Petsmart 2009 Annual Report Download - page 37

Interest Expense, net
Interest expense, which is primarily related to capital leases, increased to $59.3 million for 2008 compared to
$51.5 million for 2007. The increase is primarily attributable to continued increases in capital lease obligations.
Included in interest expense, net was interest income of $0.6 million and $6.8 million for 2008 and 2007,
respectively. Cash available for short-term investments was lower during 2008 compared to 2007 primarily due to
cash used to partially fund our accelerated share repurchase, or “ASR,” agreement, in August 2007, payments on the
revolving line of credit, and the purchase of 2.3 million shares of our common stock for $50.0 million during 2008.
During 2008, our investments were limited to short-term, highly liquid, money market funds.
Income Tax Expense
In 2008, the $121.0 million income tax expense represents an effective tax rate of 38.9%, compared with 2007
income tax expense of $145.2 million, which represented an effective tax rate of 36.1%. The effective tax rate for
2007 includes a benefit from the use of capital loss carryforwards to reduce the tax on the gain from the sale of
Banfield non-voting shares and benefits from the release of uncertain tax positions as a result of settlements with
taxing authorities and from the expiration of the statute of limitations for certain tax positions. The effective tax rate
is calculated by dividing our income tax expense, which includes the income tax expense related to our equity in
income from investee, by income before income tax expense and equity in income from investee.
Equity in Income from Investee
Our equity in income from our investment in Banfield was $2.6 million and $1.7 million for 2008 and 2007,
respectively, based on our ownership percentage in Banfield’s net income.
Liquidity and Capital Resources
Cash Flow
Despite recent volatility and disruption in the global and capital credit markets, we have continued to have full
access to our credit facility and to generate operating cash flow sufficient to meet our financing needs. We believe
that our operating cash flow and cash on hand will be adequate to meet our operating, investing and financing needs
in the foreseeable future. In addition, we also have access to our $350.0 million five-year revolving credit facility,
although there can be no assurance that continued or increased volatility and disruption in the global capital and
credit markets will not impair our ability to access these markets on commercially acceptable terms. We expect to
continuously assess the economic environment and market conditions to guide our decisions regarding our uses of
cash, including capital expenditures, investments, dividends and the purchase of treasury stock.
We finance our operations, new store and PetsHotel growth, store remodels and other expenditures to support
our growth initiatives primarily through cash generated by operating activities. Net cash provided by operating
activities was $566.9 million for 2009, $420.7 million for 2008 and $332.7 million for 2007. Receipts from our sales
come from cash, checks and third-party debit and credit cards, and therefore provide a significant source of
liquidity. Cash is used in operating activities primarily to fund procurement of merchandise inventories and other
assets, net of accounts payable and other accrued liabilities. The primary differences between 2009 and 2008 were
lower levels of merchandise inventories and prepaid assets and an increase in other current liabilities, offset by an
increase in deferred income taxes. Included in 2008 were $27.1 million of tax benefits from the Economic Stimulus
Act of 2008, which provided for an accelerated depreciation deduction for certain qualifying property. The primary
differences between 2008 and 2007 include higher levels of merchandise inventories, partially offset by an increase
in both accounts payable and the purchases of prepaid expenses and other assets.
Net cash used in investing activities was $157.2 million for 2009, $235.2 million for 2008 and $139.2 million
for 2007. The net cash used in 2009 consisted primarily of capital expenditures. Capital expenditures consisted of
costs associated with opening or acquiring new stores, reformatting existing stores, new equipment and computer
software in support of our system initiatives, PetsHotel construction, expansion of our distribution network and
other costs to support our growth plans and initiatives. The primary differences between 2009 and 2008 were a
decrease in cash paid for property and equipment as a result of the slowdown in store openings, and an increase in
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