Sears 2006 Annual Report Download - page 69

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Selected Unaudited Pro Forma Combined Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of
operations of Kmart and Sears for fiscal 2005 as though the Merger had occurred as of the beginning of fiscal
2005. The unaudited pro forma financial information is presented for informational purposes only and is not
indicative of the results of operations that would have been achieved if the Merger had taken place at the
beginning of the period presented, or that may result in the future. In addition, Holdings is realizing operating
synergies as a result of the Merger. The following unaudited pro forma financial information has not been
adjusted to reflect any operating efficiencies realized as a result of the Merger.
millions, except earnings per share 2005
Revenues ......................................................... $54,261
Operating income ................................................... 2,073
Income before cumulative effect of change in accounting principle ............ 879
Net income ........................................................ 789
Diluted earnings per share before cumulative effect of change in accounting
principle ........................................................ $ 5.40
Diluted earnings per share ............................................ $ 4.85
NOTE 3—CHANGES IN ACCOUNTING PRINCIPLE
Accounting For Certain Indirect Buying, Warehousing and Distribution Costs
Effective January 27, 2005, the Company changed its method of accounting for certain indirect buying,
warehousing and distribution costs. Prior to this change, the Company had included indirect buying, warehousing
and distribution costs as inventoriable costs. Beginning in fiscal 2005, such costs have been expensed as incurred,
which is the method of accounting previously followed by Sears. The Company believes that this change
provides a better measurement of operating results in light of changes to the Company’s supply chain to realize
cost savings from the Merger, the closure of certain facilities and the combined capacity of the existing
distribution and headquarters facilities. In accordance with Accounting Principles Board Opinion (“APB”)
No. 20, “Accounting Changes,” changes in accounting policy to conform the acquirer’s policy to that of the
acquired entity are treated as a change in accounting principle. The indirect buying, warehousing and distribution
costs that were capitalized to inventory as of January 26, 2005 have been reflected in the fiscal 2005 consolidated
statement of income as a cumulative effect of a change in accounting principle in the amount of $90 million, net
of income taxes of $58 million.
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