Sprint - Nextel 2006 Annual Report Download - page 57

Earthlink, Inc. In 2004, we recognized a gain of $15 million from the sale of investments, primarily
attributable to our investment in Earthlink.
Income Tax (Expense) Benefit
Our consolidated effective tax rates were 32.9% in 2006, 36.4% in 2005 and 38.2% in 2004. The 2006
effective tax rate was impacted by a $42 million benefit related to tax audit settlements for the years 1995 to
2002 and a $27 million benefit related to state income tax law changes. Information regarding the items that
caused the effective income tax rates to vary from the statutory federal rate for income taxes related to
continuing operations can be found in note 12 of the Notes to Consolidated Financial Statements appearing at
the end of this annual report on Form 10-K.
Discontinued Operations, net
Discontinued operations reflect the results of our Local segment for the full years 2004 and 2005 and the
year-to-date period through May 17, 2006, the date of the Embarq spin-off. Additional information regarding
our discontinued operations can be found in note 2 of the Notes to Consolidated Financial Statements
appearing at the end of this annual report on Form 10-K. Income from discontinued operations related to the
spin-off of Embarq remained relatively stable in 2005 and 2004.
Financial Condition
Our consolidated assets were $97.2 billion as of December 31, 2006, which included $60.1 billion of
intangible assets, and $102.8 billion as of December 31, 2005, which included $49.3 billion of intangible
assets. The decrease in our consolidated assets was due primarily to the spin-off of Embarq, payments and
retirements of debt, purchases of shares of our common stock and the retirement of our Seventh series
redeemable preferred shares, partially offset by an increase due to assets acquired in connection with several
business combinations, net of cash used to purchase the acquired entities. Additional information regarding the
impact of the spin-off and the business combinations on consolidated assets can be found in notes 2 and 3 of
the Notes to Consolidated Financial Statements at the end of this annual report on Form 10-K. See “Liquidity
and Capital Resources” for additional information on the change in cash and cash equivalents.
Liquidity and Capital Resources
Management exercises discretion regarding the liquidity and capital resource needs of our business segments.
This responsibility includes the ability to prioritize the use of capital and debt capacity, to determine cash
management policies and to make decisions regarding the timing and amount of capital expenditures.
Discontinued Operations
On May 17, 2006, we completed the spin-off of Embarq. The separation of Embarq from us resulted in two
separate companies each of which can focus on maximizing opportunities for its distinct business. We believe
this separation presents the opportunity for enhanced performance of each of the two companies, including:
allowing each company separately to pursue the business and regulatory strategies that best suit its long-term
interests and, by doing so, addressing the growing strategic divergence between Embarq’s local wireline-
centric focus and our increasingly national wireless-centric focus; creating separate companies that have
different financial characteristics, which may appeal to different investor bases; creating opportunities to more
efficiently develop and finance expansion plans; and creating effective management incentives tied to the
relevant company’s performance.
In the spin-off, we distributed pro rata to our shareholders one Embarq common share for every 20 shares of
our voting and non-voting common stock, or about 149 million Embarq common shares. Cash was paid for
fractional shares. The distribution of Embarq common shares is considered a tax-free transaction for us and for
our shareholders, except cash payments made in lieu of fractional shares which are generally taxable.
In connection with the spin-off, Embarq transferred to our parent company $2.1 billion in cash and about
$4.5 billion of Embarq senior notes in partial consideration for, and as a condition to, our transfer to Embarq
of the local communications business. Embarq also retained about $665 million in debt obligations of its
subsidiaries. The cash and senior notes were transferred by our parent company to our finance subsidiary,
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