Neiman Marcus 2006 Annual Report Download - page 41

Inflation and Deflation
We believe changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the
periods presented. In recent years, we have experienced certain inflationary conditions related to 1) increases in product costs due
primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and 2) increases in
SG&A. We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their
local currency against the dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar
exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in
numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies. Accordingly, changes in the value of the
dollar relative to foreign currencies may increase our cost of goods sold and if we are unable to pass such cost increases to our customers,
our gross margins, and ultimately our earnings, would decrease. Foreign currency fluctuations could have a material adverse effect on our
business, financial condition and results of operations in the future. We attempt to offset the effects of inflation through price increases
and control of expenses, although our ability to increase prices may be limited by competitive factors. We attempt to offset the effects of
merchandise deflation, which has occurred on a limited basis in recent years, through control of expenses. There is no assurance,
however, that inflation or deflation will not materially affect our operations in the future.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements consist principally of:
• the funding of our merchandise purchases;
• capital expenditures for new store construction, store renovations and upgrades of our management information systems;
• debt service requirements;
• income tax payments; and
• obligations related to our Pension Plan.
Our primary sources of short-term liquidity are comprised of cash on hand and availability under our Asset-Based Revolving
Credit Facility. The amounts of cash on hand and borrowings under the Asset-Based Revolving Credit Facility are influenced by a
number of factors, including revenues, working capital levels, vendor terms, the level of capital expenditures, cash requirements related to
financing instruments and our debt service, Pension Plan funding and tax payment obligations, among others.
Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and second quarters of
each fiscal year as a result of higher seasonal levels of inventories. We have typically financed the increases in working capital needs
during the first and second fiscal quarters with cash flows from operations and, to a lesser extent, with cash provided from borrowings
under our credit facilities. During fiscal year 2006, we financed our seasonal increases in working capital with cash flows from operations
and borrowings under our Asset-Based Revolving Credit Facility. During the first quarter of fiscal year 2006, we borrowed $150 million
under our Asset-Based Revolving Credit Facility. We repaid these borrowings in the second quarter of fiscal year 2006. In fiscal year
2007, we have made no borrowings under our Asset-Based Revolving Credit Facility.
We believe that operating cash flows, available vendor financing and amounts available pursuant to our senior secured Asset-
Based Revolving Credit Facility will be sufficient to fund our operations, anticipated capital expenditure requirements, debt service
obligations, contractual obligations and commitments and Pension Plan funding requirements through the end of fiscal year 2008.
At July 28, 2007, cash and cash equivalents were $141.2 million compared to $223.7 million at July 29, 2006. Net cash provided
by operating activities was $258.9 million in fiscal year 2007 compared to net cash provided by operating activities of $400.2 million in
fiscal year 2006. Cash flows related to operating activities were lower in fiscal year 2007 than in the prior fiscal year primarily due to 1)
an $78.6 million increase in cash interest requirements on indebtedness incurred in connection with the Transactions and 2) a $122.1
million increase in cash requirements for income taxes. These increases in cash
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