Rayovac 2012 Annual Report Download - page 61

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 income was close to break even, which created a high effective tax rate as this rate is calculated
by dividing tax expense into pre-tax income (loss) from operations.
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.
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. Accounting Standards Codification (“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 required.
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