Circuit City 2007 Annual Report Download - page 27

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INCOME TAXES
The low effective tax rate in 2007 resulted primarily from the reversal of a valuation allowance of approximately $5.9 million against deferred
tax assets in the United Kingdom partially offset by the recording of a valuation allowance of approximately $1.7 million against the deferred tax
assets of Germany. The United Kingdom valuation allowance, originally recorded at $10.2 million, had been established in 2005 as the result of
a cumulative loss position in the United Kingdom and was the primary driver of the high effective tax rate in 2005. 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.
During 2007, 2006 and 2005, we did not recognize 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.
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, 2005 (amounts in
millions) .
25
March 31
June 30
September 30
December 31
2007
Net sales
$
676
$
647
$
687
$
769
Percentage of year
’
s net sales
24.3
%
23.3
%
24.7
%
27.7
%
Gross profit
$
97
$
99
$
111
$
120
Operating income
$
22
$
20
$
26
$
27
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
Operating income
$
21
$
11
$
19
$
11
2005
Net sales
$
538
$
506
$
489
$
583
Percentage of year
’
s net sales
25.4
%
23.9
%
23.1
%
27.6
%
Gross profit
$
80
$
71
$
70
$
86
Operating income
$
5
$
3
$
8
$
18