Foot Locker 2004 Annual Report Download - page 26

Interest income is generated through the investment of cash equivalents, short-term investments, the accretion of
the Northern Group note to its face value and accrual of interest on the outstanding principal, as well as, interest on income
tax refunds. The decrease in interest income of $1 million in 2004 was primarily related to the reduction of interest income
earned on tax refunds and settlements as they were received during 2003. The Northern Group note was recorded in the
fourth quarter of 2002 and interest income amounted to $2 million in both 2004 and 2003. Interest income related to
cash equivalents and short-term investments was $5 million in 2004 and 2003.
Interest expense of $26 million declined in 2003 by 21.2 percent from $33 million in 2002. Interest expense related
to long-term debt declined by $6 million primarily as a result of the $100 million of interest rate swaps that were
outstanding during 2003. These interest rate swaps were entered into to effectively convert a portion of the 8.50 percent
fixed-rate debentures, due in 2022, to a lower variable rate. The Company entered into a $50 million interest rate swap
agreement in December 2002 and subsequently entered into two additional swaps during 2003, totaling $50 million, to
convert $50 million of the 8.50 percent debentures to a variable rate debt which allowed the Company to lower the net
amount of interest expense being paid at each interest payment date. The swaps reduced interest expense by
approximately $4 million. The remaining decrease is a result of the lower debt balance as the Company repurchased $19
million of the 8.50 percent debentures in 2003 and $9 million in the latter part of 2002. Interest expense in 2003 was
further reduced as a result of the repayment of the remaining $32 million of the $40 million 7.00 percent medium-term
notes that matured in October 2002.
Interest income related to cash equivalents and short-term investments amounted to $5 million in both 2003 and
2002. Additional interest income on the Northern Group note in 2003 was $2 million. Interest income of $1 million and
$2 million was related to tax refunds and settlements in 2003 and 2002, respectively.
Income Taxes
The effective tax rate for 2004 was 31.7 percent, as compared with 35.5 percent in the prior year. The reduction was
principally related to a lower rate of tax on the Company’s foreign operations and the settlement of tax examinations.
During the second quarter of 2004 the Commonwealth of Puerto Rico concluded an examination of the Company’s
branch income tax returns, including an income tax audit for the years 1994 through 1999 and a branch profit tax audit
for the years 1994 through 2002. As a result, the Company reduced its income tax provision for continuing operations
by $2 million. Also, during the second quarter of 2004, the IRS completed its survey of the Company’s income tax returns
for the years from 1999-2001 and its examination of the 2002 year. The IRS and the Company also came to an agreement
on the pre-filing review of the Company’s income tax return for 2003. As a result of these actions by the IRS, the Company
reduced its income tax provision for continuing operations by $7 million and discontinued operations by $37 million.
During the third quarter of 2004 the IRS completed its post-filing review of the Company’s income tax return for 2003
resulting in a $2 million reduction to the income tax provision. During the fourth quarter of 2004 the Company completed
an analysis of the effect of the completion of the IRS’s examination and review of the Company’s income tax returns. This
analysis resulted in a reduction to the income tax provision of $3 million.
The effective rate for 2003 was 35.5 percent, as compared with 34.2 percent in 2002. The increased tax rate was
primarily due to the Company recording tax benefits of $5 million in 2003 as compared to $9 million in 2002. In addition
the rate increased due to a shift in taxable income from lower to higher tax jurisdictions. During 2003, the Company
recorded a $1 million tax benefit related to state tax law changes, a $2 million tax benefit related to a reduction in the
valuation allowance for deferred tax assets related to a multi-state tax planning strategy, a $1 million tax benefit related
to a reduction in the valuation allowance for foreign tax loss carryforwards, and a tax benefit of $1 million related to the
settlement of tax examinations.
The effective rate for 2002 was 34.2 percent. The Company recorded a tax benefit during 2002 of $5 million related
to a multi-state tax planning strategy, a $1 million tax benefit related to settlement of tax examinations, a $2 million
benefit related to the reduction in the valuation allowance for deferred tax assets related to foreign tax credits and a $1
million benefit related to international tax planning strategies. The combined effect of these items, in addition to higher
earnings in lower tax jurisdictions and the utilization of tax loss carryforwards, reduced the effective tax rate.
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