Family Dollar 2006 Annual Report Download - page 24

Interest Expense
On September 27, 2005, the Company obtained $250 million in aggregate proceeds through a private placement of unsecured
Senior Notes (the “Notes”) to a group of institutional accredited investors. During fiscal 2006, the Company incurred $11.4 million in
interest expense related to the Notes. See Note 4 to the Consolidated Financial Statements included in this Report for information on
the Company’s current and long−term debt. Also during fiscal 2006, the Company recorded $1.4 million of interest expense relating
to income tax adjustments as a result of changes to the measurement dates of certain stock option grants. See Note 10 to the
Consolidated Financial Statements included in this Report for more information. The Company did not incur any interest expense
during fiscal 2005 or fiscal 2004.
Income Taxes
The effective tax rate was 37.3% in fiscal 2006, 36.5% in fiscal 2005, and 36.6% in fiscal 2004. The increase in the effective
tax rate in fiscal 2006, compared with fiscal 2005 was a result of the effect of changes in state income taxes and the expiration of
certain federal jobs tax credits for employees hired after December 31, 2005.
Liquidity and Capital Resources
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during fiscal
2006 was $451.0 million as compared to $299.4 million in fiscal 2005, and $376.5 million in fiscal 2004. These amounts have
enabled the Company to fund its regular operating needs, capital expenditure program, cash dividend payments, and interest
payments.
On August 24, 2006, the Company entered into an unsecured revolving credit facility with a syndicate of lenders for
short−term borrowings of up to $350 million. The credit facility replaced the Company’s then outstanding unsecured revolving credit
facilities for short−term borrowings of up to $200 million. The credit facility expires on August 24, 2011. Any borrowings under the
credit facility are at a variable interest rate based on short−term market interest rates. Outstanding standby letters of credit reduce the
borrowing capacity of the credit facility. The Company had no borrowings against its credit facilities during fiscal 2006. The credit
facility contains certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed
charges coverage ratio, and a priority debt to consolidated net worth ratio.
Merchandise inventories at the end of fiscal 2006 were 4.9% lower than at the end of fiscal 2005. The decrease in
merchandise inventories was a result of the Company’s renewed focus on inventory productivity and a shift in the timing of holiday
merchandise receipts, which more than offset additional inventory related to 275 net new stores and inventory associated with the
cooler program. Inventory on a per store basis at the end of fiscal 2006 was approximately 10% lower than at the end of fiscal 2005,
excluding merchandise in transit to the distribution centers. The Company’s focus on inventory productivity includes improved
planning and flow of fashion merchandise and the use of more aggressive exit strategies. As a result, inventories in the apparel and
accessories category have shown the most significant improvement in productivity. In addition, the continued expansion and
refinement of the Company’s centralized replenishment system has resulted in lower inventory levels of basic merchandise and better
in−stock levels.
The decrease in capital expenditures to $192.2 million in fiscal 2006 from $229.1 million in fiscal 2005 was due primarily to
the decrease in the number of stores opened during fiscal 2006 as compared to fiscal 2005. Offsetting some of the decrease was the
installation of refrigerated coolers in approximately 2,800 stores. Capital expenditures for fiscal 2007 are expected to be between
$155 and $165 million and relate primarily to new store openings; existing store expansions, relocations and renovations; expenditures
related to technology infrastructure investments; and the continued implementation of a refrigerated cooler program for perishable
goods in selected stores. The new store expansion will require additional investment in merchandise inventories.
Capital spending plans, including store opening plans, are continuously reviewed and are subject to change. Cash flow from
current operations is expected to be sufficient to meet planned liquidity and operational capital resource needs, including store
expansion and other capital spending programs. In addition, the Company has available a revolving credit facility as previously
discussed.
During fiscal 2006, the Company purchased 15.4 million shares of its common stock at a cost of $367.3 million, as described
below. During fiscal 2005 and fiscal 2004, the Company purchased in the open market 3.3 million shares and 5.6 million shares,
respectively, at a cost of $92.0 million and $176.7 million, respectively.
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Source: FAMILY DOLLAR STORES, 10−K, March 28, 2007