The Gap 2007 Annual Report Download - page 22

The following table reconciles free cash flow, a non-GAAP financial measure, to a GAAP financial measure.
($ in millions)
52 Weeks Ended
February 2, 2008
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Net cash provided by operating activities ................... $2,081 $1,250 $1,551
Less: Purchases of property and equipment ................. (682) (572) (600)
Free cash flow ..................................... $1,399 $ 678 $ 951
The following table sets forth our expected fiscal 2008 free cash flow of about $900 million:
($ in millions)
Projected
52 Weeks Ending
January 31, 2009
Expected net cash provided by operating activities ...................................... $1,400
Less: Expected purchases of property and equipment .................................... (500)
Expected fiscal 2008 free cash flow ............................................... $ 900
Dividend Policy
In determining whether and at what level to, declare a dividend, we considered a number of financial factors,
including sustainability and financial flexibility, as well as other factors including operating performance and capital
resources. We intend to consider an increase in dividends when we deliver growth in net earnings.
A dividend of $0.08 per share was declared and paid in each quarter of fiscal 2007 and 2006, for an annual
dividend of $0.32 per share. In 2005, a dividend of $0.045 per share was declared and paid in each quarter of
fiscal 2005, for an annual dividend of $0.18. We intend to increase our annual dividend per share from $0.32 for
fiscal 2007 to $0.34 for fiscal 2008.
Share Repurchase Program
Since the beginning of fiscal 2004, the Company has repurchased approximately 294 million shares for
$5.7 billion. In August 2007, the Board of Directors authorized $1.5 billion of our share repurchase program which
was fully utilized in fiscal 2007. In connection with this $1.5 billion share repurchase program, we entered into
purchase agreements with individual members of the Fisher family whose ownership represented approximately
17 percent of the Company’s outstanding shares at the end of the second quarter of fiscal 2007. The shares were
purchased each month at the same weighted-average market price that we paid for share repurchases in the
open market. During fiscal 2007, we repurchased approximately 89 million shares for $1.7 billion, including
commissions, at an average price per share of $19.05. Approximately 13 million shares were repurchased for
$249 million from the Fisher family.
During fiscal 2006, we repurchased approximately 58 million shares for $1.1 billion, including commissions, at an
average price per share of $17.97.
In February 2008, we announced that the Board of Directors authorized an additional $1 billion share repurchase
program, and that the Company has entered into purchase agreements with individual members of the Fisher
family whose ownership represents approximately 16 percent of our outstanding shares. The Company expects
that about $158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased
from these Fisher family members.
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Debt
The following discussion should be read in conjunction with Note 4 of Notes to the Consolidated Financial
Statements.
In September 2007, we paid $326 million related to the maturity of our 6.90 percent notes payable. The remaining
balance of our 8.80 percent notes payable of $138 million, due December 2008 (“2008 Notes”) was reclassified
into current maturities of long-term debt in our Consolidated Balance Sheet as of February 2, 2008. The interest
rate payable on the 2008 Notes is subject to an increasing or decreasing rate of interest based on certain credit
rating fluctuations. As a result of changes to our long-term senior unsecured credit ratings in prior periods, the
interest rate on the 2008 Notes was 10.05 percent per annum as of February 2, 2008. Our access to the capital
markets and interest expense on future financings is dependent on our senior unsecured debt rating.
Our long-term debt as of February 2, 2008 consists of $50 million notes payable due March 2009 with a fixed
interest rate of 6.25 percent per annum. See Note 7 of Notes to Consolidated Financial Statements for information
on the cross-currency interest rate swaps used in connection with this debt.
Credit Facilities
The following discussion should be read in conjunction with Note 5 of Notes to the Consolidated Financial
Statements.
Trade letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a
given amount of money upon presentation of specific documents demonstrating that merchandise has shipped.
Vendor payables are recorded in the Consolidated Balance Sheets at the time of merchandise title transfer,
although the letters of credit are generally issued prior to this. As of February 2, 2008, our letter of credit
agreements consist of two separate $125 million, three-year, unsecured letter of credit agreements for a total
aggregate availability of $250 million and a scheduled termination date of May 2010. As of February 2, 2008, we
had $91 million in trade letters of credit issued under these letter of credit agreements.
We also have a $500 million, five-year, unsecured revolving credit facility scheduled to expire in August 2012 (the
“New Facility”). The New Facility is available for general corporate purposes, including commercial paper
backstop, working capital, trade letters of credit and standby letters of credit. The facility usage fees and fees
related to the New Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage
ratio. If we were to draw on the facility, interest would be a base rate (typically the London Interbank Offered Rate)
plus a margin based on our long-term senior unsecured credit ratings and our leverage ratio on the unpaid
principal amount. To maintain availability of funds under the revolving credit facility, we pay a facility fee on the full
facility amount, regardless of usage. As of February 2, 2008, there were no borrowings under the New Facility.
The New Facility and letter of credit agreements contain financial and other covenants, including, but not limited
to, limitations on liens and subsidiary debt as well as the maintenance of two financial ratios—a fixed charge
coverage ratio and a leverage ratio. A violation of these covenants could result in a default under the New Facility
and letter of credit agreements, which would permit the participating banks to terminate our ability to access the
New Facility for letters of credit and advances, terminate our ability to request letters of credit under the letter of
credit agreements, require the immediate repayment of any outstanding advances under the New Facility, and
require the immediate posting of cash collateral in support of any outstanding letters of credit under the letter of
credit agreements. In addition, such a default could, under certain circumstance, permit the holders of our
outstanding unsecured debt to accelerate payment of such obligations.
Contractual Cash Obligations and Commercial Commitments
We are party to many contractual obligations involving commitments to make payments to third parties. The
following table provides summary information concerning our future contractual obligations as of February 2,
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