Big Lots 2007 Annual Report Download - page 117

29
covenants could result in a default under the Credit Agreement, which would permit the lenders to restrict
our ability to further access the Credit Agreement for loans and letters of credit, and require the immediate
repayment of any outstanding loans under the Credit Agreement.
On December 22, 2006, we entered into an amendment to the Credit Agreement in order to permit us to acquire
investments rated by an additional rating agency. On October 25, 2005, we entered into an amendment to the
Credit Agreement in order to eliminate the impact on the covenant calculations of the charges related to the store
closings discussed in note 11 to the accompanying consolidated financial statements. We were in compliance
with our amended financial covenants under the Credit Agreement at February 2, 2008.
The Credit Agreement permits, at our option, borrowings at various interest rate options based on the prime
rate or the London InterBank Offering Rate plus applicable margin. The Credit Agreement also permits, as
applicable, borrowings at various interest rate options mutually agreed upon by us and the lenders. Whenever
our liquidity position requires us to borrow funds under the Credit Agreement, we typically repay and/or borrow
on a daily basis. The daily activity is a net result of our liquidity position, which is generally driven by: 1) cash
inflows such as cash or credit card receipts collected from stores for merchandise sales and other miscellaneous
deposits; and 2) cash outflows such as check clearings for the acquisition of merchandise and payroll, wire and
other electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the Credit Agreement includes a $30.0 million swing loan sub-limit, a
$50.0 million bid loan sub-limit, and a $150.0 million letter of credit sub-limit. At February 2, 2008, we had
$163.7 million of borrowings outstanding under the Credit Agreement. The weighted average interest rate
on these borrowings was 4.6% as of February 2, 2008. At February 3, 2007, we did not have any borrowings
outstanding under the Credit Agreement. The borrowings available under the Credit Agreement, after taking
into account the outstanding borrowings and the reduction of availability resulting from outstanding letters of
credit totaling $58.4 million, were $277.9 million at February 2, 2008.
We utilize our credit facility, as necessary, to provide funds for ongoing and seasonal working capital, capital
expenditures, share repurchase programs, and other expenditures. In addition, our credit facility is used to
provide letters of credit for various operating and regulatory requirements, a significant portion of which
consists of letters of credit required as a result of our self-funded insurance programs. Given the seasonality
of our business, the amount of borrowings under the Credit Agreement may fluctuate materially depending
on various factors, including our operating financial performance, the time of year, and our need to increase
merchandise inventory levels prior to the peak selling season. We anticipate total indebtedness under the facility
will be less than $350.0 million through the end of May 2008.
Liquidity
The primary source of our liquidity is cash flows from operations and, as necessary, borrowings under the
Credit Agreement. At February 2, 2008, working capital was $390.8 million.
We generated $307.9 million from operating activities in 2007, driven by net income of $158.5 million,
depreciation and amortization expense of $83.1 million, improved accounts payable leverage of $66.3 million,
and a decrease in inventories of $10.2 million. These increases in cash were partially offset by a decline in
accrued operating expenses of $25.4 million. The increase in accounts payable was driven by our efforts to
improve terms with our vendors. At February 2, 2008, to minimize the outstanding borrowings under the
Credit Agreement, the dollar amount of outstanding checks was greater than cash deposited at our disbursement
bank, and as a result, we reported the unfunded checks as accounts payable. The decrease in inventories was
primarily due to lower store count at the end of the 2007. The decline in accrued operating expenses included
lower insurance reserves, primarily due to the new health and welfare plan provider in 2007 that makes claim
payments in a more timely manner, lower accrued bonus primarily due to the lower rate of achievement of
general office and store performance objectives in 2007, and lower sales taxes payable primarily driven by the
53rd week in fiscal 2006.