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This excerpt taken from the FL 10-Q filed Sep 11, 2007. Family Footwear During the first quarter of 2007, the Company launched a new family footwear concept, Footquarters. Sales and division results were not significant for the thirteen and twenty-six weeks ended August 4, 2007. The concept’s results did not meet the Company’s expectations and, therefore, the Company decided not to further invest in this business. Subsequent to the close of the second quarter, the Company converted these stores to Foot Locker and Champs Sports outlet stores. A charge of $1.8 million was recorded in the second quarter, which primarily represented costs associated with the removal of signage and the write-off of unusable fixtures. Corporate Expense Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Corporate expense was $17 million for the thirteen weeks ended August 4, 2007, an increase of $3 million as compared with the corresponding prior-year period. During the second quarter of 2007, the Company identified an under accrual related to employee vacation entitlements. The accrual was understated by $1 million ($0.6 million after-tax); accordingly, a charge was recorded to reflect the liability as of August 4, 2007. This under accrual was not material to the Company’s consolidated statement of operations or cash flows for this period or any of the earlier reported periods. Additionally, the second quarter of 2006 reflected reduced incentive compensation expense of $3 million, as well as a charge for an anticipated legal settlement of $2 million. Corporate expense for the twenty-six weeks ended August 4, 2007 increased by $1 million to $33 million from the same period in the prior year. Selling, General and Administrative Selling, general and administrative expenses (“SG&A”) of $286 million increased by $13 million, or 4.8 percent, in the second quarter of 2007 as compared with the corresponding prior-year period. SG&A of $576 million increased by $20 million, or 3.6 percent, in the first half of 2007 as compared with the corresponding prior-year period. SG&A, as a percentage of sales increased to 22.3 percent for the thirteen weeks ended August 4, 2007 as compared with 21.0 percent in the corresponding prior-year period. SG&A, as a percentage of sales increased to 22.2 percent for the twenty-six weeks ended August 4, 2007 as compared with 20.8 percent in the corresponding prior-year period. The increases in SG&A as a percentage of sales are due, in large part, to the decline in sales during the current year coupled with the increase in corporate expense, both as discussed above. Excluding the effect of foreign currency fluctuations, SG&A increased $9 million and $10 million for the thirteen and twenty-six weeks ended August 4, 2007, respectively, as compared with the corresponding prior-year periods. Depreciation and Amortization Depreciation and amortization remained essentially unchanged for the thirteen and twenty-six weeks ended August 4, 2007 as compared with the corresponding prior-year period. Page 15 of 27 Interest Expense Interest expense was $5 million and $6 million for the thirteen week periods ended August 4, 2007 and July 29, 2006, respectively. Interest expense was $10 million and $11 million for the twenty-six week periods ended August 4, 2007 and July 29, 2006, respectively. The reduction in interest expense relates primarily to the $38 million purchase and retirement in 2006 of the Company’s 8.5 percent debentures. Interest income was $5 million for the thirteen weeks ended August 4, 2007 and July 29, 2006, respectively. Interest income increased to $10 million from $9 million for the twenty-six weeks ended August 4, 2007 and July 29 2006, respectively. The increase in interest income is primarily the result of higher average interest rates on cash, cash equivalents, and short-term investments, coupled with an increase in the average short-term investment balance. Income Taxes The Company’s effective tax rate for the thirteen and twenty-six weeks ended August 4, 2007 was 38.4 percent and 71.6 percent as compared with 44.2 percent and 38.4 percent for the corresponding prior-year periods. The difference in the second quarter rate is primarily due to the proportion of the U.S. loss to the total loss for the quarter, offset in part by the effect of a change in the German statutory tax rates. The 2007 year-to-date effective rate is distorted by the fact that the first quarter represented income whereas the second quarter was a loss of essentially the same amount. The Company expects its effective rate to approximate 35 percent for the remaining quarters of 2007, as well as for the full year. The actual rate will depend in significant part on the proportion of the Company’s worldwide income that is earned in the U.S. Net Income (Loss) For the thirteen weeks ended August 4, 2007, the Company reported a net loss $18 million, or $0.12 per diluted share. This compares to net income of $14 million or $0.09 per diluted share for the corresponding prior-year period. The decline is a result of lower sales due to the continued challenging athletic retail environment and approximately $50 million in additional markdowns recorded to liquidate slow-moving merchandise. Included in the thirteen weeks ended July 29, 2006 is a non-cash impairment charge of $17 million ($12 million after-tax) or $0.08 per share, to write-down the value of long-lived assets of underperforming stores in the Company’s European operations. For the twenty-six weeks ended August 4, 2007, the Company reported a net loss of $1 million, or $0.01 per diluted share, a decrease of $0.48 per diluted share from $73 million, or $0.47 per diluted share, for the twenty-six weeks ended July 29, 2006. The twenty-six weeks ended July 29, 2006 reflects a benefit of $1 million, or $0.01 per diluted share, from a cumulative effect of accounting change related to the required adoption of SFAS No. 123 (R). LIQUIDITY AND CAPITAL RESOURCES Generally, the Company’s primary sources of cash have been from operations. The Company generally finances real estate with operating leases. The principal uses of cash have been to finance inventory requirements, capital expenditures related to store openings, store remodelings, and management information systems, and to fund other general working capital requirements. Management believes operating cash flows will be adequate to fund its working capital requirements, future pension contributions for the Company’s retirement plans, anticipated quarterly dividend payments, scheduled debt repayments, potential share repurchases, and to support the development of its short-term and long-term operating strategies. Additionally, the Company has a $200 million revolving credit facility. Other than to support standby letter of credit commitments, of which $14 million were in place at August 4, 2007, this revolving credit facility has not been used during 2007. In 2004, the Company obtained a 5-year, $175 million amortizing term loan from the bank group participating in the revolving credit facility, of which $88 million is outstanding as of August 4, 2007. Under the Company’s revolving credit and term loan agreement the Company is required to satisfy certain financial and operating covenants, including a minimum fixed charge coverage ratio. In addition, this agreement restricts the amount the Company may expend in any year for dividends to 50 percent of its prior year’s net income. Based upon the Company's second quarter financial results and business uncertainties for the second half of the year, the Company may not continue to be in compliance with the fixed charge coverage ratio. In addition, the restricted payment provision may prohibit the Company from the payment of the dividend at the current rate in 2008. In the event that the Company does not satisfy one or more of the covenants, the Company will evaluate several options and expects that it would be able to obtain a waiver, amend the agreement, or enter into a new credit facility. Any materially adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with foreign global sourcing or economic conditions worldwide, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations. Net cash provided by operating activities was $53 million for the twenty-six weeks ended August 4, 2007 and net cash used in operating activities was $113 million for the twenty-six weeks ended July 29, 2006. These amounts reflect net income adjusted for non-cash items and working capital changes. The Company reported a loss of $1 million for the twenty-six weeks ended August 4, 2007, as compared with a profit of $73 million in the corresponding prior-year period primarily as a result of the liquidation of slow-moving merchandise. While the liquidation negatively affected the results for the period, the Company’s operating cash flows were enhanced by the liquidation activity. The Company believes its inventory levels are well positioned for the back-to-school selling period. Additionally, in the first half of 2007 the Company did not contribute to the U.S. and Canadian qualified pension plans as a contribution was not required. This compares with $68 million contributed in the first half of 2006. Page 16 of 27 Net cash provided by investing activities was $7 million for the twenty-six weeks ended August 4, 2007 and was $85 million for the twenty-six weeks ended July 29, 2006. The Company’s sales of short-term investments, net of purchases, provided cash of $90 million as compared with $165 million in the corresponding prior-year period. Planned capital expenditures for 2007 are expected to total $147 million, of which $121 million relates to new store openings and modernizations of existing stores, and $26 million reflects the development of information systems and other support facilities. This amount is $23 million less than was originally planned primarily because the Company will no longer be investing in the Footquarters concept coupled with the reduced number of store modernizations planned for the U.S. formats. The Company has the ability to revise and reschedule its anticipated capital expenditure program in the event that any changes to the Company’s financial position require it. Net cash used in financing activities for the Company’s operations was $82 million for the twenty-six weeks ended August 4, 2007 and was $77 million for the twenty-six weeks ended July 29, 2006. During the second quarters of 2007 and 2006, the Company made payments of $2 million and $50 million, respectively, related to its 5-year term loan. The Company recorded an excess tax benefit related to stock-based compensation of $1 million and $2 million for the twenty-six weeks ended August 4, 2007 and July 29, 2006, respectively. The Company declared and paid a $0.125 per share dividend during the first and second quarters of 2007 totaling $39 million, as compared with a $0.09 per share dividend during the first and second quarters of 2006, which totaled $28 million. The Company received proceeds from the issuance of common stock in connection with employee stock programs of $8 million and $7 million for the twenty-six weeks ended August 4, 2007 and July 29, 2006, respectively. In the first quarter of 2007, the Company announced that the Board of Directors authorized a new $300 million, three-year repurchase program replacing a prior $150 million program. As part of the new authorized repurchase program, the Company purchased 2,283,254 shares of its common stock during the twenty-six weeks ended August 4, 2007 for approximately $50 million. The Company purchased 334,200 shares of its common stock during the twenty-six weeks ended July 29, 2006 for approximately $8 million. Under the current share repurchase program, subject to legal and contractual restrictions, the Company may make purchases of its common stock, from time to time, depending on market conditions, availability of other investment opportunities and other factors. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended February 3, 2007, except for the following. This excerpt taken from the FL 10-Q filed Jun 12, 2007. Family Footwear The Company opened 31 Footquarters stores during the first quarter of 2007. Sales and division results were not significant and reflected the fact that none of the locations were open during the entire period, many opened in the final weeks of the first quarter. The Company expects sales to increase as the stores gains consumer awareness. Division results primarily reflected occupancy related costs incurred during pre-opening period. Corporate Expense Corporate expense consists of unallocated general and administrative expenses, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses and other items. Corporate expense for the thirteen weeks ended May 5, 2007 decreased by $2 million, which reflects decreased compensation costs for incentive bonuses. Selling, General and Administrative Selling, general and administrative expenses (“SG&A”) of $290 million increased by $7 million, or 2.5 percent, in the first quarter of 2007 as compared with the corresponding prior-year period. SG&A, as a percentage of sales, increased to 22.0 percent for the thirteen weeks ended May 5, 2007, as compared with 20.7 percent in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, SG&A increased by $1 million for the thirteen weeks ended May 5, 2007, as compared with the corresponding prior year period. Depreciation and Amortization Depreciation and amortization remained essentially unchanged for the thirteen weeks ended May 5, 2007 as compared with the corresponding prior year period. Interest Expense Interest expense was $5 million for the thirteen-week periods ended May 5, 2007 and April 29, 2006, respectively. Interest income increased to $5 million for the thirteen weeks ended May 5, 2007, from $4 million for the thirteen weeks ended April 29, 2006. The increase in interest income is primarily the result of higher average interest rates on cash, cash equivalents, and short-term investments coupled with an increase in the average short-term investment balances. Income Taxes The Company’s effective tax rate for the thirteen weeks ended May 5, 2007 was 36.0 percent as compared with 36.8 percent for the corresponding prior year period. The Company expects its effective rate to approximate 37.5 percent for the remaining quarters of 2007. The actual rate will depend in significant part on the proportion of the Company’s worldwide income that is earned in the U.S. Page 15 of 26 Net Income Net income of $17 million, or $0.11 per diluted share, for the thirteen weeks ended May 5, 2007 decreased by $0.27 per diluted share from $59 million, or $0.38 per diluted share, for the thirteen weeks ended April 29, 2006. The first quarter 2006 results benefited by $1 million, or $0.01 per diluted share, from a cumulative effect of accounting change related to the Company’s required adoption of SFAS 123(R). LIQUIDITY AND CAPITAL RESOURCES Generally, the Company’s primary sources of cash have been from operations. The Company has a $200 million revolving credit facility. Other than to support standby letter of credit commitments, of which $14 million were in place at May 5, 2007, this revolving credit facility has not been used during 2007. The Company generally finances real estate with operating leases. The principal uses of cash have been to finance inventory requirements, capital expenditures related to store openings, store remodelings, and management information systems, and to fund other general working capital requirements. Management believes operating cash flows and current credit facilities will be adequate to fund its working capital requirements, future pension contributions for the Company’s retirement plans, anticipated quarterly dividend payments, scheduled debt repayments, potential share repurchases, and to support the development of its short-term and long-term operating strategies. Any materially adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with foreign global sourcing or economic conditions worldwide, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations. Net cash provided by operating activities of continuing operations was $27 million for the thirteen weeks ended May 5, 2007 and net cash used in operating activities was $114 million for the thirteen weeks ended April 29, 2006. These amounts reflect net income adjusted for non-cash items and working capital changes. The increase in operating cash flows is primarily related to the increase in accounts payable primarily offset by an increase in inventory. Additionally, in the first quarter of 2007 the Company did not contribute to the U.S. and Canadian qualified pension plans, as compared with $68 million contributed in the first quarter of 2006. Net cash used in investing activities was $15 million for the thirteen weeks ended May 5, 2007 and net cash provided by investing activities was $34 million for the thirteen weeks ended April 29, 2006. The Company’s sales of short-term investments, net of purchases, decreased by $40 million to $28 million for the thirteen weeks ended May 5, 2007 as compared with net sales of $68 million for the thirteen weeks ended April 29, 2006. Capital expenditures were $43 million for the thirteen weeks ended May 5, 2007 as compared with $34 million in the corresponding prior year period. Planned capital expenditures for 2007 are approximately $145 million, of which $117 million relates to new store openings and modernizations of existing stores, and $28 million reflects the development of information systems and other support facilities. This amount is $25 million less than was originally planned primarily as the Company expects to open fewer Footquarters stores than originally planned. The Company has the ability to revise and reschedule its anticipated capital expenditure program in the event that any changes to the Company’s financial position require it. Net cash used in financing activities for the Company’s continuing operations was $39 million and $67 million for the thirteen weeks ended May 5, 2007, and April 29, 2006, respectively. During the first quarter of 2006, the Company made payments of $50 million related to its term loan that were originally due in May of 2007 and 2008. The Company recorded an excess tax benefit related to stock-based compensation of $1 million and $2 million for the thirteen weeks ending May 5, 2007 and April 29, 2006. The Company declared and paid a $0.125 per share dividend during the first quarter of 2007 totaling $19 million, as compared with a $0.09 per share dividend during the first quarter of 2006, which totaled $14 million. The Company received proceeds from the issuance of common stock in connection with employee stock programs of $5 million and $3 million for the thirteen weeks ended May 5, 2007 and April 29, 2006, respectively. In the first quarter of 2007, the Company announced that the Board of Directors authorized a new $300 million, three-year repurchase program replacing a prior $150 million program. As part of the new authorized repurchase program, the Company purchased 1,173,711 shares of its common stock during the first quarter of 2007 for approximately $26 million. The Company purchased 334,200 shares of its common stock during the first quarter of 2006 for approximately $8 million. Subsequent to the end of the first quarter, through June 11, 2007, the Company purchased an additional 759,543 shares of its common stock for approximately $16 million. Under the share repurchase program, subject to legal and contractual restrictions, the Company may make purchases of its common stock, from time to time, depending on market conditions, availability of other investment opportunities and other factors. Page 16 of 26 CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended February 3, 2007, except for the following. | EXCERPTS ON THIS PAGE:
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