Big Lots 2008 Annual Report Download - page 93

25
compared to opening 73, 103, and 86 stores in 2005, 2004, and 2003, respectively. In addition, in 2006 and 2007,
we took a conservative approach to capital investments aimed primarily at the development and installation of
a new point-of-sale register system, which was installed in approximately 700 stores in 2007 and in all of our
remaining stores in 2008. As a result of the installation of the new point-of-sale register system, we reduced the
estimated remaining service life on our old register system, effective the fourth quarter of 2006. The impact
of this service life reduction was to recognize $4.1 million in 2007 and $0.5 million in 2008 as additional
depreciation expense associated with the old cash registers.
For 2009, we expect capital expenditures of approximately $80 million to $85 million. Using this assumption
and the run rate of depreciation on our existing property and equipment, we expect 2009 depreciation expense
to be $70 million to $75 million, which would represent a decline from the $78.6 million of depreciation expense
in 2008.
Interest Expense
Interest expense increased $2.8 million to $5.3 million in 2008 compared to $2.5 million in 2007. The increase
in interest expense was principally due to higher average borrowings of $151.8 million in 2008 compared to
average borrowings of $37.9 million in 2007. The higher average borrowings caused interest expense to be higher
by approximately $4 million. The higher average borrowings were driven principally by the acquisition of our
common shares under our publicly announced share repurchase programs. Our average effective interest rate
of 3.5% in 2008 was lower than our average effective interest rate of 6.6% in 2007. The decrease in the average
effective interest rate decreased our interest expense by approximately $1 million in 2008. The lower interest rate
was due to a decrease in LIBOR, the base interest rate available to us under the 2004 Credit Agreement.
We anticipate lower average borrowings in 2009 as we began 2009 with borrowings under the 2004 Credit
Agreement of $61.7 million, which was $102 million lower than the borrowings outstanding at the beginning
of 2008. In addition, we expect cash provided by operating activities to be $225 million to $230 million, which
is in excess of cash used for investing activities (capital expenditures) of $80 million to $85 million. In 2009,
we expect to enter into a new bank credit agreement to replace the 2004 Credit Agreement. Because interest
rate credit spreads have widened since we entered into the 2004 Credit Agreement, we may pay higher interest
rates in the future under a new bank credit agreement; however, the current LIBOR rate, which is a base rate
available to us under the 2004 Credit Agreement and expected to be available to us under a new bank credit
agreement (prior to the application of the applicable credit spread), is approximately 4% lower than the peak
LIBOR rate in 2008. We do not expect the higher credit spread under the new bank agreement to have a
material adverse effect on our operating results in 2009. We expect interest expense to be lower in 2009 than
2008 because the estimated impact of the lower average borrowings is greater than the estimated impact of the
higher interest rates.
Interest and Investment Income
Interest and investment income decreased $5.1 million in 2008 to $0.1 million compared to $5.2 million in 2007.
The decline in interest and investment income was caused by the reduction in funds available to invest in 2008
compared to 2007. Our average invested amount in 2008 was $3.6 million compared to $130.4 million in 2007.
The decline in funds available for investment was caused by the $750 million of share repurchases under our 2007
Share Repurchase Programs during the period March 2007 through February 2008. In 2007, we invested primarily
in money market type investments that were considered cash equivalents and other short term high grade bond
mutual funds. We did not hold any investment balances at the end of 2008. We expect to have higher average
invested amounts in 2009 as result of the lower debt levels and expected cash provided by operating activities.
Income Taxes
Our effective income tax rate on income from continuing operations was 38.0% for 2008 compared to 36.8% for
2007. The net increase in 2008 was driven by a decrease in nontaxable municipal interest income, the increase in
the valuation allowance on unrealized capital losses (versus a net decrease in the valuation allowance in 2007), and
a change in the jurisdictional earnings mix, partially offset by the settlement of certain income tax matters.
We anticipate our 2009 effective income tax rate to be within a range of 38.0% to 39.0%.