Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Williams-Sonoma, Inc.

Consolidated Statements of Earnings


In thousands, except per share amounts	Fiscal 2017	Fiscal 2016	Fiscal 2015
E-commerce net revenues	$ 2,778,457	$ 2,633,602	$ 2,522,580
Retail net revenues	2,513,902	2,450,210	2,453,510
Net revenues	5,292,359	5,083,812	4,976,090
Cost of goods sold	3,360,648	3,200,502	3,131,876
Gross profit	1,931,711	1,883,310	1,844,214
Selling, general and administrative expenses	1,477,900	1,410,711	1,355,580
Operating income	453,811	472,599	488,634
Interest (income) expense, net	1,372	688	627
Earnings before income taxes	452,439	471,911	488,007
Income taxes	192,894	166,524	177,939
Net earnings	$ 259,545	$ 305,387	$ 310,068
Basic earnings per share	$ 3.03	$ 3.45	$ 3.42
Diluted earnings per share	$ 3.02	$ 3.41	$ 3.37
Shares used in calculation of earnings per share:
Basic	85,592	88,594	90,787
Diluted	86,080	89,462	92,102

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Statements of Comprehensive Income


In thousands	Fiscal 2017		Fiscal 2016		Fiscal 2015
Net earnings	$ 259,545		$ 305,387		$ 310,068
Other comprehensive income (loss):
Foreign currency translation adjustments	3,730		1,523		(7,958	)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $(259), $(327) and $380	(715	)	(916	)	1,074
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $(38), $(41) and $421	106		106		(1,184	)
Comprehensive income	$ 262,666		$ 306,100		$ 302,000

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Balance Sheets


In thousands, except per share amounts	Jan. 28, 2018			Jan. 29, 2017
ASSETS
Current assets
Cash and cash equivalents	$	390,136		$	213,713
Accounts receivable, net		90,119			88,803
Merchandise inventories, net		1,061,593			977,505
Prepaid catalog expenses		24,028			23,625
Prepaid expenses		58,693			52,882
Other assets		11,876			10,652
Total current assets		1,636,445			1,367,180
Property and equipment, net		932,283			923,283
Deferred income taxes, net		67,306			135,238
Other assets, net		149,715			51,178
Total assets	$	2,785,749		$	2,476,879
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	459,378		$	453,710
Accrued salaries, benefits and other liabilities		135,884			130,187
Customer deposits		292,460			294,276
Income taxes payable		56,783			23,245
Other liabilities		63,318			59,838
Total current liabilities		1,007,823			961,256
Deferred rent and lease incentives		202,134			196,188
Long-term debt		299,422			—
Other long-term obligations		72,804			71,215
Total liabilities		1,582,183			1,228,659
Commitments and contingencies – See Note I
Stockholders’ equity
Preferred stock: $.01 par value; 7,500 shares authorized; none issued		—			—
Common stock: $.01 par value; 253,125 shares authorized; 83,726 and 87,325 shares issued and outstanding at January 28, 2018 and January 29, 2017, respectively		837			873
Additional paid-in capital		562,814			556,928
Retained earnings		647,422			701,702
Accumulated other comprehensive loss		(6,782	)		(9,903	)
Treasury stock – at cost: 11 and 20 shares as of January 28, 2018 and January 29, 2017, respectively		(725	)		(1,380	)
Total stockholders’ equity		1,203,566			1,248,220
Total liabilities and stockholders’ equity	$	2,785,749		$	2,476,879

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Statements of Stockholders’ Equity


	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity
In thousands	Shares			Amount

Balance at February 1, 2015		91,891		$	919		$	527,261		$	701,214		$	(2,548	)	$	(2,140	)	$	1,224,706

Net earnings		—			—			—			310,068			—			—			310,068
Foreign currency translation adjustments		—			—			—			—			(7,958	)		—			(7,958	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			1,074			—			1,074
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax		—			—			—			—			(1,184	)		—			(1,184	)
Exercise of stock-based awards and related tax effect		68			1			17,238			—			—			—			17,239
Conversion/release of stock-based awards_1_		554			6			(31,411	)		—			—			—			(31,405	)
Repurchases of common stock		(2,950	)		(30	)		(12,646	)		(212,319	)		—			—			(224,995	)
Reissuance of treasury stock under stock-based compensation plans_1_		—			—			(492	)		(128	)		—			234			(386	)
Stock-based compensation expense		—			—			41,357			—			—			—			41,357
Dividends declared		—			—			—			(130,290	)		—			—			(130,290	)
Balance at January 31, 2016		89,563			896			541,307			668,545			(10,616	)		(1,906	)		1,198,226

Net earnings		—			—			—			305,387			—			—			305,387
Foreign currency translation adjustments		—			—			—			—			1,523			—			1,523
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			(916	)		—			(916	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax		—			—			—			—			106			—			106
Exercise of stock-based awards and related tax effect		39			—			4,762			—			—			—			4,762
Conversion/release of stock-based awards_1_		594			6			(26,805	)		—			—			(263	)		(27,062	)
Repurchases of common stock		(2,871	)		(29	)		(12,684	)		(138,559	)		—			—			(151,272	)
Reissuance of treasury stock under stock-based compensation plans_1_		—			—			(706	)		(83	)		—			789			—
Stock-based compensation expense		—			—			51,054			—			—			—			51,054
Dividends declared		—			—			—			(133,588	)		—			—			(133,588	)
Balance at January 29, 2017		87,325			873			556,928			701,702			(9,903	)		(1,380	)		1,248,220

Net earnings		—			—			—			259,545			—			—			259,545
Foreign currency translation adjustments		—			—			—			—			3,730			—			3,730
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			(715	)		—			(715	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax		—			—			—			—			106			—			106
Conversion/release of stock-based awards_1_		452			5			(17,810	)		—			—			(325	)		(18,130	)
Repurchases of common stock		(4,051	)		(41	)		(18,518	)		(177,620	)		—			—			(196,179	)
Reissuance of treasury stock under stock-based compensation plans_1_		—			—			(554	)		(426	)		—			980			—
Stock-based compensation expense		—			—			42,768			—			—			—			42,768
Dividends declared		—			—			—			(135,779	)		—			—			(135,779	)
Balance at January 28, 2018		83,726		$	837		$	562,814		$	647,422		$	(6,782	)	$	(725	)	$	1,203,566

1	Amounts are shown net of shares withheld for employee taxes.

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Statements of Cash Flows


In thousands	Fiscal 2017			Fiscal 2016			Fiscal 2015
Cash flows from operating activities:
Net earnings	$	259,545		$	305,387		$	310,068
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		183,077			173,195			167,760
Loss on disposal/impairment of assets		1,889			3,806			4,339
Amortization of deferred lease incentives		(25,372	)		(25,212	)		(24,721	)
Deferred income taxes		63,381			7,114			(7,436	)
Tax benefit related to stock-based awards		—			3,230			14,592
Excess tax benefit related to stock-based awards		—			(4,894	)		(14,494	)
Stock-based compensation expense		42,988			51,116			41,357
Other		(135	)		(423	)		149
Changes in:
Accounts receivable		149			(9,794	)		(12,849	)
Merchandise inventories		(80,235	)		4,493			(92,647	)
Prepaid catalog expenses		(403	)		5,294			5,022
Prepaid expenses and other assets		(16,092	)		(6,367	)		(9,245	)
Accounts payable		2,382			3,169			60,507
Accrued salaries, benefits and other liabilities		9,157			25,876			(135	)
Customer deposits		(2,394	)		(3,037	)		35,877
Deferred rent and lease incentives		28,226			35,559			31,334
Income taxes payable		33,541			(43,803	)		34,548
Net cash provided by operating activities		499,704			524,709			544,026
Cash flows from investing activities:
Purchases of property and equipment		(189,712	)		(197,414	)		(202,935	)
Acquisition of Outward, Inc., net of cash received		(80,528	)		—			—
Other		480			439			769
Net cash used in investing activities		(269,760	)		(196,975	)		(202,166	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		300,000			—			—
Repurchases of common stock		(196,179	)		(151,272	)		(224,995	)
Borrowings under revolving line of credit		170,000			125,000			200,000
Repayments of borrowings under revolving line of credit		(170,000	)		(125,000	)		(200,000	)
Payment of dividends		(135,010	)		(133,539	)		(127,636	)
Tax withholdings related to stock-based awards		(18,130	)		(27,062	)		(31,790	)
Excess tax benefit related to stock-based awards		—			4,894			14,494
Proceeds related to stock-based awards		—			1,532			2,647
Repayment of long-term obligations		—			—			(1,968	)
Debt issuance costs		(1,191	)		(359	)		(135	)
Other		(1,197	)		—			—
Net cash used in financing activities		(51,707	)		(305,806	)		(369,383	)
Effect of exchange rates on cash and cash equivalents		(1,814	)		(1,862	)		(1,757	)
Net increase (decrease) in cash and cash equivalents		176,423			20,066			(29,280	)
Cash and cash equivalents at beginning of year		213,713			193,647			222,927
Cash and cash equivalents at end of year	$	390,136		$	213,713		$	193,647
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	2,915		$	2,202		$	1,989
Cash paid during the year for income taxes, net of refunds	$	99,062		$	203,426		$	134,478
Non-cash investing activities:
Purchases of property and equipment not yet paid for at end of year	$	1,257		$	625		$	2,715

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Notes to Consolidated Financial Statements

Note A: Summary of Significant Accounting Policies

We are a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies — Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation, and Mark and Graham — are marketed through e-commerce websites, direct-mail catalogs and 631 stores. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. In 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry. Headquartered in San Jose, California, Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality.

Consolidation

The Consolidated Financial Statements include the accounts of Williams-Sonoma, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.

Fiscal Year

Our fiscal year ends on the Sunday closest to January 31, based on a 52 or 53-week year. Fiscal 2017, a 52-week year, ended on January 28, 2018; Fiscal 2016, a 52-week year, ended on January 29, 2017; and Fiscal 2015, a 52-week year, ended on January 31, 2016.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash Equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less. As of January 28, 2018, we were invested primarily in interest bearing demand deposit accounts and money market funds. Book cash overdrafts issued, but not yet presented to the bank for payment, are reclassified to accounts payable.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at their carrying values, net of an allowance for doubtful accounts. Accounts receivable consist primarily of credit card, franchisee and landlord receivables for which collectability is reasonably assured. Receivables are evaluated for collectability on a regular basis and an allowance for doubtful accounts is recorded, if necessary. Our allowance for doubtful accounts was not material to our financial statements as of January 28, 2018 and January 29, 2017.

Merchandise Inventories

Merchandise inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be reduced below cost, we consider current and anticipated demand, customer preferences and age of the merchandise. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends, aging reports, specific identification and our estimates of future sales and selling prices.

Reserves for shrinkage are estimated and recorded throughout the year as a percentage of net sales based on historical shrinkage results, cycle count results within our distribution centers, expectations of future shrinkage and current inventory levels. Actual shrinkage is recorded at year-end based on the results of our physical inventory counts and can vary from our estimates due to such factors as changes in operations, the mix of our

inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution facilities, off-site storage locations, and with our third-party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end, with the exception of a cycle count reserve based on the historical cycle count results in our distribution centers. This reserve was not material to our Consolidated Financial Statements as of January 28, 2018. Historically, actual shrinkage has not differed materially from our estimates.

Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly throughout the year. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. As of January 28, 2018 and January 29, 2017, our inventory obsolescence reserves were $12,649,000 and $13,770,000, respectively.

Advertising and Prepaid Catalog Expenses

Advertising expenses consist of media and production costs related to digital advertising, catalog mailings and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement, with the exception of prepaid catalog expenses. Prepaid catalog expenses consist primarily of third-party incremental direct costs, including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and amortized over their expected period of future benefit, generally three months.

Total advertising expenses (including digital advertising, catalog advertising and other advertising costs) were approximately $382,206,000, $347,474,000 and $333,276,000 in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:


Leasehold improvements		Shorter of estimated useful life or lease term (generally 5 – 22 years)
Fixtures and equipment		2 – 20 years
Buildings and building improvements		10 – 40 years
Capitalized software		2 – 10 years

We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. Impairment may result when the carrying value of the asset exceeds the estimated undiscounted future cash flows over its remaining useful life. For store impairment, our estimate of undiscounted future cash flows over the store lease term is based upon our experience, the historical operations of the stores and estimates of future store profitability and economic conditions. The estimates of future store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment costs, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the excess of the asset’s net carrying value over its fair value. Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy (see Note M). The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.

During fiscal 2017, we did not record any asset impairment charges. During fiscal 2016 and fiscal 2015, we recorded asset impairment charges of approximately $1,765,000 and $2,100,000, respectively, related to our retail stores, which is recorded within selling, general and administrative expenses.

Goodwill

Goodwill is initially recorded as of the acquisition date, and is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized, but rather is subject to impairment testing annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. We first perform a qualitative assessment to evaluate goodwill for potential impairment. If based on that assessment it is more likely than not that the fair value of the reporting unit is below its carrying value, a quantitative impairment test is necessary. The quantitative impairment test requires determining the fair value of the reporting unit. We use the income approach, whereby we calculate the fair value based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions about the future such as sales growth, gross margins, employment costs, capital expenditures, inflation and future economic and market conditions. Actual future results may differ from those estimates. If the carrying value of the reporting unit’s assets and liabilities, including goodwill, exceeds its fair value, impairment is recorded for the excess, not to exceed the total amount of goodwill allocated to the reporting unit.

As of January 28, 2018 and January 29, 2017, we had goodwill of $18,838,000 and $18,680,000, respectively, presented within other long-term assets in our Consolidated Balance Sheets, primarily related to our fiscal 2011 acquisition of Rejuvenation, Inc. In fiscal 2017 and fiscal 2016, we performed a qualitative assessment of potential goodwill impairment and determined it was more likely than not that the fair value of each of our reporting units exceeded its carrying value. Accordingly, no further impairment testing of goodwill was performed, and we did not recognize any goodwill impairment in fiscal 2017 or fiscal 2016. In fiscal 2015, we performed a quantitative goodwill impairment test and determined that the fair value of each of our reporting units substantially exceeded their carrying value. Accordingly, we did not recognize any goodwill impairment in fiscal 2015.

Self-Insured Liabilities

We are primarily self-insured for workers’ compensation, employee health benefits, product and other general liability claims. We record self-insurance liability reserves based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported, based on an actuarial analysis of historical claims data. Factors affecting these estimates include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different number of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. Self-insurance reserves for workers’ compensation, employee health benefits, product and other general liability claims were $26,370,000 and $24,988,000 as of January 28, 2018 and January 29, 2017, respectively.

Customer Deposits

Customer deposits are primarily comprised of deferred revenues related to unredeemed stored-value cards and undelivered merchandise. We maintain a liability for unredeemed stored-value cards until the earlier of redemption, escheatment or four years as we have concluded that the likelihood of our stored-value cards being redeemed beyond four years from the date of issuance is remote. Income from unredeemed stored-value cards, which is recorded in other income within selling, general and administrative expenses, is not material to our Consolidated Financial Statements. Our stored-value cards have no expiration dates.

Deferred Rent and Lease Incentives

For leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize rental expense on a straight-line basis over the lease term, including the construction period, and record the difference between rent expense and the amount currently payable as deferred rent. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the lease term, including the construction period.

For any store or facility closure where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the cease use date.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and debt approximate their estimated fair values. We use derivative financial instruments to hedge against foreign currency exchange rate fluctuations. The assets or liabilities associated with our derivative financial instruments are recorded at fair value in either other current or long-term assets or other current or long-term liabilities. The fair value of our foreign currency derivative instruments is measured using the income approach whereby we use observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. These observable inputs include spot rates, forward rates, interest rates and credit derivative market rates (see Notes L and M for additional information).

Revenue Recognition

We recognize revenues (including shipping fees) and the related cost of goods sold (including shipping expense) at the time the products are delivered to our customers. Revenue is recognized for retail sales (excluding home-delivered merchandise) at the point of sale in the store and, for home-delivered merchandise and e-commerce sales, when the merchandise is delivered to the customer. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities. We recognize revenues from sales to franchisees at the time merchandise ownership is transferred to the franchisee.

Sales Returns Reserve

Our customers may return purchased items for an exchange or refund. We record a reserve for estimated product returns, net of cost of goods sold, based on historical return trends together with current product sales performance. A summary of activity in our sales returns reserve is as follows:


In thousands	Fiscal 2017_1_			Fiscal 2016_1_			Fiscal 2015_1_
Balance at beginning of year	$	16,058		$	19,113		$	14,782
Provision for sales returns		302,320			303,694			321,421
Actual sales returns		(306,536	)		(306,749	)		(317,090	)
Balance at end of year	$	11,842		$	16,058		$	19,113

1	Amounts are shown net of cost of goods sold.

Vendor Allowances

We receive allowances or credits from certain vendors for volume rebates. We treat such volume rebates as an offset to the cost of the product or services provided at the time the expense is recorded. These allowances and credits received are recorded in both cost of goods sold and in selling, general and administrative expenses.

Cost of Goods Sold

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory-related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of non-occupancy-related costs associated with our retail stores, distribution facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third-party credit card processing and other general expenses.

Stock-Based Compensation

We account for stock-based compensation arrangements by measuring and recognizing compensation expense for all stock-based awards using a fair value based method. Restricted stock units are valued using the closing price of our stock on the date prior to the date of grant. The fair value of each stock-based award is amortized over the requisite service period.

Foreign Currency Translation

Some of our foreign operations have a functional currency other than the U.S. dollar. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive income within stockholders’ equity. Foreign currency exchange gains and losses are recorded in selling, general and administrative expenses, except for those discussed in Note L.

Earnings Per Share

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding plus common stock equivalents for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our Consolidated Financial Statements. We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrence of other events.

In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our estimated effective tax rate are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions or changes in tax law.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. In addition, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The FASB also issued ASU 2016-10, Identifying Performance Obligations and Licensing in April 2016, which amends certain aspects of ASU 2014-09 for identifying performance obligations and the implementation guidance on licensing. These ASUs are effective for us beginning in the first quarter of fiscal 2018. The adoption of these standards will result in an overall increase in net revenues recognized in fiscal 2018 and a corresponding net reduction in selling, general and administrative expenses due to the following:

	•		the reclassification from selling, general and administrative expenses into net revenues for certain incentives received from credit card issuers,

	•		the reclassification of breakage income related to our unredeemed stored-value cards from selling, general and administrative expenses into net revenues, as well as an acceleration in the timing of recognizing breakage income, and

	•		an acceleration in the timing of revenue recognition for certain merchandise shipped to our customers.

In addition, prepaid catalog advertising costs, which are currently amortized over their expected period of future benefit of approximately three months, will be expensed as incurred. We do not expect the impact of this change to be material to our Consolidated Statement of Earnings going forward.

We will adopt these ASUs on a modified retrospective basis in the first quarter of fiscal 2018 and, as a result, will record approximately $30,000,000 in net pre-tax cumulative effect adjustments to increase retained earnings primarily related to unredeemed stored-value cards, partially offset by prepaid catalog expenses capitalized prior to adoption.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. We will adopt this ASU in the first quarter of fiscal 2018, and do not expect the adoption to have a material impact on our financial condition, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions (including the accounting for income taxes and forfeitures, among other areas). The ASU requires entities to, among other things, recognize all excess tax benefits and deficiencies in the income statement, as a benefit or expense within income taxes, in the period in which they occur. The ASU also allows an entity to make an accounting policy election to either estimate expected forfeitures or account for them as they occur. We adopted this ASU in the first quarter of fiscal 2017, and as a result, we no longer classify excess tax benefits related to stock-based awards as a financing cash inflow and an operating cash outflow. These classification requirements were adopted prospectively and, as such, our Consolidated Statements of Cash Flows for the fifty-two weeks ended January 29, 2017 and January 31, 2016 have not been retrospectively adjusted. We continue to estimate expected forfeitures.

In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). This ASU is effective for us beginning in the first quarter of fiscal 2019. We are currently assessing the impact of this ASU on our Consolidated Financial Statements, but expect that it will result in a substantial increase in our long-term assets and liabilities, however, we do not expect it to materially impact our Consolidated Statement of Earnings.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory. The amendments remove the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. This ASU is effective for us beginning in the first quarter of fiscal 2018. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815), which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This ASU is effective for us in the first quarter of fiscal 2019 and early adoption is permitted. Entities should apply the guidance to existing cash flow and net investment hedge relationships using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings on the date of adoption. The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges where the hedge documentation needs to be modified. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018 and early adoption is permitted. The adoption of this ASU will not have a material impact on our financial condition, results of operations or cash flows.

Note B: Property and Equipment

Property and equipment consists of the following:


In thousands	Jan. 28, 2018			Jan. 29, 2017
Leasehold improvements	$	950,024		$	923,909
Fixtures and equipment		800,003			762,379
Capitalized software		621,730			584,122
Land and buildings		173,457			172,856
Corporate systems projects in progress		65,283			52,352
Construction in progress 1		8,615			13,704
Total		2,619,112			2,509,322
Accumulated depreciation		(1,686,829	)		(1,586,039	)
Property and equipment, net	$	932,283		$	923,283

1	Construction in progress primarily consists of leasehold improvements and furniture and fixtures related to new, expanded or remodeled retail stores where construction had not been completed as of year-end.

Note C: Borrowing Arrangements

Credit Facility

On January 8, 2018, we amended and extended our credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”) and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may, prior to the first and second anniversaries of the closing date of the amendment of the credit facility, elect to extend the maturity date for an additional year, subject to lender approval. Costs incurred in connection with the amendment and extension of the revolver are presented as an asset in our Consolidated Balance Sheet.

During fiscal 2017, we had borrowings of $170,000,000 under the revolver (at a weighted average interest rate of 2.21%), all of which were repaid in the fourth quarter of fiscal 2017, and no amounts were outstanding as of January 28, 2018. During fiscal 2016, we had borrowings of $125,000,000 under the revolver (at a weighted average interest rate of 1.54%), all of which were repaid in the fourth quarter of fiscal 2016, and no amounts were outstanding as of January 29, 2017. Additionally, as of January 28, 2018, $12,780,000 in issued but undrawn standby letters of credit were outstanding under the revolver. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

As of January 28, 2018, we had $300,000,000 outstanding under our term loan (at a weighted average interest rate of 2.68%). The term loan matures on January 8, 2021, at which time all outstanding principal and any accrued interest must be repaid. Costs incurred in connection with the issuance of the term loan are presented as a reduction to the carrying value of the debt in our Consolidated Balance Sheet.

The interest rate under the credit facility is variable, and may be elected by us as: (i) the London Interbank Offer Rate (“LIBOR”) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and 1.0% to 2.0% for the term loan; or (ii) a base rate as defined in the credit facility, plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0% to 1% for the term loan.

As of January 28, 2018, we were in compliance with our covenants under the credit facility and, based on current projections, we expect to remain in compliance throughout fiscal 2018.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 25, 2018. The letter of credit facilities contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus a margin based on our leverage ratio. As of January 28, 2018, an aggregate of $6,721,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 22, 2019.

Note D: Income Taxes

The 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and significantly changed U.S. tax law by, among other things, reducing the corporate income tax rate to 21% as of January 1, 2018, and introducing a modified territorial tax system that includes a transition tax on deemed repatriated earnings of foreign subsidiaries. In response to the Tax Act, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements and provides a one-year measurement period for a registrant to adjust the estimates and complete the accounting required under FASB Accounting Standards Codification (“ASC”) 740, Income Taxes.

Our U.S. federal statutory rate for fiscal 2017 was a blended rate of 33.9%, and our rate will be 21% for future fiscal years. Based on information available as of January 28, 2018, we recorded a net tax expense of $13,200,000 for the transition tax and $28,300,000 for the re-measurement of our deferred tax assets.

The components of earnings before income taxes, by tax jurisdiction, are as follows:


In thousands	Fiscal 2017		Fiscal 2016		Fiscal 2015
United States		$ 379,000		$ 425,517		$ 462,701
Foreign		73,439		46,394		25,306
Total earnings before income taxes		$ 452,439		$ 471,911		$ 488,007

The provision for income taxes consists of the following:


In thousands	Fiscal 2017		Fiscal 2016			Fiscal 2015
Current
Federal		$ 97,202		$ 125,760			$ 156,812
State		19,552		26,197			22,969
Foreign		12,759		7,453			5,594
Total current		129,513		159,410			185,375
Deferred
Federal		62,893		8,307			(6,093	)
State		460		(807	)		1,258
Foreign		28		(386	)		(2,601	)
Total deferred		63,381		7,114			(7,436	)
Total provision		$ 192,894		$ 166,524			$ 177,939

As part of the modified territorial tax system, the Tax Act implemented a new tax on Global Intangible Low-Taxed Income (“GILTI”). A company can elect an accounting policy to account for GILTI as either a

periodic expense when the tax arises or as part of deferred taxes related to the investment in the subsidiary. We are currently in the process of analyzing this provision and, as a result, are not yet able to reasonably estimate its effect. Therefore, we have not yet made a policy election regarding the accounting for GILTI. We will continue to assess the impact of the Tax Act on our Consolidated Financial Statements during the measurement period under SAB 118.

We have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we intended to utilize those earnings in our foreign operations for an indefinite period of time. As a result of the Tax Act, we are deemed to have remitted all of the post-1986 accumulated earnings of our foreign subsidiaries to the U.S. as of December 31, 2017 as part of the transition tax. No additional U.S. income tax or foreign withholding taxes have been provided. In light of the Tax Act, we continue to evaluate our permanent reinvestment assertion and expect our evaluation of the impact to be completed within the one-year measurement period under SAB 118.

A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:


	Fiscal 2017			Fiscal 2016			Fiscal 2015
Federal income taxes at the statutory rate		33.9%			35.0%			35.0%
Re-measurement of deferred tax assets and liabilities		6.7%			—			—
Transition tax		2.9%			—			—
State income tax rate		2.5%			3.5%			3.2%
Change in uncertain tax positions		(1.6%	)		2.8%			(0.1%	)
Rate differential		(2.9%	)		(5.7%	)		(1.8%	)
Other		1.1%			(0.3%	)		0.2%
Effective tax rate		42.6%			35.3%			36.5%

Significant components of our deferred income tax accounts are as follows:


Deferred tax assets (liabilities), in thousands	Jan. 28, 2018			Jan. 29, 2017
Customer deposits		$ 23,601			$ 64,776
Merchandise inventories		23,314			32,003
Deferred rent		18,387			24,182
Compensation		14,127			16,781
Accrued liabilities		13,626			23,994
Stock-based compensation		9,024			17,437
Federal and state net operating loss		6,026			2,797
Executive deferred compensation		5,886			7,060
State taxes		5,099			7,107
Deferred lease incentives		(24,854	)		(36,715	)
Depreciation		(17,361	)		(22,477	)
Prepaid catalog expenses		(5,386	)		(8,726	)
Other		(3,116	)		8,014
Valuation allowance		(1,067	)		(995	)
Total deferred income tax assets, net		$ 67,306			$ 135,238

As the result of the acquisition of Outward, Inc. (see Note O), we had net operating loss carry-forwards of $14,904,000 and $4,838,000 for U.S. federal and state, respectively, as of January 28, 2018. The carry-forwards are expected to be fully utilized in future years and, therefore, no valuation allowance has been provided to the related deferred tax assets.

The following table summarizes the activity related to our gross unrecognized tax benefits:


In thousands	Fiscal 2017			Fiscal 2016			Fiscal 2015
Balance at beginning of year		$ 25,864			$ 13,290			$ 14,359
Increases related to current year’s tax positions		3,345			11,772			2,765
Increases related to prior years’ tax positions		808			3,456			101
Decreases related to prior years’ tax positions		(10,610	)		(818	)		(341	)
Settlements		—			(714	)		(2,912	)
Lapses in statute of limitations		(1,356	)		(1,122	)		(682	)
Balance at end of year		$ 18,051			$ 25,864			$ 13,290

As of January 28, 2018, we had $18,051,000 of gross unrecognized tax benefits, of which $13,286,000 would, if recognized, affect the effective tax rate.

We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of January 28, 2018 and January 29, 2017, our accruals for the payment of interest and penalties totaled $3,719,000 and $2,882,000, respectively.

Due to the potential resolution of state issues, it is reasonably possible that the balance of our gross unrecognized tax benefits could decrease within the next twelve months by a range of $0 to $3,800,000.

We file income tax returns in the U.S. and foreign jurisdictions and are therefore subject to examination by the tax authorities in these jurisdictions. Our U.S. federal taxable years for which the statute of limitations has not expired are fiscal years 2013 to 2016. Substantially all material states, local and foreign jurisdictions’ statutes of limitations are closed for taxable years prior to fiscal 2013.

Note E: Accounting for Leases

Operating Leases

We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations for original terms generally ranging from 5 to 22 years. Certain leases contain renewal options for periods up to 20 years. The rental payments for our store leases are typically structured as either: minimum rent; rent based on a percentage of store sales; minimum rent plus additional rent based on a percentage of store sales; or rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. Contingent rental payments, including rental payments that are based on a percentage of sales, cannot be predicted with certainty at the onset of the lease term. Accordingly, such contingent rental payments are recorded as incurred each period and are excluded from our calculation of deferred rent liability.

Total rent expense for all operating leases was as follows:


In thousands	Fiscal 2017			Fiscal 2016			Fiscal 2015
Rent expense		$ 263,409			$ 251,066			$ 224,564
Contingent rent expense		24,918			26,980			33,985
Rent expense before deferred lease incentive income		288,327			278,046			258,549
Deferred lease incentive income		(25,293	)		(25,298	)		(24,679	)
Less: sublease rental income		(578	)		(558	)		(608	)
Total rent expense_1_		$ 262,456			$ 252,190			$ 233,262

1	Excludes all other occupancy-related costs including depreciation, common area maintenance, property taxes and utilities.

The aggregate future minimum annual cash rental payments under non-cancellable operating leases in effect at January 28, 2018 were as follows:


In thousands			Lease Commitments_1_
Fiscal 2018			$ 288,583
Fiscal 2019			275,712
Fiscal 2020			245,189
Fiscal 2021			212,085
Fiscal 2022			176,193
Thereafter			671,173
Total			$ 1,868,935

Projected cash payments include only those amounts that are fixed and determinable as of the reporting date and are not necessarily representative of future expected rent expense. We currently pay rent for certain store locations based on a percentage of store sales. As future store sales cannot be predicted with certainty, projected payments for these locations are based on minimum rent, which is generally higher than rent based on a percentage of store sales. We incur other lease obligation expenses, such as common area maintenance and other executory costs, which are not fixed in nature and are thus not included in the future projected cash payments reflected above. In addition, projected cash payments do not include any benefit from deferred lease incentive income, which is reflected within “Total rent expense” above.

Memphis-Based Distribution Facility

In August 1990, we entered into an agreement to lease a distribution facility in Memphis, Tennessee. The lessor is a general partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder and two unrelated parties. The terms of the lease automatically renewed until the second quarter of fiscal 2015 when the bonds that financed the construction of the facility were fully repaid. Simultaneously, we entered into an agreement with the partnership to lease the facility through July 2017. In fiscal 2017, we exercised the first of two one-year extensions available under the lease to extend the term through July 2018. Subsequently, in fiscal 2017, we amended the lease to further extend the term through July 2020. The amended lease provides for two additional one-year renewal options. We made annual rental payments of approximately $1,629,000, $1,599,000, and $3,050,000 plus applicable taxes, insurance and maintenance expenses in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

Note F: Earnings Per Share

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:


In thousands, except per share amounts	Net Earnings		Weighted Average Shares		Earnings Per Share
Fiscal 2017
Basic	$	259,545		85,592	$	3.03
Effect of dilutive stock-based awards				488
Diluted	$	259,545		86,080	$	3.02
Fiscal 2016
Basic	$	305,387		88,594	$	3.45
Effect of dilutive stock-based awards				868
Diluted	$	305,387		89,462	$	3.41
Fiscal 2015
Basic	$	310,068		90,787	$	3.42
Effect of dilutive stock-based awards				1,315
Diluted	$	310,068		92,102	$	3.37

Stock-based awards of 577,000, 261,000, and 12,000 were excluded from the computation of diluted earnings per share in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, as their inclusion would be anti-dilutive.

Note G: Stock-Based Compensation

Equity Award Programs

Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 32,310,000 shares. As of January 28, 2018, there were approximately 6,014,000 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee members of the board of directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Option Awards

Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain option awards contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event.

Stock Awards

Annual grants of stock awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member).

Stock-Based Compensation Expense

During fiscal 2017, fiscal 2016 and fiscal 2015, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $42,988,000, $51,116,000, and $41,357,000, respectively. As of January 28, 2018, there was $71,272,000 of unrecognized stock-based compensation expense (net of estimated forfeitures), which we expect to recognize on a straight-line basis over a weighted average remaining service period of approximately two years. At each reporting period, all compensation expense attributable to vested awards has been fully recognized.

Stock-Settled Stock Appreciation Rights

A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the grant date and the conversion date for the number of shares converted.

The following table summarizes our stock-settled stock appreciation right activity during fiscal 2017:


	Shares			Weighted Average Conversion Price_1_		Weighted Average Contractual Term Remaining (Years)		Intrinsic Value_2_
Balance at January 29, 2017 (100% vested)		411,710		$	26.02
Granted		—			—
Converted into common stock		(243,973	)		22.66
Cancelled		—			—
Balance at January 28, 2018 (100% vested)		167,737		$	30.91		0.42	$	3,774,000

1	Conversion price is equal to the market value on the date of grant.

2	Intrinsic value for outstanding and vested rights is based on the excess of the market value of our common stock on the last business day of the fiscal year (or $53.41) over the conversion price.

No stock-settled stock appreciation rights were granted in fiscal 2017, fiscal 2016 or fiscal 2015. The total intrinsic value of awards converted to common stock was $7,287,000 for fiscal 2017, $5,237,000 for fiscal 2016 and $24,465,000 for fiscal 2015. Intrinsic value for conversions is based on the excess of the market value on the date of conversion over the conversion price.

Restricted Stock Units

The following table summarizes our restricted stock unit activity during fiscal 2017:


	Shares			Weighted Average Grant Date Fair Value		Weighted Average Contractual Term Remaining (Years)		Intrinsic Value_1_
Balance at January 29, 2017		2,232,486		$	63.75
Granted		1,301,405			52.60
Granted, with vesting subject to performance conditions		222,110			53.74
Released		(665,085	)		61.26
Cancelled		(732,779	)		61.09
Balance at January 28, 2018		2,358,137		$	58.18		3.17	$	125,948,000
Vested plus expected to vest at January 28, 2018		1,684,675		$	57.15		3.24	$	89,978,000

1	Intrinsic value for outstanding and unvested restricted stock units is based on the market value of our common stock on the last business day of the fiscal year (or $53.41).

The following table summarizes additional information about restricted stock units:


	Fiscal 2017		Fiscal 2016		Fiscal 2015
Weighted average grant date fair value per share of awards granted	$	52.76	$	59.17	$	76.19
Intrinsic value of awards released_1_	$	35,508,000	$	56,405,000	$	50,773,000

1	Intrinsic value for releases is based on the market value on the date of release.

Tax Effect

In accordance with ASU 2016-09_, Improvements to Employee Share-Based Payment Accounting_, we record excess tax benefits and deficiencies resulting from the settlement of stock-based awards as a benefit or expense within income taxes in the period in which they occur. Further, in accordance with the ASU, we no longer classify such tax benefits as a financing cash inflow and an operating cash outflow. We adopted the classification requirements of this ASU prospectively as of the first quarter of fiscal 2017 and, as such, our Consolidated

Statements of Cash Flows for fiscal 2016 and fiscal 2015 have not been retrospectively adjusted. During fiscal 2017, fiscal 2016 and fiscal 2015, proceeds related to stock-based awards were $0, $1,532,000 and $2,647,000, respectively, and the current tax benefit related to stock-based awards totaled $16,066,000, $24,129,000 and $30,352,000, respectively.

Note H: Williams-Sonoma, Inc. 401(k) Plan and Other Employee Benefits

We have a defined contribution retirement plan, the Williams-Sonoma, Inc. 401(k) Plan (the “401(k) Plan”), which is intended to be qualified under Internal Revenue Code sections 401(a), 401(k), 401(m) and 4975(e)(7). The 401(k) Plan permits eligible employees to make salary deferral contributions up to 75% of their eligible compensation each pay period (7% for highly-compensated employees). Employees designate the funds in which their contributions are invested. Each participant may choose to have his or her salary deferral contributions and earnings thereon invested in one or more investment funds, including our company stock fund.

Our matching contribution is equal to 50% of each participant’s salary deferral contribution, taking into account only those contributions that do not exceed 6% of the participant’s eligible pay for the pay period. Each participant’s matching contribution is earned on a semi-annual basis with respect to eligible salary deferrals for those participants that are employed with the company on June 30th or December 31st of the year in which the deferrals are made. Each associate must complete one year of service prior to receiving company matching contributions. For the first five years of the participant’s employment, all matching contributions vest at the rate of 20% per year of service, measuring service from the participant’s hire date. Thereafter, all matching contributions vest immediately. Our contributions to the plan were $8,224,000, $7,725,000 and $6,915,000 in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

The 401(k) Plan consists of two parts: a profit sharing plan portion and a stock bonus plan/employee stock ownership plan (the “ESOP”). The ESOP portion is the portion that is invested in the Williams-Sonoma, Inc. Stock Fund. The profit sharing and ESOP components of the 401(k) Plan are considered a single plan under Internal Revenue Code section 414(l).

We also have a nonqualified executive deferred compensation plan that provides supplemental retirement income benefits for a select group of management. This plan permits eligible employees to make salary and bonus deferrals that are 100% vested. We have an unsecured obligation to pay in the future the value of the deferred compensation adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. As of January 28, 2018 and January 29, 2017, $24,151,000 and $18,736,000, respectively, is included in other long-term liabilities related to these deferred compensation obligations. Additionally, we have purchased life insurance policies on certain participants to potentially offset these unsecured obligations. The cash surrender value of these policies was $25,550,000 and $19,000,000 as of January 28, 2018 and January 29, 2017, respectively, and is included in other assets, net.

Note I: Commitments and Contingencies

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our Consolidated Financial Statements taken as a whole.

Note J: Stock Repurchase Program and Dividends

During fiscal 2017, we repurchased 4,050,697 shares of our common stock at an average cost of $48.43 per share and a total cost of approximately $196,179,000 under our stock repurchase program. As of January 28, 2018, there was approximately $214,399,000 remaining under our current stock repurchase program. In March 2018, we announced that our Board of Directors had authorized an increase in our current stock repurchase program to $500,000,000. As of January 28, 2018, we held treasury stock of $725,000 that represents the cost of shares available for issuance intended to satisfy future stock-based award settlements in certain foreign jurisdictions.

During fiscal 2016, we repurchased 2,871,480 shares of our common stock at an average cost of $52.68 per share and a total cost of approximately $151,272,000. During fiscal 2015, we repurchased 2,950,438 shares of our common stock at an average cost of $76.26 per share and a total cost of approximately $224,995,000.

Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions.

Total cash dividends declared in fiscal 2017, fiscal 2016 and fiscal 2015, were approximately $135,779,000, or $1.56 per common share, $133,588,000, or $1.48 per common share and $130,290,000, or $1.40 per common share, respectively. In March 2018, we announced that our Board of Directors had authorized a 10% increase in our quarterly cash dividend, from $0.39 to $0.43 per common share, subject to capital availability.

Note K: Segment Reporting

We have two reportable segments, e-commerce and retail. The e-commerce segment has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation and Mark and Graham, which sell our products through our e-commerce websites and direct-mail catalogs. Our e-commerce merchandise strategies are operating segments, which have been aggregated into one reportable segment, e-commerce. The retail segment, which includes our franchise operations, has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, which sell our products through our retail stores. Our retail merchandise strategies are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.

These reportable segments are strategic business units that offer similar products for the home. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income (expense) and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third-party service costs, primarily in our corporate administrative and systems departments. Unallocated assets include corporate cash and cash equivalents, prepaid expenses, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.

Income taxes are calculated at an entity level and are not allocated to our reportable segments.

Segment Information


In thousands	E-commerce		Retail		Unallocated			Total
Fiscal 2017
Net revenues_1_		$ 2,778,457		$ 2,513,902		$ —			$ 5,292,359
Depreciation and amortization expense		28,977		90,625		63,475			183,077
Operating income (loss) 2,3		599,491		224,608		(370,288	)		453,811
Assets_4_		776,569		1,114,726		894,454			2,785,749
Capital expenditures		39,273		83,750		66,689			189,712
Fiscal 2016
Net revenues_1_		$ 2,633,602		$ 2,450,210		$ —			$ 5,083,812
Depreciation and amortization expense		31,135		86,228		55,832			173,195
Operating income (loss)2		606,286		231,929		(365,616	)		472,599
Assets_4_		614,213		1,077,593		785,073			2,476,879
Capital expenditures		21,479		102,859		73,076			197,414
Fiscal 2015
Net revenues_1_		$ 2,522,580		$ 2,453,510		$ —			$ 4,976,090
Depreciation and amortization expense		32,056		83,027		52,677			167,760
Operating income (loss)		562,081		239,288		(312,735	)		488,634
Assets_4_		625,951		1,049,892		741,584			2,417,427
Capital expenditures		22,293		102,717		77,925			202,935

1	Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $328.2 million, $321.2 million and $298.9 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

2	Includes approximately $8.6 million in fiscal 2017 and $14.4 million in fiscal 2016 for severance-related reorganization charges, primarily in our corporate functions, which is recorded in selling, general and administrative expenses within the unallocated segment.

3	Includes approximately $6.2 million in fiscal 2017 for costs related to the acquisition of Outward and its ongoing operations, which is primarily recorded in selling, general and administrative expenses.

4	Includes long-term assets related to our international operations of approximately $63.4 million, $59.2 million and $61.7 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

Note L: Derivative Financial Instruments

We have retail and e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with the derivative financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with the ASC 815, Derivatives and Hedging.

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost

of goods sold. Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in selling, general and administrative expenses. Based on the rates in effect as of January 28, 2018, we expect to reclassify a net pre-tax loss of approximately $756,000 from OCI to cost of goods sold over the next 12 months.

We also enter into non-designated foreign currency forward contracts (to sell Australian dollars and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains or losses related to these contracts are recognized in selling, general and administrative expenses. As of January 28, 2018, and January 29, 2017, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:


In thousands	Jan. 28, 2018		Jan. 29, 2017
Contracts designated as cash flow hedges	$	28,200	$	19,550
Contracts not designated as cash flow hedges	$	46,000	$	46,000

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for fiscal 2017, fiscal 2016 and fiscal 2015.

The effect of derivative instruments in our Consolidated Financial Statements, pre-tax, was as follows:


In thousands	Fiscal 2017			Fiscal 2016			Fiscal 2015
Net gain (loss) recognized in OCI	$	(974	)	$	(1,243	)	$	1,454
Net gain (loss) reclassified from OCI to cost of goods sold	$	(144	)	$	(147	)	$	1,605
Net foreign exchange gain (loss) recognized in selling, general and administrative expenses:
Instruments designated as cash flow hedges_1_	$	88		$	(4	)	$	(66	)
Instruments not designated or de-designated	$	(3,286	)	$	(3,569	)	$	2,838

1	Changes in fair value of the forward contract related to interest charges (or forward points).

The fair values of our derivative financial instruments are presented below according to their classification in our Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note M.


In thousands	Jan. 28, 2018			Jan. 29, 2017
Derivatives designated as cash flow hedges:
Other current assets	$	—		$	241
Other long-term assets	$	—		$	21
Other current liabilities	$	(635	)	$	(230	)
Other long-term liabilities	$	(54	)	$	—
Derivatives not designated as hedging instruments:
Other current assets	$	—		$	111
Other current liabilities	$	(299	)	$	—

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

Note M: Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by ASC 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:

	•		Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;

	•		Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

	•		Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.

The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.

Long-term Debt

As of January 28, 2018, the fair value of our long-term debt approximates its carrying value and is based on observable Level 2 inputs, primarily market interest rates for instruments with similar maturities.

Foreign Currency Derivatives and Hedging Instruments

We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for foreign currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.

The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts entered into are subject to credit risk-related contingent features or collateral requirements.

Property and Equipment

We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure these assets at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.

There were no transfers between Level 1, 2 or 3 categories during fiscal 2017 or fiscal 2016.

Note N: Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows:


In thousands	Foreign Currency Translation			Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
Balance at February 1, 2015	$	(3,522)		$	974		$	(2,548)
Foreign currency translation adjustments		(7,958	)		—			(7,958	)
Change in fair value of derivative financial instruments		—			1,074			1,074
Reclassification adjustment for realized (gain) loss on derivative financial instruments_1_		—			(1,184	)		(1,184	)
Other comprehensive income (loss)		(7,958	)		(110	)		(8,068	)
Balance at January 31, 2016		(11,480	)		864			(10,616	)
Foreign currency translation adjustments		1,523			—			1,523
Change in fair value of derivative financial instruments		—			(916	)		(916	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments_1_		—			106			106
Other comprehensive income (loss)		1,523			(810	)		713
Balance at January 29, 2017		(9,957	)		54			(9,903	)
Foreign currency translation adjustments		3,730			—			3,730
Change in fair value of derivative financial instruments		—			(715	)		(715	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments_1_		—			106			106
Other comprehensive income (loss)		3,730			(609	)		3,121
Balance at January 28, 2018	$	(6,227	)	$	(555	)	$	(6,782	)

1	Refer to Note L for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Consolidated Statements of Earnings.

Note O: Acquisition of Outward, Inc.

On December 1, 2017, we acquired Outward, Inc. (“Outward”), a 3-D imaging and augmented reality platform for the home furnishings and décor industry. Of the $112,000,000 contractual purchase price, approximately $80,864,000 was deemed to be purchase consideration, $26,690,000 is payable to former stockholders of Outward over a period of four years from the acquisition date, contingent upon their continued service during that time, and $4,446,000 primarily represents settlement of pre-existing obligations of Outward with third parties on the acquisition date. Certain key employees of Outward may also collectively earn up to an additional $20,000,000, contingent upon achievement of certain financial performance targets, and subject to their continued service over the performance period. Both of these contingent amounts will be recognized as post-combination compensation expense as they are earned.

The purchase consideration of $80,864,000 was allocated to identifiable assets acquired of $2,767,000, primarily property and equipment, and to liabilities assumed of $12,169,000, based on their estimated fair values on the acquisition date. The remaining consideration has been recorded within other long-term assets in our Consolidated Balance Sheet as of January 28, 2018. We are currently in the process of valuing intangible assets acquired, and expect to allocate the remaining consideration between goodwill and intangible assets upon completion. During the fourth quarter of fiscal 2017, we incurred third party acquisition-related costs of approximately $1,983,000, which have been recorded within selling, general and administrative expenses.

Outward is a wholly-owned subsidiary of Williams-Sonoma, Inc. Results of operations for Outward have been included in our Consolidated Financial Statements from the acquisition date. Pro forma results of Outward have not been presented as the results were not material to our Consolidated Financial Statements for all years presented, and would not have been material had the acquisition occurred at the beginning of fiscal 2017.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Williams-Sonoma, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the “Company”) as of January 28, 2018 and January 29, 2017, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended January 28, 2018, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of January 28, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 28, 2018 and January 29, 2017, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2018, in conformity with the accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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/ DELOITTE & TOUCHE LLP

San Francisco, California

March 29, 2018

We have served as the Company’s auditor since 1980.

Quarterly Financial Information

(Unaudited)


In thousands, except per share amounts
Fiscal 2017	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Full Year
Net revenues	$1,111,507	$	1,201,606	$	1,299,336	$	1,679,910	$	5,292,359
Gross profit	395,760		422,711		467,067		646,173		1,931,711
Operating income_1,2_	62,474		81,584		110,813		198,940		453,811
Net earnings_3,4_	39,555		52,917		71,313		95,760		259,545
Basic earnings per share_5_	$ 0.45	$	0.61	$	0.84	$	1.14	$	3.03
Diluted earnings per share_5_	$ 0.45	$	0.61	$	0.84	$	1.13	$	3.02
Fiscal 2016	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Full Year
Net revenues	$1,097,817	$	1,159,029	$	1,245,385	$	1,581,581	$	5,083,812
Gross profit	392,517		410,539		458,223		622,031		1,883,310
Operating income_6_	63,525		83,276		109,979		215,819		472,599
Net earnings_7_	39,597		51,785		69,378		144,627		305,387
Basic earnings per share_5_	$ 0.44	$	0.58	$	0.78	$	1.65	$	3.45
Diluted earnings per share_5_	$ 0.44	$	0.58	$	0.78	$	1.63	$	3.41

1	Includes approximately $5.7 million in the first quarter and $2.9 million in the fourth quarter of fiscal 2017 for severance-related reorganization charges primarily in our corporate functions, which is recorded in selling, general and administrative expenses within the unallocated segment.

2	Includes approximately $6.2 million in the fourth quarter of fiscal 2017 for expenses related to the acquisition of Outward and its ongoing operations, which is primarily recorded in selling, general and administrative expenses.

3	Includes tax expense of approximately $1.4 million in the first quarter and a tax benefit of approximately $1.7 million in the fourth quarter of fiscal 2017 associated with the adoption of new accounting rules related to stock-based compensation.

4	Includes provisional tax expense of approximately $41.5 million in the fourth quarter of fiscal 2017 resulting from the enactment of the Tax Cuts and Jobs Act.

5	Due to differences between quarterly and full year weighted average share count calculations, and the effect of quarterly rounding to the nearest cent per share, full year earnings per share may not equal the sum of the quarters.

6	Includes approximately $13.2 million and $1.2 million in the first quarter and third quarter of fiscal 2016, respectively, for severance-related reorganization charges due to headcount reduction, primarily in our corporate functions, which is recorded in selling, general and administrative expenses within the unallocated segment.

7	Includes a benefit of approximately $7.7 million from a one-time favorable tax adjustment in the fourth quarter of fiscal 2016.

Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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