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SPECTRUM BRANDS | 2006 ANNUAL REPORT 31

Included in long-term liabilities assumed in connection with

the acquisition of Microlite is a provision for IPI taxes. Although

a previous ruling by the Brazilian Federal Supreme Court has

been issued in favor of a speciﬁ c Brazilian taxpayer with similar

tax credits, the legality and constitutionality of the IPI “pre-

sumed” credits is currently being revisited by the Brazilian Federal

Supreme Court, and it is not certain when a ﬁ nal ruling will be

issued. At September 30, 2006, these amounts totaled approxi-

mately $39.0 million and are included in other long-term liabili-

ties in the Consolidated Balance Sheets; however, ultimate

resolution of this matter by the Brazilian Supreme Court could

result in a liability less than or in excess of amounts accrued.

Global Pet

(in millions)

2006 2005

Net sales to external customers $ 543 $286

Segment profit $ 84 $ 29

Segment profit as a % of net sales 15.5% 10.1%

Assets as of September 30, $1,171 $791

Segment net sales to external customers in ﬁ scal 2006 were

$543 million. This represents a $257 increase from ﬁ scal 2005.

This increase is due to the inclusion of the acquired businesses

of Tetra, United Pet Group and Jungle Labs for the entire ﬁ scal

2006. These acquired businesses contributed $243 million to net

sales in ﬁ scal 2006 for the comparable periods not owned in ﬁ scal

2005. This increase is primarily the result of strong growth in

specialty pet products sales of 6%, while aquatic product sales

were approximately the same as in ﬁ scal 2005. During ﬁ scal

2006, we experienced growth in sales of pet products in North

America and Europe, offset by weakness in Japan. Unfavorable

foreign currency exchange translation impacted sales by approxi-

mately $3 million.

Segment proﬁ tability in ﬁ scal 2006 was $84 million, or 15.5%

of net sales. Our proﬁ tability in ﬁ scal 2005 was $29 million, or

10.1% of net sales. The aforementioned inventory purchase

accounting charge in ﬁ scal 2005, $14 million of which related to

the Global Pet segment, reduced ﬁ scal 2005 segment proﬁ t as a

percent of net sales by approximately 4.9 percentage points.

Operating expenses as a percentage of net sales increased to approx-

imately 28.5% in ﬁ scal 2006 from 26.4% in ﬁ scal 2005 due primar-

ily to increased distribution costs. Distribution costs increased as we

incurred increased fuel costs and other unexpected costs to meet

customer needs during the peak selling season.

Segment assets at September 30, 2006 increased to $1,171 mil-

lion from $791 million at September 30, 2005. The increase in

assets is primarily attributable to allocations of United Pet Group

goodwill from the North America segment to the Global Pet seg-

ment, as a result of our new segment structure, partly offset by the

impairment of goodwill and certain trade name intangible assets

in ﬁ scal 2006. See Note 2(i), Signiﬁ cant Accounting Policies—

Intangible Assets, of Notes to Consolidated Financial Statements

included in this Annual Report on Form 10-K for additional infor-

mation on the impairment. Goodwill and intangible assets repre-

sent $930 million of total assets and arose from our acquisition of

United Pet Group as part of the United acquisition on February 7,

2005 and the acquisition of Tetra on April 29, 2005. The purchase

price allocations for the United Pet Group and Tetra acquisitions

were ﬁ nalized in 2006. See Note 17, Acquisitions, of Notes to

Consolidated Financial Statements included in this Annual Report

on Form 10-K for additional information on these acquisitions.

Corporate Expense

Our corporate expenses in ﬁ scal 2006 increased to $103 mil-

lion from $85 million in the same period last year. The increase

was due to expenses incurred related to our continuing expan-

sion of the global operations support infrastructure in Asia and

higher amortization of unearned restricted stock during ﬁ scal

2006. Our corporate expense as a percentage of net sales in ﬁ scal

2006 increased to 4.0% from 3.7% in the previous year.

Restructuring and Related Charges

Our integration activities related to the United and Tetra

acquisitions are ongoing and are expected to continue through

ﬁ scal 2008. We incurred approximately $33 million and $18 mil-

lion of pretax restructuring and related charges during ﬁ scal

2006 and ﬁ scal 2005, respectively, in connection with these inte-

gration activities. Costs associated with our United and Tetra inte-

gration efforts are expected to total approximately $85 million, of

which approximately $65 million will be cash costs and $20 mil-

lion will be non-cash. In ﬁ scal 2007, we expect to incur $30 mil-

lion to $35 million of costs associated with the integration, which

includes $20 million to $25 million of cash costs.

As a result of the European Initiatives, we incurred approxi-

mately $23 million of pretax restructuring and related charges

during ﬁ scal 2006. Upon completion of the European Initiatives,

which are expected to be completed by June 2007, total annual-

ized savings are projected at $30 million. Costs associated with

the European Initiatives, which primarily represent cash costs,

relate primarily to severance and are projected to total approxi-

mately $29 million.

2006 Form 10-K Annual Report

Spectrum Brands, Inc.