Big Lots 2008 Annual Report Download - page 97

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Capital Resources and Liquidity
The primary sources of our liquidity are cash flows from operations and, as necessary, borrowings under the
2004 Credit Agreement. Our net income and, consequently, our cash provided by operations are impacted
by net sales volume, seasonal sales patterns, and operating profit margins. Our net sales are typically highest
during the nine-weeks of Christmas selling season (during our fourth fiscal quarter). Generally our working
capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We meet those
needs typically with borrowings under the 2004 Credit Agreement, which terminates on October 28, 2009. At
January 31, 2009, working capital was $355.8 million, which included $61.7 million for the current maturities of
obligations under the 2004 Credit Agreement.
Global capital and credit markets have recently experienced increased volatility and disruption. Despite this
volatility and disruption, we believe that our operating cash flow, together with the 2004 Credit Agreement,
will be adequate to meet current operating, investing and financing needs. There can be no assurance that
continued or increased volatility and disruption in the global capital and credit markets will not impair our
ability to replace, renew, extend or modify the 2004 Credit Agreement beyond its October 2009 termination
date on commercially acceptable terms. We expect to have a new bank credit agreement by the end of the
second quarter of 2009; however, we expect the cost of borrowing under the new bank credit agreement will be
higher than the 2004 Credit Agreement and our borrowing capacity may be less than the $500 million currently
available to us under the 2004 Credit Agreement.
Cash provided by operating activities declined in 2008 to $211.1 million from $307.9 million in 2007 and $381.5
million in 2006. While operating profit margins have expanded from 2006 to 2008, these improvements were
more than offset with working capital changes. During 2006 through 2008, our inventories declined resulting
in cash provided by operations of $99.5 million. The majority of the decline in inventories occurred in 2006 and
increased our 2006 cash from operations by $77.9 million. In 2007 and 2008 the inventory decline only resulted
in $10.2 million and $11.3 million of cash from operations, respectively. The decline in inventories was driven
by lower average store inventory and lower store count each year. The decline in average store inventory was
more pronounced in 2006 as a result of our merchandising and operating strategies that resulted in an improved
turnover rate of our inventories (which increased from 3.0 turns in 2005 to 3.4 turns in 2006) along with delayed
timing of merchandise replenishments. Comparatively, during 2006 through 2008, our accounts payable increased
resulting in cash provided by operations of $66.0 million. Our accounts payable leverage was most pronounced in
2007 when we benefited from an increase of $66.3 million in accounts payable. The increase in accounts payable
in 2007 was driven by our efforts to improve our terms with our vendors. Accounts payable declined in 2008
principally due to lower inventory in 2008 compared to 2007, and a shift in our merchandise mix to purchases
from vendors with shorter payment terms, many of whom offer us discounts. Our cash paid for income taxes
was $35.7 million, $65.8 million and $92.4 million during 2006, 2007, and 2008, respectively. The increases in
income taxes paid were a direct result of higher operating profits and partly impacted by the timing of required
tax payments relative to the fiscal years in which these profits were earned. Additionally, in 2007, we benefited
from larger tax deductions caused by our employees’ exercise of stock options and vesting of restricted stock. In
2008, we contributed $11.0 million to the Pension Plan. These contributions were made principally as a result of
the decline in market value of the Pension Plan’s investments resulting from the general economic conditions. We
do not expect to have any required contributions to the Pension Plan in 2009; however, we may choose to make
discretionary contributions. Based on assumptions about our 2009 operating performance that we have discussed
above in MD&A, we expect cash provided by operating activities to be approximately $225 million to $230 million
in 2009. However, based on the current general economic conditions, consumers may elect to defer or forego
purchases in response to tighter credit and negative financial news. Reduced consumer spending may reduce our
net sales, which could lower our profitability and limit our ability to convert merchandise inventories to cash.
Cash used in investing activities increased in 2008 to $88.2 million from $58.8 million in 2007 and $30.4
million in 2006. These changes were caused by the increase in capital expenditures each year. In 2006, our
capital expenditures were limited principally to maintenance type capital related to various store, distribution
center, and lease related requirements, as well as capital related to opening 11 new stores, and software
development costs for our new point-of-sale register system. In 2007, our capital expenditures were higher
principally due to the installation of the new point-of-sale register system in approximately 700 of our stores
and for approximately 70 store retrofits to better feature some of our key merchandise growth classifications.
In 2008, we completed the installation of new cash registers in all of our stores and capital expenditures were