10-Q 1 ltd-201884_10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________
FORM 10-Q
 _________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2018
OR
o
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 1-8344
 _________________________________
L BRANDS, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Delaware
 
31-1029810
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
Three Limited Parkway
Columbus, Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(614) 415-7000
(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   ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o

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.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  o    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.50 Par Value
 
Outstanding at August 31, 2018
 
 
275,063,433 Shares
 



L BRANDS, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
 
 
 
 
 
 
Item 6. Exhibits
 
 
 
*
The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2018” and “second quarter of 2017” refer to the thirteen-week periods ended August 4, 2018 and July 29, 2017, respectively. "Year-to-date 2018" and "year-to-date 2017" refer to the twenty-six-week periods ending August 4, 2018 and July 29, 2017, respectively.


2


PART I—FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS

L BRANDS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions except per share amounts)
(Unaudited)
 
 
Second Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Net Sales
$
2,984

 
$
2,755

 
$
5,610

 
$
5,192

Costs of Goods Sold, Buying and Occupancy
(1,925
)
 
(1,727
)
 
(3,607
)
 
(3,261
)
Gross Profit
1,059

 
1,028


2,003


1,931

General, Administrative and Store Operating Expenses
(831
)
 
(727
)
 
(1,620
)
 
(1,421
)
Operating Income
228

 
301


383


510

Interest Expense
(98
)
 
(101
)
 
(196
)
 
(201
)
Other Income (Loss)
(1
)
 
17

 
1

 
27

Income Before Income Taxes
129

 
217


188


336

Provision for Income Taxes
30

 
78

 
41

 
103

Net Income
$
99

 
$
139


$
147


$
233

Net Income Per Basic Share
$
0.36

 
$
0.48

 
$
0.53

 
$
0.81

Net Income Per Diluted Share
$
0.36

 
$
0.48

 
$
0.52

 
$
0.81

Dividends Per Share
$
0.60

 
$
0.60

 
$
1.20

 
$
1.20



L BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Second Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Net Income
$
99

 
$
139

 
$
147

 
$
233

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
   Foreign Currency Translation
(9
)
 
7

 
(22
)
 
10

   Unrealized Gain (Loss) on Cash Flow Hedges
3

 
(26
)
 
9

 
(16
)
   Reclassification of Cash Flow Hedges to Earnings
1

 
12

 
3

 
5

Total Other Comprehensive Income (Loss), Net of Tax
(5
)
 
(7
)

(10
)

(1
)
Total Comprehensive Income
$
94

 
$
132

 
$
137

 
$
232



The accompanying Notes are an integral part of these Consolidated Financial Statements.

3


L BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
 
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(Unaudited)
 
 
 
(Unaudited)
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and Cash Equivalents
$
843

 
$
1,515

 
$
1,360

Accounts Receivable, Net
310

 
310

 
245

Inventories
1,315

 
1,240

 
1,118

Other
247

 
228

 
234

Total Current Assets
2,715

 
3,293

 
2,957

Property and Equipment, Net
2,949

 
2,893

 
2,841

Goodwill
1,348

 
1,348

 
1,348

Trade Names
411

 
411

 
411

Deferred Income Taxes
21

 
14

 
25

Other Assets
176

 
190

 
181

Total Assets
$
7,620

 
$
8,149

 
$
7,763

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Accounts Payable
$
821

 
$
717

 
$
758

Accrued Expenses and Other
963

 
1,029

 
860

Current Debt
65

 
87

 
64

Income Taxes
7

 
198

 
76

Total Current Liabilities
1,856

 
2,031

 
1,758

Deferred Income Taxes
237

 
238

 
369

Long-term Debt
5,712

 
5,707

 
5,704

Other Long-term Liabilities
937

 
924

 
844

Shareholders’ Equity (Deficit):
 
 
 
 
 
Preferred Stock - $1.00 par value; 10 shares authorized; none issued

 

 

Common Stock - $0.50 par value; 1,000 shares authorized; 283, 283 and 318 shares issued; 275, 280 and 286 shares outstanding, respectively
142

 
141

 
159

Paid-in Capital
718

 
678

 
707

Accumulated Other Comprehensive Income
12

 
24

 
11

Retained Earnings (Deficit)
(1,648
)
 
(1,434
)
 
94

Less: Treasury Stock, at Average Cost; 8, 3 and 32 shares, respectively
(348
)
 
(162
)
 
(1,885
)
Total L Brands, Inc. Shareholders’ Equity (Deficit)
(1,124
)
 
(753
)
 
(914
)
Noncontrolling Interest
2

 
2

 
2

Total Equity (Deficit)
(1,122
)
 
(751
)
 
(912
)
Total Liabilities and Equity (Deficit)
$
7,620

 
$
8,149

 
$
7,763


The accompanying Notes are an integral part of these Consolidated Financial Statements.

4


L BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Year-to-Date
 
2018
 
2017
Operating Activities:
 
 
 
Net Income
$
147

 
$
233

Adjustments to Reconcile Net Income to Net Cash Provided by (Used for) Operating Activities:
 
 
 
Depreciation of Long-lived Assets
296

 
282

Amortization of Landlord Allowances
(22
)
 
(24
)
Share-based Compensation Expense
50

 
50

Deferred Income Taxes

 
12

Gains on Distributions from Easton Investments
(7
)
 
(20
)
Unrealized Losses on Marketable Equity Securities
6

 

Changes in Assets and Liabilities:
 
 
 
Accounts Receivable
1

 
50

Inventories
(81
)
 
(18
)
Accounts Payable, Accrued Expenses and Other
4

 
(73
)
Income Taxes Payable
(209
)
 
(223
)
Other Assets and Liabilities
27

 
(48
)
Net Cash Provided by Operating Activities
212

 
221

Investing Activities:
 
 
 
Capital Expenditures
(345
)
 
(372
)
Return of Capital from Easton Investments
13

 
27

Other Investing Activities
2

 
(5
)
Net Cash Used for Investing Activities
(330
)
 
(350
)
Financing Activities:
 
 
 
Payment of Long-term Debt
(52
)
 

Borrowings from Foreign Facilities
89

 
36

Repayments of Foreign Facilities
(57
)
 
(8
)
Dividends Paid
(335
)
 
(344
)
Repurchases of Common Stock
(186
)
 
(132
)
Tax Payments related to Share-based Awards
(12
)
 
(30
)
Proceeds from Exercise of Stock Options
1

 
37

Financing Costs and Other
(2
)
 
(8
)
Net Cash Used for Financing Activities
(554
)
 
(449
)
Effects of Exchange Rate Changes on Cash and Cash Equivalents

 
4

Net Decrease in Cash and Cash Equivalents
(672
)
 
(574
)
Cash and Cash Equivalents, Beginning of Period
1,515

 
1,934

Cash and Cash Equivalents, End of Period
$
843

 
$
1,360


The accompanying Notes are an integral part of these Consolidated Financial Statements.

5


L BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Description of Business and Basis of Presentation
Description of Business
L Brands, Inc. (“the Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, personal care, beauty and home fragrance products. The Company sells its merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada, United Kingdom (“U.K.”), Ireland and Greater China (China and Hong Kong), which are primarily mall-based, and through its websites and other channels. The Company's other international operations are primarily through franchise, license and wholesale partners. The Company currently operates the following retail brands:
Victoria’s Secret
PINK
Bath & Body Works
La Senza
Henri Bendel
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2018” and “second quarter of 2017” refer to the thirteen-week periods ended August 4, 2018 and July 29, 2017, respectively. “Year-to-date 2018” and “year-to-date 2017” refer to the twenty-six-week periods ending August 4, 2018 and July 29, 2017, respectively.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income. The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income (Loss) on the Consolidated Statements of Income. The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended August 4, 2018 and July 29, 2017 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2017 Annual Report on Form 10-K.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
Seasonality of Business
Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.
Concentration of Credit Risk
The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. Typically, the Company’s investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.

6


The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company records an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.

2. New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which was further clarified and amended in 2015 and 2016. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted the standard in the first quarter of 2018 under the modified retrospective approach. Under the standard, income from the Victoria's Secret private label credit card arrangement, which was historically presented as a reduction to General, Administrative and Store Operating Expenses, is presented as revenue. Further, historical accounting related to loyalty points earned under the Victoria's Secret customer loyalty program changed as the Company now defers revenue associated with customer loyalty points until the points are redeemed using a relative stand-alone selling price method. The standard also changed accounting for sales returns which requires balance sheet presentation on a gross basis.

In the first quarter of 2018, the Company recorded a cumulative catch-up adjustment resulting in a reduction to opening retained earnings, net of tax, of $28 million. The cumulative adjustment primarily related to the deferral of revenue related to outstanding points, net of estimated forfeitures, under the Victoria's Secret customer loyalty program. In addition, Net Sales and General, Administrative and Store Operating Expenses both increased $48 million and $73 million in the second quarter and year-to-date 2018 Consolidated Statements of Income, respectively. Further, gross presentation of the Company's sales return reserve resulted in a $4 million increase in Other Current Assets and Accrued Expenses and Other on the August 4, 2018 Consolidated Balance Sheet.
Fair Value of Financial Instruments
In January 2016, the FASB issued ASC 321, Investments - Equity Securities, which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The standard requires the recognition of changes in the fair value of marketable equity securities in net income as compared to historical treatment in accumulated other comprehensive income on the balance sheet. The Company adopted the standard in the first quarter of 2018 and recorded an increase to opening retained earnings, net of tax, of $2 million.
Leases
In February 2016, the FASB issued ASC 842, Leases, which requires companies classified as lessees to account for most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. In July 2018, the FASB approved an amendment to the standard that provides companies a transition option that would not require earlier periods to be restated upon adoption. The standard is effective beginning in fiscal 2019, with early adoption permitted.

The Company is currently evaluating the impacts that this standard will have on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows. The Company currently expects that most of its operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption of the standard. Thus, the Company expects adoption will result in a material increase to the assets and liabilities on the Consolidated Balance Sheet. The Company will adopt the standard in the first quarter of 2019 and apply the standard prospectively as of the adoption date.

7


Hedging Activities
In August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12, Targeted Improvements to Accounting for Hedging Activities, which is intended to better align risk management activities and financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements. This guidance will be effective beginning in fiscal 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
3. Revenue Recognition

In the first quarter of 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. Results for the second quarter and year-to-date 2018 are presented under ASC 606, while prior period consolidated financial statements have not been adjusted and continue to be presented under the accounting standards in effect for those periods.

The Company recognizes revenue based on the amount it expects to receive when control of the goods or services is transferred to the customer. The Company recognizes sales upon customer receipt of merchandise, which for direct channel revenues reflects an estimate of shipments that have not yet been received by the customer based on shipping terms and historical delivery times. The Company’s shipping and handling revenues are included in Net Sales with the related costs included in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income. The Company also provides a reserve for projected merchandise returns based on historical experience. Net Sales exclude sales and other similar taxes collected from customers.

The Company offers certain loyalty programs that allow customers to earn points based on purchasing activity. As customers accumulate points and reach point thresholds, they are able to use the points to purchase merchandise in stores or online. The Company allocates revenue to points earned on qualifying purchases and defers recognition until the points are redeemed. The amount of revenue deferred is based on the relative stand-alone selling price method, which includes an estimate for points not expected to be redeemed based on historical experience.

The Company’s brands sell gift cards with no expiration dates to customers. The Company does not charge administrative fees on unused gift cards. The Company recognizes revenue from gift cards when they are redeemed by the customer. In addition, the Company recognizes revenue on unredeemed gift cards where the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). Gift card breakage revenue is recognized in proportion, and over the same time period, as actual gift card redemptions. The Company determines the gift card breakage rate based on historical redemption patterns. Gift card breakage is included in Net Sales in the Consolidated Statements of Income.

Revenue earned in connection with Victoria’s Secret's private label credit card arrangement is recognized over the term of the license arrangement and is included in Net Sales in the 2018 Consolidated Statements of Income.

The Company also recognizes revenues associated with franchise, license and wholesale arrangements. Revenue recognized under franchise and license arrangements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers. Revenue is generally recognized under wholesale and sourcing arrangements at the time the title passes to the partner.

Accounts receivable, net from revenue-generating activities were $165 million as of August 4, 2018 and $144 million as of the beginning of the period upon adoption of the new standard. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 75 days.

The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. The balance of deferred revenue was $281 million as of August 4, 2018 and $320 million as of the beginning of the period upon adoption of the new standard. The Company recognized $159 million as revenue year-to-date in 2018 from amounts recorded as deferred revenue at the beginning of the period. The Company's deferred revenue balance would have been $241 million as of August 4, 2018 under accounting standards in effect prior to the adoption of the new standard. As of August 4, 2018, the Company recorded deferred revenues of

8


$265 million within Accrued Expenses and Other, and $16 million within Other Long-term Liabilities on the Consolidated Balance Sheet.

The following table provides a disaggregation of Net Sales for the second quarter and year-to-date 2018 and 2017:
 
Second Quarter
 
Year-to-Date
 
2018
 
2017 (a)
 
2018
 
2017 (a)
 
(in millions)
Victoria’s Secret Stores (b)
$
1,365

 
$
1,351

 
$
2,601

 
$
2,597

Victoria’s Secret Direct
360

 
295

 
713

 
582

Total Victoria’s Secret
1,725

 
1,646

 
3,314

 
3,179

Bath & Body Works Stores (b)
824

 
753

 
1,473

 
1,342

Bath & Body Works Direct
140

 
107

 
251

 
197

Total Bath & Body Works
964

 
860

 
1,724

 
1,539

Victoria's Secret and Bath & Body Works International (c)
145

 
114

 
281

 
217

Other (d)
150

 
135

 
291

 
257

Total Net Sales
$
2,984

 
$
2,755

 
$
5,610

 
$
5,192

 _______________
(a)
2017 amounts have not been adjusted under the modified retrospective approach.
(b)
Includes company-owned stores in the U.S. and Canada.
(c)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(d)
Includes wholesale revenues from the Company's sourcing function, and La Senza and Henri Bendel store and direct sales.

4. Earnings Per Share and Shareholders’ Equity (Deficit)
Earnings Per Share
Earnings per basic share is computed based on the weighted-average number of outstanding common shares. Earnings per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.
The following table provides shares utilized for the calculation of basic and diluted earnings per share for the second quarter and year-to-date 2018 and 2017:
 
Second Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Weighted-average Common Shares:
 
 
 
 
 
 
 
Issued Shares
283

 
318

 
283

 
317

Treasury Shares
(6
)
 
(31
)
 
(5
)
 
(31
)
Basic Shares
277

 
287


278


286

Effect of Dilutive Options and Restricted Stock
2

 
2

 
2

 
3

Diluted Shares
279

 
289


280


289

Anti-dilutive Options and Awards (a)
5

 
4

 
5

 
4

 _______________
(a)
These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.


9


Shareholders’ Equity (Deficit)
Common Stock Share Repurchases
Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs for year-to-date 2018 and 2017:
 
Amount
Authorized
 
Shares
Repurchased
 
Amount
Repurchased
 
Average Stock Price of Shares Repurchased within Program
Repurchase Program
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in millions)
 
(in thousands)
 
(in millions)
 
 
 
 
March 2018
$
250

 
4,538

 
NA

 
$
161

 
NA

 
$
35.53

 
NA

September 2017
250

 
527

 
NA

 
25

 
NA

 
$
46.98

 
NA

February 2017
250

 
NA

 
2,605

 
NA

 
$
129

 
NA

 
$
49.58

February 2016
500

 
NA

 
51

 
NA

 
3

 
NA

 
$
58.95

Total
 
 
5,065

 
2,656

 
$
186

 
$
132

 
 
 
 
In March 2018, the Company's Board of Directors approved a new $250 million share repurchase program, which included the $23 million remaining under the September 2017 repurchase program.
In September 2017, the Company's Board of Directors approved a $250 million share repurchase program, which included the $10 million remaining under the February 2017 repurchase program.
In February 2017, the Company's Board of Directors approved a $250 million share repurchase program, which included the $59 million remaining under the February 2016 repurchase program.
In February 2016, the Company's Board of Directors approved a $500 million share repurchase program, which included the $17 million remaining under the June 2015 repurchase program.
The March 2018 repurchase program had $89 million remaining as of August 4, 2018. Subsequent to August 4, 2018, the Company repurchased an additional 0.3 million shares of common stock for $10 million under this program.
There were $2 million, $2 million and $3 million of share repurchases reflected in Accounts Payable on the August 4, 2018, February 3, 2018 and July 29, 2017 Consolidated Balance Sheets, respectively.

Dividends
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during year-to-date 2018 and 2017:
 
 
Ordinary Dividends
 
Total Paid
 
 
(per share)
 
(in millions)
2018
 
 
 
 
Second Quarter
 
$
0.60

 
$
167

First Quarter
 
0.60

 
168

2018 Total
 
$
1.20

 
$
335

2017
 
 
 
 
Second Quarter
 
$
0.60

 
$
172

First Quarter
 
0.60

 
172

2017 Total
 
$
1.20

 
$
344


10


5. Inventories
The following table provides details of inventories as of August 4, 2018February 3, 2018 and July 29, 2017:
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(in millions)
Finished Goods Merchandise
$
1,143

 
$
1,121

 
$
973

Raw Materials and Merchandise Components
172

 
119

 
145

Total Inventories
$
1,315

 
$
1,240

 
$
1,118

Inventories are principally valued at the lower of cost, on a weighted-average cost basis, or net realizable value.

6. Property and Equipment, Net
The following table provides details of property and equipment, net as of August 4, 2018February 3, 2018 and July 29, 2017:
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(in millions)
Property and Equipment, at Cost
$
6,890

 
$
6,687

 
$
6,478

Accumulated Depreciation and Amortization
(3,941
)
 
(3,794
)
 
(3,637
)
Property and Equipment, Net
$
2,949

 
$
2,893

 
$
2,841

Depreciation expense was $148 million and $140 million for the second quarter of 2018 and 2017, respectively. Depreciation expense was $296 million and $282 million for year-to-date 2018 and 2017, respectively.

7. Equity Investments
Easton Investments
The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $78 million as of August 4, 2018, $81 million as of February 3, 2018, and $75 million as of July 29, 2017, are recorded in Other Assets on the Consolidated Balance Sheets.

Included in the Company’s Easton investments are equity interests in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and develop commercial entertainment and shopping centers. The Company’s investments in ETC and EG are accounted for using the equity method of accounting. The Company has a majority financial interest in ETC and EG, but another unaffiliated member manages them, and certain significant decisions regarding ETC and EG require the consent of unaffiliated members in addition to the Company.

During 2018, the Company received cash distributions of $13 million from certain of its Easton investments. As a result, the Company recognized pre-tax gains totaling $7 million which are included in Other Income (Loss) on the 2018 Consolidated Statements of Income and the return of capital is included within the Investing Activities section of the 2018 Consolidated Statement of Cash Flows.

During 2017, the Company received cash distributions of $27 million from certain of its Easton investments. As a result, the Company recognized pre-tax gains totaling $20 million which are included in Other Income (Loss) on the 2017 Consolidated Statements of Income and the return of capital is included within the Investing Activities section of the 2017 Consolidated Statement of Cash Flows.

8. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TCJA reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. 

11


For the second quarter of 2018, the Company’s effective tax rate was 23.2% compared to 36.0% in the second quarter of 2017. The second quarter 2018 rate was lower than the Company's combined federal and state statutory rate primarily due to the resolution of certain tax matters. The second quarter 2017 rate was lower than the Company's combined federal and state statutory rate primarily due to the domestic manufacturing deduction.
For year-to-date 2018, the Company's effective tax rate was 21.7% compared to 30.6% year-to-date 2017. The year-to-date 2018 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The year-to-date 2017 rate was lower than the Company's combined federal and state statutory rate primarily due to the recognition of tax benefits resulting from stock options exercised.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in 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 TCJA. The ultimate impact may differ from provisional amounts, due to changes in interpretations and assumptions the Company has made regarding application of the TCJA as well as additional regulatory guidance that may be issued. Any adjustments made to the provisional amounts under SAB 118 should be recorded as discrete adjustments in the period identified (not to extend beyond the one-year measurement provided in SAB 118). Through the second quarter of 2018, the Company did not make any adjustments to its provisional amounts included in its consolidated financial statements for the year ended February 3, 2018. The accounting is expected to be completed in the fourth quarter of 2018.
Income taxes paid were $255 million and $305 million for the second quarter of 2018 and 2017, respectively. Income taxes paid were $266 million and $320 million for year-to-date 2018 and 2017, respectively.

9. Long-term Debt and Borrowing Facilities
The following table provides the Company’s outstanding debt balance, net of unamortized debt issuance costs and discounts, as of August 4, 2018February 3, 2018 and July 29, 2017:
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(in millions)
Senior Debt with Subsidiary Guarantee
 
 
 
 
 
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
990


$
990


$
990

$1 billion, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
951


994


993

$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
776


994


993

$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
693


693


692

$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
498


497


497

$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)
495

 
495

 

$500 million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”)(a)




497

$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
337


398


397

$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”)
272

 

 

Secured Foreign Facilities
80

 
1

 

Total Senior Debt with Subsidiary Guarantee
$
5,092


$
5,062


$
5,059

Senior Debt
 
 
 
 
 
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348


$
348


$
348

$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
297


297


297

Unsecured Foreign Facilities
40


87


64

Total Senior Debt
$
685


$
732


$
709

Total
$
5,777


$
5,794


$
5,768

Current Debt
(65
)

(87
)

(64
)
Total Long-term Debt, Net of Current Portion
$
5,712


$
5,707


$
5,704

 ________________
(a)
The balance includes a fair value interest rate hedge adjustment which increased the debt balance by $2 million as of July 29, 2017.

12


Exchange of Notes
In June 2018, the Company completed private offers to exchange $62 million, $220 million and $44 million of outstanding 2020 Notes, 2021 Notes and 2022 Notes, respectively, for $297 million of newly issued 6.694% notes due in January 2027 and $52 million in cash consideration, which included a $24 million exchange premium. The exchange was treated as a modification under ASC 470, Debt, and no gain or loss was recognized. The exchange premium will be amortized through the maturity date of January 2027 and is included within Long-term Debt on the August 4, 2018 Consolidated Balance Sheet. The obligation to pay principal and interest on the 2027 Notes is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's 100% owned subsidiaries (the “Guarantors”).
Issuance of Notes
In January 2018, the Company issued $500 million of 5.25% notes due in February 2028. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The proceeds from the issuance were $495 million, which were net of issuance costs of $5 million. These issuance costs are being amortized through the maturity date of February 2028 and are included within Long-term Debt on the August 4, 2018 and February 3, 2018 Consolidated Balance Sheets.
Redemption of Notes
In January 2018, the Company used the proceeds from the 2028 Notes to redeem the $500 million 2019 Notes for $540 million. In the fourth quarter of 2017, the Company recognized a pre-tax loss on extinguishment of this debt of $45 million (after-tax loss of $29 million), which includes write-offs of unamortized issuance costs and discounts and losses related to terminated interest rate swaps associated with the 2019 Notes.
Secured Revolving Facility
The Company and the Guarantors guarantee and pledge collateral to secure a revolving credit facility ("Revolving Facility"). The Revolving Facility has aggregate availability of $1 billion and expires in May 2022. The Revolving Facility allows the Company and certain of the Company's non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
The Revolving Facility fees related to committed and unutilized amounts are 0.25% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings is the London Interbank Offered Rate (“LIBOR”) plus 1.50% per annum. The interest rate on outstanding foreign denominated borrowings is the applicable benchmark rate plus 1.50% per annum.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. The Company is required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of August 4, 2018, the Company was in compliance with both of its financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of August 4, 2018, there were no borrowings outstanding under the Revolving Facility.
The Revolving Facility supports the Company’s letter of credit program. The Company had $9 million of outstanding letters of credit as of August 4, 2018 that reduced its remaining availability under the Revolving Facility.
Secured Foreign Facilities
The Company and the Guarantors guarantee and pledge collateral to secure revolving and term loan bank facilities ("Secured Foreign Facilities") used by certain of the Company's Greater China subsidiaries to support their operations. The Secured Foreign Facilities, which allow borrowings in U.S. dollars and Chinese yuan, have availability totaling $100 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing. For year-to-date 2018, the Company borrowed $79 million under the Secured Foreign Facilities. Borrowings on the Secured Foreign Facilities mature between August 2018 and May 2022. As of August 4, 2018, borrowings of $25 million are included within Current Debt on the Consolidated Balance Sheet and the remaining borrowings are included within Long-term Debt.
Unsecured Foreign Facilities
The Company guarantees unsecured revolving and term loan bank facilities ("Unsecured Foreign Facilities") used by certain of the Company's Greater China subsidiaries to support their operations. The Unsecured Foreign Facilities, which allow borrowings in U.S. dollars and Chinese yuan, have availability totaling $100 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing. For year-to-date 2018, the Company borrowed $10 million and made payments of $57 million under the Unsecured Foreign Facilities. The maximum

13


daily amount outstanding at any point in time in 2018 was $90 million. Borrowings on the Unsecured Foreign Facilities mature between August 2018 and December 2018. As of August 4, 2018, borrowings of $40 million are included within Current Debt on the Consolidated Balance Sheet.

10. Derivative Financial Instruments
Foreign Exchange Derivative Instruments
The earnings of the Company's wholly owned foreign businesses are subject to exchange rate risk as substantially all their merchandise is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure for its Canadian and U.K. businesses. These forward contracts currently have a maximum term of 18 months. Amounts are reclassified from accumulated other comprehensive income upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income.

The Company had a cross-currency swap related to an intercompany loan of approximately CAD$170 million that matured in January 2018 which was designated as a cash flow hedge of foreign currency exchange risk. This cross-currency swap mitigated the exposures to fluctuations in the U.S. dollar-Canadian dollar exchange rate related to the Company's Canadian operations. Changes in the U.S. dollar-Canadian dollar exchange rate and the related swap settlements resulted in reclassification of amounts from accumulated other comprehensive income to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.

The Company uses foreign currency forward contracts to mitigate the impact of fluctuations in foreign currency exchange rates relative to recognized payable balances denominated in non-functional currencies. The fair value of these non-designated foreign currency forward contracts is not significant as of August 4, 2018.

The following table provides the U.S. dollar notional amount of outstanding foreign currency derivative financial instruments as of August 4, 2018, February 3, 2018 and July 29, 2017:
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(in millions)
Notional Amount
$
224

 
$
217

 
$
376


The following table provides a summary of the fair value and balance sheet classification of outstanding derivative financial instruments designated as foreign currency cash flow hedges as of August 4, 2018, February 3, 2018 and July 29, 2017:
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(in millions)
Other Current Assets
$
3

 
$

 
$
8

Accrued Expenses and Other
1

 
8

 
8

Other Long-term Liabilities

 
1

 
3


The following table provides a summary of the pre-tax financial statement effect of the gains and losses on derivative financial instruments designated as foreign currency cash flow hedges for the second quarter and year-to-date 2018 and 2017:
 
Second Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Gain (Loss) Recognized in Accumulated Other Comprehensive Income
$
3

 
$
(28
)
 
$
10

 
$
(18
)
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Costs of Goods Sold, Buying and Occupancy Expense (a)
1

 
(1
)
 
3

 
(3
)
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Other Income (Loss) (b)

 
13

 

 
8

 ________________
(a)
Represents reclassification of amounts from accumulated other comprehensive income to earnings when the hedged merchandise is sold to the customer. No ineffectiveness was associated with these foreign currency cash flow hedges.

14


(b)
Represents reclassification of amounts from accumulated other comprehensive income to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.

The Company estimates that $2 million of net gains included in accumulated other comprehensive income as of August 4, 2018 related to foreign currency forward contracts designated as cash flow hedges will be reclassified into earnings within the following 12 months. Actual amounts ultimately reclassified depend on the exchange rates in effect when derivative contracts that are currently outstanding mature.

11. Fair Value Measurements
The authoritative guidance included in ASC 820, Fair Value Measurement, establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices of similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following table provides a summary of assets and liabilities measured in the consolidated financial statements at fair value on a recurring basis as of August 4, 2018, February 3, 2018 and July 29, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
As of August 4, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
843

 
$

 
$

 
$
843

Marketable Equity Securities
11

 

 

 
11

Foreign Currency Cash Flow Hedges

 
3

 

 
3

Liabilities:
 
 
 
 
 
 
 
Foreign Currency Cash Flow Hedges

 
1

 

 
1

As of February 3, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,515

 
$

 
$

 
$
1,515

Marketable Equity Securities
17

 

 

 
17

Liabilities:
 
 
 
 
 
 
 
Foreign Currency Cash Flow Hedges

 
9

 

 
9

As of July 29, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,360

 
$

 
$

 
$
1,360

Marketable Equity Securities
6

 

 

 
6

Interest Rate Fair Value Hedges

 
2

 

 
2

Foreign Currency Cash Flow Hedges

 
8

 

 
8

Liabilities:
 
 
 
 
 
 
 
Foreign Currency Cash Flow Hedges

 
11

 

 
11


The Company's Level 1 fair value measurements use unadjusted quoted prices in active markets for identical assets. The Company's marketable equity securities are classified as Level 1 fair value measurements as they are traded with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.


15


In January 2016, the FASB issued ASC 321, Investments - Equity Securities. The standard requires the recognition of changes in the fair value of the Company's marketable equity securities in net income as compared to historical treatment in accumulated other comprehensive income. The Company adopted the standard in the first quarter of 2018. The Company recognized unrealized losses of $6 million related to its marketable equity securities in Other Income (Loss) in the 2018 Consolidated Statements of Income.
The Company’s Level 2 fair value measurements use market approach valuation techniques. The primary inputs to these techniques include benchmark interest rates and foreign currency exchange rates, as applicable to the underlying instruments.
The following table provides a summary of the principal value and estimated fair value of outstanding long-term debt, excluding Foreign Facility borrowings, as of August 4, 2018February 3, 2018 and July 29, 2017:
 
August 4,
2018
 
February 3,
2018
 
July 29,
2017
 
(in millions)
Principal Value
$
5,722

 
$
5,750

 
$
5,750

Fair Value (a)
5,432

 
5,943

 
5,929

  _______________
(a)
The estimated fair value of the Company’s publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC 820. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Management believes that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.

12. Comprehensive Income
The following table provides the rollforward of accumulated other comprehensive income for year-to-date 2018:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Marketable Equity Securities
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of February 3, 2018
$
32

 
$
(10
)
 
$
2

 
$
24

Amount reclassified to Retained Earnings upon adoption of ASC 321

 

 
(2
)
 
(2
)
Balance as of February 4, 2018
32

 
(10
)
 

 
22

Other Comprehensive Income (Loss) Before Reclassifications
(22
)
 
10

 

 
(12
)
Amounts Reclassified from Accumulated Other Comprehensive Income

 
3

 

 
3

Tax Effect

 
(1
)
 

 
(1
)
Current-period Other Comprehensive Income (Loss)
(22
)
 
12

 

 
(10
)
Balance as of August 4, 2018
$
10

 
$
2

 
$

 
$
12



16


The following table provides the rollforward of accumulated other comprehensive income for year-to-date 2017:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Marketable Equity Securities
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of January 28, 2017
$
9

 
$
3

 
$

 
$
12

Other Comprehensive Income (Loss) Before Reclassifications
10

 
(18
)
 

 
(8
)
Amounts Reclassified from Accumulated Other Comprehensive Income

 
5

 

 
5

Tax Effect

 
2

 

 
2

Current-period Other Comprehensive Income (Loss)
10

 
(11
)
 

 
(1
)
Balance as of July 29, 2017
$
19

 
$
(8
)
 
$

 
$
11


The following table provides a summary of the reclassification adjustments out of accumulated other comprehensive income for the second quarter and year-to-date 2018 and 2017:
Details About Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Location on Consolidated Statements of Income
 
 
Second Quarter
 
Year-to-Date
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
(in millions)
 
 
(Gain) Loss on Cash Flow Hedges
 
$
1

 
$
(1
)
 
$
3

 
$
(3
)
 
Costs of Goods Sold, Buying and Occupancy
 
 

 
13

 

 
8

 
Other Income (Loss)
 
 

 

 

 

 
Provision for Income Taxes
 
 
$
1

 
$
12

 
$
3

 
$
5

 
Net Income

13. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Guarantees
In connection with the disposition of a certain business, the Company has remaining guarantees of $8 million related to lease payments under the current terms of noncancelable leases expiring at various dates through 2021. These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the business. In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended. The Company has not recorded a liability with respect to these guarantee obligations as of August 4, 2018, February 3, 2018 or July 29, 2017 as it concluded that payments under these guarantees were not probable.
In connection with noncancelable operating leases of certain assets, the Company provided residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire at various dates through 2021, and the total amount of the guarantees is $104 million. The Company recorded a liability of $3 million as of August 4, 2018 and February 3, 2018, and a liability of less than $1 million as of July 29, 2017 related to these guarantee obligations, which are included in Other Long-term Liabilities on the Consolidated Balance Sheets.


17


14. Retirement Benefits
The Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement plan for substantially all its associates within the U.S. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.
The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $20 million for the second quarter of 2018 and $16 million for the second quarter of 2017. Total expense recognized related to the qualified plan was $38 million for year-to-date 2018 and $32 million for year-to-date 2017.
The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions up to a maximum percentage of eligible compensation. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a fixed rate determined by the Company and reviewed by the Compensation Committee of the Board of Directors, prior to the beginning of each year. Associate contributions and the related interest vest immediately. Company contributions, along with related interest, are subject to vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specified period of up to 10 years. Total expense recognized related to the non-qualified plan was $5 million for the second quarter of 2018 and 2017. Total expense recognized related to the non-qualified plan was $11 million for year-to-date 2018 and $9 million for year-to-date 2017.

15. Segment Information
The Company has three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International.
The Victoria’s Secret segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold online and through retail stores located in the U.S. and Canada.
The Bath & Body Works segment sells body care, home fragrance products, soaps and sanitizers under the Bath & Body Works, White Barn, C.O. Bigelow and other brand names. Bath & Body Works merchandise is sold online and at retail stores located in the U.S. and Canada.
The Victoria's Secret and Bath & Body Works International segment includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores located outside of the U.S. and Canada, as well as the online business in Greater China. This segment includes the following:
Victoria's Secret International, comprised of company-owned stores in the U.K., Ireland and Greater China, as well as stores operated by partners under franchise and license arrangements;
Victoria's Secret Beauty and Accessories, comprised of company-owned stores in Greater China, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature Victoria's Secret branded beauty and accessories products in travel retail and other locations; and
Bath & Body Works International stores operated by partners under franchise, license and wholesale arrangements.
Other consists of the following:
Mast Global, a merchandise sourcing and production function serving the Company and its international partners;
La Senza, which sells women's intimate apparel online and through company-owned stores located in Canada and the U.S., as well as stores operated by partners under franchise and license arrangements;
Henri Bendel, which sells handbags, jewelry and other accessory products online and through company-owned stores; and
Corporate functions including non-core real estate, equity investments and other governance functions such as treasury and tax.

18


The following table provides the Company’s segment information for the second quarter and year-to-date 2018 and 2017:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body Works International
 
Other
 
Total
 
(in millions)
2018
 
 
 
 
 
 
 
 
 
Second Quarter:
 
 
 
 
 
 
 
 
 
Net Sales
$
1,725

 
$
964

 
$
145

 
$
150

 
$
2,984

Operating Income (Loss)
114

 
169

 
(9
)
 
(46
)
 
228

Year-to-Date:
 
 
 
 
 
 
 
 
 
Net Sales
$
3,314

 
$
1,724

 
$
281

 
$
291

 
$
5,610

Operating Income (Loss)
197

 
293

 
(14
)
 
(93
)
 
383

2017
 
 
 
 
 
 
 
 
 
Second Quarter:
 
 
 
 
 
 
 
 
 
Net Sales
$
1,646

 
$
860

 
$
114

 
$
135

 
$
2,755

Operating Income (Loss)
183

 
156

 
2

 
(40
)
 
301

Year-to-Date:
 
 
 
 
 
 
 
 


Net Sales
$
3,179

 
$
1,539

 
$
217

 
$
257

 
$
5,192

Operating Income (Loss)
342

 
258

 
1

 
(91
)
 
510

The Company's international net sales include sales from company-owned stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s international net sales across all segments totaled $400 million and $350 million for the second quarter of 2018 and 2017, respectively. The Company's international net sales across all segments totaled $758 million and $649 million for year-to-date 2018 and 2017, respectively.
 
16. Subsequent Events
Subsequent to August 4, 2018, the Company repurchased an additional 0.3 million shares of common stock for $10 million under the March 2018 repurchase program.

17. Supplemental Guarantor Financial Information
The Company’s 2020 Notes, 2021 Notes, 2022 Notes, 2023 Notes, 2027 Notes, 2028 Notes, 2035 Notes, 2036 Notes, Revolving Facility and Secured Foreign Facilities are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The Company is a holding company, and its most significant assets are the stock of its subsidiaries. The Guarantors represent: (a) substantially all of the sales of the Company’s domestic subsidiaries, (b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.
The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries: the Condensed Consolidating Balance Sheets as of August 4, 2018, February 3, 2018 and July 29, 2017 and the Condensed Consolidating Statements of Income, Comprehensive Income and Cash Flows for the periods ended August 4, 2018 and July 29, 2017.

19


L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
(Unaudited)
 
 
August 4, 2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$

 
$
453

 
$
390

 
$

 
$
843

Accounts Receivable, Net

 
166

 
144

 

 
310

Inventories

 
1,139

 
176

 

 
1,315

Other
6

 
143

 
98

 

 
247

Total Current Assets
6

 
1,901

 
808

 

 
2,715

Property and Equipment, Net

 
2,012

 
937

 

 
2,949

Goodwill

 
1,318

 
30

 

 
1,348

Trade Names

 
411

 

 

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,544

 
19,604

 
2,205

 
(26,353
)
 

Deferred Income Taxes

 
10

 
11

 

 
21

Other Assets
128

 
14

 
645

 
(611
)
 
176

Total Assets
$
4,678

 
$
25,270

 
$
4,636

 
$
(26,964
)
 
$
7,620

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
3

 
$
430

 
$
388

 
$

 
$
821

Accrued Expenses and Other
96

 
539

 
328

 

 
963

Current Debt

 

 
65

 

 
65

Income Taxes

 

 
7

 

 
7

Total Current Liabilities
99

 
969

 
788

 

 
1,856

Deferred Income Taxes
(2
)
 
(38
)
 
277

 

 
237

Long-term Debt
5,657

 
597

 
55

 
(597
)
 
5,712

Other Long-term Liabilities
58

 
796

 
97

 
(14
)
 
937

Total Equity (Deficit)
(1,134
)
 
22,946

 
3,419

 
(26,353
)
 
(1,122
)
Total Liabilities and Equity (Deficit)
$
4,678

 
$
25,270

 
$
4,636

 
$
(26,964
)
 
$
7,620


















20


L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)

 
February 3, 2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$

 
$
1,164

 
$
351

 
$

 
$
1,515

Accounts Receivable, Net

 
186

 
124

 

 
310

Inventories

 
1,095

 
145

 

 
1,240

Other

 
132

 
96

 

 
228

Total Current Assets

 
2,577

 
716

 

 
3,293

Property and Equipment, Net

 
1,984

 
909

 

 
2,893

Goodwill

 
1,318

 
30

 

 
1,348

Trade Names

 
411

 

 

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,973

 
18,298

 
2,106

 
(25,377
)
 

Deferred Income Taxes

 
10

 
4

 

 
14

Other Assets
129

 
18

 
654

 
(611
)
 
190

Total Assets
$
5,102

 
$
24,616

 
$
4,419

 
$
(25,988
)
 
$
8,149

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
2

 
$
349

 
$
366

 
$

 
$
717

Accrued Expenses and Other
101

 
529

 
399

 

 
1,029

Current Debt

 

 
87

 

 
87

Income Taxes
6

 
174

 
18

 

 
198

Total Current Liabilities
109

 
1,052

 
870

 

 
2,031

Deferred Income Taxes
(2
)
 
(46
)
 
286

 

 
238

Long-term Debt
5,706

 
597

 
1

 
(597
)
 
5,707

Other Long-term Liabilities
64

 
774

 
100

 
(14
)
 
924

Total Equity (Deficit)
(775
)
 
22,239

 
3,162

 
(25,377
)
 
(751
)
Total Liabilities and Equity (Deficit)
$
5,102

 
$
24,616

 
$
4,419

 
$
(25,988
)
 
$
8,149



21


L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
(Unaudited)
 
 
July 29, 2017
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$

 
$
1,008

 
$
352

 
$

 
$
1,360

Accounts Receivable, Net

 
147

 
98

 

 
245

Inventories

 
995

 
123

 

 
1,118

Other

 
148

 
86

 

 
234

Total Current Assets

 
2,298

 
659

 

 
2,957

Property and Equipment, Net

 
1,997

 
844

 

 
2,841

Goodwill

 
1,318

 
30

 

 
1,348

Trade Names

 
411

 

 

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,753

 
17,731

 
1,834

 
(24,318
)
 

Deferred Income Taxes

 
10

 
15

 

 
25

Other Assets
133

 
29

 
631

 
(612
)
 
181

Total Assets
$
4,886

 
$
23,794

 
$
4,013

 
$
(24,930
)
 
$
7,763

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
3

 
$
414

 
$
341

 
$

 
$
758

Accrued Expenses and Other
101

 
452

 
307

 

 
860

Current Debt

 

 
64

 

 
64

Income Taxes
1

 
18

 
57

 

 
76

Total Current Liabilities
105

 
884

 
769

 

 
1,758

Deferred Income Taxes
(3
)
 
(78
)
 
450

 

 
369

Long-term Debt
5,704

 
597

 

 
(597
)
 
5,704

Other Long-term Liabilities
3

 
764

 
91

 
(14
)
 
844

Total Equity (Deficit)
(923
)
 
21,627

 
2,703

 
(24,319
)
 
(912
)
Total Liabilities and Equity (Deficit)
$
4,886

 
$
23,794

 
$
4,013

 
$
(24,930
)
 
$
7,763



22


L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
(Unaudited)
 
 
Second Quarter 2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Sales
$

 
$
2,797

 
$
751

 
$
(564
)
 
$
2,984

Costs of Goods Sold, Buying and Occupancy

 
(1,835
)
 
(650
)
 
560

 
(1,925
)
Gross Profit

 
962

 
101

 
(4
)
 
1,059

General, Administrative and Store Operating Expenses
(2
)
 
(717
)
 
(118
)
 
6

 
(831
)
Operating Income (Loss)