Rayovac 2011 Annual Report Download - page 152

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SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
(In thousands, except per share amounts)
• 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. 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. 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 is 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
were selected based on consideration of several factors, including prior transactions of Russell
Hobbs related trademarks and trade names, other similar trademark licensing and transaction
agreements and the relative profitability and perceived contribution of the trademarks and trade
names. Royalty rates used in the determination of the fair values of trade names and trademarks
ranged from 2.0% to 5.5% of expected net sales related to the respective trade names and
trademarks. The Company anticipates using the majority of the trade names and trademarks for an
indefinite period as demonstrated by the sustained use of each subject trademark. In estimating the
fair value of the trademarks and trade names, Net sales for significant trade names and trademarks
were estimated to grow at a rate of 1%-14% annually with a terminal year growth rate of 3%.
Income taxes were estimated in a range of 30%-38% and amounts were discounted using rates
between 15.5%-16.5%. Trade name and trademarks were valued at $170,930 under this approach.
• The Company valued a trade name license agreement using the income approach, specifically the
multi-period excess earnings method. In determining the fair value of the trade name license
agreement, 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 trade name license agreement
after deducting contributory asset charges. The incremental after-tax cash flows attributable to the
subject intangible asset are then discounted to their present value. In estimating the fair value of
the trade name license agreement, net sales were estimated to grow at a rate of (3)%-1% annually.
The Company assumed a twelve year useful life of the trade name license agreement. Income
taxes were estimated at 37% and amounts were discounted using a rate of 15.5%. The trade name
license agreement was valued at $149,200 under this approach.
• The Company valued technology 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 technology was not owned. Royalty rates were selected
based on consideration of several factors, including prior transactions of Russell Hobbs related
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