Rayovac 2009 Annual Report Download - page 60

Table of Contents
Index to Financial Statements
Income Taxes. Our effective tax rate on losses from continuing operations is approximately 2.0% for Old Spectrum and (256)% for New
Spectrum during Fiscal 2009. Our effective tax rate on income from continuing operations was approximately 1.0% for Fiscal 2008. The primary drivers of
the change in our effective rate for New Spectrum for Fiscal 2009 as compared to Fiscal 2008 relate to residual income taxes recorded on the actual and
deemed distribution of foreign earnings in Fiscal 2009. The change in the valuation allowance related to these dividends was recorded against goodwill as
an adjustment for release of valuation allowance. The primary drivers for Fiscal 2008 include tax expense recorded for an increase in the valuation
allowance associated with our net U.S. deferred tax asset and the tax impact of the impairment charges.
As of September 30, 2009, we have U.S. federal and state net operating loss carryforwards of approximately $598 and $643 million, respectively,
which will expire between 2010 and 2029, and we have foreign net operating loss carryforwards of approximately $138 million, which will expire
beginning in 2010. Certain of the foreign net operating losses have indefinite carryforward periods. As of September 30, 2008 we had U.S. federal, foreign
and state net operating loss carryforwards of approximately $960, $142 and $854 million, respectively, which, at that time, were scheduled to expire
between 2009 and 2028. Certain of the foreign net operating losses have indefinite carryforward periods. We are subject to an annual limitation on the use
of our net operating losses that arose prior to its emergence from bankruptcy. We have had multiple changes of ownership, as defined under Internal
Revenue Code (“IRC”) Section 382, that subject us to 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 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. Based on these factors, we project that $149 million of the total U.S. federal and $311
million of the state net operating loss will expire unused. We have provided a full valuation allowance against the deferred tax asset.
We recognized income tax expense of approximately $124 million related to the gain on the settlement of liabilities subject to compromise and the
modification of the senior secured credit facility in the eleven month period ended August 30, 2009. This adjustment, net of a change in valuation allowance
is embedded in Reorganization items expense (income), net. We intend to reduce our net operating loss carryforwards for any cancellation of debt income in
accordance with IRC Section 108 that arises from our emergence from Chapter 11 of the Bankruptcy Code under IRC Section 382 (1)(6).
The ultimate realization of our deferred tax assets depends on our ability to generate sufficient taxable income of the appropriate character in the
future and in the appropriate taxing jurisdictions. We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that
the tax assets will not be realized. We base these estimates on projections of future income, including tax planning strategies, in certain jurisdictions.
Changes in industry conditions and other economic conditions may impact our ability to project future income. ASC Topic 740: “Income Taxes,” formerly
SFAS No. 109 “Accounting for Income Taxes” (“ASC 740”) requires the establishment of a valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In accordance with ASC 740, we periodically assess the likelihood that our deferred tax assets
will be realized and determine if adjustments to the valuation allowance are appropriate. In 2009, Old Spectrum recorded a reduction in the valuation
allowance against the U.S. net deferred tax asset exclusive of indefinite lived intangible assets primarily as a result of utilizing net operating losses to offset
the gain on settlement of liabilities subject to compromise and the impact of the fresh start reporting adjustments. New Spectrum recorded a reduction in the
domestic valuation allowance of $47 million as a reduction to goodwill as a result of the recognition of pre−fresh start deferred tax assets to offset New
Spectrum income. Our total valuation allowance established for the tax benefit of deferred tax assets that may not be realized is approximately $133 million
at September 30, 2009. Of this amount, approximately $109 million relates to U.S. net deferred tax assets and approximately $24 million relates to foreign
net deferred tax assets. We recorded a non−cash deferred income tax charge of approximately $257 million related to a valuation allowance against U.S. net
deferred tax assets during Fiscal 2008. Included in the total is a non−cash deferred income tax charge of approximately $4 million related to an increase in
the valuation allowance against our net deferred tax assets in China in connection with the Ningbo Exit Plan. We also determined that a valuation allowance
was no
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