Sears 2006 Annual Report Download - page 43

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Investing Activities and Cash Flows
Net cash flows used by investing activities totaled $0.7 billion in fiscal 2006, as compared to $0.6 billion
provided in fiscal 2005. Investing cash flows in both years were heavily impacted by a number of significant
transactions.
Fiscal 2006 investing activity cash flows reflect cash paid in connection with the acquisition of additional
interests in Sears Canada. The Company paid a total of $282 million for additional common shares of Sears
Canada, raising Holdings’ ownership in Sears Canada to approximately 70% as of February 3, 2007 from
approximately 54% as of fiscal year-end 2005. This transaction is further described in Note 4 of Notes to
Consolidated Financial Statements. Fiscal 2005 reflects the receipt of $2.0 billion in proceeds from the sale of
Sears Canada’s Credit and Financial Services business in November 2005, partially offset by cash paid in
connection with the Merger, a $1.0 billion net cash outflow.
In addition, during fiscal 2006 the Company spent $513 million on capital expenditures compared to
$546 million during the prior year. The prior year spending of $546 million excludes approximately $40 million
of capital expenditures made by Sears during the period January 30, 2005 through March 24, 2005 (pre-Merger
period). Significant capital projects during fiscal 2006 included opening 16 Sears Essentials/Grand locations, as
well as remodeling approximately 70 Kmart locations to include Sears brand products inside, most notably home
appliances.
The Company anticipates fiscal 2007 capital expenditure levels to increase by approximately $150 million
to $200 million as compared to fiscal 2006 levels, with planned increases partially driven by additional capital
spending on innovation projects, distribution capability enhancements and further expansion of home appliances
into Kmart locations; however, it should be noted that in the normal course of business, the Company considers
opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating
and non-operating properties. These transactions may, individually or in the aggregate, result in material
proceeds or outlays of cash and cause the Company’s capital expenditure levels to vary from period to period. In
addition, the Company reviews leases that will expire in the short term in order to determine the appropriate
action to take with respect to them. During fiscal 2006, the Company purchased eight previously leased operating
properties for $26 million.
Financing Activities and Cash Flows
Net cash used in financing activities was $1.3 billion in fiscal 2006, reflecting $816 million in share
repurchases and $434 million of debt repayments, net of new borrowings. Of the total share repurchases, $806
million of the total was made pursuant to the Company’s common share repurchase program. The common share
repurchase program was initially announced in 2005 with a total authorization by the Company’s Board of
Directors of up to $1.0 billion. During fiscal 2006, the Board of Directors authorized the repurchase of up to an
additional $1.0 billion of common stock, for a total authorization of $2.0 billion. At February 3, 2007, the
Company had approximately $604 million of remaining authorization under the program.
In December 2006, a subsidiary of Orchard Supply Hardware Stores Corporation (“OSH”) generated $198
million of debt proceeds, net of approximately $2 million in issuance costs, in connection with its entering into a
five year, $200 million Senior Secured Term Loan. The proceeds of this borrowing were used by OSH to pay
Holdings the remaining loan payable issued in connection with OSH’s recapitalization in November 2005. The
Senior Secured Term Loan is non-recourse to Holdings.
Net cash used in financing activities was $2.0 billion in fiscal 2005, primarily reflecting $815 million of
debt repayments, net of new borrowings, a dividend of $794 million paid by Sears Canada to minority
shareholders of Sears Canada subsequent to the sale of Sears Canada’s Credit and Financial Services business in
November 2005, and $590 million in share repurchases.
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