Motorola 2006 Annual Report Download - page 49

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gains on Sales of Investments and Businesses
Gains on sales of investments and businesses were $41 million in 2006, compared to $1.8 billion in 2005. In
2006, the $41 million of net gains primarily reflects a gain of $141 million on the sale of the Company's remaining
shares in Telus Corporation, partially offset by a loss of $126 million on the sale of the Company's remaining
shares in Sprint Nextel Corporation (""Sprint Nextel''). In 2005, the net gains were primarily related to: (i) a
$1.3 billion net gain in connection with the completion of the merger between Sprint Corporation (""Sprint'') and
Nextel Communications, Inc. (""Nextel''), and (ii) a $609 million net gain on the sale of a portion of the
Company's shares of Nextel, partially offset by a $70 million net loss on the sale of a portion of the Company's
shares of Sprint Nextel.
Other
Income classified as Other, as presented in Other income (expense), was $151 million in 2006, compared to
net charges of $109 million in 2005. The net income in 2006 was primarily comprised of: (i) a $99 million net gain
due to an increase in market value of a zero-cost collar derivative entered into to protect the value of the
Company's investment in Sprint Nextel, and (ii) $60 million of foreign currency gains, partially offset by
$27 million of investment impairment charges. The net charges in 2005 were primarily comprised of:
(i) $137 million of debt retirement costs, relating to the Company's repurchase of an aggregate principal amount of
$1.0 billion of long-term debt through cash tender offers, (ii) $38 million of foreign currency losses, and
(iii) $25 million in investment impairment charges, partially offset by: (i) a $51 million gain due to an increase in
the market value of variable forward instruments entered into to protect the Company's investment in Nextel
common stock prior to the merger of Sprint and Nextel, and (ii) $30 million in income from the repayment of a
previously-reserved loan related to Iridium.
Effective Tax Rate
The effective tax rate was 29% in 2006, representing a $1.3 billion net tax expense, compared to 30% in 2005,
representing a $1.9 billion net tax expense. During 2006, the Company recorded $348 million in net tax benefits,
comprised of: (i) a $186 million tax benefit for the reduction in deferred tax valuation allowances for its German
and U.K. subsidiaries, (ii) $68 million relating to incremental net tax benefits realized in 2006 relating to its 2005
repatriations, (iii) a $54 million tax benefit driven by a mix shift in profits towards lower-tax jurisdictions that the
Company intends to permanently reinvest, (iv) a $44 million tax benefit for favorable settlements reached with
foreign tax jurisdictions, (v) a $34 million tax charge for a valuation allowance relating to deferred tax assets on
select investments, and (vi) a $30 million incremental tax benefit relating to the contribution of appreciated equity
holdings to the Company's charitable foundation. Additionally, during 2006, the Company incurred nondeductible
IPR&D charges relating to acquisitions and restructuring charges in low tax jurisdictions that caused an increase in
the Company's effective tax rate. The Company's effective tax rate in 2006, excluding the net tax benefits,
nondeductible IPR&D charges and restructuring charges in low tax jurisdictions, was 36%.
During 2005, the tax rate reflected a $265 million net tax benefit related to the repatriation of foreign earnings
under the provisions of the American Jobs Creation Act of 2004 and an $81 million net tax benefit on the stock
sale of a sensor business that was divested in 2005.
Earnings from Continuing Operations
The Company had earnings from continuing operations before income taxes of $4.6 billion in 2006, compared
to earnings from continuing operations before income taxes of $6.4 billion in 2005. After taxes, the Company had
earnings from continuing operations of $3.3 billion, or $1.30 per diluted share, in 2006, compared with earnings
from continuing operations of $4.5 billion, or $1.79 per diluted share, in 2005.
The decrease in earnings from continuing operations before income taxes in 2006 compared to 2005 is
primarily attributed to: (i) a $1.8 billion decrease in gains on the sale of investments and businesses, (ii) an
$876 million increase in SG&A expenses, (iii) a $506 million increase in R&D expenditures, and (iv) a
$429 million change in Other charges (income). These negative impacts on operating earnings were partially offset
by: (i) a $1.3 billion increase in gross margin, primarily due to the $7.6 billion increase in net sales, (ii) a
$260 million increase in income classified as Other, as presented in Other income (expense), and (iii) a
$255 million increase in net interest income.