10-K 1 dltr-2015x01x31x10k.htm 10-K FOR FISCAL YEAR ENDED 01-31-15 DLTR-2015-01-31-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 2015
Commission File No.0-25464
DOLLAR TREE, INC.
(Exact name of registrant as specified in its charter)
Virginia
26-2018846
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
500 Volvo Parkway, Chesapeake, VA 23320
(Address of principal executive offices)
Registrant’s telephone number, including area code: (757) 321-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock (par value $.01 per share)
NASDAQ
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (X)
    No (  )
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes (  )
    No (X)
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X)
    No (  )
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X)
    No (  )




   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )
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 definition 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 (  )
Smaller reporting company (  )
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (  )
    No (X)
The aggregate market value of Common Stock held by non-affiliates of the Registrant on August 1, 2014, was $10,784,848,842, based on a $54.61 average of the high and low sales prices for the Common Stock on such date.  For purposes of this computation, all executive officers and directors have been deemed to be affiliates.  Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the Registrant.
On March 4, 2015, there were 205,759,864 shares of the Registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information regarding securities authorized for issuance under equity compensation plans called for in Item 5 of Part II and the information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Stockholders of the Company to be held June 18, 2015, which will be filed with the Securities and Exchange Commission not later than May 29, 2015.

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DOLLAR TREE, INC.
TABLE OF CONTENTS

 
 
Page
 
PART I
 
 
 
 
Item 1.
BUSINESS
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 1B.
UNRESOLVED STAFF COMMENTS
 
 
 
Item 2.
PROPERTIES
 
 
 
Item 3.
LEGAL PROCEEDINGS
 
 
 
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
 
PART II
 
 
 
 
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
 
 
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
Item 6.
SELECTED FINANCIAL DATA
 
 
 
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
 
 
CONDITION AND RESULTS OF OPERATIONS
 
 
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 
 
ACCOUNTING AND FINANCIAL DISCLOSURE
 
 
 
Item 9A.
CONTROLS AND PROCEDURES
 
 
 
Item 9B.
OTHER INFORMATION
 
 
 
 
PART III
 
 
 
 
Item 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
 
 
Item 11.
EXECUTIVE COMPENSATION
 
 
 
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
 
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
 
Item 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
 
 
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 
 
 
PART IV
 
 
 
 
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
 
 
 
SIGNATURES

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS:  This document contains "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements address future events, developments and results.  They include statements preceded by, followed by or including words such as "believe," "anticipate," "expect," "intend," "plan," "view," “target” or "estimate."  For example, our forward-looking statements include statements regarding:

the timing of the regulatory approvals and closing of the proposed acquisition of Family Dollar Stores, Inc. ("Family Dollar");
the consideration to be paid to the Family Dollar shareholders in the proposed acquisition and the number of outstanding Family Dollar shares of common stock at closing;
acquisition-related expenses and financing costs;
the benefits, results and effects of the proposed Family Dollar acquisition and the combined company’s plans, objectives, expectations (financial or otherwise), including synergies, the cost to achieve synergies, and the effect on earnings per share;
the outcome and costs of pending or potential litigation or governmental investigations against either us or Family Dollar;
regulatory approvals and expected store divestitures in connection with the proposed Family Dollar acquisition;
the inability to retain key personnel at Family Dollar;
our anticipated sales, including comparable store net sales, net sales growth and earnings growth;
costs of pending and possible future legal claims;
our growth plans, including our plans to add, expand or relocate stores, our anticipated square footage increase, and our ability to renew leases at existing store locations;
the average size of our stores to be added in 2015 and beyond;
the effect on merchandise mix of consumables and the increase in the number of our stores with freezers and coolers on gross profit margin and sales;
the net sales per square foot, net sales and operating income of our stores;
the potential effect of inflation and other economic changes on our costs and profitability, including the potential effect of future changes in minimum wage rates, shipping rates, domestic and import freight costs, fuel costs and wage and benefit costs;
our gross profit margin, earnings, inventory levels and ability to leverage selling, general and administrative and other fixed costs;
our seasonal sales patterns including those relating to the length of the holiday selling seasons;
the capabilities of our inventory supply chain technology and other systems;
the reliability of, and cost associated with, our sources of supply, particularly imported goods such as those sourced from China;
the capacity, performance and cost of our distribution centers;
our cash needs, including our ability to fund our future capital expenditures and working capital requirements;
our expectations regarding competition and growth in our retail sector; and
management's estimates associated with our critical accounting policies, including inventory valuation, accrued expenses and income taxes.
For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the risk factors described in Item 1A “Risk Factors” beginning on page 10, as well as Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 25 of this Form 10-K.
Our forward-looking statements could be wrong in light of these risks, uncertainties and assumptions.  The future events, developments or results described in this report could turn out to be materially different.  We have no obligation to publicly update or revise our forward-looking statements after the date of this annual report and you should not expect us to do so.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, it is against our policy to selectively disclose to them any material, nonpublic information or other confidential commercial information.  Accordingly, shareholders should not assume that we agree with any statement or report issued by any securities analyst regardless of the content of the statement or report as we have a policy against confirming information issued by others.  Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "Dollar Tree" generally refer to Dollar Tree, Inc. and its direct and indirect subsidiaries on a consolidated basis.  Unless specifically indicated otherwise, any references to

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2015” or “fiscal 2015”, “2014” or “fiscal 2014”, “2013” or “fiscal 2013”, and “2012” or “fiscal 2012”, relate to as of or for the years ended January 30, 2016, January 31, 2015, February 1, 2014 and February 2, 2013, respectively.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on our website at www.dollartree.com as soon as reasonably practicable after electronic filing of such reports with the SEC.

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PART I
Item 1.  BUSINESS
Overview
We are the leading operator of discount variety stores offering merchandise at the fixed price of $1.00.  We believe the variety and value of products we sell for $1.00 sets us apart from our competitors.  At January 31, 2015, we operated 5,367 discount variety retail stores.  Our stores operate under the names of Dollar Tree, Deals, Dollar Tree Deals, Dollar Tree Canada, Dollar Giant and Dollar Bills.  In 5,148 of these stores, we sell substantially all items for $1.00 or less in the United States and $1.25(CAD) or less in Canada.  In substantially all of the remaining stores, operating as Deals or Dollar Tree Deals, we sell items for $1.00 or less but also sell items for more than $1.00.
We believe our optimal store size is between 8,000 and 10,000 selling square feet.  This store size provides the appropriate amount of space for our broad merchandise offerings while allowing us to provide ease of shopping to our customers.  As we have been expanding our merchandise offerings, we have added freezers and coolers to approximately 3,620 stores to increase sales and shopping frequency.  At January 29, 2011, we operated 4,101 stores in the United States and Canada.  At January 31, 2015, we operated 5,157 stores in 48 states and the District of Columbia, as well as 210 stores in Canada.  Our revenue and assets in Canada are not material. Our selling square footage increased from approximately 35.1 million square feet in January 2011 to 46.5 million square feet in January 2015.  Our store growth has resulted primarily from opening new stores.
Business Strategy
Value Merchandise Offering.  We strive to exceed our customers' expectations of the variety and quality of products that they can purchase for $1.00 by offering items that we believe typically sell for higher prices elsewhere.  We buy approximately 59% to 61% of our merchandise domestically and import the remaining 39% to 41%.  Our domestic purchases include basic, seasonal, closeouts and promotional merchandise.  We believe our mix of imported and domestic merchandise affords our buyers flexibility that allows them to consistently exceed the customer's expectations.  In addition, direct relationships with manufacturers permit us to select from a broad range of products and customize packaging, product sizes and package quantities that meet our customers' needs.
Mix of Basic Variety and Seasonal Merchandise.  We maintain a balanced selection of products within traditional variety store categories.  We offer a wide selection of everyday basic products and we supplement these basic, everyday items with seasonal, closeout and promotional merchandise.  We attempt to keep certain basic consumable merchandise in our stores continuously to establish our stores as a destination and increase the traffic in our stores.  Closeout and promotional merchandise is purchased opportunistically and represents less than 10% of our purchases.
Our merchandise mix consists of:
consumable merchandise, which includes candy and food, health and beauty care, and everyday consumables such as paper and chemicals, and in select stores, frozen and refrigerated food;
variety merchandise, which includes toys, durable housewares, gifts,  party goods, greeting cards, softlines, and other items; and
seasonal goods, which include, among others, Valentine's Day, Easter, Halloween and Christmas merchandise.
We added freezers and coolers to certain stores and increased the amount of consumable merchandise carried by those stores.  We believe this initiative helps drive additional transactions and allows us to appeal to a broader demographic mix.  We added freezers and coolers to 460 additional stores in 2014.  Therefore, as of January 31, 2015, we have freezers and coolers in 3,620 of our stores.  We plan to install them in 320 additional stores by the end of fiscal 2015.
The following table shows the percentage of net sales of each major product group for the years ended January 31, 2015 and February 1, 2014:
 
January 31,
 
February 1,
Merchandise Type
2015
 
2014
Consumable
49.3
%
 
49.4
%
Variety categories
46.4
%
 
46.3
%
Seasonal
4.3
%
 
4.3
%

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At any point in time, we carry approximately 6,800 items in our stores and as of the end of 2014 approximately 35% of our items are automatically replenished.  The remaining items are pushed to the stores and a portion can be reordered by our store managers on a weekly basis.  Through automatic replenishment and our store managers’ ability to order product, each store manager is able to satisfy the demands of his or her particular customer base.
Customer Payment Methods.  All of our stores in the United States accept cash, checks, debit cards and credit cards.  Along with the rollout of freezers and coolers, we have increased the number of stores accepting Electronic Benefits Transfer (EBT) cards and food stamps (under the Supplemental Nutrition Assistance Program (“SNAP”)) to approximately 5,000 stores as of January 31, 2015.
Convenient Locations and Store Size.  We primarily focus on opening new stores in strip shopping centers anchored by large retailers who draw target customers we believe to be similar to ours.  Our stores are successful in metropolitan areas, mid-sized cities and small towns.  The range of our store sizes allows us to target a particular location with a store that best suits that market and takes advantage of available real estate opportunities.  Our stores are attractively designed and create an inviting atmosphere for shoppers by using bright lighting, vibrant colors and decorative signs.  We enhance the store design with attractive merchandise displays.  We believe this design attracts new and repeat customers and enhances our image as both a destination and impulse purchase store.
For more information on retail locations and retail store leases, see Item 2 "Properties” beginning on page 19 of this Form 10-K.
Profitable Stores with Strong Cash Flow.  We maintain a disciplined, cost-sensitive approach to store site selection in order to minimize the initial capital investment required and maximize our potential to generate high operating margins and strong cash flows.  We believe that our stores have a relatively small shopping radius, which allows us to profitably concentrate multiple stores within a single market.  Our ability to open new stores is dependent upon, among other factors, locating suitable sites and negotiating favorable lease terms.
The strong cash flows generated by our stores allow us to self-fund infrastructure investment and new stores.  Over the past five years, cash flows from operating activities have exceeded capital expenditures.
For more information on our results of operations, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 25 of this Form 10-K.
Cost Control.  We believe that our substantial buying power and our flexibility in making sourcing decisions contributes to our successful purchasing strategy, which includes targeted merchandise margin goals by category.  We also believe our ability to select quality merchandise helps to minimize markdowns.  We buy products on an order-by-order basis and have no material long-term purchase contracts or other assurances of continued product supply or guaranteed product cost.  No vendor accounted for more than 10% of total merchandise purchased in any of the past five years.
Our supply chain systems continue to provide us with valuable sales information to assist our buyers and improve merchandise allocation to our stores.  Controlling our inventory levels has resulted in more efficient distribution and store operations.
Information Systems.  We believe that investments in technology help us to increase sales and control costs.  Our inventory management system has allowed us to improve the efficiency of our supply chain, improve merchandise flow, increase inventory turnover and control distribution and store operating costs. It is also used to provide information to calculate our estimate of inventory cost under the retail inventory method, which is widely used in the retail industry. Our automatic replenishment system replenishes key items, based on actual store level sales and inventory.  At the end of 2014, approximately 35% of our items are on automatic replenishment.
Point-of-sale data allows us to track sales and inventory by merchandise category at the store level and assists us in planning for future purchases of inventory.  We believe that this information allows us to ship the appropriate product to stores at the quantities commensurate with selling patterns.  Using this point-of-sale data to plan purchases of inventory has helped us manage our inventory levels.  
Corporate Culture and Values.  We believe that honesty and integrity, doing the right things for the right reasons, and treating people fairly and with respect are core values within our corporate culture.  We believe that running a business, and certainly a public company, carries with it a responsibility to be above reproach when making operational and financial decisions.  Our executive management team visits and shops our stores like every customer, and ideas and individual creativity on the part of our associates are encouraged, particularly from our store managers who know their stores and their customers.  We have standards for store displays, merchandise presentation, and store operations.  We maintain an open door

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policy for all associates.  Our distribution centers are operated based on objective measures of performance and virtually everyone in our store support center is available to assist associates in the stores and distribution centers.
Our disclosure committee meets at least quarterly and monitors our internal controls over financial reporting to ensure that our public filings contain discussions about the risks our business faces.  We believe that we have the controls in place to be able to certify our financial statements.  Additionally, we have complied with the listing requirements for the Nasdaq Stock Market.
Seasonality. For information on the impact of seasonality, see Item 1A. "Risk Factors" beginning on page 10 of this Form 10-K and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 25 of this Form 10-K.
Growth Strategy
Store Openings and Square Footage Growth.  The primary factors contributing to our net sales growth have been new store openings, an active store expansion and remodel program, and selective mergers and acquisitions.  In the last five years, net sales increased at a compound annual growth rate of 10.0%.  We expect that the majority of our future sales growth will come primarily from new store openings and from our store expansion and relocation program.
The following table shows the average selling square footage of our stores and the selling square footage per new store opened over the last five years.  Our growth and productivity statistics are reported based on selling square footage because our management believes the use of selling square footage yields a more accurate measure of store productivity.
Year
 
Number of Stores
 
Average Selling Square Footage Per Store
 
Average Selling Square Footage Per New Store Opened
2010
 
4,101
 
8,570
 
8,400
2011
 
4,351
 
8,640
 
8,360
2012
 
4,671
 
8,660
 
8,060
2013
 
4,992
 
8,660
 
8,020
2014
 
5,367
 
8,660
 
8,060
We expect to increase the selling square footage in our Dollar Tree stores in the future by opening new stores in underserved markets and strategically increasing our presence in our existing markets via new store openings and store expansions (expansions include store relocations).  In fiscal 2015 and beyond, we plan to predominantly open Dollar Tree stores that are approximately 8,000 - 10,000 selling square feet and we believe this size allows us to achieve our objectives in the markets in which we plan to expand.  At January 31, 2015, approximately 2,974 of our stores, totaling 65% of our selling square footage, were 8,000 selling square feet or larger.
Our Deals stores, which offer an expanded assortment of merchandise including items that sell for more than $1.00, provide us an opportunity to leverage our Dollar Tree infrastructure in different merchandise concepts, including higher price points, without disrupting the single-price point model in our Dollar Tree stores.  We operated 219 Deals stores as of January 31, 2015.
In addition to new store openings, we plan to continue our store expansion program to increase our net sales per store and take advantage of market opportunities.  We target stores for expansion based on the current sales per selling square foot and changes in market opportunities.  Stores targeted for expansion are generally less than 6,000 selling square feet in size.  Store expansions generally increase the existing store size by approximately 2,750 selling square feet.
Since 1995, we have added a total of 695 stores through several mergers and acquisitions.  Our acquisition strategy has been to target companies that have a similar single-price point concept that have shown success in operations or companies that provide a strategic advantage.  We evaluate potential acquisition opportunities as they become available. On July 27, 2014, we executed an Agreement and Plan of Merger to acquire Family Dollar Stores, Inc. For more information regarding the pending acquisition, see "Family Dollar Acquisition" below and Item 8. "Financial Statements and Supplementary Data, Note 11 - Pending Acquisition and Related Debt" beginning on page 61 of this Form 10-K.
From time to time, we also acquire the rights to store leases through bankruptcy or other proceedings.  We will continue to take advantage of these opportunities as they arise depending upon several factors including their fit within our location and selling square footage size parameters.

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Merchandising and Distribution.  Expanding our customer base is important to our growth plans.  We plan to continue to stock our new stores with a compelling mix of ever-changing merchandise that our customers have come to appreciate.  Consumable merchandise typically leads to more frequent return trips to our stores resulting in increased sales.  The presentation and display of merchandise in our stores are critical to communicating value to our customers and creating a more exciting shopping experience.  We believe our approach to visual merchandising results in higher sales volume and an environment that encourages impulse purchases.
A strong and efficient distribution network is critical to our ability to grow and to maintain a low-cost operating structure. In 2014, we expanded our Joliet, Illinois distribution center to 1.5 million square feet. In 2013, we completed construction on a new 1.0 million square foot distribution center in Windsor, Connecticut which began shipping merchandise in June 2013 and expanded our Marietta, Oklahoma distribution center to 1.0 million square feet. In addition, we leased an additional 0.4 million square feet at our San Bernardino, California distribution center in 2013. We believe our distribution center network is currently capable of supporting approximately $10.5 billion in annual sales in the United States. New distribution sites are strategically located to reduce stem miles, maintain flexibility and improve efficiency in our store service areas. We also are a party to an agreement which provides distribution services from two facilities in Canada.
Our stores receive approximately 90% of their inventory from our distribution centers via contract carriers.  The remaining store inventory, primarily perishable consumable items and other vendor-maintained display items, are delivered directly to our stores from vendors.  For more information on our distribution center network, see Item 2 “Properties” beginning on page 19 of this Form 10-K.
Family Dollar Acquisition
Dollar Tree's proposed acquisition (the "Acquisition") of Family Dollar Stores, Inc. was approved by the Family Dollar shareholders on January 22, 2015. We believe that the combined company will benefit from the following competitive strengths:

Size and Scale. Upon consummation of the Acquisition, we will become one of the largest retailers in North America, with approximately 13,000 stores in operation across 48 states, the District of Columbia and five Canadian Provinces. By banner, our store base and infrastructure will include Dollar Tree’s approximately 5,300 stores (including over 200 Deals stores) and 10 distribution centers and Family Dollar’s over 8,100 stores and 11 distribution centers, subject to adjustment for any stores that are divested in connection with the Acquisition. Dollar Tree has not yet reached an agreement with the Federal Trade Commission (‘‘FTC’’) regarding the number of stores that it will be required to divest but continues to believe that it will need to divest no more than roughly 300 stores, although the actual number of divestitures may be above or below 300, as the number of divestitures that the FTC will require remains subject to uncertainties.

Complementary business models across fixed- and multi-price points. Dollar Tree is the nation’s leading operator of fixed-price point stores, selling everything for $1 or less and Family Dollar is a leading national operator of multi-price point stores, selling the majority of its products at $10 or less. Following the Acquisition, we will create a diversified and complementary business model across both fixed-price and multi-price points which will allow us to offer our customers a broader assortment of compelling, fresh and fun merchandise at incredible values.

Targets broad range of customers and geographies. Dollar Tree targets customers within a broad range of Middle America with stores located primarily in suburban areas while Family Dollar targets low- and lower-middle income households through its urban and rural locations. We plan to operate and grow both banners. The Dollar Tree and Family Dollar store concepts are complementary and co-locate successfully in the same market with little cannibalization. Consequently, following the Acquisition we believe we will be able to significantly extend our reach to a broader base of customers and serve them with even greater value, choice and convenience.

Complementary product offering, providing a broad, compelling and fresh merchandise assortment at incredible values. Upon the consummation of the Acquisition, we will be able to leverage our complementary merchandise assortments across Dollar Tree and Family Dollar stores to deliver a broad, compelling and fresh product offering to our customers. Dollar Tree’s assortment consists of consumable merchandise (49%); variety merchandise (47%); and seasonal merchandise (4%) while Family Dollar’s assortment consists of consumable merchandise (73%); home products (10%); seasonal and electronics (10%); and apparel and accessories (7%). These complementary assortments will enable the combined company to leverage Dollar Tree's variety and seasonal expertise and Family Dollar's consumables expertise across both store banners and enhance the overall quality of our combined business’s merchandise offering.

Stable and recession resilient business. We believe that the retail segment in which we operate is a stable and recession resilient industry that grows through various economic cycles and experiences less volatility relative to other retail segments.

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Dollar Tree has achieved consistent growth in net sales over each of the last 10 years and has successfully delivered positive same stores sales for 28 consecutive quarters through varying economic environments. Following the 2008 recession, Dollar Tree and Family Dollar stores have become a more frequent shopping channel for consumers who are increasingly price and value conscious. We believe that this industry backdrop coupled with our diversified geographic footprint and merchandise offering positions us well to generate stable, consistent demand going forward through various economic cycles.

Strong free cash flow generation to support planned debt repayment. We have always been prudent with our use of capital and following consummation of the Acquisition we intend to maintain our disciplined approach to capital deployment to invest in new store growth while supporting our existing infrastructure and store efficiency initiatives. Our business model offers a highly profitable and capital efficient platform with new stores requiring relatively minimal investment, while delivering robust operating income margins and initial investment payback within only a few years. We believe we will be able to share our best practices in capital deployment and store development across our combined platform to generate significant excess cash flow going forward and enable rapid debt repayment with the goal of returning to an investment grade rating profile within approximately five years.

Best in class management team with proven track record. Our management team includes experienced, long-standing members of the Dollar Tree family with a consistent track record of delivering industry leading profitability and returns on capital over the last 10 years. Led by Chief Executive Officer, Bob Sasser, our management team is responsible for our financial outperformance over the past decade. Together with the Family Dollar team, we intend to leverage our management expertise across a larger retail network in an effort to achieve higher levels of sales and profitability.
Competition
Our segment of the retail industry is highly competitive and we expect competition to increase in the future.  We operate in the discount retail business, which is currently and is expected to continue to be highly competitive with respect to price, store location, merchandise quality, assortment and presentation, and customer service.  Our competitors include single-price dollar stores, multi-price dollar stores, mass merchandisers, discount retailers, drug stores, convenience stores, independently operated discount stores, and a wide variety of other retailers.  In addition, several competitors have sections within their stores devoted to "one dollar" price point merchandise, which further increases competition.  We believe we differentiate ourselves from other retailers by providing high value, high quality, low cost merchandise in attractively designed stores that are conveniently located.  Our sales and profits could be reduced by increases in competition.  There are no significant economic barriers for others to enter our retail sector.
Trademarks
We are the owners of several federal service mark registrations including "Dollar Tree," the "Dollar Tree" logo, the Dollar Tree logo with a “1”, and "One Price...One Dollar."  In addition, we own a concurrent use registration for "Dollar Bill$" and the related logo.  We also acquired the rights to use trade names previously owned by Everything's A Dollar, a former competitor in the $1.00 price point industry.  Several trade names were included in the purchase, including the marks "Everything's $1.00 We Mean Everything!," and "Everything's $1.00."  With the acquisition of Deals, we became the owners of the trademark "Deal$”.  With the acquisition of Dollar Giant, we became the owners of the trademark “Dollar Giant” and others in Canada. We have federal trademark registrations for a variety of private labels that we use to market some of our product lines.  Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are properly renewed, they have a perpetual duration.
Employees
We employed approximately 18,100 full-time and 71,900 part-time associates on January 31, 2015.  Part-time associates work an average of less than 30 hours per week.  The number of part-time associates fluctuates depending on seasonal needs.  We consider our relationship with our associates to be good, and we have not experienced significant interruptions of operations due to labor disagreements.
Item 1A.  RISK FACTORS
An investment in our common stock involves a high degree of risk.  Any failure to meet market expectations, including our comparable store sales growth rate, earnings and earnings per share or new store openings, could cause the market price of our stock to decline.  You should carefully consider the specific risk factors listed below together with all other information included or incorporated in this report.  Any of the following risks may materialize, and additional risks not known to us, or that we now deem immaterial, may arise.  In such event, our business, financial condition, results of operations or prospects could be materially adversely affected.


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Our profitability is vulnerable to cost increases.

Future increases in costs such as the cost of merchandise, wage and benefit costs, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our profitability. The minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions and there is a possibility that Congress will increase the federal minimum wage. We do not raise the sales price of our merchandise to offset cost increases because we are committed to selling primarily at the $1.00 price point to continue to provide value to the customer. We are dependent on our ability to adjust our product assortment, to operate more efficiently or to increase our comparable store net sales in order to offset inflation or other cost increases. We can give no assurance that we will be able to operate more efficiently or increase our comparable store net sales in the future. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 25 of this Form 10-K for further discussion of the effect of Inflation and Other Economic Factors on our operations.

A downturn in economic conditions could impact our sales.

Deterioration in economic conditions, such as those caused by a recession, inflation, higher unemployment, consumer debt levels, lack of available credit, cost increases, as well as adverse weather conditions or terrorism, could reduce consumer spending or cause customers to shift their spending to products we either do not sell or do not sell as profitably. Adverse economic conditions could disrupt consumer spending and significantly reduce our sales, decrease our inventory turnover, cause greater markdowns or reduce our profitability due to lower margins.

A significant disruption in our computer and technology systems could adversely affect our results of operation or business.

We rely extensively on our computer and technology systems to manage inventory, process credit card and customer transactions and summarize results. Systems may be subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events. If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions and may receive negative publicity, which could adversely affect our results of operation or business.

If we are unable to secure our customers’ credit card and confidential information, or other private data relating to our associates, suppliers or our business, we could be subject to negative publicity, costly government enforcement actions or private litigation, which could damage our business reputation and adversely affect our results of operation or business.

We have procedures and technology in place to safeguard our customers’ debit and credit card information, our associates’ private data, suppliers’ data, and our business records and intellectual property. Despite these measures, criminals are constantly devising schemes to circumvent safeguards and we may be vulnerable to, and unable to detect and appropriately respond to, data security breaches and data loss, including cyber-security attacks. Other sophisticated retailers have recently suffered serious security breaches. If we experience a data security breach, we could be exposed to negative publicity, government enforcement actions, private litigation, or costly response measures. In addition, our reputation within the business community and with our customers may be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores or not shopping in our stores altogether. This could have an adverse effect on our results of operation or business.

Our growth is dependent on our ability to increase sales in existing stores and to expand our square footage profitably.

Existing store sales growth is dependent on a variety of factors including merchandise selection and availability, store operations and customer satisfaction. In addition, competition could affect our sales. Our highest sales periods are the Christmas and Easter seasons and we generally realize a disproportionate amount of our net sales and our operating and net income during the fourth quarter. In anticipation, we stock extra inventory and hire many temporary employees to prepare our stores. A reduction in sales during these periods could adversely affect our operating results, particularly operating and net income, to a greater extent than if a reduction occurred at other times of the year. Untimely merchandise delays due to receiving or distribution problems could have a similar effect. Easter was observed on March 31, 2013, April 20, 2014, and will be observed on April 5, 2015.

Expanding our square footage profitably depends on a number of uncertainties, including our ability to locate, lease, build out and open or expand stores in suitable locations on a timely basis under favorable economic terms. In addition, our expansion is dependent upon third-party developers’ abilities to acquire land, obtain financing, and secure necessary permits

11



and approvals. It remains difficult for third party developers to obtain financing for new projects due to the recent turmoil in the financial markets. We also open or expand stores within our established geographic markets, where new or expanded stores may draw sales away from our existing stores. We may not manage our expansion effectively, and our failure to achieve our expansion plans could materially and adversely affect our business, financial condition and results of operations.

Risks associated with our domestic and foreign suppliers from whom our products are sourced could affect our financial performance.

We are dependent on our vendors to supply merchandise in a timely and efficient manner. If a vendor fails to deliver on its commitments due to financial or other difficulties, we could experience merchandise shortages which could lead to lost sales or increased merchandise costs if alternative sources must be used.

Merchandise imported directly accounts for approximately 39% to 41% of our total retail value purchases. In addition, we believe that a portion of our goods purchased from domestic vendors is imported. China is the source of a substantial majority of our imports. Imported goods are generally less expensive than domestic goods and increase our profit margins. A disruption in the flow of our imported merchandise or an increase in the cost of those goods may significantly decrease our profits. Risks associated with our reliance on imported goods may include disruptions in the flow of or increases in the cost of imported goods because of factors such as:

raw material shortages, work stoppages, strikes and political unrest;
economic crises and international disputes;
changes in currency exchange rates or policies and local economic conditions, including inflation in the country of origin; and
failure of the United States to maintain normal trade relations with China.

We could encounter disruptions in our distribution network or additional costs in distributing merchandise.

Our success is dependent on our ability to transport merchandise to our distribution centers and then ship it to our stores in a timely and cost-effective manner. We may not anticipate, respond to or control all of the challenges of operating our receiving and distribution systems. Additionally, if a vendor fails to deliver on its commitments, we could experience merchandise shortages that could lead to lost sales or increased costs. Some of the factors that could have an adverse effect on our distribution network or costs are:

Shipping disruption. Our oceanic shipping schedules may be disrupted or delayed from time to time.
Shipping costs. We could experience increases in shipping rates imposed by the trans-Pacific ocean carriers. Changes in import duties, import quotas and other trade sanctions could increase our costs.
Diesel fuel costs. We have experienced volatility in diesel fuel costs over the past few years.
Vulnerability to natural or man-made disasters. A fire, explosion or natural disaster at a port or any of our distribution facilities could result in a loss of merchandise and impair our ability to adequately stock our stores. Some facilities are vulnerable to earthquakes, hurricanes or tornadoes.
Labor disagreement. Labor disagreements, disruptions or strikes may result in delays in the delivery of merchandise to our distribution centers or stores and increase costs.
War, terrorism and other events. War and acts of terrorism in the United States, the Middle East, or in China or other parts of Asia, where we buy a significant amount of our imported merchandise, could disrupt our supply chain or increase our transportation costs.
Economic conditions. Suppliers may encounter financial or other difficulties.

Our profitability is affected by the mix of products we sell.

Our gross profit margin could decrease if we increase the proportion of higher cost goods we sell in the future. In recent years, the percentage of our sales from higher cost consumable products has increased and we can give no assurance that this trend will not continue. As a result, our gross profit margin could decrease unless we are able to maintain our current merchandise cost sufficiently to offset any decrease in our product margin percentage. We can give no assurance that we will be able to do so.

Pressure from competitors may reduce our sales and profits.

The retail industry is highly competitive. The marketplace is highly fragmented as many different retailers compete for market share by utilizing a variety of store formats and merchandising strategies. We expect competition to increase in the

12



future. There are no significant economic barriers for others to enter our retail sector. Some of our current or potential competitors have greater financial resources than we do. We cannot guarantee that we will continue to be able to compete successfully against existing or future competitors. Please see Item 1, “Business” beginning on page 6 of this Form 10-K for further discussion of the effect of competition on our operations.

Litigation may adversely affect our business, financial condition and results of operations.

Our business is subject to the risk of litigation involving employees, consumers, suppliers, competitors, shareholders, government agencies, or others through private actions, class actions, governmental investigations, administrative proceedings, regulatory actions or other litigation. Our products could also cause illness or injury, harm our reputation, and subject us to litigation. We are currently defendants in several employment-related class and collective actions, litigation concerning leases, several occupational safety proceedings, and a governmental investigation concerning retail hazardous waste. The outcome of litigation is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss may remain unknown for substantial periods of time. In addition, certain of these matters, if decided adversely to us or settled by us, may result in an expense that may be material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The cost to defend current and future litigation may be significant. There also may be adverse publicity associated with litigation, including litigation related to product safety, customer information and environmental or safety requirements, which could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.

For a discussion of current legal matters, please see Item 3, “Legal Proceedings” beginning on page 20 of this Form 10-K and Item 8, “Financial Statements and Supplementary Data, Note 4 Commitments and Contingencies” under the caption “Contingencies” beginning on page 51 of this Form 10-K. Resolution of these matters, if decided against the Company, could have a material adverse effect on our results of operations, accrued liabilities or cash flows.

Changes in federal, state or local law, or our failure to comply with such laws, could increase our expenses and expose us to legal risks.

Our business is subject to a wide array of laws and regulations. Significant legislative changes, such as the health-care legislation, that impact our relationship with our workforce could increase our expenses and adversely affect our operations. The minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions and there is a possibility that Congress will increase the federal minimum wage. Changes in other regulatory areas, such as consumer credit, privacy and information security, product safety, worker safety or environmental protection, among others, could cause our expenses to increase. In addition, if we fail to comply with applicable laws and regulations, particularly wage and hour laws, we could be subject to legal risk, including government enforcement action and class action civil litigation, which could adversely affect our results of operations. Changes in tax laws, the interpretation of existing laws, or our failure to sustain our reporting positions on examination could adversely affect our effective tax rate.

Our business could be adversely affected if we fail to attract and retain qualified associates and key personnel.

Our growth and performance is dependent on the skills, experience and contributions of our associates, executives and key personnel. Various factors, including overall labor availability, wage rates, regulatory or legislative impacts, and benefit costs could impact the ability to attract and retain qualified associates at our stores, distribution centers and corporate office.

Certain provisions in our Articles of Incorporation and Bylaws could delay or discourage a change of control transaction that may be in a shareholder’s best interest.

Our Articles of Incorporation and Bylaws currently contain provisions that may delay or discourage a takeover attempt that a shareholder might consider in his best interest. These provisions, among other things:

provide that only the Board of Directors, chairman or president may call special meetings of the shareholders;
establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder proposals to be considered at shareholders’ meetings; and
permit the Board of Directors, without further action of the shareholders, to issue and fix the terms of preferred stock, which may have rights senior to those of the common stock.

However, we believe that these provisions allow our Board of Directors to negotiate a higher price in the event of a

13



takeover attempt which would be in the best interest of our shareholders.

Risks related to the proposed Family Dollar merger and the business of the combined company

Completion of the proposed merger is subject to the satisfaction of numerous conditions, and the proposed merger may not be completed on the proposed terms, within the expected timeframe, or at all.

Each of our and Family Dollar’s obligation to consummate the proposed merger remains subject to a number of conditions, including, among others, the following, as further described in the merger agreement: (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (‘‘HSR Act’’), (ii) approval of the listing on the Nasdaq of our common stock to be issued in the merger, (iii) the absence of an injunction prohibiting the merger, (iv) the accuracy of the representations and warranties of the other party under the merger agreement (subject to the materiality standards set forth in the merger agreement), (v) the performance by the other party of its respective obligations under the merger agreement in all material respects, (vi) delivery of officer certificates by the other party certifying satisfaction of the two preceding conditions, and in the case of our obligations to complete the merger, the absence of a material adverse effect (as described in the merger agreement) on Family Dollar since July 27, 2014.

There is no assurance that all of the conditions will be satisfied, or that the proposed merger will be completed on the proposed terms, within the expected timeframe, or at all. Any delay in completing the proposed merger could cause us not to realize some or all of the benefits that we expect to achieve if the merger is successfully completed within its expected timeframe. Further, there can be no assurance that the conditions to the closing of the merger will be satisfied or waived or that the merger will be completed. See the risk factor entitled “Failure to complete the merger could negatively impact our stock price and future business and financial results,” below.

In order to complete the proposed merger, we and Family Dollar must make certain governmental filings and obtain certain governmental authorizations, and if such filings and authorizations are not made or granted or are granted with conditions, completion of the merger may be jeopardized or the anticipated benefits of the proposed merger could be reduced.

Although we and Family Dollar have agreed in the merger agreement to use our reasonable best efforts, subject to certain limitations, to make certain governmental filings and obtain the required expiration or termination of the waiting period under the HSR Act, there can be no assurance that the waiting period under the HSR Act will expire or be terminated. As a condition to granting termination of the waiting period under the HSR Act, governmental authorities may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of our business after completion of the merger. Under the terms of the merger agreement, subject to certain exceptions, we are required to accept certain conditions and take certain actions imposed by governmental authorities that would apply to, or affect, our businesses, assets or properties or those of Family Dollar and its subsidiaries. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions (including requiring divestitures) and that such conditions, terms, obligations or restrictions (including divestitures) will not have the effect of delaying completion of the merger or imposing additional material costs on or materially limiting the revenues of the combined company following the merger, or otherwise adversely affecting our business and results of operations after completion of the proposed merger. In addition, we can provide no assurance that these conditions, terms, obligations or restrictions will not result in the delay or abandonment of the proposed merger. There can also be no assurance that regulators will not seek to challenge the merger.

We and Family Dollar each submitted a filing under the HSR Act, on August 8, 2014, and each received a Second Request from the FTC regarding the Acquisition on September 8, 2014. We and Family Dollar certified substantial compliance with the Second Request on November 7, 2014, and October 21, 2014, respectively. The HSR Act waiting period has been extended by a timing agreement among the parties and the FTC, and we and Family Dollar have agreed to provide the FTC with four weeks’ notice prior to closing. We expect to initiate the 4-week notice period (which may be terminated early by the FTC) after we execute a consent decree with the FTC.

As of March 10, 2015, the FTC has identified approximately 250 stores for divestiture, representing approximately $34 million of operating income. We expect the FTC to substantially complete its review of all remaining stores in the near future. We continue to estimate that no more than roughly 300 stores will be required to be divested, although we can give no assurance as to the exact number and it could be more or less than 300. In parallel, we have made good progress with divestiture buyers and have received multiple indications of interest from buyers, each of whom intend to operate these divested locations as dollar stores to address the FTC's concerns. We will work to secure FTC approval and finalize divestiture agreements with the selected bidder(s) as soon as practical. We are working to close the proposed merger as early as April 2015, but it is uncertain whether the FTC will approve the transaction by that date.

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Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits, synergies and cost savings of the proposed merger may not be realized, including as a result of the challenges Family Dollar has been recently experiencing as a stand-alone company.

We and Family Dollar have operated and, until the completion of the proposed merger, will continue to operate, independently. The success of the proposed merger, including anticipated benefits, synergies and cost savings, will depend, in part, on our ability to successfully combine and integrate the businesses of our company and Family Dollar. It is possible that the pendency of the merger and/or the integration process could result in the loss of key employees, higher than expected costs, litigation relating to the proposed merger, diversion of management attention of both Dollar Tree and Family Dollar, increased competition, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the proposed merger. If we experience difficulties with the integration process, the anticipated benefits of the proposed merger may not be realized fully or at all, or may take longer to realize than expected. Family Dollar’s first quarter of fiscal year 2015 experienced increased pressures on merchandise margin, deleveraging of expenses and increased professional fees, and such conditions may continue in fiscal 2015. Moreover, Family Dollar has recently experienced turnover in its corporate office and may continue to do so during the pendency of the proposed merger and/or integration process. Each of these factors, among others, could negatively impact the actual benefits realized in the merger. Furthermore, integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on us during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the proposed merger could be less than anticipated.

Failure to complete the proposed merger could negatively impact our stock price and our future business and financial results.

If the proposed Family Dollar merger is not completed for any reason, we would be subject to a number of risks, including the following:

We will incur substantial expenses and costs related to the proposed merger, whether or not it is consummated, including legal, accounting and advisory fees;
Matters relating to the proposed merger (including integration planning) will require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other potentially advantageous business opportunities or plans that may have been beneficial to us, without realizing any of the expected benefits of the proposed merger; and
Failure to consummate the proposed merger may result in negative reactions from the financial markets or from our customers, vendors and employees.

If the proposed merger is not completed, these risks may materialize and could have a material adverse effect on our stock price, business and cash flows, financial condition and results of operations.

We will incur significant transaction and acquisition-related costs in connection with the proposed merger.

We expect to incur a number of non-recurring costs associated with the proposed merger and combining the operations of the two companies. The substantial majority of non-recurring expenses will be comprised of transaction and regulatory costs related to the merger.

We also will incur transaction fees and costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the proposed merger and the integration of the two companies’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all. See the risk factor entitled “Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits, synergies and cost savings of the proposed merger may not be realized, including as a result of the challenges Family Dollar has been recently experiencing as a stand-alone company” above.


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Lawsuits have been filed against Family Dollar, its directors, Dollar Tree, and one of Dollar Tree's subsidiaries challenging the proposed merger, and an adverse ruling in such lawsuits may prevent the proposed merger from becoming effective or from becoming effective within the expected timeframe.

Family Dollar, its directors, Dollar Tree, and one of Dollar Tree's subsidiaries are named as defendants in three putative class action lawsuits, which have been consolidated under the caption In re Family Dollar Stores, Inc. Stockholder Litig., C.A. No. 9985 CB., brought by purported Family Dollar shareholders challenging the proposed merger, seeking, among other things, to enjoin consummation of the proposed merger. The parties conducted certain document discovery and depositions relating to the motion for a preliminary injunction and a hearing was held on December 5, 2014. On December 19, 2014, the Court of Chancery issued an opinion and order denying plaintiffs’ preliminary injunction motion. The plaintiffs sought from the Court of Chancery certification of an interlocutory appeal of that order to the Delaware Supreme Court, but on January 2, 2015, the Court of Chancery denied that request. No schedule has yet been set for the adjudication of the plaintiffs’ remaining claims for relief. If the plaintiffs are successful in their remaining claims, there could be an adverse effect on our and Family Dollar’s business, financial condition, results of operations and cash flows.

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes.

Our consolidated indebtedness as of January 31, 2015 was $757 million. Following the proposed merger, we will have substantially increased our indebtedness, which could adversely affect our ability to fulfill our obligations and have a negative impact on our financing options and liquidity position. Upon completion of the proposed merger we expect to have indebtedness of approximately $8,507 million and availability under our new revolving credit facility of approximately $1,250 million, less amounts outstanding for letters of credit.

Our high level of debt could have significant consequences, including the following:

limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes;
requiring a substantial portion of our cash flows to be dedicated to debt service payments, instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
limiting our ability to refinance our indebtedness on terms acceptable to us or at all;
imposing restrictive covenants on our operations;
placing us at a competitive disadvantage to competitors carrying less debt; and
making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressures.

In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect the opinions of the ratings agencies of our financial strength, operating performance and ability to meet our debt obligations. There can be no assurance that we will achieve a particular rating or maintain a particular rating in the future.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash requirements, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. Upon consummation of the proposed merger, the agreements that will govern the indebtedness to be incurred or assumed in connection with the proposed merger are expected to restrict (a) our ability to dispose of assets and use the proceeds from any such dispositions and (b) our ability to raise debt capital to be used to repay our indebtedness when it becomes due. We may not be able to consummate those dispositions or to

16



obtain proceeds in an amount sufficient to meet any debt service obligations then due.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations.

If we cannot make scheduled payments on our debt, we will be in default and, as a result, holders of the notes (and lenders under any of our existing and future indebtedness) could declare all outstanding principal and interest to be due and payable, the lenders under the credit facilities could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing such borrowings and we could be forced into bankruptcy or liquidation, in each case, which could result in your losing your investment.

Despite current and anticipated indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks described above.

We may be able to incur substantial additional indebtedness in the future. Although the agreements that will govern the indebtedness to be incurred or assumed in connection with the proposed merger are expected to restrict the incurrence of additional indebtedness, these restrictions are and will be subject to a number of qualifications and exceptions and the additional indebtedness incurred in compliance with these restrictions could be substantial. If new debt is added to our current debt levels, the related risks that we now face could intensify. Upon completion of the pending acquisition, we expect to have approximately $1,250 million of availability under our new revolving credit facility.

The terms of the agreements governing our indebtedness upon consummation of the proposed merger may restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies, and could adversely affect our capital resources, financial condition and liquidity.

The agreements that will govern the indebtedness to be incurred or assumed in connection with the proposed merger are expected to contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including, among other things, restrictions on our ability to:

incur, assume or guarantee additional indebtedness;
declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests;
make any principal payment on, or redeem or repurchase, subordinated debt;
make loans, advances or other investments;
incur liens;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
enter into sale and lease-back transactions;
consolidate or merge with or into, or sell all or substantially all of our assets to, another person; and
enter into transactions with affiliates.

In addition, certain of these agreements are expected to require us to comply with certain financial maintenance covenants. Our ability to satisfy these financial maintenance covenants can be affected by events beyond our control, and we cannot assure you that we will meet them.

A breach of the covenants under these agreements could result in an event of default under the applicable indebtedness, which, if not cured or waived, could result in us having to repay our borrowings before their due dates. Such default may allow the debt holders to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If we are forced to refinance these borrowings on less favorable terms or if we were to experience difficulty in refinancing the debt prior to maturity, our results of operations or financial condition could be materially affected. In addition, an event of default under our credit facilities may permit the lenders under our credit facilities to terminate all commitments to extend further credit under such credit facilities. Furthermore, if we are unable to repay the amounts due and payable under our credit facilities, those lenders may be able to proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of notes accelerate the repayment of such borrowings, we cannot assure you that we will have sufficient assets to repay such indebtedness.


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As a result of these restrictions, we may be:

limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively, take advantage of new business opportunities or grow in accordance with our plans.

Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.

Certain of our indebtedness, including borrowings under our new revolving credit facility and our existing credit facility, is or is expected to be subject to variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. An increase (decrease) of 0.25% on the estimated interest rate on debt to finance the proposed merger would result in an increase (decrease) of $20.5 million in annual interest expense. Although we may enter into interest rate swaps, involving the exchange of floating- for fixed-rate interest payments, to reduce interest rate volatility, we cannot assure you we will be able to do so.

The proposed merger may not be accretive, and may be dilutive, to our earnings per share, which may negatively affect the market price of our common stock.

Because shares of our common stock would be issued in the proposed merger, it is possible that the merger will be dilutive to our earnings per share, which could negatively affect the market price of shares of our common stock.

In connection with the completion of the proposed merger, based on the number of issued and outstanding shares of our common stock and Family Dollar common stock as of January 31, 2015, we would issue approximately 28.5 million shares of our common stock. The issuance of these new shares of our common stock could have the effect of depressing the market price of shares of our common stock, through dilution of earnings per share or otherwise.
 
In addition, future events and conditions could increase the dilution that is currently projected, including adverse changes in market conditions, additional transaction and integration related costs and other factors such as the failure to realize some or all of the benefits anticipated in the merger. Any dilution of, or delay of any accretion to, our earnings per share could cause the price of shares of our common stock to decline or grow at a reduced rate.

Sales of shares of our common stock before and after the completion of the proposed Family Dollar merger may cause the market price of our common stock to fall.
        
Based on the number of outstanding shares of our common stock and Family Dollar common stock as of January 31, 2015, we would issue approximately 28.5 million shares of our common stock in connection with the proposed Family Dollar merger. The issuance of these new shares of our common stock could have the effect of depressing the market price for our common stock.
        
In addition, many Family Dollar stockholders may decide not to hold the shares of our common stock they will receive in the proposed merger. Other Family Dollar stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of our common stock that they receive in the proposed merger. Such sales of our common stock could have the effect of depressing the market price for our common stock and may take place promptly following consummation of the proposed merger.


Item 1B.  UNRESOLVED STAFF COMMENTS
None.

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Item 2.  PROPERTIES
Stores
As of January 31, 2015, we operated 5,367 stores in 48 states and the District of Columbia, and five Canadian provinces as detailed below:
Alabama
 
106

 
Maine
 
27

 
Oklahoma
 
55

Arizona
 
95

 
Maryland
 
103

 
Oregon
 
88

Arkansas
 
53

 
Massachusetts
 
98

 
Pennsylvania
 
255

California
 
486

 
Michigan
 
194

 
Rhode Island
 
26

Colorado
 
82

 
Minnesota
 
100

 
South Carolina
 
96

Connecticut
 
56

 
Mississippi
 
64

 
South Dakota
 
9

Delaware
 
29

 
Missouri
 
101

 
Tennessee
 
132

District of Columbia
 
2

 
Montana
 
13

 
Texas
 
340

Florida
 
389

 
Nebraska
 
19

 
Utah
 
48

Georgia
 
195

 
Nevada
 
38

 
Vermont
 
7

Idaho
 
26

 
New Hampshire
 
30

 
Virginia
 
157

Illinois
 
208

 
New Jersey
 
127

 
Washington
 
96

Indiana
 
106

 
New Mexico
 
38

 
West Virginia
 
37

Iowa
 
37

 
New York
 
255

 
Wisconsin
 
100

Kansas
 
32

 
North Carolina
 
210

 
Wyoming
 
13

Kentucky
 
87

 
North Dakota
 
7

 
 
 
 

Louisiana
 
91

 
Ohio
 
194

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Alberta
 
34

 
Manitoba
 
11

 
Saskatchewan
 
10

British Columbia
 
53

 
Ontario
 
102

 
 
 
 
We lease the vast majority of our stores and expect to lease the majority of our new stores as we expand.  Our leases typically provide for a short initial lease term, generally five years, with options to extend, however in some cases we have initial lease terms of seven to ten years.  We believe this leasing strategy enhances our flexibility to pursue various expansion opportunities resulting from changing market conditions.  As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or better locations in the same general area.

19



Distribution Centers
The following table includes information about the distribution centers that we operate in the United States.  Except for 0.4 million square feet of our distribution center in San Bernardino, CA, all of our distribution center capacity is owned. In 2014, we expanded our Joliet, Illinois distribution center by 0.3 million square feet. In 2013, we completed construction on a new 1.0 million square foot distribution center in Windsor, Connecticut which began shipping merchandise in June 2013.  In addition, we expanded our Marietta, Oklahoma distribution center by 0.4 million square feet and leased an additional 0.4 million square feet at our San Bernardino, California distribution center in 2013. We believe our distribution center network is currently capable of supporting approximately $10.5 billion in annual sales in the United States.  
 
Location
Size in
Square Feet
Chesapeake, Virginia
400,000
Olive Branch, Mississippi
425,000
Joliet, Illinois
1,470,000
Stockton, California
525,000
Briar Creek, Pennsylvania
1,003,000
Savannah, Georgia
1,014,000
Marietta, Oklahoma
1,004,000
San Bernardino, California
802,000
Ridgefield, Washington
665,000
Windsor, Connecticut
1,001,000
Each of our distribution centers contains advanced materials handling technologies, including radio-frequency inventory tracking equipment and specialized information systems.  With the exception of our Ridgefield, Washington facility, each of our distribution centers in the United States also contains automated conveyor and sorting systems.

Distribution services in Canada are provided by a third party from facilities in British Columbia and Ontario.

Store Support Center
Our Store Support Center is located in an approximately 190,000 square foot building which we own in Chesapeake, Virginia.
For more information on financing of our distribution centers, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations- Funding Requirements" beginning on page 25 of this Form 10-K.
Item 3.  LEGAL PROCEEDINGS
From time to time, we are defendants in ordinary, routine litigation or proceedings incidental to our business, including allegations regarding:
employment-related matters;
infringement of intellectual property rights;
personal injury/wrongful death claims;
product safety matters, which may include product recalls in cooperation with the Consumer Products Safety Commission or other jurisdictions;
real estate matters related to store leases; and
environmental and safety issues.

In addition, we are defendants in several class or collective action lawsuits, lease restriction cases, an environmental investigation and merger-related shareholder litigation. These proceedings are described in "Note 4 - Commitments and Contingencies" under the caption "Contingencies" beginning on Page 51 of this Form 10-K included in "Part II. Item 8. Financial Statements and Supplementary Data."


20



We will vigorously defend ourselves in these matters. We do not believe that any of these matters will, individually or in the aggregate, have a material effect on our business or financial condition. We cannot give assurance, however, that one or more of these lawsuits will not have a material effect on our results of operations for the period in which they are resolved. Based on the information available, including the amount of time remaining before trial, the results of discovery and the judgment of internal and external counsel, we are unable to express an opinion as to the outcome of those matters which are not settled and cannot estimate a potential range of loss except as specified in Note 4. When a range is expressed, we are currently unable to determine the probability of loss within that range.


Item 4.  MINE SAFETY DISCLOSURES
None.

21



PART II
Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market®.  Our common stock has been traded on Nasdaq under the symbol "DLTR" since our initial public offering on March 6, 1995.  The following table gives the high and low sales prices of our common stock as reported by Nasdaq for the periods indicated.
 
High
 
Low
Fiscal year ended February 1, 2014:
 
 
 
First Quarter
$
48.92

 
$
38.43

Second Quarter
55.02

 
47.70

Third Quarter
60.19

 
50.33

Fourth Quarter
60.11

 
49.66

Fiscal year ended January 31, 2015:
 

 
 

First Quarter
$
56.39

 
$
49.59

Second Quarter
59.84

 
49.69

Third Quarter
61.00

 
53.17

Fourth Quarter
72.59

 
60.21

On March 4, 2015, the last reported sale price for our common stock, as quoted by Nasdaq, was $78.84 per share.  As of March 4, 2015, we had approximately 259 shareholders of record.
We did not repurchase any shares of common stock on the open market in 2014. At January 31, 2015, we had $1.0 billion remaining under Board repurchase authorization.
On September 17, 2013, we entered into agreements and made payments to repurchase $1.0 billion of our common shares under two $500.0 million Accelerated Share Repurchase Agreements (ASRs). On February 14, 2014 the uncollared agreement concluded and we received an additional 1.9 million shares without any additional cash payment resulting in a total of 9.1 million shares repurchased under the uncollared agreement. On May 15, 2014 the collared agreement concluded and we received an additional 1.2 million shares, without any additional cash payments, resulting in a total of 9.0 million shares repurchased under this agreement. See additional discussion of the ASRs in "Note 7. Shareholders' Equity", included in “Part II, Note 7. Shareholders' Equity” of this Form 10-K.
We anticipate that substantially all of our cash flow from operations in the foreseeable future will be retained for the development and expansion of our business, the repayment of indebtedness and, as authorized by our Board of Directors, the repurchase of stock.  Management does not anticipate paying dividends on our common stock in the foreseeable future.

22



Stock Performance Graph
The following graph sets forth the yearly percentage change in the cumulative total shareholder return on our common stock during the five fiscal years ended January 31, 2015, compared with the cumulative total returns of the S&P 500 Index and the S&P Retailing Index.  The comparison assumes that $100 was invested in our common stock on January 30, 2010, and, in each of the foregoing indices on January 30, 2010, and that dividends were reinvested.


23



Item 6.  SELECTED FINANCIAL DATA
The following table presents a summary of our selected financial data for the fiscal years ended January 31, 2015, February 1, 2014, February 2, 2013, January 28, 2012, and January 29, 2011.  Fiscal 2012 included 53 weeks, commensurate with the retail calendar, while all other fiscal years reported in the table contain 52 weeks. The selected income statement and balance sheet data have been derived from our consolidated financial statements that have been audited by our independent registered public accounting firm.  This information should be read in conjunction with the consolidated financial statements and related notes, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our financial information found elsewhere in this report.
Comparable store net sales compare net sales for stores open before December of the year prior to the two years being compared, including expanded stores.  Net sales per store and net sales per selling square foot are calculated for stores open throughout the period presented.
Amounts in the following tables are in millions, except per share data, number of stores data, net sales per selling square foot data and inventory turns. 
 
Year Ended
 
January 31,
2015
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales
$
8,602.2

 
$
7,840.3

 
$
7,394.5

 
$
6,630.5

 
$
5,882.4

Gross profit
3,034.0

 
2,789.8

 
2,652.7

 
2,378.3

 
2,087.6

Selling, general and administrative expenses
1,993.8

 
1,819.5

 
1,732.6

 
1,596.2

 
1,457.6

Operating income
1,040.2

 
970.3

 
920.1

 
782.1

 
630.0

Net income
599.2

 
596.7

 
619.3

 
488.3

 
397.3

Margin Data (as a percentage of net sales):
 
 
 
 
 
 
 

 
 

Gross profit
35.3
%
 
35.6
%
 
35.9
%
 
35.9
%
 
35.5
%
Selling, general and administrative expenses
23.2
%
 
23.2
%
 
23.5
%
 
24.1
%
 
24.8
%
Operating income
12.1
%
 
12.4
%
 
12.4
%
 
11.8
%
 
10.7
%
Net income
7.0
%
 
7.6
%
 
8.4
%
 
7.4
%
 
6.8
%
Per Share Data:
 

 
 

 
 

 
 

 
 

Diluted net income per share
$
2.90

 
$
2.72

 
$
2.68

 
$
2.01

 
$
1.55

Diluted net income per share increase
6.6
%
 
1.5
%
 
33.3
%
 
29.7
%
 
30.3
%

24



 
As of
 
January 31,
2015
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
and short-term investments
$
864.1

 
$
267.7

 
$
399.9

 
$
288.3

 
$
486.0

Working capital
1,133.0

 
692.2

 
797.3

 
628.4

 
800.4

Total assets
3,567.0

 
2,771.9

 
2,752.0

 
2,328.6

 
2,380.5

Total debt, including capital lease obligations
757.0

 
769.8

 
271.3

 
265.8

 
267.8

Shareholders' equity
1,785.0

 
1,170.7

 
1,667.3

 
1,344.6

 
1,459.0

 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
January 31,
2015
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
Selected Operating Data:
 

 
 

 
 

 
 

 
 

Number of stores open at end of period
5,367

 
4,992

 
4,671

 
4,351

 
4,101

Gross square footage at end of period
58.3

 
54.3

 
50.9

 
47.4

 
44.4

Selling square footage at end of period
46.5

 
43.2

 
40.5

 
37.6

 
35.1

Selling square footage annual growth
7.4
%
 
6.9
%
 
7.7
%
 
6.9
%
 
8.8
%
Net sales annual growth
9.7
%
 
6.0
%
 
11.5
%
 
12.7
%
 
12.4
%
Comparable store net sales increase
4.3
%
 
2.4
%
 
3.4
%
 
6.0
%
 
6.3
%
Net sales per selling square foot
$
192

 
$
187

 
$
190

 
$
182

 
$
174

Net sales per store
$
1.7

 
$
1.6

 
$
1.6

 
$
1.6

 
$
1.5

Selected Financial Ratios:
 

 
 

 
 

 
 

 
 

Return on assets
18.9
%
 
21.6
%
 
24.4
%
 
20.7
%
 
17.0
%
Return on equity
40.5
%
 
42.1
%
 
41.1
%
 
34.8
%
 
27.5
%
Inventory turns
4.4

 
4.1

 
4.3

 
4.2

 
4.2

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In Management’s Discussion and Analysis, we explain the general financial condition and the results of operations for our company, including:
what factors affect our business;
what our net sales, earnings, gross margins and costs were in 2014, 2013 and 2012;
why those net sales, earnings, gross margins and costs were different from the year before;
how all of this affects our overall financial condition;
what our expenditures for capital projects were in 2014 and 2013 and what we expect them to be in 2015; and
where funds will come from to pay for future expenditures.
As you read Management’s Discussion and Analysis, please refer to our consolidated financial statements, included in Item 8 of this Form 10-K, which present the results of operations for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013.  In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal year 2014 compared to fiscal year 2013 and for fiscal year 2013 compared to fiscal year 2012. Unless otherwise indicated, references to "we," "our" or "Dollar Tree" refer to Dollar Tree, Inc. and its direct and indirect subsidiaries on a consolidated basis and do not give effect to the proposed acquisition of Family Dollar Stores, Inc.


25




Key Events and Recent Developments

Several key events have had or are expected to have a significant effect on our operations. You should keep in mind that:

On March 9, 2015, we entered into a credit agreement and term loan facilities and received $3.95 billion under the Term Loan B which is being held in escrow pending the consummation of the Family Dollar acquisition.
On February 23, 2015, we completed the offering of $3.25 billion of acquisition notes which we expect to use in connection with our financing of the Family Dollar acquisition. The acquisition notes were issued by a wholly owned subsidiary of Dollar Tree and the proceeds of the offering are being held in escrow pending the consummation of the Family Dollar acquisition.
On January 22, 2015, Family Dollar Stores, Inc. shareholders voted to approve our acquisition of Family Dollar.
In January 2015, we completed a 270,000 square foot expansion of our distribution center in Joliet, Illinois. The Joliet distribution center is now a 1,470,000 square foot, fully automated facility.
On July 27, 2014, we entered into an Agreement and Plan of Merger to acquire Family Dollar in a cash and stock transaction.
On September 17, 2013, we entered into agreements with JP Morgan Chase Bank to repurchase $1.0 billion of our common stock under a variable maturity accelerated share repurchase program, 50% of which was collared and 50% of which was uncollared.
On September 16, 2013, we completed a private placement with institutional investors of $750 million aggregate principal amount of Senior Notes. The Senior Notes include three tranches with $300 million of 4.03% Senior Notes due in September 2020, $350 million of 4.63% Senior Notes due in September 2023 and $100 million of 4.78% Senior Notes due in September 2025.
On September 13, 2013, our Board of Directors authorized the repurchase of an additional $2.0 billion of our common stock. This authorization replaced all previous authorizations. At January 31, 2015, we had $1.0 billion remaining under Board repurchase authorization.
In August 2013, we completed a 401,000 square foot expansion of our distribution center in Marietta, Oklahoma. The Marietta distribution center is now a 1,004,000 square foot, fully automated facility.
In June 2013, we completed construction on a new 1.0 million square foot distribution center in Windsor, Connecticut.
In March 2013, we leased an additional 0.4 million square feet at our distribution center in San Bernardino, California. The San Bernardino distribution center is now an 802,000 square foot facility.
On June 6, 2012, we entered into a five-year $750.0 million Unsecured Credit Agreement which provides for a $750.0 million revolving line of credit, including up to $150.0 million in available letters of credit.  The interest rate on the facility is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.

Overview

Our net sales are derived from the sale of merchandise.  Two major factors tend to affect our net sales trends.  First is our success at opening new stores or adding new stores through acquisitions.  Second, sales vary at our existing stores from one year to the next.  We refer to this change as a change in comparable store net sales, because we compare only those stores that are open throughout both of the periods being compared.  We include sales from stores expanded during the year in the calculation of comparable store net sales, which has the effect of increasing our comparable store net sales.  The term 'expanded' also includes stores that are relocated.
At January 31, 2015, we operated 5,367 stores in 48 states and the District of Columbia, and five Canadian provinces, with 46.5 million selling square feet compared to 4,992 stores with 43.2 million selling square feet at February 1, 2014.  During fiscal 2014, we opened 391 stores, expanded 72 stores and closed 16 stores, compared to 343 new stores opened, 71 stores expanded and 22 stores closed during fiscal 2013.  In the current year we increased our selling square footage by 7.4%. Of the 3.2 million selling square foot increase in 2014, 0.2 million was added by expanding existing stores.  The average size of our stores opened in 2014 was approximately 8,060 selling square feet (or about 10,000 gross square feet).  For 2015, we continue to plan to open stores that are approximately 8,000 - 10,000 selling square feet (or about 10,000 - 12,000 gross square feet).  We believe that this store size is our optimal size operationally and that this size also gives our customers an ideal shopping environment that invites them to shop longer and buy more.
Fiscal 2014 and Fiscal 2013 which ended on January 31, 2015, and February 1, 2014, respectively, each included 52 weeks. Fiscal 2012 ended on February 2, 2013 and included 53 weeks, commensurate with the retail calendar. The 53rd week in 2012 added approximately $125 million in sales.

26



In fiscal 2014, comparable store net sales increased by 4.3%.  The comparable store net sales increase was the result of a 3.4% increase in the number of transactions and a 0.9% increase in average ticket.  We believe comparable store net sales continued to be positively affected by a number of our initiatives, as debit and credit card penetration continued to increase in 2014, and we continued the roll-out of frozen and refrigerated merchandise to more of our stores.  At January 31, 2015 we had frozen and refrigerated merchandise in approximately 3,620 stores compared to approximately 3,160 stores at February 1, 2014.  We believe that the addition of frozen and refrigerated product enables us to increase sales and earnings by increasing the number of shopping trips made by our customers.  In addition, we accept food stamps (under the Supplemental Nutrition Assistance Program (“SNAP”)) in approximately 5,000 qualified stores compared to 4,620 at the end of 2013.
Our point-of-sale technology provides us with valuable sales and inventory information to assist our buyers and improve our merchandise allocation to our stores.  We believe that this has enabled us to better manage our inventory flow resulting in more efficient distribution and store operations.
We must continue to control our merchandise costs, inventory levels and our general and administrative expenses as increases in these line items could negatively impact our operating results.
Pending Acquisition
On July 27, 2014, we executed an Agreement and Plan of Merger (the "Merger Agreement") to acquire Family Dollar in a cash and stock transaction (the “Acquisition”). Under the Acquisition, which was approved by Family Dollar shareholders on January 22, 2015, the Family Dollar shareholders will receive $59.60 in cash plus no more than 0.3036 and no less than 0.2484 shares of our common stock for each share of Family Dollar common stock they own. On January 31, 2015, Family Dollar had approximately 114.5 million outstanding shares of common stock. Due to the vesting of outstanding equity awards, Family Dollar is expected to have up to an additional 2.0 million shares of common stock outstanding at closing in connection with the Acquisition. Family Dollar stock options and RSUs will convert into options and RSUs in our common stock. After the Acquisition, we expect that former Family Dollar stockholders will own no more than 15.1% and no less than 12.7% of the outstanding shares of Dollar Tree common stock.
The transaction is subject to expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") and satisfaction or waiver of the other customary closing conditions.
On or before closing, we expect to incur approximately $210.0 million in acquisition-related expenses, of which $75.2 million were incurred in 2014 including $33.5 million that was paid in 2014. During 2014, $28.5 million of acquisition-related expenses were recorded in "selling, general and administrative expenses" and $46.7 million related to commitment fees were recorded in "interest expense, net." We expect to incur an additional $22.6 million in commitment fees in the first quarter of fiscal 2015. We also expect to expend approximately $174.0 million in capitalizable debt issuance costs related to the financing of the Acquisition.
In connection with the Acquisition, we expect to pay off most of our and Family Dollar's existing debt, and obtain approximately $9.5 billion in bank and bond financing to recapitalize the combined company and finance the Acquisition and ongoing operations. On February 23, 2015 we completed the offering of $3.25 billion of acquisition notes and on March 9, 2015 we received funding under the $3.95 billion Term Loan B in connection with the financing. The proceeds of the acquisition notes and Term Loan B are being held in escrow pending consummation of the Acquisition. Please see "Note 11 - Pending Acquisition and Related Debt" beginning on Page 61 of this Form 10-K included in "Part II. Item 8. Financial Statements and Supplementary Data" for more information on the financing.
We expect to achieve approximately $300 million in annual cost savings synergies by the end of the third year after closing, and that we will incur $300 million in one-time costs to achieve those synergies. We project that the Acquisition will be dilutive to earnings per share in the first twelve months following closing on a GAAP basis; however, we expect it will be accretive excluding the one-time costs to achieve synergies.

27



Results of Operations
 
Year Ended
 
January 31,
2015
 
February 1,
2014
 
February 2,
2013
Net sales
100.0
%
 
100.0
%
 
100.0
 %
Cost of sales
64.7
%
 
64.4
%
 
64.1
 %
Gross profit
35.3
%
 
35.6
%
 
35.9
 %
Selling, general and administrative expenses
23.2
%
 
23.2
%
 
23.5
 %
Operating income
12.1
%
 
12.4
%
 
12.4
 %
Interest expense, net
0.9
%
 
0.2
%
 
 %
Other (income) expense, net
0.1
%
 
%
 
(0.8
)%
Income before income taxes
11.1
%
 
12.2
%
 
13.2
 %
Provision for income taxes
4.1
%
 
4.6
%
 
4.8
 %
Net income
7.0
%
 
7.6
%
 
8.4
 %
Fiscal year ended January 31, 2015 compared to fiscal year ended February 1, 2014
Net sales.  Net sales increased 9.7%, or $761.9 million, in 2014 compared to 2013, resulting from sales in our new stores and a 4.3% increase in comparable store net sales. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and, to a lesser extent, are negatively affected when we open new stores or expand stores near existing ones.
The following table summarizes the components of the changes in our store count for fiscal years ended January 31, 2015 and February 1, 2014.
 
January 31, 2015
 
February 1, 2014
New stores
391

 
343

Expanded or relocated stores
72

 
71

Closed stores
(16
)
 
(22
)
Of the 3.2 million selling square foot increase in 2014 approximately 0.2 million was added by expanding existing stores.
Gross profit. Gross profit margin was 35.3% in 2014 compared to 35.6% in 2013 due to increased freight costs partially offset by leverage in occupancy costs from the higher comparable store sales increase.
Selling, general and administrative expenses.  Selling, general and administrative expenses, as a percentage of net sales, remained at 23.2% for 2014 compared to 2013.  Excluding $28.5 million or approximately 35 basis points of expenses related to the Family Dollar acquisition, the selling, general and administrative rate was 22.9%. The decrease is primarily due to lower store payroll, health insurance and workers' compensation costs.
Operating income.  Operating income margin was 12.1% in 2014 compared to 12.4% in 2013. Excluding the approximately 35 basis points of acquisition-related expenses, operating income margin was 12.4% in 2014 as lower selling, general and administrative expenses as a percentage of sales were offset by lower gross profit margin for the reasons noted above.
Interest expense, net. Interest expense, net increased $64.7 million due to $46.7 million of commitment fees related to the financing of the Family Dollar acquisition and a full year of interest expense on the $750.0 million of senior notes issued in September 2013.
Other (income) expense, net.  Other (income) expense, net in 2014 increased $5.6 million primarily due to unfavorable fair market value adjustments for our diesel fuel hedges.
Income taxes.  Our effective tax rate was 37.2% in 2014 compared to 37.5% in 2013. The rate decrease is the result of lower state tax rates and additional work opportunity tax credits in 2014.

28



Fiscal year ended February 1, 2014 compared to fiscal year ended February 2, 2013
Net sales.  Net sales increased 6.0%, or $445.8 million, in 2013 compared to 2012, resulting from sales in our new stores and a 2.4% increase in comparable store net sales. Excluding the 53rd week in 2012, which accounted for approximately $125.0 million of sales, net sales increased 7.9%, or $570.8 million. The comparable store net sales increase is based on the comparable 52 weeks for both years. Comparable store net sales are positively affected by our expanded and relocated stores, which we include in the calculation, and, to a lesser extent, are negatively affected when we open new stores or expand stores near existing ones.
The following table summarizes the components of the changes in our store count for fiscal years ended February 1, 2014 and February 2, 2013.
 
February 1, 2014
 
February 2, 2013
New stores
343

 
345

Expanded or relocated stores
71

 
87

Closed stores
(22
)
 
(25
)
Of the 2.7 million selling square foot increase in 2013 approximately 0.2 million was added by expanding existing stores.
 Gross profit. Gross profit margin was 35.6% in 2013 compared to 35.9% in 2012 due to loss of leverage in occupancy and distribution cost from the 53rd week of sales in 2012.
Selling, general and administrative expenses.  Selling, general and administrative expenses, as a percentage of net sales, decreased to 23.2% for 2013 compared to 23.5% for 2012.  The decrease is primarily due to lower incentive compensation achievement in 2013 compared with 2012 and lower inventory service fees.
Operating income.  Operating income margin was 12.4% in 2013 and 2012 due to the reasons noted above.
Other (income) expense, net.  Other (income) expense, net in 2012 includes a $60.8 million gain on the sale of our investment in Ollie's Holdings, Inc.
Income taxes.  Our effective tax rate was 37.5% in 2013 compared to 36.7% in 2012. The rate increase is the result of statute expirations and the settlement of state tax audits in 2012.
Liquidity and Capital Resources
Our business requires capital to build and open new stores, expand our distribution network and operate and expand existing stores.  Our working capital requirements for existing stores are seasonal and usually reach their peak in September and October.  Historically, we have satisfied our seasonal working capital requirements for existing stores and have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities.
The following table compares cash-flow related information for the years ended January 31, 2015, February 1, 2014 and February 2, 2013:
 
 
Year Ended
 
 
January 31,
 
February 1,
 
February 2,
(in millions)
 
2015
 
2014
 
2013
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
926.8

 
$
794.1

 
$
678.3

Investing activities
 
(315.0
)
 
(325.0
)
 
(261.9
)
Financing activities
 
(14.6
)
 
(597.8
)
 
(303.4
)
Net cash provided by operating activities increased $132.7 million in 2014 compared to 2013 due primarily to an increase in accrued expenditures related to the Family Dollar acquisition and a decrease in cash used to purchase merchandise inventories.

29



Net cash provided by operating activities increased $115.8 million in 2013 compared to 2012 due to a decrease in cash used for prepaid rent and purchasing merchandise inventory partially offset by a decrease in income taxes payable.
Net cash used in investing activities decreased $10.0 million in 2014 compared with 2013 primarily due to reduced capital expenditures, increased proceeds on fixed asset dispositions and reduced purchases of restricted investments.
Net cash used in investing activities increased $63.1 million in 2013 primarily due to the impact from $62.3 million in proceeds from the sale of the investment in Ollie's Holdings, Inc. in 2012.
In 2014, net cash used in financing activities decreased $583.2 million compared to 2013 primarily due to $1.1 billion of share repurchases and the repayment of $250.0 million in long-term debt in 2013 partially offset by the issuance of the $750.0 million of Senior Notes in 2013.
In 2013, net cash used in financing activities increased $294.4 million as a result of an increase in share repurchases in 2013 and the repayment of the $250.0 million outstanding on the revolving credit facility partially offset by $750.0 million of proceeds from the issuance of the Senior Notes.
At January 31, 2015, our long-term borrowings were $757.0 million.  We also have $110.0 million, $100.0 million and $20.0 million Letter of Credit Reimbursement and Security Agreements, under which approximately $162.9 million were committed to letters of credit issued for routine purchases of imported merchandise at January 31, 2015.

In September 2013, we entered into a Note Purchase Agreement with institutional accredited investors in which we issued and sold $750.0 million of senior notes (the "Notes") in an offering exempt from the registration requirements of the Securities Act of 1933. The Notes consist of three tranches: $300.0 million of 4.03% Senior Notes due September 16, 2020; $350.0 million of 4.63% Senior Notes due September 16, 2023; and $100.0 million of 4.78% Senior Notes due September 16, 2025. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year. The Notes are unsecured and rank pari passu in right of repayment with our other senior unsecured indebtedness. We may prepay some or all of the Notes at any time in an amount not less than 5% of the original aggregate principal amount of the Notes to be prepaid, at a price equal to the sum of (a) 100% of the principal amount thereof, plus accrued and unpaid interest, and (b) the applicable make-whole amount. In the event of a change in control (as defined in the Note Purchase Agreement), we may be required to prepay the Notes. The Note Purchase Agreement contains customary affirmative and restrictive covenants. We used the net proceeds of the Notes to finance share repurchases.

On January 20, 2015, we entered into the First Amendment (the “ Notes Amendment”) to the Note Purchase Agreement,with a majority of the noteholders party thereto. The Notes Amendment was entered into in connection with our pending acquisition (the “Acquisition”) of Family Dollar Stores, Inc. (“Family Dollar”). The Notes Amendment will, among other things, allow a newly-formed subsidiary of Dollar Tree to issue debt and hold the proceeds in escrow pending consummation of the Acquisition (such debt, the “Escrow Debt”). Pursuant to the terms of the Notes Amendment, in certain circumstances the amount of interest due on the Notes may increase by 1.0% per annum. The Notes Amendment also contains certain negative covenants and other restrictions applicable during the period in which any Escrow Debt is outstanding. Upon closing of the Acquisition, we expect to fully repay the Notes which will result in the repayment of the $750.0 million outstanding and the payment of approximately $121.2 million of prepayment fees.
In June 2012, we entered into a five-year $750.0 million unsecured Credit Agreement (the Agreement).  The Agreement provides for a $750.0 million revolving line of credit, including up to $150.0 million in available letters of credit.  The interest rate on the Agreement is based, at our option, on a LIBOR rate, plus a margin, or an alternate base rate, plus a margin.  The Agreement also bears a facilities fee, calculated as a percentage, as defined, of the amount available under the line of credit, payable quarterly. The Agreement also bears an administrative fee payable annually.  The Agreement, among other things, requires the maintenance of certain specified financial ratios, restricts the payment of certain distributions and prohibits the incurrence of certain new indebtedness.  As of January 31, 2015, no amount was outstanding under the $750.0 million revolving line of credit.
In September 2013, we amended the Agreement to enable the issuance of the Notes.

On August 15, 2014, we entered into an amendment (the "Credit Amendment") to the Agreement. The Credit Amendment further amends the Agreement to facilitate the issuance and/or borrowings of certain third-party debt financing that we may use to finance the Acquisition. The Credit Amendment also facilitates escrow arrangements related to the Acquisition.
 
On February 23, 2015, our wholly owned subsidiary completed the offering of $750,000,000 aggregate principal amount of 5.250% senior notes due 2020 (the “2020 notes”) and $2,500,000,000 aggregate principal amount of 5.750% senior notes

30



due 2023 (the “2023 notes”, and together with the 2020 notes, the “acquisition notes”). The acquisition notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States, only to non-U.S. investors pursuant to Regulation S under the Securities Act. The acquisition notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent an effective registration statement or an applicable exemption from registration requirements or a transaction not subject to the registration requirements of the Securities Act or any state securities laws.

We expect to use the proceeds of the acquisition notes to finance in part the Acquisition. The proceeds of the 2020 notes and the 2023 notes will be held in, and secured by liens on, separate escrow accounts with U.S. Bank National Association, as escrow agent (the “Escrow Agent”), pending consummation of the Acquisition. We expect that, in connection with the consummation of the Acquisition, our wholly owned subsidiary that issued the acquisition notes will merge with and into us, we will assume the obligations in respect of the acquisition notes, and the acquisition notes will be jointly and severally guaranteed on an unsecured, unsubordinated basis, subject to certain exceptions, by each of our subsidiaries that guarantees the obligations under our new senior secured credit facilities or certain other indebtedness, including Family Dollar and certain of its subsidiaries.

The 2020 notes, which mature on March 1, 2020, were issued pursuant to an indenture, dated as of February 23, 2015, with U.S. Bank National Association, as trustee (the “2020 notes indenture”). The 2023 notes, which mature on March 1, 2023, were issued pursuant to an indenture, dated as of February 23, 2015, with U.S. Bank National Association, as trustee (the “2023 notes indenture”, and together with the 2020 notes indenture, the “indentures”).

The indentures provide that if the Acquisition is not consummated before August 28, 2015, if the Escrow Agent has not received certain additional monthly deposits by certain dates, or upon the occurrence of certain other events, the acquisition notes will be subject to a special mandatory redemption at a price of 100% of the gross proceeds of the acquisition notes offered, plus accrued and unpaid interest to, but excluding, the date of redemption.

Interest on the acquisition notes is due semiannually on March 1 and September 1 of each year, commencing on September 1, 2015. No principal is due on the acquisition notes within five years and annual interest is expected to be approximately $183.1 million.

The indentures contain covenants that, from and after the date of the Acquisition, will limit our and certain of our subsidiaries ability to, among other things and subject to certain significant exceptions: (i) incur, assume or guarantee additional indebtedness; (ii) declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests; (iii) make any principal payment on, or redeem or repurchase, subordinated debt; (iv) make loans, advances or other investments; (v) incur liens; (vi) sell or otherwise dispose of assets, including capital stock of subsidiaries; (vii) consolidate or merge with or into, or sell all or substantially all assets to, another person; and (viii) enter into transactions with affiliates. The indentures also provide for certain events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding acquisition notes under the applicable indenture to be declared immediately due and payable.

On March 9, 2015, our wholly owned subsidiary entered into a credit agreement, with JPMorgan Chase Bank, N.A., as administrative agent, providing for $6,200 million in senior secured credit facilities (the “New Senior Secured Credit Facilities”) consisting of a $1,250 million revolving credit facility (the “New Revolving Credit Facility”) and $4,950 million of term loan facilities (the “New Term Loan Facilities”). The New Term Loan Facilities consist of a $1,000 million Term Loan A tranche and a $3,950 million Term Loan B tranche. The New Revolving Credit Facility and the borrowings under the Term Loan A tranche will mature five years after the closing of the Acquisition, unless any of the 2020 notes remain outstanding as of 91 days prior to their stated maturity, in which case the New Revolving Credit Facility and the borrowings under the Term Loan A tranche will mature at such time. The borrowings under the Term Loan B tranche will mature seven years after the closing of the Acquisition. Annual interest expense on the New Term Loan Facilities is expected to approximate $197.6 million.

The proceeds of the borrowings under the Term Loan B tranche were deposited in an escrow account (separate from the escrow accounts related to the acquisition notes) and will be held in escrow prior to the closing of the Acquisition. Upon the consummation of the Acquisition, we will become the borrower under the New Senior Secured Credit Facilities and will draw the term loans under the Term Loan A facility and will have the ability to borrow under the New Revolving Credit Facility.

The New Senior Secured Credit Facilities will not be guaranteed by us or any of our subsidiaries prior to the consummation of the Acquisition, but upon consummation of the Acquisition the New Senior Secured Credit Facilities will be guaranteed by certain of our direct or indirect wholly owned U.S. subsidiaries, including Family Dollar and certain of its subsidiaries (collectively, the “Credit Agreement Guarantors”). Upon the consummation of the Acquisition, we expect the New

31



Senior Secured Credit Facilities will be secured by a security interest in substantially all the assets of Dollar Tree and the Credit Agreement Guarantors, subject to certain exceptions.

The loans under the Term Loan A tranche and the New Revolving Credit Facility will bear interest at LIBOR plus 2.25% per annum (or a base rate plus 1.25%), and the Term Loan B tranche of the New Senior Secured Credit Facilities will bear interest at LIBOR plus 3.50% per annum (or a base rate plus 2.50%). The Term Loan B tranche will be subject to a “LIBOR floor” of 0.75%. The Term Loan A tranche of the New Term Loan Facilities will require quarterly amortization payments of 1.25% of the original principal amount thereof in the first year following the consummation of the Acquisition, 2.5% of the original principal amount thereof in the second year following the Acquisition, and 3.75% of the original principal amount thereof thereafter and the Term Loan B tranche requires quarterly amortization payments of 0.25% of the original principal amount thereof after the closing of the Acquisition. The New Term Loan Facilities also require mandatory prepayments in connection with certain asset sales and out of excess cash flow, among other things, and subject in each case to certain significant exceptions. We expect to pay certain commitment fees in connection with the New Revolving Credit Facility. Additionally, the Term Loan B tranche of the New Term Loan Facilities will require us to pay a 1.00% prepayment fee if the loans thereunder are subject to certain “repricing” transactions before March 9, 2016.

The New Senior Secured Credit Facilities contain representations and warranties, events of default and affirmative and negative covenants that apply, in certain circumstances, before and after the closing of the Acquisition and are customary for similar financings. These include, among other things and subject to certain significant exceptions, restrictions on our ability to declare or pay dividends, repay the acquisition notes, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. In addition, a financial maintenance covenant based on our consolidated first lien secured net leverage ratio will apply to the New Revolving Credit Facility and the Term Loan A tranche of the New Term Loan Facilities after the closing of the Acquisition.
Historically we have used cash to repurchase shares but we did not repurchase any shares in fiscal 2014.  We repurchased 17.4 million shares for $1,112.1 million in fiscal 2013.  We repurchased 8.1 million shares for $340.2 million in fiscal 2012.  At January 31, 2015, we have $1.0 billion remaining under Board repurchase authorization.
Funding Requirements
Overview, Including Off-Balance Sheet Arrangements
We expect our cash needs for opening new stores and expanding existing stores in fiscal 2015 to total approximately $290.7 million, which includes capital expenditures, initial inventory and pre-opening costs.
Our estimated capital expenditures for fiscal 2015 are between $465.0 million and $475.0 million, including planned expenditures for our new and expanded stores, the addition of freezers and coolers to approximately 320 stores, the initial phases of work on our eleventh distribution center and the expansion of our Olive Branch, Mississippi distribution center.  We believe that we can adequately fund our working capital requirements and planned capital expenditures for the next few years from net cash provided by operations and potential borrowings under our existing credit facility.
The following tables summarize our material contractual obligations at January 31, 2015, including both on- and off-balance sheet arrangements, and our commitments, including interest on long-term borrowings (in millions):
Contractual Obligations
Total
2015
2016
2017
2018
2019
Thereafter
Lease Financing
 
 
 
 
 
 
 
Operating lease obligations
$
2,622.5

$
558.6

$
521.8

$
469.8

$
335.7

$
244.1

$
492.5

Long-term Borrowings
 

 

 

 

 

 

 

Senior notes
750.0






750.0

Forgivable promissory note
7.0



0.2

1.4

1.4

4.0

Interest on long-term borrowings
261.6

33.1

33.1

33.1

33.1

33.1

96.1

Total obligations
$
3,641.1

$
591.7

$
554.9

$
503.1

$
370.2

$
278.6

$
1,342.6


32



Commitments
Total
Expiring in 2015
Expiring in 2016
Expiring in 2017
Expiring in 2018
Expiring in 2019
Thereafter
Letters of credit and surety bonds
$
179.0

$
178.8

$
0.2

$

$

$

$

Technology assets
13.5

13.5






Telecommunication contracts
16.8

7.1

7.1

2.6




Total commitments
$
209.3

$
199.4

$
7.3

$
2.6

$

$

$

Lease Financing
Operating lease obligations.  Our operating lease obligations are primarily for payments under noncancelable store leases.  The commitment includes amounts for leases that were signed prior to January 31, 2015 for stores that were not yet open on January 31, 2015.
Long-term Borrowings
Senior notes. In September 2013, we entered into a Note Purchase Agreement with institutional accredited investors in which we issued and sold $750.0 million of senior notes (the "Notes") in an offering exempt from the registration requirements of the Securities Act of 1933. The Notes consist of three tranches: $300.0 million of 4.03% Senior Notes due September 16, 2020; $350.0 million of 4.63% Senior Notes due September 16, 2023; and $100.0 million of 4.78% Senior Notes due September 16, 2025. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year. For complete terms of the Notes please see Item 8. Financial Statements and Supplementary Data, "Note 5 - Long-Term Debt" beginning on page 54 of this Form 10-K.
Demand revenue bonds.  In May 1998, we entered into an agreement with the Mississippi Business Finance Corporation under which it issued $19.0 million of variable-rate demand revenue bonds.  We used the proceeds from the bonds to finance the acquisition, construction and installation of land, buildings, machinery and equipment for our distribution facility in Olive Branch, Mississippi.  The bonds did not have a prepayment penalty as long as the interest rate remained variable.  The bonds contained a demand provision and, therefore, outstanding amounts were classified as current liabilities.  In 2014, we repaid the $12.8 million outstanding under the Demand Revenue Bonds and the debt was retired.
Forgivable promissory note. In 2012, we entered into a promissory note with the state of Connecticut under which the state loaned us $7.0 million in connection with our acquisition, construction and installation of land, building, machinery and equipment for our distribution facility in Windsor, Connecticut. If certain performance targets are met, the loan and any accrued interest will be forgiven in fiscal 2017. If the performance targets are not met, the loan and accrued interest must be repaid over a five-year period beginning in fiscal 2017.
Interest on long-term borrowings.  These amounts represent interest payments on the Notes, and Forgivable Promissory Note using the interest rates for each at January 31, 2015.
Commitments
Letters of credit and surety bonds.  We are a party to three Letter of Credit Reimbursement and Security Agreements providing $110.0 million, $100.0 million and $20.0 million, respectively for letters of credit.  Letters of credit are generally issued for the routine purchase of imported merchandise and we had approximately $162.9 million of purchases committed under these letters of credit at January 31, 2015.
We also have approximately $11.9 million of letters of credit outstanding for our self-insurance programs and $4.2 million of surety bonds outstanding primarily for certain utility payment obligations at some of our stores.
Technology assets.  We have commitments totaling approximately $13.4 million to primarily purchase store technology assets and maintenance for our stores during 2015.
Telecommunication contracts.  We have contracted for telecommunication services with contracts expiring in 2017.  The total amount of these commitments is approximately $16.8 million.
Derivative Financial Instruments
In 2014 and 2013, we were party to fuel derivative contracts with third parties which included approximately 1.6 million and 2.8 million gallons of diesel fuel, or approximately 10% and 20% of our domestic truckload fuel needs, respectively.  These derivative contracts did not qualify for hedge accounting and therefore all changes in fair value for these derivatives are included in earnings.  We currently have fuel derivate contracts to hedge 6.6 million gallons of diesel fuel, or approximately 40% of our domestic truckload fuel needs from February 2015 through January 2016.

33



Critical Accounting Policies
The preparation of financial statements requires the use of estimates.  Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates.  Following is a discussion of the estimates that we consider critical.
Inventory Valuation
As discussed in Item 8. Financial Statements and Supplementary Data, "Note 1 - Summary of Significant Account Policies" under the caption "Merchandise Inventories" beginning on page 44 of this Form 10-K, inventories at the distribution centers are stated at the lower of cost or market with cost determined on a weighted-average basis.  Cost is assigned to store inventories using the retail inventory method on a weighted-average basis.  Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated cost-to-retail ratio to the retail value of inventories.  The retail inventory method is an averaging method that is widely used in the retail industry and results in valuing inventories at lower of cost or market when markdowns are taken as a reduction of the retail value of inventories on a timely basis.
Inventory valuation methods require certain significant management estimates and judgments, including estimates of future merchandise markdowns and shrink, which significantly affect the ending inventory valuation at cost as well as the resulting gross margins.  The averaging required in applying the retail inventory method and the estimates of shrink and markdowns could, under certain circumstances, result in costs not being recorded in the proper period.
We estimate our markdown reserve based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or seasonal, carryover merchandise on hand, historical markdown statistics and future merchandising plans.  The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends.  Historically, we have not experienced significant differences in our estimated reserve for markdowns compared with actual results.
Our accrual for shrink is based on the actual, historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions and business trends.  These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger.  Our physical inventory counts are generally taken between January and September of each year; therefore, the shrink accrual recorded at January 31, 2015 is based on estimated shrink for most of 2014, including the fourth quarter.  We have not experienced significant fluctuations in historical shrink rates beyond approximately 10-20 basis points in our Dollar Tree stores for the last few years.  However, we have sometimes experienced higher than typical shrink in acquired stores in the year following an acquisition.  We periodically adjust our shrink estimates to address these factors as they become apparent.
Our management believes that our application of the retail inventory method results in an inventory valuation that reasonably approximates cost and results in carrying inventory at the lower of cost or market each year on a consistent basis.
Accrued Expenses
On a monthly basis, we estimate certain expenses in an effort to record those expenses in the period incurred.  Certain expenses, such as legal reserves, require a high degree of judgment and our most material estimates include domestic freight expenses, self-insurance costs, store-level operating expenses, such as property taxes and utilities, and certain other expenses.

We are involved in numerous legal proceedings and claims. Our accruals, if any, related to these proceedings and claims are based on a determination of whether or not the loss is both probable and estimable. We review outstanding matters with external counsel to assess the probability of an unfavorable outcome and estimates of loss. We re-evaluate outstanding proceedings and claims each quarter or as new and significant information becomes available, and we adjust or establish accruals, if necessary. Our legal proceedings are described in "Note 4 - Commitments and Contingencies" under the caption "Contingencies" beginning on Page 51 of this Form 10-K included in "Part II. Item 8. Financial Statements and Supplementary Data.

Our freight and store-level operating expenses are estimated based on current activity and historical trends and results.  Our workers' compensation, general liability and health insurance accruals are recorded based on actuarial valuations which are adjusted at least annually based on a review performed by a third-party actuary.  For our workers' compensation and general liability accruals, these actuarial valuations are estimates based on our historical loss development factors. For our health insurance accrual, the actuary provides an estimate based on historical claims and claim payment timing. Certain other expenses are estimated and recorded in the periods that management becomes aware of them.  The related accruals are adjusted as management’s estimates change.


34



Differences in management's estimates and assumptions could result in accruals which are materially different from the calculated accruals.  Our experience has been that some of our estimates are too high and others are too low.  Historically, the net total of these differences has not had a material effect on our financial condition or results of operations.
Income Taxes
On a quarterly basis, we estimate our required income tax liability and assess the recoverability of our deferred tax assets.  Our income taxes payable are estimated based on enacted tax rates, including estimated tax rates in states where our store base is growing, applied to the income expected to be taxed currently.  Management assesses the recoverability of deferred tax assets based on the availability of carrybacks of future deductible amounts and management’s projections for future taxable income.  We cannot guarantee that we will generate taxable income in future years.  Historically, we have not experienced significant differences in our estimates of our tax accrual.
In addition, we have a recorded liability for our estimate of uncertain tax positions taken or expected to be taken in our tax returns.  Judgment is required in evaluating the application of federal and state tax laws, including relevant case law, and assessing whether it is more likely than not that a tax position will be sustained on examination and, if so, judgment is also required as to the measurement of the amount of tax benefit that will be realized upon settlement with the taxing authority.  Income tax expense is adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amounts recorded.  We believe that our liability for uncertain tax positions is adequate.  For further discussion of our changes in reserves during 2014, see Item 8 “Financial Statements and Supplementary Data - Note 3 to the Consolidated Financial Statements” beginning on page 48 of this Form 10-K.
Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales, comparable store net sales, operating income and net income and expect this trend to continue.  Our results of operations may also fluctuate significantly as a result of a variety of factors, including:
shifts in the timing of certain holidays, especially Easter;
the timing of new store openings;
the net sales contributed by new stores;
changes in our merchandise mix; and
competition.
Our highest sales periods are the Christmas and Easter seasons.  Easter was observed on March 31, 2013 and on April 20, 2014, and will be observed on April 5, 2015.  We believe that the earlier Easter in 2015 could result in a $8.0 million decrease in sales in the first quarter of 2015 as compared to the first quarter of 2014.  We generally realize a disproportionate amount of our net sales and of our operating and net income during the fourth quarter.  In anticipation of increased sales activity during these months, we purchase substantial amounts of inventory and hire a significant number of temporary employees to supplement our continuing store staff.  Our operating results, particularly operating and net income, could suffer if our net sales were below seasonal norms during the fourth quarter or during the Easter season for any reason, including merchandise delivery delays due to receiving or distribution problems, changes in consumer sentiment or inclement weather.
Our unaudited results of operations for the eight most recent quarters are shown in a table in Note 12 of the Consolidated Financial Statements in Item 8 of this Form 10-K.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price and on a profitable basis may be subject to economic factors and influences that we cannot control.  Consumer spending could decline because of economic pressures, including unemployment and rising fuel prices.  Reductions in consumer confidence and spending could have an adverse effect on our sales.  National or international events, including war or terrorism, could lead to disruptions in economies in the United States or in foreign countries.  These and other factors could increase our merchandise costs, fuel costs and other costs that are critical to our operations, such as shipping and wage rates.
Shipping Costs.  Trans-Pacific shipping rates are negotiated with individual freight lines and are subject to fluctuation based on shipping industry market conditions and fuel costs.  We can give no assurances as to the final rate trends for 2015, as we are in the early stages of our negotiations.
Minimum Wage. Multiple states and local jurisdictions passed legislation that increase their minimum wages in 2015 and 2016 and the federal government has made indications that it may consider increasing the federal minimum wage. As a result,

35



we believe our expenses could increase unless we are able to offset the increase in payroll costs by operating more effectively or efficiently.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes and diesel fuel cost changes.  We may enter into interest rate or diesel fuel swaps to manage exposure to interest rate and diesel fuel price changes.  We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Diesel Fuel Cost Risk
In order to manage fluctuations in cash flows resulting from changes in diesel fuel costs, we entered into fuel derivative contracts with third parties.  We hedged 1.6 million, 2.8 million and 4.8 million gallons of diesel fuel in 2014, 2013 and 2012, respectively.  These hedges represented approximately 10%, 20% and 35% of our total domestic truckload fuel needs in 2014, 2013 and 2012, respectively.  We currently have fuel derivate contracts to hedge 6.6 million gallons of diesel fuel, or approximately 40% of our domestic truckload fuel needs from February 2015 through January 2016. Under these contracts, we pay the third party a fixed price for diesel fuel and receive variable diesel fuel prices at amounts approximating current diesel fuel costs, thereby creating the economic equivalent of a fixed-rate obligation.  These derivative contracts do not qualify for hedge accounting and therefore all changes in fair value for these derivatives are included in earnings.  The fair value of these contracts as of January 31, 2015 was a liability of $5.7 million.



36



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
 
 
Report of Independent Registered Public Accounting Firm
 
 
Consolidated Income Statements for the years ended
 
January 31, 2015, February 1, 2014 and February 2, 2013
 
 
Consolidated Statements of Comprehensive Income
 
for the years ended January 31, 2015, February 1, 2014 and
 
February 2, 2013
 
 
Consolidated Balance Sheets as of January 31, 2015 and
 
February 1, 2014
 
 
Consolidated Statements of Shareholders’ Equity for the years
 
ended January 31, 2015, February 1, 2014 and
 
February 2, 2013
 
 
Consolidated Statements of Cash Flows for the years ended
 
January 31, 2015, February 1, 2014 and February 2, 2013
 
 
Notes to Consolidated Financial Statements

37



Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Dollar Tree, Inc.:
We have audited the accompanying consolidated balance sheets of Dollar Tree, Inc. (the Company) as of January 31, 2015 and February 1, 2014, and the related consolidated income statements, and statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2015 and February 1, 2014, and the results of its operations and its cash flows for each of the years in the three‑year period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Norfolk, Virginia
March 13, 2015


38



DOLLAR TREE, INC.
CONSOLIDATED INCOME STATEMENTS
 
 
Year Ended
 
 
January 31,
 
February 1,
 
February 2,
(in millions, except per share data)
 
2015
 
2014
 
2013
Net sales
 
$
8,602.2

 
$
7,840.3

 
$
7,394.5

Cost of sales
 
5,568.2

 
5,050.5

 
4,741.8

Gross profit
 
3,034.0

 
2,789.8

 
2,652.7

Selling, general and administrative
 
 

 
 

 
 

expenses
 
1,993.8

 
1,819.5

 
1,732.6

Operating income
 
1,040.2

 
970.3

 
920.1

Interest expense, net
 
80.1

 
15.4

 
2.8

Other (income) expense, net
 
5.9

 
0.6

 
(61.6
)
Income before income taxes
 
954.2

 
954.3

 
978.9

Provision for income taxes
 
355.0

 
357.6

 
359.6

Net income
 
$
599.2

 
$
596.7

 
$
619.3

Basic net income per share
 
$
2.91

 
$
2.74

 
$
2.70

Diluted net income per share
 
$
2.90

 
$
2.72

 
$
2.68

See accompanying Notes to Consolidated Financial Statements

39




DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Year Ended
 
 
January 31,
 
February 1,
 
February 2,
(in millions)
 
2015
 
2014
 
2013
Net income
 
$
599.2

 
$
596.7

 
$
619.3

 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(17.2
)
 
(15.4
)
 
(0.9
)
 
 
 
 
 
 
 
Total comprehensive income
 
$
582.0

 
$
581.3

 
$
618.4


See accompanying Notes to Consolidated Financial Statements

40




DOLLAR TREE, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
 
January 31, 2015
 
February 1, 2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
864.1

 
$
267.7

Merchandise inventories, net
 
1,035.7

 
1,035.3

Current deferred tax assets, net
 
28.3

 
18.9

Prepaid expenses and other current assets
 
66.5

 
56.6

Total current assets
 
1,994.6

 
1,378.5

Property, plant and equipment, net
 
1,210.5

 
1,094.0

Goodwill
 
164.6

 
169.3

Deferred tax assets, net
 
30.6

 
24.1

Other assets, net
 
166.7

 
106.0

TOTAL ASSETS
 
$
3,567.0

 
$
2,771.9

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$

 
$
12.8

Accounts payable
 
433.6

 
393.9

Other current liabilities
 
385.3

 
232.3

Income taxes payable
 
42.7

 
47.3

Total current liabilities
 
861.6

 
686.3

Long-term debt, excluding current portion
 
757.0

 
757.0

Income taxes payable, long-term
 
6.5

 
5.5

Other liabilities
 
156.9

 
152.4

Total liabilities
 
1,782.0

 
1,601.2

Commitments and contingencies
 


 


Shareholders' equity:
 
 

 
 

Common stock, par value $0.01;  600,000,000 shares
 
 

 
 

authorized, 205,683,113 and 208,131,669 shares
 
 

 
 

issued and outstanding at January 31, 2015
 
 

 
 

and February 1, 2014, respectively
 
2.1

 
2.1

Additional paid-in capital
 
43.0

 
10.7

Accumulated other comprehensive loss
 
(34.1
)
 
(16.9
)
Retained earnings
 
1,774.0

 
1,174.8

Total shareholders' equity
 
1,785.0

 
1,170.7

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
3,567.0

 
$
2,771.9

See accompanying Notes to Consolidated Financial Statements

41



DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED JANUARY 31, 2015, FEBRUARY 1, 2014, AND FEBRUARY 2, 2013
(in millions)
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Share-
holders'
Equity
Balance at January 28, 2012
 
231.2

 
$
1.1

 
$

 
$
(0.6
)
 
$
1,344.1

 
$
1,344.6

Net income
 

 

 

 

 
619.3

 
619.3

Total other comprehensive loss
 

 

 

 
(0.9
)
 

 
(0.9
)
Transfer from additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
for Common Stock dividend
 

 
1.2

 
(1.2
)
 

 

 

Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.1

 

 
4.8

 

 

 
4.8

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $7.0
 
0.6

 

 
12.8

 

 

 
12.8

Repurchase and retirement of shares
 
(8.1
)
 
(0.1
)
 
(43.0
)
 

 
(297.1
)
 
(340.2
)
Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $14.3
 
0.8

 

 
26.9

 

 

 
26.9

Balance at February 2, 2013
 
224.6

 
2.2

 
0.3

 
(1.5
)
 
1,666.3

 
1,667.3

Net income
 

 

 

 

 
596.7

 
596.7

Total other comprehensive loss
 

 

 

 
(15.4
)
 

 
(15.4
)
Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.1

 

 
4.8

 

 

 
4.8

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $1.6
 
0.1

 

 
3.7

 

 

 
3.7

Repurchase and retirement of shares
 
(17.4
)
 
(0.1
)
 
(23.8
)
 

 
(1,088.2
)
 
(1,112.1
)
Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $8.2
 
0.7

 

 
25.7

 

 

 
25.7

Balance at February 1, 2014
 
208.1

 
2.1

 
10.7

 
(16.9
)
 
1,174.8

 
1,170.7

Net income
 

 

 

 

 
599.2

 
599.2

Total other comprehensive loss
 

 

 

 
(17.2
)
 

 
(17.2
)
Issuance of stock under Employee Stock
 
 

 
 

 
 

 
 

 
 

 
 

Purchase Plan
 
0.1

 

 
4.7

 

 

 
4.7

Exercise of stock options, including
 
 

 
 

 
 

 
 

 
 

 
 

income tax benefit of $1.4
 
0.1

 

 
2.1

 

 

 
2.1

Repurchase and retirement of shares
 
(3.1
)
 

 

 

 

 

Stock-based compensation, net, including
 
 

 
 

 
 

 
 

 
 

 
 

  income tax benefit of $3.1
 
0.5

 

 
25.5

 

 

 
25.5

Balance at January 31, 2015
 
205.7

 
$
2.1

 
$
43.0

 
$
(34.1
)
 
$
1,774.0

 
$
1,785.0

See accompanying Notes to Consolidated Financial Statements

42

DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


 
 
Year Ended
 
 
January 31,
 
February 1,
 
February 2,
(in millions)
 
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
599.2

 
$
596.7

 
$
619.3

Adjustments to reconcile net income to net cash
 
 

 
 

 
 

provided by operating activities:
 
 

 
 

 
 

Depreciation and amortization
 
205.9

 
190.5

 
175.3

Gain on sale of Ollie's investment
 

 

 
(60.8
)
Provision for deferred income taxes
 
(18.1
)
 
6.7

 
(7.7
)
Stock-based compensation expense
 
38.3

 
37.0

 
35.5

Other non-cash adjustments to net income
 
4.3

 
4.6

 
4.7

Changes in assets and liabilities increasing
 
 

 
 

 
 

(decreasing) cash and cash equivalents:
 
 

 
 

 
 

Merchandise inventories
 
(6.0
)
 
(67.7
)
 
(104.0
)
Prepaids and other current assets
 
(12.2
)
 
26.1

 
(56.7
)
Accounts payable
 
41.9

 
46.9

 
59.3

Income taxes payable
 
(4.6
)
 
(32.3
)
 
16.3

Other current liabilities
 
87.5

 
(2.9
)
 
20.3

Other liabilities
 
(9.4
)
 
(11.5
)
 
(23.2
)
Net cash provided by operating activities
 
926.8

 
794.1

 
678.3

Cash flows from investing activities:
 
 

 
 

 
 

Capital expenditures
 
(325.6
)
 
(330.1
)
 
(312.2
)
Proceeds from sale of Ollie's investment
 

 

 
62.3

Purchase of restricted investments
 
(6.8
)
 
(8.8
)
 
(11.0
)
Proceeds from sale of restricted investments
 
15.8

 
15.0

 

Proceeds from (payments for) fixed asset disposition
 
1.6

 
(0.8
)
 
(1.0
)
Acquisition of favorable lease rights
 

 
(0.3
)
 

Net cash used in investing activities
 
(315.0
)
 
(325.0
)
 
(261.9
)
Cash flows from financing activities:
 
 

 
 

 
 

Principal payments for long-term debt
 
(12.8
)
 
(271.5
)
 
(1.5
)
Proceeds from long-term debt
 

 
770.0

 
7.0

Debt issuance costs
 
(11.8
)
 

 

Payments for share repurchases
 

 
(1,112.1
)
 
(340.2
)
Proceeds from stock issued pursuant to stock-based
 
 

 
 

 
 

compensation plans
 
5.5

 
6.0

 
10.0

Tax benefit of exercises/vesting of equity based compensation
 
4.5

 
9.8

 
21.3

Net cash used in financing activities
 
(14.6
)
 
(597.8
)
 
(303.4
)
Effect of exchange rate changes on cash and cash equivalents
 
(0.8
)
 
(3.5
)
 
(1.4
)
Net increase (decrease) in cash and cash equivalents
 
596.4

 
(132.2
)
 
111.6

Cash and cash equivalents at beginning of year
 
267.7

 
399.9

 
288.3

Cash and cash equivalents at end of year
 
$
864.1

 
$
267.7

 
$
399.9

Supplemental disclosure of cash flow information:
 
 

 
 

 
 

Cash paid for:
 
 

 
 

 
 

Interest
 
$
33.9

 
$
14.5

 
$
3.3

Income taxes