Rayovac 2010 Annual Report Download - page 70

As of September 30, 2010, we have 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, and we have foreign loss carryforwards of approximately $195 million, which will expire
beginning in 2011. Certain of the foreign net operating losses have indefinite carryforward periods. We are
subject to an annual limitation on the use of our U.S. net operating losses that arose prior to our emergence from
bankruptcy. 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 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 project that $296 million of the total U.S. federal and $463
million of the state net operating loss will expire unused. In addition, we project that $38 million of the total
foreign net operating loss carryforwards will expire unused. We have provided a full valuation allowance against
these deferred tax assets.
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 period from
October 1, 2008 through August 30, 2009. This adjustment, net of a change in valuation allowance is embedded
in Reorganization items expense (income), net. We have, in accordance with the IRC Section 108 reduced our
net operating loss carryforwards for cancellation of debt income that arose 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” (“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.
Our total valuation allowance established for the tax benefit of deferred tax assets that may not be realized is
approximately $331 million at September 30, 2010. Of this amount, approximately $300 million relates to U.S.
net deferred tax assets and approximately $31 million relates to foreign net deferred tax assets. In connection
with the Merger, we established an additional valuation allowance of approximately $104 million related to
acquired net deferred tax assets as part of acquisition accounting. 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 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 longer
required in Brazil and thus recorded a $31 million benefit to reverse the valuation allowance previously
established. Our total valuation allowance, established for the tax benefit of deferred tax assets that may not be
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