UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 Form 10-Q 

 

We have five reportable segments, which are primarily located in major shopping malls and strip centers.

Basis of Presentation and Consolidation

The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in our opinion, necessary for a fair presentation of the information as of and for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required under GAAP for complete consolidated financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with our annual report on Form 10-K as amended, for the 52 weeks ended January 30, 201628, 2017 (the “2015“2016 Annual Report on Form 10-K”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results. Actual results could differ from those estimates. Due to the seasonal nature of our business, the results of operations for the 3913 weeks ended OctoberApril 29, 20162017 are not indicative of the results to be expected for the 5253 weeks ending January 28, 2017February 3, 2018 (“fiscal 2016”2017”).

Restricted Cash

Restricted cash of $10.1$10.3 million, $9.8$10.5 million and $9.7$10.2 million as of OctoberApril 29, 2017, April 30, 2016 October 31, 2015 and January 30, 2016,28, 2017, respectively, consists primarily of bank deposits serving as collateral for bank guarantees issued on behalf of our foreign subsidiaries and is included in other noncurrent assets in our unaudited condensed consolidated balance sheets.

Dividend

On November 21, 2016,May 23, 2017, our Board of Directors approved a quarterly cash dividend to our stockholders of $0.37$0.38 per share of Class A Common Stock payable on December 13, 2016June 20, 2017 to stockholders of record at the close of business on December 1, 2016.June 7, 2017. Future dividends will be subject to approval by our Board of Directors.

In November 2015,January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting StandardsStandard Update ("ASU") No. 2015-17, Balance Sheet Classification of Deferred Taxes. The standard amends2017-04, Intangibles—Goodwill and Other, Simplifying the current requirementTest for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now beGoodwill Impairment, which simplifies how an entity is required to classify all deferred tax assetstest goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill and liabilities as noncurrent. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Companythe carrying amount. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its estimated fair value. We early adopted this updated standard during the fourth quarter of fiscal 2015, utilizing prospective application as permitted. As such, certain prior period amountswhich did not have not been retrospectively adjustedan impact to conform to the current period presentation.our consolidated financial statements.

In April 2015,October 2016, the FASB issued ASU 2015-03, Simplifying2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, which eliminates the Presentationexception to defer the tax effects of Debt Issuance Costs. This standard requires that debt issuance costs relatedintra-entity asset transfers (intercompany sales). Prior to this update, the tax effects of intra-entity asset transfers were deferred until the transferred asset was sold to a recognized debt liability be presented inthird party or otherwise recovered through use, which was an exception to the balance sheet as a direct deduction from the carrying amountgeneral requirement for comprehensive recognition of that debt liability, consistent with debt discounts. ASU 2015-03 became effective for interimcurrent and annual reporting periods beginning after December 15, 2015.deferred income taxes. We early adopted this guidance as ofupdated standard, effective January 31, 2016,29, 2017, and as a result have recastwe recognize tax expense or benefit from intercompany sales of assets other than inventory in the October 31, 2015period in which the transaction occurs.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for employee share-based payment transactions. The amendments of the updated standard include, among other things, the requirement to recognize excess tax benefits and deficiencies through earnings and present the related cash flows in operating activities in the statement of cash flows, the election of a policy to either estimate forfeitures when determining periodic expense or recognize actual forfeitures when they occur, and an increase in the allowable income tax withholding from the minimum to maximum statutory rate and its classification in the statement of cash flows. As a result of the adoption of this updated standard, effective January 30, 2016 condensed consolidated balance sheets29, 2017, excess tax benefits and deficiencies are recognized in our results of operations and are presented in cash flows from operating activities in our statement of cash flows on a prospective basis. In addition, we elected to conform to the current period presentation.recognize actual forfeitures of stock-based awards as they occur. The adoption of this updated standard reduced previously presented prepaid expenses and other current assets by $1.3 million, other noncurrent assets by $3.6 million, and long-term debt by $4.9 million for the period ended October 31, 2015 based upon the balance of unamortized debt financing costs relatingdid not result in a material impact to our senior notes due in 2019. The adoption of this standard also reduced previously presented prepaid expenses and other current assets by $1.3 million, other noncurrent assets by $3.3 million, and long-term debt by $4.6 million, for the period ended January 30, 2016 based upon the balance of unamortized debt financing costs relating to our senior notes due in 2019.unaudited consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues in regard to how cash receipts and cash payments are presented and classified in the statement of cash flows. The ASUupdated standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. The amendments in the ASU should be adopted on a retrospective basis unless it is impracticable to apply, in which case the amendments should be applied prospectively as of the earliest date practicable. We are currently evaluating the impact that this standard will have on our consolidated financial statements and disclosures.

In March 2016,May 2014, the FASB issued ASU No. 2016-09, Improvements2014-09, Revenue from Contracts with Customers, which sets forth a new five-step revenue recognition model that replaces the prior revenue recognition guidance in its entirety. The underlying principle of the new standard is that an entity will recognize revenue to Employee Share-Based Payment Accounting.depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The update simplifies several aspectsupdated standard also required additional disclosures on the nature, timing, and uncertainty of accounting for employee share-based payment transactions for both publicrevenue and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement ofrelated cash flows. The following subsequent ASUs either clarified or revised guidance set forth in ASU is2014-09:

The ASU isupdated revenue recognition standards are effective for fiscal years, and interimannual reporting periods within those years, beginning on or after December 15, 2017, with the option to early adoption permitted.adopt for annual periods beginning after December 15, 2016. Entities may use either a full retrospective or modified retrospective transition approach in applying these ASUs. We do notcurrently anticipate adopting these standards in the first quarter of fiscal 2018 and applying the modified retrospective approach. We anticipate that adoption ofthe standards will affect the way that we recognize liabilities associated with our loyalty program and gift cards. We continue to evaluate the impact that this standard will have a material impact toon our consolidated financial statements.statements and footnote disclosures.

In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. The standard specifies how prepaid stored-value product liabilities should be derecognized, thereby eliminating the current and potential future diversity in practice. Consistent with ASU 2014-09 related to revenue recognition, the standard requires derecognition in proportion with the rights expected to be exercised by the holder. Entities may adopt this standard using either a modified retrospective transition approach with a cumulative-effect adjustment to retained earnings or a full retrospective transition approach. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We do not anticipatecontinue to evaluate the impact that adoption of this standard will have a material impact toon our consolidated financial statements.statements and footnote disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires a lessee to recognize a liability related to lease payments and an offsetting right-of-use asset representing a right to use the underlying asset for the lease term on the balance sheet. Entities are required to use a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements, with certain reliefs available. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the overall impact to our consolidated financial statements, though we expect the adoption to result in a material increase in the assets and liabilities reflected in our consolidated balance sheets.

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair valueApplicable accounting guidance applies to our foreign currency contracts, which include forward exchange contracts, foreign currency options and cross-currency swaps, our Company-owned life insurance policies with a cash surrender value, contingent consideration payable associated with acquisitions, and certain nonqualified deferred compensation liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition.

Assets and liabilities that are measured at fair value on a recurring basis include our foreign currency contracts, Company-ownedlife insurance policies we own that have a cash surrender value, contingent consideration payable associated with acquisitions, and certain nonqualified deferred compensation liabilities.

In connection with our acquisition of certain assets from Cellular World and Red Skye Wireless during the fiscal year ended January 28, 2017 ("fiscal 2016"), we recognized an acquisition-date liability of $43.2 million representing the total estimated fair value of the contingent consideration (see Note 2, Acquisitions).consideration. The fair value was estimated based on Level 3 inputs which include future sales projections derived from our historical experience with comparable acquired stores and a discount rate commensurate with the risks and inherent uncertainty in the business. There was no material change in the fair value of the contingent consideration from the date of acquisition through OctoberApril 29, 2016.2017.

The following table provides the fair value of our assets and liabilities measured at fair value on a recurring basis and recorded in our unaudited condensed consolidated balance sheets (in millions): 

We use forward exchange contracts, foreign currency options and cross-currency swaps (together, the “foreign currency contracts”) to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and liabilities. The foreign currency contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency assets and liabilities. The total gross notional value of derivatives related to our foreign currency contracts was $986.3$457.2 million, $1,099.8$804.4 million and $925.3$586.0 million as of OctoberApril 29, 2017, April 30, 2016 October 31, 2015 and January 30, 2016,28, 2017, respectively.

Activity related to the trading of derivative instruments and the offsetting impact of related intercompany loans and foreign currency assets and liabilities recognized in selling, general and administrative expense is as follows (in millions):

We do not use derivative financial instruments for trading or speculative purposes. We are exposed to counterparty credit risk on all of our derivative financial instruments and cash equivalent investments. We manage counterparty risk according to the guidelines and controls established under our comprehensive risk management and investment policies. We continuously monitor our counterparty credit risk and utilize a number of different counterparties to minimize our exposure to potential defaults. We do not require collateral under derivative or investment agreements.

NonrecurringAssets that are Measured at Fair Value Measurementson a Nonrecurring Basis

In addition to assets and liabilitiesAssets that are recorded at fair value on a recurring basis, we record certain assets and liabilitiesmeasured at fair value on a nonrecurring basis as required by GAAP. Generally,relate primarily to property and equipment, goodwill and other intangible assets, which are recorded atremeasured when the estimated fair value on a nonrecurring basis as a resultis below its carrying value. For these assets, we do not periodically adjust carrying value to fair value; rather, when we determine that impairment has occurred, the carrying value of impairment charges.the asset is reduced to its fair value. We did not record any significant impairment charges related to assets measured at fair value on a nonrecurring basis during the 3913 weeks ended OctoberApril 29, 20162017 or October 31, 2015.April 30, 2016.

Other Fair Value Disclosures

The carrying values of our cash equivalents, receivables, net, accounts payable and accountsnotes payable approximate the fair value due to their short-term maturities.

As of OctoberApril 29, 2016,2017, our unsecured 5.50% senior notes due in 2019 had a net carrying value of $346.3$347.0 million and a fair value of $361.2$358.3 million, and our unsecured 6.75% senior notes due in 2021 had a net carrying value of $468.0$468.7 million and a fair value of $491.7of$490.4 million. The fair values of our senior notes were determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined thesethis to be a Level 2 measurementsmeasurement as all significant inputs into the quotesquote provided by our external pricing source are observable in active markets.

The indentures governing the 2019 Senior Notes and the 2021 Senior Notes (together, the "Senior Notes") do not contain financial covenants but do contain covenants which place certain restrictions on us and our subsidiaries, including limitations on asset sales, additional liens, investments, stock repurchases, the incurrence of additional debt and the repurchase of debt that is junior to the Senior Notes. In addition, the indentures restrict payments of dividends to stockholders (other than dividends payable in shares of capital stock) if one of the following conditions exist: (i) an event of default has occurred, (ii) we could not incur additional debt under the general debt covenant of the indentures or (iii) the sum of the proposed dividend and all other dividends and other restricted payments made under the indentures from the date of the indentures governing the Senior Notes exceeds the sum of 50% of consolidated net income plus 100% of net proceeds from capital stock sales and other amounts set forth in and determined as provided in the indentures. These restrictions are subject to exceptions and qualifications, including that we can pay up to $175 million in dividends to stockholders in each fiscal year and we can pay dividends and make other restricted payments in an unlimited amount if our leverage ratio on a pro forma basis after giving effect to the dividend payment and other restricted payments would be less than or equal to 1.0:1.0.

The indentures contain customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, may be declared immediately due and payable. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs.

Borrowing availability under the Revolver is limited to a borrowing base which allows us to borrow up to 90% of the appraisal value of the inventory, in each case plus 90% of eligible credit card receivables, net of certain reserves. The borrowing base provides for borrowing of up to 92.5% of the appraisal value during the fiscal months of August through October. Letters of credit reduce the amount available to borrow under the Revolver by an amount equal to the face value of the letters of credit. Our ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if either (1) excess availability under the Revolver is less than 30%, or is projected to be within 12 months after such payment or (2) excess availability under the Revolver is less than 15%, or is projected to be within 12 months after such payment, and the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months, is 1.1:1.0 or less. In the event that excess availability under the Revolver is at any time less than the greater of (1) $30 million or (2) 10% of the lesser of the total commitment or the borrowing base, we will be subject to a fixed charge coverage ratio covenant of 1.0:1.0.

The Revolver places certain restrictions on us and our subsidiaries, including limitations on asset sales, additional liens, investments, loans, guarantees, acquisitions and the incurrence of additional indebtedness. Absent consent from our lenders, we may not incur more than $1 billion of senior secured debt and $750 million of additional unsecured indebtedness to be limited to $250 million in general unsecured obligations and $500 million in unsecured obligations to finance acquisitions valued at $500 million or more.

The Revolver provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made by us or the borrowers proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting us or our subsidiaries, defaults relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of the Company or certain of its subsidiaries. During the 3913 weeks ended OctoberApril 29, 2016,2017, we cumulatively borrowed $510.0 million and repaid $510.0 millionhad no borrowings or repayments under the Revolver. Average borrowings under the Revolver for the 39 weeks ended October 29, 2016 were $56.5 million and our average interest rate on those borrowings was 2.4%. As of OctoberApril 29, 2016,2017, total availability under the Revolver was $391.5$392.5 million, with no outstanding borrowings and outstanding standby letters of credit of $8.5$7.5 million. We are currently in compliance with the financial requirements of the Revolver.

In September 2007, our Luxembourg subsidiary entered into a discretionary $20$20.0 million Uncommitted Line of Credit (the “Line of Credit”) with Bank of America. There is no term associated with the Line of Credit and Bank of America may withdraw the facility at any time without notice. The Line of Credit is available to our foreign subsidiaries for use primarily as a bank overdraft facility for short-term liquidity needs and for the issuance of bank guarantees and letters of credit to support operations. As of OctoberApril 29, 2016,2017, there were nowas a $1.3 million cash overdraftsoverdraft outstanding under the Line of Credit and bank guarantees outstanding totaled $2.0$9.7 million.

In the ordinary course of business, we are, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions, stockholder actions and consumer class actions. We may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interest of our stockholders. We do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material effect on our financial condition, results of operations or liquidity.

Certain of our French subsidiaries have been under audit by the French Tax Administration (the "FTA") for fiscal years 2008 through 2012. We received tax reassessment notices on December 23, 2015 and April 4, 2016, pursuant to which the FTA asserted that the French subsidiaries were ineligible to claim certain tax deductions from November 4, 2008, through January 31, 2013, resulting in a potential additional tax charge of approximately €85.5 million. We may receive additional tax reassessments in material amounts for subsequent fiscal years. We filed a response to each reassessment and intend to vigorously contest the reassessments through administrative procedures. If we are unable to resolve this matter through administrative remedies at the FTA, we plan to pursue judicial remedies. We believe our tax positions will be sustained and have not taken a reserve for any potential adjustment based on the reassessment. If we were not to prevail, then the adjustment to our income tax provision could be material.

The tables below set forth net sales, percentages of total net sales, gross profit and gross profit percentages by significant product category for the periods indicated (dollars in millions). We have revised the classification of sales and gross profit of our mobile and consumer electronics in this Quarterly Report on Form 10-Q for the period ended October 29, 2016 ("Report"). Prior to this Report, we presented a product category labeled "Mobile and consumer electronics" which was comprised of mobile and consumer electronics sold through our Video Game Brands segments and Technology Brands segment. In this Report, sales and gross profit of mobile and consumer electronics generated by our Technology Brands segment are separately presented as "Technology Brands" and sales and gross profit of mobile and consumer electronics generated by our Video Game Brands segments are included in "Other." We believe this presentation is more meaningful to our investors as gross margins of mobile and consumer electronics in our Technology Brands segment differ from our Video Game Brands segments. Sales and gross profit data for prior periods have been recast to the current period presentation.