Macy's 2009 Annual Report Download - page 30

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as a result of tax examinations, and given the status of examinations, the Company cannot reliably estimate the
period of any cash settlement with the respective taxing authorities. The Company has included in the contractual
obligations table $14 million of liabilities for unrecognized tax benefits that the Company expects to settle in
cash in the next year. The Company has not included in the contractual obligation table the $1,014 million
Pension Plan liability. The Company’s funding policy is to contribute amounts necessary to satisfy minimum
pension funding requirements, including requirements of the Pension Protection Act of 2006, plus such
additional amounts from time to time as are determined to be appropriate to improve the Pension Plan’s funded
status. The Pension Plan’s funded status is affected by many factors including discount rates and the performance
of Pension Plan assets. On February 22, 2010, the Company made a funding contribution to the Pension Plan of
$325 million. The Company does not anticipate making any additional funding contributions to the Pension Plan
during 2010, but may consider making additional funding contributions depending on the market performance
and other factors.
Management believes that, with respect to the Company’s current operations, cash on hand and funds from
operations, together with its credit facility and other capital resources, will be sufficient to cover the Company’s
reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash
requirements in both the near term and over the longer term. The Company’s 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. To the extent that the Company’s cash
balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the
Company will consider alternative uses of some or all of such excess cash. Depending upon its actual and
anticipated sources and uses of liquidity, 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,
for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate
purposes, and the redemption or repurchase of debt or other securities through open market purchases, privately
negotiated transactions or otherwise.
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 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.
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