Rayovac 2006 Annual Report Download - page 23

SPECTRUM BRANDS | 2006 ANNUAL REPORT 11
Our dependence on, and the price of, raw materials may
adversely affect our profi ts.
The principal raw materials used to produce our products—
including granular urea, zinc powder, electrolytic manganese diox-
ide powder and steel—are sourced on a global or regional basis,
and the prices of those raw materials are susceptible to price fl uctu-
ations due to supply/demand trends, energy costs, transportation
costs, government regulations and tariffs, changes in currency
exchange rates, price controls, the economic climate and other
unforeseen circumstances. We regularly engage in forward pur-
chase and hedging derivative transactions in an attempt to effec-
tively manage the raw material costs we expect to incur over the
next 12 to 24 months. These efforts may not be effective and, if we
are unable to pass on raw materials price increases to our custom-
ers, our future profi tability may be materially adversely affected.
Specifi cally with respect to transportation costs, certain modes of
delivery are subject to fuel surcharges which are determined based
upon the current cost of diesel fuel in relation to pre-established
agreed upon costs. There is no guarantee that we will be able to pass
these fuel surcharges on to our customers.
In addition, we have exclusivity arrangements and minimum pur-
chase requirements with certain of our suppliers for our lawn and
garden business, which increase our dependence upon and exposure
to those suppliers. Some of those agreements include caps on the
price we pay for our supplies, and in certain instances, these caps have
allowed us to purchase materials at below market prices. Any renewal
of those contracts may not include or reduce the effect of those caps
and could even impose above market prices in an attempt by the
applicable supplier to make up for any below market prices paid by us
prior to the renewal of the agreement. Any failure to timely obtain
suitable supplies at competitive prices could materially adversely
affect our business, fi nancial condition and results of operations.
Consolidation of retailers and our dependence on a small
number of key customers for a signifi cant percentage of
our sales may negatively affect our profi ts.
During the past decade, retail sales of the consumer products
we market have been increasingly consolidated into a small number
of regional and national mass merchandisers and warehouse clubs.
This trend towards consolidation is occurring on a worldwide basis.
As a result of this consolidation, a signifi cant percentage of our sales
are attributable to a very limited group of retailer customers,
including Wal-Mart, The Home Depot, Carrefour, Target, Lowe’s,
PetSmart, Canadian Tire, PetCo and Gigante. Wal-Mart Stores,
Inc., our largest retailer customer, accounted for approximately
19% of our net consolidated sales in fi scal 2006. Our sales generally
are made through the use of individual purchase orders, consistent
with industry practice. Because of the importance of these key cus-
tomers, demands for price reductions or promotions by such cus-
tomers, reductions in their purchases, changes in their fi nancial
condition or loss of their accounts could have a material adverse
effect on our business, fi nancial condition and results of operations.
In addition, as a result of the desire of retailers to more closely
manage inventory levels, there is a growing trend among them to
purchase our products on a “just-in-time” basis. This requires us to
shorten our lead-time for production in certain cases and more
closely anticipate demand, which could in the future require us to
carry additional inventories and increase our working capital and
related fi nancing requirements. Furthermore, we primarily sell
branded products, so a move by one of our customers to sell signifi -
cant quantities of private label products which directly compete
with our products could have a material adverse effect on our
business, fi nancial condition and results of operations.
We cannot assure you that we will successfully complete
the integration of United and Tetra.
If we cannot successfully complete the integration of the operations
of United and Tetra, we may experience material adverse consequences
to our business, fi nancial condition and results of operations. The inte-
gration of separately-managed companies operating in distinctly
different markets involves a number of risks, including, but not
limited to, the following:
• the risks of entering markets in which we have no prior
experience;
• the diversion of management’s attention from the manage-
ment of daily operations to the integration of operations;
• demands on management related to the signifi cant increase in
our size after the acquisitions of United and Tetra;
• diffi culties in the assimilation and retention of employees;
• diffi culties in the assimilation of different corporate cultures
and practices, and of broad and geographically dispersed per-
sonnel and operations;
• diffi culties in the integration of departments, information
technology systems, accounting systems, technologies, books
and records and procedures, as well as in maintaining uniform
standards and controls, including internal accounting controls,
procedures and policies; and
• expenses of any undisclosed or potential legal liabilities.
Prior to the acquisitions of United and Tetra, Spectrum, United
and Tetra operated as separate entities. We may not be able to main-
tain the levels of revenue, earnings or operating effi ciency that any
one of these entities had achieved or might achieve separately. The
fi nancial statements included in this report cover periods during
which United and Tetra were not under the same management and,
therefore, may not be indicative of our future fi nancial condition or
operating results. Successfully completing the integration of each
company’s operations will depend on our ability to manage those
operations, realize opportunities for revenue growth presented by
strengthened product offerings and expanded geographic market
coverage and, to some degree, eliminate redundant and excess
costs. The anticipated savings opportunities are based on projec-
tions and assumptions, all of which are subject to change. We may
2006 Form 10-K Annual Report
Spectrum Brands, Inc.