Circuit City 2006 Annual Report Download - page 21

ended December 31, 2004, restructuring charges of $7.4 million were included in income from operations.
Income from operations in North America was $45.4 million for the year ended December 31, 2006, $39.4 million in
2005 and $31.4 million in 2004. Declining gross profit margin and increased selling, general and administrative expenses
resulted in our implementation of the previously described restructuring activities in Europe in 2005 and 2004.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest expense was $1.7 million in 2006, $2.7 million in 2005 and $3.1 million in 2004. Interest expense decreased in
2006 as a result of decreased short-term borrowings in the United Kingdom as well as the extinguishment of mortgage debt
related to our Georgia warehouse sale in the first quarter of 2006. The increased expense in 2004 resulted from increased
short-term borrowings under our United Kingdom facility. Interest and other income, net was $9.5 million in 2006, $0.7
million in 2005 and $0.6 million in 2004. The increase in other income in 2006 mainly resulted from the gain on sale of the
Georgia location.
INCOME TAXES
Our income tax provisions were $24.5 million for the year ended December 31, 2006, $21.4 million for the year ended
December 31, 2005 and $6.4 million for 2004. The effective rates were 35.2% in 2006, 65.2% in 2005, and 38.5% in 2004.
The high effective tax rate in 2005 was a result of our establishing valuation allowances of approximately $10.2 million for
deferred tax assets in the United Kingdom in 2005. The Company’
s United Kingdom subsidiary had recorded historical losses
and had been affected by restructuring and other charges in recent years. These losses represented evidence for management
to estimate that a full valuation allowance for the net deferred tax asset was necessary in 2005. In 2006 the United Kingdom
subsidiary recorded a profit and the Company’s effective tax rate benefited by approximately 3.2% or $2.3 million.. The
effective rate in 2005 also was unfavorably impacted by increased state and local taxes and losses in other foreign
jurisdictions for which no tax benefit has been recognized. These increases were partially offset by an income tax benefit of
$2.7 million we recorded in the fourth quarter of 2005 resulting from a favorable decision we received for a petition
submitted in connection with audit assessments made in 2002 and 2004 in a foreign jurisdiction. The tax rate in 2004 was
higher than the United States statutory rate of 35% primarily due to losses in foreign jurisdictions for which we recognized no
tax benefit and losses in a foreign jurisdiction where the benefit rate is lower than the rate in the United States.
For the years ended December 31, 2006, 2005 and 2004, we have not recognized certain foreign tax credits, certain
state deferred tax assets in the United States and certain benefits on losses in foreign tax jurisdictions due to our inability to
carry such credits and losses back to prior years and our determination that it was more likely than not that we would not
generate sufficient future taxable income to realize these assets. Accordingly, valuation allowances were recorded against the
deferred tax assets associated with those items. If we are able to realize all or part of these deferred tax assets in future
periods, it will reduce our provision for income taxes by a release of the corresponding valuation allowance.
NET INCOME
Net income was $45.1 million, or $1.29 per basic share and $1.22 per diluted share, for the year ended December 31,
2006, $11.4 million, or $.33 per basic share and $.31 per diluted share, for the year ended December 31, 2005 and $10.2
million, or $.30 per basic share and $.29 per diluted share, for the year ended December 31, 2004.
Seasonality
Net sales have historically been modestly weaker during the second and third quarters as a result of lower business
activity during those months. The following table sets forth the net sales, gross profit and income from operations for each of
the quarters since January 1, 2004 (amounts in millions) .
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2006
----
Net sales $575 $547 $575 $648
Percentage of year's net sales 24.5% 23.3% 24.5% 27.6%
Gross profit $90 $77 $92 $83
Income from Operations $21 $11 $19 $11
2005