Office Depot 2004 Annual Report Download - page 62

60 |Office Depot 2004 Annual Report
The following is a reconciliation of income taxes at the
Federal statutory rate to the provision for income taxes:
(Dollars in thousands) 2004 2003 2002
Federal tax computed
at the statutory rate. . . $161,432 $154,269 $166,589
State taxes, net of
Federal benefit . . . . . . 6,289 6,506 8,373
Repatriation of foreign
earnings . . . . . . . . . . . 11,540 ——
Reduction in valuation
allowance . . . . . . . . . . (11,295) ——
State credits . . . . . . . . . . (1,386) (10,400) —
Foreign income taxed
at rates other than
Federal . . . . . . . . . . . . (27,015) (17,741) (12,543)
Settlement of
tax audits . . . . . . . . . . (12,355) (217) (2,144)
Change in accrual
estimates relating to
uncertain tax
positions . . . . . . . . . . . (4,418) 8,090 4,127
Other items, net . . . . . . . 2,937 1,017 2,152
Provision for income
taxes. . . . . . . . . . . . . . $125,729 $141,524 $166,554
In October 2004, the American Jobs Creation Act of 2004
was passed by Congress and signed into law. Among other
things, the Act provided U.S. taxpayers a one-year reduction of
taxes on the repatriation of foreign earnings. We are still evalu-
ating the potential impact of this legislation and awaiting further
clarification and interpretation of the Act. However, we have
determined that we will repatriate at least $200 million of foreign
earnings during 2005 and have included in the 2004 Statement
of Earnings a tax expense of $11.5 million for this U.S. tax
consequence. During 2005, we may decide to repatriate an
additional amount of these foreign earnings, and would recog-
nize the tax expense at that time. The maximum repatriation
allowable to us under the Act is $778.7 million, which would
add approximately $32.9 million of tax expense. Repatriation of
lesser amounts will result in proportionally lower tax expense.
During 2004, because of a projected increase in taxable
income of certain international entities, and a reassessment of
certain state tax circumstances, we changed our assessment
of the need for the valuation allowances on the related deferred
tax assets. Accordingly, income tax expense was reduced by
$11.3 million because of the increased likelihood of these ben-
efits being realized.
We regularly assess our position with regard to individual tax
exposures and record liabilities for our uncertain tax positions
and related interest and penalties according to the principles
of FAS 5, Accounting for Contingencies. These accruals, which
relate primarily to cross-jurisdictional transactions, reflect man-
agement’s view of the likely outcomes of current and future audits.
We operate in numerous taxing jurisdictions and are sub-
ject to regular examinations by various taxing authorities for
differing tax periods. Currently, we are under audit in the United
States for the tax periods 2000–2001, and in various foreign and
state jurisdictions for various tax periods. Additionally, we are
in the final stages of an appellate level review of contested
issues related to the audit of our 1997–1999 tax returns by the
Internal Revenue Service.
It is likely that the future resolution of these uncertain tax
positions will be different from the amounts currently accrued
and will impact future tax period expense. However, manage-
ment believes those amounts will not be material to the finan-
cial condition of the company.
NOTE I—Commitments and Contingencies
Operating Leases: We lease facilities and equipment under
agreements that expire in various years through 2027. In addi-
tion to minimum rentals, there are certain executory costs such
as real estate taxes, insurance and common area maintenance
on most of our facility leases. Certain leases contain provisions
for additional rent to be paid if sales exceed a specified amount,
though such payments have been immaterial during the years
presented. The table below shows future minimum lease pay-
ments due under non-cancelable leases as of December 25,
2004. These minimum lease payments include facility leases
that were accrued as store closure costs.
(Dollars in thousands)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 426,180
2006 ................................... 383,751
2007 ................................... 336,561
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,163
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,337
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,033,205
3,774,197
Less sublease income . . . . . . . . . . . . . . . . . . . . . (84,469)
$3,689,728
We are in the process of opening new stores in the ordinary
course of business, and leases signed subsequent to Decem-
ber 25, 2004 are not included in the above described commit-
ment amounts. Rent expense, including equipment rental, was
$443.7 million, $424.1 million and $401.4 million in 2004, 2003,
and 2002, respectively. Rent expense was reduced by sub-
lease income of $2.9 million in 2004, $3.1 million in 2003 and
$2.9 million in 2002.
Guarantee of Private Label Credit Card Receivables: Office
Depot has private label credit card programs that are man-
aged by a third-party financial services company. We act as
the guarantor of all loans between our commercial customers
and the financial services company. The difference between
the transfer amount and the amount received is recognized in
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)