SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: July 29, 2017May 5, 2018
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 1-10299
(Exact name of registrant as specified in its charter)
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New York | 13-3513936 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
330 West 34th Street, New York, New York 10001
(Address of principal executive offices, Zip Code)
(212-720-3700)
(Registrant’s telephone number, including area code)
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐ | ||||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐ | ||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | ||||
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Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
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Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑ |
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Number of shares of Common Stock outstanding as of |
FOOT LOCKER, INC.
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except shares)
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| July 29, |
| July 30, |
| January 28, | May 5, |
| April 29, |
| February 3, | ||||||
| 2017 |
| 2016 |
| 2017 | 2018 |
| 2017 |
| 2018 | ||||||
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| * | (Unaudited) |
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| * | ||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 1,043 |
| $ | 945 |
| $ | 1,046 | $ | 1,029 |
| $ | 1,049 |
| $ | 849 |
Merchandise inventories |
| 1,290 |
| 1,339 |
| 1,307 |
| 1,210 |
| 1,279 |
| 1,278 | ||||
Other current assets |
| 311 |
| 301 |
| 280 |
| 301 |
| 294 |
| 424 | ||||
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| 2,644 |
| 2,585 |
| 2,633 |
| 2,540 |
| 2,622 |
| 2,551 | ||||
Property and equipment, net |
| 821 |
| 726 |
| 765 |
| 843 |
| 792 |
| 866 | ||||
Deferred taxes |
| 167 |
| 174 |
| 161 |
| 104 |
| 162 |
| 48 | ||||
Goodwill |
| 158 |
| 156 |
| 155 |
| 158 |
| 156 |
| 160 | ||||
Other intangible assets, net |
| 45 |
| 44 |
| 42 |
| 43 |
| 43 |
| 46 | ||||
Other assets |
| 111 |
| 77 |
| 84 |
| 275 |
| 102 |
| 290 | ||||
| $ | 3,946 |
| $ | 3,762 |
| $ | 3,840 | $ | 3,963 |
| $ | 3,877 |
| $ | 3,961 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 162 |
| $ | 348 |
| $ | 249 | $ | 344 |
| $ | 208 |
| $ | 258 |
Accrued and other liabilities |
| 308 |
| 326 |
| 363 |
| 309 |
| 327 |
| 358 | ||||
Current portion of capital lease obligations |
| — |
| 1 |
| — | ||||||||||
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| 470 |
| 675 |
| 612 |
| 653 |
| 535 |
| 616 | ||||
Long-term debt and obligations under capital leases |
| 126 |
| 128 |
| 127 | ||||||||||
Long-term debt |
| 125 |
| 127 |
| 125 | ||||||||||
Other liabilities |
| 456 |
| 381 |
| 391 |
| 642 |
| 393 |
| 701 | ||||
Total liabilities |
| 1,052 |
| 1,184 |
| 1,130 |
| 1,420 |
| 1,055 |
| 1,442 | ||||
Shareholders’ equity: |
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Common stock and paid-in capital: 133,134,411; 174,250,091; and 132,616,087 shares outstanding, respectively |
| 916 |
| 1,147 |
| 900 | ||||||||||
Common stock and paid-in capital: 121,341,925; 133,088,450; and 121,262,456 shares outstanding, respectively |
| 848 |
| 914 |
| 842 | ||||||||||
Retained earnings |
| 2,403 |
| 3,426 |
| 2,254 |
| 2,184 |
| 2,393 |
| 2,019 | ||||
Accumulated other comprehensive loss |
| (284) |
| (343) |
| (363) |
| (313) |
| (357) |
| (279) | ||||
Less: Treasury stock at cost: 2,034,408; 41,174,061; and 1,120,466 shares, respectively |
| (141) |
| (1,652) |
| (81) | ||||||||||
Less: Treasury stock at cost: 4,080,653; 1,791,789; and 1,433,433 shares, respectively |
| (176) |
| (128) |
| (63) | ||||||||||
Total shareholders' equity |
| 2,894 |
| 2,578 |
| 2,710 |
| 2,543 |
| 2,822 |
| 2,519 | ||||
| $ | 3,946 |
| $ | 3,762 |
| $ | 3,840 | $ | 3,963 |
| $ | 3,877 |
| $ | 3,961 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
* The balance sheet at February 3, 2018 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended February 3, 2018.
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* The balance sheet at January 28, 2017 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended January 28, 2017.
1
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
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| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended | ||||||||||||
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| July 29, |
| July 30, |
| July 29, |
| July 30, |
| May 5, |
| April 29, | ||||||
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Sales |
| $ | 1,701 |
| $ | 1,780 |
| $ | 3,702 |
| $ | 3,767 |
| $ | 2,025 |
| $ | 2,001 |
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Cost of sales |
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| 1,198 |
| 1,193 |
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| 2,519 |
| 2,484 |
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| 1,359 |
| 1,321 | |||
Selling, general and administrative expenses |
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| 339 |
| 350 |
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| 710 |
| 711 |
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| 385 |
| 371 | |||
Depreciation and amortization |
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| 42 |
| 39 |
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| 83 |
| 78 |
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| 45 |
| 41 | |||
Litigation and other charges |
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| 12 |
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Income from operations |
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| 122 |
| 198 |
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| 390 |
| 494 |
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| 224 |
| 268 | |||
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Litigation charge |
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| 50 |
| — |
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| 50 |
| — | ||||||||
Interest (income) / expense, net |
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| 1 |
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| 1 | ||||||||
Interest income, net |
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| — | |||||||||||||
Other income |
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| (3) |
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Income before income taxes |
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| 73 |
| 198 |
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| 342 |
| 496 |
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| 229 |
| 269 | |||
Income tax expense |
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| 22 |
| 71 |
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| 111 |
| 178 |
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| 64 |
| 89 | |||
Net income |
| $ | 51 |
| $ | 127 |
| $ | 231 |
| $ | 318 |
| $ | 165 |
| $ | 180 |
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Basic earnings per share |
| $ | 0.39 |
| $ | 0.94 |
| $ | 1.76 |
| $ | 2.35 |
| $ | 1.39 |
| $ | 1.37 |
Weighted-average shares outstanding |
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| 131.3 |
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| 134.4 |
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| 131.3 |
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| 135.4 |
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| 118.7 |
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| 131.4 |
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Diluted earnings per share |
| $ | 0.39 |
| $ | 0.94 |
| $ | 1.74 |
| $ | 2.33 |
| $ | 1.38 |
| $ | 1.36 |
Weighted-average shares outstanding, assuming dilution |
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| 132.0 |
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| 135.5 |
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| 132.3 |
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| 136.6 |
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| 119.1 |
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| 132.6 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
($ in millions)
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| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended | ||||||||||||
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| July 30, |
| July 29, |
| July 30, |
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| April 29, | ||||||
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Net income |
| $ | 51 |
| $ | 127 |
| $ | 231 |
| $ | 318 |
| $ | 165 |
| $ | 180 |
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Other comprehensive income, net of income tax: |
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Foreign currency translation adjustment: |
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Translation adjustment arising during the period, net of income tax |
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| 70 |
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| (27) |
| 74 |
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| 17 | |||||||
Translation adjustment arising during the period, net of income tax benefit of $(5) and $(1) million, respectively |
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Cash flow hedges: |
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Change in fair value of derivatives, net of income tax |
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| 2 |
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| 3 |
| 1 |
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| 3 |
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Available for sale securities: |
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Unrealized gain on available for sale securities |
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| 1 |
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Pension and postretirement adjustments: |
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Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $1, $1, $2 and $2 million, respectively, and foreign currency fluctuations |
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Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $1 and $1 million, respectively, and foreign currency fluctuations |
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Comprehensive income |
| $ | 124 |
| $ | 107 |
| $ | 310 |
| $ | 341 |
| $ | 131 |
| $ | 186 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
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| July 29, |
| July 30, | May 5, |
| April 29, | ||||
| 2017 |
| 2016 * | 2018 |
| 2017 | ||||
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From operating activities: |
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Net income | $ | 231 |
| $ | 318 | $ | 165 |
| $ | 180 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 83 |
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| 78 |
| 45 |
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| 41 |
Share-based compensation expense |
| 8 |
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| 11 |
| 5 |
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| 5 |
Qualified pension plan contributions |
| (25) |
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| (25) |
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Change in assets and liabilities: |
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Merchandise inventories |
| 41 |
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| (50) |
| 53 |
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| 31 |
Accounts payable |
| (93) |
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| 67 |
| 90 |
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| (41) |
Accrued and other liabilities |
| (38) |
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| (13) |
| (6) |
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| (26) |
Pension litigation accrual |
| 50 |
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| — |
| 12 |
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Other, net |
| (6) |
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| (1) |
| 51 |
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| (6) |
Net cash provided by operating activities |
| 251 |
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| 385 |
| 415 |
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| 159 |
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From investing activities: |
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Capital expenditures |
| (150) |
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| (131) |
| (64) |
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| (75) |
Insurance proceeds related to loss on property and equipment |
| 1 |
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Net cash used in investing activities |
| (150) |
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| (131) |
| (63) |
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| (75) |
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From financing activities: |
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Purchase of treasury shares |
| (59) |
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| (276) |
| (112) |
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| (38) |
Dividends paid on common stock |
| (82) |
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| (74) |
| (41) |
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Proceeds from exercise of stock options |
| 10 |
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| 14 |
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| 9 |
Treasury stock reissued under employee stock plan |
| 5 |
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Shares of common stock repurchased to satisfy tax withholding obligations |
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Payment of revolving credit agreement costs |
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Net cash used in financing activities |
| (135) |
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| (340) |
| (154) |
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| (79) |
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Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash |
| 34 |
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| 10 |
| (18) |
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Net change in cash, cash equivalents, and restricted cash |
| — |
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| (76) |
| 180 |
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| 4 |
Cash, cash equivalents, and restricted cash at beginning of period |
| 1,073 |
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| 1,048 |
| 1,031 |
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| 1,073 |
Cash, cash equivalents, and restricted cash at end of period | $ | 1,073 |
| $ | 972 | $ | 1,211 |
| $ | 1,077 |
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Cash paid during the period: |
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Interest | $ | 6 |
| $ | 5 | $ | — |
| $ | — |
Income taxes | $ | 155 |
| $ | 216 | $ | 61 |
| $ | 122 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
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4
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 3, 20182, 2019 and of the fiscal year ended January 28, 2017.February 3, 2018. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended January 28, 2017,February 3, 2018, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2017.29, 2018.
RecentOther than the changes to the Revenue Recognition policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to our significant accounting policies disclosed in Note 1, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended February 3, 2018.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of this amendmentTopic 606 is that an entity shouldto recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.The Company does not expect to adopt these ASUs until required, and has not yet selectedadopted ASU 2014-09 during the transitionfirst quarter of 2018 using the modified retrospective method. Based on an evaluationWe recognized $5 million, or $4 million net of tax, as the standard as a whole, the Company has identified gift card breakage, direct-response advertising, and principal versus agent considerations as areas which will most likely be affected bycumulative effect of initially applying the new revenue standard as an increase to the opening balance of retained earnings.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740):Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition guidance. Weof income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted this ASU during the first quarter of 2018 using the modified retrospective method, and as a result increased deferred income tax assets by $37 million. The Company has written off the income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. The Company also recorded deferred tax assets with an offset to opening retained earnings for amounts that were not previously recognized under the previous guidance but are inrecognized under this ASU.
Other recently adopted ASUs are discussed within the process of finalizing the analysis of our revenue streams and quantifying the effectsapplicable disclosures on the areas discussed above, and we currently do not expect the adoption will significantly affect our consolidated statements of operations, financial position or cash flows.following pages.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods therein, and requires a modified retrospective adoption, with earlier adoption permitted. The Company does not expect to adopt this ASU until required and is evaluating the effect of this guidance. The Company has historically presented a non-GAAP measure to adjust its balance sheet to present operating leases as if they were capital leases. Based upon that analysis and preliminary evaluation of the standard, we estimate the adoption will result in the addition of $3 billion to $4 billion of assets and liabilities to our consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740):Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted. The Company does not expect to adopt this ASU until required. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. While we could initiate additional relevant transactions prior to this ASU’s adoption date, based on deferred tax amounts related to applicable past intercompany transactions and the foreign exchange rates as of July 29, 2017, we expect the adoption will result in an increase in deferred income tax assets of approximately $40 million to $45 million.
Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.
5
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting PronouncementsRevenue Recognition
Store revenue is recognized at the point of sale and includes merchandise, net of returns, and excludes taxes. Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid.
In March 2016,conjunction with the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment transactions, including tax consequences, forfeitures, and classificationsadoption of the tax related items in the statement of cash flows. The Company adopted ASU 2016-09Topic 606 during the first quarter of 2017. Amendments relating2018, we have determined that revenue for merchandise that is shipped to accountingour customers from our distribution centers and stores will be recognized upon shipment date. Total revenue recognized includes shipping and handling fees. We have determined that control of the promised good is passed to the customer upon shipment date since the customer has legal title, the rewards of ownership, and paid for excess tax benefits and deficiencies have been adopted prospectively. For the twenty-six weeks ended July 29,2017,merchandise as of the shipment date. This reflects a change in timing in how we previously recognized revenue for our direct-to-customer sales. Prior to the adoption of Topic 606, the Company recorded excess tax benefits related to share-based compensation awardsrecognized such revenue upon date of $7 million to the income statement, within the income tax provision, whereas such benefits were previously recognized in equity. Excess tax benefits recorded for the thirteen weeks ended July 29, 2017 were not significant. Also, in the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefits. This ASU also requires that we present excess tax benefits or deficiencies as operating activities in our condensed consolidated statement of cash flow.delivery. As a result of adopting this change, retrospectively, we reclassified excessthe Company recorded $1 million, net of tax, benefits of $10 million which were previously classified as cash flows from financing activitiesan increase to operating activities foropening retained earnings to reflect the twenty-six weeks ended July 30, 2016. Additionally, the presentation of employee taxes paid to taxing authorities for share-based transactions of $6 million, previously classified as cash flows from operating activities, were reclassified to financing activities for the twenty-six weeks ended July 30, 2016. The Company has made a policy election of recording forfeitures as they occur instead of estimating forfeitures using a modified retrospective approach. The cumulative effect of adopting this change was not significant.change. We have elected to account for shipping and handling as a fulfillment activity. The Company accrues the cost and recognized revenue for these activities upon shipment date.
Gift Cards
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU is effective for annual reporting periods beginning after December 15, 2017 including interim periods therein, with early adoption permitted. The Company has adopted this ASUsells to its customers gift cards, which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed. Effective as of the first quarter of 2017. 2018 with the adoption of Topic 606, gift card breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, unless there is a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. This reflects a change in our accounting for gift card breakage from the remote method to the proportional method. As a result of adopting Topic 606, the Company recorded $4 million, or $3 million net of tax, as an increase to opening retained earnings to reflect the cumulative effect of this change based upon historical redemption patternsAccordingly, we restated our cash. Additionally, breakage income was previously recorded within selling, general and cash equivalents balancesadministrative expenses, however this amount is currently reported within sales as required by the standard. This change in classification is not considered significant.
2. Revenue
Sales disaggregated based upon sales channel is presented below.
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| Thirteen weeks ended | ||||
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| May 5, |
| April 29, | ||
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| 2018 |
| 2017 | ||
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| ($ in millions) | ||||
Stores |
| $ | 1,743 |
| $ | 1,722 |
Direct-to-customers |
|
| 282 |
|
| 279 |
Total sales |
| $ | 2,025 |
| $ | 2,001 |
Sales disaggregated based upon geographic area is presented in the condensed consolidated statementsbelow table. Sales are attributable to the country in which the sales transaction is fulfilled.
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| Thirteen weeks ended | |||
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| May 5, |
| April 29, | |
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| 2018 |
| 2017 | |
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|
| ($ in millions) | |||
United States |
| $ | 1,501 |
| $ | 1,500 |
International |
|
| 524 |
|
| 501 |
Total sales |
| $ | 2,025 |
| $ | 2,001 |
6
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contract Liabilities
The table below presents the activity of cash flowsour gift card liability balance:
($ in millions) | ||
Balance at February 4, 2018 | $ | 38 |
Redemptions | (24) | |
Cumulative catch-up adjustment to retained earnings from the adoption of Topic 606 | (4) | |
Breakage recognized | (2) | |
Activations | 20 | |
Balance at May 5, 2018 | $ | 28 |
Due to include restricted cash of $27million as of July 30, 2016, January 30, 2016, and January 28, 2017. Please see Note 3, Restricted Cash, for a reconciliation of cash and cash equivalents as presented on our condensed consolidated balance sheetsthe fact that most gift cards are redeemed within 12 months, the Company elected not to cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows.disclose information about remaining performance obligations.
23. Segment Information
The Company has determined that its reportableintegrated all available shopping channels including stores, websites, and catalogs. Store sales are primarily fulfilled from the store’s inventory, but may also be shipped from any of our distribution centers or from a different store location if an item is not available at the original store. Direct-to-customer orders are primarily shipped to our customers through our distribution centers but may also be shipped from any store or a combination of our distribution centers and stores depending on the availability of particular items.
Our operating segments are those thatidentified according to how our business activities are based on its method of internal reporting. Themanaged and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, the Company hashad two reportable segments,segments: Athletic Stores and Direct-to-Customers. Beginning in fiscal 2018, the Company has changed its organizational and internal reporting structure in order to execute our omni-channel strategy. In light of these changes, the Company has re-evaluated its operating segments, which now reflect the combination of stores and direct-to-customer by geography. The Company has determined that it has two operating segments, North America and International. Our North America operating segment includes the results of the following banners: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, SIX:02, Foot Locker Canada, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team services and sales. Our International operating segment includes the results of Foot Locker Europe, Runners Point, Sidestep, Foot Locker Asia Pacific, including each of their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. Prior-year information has been restated to reflect this change.
The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest (income) / expense.income. The following table summarizes our results:
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| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 | ||||
Sales |
| ($ in millions) | ||||||||||
Athletic Stores |
| $ | 1,485 |
| $ | 1,576 |
| $ | 3,207 |
| $ | 3,311 |
Direct-to-Customers |
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| 216 |
|
| 204 |
|
| 495 |
|
| 456 |
Total sales |
| $ | 1,701 |
| $ | 1,780 |
| $ | 3,702 |
| $ | 3,767 |
Operating Results |
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Athletic Stores |
| $ | 109 |
| $ | 193 |
| $ | 350 |
| $ | 470 |
Direct-to-Customers |
|
| 20 |
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| 22 |
|
| 62 |
|
| 60 |
Division profit |
|
| 129 |
|
| 215 |
|
| 412 |
|
| 530 |
Less: Pension litigation charge (1) |
|
| 50 |
|
| — |
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| 50 |
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| — |
Less: Corporate expense |
|
| 7 |
|
| 17 |
|
| 22 |
|
| 36 |
Operating profit |
|
| 72 |
|
| 198 |
|
| 340 |
|
| 494 |
Interest (income) / expense, net |
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| (1) |
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| 1 |
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| (1) |
|
| 1 |
Other income (2) |
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| — |
|
| 1 |
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| 1 |
|
| 3 |
Income before income taxes |
| $ | 73 |
| $ | 198 |
| $ | 342 |
| $ | 496 |
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| Thirteen weeks ended | ||||
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| May 5, |
| April 29, | ||
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| 2018 |
| 2017 | ||
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| ($ in millions) | ||||
Sales |
| $ | 2,025 |
| $ | 2,001 |
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Operating Results |
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Division profit |
|
| 247 |
|
| 283 |
Less: Pension litigation (1) |
|
| 12 |
|
| — |
Less: Corporate expense (2) |
|
| 11 |
|
| 15 |
Income from operations |
|
| 224 |
|
| 268 |
Interest income, net |
|
| (2) |
|
| — |
Other income (3) |
|
| 3 |
|
| 1 |
Income before income taxes |
| $ | 229 |
| $ | 269 |
67
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) | Included in the thirteen weeks ended May 5, 2018 is a pre-tax charge of $12 million relating to a pension litigation matter described further in Note 14, Legal Proceedings. |
(2) | Corporate expense consists of unallocated selling general and administrative expenses as well as depreciation and amortizationrelated to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. |
(3) | Other income includes non-operating items, such as lease termination gains, royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, and net benefit expense related to our pension and postretirement programs excluding the service cost component. |
3.
4. Litigation and Other Charges
As more fully discussed in Note 14, Legal Proceedings, during the first quarter of 2018 the Company recorded a $12 million charge related to the pension litigation. This charge comprised $11 million related to the estimated cost of the reformation and $1 million in professional fees incurred in connection with the plan reformation.
During the third quarter of the prior year, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. The following is a reconciliation of the accrual recorded in connection with that event for the quarter ended May 5, 2018:
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| Other Related |
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| Benefit Costs |
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| Charges |
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| Total |
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| ($ in millions) | |||||||
Balance at February 3, 2018 |
| $ | 5 |
| $ | 2 |
| $ | 7 |
Amounts charged to expense |
|
| — |
|
| — |
|
| — |
Cash payments |
|
| (2) |
|
| — |
|
| (2) |
Balance at May 5, 2018 |
| $ | 3 |
| $ | 2 |
| $ | 5 |
5. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows.
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| July 29, |
| July 30, |
| January 28, |
| May 5, |
| April 29, |
| February 3, | ||||||
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| 2017 |
| 2016 |
| 2017 |
| 2018 |
| 2017 |
| 2018 | ||||||
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| ($ in millions) |
| ($ in millions) | ||||||||||||||
Cash and cash equivalents |
| $ | 1,043 |
| $ | 945 |
| $ | 1,046 |
| $ | 1,029 |
| $ | 1,049 |
| $ | 849 |
Restricted cash included in other current assets |
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| 1 |
|
| — |
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| — |
|
| 1 |
|
| 1 |
|
| 1 |
Restricted cash included in other non-current assets |
|
| 29 |
|
| 27 |
|
| 27 |
|
| 181 |
|
| 27 |
|
| 181 |
Cash, cash equivalents, and restricted cash |
| $ | 1,073 |
| $ | 972 |
| $ | 1,073 |
| $ | 1,211 |
| $ | 1,077 |
| $ | 1,031 |
Amounts included in restricted cash primarily relate to funds deposited to a qualified settlement fund in connection with the pension litigation and amounts held in escrow in connection with various leasing arrangements in Europe. In addition, restricted cash reflects deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.
4.6. Goodwill
Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual review
8
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As a result of goodwill and intangible assets with indefinite lives performed during the first quarter change in our organizational and internal reporting structure, we have determined that we have one reportable segment. We have reassessed our reporting units in light of 2017 did not resultthis change and have deemed the collective omni-channel banners in North America and International to be the two reporting units at which goodwill is tested. Therefore, goodwill was re-allocated to these reporting units based on their relative fair values. As required, we conducted our annual impairment review both before and after this change. Neither review resulted in the recognition of impairment. The following table provides a summaryimpairment, as the fair value of goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations.each reporting unit exceeded its carrying value.
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| July 29, |
| July 30, |
| January 28, | |||
|
| 2017 |
| 2016 |
| 2017 | |||
|
| ($ in millions) | |||||||
Athletic Stores |
| $ | 18 |
| $ | 17 |
| $ | 16 |
Direct-to-Customers |
|
| 140 |
|
| 139 |
|
| 139 |
Total goodwill |
| $ | 158 |
| $ | 156 |
| $ | 155 |
5.7. Other Intangible Assets, net
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
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| July 29, 2017 |
| July 30, 2016 |
| January 28, 2017 |
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| May 5, 2018 |
| April 29, 2017 |
| February 3, 2018 | ||||||||||||||||||||||||||||||||||||||||||
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| Gross |
| Accum. |
| Net |
| Gross |
| Accum. |
| Net |
| Gross |
| Accum. |
| Net |
|
| Gross |
| Accum. |
| Net |
| Gross |
| Accum. |
| Net |
| Gross |
| Accum. |
| Net | ||||||||||||||||||
($ in millions) | ($ in millions) |
| value |
| amort. |
| Value |
| Value |
| amort. |
| Value |
| value |
| amort. |
| Value | ($ in millions) |
| value |
| amort. |
| value |
| value |
| amort. |
| value |
| value |
| amort. |
| value | ||||||||||||||||||
Amortized intangible assets: (1) | Amortized intangible assets: (1) |
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| Amortized intangible assets: (1) |
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| Lease acquisition costs |
| $ | 128 |
| $ | (115) |
| $ | 13 |
| $ | 120 |
| $ | (108) |
| $ | 12 |
| $ | 116 |
| $ | (105) |
| $ | 11 | Lease acquisition costs |
| $ | 128 |
| $ | (117) |
| $ | 11 |
| $ | 118 |
| $ | (107) |
| $ | 11 |
| $ | 135 |
| $ | (122) |
| $ | 13 |
| Trademarks / trade names |
|
| 20 |
|
| (13) |
|
| 7 |
|
| 20 |
|
| (13) |
|
| 7 |
|
| 20 |
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| (13) |
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| 7 | Trademarks / trade names |
|
| 20 |
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| (14) |
|
| 6 |
|
| 20 |
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| (13) |
|
| 7 |
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| 20 |
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| (14) |
|
| 6 |
| Favorable leases |
|
| 7 |
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| (6) |
|
| 1 |
|
| 7 |
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| (5) |
|
| 2 |
|
| 7 |
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| (5) |
|
| 2 | Favorable leases |
|
| 7 |
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| (6) |
|
| 1 |
|
| 7 |
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| (5) |
|
| 2 |
|
| 7 |
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| (6) |
|
| 1 |
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|
| $ | 155 |
| $ | (134) |
| $ | 21 |
| $ | 147 |
| $ | (126) |
| $ | 21 |
| $ | 143 |
| $ | (123) |
| $ | 20 |
|
| $ | 155 |
| $ | (137) |
| $ | 18 |
| $ | 145 |
| $ | (125) |
| $ | 20 |
| $ | 162 |
| $ | (142) |
| $ | 20 |
Indefinite life intangible assets: (1) | Indefinite life intangible assets: (1) |
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| Indefinite life intangible assets: (1) |
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| Runners Point Group trademarks / trade names |
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| $ | 24 |
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| $ | 23 |
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| $ | 22 | Runners Point Group trademarks / trade names |
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| $ | 25 |
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| $ | 23 |
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| $ | 26 |
Other intangible assets, net | Other intangible assets, net |
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| $ | 45 |
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| $ | 44 |
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| $ | 42 | Other intangible assets, net |
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| $ | 43 |
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| $ | 43 |
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| $ | 46 |
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(1) | The change in the ending balances also reflects the effect of foreign currency fluctuations due primarily to the movements of the euro in relation to the U.S. dollar. |
The annual review of intangible assets with indefinite lives performed during the first quarter of 2018 did not result in the recognition of impairment.
Amortization expense recorded is as follows:
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|
| Thirteen weeks ended | ||||
($ in millions) |
|
| May 5, 2018 |
|
| April 29, 2017 |
Amortization expense |
| $ | 1 |
| $ | 1 |
Estimated future amortization expense for finite-life intangible assets is as follows:
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|
| ($ in millions) |
Remainder of 2018 | $ | 3 |
2019 |
| 4 |
2020 |
| 3 |
2021 |
| 2 |
2022 |
| 2 |
2023 |
| 2 |
79
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the twenty-six week period ended July 29, 2017, the Company recorded $1 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 10 years. Amortization expense recorded is as follows:
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| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||
($ in millions) |
|
| July 29, 2017 |
|
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 | ||
Amortization expense |
| $ | 1 |
| $ | 1 |
| $ | 2 |
| $ | 2 |
Estimated future amortization expense for finite life intangible assets is as follows:
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|
| ($ in millions) |
Remainder of 2017 | $ | 2 |
2018 |
| 4 |
2019 |
| 4 |
2020 |
| 3 |
2021 |
| 2 |
2022 |
| 2 |
6.8. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:
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| July 29, |
| July 30, |
| January 28, | May 5, |
| April 29, |
| February 3, | ||||||
| 2017 |
| 2016 |
| 2017 | 2018 |
| 2017 |
| 2018 | ||||||
| ($ in millions) | ($ in millions) | ||||||||||||||
Foreign currency translation adjustments | $ | (53) |
| $ | (102) |
| $ | (127) | $ | (47) |
| $ | (123) |
| $ | (9) |
Cash flow hedges |
| 2 |
|
| 5 |
|
| 1 |
| 1 |
|
| — |
|
| — |
Unrecognized pension cost and postretirement benefit |
| (233) |
|
| (246) |
|
| (236) |
| (267) |
|
| (233) |
|
| (270) |
Unrealized loss on available-for-sale security |
| — |
|
| — |
|
| (1) |
| — |
|
| (1) |
|
| — |
| $ | (284) |
| $ | (343) |
| $ | (363) | $ | (313) |
| $ | (357) |
| $ | (279) |
The changes in AOCL for the twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 were as follows:
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| Items Related |
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| Items Related |
|
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| |||||||
|
| Foreign Currency |
|
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| to Pension and |
| Unrealized Loss on |
|
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| Foreign Currency |
|
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| to Pension and |
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| |||||||
|
| Translation |
| Cash Flow |
| Postretirement |
| Available-For- |
|
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| Translation |
| Cash Flow |
| Postretirement |
|
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| |||||||
($ in millions) |
| Adjustments |
| Hedges |
| Benefits |
| Sale Security |
| Total |
| Adjustments |
| Hedges |
| Benefits |
| Total | |||||||||
Balance as of January 28, 2017 |
| $ | (127) |
| $ | 1 |
| $ | (236) |
| $ | (1) |
| $ | (363) | ||||||||||||
Balance as of February 3, 2018 |
| $ | (9) |
| $ | — |
| $ | (270) |
| $ | (279) | |||||||||||||||
OCI before reclassification |
|
| 74 |
|
| 1 |
|
| (1) |
|
| 1 |
|
| 75 |
|
| (38) |
|
| 1 |
|
| 1 |
|
| (36) |
Reclassified from AOCL |
|
| — |
|
| — |
|
| 4 |
|
| — |
|
| 4 |
|
| — |
|
| — |
|
| 2 |
|
| 2 |
Other comprehensive income |
|
| 74 |
|
| 1 |
|
| 3 |
|
| 1 |
|
| 79 |
|
| (38) |
|
| 1 |
|
| 3 |
|
| (34) |
Balance as of July 29, 2017 |
| $ | (53) |
| $ | 2 |
| $ | (233) |
| $ | — |
| $ | (284) | ||||||||||||
Balance as of May 5, 2018 |
| $ | (47) |
| $ | 1 |
| $ | (267) |
| $ | (313) |
Reclassifications from AOCL for the twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 were as follows:
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|
|
| ($ in millions) |
Amortization of actuarial (gain) loss: |
|
|
Pension benefits- amortization of actuarial loss | $ | |
Postretirement benefits- amortization of actuarial gain |
| — |
Net periodic benefit cost (see Note |
| |
Income tax benefit |
| |
Net of tax | $ |
9. Income Taxes
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”). This update provides guidance on income tax accounting implications under Public Law 115-97, informally known as the Tax Cuts and Jobs Act (the "Tax Act"), which was enacted on December 22, 2017. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35 percent to 21 percent, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. SAB 118 addressed the application of GAAP to situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of the fourth quarter of 2017, the Company had not completed the determination of the accounting implications of the Tax Act on the Company’s tax accruals. However, we reasonably estimated the effects of the Tax Act and recognized a provisional net tax expense of $99 million associated with the Tax Act in the fourth quarter of 2017.
For the thirteen weeks ended May 5, 2018, our accounting for the Tax Act is still incomplete. We have not made any measurement-period adjustments related to these items during the first quarter of fiscal 2018 because we have not finalized the following items: the earnings and profits of the relevant subsidiaries, deemed repatriation of deferred foreign income, and prior-year deferred tax activity. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the one-year time period provided by SAB 118. Any adjustment to these amounts during the measurement period will be recorded in income tax expense in the period in which the analysis is complete.
810
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Financial InstrumentsThe Company continues to evaluate the provisions of the Tax Act, including the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income (“FDII”) provisions. The Company has made an accounting policy election to treat GILTI taxes as a current period expense.
The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a resultultimate effect of the use of derivative instruments, the Company is exposedTax Act may differ from these provisional amounts, possibly materially, due to, the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk,among other things, additional analysis, changes in interpretations and assumptions the Company has a practicemade, additional regulatory guidance that may of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. Thebe issued, as well as any related actions the Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 8, Fair Value Measurements.may take.
Derivative Holdings Designated as Hedges
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. The amount of such gains or losses that were recognized in earnings during the twenty-six weeks ended July 29, 2017 was not significant and there were no such gains or losses in the corresponding prior-year period. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.
The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The most significant exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At quarter-end, substantially all of the Company’s hedged forecasted transactions were less than twelve months into the future, and the Company expects the derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.
The net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges was a $2 million gain for the thirteen weeks ended July 29, 2017 and a $1 million gain for the twenty-six weeks ended July 29, 2017. At July 29, 2017, a $2 million gain remained in AOCL. For both the thirteen and twenty-six weeks ended July 30, 2016, the net change in fair value was a $3 million gain. The notional value of the foreign exchange contracts designed as hedges outstanding at July 29, 2017 was $125 million, and these contracts mature at various dates through August 2018.
Derivative Holdings Not Designated as Hedges
The Company enters into certain derivative contracts that are not designated as hedges, such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage certain costs of foreign currency-denominated merchandise purchases, intercompany transactions, and the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of derivative holdings not designated as hedges, as well as realized gains and premiums paid, are recorded in earnings immediately within selling, general and administrative expenses or other income, depending on the type of transaction. The net change in fair value was not significant for the thirteen and twenty-six weeks ended July 29, 2017. The net change in fair value was not significant for the thirteen weeks ended July 30, 2016 and resulted in expense of $1 million for the twenty-six weeks ended July30,2016. The notional value of the foreign exchange contracts not designed as hedges outstanding at July29,2017 was $2 million, and these contracts mature in August 2017.
9
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
From time to time,May 5, 2018, the Company mitigatesrecorded an income tax provision of $64 million, which represented an effective tax rate of 27.9 percent, compared with the effectprior-year income tax provision of fluctuating foreign exchange rates on the reporting$89 million, which represented an effective tax rate of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately33.0 percent. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. No such contracts were outstanding at July29,2017.
Fair Value of Derivative Contracts
The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:
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| Balance Sheet |
| July 29, |
| July 30, |
| January 28, | |||
($ in millions) |
| Caption |
| 2017 |
| 2016 |
| 2017 | |||
Hedging Instruments: |
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|
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|
|
Foreign exchange forward contracts |
| Current assets |
| $ | 3 |
| $ | 6 |
| $ | 3 |
Foreign exchange forward contracts |
| Current liabilities |
| $ | 1 |
| $ | — |
| $ | 3 |
8.10. Fair Value Measurements
The Company’s financial assets recorded at fair value are categorized as follows:
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| Level 1– | Quoted prices for identical instruments in active markets. |
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| Level 2 – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. |
|
|
|
| Level 3 – | Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. |
The following tables provide a summary of the Company’s recognized assets and liabilities that are measured at fair value on a recurring basis:
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| As of July 29, 2017 |
| As of July 30, 2016 |
| As of January 28, 2017 |
| As of May 5, 2018 |
| As of April 29, 2017 |
| As of February 3, 2018 | ||||||||||||||||||||||||||||||||||||||||||
|
| ($ in millions) |
| ($ in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||||||||||
Assets |
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Available-for-sale securities |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — | |||||||||||||||||||||||||||
Available-for-sale security |
| $ | — |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | — | |||||||||||||||||||||||||||
Foreign exchange forward contracts |
|
| — |
|
| 3 |
|
| — |
|
| — |
|
| 6 |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| — |
Total Assets |
| $ | — |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 13 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 8 |
| $ | — |
Liabilities |
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Foreign exchange forward contracts |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3 |
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| — |
|
| — |
|
| 1 |
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| — |
|
| — |
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| 2 |
|
| — |
|
| — |
|
| 1 |
|
| — |
Total Liabilities |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
SecuritiesIn conjunction with the first quarter 2018 adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, our security classified as available-for-sale areis now recorded at fair value with unrealized gains and losses reported netto other income in our Statement of tax, in other comprehensive income, unless unrealized gains or losses are determinedOperations, whereas previously it was recorded to be other than temporary. AOCL. The adjustment recorded to retained earnings as a result of adopting ASU 2016-01 was not significant. The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.
10
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and therefore are classified as Level 2 instruments.
There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.
11
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:
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| July 29, |
| July 30, |
| January 28, |
| May 5, |
| April 29, |
| February 3, | ||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2018 |
| 2017 |
| 2018 | ||||||
|
| ($ in millions) |
| ($ in millions) | ||||||||||||||
Carrying value |
| $ | 126 |
| $ | 129 |
| $ | 127 |
| $ | 125 |
| $ | 127 |
| $ | 125 |
Fair value |
| $ | 146 |
| $ | 151 |
| $ | 148 |
| $ | 142 |
| $ | 147 |
| $ | 144 |
The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2. The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.
9.11. Earnings Per Share
The Company accounts for and discloses earnings per share using the treasury stock method. Basic earnings per share is computed by dividing net income for the period by the weighted-average number of common shares outstanding at the end of the period. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.
The computation of basic and diluted earnings per share is as follows:
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| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended | |||||||||||||
|
| July 29, |
| July 30, |
| July 29, |
| July 30, |
| May 5, |
| April 29, | ||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
|
| (in millions, except per share data) |
| (in millions, except per share data) | ||||||||||||||
Net Income |
| $ | 51 |
| $ | 127 |
| $ | 231 |
| $ | 318 |
| $ | 165 |
| $ | 180 |
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Weighted-average common shares outstanding |
|
| 131.3 |
|
| 134.4 |
|
| 131.3 |
|
| 135.4 |
|
| 118.7 |
|
| 131.4 |
Dilutive effect of potential common shares |
|
| 0.7 |
|
| 1.1 |
|
| 1.0 |
|
| 1.2 |
|
| 0.4 |
|
| 1.2 |
Weighted-average common shares outstanding assuming dilution |
|
| 132.0 |
|
| 135.5 |
|
| 132.3 |
|
| 136.6 |
|
| 119.1 |
|
| 132.6 |
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Earnings per share - basic |
| $ | 0.39 |
| $ | 0.94 |
| $ | 1.76 |
| $ | 2.35 |
| $ | 1.39 |
| $ | 1.37 |
Earnings per share - diluted |
| $ | 0.39 |
| $ | 0.94 |
| $ | 1.74 |
| $ | 2.33 |
| $ | 1.38 |
| $ | 1.36 |
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Anti-dilutive share-based awards excluded from diluted calculation |
|
| 1.7 |
|
| 1.1 |
|
| 0.8 |
|
| 1.0 | ||||||
Anti-dilutive option awards excluded from diluted calculation |
|
| 2.2 |
|
| 0.2 |
The Company adopted ASU 2016-09 during the first quarter of 2017. As a result, excess tax benefits and tax deficiencies are no longer included as assumed proceeds in the calculation of diluted shares outstanding. This change was adopted prospectively.
Contingently issuableAdditionally, shares of 1.1 million and 0.4 million as of May 5, 2018 and 0.3 millionApril 29, 2017, respectively, have been excluded from diluted weighted-average shares as the number of shares that will be issued is contingent on the Company’s performance metrics as compared to the pre-established performance goals which have not been included as the vesting conditions have not been satisfiedachieved as of JulyMay 5, 2018 and April 29, 2017 and July 30, 2016, respectively.2017. These shares relate to restricted stock units issued in connection with the Company’s long-term incentive program.
11
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.12. Pension and Postretirement Plans
The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. The Company also has a defined benefit pension plan covering certain employees of the Runners Point Group.
In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.
12
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which areincome. In conjunction with the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, service cost continues to be recognized as part of SG&A expense:
expense, while the remaining pension and postretirement expense components are now recognized as part of other income. Prior periods were not reclassified as required by this ASU as the amounts were not considered significant.
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| Pension Benefits |
| Postretirement Benefits |
| Pension Benefits |
| Postretirement Benefits | ||||||||||||||||||||||||||||
|
| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended |
| Thirteen weeks ended | ||||||||||||||||||||||||
|
| July 29, |
| July 30, |
| July 29, |
| July 30, |
| July 29, |
| July 30, |
| July 29, |
| July 30, |
| May 5, |
| April 29, |
| May 5, |
| April 29, | ||||||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||
Service cost |
| $ | 4 |
| $ | 4 |
| $ | 8 |
| $ | 8 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 5 |
| $ | 4 |
| $ | — |
| $ | — |
Interest cost |
|
| 7 |
|
| 7 |
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| 13 |
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| 13 |
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| — |
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| — |
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| — |
|
| — |
|
| 6 |
|
| 6 |
|
| — |
|
| — |
Expected return on plan assets |
|
| (10) |
|
| (9) |
|
| (19) |
|
| (18) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10) |
|
| (9) |
|
| — |
|
| — |
Amortization of net loss (gain) |
|
| 4 |
|
| 3 |
|
| 7 |
|
| 7 |
|
| (1) |
|
| — |
|
| (1) |
|
| (1) |
|
| 3 |
|
| 3 |
|
| — |
|
| — |
Net benefit expense (income) |
| $ | 5 |
| $ | 5 |
| $ | 9 |
| $ | 10 |
| $ | (1) |
| $ | — |
| $ | (1) |
| $ | (1) |
| $ | 4 |
| $ | 4 |
| $ | — |
| $ | — |
During the first quarter of 2017, the Company made a contribution of $25 million to the U.S. qualified plan. The Company continually evaluates the amount and timing of any future contributions. The Company currently does not expect to make any further pension plan contributions during this year. Actual contributions are dependent on several factors, includingfactors; however, the outcome ofCompany expects to make contributions totaling $128 million during 2018 in connection with the ongoinganticipated U.S. pension litigation. plan reformation. The Company contributed approximately $30 million in late May 2018 and currently expects the remaining balance to be contributed on or before September 15, 2018. See Note 12,14, Legal Proceedings, for further information.information about this matter.
11.13. Share-Based Compensation
Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans, were as follows:
|
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| Thirteen weeks ended |
| Twenty-six weeks ended | Thirteen weeks ended | ||||||||||||
| July 29, |
| July 30, |
| July 29, |
| July 30, | May 5, |
| April 29, | ||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 | ||||||
| ($ in millions) | ($ in millions) | ||||||||||||||
Options and shares purchased under the employee stock purchase plan | $ | 3 |
| $ | 2 |
| $ | 5 |
| $ | 5 | $ | 2 |
| $ | 2 |
Restricted stock and restricted stock units |
| — |
|
| 4 |
|
| 3 |
|
| 6 |
| 3 |
|
| 3 |
Total share-based compensation expense | $ | 3 |
| $ | 6 |
| $ | 8 |
| $ | 11 | $ | 5 |
| $ | 5 |
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
Tax benefit recognized | $ | 1 |
| $ | 2 |
| $ | 2 |
| $ | 3 | $ | 1 |
| $ | 1 |
Valuation Model and Assumptions
The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.
12
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the first quarter of 2017, in connection with the adoption of ASU 2016-09, we have made the accounting policy election to discontinue estimating forfeitures and will account for forfeitures as they occur.
The following table shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the twenty-sixthirteen weeks ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016:2017:
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| |||
|
| Stock Option Plans |
| Stock Purchase Plan |
|
| Stock Option Plans |
|
| Stock Purchase Plan |
| |||||||||||||
|
| July 29, |
| July 30, |
|
| July 29, |
| July 30, |
|
| May 5, |
|
| April 29, |
|
| May 5, |
|
| April 29, |
| ||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||
Weighted-average risk free rate of interest |
| 2.1 | % |
| 1.4 | % |
| 0.8 | % |
| 0.4 | % |
| 2.7 | % |
| 2.1 | % |
| 1.2 | % |
| 0.7 | % |
Expected volatility |
| 25 | % |
| 30 | % |
| 29 | % |
| 26 | % |
| 37 | % |
| 25 | % |
| 30 | % |
| 29 | % |
Weighted-average expected award life (in years) |
| 5.3 |
| 5.7 |
| 1.0 |
| 1.0 |
|
| 5.5 |
|
| 5.3 |
|
| 1.0 |
|
| 1.0 |
| |||
Dividend yield |
| 1.7 | % |
| 1.7 | % |
| 2.0 | % |
| 1.7 | % |
| 3.1 | % |
| 1.7 | % |
| 2.1 | % |
| 2.0 | % |
Weighted-average fair value | $ | 15.56 |
| $ | 15.68 |
| $ | 10.61 |
| $ | 15.19 |
| $ | 12.35 |
| $ | 15.58 |
| $ | 16.49 |
| $ | 10.33 |
|
13
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The information in the following table covers option activity under the Company’s stock option plans for the twenty-sixthirteen weeks ended July 29, 2017:May 5, 2018:
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|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
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|
|
|
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|
|
| Weighted- |
| Weighted- |
|
|
|
| Weighted- |
| Weighted- | ||||
|
|
| Number |
| Average |
| Average |
|
| Number |
| Average |
| Average | ||||
|
|
| of |
| Remaining |
| Exercise |
|
| of |
| Remaining |
| Exercise | ||||
|
|
| Shares |
| Contractual Life |
| Price |
|
| Shares |
| Contractual Life |
| Price | ||||
|
|
| (in thousands) |
| (in years) |
| (per share) |
|
| (in thousands) |
| (in years) |
| (per share) | ||||
Options outstanding at the beginning of the year |
|
| 2,806 |
|
|
|
| $ | 42.61 |
|
| 2,739 |
|
|
|
| $ | 52.45 |
Granted |
|
| 497 |
|
|
|
|
| 72.75 |
|
| 379 |
|
|
|
|
| 44.79 |
Exercised |
|
| (334) |
|
|
|
|
| 28.14 |
|
| (4) |
|
|
|
|
| 11.66 |
Expired or cancelled |
|
| (12) |
|
|
|
|
| 59.55 |
|
| (23) |
|
|
|
|
| 50.19 |
Options outstanding at July 29, 2017 |
|
| 2,957 |
|
| 6.4 |
| $ | 49.24 | |||||||||
Options exercisable at July 29, 2017 |
|
| 1,926 |
|
| 5.1 |
| $ | 39.40 | |||||||||
Options available for future grant at July 29, 2017 |
|
| 10,997 |
|
|
|
|
|
| |||||||||
Options outstanding at May 5, 2018 |
|
| 3,091 |
|
| 6.7 |
| $ | 51.58 | |||||||||
Options exercisable at May 5, 2018 |
|
| 2,174 |
|
| 5.6 |
| $ | 48.91 | |||||||||
Options available for future grant at May 5, 2018 |
|
| 8,271 |
|
|
|
|
|
|
The total fair value of options vested as of JulyMay 5, 2018 and April 29, 2017 and July 30, 2016 was $7$8 million and $8$7 million, respectively. The cash received from option exercises and the related tax benefit for the thirteen and twenty-six weeks ended July29,2017May 5, 2018 was $1 million and $10 million, respectively. The cash received from option exercises for the thirteen and twenty-six weeks ended July 30, 2016 was $7 million and $14 million, respectively.not significant.
The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:
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|
|
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||
| July 29, |
| July 30, |
| July 29, |
| July 30, | ||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
| ($ in millions) | ||||||||||
Exercised | $ | — |
| $ | 12 |
| $ | 15 |
| $ | 26 |
Thirteen weeks ended | |||||
May 5, 2018 | April 29, 2017 | ||||
($ in millions) | |||||
Exercised | $ | — | $ | 15 |
The total tax benefit realized from option exercises was not significant for the thirteen weeks ended July 29, 2017, and was $6 million for the twenty-six weeks ended July 29, 2017. The total tax benefit realized from option exercises was $5 million and $10 million for the corresponding prior-year periods.
13
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The aggregate intrinsic value for stock options outstanding, and outstanding and exercisable and vested and expected to vest (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below:
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| ||
| Twenty-six weeks ended |
|
|
|
| |||||
| July 29, |
| July 30, | Thirteen weeks ended | ||||||
| 2017 |
| 2016 | May 5, 2018 |
| April 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Outstanding | $ | 23 |
| $ | 76 | $ | 11 |
| $ | 84 |
Outstanding and exercisable | $ | 23 |
| $ | 74 | $ | 11 |
| $ | 74 |
Vested and expected to vest | $ | 23 |
| $ | 76 |
As of July 29, 2017May 5, 2018 there was $9$8 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.61.7 years.
The following table summarizes information about stock options outstanding and exercisable at July 29, 2017:May 5, 2018:
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| ||||
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| Options Outstanding |
| Options Exercisable |
| Options Outstanding |
| Options Exercisable | ||||||||||||||||
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|
|
| Weighted- |
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|
| Weighted- |
|
|
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|
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|
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| Average |
| Weighted- |
|
|
| Weighted- |
|
|
| Average |
| Weighted- |
|
|
| Weighted- | ||||
|
|
|
| Remaining |
| Average |
|
|
| Average |
|
|
| Remaining |
| Average |
|
|
| Average | ||||
Range of Exercise |
| Number |
| Contractual |
| Exercise |
| Number |
| Exercise |
| Number |
| Contractual |
| Exercise |
| Number |
| Exercise | ||||
Prices |
| Outstanding |
| Life |
| Price |
| Exercisable |
| Price |
| Outstanding |
| Life |
| Price |
| Exercisable |
| Price | ||||
|
| (in thousands, except prices per share and contractual life) |
| (in thousands, except prices per share and contractual life) | ||||||||||||||||||||
$9.85 to $24.75 |
| 546 |
| 2.2 |
| $ | 14.33 |
| 546 |
| $ | 14.33 | ||||||||||||
$30.92 to $45.75 |
| 748 |
| 5.6 |
|
| 38.52 |
| 746 |
|
| 38.50 | ||||||||||||
$55.02 to $62.11 |
| 697 |
| 7.1 |
|
| 61.25 |
| 476 |
|
| 61.36 | ||||||||||||
$9.85 to $18.84 |
| 267 |
| 2.3 |
| $ | 16.39 |
| 267 |
| $ | 16.39 | ||||||||||||
$24.75 to $34.75 |
| 457 |
| 4.3 |
|
| 32.33 |
| 419 |
|
| 32.10 | ||||||||||||
$44.78 to $45.75 |
| 708 |
| 7.9 |
|
| 44.93 |
| 339 |
|
| 45.08 | ||||||||||||
$46.64 to $62.11 |
| 699 |
| 6.4 |
|
| 61.00 |
| 674 |
|
| 61.35 | ||||||||||||
$63.79 to $73.21 |
| 966 |
| 9.1 |
|
| 68.59 |
| 158 |
|
| 64.02 |
| 960 |
| 8.3 |
|
| 68.60 |
| 475 |
|
| 67.12 |
|
| 2,957 |
| 6.4 |
| $ | 49.24 |
| 1,926 |
| $ | 39.40 |
| 3,091 |
| 6.7 |
| $ | 51.58 |
| 2,174 |
| $ | 48.91 |
14
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock and Restricted Stock Units
Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. Additionally, RSU awards are made to employees in connection with the Company’s long-term incentive program, and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. There were 668,120874,458 and 671,690669,542 RSU awards outstanding as of JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, respectively.
Generally, awards fully vest after the passage of time, typically three years. However, RSU awards made in connection with the Company’s performance-based long-term incentive program are earned after the attainment of certain performance metrics and vest after the passage of time. Restricted stock is considered outstanding at the time of grant and the holders have voting rights. Dividends are paid to holders of restricted stock that vest with the passage of time. With regard to performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid or accumulated on RSU awards. Compensation expense is recognized using the market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.
14
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock and RSU activity for the twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 is summarized as follows:
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Average |
| Weighted- |
|
|
| Average |
| Weighted- | ||
|
| Number |
| Remaining |
| Average |
| Number |
| Remaining |
| Average | ||
|
| of |
| Contractual |
| Grant Date |
| of |
| Contractual |
| Grant Date | ||
|
| Shares |
| Life |
| Fair Value |
| Shares |
| Life |
| Fair Value | ||
|
| (in thousands) |
| (in years) |
|
| (per share) |
| (in thousands) |
| (in years) |
|
| (per share) |
Nonvested at beginning of year |
| 798 |
|
|
| $ | 56.91 |
| 374 |
|
|
| $ | 59.15 |
Granted |
| 248 |
|
|
|
| 72.71 |
| 635 |
|
|
|
| 47.31 |
Vested |
| (279) |
|
|
|
| 48.96 |
| (80) |
|
|
|
| 62.78 |
Expired or cancelled |
| (60) |
|
|
|
| 43.62 | |||||||
Nonvested at July 29, 2017 |
| 707 |
| 1.7 |
| $ | 66.63 | |||||||
Cancelled (2) |
| (46) |
|
|
|
| 60.55 | |||||||
Nonvested at May 5, 2018 |
| 883 |
| 2.5 |
| $ | 50.22 | |||||||
Aggregate value ($ in millions) | $ | 47 |
|
|
|
|
| $ | 44 |
|
|
|
|
|
(1) | Approximately 0.4 million performance-based RSUs were granted during the first quarter of 2018 and are included as granted in the table above. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets. |
(2) | Adjustments were made to performance-based RSUs previously granted and are included as cancelled in the table above. These adjustments reflect changes in estimates based upon the Company’s current performance against predefined financial targets. |
The total value of awards for which restrictions lapsed during the twenty-sixthirteen weeks ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016 was $14$5 million and $8$13 million, respectively. As of July 29, 2017,May 5, 2018, there was $12$33 million of total unrecognized compensation cost related to nonvested restricted awards.
12.14. Legal Proceedings
Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company or businesses that have been sold or disposed ofdiscontinued by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims. Additionally, the Company is a defendant in a purported Fair Credit Reporting Act class action in California, a purported meal break class action in California, and a purported class action in New York alleging failure to pay for all hours worked by employees. The Company and certain officers of the Company are defendants in a purported securities law class action in New York. Additionally, the directors and certain officers of the Company are defendants in a related derivative action.
The15
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the last several years, the Company and the Company’s U.S. retirement plan arehave been defendants in a class action (Osberg v. Foot Locker Inc.et ano., filed in the U.S. District Court for the Southern District of New York) in which the plaintiff allegesalleged that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff’s claims were for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, and violation of the statutory provisions governing the content of the Summary Plan Description. During the third quarter of 2015, the trial court ruled that the retirement plan be reformed. As result of this development, the Company recorded a charge of $100 million pre-tax ($61 million after-tax).
TheIn early 2018, the Company appealedexhausted all of its legal remedies and is required to reform the pension plan consistent with the trial court’s decision and judgment. The amount accrued as of February 3, 2018 was $278 million. During the first quarter of 2018, the estimated value of the judgment was stayed pendingincreased by $11 million, of which $7 million related to a change in the outcomeestimated value of the appeal process. Duringjudgment, based on additional facts as to how the reformation should be calculated, and $4 million related to the interest that continues to accrue as required by the provisions of the required plan reformation. We have been, and will continue, working with plaintiffs’ counsel and the court on the specific steps needed to implement the judgment, which we expect to occur during our second quarter of 2017,quarter. Until the Second Circuit Court of Appeals affirmed the trial court’s decision. In light of this development,court enters its final order the Company reassessed its estimatecannot complete the reformation of the liability. The Company’s updated reasonable estimate of this liability is a range between $150 million and $260 million. The high endplan as the actual terms of the range reflectsreformation must be approved by the estimated cost to reformcourt. The court will be ruling on the retirement plan in accordance withfairness of the court ruling; however, it excludes any legalclass counsel fees that mayand how those costs will be awarded to plaintiff’s counsel. Noshared by the class members. We believe the amount within that range is more probable than any other amount and therefore, in accordance with U.S. GAAP, the Company recorded a charge of $50 million pre-tax ($30 million after-tax) during the second quarter of 2017, bringing the cumulative amountwe have accrued for this matter to $150 million. The accrual has been classified as a long-term liability. The Company will continue to vigorously defend itselfis appropriate in this case. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amountfacts as we currently accrued by the Company.understand them.
Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, as described above, would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole, based upon current knowledge and taking into consideration current accruals. Litigation is inherently unpredictable, and judgmentsunpredictable. Judgments could be rendered or settlements entered intomade that could adversely affect the Company’s operating results or cash flows in a particular period.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the U.S. Securities and Exchange Commission.
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the 20162017 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.
Business Overview
Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and mobile sites and catalogs.
world. The Foot Locker brand is one of the most widely recognized names in the markets in which we operate, epitomizing premium quality for the active lifestyle customer. This brand equity has aided our ability to successfully develop and increase our portfolio of complementary retail store formats, such as Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, our direct-to-customer business. Through various marketing channels and experiences, including social, digital, broadcast, and print media, as well as various sports sponsorships and events, we reinforce our image with a consistent message — namely, that we are thea destination for athletically inspiredpremium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.
We identify our operating segments according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, we had two reportable segments, Athletic Stores and Direct-to-Customers. Beginning in fiscal 2018, the Company has changed its organizational and internal reporting structure in order to execute our omni-channel strategy. This change resulted in the combination of our stores and direct-to-customer financial results.
16
The Company has determined that it has two operating segments, North America and International. Our North America operating segment includes the results of the following banners: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, SIX:02, Foot Locker Canada, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team services and sales. Our International operating segment includes the results of Foot Locker Europe, Runners Point, Sidestep, Foot Locker Asia Pacific, including each of their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. Please see Item 1. “Financial Statements,” Note 3, Segment Information for further information on this change.
Store Count
At July 29, 2017,May 5, 2018, we operated 3,3593,284 stores as compared with 3,3633,310 and 3,4013,354 stores at January 28,February 3, 2018 and April 29, 2017, and July 30, 2016, respectively.
During the first quarter of 2017, the Company entered into a franchise agreement with Fox-Wizel Ltd, for franchised stores operating in Israel. There are 7 franchised stores operating in Israel as of July29, 2017. Also, during the second quarter of 2017, the Company terminated its franchise agreement with the third party that operated stores in the Republic of Korea. A total of 82116 franchised stores were operating at July 29, 2017,May 5, 2018, as compared with 74112 and 6977 stores at January 28,February 3, 2018 and April 29, 2017, and July 30, 2016, respectively. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the operating store count above.
Reconciliation of Non-GAAP Measures
The Company presents certain non-GAAP measures, such as sales changes excluding foreign currency fluctuations, adjusted net income before income taxes, adjusted net income, and adjusted diluted earnings per share. Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates.
16
We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our businesses that are not related to currency movements. In addition, these non-GAAP measures are useful in assessing the Company’s progress in achieving its long-term financial objectives.
The non-GAAP financial information is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP. The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal rate to each of the respective items.
Presented below is a reconciliation of GAAP and non-GAAP results for the thirteen and twenty-six weeks ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, respectively.
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| Twenty-six weeks ended |
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| July 30, |
| July 29, |
| July 30, |
| Thirteen weeks ended |
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| 2016 |
| 2017 |
| 2016 |
| May 5, 2018 |
| April 29, 2017 |
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| ($ in millions) |
| ($ in millions) | |||||||||||||||
Pre-tax income: |
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Income before income taxes |
| $ | 73 |
| $ | 198 |
| $ | 342 |
| $ | 496 |
| $ | 229 |
| $ | 269 |
|
Pre-tax amounts excluded from GAAP: |
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Pension litigation charge |
|
| 50 |
| — |
| 50 |
| — |
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| 12 |
| — |
| ||||
Adjusted income before income taxes (non-GAAP) |
| $ | 123 |
| $ | 198 |
| $ | 392 |
| $ | 496 |
| $ | 241 |
| $ | 269 |
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After-tax income: |
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Net income |
| $ | 51 |
| $ | 127 |
| $ | 231 |
| $ | 318 |
| $ | 165 |
| $ | 180 |
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After-tax adjustments excluded from GAAP: |
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Pension litigation charge, net of income tax benefit of $20 million |
|
| 30 |
| — |
| 30 |
| — | ||||||||||
Pension litigation charge, net of income tax benefit of $3 million |
| 9 |
| — |
| ||||||||||||||
Adjusted net income (non-GAAP) |
| $ | 81 |
| $ | 127 |
| $ | 261 |
| $ | 318 |
| $ | 174 |
| $ | 180 |
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Earnings per share: |
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Diluted EPS |
| $ | 0.39 |
| $ | 0.94 |
| $ | 1.74 |
| $ | 2.33 |
| $ | 1.38 |
| $ | 1.36 |
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Diluted EPS amounts excluded from GAAP: |
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Pension litigation charge |
|
| 0.23 |
| — |
| 0.23 |
| — |
| 0.07 |
| — |
| |||||
Adjusted diluted EPS (non-GAAP) |
| $ | 0.62 |
| $ | 0.94 |
| $ | 1.97 |
| $ | 2.33 |
| $ | 1.45 |
| $ | 1.36 |
|
17
During the secondfirst quarter ended July 29, 2017,May 5, 2018, the Company recorded a charge of $50$12 million, $30$9 million after-tax or $0.23$0.07 per share, related to pension litigation. Please see Item 1. “Financial Statements,” Note 12,14, Legal Proceedings for further information on this item.charge.
Results of Operations
We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest income.
The following table summarizes our results:
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| Thirteen weeks ended | ||||
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| May 5, |
| April 29, | ||
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| 2018 |
| 2017 | ||
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| ($ in millions) | ||||
Sales |
| $ | 2,025 |
| $ | 2,001 |
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Operating Results |
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Division profit |
|
| 247 |
|
| 283 |
Less: Pension litigation (1) |
|
| 12 |
|
| — |
Less: Corporate expense (2) |
|
| 11 |
|
| 15 |
Income from operations |
|
| 224 |
|
| 268 |
Interest income, net |
|
| (2) |
|
| — |
Other income (3) |
|
| 3 |
|
| 1 |
Income before income taxes |
| $ | 229 |
| $ | 269 |
(1) | Included in the thirteen weeks ended May 5, 2018 is a pre-tax charge of $12 million relating to a pension litigation matter described further in Note 14, Legal Proceedings. |
(2) | Corporate expense consists of unallocated selling general and administrative expenses as well as depreciation and amortizationrelated to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $4 million and $3 million for the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively. The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $10 million for the thirteen weeks ended May 5, 2018 thus reducing corporate expense. Excluding the corporate allocation change as well as depreciation and amortization, corporate expense increased by $5 million for the thirteen weeks ended May 5, 2018. The increase for the thirteen weeks ended May 5, 2018 was primarily due to increased corporate support costs primarily related to information technology. |
(3) | Other income includes non-operating items, such as lease termination gains, royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, and net benefit expense related to our pension and postretirement programs excluding the service cost component. The increase in other income for the thirteen weeks ended May 5, 2018 as compared with the corresponding prior-year period primarily reflects increased royalty income and lease termination gains. |
Sales
All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable-store sales also includes the sales of the Direct-to-Customers segment.our direct-to-customer channel. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effect of foreign currency fluctuations.
Sales decreasedincreased by $79$24 million, or 4.41.2 percent, to $1,701$2,025 million for the thirteen weeks ended July 29, 2017,May5,2018, from $1,780$2,001 million for the thirteen weeks ended July 30, 2016. For the twenty-six weeks ended JulyApril 29, 2017, sales of $3,702 million decreased 1.7 percent from sales of $3,767 million in the corresponding prior-year period.2017. Excluding the effect of foreign currency fluctuations, total sales decreased by 4.3 and 1.11.5 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively. Comparable-storeMay 5, 2018. Total comparable-store sales decreased by 6.0 and 2.62.8 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively. This reflected a decline in our Athletic Stores segment, partially offsetMay 5, 2018. The information shown below represents certain sales metrics by an increase in our Direct-to-Customers segment.
sales channel:
1718
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| May 5, |
| April 29, |
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| 2018 |
| 2017 |
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| ($ in millions) | |||||
Stores |
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Sales |
| $ | 1,743 |
| $ | 1,722 |
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$ Change |
| $ | 21 |
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% Change |
|
| 1.2 | % |
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% of total sales |
|
| 86.1 | % |
| 86.1 | % |
Comparable sales (decrease) |
|
| (3.1) | % |
| (1.2) | % |
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Direct-to-customers |
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Sales |
| $ | 282 |
| $ | 279 |
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$ Change |
| $ | 3 |
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% Change |
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| 1.1 | % |
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% of total sales |
|
| 13.9 | % |
| 13.9 | % |
Comparable sales (decrease) / increase |
|
| (0.5) | % |
| 12.1 | % |
Effective with the first quarter of 2018, the Company discloses one reportable segment and accordingly the following discussion describes the changes in sales by banner on an omni-channel basis, meaning that each banner’s results are inclusive of their store and e-commerce activity.
Excluding the effect of foreign currency, sales declined for the thirteen weeks ended May 5, 2018 and was primarily related to declines in our Foot Locker Europe, Champs Sports, Runners Point, Sidestep, and Footaction banners. The sales decline for these banners primarily reflected a decrease in footwear sales, which was partially offset by gains in apparel for most of these banners. Our European businesses were negatively affected by the decline in popularity of certain casual footwear styles. Foot Locker and Kids Foot Locker both experienced an increase in sales, which was primarily driven by the apparel category in addition to gains in the children’s footwear category. Our e-commerce business in Europe experienced a decline, while our U.S. e-commerce business was relatively flat with the prior year on a comparable basis.
The footwear category experienced a decline during the quarter and was primarily caused by a decline in men’s basketball, which was offset, in part, by an increase in certain running styles. The comparable-store sales decline in women’s footwear primarily reflected decreases in women’s running and court styles reflecting the prior-year success of certain offerings with no such comparable offerings in the current year.
The overall comparable-store increase in apparel was produced by the majority of our banners, as this category performed very well during the quarter. The gains primarily reflected comparable-store sales increases in men’s and children’s branded apparel, partially offset by a decline in men’s private label apparel.
Gross Margin
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| July 29, |
| July 30, |
| July 29, |
| July 30, |
| Thirteen weeks ended | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| May 5, 2018 |
| April 29, 2017 | ||||||
Gross margin rate |
| 29.6 | % |
| 33.0 | % |
| 32.0 | % |
| 34.1 | % |
| 32.9 | % |
| 34.0 | % |
Basis point change in the gross margin rate |
| (340) |
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| (210) |
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| (110) |
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Components of the change- |
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Decline in the merchandise margin rate |
| (200) |
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| (120) |
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Decrease in the merchandise margin rate |
| (60) |
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Higher occupancy and buyers' compensation expense rate |
| (140) |
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| (90) |
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| (50) |
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Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent, common area maintenance charges, real estate taxes, general maintenance, and utilities.
19
The gross margin rate decreased by 340 and 210110 basis points for the thirteen and twenty-six weeks ended July29, 2017, respectively.
May 5, 2018. The merchandise margin rate decline for both the quarter and year-to-date periods primarily reflected a higher markdown raterates, as the Company was more promotional in both our Athletic Stores and Direct-to-Customers segments as we were more promotional. The increased promotional activity was necessaryorder to stimulate sales and ensure thatproactively manage inventory levels remained currentat optimal levels. Additionally, although to a lesser degree, a decline in our shipping and in line withhandling revenue also negatively affected the pace of sales.
merchandise margin rate. The higher occupancy and buyers’ compensation expense rate for both the quarter and year-to-date periods reflected higheran increase in rent-related costs coupled with a decrease in sales. Higher occupancy costs are primarily attributed to several high-profile location leases entered into recently.recently, partially offset by rent reductions in certain other stores.
Selling, General and Administrative Expenses (SG&A)
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| Thirteen weeks ended |
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 |
|
| May 5, 2018 |
| April 29, 2017 |
| ||||||
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| ($ in millions) |
|
| ($ in millions) | |||||||||||||||
SG&A |
| $ | 339 |
| $ | 350 |
| $ | 710 |
| $ | 711 |
|
| $ | 385 |
| $ | 371 |
|
$ Change |
| $ | (11) |
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|
| $ | (1) |
| $ |
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| $ | 14 |
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| ||
% Change |
| (3.1) | % |
|
|
| (0.1) | % |
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| 3.8 | % |
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| |||
SG&A as a percentage of sales |
| 19.9 | % |
| 19.7 | % |
| 19.2 | % |
| 18.9 | % |
| 19.0 | % |
| 18.5 | % |
The effect of foreign currency fluctuationsSG&A increased by $14 million, or by 50 basis points, to $385 million for the thirteen weeks ended July 29, 2017 was not significant. ForMay 5,2018, as compared with the twenty-six weeks ended July 29, 2017, excludingprior year. Excluding the effect of foreign currency fluctuations, the SG&A expense rate increased by $5 million20 basis points for the thirteen weeks ended May 5, 2018, as compared with the corresponding prior-year period.Comparing
The increase in the SG&A expense rate to the prior-year periods, the rate increased by 20 and 30 basis points for the thirteen and twenty-six weeks ended July 29, 2017, respectively.
Thereflected higher SG&A expense rate for both the quarter and year-to-date periods,wages, as compared with the corresponding prior-year periods,period, as wages increased at a higher rate than sales. Additionally, we incurred higher costs in connection with our ongoing investment in various technology and infrastructure projects, coupled with an accrual for a legal matter. This was driven by the Athletic Stores segment and was primarily related to higher store-related compensation costs. Wages were higher mainly due to minimum wage increases, as well as related payroll taxes and benefits. As a percentage of sales, store wages and related costs increased due to the decline in sales as we were not able to reduce staffing levels commensurate with the rate of decline in sales. Our Direct-to-Customers segment’s SG&A expense rate declined for both the quarter and year-to-date periods reflecting increased marketing efforts in order to drive traffic to its websites,partially offset by a decline in incentive compensation accruals dueinsurance recoveries received for damaged inventory and fixed assets relating to the underperformance relative to planned results. Additionally, corporate expense significantly declinedlosses incurred last year during the second quarter and year-to-date periods reflecting primarily reduced incentive compensation expense.Hurricane Maria.
18
Depreciation and Amortization
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| Thirteen weeks ended |
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 |
|
| May 5, 2018 |
| April 29, 2017 |
| ||||||
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| ($ in millions) |
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| ($ in millions) | |||||||||||||||
Depreciation and amortization |
| $ | 42 |
| $ | 39 |
| $ | 83 |
| $ | 78 |
|
| $ | 45 |
| $ | 41 |
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$ Change |
| $ | 3 |
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| $ | 5 |
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| $ | 4 |
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% Change |
| 7.7 | % |
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| 6.4 | % |
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| 9.8 | % |
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|
Depreciation and amortization increased by $3 million and $5$4 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively,May 5, 2018, as compared with the corresponding prior-year periods.period. The increase in depreciation and amortization reflected increasedongoing capital spending on store projects, enhancing our digital sites,capabilities, and various other technologies and infrastructure.
Division Profit
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| Thirteen weeks ended |
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| May 5, 2018 |
| April 29, 2017 |
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| ($ in millions) | |||||
Division profit |
| $ | 247 |
| $ | 283 |
|
Division profit margin |
|
| 12.2 | % |
| 14.1 | % |
Division profit decreased by 12.7 percent for the thirteen weeks ended May 5, 2018 as compared with the corresponding prior-year period. The decline in division profit reflected both a lower gross margin rate coupled with the deleverage in the SG&A expense rate. Both factors contributed equally to the decline in division profit.
20
Interest Expense, Net
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| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended |
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 |
| May 5, 2018 |
| April 29, 2017 |
| ||||||
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| ($ in millions) |
| ($ in millions) | |||||||||||||||
Interest expense |
| $ | 3 |
| $ | 3 |
| $ | 6 |
| $ | 6 |
| $ | 3 |
| $ | 3 |
|
Interest income |
| (4) |
| (2) |
| (7) |
| (5) |
| (5) |
| (3) |
| ||||||
Interest (income) / expense, net |
| $ | (1) |
| $ | 1 |
| $ | (1) |
| $ | 1 | |||||||
Interest income, net |
| $ | (2) |
| $ | — |
|
Interest income increased by $2 million for both the thirteen and twenty-six weeks ended July 29, 2017,May 5, 2018, as compared with the corresponding prior-year periods, due toperiod, while interest expense was unchanged. The increase in interest income primarily represented higher average interest rates earned on our cash investments.
Income Taxes
The Company recorded income tax provisions of $22 million and $111 million, which represented effective tax rates of 30.9 percent and 32.6 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively. For the thirteen and twenty-six weeks ended July 30, 2016,May 5, 2018, the Company recorded an income tax provisionsprovision of $71 million and $178$64 million, which represented an effective tax rate of 35.927.9 percent, for both periods.compared with the prior-year income tax provision of $89 million, which represented an effective tax rate of 33.0 percent. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented.
The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The changes in the tax reserves were not significant for any of the periods presented.
The Company adopted ASU 2016-09 during the first quarter of 2017 requiring excess tax benefits or deficiencies from share-based compensation to be recorded as a component of the income tax provision, rather than to equity. The excess tax benefits recorded inDuring the thirteen weeks ended July 29, 2017 were not significant. For the twenty-six weeks ended July 29, 2017, the excess tax benefits recognized were $7 million.
For the thirteen and twenty-six weeks ended JulyApril 29, 2017 the Company recorded a pension-related litigation chargerecognized excess tax benefits of $50$7 million with afrom share-based compensation, while the amount related tax benefit of $20 million. This litigation charge reducedto the overall effective rate because it reduced the proportion of the Company’s worldwide income taxed in the United States, where the tax rates are the highest.thirteen weeks ended May 5, 2018 was not significant.
Excluding the above-mentioned excess tax benefits, and the impact of the litigation charge, the effective tax rate for the thirteen and twenty-six weeks ended July 29, 2017May 5, 2018 decreased as compared with the corresponding prior-year periodsperiod, primarily due to a higher proportionthe enactment of the Tax Act which reduced the statutory U.S. federal corporate income earnedtax rate from 35 percent to 21 percent. This was offset, in international jurisdictions with lowerpart, by foreign taxes assessed at rates in excess of the U.S. federal rate for which no U.S. foreign tax rates.credit is available, as well as valuation allowances for certain foreign operating loss carryforwards that the Company estimates it will not be able to utilize in future periods.
The Company currently expects its full-year tax rate to approximate 3427.5 percent excluding the effect of any nonrecurring items that may occur. The actual tax rate will vary depending on the level of stock option exercise activity and the stock price at exercise. Additionally, the actual tax rate will also vary depending on the level and mix of income earned in the United States, as compared with our international operations.various jurisdictions. Please see Item 1. “Financial Statements,” Note 9, Income Taxes for further information.
19
Net Income
For the thirteen weeks ended July 29, 2017,May 5, 2018, net income decreased by $76$15 million, or 608.3 percent, and diluted earnings per share decreasedincreased by 591.5 percent to $0.39$1.38 per share, as compared with the corresponding prior-year period. For the twenty-six weeks ended July 29, 2017, net income decreased by $87 million, or 27 percent, and diluted earnings per share decreased by 25 percent to $1.74 per share, as compared with the corresponding prior-year period.
Segment Information
We have two reportable segments, Athletic Stores and Direct-to-Customers, which are based on our method of internal reporting. We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest (income) / expense. The following table summarizes results by segment:
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| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 | ||||
|
| ($ in millions) | ||||||||||
Sales |
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Athletic Stores |
| $ | 1,485 |
| $ | 1,576 |
| $ | 3,207 |
| $ | 3,311 |
Direct-to-Customers |
|
| 216 |
|
| 204 |
|
| 495 |
|
| 456 |
|
| $ | 1,701 |
| $ | 1,780 |
| $ | 3,702 |
| $ | 3,767 |
Operating Results |
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Athletic Stores |
| $ | 109 |
| $ | 193 |
| $ | 350 |
| $ | 470 |
Direct-to-Customers |
|
| 20 |
|
| 22 |
|
| 62 |
|
| 60 |
Division profit |
|
| 129 |
|
| 215 |
|
| 412 |
|
| 530 |
Less: Pension litigation charge (1) |
|
| 50 |
|
| — |
|
| 50 |
|
| — |
Less: Corporate expense |
|
| 7 |
|
| 17 |
|
| 22 |
|
| 36 |
Operating profit |
|
| 72 |
|
| 198 |
|
| 340 |
|
| 494 |
Other income (2) |
|
| — |
|
| 1 |
|
| 1 |
|
| 3 |
Earnings before interest expense and income taxes |
|
| 72 |
|
| 199 |
|
| 341 |
|
| 497 |
Interest (income) / expense, net |
|
| (1) |
|
| 1 |
|
| (1) |
|
| 1 |
Income before income taxes |
| $ | 73 |
| $ | 198 |
| $ | 342 |
| $ | 496 |
|
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Athletic Stores
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 |
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| ($ in millions) |
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Sales |
| $ | 1,485 |
| $ | 1,576 |
| $ | 3,207 |
| $ | 3,311 |
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$ Change |
| $ | (91) |
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| $ | (104) |
| $ |
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% Change |
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| (5.8) | % |
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| (3.1) | % |
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Division profit |
| $ | 109 |
| $ | 193 |
| $ | 350 |
| $ | 470 |
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Division profit margin |
|
| 7.3 | % |
| 12.2 | % |
| 10.9 | % |
| 14.2 | % |
Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales decreased by 5.5 percent and 2.5 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. The sales decline for the current quarter and year-to-date periods, excluding the effect of foreign currency fluctuations, was across almost all of our store banners with the exception of our Foot Locker Canada and SIX:02 businesses, which increased sales.
20
Comparable-store sales decreased by 7.5 percent and 4.2 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. The overall decline in comparable-store sales was largely due to a decrease in footwear sales for both the quarter and year-to-date periods. Men’s, women’s and children’s footwear all experienced comparable-store sales declines, with children’s footwear experiencing the largest decline. Accordingly, Kids Foot Locker was the banner most negatively affected. The comparable-sales increase in men’s lifestyle running footwear for both the quarter and year-to-date periods for the majority of our store banners was not enough to compensate for the comparable-store declines in basketball, especially the Jordan brand, and court lifestyle footwear. Women’s court styles mainly contributed to the comparable-store sales decline in women’s footwear both domestically and internationally for the quarter and year-to-date periods. The decline in most of our footwear categories for both the quarter and year-to-date periods was the result of insufficient product availability of certain styles and the lack of product innovation in select categories to suit our customer’s quickly changing style preferences.
The decline in footwear sales was partially offset by gains in apparel sales, as the majority of our store banners experienced apparel sales gains for both the thirteen and twenty-six weeks ended July 29, 2017. Most of our banners benefited from gains in men’s branded and outerwear apparel, which was partially offset by declines in private label and licensed apparel for both the quarter and year-to-date periods. Additionally, women’s apparel performed well for our SIX:02 banner for both the quarter and year-to-date periods, although this was largely driven by increased markdowns. Children’s apparel experienced a comparable-store sales decline for the current quarter, while total sales increased during the period due to an increase in net store openings. For the year-to-date period children’s apparel, both total and comparable-store sales increased as compared to the corresponding prior-year period.
Athletic Stores division profit decreased by 43.5 percent and 25.5 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. The decline in division profit for both the quarter and year-to-date periods was attributable primarily to a lower gross margin rate, coupled with a higher SG&A expense rate.
Direct-to-Customers
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 |
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| ($ in millions) |
| ||||||||||
Sales |
| $ | 216 |
| $ | 204 |
| $ | 495 |
| $ | 456 |
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$ Change |
| $ | 12 |
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| $ | 39 |
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% Change |
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| 5.9 | % |
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| 8.6 | % |
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Division profit |
| $ | 20 |
| $ | 22 |
| $ | 62 |
| $ | 60 |
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Division profit margin |
|
| 9.3 | % |
| 10.8 | % |
| 12.5 | % |
| 13.2 | % |
Comparable-sales for the Direct-to-Customers segment increased by 5.4 percent and 9.1 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. This reflected our continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally. Additionally, Eastbay experienced gains during the current quarter and year-to-date periods.
The footwear category continued to deliver the strongest gains during the current quarter and year-to-date periods. The footwear gains related to our domestic store-banner websites for both the quarter and year-to-date periods were driven by strong results in women’s casual styles, children’s footwear and lifestyle running. These gains were partially offset by declines in women’s running, football, and training. The Jordan brand experienced declines during the current quarter, but performed well for the year-to-date period. The footwear gains related to our international store-banner websites for both the quarter and year-to-date periods were primarily driven by men’s and women’s lifestyle running styles.
Direct-to-Customers division profit for the thirteen weeks ended July 29, 2017 decreased by $2 million, as compared with the corresponding prior-year period, and increased by $2 million for the year-to-date period. Division profit, as a percentage of sales, declined 150 basis points and 70 basis points for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. While sales increased, the gross margin rate declined due to increased markdowns due to additional promotional activity and, to a lesser degree, higher shipping and handling expense. Partially offsetting the gross margin decline was an expense rate improvement primarily related to lower incentive compensation expense in light of current performance as compared with our plan.
21
Corporate Expense
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| July 29, 2017 |
| July 30, 2016 |
| July 29, 2017 |
| July 30, 2016 |
| ||||
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| ($ in millions) |
| ||||||||||
Corporate expense |
| $ | 7 |
| $ | 17 |
| $ | 22 |
| $ | 36 |
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$ Change |
| $ | (10) |
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| $ | (14) |
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Corporate expense consists of unallocated SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $4 million and $7 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, which remained unchanged as compared with the corresponding prior-year periods.
The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $3 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $9 million and $11 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively.
The decrease for the thirteen weeks and twenty-six weeks ended July 29, 2017 was primarily due to a decrease in incentive compensation and share-based compensation expense of $10 million as compared with the corresponding prior-year periods, reflecting the Company’s underperformance compared to its plan. This decline was partially offset by increased corporate support costs such as information technology and real estate management. Additionally, the decline for the twenty-six weeks ended July 29, 2017 was due to the prior-year corporate headquarters relocation costs of $4 million.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been: tobeen to: fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; to make retirement plan contributions, quarterly dividend payments, and interest payments; and to fund other cash requirements to support the development of our short-term and long-term operating strategies. We generally finance real estate with operating leases. We believe our cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements.
The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of July 29, 2017, just under $1.2 billionMay 5, 2018, approximately $646 million remained available under the Company’s current $1.2 billion share repurchase program.
21
As discussed further in the Legal Proceedings note under “Item 1. Financial Statements,” during the secondfirst quarter of 2017, in connection with our pension litigation,2018, we recorded a pre-tax charge of $50$12 million ($30 9million after-tax or $0.23$0.07 per diluted share)in connection with the pension litigation. The Company previously recorded a pre-tax chargeaccrued amount as of $100May 5, 2018 was $289 million during 2015. This period’s charge reflects the Company’s revised estimate of its exposure for the matter, bringing the total pre-tax amount accrued to $150 million. In light of the uncertainties involved in this matter, thereand is no assurance that the ultimate resolution will not differ from the amount currently accrued by us. The total accrual of $150 million has been classified as a long-term liability dueliability. The accrual will continue to increase with interest until paid, as required by the provisions of the required plan reformation. The Company expects to make contributions totaling $128 million to the uncertainty involved with the resolutionpension plan during 2018 to fund a portion of this litigation. The pension plan is currently sufficiently funded to initially absorb a $150 million liability and, accordingly, we currently do not anticipate the need to make any pension contributions in the near term in connection with this matter.liability. The timing and the amount of actual contributions to the pension plan are dependent on when the court approves the reformation, the funded status of the plan, and various other factors, such as interest rates and the performance of the plan’s assets.
22
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our needs from business operations.
Operating Activities
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| July 29, |
| July 30, | Thirteen weeks ended | ||||||
| 2017 |
| 2016 | May 5, 2018 |
| April 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Net cash provided by operating activities | $ | 251 |
| $ | 385 | $ | 415 |
| $ | 159 |
$ Change | $ | (134) |
|
|
| $ | 256 |
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|
The amount provided by operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include depreciation and amortization, and share-based compensation expense.
The decreaseincrease from the prior year primarily reflects working capital changes and a decrease of $61 million in cash paid for income taxes during the thirteen weeks ended May 5, 2018. In the prior year, we contributed $25 million to our U.S. qualified pension plan. No such contribution was made during the thirteen weeks ended May 5, 2018. The overall increase was partially offset by the decline in net income as compared with the prior year.
Investing Activities
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| Twenty-six weeks ended |
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| |||||
| July 29, |
| July 30, | Thirteen weeks ended | ||||||
| 2017 |
| 2016 | May 5, 2018 |
| April 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Net cash used in investing activities | $ | 150 |
| $ | 131 | $ | 63 |
| $ | 75 |
$ Change | $ | 19 |
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| $ | (12) |
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Capital expenditures were $19declined by $11 million higher thancompared with the prior year. The increase was due to increasedcorresponding prior-year period. This represented a decline in spending on corporate technologystore projects and cash paymentspartially offset by an increase related to the 2016 capital program.technology projects. The Company’s full-year capital spending is expected to be approximately $274$229 million, which includes $204$124 million related to the remodeling or relocation of approximately 190110 existing stores and the opening of approximately 9040 new stores, as well as $70$105 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. Additionally, during the thirteen weeks ending May 5, 2018, we finalized our insurance claim relating to Hurricane Maria and recorded a gain of $5 million. We received $1 million of insurance proceeds for fixed assets and we will receive an additional $4 million during the second quarter, of which $1 million will be classified as an investing activity.
Financing Activities
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| Twenty-six weeks ended |
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| July 29, |
| July 30, | Thirteen weeks ended | ||||||
| 2017 |
| 2016 | May 5, 2018 |
| April 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Net cash used in financing activities | $ | 135 |
| $ | 340 | $ | 154 |
| $ | 79 |
$ Change | $ | (205) |
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| $ | 75 |
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22
During the twenty-sixthirteen weeks ended July 29, 2017,May 5, 2018, we repurchased 896,1002,616,805 shares of our common stock for $59$112 million, as compared with 4,724,691546,100 shares repurchased for $276$38 million in the corresponding prior-year period. The Company also declared and paid dividends of $41 million during the first two quartersquarter of 20172018 and 2016 of $82 million and $74 million, respectively.2017. This represented quarterly rates of $0.31$0.345 and $0.275$0.31 per share for 20172018 and 2016,2017, respectively. Additionally, wethe amount received for proceeds from the issuance of common stock in connection with employee stock programs of $10 millionwas not significant for the thirteen weeks ended May 5, 2018, and $14 was $9 million for the twenty-six weeks ended July 29, 2017corresponding prior-year period. and July 30, 2016, respectively. Also, during the twenty-sixthirteen weeks ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, the Company paid $9$1 million and $6$9 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.The activity for the twenty-six weeks ended July 29, 2017 also reflected an increase of $1 million relating to treasury stock reissued under the employee stock purchase plan. Included in financing activities for the prior year were fees of $2 million paid in connection with the new credit agreement.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended January 28, 2017.February 3, 2018.
23
Recent Accounting Pronouncements
Descriptions of the recently issued and adopted accounting principles are included Item 1. “Financial Statements” in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.
Contractual Obligations and Commitments
The Company’s contractual cash obligations and commercial commitments at May 5, 2018 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not changed significantly since February 3, 2018 other than amounts related to tax reform. The Company plans to elect to pay the tax related to the mandatory deemed repatriation (“toll charge”) in annual installments over an eight year period. During the first quarter of 2018, the IRS issued a Q&A which indicated that a taxpayer may not receive a refund, or credit any portion of properly applied 2017 tax payments, unless the amount of payments exceeds the entire unpaid toll charge. Due to the Company’s prepayments with the IRS, the entire amount of the toll charge has been satisfied. Approximately $10 million related to tax reform remains payable, however the timing of payment is not determinable at this time.
Item 4. Controls and Procedures
TheDuring the quarter, the Company’s management performed an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and completed an evaluation as of July 29, 2017 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
We are currently migrating our point-of-sale software to a new platform. Approximately 500 stores have been converted to the new software platform as May 5, 2018, and we expect to complete the implementation primarily in this fiscal year. In connection with this implementation and resulting business process changes, we may make changes to the design and operation to our internal control over financial reporting.
During the quarter ended July 29, 2017,May 5, 2018, there were no changes in the Company’s internal control over financial reporting, other than the implementation of new point-of-sale software noted above, (as defined in Rules 13a-15(f) of the Exchange Act) that materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.
23
PART II - OTHER INFORMATION
Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under Item 1. “Financial Statements.”
There were no material changes to the risk factors disclosed in the 20162017 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended July 29, 2017: May 5, 2018:
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| Approximate | |
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| Total Number of |
| Dollar Value of | |
|
| Total |
| Average |
| Shares Purchased as |
| Shares that may | ||
|
| Number |
| Price |
| Part of Publicly |
| yet be Purchased | ||
|
| of Shares |
| Paid Per |
| Announced |
| Under the | ||
Date Purchased |
| Purchased (1) |
| Share (1) |
| Program (2) |
| Program (2) | ||
April 30 - May 27, 2017 |
| 200,155 |
| $ | 59.76 |
| 200,000 |
| $ | 1,175,348,788 |
May 28 - July 1, 2017 |
| 152,254 |
|
| 58.90 |
| 150,000 |
|
| 1,166,512,859 |
July 2 - July 29, 2017 |
| — |
|
| — |
| — |
|
| 1,166,512,859 |
|
| 352,409 |
| $ | 59.39 |
| 350,000 |
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| Approximate | |
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| Total Number of |
| Dollar Value of | |
|
| Total |
| Average |
| Shares Purchased as |
| Shares that may | ||
|
| Number |
| Price |
| Part of Publicly |
| yet be Purchased | ||
|
| of Shares |
| Paid Per |
| Announced |
| Under the | ||
Date Purchased |
| Purchased (1) |
| Share (1) |
| Program (2) |
| Program (2) | ||
February 4 - March 3, 2018 |
| 14,200 |
| $ | 44.74 |
| 14,200 |
| $ | 757,828,494 |
March 4 - April 7, 2018 |
| 2,232,984 |
|
| 43.10 |
| 2,202,605 |
|
| 662,907,107 |
April 8 - May 5, 2018 |
| 400,036 |
|
| 42.18 |
| 400,000 |
|
| 646,034,376 |
|
| 2,647,220 |
| $ | 42.97 |
| 2,616,805 |
|
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| |||
(1) | These columns also reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock | |||
(2) | On February 14, 2017, the Board of Directors approved a 3-year, $1.2 billion share repurchase program extending through January 2020. |
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Date: | FOOT LOCKER, INC. |
|
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| /s/ Lauren B. Peters |
| LAUREN B. PETERS |
| Executive Vice President and Chief Financial Officer |
25
FOOT LOCKER, INC.
|
|
|
Exhibit No. |
| Description |
10.1† | ||
10.2† | ||
12* |
| |
15* |
| |
31.1* |
| |
31.2* |
| |
32** |
| |
99* |
| |
101.INS* |
| XBRL Instance Document. |
101.SCH* |
| XBRL Taxonomy Extension Schema. |
101.CAL* |
| XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF* |
| XBRL Taxonomy Extension Definition Linkbase. |
101.LAB* |
| XBRL Taxonomy Extension Label Linkbase. |
101.PRE* |
| XBRL Taxonomy Extension Presentation Linkbase. |
|
|
|
† | Management contract or compensatory plan or arrangement. | |
* |
| Filed herewith. |
** |
| Furnished herewith. |
26