SBI 12.30.2012 10-Q (1)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 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 001-34757
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 HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED December 30, 2012
INDEX
 

 
 
Page
 
Part I—Financial Information
 
 
 
 
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
December 30, 2012 and September 30, 2012
(Unaudited)
(Amounts in thousands)
 
December 30, 2012
 
September 30, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
70,832

 
$
157,872

Receivables:
 
 
 
Trade accounts receivable, net of allowances of $24,154 and $21,870, respectively
481,235

 
335,301

Other
47,172

 
40,067

Inventories
679,150

 
452,633

Deferred income taxes
20,301

 
28,143

Prepaid expenses and other
164,497

 
49,273

Total current assets
1,463,187

 
1,063,289

Property, plant and equipment, net of accumulated depreciation of $151,266 and $139,994, respectively
320,065

 
214,017

Deferred charges and other
32,800

 
27,711

Goodwill
1,421,326

 
694,245

Intangible assets, net
2,207,970

 
1,714,929

Debt issuance costs
76,486

 
39,320

Total assets
$
5,521,834

 
$
3,753,511

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
29,190

 
$
16,414

Accounts payable
407,369

 
325,023

Accrued liabilities:
 
 
 
Wages and benefits
59,601

 
82,119

Income taxes payable
21,373

 
30,272

Accrued interest
21,068

 
30,473

Other
156,124

 
124,597

Total current liabilities
694,725

 
608,898

Long-term debt, net of current maturities
3,193,094

 
1,652,886

Employee benefit obligations, net of current portion
95,189

 
89,994

Deferred income taxes
487,428

 
377,465

Other
37,540

 
31,578

Total liabilities
4,507,976

 
2,760,821

Commitments and contingencies
 
 
 
Shareholders’ equity:
 
 
 
Other capital
1,367,437

 
1,359,946

Accumulated deficit
(369,978
)
 
(333,821
)
Accumulated other comprehensive loss
(30,468
)
 
(33,435
)
Total shareholders' equity
966,991

 
992,690

Non-controlling interest
46,867

 

Total equity
1,013,858

 
992,690

Total liabilities and equity
$
5,521,834

 
$
3,753,511

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 month periods ended December 30, 2012 and January 1, 2012
(Unaudited)
(Amounts in thousands)
 
 
THREE MONTHS ENDED
 
December 30, 2012
 
January 1, 2012
Net sales
$
870,268

 
$
848,771

Cost of goods sold
581,026

 
560,140

Restructuring and related charges
1,086

 
4,605

Gross profit
288,156

 
284,026

Selling
128,761

 
131,759

General and administrative
56,046

 
50,430

Research and development
8,171

 
7,235

Acquisition and integration related charges
20,812

 
7,600

Restructuring and related charges
5,502

 
3,120

Total operating expenses
219,292

 
200,144

Operating income
68,864

 
83,882

Interest expense
63,780

 
41,209

Other expense, net
1,562

 
2,193

Income from continuing operations before income taxes
3,522

 
40,480

Income tax expense
10,613

 
27,310

Net (loss) income
(7,091
)
 
13,170

Less: Net loss attributable to non-controlling interest
(518
)
 

Net (loss) income attributable to controlling interest
$
(6,573
)
 
$
13,170

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 Comprehensive Income (Loss)
For the three month periods ended December 30, 2012 and January 1, 2012
(Unaudited)
(Amounts in thousands)

 
THREE MONTHS ENDED
 
December 30, 2012
 
January 1, 2012
Net (loss) income
$
(7,091
)
 
$
13,170

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation
2,867

 
(14,929
)
Unrealized gain on derivative instruments
246

 
2,121

Defined benefit pension (loss) gain
(146
)
 
303

Other comprehensive income (loss), net of tax
2,967

 
(12,505
)
Comprehensive (loss) income
(4,124
)
 
665

Less: Comprehensive loss attributable to non-controlling interest
$
(518
)
 
$

Comprehensive (loss) income attributable to controlling interest
$
(3,606
)
 
$
665

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


5

Table of Contents


SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Cash Flows
For the three month periods ended December 30, 2012 and January 1, 2012
(Unaudited)
(Amounts in thousands)
  
 
THREE MONTHS ENDED
 
December 30, 2012
 
January 1, 2012
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(7,091
)
 
$
13,170

Adjustments to reconcile net (loss) income to net cash used by operating activities, net of effects of acquisitions:
 
 
 
Depreciation
10,625

 
9,248

Amortization of intangibles
17,124

 
14,628

Amortization of unearned restricted stock compensation
2,775

 
4,307

Amortization of debt issuance costs
1,816

 
1,686

Non-cash increase to cost of goods sold from sale of HHI Business acquisition inventory
5,247

 

Write off unamortized discount on retired debt
885

 

Write off debt issuance costs
4,600

 

Other non-cash adjustments
4,865

 
558

Net changes in assets and liabilities
(227,641
)
 
(138,524
)
Net cash used by operating activities
(186,795
)
 
(94,927
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(9,325
)
 
(8,851
)
Acquisition of Shaser, net of cash acquired
(23,919
)
 

Acquisition of the HHI Business, net of cash acquired
(1,271,956
)
 

Acquisition of Black Flag

 
(43,750
)
Acquisition of FURminator, net of cash acquired

 
(139,390
)
Escrow payment - TLM Taiwan acquisition
(100,000
)
 

Other investing activities
16

 
(100
)
Net cash used by investing activities
(1,405,184
)
 
(192,091
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Term Loan
792,000

 

Proceeds from issuance of 6.375% Notes
520,000

 

Proceeds from issuance of 6.625% Notes
570,000

 

Proceeds from issuance of 9.5% Notes, including premium

 
217,000

Payment of senior credit facilities, excluding ABL revolving credit facility
(370,175
)
 
(1,363
)
Debt issuance costs
(43,590
)
 
(4,020
)
Other debt financing, net
7,431

 
1,361

Reduction of other debt
(1,013
)
 
(25,809
)
ABL revolving credit facility, net
32,000

 
11,400

Capital contribution from parent
28,562

 

Cash dividends paid to parent
(29,584
)
 

Net cash provided by financing activities
1,505,631

 
198,569

Effect of exchange rate changes on cash and cash equivalents
(692
)
 
1,627

Net decrease in cash and cash equivalents
(87,040
)
 
(86,822
)
Cash and cash equivalents, beginning of period
157,872

 
142,414

Cash and cash equivalents, end of period
$
70,832

 
$
55,592

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

6

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, Inc., is a wholly owned subsidiary of Spectrum Brands Holdings, Inc. ("SB Holdings"). SB Holdings' common stock trades on the New York Stock Exchange (the “NYSE”) under the symbol “SPB.”
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.
On December 17, 2012, the Company acquired the residential hardware and home improvement business (the “HHI Business”) from Stanley Black & Decker, Inc. (“Stanley Black & Decker”), which includes (i) the equity interests of certain subsidiaries of Stanley Black & Decker engaged in the business and (ii) certain assets of Stanley Black & Decker used or held for use in connection with the business (the “Hardware Acquisition”). The HHI Business has a broad portfolio of recognized brands names, including Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister, as well as patented technologies such as Smartkey, a rekeyable lockset technology, and Smart Code Home Connect. A portion of the Hardware Acquisition has not yet closed, consisting of the purchase of certain assets of Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation ("TLM Taiwan”), which is involved in the production of residential locksets. For information pertaining to the Hardware Acquisition, see Note 14, “Acquisitions.”
The Company sells its products in approximately 140 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, Dingo, Nature's Miracle, Spectracide, Cutter, Hot Shot, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator, the previously mentioned HHI Business brands 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; home and garden controls; and hardware and home improvement, which consists of the recently acquired HHI Business.
The Company manages the businesses in four 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 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”); (iii) Home and Garden Business, which consists of the Company's home and garden and insect control business (the “Home and Garden Business”); and (iv) Hardware & Home Improvement, which consists of the recently acquired HHI Business (“Hardware & Home Improvement”). Management reviews the performance of the Company based on these segments, which also reflect the manner in which the Company's management monitors performance and allocates resources. 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 December 30, 2012, the results of operations for the three month periods ended December 30, 2012 and January 1, 2012, the

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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)


comprehensive income (loss) for the three month periods ended December 30, 2012 and January 1, 2012 and the cash flows for the three month periods ended December 30, 2012 and January 1, 2012. 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, 2012.
Use of Estimates: The preparation of 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. Customer relationships and proprietary technology intangibles are amortized, using the straight-line method, over their estimated useful lives. Excess of cost over fair value of net assets acquired (goodwill) and indefinite lived trade name intangibles are not amortized. 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. Goodwill is tested for impairment 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. Indefinite lived 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.
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 $49,996 and $50,319 for the three month periods ended December 30, 2012 and January 1, 2012, 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 21% and 24% of the Company’s Net sales during the three month periods ended December 30, 2012 and January 1, 2012, respectively. This customer also represented approximately 8% and 13% of the Company’s Trade accounts receivable, net at December 30, 2012 and September 30, 2012, respectively.
Approximately 50% and 49% of the Company’s Net sales during the three month periods ended December 30, 2012 and January 1, 2012, 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.
Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three month period ended December 30, 2012 was $2,775. Total stock compensation expense associated

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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)


with restricted stock awards and restricted stock units recognized by the Company during the three month period ended January 1, 2012 was $4,307.
The Company granted approximately 552 restricted stock units during the three month period ended December 30, 2012. Of these 552 grants, 90 are performance-based and vest over a one year period and 462 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 $24,748.
The Company granted approximately 687 restricted stock units during the three month period ended January 1, 2012, all of which 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 $18,457.
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. At December 30, 2012 and September 30, 2012, the Company had 13 restricted stock awards outstanding with a weighted average grant date fair value of $28.00 per share and a total fair value at grant date of $364. A summary of the status of the Company’s non-vested restricted stock units as of December 30, 2012 is as follows:
 
Restricted Stock Units
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Fair Value
at Grant
Date
Restricted stock units at September 30, 2012
1,931

 
$
28.45

 
$
54,931

Granted
552

 
44.83

 
24,748

Forfeited
(263
)
 
28.85

 
(7,588
)
Vested
(999
)
 
28.23

 
(28,200
)
Restricted stock units at December 30, 2012
1,221

 
$
35.95

 
$
43,891


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.

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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)


The following table summarizes acquisition and integration related charges incurred by the Company during the three month periods ended December 30, 2012 and January 1, 2012:
 
Three Months Ended
 
December 30, 2012
 
January 1, 2012
Russell Hobbs
 
 
 
Integration costs
$
1,054

 
$
2,408

Employee termination charges
108

 
612

Legal and professional fees
79

 
609

Russell Hobbs Acquisition and integration related charges
$
1,241

 
$
3,629

HHI Business
 
 
 
Legal and professional fees
14,498

 

Integration costs
114

 

HHI Business Acquisition and integration related charges
$
14,612

 
$

 
 
 
 
Shaser
4,220

 

FURminator
670

 
2,485

Black Flag
28

 
1,285

Other
41

 
201

Total Acquisition and integration related charges
$
20,812

 
$
7,600



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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)


3
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation gains and losses on assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as a hedge of a net investment in a foreign subsidiary, deferred gains and losses on derivative financial instruments designated as cash flow hedges and amortization of deferred gains and losses associated with the Company’s pension plans. The foreign currency translation gains and losses for the three month periods ended December 30, 2012 and January 1, 2012 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.
The components of Other comprehensive income (loss), net of tax, for the three month periods ended December 30, 2012 and January 1, 2012 are as follows:
 
 
 
Three Months Ended
 
 
December 30, 2012
 
January 1, 2012
Foreign Currency Translation Adjustments:
 
 
 
 
Gross change before reclassification adjustment
 
$
2,867

 
$
(14,929
)
Net reclassification adjustment for (gains) losses included in earnings
 

 

Gross change after reclassification adjustment
 
2,867

 
(14,929
)
Deferred tax effect
 

 

Deferred tax valuation allowance
 

 

Other Comprehensive Income (Loss)
 
$
2,867

 
$
(14,929
)
 
 
 
 
 
Unrealized Gains (Losses) on Derivative Instruments:
 
 
 
 
Gross change before reclassification adjustment
 
$
(83
)
 
$
413

Net reclassification adjustment for losses included in earnings
 
443

 
2,402

Gross change after reclassification adjustment
 
$
360

 
$
2,815

Deferred tax effect
 
(50
)
 
(997
)
Deferred tax valuation allowance
 
(64
)
 
303

Other Comprehensive Income
 
$
246

 
$
2,121

 
 
 
 
 
Defined Benefit Pension Plans:
 
 
 
 
Gross change before reclassification adjustment
 
(689
)
 
329

Net reclassification adjustment for losses included in earnings
 
519

 
23

Gross change after reclassification adjustment
 
$
(170
)
 
$
352

Deferred tax effect
 
24

 
(49
)
Deferred tax valuation allowance
 

 

Other Comprehensive (Loss) Income
 
$
(146
)
 
$
303

 
 
 
 
 
Total Other Comprehensive Income (Loss), net of tax
 
$
2,967

 
$
(12,505
)


5
INVENTORIES
Inventories for the Company, which are stated at the lower of cost or market, 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)


 
December 30,
2012
 
September 30,
2012
Raw materials
$
103,068

 
$
58,515

Work-in-process
44,191

 
23,434

Finished goods
531,891

 
370,684

 
$
679,150

 
$
452,633


5
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets of the Company consist of the following:
 
 
Global Batteries &
Appliances
 
Hardware & Home Improvement
 
Global Pet
Supplies
 
Home and
Garden
Business
 
Total
Goodwill:
 
 
 
 
 
 
 
 
 
Balance at September 30, 2012
$
268,556

 
$

 
$
237,932

 
$
187,757

 
$
694,245

Additions
63,880

 
662,216

 

 

 
726,096

Effect of translation
321

 

 
664

 

 
985

Balance at December 30, 2012
$
332,757

 
$
662,216

 
$
238,596

 
$
187,757

 
$
1,421,326

Intangible Assets:
 
 
 
 
 
 
 
 
 
Trade names Not Subject to Amortization
 
 
 
 
 
 
 
 
 
Balance at September 30, 2012
$
545,426

 
$

 
$
212,142

 
$
83,500

 
$
841,068

Additions

 
330,000

 

 

 
330,000

Effect of translation
555

 

 
2,272

 

 
2,827

Balance at December 30, 2012
$
545,981

 
$
330,000

 
$
214,414

 
$
83,500

 
$
1,173,895

Intangible Assets Subject to Amortization
 
 
 
 
 
 
 
 
 
Balance at September 30, 2012, net
$
447,112

 

 
$
264,622

 
$
162,127

 
$
873,861

Additions
35,500

 
140,000

 

 

 
175,500

Amortization during period
(8,835
)
 
(583
)
 
(5,337
)
 
(2,369
)
 
(17,124
)
Effect of translation
1,120

 

 
718

 

 
1,838

Balance at December 30, 2012, net
$
474,897

 
$
139,417

 
$
260,003

 
$
159,758

 
$
1,034,075

Total Intangible Assets, net at December 30, 2012
$
1,020,878

 
$
469,417

 
$
474,417

 
$
243,258

 
$
2,207,970


Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which were recognized in connection with acquisitions and from the application of fresh-start reporting during fiscal 2009. The useful lives of the Company’s intangible assets subject to amortization are 9 to 17 years for technology assets associated with the Global Batteries & Appliances segment, 8 to 9 years for technology assets related to the Hardware & Home Improvement segment, 4 to 9 years for technology assets related to the Global Pet Supplies segment, 15 to 20 years for customer relationships of the Global Batteries & Appliances segment, 20 years for customer relationships of the Hardware & Home Improvement segment, Home and Garden Business and Global Pet Supplies segments, 1 to 12 years for trade names within the Global Batteries & Appliances segment, 5 to 8 years for trade names within the Hardware & Home Improvement segment and 3 years for a trade name within the Global Pet Supplies segment.

The carrying value and accumulated amortization for intangible assets subject to amortization are as follows:
 

12

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


 
December 30,
2012
 
September 30,
2012
Technology Assets Subject to Amortization:
 
 
 
Gross balance
$
177,424

 
$
90,924

Accumulated amortization
(25,873
)
 
(22,768
)
Carrying value, net
$
151,551

 
$
68,156

Trade Names Subject to Amortization:
 
 
 
Gross balance
$
165,852

 
$
150,829

Accumulated amortization
(31,950
)
 
(28,347
)
Carrying value, net
$
133,902

 
$
122,482

Customer Relationships Subject to Amortization:
 
 
 
Gross balance
$
875,531

 
$
796,235

Accumulated amortization
(126,909
)
 
(113,012
)
Carrying value, net
$
748,622

 
$
683,223

Total Intangible Assets, net Subject to Amortization
$
1,034,075

 
$
873,861


Amortization expense for the three month periods ended December 30, 2012 and January 1, 2012 is as follows:
 
 
Three Months Ended
 
December 30, 2012
 
January 1, 2012
Proprietary technology amortization
$
3,105

 
$
1,897

Trade names amortization
3,595

 
3,140

Customer relationships amortization
10,424

 
9,591

 
$
17,124

 
$
14,628


The Company estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $78,500 per year.


13

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


6
DEBT
Debt consists of the following:
 
 
December 30, 2012
 
September 30, 2012
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan, due December 17, 2019
$
799,056

 
4.6
%
 
$

 
%
Former term loan facility

 

 
370,175

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

 
9.5
%
 
950,000

 
9.5
%
6.375% Notes, due November 15, 2020
520,000

 
6.4
%
 

 
%
6.625% Notes, due November 15, 2022
570,000

 
6.6
%
 

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

 
6.8
%
 
300,000

 
6.8
%
ABL Facility, expiring May 24, 2017
32,000

 
3.8
%
 

 
4.3
%
Other notes and obligations
26,325

 
8.6
%
 
18,059

 
10.9
%
Capitalized lease obligations
28,539

 
6.2
%
 
26,683

 
6.2
%
 
$
3,225,920

 
 
 
$
1,664,917

 
 
Original issuance premiums (discounts) on debt
(3,636
)
 
 
 
4,383

 
 
Less: current maturities
29,190

 
 
 
16,414

 
 
Long-term debt
$
3,193,094

 
 
 
$
1,652,886

 
 
Term Loan
On December 17, 2012, the Company entered into a senior term loan facility, maturing December 17, 2019, which provides borrowings in an aggregate principal amount of $800,000, with $100,000 in Canadian dollar equivalents (the "Term Loan") in connection with the acquisition of the HHI Business. A portion of the Term Loan proceeds were used to refinance the former term loan facility, maturing June 17, 2016, which had an aggregate amount outstanding of $370,175 prior to refinancing. In connection with the refinancing, the Company recorded accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs totaling $5,485 as an adjustment to interest expense during the three month period ended December 30, 2012.
The Term Loan contains financial covenants with respect to debt, including, but not limited to, a fixed charge ratio. 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, its domestic subsidiaries and its Canadian subsidiaries have guaranteed their 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 issuance of the Term Loan, the Company recorded $18,748 of fees during the three month period ended December 30, 2012 of which $16,327 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 with the remainder of $2,421 reflected as an increase to interest expense during the three month period ended December 30, 2012.
6.375% Notes and 6.625% Notes
On December 17, 2012, in connection with the acquisition of the HHI Business, the Company assumed $520,000 aggregate principal amount of 6.375% Notes at par value, due November 15, 2020 (the "6.375% Notes"), and $570,000 aggregate principal amount of 6.625% Notes at par value, due November 15, 2022 (the "6.625% Notes"), previously issued by Spectrum Brands Escrow Corporation. The 6.375% Notes and the 6.625% Notes are unsecured and guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries.

14

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


The Company may redeem all or a part of the 6.375% Notes and the 6.625% Notes, upon not less than 30 or more than 60 days notice, at specified redemption prices. Further, the indenture governing the 6.375% Notes and the 6.625% Notes (the “2020/22 Indenture”), requires the Company to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of the Company, as defined in such indenture.
The 2020/22 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 2020/22 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 2020/22 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 6.375% Notes and the 6.625% Notes. If any other event of default under the 2020/22 Indenture occurs and is continuing, the trustee for the 2020/22 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 6.375% Notes, or the 6.625% Notes, may declare the acceleration of the amounts due under those notes.
 
The Company recorded $12,860 and $14,080 of fees in connection with the offering of the 6.375% Notes and the 6.625% Notes, respectively, during the three month period ended December 30, 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 respective remaining lives of the 6.375% Notes and the 6.625% Notes.
ABL Facility
On December 17, 2012 the Company exercised its option to increase its asset based lending revolving credit facility (the "ABL Facility") from $300,000 to $400,000 and extend the maturity to May 24, 2017. In connection with the increase and extension, the Company incurred $323 of fees. 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 ABL Facility.
As a result of borrowings and payments under the ABL Facility, at December 30, 2012, the Company had aggregate borrowing availability of approximately $133,267, net of lender reserves of $7,942 and outstanding letters of credit of $25,412.

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 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:
 

15

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


Asset Derivatives
 
 
December 30,
2012
 
September 30,
2012
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contracts
Receivables—Other
 
$
1,091

 
$
985

Commodity contracts
Deferred charges and other
 
710

 
1,017

Foreign exchange contracts
Receivables—Other
 
593

 
1,194

Foreign exchange contracts
Deferred charges and 
other
 
4

 

Total asset derivatives designated as hedging instruments under ASC 815
 
 
2,398

 
3,196

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

 
41

Total asset derivatives
 
 
$
2,398

 
$
3,237


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
 
 
December 30,
2012
 
September 30,
2012
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contracts
Accounts payable
 
$
1

 
$
9

Foreign exchange contracts
Accounts payable
 
2,045

 
3,063

Foreign exchange contracts
Other long term  liabilities
 
31

 

Total liability derivatives designated as hedging instruments under ASC 815
 
 
$
2,077

 
$
3,072

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
Foreign exchange contracts
Accounts payable
 
5,650

 
3,967

Foreign exchange contracts
Other long term  liabilities
 
2,802

 
2,926

Total liability derivatives
 
 
$
10,529

 
$
9,965

 
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 Accumulated Other Comprehensive Income ("AOCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings. See Note 3, "Comprehensive Income (Loss)" for further information.
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended December 30, 2012, pretax:
 

16

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
$
(232
)
 
Cost of goods sold
 
$
(97
)
 
Cost of goods sold
 
$
(46
)
Foreign exchange contracts
498

 
Net sales
 
121

 
Net sales
 

Foreign exchange contracts
(349
)
 
Cost of goods sold
 
(467
)
 
Cost of goods sold
 

Total
$
(83
)
 
 
 
$
(443
)
 
 
 
$
(46
)

 
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended January 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
$
(745
)
 
Cost of goods sold
 
$
(366
)
 
Cost of goods sold
 
$
(19
)
Interest rate contracts
(21
)
 
Interest expense
 
(659
)
 
Interest expense
 

Foreign exchange contracts
(129
)
 
Net sales
 
(122
)
 
Net sales
 

Foreign exchange contracts
1,308

 
Cost of goods sold
 
(1,255
)
 
Cost of goods sold
 

Total
$
413

 
 
 
$
(2,402
)
 
 
 
$
(19
)


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 December 30, 2012 and January 1, 2012, 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
December 30, 2012
 
January 1, 2012
 
Foreign exchange contracts
(4,099
)
 
7,245

 
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 $24 and $46 at December 30, 2012 and September 30, 2012, respectively.

17

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


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 December 30, 2012 and September 30, 2012, the Company had posted cash collateral of $450 and $50, respectively, related to such liability positions. In addition, at December 30, 2012 and September 30, 2012, the Company had no posted standby letters of credit 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
When appropriate, 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 December 30, 2012, the Company did not have any 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, Mexican Pesos, 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 December 30, 2012 the Company had a series of foreign exchange derivative contracts outstanding through March 2014 with a contract value of $173,013. The derivative net loss on these contracts recorded in AOCI by the Company at December 30, 2012 was $1,046, net of tax benefit of $433. At December 30, 2012, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,046, 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 December 30, 2012 the Company had a series of such swap contracts outstanding through September 2014 for 12 tons with a contract value of $24,305. The derivative net gain on these contracts recorded in AOCI by the Company at December 30, 2012 was $1,510, net of tax expense of $302. At December 30, 2012, the portion of derivative net gains estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $905, 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, Canadian 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 December 30, 2012 and September 30, 2012, the Company had $162,779 and $172,581, respectively, of notional value for such foreign exchange derivative contracts outstanding.

8
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s net derivative portfolio as of December 30, 2012, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of December 30, 2012 were as follows:
 

18

Table of Contents
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:
 
 
 
 
 
 
 
Commodity contracts, net
$

 
$
1,800

 
$

 
$
1,800

Total Assets, net
$

 
$
1,800

 
$

 
$
1,800

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts, net
$

 
$
(9,931
)
 
$

 
$
(9,931
)
Total Liabilities, net
$

 
$
(9,931
)
 
$

 
$
(9,931
)
 
The Company’s net derivative portfolio as of September 30, 2012, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of September 30, 2012 were as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Commodity contracts, net
$

 
$
1,993

 
$

 
$
1,993

Total Assets
$

 
$
1,993

 
$

 
$
1,993

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts, net
$

 
$
(8,721
)
 
$

 
$
(8,721
)
Total Liabilities, net
$

 
$
(8,721
)
 
$

 
$
(8,721
)

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 on 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):
 
 
December 30, 2012
 
September 30, 2012
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Total debt
$
(3,222,284
)
 
$
(3,441,805
)
 
$
(1,669,300
)
 
$
(1,804,831
)
Commodity swap and option agreements
1,800

 
1,800

 
1,993

 
1,993

Foreign exchange forward agreements
(9,931
)
 
(9,931
)
 
(8,721
)
 
(8,721
)

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, including the United Kingdom, the Netherlands, Germany, Guatemala, Brazil and Mexico. These pension plans generally provide benefits of stated amounts for each year of service.
The Company’s results of operations for the three month periods ended December 30, 2012 and January 1, 2012 reflect the following pension and deferred compensation benefit costs:
 

19

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


 
Three Months Ended
Components of net periodic pension benefit and deferred compensation benefit cost
December 30, 2012
 
January 1, 2012
Service cost
$
724

 
$
543

Interest cost
2,363

 
1,926

Expected return on assets
(2,196
)
 
(1,276
)
Recognized net actuarial loss
519

 
23

Employee contributions
(46
)
 
(46
)
Net periodic benefit cost
$
1,364

 
$
1,170


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 month periods ended December 30, 2012 and January 1, 2012 were as follows:
 
 
Three Months Ended
Pension and deferred compensation contributions
December 30, 2012
 
January 1, 2012
Contributions made during period
$
607

 
$
824


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 month periods ended December 30, 2012 and January 1, 2012 were $1,151 and $576, respectively.

10
INCOME TAXES
For the three month periods ended December 30, 2012 and January 1, 2012, the Company's effective tax rates of 301% and 67%, respectively, differ from the United States federal statutory rate of 35% principally due to: (i) losses in the U.S. and certain foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances that have been provided on the Company's net operating loss carryforward tax benefits and other deferred tax assets; (ii) deferred income tax expense related to the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes, and (iii) the reversal of U.S. valuation allowances of $45,932 and $13,915 on deferred tax assets of the Company as a result of the HHI Business and FURminator acquisitions during the three month periods ended December 30, 2012 and January 1, 2012, respectively.
The Company recognizes in its consolidated financial statements the impact of a tax position if it concludes that the position is more likely than not sustainable upon audit, based on the technical merits of the position. At December 30, 2012 and September 30, 2012, the Company had $5,459 and $5,877, respectively, of unrecognized tax benefits related to uncertain tax positions. The Company also had approximately $3,430 and $3,564, respectively, of accrued interest and penalties related to the uncertain tax positions at those dates. Interest and penalties related to uncertain tax positions are reported in the financial statements as part of income tax expense.
As of December 30, 2012, certain of the Company's legal entities in various jurisdictions are undergoing income tax audits. The Company cannot predict the ultimate outcome of the examinations; however, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized.

11
SEGMENT RESULTS
The Company manages its business in four vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; (iii) Home and Garden Business; and (iv) Hardware & Home Improvement.

20

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


The results of the HHI Business operations since December 17, 2012 are included in the Company's Condensed Consolidated Statement of Operations (Unaudited). The financial results are reported as a separate business segment, Hardware & Home Improvement.
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 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 month periods ended December 30, 2012 and January 1, 2012 is as follows:
 
 
Three Months Ended
 
December 30, 2012
 
January 1, 2012
Net sales from external customers
 
 
 
Global Batteries & Appliances
$
666,011

 
$
689,181

Global Pet Supplies
139,763

 
134,938

Home and Garden Business
30,512

 
24,652

Hardware & Home Improvement
33,982

 

Total segments
$
870,268

 
$
848,771

 
 
 
 
 
Three Months Ended
 
December 30, 2012
 
January 1, 2012
Segment profit (loss)
 
 
 
Global Batteries & Appliances
$
95,378

 
$
98,206

Global Pet Supplies
15,941

 
16,060

Home and Garden Business
(4,261
)
 
(5,919
)
Hardware & Home Improvement
(3,210
)
 

Total segments
103,848

 
108,347

Corporate expense
7,584

 
9,140

Acquisition and integration related charges
20,812

 
7,600

Restructuring and related charges
6,588

 
7,725

Interest expense
63,780

 
41,209

Other expense, net
1,562

 
2,193

(Loss) income from continuing operations before income taxes
$
3,522

 
$
40,480


 

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


 
December 30, 2012
 
September 30, 2012
Segment total assets
 
 
 
Global Batteries & Appliances
$
2,273,392

 
$
2,243,472

Global Pet Supplies
967,400

 
956,043

Home and Garden Business
532,590

 
508,083

Hardware & Home Improvement
1,663,712

 

Total segment assets
5,437,094

 
3,707,598

Corporate
84,740

 
45,913

Total assets at period end
$
5,521,834

 
$
3,753,511


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 month periods ended December 30, 2012 and January 1, 2012:
 
 
Three Months Ended
 
December 30, 2012
 
January 1, 2012
Cost of goods sold:
 
 
 
Global Batteries & Appliances
$
366

 
$
3,020

Global Pet Supplies
720

 
1,585

Total restructuring and related charges in cost of goods sold
1,086

 
4,605

Operating expenses:
 
 
 
Global Batteries & Appliances
956

 
877

Global Pet Supplies
4,230

 
1,290

Home and Garden Business
183

 
344

Corporate
133

 
609

Total restructuring and related charges in operating expenses
5,502

 
3,120

Total restructuring and related charges
$
6,588

 
$
7,725


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 $98,000.

22

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


The Company recorded $6,471 and $7,129 of pretax restructuring and related charges during the three month periods ended December 30, 2012 and January 1, 2012, respectively, related to the Global Cost Reduction Initiatives.
 
The following table summarizes the remaining accrual balance associated with the Global Cost Reduction Initiatives and the activity during the three month period ended December 30, 2012:
 
 
Termination
Benefits
 
Other
Costs
 
Total
Accrual balance at September 30, 2012
$
3,252

 
$
1,095

 
$
4,347

Provisions
3,813

 
103

 
3,916

Cash expenditures
(1,484
)
 
(303
)
 
(1,787
)
Non-cash items
26

 
28

 
54

Accrual balance at December 30, 2012
$
5,607

 
$
923

 
$
6,530

Expensed as incurred (A) 
$
185

 
$
2,370

 
$
2,555

 ______________________________
(A)
Consists of amounts not impacting the accrual for restructuring and related charges.
The following table summarizes the expenses incurred during the three month period ended December 30, 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:
  
 
Global
Batteries &
Appliances
 
Global Pet
Supplies
 
Home and
Garden
Business
 
Corporate
 
Total
Restructuring and related charges during the three month period ended December 30, 2012
$
1,337

 
$
4,951

 
$
183

 
$

 
$
6,471

Restructuring and related charges since initiative inception
$
22,146

 
$
41,949

 
$
17,803

 
$
7,591

 
$
89,489

Total future restructuring and related charges expected
$
1,392

 
$
5,520

 
$
1,342

 
$

 
$
8,254


In connection with other restructuring efforts, the Company recorded $117 and $596 of pretax restructuring and related charges during the three month periods ended December 30, 2012, and January 1, 2012, 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 $5,301, 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.

23

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


HHI Business
On December 17, 2012, the Company completed the cash acquisition of the HHI Business from Stanley Black & Decker. The following table summarizes the preliminary consideration paid for the HHI Business:
Negotiated sales price, excluding TLM Taiwan
$
1,300,000

Preliminary working capital and other adjustments
(10,638
)
Preliminary purchase price
$
1,289,362


The HHI Business is a major manufacturer and supplier of residential locksets, residential builders' hardware and faucets with a portfolio of recognized brand names, including Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister, as well as patented technologies such as the SmartKey, a re-keyable lockset technology, and Smart Code Home Connect. Customers of the HHI Business include retailers, non-retail distributors and homebuilders. Headquartered in Lake Forest, California, the HHI Business has a global sales force and operates manufacturing and distribution facilities in the U.S., Canada, Mexico and Asia.
A portion of the Hardware Acquisition consisting of the purchase of certain assets of TLM Taiwan has not yet closed. The Company paid Stanley Black & Decker the negotiated sales price of $100,000 on December 17, 2012, which is being held in escrow until the close of the TLM Taiwan acquisition. This payment was made in conjunction with the close of the HHI Business acquisition and is classified within Prepaid expenses and other in the Condensed Consolidated Statements of Financial Position (Unaudited).
The results of the HHI Business operations since December 17, 2012 are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) and are reported within the Hardware & Home Improvement segment.
Preliminary Valuation of Assets and Liabilities
The preliminary fair values of the net tangible and intangible assets acquired and liabilities assumed in connection with the purchase of the HHI Business have been recognized in the Condensed Consolidated Statement of Financial Position based upon their preliminary values at December 17, 2012, as set forth below. The excess of the purchase price over the preliminary net tangible and intangible assets was recorded as goodwill, the majority of which is not expected to be deductible for income tax purposes. The preliminary fair values recorded were based upon a preliminary valuation and the estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary valuation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, certain legal matters, amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions and net operating loss carryforwards inclusive of associated limitations and valuation allowances, the determination of identifiable intangible assets and the final amount of residual goodwill. Additionally, finalized fair values associated with deferred tax accounts could have a material affect on the Company's estimated reversal of its consolidated U.S. valuation allowances recognized during the three month period ended December 30, 2012. See Note 10, "Income Taxes," for further information. The Company expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period. The preliminary valuation of the assets acquired and liabilities assumed for the HHI Business is as follows:

24

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


 
Cash
$
17,406

Other current assets
325,112

Property, plant and equipment
104,502

Intangible assets
470,000

Other assets
3,051

Total assets acquired
$
920,071

Current liabilities
174,752

Long-term liabilities
115,938

Total liabilities assumed
$
290,690

Total identifiable net assets
629,381

Non-controlling interest
(2,235
)
Goodwill
662,216

Total identifiable net assets
$
1,289,362

 
Preliminary Pre-Acquisition Contingencies Assumed
The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to the HHI Business that existed as of the acquisition date. Based on the evaluation to date, the Company has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, the Company has preliminarily recorded its best estimates for these contingencies as part of the preliminary valuation of the assets and liabilities acquired for the HHI Business. The Company continues to gather information relating to all pre-acquisition contingencies that it has assumed from the HHI Business. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of the measurement period any adjustments to pre-acquisition contingency amounts will be reflected in the Company's results of operations.
Preliminary Valuation Adjustments
The Company performed a preliminary valuation of the assets and liabilities of the HHI Business at December 17, 2012. Significant adjustments as a result of the preliminary valuation and the bases for their determination are summarized as follows:
Inventories-An adjustment of $31,500 was recorded to adjust inventory to fair value. Finished goods were valued at estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort.
Property, plant and equipment, net-An adjustment of $8,892 was recorded to adjust the net book value of property, plant and equipment to fair value giving consideration to the highest and best use of the assets. The valuation of the Company's property, plant and equipment was 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 $470,000 as of December 17, 2012. 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 relationships, 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 35% and amounts were discounted using a rate of 12%. The customer relationships were valued at $74,000 under this approach and will be amortized over 20 years.
The Company valued indefinite-lived 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

25

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


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 the HHI Business 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 3% - 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 2.5% - 5% annually with a terminal year growth rate of 2.5%. Income taxes were estimated at 35% and amounts were discounted using a rate of 12%. Trade name and trademarks were valued at $330,000 under this approach.
The Company valued a definite lived trade name 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 the HHI Business 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. The royalty rate used in the determination of the fair values of trade name was 3.5% of expected net sales related to the respective trade name. The Company assumed an 8 year useful life of the trade name. In estimating the fair value of the trade name, Net sales for the trade name were estimated to grow at a rate of 2.5% - 5% annually. Income taxes were estimated at 35% and amounts were discounted using a rate of 12%. The trade name was valued at $3,000 under this approach.
The Company valued a trade name license agreement 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 the HHI Business 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. The royalty rate used in the determination of the fair value of the trade name license agreement was 4% of expected Net sales related to the respective trade name. In estimating the fair value of the trade name license agreement, Net sales were estimated to grow at a rate of 2.5% - 5% annually. The Company assumed a 5 year useful life of the trade name license agreement. Income taxes were estimated at 35% and amounts were discounted using a rate of 12%. The trade name license agreement was valued at $12,000 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 were selected based on consideration of several factors, including prior transactions of the HHI Business, related licensing agreements and the importance of the technology and profit levels, among other considerations. Royalty rates used in the determination of the fair values of technologies ranged from 4% - 5% of expected Net sales related to the respective technology. The Company anticipates using these technologies through the legal life of the underlying patent; therefore, the expected life of these technologies was equal to the remaining legal life of the underlying patents which was 10 years. In estimating the fair value of the technologies, Net sales were estimated to grow at a rate of 2.5% - 31% annually. Income taxes were estimated at 35% and amounts were discounted using the rate of 12%. The technology assets were valued at $51,000 under this approach.
Deferred tax liabilities, net-An adjustment of $111,790 was recorded to adjust deferred taxes for the preliminary fair value adjustments made in accounting for the purchase.


26

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


Supplemental Pro Forma Information (Unaudited)
The following reflects the Company's pro forma results had the results of the HHI Business been included for all periods presented.
 
 
December 30, 2012
 
January 1, 2012
Net sales:
 
 
 
Reported Net sales
$
870,268

 
$
848,771

HHI Business adjustment
187,173

 
226,376

Pro forma Net sales
$
1,057,441

 
$
1,075,147

 
 
 
 

Adjusted net (loss) income:
 
 
 

Reported Net (loss) income (1) (2)
$
(7,091
)
 
$
13,170

HHI Business adjustment
2,122

 
10,242

Pro forma adjusted Net (loss) income
$
(4,969
)
 
$
23,412

 
(1)
Included in Reported Net (loss) income for the three months ended December 30, 2012, is a $45,932 income tax benefit recorded as a result of the reversal of U.S. valuation allowances on deferred tax assets as a result of the HHI Business acquisition. For information pertaining to the income tax benefit, see Note 11, “Income Taxes.”
(2)
Included in Reported Net (loss) income for the three months ended December 30, 2012, is $14,612 of Acquisition and integration related charges as a result of the HHI Business acquisition. For information pertaining to Acquisition and integration related charges, see Note 2, “Significant Accounting Policies - Acquisition and Integration Related Charges.”
Shaser
On November 8, 2012, SB Holdings completed the cash acquisition of approximately 56% interest in Shaser Biosciences, Inc. ("Shaser"), of which the Company purchased 49%. Shaser is a global technology leader in developing energy-based, aesthetic dermatological technology for home use devices. This acquisition was not significant individually.
The following table summarizes the preliminary consideration paid for Shaser:
Negotiated sales price
$
50,000

Less: negotiated sales price attributable to SB Holdings
6,197

Preliminary working capital adjustment
(423
)
Negotiated sales price attributable to the Company
$
43,380

The purchase agreement provides SB Holdings with an option, exercisable solely at the Company's discretion, to acquire the remaining 44% interest of Shaser (the "Call Option"). The Call Option is exercisable any time between January 1, 2017 and March 31, 2017 at a price equal to 1.0x trailing revenues or 7.0x adjusted trailing EBITDA, as defined, for calendar year ended December 31, 2016.
As of December 30, 2012, the Company has paid approximately half of the negotiated sales price to the seller. The remaining purchase consideration is payable no later than April 2, 2013.
The results of Shaser’s operations since November 8, 2012 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Global Batteries & Appliances segment.
 

27

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


Preliminary Valuation of Assets and Liabilities
The assets acquired and liabilities assumed in the Shaser acquisition have been measured at their fair values at November 8, 2012 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, which is not expected to be deductible for income tax purposes. The preliminary fair values recorded were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of acquisition accounting that are not yet finalized relate to the preliminary valuation, amounts for income taxes including deferred tax accounts, uncertain tax positions and net operating loss carryforwards inclusive of associated limitations and valuation allowances, certain legal matters and residual goodwill.
The preliminary fair values recorded for the assets acquired and liabilities assumed for Shaser are as follows:
 
Cash
$
870

Intangible asset
35,500

Other assets
2,679

Total assets acquired
$
39,049

Total liabilities assumed
14,398

Total identifiable net assets
24,651

Non-controlling interest
(45,151
)
Goodwill
63,880

Total identifiable net assets
$
43,380


Preliminary Pre-Acquisition Contingencies Assumed
The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to Shaser that existed as of the acquisition date. Based on the evaluation to date, the Company has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, the Company has preliminarily recorded its best estimates for these contingencies as part of the preliminary accounting for Shaser. The Company continues to gather information relating to all pre-acquisition contingencies that it has assumed from Shaser. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of the measurement period any adjustments to pre-acquisition contingency amounts will be reflected in the Company's results of operations.
Preliminary Valuation Adjustments
The Company performed a preliminary valuation of the acquired proprietary technology assets, the non-controlling interest and the Call Option related to Shaser at November 8, 2012. A summary of the significant key inputs is as follows:
The Company valued the technology assets 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 Shaser, related licensing agreements and the importance of the technology and profit levels, among other considerations. The royalty rate used in the determination of the fair value of the technology asset was 10.5% of expected Net sales related to the technology. The Company anticipates using the technology through the legal life of the underlying patent and therefore the expected life of the technology was equal to the remaining legal life of the underlying patent which was 13 years. In estimating the fair value of the technology, Net sales were estimated to grow at a long-term rate of 3% annually. Income taxes were estimated at 35% and amounts were discounted using the rate of 11%. The technology asset was valued at approximately $35,500 under this approach.
The Company valued the non-controlling interest in Shaser, a private company, by applying both income and market approaches. Under these methods, the non-controlling value was determined by using a discounted cash flow method, a guideline companies method, and a recent transaction approach. In estimating the fair value of the non-controlling interest, key assumption include (i) cash flow projections based on market participant data and estimates by Company management, with Net sales estimated to grow

28

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


at a terminal growth rate of 3% annually, income taxes estimated at 35%, and amounts discounted using a rate of 12%, (ii) financial multiples of companies deemed to be similar to Shaser, and (iii) adjustments because of lack of control or lack of marketability that market participants would consider when estimating the fair value of the non-controlling interest in Shaser. The non-controlling interest was valued at $38,954 under this approach.
The Company, in connection with valuing the non-controlling interest in Shaser, also valued the Call Option. In addition to the valuation methods and key assumptions discussed above, the Company compared the forecasted revenue and EBITDA multiples, as defined, associated with the Call Option to current guideline companies. The Call Option was determined to have an immaterial value under this approach.

15
NEW ACCOUNTING PRONOUNCEMENTS

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. A deferral of provisions of the guidance requiring disclosure of the income statement location
were gains and losses reclassified out of comprehensive income are located was issued in December 2011. In November 2012,
the FASB issued a statement of opinion to clarify their position on the reclassification disclosures, allowing disclosure of
reclassification adjustments on the face of the comprehensive income statement or in the notes to the financial statements. The
accounting guidance requiring a comprehensive income statement is now effective for the Company, however the final
disclosure requirements for reclassification adjustments are not effective until the second quarter of Fiscal 2013. The Company
has implemented all required disclosures except the deferred reclassification provisions which will be implemented in the
second quarter of Fiscal 2013.

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.

29

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


SPECTRUM BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Financial Position
December 30, 2012
(Unaudited)
(Amounts in thousands) 
 
Parent
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,038

 
$
2,112

 
$
67,682

 
$

 
$
70,832

Receivables:
 
 
 
 
 
 
 
 
 
Trade accounts receivables, net of allowances
44,399

 
66,364

 
370,472

 

 
481,235

Intercompany receivables
288,208

 
965,643

 
326,826

 
(1,577,996
)
 
2,681

Other
2,305

 
8,098

 
34,088

 

 
44,491

Inventories
73,388

 
204,902

 
408,738

 
(7,878
)
 
679,150

Deferred income taxes
(3,092
)
 
22,451

 
(1,051
)
 
1,993

 
20,301

Prepaid expenses and other
119,460

 
10,271

 
34,825

 
(59
)
 
164,497

Total current assets
525,706

 
1,279,841

 
1,241,580

 
(1,583,940
)
 
1,463,187

Property, plant and equipment, net
62,797

 
47,215

 
210,053

 

 
320,065

Long-term intercompany receivables
105,110

 
86,242

 
34,226

 
(225,578
)
 

Deferred charges and other
11,767

 
1,910

 
19,123

 

 
32,800

Goodwill
67,722

 
438,864

 
914,740

 

 
1,421,326

Intangible assets, net
512,356

 
766,802

 
928,812

 

 
2,207,970

Debt issuance costs
74,398

 

 
2,088

 

 
76,486

Investments in subsidiaries
3,910,228

 
2,352,614

 
445

 
(6,263,287
)
 

Total assets
$
5,270,084

 
$
4,973,488

 
$
3,351,067

 
$
(8,072,805
)
 
$
5,521,834

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
7,044

 
$
1,271

 
$
20,875

 
$

 
$
29,190

Accounts payable
81,926

 
70,416

 
255,027

 

 
407,369

Intercompany accounts payable
944,964

 
368,067

 
22,662

 
(1,335,693
)
 

Accrued liabilities:
 
 
 
 
 
 
 
 
 
Wages and benefits
8,687

 
17,881

 
33,033

 

 
59,601

Income taxes payable
8

 
(188
)
 
21,553

 

 
21,373

Accrued interest
20,835

 

 
233

 

 
21,068

Other
19,375

 
25,901

 
110,848

 

 
156,124

Total current liabilities
1,082,839

 
483,348

 
464,231

 
(1,335,693
)
 
694,725

Long-term debt, net of current maturities
3,065,710

 
3,355

 
124,029

 

 
3,193,094

Intercompany long-term debt

 
347,991

 
119,951

 
(467,942
)