Rayovac 2010 Annual Report Download - page 112

SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The four-column consolidated statement of financial position as of August 30, 2009 reflects the
implementation of the Plan as if the Plan had been effective on August 30, 2009. Reorganization adjustments
have been recorded within the consolidated statement of financial position as of August 30, 2009 to reflect
effects of the Plan, including the discharge of Liabilities subject to compromise and the adoption of fresh-start
reporting in accordance with ASC 852. The Bankruptcy Court confirmed the Plan based upon a reorganization
value of the Company between $2,200,000 and $2,400,000, which was estimated using various valuation
methods including: (i) publicly traded company analysis, (ii) discounted cash flow analysis; and (iii) a review
and analysis of several recent transactions of companies in similar industries to the Company. These three
valuation methods were equally weighted in determining the final range of reorganization value as confirmed by
the Bankruptcy Court. Based upon the factors used in determining the range of reorganization value, the
Company concluded that $2,275,000 should be used for fresh-start reporting purposes as it most closely
approximated fair value.
The basis of the discounted cash flow analysis used in developing the reorganization value was based on
Company prepared projections which included a variety of estimates and assumptions. While the Company
considers such estimates and assumptions reasonable, they are inherently subject to significant business,
economic and competitive uncertainties, many of which are beyond the Company’s control and, therefore, may
not be realized. Changes in these estimates and assumptions may have had a significant effect on the
determination of the Company’s reorganization value. The assumptions used in the calculations for the
discounted cash flow analysis included projected revenue, costs, and cash flows, for the fiscal years ending
September 30, 2009, 2010, 2011, 2012 and 2013 and represented the Company’s best estimates at the time the
analysis was prepared. The Company’s estimates implicit in the cash flow analysis included net sales growth of
approximately 1.5% for the fiscal year ending September 30, 2010 and 4.0% per year for each of the fiscal years
ending September 30, 2011, 2012 and 2013. In addition, selling, general and administrative expenses, excluding
depreciation and amortization, were projected to grow at rates relative to net sales, however, certain expense
categories for each of the fiscal years ending September 30, 2010, 2011, 2012 and 2013 were reduced for the
projected impact of various cost reduction initiatives implemented by the Company during Fiscal 2009 which
included lower trade spending, salary freezes, reduced marketing expenses, furloughs, suspension of the
Company’s match to its 401(k) and reductions in salaries of certain members of management. The analysis also
included anticipated levels of reinvestment in the Company’s operations through capital expenditures of
approximately $25,000 per year. The Company did not include in its estimates the potential effects of litigation,
either on the Company or the industry. The foregoing estimates and assumptions are inherently subject to
uncertainties and contingencies beyond the control of the Company. Accordingly, there can be no assurance that
the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary
materially.
The publicly traded company analysis identified a group of comparable companies giving consideration to
lines of business, business risk, scale and capitalization and leverage. This analysis involved the selection of the
appropriate earnings before interest, taxes, depreciation and amortization (“EBITDA”) market multiples by
segment deemed to be the most relevant when analyzing the peer group. A range of valuation multiples was then
identified and applied to the Company’s Fiscal 2009 and Fiscal 2010 projections by segment to determine an
estimate of reorganization values. The market multiple ranges used by segment were as follows: (i) Global
Batteries and Personal Care used a range of 7.0x-8.0x for Fiscal 2009 and 6.5x-7.5x for Fiscal 2010; (ii) Global
Pet Supplies used a range of 7.5x-8.5x for Fiscal 2009 and 7.0x-8.0x for Fiscal 2010; and (iii) the Home and
Garden Business used a range of 9.0x-10.0x for Fiscal 2009 and 8.0x-9.0x for Fiscal 2010. Theses multiples were
based on estimated EBITDA adjusted for certain non-recurring initiatives, as mentioned above.
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