Petsmart 2005 Annual Report Download - page 46

assets and additional amortization related to store lighting replacements. The increases were offset by lower
advertising, bonus and closed store expenses as a percentage of revenue in fiscal 2004 compared to fiscal 2003. We
also recognized a $3.6 million gain from a legal settlement in the fourth quarter of 2004.
Interest Income
Interest income increased to $4.8 million during fiscal 2004 compared to $3.4 million during fiscal 2003
primarily due to an increase in interest rates.
Interest Expense
Interest expense increased to $21.3 million for fiscal 2004, from $19.3 million for fiscal 2003. The increase
was primarily due to an increase in capital lease obligations in 2004.
Income Tax Expense
For fiscal 2004, income tax expense was $83.4 million representing an effective rate of 34.6%. For fiscal 2003,
income tax expense of $78.0 million represents an effective rate of 38.4%. The reduction in the effective tax rate
from fiscal 2003 to 2004 is primarily due to an analysis of our net operating loss carryovers related to our fiscal 2000
purchase of PetSmart.com. We completed the analysis in the second quarter of 2004 and it was based on guidance
issued from the Internal Revenue Service. As a result, we expect to utilize an additional $22.1 million of net
operating losses previously considered unavailable. We recorded a total tax benefit of $7.7 million in the second
quarter of fiscal 2004, related to the additional net operating loss utilization. In addition, we recognized a legal
settlement of $3.6 million in the fourth quarter of fiscal 2004, which allowed us to use a portion of our capital loss
carryforwards. We reversed a previously established valuation allowance, and as a result, recorded a tax benefit of
$1.2 million.
Liquidity and Capital Resources
Cash Flow and Balance Sheet Data
The following table represents our cash and cash equivalents and short-term investments (in thousands):
January 29,
2006
January 30,
2005
Cash and cash equivalents ..................................... $110,415 $ 87,032
Short-term investments ....................................... 219,900 313,575
Total .................................................... $330,315 $400,607
We manage our cash and cash equivalents and short-term investments in order to fund operating requirements.
Cash and cash equivalents increased $23.4 million to $110.4 million as of January 29, 2006. Short-term investments
decreased $93.7 million to $219.9 million as of January 29, 2006. Short-term investments mainly consist of Auction
Rate Securities, or ARS. ARS generally have long-term maturities beyond three months but are priced and traded as
short-term instruments.
Cash provided by operations increased $86.2 million to $342.3 million in 2005, compared with $256.1 million
in fiscal 2004. Cash provided by operating activities was generated primarily by net income of $182.5 million and
non-cash depreciation and amortization expenses of $139.6 million and stock-based compensation of $22.4 million.
Cash is used in operating activities primarily to fund growth in inventory and other assets, net of accounts payable
and other accrued liabilities. Inventory increased to $399.4 million at January 29, 2006 compared to $337.3 million
at January 30, 2005 primarily due to the build up of inventory for our new distribution center, 100 net new stores in
fiscal 2005 and a decision to slightly increase our average inventory per store in support of a strong and consistent
in-stock position. Accounts payable increased by $25.1 million as a result of increased inventory levels. Other
current liabilities increased $55.1 million as a result of increased taxes payable and accruals for advertising, capital
invoices and freight.
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