Rayovac 2010 Annual Report Download - page 174

SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Certain estimated values are not yet finalized and are subject to change, which could be significant. The
Company will finalize the amounts recognized as it obtains the information necessary to complete its analysis
during the measurement period. The following items are provisional and subject to change:
• amounts for legal contingencies, pending the finalization of the Company’s examination and evaluation
of the portfolio of filed cases;
• amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net
operating loss carryforwards inclusive of associated limitations; and
• the final allocation of Goodwill.
ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at
their fair values as of the acquisition date. Accordingly, the Company performed a preliminary valuation of the
assets and liabilities of Russell Hobbs at June 16, 2010. Significant adjustments as a result of that preliminary
valuation are summarized as followed:
• Inventories—An adjustment of $1,721 was recorded to adjust inventory to fair value. Finished goods
were valued at estimated selling prices less the sum of costs of disposal and a reasonable profit
allowance for the selling effort.
• Deferred tax liabilities, net—An adjustment of $43,086 was recorded to adjust deferred taxes for the
preliminary fair value allocations.
• Property, plant and equipment, net—An adjustment of $(455) was recorded to adjust the net book value
of property, plant and equipment to fair value giving consideration to their highest and best use. Key
assumptions used in the valuation of the Company’s property, plant and equipment were based on the
cost approach.
• Certain indefinite-lived intangible assets were valued using a relief from royalty methodology.
Customer relationships and certain definite-lived intangible assets were valued using a multi-period
excess earnings method. Certain intangible assets are subject to sensitive business factors of which
only a portion are within control of the Company’s management. The total fair value of indefinite and
definite lived intangibles was $363,327 as of June 16, 2010. A summary of the significant key inputs
were as follows:
• The Company valued customer relationships using the income approach, specifically the multi-
period excess earnings method. In determining the fair value of the customer relationship, the
multi-period excess earnings approach values the intangible asset at the present value of the
incremental after-tax cash flows attributable only to the customer relationship after deducting
contributory asset charges. The incremental after-tax cash flows attributable to the subject
intangible asset are then discounted to their present value. Only expected sales from current
customers were used which included an expected growth rate of 3%. The Company assumed a
customer retention rate of approximately 93% which was supported by historical retention rates.
Income taxes were estimated at 36% and amounts were discounted using a rate of 15.5%. The
customer relationships were valued at $38,000 under this approach.
• The Company valued trade names and trademarks using the income approach, specifically the
relief from royalty method. Under this method, the asset value was determined by estimating the
hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates
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