10-Q 1 nci10q103004.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from------- to --------- Commission File Number 0-12994 Nordstrom Credit, Inc. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Colorado 91-1181301 ------------------------------- ------------------ (State or other jurisdiction of (IRS Employer incorporation or organization Identification No.) 13531 East Caley, Centennial, Colorado 80111 ---------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 303-397-4700 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act 12b-2). YES NO X ----- ----- On November 30, 2004 Registrant had 10,000 shares of common stock ($.50 par value) outstanding; all such shares are owned by Registrant's parent, Nordstrom, Inc. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. 1 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY ------------------------------------- INDEX -----

Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter and Year to Date ended ~~July~~October 3130, 2004 and ~~July~~October 31, 2003 3 Condensed Consolidated Balance Sheets ~~July~~October 3130, 2004, January 31, 2004 and ~~July~~October 31, 2003 4 Condensed Consolidated Statements of Cash Flows Year to Date ended ~~July~~October 3130, 2004 and ~~July~~October 31, 2003 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 4. Controls and Procedures 8 PART II. OTHER INFORMATION Item 6. Exhibits 9 SIGNATURES 10

2 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands) (unaudited)

Quarter Ended Year to Date Ended ----------------------- ----------------------- ~~July~~October 3130, ~~July~~October 31, ~~July~~October 3130, ~~July~~October 31, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenue: Service charge income $23,~~512~~539 $2324,~~988~~263 $4770,~~027~~566 $4873,~~745~~008 Other fees and charges 21,~~022~~843 2,~~301~~074 35,~~897~~740 46,~~404~~478 -------- -------- -------- -------- Total revenue $25,~~534~~382 26,~~289~~337 5076,~~924~~306 5379,~~149~~486 Expenses: Interest, ~~net~~expense (45,~~248~~819) (5,~~023~~516) (916,~~374~~980) (1016,~~058~~298) Servicing and marketing fees paid to Nordstrom fsb (23,~~987~~055) (3,~~360~~321) (69,~~149~~204) (710,~~536~~857) Selling, general and administrative (~~252~~251) (~~388~~257) (~~433~~684) (~~639~~896) -------- -------- -------- -------- Total expenses (79,~~487~~125) (89,~~771~~094) (1526,~~956~~868) (1828,~~233~~051) Interest income 1,575 515 3,362 1,239 -------- -------- -------- -------- Operating income 1817,~~047~~832 17,~~518~~758 3452,~~968~~800 3452,~~916~~674 Other income ~~282~~279 281 ~~568~~847 ~~562~~843 -------- -------- -------- -------- Earnings before income taxes 18,~~329~~111 1718,~~799~~039 3553,~~536~~647 3553,~~478~~517 Income tax expense (6,~~690~~610) (6,~~479~~585) (1219,~~971~~581) (1219,~~949~~534) -------- -------- -------- -------- Net earnings $11,~~639~~501 $11,~~320~~454 $2234,~~565~~066 $2233,~~529~~983 ======== ======== ======== ========

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 3 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited)

~~July~~October 3130, January 31, ~~July~~October 31, 2004 2004 2003 ----------- ----------- ----------- ASSETS ------ Cash and cash equivalents $ ~~315~~432 $ 338 $ ~~397~~320 Customer accounts receivable, net of allowance for doubtful accounts of $19,~~934~~534, $20,320 and $2120,~~146~~746 ~~604~~535,~~388~~597 575,792 ~~619~~552,~~731~~672 ~~Master~~Investment in master trust certificates 250,000 - - Receivable from affiliates and other receivables, net 3022,~~347~~836 27,581 1014,~~165~~163 Notes receivable from affiliates 3829,~~560~~185 205,435 ~~160~~177,~~495~~835 Land, buildings and equipment, net ~~443~~438 279 ~~281~~284 Deferred taxes and other assets 6,~~969~~827 7,554 87,~~482~~704 -------- -------- -------- $~~931~~845,~~022~~315 $816,979 $~~799~~752,~~551~~978 ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Payable to affiliates, net $ 2,~~505~~905 $ 9,450 $ 812,~~529~~472 Note payable to Nordstrom, Inc. ~~220~~120,~~125~~975 118,850 ~~130~~66,~~185~~825 Accrued interest, taxes and other 46,~~676~~981 6,017 ~~662~~2,317 Current portion of long-term debt 96,~~527~~027 - - Long-term debt 300,000 397,500 397,500 Other liabilities 14,~~367~~104 14,905 15,~~443~~178 -------- -------- -------- Total liabilities ~~638~~540,~~200~~992 546,722 ~~552~~494,~~319~~292 Common stock and additional paid in capital 55,059 55,059 55,059 Retained earnings ~~237~~249,~~763~~264 215,198 ~~192~~203,~~173~~627 -------- -------- -------- Total shareholder's equity ~~292~~304,~~822~~323 270,257 ~~247~~258,~~232~~686 -------- -------- -------- $~~931~~845,~~022~~315 $816,979 $~~799~~752,~~551~~978 ======== ======== ========

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 4 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)

Year to Date Ended ----------------------- ~~July~~October 3130, ~~July~~October 31, 2004 2003 ---------- ---------- OPERATING ACTIVITIES: Net earnings $2234,~~565~~066 $2233,~~529~~983 Adjustments to reconcile net earnings to net cash ~~provided~~used byin operating activities: Depreciation and amortization 68104 5887 Deferred income taxes ~~214~~310 -634 Change in operating assets and liabilities: Receivable from affiliates and other receivables, net (~~8,224~~713) 1921,~~771~~962 Notes receivable from affiliates (8373,~~125~~750) (7693,~~100~~440) Other assets 9910 ~~168~~287 Payable to affiliates, net (~~1,266~~756) 64,~~399~~153 Accrued interest, taxes and other (964 1,~~341)~~364 ~~(291)~~ Other liabilities (~~538~~801) (~~427~~692) -------- -------- Net cash used byin operating activities (7140,~~548~~566) (2731,~~893~~662) -------- -------- INVESTING ACTIVITIES: Increase in customer accounts receivable, net ~~(28~~40,~~596)~~195 ~~(25~~41,~~281)~~778 Additions to property and equipment, net (~~181~~187) (2431) -------- -------- Net cash ~~used~~provided inby investing activities ~~(28~~40,~~777)~~008 ~~(25~~41,~~305)~~747 -------- -------- FINANCING ACTIVITIES: Borrowings (repayments) under note payable to Nordstrom, Inc., net ~~101~~2,~~275~~125 55(7,~~725~~635) Principal payments on long-term debt (~~973~~1,473) (2,500) -------- -------- Net cash provided by (used in) financing activities ~~100,302~~652 53(10,~~225~~135) -------- -------- Net increase (decrease) ~~increase~~ in cash and cash equivalents 94 (2350) 27 Cash and cash equivalents at beginning of period 338 370 -------- -------- Cash and cash equivalents at end of period $ ~~315~~432 $ ~~397~~320 ======== ========

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 5 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Nordstrom Credit, Inc. 2003 Annual Report on Form 10-K. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. In management's opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. We reclassified certain prior year amounts to conform to the current year presentation. The interim financial information presented here is not necessarily indicative of the results to be expected for the fiscal year. Change in Fiscal Year --------------------- On February 1, 2004, our fiscal year-end changed from January 31 to the Saturday closest to January 31. Future fiscal years will consist of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. Note 2 - Intercompany Interest Interest expense includes $631 and $243 of intercompany interest expense for the third quarter of 2004 and 2003, respectively. For the year to date periods ended October 30, 2004 and October 31, 2003, intercompany interest expense was $1,259 and $404, respectively. Interest income includes $122 and $508 of intercompany interest income for the third quarter of 2004 and 2003, respectively. For the year to date periods ended October 30, 2004 and October 31, 2003, intercompany interest income was $642 and $1,213, respectively. Note 3 - Customer Accounts Receivable Customer accounts receivable, net, consists of the following:

~~July~~October 3130, January 31, ~~July~~October 31, 2004 2004 2003 ---------- ----------- ---------- Private label trade receivables: Unrestricted accounts $ 610,~~213~~155 $ 6,120 $ 26,~~305~~022 Restricted accounts ~~618~~544,~~109~~976 589,992 ~~638~~567,~~572~~396 Allowance for doubtful accounts (19,~~934~~534) (20,320) (2120,~~146~~746) ---------- ----------- ---------- Private label trade receivables, net $~~604~~535,~~388~~597 $575,792 $~~619~~552,~~731~~672 ========== =========== ==========

Restricted accounts receivable secure the $300,000 term note due 2006, and the variable funding note facility, which had no balance outstanding in 2004. 6 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 4 - Investment in Master Trust Certificates On March 31, 2004, we exchanged $200,000 of intercompany receivables from Nordstrom fsb for an investment in master trust certificates ("2004 Notes") issued by a trust (the "Trust") that is comprised of Nordstrom co-branded VISA credit card receivables. Nordstrom fsb caused a portion of its interest in the Trust to be exchanged for the newly issued 2004 Notes. The 2004 Notes were purchased by us at par for a combined face amount of $200,000. Interest earned is based on one month LIBOR and a credit spread index. Maturity is subject to annual renewal by Nordstrom fsb and us. The principal balances can change subject to agreement and other approvals required by the governing transaction documents. On June 30, 2004, we mutually agreed with Nordstrom fsb to increase the face value of the 2004 Notes by $50,000 to $250,000. The 2004 Notes are accounted for as available-for-sale securities under Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Note 5 - Debt The agreement for our 6.7% medium-term notes contains restrictive covenants, which include maintaining a ratio of Earnings to Fixed Charges of at least 1.25 to 1.00. We are in full compliance with these restrictive covenants at October 30, 2004. During the third quarter of 2004, we retired $500 of our 6.7% medium-term notes for a total cash payment of $519. During the first quarter of 2004, we retired $973 of our 6.7% medium-term notes for a total cash payment of $1,033. In May 2004, we renewed our variable funding note backed by Nordstrom private label trade receivables and lowered the capacity by $50,000 to $150,000. This note is renewed annually and interest is paid based on the actual cost of commercial paper plus specified fees. We also pay a commitment fee for the note based on the amount of the facility. We did not make any borrowings under this note during the year to date period ended October 30, 2004. Note 6 - Supplementary Cash Flow Information As described above in Note 4, we exchanged the 2004 Notes that represent undivided interests in a pool of VISA credit card receivables for notes receivable from affiliates. The 2004 Notes have a combined face amount of $250,000 and were priced at par. Initial expenses of $2,206 related to the securitization of private label receivables were capitalized in November 2001 and are amortized using the straight-line method over the 60-month life of the trust agreement. Amortized costs are reimbursed by Nordstrom, Inc. monthly. Year to date amortization was $331 and $345 in 2004 and 2003, respectively. 7 of 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations We earn service charge income on customer accounts receivable, which we purchase from an affiliate that is also a wholly-owned subsidiary of our parent, Nordstrom, Inc. Service charge income decreased for the quarter and year to date periods ended October 30, 2004 compared to the same periods in 2003, primarily due to a decrease in the average customer accounts receivable balances. Customer accounts receivable have declined approximately 3% over the past year for the quarter and year to date periods ended October 30, 2004 due to lower volume and accelerated customer repayments. Other fees and charges consist primarily of late fees. Late fee income was $1.5 million and $1.8 million for the third quarter of 2004 and 2003, respectively. For the year to date periods in 2004 and 2003, late fee income was $4.8 million and $5.6 million, respectively. Interest income increased for the quarter and year to date periods ended October 30, 2004 compared to the same periods in 2003, primarily due to an increase in interest income earned on the investment in master trust certificates ("2004 Notes"). The interest rate on the 2004 Notes is higher than the rate on the receivables due from Nordstrom fsb, which we exchanged for the 2004 Notes. The increase in interest income related to the 2004 Notes was partially offset by a decrease in intercompany interest income. The decrease in intercompany interest income is due to the lower average outstanding note receivable balance from Nordstrom fsb during 2004 compared to the prior year. Servicing and marketing fees paid to Nordstrom fsb decreased for the quarter and year to date periods ended October 30, 2004 compared to the same periods in 2003, primarily due to a restructure of the marketing fees. The decrease is also due to a decline in the outstanding balances of the private label card portfolio. Item 4. Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our President and Vice President and Treasurer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our President and our Vice President and Treasurer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 8 of 10 PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits 31.1 Certification of President required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Vice President and Treasurer required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of President regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Vice President and Treasurer regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 9 of 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORDSTROM CREDIT, INC. AND SUBSIDIARY (Registrant) /s/ Michael G. Koppel --------------------------------------- Michael G. Koppel Vice President and Treasurer (Principal Financial Officer) Date: December 3, 2004 -------------------------- 10 of 10 NORDSTROM CREDIT INC. AND SUBSIDIARY Exhibit Index Exhibit Method of Filing ------- ---------------- 31.1 Certification of President Filed herewith electronically required by Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Vice President and Filed herewith electronically Treasurer required by Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of President Furnished herewith electronically regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Vice President and Furnished herewith electronically Treasurer regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filing Compare · NORDSTROM CREDIT INC