Nordstrom 2006 Annual Report Download - page 53

Nordstrom, Inc. and subsidiaries 35
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Dollar and share amounts in thousands except per share and per option amounts
In 2004 and 2005, we used the Black-Scholes option valuation model to estimate the fair value of the stock options under SFAS 123. When we adopted
SFAS 123(R), we elected to use the Binomial Lattice option valuation model. We believe that this model provides a better estimate of fair value than
the Black-Scholes option valuation model, as it can accommodate variability in assumptions for expected volatility, dividends and risk-free interest
rates. We used the following assumptions to estimate the fair value for stock options at grant date:
Fiscal year
2006
2005
2004
Risk-free interest rate
4.9% - 5.1%
3.9%
3.0%
Volatility
37.0%
44.3%
65.4%
Dividend yield
1.0%
1.7%
1.5%
Expected life in years
5.4
5.0
6.0
The weighted average fair value per option at the grant date was $16, $10 and $11 in 2006, 2005 and 2004. The following describes the significant
assumptions used to estimate the fair value of options granted:
• Risk-free interest rate: For 2006, the rate represents the yield on U.S. Treasury zero-coupon securities that mature over the 10-year
life of the stock options. For 2005, the rate was the yield on the U.S. Treasury zero-coupon securities which matured near the end of
the expected life of the stock options.
• Expected volatility: For 2006, the expected volatility was based on a combination of the historical volatility of our common stock and
the implied volatility of exchange traded options for our common stock. In 2005, the expected volatility was estimated using the
historical volatility of our common stock.
• Expected dividend yield: For 2006, the yield was our forecasted dividend yield for the next ten years. In 2005, the expected dividend
yield was based on our historical dividend yield.
• Expected life in years: The expected life represents the estimated period of time until option exercise. In 2006, the expected term of
options granted was derived from the output of the Binomial Lattice option valuation model based on our historical exercise behavior
and taking into consideration the contractual term of the option and our employees’ expected exercise and post-vesting employment
termination behavior. In 2005, the expected life was determined based on our historical exercise behavior.
Cash Equivalents
Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase. As of the end of 2006 and 2005,
we had restricted cash of $7,798 and $6,728 included in other long term assets. The restricted cash is held in a trust for use by our Supplemental
Executive Retirement Plan and Deferred Compensation Plans.
Cash Management
Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at the end
of 2006 and 2005 included $40,818 and $91,671 of checks not yet presented for payment drawn in excess of our bank deposit balances.
Supplemental Cash Flow Information
Fiscal year
2006
2005
2004
Cash paid during the year for:
Interest (net of capitalized interest)
$55,367
$57,187
$88,876
Income taxes
448,668
343,891
253,576
Short-term Investments
Short-term investments consist of auction rate securities classified as available-for-sale. Auction rate securities are high-quality variable rate bonds
whose interest rate is periodically reset, typically every 7, 28, or 35 days. However, the underlying security can have a duration from 15 to 30 years.
Our auction rate securities are stated at cost, which approximates fair value, and therefore there were no unrealized gains or losses related to these
securities included in accumulated other comprehensive earnings. The cost of securities sold was based on the specific identification method.
Securitization of Accounts Receivable
We offer Nordstrom private label cards and co-branded Nordstrom VISA credit cards to our customers. Substantially all of the receivables related
to both credit cards are securitized. Under our credit card securitizations, the receivables are transferred to third-party trusts on a daily basis. The
balance of the receivables transferred to the trusts fluctuates as new receivables are generated and old receivables are retired (through payments
received, charge-offs, or credits for merchandise returns). The trusts issue securities that are backed by the receivables. Certain of these securities
or “beneficial interests” are sold to third-party investors and the remaining securities are issued to us.