Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 

ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended November 3, 2018

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from    to

Commission file number: 1-13536
 
macysinclogohighresa02.jpg
 
Incorporated in Delaware
 
I.R.S. Employer Identification No.
 
 
13-3324058

7 West Seventh Street
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company  o

 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at December 1, 2018
Common Stock, $0.01 par value per share
 
307,467,240 shares
 


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MACY’S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(millions, except per share figures)
 
 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
Net sales
$
5,404

 
$
5,281

 
$
16,516

 
$
16,267

Credit card revenues, net
185

 
145

 
528

 
473

 
 
 
 
 
 
 
 
Cost of sales
(3,226
)
 
(3,152
)
 
(9,927
)
 
(9,858
)
Selling, general and administrative expenses
(2,255
)
 
(2,188
)
 
(6,501
)
 
(6,406
)
Gains on sale of real estate
42

 
65

 
111

 
176

Impairment, restructuring and other costs
(3
)
 
(33
)
 
(39
)
 
(33
)
Operating income
147

 
118

 
688

 
619

Benefit plan income, net
9

 
15

 
31

 
42

Settlement charges
(23
)
 
(22
)
 
(73
)
 
(73
)
Interest expense
(64
)
 
(76
)
 
(204
)
 
(244
)
Losses on early retirement of debt
—

 
—

 
(5
)
 
(1
)
Interest income
5

 
2

 
17

 
7

Income before income taxes
74

 
37

 
454

 
350

Federal, state and local income tax expense
(12
)
 
(10
)
 
(96
)
 
(138
)
Net income
62

 
27

 
358

 
212

Net loss attributable to noncontrolling interest
—

 
3

 
10

 
7

Net income attributable to Macy's, Inc. shareholders
$
62

 
$
30

 
$
368

 
$
219

Basic earnings per share attributable to Macy's, Inc. shareholders
$
0.20

 
$
0.10

 
$
1.20

 
$
0.72

Diluted earnings per share attributable to Macy's, Inc. shareholders
$
0.20

 
$
0.10

 
$
1.18

 
$
0.71


The accompanying notes are an integral part of these Consolidated Financial Statements.

2

MACY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(millions)

 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
Net income
$
62

 
$
27

 
$
358

 
$
212

Other comprehensive income (loss):
 
 
 
 
 
 
 
Actuarial gain (loss) on post employment and postretirement benefit plans, before tax
(164
)
 
10

 
(194
)
 
57

Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of net actuarial loss and prior service credit on post employment and postretirement benefit plans included in net income, before tax
7

 
8

 
25

 
26

Settlement charges, before tax
23

 
22

 
73

 
73

Tax effect related to items of other comprehensive income (loss)
35

 
(15
)
 
24

 
(60
)
Total other comprehensive income (loss), net of tax effect
(99
)
 
25

 
(72
)
 
96

Comprehensive income (loss)
(37
)
 
52

 
286

 
308

Comprehensive loss attributable to noncontrolling interest
—

 
3

 
10

 
7

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
(37
)
 
$
55

 
$
296

 
$
315


The accompanying notes are an integral part of these Consolidated Financial Statements.


3

MACY’S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(millions)
 
 
 
 
 
 
 
 
November 3, 2018
 
February 3, 2018
 
October 28, 2017
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
736

 
$
1,455

 
$
534

Receivables
180

 
363

 
219

Merchandise inventories
7,147

 
5,178

 
7,065

Income tax receivable
10

 
—

 
—

Prepaid expenses and other current assets
594

 
650

 
610

Total Current Assets
8,667

 
7,646

 
8,428

Property and Equipment - net of accumulated depreciation and
amortization of $5,084, $4,610 and $5,330
6,572

 
6,672

 
6,742

Goodwill
3,908

 
3,897

 
3,897

Other Intangible Assets – net
481

 
488

 
491

Other Assets
733

 
880

 
835

Total Assets
$
20,361

 
$
19,583

 
$
20,393

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
65

 
$
22

 
$
22

Merchandise accounts payable
3,381

 
1,590

 
3,173

Accounts payable and accrued liabilities
2,998

 
3,271

 
3,257

Income taxes
—

 
296

 
34

Total Current Liabilities
6,444

 
5,179

 
6,486

Long-Term Debt
5,469

 
5,861

 
6,297

Deferred Income Taxes
1,185

 
1,148

 
1,586

Other Liabilities
1,618

 
1,662

 
1,750

Shareholders' Equity:
 
 
 
 
 
Macy's, Inc.
5,667

 
5,745

 
4,282

Noncontrolling interest
(22
)
 
(12
)
 
(8
)
Total Shareholders’ Equity
5,645

 
5,733

 
4,274

Total Liabilities and Shareholders’ Equity
$
20,361

 
$
19,583

 
$
20,393


The accompanying notes are an integral part of these Consolidated Financial Statements.


4

MACY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(millions)
 
 
 
 
 
39 Weeks Ended
 
November 3, 2018
 
October 28, 2017
Cash flows from operating activities:
 
 
 
Net income
$
358

 
$
212

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Impairment, restructuring and other costs
39

 
33

Settlement charges
73

 
73

Depreciation and amortization
718

 
741

Stock-based compensation expense
48

 
46

Gains on sale of real estate
(111
)
 
(176
)
Amortization of financing costs and premium on acquired debt
(5
)
 
(10
)
Changes in assets and liabilities:
 
 
 
Decrease in receivables
163

 
274

Increase in merchandise inventories
(1,969
)
 
(1,665
)
Decrease in prepaid expenses and other current assets
16

 
34

Increase in merchandise accounts payable
1,664

 
1,630

Decrease in accounts payable, accrued liabilities
and other items not separately identified
(196
)
 
(412
)
Decrease in current income taxes
(301
)
 
(321
)
Increase in deferred income taxes
62

 
47

Change in other assets and liabilities not separately identified
(130
)
 
(107
)
Net cash provided by operating activities
429

 
399

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(468
)
 
(359
)
Additions to capitalized software
(209
)
 
(191
)
Disposition of property and equipment
121

 
212

Other, net
7

 
9

Net cash used by investing activities
(549
)
 
(329
)
Cash flows from financing activities:
 
 
 
Debt repaid
(361
)
 
(564
)
Dividends paid
(347
)
 
(346
)
Increase in outstanding checks
44

 
80

Acquisition of treasury stock
—

 
(1
)
Issuance of common stock
41

 
3

Proceeds from noncontrolling interest
7

 
12

Net cash used by financing activities
(616
)
 
(816
)
Net decrease in cash, cash equivalents and restricted cash
(736
)
 
(746
)
Cash, cash equivalents and restricted cash beginning of period
1,513

 
1,334

Cash, cash equivalents and restricted cash end of period
$
777

 
$
588

Supplemental cash flow information:
 
 
 
Interest paid
$
213

 
$
251

Interest received
17

 
7

Income taxes paid (net of refunds received)
335

 
412

The accompanying notes are an integral part of these Consolidated Financial Statements.

5

MACY’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

1.    Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc. and subsidiaries (the "Company") is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and kids), cosmetics, home furnishings and other consumer goods. The Company operates approximately 870 stores in 44 states, the District of Columbia, Guam and Puerto Rico. As of November 3, 2018, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale's The Outlet, Macy's Backstage, bluemercury and STORY.
Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (the "2017 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2017 10-K.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.
The Consolidated Financial Statements for the 13 and 39 weeks ended November 3, 2018 and October 28, 2017, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company.
Seasonality
Because of the seasonal nature of the retail business, the results of operations for the 13 and 39 weeks ended November 3, 2018 and October 28, 2017 (which do not include the Christmas season) are not necessarily indicative of such results for the full fiscal year.
Reclassifications
Certain reclassifications were made to prior years’ amounts to conform to the classifications of such amounts in the most recent years and adoption of new accounting standards as discussed in more detail below.
Comprehensive Income
Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income. For the Company, the only other components of total comprehensive income for the 13 and 39 weeks ended November 3, 2018 and October 28, 2017 relate to post employment and postretirement plan items. Settlement charges incurred are included as a separate component of income before income taxes in the Consolidated Statements of Income. Amortization reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and are included in benefit plan income, net on the Consolidated Statements of Income. See Note 4, "Benefit Plans," for further information.
Net sales
Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. The Company's revenue generating activities include the following:



6
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


Retail Sales
Retail sales include merchandise sales, licensed department income, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Sales of merchandise are recorded at the time of shipment to the customer and are reported net of estimated merchandise returns and certain customer incentives. Commissions earned on sales generated by licensed departments are included as a component of total net sales and are recognized as revenue at the time merchandise is sold to customers. Service revenues (e.g., alteration and cosmetic services) are recorded at the time the customer receives the benefit of the service. The Company has elected to present sales taxes on a net basis and, as such, sales taxes are included in accounts payable and accrued liabilities until remitted to the taxing authorities.
For the 13 and 39 weeks ended November 3, 2018 and October 28, 2017, Macy's accounted for 88% of the Company's net sales. Disaggregation of the Company's net sales by family of business for the 13 and 39 weeks ended November 3, 2018 and October 28, 2017 were as follows:
 
13 Weeks Ended
 
39 Weeks Ended
Net sales by family of business
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
 
(millions)
Women's Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances
$
2,010

 
$
1,989

 
$
6,221

 
$
6,122

Women's Apparel
1,264

 
1,247

 
3,969

 
3,989

Men's and Kids
1,243

 
1,184

 
3,702

 
3,558

Home/Other (a)
887

 
861

 
2,624

 
2,598

Total
$
5,404

 
$
5,281

 
$
16,516

 
$
16,267

(a) Other primarily includes restaurant sales, certain loyalty program income and breakage income from unredeemed gift cards.
Merchandise Returns
The Company estimates merchandise returns using historical data and recognizes an allowance that reduces net sales and cost of sales. The liability for merchandise returns is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $265 million, $291 million and $260 million as of November 3, 2018, February 3, 2018 and October 28, 2017, respectively. Included in prepaid expenses and other current assets is an asset totaling $180 million, $201 million and $178 million as of November 3, 2018, February 3, 2018 and October 28, 2017, respectively, for the recoverable cost of merchandise estimated to be returned by customers.
Gift Cards and Customer Loyalty Programs
The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold or issued, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records revenue from unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns.
The Company maintains customer loyalty programs in which customers earn points based on their purchases. Under the Macy’s brand, points are earned based on customers’ spending on Macy’s private label and co-branded credit cards as well as non-proprietary cards during certain tender-neutral promotional events. Under the Bloomingdale’s brand, the Company offers a tender neutral points-based program. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer.
The liability for unredeemed gift cards and customer loyalty programs is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $711 million, $894 million and $707 million as of November 3, 2018, February 3, 2018 and October 28, 2017, respectively.
Credit Card Revenues, net
In 2005, the Company entered into an arrangement with Citibank to sell the Company's private label and co-branded credit cards ("Credit Card Program"). Subsequent to this initial arrangement and associated amendments, in 2014, the Company entered into an amended and restated Credit Card Program Agreement (the "Program Agreement") with Citibank. As part of the Program Agreement, the Company receives payments for providing a combination of interrelated services and intellectual property to Citibank in support of the underlying Credit Card Program. Revenue based on the spending activity of the

7
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


underlying accounts is recognized as the respective card purchases occur and the Company’s profit share is recognized based on the performance of the underlying portfolio. Revenue associated with the establishment of new credit accounts and assisting in the receipt of payments for existing accounts is recognized as such activities occur. Credit card revenues include finance charges, late fees and other revenue generated by the Company’s Credit Card Program, net of fraud losses and expenses associated with establishing new accounts.
Newly Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which established principles to report useful information to financial statements users about the nature, timing and uncertainty of revenue from contracts with customers. ASU No. 2014-09 along with various related amendments comprise ASC Topic 606, Revenue from Contracts with Customers, and provide guidance that is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. The new standard and its related updates were adopted by the Company on February 4, 2018. On the effective date, the Company elected to apply the new guidance retrospectively to each prior period presented which resulted in an increase to retained earnings of $72 million and $54 million at the beginning of fiscal 2018 and fiscal 2017, respectively.

Overall, the new standard did not have a material impact on the results of the Company's operations or consolidated statements of financial position, but impacted the presentation and timing of certain revenue transactions. Specifically, the changes included gross presentation of the Company's estimates for future sales returns and related recoverable assets, presenting income from credit operations, gift card breakage income, and certain loyalty program income as separate components of revenue and recognizing gift card breakage revenue over the period of redemption for gift cards associated with certain returns. The Company's evaluation of the new standards included a review of certain vendor arrangements to determine whether the Company acts as principal or agent in such arrangements and such evaluation did not result in any material changes in gross versus net presentation as a result of the adoption of the new standards.

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (ASC Topic 715), which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. The Company adopted this standard effective February 4, 2018 on a retrospective basis to each prior period presented and has recognized its net periodic benefit costs, excluding service costs, in benefit plan income, net on its Consolidated Statements of Income.

In 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (ASC Topic 230): Restricted Cash, and ASU No. 2016-15, Statement of Cash Flows (ASC Topic 230): Classification of Certain Cash Receipts and Cash Payments. These standards were issued to resolve numerous diversities in practice with regard to the presentation and classification of certain cash receipts and payments in the statement of cash flows. The standards were effective for the Company on February 4, 2018, and were adopted using a retrospective transition method to each prior period presented. As a result of these standards, the Company included its beginning-of-period restricted cash balances of $58 million and end-of-period restricted cash balances of $41 million when reconciling the Consolidated Statement of Cash Flow movement for the 39 weeks ended November 3, 2018. Similarly, for the 39 weeks ended October 28, 2017, the Company included its beginning-of-period restricted cash balances of $37 million and end-of-period restricted cash balances of $54 million. In addition to these changes, the Company changed the classification of $10 million of cash payments for the prepayment of debt from an operating outflow to a financing outflow for the 39 weeks ended October 28, 2017.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for stranded tax effects in accumulated other comprehensive income resulting from H.R. 1, originally known as the “Tax Cuts and Jobs Act,” to be reclassified to retained earnings. The Company early adopted this standard during the first quarter of 2018 and, as a result, reclassified $164 million of stranded tax effects to retained earnings.





8
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


2.    Earnings Per Share Attributable to Macy's, Inc. Shareholders
The following tables set forth the computation of basic and diluted earnings per share attributable to Macy's, Inc. shareholders:

 
13 Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income attributable to Macy's, Inc. shareholders and
average number of shares outstanding
$
62

 
 
 
307.2

 
$
30

 
 
 
304.6

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.9

 
$
62

 
 
 
308.1

 
$
30

 
 
 
305.5

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.20

 
 
 
 
 
$
0.10

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
4.1

 
 
 
 
 
1.0

 
$
62

 
 
 
312.2

 
$
30

 
 
 
306.5

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.20

 
 
 
 
 
$
0.10

 
 

 
39 Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income attributable to Macy's, Inc. shareholders and
average number of shares outstanding
$
368

 
 
 
306.6

 
$
219

 
 
 
304.5

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.8

 
$
368

 
 
 
307.5

 
$
219

 
 
 
305.3

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
1.20

 
 
 
 
 
$
0.72

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
3.7

 
 
 
 
 
1.3

 
$
368

 
 
 
311.2

 
$
219

 
 
 
306.6

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
1.18

 
 
 
 
 
$
0.71

 
 


In addition to the stock options and restricted stock units reflected in the foregoing tables, stock options to purchase 12.7 million shares of common stock and restricted stock units relating to 1.4 million shares of common stock were outstanding at November 3, 2018, but were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.

In addition to the stock options and restricted stock units reflected in the foregoing tables, stock options to purchase 18.9 million shares of common stock and restricted stock units relating to 1.2 million shares of common stock were outstanding at October 28, 2017, but were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.



9
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


3.    Financing Activities
The following table shows the detail of debt repayments:
 
 
39 Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
(millions)
7.45% Senior debentures due 2017
$
—

 
$
300

6.9% Senior debentures due 2029
90

 
3

4.5% Senior notes due 2034
80

 
—

6.7% Senior notes due 2028
60

 
3

6.375% Senior notes due 2037
43

 
135

6.7% Senior debentures due 2034
28

 
28

7.0% Senior debentures due 2028
27

 
2

6.65% Senior debentures due 2024
11

 
4

6.9% Senior debentures due 2032
5

 
72

9.5% Amortizing debentures due 2021
4

 
4

9.75% Amortizing debentures due 2021
2

 
2

Capital leases and other obligations
1

 
1

 
$
351

 
$
554


During the 39 weeks ended November 3, 2018, the Company repurchased $344 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cost of $354 million, including expenses and other fees related to the transactions. Such repurchases resulted in the recognition of expense of $5 million during the 39 weeks ended November 3, 2018 presented as losses on early retirement of debt on the Consolidated Statements of Income.

During the 39 weeks ended October 28, 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cost of $257 million, including expenses and other fees related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during the 39 weeks ended October 28, 2017 presented as losses on early retirement of debt on the Consolidated Statements of Income.

During the 39 weeks ended October 28, 2017, the Company also repaid, at maturity, $300 million of 7.45% Senior debentures due July 2017.
On November 28, 2018, the Company commenced a cash tender offer ("tender offer") to purchase up to $600 million in aggregate principal amount of certain senior unsecured notes and debentures, with stated interest rates ranging from 2.875% to 8.75% and maturities ranging from fiscal years 2023 to 2042. The tender offer expires on December 26, 2018, with an early tender date on December 11, 2018.


4.    Benefit Plans
The Company has defined contribution plans which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has a funded defined benefit plan ("Pension Plan") and an unfunded defined benefit supplementary retirement plan ("SERP"), which provides benefits, for certain employees, in excess of qualified plan limitations. Effective January 1, 2012, the Pension Plan was closed to new participants, with limited exceptions, and effective January 2, 2012, the SERP was closed to new participants.
In February 2013, the Company announced changes to the Pension Plan and SERP whereby eligible employees no longer earn future pension service credits after December 31, 2013, with limited exceptions. All retirement benefits attributable to service in subsequent periods are provided through defined contribution plans.

10
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


In addition, certain retired employees currently are provided with specified health care and life insurance benefits ("Postretirement Obligations"). Eligibility requirements for such benefits vary, but generally state that benefits are available to eligible employees who were hired prior to a certain date and retire after a certain age with specified years of service. Certain employees are subject to having such benefits modified or terminated.
The defined contribution plan expense and actuarially determined components of the net periodic benefit cost (income) associated with the defined benefit plans are as follows:
 
13 Weeks Ended
 
39 Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
 
(millions)
 
(millions)
401(k) Qualified Defined Contribution Plan
$
24

 
$
20

 
$
71

 
$
65

 
 
 
 
 
 
 
 
Non-Qualified Defined Contribution Plan
$
—

 
$
—

 
$
1

 
$
—

 
 
 
 
 
 
 
 
Pension Plan
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
4

 
$
4

Interest cost
28

 
25

 
81

 
79

Expected return on assets
(51
)
 
(55
)
 
(157
)
 
(168
)
Recognition of net actuarial loss
7

 
8

 
23

 
24

Amortization of prior service credit
—

 
—

 
—

 
—

 
$
(15
)
 
$
(21
)
 
$
(49
)
 
$
(61
)
Supplementary Retirement Plan
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
6

 
6

 
17

 
17

Recognition of net actuarial loss
2

 
2

 
6

 
6

Amortization of prior service cost
—

 
—

 
—

 
—

 
$
8

 
$
8

 
$
23

 
$
23

 
 
 
 
 
 
 
 
Total Retirement Expense
$
17

 
$
7

 
$
46

 
$
27

 
 
 
 
 
 
 
 
Postretirement Obligations
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
1

 
1

 
3

 
4

Recognition of net actuarial gain
(2
)
 
(2
)
 
(4
)
 
(4
)
Amortization of prior service credit
—

 
—

 
—

 
—

 
$
(1
)
 
$
(1
)
 
$
(1
)
 
$
—


For the 13 and 39 weeks ended November 3, 2018, the Company incurred non-cash settlement charges of $23 million and $73 million, respectively, related to the Company's defined benefit plans. For the 13 and 39 weeks ended October 28, 2017, the Company incurred non-cash settlement charges of $22 million and $73 million, respectively. These charges relate to the pro-rata recognition of net actuarial losses and are the result of an increase in lump sum distributions primarily associated with retiree distribution elections and restructuring activity.

11
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


5.    Fair Value Measurements
The following table shows the Company's financial assets that are required to be measured at fair value on a recurring basis, by level within the hierarchy as defined by applicable accounting standards:
 
 
November 3, 2018
 
October 28, 2017
 
 
 
Fair Value Measurements
 
 
 
Fair Value Measurements
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(millions)
Marketable equity and debt securities
$
96

 
$
26

 
$
70

 
$
—

 
$
100

 
$
23

 
$
77

 
$
—


Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, certain short-term investments and other assets, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount of these financial instruments approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
The following table shows the estimated fair value of the Company's long-term debt, excluding capital leases and other obligations:
 
 
November 3, 2018
 
October 28, 2017
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
(millions)
Long-term debt
$
5,420

 
$
5,444

 
$
5,170

 
$
6,206

 
$
6,271

 
$
5,908


6.    Condensed Consolidating Financial Information
Certain debt obligations of the Company, which constitute debt obligations of Macy's Retail Holdings, Inc. ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent"), are fully and unconditionally guaranteed by Parent. In the following condensed consolidating financial statements, "Other Subsidiaries" includes all other direct subsidiaries of Parent, including Bluemercury, Inc., FDS Bank, West 34th Street Insurance Company New York, Macy's Merchandising Corporation, Macy's Merchandising Group, Inc. and its subsidiaries Macy's Merchandising Group (Hong Kong) Limited, Macy's Merchandising Group Procurement, LLC, Macy's Merchandising Group International, LLC, Macy's Merchandising Group International (Hong Kong) Limited, and its majority-owned subsidiary Macy's China Limited. "Subsidiary Issuer" includes operating divisions and non-guarantor subsidiaries of the Subsidiary Issuer on an equity basis. The assets and liabilities and results of operations of the non-guarantor subsidiaries of the Subsidiary Issuer are also reflected in "Other Subsidiaries."
Condensed Consolidating Statements of Comprehensive Income for the 13 and 39 weeks ended November 3, 2018 and October 28, 2017, Condensed Consolidating Balance Sheets as of November 3, 2018, October 28, 2017 and February 3, 2018, and the related Condensed Consolidating Statements of Cash Flows for the 39 weeks ended November 3, 2018 and October 28, 2017 are presented on the following pages.







12
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended November 3, 2018
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$
—

 
$
2,030

 
$
6,185

 
$
(2,811
)
 
$
5,404

Credit card revenues, net
—

 
—

 
185

 
—

 
185

 
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
(1,266
)
 
(4,771
)
 
2,811

 
(3,226
)
Selling, general and administrative expenses
—

 
(883
)
 
(1,372
)
 
—

 
(2,255
)
Gains on sale of real estate
—

 
41

 
1

 
—

 
42

Restructuring and other costs
—

 
—

 
(3
)
 
—

 
(3
)
Operating income (loss)
—

 
(78
)
 
225

 
—

 
147

Benefit plan income, net
—

 
3

 
6

 
—

 
9

Settlement charges
—

 
(8
)
 
(15
)
 
—

 
(23
)
Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
4

 
(64
)
 
1

 
—

 
(59
)
Intercompany
—

 
(18
)
 
18

 
—

 
—

Equity in earnings (loss) of subsidiaries
59

 
(58
)
 
—

 
(1
)
 
—

Income (loss) before income taxes
63

 
(223
)
 
235

 
(1
)
 
74

Federal, state and local income
tax benefit (expense)
(1
)
 
57

 
(68
)
 
—

 
(12
)
Net income (loss)
62

 
(166
)
 
167

 
(1
)
 
62

Net loss attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

Net income (loss) attributable to
Macy's, Inc. shareholders
$
62

 
$
(166
)
 
$
167

 
$
(1
)
 
$
62

Comprehensive income (loss)
$
(37
)
 
$
(257
)
 
$
106

 
$
151

 
$
(37
)
Comprehensive loss attributable to
noncontrolling interest
—

 
—

 
—

 
—

 
—

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
(37
)
 
$
(257
)
 
$
106

 
$
151

 
$
(37
)

13
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended October 28, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$
—

 
$
2,073

 
$
5,865

 
$
(2,657
)
 
$
5,281

Credit card revenues, net
—

 
—

 
145

 
—

 
145

 
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
(1,382
)
 
(4,427
)
 
2,657

 
(3,152
)
Selling, general and administrative expenses
—

 
(834
)
 
(1,354
)
 
—

 
(2,188
)
Gains on sale of real estate
—

 
24

 
41

 
—

 
65

Restructuring and other costs
—

 
(1
)
 
(32
)
 
—

 
(33
)
Operating income (loss)
—

 
(120
)
 
238

 
—

 
118

Benefit plan income, net
—

 
6

 
9

 
—

 
15

Settlement charges
—

 
(8
)
 
(14
)
 
—

 
(22
)
Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(76
)
 
1

 
—

 
(74
)
Intercompany
—

 
(34
)
 
34

 
—

 
—

Equity in earnings (loss) of subsidiaries
29

 
(57
)
 
—

 
28

 
—

Income (loss) before income taxes
30

 
(289
)
 
268

 
28

 
37

Federal, state and local income
tax benefit (expense)
—

 
59

 
(69
)
 
—

 
(10
)
Net income (loss)
30

 
(230
)
 
199

 
28

 
27

Net loss attributable to noncontrolling interest
—

 
—

 
3

 
—

 
3

Net income (loss) attributable to
Macy's, Inc. shareholders
$
30

 
$
(230
)
 
$
202

 
$
28

 
$
30

Comprehensive income (loss)
$
55

 
$
(207
)
 
$
215

 
$
(11
)
 
$
52

Comprehensive loss attributable to
noncontrolling interest
—

 
—

 
3

 
—

 
3

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
55

 
$
(207
)
 
$
218

 
$
(11
)
 
$
55














14
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 39 Weeks Ended November 3, 2018
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$
—

 
$
6,110

 
$
16,462

 
$
(6,056
)
 
$
16,516

Credit card revenues (expense), net
—

 
(3
)
 
531

 
—

 
528

 
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
(3,857
)
 
(12,126
)
 
6,056

 
(9,927
)
Selling, general and administrative expenses
—

 
(2,522
)
 
(3,979
)
 
—

 
(6,501
)
Gains on sale of real estate
—

 
83

 
28

 
—

 
111

Impairment, restructuring and other costs
—

 
—

 
(39
)
 
—

 
(39
)
Operating income (loss)
—

 
(189
)
 
877

 
—

 
688

Benefit plan income, net
—

 
12

 
19

 
—

 
31

Settlement charges
(5
)
 
(24
)
 
(44
)
 
—

 
(73
)
Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
13

 
(203
)
 
3

 
—

 
(187
)
Intercompany
—

 
(54
)
 
54

 
—

 
—

Losses on early retirement of debt
—

 
(5
)
 
—

 
—

 
(5
)
Equity in earnings of subsidiaries
362

 
51

 
—

 
(413
)
 
—

Income (loss) before income taxes
370

 
(412
)
 
909

 
(413
)
 
454

Federal, state and local income
tax benefit (expense)
(2
)
 
123

 
(217
)
 
—

 
(96
)
Net income (loss)
368

 
(289
)
 
692

 
(413
)
 
358

Net loss attributable to noncontrolling interest
—

 
—

 
10

 
—

 
10

Net income (loss) attributable to
Macy's, Inc. shareholders
$
368

 
$
(289
)
 
$
702

 
$
(413
)
 
$
368

Comprehensive income (loss)
$
296

 
$
(357
)
 
$
646

 
$
(299
)
 
$
286

Comprehensive loss attributable to
noncontrolling interest
—

 
—

 
10

 
—

 
10

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
296

 
$
(357
)
 
$
656

 
$
(299
)
 
$
296












15
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 39 Weeks Ended October 28, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$
—

 
$
6,358

 
$
15,784

 
$
(5,875
)
 
$
16,267

Credit card revenues (expense), net
—

 
(2
)
 
475

 
—

 
473

 
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
(4,160
)
 
(11,573
)
 
5,875

 
(9,858
)
Selling, general and administrative expenses
(1
)
 
(2,458
)
 
(3,947
)
 
—

 
(6,406
)
Gains on sale of real estate
—

 
116

 
60

 
—

 
176

Restructuring and other costs
—

 
(1
)
 
(32
)
 
—

 
(33
)
Operating income (loss)
(1
)
 
(147
)
 
767

 
—

 
619

Benefit plan income, net
—

 
16

 
26

 
—

 
42

Settlement charges
—

 
(24
)
 
(49
)
 
—

 
(73
)
Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
4

 
(243
)
 
2

 
—

 
(237
)
Intercompany
—

 
(102
)
 
102

 
—

 
—

Losses on early retirement of debt
—

 
(1
)
 
—

 
—

 
(1
)
Equity in earnings (loss) of subsidiaries
217

 
(26
)
 
—

 
(191
)
 
—

Income (loss) before income taxes
220

 
(527
)
 
848

 
(191
)
 
350

Federal, state and local income
tax benefit (expense)
(1
)
 
142

 
(279
)
 
—

 
(138
)
Net income (loss)
219

 
(385
)
 
569

 
(191
)
 
212

Net loss attributable to noncontrolling interest
—

 
—

 
7

 
—

 
7

Net income (loss) attributable to
Macy's, Inc. shareholders
$
219

 
$
(385
)
 
$
576

 
$
(191
)
 
$
219

Comprehensive income (loss)
$
315

 
$
(295
)
 
$
632

 
$
(344
)
 
$
308

Comprehensive loss attributable to
noncontrolling interest
—

 
—

 
7

 
—

 
7

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
315

 
$
(295
)
 
$
639

 
$
(344
)
 
$
315



16
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Balance Sheet
As of November 3, 2018
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
426

 
$
74

 
$
236

 
$
—

 
$
736

Receivables
1

 
25

 
154

 
—

 
180

Merchandise inventories
—

 
3,112

 
4,035

 
—

 
7,147

Income tax receivable
81

 
—

 
—

 
(71
)
 
10

Prepaid expenses and other current assets
—

 
139

 
455

 
—

 
594

Total Current Assets
508

 
3,350

 
4,880

 
(71
)
 
8,667

Property and Equipment – net
—

 
3,244

 
3,328

 
—

 
6,572

Goodwill
—

 
3,326

 
582

 
—

 
3,908

Other Intangible Assets – net
—

 
40

 
441

 
—

 
481

Other Assets
—

 
39

 
694

 
—

 
733

Deferred Income Taxes
11

 
—

 
—

 
(11
)
 
—

Intercompany Receivable
1,725

 
—

 
882

 
(2,607
)
 
—

Investment in Subsidiaries
3,639

 
3,028

 
—

 
(6,667
)
 
—

Total Assets
$
5,883

 
$
13,027

 
$
10,807

 
$
(9,356
)
 
$
20,361

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$
—

 
$
42

 
$
23

 
$
—

 
$
65

Merchandise accounts payable
—

 
1,515

 
1,866

 
—

 
3,381

Accounts payable and accrued liabilities
192

 
874

 
1,932

 
—

 
2,998

Income taxes
—

 
40

 
31

 
(71
)
 
—

Total Current Liabilities
192

 
2,471

 
3,852

 
(71
)
 
6,444

Long-Term Debt
—

 
5,453

 
16

 
—

 
5,469

Intercompany Payable
—

 
2,607

 
—

 
(2,607
)
 
—

Deferred Income Taxes
—

 
619

 
577

 
(11
)
 
1,185

Other Liabilities
24

 
431

 
1,163

 
—

 
1,618

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
5,667

 
1,446

 
5,221

 
(6,667
)
 
5,667

Noncontrolling Interest
—

 
—

 
(22
)
 
—

 
(22
)
Total Shareholders' Equity
5,667

 
1,446

 
5,199

 
(6,667
)
 
5,645

Total Liabilities and Shareholders' Equity
$
5,883

 
$
13,027

 
$
10,807

 
$
(9,356
)
 
$
20,361








17
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Balance Sheet
As of October 28, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
116

 
$
89

 
$
329

 
$
—

 
$
534

Receivables
—

 
67

 
152

 
—

 
219

Merchandise inventories
—

 
3,218

 
3,847

 
—

 
7,065

Income tax receivable
—

 
2

 
—

 
(2
)
 
—

Prepaid expenses and other current assets
—

 
141

 
469

 
—

 
610

Total Current Assets
116

 
3,517

 
4,797

 
(2
)
 
8,428

Property and Equipment – net
—

 
3,370

 
3,372

 
—

 
6,742

Goodwill
—

 
3,315

 
582

 
—

 
3,897

Other Intangible Assets – net
—

 
46

 
445

 
—

 
491

Other Assets
1

 
62

 
772

 
—

 
835

Deferred Income Taxes
27

 
—

 
—

 
(27
)
 
—

Intercompany Receivable
1,436

 
—

 
2,161

 
(3,597
)
 
—

Investment in Subsidiaries
2,932

 
3,700

 
—

 
(6,632
)
 
—

Total Assets
$
4,512

 
$
14,010

 
$
12,129

 
$
(10,258
)
 
$
20,393

LIABILITIES AND SHAREHOLDERS’ EQUITY: