Pallet-Management-Services - AFM

| ANNUAL REPORT 2006 | IFCO SYSTEMS N.V. |
Corporate
US $ in thousands 2006 2005 % Change
Selling, general and administrative expenses 4,470 7,452 (40.0%)
Net finance costs 19,121 17,881 6.9%
Foreign currency loss, net (2) (2,488) (99.9%)
Income tax provision 6,485 2,006 223.3%
Loss from discontinued operations (665) (3,651) (81.8%)
Selling, general and administrative expenses
Our corporate general and administrative expenses decreased
by US $3.0 million in 2006, mainly because of decreased
variable compensation accruals for our Managers.
Net fi nance costs
Our net borrowing costs increased, primarily as a result of a
stronger Euro in 2006 as compared to prior year, higher capital
lease obligation levels and the periodic usage of our working
capital facility for the first time in 2006.
Foreign currency loss, net
Our foreign currency losses recorded during 2005 and 2006
are principally the result of the periodic non-cash revaluation of
a foreign currency hedge agreement we entered into in
Q4 2003. This agreement expired at December 31, 2006.
Income taxes
During 2006 and 2005, our recorded consolidated income tax
provision differs from the amount which would be calculated
by applying statutory rates to our profit before income taxes.
This is principally a result of our legal entities in the local tax
jurisdictions in which we operate being allowed to recognize
certain deductions for tax purposes, principally depreciation
of our RPCs at a faster rate, and amortization of goodwill than
we recognize these items in our IFRS consolidated financial
statements. We believe that these accelerated income tax
deductions, together with other items, will result in reporting
taxable losses in 2006 in many of our principal tax jurisdictions,
and in minimal taxable income in other jurisdictions. Additionally,
as of December 31, 2006, our European and United States
operations had substantial net operating loss carryforwards.
Approximately US $4.8 million of current income tax provision
was accrued during 2006 as a result of the accounting gain
resulting from the RPC pool adjustment in Q2 2006. See Notes
to consolidated financial statements for further description and
analysis of income taxes.
58
Discontinued operations
In February 2002, we completed the sale of a majority of
the assets of our industrial container services operations to
Industrial Container Services, Inc. (ICS).
During Q2 2003, two lawsuits were filed, naming as defendants
the Company and certain of its subsidiaries as well as a number
of the customers, ICS and certain affiliates of ICS, based upon
alleged discharges of contaminants, toxic substances and
chemicals from one of our drum facilities in Chicago on or
before mid-2001. At this stage, the Company cannot accurately
assess the potential merit or consequences of these claims. The
Company intends to defend these claims vigorously. However,
if these claims have a negative outcome to the Company or to
parties to whom the Company owes indemnities, such claims
could have a material adverse effect on the Company’s business,
liquidity, results of operation and financial condition. US $0.2
million in net additional provisions were accrued during 2006,
based on management’s best estimate of the uninsured legal
costs and other costs which may be required in defending these
lawsuits. US $2.6 million was accrued during 2005. During July
2006, we were notified of a lawsuit filed by the city of Chicago
against one of the Company’s subsidiaries requesting that it
demolish or otherwise repair the Chicago drum property to a
condition suitable to the city of Chicago. Although the Company
is still in discussions with the city of Chicago regarding this
claim, approximately US $0.5 million was accrued during 2006,
representing estimated demolition and other costs which might
ultimately be associated with these claims.
During Q2 2005, the Company’s Board of Directors approved
the Company’s Executive Management to pursue a sale of its
non strategic Pallet Pooling business in Canada, which was
completed in June 2005. IFRS requires that the results of
operations for all periods prior to the disposal be presented as
a component of discontinued operations in the accompanying
consolidated income statements and statements of cash flows.
Accordingly, the operating income of the Pallet Pooling business
during 2005 and the loss on disposal, totaling a combined
US $1.5 million, and the related cash flow results, have been
presented as discontinued operations throughout this report.