10-Q 1 fl-20171028x10q.htm 10-Q FL-2017 Q3 10-Q Filing Report

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: October 28, 2017



OR





 

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



For the transition period from __________ to __________



Commission File Number: 1-10299

______________________________________



Picture 1

(Exact name of registrant as specified in its charter)

______________________________________





 

New York

13-3513936

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)



330 West 34th Street, New York, New York 10001

(Address of principal executive offices, Zip Code)

(212-720-3700)

(Registrant’s telephone number, including area code)





 

 

 

 



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  

Smaller reporting company 

 

Emerging growth company 

 

 

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 



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

   

Number of shares of Common Stock outstanding as of November 24,  2017: 121,205,589





 

 


 

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 

17 



 

Item 4.

 

Controls and Procedures 

26 



 

 

 

 

 

PART II

 

OTHER INFORMATION 

 



 

Item 1. 

 

Legal Proceedings 

26 



 

Item 1A.

 

Risk Factors 

26 



 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds 

26 



 

Item 6. 

 

Exhibits 

26 



 

 

 

 

 

SIGNATURE

 

27 



 

 

 

 

 

INDEX OF EXHIBITS

 

28 









 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions, except shares)









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



October 28,

 

October 29,

 

January 28,



2017

 

2016

 

2017



(Unaudited)

 

(Unaudited)

 

*

ASSETS

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

890 

 

$

865 

 

$

1,046 

Merchandise inventories

 

1,313 

 

 

1,361 

 

 

1,307 

Other current assets

 

295 

 

 

291 

 

 

280 



 

2,498 

 

 

2,517 

 

 

2,633 

Property and equipment, net

 

835 

 

 

732 

 

 

765 

Deferred taxes

 

164 

 

 

171 

 

 

161 

Goodwill

 

158 

 

 

156 

 

 

155 

Other intangible assets, net

 

45 

 

 

43 

 

 

42 

Other assets

 

113 

 

 

75 

 

 

84 



$

3,813 

 

$

3,694 

 

$

3,840 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

241 

 

$

215 

 

$

249 

Accrued and other liabilities

 

326 

 

 

327 

 

 

363 

Current portion of capital lease obligations

 

 —

 

 

 

 

 —



 

567 

 

 

543 

 

 

612 

Long-term debt and obligations under capital leases

 

126 

 

 

127 

 

 

127 

Other liabilities

 

463 

 

 

391 

 

 

391 

Total liabilities

 

1,156 

 

 

1,061 

 

 

1,130 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 133,336,171;  174,687,964; and 132,616,087 shares outstanding, respectively

 

921 

 

 

1,168 

 

 

900 

Retained earnings

 

2,467 

 

 

3,546 

 

 

2,254 

Accumulated other comprehensive loss

 

(286)

 

 

(353)

 

 

(363)

Less: Treasury stock at cost: 10,730,582;  42,326,538; and 1,120,466 shares, respectively

 

(445)

 

 

(1,728)

 

 

(81)

Total shareholders' equity

 

2,657 

 

 

2,633 

 

 

2,710 



$

3,813 

 

$

3,694 

 

$

3,840 









See Accompanying Notes to Condensed Consolidated Financial Statements.



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



 

1


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Sales 

 

$

1,870 

 

$

1,886 

 

$

5,572 

 

$

5,653 



 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,290 

 

 

1,246 

 

 

3,809 

 

 

3,730 

Selling, general and administrative expenses

 

 

368 

 

 

366 

 

 

1,078 

 

 

1,077 

Depreciation and amortization

 

 

44 

 

 

40 

 

 

127 

 

 

118 

Litigation and other charges

 

 

13 

 

 

 

 

63 

 

 

Income from operations

 

 

155 

 

 

228 

 

 

495 

 

 

722 



 

 

 

 

 

 

 

 

 

 

 

 

Interest (income) / expense, net

 

 

 —

 

 

 

 

(1)

 

 

Other income

 

 

(1)

 

 

 —

 

 

(2)

 

 

(3)

Income before income taxes

 

 

156 

 

 

227 

 

 

498 

 

 

723 

Income tax expense

 

 

54 

 

 

70 

 

 

165 

 

 

248 

Net income 

 

$

102 

 

$

157 

 

$

333 

 

$

475 



 

 

 

 

 

 

 

 

 

 

 

 

  Basic earnings per share

 

$

0.81 

 

$

1.18 

 

$

2.57 

 

$

3.53 

  Weighted-average shares outstanding

 

 

126.0 

 

 

132.9 

 

 

129.6 

 

 

134.6 



 

 

 

 

 

 

 

 

 

 

 

 

  Diluted earnings per share

 

$

0.81 

 

$

1.17 

 

$

2.55 

 

$

3.50 

  Weighted-average shares outstanding, assuming dilution

 

 

126.4 

 

 

134.0 

 

 

130.3 

 

 

135.7 





See Accompanying Notes to Condensed Consolidated Financial Statements.









 

 



 

2


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ in millions)

 

   





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016

Net income

 

$

102 

 

$

157 

 

$

333 

 

$

475 



 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment: 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment arising during the period, net of income tax

 

 

(4)

 

 

(14)

 

 

70 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges: 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of income tax

 

 

 —

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

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,  $3 and $3 million, respectively, and foreign currency fluctuations

 

 

 

 

 

 

 

 

Comprehensive income

 

$

100 

 

$

147 

 

$

410 

 

$

488 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

   

3


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)

 





 

 

 

 

 



 

 

 

 

 



Thirty-nine weeks ended



October 28,

 

October 29,



2017

 

2016 *



 

 

 

 

 

From operating activities:

 

 

 

 

 

   Net income

$

333 

 

$

475 

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

 

 

 

 

 

      Non-cash impairment charges

 

 —

 

 

      Depreciation and amortization

 

127 

 

 

118 

      Share-based compensation expense

 

11 

 

 

17 

      Qualified pension plan contributions

 

(25)

 

 

(33)

      Change in assets and liabilities:

 

 

 

 

 

         Merchandise inventories

 

18 

 

 

(77)

         Accounts payable

 

(13)

 

 

(66)

         Accrued and other liabilities

 

(29)

 

 

(3)

         Pension litigation accrual

 

50 

 

 

 —

         Other, net

 

24 

 

 

40 

Net cash provided by operating activities

 

496 

 

 

477 



 

 

 

 

 

From investing activities:

 

 

 

 

 

   Capital expenditures

 

(204)

 

 

(193)

Net cash used in investing activities

 

(204)

 

 

(193)



 

 

 

 

 

From financing activities:

 

 

 

 

 

   Purchase of treasury shares

 

(362)

 

 

(352)

   Dividends paid on common stock

 

(120)

 

 

(111)

   Proceeds from exercise of stock options

 

12 

 

 

24 

   Treasury stock reissued under employee stock plan

 

 

 

   Shares of common stock repurchased to satisfy tax withholding obligations

 

(10)

 

 

(6)

   Payment of revolving credit agreement costs

 

 —

 

 

(2)

Net cash used in financing activities

 

(475)

 

 

(443)



 

 

 

 

 

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

 

30 

 

 

Net change in cash, cash equivalents, and restricted cash

 

(153)

 

 

(155)

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

 

1,073 

 

 

1,048 

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

$

920 

 

$

893 



 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

   Interest

$

 

$

   Income taxes

$

187 

 

$

271 



See Accompanying Notes to Condensed Consolidated Financial Statements.



* Amounts for the thirty-nine weeks ended October 29, 2016 have been revised from previously reported amounts to reflect the adoption of new accounting standards in the first quarter of 2017. For additional information, see the Recently Adopted Accounting Pronouncements note.



 

4


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies



Basis of Presentation



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



Recent Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company expects a change in the timing of recognizing gift card breakage, sales relating to shipping and handling for undelivered orders, and a change in timing for the recognition of expenses related to direct-response advertising costs. In addition, we expect a balance sheet reclassification from inventory to other current assets relating to our right to recover products for our sales returns, as well as a change to the accounting for our unredeemed rewards for our loyalty program as a reduction to sales instead of recording the charge to cost of goods sold. Although we are in the process of finalizing the quantification of the effects on the areas discussed above, we currently do not expect the adoption will significantly affect our consolidated statements of operations, financial position or cash flows. The Company expects to adopt the provisions of this standard using the modified retrospective method, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption.



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



In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective and will be adopted by the Company for annual reporting periods beginning after December 15, 2017, including interim periods therein. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. Based on deferred tax amounts related to applicable past intercompany transactions and the foreign exchange rates as of October 28, 2017, we expect the adoption will result in an increase in deferred income tax assets of approximately $40 million to $45 million.



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

5

 


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Adopted Accounting Pronouncements



In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment transactions, including tax consequences, forfeitures, and classifications of the tax related items in the statement of cash flows. The Company adopted ASU 2016-09 during the first quarter of 2017. Amendments relating to accounting for excess tax benefits and deficiencies have been adopted prospectively. For the thirteen and thirty-nine weeks ended October 28, 2017, the Company recorded excess tax benefits related to share-based compensation awards of $2 million and $9 million, respectively, to the income statement, within the income tax provision, whereas such benefits were previously recognized in equity. Also, in the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefits. This ASU also requires that we present excess tax benefits or deficiencies as operating activities in our condensed consolidated statement of cash flow. As a result of adopting this change retrospectively, we reclassified excess tax benefits of $16 million which were previously classified as cash flows from financing activities to operating activities for the thirty-nine weeks ended October 29, 2016. Additionally, the presentation of employee taxes paid to taxing authorities for share-based transactions of $6 million, previously classified as cash flows from operating activities, were reclassified to financing activities for the thirty-nine weeks ended October 29, 2016. The Company has made a policy election of recording forfeitures as they occur instead of estimating forfeitures using a modified retrospective approach. The cumulative effect of this change was not significant.



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU is effective for annual reporting periods beginning after December 15, 2017 including interim periods therein. The Company has adopted this ASU as of the first quarter of 2017. Accordingly, we restated our cash and cash equivalents balances in the condensed consolidated statements of cash flows to include restricted cash of $28 million as of October 29, 2016 and $27 million as of both January 30, 2016, and January 28, 2017. Please see Note 5, Restricted Cash, for a reconciliation of cash and cash equivalents as presented on our condensed consolidated balance sheets to cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows. 



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, pension litigation charge, reorganization charge, corporate expense, non-operating income, and net interest (income) / expense.



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016

Sales

 

($ in millions)

Athletic Stores

 

$

1,612 

 

$

1,644 

 

$

4,819 

 

$

4,955 

Direct-to-Customers

 

 

258 

 

 

242 

 

 

753 

 

 

698 

Total sales

 

$

1,870 

 

$

1,886 

 

$

5,572 

 

$

5,653 

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

Athletic Stores (1)

 

$

154 

 

$

213 

 

$

504 

 

$

683 

Direct-to-Customers

 

 

26 

 

 

32 

 

 

88 

 

 

92 

Division profit

 

 

180 

 

 

245 

 

 

592 

 

 

775 

Less: Pension litigation and reorganization charges (2), (3)

 

 

13 

 

 

 —

 

 

63 

 

 

 —

Less: Corporate expense

 

 

12 

 

 

17 

 

 

34 

 

 

53 

Operating profit

 

 

155 

 

 

228 

 

 

495 

 

 

722 

Interest (income) / expense, net

 

 

 —

 

 

 

 

(1)

 

 

Other income (4)

 

 

 

 

 —

 

 

 

 

Income before income taxes

 

$

156 

 

$

227 

 

$

498 

 

$

723 











 

6


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to write down long-lived store assets of Runners Point and Sidestep. See Note 3, Litigation and Other Charges for additional information.

(2)

Included in the thirty-nine weeks ended October 28, 2017 is a pre-tax charge of $50 million relating to a pension litigation matter described further in Note 14, Legal Proceedings.

(3)

Included in the thirteen and thirty-nine weeks ended October 28, 2017 is $13 million in pre-tax reorganization costs related to the reduction and reorganization of division and corporate staff that occurred in the third quarter of 2017, described more fully in Note 3, Litigation and Other Charges.

(4)

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 and losses associated with foreign currency option contracts.





3. Litigation and Other Charges







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

($ in millions)

Pension litigation charge

 

$

 —

 

$

 —

 

$

50 

 

$

 —

Reorganization costs

 

 

13 

 

 

 —

 

 

13 

 

 

 —

Impairment of long-lived assets

 

 

 —

 

 

 

 

 —

 

 

Total litigation and other charges

 

$

13 

 

$

 

$

63 

 

$



During the third quarter of 2017, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. As a result of this, as well as certain corporate staff reductions taken to improve corporate efficiency, the Company recorded a charge of $13 million. The charge consisted primarily of severance payments and benefit continuation costs for approximately 190 associates. The following is a reconciliation of the accrual for the quarter ended October 28, 2017:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Severance and

 

 

Other Related

 

 

 



 

 

Benefit Costs

 

 

Charges

 

 

Total



 

($ in millions)

Balance at January 28, 2017

 

$

 —

 

$

 —

 

$

 —

Amounts charged to expense

 

 

11 

 

 

 

 

13 

Cash payments

 

 

(2)

 

 

 —

 

 

(2)

Balance at October 28, 2017

 

$

 

$

 

$

11 



As more fully discussed in Note 14, Legal Proceedings, during the second quarter of 2017 the Company recorded a $50 million pension litigation charge.



Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a non-cash charge of $6 million to write down store fixtures and leasehold improvements related to the Runners Point and Sidestep businesses.



4. Hurricane-Related Costs



Hurricanes Harvey, Irma, and Maria adversely affected the Company’s third quarter of 2017 operations and resulted in the closure of approximately 450 of the Company’s retail stores for varying periods of time. As of October 28, 2017, 22 of these stores remain closed in Puerto Rico. The Company expects to re-open 8 of the remaining stores during the fourth quarter of 2017 and an additional 7 stores during the early part of 2018, dependent on timing of repairs and mall openings. Currently, we do not expect to re-open the balance of the stores.



The Company recorded a $7 million charge associated with its retail stores that were damaged by the hurricanes. This charge was recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 28, 2017. The charge reflects estimated property damages and other costs of $2 million and inventory write-offs of $5 million. The Company is working with its insurance providers to determine if any of the losses can be recovered.



7


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5. Restricted Cash



The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows.



 

 

 

 

 

 

 

 

 



 

October 28,

 

October 29,

 

January 28,



    

2017

    

2016

    

2017



 

($ in millions)

Cash and cash equivalents

 

$

890 

 

$

865 

 

$

1,046 

Restricted cash included in other current assets

 

 

 

 

 —

 

 

 —

Restricted cash included in other non-current assets

 

 

29 

 

 

28 

 

 

27 

Cash, cash equivalents, and restricted cash

 

$

920 

 

$

893 

 

$

1,073 



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



6. Goodwill



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













 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

October 28,

 

October 29,

 

January 28,



    

2017

    

2016

    

2017



 

($ in millions)

Athletic Stores

 

$

18 

 

$

17 

 

$

16 

Direct-to-Customers

 

 

140 

 

 

139 

 

 

139 

Total goodwill

 

$

158 

 

$

156 

 

$

155 







7. Other Intangible Assets, net



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

October 28, 2017

 

October 29, 2016

 

January 28, 2017



 

 

Gross

 

Accum.

 

Net

 

Gross

 

Accum.

 

Net

 

Gross

 

Accum.

 

Net

($ in millions)

 

value

 

amort.

 

value

 

value

 

amort.

 

value

 

value

 

amort.

 

value

Amortized intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Lease acquisition costs

 

 $

129 

 

 $

(117)

 

 $

12 

 

$

118 

 

$

(107)

 

$

11 

 

 $

116 

 

$

(105)

 

$

11 



Trademarks / trade names

 

 

20 

 

 

(13)

 

 

 

 

20 

 

 

(13)

 

 

 

 

20 

 

 

(13)

 

 



Favorable leases

 

 

 

 

(6)

 

 

 

 

 

 

(5)

 

 

 

 

 

 

(5)

 

 



 

 

 $

156 

 

 $

(136)

 

 $

20 

 

$

145 

 

$

(125)

 

$

20 

 

 $

143 

 

$

(123)

 

20 

Indefinite life intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Runners Point Group trademarks / trade names

 

 

 

 

 

 

 

 $

25 

 

 

 

 

 

 

 

 $

23 

 

 

 

 

 

 

 

 $

22 

Other intangible assets, net

 

 

 

 

 

 

 

 $

45 

 

 

 

 

 

 

 

$

43 

 

 

 

 

 

 

 

 $

42 







 

(1)

The change in the ending balances also reflects the effect of foreign currency fluctuations due primarily to the movements of the euro in relation to the U.S. dollar.

8


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the thirty-nine week period ended October, 28 2017, the Company recorded $2 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 10 years.  Amortization expense recorded is as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

($ in millions)

 

 

October 28, 2017

 

 

October 29, 2016

     

October 28, 2017

 

October 29, 2016

Amortization expense

 

$

 

$

 

$

 

$



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



 

 

  

 

($ in millions)

Remainder of 2017

$

2018

 

2019

 

2020

 

2021

 

2022

 



8. Accumulated Other Comprehensive Loss



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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



October 28,

 

October 29,

 

January 28,



2017

 

2016

 

2017



($ in millions)

Foreign currency translation adjustments

 $

(57)

 

$

(116)

 

$

(127)

Cash flow hedges

 

 

 

 

 

Unrecognized pension cost and postretirement benefit

 

(231)

 

 

(243)

 

 

(236)

Unrealized loss on available-for-sale security

 

 —

 

 

 —

 

 

(1)



 $

(286)

 

$

(353)

 

$

(363)



The changes in AOCL for the thirty-nine weeks ended October 28, 2017 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Items Related

 

 

 

 

 



 

Foreign Currency

 

 

 

to Pension and

 

Unrealized Loss on

 

 

 



 

Translation

 

Cash Flow

 

Postretirement

 

Available-For-

 

 

 

($ in millions)

 

Adjustments

 

Hedges

 

Benefits

 

Sale Security

 

Total

Balance as of January 28, 2017

 

$

(127)

 

$

 

$

(236)

 

$

(1)

 

$

(363)

OCI before reclassification

 

 

70 

 

 

 

 

(1)

 

 

 

 

71 

Reclassified from AOCL

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Other comprehensive income

 

 

70 

 

 

 

 

 

 

 

 

77 

Balance as of October 28, 2017

 

$

(57)

 

$

 

$

(231)

 

$

 —

 

$

(286)



Reclassifications from AOCL for the thirty-nine weeks ended October 28, 2017 were as follows:





 

 



 

 



 

($ in millions) 

Amortization of actuarial (gain) loss:

 

 

    Pension benefits- amortization of actuarial loss

 $

10 

    Postretirement benefits- amortization of actuarial gain

 

(1)

Net periodic benefit cost (see Note 12)

 

Income tax benefit

 

(3)

Net of tax

 $





9


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. 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 10, Fair Value Measurements.



Derivative Holdings Designated as Hedges



For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. The amount of such gains or losses that were recognized in earnings during the thirty-nine weeks ended October 28, 2017 was not significant and there were no such gains or losses in the corresponding prior-year period. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.



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



The net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges was not significant for the thirteen weeks ended October 28, 2017 and was a $1 million gain for the thirty-nine weeks ended October 28, 2017. At October 28, 2017, a $2 million gain remained in AOCL. For the thirteen and thirty-nine weeks ended October 29, 2016, the net change in fair value was a $1 million and $4 million gain, respectively. The notional value of the foreign exchange contracts designated as hedges outstanding at October 28, 2017 was $138 million, and these contracts mature at various dates through January 2019.  



Derivative Holdings Not Designated as Hedges



The Company enters into certain derivative contracts that are not designated as hedges, such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage certain costs of foreign currency-denominated merchandise purchases, intercompany transactions, and the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of derivative holdings not designated as hedges, as well as realized gains and premiums paid, are recorded in earnings immediately within selling, general and administrative expenses or other income, depending on the type of transaction. The net change in fair value was not significant for the thirteen and thirty-nine weeks ended October 28, 2017.

10


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The net change in fair value resulted in income of $1 million for the thirteen weeks ended October 29, 2016, and was not significant for the thirty-nine weeks ended October 29, 2016. The notional value of the foreign exchange contracts not designated as hedges outstanding at October 28, 2017 was $2 million, and these contracts mature in November 2017.



From time to time, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. No such contracts were outstanding at October 28, 2017. 



Fair Value of Derivative Contracts 



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









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Balance Sheet

 

October 28,

 

October 29,

 

January 28,

($ in millions)

 

Caption

 

2017

 

2016

 

2017

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 

$

 

$

Foreign exchange forward contracts

 

Current liabilities

 

$

 

$

 —

 

$

Non-hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 —

 

$

 

$

 —





10. 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.