AutoNation 2005 Annual Report Download - page 34

Table of Contents
Provision for Income Taxes
The effective income tax rate was 36.5%, 34.7%, and 15.2% for the years ended December 31, 2005, 2004 and 2003, respectively.
Income taxes are provided based upon our anticipated underlying annual blended federal and state income tax rates, adjusted, as necessary,
for any other tax matters occurring during the period. As we operate in various states, our effective tax rate is also dependent upon our
geographic revenue mix. In February 2006, we made estimated state tax and federal tax payments totaling approximately $100 million,
primarily related to provisions for the third and fourth quarter of 2005.
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. 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. In 2003, we made a $366.0 million prepayment of the initial installment due March 2004,
including interest. Additionally, in 2004, we prepaid the remaining balance due related to the IRS settlement totaling $128.9 million,
including accrued interest.
During 2005, 2004 and 2003, we recorded net income tax benefits in our provision for income taxes of $14.5 million, $25.8 million and
$140.9 million (which includes $127.5 million recognized as a result of the IRS settlement discussed above), respectively, primarily related
to the resolution of various income tax matters. In 2005 and 2004, we also recognized gains totaling $110.0 million and $52.2 million,
respectively, included in Discontinued Operations related to the settlement of various income tax matters.
A federal income tax audit for 2002 through 2004 is being conducted by the IRS. In addition, we are routinely audited by the states in
which we do business and remain under examination by various states. We could experience additional state and federal tax adjustments in
the future as we continue to work through various tax matters. Once we resolve our open tax matters, we expect our effective tax rate to be
approximately 39.5%.
See Note 11, Income Taxes, of the Notes to Consolidated Financial Statements for further information.
Financial Condition
At December 31, 2005, we had $243.8 million of unrestricted cash and cash equivalents. Through July 14, 2005, we had two revolving
credit facilities with an aggregate borrowing capacity of $500.0 million. There were no borrowings on these revolving credit facilities during
2005 and 2004. On July 14, 2005, we terminated these credit facilities and entered into a new five-year revolving credit facility with an
aggregate borrowing capacity of $600.0 million with investment-grade terms, including lower credit spreads compared to the facilities it
replaced. The facility is guaranteed by substantially all of our subsidiaries. We have negotiated a letter of credit sub-limit as part of our
revolving credit facility. The amount available to be borrowed under the $600.0 million multi-year revolving credit facility is reduced on a
dollar-for-dollar basis by the cumulative amount of any outstanding letters of credit, which totaled $87.6 million at December 31, 2005.
In the ordinary course of business, we are required to post performance and surety bonds, letters of credit, and/or cash deposits as
financial guarantees of our performance. At December 31, 2005, surety bonds, letters of credit and cash deposits totaled $120.3 million,
including $87.6 million in letters of credit. We are not required to provide cash collateral for outstanding letters of credit.
We also have $321.7 million of outstanding 9.0% senior unsecured notes due August 1, 2008. During 2005, we repurchased
$123.1 million (face value) of senior unsecured notes at an average price of 110.5% of face value or $136.0 million. For 2005, the premium
paid for this repurchase was $12.9 million plus related deferred financing costs of $4.5 million, which was recognized as Other Interest
Expense in the accompanying 2005 Consolidated Income Statement. Through December 31, 2005, cumulative repurchases of senior
unsecured notes, which began during the fourth quarter of 2004, totaled $126.5 million (face value). The senior unsecured notes are
guaranteed by substantially all of our subsidiaries.
Our senior unsecured notes, revolving credit facility and mortgage facility contain numerous customary financial and operating covenants
that place significant restrictions on us, including our ability to incur
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