Big Lots 2012 Annual Report Download - page 111

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(including capital leases) of $88.2 million in 2011 compared to total average borrowings of $24.0 million in
2010. Borrowings increased as a result of our execution of the 2011 Repurchase Program and the acquisition of
Liquidation World Inc.
Income Taxes
The effective income tax rate in 2011 and 2010 for income from continuing operations was 39.4% and 37.4%,
respectively. The higher rate in 2011 is primarily due to a valuation allowance relative to the deferred tax
benefit of the loss generated by our Canadian segment, the effect of U.S. income taxes on a lower pretax income
base (driven by the loss generated by our Canadian segment) and a net decrease in favorable discrete income
tax items.
Capital Resources and Liquidity
On July 22, 2011, we entered into the 2011 Credit Agreement. The 2011 Credit Agreement is scheduled to expire
on July 22, 2016. In connection with our entry into the 2011 Credit Agreement, we paid bank fees and other
expenses in the aggregate amount of $3.0 million, which are being amortized over the term of the agreement.
Borrowings under the 2011 Credit Agreement are available for general corporate purposes, working capital,
and to repay certain of our indebtedness. The 2011 Credit Agreement includes a $10 million Canadian swing
loan sublimit, a $30 million U.S. swing loan sublimit, a $150 million letter of credit sublimit and a $200 million
Canadian revolving credit loan subfacility. The interest rates, pricing and fees under the 2011 Credit Agreement
fluctuate based on our debt rating. The 2011 Credit Agreement allows us to select our interest rate for each
borrowing from multiple interest rate options. The interest rate options are generally derived from the
prime rate, LIBOR, or CDOR. We may prepay revolving loans made under the 2011 Credit Agreement. The
2011 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on
indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a
fixed charge coverage ratio. A violation of any of the covenants could result in a default under the 2011 Credit
Agreement that would permit the lenders to restrict our ability to further access the 2011 Credit Agreement for
loans and letters of credit and require the immediate repayment of any outstanding loans under the 2011 Credit
Agreement. At February 2, 2013, we were in compliance with the covenants of the 2011 Credit Agreement.
We use the 2011 Credit Agreement, as necessary, to provide funds for ongoing and seasonal working capital,
capital expenditures, share repurchase programs, and other expenditures. In addition, we use the 2011 Credit
Agreement 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 2011 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.
The primary source of our liquidity is cash flows from operations and, as necessary, borrowings under the
2011 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-week Christmas selling season in our fourth fiscal quarter. Generally, our working capital
requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have typically funded
those requirements with borrowings under our credit facility. In 2012, our total indebtedness (outstanding
borrowings and letters of credit) peaked at approximately $574 million in November. At February 2, 2013, we
had $171.2 million in borrowings under the 2011 Credit Agreement and the borrowings available under the 2011
Credit Agreement were $523.4 million, after taking into account the reduction in availability resulting from
outstanding letters of credit totaling $5.4 million. We anticipate that total indebtedness under the 2011 Credit
Agreement through June 15, 2013, will not exceed $176.6 million, which includes our estimate of outstanding
letters of credit and the estimated impact of cash needs of Big Lots Canada. Working capital was $461.0 million
at February 2, 2013.
Whenever our liquidity position requires us to borrow funds under the 2011 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 the following components of our operations: (1) cash inflows such as cash or credit card