Comcast 2006 Annual Report Download - page 34

MD&A Comcast 2006 Annual Report 32
from 2004 was primarily the result of $57 million of gains recognized in
2005 and $69 million of losses recognized in 2004 in connection with
the early extinguishment of some of our debt facilities, partially offset
by the effects of higher interest rates on variable-rate debt in 2005.
Investment Income (Loss), Net
The components of investment income (loss), net for 2006, 2005
and 2004 are presented in a table in Note 6 to our consolidated
financial statements. In connection with the Adelphia and Time
Warner transactions, we recognized gains of approximately $646
million for the year ended December 31, 2006.
We have entered into derivative financial instruments that we
account for at fair value and which economically hedge the market
price fluctuations in the common stock of substantially all of our
investments accounted for as trading securities. The differences
between the unrealized gains (losses) on trading securities and
the mark to market adjustments on derivatives related to trading
securities, as presented in the table in Note 6, result from one or
more of the following:
• we did not maintain an economic hedge for our entire investment
in the security during some or all of the period
• there were changes in the derivative valuation assumptions such
as interest rates, volatility and dividend policy
• the magnitude of the difference between the market price of the
underlying security to which the derivative relates and the strike
price of the derivative
• the change in the time value component of the derivative value
during the period
• the security to which the derivative relates changed due to a
corporate reorganization of the issuing company to a security
with a different volatility rate
Equity in Net (Losses) Income of Affiliates, Net
The increase in equity in net losses of affiliates for 2006 from 2005
was primarily a result of other-than-temporary impairment charges
recognized in 2006. The decrease in equity in net losses of affiliates
for 2005 from 2004 was primarily a result of changes in the net
income or loss of our equity investees.
Other Income (Expense)
Other income for 2006 consisted principally of $170 million of gains
on the sales of investment assets. Other expense for 2005 con-
sisted principally of a $170 million payment representing our share
of the settlement amount related to certain of AT&T’s litigation with
At Home, partially offset by a $24 million gain on the exchange of
one of our equity method investments and $62 million of gains
recognized on the sale or restructuring of investment assets in
2005. Other income for 2004 consisted principally of the $250
million reduction in the estimated fair value liability associated with
the securities litigation of an acquired company and the $94 million
gain recognized on the sale of our investment in DHC Ventures,
LLC (“Discovery Health Channel”).
Income Tax Expense
Our effective income tax rate was 37.5%, 50.7% and 45.9% for
2006, 2005 and 2004, respectively. Tax expense reflects an effec-
tive income tax rate that differs from the federal statutory rate
primarily as a result of state income taxes and adjustments to prior
year accruals, including related interest. Adjustments to prior year
accruals in 2006 are principally related to the favorable resolution of
issues and revised estimates of the outcome of unresolved issues
with various taxing authorities.
Discontinued Operations
The operating results of our previously owned cable systems located
in Los Angeles, Dallas and Cleveland, reported as discontinued oper-
ations for 2006, include seven months of operations, as the closing
date of the transaction was July 31, 2006. For 2005 and 2004,
results include 12 months of operations. As a result of the exchange
transaction, we recognized a gain on the sale of these systems of
$195 million, net of tax of $541 million (see Note 5). The effective tax
rate on the gain is higher than the federal statutory rate primarily as a
result of the nondeductible amounts attributed to goodwill.
Liquidity and Capital Resources
As we describe further below, our businesses generate significant
cash flow from operating activities. The proceeds from monetizing
our nonstrategic investments have also provided us with a signifi-
cant source of cash flow. We believe that we will be able to meet
our current and long-term liquidity and capital requirements, includ-
ing fixed charges, through our cash flow from operating activities,
existing cash, cash equivalents and investments; through available
borrowings under our existing credit facilities; and through our abil-
ity to obtain future external financing. We anticipate continuing to
use a substantial portion of our cash flow to fund our capital expen-
ditures, invest in business opportunities and repurchase our stock.
Operating Activities
Net cash provided by operating activities amounted to $6.618 bil-
lion for 2006, primarily as a result of our operating income before
depreciation and amortization, the timing of interest and income tax
payments, and changes in other operating assets and liabilities.
Financing Activities
Net cash provided by financing activities was $3.546 billion for
2006, and consisted principally of our proceeds from borrowings of