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BIG LOTS INC - Quarter Report: 2017 July (Form 10-Q)

Table of Contents

 
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 July 29, 2017
or

o 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     Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesþ     Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,”  “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     Noþ
The number of the registrant’s common shares, $0.01 par value, outstanding as of September 1, 2017, was 42,452,285.
 


Table of Contents

BIG LOTS, INC. 
FORM 10-Q 
FOR THE FISCAL QUARTER ENDED JULY 29, 2017

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
a)
 
 
 
b)
 
 
 
c)
 
 
 
d)
 
 
 
e)
 
 
 
f)
 
 
 
Item 2. 
 
 
 
Item 3.
 
 
 
Item 4. 
 
 
 
 
 
 
Item 1.  
 
 
 
Item 1A.  
 
 
 
Item 2.  
 
 
 
Item 3.  
 
 
 
Item 4.  
 
 
 
Item 5.  
 
 
 
Item 6.  
 
 
 
 

1

Table of Contents

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
 
Twenty-Six Weeks Ended
 
July 29, 2017
July 30, 2016
 
July 29, 2017
July 30, 2016
Net sales
$
1,221,301

$
1,203,155

 
$
2,518,088

$
2,515,730

Cost of sales (exclusive of depreciation expense shown separately below)
728,801

716,732

 
1,501,313

1,511,626

Gross margin
492,500

486,423

 
1,016,775

1,004,104

Selling and administrative expenses
415,154

416,746

 
831,126

842,149

Depreciation expense
29,386

30,757

 
57,981

60,476

Operating profit
47,960

38,920

 
127,668

101,479

Interest expense
(1,619
)
(1,494
)
 
(2,628
)
(2,128
)
Other income (expense)
435

(406
)
 
(82
)
358

Income before income taxes
46,776

37,020

 
124,958

99,709

Income tax expense
17,656

14,305

 
44,326

38,335

Net income
$
29,120

$
22,715

 
$
80,632

$
61,374

 
 
 
 
 
 
Earnings per common share
 

 

 
 
 
Basic
$
0.68

$
0.51

 
$
1.84

$
1.32

Diluted
$
0.67

$
0.50

 
$
1.83

$
1.31

 
 
 
 
 
 
Weighted-average common shares outstanding:
 

 

 
 
 
Basic
43,136

44,402

 
43,749

46,434

Dilutive effect of share-based awards
428

612

 
373

494

Diluted
43,564

45,014

 
44,122

46,928

 
 
 
 
 
 
Cash dividends declared per common share
$
0.25

$
0.21

 
$
0.50

$
0.42

 
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
July 29, 2017
July 30, 2016
 
July 29, 2017
July 30, 2016
Net income
$
29,120

$
22,715

 
$
80,632

$
61,374

Other comprehensive income:
 
 
 
 
 
Amortization of pension, net of tax expense of $0, $(223), $0, and $(468), respectively

339

 

714

Valuation adjustment of pension, net of tax benefit (expense) of $0, $7, $0 and $(544), respectively

(10
)
 

831

Total other comprehensive income

329

 

1,545

Comprehensive income
$
29,120

$
23,044

 
$
80,632

$
62,919


The accompanying notes are an integral part of these consolidated financial statements.


3

Table of Contents

BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(In thousands, except par value)
 
 
 
 
 
July 29, 2017
 
January 28, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
56,009

 
$
51,164

Inventories
810,485

 
858,689

Other current assets
107,899

 
84,526

Total current assets
974,393

 
994,379

Property and equipment - net
523,719

 
525,851

Deferred income taxes
47,084

 
46,469

Other assets
46,268

 
41,008

Total assets
$
1,591,464

 
$
1,607,707

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
363,276

 
$
400,495

Property, payroll, and other taxes
84,625

 
81,306

Accrued operating expenses
70,092

 
71,251

Insurance reserves
47,710

 
40,269

Accrued salaries and wages
32,419

 
54,009

Income taxes payable
2,072

 
31,265

Total current liabilities
600,194

 
678,595

Long-term obligations
226,600

 
106,400

Deferred rent
57,640

 
56,035

Insurance reserves
57,687

 
56,593

Unrecognized tax benefits
17,480

 
15,853

Other liabilities
46,925

 
43,601

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 42,205 shares and 44,259 shares, respectively
1,175

 
1,175

Treasury shares - 75,290 shares and 73,236 shares, respectively, at cost
(2,405,925
)
 
(2,291,379
)
Additional paid-in capital
608,720

 
617,516

Retained earnings
2,380,968

 
2,323,318

Accumulated other comprehensive loss

 

Total shareholders’ equity
584,938

 
650,630

Total liabilities and shareholders’ equity
$
1,591,464

 
$
1,607,707

 
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity (Unaudited)
(In thousands)
 
Common
Treasury
Additional
Paid-In
Capital
Retained Earnings
Accumulated Other Comprehensive Loss
 
 
Shares
Amount
Shares
Amount
Total
 
 
 
 
 
 
 
 
 
Balance - January 30, 2016
49,101

$
1,175

68,394

$
(2,063,091
)
$
588,124

$
2,210,239

$
(15,977
)
$
720,470

Comprehensive income





61,374

1,545

62,919

Dividends declared ($0.42 per share)





(20,290
)

(20,290
)
Purchases of common shares
(5,681
)

5,681

(254,121
)



(254,121
)
Exercise of stock options
455


(455
)
14,137

3,136



17,273

Restricted shares vested
244


(244
)
7,380

(7,380
)



Performance shares vested
13


(13
)
394

(394
)



Tax benefit from share-based awards




340



340

Share activity related to deferred compensation plan



3

9



12

Other
4


(4
)
136

68



204

Share-based employee compensation expense




16,691



16,691

Balance - July 30, 2016
44,136

1,175

73,359

(2,295,162
)
600,594

2,251,323

(14,432
)
543,498

Comprehensive income





91,454

14,432

105,886

Dividends declared ($0.42 per share)





(19,459
)

(19,459
)
Purchases of common shares
(4
)

4

(183
)



(183
)
Exercise of stock options
118


(118
)
3,697

686



4,383

Restricted shares vested
8


(8
)
269

(269
)



Performance shares vested








Tax benefit from share-based awards




170



170

Share activity related to deferred compensation plan




(3
)


(3
)
Other
1


(1
)





Share-based employee compensation expense




16,338



16,338

Balance - January 28, 2017
44,259

1,175

73,236

(2,291,379
)
617,516

2,323,318


650,630

Comprehensive income





80,632


80,632

Dividends declared ($0.50 per share)





(22,836
)

(22,836
)
Adjustment for ASU 2016-09




241

(146
)

95

Purchases of common shares
(2,976
)

2,976

(143,475
)



(143,475
)
Exercise of stock options
147


(147
)
4,619

796



5,415

Restricted shares vested
344


(344
)
10,790

(10,790
)



Performance shares vested
431


(431
)
13,523

(13,523
)



Share activity related to deferred compensation plan



(3
)



(3
)
Other








Share-based employee compensation expense




14,480



14,480

Balance - July 29, 2017
42,205

$
1,175

75,290

$
(2,405,925
)
$
608,720

$
2,380,968

$

$
584,938

 
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Twenty-Six Weeks Ended
 
July 29, 2017
July 30, 2016
Operating activities:
 
 
Net income
$
80,632

$
61,374

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

Depreciation and amortization expense
52,722

54,587

Deferred income taxes
(520
)
(12,653
)
(Gain) loss on disposition of property and equipment
(67
)
708

Non-cash share-based compensation expense
14,480

16,691

Excess tax benefit from share-based awards

(911
)
Unrealized gain on fuel derivative instruments
(350
)
(1,664
)
Pension expense, net of contributions

1,911

Change in assets and liabilities, excluding effects of foreign currency adjustments:
 

 

Inventories
48,205

41,352

Accounts payable
(37,219
)
3,356

Current income taxes
(39,185
)
(42,185
)
Other current assets
(13,631
)
(663
)
Other current liabilities
(13,158
)
(15,538
)
Other assets
(5,351
)
(5,266
)
Other liabilities
13,404

10,401

Net cash provided by operating activities
99,962

111,500

Investing activities:
 

 

Capital expenditures
(53,245
)
(45,247
)
Cash proceeds from sale of property and equipment
1,561

219

Other
(7
)
(2
)
Net cash used in investing activities
(51,691
)
(45,030
)
Financing activities:
 

 

Net proceeds from borrowings under bank credit facility
120,200

195,600

Payment of capital lease obligations
(2,008
)
(2,245
)
Dividends paid
(23,555
)
(19,879
)
Proceeds from the exercise of stock options
5,415

17,273

Excess tax benefit from share-based awards

911

Payment for treasury shares acquired
(143,475
)
(254,121
)
Other
(3
)
216

Net cash used in financing activities
(43,426
)
(62,245
)
Increase in cash and cash equivalents
4,845

4,225

Cash and cash equivalents:
 

 

Beginning of period
51,164

54,144

End of period
$
56,009

$
58,369


The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND 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 a unique, non-traditional, discount retailer in the United States (“U.S.”). At July 29, 2017, we operated 1,429 stores in 47 states.  We make available, free of charge, through the “Investor Relations” 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. The consolidated financial statements, however, do not include all information necessary for a complete presentation of financial condition, 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, or actually result during, any other interim period or for the year as a whole.  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 our fourth fiscal quarter.  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 January 28, 2017 (“2016 Form 10-K”).

Fiscal Periods
Our fiscal year ends on the Saturday nearest to January 31, which results in fiscal years consisting of 52 or 53 weeks.  Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years.  Fiscal year 2017 (“2017”) is comprised of the 53 weeks that began on January 29, 2017 and will end on February 3, 2018.  Fiscal year 2016 (“2016”) was comprised of the 52 weeks that began on January 31, 2016 and ended on January 28, 2017.  The fiscal quarters ended July 29, 2017 (“second quarter of 2017”) and July 30, 2016 (“second quarter of 2016”) were both comprised of 13 weeks.  The year-to-date periods ended July 29, 2017 (“year-to-date 2017”) and July 30, 2016 (“year-to-date 2016”) were both comprised of 26 weeks. 

Selling and Administrative Expenses
Selling and administrative expenses include store expenses (such as payroll and occupancy costs) and costs related to warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance, non-income taxes, accepting credit/debit cards, and overhead.  Our selling and administrative expense rates may not be comparable to those of other retailers that include warehousing, distribution, and outbound transportation costs in cost of sales.  Warehousing, distribution, and outbound transportation costs included in selling and administrative expenses were $36.9 million and $35.4 million for the second quarter of 2017 and the second quarter of 2016, respectively, and $76.2 million and $73.1 million for the year-to-date 2017 and the year-to-date 2016, respectively.

Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, digital or internet marketing and advertising, and in-store point-of-purchase presentations.  Advertising expenses are included in selling and administrative expenses.  Advertising expenses were $15.9 million and $16.6 million for the second quarter of 2017 and the second quarter of 2016, respectively, and $35.8 million and $36.7 million for the year-to-date 2017 and the year-to-date 2016, respectively.

Derivative Instruments
We use derivative instruments to mitigate the risk of market fluctuations in the price of diesel fuel that we expect to consume to support our outbound transportation of inventory to our stores. We do not enter into derivative instruments for speculative purposes. Our derivative instruments may consist of collar or swap contracts. Our current derivative instruments do not meet the requirements for cash flow hedge accounting. Instead, our derivative instruments are marked-to-market to determine their fair value and any gains or losses are recognized currently in other income (expense) on our consolidated statements of operations.

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Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for the year-to-date 2017 and the year-to-date 2016:
 
Twenty-Six Weeks Ended
(In thousands)
July 29, 2017
 
July 30, 2016
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest, including capital leases
$
2,094

 
$
1,782

Cash paid for income taxes, excluding impact of refunds
$
84,579

 
$
101,047

Gross proceeds from borrowings under bank credit facility
$
826,000

 
$
884,900

Gross repayments of borrowings under bank credit facility
$
705,800

 
$
689,300

Non-cash activity:
 

 
 

Assets acquired under capital leases
$
72

 
$
132

Accrued property and equipment
$
13,322

 
$
11,179


Reclassifications
Merchandise Categories
We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The pronouncement was originally set to be effective for annual and interim reporting periods beginning after December 15, 2016. In July 2015, the FASB approved a one-year deferral of the effective date from December 15, 2016 to December 15, 2017, but allowed for early adoption as of December 15, 2016. This ASU permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact this guidance will have on our consolidated financial statements as well as the expected adoption method. We do not currently anticipate a significant change in the timing of the recognition of our revenue or costs; although upon adoption of this standard, our principal versus agent presentation of an immaterial portion of our vendor relationships may be impacted. We currently anticipate adopting the new standard effective February 4, 2018, using the full retrospective method; however, this decision is not final and is subject to the completion of our analysis of the standard. We will continue to evaluate ASU 2014-09 through the date of adoption.

In February 2016, the FASB issued ASU 2016-02, Leases. The update requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating both the impact that this standard will have on our consolidated financial statements and which method of adoption to employ. We do not currently anticipate early adopting this standard.

Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update makes several modifications to the accounting for employee share-based payment transactions, including the requirement to recognize the income tax deduction excess or deficiency attributable to awards that vest or settle as income tax expense in the reporting period they vest or settle. Additionally, this update clarifies the presentation of certain components of share-based awards in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods.

We selected a modified retrospective method to adopt the recognition of the cumulative income tax effects and a prospective method for cash flow presentations. In the first quarter of 2017, we recorded a $3.1 million benefit to income tax expense. For 2016, $0.5 million of excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes if this new guidance had been adopted on a full retrospective basis. Additionally, we recorded an insignificant adjustment to retained earnings to change our accounting method from an estimated forfeiture rate approach to actual forfeiture approach, which accounts for forfeitures as they occur.

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NOTE 2 – BANK CREDIT FACILITY

On July 22, 2011, we entered into a $700 million five-year unsecured credit facility, which was first amended on May 30, 2013. On May 28, 2015, we entered into a second amendment of the credit facility that among other things extended its expiration date to May 30, 2020 (as amended, the “2011 Credit 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.  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 July 29, 2017, we had $226.6 million of borrowings outstanding under the 2011 Credit Agreement and $16.0 million was committed to outstanding letters of credit, leaving $457.4 million available under the 2011 Credit Agreement.  

NOTE 3 – FAIR VALUE MEASUREMENTS

In connection with our nonqualified deferred compensation plan, we had mutual fund investments of $29.5 million and $24.1 million at July 29, 2017 and January 28, 2017, respectively, which were recorded in other assets. These investments were classified as trading securities and were recorded at their fair value. The fair values of mutual fund investments were Level 1 valuations under the fair value hierarchy because each fund’s quoted market value per share was available in an active market.

The fair values of our long-term obligations are estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for similar instruments. These fair value measurements are classified as Level 2 within the fair value hierarchy. Given the variable rate features and relatively short maturity of the instruments underlying our long-term obligations, the carrying value of these instruments approximates the fair value.

The carrying value of accounts receivable, accounts payable, and accrued expenses approximates fair value because of the relatively short maturity of these items.

NOTE 4 – 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 July 29, 2017 or July 30, 2016 which were excluded from the computation of earnings per share other than antidilutive stock options, restricted stock awards, restricted stock units, and performance share units.  For all periods presented, the stock options outstanding that were antidilutive and excluded from the computation of diluted earnings per share were immaterial.  Antidilutive stock options generally consist of outstanding stock options with an exercise price per share that is greater than the weighted-average market price per share for our common shares for each period.  Antidilutive stock options, restricted stock awards, restricted stock units, and performance share units are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. The restricted stock awards, restricted stock units, and performance share units that were antidilutive, as determined under the treasury stock method, were immaterial for all periods presented.

Share Repurchase Programs
On February 28, 2017, our Board of Directors authorized a share repurchase program providing for the repurchase of up to $150 million of our common shares (“2017 Repurchase Program”). Pursuant to the 2017 Repurchase Program, we may repurchase common shares 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 2017 Repurchase Program will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 2017 Repurchase Program has no scheduled termination date and will be funded with cash and cash equivalents, cash generated from operations or, if needed, by drawing on the 2011 Credit Agreement.


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During the second quarter of 2017, we acquired approximately 2.0 million of our outstanding common shares for $94.6 million under the 2017 Repurchase Program. During the year-to-date 2017, we acquired approximately 2.7 million of our outstanding common shares for $128.3 million under the 2017 Repurchase Program.

Dividends
The Company declared and paid cash dividends per common share during the periods presented as follows:
 
Dividends
Per Share
 
Amount Declared
 
Amount Paid
2017:
 
 
(In thousands)
 
(In thousands)
First quarter
$
0.25

 
$
11,547

 
$
12,683

Second quarter
0.25

 
11,289

 
10,872

Total
$
0.50

 
$
22,836

 
$
23,555


The amount of dividends declared may vary from the amount of dividends paid in a period based on certain instruments with restrictions on payment, including restricted stock awards, restricted stock units, and performance share units. The payment of future dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with applicable laws and agreements and any other factors deemed relevant by our Board of Directors.

NOTE 5 – SHARE-BASED PLANS

We have issued nonqualified stock options, restricted stock awards, restricted stock units, and performance share units under our shareholder-approved equity compensation plans.  Our restricted stock awards and restricted stock units, as described below and/or in note 7 to the consolidated financial statements in our 2016 Form 10-K, are expensed and reported as nonvested shares. We recognized share-based compensation expense of $6.6 million and $8.2 million in the second quarter of 2017 and the second quarter of 2016, respectively, and $14.5 million and $16.7 million for the year-to-date 2017 and the year-to-date 2016, respectively.

Non-vested Restricted Stock
The following table summarizes the non-vested restricted stock awards and restricted stock units activity for the year-to-date 2017:

Number of Shares
Weighted Average Grant-Date Fair Value Per Share
Outstanding non-vested restricted stock at January 28, 2017
771,521

$
42.12

Granted
180,196

51.49

Vested
(311,180
)
43.27

Forfeited
(9,893
)
42.71

Outstanding non-vested restricted stock at April 29, 2017
630,644

$
44.22

Granted
24,710

48.75

Vested
(33,104
)
46.11

Forfeited
(1,021
)
48.99

Outstanding non-vested restricted stock at July 29, 2017
621,229

$
44.29


The non-vested restricted stock units granted in the first and second quarters of 2017 generally vest, and are expensed, on a ratable basis over three years from the grant date of the award, if certain threshold financial performance objectives are probable of being achieved and the grantee remains employed by us through the vesting dates.

The non-vested restricted stock awards granted in 2013 have met the threshold financial performance objective and will vest in 2018 on the five-year anniversary of the grant date of the award.


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Non-vested Stock Awards to Non-Employee Directors
In the second quarter of 2017, 16,816 common shares underlying the restricted stock awards granted in 2016 to the non-employee members of our Board of Directors vested on the trading day immediately preceding our 2017 Annual Meeting of Shareholders. These awards were part of the annual compensation granted in 2016 to the non-employee members of the Board of Directors.
Additionally, in the second quarter of 2017, the chairman of our Board of Directors received an annual restricted stock unit grant having a grant date fair value of approximately $200,000. The remaining non-employees elected to our Board of Directors at our 2017 Annual Meeting of Shareholders each received an annual restricted stock unit grant having a grant date fair value of approximately $135,000.  The 2017 restricted stock units will vest on the earlier of (1) the trading day immediately preceding our 2018 Annual Meeting of Shareholders, or (2) the non-employee director’s death or disability.  However, the restricted stock units will not vest if the non-employee director ceases to serve on our Board of Directors before either vesting event occurs.

Performance Share Units
In the year-to-date 2017, we issued performance share units (“PSUs”) to certain members of management, which vest if certain financial performance objectives are achieved over a three-year performance period and the grantee remains employed by us during that period. The financial performance objectives for each fiscal year within the three-year performance period are approved by the Compensation Committee of our Board of Directors during the first quarter of the respective fiscal year.

As a result of the process used to establish the financial performance objectives, we will only meet the requirements of establishing a grant date for the PSUs when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.

We have begun or expect to begin recognizing expense related to PSUs that are issued and outstanding as follows:
Issue Year
PSUs at July 29, 2017
Actual Grant Date
Expected Valuation (Grant) Date
Actual or Expected Expense Period
2015
250,471

March 2017
 
Fiscal 2017
2016
341,300

 
March 2018
Fiscal 2018
2017
271,517

 
March 2019
Fiscal 2019
Total
863,288

 
 
 

The number of shares to be distributed upon vesting of the PSUs depends on our average performance attained during the three-year performance period as compared to the targets defined by the Compensation Committee, and may result in the distribution of an amount of shares that is greater or less than the number of PSUs granted, as defined in the award agreement. At July 29, 2017, we estimate the attainment of an average performance that is greater than the targets established for the PSUs issued in 2015. In the year-to-date 2017, we recognized $8.1 million in share-based compensation expense related to PSUs.


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The following table summarizes the activity related to PSUs for the year-to-date 2017:
 
Number of Shares
Weighted Average Grant-Date Fair Value Per Share
Outstanding PSUs at January 28, 2017
360,357

$
41.04

Granted
259,042

51.49

Vested
(360,357
)
41.04

Forfeited
(7,730
)
51.49

Outstanding PSUs at April 29, 2017
251,312

$
51.49

Granted


Vested


Forfeited
(841
)
51.49

Outstanding PSUs at July 29, 2017
250,471

$
51.49


Stock Options
The following table summarizes stock option activity for the year-to-date 2017:

Number of Options
Weighted Average Exercise Price Per Share
Weighted Average Remaining Contractual Term (years)
Aggregate Intrinsic Value (000's)
Outstanding stock options at January 28, 2017
589,675

$
38.75



Exercised
(104,987
)
36.88



Forfeited
(5,000
)
36.93



Outstanding stock options at April 29, 2017
479,688

$
39.18

2.2
$
5,424

Exercised
(41,687
)
37.00

 
 
Forfeited


 
 
Outstanding stock options at July 29, 2017
438,001

$
39.39

1.9
$
4,835

Vested or expected to vest at July 29, 2017
438,001

$
39.39

1.9
$
4,835

Exercisable at July 29, 2017
424,562

$
39.47

1.9
$
4,652


The stock options granted in prior years vest in equal amounts on the first four anniversaries of the grant date and have a contractual term of seven years.  With the adoption of ASU 2016-09, we have eliminated our annual forfeiture rate assumption.
The following activity occurred under our share-based plans during the respective periods shown:

Second Quarter
 
Year-to-Date
(In thousands)
2017
2016
 
2017
2016
Total intrinsic value of stock options exercised
$
539

$
4,780

 
$
2,077

$
5,580

Total fair value of restricted stock vested
1,629

1,289

 
17,829

11,072

Total fair value of performance shares vested

621

 
21,026

621


The total unearned compensation cost related to all share-based awards outstanding, excluding PSUs issued in 2016 and 2017, at July 29, 2017 was approximately $24.8 million.  This compensation cost is expected to be recognized through May 2020 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 1.1 years from July 29, 2017.


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NOTE 6 – EMPLOYEE BENEFIT PLANS

We maintained a qualified defined benefit pension plan (“Pension Plan”) and a nonqualified supplemental defined benefit pension plan (“Supplemental Pension Plan”) covering certain employees whose hire date was on or before April 1, 1994. Benefits under each plan were based on credited years of service and the employee’s compensation during the last five years of employment.

On October 31, 2015, our Board of Directors approved amendments to freeze benefits and terminate the Pension Plan. The Pension Plan discontinued accruing benefits on December 31, 2015 and the termination was effective January 31, 2016. On December 2, 2015, our Board of Directors approved amendments to freeze benefits and terminate the Supplemental Pension Plan. The Supplemental Pension Plan discontinued accruing benefits on December 31, 2015 and the termination was effective December 31, 2015. During 2016, we completed the termination proceedings for the Pension Plan, including seeking and receiving a favorable IRS determination letter, conducting a lump sum offering to our active and terminated vested participants, and conducting an insurance placement for the annuity purchasers. Additionally, we funded the Pension Plan and reduced our liability thereunder to zero. In January 2017, we completed the termination proceedings for the Supplemental Pension Plan and paid all accrued balances to located participants through lump sum settlements.

The weighted-average assumptions used to determine net periodic pension cost for our plans were as follows:
 
2016
Discount rate
1.2
%
Expected long-term rate of return
3.0
%
 
The components of combined net periodic pension cost were as follows:
 
Second Quarter
 
Year-to-Date
(In thousands)
2016
 
2016
Interest cost on projected benefit obligation
$
215

 
$
444

Expected investment return on plan assets
(397
)
 
(781
)
Amortization of actuarial loss
562

 
1,182

Settlement loss
139

 
1,255

Net periodic pension cost
$
519

 
$
2,100

 
NOTE 7 – INCOME TAXES

We have estimated the reasonably possible expected net change in unrecognized tax benefits through August 4, 2018, based on 1) expected cash and noncash settlements or payments of uncertain tax positions, and 2) lapses of the applicable statutes of limitations for unrecognized tax benefits.  The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0 million.  Actual results may differ materially from this estimate.

NOTE 8 – CONTINGENCIES

Shareholder and Derivative Matters
On May 21, May 22 and July 2, 2012, three shareholder derivative lawsuits were filed in the U.S. District Court for the Southern District of Ohio against us and certain of our current and former outside directors and executive officers. The lawsuits were consolidated, and, on August 13, 2012, plaintiffs filed a consolidated complaint captioned In re Big Lots, Inc. Shareholder Litigation, No. 2:12-cv-00445 (S.D. Ohio) (the “Consolidated Derivative Action”), which generally alleged that the individual defendants traded in our common shares based on material, nonpublic information concerning our guidance for fiscal 2012 and the first quarter of fiscal 2012 and the director defendants failed to suspend our share repurchase program during such trading activity. The consolidated complaint asserted claims under Ohio law for breach of fiduciary duty, unjust enrichment, misappropriation of trade secrets and corporate waste and sought declaratory relief and disgorgement to us of proceeds from any wrongful sales of our common shares, plus attorneys’ fees and expenses.


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The defendants filed a motion to dismiss the consolidated complaint, which was granted by the Court in an Opinion and Order dated April 14, 2015, pursuant to which plaintiffs’ claims were all dismissed with prejudice, with the exception of their claim for corporate waste, which was dismissed without prejudice. On May 5, 2015, plaintiffs filed a Motion for Leave to File Verified Consolidated Amended Shareholder Derivative Complaint, which sought to replead the claim for corporate waste that was dismissed without prejudice by the Court, as well as a Motion for Reconsideration and, in the Alternative, for Certification of Question of State Law to the Supreme Court of Ohio. Defendants’ responses to both motions were filed on May 29, 2015. On August 3, 2015, the Court granted Plaintiffs’ Motion for Leave to File Verified Consolidated Amended Shareholder Derivative Complaint, and Plaintiffs filed the amended complaint on the same date, asserting a claim for corporate waste against Jeffrey Berger, Steven Fishman, David Kollat, Brenda Lauderback, Philip Mallott, Russell Solt, and Dennis Tishkoff. On September 30, 2015, defendants filed an answer to the amended complaint.

We received a letter dated January 28, 2013, sent on behalf of a shareholder demanding that our Board of Directors investigate and take action in connection with the allegations made in the derivative and securities lawsuits described above. The shareholder indicated that he would commence a derivative lawsuit if our Board of Directors failed to take the demanded action. On March 6, 2013, our Board of Directors referred the shareholder’s letter to a committee of independent directors to investigate the matter. That committee, with the assistance of independent outside counsel, investigated the allegations in the shareholder’s demand letter and, on August 28, 2013, reported its findings to our Board of Directors along with its recommendation that the Board reject the shareholder’s demand. Our Board of Directors unanimously accepted the recommendation of the demand investigation committee and, on September 9, 2013, outside counsel for the committee sent a letter to counsel for the shareholder informing the shareholder of the Board’s determination. On October 18, 2013, the shareholder filed a derivative lawsuit captioned Brosz v. Fishman et al., No. 1:13-cv-00753 (S.D. Ohio) (the “Brosz Action”) in the U.S. District Court for the Southern District of Ohio against us and each of the current and former outside directors and executive officers originally named in the 2012 shareholder derivative lawsuit. The plaintiff’s complaint generally alleged that the individual defendants traded in our common shares based on material, nonpublic information concerning our guidance for fiscal 2012 and the first quarter of fiscal 2012 and the director defendants failed to suspend our share repurchase program during such trading activity. The complaint asserted claims under Ohio law for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste and misappropriation of trade secrets and sought damages, injunctive relief and disgorgement to us of proceeds from any wrongful sales of our common shares, plus attorneys’ fees and expenses.

The defendants filed a motion to dismiss the complaint, which was granted by the Court in an Opinion and Order dated April 14, 2015, which dismissed the plaintiff’s claims with prejudice with the exception of his claim for corporate waste and his assertion that our Board of Directors wrongfully rejected his demand to take action against the individually named defendants. On May 5, 2015, the Court so ordered the parties’ stipulation, staying plaintiff’s time to seek leave to amend his complaint in order to make a request to inspect the Company’s books and records pursuant to Ohio Revised Code §1701.37, and plaintiff served that request for inspection on May 8, 2015. On August 17, 2015, plaintiff filed an Amended Verified Shareholder Derivative Complaint. On September 30, 2015, defendants moved to dismiss the amended complaint. On December 29, 2016, the Court denied defendants’ motion to dismiss the amended complaint and ordered that the Brosz Action be consolidated with the Consolidated Derivative Action.

On February 10, 2014, a shareholder derivative lawsuit was filed in the Franklin County Common Pleas Court in Columbus, Ohio, captioned Tremblay v. Campisi et al., No. 14CV-02-1421 (Ohio Ct. Com. Pl., Franklin Cnty.) (the “Tremblay Action”), against us and certain of our current and former outside directors and executive officers (David Campisi, Steven Fishman, Joe Cooper, Charles Haubiel, Timothy Johnson, Robert Claxton, John Martin, Norman Rankin, Paul Schroeder, Robert Segal, Steven Smart, David Kollat, Jeffrey Berger, James Chambers, Peter Hayes, Brenda Lauderback, Philip Mallott, Russell Solt, James Tener and Dennis Tishkoff). The plaintiff’s complaint generally alleges that the individual defendants traded in our common shares based on material, nonpublic information concerning our guidance for fiscal 2012 and the first quarter of fiscal 2012 and the director defendants failed to suspend our share repurchase program during such trading activity. The complaint also alleges that we and various individual defendants made false and misleading statements regarding our Canadian operations prior to our announcement on December 5, 2013 that we were exiting the Canadian market. The complaint asserts claims under Ohio law for breach of fiduciary duty, unjust enrichment, waste of corporate assets and misappropriation of insider information and seeks damages, injunctive relief and disgorgement to us of proceeds from any wrongful sales of our common shares, plus attorneys’ fees and expenses. At the parties’ request, the court stayed this lawsuit until after the judge in the federal derivative lawsuits discussed in the preceding paragraphs ruled on the motions to dismiss pending in those actions. On January 12, 2017, the Tremblay Action was voluntarily dismissed by the plaintiffs, without prejudice to refiling.


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On August 1, 2016, our Board of Directors passed a resolution creating a special litigation committee (“SLC”) to conduct an independent investigation and determine, in its sole discretion, whether it is in the best interests of the Company to pursue, settle, or seek dismissal of, the claims asserted in the Consolidated Derivative Action, the Brosz Action, and the Tremblay Action. The SLC is composed of three members, each of whom is a director that is not a party to any of the derivative actions and was not a member of the Board until well after the relevant time period.  The SLC retained independent counsel and conducted an investigation. On October 20, 2016, the Company filed motions to stay all proceedings in the Consolidated Derivative Action and the Brosz Action pending the completion of the SLC’s investigation. The court granted the motion to stay all proceedings on December 15, 2016. As noted above, the Brosz action was consolidated with the Consolidated Derivative Action on December 29, 2016, and the Tremblay Action was voluntarily dismissed on January 12, 2017. On May 18, 2017, after concluding its investigation, the SLC filed a motion to dismiss the Consolidated Derivative Action. On May 19, 2017, the Court issued an order providing for discovery and briefing in connection with the SLC’s motion to dismiss and setting a schedule for further litigation of the merits of the lawsuit. The case is currently in discovery on the merits of the lawsuit and in connection with the SLC’s motion to dismiss.

On July 9, 2012, a putative securities class action lawsuit captioned Willis, et al. v. Big Lots, Inc., et al., 2:12-cv-00604 (S.D. Ohio) was filed in the U.S. District Court for the Southern District of Ohio on behalf of persons who acquired our common shares between February 2, 2012 and April 23, 2012. This lawsuit was filed against us, Lisa Bachmann, Mr. Cooper, Mr. Fishman and Mr. Haubiel. The complaint in the putative class action generally alleges that the defendants made statements concerning our financial performance that were false or misleading. The complaint asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 and seeks damages in an unspecified amount, plus attorneys’ fees and expenses. The lead plaintiff filed an amended complaint on April 4, 2013, which added Mr. Johnson as a defendant, removed Ms. Bachmann as a defendant, and extended the putative class period to August 23, 2012. On May 6, 2013, the defendants filed a motion to dismiss the putative class action complaint. On January 21, 2016, the Court granted in part and denied in part the defendants’ motion to dismiss, allowing some claims to move forward. On May 27, 2016, the lead plaintiff moved for class certification (requesting a class period from March 2, 2012 through August 23, 2012) and to appoint class representatives and class counsel. Defendants opposed the motion. On March 17, 2017, the Court granted plaintiffs' motion, certifying the class and appointing class representatives and class counsel. On March 31, 2017, the Company filed a petition pursuant to Federal Rule of Civil Procedure 23(f) for appeal of the Court's ruling with the U.S. Court of Appeals for the Sixth Circuit. That petition is currently pending. In the District Court, fact discovery was substantially completed on May 26, 2017, and the case is currently in expert discovery.

We believe that the shareholder derivative and putative class action lawsuits are without merit, and we intend to defend ourselves vigorously against the allegations levied in these lawsuits. While a loss from these lawsuits is reasonably possible, at this time, we cannot reasonably estimate the amount of any loss that may result or whether the lawsuits will have a material impact on our financial statements.

Tabletop Torches Matter
In 2013, we sold certain tabletop torch and citronella products manufactured by third parties. In August 2013, we recalled the tabletop torches and discontinued their sale in our stores. In 2014, we were named as a defendant in a number of lawsuits relating to these products alleging personal injuries suffered as a result of negligent shelving and pairing of the products, product design, manufacturing and marketing defects and/or breach of warranties. Although we believe that we are entitled to indemnification from the third-party manufacturers of the products and the company that tested the tabletop torches for all of the expenses that we have incurred with respect to these matters and that these expenses are covered by our insurance (subject to a $1 million deductible), in the second quarter of 2015, we (1) determined that our ability to obtain any recovery from the manufacturer of the tabletop torches may be limited because, among other things, the manufacturer has exhausted its applicable insurance coverage, is domiciled outside the United States and has been dissolved by its parent and (2) became engaged in litigation with our excess insurance carrier regarding the scope of our coverage. In the second quarter of 2015, we settled one of the lawsuits and settled another lawsuit in the third quarter of 2015. We settled an additional lawsuit in the first quarter of 2017. In the second quarter of 2017, we reached a settlement with the plaintiff in the final lawsuit. Additionally, we have brought a separate lawsuit in the United States District Court of Massachusetts against the company that tested the tabletop torch and an additional lawsuit in the United States District Court for the Southern District of Ohio against the third-party manufacturers and the company that tested the tabletop torch. In the second quarter of 2017, we reached a settlement in principle with our primary and excess insurance carriers.  During the second quarter of 2015, we recorded a $4.5 million charge related to these matters.


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Other Matters
We are involved in other legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material 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 effect on our financial condition, results of operations, and liquidity.

NOTE 9 – BUSINESS SEGMENT DATA

We use the following seven merchandise categories, which match our internal management and reporting of merchandise net sales: Food, Consumables, Soft Home, Hard Home, Furniture, Seasonal, and Electronics, Toys & Accessories. The Food category includes our beverage & grocery, candy & snacks, and specialty foods departments. The Consumables category includes our health, beauty and cosmetics, plastics, paper, chemical, and pet departments. The Soft Home category includes the home décor, frames, fashion bedding, utility bedding, bath, window, decorative textile, home organization and area rugs departments. The Hard Home category includes our small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments. The Furniture category includes our upholstery, mattress, ready-to-assemble, and case goods departments. The Seasonal category includes our lawn & garden, summer, Christmas, and other holiday departments. The Electronics, Toys, & Accessories category includes the electronics, jewelry, hosiery, toys and infant accessories departments.

We periodically assess, and potentially enact minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.

The following table presents net sales data by merchandise category:
 
 
Second Quarter
 
Year-to-Date
(In thousands)
 
2017
 
2016
 
2017
 
2016
Furniture
 
$
259,439

 
$
249,276

 
$
622,378

 
$
606,333

Seasonal
 
232,810

 
216,493

 
416,561

 
401,129

Consumables
 
198,706

 
201,752

 
388,499

 
396,313

Food
 
182,451

 
189,199

 
379,403

 
391,679

Soft Home
 
176,440

 
168,373

 
364,514

 
354,530

Hard Home
 
97,640

 
101,251

 
188,159

 
201,209

Electronics, Toys, & Accessories
 
73,815

 
76,811

 
158,574

 
164,537

Net sales
 
$
1,221,301

 
$
1,203,155

 
$
2,518,088

 
$
2,515,730


NOTE 10 – COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the components of accumulated other comprehensive loss, net of tax:
 
Second Quarter
 
Year-to-Date
(In thousands)
2016
 
2016
Beginning of period
$
(14,761
)
 
$
(15,977
)
Other comprehensive income before reclassifications
(94
)
 
73

Amounts reclassified from accumulated other comprehensive loss
423

 
1,472

Net period change
329

 
1,545

End of period
(14,432
)
 
(14,432
)

The amounts reclassified from accumulated other comprehensive loss are associated with our pension plans and have been reclassified to selling and administrative expenses in our statements of operations. Please see note 6 to the consolidated financial statements for further information on our pension plans.


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NOTE 11 – DERIVATIVE INSTRUMENTS

We may enter into derivative instruments designed to mitigate certain risks, including collar contracts to mitigate our risk associated with market fluctuations in diesel fuel prices. These contracts are used strictly to limit our risk exposure and not as speculative transactions. Our derivative instruments associated with diesel fuel do not meet the requirements for cash flow hedge accounting. Therefore, our derivative instruments associated with diesel fuel will be marked-to-market to determine their fair value and the associated gains and losses will be recognized currently in other income (expense) on our consolidated statements of operations.

Our outstanding derivative instrument contracts for the second quarter of 2017 were comprised of the following:
(In thousands)
July 29, 2017
 
January 28, 2017
Diesel fuel collars (in gallons)
5,150
 
4,425

The fair value of our outstanding derivative instrument contracts was as follows:
(In thousands)
 
Assets (Liabilities)
Derivative Instrument
Balance Sheet Location
July 29, 2017
 
January 28, 2017
Diesel fuel collars
Other current assets
$
129

 
$
135

 
Other assets
403

 
180

 
Accrued operating expenses
(632
)
 
(1,001
)
 
Other liabilities
(558
)
 
(322
)
Total derivative instruments
 
$
(658
)
 
$
(1,008
)

The effect of derivative instruments on the consolidated statements of operations was as follows:
 
 
Amount of Gain (Loss)
(In thousands)
 
Second Quarter
 
Year-to-Date
Derivative Instrument
Statements of Operations Location
2017
 
2016
 
2017
 
2016
Diesel fuel collars
 
 
 
 
 
 
 
 
Realized
Other income (expense)
$
(213
)
 
$
(561
)
 
$
(499
)
 
$
(1,362
)
Unrealized
Other income (expense)
571

 
184

 
350

 
1,664

Total derivative instruments
 
$
358

 
$
(377
)
 
$
(149
)
 
$
302


The fair values of our derivative instruments are determined using observable inputs from commonly quoted markets. These fair value measurements are classified as Level 2 within the fair value hierarchy.


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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 (the “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,” “should,” “may,” “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 current economic and credit conditions, 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 they are made. 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.


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OVERVIEW

The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes.  Each term defined in the notes has the same meaning in this item and the balance of this report.

The following are the results from the second quarter of 2017 that we believe are key indicators of our operating performance when compared to our operating performance from the second quarter of 2016:
    
Net sales increased $18.1 million, or 1.5%.
Comparable store sales for stores open at least fifteen months, including e-commerce, increased $20.5 million, or 1.8%.
Gross margin dollars increased $6.1 million, while gross margin rate decreased 10 basis points to 40.3% from 40.4% of sales.
Selling and administrative expenses decreased $1.5 million. As a percentage of net sales, selling and administrative expenses decreased 60 basis points to 34.0% of net sales.
Operating profit rate increased 70 basis points to 3.9%.
Diluted earnings per share increased to $0.67 per share from $0.50 per share.
Inventory increased by 0.2%, or $1.9 million, to $810.5 million from the second quarter of 2016.
We acquired 2.0 million of our outstanding common shares for $94.6 million under our 2017 Repurchase Program.
We declared and paid a quarterly cash dividend in the amount of $0.25 per common share in the second quarter of 2017 compared to a quarterly cash dividend of $0.21 per common share paid in the second quarter of 2016.

See the discussion and analysis below for additional details regarding our operating results.

STORES

The following table presents stores opened and closed during the year-to-date 2017 and the year-to-date 2016:
 
 
2017
2016
Stores open at the beginning of the fiscal year
1,432

1,449

Stores opened during the period
8

2

Stores closed during the period
(11
)
(6
)
 
Stores open at the end of the period
1,429

1,445


We continue to expect to close 20 net stores during 2017. We have increased our expectations to now open approximately 24 stores and close approximately 44 stores during 2017.



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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:
 
Second Quarter
 
Year-to-Date
 
2017
2016
 
2017
2016
Net sales
100.0
 %
100.0
 %
 
100.0
 %
100.0
 %
Cost of sales (exclusive of depreciation expense shown separately below)
59.7

59.6

 
59.6

60.1

Gross margin
40.3

40.4

 
40.4

39.9

Selling and administrative expenses
34.0

34.6

 
33.0

33.5

Depreciation expense
2.4

2.6

 
2.3

2.4

Operating profit
3.9

3.2

 
5.1

4.0

Interest expense
(0.1
)
(0.1
)
 
(0.1
)
(0.1
)
Other income (expense)
0.0

(0.0
)
 
(0.0
)
0.0

Income before income taxes
3.8

3.1

 
5.0

4.0

Income tax expense
1.4

1.2

 
1.8

1.5

Net income
2.4
 %
1.9
 %
 
3.2
 %
2.4
 %

SECOND QUARTER OF 2017 COMPARED TO SECOND QUARTER OF 2016

Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales) in the second quarter of 2017 and the second quarter of 2016, and the change in net sales (in dollars and percentage) and the change in comparable store sales for stores open at least fifteen months plus the results of our e-commerce net sales (“comp” or “comps”) (in percentage) from the second quarter of 2017 compared to the second quarter of 2016 were as follows:
Second Quarter
 
 
($ in thousands)
2017
 
2016
 
Change
 
Comps
Furniture
$
259,439

21.3
%
 
$
249,276

20.7
%
 
$
10,163

4.1
 %
 
3.7
 %
Seasonal
232,810

19.1

 
216,493

18.0

 
16,317

7.5

 
8.0

Consumables
198,706

16.3

 
201,752

16.8

 
(3,046
)
(1.5
)
 
(0.9
)
Food
182,451

14.9

 
189,199

15.7

 
(6,748
)
(3.6
)
 
(3.1
)
Soft Home
176,440

14.4

 
168,373

14.0

 
8,067

4.8

 
5.2

Hard Home
97,640

8.0

 
101,251

8.4

 
(3,611
)
(3.6
)
 
(3.0
)
Electronics, Toys, & Accessories
73,815

6.0

 
76,811

6.4

 
(2,996
)
(3.9
)
 
(5.0
)
  Net sales
$
1,221,301

100.0
%
 
$
1,203,155

100.0
%
 
$
18,146

1.5
 %
 
1.8
 %
 
We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.


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Table of Contents

Net sales increased $18.1 million, or 1.5%, to $1,221.3 million in the second quarter of 2017, compared to $1,203.2 million in the second quarter of 2016.  The increase in net sales was driven by a 1.8% increase in our comps, which increased net sales by $20.5 million, partially offset by the net decrease of 16 stores since the end of the second quarter of 2016, which decreased net sales by $2.4 million. Our Seasonal, Soft Home, and Furniture merchandise categories generated positive comps:
The positive comps and net sales in our Seasonal category were primarily the result of strength in our lawn & garden and summer departments, which was a result of an improved quality of merchandise, a shift in merchandise mix towards a higher average retail value, and strategically higher inventory levels in the second quarter of 2017 compared to the second quarter of 2016.
Soft Home experienced increases in net sales and comps which were primarily driven by continued improvement in the product assortment, quality, and perceived value by our customers.
The Furniture category experienced increased net sales and comps during the second quarter of 2017, primarily driven by strength in our mattress and upholstery departments and the positive impact of our Easy Leasing lease-to-own program and our third-party, private label credit card offering.

The positive comps in Seasonal, Soft Home, and Furniture were offset by negative comps in Consumables, Food, Hard Home, and Electronics, Toys, & Accessories:
Consumables experienced a decrease in net sales and comps in numerous departments due to the timing of closeout inventory purchases that increased sales in the second quarter of 2016, which was partially offset by positive comps driven by new and expanded product offerings in our bath / body wash and over-the-counter / nutritional health products.
The Food category experienced decreased net sales and negative comps due to product mix imbalances and a highly competitive marketplace. During the first quarter of 2017, we invested in our inventory levels to correct certain product mix imbalances, including improvements to our “never out” product assortment. Jennifer began responding to the improved product assortment as the second quarter progressed.
The decreased net sales and negative comps in Hard Home and Electronics, Toys, & Accessories were a result of an intentionally narrowed merchandise assortment and linear footage allocation.

Gross Margin
Gross margin dollars increased by $6.1 million, or 1.3%, to $492.5 million for the second quarter of 2017, compared to $486.4 million for the second quarter of 2016. The increase in gross margin dollars was principally due to an increase in net sales, which increased gross margin dollars by $7.3 million, partially offset by a slightly lower gross margin rate, which decreased gross margin dollars by approximately $1.2 million. Gross margin as a percentage of net sales decreased 10 basis points to 40.3% in the second quarter of 2017, compared to 40.4% in the second quarter of 2016. The gross margin rate decrease was principally due to a higher overall markdown rate, partially offset by both a higher initial mark-up, driven by favorable inbound freight costs and lower product costs, and a lower shrink rate in the second quarter of 2017 as compared to the second quarter of 2016.

Selling and Administrative Expenses
Selling and administrative expenses were $415.2 million for the second quarter of 2017, compared to $416.7 million for the second quarter of 2016. The decrease of $1.5 million, or 0.4%, was primarily driven by a decrease in share-based compensation of $1.6 million. The decrease in share-based compensation expense was primarily a result of fewer performance share units expensing in 2017 compared to 2016.

As a percentage of net sales, selling and administrative expenses decreased 60 basis points to 34.0% for the second quarter of 2017 compared to 34.6% for the second quarter of 2016.
                                          
Depreciation Expense
Depreciation expense decreased $1.4 million to $29.4 million in the second quarter of 2017, compared to $30.8 million for the second quarter of 2016. Depreciation expense as a percentage of sales decreased 20 basis points to 2.4% for the second quarter of 2017 compared to 2.6% for the second quarter of 2016. The decrease was driven by a reduction in new store spending in 2015 and 2016 as compared to 2011 and 2012, as the initial store construction costs on those stores have completed their depreciation cycle. 


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Table of Contents

Interest Expense
Interest expense was $1.6 million in the second quarter of 2017, compared to $1.5 million in the second quarter of 2016. The increase in interest expense was primarily driven by an increase in our average interest rate on our revolving debt in the second quarter of 2017 compared to the second quarter of 2016. The increase in interest rate was partially offset by a decrease in total average borrowings. We had total average borrowings (including capital leases) of $240.2 million in the second quarter of 2017 compared to total average borrowings of $289.3 million in the second quarter of 2016. The decrease in total average borrowings (including capital leases) was primarily due to a decrease of $43.9 million to our average revolving debt balance under the 2011 Credit Agreement, which was primarily the result of repurchasing fewer shares under our Repurchase Program during the second quarter of 2017 compared to the second quarter of 2016.

Other Income (Expense)
Other income (expense) was $0.4 million in the second quarter of 2017, compared to $(0.4) million in the second quarter of 2016. The change from 2016 to 2017 was driven by a change in pricing trends for diesel fuel. We realized losses on our diesel fuel hedging contracts that settled during both periods, as diesel fuel prices were below our collar limits. Current diesel prices during the second quarter of 2016 were both lower and further below our collar limits than the second quarter of 2017. In both periods, we recognized unrealized gains due to an increase in forecasted future fuel prices, which positively impacted the valuation of our hedges.

Income Taxes
The effective income tax rate for the second quarter of 2017 and the second quarter of 2016 was 37.7% and 38.6%, respectively.  The decrease in the effective income tax rate was primarily attributable to a decrease in nondeductible expenses and the net excess tax benefits associated with settlement of share-based payment awards (due to the adoption of ASU 2016-09).  Rates were also impacted by higher pretax earnings this year.

YEAR-TO-DATE 2017 COMPARED TO YEAR-TO-DATE 2016

Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales) in the year-to-date 2017 and the year-to-date 2016, and the change in net sales (in dollars and percentage) and the change in comps (in percentage) from the year-to-date 2017 compared to the year-to-date 2016 were as follows:
Year-to-Date
 
 
($ in thousands)
2017
 
2016
 
Change
 
Comps
Furniture
$
622,378

24.7
%
 
$
606,333

24.1
%
 
$
16,045

2.6
 %
 
2.4
 %
Seasonal
416,561

16.5

 
401,129

15.9

 
15,432

3.8

 
4.4

Consumables
388,499

15.4

 
396,313

15.8

 
(7,814
)
(2.0
)
 
(1.2
)
Food
379,403

15.1

 
391,679

15.6

 
(12,276
)
(3.1
)
 
(2.5
)
Soft Home
364,514

14.5

 
354,530

14.1

 
9,984

2.8

 
3.4

Hard Home
188,159

7.5

 
201,209

8.0

 
(13,050
)
(6.5
)
 
(5.8
)
Electronics, Toys, & Accessories
158,574

6.3

 
164,537

6.5

 
(5,963
)
(3.6
)
 
(5.4
)
  Net sales
$
2,518,088

100.0
%
 
$
2,515,730

100.0
%
 
$
2,358

0.1
 %
 
0.4
 %

Net sales increased $2.4 million, or 0.1%, to $2,518.1 million in the year-to-date 2017, compared to $2,515.7 million in the year-to-date 2016.  The increase in net sales was principally due to a 0.4% increase in comps, which increased net sales by $9.2 million, partially offset by the net decrease of 16 stores since the end of the second quarter of 2016, which decreased net sales by $6.8 million.


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Table of Contents

Our Seasonal, Soft Home, and Furniture merchandise categories generated positive comps:
The positive comps and increased net sales in our Seasonal category were primarily the result of strength in our summer and lawn & garden departments, which was the result of improved product assortment and strategically higher inventory levels in 2017 compared to 2016.
Soft Home experienced increases in net sales and comps which were primarily driven by continued improvement in the product assortment, quality, and perceived value by our customers.
The Furniture category experienced increased net sales and comps during the year-to-date 2017, primarily driven by strength in our upholstery and mattress departments and the positive impact of our Easy Leasing lease-to-own program and our third-party, private label credit card offering.

The positive comps in Seasonal, Soft Home, and Furniture were offset by negative comps in Consumables, Food, Electronics, Toys, & Accessories and Hard Home:
Consumables experienced a decrease in net sales and comps in numerous departments due to the timing of closeout inventory purchases, which was partially offset by positive comps in our health, beauty, and cosmetics department due to the introduction of an everyday, branded product program and space expansions in our bath / body wash and over-the-counter/nutritional health departments.
The Food category experienced negative net sales and comps due to merchandising execution, such as product mix imbalances. We invested in growing our Food inventory position from the beginning of the year to address these imbalances in future periods.
The negative comps and decreased net sales in Electronics, Toys, & Accessories and Hard Home were a result of an intentionally narrowed merchandise assortment.

For the third quarter of 2017, we expect comparable store sales to increase in the low single digits. We forecast comparable store sales for the fourth quarter of 2017 to be in the range of flat to a 2% increase.

Gross Margin
Gross margin dollars increased $12.7 million, or 1.3%, to $1,016.8 million for the year-to-date 2017, compared to $1,004.1 million for the year-to-date 2016.  The increase in gross margin dollars was principally due to an increase in gross margin rate, which increased gross margin dollars by approximately $11.7 million, coupled with an increase in net sales of $2.4 million, which benefited gross margin dollars by approximately $1.0 million. Gross margin as a percentage of net sales increased 50 basis points to 40.4% in the year-to-date 2017, compared to 39.9% in the year-to-date 2016.  The gross margin rate increase was the result of a higher initial mark-up, driven by favorable inbound freight costs and lower product costs, and a lower shrink rate, partially offset by a higher overall markdown rate.

We expect our gross margin rate will be similar in the third quarter of 2017 to the third quarter of 2016. For the fourth quarter of 2017, we anticipate our gross margin rate will be slightly lower than the fourth quarter of 2016 principally due to a favorable physical inventory shrink adjustment which occurred in fourth quarter of 2016 that is not currently forecasted to occur in the fourth quarter of 2017.

Selling and Administrative Expenses
Selling and administrative expenses were $831.1 million for the year-to-date 2017, compared to $842.1 million for the year-to-date 2016. The decrease of $11.0 million, or 1.3%, was primarily driven by decreases in legal settlement costs of $4.8 million, utility expenses of $2.3 million, accrued bonus expense of $2.3 million, and share-based compensation expense of $2.2 million, and the absence of $1.3 million in pension settlement charges in 2017, partially offset by increases in occupancy charges of $3.4 million, distribution and outbound transportation costs of $3.1 million, and corporate office payroll expenses of $2.3 million. During the year-to-date 2016, we incurred $5.2 million in charges related to wage and hour claims brought against us in the State of California associated with both our stores and our distribution center as well as for an action related to our handling of hazardous materials and hazardous waste in California. The decrease in utility expenses was primarily driven by cost saving initiatives, such as our LED lighting replacement project. The decrease in accrued bonus expense was driven by our current performance relative to our operating plan in the year-to-date 2017 as compared to our out-performance relative to our operating plan in the year-to-date 2016. The decrease in share-based compensation expense was primarily a result of fewer performance share units expensing in 2017 compared to 2016. Additionally, we incurred $1.3 million in pension settlement charges during the year-to-date 2016, which was the result of the termination of our pension plans. The increase in occupancy charges is primarily driven by annual rent increases for the renewal of expiring leases. The increase in distribution and outbound transportation costs of $3.1 million was driven by higher fuel prices in the year-to-date 2017 compared to the year-to-date 2016, coupled with additional expenses as we continue to sell and ship larger sized items in our Furniture and Seasonal categories. The increase in corporate office payroll expenses was primarily driven by annual merit increases.


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Table of Contents

As a percentage of net sales, selling and administrative expenses decreased 50 basis points to 33.0% for the year-to-date 2017 and compared to 33.5% for the year-to-date 2016.

During the third and fourth quarters of 2017, we anticipate that our selling and administrative expenses as a percentage of net sales will decrease slightly compared to the third and fourth quarters of 2016.

Depreciation Expense
Depreciation expense decreased $2.5 million to $58.0 million in the year-to-date 2017, compared to $60.5 million for the year-to-date 2016. The decrease was driven by the reduction in new store spending in 2015 and 2016 as compared to 2011 and 2012, as the initial store construction costs on those stores are completing their depreciation cycle. Depreciation expense as a percentage of sales decreased by 10 basis points compared to the year-to-date 2016.

We expect that our depreciation expense for the balance of 2017 will be slightly lower in comparison to the third and fourth quarter of 2016.

Interest Expense
Interest expense was $2.6 million in the year-to-date 2017, compared to $2.1 million in the year-to-date 2016.  The increase was driven by higher average borrowings under the 2011 Credit Agreement. The increase in interest expense was also driven by an increase in our average interest rate on our revolving debt in the year-to-date 2017 compared to the year-to-date 2016. Additionally, we had total average borrowings (including capital leases) of $193.3 million in the year-to-date 2017 compared to total average borrowings of $189.9 million in the year-to-date 2016. The increase in total average borrowings (including capital leases) was primarily due to an increase of $8.4 million to our average revolving debt balance under the 2011 Credit Agreement, which was primarily the result of a higher beginning debt balance in 2017 as compared to 2016.

Other Income (Expense)
Other income (expense) was $(0.1) million in the year-to-date 2017, compared to $0.4 million in the year-to-date 2016. The change from 2016 to 2017 was driven by a change in pricing trends for diesel fuel. During the year-to-date 2016, diesel prices increased which generated an overall gain, while in the year-to-date 2017 prices have moderated.

Income Taxes
The effective income tax rate for the year-to-date 2017 and the year-to-date 2016 was 35.5% and 38.4%, respectively. The decrease in the effective income tax rate was primarily attributable to the net excess tax benefits associated with vestings and exercises of share-based payment awards due to the adoption of ASU 2016-09 (as described in note 1), which decreased our effective income tax rate by approximately 2.5%, and a decrease in nondeductible expenses.

Capital Resources and Liquidity
On July 22, 2011, we entered into the 2011 Credit Agreement, which was first amended on May 30, 2013. On May 28, 2015, we entered into a second amendment of the 2011 Credit Agreement that, among other things, extended its expiration date to May 30, 2020. Borrowings under the 2011 Credit Agreement are available for working capital and general corporate purposes. 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. 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 July 29, 2017, we were in compliance with the covenants of the 2011 Credit Agreement.

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. At July 29, 2017, we had $226.6 million in outstanding borrowings under the 2011 Credit Agreement and the borrowings available under the 2011 Credit Agreement were $457.4 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $16.0 million.


24

Table of Contents

In February 2017, our Board of Directors authorized us to repurchase up to $150.0 million of our outstanding common shares. During the year-to-date 2017, we purchased approximately 2.7 million common shares at an average price of $48.00 per share under the 2017 Repurchase Program.

In the year-to-date 2017, we have declared and paid two quarterly cash dividends of $0.25 per common share each for a total paid amount of approximately $23.6 million.

In August 2017, our Board of Directors declared a quarterly cash dividend of $0.25 per common share payable on
September 22, 2017 to shareholders of record as of the close of business on September 8, 2017.

The following table compares the primary components of our cash flows from the year-to-date 2017 to the year-to-date 2016:
(In thousands)
2017
 
2016
 
Change
Net cash provided by operating activities
$
99,962

 
$
111,500

 
$
(11,538
)
Net cash used in investing activities
(51,691
)
 
(45,030
)
 
(6,661
)
Net cash used in financing activities
$
(43,426
)
 
$
(62,245
)
 
$
18,819


Cash provided by operating activities decreased by $11.5 million to $100.0 million in the year-to-date 2017 compared to $111.5 million of cash provided by operating activities in the year-to-date 2016. The decrease was driven by a decrease to accounts payable, which decreased our cash provided by operating activities by $40.6 million in the year-to-date 2017 compared to the year-to-date 2016. In the second quarter of 2017, we reduced our receipts of merchandise to manage our inventory levels, which resulted in a decrease in outstanding accounts payable. Partially offsetting the decrease in cash provided by operating activities was an increase in net income of $19.2 million, which was primarily driven by the increase in comparable store sales and an improved operating profit rate in the year-to-date 2017. Additionally, the net decrease in deferred income taxes increased cash provided by operating activities by $12.2 million in the year-to-date 2017 compared to the year-to-date 2016. In 2016, our deferred tax assets increased as a result of the revaluation of pension settlement liabilities. The pension settlements were paid in the fourth quarter of 2016 (impacting the year-to-date 2017), which resulted in a realization of the previously deferred income tax benefit.

Cash used in investing activities increased by $6.7 million to $51.7 million in the year-to-date 2017 compared to $45.0 million in the year-to-date 2016.  The increase was primarily driven by an $8.0 million increase in capital expenditures to $53.2 million in the year-to-date 2017 compared to $45.2 million in the year-to-date 2016. The increase in capital expenditures was driven by our increased investment in new store openings and our LED lighting program in the year-to-date 2017.

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Table of Contents


Cash used in financing activities decreased by $18.8 million to $43.4 million in the year-to-date 2017 compared to $62.2 million in the year-to-date 2016. The primary driver of this decrease was a $121.7 million decrease in cash used to repurchase common shares under our share repurchase programs in the year-to-date 2017 compared to the year-to-date 2016, partially offset by both a decrease of $75.4 million in net borrowings under our bank credit facility to $120.2 million in the year-to-date 2017 compared to $195.6 million in the year-to-date 2016 and a decrease of $11.9 million in proceeds from stock option exercises.

On a consolidated basis, we continue to expect cash provided by operating activities less capital expenditures to be approximately $180 million to $190 million for 2017.

26

Table of Contents

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 our 2016 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 2016 Form 10-K.  Had we used estimates, judgments, and assumptions different from any of those discussed in our 2016 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 on investments that we make from time to time and on borrowings under the 2011 Credit Agreement. An increase or decrease of 1% in interest rates would not have a material effect on our financial condition, results of operations, or liquidity.

We are subject to market risk from exposure to changes in our derivative instruments, associated with diesel fuel. At July 29, 2017, we had outstanding derivative instruments, in the form of collars, covering 5,150,000 gallons of diesel fuel. The below table provides further detail related to our current derivative instruments, associated with diesel fuel.
Calendar Year of Maturity
 
Diesel Fuel Derivatives
 
Fair Value
 
Puts
 
Calls
 
Asset (Liability)
 
 
(Gallons, in thousands)
 
(In thousands)
2017
 
1,550

 
1,550

 
$
(365
)
2018
 
2,400

 
2,400

 
(239
)
2019
 
1,200

 
1,200

 
(54
)
Total
 
5,150

 
5,150

 
$
(658
)

Additionally, at July 29, 2017, a 10% difference in the forward curve for diesel fuel prices would affect unrealized gains (losses) in other income (expense) by approximately $1.3 million.

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
There were 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) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


27

Table of Contents

Part II. Other Information


Item 1. Legal Proceedings

No response is required under Item 103 of Regulation S-K.

Item 1A. Risk Factors

During the second quarter of 2017, there were no material changes to the risk factors previously disclosed in our 2016 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(In thousands, except price per share data)
 
 
 
 
Period
(a) Total Number of Shares Purchased (1)(2)
(b) Average Price Paid per Share
(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
April 30, 2017 - May 27, 2017
698

$
47.79

698

$
83,021

May 28, 2017 - June 24, 2017
547

48.22

541

53,249

June 25, 2017 - July 29, 2017
739

47.67

738

21,742

   Total
1,984

$
47.87

1,977

$
21,742

 
(1)
The 2017 Repurchase Program is comprised of a February 28, 2017 authorization by our Board of Directors for the repurchase of up to $150.0 million of our common shares. During the second quarter of 2017, we purchased approximately 2.0 million of our common shares for approximately $94.6 million under the 2017 Repurchase Program.

(2)
In April, May, and June 2017, in connection with the vesting of certain outstanding restricted stock awards and restricted stock units, we acquired 590, 6,151 and 160 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.


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Table of Contents

Item 6. Exhibits

Exhibits marked with an asterisk (*) are filed herewith. The Exhibit marked with two asterisks (**) is furnished electronically with this Quarterly Report.

 
Exhibit No.
 
Document
 
 
 
 
 
 
Big Lots Senior Executive Severance Agreement
 
 
 
 
 
 
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.
 
 
 
 
 
101**
 
XBRL Instance Document.

Signature

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: September 6, 2017
 
BIG LOTS, INC.
 
 
 
By: /s/ Timothy A. Johnson
 
 
 
Timothy A. Johnson
 
Executive Vice President, Chief Administrative Officer
 
and Chief Financial Officer
 
(Principal Financial Officer, Principal Accounting Officer and Duly Authorized Officer)


29