Burlington Stores, Inc. 10-Q

Item 1. Financial Statements BURLINGTON STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited) (All amounts in thousands, except per share data) Three Months Ended May 1, May 2, 2021 2020 REVENUES: Net sales $ 2,190,667 $ 797,996 Other revenue 2,629 3,527 Total revenue 2,193,296 801,523 COSTS AND EXPENSES: Cost of sales 1,242,189 782,184 Selling, general and administrative expenses 664,828 485,088 Costs related to debt issuances and amendments — 4,352 Depreciation and amortization 55,610 54,291 Impairment charges - long-lived assets 777 1,924 Other income - net ( 1,374 ) ( 2,124 ) Loss on extinguishment of debt — 202 Interest expense 19,599 14,693 Total costs and expenses 1,981,629 1,340,610 Income (loss) before income tax expense (benefit) 211,667 ( 539,087 ) Income tax expense (benefit) 40,637 ( 205,359 ) Net income (loss) $ 171,030 $ ( 333,728 ) Net income (loss) per common share: Common stock - basic $ 2.58 $ ( 5.09 ) Common stock - diluted $ 2.51 $ ( 5.09 ) Weighted average number of common shares: Common stock - basic 66,397 65,572 Common stock - diluted 68,032 65,572 See Notes to Condensed Consolidated Financial Statements. 3 BURLINGTON STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (All amounts in thousands) Three Months Ended May 1, May 2, 2021 2020 Net income (loss) $ 171,030 $ ( 333,728 ) Other comprehensive income (loss), net of tax: Interest rate derivative contracts: Net unrealized gains (losses) arising during the period 825 ( 9,609 ) Net reclassification into earnings during the period 2,159 1,108 Other comprehensive income (loss), net of tax 2,984 ( 8,501 ) Total comprehensive income (loss) $ 174,014 $ ( 342,229 ) 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) May 1, January 30, May 2, 2021 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 1,530,600 $ 1,380,276 $ 1,488,470 Restricted cash and cash equivalents 6,582 6,582 6,582 Accounts receivable — net 83,350 62,161 12,375 Merchandise inventories 767,575 740,788 625,908 Assets held for disposal 6,655 6,655 2,261 Prepaid and other current assets 343,336 314,154 94,284 Total current assets 2,738,098 2,510,616 2,229,880 Property and equipment—net 1,454,454 1,438,863 1,407,082 Operating lease assets 2,500,887 2,469,366 2,437,444 Tradenames 238,000 238,000 238,000 Goodwill 47,064 47,064 47,064 Deferred tax assets 4,332 4,422 4,661 Other assets 68,209 72,761 276,546 Total assets $ 7,051,044 $ 6,781,092 $ 6,640,677 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 906,960 $ 862,638 $ 701,922 Current operating lease liabilities 312,934 304,629 269,016 Other current liabilities 504,520 512,830 380,789 Current maturities of long term debt 4,287 3,899 3,679 Total current liabilities 1,728,701 1,683,996 1,355,406 Long term debt 2,081,013 1,927,770 2,304,094 Long term operating lease liabilities 2,428,866 2,400,782 2,370,861 Other liabilities 100,953 103,940 112,092 Deferred tax liabilities 171,619 199,850 219,123 Commitments and contingencies (Note 12) Stockholders’ equity: 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: 80,897,050 shares, 80,661,453 shares and 80,084,171 shares, respectively; Outstanding: 66,580,160 shares, 66,386,331 shares and 65,846,701 shares, respectively 7 7 7 Additional paid-in-capital 1,706,883 1,809,831 1,737,868 Accumulated earnings (deficit) 176,483 ( 11,702 ) ( 128,931 ) Accumulated other comprehensive loss ( 20,031 ) ( 23,015 ) ( 27,461 ) Treasury stock, at cost ( 1,323,450 ) ( 1,310,367 ) ( 1,302,382 ) Total stockholders' equity 539,892 464,754 279,101 Total liabilities and stockholders' equity $ 7,051,044 $ 6,781,092 $ 6,640,677 See Notes to Condensed Consolidated Financial Statements. 5 BURLINGTON STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands) Three Months Ended May 1, May 2, 2021 2020 OPERATING ACTIVITIES Net income (loss) $ 171,030 $ ( 333,728 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 55,610 54,291 Impairment charges — long-lived assets 777 1,924 Amortization of deferred financing costs 1,651 479 Accretion of long term debt instruments 197 1,562 Deferred income taxes 9,010 ( 4,146 ) Non-cash loss on extinguishment of debt — 202 Non-cash stock compensation expense 12,879 17,352 Non-cash lease expense ( 4,799 ) 1,174 Cash received from landlord allowances 9,690 5,807 Changes in assets and liabilities: Accounts receivable ( 20,175 ) 89,367 Merchandise inventories ( 26,787 ) 151,340 Prepaid and other current assets ( 29,182 ) 42,415 Accounts payable 42,651 ( 70,377 ) Other current liabilities ( 3,029 ) ( 40,553 ) Other long term assets and long term liabilities 346 ( 192,735 ) Other operating activities 3,540 3,891 Net cash provided by (used in) operating activities 223,409 ( 271,735 ) INVESTING ACTIVITIES Cash paid for property and equipment ( 71,671 ) ( 62,463 ) Other investing activities ( 149 ) ( 146 ) Net cash (used in) investing activities ( 71,820 ) ( 62,609 ) FINANCING ACTIVITIES Proceeds from long term debt—ABL Line of Credit — 400,000 Principal payments on long term debt—ABL Line of Credit — — Proceeds from long term debt—Convertible Note — 805,000 Proceeds from long term debt—Secured Note — 300,000 Purchase of treasury shares ( 13,083 ) ( 57,542 ) Proceeds from stock option exercises 16,089 1,454 Deferred financing costs ( 44 ) ( 26,846 ) Other financing activities ( 4,227 ) ( 2,326 ) Net cash (used in) provided by financing activities ( 1,265 ) 1,419,740 Increase in cash, cash equivalents, restricted cash and restricted cash equivalents 150,324 1,085,396 Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 1,386,858 409,656 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 1,537,182 $ 1,495,052 Supplemental disclosure of cash flow information: Interest paid $ 23,758 $ 8,566 Income tax payments - net $ 462 $ 104 Non-cash investing activities: Accrued purchases of property and equipment $ 41,745 $ 57,219 See Notes to Condensed Consolidated Financial Statements. 6 BURLINGTON STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 1, 2021 (Unaudited) 1. Summary of Significant Accounting Policies Basis of Presentation As of May 1, 2021, Burlington Stores, Inc., a Delaware corporation (collectively with its subsidiaries, the Company), through its indirect subsidiary Burlington Coat Factory Warehouse Corporation (BCFWC), operated 784 retail stores. These unaudited Condensed Consolidated Financial Statements include the accounts of Burlington Stores, Inc. and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The Condensed Consolidated Financial Statements are unaudited, but in the opinion of management reflect all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of operations for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (Fiscal 2020 10-K). The balance sheet at January 30, 2021 presented herein has been derived from the audited Consolidated Financial Statements contained in the Fiscal 2020 10-K. Because of the COVID-19 pandemic discussed below, and because the Company’s business is seasonal in nature, the operating results for the three month period ended May 1, 2021 are not necessarily indicative of results for the fiscal year. Accounting policies followed by the Company are described in Note 1, “Summary of Significant Accounting Policies,” included in Part II, Item 8 of the Fiscal 2020 10-K. 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 ending January 29, 2022 (Fiscal 2021) and the prior fiscal year ended January 30, 2021 (Fiscal 2020) both consist of 52 weeks. COVID-19 On March 11, 2020, the World Health Organization declared the novel coronavirus (known as COVID-19) outbreak to be a global pandemic. As a result, the Company began the temporary closing of some of its stores, and effective March 22, 2020, it made the decision to temporarily close all of its stores, distribution centers (other than processing of received inventory) and corporate offices to combat the rapid spread of COVID-19. These developments caused significant disruptions to the Company’s business and had a significant adverse impact on its financial condition, results of operations and cash flows. The Company began re-opening stores on May 11, 2020, with substantially all stores re-opened by the end of the second quarter of Fiscal 2020. In response to the COVID-19 pandemic and the temporary closing of stores, the Company provided two weeks of financial support to associates impacted by these store closures and by the shutdown of distribution centers. The Company temporarily furloughed most store and distribution center associates, as well as some corporate associates, but continued to provide benefits to its furloughed associates in accordance with its benefit plans. In addition, the Company paid 100 % of their medical benefit premiums during the period they were furloughed. During the second quarter of Fiscal 2020, the Company recalled all furloughed associates at its re-opened stores, as well as its corporate and distribution facilities. In order to maintain maximum financial flexibility during these uncertain times, the Company completed several debt transactions in the first quarter of Fiscal 2020. In March 2020, the Company borrowed $ 400 million on its existing $ 600 million senior secured asset-based revolving credit facility (the ABL Line of Credit), of which $ 150 million was repaid during the second quarter of Fiscal 2020, and the remaining $ 250 million was repaid during the fourth quarter of Fiscal 2020. In April 2020, the Company issued $ 805 million of 2.25 % Convertible Senior Notes due 2025 (the Convertible Notes), and BCFWC issued $ 300 million of 6.25 % Senior Secured Notes due 2025 (the Secured Notes). Refer to Note 4, “Long Term Debt,” for further discussion regarding these debt transactions. 7 Additionally, the Company took the following steps to further enhance its financial flexibility: • Carefully managed operating expenses, working capital and capital expenditures, including ceasing substantially all buying activities while stores were closed. The Company subsequently resumed its buying activities, while continuing its conservative approach toward operating expenses and capital expenditures. • Negotiated rent deferral agreements with landlords. • Suspended the Company’s share repurchase program. • The Company’s CEO voluntarily agreed to not take a salary; the Company’s board of directors voluntarily forfeited their cash compensation; the Company’s executive leadership team voluntarily agreed to decrease their salary by 50 %; and smaller salary reductions were temporarily put in place for all employees through a certain level. This compensation was reinstated once substantially all of the Company’s stores re-opened. • The annual incentive bonus payments related to Fiscal 2019 performance were delayed to the second quarter of Fiscal 2020, and merit pay increases for Fiscal 2020 were delayed to the third quarter of Fiscal 2020. Due to the aging of inventory related to the temporary store closures discussed above, as well as the impact of seasonality on the Company’s merchandise, the Company recognized inventory markdown reserves of $ 271.9 million during the three month period ended May 2, 2020. These reserves covered markdowns taken during the second quarter of Fiscal 2020. These charges were included in “Cost of sales” on the Company’s Condensed Consolidated Statement of Income (Loss). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law, which provides emergency economic assistance for American workers, families and businesses affected by the COVID-19 pandemic. For the year ended January 30, 2021 the Company estimated it would obtain a one-time tax refund of $ 219.7 million from the carryback of federal net operating losses (NOLs) as a result of the CARES Act, which is included in the line item “Prepaid and other current assets” on the Company’s Condensed Consolidated Balance Sheet. Recently Adopted Accounting Standards Convertible Debt On August 5, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments. The new guidance removes from GAAP the separation models for convertible debt with a cash conversion feature. The Company elected to early adopt this ASU as of the beginning of Fiscal 2021, using the modified retrospective method of transition. Prior periods have not been restated. As a result of adopting the guidance, the Company is no longer separating the Convertible Notes into debt and equity components, and is instead accounting for it wholly as debt. As of the beginning of Fiscal 2021, this ASU resulted in a reduction in the line item “Additional paid-in capital” of $ 176.0 million, net of deferred financing costs, and an increase in the line item “Long term debt” of $ 153.0 million, which eliminated the debt discount and reallocated deferred financing costs that were previously allocated to the equity component. The changes noted above caused a decrease in the effective interest rate on the Convertible Notes from 8.2 % to 2.8 %, resulting in a cumulative-effect adjustment to retained earnings of $ 23.0 million related to Fiscal 2020 interest expense, as well as a $ 7.6 million reduction in interest expense for the three month period ended May 1, 2021. As of the beginning of Fiscal 2021, the tax effect of adopting this guidance resulted in a $ 44.1 million increase in the line item “Additional paid-in-capital,” a $ 38.3 million reduction in the line item “Deferred tax liabilities” and a $ 5.9 million reduction to retained earnings. The new guidance also requires use of the if-converted method when calculating the dilutive impact of the Convertible Notes on earnings per share. The Company used the treasury stock method prior to adoption of the ASU. The impact of this ASU on net income and weighted average diluted shares resulted in an increase to diluted net income per share of $ 0.05 during the three month period ended May 1, 2021. 8 There were no other new accounting standards that had a material impact on the Company’s Condensed Consolidated Financial Statements and notes thereto during the three month period ended May 1, 2021, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of May 1, 2021 that the Company expects to have a material impact on its financial position or results of operations upon becoming effective. 2. Stockholders’ Equity Activity for the three month periods ended May 1, 2021 and May 2, 2020 in the Company’s stockholders’ equity are summarized below: (in thousands, except share data) Common Stock Additional Paid-in Accumulated Earnings Accumulated Other Comprehensive Treasury Stock Shares Amount Capital (Deficit) Loss Shares Amount Total Balance at January 30, 2021 80,661,453 7 1,809,831 ( 11,702 ) ( 23,015 ) ( 14,275,122 ) ( 1,310,367 ) 464,754 Net income — — — 171,030 — — — 171,030 Stock options exercised 181,683 — 16,089 — — — — 16,089 Shares used for tax withholding — — — — — ( 41,768 ) ( 13,083 ) ( 13,083 ) Vesting of restricted shares, net of forfeitures of 883 restricted shares 53,914 — — — — — — — Stock based compensation — — 12,879 — — — — 12,879 Unrealized losses on interest rate derivative contracts, net of related taxes of $ 0.3 million — — — — 825 — — 825 Amount reclassified into earnings, net of related taxes of $ 0.8 million — — — — 2,159 — — 2,159 Adoption of Accounting Standards Update 2020-06 (Note 1) — — ( 131,916 ) 17,155 — — — ( 114,761 ) Balance at May 1, 2021 80,897,050 $ 7 $ 1,706,883 $ 176,483 $ ( 20,031 ) ( 14,316,890 ) $ ( 1,323,450 ) $ 539,892 (in thousands, except share data) Common Stock Additional Paid-in Accumulated Accumulated Other Comprehensive Treasury Stock Shares Amount Capital Deficit Loss Shares Amount Total Balance at February 1, 2020 79,882,506 $ 7 $ 1,587,146 $ 204,797 $ ( 18,960 ) ( 13,952,534 ) $ ( 1,244,841 ) $ 528,149 Net loss — — — ( 333,728 ) — — — ( 333,728 ) Stock options exercised 180,950 — 1,454 — — — — 1,454 Shares used for tax withholding — — — — — ( 41,363 ) ( 7,383 ) ( 7,383 ) Shares purchased as part of publicly announced programs — — — — — ( 243,573 ) ( 50,158 ) ( 50,158 ) Vesting of restricted shares, net of forfeitures of 4,166 restricted shares 20,715 — — — — — — — Stock based compensation — — 17,352 — — — — 17,352 Equity component of convertible notes issuance, net of related taxes of $ 44.1 million — — 131,916 — — — — 131,916 Unrealized losses on interest rate derivative contracts, net of related tax benefit of $ 3.6 million — — — — ( 9,609 ) — — ( 9,609 ) Amount reclassified into earnings, net of related taxes of $ 0.4 million — — — — 1,108 — — 1,108 Balance at May 2, 2020 80,084,171 $ 7 $ 1,737,868 $ ( 128,931 ) $ ( 27,461 ) ( 14,237,470 ) $ ( 1,302,382 ) $ 279,101 9 3. Lease Commitments The Company’s leases primarily consist of stores, distribution facilities and office space under operating and finance leases that will expire principally during the next 30 years. The leases typically include renewal options at five year intervals and escalation clauses. Lease renewals are only included in the lease liability to the extent that they are reasonably assured of being exercised. The Company’s leases typically provide for contingent rentals based on a percentage of gross sales. Contingent rentals are not included in the lease liability, and they are recognized as variable lease cost when incurred. As a result of the COVID-19 pandemic and the associated temporary store closures discussed above, the Company worked with landlords to modify payment terms for certain leases. The FASB has provided relief under ASC 842, “Leases,” related to the COVID-19 pandemic. Under this relief, companies can make a policy election on how to treat lease concessions resulting directly from COVID-19, provided that the modified contracts result in total cash flows that are substantially the same or less than the cash flows in the original contract. The Company has made the policy election to account for lease concessions that result from the COVID-19 pandemic as if they were made as enforceable rights under the original contract. Additionally, the Company has elected to account for these concessions outside of the lease modification framework described under ASC 842. As a result, deferred payments related to these leases of $ 20.6 million are included in the line item “Other current liabilities” on the Company’s Condensed Consolidated Balance Sheet. Due dates for these payments vary by lease, with all payments due before the end of Fiscal 2021. The following is a schedule of the Company’s future lease payments: (in thousands) Fiscal Year Operating Leases Finance Leases 2021 (remainder) $ 334,958 $ 5,322 2022 463,834 7,513 2023 441,232 7,589 2024 405,047 7,417 2025 371,823 5,298 2026 332,587 5,324 Thereafter 1,064,491 28,030 Total future minimum lease payments 3,413,972 66,493 Amount representing interest ( 672,172 ) ( 19,774 ) Total lease liabilities 2,741,800 46,719 Less: current portion of lease liabilities ( 312,934 ) ( 4,287 ) Total long term lease liabilities $ 2,428,866 $ 42,432 Weighted average discount rate 5.3 % 6.8 % Weighted average remaining lease term (years) 8.3 11.6 The above schedule excludes approximately $ 418.6 million for 86 stores that the Company has committed to open or relocate but has not yet taken possession of the space. The discount rates used in valuing the Company’s leases are not readily determinable, and are based on the Company’s incremental borrowing rate on a fully collateralized basis. The following is a schedule of net lease costs for the periods indicated: (in thousands) Three Months Ended May 1, 2021 May 2, 2020 Finance lease cost: Amortization of finance lease asset (a) $ 1,142 $ 1,211 Interest on lease liabilities (b) 808 872 Operating lease cost (c) 111,159 108,973 Variable lease cost (c) 46,747 41,218 Total lease cost 159,856 152,274 Less all rental income(d) ( 1,275 ) ( 1,248 ) Total net rent expense (e) $ 158,581 $ 151,026 (a) Included in the line item “Depreciation and amortization” in the Company’s Condensed Consolidated Statements of Income (Loss). (b) Included in the line item “Interest expense” in the Company’s Condensed Consolidated Statements of Income (Loss). 10 (c) Includes real estate taxes, common area maintenance, insurance and percentage rent. Included in the line item “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income (Loss). (d) Included in the line item “Other revenue” in the Company’s Condensed Consolidated Statements of Income (Loss). (e) Excludes an immaterial amount of short-term lease cost. Supplemental cash flow disclosures related to leases are as follows: (in thousands) Three Months Ended May 1, 2021 May 2, 2020 Cash paid for amounts included in the measurement of lease liabilities: Cash payments arising from operating lease liabilities (a) $ 128,200 $ 87,209 Cash payments for the principal portion of finance lease liabilities (b) $ 1,263 $ 853 Cash payments for the interest portion of finance lease liabilities (a) $ 808 $ 872 Supplemental non-cash information: Operating lease liabilities arising from obtaining right-of-use assets $ 114,364 $ 125,335 (a) Included within operating activities in the Company’s Condensed Consolidated Statements of Cash Flows. (b) Included within financing activities in the Company’s Condensed Consolidated Statements of Cash Flows. 4. Long Term Debt Long term debt consists of: (in thousands) May 1, January 30, May 2, 2021 2021 2020 $ 1,200,000 senior secured term loan facility (Term B-5 Loans), LIBOR (with a floor of 0.00 %) plus 1.75 % , matures on November 17, 2024 $ 958,615 $ 958,418 $ 957,829 $ 805,000 convertible senior notes, 2.25 %, matures on April 15, 2025 805,000 648,311 625,688 $ 300,000 senior secured notes, 6.25 %, matures on April 15, 2025 300,000 300,000 300,000 $ 600,000 ABL senior secured revolving facility, LIBOR plus spread based on average outstanding balance, matures on June 29, 2023 — — 400,000 Finance lease obligations 46,719 47,664 49,508 Unamortized deferred financing costs ( 25,034 ) ( 22,724 ) ( 25,252 ) Total debt 2,085,300 1,931,669 2,307,773 Less: current maturities ( 4,287 ) ( 3,899 ) ( 3,679 ) Long term debt, net of current maturities $ 2,081,013 $ 1,927,770 $ 2,304,094 Term Loan Facility On February 26, 2020, the Company entered into Amendment No. 8 (the Eighth Amendment) to the Term Loan Credit Agreement governing its senior secured credit term loan facility (the Term Loan Facility). The Eighth Amendment, among other things, reduced the interest rate margins applicable to the Term Loan Facility from 1.00 % to 0.75 %, in the case of prime rate loans, and from 2.00 % to 1.75 %, in the case of LIBOR loans, with the LIBOR floor remaining at 0.00 %. In connection with the execution of the Eighth Amendment, the Company incurred fees of $ 1.1 million, primarily related to legal and placement fees, which were recorded in the line item “Costs related to debt issuances and amendments” in the Company’s Condensed Consolidated Statement of Income (Loss). Additionally, the Company recognized a non-cash loss on the extinguishment of debt of $ 0.2 million, representing the write-off of unamortized deferred financing costs and original issue discount, which was recorded in the line item “Loss on extinguishment of debt” in the Company’s Condensed Consolidated Statement of Income (Loss). At May 1, 2021 and May 2, 2020, the Company’s interest rate related to the Term Loan Facility was 1.9 % and 2.6 %, respectively. Convertible Notes On April 16, 2020, the Company issued $ 805 million of Convertible Notes. An aggregate of up to 3,656,149 shares of common stock may be issued upon conversion of the Convertible Notes, which number is subject to adjustment up to an aggregate of 4,844,410 shares following certain corporate events that occur prior to the maturity date or if the Company issues a notice of redemption, and which is also subject to certain anti-dilution adjustments. 11 The Convertible Notes are general unsecured obligations of the Company. The Convertible Notes bear interest at a rate of 2.25 % per year, payable semi-annually in cash, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2020 . The Convertible Notes will mature on April 15, 2025 , unless earlier converted, redeemed or repurchased. Prior to the close of business on the business day immediately preceding January 15, 2025, the Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Convertible Notes have an initial conversion rate of 4.5418 shares per $ 1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 220.18 per share of the Company’s common stock), subject to adjustment if certain events occur. The initial conversion price represents a conversion premium of approximately 32.50 % over $ 166.17 per share, the last reported sale price of the Company’s common stock on April 13, 2020 (the pricing date of the offering) on the New York Stock Exchange. During the first quarter of Fiscal 2021, the Company made an irrevocable settlement election for any conversions of the Convertible Notes. Upon conversion, the Company will pay cash for the principal amount. For any excess above principal, the Company will deliver shares of its common stock. The Company may not redeem the Convertible Notes prior to April 15, 2023. On or after April 15, 2023, the Company will be able to redeem for cash all or any portion of the Convertible Notes, at its option, if the last reported sale price of the Company’s common stock is equal to or greater than 130 % of the conversion price for a specified period of time, at a redemption price equal to 100 % of the principal aggregate amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Holders of the Convertible Notes may require the Company to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a purchase price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their Convertible Notes in connection with such corporate event or during the relevant redemption period for such Convertible Notes. The Convertible Notes contain a cash conversion feature, and as a result, the Company initially separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which was recognized as a debt discount, was valued as the difference between the face value of the Convertible Notes and the fair value of the liability component. As a result of adopting ASU 2020-06, the Company is no longer separating the Convertible Notes into debt and equity components, and is instead accounting for it wholly as debt. In connection with the Convertible Notes issuance, the Company incurred deferred financing costs of $ 21.0 million, primarily related to fees paid to the bookrunners of the offering, as well as legal, accounting and rating agency fees. These costs were initially allocated on a pro rata basis, with $ 16.4 million allocated to the debt component and $ 4.6 million allocated to the equity component. As a result of adopting ASU 2020-06, all unamortized deferred financing costs related to the Convertible Notes are now allocated to debt. Prior to adoption of ASU 2020-06, the debt discount and the debt portion of the deferred costs were being amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 8.2 %. The effective interest rate after adoption of ASU 2020-06 is 2.8 %. The Convertible Notes consist of the following components as of the dates indicated: (in thousands) May 1, January 30, May 2, 2021 2021 2020 Liability component: Principal $ 805,000 $ 805,000 $ 805,000 Unamortized debt discount — ( 156,689 ) ( 179,312 ) Unamortized deferred debt costs ( 16,854 ) ( 14,191 ) ( 15,881 ) Net carrying amount $ 788,146 $ 634,120 $ 609,807 Equity component, net $ — $ 131,916 $ 131,916 12 Interest expense related to the Convertible Notes consists of the following as of the periods indicated: (in thousands) Three Months Ended May 1, 2021 May 2, 2020 Coupon interest $ 4,511 $ 843 Amortization of debt discount — 1,366 Amortization of deferred debt costs 1,000 121 Convertible Notes interest expense $ 5,511 $ 2,330 Secured Notes On April 16, 2020, BCFWC issued $ 300 million of Secured Notes. The Secured Notes are senior, secured obligations of BCFWC, and interest is payable semiannually in cash, in arrears, at a rate of 6.25 % per annum on April 15 and October 15 of each year, beginning on October 15, 2020 . The Secured Notes are guaranteed on a senior secured basis by Burlington Coat Factory Holdings, LLC, Burlington Coat Factory Investments Holdings, Inc. and BCFWC’s subsidiaries that guarantee the loans under the Term Loan Facility. The Secured Notes mature on April 15, 2025 , unless earlier redeemed or repurchased. In connection with the Secured Notes issuance, the Company incurred deferred financing costs of $ 7.9 million, primarily related to fees paid to the bookrunners of the offering, as well as legal fees. These costs are being amortized to interest expense over the term of the Secured Notes. The Company incurred additional costs of $ 2.5 million, primarily related to legal fees, which are recorded in the line item, “Costs related to debt issuances and amendments” in the Company’s Condensed Consolidated Statement of Income (Loss). On May 27, 2021, the Company announced a make-whole call for the full $ 300.0 million outstanding principal amount of the Secured Notes. As a result of this action, the Company is expecting a pre-tax debt extinguishment charge of approximately $ 30 million in the three month period ended July 31, 2021. ABL Line of Credit On March 17, 2020, the Company borrowed $ 400 million under the ABL Line of Credit as a precautionary measure in order to increase the Company’s cash position and facilitate financial flexibility in light of the uncertainty resulting from COVID-19. The Company repaid $ 150 million of this amount during the second quarter of Fiscal 2020, and the remaining $ 250.0 million during the fourth quarter of Fiscal 2020. At May 1, 2021, the Company had $ 549.5 million available under the ABL Line of Credit. There were no borrowings under the ABL Line of Credit during the three month period ended May 1, 2021. At May 2, 2020, the Company had $ 150.9 million available under the ABL Line of Credit. The maximum borrowings under the ABL Line of Credit during the three month period ended May 2, 2020 amounted to $ 400.0 million. Average borrowings during the three month period ended May 2, 2020 amounted to $ 206.6 million, at an average interest rate of 2.2 %. 5. Derivative Instruments and Hedging Activities The Company accounts for derivatives and hedging activities in accordance with ASC 815, “Derivatives and Hedging” (ASC 815). As required by ASC 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 820, “Fair Value Measurements” (ASC 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 ASC 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 has only one derivative. 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 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. 13 As of May 1, 2021, the Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk: Interest Rate Derivative Number of Instruments Notional Aggregate Principal Amount Interest Cap/Swap Rate Maturity Date Interest rate swap contract One $ 450.0 million 2.72 % December 29, 2023 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 May 1, 2021 January 30, 2021 May 2, 2020 Derivatives Designated as Hedging Instruments Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Interest rate swap contract Other liabilities $ 27,569 Other liabilities $ 31,665 Other liabilities $ 37,913 The following table presents the unrealized gains and losses deferred to accumulated other comprehensive loss resulting from the Company’s derivative financial instruments for each of the reporting periods. (in thousands) Three Months Ended Interest Rate Derivatives: May 1, 2021 May 2, 2020 Unrealized gains (losses), before taxes $ 1,132 $ ( 13,164 ) Income tax (expense) benefit ( 307 ) 3,555 Unrealized gains (losses), net of taxes $ 825 $ ( 9,609 ) The following table presents information about the reclassification of gains and losses from accumulated other comprehensive loss into earnings related to the Company’s derivative instruments for each of the reporting periods. (in thousands) Three Months Ended Component of Earnings: May 1, 2021 May 2, 2020 Interest expense $ 2,964 $ 1,532 Income tax benefit ( 805 ) ( 424 ) Net reclassification into earnings $ 2,159 $ 1,108 The Company estimates that approximately $ 11.5 million will be reclassified from accumulated other comprehensive loss into interest expense during the next twelve months. 6. Accumulated Other Comprehensive Loss Amounts included in accumulated other comprehensive loss are recorded net of the related income tax effects. The following table details the changes in accumulated other comprehensive loss: (in thousands) Derivative Instruments Balance at January 30, 2021 $ ( 23,015 ) Unrealized gains, net of related taxes of $ 0.3 million 825 Amount reclassified into earnings, net of related taxes of $ 0.8 million 2,159 Balance at May 1, 2021 $ ( 20,031 ) 7. 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 14 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 5, “Derivative Instruments and Hedging Activities,” for further discussion regarding the fair value of the Company’s interest rate swap contract. Financial Assets The fair values of the Company’s financial assets and the hierarchy of the level of inputs as of May 1, 2021, January 30, 2021 and May 2, 2020 are summarized below: (in thousands) Fair Value Measurements at May 1, January 30, May 2, 2021 2021 2020 Level 1 Cash equivalents (including restricted cash) $ 1,001,534 $ 1,001,475 $ 1,001,033 Long-Lived Assets Long-lived assets are measured at fair value on a non-recurring basis for purposes of calculating impairment using the fair value hierarchy of ASC 820. The fair value of the Company’s long-lived assets is generally calculated using discounted cash flows. During the three months ended May 1, 2021, the Company recorded impairment charges of $ 0.8 million, primarily related to declines in revenues and operating results for one store. These costs were recorded in the line item “Impairment charges – long-lived assets” in the Company’s Condensed Consolidated Statements of Income (Loss). All of the fixed assets for this store were fully impaired and therefore had zero fair value as of May 1, 2021, and would be categorized as Level 3 in the fair value hierarchy described above. Financial Liabilities The fair values of the Company’s financial liabilities are summarized below: (in thousands) May 1, 2021 January 30, 2021 May 2, 2020 Principal Amount Fair Value Principal Amount Fair Value Principal Amount Fair Value Term B-5 Loans $ 961,415 $ 953,604 $ 961,415 $ 955,406 $ 961,415 $ 896,169 Convertible Notes 805,000 1,268,382 805,000 1,080,713 805,000 847,746 Secured Notes 300,000 318,375 300,000 320,625 300,000 304,583 ABL Line of Credit — — — — 400,000 400,000 Total debt (a) $ 2,066,415 $ 2,540,361 $ 2,066,415 $ 2,356,744 $ 2,466,415 $ 2,448,498 (a) The table above excludes finance lease obligations, debt discount and deferred debt costs. 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, and are based on current market quotes received from inactive markets. 15 8. Income Taxes Income tax expense was $ 40.6 million during the three month period ended May 1, 2021, compared with income tax benefit of $ 205.4 million during the three month period ended May 2, 2020. The effective tax rate for the three month period ended May 1, 2021 was 19.2 %, compared with 38.1 % during the three month period ended May 2, 2020. The decrease in the effective tax rate was primarily due to the Company’s pretax loss in the prior year and applying various provisions of the CARES Act, namely the benefit related to the carryback of federal NOLs in Fiscal 2020 to earlier tax years with higher tax rates. Net deferred taxes are as follows: (in thousands) May 1, January 30, May 2, 2021 2021 2020 Deferred tax asset $ 4,332 $ 4,422 $ 4,661 Deferred tax liability 171,619 199,850 219,123 Net deferred tax liability $ 167,287 $ 195,428 $ 214,462 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. The decrease in deferred tax liability is primarily attributable to the early adoption of ASU 2020-06 related to accounting for convertible debt in the first quarter of 2021. See Note 1 for additional information related to the Company’s adoption of this accounting guidance. As of May 1, 2021, the Company had a deferred tax asset related to net operating losses of $ 36.2 million, inclusive of $ 35.9 million related to state net operating losses that expire at various dates between 2022 and 2040 , as well as $ 0.3 million related to Puerto Rico net operating losses that will expire in 2025 . As of May 1, 2021, the Company had a deferred tax asset related to tax credit carry-forwards of $ 9.8 million, inclusive of $ 8.6 million of state tax credit carry-forwards, which will begin to expire in 2023 , and $ 1.2 million of deferred tax assets recorded for Puerto Rico alternative minimum tax credits that have an indefinite life . As of May 1, 2021, January 30, 2021 and May 2, 2020, valuation allowances amounted to $ 13.7 million, $ 13.0 million and $ 10.7 million, respectively, related to state and Puerto Rico net operating losses and state tax credit carry-forwards. The Company believes that it is more likely than not that this portion of state and Puerto Rico net operating losses and state tax credit carry-forwards will not be realized. 9. Capital Stock Treasury Stock The Company accounts for treasury stock under the cost method. During the three month period ended May 1, 2021, the Company acquired 41,768 shares of common stock from employees for approximately $ 13.1 million to satisfy their minimum statutory tax withholdings related to the vesting of restricted stock and restricted stock unit 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 Program On August 14, 2019, the Company’s Board of Directors authorized the repurchase of up to $ 400 million of common stock, which is authorized to be executed through August 2021 . This repurchase program is funded using the Company’s available cash and borrowings under the ABL Line of Credit. As part of the Company’s cash management efforts during the COVID-19 pandemic, the Company suspended its share repurchase program in March 2020. As of May 1, 2021, the Company had $ 348.4 million remaining under its share repurchase authorization. 10. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method for the Company’s 16 stock option, restricted stock and restricted stock unit awards, and the if-converted method for the Convertible Notes . The following table presents the computation of basic and diluted net income (loss) per share: (in thousands, except per share data) Three Months Ended May 1, May 2, 2021 2020 Basic net income (loss) per share Net income (loss) $ 171,030 $ ( 333,728 ) Weighted average number of common shares – basic 66,397 65,572 Net income (loss) per common share – basic $ 2.58 $ ( 5.09 ) Diluted net income (loss) per share Net income (loss) $ 171,030 $ ( 333,728 ) Shares for basic and diluted net income (loss) per share: Weighted average number of common shares – basic 66,397 65,572 Assumed exercise of stock options and vesting of restricted stock 761 — Assumed conversion of convertible debt 874 — Weighted average number of common shares – diluted 68,032 65,572 Net income (loss) per common share – diluted $ 2.51 $ ( 5.09 ) Approximately 5,000 shares of the Company’s stock-based compensation grants were excluded from diluted net income per share for the three month period ended May 1, 2021, since their effect was anti-dilutive. All of the Company’s stock option, restricted stock and restricted stock unit awards have an anti-dilutive effect while in a net loss position. Approximately 2,025,000 shares related to the Company’s stock option, restricted stock and restricted stock unit awards were excluded from diluted net loss per share for the three month period ended May 2, 2020, since their effect was anti-dilutive. 11. Stock-Based Compensation As of May 1, 2021, there were 2,485,161 shares of common stock available for issuance under the Company’s 2013 Omnibus Incentive Plan. Non-cash stock compensation expense is as follows: (in thousands) Three Months Ended May 1, May 2, Type of Non-Cash Stock Compensation 2021 2020 Restricted stock and restricted stock unit grants (a) $ 6,256 $ 6,899 Stock option grants (a) 4,394 6,332 Performance stock unit grants (a) 2,229 4,121 Total (b) $ 12,879 $ 17,352 (a) Included in the line item “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income (Loss). (b) The amounts presented in the table above exclude taxes. For the three month period ended May 1, 2021, the tax benefit related to the Company’s non-cash stock compensation was approximately $ 2.4 million. For the three month period ended May 2, 2020, the tax benefit related to the Company’s non-cash stock compensation was approximately $ 3.8 million. 17 Stock Options Stock option transactions during the three month period ended May 1, 2021 are summarized as follows: Number of Shares Weighted Average Exercise Price Per Share Options outstanding, January 30, 2021 1,346,775 $ 133.86 Options granted 1,613 287.34 Options exercised (a) ( 181,683 ) 88.56 Options forfeited ( 5,960 ) 155.14 Options outstanding, May 1, 2021 1,160,745 $ 141.05 (a) Options exercised during the three month period ended May 1, 2021 had a total intrinsic value of $ 39.9 million. The following table summarizes information about the stock options vested and expected to vest during the contractual term of such options as of May 1, 2021: Options Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Aggregate Intrinsic Value (in millions) Options vested and expected to vest 1,160,745 6.5 $ 141.05 $ 215.1 Options exercisable 626,102 5.4 $ 127.75 $ 124.3 The fair value of each stock option granted during the three month period ended May 1, 2021 was estimated using the Black Scholes option pricing model using the following assumptions: Three Months Ended May 1, 2021 Risk-free interest rate 0.45 % Expected volatility 35 % Expected life (years) 6.25 Contractual life (years) 10.0 Expected dividend yield 0.0 % Weighted average grant date fair value of options issued $ 101.03 The expected dividend yield was based on the Company’s expectation of not paying dividends in the near term. Since the Company completed its initial public offering in October 2013, it does not have sufficient history as a publicly traded company to evaluate its volatility factor. As such, the expected stock price volatility is based upon the historical volatility of the stock price over the expected life of the options of peer companies that are publicly traded. The risk free interest rate was based on the U.S. Treasury rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the awards being valued. For grants issued during the three month period ended May 1, 2021, the expected life of the options was calculated using the simplified method. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. This methodology was utilized due to the relatively short length of time the Company’s common stock has been publicly traded. 18 Restricted Stock Prior to May 1, 2019, the Company granted shares of restricted stock. Grants made on and after May 1, 2019 are in the form of restricted stock units. Restricted stock transactions during the three month period ended May 1, 2021 are summarized as follows: Number of Shares Weighted Average Grant Date Fair Value Per Award Non-vested awards outstanding, January 30, 2021 396,555 $ 168.87 Awards granted 570 287.34 Awards vested (a) ( 119,147 ) 142.38 Awards forfeited ( 2,533 ) 155.15 Non-vested awards outstanding, May 1, 2021 275,445 180.70 (a) Restricted stock awards vested during the three month period ended May 1, 2021 had a total intrinsic value of $ 37.5 million. The fair value of each share of restricted stock granted during Fiscal 2021 was based upon the closing price of the Company’s common stock on the grant date . Performance Stock Units The Company grants performance-based restricted stock units to its senior executives. Vesting of these performance stock units is based on pre-established EBIT margin expansion and sales compounded annual growth rate (CAGR) goals (each weighted equally) over a three-year performance period. Based on the Company’s achievement of these goals, each award may range from 50 % (at threshold performance) to no more than 200 % of the target award. In the event that actual performance is below threshold, no award will be made. In addition to the performance conditions, each performance stock unit cliff vests at the end of a three-year service period. Compensation costs recognized on the performance stock units are adjusted, as applicable, for performance above or below the target specified in the award. Performance stock unit transactions during the three month period ended May 1, 2021 are summarized as follows: Number of Shares Weighted Average Grant Date Fair Value Per Award Non-vested units outstanding, January 30, 2021 148,668 $ 176.70 Units granted — — Awards forfeited — — Non-vested units outstanding, May 1, 2021 148,668 176.70 12. Commitments and Contingencies Legal Like many retailers, the Company has been named in potential class or collective actions on behalf of groups alleging violations of federal and state wage and hour and other labor statutes, and alleged violations of state consumer and/or privacy protection and other statutes. In the normal course of business, the Company is also party to representative claims under the California Private Attorneys’ General Act and various other lawsuits and regulatory proceedings including, among others, commercial, product, product safety, employee, customer, intellectual property and other claims. Actions against us are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties. While no assurance can be given as to the ultimate outcome of these matters, the Company believes that the final resolution of these actions will not have a material adverse effect on the Company’s results of operations, financial position, liquidity or capital resources. Letters of Credit The Company had letters of credit arrangements with various banks in the aggregate amount of $ 50.6 million, $ 54.9 million and $ 49.1 million as of May 1, 2021, January 30, 2021 and May 2, 2020, respectively. Among these arrangements, as of May 1, 2021, 19 January 30, 2021 and May 2, 2020 , the Company had letters of credit outstanding in the amount of $ 46.8 million, $ 46.8 million and $ 47.2 million, respectively, guaranteeing performance under various insurance contracts and utility agreements. In addition, the Company had outstand ing letters of credit arrangements in the amounts of $ 3.8 million, $ 8.2 million and $ 1.9 million at May 1, 2021 , January 30, 2021 and May 2, 2020 , respectively, related to certain merchandising agreements. Based on the terms of the agreement governing the ABL Line of Credit, the Company had the ability to enter into letters of credit up to $ 549.5 million, $ 476.8 million and $ 150.9 million as of May 1, 2021 , January 30, 2021 and May 2, 2020 , respectively. Purchase Commitments The Company had $ 1,576.6 million of purchase commitments related to goods that were not received as of May 1, 2021. Death Benefits In November 2005, the Company entered into agreements with three of the Company’s former executives whereby upon each of their deaths the Company will pay $ 1.0 million to each respective designated beneficiary. 13. Related Parties The brother-in-law of one of the Company’s Executive Vice Presidents is an independent sales representative of one of the Company’s suppliers of merchandise inventory. This relationship predated the commencement of the Executive Vice President’s employment with the Company. The Company has determined that the dollar amount of purchases through such supplier represents an insignificant amount of its inventory purchases. 20 BURLINGTON STORES, INC.