Rayovac 2010 Annual Report Download - page 32

We may not be able to fully utilize our U.S. net operating loss carryforwards.
As of September 30, 2010, Spectrum Brands had U.S. federal and state net operating loss carryforwards of
approximately $1,087 million and $936 million, respectively. These net operating loss carryforwards expire
through years ending in 2031. As of September 30, 2010, our management determined that it continues to be
more likely than not that the net U.S. deferred tax asset, excluding certain indefinite lived intangibles, will not be
realized in the future and as such recorded a full valuation allowance to offset the net U.S. deferred tax asset,
including Spectrum Brands’ net operating loss carryforwards. In addition, Spectrum Brands has had changes of
ownership, as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), that
continue to subject a significant amount of Spectrum Brands’ U.S. net operating losses and other tax attributes to
certain limitations. We estimate that approximately $296 million of our federal and $463 million of our state net
operating losses will expire unused due to the limitation in Section 382 of the IRC.
As a consequence of the Salton-Applica Merger, as well as earlier business combinations and issuances of
common stock consummated by both companies, use of the tax benefits of Russell Hobbs’ loss carryforwards is
also subject to limitations imposed by Section 382 of the IRC. The determination of the limitations is complex
and requires significant judgment and analysis of past transactions. Our analysis to determine what portion of
Russell Hobbs’ carryforwards are restricted or eliminated by that provision is ongoing and, pursuant to such
analysis, we expect that a significant portion of these carryforwards will not be available to offset future taxable
income, if any. In addition, use of Russell Hobbs’ net operating loss and credit carryforwards is dependent upon
both Russell Hobbs and us achieving profitable results in the future. The Russell Hobbs’ net operating loss
carryforwards are subject to a full valuation allowance at September 30, 2010.
If we are unable to fully utilize our net operating losses, other than those restricted under Section 382 of the
IRC, 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 retailers and consumer trends toward national mass merchandisers, a
significant percentage of our sales are attributable to a very limited group of customers. Our largest customer
accounted for approximately 22% of our consolidated net sales for the fiscal year ended September 30, 2010. As
these mass merchandisers and retailers grow larger and become more sophisticated, they may demand lower
pricing, special packaging, or impose other requirements on product suppliers. These business demands may
relate to inventory practices, logistics, or other aspects of the customer-supplier relationship. Because of the
importance of these key customers, demands for price reductions or promotions, 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.
Although we have long-established relationships with many of our customers, we do not have long-term
agreements with them and purchases are generally made through the use of individual purchase orders. Any
significant reduction in purchases, failure to obtain anticipated orders or delays or cancellations of orders by any
of these major customers, or significant pressure to reduce prices from any of these major customers, could have
a material adverse effect on our business, financial condition and results of operations. Additionally, a significant
deterioration in the financial condition of the retail industry in general could have a material adverse effect on our
sales and profitability.
In addition, as a result of the desire of retailers to more closely manage inventory levels, there is a growing
trend among them to purchase products on a “just-in-time” basis. Due to a number of factors, including
(i) manufacturing lead-times, (ii) seasonal purchasing patterns and (iii) the potential for material price increases,
we may be required to shorten our lead-time for production and more closely anticipate our retailers’ and
customers’ demands, which could in the future require us to carry additional inventories and increase our
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