Rayovac 2009 Annual Report Download - page 23

Table of Contents
Index to Financial Statements
Our products utilize certain key raw materials; any increase in the price of these raw materials could have a material and adverse effect on our
business, financial condition and profits.
The principal raw materials used to produce our products—including zinc powder, electrolytic manganese dioxide powder and steel—are sourced
either on a global or regional basis, and the prices of those raw materials are susceptible to price fluctuations due to supply and demand trends, energy costs,
transportation costs, government regulations, duties and tariffs, changes in currency exchange rates, price controls, general economic conditions and other
unforeseen circumstances. In particular, during 2007 and 2008 we experienced extraordinary price increases for raw materials, particularly as a result of
strong demand from China.
We regularly engage in forward purchase and hedging derivative transactions in an attempt to effectively manage and stabilize some of the raw
material costs we expect to incur over the next 12 to 24 months; however, our hedging positions may not be effective or may not anticipate beneficial trends
in a particular raw material market or as a result of changes in any of our business may no longer be useful for the Company. In addition, for certain of the
principle raw materials we use to produce our products, such as electrolytic manganese dioxide powder, there are no available effective hedging markets. If
these efforts are not effective or expose us to above average costs for an extended period of time and we are unable to pass our raw materials costs on to our
customers, our future profitability may be materially and adversely affected. Further, with respect to transportation costs, certain modes of delivery are
subject to fuel surcharges which are determined based upon the current cost of diesel fuel in relation to pre−established agreed upon costs. We may be
unable to pass these fuel surcharges on to our customers which may have an adverse effect on our profitability and results of operations.
In addition, we have exclusivity arrangements and minimum purchase requirements with certain of our suppliers for the Home and Garden Business,
which increase our dependence upon and exposure to those suppliers. Some of those agreements include caps on the price we pay for our supplies and in
certain instances, these caps have allowed us to purchase materials at below market prices. When we attempt to renew those contracts the other parties to the
contracts may not be willing to include or may limit the effect of those caps and could even attempt to impose above market prices in an effort to make up
for any below market prices paid by us prior to the renewal of the agreement. Any failure to timely obtain suitable supplies at competitive prices could
materially adversely affect our business, financial condition and results of operations.
We may not be able to fully utilize our United States net operating loss carryforwards.
As of September 30, 2009, we have U.S. federal and state net operating loss carryforwards of approximately $598 and $643 million, respectively.
These net operating loss carryforwards expire through years ending in 2029. As of September 30, 2009, management determined that it continues to be
more likely than not that the net U.S. deferred tax asset, excluding certain indefinite lived intangibles, would not be realized in the future and as such
recorded a full valuation allowance to offset the net U.S. deferred tax asset, including the Company’s net operating loss carryforwards. In addition, the
Company has had changes of ownership, as defined under Internal Revenue Code Section 382, that continue to subject a significant amount of the
Company’s U.S. net operating losses and other tax attributes to certain limitations. We estimate that approximately $149 million of our federal and $311
million of our state net operating losses will expire unused due to Internal Revenue Code Section 382 limitation. If we are unable to fully utilize our net
operating losses other than those restricted under Internal Revenue Code Section 382, as discussed above, to offset taxable income generated in the future,
our results of operations could be materially and negatively impacted.
Consolidation of retailers and our dependence on a small number of key customers for a significant percentage of our sales may negatively affect
our business, financial condition and results of operations.
As a result of consolidation of national mass merchandisers, a significant percentage of our sales are attributable to a very limited group of retailer
customers. Because of the importance of these key customers, demands for price reductions or promotions by such customers, reductions in their purchases,
changes in their financial condition or loss of their accounts could have a material adverse effect on our business, financial condition and results of
operations. In addition, as a result of the desire of retailers to more closely manage
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