Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 912K
12: 10-Q Complete Submission PDF File -- ltd2016102910q PDF 1.57M
2: EX-15 Letter Re: Incorporation of Report of Registered HTML 25K
Public Accounting Firm
3: EX-31.1 Section 302 Certification of CEO HTML 29K
4: EX-31.2 Section 302 Certification of CFO HTML 30K
5: EX-32 Section 906 Certification of CEO and CFO HTML 25K
13: R1 Document and Entity Information Document HTML 43K
14: R2 Consolidated Statements Of Income HTML 60K
15: R3 Consolidated Statements Of Comprehensive Income HTML 49K
16: R4 Consolidated Balance Sheets HTML 105K
17: R5 Consolidated Balance Sheets (Parenthetical) HTML 41K
18: R6 Consolidated Statements Of Cash Flows HTML 135K
19: R7 Description Of Business And Basis Of Presentation HTML 40K
20: R8 New Accounting Pronouncement (Notes) HTML 37K
21: R9 Earnings Per Share And Shareholders' Equity HTML 107K
22: R10 Acquisition Acquisition (Notes) HTML 39K
23: R11 Restructuring Activities (Notes) HTML 29K
24: R12 Inventories HTML 36K
25: R13 Property And Equipment, Net HTML 38K
26: R14 Equity Investments And Other HTML 32K
27: R15 Income Taxes HTML 37K
28: R16 Long-term Debt HTML 82K
29: R17 Derivative Instruments HTML 75K
30: R18 Fair Value Measurements HTML 90K
31: R19 Comprehensive Income HTML 104K
32: R20 Commitments And Contingencies HTML 29K
33: R21 Retirement Benefits HTML 31K
34: R22 Segment Information HTML 85K
35: R23 Subsequent Event (Notes) HTML 25K
36: R24 Supplemental Guarantor Financial Information HTML 770K
Supplemental Guarantor Financial Information
(Notes)
37: R25 Description Of Business And Basis Of Presentation HTML 72K
(Policy)
38: R26 Earnings Per Share And Shareholders' Equity HTML 107K
(Tables)
39: R27 Acquisition (Tables) HTML 32K
40: R28 Inventories (Tables) HTML 35K
41: R29 Property And Equipment, Net (Tables) HTML 36K
42: R30 Long-term Debt (Tables) HTML 72K
43: R31 Derivative Instruments (Tables) HTML 72K
44: R32 Fair Value Measurements (Tables) HTML 83K
45: R33 Comprehensive Income (Tables) HTML 103K
46: R34 Segment Information (Tables) HTML 72K
47: R35 Supplemental Guarantor Financial Information HTML 763K
(Tables)
48: R36 New Accounting Pronouncement Debt Issuance Costs HTML 26K
(Details)
49: R37 New Accounting Pronouncement Deferred Income Taxes HTML 34K
(Details)
50: R38 Earnings Per Share And Shareholders' Equity HTML 41K
(Shares Utilized for the Calculation of Basic and
Diluted Earnings per Share) (Details)
51: R39 Earnings Per Share And Shareholders' Equity HTML 51K
(Schedule of Company's Repurchase Program)
(Details)
52: R40 Earnings Per Share And Shareholders' Equity HTML 33K
(Dividends) (Details)
53: R41 Acquisition (Details) HTML 54K
54: R42 Restructuring Activities (Details) HTML 48K
55: R43 Inventories (Details) HTML 30K
56: R44 Property And Equipment, Net (Details) HTML 34K
57: R45 Equity Investments and Other (Details) HTML 46K
58: R46 Income Taxes (Narrative) (Details) HTML 42K
59: R47 Long-term Debt (Schedule Of Long-term Debt HTML 60K
Instruments) (Details)
60: R48 Long-term Debt (Issuance And Repurchase Of Notes) HTML 53K
(Narrative) (Details)
61: R49 Long-term Debt (Revolving Facility And Letters Of HTML 61K
Credit) (Narrative) (Details)
62: R50 Derivative Instruments (Foreign Exchange Contracts HTML 60K
- Cash Flow Hedging Disclosure) (Details)
63: R51 Derivative Instruments Fair Values Derivatives, HTML 32K
Balance Sheet Location, by Derivative Contract
Type (Details)
64: R52 Derivative Instruments Derivative Instruments HTML 28K
(Interest Rate Contracts - Fair Value Hedging
Disclosures) (Details)
65: R53 Fair Value Measurements (Carrying Value And Fair HTML 28K
Value Of Long-Term Debt, Disclosure) (Detail)
66: R54 Fair Value Measurements (Fair Value, Assets And HTML 65K
Liabilities Measured On Recurring Basis) (Details)
67: R55 Fair Value Measurements Fair Value Measurements HTML 46K
(Securities Narrative) (Details)
68: R56 Comprehensive Income (Components Of Accumulated HTML 75K
Other Comprehensive Income (Loss)) (Details)
69: R57 Commitments And Contingencies (Details) HTML 29K
70: R58 Retirement Benefits (Narrative) (Details) HTML 31K
71: R59 Segment Information (Details) HTML 41K
72: R60 Subsequent Event (Details) HTML 31K
73: R61 Supplemental Guarantor Financial Information HTML 26K
(Narrative) (Details)
74: R62 Supplemental Guarantor Financial Information HTML 128K
(Consolidated Balance Sheets) (Details)
75: R63 Supplemental Guarantor Financial Information HTML 114K
(Consolidated Statements Of Income) (Details)
76: R64 Supplemental Guarantor Financial Information HTML 170K
(Consolidated Statements Of Cash Flows) (Details)
78: XML IDEA XML File -- Filing Summary XML 142K
77: EXCEL IDEA Workbook of Financial Reports XLSX 87K
6: EX-101.INS XBRL Instance -- lb-20161029 XML 4.08M
8: EX-101.CAL XBRL Calculations -- lb-20161029_cal XML 198K
9: EX-101.DEF XBRL Definitions -- lb-20161029_def XML 916K
10: EX-101.LAB XBRL Labels -- lb-20161029_lab XML 1.46M
11: EX-101.PRE XBRL Presentations -- lb-20161029_pre XML 1.04M
7: EX-101.SCH XBRL Schema -- lb-20161029 XSD 163K
79: ZIP XBRL Zipped Folder -- 0000701985-16-000101-xbrl Zip 273K
(Registrant's Telephone Number, Including Area Code)
_______________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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
ý
Accelerated filer
o
Non-accelerated
filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The
Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “third quarter of 2016” and “third quarter of 2015” refer to the thirteen week periods ending October 29, 2016 and October 31, 2015, respectively. “Year-to-date 2016” and “year-to-date 2015” refer to the thirty-nine week periods ending October 29, 2016 and October 31, 2015, respectively.
1. Description of Business and Basis of Presentation
Description of Business
L Brands, Inc. (“the
Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories. The Company sells its merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada, United Kingdom ("U.K.") and Greater China (China and Hong Kong), and through its websites and other channels. The Company's other international operations are primarily through franchise, license and wholesale partners. The
Company currently operates the following retail brands:
•
Victoria’s Secret
•
PINK
•
Bath & Body Works
•
La
Senza
•
Henri Bendel
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “third quarter of 2016” and “third quarter of 2015” refer to the thirteen week periods ending October 29, 2016
and October 31, 2015, respectively. "Year-to-date 2016" and "year-to-date 2015" refer to the thirty-nine week periods ending October 29, 2016 and October 31, 2015, respectively.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide
funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income. The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income on the Consolidated Statements of Income. The Company’s equity method investments are required to be tested for impairment when it is determined there may be an other-than-temporary loss in value.
Interim Financial Statements
The
Consolidated Financial Statements as of and for the periods ended October 29, 2016 and October 31, 2015 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2015 Annual Report on Form 10-K.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments which are of a normal recurring nature and necessary for a fair presentation of the
results for the interim periods.
Seasonality of Business
Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.
Concentration of Credit Risk and Investments
The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the
Company transacts and limits the amount of credit exposure with any one entity. Typically, the Company’s investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.
The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the
Company grants credit terms in the normal course of business. The Company records an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the
Company revises its estimates and assumptions as new information becomes available.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration
to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective beginning in fiscal year 2018, with early adoption as of fiscal year 2017 permitted. The standard allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating this standard, including the transition method and timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal year 2019, with early adoption permitted. The Company is currently evaluating this standard, including the timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and
Statements of Cash Flows.
Simplifying the Presentation of Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance requires companies to recognize income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The standard also will require all tax-related cash flows resulting from share-based payments to be reported as operating activities on the statements of cash flows, and any cash payments made to taxing authorities on an employee's behalf as financing activities. The standard will be
effective beginning in fiscal year 2017, with early adoption permitted. Management has determined that the Company will adopt ASU 2016-09 in the first quarter of fiscal year 2017. The Company is currently evaluating the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This guidance requires companies to recognize debt issuance costs related to recognized debt liabilities on the balance sheet as a direct deduction from the carrying amount
of those debt liabilities, consistent with debt discounts. This guidance is effective beginning in fiscal year 2016, with early adoption permitted.
The Company elected to early adopt this standard effective January 30, 2016. Upon adoption, prior period financial statements were recast as required by the standard to present debt issuance costs as a direct deduction from the carrying value of the related debt liabilities. The impact of the adoption of this standard is a decrease of $49 million to Other Assets and Long-term Debt on the October 31, 2015 Consolidated Balance Sheet.
7
Balance
Sheet Classification of Deferred Taxes
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies to present all deferred tax assets and liabilities as noncurrent on the balance sheet. This guidance will be effective beginning in fiscal year 2017, and early adoption is permitted.
The Company elected to early adopt this standard effective January 30, 2016 using the retrospective application transition method. Upon adoption, prior period financial statements were recast to present all deferred tax assets and liabilities as noncurrent on the balance sheet. The impact of the adoption of this standard on the October 31,
2015 Consolidated Balance Sheet is a decrease in current deferred income tax assets of $35 million; an increase in noncurrent deferred income tax assets of $8 million; and a decrease to noncurrent deferred income tax liabilities of $27 million.
3. Earnings Per Share and Shareholders’ Equity (Deficit)
Earnings Per Share
Earnings per basic share is computed based on the weighted-average number of outstanding common shares. Earnings per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares
outstanding.
The following table provides shares utilized for the calculation of basic and diluted earnings per share for the third quarter and year-to-date 2016 and 2015:
Third Quarter
Year-to-Date
2016
2015
2016
2015
(in
millions)
Weighted-average Common Shares:
Issued Shares
315
313
314
312
Treasury
Shares
(29
)
(22
)
(27
)
(20
)
Basic Shares
286
291
287
292
Effect
of Dilutive Options and Restricted Stock
4
5
4
5
Diluted Shares
290
296
291
297
Anti-dilutive
Options and Awards (a)
2
1
2
1
_______________
(a)
These
options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Shareholders’ Equity (Deficit)
Common Stock Share Repurchases
Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs for year-to-date 2016 and 2015:
Amount
Authorized
Shares
Repurchased
Amount
Repurchased
Average
Stock Price of Shares Repurchased within Program
Repurchase Program
2016
2015
2016
2015
(in millions)
(in
thousands)
(in millions)
February 2016
$
500
5,270
NA
$
410
NA
$
77.75
June
2015
$
250
NA
1,375
NA
$
113
$
82.31
February
2015
$
250
NA
2,788
NA
$
250
$
89.45
In
the first quarter of 2016, the Company's Board of Directors approved a new $500 million share repurchase program, which included $17 million remaining under the June 2015 repurchase program.
The February 2016 repurchase program had $90 million remaining as of October 29, 2016. Subsequent to October 29, 2016, the Company repurchased an additional 0.2 million shares of common stock for $11
million under this program.
Under the authority and
declaration of the Board of Directors, the Company paid the following dividends during year-to-date 2016 and 2015:
Ordinary Dividends
Special
Dividends
Total Dividends
Total Paid
(per share)
(in millions)
2016
Third
Quarter
$
0.60
$
—
$
0.60
$
173
Second
Quarter
0.60
—
0.60
173
First Quarter
0.60
2.00
2.60
750
2016
Total
$
1.80
$
2.00
$
3.80
$
1,096
2015
Third
Quarter
$
0.50
$
—
$
0.50
$
146
Second
Quarter
0.50
—
0.50
146
First Quarter
0.50
2.00
2.50
734
2015
Total
$
1.50
$
2.00
$
3.50
$
1,026
4.
Acquisition
On April 18, 2016, the Company completed the acquisition of 100% of the shares of American Beauty Limited for a total purchase price of $44 million. This agreement included the reacquisition of the franchise rights from one of our partners to operate Victoria's Secret Beauty and Accessories stores in Greater China, including 26 stores already open at the time of acquisition. The purchase price included $10 million in forgiveness of liabilities owed to the Company from the pre-existing relationship. As a result of
this acquisition, the Company's financial statements now include the financial results of American Beauty Limited, which are reported as part of the Victoria's Secret and Bath & Body Works International segment.
The total purchase price was allocated to the net tangible and intangible assets acquired based on their estimated fair value. Such estimated fair values require management to make estimates and judgments, especially with respect to intangible assets. The allocation of the purchase price to goodwill was complete as of the second quarter of 2016. Goodwill related to the acquisition is not deductible for tax purposes.
The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is as follows:
During the first quarter of 2016, the Company announced strategic actions within the Victoria’s Secret segment designed to focus the brand on its
core merchandise categories and streamline operations. The Company announced it will place more focus on brand building and loyalty-enhancing marketing and advertising rather than using traditional catalogues and offers. As a result of these actions, the Company recorded charges related to cancellations of fabric commitments for non-go forward merchandise and a reserve against paper that was previously intended for future catalogues. These costs, totaling $11 million, including non-cash charges of $10 million, are included in Cost of Goods Sold, Buying and Occupancy on the year-to-date 2016 Consolidated Statement of Income. These actions also resulted in the elimination of approximately 200
positions primarily in the Company's Ohio and New York home offices. Severance and related costs associated with these eliminations, totaling $24 million, are included in General, Administrative and Store Operating Expenses on the year-to-date 2016 Consolidated Statement of Income. The Company recognized a total pre-tax charge of $35 million for these items in the first quarter of 2016. Through the third quarter of 2016, the Company made cash payments of $13 million and decreased the estimate
of expected severance and related costs by $2 million. The remaining balance of $10 million is included in Accrued Expenses and Other on the October 29, 2016 Consolidated Balance Sheet.
Depreciation
expense was $133 million and $111 million for the third quarter of 2016 and 2015, respectively. Depreciation expense was $378 million and $335 million for year-to-date 2016 and 2015, respectively.
8. Equity Investments and Other
Third-party Apparel Sourcing Business
In the first quarter of 2015, the
Company divested its remaining ownership interest in its third-party apparel sourcing business. The Company received cash proceeds of $85 million and recognized a pre-tax gain of $78 million (after-tax gain of $69 million). The gain is included in Other Income in the year-to-date 2015 Consolidated Statement of Income and the cash proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section of the 2015 Consolidated Statement of Cash Flows.
Easton Investments
The
Company has land and other investments in Easton, a 1,300-acre planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments totaled $80 million as of October 29, 2016, $86 million as of January 30, 2016 and $96 million as of October 31, 2015 and are recorded in Other Assets on the Consolidated Balance Sheets.
Included in the Company’s Easton investments is an equity interest in Easton Town Center, LLC (“ETC”), an entity that owns and has developed a commercial entertainment and shopping center. The Company’s investment in ETC is accounted for using the equity method of accounting. The Company has a majority financial interest in ETC, but another unaffiliated member manages ETC. Certain significant decisions regarding ETC require the consent of unaffiliated members in addition to the Company.
In the second quarter
of 2016, ETC refinanced its bank loan. In conjunction with the loan refinancing, the Company received a cash distribution from ETC of $124 million and recognized a pre-tax gain of $108 million (after-tax gain of $70 million). The gain is included in Other Income in the year-to-date 2016 Consolidated Statement of Income and the return of capital is included within the Investing Activities section of the 2016 Consolidated Statement of Cash Flows.
Also included in the Company's Easton investments is an equity interest in Easton Gateway, LLC ("EG"), an entity that owns and has developed a commercial shopping center in
the Easton community. The Company's investment in EG is accounted for using the equity method of accounting. The Company has a majority financial interest in EG, but another unaffiliated member manages EG. Certain significant decisions regarding EG require the consent of the unaffiliated member in addition to the Company.
9. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The
Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries.
For the third quarter of 2016, the Company’s effective tax rate was 36.0% compared to 36.8% in the third quarter of 2015. The third quarter 2016 rate was lower than the Company's
combined federal and state statutory rate primarily due to the resolution of certain tax matters. The third quarter 2015 rate was lower than the Company’s combined federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined federal and state rate.
For year-to-date 2016, the Company’s effective tax rate was 34.5% compared to 35.2% year-to-date 2015. The year-to-date 2016 rate was lower than the
Company's combined federal and state statutory rate primarily due to the resolution of certain tax matters. The year-to-date 2015 rate was lower than the Company’s combined federal and state statutory rate primarily due to the foreign portion of the divestiture of our third-party apparel sourcing business.
As of October 29, 2016, any unrecognized deferred income tax liability resulting from the Company's undistributed foreign earnings from non-U.S. subsidiaries is not expected to reverse in the foreseeable future; furthermore,
the undistributed foreign earnings are permanently reinvested. If the Company elects to distribute these foreign earnings in the future, they could be subject to additional income taxes. Determination of the amount of any unrecognized deferred income tax liability on these undistributed foreign earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Income taxes paid were approximately $103 million and $106 million for the third quarter of 2016 and 2015, respectively. Income taxes paid were approximately $441 million
and $476 million for year-to-date 2016 and 2015, respectively.
Uncertain Tax Positions
The Company had gross unrecognized tax benefits of $248 million as of January 30, 2016, of which approximately $217 million, if recognized, would favorably affect the effective income tax rate in future periods. For year-to-date 2016, the Company had a net decrease to gross unrecognized
tax benefits of $94 million, primarily due to the resolution of certain tax matters, resulting in a $16 million benefit to the Company's Provision for Income Taxes.
Of the total unrecognized benefits as of October 29, 2016, it is reasonably possible that $78 million could change in the next 12 months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the
Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.
The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. As of October 29, 2016, January 30, 2016 and October 31, 2015, the Company had accrued $26 million, $38 million, and $33
million, respectively, for the payment of interest and penalties.
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
989
$
988
$
988
$1
billion, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
992
991
990
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
992
990
990
$700
million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
692
—
—
$500 million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”)(a)
498
499
497
$500
million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
497
496
496
$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
396
396
396
Total
Senior Unsecured Debt with Subsidiary Guarantee
$
5,056
$
4,360
$
4,357
Senior Unsecured Debt
$350
million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348
$
348
$
348
$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
297
297
297
$700
million, 6.90% Fixed Interest Rate Notes due July 2017 (“2017 Notes”)(b)
—
709
710
Foreign Facilities
23
7
5
Total
Senior Unsecured Debt
$
668
$
1,361
$
1,360
Total
$
5,724
$
5,721
$
5,717
Current
Portion of Long-term Debt
(23
)
(6
)
(4
)
Total Long-term Debt, Net of Current Portion
$
5,701
$
5,715
$
5,713
________________
(a)
The
balances include a fair value interest rate hedge adjustment which increased the debt balance by $6 million as of October 29, 2016, $8 million as of January 30, 2016 and $7 million as of October 31, 2015.
(b)
The balances include a fair value interest rate hedge adjustment which increased the debt balance by $10
million as of January 30, 2016 and $11 million as of October 31, 2015.
In the fourth quarter of 2015, the Company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The impact of the adoption of this standard is a decrease to Other Assets and Long-term Debt on the October 31, 2015 Consolidated Balance Sheet of $49 million.
For additional information, see Note 2, "New Accounting Pronouncements."
Issuance of Notes
In June 2016, the Company issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's 100% owned subsidiaries (the "Guarantors"). The proceeds from the issuance were $692 million, which were
net of issuance costs of $8 million. These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the October 29, 2016 Consolidated Balance Sheet.
In October 2015, the Company issued $1 billion of 6.875% notes due in November 2035. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The proceeds from the issuance were $988 million, which were net of issuance costs of $12 million. These
issuance costs are being amortized through the maturity date of November 2035 and are included within Long-term Debt on the Consolidated Balance Sheets.
Repurchase of Notes
In July 2016, the Company used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. The pre-tax loss on extinguishment of this debt was $36 million (after-tax net loss of $22 million), which is net of gains of $7 million related to terminated interest rate swaps associated with the 2017 Notes. This loss is included in Other Income in the year-to-date 2016 Consolidated
Statement of Income.
The Company maintains a secured revolving credit facility (“Revolving Facility”). The Revolving Facility has aggregate availability of $1 billion and expires July 18, 2019. The fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.50%
per annum. In addition, the interest rate on outstanding U.S. dollar borrowings or British pound borrowings is London Interbank Offered Rate (“LIBOR”) plus 1.50% per annum. The interest rate on outstanding Canadian dollar borrowings is Canadian Dollar Offered Rate ("CDOR") plus 1.50% per annum.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. The Company is required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00
for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of October 29, 2016, the Company was in compliance with both of its financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As
of October 29, 2016, there were no borrowings outstanding under the Revolving Facility.
The Revolving Facility supports the Company’s letter of credit program. The Company had $8 million of outstanding letters of credit as of October 29, 2016 that reduce its remaining availability under the Revolving Facility.
In addition to the Revolving Facility, the Company
maintains various revolving and term loan bank facilities with availability totaling $100 million to support its foreign operations ("Foreign Facilities"). Current borrowings on these Foreign Facilities mature between November 15, 2016 and October 26, 2017. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing.
During the third quarter of 2016, the Company borrowed $10 million and made payments of $4 million under the Foreign Facilities. The
maximum daily amount outstanding at any point in time during 2016 was $23 million. As of October 29, 2016, there were borrowings of $23 million outstanding under the Foreign Facilities.
Interest Rate Swap Arrangements
For information related to the Company’s fair value interest rate swap arrangements, see Note 11, “Derivative Financial Instruments.”
11.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to foreign currency exchange rates and interest rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated Balance Sheets at fair value.
For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into earnings in the same period during which the hedged item affects earnings. Gains and losses on the derivative representing
hedge ineffectiveness, if any, are recognized in current earnings.
For derivative financial instruments that are designated and qualify as fair value hedges, the change in the fair value of the derivative instrument has an equal and offsetting impact to the carrying value of the liability on the balance sheet.
For derivative financial instruments that are not designated as hedging instruments, the gain or loss on the derivative instrument is recognized in current earnings in Other Income in the Consolidated Statements of Income.
Foreign Exchange Risk
The Company's Canadian dollar and British pound denominated earnings are subject to exchange rate risk as substantially all of its merchandise sold in Canada and the
U.K. is sourced through U.S. dollar transactions. As a result, the Company uses foreign currency forward contracts designated as cash flow hedges to mitigate the foreign currency exposure associated with forecasted U.S. dollar-denominated merchandise purchases. These forward contracts currently have a maximum term of 18 months. Amounts are reclassified from accumulated other comprehensive income (loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Cost of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income.
The
Company uses foreign currency forward contracts not designated as cash flow hedges to manage the impact of fluctuations in foreign currency exchange rates relative to recognized merchandise payable balances denominated in non-functional currencies. The fair value of these non-designated foreign currency forward contracts is not significant as of October 29, 2016.
The
Company has a cross-currency swap related to an intercompany loan of approximately CAD$170 million maturing in January 2018 which is designated as a cash flow hedge of foreign currency exchange risk. This cross-currency swap mitigates the exposure to fluctuations in the U.S. dollar-Canadian dollar exchange rate related to the Company's Canadian operations. The cross-currency swap requires the periodic exchange of fixed-rate Canadian dollar interest payments for fixed-rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. Changes in the U.S. dollar-Canadian dollar exchange rate and the related swap settlements result in reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains
and losses recognized on the intercompany loan.
The
following table provides a summary of the fair value and balance sheet classification of outstanding derivative financial instruments designated as foreign currency cash flow hedges as of October 29, 2016, January 30, 2016 and October 31, 2015:
The following table provides a summary of the net of tax financial statement effect of the gains and losses on derivative financial instruments designated as foreign currency cash flow hedges for the third quarter and year-to-date
2016 and 2015:
Third Quarter
Year-to-Date
2016
2015
2016
2015
(in
millions)
Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)
$
9
$
2
$
(2
)
$
6
(Gain)
Loss Reclassified from Accumulated Other Comprehensive Income into Cost of Goods Sold, Buying and Occupancy Expense (a)
—
—
—
—
(Gain) Loss Reclassified
from Accumulated Other Comprehensive Income into Other Income (b)
(4
)
3
5
(7
)
________________
(a)
Represents
reclassification of amounts from accumulated other comprehensive income (loss) to earnings when the hedged merchandise is sold to the customer. No ineffectiveness was associated with these foreign currency cash flow hedges.
(b)
Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan. No ineffectiveness was associated with this foreign currency cash flow hedge.
We estimate that $4
million of foreign currency cash flow hedge gains included in accumulated other comprehensive income (loss) as of October 29, 2016 will be reclassified into earnings within the following 12 months. Actual amounts ultimately reclassified depend on the exchange rates in effect when derivative contracts that are currently outstanding mature.
Interest Rate Risk
The Company has interest rate swap arrangements related to $300 million of the outstanding 2019 Notes that are designated as interest rate fair value hedges. The interest rate swap arrangements
effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
The following table provides a summary of the fair value and balance sheet classification of the derivative financial instruments designated as interest rate fair value hedges as of October 29,
2016, January 30, 2016 and October 31, 2015:
The estimated fair value of the
Company’s publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC Topic 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The authoritative guidance included in ASC Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level
1 – Quoted market prices in active markets for identical assets or liabilities.
•
Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices of similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•
Level 3
– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following table provides a summary of assets and liabilities measured in the consolidated financial statements at fair value on a recurring basis as of October 29, 2016, January 30, 2016
and October 31, 2015:
The
Company's Level 1 fair value measurements use unadjusted quoted prices in active markets for identical assets. In the first quarter of 2015, the Company invested $50 million in U.S. Treasury Bills which were classified as available-for-sale. These securities were sold in the third quarter of 2015. In the third quarter of 2015, the Company invested $10 million in marketable equity securities which were classified as available-for-sale. In the first quarter of 2016, the Company sold a portion of this investment and received cash proceeds of $10 million
and recognized a pre-tax gain of $4 million (after-tax gain of $3 million). The gain is included within Other Income in the year-to-date 2016 Consolidated Statement of Income, and the cash proceeds are included in Proceeds from Sale of Marketable Securities within the Investing Activities section of the 2016 Consolidated Statement of Cash Flows. These securities are classified as Level 1 fair value measurements as they are traded with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.
The Company’s Level 2 fair value measurements use market approach valuation techniques.
The primary inputs to these techniques include benchmark interest rates and foreign currency exchange rates, as applicable to the underlying instruments.
Management believes that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.
The following table provides a summary of the reclassification adjustments out of accumulated other comprehensive income (loss) for the third quarter and year-to-date 2016 and 2015:
Details About Accumulated Other Comprehensive Income (Loss) Components
Amount
Reclassified from Accumulated Other Comprehensive Income (Loss)
Location on Consolidated Statements of Income
Third Quarter
Year-to-Date
2016
2015
2016
2015
(in
millions)
(Gain) Loss on Cash Flow Hedges
$
(4
)
$
3
$
5
$
(7
)
Other
Income
—
—
—
—
Provision
for Income Taxes
$
(4
)
$
3
$
5
$
(7
)
Net
Income
Sale of Available-for-Sale Securities
$
—
$
—
$
(4
)
$
—
Other
Income
—
—
1
—
Provision
for Income Taxes
$
—
$
—
$
(3
)
$
—
Net
Income
14. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect
on the Company’s results of operations, financial condition or cash flows.
In connection with the disposition of certain businesses, the Company has remaining guarantees of approximately $18 million related to lease payments under the current terms of noncancellable leases expiring at various dates through 2021. These guarantees include minimum rent and additional payments covering taxes,
common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the businesses. In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended. The Company has not recorded a liability with respect to these guarantee obligations as it concluded that payments under these guarantees were not probable as of October 29, 2016.
In connection with the sale and leaseback under noncancellable operating leases of certain assets, the Company provides residual value guarantees to the lessor if the leased assets
cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire in 2020, and the total amount of the guarantees is approximately $105 million. The Company recorded a liability of $3 million related to these guarantee obligations as of October 29, 2016 and January 30, 2016, which is included in Other Long-term Liabilities on the Consolidated Balance Sheets.
15. Retirement Benefits
The
Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement plan for substantially all of its associates within the U.S. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.
The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately.
Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $15 million for the third quarter of 2016 and 2015. Total expense recognized related to the qualified plan was $47 million for year-to-date 2016 and $46 million for year-to-date 2015.
The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions
up to a maximum percentage of eligible compensation. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a fixed rate determined by the Company and reviewed by the Compensation Committee of the Board of Directors, prior to the beginning of each year. Associate contributions and the related interest vest immediately. Company contributions, along with related interest, are subject to
vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specified period of up to 10 years. Total expense recognized related to the non-qualified plan was $7 million for the third quarter of 2016 and $9 million for the third quarter of 2015. Total expense recognized related to the non-qualified plan was $20 million for year-to-date 2016
and $22 million for year-to-date 2015.
16. Segment Information
The Company has three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International.
The Victoria’s Secret segment sells women’s intimate and other apparel and personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold through retail stores located in the U.S. and Canada and its website,
www.VictoriasSecret.com.
The Bath & Body Works segment sells personal care, soaps, sanitizers and home fragrance products under the Bath & Body Works, White Barn, C.O. Bigelow and other brand names. Bath & Body Works merchandise is sold at retail stores located in the U.S. and Canada and through its website, www.BathandBodyWorks.com.
The Victoria's Secret and Bath & Body Works International segment includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores located outside of the U.S. and Canada. These businesses include the following:
•
Victoria's Secret Beauty and Accessories, comprised of company-owned stores in Greater China, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature Victoria's Secret branded beauty and accessories products;
•
Victoria's
Secret International, comprised of company-owned stores in the U.K., as well as stores operated by partners under franchise, license and wholesale arrangements; and
•
Bath & Body Works International stores operated by partners under franchise, license and wholesale arrangements.
Other consists of the following:
•
Mast Global, a merchandise sourcing and production function serving the Company
and its international partners;
•
La Senza, comprised of company-owned stores in the U.S. and Canada, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature women's intimate apparel;
•
Henri Bendel, operator of 29 specialty stores which feature handbags, jewelry and other accessory products; and
•
Corporate
functions including non-core real estate, equity investments and other governance functions such as treasury and tax.
The following table provides the Company’s segment information for the third quarter and year-to-date 2016 and 2015:
Victoria’s
Secret
Bath &
Body Works
Victoria’s
Secret
and
Bath & Body Works International
Other
Total
(in millions)
2016
Third
Quarter:
Net Sales
$
1,584
$
770
$
104
$
123
$
2,581
Operating
Income (Loss)
164
145
9
(34
)
284
Year-to-Date:
Net
Sales
$
5,192
$
2,232
$
299
$
362
$
8,085
Operating
Income (Loss)
679
405
30
(99
)
1,015
2015
Third
Quarter:
Net Sales
$
1,567
$
705
$
93
$
117
$
2,482
Operating
Income (Loss)
211
136
18
(26
)
339
Year-to-Date:
Net
Sales
$
5,058
$
2,067
$
273
$
361
$
7,759
Operating
Income (Loss)
797
371
60
(114
)
1,114
The
Company's international net sales include sales from company-owned stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s international net sales across all segments totaled $330 million and $295 million for the third quarter of 2016 and 2015, respectively. The Company’s international net sales across all segments totaled $958 million and $901
million for year-to-date 2016 and 2015, respectively.
17. Subsequent Events
Subsequent to October 29, 2016, the Company repurchased an additional 0.2 million shares of common stock for $11 million under the February 2016 repurchase program. For additional information, see Note 3, "Earnings Per Share and Shareholders' Equity (Deficit)."
The Company’s 2019 Notes, 2020 Notes, 2021 Notes, 2022 Notes, 2023 Notes, 2035 Notes and 2036 Notes are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The Company is a holding company, and its most significant assets are the stock of its subsidiaries. The Guarantors represent: (a) substantially all of the sales of the Company’s domestic subsidiaries,
(b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.
The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries:
the Condensed Consolidating Balance Sheets as of October 29, 2016, January 30, 2016 and October 31, 2015 and the Condensed Consolidating Statements of Income, Comprehensive Income and Cash Flows for the periods ended October 29, 2016 and October 31, 2015. The Company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, and ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes, effective January 30, 2016. As such, amounts have been recast to include the retrospective application of these standards. For additional information, see Note 2, "New Accounting Pronouncements."
We conducted our review in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 30, 2016, and the related consolidated statements of income, comprehensive income, total equity (deficit), and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 18, 2016. In our opinion, the accompanying consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 30, 2016, is
fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
L Brands, Inc. cautions any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our company or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,”“project,”“plan,”“believe,”“expect,”“anticipate,”“intend,”“planned,”“potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our company or our management:
•
general economic conditions, consumer confidence, consumer spending patterns and market disruptions including severe weather conditions, natural disasters,
health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•
the seasonality of our business;
•
the dependence on mall traffic and the availability of suitable store locations on appropriate terms;
•
our ability to grow through
new store openings and existing store remodels and expansions;
•
our ability to successfully expand internationally and related risks;
•
our relationships with independent franchise, license and wholesale partners;
•
our direct channel businesses;
•
our
ability to protect our reputation and our brand images;
•
our ability to attract customers with marketing, advertising and promotional programs;
•
our ability to protect our trade names, trademarks and patents;
•
the highly competitive nature of the retail industry and the segments in which we
operate;
•
consumer acceptance of our products and our ability to keep up with fashion trends, develop new merchandise and launch new product lines successfully;
•
our ability to source, distribute and sell goods and materials on a global basis, including risks related to:
•
political instability,
significant health hazards, environmental hazards or natural disasters;
•
duties, taxes and other charges;
•
legal and regulatory matters;
•
volatility in currency exchange rates;
•
local
business practices and political issues;
•
potential delays or disruptions in shipping and transportation and related pricing impacts;
•
disruption due to labor disputes; and
•
changing expectations regarding product safety due to new legislation;
•
our
geographic concentration of supplier and distribution facilities in central Ohio;
•
fluctuations in foreign currency exchange rates;
•
stock price volatility;
•
our ability to pay dividends and related effects;
•
our
ability to maintain our credit rating;
•
our ability to service or refinance our debt;
•
our ability to retain key personnel;
•
our ability to attract, develop and retain qualified employees and manage labor-related costs;
•
the
ability of our manufacturers to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
•
fluctuations in product input costs;
•
fluctuations in energy costs;
•
increases in the costs of mailing, paper and printing;
•
claims
arising from our self-insurance;
•
our ability to implement and maintain information technology systems and to protect associated data;
•
our ability to maintain the security of customer, associate, supplier or company information;
•
our ability to comply with regulatory requirements;
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or
implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with
GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.
Executive Overview
In the third quarter of 2016, our operating income decreased $55 million, or 16%, to $284 million, and our operating income rate decreased to 11.0% from 13.7%. Net sales increased $99 million to $2.581 billion, comparable sales increased 2%, and comparable
store sales were flat. At Victoria's Secret, net sales increased 1%, and operating income decreased 22%. At Bath & Body Works, net sales increased 9%, and operating income increased 7%. At Victoria's Secret and Bath & Body Works International, net sales increased 12%, and operating income decreased 51%. For additional information related to our third quarter 2016 financial performance, see “Results of Operations.”
The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to manage our
business carefully and focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments and store and digital experiences to our customers. We will look for, and capitalize on, those opportunities available to us. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well-positioned.
In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided
below are non-GAAP measurements which present net income and earnings per share in 2016 and 2015 on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial
measures to the non-GAAP financial measures.
Year-to-Date
(in millions, except per share amounts)
2016
2015
Detail of Special Items included in Operating Income - Income (Expense)
Victoria's
Secret Restructuring (a)
$
(35
)
$
—
Total Special Items included in Operating Income
$
(35
)
$
—
Detail
of Special Items included in Other Income - Income (Loss)
Loss on Extinguishment of Debt (b)
$
(36
)
$
—
Gain on Distribution from Easton Town Center, LLC (c)
108
—
Gain
on Divestiture of Third-Party Apparel Sourcing Business (d)
—
78
Total Special Items included in Other Income
$
72
$
78
Detail
of Special Items included in Provision for Income Taxes - Provision
Tax effect of Special Items
$
(11
)
$
(9
)
Total Special Items included in Provision for Income Taxes
$
(11
)
$
(9
)
Reconciliation
of Reported Operating Income to Adjusted Operating Income
Reported Operating Income
$
1,015
$
1,114
Special Items included in Operating Income
35
—
Adjusted
Operating Income
$
1,050
$
1,114
Reconciliation of Reported Net Income to Adjusted Net Income
Reported
Net Income
$
526
$
617
Special Items included in Net Income
(26
)
(69
)
Adjusted
Net Income
$
500
$
548
Reconciliation of Reported Earnings Per Diluted Share to Adjusted Earnings Per Diluted Share
Reported
Earnings Per Diluted Share
$
1.81
$
2.08
Special Items included in Earnings Per Diluted Share
(0.09
)
(0.24
)
Adjusted
Earnings Per Diluted Share
$
1.72
$
1.84
_______________
(a)
In the first quarter of 2016, we announced strategic actions within the Victoria’s Secret segment designed to focus the brand on its core merchandise categories and streamline operations. As
a result of these actions, we recorded charges related to severance and related costs, fabric cancellations and catalogue paper write-offs. For additional information see Note 5, "Restructuring Activities" included in Item 1. Financial Statements.
(b)
In the second quarter of 2016, we repurchased our $700 million 6.90% Senior Unsecured Notes due July 2017 resulting in a pre-tax loss on extinguishment of $36 million (after-tax loss of $22 million). For additional information see Note 10, "Long-term Debt" included in Item 1. Financial Statements.
(c)
In
the second quarter of 2016, we received a $124 million cash distribution from Easton Town Center, LLC resulting in a pre-tax gain of $108 million (after-tax gain of $70 million). For additional information see Note 8, "Equity Investments and Other" included in Item 1. Financial Statements.
(d)
In the first quarter of 2015, we divested our remaining ownership interest in our third-party apparel sourcing business. We received cash proceeds of $85 million and recognized a pre-tax gain of $78 million (after-tax gain
of $69 million). For additional information see Note 8, "Equity Investments and Other" included in Item 1. Financial Statements.
The following table compares the third quarter of 2016 company-owned store data to the third quarter of 2015 and year-to-date 2016
store data to year-to-date 2015:
The following table compares third quarter of 2016 company-owned store data to the third quarter of 2015 and year-to-date 2016 store data to year-to-date 2015:
Third
Quarter
Year-to-Date
Number of Stores
2016
2015
2016
2015
Victoria’s Secret U.S.
Beginning
of Period
1,123
1,105
1,118
1,098
Opened
10
13
19
24
Closed
(3
)
(2
)
(7
)
(6
)
End
of Period
1,130
1,116
1,130
1,116
Victoria’s Secret Canada
Beginning
of Period
46
43
46
41
Opened
—
2
—
4
Closed
—
—
—
—
End
of Period
46
45
46
45
Bath & Body Works U.S.
Beginning
of Period
1,583
1,565
1,574
1,558
Opened
11
9
23
19
Closed
(2
)
(1
)
(5
)
(4
)
End
of Period
1,592
1,573
1,592
1,573
Bath & Body Works Canada
Beginning
of Period
102
91
98
88
Opened
—
7
4
10
Closed
—
—
—
—
End
of Period
102
98
102
98
Victoria’s Secret U.K.
Beginning
of Period
16
10
14
10
Opened
1
—
3
—
Closed
—
—
—
—
End
of Period
17
10
17
10
Victoria's Secret Beauty and Accessories
Beginning
of Period
28
—
—
—
Acquired (a)
—
—
26
—
Opened
2
—
4
—
Closed
(1
)
—
(1
)
—
End
of Period
29
—
29
—
La Senza U.S.
Beginning
of Period
—
—
—
—
Opened
3
—
3
—
Closed
—
—
—
—
End
of Period
3
—
3
—
La Senza Canada
Beginning
of Period
125
133
126
145
Opened
—
1
—
1
Closed
—
(2
)
(1
)
(14
)
End
of Period
125
132
125
132
Henri Bendel
Beginning
of Period
29
29
29
29
Opened
—
—
—
—
Closed
—
—
—
—
End
of Period
29
29
29
29
Total
Beginning
of Period
3,052
2,976
3,005
2,969
Acquired (a)
—
—
26
—
Opened
27
32
56
58
Closed
(6
)
(5
)
(14
)
(24
)
End
of Period
3,073
3,003
3,073
3,003
_______________
(a) Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores
in Greater China. For additional
information see Note 4, "Acquisition" included in Item 1. Financial Statements.
The following table compares the third quarter of 2016 noncompany-owned store data to the third quarter of 2015 and year-to-date 2016 store data to year-to-date 2015:
Third
Quarter
Year-to-Date
Number of Stores
2016
2015
2016
2015
Victoria’s Secret Beauty & Accessories
Beginning
of Period
365
325
373
290
Opened
18
19
43
57
Closed
(2
)
(2
)
(9
)
(5
)
Transferred
(a)
—
—
(26
)
—
End of Period
381
342
381
342
Victoria's
Secret
Beginning of Period
22
17
19
14
Opened
4
1
7
4
Closed
—
—
—
—
End
of Period
26
18
26
18
Bath & Body Works
Beginning
of Period
140
101
125
80
Opened
10
9
26
32
Closed
—
—
(1
)
(2
)
End
of Period
150
110
150
110
La Senza
Beginning
of Period
213
233
221
266
Opened
3
2
4
3
Closed
(9
)
(3
)
(18
)
(37
)
End
of Period
207
232
207
232
Total
Beginning
of Period
740
676
738
650
Opened
35
31
80
96
Closed
(11
)
(5
)
(28
)
(44
)
Transferred
(a)
—
—
(26
)
—
End of Period
764
702
764
702
_______________
(a) Relates
to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional
information see Note 4, "Acquisition" included in Item 1. Financial Statements.
Third Quarter of 2016 Compared to Third Quarter of 2015
Operating
Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the third quarter of 2016 in comparison to the third quarter of 2015:
Operating Income Rate
2016
2015
2016
2015
Third
Quarter
(in millions)
Victoria’s Secret
$
164
$
211
10.3
%
13.5
%
Bath &
Body Works
145
136
18.9
%
19.3
%
Victoria’s Secret and Bath & Body Works International
9
18
8.6
%
19.6
%
Other
(a)
(34
)
(26
)
(28.1
)%
(23.1
)%
Total Operating Income
$
284
$
339
11.0
%
13.7
%
_______________
(a)
Includes
Mast Global, La Senza, Henri Bendel and Corporate.
For the third quarter of 2016, operating income decreased $55 million, or 16%, to $284 million, and the operating income rate decreased to 11.0% from 13.7%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the third quarter of 2016 in comparison to the third
quarter of 2015:
2016
2015
% Change
Third Quarter
(in millions)
Victoria’s
Secret Stores (a)
$
1,286
$
1,282
—
%
Victoria’s Secret Direct
298
285
4
%
Total
Victoria’s Secret
1,584
1,567
1
%
Bath & Body Works Stores (a)
682
637
7
%
Bath
& Body Works Direct
88
68
30
%
Total Bath & Body Works
770
705
9
%
Victoria’s
Secret and Bath & Body Works International (b)
104
93
12
%
Other (c)
123
117
5
%
Total
Net Sales
$
2,581
$
2,482
4
%
_______________
(a)
Includes
company-owned stores in the U.S. and Canada.
(b)
Includes Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the U.S. and Canada.
(c)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The
following table provides a reconciliation of net sales for the third quarter of 2016 to the third quarter of 2015:
Victoria’s
Secret
Bath
&
Body Works
Victoria’s Secret
and
Bath & Body Works International
Other
Total
Third Quarter
(in millions)
2015 Net Sales
$
1,567
$
705
$
93
$
117
$
2,482
Comparable
Store Sales
(23
)
27
1
—
5
Sales
Associated with New, Closed and Non-comparable Remodeled Stores, Net
27
18
17
—
62
Foreign
Currency Translation
—
—
(5
)
—
(5
)
Direct
Channels
13
20
—
2
35
International
Wholesale, Royalty and Other
—
—
(2
)
4
2
2016
Net Sales
$
1,584
$
770
$
104
$
123
$
2,581
The
following table compares the third quarter of 2016 comparable sales to the third quarter of 2015:
Third Quarter
2016
2015
Comparable Sales (Stores and Direct) (a)
Victoria's
Secret (b)
(1
)%
6
%
Bath & Body Works (b)
7
%
7
%
Total Comparable Sales
2
%
7
%
Comparable
Store Sales (a)
Victoria’s Secret (b)
(2
)%
7
%
Bath & Body Works (b)
5
%
6
%
Total
Comparable Store Sales
—
%
7
%
________
(a)
The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable store sales when
it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. Comparable store sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria's Secret
For the third quarter of 2016,
net sales increased $17 million to $1.584 billion, comparable sales decreased 1% and comparable store sales decreased 2%. Net sales increased primarily due to increases in PINK and sport, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion. These results were partially offset by decreases in swim and apparel due to a strategic decision to exit these categories, core bras due to lower average unit retail prices, and beauty as we reposition the category.
The decrease in comparable store sales was primarily driven by a decrease in total transactions.
Bath & Body Works
For the third
quarter of 2016, net sales increased $65 million to $770 million, comparable sales increased 7% and comparable store sales increased 5%. Net sales increased across most categories including home fragrance, Signature Collection and soaps and sanitizers, which all incorporated newness, innovation and fashion.
The increase in comparable store sales was driven by an increase in total transactions.
Victoria's
Secret and Bath & Body Works International
For the third quarter of 2016, net sales increased $11 million to $104 million primarily related to recently acquired Victoria's Secret Beauty and Accessories stores in Greater China, company-owned Victoria's Secret stores in the U.K., and additional stores opened by our partners. These results were partially offset by the negative impacts of foreign currency at Victoria's Secret U.K. and Victoria's Secret Beauty and Accessories.
Other
For the third quarter of 2016, net sales increased $6 million
to $123 million primarily related to an increase in net sales at La Senza and international sourcing revenues.
Gross Profit
For the third quarter of 2016, our gross profit decreased $6 million to $1.025 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 39.7% from 41.6%, primarily driven by the following:
Victoria's Secret
For the third quarter of 2016,
the gross profit decrease was driven by a decline in merchandise margin primarily due to a decline in beauty as we reposition the category, promotions and pricing to drive trial in key categories and clearance activity on non-go forward merchandise categories. Buying and occupancy expenses decreased primarily driven by the discontinuation of catalogue production, and were partially offset by an increase in occupancy expense due to investments in store real estate.
The gross profit rate decrease was driven primarily by increases in the promotional and clearance activity described above, partially offset by lower buying and occupancy expenses due to decreased catalogue costs.
Bath & Body Works
For the third quarter of 2016, the gross profit
increase was driven by higher merchandise margin dollars primarily related to the increase in net sales. The increase in merchandise margin was partially offset by an increase in occupancy expense due to investments in store real estate.
The gross profit rate decrease was driven by an increase in occupancy expenses primarily due to investments in store real estate.
Victoria's Secret and Bath & Body Works International
For the third quarter of 2016, the gross profit decrease was driven by higher occupancy expenses due to investments in store real estate in Greater China and the negative impacts of foreign currency on merchandise margin at Victoria's Secret U.K. These decreases were partially offset by increased merchandise margin dollars generated
from higher net sales from recently acquired stores in Greater China.
The gross profit rate decrease was driven primarily by an increase in occupancy expenses due to investments in store real estate and the negative impacts of foreign currency on merchandise margin at Victoria's Secret U.K.
General, Administrative and Store Operating Expenses
For the third quarter of 2016, our general, administrative and store operating expenses increased $49 million to $741 million primarily due to corporate expenses in Greater China, increased legal expenses and increased store selling expenses related to higher sales volumes.
The
general, administrative and store operating expense rate increased to 28.7% from 27.9% due to corporate expenses in Greater China, increased legal expenses and increased selling expenses, partially offset by leverage from higher sales.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the third quarter of 2016 and 2015:
Third
Quarter
2016
2015
Average daily borrowings (in millions)
$
5,770
$
4,765
Average borrowing rate (in percentages)
6.75
%
6.70
%
For
the third quarter of 2016, our interest expense increased $18 million to $97 million primarily due to an increase in average borrowings related to the October 2015 $1 billion note issuance.
For the third quarter of 2016, our other income increased $3 million to $3
million primarily driven by a gain on a distribution received from an investment.
Provision for Income Taxes
For the third quarter of 2016, our effective tax rate was 36.0% compared to 36.8% in the third quarter of 2015. The third quarter 2016 rate was lower than our combined federal and state statutory rate primarily due to the favorable resolution of certain tax matters. The third quarter 2015 rate was
lower than the Company’s combined federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined federal and state rate.
Year-to-Date 2016 Compared to Year-to-Date 2015
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for year-to-date 2016 in comparison to year-to-date 2015:
Operating Income Rate
2016
2015
2016
2015
Year-to-Date
(in millions)
Victoria’s
Secret
$
679
$
797
13.1
%
15.8
%
Bath & Body Works
405
371
18.2
%
18.0
%
Victoria’s
Secret and Bath & Body Works International
30
60
9.9
%
21.9
%
Other (a)
(99
)
(114
)
(27.3
)%
(31.8
)%
Total
Operating Income
$
1,015
$
1,114
12.6
%
14.4
%
_______________
(a)
Includes
Mast Global, La Senza, Henri Bendel and Corporate.
For year-to-date 2016, operating income decreased $99 million, or 9%, to $1.015 billion, and the operating income rate decreased to 12.6% from 14.4%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for year-to-date 2016 in comparison to year-to-date 2015:
2016
2015
% Change
Year-to-Date
(in millions)
Victoria’s
Secret Stores (a)
$
4,136
$
4,065
2
%
Victoria’s Secret Direct
1,056
993
6
%
Total
Victoria’s Secret
5,192
5,058
3
%
Bath & Body Works Stores (a)
1,977
1,863
6
%
Bath
& Body Works Direct
255
204
25
%
Total Bath & Body Works
2,232
2,067
8
%
Victoria’s
Secret and Bath & Body Works International (b)
299
273
10
%
Other (c)
362
361
—
%
Total
Net Sales
$
8,085
$
7,759
4
%
_______________
(a)
Includes
company-owned stores in the U.S. and Canada.
(b)
Includes Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the U.S. and Canada.
(c)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The following table provides a reconciliation of net sales for year-to-date 2016 to year-to-date 2015:
Victoria’s
Secret
Bath
&
Body Works
Victoria’s Secret
and
Bath & Body Works International
Other
Total
Year-to-Date
(in millions)
2015 Net Sales
$
5,058
$
2,067
$
273
$
361
$
7,759
Comparable
Store Sales
(9
)
69
2
4
66
Sales
Associated with New, Closed and Non-comparable Remodeled Stores, Net
85
48
40
(5
)
168
Foreign
Currency Translation
(5
)
(3
)
(12
)
(4
)
(24
)
Direct
Channels
63
51
—
7
121
International
Wholesale, Royalty and Other
—
—
(4
)
(1
)
(5
)
2016
Net Sales
$
5,192
$
2,232
$
299
$
362
$
8,085
The
following table compares year-to-date 2016 comparable sales to year-to-date 2015:
Year-to-Date
2016
2015
Comparable Sales (Stores and Direct) (a)
Victoria's
Secret (b)
1
%
3
%
Bath & Body Works (b)
6
%
6
%
Total Comparable Sales
3
%
4
%
Comparable
Store Sales (a)
Victoria’s Secret (b)
—
%
5
%
Bath & Body Works (b)
4
%
5
%
Total
Comparable Store Sales
1
%
5
%
________
(a)
The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable store sales when
it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. Comparable store sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria's Secret
For year-to-date 2016, net sales increased
$134 million to $5.192 billion, comparable sales increased 1% and comparable store sales were flat. Net sales increased primarily due to increases in PINK and sport, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion. These results were partially offset by decreases in swim and apparel due to a strategic decision to exit these categories, core bras due to lower average unit retail prices, and beauty as we reposition the category.
Bath & Body Works
For year-to-date 2016, net sales increased $165 million to $2.232 billion, comparable sales increased 6%
and comparable store sales increased 4%. Net sales increased across most categories including home fragrance, Signature Collection and soaps and sanitizers, which all incorporated newness, innovation and fashion.
The increase in comparable store sales was driven by an increase in average dollar sales.
Victoria's Secret and Bath & Body Works International
For year-to-date 2016, net sales increased $26 million to $299
million primarily related to newly acquired Victoria's Secret Beauty and Accessories stores in Greater China, company-owned Victoria's Secret stores in the U.K., and additional stores opened by our partners. These results were partially offset by the negative impacts of foreign currency at Victoria's Secret U.K. and Victoria's Secret Beauty and Accessories.
Other
For year-to-date 2016, net sales increased $1 million to $362 million primarily due to increases in our La Senza and Henri Bendel direct channels, partially offset by store closures and the negative impacts of foreign currency at La Senza.
Gross Profit
For year-to-date 2016,
our gross profit decreased $20 million to $3.181 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 39.3% from 41.3%, primarily driven by the following:
Victoria's Secret
For year-to-date 2016, the gross profit decrease was primarily driven by a decline in merchandise margin due to clearance activity on non-go forward merchandise categories, promotions and pricing to drive trial in beauty and other key categories, and fabric cancellations related to restructuring activities. Buying and occupancy expenses increased primarily driven by an increase in occupancy expense resulting from investments in real estate, partially
offset by a decrease in catalogue costs.
The gross profit rate decrease was driven primarily by increases in the promotional and clearance activity described above, the expenses related to the restructuring activities and investments in store real estate, partially offset by lower buying and occupancy expenses due to decreased catalogue costs.
Bath & Body Works
For year-to-date 2016, the gross profit increase was primarily driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin was partially offset by higher occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven by an increase in occupancy expenses primarily due to investments in store
real estate.
Victoria's Secret and Bath & Body Works International
For year-to-date 2016, the gross profit decrease was primarily due to higher occupancy expenses driven by investments in store real estate in Greater China and the U.K., and lower merchandise margin dollars at Victoria's Secret Beauty and Accessories due to the negative impacts of foreign currency and business performance. These decreases were partially offset by increased merchandise margin dollars generated from higher net sales.
The gross profit rate decrease was driven primarily by higher occupancy expenses due to investments in store real estate and a decrease in the merchandise margin rate at Victoria's Secret Beauty and Accessories.
General, Administrative and Store Operating
Expenses
For year-to-date 2016, our general, administrative and store operating expenses increased $79 million to $2.166 billion primarily driven by increased store selling expenses related to higher sales volume and investments in selling to improve the customer experience, severance charges related to the Victoria's Secret restructuring and corporate expenses in Greater China.
The general, administrative and store operating expense rate decreased to 26.8% from 26.9% primarily due to leverage from higher sales, partially offset by deleverage associated with the Victoria's Secret restructuring and corporate expenses in Greater China.
Other
Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for year-to-date 2016 and 2015:
Year-to-Date
2016
2015
Average
daily borrowings (in millions)
$
5,843
$
4,755
Average borrowing rate (in percentages)
6.73
%
6.63
%
For
year-to-date 2016, our interest expense increased $58 million to $295 million primarily due to an increase in average borrowings related to the October 2015 $1 billion note issuance.
For year-to-date 2016, our other income increased $8 million to $83 million primarily driven by a distribution received from Easton Town Center,
LLC resulting in a pre-tax gain of $108 million, partially offset by a $36 million pre-tax loss on extinguishment of the 2017 Notes. In 2015, we recognized a pre-tax gain of $78 million due to the divestiture of our remaining ownership interest in the third-party apparel sourcing business.
Provision for Income Taxes
For year-to-date 2016, our effective tax rate was 34.5% compared to 35.2% year-to-date 2015. The year-to-date 2016 rate was lower than our combined federal and state statutory rate primarily due to the favorable
resolution of certain tax matters. The year-to-date 2015 rate was lower than our combined federal and state statutory rate primarily due to the foreign portion of the divestiture of our third-party apparel sourcing business.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations
is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions and profit margins. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.
We believe in returning value to our shareholders through a combination of dividends and share repurchase programs. During 2016, we have paid $1.096 billion in regular and special dividends and repurchased $410 million of our common stock. We use cash flow generated from operating activities and financing activities to fund
our dividends and share repurchase programs.
Our total cash and cash equivalents held by foreign subsidiaries were $282 million as of October 29, 2016. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional income taxes.
$1 billion, 6.875% Fixed Interest Rate Notes due
November 2035 ("2035 Notes")
$
989
$
988
$
988
$1 billion, 5.625% Fixed Interest Rate Notes due February 2022 ("2022 Notes")
992
991
990
$1
billion, 6.625% Fixed Interest Rate Notes due April 2021 ("2021 Notes")
992
990
990
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 ("2036 Notes")
692
—
—
$500
million, 8.50% Fixed Interest Rate Notes due June 2019 ("2019 Notes") (a)
498
499
497
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 ("2023 Notes")
497
496
496
$400
million, 7.00% Fixed Interest Rate Notes due May 2020 ("2020 Notes")
396
396
396
Total Senior Unsecured Debt with Subsidiary Guarantee
$
5,056
$
4,360
$
4,357
Senior
Unsecured Debt
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 ("2033 Notes")
$
348
$
348
$
348
$300
million, 7.60% Fixed Interest Rate Notes due July 2037 ("2037 Notes")
297
297
297
$700 million, 6.90% Fixed Interest Rate Notes due July 2017 ("2017 Notes") (b)
—
709
710
Foreign
Facilities
23
7
5
Total Senior Unsecured Debt
$
668
$
1,361
$
1,360
Total
$
5,724
$
5,721
$
5,717
Current
Portion of Long-term Debt
(23
)
(6
)
(4
)
Total Long-term Debt, Net of Current Portion
$
5,701
$
5,715
$
5,713
_______________
(a)
The
balances include a fair value interest rate hedge adjustment which increased the debt balance by $6 million as of October 29, 2016, $8 million as of January 30, 2016 and $7 million as of October 31, 2015.
(b)
The balances include a fair value interest rate hedge adjustment which increased the debt balance by $10
million as of January 30, 2016 and $11 million as of October 31, 2015.
Issuance of Notes
In June 2016, we issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by our Guarantors. The proceeds from the issuance were $692 million, which were net of issuance costs of $8 million.
These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the October 29, 2016 Consolidated Balance Sheet.
In October 2015, we issued $1 billion of 6.875% notes due in November 2035. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by our Guarantors. The proceeds from the issuance were $988 million, which were net of issuance costs of $12 million. These issuance costs are being amortized through the maturity date of November 2035 and are included within Long-term Debt on the Consolidated Balance Sheets.
Repurchase
of Notes
In July 2016, we used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. The pre-tax loss on extinguishment of this debt was $36 million (after-tax net loss of $22 million), which is net of gains of $7 million related to terminated interest rate swaps associated with the 2017 Notes. This loss is included in Other Income in the year-to-date 2016 Consolidated Statement of Income.
Revolving Facilities
We maintain a secured revolving credit facility (“Revolving Facility”). The Revolving Facility has aggregate availability of $1 billion and expires July
18, 2019. The fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings or British pound borrowings is LIBOR plus 1.50% per annum. The interest rate on outstanding Canadian dollar borrowings is CDOR plus 1.50% per annum.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. We
are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of October 29, 2016,
we were in compliance with both of our financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of October 29, 2016, there were no borrowings outstanding under the Revolving Facility.
The Revolving Facility supports our letter of credit program. We had $8 million of outstanding letters of credit as of October 29, 2016 that reduce our remaining availability under our Revolving Facility.
In addition to the Revolving Facility,
we maintain various revolving and term loan bank facilities with availability totaling $100 million to support our foreign operations ("Foreign Facilities"). Current borrowings on these Foreign Facilities mature between November 15, 2016 and October 26, 2017. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing.
During the third quarter of 2016, we borrowed $10 million and made payments of $4 million under the Foreign Facilities. The maximum daily amount outstanding at any point in time during 2016
was $23 million. As of October 29, 2016, there were borrowings of $23 million outstanding under the Foreign Facilities.
Interest Rate Swap Arrangements
We have interest rate swap arrangements related to $300 million of the outstanding 2019 Notes that are designated as interest rate fair value hedges. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received
on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
Working Capital and Capitalization
We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements.
Letters of credit issued reduce our remaining availability under the Revolving Facility. We have outstanding letters of credit that reduce our remaining availability under the Revolving Facility of $8 million as of October 29,
2016 and January 30, 2016 and $19 million as of October 31, 2015.
Credit Ratings
The following table provides our credit ratings as of October 29, 2016:
Our borrowing costs under our Revolving Facility are linked to our credit ratings at Moody’s, S&P and Fitch. If we receive an upgrade or downgrade to our corporate credit ratings by Moody’s, S&P or Fitch, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Revolving Facility by the Guarantors and the security interests granted in our and the Guarantors’ collateral securing such obligations are released if our credit ratings are higher than a certain level. Additionally, the restrictions imposed under the Revolving Facility on our ability to make investments and to make restricted payments cease to apply if our credit ratings are higher than certain levels. Credit rating downgrades by any of the agencies do not accelerate the repayment of any of our debt.
Common Stock Share Repurchases
Under
the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase programs for year-to-date 2016 and 2015:
Amount Authorized
Shares
Repurchased
Amount
Repurchased
Average
Stock Price of Shares Repurchased within Program
Repurchase Program
2016
2015
2016
2015
(in millions)
(in
thousands)
(in millions)
February 2016
$
500
5,270
NA
$
410
NA
$
77.75
June
2015
$
250
NA
1,375
NA
$
113
$
82.31
February
2015
$
250
NA
2,788
NA
$
250
$
89.45
In
the first quarter of 2016, our Board of Directors approved a new $500 million share repurchase program, which included $17 million remaining under the June 2015 repurchase program.
The February 2016 repurchase program had $90 million remaining as of October 29, 2016. Subsequent to October 29, 2016, we repurchased an additional 0.2 million shares of common stock for $11 million under this program.
We use cash flow generated from operating and financing activities to fund our share repurchase programs. The timing and amount of any repurchases will be made at our discretion taking into account a number of factors including market conditions.
Dividend Policy and Procedures
Under the authority and declaration of our Board of Directors, we paid the following dividends during year-to-date 2016
and 2015:
Ordinary Dividends
Special Dividends
Total
Dividends
Total Paid
(per share)
(in millions)
2016
Third
Quarter
$
0.60
$
—
$
0.60
$
173
Second
Quarter
0.60
—
0.60
173
First Quarter
0.60
2.00
2.60
750
2016
Total
$
1.80
$
2.00
$
3.80
$
1,096
2015
Third
Quarter
$
0.50
$
—
$
0.50
$
146
Second
Quarter
0.50
—
0.50
146
First Quarter
0.50
2.00
2.50
734
2015
Total
$
1.50
$
2.00
$
3.50
$
1,026
Our
Board of Directors will determine future dividends and share repurchase authorizations after giving consideration to the Company's levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating activities to fund our ordinary dividends and a combination of cash flow generated from operating activities and financing activities to fund our special dividends and share repurchases.
The following table provides a summary of our cash flow activity for year-to-date 2016 and 2015:
Year-to-Date
2016
2015
(in
millions)
Cash and Cash Equivalents, Beginning of Period
$
2,548
$
1,681
Net Cash Flows Provided by Operating Activities
316
262
Net
Cash Flows Used for Investing Activities
(721
)
(332
)
Net Cash Flows Used for Financing Activities
(1,486
)
(302
)
Effects of Exchange Rate Changes on Cash
and Cash Equivalents
(3
)
2
Net Decrease in Cash and Cash Equivalents
(1,894
)
(370
)
Cash and Cash Equivalents, End of Period
$
654
$
1,311
Operating
Activities
Net cash provided by operating activities in 2016 was $316 million, including net income of $526 million. Net income included depreciation and amortization of $378 million, gain on distribution from Easton Town Center, LLC of $108 million, share-based compensation expense of $70 million, excess tax benefits from share-based compensation of $39 million, and loss on extinguishment of debt of $36 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant
items in working capital were the seasonal increases in Inventories (and related increases in Accounts Payable), as we build our inventory levels in anticipation of the holiday season, which generates a substantial portion of our operating cash flow for the year. In addition, our Income Taxes Payable decrease was due to seasonal tax payments.
Net cash provided by operating activities in 2015 was $262 million, including net income of $617 million. Net income included depreciation and amortization of $335 million, gain on divestiture of the third-party apparel sourcing business of $78 million, share-based compensation expense of $73 million and excess tax
benefits from share-based compensation of $65 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal increases in Inventories (and related increases in Accounts Payable), as we build our inventory levels in anticipation of the holiday season, which generates a substantial portion of our operating cash flow for the year. In addition, our Income Taxes Payable decrease was due to seasonal tax payments.
Investing Activities
Net cash used for investing activities in 2016 was $721 million consisting primarily of capital expenditures of $825 million and
$33 million related to the acquisition of our Victoria's Secret Beauty and Accessories franchise partner's operations and stores in Greater China, partially offset by a $108 million return of capital from Easton Town Center, LLC and proceeds from the sale of marketable securities of $10 million. The capital expenditures included $691 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Net cash used for investing activities in 2015 was $332 million consisting primarily of capital expenditures of $603
million and purchases of marketable securities of $60 million, partially offset by proceeds from the sale of assets of $196 million, the divestiture of the third-party apparel sourcing business of $85 million and proceeds from the sale of marketable securities of $50 million. The capital expenditures included $476 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Financing Activities
Net cash used for financing activities in 2016 was $1.486
billion consisting primarily of quarterly and special dividend payments aggregating to $3.80 per share, or $1.096 billion, $742 million to repurchase our 2017 Notes, and repurchases of common stock of $410 million, partially offset by net proceeds of $692 million from the 2036 Notes issuance, excess tax benefits from share-based compensation of $39 million and proceeds from the exercise of stock options of $17 million.
Net cash used for financing activities in 2015 was $302 million consisting primarily
of quarterly and special dividend payments aggregating to $3.50 per share, or $1.026 billion, and repurchases of common stock of $363 million, partially offset by the net proceeds from the 2035 Notes issuance of $988 million, excess tax benefits from share-based compensation of $65 million and proceeds from the exercise of stock options of $31 million.
Contingent Liabilities and Contractual
Obligations
In connection with the disposition of certain businesses, we have remaining guarantees of approximately $18 million related to lease payments under the current terms of noncancellable leases expiring at various dates through 2021. These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the businesses. In certain instances, our guarantee may remain in effect if the term of a lease is extended. We have not recorded a liability with respect to these guarantee obligations as we concluded that payments under these guarantees were not probable as of October 29, 2016.
In connection with the sale and leaseback
under noncancellable operating leases of certain assets, we provided residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire in 2020, and the total amount of the guarantees is approximately $105 million. We recorded a liability of $3 million related to these guarantee obligations as of October 29, 2016 and January 30, 2016, which is included in Other Long-term Liabilities on the Consolidated Balance Sheets.
Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases,
purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since January 30, 2016, as discussed in "Contingent Liabilities and Contractual Obligations" in our 2015 Annual Report on Form 10-K, other than the issuance of the 2036 Notes and the repurchase of the 2017 Notes. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations which fluctuate throughout the year as a result of the seasonal nature of our operations).
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. This guidance will be effective beginning in fiscal year 2018, with early adoption as of fiscal year 2017 permitted. The standard allows for either a full retrospective or a modified retrospective transition method. We are currently evaluating this standard, including the transition method and timing of adoption, and the related impact on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments
made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal year 2019, with early adoption permitted. We are currently evaluating this standard, including the timing of adoption, and the related impact on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
Simplifying the Presentation of Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance requires companies to recognize income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase
more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The standard also will require all tax-related cash flows resulting from share-based payments to be reported as operating activities on the statements of cash flows, and any cash payments made to taxing authorities on an employee's behalf as financing activities. The standard will be effective beginning in fiscal year 2017, with early adoption permitted. We have determined that we will adopt ASU 2016-09 in the first quarter of fiscal year 2017. We are currently evaluating the related impact on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on the results of operations and financial condition have been minor.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period,
as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to the critical accounting policies and estimates disclosed in our 2015 Annual Report on Form 10-K.
Item 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We use derivative financial instruments like cross-currency swaps, foreign currency forward contracts and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rate Risk
We have operations in foreign countries which expose us to market risk associated with foreign currency exchange rate
fluctuations. To mitigate the translation risk to our earnings and the fair value of our Canadian operations associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate, we entered into a cross-currency swap related to a Canadian dollar denominated intercompany loan. This cross-currency swap requires the periodic exchange of fixed rate Canadian dollar interest payments for fixed rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. The swap arrangement matures in January 2018 at the same time as the related loan. As a result of the Canadian dollar denominated intercompany loan and the related cross-currency swap, we do not believe there is any material translation risk to our Canadian net earnings associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate.
In addition, our Canadian dollar, British pound and Chinese yuan
denominated earnings are subject to exchange rate risk as substantially all of our merchandise sold in Canada, the U.K. and China is sourced through U.S. dollar transactions. Although we utilize foreign currency forward contracts to partially offset risks associated with Canadian dollar and British pound denominated earnings, these measures may not succeed in offsetting all of the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.
Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange
rate fluctuations.
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities are the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Typically, our investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any
material risk to principal associated with increases or decreases in interest rates.
The majority of our long-term debt as of October 29, 2016, has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into interest rate swap arrangements. As of October 29, 2016, we have interest rate swap arrangements with notional amounts of $300 million related to a portion of our 2019 Notes.
The
effect of the interest rate swap arrangements is to convert the respective amount of debt from a fixed interest rate to a variable interest rate. The variable interest rate associated with these swap arrangements fluctuates based on changes in three-month LIBOR.
For the balance of our long-term debt that is not subject to interest rate swap arrangements, our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.
Fair Value of Financial Instruments
As of October 29, 2016, we believe that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.
The
estimated fair value is based on reported transaction prices. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.
(b)
Hedge arrangements are in an asset position.
Concentration of Credit Risk
We maintain cash and cash equivalents and derivative contracts with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Typically, our investment portfolio is
primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.
Evaluation
of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. In August 2016, we implemented a new Human Resources and Payroll system. Various processes and controls were modified due to the new system. Additionally, we implemented additional compensating controls over financial reporting to ensure the accuracy and integrity of our financial statements during the post-implementation phase. We believe the system and process changes will enhance internal control over financial reporting in future periods. There were no other changes in our internal control over financial reporting that occurred in the third quarter of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
We are a defendant in a variety of lawsuits arising in the ordinary course of
business. Actions filed against our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.
Item 1A.
RISK FACTORS
The
risk factors that affect our business and financial results are discussed in “Item 1A: Risk Factors” in the 2015 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A: Risk Factors” in our 2015 Annual Report on Form 10-K and those described elsewhere in this report or other SEC filings, could cause actual results to differ materially from those stated in any forward-looking statements.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table provides our repurchases of our common stock during the third quarter of 2016:
Period
Total
Number of
Shares
Purchased (a)
Average Price
Paid
per
Share (b)
Total Number of Shares Purchased as Part of Publicly Announced Programs (c)
Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Programs (c)
(in thousands)
(in thousands)
August
2016
266
$
72.89
257
$
93,314
September 2016
66
71.65
42
90,359
October
2016
64
70.53
3
90,162
Total
396
302
_______________
(a)
The
total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options.
(b)
The average price paid per share includes any broker commissions.
(c)
For additional share repurchase program information, see Note 3, "Earnings Per Share
and Shareholders' Equity (Deficit)" included in Item 1. Financial Statements.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Mr. Burgdoerfer is the principal financial
officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.
54
Dates Referenced Herein and Documents Incorporated by Reference