Rayovac 2010 Annual Report Download - page 151

SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
on approximately $165,937 of actual and deemed distributions of foreign earnings resulting in an increase in tax
expense of approximately $58,295. The Company made these distributions, which were primarily non-cash, to
reduce the U.S. tax loss for Fiscal 2009 as a result of Section 382 considerations. Remaining undistributed
earnings of the Company’s foreign operations amounting to approximately $302,447 and $156,270 at
September 30, 2010 and September 2009, respectively, are intended to remain permanently invested.
Accordingly, no residual income taxes have been provided on those earnings at September 30, 2010 and
September 30, 2009. If at some future date, these earnings cease to be permanently invested the Company may be
subject to U.S. income taxes and foreign withholding and other taxes on such amounts. If such earnings were not
considered permanently reinvested, a deferred tax liability of approximately $109,189 would be required.
The Company, as of September 30, 2010, has U.S. federal and state net operating loss carryforwards of
approximately $1,087,489 and $936,208, respectively. These net operating loss carryforwards expire through
years ending in 2031. The Company has foreign loss carryforwards of approximately $195,456 which will expire
beginning in 2011. Certain of the foreign net operating losses have indefinite carryforward periods. The
Company is subject to an annual limitation on the use of its net operating losses that arose prior to its emergence
from bankruptcy. The Company has had multiple changes of ownership, as defined under IRC Section 382, that
subject the Company’s U.S. federal and state net operating losses and other tax attributes to certain limitations.
The annual limitation is based on a number of factors including the value of the Company’s stock (as defined for
tax purposes) on the date of the ownership change, its net unrealized built in gain position on that date, the
occurrence of realized built in gains in years subsequent to the ownership change, and the effects of subsequent
ownership changes (as defined for tax purposes) if any. Based on these factors, the Company projects that
$296,160 of the total U.S. federal and $462,837 of the state net operating loss carryforwards will expire unused.
In addition, separate return year limitations apply to limit the Company’s utilization of the acquired Russell
Hobbs U.S. federal and state net operating losses to future income of the Russell Hobbs subgroup. The Company
also projects that $37,542 of the total foreign loss carryforwards will expire unused. The Company has provided
a full valuation allowance against these deferred tax assets.
The Predecessor Company recognized income tax expense of approximately $124,054 related to the gain on
the settlement of liabilities subject to compromise and the modification of the senior secured credit facility in the
period from October 1, 2008 through August 30, 2009. The Company, has, in accordance with the IRC
Section 108 reduced its net operating loss carryforwards for cancellation of debt income that arose from its
emergence from Chapter 11 of the Bankruptcy Code, under IRC Section 382(1)(6).
A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company
to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing
jurisdictions. As of September 30, 2010 and September 30, 2009, the Company’s valuation allowance, established
for the tax benefit that may not be realized, totaled approximately $330,936 and $132,688, respectively. As of
September 30, 2010 and September 30, 2009, approximately $299,524 and $108,493, respectively related to U.S.
net deferred tax assets, and approximately $31,412 and $24,195, respectively, related to foreign net deferred tax
assets. The increase in the allowance during Fiscal 2010 totaled approximately $198,248, of which approximately
$191,031 related to an increase in the valuation allowance against U.S. net deferred tax assets, and approximately
$7,217 related to a decrease in the valuation allowance against foreign net deferred tax assets. In connection with
the Merger, the Company established additional valuation allowance of approximately $103,790 related to acquired
net deferred tax assets as part of purchase accounting. This amount is included in the $198,248 above.
The total amount of unrecognized tax benefits on the Successor Company’s Consolidated Statements of
Financial Position at September 30, 2010 and September 30, 2009 are $12,808 and $7,765, respectively, that if
recognized will affect the effective tax rate. The Company recognizes interest and penalties related to uncertain
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