DDS-11.01.2014-10Q
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 1, 2014
 
or
 
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     .
 
Commission File Number:  1-6140

DILLARD’S, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
71-0388071
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
 
1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS  72201
(Address of principal executive offices)
(Zip Code)
 
(501) 376-5200
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
x Yes  o No
 
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 ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
o Yes  x No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
CLASS A COMMON STOCK as of November 29, 2014     37,164,904
CLASS B COMMON STOCK as of November 29, 2014        4,010,929

 
 
 
 
 



Table of Contents

Index
 
DILLARD’S, INC.
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
DILLARD’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
 
 
November 1,
2014
 
February 1,
2014
 
November 2,
2013
Assets
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
91,901

 
$
237,134

 
$
110,972

Restricted cash
 
9,930

 

 

Accounts receivable
 
41,661

 
30,840

 
31,710

Merchandise inventories
 
1,832,297

 
1,345,321

 
1,829,198

Other current assets
 
64,920

 
46,861

 
65,664

 
 
 
 
 
 
 
Total current assets
 
2,040,709

 
1,660,156

 
2,037,544

 
 
 
 
 
 
 
Property and equipment (net of accumulated depreciation and amortization of $2,437,364, $2,260,675 and $2,353,194)
 
2,064,303

 
2,134,200

 
2,164,545

Other assets
 
252,056

 
256,383

 
257,826

 
 
 
 
 
 
 
Total assets
 
$
4,357,068

 
$
4,050,739

 
$
4,459,915

 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Trade accounts payable and accrued expenses
 
$
1,025,968

 
$
640,336

 
$
1,035,827

Current portion of capital lease obligations
 
828

 
784

 
770

Other short-term borrowings
 
63,000

 

 
170,000

Federal and state income taxes including current deferred taxes
 
124,332

 
137,191

 
91,848

 
 
 
 
 
 
 
Total current liabilities
 
1,214,128

 
778,311

 
1,298,445

 
 
 
 
 
 
 
Long-term debt
 
614,785

 
614,785

 
614,785

Capital lease obligations
 
6,136

 
6,759

 
6,957

Other liabilities
 
233,213

 
228,439

 
230,858

Deferred income taxes
 
191,256

 
230,248

 
236,300

Subordinated debentures
 
200,000

 
200,000

 
200,000

Commitments and contingencies
 


 


 


Stockholders’ equity:
 
 

 
 

 
 

Common stock
 
1,237

 
1,237

 
1,237

Additional paid-in capital
 
936,106

 
935,208

 
933,264

Accumulated other comprehensive loss
 
(22,842
)
 
(24,074
)
 
(25,305
)
Retained earnings
 
3,606,871

 
3,413,240

 
3,296,788

Less treasury stock, at cost
 
(2,623,822
)
 
(2,333,414
)
 
(2,333,414
)
 
 
 
 
 
 
 
Total stockholders’ equity
 
1,897,550

 
1,992,197

 
1,872,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
4,357,068

 
$
4,050,739

 
$
4,459,915

 
See notes to condensed consolidated financial statements.


3

Table of Contents

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except Per Share Data)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Net sales
 
$
1,459,781

 
$
1,468,612

 
$
4,485,579

 
$
4,497,600

Service charges and other income
 
39,363

 
38,313

 
114,994

 
115,502

 
 
 
 
 
 
 
 
 
 
 
1,499,144

 
1,506,925

 
4,600,573

 
4,613,102

 
 
 
 
 
 
 
 
 
Cost of sales
 
924,443

 
937,407

 
2,839,936

 
2,852,014

Selling, general and administrative expenses
 
412,259

 
404,406

 
1,206,369

 
1,192,820

Depreciation and amortization
 
62,714

 
64,942

 
186,731

 
194,302

Rentals
 
5,780

 
5,946

 
17,455

 
17,049

Interest and debt expense, net
 
14,598

 
15,789

 
45,642

 
48,345

Gain on disposal of assets
 
(5,923
)
 
(2
)
 
(6,362
)
 
(12,371
)
Asset impairment and store closing charges
 

 

 

 
6,527

 
 


 
 
 
 
 
 
Income before income taxes and income on and equity in earnings of joint ventures
 
85,273

 
78,437

 
310,802

 
314,416

Income taxes
 
30,110

 
27,570

 
109,960

 
110,665

Income on and equity in earnings of joint ventures
 
68

 
1

 
521

 
818

 
 
 
 
 
 
 
 
 
Net income
 
55,231

 
50,868

 
201,363

 
204,569

 
 
 
 
 
 
 
 
 
Retained earnings at beginning of period
 
3,554,170

 
3,248,620

 
3,413,240

 
3,099,566

Cash dividends declared
 
(2,530
)
 
(2,700
)
 
(7,732
)
 
(7,347
)
 
 
 
 
 
 
 
 
 
Retained earnings at end of period
 
$
3,606,871

 
$
3,296,788

 
$
3,606,871

 
$
3,296,788

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic and diluted
 
$
1.30

 
$
1.13

 
$
4.67

 
$
4.43

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.06

 
$
0.06

 
$
0.18

 
$
0.16

 
See notes to condensed consolidated financial statements.

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Table of Contents

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Net income
 
$
55,231

 
$
50,868

 
$
201,363

 
$
204,569

Other comprehensive income:
 
 

 
 

 
 

 
 

Amortization of retirement plan and other retiree benefit adjustments (net of tax of $254, $297, $763 and $3,692)
 
411

 
480

 
1,232

 
5,970

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
55,642

 
$
51,348

 
$
202,595

 
$
210,539

 
See notes to condensed consolidated financial statements.


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Table of Contents

DILLARD’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 
 
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
Operating activities:
 
 

 
 

Net income
 
$
201,363

 
$
204,569

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

 
 

Depreciation and amortization of property and deferred financing costs
 
187,907

 
195,664

Gain on disposal of assets
 
(6,362
)
 
(12,371
)
Asset impairment and store closing charges
 

 
6,527

Changes in operating assets and liabilities:
 
 

 
 

Increase in accounts receivable
 
(10,821
)
 
(191
)
Increase in merchandise inventories
 
(486,976
)
 
(534,617
)
Increase in other current assets
 
(17,161
)
 
(23,075
)
Decrease in other assets
 
3,248

 
2,643

Increase in trade accounts payable and accrued expenses and other liabilities
 
390,555

 
372,994

Decrease in income taxes payable
 
(51,851
)
 
(39,141
)
 
 
 
 
 
Net cash provided by operating activities
 
209,902

 
173,002

 
 
 
 
 
Investing activities:
 
 

 
 

Purchases of property and equipment
 
(124,103
)
 
(65,295
)
Proceeds from disposal of assets
 
14,723

 
18,279

Increase in restricted cash
 
(9,930
)
 

 
 
 
 
 
Net cash used in investing activities
 
(119,310
)
 
(47,016
)
 
 
 
 
 
Financing activities:
 
 

 
 

Principal payments on long-term debt and capital lease obligations
 
(579
)
 
(1,507
)
Issuance cost of line of credit
 

 
(1,354
)
Increase in short-term borrowings
 
63,000

 
170,000

Cash dividends paid
 
(7,838
)
 
(4,647
)
Purchase of treasury stock
 
(290,408
)
 
(301,566
)
 
 
 
 
 
Net cash used in financing activities
 
(235,825
)
 
(139,074
)
 
 
 
 
 
Decrease in cash and cash equivalents
 
(145,233
)
 
(13,088
)
Cash and cash equivalents, beginning of period
 
237,134

 
124,060

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
91,901

 
$
110,972

 
 
 
 
 
Non-cash transactions:
 
 

 
 

Accrued capital expenditures
 
$
10,964

 
$
9,700

Stock awards
 
898

 
769

 
See notes to condensed consolidated financial statements.

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Table of Contents

DILLARD’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.         Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine months ended November 1, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015 due to the seasonal nature of the business.
 
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 filed with the SEC on March 27, 2014.

Restricted Cash - Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.
 
Note 2.  Business Segments
 
The Company operates in two reportable segments:  the operation of retail department stores (“retail operations”) and a general contracting construction company (“construction”).
 
For the Company’s retail operations, the Company determined its operating segments on a store by store basis.  Each store’s operating performance has been aggregated into one reportable segment.  The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics, class of consumer, nature of products and distribution methods. Revenues from external customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue. Across all stores, the Company operates one store format under the Dillard’s name where each store offers the same general mix of merchandise with similar categories and similar customers.  The Company believes that disaggregating its operating segments would not provide meaningful additional information.


7

Table of Contents

The following tables summarize certain segment information, including the reconciliation of those items to the Company’s consolidated operations: 
(in thousands of dollars)

Retail
Operations

Construction

Consolidated
Three Months Ended November 1, 2014:
 
 

 
 


 

Net sales from external customers
 
$
1,422,359

 
$
37,422


$
1,459,781

Gross profit
 
533,679

 
1,659


535,338

Depreciation and amortization
 
62,639

 
75


62,714

Interest and debt expense (income), net
 
14,606

 
(8
)

14,598

Income before income taxes and income on and equity in earnings of joint ventures
 
84,332

 
941


85,273

Income on and equity in earnings of joint ventures
 
27

 
41


68

Total assets
 
4,314,799

 
42,269


4,357,068

 
 
 
 
 
 
 
Three Months Ended November 2, 2013:
 
 
 
 



Net sales from external customers
 
$
1,437,492

 
$
31,120


$
1,468,612

Gross profit
 
529,453

 
1,752


531,205

Depreciation and amortization
 
64,878

 
64


64,942

Interest and debt expense (income), net
 
15,806

 
(17
)

15,789

Income before income taxes and income on and equity in earnings of joint ventures
 
78,040

 
397


78,437

Income on and equity in earnings of joint ventures
 
1

 


1

Total assets
 
4,420,445

 
39,470


4,459,915

 
 
 
 
 
 
 
Nine Months Ended November 1, 2014:
 
 
 
 



Net sales from external customers
 
$
4,422,686

 
$
62,893


$
4,485,579

Gross profit
 
1,642,370

 
3,273


1,645,643

Depreciation and amortization
 
186,507

 
224


186,731

Interest and debt expense (income), net
 
45,672

 
(30
)

45,642

Income (loss) before income taxes and income on and equity in earnings of joint ventures
 
311,320

 
(518
)

310,802

Income on and equity in earnings of joint ventures
 
480

 
41


521

Total assets
 
4,314,799

 
42,269


4,357,068

 
 
 
 
 
 
 
Nine Months Ended November 2, 2013:
 
 
 
 



Net sales from external customers
 
$
4,426,270

 
$
71,330


$
4,497,600

Gross profit
 
1,640,759

 
4,827


1,645,586

Depreciation and amortization
 
194,121

 
181


194,302

Interest and debt expense (income), net
 
48,398

 
(53
)

48,345

Income before income taxes and income on and equity in earnings of joint ventures
 
313,221

 
1,195


314,416

Income on and equity in earnings of joint ventures
 
818

 


818

Total assets
 
4,420,445

 
39,470


4,459,915

 
Intersegment construction revenues of $23.3 million and $67.1 million for the three and nine months ended November 1, 2014, respectively, and intersegment construction revenues of $9.2 million and $21.5 million for the three and nine months ended November 2, 2013, respectively, were eliminated during consolidation and have been excluded from net sales for the respective periods.
 


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Table of Contents

Note 3.  Stock-Based Compensation
 
The Company has various stock option plans that provide for the granting of options to purchase shares of Class A Common Stock to certain key employees of the Company.  Exercise and vesting terms for options granted under the plans are determined at each grant date.  No stock options were granted during the three and nine months ended November 1, 2014 and November 2, 2013, and no stock options were outstanding at November 1, 2014.

Note 4.  Asset Impairment and Store Closing Charges
 
There were no asset impairment and store closing charges recorded during the three or nine months ended November 1, 2014 or the three months ended November 2, 2013. During the nine months ended November 2, 2013, the Company recorded a pretax charge of $6.5 million for asset impairment and store closing costs.  The charge was for the write-down of an operating property and certain cost method investments. 
 
Note 5. Earnings Per Share Data
 
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data). 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Net income
 
$
55,231

 
$
50,868

 
$
201,363

 
$
204,569

 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
42,369

 
45,155

 
43,079

 
46,139

 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share
 
$
1.30

 
$
1.13

 
$
4.67

 
$
4.43

 
The Company maintains a capital structure in which common stock is the only security issued and outstanding, and there were no shares of preferred stock, stock options, other dilutive securities or potentially dilutive securities issued or outstanding during the three or nine months ended November 1, 2014 and November 2, 2013.
 
Note 6.  Commitments and Contingencies
 
Various legal proceedings, in the form of lawsuits and claims, which occur in the normal course of business, are pending against the Company and its subsidiaries.  In the opinion of management, disposition of these matters is not expected to have a material adverse effect on the Company’s financial position, cash flows or results of operations.
 
At November 1, 2014, letters of credit totaling $33.0 million were issued under the Company’s revolving credit facility.

Note 7.  Benefit Plans
 
The Company has an unfunded, nonqualified defined benefit plan (“Pension Plan”) for its officers.  The Pension Plan is noncontributory and provides benefits based on years of service and compensation during employment.  Pension expense is determined using various actuarial cost methods to estimate the total benefits ultimately payable to officers and allocates this cost to service periods.  The actuarial assumptions used to calculate pension costs are reviewed annually.  The Company made contributions to the Pension Plan of $0.7 million and $2.1 million during the three and nine months ended November 1, 2014, respectively.  The Company expects to make contributions to the Pension Plan of approximately $0.7 million during the remainder of fiscal 2014.
 

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Table of Contents

The components of net periodic benefit costs are as follows (in thousands): 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Components of net periodic benefit costs:
 
 

 
 

 
 

 
 

Service cost
 
$
1,099

 
$
1,059

 
$
3,297

 
$
3,178

Interest cost
 
1,911

 
1,696

 
5,733

 
5,086

Net actuarial loss
 
665

 
753

 
1,995

 
2,259

Amortization of prior service cost
 

 
24

 

 
72

Plan curtailment gain
 

 

 

 
(1,480
)
Net periodic benefit costs
 
$
3,675

 
$
3,532

 
$
11,025

 
$
9,115

 
Net periodic benefit costs are included in selling, general and administrative expenses.
 
Note 8.  Revolving Credit Agreement
 
At November 1, 2014, the Company maintained a $1.0 billion revolving credit facility (“credit agreement”) with J. P. Morgan Securities LLC (“JPMorgan”) and Wells Fargo Capital Finance, LLC as the lead agents for various banks, secured by the inventory of certain Dillard’s, Inc. operating subsidiaries.  The credit agreement expires July 1, 2018.
 
Borrowings under the credit agreement accrue interest at either JPMorgan’s Base Rate or LIBOR plus 1.5% (1.66% at November 1, 2014) subject to certain availability thresholds as defined in the credit agreement.
 
Limited to 90% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $1.0 billion at November 1, 2014.  Borrowings of $63.0 million were outstanding at November 1, 2014, and letters of credit totaling $33.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $904 million at November 1, 2014.  There are no financial covenant requirements under the credit agreement provided availability exceeds $100 million.  The Company pays an annual commitment fee to the banks of 0.25% of the committed amount less outstanding borrowings and letters of credit.
 
Note 9.  Stock Repurchase Programs
 
All repurchases of the Company’s Class A Common Stock below were made at the market price at the trade date.  Accordingly, all amounts paid to reacquire these shares were allocated to Treasury Stock.
 
November 2013 Stock Plan
 
In November 2013, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended stock plan (“November 2013 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 (“Exchange Act”) or through privately negotiated transactions.  The November 2013 Stock Plan has no expiration date. During the three and nine months ended November 1, 2014, the Company repurchased 2.0 million shares and 2.3 million shares for $224.5 million and $250.0 million at an average price of $109.89 per share and $107.44 per share, respectively. At November 1, 2014, no authorization remained under the November 2013 Stock Plan.

March 2013 Stock Plan
 
In March 2013, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended stock plan (“March 2013 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions. During the nine months ended November 1, 2014, the Company repurchased 0.5 million shares for $40.4 million at an average price of $89.04 per share. During the three and nine months ended November 2, 2013, the Company repurchased 2.4 million shares and 2.7 million shares for $186.9 million and $209.6 million at an average price of $77.80 per share and $77.93 per share, respectively. At November 1, 2014, no authorization remained under the March 2013 Stock Plan.

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Table of Contents

2012 Stock Plan
 
In February 2012, the Company’s Board of Directors authorized the Company to repurchase up to $250 million of the Company’s Class A Common Stock under an open-ended stock plan (“2012 Stock Plan”).  This authorization permitted the Company to repurchase its Class A Common Stock in the open market, pursuant to preset trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act or through privately negotiated transactions.  During the nine months ended November 2, 2013, the Company repurchased 1.2 million shares for $92.0 million at an average price of $79.14 per share, which completed the authorization under the 2012 Stock Plan.
 
Note 10.  Income Taxes
 
During the three months ended November 1, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.  During the three months ended November 2, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.

During the nine months ended November 1, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes.  During the nine months ended November 2, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.

Note 11. Reclassifications from Accumulated Other Comprehensive Loss (“AOCL”)
 
Reclassifications from AOCL are summarized as follows (in thousands): 
 
 
Amount Reclassified from AOCL
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
Affected Line Item in the Statement Where Net Income Is Presented
Details about AOCL Components
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
 
Defined benefit pension plan items
 
 

 
 

 
 

 
 

 
 
Amortization of prior service cost
 
$

 
$
24

 
$

 
$
72

 
(1)
Amortization of actuarial losses
 
665

 
753

 
1,995

 
2,259

 
(1)
Plan curtailment gain
 

 

 

 
7,331

 
(2)
 
 
665

 
777

 
1,995

 
9,662

 
Total before tax
 
 
254

 
297

 
763

 
3,692

 
Income tax expense
 
 
$
411

 
$
480

 
$
1,232

 
$
5,970

 
Total net of tax
_______________________________
(1)        These items are included in the computation of net periodic pension cost.  See Note 7, Benefit Plans, for additional information.
(2)        The excess of the pension liability for the curtailed plan over the amount shown here is included in the computation of net periodic pension cost.  See Note 7, Benefit Plans, for additional information.
 


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Note 12. Changes in Accumulated Other Comprehensive Loss
 
Changes in AOCL by component (net of tax) are summarized as follows (in thousands): 
 
 
Defined Benefit Pension Plan Items
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Beginning balance
 
$
23,253

 
$
25,785

 
$
24,074

 
$
31,275

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 

 

 

Amounts reclassified from AOCL
 
(411
)
 
(480
)
 
(1,232
)
 
(5,970
)
Net other comprehensive income
 
(411
)
 
(480
)
 
(1,232
)
 
(5,970
)
 
 
 
 
 
 
 
 
 
Ending balance
 
$
22,842

 
$
25,305

 
$
22,842

 
$
25,305

 
Note 13.  Gain on Disposal of Assets
 
During the three months ended November 1, 2014, the Company received proceeds of $9.9 million from the sale of a store location, resulting in a gain of $5.9 million that was recorded in gain on disposal of assets.

During the nine months ended November 2, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas.  The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.
 
During the nine months ended November 2, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.

Note 14.  Fair Value Disclosures
 
The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange.
 
The fair value of the Company’s long-term debt and subordinated debentures is based on market prices or dealer quotes.
 
The fair value of the Company’s cash and cash equivalents, restricted cash, accounts receivable and other short-term borrowings approximates their carrying values at November 1, 2014 due to the short-term maturities of these instruments.  The fair value of the Company’s long-term debt at November 1, 2014 was approximately $684 million.  The carrying value of the Company’s long-term debt at November 1, 2014 was $615 million.  The fair value of the Company’s subordinated debentures at November 1, 2014 was approximately $207 million.  The carrying value of the Company’s subordinated debentures at November 1, 2014 was $200 million.
 
During the nine months ended November 2, 2013, the Company recognized an impairment charge of $5.4 million on certain cost method investments.  The Company evaluated all factors and determined that an other-than-temporary impairment charge was necessary.  These investments are recorded in other assets on the balance sheet.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
The Financial Accounting Standards Board's ("FASB") accounting guidance utilizes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels:
 
Level 1:  Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities
 

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Level 2:  Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
 
Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions
 
 
 
 
 
Basis of Fair Value Measurements
 
 
Fair Value
of Assets
 
Quoted Prices In Active
Markets for
Identical Items
 
Significant Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(in thousands)
 
(Liabilities)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Long-lived assets held for use
 
 
 
 
 
 
 
 
As of November 2, 2013
 
$
3,000

 
$

 
$
3,000

 
$

 
Long-lived assets held for use
 
During the nine months ended November 2, 2013, a long-lived asset group held for use was written down to its fair value of $3.0 million, resulting in an impairment charge of $1.2 million, which was charged against earnings during the period.  The inputs used to calculate the fair value of these long-lived assets held for use were based upon an offer to purchase the property.

Note 15.  Recently Issued Accounting Standards
 
Presentation of Discontinued Operations
 
In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which stipulates that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also removed the conditions that (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company adopted this guidance as of the beginning of its fiscal year 2014. The adoption of this guidance had no impact on the Company's condensed consolidated financial statements.

Revenue from Contracts with Customers
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will be effective for the Company retrospectively beginning in the first quarter of fiscal 2017 with early adoption not permitted. The Company is currently assessing the impact of this update on its condensed consolidated financial statements.

Presentation of Financial Statements - Going Concern
 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures.  This ASU is effective for annual periods ending after December 15, 2016 and interim periods thereafter.  Early application is permitted.  The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the condensed consolidated financial statements and the footnotes thereto included elsewhere in this report, as well as the financial and other information included in our Annual Report on Form 10-K for the year ended February 1, 2014.
 
EXECUTIVE OVERVIEW

During the quarter ended November 1, 2014, comparable store sales declined 1% over last year's third quarter. Weaker sales contributed to a 70 basis points of sales increase in our selling general, and administrative expenses. Gross margin from retail operations improved 69 basis points of sales as we increased markups and took fewer markdowns. Net income increased to $55.2 million for the current year third quarter from $50.9 million for the prior year third quarter. This improvement in net earnings combined with the completion of our remaining $224.5 million of share repurchase authorization during the quarter helped raise our earnings per share to $1.30 per share from $1.13 per share, a 15% increase over last year's third quarter.

Included in net income for the quarter ended November 1, 2014 is a pretax gain of $5.9 million ($3.8 million after tax or $0.09 per share) related to the sale of a retail store location.

As of November 1, 2014, we had working capital of $826.6 million, cash and cash equivalents of $91.9 million and $877.8 million of total debt outstanding, excluding capital lease obligations.  Cash flows from operating activities were $209.9 million for the nine months ended November 1, 2014, increasing 21% over the prior year comparable period.  We operated 298 total stores, including 18 clearance centers, and one internet store as of November 1, 2014, a decrease of one store from November 2, 2013.
 
Key Performance Indicators
 
We use a number of key indicators of financial condition and operating performance to evaluate our business, including the following: 
 
 
Three Months Ended
 
 
November 1,
2014
 
November 2,
2013
Net sales (in millions)
 
$
1,459.8

 
$
1,468.6

Retail stores sales trend
 
(1
)%
 
1
%
Comparable retail stores sales trend
 
(1
)%
 
1
%
Gross profit (in millions)
 
$
535.3

 
$
531.2

Gross profit as a percentage of net sales
 
36.7
 %
 
36.2
%
Retail gross profit as a percentage of net sales
 
37.5
 %
 
36.8
%
Selling, general and administrative expenses as a percentage of net sales
 
28.2
 %
 
27.5
%
Cash flow from operations (in millions)*
 
$
209.9

 
$
173.0

Total retail store count at end of period
 
298

 
299

Retail sales per square foot
 
$
28

 
$
29

Comparable retail store inventory trend
 
0
 %
 
6
%
Retail merchandise inventory turnover
 
2.3

 
2.4

 
_____________________
*Cash flow from operations data is for the nine months ended November 1, 2014 and November 2, 2013.

General
 
Net sales.  Net sales include merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of CDI Contractors, LLC (“CDI”), the Company’s general contracting construction company.  Comparable store sales include sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior year.  Comparable store sales exclude the change in the allowance for sales returns.  Non-comparable store sales include:  sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores; sales from new stores opened during the current fiscal year; sales in the previous fiscal year for stores

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closed during the current or previous fiscal year that are no longer considered comparable stores; sales in clearance centers; and changes in the allowance for sales returns.
 
Service charges and other income.  Service charges and other income includes income generated through the long-term marketing and servicing alliance (“Alliance”) with Synchrony Financial ("Synchrony"; formerly GE Consumer Finance), which owned and managed the Dillard’s branded proprietary cards.  Other income includes rental income, shipping and handling fees, gift card breakage and lease income on leased departments.
 
Cost of sales.  Cost of sales includes the cost of merchandise sold (net of purchase discounts and non-specific margin maintenance allowances), bankcard fees, freight to the distribution centers, employee and promotional discounts, and direct payroll for salon personnel.  Cost of sales also includes CDI contract costs, which comprise all direct material and labor costs, subcontract costs and those indirect costs related to contract performance, such as indirect labor, employee benefits and insurance program costs.
 
Selling, general and administrative expenses.  Selling, general and administrative expenses include buying, occupancy, selling, distribution, warehousing, store and corporate expenses (including payroll and employee benefits), insurance, employment taxes, advertising, management information systems, legal and other corporate level expenses.  Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
 
Depreciation and amortization.  Depreciation and amortization expenses include depreciation and amortization on property and equipment.
 
Rentals.  Rentals include expenses for store leases, including contingent rent, and data processing and other equipment rentals.
 
Interest and debt expense, net.  Interest and debt expense includes interest, net of interest income and capitalized interest, relating to the Company’s unsecured notes, subordinated debentures and borrowings under the Company’s credit facility.  Interest and debt expense also includes gains and losses on note repurchases, if any, amortization of financing costs and interest on capital lease obligations.
 
Gain on disposal of assets.  Gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment and the gain on the sale of an investment.
 
Asset impairment and store closing charges.  Asset impairment and store closing charges consist of (a) write-downs to fair value of under-performing or held for sale properties and of cost method investments and (b) exit costs associated with the closure of certain stores, when applicable.  Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.
 
Income on and equity in earnings of joint ventures.  Income on and equity in earnings of joint ventures includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures.
 
Seasonality and Inflation
 
Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year due to the holiday season.  Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We do not believe that inflation has had a material effect on our results during the periods presented; however, our business could be affected by such in the future.
 


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RESULTS OF OPERATIONS
 
The following table sets forth the results of operations as a percentage of net sales for the periods indicated (percentages may not foot due to rounding): 
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Service charges and other income
 
2.7

 
2.6

 
2.6

 
2.6

 
 
 
 
 
 
 
 
 
 
 
102.7

 
102.6

 
102.6

 
102.6

 
 
 
 
 
 
 
 
 
Cost of sales
 
63.3

 
63.8

 
63.3

 
63.4

Selling, general and administrative expenses
 
28.2

 
27.5

 
26.9

 
26.5

Depreciation and amortization
 
4.3

 
4.4

 
4.2

 
4.3

Rentals
 
0.4

 
0.4

 
0.4

 
0.4

Interest and debt expense, net
 
1.0

 
1.1

 
1.0

 
1.1

Gain on disposal of assets
 
(0.4
)
 

 
(0.1
)
 
(0.3
)
Asset impairment and store closing charges
 

 

 

 
0.1

 
 
 
 
 
 
 
 
 
Income before income taxes and income on and equity in earnings of joint ventures
 
5.8

 
5.3

 
6.9

 
7.0

Income taxes
 
2.1

 
1.9

 
2.5

 
2.5

Income on and equity in earnings of joint ventures
 

 

 

 

 
 
 
 
 
 
 
 
 
Net income
 
3.8
 %
 
3.5
 %
 
4.5
 %
 
4.5
 %


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Table of Contents

Net Sales (Three-Month Comparison)
 
 
 
Three Months Ended
 
 
(in thousands of dollars)
 
November 1,
2014
 
November 2,
2013
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
1,422,359

 
$
1,437,492

 
$
(15,133
)
Construction segment
 
37,422

 
31,120

 
6,302

Total net sales
 
$
1,459,781

 
$
1,468,612

 
$
(8,831
)
 
The percent change in the Company’s sales by segment and product category for the three months ended November 1, 2014 compared to the three months ended November 2, 2013 as well as the sales percentage by segment and product category to total net sales for the three months ended November 1, 2014 are as follows: 
 
 
% Change
2014-2013
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
0.1
 %
 
15
%
Ladies’ apparel
 
(0.1
)
 
22

Ladies’ accessories and lingerie
 
(1.0
)
 
14

Juniors’ and children’s apparel
 
2.1

 
9

Men’s apparel and accessories
 
1.0

 
17

Shoes
 
(4.3
)
 
16

Home and furniture
 
(12.1
)
 
4

 
 
 

 
97

Construction segment
 
20.3

 
3

Total
 
 

 
100
%
 
Net sales from the retail operations segment decreased $15.1 million during the three months ended November 1, 2014 compared to the three months ended November 2, 2013, declining 1% in both total and comparable stores.  Sales of juniors’ and children’s apparel increased moderately over the prior year period, and sales of men’s apparel and accessories increased slightly.  Sales of ladies' apparel and cosmetics remained essentially flat between the periods. Sales of ladies’ accessories and lingerie decreased slightly compared to the prior year period, sales of shoes decreased moderately and sales of home and furniture decreased significantly.
 
The number of sales transactions decreased 5% for the three months ended November 1, 2014 compared to the three months ended November 2, 2013 while the average dollars per sales transaction increased 4%.  We recorded an allowance for sales returns of $5.8 million and $6.6 million as of November 1, 2014 and November 2, 2013, respectively.
 
During the three months ended November 1, 2014, net sales from the construction segment increased $6.3 million or 20% compared to the three months ended November 2, 2013 due to an increase in construction projects.  The backlog of awarded construction contracts at November 1, 2014 totaled $318.3 million, increasing approximately 62% from February 1, 2014 and approximately 101% from November 2, 2013.



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Table of Contents

Net Sales (Nine-Month Comparison)
 
 
 
Nine Months Ended
 
 
(in thousands of dollars)
 
November 1,
2014
 
November 2,
2013
 
$ Change
Net sales:
 
 

 
 

 
 

Retail operations segment
 
$
4,422,686

 
$
4,426,270

 
$
(3,584
)
Construction segment
 
62,893

 
71,330

 
(8,437
)
Total net sales
 
$
4,485,579

 
$
4,497,600

 
$
(12,021
)
 
The percent change in the Company’s sales by segment and product category for the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013 as well as the sales percentage by segment and product category to total net sales for the nine months ended November 1, 2014 are as follows: 
 
 
% Change
2014-2013
 
% of
Net Sales
Retail operations segment
 
 

 
 

Cosmetics
 
(0.7
)%
 
15
%
Ladies’ apparel
 
0.4

 
24

Ladies’ accessories and lingerie
 
0.3

 
15

Juniors’ and children’s apparel
 
3.0

 
9

Men’s apparel and accessories
 
1.8

 
17

Shoes
 
(2.0
)
 
15

Home and furniture
 
(8.8
)
 
4

 
 
 

 
99

Construction segment
 
(11.8
)
 
1

Total
 
 

 
100
%
 
Net sales from the retail operations segment decreased $3.6 million during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013, remaining essentially flat in total stores and increasing 1% in comparable stores.  Sales of juniors’ and children’s apparel and men’s apparel and accessories increased moderately over the prior year period while sales of ladies' apparel and ladies’ accessories and lingerie remained essentially flat. Sales of cosmetics decreased slightly compared to the prior year period, sales of shoes decreased moderately and sales of home and furniture decreased significantly.
 
The number of sales transactions decreased 3% for the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013 while the average dollars per sales transaction increased 3%. 

During the nine months ended November 1, 2014, net sales from the construction segment decreased $8.4 million or 12% compared to the nine months ended November 2, 2013 due to a delay in the timing of certain construction projects during the first half of the year. 


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Table of Contents

Service Charges and Other Income
 
 
 
Three Months Ended
 
Nine Months Ended
 
Three
 Months
 
Nine
 Months
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
 
$ Change
2014-2013
 
$ Change
2014-2013
Service charges and other income:
 
 

 
 

 
 

 
 

 
 

 
 

Retail operations segment
 
 

 
 

 
 

 
 

 
 

 
 

Leased department income
 
$
2,018

 
$
1,990

 
$
6,068

 
$
6,394

 
$
28

 
$
(326
)
Income from Synchrony marketing and servicing alliance
 
29,431

 
29,281

 
85,178

 
84,317

 
150

 
861

Shipping and handling income
 
4,874

 
4,262

 
14,931

 
13,720

 
612

 
1,211

Other
 
2,690

 
2,766

 
8,443

 
11,045

 
(76
)
 
(2,602
)
 
 
39,013

 
38,299

 
114,620

 
115,476

 
714

 
(856
)
Construction segment
 
350

 
14

 
374

 
26

 
336

 
348

Total service charges and other income
 
$
39,363

 
$
38,313

 
$
114,994

 
$
115,502

 
$
1,050

 
$
(508
)
 
Service charges and other income is composed primarily of income from the Alliance with Synchrony.  Income from the Alliance increased during the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013 primarily from increases in finance charge income partially offset by increased credit losses.
 

Gross Profit
 
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
$ Change
 
% Change
Gross profit:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
533,679

 
$
529,453

 
$
4,226

 
0.8
 %
Construction segment
 
1,659

 
1,752

 
(93
)
 
(5.3
)
Total gross profit
 
$
535,338

 
$
531,205

 
$
4,133

 
0.8
 %
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
1,642,370

 
$
1,640,759

 
$
1,611

 
0.1
 %
Construction segment
 
3,273

 
4,827

 
(1,554
)
 
(32.2
)
Total gross profit
 
$
1,645,643

 
$
1,645,586

 
$
57

 
 %
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Gross profit as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
37.5
%
 
36.8
%
 
37.1
%
 
37.1
%
Construction segment
 
4.4

 
5.6

 
5.2

 
6.8

Total gross profit as a percentage of net sales
 
36.7

 
36.2

 
36.7

 
36.6

 
Gross profit as a percentage of net sales improved 50 basis points of sales during the three months ended November 1, 2014 compared to the three months ended November 2, 2013. Gross profit from retail operations improved 69 basis points of sales during the same comparable periods primarily from increased markups combined with decreased markdowns.  Gross margin improved moderately in juniors’ and children’s apparel and shoes and improved slightly in men’s apparel and accessories and ladies' apparel. Gross margin was essentially flat in cosmetics. Gross margin declined slightly in ladies' accessories and lingerie and declined moderately in home and furniture.

Gross profit as a percentage of net sales improved 10 basis points of sales during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013. Gross profit from retail operations improved 7 basis points of sales

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during the same comparable periods primarily from increased markups partially offset by increased markdowns.  Gross margin improved moderately in juniors’ and children’s apparel and improved slightly in shoes and ladies' apparel. Gross margin remained essentially flat in cosmetics. Gross margin declined slightly in men’s apparel and accessories and ladies' accessories and lingerie and declined moderately in home and furniture.

Inventory in both total and comparable stores remained essentially flat as of November 1, 2014 compared to November 2, 2013.  A 1% change in the dollar amount of markdowns would have impacted net income by approximately $2 million and $6 million for the three and nine months ended November 1, 2014, respectively.

 
Selling, General and Administrative Expenses (“SG&A”)
 
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
$ Change
 
% Change
SG&A:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
411,272

 
$
403,101

 
$
8,171

 
2.0
 %
Construction segment
 
987

 
1,305

 
(318
)
 
(24.4
)
Total SG&A
 
$
412,259

 
$
404,406

 
$
7,853

 
1.9
 %
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
1,202,448

 
$
1,189,320

 
$
13,128

 
1.1
 %
Construction segment
 
3,921

 
3,500

 
421

 
12.0

Total SG&A
 
$
1,206,369

 
$
1,192,820

 
$
13,549

 
1.1
 %
 
 
Three Months Ended
 
Nine Months Ended
 
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
SG&A as a percentage of segment net sales:
 
 

 
 

 
 

 
 

Retail operations segment
 
28.9
%
 
28.0
%
 
27.2
%
 
26.9
%
Construction segment
 
2.6

 
4.2

 
6.2

 
4.9

Total SG&A as a percentage of net sales
 
28.2

 
27.5

 
26.9

 
26.5

 
SG&A increased $7.9 million or 70 basis points of sales during the three months ended November 1, 2014 compared to the three months ended November 2, 2013.  This increase was primarily due to an increase in payroll and payroll taxes ($8.8 million), primarily of selling payroll.

SG&A increased $13.5 million or 37 basis points of sales during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013.  This increase was primarily due to an increase in payroll and payroll taxes ($22.9 million) partially offset by a decrease in insurance expenses ($6.8 million) and advertising ($6.6 million). During the nine months ended November 2, 2013, the Company also recognized a $1.5 million pretax reduction of pension expense for a gain from a pension plan curtailment.



20

Table of Contents

Depreciation and Amortization
 
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
$ Change
 
% Change
Depreciation and amortization:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
62,639

 
$
64,878

 
$
(2,239
)
 
(3.5
)%
Construction segment
 
75

 
64

 
11

 
17.2

Total depreciation and amortization
 
$
62,714

 
$
64,942

 
$
(2,228
)
 
(3.4
)%
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
186,507

 
$
194,121

 
$
(7,614
)
 
(3.9
)%
Construction segment
 
224

 
181

 
43

 
23.8

Total depreciation and amortization
 
$
186,731

 
$
194,302

 
$
(7,571
)
 
(3.9
)%
 
The decrease in depreciation and amortization expense for the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013 was primarily due to the timing and composition of capital expenditures.
 
 
 
 
 
 
 
 
 

 Interest and Debt Expense, Net
 
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
$ Change
 
% Change
Interest and debt expense (income), net:
 
 

 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
14,606

 
$
15,806

 
$
(1,200
)
 
(7.6
)%
Construction segment
 
(8
)
 
(17
)
 
9

 
52.9

Total interest and debt expense, net
 
$
14,598

 
$
15,789

 
$
(1,191
)
 
(7.5
)%
 
 
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

 
 

Retail operations segment
 
$
45,672

 
$
48,398

 
$
(2,726
)
 
(5.6
)%
Construction segment
 
(30
)
 
(53
)
 
23

 
43.4

Total interest and debt expense, net
 
$
45,642

 
$
48,345

 
$
(2,703
)
 
(5.6
)%
 
The decrease in net interest and debt expense for the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013 was primarily attributable to a reduction in credit facility fees and an increase in capitalized interest.  Total weighted average debt decreased approximately $27.6 million and $24.6 million during the three and nine months ended November 1, 2014 compared to the three and nine months ended November 2, 2013, respectively.


 

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Table of Contents

Gain on Disposal of Assets
 
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
$ Change
(Gain) loss on disposal of assets:
 
 

 
 

 
 

Three months ended
 
 

 
 

 
 

Retail operations segment
 
$
(5,923
)
 
$
(6
)
 
$
(5,917
)
Construction segment
 

 
4

 
(4
)
Total gain on disposal of assets
 
$
(5,923
)
 
$
(2
)
 
$
(5,921
)
 
 
 
 
 
 
 
Nine months ended
 
 

 
 

 
 

Retail operations segment
 
$
(6,362
)
 
$
(12,367
)
 
$
6,005

Construction segment
 

 
(4
)
 
4

Total gain on disposal of assets
 
$
(6,362
)
 
$
(12,371
)
 
$
6,009

 
During the three months ended November 1, 2014, the Company received proceeds of $9.9 million from the sale of a store location, resulting in a gain of $5.9 million that was recorded in gain on disposal of assets.

During the nine months ended November 2, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas.  The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.

During the nine months ended November 2, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.
  

Asset Impairment and Store Closing Charges
 
There were no asset impairment and store closing charges recorded during the three or nine months ended November 1, 2014 or the three months ended November 2, 2013. During the nine months ended November 2, 2013, the Company's retail operations segment recorded a pretax charge of $6.5 million for asset impairment and store closing costs.  The charge was for the write-down of an operating property and certain cost method investments.


Income Taxes
 
The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 35.3% and 35.1% for the three months ended November 1, 2014 and November 2, 2013, respectively.  During the three months ended November 1, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes. During the three months ended November 2, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.

The Company’s estimated federal and state effective income tax rate, inclusive of income on and equity in earnings of joint ventures, was approximately 35.3% and 35.1% for the nine months ended November 1, 2014 and November 2, 2013, respectively.  During the nine months ended November 1, 2014, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes. During the nine months ended November 1, 2014, the IRS concluded its examination of the Company's federal income tax returns for fiscal tax years 2011 and 2012, with no material changes in these tax years as a result of such examination. During the nine months ended November 2, 2013, income tax expense differed from what would be computed using the statutory federal tax rate primarily due to the effect of state and local income taxes partially offset by tax benefits recognized for federal tax credits.

The Company expects the fiscal 2014 federal and state effective income tax rate to approximate 35%.  This rate may change if results of operations for fiscal 2014 differ from management’s current expectations.  Changes in the Company’s assumptions

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and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income.

FINANCIAL CONDITION
 
A summary of net cash flows for the nine months ended November 1, 2014 and November 2, 2013 follows: 
 
 
Nine Months Ended
 
 
(in thousands of dollars)
 
November 1, 2014
 
November 2, 2013
 
$ Change
Operating Activities
 
$
209,902

 
$
173,002

 
$
36,900

Investing Activities
 
(119,310
)
 
(47,016
)
 
(72,294
)
Financing Activities
 
(235,825
)
 
(139,074
)
 
(96,751
)
Total Cash Used
 
$
(145,233
)
 
$
(13,088
)
 
$
(132,145
)
 
Net cash flows from operations increased $36.9 million during the nine months ended November 1, 2014 compared to the nine months ended November 2, 2013.  This improvement was primarily attributable to an increase of $48.4 million related to changes in working capital items, primarily of changes in inventories.
 
Synchrony owned and managed Dillard’s branded proprietary credit card business under the Alliance.  The Alliance provided for certain payments to be made by Synchrony to the Company, including a revenue sharing and marketing reimbursement.  The Company received income of approximately $85.2 million and $84.3 million from Synchrony during the nine months ended November 1, 2014 and November 2, 2013, respectively.  The amount the Company received was dependent on the level of sales on Synchrony accounts, the level of balances carried on the Synchrony accounts by Synchrony customers, payment rates on Synchrony accounts, finance charge rates and other fees on Synchrony accounts, the level of credit losses for the Synchrony accounts as well as Synchrony’s funding costs. The Alliance expired in November 2014.

In April 2014, the Company announced that it entered into a 10-year agreement with Wells Fargo Bank, N.A. ("Wells Fargo"), which took effect in November 2014 following the scheduled expiration of the Alliance. Under the new agreement, Wells Fargo funds, issues and services Dillard's-branded private label and co-branded credit cards and also manages the cardholder loyalty program for the Company. While future cash flows under this new agreement are difficult to predict, the Company expects income, exclusive of startup costs, from the new agreement to be comparable to the Company's historical earnings from the Alliance and believes that earnings will increase with future program growth. 
 
During the nine months ended November 1, 2014, the Company received proceeds of $9.9 million from the sale of a store location, resulting in a gain of $5.9 million that was recorded in gain on disposal of assets. The cash proceeds from this sale are being held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.

During the nine months ended November 2, 2013, the Company received proceeds of $15.7 million from the sale of its investment in Acumen Brands, an eCommerce company based in Fayetteville, Arkansas.  The sale resulted in a gain of $11.7 million that was recorded in gain on disposal of assets.
 
During the nine months ended November 2, 2013, the Company also received proceeds of $1.7 million from the sale of two former retail stores located in Oklahoma City, Oklahoma and Pasadena, Texas that were held for sale, resulting in a gain of $0.6 million that was recorded in gain on disposal of assets.
 
Capital expenditures were $124.1 million and $65.3 million for the nine months ended November 1, 2014 and November 2, 2013, respectively.  The current year expenditures were primarily for the construction of new stores and the remodeling of existing stores.  Capital expenditures for fiscal 2014 are expected to be approximately $155 million compared to actual expenditures of $95 million during fiscal 2013.  We opened two new locations during the third quarter of fiscal 2014: The Mall at University Town Center in Sarasota, Florida (180,000 square feet) and The Shops at Summerlin in Las Vegas, Nevada (200,000 square feet).
 
No stores were closed during the nine months ended November 1, 2014; however, we remain committed to closing under-performing stores where appropriate and may incur future closing costs related to these stores when they close.
 

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Table of Contents

The Company had cash on hand of $91.9 million as of November 1, 2014.  As part of our overall liquidity management strategy and for peak working capital requirements, the Company maintains a $1.0 billion credit facility.  The credit agreement expires July 1, 2018. Limited to 90% of the inventory of certain Company subsidiaries, availability for borrowings and letter of credit obligations under the credit agreement was $1.0 billion at November 1, 2014.  Borrowings of $63.0 million were outstanding at November 1, 2014, and letters of credit totaling $33.0 million were issued under this credit agreement leaving unutilized availability under the facility of approximately $904 million at November 1, 2014
 
During the nine months ended November 1, 2014, the Company repurchased 2.8 million shares of stock for $290.4 million at an average price of $104.44 per share under the Company’s March 2013 and November 2013 Stock Plans.  During the