Netgear 2004 Annual Report Download - page 29

Table of Contents
Extinguishment of Debt
During the year ended December31, 2003 we used $20.0million of the proceeds from our initial public offering to repay debt that had a
carrying value of $14.1million. The repayment of debt resulted in the recognition of an extinguishment of debt charge of $5.9million in
the third quarter of 2003 due to the acceleration of interest expense equal to the unamortized discounted balance at the date of
repayment. There was no such charge taken in the year ended December31, 2004.
Provision (Benefit) for Income Taxes
Provision for income taxes increased $16.4million, to a provision of $12.9million for the year ended December31, 2004, from a benefit of
$3.5million for the year ended December31, 2003. The effective tax rate for the year ended December31, 2004 was approximately 36%
and differed from our statutory rate of approximately 35% due to non-deductible stock-based compensation, state taxes, and other
non-deductible expenses, offset in part by a $1.5million tax benefit from exercises of stock options and tax credits. The effective tax rate
was (37)% for the year ended December31, 2003. The principal reason for the income tax benefit in this period was the reversal of the
valuation allowance against our deferred tax assets of $9.8million offset by provisions on taxable income including state taxes. The
$5.9million charge recorded in 2003 for extinguishment of debt was non-deductible for tax purposes.
Net Income
Net income increased $10.4million, to $23.5million for the year ended December31, 2004 from $13.1million for the year ended
December31, 2003. This increase was due to an increase in gross profit of $39.0million, the absence of a $5.9million extinguishment of
debt charge that was taken in the prior year, and an increase in interest income, interest expense and other expense, net, of $1.6million,
offset by an increase in operating expenses of $19.7million and an increase in provision for income taxes of $16.4million.
Year Ended December31, 2003 Compared to Year Ended December31, 2002
Net Revenue
Net revenue increased $62.0million, or 26%, to $299.3million for the year ended December31, 2003, from $237.3million for the year ended
December31, 2002. This increase was primarily due to an increase in gross shipments of our existing products and to the introduction
of various new products that were favorably received by customers. In particular, net revenue in the EMEA region grew by
$31.4million or 46%, year over year. This increase was partially offset by a $14.1million increase in rebates and cooperative marketing
costs primarily, in North America, associated with increased product sales. Net revenue for the years ended December31, 2002 and
2003 was reduced for cooperative marketing expenses in the amount of $15.4million and $23.5million, respectively, deemed to be sales
incentives under Emerging Issues Task Force (“EITF”) 01-9.
Cost of Revenue and Gross Margin
Cost of revenue increased $38.3million, or 22%, to $215.5million for the year ended December31, 2003 from $177.1million for the year
ended December31, 2002. Our gross margin improved to 28.0% for the year ended December31, 2003, from 25.4% for the year ended
December31, 2002. The improvement in gross margin was primarily due to a favorable shift in product mix, especially of newer
products, which often carry higher gross margins, as well as due to operational efficiency and supply chain management programs that
reduced inbound freight costs by $2.1million and excess and absolute inventory charges by approximately $4.4million. Furthermore, we
were able to negotiate better pricing with our contract manufacturers and chip vendors due to increased volumes.
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