Rayovac 2003 Annual Report Download - page 30

require collateral. Our credit terms generally range between 30 and 90 days from invoice date, depending upon the evaluation of the
customer’s financial condition and history. We monitor our customers’ credit and financial conditions based on changing economic
conditions and adjust our credit policies with respect to any individual customer as we determine appropriate. These adjustments
may include, but are not limited to, restricting shipments to customers, reducing credit limits, shortening credit terms, requiring
cash payments in advance of shipment, or securing credit insurance. Our adjustments to our credit policies may not be effective
in reducing our credit risk associated with any particular customer. In 2002, we experienced a significant loss resulting from the
bankruptcy filing of a large retailer in the United States to which we had extended credit in accordance with our credit policy. In
the future, we may experience additional losses due to changing economic, political and specific customer conditions that may
adversely affect collectibility of trade receivables.
See Notes 2(b), 2(c), and 2(e) to the Consolidated Financial Statements for more information about our revenue recognition and
credit policies.
Pensions
Our accounting for pension benefits is primarily based on discount rate, expected and actual return on plan assets, and other assump-
tions made by management, and is impacted by outside factors such as equity and fixed income market performance. Pension lia-
bility is principally the estimated present value of future benefits, net of plan assets. In calculating the estimated present value of
future benefits, net of plan assets, for 2002 and 2003, we used a discount rate of 7.0% and 5.0% to 6.0%, respectively. In lowering the
discount rate from 2002 to 2003, we considered the change in the general market interest rates of debt rated Aaa or Aa by Moody’s
Investors Service from June 2002 to June 2003 and solicited the advice of its independent actuary. We believe the discount rate used
is reflective of the rate at which the pension benefits could be effectively settled. The decrease in our discount rate in fiscal 2003
contributed to an increase in our projected benefit obligation from the end of fiscal 2002 to the end of fiscal 2003.
Pension expense is principally the sum of interest and service cost of the plan, less the expected return on plan assets and the amor-
tization of the difference between our assumptions and actual experience. The expected return on plan assets is calculated by apply-
ing an assumed rate of return to the fair value of plan assets. In 2002 and 2003, we used an expected return on plan assets of 8.5% and
4.0% to 8.5%, respectively. Based on the advice of our independent actuary, we believe the expected rate of return is reflective of the
long-term average rate of earnings expected on the funds invested. An increase in the expected return on plan assets used by us
would have the effect of decreasing future pension expense. If such expected return were overstated, it would ultimately increase
future pension expense. Similarly, an understatement of the expected return would ultimately decrease future pension expense.
If plan assets decline due to poor performance by the markets and/or interest rate declines our pension liability would increase,
ultimately increasing future pension expense.
See Note 11 to the Consolidated Financial Statements for a more complete discussion of our employee benefit plans.
Restructuring
Restructuring liabilities are recorded for estimated costs of facility closures, significant organizational adjustments, and measures
undertaken by management to exit certain activities. Costs for such activities are estimated by management after evaluating detailed
analyses of the cost to be incurred. Such liabilities could include amounts for items such as severance costs and related benefits
(including settlements of pension plans), impairment of property and equipment and other current or long term assets, lease ter-
mination payments, plus any other items directly related to the exit activities. While the actions are carried out as expeditiously as
possible, restructuring charges are estimates. Changes in estimates resulting in an increase to or a reversal of a previously recorded
liability, may be required as management executes the restructuring plan. During fiscal 2003, we adopted the requirements of FASB
Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which impacts the timing of recognition of certain exit
or disposal costs.
We report restructuring charges relating to manufacturing and related initiatives in cost of goods sold. Restructuring and related
charges reflected in cost of goods sold include, but are not limited to, termination and related costs associated with manufacturing
employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring initiatives
implemented.
We report restructuring charges relating to administrative functions in operating expenses, such as, initiatives impacting sales,
marketing, distribution, or other non-manufacturing related functions. Restructuring and related charges reflected in operating
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rayovac Corporation and Subsidiaries
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