Rayovac 2006 Annual Report Download - page 46

34 SPECTRUM BRANDS | 2006 ANNUAL REPORT
Global and geographic strategic initiatives and fi nancial objec-
tives are determined at the corporate level. Each business seg-
ment is responsible for implementing defi ned strategic initiatives
and achieving predetermined fi nancial objectives. Each business
segment has a general manager responsible for sales and market-
ing initiatives for all product lines within the business segment
and the fi nancial results of the 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
purchasing department, corporate general and administrative
areas and research and development.
North America
(in millions) 2005 2004
Net sales to external customers $1,156 $654
Segment profit $ 165 $131
Segment profit as a % of net sales 14.3% 20.0%
Assets as of September 30, $2,246 $685
Segment net sales to external customers increased by $502
million in 2005. This increase was driven by sales of the acquired
lawn and garden and household insect control business of United,
which contributed $545 million in net sales. Offsetting this
amount was a $35 million decline in our alkaline battery sales,
driven by the transition to a new marketing strategy. The new
marketing strategy was more costly than anticipated and was
completed in fi scal 2006. Markdown dollars were required and
shipments were fewer because (i) customers held high retail
inventories of the previous product and (ii) retailers focused on
reducing their inventory levels. Fiscal 2005 results represent
approximately 7% growth in our U.S. Home & Garden business
as compared to 2004, assuming the U.S. Home & Garden business
was included in the comparable prior fi scal period. Contributing to
this growth was a 12% increase in our lawn and garden business,
which was partially offset by a 3% decline in our household insect
control business.
Segment profi tability in fi scal 2005 increased to $165 million
from $131 million in the previous year. The inclusion of the
acquired lawn and garden and household insect control business
of United, subsequent to the acquisition date of February 7,
2005, added approximately $52 million to our profi tability in fi s-
cal 2005. Our profi tability in the acquired lawn and garden and
household insect control business of United was negatively
impacted by the aforementioned inventory valuation charges of
which approximately $23 million related to the acquired lawn
and garden and household insect control business of United. In
addition, our profi tability was impacted by higher raw material
costs, particularly for urea, a major component in fertilizers, and
fuel surcharges, passed on to us from our freight carriers.
Profi tability was also negatively impacted by changes in demand
for our product. Customers purchased less household insect con-
trols products, which have higher gross margins and more lawn
and garden products, which have lower gross margins. Our prof-
itability in our Legacy Businesses in our North American report-
ing segment declined $18 million. This decrease in profi tability
primarily refl ects the impact of lost margin as a result of reduced
battery sales and lower margins on Remington branded prod-
ucts, partially offset by lower marketing and advertising costs
during the year. Our profi t margin decreased to 14.3% from
20.0% in 2004, primarily due to the inclusion of the inventory
valuation charges, an increased percentage of net sales coming
from lower margin lawn and garden products and the negative
impact of lower gross margins on Remington branded products,
partially offset by reductions to operating expenses. Operating
expenses as a percentage of net sales were approximately 23% in
both 2004 and 2005, as lower marketing and advertising costs
were offset by higher distribution costs.
Segment assets at September 30, 2005 increased to $2,246 mil-
lion from $685 million at September 30, 2004. Of the increase,
$1,557 million was attributable to the assets of the acquired lawn
and garden and household insect control business of United. The
remaining $4 million increase in assets was primarily attributable to
higher debt issue costs associated with the debt issued in connection
with the United and Tetra acquisitions as well as an increase in cash
on hand at the end of 2005 which allowed us to make an interest
payment due in early 2006. Intangible assets were approximately
$1,510 million and primarily relate to the United and Remington
acquisitions. The purchase price allocation for the United acquisi-
tion was fi nalized in fi scal 2006. See Note 17, Acquisitions, of Notes
to Consolidated Financial Statements included in this Annual Report
on Form 10-K for additional information on the United acquisition.
The purchase price allocation for the Remington acquisition was
fi nalized in September 2004.
Europe/ROW
(in millions) 2005 2004
Net sales to external customers $658 $618
Segment profit $ 95 $ 96
Segment profit as a % of net sales 14.4% 15.5%
Assets as of September 30, $557 $596
Segment net sales to external customers in fi scal 2005 increased
to $658 million from $618 million in fi scal 2004, or 6%. The
Ningbo acquisition, completed on March 31, 2004, contributed
approximately $11 million to the sales increase for the six months
not included in the comparable prior fi scal year, with the remaining
increase primarily attributable to the favorable impact from foreign
currency exchange rates of approximately $30 million. During fi s-
cal 2004, the battery business in continental Europe, and in our
largest European market, Germany, was negatively affected by a
stagnant economy and a continuing shift from branded product
sales to private label sales. From 2004 to 2005, we estimate that
the unit volume in the overall alkaline European market was fl at,
while sales dollars declined as unit sales shifted to private label bat-
teries. While our overall battery sales were fl at, excluding the ben-
2006 Form 10-K Annual Report
Spectrum Brands, Inc.