Dollar General Corporation
DOLLAR GENERAL CORP (Form: 10-Q, Received: 12/11/2012 08:09:25)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 2, 2012

 

Commission File Number: 001-11421

 

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

TENNESSEE

 

61-0502302

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

100 MISSION RIDGE

GOODLETTSVILLE, TN 37072

(Address of principal executive offices, zip code)

 

Registrant’s telephone number, including area code:  (615) 855-4000

 

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 x   No o

 

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 x   No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

The registrant had 328,712,549 shares of common stock outstanding on December 3, 2012.

 

 

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1.                 FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

November 2,
2012

 

February 3,
2012

 

 

 

(Unaudited)

 

(see Note 1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

142,580

 

$

126,126

 

Merchandise inventories

 

2,330,436

 

2,009,206

 

Income taxes receivable

 

13,554

 

 

Prepaid expenses and other current assets

 

131,622

 

139,742

 

Total current assets

 

2,618,192

 

2,275,074

 

Net property and equipment

 

2,047,434

 

1,794,960

 

Goodwill

 

4,338,589

 

4,338,589

 

Other intangible assets, net

 

1,223,407

 

1,235,954

 

Other assets, net

 

46,055

 

43,943

 

Total assets

 

$

10,273,677

 

$

9,688,520

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term obligations

 

$

891

 

$

590

 

Accounts payable

 

1,199,727

 

1,064,087

 

Accrued expenses and other

 

392,439

 

397,075

 

Income taxes payable

 

997

 

44,428

 

Deferred income taxes

 

39,785

 

3,722

 

Total current liabilities

 

1,633,839

 

1,509,902

 

Long-term obligations

 

3,023,367

 

2,617,891

 

Deferred income taxes

 

655,910

 

656,996

 

Other liabilities

 

225,699

 

229,149

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock

 

 

 

Common stock

 

287,613

 

295,828

 

Additional paid-in capital

 

2,983,323

 

2,967,027

 

Retained earnings

 

1,468,534

 

1,416,918

 

Accumulated other comprehensive loss

 

(4,608

)

(5,191

)

Total shareholders’ equity

 

4,734,862

 

4,674,582

 

Total liabilities and shareholders’ equity

 

$

10,273,677

 

$

9,688,520

 

 

See notes to condensed consolidated financial statements.

 

1



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

For the 13 weeks ended

 

For the 39 weeks ended

 

 

 

November 2,
2012

 

October 28,
2011

 

November 2,
2012

 

October 28,
2011

 

Net sales

 

$

3,964,647

 

$

3,595,224

 

$

11,814,507

 

$

10,622,115

 

Cost of goods sold

 

2,738,524

 

2,479,422

 

8,096,905

 

7,270,574

 

Gross profit

 

1,226,123

 

1,115,802

 

3,717,602

 

3,351,541

 

Selling, general and administrative expenses

 

864,734

 

804,885

 

2,584,675

 

2,368,977

 

Operating profit

 

361,389

 

310,917

 

1,132,927

 

982,564

 

Interest expense

 

27,726

 

38,632

 

100,466

 

164,831

 

Other (income) expense

 

1,728

 

53

 

29,956

 

60,564

 

Income before income taxes

 

331,935

 

272,232

 

1,002,505

 

757,169

 

Income tax expense

 

124,250

 

101,068

 

367,265

 

282,994

 

Net income

 

$

207,685

 

$

171,164

 

$

635,240

 

$

474,175

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.62

 

$

0.50

 

$

1.90

 

$

1.39

 

Diluted

 

$

0.62

 

$

0.50

 

$

1.89

 

$

1.37

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

332,337

 

341,955

 

333,806

 

341,670

 

Diluted

 

334,004

 

345,777

 

336,339

 

345,598

 

 

See notes to condensed consolidated financial statements.

 

2



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

For the 13 weeks ended

 

For the 39 weeks ended

 

 

 

November 2,
2012

 

October 28,
2011

 

November 2,
2012

 

October 28,
2011

 

Comprehensive income

 

$

208,249

 

$

174,269

 

$

635,823

 

$

486,594

 

 

See notes to condensed consolidated financial statements.

 

3



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

For the 39 weeks ended

 

 

 

November 2,
2012

 

October 28,
2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

635,240

 

$

474,175

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

222,398

 

204,771

 

Deferred income taxes

 

24,221

 

23,977

 

Tax benefit of stock options

 

(85,335

)

(16,101

)

Loss on debt retirement, net

 

30,620

 

60,303

 

Noncash share-based compensation

 

15,357

 

10,969

 

Other noncash gains and losses

 

9,548

 

31,656

 

Change in operating assets and liabilities:

 

 

 

 

 

Merchandise inventories

 

(326,076

)

(350,932

)

Prepaid expenses and other current assets

 

12,399

 

(30,899

)

Accounts payable

 

130,733

 

164,336

 

Accrued expenses and other liabilities

 

(4,334

)

89,993

 

Income taxes

 

28,350

 

(57,575

)

Other

 

(2,235

)

(174

)

Net cash provided by (used in) operating activities

 

690,886

 

604,499

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(453,626

)

(363,099

)

Proceeds from sales of property and equipment

 

1,144

 

729

 

Net cash provided by (used in) investing activities

 

(452,482

)

(362,370

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of long-term obligations

 

500,000

 

 

Repayments of long-term obligations

 

(478,026

)

(911,708

)

Borrowings under revolving credit facility

 

1,703,400

 

649,100

 

Repayments of borrowings under revolving credit facility

 

(1,349,800

)

(361,300

)

Debt issue costs

 

(15,278

)

 

Repurchases of common stock

 

(596,442

)

 

Equity transactions with employees, net of taxes paid

 

(71,139

)

(13,188

)

Tax benefit of stock options

 

85,335

 

16,101

 

Net cash provided by (used in) financing activities

 

(221,950

)

(620,995

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

16,454

 

(378,866

)

Cash and cash equivalents, beginning of period

 

126,126

 

497,446

 

Cash and cash equivalents, end of period

 

$

142,580

 

$

118,580

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Purchases of property and equipment awaiting processing for payment, included in Accounts payable

 

$

40,569

 

$

44,225

 

Purchases of property and equipment under capital lease obligations

 

$

3,440

 

$

 

 

See notes to condensed consolidated financial statements.

 

4



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.              Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Such financial statements consequently do not include all of the disclosures normally required by U.S. GAAP or those normally made in the Company’s Annual Report on Form 10-K, including the condensed consolidated balance sheet as of February 3, 2012 which has been derived from the audited consolidated financial statements at that date. Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2012 for additional information.

 

The Company’s fiscal year ends on the Friday closest to January 31. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2012 fiscal year will be a 52-week accounting period ending on February 1, 2013 and the 2011 fiscal year was a 53-week accounting period that ended on February 3, 2012.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position as of November 2, 2012 and results of operations for the 13-week and 39-week accounting periods ended November 2, 2012 and October 28, 2011 have been made.

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

The Company uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation/deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation. The Company recorded a LIFO provision of $0.1 million and $11.1 million in the respective 13-week periods, and $1.2 million and $25.4 million in the respective 39-week periods, ended November 2, 2012 and October 28, 2011. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation. Because the Company’s business is

 

5



 

moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

In July 2012, the Financial Accounting Standards Board issued new accounting guidance relating to impairment testing for indefinite-lived intangible assets. In accordance with this guidance, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the indefinite-lived intangible asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test as required by existing standards. This guidance is effective for annual and interim impairment tests for fiscal years beginning after September 15, 2012 and early adoption is permitted. The Company adopted this guidance in the third quarter of 2012 and it did not have a material impact on its condensed consolidated financial statements.

 

Certain financial statement amounts relating to prior periods have been reclassified to conform to the current period presentation.

 

2.                                       Common stock transactions

 

On August 29, 2012, the Company’s Board of Directors authorized a $500 million common stock repurchase program, of which $218.6 million remained available for repurchase as of November 2, 2012. The repurchase authorization has no expiration date and allows repurchases from time to time in the open market or in privately negotiated transactions, which could include repurchases from Buck Holdings, L.P., a Delaware limited partnership controlled by KKR and Goldman Sachs and Co., or other related parties if appropriate. The timing and number of shares purchased will depend on a variety of factors, such as price, market conditions, compliance with the covenants and restrictions under our debt agreements and other factors. Repurchases under the program may be funded from available cash or borrowings under our senior secured asset-based revolving credit facility, which is discussed in further detail in Note 5.

 

On November 30, 2011, the Company’s Board of Directors authorized a $500 million common stock repurchase program, which was completed during the period ended November 2, 2012 as discussed below. The repurchase authorization had terms similar to the August 2012 authorization.

 

During the 39-week period ended November 2, 2012, the Company repurchased approximately 7.1 million shares under the November 2011 authorization at a total cost of $315.0 million, including approximately 6.8 million shares purchased from Buck Holdings, L.P. for an aggregate purchase price of $300.0 million, and approximately 5.6 million shares under the August 2012 authorization at a total cost of $281.4 million, including approximately 4.9 million shares purchased from Buck Holdings, L.P. for an aggregate purchase price of $250.0 million.

 

6



 

3.                                       Earnings per share

 

Earnings per share is computed as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended November 2, 2012

 

13 Weeks Ended October 28, 2011

 

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

$

207,685

 

332,337

 

$

0.62

 

$

171,164

 

341,955

 

$

0.50

 

Effect of dilutive share-based awards

 

 

 

1,667

 

 

 

 

 

3,822

 

 

 

Diluted earnings per share

 

$

207,685

 

334,004

 

$

0.62

 

$

171,164

 

345,777

 

$

0.50

 

 

 

 

39 Weeks Ended November 2, 2012

 

39 Weeks Ended October 28, 2011

 

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

$

635,240

 

333,806

 

$

1.90

 

$

474,175

 

341,670

 

$

1.39

 

Effect of dilutive share-based awards

 

 

 

2,533

 

 

 

 

 

3,928

 

 

 

Diluted earnings per share

 

$

635,240

 

336,339

 

$

1.89

 

$

474,175

 

345,598

 

$

1.37

 

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined based on the dilutive effect of stock options using the treasury stock method.

 

Options to purchase shares of common stock that were outstanding at the end of the respective periods, but were not included in the computation of diluted earnings per share because the effect of exercising such options would be antidilutive, were 0.8 million and 0.3 million in the 2012 and 2011 periods, respectively.

 

4.                                       Income taxes

 

Under the accounting standards for income taxes, the asset and liability method is used for computing the future income tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns.

 

Income tax reserves are determined using the methodology established by accounting standards for income taxes which require companies to assess each income tax position taken using a two-step approach. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position.

 

The Internal Revenue Service (“IRS”) has completed its examination of the Company’s federal income tax returns for fiscal years 2006, 2007, and 2008. As a result, the 2008 and earlier tax years are not open for examination by the IRS.  The IRS, at its discretion, may choose to examine the Company’s 2009, 2010, or 2011 fiscal year income tax filings. The Company has

 

7



 

various state income tax examinations that are currently in progress. Generally, the Company’s 2009 and later tax years remain open for examination by the various state taxing authorities.

 

As of November 2, 2012, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $22.7 million, $2.1 million and $0.4 million, respectively, for a total of $25.2 million. Of this amount, $0.3 million and $24.9 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the condensed consolidated balance sheet. The reserve for uncertain tax benefits decreased during the 39-week period ended November 2, 2012 by $19.3 million due principally to the favorable resolution of matters associated with examination activity.

 

As of November 2, 2012, approximately $22.7 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions. The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $15.0 million in the coming twelve months due principally to the effective settlement of reserved amounts.

 

The effective income tax rates for the 13-week and 39-week periods ended November 2, 2012 were 37.4% and 36.6%, compared to rates of 37.1% and 37.4% for the respective 13-week and 39-week periods ended October 28, 2011. The increase in the effective income tax rate for the 13-week period is primarily associated with state income tax items.  The 2011 period benefited, to a greater extent, from a decrease in a state income tax valuation allowance associated with state income tax credits and from decreases in state income tax reserves as compared to 2012’s reserve increases.  The decrease in the 39-week period effective income tax rate was due to benefits (recorded earlier in the current fiscal year) associated with the adjustment of accruals due to the favorable resolution of income tax examinations that exceeded increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit), the expiration of the Hire Act’s Retention Credit and an increase in the state income tax rate as noted earlier in this paragraph.

 

5.                                       Current and long-term obligations

 

Current and long-term obligations consist of the following:

 

(In thousands)

 

November 2,
2012

 

February 3,
2012

 

Senior secured term loan facility:

 

 

 

 

 

Maturity July 6, 2014

 

$

1,083,800

 

$

1,963,500

 

Maturity July 6, 2017

 

879,700

 

 

ABL Facility, maturity July 6, 2014

 

538,300

 

184,700

 

4 1/8% Senior Notes due July 15, 2017

 

500,000

 

 

11 7/8%/12 5/8% Senior Subordinated Notes due July 15, 2017

 

 

450,697

 

Capital lease obligations

 

7,963

 

5,089

 

Tax increment financing due February 1, 2035

 

14,495

 

14,495

 

 

 

3,024,258

 

2,618,481

 

Less: current portion

 

(891

)

(590

)

Long-term portion

 

$

3,023,367

 

$

2,617,891

 

 

8



 

As of November 2, 2012 the Company has senior secured credit agreements (the “Credit Facilities”) which provide total financing of $3.16 billion, consisting of a senior secured term loan facility (“Term Loan Facility”), and a senior secured asset-based revolving credit facility (“ABL Facility”).

 

On March 15, 2012, the ABL Facility was amended and restated. The maturity date was extended by a year to July 6, 2014 and the total commitment was increased to $1.2 billion (of which up to $350.0 million is available for letters of credit), subject to borrowing base availability. The Company capitalized $2.7 million of debt issue costs, and incurred a pretax loss of $1.6 million for the write off of a portion of existing debt issue costs associated with the amendment, which is reflected in Other (income) expense in the condensed consolidated statement of income for the 39-week period ended November 2, 2012.

 

On March 30, 2012, the Term Loan Facility was amended and restated. Pursuant to the amendment, the maturity date for a portion ($879.7 million) of the Term Loan Facility was extended from July 6, 2014 to July 6, 2017. The applicable margin for borrowings under the Term Loan Facility remains unchanged. The Company capitalized $5.2 million of debt issue costs associated with the amendment.

 

On October 9, 2012, the Credit Facilities were further amended to add additional capacity for the Company to repurchase, redeem or otherwise acquire shares of its capital stock, not to exceed $250.0 million. The Company incurred a fee of $1.7 million associated with these amendments which is included in Other (income) expense in the condensed consolidated statements of income for the 13-week and 39-week periods ended November 2, 2012. The Company was reimbursed for these fees as further discussed in Note 9.

 

Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin plus, at the Company’s option, either (a) LIBOR or (b) a base rate (which is usually equal to the prime rate). The applicable margin for borrowings as of November 2, 2012 and February 3, 2012 was (i) under the Term Loan, 2.75% for LIBOR borrowings and 1.75% for base-rate borrowings and (ii) under the ABL Facility, 1.75% and 1.50%, respectively, for LIBOR borrowings and 0.75% and 0.50%, respectively, for base-rate borrowings. At February 3, 2012, prior to the amendment discussed above, the ABL Facility also had a “last out” tranche of $101.0 million for which the applicable margin was 2.25% for LIBOR borrowings and 1.25% for base rate borrowings. The applicable margins for borrowings under the ABL Facility are subject to adjustment each quarter based on average daily excess availability under the ABL Facility. The Company also must pay customary letter of credit fees. The interest rate for borrowings under the Term Loan Facility was 3.0% and 3.1% (without giving effect to the interest rate swaps discussed in Note 7), as of November 2, 2012 and February 3, 2012, respectively.

 

The senior secured credit agreement for the Term Loan Facility requires the Company to prepay outstanding term loans, subject to certain exceptions, with percentages of excess cash flow, proceeds of non-ordinary course asset sales or dispositions of property, and proceeds of incurrences of certain debt. In addition, the senior secured credit agreement for the ABL Facility requires the Company to prepay the ABL Facility, subject to certain exceptions, with proceeds of non-ordinary course asset sales or dispositions of property and any borrowings in excess of the then current borrowing base. The Term Loan Facility can be prepaid in whole or in part at any

 

9



 

time. No prepayments have been required under any prepayment provisions through November 2, 2012.

 

All obligations under the Credit Facilities are unconditionally guaranteed by substantially all of the Company’s existing and future domestic subsidiaries (excluding certain immaterial subsidiaries and certain subsidiaries designated by the Company under the Credit Facilities as “unrestricted subsidiaries”).

 

All obligations and guarantees of those obligations under the Term Loan Facility are secured by, subject to certain exceptions, a second-priority security interest in all existing and after-acquired inventory and accounts receivable; a first priority security interest in substantially all of the Company’s and the guarantors’ tangible and intangible assets (other than the inventory and accounts receivable collateral); and a first-priority pledge of the capital stock held by the Company. All obligations under the ABL Facility are secured by all existing and after-acquired inventory and accounts receivable, subject to certain exceptions.

 

The Credit Facilities contain certain covenants, including, among other things, covenants that limit the Company’s ability to incur additional indebtedness, sell assets, incur additional liens, pay dividends, make investments or acquisitions, or repay certain indebtedness.

 

As of November 2, 2012 and February 3, 2012, the respective letter of credit amounts related to the ABL Facility were $41.1 million and $38.4 million, and borrowing availability under the ABL Facility was $620.6 million and $807.9 million, respectively.

 

On July 12, 2012, the Company issued $500.0 million aggregate principal amount of 4.125% senior notes due 2017 (the “Senior Notes”) which mature on July 15, 2017, pursuant to an indenture dated as of July 12, 2012 (the “Senior Indenture”).  The Company capitalized $7.3 million of debt issue costs associated with the Senior Notes.

 

Interest on the Senior Notes is payable in cash on January 15 and July 15 of each year, commencing on January 15, 2013. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of the existing and future direct or indirect domestic subsidiaries that guarantee the obligations under the Credit Facilities discussed above.

 

The Company may redeem some or all of the Senior Notes at any time at redemption prices described or set forth in the Senior Indenture. The Company also may seek, from time to time, to retire some or all of the Senior Notes through cash purchases in the open market, in privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of the Senior Notes has the right to require the Company to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

 

10



 

The Senior Indenture contains covenants limiting, among other things, the ability of the Company and its restricted subsidiaries to (subject to certain exceptions): consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; and i ncur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

 

The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Notes to become or to be declared due and payable.

 

On July 15, 2012, the Company redeemed the entire $450.7 million outstanding aggregate principal amount of its 11.875%/12.625% Senior Subordinated Notes due 2017 (the “Senior Subordinated Notes”) at a premium. The pretax loss on this transaction of $29.0 million is reflected in Other (income) expense in the condensed consolidated statements of income for the 39-week period ended November 2, 2012. The Company funded the redemption price for the Senior Subordinated Notes with proceeds from the issuance of the Senior Notes.

 

In April and July 2011, the Company repurchased or redeemed all $864.3 million outstanding aggregate principal amount of its 10.625% senior notes due 2015 at a premium. The Company funded the redemption price for the senior notes due 2015 with cash on hand and borrowings under the ABL Facility. The 2011 redemption and repurchase resulted in pretax losses totaling $60.3 million, which is reflected in Other (income) expense in the condensed consolidated statements of income for 39-week period ended October 28, 2011.

 

Approximately $1.6 billion of the Company’s outstanding long-term debt balances as of November 2, 2012 will mature in 2014 and approximately $1.4 billion of such debt will mature after 2016.

 

6.                                       Assets and liabilities measured at fair value

 

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

In connection with accounting standards for fair value measurement, the Company has 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. The Company has determined that the majority of the inputs used to value its derivative financial instruments using the income approach fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of November 2, 2012, the Company has assessed the significance of

 

11



 

the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that such adjustments are not significant to the derivatives’ valuation. As a result, the Company has classified its derivative valuations, as discussed in detail in Note 7, in Level 2 of the fair value hierarchy. The Company’s long-term obligations that are classified in Level 2 of the fair value hierarchy are valued at cost. The Company does not have any fair value measurements categorized within Level 3 as of November 2, 2012.

 

(in thousands)

 

Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance at
November 2,
2012

 

Assets:

 

 

 

 

 

 

 

 

 

Trading securities (a)

 

$

5,742

 

$

 

$

 

$

5,742

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term obligations (b)

 

3,032,042

 

22,458

 

 

3,054,500

 

Derivative financial instruments (c)

 

 

7,567

 

 

7,567

 

Deferred compensation (d)

 

21,380

 

 

 

21,380

 

 


(a)        Reflected at fair value in the condensed consolidated balance sheet as Prepaid expenses and other current assets of $4,047 and Other assets, net of $1,695.

(b)        Reflected at book value in the condensed consolidated balance sheet as Current portion of long-term obligations of $891 and Long-term obligations of $3,023,367.

(c)         Reflected in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $1,557 and non-current Other liabilities of $6,010.

(d)        Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $4,047 and non-current Other liabilities of $17,333.

 

7.                                       Derivatives and hedging activities

 

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards.

 

12



 

Risk management objective of using derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

 

The Company is exposed to certain risks arising from uncertainties of future market values caused by the fluctuation in the prices of commodities. From time to time the Company may enter into derivative financial instruments to protect against future price changes related to these commodity prices.

 

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 this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (also referred to as “OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the 13-week and 39-week periods ended November 2, 2012 and October 28, 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. Any ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

 

In May 2012, the Company entered into interest rate swaps with a total notional amount of $875.0 million in order to mitigate a portion of the variable rate interest exposure under the Term Loan Facility. These swaps were effective May 31, 2012 and are scheduled to mature on May 29, 2015. The terms of the agreements resulted in the swap of one month LIBOR rates for a fixed interest rate, which results in the payment of an all-in fixed rate of 3.34% on the notional amount.

 

As of November 2, 2012, the Company had four interest rate swaps with a combined notional value of $1.175 billion that were designated as cash flow hedges of interest rate risk. Amounts reported in Accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate

 

13



 

debt. During the next 52-week period, the Company estimates that an additional $4.8 million will be reclassified as an increase to interest expense for all of its interest rate swaps.

 

Non-designated hedges of commodity risk

 

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of November 2, 2012, and October 28, 2011, the Company had no such non-designated hedges.

 

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of November 2, 2012 and February 3, 2012:

 

(in thousands)

 

November 2,
2012

 

February 3,
2012

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

Interest rate swaps classified in current liabilities as Accrued expenses and other

 

$

1,557

 

$

10,820

 

Interest rate swaps classified in noncurrent Other liabilities

 

$

6,010

 

$

 

 

The tables below present the pre-tax effect of the Company’s derivative financial instruments on the condensed consolidated statements of comprehensive income for the 13-week and 39-week periods ended November 2, 2012 and October 28, 2011:

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

(in thousands)

 

November 2,
2012

 

October 28,
2011

 

November 2,
2012

 

October 28,
2011

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

 

 

 

 

 

 

Loss related to effective portion of derivative recognized in OCI

 

$

1,441

 

$

482

 

$

9,983

 

$

3,319

 

Loss related to effective portion of derivative reclassified from Accumulated OCI to Interest expense

 

$

2,368

 

$

5,570

 

$

10,939

 

$

23,710

 

(Gain) loss related to ineffective portion of derivative recognized in Other (income) expense

 

$

 

$

52

 

$

(2,392

)

$

261

 

 

Credit-risk-related contingent features

 

The Company has agreements with all of its interest rate swap counterparties that contain a provision that the Company could be declared in default on its derivative obligations if there is a payment default or repayment is accelerated by the lender as a result of the Company’s default on indebtedness equal to or greater than the cross default threshold in the Credit Facilities.

 

As of November 2, 2012, the fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $7.9 million. If the Company had breached any of these provisions at

 

14



 

November 2, 2012, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value of $7.9 million. As of November 2, 2012, the Company had not breached any of these provisions or posted any collateral related to these agreements.

 

8.                                       Commitments and contingencies

 

Legal proceedings

 

On August 7, 2006, a lawsuit entitled Cynthia Richter, et al. v. Dolgencorp, Inc., et al. was filed in the United States District Court for the Northern District of Alabama (Case No. 7:06-cv-01537-LSC) (“Richter”) in which the plaintiff alleges that she and other current and former Dollar General store managers were improperly classified as exempt executive employees under the Fair Labor Standards Act (“FLSA”) and seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs. On August 15, 2006, the Richter plaintiff filed a motion in which she asked the court to certify a nationwide class of current and former store managers. The Company opposed the plaintiff’s motion. On March 23, 2007, the court conditionally certified a nationwide class. On December 2, 2009, notice was mailed to over 28,000 current or former Dollar General store managers. Approximately 3,950 individuals have opted into the lawsuit, approximately 800 of whom have been dismissed for various reasons, including failure to cooperate in discovery.

 

On April 2, 2012, the Company moved to decertify the class.  The plaintiff’s response to that motion was filed on May 9, 2012.

 

On October 22, 2012, the court entered a Memorandum Opinion granting the Company’s decertification motion.  The Company expects the court to enter an Order implementing its Memorandum Opinion within the next 30-60 days, at which time the parties expect to receive additional information regarding procedural matters such as whether the opt-in plaintiffs’ claims will be dismissed or transferred to other jurisdictions and applicable deadlines. The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the Richter action is not appropriate for collective action treatment. The Company has obtained summary judgment in some, although not all, of its pending individual or single-plaintiff store manager exemption cases in which it has filed such a motion.

 

However, at this time, it is not possible to predict whether Richter ultimately will be permitted to proceed collectively, and no assurances can be given that the Company will be successful in its defense of the action on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted in Richter . For these reasons, the Company is unable to estimate any potential loss or range of loss in the matter; however, if the Company is not successful in its defense efforts, the resolution of Richter could have a material adverse effect on the Company’s financial statements as a whole. The Company will continue to vigorously defend its position in the Richter matter.

 

On March 7, 2006, a complaint was filed in the United States District Court for the Northern District of Alabama ( Janet Calvert v. Dolgencorp, Inc. , Case No. 2:06-cv-00465-VEH (“Calvert”)), in which the plaintiff, a former store manager, alleged that she was paid less than

 

15



 

male store managers because of her sex, in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964, as amended (“Title VII”) (now captioned, Wanda Womack, et al. v. Dolgencorp, Inc., Case No. 2:06-cv-00465-VEH). The complaint subsequently was amended to include additional plaintiffs, who also allege to have been paid less than males because of their sex, and to add allegations that the Company’s compensation practices disparately impact females. Under the amended complaint, plaintiffs sought to proceed collectively under the Equal Pay Act and as a class under Title VII, and requested back wages, injunctive and declaratory relief, liquidated damages, punitive damages and attorneys’ fees and costs.

 

On July 9, 2007, the plaintiffs filed a motion in which they asked the court to approve the issuance of notice to a class of current and former female store managers under the Equal Pay Act. The Company opposed plaintiffs’ motion. On November 30, 2007, the court conditionally certified a nationwide class of females under the Equal Pay Act who worked for Dollar General as store managers between November 30, 2004 and November 30, 2007. The notice was issued on January 11, 2008, and persons to whom the notice was sent were required to opt into the suit by March 11, 2008. Approximately 2,100 individuals opted into the lawsuit.

 

On April 19, 2010, the plaintiffs moved for class certification relating to their Title VII claims. The Company filed its response to the certification motion in June 2010. The Company’s motion to decertify the Equal Pay Act class was denied as premature.

 

The parties agreed to mediate, and the court stayed the action pending the results of the mediation.  The mediation occurred in March and April, 2011, at which time the Company reached an agreement in principle to settle the matter on behalf of the entire putative class. The proposed settlement, which received final approval from the court on July 23, 2012, provides for both monetary and equitable relief. Under the approved terms, $3.25 million was paid for plaintiffs’ legal fees and costs and $15.5 million was paid into a fund for the class members that will be apportioned and paid out to individual members (less certain administrative expenses and an additional $3 million in attorneys’ fees approved by the court on October 24, 2012).  Of the total $18.75 million, the Company’s Employment Practices Liability Insurance (“EPLI”) carrier paid approximately $15.9 million in the first quarter of 2012 to a third party claims administrator to disburse the funds, per the settlement terms, to claimants and counsel in accordance with the court’s orders, which represented the balance remaining of the $20 million EPLI policy covering the claims. The Company paid approximately $2.8 million to the third party claims administrator.  In addition, the Company agreed to make, and, effective April 1, 2012, has made, certain adjustments to its pay setting policies and procedures for new store managers.  Because it deemed settlement probable and estimable, the Company accrued for the net settlement as well as for certain additional anticipated fees related thereto during the first quarter of 2011, and concurrently recorded a receivable of approximately $15.9 million from its EPLI carrier. Due to the payments described above, the accrual and receivable were each relieved during the first quarter of 2012.

 

On April 9, 2012, the Company was served with a lawsuit filed in the United States District Court for the Eastern District of Virginia entitled Jonathan Marcum v. Dolgencorp. Inc. (Civil Action No. 3:12-cv-00108-JRS) in which the plaintiff, whose conditional offer of employment was rescinded, alleges defamation and that certain of the Company’s background check procedures violate the Fair Credit Reporting Act (“FCRA”).  According to the complaint

 

16



 

and subsequently filed amended complaint, the plaintiff seeks to represent a putative class of applicants in connection with his FCRA claims. The Company filed its response to the original complaint in June 2012 and moved to dismiss certain allegations contained in the amended complaint in November 2012.  The plaintiff’s certification motion is due to be filed on or before April 5, 2013.

 

At this time, it is not possible to predict whether the court ultimately will permit the action to proceed as a class under the FCRA.  Although the Company intends to vigorously defend the action, no assurances can be given that it will be successful in the defense on the merits or otherwise.  At this stage in the proceedings, the Company cannot estimate either the size of any potential class or the value of the claims raised by the plaintiff.  For these reasons, the Company is unable to estimate any potential loss or range of loss in such a scenario; however, if the Company is not successful in defending this action, its resolution could have a material adverse effect on the Company’s financial statements as a whole.

 

In September 2011, the Chicago Regional Office of the United States Equal Employment Opportunity Commission (“EEOC” or “Commission”) notified the Company of a cause finding related to the Company’s criminal background check policy.  The cause finding alleges that Dollar General’s criminal background check policy, which excludes from employment individuals with certain criminal convictions for specified periods, has a disparate impact on African-American candidates and employees in violation of Title VII of the Civil Rights Act of 1964, as amended.

 

The Company and the EEOC engaged in the statutorily required conciliation process, and despite the Company’s good faith efforts to resolve the matter, the Commission notified the Company on July 26, 2012 of its view that conciliation had failed.

 

The Company believes that its criminal background check process is both lawful and necessary to a safe environment for its employees and customers and the protection of its assets and shareholders’ investments.  Based on the Commission’s conciliation demands and its decision to fail conciliation, the Company believes that litigation may ensue.  The Company does not believe that this matter would be amenable to class or similar treatment; however, because at this time the Company cannot estimate or determine the form that any ultimate litigation would take, the size of any putative class or the damages or other recoveries that would be sought, it cannot estimate the potential exposure.  If the matter were to proceed successfully as a class or similar action, it could have a material impact on the Company’s financial statements as a whole.

 

On May 20, 2011, a lawsuit entitled Winn-Dixie Stores, Inc., et al. v. Dolgencorp, LLC was filed in the United States District Court for the Southern District of Florida (Case No. 9:11-cv-80601-DMM) (“Winn-Dixie”) in which the plaintiffs alleged that the sale of food and other items in approximately 55 of the Company’s stores, each of which allegedly is or was at some time co-located in a shopping center with one of plaintiffs’ stores, violates restrictive covenants that plaintiffs contend are binding on the occupants of the shopping centers.  Plaintiffs sought damages and an injunction limiting the sale of food and other items in those stores.  Although plaintiffs did not make a demand for any specific amount of damages, documents prepared and produced by plaintiffs during discovery suggested that plaintiffs would seek as much as $47

 

17



 

million although the court limited their ability to prove such damages. The Company vigorously defended the Winn-Dixie matter and viewed that sum as wholly without basis and unsupported by the law and the facts. The various leases involved in the matter are unique in their terms and/or the factual circumstances surrounding them, and, in some cases, the stores named by plaintiffs are not now and have never been co-located with plaintiffs’ stores. The court granted the Company’s motion challenging the admissibility of plaintiffs’ damages expert, precluding the expert from testifying. The case was consolidated with similar cases against Big Lots and Dollar Tree, and a non-jury trial commenced on May 14, 2012 and presentation of evidence concluded on May 22, 2012. The court issued an order on August 10, 2012 in which it (i) dismissed all claims for damages, (ii) dismissed claims for injunctive relief for all but four stores, and (iii) directed the Company to report to the court on its compliance with restrictive covenants at the four stores for which it did not dismiss the claims for injunctive relief. The Company believes that the ruling will have no material impact on the Company’s financial statements or otherwise.  Plaintiffs filed a notice of appeal of the court’s decision on August 28, 2012. If all or a portion of the court’s ruling is overturned on appeal, no assurances can be given that the Company will be successful in its ultimate defense of the action on the merits or otherwise.  If the Company is not successful in its defense, the outcome could have a material adverse effect on the Company’s financial statements as a whole.

 

In 2008, the Company terminated an interest rate swap as a result of the counterparty’s declaration of bankruptcy and made a cash payment of $7.6 million to settle the swap. On May 14, 2010, the Company received a demand from the counterparty for an additional payment of approximately $19 million plus interest. In April 2011, the Company reached a settlement with the counterparty under which the Company paid an additional $9.85 million in exchange for a full release. The Company accrued the settlement amount along with additional expected fees and costs related thereto in the first quarter of 2011. The settlement was finalized and the payment was made in May 2011.

 

From time to time, the Company is a party to various other legal actions involving claims incidental to the conduct of its business, including actions by employees, consumers, suppliers, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation, including without limitation under federal and state employment laws and wage and hour laws. The Company believes, based upon information currently available, that such other litigation and claims, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s results of operations, cash flows, or financial position. In addition, certain of these lawsuits, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’s financial position or may negatively affect operating results if changes to the Company’s business operation are required.

 

9.                                       Related party transactions

 

From time to time the Company may conduct business with related parties including KKR and Goldman, Sachs and Co., and references herein to these entities include their affiliates. KKR and Goldman, Sachs & Co. indirectly own a significant portion of the Company’s common

 

18



 

stock. Two of KKR’s members and a managing director of Goldman, Sachs & Co. serve on the Company’s Board of Directors.

 

KKR and Goldman, Sachs & Co. (among other entities) are or may be lenders, agents or arrangers under the Company’s Term Loan Facility and ABL Facility discussed in further detail in Note 5. The Company made interest payments of approximately $47.1 million and $46.4 million on the Term Loan Facility and $4.3 million and $1.2 million on the ABL Facility during the 39-week periods ended November 2, 2012 and October 28, 2011, respectively. In connection with the March 2012 amendment to the Term Loan Facility, KKR received $0.4 million.  In connection with the March 2012 ABL Facility and Term Loan Facility amendments, Goldman, Sachs & Co. received $0.1 million and $0.4 million, respectively.

 

On October 9, 2012, the Term Loan and ABL Facilities were further amended to add additional capacity for the Company to repurchase, redeem or otherwise acquire shares of its capital stock, not to exceed $250 million. The Company incurred a fee of $1.7 million associated with these amendments, which was reimbursed to the Company by Buck Holdings, L.P. (which is controlled by KKR and Goldman Sachs & Co.) and such reimbursement was recorded as a capital contribution during the period ended November 2, 2012.

 

As joint book-running managers in connection with the issuance of the Senior Notes, KKR and Goldman Sachs & Co. received an equivalent share of approximately $2.3 million during the 39-week period ended November 2, 2012.

 

Goldman, Sachs & Co. was a counterparty to an amortizing interest rate swap, entered into in connection with the Term Loan Facility, which matured on July 31, 2012.  The Company paid Goldman, Sachs & Co. approximately $2.5 million and $10.6 million in the 39-week periods ended November 2, 2012 and October 28, 2011, respectively, pursuant to this swap.

 

KKR and Goldman, Sachs & Co. served as underwriters in connection with the secondary offerings of the Company’s common stock held by certain existing shareholders that were completed in April, June and October of 2012 and September of 2011. The Company did not sell shares of common stock, receive proceeds from such shareholders’ sales of shares of common stock or pay any underwriting fees in connection with the secondary offerings. Certain members of the Company’s management exercised registration rights in connection with such offerings.

 

The Company repurchased common stock held by Buck Holdings, L.P during 2012 as further discussed in Note 2.

 

19



 

10.                                Segment reporting

 

The Company manages its business on the basis of one reportable segment. As of November 2, 2012, all of the Company’s operations were located within the United States, with the exception of a Hong Kong subsidiary and a liaison office in India, the collective assets and revenues of which are not material. Net sales grouped by classes of similar products are presented below.

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

(In thousands)

 

November 2,
2012

 

October 28,
2011

 

November 2,
2012

 

October 28,
2011

 

Classes of similar products:

 

 

 

 

 

 

 

 

 

Consumables

 

$

3,004,247

 

$

2,705,765

 

$

8,802,350

 

$

7,845,905

 

Seasonal

 

471,541

 

433,931

 

1,532,772

 

1,393,557

 

Home products

 

257,918

 

236,951

 

772,831

 

706,962

 

Apparel

 

230,941

 

218,577

 

706,554

 

675,691

 

Net sales

 

$

3,964,647

 

$

3,595,224

 

$

11,814,507

 

$

10,622,115

 

 

11.                                Guarantor subsidiaries

 

Certain of the Company’s subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed on a joint and several basis the Company’s obligations under certain outstanding debt obligations. Each of the Guarantors is a direct or indirect wholly-owned subsidiary of the Company. The following consolidating schedules present condensed financial information on a combined basis, in thousands.

 

20



 

 

 

November 2, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,223

 

$

116,107

 

$

25,250

 

$

 

$

142,580

 

Merchandise inventories

 

 

2,330,436

 

 

 

2,330,436

 

Income taxes receivable

 

26,908

 

6,847

 

 

(20,201

)

13,554

 

Deferred income taxes

 

1,592

 

 

8,626

 

(10,218

)

 

Prepaid expenses and other current assets

 

701,969

 

5,379,125

 

10,035

 

(5,959,507

)

131,622

 

Total current assets

 

731,692

 

7,832,515

 

43,911

 

(5,989,926

)

2,618,192

 

Net property and equipment

 

123,523

 

1,923,806

 

105

 

 

2,047,434

 

Goodwill

 

4,338,589

 

 

 

 

4,338,589

 

Other intangible assets, net

 

1,199,700

 

23,707

 

 

 

1,223,407

 

Deferred income taxes

 

 

 

49,588

 

(49,588

)

 

Other assets, net

 

7,529,127

 

14,573

 

344,715

 

(7,842,360

)

46,055

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,922,631

 

$

9,794,601

 

$

438,319

 

$

(13,881,874

)

$

10,273,677

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

588

 

$

303

 

$

 

$

 

$

891

 

Accounts payable

 

5,356,882

 

1,737,980

 

50,534

 

(5,945,669

)

1,199,727

 

Accrued expenses and other

 

52,287

 

285,731

 

68,259

 

(13,838

)

392,439

 

Income taxes payable

 

 

 

21,198

 

(20,201

)

997

 

Deferred income taxes

 

 

50,003

 

 

(10,218

)

39,785

 

Total current liabilities

 

5,409,757

 

2,074,017

 

139,991

 

(5,989,926

)

1,633,839

 

Long-term obligations

 

3,301,168

 

3,604,106

 

 

(3,881,907

)

3,023,367

 

Deferred income taxes

 

433,413

 

272,085

 

 

(49,588

)

655,910

 

Other liabilities

 

43,431

 

40,239

 

142,029

 

 

225,699

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

287,613

 

23,855

 

100

 

(23,955

)

287,613

 

Additional paid-in capital

 

2,983,323

 

431,253

 

19,900

 

(451,153

)

2,983,323

 

Retained earnings

 

1,468,534

 

3,349,046

 

136,299

 

(3,485,345

)

1,468,534

 

Accumulated other comprehensive loss

 

(4,608

)

 

 

 

(4,608

)

Total shareholders’ equity

 

4,734,862

 

3,804,154

 

156,299

 

(3,960,453

)

4,734,862

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

13,922,631

 

$

9,794,601

 

$

438,319

 

$

(13,881,874

)

$

10,273,677

 

 

21



 

 

 

February 3, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

BALANCE SHEET:

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,844

 

$

102,627

 

$

21,655

 

$

 

$

126,126

 

Merchandise inventories

 

 

2,009,206

 

 

 

2,009,206

 

Deferred income taxes

 

10,078

 

 

21,729

 

(31,807

)

 

Prepaid expenses and other current assets

 

551,457

 

4,685,263

 

5,768

 

(5,102,746

)

139,742

 

Total current assets

 

563,379

 

6,797,096

 

49,152

 

(5,134,553

)

2,275,074

 

Net property and equipment

 

113,661

 

1,681,072

 

227

 

 

1,794,960

 

Goodwill

 

4,338,589

 

 

 

 

4,338,589

 

Other intangible assets, net

 

1,199,200

 

36,754

 

 

 

1,235,954

 

Deferred income taxes

 

 

 

49,531

 

(49,531

)

 

Other assets, net

 

6,575,574

 

13,260

 

323,736

 

(6,868,627

)

43,943

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

12,790,403

 

$

8,528,182

 

$

422,646

 

$

(12,052,711

)

$

9,688,520

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

 

$

590

 

$

 

$

 

$

590

 

Accounts payable

 

4,654,237

 

1,451,277

 

52,362

 

(5,093,789

)

1,064,087

 

Accrued expenses and other

 

79,010

 

264,575

 

62,447

 

(8,957

)

397,075

 

Income taxes payable

 

12,972

 

5,013

 

26,443

 

 

44,428

 

Deferred income taxes

 

 

35,529

 

 

(31,807

)

3,722

 

Total current liabilities

 

4,746,219

 

1,756,984

 

141,252

 

(5,134,553

)

1,509,902

 

Long-term obligations

 

2,879,475

 

3,340,075

 

 

(3,601,659

)

2,617,891

 

Deferred income taxes

 

435,791

 

270,736

 

 

(49,531

)

656,996

 

Other liabilities

 

54,336

 

33,156

 

141,657

 

 

229,149

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

295,828

 

23,855

 

100

 

(23,955

)

295,828

 

Additional paid-in capital

 

2,967,027

 

431,253

 

19,900

 

(451,153

)

2,967,027

 

Retained earnings

 

1,416,918

 

2,672,123

 

119,737

 

(2,791,860

)

1,416,918

 

Accumulated other comprehensive loss

 

(5,191

)

 

 

 

(5,191

)

Total shareholders’ equity

 

4,674,582

 

3,127,231

 

139,737

 

(3,266,968

)

4,674,582

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

12,790,403

 

$

8,528,182

 

$

422,646

 

$

(12,052,711

)

$

9,688,520

 

 

22



 

 

 

For the 13-weeks ended November 2, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

86,674

 

$

3,964,647

 

$

24,082

 

$

(110,756

)

$

3,964,647

 

Cost of goods sold

 

 

2,738,524

 

 

 

2,738,524

 

Gross profit

 

86,674

 

1,226,123

 

24,082

 

(110,756

)

1,226,123

 

Selling, general and administrative expenses

 

78,795

 

877,237

 

19,458

 

(110,756

)

864,734

 

Operating profit

 

7,879

 

348,886

 

4,624

 

 

361,389

 

Interest income

 

(10,837

)

(9,095

)

(4,836

)

24,768

 

 

Interest expense

 

41,599

 

10,885

 

10

 

(24,768

)

27,726

 

Other (income) expense

 

1,728

 

 

 

 

1,728

 

Income (loss) before income taxes

 

(24,611

)

347,096

 

9,450

 

 

331,935

 

Income tax expense (benefit)

 

(11,440

)

132,511

 

3,179

 

 

124,250

 

Equity in subsidiaries’ earnings, net of taxes

 

220,856

 

 

 

(220,856

)

 

Net income

 

$

207,685

 

$

214,585

 

$

6,271

 

$

(220,856

)

$

207,685

 

Comprehensive income

 

$

208,249

 

$

214,585

 

$

6,271

 

$

(220,856

)

$

208,249

 

 

 

 

For the 13-weeks ended October 28, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

80,476

 

$

3,595,224

 

$

21,340

 

$

(101,816

)

$

3,595,224

 

Cost of goods sold

 

 

2,479,422

 

 

 

2,479,422

 

Gross profit

 

80,476

 

1,115,802

 

21,340

 

(101,816

)

1,115,802

 

Selling, general and administrative expenses

 

73,160

 

814,281

 

19,260

 

(101,816

)

804,885

 

Operating profit

 

7,316

 

301,521

 

2,080

 

 

310,917

 

Interest income

 

(11,269

)

(7,491

)

(5,146

)

23,906

 

 

Interest expense

 

54,059

 

8,465

 

14

 

(23,906

)

38,632

 

Other (income) expense

 

53

 

 

 

 

53

 

Income (loss) before income taxes

 

(35,527

)

300,547

 

7,212

 

 

272,232

 

Income tax expense (benefit)

 

(12,715

)

111,788

 

1,995

 

 

101,068

 

Equity in subsidiaries’ earnings, net of taxes

 

193,976

 

 

 

(193,976

)

 

Net income

 

$

171,164

 

$

188,759

 

$

5,217

 

$

(193,976

)

$

171,164

 

Comprehensive income

 

$

174,269

 

$

188,759

 

$

5,217

 

$

(193,976

)

$

174,269

 

 

23



 

 

 

For the 39-weeks ended November 2, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

255,130

 

$

11,814,507

 

$

73,287

 

$

(328,417

)

$

11,814,507

 

Cost of goods sold

 

 

8,096,905

 

 

 

8,096,905

 

Gross profit

 

255,130

 

3,717,602

 

73,287

 

(328,417

)

3,717,602

 

Selling, general and administrative expenses

 

231,937

 

2,618,062

 

63,093

 

(328,417

)

2,584,675

 

Operating profit

 

23,193

 

1,099,540

 

10,194

 

 

1,132,927

 

Interest income

 

(31,327

)

(27,174

)

(14,676

)

73,177

 

 

Interest expense

 

143,382

 

30,234

 

27

 

(73,177

)

100,466

 

Other (income) expense

 

29,956

 

 

 

 

29,956

 

Income (loss) before income taxes

 

(118,818

)

1,096,480

 

24,843

 

 

1,002,505

 

Income tax expense (benefit)

 

(60,573

)

419,557

 

8,281

 

 

367,265

 

Equity in subsidiaries’ earnings, net of taxes

 

693,485

 

 

 

(693,485

)

 

Net income

 

$

635,240

 

$

676,923

 

$

16,562

 

$

(693,485

)

$

635,240

 

Comprehensive income

 

$

635,823

 

$

676,923

 

$

16,562

 

$

(693,485

)

$

635,823

 

 

 

 

For the 39-weeks ended October 28, 2011

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

242,397

 

$

10,622,115

 

$

62,735

 

$

(305,132

)

$

10,622,115

 

Cost of goods sold

 

 

7,270,574

 

 

 

7,270,574

 

Gross profit

 

242,397

 

3,351,541

 

62,735

 

(305,132

)

3,351,541

 

Selling, general and administrative expenses

 

220,361

 

2,394,639

 

59,109

 

(305,132

)

2,368,977

 

Operating profit

 

22,036

 

956,902

 

3,626

 

 

982,564

 

Interest income

 

(35,379

)

(17,587

)

(15,640

)

68,606

 

 

Interest expense

 

198,097

 

35,312

 

28

 

(68,606

)

164,831

 

Other (income) expense

 

60,564

 

 

 

 

60,564

 

Income (loss) before income taxes

 

(201,246

)

939,177

 

19,238

 

 

757,169

 

Income tax expense (benefit)

 

(73,825

)

351,175

 

5,644

 

 

282,994

 

Equity in subsidiaries’ earnings, net of taxes

 

601,596

 

 

 

(601,596

)

 

Net income

 

$

474,175

 

$

588,002

 

$

13,594

 

$

(601,596

)

$

474,175

 

Comprehensive income

 

$

486,594

 

$

588,002

 

$

13,594

 

$

(601,596

)

$

486,594

 

 

24



 

 

 

For the 39-weeks ended November 2, 2012

 

 

 

DOLLAR
GENERAL
CORPORATION

 

GUARANTOR
SUBSIDIARIES

 

OTHER
SUBSIDIARIES

 

ELIMINATIONS

 

CONSOLIDATED
TOTAL

 

STATEMENTS OF CASH FLOWS:

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

635,240

 

$

676,923

 

$

16,562

 

$

(693,485

)

$

635,240

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

22,942

 

199,317

 

139

 

 

222,398

 

Deferred income taxes

 

(4,648

)

15,823

 

13,046

 

 

24,221

 

Tax benefit of stock options

 

(85,335

)

 

 

 

(85,335

)

Loss on debt retirement, net

 

30,620

 

 

 

 

30,620

 

Noncash share-based compensation

 

15,357

 

 

 

 

15,357

 

Other noncash gains and losses

 

(593

)

10,141

 

 

 

9,548

 

Equity in subsidiaries’ earnings, net

 

(693,485

)

 

 

693,485

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

 

(326,076

)

 

 

(326,076

)

Prepaid expenses and other current assets

 

24,897

 

(14,774

)

2,276

 

 

12,399

 

Accounts payable

 

15,385

 

117,007

 

(1,659

)

 

130,733

 

Accrued expenses and other liabilities

 

(39,256

)

28,738

 

6,184

 

 

(4,334

)

Income taxes

 

45,455

 

(11,860

)

(5,245

)

 

28,350

 

Other

 

(501

)

(1,663

)

(71

)

 

(2,235

)

Net cash provided by (used in) operating activities

 

(33,922

)

693,576

 

31,232

 

 

690,886

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(19,949

)

(433,660

)

(17

)

 

(453,626

)

Proceeds from sales of property and equipment

 

65

 

1,079

 

 

 

1,144

 

Net cash provided by (used in) investing activities

 

(19,884

)

(432,581

)

(17

)

 

(452,482

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Issuance of long-term obligations

 

500,000

 

 

 

 

500,000

 

Repayments of long-term obligations

 

( 477,521

)

(505

)

 

 

(478,026

)

Borrowings under revolving credit facility

 

1,703,400

 

 

 

 

1,703,400

 

Repayments of borrowings under revolving credit facility

 

(1,349,800

)

 

 

 

(1,349,800

)

Debt issue costs

 

(15,278

)

 

 

 

(15,278

)

Repurchase of common stock

 

(596,442

)

 

 

 

(596,442

)

Equity transactions with employees, net of taxes paid

 

(71,139

)

 

 

 

(71,139

)

Tax benefit of stock options

 

85,335

 

 

 

 

85,335

 

Changes in intercompany note balances, net

 

274,630

 

(247,010

)

(27,620

)

 

 

Net cash provided by (used in) financing activities

 

53,185

 

(247,515

)

(27,620

)

 

(221,950

)

Net increase (decrease) in cash and cash equivalents

 

(621

)

13,480

 

3,595

 

 

16,454

 

Cash and cash equivalents, beginning of period

 

1,844

 

102,627

 

21,655