Freeport-McMoRan 2005 Annual Report Download - page 36

developer฀of฀a฀parcel฀of฀land฀in฀Arizona฀owned฀by฀the฀joint฀
venture฀mentioned฀above฀resulting฀in฀a฀gain฀of฀$21.3฀million฀
($20.4฀million฀to฀net฀income฀or฀$0.11฀per฀share).฀In฀the฀
second฀transaction,฀Atlantic฀Copper฀completed฀a฀sale฀of฀its฀
wire฀rod฀and฀wire฀assets฀for฀$18.3฀million฀cash฀and฀recorded฀
a฀gain฀of฀$7.5฀million฀($7.5฀million฀to฀net฀income฀or฀฀฀฀฀฀฀
$0.04฀per฀share).
฀ Other฀income฀(expense)฀includes฀interest฀income฀of฀฀฀฀฀฀฀
$16.8฀million฀in฀2005,฀$5.9฀million฀in฀2004฀and฀$8.9฀million฀
in฀2003.฀Other฀income฀(expense)฀also฀includes฀the฀impact฀
of฀translating฀into฀U.S.฀dollars฀Atlantic฀Copper’s฀net฀euro-
denominated฀liabilities,฀primarily฀its฀retiree฀pension฀obligations.฀
Changes฀in฀the฀U.S.฀dollar/euro฀exchange฀rate฀require฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
us฀to฀adjust฀the฀dollar฀value฀of฀our฀net฀euro-denominated฀
liabilities฀and฀record฀the฀adjustment฀in฀earnings.฀Exchange฀
rate฀effects฀on฀our฀net฀income฀from฀euro-denominated฀
liabilities฀were฀gains฀(losses)฀of฀$5.8฀million฀in฀2005,฀฀฀฀฀฀฀฀
$(1.6)฀million฀in฀2004฀and฀$(13.6)฀million฀in฀2003.฀The฀gains฀
reflect฀a฀stronger฀U.S.฀dollar฀in฀relation฀to฀the฀euro฀and฀the฀
losses฀reflect฀a฀stronger฀euro฀in฀relation฀to฀the฀U.S.฀dollar฀in฀
the฀respective฀periods฀(see฀“Disclosures฀About฀Market฀
Risks”).฀Other฀expenses฀in฀2003฀also฀include฀a฀$5.6฀million฀
($3.7฀million฀to฀net฀income฀or฀$0.02฀per฀share)฀charge฀
associated฀with฀the฀amended฀FCX฀and฀PT฀Freeport฀Indonesia฀
credit฀facility฀(see฀“Capital฀Resources฀and฀Liquidity฀–฀
Financing฀Activities”).
฀ PT฀Freeport฀Indonesia’s฀Contract฀of฀Work฀provides฀for฀a฀฀฀
35฀percent฀corporate฀income฀tax฀rate.฀PT฀Indocopper฀
Investama฀pays฀a฀30฀percent฀corporate฀income฀tax฀on฀dividends฀
it฀receives฀from฀its฀9.36฀percent฀ownership฀in฀PT฀Freeport฀
Indonesia.฀In฀addition,฀the฀tax฀treaty฀between฀Indonesia฀and฀
the฀U.S.฀provides฀for฀a฀withholding฀tax฀rate฀of฀10฀percent฀฀฀฀฀
on฀dividends฀and฀interest฀that฀PT฀Freeport฀Indonesia฀and฀PT฀
Indocopper฀Investama฀pay฀to฀their฀parent฀company,฀FCX.฀
Prior฀to฀2005,฀we฀also฀incurred฀a฀U.S.฀alternative฀minimum฀
tax฀at฀an฀effective฀rate฀of฀two฀percent฀based฀primarily฀on฀
consolidated฀income,฀net฀of฀smelting฀and฀refining฀results.฀As฀a฀
result฀of฀the฀enactment฀of฀the฀American฀Jobs฀Creation฀Act฀฀฀฀
of฀2004,฀the฀90฀percent฀limitation฀on฀the฀use฀of฀foreign฀tax฀
credits฀to฀offset฀the฀U.S.฀federal฀alternative฀minimum฀tax฀
liability฀was฀repealed฀effective฀January฀1,฀2005.฀The฀removal฀of฀
this฀limitation฀significantly฀reduced฀our฀U.S.฀federal฀taxes฀
beginning฀in฀2005.฀Our฀U.S.฀federal฀alternative฀minimum฀tax฀
liability฀totaled฀$8.2฀million฀in฀2004฀and฀$9.3฀million฀in฀
2003.฀We฀currently฀record฀no฀income฀taxes฀at฀Atlantic฀Copper,฀
which฀is฀subject฀to฀taxation฀in฀Spain,฀because฀it฀has฀not฀
generated฀significant฀taxable฀income฀in฀recent฀years฀and฀has฀
substantial฀tax฀loss฀carryforwards฀for฀which฀we฀have฀provided฀
no฀net฀financial฀statement฀benefit.฀We฀receive฀no฀consolidated฀
tax฀benefit฀from฀these฀losses฀because฀they฀cannot฀be฀used฀to฀
offset฀PT฀Freeport฀Indonesia’s฀profits฀in฀Indonesia,฀but฀can฀be฀
utilized฀to฀offset฀Atlantic฀Copper’s฀profits.
฀ Parent฀company฀costs฀consist฀primarily฀of฀interest,฀
depreciation฀and฀amortization,฀and฀general฀and฀administrative฀
expenses.฀We฀receive฀minimal฀tax฀benefit฀from฀these฀costs,฀
including฀interest฀expense,฀primarily฀because฀our฀parent฀
company฀normally฀generates฀no฀taxable฀income฀from฀U.S.฀
sources.฀As฀a฀result,฀our฀provision฀for฀income฀taxes฀as฀a฀
percentage฀of฀our฀consolidated฀income฀before฀income฀taxes฀
and฀minority฀interests฀will฀vary฀as฀PT฀Freeport฀Indonesia’s฀
income฀changes,฀absent฀changes฀in฀Atlantic฀Copper฀and฀
parent฀company฀costs.฀The฀provision฀for฀income฀taxes฀as฀a฀
percentage฀of฀consolidated฀income฀before฀income฀taxes฀
and฀minority฀interests฀totaled฀45฀percent฀for฀2005฀and฀฀฀฀฀฀฀฀฀฀
58฀percent฀for฀2004฀and฀2003.฀Summaries฀of฀the฀approximate฀
significant฀components฀of฀the฀calculation฀of฀our฀
consolidated฀provision฀for฀income฀taxes฀are฀shown฀below฀฀
(in฀thousands,฀except฀percentages).
Management’s Discussion and Analysis
฀33฀|฀2005฀ANNUAL฀REPORT฀฀฀FINANCIAL฀&฀OPERATING฀INFORMATION
Years฀Ended฀December฀31,฀ 2005฀ 2004฀ 2003
Mining฀and฀exploration฀segment฀operating฀incomea฀ ฀ ฀ ฀ ฀ $฀2,312,771฀ $฀832,112฀ $฀850,253
Mining฀and฀exploration฀segment฀interest฀expense,฀net฀฀ ฀ ฀ ฀ ฀ (22,386)฀ ฀ (22,209)฀ ฀ (44,861)
Intercompany฀operating฀profit฀(deferred)฀recognized฀ ฀ ฀ ฀ ฀ ฀ (144,986)฀ ฀ (24,683)฀ ฀ 13,828
฀ Income฀before฀taxes฀ ฀ ฀ ฀ ฀ ฀2,145,399฀ ฀ 785,220฀ ฀ 819,220
Indonesian฀corporate฀income฀tax฀rate฀(35%)฀plus฀U.S.฀alternative฀minimum฀tax฀rate฀
฀ (2%)฀for฀2004฀and฀2003฀ ฀ ฀ ฀ ฀ ฀ 35%฀ ฀ 37%฀ ฀ ฀37%
฀ Corporate฀income฀taxes฀ ฀ ฀ ฀ ฀ ฀ 750,890฀ ฀ 290,531฀ ฀ 303,111
Approximate฀PT฀Freeport฀Indonesia฀net฀income฀ ฀ ฀ ฀ ฀ ฀1,394,509฀ ฀ 494,689฀ ฀ 516,109
Withholding฀tax฀on฀FCX’s฀equity฀share฀ ฀ ฀ ฀ ฀ ฀ 9.064%฀ ฀ 9.064%฀ ฀ 9.064%
฀ Withholding฀taxes฀ ฀ ฀ ฀ ฀ ฀ 126,398฀ ฀ 44,839฀ ฀ 46,780
PT฀Indocopper฀Investama฀corporate฀income฀tax฀ ฀ ฀ ฀ ฀ ฀ 36,544฀ ฀ 3,005฀ ฀ —
Other,฀net฀฀ ฀ ฀ ฀ ฀ ฀ 1,236฀ ฀ (7,695)฀ ฀ (11,838)
FCX฀consolidated฀provision฀for฀income฀taxes฀ ฀ ฀ ฀ ฀ $฀ 915,068฀ $฀330,680฀ $฀338,053
FCX฀consolidated฀effective฀tax฀rate฀ ฀฀ ฀ ฀ ฀ ฀ 45%฀ ฀ 58%฀ ฀ 58%
a.฀ Excludes฀charges฀for฀the฀in-the-money฀value฀of฀FCX฀stock฀option฀exercises,฀which฀are฀eliminated฀in฀consolidation,฀totaling฀$64.5฀million฀in฀2005,฀฀฀฀
$87.3฀million฀in฀2004฀and฀$57.8฀million฀in฀2003.