Rayovac 2006 Annual Report Download - page 45

SPECTRUM BRANDS | 2006 ANNUAL REPORT 33
acquisitions. Unless otherwise indicated, all discussion included
herein compares results from continuing operations. See Note
11, Discontinued Operations, of Notes to Consolidated Financial
Statements of this Annual Report on Form 10-K for additional
information on the disposition of Nu-Gro Pro and Tech.
Net Sales
Net sales for fi scal 2005 increased to $2,307 million from
$1,417 million in fi scal 2004 refl ecting a 63% increase. The fol-
lowing table details the principal components of the change in net
sales from fi scal 2004 to fi scal 2005 (in millions):
Net Sales
Fiscal 2004 Net Sales $1,417
Impact of United acquisition from
February 2005 – September 2005 735
Impact of Tetra acquisition from
May 2005 – September 2005 96
Microlite acquisition from October
2004 – May 2005 39
Ningbo acquisition from October
2004 – March 2005 11
Foreign currency benefit, net 46
Decline in North America alkaline battery sales (35)
Other, net (2)
Fiscal 2005 Net Sales $2,307
Consolidated net sales by product line for fi scal 2005 and fi scal
2004 are as follows (in millions):
Fiscal Year 2005 2004
Product line net sales
Batteries $ 968 $ 939
Lights 94 90
Shaving and grooming 273 272
Personal care 141 116
Lawn and garden 402 –
Household insect control 143 –
Pet products 286 –
Total net sales to external customers $2,307 $1,417
The increase in consolidated battery sales was due to contri-
butions from the Microlite and Ningbo acquisitions and the favor-
able impact of foreign currency exchange rates, offset by the
decline in North America alkaline battery sales. The decline in
our North America battery sales was driven by the transition to a
new alkaline marketing strategy centered around an improved
value position. Our previous alkaline marketing strategy of “50%
More” focused on the cost of our product to the customer while
our current alkaline marketing strategy, “Same Performance,
Better Price,” is designed to highlight the fact that battery perfor-
mance 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 message 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 were sold to discounters at
prices lower than the retail prices we would have typically
received in the marketplace. The transition to this new product
positioning is taking longer than initially anticipated and remains
ongoing. The speed of the transition has been affected by the con-
tinued focus by our customers on reducing inventory at retail.
Gross Profit
Our gross profi t margin for fi scal 2005 decreased to 37.7%
from 42.8% in fi scal 2004. The decline in gross margin is primarily
attributable to the impact of unfavorable product mix changes
within our Remington brand personal care and shaving and groom-
ing products, particularly in North America, the impact of our
transition from Rayovac’s “50% More” battery marketing strategy
in the North American battery business and higher raw material
and transportation costs. In addition, approximately 1.6 percent-
age points of the decline was driven by charges recognized as 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, we revalued
the inventory as part of the purchase price allocation. For fi scal
2005, this resulted in an increase in acquired inventory of
$8 million and $29 million for Tetra and United, respectively. These
inventory valuation adjustments were non-cash charges. Also,
approximately $10 million of the decline represents restructuring
and related charges incurred during fi scal 2005 related to the clos-
ing of a zinc carbon manufacturing facility in Breitenbach, France.
Operating Income
Our operating income for fi scal 2005 increased to $196 million
from $156 million in fi scal 2004. The increase was primarily attrib-
utable to the impact of the United and Tetra acquisitions, which con-
tributed approximately $71 million and $10 million, respectively.
The benefi ts of our acquisitions were partially offset by the previ-
ously discussed declines in gross margins, and an increase in
restructuring and related charges that were included in operating
expenses of approximately $16 million during the period pri-
marily related to United integration initiatives. See “Restructuring
and Related Charges” below as well as Note 16, Restructuring and
Related Charges, of the Notes to Consolidated Financial
Statements of this Annual Report on Form 10-K for additional
information regarding these restructuring and related charges.
Segment Results
As of October 1, 2005, we began managing our business in
four reportable segments, including: (i) North America; (ii)
Latin America; (iii) Europe/ROW; and (iv) Global Pet. The pre-
sentation of all historical segment reporting herein has been
adjusted to conform to this segment reporting structure.
2006 Form 10-K Annual Report
Spectrum Brands, Inc.