Rayovac 2010 Annual Report Download - page 33

working capital and related financing requirements. This may increase the cost of warehousing inventory or
result in excess inventory becoming difficult to manage, unusable or obsolete. In addition, if our retailers
significantly change their inventory management strategies, we may encounter difficulties in filling customer
orders or in liquidating excess inventories, or may find that customers are cancelling orders or returning products,
which may have a material adverse effect on our business.
Furthermore, we primarily sell branded products and a move by one or more of our large customers to sell
significant quantities of private label products, which we do not produce on their behalf and which directly
compete with our products, could have a material adverse effect on our business, financial condition and results
of operations.
As a result of our international operations, we face a number of risks related to exchange rates and foreign
currencies.
Our international sales and certain of our expenses are transacted in foreign currencies. During the fiscal
year ended September 30, 2010, approximately 44% of both our net sales and our operating expenses were
denominated in foreign currencies. We expect that the amount of our revenues and expenses transacted in foreign
currencies will increase as our Latin American, European and Asian operations grow and, as a result, our
exposure to risks associated with foreign currencies could increase accordingly. Significant changes in the value
of the U.S. dollar in relation to foreign currencies will affect our cost of goods sold and our operating margins
and could result in exchange losses or otherwise have a material effect on our business, financial condition and
results of operations. Changes in currency exchange rates may also affect our sales to, purchases from and loans
to our subsidiaries as well as sales to, purchases from and bank lines of credit with our customers, suppliers and
creditors that are denominated in foreign currencies.
We source many products from, and sell many products in, China and other Asian countries. To the extent
the Chinese Renminbi (“RMB”) or other currencies appreciate with respect to the U.S. dollar, we may experience
fluctuations in our results of operations. Since 2005, the RMB has no longer been pegged to the U.S. dollar at a
constant exchange rate and instead fluctuates versus a basket of currencies. Although the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange
rate, the RMB may appreciate or depreciate within a flexible peg range against the U.S. dollar in the medium to
long term. Moreover, it is possible that in the future Chinese authorities may lift restrictions on fluctuations in the
RMB exchange rate and lessen intervention in the foreign exchange market.
While we may enter into hedging transactions in the future, the availability and effectiveness of these
transactions may be limited, and we may not be able to successfully hedge our exposure to currency fluctuations.
Further, we may not be successful in implementing customer pricing or other actions in an effort to mitigate the
impact of currency fluctuations and, thus, our results of operations may be adversely impacted.
A deterioration in trade relations with China could lead to a substantial increase in tariffs imposed on goods
of Chinese origin, which potentially could reduce demand for and sales of our products.
We purchase a number of our products and supplies from suppliers located in China. China gained
Permanent Normal Trade Relations (“PNTR”) with the U.S. when it acceded to the World Trade Organization
(“WTO”), effective January 2002. The U.S. imposes the lowest applicable tariffs on exports from PNTR
countries to the U.S. In order to maintain its WTO membership, China has agreed to several requirements,
including the elimination of caps on foreign ownership of Chinese companies, lowering tariffs and publicizing its
laws. China may not meet these requirements, it may not remain a member of the WTO, and its PNTR trading
status may not be maintained. If China’s WTO membership is withdrawn or if PNTR status for goods produced
in China were removed, there could be a substantial increase in tariffs imposed on goods of Chinese origin
entering the U.S. which could have a material negative adverse effect on our sales and gross margin.
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