Rayovac 2014 Annual Report Download - page 136

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SPECTRUM BRANDS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(Amounts in thousands, except per share figures)
the Company has recorded its best estimates for these contingencies as part of the purchase accounting for Liquid
Fence. Further adjustments to pre-acquisition contingency amounts will be reflected in the Company’s results of
operations.
Valuation Adjustments
The Company performed a valuation of the acquired trade names, proprietary technology assets, customer
relationships and a contingent earn-out liability at January 2, 2014. A summary of the significant key inputs is as
follows:
• The Company valued the technology assets related to formulas and processes using the income
approach, specifically the excess earnings method. Under this method, the asset value was determined
by estimating the earnings attributable to the technology assets, adjusted for contributory asset charges.
In estimating the fair value of the technology, Net sales and associated earnings were forecasted and
adjusted for a technical obsolescence factor to isolate the forecasted sales and earnings attributable to
the acquired technology assets. The forecasted technology earnings were discounted to present value to
arrive at the concluded fair value. The Company anticipates using the technology asset over a useful
life of 17 years which is generally determined by assessing the time period in which substantially all of
the discounted cash flows are expected to be generated. The technology asset was valued at
approximately $20,500 under this approach.
• The Company valued an indefinite-lived trade name using the income approach, specifically the relief
from royalty method. Under this method, the asset value was determined by estimating the hypothetical
royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based
on consideration of several factors, including prior transactions of Liquid Fence, related trademarks
and trade names, other similar trademark licensing and transaction agreements and the relative
profitability and perceived contribution of the trademarks and trade names. Trade name and trademarks
were valued at $5,100 under this approach.
• The Company valued customer relationships using the distributor approach. Under this method, the
asset value was determined by estimating the hypothetical earnings before interest and taxes (“EBIT”)
that a comparable distributor would earn, further adjusted for contributory asset charges. In
determining the fair value of the customer relationships, the distributor approach values the intangible
asset at the present value of the incremental after-tax cash flows. The customer relationships were
valued at $1,300 under this approach and will be amortized over 15 years.
The Company valued a contingent liability related to additional payments that may be made to the selling
company. This liability was calculated based on the probability weighted present value of expected payments.
This contingent liability is based on the achievement of specific revenue milestones through both January 31,
2015 and January 31, 2016. The contingent liability was valued at $1,500 under this approach.
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