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: May 5,August 4, 2018
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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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| May 5, |
| April 29, |
| February 3, | August 4, |
| July 29, |
| February 3, | ||||||
| 2018 |
| 2017 |
| 2018 | 2018 |
| 2017 |
| 2018 | ||||||
| (Unaudited) |
| (Unaudited) |
| * | (Unaudited) |
| (Unaudited) |
| * | ||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 1,029 |
| $ | 1,049 |
| $ | 849 | $ | 950 |
| $ | 1,043 |
| $ | 849 |
Merchandise inventories |
| 1,210 |
| 1,279 |
| 1,278 |
| 1,254 |
| 1,290 |
| 1,278 | ||||
Other current assets |
| 301 |
| 294 |
| 424 |
| 320 |
| 311 |
| 424 | ||||
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| 2,540 |
| 2,622 |
| 2,551 |
| 2,524 |
| 2,644 |
| 2,551 | ||||
Property and equipment, net |
| 843 |
| 792 |
| 866 |
| 842 |
| 821 |
| 866 | ||||
Deferred taxes |
| 104 |
| 162 |
| 48 |
| 108 |
| 167 |
| 48 | ||||
Goodwill |
| 158 |
| 156 |
| 160 |
| 158 |
| 158 |
| 160 | ||||
Other intangible assets, net |
| 43 |
| 43 |
| 46 |
| 41 |
| 45 |
| 46 | ||||
Other assets |
| 275 |
| 102 |
| 290 |
| 159 |
| 111 |
| 290 | ||||
| $ | 3,963 |
| $ | 3,877 |
| $ | 3,961 | $ | 3,832 |
| $ | 3,946 |
| $ | 3,961 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 344 |
| $ | 208 |
| $ | 258 | $ | 408 |
| $ | 162 |
| $ | 258 |
Accrued and other liabilities |
| 309 |
| 327 |
| 358 |
| 313 |
| 308 |
| 358 | ||||
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| 653 |
| 535 |
| 616 |
| 721 |
| 470 |
| 616 | ||||
Long-term debt |
| 125 |
| 127 |
| 125 |
| 124 |
| 126 |
| 125 | ||||
Other liabilities |
| 642 |
| 393 |
| 701 |
| 505 |
| 456 |
| 701 | ||||
Total liabilities |
| 1,420 |
| 1,055 |
| 1,442 |
| 1,350 |
| 1,052 |
| 1,442 | ||||
Shareholders’ equity: |
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Common stock and paid-in capital: 121,341,925; 133,088,450; and 121,262,456 shares outstanding, respectively |
| 848 |
| 914 |
| 842 | ||||||||||
Common stock and paid-in capital: 121,497,470; 133,134,411; and 121,262,456 shares outstanding, respectively |
| 857 |
| 916 |
| 842 | ||||||||||
Retained earnings |
| 2,184 |
| 2,393 |
| 2,019 |
| 2,232 |
| 2,403 |
| 2,019 | ||||
Accumulated other comprehensive loss |
| (313) |
| (357) |
| (279) |
| (340) |
| (284) |
| (279) | ||||
Less: Treasury stock at cost: 4,080,653; 1,791,789; and 1,433,433 shares, respectively |
| (176) |
| (128) |
| (63) | ||||||||||
Less: Treasury stock at cost: 5,869,122; 2,034,408; and 1,433,433 shares, respectively |
| (267) |
| (141) |
| (63) | ||||||||||
Total shareholders' equity |
| 2,543 |
| 2,822 |
| 2,519 |
| 2,482 |
| 2,894 |
| 2,519 | ||||
| $ | 3,963 |
| $ | 3,877 |
| $ | 3,961 | $ | 3,832 |
| $ | 3,946 |
| $ | 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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FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
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| Thirteen weeks ended |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
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| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
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Sales |
| $ | 2,025 |
| $ | 2,001 |
| $ | 1,782 |
| $ | 1,701 |
| $ | 3,807 |
| $ | 3,702 |
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Cost of sales |
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| 1,359 |
| 1,321 |
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| 1,243 |
| 1,198 |
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| 2,602 |
| 2,519 | |||
Selling, general and administrative expenses |
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| 385 |
| 371 |
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| 380 |
| 339 |
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| 765 |
| 710 | |||
Depreciation and amortization |
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| 45 |
| 41 |
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| 44 |
| 42 |
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| 89 |
| 83 | |||
Litigation and other charges |
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| 12 |
| — |
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| 3 |
| 50 |
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| 15 |
| 50 | |||
Income from operations |
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| 224 |
| 268 |
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| 112 |
| 72 |
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| 336 |
| 340 | |||
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Interest income, net |
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| (2) |
| — |
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| (1) |
| (1) |
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| (3) |
| (1) | |||
Other income |
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| (3) |
| (1) |
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| (2) |
| — |
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| (5) |
| (1) | |||
Income before income taxes |
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| 229 |
| 269 |
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| 115 |
| 73 |
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| 344 |
| 342 | |||
Income tax expense |
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| 64 |
| 89 |
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| 27 |
| 22 |
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| 91 |
| 111 | |||
Net income |
| $ | 165 |
| $ | 180 |
| $ | 88 |
| $ | 51 |
| $ | 253 |
| $ | 231 |
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Basic earnings per share |
| $ | 1.39 |
| $ | 1.37 |
| $ | 0.76 |
| $ | 0.39 |
| $ | 2.15 |
| $ | 1.76 |
Weighted-average shares outstanding |
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| 118.7 |
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| 131.4 |
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| 116.6 |
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| 131.3 |
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| 117.7 |
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| 131.3 |
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Diluted earnings per share |
| $ | 1.38 |
| $ | 1.36 |
| $ | 0.75 |
| $ | 0.39 |
| $ | 2.14 |
| $ | 1.74 |
Weighted-average shares outstanding, assuming dilution |
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| 119.1 |
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| 132.6 |
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| 117.1 |
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| 132.0 |
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| 118.1 |
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| 132.3 |
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 |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
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| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
Net income |
| $ | 165 |
| $ | 180 |
| $ | 88 |
| $ | 51 |
| $ | 253 |
| $ | 231 |
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 benefit of $(5) and $(1) million, respectively |
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| (38) |
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Translation adjustment arising during the period, net of income tax (benefit)/expense of $1, $5, $(7), and $5 million, respectively |
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| (20) |
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| 70 |
| (58) |
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| 74 | |||||||
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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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| 1 |
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| (1) |
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| — |
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| 2 |
| 1 |
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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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| 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 and $1 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, $1, and $2 million, respectively |
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| 4 |
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Pension remeasurement and foreign currency fluctuations arising during the year, net of income tax benefit of $3, $-, $3, and $- million, respectively |
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| (8) |
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Comprehensive income |
| $ | 131 |
| $ | 186 |
| $ | 61 |
| $ | 124 |
| $ | 192 |
| $ | 310 |
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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| Thirteen weeks ended | Twenty-six weeks ended | ||||||||
| May 5, |
| April 29, | August 4, |
| July 29, | ||||
| 2018 |
| 2017 | 2018 |
| 2017 | ||||
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From operating activities: |
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Net income | $ | 165 |
| $ | 180 | $ | 253 |
| $ | 231 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 45 |
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| 41 |
| 89 |
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| 83 |
Share-based compensation expense |
| 5 |
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| 5 |
| 9 |
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| 8 |
Qualified pension plan contributions |
| — |
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| (25) |
| (30) |
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| (25) |
Change in assets and liabilities: |
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Merchandise inventories |
| 53 |
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| 31 |
| 3 |
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| 41 |
Accounts payable |
| 90 |
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| (41) |
| 155 |
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| (93) |
Accrued and other liabilities |
| (6) |
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| (26) |
| — |
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| (38) |
Pension litigation accrual |
| 12 |
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| — |
| 15 |
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| 50 |
Class counsel fees paid in connection with pension litigation |
| (97) |
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Other, net |
| 51 |
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| (6) |
| 30 |
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| (6) |
Net cash provided by operating activities |
| 415 |
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| 159 |
| 427 |
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| 251 |
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From investing activities: |
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Capital expenditures |
| (64) |
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| (75) |
| (115) |
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| (150) |
Insurance proceeds related to loss on property and equipment |
| 1 |
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| — |
| 2 |
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| — |
Net cash used in investing activities |
| (63) |
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| (75) |
| (113) |
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| (150) |
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From financing activities: |
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Purchase of treasury shares |
| (112) |
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| (38) |
| (205) |
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| (59) |
Dividends paid on common stock |
| (41) |
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| (41) |
| (81) |
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| (82) |
Proceeds from exercise of stock options |
| — |
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| 9 |
| 4 |
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| 10 |
Treasury stock reissued under employee stock plan |
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| 5 | |||||
Shares of common stock repurchased to satisfy tax withholding obligations |
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| (9) |
| (1) |
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| (9) |
Net cash used in financing activities |
| (154) |
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| (79) |
| (281) |
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| (135) |
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Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash |
| (18) |
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| (1) |
| (25) |
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| 34 |
Net change in cash, cash equivalents, and restricted cash |
| 180 |
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| 4 |
| 8 |
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Cash, cash equivalents, and restricted cash at beginning of period |
| 1,031 |
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| 1,073 |
| 1,031 |
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| 1,073 |
Cash, cash equivalents, and restricted cash at end of period | $ | 1,211 |
| $ | 1,077 | $ | 1,039 |
| $ | 1,073 |
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Cash paid during the period: |
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Interest | $ | — |
| $ | — | $ | 5 |
| $ | 6 |
Income taxes | $ | 61 |
| $ | 122 | $ | 129 |
| $ | 155 |
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 2, 2019 and of the fiscal year ended 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 February 3, 2018, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29,2018.
Other 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 Topic 606 is to 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. The Company adopted ASU 2014-09 during the first quarter of 2018 using the modified retrospective method. We recognized $5 million, or $4 million net of tax, as the cumulative 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 of 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 writtenrecorded an adjustment to opening retained earnings to write off the income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings.assets. 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 recognized under this ASU.
Other recently adopted ASUs are discussed within the applicable disclosures on the following pages.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. This standard willIn July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted. These new leasing standards are effective for fiscal years beginning after December 15, 2018, including interim periods therein, and requires a modified retrospective adoption, with earlier adoption permitted.therein. The Company does not expectintends to adopt thisTopic 842 during the first quarter of 2019 using the optional transition method provided by ASU until required and is evaluating the effect of this guidance.2018-11. 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 preliminaryour current 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.
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
Revenue 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 conjunction with the adoption of Topic 606 during the first quarter of 2018, we have determined that revenue for merchandise that is shipped to our 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 the 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 recognized such revenue upon date of delivery. As a result of this change, the Company recorded $1 million, net of tax, as an increase to opening retained earnings to reflect the cumulative effect of adopting this 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
The Company sells to its customers gift cards, which do not have expiration dates.dates to its customers. Revenue from gift card sales is recorded when the gift cards are redeemed. Effective as of the first quarter of 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 $3 million net of tax, as an increase to opening retained earnings to reflect the cumulative effect of this change based upon historical redemption patterns. Additionally, breakage income was previously recorded within selling, general and administrative expenses,expenses; however, with the adoption of this amountstandard in the first quarter of 2018, this income is currently reported within sales as required by the standard.part of sales. This change in classification is not considered significant.
2. Revenue
Sales disaggregated based upon sales channel is presented below.
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| ||||
|
| Thirteen weeks ended |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
|
| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
|
| ($ in millions) |
| ($ in millions) | ||||||||||||||
Stores |
| $ | 1,743 |
| $ | 1,722 |
| $ | 1,542 |
| $ | 1,485 |
| $ | 3,285 |
| $ | 3,207 |
Direct-to-customers |
|
| 282 |
| 279 |
|
| 240 |
| 216 |
|
| 522 |
|
| 495 | ||
Total sales |
| $ | 2,025 |
| $ | 2,001 |
| $ | 1,782 |
| $ | 1,701 |
| $ | 3,807 |
| $ | 3,702 |
Sales disaggregated based upon geographic area is presented in the below table. Sales are attributable to the countrygeographic area in which the sales transaction is fulfilled.
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| Thirteen weeks ended |
| Twenty-six weeks ended | |||||||||||
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| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | |||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | |||||
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| ($ in millions) |
| ($ in millions) | |||||||||||||
United States |
| $ | 1,501 |
| $ | 1,500 |
| $ | 1,220 |
| $ | 1,146 |
| $ | 2,721 |
| $ | 2,646 |
International |
|
| 524 |
|
| 501 |
|
| 562 |
|
| 555 |
| 1,086 |
|
| 1,056 | |
Total sales |
| $ | 2,025 |
| $ | 2,001 |
| $ | 1,782 |
| $ | 1,701 |
| $ | 3,807 |
| $ | 3,702 |
6
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contract Liabilities
The table below presents the activity of our gift card liability balance:
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| ($ in millions) |
Balance at February 4, 2018 | $ | 38 |
Redemptions |
| |
Cumulative catch-up adjustment to retained earnings from the adoption of Topic 606 |
| (4) |
Breakage recognized |
| |
Activations |
| |
Foreign currency fluctuations | (1) | |
Balance at | $ |
Due to the fact that most gift cards are redeemed within 12 months, the Company elected not to disclose information about remaining performance obligations.
3. Segment Information
The Company has integrated 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 identified according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, the Company 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. 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:banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and 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 the following banners operating in Europe, Australia, and New Zealand: Foot Locker, Europe, Runners Point, Sidestep, and Kids 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 the banner’s financial results referred to as division results.profit. 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 |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
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| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
|
| ($ in millions) |
| ($ in millions) | ||||||||||||||
Sales |
| $ | 2,025 |
| $ | 2,001 |
| $ | 1,782 |
| $ | 1,701 |
| $ | 3,807 |
| $ | 3,702 |
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| ||||
Operating Results |
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| ||||
Division profit |
|
| 247 |
| 283 |
|
| 131 |
| 129 |
| 378 |
| 412 | ||||
Less: Pension litigation (1) |
|
| 12 |
| — |
|
| 3 |
| 50 |
| 15 |
| 50 | ||||
Less: Corporate expense (2) |
|
| 11 |
| 15 |
|
| 16 |
| 7 |
| 27 |
| 22 | ||||
Income from operations |
|
| 224 |
| 268 |
|
| 112 |
| 72 |
|
| 336 |
| 340 | |||
Interest income, net |
|
| (2) |
| — |
|
| (1) |
| (1) |
|
| (3) |
| (1) | |||
Other income (3) |
|
| 3 |
| 1 |
|
| 2 |
| — |
|
| 5 |
| 1 | |||
Income before income taxes |
| $ | 229 |
| $ | 269 |
| $ | 115 |
| $ | 73 |
| $ | 344 |
| $ | 342 |
7
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1) | Included in the thirteen and twenty-six weeks ended |
(2) | Corporate expense consists of unallocated selling, general and administrative expenses 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. |
(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. |
4. Litigation and Other Charges
As more fully discussed in Note 14, Legal Proceedings, during the first quarterCompany recorded charges related to the pension litigation of $3 million and $15 million for the thirteen and twenty-six weeks ended August 4, 2018. For the thirteen and twenty-six weeks ended August 4, 2018, the Company recorded a $12charges of $2 million charge related to the pension litigation. This charge comprised $11and $13 million, relatedrespectively, representing adjustments to the estimated cost of the reformation and $1 million ininterest. Additionally, professional fees incurred in connection with the plan reformation.reformation were incurred totaling $1 million and $2 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively. During the second quarter of 2017, the Company recorded $50 million of charges related to the pension litigation.
During the third quarter of the prior year, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. The following is a reconciliationrollforward of the accrual recorded in connection withliability related to that event for the quartertwenty-six weeks ended May 5,August 4, 2018:
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| Severance and |
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| Other Related |
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| Severance and |
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| Other Related |
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| Benefit Costs |
|
| Charges |
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| Total |
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| Benefit Costs |
|
| Charges |
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| Total |
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| ($ in millions) |
| ($ in millions) | ||||||||||||||
Balance at February 3, 2018 |
| $ | 5 |
| $ | 2 |
| $ | 7 |
| $ | 5 |
| $ | 2 |
| $ | 7 |
Amounts charged to expense |
|
| — |
|
| — |
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| — | |||||||||
Cash payments |
|
| (2) |
|
| — |
|
| (2) |
|
| (4) |
|
| (1) |
|
| (5) |
Balance at May 5, 2018 |
| $ | 3 |
| $ | 2 |
| $ | 5 | |||||||||
Balance at August 4, 2018 |
| $ | 1 |
| $ | 1 |
| $ | 2 |
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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| May 5, |
| April 29, |
| February 3, |
| August 4, |
| July 29, |
| February 3, | ||||||
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| 2018 |
| 2017 |
| 2018 |
| 2018 |
| 2017 |
| 2018 | ||||||
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| ($ in millions) |
| ($ in millions) | ||||||||||||||
Cash and cash equivalents |
| $ | 1,029 |
| $ | 1,049 |
| $ | 849 |
| $ | 950 |
| $ | 1,043 |
| $ | 849 |
Restricted cash included in other current assets |
|
| 1 |
|
| 1 |
|
| 1 |
|
| 1 |
|
| 1 |
|
| 1 |
Restricted cash included in other non-current assets |
|
| 181 |
|
| 27 |
|
| 181 |
|
| 88 |
|
| 29 |
|
| 181 |
Cash, cash equivalents, and restricted cash |
| $ | 1,211 |
| $ | 1,077 |
| $ | 1,031 |
| $ | 1,039 |
| $ | 1,073 |
| $ | 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.
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.
8
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the first quarter 2018 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 this 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, as the fair value of each reporting unit exceeded its carrying value.
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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| May 5, 2018 |
| April 29, 2017 |
| February 3, 2018 |
|
| August 4, 2018 |
| July 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 |
| $ | (117) |
| $ | 11 |
| $ | 118 |
| $ | (107) |
| $ | 11 |
| $ | 135 |
| $ | (122) |
| $ | 13 | Lease acquisition costs |
| $ | 125 |
| $ | (115) |
| $ | 10 |
| $ | 128 |
| $ | (115) |
| $ | 13 |
| $ | 135 |
| $ | (122) |
| $ | 13 |
| Trademarks / trade names |
|
| 20 |
|
| (14) |
|
| 6 |
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| 20 |
|
| (13) |
|
| 7 |
|
| 20 |
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| (14) |
|
| 6 | Trademarks / trade names |
|
| 20 |
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| (14) |
|
| 6 |
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| 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 |
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| 7 |
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| (5) |
|
| 2 |
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| 7 |
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| (6) |
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| 1 | Favorable leases |
|
| 7 |
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| (6) |
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| 1 |
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| 7 |
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| (6) |
|
| 1 |
|
| 7 |
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| (6) |
|
| 1 |
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|
| $ | 155 |
| $ | (137) |
| $ | 18 |
| $ | 145 |
| $ | (125) |
| $ | 20 |
| $ | 162 |
| $ | (142) |
| $ | 20 |
|
| $ | 152 |
| $ | (135) |
| $ | 17 |
| $ | 155 |
| $ | (134) |
| $ | 21 |
| $ | 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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| $ | 25 |
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| $ | 23 |
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| $ | 26 | Runners Point Group trademarks / trade names |
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| $ | 24 |
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| $ | 24 |
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| $ | 26 |
Other intangible assets, net | Other intangible assets, net |
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| $ | 43 |
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| $ | 43 |
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| $ | 46 | Other intangible assets, net |
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| $ | 41 |
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| $ | 45 |
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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 |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
($ in millions) |
|
| May 5, 2018 |
|
| April 29, 2017 |
| August 4, 2018 |
| July 29, 2017 |
| August 4, 2018 |
| July 29, 2017 | ||||
Amortization expense |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 2 |
| $ | 2 |
Estimated future amortization expense for finite-life intangible assets is as follows:
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| ($ in millions) |
| ($ in millions) |
Remainder of 2018 | $ | 3 | $ | 2 |
2019 |
| 4 |
| 4 |
2020 |
| 3 |
| 3 |
2021 |
| 2 |
| 2 |
2022 |
| 2 |
| 2 |
2023 |
| 2 |
| 2 |
8. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:
Accumulated other comprehensive loss (“AOCL”), net of x, is comprised of the following: |
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|
| August 4, |
| July 29, |
| February 3, | |||
| 2018 |
| 2017 |
| 2018 | |||
| ($ in millions) | |||||||
Foreign currency translation adjustments | $ | (67) |
| $ | (53) |
| $ | (9) |
Cash flow hedges |
| 1 |
|
| 2 |
|
| — |
Unrecognized pension cost and postretirement benefit |
| (274) |
|
| (233) |
|
| (270) |
| $ | (340) |
| $ | (284) |
| $ | (279) |
9
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:
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| May 5, |
| April 29, |
| February 3, | |||
| 2018 |
| 2017 |
| 2018 | |||
| ($ in millions) | |||||||
Foreign currency translation adjustments | $ | (47) |
| $ | (123) |
| $ | (9) |
Cash flow hedges |
| 1 |
|
| — |
|
| — |
Unrecognized pension cost and postretirement benefit |
| (267) |
|
| (233) |
|
| (270) |
Unrealized loss on available-for-sale security |
| — |
|
| (1) |
|
| — |
| $ | (313) |
| $ | (357) |
| $ | (279) |
The changes in AOCL for the thirteentwenty-six weeks ended May 5,August 4, 2018 were as follows:
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| Items Related |
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| Items Related |
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| ||||||
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| Foreign Currency |
|
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| to Pension and |
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| Foreign Currency |
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| to Pension and |
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| ||||||
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| Translation |
| Cash Flow |
| Postretirement |
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| Translation |
| Cash Flow |
| Postretirement |
|
|
| ||||||
($ in millions) |
| Adjustments |
| Hedges |
| Benefits |
| Total |
| Adjustments |
| Hedges |
| Benefits |
| Total | ||||||||
Balance as of February 3, 2018 |
| $ | (9) |
| $ | — |
| $ | (270) |
| $ | (279) |
| $ | (9) |
| $ | — |
| $ | (270) |
| $ | (279) |
OCI before reclassification |
|
| (38) |
|
| 1 |
|
| 1 |
|
| (36) |
|
| (58) |
|
| 1 |
|
| 1 |
|
| (56) |
Reclassified from AOCL |
|
| — |
|
| — |
|
| 2 |
|
| 2 | ||||||||||||
Amortization of pension actuarial (gain)/loss, net of tax |
|
| — |
|
| — |
|
| 4 |
|
| 4 | ||||||||||||
Pension remeasurement, net of tax |
|
| — |
|
| — |
|
| (9) |
|
| (9) | ||||||||||||
Other comprehensive income |
|
| (38) |
|
| 1 |
|
| 3 |
|
| (34) |
|
| (58) |
|
| 1 |
|
| (4) |
|
| (61) |
Balance as of May 5, 2018 |
| $ | (47) |
| $ | 1 |
| $ | (267) |
| $ | (313) | ||||||||||||
Balance as of August 4, 2018 |
| $ | (67) |
| $ | 1 |
| $ | (274) |
| $ | (340) |
Reclassifications from AOCL for the thirteentwenty-six weeks ended May 5,August 4, 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 12) |
| |
Income tax benefit |
| (1) |
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 During the thirteen weeks ended May 5,second quarter of 2018, ourthe Company reduced its provisional calculation by $1 million, which represented a revised estimate of foreign tax credits. 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 becauseincomplete as 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.
10
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The 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.provisions, and the base erosion and anti-abuse tax (“BEAT”). The Company has made an accounting policy election to treat GILTI taxes as a current period expense.
The ultimate effect of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, as well as any related actions the Company may take.
10
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the thirteen and twenty-six weeks ended May 5,August 4, 2018, the Company recorded an income tax provisionprovisions of $64$27 million and $91 million, which represented an effective tax raterates of 27.923.6 percent compared withand 26.4 percent, respectively. For the prior-yearthirteen and twenty-six weeks ended July 29, 2017, the Company recorded income tax provisionprovisions of $89$22 million and $111 million, which represented an effective tax raterates of 33.0 percent.30.9 percent and 32.6 percent, respectively. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented.
10. Fair Value Measurements
The Company’s financial assets recorded at fair value are categorized as follows:
|
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| Level 1 – | Quoted prices for identical instruments in active markets. |
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|
| Level 2 – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. |
|
|
|
| Level 3 – | Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. |
The following tables provide a summary of the Company’s recognized assets and liabilities that are measured at fair value on a recurring basis:
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| As of May 5, 2018 |
| As of April 29, 2017 |
| As of February 3, 2018 |
| As of August 4, 2018 |
| As of July 29, 2017 |
| As of February 3, 2018 | ||||||||||||||||||||||||||||||||||||||||||
|
| ($ 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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Investment in equity securities |
| $ | — |
| $ | 15 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — | |||||||||||||||||||||||||||
Available-for-sale security |
| $ | — |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | — |
|
| — |
|
| 7 |
|
| — |
|
| — |
|
| 7 |
|
| — |
|
| — |
|
| 7 |
|
| — |
Foreign exchange forward contracts |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| — |
|
| 1 |
|
| — |
Total Assets |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 8 |
| $ | — |
| $ | — |
| $ | 24 |
| $ | — |
| $ | — |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 8 |
| $ | — |
Liabilities |
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Foreign exchange forward contracts |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
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| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| — |
Total Liabilities |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
In conjunction with the first quarter of 2018 adoption ofthe Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,. The Company’s equity investment, under the practicability exception, is now measured at cost adjusted for changes in observable prices minus impairment. Additionally, our security classified as available-for-sale is now recorded at fair value with gains and losses reported to other income in our Statement of Operations, whereas previously it was recorded to AOCL. The adjustment recorded to retained earnings as a result of adopting ASU 2016-01 was not significant. The fair value of the Company’s investment in equity securities is determined by using quoted prices for identical or similar instruments in markets that are not active and therefore are classified as Level 2. 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.
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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|
| May 5, |
| April 29, |
| February 3, |
| August 4, |
| July 29, |
| February 3, | ||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2018 |
| 2017 |
| 2018 | ||||||
|
| ($ in millions) |
| ($ in millions) | ||||||||||||||
Carrying value |
| $ | 125 |
| $ | 127 |
| $ | 125 |
| $ | 124 |
| $ | 126 |
| $ | 125 |
Fair value |
| $ | 142 |
| $ | 147 |
| $ | 144 |
| $ | 140 |
| $ | 146 |
| $ | 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.
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 |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
|
| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
|
| (in millions, except per share data) |
| (in millions, except per share data) | ||||||||||||||
Net Income |
| $ | 165 |
| $ | 180 |
| $ | 88 |
| $ | 51 |
| $ | 253 |
| $ | 231 |
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Weighted-average common shares outstanding |
|
| 118.7 |
|
| 131.4 |
|
| 116.6 |
|
| 131.3 |
|
| 117.7 |
|
| 131.3 |
Dilutive effect of potential common shares |
|
| 0.4 |
|
| 1.2 |
|
| 0.5 |
|
| 0.7 |
|
| 0.4 |
|
| 1.0 |
Weighted-average common shares outstanding assuming dilution |
|
| 119.1 |
|
| 132.6 |
|
| 117.1 |
|
| 132.0 |
|
| 118.1 |
|
| 132.3 |
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Earnings per share - basic |
| $ | 1.39 |
| $ | 1.37 |
| $ | 0.76 |
| $ | 0.39 |
| $ | 2.15 |
| $ | 1.76 |
Earnings per share - diluted |
| $ | 1.38 |
| $ | 1.36 |
| $ | 0.75 |
| $ | 0.39 |
| $ | 2.14 |
| $ | 1.74 |
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Anti-dilutive option awards excluded from diluted calculation |
|
| 2.2 |
|
| 0.2 |
|
| 2.0 |
|
| 1.7 |
|
| 1.7 |
|
| 0.8 |
Additionally, shares of 1.1 million and 0.4 million as of May 5,August 4, 2018 and AprilJuly 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 achieved as of May 5,August 4, 2018 and AprilJuly 29, 2017. These shares relate to restricted stock units issued in connection with the Company’s long-term incentive program.
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. 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, 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 |
| Thirteen weeks ended |
| Thirteen weeks ended |
| Twenty-six weeks ended |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||||||||||||||
|
| May 5, |
| April 29, |
| May 5, |
| April 29, |
| Aug. 4, |
| July 29, |
| Aug. 4, |
| July 29, |
| Aug. 4, |
| July 29, |
| Aug. 4, |
| July 29, | ||||||||||||
($ in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||
Service cost |
| $ | 5 |
| $ | 4 |
| $ | — |
| $ | — |
| $ | 4 |
| $ | 4 |
| $ | 9 |
| $ | 8 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Interest cost |
|
| 6 |
|
| 6 |
|
| — |
|
| — |
|
| 7 |
|
| 7 |
|
| 13 |
|
| 13 |
|
| — |
|
| — |
|
| — |
|
| — |
Expected return on plan assets |
|
| (10) |
|
| (9) |
|
| — |
|
| — |
|
| (9) |
|
| (10) |
|
| (19) |
|
| (19) |
|
| — |
|
| — |
|
| — |
|
| — |
Amortization of net loss (gain) |
|
| 3 |
|
| 3 |
|
| — |
|
| — |
|
| 3 |
|
| 4 |
|
| 6 |
|
| 7 |
|
| (1) |
|
| (1) |
|
| (1) |
|
| (1) |
Net benefit expense (income) |
| $ | 4 |
| $ | 4 |
| $ | — |
| $ | — |
| $ | 5 |
| $ | 5 |
| $ | 9 |
| $ | 9 |
| $ | (1) |
| $ | (1) |
| $ | (1) |
| $ | (1) |
The Company contributed $30 million in May 2018 and $98 million in early September 2018 to the U.S. qualified pension plan. The Company continually evaluates the amount and timing of any future contributions.
Actual contributions are dependent on several factors; however, the Company expects to make contributions totaling $128 million during 2018 inIn connection with the anticipated U.S. pension plan reformation. The Company contributed approximately $30 millionlitigation more fully disclosed in late May 2018 and currently expects the remaining balance to be contributed on or before September 15, 2018. See Note 14, Legal Proceedings for further information about, the Company reformed its U.S. qualified pension plan during the second quarter of 2018, which resulted in the reclassification of the accrued liability previously recorded and the remeasurement of the liability. The Company reclassified $194 million, after the payment of class counsel fees, to the U.S. qualified pension plan liability. After this matter.reclassification, the remeasurement resulted in an increase to the benefit obligation of $12 million, with a corresponding charge to accumulated other comprehensive loss of $9 million, net of tax. The assumptions used to determine the remeasured benefit obligation did not change from the beginning of the year with the exception of the discount rate which increased from 3.7 percent to 4.0 percent.
13. Share-Based Compensation
Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans, were as follows:
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| Thirteen weeks ended | Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
| May 5, |
| April 29, | August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
| 2018 |
| 2017 | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
| ($ in millions) | ($ in millions) | ||||||||||||||
Options and shares purchased under the employee stock purchase plan | $ | 2 |
| $ | 2 | $ | 1 |
| $ | 3 |
| $ | 3 |
| $ | 5 |
Restricted stock and restricted stock units |
| 3 |
|
| 3 |
| 3 |
|
| — |
|
| 6 |
|
| 3 |
Total share-based compensation expense | $ | 5 |
| $ | 5 | $ | 4 |
| $ | 3 |
| $ | 9 |
| $ | 8 |
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Tax benefit recognized | $ | 1 |
| $ | 1 | $ | — |
| $ | 1 |
| $ | 1 |
| $ | 2 |
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 subjective assumptions, including expected term and expected volatility.
The following table shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the thirteen weeks ended May 5, 2018 and April 29, 2017:
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| Stock Option Plans |
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| Stock Purchase Plan |
| ||||||
|
| May 5, |
|
| April 29, |
|
| May 5, |
|
| April 29, |
|
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
Weighted-average risk free rate of interest |
| 2.7 | % |
| 2.1 | % |
| 1.2 | % |
| 0.7 | % |
Expected volatility |
| 37 | % |
| 25 | % |
| 30 | % |
| 29 | % |
Weighted-average expected award life (in years) |
| 5.5 |
|
| 5.3 |
|
| 1.0 |
|
| 1.0 |
|
Dividend yield |
| 3.1 | % |
| 1.7 | % |
| 2.1 | % |
| 2.0 | % |
Weighted-average fair value | $ | 12.35 |
| $ | 15.58 |
| $ | 16.49 |
| $ | 10.33 |
|
13
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the twenty-six weeks ended August 4, 2018 and July 29, 2017:
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| Stock Option Plans |
|
| Stock Purchase Plan |
| ||||||
|
| August 4, |
|
| July 29, |
|
| August 4, |
|
| July 29, |
|
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
Weighted-average risk free rate of interest |
| 2.7 | % |
| 2.1 | % |
| 1.6 | % |
| 0.8 | % |
Expected volatility |
| 37 | % |
| 25 | % |
| 41 | % |
| 29 | % |
Weighted-average expected award life (in years) |
| 5.5 |
|
| 5.3 |
|
| 1.0 |
|
| 1.0 |
|
Dividend yield |
| 3.1 | % |
| 1.7 | % |
| 2.3 | % |
| 2.0 | % |
Weighted-average fair value | $ | 12.37 |
| $ | 15.56 |
| $ | 14.89 |
| $ | 10.61 |
|
The information in the following table covers option activity under the Company’s stock option plans for the thirteentwenty-six weeks ended May 5,August 4, 2018:
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| Weighted- |
| Weighted- |
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|
| 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 |
|
| 2,739 |
|
|
|
| $ | 52.45 |
|
| 2,739 |
|
|
|
| $ | 52.45 |
Granted |
|
| 379 |
|
|
|
|
| 44.79 |
|
| 380 |
|
|
|
|
| 44.82 |
Exercised |
|
| (4) |
|
|
|
|
| 11.66 |
|
| (134) |
|
|
|
|
| 31.47 |
Expired or cancelled |
|
| (23) |
|
|
|
|
| 50.19 |
|
| (48) |
|
|
|
|
| 57.91 |
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 |
|
|
|
|
|
| |||||||||
Options outstanding at August 4, 2018 |
|
| 2,937 |
|
| 6.5 |
| $ | 52.33 | |||||||||
Options exercisable at August 4, 2018 |
|
| 2,054 |
|
| 5.4 |
| $ | 50.00 | |||||||||
Options available for future grant at August 4, 2018 |
|
| 8,323 |
|
|
|
|
|
|
The total fair value of options vested as of May 5,August 4, 2018 and AprilJuly 29, 2017 was $8 million and $7 million, respectively. The cash received from option exercises was $4 million for both the thirteen and the relatedtwenty-six weeks ended August 4, 2018. The total tax benefit realized from option exercises was $1 million for both the thirteen and twenty-six weeks ended May 5, 2018 was not significant.August 4, 2018.
The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:
| |||||
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| ||||
| |||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||
| August 4, 2018 |
| July 29, 2017 |
| August 4, 2018 |
| July 29, 2017 | ||||
| ($ in millions) | ||||||||||
Exercised | $ | 3 |
| $ | — |
| $ | 3 |
| $ | 15 |
The aggregate intrinsic value for stock options outstanding, and outstanding and exercisable (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:
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| ||
| Thirteen weeks ended | Twenty-six weeks ended | ||||||||
| May 5, 2018 |
| April 29, 2017 | August 4, 2018 |
| July 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Outstanding | $ | 11 |
| $ | 84 | $ | 15 |
| $ | 23 |
Outstanding and exercisable | $ | 11 |
| $ | 74 | $ | 13 |
| $ | 23 |
As of May 5,August 4, 2018 there was $8$7 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.71.5 years.
The following table summarizes information about stock options outstanding and exercisable at May 5, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
| Options Exercisable | ||||||||
|
|
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
| Weighted- |
|
|
|
| Weighted- |
|
|
|
| Remaining |
|
| Average |
|
|
|
| Average |
Range of Exercise |
| Number |
| Contractual |
|
| Exercise |
| Number |
|
| Exercise |
Prices |
| Outstanding |
| Life |
|
| Price |
| Exercisable |
|
| Price |
|
| (in thousands, except prices per share and contractual life) | ||||||||||
$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 |
| 960 |
| 8.3 |
|
| 68.60 |
| 475 |
|
| 67.12 |
|
| 3,091 |
| 6.7 |
| $ | 51.58 |
| 2,174 |
| $ | 48.91 |
14
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding and exercisable at August 4, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
| Options Exercisable | ||||||||
|
|
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
| Weighted- |
|
|
|
| Weighted- |
|
|
|
| Remaining |
|
| Average |
|
|
|
| Average |
Range of Exercise |
| Number |
| Contractual |
|
| Exercise |
| Number |
|
| Exercise |
Prices |
| Outstanding |
| Life |
|
| Price |
| Exercisable |
|
| Price |
|
| (in thousands, except prices per share and contractual life) | ||||||||||
$9.85 to $18.84 |
| 240 |
| 2.2 |
| $ | 17.10 |
| 240 |
| $ | 17.10 |
$24.75 to $34.75 |
| 395 |
| 4.5 |
|
| 32.16 |
| 356 |
|
| 31.88 |
$44.78 to $45.75 |
| 663 |
| 7.7 |
|
| 44.92 |
| 299 |
|
| 45.08 |
$46.64 to $62.11 |
| 699 |
| 6.0 |
|
| 60.98 |
| 683 |
|
| 61.22 |
$63.79 to $73.21 |
| 940 |
| 7.9 |
|
| 68.57 |
| 476 |
|
| 67.13 |
|
| 2,937 |
| 6.5 |
| $ | 52.33 |
| 2,054 |
| $ | 50.00 |
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 874,458842,768 and 669,542668,120 RSU awards outstanding as of May 5,August 4, 2018 and AprilJuly 29,2017, 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.
Restricted stock and RSU activity for the thirteentwenty-six weeks ended May 5,August 4, 2018 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| 374 |
|
|
| $ | 59.15 |
| 374 |
|
|
| $ | 59.15 |
Granted (1) |
| 635 |
|
|
|
| 47.31 |
| 651 |
|
|
|
| 47.29 |
Vested |
| (80) |
|
|
|
| 62.78 |
| (94) |
|
|
|
| 63.37 |
Cancelled (2) |
| (46) |
|
|
|
| 60.55 |
| (80) |
|
|
|
| 58.92 |
Nonvested at May 5, 2018 |
| 883 |
| 2.5 |
| $ | 50.22 | |||||||
Nonvested at August 4, 2018 |
| 851 |
| 2.3 |
| $ | 49.63 | |||||||
Aggregate value ($ in millions) | $ | 44 |
|
|
|
|
| $ | 42 |
|
|
|
|
|
|
|
(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) |
|
15
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The total value of awards for which restrictions lapsed during the thirteentwenty-six weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017 was $5$6 million and $13$14 million, respectively. As of May 5,August 4, 2018, there was $33$29 million of total unrecognized compensation cost related to nonvested restricted awards.
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 discontinued 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.
15
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the last several years, the Company and the Company’s U.S. retirement plan have 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 alleged 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.
In early 2018, the Company exhausted all of its legal remedies and is required to reform the pension plan consistent with the trial court’s decision and judgment. During the second quarter of 2018, the court entered its final judgment, including the ruling on the fairness of the class counsel fees. The amount accrued as of February 3, 2018 was $278 million. During the first quarter of 2018 the estimated valueamount of the judgmentaccrual was increased by $11 million, of which $7 million related to a change in the estimated value of the judgment, based on additional facts as to how the reformation should be calculated, and $4 million related to thecalculated. Additionally, interest that continues to accruewas accrued as requiredmandated by the provisions of the required plan reformation. We have been,reformation of $2 million and will continue, working with plaintiffs’ counsel$6 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, bringing the court on the specific steps neededtotal amount accrued to implement the judgment, which we expect to occur during our second quarter. Until the court enters its final order$291 million. In June 2018, the Company cannot complete the reformation of the plan as the actual terms of the reformation must be approved by the court. The court will be ruling on the fairness of thepaid $97 million to class counsel fees and how those costs will be shared byrepresenting the class members. We believecourt-approved fees. The remaining balance of $194 million was reclassified to the amount we have accrued for this matter is appropriatepension plan obligation in light ofconnection with the facts as we currently understand them.reformation.
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. Judgments could be rendered or settlements made that could adversely affect the Company’s operating results or cash flows in a particular period.
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 2017 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.
16
Business Overview
Foot Locker, Inc., through its subsidiaries, is one of the largest athletic footwear and apparel retailers in the 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. 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 a destination for premium 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:banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and 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 the following banners operating in Europe, Australia, and New Zealand: Foot Locker, Europe, Runners Point, Sidestep, and Kids 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 May 5,August 4, 2018, we operated 3,2843,276 stores as compared with 3,310 and 3,3543,359 stores at February 3, 2018 and AprilJuly 29, 2017, respectively. A total of 116117 franchised stores were operating at May 5,August 4, 2018, as compared with 112 and 7782 stores at February 3, 2018 and AprilJuly 29, 2017, 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.
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.
17
Presented below is a reconciliation of GAAP and non-GAAP results for the thirteen and twenty-six weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017, respectively.
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| ||||||
|
| Thirteen weeks ended |
|
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
|
| May 5, 2018 |
| April 29, 2017 |
|
| August 4, 2018 |
| July 29, 2017 |
| August 4, 2018 |
| July 29, 2017 | ||||||
|
| ($ in millions) |
| ($ in millions) | |||||||||||||||
Pre-tax income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
| $ | 229 |
| $ | 269 |
|
| $ | 115 |
| $ | 73 |
| $ | 344 |
| $ | 342 |
Pre-tax amounts excluded from GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Pension litigation charge |
|
| 12 |
| — |
|
|
| 3 |
| 50 |
| 15 |
| 50 | ||||
Adjusted income before income taxes (non-GAAP) |
| $ | 241 |
| $ | 269 |
|
| $ | 118 |
| $ | 123 |
| $ | 359 |
| $ | 392 |
|
|
|
|
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|
|
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|
|
|
|
|
|
| ||||
After-tax income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 165 |
| $ | 180 |
|
| $ | 88 |
| $ | 51 |
| $ | 253 |
| $ | 231 |
After-tax adjustments excluded from GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pension litigation charge, net of income tax benefit of $3 million |
| 9 |
| — |
| ||||||||||||||
Pension litigation charge, net of income tax benefit of $1, $20, $4, and $20 million |
| 2 |
| 30 |
| 11 |
| 30 | |||||||||||
U.S. tax reform |
| (1) |
| — |
| (1) |
| — | |||||||||||
Tax benefit related to enacted change in foreign branch currency regulations |
| (1) |
| — |
| (1) |
| — | |||||||||||
Adjusted net income (non-GAAP) |
| $ | 174 |
| $ | 180 |
|
| $ | 88 |
| $ | 81 |
| $ | 262 |
| $ | 261 |
|
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|
| ||||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Diluted EPS |
| $ | 1.38 |
| $ | 1.36 |
|
| $ | 0.75 |
| $ | 0.39 |
| $ | 2.14 |
| $ | 1.74 |
Diluted EPS amounts excluded from GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pension litigation charge |
| 0.07 |
| — |
|
| 0.02 |
| 0.23 |
| 0.09 |
| 0.23 | ||||||
U.S. tax reform |
| (0.01) |
| — |
| (0.01) |
| — | |||||||||||
Tax benefit related to enacted change in foreign branch currency regulations |
| (0.01) |
| — |
| (0.01) |
| — | |||||||||||
Adjusted diluted EPS (non-GAAP) |
| $ | 1.45 |
| $ | 1.36 |
|
| $ | 0.75 |
| $ | 0.62 |
| $ | 2.21 |
| $ | 1.97 |
17
During the first quarterthirteen and twenty-six weeks ended May 5,August 4, 2018, the Company recorded pre-tax charges of $3million and $15 million, respectively, in connection with its U.S. retirement plan litigation and required plan reformation. These charges represented $2 million after-tax ($0.02 per share) and $11 million after-tax ($0.09 per share), respectively. During the thirteen and twenty-six weeks ended July 29, 2017, the Company recorded a charge related to the same litigation of $12$50 million, $9$30 million after-tax or $0.07$0.23 per share, related to pension litigation.share. Please see Item 1. “Financial Statements,” Note 14, Legal Proceedings for further information on this charge.these charges.
During the fourth quarter of 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions. During the second quarter of 2018, we revised the provisional amount that was originally recorded which resulted in a benefit of $1 million. We revised our estimate of the amount of foreign tax credits that we expect to utilize. Our accounting for tax reform is still incomplete as we have not finalized the 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.
During the second quarter of 2018, the U.S. Treasury issued a notice that delayed the effective date of regulations under Internal Revenue Code Section 987. These regulations, which were promulgated in December 2016, changed our method for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. As a result of the delay in the effective date, the Company updated its calculations for the effect of these regulations, which resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $1 million.
18
Results of Operations
We evaluate performance based on several factors, of which the primary financial measure of which is the banner’s financial results referred to as division results.profit. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest income.
The following table summarizes our results:
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|
| Thirteen weeks ended |
| Thirteen weeks ended |
| Twenty-six weeks ended | ||||||||||||
|
| May 5, |
| April 29, |
| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
|
| ($ in millions) |
| ($ in millions) | ||||||||||||||
Sales |
| $ | 2,025 |
| $ | 2,001 |
| $ | 1,782 |
| $ | 1,701 |
| $ | 3,807 |
| $ | 3,702 |
|
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| ||||
Operating Results |
|
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|
| ||||
Division profit |
|
| 247 |
| 283 |
|
| 131 |
| 129 |
| 378 |
| 412 | ||||
Less: Pension litigation (1) |
|
| 12 |
| — |
|
| 3 |
| 50 |
| 15 |
| 50 | ||||
Less: Corporate expense (2) |
|
| 11 |
| 15 |
|
| 16 |
| 7 |
| 27 |
| 22 | ||||
Income from operations |
|
| 224 |
| 268 |
|
| 112 |
| 72 |
|
| 336 |
| 340 | |||
Interest income, net |
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| (2) |
| — |
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| (1) |
| (1) |
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| (3) |
| (1) | |||
Other income (3) |
|
| 3 |
| 1 |
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| 2 |
| — |
|
| 5 |
| 1 | |||
Income before income taxes |
| $ | 229 |
| $ | 269 |
| $ | 115 |
| $ | 73 |
| $ | 344 |
| $ | 342 |
|
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(1) | Included in the thirteen and twenty-six weeks ended |
(2) | Corporate expense consists of unallocated selling, general and administrative expenses 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
The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $10 million and $20 million for the thirteen and twenty-six weeks ended |
(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 and twenty-six weeks ended |
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 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 increased by $24$81 million, or 1.24.8 percent, to $2,025$1,782 million for the thirteen weeks ended May5,August 4, 2018, from $2,001$1,701 million for the thirteen weeks ended AprilJuly 29, 2017. For the twenty-six weeks ended August4,2018, sales of $3,807 million increased 2.8 percent from sales of $3,702 million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales decreasedincreased by 1.53.9 percent and 0.9 percent for the thirteen and twenty-six weeks ended August 4, 2018, respectively. Total comparable sales increased by 0.5 percent for the thirteen weeks ended May 5, 2018. Total comparable-store salesAugust 4, 2018 and decreased by 2.81.2 percent thirteenfor the twenty-six weeks ended May 5, 2018. August 4, 2018 as compared with the corresponding prior-year periods. The main difference between the change in comparable sales and the total change in sales represented the shift caused by the 53rd week of 2017, which caused more of the higher-volume back-to-school selling period to be included in this quarter’s results.
19
The information shown below represents certain sales metrics by sales channel:
18
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Stores |
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Sales |
| $ | 1,743 |
| $ | 1,722 |
|
| $ | 1,542 |
| $ | 1,485 |
| $ | 3,285 |
| $ | 3,207 |
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$ Change |
| $ | 21 |
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| $ | 57 |
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| $ | 78 |
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% Change |
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| 1.2 | % |
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| 3.8 | % |
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| 2.4 | % |
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% of total sales |
| 86.1 | % |
| 86.1 | % |
| 86.5 | % |
| 87.3 | % |
| 86.3 | % |
| 86.6 | % | ||
Comparable sales (decrease) |
| (3.1) | % |
| (1.2) | % |
| (0.8) | % |
| (7.5) | % |
| (2.0) | % |
| (4.2) | % | ||
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Direct-to-customers |
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Sales |
| $ | 282 |
| $ | 279 |
|
| $ | 240 |
| $ | 216 |
| $ | 522 |
| $ | 495 |
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$ Change |
| $ | 3 |
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| $ | 24 |
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| $ | 27 |
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% Change |
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| 1.1 | % |
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| 11.1 | % |
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| 5.5 | % |
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% of total sales |
| 13.9 | % |
| 13.9 | % |
| 13.5 | % |
| 12.7 | % |
| 13.7 | % |
| 13.4 | % | ||
Comparable sales (decrease) / increase |
| (0.5) | % |
| 12.1 | % | ||||||||||||||
Comparable sales increase |
| 9.3 | % |
| 5.4 | % |
| 3.8 | % |
| 9.1 | % |
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 theirits store and e-commerce activity.
Excluding the effect of foreign currency, the increase in sales declinedfor both the thirteen and twenty-six weeks ended August 4, 2018 primarily reflects sales gains in our Champs Sports, Foot Locker in the U.S., and Kids Foot Locker banners. Our e-commerce businesses in Europe and the U.S. contributed to the sales gains for both the quarter and year-to-date periods. These increases were partially offset by the continued sales decline in our international banners including Foot Locker, Runners Point, and Sidestep. Footaction’s results for the second quarter were essentially flat with the corresponding prior-year period, although for the year-to-date period sales declined.
For both the thirteen and twenty-six weeks ended May 5,August 4, 2018, our direct-to-customers channel generated positive comparable sales results and was primarily relatedoffset by a decline experienced in the stores channel. From a product perspective for the combined channels, the increase in the quarter was driven by gains in the apparel category, partially offset by a decline in the footwear category. The year-to-date decline in comparable sales was attributable 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 ansales.
The 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 duringfor both the quarter and was primarily caused by a declineyear-to-date periods reflected the continued success in men’s basketball,and children’s branded apparel, which was offset, in part, by an increasedeclines in certain running styles. men’s private-label apparel.
The comparable-storecomparable sales decline in footwear for the thirteen weeks ended August 4, 2018 reflected decreases in women’s and children’s footwear sales, partially offset by gains in sales of men’s footwear. All of these wearer segments experienced comparable declines for the year-to-date period of 2018. For both the quarter and year-to-date periods, the comparable sales decline in women’s footwear primarily reflected decreases in sales of women’s running and court styles reflectingstyles. This was the result of our prior-year success of certain women’s offerings with no such comparable offerings in the current year.
The overall comparable-store increase in apparelmen’s footwear for the thirteen weeks ended August 4, 2018 primarily represented gains in sales of running styles, which 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 declines in sales of men’s basketball styles. For the year-to-date period, sales of men’s footwear posted a slight comparable sales decline as the gains in sales of running footwear styles were not enough to compensate for the decline in men’s private label apparel.sales of basketball styles.
20
Gross Margin
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| May 5, 2018 |
| April 29, 2017 |
| August 4, 2018 |
| July 29, 2017 |
| August 4, 2018 |
| July 29, 2017 | ||||||
Gross margin rate |
| 32.9 | % |
| 34.0 | % |
| 30.2 | % |
| 29.6 | % |
| 31.7 | % |
| 32.0 | % |
Basis point change in the gross margin rate |
| (110) |
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| 60 |
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| (30) |
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Components of the change- |
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Decrease in the merchandise margin rate |
| (60) |
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Higher occupancy and buyers' compensation expense rate |
| (50) |
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Increase/ (decrease) in the merchandise margin rate |
| 30 |
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| (10) |
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Lower / (higher) occupancy and buyers' compensation expense rate |
| 30 |
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| (20) |
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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 decreasedincreased by 11060 basis points for the thirteen weeks ended May 5, 2018.August 4, 2018 and decreased by 30 basis points for the twenty-six weeks ended August 4, 2018, as compared with the corresponding prior-year periods. The merchandise margin rate declineimprovement for the quarterthirteen weeks ended August 4, 2018 primarily reflected higherlower markdown rates as we increased full-price selling during the Companycurrent quarter. For the twenty-six weeks ended August 4, 2018, the gross margin rate was morelower primarily due to additional promotional in orderactivity during the first quarter to proactively managemaintain appropriate inventory levels at optimal levels. Additionally, although to a lesser degree, a decline in ourFor both the quarter and year-to-date periods, shipping and handling revenue alsodeclined as a result of higher free shipping offers, which negatively affected the merchandise margin rate.
The higher occupancy and buyers’buyer’s compensation expense rate decreased for the thirteen weeks ended August 4, 2018, which reflected the higher sales, in part due to the shift that resulted due to the 53rd week of 2017, during the quarter reflected anas compared with a relatively fixed rent cost. However, the rate increased for the twenty-six weeks ended August 4, 2018 as the increase in sales was not enough to compensate for the increased rent-related costs primarily attributed to several high-profile location leases entered into recently, partially offset by rent reductions in certain other stores.recently.
Selling, General and Administrative Expenses (SG&A)
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| May 5, 2018 |
| April 29, 2017 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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| ($ in millions) |
| ($ in millions) |
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SG&A |
| $ | 385 |
| $ | 371 |
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| $ | 380 |
| $ | 339 |
| $ | 765 |
| $ | 710 |
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$ Change |
| $ | 14 |
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| $ | 41 |
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| $ | 55 |
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% Change |
| 3.8 | % |
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| 12.1 | % |
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| 7.7 | % |
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SG&A as a percentage of sales |
| 19.0 | % |
| 18.5 | % |
| 21.3 | % |
| 19.9 | % |
| 20.1 | % |
| 19.2 | % |
SG&A increased by $14$41 million, or by 50140 basis points, to $385$380 million for the thirteen weeks ended May 5,August 4, 2018, as compared with the prior year. Excluding the effect of foreign currency fluctuations, the SG&A expense rate increased by 20 basis points for the thirteen weeks ended May 5, 2018, as compared with the corresponding prior-year period.
The increase in For the twenty-six weeks ended August 4, 2018, SG&A expense rate reflected higher wages,increased by $55 million, or by 90 basis points, to $765 million, as compared with the corresponding prior-year period, asperiod. The effect of foreign currency fluctuations for the current quarter and year-to-date periods was not significant.
The higher SG&A expense rate for both the quarter and year-to-date periods reflected higher wages, increased at a higher rate than sales. Additionally, weincentive compensation expense, and an increase in costs incurred higher costs in connection with our ongoing investment in various technology and infrastructure projects, coupled with an accrualprojects. Corporate expense (a component of SG&A) increased during the quarter and year-to-date periods also reflecting increased incentive compensation expense. The increase in incentive compensation expense was the result of a reduction in the prior year due to the underperformance of our results. The increase for a legal matter. Thisthe year-to-date period was partially offset by a benefit of $5 million recorded in the first quarter relating to insurance recoveries received for damaged inventory and fixed assets relating tofor losses incurred last year during Hurricane Maria.
21
Depreciation and Amortization
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| August 4, |
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| August 4, |
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| May 5, 2018 |
| April 29, 2017 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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| ($ in millions) |
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Depreciation and amortization |
| $ | 45 |
| $ | 41 |
|
| $ | 44 |
| $ | 42 |
| $ | 89 |
| $ | 83 |
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$ Change |
| $ | 4 |
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| $ | 2 |
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| $ | 6 |
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% Change |
| 9.8 | % |
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| 4.8 | % |
|
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| 7.2 | % |
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|
Depreciation and amortization increased by $4$2 million and $6 million for the thirteen and twenty-six weeks ended May 5,August 4, 2018, respectively, as compared with the corresponding prior-year period. The increase in depreciation and amortization reflected ongoing capital spending on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.
Division Profit
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| August 4, |
| July 29, |
| August 4, |
| July 29, |
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| May 5, 2018 |
| April 29, 2017 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||
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| ($ in millions) |
| ($ in millions) |
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Division profit |
| $ | 247 |
| $ | 283 |
|
| $ | 131 |
| $ | 129 |
| $ | 378 |
| $ | 412 |
|
Division profit margin |
| 12.2 | % |
| 14.1 | % |
| 7.4 | % |
| 7.6 | % |
| 9.9 | % |
| 11.1 | % |
Division profit decreasedincreased by 12.71.6 percent for the thirteen weeks ended May 5,August 4, 2018 and decreased 8.3 percent for the twenty-six weeks ended August 4, 2018, as compared with the corresponding prior-year period.periods. The declineincrease in division profit reflected both a lowerfor the thirteen weeks ended August 4, 2018 reflects an increase in the gross margin rate coupledas compared with the deleverage incorresponding prior-year period. For the SG&A expense rate. Both factors contributed equally totwenty-six weeks ended August 4, 2018, both the decline in our gross margin rate and the increase in our SG&A expense rate contributed to the decrease in division profit.
20
Interest Expense, Net
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| Thirteen weeks ended |
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| May 5, 2018 |
| April 29, 2017 |
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| ($ in millions) | |||||
Interest expense |
| $ | 3 |
| $ | 3 |
|
Interest income |
|
| (5) |
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| (3) |
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Interest income, net |
| $ | (2) |
| $ | — |
|
Interest Income, Net
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| Thirteen weeks ended |
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| August 4, |
| July 29, |
| August 4, |
| July 29, | ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
|
| ($ in millions) | ||||||||||
Interest expense |
| $ | 3 |
| $ | 3 |
| $ | 6 |
| $ | 6 |
Interest income |
|
| (4) |
|
| (4) |
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| (9) |
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| (7) |
Interest income, net |
| $ | (1) |
| $ | (1) |
| $ | (3) |
| $ | (1) |
Net interest income was unchanged for the thirteen weeks ended August 4, 2018 and increased by $2 million for the thirteentwenty-six weeks ended May 5,August 4, 2018, as compared with the corresponding prior-year period,periods. Interest expense was unchanged for both the thirteen and twenty-six weeks ended August 4, 2018 as compared with the corresponding prior-year periods, while interest expense was unchanged. The increase in interest income increased primarily representeddue to higher average interest rates on our cash investments.
Income Taxes
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| July 29, |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
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| ($ in millions) |
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Provision for income taxes |
| $ | 27 |
| $ | 22 |
| $ | 91 |
| $ | 111 |
|
Effective tax rate |
|
| 23.6 | % |
| 30.9 | % |
| 26.4 | % |
| 32.6 | % |
For the thirteen weeks ended May 5, 2018, the Company recorded an income tax provision of $64 million, which represented an effective tax rate of 27.9 percent, 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.
During
22
The Company regularly assesses the thirteen weeks ended April 29, 2017adequacy of its provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, the Company recognized excessmay adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of $7 millionrelevant tax law, assessments from share-based compensation, while the amount related to the thirteen weeks ended May 5, 2018 was not significant.
Excluding the above-mentioned excess tax benefits, thetaxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The effective tax rate for the thirteen weeks ended May 5,August 4, 2018 included a tax benefit of $3 million from a reserve release due to a settlement of an international tax examination. The changes in the tax reserves were not significant for the prior-year periods.
During the second quarter of fiscal 2018, the Company reduced its provisional net expense related to the mandatory deemed repatriation of foreign sourced net earnings by $1 million due to arevised estimate of the foreign tax credits the Company expected to utilize. Please see Item 1. “Financial Statements,” Note 9, Income Taxes for further information.
Also during the second quarter of 2018, the U.S. Treasury issued a notice that delayed the effective date of Internal Revenue Code Section 987 regulations for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. As a result of the delay in the effective date, the Company updated its calculations of the effect of these regulations, which resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $1 million.
During 2017, the Company adopted ASU 2016-09 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. No significant excess tax benefits were recorded during the thirteen and twenty-six weeks ended August 4, 2018. Excess tax benefits recorded during the thirteen weeks ended July 29, 2017 were not significant; however we recognized $7 million for the twenty-six weeks ended July 29, 2017.
Excluding the above-mentioned discrete items, the effective tax rate for the thirteen and twenty-six weeks ended August 4, 2018 decreased as compared with the corresponding prior-year period, primarily due to the enactment of the Tax Act which reduced the statutory U.S. federal corporate income tax rate from 35 percent to 21 percent. This was offset, in part, by foreign taxes assessed at rates in excess of the U.S. federal rate for which no U.S. foreign tax 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 27.5 percent excluding the effect of any nonrecurring items that may occur. The actual tax rate will also vary depending on the level and mix of income earned in the various jurisdictions.jurisdictions as well as the finalization of our accounting for the Tax Act. Please see Item 1. “Financial Statements,” Note 9, Income Taxes for further information.
Net Income
For the thirteen and twenty-six weeks ended May 5,August 4, 2018, net income decreasedincreased by $15$37 million, or 8.372.5 percent and diluted earnings per share increased by 1.5$22 million, or 9.5 percent to $1.38 per share,, respectively, as compared with the corresponding prior-year periodperiods. . Diluted earnings per share increased by 92.3 percent to $0.75 per share, and increased by 23.0 percent to $2.14 per share for the thirteen and twenty-six weeks ended August 4, 2018, respectively. The increase in diluted earnings per share for both the quarter and year-to-date periods reflected an increase in net income coupled with a reduction of in the number of shares outstanding as a result of the Company’s share repurchase program.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been to: fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and 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.
23
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 May 5,August 4, 2018, approximately $646$554 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 first quarter ofthirteen and twenty-six weeks ended August 4, 2018, we recorded a pre-tax charge of $12$3 million ($92 million after-tax or $0.07$0.02 per diluted share)and $15 million ($11 million after-tax or $0.09 per diluted share), respectively, in connection with the pension litigation. The accrued amount asDuring the second quarter of May 5, 2018, was $289 million and is classified as a long-term liability. The accrual will continue to increase with interest until paid, asthe Company reformed its U.S. qualified pension plan, which required by the provisionsremeasurement of the required plan reformation.pension liabilities and payment to plaintiffs’ counsel of $97 million representing class counsel fees awarded in the judgment. The Company expects to make contributions totaling $128 contributed $30million to theits U.S. qualified pension plan duringin May 2018 and intends make another contribution in the amount of $98 million in September 2018 to fund a portion of this liability. The timing and the amount of actualFuture contributions to the pension plan are dependent on when the court approves the reformation, the funded status of the plan, and various otherseveral factors, such as interest rates andincluding the performance of the plan’s assets.assets and interest rates.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our needs from business operations.
Operating Activities
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| Thirteen weeks ended | Twenty-six weeks ended | ||||||||
| May 5, 2018 |
| April 29, 2017 | August 4, 2018 |
| July 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Net cash provided by operating activities | $ | 415 |
| $ | 159 | $ | 427 |
| $ | 251 |
$ Change | $ | 256 |
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| $ | 176 |
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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 increase from the prior year primarily reflects net income adjusted for working capital changes and a decrease of $61$26 million in cash paid for income taxes during the thirteentwenty-six weeks ended May 5,August 4, 2018. InThis was partially offset by an increase in pension contributions. During the prior year,twenty-six weeks ended August 4, 2018, we contributed $25$30 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 incomeplan as compared with $25 million in the prior year.corresponding prior-year period. In connection with the pension litigation and the associated court order, the Company paid class counsel $97 million during the second quarter of 2018.
Investing Activities
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| Thirteen weeks ended | Twenty-six weeks ended | ||||||||
| May 5, 2018 |
| April 29, 2017 | August 4, 2018 |
| July 29, 2017 | ||||
| ($ in millions) | ($ in millions) | ||||||||
Net cash used in investing activities | $ | 63 |
| $ | 75 | $ | 113 |
| $ | 150 |
$ Change | $ | (12) |
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| $ | (37) |
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Capital expenditures declined by $11$35 million compared with the corresponding prior-year period. This represented a decline in spending on store projects partially offset by an increase related to technology projects. The Company’s full-year capital spending is expected to be approximately $229 million, which includes $124$130 million related to the remodeling or relocation of approximately 110115 existing stores and the opening of approximately 4050 new stores, as well as $105$99 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. Additionally, duringinvesting activities for the thirteentwenty-six weeks ending May 5,ended August 4, 2018 we finalized ourincludes the receipt of insurance proceeds of $2 million for fixed assets from an 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. Maria.
Financing Activities
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| April 29, 2017 | ||
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Net cash used in financing activities | $ | 154 |
| $ | 79 |
$ Change | $ | 75 |
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Financing Activities
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| August 4, 2018 |
| July 29, 2017 | ||
| ($ in millions) | ||||
Net cash used in financing activities | $ | 281 |
| $ | 135 |
$ Change | $ | 146 |
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During the thirteentwenty-six weeks ended May 5,August 4, 2018, we repurchased 2,616,8054,452,405 shares of our common stock for $112$205 million, as compared with 546,100896,100 shares repurchased for $38$59 million in the corresponding prior-year period. The Company also declared and paid dividends of $41$81 million and $82 million during the first quartertwo quarters of 2018 and 2017.2017, respectively. This represented quarterly rates of $0.345 and $0.31 per share for 2018 and 2017, respectively. Additionally, the amount received for proceeds from common stock in connection with employee stock was not significant for the thirteen weeks ended May 5, 2018, and was $9 million for the corresponding prior-year period. Also, during the thirteentwenty-six weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017, the Companywe paid $1 million and $9 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.Offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with employee stock programs of $4 million and $10 million for the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively.
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 February 3, 2018.
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,August 4, 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 had previously disclosed its plans to elect to pay the tax related to the mandatory deemed repatriation (“toll charge”) in annual installments over an eight year period. DuringHowever, 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,payable; however, the timing of this payment is not determinable at this time.
Item 4. Controls and Procedures
During 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”), 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.
25
We are currently migrating our point-of-sale software to a new platform. Approximately 5001,200 stores have been converted to the new software platform as May 5,of August 4, 2018, and we expect to complete the implementation primarily in this fiscal year.spring 2019. 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 May 5,August 4, 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.”Statements” in Part I.
There were no material changes to the risk factors disclosed in the 2017 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 May 5,August 4, 2018:
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| Approximate | |
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| Total Number of |
| Dollar Value of | |
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| Total |
| Average |
| Shares Purchased as |
| Shares that may | ||
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| Number |
| Price |
| Part of Publicly |
| yet be Purchased | ||
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| 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 |
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| 43.10 |
| 2,202,605 |
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| 662,907,107 |
April 8 - May 5, 2018 |
| 400,036 |
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| 42.18 |
| 400,000 |
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| 646,034,376 |
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| 2,647,220 |
| $ | 42.97 |
| 2,616,805 |
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| Total Number of |
| Dollar Value of | |
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| Total |
| Average |
| Shares Purchased as |
| Shares that may | ||
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| Number |
| Price |
| Part of Publicly |
| yet be Purchased | ||
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| of Shares |
| Paid Per |
| Announced |
| Under the | ||
Date Purchased |
| Purchased (1) |
| Share (1) |
| Program (2) |
| Program (2) | ||
May 6 - June 2, 2018 |
| 472,450 |
| $ | 43.17 |
| 472,450 |
| $ | 625,637,605 |
June 3 - July 7, 2018 |
| 821,604 |
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| 54.69 |
| 821,100 |
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| 580,732,048 |
July 8 - August 4, 2018 |
| 542,614 |
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| 50.23 |
| 542,050 |
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| 553,505,599 |
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| 1,836,668 |
| $ | 50.41 |
| 1,835,600 |
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(1) | These columns also reflect shares acquired in satisfaction of the tax withholding obligations of holders of | |||
(2) | On February 14, 2017, the Board of Directors approved a 3-year, $1.2 billion share repurchase program extending through January 2020.
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(a) | Exhibits |
The exhibits that are in this report immediately follow the index. |
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(a)
Exhibits
The exhibits that are inPursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report immediately followto be signed on its behalf by the index.undersigned thereunto duly authorized.
Date: September 12, 2018 FOOT LOCKER, INC. /s/ Lauren B. Peters LAUREN B. PETERS Executive Vice President and Chief Financial Officer 24
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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.
| FOOT LOCKER, INC. |
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25
FOOT LOCKER, INC.
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Exhibit No. |
| Description |
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12* |
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15* |
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31.1* |
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31.2* |
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32** |
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99* |
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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. |
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* |
| Filed herewith. |
** | Furnished herewith. | |
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Furnished herewith.
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