Rayovac 2007 Annual Report Download - page 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Spectrum Brands, Inc.
factors, but primarily due to a reduction of inventory levels at
certain retailers in North America, lost distribution and the
completion of our transition to a new alkaline marketing strategy
in North America, centered around an improved value position,
which took longer than anticipated. Our previous alkaline mar-
keting strategy of “50% More” focused on the cost of our product
to the customer while our current alkaline marketing strategy,
“Same Performance, Better Price,” introduced in Fiscal 2006,
was designed to highlight the fact that battery performance tests
show that our alkaline batteries perform as well as the leading
alkaline battery brands and are offered at better prices. We expe-
rienced decreased battery sales as a result of the change in pack-
aging 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 pric-
ing and package sizes. During this transition, some of the existing
inventories of “50% More” alkaline battery products were heavily
promoted to sell and others were sold to discounters at prices
lower than the prices we would have typically received in the
marketplace. The decline in consolidated electric shaving and
grooming sales was primarily attributable to a $28 million
decline in North America sales driven by lower than expected
sales of Remington men’s shaving products, primarily during the
2006 Father’s Day holiday and 2005 Christmas holiday. These
declines were partly offset by a $14 million increase in sales of
Remington branded products in Latin America as we continued
the introduction of Remington branded products throughout
that region.
During the fourth quarter of Fiscal 2006, the North American
consumer battery business showed some signs of improvement.
Fourth quarter Fiscal 2006 battery sales in North America
increased by approximately 16% over the prior year’s fourth
quarter due primarily to the nonreoccurrence of certain retailer
inventory reductions which began in the fourth quarter of 2005.
In the fourth quarter of Fiscal 2006, we benefi ted from strong
customer acceptance of our new Rayovac marketing campaign
referenced above.
Gross Profi t. Gross profi t margin for Fiscal 2006 decreased
slightly to 37.3%, compared to our Fiscal 2005 gross profi t margin
of 38.3%. Our Fiscal 2006 gross profi t margin was impacted by
approximately $22 million of restructuring and related charges,
primarily related to a series of initiatives in Europe to reduce oper-
ating costs and rationalize our manufacturing structure as well as
the costs associated with our integration of United and Tetra. Our
Fiscal 2005 gross margin was impacted by charges recognized in
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, this inven-
tory was revalued as part of the purchase price allocation.
For Fiscal 2005, this accounting treatment resulted in an
increase in acquired inventory of $8 million and $29 million for
Tetra and United, respectively. These inventory valuation adjust-
ments were non-cash charges. We also incurred approximately
$10 million of restructuring and related charges during Fiscal
2005 related to the closing of a zinc carbon manufacturing facil-
ity in Breitenbach, France. See “Restructuring and Related
Charges” below as well as Note 16, Restructuring and Related
Charges, of Notes to Consolidated Financial Statements included
in this Annual Report on Form 10-K for additional information
regarding our restructuring and related charges.
In addition to the items discussed above, our gross profi t mar-
gin in Fiscal 2006 included a seven-month benefi t from higher
margin Tetra pet product sales during the comparable months
not owned in Fiscal 2005. This benefi t, however, was more than
offset by declines in gross margins on our consumer battery, elec-
tric shaving and grooming and electric personal care products.
The decline in consumer battery gross margins was driven by
higher raw material costs, primarily zinc, reduced utilization of
our manufacturing facilities due to volume declines and the previ-
ously mentioned shift in European product mix and distribution
channels. Higher prices of zinc negatively impacted Fiscal 2006
gross profi t by approximately $18 million. Electric shaving and
grooming and electric personal care margins declined primarily
as a result of consumers purchasing lower-margin products.
Operating (Loss) Income. An operating loss of approximately
$319 million was recognized in Fiscal 2006 as compared to oper-
ating income in Fiscal 2005 of $154 million. The Fiscal 2006
operating loss is directly attributable to a non-cash pretax impair-
ment charge of approximately $433 million for certain trade
name intangible assets and goodwill written down to fair value in
accordance with SFAS 142. See “Goodwill and Intangibles
Impairment” below for further details on this impairment charge.
Also included in operating expenses in Fiscal 2006 were approxi-
mately $12 million of restructuring and related charges primarily
related to a series of initiatives in Europe to reduce operating costs
and rationalize our manufacturing structure as well as the costs
associated with our integration of United and Tetra. Included in
operating expenses in Fiscal 2005 were approximately $6 million
of restructuring and related charges primarily incurred in con-
nection with United integration initiatives. See “Restructuring
and Related Charges” below as well as Note 16, Restructuring and
Related Charges, of Notes to Consolidated Financial Statements
included in this Annual Report on form 10-K for additional infor-
mation regarding our restructuring and related charges. In addi-
tion to the items discussed above, operating expenses as a
percentage of net sales in Fiscal 2006 increased due to increased
distribution costs which totaled approximately $216 million, or
8.5% of sales, in Fiscal 2006 versus $162 million, or 7.0% of sales,
in the prior year. Fiscal 2006 distribution costs were well above
historical levels as we incurred increased fuel costs and above
normal shipping and delivery costs in North America in our
Global Batteries & Personal Care and Global Pet Supplies seg-
ment during the peak selling season to meet customer needs. All
22 SPECTRUM BRANDS | 2007 ANNUAL REPORT