burl-10q_20171030.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number 001-36107

 

BURLINGTON STORES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0895227

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2006 Route 130 North

Burlington, New Jersey

 

08016

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (609) 387-7800

 

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.    Yes      No  

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

Accelerated filer

 

 

 

 

Non-Accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

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.       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 68,247,877 shares of common stock outstanding as of October 28, 2017.

 

 


BURLINGTON STORES, INC.

INDEX

 

 

 

Page

Part I—Financial Information

 

3

 

 

 

Item 1. Financial Statements (unaudited)

 

3

 

 

 

Condensed Consolidated Statements of Income - Three and Nine Months Ended October 28, 2017 and October 29, 2016  

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended October 28, 2017 and October 29, 2016

 

4

 

 

 

Condensed Consolidated Balance Sheets – October 28, 2017, January 28, 2017 and October 29, 2016

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended October 28, 2017 and October 29, 2016

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

Item 4. Controls and Procedures

 

34

 

 

 

Part II—Other Information

 

34

 

 

 

Item 1. Legal Proceedings

 

34

 

 

 

Item 1A. Risk Factors

 

35

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

Item 3. Defaults Upon Senior Securities

 

35

 

 

 

Item 4. Mine Safety Disclosures

 

35

 

 

 

Item 5. Other Information

 

35

 

 

 

Item 6. Exhibits

 

36

 

 

 

SIGNATURES

 

37

 

 

 

 

2


Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

BURLINGTON STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(All amounts in thousands, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,438,167

 

 

$

1,342,600

 

 

$

4,147,937

 

 

$

3,880,322

 

Other revenue

 

 

6,405

 

 

 

6,447

 

 

 

17,834

 

 

 

18,324

 

Total revenue

 

 

1,444,572

 

 

 

1,349,047

 

 

 

4,165,771

 

 

 

3,898,646

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

831,728

 

 

 

789,858

 

 

 

2,436,250

 

 

 

2,316,162

 

Selling, general and administrative expenses

 

 

480,194

 

 

 

451,072

 

 

 

1,338,247

 

 

 

1,261,559

 

Costs related to debt amendments

 

 

 

 

 

 

 

 

 

 

 

1,346

 

Stock option modification expense

 

 

26

 

 

 

106

 

 

 

131

 

 

 

520

 

Depreciation and amortization

 

 

50,836

 

 

 

46,472

 

 

 

147,547

 

 

 

136,630

 

Impairment charges - long-lived assets

 

 

 

 

 

 

 

 

988

 

 

 

109

 

Other income - net

 

 

(1,362

)

 

 

(1,473

)

 

 

(6,948

)

 

 

(7,361

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

3,805

 

Interest expense

 

 

15,351

 

 

 

13,159

 

 

 

43,409

 

 

 

43,196

 

Total costs and expenses

 

 

1,376,773

 

 

 

1,299,194

 

 

 

3,959,624

 

 

 

3,755,966

 

Income before income tax expense

 

 

67,799

 

 

 

49,853

 

 

 

206,147

 

 

 

142,680

 

Income tax expense

 

 

22,920

 

 

 

17,449

 

 

 

61,998

 

 

 

52,368

 

Net income

 

$

44,879

 

 

$

32,404

 

 

$

144,149

 

 

$

90,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - basic

 

$

0.66

 

 

$

0.46

 

 

$

2.10

 

 

$

1.28

 

Common stock - diluted

 

$

0.65

 

 

$

0.45

 

 

$

2.04

 

 

$

1.25

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - basic

 

 

67,694

 

 

 

70,347

 

 

 

68,611

 

 

 

70,757

 

Common stock - diluted

 

 

69,541

 

 

 

71,597

 

 

 

70,616

 

 

 

72,002

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

 

3


BURLINGTON STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(All amounts in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

44,879

 

 

$

32,404

 

 

$

144,149

 

 

$

90,312

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) arising during the period

 

 

1,144

 

 

 

239

 

 

 

45

 

 

 

(3,054

)

Reclassification into earnings during the period

 

 

908

 

 

 

442

 

 

 

2,654

 

 

 

860

 

Other comprehensive income (loss), net of tax:

 

 

2,052

 

 

 

681

 

 

 

2,699

 

 

 

(2,194

)

Total comprehensive income

 

$

46,931

 

 

$

33,085

 

 

$

146,848

 

 

$

88,118

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 


 

4


BURLINGTON STORES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(All amounts in thousands, except share and per share data)

 

 

 

 

October 28,

 

 

January 28,

 

 

October 29,

 

 

 

2017

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,080

 

 

$

81,597

 

 

$

32,799

 

Restricted cash and cash equivalents

 

 

27,800

 

 

 

27,800

 

 

 

27,800

 

Accounts receivablenet

 

 

78,995

 

 

 

43,252

 

 

 

59,757

 

Merchandise inventories

 

 

903,663

 

 

 

701,891

 

 

 

822,469

 

Prepaid and other current assets

 

 

91,917

 

 

 

73,784

 

 

 

104,051

 

Total current assets

 

 

1,150,455

 

 

 

928,324

 

 

 

1,046,876

 

Property and equipment—net

 

 

1,111,949

 

 

 

1,049,447

 

 

 

1,040,297

 

Tradenames

 

 

238,000

 

 

 

238,000

 

 

 

238,000

 

Favorable leases—net

 

 

195,374

 

 

 

213,180

 

 

 

220,680

 

Goodwill

 

 

47,064

 

 

 

47,064

 

 

 

47,064

 

Deferred tax assets

 

 

7,939

 

 

 

7,973

 

 

 

 

Other assets

 

 

92,582

 

 

 

90,495

 

 

 

95,203

 

Total assets

 

$

2,843,363

 

 

$

2,574,483

 

 

$

2,688,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

764,563

 

 

$

640,326

 

 

$

691,971

 

Other current liabilities

 

 

361,170

 

 

 

354,870

 

 

 

326,114

 

Current maturities of long term debt

 

 

1,942

 

 

 

1,638

 

 

 

1,574

 

Total current liabilities

 

 

1,127,675

 

 

 

996,834

 

 

 

1,019,659

 

Long term debt

 

 

1,294,300

 

 

 

1,128,843

 

 

 

1,303,001

 

Other liabilities

 

 

309,848

 

 

 

290,683

 

 

 

294,740

 

Deferred tax liabilities

 

 

222,073

 

 

 

207,935

 

 

 

206,124

 

Commitments and contingencies (Notes 2, 9 and 11)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value: authorized: 50,000,000

   shares; no shares issued and outstanding

 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

 

 

 

 

 

   Authorized: 500,000,000 shares;

 

 

 

 

 

 

 

 

 

 

 

 

   Issued: 78,314,940 shares, 77,653,924 shares and 77,500,291 shares, respectively;

 

 

 

 

 

 

 

 

 

 

 

 

   Outstanding: 68,247,877 shares, 70,180,713 shares and 70,597,057 shares, respectively

 

 

7

 

 

 

7

 

 

 

7

 

Additional paid-in-capital

 

 

1,448,347

 

 

 

1,420,581

 

 

 

1,413,955

 

Accumulated deficit

 

 

(916,367

)

 

 

(1,060,099

)

 

 

(1,185,660

)

Accumulated other comprehensive loss

 

 

(4,492

)

 

 

(7,191

)

 

 

(11,186

)

Treasury stock, at cost

 

 

(638,028

)

 

 

(403,110

)

 

 

(352,520

)

Total stockholders' deficit

 

 

(110,533

)

 

 

(49,812

)

 

 

(135,404

)

Total liabilities and stockholders' deficit

 

$

2,843,363

 

 

$

2,574,483

 

 

$

2,688,120

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

5


BURLINGTON STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(All amounts in thousands)

 

 

Nine Months Ended

 

 

 

October 28,

 

 

October 29,

 

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

144,149

 

 

$

90,312

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

147,547

 

 

 

136,630

 

Impairment chargeslong-lived assets

 

 

988

 

 

 

109

 

Amortization of deferred financing costs

 

 

1,897

 

 

 

2,052

 

Accretion of long term debt instruments

 

 

816

 

 

 

670

 

Deferred income taxes

 

 

12,375

 

 

 

5,891

 

Non-cash loss on extinguishment of debt

 

 

 

 

 

3,805

 

Non-cash stock compensation expense

 

 

19,655

 

 

 

11,634

 

Non-cash rent

 

 

(17,940

)

 

 

(22,052

)

Deferred rent incentives

 

 

33,557

 

 

 

17,884

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(25,894

)

 

 

(13,671

)

Merchandise inventories

 

 

(201,772

)

 

 

(39,518

)

Prepaid and other current assets

 

 

(18,513

)

 

 

(37,529

)

Accounts payable

 

 

125,067

 

 

 

88,090

 

Other current liabilities

 

 

(7,646

)

 

 

47,510

 

Other long term assets and long term liabilities

 

 

581

 

 

 

4,187

 

Other operating activities

 

 

6,629

 

 

 

2,216

 

Net cash provided by operating activities

 

 

221,496

 

 

 

298,220

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Cash paid for property and equipment

 

 

(192,491

)

 

 

(137,643

)

Proceeds from insurance recoveries related to property and equipment

 

 

3,069

 

 

 

 

Other investing activities

 

 

990

 

 

 

104

 

Net cash (used in) investing activities

 

 

(188,432

)

 

 

(137,539

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from long term debt—ABL Line of Credit

 

 

1,124,300

 

 

 

1,286,100

 

Principal payments on long term debt—ABL Line of Credit

 

 

(959,100

)

 

 

(1,279,200

)

Proceeds from long term debt—Term B-4 Loans

 

 

 

 

 

1,114,208

 

Principal payments on long term debt—Term B-3 Loans

 

 

 

 

 

(1,117,000

)

Purchase of treasury shares

 

 

(234,918

)

 

 

(151,781

)

Proceeds from stock option exercises

 

 

7,696

 

 

 

3,919

 

Other financing activities

 

 

(4,559

)

 

 

(5,043

)

Net cash used in financing activities

 

 

(66,581

)

 

 

(148,797

)

(Decrease) increase in cash and cash equivalents

 

 

(33,517

)

 

 

11,884

 

Cash and cash equivalents at beginning of period

 

 

81,597

 

 

 

20,915

 

Cash and cash equivalents at end of period

 

$

48,080

 

 

$

32,799

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

36,221

 

 

$

40,623

 

Income tax payments - net

 

$

108,742

 

 

$

62,548

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

34,466

 

 

$

26,045

 

See Notes to Condensed Consolidated Financial Statements.

 

6


BURLINGTON STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 28, 2017

(Unaudited)

 

1. Summary of Significant Accounting Policies

Basis of Presentation

As of October 28, 2017, Burlington Stores, Inc., a Delaware Corporation, and its subsidiaries (collectively, the Company), through its indirect subsidiary Burlington Coat Factory Warehouse Corporation (BCFWC), has expanded its store base to 631 retail stores, inclusive of an internet store, of which 12 remained closed as of October 28, 2017, primarily as a result of weather-related incidents as discussed below.

These unaudited Condensed Consolidated Financial Statements include the accounts of Burlington Stores, Inc. and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The Condensed Consolidated Financial Statements are unaudited, but in the opinion of management reflect all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of operations for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (Fiscal 2016 10-K). The balance sheet at January 28, 2017 presented herein has been derived from the audited Consolidated Financial Statements contained in the Fiscal 2016 10-K. Because the Company’s business is seasonal in nature, the operating results for the three and nine month periods ended October 28, 2017 are not necessarily indicative of results for the fiscal year.

Accounting policies followed by the Company are described in Note 1 to the Fiscal 2016 10-K, “Summary of Significant Accounting Policies.”

Fiscal Year

The Company defines its fiscal year as the 52 or 53 week period ending on the Saturday closest to January 31. The current fiscal year ends February 3, 2018 (Fiscal 2017) and is a 53-week fiscal year. The fiscal year ended January 28, 2017 (Fiscal 2016) was 52-week fiscal year.

Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees including: (i) requiring all income tax effects of awards to be recognized in the income statement, rather than in additional paid in capital, when the awards vest or are settled, (ii) eliminating the requirement that excess tax benefits be realized before companies can recognize them, (iii) requiring companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, (iv) increasing the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, (v) requiring an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows and (vi) requiring an employer to elect whether to account for forfeitures of share-based payments by (a) recognizing forfeitures of awards as they occur or (b) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. The Company adopted this standard effective January 29, 2017.

The primary impact of adoption was the prospective recognition of excess tax benefits in the income statement as an income tax benefit rather than equity, which increased net income per share during the three and nine month periods ended October 28, 2017 by $0.04 and $0.20, respectively, by lowering the Company’s effective tax rate approximately 430 basis points and 730 basis points, respectively.

 

7


The Company has applied the amendment relating to the presentation of the excess tax benefits on the Condensed Consolidated Statements of Cash Flows retrospectively, resulting in the reclassification of $11.7 million of excess tax benefits from cash flows from financing activities to cash flows from operating activities for the nine month period ended October 29, 2016.

The Company has elected to account for forfeitures of share-based awards as they occur, on a modified retrospective basis, resulting in a $0.4 million cumulative-effect adjustment to retained earnings as of January 29, 2017.

The presentation requirements for cash flows related to employee taxes paid upon the vesting of restricted stock awards had no impact to any of the periods presented in the Company’s Condensed Consolidated Statements of Cash Flows since such cash flows have historically been presented as a financing activity.

Pending Accounting Standards

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which converges revenue recognition under U.S. GAAP and International Financial Reporting Standards. The new guidance supersedes most preexisting revenue recognition guidance, and provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 for public companies to periods beginning after December 15, 2017, with early adoption permitted. The standard shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. This ASU will be effective for the Company as of the beginning of the fiscal year ending February 2, 2019 (Fiscal 2018). The Company is in the process of determining the impact of the adoption of this guidance on its consolidated financial statements or notes thereto. The Company believes that there will be no change in the timing or amount of revenue recognized under the new standard as it relates to revenue from point of sale at the registers in our stores, which constitutes more than 99% of the Company’s revenue. The new standard will require a change in the presentation of the Company’s sales return reserve on the balance sheet, which is currently recorded net. The new standard will require the reserve to be established at the gross sales value with an asset established for the value of the merchandise returned. The Company does not, however, anticipate that the new guidance will have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard’s core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This ASU will be effective for the Company as of the beginning of the fiscal year ending February 1, 2020 (Fiscal 2019). Early adoption is permitted. While the Company is continuing to evaluate the impact of the adoption of this guidance on its consolidated financial statements or notes thereto, it does expect that this new guidance will result in a significant increase to the assets and liabilities presented on its consolidated balance sheets. Refer to Note 13 to the Company’s Consolidated Financial Statements included in the Fiscal 2016 10-K (entitled “Lease Commitments”) for further detail of the Company’s future minimum lease payments. This guidance is not expected, however, to have a material impact on the Company's liquidity.

On August 26, 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.” The primary purpose of this ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. This ASU is effective for fiscal years beginning after December 15, 2017. This ASU will be effective for the Company as of the beginning of Fiscal 2018. Early adoption is permitted in any interim or annual period. The Company does not anticipate that the new guidance will have a significant impact on its consolidated financial statements.

On November 17, 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash.” The primary purpose of this ASU is to reduce the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017. This ASU will be effective for the Company as of the beginning of Fiscal 2018. Early adoption is permitted in any interim or annual period. While the Company is still in the process of determining the impact of the adoption of this guidance on its consolidated financial statements or notes thereto, it does not anticipate that the new guidance will have a significant impact on its consolidated financial statements.

On January 26, 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment,” which aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, goodwill impairment will be measured as the amount by which the carrying value exceeds the fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The new guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods. This ASU will be effective for

 

8


the Company as of the beginning of Fiscal 2020. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate that the new guidance will have a significant impact on its consolidated financial statements.

There were no other new accounting standards that had a material impact on the Company’s Condensed Consolidated Financial Statements during the three and nine month periods ended October 28, 2017, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of October 28, 2017 that the Company expects to have a material impact on its financial position or results of operations upon becoming effective.

Weather-Related Incidents

As a result of the effects of certain weather-related incidents during the third quarter of Fiscal 2017, 80 of the Company’s stores were closed for at least one day during the quarter.  The Company incurred losses of (i) $5.9 million related to the net book values of merchandise inventories, and (ii) $9.7 million related to the net book values of property and equipment and other long-lived assets, as well as repair and maintenance costs related to the clean-up of its stores. These costs are recorded in the line items “Cost of sales” and “Selling general and administrative expenses” on the Company’s Condensed Consolidated Statements of Income, respectively, for the three and nine months ended October 28, 2017. As of October 31, 2017, the Company received approximately $11.7 million of insurance proceeds to offset some of its losses.  The Company allocated $3.1 million of these proceeds to property and equipment, which is included in the line item “Proceeds from insurance recoveries related to property and equipment,” a component of cash flows from investing activities, on the Company’s Condensed Consolidated Statements of Cash Flows during the nine months ended October 28, 2017.  The Company is insured at the selling price of the inventory and at replacement costs for the property and equipment and other long-lived assets, less a deductible. The Company has recorded a $2.8 million receivable related to these losses as of October 28, 2017, as the collection is deemed probable based on the insurance contracts the Company had in place at the time of the losses, which is included in the line item “Accounts receivable” on the Company’s Condensed Consolidated Balance Sheets.

 

2. Long Term Debt

Long term debt consists of:

 

 

(in thousands)

 

 

 

October 28,

 

 

January 28,

 

 

October 29,

 

 

 

2017

 

 

2017

 

 

2016

 

$1,200,000 senior secured term loan facility (Term B-4 Loans), LIBOR (with a floor of 0.75%) plus 2.75%, matures on August 13, 2021

 

$

1,112,860

 

 

$

1,112,044

 

 

$

1,111,772

 

$600,000 ABL senior secured revolving facility, LIBOR plus spread based on average outstanding balance, matures on August 13, 2019

 

 

165,200

 

 

 

 

 

 

174,300

 

Capital lease obligations

 

 

22,531

 

 

 

23,643

 

 

 

23,972

 

Unamortized deferred financing costs

 

 

(4,349

)

 

 

(5,206

)

 

 

(5,469

)

Total debt

 

 

1,296,242

 

 

 

1,130,481

 

 

 

1,304,575

 

Less: current maturities

 

 

(1,942

)

 

 

(1,638

)

 

 

(1,574

)

Long term debt, net of current maturities

 

$

1,294,300

 

 

$

1,128,843

 

 

$

1,303,001

 

 

Term Loan Facility

At October 28, 2017 and October 29, 2016, the Company’s borrowing rate related to its senior secured term loan facility (the Term Loan Facility) was 4.0% and 3.5%, respectively.

On November 17, 2017, BCFWC entered into Amendment No. 6 (the Sixth Amendment) to the Term Loan Credit Agreement (as amended, the Amended Term Loan Credit Agreement) governing its senior secured term loan facility (the Term Loan Facility). The Sixth Amendment, among other things, reduced the interest rate margins applicable to the Term Loan Facility from 1.75% to 1.50% in the case of prime rate loans, and from 2.75% to 2.50% in the case of LIBOR loans, with the LIBOR floor continuing to be 0.75%. The Sixth Amendment also extended the maturity date from August 13, 2021 to November 17, 2024. The Sixth Amendment was accomplished by replacing the outstanding $1,117.0 million principal amount of Term B-4 Loans with a like aggregate principal amount of Term B-5 Loans. The Company is required to make quarterly payments of $2.8 million on the Term B-5 Loans, due on the last fiscal day of each quarter, with the balance due upon maturity. As a result of this transaction, the Company will incur approximately a $3 million charge to loss on extinguishment of debt and approximately a $1 million charge to costs related to debt amendments in the fourth quarter of Fiscal 2017.  

 

9


ABL Line of Credit

At October 28, 2017, the Company had $380.6 million available under the Second Amended and Restated Credit Agreement, dated September 2, 2011, governing BCFWC’s existing senior secured asset-based revolving credit facility (the ABL Line of Credit). The maximum borrowings under the facility during the three and nine month periods ended October 28, 2017 amounted to $235.5 million for both periods. Average borrowings during the three and nine month periods ended October 28, 2017 amounted to $147.4 million and $86.1 million, respectively, at average interest rates of 2.7% for both periods.

At October 29, 2016, the Company had $383.7 million available under the ABL Line of Credit. The maximum borrowings under the facility during the three and nine month periods ended October 29, 2016 amounted to $300.0 million and $350.0 million, respectively. Average borrowings during the three and nine month periods ended October 29, 2016 amounted to $201.4 million and $216.8 million, respectively, at average interest rates of 1.8% for both periods.

 

 

3. Derivative Instruments and Hedging Activities

The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815 “Derivatives and Hedging” (Topic No. 815). As required by Topic No. 815, the Company records all derivatives on the balance sheet at fair value and adjusts to market on a quarterly basis. In addition, to comply with the provisions of ASC Topic No. 820, “Fair Value Measurements” (Topic No. 820), credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees. In accordance with Topic No. 820, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. There is no impact of netting because the Company’s only derivatives are interest rate cap contracts that are with separate counterparties and are under separate master netting agreements.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.

The Company did not record any hedge ineffectiveness in its earnings during the three and nine month periods ended October 28, 2017 or October 29, 2016. The Company financed the cost of the interest rate cap contracts, which will be amortized through the life of the caps. During the three and nine month periods ended October 28, 2017, the Company paid $0.8 million and $3.4 million, respectively, exclusive of $0.3 million and $1.4 million of taxes, respectively, related to the financing of these interest rate cap contracts.  During the three and nine month periods ended October 29, 2016, the Company paid $0.9 million and $3.5 million, respectively, exclusive of $0.4 million and $1.4 million of taxes, respectively, related to the financing of these interest rate cap contracts. These costs are included in the line item “Accumulated other comprehensive loss” on the Company’s Condensed Consolidated Balance Sheets. The Company estimates that approximately $5.4 million will be reclassified into interest expense during the next twelve months.

As of October 28, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative

 

Number of

Instruments

 

Notional Aggregate

Principal Amount

 

Interest

Cap Rate

 

 

Maturity Date

Interest rate cap contracts

 

Two

 

$ 800.0 million

 

 

1.0%

 

 

May 31, 2019

 

 

10


Tabular Disclosure

The table below presents the fair value of the Company’s derivative financial instruments on a gross basis as well as their classification on the Company’s Condensed Consolidated Balance Sheets:

 

 

 

(in thousands)

 

 

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

 

 

October 28, 2017

 

 

January 28, 2017

 

 

October 29, 2016

 

Derivatives Designated as Hedging Instruments

 

Balance

Sheet

Location

 

Fair

Value

 

 

Balance

Sheet

Location

 

Fair

Value

 

 

Balance

Sheet

Location

 

Fair

Value

 

Interest rate cap contracts

 

Other assets

 

$

340

 

 

N/A

 

$

 

 

N/A

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Fair Values of Derivative Instruments

 

 

 

Liability Derivatives

 

 

 

October 28, 2017

 

 

January 28, 2017

 

 

October 29, 2016

 

Derivatives Designated as Hedging Instruments

 

Balance

Sheet

Location

 

Fair

Value

 

 

Balance

Sheet

Location

 

Fair

Value

 

 

Balance

Sheet

Location

 

Fair

Value

 

Interest rate cap contracts

 

Other liabilities

 

$

 

 

Other liabilities

 

$

3,183

 

 

Other liabilities

 

$

9,957

 

 

The following table presents the unrealized losses deferred to accumulated other comprehensive loss resulting from the Company’s derivative instruments designated as cash flow hedging instruments for each of the reporting periods.

 

 

 

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Interest Rate Cap Contracts:

 

October 28, 2017

 

 

October 29, 2016

 

 

October 28, 2017

 

 

October 29, 2016

 

Unrealized gains (losses), before taxes

 

$

1,907

 

 

$

398

 

 

$

77

 

 

$

(5,090

)

Income tax (expense) benefit

 

 

(763

)

 

 

(159

)

 

 

(32

)

 

 

2,036

 

Unrealized gains (losses), net of taxes

 

$

1,144

 

 

$

239

 

 

$

45

 

 

$

(3,054

)

 

 

The following table presents information about the reclassification of losses from accumulated other comprehensive loss into earnings related to the Company’s derivative instruments designated as cash flow hedging instruments for each of the reporting periods.

 

 

 

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Component of Earnings:

 

October 28, 2017

 

 

October 29, 2016

 

 

October 28, 2017

 

 

October 29, 2016

 

Interest expense

 

$

1,513

 

 

$

738

 

 

$

4,418

 

 

$

1,434

 

Income tax (benefit)

 

 

(605

)

 

 

(296

)

 

 

(1,764

)

 

 

(574

)

Net income

 

$

908

 

 

$

442

 

 

$

2,654

 

 

$

860

 

 

 

 

4. Accumulated Other Comprehensive Loss

Amounts included in accumulated other comprehensive loss are recorded net of the related income tax effects. The following table details the changes in accumulated other comprehensive loss:

 

 

(in thousands)

 

 

Derivative

Instruments

 

Balance at January 28, 2017

$

(7,191

)

Unrealized gains, net of related taxes of less than $0.1 million

 

45

 

Amount reclassified into earnings, net of related taxes of $1.8 million

 

2,654

 

Balance at October 28, 2017

$

(4,492

)

 

 

11


 

5. Fair Value Measurements

The Company accounts for fair value measurements in accordance with Topic No. 820, which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurements. Topic No. 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price), and classifies the inputs used to measure fair value into the following hierarchy:

 

Level 1:

Quoted prices for identical assets or liabilities in active markets.

 

Level 2:

Quoted market prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3:

Pricing inputs that are unobservable for the assets and liabilities and include situations where there is little, if any, market activity for the assets and liabilities.

The inputs into the determination of fair value require significant management judgment or estimation.

The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments.

Refer to Note 3, “Derivative Instruments and Hedging Activities,” for further discussion regarding the fair value of the Company’s interest rate cap contracts.

Financial Assets

The fair values of the Company’s financial assets and the hierarchy of the level of inputs as of October 28, 2017, January 28, 2017 and October 29, 2016 are summarized below: 

 

 

(in thousands)

 

 

 

Fair Value Measurements at

 

 

 

October 28,

 

 

January 28,

 

 

October 29,

 

 

 

2017

 

 

2017

 

 

2016

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (including restricted cash)

 

$

28,247

 

 

$

28,167

 

 

$

28,153

 

Non-financial Assets

Long-lived assets are measured at fair value on a non-recurring basis for purposes of calculating impairment using the fair value hierarchy of Topic No. 820. The fair value of the Company’s long-lived assets is generally calculated using discounted cash flows. During the nine month period ended October 28, 2017, the Company recorded impairment charges of $1.0 million, primarily related to declines in revenues and operating results for one leased store, which was fully impaired, and a decline in the appraised fair value of one of the Company’s owned stores, which was partially impaired.  These costs were recorded in the line item “Impairment charges – long-lived assets” in the Company’s Condensed Consolidated Statements of Income. The fully impaired store had zero fair value as of October 28, 2017, and would be categorized as Level 3 in the fair value hierarchy described above. The table below sets forth the aggregate impairment charges and the remaining fair value, by level within the fair value hierarchy, of the partially-impaired store as of October 28, 2017:

 

 

(in thousands)

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Un-

Observable

Inputs

(Level 3)

 

 

Total

 

 

Total

Impairment

Losses

 

Land

 

$

 

 

$

 

 

$

470

 

 

$

 

 

$

247

 

Buildings

 

 

 

 

 

 

 

 

374

 

 

 

 

 

 

227

 

Store fixtures and equipment

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

203

 

Leasehold improvements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

108

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

203

 

Total

 

$

 

 

$

 

 

$

853

 

 

$

 

 

$

988

 

 

12


Financial Liabilities

The fair values of the Company’s financial liabilities are summarized below:

 

 

(in thousands)

 

 

 

October 28, 2017

 

 

January 28, 2017

 

 

October 29, 2016

 

 

 

Carrying

Amount (b)

 

 

Fair

Value (b)

 

 

Carrying

Amount (b)

 

 

Fair

Value (b)

 

 

Carrying

Amount (b)

 

 

Fair

Value (b)

 

$1,200,000 senior secured term loan facility (Term B-4 Loans), LIBOR (with a floor of 0.75%) plus 2.75%, matures on August 13, 2021

 

$

1,112,860

 

 

$

1,116,106

 

 

$

1,112,044

 

 

$

1,116,678

 

 

$

1,111,772

 

 

$

1,116,404

 

$600,000 ABL senior secured revolving facility, LIBOR plus spread based on average outstanding balance, matures on August 13, 2019(a)

 

 

165,200

 

 

 

165,200

 

 

 

 

 

 

 

 

 

174,300

 

 

 

174,300

 

Total debt

 

$

1,278,060

 

 

$

1,281,306

 

 

$

1,112,044

 

 

$

1,116,678