10-Q 1 fl-20180804x10q.htm 10-Q FL-2018 Q2 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: August 4, 2018



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 August 31, 2018: 114,896,024





 

 


 

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 

25 



 

 

 

 

 

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)













 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



August 4,

 

July 29,

 

February 3,



2018

 

2017

 

2018



(Unaudited)

 

(Unaudited)

 

*

ASSETS

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

950 

 

$

1,043 

 

$

849 

Merchandise inventories

 

1,254 

 

 

1,290 

 

 

1,278 

Other current assets

 

320 

 

 

311 

 

 

424 



 

2,524 

 

 

2,644 

 

 

2,551 

Property and equipment, net

 

842 

 

 

821 

 

 

866 

Deferred taxes

 

108 

 

 

167 

 

 

48 

Goodwill

 

158 

 

 

158 

 

 

160 

Other intangible assets, net

 

41 

 

 

45 

 

 

46 

Other assets

 

159 

 

 

111 

 

 

290 



$

3,832 

 

$

3,946 

 

$

3,961 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

408 

 

$

162 

 

$

258 

Accrued and other liabilities

 

313 

 

 

308 

 

 

358 



 

721 

 

 

470 

 

 

616 

Long-term debt

 

124 

 

 

126 

 

 

125 

Other liabilities

 

505 

 

 

456 

 

 

701 

Total liabilities

 

1,350 

 

 

1,052 

 

 

1,442 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 121,497,470;  133,134,411; and 121,262,456 shares outstanding, respectively

 

857 

 

 

916 

 

 

842 

Retained earnings

 

2,232 

 

 

2,403 

 

 

2,019 

Accumulated other comprehensive loss

 

(340)

 

 

(284)

 

 

(279)

Less: Treasury stock at cost: 5,869,122;  2,034,408; and 1,433,433 shares, respectively

 

(267)

 

 

(141)

 

 

(63)

Total shareholders' equity

 

2,482 

 

 

2,894 

 

 

2,519 



$

3,832 

 

$

3,946 

 

$

3,961 



See Accompanying Notes to Condensed Consolidated Financial Statements.



* The balance sheet at February 3, 2018 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 February 3, 2018.













 

1


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended



 

August 4,

 

July 29,

 

August 4,

 

July 29,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Sales 

 

$

1,782 

 

$

1,701 

 

$

3,807 

 

$

3,702 



 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,243 

 

 

1,198 

 

 

2,602 

 

 

2,519 

Selling, general and administrative expenses

 

 

380 

 

 

339 

 

 

765 

 

 

710 

Depreciation and amortization

 

 

44 

 

 

42 

 

 

89 

 

 

83 

Litigation and other charges

 

 

 

 

50 

 

 

15 

 

 

50 

Income from operations

 

 

112 

 

 

72 

 

 

336 

 

 

340 



 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

(1)

 

 

(1)

 

 

(3)

 

 

(1)

Other income

 

 

(2)

 

 

 —

 

 

(5)

 

 

(1)

Income before income taxes

 

 

115 

 

 

73 

 

 

344 

 

 

342 

Income tax expense

 

 

27 

 

 

22 

 

 

91 

 

 

111 

Net income 

 

$

88 

 

$

51 

 

$

253 

 

$

231 



 

 

 

 

 

 

 

 

 

 

 

 

  Basic earnings per share

 

$

0.76 

 

$

0.39 

 

$

2.15 

 

$

1.76 

  Weighted-average shares outstanding

 

 

116.6 

 

 

131.3 

 

 

117.7 

 

 

131.3 



 

 

 

 

 

 

 

 

 

 

 

 

  Diluted earnings per share

 

$

0.75 

 

$

0.39 

 

$

2.14 

 

$

1.74 

  Weighted-average shares outstanding, assuming dilution

 

 

117.1 

 

 

132.0 

 

 

118.1 

 

 

132.3 





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



 

August 4,

 

July 29,

 

August 4,

 

July 29,



 

2018

 

2017

 

2018

 

2017

Net income

 

$

88 

 

$

51 

 

$

253 

 

$

231 

Other comprehensive income, net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment: 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment arising during the period, net of income tax (benefit)/expense of $1,  $5,  $(7), and $5 million, respectively

 

 

(20)

 

 

70 

 

 

(58)

 

 

74 



 

 

 

 

 

 

 

 

 

 

 

 

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, and $2 million, respectively

 

 

 

 

 —

 

 

 

 

Pension remeasurement and foreign currency fluctuations arising during the year, net of income tax benefit of $3, $-, $3, and $- million, respectively

 

 

(9)

 

 

 —

 

 

(8)

 

 

 —

Comprehensive income

 

$

61 

 

$

124 

 

$

192 

 

$

310 





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



August 4,

 

July 29,



2018

 

2017



 

 

 

 

 

From operating activities:

 

 

 

 

 

   Net income

$

253 

 

$

231 

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

 

 

 

 

 

      Depreciation and amortization

 

89 

 

 

83 

      Share-based compensation expense

 

 

 

      Qualified pension plan contributions

 

(30)

 

 

(25)

      Change in assets and liabilities:

 

 

 

 

 

         Merchandise inventories

 

 

 

41 

         Accounts payable

 

155 

 

 

(93)

         Accrued and other liabilities

 

 —

 

 

(38)

         Pension litigation accrual

 

15 

 

 

50 

         Class counsel fees paid in connection with pension litigation

 

(97)

 

 

 —

         Other, net

 

30 

 

 

(6)

Net cash provided by operating activities

 

427 

 

 

251 



 

 

 

 

 

From investing activities:

 

 

 

 

 

   Capital expenditures

 

(115)

 

 

(150)

   Insurance proceeds related to loss on property and equipment

 

 

 

 —

Net cash used in investing activities

 

(113)

 

 

(150)



 

 

 

 

 

From financing activities:

 

 

 

 

 

   Purchase of treasury shares

 

(205)

 

 

(59)

   Dividends paid on common stock

 

(81)

 

 

(82)

   Proceeds from exercise of stock options

 

 

 

10 

   Treasury stock reissued under employee stock plan

 

 

 

   Shares of common stock repurchased to satisfy tax withholding obligations

 

(1)

 

 

(9)

Net cash used in financing activities

 

(281)

 

 

(135)



 

 

 

 

 

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

 

(25)

 

 

34 

Net change in cash, cash equivalents, and restricted cash

 

 

 

 —

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

 

1,031 

 

 

1,073 

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

$

1,039 

 

$

1,073 



 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

   Interest

$

 

$

   Income taxes

$

129 

 

$

155 



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 normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 2, 2019 and of the fiscal year ended February 3, 2018. 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 February 3, 2018, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2018.



Other than the changes to the Revenue Recognition policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to our significant accounting policies disclosed in Note 1, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended February 3, 2018.



Recently Adopted Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is to 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. The Company adopted ASU 2014-09 during the first quarter of 2018 using the modified retrospective method. We recognized $5 million, or $4 million net of tax, as the cumulative effect of initially applying the new revenue standard as an increase to the opening balance of retained earnings.



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. The Company adopted this ASU during the first quarter of 2018 using the modified retrospective method, and as a result increased deferred income tax assets by $37 million. The Company recorded an adjustment to opening retained earnings to write off the income tax effects that had been deferred from past intercompany transactions involving non-inventory assets. The Company also recorded deferred tax assets with an offset to opening retained earnings for amounts that were not previously recognized under the previous guidance but are recognized under this ASU.



Other recently adopted ASUs are discussed within the applicable disclosures on the following pages.



Recent Accounting Pronouncements Not Yet Adopted



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted. These new leasing standards are effective for fiscal years beginning after December 15, 2018, including interim periods therein. The Company intends to adopt Topic 842 during the first quarter of 2019 using the optional transition method provided by ASU 2018-11. 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 our current 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.



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

 

Revenue Recognition



Store revenue is recognized at the point of sale and includes merchandise, net of returns, and excludes taxes. Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid.



In conjunction with the adoption of Topic 606 during the first quarter of 2018, we have determined that revenue for merchandise that is shipped to our customers from our distribution centers and stores will be recognized upon shipment date. Total revenue recognized includes shipping and handling fees. We have determined that control of the promised good is passed to the customer upon shipment date since the customer has legal title, the rewards of ownership, and paid for the merchandise as of the shipment date. This reflects a change in timing in how we previously recognized revenue for our direct-to-customer sales. Prior to the adoption of Topic 606, the Company recognized such revenue upon date of delivery. As a result of this change, the Company recorded $1 million, net of tax, as an increase to opening retained earnings to reflect the cumulative effect of adopting this change. We have elected to account for shipping and handling as a fulfillment activity. The Company accrues the cost and recognized revenue for these activities upon shipment date.



Gift Cards



The Company sells gift cards, which do not have expiration dates to its customers. Revenue from gift card sales is recorded when the gift cards are redeemed. Effective as of the first quarter of 2018 with the adoption of Topic 606, gift card breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, unless there is a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. This reflects a change in our accounting for gift card breakage from the remote method to the proportional method. As a result of adopting Topic 606, the Company recorded $4 million, or $3 million net of tax, as an increase to opening retained earnings to reflect the cumulative effect of this change based upon historical redemption patterns.  Additionally, breakage income was previously recorded within selling, general and administrative expenses; however, with the adoption of this standard in the first quarter of 2018, this income is reported as part of sales. This change in classification is not considered significant.



2. Revenue



Sales disaggregated based upon sales channel is presented below.





 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended



 

August 4,

 

July 29,

 

August 4,

 

July 29,



 

2018

 

2017

 

2018

 

2017



 

($ in millions)

Stores

 

$

1,542 

 

$

1,485 

 

$

3,285 

 

$

3,207 

Direct-to-customers

 

 

240 

 

 

216 

 

 

522 

 

 

495 

Total sales

 

$

1,782 

 

$

1,701 

 

$

3,807 

 

$

3,702 



Sales disaggregated based upon geographic area is presented in the below table. Sales are attributable to the geographic area in which the sales transaction is fulfilled.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended



 

August 4,

 

July 29,

 

August 4,

 

July 29,



 

2018

 

2017

 

2018

 

2017



 

($ in millions)

United States

 

$

1,220 

 

$

1,146 

 

$

2,721 

 

$

2,646 

International

 

 

562 

 

 

555 

 

 

1,086 

 

 

1,056 

Total sales

 

$

1,782 

 

$

1,701 

 

$

3,807 

 

$

3,702 



6


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contract Liabilities



The table below presents the activity of our gift card liability balance:



 

 



 

($ in millions) 

Balance at February 4, 2018

 $

38 

Redemptions

 

(43)

Cumulative catch-up adjustment to retained earnings from the adoption of Topic 606

 

(4)

Breakage recognized

 

(3)

Activations

 

39 

Foreign currency fluctuations

 

(1)

Balance at August 4, 2018

 $

26 



Due to the fact that most gift cards are redeemed within 12 months, the Company elected not to disclose information about remaining performance obligations.



3. Segment Information



The Company has integrated all available shopping channels including stores, websites, and catalogs. Store sales are primarily fulfilled from the store’s inventory, but may also be shipped from any of our distribution centers or from a different store location if an item is not available at the original store. Direct-to-customer orders are primarily shipped to our customers through our distribution centers but may also be shipped from any store or a combination of our distribution centers and stores depending on the availability of particular items.



Our operating segments are identified according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, the Company had two reportable segments: Athletic Stores and Direct-to-Customers. Beginning in fiscal 2018, the Company has changed its organizational and internal reporting structure in order to execute our omni-channel strategy. In light of these changes, the Company has re-evaluated its operating segments, which now reflect the combination of stores and direct-to-customer by geography. The Company has determined that it has two operating segments, North America and International. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team services and sales. Our International operating segment includes the results of the following banners operating in Europe, Australia, and New Zealand: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. Prior-year information has been restated to reflect this change.



The Company evaluates performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division profit. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest income. The following table summarizes our results:



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended



 

August 4,

 

July 29,

 

August 4,

 

July 29,



 

2018

 

2017

 

2018

 

2017



 

($ in millions)

Sales

 

$

1,782 

 

$

1,701 

 

$

3,807 

 

$

3,702 



 

 

 

 

 

 

 

 

 

 

 

 

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

Division profit

 

 

131 

 

 

129 

 

 

378 

 

 

412 

Less: Pension litigation (1)

 

 

 

 

50 

 

 

15 

 

 

50 

Less: Corporate expense (2)

 

 

16 

 

 

 

 

27 

 

 

22 

Income from operations

 

 

112 

 

 

72 

 

 

336 

 

 

340 

Interest income, net

 

 

(1)

 

 

(1)

 

 

(3)

 

 

(1)

Other income (3)

 

 

 

 

 —

 

 

 

 

Income before income taxes

 

$

115 

 

$

73 

 

$

344 

 

$

342 





7


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 







 

(1)

Included in the thirteen and twenty-six weeks ended August 4, 2018 are pre-tax charges of $3 million and $15 million, respectively, relating to a pension litigation matter described further in Note 14, Legal Proceedings. Included in the thirteen and twenty-six weeks ended July 29, 2017 are pre-tax charges of $50 million in both periods relating to the same matter.

(2)

Corporate expense consists of unallocated selling, general and administrative expenses as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items.

(3)

Other income includes non-operating items, such as lease termination gains, royalty income,  changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, and net benefit expense related to our pension and postretirement programs excluding the service cost component.





4. Litigation and Other Charges



As more fully discussed in Note 14, Legal Proceedings, the Company recorded charges related to the pension litigation of $3 million and $15 million for the thirteen and twenty-six weeks ended August 4, 2018. For the thirteen and twenty-six weeks ended August 4, 2018, the Company recorded charges of $2 million and $13 million, respectively, representing adjustments to the estimated cost of reformation and interest. Additionally, professional fees in connection with the plan reformation were incurred totaling $1 million and $2 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively. During the second quarter of 2017, the Company recorded $50 million of charges related to the pension litigation.



During the third quarter of the prior year, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. The following is a rollforward of the liability related to that event for the twenty-six weeks ended August 4, 2018: 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Severance and

 

 

Other Related

 

 

 



 

 

Benefit Costs

 

 

Charges

 

 

Total



 

($ in millions)

Balance at February 3, 2018

 

$

 

$

 

$

Cash payments

 

 

(4)

 

 

(1)

 

 

(5)

Balance at August 4, 2018

 

$

 

$

 

$







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.



 

 

 

 

 

 

 

 

 



 

August 4,

 

July 29,

 

February 3,



    

2018

    

2017

    

2018



 

($ in millions)

Cash and cash equivalents

 

$

950 

 

$

1,043 

 

$

849 

Restricted cash included in other current assets

 

 

 

 

 

 

Restricted cash included in other non-current assets

 

 

88 

 

 

29 

 

 

181 

Cash, cash equivalents, and restricted cash

 

$

1,039 

 

$

1,073 

 

$

1,031 



Amounts included in restricted cash primarily relate to funds deposited to a qualified settlement fund in connection with the pension litigation and 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.

8


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As a result of the first quarter 2018 change in our organizational and internal reporting structure, we have determined that we have one reportable segment. We have reassessed our reporting units in light of this change and have deemed the collective omni-channel banners in North America and International to be the two reporting units at which goodwill is tested. Therefore, goodwill was re-allocated to these reporting units based on their relative fair values. As required, we conducted our annual impairment review both before and after this change. Neither review resulted in the recognition of impairment, as the fair value of each reporting unit exceeded its carrying value.





7. Other Intangible Assets, net



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

August 4, 2018

 

July 29, 2017

 

February 3, 2018



 

 

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

 

 $

125 

 

 $

(115)

 

 $

10 

 

$

128 

 

$

(115)

 

$

13 

 

 $

135 

 

$

(122)

 

$

13 



Trademarks / trade names

 

 

20 

 

 

(14)

 

 

 

 

20 

 

 

(13)

 

 

 

 

20 

 

 

(14)

 

 



Favorable leases

 

 

 

 

(6)

 

 

 

 

 

 

(6)

 

 

 

 

 

 

(6)

 

 



 

 

 $

152 

 

 $

(135)

 

 $

17 

 

$

155 

 

$

(134)

 

$

21 

 

 $

162 

 

$

(142)

 

20 

Indefinite life intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Runners Point Group trademarks / trade names

 

 

 

 

 

 

 

 $

24 

 

 

 

 

 

 

 

 $

24 

 

 

 

 

 

 

 

 $

26 

Other intangible assets, net

 

 

 

 

 

 

 

 $

41 

 

 

 

 

 

 

 

$

45 

 

 

 

 

 

 

 

 $

46 







 

(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.

The annual review of intangible assets with indefinite lives performed during the first quarter of 2018 did not result in the recognition of impairment. Amortization expense recorded is as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Twenty-six weeks ended

($ in millions)

 

August 4, 2018

 

July 29, 2017

     

August 4, 2018

 

July 29, 2017

Amortization expense

 

$

 

$

 

$

 

$



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





 

 

  

 

($ in millions)

Remainder of 2018

$

2019

 

2020

 

2021

 

2022

 

2023

 





8. Accumulated Other Comprehensive Loss 



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

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

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



August 4,

 

July 29,

 

February 3,



2018

 

2017

 

2018



($ in millions)

Foreign currency translation adjustments

 $

(67)

 

$

(53)

 

$

(9)

Cash flow hedges

 

 

 

 

 

 —

Unrecognized pension cost and postretirement benefit

 

(274)

 

 

(233)

 

 

(270)



 $

(340)

 

$

(284)

 

$

(279)





9


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The changes in AOCL for the twenty-six weeks ended August 4, 2018 were as follows:



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Items Related

 

 

 



 

Foreign Currency

 

 

 

to Pension and

 

 

 



 

Translation

 

Cash Flow

 

Postretirement

 

 

 

($ in millions)

 

Adjustments

 

Hedges

 

Benefits

 

Total

Balance as of February 3, 2018

 

$

(9)

 

$

 —

 

$

(270)

 

$

(279)

OCI before reclassification

 

 

(58)

 

 

 

 

 

 

(56)

Amortization of pension actuarial (gain)/loss, net of tax

 

 

 —

 

 

 —

 

 

 

 

Pension remeasurement, net of tax

 

 

 —

 

 

 —

 

 

(9)

 

 

(9)

Other comprehensive income

 

 

(58)

 

 

 

 

(4)

 

 

(61)

Balance as of August 4, 2018

 

$

(67)

 

$

 

$

(274)

 

$

(340)



Reclassifications from AOCL for the twenty-six weeks ended August 4, 2018 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 12)

 

Income tax benefit

 

(1)

Net of tax

 $





9. Income Taxes



In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”). This update provides guidance on income tax accounting implications under Public Law 115-97, informally known as the Tax Cuts and Jobs Act (the "Tax Act"), which was enacted on December 22, 2017. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35 percent to 21 percent, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. SAB 118 addressed the application of GAAP to 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 Tax Act. 



As of the fourth quarter of 2017, the Company had not completed the determination of the accounting implications of the Tax Act on the Company’s tax accruals. However, we reasonably estimated the effects of the Tax Act and recognized a provisional net tax expense of $99 million associated with the Tax Act in the fourth quarter of 2017. During the second quarter of 2018, the Company reduced its provisional calculation by $1 million, which represented a revised estimate of foreign tax credits. Our accounting for the Tax Act is still incomplete as we have not finalized the deemed repatriation of deferred foreign income and prior-year deferred tax activity. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the one-year time period provided by SAB 118. Any adjustment to these amounts during the measurement period will be recorded in income tax expense in the period in which the analysis is complete.



The Company continues to evaluate the provisions of the Tax Act, including the global intangible low-taxed income (“GILTI”), the foreign derived intangible income (“FDII”) provisions, and the base erosion and anti-abuse tax (“BEAT”). The Company has made an accounting policy election to treat GILTI taxes as a current period expense.



The ultimate effect of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, as well as any related actions the Company may take.



10


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the thirteen and twenty-six weeks ended August 4, 2018, the Company recorded income tax provisions of $27 million and $91 million, which represented effective tax rates of 23.6 percent and 26.4 percent, respectively. For the thirteen and twenty-six weeks ended July 29, 2017, the Company recorded income tax provisions of $22 million and $111 million, which represented effective tax rates of 30.9 percent and 32.6 percent, respectively. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. 





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.







 

 

 

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 August 4, 2018

 

As of July 29, 2017

 

As of February 3, 2018



 

($ in millions)



   

Level 1

 

Level 2

   

Level 3

   

Level 1

 

Level 2

   

Level 3

 

Level 1

 

Level 2

   

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in equity securities

 

 $

 —

 

$

15 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Available-for-sale security

 

 

 —

 

 

 

 

 —