Big Lots 2008 Annual Report Download - page 96

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28
Depreciation Expense
Depreciation expense declined $12.8 million (12.6%) to $88.5 million for 2007 compared to $101.3 million
for 2006. The decrease was principally related to the decline in capital expenditures over the last 24 months
compared to earlier fiscal years. The lower capital expenditures are principally related to opening seven stores
in 2007 and 11 stores in 2006 compared to opening 73, 103, and 86 stores in 2005, 2004, and 2003, respectively.
For additional discussion and analysis of our real estate strategy, see the discussion above in the Overview
section of MD&A. 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 of our stores as of February 2, 2008, and other items generally considered “maintenance
capital” items for our distribution centers and stores.
In 2006, upon the successful completion of a pilot program in 32 of our stores and the decision to move forward
with the implementation of a new point-of-sale system in all of our stores, we reduced the remaining estimated
service life on approximately $6.9 million of certain point-of-sale equipment. The impact of this service life
reduction was to recognize approximately $2.3 million in the fourth quarter of 2006 and $4.1 million in 2007 as
additional depreciation expense on the old cash registers.
Interest Expense
Interest expense increased by $1.9 million to $2.5 million in 2007 compared to $0.6 million in 2006. The
increase in interest expense was principally due to higher average outstanding borrowings of $37.9 million in
2007 compared to average outstanding borrowings of $4.8 million in 2006. The higher average borrowings
were driven principally by the acquisition of approximately 30.0 million shares of our common stock for $712.5
million under our publicly announced share repurchase programs.
Interest and Investment Income
Interest and investment income increased $1.9 million in 2007 to $5.2 million compared to $3.3 million in
2006. Because we began 2007 with cash and cash equivalents of $281.7 million, we were in an invested position
throughout the first half of 2007. We invested primarily in money market type investments that are considered
cash equivalents and other short term high grade bond mutual funds.
Income Taxes
Our effective income tax rate on income from continuing operations was 36.8% for 2007 compared to 33.9% for
2006. The increase in 2007 was driven primarily by less benefit from valuation allowance reductions (relating to
net operating loss deferred tax assets) and the increase in income from continuing operations before income taxes.
Discontinued Operations
We recorded income from discontinued operations of $7.3 million in 2007 compared to $11.4 million in 2006.
The income from discontinued operations in 2007 was principally comprised of 1) the release of our KB-I
Bankruptcy Lease Obligations (as defined in note 11 to the accompanying consolidated financial statements)
of $6.6 million, net of tax, 2) the recognition of $1.1 million of proceeds, net of tax, from the bankruptcy
trust as recovery for prior charges incurred by us for KB-I Bankruptcy Lease Obligations and the Pittsfield,
Massachusetts distribution center (formerly owned by KB Toys) mortgage guarantee, and 3) exit-related costs
on the 130 closed stores of $0.6 million, net of tax, related to expenses on the portion of the 130 stores where the
leases have not been terminated. The income from discontinued operations in 2006 was principally comprised
of the partial release of our KB-I Bankruptcy Lease Obligations of $8.7 million, net of tax, and the release of
KB Toys-related income tax and sales tax indemnification liabilities of $4.7 million, net of tax, which were
partially offset by a loss on the sale of the Pittsfield, Massachusetts distribution center of approximately $1.4
million, net of tax and exit-related costs on the 130 closed stores of $1.6 million, net of tax, including a $0.7
million pretax pension settlement charge and expenses on the portion of the 130 stores where the leases had not
been terminated.