FEDERATED DEPARTMENT STORES 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
Annual Report Pursuant to
Section 13 or 15(d)
of the Securities Exchange Act
of 1934
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For the Fiscal Year Ended
February 3, 2007
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Commission File Number:
1-13536
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Federated Department Stores,
Inc.
7 West Seventh
Street
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West
34th Street
New York, New York
10001
(212) 494-1602
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Incorporated in
Delaware
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I.R.S. No. 13-3324058
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Securities Registered Pursuant
to Section 12(b) of the Act:
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Name of Each Exchange on
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Title of Each Class
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Which Registered
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Common Stock, par value $.01 per
share
7.45% Senior Debentures due 2017
6.79% Senior Debentures due 2027
7% Senior Debentures due 2028
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New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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Securities Registered Pursuant
to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated filer
þ
Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant as of the last business
day of the registrants most recently completed second
fiscal quarter (July 29, 2006) was approximately
$19,061,683,000.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at March 2, 2007
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Common Stock, $0.01 par value
per share
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454,663,061 shares
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DOCUMENTS
INCORPORATED BY REFERENCE
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Parts Into
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Document
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Which Incorporated
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Proxy Statement for the Annual
Meeting of Stockholders to be held May 18, 2007 (Proxy
Statement)
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Part III
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Explanatory
Note
On August 30, 2005, pursuant to the Agreement and Plan of
Merger (the Merger Agreement), dated as of
February 27, 2005, by and among Federated Department
Stores, Inc. (Federated), The May Department Stores
Company, a Delaware corporation (May), and Milan
Acquisition LLC (formerly known as Milan Acquisition Corp.), a
wholly owned subsidiary of the Company (Merger Sub),
May merged with and into Merger Sub (the Merger). As
a result of the Merger, Mays separate corporate existence
terminated. Upon the completion of the Merger, Merger Sub was
merged with and into Federated, and Merger Subs separate
corporate existence terminated.
Unless the context requires otherwise (i) references
herein to the Company are, for all periods prior to
August 30, 2005 (the Merger Date), references
to Federated and its subsidiaries and their respective
predecessors, and for all periods following the Merger Date,
references to the surviving corporation in the Merger and its
subsidiaries, and (ii) references to 2006,
2005, 2004, 2003 and
2002are references to the Companys fiscal
years ended February 3, 2007, January 28, 2006,
January 29, 2005, January 31, 2004 and
February 1, 2003, respectively.
Forward-Looking
Statements
This report and other reports, statements and information
previously or subsequently filed by the Company with the
Securities and Exchange Commission (the SEC) contain
or may contain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information
available to, the management of the Company at the time such
statements are made. The following are or may constitute
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995: (i) statements
preceded by, followed by or that include the words
may, will, could,
should, believe, expect,
future, potential,
anticipate, intend, plan,
think, estimate or continue
or the negative or other variations thereof, and
(ii) statements regarding matters that are not historical
facts. Such forward-looking statements are subject to various
risks and uncertainties, including:
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risks and uncertainties relating to the possible invalidity
of the underlying beliefs and assumptions;
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possible changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances
and conditions;
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actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners, competitors
and legislative, regulatory, judicial and other governmental
authorities and officials;
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adverse changes in relationships with vendors and other
product and service providers;
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systems failures
and/or
security breaches, including, any security breach that results
in the theft, transfer or unauthorized disclosure of customer,
employee or company information, or the failure to comply with
various laws applicable to the company in the event of such a
breach;
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risks related to currency and exchange rates and other
capital market, economic and geo-political conditions;
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risks associated with severe weather and changes in weather
patterns;
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risks associated with an outbreak of an epidemic or pandemic
disease;
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the potential impact of national and international security
concerns on the retail environment, including any possible
military action, terrorist attacks or other hostilities;
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risks associated with the possible inability of the
Companys manufacturers to deliver products in a timely
manner or meet quality standards;
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risks associated with the Companys reliance on foreign
sources of production, including risks related to the disruption
of imports by labor disputes;
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risks related to duties, taxes, other charges and quotas on
imports;
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competitive pressures from department and specialty stores,
general merchandise stores, manufacturers outlets,
off-price and discount stores, and all other retail channels,
including the Internet, mail-order catalogs and television;
and
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general consumer-spending levels, including the impact of the
availability and level of consumer debt, levels of consumer
confidence and the effects of the weather or natural
disasters.
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In addition to any risks and uncertainties specifically
identified in the text surrounding such forward-looking
statements, the statements in the immediately preceding sentence
and the statements under captions such as Risk
Factors and Special Considerations in reports,
statements and information filed by the Company with the SEC
from time to time constitute cautionary statements identifying
important factors that could cause actual amounts, results,
events and circumstances to differ materially from those
reflected in such forward-looking statements.
General. The Company is a Delaware
corporation. The Company and its predecessors have been
operating department stores since 1820.
Upon the completion of the Merger, the Company acquired
Mays approximately 500 department stores and approximately
800 bridal and formalwear stores. All locations retained by the
Company that operated under the following May nameplates were
converted to the Macys or Bloomingdales nameplate by
the end of 2006: Famous-Barr,
Filenes, Foleys,
Hechts, Kaufmanns,
Lord & Taylor, L.S. Ayres,
Marshall Fields, Meier &
Frank, Robinsons-May,
Strawbridges and The Jones Store.
In connection with the Merger, the Company announced its
intention to divest certain of these stores and certain
Macys stores. As of April 3, 2007, the Company had
sold approximately 65 of these stores.
On September 20, 2005, the Company announced its intention
to divest Mays Bridal Group division, which included the
operations of Davids Bridal, After Hours Formalwear and
Priscilla of Boston. In January 2007, the Company completed the
sale of its Davids Bridal and Priscilla of Boston
businesses for approximately $740 million in cash. The sale
included 273 Davids Bridal stores and 10 Priscilla of
Boston locations. The Company expects the sale of its 507-store
After Hours Formalwear business, which includes Mr. Tux
stores in New England, to be completed in the first half of 2007.
On January 12, 2006, the Company announced its intention to
divest Mays Lord & Taylor department store
division. The Lord & Taylor division included 55
department stores, including six stores scheduled to be closed,
of which one was retained by the Company and will be reopened as
a Macys. In October 2006, the Company completed the sale
of its Lord & Taylor division for approximately
$1,047 million in cash and a long-term note receivable of
approximately $17 million.
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As of February 3, 2007, the continuing operations of the
Company, through its various divisions, operated more than 850
retail stores in 45 states, the District of Columbia, Guam
and Puerto Rico under the names Macys and
Bloomingdales.
The Companys retail stores sell a wide range of
merchandise, including mens, womens and
childrens apparel and accessories, cosmetics, home
furnishings and other consumer goods, and are diversified by
size of store, merchandising character and character of
community served. Most stores are located at urban or suburban
sites, principally in densely populated areas across the United
States.
The Company, through its divisions, conducts electronic commerce
and
direct-to-customer
mail catalog businesses under the names macys.com,
bloomingdales.com and Bloomingdales By
Mail. Additionally, the Company offers an on-line bridal
registry to customers.
For 2006, 2005 and 2004, the following merchandise constituted
the following percentages of sales:
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2006
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2005
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2004
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Feminine Accessories, Intimate
Apparel, Shoes and Cosmetics
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35
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%
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34
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33
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Feminine Apparel
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28
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27
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27
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Mens and Childrens
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22
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22
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21
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Home / Miscellaneous
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15
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17
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19
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100
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%
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100
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%
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100
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%
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The Company provides various support functions to its retail
operating divisions on an integrated, company-wide basis.
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The Companys subsidiary, FDS Bank, and its financial,
administrative and credit services subsidiary, FACS Group, Inc.
(FACS), provide credit processing, certain
collections, customer service and credit marketing services for
the proprietary credit programs of the Companys retail
operating divisions in respect of all proprietary and
non-proprietary credit card accounts owned by Department Stores
National Bank (DSNB), a subsidiary of Citibank, N.A.
and FDS Bank. In addition, FACS provides payroll and benefits
services to the Companys retail operating and service
subsidiaries and divisions.
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As previously reported, on June 1, 2005, the Company and
certain of its subsidiaries entered into a Purchase, Sale and
Servicing Transfer Agreement (the Purchase
Agreement) with Citibank, N.A. (together with its
subsidiaries, as applicable, Citibank). The Purchase
Agreement provided for, among other things, the purchase by
Citibank of substantially all of (i) the credit card
accounts and related receivables and other related assets owned
by FDS Bank, (ii) the Macys credit card
accounts owned by GE Money Bank, immediately upon the purchase
back by the Company of such accounts, and (iii) the
proprietary credit card accounts owned by May and related
receivables balances (collectively, the Credit
Assets). Various arrangements between the Company and
Citibank in respect of the Credit Assets are set forth in a
credit card program agreement, including arrangements relating
to the servicing of the Credit Assets by FDS Bank and FACS.
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Federated Systems Group, Inc. (FSG), a wholly-owned
indirect subsidiary of the Company, provides (directly and
pursuant to outsourcing arrangements with third parties)
operational electronic data processing and management
information services to each of the Companys retail
operating and service subsidiaries and divisions.
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Macys Merchandising Group, Inc. (MMG), a
wholly-owned indirect subsidiary of the Company, is responsible
for all of the private label development of the Companys
Macys divisions. MMG also helps the Company to centrally
develop and execute consistent merchandise strategies while
retaining the ability to tailor merchandise assortments and
strategies to the particular character and customer base of the
Companys various department store markets.
Bloomingdales uses MMG for some of its private label
merchandise but also sources some of its private label
merchandise through Associated Merchandising Corporation.
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Federated Logistics and Operations (FLO), a division
of a subsidiary of the Company, provides warehousing and
merchandise distribution services, store design and construction
services and certain supply purchasing services for the
Companys retail operating subsidiaries and divisions.
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Macys Home Store, LLC, a wholly-owned indirect subsidiary
of the Company, is responsible for the overall strategy,
merchandising and marketing of home-related merchandise
categories in all of the Companys Macys stores.
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A specialized staff maintained in the Companys corporate
offices provides services for all divisions of the Company in
such areas as accounting, legal, marketing, real estate and
insurance, as well as various other corporate office functions.
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FACS, FSG and MMG also offer their services to unrelated third
parties.
The Companys executive offices are located at 7 West
Seventh Street, Cincinnati, Ohio 45202, telephone number:
(513) 579-7000
and 151 West 34th Street, New York, New York 10001,
telephone number:
(212) 494-1602.
Employees. As of February 3, 2007, the
Companys continuing operations had approximately 188,000
regular full-time and part-time employees. Because of the
seasonal nature of the retail business, the number of employees
peaks in the holiday season. Approximately 10% of the
Companys employees as of February 3, 2007 were
represented by unions. Management considers its relations with
its employees to be satisfactory.
Seasonality. The retail business is seasonal
in nature with a high proportion of sales and operating income
generated in the months of November and December. Working
capital requirements fluctuate during the year, increasing
somewhat in mid-summer in anticipation of the fall merchandising
season and increasing substantially prior to the holiday season
when the Company must carry significantly higher inventory
levels.
Purchasing. The Company purchases merchandise
from many suppliers, no one of which accounted for more than 5%
of the Companys net purchases during 2006. The Company has
no long-term purchase commitments or arrangements with any of
its suppliers, and believes that it is not dependent on any one
supplier. The Company considers its relations with its suppliers
to be satisfactory.
Competition. The retailing industry is
intensely competitive. The Companys stores and
direct-to-customer
business operations compete with many retailing formats in the
geographic areas in which they operate, including department
stores, specialty stores, general merchandise stores, off-price
and discount stores, new and established forms of home shopping
(including the Internet, mail order catalogs and television) and
manufacturers outlets, among others. The retailers with
which the Company competes include Bed Bath & Beyond,
Belk, Dillards, Gap, J.C. Penney, Kohls, Limited,
Linens n Things, Neiman Marcus, Nordstrom, Saks,
Sears, Stage Stores, Target, TJ Maxx and Wal-Mart. The Company
seeks to attract customers by offering superior selections,
value pricing, and strong private label merchandise in stores
that are located in premier locations, and by providing an
exciting shopping environment and superior service. Other
retailers may
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compete for customers on some or all of these bases, or on other
bases, and may be perceived by some potential customers as being
better aligned with their particular preferences.
Available Information. The Company makes its
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act available free
of charge through its internet website at
http://www.fds.com
as soon as reasonably practicable after it electronically
files such material with, or furnishes it to, the SEC. The
public also may read and copy any of these filings at the
SECs Public Reference Room, 100 F Street, NE,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-732-0330.
The SEC also maintains an Internet site that contains the
Companys filings; the address of that site is
http://www.sec.gov. In addition, the Company has made the
following available free of charge through its website at
http://www.fds.com:
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Audit Committee Charter,
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Compensation and Management Development Committee Charter,
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Nominating and Corporate Governance Committee Charter,
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Corporate Governance Principles, and
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Code of Business Conduct and Ethics.
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Any of these items are also available in print to any
shareholder who requests them. Requests should be sent to the
Corporate Secretary of Federated Department Stores, Inc. at
7 West
7th Street,
Cincinnati, OH 45202.
Executive
Officers of the
Registrant.
The following table sets forth certain information as of
April 3, 2007 regarding the executive officers of the
Company:
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Name
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Age
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Position with the Company
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Terry J. Lundgren
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55
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Chairman of the Board; President
and Chief Executive Officer; Director
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Thomas G. Cody
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65
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Vice Chair
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Thomas L. Cole
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58
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Vice Chair
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Janet E. Grove
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55
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Vice Chair
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Susan D. Kronick
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55
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Vice Chair
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Karen M. Hoguet
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50
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Executive Vice President and Chief
Financial Officer
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Dennis J. Broderick
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58
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Senior Vice President, General
Counsel and Secretary
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Joel A. Belsky
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53
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Vice President and Controller
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Terry J. Lundgren has been Chairman of the Board since January
2004 and President and Chief Executive Officer of the Company
since February 2003; prior thereto he served as the President /
Chief Operating Officer and Chief Merchandising Officer of the
Company from April 2002 to February 2003. Mr. Lundgren
served as the President and Chief Merchandising Officer of the
Company from May 1997 to April 2002.
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Thomas G. Cody has been Vice Chair, Legal, Human Resources,
Internal Audit and External Affairs of the Company since
February 2003; prior thereto he served as the Executive Vice
President, Legal and Human Resources, of the Company from May
1988 to February 2003.
Thomas L. Cole has been Vice Chair, Support Operations of the
Company since February 2003 and Chairman of FLO since 1995, FSG
since 2001 and FACS since 2002.
Janet E. Grove has been Vice Chair, Merchandising, Private Brand
and Product Development of the Company since February 2003 and
Chairman of MMG since 1998 and Chief Executive Officer of MMG
since 1999.
Susan D. Kronick has been Vice Chair, Department Store Divisions
of the Company since February 2003; prior thereto she served as
Group President, Regional Department Stores of the Company from
April 2001 to February 2003; and prior thereto as Chairman and
Chief Executive Officer of Macys Florida (formerly known
as Burdines, Inc.) from June 1997 to February 2003.
Karen M. Hoguet has been Executive Vice President of the Company
since June 2005 and Chief Financial Officer of the Company since
October 1997.
Dennis J. Broderick has been Secretary of the Company since July
1993 and Senior Vice President and General Counsel of the
Company since January 1990.
Joel A. Belsky has been Vice President and Controller of the
Company since October 1996.
In evaluating the Company, the risks described below and the
matters described in Forward-Looking Statements
should be considered carefully. Such risks and matters could
significantly and adversely affect the Companys business,
prospects, financial condition, results of operations and cash
flows.
The
Company faces significant competition in the retail
industry.
The Company conducts its retail merchandising business under
highly competitive conditions. Although the Company is one of
the nations largest retailers, it has numerous and varied
competitors at the national and local levels, including
conventional and specialty department stores, other specialty
stores, category killers, mass merchants, value retailers,
discounters, and Internet and mail-order retailers. Competition
may intensify as the Companys competitors enter into
business combinations or alliances. Competition is characterized
by many factors, including assortment, advertising, price,
quality, service, location, reputation and credit availability.
If the Company does not compete effectively with regard to these
factors, its results of operations could be materially and
adversely affected.
The
Companys sales and operating results depend on consumer
preferences and consumer spending.
The fashion and retail industries are subject to sudden shifts
in consumer trends and consumer spending. The Companys
sales and operating results depend in part on its ability to
predict or respond to changes in fashion trends and consumer
preferences in a timely manner. The Company develops new retail
concepts and continuously adjusts its industry position in
certain major and private-label brands and product categories in
an effort to satisfy customers. Any sustained failure to
anticipate, identify and respond to emerging trends in lifestyle
and consumer preferences could have a material adverse affect on
the Companys business. Consumer spending may be affected
by many factors outside of the Companys control, including
competition from
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store-based retailers, mail-order and Internet companies,
consumer confidence and preferences, consumers disposable
income, weather that affects consumer traffic and general
economic conditions.
A privacy
breach could adversely affect the Companys
business.
The protection of customer, employee, and company data is
critical to the Company. The regulatory environment surrounding
information security and privacy is increasingly demanding, with
the frequent imposition of new and constantly changing
requirements across business units. In addition, customers have
a high expectation that the Company will adequately protect
their personal information. A significant breach of customer,
employee, or company data could damage the Companys
reputation and result in lost sales, fines, or lawsuits.
The
Company depends upon its relationships with designers, vendors
and other sources of merchandise.
The Companys relationships with established and emerging
designers have been a significant contributor to the
Companys past success. The Companys ability to find
qualified vendors and access products in a timely and efficient
manner is often challenging, particularly with respect to goods
sourced outside the United States. Political or financial
instability, trade restrictions, tariffs, currency exchange
rates, transport capacity and costs and other factors relating
to foreign trade, each of which affects the Companys
ability to access suitable merchandise on acceptable terms, are
beyond the Companys control and could adversely impact the
Companys performance.
The
Companys business could be affected by extreme weather
conditions or natural disasters.
Extreme weather conditions in the areas in which the
Companys stores are located could adversely affect the
Companys business. For example, frequent or unusually
heavy snowfall, ice storms, rain storms or other extreme weather
conditions over a prolonged period could make it difficult for
the Companys customers to travel to its stores and thereby
reduce the Companys sales and profitability. The
Companys business is also susceptible to unseasonable
weather conditions. For example, extended periods of
unseasonably warm temperatures during the winter season or cool
weather during the summer season could render a portion of the
Companys inventory incompatible with those unseasonable
conditions. Reduced sales from extreme or prolonged unseasonable
weather conditions could adversely affect the Companys
business.
In addition, natural disasters such as hurricanes, tornadoes and
earthquakes, or a combination of these or other factors, could
severely damage or destroy one or more of the Companys
stores or warehouses located in the affected areas, thereby
disrupting the Companys business operations.
A
regional or global health pandemic could severely affect the
Companys business.
A health pandemic is a disease that spreads rapidly and widely
by infection and affects many individuals in an area or
population at the same time. If a regional or global health
pandemic were to occur, depending upon its location, duration
and severity, the Companys business could be severely
affected. Customers might avoid public places in the event of a
health pandemic, and local, regional or national governments
might limit or ban public gatherings to halt or delay the spread
of disease. A regional or global health pandemic might also
adversely impact the Companys business by disrupting or
delaying production and delivery of materials and products in
its supply chain and by causing staffing shortages in its stores.
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The
Companys revenues and cash requirements are affected by
the seasonal nature of its business.
The Companys business is seasonal, with a high proportion
of revenues and operating cash flows generated during the second
half of the fiscal year, which includes the fall and holiday
selling seasons. The Company has in the past experienced
significant fluctuations in its revenues from quarter to quarter
with a disproportionate amount of revenues falling in the fourth
fiscal quarter, which coincides with the holiday season. In
addition, the Company incurs significant additional expenses in
the period leading up to the months of November and December in
anticipation of higher sales volume in those periods, including
for additional inventory, advertising and employees.
The
Companys business is subject to unfavorable economic and
political conditions and other developments and risks.
Unfavorable global, domestic or regional economic or political
conditions and other developments and risks could negatively
affect the Companys business. For example, unfavorable
changes related to interest rates, rates of economic growth,
fiscal and monetary policies of governments, inflation,
deflation, consumer credit availability, consumer debt levels,
tax rates and policy, unemployment trends, oil prices, and other
matters that influence the availability and cost of merchandise,
consumer confidence, spending and tourism could adversely impact
the Companys business and results of operations. In
addition, unstable political conditions or civil unrest,
including terrorist activities and worldwide military and
domestic disturbances and conflicts, may disrupt commerce and
could have a material adverse effect on the Companys
business and results of operations.
The
Companys growth may strain operations, which could
adversely affect the Companys business and financial
performance.
With the acquisition of May, the Companys business has
grown dramatically. Accordingly, sales, number of stores and
number of associates have grown and likely will continue to
grow. This growth places significant demands on management and
operational systems. If the Company is unable to effectively
manage its growth, operational inefficiencies could occur and,
as a result, the Companys business and results of
operations could be materially and adversely affected.
The
Company depends upon the success of its advertising and
marketing programs.
The Companys advertising and promotional costs, net of
cooperative advertising allowances, amounted to
$1,171 million for 2006. The Companys business
depends on high customer traffic in its stores and effective
marketing. The Company has many initiatives in this area, and
often changes its advertising and marketing programs. There can
be no assurance as to the Companys continued ability to
effectively execute its advertising and marketing programs, and
any failure to do so could have a material adverse effect on the
Companys business and results of operations.
A
material disruption in the Companys computer systems could
adversely affect the Companys business or results of
operations.
The Company relies extensively on its computer systems to
process transactions, summarize results and manage its business.
The Companys computer systems are subject to damage or
interruption from power outages, computer and telecommunications
failures, computer viruses, security breaches, catastrophic
events such as fires, floods, earthquakes, tornadoes,
hurricanes, acts of war or terrorism, and usage errors by the
8
Companys employees. If the Companys computer systems
are damaged or cease to function properly, the Company may have
to make a significant investment to fix or replace them, and the
Company may suffer loss of critical data and interruptions or
delays in its operations in the interim. Any material
interruption in the Companys computer systems could
adversely affect its business or results of operations.
If the
Company is unable to attract and retain quality employees, its
business could be adversely affected.
The Companys business is dependent upon attracting and
retaining a large and growing number of quality employees. Many
of these employees are in entry level or part-time positions
with historically high rates of turnover. The Companys
ability to meet its labor needs while controlling the costs
associated with hiring and training new employees is subject to
external factors such as unemployment levels, prevailing wage
rates, minimum wage legislation and changing demographics.
Changes that adversely impact the Companys ability to
attract and retain quality employees could adversely affect the
Companys business.
The
Company is subject to numerous regulations that could adversely
affect its business.
The Company is subject to customs,
truth-in-advertising
and other laws, including consumer protection regulations and
zoning and occupancy ordinances that regulate retailers
generally
and/or
govern the importation, promotion and sale of merchandise and
the operation of retail stores and warehouse facilities.
Although the Company undertakes to monitor changes in these
laws, if these laws change without the Companys knowledge,
or are violated by importers, designers, manufacturers or
distributors, the Company could experience delays in shipments
and receipt of goods or be subject to fines or other penalties
under the controlling regulations, any of which could adversely
affect the Companys business.
Litigation
or regulatory developments could adversely affect the
Companys business or financial condition.
The Company is subject to various federal, state and local laws,
rules and regulations, which may change from time to time. In
addition, the Company is regularly involved in various
litigation matters that arise in the ordinary course of its
business. Litigation or regulatory developments could adversely
affect the Companys business and financial condition.
Factors
beyond the Companys control could affect the
Companys stock price.
The Companys stock price, like that of other retail
companies, is subject to significant volatility because of many
factors, including factors beyond the control of the Company.
These factors may include:
|
|
|
|
|
general economic and stock market conditions;
|
|
|
|
risks relating to the Companys business and its industry,
including those discussed above;
|
|
|
|
strategic actions by the Company or its competitors;
|
|
|
|
variations in the Companys quarterly results of operations;
|
|
|
|
future sales or purchases of the Companys common
stock; and
|
|
|
|
investor perceptions of the investment opportunity associated
with the Companys common stock relative to other
investment alternatives.
|
In addition, the Company may fail to meet the expectations of
its stockholders or of analysts at some time in the future. If
the analysts that regularly follow the Companys stock
lower their rating or lower their
9
projections for future growth and financial performance, the
Companys stock price could decline. Also, sales of a
substantial number of shares of the Companys common stock
in the public market or the appearance that these shares are
available for sale could adversely affect the market price of
the Companys common stock.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
The properties of the Company consist primarily of stores and
related facilities, including warehouses and distribution and
fulfillment centers. The Company also owns or leases other
properties, including corporate office space in Cincinnati and
New York and other facilities at which centralized operational
support functions are conducted. As of February 3, 2007,
the continuing operations of the Company operated 858 retail
stores in 45 states, the District of Columbia, Puerto Rico
and Guam, comprising a total of approximately
156,400,000 square feet. Of such stores, 463 were
owned, 273 were leased and 122 stores were operated under
arrangements where the Company owned the building and leased the
land. Substantially all owned properties are held free and clear
of mortgages. Pursuant to various shopping center agreements,
the Company is obligated to operate certain stores for periods
of up to 20 years. Some of these agreements require that
the stores be operated under a particular name. Most leases
require the Company to pay real estate taxes, maintenance and
other costs; some also require additional payments based on
percentages of sales and some contain purchase options. Certain
of the Companys real estate leases have terms that extend
for significant numbers of years and provide for rental rates
that increase or decrease over time.
Item 3. Legal
Proceedings.
On January 11, 2006, Edward Decristofaro, an alleged former
May stockholder, filed a purported class action lawsuit on
behalf of all former May stockholders in the Circuit Court of
St. Louis, Missouri against May and the former members of
the board of directors of May. The complaint generally alleges
that the directors of May breached their fiduciary duties of
loyalty, due care, good faith and candor to May stockholders in
connection with the Merger. The Company believes the lawsuit is
without merit and intends to contest it vigorously. The
defendants have filed a motion to dismiss the lawsuit upon which
the court has not yet ruled.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security-Holders.
|
None.
10
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The Common Stock is listed on the New York Stock Exchange (the
NYSE) under the trading symbol FD. As of
February 3, 2007, the Company had approximately 26,600
stockholders of record. The following table sets forth for each
fiscal quarter during 2006 and 2005 the high and low sales
prices per share of Common Stock as reported on the NYSE
Composite Tape and the dividend declared each fiscal quarter on
each share of Common Stock. Throughout this report, share and
per share amounts have been adjusted as appropriate to reflect
the
two-for-one
stock split effected in the form of a stock dividend distributed
on June 9, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
|
1st Quarter
|
|
|
32.37
|
|
|
|
39.21
|
|
|
|
0.1250
|
|
|
|
27.45
|
|
|
|
32.54
|
|
|
|
0.0675
|
|
2nd Quarter
|
|
|
32.57
|
|
|
|
39.69
|
|
|
|
0.1275
|
|
|
|
28.84
|
|
|
|
38.62
|
|
|
|
0.0675
|
|
3rd Quarter
|
|
|
33.52
|
|
|
|
45.01
|
|
|
|
0.1275
|
|
|
|
28.78
|
|
|
|
39.02
|
|
|
|
0.1250
|
|
4th Quarter
|
|
|
36.12
|
|
|
|
44.86
|
|
|
|
0.1275
|
|
|
|
29.90
|
|
|
|
37.48
|
|
|
|
0.1250
|
|
The following table provides information regarding the
Companys purchases of Common Stock during the fourth
quarter of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Number of Shares
|
|
|
Open
|
|
|
|
of Shares
|
|
|
Price per
|
|
|
Purchased under
|
|
|
Authorization
|
|
|
|
Purchased
|
|
|
Share ($)
|
|
|
Program (1)
|
|
|
Remaining (1) ($)
|
|
|
|
(thousands)
|
|
|
|
|
|
(thousands)
|
|
|
(millions)
|
|
|
October 29, 2006 -
November 25, 2006
|
|
|
5,828
|
|
|
|
42.20
|
|
|
|
5,828
|
|
|
|
1,307
|
|
November 26, 2006 -
December 30, 2006
|
|
|
16,878
|
|
|
|
39.67
|
|
|
|
16,876
|
|
|
|
637
|
|
December 31, 2006 -
February 3, 2007
|
|
|
11,800
|
|
|
|
39.57
|
|
|
|
11,800
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,506
|
|
|
|
40.06
|
|
|
|
34,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys board of directors initially approved a
$500 million authorization to purchase common stock on
January 27, 2000 and approved additional $500 million
authorizations on each of August 25, 2000, May 18,
2001 and April 16, 2003, additional $750 million
authorizations on each of February 27, 2004 and
July 20, 2004, an additional authorization of
$2,000 million on August 25, 2006 and an additional
authorization of $4,000 million on February 26, 2007.
All authorizations are cumulative and do not have an expiration
date. On February 27, 2007, the Company announced that it
had repurchased 45 million shares of its common stock for
an initial price of approximately $2,000 million, subject
to adjustment pursuant to the terms of the related accelerated
share repurchase agreements. |
11
The following graph compares the cumulative total stockholder
return on the Common Stock with the Standard &
Poors 500 Composite Index and the Standard &
Poors Retail Department Store Index for the period from
February 1, 2002 through February 2, 2007, assuming an
initial investment of $100 and the reinvestment of all
dividends, if any.
(1) The companies included in the S&P Retail Department
Store Index are Dillards, Federated, J.C. Penney,
Kohls, Nordstrom and Sears, as well as May for the periods
of 2002 to August 29, 2005.
12
|
|
Item 6.
|
Selected
Financial Data.
|
The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the
notes thereto and the other information contained elsewhere in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006*
|
|
|
2005**
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(millions, except per share data)
|
|
|
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
26,970
|
|
|
$
|
22,390
|
|
|
$
|
15,776
|
|
|
$
|
15,412
|
|
|
$
|
15,571
|
|
Cost of sales
|
|
|
(16,019
|
)
|
|
|
(13,272
|
)
|
|
|
(9,382
|
)
|
|
|
(9,175
|
)
|
|
|
(9,324
|
)
|
Inventory valuation
adjustments May integration
|
|
|
(178
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
10,773
|
|
|
|
9,093
|
|
|
|
6,394
|
|
|
|
6,237
|
|
|
|
6,247
|
|
Selling, general and administrative
expenses
|
|
|
(8,678
|
)
|
|
|
(6,980
|
)
|
|
|
(4,994
|
)
|
|
|
(4,896
|
)
|
|
|
(4,904
|
)
|
May integration costs
|
|
|
(450
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sale of accounts receivable
|
|
|
191
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,836
|
|
|
|
2,424
|
|
|
|
1,400
|
|
|
|
1,341
|
|
|
|
1,343
|
|
Interest expense (a)
|
|
|
(451
|
)
|
|
|
(422
|
)
|
|
|
(299
|
)
|
|
|
(266
|
)
|
|
|
(311
|
)
|
Interest income
|
|
|
61
|
|
|
|
42
|
|
|
|
15
|
|
|
|
9
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
1,446
|
|
|
|
2,044
|
|
|
|
1,116
|
|
|
|
1,084
|
|
|
|
1,048
|
|
Federal, state and local income tax
expense
|
|
|
(458
|
)
|
|
|
(671
|
)
|
|
|
(427
|
)
|
|
|
(391
|
)
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
988
|
|
|
|
1,373
|
|
|
|
689
|
|
|
|
693
|
|
|
|
638
|
|
Discontinued operations, net of
income taxes (b)
|
|
|
7
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
995
|
|
|
$
|
1,406
|
|
|
$
|
689
|
|
|
$
|
693
|
|
|
$
|
818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share: (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.83
|
|
|
$
|
3.22
|
|
|
$
|
1.97
|
|
|
$
|
1.88
|
|
|
$
|
1.62
|
|
Net income
|
|
|
1.84
|
|
|
|
3.30
|
|
|
|
1.97
|
|
|
|
1.88
|
|
|
|
2.08
|
|
Diluted earnings per
share: (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.80
|
|
|
$
|
3.16
|
|
|
$
|
1.93
|
|
|
$
|
1.85
|
|
|
$
|
1.60
|
|
Net income
|
|
|
1.81
|
|
|
|
3.24
|
|
|
|
1.93
|
|
|
|
1.85
|
|
|
|
2.06
|
|
Average number of shares
outstanding (c)
|
|
|
540.0
|
|
|
|
426.1
|
|
|
|
349.0
|
|
|
|
367.6
|
|
|
|
393.2
|
|
Cash dividends paid per
share (c)
|
|
$
|
.5075
|
|
|
$
|
.385
|
|
|
$
|
.265
|
|
|
$
|
.1875
|
|
|
$
|
|
|
Depreciation and amortization
|
|
$
|
1,265
|
|
|
$
|
976
|
|
|
$
|
737
|
|
|
$
|
710
|
|
|
$
|
680
|
|
Capital expenditures
|
|
$
|
1,392
|
|
|
$
|
656
|
|
|
$
|
548
|
|
|
$
|
568
|
|
|
$
|
627
|
|
Balance Sheet Data (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,211
|
|
|
$
|
248
|
|
|
$
|
868
|
|
|
$
|
925
|
|
|
$
|
716
|
|
Total assets
|
|
|
29,550
|
|
|
|
33,168
|
|
|
|
14,885
|
|
|
|
14,550
|
|
|
|
14,441
|
|
Short-term debt
|
|
|
650
|
|
|
|
1,323
|
|
|
|
1,242
|
|
|
|
908
|
|
|
|
946
|
|
Long-term debt
|
|
|
7,847
|
|
|
|
8,860
|
|
|
|
2,637
|
|
|
|
3,151
|
|
|
|
3,408
|
|
Shareholders equity
|
|
|
12,254
|
|
|
|
13,519
|
|
|
|
6,167
|
|
|
|
5,940
|
|
|
|
5,762
|
|
|
|
|
*
|
|
53 weeks
|
|
**
|
|
The May Department Stores Company
was acquired August 30, 2005 and the results of operations
have been included in the Companys results of operations
from the date of the acquisition.
|
|
(a)
|
|
Interest expense includes a gain of
approximately $54 million in 2006 related to the completion
of a debt tender offer and a cost of approximately
$59 million in 2004 associated with repurchases of the
Companys long-term debt.
|
|
(b)
|
|
Discontinued operations include
(1) for 2006, the after-tax results of operations of the
Lord & Taylor division and the Bridal Group division
(including Davids Bridal, After Hours Formalwear, and
Priscilla of Boston), including after tax losses of
$38 million and $18 million on the disposals of the
Lord & Taylor division and the Davids Bridal and
Priscilla of Boston businesses, respectively and (2) for
2005, the after-tax results of operations of the Lord &
Taylor division and the Bridal Group division. For 2002,
discontinued operations represents adjustments to the estimated
loss on disposal of a former subsidiary.
|
|
(c)
|
|
Share and per share amounts have
been adjusted as appropriate to reflect the
two-for-one
stock-split effective in the form of a stock dividend
distributed on June 9, 2006.
|
13
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The Company is a retail organization operating retail stores
that sell a wide range of merchandise, including mens,
womens and childrens apparel and accessories,
cosmetics, home furnishings and other consumer goods in
45 states, the District of Columbia, Guam and Puerto Rico.
The Company operates
coast-to-coast
exclusively under two retail brands Macys and
Bloomingdales. The Companys operations are
significantly impacted by competitive pressures from department
stores, specialty stores, mass merchandisers and all other
retail channels. The Companys operations are also
significantly impacted by general consumer-spending levels,
which are driven in part by consumer confidence and employment
levels.
In 2003, the Company commenced the implementation of a strategy
to more fully utilize its Macys brand, converting all of
the Companys regional store nameplates to the Macys
nameplate. This strategy allowed the Company to magnify the
impact of its marketing efforts on a nationwide basis, as well
as to leverage major events such as the Macys Thanksgiving
Day Parade and Macys
4th of
July fireworks.
In early 2004, the Company announced a further step in
reinventing its department stores the creation of a
centralized organization to be responsible for the overall
strategy, merchandising and marketing of the Companys
home-related categories of business in all of its
Macys-branded stores. While its benefits have taken longer
to be realized, the centralized operation is still expected to
accelerate future sales in these categories largely by improving
and further differentiating the Companys home-related
merchandise assortments.
For the past several years, the Company has been focused on four
key priorities for improving the business over the longer term:
differentiating and editing merchandise assortments; simplifying
pricing; improving the overall shopping experience; and
communicating better with customers through more brand focused
and effective marketing. The Company believes that its recent
results indicate that these strategies are working and that the
customer is responding in a favorable manner. In 2005, the
Company launched a new nationwide Macys customer loyalty
program, called Star Rewards, in coordination with the launch of
the Macys nameplate in cities across the country. The
program provides an enhanced level of offers and benefits to
Macys best credit card customers.
On August 30, 2005, the Company completed its merger with
May (the Merger). The results of Mays
operations have been included in the Consolidated Financial
Statements since that date. The aggregate purchase price for May
was approximately $11.7 billion, including approximately
$5.7 billion of cash and approximately 200 million
shares of Company common stock and options to purchase an
additional 18.8 million shares of Company common stock
valued at approximately $6.0 billion in the aggregate. In
connection with the Merger, the Company also assumed
approximately $6.0 billion of May debt.
The Merger has had and is expected to continue to have a
material effect on the Companys consolidated financial
position, results of operations and cash flows. The Company was
able to realize more than $175 million of cost savings in
2006 and expects to realize at least $450 million of annual
cost savings starting in 2007, resulting from the consolidation
of central functions, division integrations and the adoption of
best practices across the combined company with respect to
systems, logistics, store operations and credit management, all
of which have been substantially completed as of February 2007.
The Merger is also expected to accelerate comparable store sales
growth. The Company has incurred approximately $628 million
and $194 million of merger integration costs and related
inventory valuation adjustments in 2006 and 2005, respectively.
In addition, the Company anticipates incurring approximately
$100 to $125 million of May integration costs during fiscal
2007, which ends February 2, 2008.
14
In September 2005 and January 2006, the Company announced its
intention to dispose of the acquired May bridal group business,
which includes the operations of Davids Bridal, After
Hours Formalwear and Priscilla of Boston, and the acquired
Lord & Taylor division of May, respectively. In October
2006, the Company completed the sale of the Lord &
Taylor division for $1,047 million in cash and a long-term
note receivable of approximately $17 million. In January
2007, the Company completed the sale of the Davids Bridal
and Priscilla of Boston businesses for approximately
$740 million in cash. The Mens Wearhouse, Inc. has
agreed to purchase the After Hours Formalwear business for
approximately $100 million, less cash deposits on hand at
the time of sale, and the transaction is expected to close in
the first half of 2007. As a result of the Companys
decision to dispose of these businesses, these businesses are
being reported as discontinued operations. Unless otherwise
indicated, the following discussion relates to the
Companys continuing operations.
The Company added about 400 Macys locations nationwide in
2006 as it converted the regional department store nameplates
acquired through the Merger. In conjunction with the conversion
process, the Company has identified certain Macys and
former May store locations to be divested. Locations identified
for divestiture accounted for approximately $2.2 billion of
2005 sales on a pro forma basis. As of February 3, 2007,
the Company had sold approximately 65 of the stores identified
for divestiture. The Company is continuing to study its store
portfolio in light of the Merger.
In June 2005, the Company entered into a Purchase, Sale and
Servicing Transfer Agreement (the Purchase
Agreement) with Citibank, N.A. pursuant to which the
Company agreed to sell to Citibank (i) the proprietary and
non-proprietary credit card accounts owned by the Company,
together with related receivables balances, and the capital
stock of Prime Receivables Corporation, a wholly owned
subsidiary of the Company, which owned all of the Companys
interest in the Prime Credit Card Master Trust (the FDS
Credit Assets), (ii) the Macys
credit card accounts owned by GE Capital Consumer Card Co.
(GE Bank), together with related receivables
balances (the GE/Macys Credit Assets), upon
the termination of the Companys credit card program
agreement with GE Bank, and (iii) the proprietary credit
card accounts owned by May, together with related receivables
balances (the May Credit Assets). The purchase by
Citibank of the FDS Credit Assets was completed on
October 24, 2005, the purchase by Citibank of the
GE/Macys Credit Assets was completed on May 1, 2006
and the purchase by Citibank of the May Credit Assets was
completed on May 22, 2006 and July 17, 2006.
In connection with the Purchase Agreement, the Company and
Citibank entered into a long-term marketing and servicing
alliance pursuant to the terms of a Credit Card Program
Agreement (the Program Agreement) with an initial
term of 10 years expiring on July 17, 2016 and, unless
terminated by either party as of the expiration of the initial
term, an additional renewal term of three years. The Program
Agreement provides for, among other things, (i) the
ownership by Citibank of the accounts purchased by Citibank
pursuant to the Purchase Agreement, (ii) the ownership by
Citibank of new accounts opened by the Companys customers,
(iii) the provision of credit by Citibank to the holders of
the credit cards associated with the foregoing accounts,
(iv) the servicing of the foregoing accounts, and
(v) the allocation between Citibank and the Company of the
economic benefits and burdens associated with the foregoing and
other aspects of the alliance.
The sales prices provided for in the Purchase Agreement equate
to approximately 111.5% of the receivables included in the FDS
Credit Assets, the GE/Macys Credit Assets and the May
Credit Assets, and the Company will receive ongoing payments
under the Program Agreement. The transactions completed under
the Purchase Agreement and contemplated by the Program Agreement
are expected to be accretive to the
15
Companys earnings per share, particularly now that the
sales of the GE/Macys Credit Assets and the May Credit
Assets have been completed.
The transactions under the Purchase Agreement have provided the
Company with significant liquidity (i) through receipt of
the purchase price (which included a premium) for the divested
credit card accounts and related receivable balances and
(ii) because the Company will no longer have to finance
significant accounts receivable balances associated with the
divested credit card accounts going forward, and will receive
payments from Citibank immediately for sales under such credit
card accounts. Although the Companys future cash flows
will include payments to the Company under the Program
Agreement, these payments will be less than the net cash flow
that the Company would have derived from the finance charge and
other income generated on the receivables balances, net of the
interest expense associated with the Companys financing of
these receivable balances.
The following discussion should be read in conjunction with our
Consolidated Financial Statements and the related notes included
elsewhere in this report. The following discussion contains
forward-looking statements that reflect the Companys
plans, estimates and beliefs. The Companys actual results
could materially differ from those discussed in these
forward-looking statements. Factors that could cause or
contribute to those differences include, but are not limited to,
those discussed below and elsewhere in this report, particularly
in Forward-Looking Statements.
Results
of Operations
Comparison of the 53 Weeks Ended February 3, 2007 and
the 52 Weeks Ended January 28, 2006. Net
income for 2006 decreased to $995 million compared to
$1,406 million for 2005, reflecting strong sales and gross
margin performance offset by higher May integration costs and
related inventory valuation adjustments and smaller gains on the
sale of accounts receivable.
Net sales for 2006 totaled $26,970 million, compared to net
sales of $22,390 million for 2005, an increase of
$4,580 million or 20.5%. Net sales for 2006 and for the
period September 2005 through January 2006 include the
continuing operations of May, which represented
$9,832 million and $6,473 million, respectively. On a
comparable store basis (sales from Bloomingdales and
Macys stores in operation throughout 2005 and 2006 and all
Internet sales and mail order sales from continuing businesses
and adjusting for the impact of the 53rd week in 2006), net
sales increased 4.4% in 2006 compared to 2005. Sales in 2006
were strongest at Macys Florida and Bloomingdales
and comparable store sales were strongest at Macys East,
Macys Florida and Bloomingdales. Sales for 2006 in
the newly re-branded Macys stores were lower than
anticipated. Sales of the Companys private label brands
continued to be strong in 2006 and increased to 18.2% of net
sales in legacy Macys-branded stores. By family of
business, sales in 2006 were strongest in dresses, handbags,
cosmetics and fragrances and young mens. The weaker
businesses during 2006 continued to be in the big-ticket
home-related areas.
Cost of sales was $16,019 million or 59.4% of net sales for
2006, compared to $13,272 million or 59.3% of net sales for
2005, an increase of $2,747 million. Cost of sales for the
period September 2005 through January 2006 included the
continuing operations of May, which represented
$3,894 million or 60.2% of May net sales. The cost of sales
rate in 2006 was essentially flat with the cost of sales rate in
2005. In addition, gross margin includes $178 million and
$25 million of inventory valuation adjustments related to
the integration of May and Federated merchandise assortments in
2006 and 2005, respectively. The valuation of department store
merchandise inventories on the
last-in,
first-out basis did not impact cost of sales in either period.
16
Selling, general and administrative (SG&A)
expenses were $8,678 million or 32.2% of net sales for
2006, compared to $6,980 million or 31.2% of net sales for
2005, an increase of $1,698 million. SG&A expenses for
the period September 2005 through January 2006 included the
continuing operations of May, which represented
$1,951 million or 30.1% of May net sales. The SG&A
expense rate for 2006 was negatively impacted by higher
depreciation and amortization expense, higher retirement
expenses, and higher stock-based compensation expenses,
including the expensing of stock options. Depreciation and
amortization expense was $1,265 million for 2006, compared
to $976 million for 2005. Pension and supplementary
retirement plan expense amounted to $158 million for 2006,
compared to $129 million for 2005. Stock-based compensation
expense was $91 million for 2006, compared to
$10 million for 2005. The SG&A rate for 2006 benefited
by the achievement of more than $175 million of cost
savings resulting from merger synergies.
May integration costs for 2006 and 2005 amounted to
$450 million and $169 million, respectively, primarily
related to store and distribution center closings, as well as
system conversions and other operational consolidations. May
integration costs for 2006 also included re-branding-related
marketing and advertising costs and were partially offset by
gains from the sale of Federated locations.
Pre-tax gains of approximately $191 million and
$480 million were recorded in 2006 and 2005, respectively,
in connection with the sale of certain credit card accounts and
receivables.
Net interest expense was $390 million for 2006, compared to
$380 million for 2005, an increase of $10 million. The
increase in interest expense during 2006 as compared to 2005 is
due to the increased levels of borrowings associated with the
acquisition of May, offset in part by a gain of approximately
$54 million related to the completion of a debt tender
offer in the fourth quarter of 2006. Net interest expense for
2006 and 2005 each includes approximately $17 million of
interest income related to the settlement of various tax
examinations.
The Companys effective income tax rates of 31.7% for 2006
and 32.8% for 2005 differ from the federal income tax statutory
rate of 35.0%, and on a comparative basis, principally because
of the settlement of tax examinations, the reduction in the
valuation allowance associated with capital loss carryforwards
and the effect of state and local income taxes. Federal, state
and local income tax expense for 2006 included a benefit of
approximately $80 million recorded in the second quarter
related to the settlement of various tax examinations, primarily
attributable to losses related to the disposition of a former
subsidiary. Federal, state and local income tax expense for 2005
included a benefit of approximately $85 million related to
the reduction in the valuation allowance associated with the
capital loss carryforwards realized as a result of the sale of
the FDS Credit Assets and $10 million related to the
settlement of various tax examinations.
For 2006, income from the discontinued operations of the
acquired Lord & Taylor and bridal group businesses, net
of income taxes, was $7 million on sales of approximately
$1,741 million. For 2006, discontinued operations also
includes the loss on disposal of the Lord & Taylor
division of $38 million after income taxes and the loss on
disposal of the Davids Bridal and Priscilla of Boston
businesses of $18 million after income taxes. The losses on
disposal reflect reductions to the fair value of the assets sold
based on the actual purchase agreements. For 2005, income from
the discontinued operations of the acquired Lord &
Taylor and bridal group businesses, net of income taxes, was
$33 million on sales of approximately $957 million.
Comparison of the 52 Weeks Ended January 28, 2006 and
the 52 Weeks Ended January 29, 2005. Net
income for 2005 increased to $1,406 million compared to
$689 million for 2004. Net income for 2005 included income
from discontinued operations of $33 million. The increase
in income from continuing operations in 2005 reflected the
$480 million gain on the sale of credit card accounts and
receivables as well as the impact of the acquisition of May.
17
Net sales for 2005 totaled $22,390 million, compared to net
sales of $15,776 million for 2004, an increase of
$6,614 million or 41.9%. Net sales for September 2005
through January 2006 included the continuing operations of May,
which represented $6,473 million. On a comparable store
basis (sales from Bloomingdales and Macys stores in
operation throughout 2004 and 2005 and all Internet sales and
mail order sales from continuing businesses), net sales
increased 1.3% compared to 2004. Sales in 2005 were strongest at
Bloomingdales and Macys Florida. Sales of the
Companys private label brands continued to be strong in
2005 in all Macys-branded stores. By family of business,
sales in 2005 were strong in shoes, handbags, cosmetics and
fragrances and mens and womens sportswear. The
weaker businesses during 2005 continued to be in the
home-related areas.
Cost of sales was $13,272 million or 59.3% of net sales for
2005, compared to $9,382 million or 59.5% of net sales for
2004, an increase of $3,890 million. Cost of sales for
September 2005 through January 2006 included the continuing
operations of May, which represented $3,894 million or
60.2% of May net sales. Included in cost of sales for 2004 were
$36 million of markdowns, 0.2% of net sales, associated
with the Macys home store centralization and the
Burdines-Macys consolidation in Florida. The cost of sales
rate in 2005 was essentially flat with the cost of sales rate in
2004, excluding the impact of the markdowns in 2004. These
markdowns were primarily related to merchandise that was being
sold at Macys-branded stores and which was not reordered
following the Burdines-Macys consolidation and home store
centralization. Gross margin for 2005 reflected $25 million
of inventory valuation adjustments related to the integration of
May and Federated merchandise assortments. The valuation of
department store merchandise inventories on the
last-in,
first-out basis did not impact cost of sales in either period.
SG&A expenses were $6,980 million or 31.2% of net sales
for 2005, compared to $4,994 million or 31.6% of net sales
for 2004, an increase of $1,986 million. SG&A expenses
for September 2005 through January 2006 included the continuing
operations of May, which represented $1,951 million or
30.1% of May net sales. Included in SG&A expenses for 2004
were approximately $63 million of costs, 0.4% of net sales,
incurred in connection with store closings, the
Burdines-Macys consolidation and the home store
centralization. The SG&A rate in 2005 was negatively
impacted by the sale of the FDS Credit Assets.
May integration costs for 2005 amounted to $169 million,
primarily related to impairment charges for certain Macys
stores to be closed and sold.
A pre-tax gain of approximately $480 million was recorded
in 2005 in connection with the sale of the FDS Credit Assets.
Net interest expense was $380 million for 2005, compared to
$284 million for 2004, an increase of $96 million. The
increase in interest expense during 2005 as compared to 2004 was
due to the increased levels of borrowings associated with the
acquisition of May, offset in part by the reduction in
receivables-backed borrowings due to the sale of the FDS Credit
Assets. Net interest expense for 2005 included $17 million
of interest income related to the settlement of various tax
examinations. Net interest expense for 2004 included
$59 million of costs associated with the repurchase of
$274 million of the Companys 8.5% senior notes
due 2010.
The Companys effective income tax rates of 32.8% for 2005
and 38.3% for 2004 differed from the federal income tax
statutory rate of 35.0%, and on a comparative basis, principally
because of the reduction in the valuation allowance associated
with capital loss carryforwards, the settlement of various tax
examinations and the effect of state and local income taxes.
Federal, state and local income tax expense for 2005 included a
benefit of approximately $85 million related to the
reduction in the valuation allowance associated with the
18
capital loss carryforwards realized as a result of the sale of
the FDS Credit Assets and $10 million related to the
settlement of various tax examinations.
For 2005, income from the discontinued operations of the
acquired Lord & Taylor and bridal group businesses, net
of income taxes, was $33 million on sales of approximately
$957 million.
Liquidity
and Capital Resources
The Companys principal sources of liquidity are cash from
operations, cash on hand and the credit facilities described
below.
Net cash provided by continuing operating activities in 2006 was
$3,692 million, compared to the $4,145 million
provided in 2005. The decrease in net cash provided by
continuing operating activities in 2006 reflects lower net
income, lower proceeds from the sale of proprietary accounts
receivable, and a greater decrease in accounts payable and
accrued liabilities, partially offset by higher depreciation and
amortization expense, higher May integration costs and smaller
gains on the sale of accounts receivable.
Net cash provided by continuing investing activities was
$1,273 million for 2006, compared to net cash used by
continuing investing activities of $4,701 million for 2005.
Continuing investing activities for 2006 included purchases of
property and equipment totaling $1,317 million and
capitalized software of $75 million. Continuing investing
activities for 2006 also included the $1,141 million
repurchase of accounts receivable from GE Bank and the proceeds
of $1,323 million from the subsequent sale of the
repurchased accounts receivables to Citibank,
$1,047 million of proceeds from the disposition of the
Companys Lord & Taylor division,
$740 million of proceeds from the disposition of the
Companys Davids Bridal and Priscilla of Boston
businesses and $679 million from disposal of property and
equipment, primarily from the sale of approximately 65 duplicate
store and other facility locations. Continuing investing
activities for 2005 included purchases of property and equipment
totaling $568 million, capitalized software of
$88 million and an increase in non-proprietary accounts
receivable of $131 million. Continuing investing activities
for 2005 also included the cash outflow associated with the
acquisition of May of $5,321 million and the cash inflow
associated with the sale of the non-proprietary account portion
of the FDS Credit Assets of $1,388 million.
During 2006, the Company opened three new Macys department
stores, two new Bloomingdales department stores and
reopened two Macys department stores that were temporarily
closed after Hurricane Wilma. During 2005, the Company opened
two new Macys department stores and six new department
stores under legacy May nameplates subsequent to the acquisition
of May. The Company intends to open six new department stores
and two new furniture galleries in 2007. The Companys
budgeted capital expenditures are approximately
$1.2 billion for 2007 and approximately $1.1 billion
for each of 2008 and 2009. Management presently anticipates
funding such expenditures with cash from operations.
Net cash used by the Company for all continuing financing
activities was $4,013 million for 2006, including the
issuance of $1,146 million of long-term debt, the repayment
of $2,680 million of debt, the acquisition of
62.4 million shares of its common stock at an approximate
cost of $2,500 million, the issuance of $382 million
of its common stock, primarily related to the exercise of stock
options, and $274 million of cash dividends paid. The debt
repaid in 2006 includes $1,199 million of short-term
borrowings associated with the acquisition of May, approximately
$957 million aggregate principal amount of senior unsecured
notes repurchased in a tender offer, $100 million of 8.85%
senior debentures due 2006 and the prepayment of
$200 million of 8.30% debentures due 2026.
In November 2006, the Company issued $1,100 million
aggregate principal amount of 5.90% senior unsecured notes
due 2016. In December 2006, the Company used the net proceeds of
the issuance of such
19
notes, together with cash on hand, to repurchase approximately
$957 million aggregate principal amount of its outstanding
senior unsecured notes, which had a net book value of
approximately $1,201 million. The repurchased outstanding
senior unsecured notes had stated interest rates ranging from
7.60% to 10.25%, a weighted-average interest rate of 8.53% and
maturities from 2019 to 2036. In connection with the repurchase
of the senior unsecured notes, on November 21, 2006, the
Company entered into reverse Treasury lock agreements, which are
derivative financial instruments, with an aggregate notional
amount of $900 million. These agreements were settled on
December 4, 2006, with a net payment to the Company of
approximately $4 million. The derivative financial
instruments were used to mitigate the Companys exposure to
interest rate sensitivity during the period between the date on
which the 5.90% senior unsecured notes were priced and the
date on which the applicable consideration payable with respect
to the cash repurchase of senior unsecured notes was finalized.
Net cash used by the Company for all continuing financing
activities was $58 million for 2005, including the issuance
of $4,580 million of short-term debt used to finance the
acquisition of May, the repayment of approximately
$4,755 million of debt, the issuance of $336 million
of its common stock, primarily related to the exercise of stock
options and $157 million of cash dividends paid. The debt
repaid in 2005 includes $1.2 billion of receivables backed
financings and approximately $3.4 billion of
acquisition-related borrowings, which repayments were primarily
funded from the net proceeds received from the sale of the FDS
Credit Assets. The Company acquired no shares of its common
stock under its share repurchase program during 2005.
In connection with the Merger, the Company entered into a
364-day
bridge credit agreement with certain financial institutions
providing for revolving credit borrowings in an aggregate amount
initially not to exceed $5.0 billion outstanding at any
particular time. On June 19, 2006, the Company terminated
the 364-day
bridge credit agreement.
The Company is a party to a five-year credit agreement with
certain financial institutions providing for revolving credit
borrowings and letters of credit in an aggregate amount not to
exceed $2.0 billion (which amount may be increased to
$2.5 billion at the option of the Company) outstanding at
any particular time. This agreement was amended and restated and
will now expire on August 30, 2011, replacing the previous
agreement which was set to expire August 30, 2010. As of
February 3, 2007, the Company had no borrowings outstanding
under the five-year credit agreement.
The Company maintains an unsecured commercial paper program
pursuant to which it may issue and sell commercial paper in an
aggregate amount outstanding at any particular time not to
exceed its then-current combined borrowing availability under
the revolving credit facilities described above. As of
February 3, 2007, the Company had no outstanding borrowings
under its commercial paper program.
The Companys bank credit agreements require the Company to
maintain a specified interest coverage ratio of no less than
3.25 and a specified leverage ratio of no more than .62. The
interest coverage ratio for 2006 was 6.92 and at
February 3, 2007 the leverage ratio was .37. Management
believes that the likelihood of the Company defaulting on these
requirements in the future is remote absent any material
negative event affecting the U.S. economy as a whole.
However, if the Companys results of operations or
operating ratios deteriorate to a point where the Company is not
in compliance with any of its debt covenants and the Company is
unable to obtain a waiver, much of the Companys debt would
be in default and could become due and payable immediately.
20
On August 25, 2006, the Companys board of directors
approved an additional $2,000 million authorization to the
Companys existing share repurchase program. The new
authorization was additive to the existing repurchase program,
which as of February 3, 2007 had approximately
$170 million of authorization remaining.
On February 26, 2007, the Companys board of directors
approved an additional $4,000 million authorization to the
Companys existing share repurchase program. The Company
used a portion of this authorization to effect the immediate
repurchase of 45 million outstanding shares for an initial
payment of approximately $2,000 million, subject to
adjustment pursuant to the terms of the related accelerated
share repurchase agreements. With this additional authorization
to the share repurchase program and the immediate repurchase
agreements entered into by the Company, the repurchase program
had approximately $2,170 million of authorization remaining
as of April 3, 2007. The Company may continue or, from time
to time, suspend repurchases of shares under its stock
repurchase program, depending on prevailing market conditions,
alternate uses of capital and other factors.
On February 26, 2007, the Companys board of directors
also declared a regular quarterly dividend of 12.75 cents per
share on its common stock, payable April 2, 2007 to
Federated shareholders of record at the close of business on
March 15, 2007.
On March 7, 2007, the Company issued $1,100 million
aggregate principal amount of 5.35% senior unsecured notes
due 2012 and $500 million aggregate principal amount of
6.375% senior unsecured notes due 2037. The net proceeds of
the debt issuances were used to repay commercial paper
borrowings incurred in connection with the accelerated share
repurchase agreements and the balance will be used for general
corporate purposes.
At February 3, 2007, the Company had contractual
obligations (within the scope of Item 303(a)(5) of
Regulation S-K)
as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations Due, by Period
|
|
|
|
|
|
|
Less than
|
|
|
1 3
|
|
|
3 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(millions)
|
|
|
Short-term debt
|
|
$
|
645
|
|
|
$
|
645
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt
|
|
|
7,423
|
|
|
|
|
|
|
|
1,624
|
|
|
|
901
|
|
|
|
4,898
|
|
Interest on debt
|
|
|
5,837
|
|
|
|
523
|
|
|
|
923
|
|
|
|
758
|
|
|
|
3,633
|
|
Capital lease obligations
|
|
|
88
|
|
|
|
10
|
|
|
|
18
|
|
|
|
15
|
|
|
|
45
|
|
Other long-term liabilities
|
|
|
1,362
|
|
|
|
6
|
|
|
|
422
|
|
|
|
250
|
|
|
|
684
|
|
Operating leases
|
|
|
2,802
|
|
|
|
225
|
|
|
|
404
|
|
|
|
347
|
|
|
|
1,826
|
|
Letters of credit
|
|
|
53
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other obligations
|
|
|
2,412
|
|
|
|
2,190
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,622
|
|
|
$
|
3,652
|
|
|
$
|
3,613
|
|
|
$
|
2,271
|
|
|
$
|
11,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other obligations in the foregoing table consist
primarily of significant merchandise purchase obligations and
obligations under outsourcing arrangements, construction
contracts, employment contracts, group medical/dental/life
insurance programs and energy and other supply agreements
identified by the Company. The Companys merchandise
purchase obligations fluctuate on a seasonal basis, typically
being higher in the summer and early fall and being lower in the
late winter and early spring. The Company purchases a
substantial portion of its merchandise inventories and other
goods and services otherwise than through binding contracts.
Consequently, the amounts shown as Other obligations
in the foregoing table do
21
not reflect the total amounts that the Company would need to
spend on goods and services in order to operate its businesses
in the ordinary course.
Management believes that, with respect to the Companys
current operations, cash on hand and funds from operations,
together with its credit facilities and other capital resources,
will be sufficient to cover the Companys reasonably
foreseeable working capital, capital expenditure and debt
service requirements in both the near term and over the longer
term. The Companys ability to generate funds from
operations may be affected by numerous factors, including
general economic conditions and levels of consumer confidence
and demand; however, the Company expects to be able to manage
its working capital levels and capital expenditure amounts so as
to maintain sufficient levels of liquidity. For short-term
liquidity, the Company also relies on its unsecured commercial
paper facility (which is discussed above). Access to the
unsecured commercial paper program is primarily dependent on the
Companys credit ratings; a downgrade in its short-term
ratings could hinder its ability to access this market. If the
Company is unable to access the unsecured commercial paper
market, it has the current ability to access $2.0 billion
pursuant to its bank credit agreement, subject to compliance
with the interest coverage and leverage ratio requirements
discussed above and other requirements under the agreement.
Depending upon conditions in the capital markets and other
factors, the Company will from time to time consider the
issuance of debt or other securities, or other possible capital
markets transactions, the proceeds of which could be used to
refinance current indebtedness or for other corporate purposes.
Management believes the department store business and other
retail businesses will continue to consolidate. The Company
intends from time to time to consider additional acquisitions
of, and investments in, department stores and other
complementary assets and companies. Acquisition transactions, if
any, are expected to be financed from one or more of the
following sources: cash on hand, cash from operations,
borrowings under existing or new credit facilities and the
issuance of long-term debt, commercial paper or other
securities, including common stock.
Critical
Accounting Policies
Merchandise
Inventories
Merchandise inventories are valued at the lower of cost or
market using the
last-in,
first-out (LIFO) retail inventory method. Under the retail
inventory method, inventory is segregated into departments of
merchandise having similar characteristics, and is stated at its
current retail selling value. Inventory retail values are
converted to a cost basis by applying specific average cost
factors for each merchandise department. Cost factors represent
the average
cost-to-retail
ratio for each merchandise department based on beginning
inventory and the fiscal year purchase activity. The retail
inventory method inherently requires management judgments and
contains estimates, such as the amount and timing of permanent
markdowns to clear unproductive or slow-moving inventory, which
may impact the ending inventory valuation as well as gross
margins.
Permanent markdowns designated for clearance activity are
recorded when the utility of the inventory has diminished.
Factors considered in the determination of permanent markdowns
include current and anticipated demand, customer preferences,
age of the merchandise and fashion trends. When a decision is
made to permanently mark down merchandise, the resulting gross
profit reduction is recognized in the period the markdown is
recorded.
The Company receives certain allowances from various vendors in
support of the merchandise it purchases for resale. The Company
receives certain allowances as reimbursement for markdowns taken
and/or to
support the gross margins earned in connection with the sales of
merchandise. These allowances are
22
generally credited to cost of sales at the time the merchandise
is sold in accordance with Emerging Issues Task Force
(EITF) Issue
No. 02-16,
Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor. The Company
also receives advertising allowances from more than 1,200 of its
merchandise vendors pursuant to cooperative advertising
programs, with some vendors participating in multiple programs.
These allowances represent reimbursements by vendors of costs
incurred by the Company to promote the vendors merchandise
and are netted against advertising and promotional costs when
the related costs are incurred in accordance with EITF Issue
No. 02-16.
The arrangements pursuant to which the Companys vendors
provide allowances, while binding, are generally informal in
nature and one year or less in duration. The terms and
conditions of these arrangements vary significantly from vendor
to vendor and are influenced by, among other things, the type of
merchandise to be supported. Although it is highly unlikely that
there will be any significant reduction in historical levels of
vendor support, if such a reduction were to occur, the Company
could experience higher costs of sales and higher advertising
expense, or reduce the amount of advertising that it uses,
depending on the specific vendors involved and market conditions
existing at the time.
Shrinkage is estimated as a percentage of sales for the period
from the last inventory date to the end of the fiscal period.
Such estimates are based on experience and the most recent
physical inventory results. While it is not possible to quantify
the impact from each cause of shrinkage, the Company has loss
prevention programs and policies that are intended to minimize
shrinkage. Physical inventories are generally taken within each
merchandise department annually, and inventory records are
adjusted accordingly.
Long-Lived
Asset Impairment and Restructuring Charges
The carrying values of long-lived assets are periodically
reviewed by the Company whenever events or changes in
circumstances indicate that a potential impairment has occurred.
For long-lived assets held for use, a potential impairment has
occurred if projected future undiscounted cash flows are less
than the carrying value of the assets. The estimate of cash
flows includes managements assumptions of cash inflows and
outflows directly resulting from the use of those assets in
operations. When a potential impairment has occurred, an
impairment write-down is recorded if the carrying value of the
long-lived asset exceeds its fair value. The Company believes
its estimated cash flows are sufficient to support the carrying
value of its long-lived assets. If estimated cash flows
significantly differ in the future, the Company may be required
to record asset impairment write-downs.
For long-lived assets held for disposal by sale, an impairment
charge is recorded if the carrying amount of the assets exceeds
its fair value less costs to sell. Such valuations include
estimations of fair values and incremental direct costs to
transact a sale. For long-lived assets to be abandoned, the
Company considers the asset to be disposed of when it ceases to
be used. If the Company commits to a plan to abandon a
long-lived asset before the end of its previously estimated
useful life, depreciation estimates are revised accordingly. In
addition, liabilities arise such as severance, contractual
obligations and other accruals associated with store closings
from decisions to dispose of assets. The Company estimates these
liabilities based on the facts and circumstances in existence
for each restructuring decision. The amounts the Company will
ultimately realize or disburse could differ from the amounts
assumed in arriving at the asset impairment and restructuring
charge recorded.
The carrying value of goodwill and other intangible assets with
indefinite lives are reviewed annually for possible impairment.
The impairment review is based on a discounted cash flow
approach at the reporting unit level that requires significant
management judgment with respect to sales, gross margin and
expense growth rates, and the selection and use of an
appropriate discount rate. The use of different assumptions
would
23
increase or decrease estimated discounted future operating cash
flows and could increase or decrease an impairment charge. The
occurrence of an unexpected event or change in circumstances,
such as adverse business conditions or other economic factors,
would determine the need for impairment testing between annual
impairment tests.
Self-Insurance
Reserves
The Company is self-insured for workers compensation and public
liability claims up to certain maximum liability amounts.
Although the amounts accrued are actuarially determined by third
parties based on analysis of historical trends of losses,
settlements, litigation costs and other factors, the amounts the
Company will ultimately disburse could differ from such accrued
amounts.
Pension
and Supplementary Retirement Plans
In September 2006, the FASB issued SFAS 158
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R)
(SFAS 158), which requires, among other things,
an employer to recognize the funded status of a defined benefit
postretirement plan as an asset or liability on the balance
sheet and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. The
recognition and disclosure provisions of this statement were
adopted by the Company for fiscal year 2006. Effective
February 4, 2007, the Company adopted the remaining
provision of SFAS 158, which requires the measurement of
defined benefit plan assets and obligations to be the date of
the Companys fiscal year-end balance sheet. This required
a change in the Companys measurement date, which was
previously December 31.
The Company has a funded defined benefit pension plan (the
Pension Plan) and an unfunded defined benefit
supplementary retirement plan (the SERP). The
Company accounts for these plans using SFAS No. 87,
Employers Accounting for Pensions
(SFAS 87), as amended by
SFAS No. 158. Under SFAS 87 and SFAS 158,
pension expense is recognized on an accrual basis over
employees approximate service periods. Pension expense
calculated under SFAS 87 and SFAS 158 is generally
independent of funding decisions or requirements. The Company
anticipates that pension expense and other retirement costs
relating to continuing operations will decrease by approximately
$20 million in 2007, compared to 2006.
Funding requirements for the Pension Plan are determined by
government regulations, not SFAS 87 or SFAS 158.
Although no funding contributions were required, the Company
made a $100 million voluntary funding contribution to the
Pension Plan in 2006 and a $136 million voluntary funding
contribution to the Pension Plan in 2005. The Company currently
anticipates that it will not be required to make any additional
contributions to the Pension Plan until 2009. As of the date of
this report, the Company is considering making a voluntary
funding contribution to the Pension Plan of $180 million
prior to February 2, 2008.
During 2006, Congress passed the Pension Protection Act of 2006
(the Act) with the stated purpose of improving the
funding of Americas private pension plans. The Act
introduces new funding requirements for defined benefit pension
plans, introduces benefit limitations for certain under-funded
plans and raises tax deduction limits for contributions. The Act
applies to pension plan years beginning after December 31,
2007. The Company has preliminarily reviewed the provisions of
the Act to determine the impact on the Company. Required funding
under the Act will be dependent upon many factors including the
Pension Plans future funded status including any voluntary
funding contributions the Company may choose to make and annual
Pension Plan asset returns. Based upon this preliminary review
as well as the current funded status of the Pension Plan
relative to the Companys level of annual operating cash
flows, the Company does not believe
24
that required contributions under the Act would materially
impact the Companys operating cash flows in any given year.
At February 3, 2007, the Company had unrecognized actuarial
losses of $296 million for the Pension Plan and
$75 million for the SERP. These losses will be recognized
as a component of pension expense in future years in accordance
with SFAS No. 158.
The calculation of pension expense and pension liabilities
requires the use of a number of assumptions. Changes in these
assumptions can result in different expense and liability
amounts, and future actual experience may differ significantly
from current expectations. The Company believes that the most
critical assumptions relate to the long-term rate of return on
plan assets (in the case of the Pension Plan), the discount rate
used to determine the present value of projected benefit
obligations and the weighted average rate of increase of future
compensation levels.
The Company has assumed that the Pension Plans assets will
generate an annual long-term rate of return of 8.75% since 2004.
The Company develops its long-term rate of return assumption by
evaluating input from several professional advisors taking into
account the asset allocation of the portfolio and long-term
asset class return expectations, as well as long-term inflation
assumptions. Pension expense increases or decreases as the
expected rate of return on the assets of the Pension Plan
decreases or increases, respectively. Lowering the expected
long-term rate of return on the Pension Plans assets by
0.25% (from 8.75% to 8.50%) would increase the estimated 2007
pension expense by approximately $6 million and raising the
expected long-term rate of return on the Pension Plans
assets by 0.25% (from 8.75% to 9.00%) would decrease the
estimated 2007 pension expense by approximately $6 million.
The Company discounted its future pension obligations using a
rate of 5.85% at December 31, 2006, compared to 5.70% at
December 31, 2005. The Company determines the appropriate
discount rate with reference to the current yield earned on an
index of investment-grade long-term bonds and the impact of a
yield curve analysis to account for the difference in duration
between the long-term bonds and the Pension Plans and
SERPs estimated payments. Pension liability and future
pension expense both increase or decrease as the discount rate
is reduced or increased, respectively. Lowering the discount
rate by 0.25% (from 5.85% to 5.60%) would increase the projected
benefit obligation at February 3, 2007 by approximately
$109 million and would increase estimated 2007 pension
expense by approximately $15 million. Increasing the
discount rate by 0.25% (from 5.85% to 6.10%) would decrease the
projected benefit obligation at February 3, 2007 by
approximately $105 million and would decrease estimated
2007 pension expense by approximately $12 million.
The assumed weighted average rate of increase in future
compensation levels was 5.4% as of December 31, 2006 and
December 31, 2005 for the Pension Plan, and 7.2% as of
December 31, 2006 and December 31, 2005 for the SERP.
The Company develops its increase of future compensation level
assumption based on recent experience. Pension liabilities and
future pension expense both increase or decrease as the weighted
average rate of increase of future compensation levels is
increased or decreased, respectively. Increasing or decreasing
the assumed weighted average rate of increase of future
compensation levels by 0.25% would increase or decrease the
projected benefit obligation at February 3, 2007 by
approximately $13 million and change estimated 2007 pension
expense by approximately $3 million.
New
Pronouncements
Effective January 29, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R) using the modified
prospective transition method. This statement is a revision of
SFAS No. 123,
25
Accounting for Stock-Based Compensation
(SFAS 123), and supersedes APB Opinion
No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values. Under the provisions of this statement, the
Company must determine the appropriate fair value model to be
used for valuing share-based payments and the amortization
method for compensation cost. The modified prospective
transition method requires that compensation expense be
recognized beginning with the effective date, based on the
requirements of this statement, for all share-based payments
granted after the effective date, and based on the requirements
of SFAS 123, for all awards granted to employees prior to
the effective date of this statement that remain nonvested on
the effective date. See Note 15, Stock Based
Compensation, for further information.
Effective January 29, 2006, the Company adopted Statement
of Financial Accounting Standards (SFAS)
No. 151, Inventory Costs An Amendment of
ARB No. 43, Chapter 4. This statement amends the
guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage). The adoption of this statement did not have
a material impact on the Companys consolidated financial
position, results of operations or cash flows.
Effective January 29, 2006, the Company adopted
SFAS No. 153, Exchanges of Nonmonetary
Assets An Amendment of APB Opinion
No. 29. This statement eliminates the exception from
fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion
No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. The adoption of
this statement did not have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides
interpretations regarding the process of quantifying prior year
financial statement misstatements for the purposes of a
materiality assessment. SAB 108 provides guidance that the
following two methodologies should be used to quantify prior
year income statement misstatements: (i) the error is
quantified as the amount by which the income statement is
misstated, and (ii) the error is quantified as the
cumulative amount by which the current year balance sheet is
misstated. SAB No. 108 concludes that a company should
quantify a misstatement using both of these methodologies.
Historically, the Company evaluated the impact of financial
statement misstatements for the purposes of a materiality
assessment on a current year income statement approach. The
interpretation is effective for evaluations made on or after
November 15, 2006. The adoption of SAB 108 did not
have a material impact on the Companys consolidated
financial position, results of operations or cash flows.
Also in September 2006, the FASB issued SFAS 158, which
requires an employer to recognize the funded status of a defined
benefit postretirement plan as an asset or liability on the
balance sheet and to recognize changes in that funded status in
the year in which the changes occur through comprehensive
income. The recognition and disclosure provisions of this
statement were adopted by the Company for fiscal year 2006. See
Note 13, Retirement Plans, for further
information.
26
The incremental effects of applying the recognition and
disclosure provisions of SFAS No. 158 on line items in
the Consolidated Balance Sheets as of February 3, 2007 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Application
|
|
|
|
|
|
After Application
|
|
|
|
of SFAS No. 158
|
|
|
Adjustments
|
|
|
of SFAS No. 158
|
|
|
|
(thousands)
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
4,866
|
|
|
$
|
78
|
|
|
$
|
4,944
|
|
Deferred income taxes
|
|
|
1,895
|
|
|
|
(115
|
)
|
|
|
1,780
|
|
Other liabilities
|
|
|
1,151
|
|
|
|
211
|
|
|
|
1,362
|
|
Total liabilities
|
|
|
17,122
|
|
|
|
174
|
|
|
|
17,296
|
|
Accumulated other comprehensive
loss
|
|
|
(8
|
)
|
|
|
(174
|
)
|
|
|
(182
|
)
|
Total Shareholders Equity
|
|
|
12,428
|
|
|
|
(174
|
)
|
|
|
12,254
|
|
Effective February 4, 2007, the Company adopted the
remaining provisions of SFAS 158, which require the
measurement of defined benefit plan assets and obligations to be
the date of the Companys fiscal year-end balance sheet.
This required a change in the Companys measurement date,
which was previously December 31. The adoption of the
remaining provisions of this statement resulted in an adjustment
to the beginning balance of accumulated equity on
February 4, 2007 of approximately $8 million in order
to recognize post employment and postretirement benefit expense
for January 2007 and also reduced estimated 2007 post employment
and postretirement benefit expense, due to the change in the
discount rate at February 3, 2007 as compared to
December 31, 2006, by approximately $6 million.
In June 2006, the FASB issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109. (FIN 48), which prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 will be
effective beginning in the first quarter of fiscal 2007 and the
cumulative effect of applying the provisions of FIN 48 will
be recognized as an adjustment to the beginning balance of
accumulated equity. The initial adoption of FIN 48 on
February 4, 2007 did not have a material impact on the
Companys beginning of year consolidated financial position
and is not anticipated to have a material impact on the
Companys fiscal 2007 results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155), which amended certain provisions of
SFAS No. 133 and SFAS No. 140. SFAS 155
is effective for all financial instruments acquired, issued or
subject to a remeasurement (new basis) event after the beginning
of a companys first fiscal year that begins after
September 15, 2006. The Company does not anticipate
adoption of this statement will have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 addresses how companies should measure fair value
when they are required to use a fair value measure for
recognition and disclosure purposes under generally accepted
accounting principles. SFAS 157 will require the fair value
of an asset or liability to be based on a market based measure
which will reflect the credit risk of the company. SFAS 157
will also require expanded disclosure requirements which will
include the methods and assumptions used to measure fair value
and the effect of fair value measurements on earnings.
SFAS 157 will be applied prospectively and will be
effective for fiscal years beginning after November 15,
2007 and to
27
interim periods within those fiscal years. The Company is
currently in the process of evaluating the impact of adopting
SFAS 157 on the Companys consolidated financial
position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159
The Fair Value Option for Financial Assets and Financial
Liabilities, (SFAS 159). SFAS 159
provides companies with an option to report selected financial
assets and financial liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting
date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently in the
process of evaluating the impact of adopting SFAS 159 on
the Companys consolidated financial position, results of
operations and cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
The Company is exposed to market risk from changes in interest
rates that may adversely affect its financial position, results
of operations and cash flows. In seeking to minimize the risks
from interest rate fluctuations, the Company manages exposures
through its regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for
trading or other speculative purposes and is not a party to any
leveraged financial instruments.
The Company is exposed to interest rate risk primarily through
its customer lending and borrowing activities, which are
described in Notes 6 and 10 to the Consolidated Financial
Statements. The majority of the Companys borrowings are
under fixed rate instruments. However, the Company, from time to
time, may use interest rate swap and interest rate cap
agreements to help manage its exposure to interest rate
movements and reduce borrowing costs. At February 3, 2007,
the Company was not a party to any derivative financial
instruments. In connection with the repurchase of senior
unsecured notes, on November 21, 2006, the Company entered
into reverse Treasury lock agreements, which are derivative
financial instruments, with an aggregate notional amount of
$900 million. These agreements were settled on
December 4, 2006, with a net payment to the Company of
approximately $4 million. The derivative financial
instruments were used to mitigate the Companys exposure to
interest rate sensitivity during the period between the date on
which the 5.90% senior unsecured notes were priced and the
date on which the applicable consideration payable with respect
to the cash repurchase of senior unsecured notes was finalized.
See Notes 10 and 17 to the Consolidated Financial
Statements, which are incorporated herein by reference.
Based on the Companys lack of market risk sensitive
instruments (primarily limited to variable rate debt)
outstanding at February 3, 2007, the Company has determined
that there was no material market risk exposure to the
Companys consolidated financial position, results of
operations or cash flows as of such date.
28
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data.
|
Information called for by this item is set forth in the
Companys Consolidated Financial Statements and
supplementary data contained in this report and is incorporated
herein by this reference. Specific financial statements and
supplementary data can be found at the pages listed in the
following index.
INDEX
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
29
|
|
Item 9A.
|
Controls
and Procedures.
|
a. Disclosure Controls and Procedures
The Companys Chief Executive Officer and Chief Financial
Officer have carried out, as of February 3, 2007, with the
participation of the Companys management, an evaluation of
the effectiveness of the Companys disclosure controls and
procedures, as defined in
Rule 13a-15(e)
under the Exchange Act. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures are
effective to provide reasonable assurance that material
information required to be disclosed by the Company in reports
the Company files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC rules and forms.
b. Managements Report on Internal Control over
Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Exchange Act
Rule 13a-15(f).
The Companys management conducted an assessment of the
Companys internal control over financial reporting based
on the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control Integrated Framework. Based
on this assessment, the Companys management has concluded
that, as of February 3, 2007, the Companys internal
control over financial reporting is effective.
The Companys independent registered public accounting
firm, KPMG LLP, has audited the Companys Consolidated
Financial Statements and has issued an attestation report on
managements assessment of the Companys internal
control over financial reporting, as stated in their report
included herein.
c. Changes in Internal Control over Financial
Reporting
There were no changes in the Companys internal controls
over financial reporting that occurred during the Companys
most recently completed fiscal quarter that materially affected,
or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
d. Certifications
The certifications of the Companys Chief Executive Officer
and Chief Financial Officer required under Section 302 of
the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and
31.2 to this report. Additionally, in 2006 the Companys
Chief Executive Officer certified to the NYSE that he was not
aware of any violation by the Company of the NYSE corporate
governance listing standards.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant.
|
Information called for by this item is set forth under
Item 1 Election of Directors and
Further Information Concerning the Board of
Directors Committees of the Board Audit
Committee and Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement to
be delivered to stockholders in connection with our Annual
Meeting of Stockholders to be held on or about May 18, 2007
(the Proxy Statement), and Item 1.
Business- Executive Officers of the Registrant in this
report and incorporated herein by reference.
30
|
|
Item 11.
|
Compensation
of Directors and Executive Officers.
|
Information called for by this item is set forth under
Compensation Discussion and Analysis,
Compensation of the Named Executives for 2006,
Compensation Committee Report and Compensation
Committee Interlocks and Insider Participation in the
Proxy Statement and incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Information called for by this item is set forth under
Stock Ownership Certain Beneficial
Owners and Stock Ownership Stock
Ownership of Directors and Executive Officers. in the
Proxy Statement and incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions.
|
Information called for by this item is set forth under
Further Information Concerning the Board of
Directors Director Independence and
Policy on Related Person Transactions in the Proxy
Statement and incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
Information called for by this item is set forth under
Item 2 Appointment of Independent
Registered Public Accounting Firm in the Proxy Statement
and incorporated herein by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) The following documents are filed as part of this
report:
The list of financial statements required by this item is set
forth in Item 8 Consolidated Financial Statements and
Supplementary Data and is incorporated herein by reference.
|
|
|
|
2.
|
Financial Statement Schedules:
|
All schedules are omitted because they are inapplicable, not
required, or the information is included elsewhere in the
Consolidated Financial Statements or the notes thereto.
31
The following exhibits are filed herewith or incorporated by
reference as indicated below.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger,
dated as of February 27, 2005, by and among the Company,
Milan Acquisition Corp. and The May Department Stores Company
(May Delaware)
|
|
Exhibit 2.1 to the Current
Report on
Form 8-K
filed on February 28, 2005 by May Delaware
|
|
3
|
.1
|
|
Certificate of Incorporation
|
|
Exhibit 3.1 to the
Companys Annual Report on
Form 10-K
(File No. 001-135361) for the fiscal year ended January 28,
1995 (the 1994
Form 10-K)
|
|
3
|
.1.1
|
|
Amended and Restated
Article Seventh to the Certificate of Incorporation of the
Company
|
|
Annex F to the Companys
Proxy Statement dated May 31, 2005
|
|
3
|
.1.2
|
|
Amended and Restated
Section 1 of Article Fourth to the Certificate of
Incorporation of the Company
|
|
|
|
3
|
.1.3
|
|
Certificate of Designations of
Series A Junior Participating Preferred Stock
|
|
Exhibit 3.1.1 to the
Companys 1994
Form 10-K
|
|
3
|
.2
|
|
By-Laws
|
|
Exhibit 4.3 to the
Companys Registration Statement on
Form S-8
(Registration No.
333-104204)
filed on April 1, 2003
|
|
3
|
.2.1
|
|
Amended and Restated
Sections 28 and 29 of the By-Laws of the Company
|
|
Exhibit 99.1 to the
Companys Current Report on
Form 8-K
dated July 18, 2005
|
|
4
|
.1
|
|
Certificate of Incorporation
|
|
See Exhibits 3.1, 3.1.1,
3.1.2 and 3.1.3
|
|
4
|
.2
|
|
By-Laws
|
|
See Exhibit 3.2 and 3.2.1
|
|
4
|
.3
|
|
Indenture, dated as of
December 15, 1994, between the Company and U.S. Bank
National Association (successor to State Street Bank and Trust
Company and The First National Bank of Boston), as Trustee (the
1994 Indenture)
|
|
Exhibit 4.1 to the
Companys Registration Statement on
Form S-3
(Registration No.
33-88328)
filed on January 9, 1995
|
|
4
|
.3.1
|
|
Eighth Supplemental Indenture to
the 1994 Indenture, dated as of July 14, 1997, between the
Company and U.S. Bank National Association (successor to
State Street Bank and Trust Company and The First National Bank
of Boston), as Trustee
|
|
Exhibit 2 to the
Companys Current Report on
Form 8-K
dated July 15, 1997 (the July 1997
Form 8-K)
|
|
4
|
.3.2
|
|
Ninth Supplemental Indenture to
the 1994 Indenture, dated as of July 14, 1997, between the
Company and U.S. Bank National Association (successor to
State Street Bank and Trust Company and The First National Bank
of Boston), as Trustee
|
|
Exhibit 3 to the July 1997
Form 8-K
|
32
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
4
|
.3.3
|
|
Tenth Supplemental Indenture to
the 1994 Indenture, dated as of August 30, 2005, among the
Company, Federated Retail Holdings, Inc. (Federated
Retail) and U.S. Bank National Association (as
successor to State Street Bank and Trust Company and as
successor to The First National Bank of Boston), as Trustee
|
|
Exhibit 10.14 to the
Companys Current Report on
Form 8-K
dated August 30, 2005 (the August 30, 2005
Form 8-K)
|
|
4
|
.3.4
|
|
Guarantee of Securities, dated as
of August 30, 2005, by the Company relating to the 1994
Indenture
|
|
Exhibit 10.16 to the
August 30, 2005
Form 8-K
|
|
4
|
.4
|
|
Indenture, dated as of
September 10, 1997, between the Company and U.S. Bank
National Association (successor to Citibank, N.A.), as Trustee
(the 1997 Indenture)
|
|
Exhibit 4.4 to the
Companys Amendment No. 1 to
Form S-3
(Registration
No. 333-34321)
filed on September 11, 1997
|
|
4
|
.4.1
|
|
First Supplemental Indenture to
the 1997 Indenture, dated as of February 6, 1998, between
the Company and U.S. Bank National Association (successor
to Citibank, N.A.), as Trustee
|
|
Exhibit 2 to the
Companys Current Report on
Form 8-K
dated February 6, 1998
|
|
4
|
.4.2
|
|
Third Supplemental Indenture to
the 1997 Indenture, dated as of March 24, 1999, between the
Company and U.S. Bank National Association (successor to
Citibank, N.A.), as Trustee
|
|
Exhibit 4.2 to the
Companys Registration Statement on
Form S-4
(Registration No.
333-76795)
filed on April 22, 1999
|
|
4
|
.4.3
|
|
Fourth Supplemental Indenture to
the 1997 Indenture, dated as of June 6, 2000, between the
Company and U.S. Bank National Association (successor to
Citibank, N.A.), as Trustee
|
|
Exhibit 4.1 to the
Companys Current Report on
Form 8-K,
dated June 5, 2000
|
|
4
|
.4.4
|
|
Fifth Supplemental Trust Indenture
dated as of March 27, 2001, between the Company and
U.S. Bank National Association (successor to Citibank,
N.A.), as Trustee
|
|
Exhibit 4 to the
Companys Current Report on
Form 8-K
dated March 21, 2001
|
|
4
|
.4.5
|
|
Sixth Supplemental Indenture to
the 1997 Indenture dated as of August 23, 2001, between the
Company and U.S. Bank National Association (successor to
Citibank, N.A.), as Trustee
|
|
Exhibit 4 to the
Companys Current Report on
Form 8-K
dated August 22, 2001
|
|
4
|
.4.6
|
|
Seventh Supplemental Indenture to
the 1997 Indenture, dated as of August 30, 2005 among the
Company, Federated Retail and U.S. Bank National
Association (successor to Citibank, N.A.), as Trustee
|
|
Exhibit 10.15 to the
August 30, 2005
Form 8-K
|
|
4
|
.4.7
|
|
Guarantee of Securities, dated as
of August 30, 2005, by the Company relating to the 1997
Indenture
|
|
Exhibit 10.17 to the
August 30, 2005
Form 8-K
|
33
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
4
|
.5
|
|
Indenture, dated as of
June 17, 1996, among May Delaware, Federated Retail (f/k/a
The May Department Stores Company (NY)) (May New
York) and J.P. Morgan Trust Company, as Trustee (the
1996 Indenture)
|
|
Exhibit 4.1 to the
Registration Statement on
Form S-3
(Registration
No. 333-06171)
filed on June 18, 1996 by May Delaware
|
|
4
|
.5.1
|
|
First Supplemental Indenture to
the 1996 Indenture, dated as of August 30, 2005, by and
among the Company (as successor to May Delaware), Federated
Retail (f/k/a May New York) and J.P. Morgan Trust Company,
as Trustee
|
|
Exhibit 10.9 to the
August 30, 2005
Form 8-K
|
|
4
|
.6
|
|
Indenture, dated as of
July 20, 2004, among May Delaware, Federated Retail (f/k/a
May New York) and J.P. Morgan Trust Company, as Trustee
(the 2004 Indenture)
|
|
Exhibit 4.1 to the Current
Report on
Form 8-K
(File No. 001-00079) filed July 21, 2004 by May Delaware
|
|
4
|
.6.1
|
|
First Supplemental Indenture to
the 2004 Indenture, dated as of August 30, 2005 among the
Company (as successor to May Delaware), Federated Retail (f/k/a
May New York) and J.P. Morgan Trust Company, as Trustee
|
|
Exhibit 10.10 to the
August 30, 2005
Form 8-K
|
|
4
|
.7
|
|
Indenture, dated as of
November 2, 2006, by and among Federated Retail, the
Company and U.S. Bank National Association, as Trustee (the
2006 Indenture)
|
|
Exhibit 4.6 to the
Companys Registration Statement on
Form S-3ASR
(Registration No.
333-138376)
filed on November 2, 2006
|
|
4
|
.7.1
|
|
First Supplemental Indenture to
the 2006 Indenture, dated November 29, 2006, among
Federated Retail, the Company and U.S. Bank National
Association, as Trustee
|
|
Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on November 29, 2006.
|
|
4
|
.7.2
|
|
Second Supplemental Indenture to
the 2006 Indenture, dated March 12, 2007, among Federated
Retail, the Company and U.S. Bank National Association, as
Trustee
|
|
Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on March 12, 2007 (the March 12,
2007
Form 8-K)
|
|
4
|
.7.3
|
|
Third Supplemental Indenture to
the 2006 Indenture, dated March 12, 2007, among Federated
Retail, the Company and U.S. Bank National Association, as
Trustee
|
|
Exhibit 4.2 to the
March 12, 2007
Form 8-K
|
|
10
|
.1
|
|
Amended and Restated Credit
Agreement, dated as of August 30, 2006, among the Company,
Federated Retail, the lenders from time to time party thereto,
JPMorgan Chase Bank, N.A. and Bank of America, N.A., as
administrative agents, and JPMorgan Chase Bank, N.A. as paying
agent
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed September 1, 2006 (the September 1,
2006
Form 8-K).
|
|
10
|
.1.1
|
|
Guarantee Agreement, dated as of
August 30, 2006, among the Company, Federated Retail and
JPMorgan Chase Bank, N.A. related to the Amended and Restated
Credit Agreement
|
|
Exhibit 10.2 to the
September 1, 2006
Form 8-K
|
34
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
10
|
.2
|
|
Commercial Paper Issuing and
Paying Agent Agreement, dated as of January 30, 1997,
between Citibank, N.A. and the Company (the Issuing and
Paying Agent Agreement)
|
|
Exhibit 10.25 to the
Companys Annual Report on
Form 10-K
(File No. 1-13536) for the fiscal year ended
February 1, 1997 (the 1996
Form 10-K)
|
|
10
|
.2.1
|
|
Letter Agreement, dated
August 30, 2005, among the Company, Federated Retail and
Citibank, as issuing and paying agent, amending the Issuing and
Paying Agent Agreement
|
|
Exhibit 10.5 to the
August 30, 2005
Form 8-K
|
|
10
|
.3
|
|
Commercial Paper Dealer Agreement,
dated as of August 30, 2005, among the Company, Federated
Retail and Banc of America Securities LLC
|
|
Exhibit 10.6 to the
August 30, 2005
Form 8-K
|
|
10
|
.4
|
|
Commercial Paper Dealer Agreement,
dated as of August 30, 2005, among the Company, Federated
Retail and Goldman, Sachs & Co.
|
|
Exhibit 10.7 to the
August 30, 2005
Form 8-K
|
|
10
|
.5
|
|
Commercial Paper Dealer Agreement,
dated as of August 30, 2005, among the Company, Federated
Retail and J.P. Morgan Securities Inc.
|
|
Exhibit 10.8 to the
August 30, 2005
Form 8-K
|
|
10
|
.6
|
|
Commercial Paper Dealer Agreement,
dated as of October 4, 2006, among the Company and Loop
Capital Markets, LLC
|
|
|
|
10
|
.7
|
|
Tax Sharing Agreement
|
|
Exhibit 10.10 to the
Companys Registration Statement on Form 10, filed
November 27, 1991, as amended (the Form
10)
|
|
10
|
.8
|
|
Ralphs Tax Indemnification
Agreement
|
|
Exhibit 10.1 to Form 10
|
|
10
|
.9
|
|
Purchase, Sale and Servicing
Transfer Agreement, effective as of June 1, 2005, among the
Company, FDS Bank, Prime II Receivables Corporation
(Prime II) and Citibank, N.A.
(Citibank)
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated June 2, 2005 (the June 2, 2005
Form 8-K)
|
|
10
|
.9.1
|
|
Letter Agreement, dated
August 22, 2005, among the Company, FDS Bank, Prime II
and Citibank
|
|
Exhibit 10.17.1 to the
Companys Annual Report on
Form 10-K
(File No. 1-13536) for the fiscal year ended
January 28, 2006 (the 2005
Form 10-K)
|
|
10
|
.9.2
|
|
Second Amendment to Purchase, Sale
and Servicing Transfer Agreement, dated October 24, 2005,
between the Company and Citibank
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated October 24, 2005 (the October 24,
2005
Form 8-K)
|
|
10
|
.9.3
|
|
Third Amendment to Purchase, Sale
and Servicing Transfer Agreement, dated May 1, 2006,
between the Company and Citibank
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed May 3, 2006
|
|
10
|
.9.4
|
|
Fourth Amendment to Purchase, Sale
and Servicing Transfer Agreement, dated May 22, 2006,
between the Company and Citibank
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed May 24, 2006 (the May 24, 2006
Form 8-K)
|
|
10
|
.10
|
|
Credit Card Program Agreement,
effective as of June 1, 2005, among the Company, FDS Bank,
FACS Group, Inc. and Citibank
|
|
Exhibit 10.2 to the
June 2, 2005
Form 8-K
|
35
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
10
|
.10.1
|
|
First Amendment to Credit Card
Program Agreement, dated October 24, 2005, between the
Company and Citibank
|
|
Exhibit 10.2 to the
October 24, 2005
Form 8-K
|
|
10
|
.10.2
|
|
Second Amendment to the Credit
Card Program Agreement, dated May 22, 2006, between the
Company, FDS Bank, FACS Group, Inc., Macys Department
Stores, Inc., Bloomingdales, Inc. and Department Stores
National Bank and Citibank
|
|
Exhibit 10.2 to the
May 24, 2006
Form 8-K
|
|
10
|
.11
|
|
Letter Agreement, dated
February 26, 2007, between the Company and Credit Suisse,
New York Branch, related to Accelerated Share Repurchase
Transaction
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on February 27, 2007 (the
February 27, 2007
Form 8-K)
|
|
10
|
.12
|
|
Letter Agreement, dated
February 26, 2007, between the Company and Credit Suisse,
New York Branch, related to Variable Term Accelerated Share
Repurchase Transaction
|
|
Exhibit 10.2 to the
February 27, 2007
Form 8-K
|
|
10
|
.13
|
|
1995 Executive Equity Incentive
Plan, as amended and restated as of May 19, 2006 *
|
|
Appendix C to the Companys
Proxy Statement filed April 13, 2006
|
|
10
|
.14
|
|
1992 Incentive Bonus Plan, as
amended and restated as of May 17, 2002 *
|
|
Appendix A to the Companys
Proxy Statement filed on April 17, 2002
|
|
10
|
.15
|
|
1994 Stock Incentive Plan, as
amended and restated as of May 19, 2006 *
|
|
Appendix D to the Companys
Proxy Statement filed April 13, 2006
|
|
10
|
.16
|
|
Form of Indemnification Agreement *
|
|
Exhibit 10.14 to Form 10
|
|
10
|
.17
|
|
Senior Executive Medical Plan *
|
|
Exhibit 10.1.7 to the
Companys Annual Report on
Form 10-K
(File No. 1-163) for the fiscal year ended February 3,
1990
|
|
10
|
.18
|
|
Employment Agreement, dated as of
March 8, 2007, between Terry J. Lundgren and the Company
(the Lundgren Employment Agreement)*
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on March 9, 2007
|
|
10
|
.19
|
|
Employment Agreement, dated
July 1, 2005, between Thomas L. Cole and Federated
Corporate Services, Inc., a wholly-owned subsidiary of the
Company (the Cole Employment Agreement)*
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated May 26, 2005
|
|
10
|
.19.1
|
|
Amended Exhibit A, effective
as of April 1, 2006, to the Cole Employment Agreement *
|
|
Exhibit 10.3 to the
March 24, 2006
Form 8-K
|
|
10
|
.20
|
|
Employment Agreement, dated
July 1, 2005, between Janet E. Grove and Macys
Merchandising Group, Inc. (f/k/a Macys Merchandising
Group, LLC), a wholly-owned and indirect subsidiary of the
Company (the Grove Employment Agreement) *
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated May 31, 2005
|
|
10
|
.20.1
|
|
Amended Exhibit A, effective
as of April 1, 2006, to the Grove Employment Agreement *
|
|
Exhibit 10.4 to the
March 24, 2006
Form 8-K
|
36
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
10
|
.21
|
|
Employment Agreement, dated
July 1, 2005, between Thomas G. Cody and Federated
Corporate Services, Inc., a wholly-owned subsidiary of the
Company (the Cody Employment Agreement) *
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated June 13, 2005
|
|
10
|
.21.1
|
|
Amended Exhibit A, effective
as of April 1, 2006, to the Cody Employment Agreement *
|
|
Exhibit 10.2 to the
March 24, 2006
Form 8-K
|
|
10
|
.22
|
|
Employment Agreement, dated
July 1, 2005, between Susan Kronick and Federated Corporate
Services, Inc., a wholly-owned subsidiary of the Company (the
Kronick Employment Agreement) *
|
|
Exhibit 10.6 to the
March 24, 2006
Form 8-K
|
|
10
|
.22.1
|
|
Amended Exhibit A, effective
as of April 1, 2006, to the Kronick Employment Agreement *
|
|
Exhibit 10.5 to the
March 24, 2006
Form 8-K
|
|
10
|
.23
|
|
Form of Employment Agreement for
Executives and Key Employees *
|
|
Exhibit 10.31 the
Companys Annual Report on
Form 10-K
(File No. 001-10951) for fiscal year ended January 29, 1994
|
|
10
|
.24
|
|
Form of Severance Agreement (for
Executives and Key Employees other than Executive Officers) *
|
|
Exhibit 10.44 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended January 30, 1999 (the
1998
Form 10-K)
|
|
10
|
.25
|
|
Form of Second Amended and
Restated Severance Agreement (for Executive Officers) *
|
|
Exhibit 10.45 to the 1998
Form 10-K
|
|
10
|
.25.1
|
|
Form of Amendment No. 1 to
Severance Agreement
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed November 2, 2006
|
|
10
|
.26
|
|
Form of Non-Qualified Stock Option
Agreement (for Executives and Key Employees) *
|
|
Exhibit 10.2 to the
March 25, 2005
Form 8-K
|
|
10
|
.26.1
|
|
Form of Non-Qualified Stock Option
Agreement (for Executives and Key Employees), as amended *
|
|
Exhibit 10.33.1 to the 2005
Form 10-K
|
|
10
|
.27
|
|
Form of Restricted Stock Agreement
for the 1994 Stock Incentive Plan *
|
|
Exhibit 10.4 to the Current
Report on
From 8-K
filed March 23, 2005 by May Delaware (the
March 23, 2005
Form 8-K)
|
|
10
|
.28
|
|
Form of Performance Restricted
Stock Agreement for the 1994 Stock Incentive Plan *
|
|
Exhibit 10.5 to the
March 23, 2005
Form 8-K
|
|
10
|
.29
|
|
Form of Non-Qualified Stock Option
Agreement for the 1994 Stock Incentive Plan *
|
|
Exhibit 10.7 to the
March 23, 2005
Form 8-K
|
|
10
|
.30
|
|
Supplementary Executive Retirement
Plan, as amended and restated as of January 1, 1997 *
|
|
Exhibit 10.46 to the 1996
Form 10-K
|
|
10
|
.31
|
|
Executive Deferred Compensation
Plan, as amended through January 1, 2005 *
|
|
Exhibit 10.4 to the
Companys Quarterly Report on
Form 10-Q
for the period ended April 29, 2006
|
|
10
|
.32
|
|
Profit Sharing 401(k) Investment
Plan, effective as of April 1, 1997, as amended and
restated as of February 5, 2002 (the Amended and
Restated 401(k) Plan)*
|
|
Exhibit 10.40 to the 2005
Form 10-K
|
|
10
|
.32.1
|
|
Amendment (No. 1) to the
Amended and Restated 401(k) Plan, dated as of July 19, 2002
*
|
|
Exhibit 10.40.2 to the 2005
Form 10-K
|
37
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Document if Incorporated by Reference
|
|
|
10
|
.32.2
|
|
Amendment (No. 2) to the
Amended and Restated 401(k) Plan, dated as of December 23,
2002 *
|
|
Exhibit 10.40.1 to the 2005
Form 10-K
|
|
10
|
.32.3
|
|
Amendment (No. 3) to the
Amended and Restated 401(k) Plan, dated as of February 3,
2003 *
|
|
Exhibit 10.40.3 to the 2005
Form 10-K
|
|
10
|
.32.4
|
|
Amendment (No. 4) to the
Amended and Restated 401(k) Plan, dated as of December 30,
2003 *
|
|
Exhibit 10.40.4 to the 2005
Form 10-K
|
|
10
|
.32.5
|
|
Amendment (No. 5) to the
Amended and Restated 401(k) Plan, dated as of December 31,
2003 *
|
|
Exhibit 10.40.5 to the 2005
Form 10-K
|
|
10
|
.32.6
|
|
Amendment (No. 6) to the
Amended and Restated 401(k) Plan, dated as of March 30,
2005 *
|
|
Exhibit 10.40.6 to the 2005
Form 10-K
|
|
10
|
.32.7
|
|
Amendment (No. 7) to the
Amended and Restated 401(k) Plan, dated as of August 23,
2005 *
|
|
Exhibit 10.40.7 to the 2005
Form 10-K
|
|
10
|
.32.8
|
|
Amendment (No. 8) to the
Amended and Restated 401(k) Plan, dated as of February 27,
2006 *
|
|
Exhibit 10.40.8 to the 2005
Form 10-K
|
|
10
|
.32.9
|
|
Amendment (No. 9) to the
Amended and Restated 401(k) Plan, dated as of August 29,
2006 *
|
|
|
|
10
|
.32.10
|
|
Amendment (No. 10) to
the Amended and Restated 401(k) Plan, dated as of
December 19, 2006 *
|
|
|
|
10
|
.32.11
|
|
Amendment (No. 11) to
the Amended and Restated 401(k) Plan, dated as of
December 19, 2006 *
|
|
|
|
10
|
.33
|
|
Cash Account Pension Plan
(amending and restating the Company Pension Plan) effective as
of January 1, 1997 *
|
|
Exhibit 10.49 to the 1996
Form 10-K
|
|
10
|
.34
|
|
Description of Non-Employee
Directors Compensation Program, dated as of April 1,
2006 *
|
|
Exhibit 10.42 to the 2005
Form 10-K
|
|
10
|
.35
|
|
Stock Credit Plan for
2006 2007 of Federated Department Stores, Inc. *
|
|
Exhibit 10.43 to the 2005
Form 10-K
|
|
10
|
.36
|
|
Agreement and Release of Claims
between Federated Corporate Services, Inc. and Ronald W. Tysoe,
dated as of October 2, 2006 *
|
|
Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed on October 2, 2006
|
|
21
|
|
|
Subsidiaries
|
|
|
|
23
|
|
|
Consent of KPMG LLP
|
|
|
|
24
|
|
|
Powers of Attorney
|
|
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
|
|
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
|
|
|
|
32
|
.1
|
|
Certifications by Chief Executive
Officer and Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act
|
|
|
|
|
|
* |
|
Constitutes a compensatory plan or arrangement. |
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FEDERATED DEPARTMENT
STORES, INC.
|
|
|
|
By:
|
/s/ Dennis
J. Broderick
|
Dennis J. Broderick
Senior Vice President, General Counsel and Secretary/
Date: April 4, 2007
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated on April 4, 2007.
|
|
|
|
|
Signature
|
|
Title
|
|
*
Terry
J. Lundgren
|
|
Chairman of the Board, President
and
Chief Executive Officer
(principal executive officer) and Director
|
*
Karen
M. Hoguet
|
|
Executive Vice President and Chief
Financial Officer
(principal financial officer)
|
*
Joel
A. Belsky
|
|
Vice President and Controller
(principal accounting officer)
|
*
Meyer
Feldberg
|
|
Director
|
*
Sara
Levinson
|
|
Director
|
*
Joseph
Neubauer
|
|
Director
|
*
Joseph
A. Pichler
|
|
Director
|
*
Joyce
M. Roché
|
|
Director
|
*
William
P. Stiritz
|
|
Director
|
*
Karl
M. von der Heyden
|
|
Director
|
*
Craig
E. Weatherup
|
|
Director
|
*
Marna
C. Whittington
|
|
Director
|
|
|
|
* |
|
The undersigned, by signing his name hereto, does sign and
execute this Annual Report on
Form 10-K
pursuant to the Powers of Attorney executed by the above-named
officers and directors and filed herewith. |
|
|
|
|
By:
|
/s/ Dennis
J. Broderick
|
Dennis J. Broderick
Attorney-in-Fact
39
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
F-1
REPORT OF
MANAGEMENT
To the Shareholders of
Federated Department Stores, Inc.:
The integrity and consistency of the Consolidated Financial
Statements of Federated Department Stores, Inc. and
subsidiaries, which were prepared in accordance with accounting
principles generally accepted in the United States of America,
are the responsibility of management and properly include some
amounts that are based upon estimates and judgments.
The Company maintains a system of internal accounting controls,
which is supported by a program of internal audits with
appropriate management
follow-up
action, to provide reasonable assurance, at appropriate cost,
that the Companys assets are protected and transactions
are properly recorded. Additionally, the integrity of the
financial accounting system is based on careful selection and
training of qualified personnel, organizational arrangements
which provide for appropriate division of responsibilities and
communication of established written policies and procedures.
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Exchange Act
Rule 13a-15(f)
and has issued Managements Report on Internal Control over
Financial Reporting. KPMG LLP has issued an attestation report
on Managements Report on Internal Control over Financial
Reporting.
The Consolidated Financial Statements of the Company have been
audited by KPMG LLP. Their report expresses their opinion as to
the fair presentation, in all material respects, of the
financial statements and is based upon their independent audits.
The Audit Committee, composed solely of outside directors, meets
periodically with KPMG LLP, the internal auditors and
representatives of management to discuss auditing and financial
reporting matters. In addition, KPMG LLP and the Companys
internal auditors meet periodically with the Audit Committee
without management representatives present and have free access
to the Audit Committee at any time. The Audit Committee is
responsible for recommending to the Board of Directors the
engagement of the independent registered public accounting firm,
which is subject to shareholder approval, and the general
oversight review of managements discharge of its
responsibilities with respect to the matters referred to above.
Terry J. Lundgren
Chairman, President and Chief Executive Officer
Karen M. Hoguet
Executive Vice President and Chief Financial Officer
Joel A. Belsky
Vice President and Controller
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Federated Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets of
Federated Department Stores, Inc. and subsidiaries as of
February 3, 2007 and January 28, 2006, and the related
consolidated statements of income, changes in shareholders
equity and cash flows for each of the three fiscal years in the
period ended February 3, 2007. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Federated Department Stores, Inc. and subsidiaries
as of February 3, 2007 and January 28, 2006, and the
results of their operations and their cash flows for each of the
three fiscal years in the period ended February 3, 2007, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial
statements, Federated Department Stores, Inc. adopted the
provisions of the Financial Accounting Standards Boards
Statement of Financial Accounting Standard No. 123R
(Revised 2004), Share Based Payment, and the
recognition and related disclosure provisions of the Financial
Accounting Standards Boards Statement of Financial
Accounting Standard No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R) in fiscal 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Federated Department Stores, Inc.s
internal control over financial reporting as of February 3,
2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 30, 2007 expressed an unqualified
opinion on managements assessment of, and the effective
operation of, internal control over financial reporting.
Cincinnati, Ohio
March 30, 2007
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Federated Department Stores, Inc.:
We have audited managements assessment, included in the
accompanying Item 9A (b) Managements Report on
Internal Control over Financial Reporting, that Federated
Department Stores, Inc. maintained effective internal control
over financial reporting as of February 3, 2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Federated Department Stores, Inc.
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Federated
Department Stores, Inc. maintained effective internal control
over financial reporting as of February 3, 2007 is fairly
stated, in all material respects, based on criteria established
in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Federated Department Stores, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of February 3, 2007 based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
F-4
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Federated Department Stores, Inc.
and subsidiaries as of February 3, 2007 and
January 28, 2006, and the related consolidated statements
of income, changes in shareholders equity and cash flows
for each of the three fiscal years in the period ended
February 3, 2007, and our report dated March 30, 2007
expressed an unqualified opinion on those consolidated financial
statements.
Cincinnati, Ohio
March 30, 2007
F-5
FEDERATED
DEPARTMENT STORES, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net sales
|
|
$
|
26,970
|
|
|
$
|
22,390
|
|
|
$
|
15,776
|
|
Cost of sales
|
|
|
(16,019
|
)
|
|
|
(13,272
|
)
|
|
|
(9,382
|
)
|
Inventory valuation
adjustments May integration
|
|
|
(178
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
10,773
|
|
|
|
9,093
|
|
|
|
6,394
|
|
Selling, general and
administrative expenses
|
|
|
(8,678
|
)
|
|
|
(6,980
|
)
|
|
|
(4,994
|
)
|
May integration costs
|
|
|
(450
|
)
|
|
|
(169
|
)
|
|
|
|
|
Gains on the sale of accounts
receivable
|
|
|
191
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,836
|
|
|
|
2,424
|
|
|
|
1,400
|
|
Interest expense
|
|
|
(451
|
)
|
|
|
(422
|
)
|
|
|
(299
|
)
|
Interest income
|
|
|
61
|
|
|
|
42
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
1,446
|
|
|
|
2,044
|
|
|
|
1,116
|
|
Federal, state and local income
tax expense
|
|
|
(458
|
)
|
|
|
(671
|
)
|
|
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
988
|
|
|
|
1,373
|
|
|
|
689
|
|
Discontinued operations, net of
income taxes
|
|
|
7
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
995
|
|
|
$
|
1,406
|
|
|
$
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.83
|
|
|
$
|
3.22
|
|
|
$
|
1.97
|
|
Income from discontinued operations
|
|
|
.01
|
|
|
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.84
|
|
|
$
|
3.30
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.80
|
|
|
$
|
3.16
|
|
|
$
|
1.93
|
|
Income from discontinued operations
|
|
|
.01
|
|
|
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.81
|
|
|
$
|
3.24
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-6
FEDERATED
DEPARTMENT STORES, INC.
CONSOLIDATED
BALANCE SHEETS
(millions)
|
|
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
January 28, 2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,211
|
|
|
$
|
248
|
|
Accounts receivable
|
|
|
517
|
|
|
|
2,522
|
|
Merchandise inventories
|
|
|
5,317
|
|
|
|
5,459
|
|
Supplies and prepaid expenses
|
|
|
251
|
|
|
|
203
|
|
Assets of discontinued operations
|
|
|
126
|
|
|
|
1,713
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
7,422
|
|
|
|
10,145
|
|
Property and Equipment
net
|
|
|
11,473
|
|
|
|
12,034
|
|
Goodwill
|
|
|
9,204
|
|
|
|
9,520
|
|
Other Intangible
Assets net
|
|
|
883
|
|
|
|
1,080
|
|
Other Assets
|
|
|
568
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
29,550
|
|
|
$
|
33,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
650
|
|
|
$
|
1,323
|
|
Accounts payable and accrued
liabilities
|
|
|
4,944
|
|
|
|
5,246
|
|
Income taxes
|
|
|
665
|
|
|
|
454
|
|
Deferred income taxes
|
|
|
52
|
|
|
|
103
|
|
Liabilities of discontinued
operations
|
|
|
48
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
6,359
|
|
|
|
7,590
|
|
Long-Term Debt
|
|
|
7,847
|
|
|
|
8,860
|
|
Deferred Income Taxes
|
|
|
1,728
|
|
|
|
1,704
|
|
Other Liabilities
|
|
|
1,362
|
|
|
|
1,495
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock (496.9 and
546.8 shares outstanding)
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
9,486
|
|
|
|
9,238
|
|
Accumulated equity
|
|
|
6,375
|
|
|
|
5,654
|
|
Treasury stock
|
|
|
(3,431
|
)
|
|
|
(1,091
|
)
|
Accumulated other comprehensive
loss
|
|
|
(182
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
12,254
|
|
|
|
13,519
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
29,550
|
|
|
$
|
33,168
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-7
FEDERATED
DEPARTMENT STORES, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Restricted
|
|
|
Income
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Equity
|
|
|
Stock
|
|
|
Stock
|
|
|
(Loss)
|
|
|
Equity
|
|
|
Balance at January 31, 2004
|
|
$
|
4
|
|
|
$
|
3,878
|
|
|
$
|
3,809
|
|
|
$
|
(1,477
|
)
|
|
$
|
(4
|
)
|
|
$
|
(270
|
)
|
|
$
|
5,940
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
689
|
|
Minimum pension liability
adjustment, net of income tax effect of $144 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
919
|
|
Common stock dividends
($.265 per share)
|
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
Stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(899
|
)
|
|
|
|
|
|
|
|
|
|
|
(899
|
)
|
Stock issued under stock plans
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
276
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
247
|
|
Retirement of common stock
|
|
|
|
|
|
|
(777
|
)
|
|
|
|
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock plan amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Deferred compensation plan
distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Income tax benefit related to stock
plan activity
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2005
|
|
|
4
|
|
|
|
3,122
|
|
|
|
4,405
|
|
|
|
(1,322
|
)
|
|
|
(2
|
)
|
|
|
(40
|
)
|
|
|
6,167
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,406
|
|
Minimum pension liability
adjustment, net of income tax effect of $160 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
(257
|
)
|
Unrealized gain on marketable
securities, net of income tax effect of $6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,158
|
|
Stock issued in acquisition
|
|
|
2
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,021
|
|
Common stock dividends
($.385 per share)
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
Stock issued under stock plans
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
265
|
|
Restricted stock plan amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Deferred compensation plan
distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Income tax benefit related to stock
plan activity
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
6
|
|
|
|
9,238
|
|
|
|
5,654
|
|
|
|
(1,091
|
)
|
|
|
|
|
|
|
(288
|
)
|
|
|
13,519
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
995
|
|
Minimum pension liability
adjustment, net of income tax effect of $151 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
244
|
|
Unrealized gain on marketable
securities, net of income tax effect of $23 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,275
|
|
Adjustment to initially apply
SFAS No. 158, net of income tax effect of
$115 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
(174
|
)
|
Common stock dividends
($.5075 per share)
|
|
|
|
|
|
|
|
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274
|
)
|
Stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Stock issued under stock plans
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
317
|
|
Deferred compensation plan
distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Income tax benefit related to stock
plan activity
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
$
|
6
|
|
|
$
|
9,486
|
|
|
$
|
6,375
|
|
|
$
|
(3,431
|
)
|
|
$
|
|
|
|
$
|
(182
|
)
|
|
$
|
12,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-8
FEDERATED
DEPARTMENT STORES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from continuing
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
995
|
|
|
$
|
1,406
|
|
|
$
|
689
|
|
Adjustments to reconcile net income
to net cash provided by continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
(7
|
)
|
|
|
(33
|
)
|
|
|
|
|
Gains on the sale of accounts
receivable
|
|
|
(191
|
)
|
|
|
(480
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
91
|
|
|
|
10
|
|
|
|
12
|
|
May integration costs
|
|
|
628
|
|
|
|
194
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,265
|
|
|
|
976
|
|
|
|
734
|
|
Amortization of financing costs and
premium on acquired debt
|
|
|
(49
|
)
|
|
|
(20
|
)
|
|
|
6
|
|
Gain on early debt extinguishment
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of proprietary
accounts receivable
|
|
|
1,860
|
|
|
|
2,195
|
|
|
|
|
|
(Increase) decrease in proprietary
and other accounts receivable not separately identified
|
|
|
207
|
|
|
|
(147
|
)
|
|
|
17
|
|
(Increase) decrease in merchandise
inventories
|
|
|
(51
|
)
|
|
|
495
|
|
|
|
95
|
|
(Increase) decrease in supplies and
prepaid expenses
|
|
|
(41
|
)
|
|
|
122
|
|
|
|
(5
|
)
|
(Increase) decrease in other assets
not separately identified
|
|
|
25
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Decrease in accounts payable and
accrued liabilities not separately identified
|
|
|
(841
|
)
|
|
|
(444
|
)
|
|
|
(24
|
)
|
Increase (decrease) in current
income taxes
|
|
|
(139
|
)
|
|
|
49
|
|
|
|
(6
|
)
|
Increase (decrease) in deferred
income taxes
|
|
|
(18
|
)
|
|
|
(36
|
)
|
|
|
59
|
|
Increase (decrease) in other
liabilities not separately identified
|
|
|
12
|
|
|
|
(140
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operating activities
|
|
|
3,692
|
|
|
|
4,145
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,317
|
)
|
|
|
(568
|
)
|
|
|
(467
|
)
|
Capitalized software
|
|
|
(75
|
)
|
|
|
(88
|
)
|
|
|
(81
|
)
|
Proceeds from the disposition of
Lord & Taylor
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
Proceeds from the disposition of
Davids Bridal and Priscilla of Boston
|
|
|
740
|
|
|
|
|
|
|
|
|
|
Repurchase of accounts receivable
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
|
|
Proceeds from the sale of
repurchased accounts receivable
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
Proceeds from hurricane insurance
claim
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Disposition of property and
equipment
|
|
|
679
|
|
|
|
19
|
|
|
|
27
|
|
Acquisition of The May Department
Stores Company, net of cash acquired
|
|
|
|
|
|
|
(5,321
|
)
|
|
|
|
|
Proceeds from sale of
non-proprietary accounts receivable
|
|
|
|
|
|
|
1,388
|
|
|
|
|
|
Increase in non-proprietary
accounts receivable
|
|
|
|
|
|
|
(131
|
)
|
|
|
(236
|
)
|
Collection of notes receivable
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing investing activities
|
|
|
1,273
|
|
|
|
(4,701
|
)
|
|
|
(727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issued
|
|
|
1,146
|
|
|
|
4,580
|
|
|
|
186
|
|
Financing costs
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
|
|
Debt repaid
|
|
|
(2,680
|
)
|
|
|
(4,755
|
)
|
|
|
(365
|
)
|
Dividends paid
|
|
|
(274
|
)
|
|
|
(157
|
)
|
|
|
(93
|
)
|
Increase (decrease) in outstanding
checks
|
|
|
(77
|
)
|
|
|
(53
|
)
|
|
|
38
|
|
Acquisition of treasury stock
|
|
|
(2,500
|
)
|
|
|
(7
|
)
|
|
|
(901
|
)
|
Issuance of common stock
|
|
|
382
|
|
|
|
336
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by continuing
financing activities
|
|
|
(4,013
|
)
|
|
|
(58
|
)
|
|
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing operations
|
|
|
952
|
|
|
|
(614
|
)
|
|
|
(57
|
)
|
Net cash provided by discontinued
operating activities
|
|
|
54
|
|
|
|
63
|
|
|
|
|
|
Net cash used by discontinued
investing activities
|
|
|
(97
|
)
|
|
|
(61
|
)
|
|
|
|
|
Net cash provided (used) by
discontinued financing activities
|
|
|
54
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
discontinued operations
|
|
|
11
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
963
|
|
|
|
(620
|
)
|
|
|
(57
|
)
|
Cash and cash equivalents beginning
of period
|
|
|
248
|
|
|
|
868
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of
period
|
|
$
|
1,211
|
|
|
$
|
248
|
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
600
|
|
|
$
|
457
|
|
|
$
|
300
|
|
Interest received
|
|
|
59
|
|
|
|
42
|
|
|
|
16
|
|
Income taxes paid (net of refunds
received)
|
|
|
561
|
|
|
|
481
|
|
|
|
322
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-9
FEDERATED
DEPARTMENT STORES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Federated Department Stores, Inc. and subsidiaries (the
Company) is a retail organization operating retail
stores that sell a wide range of merchandise, including
mens, womens and childrens apparel and
accessories, cosmetics, home furnishings and other consumer
goods.
The Companys fiscal year ends on the Saturday closest to
January 31. Fiscal years 2006, 2005 and 2004 ended on
February 3, 2007, January 28, 2006 and
January 29, 2005, respectively. Fiscal year 2006 includes
53 weeks and fiscal years 2005 and 2004 included
52 weeks. References to years in the Consolidated Financial
Statements relate to fiscal years rather than calendar years.
The Consolidated Financial Statements include the accounts of
the Company and its wholly-owned subsidiaries. The Company from
time to time invests in companies engaged in complementary
businesses. Investments in companies in which the Company has
the ability to exercise significant influence, but not control,
are accounted for by the equity method. All marketable equity
and debt securities held by the Company are accounted for under
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt
and Equity Securities, with unrealized gains and losses on
available-for-sale
securities being included as a separate component of accumulated
other comprehensive income, net of income tax effect. All other
investments are carried at cost. All significant intercompany
transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates and
assumptions are subject to inherent uncertainties, which may
result in actual amounts differing from reported amounts.
On May 19, 2006, the Companys board of directors
approved a
two-for-one
stock split to be effected in the form of a stock dividend. The
additional shares resulting from the stock split were
distributed after the close of trading on June 9, 2006 to
shareholders of record on May 26, 2006. Share and per share
amounts reflected throughout the Consolidated Financial
Statements and notes thereto have been retroactively restated
for the stock split.
Certain reclassifications were made to prior years amounts
to conform with the classifications of such amounts for the most
recent year.
The Company operates in one segment as an operator of retail
stores.
Net sales include merchandise sales, leased department income
and shipping and handling fees. The Company licenses third
parties to operate certain departments in its stores. The
Company receives commissions from these licensed departments
based on a percentage of net sales. Commissions are recognized
as income at the time merchandise is sold to customers. Sales
taxes collected from customers are not considered revenue and
are included in accounts payable and accrued liabilities until
remitted to the taxing authorities. Cost of sales consists of
the cost of merchandise, including inbound freight, and shipping
and handling costs.
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Sales of merchandise are recorded at the time of delivery and
reported net of merchandise returns. An estimated allowance for
future sales returns is recorded and cost of sales is adjusted
accordingly.
Cash and cash equivalents include cash and liquid investments
with original maturities of three months or less.
Prior to the Companys sales of its credit card accounts
and receivables (see Note 5, Sale of Credit Card
Accounts and Receivables), the Company offered proprietary
credit to its customers under revolving accounts. Such revolving
accounts were accepted on customary revolving credit terms and
offered the customer the option of paying the entire balance on
a 25-day
basis without incurring finance charges. Alternatively,
customers were able to make scheduled minimum payments and incur
finance charges, which were competitive with other retailers and
lenders. Minimum payments varied from 2.5% to 100.0% of the
account balance, depending on the size of the balance. The
Company also offered proprietary credit on deferred billing
terms for periods not to exceed one year. Such accounts were
convertible to revolving credit, if unpaid, at the end of the
deferral period. Finance charge income was treated as a
reduction of selling, general and administrative expenses on the
Consolidated Statements of Income.
Prior to the Companys sales of its credit card accounts
and receivables, the Company evaluated the collectibility of its
proprietary and non-proprietary accounts receivable based on a
combination of factors, including analysis of historical trends,
aging of accounts receivable, write-off experience and
expectations of future performance. Proprietary and
non-proprietary accounts receivable were considered delinquent
if more than one scheduled minimum payment was missed.
Delinquent proprietary accounts of Federated were generally
written off automatically after the passage of 210 days
without receiving a full scheduled monthly payment. Delinquent
non-proprietary accounts and delinquent proprietary accounts of
May were generally written off automatically after the passage
of 180 days without receiving a full scheduled monthly
payment. Accounts were written off sooner in the event of
customer bankruptcy or other circumstances that made further
collection unlikely. The Company previously reserved for
Federateds doubtful proprietary accounts based on a
loss-to-collections
rate and Federateds doubtful non-proprietary accounts
based on a roll-reserve rate. The Company previously reserved
for May doubtful proprietary accounts with a methodology based
upon historical write-off performance in addition to factoring
in a flow rate performance tied to the customer delinquency
trend.
In connection with the sales of credit card accounts and related
receivable balances, the Company and Citibank entered into a
long-term marketing and servicing alliance pursuant to the terms
of a Credit Card Program Agreement (the Program
Agreement) (see Note 5, Sale of Credit Card
Accounts and Receivables). Income earned under the Program
Agreement is treated as a reduction of selling, general and
administrative expenses on the Consolidated Statements of Income.
The Company maintains customer loyalty programs in which
customers are awarded certificates based on their spending. Upon
reaching certain levels of qualified spending, customers
automatically receive certificates to apply toward future
purchases. The Company expenses the estimated net amount of the
certificates that will be earned and redeemed as the
certificates are earned.
Merchandise inventories are valued at lower of cost or market
using the
last-in,
first-out (LIFO) retail inventory method. Under the retail
inventory method, inventory is segregated into departments of
merchandise
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
having similar characteristics, and is stated at its current
retail selling value. Inventory retail values are converted to a
cost basis by applying specific average cost factors for each
merchandise department. Cost factors represent the average
cost-to-retail
ratio for each merchandise department based on beginning
inventory and the fiscal year purchase activity. The retail
inventory method inherently requires management judgments and
estimates, such as the amount and timing of permanent markdowns
to clear unproductive or slow-moving inventory, which may impact
the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are
recorded when the utility of the inventory has diminished.
Factors considered in the determination of permanent markdowns
include current and anticipated demand, customer preferences,
age of the merchandise and fashion trends. When a decision is
made to permanently mark down merchandise, the resulting gross
margin reduction is recognized in the period the markdown is
recorded.
Shrinkage is estimated as a percentage of sales for the period
from the last inventory date to the end of the fiscal period.
Such estimates are based on experience and the most recent
physical inventory results. While it is not possible to quantify
the impact from each cause of shrinkage, the Company has loss
prevention programs and policies that are intended to minimize
shrinkage. Physical inventories are generally taken within each
merchandise department annually, and inventory records are
adjusted accordingly.
The Company receives certain allowances from various vendors in
support of the merchandise it purchases for resale. The Company
receives certain allowances as reimbursement for markdowns taken
and/or to
support the gross margins earned in connection with the sales of
merchandise. These allowances are generally credited to cost of
sales at the time the merchandise is sold in accordance with
Emerging Issues Task Force (EITF) Issue
No. 02-16,
Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor. The Company
also receives advertising allowances from more than 1,200 of its
merchandise vendors pursuant to cooperative advertising
programs, with some vendors participating in multiple programs.
These allowances represent reimbursements by vendors of costs
incurred by the Company to promote the vendors merchandise
and are netted against advertising and promotional costs when
the related costs are incurred in accordance with EITF Issue
No. 02-16.
Advertising and promotional costs, net of cooperative
advertising allowances, amounted to $1,171 million for
2006, $1,076 million for 2005, and $716 million for
2004. Cooperative advertising allowances that offset advertising
and promotional costs were approximately $517 million for
2006, $432 million for 2005, and $312 million for
2004. Department store non-direct response advertising and
promotional costs are expensed either as incurred or the first
time the advertising occurs. Direct response advertising and
promotional costs are deferred and expensed over the period
during which the sales are expected to occur, generally one to
four months.
The arrangements pursuant to which the Companys vendors
provide allowances, while binding, are generally informal in
nature and one year or less in duration. The terms and
conditions of these arrangements vary significantly from vendor
to vendor and are influenced by, among other things, the type of
merchandise to be supported.
Depreciation of owned properties is provided primarily on a
straight-line basis over the estimated asset lives, which range
from 15 to 50 years for buildings and building equipment
and 3 to 15 years for fixtures and
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equipment. Real estate taxes and interest on construction in
progress and land under development are capitalized. Amounts
capitalized are amortized over the estimated lives of the
related depreciable assets. The Company receives contributions
from developers and merchandise vendors to fund building
improvement and the construction of vendor shops. Such
contributions are netted against the capital expenditures.
Buildings on leased land and leasehold improvements are
amortized over the shorter of their economic lives or the lease
term, beginning on the date the asset is put into use. The
Company receives contributions from landlords to fund buildings
and leasehold improvements. Such contributions are recorded as
deferred rent and amortized as reductions to lease expense over
the lease term.
The Company recognizes operating lease minimum rentals on a
straight-line basis over the lease term. Executory costs such as
real estate taxes and maintenance, and contingent rentals such
as those based on a percentage of sales are recognized as
incurred.
The lease term, which includes all renewal periods that are
considered to be reasonably assured, begins on the date the
Company has access to the leased property.
During 2004, the Company reviewed its accounting for leases in
accordance with the accounting policies set out above. As a
result of this review, certain errors were identified and were
corrected in the fourth quarter of 2004. Depreciation expense
was increased by $42 million and rent expense was decreased
by approximately the same amount, resulting in an insignificant
impact on selling, general and administrative expenses.
Additionally, property and equipment, net was increased by
$65 million and accounts payable and accrued liabilities
were increased by approximately the same amount. The impact of
these corrections on 2004 and prior year Consolidated Financial
Statements was not material.
The carrying value of long-lived assets is periodically reviewed
by the Company whenever events or changes in circumstances
indicate that a potential impairment has occurred. For
long-lived assets held for use, a potential impairment has
occurred if projected future undiscounted cash flows are less
than the carrying value of the assets. The estimate of cash
flows includes managements assumptions of cash inflows and
outflows directly resulting from the use of those assets in
operations. When a potential impairment has occurred, an
impairment write-down is recorded if the carrying value of the
long-lived asset exceeds its fair value. The Company believes
its estimated cash flows are sufficient to support the carrying
value of its long-lived assets. If estimated cash flows
significantly differ in the future, the Company may be required
to record asset impairment write-downs.
For long-lived assets held for disposal by sale, an impairment
charge is recorded if the carrying amount of the asset exceeds
its fair value less costs to sell. Such valuations include
estimations of fair values and incremental direct costs to
transact a sale. For long-lived assets to be abandoned, the
Company considers the asset to be disposed of when it ceases to
be used. If the Company commits to a plan to abandon a
long-lived asset before the end of its previously estimated
useful life, depreciation estimates are revised accordingly.
Additionally, related liabilities arise such as severance,
contractual obligations and other accruals associated with store
closings from decisions to dispose of assets. The Company
estimates these liabilities based on the facts and circumstances
in existence for each restructuring decision. The amounts the
Company will ultimately realize or disburse could differ from
the amounts assumed in arriving at the asset impairment and
restructuring charge recorded.
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company accounts for recorded goodwill and other intangible
assets in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS 142).
In accordance with SFAS 142, goodwill and intangible assets
having indefinite lives are not being amortized to earnings, but
instead are subject to periodic testing for impairment. Goodwill
and other intangible assets not subject to amortization have
been assigned to reporting units for purposes of impairment
testing. The reporting units are the Companys retail
operating divisions. Goodwill and indefinite lived intangible
assets of a reporting unit are tested for impairment annually at
the end of the fiscal month of May and more frequently if
certain indicators are encountered. Goodwill and indefinite
lived intangible impairment tests consist of a comparison of
each reporting units fair value with its carrying value.
The fair value of a reporting unit is an estimate of the amount
for which the unit as a whole could be sold in a current
transaction between willing parties. The Company generally
estimates fair value based on discounted cash flows. If the
carrying value of a reporting unit exceeds its fair value,
goodwill is written down to its implied fair value. Intangible
assets with determinable useful lives are amortized over their
estimated useful lives. These estimated useful lives are
evaluated annually to determine if a revision is warranted.
The Company capitalizes purchased and internally developed
software and amortizes such costs to expense on a straight-line
basis over 2-5 years. Capitalized software is included in
other assets on the Consolidated Balance Sheets.
The Company offers gift cards to its customers. At the time gift
cards are sold, no revenue is recognized; rather, the Company
records an accrued liability to customers. The liability is
relieved and revenue is recognized equal to the amount redeemed
at the time the gift cards are redeemed for merchandise. Gift
cards generally expire within two years after the date of
issuance, except in states where gift cards are prohibited by
law from expiring.
The Company is self-insured for workers compensation and public
liability claims up to certain maximum liability amounts.
Although the amounts accrued are actuarially determined based on
analysis of historical trends of losses, settlements, litigation
costs and other factors, the amounts the Company will ultimately
disburse could differ from such accrued amounts.
The Company, through its actuaries, utilizes assumptions when
estimating the liabilities for pension and other employee
benefit plans. These assumptions, where applicable, include the
discount rates used to determine the actuarial present value of
projected benefit obligations, the rate of increase in future
compensation levels, the long-term rate of return on assets and
the growth in health care costs. The cost of these benefits is
recognized in the Consolidated Financial Statements over an
employees term of service with the Company, and the
accrued benefits are reported in accounts payable and accrued
liabilities and other liabilities on the Consolidated Balance
Sheets, as appropriate.
Financing costs are amortized using the effective interest
method over the life of the related debt.
Income taxes are accounted for under the asset and liability
method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases,
and net operating loss and tax credit carryforwards. Deferred
income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the
Consolidated Statements of Income in the period that includes
the enactment date. Deferred income tax assets are reduced by a
valuation allowance when it is more likely than not that some
portion of the deferred income tax assets will not be realized.
The Company records derivative transactions according to the
provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended,
which establishes accounting and reporting standards for
derivative instruments and hedging activities and requires
recognition of all derivatives as either assets or liabilities
and measurement of those instruments at fair value. The Company
makes limited use of derivative financial instruments. The
Company does not use financial instruments for trading or other
speculative purposes and is not a party to any leveraged
financial instruments. On the date that the Company enters into
a derivative contract, the Company designates the derivative
instrument as either a fair value hedge, cash flow hedge or as a
free-standing derivative instrument, each of which would receive
different accounting treatment. Prior to entering into a hedge
transaction, the Company formally documents the relationship
between hedging instruments and hedged items, as well as the
risk management objective and strategy for undertaking various
hedge transactions. Derivative instruments that the Company may
use as part of its interest rate risk management strategy
include interest rate swap and interest rate cap agreements and
Treasury lock agreements. At February 3, 2007, the Company
was not a party to any derivative financial instruments.
Effective January 29, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R) using the modified
prospective transition method. This statement is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), and supersedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values. Under the provisions of this statement, the
Company must determine the appropriate fair value model to be
used for valuing share-based payments and the amortization
method for compensation cost. The modified prospective
transition method requires that compensation expense be
recognized beginning with the effective date, based on the
requirements of this statement, for all share-based payments
granted after the effective date, and based on the requirements
of SFAS 123, for all awards granted to employees prior to
the effective date of this statement that remain nonvested on
the effective date. See Note 15, Stock Based
Compensation, for further information.
Effective January 29, 2006, the Company adopted
SFAS No. 151, Inventory Costs An
Amendment of ARB No. 43, Chapter 4. This
statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). The
adoption of this statement did not have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
Effective January 29, 2006, the Company adopted
SFAS No. 153, Exchanges of Nonmonetary
Assets An Amendment of APB Opinion
No. 29. This statement eliminates the exception from
fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion
No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. The adoption of
this statement did not have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides
interpretations regarding the process of quantifying prior year
financial statement misstatements for the purposes of a
materiality assessment. SAB 108 provides guidance that the
following two methodologies should be used to quantify prior
year income statement misstatements: (i) the error is
quantified as the amount by which the income statement is
misstated, and (ii) the error is quantified as the
cumulative amount by which the current year balance sheet is
misstated. SAB No. 108 concludes that a Company should
quantify a misstatement using both of these methodologies.
Historically, the Company evaluated the impact of financial
statement misstatements for the purposes of a materiality
assessment on a current year income statement approach. The
interpretation is effective for evaluations made on or after
November 15, 2006. The adoption of SAB 108 did not
have a material impact on the Companys consolidated
financial position, results of operations or cash flows.
Also in September 2006, the FASB issued SFAS 158, which
requires an employer to recognize the funded status of a defined
benefit postretirement plan as an asset or liability on the
balance sheet and to recognize changes in that funded status in
the year in which the changes occur through comprehensive
income. The recognition and disclosure provisions of this
statement were adopted by the Company for fiscal year 2006. See
Note 13, Retirement Plans, for further
information.
The incremental effects of applying the recognition and
disclosure provisions of SFAS No. 158 on line items in
the Consolidated Balance Sheets as of February 3, 2007 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Application
|
|
|
|
|
|
After Application
|
|
|
|
of SFAS No. 158
|
|
|
Adjustments
|
|
|
of SFAS No. 158
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
4,866
|
|
|
$
|
78
|
|
|
$
|
4,944
|
|
Deferred income taxes
|
|
|
1,895
|
|
|
|
(115
|
)
|
|
|
1,780
|
|
Other liabilities
|
|
|
1,151
|
|
|
|
211
|
|
|
|
1,362
|
|
Total liabilities
|
|
|
17,122
|
|
|
|
174
|
|
|
|
17,296
|
|
Accumulated other comprehensive
loss
|
|
|
(8
|
)
|
|
|
(174
|
)
|
|
|
(182
|
)
|
Total shareholders equity
|
|
|
12,428
|
|
|
|
(174
|
)
|
|
|
12,254
|
|
Effective February 4, 2007, the Company adopted the
remaining provisions of SFAS 158, which require the
measurement of defined benefit plan assets and obligations to be
the date of the Companys fiscal year-end balance sheet.
This required a change in the Companys measurement date,
which was previously December 31. The adoption of the
remaining provisions of this statement resulted in an adjustment
to the beginning balance of accumulated equity on
February 4, 2007 of approximately $8 million in order
to recognize post employment and postretirement benefit expense
for January 2007 and also reduced estimated 2007 post employment
and postretirement benefit expense, due to the change in the
discount rate at February 3, 2007 as compared to
December 31, 2006, by approximately $6 million.
In June 2006, the FASB issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109. (FIN 48), which prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. FIN 48 will be effective beginning in the first
quarter of fiscal 2007 and the cumulative effect of applying the
provisions of FIN 48 will be recognized as an adjustment to
the beginning balance of accumulated equity. The initial
adoption of FIN 48 on February 4, 2007 did not have a
material impact on the Companys beginning of year
consolidated financial position and is not anticipated to have a
material impact on the Companys fiscal 2007 results of
operations or cash flows.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155), which amended certain provisions of
SFAS No. 133 and SFAS No. 140. SFAS 155
is effective for all financial instruments acquired, issued or
subject to a remeasurement (new basis) event after the beginning
of a companys first fiscal year that begins after
September 15, 2006. The Company does not anticipate
adoption of this statement will have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 addresses how companies should measure fair value
when they are required to use a fair value measure for
recognition and disclosure purposes under generally accepted
accounting principles. SFAS 157 will require the fair value
of an asset or liability to be based on a market based measure
which will reflect the credit risk of the company. SFAS 157
will also require expanded disclosure requirements which will
include the methods and assumptions used to measure fair value
and the effect of fair value measurements on earnings.
SFAS 157 will be applied prospectively and will be
effective for fiscal years beginning after November 15,
2007 and to interim periods within those fiscal years. The
Company is currently in the process of evaluating the impact of
adopting SFAS 157 on the Companys consolidated
financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159
The Fair Value Option for Financial Assets and Financial
Liabilities, (SFAS 159). SFAS 159
provides companies with an option to report selected financial
assets and financial liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting
date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently in the
process of evaluating the impact of adopting SFAS 159 on
the Companys consolidated financial position, results of
operations and cash flows.
On August 30, 2005, the Company completed the acquisition
of The May Department Stores Company (May). The
results of Mays operations have been included in the
Consolidated Financial Statements since that date. The acquired
May operations include approximately 500 department stores and
approximately 800 bridal and formalwear stores nationwide. Most
of the acquired May department stores were converted to the
Macys nameplate in September 2006, resulting in a national
retailer with stores in almost all major markets. As a result of
the acquisition and the integration of the acquired May
operations, the Companys continuing operations operate
over 850 stores in 45 states, the District of Columbia,
Guam and Puerto Rico. The Company has previously announced its
intention to divest certain locations of the combined
Companys stores and certain duplicate facilities,
including distribution centers, call centers and corporate
offices. The stores
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
identified for divestiture accounted for approximately
$2.2 billion of annual 2005 sales on a pro forma basis. As
of February 3, 2007, the Company had sold approximately 65
of these stores.
In September 2005 and January 2006, the Company announced its
intention to dispose of the acquired May bridal group business,
which includes the operations of Davids Bridal, After
Hours Formalwear and Priscilla of Boston, and the acquired
Lord & Taylor division of May, respectively. In October
2006, the Company completed the sale of its Lord &
Taylor division for $1,047 million in cash and a long-term
note receivable of approximately $17 million. In January
2007, the Company completed the sale of its Davids Bridal
and Priscilla of Boston businesses for approximately
$740 million in cash. The Mens Wearhouse, Inc. has
agreed to purchase the After Hours Formalwear business for
approximately $100 million, less cash deposits on hand at
the time of sale, and the transaction is expected to close in
the first half of 2007. As a result of the Companys
decision to dispose of these businesses, these businesses are
being reported as discontinued operations.
The acquired May credit card accounts and related receivables
were sold to Citibank in May and July 2006 (see Note 5,
Sale of Credit Card Accounts and Receivables).
The aggregate purchase price for the acquisition of May (the
Merger) was approximately $11.7 billion,
including approximately $5.7 billion of cash and
approximately 200 million shares of Company common stock
and options to purchase an additional 18.8 million shares
of Company common stock valued at approximately
$6.0 billion in the aggregate. The value of the
approximately 200 million shares of Company common stock
was determined based on the average market price of the
Companys stock from February 24, 2005 to
March 2, 2005 (the merger agreement was entered into on
February 27, 2005). In connection with the Merger, the
Company also assumed approximately $6.0 billion of May debt.
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The May purchase price has been allocated to the assets acquired
and liabilities assumed based on their fair values. The
following table summarizes the purchase price allocation at the
date of acquisition:
|
|
|
|
|
|
|
(millions)
|
|
|
Current assets, excluding assets
of discontinued operations
|
|
$
|
5,288
|
|
Assets of discontinued operations
|
|
|
2,264
|
|
Property and equipment
|
|
|
6,579
|
|
Goodwill
|
|
|
8,946
|
|
Intangible assets
|
|
|
679
|
|
Other assets
|
|
|
31
|
|
|
|
|
|
|
Total assets acquired
|
|
|
23,787
|
|
Current liabilities, excluding
short-term debt and liabilities of discontinued operations
|
|
|
(3,222
|
)
|
Liabilities of discontinued
operations
|
|
|
(683
|
)
|
Short-term debt
|
|
|
(248
|
)
|
Long-term debt
|
|
|
(6,256
|
)
|
Other liabilities
|
|
|
(1,629
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(12,038
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
11,749
|
|
|
|
|
|
|
The following pro forma information presents the Companys
net sales, income from continuing operations, net income and
diluted earnings per share as if the Companys acquisition
of May had occurred on January 30, 2005:
|
|
|
|
|
|
|
2005
|
|
|
|
(millions, except
|
|
|
|
per share data)
|
|
|
Net sales
|
|
$
|
28,989
|
|
Income from continuing operations
|
|
|
1,398
|
|
Net income
|
|
|
1,455
|
|
Diluted earnings per share:
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.54
|
|
Income from discontinued operations
|
|
|
.10
|
|
|
|
|
|
|
Net income
|
|
$
|
2.64
|
|
|
|
|
|
|
Pro forma adjustments have been made to reflect depreciation and
amortization using estimated asset values recognized after
applying purchase accounting adjustments and interest expense on
borrowings used to finance the acquisition. Certain
non-recurring charges of $194 million recorded by May prior
to August 30, 2005 directly related to the acquisition,
including $114 million of accelerated stock compensation
expense triggered by the approval of the acquisition by
Mays stockholders and the subsequent completion of the
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquisition, and approximately $66 million of direct
transaction costs, have been excluded from the pro forma
information presented above.
The pro forma information for 2005 includes a $480 million
pre-tax gain recognized on the sale of the proprietary and
non-proprietary credit card accounts and $194 million of
May integration costs and related inventory valuation
adjustments.
This pro forma information is presented for informational
purposes only and is not necessarily indicative of actual
results had the acquisition been effected at the beginning of
the period presented, is not necessarily indicative of future
results, and does not reflect potential synergies, integration
costs, or other such costs or savings.
May integration costs represent the costs associated with the
integration of the acquired May businesses with the
Companys pre-existing businesses and the consolidation of
certain operations of the Company. The Company had announced
that it planned to divest certain store locations and
distribution center facilities as a result of the acquisition of
May.
During 2006, the Company recorded $628 million of
integration costs associated with the acquisition of May,
including $178 million of inventory valuation adjustments
associated with the combination and integration of the
Companys and Mays merchandise assortments. The
remaining $450 million of May integration costs incurred
during the year included store and distribution center
closing-related costs, re-branding-related marketing and
advertising costs, severance, retention and other human
resource-related costs, EDP system integration costs and other
costs, partially offset by approximately $55 million of
gains from the sale of certain Macys locations.
During 2006, approximately $780 million of property and
equipment for approximately 75 May and Macys
locations was transferred to assets held for sale upon store or
facility closure. Property and equipment totaling approximately
$730 million for approximately 65 store and other facility
locations were subsequently disposed of, approximately
$190 million of which was exchanged for other long-term
assets. Assets held for sale are included in other assets on the
Consolidated Balance Sheets.
During 2005, the Company recorded $194 million of
integration costs associated with the acquisition of May,
including $25 million of inventory valuation adjustments
associated with the combination and integration of the
Companys and Mays merchandise assortments.
$125 million of these costs related to impairment charges
of certain Macys locations planned to be disposed of. The
remaining $44 million of May integration costs incurred in
2005 represented expenses associated with the preliminary
planning activities in connection with the consolidation and
integration of Mays businesses with the Companys
pre-existing businesses and included consulting fees, EDP system
integration costs, travel and other costs.
The impairment charges for the Macys locations to be
disposed of were calculated based on the excess of historical
cost over fair value less costs to sell. The fair values were
determined based on prices of similar assets.
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the allocation of the May purchase price in
2005, the Company recorded a liability for termination of May
employees in the amount of $358 million, of which
$69 million had been paid as of January 28, 2006.
During 2006, the Company recorded additional severance and
relocation liabilities for May employees and severance
liabilities for certain Macys employees in connection with
the integration of the acquired May businesses. Severance and
relocation liabilities for May employees recorded prior to the
one-year anniversary of the acquisition of May were allocated to
goodwill and subsequent severance and relocation liabilities
recorded for May employees and all severance liabilities for
Macys employees were charged to May integration costs.
The following table shows, for 2006, the beginning and ending
balance of, and the activity associated with, the severance and
relocation accrual established in connection with the May
integration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
Allocated to
|
|
|
Integration
|
|
|
|
|
|
February 3,
|
|
|
|
|
|
|
2006
|
|
|
Goodwill
|
|
|
Costs
|
|
|
Payments
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
Severance and relocation costs
|
|
$
|
289
|
|
|
$
|
76
|
|
|
$
|
35
|
|
|
$
|
(327
|
)
|
|
$
|
73
|
|
|
|
|
|
The Company expects to pay out the accrued severance and
relocation costs, which are included in accounts payable and
accrued liabilities on the Consolidated Balance Sheets, over the
next two years.
|
|
4.
|
Discontinued
Operations
|
On September 20, 2005 and January 12, 2006, the
Company announced its intention to dispose of the acquired May
bridal group business, which included the operations of
Davids Bridal, After Hours Formalwear and Priscilla of
Boston, and the acquired Lord & Taylor division of May,
respectively. Accordingly, for financial statement purposes, the
assets, liabilities, results of operations and cash flows of
these businesses have been segregated from those of continuing
operations for all periods presented. The net assets of these
businesses are presented in the Consolidated Balance Sheets at
fair value less costs to sell.
In October 2006, the Company completed the sale of its
Lord & Taylor division for approximately
$1,047 million in cash, a long-term note receivable of
approximately $17 million and a receivable for a working
capital adjustment to the purchase price of approximately
$23 million. The Lord & Taylor division
represented approximately $1,130 million of net assets,
before income taxes. After adjustment for transaction costs of
approximately $20 million, the Company recorded the loss on
disposal of the Lord & Taylor division of
$63 million on a pre-tax basis, or $38 million after
income taxes, or $.07 per diluted share.
In January 2007, the Company completed the sale of its
Davids Bridal and Priscilla of Boston businesses for
approximately $740 million in cash, net of $10 million
of transaction costs. The Davids Bridal and Priscilla of
Boston businesses represented approximately $751 million of
net assets, before income taxes. After adjustment for a
liability for a working capital adjustment to the purchase price
and other items totaling approximately $11 million, the
Company recorded the loss on disposal of the Davids Bridal
and Priscilla of Boston businesses of $22 million on a
pre-tax basis, or $18 million after income taxes, or
$.03 per diluted share.
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the divestitures of the Lord &
Taylor, Davids Bridal and Priscilla of Boston businesses,
the Company entered into agreements providing for customary
transition services and certain other marketing and licensing
arrangements, some of which will expire upon the completion of
the Companys planned divestiture of After Hours
Formalwear. The effects of these arrangements are not expected
to be material to the Company.
In connection with the sale of the Davids Bridal and
Priscilla of Boston businesses, the Company agreed to indemnify
the buyer and related parties of the buyer for certain losses or
liabilities incurred by the buyer or such related parties with
respect to (1) certain representations and warranties made
to the buyer by the Company in connection with the sale,
(2) liabilities relating to the After Hours Formalwear
business under certain circumstances, and (3) certain
pre-closing tax obligations. The representations and warranties
in respect of which the Company is subject to indemnification
are generally limited to representations and warranties relating
to the capitalization of the entities that were sold, the
Companys ownership of the equity interests that were sold,
the enforceability of the agreement and certain employee
benefits and tax matters. The indemnity for breaches of most of
these representations expires on March 31, 2008 and is
subject to a deductible of $2.5 million and a cap of
$75 million, with the exception of certain representations
relating to capitalization and the Companys ownership
interest, in respect of which the indemnity does not expire and
is not subject to a cap or deductible.
Indemnity obligations created in connection with the sales of
businesses generally do not represent added liabilities for the
Company, but simply serve to protect the buyer from potential
liabilities associated with particular conditions. The Company
records accruals for those pre-closing obligations that are
considered probable and estimable. Under FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, the Company is required to record
a liability for the fair value of the guarantees that are
entered into subsequent to December 15, 2002. The Company
has not accrued any additional amounts as a result of the
indemnity arrangements summarized above as the Company believes
the fair value of these arrangements is not material.
The Mens Wearhouse, Inc. has agreed to purchase the After
Hours Formalwear business for approximately $100 million,
less cash deposits on hand at the time of sale, and the
transaction is expected to close in the first half of 2007.
Discontinued operations include net sales of approximately
$1,741 million for 2006 and approximately $957 million
for 2005. No consolidated interest expense has been allocated to
discontinued operations. For 2006, income from discontinued
operations, net of the losses on disposal of the Lord &
Taylor division and the Davids Bridal and Priscilla of
Boston businesses, totaled $17 million before income taxes,
with a related income tax expense of $10 million. For 2005,
income from discontinued operations totaled $55 million
before income taxes, with related income tax expense of
$22 million.
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities of discontinued operations are as
follows:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Accounts receivable
|
|
$
|
2
|
|
|
$
|
156
|
|
Merchandise inventories
|
|
|
9
|
|
|
|
419
|
|
Property and Equipment
net
|
|
|
109
|
|
|
|
627
|
|
Goodwill and other intangible
assets net
|
|
|
|
|
|
|
446
|
|
Other assets
|
|
|
6
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126
|
|
|
$
|
1,713
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
48
|
|
|
$
|
317
|
|
Income taxes
|
|
|
|
|
|
|
131
|
|
Other liabilities
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Sale of
Credit Card Accounts and Receivables
|
On October 24, 2005, the Company sold to Citibank certain
proprietary and non-proprietary credit card accounts owned by
the Company, together with related receivables balances, and the
capital stock of Prime Receivables Corporation, a wholly owned
subsidiary of the Company, which owned all of the Companys
interest in the Prime Credit Card Master Trust (the foregoing
and certain related assets being the FDS Credit
Assets). The sale of the FDS Credit Assets for a cash
purchase price of approximately $3.6 billion resulted in a
pre-tax gain of $480 million. The net proceeds received,
after eliminating related receivables backed financings, were
used to repay debt associated with the acquisition of May.
On May 1, 2006, the Company terminated the Companys
credit card program agreement with GE Capital Consumer Card Co.
(GE Bank) and purchased all of the
Macys credit card accounts owned by GE Bank,
together with related receivables balances (the
GE/Macys Credit Assets), as of April 30,
2006. Also on May 1, 2006, the Company sold the
GE/Macys Credit Assets to Citibank, resulting in a pre-tax
gain of approximately $179 million. The net proceeds of
approximately $180 million were used to repay short-term
borrowings associated with the acquisition of May.
On May 22, 2006, the Company sold a portion of the acquired
May credit card accounts and related receivables to Citibank,
resulting in a pre-tax gain of approximately $5 million.
The net proceeds of approximately $800 million were
primarily used to repay short-term borrowings associated with
the acquisition of May.
On July 17, 2006, the Company sold the remaining portion of
the acquired May credit card accounts and related receivables to
Citibank, resulting in a pre-tax gain of approximately
$7 million. The net proceeds of approximately
$1,100 million were used for general corporate purposes.
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the sales of credit card accounts and related
receivable balances, the Company and Citibank entered into a
long-term marketing and servicing alliance pursuant to the terms
of a Credit Card Program Agreement (the Program
Agreement) with an initial term of 10 years expiring
on July 17, 2016 and, unless terminated by either party as
of the expiration of the initial term, an additional renewal
term of three years. The Program Agreement provides for, among
other things, (i) the ownership by Citibank of the accounts
purchased by Citibank, (ii) the ownership by Citibank of
new accounts opened by the Companys customers,
(iii) the provision of credit by Citibank to the holders of
the credit cards associated with the foregoing accounts,
(iv) the servicing of the foregoing accounts, and
(v) the allocation between Citibank and the Company of the
economic benefits and burdens associated with the foregoing and
other aspects of the alliance.
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Due from proprietary credit card
holders
|
|
$
|
|
|
|
$
|
1,863
|
|
Less allowance for doubtful
accounts
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
Estimated premium on acquired May
Credit Assets
|
|
|
|
|
|
|
229
|
|
Other receivables
|
|
|
517
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
517
|
|
|
$
|
2,522
|
|
|
|
|
|
|
|
|
|
|
Sales through the Companys proprietary credit plans were
$1,385 million for 2006, $5,421 million for 2005 and
$4,401 million for 2004. Finance charge income related to
proprietary credit card holders amounted to $106 million
for 2006, $359 million for 2005 and $354 million for
2004. Finance charge income related to non-proprietary credit
card holders amounted to $98 million for 2005 and
$100 million for 2004. The amounts for 2006 include the
impact from the May Credit Assets prior to May 22, 2006 and
July 17, 2006, and the amounts for 2005 include the impact
from the FDS Credit Assets up to October 24, 2005 and the
May Credit Assets since August 30, 2005.
The credit plans relating to certain operations of the Company
were owned by GE Bank prior to April 30, 2006. However, the
Company participated with GE Bank in the net operating results
of such plans. At January 28, 2006, the net balance of
receivables owned by GE Bank amounted to $1,217 million.
Various arrangements between the Company and GE Bank were set
forth in a credit card program agreement.
F-24
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the allowance for doubtful accounts related to
proprietary credit card holders prior to the date of the sale of
the receivables are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
43
|
|
|
$
|
67
|
|
|
$
|
81
|
|
Acquisition
|
|
|
|
|
|
|
45
|
|
|
|
|
|
Charged to costs and expenses
|
|
|
19
|
|
|
|
100
|
|
|
|
117
|
|
Net uncollectible balances
written-off
|
|
|
(21
|
)
|
|
|
(112
|
)
|
|
|
(131
|
)
|
Sale of credit card accounts and
receivables
|
|
|
(41
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
|
$
|
43
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for doubtful accounts related to
non-proprietary credit card holders prior to the date of the
sale of the receivables are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Balance, beginning of year
|
|
$
|
46
|
|
|
$
|
35
|
|
Charged to costs and expenses
|
|
|
43
|
|
|
|
60
|
|
Net uncollectible balances
written-off
|
|
|
(40
|
)
|
|
|
(49
|
)
|
Sale of credit card accounts and
receivables
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories were $5,317 million at
February 3, 2007, compared to $5,459 million at
January 28, 2006. At these dates, the cost of inventories
using the LIFO method approximated the cost of such inventories
using the FIFO method. The application of the LIFO method did
not impact cost of sales for 2006, 2005 or 2004.
F-25
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Land
|
|
$
|
1,804
|
|
|
$
|
1,893
|
|
Buildings on owned land
|
|
|
5,094
|
|
|
|
5,241
|
|
Buildings on leased land and
leasehold improvements
|
|
|
2,434
|
|
|
|
2,728
|
|
Fixtures and equipment
|
|
|
6,642
|
|
|
|
6,261
|
|
Leased properties under
capitalized leases
|
|
|
70
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,044
|
|
|
|
16,250
|
|
Less accumulated depreciation and
amortization
|
|
|
4,571
|
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,473
|
|
|
$
|
12,034
|
|
|
|
|
|
|
|
|
|
|
In connection with various shopping center agreements, the
Company is obligated to operate certain stores within the
centers for periods of up to 20 years. Some of these
agreements require that the stores be operated under a
particular name.
The Company leases a portion of the real estate and personal
property used in its operations. Most leases require the Company
to pay real estate taxes, maintenance and other executory costs;
some also require additional payments based on percentages of
sales and some contain purchase options. Certain of the
Companys real estate leases have terms that extend for
significant numbers of years and provide for rental rates that
increase or decrease over time. In addition, certain of these
leases contain covenants that restrict the ability of the tenant
(typically a subsidiary of the Company) to take specified
actions (including the payment of dividends or other amounts on
account of its capital stock) unless the tenant satisfies
certain financial tests.
F-26
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum rental commitments (excluding executory costs) at
February 3, 2007, for noncancellable
leases are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
Operating
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
10
|
|
|
$
|
225
|
|
|
$
|
235
|
|
2008
|
|
|
9
|
|
|
|
211
|
|
|
|
220
|
|
2009
|
|
|
9
|
|
|
|
193
|
|
|
|
202
|
|
2010
|
|
|
8
|
|
|
|
181
|
|
|
|
189
|
|
2011
|
|
|
7
|
|
|
|
166
|
|
|
|
173
|
|
After 2011
|
|
|
45
|
|
|
|
1,826
|
|
|
|
1,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
88
|
|
|
$
|
2,802
|
|
|
$
|
2,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum
capitalized lease payments
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized leases are included in the Consolidated Balance
Sheets as property and equipment while the related obligation is
included in short-term ($5 million) and long-term
($45 million) debt. Amortization of assets subject to
capitalized leases is included in depreciation and amortization
expense. Total minimum lease payments shown above have not been
reduced by minimum sublease rentals of approximately
$94 million on operating leases.
The Company is a guarantor with respect to certain lease
obligations associated with businesses divested by May prior to
the Merger. The leases, one of which includes potential
extensions to 2087, have future minimum lease payments
aggregating approximately $730 million and are offset by
payments from existing tenants and subtenants. In addition, the
Company is liable for other expenses related to the above
leases, such as property taxes and common area maintenance,
which are also payable by existing tenants and subtenants.
Potential liabilities related to these guarantees are subject to
certain defenses by the Company. The Company believes that the
risk of significant loss from the guarantees of these lease
obligations is remote.
F-27
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rental expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Real estate (excluding executory
costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent rentals
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Operating leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rentals
|
|
|
221
|
|
|
|
189
|
|
|
|
133
|
|
Contingent rentals
|
|
|
23
|
|
|
|
21
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
211
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less income from
subleases Operating leases
|
|
|
(9
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
236
|
|
|
$
|
206
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal property
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
15
|
|
|
$
|
12
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rental expense for operating leases for 2004 reflects a
$42 million reduction for lease accounting policy changes,
including $24 million of deferred rent income amortization.
F-28
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Goodwill
and Other Intangible Assets
|
The following summarizes the Companys goodwill and other
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Non-amortizing
intangible assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
9,204
|
|
|
$
|
9,520
|
|
Tradenames
|
|
|
487
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,691
|
|
|
$
|
10,007
|
|
|
|
|
|
|
|
|
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
Favorable leases
|
|
$
|
283
|
|
|
$
|
411
|
|
Customer relationships
|
|
|
188
|
|
|
|
188
|
|
Tradenames
|
|
|
|
|
|
|
24
|
|
Customer lists
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Favorable leases
|
|
|
(48
|
)
|
|
|
(14
|
)
|
Customer relationships
|
|
|
(27
|
)
|
|
|
(8
|
)
|
Tradenames
|
|
|
|
|
|
|
(10
|
)
|
Customer lists
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
396
|
|
|
$
|
593
|
|
|
|
|
|
|
|
|
|
|
Goodwill during 2006 decreased primarily as a result of the
final purchase price allocation related to the acquisition of
May (see Note 2, Acquisition). Additionally,
certain income tax benefits realized of approximately
$22 million resulting from the exercise of stock options
assumed in the acquisition of May were recorded as a reduction
of goodwill during 2006.
Intangible amortization expense amounted to $69 million for
2006, $33 million for 2005 and less than $1 million
for 2004.
F-29
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future estimated intangible amortization expense is shown below:
|
|
|
|
|
|
|
(millions)
|
|
|
Fiscal year:
|
|
|
|
|
2007
|
|
$
|
44
|
|
2008
|
|
|
44
|
|
2009
|
|
|
43
|
|
2010
|
|
|
42
|
|
2011
|
|
|
41
|
|
As a result of the acquisition of May (see Note 2,
Acquisition), the Company established intangible
assets related to favorable leases, customer lists, customer
relationships and both definite and indefinite lived tradenames.
Favorable lease intangible assets are being amortized over their
respective lease terms (weighted average life of approximately
twelve years), customer relationship intangible assets are being
amortized over their estimated useful lives of ten years, and
customer list intangible assets and certain tradename intangible
assets have been amortized over their estimated useful lives of
one year.
The Companys debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
3.95% Senior notes due 2007
|
|
$
|
400
|
|
|
$
|
|
|
7.9% Senior debentures due
2007
|
|
|
225
|
|
|
|
|
|
9.93% medium term notes due 2007
|
|
|
6
|
|
|
|
|
|
Commercial paper
|
|
|
|
|
|
|
1,199
|
|
8.85% Senior debentures due
2006
|
|
|
|
|
|
|
100
|
|
Capital lease and current portion
of other long-term obligations
|
|
|
19
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
650
|
|
|
$
|
1,323
|
|
|
|
|
|
|
|
|
|
|
F-30
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
5.9% Senior notes due 2016
|
|
$
|
1,100
|
|
|
$
|
|
|
4.8% Senior notes due 2009
|
|
|
600
|
|
|
|
600
|
|
6.625% Senior notes due 2008
|
|
|
500
|
|
|
|
500
|
|
6.625% Senior notes due 2011
|
|
|
500
|
|
|
|
500
|
|
5.75% Senior notes due 2014
|
|
|
500
|
|
|
|
500
|
|
6.9% Senior debentures due
2029
|
|
|
400
|
|
|
|
400
|
|
6.7% Senior debentures due
2034
|
|
|
400
|
|
|
|
400
|
|
6.3% Senior notes due 2009
|
|
|
350
|
|
|
|
350
|
|
7.45% Senior debentures due
2017
|
|
|
300
|
|
|
|
300
|
|
6.65% Senior debentures due
2024
|
|
|
300
|
|
|
|
300
|
|
7.0% Senior debentures due
2028
|
|
|
300
|
|
|
|
300
|
|
6.9% Senior debentures due
2032
|
|
|
250
|
|
|
|
250
|
|
8.0% Senior debentures due
2012
|
|
|
200
|
|
|
|
200
|
|
6.7% Senior debentures due
2028
|
|
|
200
|
|
|
|
200
|
|
6.79% Senior debentures due
2027
|
|
|
165
|
|
|
|
165
|
|
5.95% Senior notes due 2008
|
|
|
150
|
|
|
|
150
|
|
10.625% Senior debentures due
2010
|
|
|
150
|
|
|
|
150
|
|
7.45% Senior debentures due
2011
|
|
|
150
|
|
|
|
150
|
|
7.625% Senior debentures due
2013
|
|
|
125
|
|
|
|
125
|
|
7.45% Senior debentures due
2016
|
|
|
125
|
|
|
|
125
|
|
7.875% Senior debentures due
2036
|
|
|
108
|
|
|
|
200
|
|
7.5% Senior debentures due
2015
|
|
|
100
|
|
|
|
100
|
|
8.125% Senior debentures due
2035
|
|
|
76
|
|
|
|
150
|
|
8.5% Senior notes due 2010
|
|
|
76
|
|
|
|
76
|
|
8.75% Senior debentures due
2029
|
|
|
61
|
|
|
|
250
|
|
9.5% amortizing debentures due 2021
|
|
|
52
|
|
|
|
109
|
|
8.5% Senior debentures due
2019
|
|
|
36
|
|
|
|
200
|
|
10.25% Senior debentures due
2021
|
|
|
33
|
|
|
|
100
|
|
9.75% amortizing debentures due
2021
|
|
|
28
|
|
|
|
91
|
|
7.6% Senior debentures due
2025
|
|
|
24
|
|
|
|
100
|
|
7.875% Senior debentures due
2030
|
|
|
18
|
|
|
|
200
|
|
3.95% Senior notes due 2007
|
|
|
|
|
|
|
400
|
|
7.9% Senior debentures due
2007
|
|
|
|
|
|
|
225
|
|
8.3% Senior debentures due
2026
|
|
|
|
|
|
|
200
|
|
9.93% medium term notes due 2007
|
|
|
|
|
|
|
6
|
|
Premium on acquired debt, using an
effective
interest yield of 4.015% to 6.165%
|
|
|
379
|
|
|
|
681
|
|
Capital lease and other long-term
obligations
|
|
|
91
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,847
|
|
|
$
|
8,860
|
|
|
|
|
|
|
|
|
|
|
F-31
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Interest on debt
|
|
$
|
563
|
|
|
$
|
438
|
|
|
$
|
231
|
|
Amortization of debt premium
|
|
|
(53
|
)
|
|
|
(24
|
)
|
|
|
|
|
Amortization of financing costs
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Interest on capitalized leases
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
(Gain) loss on early retirement of
long-term debt
|
|
|
(54
|
)
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
423
|
|
|
|
299
|
|
Less interest capitalized on
construction
|
|
|
15
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
451
|
|
|
$
|
422
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future maturities of long-term debt, other than capitalized
leases and premium on acquired debt, are shown below:
|
|
|
|
|
|
|
(millions)
|
|
|
Fiscal year:
|
|
|
|
|
2008
|
|
$
|
662
|
|
2009
|
|
|
962
|
|
2010
|
|
|
238
|
|
2011
|
|
|
663
|
|
2012
|
|
|
213
|
|
After 2012
|
|
|
4,685
|
|
During 2006, the Company issued $1,146 million of long-term
debt and repaid $2,680 million of debt, including
$1,199 million of short-term borrowings associated with the
acquisition of May, approximately $957 million aggregate
principal amount of senior unsecured notes repurchased in a
tender offer, $100 million of 8.85% senior debentures
due 2006 and the prepayment of $200 million of
8.30% debentures due 2026.
In November 2006, the Company issued $1,100 million
aggregate principal amount of 5.90% senior unsecured notes
due 2016. In December 2006, the Company used the net proceeds of
the issuance of such notes, together with cash on hand, to
repurchase approximately $957 million aggregate principal
amount of its outstanding senior unsecured notes, which had a
net book value of approximately $1,201 million. The
repurchased outstanding senior unsecured notes had stated
interest rates ranging from 7.60% to 10.25%, a weighted-average
interest rate of 8.53% and had maturities from 2019 to 2036. In
connection with the repurchase of the senior unsecured notes, on
November 21, 2006, the Company entered into reverse
Treasury lock agreements, which are derivative financial
instruments, with an aggregate notional amount of
$900 million. These agreements were settled on
December 4, 2006, with a net payment to the Company of
approximately $4 million. The derivative financial
instruments were used to mitigate the Companys exposure to
interest rate sensitivity during the period between the date on
which the 5.90% senior unsecured notes were priced and the
F-32
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date on which the applicable consideration payable with respect
to the cash repurchase of senior unsecured notes was finalized.
On March 7, 2007, the Company issued $1,100 million
aggregate principal amount of 5.35% senior unsecured notes
due 2012 and $500 million aggregate principal amount of
6.375% senior unsecured notes due 2037. The net proceeds of
the debt issuances were used to repay commercial paper
borrowings incurred in connection with the accelerated share
repurchase agreements and the balance will be used for general
corporate purposes (see Note 19, Subsequent
Events).
The following summarizes certain components of the
Companys debt:
Bank
Credit Agreements
The Company is a party to a five-year credit agreement with
certain financial institutions providing for revolving credit
borrowings and letters of credit in an aggregate amount not to
exceed $2,000 million (which amount may be increased to
$2,500 million at the option of the Company) outstanding at
any particular time. This credit agreement, which was set to
expire August 30, 2010 was amended and restated and will
now expire August 30, 2011.
In connection with the Merger, the Company entered into a
364-day
bridge credit agreement with certain financial institutions
providing for revolving credit borrowings in an aggregate amount
initially not to exceed $5.0 billion outstanding at any
particular time. On June 19, 2006, the Company terminated
the 364-day
bridge credit agreement.
As of February 3, 2007, and January 28, 2006, there
were no revolving credit loans outstanding under any of these
agreements. However, there were $30 million and
$35 million of standby letters of credit outstanding at
February 3, 2007, and January 28, 2006, respectively.
Revolving loans under these agreements bear interest based on
various published rates.
These agreements, which are obligations of a wholly-owned
subsidiary of the Company, are not secured and Federated
Department Stores, Inc. (Parent) has fully and
unconditionally guaranteed these obligations (see Note 21,
Condensed Consolidating Financial Information).
The Companys bank credit agreement requires the Company to
maintain a specified interest coverage ratio of no less than
3.25 and a specified leverage ratio of no more than .62. The
interest coverage ratio for 2006 was 6.92 and at
February 3, 2007 the leverage ratio was .37.
Commercial
Paper
The Company entered into a new unsecured commercial paper
program in 2005 which replaced the previous $1.2 billion
program. The Company may issue and sell commercial paper in an
aggregate amount outstanding at any particular time not to
exceed its then-current combined borrowing availability under
the bank credit agreement described above. The issuance of
commercial paper will have the effect, while such commercial
paper is outstanding, of reducing the Companys borrowing
capacity under the bank credit agreement by an amount equal to
the principal amount of such commercial paper. As of
February 3, 2007, and
F-33
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 28, 2006, the Company had $0 and
$1,199 million of commercial paper outstanding under its
commercial paper program, respectively.
This program, which is an obligation of a wholly-owned
subsidiary of the Company, is not secured and Parent has fully
and unconditionally guaranteed the obligations (see
Note 21, Condensed Consolidating Financial
Information).
Senior
Notes and Debentures
The senior notes and the senior debentures are unsecured
obligations of a wholly-owned subsidiary of the Company and
Parent has fully and unconditionally guaranteed these
obligations (see Note 21, Condensed Consolidating
Financial Information).
Other
Financing Arrangements
There were $23 million of standby letters of credit
outstanding at February 3, 2007 and $1 million of
trade letters of credit and $24 million of standby letters
of credit outstanding at January 28, 2006.
|
|
11.
|
Accounts
Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Merchandise and expense accounts
payable
|
|
$
|
2,454
|
|
|
$
|
2,522
|
|
Liabilities to customers
|
|
|
687
|
|
|
|
643
|
|
Lease related liabilities
|
|
|
250
|
|
|
|
268
|
|
Workers compensation and
general liability reserves
|
|
|
487
|
|
|
|
474
|
|
Severance and
relocation May integration
|
|
|
73
|
|
|
|
289
|
|
Accrued wages and vacation
|
|
|
173
|
|
|
|
259
|
|
Taxes other than income taxes
|
|
|
245
|
|
|
|
321
|
|
Accrued interest
|
|
|
121
|
|
|
|
130
|
|
Current portion of post employment
and postretirement benefits
|
|
|
78
|
|
|
|
|
|
Other
|
|
|
376
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,944
|
|
|
$
|
5,246
|
|
|
|
|
|
|
|
|
|
|
Liabilities to customers includes liabilities related to gift
cards and customer award certificates of $563 million at
February 3, 2007 and $359 million at January 28,
2006 and also includes an estimated allowance for future sales
returns of $78 million at February 3, 2007 and
January 28, 2006. The acquisition of May resulted in an
increase in the estimated allowance for sales returns of
$40 million in 2005. Adjustments to the allowance for
future sales returns, which amounted to a credit of less than
$1 million for 2006, a credit of $4 million for 2005,
and a charge of $1 million for 2004, are reflected in cost
of sales.
F-34
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in workers compensation and general liability
reserves are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
474
|
|
|
$
|
201
|
|
|
$
|
173
|
|
Acquisition
|
|
|
|
|
|
|
248
|
|
|
|
|
|
Charged to costs and expenses
|
|
|
178
|
|
|
|
133
|
|
|
|
112
|
|
Payments, net of recoveries
|
|
|
(165
|
)
|
|
|
(108
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
487
|
|
|
$
|
474
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 3, 2007, workers compensation and general
liability reserves include $94 million of liabilities which
are covered by deposits and receivables included in current
assets on the Consolidated Balance Sheets.
Income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Federal
|
|
$
|
429
|
|
|
$
|
(23
|
)
|
|
$
|
406
|
|
|
$
|
520
|
|
|
$
|
61
|
|
|
$
|
581
|
|
|
$
|
310
|
|
|
$
|
70
|
|
|
$
|
380
|
|
State and local
|
|
|
65
|
|
|
|
(13
|
)
|
|
|
52
|
|
|
|
77
|
|
|
|
13
|
|
|
|
90
|
|
|
|
31
|
|
|
|
16
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
494
|
|
|
$
|
(36
|
)
|
|
$
|
458
|
|
|
$
|
597
|
|
|
$
|
74
|
|
|
$
|
671
|
|
|
$
|
341
|
|
|
$
|
86
|
|
|
$
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense reported differs from the expected tax
computed by applying the federal income tax statutory rate of
35% for 2006, 2005 and 2004 to income from continuing operations
before income taxes. The reasons for this difference and their
tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Expected tax
|
|
$
|
506
|
|
|
$
|
715
|
|
|
$
|
391
|
|
State and local income taxes, net
of federal income tax benefit
|
|
|
35
|
|
|
|
59
|
|
|
|
31
|
|
Favorable settlement of tax
examinations
|
|
|
(80
|
)
|
|
|
(10
|
)
|
|
|
|
|
Reduction of valuation allowance
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
Other
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
458
|
|
|
$
|
671
|
|
|
$
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 24, 2006, the Company received a refund of
$155 million from the Internal Revenue Service
(IRS) as a result of settling an IRS examination for
fiscal years 2000, 2001 and 2002. The refund is primarily
attributable to losses related to the disposition of a former
subsidiary. As a result of the settlement, the Company
recognized a tax benefit of approximately $80 million and
approximately $17 million of interest income in 2006.
F-35
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For 2005, income tax expense benefited from approximately
$89 million related to the reduction in the valuation
allowance associated with the capital loss carryforwards
realized primarily as a result of the sale of the FDS Credit
Assets and $10 million related to the settlement of various
tax examinations.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Post employment and postretirement
benefits
|
|
$
|
511
|
|
|
$
|
560
|
|
Accrued liabilities accounted for
on a cash basis for tax purposes
|
|
|
357
|
|
|
|
482
|
|
Long-term debt
|
|
|
180
|
|
|
|
314
|
|
Federal operating loss
carryforwards
|
|
|
28
|
|
|
|
52
|
|
State operating loss carryforwards
|
|
|
43
|
|
|
|
38
|
|
Other
|
|
|
51
|
|
|
|
52
|
|
Valuation allowance
|
|
|
(24
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,146
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Excess of book basis over tax
basis of property and equipment
|
|
|
(2,007
|
)
|
|
|
(2,198
|
)
|
Merchandise inventories
|
|
|
(420
|
)
|
|
|
(433
|
)
|
Intangible assets
|
|
|
(357
|
)
|
|
|
(423
|
)
|
Accounts receivable
|
|
|
(3
|
)
|
|
|
(137
|
)
|
Other
|
|
|
(139
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,926
|
)
|
|
|
(3,283
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,780
|
)
|
|
$
|
(1,807
|
)
|
|
|
|
|
|
|
|
|
|
The valuation allowance of $24 million at February 3,
2007 and $22 million at January 28, 2006 relates to
net deferred tax assets for state net operating loss
carryforwards. The net change in the valuation allowance
amounted to an increase of $2 million for 2006 and a
decrease of $76 million for 2005. Subsequent realization of
the state net operating loss carryforwards associated with the
valuation allowance at February 3, 2007 would result in an
$8 million reduction to goodwill and a $16 million
reduction to income tax expense.
As of February 3, 2007, the Company had federal net
operating loss carryforwards of approximately $79 million
which will expire between 2008 and 2020 and state net operating
loss carryforwards, net of valuation allowance, of approximately
$549 million which will expire between 2007 and 2027.
F-36
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has a funded defined benefit plan (Pension
Plan) and defined contribution plans (Savings
Plans), which cover substantially all employees who work
1,000 hours or more in a year. In addition, the Company has
an unfunded defined benefit supplementary retirement plan
(SERP), which includes benefits, for certain
employees, in excess of qualified plan limitations. For 2006,
2005 and 2004, retirement expense for these plans totaled
$197 million, $185 million and $86 million,
respectively.
On July 31, 2006, the Company merged the May defined
benefit plan into its Pension Plan and on August 31, 2006,
the Company merged the May SERP into its SERP, which actions
required the Company to remeasure plan assets and obligations.
Measurement of plan assets and obligations for the Pension Plan
and the SERP are calculated as of December 31 of each year.
F-37
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pension
Plan
The following provides a reconciliation of benefit obligations,
plan assets, and funded status of the Pension Plan as of
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Change in projected benefit
obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation,
beginning of year
|
|
$
|
2,807
|
|
|
$
|
1,701
|
|
Acquisition
|
|
|
|
|
|
|
1,095
|
|
Service cost
|
|
|
119
|
|
|
|
84
|
|
Interest cost
|
|
|
163
|
|
|
|
120
|
|
Plan merger
|
|
|
(182
|
)
|
|
|
|
|
Plan amendments
|
|
|
(5
|
)
|
|
|
|
|
Actuarial loss (gain)
|
|
|
257
|
|
|
|
(40
|
)
|
Benefits paid
|
|
|
(341
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end
of year
|
|
$
|
2,818
|
|
|
$
|
2,807
|
|
Changes in plan assets (primarily
stocks, bonds and U.S. government securities)
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
beginning of year
|
|
$
|
2,398
|
|
|
$
|
1,636
|
|
Acquisition
|
|
|
|
|
|
|
629
|
|
Actual return on plan assets
|
|
|
330
|
|
|
|
150
|
|
Plan merger
|
|
|
68
|
|
|
|
|
|
Company contributions
|
|
|
100
|
|
|
|
136
|
|
Benefits paid
|
|
|
(341
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of
year
|
|
$
|
2,555
|
|
|
$
|
2,398
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(263
|
)
|
|
$
|
(409
|
)
|
Unrecognized net loss
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(263
|
)
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
F-38
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Amounts recognized in the
Consolidated Balance Sheets at February 3, 2007:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
Consolidated Balance Sheets at January 28, 2006:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
$
|
(367
|
)
|
Other liabilities (minimum
liability)
|
|
|
|
|
|
|
(14
|
)
|
Accumulated other comprehensive
loss
|
|
|
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated
other comprehensive loss (income) at February 3, 2007:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
296
|
|
|
|
|
|
Prior service credit
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the Pension Plan was
$2,605 million and $2,564 million as of
December 31, 2006 and December 31, 2005, respectively.
Net pension costs for the Companys Pension Plan included
the following actuarially determined components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Service cost
|
|
$
|
119
|
|
|
$
|
84
|
|
|
$
|
45
|
|
Interest cost
|
|
|
163
|
|
|
|
120
|
|
|
|
98
|
|
Expected return on assets
|
|
|
(206
|
)
|
|
|
(165
|
)
|
|
|
(142
|
)
|
Amortization of net actuarial loss
|
|
|
27
|
|
|
|
45
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103
|
|
|
$
|
84
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss and prior service credit for
the Pension Plan that will be amortized from accumulated other
comprehensive loss (income) into net periodic benefit cost
during 2007 are $19 million and $(2) million,
respectively.
As permitted under SFAS No. 87, Employers
Accounting for Pensions, the amortization of any prior
service cost is determined using a straight-line amortization of
the cost over the average remaining service period of employees
expected to receive the benefits under the Pension Plan.
F-39
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following weighted average assumptions were used to
determine benefit obligations for the Pension Plan at
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
5.85
|
%
|
|
|
5.70
|
%
|
Rate of compensation increases
|
|
|
5.40
|
%
|
|
|
5.40
|
%
|
The following weighted average assumptions were used to
determine net periodic pension cost for the Companys
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Discount rate prior to plan merger
|
|
|
5.70
|
%
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
Discount rate subsequent to plan
merger
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
Discount rate on acquired plan at
acquisition date
|
|
|
|
|
|
|
5.25
|
%
|
|
|
|
|
Expected long-term return on plan
assets
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
Rate of compensation increases
|
|
|
5.40
|
%
|
|
|
5.40
|
%
|
|
|
5.80
|
%
|
The Pension Plans assumptions are evaluated annually and
updated as necessary. The Company determines the appropriate
discount rate with reference to the current yield earned on an
index of investment-grade long-term bonds and the impact of a
yield curve analysis to account for the difference in duration
between the long-term bonds and the Pension Plans
estimated payments. The Company develops its long-term rate of
return assumption by evaluating input from several professional
advisors taking into account the asset allocation of the
portfolio and long-term asset class return expectations, as well
as long-term inflation assumptions.
The following provides the weighted average asset allocations,
by asset category, of the assets of the Companys Pension
Plan as of December 31, 2006 and 2005 and the policy
targets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Targets
|
|
|
2006
|
|
|
2005
|
|
|
Equity securities
|
|
|
60
|
%
|
|
|
63
|
%
|
|
|
62
|
%
|
Debt securities
|
|
|
25
|
|
|
|
24
|
|
|
|
27
|
|
Real estate
|
|
|
10
|
|
|
|
9
|
|
|
|
8
|
|
Other
|
|
|
5
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets of the Pension Plan are managed by investment
specialists with the primary objectives of payment of benefit
obligations to the Plan participants and an ultimate realization
of investment returns over longer periods in excess of
inflation. The Company employs a total return investment
approach whereby a mix of domestic and foreign equity
securities, fixed income securities and other investments is
used to maximize the long-term return of the assets of the
Pension Plan for a prudent level of risk. Risks are mitigated
through the asset diversification and the use of multiple
investment managers.
The Company made a $100 million voluntary funding
contribution to the Pension Plan in 2006 and made a
$136 million voluntary funding contribution to the Pension
Plan in 2005. The Company currently anticipates
F-40
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that it will not be required to make any contributions to the
Pension Plan until 2009. As of the date of this report, the
Company is considering making a voluntary funding contribution
to the Pension Plan of $180 million prior to
February 2, 2008.
The following benefit payments are estimated to be paid from the
Pension Plan:
|
|
|
|
|
|
|
(millions)
|
|
|
Fiscal year:
|
|
|
|
|
2007
|
|
$
|
236
|
|
2008
|
|
|
226
|
|
2009
|
|
|
217
|
|
2010
|
|
|
209
|
|
2011
|
|
|
204
|
|
2012-2016
|
|
|
946
|
|
Supplementary
Retirement Plan
The following provides a reconciliation of benefit obligations,
plan assets and funded status of the supplementary retirement
plan as of December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Change in projected benefit
obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation,
beginning of year
|
|
$
|
671
|
|
|
$
|
266
|
|
Acquisition
|
|
|
|
|
|
|
386
|
|
Service cost
|
|
|
9
|
|
|
|
9
|
|
Interest cost
|
|
|
39
|
|
|
|
24
|
|
Plan merger
|
|
|
(54
|
)
|
|
|
|
|
Plan amendments
|
|
|
(5
|
)
|
|
|
|
|
Actuarial loss (gain)
|
|
|
46
|
|
|
|
(1
|
)
|
Benefits paid
|
|
|
(33
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end
of year
|
|
$
|
673
|
|
|
$
|
671
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
beginning of year
|
|
$
|
|
|
|
$
|
|
|
Company contributions
|
|
|
33
|
|
|
|
13
|
|
Benefits paid
|
|
|
(33
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of
year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(673
|
)
|
|
$
|
(671
|
)
|
Unrecognized net loss
|
|
|
|
|
|
|
92
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(673
|
)
|
|
$
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
F-41
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Amounts recognized in the
Consolidated Balance Sheets at February 3, 2007:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
(45
|
)
|
|
|
|
|
Other liabilities
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
Consolidated Balance Sheets at January 28, 2006:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
$
|
(392
|
)
|
Other liabilities (minimum
liability)
|
|
|
|
|
|
|
(265
|
)
|
Accumulated other comprehensive
loss
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated
other comprehensive loss (income) at February 3, 2007:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
75
|
|
|
|
|
|
Prior service credit
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the supplementary
retirement plan was $615 million and $624 million as
of December 31, 2006 and December 31, 2005,
respectively.
Net pension costs for the supplementary retirement plan included
the following actuarially determined components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
8
|
|
Interest cost
|
|
|
39
|
|
|
|
24
|
|
|
|
17
|
|
Recognition of net actuarial loss
|
|
|
8
|
|
|
|
13
|
|
|
|
14
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55
|
|
|
$
|
45
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss and prior service credit for
the supplementary retirement plan that will be amortized from
accumulated other comprehensive loss (income) into net periodic
benefit cost during 2007 are $0 and $(1) million,
respectively.
As permitted under SFAS No. 87, Employers
Accounting for Pensions, the amortization of any prior
service cost is determined using a straight-line amortization of
the cost over the average remaining service period of employees
expected to receive benefits under the plans.
F-42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following weighted average assumptions were used to
determine benefit obligations for the supplementary retirement
plan at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
5.85
|
%
|
|
|
5.70
|
%
|
Rate of compensation increases
|
|
|
7.20
|
%
|
|
|
7.20
|
%
|
The following weighted average assumptions were used to
determine net pension costs for the supplementary retirement
plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Discount rate prior to plan merger
|
|
|
5.70
|
%
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
Discount rate subsequent to plan
merger
|
|
|
6.30
|
%
|
|
|
|
|
|
|
|
|
Discount rate on acquired plan at
acquisition date
|
|
|
|
|
|
|
5.25
|
%
|
|
|
|
|
Rate of compensation increases
|
|
|
7.20
|
%
|
|
|
7.20
|
%
|
|
|
7.70
|
%
|
The supplementary retirement plans assumptions are
evaluated annually and updated as necessary. The Company
determines the appropriate discount rate with reference to the
current yield earned on an index of investment-grade long-term
bonds and the impact of a yield curve analysis to account for
the difference in duration between the long-term bonds and the
supplementary retirement plans estimated payments.
The following benefit payments are estimated to be funded by the
Company and paid from the supplementary retirement plan:
|
|
|
|
|
|
|
(millions)
|
|
|
Fiscal year:
|
|
|
|
|
2007
|
|
$
|
45
|
|
2008
|
|
|
48
|
|
2009
|
|
|
48
|
|
2010
|
|
|
50
|
|
2011
|
|
|
51
|
|
2012-2016
|
|
|
255
|
|
Savings
Plans
The Savings Plans include a voluntary savings feature for
eligible employees. The Companys contribution is based on
the Companys annual earnings and the minimum contribution
is
331/3%
of an employees eligible savings. Expense for the Savings
Plans amounted to $39 million for 2006, $56 million
for 2005 and $25 million for 2004.
Deferred
Compensation Plan
The Company has a deferred compensation plan wherein eligible
executives may elect to defer a portion of their compensation
each year as either stock credits or cash credits. The Company
transfers shares to a trust
F-43
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to cover the number management estimates will be needed for
distribution on account of stock credits currently outstanding.
At February 3, 2007, and January 28, 2006, the
liability under the plan, which is reflected in other
liabilities on the Consolidated Balance Sheets, was
$48 million and $45 million, respectively. Expense for
2006, 2005 and 2004 was immaterial.
|
|
14.
|
Postretirement
Health Care and Life Insurance Benefits
|
In addition to pension and other supplemental benefits, certain
retired employees currently are provided with specified health
care and life insurance benefits. Eligibility requirements for
such benefits vary by division and subsidiary, but generally
state that benefits are available to eligible employees who were
hired prior to a certain date and retire after a certain age
with specified years of service. Certain employees are subject
to having such benefits modified or terminated.
Measurement of obligations for the postretirement obligations
are calculated as of December 31 of each year.
F-44
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following provides a reconciliation of benefit obligations,
plan assets, and funded status of the postretirement obligations
as of December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Change in accumulated
postretirement benefit obligation
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit
obligation, beginning of year
|
|
$
|
359
|
|
|
$
|
293
|
|
Acquisition
|
|
|
|
|
|
|
90
|
|
Service cost
|
|
|
|
|
|
|
1
|
|
Interest cost
|
|
|
20
|
|
|
|
18
|
|
Actuarial (gain) loss
|
|
|
15
|
|
|
|
(15
|
)
|
Medicare Part D subsidy
|
|
|
2
|
|
|
|
|
|
Benefits paid
|
|
|
(35
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit
obligation, end of year
|
|
$
|
361
|
|
|
$
|
359
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
beginning of year
|
|
$
|
|
|
|
$
|
|
|
Company contributions
|
|
|
35
|
|
|
|
28
|
|
Benefits paid
|
|
|
(35
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of
year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(361
|
)
|
|
$
|
(359
|
)
|
Unrecognized net loss
|
|
|
|
|
|
|
6
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(361
|
)
|
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
(33
|
)
|
|
$
|
|
|
Other liabilities
|
|
|
(328
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(361
|
)
|
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated
other comprehensive loss (income):
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
19
|
|
|
|
|
|
Prior service credit
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net postretirement benefit costs included the following
actuarially determined components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
20
|
|
|
|
18
|
|
|
|
16
|
|
Recognition of net actuarial
(gain) loss
|
|
|
1
|
|
|
|
2
|
|
|
|
(2
|
)
|
Amortization of prior service cost
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19
|
|
|
$
|
16
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss and prior service credit of the
postretirement obligations that will be amortized from
accumulated other comprehensive loss (income) into net
postretirement benefit cost during 2007 are $1 million and
$(1) million, respectively.
As permitted under SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than
Pensions, the amortization of any prior service cost is
determined using a straight-line amortization of the cost over
the average remaining service period of employees expected to
receive benefits under the plan.
The following weighted average assumptions were used to
determine benefit obligations for the postretirement obligations
at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
5.85
|
%
|
|
|
5.70
|
%
|
The following weighted average assumptions were used to
determine net postretirement benefit expense for the
postretirement obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Discount rate
|
|
|
5.70
|
%
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
Discount rate on acquired plan at
acquisition date
|
|
|
|
|
|
|
5.25
|
%
|
|
|
|
|
The postretirement obligation assumptions are evaluated annually
and updated as necessary. The Company determines the appropriate
discount rate with reference to the current yield earned on an
index of investment-grade long-term bonds and the impact of a
yield curve analysis to account for the difference in duration
between the long-term bonds and the postretirement
obligations estimated payments.
The future medical benefits provided by the Company for certain
employees are based on a fixed amount per year of service, and
the accumulated postretirement benefit obligation is not
affected by increases in health care costs. However, the future
medical benefits provided by the Company for certain other
employees are affected by increases in health care costs.
F-46
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following provides the assumed health care cost trend rates
related to the Companys postretirement obligations at
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Health care cost trend rates
assumed for next year
|
|
|
9.75%-11.75%
|
|
|
|
9.0%-12.5%
|
|
Rates to which the cost trend rate
is assumed to
decline (the ultimate trend rate)
|
|
|
5.0%
|
|
|
|
5.0%
|
|
Year that the rate reaches the
ultimate trend rate
|
|
|
2022
|
|
|
|
2016
|
|
The assumed health care cost trend rates have a significant
effect on the amounts reported for the postretirement
obligations. A one-percentage-point change in the assumed health
care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1 Percentage
|
|
|
1 Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(millions)
|
|
|
Effect on total of service and
interest cost
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
Effect on postretirement benefit
obligations
|
|
$
|
18
|
|
|
$
|
(16
|
)
|
The following benefit payments are estimated to be funded by the
Company and paid from the postretirement obligations:
|
|
|
|
|
|
|
(millions)
|
|
|
Fiscal year:
|
|
|
|
|
2007
|
|
$
|
33
|
|
2008
|
|
|
33
|
|
2009
|
|
|
32
|
|
2010
|
|
|
32
|
|
2011
|
|
|
32
|
|
2012-2016
|
|
|
144
|
|
The estimated benefit payments reflect estimated federal
subsidies expected to be received under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 of
$2 million in each of 2007, 2008, 2009, 2010 and 2011 and
$8 million for the period 2012 to 2016.
|
|
15.
|
Stock
Based Compensation
|
The Company has equity plans intended to provide an equity
interest in the Company to key management personnel and thereby
provide additional incentives for such persons to devote
themselves to the maximum extent practicable to the businesses
of the Company and its subsidiaries. As of the date of the
Merger, the Company assumed Mays equity plan, which has
since been amended to have identical terms and provisions of the
Companys other equity plan. At the date of the Merger, all
outstanding May options under Mays equity plan were fully
vested and were converted into options to acquire common stock
of the Company in accordance with the Merger agreement. The
following disclosures present the Companys equity plans on
a
F-47
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
combined basis. The equity plans are administered by the
Compensation and Management Development Committee of the Board
of Directors (the Compensation Committee). The
Compensation Committee is authorized to grant options, stock
appreciation rights, restricted stock and restricted stock units
to officers and key employees of the Company and its
subsidiaries and to non-employee directors. Stock option grants
have an exercise price at least equal to the market value of the
underlying common stock on the date of grant, have ten-year
terms and typically vest ratably over four years of continued
service.
The Company also has a stock credit plan. Beginning in 2004, key
management personnel became eligible to earn a stock credit
grant over a two-year performance period ended January 28,
2006. In general, each stock credit is intended to represent the
right to receive the value associated with one share of the
Companys common stock. There were a total of 778,386 stock
credit awards outstanding as of February 3, 2007, including
reinvested dividend equivalents earned during the holding
period, relating to the 2004 grant. The value of one-half of the
stock credits awarded to participants in 2004 will be paid in
cash in early 2008 and the value of the other half of such stock
credits will be paid in cash in early 2009. Additionally, in
2006, key management personnel became eligible to earn a stock
credit grant over a two-year performance period ending
February 2, 2008. There were a total of 1,545,661 stock
credits awarded for the 2006 grant which remain outstanding as
of February 3, 2007. In general, the value of one-half of
the stock credits awarded to participants in 2006 will be paid
in cash in early 2010 and the value of the other half of such
stock credits will be paid in cash in early 2011. Compensation
expense for stock credit awards is recorded on a straight-line
basis over the vesting period and is calculated based on the
ending stock price for each reporting period.
Prior to January 29, 2006, the Company accounted for its
stock-based employee compensation plans in accordance with
Accounting Principles Board (APB) Opinion
No. 25 and related interpretations. No stock-based employee
compensation cost related to stock options had been reflected in
net income, as all options granted under the plans had an
exercise price at least equal to the market value of the
underlying common stock on the date of grant.
Effective January 29, 2006, the Company adopted the fair
value recognition provisions of SFAS 123R, using the
modified prospective transition method. Under this transition
method, compensation expense that the Company recognizes
beginning on that date includes expense associated with the fair
value of all awards granted on and after January 29, 2006,
and expense for the nonvested portion of previously granted
awards outstanding on January 29, 2006. Results for prior
periods have not been restated.
During 2006, the Company recorded approximately $47 million
of stock-based compensation expense for stock options,
approximately $41 million of stock-based compensation
expense for stock credits and approximately $3 million of
stock based compensation expense for restricted stock. During
2005, the Company recorded approximately $9 million of
stock-based compensation expense for stock credits and
approximately $1 million of stock based compensation
expense for restricted stock. During 2004, the Company recorded
approximately $9 million of stock-based compensation
expense for stock credits and approximately $3 million of
stock based compensation expense for restricted stock. All
stock-based compensation expense is recorded in selling, general
and administrative expense in the Consolidated Statements of
Income. The income tax benefit recognized in the Consolidated
Statements of Income related to stock-based compensation was
approximately $34 million, approximately $4 million,
and approximately $5 million for 2006, 2005 and 2004,
respectively.
F-48
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The
Company estimates the expected volatility and expected option
life assumption consistent with SFAS 123R and Securities
and Exchange Commission Staff Accounting
Bulletin No. 107. The expected volatility of the
Companys common stock at the date of grant is estimated
based on a historic volatility rate and the expected option life
is calculated based on historical stock option experience as the
best estimate of future exercise patterns. The dividend yield
assumption is based on historical and anticipated dividend
payouts. The risk-free interest rate assumption is based on
observed interest rates consistent with the expected life of
each stock option grant. The Company uses historical data to
estimate pre-vesting option forfeitures and records stock-based
compensation expense only for those awards that are expected to
vest. For options granted, the Company recognizes the fair value
on a straight-line basis primarily over the vesting period of
the options.
The fair value of stock-based awards granted during 2006, 2005
and 2004 and the weighted average assumptions used to estimate
the fair value of stock options are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average grant date fair
value of stock options granted during the period
|
|
$
|
13.83
|
|
|
$
|
10.54
|
|
|
$
|
10.14
|
|
Weighted average grant date fair
value of restricted stock granted during the period
|
|
$
|
36.24
|
|
|
|
N/A
|
|
|
$
|
25.25
|
|
Dividend yield
|
|
|
1.5
|
%
|
|
|
1.8
|
%
|
|
|
1.0
|
%
|
Expected volatility
|
|
|
39.8
|
%
|
|
|
37.5
|
%
|
|
|
41.5
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.3
|
%
|
|
|
3.1
|
%
|
Expected life
|
|
|
5.3 years
|
|
|
|
5.3 years
|
|
|
|
6 years
|
|
F-49
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the pro forma effect on net
income and earnings per share for 2005 and 2004 as if the
Company had applied the fair value recognition provisions of
SFAS 123R for stock options granted prior to
January 29, 2006.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions, except per share data)
|
|
|
Net income, as reported
|
|
$
|
1,406
|
|
|
$
|
689
|
|
Add stock-based employee
compensation cost included in reported net income, net
of related tax benefit
|
|
|
7
|
|
|
|
7
|
|
Deduct stock-based employee
compensation cost determined under the
fair value method for all awards, net of related tax benefit
|
|
|
(39
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
1,374
|
|
|
$
|
655
|
|
|
|
|
|
|
|
|
|
|
Earnings per share net
income:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
3.30
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
3.23
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
3.24
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
3.15
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
Stock option activity for 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
|
(thousands)
|
|
|
|
|
|
(years)
|
|
|
(millions)
|
|
|
Outstanding, beginning of period
|
|
|
48,364.6
|
|
|
$
|
25.51
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,541.3
|
|
|
|
36.96
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited
|
|
|
(1,723.8
|
)
|
|
|
34.65
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12,537.6
|
)
|
|
|
25.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
40,644.5
|
|
|
$
|
26.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
27,219.8
|
|
|
$
|
25.26
|
|
|
|
4.4
|
|
|
$
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest
|
|
|
11,467.6
|
|
|
$
|
30.51
|
|
|
|
8.2
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised was
$168 million, $156 million and $126 million in
2006, 2005 and 2004, respectively. The total grant-date fair
value of stock options that vested during 2006, 2005 and 2004
was $57 million, $66 million and $83 million,
respectively. Cash received from stock option exercises under
the Companys equity plan amounted to approximately
$319 million for 2006, $273 million for 2005
F-50
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and $245 million for 2004. Tax benefits realized from
exercised stock options and vested restricted stock amounted to
approximately $62 million for 2006, $61 million for
2005 and $49 million for 2004.
Restricted stock award activity for 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested, beginning of period
|
|
|
101,500
|
|
|
$
|
12.97
|
|
Granted
|
|
|
286,000
|
|
|
|
36.24
|
|
Vested
|
|
|
(500
|
)
|
|
|
25.25
|
|
|
|
|
|
|
|
|
|
|
Nonvested, end of period
|
|
|
387,000
|
|
|
$
|
30.15
|
|
|
|
|
|
|
|
|
|
|
During 2006, 286,000 shares of Common Stock were granted in
the form of restricted stock at per share market values of
$35.82 to $36.44, fully vesting after three years. No shares of
common stock were granted in the form of restricted stock during
2005. During 2004, 2,000 shares of Common Stock were
granted in the form of restricted stock at a per share market
value of $25.25, vesting ratably over four years. Compensation
expense is recorded for all restricted stock grants based on the
amortization of the fair market value at the time of grant of
the restricted stock over the period the restrictions lapse.
There have been no grants of restricted stock units or stock
appreciation rights under the equity plans.
As of February 3, 2007, 27.4 million shares of common
stock were available for additional grants pursuant to the
Companys equity plans, of which 3.8 million shares
were available for grant in the form of restricted stock or
restricted stock units. Common stock is delivered out of
treasury stock upon the exercise of stock options and grant of
restricted stock.
As of February 3, 2007, the Company had $91 million of
unrecognized compensation costs related to nonvested stock
options, which is expected to be recognized over a weighted
average period of approximately 1.8 years. As of
February 3, 2007, the Company had $8 million of
unrecognized compensation costs related to nonvested restricted
stock awards which is expected to be recognized over a weighted
average period of approximately 1.7 years.
The authorized shares of the Company consist of
125.0 million shares of preferred stock (Preferred
Stock), par value of $.01 per share, with no shares
issued, and 1,000 million shares of Common Stock, par value
of $.01 per share, with 604.0 million shares of Common
Stock issued and 496.9 million shares of Common Stock
outstanding at February 3, 2007, and 598.4 million
shares of Common Stock issued and 546.8 million shares of
Common Stock outstanding at January 28, 2006 (with shares
held in the Companys treasury being treated as issued, but
not outstanding).
On May 19, 2006, the Companys board of directors
approved a
two-for-one
stock split to be effected in the form of a stock dividend. The
additional shares resulting from the stock split were
distributed on June 9, 2006 to shareholders of record on
May 26, 2006.
F-51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2005, in connection with the Merger, the Company issued
approximately 200 million shares of Company common stock
and options to purchase an additional 18.8 million shares
of Company common stock valued at approximately
$6.0 billion in the aggregate. During 2004, the Company
retired 38 million shares of its common stock.
The Companys board of directors initially approved a
$500 million authorization to purchase common stock on
January 27, 2000 and approved additional $500 million
authorizations on each of August 25, 2000, May 18,
2001 and April 16, 2003, additional $750 million
authorizations on each of February 27, 2004 and
July 20, 2004 and an additional authorization of
$2,000 million on August 25, 2006. All authorizations
are cumulative and do not have an expiration date. Under its
share repurchase program, the Company purchased
62.4 million shares of Common Stock at a cost of
approximately $2,500 million in 2006 and 36.7 million
shares of Common Stock at a cost of approximately
$900 million in 2004. No shares of Common Stock were
purchased under its share repurchase program in 2005. As of
February 3, 2007, the Companys share repurchase
program had approximately $170 million of authorization
remaining.
On February 26, 2007, the Companys board of directors
approved an additional $4,000 million authorization to the
Companys existing share repurchase program. The Company
used a portion of this authorization to effect the immediate
repurchase of 45 million outstanding shares for an initial
payment of approximately $2,000 million, subject to
adjustment pursuant to the terms of the related accelerated
share repurchase agreements. With this additional authorization
to the share repurchase program and the immediate repurchase
agreements entered into by the Company, the repurchase program
had approximately $2,170 million of authorization remaining
as of April 3, 2007 (See Note 19, Subsequent
Events).
Common
Stock
The holders of the Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of
shareholders. Subject to preferential rights that may be
applicable to any Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by
the Board of Directors in its discretion, out of funds legally
available therefor.
Treasury
Stock
Treasury stock contains shares repurchased under the share
repurchase program, shares repurchased to cover employee tax
liabilities related to stock plan activity and shares maintained
in a trust related to the deferred compensation plans. Under the
deferred compensation plans, shares are maintained in a trust to
cover the number estimated to be needed for distribution on
account of stock credits currently outstanding.
F-52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the Companys Common Stock issued and
outstanding, including shares held by the Companys
treasury, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Common
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
Stock
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
Issued
|
|
|
Plans
|
|
|
Other
|
|
|
Total
|
|
|
Outstanding
|
|
|
|
(thousands)
|
|
|
Balance at January 31, 2004
|
|
|
434,775.7
|
|
|
|
(1,197.9
|
)
|
|
|
(76,611.6
|
)
|
|
|
(77,809.5
|
)
|
|
|
356,966.2
|
|
Stock issued under stock plans
|
|
|
|
|
|
|
(78.4
|
)
|
|
|
14,136.0
|
|
|
|
14,057.6
|
|
|
|
14,057.6
|
|
Stock repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase program
|
|
|
|
|
|
|
|
|
|
|
(36,696.2
|
)
|
|
|
(36,696.2
|
)
|
|
|
(36,696.2
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(95.6
|
)
|
|
|
(95.6
|
)
|
|
|
(95.6
|
)
|
Deferred compensation plan
distributions
|
|
|
|
|
|
|
58.0
|
|
|
|
|
|
|
|
58.0
|
|
|
|
58.0
|
|
Retirement of common stock
|
|
|
(38,000.0
|
)
|
|
|
|
|
|
|
38,000.0
|
|
|
|
38,000.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2005
|
|
|
396,775.7
|
|
|
|
(1,218.3
|
)
|
|
|
(61,267.4
|
)
|
|
|
(62,485.7
|
)
|
|
|
334,290.0
|
|
Stock issued in acquisition
|
|
|
199,449.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199,449.2
|
|
Stock issued under stock plans
|
|
|
2,183.9
|
|
|
|
(68.8
|
)
|
|
|
11,080.4
|
|
|
|
11,011.6
|
|
|
|
13,195.5
|
|
Stock repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(224.0
|
)
|
|
|
(224.0
|
)
|
|
|
(224.0
|
)
|
Deferred compensation plan
distributions
|
|
|
|
|
|
|
75.6
|
|
|
|
|
|
|
|
75.6
|
|
|
|
75.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
598,408.8
|
|
|
|
(1,211.5
|
)
|
|
|
(50,411.0
|
)
|
|
|
(51,622.5
|
)
|
|
|
546,786.3
|
|
Stock issued under stock plans
|
|
|
5,629.7
|
|
|
|
(72.8
|
)
|
|
|
6,988.8
|
|
|
|
6,916.0
|
|
|
|
12,545.7
|
|
Stock repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase program
|
|
|
|
|
|
|
|
|
|
|
(62,447.6
|
)
|
|
|
(62,447.6
|
)
|
|
|
(62,447.6
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(5.1
|
)
|
|
|
(5.1
|
)
|
|
|
(5.1
|
)
|
Deferred compensation plan
distributions
|
|
|
|
|
|
|
45.3
|
|
|
|
|
|
|
|
45.3
|
|
|
|
45.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
|
604,038.5
|
|
|
|
(1,239.0
|
)
|
|
|
(105,874.9
|
)
|
|
|
(107,113.9
|
)
|
|
|
496,924.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Financial
Instruments and Concentrations of Credit Risk
|
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash and
cash equivalents and short-term investments
The carrying amount approximates fair value because of the short
maturity of these instruments.
F-53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
receivable
The carrying amount approximates fair value because of the short
average maturity of the instruments, and because the carrying
amount at January 28, 2006 reflects a reasonable estimate
of losses from doubtful accounts.
Long-term
debt
The fair values of the Companys long-term debt, excluding
capitalized leases, are estimated based on the quoted market
prices for publicly traded debt or by using discounted cash flow
analysis, based on the Companys current incremental
borrowing rates for similar types of borrowing arrangements.
The estimated fair values of certain financial instruments of
the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
January 28, 2006
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Fair
|
|
|
Notional
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Amount
|
|
|
Value
|
|
|
|
(millions)
|
|
|
Long-term debt
|
|
$
|
7,423
|
|
|
$
|
7,802
|
|
|
$
|
7,567
|
|
|
$
|
8,080
|
|
|
$
|
8,761
|
|
|
$
|
8,777
|
|
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The Company places its
temporary cash investments in what it believes to be high credit
quality financial instruments. Credit risk with respect to
accounts receivable is concentrated in the geographic regions in
which the Company operates stores. Such concentrations, however,
are considered to be limited because of the Companys large
number of stores and their dispersion across many regions.
F-54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation of basic earnings per share to diluted
earnings per share based on income from continuing operations is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Income
|
|
|
Shares
|
|
|
Income
|
|
|
Shares
|
|
|
Income
|
|
|
Shares
|
|
|
|
|
|
|
(millions, except per share data)
|
|
|
|
|
|
Income from continuing operations
and average number of shares outstanding
|
|
$
|
988
|
|
|
|
539.0
|
|
|
$
|
1,373
|
|
|
|
425.2
|
|
|
$
|
689
|
|
|
|
349.0
|
|
Shares to be issued under deferred
compensation plans
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
988
|
|
|
|
540.0
|
|
|
$
|
1,373
|
|
|
|
426.0
|
|
|
$
|
689
|
|
|
|
350.2
|
|
Basic earnings per share
|
|
$1.83
|
|
$3.22
|
|
$1.97
|
|
|
|
|
|
|
|
Effect of dilutive
securities Stock options and restricted stock
|
|
|
|
|
|
|
7.7
|
|
|
|
|
|
|
|
8.6
|
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
988
|
|
|
|
547.7
|
|
|
$
|
1,373
|
|
|
|
434.6
|
|
|
$
|
689
|
|
|
|
356.4
|
|
Diluted earnings per share
|
|
$1.80
|
|
$3.16
|
|
$1.93
|
|
|
|
|
|
|
|
In addition to the stock options and restricted stock reflected
in the foregoing table, stock options to purchase and restricted
stock of 1.7 million shares of common stock at prices
ranging from $40.27 to $44.45 per share were outstanding at
February 3, 2007, stock options to purchase
5.8 million shares of common stock at prices ranging from
$34.84 to $40.26 per share were outstanding at
January 28, 2006 and stock options to purchase
0.8 million shares of common stock at prices ranging from
$32.03 to $39.72 per share were outstanding at
January 31, 2005 but were not included in the computation
of diluted earnings per share because their inclusion would have
been antidilutive.
On February 26, 2007, the Companys board of directors
approved an additional $4,000 million authorization to the
Companys existing share repurchase program. The Company
used a portion of this authorization to effect the immediate
repurchase of 45 million outstanding shares for an initial
payment of approximately $2,000 million, subject to
adjustment pursuant to the terms of the related accelerated
share repurchase agreements. With this additional authorization
to the share repurchase program and the immediate repurchase
agreements entered into by the Company, the repurchase program
had approximately $2,170 million of authorization remaining
as of April 3, 2007.
On March 7, 2007, the Company issued $1,100 million
aggregate principal amount of 5.35% senior unsecured notes
due 2012 and $500 million aggregate principal amount of
6.375% senior unsecured notes due 2037. The net proceeds of
the debt issuances were used to repay commercial paper
borrowings incurred in connection with the accelerated share
repurchase agreements and the balance will be used for general
corporate purposes.
F-55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20.
|
Quarterly
Results (unaudited)
|
Unaudited quarterly results for the last two years were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(millions, except per share data)
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,930
|
|
|
$
|
5,995
|
|
|
$
|
5,886
|
|
|
$
|
9,159
|
|
Cost of sales
|
|
|
(3,627
|
)
|
|
|
(3,470
|
)
|
|
|
(3,513
|
)
|
|
|
(5,409
|
)
|
Inventory valuation
adjustments May integration
|
|
|
(6
|
)
|
|
|
(134
|
)
|
|
|
(28
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
2,297
|
|
|
|
2,391
|
|
|
|
2,345
|
|
|
|
3,740
|
|
Selling, general and
administrative expenses
|
|
|
(2,154
|
)
|
|
|
(2,117
|
)
|
|
|
(2,094
|
)
|
|
|
(2,313
|
)
|
May integration costs
|
|
|
(123
|
)
|
|
|
(43
|
)
|
|
|
(117
|
)
|
|
|
(167
|
)
|
Gains on sale of accounts
receivable
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(74
|
)
|
|
|
282
|
|
|
|
20
|
|
|
|
760
|
|
Discontinued operations
|
|
|
22
|
|
|
|
35
|
|
|
|
(23
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(52
|
)
|
|
|
317
|
|
|
|
(3
|
)
|
|
|
733
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(.13
|
)
|
|
|
.51
|
|
|
|
.03
|
|
|
|
1.47
|
|
Net income (loss)
|
|
|
(.09
|
)
|
|
|
.57
|
|
|
|
(.01
|
)
|
|
|
1.42
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(.13
|
)
|
|
|
.51
|
|
|
|
.03
|
|
|
|
1.45
|
|
Net income (loss)
|
|
|
(.09
|
)
|
|
|
.57
|
|
|
|
(.01
|
)
|
|
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,641
|
|
|
$
|
3,623
|
|
|
$
|
5,555
|
|
|
$
|
9,571
|
|
Cost of sales
|
|
|
(2,176
|
)
|
|
|
(2,126
|
)
|
|
|
(3,312
|
)
|
|
|
(5,658
|
)
|
Inventory valuation
adjustments May integration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,465
|
|
|
|
1,497
|
|
|
|
2,243
|
|
|
|
3,888
|
|
Selling, general and
administrative expenses
|
|
|
(1,213
|
)
|
|
|
(1,206
|
)
|
|
|
(1,973
|
)
|
|
|
(2,588
|
)
|
May integration costs
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
(106
|
)
|
Gain on sale of accounts receivable
|
|
|
|
|
|
|
|
|
|
|
480
|
|
|
|
|
|
Income from continuing operations
|
|
|
123
|
|
|
|
148
|
|
|
|
424
|
|
|
|
678
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
123
|
|
|
|
148
|
|
|
|
436
|
|
|
|
699
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
.36
|
|
|
|
.43
|
|
|
|
.88
|
|
|
|
1.24
|
|
Net income
|
|
|
.36
|
|
|
|
.43
|
|
|
|
.91
|
|
|
|
1.28
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
.36
|
|
|
|
.42
|
|
|
|
.87
|
|
|
|
1.22
|
|
Net income
|
|
|
.36
|
|
|
|
.42
|
|
|
|
.90
|
|
|
|
1.26
|
|
F-56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
21.
|
Condensed
Consolidating Financial Information
|
Parent has fully and unconditionally guaranteed certain
long-term debt obligations of its wholly-owned subsidiary,
Federated Retail Holdings, Inc. (Subsidiary Issuer).
Other Subsidiaries includes all other direct
subsidiaries of Parent, including FDS Bank, FDS Insurance,
Leadville Insurance Company, Snowdin Insurance Company,
Priscilla of Boston, and Davids Bridal, Inc. and its
subsidiaries, including After Hours Formalwear, Inc.
Subsidiary Issuer includes operating divisions and
non-guarantor subsidiaries of the Subsidiary Issuer on an equity
basis. The assets and liabilities and results of operations of
the non-guarantor subsidiaries of the Subsidiary Issuer are also
reflected in Other Subsidiaries.
Condensed Consolidating Balance Sheets as of February 3,
2007 and January 28, 2006, the related Condensed
Consolidating Statements of Income for 2006, 2005 and 2004, and
the related Condensed Consolidating Statements of Cash Flows for
2006, 2005, and 2004 are presented below.
F-57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 3, 2007
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
968
|
|
|
$
|
73
|
|
|
$
|
171
|
|
|
$
|
(1
|
)
|
|
$
|
1,211
|
|
Accounts receivable
|
|
|
2
|
|
|
|
98
|
|
|
|
419
|
|
|
|
(2
|
)
|
|
|
517
|
|
Merchandise inventories
|
|
|
|
|
|
|
2,654
|
|
|
|
2,672
|
|
|
|
(9
|
)
|
|
|
5,317
|
|
Supplies and prepaid expenses
|
|
|
|
|
|
|
130
|
|
|
|
126
|
|
|
|
(5
|
)
|
|
|
251
|
|
Income taxes
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,001
|
|
|
|
2,955
|
|
|
|
3,440
|
|
|
|
26
|
|
|
|
7,422
|
|
Property and Equipment
net
|
|
|
3
|
|
|
|
6,028
|
|
|
|
5,550
|
|
|
|
(108
|
)
|
|
|
11,473
|
|
Goodwill
|
|
|
|
|
|
|
5,443
|
|
|
|
3,761
|
|
|
|
|
|
|
|
9,204
|
|
Other Intangible Assets
net
|
|
|
|
|
|
|
303
|
|
|
|
580
|
|
|
|
|
|
|
|
883
|
|
Other Assets
|
|
|
4
|
|
|
|
211
|
|
|
|
354
|
|
|
|
(1
|
)
|
|
|
568
|
|
Deferred Income Tax Assets
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Intercompany Receivable
|
|
|
1,923
|
|
|
|
|
|
|
|
2,299
|
|
|
|
(4,222
|
)
|
|
|
|
|
Investment in Subsidiaries
|
|
|
9,524
|
|
|
|
6,779
|
|
|
|
|
|
|
|
(16,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,458
|
|
|
$
|
21,719
|
|
|
$
|
15,984
|
|
|
$
|
(20,611
|
)
|
|
$
|
29,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY:
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
|
|
|
$
|
647
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
650
|
|
Accounts payable and accrued
liabilities
|
|
|
197
|
|
|
|
1,989
|
|
|
|
2,807
|
|
|
|
(49
|
)
|
|
|
4,944
|
|
Income taxes
|
|
|
|
|
|
|
272
|
|
|
|
424
|
|
|
|
(31
|
)
|
|
|
665
|
|
Deferred income taxes
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
52
|
|
Liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
197
|
|
|
|
3,011
|
|
|
|
3,234
|
|
|
|
(83
|
)
|
|
|
6,359
|
|
Long-Term Debt
|
|
|
|
|
|
|
7,809
|
|
|
|
38
|
|
|
|
|
|
|
|
7,847
|
|
Intercompany Payable
|
|
|
|
|
|
|
4,222
|
|
|
|
|
|
|
|
(4,222
|
)
|
|
|
|
|
Deferred Income Taxes
|
|
|
|
|
|
|
899
|
|
|
|
832
|
|
|
|
(3
|
)
|
|
|
1,728
|
|
Other Liabilities
|
|
|
7
|
|
|
|
15
|
|
|
|
1,340
|
|
|
|
|
|
|
|
1,362
|
|
Shareholders Equity
|
|
|
12,254
|
|
|
|
5,763
|
|
|
|
10,540
|
|
|
|
(16,303
|
)
|
|
|
12,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
12,458
|
|
|
$
|
21,719
|
|
|
$
|
15,984
|
|
|
$
|
(20,611
|
)
|
|
$
|
29,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR 2006
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
14,488
|
|
|
$
|
16,154
|
|
|
$
|
(3,672
|
)
|
|
$
|
26,970
|
|
Cost of sales
|
|
|
|
|
|
|
(8,946
|
)
|
|
|
(9,776
|
)
|
|
|
2,703
|
|
|
|
(16,019
|
)
|
Inventory valuation
adjustments May integration
|
|
|
|
|
|
|
(96
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
5,446
|
|
|
|
6,296
|
|
|
|
(969
|
)
|
|
|
10,773
|
|
Selling, general and
administrative expenses
|
|
|
(12
|
)
|
|
|
(5,123
|
)
|
|
|
(4,409
|
)
|
|
|
866
|
|
|
|
(8,678
|
)
|
May integration costs
|
|
|
|
|
|
|
(259
|
)
|
|
|
(276
|
)
|
|
|
85
|
|
|
|
(450
|
)
|
Gains on the sale of accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(12
|
)
|
|
|
64
|
|
|
|
1,802
|
|
|
|
(18
|
)
|
|
|
1,836
|
|
Interest (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
31
|
|
|
|
(445
|
)
|
|
|
23
|
|
|
|
1
|
|
|
|
(390
|
)
|
Intercompany
|
|
|
53
|
|
|
|
(240
|
)
|
|
|
187
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
905
|
|
|
|
682
|
|
|
|
|
|
|
|
(1,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
977
|
|
|
|
61
|
|
|
|
2,012
|
|
|
|
(1,604
|
)
|
|
|
1,446
|
|
Federal, state and local income
tax benefit (expense)
|
|
|
18
|
|
|
|
229
|
|
|
|
(715
|
)
|
|
|
10
|
|
|
|
(458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
995
|
|
|
|
290
|
|
|
|
1,297
|
|
|
|
(1,594
|
)
|
|
|
988
|
|
Discontinued operations, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
995
|
|
|
$
|
290
|
|
|
$
|
1,297
|
|
|
$
|
(1,587
|
)
|
|
$
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR 2006
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Cash flows from continuing
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
995
|
|
|
$
|
290
|
|
|
$
|
1,297
|
|
|
$
|
(1,587
|
)
|
|
$
|
995
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Gains on the sale of accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
(191
|
)
|
|
|
|
|
|
|
(191
|
)
|
May integrations costs
|
|
|
|
|
|
|
355
|
|
|
|
358
|
|
|
|
(85
|
)
|
|
|
628
|
|
Equity in earnings of subsidiaries
|
|
|
(905
|
)
|
|
|
(682
|
)
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
Dividends received from subsidiaries
|
|
|
2,165
|
|
|
|
|
|
|
|
|
|
|
|
(2,165
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
1
|
|
|
|
638
|
|
|
|
626
|
|
|
|
|
|
|
|
1,265
|
|
Proceeds from sale of proprietary
accounts receivable
|
|
|
|
|
|
|
|
|
|
|
1,860
|
|
|
|
|
|
|
|
1,860
|
|
(Increase) decrease in working
capital
|
|
|
58
|
|
|
|
(410
|
)
|
|
|
(543
|
)
|
|
|
30
|
|
|
|
(865
|
)
|
Other, net
|
|
|
(44
|
)
|
|
|
(254
|
)
|
|
|
297
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing operating activities
|
|
|
2,270
|
|
|
|
(63
|
)
|
|
|
3,704
|
|
|
|
(2,219
|
)
|
|
|
3,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
and capitalized software, net
|
|
|
(2
|
)
|
|
|
(153
|
)
|
|
|
(638
|
)
|
|
|
97
|
|
|
|
(696
|
)
|
Proceeds from the disposition of
discontinued operations
|
|
|
740
|
|
|
|
882
|
|
|
|
165
|
|
|
|
|
|
|
|
1,787
|
|
Repurchase of accounts receivable
|
|
|
|
|
|
|
|
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
(1,141
|
)
|
Proceeds from the sale of
repurchased accounts receivable
|
|
|
|
|
|
|
|
|
|
|
1,323
|
|
|
|
|
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing investing activities
|
|
|
738
|
|
|
|
729
|
|
|
|
(291
|
)
|
|
|
97
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt repaid, net of debt issued
|
|
|
|
|
|
|
(1,531
|
)
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
(1,534
|
)
|
Dividends paid
|
|
|
(274
|
)
|
|
|
(1,500
|
)
|
|
|
(665
|
)
|
|
|
2,165
|
|
|
|
(274
|
)
|
Acquisition of common stock, net of
common stock issued
|
|
|
(2,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,118
|
)
|
Intercompany activity, net
|
|
|
245
|
|
|
|
2,554
|
|
|
|
(2,887
|
)
|
|
|
88
|
|
|
|
|
|
Other, net
|
|
|
90
|
|
|
|
(149
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing financing activities
|
|
|
(2,057
|
)
|
|
|
(626
|
)
|
|
|
(3,584
|
)
|
|
|
2,254
|
|
|
|
(4,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing operations
|
|
|
951
|
|
|
|
40
|
|
|
|
(171
|
)
|
|
|
132
|
|
|
|
952
|
|
Net cash provided by discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
951
|
|
|
|
40
|
|
|
|
(171
|
)
|
|
|
143
|
|
|
|
963
|
|
Cash and cash equivalents at
beginning of period
|
|
|
17
|
|
|
|
33
|
|
|
|
342
|
|
|
|
(144
|
)
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
968
|
|
|
$
|
73
|
|
|
$
|
171
|
|
|
$
|
(1
|
)
|
|
$
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 28, 2006
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
|
$
|
33
|
|
|
$
|
342
|
|
|
$
|
(144
|
)
|
|
$
|
248
|
|
Accounts receivable
|
|
|
|
|
|
|
94
|
|
|
|
2,584
|
|
|
|
(156
|
)
|
|
|
2,522
|
|
Merchandise inventories
|
|
|
|
|
|
|
3,049
|
|
|
|
2,829
|
|
|
|
(419
|
)
|
|
|
5,459
|
|
Supplies and prepaid expenses
|
|
|
|
|
|
|
105
|
|
|
|
133
|
|
|
|
(35
|
)
|
|
|
203
|
|
Income taxes
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
|
|
Deferred income tax assets
|
|
|
3
|
|
|
|
46
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,713
|
|
|
|
1,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
119
|
|
|
|
3,327
|
|
|
|
5,888
|
|
|
|
811
|
|
|
|
10,145
|
|
Property and Equipment
net
|
|
|
2
|
|
|
|
6,979
|
|
|
|
5,680
|
|
|
|
(627
|
)
|
|
|
12,034
|
|
Goodwill
|
|
|
|
|
|
|
5,565
|
|
|
|
4,244
|
|
|
|
(289
|
)
|
|
|
9,520
|
|
Other Intangible Assets
net
|
|
|
|
|
|
|
527
|
|
|
|
710
|
|
|
|
(157
|
)
|
|
|
1,080
|
|
Other Assets
|
|
|
4
|
|
|
|
129
|
|
|
|
282
|
|
|
|
(26
|
)
|
|
|
389
|
|
Intercompany Receivable
|
|
|
1,805
|
|
|
|
|
|
|
|
4,755
|
|
|
|
(6,560
|
)
|
|
|
|
|
Investment in Subsidiaries
|
|
|
11,754
|
|
|
|
11,177
|
|
|
|
|
|
|
|
(22,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
13,684
|
|
|
$
|
27,704
|
|
|
$
|
21,559
|
|
|
$
|
(29,779
|
)
|
|
$
|
33,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
|
|
|
$
|
1,319
|
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
1,323
|
|
Accounts payable and accrued
liabilities
|
|
|
114
|
|
|
|
2,804
|
|
|
|
2,785
|
|
|
|
(457
|
)
|
|
|
5,246
|
|
Income taxes
|
|
|
|
|
|
|
170
|
|
|
|
383
|
|
|
|
(99
|
)
|
|
|
454
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
(122
|
)
|
|
|
103
|
|
Liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
114
|
|
|
|
4,293
|
|
|
|
3,398
|
|
|
|
(215
|
)
|
|
|
7,590
|
|
Long-Term Debt
|
|
|
|
|
|
|
8,781
|
|
|
|
81
|
|
|
|
(2
|
)
|
|
|
8,860
|
|
Intercompany Payable
|
|
|
|
|
|
|
6,560
|
|
|
|
|
|
|
|
(6,560
|
)
|
|
|
|
|
Deferred Income Taxes
|
|
|
45
|
|
|
|
415
|
|
|
|
1,302
|
|
|
|
(58
|
)
|
|
|
1,704
|
|
Other Liabilities
|
|
|
6
|
|
|
|
867
|
|
|
|
635
|
|
|
|
(13
|
)
|
|
|
1,495
|
|
Minority Interest *
|
|
|
|
|
|
|
|
|
|
|
518
|
|
|
|
(518
|
)
|
|
|
|
|
Shareholders Equity
|
|
|
13,519
|
|
|
|
6,788
|
|
|
|
15,625
|
|
|
|
(22,413
|
)
|
|
|
13,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
13,684
|
|
|
$
|
27,704
|
|
|
$
|
21,559
|
|
|
$
|
(29,779
|
)
|
|
$
|
33,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Parents minority interest in a subsidiary which is
wholly-owned on a consolidated basis. |
F-61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR 2005
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
7,001
|
|
|
$
|
17,193
|
|
|
$
|
(1,804
|
)
|
|
$
|
22,390
|
|
Cost of sales
|
|
|
|
|
|
|
(4,250
|
)
|
|
|
(10,075
|
)
|
|
|
1,053
|
|
|
|
(13,272
|
)
|
Inventory valuation
adjustments May integration
|
|
|
|
|
|
|
(21
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
2,730
|
|
|
|
7,114
|
|
|
|
(751
|
)
|
|
|
9,093
|
|
Selling, general and
administrative expenses
|
|
|
(7
|
)
|
|
|
(2,295
|
)
|
|
|
(5,373
|
)
|
|
|
695
|
|
|
|
(6,980
|
)
|
May integration costs
|
|
|
|
|
|
|
(34
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
(169
|
)
|
Gain on the sale of accounts
receivable
|
|
|
|
|
|
|
94
|
|
|
|
386
|
|
|
|
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(7
|
)
|
|
|
495
|
|
|
|
1,992
|
|
|
|
(56
|
)
|
|
|
2,424
|
|
Interest (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
(88
|
)
|
|
|
(268
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
(380
|
)
|
Intercompany
|
|
|
149
|
|
|
|
(72
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
1,297
|
|
|
|
477
|
|
|
|
|
|
|
|
(1,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
1,351
|
|
|
|
632
|
|
|
|
1,891
|
|
|
|
(1,830
|
)
|
|
|
2,044
|
|
Federal, state and local income
tax benefit (expense)
|
|
|
55
|
|
|
|
(91
|
)
|
|
|
(657
|
)
|
|
|
22
|
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,406
|
|
|
|
541
|
|
|
|
1,234
|
|
|
|
(1,808
|
)
|
|
|
1,373
|
|
Discontinued operations, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,406
|
|
|
$
|
541
|
|
|
$
|
1,234
|
|
|
$
|
(1,775
|
)
|
|
$
|
1,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR 2005
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Cash flows from continuing
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,406
|
|
|
$
|
541
|
|
|
$
|
1,234
|
|
|
$
|
(1,775
|
)
|
|
$
|
1,406
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(33
|
)
|
Gains on the sale of accounts
receivable
|
|
|
|
|
|
|
(94
|
)
|
|
|
(386
|
)
|
|
|
|
|
|
|
(480
|
)
|
May integrations costs
|
|
|
|
|
|
|
55
|
|
|
|
139
|
|
|
|
|
|
|
|
194
|
|
Equity in earnings of subsidiaries
|
|
|
(1,297
|
)
|
|
|
(477
|
)
|
|
|
|
|
|
|
1,774
|
|
|
|
|
|
Dividends received from subsidiaries
|
|
|
889
|
|
|
|
|
|
|
|
|
|
|
|
(889
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
233
|
|
|
|
770
|
|
|
|
(27
|
)
|
|
|
976
|
|
Proceeds from sale of proprietary
accounts receivable
|
|
|
|
|
|
|
94
|
|
|
|
2,101
|
|
|
|
|
|
|
|
2,195
|
|
(Increase) decrease in working
capital not separately identified
|
|
|
(82
|
)
|
|
|
299
|
|
|
|
(160
|
)
|
|
|
18
|
|
|
|
75
|
|
Other, net
|
|
|
153
|
|
|
|
(537
|
)
|
|
|
217
|
|
|
|
(21
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing operating activities
|
|
|
1,069
|
|
|
|
114
|
|
|
|
3,915
|
|
|
|
(953
|
)
|
|
|
4,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
and capitalized software, net
|
|
|
(1
|
)
|
|
|
(93
|
)
|
|
|
(604
|
)
|
|
|
61
|
|
|
|
(637
|
)
|
Acquisition of The May Department
Stores Company, net of cash acquired
|
|
|
(5,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,321
|
)
|
Proceeds from sale of
non-proprietary accounts receivable
|
|
|
|
|
|
|
|
|
|
|
1,388
|
|
|
|
|
|
|
|
1,388
|
|
Increase in non-proprietary
accounts receivable
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing investing activities
|
|
|
(5,322
|
)
|
|
|
(93
|
)
|
|
|
653
|
|
|
|
61
|
|
|
|
(4,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issued, net of repayments
|
|
|
4,579
|
|
|
|
(3,514
|
)
|
|
|
(1,240
|
)
|
|
|
|
|
|
|
(175
|
)
|
Dividends paid
|
|
|
(157
|
)
|
|
|
(280
|
)
|
|
|
(609
|
)
|
|
|
889
|
|
|
|
(157
|
)
|
Issuance of common stock, net
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
Intercompany activity, net
|
|
|
(1,129
|
)
|
|
|
3,840
|
|
|
|
(2,546
|
)
|
|
|
(165
|
)
|
|
|
|
|
Other, net
|
|
|
(38
|
)
|
|
|
(34
|
)
|
|
|
(15
|
)
|
|
|
32
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing financing activities
|
|
|
3,584
|
|
|
|
12
|
|
|
|
(4,410
|
)
|
|
|
756
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
continuing operations
|
|
|
(669
|
)
|
|
|
33
|
|
|
|
158
|
|
|
|
(136
|
)
|
|
|
(614
|
)
|
Net cash (used) by discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(669
|
)
|
|
|
33
|
|
|
|
158
|
|
|
|
(142
|
)
|
|
|
(620
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
686
|
|
|
|
|
|
|
|
184
|
|
|
|
(2
|
)
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
17
|
|
|
$
|
33
|
|
|
$
|
342
|
|
|
$
|
(144
|
)
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR 2004
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Net Sales
|
|
$
|
|
|
|
$
|
15,776
|
|
|
$
|
|
|
|
$
|
15,776
|
|
Cost of sales
|
|
|
|
|
|
|
(9,382
|
)
|
|
|
|
|
|
|
(9,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
6,394
|
|
|
|
|
|
|
|
6,394
|
|
Selling, general and
administrative expenses
|
|
|
10
|
|
|
|
(5,004
|
)
|
|
|
|
|
|
|
(4,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10
|
|
|
|
1,390
|
|
|
|
|
|
|
|
1,400
|
|
Interest (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
(245
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
(284
|
)
|
Intercompany
|
|
|
288
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
658
|
|
|
|
|
|
|
|
(658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
711
|
|
|
|
1,063
|
|
|
|
(658
|
)
|
|
|
1,116
|
|
Federal, state and local income
tax expense
|
|
|
(22
|
)
|
|
|
(405
|
)
|
|
|
|
|
|
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
689
|
|
|
$
|
658
|
|
|
$
|
(658
|
)
|
|
$
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEDERATED
DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR 2004
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
689
|
|
|
$
|
658
|
|
|
$
|
(658
|
)
|
|
$
|
689
|
|
Equity in earnings of subsidiaries
|
|
|
(658
|
)
|
|
|
|
|
|
|
658
|
|
|
|
|
|
Dividends received from
subsidiaries
|
|
|
449
|
|
|
|
|
|
|
|
(449
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
3
|
|
|
|
731
|
|
|
|
|
|
|
|
734
|
|
(Increase) decrease in working
capital
|
|
|
(57
|
)
|
|
|
134
|
|
|
|
|
|
|
|
77
|
|
Other, net
|
|
|
16
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
operating activities
|
|
|
442
|
|
|
|
1,514
|
|
|
|
(449
|
)
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
and capitalized software, net
|
|
|
(1
|
)
|
|
|
(520
|
)
|
|
|
|
|
|
|
(521
|
)
|
Other, net
|
|
|
24
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
investing activities
|
|
|
23
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
(727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issued, net of repayments
|
|
|
(360
|
)
|
|
|
181
|
|
|
|
|
|
|
|
(179
|
)
|
Dividends paid
|
|
|
(93
|
)
|
|
|
(449
|
)
|
|
|
449
|
|
|
|
(93
|
)
|
Issuance of common stock, net
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
(603
|
)
|
Intercompany activity, net
|
|
|
522
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
39
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing
activities
|
|
|
(495
|
)
|
|
|
(791
|
)
|
|
|
449
|
|
|
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(30
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
(57
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
716
|
|
|
|
211
|
|
|
|
(2
|
)
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
686
|
|
|
$
|
184
|
|
|
$
|
(2
|
)
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65