filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Dollar Tree, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Dollar Tree, Inc. (the Company) as of February 2, 2019 and February 3, 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three‑year period ended February 2, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 2, 2019 and February 3, 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended February 2, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 2, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 27, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Norfolk, Virginia
March 27, 2019
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Net sales | $ | 22,823.3 | $ | 22,245.5 | $ | 20,719.2 | ||||||
| Cost of sales | 15,875.8 | 15,223.6 | 14,324.5 | |||||||||
| Gross profit | 6,947.5 | 7,021.9 | 6,394.7 | |||||||||
| Selling, general and administrative expenses, excluding Goodwill impairment and Receivable impairment | 5,160.0 | 5,004.3 | 4,689.9 | |||||||||
| Goodwill impairment | 2,727.0 | — | — | |||||||||
| Receivable impairment | — | 18.5 | — | |||||||||
| Selling, general and administrative expenses | 7,887.0 | 5,022.8 | 4,689.9 | |||||||||
| Operating income (loss) | (939.5 | ) | 1,999.1 | 1,704.8 | ||||||||
| Interest expense, net | 370.0 | 301.8 | 375.5 | |||||||||
| Other income, net | (0.5 | ) | (6.7 | ) | (0.1 | ) | ||||||
| Income (loss) before income taxes | (1,309.0 | ) | 1,704.0 | 1,329.4 | ||||||||
| Provision for income taxes | 281.8 | (10.3 | ) | 433.2 | ||||||||
| Net income (loss) | $ | (1,590.8 | ) | $ | 1,714.3 | $ | 896.2 | |||||
| Basic net income (loss) per share | $ | (6.69 | ) | $ | 7.24 | $ | 3.80 | |||||
| Diluted net income (loss) per share | $ | (6.66 | ) | $ | 7.21 | $ | 3.78 |
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Net income (loss) | $ | (1,590.8 | ) | $ | 1,714.3 | $ | 896.2 | |||||
| Foreign currency translation adjustments | (6.0 | ) | 5.3 | 5.5 | ||||||||
| Total comprehensive income (loss) | $ | (1,596.8 | ) | $ | 1,719.6 | $ | 901.7 |
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED BALANCE SHEETS
| (in millions, except share and per share data) | February 2, 2019 | February 3, 2018 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 422.1 | $ | 1,097.8 | ||||
| Merchandise inventories | 3,536.0 | 3,169.3 | ||||||
| Other current assets | 335.2 | 309.2 | ||||||
| Total current assets | 4,293.3 | 4,576.3 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $3,690.6 and $3,192.1, respectively | 3,445.3 | 3,200.7 | ||||||
| Restricted cash | 24.6 | — | ||||||
| Goodwill | 2,296.6 | 5,025.2 | ||||||
| Favorable lease rights, net of accumulated amortization of $287.8 and $230.9, respectively | 288.7 | 375.3 | ||||||
| Trade name intangible asset | 3,100.0 | 3,100.0 | ||||||
| Other assets | 52.7 | 55.3 | ||||||
| Total assets | $ | 13,501.2 | $ | 16,332.8 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | — | $ | 915.9 | ||||
| Accounts payable | 1,416.4 | 1,174.8 | ||||||
| Income taxes payable | 60.0 | 31.5 | ||||||
| Other current liabilities | 619.3 | 736.9 | ||||||
| Total current liabilities | 2,095.7 | 2,859.1 | ||||||
| Long-term debt, net, excluding current portion | 4,265.3 | 4,762.1 | ||||||
| Unfavorable lease rights, net of accumulated amortization of $76.9 and $61.1, respectively | 78.8 | 100.0 | ||||||
| Deferred income taxes, net | 973.2 | 985.2 | ||||||
| Income taxes payable, long-term | 35.4 | 43.8 | ||||||
| Other liabilities | 409.9 | 400.3 | ||||||
| Total liabilities | 7,858.3 | 9,150.5 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity: | ||||||||
| Common stock, par value $0.01; 600,000,000 shares authorized, 238,081,664 and 237,325,963 shares issued and outstanding at February 2, 2019 and February 3, 2018, respectively | 2.4 | 2.4 | ||||||
| Additional paid-in capital | 2,602.7 | 2,545.3 | ||||||
| Accumulated other comprehensive loss | (38.3 | ) | (32.3 | ) | ||||
| Retained earnings | 3,076.1 | 4,666.9 | ||||||
| Total shareholders’ equity | 5,642.9 | 7,182.3 | ||||||
| Total liabilities and shareholders’ equity | $ | 13,501.2 | $ | 16,332.8 |
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED FEBRUARY 2, 2019, FEBRUARY 3, 2018, AND JANUARY 28, 2017
| (in millions) | Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Share- holders’ Equity | |||||||||||||||||
| Balance at January 30, 2016 | 235.0 | $ | 2.4 | $ | 2,391.2 | $ | (43.1 | ) | $ | 2,056.4 | $ | 4,406.9 | |||||||||||
| Net income | — | — | — | — | 896.2 | 896.2 | |||||||||||||||||
| Total other comprehensive income | — | — | — | 5.5 | — | 5.5 | |||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan | 0.1 | — | 8.0 | — | — | 8.0 | |||||||||||||||||
| Exercise of stock options | 0.6 | — | 33.5 | — | — | 33.5 | |||||||||||||||||
| Stock-based compensation, net | 0.4 | — | 39.4 | — | — | 39.4 | |||||||||||||||||
| Balance at January 28, 2017 | 236.1 | 2.4 | 2,472.1 | (37.6 | ) | 2,952.6 | 5,389.5 | ||||||||||||||||
| Net income | — | — | — | — | 1,714.3 | 1,714.3 | |||||||||||||||||
| Total other comprehensive income | — | — | — | 5.3 | — | 5.3 | |||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan | 0.2 | — | 8.4 | — | — | 8.4 | |||||||||||||||||
| Exercise of stock options | 0.5 | — | 26.6 | — | — | 26.6 | |||||||||||||||||
| Stock-based compensation, net | 0.5 | — | 38.2 | — | — | 38.2 | |||||||||||||||||
| Balance at February 3, 2018 | 237.3 | 2.4 | 2,545.3 | (32.3 | ) | 4,666.9 | 7,182.3 | ||||||||||||||||
| Net income (loss) | — | — | — | — | (1,590.8 | ) | (1,590.8 | ) | |||||||||||||||
| Total other comprehensive loss | — | — | — | (6.0 | ) | — | (6.0 | ) | |||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan | 0.2 | — | 10.0 | — | — | 10.0 | |||||||||||||||||
| Exercise of stock options | 0.1 | — | 7.5 | — | — | 7.5 | |||||||||||||||||
| Stock-based compensation, net | 0.5 | — | 39.9 | — | — | 39.9 | |||||||||||||||||
| Balance at February 2, 2019 | 238.1 | $ | 2.4 | $ | 2,602.7 | $ | (38.3 | ) | $ | 3,076.1 | $ | 5,642.9 |
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | (1,590.8 | ) | $ | 1,714.3 | $ | 896.2 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Goodwill impairment | 2,727.0 | — | — | |||||||||
| Receivable impairment | — | 18.5 | — | |||||||||
| Depreciation and amortization | 621.1 | 611.2 | 637.5 | |||||||||
| Provision for deferred income taxes | (12.1 | ) | (473.5 | ) | (124.1 | ) | ||||||
| Stock-based compensation expense | 63.1 | 65.7 | 61.6 | |||||||||
| Amortization of debt discount and debt-issuance costs | 57.2 | 15.4 | 55.2 | |||||||||
| Other non-cash adjustments to net income (loss) | 7.8 | 10.9 | 9.4 | |||||||||
| Loss on debt extinguishment | 114.7 | — | — | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Merchandise inventories | (369.2 | ) | (300.9 | ) | 21.9 | |||||||
| Other current assets | (20.2 | ) | (114.6 | ) | 117.2 | |||||||
| Accounts payable | 242.6 | 54.5 | (133.8 | ) | ||||||||
| Income taxes payable | 28.5 | (58.5 | ) | 77.1 | ||||||||
| Other current liabilities | (105.4 | ) | (22.7 | ) | 30.4 | |||||||
| Other liabilities | 1.7 | (10.1 | ) | 24.7 | ||||||||
| Net cash provided by operating activities | 1,766.0 | 1,510.2 | 1,673.3 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (817.1 | ) | (632.2 | ) | (564.7 | ) | ||||||
| Purchase of restricted investments | — | — | (36.1 | ) | ||||||||
| Proceeds from sale of restricted and unrestricted investments | — | 4.0 | 118.1 | |||||||||
| Proceeds from (payments for) fixed asset disposition | 0.4 | 0.3 | (0.9 | ) | ||||||||
| Net cash used in investing activities | (816.7 | ) | (627.9 | ) | (483.6 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from long-term debt, net of discount | 4,775.8 | — | 2,962.5 | |||||||||
| Principal payments for long-term debt | (6,214.7 | ) | (659.1 | ) | (4,036.2 | ) | ||||||
| Debt-issuance and debt extinguishment costs | (155.3 | ) | — | (6.1 | ) | |||||||
| Proceeds from revolving credit facility | 50.0 | — | 140.0 | |||||||||
| Repayments of revolving credit facility | (50.0 | ) | — | (140.0 | ) | |||||||
| Proceeds from stock issued pursuant to stock-based compensation plans | 17.5 | 35.0 | 41.5 | |||||||||
| Cash paid for taxes on exercises/vesting of stock-based compensation | (23.2 | ) | (27.4 | ) | (22.2 | ) | ||||||
| Net cash used in financing activities | (1,599.9 | ) | (651.5 | ) | (1,060.5 | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (0.5 | ) | 0.6 | 1.1 | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (651.1 | ) | 231.4 | 130.3 | ||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 1,097.8 | 866.4 | 736.1 | |||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 446.7 | $ | 1,097.8 | $ | 866.4 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for: | ||||||||||||
| Interest, net of amounts capitalized | $ | 383.4 | $ | 286.5 | $ | 329.1 | ||||||
| Income taxes | $ | 277.5 | $ | 552.4 | $ | 501.8 | ||||||
| Non-cash transactions: | ||||||||||||
| Accrued capital expenditures | $ | 43.2 | $ | 45.0 | $ | 30.3 |
See accompanying Notes to Consolidated Financial Statements
DOLLAR TREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Dollar Tree, Inc. (the Company) is a leading operator of discount retail stores in the United States and Canada. Below are those accounting policies considered by the Company to be significant.
Principles of Consolidation
The consolidated financial statements include the financial statements of Dollar Tree, Inc., and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segment Information
At February 2, 2019, the Company operates more than 15,200 retail discount stores in 48 states and five Canadian provinces. The Company’s operations are conducted in two reporting business segments: Dollar Tree and Family Dollar. The Company defines its segments as those operations whose results its chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.
The Dollar Tree segment is the leading operator of discount variety stores offering merchandise at the fixed price of $1.00. The Dollar Tree segment includes the Company’s operations under the “Dollar Tree” and “Dollar Tree Canada” brands, 12 distribution centers in the United States, two distribution centers in Canada and a store support center in Chesapeake, Virginia.
The Family Dollar segment operates a chain of general merchandise retail discount stores providing consumers with a selection of competitively-priced merchandise in convenient neighborhood stores. The Family Dollar segment consists of the Company’s operations under the “Family Dollar” brand, 11 distribution centers and a store support center in Matthews, North Carolina. During fiscal 2019, the Company plans to consolidate its Matthews, North Carolina store support center with its store support center in Chesapeake, Virginia in the Company’s newly-completed office tower in the Summit Pointe development in Chesapeake, Virginia.
Foreign Currency
The functional currencies of certain of the Company’s international subsidiaries are the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive loss. Gains and losses from foreign currency transactions, which are included in “Other income, net” have not been significant.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31. Any reference herein to “2018” or “fiscal 2018,” “2017” or “fiscal 2017,” and “2016” or “fiscal 2016,” relates to as of or for the year ended February 2, 2019, February 3, 2018, and January 28, 2017, respectively. Fiscal 2017 included 53 weeks, commensurate with the retail calendar. Fiscal 2018 and 2016 each included 52 weeks. “2019” or “fiscal 2019“ ends on February 1, 2020 and will include 52 weeks.
Use of Estimates
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 and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents at February 2, 2019 and February 3, 2018 includes $170.0 million and $674.1 million, respectively, of investments primarily in money market securities which are valued at cost, which approximates fair value. The Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents. The majority of payments due from financial institutions for the settlement of debit card and credit card transactions process within three business days, and therefore are classified as cash and cash equivalents.
Merchandise Inventories
Merchandise inventories at the Company’s distribution centers are stated at the lower of cost or net realizable value, determined on a weighted-average cost basis. Cost is assigned to store inventories using the retail inventory method on a weighted-average basis. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are computed by applying a calculated cost-to-retail ratio to the retail value of inventories.
Costs directly associated with warehousing and distribution are capitalized as merchandise inventories. Total warehousing and distribution costs capitalized into inventory amounted to $161.1 million and $137.4 million at February 2, 2019 and February 3, 2018, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets as follows:
| Buildings | 39 to 40 years |
| Furniture, fixtures and equipment | 3 to 15 years |
Leasehold improvements are amortized over the estimated useful lives of the respective assets or the committed terms of the related leases, whichever is shorter. Amortization is included in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
Costs incurred related to software developed for internal use are capitalized and amortized, generally over three years.
Capitalized Interest
The Company capitalizes interest on borrowed funds during the construction of certain property and equipment. The Company capitalized $4.2 million, $2.3 million and $2.4 million of interest costs in the years ended February 2, 2019, February 3, 2018 and January 28, 2017, respectively.
Goodwill and Nonamortizing Intangible Assets
Goodwill and nonamortizing intangible assets, including the Family Dollar trade name, are not amortized, but rather tested for impairment at least annually. In addition, goodwill and nonamortizing intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company performs a qualitative assessment to determine whether it is more likely than not that each reporting unit's fair value is less than its carrying value, including goodwill. If the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company then estimates the fair value. The Company uses a combination of a market multiple method and a discounted cash flow method to estimate the fair value of its reporting units and recognizes goodwill impairment for any excess of the carrying amount of a reporting unit’s goodwill over its estimated fair value.
The Company evaluates the Family Dollar trade name for impairment by comparing its fair value, based on an income approach using the relief-from-royalty method, to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess.
The Company's reporting units are determined in accordance with the provisions of Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other (Topic 350).” The Company performs its annual impairment testing of goodwill and nonamortizing intangible assets during the fourth quarter of each year. Refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets” for additional information on the results of the impairment tests.
Favorable and Unfavorable Lease Rights, Net
Favorable and unfavorable lease rights, net include purchased leases with terms which were either favorable or unfavorable as compared to prevailing market rates at the date of acquisition. Purchased leases are amortized over the remaining lease terms, including, in some cases, an assumed renewal. Amortization expense, net of $65.4 million, $69.2 million and $75.7 million was recognized in “Selling, general and administrative expenses” in 2018, 2017 and 2016, respectively, related to these lease rights. Favorable lease rights are tested for impairment at least annually.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets based on discounted cash flows or other readily available evidence of fair value, if any. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In fiscal 2018, 2017 and 2016, the Company recorded charges of $13.0 million, $5.6 million and $3.7 million, respectively, to write down certain assets, including $6.1 million and $0.9 million in fiscal 2018 and 2017, respectively, associated with impairment of favorable lease rights. There were no impairment charges related to favorable lease rights in fiscal 2016. These charges are recorded as a component of “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
Other Assets
Other assets consist primarily of deferred compensation plan assets and receivables which are expected to be recovered over periods longer than one year.
Insurance Reserves and Restricted Cash
The Company utilizes a combination of insurance and self-insurance programs, including a wholly-owned captive insurance entity, to provide for the potential liabilities for certain risks, including workers’ compensation, general liability and automobile liability. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering claims experience, exposure and severity factors and other actuarial assumptions.
Dollar Tree Insurance, Inc., a South Carolina-based wholly-owned captive insurance subsidiary of the Company, charges the operating subsidiary companies premiums to insure the retained workers’ compensation, general liability and automobile liability exposures. Pursuant to South Carolina insurance regulations, Dollar Tree Insurance, Inc. maintains certain levels of cash and cash equivalents related to its self-insured exposures.
Related to its insurance programs, the Company also maintains certain cash balances, which are held in trust and restricted as to withdrawal or use.
Lease Accounting
The Company generally leases its retail locations under operating leases. The Company recognizes minimum rent expense beginning when possession of the property is taken from the landlord, which normally includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. The Company also receives tenant allowances, which are recorded in deferred rent and are amortized as reductions of rent expense over the terms of the leases.
Revenue Recognition
The Company recognizes sales revenue, net of estimated returns and sales tax, at the time the customer tenders payment for and takes control of the merchandise.
Taxes Collected
The Company reports taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions (i.e., sales tax) on a net (excluded from revenue) basis.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution costs, and certain occupancy costs in cost of sales.
Vendor Allowances
The Company receives vendor support in the form of cash payments or allowances through a variety of reimbursements such as purchase discounts, cooperative advertising, markdowns, scandowns and volume rebates. The Company has agreements with vendors setting forth the specific conditions for each allowance or payment. The Company either recognizes the allowance as a
reduction of current costs or defers the payment over the period the related merchandise is sold. If the payment is a reimbursement for costs incurred, it is offset against those related costs; otherwise, it is treated as a reduction to the cost of merchandise.
Divestiture and Impaired Receivables
In connection with the Company’s 2015 acquisition of Family Dollar, the Company divested 330 Family Dollar stores to Dollar Express, LLC. As part of the divestiture, the Company was required to partially support the divested stores through a transition services agreement, under which the Company provided merchandise and services and the buyer was required to reimburse the Company. In fiscal 2017, the Company evaluated the collectability of its divestiture-related receivable and based on information then available, the Company recorded impairment charges totaling $53.5 million. In the fourth quarter of fiscal 2017, the Company settled a lawsuit with Dollar Express, which resulted in Dollar Express paying the Company $35.0 million. The settlement of the litigation resulted in a partial reversal of the receivable impairment in the fourth quarter of 2017. The remaining impairment charges of $18.5 million are included in “Receivable impairment” for the year ended February 3, 2018 in the accompanying consolidated statements of operations.
Pre-Opening Costs
The Company expenses pre-opening costs for new, expanded, relocated and re-bannered stores, as incurred.
Advertising Costs
The Company expenses advertising costs as they are incurred and they are included in “Selling, general and administrative expenses” within the accompanying consolidated statements of operations. Advertising costs, net of co-op recoveries from vendors, approximated $99.9 million, $106.3 million and $60.1 million in fiscal 2018, 2017 and 2016, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
The Company recognizes a financial statement benefit for a tax position if it determines that it is more likely than not that the position will be sustained upon examination.
The Company includes interest and penalties in the provision for income tax expense and income taxes payable. The Company does not provide for any penalties associated with tax contingencies unless they are considered probable of assessment.
Stock-Based Compensation
The Company recognizes expense for all share-based payments to employees and non-employee directors based on their fair values. Total stock-based compensation expense for 2018, 2017 and 2016 was $63.3 million, $65.8 million and $60.3 million, respectively.
The Company recognizes expense related to the fair value of restricted stock units (RSUs) and stock options over the requisite service period on a straight-line basis or a shorter period based on the retirement eligibility of the grantee. The fair value of RSUs is determined using the closing price of the Company’s common stock on the date of grant. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The Company accounts for forfeitures when they occur.
Net Income (Loss) Per Share
Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of shares outstanding. Diluted net income (loss) per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential shares and has been computed by dividing net income (loss) by the weighted average number of shares and dilutive potential shares outstanding. Dilutive potential shares include all outstanding stock options and unvested RSUs after applying the treasury stock method.
Financial Instruments
The Company may utilize derivative financial instruments to reduce its exposure to market risks from changes in interest rates and diesel fuel costs. By entering into receive-variable, pay-fixed interest rate and diesel fuel swaps, the Company limits its
exposure to changes in variable interest rates and diesel fuel prices. The Company is exposed to credit-related losses in the event of non-performance by the counterparty to these instruments but minimizes this risk by entering into transactions with high quality counterparties. Interest rate or diesel fuel cost differentials paid or received on the swaps are recognized as adjustments to interest in the period earned or incurred. The Company formally documents all hedging relationships, if applicable, and assesses hedge effectiveness both at inception and on an ongoing basis. The Company does not enter into derivative instruments for any purpose other than cash flow hedging and it does not hold derivative instruments for trading purposes. There were no derivative instruments outstanding in fiscal 2018 or 2017.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This update replaced existing revenue recognition guidance in GAAP and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company adopted the standard in the first quarter of fiscal 2018 and the adoption of the standard did not have an impact on the Company’s consolidated financial statements or its internal control over financial reporting.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on eight specific cash flow issues in an effort to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified within the statement of cash flows. The Company adopted the standard in the first quarter of fiscal 2018, resulting in the classification of $124.5 million of cash paid for debt extinguishment as a financing activity in the accompanying consolidated statement of cash flows for the year ended February 2, 2019.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. This update requires applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The update does not amend the optional qualitative assessment of goodwill impairment. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company early adopted this standard in the fourth quarter of fiscal 2018 and performed its annual goodwill impairment test in accordance with the standard, which resulted in a goodwill impairment charge of $2.73 billion related to the Company’s Family Dollar reporting unit. For additional information on the results of the goodwill impairment testing, refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets.”
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” and subsequent amendments, which replace existing lease accounting guidance in GAAP and require lessees to recognize right-of-use assets and corresponding lease liabilities on the balance sheet for all in-scope leases with a term of greater than 12 months and require disclosure of certain quantitative and qualitative information pertaining to an entity’s leasing arrangements. The Company will adopt the requirements of the standard in the first quarter of fiscal 2019, using the optional effective date transition method provided by accounting pronouncement, ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” ASU 2018-11 allows entities to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the Company’s reporting for comparative periods presented in the year of adoption will continue to be in accordance with ASC 840, “Leases (Topic 840).” The Company will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits the Company to carry forward the historical lease classification for leases that commenced before the effective date of the new standard. The Company will not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. The Company has implemented lease accounting software to facilitate the calculations of the accounting entries and disclosures in accordance with the standard and is finalizing the impact of the standard on its accounting policies, processes, disclosures and internal control over financial reporting. The Company expects to record operating lease liabilities of $6.1 billion to $6.2 billion, based upon the present value of the remaining minimum rental payments using discount rates as of the effective date of the new standard. The Company expects to record corresponding right-of-use assets of $6.0 billion to $6.3 billion, based upon the operating lease liabilities adjusted for prepaid and accrued rent, lease incentives and the impairment of right-of-use assets recognized in retained earnings as of February 3, 2019. The right-of-use assets that the Company will record will include approximately $210.0 million of net favorable lease rights which are reflected in the accompanying consolidated balance sheets as “Favorable lease rights, net” and “Unfavorable lease rights, net” at February 2, 2019. The Company does not expect a material impact on its consolidated statements of operations and consolidated statements of cash flows upon adoption of the new standard.
NOTE 2 - BALANCE SHEET COMPONENTS
Other Current Assets
Other current assets as of February 2, 2019 and February 3, 2018 consist of the following:
| February 2, | February 3, | |||||||
| (in millions) | 2019 | 2018 | ||||||
| Prepaid rent | $ | 142.5 | $ | 138.3 | ||||
| Accounts receivable, net | 100.9 | 90.4 | ||||||
| Prepaid store supplies | 46.3 | 47.1 | ||||||
| Other prepaid assets | 45.5 | 33.4 | ||||||
| Total other current assets | $ | 335.2 | $ | 309.2 |
Property, Plant and Equipment, Net
Property, plant and equipment, net, as of February 2, 2019 and February 3, 2018 consists of the following:
| February 2, | February 3, | |||||||
| (in millions) | 2019 | 2018 | ||||||
| Land | $ | 215.3 | $ | 208.0 | ||||
| Buildings | 1,300.7 | 1,092.5 | ||||||
| Leasehold improvements | 2,037.4 | 1,860.2 | ||||||
| Furniture, fixtures and equipment | 3,348.7 | 3,003.3 | ||||||
| Construction in progress | 233.8 | 228.8 | ||||||
| Total property, plant and equipment | 7,135.9 | 6,392.8 | ||||||
| Less: accumulated depreciation | 3,690.6 | 3,192.1 | ||||||
| Total property, plant and equipment, net | $ | 3,445.3 | $ | 3,200.7 |
Depreciation expense was $555.7 million, $542.0 million, and $561.8 million for the years ended February 2, 2019, February 3, 2018, and January 28, 2017, respectively.
Other Current Liabilities
Other current liabilities as of February 2, 2019 and February 3, 2018 consist of accrued expenses for the following:
| February 2, | February 3, | |||||||
| (in millions) | 2019 | 2018 | ||||||
| Taxes (other than income taxes) | $ | 159.5 | $ | 176.6 | ||||
| Compensation and benefits | 122.1 | 155.2 | ||||||
| Insurance | 106.0 | 105.4 | ||||||
| Accrued construction costs | 43.2 | 45.0 | ||||||
| Rent-related liabilities | 37.5 | 34.1 | ||||||
| Accrued interest | 29.1 | 91.1 | ||||||
| Accrued utility expenses | 23.1 | 23.9 | ||||||
| Other | 98.8 | 105.6 | ||||||
| Total other current liabilities | $ | 619.3 | $ | 736.9 |
Other Liabilities
Other long-term liabilities as of February 2, 2019 and February 3, 2018 consist of the following:
| February 2, | February 3, | |||||||
| (in millions) | 2019 | 2018 | ||||||
| Insurance | $ | 221.6 | $ | 230.2 | ||||
| Deferred rent | 142.8 | 136.5 | ||||||
| Other | 45.5 | 33.6 | ||||||
| Total other long-term liabilities | $ | 409.9 | $ | 400.3 |
NOTE 3 - GOODWILL AND NONAMORTIZING INTANGIBLE ASSETS
Goodwill allocated to the Company’s reportable segments and changes in the net carrying amount of goodwill for the years ended February 2, 2019 and February 3, 2018 are as follows:
| (in millions) | Dollar Tree | Family Dollar | Total | |||||||||
| Balance at January 28, 2017 | $ | 345.4 | $ | 4,678.1 | $ | 5,023.5 | ||||||
| Foreign currency translation adjustments | 1.7 | — | 1.7 | |||||||||
| Balance at February 3, 2018 | 347.1 | 4,678.1 | 5,025.2 | |||||||||
| Foreign currency translation adjustments | (1.6 | ) | — | (1.6 | ) | |||||||
| Goodwill reassignment for re-bannered stores | 31.0 | (31.0 | ) | — | ||||||||
| Goodwill impairment | — | (2,727.0 | ) | (2,727.0 | ) | |||||||
| Balance at February 2, 2019 | $ | 376.5 | $ | 1,920.1 | $ | 2,296.6 |
Goodwill is reassigned between segments when stores are re-bannered between segments. In 2018, the Company reassigned $31.0 million of goodwill from Family Dollar to Dollar Tree as a result of re-bannering. Re-bannered stores are treated as new stores.
Goodwill and other indefinite-lived intangible assets must be evaluated for impairment annually and may also be tested on an interim basis upon the occurrence of a triggering event or a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual goodwill impairment evaluations in 2017 and 2016 did not result in impairment. In 2018, based on the Company’s strategic and operational reassessment of the Family Dollar segment, following challenges that the business has experienced that have impacted the Company’s ability to grow the business at the originally estimated rate when it acquired Family Dollar in 2015, management determined there were indicators that the goodwill of the business may be impaired. Accordingly, a goodwill impairment test was performed in the fourth quarter of fiscal 2018. The results of the impairment test showed that the fair value of the Family Dollar business was lower than the carrying value resulting in a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge, which was recorded as a component of “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
The Company’s annual impairment evaluation of the Family Dollar trade name did not result in impairment charges during fiscal 2018, 2017 or 2016.
NOTE 4 - INCOME TAXES
The provision for income taxes consists of the following:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Current taxes: | ||||||||||||
| Federal | $ | 245.6 | $ | 439.3 | $ | 480.5 | ||||||
| State | 47.8 | 23.8 | 79.5 | |||||||||
| Foreign | 0.4 | 0.3 | 0.8 | |||||||||
| Total current taxes | 293.8 | 463.4 | 560.8 | |||||||||
| Deferred taxes: | ||||||||||||
| Federal | 0.3 | (456.0 | ) | (37.7 | ) | |||||||
| State | (12.3 | ) | (17.7 | ) | (89.9 | ) | ||||||
| Total deferred taxes | (12.0 | ) | (473.7 | ) | (127.6 | ) | ||||||
| Provision for income taxes | $ | 281.8 | $ | (10.3 | ) | $ | 433.2 |
Included in current tax expense for the years ended February 2, 2019, February 3, 2018 and January 28, 2017, are amounts related to uncertain tax positions associated with temporary differences, in accordance with ASC 740, Income Taxes.
A reconciliation of the statutory U.S. federal income tax (benefit) rate and the effective tax (benefit) rate follows:
| Year Ended | |||||||||
| February 2, 2019 | February 3, 2018 | January 28, 2017 | |||||||
| Statutory U.S. federal income tax (benefit) rate | (21.0 | )% | 33.7 | % | 35.0 | % | |||
| Effect of: | |||||||||
| Goodwill impairment | 43.7 | — | — | ||||||
| State and local income taxes, net of federal income tax benefit | 3.0 | 2.5 | 3.0 | ||||||
| Work Opportunity Tax Credit | (2.0 | ) | (1.3 | ) | (1.6 | ) | |||
| State tax election | — | — | (1.4 | ) | |||||
| Deferred tax rate change | — | (0.6 | ) | (1.6 | ) | ||||
| Incremental tax expense (benefit) of exercises/vesting of equity-based compensation | 0.1 | (0.8 | ) | (0.6 | ) | ||||
| Change in valuation allowance | 0.3 | (0.1 | ) | 0.1 | |||||
| Tax Cuts and Jobs Act | (1.3 | ) | (33.0 | ) | — | ||||
| Other, net | (1.3 | ) | (1.0 | ) | (0.3 | ) | |||
| Effective tax (benefit) rate | 21.5 | % | (0.6 | )% | 32.6 | % |
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes, including a provision that allows the full expensing of certain qualified property and adds limitations on the deductibility of certain executive compensation. In 2017, the Company recorded a $562.0 million benefit resulting from the re-measurement of the Company’s net deferred tax liabilities, primarily related to the Family Dollar trade name, to reflect the lower statutory U.S. federal income tax rate of 21%. An additional benefit of $16.2 million was recorded in 2018, related to the continued analysis of the TCJA impacts to the net deferred tax liability valuation and acceleration of depreciation. As of February 2, 2019, the Company has completed its accounting for the tax effects of the TCJA.
Goodwill Impairment
In the fourth quarter of 2018, the Company recorded a goodwill impairment charge of $2.73 billion related to the Family Dollar goodwill, as further discussed in “Note 3 - Goodwill and Nonamortizing Intangible Assets.” As the purchase of Family Dollar was a stock acquisition, carryover basis applied for tax purposes. The expense related to the impairment is not deductible for federal or state tax purposes and therefore there is no tax benefit related to the impairment.
Foreign Taxes
United States income taxes have not been provided on accumulated but undistributed earnings of the Company’s foreign subsidiaries as the Company intends to permanently reinvest earnings. The Company does not consider the tax on the mandatory deemed repatriation of undistributed foreign earnings and profits to be material.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s net deferred tax assets (liabilities) follow:
| (in millions) | February 2, 2019 | February 3, 2018 | ||||||
| Deferred tax assets: | ||||||||
| Deferred rent | $ | 44.3 | $ | 42.7 | ||||
| Accrued expenses | 18.0 | 17.8 | ||||||
| Net operating losses, interest expense and credit carryforwards | 90.7 | 75.6 | ||||||
| Accrued compensation expense | 31.6 | 23.2 | ||||||
| State tax election | 20.9 | 22.8 | ||||||
| Other | 3.0 | — | ||||||
| Total deferred tax assets | 208.5 | 182.1 | ||||||
| Valuation allowance | (42.6 | ) | (38.6 | ) | ||||
| Deferred tax assets, net | 165.9 | 143.5 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (235.5 | ) | (218.5 | ) | ||||
| Other intangibles | (864.0 | ) | (880.5 | ) | ||||
| Inventory | (17.8 | ) | (27.1 | ) | ||||
| Prepaids | (21.8 | ) | — | |||||
| Other | — | (2.6 | ) | |||||
| Total deferred tax liabilities | (1,139.1 | ) | (1,128.7 | ) | ||||
| Deferred income taxes, net | $ | (973.2 | ) | $ | (985.2 | ) |
At February 2, 2019, the Company had certain state tax credit carryforwards, net operating loss carryforwards and capital loss carryforwards totaling approximately $90.7 million. Some of these carryforwards will expire, if not utilized, beginning in 2019 through 2038.
A valuation allowance of $42.6 million, net of federal tax benefits, has been provided principally for certain state credit carryforwards, net operating loss and capital loss carryforwards. Since February 3, 2018, the valuation allowance has been increased primarily as a result of state net operating losses that may not be utilized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred taxes will not be realized. Based upon the availability of carrybacks of future deductible amounts to the past two years’ taxable income and the Company’s projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not the remaining existing deductible temporary differences will reverse during periods in which carrybacks are available or in which the Company generates net taxable income.
Uncertain Tax Positions
The Company is participating in the IRS Compliance Assurance Program (“CAP”) for fiscal 2018 and will participate in the program for fiscal 2019. This program accelerates the examination of key transactions with the goal of resolving any issues before the tax return is filed. The Company’s federal tax returns have been examined and all issues have been settled through the fiscal 2017 tax year; however, the federal statute of limitations is still open for Family Dollar’s tax returns for the tax year ended July 6, 2015. Several states completed their examinations during fiscal 2018. In general, fiscal 2015 and forward are within the statute of limitations for state tax purposes. The statute of limitations is still open prior to fiscal 2015 for some states.
The balance for unrecognized tax benefits at February 2, 2019 was $35.4 million. The total amount of unrecognized tax benefits at February 2, 2019 that, if recognized, would affect the effective tax rate was $29.6 million (net of the federal tax benefit).
The following is a reconciliation of the Company’s total gross unrecognized tax benefits:
| (in millions) | February 2, 2019 | February 3, 2018 | ||||||
| Beginning Balance | $ | 43.8 | $ | 71.2 | ||||
| Additions, based on tax positions related to current year | 4.6 | 2.5 | ||||||
| Additions for tax positions of prior years | 4.5 | 9.8 | ||||||
| Reductions for tax positions of prior years | — | (31.7 | ) | |||||
| Settlements | (2.2 | ) | (2.9 | ) | ||||
| Lapses in statutes of limitation | (15.3 | ) | (5.1 | ) | ||||
| Ending balance | $ | 35.4 | $ | 43.8 |
The Company believes it is reasonably possible that $10.0 million to $12.0 million of the reserve for uncertain tax positions may be reduced during the next 12 months principally as a result of the effective settlement of outstanding issues. It is also possible that state tax reserves will be reduced for audit settlements and statute expirations within the next 12 months. At this point it is not possible to estimate a range associated with the resolution of these audits. The Company does not expect any change to have a material impact to its consolidated financial statements.
As of February 2, 2019, the Company has recorded a liability for potential interest and penalties of $3.9 million.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Future minimum lease payments under noncancelable store and distribution center operating leases are as follows:
| (in millions) | |||
| 2019 | $ | 1,435.9 | |
| 2020 | 1,176.7 | ||
| 2021 | 1,100.0 | ||
| 2022 | 899.6 | ||
| 2023 | 729.1 | ||
| Thereafter | 1,966.3 | ||
| Total minimum lease payments | $ | 7,307.6 |
The above future minimum lease payments include amounts for leases that were signed prior to February 2, 2019 for stores that were not open as of February 2, 2019.
Minimum rental payments for operating leases do not include contingent rentals that may be paid under certain store leases based on a percentage of sales in excess of stipulated amounts. Future minimum lease payments have not been reduced by expected future minimum sublease rentals of $1.2 million under operating leases.
Minimum and Contingent Rentals
Rental expense for store and distribution center operating leases included in the accompanying consolidated statements of operations are as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Minimum rentals | $ | 1,404.0 | $ | 1,343.5 | $ | 1,276.6 | ||||||
| Contingent rentals | 7.3 | 5.2 | 6.3 |
Purchase Obligations
The Company has commitments totaling approximately $176.1 million related to legally binding agreements for software licenses and support, telecommunication services and store technology assets and maintenance for its stores.
Letters of Credit
The Company is a party to three Letter of Credit Reimbursement and Security Agreements providing $125.0 million, $120.0 million, and $110.0 million, respectively, for letters of credit. Letters of credit under these agreements are generally issued for the routine purchase of imported merchandise and approximately $166.4 million was committed to these letters of credit at February 2, 2019.
At February 2, 2019, the Company also had approximately $182.9 million in standby letters of credit that serve as collateral for its large-deductible insurance programs and expire in fiscal 2019.
Surety Bonds
The Company has issued various surety bonds that primarily serve as collateral for utility payments at the Company’s stores and self-insured insurance programs. These bonds total approximately $66.2 million and are committed through various dates through February 2022.
Build-to-Suit Lease and Related Bonds
In May 2017, the Company entered into a long-term property lease (“Missouri Lease”) which includes land and the construction of a 1.2 million square foot distribution center in Warrensburg, Missouri (“Distribution Center Project”). The Distribution Center Project was completed in 2018. The Missouri Lease commenced upon its execution in May 2017 and expires on December 1, 2032. The Company has two options to extend the Missouri Lease term for up to a combined additional ten years. Following the expiration of the lease, the property reverts back to the Company.
In addition to being a party to the Missouri Lease, the Company is also the owner of bonds which were issued in May 2017, are secured by the Missouri Lease and expire December 1, 2032 (“Missouri Bonds”). The Missouri Bonds are debt issued by the lessor in the Missouri Lease. Therefore, the Company holds the debt instrument pertaining to its Missouri Lease obligation.
The Company is deemed, for accounting purposes only, to be the owner of the Distribution Center Project including the building, even though it is not the legal owner and the related assets of $110.2 million as of February 2, 2019, are recorded within “Property, plant and equipment, net.” Because a legal right of offset exists, the Company is accounting for the Missouri Bonds as a reduction of its Missouri Lease obligation in the accompanying consolidated balance sheets.
Contingencies
The Company is a defendant in legal proceedings including those described below and will vigorously defend itself in these matters. The Company does not believe that any of these matters will, individually or in the aggregate, have a material effect on its business or financial condition. The Company cannot give assurance, however, that one or more of these matters will not have a material effect on its results of operations for the quarter or year in which they are resolved.
The Company assesses its legal proceedings and reserves are established if a loss is probable and the amount of such loss can be reasonably estimated. Many if not substantially all of the contingencies described below are subject to significant uncertainties and, therefore, determining the likelihood of a loss and the measurement of any loss can be complex and subject to judgment. With respect to legal proceedings where the Company has determined that a loss is reasonably possible but not probable, the Company is unable to estimate the amount or range of the reasonably possible loss due to the inherent difficulty of predicting the
outcome of and uncertainties regarding legal proceedings. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Management’s assessment of legal proceedings could change because of future determinations or the discovery of facts which are not presently known. Accordingly, the ultimate costs of resolving these proceedings may be substantially higher or lower than currently estimated.
Dollar Tree Active Matters
In April 2015, a distribution center employee filed a class action in California state court with allegations concerning wages, meal and rest breaks, recovery periods, wage statements and timely termination pay. The employee filed an amended complaint in which he abandoned his attempt to certify a nation-wide class of non-exempt distribution center employees for alleged improper calculation of overtime compensation. The Company removed this lawsuit to federal court. The court certified the case as a state-wide class action.
In April 2015, a former store manager filed a class action in California federal court alleging, among other things, that the Company failed to make wage statements readily available to employees who did not receive paper checks. On November 7, 2017, the jury found in favor of the Company. The plaintiff has filed an appeal from the verdict.
In August 2018, a former employee brought suit in California state court as a class action and as a Private Attorney General Act (“PAGA”) representative suit alleging the Company failed to provide all non-exempt California store employees with compliant rest and meal breaks, accrued vacation, accurate wage statements and final pay upon termination of employment.
In December 2018, two former employees brought a PAGA suit in California state court alleging that Dollar Tree Stores, Inc. and Dollar Tree Distribution, Inc. failed to provide non-exempt California store and distribution center employees with rest and meal breaks, suitable seating, overtime pay, minimum wage for all time worked, reporting time pay, accurate wage statements, timely payment of wages during and upon termination of employment, failed to reimburse business expenses, and made unlawful deductions from wage payments.
Several lawsuits have been filed against Dollar Tree, Family Dollar and their vendors alleging that personal powder products caused cancer. The Company does not believe the products it sold caused the illnesses. The Company believes these lawsuits are insured and is being indemnified by its third party vendors.
Dollar Tree Resolved Matters
In April 2016, the Company was served with a putative class action in Florida state court brought by a former store employee asserting the Company violated the Fair Credit Reporting Act in the way it handled background checks. The parties have settled the case for an amount which is not material.
In July 2017, two former employees filed suit in federal court in California, seeking to represent a class of current and former non-exempt employees alleging that the Company’s dress code required them to purchase such distinctive clothing that it constituted a uniform and the Company’s failure to reimburse them for the clothing violated California law. The former employees sought restitution, damages, penalties and injunctive relief. The Company entered into a settlement agreement which has received preliminary court approval and the Company has accrued the amount of the settlement.
In August 2017, 43 current and former employees filed suit against the Company in state court in California alleging improper classification as exempt employees which they allege resulted in, among other things, their failure to receive overtime compensation, rest and meal periods, accurate wage statements, and final pay upon termination of employment. The Company removed the case to federal court. As required by that court’s order, each plaintiff refiled his or her case individually so that the cases would be tried individually and not as a class. In June 2018, the Company mediated the 43 cases together. All of the cases have been dismissed with prejudice and the settlements were paid in 2018.
In August 2017, a former employee brought suit in California state court on a PAGA representative basis alleging the Company failed to provide him and all other California store associates with suitable seating when they were performing cashier functions. The parties settled the case and the lawsuit was dismissed with prejudice.
In November 2017, a current employee filed a PAGA representative action in California state court alleging the Company failed to make wage statements readily available to California store employees who do not receive paper checks. The lawsuit has been dismissed with prejudice.
In February 2018, a current store manager filed a statewide class action in Missouri state court alleging the Company’s store managers are improperly classified as exempt employees thereby entitling them to overtime pay, liquidated damages and damages for unjust enrichment. The case was dismissed with prejudice.
Family Dollar Active Matters
In January 2017, a customer filed a class action in federal court in Illinois alleging the Company violated various state consumer fraud laws as well as express and implied warranties by selling a product that purported to contain aloe when it did not. The requested class is limited to the state of Illinois. The Company believes that it is fully indemnified by the entities that supplied it with the product.
In January 2018, a former store manager and a former assistant store manager filed suit in California state court asserting class claims on behalf of themselves and their respective classes seeking to recover for working off the clock, noncompliant rest and meal periods and related claims. The plaintiffs have amended their complaint to add a PAGA claim but have also agreed to stay the PAGA and class claims pending the arbitration of their individual claims.
In June 2018, a former store manager filed suit in California state court asserting class and PAGA claims on behalf of himself and a class of current and former employees for alleged off the clock work, alleged failure to receive compliant rest and meal breaks and related claims.
In December 2018, a former assistant store manager filed a PAGA suit in California state court alleging the Company failed to provide rest and meal breaks, failed to pay minimum, regular and overtime wages, failed to maintain accurate records and provide accurate wage statements, failed to timely pay wages due upon termination of employment and failed to reimburse employees for business expenses.
Family Dollar Resolved Matters
In April 2017, a former store employee filed a lawsuit in California state court alleging off the clock work primarily for bag checks, failure to provide rest and meal breaks, and related claims. The court granted the Company’s motion to compel arbitration and stayed the case pending the outcome of the arbitration proceedings. Subsequently, the court allowed the plaintiff to amend her complaint to include PAGA claims which are not subject to arbitration. The parties have received preliminary court approval of the settlement they reached and the Company has accrued the amount of the settlement.
In June 2017, a former store employee filed suit in California state court asserting PAGA claims on behalf of herself and other allegedly aggrieved employees alleging the Company willfully caused their work time to go under reported so they failed to receive pay for time worked and related claims. The lawsuit has been dismissed without prejudice.
In December 2017, a former assistant store manager filed suit in California state court asserting PAGA claims on behalf of herself and other store managers and assistant store managers seeking wages for alleged off the clock work, noncompliant rest and meal breaks and related claims. The parties reached a settlement for which it has received preliminary court approval. The Company has accrued the amount of the settlement.
In August 2018, a former store manager filed a nationwide collective action in federal court in Texas asserting that she and other similarly situated store managers were improperly classified as exempt employees and are therefore owed overtime pay and other related compensation. The collective claims have been dismissed and the plaintiff has agreed to pursue her claims on an individual basis in arbitration.
In October 2018, a former employee filed a class and collective action in federal court in Arkansas alleging she and other similarly situated current and former store employees were improperly classified and worked off the clock in violation of the Fair Labor Standards Act and the Arkansas Minimum Wage Act and are therefore owed minimum wages for all time worked, overtime compensation and penalties. The former employee agreed to waive all class and collective action claims and the court stayed the case pending arbitration of her individual claims.
NOTE 6 - LONG-TERM DEBT
Long-term debt at February 2, 2019 and February 3, 2018 consists of the following:
| As of February 2, 2019 | As of February 3, 2018 | |||||||||||||||
| (in millions) | Principal | Unamortized Debt Discount, Premium and Issuance Costs | Principal | Unamortized Debt Discount, Premium and Issuance Costs | ||||||||||||
| 5.25% Acquisition Notes, due 2020 | $ | — | $ | — | $ | 750.0 | $ | 6.1 | ||||||||
| 5.75% Acquisition Notes, due 2023 | — | — | 2,500.0 | 30.8 | ||||||||||||
| Term Loan A-1 | — | — | 1,532.7 | 3.4 | ||||||||||||
| Term Loan B-2 | — | — | 650.0 | 8.6 | ||||||||||||
| $1.25 billion Tranche A Revolving Credit Facility | — | — | — | 12.6 | ||||||||||||
| 5.00% Senior Notes, due 2021 | 300.0 | (4.6 | ) | 300.0 | (6.8 | ) | ||||||||||
| $1.25 billion Revolving Credit Facility, interest payable at LIBOR, reset periodically, plus 1.25%, which was 3.76% at February 2, 2019 | — | 10.2 | — | — | ||||||||||||
| Senior Floating Rate Notes, due 2020, interest payable at LIBOR, reset quarterly, plus 0.70%, which was 3.43% at February 2, 2019 | 750.0 | 3.2 | — | — | ||||||||||||
| 3.70% Senior Notes, due 2023 | 1,000.0 | 7.5 | — | — | ||||||||||||
| 4.00% Senior Notes, due 2025 | 1,000.0 | 7.2 | — | — | ||||||||||||
| 4.20% Senior Notes, due 2028 | 1,250.0 | 11.2 | — | — | ||||||||||||
| Total | $ | 4,300.0 | $ | 34.7 | $ | 5,732.7 | $ | 54.7 |
Maturities of long-term debt are as follows (in millions):
| 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||
| $ | — | $ | 750.0 | $ | 300.0 | $ | — | $ | 1,000.0 | $ | 2,250.0 |
Senior Credit Facilities
On April 19, 2018, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, providing for $2.03 billion in senior credit facilities (the “Senior Credit Facilities”), consisting of a $1.25 billion revolving credit facility (the “Revolving Credit Facility”), of which up to $350.0 million is available for letters of credit, and a $782.0 million term loan facility (the “Term Loan Facility”), which was scheduled to mature on April 19, 2020. The loans under the Term Loan Facility bore interest at an initial interest rate of LIBOR, reset periodically, plus 1.00%, subject to adjustment based on (i) the Company’s credit ratings and (ii) the Company’s leverage ratio. The Company borrowed the entire $782.0 million Term Loan Facility on April 19, 2018 and repaid the entire amount in January 2019.
The Revolving Credit Facility matures on April 19, 2023, subject to extensions permitted under the Credit Agreement. The loans under the Revolving Credit Facility bore interest at an initial interest rate of LIBOR, reset periodically, plus 1.25%, subject to adjustment based on (i) the Company’s credit ratings and (ii) the Company’s leverage ratio. Based on these factors, interest on the loans under the Revolving Credit Facility may range from LIBOR plus 1.00% to 1.50%. At February 2, 2019, the Revolving Credit Facility bore interest at LIBOR plus1.25%. The Company pays certain commitment fees in connection with the Revolving Credit Facility. The Senior Credit Facilities allow voluntary repayment of outstanding loans at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans. There is no required amortization under the Senior Credit Facilities.
The Senior Credit Facilities contain a number of affirmative and negative covenants that, among other things, and subject to certain significant baskets and exceptions, restrict the Company’s ability to incur subsidiary indebtedness, incur liens, sell all or substantially all of the Company’s (including the Company’s subsidiaries’) assets and consummate certain fundamental changes. The Senior Credit Facilities also contain a maximum rent-adjusted leverage ratio covenant and a minimum fixed charge coverage ratio covenant. The Credit Agreement provides for certain events of default which, if any of them occurs, would permit or require the loans under the Senior Credit Facilities to be declared due and payable and the commitments thereunder to be terminated.
Senior Notes
On April 19, 2018, the Company completed the registered offering of $750.0 million aggregate principal amount of Senior Floating Rate Notes due 2020 (the “Floating Rate Notes”), $1.0 billion aggregate principal amount of 3.70% Senior Notes due 2023 (the “2023 Notes”), $1.0 billion aggregate principal amount of 4.00% Senior Notes due 2025 (the “2025 Notes”) and $1.25 billion aggregate principal amount of 4.20% Senior Notes due 2028 (the “2028 Notes” and together with the 2023 Notes and the 2025 Notes, the “Fixed Rate Notes”; and the Fixed Rate Notes together with the Floating Rate Notes, the “Notes”).
The Notes were issued pursuant to an indenture, dated as of April 2, 2018, between the Company and U.S. Bank National Association, as trustee, as supplemented by the First Supplemental Indenture dated as of April 19, 2018 (the “First Supplemental Indenture”).
The Notes are unsecured, unsubordinated obligations of the Company and rank equal in right of payment to all of the Company’s existing and future debt and other obligations that are not, by their terms, expressly subordinated in right of payment to the Notes.
The 2023 Notes mature on May 15, 2023 and bear interest at the rate of 3.70% annually. The 2025 Notes mature on May 15, 2025 and bear interest at the rate of 4.00% annually. The 2028 Notes mature on May 15, 2028 and bear interest at the rate of 4.20% annually. The Company is required to pay interest on the Fixed Rate Notes semiannually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2018, to holders of record on the preceding May 1 and November 1, respectively. The Floating Rate Notes mature on April 17, 2020 and bear interest at a floating rate, reset quarterly, equal to LIBOR plus 70 basis points. The Company is required to pay interest on the Floating Rate Notes quarterly, in arrears, on January 17, April 17, July 17 and October 17 of each year, beginning on July 17, 2018, to holders of record on the preceding January 3, April 3, July 3 and October 3, respectively.
The Company may redeem the Floating Rate Notes in whole or in part at any time beginning on April 22, 2019 at a price equal to 100% of the principal amount of Floating Rate Notes being redeemed plus accrued but unpaid interest to, but excluding, the redemption date. The Company may redeem the Fixed Rate Notes of each series in whole or in part, at its option, at any time and from time to time prior to (i) in the case of the 2023 Notes, April 15, 2023, (ii) in the case of the 2025 Notes, March 15, 2025 and (iii) in the case of the 2028 Notes, February 15, 2028 (each such date with respect to the applicable series, the “Applicable Par Call Date”), in each case, at a “make-whole” price described in the First Supplemental Indenture plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, on or after the Applicable Par Call Date, the Company may redeem the Fixed Rate Notes of the applicable series, at any time in whole or from time to time in part, at a redemption price equal to 100% of the principal amount thereof.
In the event of a Change of Control Triggering Event, as defined in the indenture, with respect to any series, the holders of the Notes of such series may require the Company to purchase for cash all or a portion of their Notes of such series at a purchase price equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase. The indenture limits the ability of the Company and its subsidiaries, subject to significant baskets and exceptions, to incur certain secured debt. The First Supplemental Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Notes to become or to be declared due and payable, as applicable.
Upon the acquisition of Family Dollar in 2015, the Company assumed the liability for $300.0 million of 5.00% Senior Notes due February 1, 2021. The Company may retire the notes early at a redemption price equal to the greater of (1) 100% of the principal amount of the notes to be redeemed and (2) the present value of the remaining scheduled payments of principal and interest at a specified treasury rate as of the redemption date plus 30 basis points, plus, in either case, accrued and unpaid interest up to the redemption date.
Repayments of Long-term Debt During 2018
During the first quarter of 2018, the Company redeemed its $750.0 million aggregate principal amount of 5.25% Acquisition Notes due 2020 (the “2020 Notes”) and accelerated the amortization of debt-issuance costs associated with the 2020 Notes of $6.1 million.
In connection with entry into the Credit Agreement and the offering of the Notes discussed above, the Company used the proceeds of borrowings under the Senior Credit Facilities, together with the net proceeds from the offering of the Notes and cash on hand to repay all of the outstanding loans under its existing senior secured credit facilities, including its Term Loan A-1 and Term Loan B-2, and to redeem all of its outstanding 5.75% Acquisition Notes due 2023.
The credit agreement governing the then-existing senior secured credit facilities, dated as of March 9, 2015 (as amended, restated, supplemented or otherwise modified from time to time, the “Existing Credit Agreement”) was terminated and all of the guarantees of the obligations under the Existing Credit Agreement were terminated and all liens granted under the Existing Credit
Agreement, including those equally and ratably securing the $300.0 million 5.00% Senior Notes due 2021 issued by the Company’s subsidiary, Family Dollar Stores, Inc., were released. Upon the termination of the Existing Credit Agreement, the Company paid certain lenders thereunder a prepayment premium of $6.5 million, which was equal to 1.00% of the outstanding principal amount of the Term Loan B-2 loans under the Existing Credit Agreement and is included in “Interest expense, net” within the accompanying consolidated statements of operations for the year ended February 2, 2019.
The Company redeemed all of its outstanding $2.5 billion aggregate principal amount of 5.75% Acquisition Notes due 2023 and the indenture governing the notes was satisfied and discharged. The Company paid a redemption premium of $107.8 million, which was equal to 4.313% of the outstanding principal amount of the Acquisition Notes due 2023 and is included in “Interest expense, net” within the accompanying consolidated statements of operations for the year ended February 2, 2019.
Related to the redemption of the 5.75% Acquisition Notes due 2023 and the repayment of the Company’s Existing Credit Agreement, the Company accelerated the expensing of approximately $41.2 million of amortizable non-cash deferred financing costs and expensed approximately $0.4 million in transaction-related costs. Additionally, the Company capitalized approximately $36.9 million of deferred financing costs and recorded an original issue discount in connection with entry into the Credit Agreement and the offering of the Notes, which are being amortized over the terms of the Senior Credit Facilities and Notes.
Debt Covenants
As of February 2, 2019, the Company was in compliance with its debt covenants.
NOTE 7 - FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
Level 3 - Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
As required, financial assets and liabilities are classified in the fair value hierarchy in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table sets forth the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:
| (in millions) | February 2, 2019 | February 3, 2018 | ||||||
| Level 1 | ||||||||
| Deferred compensation plan assets | $ | 21.8 | $ | 20.7 |
Deferred compensation plan assets are held pursuant to deferred compensation plans for certain officers and executives. The deferred compensation plan assets are recorded in “Other assets” within the accompanying consolidated balance sheets and a corresponding liability is recorded in “Other liabilities” within the accompanying consolidated balance sheets.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is
evidence of impairment). The Company reviews certain store assets for evidence of impairment. The fair values are determined based on the income approach, in which the Company utilizes internal cash flow projections over the life of the underlying lease agreements discounted based on the Company’s risk-adjusted rate. These measures of fair value, and related inputs, are considered a Level 3 approach under the fair value hierarchy. Refer to “Note 1 - Summary of Significant Accounting Policies” under the caption “Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of” for information regarding the impairment charges recorded in fiscal 2018, 2017 and 2016.
The Company’s indefinite-lived intangible assets are recorded at carrying value, and, if impaired, are adjusted to fair value using Level 3 inputs. See “Note 3 - Goodwill and Nonamortizing Intangible Assets” for further information regarding the process of determining the fair value of these assets.
Fair Value of Financial Instruments
The carrying amounts of Cash and cash equivalents, Restricted cash and Accounts payable as reported in the accompanying consolidated balance sheets approximate fair value due to their short-term maturities.
The aggregate fair values and carrying values of the Company’s long-term borrowings were as follows:
| February 2, 2019 | February 3, 2018 | |||||||||||||||
| (in millions) | Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||
| Level 1 | ||||||||||||||||
| Senior Notes and Acquisition Notes | $ | 4,198.6 | $ | 4,275.5 | $ | 3,684.6 | $ | 3,519.9 | ||||||||
| Level 2 | ||||||||||||||||
| Term loans | — | — | 2,187.6 | 2,170.7 |
The fair values of the Company’s 5.00% Senior Notes due 2021 and the Notes (collectively, the “Senior Notes”), and the fair values of the 5.25% Acquisition Notes due 2020 and 5.75% Acquisition Notes due 2023 (together, “the Acquisition Notes”) that were redeemed during the first quarter of 2018, were determined using Level 1 inputs as quoted prices in active markets for identical assets or liabilities are available. The fair values of the Term Loan A-1 and Term Loan B-2, which the Company prepaid in full during the first quarter of 2018, were determined using Level 2 inputs as quoted prices are readily available from pricing services, but the prices are not published. The carrying values of the Company’s Revolving Credit Facility at February 2, 2019 and the Company’s Tranche A Revolving Credit Facility at February 3, 2018, approximated their fair values because the interest rates vary with market interest rates.
NOTE 8 - SHAREHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock, $0.01 par value per share. No preferred shares are issued and outstanding at February 2, 2019 and February 3, 2018.
Net Income (Loss) Per Share
The following table sets forth the calculations of basic and diluted net income (loss) per share:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Basic net income (loss) per share: | ||||||||||||
| Net income (loss) | $ | (1,590.8 | ) | $ | 1,714.3 | $ | 896.2 | |||||
| Weighted average number of shares outstanding | 237.9 | 236.8 | 235.7 | |||||||||
| Basic net income (loss) per share | $ | (6.69 | ) | $ | 7.24 | $ | 3.80 | |||||
| Diluted net income (loss) per share: | ||||||||||||
| Net income (loss) | $ | (1,590.8 | ) | $ | 1,714.3 | $ | 896.2 | |||||
| Weighted average number of shares outstanding | 237.9 | 236.8 | 235.7 | |||||||||
| Dilutive effect of stock options and restricted stock (as determined by applying the treasury stock method) | 0.8 | 0.9 | 1.1 | |||||||||
| Weighted average number of shares and dilutive potential shares outstanding | 238.7 | 237.7 | 236.8 | |||||||||
| Diluted net income (loss) per share | $ | (6.66 | ) | $ | 7.21 | $ | 3.78 |
At February 2, 2019, February 3, 2018 and January 28, 2017, substantially all of the stock options outstanding were included in the calculation of the weighted average number of shares and dilutive potential shares outstanding.
Share Repurchase Programs
The Company repurchases shares on the open market and under Accelerated Share Repurchase agreements. The Company did not repurchase any shares of common stock in fiscal 2018, fiscal 2017 or fiscal 2016. At February 2, 2019, the Company had $1.0 billion remaining under Board repurchase authorization.
NOTE 9 – EMPLOYEE BENEFIT PLANS
Dollar Tree Retirement Savings Plan
The Company maintains a defined contribution profit sharing and 401(k) plan which is available to all full-time, United States-based employees over 21 years of age. Eligible employees may make elective salary deferrals. The Company may make contributions, at its discretion, to eligible employees who have completed one year of service in which they have worked at least 1,000 hours.
Prior to January 1, 2017, the Company maintained a defined contribution 401(k) plan which was available to all eligible Family Dollar employees and was known as the Family Dollar Employee Savings and Retirement Plan and Trust (“Family Dollar Plan”). The Family Dollar Plan provided the ability for the Company to make contributions at its discretion. Effective January 1, 2017, all the assets of the Family Dollar Plan were merged into the Dollar Tree Retirement Savings Plan, which was formerly named the Dollar Tree Inc. Affiliates and Subsidiaries Profit Sharing and 401(k) Retirement Plan.
Contributions to and reimbursements by the Company of expenses of the plans in the accompanying consolidated statements of operations were as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Dollar Tree Retirement Savings Plan, formerly Dollar Tree Inc. Affiliates and Subsidiaries Profit Sharing and 401(k) Retirement Plan | $ | 41.4 | $ | 52.9 | $ | 39.9 | ||||||
| Family Dollar Employee Savings and Retirement Plan and Trust | — | — | 9.2 | |||||||||
| Total | $ | 41.4 | $ | 52.9 | $ | 49.1 |
Of the total expense above, $8.7 million, $7.8 million and $7.9 million was included in “Cost of sales” in the accompanying consolidated statements of operations for the years ended February 2, 2019, February 3, 2018 and January 28, 2017, respectively, with the remaining expense included in “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
Eligible employees vest in the Company’s profit sharing contributions based on the following schedule:
| Ÿ | 20% after two years of service |
| Ÿ | 40% after three years of service |
| Ÿ | 60% after four years of service |
| Ÿ | 100% after five years of service |
All eligible employees are immediately vested in any Company match contributions under the 401(k) portion of the plan.
Dollar Tree and Family Dollar Supplemental Deferred Compensation Plan
The Company has a deferred compensation plan which provides certain officers and executives the ability to defer a portion of their base compensation and bonuses and invest their deferred amounts. The plan is a nonqualified plan and the Company does not make contributions to this plan or guarantee earnings. The deferred amounts and earnings thereon are payable to participants, or designated beneficiaries, at either specified future dates, or upon separation of service or death. Total cumulative participant deferrals and earnings were approximately $17.0 million and $15.0 million at February 2, 2019 and February 3, 2018, respectively, and are included in “Other liabilities” within the accompanying consolidated balance sheets. The related assets are included in “Other assets” within the accompanying consolidated balance sheets. The plan was formerly named the Family Dollar Compensation Deferral Plan and effective June 15, 2017, was renamed the Dollar Tree and Family Dollar Supplemental Deferred Compensation Plan.
Dollar Tree, Inc. Supplemental Deferred Compensation Plan
The Company has a deferred compensation plan which, prior to January 1, 2017, provided certain Dollar Tree officers and executives the ability to defer a portion of their base compensation and bonuses and invest their deferred amounts. The plan is a nonqualified plan and the Company could have made discretionary contributions. The deferred amounts and earnings thereon are payable to participants, or designated beneficiaries, at specified future dates, or upon retirement or death. Total cumulative participant deferrals and earnings were $4.8 million and $5.7 million at February 2, 2019 and February 3, 2018, respectively, and are included in “Other liabilities” within the accompanying consolidated balance sheets. The related assets are included in “Other assets” within the accompanying consolidated balance sheets. The Company did not make any discretionary contributions in the years ended February 2, 2019, February 3, 2018, or January 28, 2017.
Effective December 31, 2016, the plan was frozen for contributions earned after calendar year 2016. The plan continues to exist and retains all contributions and earnings previously allocated to it. Participants can continue to make investment and distribution election changes. All contributions on or after January 1, 2017 are allocated to the Dollar Tree and Family Dollar Supplemental Deferred Compensation Plan.
NOTE 10 - STOCK-BASED COMPENSATION PLANS
Fixed Stock-Based Compensation Plans
Under the Company’s 2011 Omnibus Incentive Plan (“Omnibus Plan”), the Company may grant to the Company’s employees, including executive officers and independent contractors, up to 4.0 million shares of its Common Stock plus any shares available under former plans which were previously approved by the shareholders. The Omnibus Plan permits the Company to grant equity awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance bonuses, performance units, non-employee director stock options and other equity-related awards. These awards generally vest over a three-year period with a maximum term of 10 years.
Stock appreciation rights may be awarded alone or in tandem with stock options. When the stock appreciation rights are exercisable, the holder may surrender all or a portion of the unexercised stock appreciation right and receive in exchange an amount equal to the excess of the fair market value at the date of exercise over the fair market value at the date of the grant. No stock appreciation rights have been granted to date.
Any restricted stock or RSUs awarded are subject to certain general restrictions. The restricted stock shares or units may not be sold, transferred, pledged or disposed of until the restrictions on the shares or units have lapsed or have been removed under the provisions of the plan. In addition, if a holder of restricted shares or units ceases to be employed by the Company, any shares or units in which the restrictions have not lapsed will be forfeited.
The 2013 Director Deferred Compensation Plan permits any of the Company’s directors who receive a retainer or other fees for Board or Board committee service to defer all or a portion of such fees until a future date, at which time they may be paid in cash or shares of the Company’s common stock, or receive all or a portion of such fees in non-statutory stock options. Deferred fees that are paid out in cash will earn interest at the 30-year Treasury Bond Rate. If a director elects to be paid in common stock, the number of shares will be determined by dividing the deferred fee amount by the closing market price of a share of the Company’s common stock on the date of deferral. The number of options issued to a director will equal the deferred fee amount divided by 33% of the price of a share of the Company’s common stock. The exercise price will equal the fair market value of the Company’s common stock at the date the option is issued. The options are fully vested when issued and have a term of 10 years.
In conjunction with the acquisition of Family Dollar in 2015, the Company assumed the Family Dollar Stores, Inc. 2006 Incentive Plan (the “2006 Plan”). The 2006 Plan permitted the granting of a variety of compensatory award types, including stock options and performance share rights.
The 2003 Non-Employee Director Stock Option Plan (NEDP) provided non-qualified stock options to non-employee members of the Company’s Board of Directors. The exercise price of each stock option granted equaled the closing market price of the Company’s stock on the date of grant. The options generally vested immediately. This plan was terminated on June 16, 2011 and replaced with the Omnibus Plan.
Total stock-based compensation expense was recorded in the accompanying consolidated statements of operations as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Cost of sales | $ | 12.1 | $ | 12.8 | $ | 10.8 | ||||||
| Selling, general and administrative expense | 51.2 | 53.0 | 49.5 | |||||||||
| Total stock-based compensation expense | $ | 63.3 | $ | 65.8 | $ | 60.3 |
Restricted Stock
The Company issues service-based RSUs to employees and officers and issues performance-based RSUs to certain officers of the Company. The Company recognizes expense based on the estimated fair value of the RSUs granted over the requisite service period, which is generally three years, on a straight-line basis or a shorter period based on the retirement eligibility of the grantee. The fair value of RSUs is determined using the Company’s closing stock price on the date of grant.
The following table summarizes the status of RSUs as of February 2, 2019 and changes during the year then ended:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||
| Nonvested at February 3, 2018 | 1,525,252 | $ | 79.37 | ||||
| Granted | 838,335 | 94.34 | |||||
| Vested | (681,202 | ) | 79.84 | ||||
| Forfeited | (236,285 | ) | 84.23 | ||||
| Nonvested at February 2, 2019 | 1,446,100 | $ | 86.96 |
In connection with the vesting of RSUs in 2018, 2017 and 2016, certain employees elected to receive shares net of minimum statutory tax withholding amounts which totaled $23.2 million, $27.4 million and $21.9 million, respectively. The total fair value of the restricted shares vested during the years ended February 2, 2019, February 3, 2018 and January 28, 2017 was $54.4 million, $60.3 million and $42.4 million, respectively. The weighted average grant date fair value of the restricted shares granted in 2018, 2017 and 2016 was $94.34, $78.63 and $80.13, respectively. As of February 2, 2019, there was approximately $43.4 million of total unrecognized compensation expense related to these RSUs which is expected to be recognized over a weighted-average period of 21.8 months.
Stock Options
Stock options are valued using the Black-Scholes option-pricing model and compensation expense is recognized on a straight-line basis, net of estimated forfeitures, over the requisite service period.
Certain of the Company’s directors elected to defer their compensation into stock options under the 2013 Director Deferred Compensation Plan. These options vest immediately and are expensed on the grant date. In 2016, the Company granted 0.2 million stock options with a fair value of $4.0 million from the Omnibus Plan to an officer of the Company. The fair value of these stock options is being expensed over the five-year vesting period. The Company recognized $1.3 million of expense related to these stock options in both 2018 and 2017. The Company did not recognize any expense related to these stock options in 2016.
The weighted average assumptions used in the Black-Scholes option pricing model for the officer award granted in 2016 are as follows:
| Fiscal 2016 | ||||
| Expected term in years | 6.50 | |||
| Expected volatility | 24.51 | % | ||
| Annual dividend yield | — | % | ||
| Risk free interest rate | 2.09 | % | ||
| Weighted-average fair value of options granted during the period | $ | 22.10 |
Amounts for options granted in 2018 and 2017 are immaterial.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model. The expected term of the awards granted is based on an analysis of historical and expected future exercise behavior. Expected volatility is derived from an analysis of the historical volatility of the Company’s publicly traded stock. The risk free rate is based on the U.S. Treasury rates on the grant date with maturity dates approximating the expected life of the option on the grant date.
The following tables summarize information about options outstanding at February 2, 2019 and changes during the year then ended:
| Number of Shares | Weighted Average Per Share Exercise Price | Weighted Average Remaining Term | Aggregate Intrinsic Value (in millions) | ||||||||||
| Outstanding, beginning of period | 523,083 | $ | 70.14 | ||||||||||
| Granted | 9,804 | 87.82 | |||||||||||
| Exercised | (136,073 | ) | 54.89 | ||||||||||
| Forfeited | (29,618 | ) | 71.05 | ||||||||||
| Outstanding, end of period | 367,196 | $ | 76.17 | 5.94 | $ | 5.3 | |||||||
| Options vested and exercisable at February 2, 2019 | 230,378 | $ | 77.41 | 5.94 | $ | 3.0 |
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Options Outstanding at February 2, 2019 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Options Exercisable at February 2, 2019 | Weighted Average Exercise Price | |||||||||||
| $56.90 to $76.72 | 181,940 | 5.61 | $ | 73.97 | 46,196 | $ | 73.73 | |||||||||
| $76.73 to $76.97 | 151,404 | 5.70 | 76.97 | 151,404 | 76.97 | |||||||||||
| $76.98 to $79.75 | 12,031 | 6.38 | 78.14 | 10,957 | 78.10 | |||||||||||
| $79.76 to $85.00 | 11,581 | 7.77 | 82.46 | 11,581 | 82.46 | |||||||||||
| $85.01 to $107.31 | 10,240 | 8.82 | 94.02 | 10,240 | 94.02 | |||||||||||
| $56.90 to $107.31 | 367,196 | 5.94 | $ | 76.17 | 230,378 | $ | 77.41 |
The intrinsic value of options exercised during 2018, 2017 and 2016 was approximately $12.3 million, $18.3 million and $11.8 million, respectively.
Employee Stock Purchase Plan
Under the Dollar Tree, Inc. Employee Stock Purchase Plan (ESPP), the Company is authorized to issue up to 8,278,124 shares of Common Stock to eligible employees. Under the terms of the ESPP, employees can choose to have up to 10% of their annual base earnings withheld to purchase the Company’s common stock. The purchase price of the stock is 85% of the lower of the price at the beginning or the end of the quarterly offering period. Under the ESPP, the Company has sold 5,315,026 shares as of February 2, 2019.
The fair value of the employees’ purchase rights is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||
| Expected term | 3 months | 3 months | 3 months | |||||
| Expected volatility | 18.8 | % | 10.9 | % | 14.6 | % | ||
| Annual dividend yield | — | % | — | % | — | % | ||
| Risk free interest rate | 1.9 | % | 1.1 | % | 0.4 | % |
The weighted average per share fair value of purchase rights granted in 2018, 2017 and 2016 was $18.64, $13.62 and $13.43, respectively. Total expense recognized for these purchase rights was $3.3 million, $2.0 million and $1.6 million in 2018, 2017 and 2016, respectively.
NOTE 11 – SEGMENT REPORTING
The Company operates a chain of more than 15,200 retail discount stores in 48 states and five Canadian provinces. The Company’s operations are conducted in two reporting business segments: Dollar Tree and Family Dollar. The Company defines its segments as those operations whose results its CODM regularly reviews to analyze performance and allocate resources.
The Company measures the results of its segments using, among other measures, each segment’s net sales, gross profit and operating income (loss). The Company may revise the measurement of each segment’s operating income (loss), including the allocation of distribution center and store support center costs, as determined by the information regularly reviewed by the CODM. If the measurement of a segment changes, prior period amounts and balances would be reclassified to be comparable to the current period’s presentation.
Dollar Tree segment net sales by merchandise type are as follows:
| Year Ended | |||||||||||||||||||||
| February 2, | February 3, | January 28, | |||||||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | ||||||||||||||||||
| Dollar Tree segment net sales by merchandise type: | |||||||||||||||||||||
| Consumable | $ | 5,703.8 | 48.7 | % | $ | 5,470.6 | 49.0 | % | $ | 4,957.8 | 48.9 | % | |||||||||
| Variety | 5,457.8 | 46.6 | % | 5,169.1 | 46.3 | % | 4,714.5 | 46.5 | % | ||||||||||||
| Seasonal | 550.5 | 4.7 | % | 524.7 | 4.7 | % | 466.4 | 4.6 | % | ||||||||||||
| Total net sales | $ | 11,712.1 | 100.0 | % | $ | 11,164.4 | 100.0 | % | $ | 10,138.7 | 100.0 | % |
Family Dollar segment net sales by merchandise type are as follows:
| Year Ended | |||||||||||||||||||||
| February 2, | February 3, | January 28, | |||||||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | ||||||||||||||||||
| Family Dollar segment net sales by merchandise type: | |||||||||||||||||||||
| Consumable | $ | 8,466.7 | 76.2 | % | $ | 8,344.1 | 75.3 | % | $ | 7,893.1 | 74.6 | % | |||||||||
| Home products | 911.1 | 8.2 | % | 930.8 | 8.4 | % | 920.5 | 8.7 | % | ||||||||||||
| Apparel and accessories | 700.0 | 6.3 | % | 731.3 | 6.6 | % | 740.6 | 7.0 | % | ||||||||||||
| Seasonal and electronics | 1,033.4 | 9.3 | % | 1,074.9 | 9.7 | % | 1,026.3 | 9.7 | % | ||||||||||||
| Total net sales | $ | 11,111.2 | 100.0 | % | $ | 11,081.1 | 100.0 | % | $ | 10,580.5 | 100.0 | % |
Gross profit by segment is as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Gross profit: | ||||||||||||
| Dollar Tree | $ | 4,137.5 | $ | 3,998.5 | $ | 3,584.7 | ||||||
| Family Dollar | 2,810.0 | 3,023.4 | 2,810.0 | |||||||||
| Total gross profit | $ | 6,947.5 | $ | 7,021.9 | $ | 6,394.7 |
Depreciation and amortization expense by segment is as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Depreciation and amortization expense: | ||||||||||||
| Dollar Tree | $ | 271.7 | $ | 251.8 | $ | 241.3 | ||||||
| Family Dollar | 349.7 | 359.7 | 396.5 | |||||||||
| Total depreciation and amortization expense | $ | 621.4 | $ | 611.5 | $ | 637.8 |
Operating income (loss) by segment is as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Operating income (loss): | ||||||||||||
| Dollar Tree | $ | 1,502.5 | $ | 1,481.9 | $ | 1,305.3 | ||||||
| Family Dollar | (2,442.0 | ) | 517.2 | 399.5 | ||||||||
| Total operating income (loss) | $ | (939.5 | ) | $ | 1,999.1 | $ | 1,704.8 |
Capital expenditures by segment are as follows:
| Year Ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Capital expenditures: | ||||||||||||
| Dollar Tree | $ | 556.5 | $ | 383.1 | $ | 404.9 | ||||||
| Family Dollar | 260.6 | 249.1 | 159.8 | |||||||||
| Total capital expenditures | $ | 817.1 | $ | 632.2 | $ | 564.7 |
Total assets by segment are as follows:
| As of | ||||||||
| February 2, | February 3, | |||||||
| (in millions) | 2019 | 2018 | ||||||
| Total assets: | ||||||||
| Dollar Tree | $ | 4,310.1 | $ | 4,113.4 | ||||
| Family Dollar | 9,191.1 | 12,219.4 | ||||||
| Total assets | $ | 13,501.2 | $ | 16,332.8 |
Total goodwill by segment is as follows:
| As of | ||||||||
| February 2, | February 3, | |||||||
| (in millions) | 2019 | 2018 | ||||||
| Total goodwill: | ||||||||
| Dollar Tree | $ | 376.5 | $ | 347.1 | ||||
| Family Dollar | 1,920.1 | 4,678.1 | ||||||
| Total goodwill | $ | 2,296.6 | $ | 5,025.2 |
Goodwill is reassigned between segments when stores are re-bannered between segments. In 2018, the Company reassigned $31.0 million of goodwill from Family Dollar to Dollar Tree as a result of re-bannering. In addition, in the fourth quarter of 2018, the Company recorded a $2.73 billion goodwill impairment charge to write down the Family Dollar goodwill. Refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets” for additional detail regarding the impairment of the Family Dollar goodwill.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth certain items from the Company’s unaudited consolidated statements of operations for each quarter of fiscal year 2018 and 2017. The unaudited information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this report and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of results for a full year or for any future period.
| (dollars in millions, except diluted net income (loss) per share data) | First Quarter1 | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Fiscal 2018: | ||||||||||||||||
| Net sales | $ | 5,553.7 | $ | 5,525.6 | $ | 5,538.8 | $ | 6,205.2 | ||||||||
| Gross profit2 | $ | 1,699.6 | $ | 1,663.9 | $ | 1,671.9 | $ | 1,912.1 | ||||||||
| Operating income (loss)3 | $ | 437.6 | $ | 382.5 | $ | 387.8 | $ | (2,147.4 | ) | |||||||
| Net income (loss)2,3,4 | $ | 160.5 | $ | 273.9 | $ | 281.8 | $ | (2,307.0 | ) | |||||||
| Diluted net income (loss) per share2,3,4 | $ | 0.67 | $ | 1.15 | $ | 1.18 | $ | (9.66 | ) | |||||||
| Stores open at end of quarter | 14,957 | 15,073 | 15,187 | 15,237 | ||||||||||||
| Comparable store net sales change | 1.4 | % | 1.9 | % | 1.0 | % | 2.3 | % | ||||||||
| Fiscal 2017: | ||||||||||||||||
| Net sales | $ | 5,287.1 | $ | 5,281.2 | $ | 5,316.6 | $ | 6,360.6 | ||||||||
| Gross profit | $ | 1,627.1 | $ | 1,627.8 | $ | 1,666.0 | $ | 2,101.0 | ||||||||
| Operating income5 | $ | 388.8 | $ | 419.5 | $ | 425.2 | $ | 765.6 | ||||||||
| Net income6 | $ | 200.5 | $ | 233.8 | $ | 239.9 | $ | 1,040.1 | ||||||||
| Diluted net income per share6 | $ | 0.85 | $ | 0.98 | $ | 1.01 | $ | 4.37 | ||||||||
| Stores open at end of quarter | 14,482 | 14,581 | 14,744 | 14,835 | ||||||||||||
| Comparable store net sales change | 0.5 | % | 2.4 | % | 3.3 | % | 2.5 | % |
1 Easter was observed on April 1, 2018 and April 16, 2017.
2 In the fourth quarter of 2018, the Company recorded $40.0 million in sku rationalization markdown expense in the Family Dollar segment, which decreased net income (loss) and diluted net income (loss) per share by $30.8 million and $0.13 per share, respectively, in the fourth quarter of 2018.
3 Based on the Company’s strategic and operational reassessment of the Family Dollar segment, management determined there were indicators that the goodwill of the business may be impaired. Accordingly, a goodwill impairment test was performed in the fourth quarter of fiscal 2018. The results of the impairment test showed that the fair value of the Family Dollar business was lower than the carrying value resulting in a $2.73 billion non-cash pre-tax and after-tax goodwill impairment charge. For additional information regarding the impairment of the Family Dollar goodwill, refer to “Note 3 - Goodwill and Nonamortizing Intangible Assets.” This goodwill impairment charge reduced diluted net income (loss) per share by $11.41 per share in the fourth quarter of 2018.
In the fourth quarter of 2018, the Company reviewed certain long-lived assets and identifiable intangible assets for impairment. As a result of its impairment analysis, the Company recorded charges of $13.0 million to write down certain store assets, including $6.1 million associated with impairment of favorable lease rights. These store impairment charges decreased net income (loss) and diluted net income (loss) per share in the fourth quarter of 2018 by $10.0 million and $0.04 per share, respectively.
4 In the first quarter of 2018, the Company refinanced its long-term debt obligations, resulting in the payment of redemption premiums totaling $114.3 million. In addition, the Company accelerated the expensing of approximately $41.2 million of amortizable non-cash deferred financing costs and expensed approximately $0.4 million in transaction-related costs. For additional information regarding these transactions, refer to “Note 6 - Long-Term Debt.” This refinancing of the Company’s long-term debt decreased net income (loss) and diluted net income (loss) per share in the first quarter of 2018 by $123.6 million and $0.52 per share, respectively.
5 In the first and second quarters of 2017, the Company incurred $50.9 million and $2.6 million, respectively, in impairment charges related to its divestiture-related receivable from Dollar Express. In the fourth quarter of 2017, the Company settled a lawsuit with Dollar Express related to the divestiture, under which Dollar Express paid the Company $35.0 million of the impaired receivable.
6 In the first, second and fourth quarters of 2017, net income and diluted net income per share were affected, net of tax, by the impairment charges and settlement, respectively, noted above, in the amounts of $31.6 million and $0.13 per share, $1.6 million and $0.01 per share, and $21.4 million and $0.09 per share, respectively.
In the fourth quarter of 2017, the Company reevaluated its workers’ compensation insurance reserves. As a result of the effect of re-bannered Family Dollar stores, among other factors, the Company determined that the Dollar Tree workers’ compensation loss reserves were not as predictable as they were previously. Therefore, the Company concluded that it was no longer appropriate to discount these reserves. The increase in the Dollar Tree workers’ compensation reserve resulting from the change to record the reserves on an undiscounted basis decreased fourth quarter 2017 net income and diluted net income per share by $8.0 million and $0.03 per share, respectively.
Also, on January 30, 2018, the Company provided an irrevocable notice to the holders of the $750.0 million 2020 Notes to call the 2020 Notes and recorded a redemption premium of $9.8 million. As a result, fourth quarter 2017 net income and diluted net income per share decreased by $6.2 million and $0.03 per share, respectively.
In addition, as a result of the enactment of the TCJA on December 22, 2017, fourth quarter 2017 net income and diluted net income per share increased by $583.7 million and $2.45 per share, respectively.
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