Rayovac 2013 Annual Report Download - page 29

Although we may increase the prices of certain of our goods to our customers, we may not be able to pass all of
these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost
increases. We cannot provide any assurance that our sources of supply will not be interrupted due to changes in
worldwide supply of or demand for raw materials or other events that interrupt material flow, which may have an
adverse effect on our profitability and results of operations.
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 may, as a result of changes in our business, no longer be useful for us. In addition, for certain of the
principal 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. Furthermore, 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 U.S. net operating loss carryforwards.
As of September 30, 2013, we had U.S. federal and state net operating loss carryforwards of approximately
$1,515 million and $1,551 million, respectively. These net operating loss carryforwards expire through years
ending in 2033. As of September 30, 2013, our management determined that it continues to be more likely than
not that the U.S. federal and most of the U.S. state net deferred tax asset, excluding certain indefinite-lived assets,
will not be realized in the future and as such recorded a full valuation allowance to offset the net U.S. federal and
most of the 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.
As a consequence of the merger of Salton, Inc. and Applica Incorporated in December 2007 (which created
Russell Hobbs), as well as earlier business combinations and issuances of common stock consummated by both
companies, use of the tax benefits of Russell Hobbs’ U.S. loss carryforwards is also subject to limitations
imposed by Section 382 of the IRC. 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 tax
credit carryforwards is dependent upon both Russell Hobbs and us achieving profitable results in the future. The
Russell Hobbs’ U.S. net operating loss carryforwards were subject to a full valuation allowance at September 30,
2013.
We estimate that approximately $301 million of the Spectrum and Russell Hobbs U.S. federal net operating
losses and $358 million of the Spectrum and Russell Hobbs state net operating losses would expire unused even
if the Company generates sufficient income to otherwise use all its net operating losses, due to the limitation in
Section 382 of the IRC.
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