10-Q 1 fl-20160730x10q.htm 10-Q FL-2016 Q2 10-Q Filing Folio

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: July 30, 2016



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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



 



 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer  

Smaller reporting company



 



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 August 26, 2016: 133,249,505











 

 


 

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 

24 



 

Item 1A.

 

Risk Factors 

24 



 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds 

24 



 

Item 6. 

 

Exhibits 

24 



 

 

 

 

 

SIGNATURE

 

25 



 

 

 

 

 

INDEX OF EXHIBITS

 

26 









 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($  in millions, except shares)









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



July 30,

 

August 1,

 

January 30,



2016

 

2015

 

2016



(Unaudited)

 

(Unaudited)

 

*

ASSETS

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

945 

 

$

970 

 

$

1,021 

Merchandise inventories

 

1,339 

 

 

1,317 

 

 

1,285 

Other current assets

 

301 

 

 

268 

 

 

300 



 

2,585 

 

 

2,555 

 

 

2,606 

Property and equipment, net

 

726 

 

 

644 

 

 

661 

Deferred taxes

 

174 

 

 

222 

 

 

234 

Goodwill

 

156 

 

 

156 

 

 

156 

Other intangible assets, net

 

44 

 

 

46 

 

 

45 

Other assets

 

77 

 

 

81 

 

 

73 



$

3,762 

 

$

3,704 

 

$

3,775 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

$

348 

 

$

359 

 

$

279 

Accrued and other liabilities

 

326 

 

 

380 

 

 

420 

Current portion of capital lease obligations

 

 

 

 

 



 

675 

 

 

741 

 

 

700 

Long-term debt and obligations under capital leases

 

128 

 

 

130 

 

 

129 

Other liabilities

 

381 

 

 

254 

 

 

393 

Total liabilities

 

1,184 

 

 

1,125 

 

 

1,222 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 174,250,091; 172,536,861 and 173,397,913 shares outstanding, respectively

 

1,147 

 

 

1,060 

 

 

1,108 

Retained earnings

 

3,426 

 

 

3,013 

 

 

3,182 

Accumulated other comprehensive loss

 

(343)

 

 

(338)

 

 

(366)

Less: Treasury stock at cost: 41,174,061; 33,207,045 and 36,421,104 shares, respectively

 

(1,652)

 

 

(1,156)

 

 

(1,371)

Total shareholders' equity

 

2,578 

 

 

2,579 

 

 

2,553 



$

3,762 

 

$

3,704 

 

$

3,775 







See Accompanying Notes to Condensed Consolidated Financial Statements.

* The balance sheet at January 30, 2016 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 30, 2016.



 

1


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)

 

  







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended



 

July 30,

 

August 1,

 

July 30,

 

August 1,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Sales 

 

$

1,780 

 

$

1,695 

 

$

3,767 

 

$

3,611 



 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,193 

 

 

1,142 

 

 

2,484 

 

 

2,388 

Selling, general and administrative expenses

 

 

350 

 

 

331 

 

 

711 

 

 

676 

Depreciation and amortization

 

 

39 

 

 

36 

 

 

78 

 

 

71 

Interest expense, net

 

 

 

 

 

 

 

 

Other income

 

 

(1)

 

 

 —

 

 

(3)

 

 

(1)



 

 

1,582 

 

 

1,510 

 

 

3,271 

 

 

3,136 



 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

198 

 

 

185 

 

 

496 

 

 

475 

Income tax expense

 

 

71 

 

 

66 

 

 

178 

 

 

172 

Net income 

 

$

127 

 

$

119 

 

$

318 

 

$

303 



 

 

 

 

 

 

 

 

 

 

 

 

  Basic earnings per share

 

$

0.94 

 

$

0.85 

 

$

2.35 

 

$

2.17 

  Weighted-average shares outstanding

 

 

134.4 

 

 

139.6 

 

 

135.4 

 

 

139.8 



 

 

 

 

 

 

 

 

 

 

 

 

  Diluted earnings per share

 

$

0.94 

 

$

0.84 

 

$

2.33 

 

$

2.14 

  Weighted-average shares outstanding,

 

 

 

 

 

 

 

 

 

 

 

 

  assuming dilution  

 

 

135.5 

 

 

141.3 

 

 

136.6 

 

 

141.7 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 



 

2


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($  in millions)

 

   











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended



 

July 30,

 

August 1,

 

July 30,

 

August 1,



 

2016

 

2015

 

2016

 

2015

Net income

 

$

127 

 

$

119 

 

$

318 

 

$

303 



 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of income tax 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment: 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment arising during the period, net of income tax

 

 

(27)

 

 

(23)

 

 

17 

 

 

(22)



 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges: 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of income tax

 

 

 

 

 —

 

 

 

 

(1)



 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

 

 

 —

 

 

 

 

 —



 

 

 

 

 

 

 

 

 

 

 

 

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, $1, $2 and $2 million, respectively, and foreign currency fluctuations

 

 

 

 

 

 

 

 

Comprehensive income

 

$

107 

 

$

99 

 

$

341 

 

$

284 









See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

   

3


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($  in millions)

 













 

 

 

 

 



 

 

 

 

 



Twenty-six weeks ended



July 30,

 

August 1,



2016

 

2015



 

 

 

 

 

From Operating Activities

 

 

 

 

 

Net income

$

318 

 

$

303 

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

 

 

 

 

 

   Depreciation and amortization

 

78 

 

 

71 

   Share-based compensation expense

 

11 

 

 

11 

   Excess tax benefits on share-based compensation

 

(10)

 

 

(24)

   Qualified pension plan contributions

 

(25)

 

 

 —

   Change in assets and liabilities:

 

 

 

 

 

      Merchandise inventories

 

(50)

 

 

(75)

      Accounts payable

 

67 

 

 

61 

      Accrued and other liabilities

 

(13)

 

 

(16)

      Other, net

 

(7)

 

 

Net cash provided by operating activities

 

369 

 

 

334 



 

 

 

 

 

From Investing Activities

 

 

 

 

 

Capital expenditures

 

(131)

 

 

(116)

Net cash used in investing activities

 

(131)

 

 

(116)



 

 

 

 

 

From Financing Activities

 

 

 

 

 

Purchase of treasury shares

 

(276)

 

 

(205)

Dividends paid on common stock

 

(74)

 

 

(70)

Proceeds from exercise of stock options

 

14 

 

 

38 

Treasury stock reissued under employee stock plan

 

 

 

Excess tax benefits on share-based compensation

 

10 

 

 

24 

Payment of revolving credit agreement costs

 

(2)

 

 

 —

Reduction in long-term debt and obligations under capital leases

 

 —

 

 

(1)

Net cash used in financing activities

 

(324)

 

 

(209)



 

 

 

 

 

Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents

 

10 

 

 

(6)

Net Change in Cash and Cash Equivalents

 

(76)

 

 

Cash and Cash Equivalents at Beginning of Period

 

1,021 

 

 

967 

Cash and Cash Equivalents at End of Period

$

945 

 

$

970 



 

 

 

 

 

Cash Paid During the Period:

 

 

 

 

 

   Interest

$

 

$

   Income taxes

$

216 

 

$

178 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 



 

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 adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal year ending January 28, 2017 and of the fiscal year ended January 30, 2016. 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 30, 2016, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 24, 2016.



Recent Accounting Pronouncements



In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires all deferred tax liabilities and assets to be presented in the balance sheet as noncurrent. The Company early adopted this standard on a prospective basis as of the quarter ended April 30, 2016. As a result, the Company reclassified deferred tax assets and deferred tax liabilities classified as current to noncurrent. No prior periods were retrospectively adjusted.



In February 2016, the FASB issued ASU 2016-02, Leases. This ASU revises the existing guidance related to leases by requiring 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 within those fiscal years, and requires a modified retrospective adoption, with earlier adoption permitted. The Company is currently evaluating the effects of the adoption of this ASU on its consolidated financial statements.



In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies certain aspects of the accounting for share-based payment transactions, including tax consequences, classification of awards, the option to recognize stock compensation expense with actual forfeitures as they occur, and the classifications on the statement of cash flows. ASU 2016-09 is effective for annual reporting beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The manner of adoption varies, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. The Company is currently evaluating the effects of the adoption of this ASU on its consolidated financial statements.



In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations and licensing on the previously issued ASU 2014-09, Revenue from Contracts with Customers. In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services. ASU 2016-10 and ASU 2016-11 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year. ASU 2016-10 and ASU 2016-11 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 is currently evaluating the effects of the adoption of these ASUs on its consolidated financial statements.

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

 

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

 

Twenty-six weeks ended



 

July 30,

 

August 1,

 

July 30,

 

August 1,



 

2016

 

2015

 

2016

 

2015



 

($ in millions)

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Athletic Stores

 

$

1,576 

 

$

1,503 

 

$

3,311 

 

$

3,184 

Direct-to-Customers

 

 

204 

 

 

192 

 

 

456 

 

 

427 

Total sales

 

$

1,780 

 

$

1,695 

 

$

3,767 

 

$

3,611 

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

Athletic Stores

 

$

193 

 

$

176 

 

$

470 

 

$

443 

Direct-to-Customers

 

 

22 

 

 

27 

 

 

60 

 

 

67 

Division profit

 

 

215 

 

 

203 

 

 

530 

 

 

510 

Less: Corporate expense

 

 

17 

 

 

17 

 

 

36 

 

 

34 

Operating profit

 

 

198 

 

 

186 

 

 

494 

 

 

476 

Interest expense, net

 

 

 

 

 

 

 

 

Other income (1)

 

 

 

 

 —

 

 

 

 

Income before income taxes

 

$

198 

 

$

185 

 

$

496 

 

$

475 







 

(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.







3. 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 2016 did not result in the recognition of impairment. The following table provides a summary of goodwill by reportable segment.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

July 30,

 

August 1,

 

January 30,



    

2016

    

2015

    

2016



 

($ in millions)

Athletic Stores

 

$

17 

 

$

17 

 

$

17 

Direct-to-Customers

 

 

139 

 

 

139 

 

 

139 



 

$

156 

 

$

156 

 

$

156 











































4. Other Intangible Assets, net



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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

July 30, 2016

 

August 1, 2015

 

January 30, 2016



 

 

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

 

 $

120 

 

 $

(108)

 

 $

12 

 

$

121 

 

$

(111)

 

$

10 

 

 $

119 

 

$

(107)

 

$

12 



Trademarks / trade names

 

 

20 

 

 

(13)

 

 

 

 

21 

 

 

(12)

 

 

 

 

20 

 

 

(12)

 

 



Favorable leases

 

 

 

 

(5)

 

 

 

 

 

 

(4)

 

 

 

 

 

 

(5)

 

 



 

 

 $

147 

 

 $

(126)

 

 $

21 

 

$

149 

 

$

(127)

 

$

22 

 

 $

146 

 

$

(124)

 

22 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

July 30, 2016

 

August 1, 2015

 

January 30, 2016



 

 

 

 

 

 

Net

 

 

 

 

 

Net

 

 

 

 

 

Net



 

 

 

 

 

 

Value

 

 

 

 

 

Value

 

 

 

 

 

Value

Indefinite life intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Runners Point Group trademarks / trade names

 

 

 

 

 

 

 

 $

23 

 

 

 

 

 

 

 

 $

24 

 

 

 

 

 

 

 

 $

23 

Other intangible assets, net

 

 

 

 

 

 

 

 $

44 

 

 

 

 

 

 

 

$

46 

 

 

 

 

 

 

 

 $

45 







 

 

 

 

(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.



Amortization of $2 million was recorded for the twenty-six week period ended July 30, 2016. This was partially offset by $1 million of lease acquisition additions primarily related to our European businesses, which are being amortized over a weighted-average life of 10 years.    





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended

($ in millions)

 

 

July 30, 2016

 

 

August 1, 2015

     

July 30, 2016

 

August 1, 2015

Amortization expense

 

$

 

$

 

$

 

$



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



















 

 

  

 

($ in millions)

Remainder of 2016

$

2017

 

2018

 

2019

 

2020

 

2021

 







5. Accumulated Other Comprehensive Loss



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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



July 30,

 

August 1,

 

January 30,



2016

 

2015

 

2016



($ in millions)

Foreign currency translation adjustments

 $

(102)

 

$

(97)

 

$

(119)

Cash flow hedges

 

 

 

(4)

 

 

Unrecognized pension cost and postretirement benefit

 

(246)

 

 

(236)

 

 

(248)

Unrealized loss on available-for-sale security

 

 —

 

 

(1)

 

 

(1)



 $

(343)

 

$

(338)

 

$

(366)



The changes in AOCL for the twenty-six weeks ended July 30, 2016 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Foreign

 

 

 

Items Related

 

Unrealized

 

 

 



 

Currency

 

 

 

to Pension and

 

Loss on

 

 

 



 

Translation

 

Cash Flow

 

Postretirement

 

Available-For-

 

 

 

($ in millions)

 

Adjustments

 

Hedges

 

Benefits

 

Sale Security

 

Total

Balance as of January 30, 2016

 

$

(119)

 

$

 

$

(248)

 

$

(1)

 

$

(366)

OCI before reclassification

 

 

17 

 

 

 

 

(2)

 

 

 

 

19 

Reclassified from AOCI

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Other comprehensive income/ (loss)

 

 

17 

 

 

 

 

 

 

 

 

23 

Balance as of July 30, 2016

 

$

(102)

 

$

 

$

(246)

 

$

 —

 

$

(343)



7


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Reclassifications from AOCL for the twenty-six weeks ended July 30, 2016 were as follows:



 

 



 

 



 

($ in millions) 

Amortization of actuarial (gain) loss:

 

 

    Pension benefits- amortization of actuarial loss

 $

    Postretirement benefits- amortization of actuarial gain

 

(1)

Net periodic benefit cost (see Note 10)

 

Income tax benefit

 

(2)

Net of tax

 $







6. Revolving Credit Facility



On May 19, 2016, the Company entered into a new credit agreement with its banks (“2016 Credit Agreement”) that replaced the Company’s prior credit agreement (“2011 Restated Credit Agreement”). The 2016 Credit Agreement provides for a $400 million asset-based revolving credit facility maturing on May 19, 2021. Additionally, during the term of the 2016 Credit Agreement, the Company may increase the commitments by up to $200 million, subject to customary conditions. Interest is determined, at the Company’s option, by the federal funds rate plus a margin of 0.125 percent to 0.375 percent, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 1.125 percent to 1.375 percent depending on availability under the 2016 Credit Agreement. In addition, the Company will pay a commitment fee of 0.20 percent per annum on the unused portion of the commitments.



The 2016 Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including inventory assets, accounts receivable, cash deposits, and certain insurance proceeds. The Company is not required to comply with any financial covenants unless certain events of default have occurred and are continuing, or if availability under the 2016 Credit Agreement does not exceed the greater of $40 million and 10 percent of the Loan Cap (as defined in the 2016 Credit Agreement). There are no restrictions relating to the payment of dividends and share repurchases, as long as no default or event of default has occurred and the aggregate principal amount of unused commitments under the 2016 Credit Agreement is not less than 15 percent of the lesser of the aggregate amount of the commitments and the Borrowing Base, determined as of the end of such fiscal month and on a proforma basis for the following six fiscal months.



The Company uses the credit facility to support standby letters of credit in connection with insurance programs and the amount outstanding as of July 30, 2016 was not significant. The Company’s management does not currently expect to borrow under the facility in 2016. The Company paid approximately $2 million in fees relating to the new credit facility. Deferred financing fees are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method. The unamortized balance at July 30, 2016 was $2 million. Interest expense including facility fees, related to the revolving credit facility was $1 million for both the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015. 



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.

8


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, all of the Company’s hedged forecasted transactions were less than twelve months, and the Company expects all 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 $3 million gain for both the thirteen and the twenty-six weeks ended July 30, 2016, and therefore decreased AOCL. At July 30, 2016, there was a $5 million gain included in AOCL. For the thirteen weeks ended August 1, 2015, the net change in fair value was not significant, and was a $1 million loss for the twenty-six weeks ended August 1, 2015. The notional value of the foreign exchange contracts designed as hedges outstanding at July 30, 2016 was $82 million, and these contracts mature at various dates through July 2017. 



Derivative Holdings Not Designated as Hedges



The Company enters into foreign exchange forward contracts that are not designated as hedges in order to manage the costs of foreign-currency denominated merchandise purchases and intercompany transactions. Changes in the fair value of these foreign exchange forward contracts are recorded in earnings immediately within selling, general and administrative expenses. The net change in fair value was not significant for the thirteen weeks ended July 30, 2016 and resulted in expense of $1 million for the twenty-six weeks ended July 30, 2016. The net change in fair value resulted in income of $1 million and $2 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively. The notional value of the foreign exchange contracts not designed as hedges outstanding at July 30, 2016 was $14 million, and these contracts mature at various dates through December 2016.



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. No such contracts were outstanding at July 30, 2016. 



9


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 July 30, 2016.



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

 

July 30,

 

August 1,

 

January 30,

($ in millions)

 

Caption

 

2016

 

2015

 

2016

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 

$

 —

 

$

Foreign exchange forward contracts

 

Current liabilities

 

$

 —

 

$

 

$

 —

Non-hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 —

 

$

 

$

 —

















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 July 30, 2016

 

As of August 1, 2015

 

As of January 30, 2016



 

($ 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

 

$

 —

 

$

13 

 

$

 —

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities