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Item 7. Management’s Discussion and Analysis

2023-03-15 compared with 2022-03-23 · 79 added, 100 removed, 149 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our MD&A includes the following sections:

The following discussion provides an analysis of the Company’s financial condition and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes included in this report.

The discussion in this Form 10-K generally focuses on fiscal 2022 compared to fiscal 2021.

A discussion of our results of operations and changes in financial condition for fiscal 2021 compared to fiscal 2020 has been excluded from this report, but can be found in Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for fiscal 2021.

Executive Summary

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Liquidity and Capital Resources

• Critical Accounting Policies

Critical Accounting Estimates

Fiscal 2022 Form 10-K 25

EXECUTIVE SUMMARY

The following table presents highlights of our annual financial performance:

The following table presents highlights of our annual financial results:

dollars in millions, except per share data Fiscal Fiscal Fiscal

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Payments for businesses acquired, net — 421 7,780

Proceeds from long-term debt, net of discounts and premiums 2,979 7,933 3,420

Proceeds from long-term debt, net of discounts 6,942 2,979 7,933

Repayments of long-term debt 2,491 1,532 2,872

Repurchases of common stock 14,809 791 6,965

We reported net sales of $157.4 billion in fiscal 2022.

Net earnings were $17.1 billion, or $16.69 per diluted share.

We opened five new stores in the U.S.

and two new stores in Mexico during fiscal 2021, resulting in a total store count of 2,317 at January 30, 2022, which includes 14 stores in the U.S.

from a small acquisition completed during the second quarter of fiscal 2021.

At the end of fiscal 2021, a total of 311 of our stores, or 13.4%, were located in Canada and Mexico.

During fiscal 2022, we opened two new stores in the U.S.

and four new stores in Mexico, and we lost one store in the U.S.

due to a fire, resulting in a total store count of 2,322 at January 29, 2023.

At the end of fiscal 2022, a total of 315 of our stores, or 13.6% of our total store count, were located in Canada and Mexico.

Total sales per retail square foot were $627.17 in fiscal 2022.

Our inventory turnover ratio was 4.2 times at the end of fiscal 2022, compared to 5.2 times at the end of fiscal 2021.

The decrease in our inventory turnover ratio was primarily driven by an increase in average inventory levels during fiscal 2021 to support the demand environment.

We generated $16.6 billion of cash flow from operations, issued $3.0 billion of long-term debt, net of discounts, and received $1.0 billion of net proceeds from short-term debt during fiscal 2021.

This cash flow, together with cash on hand, was used to fund cash payments of $14.8 billion for share repurchases, pay $7.0 billion of dividends, fund $2.6 billion in capital expenditures, and repay an aggregate of $1.5 billion of long-term debt.

The decrease in our inventory turnover ratio was driven by an increase in average inventory levels during fiscal 2022 resulting from strategic investments to promote higher in-stock levels and pull forward merchandise in response to ongoing global supply chain disruption, as well as continued investment in our new supply chain facilities and carryover of some spring seasonal inventory.

We generated $14.6 billion of cash flow from operations and issued $6.9 billion of long-term debt, net of discounts, during fiscal 2022.

This cash flow, together with cash on hand, was used to fund cash payments of $7.8 billion for dividends and $6.7 billion for share repurchases.

In addition, we repaid $2.5 billion of long-term debt and $1.0 billion of net short-term debt and funded $3.1 billion in capital expenditures during fiscal 2022.

In February 2023, we announced a 10% increase in our quarterly cash dividend to $2.09 per share.

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See the Non-GAAP Financial Measures section below for our definition and calculation of ROIC, as well as a reconciliation of NOPAT, a non-GAAP financial measure, to net earnings (the most comparable GAAP financial measure).

Fiscal 2022 Form 10-K 26

RESULTS OF OPERATIONS

The tables and discussion below should be read in conjunction with our consolidated financial statements and related notes included in this report.

The following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings:

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Interest and other (income) expense:

Interest and investment income (44) — (47) — (73) (0.1)

Interest income and other, net (55) — (44) — (47) —

Interest expense 1,617 1.0 1,347 0.9 1,347 1.0

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Net sales for fiscal 2022 increased $6.2 billion, or 4.1%, to $157.4 billion .

The increase in net sales for fiscal 2021 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket, as well as sales from HD Supply, which was acquired in the fourth quarter of fiscal 2020.

In fiscal 2021, we saw continued elevated home improvement demand, which began at the end of the first quarter of fiscal 2020, with strong performance across our departments as customers continued to focus on home improvement projects and repairs.

A weaker U.S.

dollar positively impacted sales growth by $760 million in fiscal 2021.

Online sales, which consist of sales generated online through our websites for products picked up in our stores or delivered to customer locations, represented 13.7% of net sales and grew by 9.4% during fiscal 2021 compared to fiscal 2020.

The increase in online sales in fiscal 2021 was driven by customers continuing to leverage our digital platforms for their shopping needs.

The increase in net s ales for fiscal 2022 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket, partially offset by a decrease in comparable customer transactions.

A stronger U.S.

dollar negatively impacted net sales by $339 million in fiscal 2022.

Fiscal 2022 Form 10-K 27

Online sales, which consist of sales generated online through our websites and mobile applications for products picked up at our stores or delivered to customer locations, represented 14.2% of net sales and grew by 7.4% during fiscal 2022 compared to fiscal 2021.

The increase in online sales in fiscal 2022 was a result of customers continuing to leverage our digital platforms and reflects our ongoing investments to enhance these platforms and related fulfillment capabilities, which support our interconnected retail strategy.

Comparable Sales.

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Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.

Total comparable sales increased 11.4% in fiscal 2021, reflecting an 11.7% increase in comparable average ticket and nearly flat comparable customer transactions when compared to fiscal 2020.

The increase in comparable sales reflected a number of factors, including strong home improvement demand and benefits from our strategic efforts to drive an enhanced interconnected experience in both the physical and digital worlds, as well as inflation.

The increase in comparable average ticket was primarily driven by inflation, an increase in big-ticket transactions, elevated project demand, and strong demand for new and innovative products.

During fiscal 2021, all of our merchandising departments posted positive comparable sales and 10 of our 14 merchandising departments posted double-digit positive comparable sales led by Kitchen and Bath and Lumber when compared to fiscal 2020.

Our Outdoor Garden, Hardware, Indoor Garden, and Paint departments had single-digit positive comparable sales when compared to fiscal 2020.

Gross Profit.

Total comparab le sales increased 3.1% in fiscal 2022, reflecting an 8.8% increase in com parable average ticket, partially offset by a 5.4% decrease in comparable customer transactions compared to fiscal 2021.

The increase in comparable average ticket was primarily driven by inflation, as well as demand for new and innovative products.

The decrease in comparable customer transactions reflects the impact of macroeconomic factors during fiscal 2022, including indications of price sensitivity to the broader inflationary environment and a gradual shift in consumer spending from goods back to services, resulting in transactions trending towards fiscal 2019, pre-COVID-19 pandemic levels.

For fiscal 2022, 10 of our 14 merchandising departments posted positive comparable sales, led by Building Materials, P lumbing, Millwork, Paint, Hardware, and Kitchen and Bath, which posted comparable sales above the Company average.

Our Indoor Garden, Outdoor Garden, Appliances, and Flooring departments posted negative comparable sales.

Gross profit increased $1.9 billion, or 3.8%, to $52.8 billion in fiscal 2022.

Gross profit as a percent of net sales, or gross profit margin, was 33.5% in fiscal 2022 compared to 33.6% in fiscal 2021.

The decrease in gross profit margin reflected pressure from product mix, investments in our supply chain network, and higher product and transportation costs offset by the benefit from higher retail prices.

The decrease in gross profit margin was primarily driven by higher product and transportation costs, pressure from shrink during the second half of the year, and investments in our supply chain network, offset by the benefit from higher retail prices, along with favorable product mix.

Operating Expenses

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Selling, General & Administrative.

SG&A increased $1.0 billion, or 3.9%, to $25.4 billion in fiscal 2021.

As a percent of net sales, SG&A was 16.8% for fiscal 2021 compared to 18.5% for fiscal 2020.

The decrease in SG&A as a percent of net sales for fiscal 2021 was primarily driven by leverage resulting from a positive comparable sales environment along with cycling total COVID-19-related expenses of $2.1 billion and transaction-related expenses associated with the acquisition of HD Supply of $110 million incurred during fiscal 2020.

These benefits were partially offset by an increase in hourly payroll-related costs in fiscal 2021, primarily driven by wage investments we made in the latter part of fiscal 2020 and throughout fiscal 2021.

Total COVID-19-related expenses incurred during fiscal 2021 were $262 million.

SG&A increased $878 million, or 3.5%, to $26.3 billion in fiscal 2022.

As a percent of net sales, SG&A was 16.7% in fiscal 2022 compared to 16.8% in fiscal 2021, primarily reflecting leverage from a positive comparable sales environment and lower incentive compensation, partially offset by wage investments for hourly associates and increased operational costs, including planned investmen ts designed to drive efficiencies in our stores .

Depreciation and Amortization.

Depreciation and amortization increased $258 million, or 12.1%, to $2.4 billion in fiscal 2021.

As a percent of net sales, depreciation and amortization was 1.6% for both fiscal 2021 and fiscal 2020, primarily reflecting leverage resulting from a positive comparable sales environment, offset by increased depreciation expense from strategic investments in the business as well as higher intangible asset amortization expense.

Depreciation and amortiz ation increased $69 million, or 2.9%, to $2.5 billion in fiscal 2022.

As a percent of net sales, depreciation and amortization was 1.6% in both fiscal 2022 and fiscal 2021 , reflecting leverage from a positive comparable sales environment, offset by increased depreciation expense from strategic investments in the business.

Interest and Other, net

Interest and other, net, was $1.3 billion for both fiscal 2021 and fiscal 2020.

Interest and other, net, as a percent of net sales was 0.9% for fiscal 2021 compared to 1.0% for fiscal 2020, primarily reflecting leverage resulting from a positive comparable sales environment.

Interest and other, net increased $259 million, or 19.9%, to $1.6 billion in fiscal 2022.

As a percent of net sales, interest and other, net, was 1.0% in fiscal 2022 compared to 0.9% in fiscal 2021 , primarily reflecting higher interest expense due to higher debt balances and increased variable rate interest on floating rate debt resulting from interest rate swaps, partially offset by leverage from a positive comparable sales environment.

Provision for Income Taxes

Our combined effective income tax rate was 24.4% for fiscal 2021 compared to 24.2% for fiscal 2020.

Our combined effective income tax rate was 23.9% in fiscal 2022 compared to 24.4% in fiscal 2021.

The decrease in our effective income tax rate in fiscal 2022 was driven by certain discrete tax benefits recognized in fiscal 2022.

Fiscal 2022 Form 10-K 28

Diluted Earnings per Share

Diluted earnings per share were $15.53 for fiscal 2021 compared to $11.94 for fiscal 2020.

The increase in diluted earnings per share for fiscal 2021 was primarily driven by the factors discussed above, as well as share repurchases.

Fiscal 2020 Compared to Fiscal 2019

For a comparison of our results of operations for fiscal 2020 to fiscal 2019, see “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of our Form 10-K for fiscal 2020.

Diluted earnings per share were $16.69 in fiscal 2022 compared to $15.53 in fiscal 2021.

The increase in diluted earnings per share for fiscal 2022 was primarily driven by higher net earnings during fiscal 2022, as well as lower diluted shares due to share repurchases.

NON-GAAP FINANCIAL MEASURES

To provide clarity about our operating performance, we supplement our reporting with certain non-GAAP financial measures.

To provide clarity on our operating performance, we supplement our reporting with certain non-GAAP financial measures.

However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures.

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Average debt and equity $ 41,055 $ 38,946 $ 33,964

$ 38,946 $ 33,964 $ 26,686

ROIC 44.6 % 44.7 % 40.8 %

(1) Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months.

(2) The beginning balance of equity for fiscal 2019 was adjusted to reflect an immaterial opening balance sheet adjustment due to the adoption of Accounting Standards Codification Topic 842, Leases, in fiscal 2019.

LIQUIDITY AND CAPITAL RESOURCES

At January 30, 2022, we had $2.3 billion in cash and cash equivalents, of which $1.3 billion was held by our foreign subsidiaries.

We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper programs, and access to the long-term debt capital markets should be sufficient not only for our operating requirements but also to enable us to invest in the business through capital expenditures, fund dividend payments, fund any share repurchases, make any required debt payments, and satisfy other contractual obligations through the next several fiscal years.

At January 29, 2023, we had $2.8 billion in cash and cash equivalents, of which $825 million was held by our foreign subsidiaries.

We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper program, and access to the long-term debt capital markets should be sufficient not only for our operating requirements, any required debt payments, and satisfaction of other contractual obligations, but also to enable us to invest in the business, fund dividend payments, and fund any share repurchases through the next several fiscal years.

In addition, we believe we have the ability to obtain alternative sources of financing, if necessary.

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These obligations primarily include long-term debt and related interest payments, operating and finance lease obligations, and purchase obligations.

See below for additional details regarding these material cash requirements.

In addition to our cash requirements, we follow a disciplined approach to capital allocation.

This approach first prioritizes investing in the business, with the intent of then returning excess cash to shareholders in the form of dividends and share repurchases.

For fiscal 2022, we plan to invest approximately $3 billion back into our business in the form of capital expenditures, in line with our expectation of approximately two percent of net sales on an annual basis, compared to $2.6 billion in fiscal 2021.

This approach first prioritizes investing in the business, followed by paying dividends, with the intent of then returning excess cash to shareholders in the form of share repurchases.

For fiscal 2023, we plan to invest approximately $3 billion back into our business in the form of capital expenditures, in line with our expectation of approximately two percent of net sales on an annual basis.

However, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate.

Capital expenditures were $3.1 billion in fiscal 2022.

Fiscal 2022 Form 10-K 29

During fiscal 2022, we paid cash dividends of $7.8 billion to shareholders.

In February 2022, we also announced a 15% increase in our quarterly cash dividend from $1.65 to $1.90 per share.

In February 2023, we announced a 10% increase in our quarterly cash dividend from $1.90 to $2.09 per share.

We intend to pay a dividend in the future;

however, any future dividend is subject to declaration by the Board of Directors based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.

In May 2021, our Board of Directors approved a $20.0 billion share repurchase authorization, of which $9.6 billion remained available as of January 30, 2022.

This new authorization replaced the previous authorization of $15.0 billion, which was approved in February 2019, and does not have a prescribed expiration date.

In August 2022, our Board of Directors approved a $15.0 billion share repurchase authorization that replaced the previous authorization of $20.0 billion, which was approved in May 2021.

This new authorization does not have a prescribed expiration date.

As of January 29, 2023, approximately $12.5 billion of the $15.0 billion share repurchase authorization remained available.

During fiscal 2022, we had cash payments of $6.7 billion for repurchases of our common stock through open market purchases.

The amount and continuation of our share repurchases will be influenced by the evolving economic environment and business conditions.

At January 30, 2022, we had commercial paper programs that allowed for borrowings up to $3.0 billion.

In connection with these programs, we had back-up credit facilities with a consortium of banks for borrowings up to $3.0 billion at January 30, 2022, which consisted of a five-year $2.0 billion credit facility scheduled to expire in December 2023 and a 364-day $1.0 billion credit facility scheduled to expire in December 2022.

In December 2021, we completed the renewal of our 364-day $1.0 billion credit facility, extending the maturity from December 2021 to December 2022.

At January 30, 2022, there were $1.0 billion of outstanding borrowings under our commercial paper programs, and we were in compliance with all of the covenants contained in our credit facilities, none of which are expected to impact our liquidity or capital resources.

In July 2022, we expanded our commercial paper program from $3.0 billion to $5.0 billion to further enhance our financial flexibility.

All of our short-term borrowings in fiscal 2022 were under our commercial paper program, and the maximum amount outstanding at any time was $2.7 billion.

In connection with our program, we have back-up credit facilities with a consortium of banks.

In July 2022, we also expanded the borrowing capacity under these back-up facilities from $3.0 billion to $5.0 billion by entering into a five-year $3.5 billion credit facility scheduled to expire in July 2027 and a 364-day $1.5 billion credit facility scheduled to expire in July 2023.

These facilities replaced our previously existing five-year $2.0 billion credit facility, which was scheduled to expire in December 2023, and our 364-day $1.0 billion credit facility, which was scheduled to expire in December 2022.

At January 29, 2023, there were no borrowings outstanding under our commercial paper program, and we were in compliance with all of the covenants contained in our credit facilities, none of which are expected to impact our liquidity or capital resources.

We also issue senior notes from time to time as part of our capital management strategy.

In September 2021, we issued $3.0 billion of senior notes, and the net proceeds were used for general corporate purposes, including repurchases of shares of our common stock.

We also repaid $1.35 billion of senior notes during fiscal 2021.

In March 2022, we issued $4.0 billion of senior notes.

The net proceeds from this issuance were used for general corporate purposes, including repayment of outstanding indebtedness and repurchases of shares of our common stock.

In September 2022, we issued an additional $3.0 billion of senior notes.

The net proceeds from this issuance were used for general corporate purposes, including repurchases of shares of our common stock.

During fiscal 2022, we repaid $2.25 billion of senior notes.

At January 29, 2023, we had an aggregate principal amount of senior notes outstanding of $41.2 billion, with $1.0 billion payable within 12 months.

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See Note 4 to our consolidated financial statements for further discussion of our debt arrangements.

We use operating and finance leases to fund a portion of our real estate, including our stores, distribution centers, and store support centers.

We use operating and finance leases largely to fund a portion of our real estate, including our stores, distribution centers, and store support centers.

At January 29, 2023, we had aggregate lease obligations of $14.7 billion, with $1.5 billion payable within 12 months.

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PURCHASE OBLIGATIONS AND OTHER

Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, media and sponsorship spend, software acquisitions, license commitments, and legally binding service contracts.

Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, media and sponsorship spend, software and license commitments, and legally binding service contracts.

We issue inventory purchase orders in the ordinary course of business, which are typically cancellable by their terms, therefore we do not consider purchase orders that are cancellable to be firm inventory commitments.

At January 30, 2022, we had aggregate purchase obligations of $2.1 billion, with $1.2 billion payable within 12 months.

At January 29, 2023, we had aggregate purchase obligations of $1.8 billion, with $947 million payable within 12 months.

At January 29, 2023, we had aggregate liabilities for unrecognized tax benefits totaling $643 million, none of which are expected to be paid in the next 12 months.

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We have no material off-balance sheet arrangements.

Fiscal 2022 Form 10-K 30

CASH FLOWS SUMMARY

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Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.

Net cash provided by operating activities decreased by $2.3 billion in fiscal 2021 compared to fiscal 2020 and was primarily driven by changes in working capital, partially offset by an increase in net earnings.

Working capital was impacted by higher merchandise inventories resulting from our efforts to continue to meet the demand environment and from higher product and transportation costs, along with timing of vendor payments.

Net cash provided by operating activities decreased by $2.0 billion in fiscal 2022 compared to fiscal 2021, primarily driven by changes in working capital, slightly offset by an increase in net earnings.

Changes in working capital were driven by inventory management actions and the related timing of vendor payments.

These inventory management actions, which began in fiscal 2021 and moderated during the second half of fiscal 2022, reflect strategic investments in inventory to support the demand environment, promote higher in-stock levels, and pull forward merchandise for seasonal events in response to global supply chain disruption, as well as investments in our new supply chain facilities.

Investing Activities

Cash used in investing activities decreased by $7.2 billion in fiscal 2021 compared to fiscal 2020, primarily due to $7.8 billion of net consideration paid to acquire HD Supply in fiscal 2020, partially offset by increased capital expenditures.

Cash used in investing activities increased by $171 million in fiscal 2022 compared to fiscal 2021, primarily resulting from increased capital expenditures, partially offset by cash paid for an acquired business during fiscal 2021.

Financing Activities

Cash used in financing activities in fiscal 2022 primarily reflected $7.8 billion of cash dividends paid, $6.7 billion of share repurchases, $2.5 billion of repayments of long-term debt, and $1.0 billion of net repayments of short-term debt, partially offset by $6.9 billion of net proceeds from long-term debt.

Cash used in financing activities in fiscal 2021 primarily reflected $14.8 billion of share repurchases, $7.0 billion of cash dividends paid, and $1.5 billion of repayments of long-term debt, partially offset by $3.0 billion of net proceeds from long-term debt and $1.0 billion of net proceeds from short-term debt.

Cash used in financing activities in fiscal 2020 primarily reflected $6.5 billion of cash dividends paid, $2.9 billion of repayments of long-term debt, $974 million of net repayments of short-term debt, and $791 million for share repurchases prior to our suspension of share repurchases in March 2020, partially offset by $7.9 billion of net proceeds from long-term debt.

Critical Accounting Policies

Fiscal 2021 reflected elevated share repurchase activity following the temporary suspension of repurchases during fiscal 2020 in order to enhance our liquidity position at the onset of the COVID-19 pandemic.

Fiscal 2022 Form 10-K 31

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses.

Actual results could differ from those estimates.

Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements.

The following discussion addresses our most critical accounting policies, which are those that are both important to the representation of our financial condition and results of operations, and that require significant judgment or use of significant assumptions or complex estimates.

The following discussion addresses our most critical accounting estimates, which are those that are both important to the representation of our financial condition and results of operations, and that require significant judgment or use of significant assumptions or complex estimates.

MERCHANDISE INVENTORIES

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Historically, the difference between estimated shrink and actual inventory losses has not been material to our annual financial results.

Due to changes in operating conditions during fiscal 2020 as a result of the COVID-19 pandemic, we used the results from a sample of stores that were able to conduct physical inventories as a basis for estimating shrink for those stores at which physical inventory counts were temporarily suspended during fiscal 2020.

We believe the sample of stores that were selected for inventory counts in fiscal 2020 provided a reasonable basis for estimating shrink where a physical inventory count was not performed in fiscal 2020.

During fiscal 2021, we performed all regularly scheduled physical inventory counts, including store locations where physical inventory counts were suspended during fiscal 2020, and the difference between estimated shrink and actual inventory losses was not material.

We do not believe there is a reasonable likelihood for a material change in the estimates or assumptions we use to value our inventory under the retail inventory method.

We believe that the retail inventory method provides an inventory valuation which approximates cost and results in valuing our inventory at the lower of cost or market.

Impairment of Long-Lived Assets

We evaluate our long-lived assets each quarter for indicators of potential impairment.

Indicators of impairment include current period losses combined with a history of losses, our decision to relocate or close a store or other location before the end of its previously estimated useful life, or when changes in other circumstances indicate the carrying amount of an asset may not be recoverable.

The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level.

The assets of a store with indicators of impairment are evaluated for recoverability by comparing their undiscounted future cash flows with their carrying value.

Our cash flow projections look several years into the future and include assumptions of variables such as future sales and operating margin growth rates, economic conditions, market competition, and inflation.

If the carrying value is greater than the undiscounted future cash flows, we then measure the asset’s fair value to determine whether an impairment loss should be recognized.

If the resulting fair value is less than the carrying value, an impairment loss is recognized.

For locations identified for closure or relocation, we generally base our estimates of fair market value on market appraisals of owned locations and estimates of the amount of potential sublease income and the time required to sublease for leased locations.

For operating locations, we generally base our fair value estimates on future cash flow projections, as described above, and an appropriate discount rate to determine the present value of those future cash flows.

Impairments of long-lived assets were not material to our consolidated financial statements in fiscal 2021, fiscal 2020 or fiscal 2019.

Uncertain Tax Positions

We are subject to income taxes in the United States and in multiple jurisdictions across our global operations.

Thus, the determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretations and application of complex tax law.

Our provision for income taxes could be affected by many factors, including changes in business operations, changes in tax law, outcomes of income tax audits, changes in our assessment of certain tax contingencies, the impact of discrete tax items, and the mix of earnings among our U.S.

and foreign operations.

The calculation of our tax liabilities involves complexity and thus, there are many transactions and calculations for which the ultimate tax determination is uncertain.

The assessment of uncertain tax positions requires the use of significant judgment in evaluating our tax positions and assessing the timing and amounts of deductible and taxable items.

We record the benefits of uncertain tax positions in our financial statements only after determining a more likely than not probability that the uncertain tax positions will be sustained.

Business Combinations

We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition.

The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when market value is not readily available and requires a significant amount of management judgment.

For the valuation of intangible assets acquired in a business combination, we typically use an income approach.

Significant estimates in valuing certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates, customer attrition rates, discount rates and useful lives.

The excess of the purchase price over fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill.

During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

ADDITIONAL INFORMATION

For information on accounting pronouncements that have impacted or are expected to materially impact our financial condition, results of operations, or cash flows, see Note 1 to our consolidated financial statements.

For information on our accounting policies and on accounting pronouncements that have impacted or are expected to materially impact our financial condition, results of operations, or cash flows, see Note 1 to our consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis