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EX-99 - EX-99 - FOOT LOCKER, INC.fl-20170429xex99.htm
EX-32 - EX-32 - FOOT LOCKER, INC.fl-20170429xex32.htm
EX-31.2 - EX-31.2 - FOOT LOCKER, INC.fl-20170429xex31_2.htm
EX-31.1 - EX-31.1 - FOOT LOCKER, INC.fl-20170429xex31_1.htm
EX-15 - EX-15 - FOOT LOCKER, INC.fl-20170429xex15.htm
EX-12.1 - EX-12.1 - FOOT LOCKER, INC.fl-20170429xex12_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________



FORM 10-Q





 

(Mark One)

 







 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended: April 29, 2017



OR





 

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

______________________________________



Picture 1

(Exact name of registrant as specified in its charter)

______________________________________





 

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)





 

 

 

 



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.

 

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  

Smaller reporting company 

 

Emerging growth company 

 

 

 

 



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. 

 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No   

   

Number of shares of Common Stock outstanding as of May 26, 2017: 131,303,334

 

 



 

 


 



FOOT LOCKER, INC.

TABLE OF CONTENTS





 

 

 

 

 



 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION  

 



 

Item 1.

 

Financial Statements

 



 

 

 

Condensed Consolidated Balance Sheets 



 

 

 

Condensed Consolidated Statements of Operations 



 

 

 

Condensed Consolidated Statements of Comprehensive Income



 

 

 

Condensed Consolidated Statements of Cash Flows 



 

 

 

Notes to Condensed Consolidated Financial Statements 



 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

16 



 

Item 4.

 

Controls and Procedures 

23 



 

 

 

 

 

PART II

 

OTHER INFORMATION 

 



 

Item 1. 

 

Legal Proceedings 

23 



 

Item 1A.

 

Risk Factors 

23 



 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds 

23 



 

Item 6. 

 

Exhibits 

23 



 

 

 

 

 

SIGNATURE

 

24 



 

 

 

 

 

INDEX OF EXHIBITS

 

25 









 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions, except shares)









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



April 29,

 

April 30,

 

January 28,



2017

 

2016

 

2017



(Unaudited)

 

(Unaudited)

 

*

ASSETS

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,049 

 

$

1,062 

 

$

1,046 

Merchandise inventories

 

1,279 

 

 

1,260 

 

 

1,307 

Other current assets

 

294 

 

 

270 

 

 

280 



 

2,622 

 

 

2,592 

 

 

2,633 

Property and equipment, net

 

792 

 

 

706 

 

 

765 

Deferred taxes

 

162 

 

 

182 

 

 

161 

Goodwill

 

156 

 

 

157 

 

 

155 

Other intangible assets, net

 

43 

 

 

46 

 

 

42 

Other assets

 

102 

 

 

75 

 

 

84 



$

3,877 

 

$

3,758 

 

$

3,840 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

208 

 

$

230 

 

$

249 

Accrued and other liabilities

 

327 

 

 

347 

 

 

363 

Current portion of capital lease obligations

 

 —

 

 

 

 

 —



 

535 

 

 

578 

 

 

612 

Long-term debt and obligations under capital leases

 

127 

 

 

128 

 

 

127 

Other liabilities

 

393 

 

 

377 

 

 

391 

Total liabilities

 

1,055 

 

 

1,083 

 

 

1,130 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 133,088,450;  173,885,868; and 132,616,087 shares outstanding, respectively

 

914 

 

 

1,127 

 

 

900 

Retained earnings

 

2,393 

 

 

3,336 

 

 

2,254 

Accumulated other comprehensive loss

 

(357)

 

 

(323)

 

 

(363)

Less: Treasury stock at cost: 1,791,789;  37,896,771; and 1,120,466 shares, respectively

 

(128)

 

 

(1,465)

 

 

(81)

Total shareholders' equity

 

2,822 

 

 

2,675 

 

 

2,710 



$

3,877 

 

$

3,758 

 

$

3,840 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

* The balance sheet at January 28, 2017 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended January 28, 2017.

 

 

 



 

1


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)

 

  





 

 

 

 

 

 



 

 

 

 

 

 



 

Thirteen weeks ended



 

April 29,

 

April 30,



 

2017

 

2016



 

 

 

 

 

 

Sales 

 

$

2,001 

 

$

1,987 

Cost of sales

 

 

1,321 

 

 

1,291 

Gross margin

 

 

680 

 

 

696 



 

 

 

 

 

 

Selling, general and administrative expenses

 

 

371 

 

 

361 

Depreciation and amortization

 

 

41 

 

 

39 

Income from operations

 

 

268 

 

 

296 



 

 

 

 

 

 

Interest expense, net

 

 

 —

 

 

 —

Other income

 

 

(1)

 

 

(2)

Income before income taxes

 

 

269 

 

 

298 

Income tax expense

 

 

89 

 

 

107 

Net income 

 

$

180 

 

$

191 



 

 

 

 

 

 

  Basic earnings per share

 

$

1.37 

 

$

1.40 

  Weighted-average shares outstanding

 

 

131.4 

 

 

136.5 



 

 

 

 

 

 

  Diluted earnings per share

 

$

1.36 

 

$

1.39 

  Weighted-average shares outstanding, assuming dilution

 

 

132.6 

 

 

137.8 

 

 

 

 

 

 

 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 



 

2


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ in millions)

 

   





 

 

 

 

 

 



 

 

 

 

 

 



 

Thirteen weeks ended



 

April 29,

 

April 30,



 

2017

 

2016

Net income

 

$

180 

 

$

191 



 

 

 

 

 

 

Other comprehensive income, net of income tax:

 

 

 

 

 

 



 

 

 

 

 

 

Foreign currency translation adjustment: 

 

 

 

 

 

 

Translation adjustment arising during the period, net of income tax

 

 

 

 

44 



 

 

 

 

 

 

Cash flow hedges: 

 

 

 

 

 

 

Change in fair value of derivatives, net of income tax

 

 

(1)

 

 

 —



 

 

 

 

 

 

Pension and postretirement adjustments: 

 

 

 

 

 

 

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

 

 

 

 

(1)

Comprehensive income

 

$

186 

 

$

234 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

   

3


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)

 





 

 

 

 

 



 

 

 

 

 



Thirteen weeks ended



April 29,

 

April 30,



2017

 

2016 *



 

 

 

 

 

From operating activities:

 

 

 

 

 

   Net income

$

180 

 

$

191 

   Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

      Depreciation and amortization

 

41 

 

 

39 

      Share-based compensation expense

 

 

 

      Qualified pension plan contributions

 

(25)

 

 

(25)

      Change in assets and liabilities:

 

 

 

 

 

         Merchandise inventories

 

31 

 

 

39 

         Accounts payable

 

(41)

 

 

(54)

         Accrued and other liabilities

 

(26)

 

 

(14)

         Other, net

 

(6)

 

 

43 

Net cash provided by operating activities

 

159 

 

 

224 



 

 

 

 

 

From investing activities:

 

 

 

 

 

   Capital expenditures

 

(75)

 

 

(65)

Net cash used in investing activities

 

(75)

 

 

(65)



 

 

 

 

 

From financing activities:

 

 

 

 

 

   Purchase of treasury shares

 

(38)

 

 

(88)

   Dividends paid on common stock

 

(41)

 

 

(37)

   Proceeds from exercise of stock options

 

 

 

   Shares of common stock repurchased to satisfy tax withholding obligations

 

(9)

 

 

(6)

Net cash used in financing activities

 

(79)

 

 

(124)



 

 

 

 

 

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash

 

(1)

 

 

Net change in cash, cash equivalents, and restricted cash

 

 

 

42 

Cash, cash equivalents, and restricted cash at beginning of period

 

1,073 

 

 

1,048 

Cash, cash equivalents, and restricted cash at end of period

$

1,077 

 

$

1,090 



 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

   Interest

$

 —

 

$

 —

   Income taxes

$

122 

 

$

115 





See Accompanying Notes to Condensed Consolidated Financial Statements.



*  Amounts for the three months ended April 30, 2016 have been revised from previously reported amounts to reflect the adoption of new accounting standards in the first quarter of 2017. For additional information, see the Recently Adopted Accounting Pronouncements note.







 

4


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies



Basis of Presentation



The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 3, 2018 and of the fiscal year ended January 28, 2017. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended January 28, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2017.



Recent Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. Earlier application is permitted for annual reporting periods beginning after December 15, 2016. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company does not expect to adopt these ASUs until required, and has not yet selected the transition method. Based on an evaluation of the standard as a whole, the Company has identified gift card breakage, direct-response advertising, and principal versus agent considerations as areas which will most likely be affected by the new revenue recognition guidance. We are in the process of finalizing the analysis of our revenue streams and quantifying the effects on the areas discussed above, and we currently do not expect the adoption will significantly affect our consolidated statements of operations, financial position or cash flows.



In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods therein, and requires a modified retrospective adoption, with earlier adoption permitted. The Company does not expect to adopt this ASU early and is evaluating the effect of this guidance. The Company has historically presented a non-GAAP measure to adjust its balance sheet to present operating leases as if they were capital leases. Based upon that analysis and preliminary evaluation of the standard, we estimate the adoption will result in the addition of $3 billion to $4 billion of assets and liabilities on our consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows.



In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted. The Company does not expect to adopt this ASU until required. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. While we could initiate additional relevant transactions prior to this ASU’s adoption date, based on deferred tax amounts related to applicable past intercompany transactions as of April 29, 2017, we expect it will result in an increase in deferred income tax assets of approximately $30 million to $40 million.



Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

5

 


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Adopted Accounting Pronouncements



In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment transactions, including tax consequences, forfeitures, and classifications of the tax related items in the statement of cash flows. The Company adopted ASU 2016-09 during the first quarter of 2017. Amendments relating to accounting for excess tax benefits and deficiencies have been adopted prospectively. For the thirteen weeks ended April 29, 2017, the Company recorded excess tax benefits related to share-based compensation awards of $7 million to the income statement, within the income tax provision, whereas such benefits were previously recognized in equity. Also, in the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. This ASU also requires that we now present excess tax benefits or deficiencies as operating activities in our condensed consolidated statement of cash flow. As a result of adopting this change retrospectively, we reclassified excess tax benefits of $6 million which were previously classified as cash flows from financing activities to operating activities for the first quarter of 2016. Additionally, the presentation of employee taxes paid to taxing authorities for share-based transactions of $6 million, previously classified as cash flows from operating activities were reclassified to financing activities for the first quarter of 2016. The Company has made a policy election of recording forfeitures as they occur instead of estimating forfeitures using a modified retrospective approach. The cumulative effect of this change was not significant.



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU is effective for annual reporting periods beginning after December 15, 2017 including interim periods therein, with early adoption permitted. The Company has adopted this ASU as of the first quarter of 2017. Accordingly, as required by this ASU, we restated our cash and cash equivalents balances in the condensed consolidated statements of cash flows to include restricted cash of $28 million and $27 million as of April 30, 2016 and January 30, 2016, respectively, and $27 million as of January 28, 2017. As required by the ASU, we have provided a reconciliation from cash and cash equivalents as presented on our condensed consolidated balance sheets to cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows. See Note 3, Restricted Cash, for this reconciliation, as well as a discussion of the nature of our restricted cash balances.



2. Segment Information



The Company has determined that its reportable segments are those that are based on its method of internal reporting. The Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense.



 

 

 

 

 

 



 

 

 

 

 

 



 

Thirteen weeks ended



 

April 29, 2017

 

April 30, 2016

Sales

 

($ in millions)

Athletic Stores

 

$

1,722 

 

$

1,735 

Direct-to-Customers

 

 

279 

 

 

252 

Total sales

 

$

2,001 

 

$

1,987 

Operating Results

 

 

 

 

 

 

Athletic Stores

 

$

241 

 

$

277 

Direct-to-Customers

 

 

42 

 

 

38 

Division profit

 

 

283 

 

 

315 

Less: Corporate expense

 

 

15 

 

 

19 

Operating profit

 

 

268 

 

 

296 

Interest expense, net

 

 

 —

 

 

 —

Other income (1)

 

 

 

 

Income before income taxes

 

$

269 

 

$

298 







 

(1)

Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries, and the changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts.





6


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. 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.





 

 

 

 

 

 

 

 

 



 

April 29,

 

April 30,

 

January 28,



    

2017

    

2016

    

2017



 

($ in millions)

Cash and cash equivalents

 

$

1,049 

 

$

1,062 

 

$

1,046 

Restricted cash included in other current assets

 

 

 

 

 

 

 —

Restricted cash included in other non-current assets

 

 

27 

 

 

27 

 

 

27 

Cash, cash equivalents, and restricted cash

 

$

1,077 

 

$

1,090 

 

$

1,073 



Amounts included in restricted cash primarily relate to amounts held in escrow in connection with various leasing arrangements in Europe. In addition, restricted cash reflects deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.



4. Goodwill



Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual review of goodwill and intangible assets with indefinite lives performed during the first quarter of 2017 did not result in the recognition of impairment. The following table provides a summary of goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations. 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

April 29,

 

April 30,

 

January 28,



    

2017

    

2016

    

2017



 

($ in millions)

Athletic Stores

 

$

16 

 

$

17 

 

$

16 

Direct-to-Customers

 

 

140 

 

 

140 

 

 

139 

Total goodwill

 

$

156 

 

$

157 

 

$

155 













5. Other Intangible Assets, net



The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

April 29, 2017

 

April 30, 2016

 

January 28, 2017



 

 

Gross

 

Accum.

 

Net

 

Gross

 

Accum.

 

Net

 

Gross

 

Accum.

 

Net

($ in millions)

 

value

 

amort.

 

Value

 

Value

 

amort.

 

Value

 

value

 

amort.

 

Value

Amortized intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Lease acquisition costs

 

 $

118 

 

 $

(107)

 

 $

11 

 

$

123 

 

$

(111)

 

$

12 

 

 $

116 

 

$

(105)

 

$

11 



Trademarks / trade names

 

 

20 

 

 

(13)

 

 

 

 

21 

 

 

(13)

 

 

 

 

20 

 

 

(13)

 

 



Favorable leases

 

 

 

 

(5)

 

 

 

 

 

 

(5)

 

 

 

 

 

 

(5)

 

 



 

 

 $

145 

 

 $

(125)

 

 $

20 

 

$

151 

 

$

(129)

 

$

22 

 

 $

143 

 

$

(123)

 

20 

Indefinite life intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Runners Point Group trademarks / trade names

 

 

 

 

 

 

 

 $

23 

 

 

 

 

 

 

 

 $

24 

 

 

 

 

 

 

 

 $

22 

Other intangible assets, net

 

 

 

 

 

 

 

 $

43 

 

 

 

 

 

 

 

$

46 

 

 

 

 

 

 

 

 $

42 







 

(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.



7


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the thirteen week period ended April 29, 2017, the Company recorded $1 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 9 years.  Amortization expense recorded is as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

Thirteen weeks ended

($ in millions)

 

 

April 29, 2017

 

 

April 30, 2016

Amortization expense

 

$

 

$



Estimated future amortization expense for finite life intangible assets is as follows:





 

 

  

 

($ in millions)

Remainder of 2017

$

2018

 

2019

 

2020

 

2021

 

2022

 







6. Accumulated Other Comprehensive Loss



Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



April 29,

 

April 30,

 

January 28,



2017

 

2016

 

2017



($ in millions)

Foreign currency translation adjustments

 $

(123)

 

$

(75)

 

$

(127)

Cash flow hedges

 

 —

 

 

 

 

Unrecognized pension cost and postretirement benefit

 

(233)

 

 

(249)

 

 

(236)

Unrealized loss on available-for-sale security

 

(1)

 

 

(1)

 

 

(1)



 $

(357)

 

$

(323)

 

$

(363)



The changes in AOCL for the thirteen weeks ended April 29, 2017 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Items Related

 

 

 

 

 



 

Foreign Currency

 

 

 

to Pension and

 

Unrealized Loss on

 

 

 



 

Translation

 

Cash Flow

 

Postretirement

 

Available-For-

 

 

 

($ in millions)

 

Adjustments

 

Hedges

 

Benefits

 

Sale Security

 

Total

Balance as of January 28, 2017

 

$

(127)

 

$

 

$

(236)

 

$

(1)

 

$

(363)

OCI before reclassification

 

 

 

 

(1)

 

 

 

 

 —

 

 

Reclassified from AOCL

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Other comprehensive income

 

 

 

 

(1)

 

 

 

 

 —

 

 

Balance as of April 29, 2017

 

$

(123)

 

$

 —

 

$

(233)

 

$

(1)

 

$

(357)



Reclassifications from AOCL for the thirteen weeks ended April 29, 2017 were as follows:





 

 



 

 



 

($ 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 10)

 

Income tax benefit

 

(1)

Net of tax

 $







8


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Financial Instruments



The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a practice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 8,  Fair Value Measurements.



Derivative Holdings Designated as Hedges



For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. No such gains or losses were recognized in earnings for any of the periods presented. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.



The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The most significant exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At quarter-end, substantially all of the Company’s hedged forecasted transactions were less than twelve months into the future, and the Company expects the derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.



The net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was a  $1 million loss for the thirteen weeks ended April 29, 2017, and therefore increased AOCL. At April 29, 2017, the amount included in AOCL was not significant. For the thirteen weeks ended April 30, 2016, the net change in fair value was not significant. The notional value of the foreign exchange contracts designed as hedges outstanding at April 29, 2017 was $137 million, and these contracts mature at various dates through August 2018. 



Derivative Holdings Not Designated as Hedges



The Company enters into certain derivative contracts that are not designated as hedges, such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage certain costs of foreign currency-denominated merchandise purchases, intercompany transactions, and the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of derivative holdings not designated as hedges, as well as realized gains and premiums paid, are recorded in earnings immediately within selling, general and administrative expenses or other income, depending on the type of transaction. The net change in fair value was not significant for the thirteen weeks ended April 29, 2017. The net change in fair value resulted in expense of $1 million for the thirteen weeks ended April 30, 2016. The notional value of the foreign exchange contract not designed as a hedge outstanding at April 29, 2017 was $2 million, and this contract matures in May 2017.



9


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

From time to time, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. The notional value of the currency option contract not designated as a hedge outstanding at April 29, 2017 was 40 million euro, and this contract matures in July 2017.    



Additionally, the Company enters into diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the periods presented. No such contracts were outstanding at April 29, 2017.



Fair Value of Derivative Contracts 



The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Balance Sheet

 

April 29,

 

April 30,

 

January 28,

($ in millions)

 

Caption

 

2017

 

2016

 

2017

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 

$

 

$

Foreign exchange forward contracts

 

Current liabilities

 

$

 

$

 —

 

$

Foreign exchange forward contracts

 

Non-current liabilities

 

$

 —

 

$

 

$

 —







8. Fair Value Measurements



The Company’s financial assets recorded at fair value are categorized as follows:





 

 

 

Level 1 –

Quoted prices for identical instruments in active markets.







 

 

 

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:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of April 29, 2017

 

As of April 30, 2016

 

As of January 28, 2017



 

($ in millions)



   

Level 1

 

Level 2

   

Level 3

   

Level 1

 

Level 2

   

Level 3

 

Level 1

 

Level 2

   

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 $

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

Total Assets

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 —

Total Liabilities

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 

$

 —







10


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Securities classified as available-for-sale are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized gains or losses are determined to be other than temporary. 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.



The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:







 

 

 

 

 

 

 

 

 



 

April 29,

 

April 30,

 

January 28,



 

2017

 

2016

 

2017



 

($ in millions)

Carrying value

 

$

127 

 

$

129 

 

$

127 

Fair value

 

$

147 

 

$

149 

 

$

148 



The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2. The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.



9. 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:





 

 

 

 

 

 



 

 

 

 

 

 



Thirteen weeks ended



 

April 29,

 

April 30,



 

2017

 

2016



 

(in millions, except per share data)

Net Income

 

$

180 

 

$

191 



 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

131.4 

 

 

136.5 

Dilutive effect of potential common shares

 

 

1.2 

 

 

1.3 

Weighted-average common shares outstanding assuming dilution

 

 

132.6 

 

 

137.8 



 

 

 

 

 

 

Earnings per share - basic

 

$

1.37 

 

$

1.40 

Earnings per share - diluted

 

$

1.36 

 

$

1.39 



 

 

 

 

 

 

Anti-dilutive share-based awards excluded from diluted calculation

 

 

0.2 

 

 

0.2 





11


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company adopted ASU 2016-09 during the first quarter of 2017. As a result, excess tax benefits and tax deficiencies are no longer included as assumed proceeds in the calculation of diluted shares outstanding. This change was adopted prospectively.



Contingently issuable shares of 0.4 million and 0.3 million have not been included as the vesting conditions have not been satisfied as of April 29, 2017 and April 30, 2016, respectively. These shares relate to RSU awards issued in connection with the Company’s long-term incentive program.



10. 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.



The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which are recognized as part of SG&A expense:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Pension Benefits

 

Postretirement Benefits



 

Thirteen weeks ended