Energizer 2004 Annual Report Download - page 16

ENR 2004 Annual Report
14
ENERGI ZER HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Continued
(Dollars in millions, except per share and percentage data)
Special Pension Termination Benefits
During the fourth quarter of fiscal 2004, Energizer announced a
Voluntary Enhanced Retirement Option (VERO) offered to approximately
600 eligible employees in the U.S., of which 321 employees accepted.
A charge of $15.2, pre-tax, was recorded during the fourth quarter of
fiscal 2004 related to the VERO and certain other special pension
benefits and the estimated impact of such benefits on the Company’s
pension plan is reflected in the amounts shown in Note 12 to the
Consolidated Financial Statements. Future cost savings from the VERO
program are expected to be approximately $9 to $12 annually, with
about half that amount realized in 2005.
Intellectual Property Rights Income
The Company entered into agreements to license certain intellectual
property to other parties in separate transactions. Such agreements do
not require any future performance by the Company, thus all committed
consideration was recorded as income at the time each agreement was
executed. The Company recorded income related to such agreements of
$1.5 pre-tax, or $0.9 after-tax, and $8.5 pre-tax, or $5.2 after-tax, in
the years ended September 30, 2004 and 2003, respectively.
Interest and Other Financing Items
Interest expense was $2.6 higher for the year on higher average debt,
offset by lower interest rates. Higher average debt reflects the borrowings
for the SWS acquisition outstanding for a full year in 2004 compared to
six months in 2003. The lower effective interest rate for 2004 was a
result of paying off high fixed rate debt in September 2003 and generally
lower rates on variable rate debt. Interest expense increased $7.1 in
2003 reflecting incremental debt due to the acquisition of SWS, partially
offset by lower interest rates.
Other financing expense declined $13.7 for the year compared to the same
period last year, which included a $20.0 charge in 2003 related to early
repayment of debt. Additionally, 2004 experienced net currency exchange
losses compared to net gains in 2003. Other financing costs increased
$15.6 in 2003, primarily due to a $20.0 charge related to early payment
of long-term debt, partially offset by net currency exchange gains in 2003.
Income Taxes
Income taxes, which include federal, state and foreign taxes, were
25.3%, 28.5% and 33.1% of earnings before income taxes in 2004,
2003 and 2002, respectively. Earnings before income taxes and income
taxes include certain unusual items and adjustments to prior recorded
tax accruals in all years, which impact the overall tax rate. The most
significant of these are described below:
•In 2004, 2003 and 2002, $16.2, $12.2 and $6.7, respectively, of
tax benefits related to prior years’ losses were recorded.
•Adjustments were recorded in each of the three years to revise pre-
viously recorded tax accruals, which were based on estimates when
recorded. Such adjustments decreased the income tax provision by
$8.5, $7.0 and $5.1 in 2004, 2003 and 2002, respectively.
•The tax benefit related to the write-up of acquired SWS inventory of
$89.7, all of which was recorded to cost of products sold in 2003,
was higher than the overall tax rate for the remainder of the business,
and thus reduced the overall tax rate by 1.8 percentage points.
Excluding the items discussed above, the income tax percentage was
32.2% in 2004, 36.1% in 2003 and 37.3% in 2002. The improved
tax rate in 2004 reflects a significantly lower rate on foreign income due
to improved foreign earnings and overall country mix. Such improve-
ments reflect better battery results as well as a favorable impact from
the inclusion of SWS.
The Company’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 2004 level and excluding any unusual
or non-recurring tax items, future tax rates would likely be in the 31-33%
range. Declines in earnings in lower tax rate countries, earnings increase
in higher tax countries or operating losses in the future could increase
future tax rates.
Special Purpose Entity
The Company routinely sells a pool of U.S. accounts receivable through
a financing arrangement between Energizer Receivables Funding
Corporation (the SPE), which is a bankruptcy-remote special purpose
entity subsidiary of the Company, and an outside party (the Conduit).
The terms of the arrangement were amended in April 2004 providing,
among other things, the ability of the Company to repurchase accounts
receivable sold to the Conduit if it so chooses. Under the amended
structure, funds received from the Conduit are treated as borrowings
rather than proceeds of accounts receivables sold for accounting purposes.
Prior to the amendment, this financing arrangement was required to be
accounted for as a sale of receivables, representing “off balance sheet
financing.” Under accounting required for the former agreement, reported
balance sheet captions were higher or lower than such amounts would
have been reported under the amended structure as presented below.
AS OF SEPTEMBER 30, 2003
Additional accounts receivable $ 175.7
Additional notes payable $ 75.0
Lower other current assets $ 100.7