AutoNation 2003 Annual Report Download - page 33

Table of Contents
and increased amortization expense resulting from payments made by us in connection with the November 2002 amendment to our senior
unsecured notes partially offset by lower interest rates. Additionally, as a result of completed capital expenditure projects, there was a lower
amount of interest expense capitalized to construction in progress in 2003 compared to 2002. The increase in 2002 was primarily due to
higher fixed interest expenses related to the senior unsecured notes sold in August 2001.
Interest Income
The 2003 decrease is primarily the result of lower average cash and investment balances combined with lower interest rates. The 2002
increase is primarily due to higher average cash and investment balances, partially offset by lower interest rates.
Other Income (Expense), Net
Other income in 2003 primarily relates to the sale of our interest in an equity-method investment in LKQ Corporation, an auto parts
recycling business, for $38.3 million, resulting in a pre-tax gain of $16.5 million.
In September 2002, one of our captive insurance companies terminated a reinsurance agreement with a third-party insurance company
and transferred our risk pertaining to certain extended warranty products under the reinsurance agreement back to such insurance company.
As a result of the transaction, we liquidated related restricted assets, realizing a $3.1 million gain on the sale. Additionally, in 2002, we
converted our remaining restricted investments to restricted cash, realizing a $2.7 million gain on the sale.
Provision for Income Taxes
Income taxes have been provided based upon our anticipated underlying annual effective income tax rate. The effective income tax rate
was 14.4%, 38.3% and 38.9% for the years ended December 31, 2003, 2002 and 2001, respectively. The decrease in the effective tax rate in
2002 primarily reflects the impact of the elimination of goodwill amortization, partially offset by increases to our effective state tax rates.
Excluding the impact of the IRS settlement and tax adjustments, the effective income tax rate for 2003 was 38.3%.
In March 2003, we entered into a settlement agreement with the IRS with respect to the tax treatment of certain transactions we entered
into in 1997 and 1999, including a transaction that generally had the effect of accelerating projected tax deductions relating to health and
welfare benefits. Under the agreement, we agreed to pay the IRS net aggregate payments of approximately $470 million, which included an
initial net payment of approximately $350 million due in March 2004 and three subsequent net payments of approximately $40 million each
due March 2005, 2006 and 2007, respectively. In July 2003, we made a $366 million prepayment of the initial installment due March 2004
(net payment of $336 million, including a $30 million income tax benefit for the interest deduction). As a result of the settlement, during
2003, we recognized an income tax benefit of $127.5 million from the reduction of previously recorded deferred tax liabilities. We continue to
be under federal income tax audit for the years 1997 through 2001.
Also during 2003, we recorded net income tax benefits totaling $13.4 million related to favorable tax adjustments and the resolution of
various income tax matters. In future periods, we expect additional tax adjustments from the continued resolution of various income tax
matters.
Our effective tax rate in future periods may be negatively impacted by changes in our blended state income tax rates and adjustments for
other tax matters. We expect our underlying effective rate to be approximately 39% in 2004.
See Note 14, Income Taxes, of the Notes to Consolidated Financial Statements for further information.
Business Acquisitions and Divestitures
During the years ended December 31, 2003, 2002 and 2001, we acquired various automotive retail businesses. We paid approximately
$45.9 million, $158.4 million and $69.7 million, respectively, in cash for these acquisitions, all of which were accounted for under the
purchase method of accounting. We also paid
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