Sears 2006 Annual Report Download - page 29

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Gains on sales of assets were $82 million in fiscal 2006, as compared to $39 million (reported) and
$40 million (pro forma) for fiscal 2005. The increase in fiscal 2006 was primarily attributable to a $41 million
pre-tax gain recognized in 2006 in connection with the 2005 sale of the Company’s former Kmart headquarters in
Troy, Michigan.
Fiscal 2005 included a $317 million gain on sale of business, which reflected a minority interest gain on the
sale of Sears Canada’s Credit and Financial Services operations in November 2005. This gain had no impact on
Holdings’ net income as its entire impact was offset by increased minority interest expense. See Note 5 of Notes
to Consolidated Financial Statements for further detail.
Restructuring charges were $28 million and $111 million (reported and proforma) for fiscal 2006 and fiscal
2005, respectively. These charges included charges of $19 million and $57 million in fiscal 2006 and fiscal 2005,
respectively, for employee-related termination costs associated with Sears Canada restructuring initiatives
implemented during fiscal 2005, including a workforce reduction of approximately 1,200 associates, as well as
$9 million and $54 million in fiscal 2006 and fiscal 2005, respectively, at Kmart for relocation assistance and
employee termination-related costs associated with Holdings’ home office integration efforts. See Note 6 of
Notes to Consolidated Financial Statements for further detail.
For fiscal 2006, interest and investment income was $254 million, as compared with $127 million (reported)
and $159 million (pro forma) in fiscal 2005. As discussed above, the increased interest and investment income in
fiscal 2006 was primarily due to total return swap income recognized in the current year.
Other income is primarily comprised of bankruptcy-related recoveries. Bankruptcy-related recoveries
decreased $26 million in fiscal 2006 and represent amounts recovered from vendors who had received cash
payment for pre-petition obligations. See Note 13 of Notes to Consolidated Financial Statements for further
detail. The impact of lower bankruptcy-related recoveries in fiscal 2006 as compared with fiscal 2005 was
partially offset by increased income recorded relative to foreign currency forward contracts for which hedge
accounting was not applied. See Note 8 of Notes to Consolidated Financial Statements for further details.
The effective tax rate increased to 37.7% in fiscal 2006 from 36.4% in fiscal 2005, with the increase
primarily attributable to the fact that the effective rate in fiscal 2005 benefited from the November 2005 sale of
Sears Canada’s Credit and Financial Services business being taxed at a capital gains rate, lowering the effective
tax rate for fiscal 2005.
Effective January 27, 2005, the Company determined that it would be preferable to conform one of the
accounting practices utilized by Kmart to that of Sears. The Company changed its method of accounting for
certain indirect overhead costs from inventoriable costs to period expenses. In accordance with Accounting
Principles Board Opinion No. 20, “Accounting Changes,” a change in accounting policy to conform the
acquirer’s policy to that of the acquired entity is treated as a change in accounting principle. As a result of the
accounting change, the Company recorded a charge of $90 million, net of taxes, in the first quarter of fiscal 2005
for the cumulative effect of this change in accounting principle. The charge represents the amount of indirect
costs reflected within inventory at the beginning of fiscal 2005. See Note 3 of Notes to Consolidated Financial
Statements for further detail.
Fiscal 2005 Compared to Fiscal 2004
The consolidated statement of income for fiscal 2005 is not comparable to that for fiscal 2004 because fiscal
2004 does not include the results of Sears. Additionally, Holdings’ consolidated statement of income for fiscal
2005 is not representative of the Company’s on-going operations as it only includes Sears’ results of operations
for the period subsequent to the Merger, or from March 25, 2005 forward. For these reasons, the Company
believes that an understanding of its reported results, trends and on-going performance is not complete without
presenting results on a pro forma basis. Accordingly, the Company has provided an analysis of operating results
for fiscal 2005 as compared to fiscal 2004 on both a reported and a pro forma basis.
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