The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying consolidated financial statements and these notes have been prepared in accordance with the rules and regulations of the SEC for interim financial information. The consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly our financial condition, results of operations, and cash flows for all periods presented. The consolidated financial statements, however, do not include all information necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  Interim results may not necessarily be indicative of results that may be expected for, or actually result during, any other interim period or for the year as a whole.whole, including as a result of the COVID-19 coronavirus pandemic, which has disrupted and may continue to disrupt our business.  We have historically experienced and expect to continue to experience, seasonal fluctuations, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter.  However, due to demand volatility we have experienced during the COVID-19 coronavirus pandemic, the seasonality of our 2020 results may differ from our historical experience. The accompanying consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 2, 1, 2020 (“2019 (“2018 Form 10-K”).

Our fiscal year ends on the Saturday nearest to January 31, which results in fiscal years consisting of 52 or 53 weeks.  Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years.  Fiscal year 2020 (“2020”) is comprised of the 52 weeks that began on February 2, 2020 and will end on January 30, 2021.  Fiscal year 2019 (“2019”) iswas comprised of the 52 weeks that began on February 3, 2019 and will endended on February 1, 2020.  Fiscal year 2018 (“2018”) was comprised of the 52 weeks that began on February 4, 2018 and ended on February 2, 2019.  The fiscal quarters ended August 3,May 2, 2020 (“first quarter of 2020”) and May 4, 2019 (“secondfirst quarter of 2019”) and August 4, 2018 (“second quarter of 2018”) were both comprised of 13 weeks. The year-to-date periods ended August 3, 2019 (“year-to-date 2019") and August 4, 2018 (“year-to-date 2018”) were both comprised of 26 weeks.

Selling and administrative expenses include store expenses (such as payroll and occupancy costs) and costs related to warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance, non-income taxes, accepting credit/debit cards, and overhead.  Our selling and administrative expense rates may not be comparable to those of other retailers that include warehousing, distribution, and outbound transportation costs in cost of sales.  Warehousing, distribution, and outbound transportation costs included in selling and administrative expenses were $43.2$52.3 million and $42.6$45.1 million for the secondfirst quarter of 20192020 and the secondfirst quarter of 2018, respectively, and $88.3 million and $85.5 million for the year-to-date 2019, and the year-to-date 2018, respectively.

Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, digital, internet and e-mail marketing and advertising, and in-store point-of-purchase signage and presentations.  Advertising expenses are included in selling and administrative expenses.  Advertising expenses were $17.3$23.0 million and $16.4$22.4 million for the secondfirst quarter of 20192020 and the secondfirst quarter of 2018, respectively, and $39.7 million and $38.3 million for the year-to-date 2019, and the year-to-date 2018, respectively.

On August 31, 2018, we entered into a $700 million five-year unsecured credit facility (“2018 Credit Agreement”) that replaced our prior credit facility entered into in July 2011 and most recently amended in May 2015 (“2011 Credit Agreement”). The 2018 Credit Agreement expires on August 31, 2023. In connection with our entry into the 2018 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $1.5 million, which are being amortized over the term of the 2018 Credit Agreement.

Borrowings under the 2018 Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness.  The 2018 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit.  The interest rates, pricing and fees under the 2018 Credit Agreement fluctuate based on our debt rating.  The 2018 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options.  The interest rate options are generally derived from the prime rate or LIBOR.  We may prepay revolving loans made under the 2018 Credit Agreement.  The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio.  The covenants of the 2018 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with the synthetic lease for our new distribution center in Apple Valley, California. A violation of any of the covenants could result in a default under the 2018 Credit Agreement that would permit the lenders to restrict our ability to further access the 2018 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2018 Credit Agreement.  At August 3, 2019,May 2, 2020, we had $467.8$390.0 million of borrowings outstanding under the 2018 Credit Agreement, while $16.1$9.5 million was committed to outstanding letters of credit, leaving $216.1$300.5 million available under the 2018 Credit Agreement.

In connection with our nonqualified deferred compensation plan, we had mutual fund investments of $32.6$28.7 million and $31.6$33.7 million at August 3, 2019May 2, 2020 and February 2, 2019,1, 2020, respectively, which were recorded in other assets. These investments were classified as trading securities and were recorded at their fair value. The fair values of mutual fund investments were Level 1 valuations under the fair value hierarchy because each fund’s quoted market value per share was available in an active market.

The fair values of our long-term obligations under the 2018 Credit Agreement are estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for similar instruments. These fair value measurements are classified as Level 2 within the fair value hierarchy. Given the variable rate features and relatively short maturity of the instruments underlying our long-term obligations,the 2018 Credit Agreement, the carrying value of these instruments approximates their fair value.

The fair value of our long-term obligations under the 2019 Term Note are based on quoted market prices and are classified as Level 2 within the fair value hierarchy. The carrying value of the instrument approximates its fair value.

The carrying value of accounts receivable and accounts payable approximates fair value because of the relatively short maturity of these items.

There were no adjustments required to be made to the weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share. At August 3,May 2, 2020 and May 4, 2019, we excluded from securities outstanding for the computation of earnings per share, antidilutive stock options, restricted stock units, and performance share units, for which the minimum applicable performance conditions had not been attained as of August 3,May 2, 2020 and May 4, 2019, and antidilutiverespectively. For the first quarter of 2020, it was determined that an immaterial amount of stock options and restricted stock units. At August 4, 2018, thereoutstanding were no securities outstanding which were excluded from the computation of earnings per share other than antidilutive stock options, restricted stock units, and performance share units. For the second quarter of 2019 and 2018, there were 0.2 million and 0.1 million stock options, respectively, outstanding that were antidilutive, as determined under the treasury stock method, and excluded from the computation of diluted earnings. Thereearnings, and for the first quarter of 2019, there were 0.20.1 million stock options outstanding for the year-to-date 2019 that were antidilutive, and for the year-to-date 2018, antidilutive options outstanding were determined to be immaterial.antidilutive. Antidilutive stock options generally consist of outstanding stock options where the exercise price per share is greater than the weighted-average market price per share for our common shares for each period. Antidilutive stock options, restricted stock units and performance share units are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. The restricted stock units and performance share units that were antidilutive, as determined under the treasury stock method, were 0.5 million and 0.20.3 million for the secondfirst quarter of 20192020 and 2018, respectively. The restricted stock units and performance share units that were antidilutive, as determined under the treasury stock method, were 0.4 million and 0.1 million for the year-to-date 2019 and 2018, respectively.

The CompanyWe declared and paid cash dividends per common share during the quarterly periods presentedfirst quarter of 2020 as follows:

The amount of dividends declared may vary from the amount of dividends paid in a period due to the vesting of restricted stock awards, restricted stock units and performance share units. The payment of future dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with applicable laws and agreements and any other factors deemed relevant by our Board.Board of Directors.

We have issued nonqualified stock options, restricted stock awards, restricted stock units, and performance share units under our shareholder-approved equity compensation plans.  At May 2, 2020, the number of nonqualified stock options outstanding was immaterial. Our restricted stock units and performance share units, as described below, are expensed and reported as non-vested shares. We recognized share-based compensation expense of $4.2$3.0 million and $5.0$4.3 million in the secondfirst quarter of 2020 and the first quarter of 2019, and the second quarter of 2018, respectively, and $8.6 million and $17.2 million for the year-to-date 2019 and the year-to-date 2018, respectively.

The following table summarizes the non-vested restricted stock units activity for the year-to-date 2019:first quarter of 2020:

The non-vested restricted stock units granted in the year-to-date 2019first quarter of 2020 generally vest and are expensed on a ratable basis over three years from the grant date of the award, if certaina threshold financial performance objectives areobjective is achieved and the grantee remains employed by us through the vesting dates.

In the year-to-date 2019,first quarter of 2020, we awarded performance share units (“RPSUs”) to certain members of senior management, which vest based on the achievement of share price performance goals and a minimum service requirement of one year. The RPSUs have a contractual term of three years. We use a Monte Carlo simulation to estimate the fair value of the RPSUs on the grant date and recognize expense over the derived service period. If the share price performance goals applicable to the RPSUs are not achieved prior to expiration, the unvested portion of the awards will be forfeited. Shares issued in connection with vested RPSUs are generally restricted from sale, transfer, or other disposition prior to the third anniversary of the grant date except under certain circumstances, such as death, disability, or change in control.

Prior to 2020, we issued performance share units (“PSUs”) to certain members of management, which will vest if certain financial performance objectives are achieved over a three-year performance period and the grantee remains employed by us during the performance period. TheTypically, the financial performance objectives for each fiscal year within the three-year performance period will beare approved by the Compensation Committee of our Board of Directors during the first quarter of the respective fiscal year. For the first quarter of 2020, due to the lack of business visibility resulting from the COVID-19 pandemic, the Compensation Committee chose to defer establishment of the 2020 performance objectives until later in the fiscal year.

As a result of the process used to establish the financial performance objectives, we will only meet the requirements for establishing a grant date for the PSUs when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.

The number of shares to be distributed upon vesting of the PSUs depends on the average performance attained during the three-year performance period compared to the performance targets established by the Compensation Committee, and may result in the distribution of an amount of shares that is greater or less than the number of PSUs granted, as defined in the award agreement. At August 3, 2019, we estimateDuring the attainmentfirst quarter of an average performance that is lower than the targets established for2020, the PSUs issued in 2017 but abovevested with an average performance attainment lower than the minimum attainment for vesting. Wetargets established. During the first quarters of 2020 and 2019, we recognized $1.0$0.4 million and $2.6$1.2 million in the second quarter of 2019 and 2018, respectively, and $2.2 million and $11.2 million in the year-to-date 2019 and 2018, respectively, of share-based compensation expense related to PSUs.PSUs, respectively.

The following table summarizes the activity related to PSUs and RPSUs for the year-to-date 2019:first quarter of 2020:

The following activity occurred under our share-based plans during the respective periods shown:

The total unearned compensation cost related to all share-based awards outstanding, excluding PSUs issued in 2018 and 2019, at August 3, 2019May 2, 2020 was approximately $20.9$29.6 million.  This compensation cost is expected to be recognized through March 2022April 2023 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 2.02.2 years from August 3, 2019.May 2, 2020.

We have estimated the reasonably possible expected net change in unrecognized tax benefits through May 2, 2020, based on (1) expected cash and noncash settlements or payments of uncertain tax positions, and (2) lapses of the applicable statutes of limitations for unrecognized tax benefits.  The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $5.0$4.0 million.  Actual results may differ materially from this estimate.

We currently are defending fournumerous purported wage and hour class actions and several individual representative actions in California, the vast majority of which have been brought since January 2018.California. The cases were brought by various current and/or former California associates alleging various violations of California wage and hour laws. Upon furtherDuring the first quarter of 2019, upon consideration of these matters, including outcomes of cases against other retailers, during the first quarter of 2019, we determined a loss from these matters was probable and we increased our accrual for litigation by recording a $7.3 million charge as our best estimate for these matters in aggregate. Since the end of the first quarter of 2019, we reached tentative settlements in each of the class actions, subjectWe intend to final documentation and court approval. We intendcontinue to defend ourselves vigorously against the allegations levied in the remainingthese lawsuits. We believe the existing accrual for litigation remains appropriate.

We are involved in other legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material effect on our financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material effect on our financial condition, results of operations, and liquidity.

We periodically assess, and makepotentially enact minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.

The following table presents net sales data by merchandise category:

The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.

Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, developments related to the COVID-19 coronavirus pandemic, the current economic and credit conditions, the cost of goods, our inability to successfully execute strategic initiatives, competitive pressures, economic pressures on our customers and us, the availability of brand name closeout merchandise, trade restrictions, freight costs, the risks discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, and other factors discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report should be read in conjunction with such filings, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.

The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes.  Each term defined in the notes has the same meaning in this item and the balance of this report.

The following are the results from the secondfirst quarter of 20192020 that we believe are key indicators of our operating performance when compared to our operating performance from the secondfirst quarter of 2018:2019:

See the discussion and analysis below for additional details regarding our operating results.

The following table presents stores opened and closed during the year-to-date 2019first quarter of 2020 and the year-to-date 2018:first quarter of 2019:

We expect our store count at the end of 2020 to open approximately 52 stores and close approximately 47 stores duringbe consistent with our store count at the end of 2019.

The following table compares components of our consolidated statements of operations and comprehensive income as a percentage of net sales at the end of each period:

Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comparable store sales (“comp” or “comps”) in the secondfirst quarter of 20192020 compared to the secondfirst quarter of 20182019 were as follows:

 

We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.

Net sales increased $30.2$143.4 million, or 2.5%11.1%, to $1,252.4$1,439.1 million in the secondfirst quarter of 2019,2020, compared to $1,222.2$1,295.8 million in the secondfirst quarter of 2018.2019.  The increase in net sales was partlyprimarily driven by a 1.2%10.3% increase in our comps, which increased net sales by $14.4$126.3 million. Additionally, our non-comparable store sales increased net sales by $15.8 million. While we experienced a net decrease of four stores at the end of the second quarter of 2019 compared to the number of stores open at the end of the second quarter of 2018, the productivity$17.1 million, driven by increased sales of our new and relocated stores has significantly outperformed the productivity of the stores we closed.compared to closed stores. Our comps are calculated based on the results of all stores that were open at least fifteen months plus the results of our e-commerce net sales.

OurOverall, we experienced a favorable impact to net sales during the first quarter of 2020 due to our position as an “essential retailer” during the COVID-19 coronavirus pandemic. The first quarter of 2020 began with a slow start as net sales for February 2020 were below the prior year and we believe that much of that decrease was attributable to the timing of tax refunds. However, in March 2020, we experienced a significant increase in demand for “Essential Products,” which we define as food, consumables, health products, and pet supplies, with the primary impact in our Food and Consumables merchandise categories, as concern over the COVID-19 coronavirus grew and customers began stocking up on Essential Products. Net sales in early April 2020 decreased compared to early April 2019 as a result of our decision to cancel a Friends and Family promotion and close our stores for the Easter holiday in response to the COVID-19 coronavirus pandemic. From the middle of April 2020 through the end of the first quarter of 2020, we experienced a surge in demand for products in our Furniture, Seasonal, and Soft Home merchandise categories, which corresponded with the release of government stimulus and unemployment funds under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, in addition to continued demand for Essential Products. Additionally, we believe our net sales in the first quarter of 2020 were favorably impacted by a decrease in competition compared to the first quarter of 2019, as certain of our competitors were closed due to the COVID-19 coronavirus pandemic.

The Furniture, Consumables, Soft Home, Food, Seasonal, and Electronics, Toys, & Accessories merchandise categories generated increased net sales and positive comps in the secondfirst quarter of 20192020 compared to the secondfirst quarter of 2018:2019:

Gross margin dollars increased $6.8$51.8 million, or 1.4%10.0%, to $498.2$570.8 million for the secondfirst quarter of 2019,2020, compared to $491.4$519.0 million for the secondfirst quarter of 2018.2019. The increase in gross margin dollars was primarily due to an increase in net sales, which increased gross margin dollars by $12.2$57.4 million. Gross margin as a percentage of net sales decreased 40 basis points to 39.8%39.7% in the secondfirst quarter of 20192020 as compared to 40.2%40.1% in the secondfirst quarter of 2018.2019. The gross margin rate decrease was primarily due to product mix resulting from increased sales of Essential Products, which have a lower average gross margin rate, and a higher markdownshrink rate from promotional selling, which wasduring the first quarter of 2020, partially offset by the absence of a higher initial mark-up compared to$6.0 million impairment of inventory in our greeting cards department recorded in the secondfirst quarter of 2018.2019.

Selling and administrative expenses were $455.0$458.6 million for the secondfirst quarter of 2019,2020, compared to $426.6$460.6 million for the secondfirst quarter of 2018.2019.  The increasedecrease of $28.4$2.0 million in selling and administrative expenses was driven by $19.5the absence of $15.3 million in costs incurred for our transformational restructuring initiative in the first quarter of 2019 and the absence of a $7.3 million loss contingency recorded in the first quarter of 2019 associated with wage and hour claims in the State of California, partially offset by an increase of $7.2 million in distribution and transportation costs, store-related payroll of $4.0 million, store occupancy costs of $4.0 million, employee retirement and separation costs of $3.9 million, and proxy contest related costs of $3.7 million in the first quarter of 2020. The costs associated with our transformational restructuring initiative announced in the first quarter of 2019, store-related occupancy costs of $8.5 million, and $4.1 million in accrued bonus expense, partially offset by a decrease in self-insurance costs of $2.4 million and store-related payroll of $1.5 million. The costs associated with our transformational restructuring consisted of consulting expenses and employee separation costs focused in our store organization, incurred during the secondfirst quarter of 2019. In the first quarter of 2019, we accrued estimated legal loss contingencies associated with employee class actions in the state of California of $7.3 million. The increase in distribution and transportation expenses were primarily due to the transition from our Rancho Cucamonga, California distribution center to our new Apple Valley, California distribution center, which was completed during early 2020. Additionally, implementation of a $2 per hour wage increase for most of our non-exempt workforce during the COVID-19 coronavirus pandemic increased distribution and transportation expenses and store-related payroll in the first quarter of 2020. Store-related occupancy costs increased indue to new stores opened since the secondfirst quarter of 2019, primarily due towhich have higher rents than the impact of the adoption of a new lease accounting standard,stores closed, and normal rent increases for stores that we renewed in late 2018, and the impact of a few early store closings.resulting from lease renewals. The increase in accrued bonus expenseemployee retirement and separation costs was primarily driven by stronger performancethe retirement and separation of senior executives. The proxy contest related costs were comprised of legal, public relations, and advisory fees, and settlement costs incurred to resolve a proxy contest in the secondfirst quarter of 2019 relative to our quarterly and annual operating plans as compared to our performance in the second quarter of 2018 relative to our quarterly and annual operating plans. Self-insurance costs decreased in the second quarter of 2019 primarily as a result of lower workers' compensation and general liability claims. The decrease in store-related payroll in the second quarter of 2019 is primarily due to a reduction in the volume of inventory receipts at our stores, along with a net decrease of 4 stores since the end of the second quarter of 2018.2020.

As a percentage of net sales, selling and administrative expenses increased 140decreased 360 basis points to 36.3%31.9% for the secondfirst quarter of 20192020 compared to 34.9%35.5% for the secondfirst quarter of 2018.2019.

Depreciation expense decreased $0.5increased $4.9 million to $30.0$37.7 million in the secondfirst quarter of 2019,2020, compared to $30.5$32.8 million for the secondfirst quarter of 2018.2019. Depreciation expense as a percentage of sales decreasedincreased 10 basis points compared to the secondfirst quarter of 2018.2019. The decreaseincrease was driven primarily by a changeinvestments in our accounting estimate onApple Valley, California distribution center, new store build-outs, and Store of the useful livesFuture remodels, and the acquisition of our leasehold improvements, fixtures, and equipment. We extended our estimated useful lives on stores that we have converted to our store of the future concept to more accurately reflect our expected usage period and average remaining lease term. The decrease in expense was partially offset by our continued investment in our store of the future concept, through both remodels and new stores.corporate headquarters.

Interest expense was $4.6$3.3 million in the secondfirst quarter of 2019,2020, compared to $2.4$3.7 million in the secondfirst quarter of 2018.2019. The increasedecrease in interest expense was driven by botha lower average interest rate on our revolving debt under the 2018 Credit Agreement, partially offset by higher total average borrowings (including finance leases). The average interest rate on our revolving debt, which is variable based on LIBOR and an increaseour credit rating, decreased due to a significant decline in interest ratesthe LIBOR rate in the first quarter of 2020 as a result of the COVID-19 coronavirus pandemic, partially offset by the impact of a decrease in our credit rating during the past 12 months.first quarter of 2020. We had total average borrowings (including financing and capitalfinance leases) of $482.1$452.8 million in the secondfirst quarter of 20192020 compared to total average borrowings of $291.6$428.8 million in the secondfirst quarter of 2018.2019. The increase in total average borrowings (including finance leases) was driven by an increaseour decision in the first quarter of $195.32020 to draw approximately $200 million in our average revolving debt balanceof additional borrowings under the 2018 Credit Agreement as a safeguard due to uncertainty caused by the COVID-19 coronavirus pandemic, which was driven by beginningwere held in Cash and Cash Equivalents at May 2, 2020. Additionally, our entry into the 2019 with a debt balance that was $174.3 million higher than the beginning of 2018. TheTerm Note increased debt balance was principally driven by elevated capital expenditures during the past twelve months. Theour total average interest rate on our revolving debt was impacted by increasesborrowings (including finance leases) in the LIBOR rate, as our 2011 Credit Agreement was and our 2018 Credit Agreement is, variable based on LIBOR, and a lowering of our credit rating in the fourthfirst quarter of 2018.2020 by $62.0 million.

The effective income tax rate for the secondfirst quarter of 2020 and the first quarter of 2019 was 27.2% and the second quarter of 2018 was 21.1% and 24.6%31.9%, respectively. The decrease in the effective income tax rate was primarily attributable to an increase in favorable state tax settlement activities partially offset by an increase in nondeductible expenses. Additionally, the effective income tax rate in the second quarter of 2019 was impacted by the lower overall income before income taxes as compared to the second quarter of 2018.