Energizer 2002 Annual Report Download - page 16

Energizer Holdings, Inc.
Management’s Discussion and Analysis of Results of Operations and Financial Condition Continued
(Dollars in millions except per share and percentage data)
ENR 2002 Annual Report Page 14
Goodwill and Intangibles
As part of its annual business planning cycle, Energizer performed an
evaluation of its European business in the fourth quarter of fiscal 2001,
which resulted in an impairment charge for $119.0 of related goodwill.
At September 30, 2001, the carrying amount of goodwill related to
Energizer’s European business was $8.5.
Energizer adopted SFAS No. 142, “Goodwill and Other Intangible
Assets” as of October 1, 2001. As a result, Energizer no longer amor-
tizes its goodwill and intangible assets, which consist of tradenames. As
part of its business planning cycle in the fourth quarter of fiscal 2002,
Energizer completed its impairment test of goodwill and intangibles,
which resulted in no impairment. See Note 8 to the Consolidated
Financial Statements for further discussion.
Intellectual Property Rights Income
In fiscal 2001, Energizer recorded income of $20.0 pre-tax, or $12.3
after-tax, related to the licensing of intellectual property rights.
Loss on Disposition of Spanish Affiliate
In fiscal 2000, Energizer recorded a $15.7 pre-tax loss on the sale of its
Spanish affiliate prior to the spin-off. The loss was a non-cash write-off of
goodwill and cumulative translation accounts of the Spanish affiliate.
Ralston recognized capital loss tax benefits related to the Spanish sale of
$24.4, which are reflected in Energizer’s historical financial statements and
resulted in a net after-tax gain of $8.7 on the Spanish transaction. Energizer
would not have realized such capital loss benefits on a stand-alone basis.
Interest and Other Financial Items
Interest expense decreased $12.1 in 2002, on lower average borrowings,
as well as lower interest rates on variable rate debt. Interest expense
increased $5.9 in 2001 from 2000 as the cost of incremental debt
assumed by Energizer immediately prior to the spin-off was partially offset
by lower average borrowings and lower interest rates in the second half of
2001, compared to the same period in 2000.
Other financing-related costs declined $1.2 in 2002, on lower discounts
on the sale of accounts receivable under a financing arrangement, par-
tially offset by net exchange losses versus net exchange gains in 2001.
Other financing-related costs increased $5.9 in 2001, reflecting the dis-
count on the sale of accounts receivable under a financing arrangement
and lower net exchange gains.
Income Taxes
Income taxes, which include federal, state and foreign taxes, were 33.1%,
223.8% and 35.5% of earnings from continuing operations before income
taxes in 2002, 2001 and 2000, respectively. Earnings before income taxes
and income taxes include certain unusual items in all years the most sig-
nificant of which are described as follows:
■In 2002, $6.7 of tax benefits related to prior years’ losses was
recorded.
■In 2001, the provision for goodwill impairment of $119.0 has no
associated tax benefit, as the charge is not deductible for tax pur-
poses. The provisions for restructuring of $29.8 have an associated
tax rate of 34.9%.
■In 2001 and 2000, goodwill was amortized with no associated tax
benefit.
■In 2000, the income tax percentage was favorably impacted by the
recognition of $24.4 U.S. capital loss tax benefits related to the dis-
position of Energizer’s Spanish affiliate.
Excluding the items discussed above, the income tax percentage was
35.5% in 2002, 42.3% in 2001 and 39.9% in 2000. In 2002, the rate
improved due to reduced foreign losses and lower taxes on repatriation of
foreign earnings. The higher effective tax rate in 2001 compared to 2000
reflects pre-tax losses in foreign tax jurisdictions for which no tax benefits
were realized. The year-over-year increase was the result of the fixed
dollar impact of these items being spread over a smaller earnings base.
Energizer’s effective tax rate is highly sensitive to country mix from
which earnings or losses are derived. To the extent future earnings
levels and country mix are similar to the 2002 level, future tax rates
would likely be in the 36% range. Shifts of earnings from lower to
higher tax rate countries or higher losses in countries where tax
benefits cannot be recognized could increase future tax rates.
Conversely, favorable country earnings mix or reduced foreign
losses could reduce future tax rates.
Liquidity and Capital Resources
Cash flows from continuing operations totaled $206.1 in 2002, $318.1 in
2001 and $289.6 in 2000. The decrease in cash flows from operations in
2002 was primarily due to the absence of a significant inventory reduction,
as was experienced in 2001 and lower proceeds from the sale of accounts
receivable. Cash flows from operations in 2001 increased modestly due
to significant inventory reduction in 2001 compared to a significant
inventory increase in 2000, and other working capital improvements in
2001, partially offset by substantially lower cash earnings in 2001 and
lower proceeds from sale of accounts receivable.
Working capital was $353.3 and $288.1 at September 30, 2002 and 2001,
respectively. Capital expenditures totaled $40.7, $77.9 and $72.8 in 2002,
2001 and 2000, respectively. These expenditures were funded by cash
flow from operations. Capital expenditures decreased in 2002 as several
major projects were completed in late 2001 and early 2002. Capital