Rayovac 2007 Annual Report Download - page 26

24 SPECTRUM BRANDS | 2007 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Spectrum Brands, Inc.
margins as compared to Fiscal 2005. As a result of our ongoing
concern regarding the European battery market, we announced a
series of initiatives in 2006 to reduce operating costs and ratio-
nalize our operating structure in Europe.
Segment assets at September 30, 2006 increased to $1,549 mil-
lion from $1,504 million at September 30, 2005. The increase is
primarily attributable to the impairment of goodwill and certain
trade name intangible assets in Fiscal 2006. See “Goodwill and
Intangibles Impairment” below as well as Note 6, Intangible
Assets, of Notes to Consolidated Financial Statements included
in this Annual Report on Form 10-K for additional information
regarding this impairment charge. Goodwill and intangible
assets at September 30, 2006 total approximately $668 million
and primarily relate to the ROV Ltd., VARTA AG, Remington
Products and Microlite acquisitions. Included in long-term lia-
bilities assumed in connection with the acquisition of Microlite
is a provision for “presumed” tax credits applied to the Brazilian
excise tax on Manufactured Products, or “IPI taxes”. Although a
previous ruling by the Brazilian Federal Supreme Court had
been issued in favor of a specifi c Brazilian taxpayer with similar
tax credits, on February 15, 2007 the Brazilian Federal Supreme
Court ruled against certain Brazilian taxpayers with respect to
the legality and constitutionality of the IPI “presumed” tax cred-
its. This decision is applicable to all similarly situated taxpayers.
At September 30, 2006, these amounts totaled approximately
$39 million and are included in Other long-term liabilities in
the Consolidated Balance Sheets included in this Annual Report
on Form 10-K.
Global Pet Supplies
(in millions) 2006 2005
Net sales to external customers $ 543 $ 286
Segment profit $ 72 $ 23
Segment profit as a % of net sales 13.3% 7.9%
Assets as of September 30, $ 1,171 $ 791
Segment net sales to external customers in Fiscal 2006 were
$543 million. This represents a $257 million increase from Fiscal
2005. This increase is due to the inclusion of the acquired busi-
nesses of Tetra, the United Pet Group division of United and
Jungle Labs for all of Fiscal 2006, versus only a portion of Fiscal
2005. These acquired businesses contributed $243 million to net
sales in Fiscal 2006 in the comparable periods during which they
were not owned in Fiscal 2005. Comparing the period during
Fiscal 2005 when these acquired businesses were owned to the
same time period in Fiscal 2006, net sales increased $13 million.
This increase is primarily the result of strong growth of 6% in
specialty pet products sales, while aquatic product sales were
approximately the same as in Fiscal 2005. During Fiscal 2006,
we experienced growth in sales of pet supplies products in North
America and Europe, offset by weakness in Japan. Unfavorable
foreign currency exchange translation impacted sales by approxi-
mately $3 million.
Segment profi tability in Fiscal 2006 was $72 million, or 13.3%
of net sales. Our profi tability in Fiscal 2005 was $23 million, or
7.9% of net sales. The aforementioned inventory purchase account-
ing charge in Fiscal 2005, $14 million of which related to Global
Pet Supplies, reduced Fiscal 2005 segment profi t as a percent of
net sales by approximately 4.9%. Operating expenses as a percent-
age of net sales increased to approximately 30.7% in Fiscal 2006
from 28.4% in Fiscal 2005, due primarily to increased distribution
costs. Distribution costs increased as we incurred increased fuel
costs and other unexpected costs to meet customer needs.
Segment assets at September 30, 2006 increased to $1,171 mil-
lion from $791 million at September 30, 2005. The increase in
assets is primarily attributable to allocations of goodwill resulting
from the acquisition of United, partly offset by the impairment of
goodwill and certain trade name intangible assets in Fiscal 2006.
See Note 2(i), Signifi cant Accounting Policies and Practices –
Intangible Assets, of Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K for additional
information on the impairment. Goodwill and intangible assets
represent $930 million of total assets and arose from our acqui-
sition of the United Pet Group division of United as part of the
United acquisition on February 7, 2005 and the acquisition of
Tetra on April 29, 2005. The purchase price allocations for the
United and Tetra acquisitions were fi nalized in Fiscal 2006. See
Note 17, Acquisitions, of Notes to Consolidated Financial State-
ments included in this Annual Report on Form 10-K for addi-
tional information on these acquisitions.
Corporate Expense. Our corporate expenses in Fiscal 2006
increased to $41 million from $28 million in the prior fi scal year.
The increase was primarily due to higher amortization of
unearned restricted stock during Fiscal 2006. Our corporate
expense as a percentage of net sales in Fiscal 2006 increased to
2.0% from 1.6% in Fiscal 2005.
Restructuring and Related Charges. We incurred approxi-
mately $12 million and $7 million of pretax restructuring and
related charges during Fiscal 2006 and Fiscal 2005, respectively,
in connection with the integration of United and Tetra. In Fiscal
2005, we also announced the closure of a zinc carbon manufac-
turing facility in France. In connection with this initiative we
incurred $10 million of pretax restructuring and related charges
in Fiscal 2005.
As a result of the European Initiatives we incurred approxi-
mately $21 million of pretax restructuring and related charges
during Fiscal 2006.