Rayovac 2006 Annual Report Download - page 41

SPECTRUM BRANDS | 2006 ANNUAL REPORT 29
and related charges primarily related to a series of initiatives in
Europe to reduce operating costs and rationalize our manufac-
turing structure as well as the costs associated with our integra-
tion of United and Tetra. Included in operating expenses in fi scal
2005 were approximately $16 million of restructuring and
related charges primarily incurred in connection with United
integration initiatives. See “Restructuring and Related Charges”
below for additional information regarding our restructuring and
related charges.
In addition to the items discussed above, operating expenses as
a percentage of net sales in fi scal 2006 increased due to increased
distribution costs which totaled approximately $216 million, or
8.5% of sales, in fi scal 2006 versus $162 million, or 7.0% of sales,
in the prior year. Fiscal 2006 distribution costs were well above
historical levels as we incurred increased fuel costs and excess costs
in our North America and Global Pet segments during the peak
selling season to meet customer needs. All other operating expenses
as a percentage of net sales in fi scal 2006 were in line with fi scal
2005 percentages.
Segment Results
As discussed above in Item 1, Business, as of October 1, 2005,
we began managing our business in four reportable segments: (i)
North America; (ii) Latin America; (iii) Europe/ROW; and (iv)
Global Pet. The presentation of all historical segment reporting
herein has been adjusted to conform to our segment reporting.
Global and geographic strategic initiatives and fi nancial objec-
tives are determined at the corporate level. Each business segment
is responsible for implementing the defi ned strategic initiatives
and achieving its fi nancial objectives. Each business segment has a
general manager responsible for sales and marketing initiatives
for all product lines within the business segment and the fi nancial
results of the business segment. We evaluate segment profi tability
based on income from operations before corporate expense,
restructuring and related charges and impairment charges.
Corporate expense includes expenses associated with the purchas-
ing department, corporate general and administrative functions
and research and development.
North America
(in millions)
2006 2005
Net sales to external customers $1,212 $1,156
Segment profit $ 146 $ 165
Segment profit as a % of net sales 12.0% 14.3%
Assets as of September 30, $1,504 $2,246
Segment net sales to external customers in fi scal 2006 increased
to $1,212 million from $1,156 million during fi scal 2005. This
5% increase was due to the inclusion of United’s lawn and garden
and household insect control business for the entire fi scal 2006 as
compared to only February through September for fi scal 2005.
Net sales contributed by United’s lawn and garden and household
insect control business from October 2005 through January 2006
totaled $87 million. This increase was tempered by a decline in
our Legacy Businesses, specifi cally an $18 million decline in alka-
line battery sales as a result of the reduction of inventory levels at
certain retailers in North America, the completion of our transi-
tion to a new alkaline battery marketing strategy and lost distri-
bution. During the fourth quarter of fi scal 2006, however, battery
sales increased signifi cantly, 16% over the prior year’s fourth
quarter, due primarily to the nonrecurrence of certain retailer
inventory reductions which began in the fourth quarter of last
year. Our Remington shaving and grooming sales in North
America declined by $28 million, driven by lower than expected
sales of Remington men’s shaving products, primarily during the
2006 Father’s Day holiday and 2005 Christmas holiday. These
sales declines were slightly offset by a $7 million increase in sales
of Remington personal care products during fi scal 2006.
Segment profi tability in fi scal 2006 decreased to $146 mil-
lion, or 12.0% of net sales, from $165 million, or 14.3% of net
sales in fi scal 2005. The previously discussed inventory purchase
accounting charge in fi scal 2005, $23 million of which related to
the North America segment, reduced segment profi t as a percent
of net sales in fi scal 2005 by approximately 2.0 percentage points.
During fi scal 2006, we incurred increased raw material costs and
experienced reduced utilization of our manufacturing facilities
due to sales volume declines which reduced our gross profi t and
gross profi t margins as compared to fi scal 2005. Operating
expenses as a percentage of net sales increased to approximately
25.2% of net sales in fi scal 2006 from approximately 22.8% of
net sales in fi scal 2005, primarily the result of increased distribu-
tion costs. Distribution costs were well above historical levels as
we incurred increased fuel costs and other unexpected costs to
meet customer needs during the peak selling season. All other
operating expenses were in line with fi scal 2005 levels.
Segment assets at September 30, 2006 decreased to $1,504 mil-
lion from $2,246 million at September 30, 2005. The decrease in
assets is attributable to allocations of United Pet Group goodwill to
the Global Pet segment, as a result of our new segment reporting
structure. Goodwill and intangible assets were approximately
$901 million at September 30, 2006 and primarily relate to the
United and Remington acquisitions. The purchase price allocation
for the United acquisition was fi nalized in 2006. The purchase price
allocation for the Remington acquisition was fi nalized in September
2004. See Note 17, Acquisitions, of Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K for addi-
tional information on the United acquisition.
Europe/ROW
(in millions)
2006 2005
Net sales to external customers $560 $658
Segment profit $ 55 $ 95
Segment profit as a % of net sales 9.8% 14.4%
Assets as of September 30, $551 $557
2006 Form 10-K Annual Report
Spectrum Brands, Inc.