Item 8. Financial Statements and Supplementary Data

Report of Management on the Consolidated Financial Statements

Management is responsible for the consistency, integrity, and presentation of the information in the Annual Report. The consolidated financial statements and other information presented in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States and include necessary judgments and estimates by management.

To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable assurance.

The Board of Directors exercised its oversight role with respect to the Corporation's systems of internal control primarily through its Audit Committee, which is comprised of independent directors. The Committee oversees the Corporation's systems of internal control, accounting practices, financial reporting and audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders' investments.

In addition, our consolidated financial statements have been audited by Ernst & Young LLP, independent registered public accounting firm, whose report also appears on this page.

 
Brian C. Cornell's Signature

Brian C. Cornell
Chairman and Chief Executive Officer

Cathy R. Smith's Signature

Cathy R. Smith
Executive Vice President and
Chief Financial Officer

March 8, 2017

 

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

The Board of Directors and Shareholders
Target Corporation

We have audited the accompanying consolidated statements of financial position of Target Corporation and subsidiaries (the Corporation) as of January 28, 2017 and January 30, 2016, and the related consolidated statements of operations, comprehensive income, cash flows, and shareholders' investment for each of the three years in the period ended January 28, 2017. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Target Corporation and subsidiaries at January 28, 2017 and January 30, 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 28, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation's internal control over financial reporting as of January 28, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated March 8, 2017, expressed an unqualified opinion thereon.

Ernst and Young's Signature

Minneapolis, Minnesota
March 8, 2017

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of January 28, 2017, based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment, we conclude that the Corporation's internal control over financial reporting is effective based on those criteria.

Our internal control over financial reporting as of January 28, 2017, has been audited by Ernst & Young LLP, the independent registered public accounting firm who has also audited our consolidated financial statements, as stated in their report which appears on this page.

 
Brian C. Cornell's Signature

Brian C. Cornell
Chairman and Chief Executive Officer

Cathy R. Smith's Signature

Cathy R. Smith
Executive Vice President and
Chief Financial Officer

March 8, 2017

 

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Shareholders
Target Corporation

We have audited Target Corporation and subsidiaries' (the Corporation) internal control over financial reporting as of January 28, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). The Corporation's management is responsible 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 Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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.

In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Target Corporation and subsidiaries as of January 28, 2017 and January 30, 2016, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders' investment for each of the three years in the period ended January 28, 2017, and our report dated March 8, 2017, expressed an unqualified opinion thereon.

Ernst and Young's Signature

Minneapolis, Minnesota
March 8, 2017

 

Consolidated Statements of Operations

(millions, except per share data)

  2016 2015 2014
Sales $69,495 $73,785 $72,618
Cost of sales 48,872 51,997 51,278
Gross margin 20,623 21,788 21,340
Selling, general and administrative expenses 13,356 14,665 14,676
Depreciation and amortization 2,298 2,213 2,129
Gain on sale (620)
Earnings from continuing operations before interest expense and income taxes 4,969 5,530 4,535
Net interest expense 1,004 607 882
Earnings from continuing operations before income taxes 3,965 4,923 3,653
Provision for income taxes 1,296 1,602 1,204
Net earnings from continuing operations 2,669 3,321 2,449
Discontinued operations, net of tax 68 42 (4,085)
Net earnings / (loss) $2,737 $3,363 $(1,636)
Basic earnings / (loss) per share
Continuing operations $4.62 $5.29 $3.86
Discontinued operations 0.12 0.07 (6.44)
Net earnings / (loss) per share $4.74 $5.35 $(2.58)
Diluted earnings / (loss) per share
Continuing operations $4.58 $5.25 $3.83
Discontinued operations 0.12 0.07 (6.38)
Net earnings / (loss) per share $4.70 $5.31 $(2.56)
Weighted average common shares outstanding
Basic 577.6 627.7 634.7
Dilutive effect of share-based awards 4.9 5.2 5.4
Diluted 582.5 632.9 640.1
Antidilutive shares 0.1 3.3
Dividends declared per share $2.36 $2.20 $1.99

Note: Per share amounts may not foot due to rounding.

See accompanying Notes to Consolidated Financial Statements.

 

Consolidated Statements of Comprehensive Income

(millions)

  2016 2015 2014
Net income / (loss) $2,737 $3,363 $(1,636)
Other comprehensive (loss) / income, net of tax
Pension and other benefit liabilities, net of tax benefit of $9, $18, and $90 (13) (27) (139)
Currency translation adjustment and cash flow hedges, net of provision for taxes of $2, $2, and $2 4 (3) 431
Other comprehensive (loss) / income (9) (30) 292
Comprehensive income / (loss) $2,728 $3,333 $(1,344)

See accompanying Notes to Consolidated Financial Statements.

 

Consolidated Statements of Financial Position

(millions, except footnotes)

  January 28, 2017 January 30, 2016
Assets
Cash and cash equivalents, including short-term investments of $1,110 and $3,008 $2,512 $4,046
Inventory 8,309 8,601
Assets of discontinued operations 69 322
Other current assets 1,100 1,161
Total current assets 11,990 14,130
Property and equipment
Land 6,106 6,125
Buildings and improvements 27,611 27,059
Fixtures and equipment 5,503 5,347
Computer hardware and software 2,651 2,617
Construction-in-progress 200 315
Accumulated depreciation (17,413) (16,246)
Property and equipment, net 24,658 25,217
Noncurrent assets of discontinued operations 12 75
Other noncurrent assets 771 840
Total assets $37,431 $40,262
Liabilities and shareholders’ investment
Accounts payable $7,252 $7,418
Accrued and other current liabilities 3,737 4,236
Current portion of long-term debt and other borrowings 1,718 815
Liabilities of discontinued operations 1 153
Total current liabilities 12,708 12,622
Long-term debt and other borrowings 11,031 11,945
Deferred income taxes 861 823
Noncurrent liabilities of discontinued operations 18 18
Other noncurrent liabilities 1,860 1,897
Total noncurrent liabilities 13,770 14,683
Shareholders’ investment
Common stock 46 50
Additional paid-in capital 5,661 5,348
Retained earnings 5,884 8,188
Accumulated other comprehensive loss
Pension and other benefit liabilities (601) (588)
Currency translation adjustment and cash flow hedges (37) (41)
Total shareholders’ investment 10,953 12,957
Total liabilities and shareholders’ investment $37,431 $40,262

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 556,156,228 shares issued and outstanding at January 28, 2017; 602,226,517 shares issued and outstanding at January 30, 2016.

Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding at January 28, 2017 or January 30, 2016.

See accompanying Notes to Consolidated Financial Statements.

 

Consolidated Statements of Cash Flows

(millions)

  2016 2015 2014
Operating activities
Net earnings / (loss) $2,737 $3,363 $(1,636)
Earnings / (losses) from discontinued operations, net of tax 68 42 (4,085)
Net earnings from continuing operations 2,669 3,321 2,449
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation and amortization 2,298 2,213 2,129
Share-based compensation expense 113 115 71
Deferred income taxes 41 (322) 7
Gain on sale (620)
Loss on debt extinguishment 422 285
Noncash (gains) / losses and other, net 57 40
Changes in operating accounts:
Inventory 293 (316) (512)
Other assets 36 227 (115)
Accounts payable and accrued liabilities (543) 579 803
Cash provided by operating activities—continuing operations 5,329 5,254 5,157
Cash provided by / (required for) operating activities—discontinued operations 107 704 (692)
Cash provided by operations 5,436 5,958 4,465
Investing activities
Expenditures for property and equipment (1,547) (1,438) (1,786)
Proceeds from disposal of property and equipment 46 28 95
Proceeds from sale of businesses 1,875
Cash paid for acquisitions, net of cash assumed (20)
Other investments 28 24 106
Cash (required for) / provided by investing activities—continuing operations (1,473) 489 (1,605)
Cash provided by / (required for) investing activities—discontinued operations 19 (321)
Cash (required for) / provided by investing activities (1,473) 508 (1,926)
Financing activities
Change in commercial paper, net (80)
Additions to long-term debt 1,977 1,993
Reductions of long-term debt (2,641) (85) (2,079)
Dividends paid (1,348) (1,362) (1,205)
Repurchase of stock (3,706) (3,483) (26)
Stock option exercises 221 300 373
Cash required for financing activities (5,497) (4,630) (1,024)
Net (decrease) / increase in cash and cash equivalents (1,534) 1,836 1,515
Cash and cash equivalents at beginning of period (a) 4,046 2,210 695
Cash and cash equivalents at end of period $2,512 $4,046 $2,210
Supplemental information
Interest paid, net of capitalized interest $999 $604 $871
Income taxes paid / (refunded) 1,514 (127) 1,251
Property and equipment acquired through capital lease obligations 238 126 88

(a) Includes cash of our discontinued operations of $25 million at February 1, 2014.

See accompanying Notes to Consolidated Financial Statements.

 

Consolidated Statements of Shareholders’ Investment

(millions)

  Common
Stock
Shares
Stock
Par
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
(Loss) / Income
Total
February 1, 2014 632.9 $53 $4,470 $12,599 $(891) $16,231
Net loss (1,636) (1,636)
Other comprehensive income 292 292
Dividends declared (1,273) (1,273)
Repurchase of stock (0.8) (46) (46)
Stock options and awards 8.1 429 429
January 31, 2015 640.2 $53 $4,899 $9,644 $(599) $13,997
Net earnings 3,363 3,363
Other comprehensive loss (30) (30)
Dividends declared (1,378) (1,378)
Repurchase of stock (44.7) (4) (3,441) (3,445)
Stock options and awards 6.7 1 449 450
January 30, 2016 602.2 $50 $5,348 $8,188 $(629) $12,957
Net earnings 2,737 2,737
Other comprehensive loss (9) (9)
Dividends declared (1,359) (1,359)
Repurchase of stock (50.9) (4) (3,682) (3,686)
Stock options and awards 4.9 313 313
January 28, 2017 556.2 $46 $5,661 $5,884 $(638) $10,953

See accompanying Notes to Consolidated Financial Statements.

 

Notes to Consolidated Financial Statements

1. Summary of Accounting Policies

Organization We are a general merchandise retailer selling products to our guests through our stores and digital channels.

As described in Note 7, in January 2015, we announced our exit from the Canadian market and filed for protection (the Filing) under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto (the Court). Our prefiling financial results in Canada and subsequent expenses directly attributable to the Canada exit are included in our financial statements and classified within discontinued operations. Discontinued operations refers only to our discontinued Canadian operations. Subsequent to the Filing, we operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels.

Consolidation The consolidated financial statements include the balances of Target and its subsidiaries after elimination of intercompany balances and transactions. All material subsidiaries are wholly owned. We consolidate variable interest entities where it has been determined that Target is the primary beneficiary of those entities' operations. As of January 15, 2015, we deconsolidated substantially all of our Canadian operations following the Filing. See Note 7 for more information.

Use of estimates The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ significantly from those estimates.

Fiscal year Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal 2016 ended January 28, 2017, and consisted of 52 weeks. Fiscal 2015 ended January 30, 2016, and consisted of 52 weeks. Fiscal 2014 ended January 31, 2015, and consisted of 52 weeks. Fiscal 2017 will end February 3, 2018, and will consist of 53 weeks.

Accounting policies Our accounting policies are disclosed in the applicable Notes to the Consolidated Financial Statements.

back to Notes to Consolidated Financial Statements

2. Revenues

Our retail stores generally record revenue at the point of sale. Digital channel sales include shipping revenue and are recorded upon delivery to the guest. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and exclusive brands within one year of purchase. Revenues are recognized net of expected returns, which we estimate using historical return patterns as a percentage of sales and our expectation of future returns. Commissions earned on sales generated by leased departments are included within sales and were $42 million, $37 million, and $32 million in 2016, 2015, and 2014, respectively.

Revenue from gift card sales is recognized upon gift card redemption. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented.

Guests receive a 5 percent discount on virtually all purchases and receive free shipping at Target.com when they use their REDcard. The discount is included as a sales reduction in our Consolidated Statements of Operations and was $899 million, $905 million, and $832 million in 2016, 2015, and 2014, respectively.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).

We plan to adopt the standard in the first quarter of 2018, which begins on February 4, 2018. We are still evaluating whether to use a full retrospective or a modified retrospective approach to adopt the standard. We do not expect the standard to materially affect our consolidated net earnings, financial position, or cash flows.

We are evaluating whether we act as principal or agent in certain vendor arrangements where the purchase and sale of inventory is virtually simultaneous, as further described in Note 12. We currently record revenue and related costs gross, with approximately 3 percent of 2016 consolidated sales made under such arrangements. Any change to net presentation would not impact gross margin or earnings.

We are also evaluating the presentation of certain ancillary income streams, including the credit card profit sharing income described in Note 9.

back to Notes to Consolidated Financial Statements

3. Cost of Sales and Selling, General and Administrative Expenses

The following table illustrates the primary items classified in each major expense category:

Cost of Sales Selling, General and Administrative Expenses

Total cost of products sold including

  • Freight expenses associated with moving merchandise from our vendors to and between our distribution centers and our retail stores
  • Vendor income that is not reimbursement of specific, incremental, and identifiable costs

Inventory shrink
Markdowns
Outbound shipping and handling expenses associated with sales to our guests
Payment term cash discounts
Distribution center costs, including compensation and benefits costs
Import costs

Compensation and benefit costs for stores and headquarters
Occupancy and operating costs of retail and headquarters facilities
Advertising, offset by vendor income that is a reimbursement of specific, incremental, and identifiable costs
Pre-opening costs of stores and other facilities
U.S. credit cards servicing expenses and profit sharing
Costs associated with accepting 3rd party bank issued payment cards
Litigation and defense costs and related insurance recovery
Other administrative costs

Note: The classification of these expenses varies across the retail industry.

back to Notes to Consolidated Financial Statements

4. Consideration Received from Vendors

We receive consideration for a variety of vendor-sponsored programs, such as volume rebates, markdown allowances, promotions, and advertising allowances and for our compliance programs, referred to as "vendor income." Under our compliance programs, vendors are charged for merchandise shipments that do not meet our requirements (violations), such as late or incomplete shipments. Substantially all consideration received is recorded as a reduction of cost of sales.

We establish a receivable for vendor income that is earned but not yet received. Based on provisions of the agreements in place, this receivable is computed by estimating the amount earned when we have completed our performance. We perform detailed analyses to determine the appropriate level of the receivable in the aggregate. The majority of year-end receivables associated with these activities are collected within the following fiscal quarter. We have not historically had significant write-offs for these receivables.

back to Notes to Consolidated Financial Statements

5. Advertising Costs

Advertising costs, which primarily consist of newspaper circulars, internet advertisements, and media broadcast, are generally expensed at first showing or distribution of the advertisement.

Advertising Costs (millions)

  2016 2015 2014
Gross advertising costs $1,503 $1,472 $1,647
Vendor income (38) (38) (47)
Net advertising costs $1,465 $1,434 $1,600
back to Notes to Consolidated Financial Statements

6. Pharmacy Transaction

In December 2015, we sold our pharmacy and clinic businesses to CVS (the Pharmacy Transaction) for cash consideration of $1.9 billion, recognizing a gain of $620 million, and deferred income of $694 million. CVS now operates the pharmacy and clinic businesses in our stores and paid us $24 million for occupancy during 2016.

Gain on Pharmacy Transaction (millions)

  2015
Cash consideration $1,868
Less:  
Deferred income (a) 694
Inventory 447
Other assets 13
Pretax transaction costs and contingent liabilities (b) 94
Pretax gain on Pharmacy Transaction (c) $620

(a) Represents the consideration received at the close of the sale related to CVS’s leasehold interest in the related space within our stores. Deferred income will be recorded as a reduction to SG&A expense evenly over the 23-year weighted average remaining accounting useful life of our stores. As of January 28, 2017, $660 million remains in other current and other noncurrent liabilities.
(b) Primarily relates to professional services, contract termination charges, severance, and impairment of certain assets not sold to CVS.
(c) Recorded outside of segment results and excluded from Adjusted EPS.

back to Notes to Consolidated Financial Statements

7. Canada Exit

On January 15, 2015, Target Canada Co. and certain other wholly owned subsidiaries of Target (collectively, Canada Subsidiaries), comprising substantially all of our former Canadian operations and our former Canadian Segment, filed for protection under the CCAA with the Ontario Superior Court of Justice in Toronto (the Court) and were deconsolidated. As a result, we recorded a pretax impairment loss on deconsolidation and other related charges, collectively totaling $5.1 billion. The Canada Subsidiaries are in the process of liquidation.

Subsequent to deconsolidation, we use the cost method to account for our equity investment in the Canada Subsidiaries, which has been reflected as zero in our Consolidated Statement of Financial Position at January 28, 2017 and January 30, 2016 based on the estimated fair value of the Canada Subsidiaries' net assets.

As of the deconsolidation date, the loans, associated interest, and accounts receivable Target Corporation held are considered related party transactions and have been recognized in Target Corporation's consolidated financial statements. In addition, we held an accrual for the estimated probable loss related to claims that may be asserted directly against us (rather than against the Canada Subsidiaries), primarily under our guarantees of certain leases of the Canada Subsidiaries.

As part of a March 2016 settlement between the Canada Subsidiaries and all of their former landlords, we agreed to subordinate a portion of our intercompany claims and make certain cash contributions to the Target Canada Co. estate in exchange for a full release from our obligations under guarantees of certain leases of the Canada Subsidiaries. The settlement was contingent upon the Canada Subsidiaries' creditors' and the Court's approval of a plan of compromise and arrangement to complete the controlled, orderly, and timely wind-down of the Canada Subsidiaries (Plan). During the second quarter of 2016, a Plan was approved. The net pretax financial impact of the settlement and Plan was materially consistent with amounts previously recorded in our financial statements. During 2016, we received $182 million from the Target Canada Co. estate and made cash contributions of $27 million.

Income / (Loss) on Discontinued Operations (millions)

  2016 2015 2014
Sales $— $— $1,902
Cost of sales 1,541
SG&A expenses 909
Depreciation and amortization 248
Interest expense 73
Pretax loss from operations (869)
Pretax exit costs 13 (129) (5,105)
Income taxes 55 171 1,889
Income / (loss) from discontinued operations $68 $42 $(4,085)

Pretax Exit Costs (millions)

  2016 2015 2014
Investment impairment $(222) $(6) $(4,766)
Contingent liabilities 229 (62) (240)
Other exit costs 6 (61) (99)
Total $13 $(129) $(5,105)

During 2016, we recognized net tax benefits of $55 million in discontinued operations, which primarily related to tax benefits from our investment losses in Canada recognized upon court approval of the Plan. During 2015, we recognized net tax benefits of $171 million in discontinued operations, which primarily related to our pretax exit costs and change in the estimated tax benefit from our investment losses in Canada. During 2014, we recognized a tax benefit of $1,889 million in discontinued operations, which includes the tax benefit of our 2014 Canadian operating losses, the tax benefit related to a loss on our investment in Canada, and other tax benefits resulting from certain asset write-offs and liabilities paid or accrued to facilitate the liquidation. The majority of these tax benefits were received in the first quarter of 2015, and we used substantially all of the remainder in 2015 to reduce our estimated tax payments.

Assets and Liabilities of Discontinued Operations (millions)

  January 28, 2017 January 30, 2016
Income tax benefit $35 $77
Receivables from Canada Subsidiaries (a) 46 320
Total assets $81 $397
     
Accrued liabilities $19 $171
Total liabilities $19 $171

(a) Represents loans and accounts receivable from Canada Subsidiaries.

back to Notes to Consolidated Financial Statements

8. Restructuring Initiatives

In 2015, we initiated a series of headquarters workforce reductions intended to increase organizational effectiveness and provide cost savings that can be reinvested in our growth initiatives. As a result, during 2015 we recorded $138 million of severance and other benefits-related charges within SG&A. The vast majority of these expenses required cash expenditures during 2015 and were not included in our segment results.

back to Notes to Consolidated Financial Statements

9. Credit Card Profit Sharing

TD Bank Group underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance. We perform account servicing and primary marketing functions. We earn a substantial portion of the profits generated by the Target Credit Card and Target MasterCard portfolios. We earned $663 million, $641 million, and $629 million of net profit-sharing income during 2016, 2015, and 2014, respectively, which reduced SG&A expense.

back to Notes to Consolidated Financial Statements

10. Fair Value Measurements

Fair value measurements are reported in one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

Fair Value Measurements - Recurring Basis (millions)

    Fair Value at
Pricing Category January 28, 2017 January 30, 2016
Assets      
Cash and cash equivalents      
Short-term investments Level 1 $1,110 $3,008
Other current assets      
Interest rate swaps (a) Level 2 1 12
Prepaid forward contracts Level 1 26 32
Beneficial interest asset Level 3 12 19
Other noncurrent assets      
Interest rate swaps (a) Level 2 4 27
Beneficial interest asset Level 3 12
Liabilities      
Other current liabilities      
Interest rate swaps (a) Level 2 8

(a) See Note 21 for additional information on interest rate swaps.

  Valuation Technique
Short-term investments Carrying value approximates fair value because maturities are less than three months.
Prepaid forward contracts Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.
Interest rate swaps Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads).

Significant Financial Instruments not Measured at Fair Value (a) (millions)

  2016 2015
Carrying Amount Fair Value Carrying Amount Fair Value
Debt (b) $11,715 $12,545 $11,859 $13,385

(a) The carrying amounts of certain other current assets, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.
(b) The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude unamortized swap valuation adjustments and capital lease obligations.

back to Notes to Consolidated Financial Statements

11. Cash Equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of purchase. These investments were $1,110 million and $3,008 million at January 28, 2017 and January 30, 2016, respectively. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. These receivables typically settle in less than five days and were $346 million and $375 million at January 28, 2017 and January 30, 2016, respectively.

back to Notes to Consolidated Financial Statements

12. Inventory

The vast majority of our inventory is accounted for under the retail inventory accounting method (RIM) using the last-in, first-out (LIFO) method. Inventory is stated at the lower of LIFO cost or market. The cost of our inventory includes the amount we pay to our suppliers to acquire inventory, freight costs incurred in connection with the delivery of product to our distribution centers and stores, and import costs, reduced by vendor income and cash discounts. The majority of our distribution center operating costs, including compensation and benefits, are expensed in the period incurred. Inventory is also reduced for estimated losses related to shrink and markdowns. The LIFO provision is calculated based on inventory levels, markup rates, and internally measured retail price indices.

Under RIM, inventory cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the inventory retail value. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market because permanent markdowns are taken as a reduction of the retail value of inventory.

We routinely enter into arrangements with vendors whereby we do not purchase or pay for merchandise until the merchandise is ultimately sold to a guest. Activity under this program is included in sales and cost of sales in the Consolidated Statements of Operations, but the merchandise received under the program is not included in inventory in our Consolidated Statements of Financial Position because of the virtually simultaneous purchase and sale of this inventory. Sales made under these arrangements totaled $2,202 million, $2,261 million, and $2,040 million in 2016, 2015, and 2014, respectively.

back to Notes to Consolidated Financial Statements

13. Other Current Assets

Other Current Assets (millions)

 
January 28, 2017 January 30, 2016
Vendor income receivable $385 $384
Income tax and other receivables 364 352
Prepaid expenses 207 214
Other 144 211
Total $1,100 $1,161

back to Notes to Consolidated Financial Statements

14. Property and Equipment

Property and equipment is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. We amortize leasehold improvements purchased after the beginning of the initial lease term over the shorter of the assets' useful lives or a term that includes the original lease term, plus any renewals that are reasonably assured at the date the leasehold improvements are acquired. Depreciation and capital lease amortization expense for 2016, 2015, and 2014 was $2,280 million, $2,191 million, and $2,108 million, respectively. For income tax purposes, accelerated depreciation methods are generally used. Repair and maintenance costs are expensed as incurred. Facility pre-opening costs, including supplies and payroll, are expensed as incurred.

Estimated Useful Lives

 
Life (Years)
Buildings and improvements 8-39
Fixtures and equipment 2-15
Computer hardware and software 2-7

Long-lived assets are reviewed for impairment when events or changes in circumstances, such as a decision to relocate or close a store or make significant software changes, indicate that the asset's carrying value may not be recoverable. For asset groups classified as held for sale, the carrying value is compared to the fair value less cost to sell. We estimate fair value by obtaining market appraisals, valuations from third party brokers, or other valuation techniques.

Impairments (a) (millions)

 
2016 2015 2014
Impairments included in segment SG&A $43 $50 $108
Unallocated impairments (b) 4 16
Total impairments $43 $54 $124

(a) Substantially all of the impairments are recorded in SG&A expense on the Consolidated Statements of Operations.
(b) For 2015, represents long-lived asset impairments from our decision to wind down certain noncore operations. For 2014, represents impairments of undeveloped land. These costs were not included in our segment results.

back to Notes to Consolidated Financial Statements

15. Other Noncurrent Assets

Other Noncurrent Assets (millions)

 
January 28,
2017
January 30,
2016
Company-owned life insurance investments (a) $345 $308
Goodwill and intangible assets 259 277
Pension asset 43 66
Other 124 189
Total $771 $840

(a) Company-owned life insurance policies on approximately 4,000 team members who have been designated highly compensated under the Internal Revenue Code and have given their consent to be insured. Amounts are presented net of loans that are secured by some of these policies.

back to Notes to Consolidated Financial Statements

16. Goodwill and Intangible Assets

Goodwill totaled $133 million at January 28, 2017 and January 30, 2016. During 2015, we announced our decision to wind down certain noncore operations. As a result, we recorded a $35 million pretax impairment loss, which included approximately $23 million of intangible assets and $12 million of goodwill. These costs were included in SG&A on our Consolidated Statements of Operations, but were not included in our segment results. No impairments were recorded in 2016 or 2014 as a result of the annual goodwill impairment tests performed.

Intangible Assets (millions)

 
Leasehold Acquisition Costs Other (a) Total
January 28, 2017 January 30, 2016 January 28, 2017 January 30, 2016 January 28, 2017 January 30, 2016
Gross asset $208 $211 $88 $88 $296 $299
Accumulated amortization (132) (127) (38) (27) (170) (154)
Net intangible assets $76 $84 $50 $61 $126 $145

(a) Other intangible assets relate primarily to trademarks.

We use the straight-line method to amortize leasehold acquisition costs primarily over 9 to 39 years and other definitelived intangibles over 3 to 15 years. The weighted average life of leasehold acquisition costs and other intangible assets was 27 years and 8 years, respectively, at January 28, 2017. Amortization expense was $18 million, $23 million, and $22 million in 2016, 2015, and 2014, respectively.

Estimated Amortization Expense (millions)

  2017 2018 2019 2020 2021
Amortization expense $16 $12 $11 $11 $11
back to Notes to Consolidated Financial Statements

17. Accounts Payable

At January 28, 2017 and January 30, 2016, we reclassified book overdrafts of $459 million and $534 million, respectively, to accounts payable and $24 million and $25 million, respectively, to accrued and other current liabilities.

back to Notes to Consolidated Financial Statements

18. Accrued and Other Current Liabilities

Accrued and Other Current Liabilities (millions)

  January 28,
2017
January 30,
2016
Wages and benefits $812 $884
Gift card liability, net of estimated breakage 693 644
Real estate, sales, and other taxes payable 571 574
Dividends payable 334 337
Straight-line rent accrual (a) 271 262
Income tax payable 158 502
Workers' compensation and general liability (b) 141 146
Interest payable 71 76
Other 686 811
Total $3,737 $4,236

(a) Straight-line rent accrual represents the amount of operating lease rent expense recorded that exceeds cash payments.
(b) We retain a substantial portion of the risk related to general liability and workers' compensation claims. Liabilities associated with these losses include estimates of both claims filed and losses incurred but not yet reported. We estimate our ultimate cost based on analysis of historical data and actuarial estimates. General liability and workers' compensation liabilities are recorded at our estimate of their net present value.

back to Notes to Consolidated Financial Statements

19. Commitments and Contingencies

Data Breach

In the fourth quarter of 2013, we experienced a data breach in which an intruder stole certain payment card and other guest information from our network (the Data Breach), which resulted in a number of claims against us. We have resolved the most significant claims relating to the Data Breach, and there were no material changes to our loss contingency assessment relating to the remaining claims during 2016. We do not expect any material changes to the assessment of our exposure from this event. At January 28, 2017, the remaining accrual for Data Breach-related liabilities was immaterial to our Consolidated Statements of Financial Position.

We incurred net Data Breach-related expenses of $39 million and $145 million during 2015 and 2014, respectively. Net expenses include expenditures for legal and other professional services and accruals for Data Breach-related costs and expected insurance recoveries. These net expenses were included in our Consolidated Statements of Operations as SG&A, but were not part of segment results. For 2016, Data Breach-related expenses were negligible.

Since the Data Breach, we have incurred $292 million of cumulative expenses, partially offset by insurance recoveries of $90 million, for net cumulative expenses of $202 million.

Other Contingencies

We are exposed to other claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition.

Commitments

Purchase obligations, which include all legally binding contracts such as firm commitments for inventory purchases, merchandise royalties, equipment purchases, marketing-related contracts, software acquisition/license commitments, and service contracts, were $1,762 million and $1,950 million at January 28, 2017 and January 30, 2016, respectively. These purchase obligations are primarily due within three years and recorded as liabilities when inventory is received. We issue inventory purchase orders, which represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation. Real estate obligations, which include commitments for the purchase, construction or remodeling of real estate and facilities, were $268 million and $279 million at January 28, 2017 and January 30, 2016, respectively. These real estate obligations are primarily due within one year, a portion of which are recorded as liabilities.

We issue letters of credit and surety bonds in the ordinary course of business. Trade letters of credit totaled $1,330 million and $1,510 million at January 28, 2017 and January 30, 2016, respectively, a portion of which are reflected in accounts payable. Standby letters of credit and surety bonds, relating primarily to insurance and regulatory requirements, totaled $463 million and $438 million at January 28, 2017 and January 30, 2016, respectively.

back to Notes to Consolidated Financial Statements

20. Notes Payable and Long-Term Debt

At January 28, 2017, the carrying value and maturities of our debt portfolio were as follows:

Debt Maturities (dollars in millions)

  January 28, 2017
  Rate (a) Balance
Due 2017-2021 4.2% $5,007
Due 2022-2026 3.2 2,048
Due 2027-2031 6.9 462
Due 2032-2036 6.4 496
Due 2037-2041 6.8 1,237
Due 2042-2046 3.8 2,465
Total notes and debentures 4.4 11,715
Swap valuation adjustments   9
Capital lease obligations   1,025
Less: Amounts due within one year   (1,718)
Long-term debt   $11,031

(a) Reflects the weighted average stated interest rate as of year-end.

Required Principal Payments (millions)

  2017 2018 2019 2020 2021
Total required principal payments $1,683 $201 $1,002 $1,094 $1,056

In April 2016, we issued unsecured fixed rate debt of $1 billion at 2.5 percent that matures in April 2026 and $1 billion at 3.625 percent that matures in April 2046. During the first half of 2016, we used cash on hand and proceeds from these issuances to repurchase $1,389 million of debt before its maturity at a market value of $1,800 million, repay $750 million of debt maturities, and for general corporate purposes. We recognized a loss on early retirement of approximately $422 million, which was recorded in net interest expense in our Consolidated Statements of Operations.

In June 2014, we issued $1 billion of unsecured fixed rate debt at 2.3 percent that matures in June 2019 and $1 billion of unsecured fixed rate debt at 3.5 percent that matures in July 2024. We used proceeds from these issuances to repurchase $725 million of debt before its maturity at a market value of $1 billion, and for general corporate purposes including the payment of $1 billion of debt maturities. We recognized a loss of $285 million on the early retirement, which was recorded in net interest expense in our Consolidated Statements of Operations.

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable.

Commercial Paper (dollars in millions)

  2016 2015 2014
Maximum daily amount outstanding during the year $89 $— $590
Average amount outstanding during the year 1 129
Amount outstanding at year-end
Weighted average interest rate 0.43% —% 0.11%

In October 2016, we obtained a committed $2.5 billion revolving credit facility that expires in October 2021. This new unsecured revolving credit facility replaced a $2.25 billion unsecured revolving credit facility that was scheduled to expire in October 2018. No balances were outstanding under either credit facility at any time during 2016 or 2015.

Substantially all of our outstanding borrowings are senior, unsecured obligations. Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facility also contains a debt leverage covenant. We are, and expect to remain, in compliance with these covenants, which have no practical effect on our ability to pay dividends.

back to Notes to Consolidated Financial Statements

21. Derivative Financial Instruments

Our derivative instruments primarily consist of interest rate swaps, which are used to mitigate interest rate risk. As a result of our use of derivative instruments, we have counterparty credit exposure to large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 10 for a description of the fair value measurement of our derivative instruments and their classification on the Consolidated Statements of Financial Position.

As of January 28, 2017 and January 30, 2016, interest rate swaps with notional amounts totaling $1,000 million and $1,250 million, respectively, were designated as fair value hedges. No ineffectiveness was recognized in 2016 or 2015.

Outstanding Interest Rate Swap Summary (dollars in millions) (a)

  January 28, 2017
  Designated De-Designated
  Pay Floating Pay Floating
Weighted average rate:
Pay 3-month LIBOR 1-month LIBOR
Receive 1.8% 1.3%
Weighted average maturity 2.4 years 1.0 year
Notional $1,000 $250

(a) There are two designated swaps and one de-designated swap at January 28, 2017

Classification and Fair Value (millions)

Assets Liabilities
Classification Jan 28, 2017 Jan 30, 2016 Classification Jan 28, 2017 Jan 30, 2016
Designated:
Other noncurrent assets $4 $27 N/A $ $
De-Designated:
Other current assets 1 12 Other current liabilities 8
Total $5 $39   $— $8

Periodic payments, valuation adjustments, and amortization of gains or losses on our derivative contracts had the
following effect on our Consolidated Statements of Operations:

Derivative Contracts - Effect on Results of Operations (millions)

Type of Contract Classification of (Income)/Expense 2016 2015 2014
Interest rate swaps Net interest expense $(24) $(36) $(32)

back to Notes to Consolidated Financial Statements

22. Leases

We lease certain retail locations, warehouses, distribution centers, office space, land, and equipment. Assets held under capital leases are included in property and equipment. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date we take possession of the property. At lease inception, we determine the lease term by assuming the exercise of those renewal options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. The lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term.

Rent expense is included in SG&A expenses. Some of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Certain leases require us to pay real estate taxes, insurance, maintenance, and other operating expenses associated with the leased premises. These expenses are classified in SG&A, consistent with similar costs for owned locations. CVS leases the space in our stores in which they operate CVS branded pharmacies and clinics. Rent income received from tenants who rent properties is recorded as a reduction to SG&A expense.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

We must adopt the standard no later than the first quarter of 2019, which begins on February 3, 2019. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

We plan to adopt the standard in the first quarter of 2018. We expect to elect the package of practical expedients, including the use of hindsight to determine the lease term. While lease classification will remain unchanged, hindsight may result in different lease terms for certain leases and affect the timing of related depreciation, interest, and rent expense. We do not expect to apply the recognition requirements to short-term leases and will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.

We believe the most significant impact relates to our accounting for retail-store and office-space real estate leases, which will be recorded as assets and liabilities on our balance sheet upon adoption. We do not believe the new standard will have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.

Rent Expense (millions)

 
2016 2015 2014
Rent expense $202 $198 $195
Rent income (a) (54) (16) (9)
Total rent expense $148 $182 $186

(a) Includes rental income from CVS from both ongoing rent payments and amortization of the deferred income liability related to the Pharmacy Transaction. See Note 6 for further discussion.

Total capital lease interest expense was $49 million, $42 million, and $38 million in 2016, 2015, and 2014, respectively, and is included within net interest expense on the Consolidated Statements of Operations.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. Certain leases also include options to purchase the leased property. Assets recorded under capital leases as of January 28, 2017 and January 30, 2016 were $888 million and $735 million, respectively. These assets are recorded net of accumulated amortization of $406 million and $321 million as of January 28, 2017 and January 30, 2016, respectively.

Future Minimum Lease Payments (millions)

  Operating Leases (a) Capital Leases (b) Rent Income Total
2017 $198 $82 $(22) $258
2018 204 86 (21) 269
2019 194 88 (20) 262
2020 184 89 (20) 253
2021 180 89 (19) 250
After 2021 2,916 1,529 (286) 4,159
Total future minimum lease payments $3,876 $1,963 $(388) $5,451
Less: Interest (c)   938    
Present value of future minimum capital lease payments (d)   $1,025    

Note: Minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance. Minimum lease payments also exclude payments to landlords for fixed purchase options which we believe are reasonably assured of being exercised.
(a) Total contractual lease payments include $2,024 million related to options to extend lease terms that are reasonably assured of being exercised and also includes $269 million of legally binding minimum lease payments for stores that are expected to open in 2017 or later.
(b) Capital lease payments include $608 million related to options to extend lease terms that are reasonably assured of being exercised and also includes $348 million of legally binding minimum lease payments for stores that are expected to open in 2017 or later.
(c) Calculated using the interest rate at inception for each lease.
(d) Includes the current portion of $31 million.

back to Notes to Consolidated Financial Statements

23. Income Taxes

Earnings from continuing operations before income taxes were $3,965 million, $4,923 million, and $3,653 million during 2016, 2015, and 2014, respectively, including $336 million, $373 million, and $261 million earned by our foreign entities subject to tax outside of the U.S.

Tax Rate Reconciliation – Continuing Operations

  2016 2015 2014
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of the federal tax benefit 2.7 3.0 2.2
International (2.6) (2.3) (2.3)
Excess tax benefit related to share-based payments (a) (0.6)
Change in valuation allowance (2.3)
Other (1.8) (0.9) (1.9)
Effective tax rate 32.7% 32.5% 33.0%

(a) Refer to Note 26.

Provision for Income Taxes (millions)

  2016 2015 2014
Current:
Federal $1,108 $1,652 $1,074
State 141 265 116
International 6 7 7
Total current 1,255 1,924 1,197
Deferred:
Federal 21 (272) (2)
State 21 (50) 10
International (1) (1)
Total deferred 41 (322) 7
Total provision $1,296 $1,602 $1,204

Net Deferred Tax Asset/(Liability) (millions)

  January 28, 2017 January 30, 2016
Gross deferred tax assets:
Accrued and deferred compensation $455 $476
Accruals and reserves not currently deductible 328 323
Self-insured benefits 178 199
Prepaid store-in-store lease income 258 270
Other 62 90
Total gross deferred tax assets 1,281 1,358
Gross deferred tax liabilities:
Property and equipment (1,822) (1,790)
Inventory (182) (190)
Other (102) (168)
Total gross deferred tax liabilities (2,106) (2,148)
Total net deferred tax liability $(825) $(790)

In 2014, we incurred a tax effected capital loss of $112 million within discontinued operations from our exit from Canada. At that time, we neither had nor anticipated sufficient capital gains to absorb this capital loss, and established a full valuation allowance within discontinued operations. In 2015, we released the entire $112 million valuation allowance due to a capital gain resulting from the Pharmacy Transaction. The benefit of the valuation allowance release was recorded in continuing operations in 2015.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year the temporary differences are expected to be recovered or settled. Tax rate changes affecting deferred tax assets and liabilities are recognized at the enactment date.

We have not recorded deferred taxes when earnings from foreign operations are considered to be indefinitely invested outside the U.S. These accumulated net earnings relate to certain ongoing operations and were $993 million at January 28, 2017 and $685 million at January 30, 2016. It is not practicable to determine the income tax liability that would be payable if such earnings were repatriated.

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. The U.S. Internal Revenue Service has completed exams on the U.S. federal income tax returns for years 2012 and prior. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2008.

Reconciliation of Liability for Unrecognized Tax Benefits (millions)

  2016 2015 2014
Balance at beginning of period $153 $155 $183
Additions based on tax positions related to the current year 12 10 10
Additions for tax positions of prior years 6 14 17
Reductions for tax positions of prior years (16) (26) (42)
Settlements (2) (13)
Balance at end of period $153 $153 $155

If we were to prevail on all unrecognized tax benefits recorded, $100 million of the $153 million reserve would benefit the effective tax rate. In addition, the reversal of accrued penalties and interest would also benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the years ended January 28, 2017, January 30, 2016, and January 31, 2015, we recorded an expense / (benefit) from accrued penalties and interest of $1 million, $5 million, and $(12) million, respectively. As of January 28, 2017, January 30, 2016, and January 31, 2015 total accrued interest and penalties were $45 million, $44 million, and $40 million, respectively.

It is reasonably possible that the amount of the unrecognized tax benefits with respect to our other unrecognized tax positions will increase or decrease during the next twelve months; however, an estimate of the amount or range of the change cannot be made at this time.

back to Notes to Consolidated Financial Statements

24. Other Noncurrent Liabilities

Other Noncurrent Liabilities (millions)

  January 28, 2017 January 30, 2016
Deferred income liability (a) $630 $660
Deferred compensation 473 454
Workers' compensation and general liability (b) 306 353
Income tax 125 122
Pension benefits 46 54
Other 280 254
Total $1,860 $1,897

(a) Represents deferred income related to the Pharmacy Transaction. See Note 6 for more information.
(b) See footnote (b) to the Accrued and Other Current Liabilities table in Note 18 for additional detail.

back to Notes to Consolidated Financial Statements

25. Share Repurchase

Share Repurchases (millions, except per share data)

  2016 2015 2014
Total number of shares purchased 50.9 44.7 0.8
Average price paid per share $72.35 $77.07 $54.07
Total investment $3,686 $3,441 $41

back to Notes to Consolidated Financial Statements

26. Share-Based Compensation

We maintain a long-term incentive plan (the Plan) for key team members and non-employee members of our Board of Directors. The Plan allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards). The number of unissued common shares reserved for future grants under the Plan was 31.0 million and 31.5 million at January 28, 2017 and January 30, 2016, respectively.

Compensation expense associated with share-based awards is recognized on a straight-line basis over the shorter of the vesting period or the minimum required service period. Share-based compensation expense recognized in the Consolidated Statements of Operations was $116 million, $118 million, and $73 million in 2016, 2015, and 2014, respectively. The related income tax benefit was $43 million, $46 million, and $29 million in 2016, 2015, and 2014, respectively.

During the first quarter of 2016, we adopted Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). As a result of adoption, we recognized $27 million of excess tax benefits related to share-based payments in our provision for income taxes for 2016. These items were historically recorded in additional paid-in capital. In addition, for each period presented, cash flows related to excess tax benefits are classified as an operating activity along with other income tax cash flows. Cash paid on employees' behalf related to shares withheld for tax purposes is classified as a financing activity. Retrospective application of the cash flow presentation resulted in increases to both net cash provided by operations and net cash required for financing activities of $113 million and $26 million for 2015 and 2014, respectively. Compensation expense each period continues to reflect estimated forfeitures.

Restricted Stock Units

We issue restricted stock units and performance-based restricted stock units generally with three-year cliff vesting from the grant date (collectively restricted stock units) to certain team members. The final number of shares issued under performance-based restricted stock units will be based on our total shareholder return relative to a retail peer group over a three-year performance period. We also regularly issue restricted stock units to our Board of Directors, which vest quarterly over a one-year period and are settled in shares of Target common stock upon departure from the Board. The fair value for restricted stock units is calculated based on the stock price on the date of grant, incorporating an analysis of the total shareholder return performance measure where applicable. The weighted average grant date fair value for restricted stock units was $74.05, $73.76, and $70.50 in 2016, 2015, and 2014, respectively.

Restricted Stock Unit Activity

  Total Nonvested Units
Restricted Stock (a) Grant Date Fair Value (b)
January 30, 2016 4,226 $69.49
Granted 639 74.05
Forfeited (358) 71.37
Vested (1,168) 64.37
January 28, 2017 3,339 $71.62

(a) Represents the number of shares of restricted stock units, in thousands. For performance-based restricted stock units, assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding restricted stock units and performance-based restricted stock units at January 28, 2017 was 2,765 thousand.
(b) Weighted average per unit.

The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. At January 28, 2017, there was $96 million of total unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of restricted stock units vested and converted to shares of Target common stock was $75 million, $90 million, and $40 million in 2016, 2015, and 2014, respectively.

Performance Share Units

We issue performance share units to certain team members that represent shares potentially issuable in the future. Issuance is based upon our performance relative to a retail peer group over a three-year performance period on certain measures including domestic market share change, return on invested capital, and EPS growth. In 2015 we also issued strategic alignment performance share units to certain team members. Issuance is based on performance against four strategic metrics identified as vital to Target's success, including total sales growth, digital channel sales growth, EBIT growth, and return on invested capital, over a two-year performance period. The fair value of performance share units is calculated based on the stock price on the date of grant. The weighted average grant date fair value for performance share units was $71.37, $74.19, and $73.12 in 2016, 2015, and 2014, respectively.

Performance Share Unit Activity

  Total Nonvested Units
  Performance Share Units (a) Grant Date Fair Value (b)
January 30, 2016 4,023 $70.70
Granted 712 71.37
Forfeited (754) 73.21
Vested (8) 63.54
January 28, 2017 3,973 $70.55

(a) Represents the number of performance share units, in thousands. Assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding units at January 28, 2017 was 1,799 thousand.
(b) Weighted average per unit.

The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. Future compensation expense for unvested awards could reach a maximum of $191 million assuming payout of all unvested awards. The unrecognized expense is expected to be recognized over a weighted average period of 1.9 years. The fair value of performance share units vested and converted to shares of Target common stock was $1 million in 2016, $2 million in 2015, and $11 million in 2014.

Stock Options

Through 2013, we granted nonqualified stock options to certain team members. Virtually all are vested and currently exercisable.

Stock Option Activity

  Stock Options
Total Outstanding Exercisable
Number of Options (a) Exercise Price (b) Intrinsic Value (c) Number of Options (a) Exercise Price (b) Intrinsic Value (c)
January 30, 2016 10,500 $53.47 $199 9,405 $52.57 $187
Granted        
Expired/forfeited (133) 60.24        
Exercised/issued (4,157) 52.93        
January 28, 2017 6,210 $53.68 $63 6,180 $53.60 $63

(a) In thousands.
(b) Weighted average per share.
(c) Represents stock price appreciation subsequent to the grant date, in millions.

 

Stock Option Exercises (millions)

  2016 2015 2014
Cash received for exercise price $219 $303 $374
Intrinsic value 103 159 143
Income tax benefit 40 77 41

The weighted average remaining life of outstanding options is 3.9 years. The total fair value of options vested was $9 million, $23 million, and $37 million in 2016, 2015, and 2014, respectively.

back to Notes to Consolidated Financial Statements

27. Defined Contribution Plans

Team members who meet eligibility requirements can participate in a defined contribution 401(k) plan by investing up to 80 percent of their compensation, as limited by statute or regulation. Generally, we match 100 percent of each team member's contribution up to 5 percent of total compensation. Company match contributions are made to funds designated by the participant.

In addition, we maintain a nonqualified, unfunded deferred compensation plan for approximately 2,200 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding executive officers, in part to recognize the risks inherent to their participation in this plan. We also maintain a frozen nonqualified, unfunded deferred compensation plan covering approximately 50 participants. Our total liability under these plans was $514 million and $497 million at January 28, 2017 and January 30, 2016, respectively.

We mitigate some of our risk of offering the nonqualified plans through investing in company-owned life insurance that offsets a substantial portion of our economic exposure to the returns of these plans. These investments are general corporate assets and are marked to market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur. See Note 15 for additional information.

Plan Expenses (millions)

  2016 2015 2014
401(k) plan matching contributions expense $197 $224 $220
Nonqualified deferred compensation plans
Benefits expense (a) 58 5 52
Related investment (income) expense (b) (38) 15 (45)
Nonqualified plan net expense $20 $20 $7

(a) Includes market-performance credits on accumulated participant account balances and annual crediting for additional benefits earned during the year.
(b) Includes investment returns and life-insurance proceeds received from company-owned life insurance policies and other investments used to economically hedge the cost of these plans.

back to Notes to Consolidated Financial Statements

28. Pension and Postretirement Health Care Plans

Pension Plans

We have qualified defined benefit pension plans covering team members who meet age and service requirements, including date of hire in certain circumstances. Effective January 1, 2009, our U.S. qualified defined benefit pension plan was closed to new participants, with limited exceptions. We also have unfunded nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on each team members' date of hire, length of service and/or team member compensation.

Funded Status (millions)

  Qualified Plans Nonqualified Plans
2016 2015 2016 2015
Projected benefit obligations $3,760 $3,558 $32 $39
Fair value of plan assets 3,785 3,607
Funded / (underfunded) status $25 $49 $(32) $(39)

Contributions and Estimated Future Benefit Payments

Our obligations to plan participants can be met over time through a combination of company contributions to these plans and earnings on plan assets. In 2016 we made no contributions to our qualified defined benefit pension plans. In 2015 we made a discretionary contribution of $200 million. We are not required to make any contributions in 2017. However, depending on investment performance and plan funded status, we may elect to make a contribution.

Estimated Future Benefit Payments (millions)

  Pension Benefits
2017 $ 163
2018 171
2019 179
2020 188
2021 197
2022-2026 1,112

Cost of Plans

Net Pension Benefits Expense (millions)

  2016 2015 2014
Service cost benefits earned during the period $87 $109 $112
Interest cost on projected benefit obligation 134 154 149
Expected return on assets (256) (260) (233)
Amortization of losses 46 82 65
Amortization of prior service cost (a) (11) (11) (11)
Settlement and special termination charges 2 4
Total $2 $78 $82

(a) Determined using the straight-line method over the average remaining service period of team members expected to receive benefits under the plan.

Assumptions

Benefit Obligation Weighted Average Assumptions

  2016 2015
Discount rate 4.40% 4.70%
Average assumed rate of compensation increase 3.00 3.00

Net Periodic Benefit Expense Weighted Average Assumptions

  2016 2015 2014
Discount rate 4.70% 3.87% 4.77%
Expected long-term rate of return on plan assets 6.80 7.50 7.50
Average assumed rate of compensation increase 3.00 3.00 3.00

The weighted average assumptions used to measure net periodic benefit expense each year are the rates as of the beginning of the year (i.e., the prior measurement date). Based on a stable asset allocation, our most recent compound annual rate of return on qualified plans' assets was 7.7 percent, 6.4 percent, 7.7 percent, and 8.2 percent for the 5-year, 10-year, 15-year, and 20-year time periods, respectively.

The market-related value of plan assets, which is used in calculating expected return on assets in net periodic benefit cost, is determined each year by adjusting the previous year's value by expected return, benefit payments, and cash contributions. The market-related value is adjusted for asset gains and losses in equal 20 percent adjustments over a five-year period.

We review the expected long-term rate of return annually and revise it as appropriate. Additionally, we monitor the mix of investments in our portfolio to ensure alignment with our long-term strategy to manage pension cost and reduce volatility in our assets. Our expected annualized long-term rate of return assumptions as of January 28, 2017 were 8.0 percent for domestic and international equity securities, 5.0 percent for long-duration debt securities, 8.0 percent for balanced funds, and 9.5 percent for other investments. These estimates are a judgmental matter in which we consider the composition of our asset portfolio, our historical long-term investment performance, and current market conditions.

Benefit Obligation

Change in Projected Benefit Obligation (millions)

  Qualified Plans Nonqualified Plans
2016 2015 2016 2015
Benefit obligation at beginning of period $3,558 $3,844 $39 $43
Service cost 86 108 1 1
Interest cost 133 152 1 2
Actuarial loss / (gain) 156 (400) (2) (4)
Participant contributions 7 6
Benefits paid (180) (155) (7) (3)
Plan amendments 3
Benefit obligation at end of period (a) $3,760 $3,558 $32 $39

(a) Accumulated benefit obligation—the present value of benefits earned to date assuming no future salary growth—is materially consistent with the projected benefit obligation in each period presented.

Plan Assets

Change in Plan Assets (millions)

 
Qualified Plans Nonqualified Plans
2016 2015 2016 2015
Fair value of plan assets at beginning of period $3,607 $3,784 $— $—
Actual return on plan assets 349 (231)
Employer contributions 2 203 7 3
Participant contributions 7 6
Benefits paid (180) (155) (7) (3)
Fair value of plan assets at end of period $3,785 $3,607 $— $—

Our asset allocation policy is designed to reduce the long-term cost of funding our pension obligations. The plan invests with both passive and active investment managers depending on the investment. The plan also seeks to reduce the risk associated with adverse movements in interest rates by employing an interest rate hedging program, which may include the use of interest rate swaps, total return swaps, and other instruments.

Asset Category

  Current Targeted Allocation Actual Allocation
2016 2015
Domestic equity securities (a) 14% 14% 16%
International equity securities 9 9 10
Debt securities 45 43 44
Balanced funds 23 25 21
Other (b) 9 9 9
Total 100% 100% 100%

(a) Equity securities include our common stock in amounts substantially less than 1 percent of total plan assets as of January 28, 2017 and January 30, 2016.
(b) Other assets include private equity, mezzanine and high-yield debt, natural resources and timberland funds, multi-strategy hedge funds, derivative instruments, and real estate. The real estate allocation represents 4 percent of total assets.

Fair Value Measurements (millions)

  Fair Value at
  Pricing Category January 31, 2017 January 30, 2016
Cash and cash equivalents Level 1 $5 $43
Government securities (a) Level 2 477 470
Fixed income (b) Level 2 1,080 979
Other (c) Level 2 4 8
  1,566 1,500
Investments valued using NAV per share (d)
Cash and cash equivalents 168 455
Common collective trusts 768 544
Fixed Income 51 49
Balanced funds 942 756
Private equity funds 126 141
Other 164 162
Total plan assets $3,785 $3,607

(a) Investments in government securities and long-term government bonds.
(b) Investments in corporate and municipal bonds.
(c) Investments in derivative investments.
(d) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

Position Valuation Technique
Cash and cash equivalents Carrying value approximates fair value.
Government securities and fixed income Valued using matrix pricing models and quoted prices of securities with similar characteristics.
Derivatives Swap derivatives - Valued initially using models calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads.

Option derivatives - Valued at transaction price initially. Subsequent valuations are based on observable inputs to the valuation model (e.g., underlying investments).

Amounts Included in Shareholders' Equity

Amounts in Accumulated Other Comprehensive Income (millions)

  2016 2015
Net actuarial loss $ 1,035 $ 1,022
Prior service credits (46) (57)
Amounts in accumulated other comprehensive income (a)(b) $ 989 $ 965

(a) $601 million and $583 million, net of tax, at the end of 2016 and 2015, respectively.
(b) We expect 2017 net pension expense to include amortization expense of $49 million ($30 million, net of tax) to net actuarial loss and prior service credit balances included in accumulated other comprehensive income.

Postretirement Health Care

Effective April 1, 2016, we discontinued the postretirement health care benefits that were offered to team members upon early retirement and prior to Medicare eligibility. This decision resulted in a $58 million reduction in the projected postretirement health care benefit obligation and a $43 million curtailment gain recorded in SG&A during 2015. As of January 30, 2016, we extinguished the remaining benefit obligation related to this plan.

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29. Accumulated Other Comprehensive Income

(millions)

  Cash Flow Hedges Currency Translation Adjustment Pension and Other Benefit Total
January 30, 2016 $(19) $(22) $(588) $(629)
Other comprehensive income / (loss) before reclassifications 1 (32) (31)
Amounts reclassified from AOCI 3 (a) 19 (b) 22
January 28, 2017 $(16) $(21) $(601) $(638)

(a) Represents gains and losses on cash flow hedges, net of $2 million of taxes, which are recorded in net interest expense on the Consolidated Statements of Operations.
(b) Represents amortization of pension and other benefit liabilities, net of $12 million of taxes, which is recorded in SG&A expenses on the Consolidated Statements of Operations. See Note 28 for additional information.

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30. Segment Reporting

Our segment measure of profit is used by management to evaluate the return on our investment and to make operating decisions. Effective January 15, 2015, following the deconsolidation of our former Canadian retail operation, we have been operating as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels.

Business Segment Results (millions)

  2016 2015 2014
Sales $69,495 $73,785 $72,618
Cost of sales 48,872 51,997 51,278
Gross margin 20,623 21,788 21,340
Selling, general, and administrative expenses (e) 13,360 14,448 14,503
Depreciation and amortization 2,298 2,213 2,129
Segment earnings before interest expense and income taxes 4,965 5,127 4,708
Gain on sale (a) 620
Restructuring costs (b)(e) (138)
Data breach-related costs, net of insurance (c)(e) (39) (145)
Other (d)(e) 4 (39) (29)
Earnings from continuing operations before interest expense and income taxes 4,969 5,530 4,535
Net interest expense 1,004 607 882
Earnings from continuing operations before income taxes $3,965 $4,923 $3,653

Note: The sum of the segment amounts may not equal the total amounts due to rounding.

(a) For 2015, represents the gain on the Pharmacy Transaction.
(b) Refer to Note 8 for more information on restructuring costs.
(c) Refer to Note 19 for more information on data breach-related costs.
(d) For 2016, represents items related to the Pharmacy Transaction. For 2015, represents impairments related to our decision to wind down certain noncore operations. For 2014, includes impairments of $16 million related to undeveloped land in the U.S. and $13 million of expense related to converting co-branded card program to MasterCard.
(e) The sum of segment SG&A expenses, restructuring costs, data breach-related costs, and other charges equal consolidated SG&A expenses.

Total Assets by Segment (millions)

  January 28, 2017 January 30, 2016
U.S. $37,350 $39,845
Assets of discontinued operations 81 397
Unallocated assets (a) 20
Total assets $37,431 $40,262

(a) Represents the insurance receivable related to the 2013 data breach.

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31. Quarterly Results (Unaudited)

Due to the seasonal nature of our business, fourth quarter operating results typically represent a substantially larger share of total year revenues and earnings because they include our peak sales period of November and December. We follow the same accounting policies for preparing quarterly and annual financial data. The table below summarizes quarterly results for 2016 and 2015:

Quarterly Results (millions, except per share data)

  First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Sales $16,196 $17,119 $16,169 $17,427 $16,441 $17,613 $20,690 $21,626 $69,495 $73,785
Cost of sales 11,185 11,911 11,102 12,051 11,471 12,440 15,116 15,594 48,872 51,997
Gross margin 5,011 5,208 5,067 5,376 4,970 5,173 5,574 6,032 20,623 21,788
Selling, general, and administrative expenses 3,153 3,514 3,249 3,495 3,339 3,736 3,614 3,921 13,356 14,665
Depreciation and amortization 546 540 570 551 570 561 612 562 2,298 2,213
Gain on sale (620) (620)
Earnings before interest expense and income taxes 1,312 1,154 1,248 1,330 1,061 876 1,348 2,169 4,969 5,530
Net interest expense 415 155 307 148 142 151 140 152 1,004 607
Earnings from continuing operations before income taxes 897 999 941 1,182 919 725 1,208 2,017 3,965 4,923
Provision for income taxes 283 348 316 409 311 249 387 596 1,296 1,602
Net earnings from continuing operations 614 651 625 773 608 476 821 1,421 2,669 3,321
Discontinued operations, net of tax 18 (16) 55 (20) 73 (4) 5 68 42
Net earnings $632 $635 $680 $753 $608 $549 $817 $1,426 $2,737 $3,363
Basic earnings/(loss) per share
Continuing operations $1.03 $1.02 $1.07 $1.21 $1.07 $0.76 $1.47 $2.33 $4.62 $5.29
Discontinued operations 0.03 (0.03) 0.09 (0.03) 0.12 (0.01) 0.01 0.12 0.07
Net earnings per share $1.06 $0.99 $1.17 $1.18 $1.07 $0.88 $1.46 $2.33 $4.74 $5.35
Diluted earnings/(loss) per share
Continuing operations $1.02 $1.01 $1.07 $1.21 $1.06 $0.76 $1.46 $2.31 $4.58 $5.25
Discontinued operations 0.03 (0.03) 0.09 (0.03) 0.11 (0.01) 0.01 0.12 0.07
Net earnings per share $1.05 $0.98 $1.16 $1.18 $1.06 $0.87 $1.45 $2.32 $4.70 $5.31
Dividends declared per share $ 0.56 $ 0.52 $ 0.60 $ 0.56 $ 0.60 $ 0.56 $ 0.60 $ 0.56 $ 2.36 $ 2.20
Closing common stock price:
High 83.98 83.57 80.12 85.01 75.81 80.87 78.61 78.23 83.98 85.01
Low 68.05 74.25 66.74 77.26 67.22 72.94 63.70 67.59 63.70 67.59

Note: Per share amounts are computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding and all other quarterly amounts may not equal the total year due to rounding.

U.S. Sales by Product Category (a)

  First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Household essentials 23% 28% 23% 28% 23% 28% 19% 21% 22% 26%
Food, beverage, and pet supplies 24 22 22 20 23 22 20 19 22 21
Apparel and accessories 21 20 22 21 21 19 18 18 20 19
Home furnishings and décor 17 16 19 17 19 18 19 18 19 17
Hardlines 15 14 14 14 14 13 24 24 17 17
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Supplemental information
Pharmacy (b) —% 6% —% 6% —% 6% —% 3% —% 5%

(a) As a percentage of sales.
(b) Included in household essentials.

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