form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended May 5, 2007
or
£
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from __________ to __________
Commission
File Number 1-8897
BIG
LOTS, INC.
(Exact
name of registrant as specified in its charter)
Ohio
|
06-1119097
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
300
Phillipi Road, P.O. Box 28512, Columbus, Ohio
|
43228-5311
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(614)
278-6800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yesþ No£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check One):
Large
accelerated filer þ
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ Noþ
The
number of the registrant’s common shares, $0.01 par value, outstanding as of
June 8, 2007, was 106,875,741.
FORM
10-Q
FOR
THE FISCAL QUARTER ENDED MAY 5, 2007
TABLE
OF CONTENTS
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Page
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2
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2
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a)
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2
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b)
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3
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c)
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4
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d)
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5
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e)
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6
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13
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18
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18
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18
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18
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19
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19
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19
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19
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19
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20
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20
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Part
I. Financial Information
Item
1. Financial Statements
BIG
LOTS, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations (Unaudited)
(In
thousands, except per share amounts)
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,128,399
|
|
|
$ |
1,091,622
|
|
Cost
of sales
|
|
|
681,486
|
|
|
|
653,300
|
|
Gross
margin
|
|
|
446,913
|
|
|
|
438,322
|
|
Selling
and administrative expenses
|
|
|
382,686
|
|
|
|
392,389
|
|
Depreciation
expense
|
|
|
21,764
|
|
|
|
24,653
|
|
Operating
profit
|
|
|
42,463
|
|
|
|
21,280
|
|
Interest
expense
|
|
|
(92 |
) |
|
|
(90 |
) |
Interest
and investment income
|
|
|
3,010
|
|
|
|
394
|
|
Income
from continuing operations before income taxes
|
|
|
45,381
|
|
|
|
21,584
|
|
Income
tax expense
|
|
|
16,357
|
|
|
|
7,080
|
|
Income
from continuing operations
|
|
|
29,024
|
|
|
|
14,504
|
|
Loss
from discontinued operations, net of tax benefitof $166 and $506,
respectively
|
|
|
(260 |
) |
|
|
(791 |
) |
Net
income
|
|
$ |
28,764
|
|
|
$ |
13,713
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - basic
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.26
|
|
|
$ |
0.13
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
(0.01 |
) |
|
|
$ |
0.26
|
|
|
$ |
0.12
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - diluted
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.26
|
|
|
$ |
0.13
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
(0.01 |
) |
|
|
$ |
0.26
|
|
|
$ |
0.12
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
109,919
|
|
|
|
113,014
|
|
Dilutive
effect of share-based awards
|
|
|
1,765
|
|
|
|
1,494
|
|
Diluted
|
|
|
111,684
|
|
|
|
114,508
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BIG
LOTS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In
thousands, except par value)
|
|
(Unaudited)
May
5, 2007
|
|
|
February
3,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
210,122
|
|
|
$ |
281,657
|
|
Inventories
|
|
|
797,500
|
|
|
|
758,185
|
|
Deferred
income taxes
|
|
|
63,648
|
|
|
|
60,292
|
|
Other
current assets
|
|
|
54,771
|
|
|
|
48,913
|
|
Total
current assets
|
|
|
1,126,041
|
|
|
|
1,149,047
|
|
Property
and equipment - net
|
|
|
494,536
|
|
|
|
505,647
|
|
Deferred
income taxes
|
|
|
51,260
|
|
|
|
45,057
|
|
Other
assets
|
|
|
22,044
|
|
|
|
20,775
|
|
Total
assets
|
|
$ |
1,693,881
|
|
|
$ |
1,720,526
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
222,306
|
|
|
$ |
193,996
|
|
Property,
payroll, and other taxes
|
|
|
71,579
|
|
|
|
93,706
|
|
Accrued
operating expenses
|
|
|
72,500
|
|
|
|
58,815
|
|
Insurance
reserves
|
|
|
43,856
|
|
|
|
43,518
|
|
KB
bankruptcy lease obligation
|
|
|
11,730
|
|
|
|
12,660
|
|
Accrued
salaries and wages
|
|
|
26,612
|
|
|
|
43,515
|
|
Income
taxes payable
|
|
|
7,867
|
|
|
|
28,022
|
|
Total
current liabilities
|
|
|
456,450
|
|
|
|
474,232
|
|
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
36,625
|
|
|
|
37,801
|
|
Insurance
reserves
|
|
|
43,988
|
|
|
|
44,238
|
|
Unrecognized
tax benefits
|
|
|
30,039
|
|
|
|
-
|
|
Other
liabilities
|
|
|
35,060
|
|
|
|
34,552
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
shares - authorized 2,000 shares; $0.01 par value; none
issued
|
|
|
-
|
|
|
|
-
|
|
Common
shares - authorized 298,000 shares; $0.01 par value; issued
117,495 shares; outstanding 108,767 shares and 109,633 shares,
respectively
|
|
|
1,175
|
|
|
|
1,175
|
|
Treasury
shares - 8,728 shares and 7,862 shares, respectively, at
cost
|
|
|
(201,153 |
) |
|
|
(124,182 |
) |
Additional
paid-in capital
|
|
|
489,634
|
|
|
|
477,318
|
|
Retained
earnings
|
|
|
807,874
|
|
|
|
781,325
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(5,811 |
) |
|
|
(5,933 |
) |
Total
shareholders' equity
|
|
|
1,091,719
|
|
|
|
1,129,703
|
|
Total
liabilities and shareholders' equity
|
|
$ |
1,693,881
|
|
|
$ |
1,720,526
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BIG
LOTS, INC. AND SUBSIDIARIES
Consolidated
Statements of Shareholders’ Equity (Unaudited)
|
|
Common
|
|
|
Treasury
|
|
|
Unearned
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- January 28, 2006
|
|
|
113,932
|
|
|
$ |
1,175
|
|
|
|
3,563
|
|
|
$ |
(48,294 |
) |
|
$ |
(2,114 |
) |
|
$ |
470,677
|
|
|
$ |
657,280
|
|
|
$ |
-
|
|
|
$ |
1,078,724
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
13,713
|
|
|
|
-
|
|
|
|
13,713
|
|
Adjustment
due to SFAS No. 123(R)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,114
|
|
|
|
(2,114 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchases
of common shares
|
|
|
(2,359 |
) |
|
|
-
|
|
|
|
2,359
|
|
|
|
(31,314 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,314 |
) |
Exercise
of stock options
|
|
|
445
|
|
|
|
-
|
|
|
|
(445 |
) |
|
|
6,083
|
|
|
|
-
|
|
|
|
(881 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
5,202
|
|
Tax
benefit from share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
367
|
|
|
|
-
|
|
|
|
-
|
|
|
|
367
|
|
Treasury
shares used for matching contributions to savings plan
|
|
|
404
|
|
|
|
-
|
|
|
|
(404 |
) |
|
|
5,589
|
|
|
|
-
|
|
|
|
(415 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
5,174
|
|
Sale
of treasury shares used for deferred compensation plan
|
|
|
5
|
|
|
|
-
|
|
|
|
(5 |
) |
|
|
77
|
|
|
|
-
|
|
|
|
(19 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
Share-based
employee compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
698
|
|
|
|
-
|
|
|
|
-
|
|
|
|
698
|
|
Balance
- April 29, 2006
|
|
|
112,427
|
|
|
|
1,175
|
|
|
|
5,068
|
|
|
|
(67,859 |
) |
|
|
-
|
|
|
|
468,313
|
|
|
|
670,993
|
|
|
|
-
|
|
|
|
1,072,622
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
110,332
|
|
|
|
|
|
|
|
110,332
|
|
Adjustment
due to SFAS No. 158
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,933 |
) |
|
|
(5,933 |
) |
Purchases
of common shares
|
|
|
(7,102 |
) |
|
|
-
|
|
|
|
7,102
|
|
|
|
(119,136 |
) |
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(119,136 |
) |
Structured
share repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
Exercise
of stock options
|
|
|
4,227
|
|
|
|
-
|
|
|
|
(4,227 |
) |
|
|
62,045
|
|
|
|
-
|
|
|
|
(9,728 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
52,317
|
|
Tax
benefit from share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,531
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,531
|
|
Sale
of treasury shares used for deferred compensation plan
|
|
|
81
|
|
|
|
-
|
|
|
|
(81 |
) |
|
|
768
|
|
|
|
-
|
|
|
|
688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,456
|
|
Share-based
employee compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,887
|
|
|
|
-
|
|
|
|
|
|
|
|
5,887
|
|
Balance
- February 3, 2007
|
|
|
109,633
|
|
|
|
1,175
|
|
|
|
7,862
|
|
|
|
(124,182 |
) |
|
|
-
|
|
|
|
477,318
|
|
|
|
781,325
|
|
|
|
(5,933 |
) |
|
|
1,129,703
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,764
|
|
|
|
-
|
|
|
|
28,764
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of pension, net of tax of $89
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122
|
|
|
|
122
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,886
|
|
Adjustment
due to FIN No. 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,215 |
) |
|
|
-
|
|
|
|
(2,215 |
) |
Purchases
of common shares
|
|
|
(3,241 |
) |
|
|
-
|
|
|
|
3,241
|
|
|
|
(113,732 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(113,732 |
) |
Exercise
of stock options
|
|
|
2,318
|
|
|
|
-
|
|
|
|
(2,318 |
) |
|
|
36,143
|
|
|
|
-
|
|
|
|
(6,029 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
30,114
|
|
Tax
benefit from share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,998
|
|
Sale
of treasury shares used for deferred compensation plan
|
|
|
57
|
|
|
|
-
|
|
|
|
(57 |
) |
|
|
618
|
|
|
|
-
|
|
|
|
1,037
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,655
|
|
Share-based
employee compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,310
|
|
Balance
- May 5, 2007
|
|
|
108,767
|
|
|
$ |
1,175
|
|
|
|
8,728
|
|
|
$ |
(201,153 |
) |
|
$ |
-
|
|
|
$ |
489,634
|
|
|
$ |
807,874
|
|
|
$ |
(5,811 |
) |
|
$ |
1,091,719
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BIG
LOTS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Unaudited)
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
28,764
|
|
|
$ |
13,713
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
20,474
|
|
|
|
23,281
|
|
Deferred
income taxes
|
|
|
(5,906 |
) |
|
|
(3,489 |
) |
Loss
on disposition of equipment
|
|
|
85
|
|
|
|
509
|
|
Employee
benefits paid with common shares
|
|
|
-
|
|
|
|
5,174
|
|
Non-cash
share-based compensation expense
|
|
|
2,310
|
|
|
|
698
|
|
Pension
|
|
|
372
|
|
|
|
270
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(39,315 |
) |
|
|
30,488
|
|
Accounts
payable
|
|
|
28,310
|
|
|
|
14,816
|
|
Current
income taxes
|
|
|
(21,882 |
) |
|
|
22,198
|
|
Other
current assets
|
|
|
(3,158 |
) |
|
|
2,930
|
|
Other
current liabilities
|
|
|
(8,819 |
) |
|
|
(2,210 |
) |
Other
assets
|
|
|
(1,607 |
) |
|
|
(247 |
) |
Other
liabilities
|
|
|
(301 |
) |
|
|
1,803
|
|
Net
cash provided by (used in) operating activities
|
|
|
(673 |
) |
|
|
109,934
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(7,995 |
) |
|
|
(6,036 |
) |
Purchase
of short-term investments
|
|
|
(385,025 |
) |
|
|
-
|
|
Redemption
of short-term investments
|
|
|
385,025
|
|
|
|
-
|
|
Cash
proceeds from sale of equipment
|
|
|
114
|
|
|
|
154
|
|
Other
|
|
|
(11 |
) |
|
|
(34 |
) |
Net
cash used in investing activities
|
|
|
(7,892 |
) |
|
|
(5,916 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term obligations
|
|
|
-
|
|
|
|
14,600
|
|
Payment
of long-term obligations
|
|
|
(17 |
) |
|
|
(20,100 |
) |
Proceeds
from the exercise of stock options
|
|
|
30,114
|
|
|
|
5,202
|
|
Excess
tax benefit from share-based awards
|
|
|
14,998
|
|
|
|
367
|
|
Payment
for treasury shares acquired
|
|
|
(109,720 |
) |
|
|
(31,314 |
) |
Treasury
shares sold for deferred compensation plan
|
|
|
1,655
|
|
|
|
58
|
|
Net
cash used in financing activities
|
|
|
(62,970 |
) |
|
|
(31,187 |
) |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(71,535 |
) |
|
|
72,831
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
281,657
|
|
|
|
1,710
|
|
End
of period
|
|
$ |
210,122
|
|
|
$ |
74,541
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest, including capital leases
|
|
$ |
2
|
|
|
$ |
29
|
|
Cash
paid for income taxes (excluding impact of refunds)
|
|
$ |
28,542
|
|
|
$ |
3
|
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
Assets
acquired under capital leases
|
|
$ |
799
|
|
|
$ |
-
|
|
Treasury
shares acquired, but not settled
|
|
$ |
4,012
|
|
|
$ |
-
|
|
Increase
(decrease) in accrued property and equipment
|
|
$ |
2,059
|
|
|
$ |
(1,130 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
BIG
LOTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Unaudited)
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All
references in this report to “we,” “us,” or “our” are to Big Lots, Inc. and
its subsidiaries. We are the nation’s largest broadline closeout
retailer. At May 5, 2007, we operated 1,376 stores in 47
states. We manage our business on the basis of one segment, broadline
closeout retailing. We have historically experienced, and expect to
continue to experience, seasonal fluctuations, with a larger percentage of
our
net sales and operating profit realized in the fourth fiscal
quarter. We make available, free of charge, through the “Investors”
section of our website (www.biglots.com) under the “SEC Filings” caption, our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)
as soon as reasonably practicable after we file such material with, or furnish
it to, the Securities and Exchange Commission (“SEC”). The contents
of our websites are not part of this report.
The
accompanying consolidated financial statements and these notes have been
prepared in accordance with the rules and regulations of the SEC for interim
financial information. The consolidated financial statements reflect all normal
recurring adjustments which management believes are necessary to present fairly
our financial condition, results of operations, and cash flows for all periods
presented. These statements, however, do not include all information necessary
for a complete presentation of financial position, results of operations, and
cash flows in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Interim results may not
necessarily be indicative of results that may be expected for any other interim
period or for the year as a whole. The accompanying consolidated
financial statements and these notes should be read in conjunction with the
audited consolidated financial statements and notes included in our Annual
Report on Form 10-K for the fiscal year ended February 3, 2007 (the “2006 Form
10-K”).
Fiscal
Periods
We
follow
the concept of a 52-53 week fiscal year, which ends on the Saturday nearest
to
January 31. Unless otherwise stated, references to years in this report relate
to fiscal years rather than calendar years. Fiscal year 2007 (“2007”)
is comprised of the 52 weeks commenced on February 4, 2007 and ending on
February 2, 2008. Fiscal year 2006 (“2006”) was comprised of the 53
weeks commenced on January 29, 2006 and ended on February 3,
2007. The fiscal quarters ended May 5, 2007 (“first quarter of 2007”)
and April 29, 2006 (“first quarter of 2006”) were both comprised of 13
weeks.
Selling
and Administrative Expenses
We
include store expenses (such as payroll and occupancy costs), warehousing costs,
outbound distribution and transportation costs to our stores, advertising,
purchasing, insurance, non-income taxes, and overhead costs in selling and
administrative expenses. Selling and administrative expense rates may
not be comparable to those of other retailers that include outbound distribution
and transportation costs in cost of sales. Outbound distribution and
transportation costs included in selling and administrative expenses were $54.4
million and $57.9 million for the first quarter of 2007 and the first quarter
of
2006, respectively.
Included
in selling and administrative expenses in the first quarter of 2007, was
approximately $3.9 million of insurance proceeds we received as recovery for
damages related to 2005 hurricanes.
Advertising
Expense
Advertising
costs, which are expensed as incurred, consist primarily of print and television
advertisements, and are included in selling and administrative
expenses. Advertising expenses were $26.6 million and $21.2 million
for the first quarter of 2007 and the first quarter of 2006,
respectively.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements. SFAS No. 157 addresses how companies should
approach measuring fair value when required by GAAP. SFAS No. 157
does not create or modify any GAAP requirements to apply fair value
accounting. The standard provides a single definition of fair value
that is to be applied consistently for all accounting applications and also
generally describes and prioritizes according to reliability the methods and
inputs used in valuations. SFAS No. 157 prescribes additional
disclosures regarding the extent of fair value measurements included in a
company’s financial statements and the methods and inputs used to arrive at
these values. SFAS No. 157 is effective on a prospective basis for us
in the first quarter of the fiscal year ending on January 31, 2009
(“2008”). We expect no significant impact on our financial condition,
results of operations, or liquidity from adopting this statement.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statement No. 87, 88, 106, and 132(R). We adopted the
recognition provisions of SFAS No. 158 in the fourth quarter of 2006, which
required us to reflect the funded status of our defined benefit pension plans
on
our consolidated balance sheet. Effective in 2008, we are required to
measure the defined benefit plans’ assets and obligations as of the date of our
year-end consolidated balance sheet. Currently, our pension plans
have a measurement date of December 31. Switching to a new
measurement date will require a one-time adjustment to retained earnings in
2008
per the transition guidance in SFAS No. 158.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS No. 159 will be effective at the beginning of
2008. We expect no significant impact on our financial condition,
results of operations, or liquidity from adopting this statement.
NOTE
2 – INCOME TAXES
In
July
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes, which is effective as of the beginning of
2007. FIN 48 is an interpretation of SFAS No. 109, Accounting for
Income Taxes, and clarifies the accounting for uncertainty in income tax
positions. FIN 48 requires us to recognize in our financial
statements the impact of a tax position, if that position is more likely
than
not of being sustained, based on the technical merits of the
position.
The
recognition and measurement guidelines of FIN 48 were applied to all of our
material income tax positions as of the beginning of 2007, resulting in an
increase in our tax liabilities of $2.2 million with a corresponding decrease
to
beginning retained earnings for the cumulative effect of a change in accounting
principle. The total amount of unrecognized income tax benefits at
the beginning of 2007 was $38.3 million, of which $23.9 million would affect
our
annual effective income tax rate if recognized. The difference
between the total amount of unrecognized tax benefits and the amount that
would
affect the effective income tax rate relates to deferred tax benefits for
temporary differences between book and tax return items and the federal tax
benefit of state income tax items. Included in the $38.3
million is $9.7 million of unrecognized tax benefits primarily related to
current and potential refund claims for welfare to work and work opportunity
tax
credits. If we prevail with respect to these claims, we would owe
approximately $1.9 million of fees, which have not been accrued, to an outside
service provider who assists us with administration of these refund
claims.
We
are
continuing to recognize interest and penalties related to uncertain income
tax
positions in our income tax expense. As of the beginning of 2007,
interest and penalties of $7.4 million have been accrued in addition to the
$38.3 million of unrecognized tax benefits.
We
are
subject to U.S. federal income tax as well as income tax of multiple state
and
local jurisdictions. We are no longer subject to an Internal Revenue
Service assessment on our federal income tax returns for periods prior to
2002. Our 2002 U.S. federal income tax return is currently under
examination. In addition, the state income tax returns filed by us
are subject to examination generally for periods beginning with 2002, although
state income tax carryforward attributes generated prior to 2002 may still
be
adjusted upon examination. We have various state income tax returns
in the process of examination or administrative appeals.
There
was
no material change in the net amount of unrecognized tax benefits in the
first
quarter of 2007. We have estimated the reasonably possible expected
net change in unrecognized tax benefits through May 3, 2008 based on 1)
anticipated positions taken in the next 12 months, 2) expected settlements
or
payments of uncertain tax positions, and 3) lapses of the applicable statutes
of
limitations of unrecognized tax benefits. The estimated net decrease
in unrecognized tax benefits for the next 12 months is approximately $5
million. Actual results may differ materially from this
estimate.
The
effective income tax rate for the thirteen weeks ended May 5, 2007 for income
from continuing operations was 36.0%, and benefited from the reduction in
a
valuation allowance related to a capital loss carryover, primarily due to
realized investment gains. The income tax rate for income from
continuing operations of 32.8% during the thirteen weeks ended April 29,
2006
was favorably impacted by a net release of an income tax loss contingency
related to the settlement/closure of certain tax matters.
Note
3 – SHAREHOLDERS’ EQUITY
Earnings
per Share
There
were no adjustments required to be made to the weighted-average common shares
outstanding for purposes of computing basic and diluted earnings per share
and
there were no securities outstanding at May 5, 2007 or April 29, 2006, which
were excluded from the computation of earnings per share other than antidilutive
stock options and restricted stock. For the first quarter of 2007 and
the first quarter of 2006, 1.1 million and 5.2 million, respectively, of stock
options outstanding were antidilutive and excluded from the computation of
diluted earnings per share. Antidilutive stock options are generally
outstanding stock options where the exercise price is greater than the
weighted-average market price of our common shares for each
period. Antidilutive stock options are excluded from the calculation
because they decrease the number of diluted shares outstanding under the
treasury share method.
Share
Repurchase Program
On
March
9, 2007, we announced that our Board of Directors authorized the repurchase
of
up to $600.0 million of our common shares commencing upon authorization and
continuing until exhausted (“2007 Repurchase Program”). We expect the
purchases to be made from time to time in the open market and/or in privately
negotiated transactions at our discretion, subject to market conditions and
other factors. Common shares acquired through the 2007 Repurchase
Program will be held in our treasury and will be available to meet obligations
under equity compensation plans and for general corporate purposes.
As
part
of the 2007 Repurchase Program, we received 2.8 million of our outstanding
common shares representing the minimum number of shares purchased under a $100.0
million guaranteed share repurchase transaction (“GSR”). Upon
receipt, the 2.8 million shares were removed from our basic and diluted weighted
average common shares outstanding. The GSR includes a forward
contract indexed to the average market price of our common shares that subjects
the GSR to a future share settlement based on the average share price between
the contractually specified price inception date of the GSR and the final
settlement date. The forward contract effectively places a collar
around the minimum and maximum number of our common shares that we will purchase
under the GSR. We are not required to make any additional payments to
the counterparty under the GSR. We may receive up to 0.4 million
additional common shares from the counterparty in settlement of the
GSR. If the GSR had settled on May 5, 2007, we would have received
approximately 0.3 million additional common shares from the counterparty based
on the average market price of our common shares since the beginning
of the period specified by the GSR. We expect the GSR to settle
in the fourth quarter of 2007.
In
addition to the GSR, we repurchased approximately 0.4 million of our outstanding
common shares in open market transactions during the first quarter of 2007
at an
aggregate cost of $13.7 million. Our remaining repurchase
authorization under the 2007 Repurchase Program is approximately $486.3 million
as of May 5, 2007.
The
shares acquired in the first quarter of 2007, including shares acquired under
the GSR, were recorded as treasury shares, at cost.
NOTE
4 – STOCK PLANS
We
have
outstanding stock options and nonvested restricted stock awarded under equity
compensation plans approved by our shareholders. In accordance with
SFAS No. 123(R), Share-Based Payment, we recognized share-based
compensation expense of $2.3 million and $0.7 million in the first quarter
of 2007 and the first quarter of 2006, respectively. The expense in
each period is less than what would have been recognized due to the
accelerated vesting of stock options prior to the adoption of SFAS No. 123(R)
(as discussed in more detail in Note 7 to the consolidated financial statements
in our 2006 Form 10-K).
The
weighted-average fair value of options granted and assumptions used in a
binomial model to estimate the fair value of stock options granted during each
of the respective periods were as follows:
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of options granted
|
|
$ |
11.54
|
|
|
$ |
5.28
|
|
Risk-free
interest rate
|
|
|
4.4 |
% |
|
|
4.6 |
% |
Expected
life (years)
|
|
|
4.4
|
|
|
|
4.6
|
|
Expected
volatility
|
|
|
42.5 |
% |
|
|
42.5 |
% |
Expected
annual forfeiture rate
|
|
|
3.0 |
% |
|
|
3.0 |
% |
A
summary
of the stock option activity for the first quarter of 2007 is as
follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic Value (000's)
|
|
Outstanding
stock options at February 3, 2007
|
|
|
6,644,990
|
|
|
$ |
15.78
|
|
|
|
|
|
|
|
Granted
|
|
|
1,057,500
|
|
|
|
28.72
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,318,325 |
) |
|
|
12.99
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(526,825 |
) |
|
|
26.91
|
|
|
|
|
|
|
|
Outstanding
stock options at May 5, 2007
|
|
|
4,857,340
|
|
|
$ |
18.73
|
|
|
|
5.8
|
|
|
$ |
70,136
|
|
Vested
and expected to vest at May 5, 2007
|
|
|
4,450,029
|
|
|
$ |
18.94
|
|
|
|
5.9
|
|
|
$ |
62,107
|
|
Exercisable
at May 5, 2007
|
|
|
2,226,490
|
|
|
$ |
18.09
|
|
|
|
5.1
|
|
|
$ |
34,662
|
|
The
stock
options granted in the first quarter of 2007 vest in equal amounts on the first
four anniversaries of the grant date and have a contractual term of seven years.
The number of options expected to vest are based on our annual forfeiture rate
assumption.
A
summary
of the restricted stock activity for the first quarter of 2007 is as
follows:
|
|
Number
of Shares
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Nonvested
restricted stock at February 3, 2007
|
|
|
408,671
|
|
|
$ |
12.37
|
|
Granted
|
|
|
319,100
|
|
|
|
28.73
|
|
Vested
|
|
|
(66,667 |
) |
|
|
11.25
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Nonvested
restricted stock at May 5, 2007
|
|
|
661,104
|
|
|
$ |
20.38
|
|
The
restricted stock granted in the first quarter of 2007 vests if certain financial
performance objectives are achieved. If we meet a threshold financial
performance objective and the grantee remains employed by us, the restricted
stock will vest at the start of our first trading window five years after the
grant date of the award. If we meet a higher financial performance
objective and the grantee remains employed by us, the restricted stock will
vest
on the first trading day after we file our Annual Report on Form 10-K with
the
SEC for the fiscal year in which the higher objective is met. Compensation
expense for the restricted stock granted in the first quarter of 2007 is being
attributed to a three-year period based on the assumed achievement of the higher
financial performance objective.
During
the first quarter of 2007, the second and third common share price targets
were
met on the 100,000 shares of restricted stock awarded in 2005 to Steven S.
Fishman, our Chairman, Chief Executive Officer and President, resulting in
the
vesting of the remaining 66,667 shares of common stock and related expense
by us
of $0.7 million.
During
the first quarter of 2007 and the first quarter of 2006, the following activity
occurred under our share-based compensation plans:
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
(In
thousands)
|
|
|
|
|
|
|
Total
intrinsic value of stock options exercised
|
|
$ |
38,881
|
|
|
$ |
971
|
|
Total
fair value of restricted stock vested
|
|
|
1,999
|
|
|
|
-
|
|
The
total
unearned compensation cost related to all share-based awards outstanding at
May
5, 2007 was approximately $25.4 million. This compensation cost is
expected to be recognized through May 2011 based on existing vesting terms
with
the weighted-average remaining expense recognition period being approximately
3.0 years from May 5, 2007.
NOTE
5 – EMPLOYEE BENEFIT PLANS
We
sponsor a qualified defined benefit pension plan and a nonqualified supplemental
defined benefit pension plan covering certain employees whose hire date was
before April 1, 1994.
The
following table represents components of net periodic pension cost:
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
(In
thousands)
|
|
|
|
|
|
|
Service
cost - benefits earned in the period
|
|
$ |
658
|
|
|
$ |
749
|
|
Interest
cost on projected benefit obligation
|
|
|
787
|
|
|
|
791
|
|
Expected
investment return on plan assets
|
|
|
(1,072 |
) |
|
|
(1,079 |
) |
Amortization
of actuarial loss
|
|
|
174
|
|
|
|
352
|
|
Amortization
of prior service cost
|
|
|
34
|
|
|
|
34
|
|
Amortization
of transition obligation
|
|
|
3
|
|
|
|
3
|
|
Net
periodic pension cost
|
|
$ |
584
|
|
|
$ |
850
|
|
Weighted-average
assumptions used to determine net periodic pension cost were:
|
Thirteen
Weeks Ended
|
|
May
5, 2007
|
|
April
29, 2006
|
Discount
rate
|
5.9%
|
|
5.7%
|
Rate
of increase in compensation levels
|
3.5%
|
|
3.5%
|
Expected
long-term rate of return
|
8.5%
|
|
8.5%
|
Measurement
date for plan assets and benefit obligations
|
12/31/06
|
|
12/31/05
|
Our
funding for the defined benefit pension plans is not expected to be materially
different than the amounts disclosed in our 2006 Form 10-K.
NOTE
6 – CONTINGENCIES
In
November 2004, a civil putative collective action complaint was filed against
us
in United States District Court for the Eastern District of Texas, Texarkana
Division, wherein it was alleged that we had violated the Fair Labor Standards
Act regulations by misclassifying as exempt employees our furniture department
managers, sales managers, and assistant managers (“Texas matter”). Subsequent to
its filing, the plaintiffs in the Texas matter amended the complaint to limit
its scope to furniture department managers. The plaintiffs in the Texas matter
seek to recover, on behalf of themselves and all other individuals who are
similarly situated, alleged unpaid overtime compensation, as well as liquidated
damages, attorneys’ fees and costs. On August 8, 2005, the District
Court in Texas issued an order conditionally certifying a class of all current
and former employees who worked for us as a furniture department manager at
any
time between November 2, 2001, and October 1, 2003. As a result of
that order, notice was sent to approximately 1,300 individuals who had the
right
to opt-in to the Texas matter. In the third quarter of 2006, we reached a
tentative settlement with the plaintiffs concerning the Texas matter. We
recorded, in the third quarter of 2006, a pretax charge of $3.2 million included
in selling and administrative expenses for the estimated settlement liability
of
the Texas matter. On January 17, 2007, the court approved the
settlement, and we are in the process of paying out the settlement. We believe
that we had adequate liability reserves for the Texas matter at May 5,
2007.
In
October 2005, a class action complaint was served upon us for adjudication
in
the Superior Court of the State of California, County of Ventura, wherein it
was
alleged that we had violated certain California wage and hour laws (“California
matter”). The plaintiff seeks to recover, on her own behalf and on behalf of all
other individuals who are similarly situated, alleged unpaid wages and rest
and
meal period compensation, as well as penalties, injunctive and other equitable
relief, reasonable attorneys’ fees and costs. In the third quarter of 2006, we
reached a tentative settlement with the plaintiff concerning the California
matter. On November 6, 2006, the court issued an order granting preliminary
approval of the tentative settlement. The tentative settlement remains subject
to acceptance by the class and final court approval. We recorded, in the third
quarter of 2006, a pretax charge of $6.5 million included in selling and
administrative expenses for the estimated settlement liability of the California
matter. We believe that we had adequate liability reserves for the California
matter at May 5, 2007.
In
November 2004, a civil putative collective action complaint was filed against
us
in the United States District Court for the Eastern District of Louisiana,
wherein it was alleged that we violated the Fair Labor Standards Act by
misclassifying assistant managers as exempt employees (“Louisiana matter”). The
plaintiffs seek to recover, on behalf of themselves and all other individuals
who are similarly situated, alleged unpaid overtime compensation, as well as
liquidated damages, attorneys’ fees and costs. On July 5, 2005, the District
Court in Louisiana issued an order conditionally certifying a class of all
current and former assistant store managers who have worked for us since
November 23, 2001. As a result of that order, notice of the lawsuit was sent
to
approximately 5,500 individuals who had the right to opt-in to the Louisiana
matter. As of May 5, 2007, approximately 1,100 individuals had joined the
Louisiana matter. We have the right to file a motion seeking to decertify the
class after discovery has been conducted. Pending discovery on the plaintiffs’
claims, we cannot make a determination as to the probability of a loss
contingency resulting from the Louisiana matter or the estimated range of
possible loss, if any. We intend to vigorously defend ourselves against the
allegations levied in the Louisiana matter; however, the ultimate resolution
of
this matter could have a material adverse effect on our financial condition,
results of operations, and liquidity.
In
September 2006, a class action complaint was filed against us in the Superior
Court of the State of California, County of Los Angeles, wherein it was alleged
that we had violated certain California wage and hour laws by misclassifying
California store managers as exempt employees. The plaintiff seeks to recover,
on his own behalf and on behalf of all other individuals who are similarly
situated, damages for alleged unpaid overtime, unpaid minimum wages, wages
not
paid upon termination, improper wage statements, missed rest breaks, missed
meal
periods, reimbursement of expenses, loss of unused vacation time, and attorneys’
fees and costs. Pending discovery on the plaintiffs’ claims, we cannot make a
determination as to the probability of a loss contingency resulting from this
lawsuit or the estimated range of possible loss, if any. We intend to vigorously
defend ourselves against the allegations levied in this lawsuit; however, the
ultimate resolution of this matter could have a material adverse effect on
our
financial condition, results of operations, and liquidity.
In
May
2007, two class action complaints were filed against us, one in the Superior
Court of the State of California, County of Orange, and one in the Superior
Court of the State of California, County of San Diego, wherein it was alleged
that we had violated California law by requesting certain customer information
in connection with the return of merchandise for which the customer sought
to
receive a refund to a credit card. The plaintiffs seek to recover, on
their own behalf and on behalf of all other individuals who are similarly
situated, statutory penalties, costs and attorneys' fees and seek injunctive
relief. We believe that substantially all of the purported class
members of the San Diego County lawsuit are within the purported class of the
Orange County lawsuit. Pending discovery on the plaintiffs' claims, we cannot
make a determination as to the probability of a loss contingency resulting
from
these lawsuits or the estimated range of possible loss, if any. We
intend to vigorously defend ourselves against the allegations levied in these
lawsuits; however, the ultimate resolution of these matters could have a
material adverse effect on our financial condition, results of operations,
and
liquidity.
We
are
involved in other legal actions and claims, including various additional
employment-related matters, arising in the ordinary course of business. We
currently believe that such actions and claims, both individually and in the
aggregate, will be resolved without material adverse effect on our financial
condition, results of operations, or liquidity. However, litigation involves
an
element of uncertainty. Future developments could cause these actions or claims
to have a material adverse effect on our financial condition, results of
operations, and liquidity.
NOTE
7 – DISCONTINUED OPERATIONS
Closed
Stores
During
2005, we closed 130 stores that met the criteria for discontinued operations
reporting. The pretax costs of $0.4 million and $1.9 million recorded
in the first quarter of 2007 and the first quarter of 2006, respectively,
principally included continuing costs associated with those closed
stores having remaining lease terms.
At
the
end of 2006, we had approximately $5.9 million of remaining obligations for
these lease termination costs. During the first quarter of 2007, we
paid approximately $1.4 million of the liability for these lease termination
costs and recorded $0.1 million of accretion expense.
KB
Toys Matters
In
the
first quarter of 2006, we recorded $0.6 million, pretax, as income in
discontinued operations primarily to reflect the reduction of insurance reserves
specifically identifiable with respect to the KB Toys business. We
sold the KB Toys business to KB Acquisition Corporation in December 2000, but
we
have certain continuing indemnification and guarantee obligations with respect
to the KB Toys business. See Note 11 to the consolidated financial
statements included in our 2006 Form 10-K for further discussion of KB Toys
matters.
NOTE
8 – BUSINESS SEGMENT DATA
We
manage
our business based on one segment, broadline closeout
retailing. During the first quarter of 2007, in connection with the
completion of the internal re-alignment of certain merchandising departments
and
classes between our divisional merchandising managers, we determined that the
following six merchandise categories most directly match our internal management
and reporting of merchandise net sales results: Consumables, Home,
Furniture, Hardlines, Seasonal, and Other. Effective for the first
quarter of 2007 we are communicating these six categories externally to report
net sales information by each merchandise group in accordance with the
requirements of SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. Prior period amounts presented were
reclassified to conform to the current year presentation.
The
following is net sales data by category:
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
(In
thousands)
|
|
|
|
|
|
|
Consumables
|
|
$ |
317,201
|
|
|
$ |
307,465
|
|
Home
|
|
|
187,183
|
|
|
|
184,344
|
|
Furniture
|
|
|
188,679
|
|
|
|
178,579
|
|
Hardlines
|
|
|
144,667
|
|
|
|
137,436
|
|
Seasonal
|
|
|
170,201
|
|
|
|
161,023
|
|
Other
|
|
|
120,468
|
|
|
|
122,775
|
|
Net
sales
|
|
$ |
1,128,399
|
|
|
$ |
1,091,622
|
|
The
Consumables category includes the food, health and beauty, plastics, paper
and
pet departments. The Home category includes the domestics,
stationery, and home decorative departments. The Furniture category includes
the
upholstery, mattresses, ready-to-assemble, and case goods departments. Case
goods consist of bedroom, dining room, and living room
furniture. The Hardlines category includes the electronics,
appliances, tools, and home maintenance departments. The Seasonal
category includes the lawn & garden, Christmas, and summer
departments. The Other category includes the toy, jewelry, infant
accessories, and apparel departments.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The
Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor
for forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking
and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the statements. We wish to take advantage of the “safe harbor”
provisions of the Act.
Certain
statements in this report are forward-looking statements within the meaning
of
the Act, and such statements are intended to qualify for the protection of
the
safe harbor provided by the Act. The words "anticipate," "estimate," "expect,"
"objective," "goal," "project," "intend," "plan," "believe," "will," "target,"
"forecast," “guidance,” “outlook,” and similar expressions generally identify
forward-looking statements. Similarly, descriptions of our objectives,
strategies, plans, goals or targets are also forward-looking statements.
Forward-looking statements relate to the expectations of management as to future
occurrences and trends, including statements expressing optimism or pessimism
about future operating results or events and projected sales, earnings, capital
expenditures and business strategy. Forward-looking statements are based upon
a
number of assumptions concerning future conditions that may ultimately prove
to
be inaccurate. Forward-looking statements are and will be based upon
management's then-current views and assumptions regarding future events and
operating performance, and are applicable only as of the dates of such
statements. Although we believe the expectations expressed in forward-looking
statements are based on reasonable assumptions within the bounds of our
knowledge, forward-looking statements, by their nature, involve risks,
uncertainties and other factors, any one or a combination of which could
materially affect our business, financial condition, results of operations
or
liquidity.
Forward-looking
statements that we make herein and in other reports and releases are not
guarantees of future performance and actual results may differ materially from
those discussed in such forward-looking statements as a result of various
factors, including, but not limited to, the cost of goods, our inability to
successfully execute strategic initiatives, competitive pressures, economic
pressures on our customers and us, the availability of brand name closeout
merchandise, trade restrictions, freight costs, the risks discussed in the
Risk
Factors section of our most recent Annual Report on Form 10-K, and other factors
discussed from time to time in our other filings with the SEC, including
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report
should be read in conjunction with such filings, and you should consider all
of
these risks, uncertainties and other factors carefully in evaluating
forward-looking statements.
Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date thereof. We undertake no obligation to publicly update
forward-looking statements whether as a result of new information, future events
or otherwise. Readers are advised, however, to consult any further disclosures
we make on related subjects in our public announcements and SEC
filings.
OVERVIEW
The
discussion and analysis presented below should be read in conjunction with
the
accompanying consolidated financial statements and related notes. The terms
defined in the notes have the same meaning in this item and the balance of
this
report.
The
following are the results from the first quarter of 2007 that we believe are
key
indicators of our operating performance when compared to the operating
performance from the first quarter of 2006:
|
Ÿ
|
Comparable
store sales for stores open at least two years at the beginning of
2007
increased 4.9%.
|
|
Ÿ
|
Gross
margin dollars increased $8.6
million.
|
|
Ÿ
|
Selling
and administrative expenses as a percent of sales decreased 200 basis
points to 33.9% of sales versus 35.9% of sales. In the first
quarter of 2007, selling and administrative expenses included the
favorable impact of the receipt of $3.9 million (30 to 40 basis points)
of
insurance recoveries related to the 2005
hurricanes.
|
|
Ÿ
|
Depreciation
expense as a percent of sales decreased 40 basis points to 1.9% of
sales
versus 2.3% of sales.
|
|
Ÿ
|
Interest
and investment income increased to $3.0 million from $0.4
million.
|
|
Ÿ
|
Diluted
earnings per share from continuing operations improved to $0.26 per
share
compared to $0.13 per share.
|
|
Ÿ
|
Net
cash used in operating activities was $0.7 million compared to net
cash
provided by operating activities of $109.9 million primarily due
to the
higher beginning inventories in 2006 and the subsequent reduction
in
inventories during the first quarter of 2006 versus an increase in
inventories in the first quarter of 2007. Other items
increasing net cash used in operations in the first quarter of 2007
include income tax payments and bonus
payments.
|
|
Ÿ
|
Average
inventory levels were lower throughout the first quarter of 2007
compared
to the first quarter of 2006 and, combined with the 4.9% increase
in
comparable store sales, resulted in a higher inventory turnover rate
in
the first quarter of 2007 than the first quarter of 2006. This
is the fifth consecutive quarter that the inventory turnover rate has
improved when compared to the comparable quarter in the prior fiscal
year.
|
|
Ÿ
|
We
acquired 3.2 million of our common shares under the 2007 Repurchase
Program, including 2.8 million shares under the
GSR.
|
See
the
discussion and analysis below for additional details of our operating
results.
STORES
The
following table presents stores opened and closed during the first quarter
of
2007 and the first quarter of 2006:
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
|
|
|
|
|
|
|
Stores
open at the beginning of the fiscal year
|
|
|
1,375
|
|
|
|
1,401
|
|
Stores
opened during the period
|
|
|
2
|
|
|
|
5
|
|
Stores
closed during the period
|
|
|
(1 |
) |
|
|
(5 |
) |
Stores
open at the end of the period
|
|
|
1,376
|
|
|
|
1,401
|
|
RESULTS
OF OPERATIONS
The
following table compares components of our consolidated statements of operations
as a percentage of net sales at the end of each period:
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
60.4
|
|
|
|
59.8
|
|
Gross
margin
|
|
|
39.6
|
|
|
|
40.2
|
|
Selling
and administrative expenses
|
|
|
33.9
|
|
|
|
35.9
|
|
Depreciation
expense
|
|
|
1.9
|
|
|
|
2.3
|
|
Operating
profit
|
|
|
3.8
|
|
|
|
2.0
|
|
Interest
expense
|
|
|
0.0
|
|
|
|
0.0
|
|
Interest
income
|
|
|
0.3
|
|
|
|
0.0
|
|
Income
from continuing operations before income taxes
|
|
|
4.0
|
|
|
|
2.0
|
|
Income
tax expense
|
|
|
1.4
|
|
|
|
0.7
|
|
Income
from continuing operations
|
|
|
2.6
|
|
|
|
1.3
|
|
Discontinued
operations
|
|
|
0.0
|
|
|
|
0.0
|
|
Net
income
|
|
|
2.5 |
% |
|
|
1.3 |
% |
FIRST
QUARTER OF 2007 AND FIRST QUARTER OF 2006
Net
Sales
Net
sales
increased 3.4% to $1,128.4 million for the first quarter of 2007, compared
to
$1,091.6 million for the first quarter of 2006. Comparable store sales for
stores open at least two years at the beginning of 2007 increased 4.9% in the
first quarter of 2007 compared to the 13 weeks ended May 6,
2006. The 13 weeks ended May 6, 2006 represent the last 12 weeks of the
first quarter of 2006 and the first week of the second quarter of 2006. As
a
result of the difference between the fiscal periods and the periods used to
calculate comparable store sales caused by the 53rd week of
fiscal
2006, changes in comparable store sales may not be consistent with changes
in
net sales reported for the fiscal period. Comparable store sales and
net sales in the first quarter of 2007 were positively impacted by approximately
1% due to the planned addition of one advertising circular compared to the
first
quarter of 2006. Comparable store sales in the first quarter of 2007
were driven by an increase in the value of the average basket as our “raise the
ring” strategy continues to deliver positive results. From a
merchandising perspective, Furniture and Hardlines were the best performing
categories. Furniture comparable store sales increased in the low
double digits while Hardlines comparable store sales were up in the high-single
digits driven by strength in the electronics business. Comparable
store sales in both Consumables and Home increased in the mid-single
digits. Sales in the Seasonal category in the first quarter of 2007
were essentially flat on a comparable store sales basis; however, due to the
shift in the calendar, net sales for Seasonal increased 5.7% when compared
to
the first quarter of 2006.
The
following table details net sales by product category with the percentage of
each category to total net sales and the net sales change in dollars and
percentage from the first quarter of 2007 to the first quarter of 2006 (See
Note
8 to the accompanying consolidated financial statements for discussion regarding
the change from four categories of merchandise in our 2006 Form 10-K to six
merchandise categories effective the first quarter of
2007):
|
|
Thirteen
Weeks Ended
|
|
|
|
May
5, 2007
|
|
|
April
29, 2006
|
|
|
Change
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
317,201
|
|
|
|
28.1 |
% |
|
$ |
307,465
|
|
|
|
28.2 |
% |
|
$ |
9,736
|
|
|
|
3.2 |
% |
Home
|
|
|
187,183
|
|
|
|
16.6
|
|
|
|
184,344
|
|
|
|
16.9
|
|
|
|
2,839
|
|
|
|
1.5
|
|
Furniture
|
|
|
188,679
|
|
|
|
16.7
|
|
|
|
178,579
|
|
|
|
16.4
|
|
|
|
10,100
|
|
|
|
5.7
|
|
Hardlines
|
|
|
144,667
|
|
|
|
12.8
|
|
|
|
137,436
|
|
|
|
12.6
|
|
|
|
7,231
|
|
|
|
5.3
|
|
Seasonal
|
|
|
170,201
|
|
|
|
15.1
|
|
|
|
161,023
|
|
|
|
14.7
|
|
|
|
9,178
|
|
|
|
5.7
|
|
Other
|
|
|
120,468
|
|
|
|
10.7
|
|
|
|
122,775
|
|
|
|
11.2
|
|
|
|
(2,307 |
) |
|
|
(1.9 |
) |
Net
sales
|
|
$ |
1,128,399
|
|
|
|
100.0 |
% |
|
$ |
1,091,622
|
|
|
|
100.0 |
% |
|
$ |
36,777
|
|
|
|
3.4 |
% |
Gross
Margin
Gross
margin increased to $446.9 million for the first quarter of 2007, compared
to
$438.3 million for the first quarter of 2006, an increase of $8.6 million or
2.0%. The increase in gross margin was principally due to increased net sales
of
$36.8 million. Gross margin as a percentage of net sales decreased to
39.6% in the first quarter of 2007 compared to 40.2% in the first quarter of
2006. The gross margin rate decrease was principally a result of certain lower
margin deals and promotions as well as a slight shift in merchandise mix towards
lower margin categories.
Selling
and Administrative Expenses
Selling
and administrative expenses decreased to $382.7 million for the first quarter
of
2007, compared to $392.4 million for the first quarter of 2006, a decrease
of
$9.7 million or 2.5%. As a percentage of net sales, selling and administrative
expenses were 33.9% for the first quarter of 2007 compared to 35.9% for the
first quarter of 2006. Included in selling and administrative
expenses in the first quarter of 2007, was approximately $3.9 million of
insurance proceeds we received as recovery for damages related to the 2005
hurricanes. In addition to the favorable impact from the insurance proceeds,
selling and administrative expenses were lower as a result of decreased
insurance-related costs, distribution and transportation costs, and store
payroll. These expenses were lower in the first quarter of 2007
compared to the first quarter of 2006 primarily because of specific management
initiatives to improve operating efficiency or lower costs such as the “raise
the ring” merchandising strategy that resulted in processing fewer cartons
while generating additional sales dollars. These expense decreases were
partially offset by higher advertising expense of $5.4 million, in part due
to
the additional advertising circular.
Outbound
distribution and transportation costs, which were included in selling and
administrative expenses, decreased to $54.4 million for the first quarter of
2007 compared to $57.9 million for the first quarter of 2006. As a percentage
of
net sales, outbound distribution and transportation costs decreased by 50 basis
points to 4.8% of net sales in the first quarter of 2007 as compared to 5.3%
for
the first quarter of 2006. The rate decrease was primarily a result of
processing fewer cartons through the system, due to the “raise the ring”
merchandising strategy, partially offset by the impact of higher fuel
prices.
Depreciation
Expense
Depreciation
expense for the first quarter of 2007 was $21.8 million compared to $24.7
million for the first quarter of 2006. The $2.9 million decrease was primarily
related to the relatively lower level of capital expenditures over the last
12
months compared to earlier fiscal years. The reduction in capital
expenditures principally relates to fewer store openings.
Interest
and Investment Income
Interest
and investment income was $3.0 million for the first quarter of 2007, compared
to $0.4 million for the first quarter of 2006. The increase in
interest and investment income was principally due to higher levels of funds
available for investment in the first quarter of 2007 compared to the first
quarter of 2006.
Income
Taxes
The
effective income tax rate for the first quarter of 2007 for income from
continuing operations was 36.0%, and benefited from the reduction in a valuation
allowance related to a capital loss carryover, primarily due to realized
investment gains. The income tax rate for income from continuing
operations of 32.8% during the first quarter of 2006 was favorably impacted
by a
net release of an income tax loss contingency related to the settlement/closure
of certain tax matters.
Discontinued
Operations
During
2005, we closed 130 stores that met the criteria for discontinued operations
reporting. The pretax costs of $0.4 million and $1.9 million recorded
in the first quarter of 2007 and the first quarter of 2006, respectively,
principally include continuing costs associated with those closed
stores having remaining lease terms. These costs have declined in the first
quarter of 2007 compared to the first quarter of 2006 due to the decline in
the
number of closed stores with remaining leases.
In
the
first quarter of 2006, we recorded $0.6 million, pretax, as income from
discontinued operations primarily to reflect the reduction of insurance reserves
specifically identifiable with respect to the KB Toys business. We
sold the KB Toys business to KB Acquisition Corporation in December 2000, but
we
have certain continuing indemnification and guarantee obligations with respect
to the KB Toys business. See Note 11 to the consolidated financial
statements in our 2006 Form 10-K for further discussion of KB Toys
matters.
CAPITAL
RESOURCES AND LIQUIDITY
The
primary source of our liquidity is cash flows from operations and, as necessary,
borrowings under our $500.0 million unsecured credit facility entered into
in
2004 (“2004 Credit Agreement”). We use the 2004 Credit Agreement
primarily to manage ongoing and seasonal working capital. The
borrowings available under the 2004 Credit Agreement, after taking into account
the reduction in availability resulting from outstanding letters of credit
totaling $58.1 million, were $441.9 million at May 5, 2007. We
anticipate total indebtedness under the facility will be less than $65.0 million
through the end of the second quarter of 2007, all of which will be comprised
of
letters of credit, excluding any impact from the execution of the 2007
Repurchase Program. Our borrowings have historically peaked in the
third fiscal quarter as we build inventory levels prior to the Christmas holiday
selling season. Given the seasonality of our business, the amount of borrowings
under the 2004 Credit Agreement may fluctuate materially depending on various
factors, including the time of year and our need to acquire merchandise
inventory. For a detailed description of the 2004 Credit Agreement,
see Note 3 to the consolidated financial statements in our 2006 Form
10-K.
Net
cash
used in operating activities was $0.7 million for the first quarter of 2007
compared to net cash provided by operating activities of $109.9 million in
the
first quarter of 2006. Inventories increased $39.3 million in the
first quarter of 2007 versus a reduction in inventories of $30.5 million in
the
first quarter of 2006. As of May 5, 2007, inventories were $797.5
million (at twenty-five fewer stores) compared to $805.6 million as of April
29,
2006. We paid income taxes of $28.4 million, net of refunds, in the
first quarter of 2007 compared to net income tax refunds of $11.1 million in
the
first quarter of 2006. Additionally, we paid bonuses of approximately
$23.0 million in the first quarter of 2007 compared to payments of approximately
$3.0 million in the first quarter of 2006. The bonus payments were
higher in the first quarter of 2007 principally because we paid a general office
bonus based on 2006 performance, and we did not pay a general office bonus
during the first quarter of 2006 based on 2005 performance.
Net
cash
used in investing activities, which was principally comprised of capital
expenditures, was $7.9 million for the first quarter of 2007 compared to $5.9
million for the first quarter of 2006.
Net
cash
used in financing activities were $63.0 million for the first quarter of 2007,
compared to $31.2 million for the first quarter of 2006. In the first
quarter of 2007, we disbursed $109.7 million for the acquisition of our common
shares under the 2007 Repurchase Program, partially offset by $30.1 million
of
proceeds from the exercise of stock options and $15.0 million for the excess
tax
benefit on share-based awards. In the first quarter of 2006, we paid
down debt of $5.5 million, purchased our common shares for $31.3 million, and
received $5.2 million of proceeds from the exercise of stock
options.
As
of May
5, 2007, we had invested $100.0 million in a GSR and acquired $13.7 million
of
our common shares in open market transactions in accordance with the 2007
Repurchase Program. As a result, we have a remaining authorization of
approximately $486.3 million, which we may use from time to time to acquire
additional common shares.
See
Note
3 to the accompanying unaudited consolidated financial statements for additional
information regarding the GSR.
We
continue to believe that we have, or, if necessary, have the ability to obtain
adequate resources to fund ongoing and seasonal working capital requirements,
future capital expenditures, development of new projects, and currently maturing
obligations. Additionally, management is not aware of any current trends,
events, demands, commitments, or uncertainties which reasonably can be expected
to have a material impact on our capital resources or liquidity.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements, in conformity with GAAP, requires
management to make estimates, judgments, and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period, as well as the related disclosure of contingent assets and
liabilities at the date of the financial statements. On an ongoing
basis, management evaluates its estimates, judgments, and assumptions, and
bases
its estimates, judgments, and assumptions on historical experience, current
trends, and various other factors that are believed to be reasonable under
the
circumstances. Actual results may differ from these
estimates. See Note 1 to our consolidated financial statements
included in the 2006 Form 10-K for additional information about our accounting
policies.
The
estimates, judgments, and assumptions that have a higher degree of inherent
uncertainty and require the most significant judgments are outlined in
management’s discussion and analysis of financial condition and results of
operations contained in our 2006 Form 10-K. Had we used estimates,
judgments, and assumptions different from any of those contained in our 2006
Form 10-K, our financial condition, results of operations, and liquidity for
the
current period could have been materially different from those
presented.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
We
are
subject to market risk from exposure to changes in interest rates associated
with investments and borrowings under the 2004 Credit Agreement that we make
from time to time. We had no fixed rate long-term debt at May 5, 2007. We do
not
expect changes in interest rates in 2007 to have a material adverse effect
on
our financial condition, results of operations, or liquidity; however, there
can
be no assurances that interest rates will not materially change. We do not
believe that a hypothetical adverse change of 10% in interest rates would have
a
material adverse effect on our financial condition, results of operations,
or
liquidity.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of
the
Exchange Act, as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have each concluded that such disclosure controls and
procedures were effective as of the end of the period covered by this
report.
Changes
in Internal Control over Financial Reporting
No
changes in our internal control over financial reporting, as that term is
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, occurred during
our last fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Part
II. Other Information
Item
1. Legal Proceedings.
No
response is required under Item 103 of Regulation S-K. For a discussion of
certain litigated matters, see Note 6 to the accompanying consolidated financial
statements.
There
are
no material changes to the risk factors as disclosed in our 2006 Form
10-K.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
The
following table sets forth information regarding our repurchase of our common
shares during the first quarter of 2007:
Issuer
Purchases of Equity Securities
(In
thousands, except price per share data)
Period
|
|
(a)
Total Number of Shares Purchased (1)
|
|
|
(b)
Average Price Paid per Share (2)
|
|
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Plans or
Programs
|
|
|
(d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under
the
Plans or Programs
|
|
February
4, 2007 - March 3, 2007
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
$ |
-
|
|
March
4, 2007 - March 31, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
April
1, 2007 - May 5, 2007
|
|
|
3,241
|
|
|
|
32.32
|
|
|
|
3,241
|
|
|
|
486,268
|
|
Total
|
|
|
3,241
|
|
|
$ |
32.32
|
|
|
|
3,241
|
|
|
$ |
486,268
|
|
|
(1)
|
On
March 9, 2007, we announced that our Board of Directors authorized
the
repurchase of up to $600.0 million of our common shares commencing
upon
authorization and continuing until exhausted. Pursuant to this
authorization, we received 2,810,239 of our outstanding common shares
in
the first quarter of 2007 representing the minimum number of shares
purchased under a $100.0 million guaranteed stock repurchase transaction
(“GSR”). Under the terms of the GSR, we are not required to
make any additional payments to the counterparty. We may
receive up to 405,756 additional common shares from the counterparty
in
settlement of the GSR based on the average price of our common shares
through the settlement date. The GSR is expected to settle in
the fourth quarter of 2007. In addition to the GSR, we made
open market purchases of 430,894 common shares during the first quarter
of
2007.
|
|
(2)
|
The
average price paid per share for the common shares purchased under
the GSR
is the average market price for the contractually specified period
assuming the GSR settled on May 5, 2007, or $32.38 per
share. The final average acquisition price per share may differ
upon settlement of the GSR, which we expect to occur in the fourth
quarter
of 2007. The average price paid per share for the open market purchases
includes a per share commission paid to the executing
broker/dealer.
|
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
Item
5.
Other Information.
None.
Exhibits
marked with an asterisk (*) are filed herewith.
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated:
June 13, 2007
|
|
|
|
|
BIG
LOTS, INC.
|
|
|
|
By:
/s/ Joe R. Cooper
|
|
|
|
Joe
R. Cooper
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer, Principal Accounting Officer and Duly Authorized
Officer)
|
20