NOTE 20—SEGMENT REPORTING

The Company defines reportable and operating segments on the same basis that it uses to evaluate performance internally by the CODM. The Company has determined that the Chief Executive Officer is its CODM. As of February 3, 2018, the Company had two operating segments: RH Segment and Waterworks. The two operating segments include all sales channels accessed by the Company’s customers, including sales through catalogs, sales through the Company’s websites, sales through stores, and sales through the commercial channel.

The Company’s two operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared management team and customer base, the Company has determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

The Company uses operating income to evaluate segment profitability. Operating income is defined as net income before interest expense—net, loss on extinguishment of debt and income tax expense.

Prior to the Waterworks acquisition, the Company had one reportable segment. As the Company’s acquisition of Waterworks was completed on May 27, 2016, reportable segment financial information for Waterworks below represents thirty-five weeks of results for fiscal 2016, whereas the RH Segment results represent fifty-two weeks for fiscal 2016. The results for fiscal 2017 include fifty-three weeks for both the RH Segment and Waterworks.

Segment Information

The following table presents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting (in thousands):

	Year Ended
	February 3,						January 28,
	2018						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	2,319,332	$	120,842	$	2,440,174	$	2,060,044	$	74,827	$	2,134,871
Gross profit		801,999		47,068		849,067		656,191		23,596		679,787
Depreciation and amortization		65,666		4,469		70,135		54,480		2,515		56,995

The following table presents the balance sheet metrics as required under ASC 280—Segment Reporting (in thousands):

	Year Ended
	February 3,						January 28,
	2018						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill ⁽¹⁾	$	124,448	$	17,445	$	141,893	$	124,374	$	49,229	$	173,603
Trademarks and domain names		48,563		52,100		100,663		48,524		52,100		100,624
Total assets		1,608,290		124,576		1,732,866		2,040,346		152,174		2,192,520

(1)

The Company recorded goodwill impairment of $33.7 million related to the Waterworks reporting unit in fiscal 2017. Refer to “Impairment” within Note 3—Significant Accounting Policies. Prior to being impaired, the Waterworks goodwill increased $1.9 million during fiscal 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

The Company uses segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) a non-cash compensation charge related to a fully vested option grant made to Mr. Friedman in May 2017, (ii) reduction of net revenues and costs associated with product recalls, (iii) property and equipment disposals, lease related charges, inventory transfer costs, severance expense and other costs associated with two distribution center closures, (iv) asset impairments and lease losses, (v) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks, (vi) the release of the remaining reserve for potential claims regarding anti-dumping duties which the Company believes have lapsed, (vii) the gain on sale of building and land for one of the Company’s owned retail galleries, (viii) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim, (ix) costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards, (x) impairment recorded due to the Company committing to a plan to sell its aircraft, (xi) a non-cash compensation charge related to the fully vested option grants made in connection with the acquisition of Waterworks and (xii) costs incurred in connection with the acquisition of Waterworks including professional fees. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that management reviews.

The following table presents segment operating income (loss) and income before tax (in thousands):

	Year Ended
	February 3,			January 28,
	2018			2017
Operating income:
RH Segment	$	173,414		$	105,274
Waterworks		(2,116	)		(2,360	)
Non-cash compensation		(23,872	)		(3,672	)
Recall accrual		(7,707	)		(4,615	)
Distribution center closures		(5,795	)		—
Asset impairments and lease losses		(4,417	)		(12,743	)
Impact of inventory step-up		(2,527	)		(6,835	)
Anti-dumping exposure		2,202			—
Gain on sale of building and land		2,119			—
Legal claim		—			(8,701	)
Reorganization related costs		—			(5,698	)
Aircraft impairment		—			(4,767	)
Acquisition related costs		—			(2,847	)
Operating income		131,301			53,036
Interest expense—net		62,570			44,482
Goodwill impairment		33,700			—
Loss on extinguishment of debt		4,880			—
Income before tax	$	30,151		$	8,554

The Company classifies its sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor. Net revenues in each category were as follows (in thousands):

	Year Ended
	February 3,		January 28,		January 30,
	2018		2017		2016
Furniture	$	1,543,404	$	1,334,526	$	1,295,486
Non-furniture		896,770		800,345		813,520
Total net revenues	$	2,440,174	$	2,134,871	$	2,109,006

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of February 3, 2018, the Company operates 4 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Revenues from Canadian and U.K. operations, and the long-lived assets in Canada and the U.K., are not material to the Company. Canada and U.K. geographic revenues are based upon revenues recognized at the retail store locations in the respective country.

No single customer accounted for more than 10% of the Company’s revenues in fiscal 2017, fiscal 2016, or fiscal 2015.