Rayovac 2006 Annual Report Download - page 40

28 SPECTRUM BRANDS | 2006 ANNUAL REPORT
The decline in consolidated battery sales was due primarily
to an $89 million decline in Europe/ROW battery sales and an
$18 million decline in North American alkaline battery sales.
Europe/ROW battery sales declined in fi scal 2006 as we experi-
enced a product mix shift from branded batteries to lower-priced
private label batteries and exited some low margin private label
alkaline business. In addition, European consumers continue to
shift their purchasing habits from high end electronic specialty
stores and photo stores, where we enjoy strong market shares,
to deep discount and food retail channels where we do not have
as strong a presence. The decline in our North American alka-
line battery sales was driven by a number of factors, primarily a
reduction of inventory levels at certain retailers in North
America, lost distribution and the completion of our transition
to a new alkaline marketing strategy in North America, cen-
tered around an improved value position, which took longer
than anticipated. Our previous alkaline marketing strategy of
“50% More” focused on the cost of our product to the cus-
tomer while our current alkaline marketing strategy, “Same
Performance, Better Price,” is designed to highlight the fact
that battery performance tests show that our alkaline batteries
perform as well as the leading alkaline battery brands and are
offered at better prices. We experienced decreased battery sales
as a result of the change in packaging and pricing from the
“50% More” strategy to the “Same Performance, Better Price”
strategy as customers and consumers adjusted to the new mes-
sage and the related changes in our pricing and package sizes.
During this transition, some of the existing inventories of “50%
More” alkaline battery products were heavily promoted to sell
and sold to discounters at prices lower than the prices we would
have typically received in the marketplace. The decline in con-
solidated shaving and grooming sales is primarily attributable
to a $28 million decline in North America sales driven by lower
than expected sales of Remington men’s shaving products, pri-
marily during the 2006 Father’s Day holiday and 2005 Christmas
holiday. These declines were partly offset by a $14 million increase
in sales of Remington branded products in Latin America as we
continued the introduction of Remington branded products
throughout the region.
During the fourth quarter of fi scal 2006, the North American
battery business began to show signs of improvement. Fourth
quarter fi scal 2006 battery sales in North America increased by
approximately 16% over the prior year’s fourth quarter due pri-
marily to the nonrecurrence of certain retailer inventory reduc-
tions which began in the fourth quarter of 2005. In the fourth
quarter of fi scal 2006, we benefi ted from strong customer accep-
tance of Rayovac’s new marketing campaign referenced above.
We recently announced battery price increases effective January
1, 2007. We expect these price increases, once realized in the
second quarter of fi scal 2007, to partially offset continued
increases in raw material costs.
Gross Profit
Gross profi t margin for fi scal 2006 decreased slightly to
37.4% compared to our fi scal 2005 gross profi t margin of 37.7%.
Our fi scal 2006 gross profi t margin was impacted by approxi-
mately $22 million of restructuring and related charges, primar-
ily related to a series of initiatives in Europe to reduce operating
costs and rationalize our manufacturing structure as well as the
costs associated with our integration of United and Tetra. Our fi s-
cal 2005 gross margin was impacted by charges recognized in
cost of goods sold related to inventory acquired as part of the
Tetra and United acquisitions. In accordance with generally
accepted accounting principles in the United States of America,
this inventory was revalued as part of the purchase price alloca-
tion. For fi scal 2005, this accounting treatment resulted in an
increase in acquired inventory of $8 million and $29 million for
Tetra and United, respectively. These inventory valuation adjust-
ments were non-cash charges. We also incurred approximately
$10 million of restructuring and related charges during fi scal
2005 related to the closing of a zinc carbon manufacturing facil-
ity in Breitenbach, France. See “Restructuring and Related Charges”
below for additional information regarding our restructuring and
related charges.
In addition to the items discussed above, our gross profi t mar-
gin in fi scal 2006 included a seven-month benefi t from higher
margin Tetra pet product sales during the comparable months
not owned in fi scal 2005. This benefi t, however, was more than
offset by declines in gross margins on our battery, shaving and
grooming and personal care products. The decline in battery
gross margins was driven by higher raw material costs, especially
zinc—a primary raw material in the manufacturing of batteries,
reduced utilization of our manufacturing facilities due to volume
declines and the previously mentioned shift in European product
mix and distribution channels. Shaving and grooming and per-
sonal care margins declined primarily as a result of consumers
purchasing lower margin products.
Higher prices of zinc negatively impacted fi scal 2006 gross
profi t by approximately $18 million. While we have some hedges
in place for fi scal 2007, we currently estimate raw material costs
to increase signifi cantly above fi scal 2006 levels based on current
cost and market trends.
Operating (Loss) Income
An operating loss of approximately $283 million was recog-
nized in fi scal 2006 as compared to operating income in fi scal
2005 of $196 million. The fi scal 2006 operating loss is directly
attributable to a non-cash pretax impairment charge of approxi-
mately $433 million for certain trade name intangible assets and
goodwill written down to fair value in accordance with SFAS 142.
See “Goodwill and Intangibles Impairment” below for further details
on this impairment charge. Also included in operating expenses
in fi scal 2006 were approximately $34 million of restructuring
2006 Form 10-K Annual Report
Spectrum Brands, Inc.