Rayovac 2007 Annual Report Download - page 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Spectrum Brands, Inc.
SPECTRUM BRANDS | 2007 ANNUAL REPORT 29
Other Commercial Commitments
The following table summarizes our other commercial commitments as of September 30, 2007, consisting entirely of standby letters
of credit that 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
2008 2009 2010 2011 2012 Thereafter Total
Letters of credit $ 40 $ 7 $ – $ – $ – $ – $ 47
Total Other Commercial Commitments $ 40 $ 7 $ – $ – $ – $ – $ 47
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
policies are critical to an understanding of our fi nancial state-
ments. 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 to be held and used, 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 circumstances in the business or exter-
nal factors warrants a review. Circumstances such as the discon-
tinuation 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 impairment
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’s judgment with respect to revenue and
expense growth rates, changes in working capital and selection
of an appropriate discount rate, as applicable. The use of differ-
ent assumptions would increase or decrease discounted future
operating cash fl ows or earnings projections and could, there-
fore, change impairment determinations.
SFAS 142 requires companies to test goodwill and indefi nite-
lived intangible assets for impairment annually, or more often if
an event or circumstance indicates that an impairment loss may
have been incurred. In Fiscal 2007 and 2006, we, with the assis-
tance of independent third-party valuation specialists, tested
our goodwill and indefi nite-lived intangible assets. As a result of
this testing, we recorded a non-cash pretax impairment charge
of $238 million and $433 million in Fiscal 2007 and 2006,
respectively. The $238 million impairment charge incurred in
Fiscal 2007 refl ects goodwill associated with our North America
reporting unit, which is part of our Global Batteries & Personal
Care reportable segment, coupled with an impairment of trade
name intangible assets primarily associated with our Global
Batteries & Personal Care reportable segment. The $433-million,
non-cash pretax impairment charge incurred in Fiscal 2006
refl ects impaired goodwill of $353 million of which $235 mil-
lion relates to our Global Pet Supplies reportable segment and
$118 million relates to our Latin America reporting unit, which
is included as part of our Global Batteries & Personal Care
reportable segment. The remaining charge of $80 million relates
to impaired trade name intangible assets of which $35 million is
associated with our Global Pet Supplies business segment and
$45 million is associated with our Latin America and Europe/
ROW reporting units, both of which are part of our Global Bat-
teries & Personal Care reportable segment. Future cash expendi-
tures will not result from these impairment charges. There were
no impairment charges recognized in Fiscal 2005 as a result of
our testing.
We used a discounted estimated future cash fl ows methodol-
ogy to determine the fair value of our reporting units (goodwill).
Fair value of indefi nite-lived intangible assets, which represent
trade names, was determined using a relief from royalty meth-
odology. Assumptions critical to our fair value estimates were:
(i) the present value factors used in determining 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 average revenue
growth rates used in the reporting unit and trade name models;
and (iv) projected long-term growth rates used in the derivation
of terminal year values. We also tested fair value for reasonable-
ness by comparison to the market capitalization of the Company.
These and other assumptions are impacted by economic condi-
tions and expectations of management and will change in the
future based on period-specifi c facts and circumstances.
As previously discussed, we have designated our Home and
Garden Business as discontinued operations. In accordance with
SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (SFAS 144) long-lived assets to be disposed of
by sale are recorded at the lower of their carrying value or fair
value less costs to sell. During Fiscal 2007, we recorded a non-
cash pretax charge of $169 million in discontinued operations to
reduce the carrying value of certain assets, principally consisting
of goodwill and intangible assets, related to the Home and Garden