Dollar General 2006 Annual Report Download - page 34

Download and view the complete annual report

Please find page 34 of the 2006 Dollar General annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 165

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165

to the South Boston DC as discussed above. The decrease in interest expense in 2005 is primarily
attributable to a reduction in tax-related interest expense of $1.4 million, principally due to the
reversal of interest accruals pertaining to certain income tax related contingencies that were
resolved during 2005. We had variable-rate debt of $14.5 million as of February 2, 2007 and
February 3, 2006. The remainder of our outstanding indebtedness at February 2, 2007 and
February 3, 2006 was fixed rate debt.
Income Taxes. The effective income tax rates for 2006, 2005 and 2004 were 37.4%,
35.7% and 35.6%, respectively.
The 2006 income tax rate was higher than the 2005 rate by 1.7%. Factors contributing to
this increase include additional expense of approximately $0.9 million related to the adoption of
a new tax system in the State of Texas which resulted in the elimination of certain deferred tax
assets that had been recorded in prior years; an increase of approximately $0.9 million in expense
related to the Company’ s current year tax liability under the revised State of Texas tax system; a
reduction in the contingent income tax reserve due to the resolution of contingent liabilities that
is $2.0 million less than the decrease that occurred in 2005; an increase in the deferred tax
valuation allowance of approximately $3.2 million related to state income tax credits; and an
increase of $2.6 million related to a benefit recognized in 2005 resulting from an internal
restructuring. Offsetting these rate increases was a reduction in the income tax rate related to
federal income tax credits. Due to the reduction in the Company’ s 2006 income before tax, a
small increase in the amount of federal income tax credits earned yielded a much larger
percentage reduction in the income tax rate for 2006 versus 2005.
While the 2005 and 2004 rates were similar overall, the rates contained offsetting
differences. Factors causing the 2005 tax rate to increase when compared to the 2004 tax rate
include a reduction in federal jobs credits of approximately $1.0 million, additional net foreign
income tax expense of approximately $0.8 million and a decrease in the contingent income tax
reserve due to resolution of contingent liabilities that was $3.6 million less than the decrease that
occurred in 2004. Factors causing the 2005 tax rate to decrease when compared to the 2004 tax
rate include the recognition of state tax credits of approximately $2.3 million related to the
construction of our DC in Indiana and a benefit of approximately $2.6 million related to an
internal restructuring that was completed during 2005. The overall effect of these items
increased the 2005 effective tax rate by approximately 0.8%.
Effects of Inflation
We believe that inflation and/or deflation had a minimal impact on our overall operations
during 2006, 2005 and 2004.
Liquidity and Capital Resources
Current Financial Condition / Recent Developments. During the past three years, we
have generated an aggregate of approximately $1.35 billion in cash flows from operating
activities. During that period, we expanded the number of stores we operate by approximately
23% (over 1,500 stores) and incurred approximately $834 million in capital expenditures,
primarily to support this growth. Also during this three-year period, we expended approximately
32