Sprint - Nextel 2005 Annual Report Download - page 138

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SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
instruments in accumulated other comprehensive loss on the Consolidated Balance Sheets, with no impact on
earnings during the life of the hedging relationship. Changes in fair value of these instruments resulted in an
unrealized loss of $16 million at December 31, 2005. These unrealized losses were included in accumulated other
comprehensive loss on the Consolidated Balance Sheets. These derivative instruments will be settled by
December 31, 2006.
The net purchased equity options embedded in variable prepaid forward contracts are designated as cash flow
hedges. During 2005, we used 10.5 million shares of EarthLink common stock to settle the prepaid forward
contracts, which resulted in a $9 million pre-tax gain. There are no variable prepaid forward contracts
outstanding at December 31, 2005.
Foreign Currency Forward and Option Contracts
Foreign currency forward and option contracts held during 2005 and 2004 were not designated as hedges as
defined in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and
changes in the fair value of these derivative instruments are recognized in earnings during the period of change.
The activity associated with these contracts was immaterial in all periods presented.
Note 13. Income Taxes
Income tax expense (benefit) allocated to continuing operations consists of the following:
Year Ended December 31,
2005 2004 2003
(in millions)
Current income tax expense (benefit)
Federal ....................................................... $ 115 $ 15 $ (672)
State ......................................................... 160 (30) 21
Total current .................................................... 275 (15) (651)
Deferred income tax expense (benefit)
Federal ....................................................... 856 (562) 494
State ......................................................... (26) (14) (55)
Total deferred ................................................... 830 (576) 439
Foreign income tax expense ........................................ — — —
Total .......................................................... $ 1,105 $ (591) $ (212)
The differences that caused our effective income tax rates to vary from the 35% federal statutory rate for income
taxes related to continuing operations were as follows:
Year Ended December 31,
2005 2004 2003
(in millions)
Income tax expense (benefit) at the federal statutory rate ................. $ 1,017 $ (562) $ (176)
Effect of:
State income taxes, net of federal income tax effect ................... 88 (28) (23)
Credit for research activities ...................................... (8) (2) (27)
Other, net ..................................................... 8 1 14
Income tax expense (benefit) ....................................... $ 1,105 $ (591) $ (212)
Effective income tax rate .......................................... 38.0% 36.9% 42.1%
F-43