Netgear 2006 Annual Report Download - page 40

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Table of Contents
The aggregate of interest income, interest expense, and other expense amounted to net other income of
$2.3 million for the year ended December 31, 2005, compared to net other income of $1.0 million for the year ended
December 31, 2004. This change was primarily due to an additional $2.5 million in interest income for the year
ended December 31, 2005, from the investment of our cash, cash equivalents, and short-term investments balance
throughout the year. This was offset in part by an increase in other expense of $1.2 million consisting primarily of
realized and unrealized losses associated with foreign currency denominated transactions due in part to currency
volatility during the year as well as our billing in foreign currencies which began in the first quarter of 2005.
Provision for Income Taxes
Provision for income taxes increased $7.0 million, resulting in a provision of $27.9 million for the year ended
December 31, 2006, from a provision of $20.9 million for the year ended December 31, 2005. The effective tax rate
was approximately 40% for the year ended December 31, 2006 and approximately 38% for the year ended
December 31, 2005. The effective tax rate for both periods differed from our statutory rate of approximately 35% due
to non-deductible stock-based compensation, state taxes, other non-deductible expenses, and tax credits. The
effective tax rate for the year ended December 31, 2006 was also impacted by non-deductible charges pertaining to
in-process research and development as a result of the acquisition of SkipJam.
Provision for income taxes increased $8.0 million, to a provision of $20.9 million for the year ended
December 31, 2005, from a provision of $12.9 million for the year ended December 31, 2004. The effective tax rate
for the year ended December 31, 2005 was approximately 38% and differed from our statutory rate of approximately
35% due to state taxes, and other non-deductible expenses, offset in part by tax credits. The effective tax rate for the
year ended December 31, 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
$1.5 million tax benefit from exercises of stock options and tax credits.
Net Income
Net income increased $7.5 million, to $41.1 million for the year ended December 31, 2006 from $33.6 million
for the year ended December 31, 2005. This increase was due to an increase in gross profit of $42.0 million and an
increase in interest and other income of $7.1 million, offset by an increase in operating expenses of $34.6 million and
an increase in provision for income taxes of $7.0 million.
Net income increased $10.1 million, to $33.6 million for the year ended December 31, 2005 from $23.5 million
for the year ended December 31, 2004. This increase was primarily due to an increase in gross profit of
$28.9 million, offset by an increase in operating expenses of $12.0 million and an increase in provision for income
taxes of $8.0 million.
Liquidity and Capital Resources
As of December 31, 2006 we had cash, cash equivalents and short-term investments totaling $197.5 million.
Our cash and cash equivalents balance decreased from $90.0 million as of December 31, 2005 to $87.7 million
as of December 31, 2006. Our short-term investments, which represent the investment of funds available for current
operations, increased from $83.7 million as of December 31, 2005 to $109.7 million as of December 31, 2006.
Operating activities during the year ended December 31, 2006 generated cash of $23.1 million primarily due to an
increase in net income. Investing activities during the year ended December 31, 2006 used $37.7 million, which
includes the net purchase of short-term investments of $24.2 million, purchases of property and equipment
amounting to $5.9 million, and payments made in connection with our acquisition of SkipJam of $7.6 million.
During the year ended December 31, 2006, financing activities provided $12.3 million, primarily resulting from the
issuance of our common stock upon exercise of stock options and our employee stock purchase program.
Our days sales outstanding decreased from 77 days as of December 31, 2005 to 66 days as of December 31,
2006.
Our accounts payable increased from $38.9 million at December 31, 2005 to $39.8 million at December 31,
2006.
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