Rayovac 2006 Annual Report Download - page 52

40 SPECTRUM BRANDS | 2006 ANNUAL REPORT
Other Commercial Commitments
The following table summarizes our other commercial commitments as of September 30, 2006, consisting entirely of standby letters
of credit which back the performance of certain of our entities under various credit facilities and lease arrangements (in millions):
Other Commercial Commitments
Amount of Commitment Expiration by Fiscal Year
2007 2008 2009 2010 2011 Thereafter Total
Letters of credit $52 $6 $ – $ – $ – $ – $58
Total Other Commercial Commitments $52 $6 $ – $ – $ – $ – $58
Critical Accounting Policies
Our Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles in the
United States of America and fairly present our fi nancial position
and results of operations. We believe the following accounting poli-
cies are critical to an understanding of our fi nancial statements. The
application of these policies requires management’s judgment and
estimates in areas that are inherently uncertain.
Valuation of Assets and Asset Impairment
We evaluate certain long-lived assets, such as property, plant
and equipment and defi nite-lived intangible assets for impairment
based on the expected future cash fl ows or earnings projections
associated with such assets. Impairment reviews are conducted at
the judgment of management when it believes that a change in cir-
cumstances in the business or external factors warrants a review.
Circumstances such as the discontinuation of a product or product
line, a sudden or consistent decline in the sales forecast for a product,
changes in technology or in the way an asset is being used, a history
of operating or cash fl ow losses or an adverse change in legal factors
or in the business climate, among others, may trigger an impair-
ment review. An asset’s value is deemed impaired if the discounted
cash fl ows or earnings projections generated do not substantiate the
carrying value of the asset. The estimation of such amounts requires
management judgment with respect to revenue and expense growth
rates, changes in working capital and selection of an appropriate dis-
count rate, as applicable. The use of different assumptions would
increase or decrease discounted future operating cash fl ows or earnings
projections and could, therefore, change impairment determinations.
Under SFAS 142, we test goodwill and indefi nite-lived intangi-
ble assets for impairment annually. During 2004, we changed the
annual impairment testing date for goodwill and such intangibles
from October 1 to August 31 of each year. The August 31 date is
preferable as it provides us with more time prior to the fi scal year-
end to complete impairment testing and to report the impact of the
impairment tests in our annual Form 10-K fi ling. In 2006, we, with
the assistance of independent third party valuation specialists, con-
ducted our annual impairment testing of goodwill and indefi nite-
lived intangible assets associated with our North America,
Europe/ROW, Latin America and Global Pet business segments.
The fair values of our reporting units were determined using the
discounted cash fl ow method and also tested for reasonableness by
comparison to our market capitalization. As a result of our goodwill
analysis, we recorded a non-cash pretax impairment charge of
approximately $353 million related to our Latin America and
Global Pet reporting units. In addition, our indefi nite-lived intangi-
ble assets which represent trade names were valued using a relief
from royalty methodology. As a result of our trade names analysis,
we recorded a non-cash pretax impairment charge of approxi-
mately $80 million equal to the excess of the carrying amounts of
certain trade names over the fair value of such assets.
Fair values were determined using discounted cash fl ow models
involving several assumptions. Changes in our assumptions could
materially impact our fair value estimates. Assumptions critical to
our fair value estimates were: (i) present value factors used in deter-
mining the fair value of the reporting units and trade names or third
party indicated fair values for assets expected to be disposed; (ii)
royalty rates used in our trade name valuations; (iii) projected aver-
age revenue growth rates used in the reporting unit and trade name
models; and (iv) projected long-term growth rates used in the deri-
vation of terminal year values. Absent changes to other assump-
tions, a 1 percentage point increase in the present value factor used
to determine the fair value of our North America and Europe/
ROW reporting units, which were not deemed impaired based on
the testing of goodwill described above, would not cause the carry-
ing value of the respective reporting unit to exceed its fair value.
These and other assumptions are impacted by economic conditions
and expectations of management and will change in the future
based on period specifi c facts and circumstances.
We evaluate net deferred tax assets based on future earnings
projections. An asset’s value is deemed impaired if the earnings pro-
jections do not substantiate the carrying value of the asset. The esti-
mation of such amounts requires signifi cant management judgment
with respect to revenue and expense growth rates, changes in work-
ing capital, sales of assets and other assumptions, as applicable. The
use of different assumptions would increase or decrease future
earnings projections and could, therefore, change the determina-
tion of whether a deferred tax asset is realizable. As a result of this
evaluation, during fi scal 2006 we recorded a non-cash charge of
approximately $29 million which increased the valuation allowance
against certain net deferred tax assets.
2006 Form 10-K Annual Report
Spectrum Brands, Inc.