Energizer 2004 Annual Report Download - page 20

ENR 2004 Annual Report
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entered into a prepaid share option with a financial institution to mitigate
this risk (see Note 18 to the Consolidated Financial Statements). The
change in fair value of the prepaid share option is recorded in selling,
general and administrative expense. Changes in value of the prepaid
share option should mitigate changes in the after-tax deferred compen-
sation liabilities tied to the Company’s stock price. Market value of the
prepaid share options was $22.1 and $39.7 at September 30, 2004
and 2003, respectively. The change in fair value of the prepaid share
option for the year ended September 30, 2004 and 2003 resulted in
income of $8.8 and $5.1, respectively.
Critical Accounting Policies
The Company identified the policies below as critical to its business
operations and the understanding of its results of operations. The impact
and any associated risks related to these policies on its business opera-
tions is discussed throughout Management’s Discussion and Analysis of
Results of Operations and Financial Condition where such policies affect
the reported and expected financial results.
Preparation of the financial statements in conformity with generally accepted
accounting principles (GAAP) in the U.S. requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. On an ongoing basis, the Company
evaluates its estimates, including those related to customer programs
and incentives, bad debts, inventories, intangible assets and other long-
lived assets, income taxes, financing operations, pensions and other
postretirement benefits, contingencies and acquisitions. Actual results
could differ from those estimates. This listing is not intended to be a
comprehensive list of all of the Company’s accounting policies.
•Revenue Recognition The Company’s revenue is from the sale of its
products. Revenue is recognized when title, ownership and risk of
loss passes to the customer. Discounts are offered to customers for
early payment and an estimate of such discounts is recorded as a
reduction of net sales in the same period as the sale. Our standard
sales terms are final and returns or exchanges are not permitted
unless a special exception is made; reserves are established and
recorded in cases where the right of return does exist for a particular
sale. The Company offers a variety of programs, primarily to its
retail customers, designed to promote sales of its products. Such
programs require periodic payments and allowances based on
estimated results of specific programs and are recorded as a reduction
to net sales. The Company accrues at the time of sale the estimated
total payments and allowances associated with each transaction.
Additionally, the Company offers programs directly to consumers to
promote the sale of its products. Promotions which reduce the
ultimate consumer sale prices are recorded as a reduction of net
sales at the time the promotional offer is made, generally using esti-
mated redemption and participation levels. The Company continually
assesses the adequacy of accruals for customer and consumer
promotional program costs not yet paid. To the extent total program
payments differ from estimates, adjustments may be necessary.
Historically, these adjustments have not been material.
•Allowance for Doubtful Accounts The Company maintains an
allowance for doubtful accounts receivable for estimated losses
resulting from customers that are unable to meet their financial
obligations. The financial condition of specific customers is consid-
ered when establishing the allowance. Provisions to increase the
allowance for doubtful accounts are included in selling, general and
administrative expense. If actual bad debt losses exceed estimates,
additional provisions may be required in the future.
•Pension Plans and Other Postretirement Benefits The determination of
the Company’s obligation and expense for pension and other postretire-
ment benefits is dependent on certain assumptions developed by
the Company and used by actuaries in calculating such amounts.
Assumptions include, among others, the discount rate, future salary
increases and the expected long-term rate of return on plan assets.
Actual results that differ from assumptions made are accumulated and
amortized over future periods and, therefore, generally affect the
Company’s recognized expense and recorded obligation in such future
periods. Significant differences in actual experience or significant
changes in assumptions may materially affect pension and other postre-
tirement obligations. Of the assumptions listed above, changes in the
expected assets return have the most significant impact on the
Company’s annual earnings prospectively. A one percentage point
decrease or increase in expected assets return would decrease or
increase the Company’s pre-tax pension expense by $6.1.
•Valuation of Long-Lived Assets The Company periodically evaluates its
long-lived assets, including goodwill and intangible assets, for
potential impairment indicators. Judgments regarding the existence
of impairment indicators are based on legal factors, market condi-
tions and operational performance. Future events could cause the
Company to conclude that impairment indicators exist. The
Company uses the discounted cash flows method to determine if
impairment exists. This requires management to make assumptions
regarding future income, working capital and discount rates, which
would affect the impairment calculation.
•Income Taxes The Company estimates income taxes and the income
tax rate in each jurisdiction that it operates. This involves estimating
taxable earnings, specific taxable and deductible items, the likelihood
of generating sufficient future taxable income to utilize deferred tax
assets, and possible exposures related to future tax audits. To the
extent these estimates change, adjustments to income taxes are
made in the period in which the estimate is changed.
•Acquisitions The Company uses the purchase method that requires
the allocation of the cost of an acquired business to the assets
acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. The excess of the cost of an acquired
business over the fair value of the assets acquired and liabilities
assumed is recognized as goodwill. The valuation of the acquired
assets and liabilities will impact the determination of future operat-
ing results. The Company uses a variety of information sources to
determine the value of acquired assets and liabilities including:
third-party appraisers for the value and lives of property, identifiable
intangibles and inventories; actuaries for defined benefit retirement
plans; and legal counsel or other experts to assess the obligations
associated with legal, environmental and other claims.
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)