burl-10q_20181103.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 November 3, 2018

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 every Interactive Data File required to be submitted 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 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

  

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 67,407,897 shares of common stock outstanding as of November 3, 2018.

 

 


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 November 3, 2018 and October 28, 2017  

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended November 3, 2018 and October 28, 2017

 

4

 

 

 

Condensed Consolidated Balance Sheets – November 3, 2018, February 3, 2018 and October 28, 2017

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended November 3, 2018 and October 28, 2017

 

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

 

35

 

 

 

Item 4. Controls and Procedures

 

35

 

 

 

Part II—Other Information

 

35

 

 

 

Item 1. Legal Proceedings

 

35

 

 

 

Item 1A. Risk Factors

 

35

 

 

 

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

 

36

 

 

 

Item 3. Defaults Upon Senior Securities

 

36

 

 

 

Item 4. Mine Safety Disclosures

 

36

 

 

 

Item 5. Other Information

 

36

 

 

 

Item 6. Exhibits

 

37

 

 

 

SIGNATURES

 

38

 

 

 

 

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

 

 

 

November 3,

 

 

October 28,

 

 

November 3,

 

 

October 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,634,489

 

 

$

1,438,167

 

 

$

4,651,568

 

 

$

4,147,937

 

Other revenue

 

 

6,469

 

 

 

6,405

 

 

 

18,840

 

 

 

17,834

 

Total revenue

 

 

1,640,958

 

 

 

1,444,572

 

 

 

4,670,408

 

 

 

4,165,771

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

942,009

 

 

 

831,728

 

 

 

2,712,165

 

 

 

2,436,250

 

Selling, general and administrative expenses

 

 

538,120

 

 

 

480,194

 

 

 

1,485,545

 

 

 

1,338,247

 

Costs related to debt amendments

 

 

2,418

 

 

 

 

 

 

2,496

 

 

 

 

Stock option modification expense

 

 

 

 

 

26

 

 

 

 

 

 

131

 

Depreciation and amortization

 

 

53,770

 

 

 

50,836

 

 

 

161,201

 

 

 

147,547

 

Impairment charges - long-lived assets

 

 

 

 

 

 

 

 

 

 

 

988

 

Other income - net

 

 

(2,336

)

 

 

(1,362

)

 

 

(7,708

)

 

 

(6,948

)

Loss on extinguishment of debt

 

 

462

 

 

 

 

 

 

1,823

 

 

 

 

Interest expense

 

 

14,460

 

 

 

15,351

 

 

 

43,563

 

 

 

43,409

 

Total costs and expenses

 

 

1,548,903

 

 

 

1,376,773

 

 

 

4,399,085

 

 

 

3,959,624

 

Income before income tax expense

 

 

92,055

 

 

 

67,799

 

 

 

271,323

 

 

 

206,147

 

Income tax expense

 

 

15,206

 

 

 

22,920

 

 

 

40,929

 

 

 

61,998

 

Net income

 

$

76,849

 

 

$

44,879

 

 

$

230,394

 

 

$

144,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - basic

 

$

1.15

 

 

$

0.66

 

 

$

3.44

 

 

$

2.10

 

Common stock - diluted

 

$

1.12

 

 

$

0.65

 

 

$

3.35

 

 

$

2.04

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - basic

 

 

66,780

 

 

 

67,694

 

 

 

66,885

 

 

 

68,611

 

Common stock - diluted

 

 

68,628

 

 

 

69,541

 

 

 

68,789

 

 

 

70,616

 

 

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

 

 

 

November 3,

 

 

October 28,

 

 

November 3,

 

 

October 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

76,849

 

 

$

44,879

 

 

$

230,394

 

 

$

144,149

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains arising during the period

 

 

232

 

 

 

1,144

 

 

 

1,204

 

 

 

45

 

Reclassification into earnings during the period

 

 

289

 

 

 

908

 

 

 

1,307

 

 

 

2,654

 

Other comprehensive income, net of tax:

 

 

521

 

 

 

2,052

 

 

 

2,511

 

 

 

2,699

 

Total comprehensive income

 

$

77,370

 

 

$

46,931

 

 

$

232,905

 

 

$

146,848

 

 

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)

 

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

 

 

2018

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,377

 

 

$

133,286

 

 

$

48,080

 

Restricted cash and cash equivalents

 

 

21,882

 

 

 

27,800

 

 

 

27,800

 

Accounts receivablenet

 

 

86,069

 

 

 

71,649

 

 

 

78,995

 

Merchandise inventories

 

 

1,056,596

 

 

 

752,562

 

 

 

903,663

 

Prepaid and other current assets

 

 

148,703

 

 

 

115,136

 

 

 

91,917

 

Total current assets

 

 

1,398,627

 

 

 

1,100,433

 

 

 

1,150,455

 

Property and equipment—net

 

 

1,239,483

 

 

 

1,134,772

 

 

 

1,111,949

 

Tradenames

 

 

238,000

 

 

 

238,000

 

 

 

238,000

 

Favorable leases—net

 

 

173,149

 

 

 

188,947

 

 

 

195,374

 

Goodwill

 

 

47,064

 

 

 

47,064

 

 

 

47,064

 

Deferred tax assets

 

 

5,004

 

 

 

6,952

 

 

 

7,939

 

Other assets

 

 

105,587

 

 

 

96,661

 

 

 

92,582

 

Total assets

 

$

3,206,914

 

 

$

2,812,829

 

 

$

2,843,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

967,236

 

 

$

736,252

 

 

$

764,563

 

Other current liabilities

 

 

433,360

 

 

 

370,215

 

 

 

361,170

 

Current maturities of long term debt

 

 

2,800

 

 

 

13,164

 

 

 

1,942

 

Total current liabilities

 

 

1,403,396

 

 

 

1,119,631

 

 

 

1,127,675

 

Long term debt

 

 

1,089,114

 

 

 

1,113,808

 

 

 

1,294,300

 

Other liabilities

 

 

340,866

 

 

 

313,130

 

 

 

309,848

 

Deferred tax liabilities

 

 

180,155

 

 

 

179,486

 

 

 

222,073

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (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: 79,114,834 shares, 78,421,947 shares and 78,314,940 shares, respectively;

 

 

 

 

 

 

 

 

 

 

 

 

   Outstanding: 67,407,897 shares, 67,871,725 shares and 68,247,877 shares, respectively

 

 

7

 

 

 

7

 

 

 

7

 

Additional paid-in-capital

 

 

1,497,878

 

 

 

1,457,205

 

 

 

1,448,347

 

Accumulated deficit

 

 

(445,270

)

 

 

(675,664

)

 

 

(916,367

)

Accumulated other comprehensive income (loss)

 

 

624

 

 

 

(1,887

)

 

 

(4,492

)

Treasury stock, at cost

 

 

(859,856

)

 

 

(692,887

)

 

 

(638,028

)

Total stockholders' equity (deficit)

 

 

193,383

 

 

 

86,774

 

 

 

(110,533

)

Total liabilities and stockholders' equity (deficit)

 

$

3,206,914

 

 

$

2,812,829

 

 

$

2,843,363

 

 

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

 

 

 

November 3,

 

 

October 28,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

230,394

 

 

$

144,149

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

161,201

 

 

 

147,547

 

Impairment chargeslong-lived assets

 

 

 

 

 

988

 

Amortization of deferred financing costs

 

 

1,262

 

 

 

1,897

 

Accretion of long term debt instruments

 

 

551

 

 

 

816

 

Deferred income taxes

 

 

1,657

 

 

 

12,375

 

Non-cash loss on extinguishment of debt

 

 

1,823

 

 

 

 

Non-cash stock compensation expense

 

 

26,215

 

 

 

19,655

 

Non-cash rent

 

 

(17,677

)

 

 

(17,940

)

Deferred rent incentives

 

 

33,612

 

 

 

33,557

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(14,292

)

 

 

(25,894

)

Merchandise inventories

 

 

(304,033

)

 

 

(201,772

)

Prepaid and other current assets

 

 

(29,178

)

 

 

(18,513

)

Accounts payable

 

 

231,325

 

 

 

125,067

 

Other current liabilities

 

 

39,237

 

 

 

(7,646

)

Other long term assets and long term liabilities

 

 

9,042

 

 

 

581

 

Other operating activities

 

 

4,214

 

 

 

6,629

 

Net cash provided by operating activities

 

 

375,353

 

 

 

221,496

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Cash paid for property and equipment

 

 

(222,501

)

 

 

(192,491

)

Lease acquisition costs

 

 

(8,543

)

 

 

 

Proceeds from insurance recoveries related to property and equipment

 

 

2,602

 

 

 

3,069

 

Other investing activities

 

 

3,152

 

 

 

990

 

Net cash (used in) investing activities

 

 

(225,290

)

 

 

(188,432

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from long term debt—ABL Line of Credit

 

 

1,090,100

 

 

 

1,124,300

 

Principal payments on long term debt—ABL Line of Credit

 

 

(985,100

)

 

 

(959,100

)

Principal payments on long term debt—Term B-5 Loans

 

 

(152,793

)

 

 

 

Purchase of treasury shares

 

 

(166,969

)

 

 

(234,918

)

Proceeds from stock option exercises

 

 

14,459

 

 

 

7,696

 

Other financing activities

 

 

(3,587

)

 

 

(4,559

)

Net cash (used in) financing activities

 

 

(203,890

)

 

 

(66,581

)

(Decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

(53,827

)

 

 

(33,517

)

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period

 

 

161,086

 

 

 

109,397

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

 

$

107,259

 

 

$

75,880

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

41,551

 

 

$

36,221

 

Income tax payments - net

 

$

61,369

 

 

$

108,742

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

53,220

 

 

$

34,466

 

Acquisition of capital lease

 

$

13,538

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


BURLINGTON STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 3, 2018

(Unaudited)

 

1. Summary of Significant Accounting Policies

Basis of Presentation

As of November 3, 2018, Burlington Stores, Inc., a Delaware corporation (collectively with its subsidiaries, the Company), through its indirect subsidiary Burlington Coat Factory Warehouse Corporation (BCFWC), has expanded its store base to 679 retail stores, inclusive of an internet store.

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 February 3, 2018 (Fiscal 2017 10-K). The balance sheet at February 3, 2018 presented herein has been derived from the audited Consolidated Financial Statements contained in the Fiscal 2017 10-K. Because the Company’s business is seasonal in nature, the operating results for the three and nine month periods ended November 3, 2018 are not necessarily indicative of results for the fiscal year.

Accounting policies followed by the Company are described in Note 1 to the Fiscal 2017 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 2, 2019 (Fiscal 2018) and is a 52-week fiscal year. The fiscal year ended February 3, 2018 (Fiscal 2017) was a 53-week fiscal year.

Weather-Related Incidents

During the nine month period ended November 3, 2018, the Company received $8.3 million of insurance proceeds related to weather-related incidents that occurred during Fiscal 2017. These proceeds resulted in a gain on insurance recovery of $1.9 million, which is included in “Other income – net” on the Company’s Condensed Consolidated Statements of Income for the nine month period ended November 3, 2018. The Company allocated $2.6 million of these proceeds to property and equipment, which was 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 Statement of Cash Flows for the nine month period ended November 3, 2018.

Adopted Accounting Standards

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, “Revenue from Contracts with Customers,” which converges revenue recognition under 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. The Company adopted this standard effective February 4, 2018 on a modified retrospective basis.

 

7


Adoption of the standard did not result in any material change in the timing or amount of revenue recognized 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 requires the Company’s sales return reserve to be established at the gross sales value with an asset established for the value of the expected merchandise returned. The liability and asset related to the sales return reserve as of November 3, 2018 were $15.7 million and $9.4 million, respectively, and were included in the lines “Other current liabilities” and “Prepaid and other current assets,” respectively, on the Company’s Condensed Consolidated Balance Sheet. Prior period amounts have not been adjusted. As of February 3, 2018 and October 28, 2017, the net sales return reserve was $3.8 million and $5.4 million, respectively, and was included in the line “Other current liabilities” on the Company’s Condensed Consolidated Balance Sheets.

The Company records revenue at the time of sale and delivery of merchandise, net of allowances for estimated future returns, which is estimated based on historical return rates. The Company presents sales, net of sales taxes, in its Condensed Consolidated Statements of Income. The Company accounts for layaway sales and leased department revenue in compliance with ASC Topic No. 606 “Revenue from Contracts with Customers” (Topic No. 606). Layaway sales are recognized upon delivery of merchandise to the customer. The amount of cash received upon initiation of the layaway is recorded as a deposit liability in the line item “Other current liabilities” in the Company’s Condensed Consolidated Balance Sheets. Stored value cards (gift cards and store credits issued for merchandise returns) are recorded as a liability at the time of issuance, and the related sale is recorded upon redemption.

The Company determines an estimated stored value card breakage rate by continuously evaluating historical redemption data. Breakage income is recognized monthly in proportion to the historical redemption patterns for those stored value cards for which the likelihood of redemption is remote.

Cash Flows

In August 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. The Company adopted this standard effective February 4, 2018. Adoption of the new guidance did not have a significant impact on the Company’s Condensed Consolidated Financial Statements.

In November 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 requires 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. The Company adopted this standard effective February 4, 2018. As a result of adoption, the Company has included $27.8 million of restricted cash and cash equivalents in both the beginning-of-period and end-of-period cash and cash equivalents balances on its Condensed Consolidated Statement of Cash Flows for the nine month period ended October 28, 2017.

Hedging Activities

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” This ASU eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges. As a result, changes in fair value for hedging instruments designated as a cash flow or net investment hedge will be recognized as a component of other comprehensive income, regardless of whether or not an economic mismatch exists in the hedging relationship. Additionally, the ASU eliminates the benchmark interest rate concept for variable-rate instruments in cash flow hedges. As a result, the contractually specified interest rate can now be designated as the hedged risk. The Company has elected to adopt the ASU as of February 4, 2018, using a modified retrospective transition method. Adoption of this ASU did not have a significant impact on the Company’s Condensed Consolidated Financial Statements.

Pending Accounting Standards

Leases

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. Early adoption is permitted. The Company intends to adopt this ASU as of the beginning of the fiscal year ending February 1, 2020 (Fiscal 2019).

 

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The Company plans to apply the changes from the new guidance at the adoption date and recognize a cumulative effect adjustment to retained earnings in the period of adoption, as allowed under ASU 2018-11, “Leases: Targeted Improvements.” The Company intends to make an accounting policy election not to capitalize leases with a term of twelve months or less. The Company intends to elect the transition package of practical expedients, which allows the Company to carry forward for its existing leases: i) the historical lease classification as either operating or capital; ii) assessment of contracts for embedded leases; and iii) capitalization of initial direct costs. Additionally, the Company intends to elect the practical expedients to not separate lease and non-lease components, to not assess whether existing or expired land easements contain a lease, and to employ hindsight when retrospectively determining lease terms for existing leases.

The Company has established a cross-functional team, which is continuing to evaluate the impact of the adoption of this guidance on the Company’s consolidated financial statements or notes thereto. While the Company is continuing to evaluate, it expects 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 2017 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.

Intangible Assets

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 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.

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU requires that implementation costs incurred in a hosting arrangement that is a service contract be assessed in accordance with the existing guidance in Subtopic 350-40, “Internal-Use Software.” Accordingly, costs incurred during the preliminary project stage must be expensed as incurred, while costs incurred during the application development stage must be capitalized. Capitalized implementation costs associated with a hosting arrangement that is a service contract must be expensed over the term of the hosting arrangement. Additionally, the new guidance requires that the expense of these capitalized costs be presented in the same line item in the statement of income as the fees associated with the hosting element of the arrangement. The new guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods. This ASU will be effective for the Company as of the beginning of Fiscal 2020. Early adoption is permitted for annual or interim periods. 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.

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 November 3, 2018, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of November 3, 2018 that the Company expects to have a material impact on its financial position or results of operations upon becoming effective.

 

 

9


2. Long Term Debt

Long term debt consists of:

 

 

(in thousands)

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

 

 

2018

 

 

2018

 

 

2017

 

$1,200,000 senior secured term loan facility (Term B-5 Loans), LIBOR (with a floor of 0.00%) plus 2.00%, matures on November 17, 2024 (a)

 

$

956,490

 

 

$

1,108,913

 

 

$

 

$1,200,000 senior secured term loan facility (Term B-4 Loans), LIBOR (with a floor of 0.75%) plus 2.75%, redeemed in full on November 17, 2017

 

 

 

 

 

 

 

 

1,112,860

 

$600,000 ABL senior secured revolving facility, LIBOR plus spread based on average outstanding balance, matures on June 29, 2023

 

 

105,000

 

 

 

 

 

 

165,200

 

Capital lease obligations

 

 

33,378

 

 

 

21,931

 

 

 

22,531

 

Unamortized deferred financing costs

 

 

(2,954

)

 

 

(3,872

)

 

 

(4,349

)

Total debt

 

 

1,091,914

 

 

 

1,126,972

 

 

 

1,296,242

 

Less: current maturities

 

 

(2,800

)

 

 

(13,164

)

 

 

(1,942

)

Long term debt, net of current maturities

 

$

1,089,114

 

 

$

1,113,808

 

 

$

1,294,300

 

 

 

(a)

Prior to November 2, 2018, the interest rate on the Term B-5 Loans was LIBOR (with a floor of 0.75%) plus 2.50%.

Term Loan Facility

At November 3, 2018 and October 28, 2017, the Company’s borrowing rate related to its senior secured term loan facility (the Term Loan Facility) was 4.3% and 4.0%, respectively.

During June 2018, the Company prepaid $150.0 million on the Term Loan Facility, which offset the mandatory quarterly payments through November 17, 2024. In accordance with ASC Topic No. 470-50, “Debt Modifications and Extinguishments” (Topic No. 470), the Company recognized a non-cash loss on the extinguishment of debt of $1.2 million, representing the write-off of unamortized original issue discount and deferred financing costs, which was recorded in the line item “Loss on extinguishment of debt” in the Company’s Condensed Consolidated Statements of Income for the nine month period ended November 3, 2018.

On November 2, 2018, BCFWC entered into Amendment No. 7 (the Seventh Amendment) to the Term Loan Credit Agreement governing its Term Loan Facility. The Seventh Amendment, among other things, reduced the interest rate margins applicable to the Company’s term loan facility from 1.50% to 1.00%, in the case of prime rate loans, and from 2.50% to 2.00%, in the case of LIBOR loans, with the LIBOR floor being reduced from 0.75% to 0.00%.  In connection with the execution of the Seventh Amendment, the Company paid fees and expenses, including a fee to each consenting lender equal to 0.125% of the aggregate principal amount of such lender’s loans under the Term Loan Credit Agreement. In accordance with Topic No. 470, the Company recognized a non-cash loss on the extinguishment of debt of $0.5 million, representing the write-off of deferred financing costs and unamortized original issue discount, which was recorded in the line item “Loss on extinguishment of debt” in the Company’s Condensed Consolidated Statements of Income. Also in connection with the Seventh Amendment, the Company incurred fees of $2.4 million, primarily related to legal and placement fees, which were recorded in the line item “Costs related to debt amendments” in the Company’s Condensed Consolidated Statements of Income.

ABL Line of Credit

On June 29, 2018, BCFWC entered into a Second Amendment (the Second Amendment) to the Second Amended and Restated Credit Agreement, dated September 2, 2011 (the ABL Credit Agreement), governing BCFWC’s existing senior secured asset-based revolving credit facility (the ABL Line of Credit). The Second Amendment, among other things, extended the maturity date from August 13, 2019 to June 29, 2023 and adjusted the pricing grid such that the lower interest rate of 1.25% in the case of LIBOR loans and 0.25% in the case of prime rate loans is applicable so long as the Company maintains at least 40% average daily availability (as opposed to 50%). In connection with its entry into the Second Amendment, and in accordance with Topic No. 470, the Company recognized a non-cash loss on the extinguishment of debt of $0.2 million, representing the write-off of deferred financing costs, which was recorded in the line item “Loss on extinguishment of debt” in the Company’s Condensed Consolidated Statements of Income for the nine month period ended November 3, 2018.

At November 3, 2018, the Company had $434.1 million available under the ABL Credit Agreement. The maximum borrowings under the facility during the three and nine month periods ended November 3, 2018 amounted to $265.0 million for both periods. Average borrowings during the three and nine month periods ended November 3, 2018 amounted to $166.5 million and $103.4 million, respectively, at average interest rates of 3.4% for both periods.

 

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At October 28, 2017, the Company had $380.6 million available under 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 an average interest rate of 2.7% 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.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of November 3, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies its derivative valuations in Level 2 of the fair value hierarchy.

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.  

As of November 3, 2018, 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

 

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

 

 

 

November 3, 2018

 

 

February 3, 2018

 

 

October 28, 2017

 

Derivatives Designated as Hedging Instruments

 

Balance

Sheet

Location

 

Fair

Value

 

 

Balance

Sheet

Location

 

Fair

Value

 

 

Balance

Sheet

Location

 

Fair

Value

 

Interest rate cap contracts

 

Prepaid and other current assets

 

$

4,390

 

 

Other assets

 

$

4,543

 

 

Other assets

 

$

340

 

The following table presents the unrealized gains and losses deferred to accumulated other comprehensive income (loss) resulting from the Company’s derivative instruments for each of the reporting periods.

 

 

 

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Interest Rate Cap Contracts:

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

Unrealized gains, before taxes

 

$

321

 

 

$

1,907

 

 

$

1,665

 

 

$

77

 

Income tax expense

 

 

(89

)

 

 

(763

)

 

 

(461

)

 

 

(32

)

Unrealized gains, net of taxes

 

$

232

 

 

$

1,144

 

 

$

1,204

 

 

$

45

 

 

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The following table presents information about the reclassification of gains and losses from accumulated other comprehensive income (loss) into earnings related to the Company’s derivative instruments for each of the reporting periods.

 

 

 

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Component of Earnings:

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

Interest expense

 

$

400

 

 

$

1,513

 

 

$

1,807

 

 

$

4,418

 

Income tax expense

 

 

(111

)

 

 

(605

)

 

 

(500

)

 

 

(1,764

)

Net income

 

$

289

 

 

$

908

 

 

$

1,307

 

 

$

2,654

 

 

The Company estimates that less than $1.0 million will be reclassified from accumulated other comprehensive income into interest expense during the next twelve months.

 

4. Accumulated Other Comprehensive Income (Loss)

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

 

 

(in thousands)

 

 

Derivative

Instruments

 

Balance at February 3, 2018

$

(1,887

)

Unrealized gains, net of related taxes of $0.5 million

 

1,204

 

Amount reclassified into earnings, net of related taxes of $0.5 million

 

1,307

 

Balance at November 3, 2018

$

624

 

 

 

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.

 

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Financial Assets

The fair values of the Company’s financial assets and the hierarchy of the level of inputs as of November 3, 2018, February 3, 2018 and October 28, 2017 are summarized below: 

 

 

(in thousands)

 

 

 

Fair Value Measurements at

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

 

 

2018

 

 

2018

 

 

2017

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (including restricted cash)

 

$

22,367

 

 

$

28,283

 

 

$

28,247

 

Financial Liabilities

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

 

 

(in thousands)

 

 

 

November 3, 2018

 

 

February 3, 2018

 

 

October 28, 2017

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Term B-5 Loans

 

$

956,490

 

 

$

955,892

 

 

$

1,108,913

 

 

$

1,108,913

 

 

$

 

 

$

 

Term B-4 Loans

 

 

 

 

 

 

 

 

 

 

$

 

 

 

1,112,860

 

 

 

1,116,106

 

ABL senior secured revolving facility

 

 

105,000

 

 

 

105,000

 

 

 

 

 

 

 

 

 

165,200

 

 

 

165,200

 

Total debt

 

$

1,061,490

 

 

$

1,060,892

 

 

$

1,108,913

 

 

$

1,108,913

 

 

$

1,278,060

 

 

$

1,281,306

 

Capital lease obligations are excluded from the table above. To the extent the Company has any outstanding borrowings under the ABL Line of Credit, the fair value would approximate its reported value, because the interest rate is variable and reflects current market rates due to its short term nature. Borrowings are typically done in increments of 30 days or less.

The fair values presented herein are based on pertinent information available to management as of the respective period end dates. The estimated fair values of the Company’s debt are classified as Level 2 in the fair value hierarchy.

 

 

6. Income Taxes

Net deferred taxes are as follows:

 

 

(in thousands)

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

 

 

2018

 

 

2018

 

 

2017

 

Deferred tax asset

 

$

5,004

 

 

$

6,952

 

 

$

7,939

 

Deferred tax liability

 

 

180,155

 

 

 

179,486

 

 

 

222,073

 

Net deferred tax liability

 

$

175,151

 

 

$

172,534

 

 

$

214,134

 

 

Net deferred tax assets relate to Puerto Rico deferred balances that have a future net benefit for tax purposes. Net deferred tax liabilities primarily relate to intangible assets and depreciation expense where the Company has a future obligation for tax purposes.

As of November 3, 2018, February 3, 2018 and October 28, 2017, valuation allowances amounted to $9.0 million, $8.4 million and $6.8 million, respectively, related to state tax net operating losses and state tax credit carry-forwards. The Company believes that it is more likely than not that this portion of the benefit of these state tax net operating losses and state tax credit carry-forwards will not be realized.

As of November 3, 2018, the Company has a deferred tax asset of $9.0 million related to state net operating losses that expire at various dates between 2018 and 2038.

As of November 3, 2018, the Company has a deferred tax asset related to tax credit carry-forwards of $5.9 million, inclusive of $4.3 million of state tax credit carry-forwards, which will begin to expire in 2021, as well as $1.6 million of deferred tax assets recorded for Puerto Rico alternative minimum tax credits that have an indefinite life.

The U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law on December 22, 2017. The Tax Act, among other things, lowered the federal statutory rate from 35% to 21%. As of February 3, 2018 the Company analyzed the Tax Act and made reasonable estimates of the effects on its Condensed Consolidated Financial Statements and tax disclosures. As of November 3, 2018 the Company completed its analysis of the Tax Act and determined there were no material changes from its initial analysis.

 

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7. Capital Stock

Treasury Stock

The Company accounts for treasury stock under the cost method.

During the nine month period ended November 3, 2018, the Company acquired 50,699 shares of common stock from employees for approximately $6.9 million to satisfy their minimum statutory tax withholdings related to the vesting of restricted stock awards, which was recorded in the line item “Treasury stock” on the Company’s Condensed Consolidated Balance Sheets, and the line item “Purchase of treasury shares” on the Company’s Condensed Consolidated Statements of Cash Flows.

Share Repurchase Programs 

On August 16, 2017, the Company’s Board of Directors authorized the repurchase of up to $300 million of common stock, which is authorized to be executed through August 2019. On August 15, 2018, the Company’s Board of Directors authorized the repurchase of up to an additional $300 million of common stock. This new repurchase program, which is in addition to the share repurchase program approved by the Company’s Board of Directors in August 2017, is authorized to be executed through August 2020. These repurchase programs are funded using the Company’s available cash and borrowings under the ABL Line of Credit.

During the nine month period ended November 3, 2018, the Company repurchased 1,106,016 shares of its common stock for $160.0 million, inclusive of commissions, under its share repurchase programs, which was recorded in the line item “Treasury stock” on the Company’s Condensed Consolidated Balance Sheets, and the line item “Purchase of treasury shares” on the Company’s Condensed Consolidated Statements of Cash Flows. As of November 3, 2018, the Company had $357.1 million remaining under its share repurchase authorizations.

 

8. Net Income Per Share

Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding. Dilutive net income per share is calculated by dividing net income by the weighted-average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method. The following table presents the computation of basic and diluted net income per share:

 

 

 

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3,

 

 

October 28,

 

 

November 3,

 

 

October 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

76,849

 

 

$

44,879

 

 

$

230,394

 

 

$

144,149

 

Weighted average number of common shares – basic

 

 

66,780

 

 

 

67,694

 

 

 

66,885

 

 

 

68,611

 

Net income per common share – basic

 

$

1.15

 

 

$

0.66

 

 

$

3.44

 

 

$

2.10

 

Diluted net income per share