filings.toolsItem 16. Form 10-K Summary
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Item 16. Form 10-K Summary
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| THE TJX COMPANIES, INC. | ||||||
| By | /s/ SCOTT GOLDENBERG | |||||
| Dated: March 28, 2017 | Scott Goldenberg, Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| /s/ ERNIE HERRMAN Ernie Herrman, Chief Executive Officer, President and Director (Principal Executive Officer) | /s/ SCOTT GOLDENBERG Scott Goldenberg, Chief Financial Officer (Principal Financial and Accounting Officer) | |
| ZEIN ABDALLA* Zein Abdalla, Director | AMY B. LANE* Amy B. Lane, Director | |
| JOSE B. ALVAREZ* José B. Alvarez, Director | CAROL MEYROWITZ* Carol Meyrowitz, Executive Chairman of the Board of Directors | |
| ALAN M. BENNETT* Alan M. Bennett, Director | JACKWYN L. NEMEROV* Jackwyn L. Nemerov, Director | |
| DAVID T. CHING* David T. Ching, Director | JOHN F. O’BRIEN* John F. O’Brien, Director | |
| MICHAEL F. HINES* Michael F. Hines, Director | WILLOW B. SHIRE* Willow B. Shire, Director |
| *BY | /s/ SCOTT GOLDENBERG | |||
| Dated: March 28, 2017 | Scott Goldenberg, as attorney-in-fact |
The TJX Companies, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years Ended January 28, 2017, January 30, 2016 and January 31, 2015.
F-1
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of The TJX Companies, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The TJX Companies, Inc. and its subsidiaries (the “Company”) at January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2017
F-2
The TJX Companies, Inc.
CONSOLIDATED STATEMENTS OF INCOME
| Fiscal Year Ended | ||||||||||||
| Amounts in thousands except per share amounts | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net sales | $ | 33,183,744 | $ | 30,944,938 | $ | 29,078,407 | ||||||
| Cost of sales, including buying and occupancy costs | 23,565,754 | 22,034,523 | 20,776,522 | |||||||||
| Selling, general and administrative expenses | 5,768,467 | 5,205,715 | 4,695,384 | |||||||||
| Loss on early extinguishment of debt | 51,773 | — | 16,830 | |||||||||
| Pension settlement charge | 31,173 | — | — | |||||||||
| Interest expense, net | 43,534 | 46,400 | 39,787 | |||||||||
| Income before provision for income taxes | 3,723,043 | 3,658,300 | 3,549,884 | |||||||||
| Provision for income taxes | 1,424,809 | 1,380,642 | 1,334,756 | |||||||||
| Net income | $ | 2,298,234 | $ | 2,277,658 | $ | 2,215,128 | ||||||
| Basic earnings per share: | ||||||||||||
| Net income | $ | 3.51 | $ | 3.38 | $ | 3.20 | ||||||
| Weighted average common shares – basic | 655,647 | 673,484 | 692,691 | |||||||||
| Diluted earnings per share: | ||||||||||||
| Net income | $ | 3.46 | $ | 3.33 | $ | 3.15 | ||||||
| Weighted average common shares – diluted | 664,432 | 683,251 | 703,545 | |||||||||
| Cash dividends declared per share | $ | 1.04 | $ | 0.84 | $ | 0.70 |
The accompanying notes are an integral part of the financial statements.
F-3
The TJX Companies, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Fiscal Year Ended | ||||||||||||
| Amounts in thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net income | $ | 2,298,234 | $ | 2,277,658 | $ | 2,215,128 | ||||||
| Additions to other comprehensive income: | ||||||||||||
| Foreign currency translation adjustments, net of related tax provision of $25,656 in fiscal 2017, and benefits of $41,048 and $56,567 in fiscal 2016 and 2015, respectively | (52,611 | ) | (143,923 | ) | (218,700 | ) | ||||||
| Loss on cash flow hedge, net of related tax benefit of $3,149 in fiscal 2015 | — | — | (4,762 | ) | ||||||||
| Recognition of net gains/losses on benefit obligations, net of related tax benefit of $7,394, provision of $6,335, and benefit of $91,941 in fiscal 2017, 2016 and 2015, respectively | (11,239 | ) | 9,629 | (139,366 | ) | |||||||
| Reclassifications from other comprehensive income to net income: | ||||||||||||
| Pension settlement charge, net of related tax provision of $12,369 in fiscal 2017 | 18,804 | — | — | |||||||||
| Amortization of loss on cash flow hedge, net of related tax provisions of $450, $450 and $300 in fiscal 2017, 2016 and 2015, respectively | 684 | 684 | 452 | |||||||||
| Amortization of prior service cost and deferred gains/losses, net of related tax provisions of $11,584, $13,501, and $4,591 in fiscal 2017, 2016 and 2015, respectively | 17,608 | 20,523 | 7,523 | |||||||||
| Other comprehensive income (loss), net of tax | (26,754 | ) | (113,087 | ) | (354,853 | ) | ||||||
| Total comprehensive income | $ | 2,271,480 | $ | 2,164,571 | $ | 1,860,275 |
The accompanying notes are an integral part of the financial statements.
F-4
The TJX Companies, Inc.
CONSOLIDATED BALANCE SHEETS
| Fiscal Year Ended | ||||||||
| Amounts in thousands except share amounts | January 28, 2017 | January 30, 2016 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,929,849 | $ | 2,095,473 | ||||
| Short-term investments | 543,242 | 352,313 | ||||||
| Accounts receivable, net | 258,831 | 238,072 | ||||||
| Merchandise inventories | 3,644,959 | 3,695,113 | ||||||
| Prepaid expenses and other current assets | 373,893 | 391,589 | ||||||
| Total current assets | 7,750,774 | 6,772,560 | ||||||
| Net property at cost | 4,532,894 | 4,137,575 | ||||||
| Non-current deferred income taxes, net | 6,193 | 13,831 | ||||||
| Goodwill | 195,871 | 193,911 | ||||||
| Other assets | 398,076 | 372,554 | ||||||
| TOTAL ASSETS | $ | 12,883,808 | $ | 11,490,431 | ||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,230,904 | $ | 2,203,050 | ||||
| Accrued expenses and other current liabilities | 2,320,464 | 2,069,659 | ||||||
| Federal, state and foreign income taxes payable | 206,288 | 129,521 | ||||||
| Total current liabilities | 4,757,656 | 4,402,230 | ||||||
| Other long-term liabilities | 1,073,954 | 881,021 | ||||||
| Non-current deferred income taxes, net | 314,000 | 285,102 | ||||||
| Long-term debt | 2,227,599 | 1,615,003 | ||||||
| Commitments and contingencies (See Note M and Note O) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, authorized 5,000,000 shares, par value $1, no shares issued | — | — | ||||||
| Common stock, authorized 1,200,000,000 shares, par value $1, issued and outstanding 646,319,046 and 663,495,715, respectively | 646,319 | 663,496 | ||||||
| Additional paid-in capital | — | — | ||||||
| Accumulated other comprehensive income (loss) | (694,226 | ) | (667,472 | ) | ||||
| Retained earnings | 4,558,506 | 4,311,051 | ||||||
| Total shareholders’ equity | 4,510,599 | 4,307,075 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 12,883,808 | $ | 11,490,431 |
The accompanying notes are an integral part of the financial statements.
F-5
The TJX Companies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year Ended | ||||||||||||
| Amounts in thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 2,298,234 | $ | 2,277,658 | $ | 2,215,128 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 658,796 | 616,696 | 588,975 | |||||||||
| Loss on property disposals and impairment charges | 5,207 | 3,383 | 3,897 | |||||||||
| Deferred income tax (benefit) provision | (5,503 | ) | 31,204 | 102,070 | ||||||||
| Share-based compensation | 102,251 | 94,107 | 88,014 | |||||||||
| Loss on early extinguishment of debt | 51,773 | — | 16,830 | |||||||||
| Pension settlement charge | 31,173 | — | — | |||||||||
| Excess tax benefits from share-based compensation | (70,999 | ) | (64,680 | ) | (95,063 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| (Increase) in accounts receivable | (23,235 | ) | (27,357 | ) | (9,052 | ) | ||||||
| Decrease (increase) in merchandise inventories | 11,862 | (506,633 | ) | (332,271 | ) | |||||||
| (Increase) in prepaid expenses and other current assets | (9,600 | ) | (40,103 | ) | (8,756 | ) | ||||||
| Increase in accounts payable | 48,253 | 216,265 | 285,223 | |||||||||
| Increase in accrued expenses and other liabilities | 389,399 | 284,929 | 20,800 | |||||||||
| Increase in income taxes payable | 146,766 | 68,014 | 144,977 | |||||||||
| Other | (32,483 | ) | (16,140 | ) | (12,403 | ) | ||||||
| Net cash provided by operating activities | 3,601,894 | 2,937,343 | 3,008,369 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Property additions | (1,024,747 | ) | (889,380 | ) | (911,522 | ) | ||||||
| Purchases of investments | (716,953 | ) | (798,008 | ) | (431,152 | ) | ||||||
| Sales and maturities of investments | 529,146 | 681,377 | 388,037 | |||||||||
| Acquisition of Trade Secret | (2,324 | ) | (57,104 | ) | — | |||||||
| Net cash (used in) investing activities | (1,214,878 | ) | (1,063,115 | ) | (954,637 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of long-term debt | 992,540 | — | 749,475 | |||||||||
| Cash payments for extinguishment of debt | (425,584 | ) | — | (416,357 | ) | |||||||
| Cash payments for debt issuance expenses | (9,921 | ) | — | (6,185 | ) | |||||||
| Cash payments for rate lock agreement | (3,150 | ) | — | (7,937 | ) | |||||||
| Cash payments for repurchase of common stock | (1,699,998 | ) | (1,828,297 | ) | (1,650,704 | ) | ||||||
| Proceeds from issuance of common stock | 164,190 | 132,033 | 143,005 | |||||||||
| Excess tax benefits from share-based compensation | 70,999 | 64,680 | 95,063 | |||||||||
| Cash dividends paid | (650,988 | ) | (544,271 | ) | (465,902 | ) | ||||||
| Net cash (used in) financing activities | (1,561,912 | ) | (2,175,855 | ) | (1,559,542 | ) | ||||||
| Effect of exchange rate changes on cash | 9,272 | (96,675 | ) | (150,161 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 834,376 | (398,302 | ) | 344,029 | ||||||||
| Cash and cash equivalents at beginning of year | 2,095,473 | 2,493,775 | 2,149,746 | |||||||||
| Cash and cash equivalents at end of year | $ | 2,929,849 | $ | 2,095,473 | $ | 2,493,775 |
The accompanying notes are an integral part of the financial statements.
F-6
The TJX Companies, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||
| Amounts in thousands | Shares | Par Value $1 | ||||||||||||||||||||||
| Balance, February 1, 2014 | 705,017 | $ | 705,017 | $ | — | $ | (199,532 | ) | $ | 3,724,408 | $ | 4,229,893 | ||||||||||||
| Net income | — | — | — | — | 2,215,128 | 2,215,128 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | (354,853 | ) | — | (354,853 | ) | ||||||||||||||||
| Cash dividends declared on common stock | — | — | — | — | (483,280 | ) | (483,280 | ) | ||||||||||||||||
| Recognition of share-based compensation | — | — | 88,014 | — | — | 88,014 | ||||||||||||||||||
| Issuance of common stock under stock incentive plan and related tax effect | 7,318 | 7,318 | 212,714 | — | — | 220,032 | ||||||||||||||||||
| Common stock repurchased | (27,602 | ) | (27,602 | ) | (300,728 | ) | — | (1,322,374 | ) | (1,650,704 | ) | |||||||||||||
| Balance, January 31, 2015 | 684,733 | 684,733 | — | (554,385 | ) | 4,133,882 | 4,264,230 | |||||||||||||||||
| Net income | — | — | — | — | 2,277,658 | 2,277,658 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | (113,087 | ) | — | (113,087 | ) | ||||||||||||||||
| Cash dividends declared on common stock | — | — | — | — | (564,586 | ) | (564,586 | ) | ||||||||||||||||
| Recognition of share-based compensation | — | — | 94,107 | — | — | 94,107 | ||||||||||||||||||
| Issuance of common stock under stock incentive plan and related tax effect | 5,317 | 5,317 | 171,733 | — | — | 177,050 | ||||||||||||||||||
| Common stock repurchased | (26,554 | ) | (26,554 | ) | (265,840 | ) | — | (1,535,903 | ) | (1,828,297 | ) | |||||||||||||
| Balance, January 30, 2016 | 663,496 | 663,496 | — | (667,472 | ) | 4,311,051 | 4,307,075 | |||||||||||||||||
| Net income | — | — | — | — | 2,298,234 | 2,298,234 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | (26,754 | ) | — | (26,754 | ) | ||||||||||||||||
| Cash dividends declared on common stock | — | — | — | — | (680,183 | ) | (680,183 | ) | ||||||||||||||||
| Recognition of share-based compensation | — | — | 102,251 | — | — | 102,251 | ||||||||||||||||||
| Issuance of common stock under stock incentive plan and related tax effect | 5,101 | 5,101 | 204,873 | — | — | 209,974 | ||||||||||||||||||
| Common stock repurchased | (22,278 | ) | (22,278 | ) | (307,124 | ) | — | (1,370,596 | ) | (1,699,998 | ) | |||||||||||||
| Balance, January 28, 2017 | 646,319 | $ | 646,319 | $ | — | $ | (694,226 | ) | $ | 4,558,506 | $ | 4,510,599 |
The accompanying notes are an integral part of the financial statements.
F-7
The TJX Companies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Accounting Policies
Basis of Presentation****: The consolidated financial statements of The TJX Companies, Inc. (referred to as “TJX,” “we” or “the Company”) include the financial statements of all of TJX’s subsidiaries, all of which are wholly owned. All of its activities are conducted by TJX or its subsidiaries and are consolidated in these financial statements. All intercompany transactions have been eliminated in consolidation.
Fiscal Year****: TJX’s fiscal year ends on the Saturday nearest to the last day of January of each year. The fiscal years ended January 28, 2017 (fiscal 2017), January 30, 2016 (fiscal 2016) and January 31, 2015 (fiscal 2015) each included 52 weeks.
Earnings Per Share****: All earnings per share amounts refer to diluted earnings per share, unless otherwise indicated.
Use of Estimates****: Preparation of The TJX Companies, Inc. financial statements, in conformity with accounting principles generally accepted in the United States of America (GAAP), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. TJX considers its accounting policies relating to inventory valuation, impairment of long-lived assets, goodwill and tradenames, retirement obligations, share-based compensation, casualty insurance, reserves for uncertain tax positions and loss contingencies to be the most significant accounting policies that involve management estimates and judgments. Actual amounts could differ from those estimates, and such differences could be material.
Revenue Recognition: TJX records revenue at the time of sale and receipt of merchandise by the customer, net of a reserve for estimated returns. We estimate returns based upon our historical experience. We defer recognition of a layaway sale and its related profit to the accounting period when the customer receives the layaway merchandise. Proceeds from the sale of gift cards as well as the value of store cards issued to customers as a result of a return or exchange are deferred until the customers use the cards to acquire merchandise. Based on historical experience, we estimate the amount of gift cards and store cards that will not be redeemed (referred to as breakage) and, to the extent allowed by local law, these amounts are amortized into income over the redemption period. Revenue recognized from breakage was $20.5 million in fiscal 2017, $13.8 million in fiscal 2016 and $17.8 million in fiscal 2015. We estimate the date of receipt by the customer when recognizing revenue from sales by our e-commerce operations and shipping and handling costs charged to the customer are included in revenue. The shipping and handling costs incurred by TJX are included in cost of sales, including buying and occupancy costs.
Consolidated Statements of Income Classifications****: Cost of sales, including buying and occupancy costs, includes the cost of merchandise sold including foreign currency gains and losses on merchandise purchases denominated in other currencies; gains and losses on inventory and fuel-related derivative contracts; asset retirement obligation costs: divisional occupancy costs (including real estate taxes, utility and maintenance costs and fixed asset depreciation); the costs of operating distribution centers; payroll, benefits and travel costs directly associated with buying inventory; and systems costs related to the buying and tracking of inventory.
Selling, general and administrative expenses include store payroll and benefit costs; communication costs; credit and check expenses; advertising; administrative and field management payroll, benefits and travel costs; corporate administrative costs and depreciation; gains and losses on non-inventory related foreign currency exchange contracts; and other miscellaneous income and expense items.
Cash and Cash Equivalents: TJX generally considers highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Investments with maturities greater than 90 days but less than one year at the date of purchase are included in short-term investments. These investments are classified as trading securities and are stated at fair value. Investments are classified as either short- or long-term based on their original maturities. TJX’s investments are primarily high-grade commercial paper, institutional money market funds and time deposits with major banks.
F-8
As of January 28, 2017, TJX’s cash and cash equivalents held outside the U.S. were $1.3 billion, of which $341.7 million was held in countries where TJX has the intention to reinvest any undistributed earnings indefinitely.
Merchandise Inventories****: Inventories are stated at the lower of cost or market. TJX uses the retail method for valuing inventories at all of its businesses, except Sierra Trading Post (STP), and Trade Secret. The businesses that utilize the retail method have some inventory that is initially valued at cost before the retail method is applied as it has not been fully processed for sale (e.g. inventory in transit and unprocessed inventory in our distribution centers). Under the retail method, TJX utilizes a permanent markdown strategy and lowers the cost value of the inventory that is subject to markdown at the time the retail prices are lowered in the stores. TJX accrues for inventory obligations at the time title transfers, which is typically at the time when inventory is shipped. As a result, merchandise inventories on TJX’s balance sheet include an accrual for in-transit inventory of $641.9 million at January 28, 2017 and $690.3 million at January 30, 2016. Comparable amounts were reflected in accounts payable at those dates.
Common Stock and Equity: Equity transactions consist primarily of the repurchase by TJX of its common stock under its stock repurchase programs and the recognition of compensation expense and issuance of common stock under TJX’s Stock Incentive Plan. Under TJX’s stock repurchase programs the Company repurchases its common stock on the open market. The par value of the shares repurchased is charged to common stock with the excess of the purchase price over par first charged against any available additional paid-in capital (APIC) and the balance charged to retained earnings. Due to the high volume of repurchases over the past several years, TJX has no remaining balance in APIC at the end of any of the years presented. All shares repurchased have been retired.
Shares issued under TJX’s Stock Incentive Plan are issued from authorized but unissued shares, and proceeds received are recorded by increasing common stock for the par value of the shares with the excess over par added to APIC. Income tax benefits upon the expensing of options result in the creation of a deferred tax asset, while income tax benefits due to the exercise of stock options reduce deferred tax assets up to the amount that an asset for the related grant has been created. Any tax benefits greater than the deferred tax assets created at the time of expensing the options are credited to APIC; any deficiencies in the tax benefits are debited to APIC to the extent a pool for such deficiencies exists. In the absence of a pool, any deficiencies are realized in the related periods’ statements of income through the provision for income taxes. Any excess income tax benefits are included in cash flows from financing activities in the statements of cash flows. The par value of restricted stock awards is also added to common stock when the stock is issued, generally at grant date. The fair value of the restricted stock awards in excess of par value is added to APIC as the awards are amortized into earnings over the related requisite service periods.
Share-Based Compensation: TJX accounts for share-based compensation by estimating the fair value of each award on the date of grant. TJX uses the Black-Scholes option pricing model for options awarded and the market price on the grant date for performance-based restricted stock awards. See Note I for a detailed discussion of share-based compensation.
Interest****: TJX’s interest expense is presented net of capitalized interest and interest income. The following is a summary of net interest expense:
| Fiscal Year Ended | ||||||||||||
| Dollars in thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Interest expense | $ | 69,219 | $ | 68,253 | $ | 64,783 | ||||||
| Capitalized interest | (7,548 | ) | (7,984 | ) | (9,403) | |||||||
| Interest (income) | (18,137 | ) | (13,869 | ) | (15,593) | |||||||
| Interest expense, net | $ | 43,534 | $ | 46,400 | $ | 39,787 |
TJX capitalizes interest during the active construction period of major capital projects. Capitalized interest is added to the cost of the related assets. Capitalized interest in fiscal 2017, 2016 and 2015 relates to costs on active owned real estate projects and development costs on a merchandising system.
Depreciation and Amortization****: For financial reporting purposes, TJX provides for depreciation and amortization of property using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated over 33 years. Leasehold costs and improvements are generally amortized over their useful life or the committed lease term (typically 10 years), whichever is shorter. Furniture, fixtures and equipment are depreciated over
F-9
3 to 10 years. Depreciation and amortization expense for property was $664.5 million in fiscal 2017, $622.0 million in fiscal 2016 and $595.6 million in fiscal 2015. TJX had no property held under capital leases during fiscal 2017, 2016, or 2015. Maintenance and repairs are charged to expense as incurred. Significant costs incurred for internally developed software are capitalized and amortized over 3 to 15 years. Upon retirement or sale, the cost of disposed assets and the related accumulated depreciation are eliminated and any gain or loss is included in income. Pre-opening costs, including rent, are expensed as incurred.
Lease Accounting****: TJX begins to record rent expense when it takes possession of a store, which is typically 30 to 60 days prior to the opening of the store and generally occurs before the commencement of the lease term, as specified in the lease.
Asset Retirement Obligations: The Company establishes an asset retirement obligation, and related asset, for leases of property that require us to return the property to its original condition (commonly referred to as a reinstatement provision) if and when we exit the facility. These reinstatement provisions are primarily applicable to our European locations. The income statement impact of our asset retirement obligation is recorded in general corporate expenses and our operating divisions are charged the actual costs incurred when a retirement takes place.
Build to Suit accounting—Lease agreements involving property built to our specifications are reviewed to determine if our involvement in the construction project requires that we account for the project costs as if we were the owner for accounting purposes. We have entered into several lease agreements where we are deemed the owner of a construction project for accounting purposes. Thus, during construction of the facility the construction costs incurred by the lessor are included as a construction in progress asset along with a related liability of the same amount on our balance sheet. Upon completion of the project, a sale-leaseback analysis is performed to determine if the Company should record a sale to remove the related asset and related obligation and record the lease as either an operating or capital lease obligation. If the Company is precluded from derecognizing the asset when construction is complete, due to continuing involvement beyond a normal leaseback, the lease is accounted for as a financing transaction and the recorded asset and related financing obligation remain on the Consolidated Balance Sheets. Accordingly, the asset is depreciated over its estimated useful life in accordance with the Company’s policy and a portion of the lease payments is allocated to ground rent and treated as an operating lease. The portion of the lease payment allocated to ground rental expense is based on the fair value of the land at the commencement of construction. Lease payments allocated to the non-land asset are recognized as reductions to the financing obligation and interest expense.
Goodwill and Tradenames****: Goodwill includes the excess of the purchase price paid over the carrying value of the minority interest acquired in fiscal 1990 in TJX’s former 83%-owned subsidiary and represents goodwill associated with the T.J. Maxx chain, as well as the excess of cost over the estimated fair market value of the net assets acquired by TJX in the purchase of Winners in fiscal 1991, the purchase of Sierra Trading Post in fiscal 2013, and the purchase of Trade Secret in fiscal 2016 (See Note B). The following is a roll forward of goodwill by component:
| Amounts in thousands | Marmaxx | Winners | Sierra Trading Post | Trade Secret | Total | |||||||||||||||
| Balance, February 1, 2014 | $ | 70,027 | $ | 1,992 | $ | 97,254 | $ | — | $ | 169,273 | ||||||||||
| Effect of exchange rate changes on goodwill | — | (251 | ) | — | — | (251 | ) | |||||||||||||
| Balance, January 31, 2015 | 70,027 | 1,741 | 97,254 | — | 169,022 | |||||||||||||||
| Additions | — | — | — | 25,233 | 25,233 | |||||||||||||||
| Effect of exchange rate changes on goodwill | — | (154 | ) | — | (190 | ) | (344 | ) | ||||||||||||
| Balance, January 30, 2016 | 70,027 | 1,587 | 97,254 | 25,043 | 193,911 | |||||||||||||||
| Effect of exchange rate changes on goodwill | — | 99 | — | 1,861 | 1,960 | |||||||||||||||
| Balance, January 28, 2017 | $ | 70,027 | $ | 1,686 | $ | 97,254 | $ | 26,904 | $ | 195,871 | ||||||||||
Goodwill is considered to have an indefinite life and accordingly is not amortized.
Tradenames, which are included in other assets, are the value assigned to the name “Marshalls,” acquired by TJX in fiscal 1996 as part of the acquisition of the Marshalls chain, the value assigned to the name “Sierra Trading Post,”
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acquired by TJX in fiscal 2013 and the value assigned to the name “Trade Secret,” acquired by TJX in fiscal 2016. The tradenames were valued by calculating the discounted present value of assumed after-tax royalty payments. The Marshalls tradename is carried at a value of $107.7 million and is considered to have an indefinite life. The Sierra Trading Post tradename is being amortized over 15 years and was carried at a value of $28.0 million in fiscal 2017, $30.6 million in fiscal 2016 and $33.2 million in fiscal 2015 net of amortization of $10.5 million, $7.9 million and $5.3 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The Trade Secret tradename is being amortized over 7 years and was carried at a value of $11.0 million in fiscal 2017 and $11.6 million in fiscal 2016 net of amortization of $1.6 million and $300,000 in fiscal 2017 and 2016, respectively.
TJX occasionally acquires or licenses other trademarks to be used in connection with private label merchandise. Such trademarks are included in other assets and are amortized to cost of sales, including buying and occupancy costs, over their useful life, generally from 7 to 10 years.
Goodwill, tradenames and trademarks, and the related accumulated amortization if any, are included in the respective operating segment to which they relate.
Impairment of Long-Lived Assets, Goodwill and Tradenames****: TJX evaluates its long-lived assets, goodwill and tradenames for indicators of impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable, and at least annually in the fourth quarter of each fiscal year. An impairment exists when the undiscounted cash flow of an asset or asset group is less than the carrying cost of that asset or asset group.
The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows which are largely independent of other groups of assets, which is generally at the individual store level. If indicators of impairment are identified, an undiscounted cash flow analysis is performed to determine if an impairment exists. The store-by-store evaluations did not indicate any recoverability issues in each of the past three fiscal years.
Goodwill is tested for impairment whenever events or changes in circumstances indicate that an impairment may have occurred and at least annually in the fourth quarter of each fiscal year, using a quantitative assessment by comparing the carrying value of the related reporting unit to its fair value. An impairment exists when this analysis, using typical valuation models such as the discounted cash flow method, shows that the fair value of the reporting unit is less than the carrying cost of the reporting unit. We may assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The assessment of qualitative factors is optional and at the Company’s discretion. In fiscal 2017 and fiscal 2016, we bypassed the qualitative assessment and performed the first step of the quantitative goodwill impairment test.
Tradenames are also tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the tradename may exceed its fair value and at least annually in the fourth quarter of each fiscal year. Testing is performed by comparing the discounted present value of assumed after-tax royalty payments to the carrying value of the tradename.
There was no impairment related to our goodwill or tradenames in fiscal 2017, 2016 or 2015.
Advertising Costs****: TJX expenses advertising costs as incurred. Advertising expense was $402.6 million for fiscal 2017, $382.9 million for fiscal 2016 and $371.3 million for fiscal 2015.
Foreign Currency Translation****: TJX’s foreign assets and liabilities are translated into U.S. dollars at fiscal year-end exchange rates with resulting translation gains and losses included in shareholders’ equity as a component of accumulated other comprehensive income (loss). Activity of the foreign operations that affect the statements of income and cash flows is translated at average exchange rates prevailing during the fiscal year.
Loss Contingencies: TJX records a reserve for loss contingencies when it is both probable that a loss will be incurred and the amount of the loss is reasonably estimable. TJX evaluates pending litigation and other contingencies at least quarterly and adjusts the reserve for such contingencies for changes in probable and reasonably estimable losses. TJX includes an estimate for related legal costs at the time such costs are both probable and reasonably estimable.
Recently Issued Accounting Standards****: In May 2014, a pronouncement was issued that creates common revenue recognition guidance for GAAP. The new guidance supersedes most preexisting revenue recognition
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guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard was originally scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In April 2015, the Financial Accounting Standards Board proposed an update to this rule which deferred its effective date for one year. The proposed update stipulates the new standard would be effective for annual reporting periods beginning after December 15, 2017, and interim periods therein, with an option to adopt the standard on the originally scheduled effective date. The standard shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. For TJX, the standard will be effective in the first quarter of the fiscal year ending January 26, 2019. We believe that there will be no change in the timing or amount of revenue recognized under the new standard as it relates to revenue from point of sale at the registers in our stores, which constitutes more than 95% of the Company’s revenue. We continue to evaluate other revenue streams such as e-commerce sales and shipping revenue and there may be a slight change in the timing of when such revenue is recognized. The new standard will require a change in the presentation of our sales return reserve on the balance sheet, which we record net. The new standard will require the reserve be established at the gross sales value with an asset established for the value of the merchandise returned. We do not expect this change to have material impact on our financial condition or results of operation.
In February 2016, a pronouncement was issued that aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. The new standard is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. The company expects this standard to have a material impact on its statement of financial condition as it will record a significant asset and liability associated with its more than 3,800 leased locations. We cannot assess the income statement impact at this time as we need to assess if the initial lease term will differ under the new standard versus current accounting practice. If the lease term remains unchanged the income statement impact of the new standard is not expected to be material. The company is in the process of evaluating its lease portfolio and identifying what additional data will be needed to comply with the new standard. We are also evaluating available software options and system support that will be required to implement the new accounting process. We do not currently plan to adopt early.
In March 2016, a pronouncement was issued that aims to simplify several aspects of accounting and reporting for share-based payment transactions. One provision requires that excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of income, rather than within additional paid-in capital on the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods, with early adoption permitted. The impact of this standard is dependent upon levels of activity in future periods but would have been a $70.0 million benefit to provision for income taxes in fiscal 2017. The standard will be effective for the first quarter of fiscal 2018.
In August 2016, a pronouncement was issued that addresses diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. The new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future diversity in practice. The standard, which is to be applied retrospectively, will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted. TJX does not expect this standard to have a material impact on our consolidated financial statements.
In January 2017, a pronouncement was issued that aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, goodwill impairment will be measured as the amount by which the carrying value exceeds the fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The new guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. TJX does not expect this standard to have a material impact on our consolidated financial statements.
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Recently Adopted Accounting Standards: In April 2015, a pronouncement was issued that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For TJX, the standard was effective in the first quarter of fiscal 2017. As a result, we have recast the January 30, 2016 consolidated balance sheet to conform to the current period presentation. The adoption of this standard reduced previously-presented other assets by $9.1 million and reduced long-term debt by $9.1 million as of January 30, 2016.
In May 2015, a pronouncement was issued that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The pronouncement also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Those disclosures are instead limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Earlier application is permitted and TJX has adopted these provisions, including the retrospective application, to all periods presented in the consolidated financial statements.
Revisions: We have revised certain amounts in the financial statements and the accompanying notes to properly present debt issuance costs as a component of long-term debt rather than other assets.
Note B. Acquisition of Trade Secret
On October 24, 2015, TJX purchased Trade Secret, an off-price retailer that operates 35 stores in Australia, for AUD$83.3 million (U.S. $59.4 million).
The following table presents the final allocation of the purchase price to the assets and liabilities acquired based on their estimated fair values as of October 24, 2015:
| In thousands | Allocation of purchase price | |||
| Current assets | $ | 25,899 | ||
| Property and equipment | 10,184 | |||
| Goodwill and intangible assets | 37,416 | |||
| Total assets acquired | 73,499 | |||
| Total liabilities assumed | (14,071 | ) | ||
| Net assets acquired | $ | 59,428 | ||
Goodwill and intangible assets include identified intangible assets of $12 million for the value of the tradename “Trade Secret” which is being amortized over 7 years, and $25 million representing goodwill (See Note A).
The operating results of Trade Secret have been included in TJX’s consolidated financial statements from the date of acquisition and Trade Secret is now part of the TJX International segment along with our European operations. Pro forma results of operations assuming the acquisition of Trade Secret occurred as of the beginning of fiscal 2015 have not been presented as the inclusion of the results of operations for the acquired business would not have produced a material impact on TJX’s sales, net income or earnings per share as reported.
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Note C. Property at Cost
Presented below are the components of property at cost:
| Fiscal Year Ended | ||||||||
| In thousands | January 28, 2017 | January 30, 2016 | ||||||
| Land and buildings | $ | 1,247,585 | $ | 1,013,247 | ||||
| Leasehold costs and improvements | 2,884,054 | 2,817,929 | ||||||
| Furniture, fixtures and equipment | 4,871,764 | 4,412,848 | ||||||
| Total property at cost | $ | 9,003,403 | $ | 8,244,024 | ||||
| Less accumulated depreciation and amortization | 4,470,509 | 4,106,449 | ||||||
| Net property at cost | $ | 4,532,894 | $ | 4,137,575 |
During fiscal 2017 the Company identified fully depreciated assets that were no longer in use and should have been written off during fiscal 2017 or prior periods. The fiscal 2016 property at cost and accumulated depreciation was reduced by $825 million. There was no impact to net property at cost. This error was not material to our consolidated financial statements, however we have corrected amounts for the prior fiscal year to reflect the write off that should have been recorded at that time.
Presented below is information related to carrying values of TJX’s long-lived assets by geographic location:
| Fiscal Year Ended | ||||||||
| Dollars in thousands | January 28, 2017 | January 30, 2016 | ||||||
| United States | $ | 3,312,210 | $ | 3,101,846 | ||||
| Canada | 283,688 | 242,705 | ||||||
| Europe | 920,710 | 782,970 | ||||||
| Australia | 16,286 | 10,054 | ||||||
| Total long-lived assets | $ | 4,532,894 | $ | 4,137,575 | ||||
Note D. Accumulated Other Comprehensive Income (Loss)
Amounts included in accumulated other comprehensive income (loss) relate to the Company’s foreign currency translation adjustments, deferred gains/losses on pension and other post-retirement obligations and a cash flow
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hedge on issued debt, all of which are recorded net of the related income tax effects. The following table details the changes in accumulated other comprehensive income (loss) for fiscal 2017, fiscal 2016 and fiscal 2015:
| Amounts in thousands | Foreign Currency Translation | Deferred Benefit Costs | Cash Flow Hedge on Debt | Accumulated Other Comprehensive Income (Loss) | ||||||||||||
| Balance, February 1, 2014 | $ | (76,569 | ) | $ | (122,963 | ) | $ | — | $ | (199,532 | ) | |||||
| Foreign currency translation adjustments (net of taxes of $56,567) | (218,700 | ) | — | — | (218,700 | ) | ||||||||||
| Recognition of net gains/losses on benefit obligations (net of taxes of $91,941) | — | (139,366 | ) | — | (139,366 | ) | ||||||||||
| Loss on cash flow hedge (net of taxes of $3,149) | — | — | (4,762 | ) | (4,762 | ) | ||||||||||
| Amortization of loss on cash flow hedge (net of taxes of $300) | — | — | 452 | 452 | ||||||||||||
| Amortization of prior service cost and deferred gains/losses (net of taxes of $4,591) | — | 7,523 | — | 7,523 | ||||||||||||
| Balance, January 31, 2015 | (295,269 | ) | (254,806 | ) | (4,310 | ) | (554,385 | ) | ||||||||
| Foreign currency translation adjustments (net of taxes of $41,048) | (143,923 | ) | — | — | (143,923 | ) | ||||||||||
| Recognition of net gains/losses on benefit obligations (net of taxes of $6,335) | — | 9,629 | — | 9,629 | ||||||||||||
| Amortization of loss on cash flow hedge (net of taxes of $450) | — | — | 684 | 684 | ||||||||||||
| Amortization of prior service cost and deferred gains/losses (net of taxes of $13,501) | — | 20,523 | — | 20,523 | ||||||||||||
| Balance, January 30, 2016 | (439,192 | ) | (224,654 | ) | (3,626 | ) | (667,472 | ) | ||||||||
| Foreign currency translation adjustments (net of taxes of $25,656) | (52,611 | ) | — | — | (52,611 | ) | ||||||||||
| Recognition of net gains/losses on benefit obligations (net of taxes of $7,394) | — | (11,239 | ) | — | (11,239 | ) | ||||||||||
| Pension settlement charge (net of taxes of $12,369) | — | 18,804 | — | 18,804 | ||||||||||||
| Amortization of loss on cash flow hedge (net of taxes of $450) | — | — | 684 | 684 | ||||||||||||
| Amortization of prior service cost and deferred gains/losses (net of taxes of $11,584) | — | 17,608 | — | 17,608 | ||||||||||||
| Balance, January 28, 2017 | $ | (491,803 | ) | $ | (199,481 | ) | $ | (2,942 | ) | $ | (694,226 | ) |
Note E. Capital Stock and Earnings Per Share
Capital Stock: TJX repurchased and retired 22.3 million shares of its common stock at a cost of $1.7 billion during fiscal 2017, on a “trade date basis.” TJX reflects stock repurchases in its financial statements on a “settlement date” or cash basis. TJX had cash expenditures under repurchase programs of $1.7 billion in fiscal 2017, $1.8 billion in fiscal 2016 and $1.7 billion in fiscal 2015, and repurchased 22.3 million shares in fiscal 2017, 26.6 million shares in fiscal 2016 and 27.6 million shares in fiscal 2015. These expenditures were funded primarily by cash generated from operations. As of January 28, 2017 TJX had $1.8 billion available under the existing $2.0 billion stock repurchase program announced by TJX in February 2016. In addition, in February 2017, TJX announced the Board of Directors had approved the repurchase of an additional $1.0 billion of TJX common stock from time to time.
All shares repurchased under the stock repurchase programs have been retired.
TJX has five million shares of authorized but unissued preferred stock, $1 par value.
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Earnings Per Share****: The following table presents the calculation of basic and diluted earnings per share for net income:
| Fiscal Year Ended | ||||||||||||
| Amounts in thousands except per share amounts | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Basic earnings per share: | ||||||||||||
| Net income | $ | 2,298,234 | $ | 2,277,658 | $ | 2,215,128 | ||||||
| Weighted average common stock outstanding for basic earnings per share calculation | 655,647 | 673,484 | 692,691 | |||||||||
| Basic earnings per share | $ | 3.51 | $ | 3.38 | $ | 3.20 | ||||||
| Diluted earnings per share: | ||||||||||||
| Net income | $ | 2,298,234 | $ | 2,277,658 | $ | 2,215,128 | ||||||
| Weighted average common stock outstanding for basic earnings per share calculation | 655,647 | 673,484 | 692,691 | |||||||||
| Assumed exercise/vesting of: | ||||||||||||
| Stock options and awards | 8,785 | 9,767 | 10,854 | |||||||||
| Weighted average common stock outstanding for diluted earnings per share calculation | 664,432 | 683,251 | 703,545 | |||||||||
| Diluted earnings per share | $ | 3.46 | $ | 3.33 | $ | 3.15 |
The weighted average common shares for the diluted earnings per share calculation excludes the impact of outstanding stock options if the assumed proceeds per share of the option is in excess of the average price of TJX’s common stock for the related fiscal periods. Such options are excluded because they would have an antidilutive effect. There were 8.1 million, 4.1 million and 8.8 million such options excluded at the end of fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Note F. Financial Instruments
As a result of its operating and financing activities, TJX is exposed to market risks from changes in interest and foreign currency exchange rates as well as fuel costs. These market risks may adversely affect TJX’s operating results and financial position. TJX seeks to minimize risk from changes in interest rates and foreign currency exchange rates and fuel costs, to the extent we deem appropriate, through the use of derivative financial instruments. TJX does not use derivative financial instruments for trading or other speculative purposes and does not use any leveraged derivative financial instruments. TJX recognizes all derivative instruments as either assets or liabilities in the statements of financial position and measures those instruments at fair value. The fair values of the derivatives are classified as assets or liabilities, current or non-current, based upon valuation results and settlement dates of the individual contracts. Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in earnings in the period of the change. For derivatives that qualify for hedge accounting, changes in the fair value of the derivatives are either recorded in shareholders’ equity as a component of other comprehensive income or are recognized currently in earnings, along with an offsetting adjustment against the basis of the item being hedged. TJX does not hedge its net investments in foreign subsidiaries.
Diesel Fuel Contracts: TJX hedges portions of its estimated notional diesel requirements, based on the diesel fuel expected to be consumed by independent freight carriers transporting TJX’s inventory. Independent freight carriers transporting TJX’s inventory charge TJX a mileage surcharge for diesel fuel price increases as incurred by the carrier. The hedge agreements are designed to mitigate the volatility of diesel fuel pricing (and the resulting per mile surcharges payable by TJX) by setting a fixed price per gallon for the period being hedged. During fiscal 2016 and fiscal 2017, TJX entered into agreements to hedge a portion of its estimated notional diesel requirements for fiscal 2017. Similarly, during fiscal 2017, TJX entered into agreements to hedge a portion of its estimated notional diesel requirements for the fiscal year ending February 3, 2018 (fiscal 2018). The hedge agreements outstanding at January 28, 2017 relate to approximately 50% of TJX’s estimated notional diesel
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requirements for fiscal 2018. These diesel fuel hedge agreements will settle throughout fiscal 2018. TJX elected not to apply hedge accounting rules to these contracts.
Foreign Currency Contracts: TJX enters into forward foreign currency exchange contracts to obtain economic hedges on portions of merchandise purchases made and anticipated to be made by the Company’s operations in Europe (United Kingdom, Ireland, Germany, Poland, Austria, and the Netherlands), TJX Canada (Canada), Marmaxx (U.S.) and HomeGoods (U.S.) in currencies other than their respective functional currencies. These contracts typically have a term of twelve months or less. The contracts outstanding at January 28, 2017 cover a portion of such actual and anticipated merchandise purchases throughout fiscal 2018. Additionally, TJX’s operations in Europe are subject to foreign currency exposure as a result of their buying function being centralized in the United Kingdom. All merchandise is purchased centrally in the U.K. and then shipped and billed to the retail entities in other countries. This intercompany billing to TJX’s European businesses’ Euro denominated operations creates exposure to the buying entity for changes in the exchange rate between the Euro and British Pound. The inflow of Euros to the central buying entity provides a natural hedge for merchandise purchased from third-party vendors that is denominated in Euros. However, with the growth of TJX’s Euro denominated retail operations, the intercompany billings committed to the Euro denominated operations is generating Euros in excess of those needed to meet merchandise commitments to outside vendors. TJX calculates this excess Euro exposure each month and enters a 30 day hedge to mitigate the exposure. TJX elected not to apply hedge accounting rules to these contracts.
TJX also enters into derivative contracts, generally designated as fair value hedges, to hedge intercompany debt and intercompany interest payable. The changes in fair value of these contracts are recorded in selling, general and administrative expenses and are offset by marking the underlying item to fair value in the same period. Upon settlement, the realized gains and losses on these contracts are offset by the realized gains and losses of the underlying item in selling, general and administrative expenses.
The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at January 28, 2017:
| In thousands | Pay | Receive | Blended Contract Rate | Balance Sheet Location | Current Asset U.S.$ | Current (Liability) U.S.$ | Net Fair Value in U.S.$ at January 28, 2017 | |||||||||||||||||||||
| Fair value hedges: | ||||||||||||||||||||||||||||
| Intercompany balances, primarily debt and related interest | ||||||||||||||||||||||||||||
| zł 67,000 | £ 13,000 | 0.1940 | (Accrued Exp) | $ | — | $ | (6 | ) | $ | (6 | ) | |||||||||||||||||
| € 63,000 | £ 54,452 | 0.8643 | Prepaid Exp | 263 | — | 263 | ||||||||||||||||||||||
| U.S.$ 68,445 | £ 55,000 | 0.8036 | Prepaid Exp | 1,196 | — | 1,196 | ||||||||||||||||||||||
| Economic hedges for which hedge accounting was not elected: | ||||||||||||||||||||||||||||
| Diesel contracts | Fixed on 2.1M — 2.5M gal per month | Float on 2.1M — 2.5M gal per month | N/A | Prepaid Exp | 2,183 | — | 2,183 | |||||||||||||||||||||
| Intercompany billings in Europe, primarily merchandise related | € 68,000 | £ 58,306 | 0.8574 | Prepaid Exp | 262 | — | 262 | |||||||||||||||||||||
| Merchandise purchase commitments | ||||||||||||||||||||||||||||
| C$ 462,025 | U.S.$ 349,750 | 0.7570 | Prepaid Exp / (Accrued Exp) | 1,089 | (3,081 | ) | (1,992 | ) | ||||||||||||||||||||
| C$ 19,571 | € 13,650 | 0.6975 | Prepaid Exp / (Accrued Exp) | 22 | (290 | ) | (268 | ) | ||||||||||||||||||||
| £ 180,963 | U.S.$ 227,500 | 1.2572 | Prepaid Exp / (Accrued Exp) | 2,327 | (2,695) | (368 | ) | |||||||||||||||||||||
| zł 249,079 | £ 48,593 | 0.1951 | Prepaid Exp / (Accrued Exp) | 681 | (927 | ) | (246 | ) | ||||||||||||||||||||
| U.S.$ 22,226 | € 20,686 | 0.9307 | Prepaid Exp / (Accrued Exp) | 178 | (257 | ) | (79 | ) | ||||||||||||||||||||
| Total fair value of financial instruments | $ | 8,201 | $ | (7,256 | ) | $ | 945 |
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The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at January 30, 2016:
| In thousands | Pay | Receive | Blended Contract Rate | Balance Sheet Location | Current Asset U.S.$ | Current (Liability) U.S.$ | Net Fair Value in U.S.$ at January 30, 2016 | |||||||||||||||||||||
| Fair value hedges: | ||||||||||||||||||||||||||||
| Intercompany balances, primarily debt and related interest | ||||||||||||||||||||||||||||
| zł 87,073 | C$ 29,950 | 0.3440 | Prepaid Exp | $ | 144 | $ | — | $ | 144 | |||||||||||||||||||
| zł 45,000 | £ 7,403 | 0.1645 | (Accrued Exp) | — | (448 | ) | (448 | ) | ||||||||||||||||||||
| € 45,000 | £ 34,496 | 0.7666 | (Accrued Exp) | — | (200 | ) | (200 | ) | ||||||||||||||||||||
| U.S.$ 77,957 | £ 55,000 | 0.7055 | Prepaid Exp | 535 | — | 535 | ||||||||||||||||||||||
| Economic hedges for which hedge accounting was not elected: | ||||||||||||||||||||||||||||
| Diesel contracts | Fixed on 900K — 3.0M gal per month | Float on 900K — 3.0M gal per month | N/A | (Accrued Exp) | — | (13,952 | ) | (13,952 | ) | |||||||||||||||||||
| Intercompany billings in Europe, primarily merchandise related | € 60,000 | £ 46,113 | 0.7686 | Prepaid Exp | 566 | — | 566 | |||||||||||||||||||||
| Merchandise purchase commitments | ||||||||||||||||||||||||||||
| C$ 434,271 | U.S.$ 322,050 | 0.7416 | Prepaid Exp / (Accrued Exp) | 12,891 | (1,601 | ) | 11,290 | |||||||||||||||||||||
| C$ 16,719 | € 11,250 | 0.6729 | Prepaid Exp / (Accrued Exp) | 316 | (90 | ) | 226 | |||||||||||||||||||||
| £ 174,235 | U.S.$ 262,250 | 1.5052 | Prepaid Exp | 13,996 | — | 13,996 | ||||||||||||||||||||||
| zł 195,892 | £ 33,088 | 0.1689 | Prepaid Exp / (Accrued Exp) | 123 | (926 | ) | (803 | ) | ||||||||||||||||||||
| U.S.$ 18,243 | € 16,724 | 0.9167 | Prepaid Exp / (Accrued Exp) | 72 | (190 | ) | (118 | ) | ||||||||||||||||||||
| Total fair value of financial instruments | $ | 28,643 | $ | (17,407 | ) | $ | 11,236 |
The impact of derivative financial instruments on the statements of income during fiscal 2017, fiscal 2016 and fiscal 2015 are as follows:
| Amount of Gain (Loss) Recognized in Income by Derivative | ||||||||||||||
| In thousands | Location of Gain (Loss) Recognized in Income by Derivative | January 28, 2017 | January 30, 2016 | January 31, 2015 | ||||||||||
| Fair value hedges: | ||||||||||||||
| Intercompany balances, primarily debt and related interest | Selling, general and administrative expenses | $ | (17,250 | ) | $ | (3,927 | ) | $ | 7,413 | |||||
| Economic hedges for which hedge accounting was not elected: | ||||||||||||||
| Diesel contracts | Cost of sales, including buying and occupancy costs | 3,906 | (21,797 | ) | (16,050 | ) | ||||||||
| Intercompany billings in Europe, primarily merchandise related | Cost of sales, including buying and occupancy costs | (8,684 | ) | (5,768 | ) | — | ||||||||
| Merchandise purchase commitments | Cost of sales, including buying and occupancy costs | 5,626 | 49,107 | 41,554 | ||||||||||
| (Loss) Gain recognized in income | $ | (16,402 | ) | $ | 17,615 | $ | 32,917 |
Included in the table above are realized losses of $6.1 million in fiscal 2017, and gains of $28.5 million in fiscal 2016 and $24.3 million in fiscal 2015, all of which were largely offset by gains and losses on the underlying hedged item.
F-18
Note G. Disclosures about Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date or “exit price.” The inputs used to measure fair value are generally classified into the following hierarchy:
| Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities | |
| Level 2: | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability | |
| Level 3: | Unobservable inputs for the asset or liability |
The following table sets forth TJX’s financial assets and liabilities that are accounted for at fair value on a recurring basis:
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Level 1 | ||||||||||||
| Assets: | ||||||||||||
| Executive Savings Plan investments | $ | 195,733 | $ | 155,847 | $ | 151,936 | ||||||
| Level 2 | ||||||||||||
| Assets: | ||||||||||||
| Short-term investments | $ | 543,242 | $ | 352,313 | $ | 282,623 | ||||||
| Foreign currency exchange contracts | 6,018 | 28,643 | 39,419 | |||||||||
| Diesel fuel contracts | 2,183 | — | — | |||||||||
| Liabilities: | ||||||||||||
| Foreign currency exchange contracts | $ | 7,256 | $ | 3,455 | $ | 1,942 | ||||||
| Diesel fuel contracts | — | 13,952 | 15,324 |
Investments designed to meet obligations under the Executive Savings Plan are invested in registered investment companies traded in active markets and are recorded at unadjusted quoted prices.
Short-term investments, foreign currency exchange contracts and diesel fuel contracts are valued using broker quotations which include observable market information. TJX’s investments are primarily high-grade commercial paper, institutional money market funds and time deposits with major banks. TJX does not make adjustments to quotes or prices obtained from brokers or pricing services but does assess the credit risk of counterparties and will adjust final valuations when appropriate. Where independent pricing services provide fair values, TJX obtains an understanding of the methods used in pricing. As such, these instruments are classified within Level 2.
The fair value of TJX’s general corporate debt was estimated by obtaining market quotes given the trading levels of other bonds of the same general issuer type and market perceived credit quality. These inputs are considered to be Level 2. The fair value of long-term debt at January 28, 2017 was $2.17 billion compared to a carrying value of $2.23 billion. The fair value of long-term debt at January 30, 2016 was $1.70 billion compared to a carrying value of $1.62 billion. The fair value of long-term debt at January 31, 2015 was $1.73 billion compared to a carrying value of $1.62 billion. These estimates do not necessarily reflect provisions or restrictions in the various debt agreements that might affect TJX’s ability to settle these obligations.
TJX’s cash equivalents are stated at cost, which approximates fair value, due to the short maturities of these instruments.
Note H. Segment Information
TJX operates four main business segments. The Marmaxx segment (T.J. Maxx, Marshalls and tjmaxx.com) and the HomeGoods segment both operate in the United States, the TJX Canada segment operates Winners, HomeSense and Marshalls in Canada, and the TJX International segment operates T.K. Maxx, HomeSense and tkmaxx.com in Europe and Trade Secret in Australia. TJX also operates Sierra Trading Post, an off-price Internet retailer that operates a small number of stores in the U.S. The results of STP are included in the Marmaxx segment.
F-19
All of TJX’s stores, with the exception of HomeGoods and HomeSense, sell family apparel and home fashions. HomeGoods and HomeSense offer home fashions.
The percentages of our consolidated revenues by major product category for the last three fiscal years are as follows:
| Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | ||||||||||
| Apparel | ||||||||||||
| Clothing including footwear | 54 | % | 55 | % | 57 | % | ||||||
| Jewelry and accessories | 15 | 15 | 14 | |||||||||
| Home fashions | 31 | 30 | 29 | |||||||||
| Total | 100 | % | 100 | % | 100 | % |
For fiscal 2017, TJX Canada and TJX International accounted for 23% of TJX’s net sales, 15% of segment profit and 24% of consolidated assets. For fiscal 2016, TJX Canada and TJX International accounted for 23% of TJX’s net sales, 17% of segment profit and 23% of consolidated assets. For fiscal 2015, TJX Canada and TJX International accounted for 24% of TJX’s net sales, 19% of segment profit and 23% of consolidated assets.
TJX evaluates the performance of its segments based on “segment profit or loss,” which it defines as pre-tax income or loss before general corporate expense, loss on early extinguishment of debt, pension settlement charge and interest expense, net. “Segment profit or loss,” as defined by TJX, may not be comparable to similarly titled measures used by other entities. These measures of performance should not be considered alternatives to net income or cash flows from operating activities as an indicator of TJX’s performance or as a measure of liquidity.
Presented below is financial information with respect to TJX’s business segments:
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net sales: | ||||||||||||
| In the United States | ||||||||||||
| Marmaxx | $ | 21,246,034 | $ | 19,948,227 | $ | 18,687,880 | ||||||
| HomeGoods | 4,404,607 | 3,915,221 | 3,414,351 | |||||||||
| TJX Canada | 3,171,127 | 2,854,617 | 2,883,863 | |||||||||
| TJX International | 4,361,976 | 4,226,873 | 4,092,313 | |||||||||
| $ | 33,183,744 | $ | 30,944,938 | $ | 29,078,407 | |||||||
| Segment profit: | ||||||||||||
| In the United States | ||||||||||||
| Marmaxx | $ | 2,995,045 | $ | 2,858,780 | $ | 2,736,694 | ||||||
| HomeGoods | 613,778 | 549,318 | 463,193 | |||||||||
| TJX Canada | 413,417 | 375,306 | 393,622 | |||||||||
| TJX International | 235,519 | 316,939 | 337,406 | |||||||||
| 4,257,759 | 4,100,343 | 3,930,915 | ||||||||||
| General corporate expense | 408,236 | 395,643 | 324,414 | |||||||||
| Loss on early extinguishment of debt | 51,773 | — | 16,830 | |||||||||
| Pension settlement charge | 31,173 | — | — | |||||||||
| Interest expense, net | 43,534 | 46,400 | 39,787 | |||||||||
| Income before provision for income taxes | $ | 3,723,043 | $ | 3,658,300 | $ | 3,549,884 |
F-20
Business segment information (continued):
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Identifiable assets: | ||||||||||||
| In the United States | ||||||||||||
| Marmaxx | $ | 5,440,448 | $ | 5,526,570 | $ | 5,014,573 | ||||||
| HomeGoods | 1,086,947 | 915,549 | 777,214 | |||||||||
| TJX Canada | 1,345,003 | 1,021,584 | 1,020,955 | |||||||||
| TJX International | 1,789,140 | 1,645,296 | 1,531,661 | |||||||||
| Corporate(1) | 3,222,270 | 2,381,432 | 2,633,590 | |||||||||
| $ | 12,883,808 | $ | 11,490,431 | $ | 10,977,993 | |||||||
| Capital expenditures: | ||||||||||||
| In the United States | ||||||||||||
| Marmaxx | $ | 449,169 | $ | 442,910 | $ | 445,041 | ||||||
| HomeGoods | 173,979 | 130,593 | 148,354 | |||||||||
| TJX Canada | 100,437 | 71,071 | 100,779 | |||||||||
| TJX International | 301,162 | 244,806 | 217,348 | |||||||||
| $ | 1,024,747 | $ | 889,380 | $ | 911,522 | |||||||
| Depreciation and amortization: | ||||||||||||
| In the United States | ||||||||||||
| Marmaxx | $ | 385,007 | $ | 364,892 | $ | 340,830 | ||||||
| HomeGoods | 77,287 | 67,204 | 54,867 | |||||||||
| TJX Canada | 62,427 | 54,573 | 66,141 | |||||||||
| TJX International | 129,376 | 126,020 | 123,547 | |||||||||
| Corporate(2) | 4,699 | 4,007 | 3,590 | |||||||||
| $ | 658,796 | $ | 616,696 | $ | 588,975 |
| (1) | Corporate identifiable assets consist primarily of cash, receivables, prepaid insurance, prepaid service contracts and the trust assets in connection with the Executive Savings Plan. Consolidated cash, including cash held in our foreign entities, is included with corporate assets for consistency with the reporting of cash for our segments in the U.S. |
|---|
| (2) | Includes debt discount accretion and debt expense amortization. |
|---|
Note I. Stock Incentive Plan
TJX has a Stock Incentive Plan under which options and other share-based awards may be granted to its directors, officers and key employees. This plan has been approved by TJX’s shareholders, and all share-based compensation awards are made under this plan. The Stock Incentive Plan, as amended with shareholder approval, has provided for the issuance of up to 347.8 million shares with 31.5 million shares available for future grants as of January 28, 2017. TJX issues shares under the plan from authorized but unissued common stock.
Total compensation cost related to share-based compensation was $102.3 million, $94.1 million and $88.0 million in fiscal 2017, 2016 and 2015, respectively. As of January 28, 2017, there was $128.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted-average period of two years.
Options for the purchase of common stock are granted with an exercise price that is 100% of market price on the grant date, generally vest in thirds over a three-year period starting one year after the grant, and have a ten-year maximum term. When options are granted with other vesting terms, the vesting information is reflected in the valuation.
F-21
The fair value of options is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
| Fiscal Year Ended | ||||||||||||
| January 28, 2017 | January 30, 2016 | January 31, 2015 | ||||||||||
| Risk-free interest rate | 1.20 | % | 1.50 | % | 1.79 | % | ||||||
| Dividend yield | 1.2 | % | 1.2 | % | 1.2 | % | ||||||
| Expected volatility factor | 23.8 | % | 24.4 | % | 24.2 | % | ||||||
| Expected option life in years | 4.8 | 4.5 | 4.5 | |||||||||
| Weighted average fair value of options issued | $ | 14.55 | $ | 14.48 | $ | 12.00 |
The risk-free interest rate is for periods within the contractual life of the option based on the U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate option exercises, employee termination behavior and dividend yield within the valuation model. Expected volatility is based on a combination of implied volatility from traded options on our stock, and historical volatility during a term approximating the expected life of the option granted. The expected option life represents an estimate of the period of time options are expected to remain outstanding based upon historical exercise trends. Employee groups and option characteristics are considered separately for valuation purposes when applicable.
Stock Options: A summary of the status of TJX’s stock options and related weighted average exercise prices (WAEP) is presented below (shares in thousands):
| Fiscal Year Ended | ||||||||||||||||||||||||
| January 28, 2017 | January 30, 2016 | January 31, 2015 | ||||||||||||||||||||||
| Options | WAEP | Options | WAEP | Options | WAEP | |||||||||||||||||||
| Outstanding at beginning of year | 28,686 | $ | 41.68 | 30,078 | $ | 34.91 | 32,628 | $ | 28.30 | |||||||||||||||
| Granted | 4,305 | 75.04 | 4,169 | 72.54 | 4,849 | 59.70 | ||||||||||||||||||
| Exercised | (5,265 | ) | 30.83 | (5,124 | ) | 25.87 | (6,981 | ) | 20.39 | |||||||||||||||
| Forfeitures | (373 | ) | 66.15 | (437 | ) | 55.06 | (418 | ) | 48.76 | |||||||||||||||
| Outstanding at end of year | 27,353 | $ | 48.69 | 28,686 | $ | 41.68 | 30,078 | $ | 34.91 | |||||||||||||||
| Options exercisable at end of year | 18,980 | $ | 38.69 | 20,175 | $ | 31.75 | 21,001 | $ | 25.75 |
The total intrinsic value of options exercised was $239.7 million in fiscal 2017, $227.4 million in fiscal 2016 and $286.3 million in fiscal 2015.
The following table summarizes information about stock options outstanding that were expected to vest and stock options outstanding that were exercisable as of January 28, 2017:
| Shares in thousands | Shares | Aggregate Intrinsic Value | Weighted Average Remaining Contract Life | WAEP | ||||||||||||
| Options outstanding expected to vest | 7,747 | $ | 24,974 | 8.9 years | $ | 71.42 | ||||||||||
| Options exercisable | 18,980 | $ | 675,109 | 5.0 years | $ | 38.69 | ||||||||||
| Total outstanding options vested and expected to vest | 26,727 | $ | 700,083 | 6.2 years | $ | 48.18 |
Options outstanding expected to vest represents total unvested options of 8.3 million adjusted for anticipated forfeitures.
Performance-Based Stock Awards: TJX has granted performance-based restricted stock, performance-based restricted stock units and performance-based deferred stock awards (collectively referred to as performance-based stock awards) under the Stock Incentive Plan. These awards are granted without a purchase price to the recipient and are subject to vesting conditions, including specified performance criteria aligned with management incentive plans for a period of generally one to three years. The grant date fair value of the awards is charged to income over the requisite service period during which the recipient must remain employed. The fair value of the awards is determined at date of grant in accordance with ASC Topic 718 and assumes that performance goals will be achieved. If such goals are not met, or only partially met, awards and related compensation costs recognized are reduced on a pro rata basis.
F-22
A summary of the status of our nonvested performance-based stock awards and changes during fiscal 2017 is presented below:
| Shares in thousands | Performance- based stock awards | Weighted Average Grant Date Fair Value | ||||||
| Nonvested at beginning of year | 1,776 | $ | 63.57 | |||||
| Granted | 514 | 78.50 | ||||||
| Vested | (706 | ) | 54.47 | |||||
| Forfeited | (25 | ) | 69.31 | |||||
| Nonvested at end of year | 1,559 | $ | 72.52 | |||||
There were 513,573 shares of performance-based stock awards, with a weighted average grant date fair value of $78.50, granted in fiscal 2017, 696,057 shares of performance-based stock awards, with a weighted average grant date fair value of $70.41, granted in fiscal 2016, and 717,500 shares of performance-based stock awards, with a weighted average grant date fair value of $62.85, granted in fiscal 2015. The fair value of performance-based stock awards that vested was $38.5 million in fiscal 2017, $27.1 million in fiscal 2016, and $21.4 million in fiscal 2015.
Other Awards: TJX also awards deferred shares to its outside directors under the Stock Incentive Plan. The outside directors are awarded two annual deferred share awards, each representing shares of TJX common stock, which were valued at $80,000 for fiscal 2017. One award vests immediately and is payable, with accumulated dividends, in stock at the earlier of separation from service as a director or a change of control. The second award vests based on a directors continued service until the annual meeting that follows the grant of the award (subject to possible earlier vesting in connection with or following a change of control) and is payable, with accumulated dividends, in stock upon vesting, unless an irrevocable advance election is made whereby it is payable at the same time as the first award. As of the end of fiscal 2017, a total of 313,367 of these deferred shares were outstanding under the plan.
Note J. Pension Plans and Other Retirement Benefits
Pension****: TJX has a funded defined benefit retirement plan that covers eligible U.S. employees hired prior to February 1, 2006. No employee contributions are required, or permitted, and benefits are based principally on compensation earned in each year of service. TJX’s funded defined benefit retirement plan assets are invested in domestic and international equity and fixed income securities, both directly and through investment funds. The plan does not invest in TJX securities. TJX also has an unfunded supplemental retirement plan that covers certain key employees and provides additional retirement benefits based on final average compensation for certain of those employees (the primary benefit) or, alternatively, based on benefits that would be provided under the funded retirement plan absent Internal Revenue Code limitations (the alternative benefit).
Presented below is financial information relating to TJX’s funded defined benefit pension plan (qualified pension plan or funded plan) and its unfunded supplemental pension plan (unfunded plan) for the fiscal years indicated. The Company has elected the practical expedient pursuant to ASU 2015-04 and has selected the measurement date of January 31, the calendar month end closest to the Company’s fiscal year end.
| Funded Plan Fiscal Year Ended | Unfunded Plan Fiscal Year Ended | |||||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 28, 2017 | January 30, 2016 | ||||||||||||
| Change in projected benefit obligation: | ||||||||||||||||
| Projected benefit obligation at beginning of year | $ | 1,213,000 | $ | 1,309,889 | $ | 84,967 | $ | 82,238 | ||||||||
| Service cost | 45,440 | 50,080 | 1,835 | 1,562 | ||||||||||||
| Interest cost | 56,094 | 51,710 | 3,391 | 3,033 | ||||||||||||
| Actuarial (gains) losses | 91,114 | (170,674 | ) | 740 | 3,806 | |||||||||||
| Settlements | (103,197 | ) | — | — | — | |||||||||||
| Benefits paid | (28,751 | ) | (24,956 | ) | (4,624 | ) | (5,672 | ) | ||||||||
| Expenses paid | (4,690 | ) | (3,049 | ) | — | — | ||||||||||
| Plan amendment | — | — | — | — | ||||||||||||
| Projected benefit obligation at end of year | $ | 1,269,010 | $ | 1,213,000 | $ | 86,309 | $ | 84,967 | ||||||||
| Accumulated benefit obligation at end of year | $ | 1,151,151 | $ | 1,120,602 | $ | 71,273 | $ | 70,750 |
F-23
| Funded Plan Fiscal Year Ended | Unfunded Plan Fiscal Year Ended | |||||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 28, 2017 | January 30, 2016 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,119,842 | $ | 1,170,748 | $ | — | $ | — | ||||||||
| Actual return on plan assets | 143,756 | (72,901 | ) | — | — | |||||||||||
| Employer contribution | 50,000 | 50,000 | 4,624 | 5,672 | ||||||||||||
| Settlements | (103,197 | ) | — | — | — | |||||||||||
| Benefits paid | (28,751 | ) | (24,956 | ) | (4,624 | ) | (5,672 | ) | ||||||||
| Expenses paid | (4,690 | ) | (3,049 | ) | — | — | ||||||||||
| Fair value of plan assets at end of year | $ | 1,176,960 | $ | 1,119,842 | $ | — | $ | — | ||||||||
| Reconciliation of funded status: | ||||||||||||||||
| Projected benefit obligation at end of year | $ | 1,269,010 | $ | 1,213,000 | $ | 86,309 | $ | 84,967 | ||||||||
| Fair value of plan assets at end of year | 1,176,960 | 1,119,842 | — | — | ||||||||||||
| Funded status – excess obligation | $ | 92,050 | $ | 93,158 | $ | 86,309 | $ | 84,967 | ||||||||
| Net liability recognized on consolidated balance sheets | $ | 92,050 | $ | 93,158 | $ | 86,309 | $ | 84,967 | ||||||||
| Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss): | ||||||||||||||||
| Prior service cost | $ | 2,313 | $ | 2,690 | $ | — | $ | — | ||||||||
| Accumulated actuarial losses | 303,612 | 348,289 | 26,438 | 29,046 | ||||||||||||
| Amounts included in accumulated other comprehensive income (loss) | $ | 305,925 | $ | 350,979 | $ | 26,438 | $ | 29,046 |
The consolidated balance sheets reflect the funded status of the plans with any unrecognized prior service cost and actuarial gains and losses recorded in accumulated other comprehensive income (loss). The combined net accrued liability of $178.4 million at January 28, 2017 is reflected on the balance sheet as of that date as a current liability of $4.0 million and a long-term liability of $174.4 million. The combined net accrued liability of $178.1 million at January 30, 2016 is reflected on the balance sheet as of that date as a current liability of $3.2 million and a long-term liability of $174.9 million.
The estimated prior service cost that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in fiscal 2018 for the funded plan is $377,000. The estimated net actuarial loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in fiscal 2018 is $21.9 million for the funded plan and $3.3 million for the unfunded plan.
TJX determined the assumed discount rate using the BOND: Link model in fiscal 2017 and fiscal 2016. TJX uses the BOND: Link model as this model allows for the selection of specific bonds resulting in better matches in timing of the plans’ expected cash flows. Presented below are weighted average assumptions for measurement purposes for determining the obligation at the year-end measurement date:
| Funded Plan Fiscal Year Ended | Unfunded Plan Fiscal Year Ended | |||||||||||||||
| January 28, 2017 | January 30, 2016 | January 28, 2017 | January 30, 2016 | |||||||||||||
| Discount rate | 4.40 | % | 4.80 | % | 4.00 | % | 4.20 | % | ||||||||
| Rate of compensation increase | 4.00 | % | 4.00 | % | 6.00 | % | 6.00 | % |
TJX made aggregate cash contributions of $54.6 million in fiscal 2017, $55.7 million in fiscal 2016 and $151.3 million in fiscal 2015 to the funded plan and to fund current benefit and expense payments under the unfunded plan. TJX’s policy with respect to the funded plan is to fund, at a minimum, the amount required to maintain a funded status of 80% of the applicable pension liability (the Funding Target pursuant to the Internal Revenue Code section 430) or such other amount as is sufficient to avoid restrictions with respect to the funding of nonqualified plans under the Internal Revenue Code. We do not anticipate any required funding in fiscal 2018 for the funded plan. We anticipate making contributions of $4.1 million to provide current benefits coming due under the unfunded plan in fiscal 2018.
F-24
The following are the components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) related to our pension plans:
| Funded Plan Fiscal Year Ended | Unfunded Plan Fiscal Year Ended | |||||||||||||||||||||||
| Dollars in thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | January 28, 2017 | January 30, 2016 | January 31, 2015 | ||||||||||||||||||
| Net periodic pension cost: | ||||||||||||||||||||||||
| Service cost | $ | 45,440 | $ | 50,080 | $ | 40,481 | $ | 1,835 | $ | 1,562 | $ | 1,398 | ||||||||||||
| Interest cost | 56,094 | 51,710 | 49,522 | 3,391 | 3,033 | 3,001 | ||||||||||||||||||
| Expected return on plan assets | (70,535 | ) | (78,042 | ) | (65,187 | ) | — | — | — | |||||||||||||||
| Amortization of prior service cost | 377 | 377 | — | — | — | 2 | ||||||||||||||||||
| Amortization of net actuarial loss | 31,397 | 33,146 | 13,848 | 3,349 | 3,958 | 2,146 | ||||||||||||||||||
| Settlement charge | 31,173 | — | — | — | — | — | ||||||||||||||||||
| Total expense | $ | 93,946 | $ | 57,271 | $ | 38,664 | $ | 8,575 | $ | 8,553 | $ | 6,547 | ||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive income: | ||||||||||||||||||||||||
| Net (gain) loss | $ | 17,894 | $ | (19,731 | ) | $ | 209,091 | $ | 740 | $ | 3,806 | $ | 19,552 | |||||||||||
| Amortization of net (loss) | (31,397 | ) | (33,146 | ) | (13,848 | ) | (3,349 | ) | (3,958 | ) | (2,146 | ) | ||||||||||||
| Settlement charge | (31,173 | ) | — | — | — | — | — | |||||||||||||||||
| Amortization of prior service cost | (377 | ) | (377 | ) | — | — | — | (2 | ) | |||||||||||||||
| Plan amendment | — | — | 3,067 | — | — | — | ||||||||||||||||||
| Total recognized in other comprehensive income (loss) | $ | (45,053 | ) | $ | (53,254 | ) | $ | 198,310 | $ | (2,609 | ) | $ | (152 | ) | $ | 17,404 | ||||||||
| Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | 48,893 | $ | 4,017 | $ | 236,974 | $ | 5,966 | $ | 8,401 | $ | 23,951 | ||||||||||||
| Weighted average assumptions for expense purposes: | ||||||||||||||||||||||||
| Discount rate | 4.80%/3.80% | 4.00% | 5.00% | 4.20% | 3.70% | 4.80% | ||||||||||||||||||
| Expected rate of return on plan assets | 6.50%/6.00% | 6.75% | 7.00% | N/A | N/A | N/A | ||||||||||||||||||
| Rate of compensation increase | 4.00% | 4.00% | 4.00% | 6.00% | 6.00% | 6.00% |
During the third quarter of fiscal 2017, TJX offered eligible former TJX Associates, who had not yet commenced receiving their pension benefit, an opportunity to receive a lump sum payout of their vested pension benefit. On October 21, 2016 the Company’s pension plan paid $103.2 million from pension plan assets to those who accepted this offer, thereby reducing its pension benefit obligations. The transaction had no cash impact on TJX but did result in a non-cash pre-tax pension settlement charge of $31.2 million, which is reported separately on the consolidated statements of income. As a result of the lump sum payout the Company re-measured the funded status of its pension plan as of September 30, 2016. The assumptions for pension expense presented above includes a discount rate of 4.80% through the measurement date and 3.80% thereafter. The expected rate of return on plan assets is 6.50% through the measurement date and 6.00% thereafter.
The rate of compensation increase presented for the unfunded plan (for measurement purposes and expense purposes) is the rate assumed for participants eligible for the primary benefit. The assumed rate of compensation increase for participants eligible for the alternative benefit under the unfunded plan is the same rate as assumed for the funded plan.
TJX develops its long-term rate of return assumption by evaluating input from professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions.
The unrecognized gains and losses in excess of 10% of the projected benefit obligation are amortized over the average remaining service life of participants.
F-25
The following is a schedule of the benefits expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter:
| In thousands | Funded Plan Expected Benefit Payments | Unfunded Plan Expected Benefit Payments | ||||||
| Fiscal Year | ||||||||
| 2018 | $ | 36,344 | $ | 4,063 | ||||
| 2019 | 39,888 | 4,534 | ||||||
| 2020 | 43,673 | 39,428 | ||||||
| 2021 | 47,775 | 4,425 | ||||||
| 2022 | 52,167 | 4,380 | ||||||
| 2023 through 2027 | 329,327 | 26,285 |
The following table presents the fair value hierarchy (See Note G) for pension assets measured at fair value on a recurring basis as of January 28, 2017:
| Funded Plan | ||||||||||||
| In thousands | Level 1 | Level 2 | Total | |||||||||
| Asset category: | ||||||||||||
| Short-term investments | $ | 63,704 | $ | — | $ | 63,704 | ||||||
| Equity Securities | 208,451 | — | 208,451 | |||||||||
| Fixed Income Securities: | ||||||||||||
| Corporate and government bond funds | — | 386,777 | 386,777 | |||||||||
| Futures Contracts | — | (31 | ) | (31 | ) | |||||||
| Total assets in the fair value hierarchy | $ | 272,155 | $ | 386,746 | $ | 658,901 | ||||||
| Assets measured at net asset value* | — | — | 518,059 | |||||||||
| Fair value of assets | $ | 272,155 | $ | 386,746 | $ | 1,176,960 |
| * | In accordance with Subtopic 820-10, certain investments that were measured using net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of assets presented above. |
|---|
The following table presents the fair value hierarchy for pension assets measured at fair value on a recurring basis as of January 30, 2016:
| Funded Plan | ||||||||||||
| In thousands | Level 1 | Level 2 | Total | |||||||||
| Asset category: | ||||||||||||
| Short-term investments | $ | 57,713 | $ | — | $ | 57,713 | ||||||
| Equity Securities | 216,526 | — | 216,526 | |||||||||
| Fixed Income Securities: | ||||||||||||
| Corporate and government bond funds | — | 337,864 | 337,864 | |||||||||
| Futures Contracts | — | (33 | ) | (33 | ) | |||||||
| Total assets in the fair value hierarchy | $ | 274,239 | $ | 337,831 | $ | 612,070 | ||||||
| Assets measured at net asset value* | — | — | 507,772 | |||||||||
| Fair value of assets | $ | 274,239 | $ | 337,831 | $ | 1,119,842 |
| * | In accordance with Subtopic 820-10, certain investments that were measured using net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of assets presented above. |
|---|
Pension plan assets are reported at fair value. Investments in equity securities traded on a national securities exchange are valued at the composite close price, as reported in the Wall Street Journal, as of the financial statement date. This information is provided by the independent pricing sources.
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Short-term investments are primarily cash related to funding of the plan which had yet to be invested as of balance sheet dates.
Certain corporate and government bonds are valued at the closing price reported in the active market in which the bond is traded. Other bonds are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. All bonds are priced by independent pricing sources.
Assets measured at net asset value include investments in limited partnerships which are stated at the fair value of the plan’s partnership interest based on information supplied by the partnerships as compared to financial statements of the limited partnership or other fair value information as determined by management. Cash equivalents or short-term investments are stated at cost which approximates fair value, and the fair value of common/collective trusts is determined based on net asset value as reported by their fund managers.
The following is a summary of TJX’s target allocation guidelines for plan assets along with the actual allocation of plan assets as of the valuation date for the fiscal years presented:
| Actual Allocation for Fiscal Year Ended | ||||||||||||
| Target Allocation | January 28, 2017 | January 30, 2016 | ||||||||||
| Return-seeking assets (previously equity securities) | 50% | 44% | 40% | |||||||||
| Liability-hedging assets (previously fixed income) | 50% | 51% | 55% | |||||||||
| All other – primarily cash | — | 5% | 5% |
Under TJX’s investment policy, plan assets are to be invested with the objective of generating investment returns that, in combination with funding contributions, provide adequate assets to meet all current and reasonably anticipated future benefit obligations under the plan. Effective January 1, 2017, the investment policy includes a dynamic asset allocation strategy, whereby, over time, in connection with any improvements in the plan’s funded status, the target allocation of return-seeking assets (generally, equities and other instruments with similar risk profile) may decline and the target allocation of liability-hedging assets (generally, fixed income and other instruments with a similar risk profile) may increase. Risks are sought to be mitigated through asset diversification and the use of multiple investment managers. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
TJX also sponsors an employee savings plan under Section 401(k) of the Internal Revenue Code for all eligible U.S. employees and a similar type of plan for eligible employees in Puerto Rico. Assets under the plans totaled $1,480.9 million as of December 31, 2016 and $1,314.8 million as of December 31, 2015, and are invested in a variety of funds. Employees may contribute up to 50% of eligible pay, subject to limitations. TJX matches employee contributions, up to 5% of eligible pay, including a basic match at rates of 25% or 75% (based upon date of hire and other eligibility criteria) plus a discretionary match, generally up to 25%, based on TJX’s performance. Eligible employees are automatically enrolled in the U.S. plan at a 2% deferral rate, unless the employee elects otherwise. TJX contributed $34.5 million in fiscal 2017, $30.8 million in fiscal 2016 and $31.2 million in fiscal 2015 to these employee savings plans. The plans include a TJX stock fund in which participants could invest a portion of TJX’s matching contribution. The TJX stock fund was closed to new investments, other than reinvestment of dividends, at the end of calendar 2015 and is scheduled to be eliminated from the plans in March 2018. The TJX stock fund represented 6.2% of plan assets at December 31, 2016, 7.1% of plan assets at December 31, 2015 and 7.4% of plan assets at December 31, 2014.
TJX also has a nonqualified savings plan (the Executive Savings Plan) for certain U.S. employees. TJX matches employee deferrals at various rates which amounted to $5.8 million in fiscal 2017, $4.5 million in fiscal 2016 and $3.5 million in fiscal 2015. Although the plan is unfunded, in order to help meet its future obligations TJX transfers an amount generally equal to employee deferrals and the related company match to a separate “rabbi” trust. The trust assets, which are invested in a variety of mutual funds, are included in other assets on the balance sheets.
F-27
In addition to the plans described above, TJX also maintains retirement/deferred savings plans for eligible associates at its foreign subsidiaries. We contributed $10.2 million for these plans in fiscal 2017, $9.7 million for these plans in fiscal 2016 and $9.3 million in fiscal 2015.
Multiemployer Pension Plans: TJX contributes to certain multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover union-represented employees. TJX contributed $14.5 million in fiscal 2017, $13.4 million in fiscal 2016 and $11.5 million in fiscal 2015 to the Legacy Plan of the National Retirement Fund (formerly, the National Retirement Fund) (EIN #13-6130178, plan #001) and the Adjustable Plan of the National Retirement Fund (EIN #13-6130178, plan #002) and was listed in each plan’s Form 5500 as providing more than 5% of the total contributions for the plan year ending December 31, 2015. Based on information available to TJX, the Pension Protection Act Zone Status of the Legacy Plan of the National Retirement Fund is Critical and a rehabilitation plan has been implemented.
The risks of participating in multiemployer pension plans are different from the risks of single-employer pension plans in certain respects, including the following: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; (c) if we cease to have an obligation to contribute to a multiemployer plan in which we had been a contributing employer, or in certain other circumstances, we may be required to pay to the plan an amount based on our allocable share of the underfunded status of the plan, referred to as a withdrawal liability.
Postretirement Medical****: TJX has maintained a postretirement medical plan that provides limited postretirement medical benefits to retirees who are eligible for the defined benefit plan and who retired at age 55 or older with ten or more years of service. During fiscal 2006, TJX eliminated this benefit for all active associates and modified the benefit that was offered to retirees enrolled in the plan at that time.
During the first quarter of fiscal 2017, TJX terminated the unfunded postretirement medical plan and made a discretionary lump sum payment to participants. The settlement of the liability and the recognition of the remaining negative plan amendment resulted in a pre-tax benefit of $5.5 million in the first quarter of fiscal 2017.
Note K. Long-Term Debt and Credit Lines
The table below presents long-term debt, exclusive of current installments, as of January 28, 2017 and January 30, 2016. All amounts are net of unamortized debt discounts.
| In thousands | January 28, 2017 | January 30, 2016 | ||||||
| General corporate debt: | ||||||||
| 6.95% senior unsecured notes, redeemed on October 12, 2016 (effective interest rate of 6.98% after reduction of unamortized debt discount of $223 in fiscal 2016) | $ | — | $ | 374,777 | ||||
| 2.50% senior unsecured notes, maturing May 15, 2023 (effective interest rate of 2.51% after reduction of unamortized debt discount of $278 and $323 in fiscal 2017 and 2016, respectively) | 499,722 | 499,677 | ||||||
| 2.75% senior unsecured notes, maturing June 15, 2021 (effective interest rate of 2.76% after reduction of unamortized debt discount of $325 and $400 in fiscal 2017 and 2016, respectively) | 749,675 | 749,600 | ||||||
| 2.25% senior unsecured notes, maturing September 15, 2026 (effective interest rate of 2.32% after reduction of unamortized debt discount of $7,149 in fiscal 2017) | 992,851 | — | ||||||
| Debt issuance cost | (14,649 | ) | (9,051 | ) | ||||
| Long-term debt | $ | 2,227,599 | $ | 1,615,003 |
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The aggregate maturities of long-term debt, exclusive of current installments at January 28, 2017 are as follows:
| In thousands | Long-Term Debt | |||
| Fiscal Year | ||||
| 2019 | $ | — | ||
| 2020 | — | |||
| 2021 | — | |||
| 2022 | 750,000 | |||
| Later years | 1,500,000 | |||
| Less amount representing unamortized debt discount | (7,752 | ) | ||
| Less amount representing debt issuance cost | (14,649 | ) | ||
| Aggregate maturities of long-term debt | $ | 2,227,599 |
On September 12, 2016, TJX issued $1.0 billion aggregate principal amount of 2.25% ten-year notes due September 2026, all of which were outstanding at January 28, 2017. TJX entered into a rate-lock agreement to hedge $700 million of the 2.25% notes. The cost of these agreements are being amortized to interest expense over the term of the notes resulting in an effective fixed rate of 2.36%. On October 12, 2016, TJX used a portion of the proceeds from the 2.25% ten-year notes to redeem all outstanding 6.95% ten-year notes and recorded a pre-tax loss on the early extinguishment of debt of $51.8 million, which includes $50.6 million of redemption premium and $1.2 million to write off unamortized debt expenses and discount.
At January 28, 2017, TJX also had outstanding $500 million aggregate principal amount of 2.50% ten-year notes due May 2023 and $750 million aggregate principal amount of 2.75% seven-year notes due June 2021. TJX entered into rate-lock agreements to hedge the underlying treasury rate of $250 million of the 2.50% notes. The costs of these agreements are being amortized to interest expense over the term of the respective notes, resulting in an effective fixed interest rate of 2.57% for the 2.50% notes. TJX also entered into rate-lock agreements to hedge the underlying treasury rate of all of the 2.75% notes prior to their issuance. The agreements were accounted for as cash flow hedges and the pre-tax realized loss of $7.9 million was recorded as a component of other comprehensive income and is being amortized to interest expense over the term of the notes, resulting in an effective fixed interest rate of 2.91%.
At January 28, 2017, TJX had two $500 million revolving credit facilities, one which matures in March 2020 and one which matures in March 2021. At January 30, 2016, TJX had two $500 million revolving credit facilities, one which was scheduled to mature in May 2016 and one which was scheduled to mature in June 2017. In March 2016, the $500 million revolving credit facility scheduled to mature in May 2016 was replaced with a new five-year $500 million revolving credit facility maturing in March 2021 and the $500 million revolving credit facility scheduled to mature in June 2017 was replaced with a new four-year $500 million revolving credit facility maturing in March 2020. The terms and covenants under the new revolving credit facilities are similar to those in the terminated facilities and require quarterly payments of 6.0 basis points per annum on the committed amounts for both agreements. This rate is based on the credit ratings of TJX’s long-term debt and will vary with specified changes in the credit ratings. These agreements had no compensating balance requirements and had various covenants. Each of these facilities required TJX to maintain a ratio of funded debt and four-times consolidated rentals to consolidated earnings before interest, taxes, consolidated rentals, depreciation and amortization (EBITDAR) of not more than 2.75 to 1.00 on a rolling four-quarter basis. TJX was in compliance with all covenants related to its credit facilities at the end of all periods presented. As of January 28, 2017 and January 30, 2016, and during the years then ended, there were no amounts outstanding under these facilities. In March 2017, the $500 million revolving credit facility scheduled to mature in March 2021 was extended to March 2022. No other terms of the facility were modified at that time.
As of January 28, 2017 and January 30, 2016, TJX Canada had two uncommitted credit lines, a C$10 million facility for operating expenses and a C$10 million letter of credit facility. As of January 28, 2017 and January 30, 2016, and during the years then ended, there were no amounts outstanding on the Canadian credit line for operating expenses. As of January 28, 2017 and January 30, 2016, our European business at TJX International had an uncommitted credit line of £5 million. As of January 28, 2017 and January 30, 2016 and during the years then ended, there were no amounts outstanding on the European credit line.
F-29
Note L. Income Taxes
For financial reporting purposes, components of income before income taxes are as follows:
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| United States | $ | 3,196,370 | $ | 3,102,304 | $ | 2,943,745 | ||||||
| Foreign | 526,673 | 555,996 | 606,139 | |||||||||
| Income before provision for income taxes | $ | 3,723,043 | $ | 3,658,300 | $ | 3,549,884 |
The provision for income taxes includes the following:
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 1,068,778 | $ | 992,094 | $ | 896,672 | ||||||
| State | 213,505 | 208,357 | 180,616 | |||||||||
| Foreign | 148,367 | 149,408 | 155,398 | |||||||||
| Deferred: | ||||||||||||
| Federal | (3,107 | ) | 34,620 | 87,057 | ||||||||
| State | (10,583 | ) | (9,979 | ) | 14,231 | |||||||
| Foreign | 7,849 | 6,142 | 782 | |||||||||
| Provision for income taxes | $ | 1,424,809 | $ | 1,380,642 | $ | 1,334,756 |
TJX had net deferred tax (liabilities) assets as follows:
| Fiscal Year Ended | ||||||||
| In thousands | January 28, 2017 | January 30, 2016 | ||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | 27,396 | $ | 18,872 | ||||
| Reserves for lease obligations | 5,107 | 7,623 | ||||||
| Pension, stock compensation, postretirement and employee benefits | 412,391 | 380,523 | ||||||
| Leases | 57,223 | 51,823 | ||||||
| Accruals and reserves | 67,662 | 60,498 | ||||||
| Other | 48,463 | 31,077 | ||||||
| Total gross deferred tax assets | $ | 618,242 | $ | 550,416 | ||||
| Valuation allowance | (29,273 | ) | (11,998 | ) | ||||
| Net deferred tax asset | $ | 588,969 | $ | 538,418 | ||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment | $ | 569,377 | $ | 539,818 | ||||
| Capitalized inventory | 51,077 | 47,374 | ||||||
| Tradename/intangibles | 51,976 | 49,111 | ||||||
| Undistributed foreign earnings | 213,948 | 167,968 | ||||||
| Other | 10,398 | 5,418 | ||||||
| Total deferred tax liabilities | $ | 896,776 | $ | 809,689 | ||||
| Net deferred tax (liability) | $ | (307,807 | ) | $ | (271,271 | ) | ||
| Non-current asset | $ | 6,193 | $ | 13,831 | ||||
| Non-current liability | (314,000 | ) | (285,102 | ) | ||||
| Total | $ | (307,807 | ) | $ | (271,271 | ) |
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes.” This guidance requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. This ASU is effective for annual reporting periods beginning
F-30
after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted and may be applied either prospectively or retrospectively to all periods presented. TJX has elected to early adopt the new reporting standard retrospectively on its fiscal 2016 consolidated financial statements.
TJX has provided for deferred U.S. taxes on all undistributed earnings through January 28, 2017 from its subsidiaries in Canada, Puerto Rico, Italy, India and Hong Kong. For all other foreign subsidiaries, no U.S. income taxes have been provided on the approximately $785 million of undistributed earnings as of January 28, 2017 because such earnings are considered to be indefinitely reinvested in the business. A determination of the amount of unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with the hypothetical calculations.
As of January 28, 2017, TJX had available for state income tax purposes net operating loss carryforwards of $99.2 million which expire, if unused, in the years 2018 through 2036. As of January 30, 2016, TJX had available for state income tax purposes net operating loss carryforwards of $62.4 million. TJX has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance of $6.8 million has been provided for the deferred tax asset as of January 28, 2017 and $5.1 million as of January 30, 2016.
As of January 28, 2017 and January 30, 2016, the Company had available for foreign income tax purposes (related to Australia, Austria and the Netherlands) net operating loss carryforwards of $75 million and $51.1 million, of which $4.4 million and $3.9 million will expire, if unused, in fiscal 2025 and 2026 respectively. The remaining loss carryforwards do not expire. For the deferred tax assets associated with the net operating loss carryforwards for which management has determined it is more likely than not that the deferred tax assets will not be realized, TJX had valuation allowances recorded of approximately $22.5 million as of January 28, 2017 and approximately $6.9 million as of January 30, 2016.
The difference between the U.S. federal statutory income tax rate and TJX’s worldwide effective income tax rate is reconciled below:
| Fiscal Year Ended | ||||||||||||
| January 28, 2017 | January 30, 2016 | January 31, 2015 | ||||||||||
| U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| Effective state income tax rate | 3.5 | 3.5 | 3.6 | |||||||||
| Impact of foreign operations | (0.2 | ) | (0.7 | ) | (0.9 | ) | ||||||
| All other | — | (0.1 | ) | (0.1 | ) | |||||||
| Worldwide effective income tax rate | 38.3 | % | 37.7 | % | 37.6 | % |
TJX’s effective income tax rate increased for fiscal 2017 as compared to fiscal 2016. The increase in the effective income tax rate was primarily due to the jurisdictional mix of income and the increase in valuation allowance on foreign net operating losses.
TJX had net unrecognized tax benefits (net of federal benefit on state issues) of $38.5 million as of January 28, 2017, $34.1 million as of January 30, 2016 and $32.7 million as of January 31, 2015.
A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Balance at beginning of year | $ | 43,326 | $ | 55,619 | $ | 48,680 | ||||||
| Additions for uncertain tax positions taken in current year | 7,018 | 2,248 | 4,771 | |||||||||
| Additions for uncertain tax positions taken in prior years | 327 | 11,707 | 5,278 | |||||||||
| Reductions for uncertain tax positions taken in prior years | (334 | ) | (23,874 | ) | (2,747 | ) | ||||||
| Reductions resulting from lapse of statute of limitations | (1,245 | ) | (389 | ) | — | |||||||
| Settlements with tax authorities | — | (1,985 | ) | (363 | ) | |||||||
| Balance at end of year | $ | 49,092 | $ | 43,326 | $ | 55,619 |
F-31
Included in the gross amount of unrecognized tax benefits are items that will impact future effective tax rates upon recognition. These items amounted to $43.8 million as of January 28, 2017, $39.0 million as of January 30, 2016 and $34.8 million as of January 31, 2015.
TJX is subject to U.S. federal income tax as well as income tax in multiple state, local and foreign jurisdictions. In the U.S., fiscal years through 2010 are no longer subject to examination. In Canada, fiscal years through 2008 are no longer subject to examination. In all other jurisdictions, fiscal years through 2009 are no longer subject to examination.
TJX follows the with and without approach for direct and indirect effects of windfall tax deductions. TJX’s accounting policy is to classify interest and penalties related to income tax matters as part of income tax expense. The amount of interest and penalties expensed was $1.4 million for the year ended January 28, 2017, $1.6 million for the year ended January 30, 2016 and $1.9 million for the year ended January 31, 2015. The accrued amounts for interest and penalties are $8.0 million as of January 28, 2017, $7.0 million as of January 30, 2016 and $10.1 million as of January 31, 2015.
Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of January 28, 2017. During the next twelve months, it is reasonably possible that state tax audit resolutions may reduce unrecognized tax benefits by $0 to $13 million, which would reduce the provision for taxes on earnings.
Note M. Commitments
TJX is committed under long-term leases related to its continuing operations for the rental of real estate and fixtures and equipment. Most of TJX’s leases are store operating leases with ten-year terms and options to extend for one or more five-year periods in the U.S. and Canada and ten to fifteen year terms in Europe, some of which have options to extend. Many of the Company’s leases contain escalation clauses and we have the right to terminate some of the leases before the expiration date under specified circumstances and some with specified payments. In addition, TJX is generally required to pay insurance, real estate taxes and other operating expenses including, in some cases, rentals based on a percentage of sales. These expenses in the aggregate were approximately one-third of the total minimum rent in fiscal 2017, fiscal 2016 and fiscal 2015 and are not included in the table below.
The following is a schedule of future minimum lease payments for continuing operations as of January 28, 2017:
| In thousands | Operating Leases | |||
| Fiscal Year | ||||
| 2018 | $ | 1,455,642 | ||
| 2019 | 1,382,818 | |||
| 2020 | 1,246,618 | |||
| 2021 | 1,089,046 | |||
| 2022 | 908,624 | |||
| Later years | 2,438,338 | |||
| Total future minimum lease payments | $ | 8,521,086 |
Rental expense under operating leases for continuing operations amounted to $1,435.2 million for fiscal 2017, $1,365.6 million for fiscal 2016 and $1,321.6 million for fiscal 2015. Rental expense includes contingent rent and is reported net of sublease income. Contingent rent paid was $14.7 million in fiscal 2017, $15.7 million in fiscal 2016 and $15.2 million in fiscal 2015. Sublease income was $1.2 million in fiscal 2017, $0.9 million in fiscal 2016 and $0.8 million in fiscal 2015.
As of January 28, 2017 we have a number of lease agreements for facilities and stores that resulted in TJX being considered the owner of the property for accounting purposes (see Lease Accounting within Note A). The assets related to these properties are included in “land and buildings” and the related liabilities of $176.2 million are included in “other long-term liabilities.”
F-32
TJX had outstanding letters of credit totaling $41.2 million as of January 28, 2017 and $29.3 million as of January 30, 2016. Letters of credit are issued by TJX primarily for the purchase of inventory.
Note N. Accrued Expenses and Other Liabilities, Current and Long Term
The major components of accrued expenses and other current liabilities are as follows:
| Fiscal Year Ended | ||||||||
| In thousands | January 28, 2017 | January 30, 2016 | ||||||
| Employee compensation and benefits, current | $ | 630,049 | $ | 573,965 | ||||
| Dividends payable | 170,490 | 141,295 | ||||||
| Accrued capital additions | 111,963 | 132,871 | ||||||
| Rent, utilities and occupancy, including real estate taxes | 214,001 | 202,653 | ||||||
| Merchandise credits and gift certificates | 362,473 | 307,350 | ||||||
| Insurance | 84,363 | 65,983 | ||||||
| Sales tax collections and V.A.T. taxes | 199,602 | 134,535 | ||||||
| All other current liabilities | 547,523 | 511,007 | ||||||
| Accrued expenses and other current liabilities | $ | 2,320,464 | $ | 2,069,659 | ||||
All other current liabilities include accruals for advertising, customer rewards liability, interest, reserve for sales returns, reserve for taxes, fair value of derivatives, expense payables, purchased services and other items, each of which is individually less than 5% of current liabilities.
The major components of other long-term liabilities are as follows:
| Fiscal Year Ended | ||||||||
| In thousands | January 28, 2017 | January 30, 2016 | ||||||
| Employee compensation and benefits, long term | $ | 471,728 | $ | 418,156 | ||||
| Accrued rent | 231,681 | 216,040 | ||||||
| Landlord allowances | 77,887 | 93,024 | ||||||
| Tax reserve, long term | 36,713 | 33,403 | ||||||
| Financing lease obligations | 176,232 | 85,214 | ||||||
| Asset retirement obligation | 45,573 | 24,774 | ||||||
| All other long-term liabilities | 34,140 | 10,410 | ||||||
| Other long-term liabilities | $ | 1,073,954 | $ | 881,021 |
Note O. Contingent Obligations and Contingencies
Contingent Obligations: TJX has contingent obligations on leases, for which it was a lessee or guarantor, which were assigned to third parties without TJX being released by the landlords. Over many years, TJX has assigned numerous leases that we originally leased or guaranteed to a significant number of third parties. With the exception of leases of former businesses for which TJX has reserved, we have rarely had a claim with respect to assigned leases, and accordingly, we do not expect that such leases will have a material adverse impact on our financial condition, results of operations or cash flows. TJX does not generally have sufficient information about these leases to estimate our potential contingent obligations under them, which could be triggered in the event that one or more of the current tenants does not fulfill their obligations related to one or more of these leases. TJX may also be contingently liable on up to nine leases of former TJX businesses which we believe the likelihood of future liability to TJX is remote.
TJX also has contingent obligations in connection with certain assigned or sublet properties that TJX is able to estimate. We estimate that the undiscounted obligations of (i) leases of former operations not included in our reserve for former operations and (ii) properties of our former operations if the subtenants do not fulfill their obligations, are approximately $53.6 million as of January 28, 2017. We believe that most or all of these contingent obligations will not revert to us and, to the extent they do, will be resolved for substantially less due to mitigating factors including our expectation to further sublet.
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TJX is a party to various agreements under which it may be obligated to indemnify the other party with respect to breach of warranty or losses related to such matters as title to assets sold, specified environmental matters or certain income taxes. These obligations are typically limited in time and amount. There are no amounts reflected in our balance sheets with respect to these contingent obligations.
Contingencies: TJX is subject to certain legal proceedings, lawsuits, disputes and claims that arise from time to time in the ordinary course of our business. In addition, TJX is a defendant in several lawsuits filed in federal and state courts brought as putative class or collective actions on behalf of various groups of current and former salaried and hourly associates in the U.S. The lawsuits allege violations of the Fair Labor Standards Act and of state wage and hour and other labor statutes, including alleged misclassification of positions as exempt from overtime, alleged entitlement to additional wages for alleged off-the-clock work by hourly employees and alleged failure to pay all wages due upon termination. TJX is also a defendant in a consolidated lawsuit filed in federal court brought as a putative class action on behalf of customers relating to TJX’s compare at pricing. The lawsuits are in various procedural stages and seek unspecified monetary damages, injunctive relief and attorneys’ fees.
In connection with ongoing litigation an immaterial amount has been accrued in the accompanying financial statements.
Note P. Supplemental Cash Flows Information
TJX’s cash payments for interest and income taxes and non-cash investing and financing activities are as follows:
| Fiscal Year Ended | ||||||||||||
| In thousands | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Cash paid for: | ||||||||||||
| Interest on debt | $ | 72,619 | $ | 64,188 | $ | 66,265 | ||||||
| Income taxes | 1,282,172 | 1,301,122 | 1,091,128 | |||||||||
| Changes in accrued expenses due to: | ||||||||||||
| Dividends payable | $ | 29,195 | $ | 20,315 | $ | 17,377 | ||||||
| Property additions | (20,908 | ) | 33,384 | 8,254 | ||||||||
| Non-cash investing and financing activity: | ||||||||||||
| Construction in progress | $ | (94,291 | ) | $ | (30,767 | ) | $ | (60,733 | ) | |||
| Financing lease obligation | 94,291 | 30,767 | 60,733 |
Note Q. Selected Quarterly Financial Data (Unaudited)
Presented below is selected quarterly consolidated financial data for fiscal 2017 and fiscal 2016 which was prepared on the same basis as the audited consolidated financial statements and includes all adjustments necessary to present fairly, in all material respects, the information set forth therein on a consistent basis.
| In thousands except per share amounts | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Fiscal Year Ended January 28, 2017 | ||||||||||||||||
| Net sales | $ | 7,542,356 | $ | 7,882,053 | $ | 8,291,688 | $ | 9,467,647 | ||||||||
| Gross earnings(1) | 2,170,213 | 2,319,092 | 2,447,815 | 2,680,870 | ||||||||||||
| Net income | 508,346 | 562,174 | 549,786 | 677,928 | ||||||||||||
| Basic earnings per share | 0.77 | 0.85 | 0.84 | 1.04 | ||||||||||||
| Diluted earnings per share | 0.76 | 0.84 | 0.83 | 1.03 | ||||||||||||
| Fiscal Year Ended January 30, 2016 | ||||||||||||||||
| Net sales | $ | 6,865,637 | $ | 7,363,731 | $ | 7,753,495 | $ | 8,962,075 | ||||||||
| Gross earnings(1) | 1,945,396 | 2,144,540 | 2,246,596 | 2,573,883 | ||||||||||||
| Net income | 474,601 | 549,335 | 587,256 | 666,466 | ||||||||||||
| Basic earnings per share | 0.70 | 0.81 | 0.88 | 1.00 | ||||||||||||
| Diluted earnings per share | 0.69 | 0.80 | 0.86 | 0.99 |
| (1) | Gross earnings equal net sales less cost of sales, including buying and occupancy costs. |
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