Big Lots 2013 Annual Report Download - page 174

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Other Performance Factors
Interest Expense
Interest expense increased $0.7 million to $4.2 million in 2012 compared to $3.5 million in 2011. The increase in interest
expense was primarily driven by increased borrowings in 2012. This increase was offset by decreases due to $0.8 million of
non-recurring prepayment fees in the second quarter of 2011 that were associated with repayment of the notes payable assumed
in the acquisition of Liquidation World Inc. The increase was also offset by lower amortization of deferred bank fees on our
2011 Credit Agreement in 2012 as compared to deferred bank fees on our prior credit agreement in 2011. We had total average
borrowings (including capital leases) of $200.3 million in 2012 compared to total average borrowings of $88.2 million in 2011.
The increase in total average borrowings was primarily the result of our investment of $298.5 million in 2012 to purchase
approximately 8.1 million of our outstanding shares under the 2011 and 2012 Repurchase Programs.
Income Taxes
The effective income tax rate in 2012 and 2011 for income from continuing operations was 39.8% and 39.4%,
respectively. The higher rate in 2012 is primarily due to a valuation allowance relative to the deferred tax benefit of the loss
generated by our Canadian segment on a lower pretax income base 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, and it was amended on May 30, 2013 to lower our interest rates,
pricing, and fees and the term was extended from July 22, 2016 to May 30, 2018. 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. In connection with the amendment of the 2011 Credit Agreement, we paid bank fees and other
expenses in the aggregate amount of $0.9 million, which are being amortized over the term of the agreement. Borrowings
under the 2011 Credit Agreement are available for general corporate purposes and working capital. The 2011 Credit Agreement
includes a $30 million swing loan sublimit and a $150 million letter of credit sublimit. 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 or LIBOR. The lenders under the 2011 Credit Agreement consented to the wind down of our Canadian segment,
and, in connection therewith, in January 2014, we and the lenders agreed to eliminate Big Lots Canada, Inc. as a borrower
under the 2011 Credit Agreement, which in turn resulted in the elimination of the $10 million Canadian swing loan sublimit,
the $200 million Canadian revolving credit loan subfacility, and the CDOR interest rate option. The elimination of Big Lots
Canada, Inc. as a borrower and the elimination of these provisions regarding Canadian borrowings did not change the total
amount available under the 2011 Credit Agreement. 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 1, 2014, 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, and if needed, letters of credit required to cover 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 2013, our total
indebtedness (outstanding borrowings and letters of credit) under the 2011 Credit Agreement, peaked at approximately $358
million in November.