BJ's Wholesale Club Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis is intended to promote an understanding of the results of operations and financial condition of the Company and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year 2023. The following discussion may contain forward-looking statements that reflect our plans, estimates and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Forward-Looking Statements" and in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year 2023. We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to "fiscal year 2024" relate to the 52 weeks ending February 1, 2025, and references herein to "fiscal year 2023" relate to the 53 weeks ended February 3, 2024. The first quarter of fiscal year 2024 ended on May 4, 2024, and the first quarter of fiscal year 2023 ended on April 29, 2023, and both include thirteen weeks. Overview BJ’s Wholesale Club is a leading operator of membership warehouse clubs concentrated primarily on the eastern half of the United States. We deliver significant value to our members, consistently offering 25% or more savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. The Company provides a curated assortment focused on groceries, fresh foods, general merchandise, gasoline, and other ancillary services to deliver a differentiated shopping experience that is further enhanced by our omnichannel capabilities. Additionally, the Company provides access to coupon books and promotions to deliver further value to our members. Since pioneering the warehouse club model in New England in 1984, we have grown our footprint to 244 large-format, high volume warehouse clubs and 176 gas stations spanning 20 states as of the date of this filing. In our core New England market, which has high population density and generates a disproportionate part of U.S. gross domestic product, we operate more than three times the number of clubs compared to the next largest warehouse club competitor. In addition to shopping in our clubs, members are able to shop when and how they want through our website, bjs.com, and our highly rated mobile app, which allows them to use our buy-online-pickup-in-club ("BOPIC") service, curbside delivery, same-day home delivery or traditional ship-to-home service, as well as through the DoorDash and Instacart marketplaces where members receive the same preferential pricing as in-club shoppers by linking their membership. We also offer Same-Day Select, which offers BJ’s members the ability to pay a one-time fee for either unlimited or twelve same-day grocery deliveries over a one-year period. Our goal is to offer our members significant value and a meaningful return in savings on their annual membership fee. We have over 7 million members p aying annual fees to gain access to savings on groceries and general merchandise and services. The annual membership fee for our Club Card membership is generally $55, and the annual membership fee for our Club+ membership, which offers additional value-enhancing features, is generally $110. We believe that members can save over ten times their $55 Club Card membership fee versus what they would otherwise pay at traditional supermarket competitors when they spend $2,500 or more per year at BJ’s on manufacturer-branded groceries. In addition to providing significant savings on a representative basket of manufacturer-branded groceries, we accept all manufacturer coupons and also carry our own exclusive brands that enable members to save on price without compromising on quality. Our two private label brands, Wellsley Farms® and Berkley Jensen®, represented approximately $4.1 billion in annual sales for fiscal year 2023. Our customers recognize the relevance of our value proposition across economic environments, as demonstrated by over 25 consecutive years of membership fee income growth. Our membership fee income was $429.5 million for the trailing twelve-months ended May 4, 2024. Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales, operating income, and cash flows from operations in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday season, respectively. Our quarterly results have been, and will continue to be, affected by the timing of new club openings and their associated pre-opening expenses. As a result of these factors, our financial results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a full fiscal year. Factors Affecting Our Business Overall economic trends 17 The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our clubs, while economic weakness, which generally results in a reduction of customer spending, may have a different or more extreme effect on spending at our clubs. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, changes to the Supplemental Nutrition Assistance Program (SNAP), government stimulus programs, tax legislation, business conditions, changes in the housing market, the availability of credit, interest rates and inflation, tax rates and fuel and energy costs. In addition, unemployment rates and benefits may cause us to experience higher labor costs. Size and loyalty of membership base The membership model is a critical element of our business. Members drive our results of operations through their membership fee income and their purchases. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We have grown our membership fee income each year for over 25 consecutive years and the quality of our membership mix is strong as evidenced by our higher tier penetration growth in the first thirteen weeks of fiscal year 2024. Our tenured membership renewal rate, a key indicator of membership engagement, satisfaction and loyalty, was 90% at the end of fiscal year 2023. Effective sourcing and distribution of products and consumer demands Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. Further, our ability to maintain our appeal to existing customers and attract new customers primarily depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences. As a result, our level of net sales could be adversely affected due to constraints in our supply chain, including our inability to procure and stock sufficient quantities of some merchandise in a manner that is able to match market demand from our customers. Infrastructure investment Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that expanding our club footprint, bringing substantially all of our end-to-end perishable supply chain in-house, enhancing our information systems, including our distribution center and transportation management systems, and investing in hardware, software, and digitally enabled shopping capabilities for convenience, such as BOPIC, ExpressPay, curbside pickup, and same day home delivery will enable us to replicate our profitable club format and provide a differentiated shopping experience. We expect these infrastructure investments to support our successful operating model across our club operations. Gasoline prices The market price of gasoline impacts our net sales and comparable club sales, and large fluctuations in the price of gasoline may produce a short-term impact on our margins. Retail gasoline prices are driven by daily crude oil and wholesale commodity market changes and are volatile, as they are influenced by factors that include changes in demand and supply of oil and refined products, global geopolitical events, regional market conditions, and supply interruptions caused by severe weather conditions. Typically, the change in crude oil prices impacts the purchase price of wholesale petroleum fuel products, which in turn impacts retail gasoline prices at the pump. During times when prices are particularly volatile, differences in pricing and procurement strategies between the Company and its competitors may lead to temporary margin contraction or expansion, depending on whether prices are rising or falling, and this impact could affect our overall results for a fiscal quarter. In addition, the relative level of gasoline prices from period to period may lead to differences in our net sales between those periods. Further, because we generally attempt to maintain a fairly stable gross profit per gallon, this variance in net sales, which may be substantial, may or may not have a significant impact on our operating income . Inflation and deflation trends Our financial results can be directly impacted by substantial changes in product costs due to commodity cost fluctuations or general inflation, disinflation, or deflation, which could lead to a reduction in our sales, as well as greater margin pressure, as costs may not be able to be passed on to consumers. Changes in commodity prices and changes in inflation rates have impacted several categories of our business. Inflationary volatility can be attributed to macro economic factors including supply chain disruptions, government stimulus, interest rates, and other factors. In response to general inflationary volatility, we seek to 18 minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary. Results of Operations The following table summarizes key components of our results of operations for the periods indicated: Statement of Operations Data Thirteen Weeks Ended (dollars in thousands, except per share amounts) May 4, 2024 April 29, 2023 Net sales $ 4,807,129 $ 4,620,620 Membership fee income 111,390 102,522 Total revenues 4,918,519 4,723,142 Cost of sales 4,035,129 3,843,150 Selling, general and administrative expenses 721,771 689,328 Pre-opening expenses 864 3,894 Operating income 160,755 186,770 Interest expense, net 13,951 14,690 Income from continuing operations before income taxes 146,804 172,080 Provision for income taxes 35,785 56,092 Income from continuing operations 111,019 115,988 Income from discontinued operations, net of income taxes — 89 Net income $ 111,019 $ 116,077 Weighted-average shares outstanding—basic 132,397 133,312 Basic EPS (a) $ 0.84 $ 0.87 Weighted-average shares outstanding—diluted 134,111 135,902 Diluted EPS (a) $ 0.83 $ 0.85 Operational Data: Total clubs at end of period 244 237 Comparable club sales (b) 1.6% 2.0% Merchandise comparable club sales (b) 0.6% 5.7% Adjusted net income (b) $ 113,408 $ 115,646 Adjusted EPS (b) 0.85 0.85 Adjusted EBITDA (b) (c) 236,386 251,538 Net cash provided by operating activities 200,847 119,132 Adjusted free cash flow (b) 95,106 27,048 (a) Basic and diluted EPS are calculated using net income. (b) See "Non-GAAP Financial Measures" and "Liquidity and Capital Resources" within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for definitions. (c) Adjusted EBITDA for the thirteen weeks ended April 29, 2023 has been recast to exclude adjustments for pre-opening expenses and non-cash rent expense to conform to the current period definition. Net Sales Net sales are derived from direct retail sales to our customers, net of merchandise returns and discounts. Fluctuations in net sales are impacted by opening new clubs and gas stations and comparable club sales. Net sales for the first quarter of fiscal year 2024 were $4.8 billion, a 4.0% increase from net sales reported for the first quarter of fiscal year 2023 of $4.6 billion. The increase was due primarily to growth in units sold, particularly in perishables and the grocery division, as well as gallons sold at our gas stations. 19 Comparable Club Sales and Merchandise Comparable Club Sales We believe net sales is an important driver of our profitability, particularly comparable club sales. Comparable club sales, a key performance indicator, also known as same-store sales in the retail industry, includes all clubs that were open for at least 13 months at the beginning of the period and were in operation during the entirety of both periods being compared, including relocated clubs and expansions. Comparable club sales allow us to evaluate how our club base is performing by measuring the change in period-over-period net sales in clubs that have been open for the applicable period. Various factors affect comparable club sales, including customer preferences and trends, product sourcing, promotional offerings and pricing, shopping frequency from new and existing members and the amount they spend on each visit, weather and holiday shopping period timing and length. Sales comparisons can be influenced by certain factors that are beyond our control such as changes in the cost of gasoline and macro-economic factors such as inflation. The higher comparable club sales, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Thirteen Weeks Ended May 4, 2024 Comparable club sales 1.6 % Less: impact from gasoline sales 1.0 % Merchandise comparable club sales 0.6 % Merchandise comparable club sales represents comparable club sales from all merchandise other than our gasoline operations for the applicable period. Merchandise comparable club sales increased 0.6% in the first quarter of fiscal year 2024 compared to the first quarter of fiscal year 2023, primarily driven by an increase in sales of groceries of 1.4%, partially offset by a decrease in sales of general merchandise and services of approximately 4.8%. In the grocery division, growth was led by fresh produce, dairy, nutrition, fresh beef, vitamins, paper, and household cleaning categories when compared to the first quarter of fiscal year 2023, partially offset by a decrease in sales of beverages and snacks. General merchandise and services decreased in the first quarter of fiscal year 2024 compared to the first quarter of fiscal year 2023, primarily driven by the impact of our co-brand credit card economics as we cycle past the anniversary of the rebranded program launch in the first quarter of fiscal year 2023, as well as lower consumer spending in seasonal categories. The overall decrease was partially offset by increased demand for certain general merchandise categories, including home merchandise, consumer electronics, and apparel. The impact of gasoline sales is a result of an increase in comparable gallons sold in the first quarter of fiscal 2024 as compared to the first quarter of fiscal year 2023, partially offset by a decline in retail prices. Membership fee income We continue to see growth in the size of our membership base and continued quality. Membership fee income was $111.4 million in the first quarter of fiscal year 2024 compared to $102.5 million in the first quarter of fiscal year 2023, an 8.6% increase. The increase was primarily driven by strength in membership acquisition and retention across both new and existing clubs. In addition to our new club opening in the first quarter of fiscal year 2024, we also continued to add new members from the five new clubs that opened in the fourth quarter of fiscal year 2023. Cost of sales Cost of sales consists primarily of the direct cost of merchandise and gasoline sold at our clubs, including costs associated with operating our distribution centers, including payroll, payroll benefits, occupancy costs, and depreciation; freight expenses associated with moving merchandise from vendors to our distribution centers and from distribution centers to our clubs; and vendor allowances, rebates, and cash discounts. 20 Cost of sales was $4.0 billion, or 83.9% of net sales, in the first quarter of fiscal year 2024 compared to $3.8 billion, or 83.2% of net sales, in the first quarter of fiscal year 2023. Merchandise gross margin rate, which excludes gasoline sales and membership fee income, decreased 50 basis points compared to the prior year period, primarily driven by the impact of our co-brand credit card economics as we cycle past the anniversary of the rebranded program launch in the first quarter of fiscal year 2023. Selling, general and administrative expenses SG&A consists of various expenses related to supporting and facilitating the sale of merchandise in our clubs, including the following: payroll and payroll benefits for team members; rent, depreciation, and other occupancy costs for retail and corporate locations; share-based compensation, advertising expenses; tender costs, including credit and debit card fees; amortization of intangible assets; and consulting, legal, insurance, restructuring charges, and other professional services expenses. SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. We expect that our SG&A will increase in future periods due to investments in comparable club sales growth and our expanding footprint as we open new clubs. In addition, any future increases in wages or stock-based grants or modifications will increase our SG&A. SG&A increased by 4.7% to $721.8 million in the first quarter of fiscal year 2024 from $689.3 million in the first quarter of fiscal year 2023. The increase in SG&A was primarily driven by increased labor and occupancy costs as a result of new club and gas station openings, as well as other continued investments to drive strategic priorities, such as the restructuring of certain corporate functions. Additionally, an increase in the number of owned clubs has resulted in increased depreciation expense. We remain focused on investing in member engagement, marketing and digital strategies. Pre-opening expenses Pre-opening expenses include startup costs for new clubs and costs for relocated clubs. Expenses will vary based on the number of club openings, geography of the club, whether the club is owned or leased, and timing of the opening relative to our period end. Pre-opening expenses were $0.9 million in the first quarter of fiscal year 2024 compared to $3.9 million in the first quarter of fiscal year 2023. Pre-opening expenses decreased due to timing of spend and the number of club openings year-over-year. Interest expense, net Interest expense, net was $14.0 million in the first quarter of fiscal year 2024 compared to $14.7 million in the first quarter of fiscal year 2023. The decrease was primarily due to a reduction in outstanding borrowings as well as fluctuations in interest rates year-over-year. Provision for income taxes Income tax expense decreased to $35.8 million in the first quarter of fiscal 2024 compared to $56.1 million in the first quarter of fiscal 2023. The decrease in income tax expense is primarily driven by higher tax benefits from stock-based compensation. Non-GAAP Financial Measures The accompanying Condensed Consolidated Financial Statements, including the related notes, are presented in accordance with GAAP. In addition to relevant GAAP measures we also provide non-GAAP measures, including adjusted EBITDA, comparable club sales, adjusted free cash flow, adjusted net income and adjusted net income per diluted share ("adjusted EPS") because management believes these metrics are useful to investors and analysts by excluding items that we do not believe are indicative of our core operating performance. These measures are customary for our industry and commonly used by competitors. These non-GAAP financial measures should not be reviewed in isolation or considered as an alternative to any other performance measure derived in accordance with GAAP and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, adjusted EBITDA, comparable club sales, adjusted free cash flow, adjusted net income and adjusted EPS share may not be comparable to similarly titled measures used by other 21 companies in our industry or across different industries. See Results of Operations above for our comparable club sales and merchandise comparable club sales results. Adjusted free cash flow is discussed within the Liquidity and Capital Resources section below. Adjusted Net Income The adjusted net income and adjusted EPS metrics are important measures used by management to compare the performance of core operating results between periods. We define adjusted net income as net income as reported, adjusted for non-recurring, infrequent, or unusual charges, including restructuring charges, and other adjustments that the Company believes appropriate, net of the tax impact of such adjustments. We define adjusted EPS as adjusted net income divided by the weighted-average diluted shares outstanding. We believe adjusted net income and adjusted EPS are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net income and net income per diluted share because adjusted items are not the result of our normal operations. Thirteen Weeks Ended (in thousands, except per share amounts) May 4, 2024 April 29, 2023 Net income as reported $ 111,019 $ 116,077 Adjustments: Restructuring (a) 3,307 — Other adjustments (b) — (601) Tax impact of adjustments to net income (c) (918) 170 Adjusted net income $ 113,408 $ 115,646 Weighted-average shares outstanding—diluted 134,111 135,902 Adjusted EPS (d) $ 0.85 $ 0.85 (a) Represents charges related to the restructuring of certain corporate functions, including costs for severance, retention, outplacement, consulting fees, and other third-party fees. (b) Other non-cash items related to the reclassification into earnings of accumulated other comprehensive income / loss associated with the de-designation of hedge accounting and other adjustments. (c) Represents the tax effect of the above adjustments at a statutory tax rate of approximately 28%. (d) Adjusted EPS is measured using weighted-average diluted shares outstanding. Adjusted EBITDA Adjusted EBITDA is defined as income from continuing operations before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including stock-based compensation expense; restructuring and other adjustments. 22 The following is a reconciliation of our income from continuing operations to Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for the periods presented: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Income from continuing operations $ 111,019 $ 115,988 Interest expense, net 13,951 14,690 Provision for income taxes 35,785 56,092 Depreciation and amortization 63,422 54,190 Stock-based compensation expense 8,590 10,007 Restructuring (a) 3,307 — Other adjustments (b) 312 571 Adjusted EBITDA (c) $ 236,386 $ 251,538 Adjusted EBITDA as a percentage of net sales 4.9 % 5.4 % (a) Represents charges related to the restructuring of certain corporate functions, including costs for severance, retention, outplacement, consulting fees, and other third-party fees. (b) Other non-cash items, including non-cash accretion on asset retirement obligations and obligations associated with our post-retirement medical plan. (c) Adjusted EBITDA for the thirteen weeks ended April 29, 2023 has been recast to exclude adjustments for pre-opening expenses and non-cash rent to conform to the current period definition. Liquidity and Capital Resources Our primary sources of liquidity are cash flows generated from club operations and borrowings from our ABL Revolving Facility. As of May 4, 2024, cash and cash equivalents totaled $35.1 million and we had $911.6 million of unused capacity under our ABL Revolving Facility. Our principal liquidity needs for the next twelve months and beyond are to fund normal recurring operational expenses and anticipated capital expenditures; fund possible acquisitions; fund share repurchases and meet debt service and principal repayment obligations. We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under our ABL Revolving Facility, will be sufficient to finance our operations for at least the next twelve months. In the first three months of fiscal year 2024, we repurchased 405,110 shares under the 2021 Repurchase Program for a total purchase price of $30.2 million. We do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our results of operations or financial position. We do, however, enter into letters of credit and purchase obligations in the normal course of our operations. Summary of Cash Flows A summary of our cash flows from operating, investing and financing activities is presented in the following table: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Net cash provided by operating activities $ 200,847 $ 119,132 Net cash used in investing activities (105,741) (92,084) Net cash used in financing activities (96,061) (37,576) Net decrease in cash and cash equivalents $ (955) $ (10,528) Net Operating Cash Flows Net cash provided by operating activities was $200.8 million for the first three months of fiscal year 2024 compared to $119.1 million for the first three months of fiscal year 2023. The $81.7 million increase was primarily due to fluctuations in working capital including $75.0 million related to merchandise inventories as well as $24.3 million related to accrued expenses, primarily driven by the change in accrued incentive compensation as a result of differences in the expected achievement from 23 period-to-period. The increase in net operating cash flows was partially offset by $18.4 million related to accounts receivable due to timing of vendor and customer cash receipts, as well as a $5.1 million decrease in net income. Our net cash from operating activities can fluctuate from period to period due to several factors, including: the timing and mix of sales, which are typically higher in the second and fourth quarters due to seasonality; the timing of inventory purchases as the Company prepares for holiday seasons; lease-related activity; and income tax and other payments. Net Investing Cash Flows Net cash used in investing activities was $105.7 million for the first three months of fiscal year 2024, compared to $92.1 million for the first three months of fiscal year 2023. This fluctuation is driven by an increase in capital spending of $13.7 million due to an increase in the number of owned clubs. Net Financing Cash Flows Net cash used in financing activities for the first three months of fiscal year 2024 was $96.1 million, compared to $37.6 million for the first three months of fiscal year 2023. The increase in cash used is primarily due to a $44.0 million increase in net payments on our ABL Revolving Facility due to our increased borrowings as well as an increase of $14.9 million for the acquisition of treasury stock compared to the prior year period, partially offset by an increase in net cash received from stock option exercises of $4.2 million. Adjusted Free Cash Flow We present adjusted free cash flow because we use it to report to our board of directors and we believe it assists investors and analysts in evaluating our liquidity. Adjusted free cash flow should not be considered as an alternative to cash flows from operations as a liquidity measure. We define adjusted free cash flow as net cash provided by operating activities less additions to property and equipment, net of disposals, plus proceeds from sale-leaseback transactions. The following is a reconciliation of our net cash provided by operating activities to adjusted free cash flow for the periods presented: Thirteen Weeks Ended (in thousands) May 4, 2024 April 29, 2023 Net cash provided by operating activities $ 200,847 $ 119,132 Less: Additions to property and equipment, net of disposals (105,741) (92,084) Plus: Proceeds from sale-leaseback transactions — — Adjusted free cash flow $ 95,106 $ 27,048 Adjusted free cash flow increased to $95.1 million for the first quarter of fiscal year 2024 compared to $27.0 million for the first quarter of fiscal year 2023. The increase is primarily the result of increased cash flows from operating activities due to fluctuations in working capital, partially offset by an increase in capital spending compared to the prior year. Debt and Borrowing Capacity Our primary sources of borrowing capacity are the ABL Revolving Facility and the First Lien Term Loan, which are further discussed in Note 4 , "Debt and Credit Arrangements," included in this Quarterly Report on Form 10-Q. On July 28, 2022, the Company entered into the ABL Revolving Facility with an aggregate ABL Revolving Commitment of $1.2 billion pursuant to that certain credit agreement with Bank of America, N.A., as administrative agent and collateral agent, and other lenders party thereto. The maturity date of the ABL Revolving Facility is July 28, 2027. On October 12, 2023, the Company amended the First Lien Term Loan to extend the maturity date from February 3, 2027 to February 3, 2029 and reduce applicable margin in respect of the interest rate, effective immediately, from SOFR plus 275 basis points per annum to SOFR plus 200 basis points per annum. Prior to the amendment, the Company repaid $50.0 million of the principal amount outstanding under the First Lien Term Loan. 24 At May 4, 2024, there was $270.0 million outstanding in loans under the ABL Revolving Facility and $18.4 million in outstanding letters of credit. The interest rate on the revolving credit facility was 6.41% and unused capacity was $911.6 million. At May 4, 2024, the interest rate for the First Lien Term Loan was 7.32% and there was $400.0 million outstanding. Material Cash Commitments Our material cash commitments consist primarily of debt obligations, interest payments, leases, and purchase orders for merchandise inventory. These material cash commitments impact our short-term and long-term liquidity and capital needs. As of May 4, 2024, other than those items related to the ordinary course of operations of our business such as inventory purchases, new leases and lease amendments, there were no material changes to our material cash commitments from those described in our Annual Report on Form 10-K for the fiscal year 2023. Critical Accounting Policies and Use of Estimates This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. There were no material changes in critical accounting policies and estimates during the period covered by this Quarterly Report on Form 10-Q. Refer to Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates," in our Annual Report on Form 10-K for the fiscal year 2023 for a complete list of our Critical Accounting Policies and Estimates. Recent Accounting Pronouncements The Company’s accounting policies are set forth in the audited financial statements included in the Company’s Annual Report on Form 10-K for fiscal year 2023. There have been no material changes to these accounting policies and no accounting pronouncements adopted that had a material impact on the Company’s financial statements. In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . ASU 2023-09 will require public companies to disclose, on an annual basis, a tabular reconciliation, using both percentages and amounts, broken out into specific categories with certain reconciling items at or above 5% of the statutory tax, further broken out by nature and/or jurisdiction. ASU 2023-09 requires all entities to disclose, on an annual basis, the amount of income taxes paid (net of refunds received), disaggregated between federal, state/local and foreign, and amounts paid to an individual jurisdiction when 5% or more of the total income taxes paid. The new standard is effective for fiscal years beginning after December 15, 2024, on a prospective basis. Early adoption and retrospective application are permitted. The Company is currently evaluating the impact the adoption of this new pronouncement will have on its financial statement disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which expands the segment reporting disclosures and requires disclosure of segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss, amounts and description of its composition for other segment items, and interim disclosure of a reportable segment’s profit or loss and assets. Additionally, the amendments require the disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing performance and deciding how to allocate resources. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new pronouncement will have on its financial statement disclosures.