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EX-99 - EX-99 - FOOT LOCKER, INC.fl-20160430xex99.htm
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EX-31.2 - EX-31.2 - FOOT LOCKER, INC.fl-20160430xex31_2.htm
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EX-15 - EX-15 - FOOT LOCKER, INC.fl-20160430xex15.htm
EX-12.1 - EX-12.1 - FOOT LOCKER, INC.fl-20160430xex12_1.htm

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: April 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)



112 West 34th Street, New York, New York 10120

(Former address, if changed since last report)

 



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 May 27, 2016: 135,309,044





 

 


 

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 

24 



 

 

 

 

 

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)









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



April 30,

 

May 2,

 

January 30,



2016

 

2015

 

2016



(Unaudited)

 

(Unaudited)

 

*

ASSETS

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,062 

 

$

986 

 

$

1,021 

Merchandise inventories

 

1,260 

 

 

1,234 

 

 

1,285 

Other current assets

 

270 

 

 

259 

 

 

300 



 

2,592 

 

 

2,479 

 

 

2,606 

Property and equipment, net

 

706 

 

 

639 

 

 

661 

Deferred taxes

 

182 

 

 

226 

 

 

234 

Goodwill

 

157 

 

 

156 

 

 

156 

Other intangible assets, net

 

46 

 

 

48 

 

 

45 

Other assets

 

75 

 

 

83 

 

 

73 



$

3,758 

 

$

3,631 

 

$

3,775 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

$

230 

 

$

303 

 

$

279 

Accrued and other liabilities

 

347 

 

 

387 

 

 

420 

Current portion of capital lease obligations

 

 

 

 

 



 

578 

 

 

692 

 

 

700 

Long-term debt and obligations under capital leases

 

128 

 

 

131 

 

 

129 

Other liabilities

 

377 

 

 

253 

 

 

393 

Total liabilities

 

1,083 

 

 

1,076 

 

 

1,222 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 173,885,868;  171,833,686 and 173,397,913 shares, respectively

 

1,127 

 

 

1,025 

 

 

1,108 

Retained earnings

 

3,336 

 

 

2,929 

 

 

3,182 

Accumulated other comprehensive loss

 

(323)

 

 

(318)

 

 

(366)

Less: Treasury stock at cost: 37,896,771;  32,094,240 and 36,421,104 shares, respectively

 

(1,465)

 

 

(1,081)

 

 

(1,371)

Total shareholders' equity

 

2,675 

 

 

2,555 

 

 

2,553 



$

3,758 

 

$

3,631 

 

$

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



 

April 30,

 

May 2,



 

2016

 

2015



 

 

 

 

 

 

Sales 

 

$

1,987 

 

$

1,916 



 

 

 

 

 

 

Cost of sales

 

 

1,291 

 

 

1,246 

Selling, general and administrative expenses

 

 

361 

 

 

345 

Depreciation and amortization

 

 

39 

 

 

35 

Interest expense, net

 

 

 —

 

 

Other income

 

 

(2)

 

 

(1)



 

 

1,689 

 

 

1,626 



 

 

 

 

 

 

Income before income taxes

 

 

298 

 

 

290 

Income tax expense

 

 

107 

 

 

106 

Net income 

 

$

191 

 

$

184 



 

 

 

 

 

 



 

 

 

 

 

 

  Basic earnings per share

 

$

1.40 

 

$

1.31 

  Weighted-average shares outstanding

 

 

136.5 

 

 

140.1 



 

 

 

 

 

 



 

 

 

 

 

 

  Diluted earnings per share

 

$

1.39 

 

$

1.29 

  Weighted-average shares outstanding, assuming dilution  

 

 

137.8 

 

 

142.1 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 



 

2


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($  in millions)

 

   











 

 

 

 

 

 



 

 

 

 

 

 



 

Thirteen weeks ended



 

April 30,

 

May 2,



 

2016

 

2015

Net income

 

$

191 

 

$

184 



 

 

 

 

 

 

Other comprehensive income, net of income tax 

 

 

 

 

 

 



 

 

 

 

 

 

Foreign currency translation adjustment: 

 

 

 

 

 

 

Translation adjustment arising during the period, net of income tax

 

 

44 

 

 



 

 

 

 

 

 

Cash flow hedges: 

 

 

 

 

 

 

Change in fair value of derivatives, net of income tax

 

 

 —

 

 

(1)



 

 

 

 

 

 

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

 

 

(1)

 

 

Comprehensive income

 

$

234 

 

$

185 









See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

   

3


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($  in millions)

 













 

 

 

 

 



 

 

 

 

 



Thirteen weeks ended



April 30,

 

May 2,



2016

 

2015



 

 

 

 

 

From Operating Activities

 

 

 

 

 

Net income

$

191 

 

$

184 

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

 

 

 

 

 

   Depreciation and amortization

 

39 

 

 

35 

   Share-based compensation expense

 

 

 

   Excess tax benefits on share-based compensation

 

(6)

 

 

(14)

   Qualified pension plan contributions

 

(25)

 

 

 —

   Change in assets and liabilities:

 

 

 

 

 

      Merchandise inventories

 

39 

 

 

17 

      Accounts payable

 

(54)

 

 

      Accrued and other liabilities

 

(14)

 

 

(10)

      Other, net

 

37 

 

 

(7)

Net cash provided by operating activities

 

212 

 

 

213 



 

 

 

 

 

From Investing Activities

 

 

 

 

 

Capital expenditures

 

(65)

 

 

(60)

Net cash used in investing activities

 

(65)

 

 

(60)



 

 

 

 

 

From Financing Activities

 

 

 

 

 

Purchase of treasury shares

 

(88)

 

 

(129)

Dividends paid on common stock

 

(37)

 

 

(35)

Proceeds from exercise of stock options

 

 

 

23 

Excess tax benefits on share-based compensation

 

 

 

14 

Net cash used in financing activities

 

(112)

 

 

(127)



 

 

 

 

 

Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents

 

 

 

(7)

Net Change in Cash and Cash Equivalents

 

41 

 

 

19 

Cash and Cash Equivalents at Beginning of Period

 

1,021 

 

 

967 

Cash and Cash Equivalents at End of Period

$

1,062 

 

$

986 



 

 

 

 

 

Cash Paid During the Period:

 

 

 

 

 

   Interest

$

 —

 

$

 —

   Income taxes

$

115 

 

$

126 





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



 

April 30,

 

May 2,



 

2016

 

2015



 

($ in millions)

Sales

 

 

 

 

 

 

Athletic Stores

 

$

1,735 

 

$

1,681 

Direct-to-Customers

 

 

252 

 

 

235 

Total sales

 

$

1,987 

 

$

1,916 

Operating Results

 

 

 

 

 

 

Athletic Stores

 

$

277 

 

$

267 

Direct-to-Customers

 

 

38 

 

 

40 

Division profit

 

 

315 

 

 

307 

Less: Corporate expense

 

 

19 

 

 

17 

Operating profit

 

 

296 

 

 

290 

Interest expense, net

 

 

 —

 

 

Other income (1)

 

 

 

 

Income before income taxes

 

$

298 

 

$

290 







 

(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. The change in the balance primarily represents foreign currency exchange fluctuations.



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

April 30,

 

May 2,

 

January 30,



    

2016

    

2015

    

2016



 

($ in millions)

Athletic Stores

 

$

17 

 

$

17 

 

$

17 

Direct-to-Customers

 

 

140 

 

 

139 

 

 

139 



 

$

157 

 

$

156 

 

$

156 







6


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

4. Other Intangible Assets, net



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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

April 30, 2016

 

May 2, 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

 

 $

123 

 

 $

(111)

 

 $

12 

 

$

126 

 

$

(115)

 

$

11 

 

 $

119 

 

$

(107)

 

$

12 



Trademarks / trade names

 

 

21 

 

 

(13)

 

 

 

 

21 

 

 

(12)

 

 

 

 

20 

 

 

(12)

 

 



Favorable leases

 

 

 

 

(5)

 

 

 

 

 

 

(4)

 

 

 

 

 

 

(5)

 

 



 

 

 $

151 

 

 $

(129)

 

 $

22 

 

$

154 

 

$

(131)

 

$

23 

 

 $

146 

 

$

(124)

 

22 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

April 30, 2016

 

May 2, 2015

 

January 30, 2016



 

 

 

 

 

 

Net

 

 

 

 

 

Net

 

 

 

 

 

Net



 

 

 

 

 

 

Value

 

 

 

 

 

Value

 

 

 

 

 

Value

Indefinite life intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Runners Point Group trademarks / trade names

 

 

 

 

 

 

 

 $

24 

 

 

 

 

 

 

 

 $

25 

 

 

 

 

 

 

 

 $

23 

Other intangible assets, net

 

 

 

 

 

 

 

 $

46 

 

 

 

 

 

 

 

$

48 

 

 

 

 

 

 

 

 $

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.



For the thirteen-week period ended April 30, 2016, activity included a $1 million increase related to foreign currency fluctuations and $1 million of lease acquisition additions primarily related to our European businesses, which are being amortized over a weighted-average life of 10 years. This was partially offset by amortization of $1 million.  





 

 

 

 

 

 



 

 

 

 

 

 



 

Thirteen weeks ended

($ in millions)

 

 

April 30, 2016

 

 

May 2, 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

 









7


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 







5. Accumulated Other Comprehensive Loss



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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



April 30,

 

May 2,

 

January 30,



2016

 

2015

 

2016



($ in millions)

Foreign currency translation adjustments

 $

(75)

 

$

(74)

 

$

(119)

Cash flow hedges

 

 

 

(4)

 

 

Unrecognized pension cost and postretirement benefit

 

(249)

 

 

(239)

 

 

(248)

Unrealized loss on available-for-sale security

 

(1)

 

 

(1)

 

 

(1)



 $

(323)

 

$

(318)

 

$

(366)





The changes in AOCL for the thirteen weeks ended April 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

 

 

44 

 

 

 —

 

 

(3)

 

 

 —

 

 

41 

Reclassified from AOCI

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Other comprehensive income/ (loss)

 

 

44 

 

 

 —

 

 

(1)

 

 

 —

 

 

43 

Balance as of April 30, 2016

 

$

(75)

 

$

 

$

(249)

 

$

(1)

 

$

(323)



Reclassifications from AOCL for the thirteen weeks ended April 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 9)

 

Income tax benefit

 

(1)

Net of tax

 $













6. 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 7, 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 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 each quarter-end, substantially all of the Company’s hedged forecasted transactions are less than twelve months, and the Company expects substantially 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 not significant for the thirteen weeks ended April 30, 2016, and therefore AOCL remained unchanged. At April 30, 2016, there was a $2 million gain included in AOCL. For the thirteen weeks ended May 2, 2015, the net change resulted in a loss of $1 million. The notional value of the foreign exchange contracts designed as hedges outstanding at April 30, 2016 was $97 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 resulted in expense of $1 million for the thirteen weeks ended April 30, 2016. The net change in fair value resulted in income of $1 million for the thirteen weeks ended May 2, 2015. The notional value of the foreign exchange contracts not designed as hedges outstanding at April 30, 2016 was $12 million, and these contracts mature at various dates through October 2016.

9


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

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 April 30, 2016. 



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. The notional value of the diesel fuel forward contracts outstanding was not significant at April 30, 2016 and these contracts mature in May 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

 

April 30,

 

May 2,

 

January 30,

($ in millions)

 

Caption

 

2016

 

2015

 

2016

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 

$

 —

 

$

Foreign exchange forward contracts

 

Current liabilities

 

$

 —

 

$

 

$

 —

Foreign exchange forward contracts

 

Non-current liabilities

 

$

 

 

 —

 

 

 —













7. 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 April 30, 2016

 

As of May 2, 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

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total Liabilities

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 —

 

$

 —



10


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

Securities classified as available-for-sale are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.



The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and, therefore, are classified as Level 2 instruments.



There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.



The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:







 

 

 

 

 

 

 

 

 



 

April 30,

 

May 2,

 

January 30,



 

2016

 

2015

 

2016



 

($ in millions)

Carrying value

 

$

129 

 

$

133 

 

$

130 

Fair value

 

$

149 

 

$

158 

 

$

156 



The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and, therefore, are classified as Level 2. The carrying values of cash and cash equivalents and other current receivables and payables approximate their fair value.



8. Earnings Per Share 

The Company accounts for and discloses earnings per share using the treasury stock method. Basic earnings per share is computed by dividing net income for the period by the weighted-average number of common shares outstanding. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.

The computation of basic and diluted earnings per share is as follows:





 

 

 

 

 

 



 

 

 

 

 

 



Thirteen weeks ended



 

April 30,

 

May 2,



 

2016

 

2015



 

(in millions, except per share data)

Net Income

 

$

191 

 

$

184 

Weighted-average common shares outstanding

 

 

136.5 

 

 

140.1 

Basic earnings per share

 

$

1.40 

 

$

1.31 

Weighted-average common shares outstanding

 

 

136.5 

 

 

140.1 

Dilutive effect of potential common shares

 

 

1.3 

 

 

2.0 

Weighted-average common shares outstanding assuming dilution

 

 

137.8 

 

 

142.1 

Diluted earnings per share

 

$

1.39 

 

$

1.29 





Options to purchase 0.2 million and 0.4 million shares of common stock were not included in the computation for the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively. These options were not included because the effect would have been antidilutive. Contingently issuable shares of 0.3 million have not been included as the vesting conditions have not been satisfied as of April 30, 2016 and May 2, 2015.

11


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

9. Pension and Postretirement Plans



The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition, the Company has a defined benefit pension plan covering certain employees of the Runners Point Group.



In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.



The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which is recognized as part of SG&A expense:





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Pension Benefits

 

 

Postretirement Benefits



 

Thirteen weeks ended

 

 

Thirteen weeks ended



 

April 30,

 

May 2,

 

 

April 30,

 

May 2,

($ in millions)

 

2016

 

2015

 

 

2016

 

2015

Service cost

 

$

 

$

 

 

$

 —

 

$

 —

Interest cost

 

 

 

 

 

 

 

 —

 

 

 —

Expected return on plan assets

 

 

(9)

 

 

(9)

 

 

 

 —

 

 

 —

Amortization of net loss (gain)

 

 

 

 

 

 

 

(1)

 

 

 —

Net benefit expense (income)

 

$

 

$

 

 

$

(1)

 

$

 —



On February 24, 2016, the Company made a contribution of $25 million to the U.S. qualified plan. The Company continually evaluates the amount and timing of any future contributions. The Company currently does not expect to make any further pension plan contributions during the current year. Actual contributions are dependent on several factors, including the outcome of the ongoing pension litigation. See Note 11, Legal Proceedings, for further information.



10. Share-Based Compensation



Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans were as follows:





 

 

 

 

 



 

 

 

 

 



Thirteen weeks ended