Rayovac 2012 Annual Report Download - page 29

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, 2012, Spectrum Brands has 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. As of September 30, 2012, our management determined that it continues to be
more likely than not that the U.S. 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. 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 Salton-Applica merger, 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 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 are subject to
a full valuation allowance at September 30, 2012.
We estimate that approximately $301 million of the Spectrum and Russell Hobbs U.S. federal net operating
losses and $385 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.
If we are unable to fully utilize our net operating losses, other than those restricted under Section 382 of the
IRC, as discussed above, to offset taxable income generated in the future, our results of operations could be
materially and negatively impacted.
Consolidation of retailers and our dependence on a small number of key customers for a significant
percentage of our sales may negatively affect our business, financial condition and results of operations.
As a result of consolidation of retailers and consumer trends toward national mass merchandisers, a
significant percentage of our sales are attributable to a very limited group of customers. Our largest customer
accounted for approximately 23% of our consolidated net sales for the fiscal year ended September 30, 2012. As
these mass merchandisers and retailers grow larger and become more sophisticated, they may demand lower
pricing, special packaging, or impose other requirements on product suppliers. These business demands may
relate to inventory practices, logistics, or other aspects of the customer-supplier relationship. Because of the
importance of these key customers, demands for price reductions or promotions, reductions in their purchases,
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