ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Company, our operations and our present business environment. The following MD&A is provided as a supplement to — and should be read in conjunction with — our MD&A for Fiscal 2021 which can be found in our Fiscal 2021 Form 10-K.
In addition, the following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements and should be read in conjunction with these statements and notes thereto.
Introduction
This MD&A is organized as follows:
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Executive Overview |
General description of the Company’s business and certain segment information. |
Key Performance Indicators |
Overview of key performance indicators reviewed by management to gauge the Company’s results. |
Current Trends and Outlook |
Discussion of trends and uncertainties facing the Company, including those related to the COVID-19 pandemic’s impact on the Company’s business, recent acquisitions and the Company’s long-term plans for growth. In addition, this section also provides a summary of the Company’s performance over the 13 and 26 weeks ended July 30, 2022 and the 13 and 26 weeks ended July 31, 2021. |
Non-GAAP Information |
Discussion of certain financial measures that have been determined to not be in accordance with GAAP. This section includes certain reconciliations from GAAP to non-GAAP financial measures and additional details on these financial non-GAAP measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. |
Results of Operations |
Provides an analysis of certain components of the Company’s Consolidated Statements of Operations for the 13 and 26 weeks ended July 30, 2022 and the 13 and 26 weeks ended July 31, 2021. |
Liquidity and Capital Resources |
Discussion of the Company’s financial condition and changes in financial condition and liquidity for the 13 and 26 weeks ended July 30, 2022 and the 13 and 26 weeks ended July 31, 2021. |
Critical Accounting Policies and Estimates |
Discusses where information may be found about accounting policies and estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of the Company’s management in their application. |
Recent accounting pronouncements the Company has adopted or is currently evaluating prior to adoption, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s audited Consolidated Financial Statements, are included in Note 2. “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included herein.
Executive Overview
We are a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under our American Eagle®, Aerie® and other brands.
We have two reportable segments, American Eagle and Aerie. Our Chief Operating Decision Maker (defined as our CEO) analyzes segment results and allocates resources between segments based on adjusted operating income (loss), or the operating income (loss) in periods where there are no adjustments, of each segment. See Note 12. “Segment Reporting,” of the Notes to the Consolidated Financial Statements included herein for additional information.
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Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:
Comparable sales — Comparable sales and comparable sales changes provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable sales in the thirteenth month of operation. However, stores that have a gross square footage change of 25% or greater due to a remodel are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel. Sales from American Eagle, Aerie, Todd Snyder, and Unsubscribed stores, as well as sales from AEO Direct and other digital channels, are included in total comparable sales. Sales from licensed stores are not included in comparable sales. Individual American Eagle and Aerie brand comparable sales disclosures represent sales from stores and AEO Direct.
Omni-channel Sales Performance – Our management utilizes the following quality of sales metrics in evaluating our omni-channel sales performance: comparable sales, average unit retail price, total transactions, units per transaction, and consolidated comparable traffic. We include these metrics in our discussion within this MD&A when we believe they enhance the understanding of the matter being discussed. Investors may find them useful as such. Each of these metrics is defined as follows (except comparable sales, which is defined separately above):
•Average unit retail price represents the selling price of our goods. It is the cumulative net sales divided by the net units sold for a period of time.
•Total transactions represents the count of customer transactions over a period of time (inclusive of Company-owned stores and AEO Direct, unless specified otherwise).
•Units per transaction represents the number of units sold divided by total transactions over a period of time (inclusive of Company-owned stores and AEO Direct, unless specified otherwise).
•Consolidated comparable traffic represents visits to our Company-owned stores, limited to those stores that qualify to be included in comparable sales as defined above, including AEO Direct, over a period of time.
Gross profit — Gross profit measures whether we are optimizing the profitability of our sales. Gross profit is the difference between total net revenue and cost of sales. Cost of sales consists of merchandise costs, including design, sourcing, importing, and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs and buying, occupancy and warehousing costs and services. Design costs consist of compensation, rent, depreciation, travel, supplies, and samples.
Buying, occupancy and warehousing costs and services consist of: compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operations.
The inability to obtain acceptable levels of sales, initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross consolidated profit and results of operations.
Operating income — Our management views operating income as a key indicator of our performance. The key drivers of operating income are net revenue, gross profit, our ability to control SG&A expenses, and our level of capital expenditures for a reasonable period of time.
Cash flow and liquidity — Our management evaluates cash flow from operations and investing and financing activities in determining the sufficiency of our cash position and capital allocation strategies. Cash flow has historically been sufficient to cover our uses of cash. Our management believes that cash flow and liquidity will be sufficient to fund anticipated capital expenditures and working capital requirements for the next twelve months and beyond.
Current Trends and Outlook
Inflation
During the second quarter of Fiscal 2022, our quarterly results were negatively impacted by macro-economic challenges and global inflationary pressures impacting consumer spending behavior, which constrained revenue and increased margin pressure to clear through excess inventory. Given ongoing external uncertainties, we have taken additional actions to improve financial performance, including more extensive expense and capital expenditure reductions. For
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further information about the risks associated with global economic conditions and the effect of economic pressures on our business, see “Risk Factors” in Part I, Item 1A of our Fiscal 2021 Form 10-K.
COVID-19
The ongoing COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis, and we continue to see disruptions and volatility in our business caused by the COVID-19 pandemic.
The unpredictability of the trajectory of the COVID-19 pandemic has significantly diminished visibility into the future operating environment, and we believe that the Company may continue to experience degrees of volatility and business disruptions and remain at risk for periods of closure of our stores, distribution centers, and corporate facilities. While trends in new cases of COVID-19 in the United States improved during the six months ended July 30, 2022 compared to the final quarter of Fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic. Past and future impacts of the COVID-19 pandemic may disrupt the operations of our partners, suppliers, and vendors, which could lead to or exacerbate existing supply chain disruptions, shipping delays, freight cost increases, and labor shortages. We are monitoring ongoing developments, and we will take further actions that we believe are in the best interests of our associates and customers, as needed. For further information about the risks associated with the COVID-19 pandemic, see “Risk Factors” in Part I, Item 1A of our Fiscal 2021 Form 10-K.
Quiet Platforms
In Fiscal 2021, the Company completed the acquisition of AirTerra and Quiet Logistics. With these acquisitions, the Company expects to be able to execute on operational efficiencies to create a supply chain platform, which we refer to as Quiet Platforms, with significant long-term growth potential.
Omni-Channel and Digital Capabilities
We sell merchandise through our digital channels, www.ae.com, www.aerie.com, www.toddsnyder.com, www.unsubscribed.com, and our AEO apps, both domestically and internationally in 81 countries. We also sell merchandise on various international online marketplaces. The digital channels reinforce each particular brand and are designed to complement the in-store experience.
Over the past several years, we have invested in building our technologies and digital capabilities. We focused our investments in three key areas: making significant advances in mobile technology, investing in digital marketing and improving the digital customer experience.
Non-GAAP Information
The results of operations section below contains net income (loss) per diluted share presented on an adjusted or non-GAAP basis, which is a non-GAAP financial measure. This financial measure is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. Non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance when reviewed in conjunction with our GAAP Consolidated Financial Statements and provides a higher degree of transparency. These amounts are not determined in accordance with GAAP and, therefore, should not be used exclusively in evaluating our business and operations. The table below reconciles the GAAP financial measure to the non-GAAP financial measure discussed above.
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13 Weeks Ended |
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July 30, |
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July 31, |
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2022 |
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2021 |
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Net (loss) income per diluted share - GAAP Basis |
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$ |
(0.24 |
) |
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$ |
0.58 |
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Add: Debt related charges (1) |
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0.28 |
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— |
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Add: Convertible Debt (2) |
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— |
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0.02 |
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Net income per diluted share - Adjusted or Non- GAAP Basis(3) |
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$ |
0.04 |
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$ |
0.60 |
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26 Weeks Ended |
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July 30, |
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July 31, |
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2022 |
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2021 |
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Net (loss) income per diluted share - GAAP Basis |
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$ |
(0.06 |
) |
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$ |
1.04 |
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Add: Debt related charges (1) |
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0.26 |
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— |
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Add: Convertible Debt (2) |
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— |
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0.04 |
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Net income per diluted share - Adjusted or Non- GAAP Basis(3) |
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$ |
0.20 |
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$ |
1.08 |
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(1)$60.1 million of pre-tax debt related charges related primarily to the induced conversion expense relating to the Note Exchange, along with certain other costs related to actions we took to strengthen our capital structure, recorded during the 13 weeks ended July 30, 2022.
(2)Amortization of the non-cash discount on the 2025 Notes included in interest expense, net on the Consolidated Statements of Operations prior to the adoption of ASU 2020-06.
(3)Adjusted EPS for the 13 and 26 weeks ended July 30, 2022 is calculated using weighted average diluted shares outstanding of 206.7 million and 213.3 million, respectively, which includes the dilutive effect of our convertible notes and equity compensation awards. As GAAP results were a net (loss) for these periods, these shares were not included in the GAAP diluted earnings per share denominator when calculating EPS on a GAAP basis.
Results of Operations
Overview
Demand in the second quarter was soft, reflecting the impact of inflationary pressure and a related shift in consumer spending patterns. In this environment, margin pressure was more amplified as we worked to clear through excess spring and summer goods. Given ongoing uncertainties in the macroeconomic environment, we have taken additional steps to position the business for improved financial performance. This includes further resetting inventory plans for the back half of the year, expanding the scope of expense and capital expenditure reductions.
The following table shows the percentage relationship to total net revenue of the listed line items included in our Consolidated Statements of Operations:
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13 Weeks Ended |
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26 Weeks Ended |
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July 30, |
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July 31, |
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July 30, |
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July 31, |
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2022 |
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2021 |
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2022 |
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2021 |
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Total net revenue |
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100.0 |
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% |
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100.0 |
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% |
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100.0 |
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% |
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100.0 |
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% |
Cost of sales, including certain buying, occupancy and warehousing expenses |
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69.1 |
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57.9 |
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66.4 |
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57.9 |
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Gross profit |
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30.9 |
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42.1 |
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33.6 |
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42.1 |
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Selling, general and administrative expenses |
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25.7 |
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24.6 |
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26.9 |
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25.1 |
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Depreciation and amortization expense |
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4.0 |
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3.4 |
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4.2 |
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3.5 |
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Operating income |
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1.2 |
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14.1 |
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2.5 |
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13.5 |
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Debt related charges |
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5.1 |
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- |
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2.7 |
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- |
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Interest expense, net |
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0.3 |
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0.8 |
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0.4 |
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0.7 |
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Other income, net |
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(0.2 |
) |
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(0.1 |
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(0.3 |
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(0.1 |
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(Loss) income before income taxes |
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(4.0 |
) |
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13.4 |
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(0.3 |
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12.9 |
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(Benefit) provision for income taxes |
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(0.5 |
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3.2 |
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0.2 |
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3.2 |
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Net (loss) income |
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(3.5 |
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% |
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10.2 |
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% |
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(0.5 |
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% |
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9.7 |
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% |
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The following table shows our consolidated store data:
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13 Weeks Ended |
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26 Weeks Ended |
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July 30, |
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July 31, |
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July 30, |
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July 31, |
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2022 |
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2021 |
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2022 |
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2021 |
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Number of stores: |
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Beginning of period |
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1,141 |
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1,074 |
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1,133 |
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1,078 |
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Opened |
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29 |
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20 |
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48 |
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31 |
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Closed |
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(10 |
) |
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(4 |
) |
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(21 |
) |
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(19 |
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End of period |
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1,160 |
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1,090 |
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1,160 |
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1,090 |
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Total gross square feet at end of period (in '000) |
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7,205 |
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6,799 |
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7,205 |
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6,799 |
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International licensed/franchise stores at end of period (1) |
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260 |
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242 |
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260 |
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242 |
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(1)International licensed/franchise stores are not included in the consolidated store data or the total gross square feet calculation.
As of July 30, 2022, we operated 873 American Eagle retail stores, which include 185 Aerie side-by-side locations and 2 OFFLINE side-by-side locations, 276 Aerie stand-alone stores (including 31 OFFLINE stand-alone stores and 21 OFFLINE side-by-side locations), and AEO Direct. Additionally, there were six Todd Snyder stand-alone locations and five Unsubscribed locations.
Comparison of the 13 weeks ended July 30, 2022 to the 13 weeks ended July 31, 2021
Total Net Revenue
Total net revenue increased $4.0 million, to $1.198 billion compared to $1.194 billion last year.
American Eagle
Total net revenue for the 13 weeks ended July 30, 2022 for the American Eagle brand was $777.8 million compared to $845.9 million for the 13 weeks ended July 31, 2021.
Aerie
Total net revenue for the 13 weeks ended July 30, 2022 for the Aerie brand was $371.7 million compared to $335.8 million for the 13 weeks ended July 31, 2021.
Gross Profit
Gross profit decreased 26% or $132.4 million to $370.0 million compared to $502.4 million last year. Our gross margin percentage decreased to 30.9% of revenue from 42.1% of revenue last year. The gross margin decline was driven by a 750 basis point impact from higher markdowns, largely reflecting initiatives to clear excess inventory as a result of the larger than expected reduction in our sales trend. Higher freight costs impacted the gross margin by approximately 200 basis points and Quiet Platforms had a 60 basis point impact as we integrate and ramp up business. Delivery, warehousing costs and rent also increased, offset by lower incentive compensation accruals.
There was $4.0 million and $3.9 million of share-based payment expense included in gross profit for the 13 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.
Selling, General and Administrative Expenses
SG&A expenses increased 5% or $13.9 million to $307.8 million from $293.9 million last year. As a percentage of total net revenue, SG&A expenses increased 110 basis points to 25.7%, compared to 24.6% last year. The increase in expenses was primarily related to increased store wages and corporate compensation, professional services and advertising, partially offset by lower incentive compensation accruals.
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There was $4.6 million and $5.1 million of share-based payment expense included in SG&A expenses for the 13 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 19% or $7.7 million, to $48.2 million for the 13 weeks ended July 30, 2022, compared to $40.5 million for the 13 weeks ended July 31, 2021, which was primarily driven by increased capital spending and the recent acquisition of Quiet Logistics. As a percentage of total net revenue, depreciation and amortization expense was 4.0% for the 13 weeks ended July 30, 2022 compared to 3.4% for the 13 weeks ended July 31, 2021.
Debt Related Charges
Debt related charges of $60.1 million for the 13 weeks ended June 30, 2022 consists primarily of a $55.7 million induced conversion expense relating to the Note Exchange, along with certain other costs related to actions we took to strengthen our capital structure.
Interest Expense, net
Interest expense, net decreased $5.5 million, to $3.4 million, for the 13 weeks ended July 30, 2022, compared to $8.9 million for the 13 weeks ended July 31, 2021. The decrease in expense was primarily attributable to the adoption of ASU 2020-06 which reduced non-cash interest expense related to amortization of the non-cash discount on our 2025 Notes, partially offset by $1.0 million of interest expense from borrowings under our Credit Facility this year.
Other Income, net
Other income, net was $1.8 million for the 13 weeks ended July 30, 2022, compared to $1.4 million for the 13 weeks ended July 31, 2021.
(Benefit) Provision for Income Taxes
The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax benefit rate for the 13 weeks ended July 30, 2022 was 10.9% compared to the effective income tax rate of 24.3% for the 13 weeks ended July 31, 2021. The change in the effective tax rate, as compared to the prior period, is primarily due to the Note Exchange as a portion of the inducement charge was not deductible, lower excess tax benefits on share-based payments, and state legislative changes.
Net (Loss) Income
Net (loss) income decreased $164.0 million, to a net loss of $42.5 million for the 13 weeks ended July 30, 2022, or (3.5%) as a percentage of total net revenue, compared to net income of $121.5 million, or 10.2% as a percentage of total net revenue for the 13 weeks ended July 31, 2021.
Net (loss) income per share decreased to a net loss of $0.24 per diluted share, including $0.28 of debt related charges for the 13 weeks ended July 30, 2022, compared to net income of $0.58 per diluted share, including $0.02 of the amortization of the non-cash discount on the 2025 Notes for the 13 weeks ended July 31, 2021. The change in net (loss) income was attributable to the factors noted above.
Comparison of the 26 weeks ended July 30, 2022 to the 26 weeks ended July 31, 2021
Total Net Revenue
Total net revenue increased 1%, or $24.4 million, to $2.253 billion compared to $2.229 billion last year.
American Eagle
Total net revenue for the 26 weeks ended July 30, 2022 for the American Eagle brand was $1.463 billion compared to $1.574 billion for the 26 weeks ended July 31, 2021.
Aerie
Total net revenue for the 26 weeks ended July 30, 2022 for the Aerie brand was $693.4 million compared to $633.3 million for the 26 weeks ended July 31, 2021.
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Gross Profit
Gross profit decreased 19% or $180.6 million, to $758.0 million compared to $938.6 million last year. Our gross margin percentage decreased to 33.6% of revenue from 42.1% of revenue last year. The gross margin decline was driven by a 440 basis point impact from higher markdowns, largely reflecting initiatives to clear excess inventory. Higher freight costs impacted the gross margin by approximately 270 basis points and Quiet Platforms had a 90 basis point impact as we integrate and ramp up the business. Delivery, warehousing costs and rent also increased, offset by lower incentive compensation accruals.
There was $9.4 million and $8.2 million of share-based payment expense included in gross profit for the 26 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.
Selling, General and Administrative Expenses
SG&A expenses increased 9% or $48.2 million to $606.6 million from $558.4 million last year. As a percentage of total net revenue, SG&A expenses increased 180 basis points to 26.9%, compared to 25.1% last year. The increase in expenses was primarily related to increased store wages and hours and corporate compensation, professional services and advertising, partially offset by lower incentive compensation accruals.
There was $13.5 million and $13.4 million of share-based payment expense included in SG&A expenses for the 26 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 21% or $16.8 million, to $95.5 million for the 26 weeks ended July 30, 2022, compared to $78.7 million for the 26 weeks ended July 31, 2021, which was primarily driven by increased capital spending and the recent acquisition of Quiet Logistics. As a percentage of total net revenue, depreciation and amortization expense was 4.2% this year compared to 3.5% last year.
Debt Related Charges
Debt related charges of $60.1 million for the 26 weeks ended June 30, 2022 consists primarily of a $55.7 million induced conversion expense related to the Note Exchange, along with certain other costs related to actions we took to strengthen our capital structure.
Interest Expense, net
Interest expense, net decreased $9.4 million, to $8.0 million, for the 26 weeks ended July 30, 2022, compared to $17.4 million for the 26 weeks ended July 31, 2021. The decrease in expense was primarily attributable to the adoption of ASU 2020-06 which reduced non-cash interest expense related to amortization of the non-cash discount on our 2025 Notes, partially offset by $1.0 million of interest expense from borrowings under our Credit Facility.
Other Income, net
Other income, net was $6.3 million for the 26 weeks ended July 30, 2022, compared to $3.2 million for the 26 weeks ended July 31, 2021.
Provision for Income Taxes
The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 26 weeks ended July 30, 2022 was -82.5% compared to 24.5% for the 26 weeks ended July 31, 2021. The change in the effective tax rate, as compared to the prior period, is primarily due to the Note Exchange as a portion of the inducement charge was not deductible, lower excess tax benefits on share-based payments, and state legislative changes.
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Net (Loss) Income
Net (loss) income decreased $227.7 million, to a net loss of $10.7 million for the 26 weeks ended July 30, 2022, or (0.5%) as a percentage of total net revenue, compared to $217.0 million, or 9.7% as a percentage of total net revenue for the 26 weeks ended July 31, 2021.
Net (loss) income per share decreased to a net loss of $0.06 per diluted share, including $0.26 of debt related charges for the 26 weeks ended July 30, 2022, compared to net income of $1.04 per diluted share, including $0.03 of the amortization of the non-cash discount on the 2025 Notes for the 26 weeks ended July 31, 2021. The change in net (loss) income was attributable to the factors noted above.
International Operations
We have agreements with multiple third-party operators to expand our brands internationally. Our international licensing partners acquire the right to sell, promote, market, and/or distribute various categories of our products in a given geographic area and to source products from us. International licensees' rights include the right to own and operate retail stores and may include rights to sell in wholesale markets, shop-in-shop concessions and operate online marketplace businesses. As of July 30, 2022, our international licensing partners operated in more than 260 licensed retail stores and concessions, as well as wholesale markets, online brand sites, and online marketplaces in 26 countries.
As of July 30, 2022, we had 103 company-owned stores in Canada, 64 in Mexico, 17 in Hong Kong and 7 in Puerto Rico.
Liquidity and Capital Resources
Our uses of cash have historically been for working capital, the construction of new stores and remodeling of existing stores, information technology and e-commerce upgrades and investments, distribution center improvements and expansion, and the return of value to shareholders through the repurchase of common stock and the payment of dividends. Additionally, our uses of cash have included the development of the Aerie brand, investments in supply chain technology and omni-channel capabilities, and our international expansion efforts.
Historically, our uses of cash have been funded with cash flow from operations and existing cash on hand. We also maintain a Credit Facility that allows us to borrow up to $700 million, which will expire in June 2027. As of July 30, 2022, we had borrowings under the Credit Facility of $307.7 million. Additionally, approximately $69.6 million aggregate principal amount of the 2025 Notes remain outstanding at July 30, 2022.
As of July 30, 2022, we had approximately $98.2 million in cash and cash equivalents. We expect to be able to fund our current and long-term cash requirements through current cash holdings and available liquidity.
The following sets forth certain measures of our liquidity:
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July 30, |
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January 29, |
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July 31, |
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2022 |
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2022 |
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2021 |
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Working Capital (in thousands) |
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$ |
459,328 |
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$ |
554,053 |
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$ |
832,365 |
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Current Ratio |
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1.64 |
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1.66 |
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2.08 |
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Working capital decreased $94.7 million compared to January 29, 2022 and decreased $373.0 million compared to last year. The $373.0 million decrease in our working capital compared to July 31, 2021, is driven by a $725.8 million decrease in cash and short-term investments. This decrease is primarily related to our acquisition of Quiet Logistics and AirTerra in Fiscal 2021 totaling $358.1 million (net of cash acquired), as well as $200.0 million in share repurchases under our ASR Agreement and $136.1 million in cash paid to holders of the 2025 Notes pursuant to the Note Exchange. This decrease in working capital was partially offset by a $183.5 million increase in inventory, a $82.4 million decrease in accrued compensation and a $65.4 million increase in net accounts receivable.
Cash Flows (Used for) Provided by Operating Activities
Net cash used for operating activities totaled $105.3 million for the 26 weeks ended July 30, 2022, compared to net cash provided by operating activities of $121.9 million for the 26 weeks ended July 31, 2021. For both periods, our major source of cash from operations was merchandise sales and our primary outflow of cash from operations was for the payment of operational costs.
Cash Flows Used for Investing Activities
Net cash used for investing activities totaled $128.4 million for the 26 weeks ended July 30, 2022, compared to net cash used for investing activities of $140.4 million for the 26 weeks ended July 31, 2021. Investing activities for the 26 weeks
33
ended July 30, 2022 primarily consisted of $127.9 million of capital expenditures for property and equipment. Investing activities for the 26 weeks ended July 31, 2021 primarily consisted of $86.2 million of capital expenditures for property and equipment and $50.0 million of net short-term investment purchases.
Cash Flows Used for Financing Activities
Net cash used for financing activities totaled $102.1 million for the 26 weeks ended July 30, 2022, compared to net cash used for financing activities of $58.1 million for the 26 weeks ended July 31, 2021. Cash used for financing activities for the 26 weeks ended July 30, 2022 consisted primarily of $200.0 million used to repurchase the Company's common stock under the ASR Agreement, $136.1 million used for the principal paid in connection with the Note Exchange, $64.8 million used for cash dividends paid at a quarterly rate of $0.18 per share and $9.6 million used for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by $307.7 million of proceeds from borrowings under our Credit Facility.
Cash used for financing activities for the 26 weeks ended July 31, 2021 consisted primarily of $53.2 million for cash dividends paid at quarterly rates of $0.1375 and $0.18 per share for the 13 weeks ended May 2, 2021 and July 31, 2021, respectively, and $17.5 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by $13.1 million of proceeds from stock option exercises.
Credit Facility
In June 2022, we entered into the Credit Agreement, which provides senior secured asset-based revolving credit for loans and letters of credit up to $700 million pursuant to the Credit Facility, subject to customary borrowing base limitations. The Credit Facility expires on June 24, 2027.
All obligations under the Credit Facility are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by certain assets of the Company and certain subsidiaries.
As of July 30, 2022, the Company was in compliance with the terms of the Credit Agreement and had $307.7 million in borrowings and $7.9 million outstanding in stand-by letters of credit. No loans were outstanding under the Company's previous credit agreement as of July 31, 2021.
Capital Expenditures for Property and Equipment
Capital expenditures for the 26 weeks ended July 30, 2022 were $127.9 million, and included $85.7 million related to investments in our stores, including 48 new stores (11 American Eagle stores, 35 Aerie stand-alone stores (including 12 OFFLINE stand-alone stores), one Todd Snyder store, and one Unsubscribed store), and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology initiatives ($33.1 million), Quiet Platforms ($7.0 million) and other home office projects ($2.1 million).
For Fiscal 2022, we expect total capital expenditures to be approximately $250 million, related to the continued support of our expansion efforts, stores, information technology upgrades to support growth, and investments in e-commerce, as well as to support and enhance our supply chain. We expect to be able to fund our capital expenditures through current cash holdings and available liquidity.
Share Repurchases
During Fiscal 2019, our Board of Directors (“Board”) authorized the repurchase of 30.0 million shares under a share repurchase program.
On June 3, 2022, the Company entered into an ASR Agreement with JPMorgan Chase Bank (“JPM”) to repurchase an aggregate of $200.0 million of the Company’s common stock.
Pursuant to the terms of the ASR Agreement, on June 3, 2022, the Company paid to JPM $200.0 million in cash and received an initial delivery of 13.4 million shares of its common stock on June 3, 2022. At final settlement, on July 28, 2022, an additional 3.7 million shares were received. The cumulative repurchase under the ASR Agreement was 17.0 million shares repurchased at an average price per share of $11.75.
As of July 30, 2022, our total remaining share repurchase authorization was approximately 13.0 million shares.
During both the 26 weeks ended July 30, 2022 and July 31, 2021, we repurchased approximately 0.6 million shares from certain employees at market prices totaling $9.6 million and $17.5 million, respectively. These shares were repurchased for the payment of taxes, in connection with the vesting of share-based payments, as permitted under our equity incentive plans.
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The aforementioned repurchased shares have been recorded as treasury stock.
Dividends
During the 13 weeks ended July 30, 2022, our Board declared a quarterly cash dividend of $0.18 per share on June 8, 2022, which was paid on July 22, 2022.
The Company maintains the right to defer the record and payment dates of its dividends, depending upon, among other factors, the progression of the COVID-19 outbreak, business performance, and the macroeconomic environment. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation, and other relevant factors.
Subsequent to the 13 weeks ended, the Company announced that, given ongoing external uncertainties, in order to increase financial flexibility it is temporarily suspending its quarterly cash dividends.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the Notes to our Consolidated Financial Statements for the year ended January 29, 2022 contained in our Fiscal 2021 Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report. The application of our critical accounting policies and estimates may require our management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Our management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.
Financial Instruments
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•Level 1 — Quoted prices in active markets.
•Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly.
•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of July 30, 2022, we held certain assets that are required to be measured at fair value on a recurring basis. These include cash and cash equivalents.
In accordance with ASC 820, the following table represents the fair value hierarchy of our financial assets (cash equivalents) measured at fair value on a recurring basis as of July 30, 2022:
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Fair Value Measurements at July 30, 2022 |
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(In thousands) |
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Carrying Amount |
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Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
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Significant Other Observable Inputs (Level 2) |
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Significant Unobservable Inputs (Level 3) |
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Cash and cash equivalents: |
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Cash |
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$ |
98,111 |
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$ |
98,111 |
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$ |
— |
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$ |
— |
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Interest bearing deposits |
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|
103 |
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103 |
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— |
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— |
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Total cash and cash equivalents |
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$ |
98,214 |
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$ |
98,214 |
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$ |
— |
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$ |
— |
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Long-Term Debt
The fair value of the 2025 Notes is not required to be measured at fair value on a recurring basis. Upon issuance, the fair value of the 2025 Notes was measured using two approaches that consider market related conditions, including market benchmark rates and a secondary market quoted price, and is therefore within Level 2 of the fair value hierarchy.