 2013		For the Three Months Ended December 31, 2013
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	$	3.8	$	4.6	$	2.3
Total	$	3.8	$	4.6	$	2.3

	At September 30, 2013		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	$	1.5	$	6.7	$	(1.0	)
Interest rate contracts	—		—		(0.3		)
Total	$	1.5	$	6.7	$	(1.3	)


(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 items.


(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, 2013 and September 30, 2013, and the amounts of gains and losses on derivative instruments not classified as cash flow hedges for the three months ended December 31, 2013 and 2012, respectively.



	At December 31, 2013			For the Three Months Ended December 31, 2013
Derivatives not designated as Cash Flow Hedging Relationships	Estimated Fair Value Asset (Liability)			Gain/(Loss) Recognized in Income (1)
Share option	$	0.8		$	7.4
Foreign currency contracts	6.2			8.8
Total	$	7.0		$	16.2

	At September 30, 2013			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	$	7.7		$	3.8
Commodity contracts	—			(1.9		)
Foreign currency contracts	(3.2		)	0.3
Total	$	4.5		$	2.2


(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 items, net.

Effective October 1, 2013, the Financial Accounting Standards Board (FASB) issued a new accounting standard update (ASU) to clarify the scope of disclosures about offsetting assets and liabilities. The standard limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements and securities lending transactions to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement.

The Company has the following recognized financial assets and financial liabilities resulting from those transactions that meet the scope of the disclosure requirements as necessitated by applicable accounting guidance for balance sheet offsetting:



Offsetting of derivative assets

		At December 31, 2013						At September 30, 2013
Description	Balance Sheet location	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet		Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amounts of assets presented in the Balance Sheet
Foreign Currency Contracts	Other Current Assets, Other Assets	$	15.5	$	—	$	15.5	$	7.3	$	(0.6	)	$	6.7

Offsetting of derivative liabilities

		At December 31, 2013						At September 30, 2013
Description	Balance Sheet location	Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet		Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet			Net amounts of liabilities presented in the Balance Sheet
Foreign Currency Contracts	Other Current Liabilities, Other Liabilities	$	5.5	$	—	$	5.5	$	8.6	$	(0.2	)	$	8.4

The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet (Condensed).

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, 2013 and September 30, 2013 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:



	Level 2
	December 31, 2013			September 30, 2013
Assets/(Liabilities) at estimated fair value:
Deferred Compensation	$	(174.4	)	$	(167.6	)
Derivatives - Foreign Currency Contracts	10.0			(1.7		)
Share Option	0.8			7.7
Net Liabilities at estimated fair value	$	(163.6	)	$	(161.6	)

At December 31, 2013 and September 30, 2013, the Company had no level 1 or level 3 financial assets or liabilities.

At December 31, 2013 and September 30, 2013, the fair market value of fixed rate long-term debt was $2,226.5 and $2,262.3, respectively, compared to its carrying value of $2,138.8 and $2,138.8, 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, 2013, the estimated fair value of foreign currency, 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. The Venezuelan government has established the official exchange rate for qualifying dividends and imported goods and services, equal to 6.30 Bolivares Fuertes to one U.S. dollar. Transactions at the official exchange rate are subject to CADIVI (the Venezuelan government's Foreign Exchange Administrative Commission). In accordance with GAAP, our overall results in Venezuela are reflected in the Consolidated Financial Statements at the official exchange rate. When the Venezuelan government changed the official exchange rate of the Bolivar Fuerte from 4.30 per U.S. dollar to 6.30 per U.S. dollar in February 2013 it also established a new auction-based exchange rate market program, referred to as SICAD. SICAD allows entities in specific sectors to bid for U.S. dollars to be used for specified import transactions. As of December 31, 2013, the Company has not utilized the SICAD auction system. On January 24, 2014, the Venezuelan government made a number of announcements related to the SICAD program. We continue to monitor this situation, including the impact restrictions may have on our future business operations. At this time, the Company is 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, 2013, the Company had approximately $65 in net monetary assets in Venezuela at the official exchange rate. Depending on the ultimate transparency and liquidity of the SICAD market, it is possible that the Company may remeasure a portion of our net monetary balances at the SICAD rate. To the extent that the SICAD rate is higher than the official exchange rate at the time our net monetary balances are remeasured, this could result in an additional devaluation charge, which could be material. The most recent transactions executed through SICAD auctions have been 11.40 Bolivares Fuertes to one U.S. dollar.