Rayovac 2013 Annual Report Download - page 69

Goodwill and Intangibles Impairment. Accounting standards require companies to test goodwill and
indefinite-lived intangible assets for impairment annually, or more often if an event or circumstance indicates
that an impairment loss may have been incurred. In Fiscal 2012 and Fiscal 2011, we tested our goodwill and
indefinite-lived intangible assets as required. As a result of this testing, no impairment was identified in Fiscal
2012 while we recorded a non-cash pretax impairment charge of $32 million in Fiscal 2011. The $32 million
non-cash pretax impairment charge incurred in Fiscal 2011 reflects trade name intangible asset impairments of
the following: $23 million related to the Global Batteries and Appliances segment; $8 million related to Global
Pet Supplies; and $1 million related to the Home and Garden Business. See Note 2(j), “Significant Accounting
Policies and Practices—Intangible Assets”, of Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K for further details on goodwill and intangibles impairment charges.
Interest Expense. Interest expense in Fiscal 2012 decreased to $192 million from $208 million in Fiscal
2011. The decrease in interest expense was primarily attributable to lower expense from the replacement of our
12% Notes with our 6.75% Notes in Fiscal 2012, reduced principal and lower effective interest rates related to
our Term Loan and lower expenses for interest rate swaps and other fees and expenses. The cost savings were
tempered by higher expense from increased principal primarily related to our 9.5% Notes, and expenses related
to the refinancing of our 12% Notes and the amendment of our ABL Revolving Credit Facility. See Note 6,
“Debt,” to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional
information regarding our outstanding debt.
Income Taxes. In Fiscal 2012, we recorded income tax expense of $60 million on pretax income from
continuing operations of $109 million, and in Fiscal 2011, we recorded income tax expense of $92 million on a
pretax loss from continuing operations of $17 million. Our effective tax rate on income from continuing
operations was approximately 55% for Fiscal 2012. Our effective tax rate on our loss from continuing operations
was approximately 539% for Fiscal 2011. There are four significant factors impacting our book income tax rate.
First, we are profitable in the foreign jurisdictions in which we operate and therefore must provide foreign
income taxes even while we have a book loss in the United States. Our book loss in the U.S. is the result of
substantially all of our debt and restructuring costs being incurred in our U.S. entities. Second, since there is a
valuation allowance against U.S. deferred tax assets, we are unable to record any financial statement benefit
related to our U.S. domestic losses. This impact is further exacerbated by the tax amortization of certain domestic
indefinite lived intangible assets. The deferred tax liabilities created by the tax amortization of these intangibles
cannot be used to offset corresponding increases in net operating loss deferred tax assets in determining the
Company’s domestic valuation allowance. This results in additional net domestic tax expense despite the U.S.
domestic book losses. Third, in Fiscal 2012, we recognized a $14 million tax benefit from the release of a portion
of our U.S. valuation allowance, as discussed below, in connection with the purchase of FURminator. Finally, in
Fiscal 2011, our consolidated pretax income was close to break even, which created a high effective tax rate as
this rate is calculated by dividing tax expense into pretax income (loss).
As of September 30, 2012, we have U.S. federal and state net operating loss carryforwards of approximately
$1,305 million and $1,341 million, respectively. These net operating loss carryforwards expire through years ending
in 2032. We also have foreign loss carryforwards of approximately $119 million, which will expire beginning in
2016. Certain of the foreign net operating losses have indefinite carryforward periods. We have had multiple
changes of ownership, as defined under Internal Revenue Code (“IRC”) Section 382, that subject our U.S. federal
and state net operating losses and other tax attributes to certain limitations. The annual limitation on our use of these
carryforwards is based on a number of factors including the value of our stock (as defined for tax purposes) on the
date of the ownership change, our 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. In addition, separate return year limitations apply to limit our utilization of the acquired
Russell Hobbs U.S. federal and state net operating losses to future income of the Russell Hobbs subgroup. Based on
these factors, we estimate that $301 million of the total U.S. federal and $385 million of the state net operating loss
would expire unused even if the Company generates sufficient income to otherwise use all its NOLs. In addition, we
project that $111 million of the total foreign net operating loss carryforwards will expire unused. We have provided
a full valuation allowance against these deferred tax assets as well.
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