SB-07.01.2012-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                    
Commission File Number 001-13615 
Spectrum Brands, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
22-2423556
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
601 Rayovac Drive
Madison, Wisconsin
 
53711
(Address of principal executive offices)
 
(Zip Code)
(608) 275-3340
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report.) 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ý    No  ¨


Table of Contents

SPECTRUM BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED July 1, 2012
INDEX
 
Page
 
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 6.

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Financial Position
July 1, 2012 and September 30, 2011
(Unaudited)
(Amounts in thousands, except per share figures)
 
July 1,
2012
 
September 30,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
62,299

 
$
142,414

Receivables:
 
 
 
Trade accounts receivable, net of allowances of $14,288 and $14,128, respectively
342,350

 
356,605

Other
46,960

 
33,235

Inventories
552,515

 
434,630

Deferred income taxes
26,359

 
28,170

Prepaid expenses and other
55,487

 
48,792

Total current assets
1,085,970

 
1,043,846

Property, plant and equipment, net of accumulated depreciation of $127,271 and $107,357, respectively
208,551

 
206,389

Deferred charges and other
34,510

 
36,824

Goodwill
688,045

 
610,338

Intangible assets, net
1,716,977

 
1,683,909

Debt issuance costs
43,901

 
40,957

Total assets
$
3,777,954

 
$
3,622,263

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
28,251

 
$
41,090

Accounts payable
251,135

 
323,171

Accrued liabilities:
 
 
 
Wages and benefits
67,175

 
70,945

Income taxes payable
26,102

 
31,606

Accrued interest
12,546

 
30,467

Other
104,624

 
134,565

Total current liabilities
489,833

 
631,844

Long-term debt, net of current maturities
1,798,814

 
1,535,522

Employee benefit obligations, net of current portion
74,433

 
83,802

Deferred income taxes
368,100

 
337,336

Other
29,887

 
44,637

Total liabilities
2,761,067

 
2,633,141

Commitments and contingencies
 
 
 
Shareholders’ equity:
 
 
 
Other capital
1,350,174

 
1,338,734

Accumulated deficit
(291,597
)
 
(335,166
)
Accumulated other comprehensive loss
(41,690
)
 
(14,446
)
Total shareholders’ equity
1,016,887

 
989,122

Total liabilities and shareholders’ equity
$
3,777,954

 
$
3,622,263


See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).

3

Table of Contents

SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Operations
For the three and nine month periods ended July 1, 2012 and July 3, 2011
(Unaudited)
(Amounts in thousands, except per share figures)
 
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
2012
 
2011
 
2012
 
2011
Net sales
$
824,803

 
$
804,635

 
$
2,419,859

 
$
2,359,586

Cost of goods sold
531,069

 
508,656

 
1,575,803

 
1,506,283

Restructuring and related charges
2,038

 
2,285

 
8,303

 
4,932

Gross profit
291,696

 
293,694

 
835,753

 
848,371

Selling
129,851

 
133,187

 
391,522

 
403,768

General and administrative
50,726

 
60,006

 
157,493

 
179,099

Research and development
8,597

 
9,192

 
23,790

 
25,557

Acquisition and integration related charges
5,274

 
7,444

 
20,625

 
31,487

Restructuring and related charges
1,858

 
4,781

 
7,587

 
12,846

Total operating expenses
196,306

 
214,610

 
601,017

 
652,757

Operating income
95,390

 
79,084

 
234,736

 
195,614

Interest expense
39,686

 
40,398

 
150,169

 
165,923

Other expense, net
2,224

 
770

 
2,225

 
1,372

Income from continuing operations before income taxes
53,480

 
37,916

 
82,342

 
28,319

Income tax (benefit) expense
(5,371
)
 
8,995

 
38,772

 
69,169

Net income (loss)
$
58,851

 
$
28,921

 
$
43,570

 
$
(40,850
)
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).

4

Table of Contents

SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended July 1, 2012 and July 3, 2011
(Unaudited)
(Amounts in thousands)
 
NINE MONTHS ENDED
 
July 1, 2012
 
July 3, 2011
Cash flows from operating activities:
 
 
 
Net income (loss)
$
43,570

 
$
(40,850
)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
 
 
 
Depreciation
28,708

 
34,719

Amortization of intangibles
46,550

 
43,073

Amortization of unearned restricted stock compensation
15,436

 
22,515

Amortization of debt issuance costs
5,273

 
8,745

Payments of acquisition related expenses for Russell Hobbs

 
(3,637
)
Non-cash debt accretion
169

 
3,622

Write off of unamortized (premium) / discount on retired debt
(466
)
 
8,950

Write off of debt issuance costs
2,945

 
15,420

Other non-cash adjustments
3,021

 
8,312

Net changes in assets and liabilities
(217,070
)
 
(102,226
)
Net cash used by operating activities
(71,864
)
 
(1,357
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(33,117
)
 
(27,433
)
Acquisition of Black Flag
(43,750
)
 

Acquisition of FURminator, net of cash acquired
(139,390
)
 

Acquisition Seed Resources, net of cash acquired

 
(11,053
)
Proceeds from sale of property, plant and equipment
418

 
188

Proceeds from sale of assets previously held for sale

 
6,997

Other investing activities
(2,045
)
 
(1,530
)
Net cash used by investing activities
(217,884
)
 
(32,831
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of 6.75% Notes
300,000

 

Payment of 12% Notes, including tender and call premium
(270,431
)
 

Proceeds from issuance of 9.5% Notes, including premium
217,000

 

Payment of senior credit facilities, excluding ABL revolving credit facility
(4,091
)
 
(93,400
)
Prepayment penalty of term loan facility

 
(7,500
)
Debt issuance costs
(11,163
)
 
(10,769
)
Other debt financing, net
6,192

 
15,349

Reduction of other debt
(27,992
)
 
(905
)
ABL revolving credit facility, net
2,500

 
55,000

Treasury stock purchases

 
(3,409
)
Other financing activities
(953
)
 

Net cash provided (used) by financing activities
211,062

 
(45,634
)
Effect of exchange rate changes on cash and cash equivalents
(1,429
)
 
(2,414
)
Net decrease in cash and cash equivalents
(80,115
)
 
(82,236
)
Cash and cash equivalents, beginning of period
142,414

 
170,614

Cash and cash equivalents, end of period
$
62,299

 
$
88,378

See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).

5

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in thousands, except per share figures)

  
1
DESCRIPTION OF BUSINESS
Spectrum Brands, Inc., a Delaware corporation (“Spectrum Brands” or the “Company”), is a global branded consumer products company. Spectrum Brands Holdings, Inc. (“SB Holdings”) was created in connection with the combination of Spectrum Brands and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company, to form a new combined company (the “Merger”). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs became wholly-owned subsidiaries of SB Holdings. Russell Hobbs was subsequently merged into Spectrum Brands. SB Holdings trades on the New York Stock Exchange under the symbol “SPB.”
Unless the context indicates otherwise, the term “Company” is used to refer to both Spectrum Brands and its subsidiaries prior to the Merger and subsequent to the Merger.
The Company’s operations include the worldwide manufacturing and marketing of alkaline, zinc carbon and hearing aid batteries, as well as aquariums and aquatic health supplies and the designing and marketing of rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. The Company’s operations also include the manufacturing and marketing of specialty pet supplies. The Company also manufactures and markets herbicides, insecticides and insect repellents in North America. The Company also designs, markets and distributes a broad range of branded small appliances and personal care products. The Company’s operations utilize manufacturing and product development facilities located in the United States (“U.S.”), Europe, Latin America and Asia.
The Company sells its products in approximately 120 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers and enjoys name recognition in its markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Tetra, 8-in-1, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator and various other brands.
The Company’s global branded consumer products have positions in seven major product categories: consumer batteries; small appliances; pet supplies; electric shaving and grooming; electric personal care; portable lighting; and home and garden controls. The Company’s chief operating decision-maker manages the businesses of the Company in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of the Company’s worldwide battery, electric shaving and grooming, electric personal care, portable lighting and small appliances, primarily in the kitchen and home product categories (“Global Batteries & Appliances”); (ii) Global Pet Supplies, which consists of the Company’s worldwide pet supplies business (“Global Pet Supplies”); and (iii) Home and Garden Business, which consists of the Company’s home and garden and insect control business (the “Home and Garden Business”). Management reviews the performance of the Company based on these segments. For information pertaining to our business segments, see Note 11, “Segment Results”.
2
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The condensed consolidated financial statements include the accounts of SB Holdings and its subsidiaries and are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). All intercompany transactions have been eliminated.
These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position of the Company at July 1, 2012, the results of operations for the three and nine month periods ended July 1, 2012 and July 3, 2011 and the cash flows for the nine month periods ended July 1, 2012 and July 3, 2011. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
Use of Estimates: The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
Intangible Assets: Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination.

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Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

Customer relationships and proprietary technology intangibles are amortized, using the straight-line method, over their estimated useful lives of approximately 4 to 20 years. Excess of cost over fair value of net assets acquired (goodwill) and trade name intangibles are not amortized. Goodwill is tested for impairment at least annually at the reporting unit level, with such groupings being consistent with the Company’s reportable segments. If an impairment is indicated, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Trade name intangibles are tested for impairment at least annually by comparing the fair value with the carrying value. Any excess of carrying value over fair value is recognized as an impairment loss in income from operations. Accounting Standards Codification (“ASC”) Topic 350: “Intangibles-Goodwill and Other,” requires that goodwill and indefinite-lived intangible assets be tested for impairment annually, or more often if an event or circumstance indicates that an impairment loss may have been incurred.
The Company’s annual impairment testing is completed at the August financial period end. Management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts may signal that an asset has become impaired.
Shipping and Handling Costs: The Company incurred shipping and handling costs of $48,797 and $148,383 for the three and nine month periods ended July 1, 2012, respectively, and $51,172 and $150,140 for the three and nine month periods ended July 3, 2011, respectively. These costs are included in Selling expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited). Shipping and handling costs include costs incurred with third-party carriers to transport products to customers as well as salaries and overhead costs related to activities to prepare the Company’s products for shipment from its distribution facilities.
Concentrations of Credit Risk: Trade receivables subject the Company to credit risk. Trade accounts receivable are carried at net realizable value. The Company extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history, and generally does not require collateral. The Company monitors its customers’ credit and financial condition based on changing economic conditions and makes adjustments to credit policies as required. Provision for losses on uncollectible trade receivables are determined based on ongoing evaluations of the Company’s receivables, principally on the basis of historical collection experience and evaluations of the risks of nonpayment for a given customer.
The Company has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represented approximately 23% of the Company’s Net sales during both the three and nine month periods ended July 1, 2012. This customer represented approximately 25% and 23% of the Company’s Net sales during the three and nine month periods ended July 3, 2011, respectively. This customer also represented approximately 14% and 16% of the Company’s Trade accounts receivable, net at July 1, 2012 and September 30, 2011, respectively.
Approximately 40% and 44% of the Company’s Net sales during the three and nine month periods ended both July 1, 2012, and July 3, 2011, respectively, occurred outside the U.S. These sales and related receivables are subject to varying degrees of credit, currency, political and economic risk. The Company monitors these risks and makes appropriate provisions for collectibility based on an assessment of the risks present.
Stock-Based Compensation: The Company measures the cost of its stock-based compensation plans based on the fair value of its employee stock awards and recognizes these costs over the requisite service period of the awards.
In September 2009, the Company’s board of directors (the “Board”) adopted the 2009 Spectrum Brands Inc. Incentive Plan (the “2009 Plan”). In conjunction with the Merger, the 2009 Plan was assumed by SB Holdings. Up to 3,333 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2009 Plan. After October 21, 2010, no further awards may be made under the 2009 Plan (as described in further detail below) as the Spectrum Brands Holdings, Inc. 2011 Omnibus Equity Award Plan (the “2011 Plan”) was approved by the shareholders of the Company on March 1, 2011.
In conjunction with the Merger, the Company assumed the Spectrum Brands Holdings, Inc. 2007 Omnibus Equity Award Plan (formerly known as the Russell Hobbs, Inc. 2007 Omnibus Equity Award Plan, as amended on June 24, 2008) (the “2007 RH Plan”). Up to 600 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2007 RH Plan. After October 21, 2010, no further awards may be made under the 2007 RH Plan (as described in further detail below) as the 2011 Plan was approved by the shareholders of the Company on March 1, 2011.
On October 21, 2010, the Board adopted the 2011 Plan, which received shareholder approval at the Annual Meeting of the shareholders of the Company held on March 1, 2011. After such shareholder approval, no further awards will be granted under the 2009 Plan and the 2007 RH Plan. Up to 4,626 shares of common stock of the Company, net of cancellations, may be

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Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

issued under the 2011 Plan.
 
Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three and nine month periods ended July 1, 2012 was $4,361, or $2,834, net of taxes, and $15,436, or $10,034, net of taxes, respectively. Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three and nine month periods ended July 3, 2011 was $8,408, or $5,465, net of taxes, and $22,515, or $14,635, net of taxes, respectively.
The Company granted approximately 42 and 741 restricted stock units during the three and nine month periods ended July 1, 2012, respectively. Of these grants, 42 restricted stock units are time-based and vest over a two year period and the remaining 699 restricted stock units are performance and time-based and vest over a two year period. The total market value of the restricted stock units on the dates of the grants was approximately $20,293.
The Company granted approximately 1,565 restricted stock units during the nine month period ended July 3, 2011. Of these 1,565 grants, 18 restricted stock units are time-based and vest over a three year period. The remaining 1,547 restricted stock units are performance and time-based with 665 units vesting over a two year period and 882 units vesting over a three year period. The total market value of the restricted stock units on the dates of the grants was approximately $45,614.
The fair value of restricted stock awards and restricted stock units is determined based on the market price of the Company’s shares of common stock on the grant date. A summary of the status of the Company’s non-vested restricted stock awards and restricted stock units as of July 1, 2012 is as follows:
 
Restricted Stock Awards
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Fair Value at
Grant Date
Restricted stock awards at September 30, 2011
123

 
$
24.20

 
$
2,977

Vested
(110
)
 
23.75

 
(2,613
)
Restricted stock awards at July 1, 2012
13

 
$
28.00

 
$
364

 
 
 
 
 
 
Restricted Stock Units
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Fair Value
at Grant
Date
Restricted stock units at September 30, 2011
1,629

 
$
29.00

 
$
47,236

Granted
741

 
27.39

 
20,293

Forfeited
(53
)
 
28.08

 
(1,488
)
Vested
(381
)
 
28.75

 
(10,953
)
Restricted stock units at July 1, 2012
1,936

 
$
28.45

 
$
55,088

Acquisition and Integration Related Charges: Acquisition and integration related charges reflected in Operating expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited) include, but are not limited to, transaction costs such as banking, legal, accounting and other professional fees directly related to acquisitions, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination expenses associated with mergers and acquisitions.
The following table summarizes acquisition and integration related charges incurred by the Company during the three and nine month periods ended July 1, 2012 and July 3, 2011:
 

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Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Russell Hobbs
 
 
 
 
 
 
 
Integration costs
$
1,573

 
$
6,718

 
$
6,766

 
$
22,088

Employee termination charges
840

 
310

 
3,356

 
5,206

Legal and professional fees
587

 
360

 
1,508

 
3,949

Merger related Acquisition and integration related charges
$
3,000

 
$
7,388

 
$
11,630

 
$
31,243

FURminator
1,738

 

 
6,337

 

Black Flag
95

 

 
1,912

 

Other
441

 
56

 
746

 
244

Total Acquisition and integration related charges
$
5,274

 
$
7,444

 
$
20,625

 
$
31,487

 

3
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and the components of other comprehensive income (loss), net of tax, for the three and nine month periods ended July 1, 2012 and July 3, 2011 are as follows:

 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Net income (loss)
$
58,851

 
$
28,921

 
$
43,570

 
$
(40,850
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation
(34,148
)
 
13,139

 
(30,538
)
 
33,009

Valuation allowance adjustments
465

 
(216
)
 
214

 
860

Pension liability adjustments
422

 

 
953

 

Net unrealized gain (loss) on derivative instruments
1,010

 
(653
)
 
2,127

 
(3,718
)
Net change to derive comprehensive (loss) income for the period
(32,251
)
 
12,270

 
(27,244
)
 
30,151

Comprehensive income (loss)
$
26,600

 
$
41,191

 
$
16,326

 
$
(10,699
)
Net gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated in the Accumulated other comprehensive income (“AOCI”) section of Shareholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature.
The changes in accumulated foreign currency translation for the three and nine month periods ended July 1, 2012 and July 3, 2011 were primarily attributable to the impact of translation of the net assets of the Company’s European and Latin American operations, which primarily have functional currencies in Euros, Pounds Sterling and Brazilian Real.
4
INVENTORIES
Inventories for the Company, which are stated at the lower of cost or market, consist of the following:
 
July 1,
2012
 
September 30, 2011
Raw materials
$
78,116

 
$
59,928

Work-in-process
29,672

 
25,465

Finished goods
444,727

 
349,237

 
$
552,515

 
$
434,630

5
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets of the Company consist of the following:
 

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Global Batteries &
Appliances
 
Global Pet
Supplies
 
Home and
Garden
Business
 
Total
Goodwill:
 
 
 
 
 
 
 
Balance at September 30, 2011
$
268,148

 
$
170,285

 
$
171,905

 
$
610,338

Additions

 
70,023

 
15,852

 
85,875

Effect of translation
(4,089
)
 
(4,079
)
 

 
(8,168
)
Balance at July 1, 2012
$
264,059

 
$
236,229

 
$
187,757

 
$
688,045

Intangible Assets:
 
 
 
 
 
 
 
Trade names Not Subject to Amortization
 
 
 
 
 
 
 
Balance at September 30, 2011
$
545,804

 
$
205,491

 
$
75,500

 
$
826,795

Additions

 
14,000

 
8,000

 
22,000

Effect of translation
(5,216
)
 
(8,125
)
 

 
(13,341
)
Balance at July 1, 2012
$
540,588

 
$
211,366

 
$
83,500

 
$
835,454

Intangible Assets Subject to Amortization
 
 
 
 
 
 
 
Balance at September 30, 2011, net
$
481,473

 
$
219,243

 
$
156,398

 
$
857,114

Additions

 
65,118

 
17,000

 
82,118

Amortization during period
(24,613
)
 
(14,325
)
 
(7,612
)
 
(46,550
)
Effect of translation
(6,500
)
 
(4,659
)
 

 
(11,159
)
Balance at July 1, 2012, net
$
450,360

 
$
265,377

 
$
165,786

 
$
881,523

Total Intangible Assets, net at July 1, 2012
$
990,948

 
$
476,743

 
$
249,286

 
$
1,716,977

Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which were recognized as a result of fresh-start reporting upon the Company’s emergence from bankruptcy during the fiscal year ended September 30, 2009 and through other acquisitions. The useful life of the Company’s intangible assets subject to amortization are 4 to 9 years for technology assets related to the Global Pet Supplies segment, 9 to 17 years for technology assets associated with the Global Batteries & Appliances segment, 15 to 20 years for customer relationships of the Global Batteries & Appliances segment, 20 years for customer relationships of the Home and Garden Business and Global Pet Supplies segments, 12 years for a trade name within the Global Batteries & Appliances segment and 4 years for a trade name within the Home and Garden Business segment.
The carrying value and accumulated amortization for intangible assets subject to amortization are as follows:
 
July 1,
2012
 
September 30,
2011
Technology Assets Subject to Amortization:
 
 
 
Gross balance
$
90,924

 
$
71,805

Accumulated amortization
(20,356
)
 
(13,635
)
Carrying value, net
$
70,568

 
$
58,170

Trade Names Subject to Amortization:
 
 
 
Gross balance
$
149,700

 
$
149,700

Accumulated amortization
(26,108
)
 
(16,320
)
Carrying value, net
$
123,592

 
$
133,380

Customer Relationships Subject to Amortization:
 
 
 
Gross balance
$
789,465

 
$
738,937

Accumulated amortization
(102,102
)
 
(73,373
)
Carrying value, net
$
687,363

 
$
665,564

Amortization expense for the three and nine month periods ended July 1, 2012 and July 3, 2011 is as follows:

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Proprietary technology amortization
$
2,411

 
$
1,649

 
$
6,721

 
$
4,946

Customer relationships amortization
10,181

 
9,650

 
30,041

 
28,708

Trade names amortization
3,509

 
3,140

 
9,788

 
9,419

 
$
16,101

 
$
14,439

 
$
46,550

 
$
43,073

 
The Company estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $62,600 per year.
6
DEBT
Debt consists of the following: 
 
July 1, 2012
 
September 30, 2011
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan, U.S. Dollar, due June 17, 2016
$
521,146

 
5.1
%
 
$
525,237

 
5.1
%
9.5% Notes, due June 15, 2018
950,000

 
9.5
%
 
750,000

 
9.5
%
6.75% Notes, due March 15, 2020
300,000

 
6.8
%
 

 

12% Notes, due August 28, 2019

 

 
245,031

 
12.0
%
ABL Revolving Credit Facility, expiring May 3, 2016
2,500

 
4.0
%
 

 
2.5
%
Other notes and obligations
24,275

 
11.0
%
 
44,333

 
6.5
%
Capitalized lease obligations
25,294

 
6.5
%
 
24,911

 
6.2
%
 
$
1,823,215

 
 
 
$
1,589,512

 
 
Original issuance premiums (discounts) on debt
3,850

 
 
 
(12,900
)
 
 
Less: current maturities
28,251

 
 
 
41,090

 
 
Long-term debt
$
1,798,814

 
 
 
$
1,535,522

 
 
The Company has the following debt instruments outstanding at July 1, 2012: (i) a senior secured term loan (the “Term Loan”) pursuant to a senior credit agreement (the “Senior Credit Agreement”) ; (ii) 9.5% secured notes (the “9.5% Notes”); (iii) 6.75% unsecured notes (the “6.75% Notes”); and (iv) a $300,000 ABL revolving credit facility (the “ABL Revolving Credit Facility”).
Term Loan
On December 15, 2011 and June 14, 2012, the Company amended its Term Loan. As a result, the aggregate incremental amount by which the Company, subject to compliance with financial covenants and certain other conditions, may increase the amount of the commitment under the Term Loan has been increased from $100,000 to $250,000. Certain covenants in respect to indebtedness, liens and interest coverage were also amended to provide for dollar limits more favorable to the Company and, subject to compliance with financial covenants and certain other conditions, to allow for the incurrence of incremental unsecured indebtedness.
The Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on the Company’s ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. Pursuant to a guarantee and collateral agreement, the Company and its domestic subsidiaries have guaranteed the respective obligations under the Term Loan and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.
In connection with the amendments, the Company recorded $236 and $792 of fees in connection with the Term Loan during the three and nine month periods ended July 1, 2012, respectively. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

interest expense over the remaining life of the Term Loan. In connection with the amendments, the Company also recorded cash charges of $30 and $531 as an increase to interest expense during the three and nine month periods ended July 1, 2012, respectively.
9.5% Notes
On November 2, 2011, the Company offered $200,000 aggregate principal amount of 9.5% Notes at a price of 108.5% of the par value; these notes are in addition to the $750,000 aggregate principal amount of 9.5% Notes that were already outstanding. The additional notes are guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries and secured by liens on substantially all of the Company’s and the guarantors assets. The additional notes will vote together with the existing 9.5% Notes.

The indenture governing the 9.5% Notes (the “2018 Indenture”) contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.
In addition, the 2018 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments when due or on acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2018 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other event of default under the 2018 Indenture occurs and is continuing, the trustee for the 2018 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the amounts due under those notes.
The Company recorded $11 and $3,581 of fees in connection with the offering of the 9.5% Notes during the three and nine month periods ended July 1, 2012, respectively. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the 9.5% Notes.
6.75% Notes
On March 15, 2012, the Company offered $300,000 aggregate principal amount of 6.75% Notes at a price of 100% of the par value. The 6.75% Notes are unsecured and guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries.
The indenture governing the 6.75% Notes (the “2020 Indenture”) contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.
In addition, the 2020 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments when due or on acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2020 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 6.75% Notes. If any other event of default under the 2020 Indenture occurs and is continuing, the trustee for the 2020 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 6.75% Notes may declare the acceleration of the amounts due under those notes.
The Company recorded $450 and $6,265 of fees in connection with the offering of the 6.75% Notes during the three and nine month periods ended July 1, 2012, respectively. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the 6.75% Notes.
12% Notes
On March 1, 2012, the Company launched a cash tender offer (the “Tender Offer”) and consent solicitation (the “Consent Solicitation”) with respect to any and all of its outstanding 12% Senior Subordinated Toggle Notes due 2019 (the “12% Notes”). Pursuant to the Consent Solicitation, the Company received consents to the adoption of certain amendments to the

12

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

indenture governing the 12% Notes to, among other things, eliminate substantially all of the restrictive covenants, certain events of default and other related provisions. The terms of the Tender Offer provided that holders of the 12% Notes who tendered their 12% Notes prior to the expiration of a consent solicitation period, which ended March 14, 2012, would receive tender offer consideration and a consent payment. Holders tendering their 12% Notes subsequent to expiration of the consent solicitation period, but prior to the March 28, 2012 expiration of the Tender Offer period, would receive only tender offer consideration. As of the expiration of the consent solicitation period, holders of the 12% Notes had tendered approximately $231,421 of the 12% Notes. Following the expiration of the consent solicitation period and as of the expiration of the Tender Offer period, an additional $88 of the 12% Notes were tendered. Following expiration of the Tender Offer period, the Company paid the trustee principal, prepaid interest and a prepaid call premium sufficient to obtain a notice of satisfaction and discharge (“Satisfaction and Discharge”) from the trustee for the remaining approximately $13,522 of the 12% Notes not tendered. The Company delivered funds sufficient to redeem the 12% Notes on the first redemption date, August 28, 2012 (the “Redemption Date”), and has irrevocably taken all steps on its part necessary to effect such redemption, The trustee under the indenture governing the 12% Notes (the “12% Trustee”) has accepted those funds in trust for the benefit of the holders of the 12% Notes and has acknowledged the Satisfaction and Discharge of the 12% Notes and the indenture governing the 12% Notes.

In connection with the Tender Offer, the Company recorded $23,777 of fees and expenses as a cash charge to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the nine month period ended July 1, 2012. In connection with the Satisfaction and Discharge process, the Company recorded cash charges of $1,623 to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the nine month period ended July 1, 2012. In addition, $2,097 of debt issuance costs and unamortized premium related to the 12% Notes were written off as a non-cash charge to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the nine month period ended July 1, 2012.
ABL Revolving Credit Facility
On May 24, 2012, the Company amended its ABL Revolving Credit Facility. As a result, the maturity date was extended from April 21, 2016 to May 3, 2016.
The amended facility carries an interest rate at the option of the Company, which is subject to change based on availability under the facility, of either: (a) the base rate plus currently 0.75% per annum or (b) the reserve-adjusted LIBOR rate plus currently 1.75% per annum. No principal amortizations are required with respect to the ABL Revolving Credit Facility. Pursuant to the credit and security agreement, the obligations under the ABL credit agreement are secured by certain current assets of the guarantors, including, but not limited to, deposit accounts, trade receivables and inventory.
The ABL Revolving Credit Facility contains various representations and warranties and covenants, including, without limitation, enhanced collateral reporting and a maximum fixed charge coverage ratio. The ABL Revolving Credit Facility also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.
In connection with the amendment of the ABL Revolving Credit Facility, the Company recorded $525 of fees during the three and nine month period ended July 1, 2012. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the Term Loan. In connection with the amendment, the Company also recorded cash charges of $482 as an increase to interest expense during the three and nine month period ended July 1, 2012. In addition, $382 of debt issuance costs were written off in connection with the amendment as a non-cash charge to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the three and nine month period ended July 1, 2012.
As a result of borrowings and payments under the ABL Revolving Credit Facility, at July 1, 2012, the Company had aggregate borrowing availability of approximately $194,909, net of lender reserves of $27,471 and outstanding letters of credit of $26,730.
7
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency exchange rate and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. Derivative instruments are reported at fair value in the Condensed Consolidated Statements of Financial Position (unaudited). When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses both at the inception and at least quarterly thereafter, whether the financial

13

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.
Fair Value of Derivative Instruments
The Company discloses its derivative instruments and hedging activities in accordance with ASC Topic 815: “Derivatives and Hedging,” (“ASC 815”).
The fair value of the Company’s outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows: 
Asset Derivatives
 
July 1,
2012
 
September 30,
2011
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
Commodity contracts
Receivables—Other
$

 
$
274

Foreign exchange contracts
Receivables—Other
4,959

 
3,189

Foreign exchange contracts
Deferred charges and other
326

 

Total asset derivatives designated as hedging instruments under ASC 815
 
$
5,285

 
$
3,463

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Foreign exchange contracts
Receivables—Other
271

 

Total asset derivatives
 
$
5,556

 
$
3,463

The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
Liability Derivatives
 
July 1,
2012
 
September 30,
2011
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
Interest rate contracts
Accounts payable
$

 
$
1,246

Interest rate contracts
Accrued interest

 
708

Commodity contracts
Accounts payable
1,801

 
1,228

Commodity contracts
Other long term liabilities
892

 
4

Foreign exchange contracts
Accounts payable
753

 
2,698

Total liability derivatives designated as hedging instruments under ASC 815
 
$
3,446

 
$
5,884

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
Foreign exchange contracts
Accounts payable
1,780

 
10,945

Foreign exchange contracts
Other long term liabilities
1,504

 
12,036

Total liability derivatives
 
$
6,730

 
$
28,865

Changes in AOCI from Derivative Instruments
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated

14

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

Statement of Operations (Unaudited) for the three month period ended July 1, 2012, pretax:
Derivatives in ASC 815 Cash Flow
Hedging Relationships
Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective  Portion)
 
Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
 
Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Commodity contracts
$
(2,368
)
 
Cost of goods sold
 
$
(120
)
 
Cost of goods sold
 
$
(6
)
Interest rate contracts

 
Interest expense
 

 
Interest expense
 

Foreign exchange contracts
(395
)
 
Net sales
 
(129
)
 
Net sales
 

Foreign exchange contracts
5,973

 
Cost of goods sold
 
558

 
Cost of goods sold
 

Total
$
3,210

 
 
 
$
309

 
 
 
$
(6
)
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended July 1, 2012, pretax:
 
Derivatives in ASC 815 Cash Flow
Hedging Relationships
Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective  Portion)
 
Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
 
Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Commodity contracts
$
(1,989
)
 
Cost of goods sold
 
$
(675
)
 
Cost of goods sold
 
$
8

Interest rate contracts
15

 
Interest expense
 
(864
)
 
Interest expense
 

Foreign exchange contracts
(61
)
 
Net sales
 
(339
)
 
Net sales
 

Foreign exchange contracts
2,426

 
Cost of goods sold
 
(1,336
)
 
Cost of goods sold
 

Total
$
391

 
 
 
$
(3,214
)
 
 
 
$
8

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended July 3, 2011, pretax:
 
Derivatives in ASC 815 Cash Flow
Hedging Relationships
Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective  Portion)
 
Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
 
Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Commodity contracts
$
(109
)
 
Cost of goods sold
 
$
587

 
Cost of goods sold
 
$
16

Interest rate contracts
(42
)
 
Interest expense
 
(839
)
 
Interest expense
 
(44
)
Foreign exchange contracts
(11
)
 
Net sales
 
105

 
Net sales
 

Foreign exchange contracts
(5,011
)
 
Cost of goods sold
 
(4,346
)
 
Cost of goods sold
 

Total
$
(5,173
)
 
 
 
$
(4,493
)
 
 
 
$
(28
)

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended July 3, 2011, pretax:
 

15

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

Derivatives in ASC 815 Cash Flow
Hedging Relationships
Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective  Portion)
 
Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
 
Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Commodity contracts
$
1,764

 
Cost of goods sold
 
$
1,921

 
Cost of goods sold
 
$
17

Interest rate contracts
(102
)
 
Interest expense
 
(2,527
)
 
Interest expense
 
(294
)
Foreign exchange contracts
216

 
Net sales
 
(102
)
 
Net sales
 

Foreign exchange contracts
(15,801
)
 
Cost of goods sold
 
(8,438
)
 
Cost of goods sold
 

Total
$
(13,923
)
 
 
 
$
(9,146
)
 
 
 
$
(277
)
Other Changes in Fair Value of Derivative Contracts
For derivative instruments that are used to economically hedge the fair value of the Company’s third party and intercompany foreign currency payments, commodity purchases and interest rate payments, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three month periods ended July 1, 2012 and July 3, 2011, the Company recognized the following gains (losses) on these derivative contracts:
 
Derivatives Not Designated as
Hedging Instruments Under ASC 815
Amount of Gain (Loss)
Recognized in
Income on Derivatives
 
Location of Gain or (Loss)
Recognized in
Income on Derivatives
2012
 
2011
 
Foreign exchange contracts
7,941

 
(7,578
)
 
Other expense, net
During the nine month periods ended July 1, 2012 and July 3, 2011, the Company recognized the following gains (losses) on these derivative contracts:
 
Derivatives Not Designated as
Hedging Instruments Under ASC 815
Amount of Gain (Loss)
Recognized in
Income on Derivatives
 
Location of Gain or (Loss)
Recognized in
Income on Derivatives
2012
 
2011
 
Foreign exchange contracts
11,734

 
(17,468
)
 
Other expense, net
 
Credit Risk
The Company is exposed to the risk of default by the counterparties with which it transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. The Company monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are concentrated with certain domestic and foreign financial institution counterparties. The Company considers these exposures when measuring its credit reserve on its derivative assets, which was $26 and $18 at July 1, 2012 and September 30, 2011, respectively.
The Company’s standard contracts do not contain credit risk related contingent features whereby the Company would be required to post additional cash collateral as a result of a credit event. However, the Company is typically required to post collateral in the normal course of business to offset its liability positions. At July 1, 2012 and September 30, 2011, the Company had posted cash collateral of $1,717 and $418, respectively, related to such liability positions. In addition, at July 1, 2012 and September 30, 2011, the Company had posted standby letters of credit of $0 and $2,000, respectively, related to such liability positions. The cash collateral is included in Current Assets—Receivables-Other within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited).
Derivative Financial Instruments
Cash Flow Hedges

16

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At July 1, 2012 the Company did not have any of such interest rate swaps outstanding.
The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to Net sales or purchase price variance in Cost of goods sold. At July 1, 2012 the Company had a series of foreign exchange derivative contracts outstanding through June 2013 with a contract value of $120,804. The derivative net gain on these contracts recorded in AOCI by the Company at July 1, 2012 was $3,269, net of tax expense of $1,262. At July 1, 2012, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $3,065, net of tax.
The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At July 1, 2012 the Company had a series of such swap contracts outstanding through July 2014 for 16 tons with a contract value of $31,665. The derivative net loss on these contracts recorded in AOCI by the Company at July 1, 2012 was $2,225, net of tax benefit of $428. At July 1, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,479, net of tax.
Derivative Contracts
The Company periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited). The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At July 1, 2012 and September 30, 2011, the Company had $189,538 and $265,974, respectively, of notional value for such foreign exchange derivative contracts outstanding.

The Company is exposed to economic risk from foreign currencies, including firm commitments for purchases of materials denominated in South African Rand. Periodically the Company economically hedges a portion of the risk associated with these purchases through forward and swap foreign exchange contracts. The contracts are designated as fair value hedges. The hedges effectively fix the foreign exchange in U.S. Dollars on a specified amount of Rand to a future payment date. The unrealized change in fair value of the hedge contracts is recorded in earnings and as a hedge asset or liability, as applicable. Derivative gains or losses are realized as the hedged purchases of materials affects earnings. At July 1, 2012 and September 30, 2011, the Company had $2,249 and $0, respectively, of such foreign exchange derivative contracts outstanding.
8
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s net derivative portfolio as of July 1, 2012, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of July 1, 2012 were as follows:

17

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Level 1    
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Foreign exchange contracts, net
$

 
$
1,519

 
$

 
$
1,519

Total Assets, net
$

 
$
1,519

 
$

 
$
1,519

Liabilities:
 
 
 
 
 
 
 
Commodity contracts, net
$

 
$
(2,693
)
 
$

 
$
(2,693
)
Total Liabilities, net
$

 
$
(2,693
)
 
$

 
$
(2,693
)
The Company’s net derivative portfolio as of September 30, 2011, contains Level 2 instruments and consists of commodity, interest rate and foreign exchange contracts. The fair values of these instruments as of September 30, 2011 were as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total
Total Assets
$

 
$

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
(1,954
)
 
$

 
$
(1,954
)
Commodity contracts

 
(958
)
 

 
(958
)
Foreign exchange contracts, net

 
(22,490
)
 

 
(22,490
)
Total Liabilities, net
$

 
$
(25,402
)
 
$

 
$
(25,402
)
The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and non-publicly traded debt approximate fair value. The fair values of long-term publicly traded debt are based off unadjusted quoted market prices (level 1) and derivative financial instruments are generally based on quoted or observed market prices (level 2).
The carrying values of goodwill, intangible assets and other long-lived assets are tested annually, or more frequently if an event occurs that indicates an impairment loss may have been incurred, using fair value measurements with unobservable inputs (Level 3).
 
The carrying amounts and fair values of the Company’s financial instruments are summarized as follows ((liability)/asset):
 
July 1, 2012
 
September 30, 2011
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Total debt
$
(1,827,065
)
 
$
(1,957,870
)
 
$
(1,576,612
)
 
$
(1,660,528
)
Interest rate swap agreements

 

 
(1,954
)
 
(1,954
)
Commodity swap and option agreements
(2,693
)
 
(2,693
)
 
(958
)
 
(958
)
Foreign exchange forward agreements
1,519

 
1,519

 
(22,490
)
 
(22,490
)
9
EMPLOYEE BENEFIT PLANS
Pension Benefits
The Company has various defined benefit pension plans covering some of its employees in the U.S. and certain employees in other countries, primarily the United Kingdom and Germany. These pension plans generally provide benefits of stated amounts for each year of service.
The Company’s results of operations for the three and nine month periods ended July 1, 2012 and July 3, 2011 reflect the following pension and deferred compensation benefit costs:

18

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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Three Months
 
Nine Months
Components of net periodic pension benefit and deferred compensation benefit cost
2012
 
2011
 
2012
 
2011
Service cost
$
578

 
$
781

 
$
1,700

 
$
2,344

Interest cost
2,552

 
2,557

 
7,030

 
7,670

Expected return on assets
(2,051
)
 
(1,965
)
 
(5,378
)
 
(5,896
)
Recognized net actuarial loss
242

 
97

 
508

 
291

Employee contributions
(46
)
 
(129
)
 
(139
)
 
(386
)
Net periodic benefit cost
$
1,275

 
$
1,341

 
$
3,721

 
$
4,023

 
The Company funds its U.S. pension plans in accordance with the Internal Revenue Service (“IRS”) defined guidelines and, where applicable, in amounts sufficient to satisfy the minimum funding requirements of applicable laws. Additionally, in compliance with the Company’s funding policy, annual contributions to non-U.S. defined benefit plans are equal to the actuarial recommendations or statutory requirements in the respective countries. The Company’s contributions to its pension and deferred compensation plans for the three and nine month periods ended July 1, 2012 and July 3, 2011 were as follows:
 
Three Months
 
Nine Months
Pension and deferred compensation contributions
2012
 
2011
 
2012
 
2011
Contributions made during period
$
1,289

 
$
3,189

 
$
3,767

 
$
6,145

The Company sponsors a defined contribution pension plan for its domestic salaried employees, which allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company also sponsors defined contribution pension plans for employees of certain foreign subsidiaries. Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended July 1, 2012 were $545 and $1,694, respectively. Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended July 3, 2011 were $1,439 and $4,192, respectively.
10
INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Company’s major taxing jurisdictions are the U.S., United Kingdom and Germany. In the U.S., federal tax filings for years prior to and including the Company’s fiscal years ended September 30, 2008 are closed. However, the federal net operating loss carryforwards from the Company’s fiscal years ended September 30, 2008 and prior are subject to IRS examination until the year that such net operating loss carryforwards are utilized and that year is closed for audit. The Company’s fiscal years ended September 30, 2009, 2010 and 2011 remain open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.
11
SEGMENT RESULTS
The Company manages its business in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; and (iii) the Home and Garden Business.
Global strategic initiatives and financial objectives for each reportable segment are determined at the corporate level. Each reportable segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for the sales and marketing initiatives and financial results for product lines within that segment.
Net sales and Cost of goods sold to other business segments have been eliminated. The gross contribution of intersegment sales is included in the segment selling the product to the external customer. Segment net sales are based upon the segment from which the product is shipped.
The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, interest expense, interest income and income tax expense. Corporate expenses primarily include general and administrative expenses and global long-term incentive compensation plan costs which are evaluated on a consolidated basis and not allocated to the Company’s operating segments. All depreciation and amortization included in income from operations is related to operating segments or corporate expense. Costs are identified to operating segments or corporate expense

19

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

according to the function of each cost center.
All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.
Segment information for the three and nine month periods ended July 1, 2012 and July 3, 2011 is as follows:
 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Net sales from external customers
 
 
 
 
 
 
 
Global Batteries & Appliances
$
500,724

 
$
505,213

 
$
1,669,973

 
$
1,661,177

Global Pet Supplies
157,495

 
143,839

 
448,962

 
425,106

Home and Garden Business
166,584

 
155,583

 
300,924

 
273,303

Total segments
$
824,803

 
$
804,635

 
$
2,419,859

 
$
2,359,586

 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Segment profit
 
 
 
 
 
 
 
Global Batteries & Appliances
$
47,093

 
$
45,480

 
$
185,726

 
$
180,460

Global Pet Supplies
22,470

 
19,240

 
57,778

 
53,951

Home and Garden Business
44,224

 
42,921

 
60,509

 
51,008

Total segments
113,787

 
107,641

 
304,013

 
285,419

Corporate expense
9,227

 
14,047

 
32,762

 
40,540

Acquisition and integration related charges
5,274

 
7,444

 
20,625

 
31,487

Restructuring and related charges
3,896

 
7,066

 
15,890

 
17,778

Interest expense
39,686

 
40,398

 
150,169

 
165,923

Other expense, net
2,224

 
770

 
2,225

 
1,372

Income from continuing operations before income taxes
$
53,480

 
$
37,916

 
$
82,342

 
$
28,319

 
 
July 1,
2012
 
September 30,
2011
Segment total assets
 
 
 
Global Batteries & Appliances
$
2,183,331

 
$
2,275,076

Global Pet Supplies
973,559

 
828,202

Home and Garden Business
567,718

 
476,381

Total segment assets
3,724,608

 
3,579,659

Corporate
53,346

 
42,604

Total assets at period end
$
3,777,954

 
$
3,622,263

12
RESTRUCTURING AND RELATED CHARGES
The Company reports restructuring and related charges associated with manufacturing and related initiatives in Cost of goods sold. Restructuring and related charges reflected in Cost of goods sold include, but are not limited to, termination, compensation and related costs associated with manufacturing employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring or integration initiatives implemented.
The Company reports restructuring and related charges relating to administrative functions in Operating expenses, such as initiatives impacting sales, marketing, distribution, or other non-manufacturing functions. Restructuring and related charges reflected in Operating expenses include, but are not limited to, termination and related costs, any asset impairments relating to the functional areas described above, and other costs directly related to the initiatives.
The following table summarizes restructuring and related charges incurred by segment for the three and nine month periods ended July 1, 2012 and July 3, 2011:

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Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Three Months
 
Nine Months
 
2012
 
2011
 
2012
 
2011
Cost of goods sold:
 
 
 
 
 
 
 
Global Batteries & Appliances
$
1,205

 
$
408

 
$
4,679

 
$
508

Global Pet Supplies
833

 
1,877

 
3,624

 
4,424

Total restructuring and related charges in cost of goods sold
2,038

 
2,285

 
8,303

 
4,932

Operating expenses:
 
 
 
 
 
 
 
Global Batteries & Appliances
640

 
1,678

 
2,283

 
2,295

Global Pet Supplies
883

 
1,855

 
3,276

 
5,435

Home and Garden Business
192

 
747

 
1,163

 
2,082

Corporate
143

 
501

 
865

 
3,034

Total restructuring and related charges in operating expenses
1,858

 
4,781

 
7,587

 
12,846

Total restructuring and related charges
$
3,896

 
$
7,066

 
$
15,890

 
$
17,778

Global Cost Reduction Initiatives Summary
During the fiscal year ended September 30, 2009, the Company implemented a series of initiatives within the Global Batteries & Appliances segment, the Global Pet Supplies segment and the Home and Garden Business segment to reduce operating costs, and to evaluate opportunities to improve the Company’s capital structure (the “Global Cost Reduction Initiatives”). These initiatives included headcount reductions and the exit of certain facilities within each of the Company’s segments. These initiatives also included consultation, legal and accounting fees related to the evaluation of the Company’s capital structure. Costs associated with these initiatives, which are expected to be incurred through January 31, 2015, are projected to total approximately $87,000.
The Company recorded $3,768 and $15,070 of pretax restructuring and related charges during the three and nine month periods ended July 1, 2012, respectively, and the Company recorded $6,462 and $14,569 of pretax restructuring and related charges during the three and nine month periods ended July 3, 2011, respectively, related to the Global Cost Reduction Initiatives.
The following table summarizes the remaining accrual balance associated with the 2009 initiatives and the activity during the nine month period ended July 1, 2012: 
 
Termination
Benefits
 
Other
Costs
 
Total
Accrual balance at September 30, 2011
$
8,795

 
$
3,021

 
$
11,816

Provisions
1,051

 
267

 
1,318

Cash expenditures
(6,897
)
 
(1,102
)
 
(7,999
)
Non-cash items
(108
)
 
(436
)
 
(544
)
Accrual balance at July 1, 2012
$
2,841

 
$
1,750

 
$
4,591

Expensed as incurred (A) 
$
3,556

 
$
10,196

 
$
13,752


(A)
Consists of amounts not impacting the accrual for restructuring and related charges.
The following table summarizes the expenses incurred during the nine month period ended July 1, 2012, the cumulative amount incurred to date and the total future expected costs to be incurred associated with the Global Cost Reduction Initiatives by operating segment:

21

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

 
Global
Batteries &
Appliances
 
Global Pet
Supplies
 
Home and
Garden
Business
 
Corporate
 
Total
Restructuring and related charges during the nine month period ended July 1, 2012
$
7,007

 
$
6,900

 
$
1,163

 
$

 
$
15,070

Restructuring and related charges since initiative inception
$
20,174

 
$
33,762

 
$
17,871

 
$
7,591

 
$
79,398

Total future restructuring and related charges expected
$
555

 
$
5,300

 
$
1,755

 
$

 
$
7,610

In connection with other restructuring efforts, the Company recorded $128 and $820 of pretax restructuring and related charges during the three and nine month periods ended July 1, 2012, respectively, and $604 and $3,209 of pretax restructuring and related charges during the three and nine month periods ended July 3, 2011, respectively.
13
COMMITMENTS AND CONTINGENCIES
The Company has provided for the estimated costs associated with environmental remediation activities at some of its current and former manufacturing sites. The Company believes that any additional liability which may result from resolution of these matters in excess of the amounts provided of approximately $5,490, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
The Company is a defendant in various other matters of litigation generally arising out of the ordinary course of business.
The Company does not believe that the resolution of any other matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.
14
ACQUISITIONS
In accordance with ASC Topic 805, “Business Combinations” (“ASC 805”), the Company accounts for acquisitions by applying the acquisition method of accounting. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition.
Black Flag
On October 31, 2011, the Company completed the $43,750 cash acquisition of the Black Flag and TAT trade names from The Homax Group, Inc. ("Black Flag"), a portfolio company of Olympus Partners. The Black Flag and TAT product lines consist of liquids, aerosols, baits and traps that control ants, spiders, wasps, bedbugs, fleas, flies, roaches, yellow jackets and other insects. This acquisition was not significant individually.
The results of Black Flag’s operations since October 31, 2011 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Home and Garden Business segment.
 
Acquisition Accounting
The assets acquired and liabilities assumed in the Black Flag acquisition have been measured at their fair values at October 31, 2011 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill. The amounts recorded in connection with the acquisition of Black Flag are as follows:

Inventory
$
2,509

Property, plant and equipment
301

Intangible assets
25,000

Goodwill
15,852

Other assets
88

Total assets acquired
$
43,750

The Company performed a valuation of the acquired assets of Black Flag at October 31, 2011. Significant matters related

22

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

to the determination of the fair values of the acquired identifiable intangible assets are summarized as follows:

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 $25,000 as of October 31, 2011. 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 95%, which was supported by historical retention rates. Income taxes were estimated at 40% and amounts were discounted using a rate of 13.5%. The customer relationships were valued at $17,000 under this approach and will be amortized over 20 years.
The Company valued trade names 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 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 were in the range of 2%-4% of expected net sales related to the respective trade name. The Company anticipates using the trade names for an indefinite period as demonstrated by the sustained use of each subject trademark. In estimating the fair value of the trade names, net sales for the trade names were estimated to grow at a rate of (15)%-8% annually with a terminal year growth rate of 3%. Income taxes were estimated at 40% and amounts were discounted using a rate of 13.5%. Trade names were valued at $8,000 under this approach.
The Company’s estimates and assumptions for Black Flag are subject to change as the Company obtains additional information for its estimates during the measurement period. The primary areas of acquisition accounting that are not yet finalized relate to certain legal matters and residual goodwill.
FURminator
On December 22, 2011, the Company completed the $141,745 cash acquisition of FURminator, Inc. from HKW Capital Partners III, L.P. ("FURminator"). FURminator is a leading worldwide provider of branded and patented pet deshedding products. This acquisition was not significant individually.
The results of FURminator operations since December 22, 2011 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Global Pet Supplies business segment.

Acquisition Accounting
The assets acquired and liabilities assumed in the FURminator acquisition have been measured at their fair values at December 22, 2011 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill. The amounts recorded in connection with the acquisition of FURminator are as follows:
 
 
Current assets
$
9,240

Property, plant and equipment
648

Intangible assets
79,000

Goodwill
68,531

Total assets acquired
$
157,419

Current liabilities
758

Long-term liabilities
14,916

Total liabilities assumed
$
15,674

Net assets acquired
$
141,745


23

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

The Company performed a valuation of the assets and liabilities of FURminator at December 22, 2011. Significant matters related to the determination of the fair values of the acquired identifiable intangible assets are summarized as follows:

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 $79,000 as of December 22, 2011. 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 95%, which was supported by historical retention rates. Income taxes were estimated at 40% and amounts were discounted using a rate of 14%. The customer relationships were valued at $46,000 under this approach and will be amortized over 20 years.
The Company valued trade names 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 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 were in the range of 4%-5% of expected net sales related to the respective trade name. The Company anticipates using the trade names for an indefinite period as demonstrated by the sustained use of each subject trade name. In estimating the fair value of the trade names, net sales for the trade names were estimated to grow at a rate of 2%-12% annually with a terminal year growth rate of 3%. Income taxes were estimated at 40% and amounts were discounted using a rate of 14%. Trade names were valued at $14,000 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 used in the determination of the fair values of technologies were 10%-12% of expected net sales related to the respective technology. The Company anticipates using these technologies through the legal life of the underlying patent and therefore the expected life of these technologies was equal to the remaining legal life of the underlying patents, which is approximately 9 years. In estimating the fair value of the technologies, net sales were estimated to grow at a rate of 2%-12% annually. Income taxes were estimated at 40% and amounts were discounted using the rate of 14%. The technology assets were valued at $19,000 under this approach.
 
The Company’s estimates and assumptions for FURminator are subject to change as the Company obtains additional information for its estimates during the measurement period. The primary areas of acquisition accounting that are not yet finalized relate to certain legal matters, income and non-income based taxes and residual goodwill.
15
NEW ACCOUNTING PRONOUNCEMENTS
Fair Value Measurement
In May 2011, the Financial Accounting Standards Board (the “FASB”) issued amended accounting guidance to achieve a consistent definition of and common requirements for measurement of and disclosure concerning fair value between GAAP and International Financial Reporting Standards. This amended guidance was effective for the Company beginning in the second quarter of its fiscal year ending September 30, 2012. The new accounting guidance did not have a material effect on the Company’s Consolidated Financial Statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued new accounting guidance which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. This accounting guidance is effective for the Company for the fiscal year beginning October 1, 2012. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its Consolidated Financial Statements.

24

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)

Impairment Testing
During September 2011, the FASB issued new accounting guidance intended to simplify how an entity tests goodwill for impairment. The guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting guidance is effective for the Company for the annual and any interim goodwill impairment tests performed for the fiscal year beginning October 1, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements.
Additionally, in July 2012, the FASB issued new accounting guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An entity will no longer be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting guidance is effective for the Company for the annual and any interim indefinite-lived intangible asset impairment tests performed for the fiscal year beginning October 1, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements.

16
CONSOLIDATING FINANCIAL STATEMENTS
In connection with the combination with Russell Hobbs, Spectrum Brands, with its domestic subsidiaries and SB/RH Holdings, LLC as guarantors, issued the 9.5% Notes under the 2018 Indenture. (See Note 6, “Debt,” for further information on the the 9.5% Notes under the 2018 Indenture.)
The following consolidating financial statements illustrate the components of the consolidated financial statements of the Company. Investments in subsidiaries are accounted for using the equity method for purposes of illustrating the consolidating presentation. Earnings of subsidiaries are therefore reflected in the Company’s and Guarantor Subsidiaries’ investment accounts and earnings. The elimination entries presented herein eliminate investments in subsidiaries and intercompany balances and transactions. Separate consolidated financial statements of the Guarantor Subsidiaries are not presented because management has determined that such financial statements would not be material to investors.


25

Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Financial Position
July 1, 2012
(Unaudited)
(Amounts in thousands) 
 
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
464

 
$
2,160

 
$
59,675

 
$

 
$
62,299

Receivables:
 
 
 
 
 
 
 
 
 
Trade accounts receivables, net of allowances
34,397

 
108,652

 
199,301

 

 
342,350

Intercompany receivables
282,970

 
896,404

 
342,561

 
(1,520,065
)
 
1,870

Other
3,943

 
6,377

 
34,770

 

 
45,090

Inventories
108,155

 
228,523

 
223,884

 
(8,047
)
 
552,515

Deferred income taxes
(5,845
)
 
23,775

 
6,430

 
1,999

 
26,359

Prepaid expenses and other
19,023

 
9,333

 
27,131

 

 
55,487

Total current assets
443,107

 
1,275,224

 
893,752

 
(1,526,113
)
 
1,085,970

Property, plant and equipment, net
62,003

 
48,043

 
98,505

 

 
208,551

Long-term intercompany receivables
143,713

 
117,040

 
64,755

 
(325,508
)
 

Deferred charges and other
14,419

 
3,767

 
16,324

 

 
34,510

Goodwill
67,722

 
438,864

 
181,459

 

 
688,045

Intangible assets, net
517,577

 
788,789

 
410,611

 

 
1,716,977

Debt issuance costs
43,901

 

 

 

 
43,901

Investments in subsidiaries
2,636,602

 
1,098,104

 
445

 
(3,735,151
)
 

Total assets
$
3,929,044

 
$
3,769,831

 
$
1,665,851

 
$
(5,586,772
)
 
$
3,777,954

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
5,531

 
$
1,667

 
$
21,053

 
$

 
$
28,251

Accounts payable
61,883

 
97,761

 
91,491

 

 
251,135

Intercompany accounts payable
901,236

 
336,869

 
49,463

 
(1,287,568
)
 

Accrued liabilities:
 
 
 
 
 
 
 
 
 
Wages and benefits
17,256

 
14,335

 
35,584

 

 
67,175

Income taxes payable
436

 
(11
)
 
25,677

 

 
26,102

Accrued interest
12,503