The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for the years ended
March 31, 2022, and 2021 and year-over-year comparisons between those periods. For year-over-year comparisons between the years ended March 31, 2021, and 2020, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the SECon May 28, 2021. Certain statements made in this section constitute "forward-looking statements," which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" within this Annual Report for additional information.
We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers.
Highlights of the consolidated financial performance of fiscal year 2022 compared to the prior period are as follows:
•Net sales increased 23.8% to
$3,150,339. •Channel ?Wholesale channel net sales increased 31.0% to $1,936,739. ?DTC channel net sales increased 13.8% to $1,213,600. •Geography ?Domestic net sales increased 23.1% to $2,167,793. ?International net sales increased 25.3% to $982,546. •Gross margin decreased 300 basis points to 51.0%. •Income from operations increased 12.0% to $564,707. •Diluted earnings per share increased by $2.79per share to $16.26per share.
Trends and Uncertainties Affecting Our Business and Industry
We anticipate that our business and the industry in which we operate will continue to be affected by several important trends and uncertainties, including the following:
•Similar to other companies in our industry, we continue to experience supply chain challenges across each of the geographies in which we operate. The most significant macro-level supply chain impacts continue to be extended transit lead times and cost pressures, including from inflation, due primarily to container shortages, port congestion, and trucking and labor scarcity, which have created negative downstream impacts on our results of operations. To offset the impacts of these ongoing constraints, we have used a substantial amount of air freight. These costs, together with higher ocean container shipment and trucking costs, have elevated our transportation and logistics costs and negatively impacted our gross margin during fiscal year 2022, and we expect will continue to do so in future periods, particularly as we seek to maintain strategic product launch timelines and customer service levels. As we manage product availability, we remain focused on mitigating the impacts of ongoing disruptions in both the wholesale and DTC channels into our next 31 -------------------------------------------------------------------------------- Table of Contents fiscal year, including through the use of air freight (almost exclusively for the HOKA brand) and the early procurement of inventory in the country of sale, which will likely result in higher levels of inventory to allow us to maintain expected service levels into our next fiscal year. We anticipate these global supply chain pressures will continue, and we remain focused on ensuring our long-term growth strategy remains flexible to adapt to fluid conditions. •Although our owned DCs and 3PL providers are currently operating and supporting ongoing logistics, certain of these facilities continue to experience operational challenges, which have resulted in delays distributing our products, as well as cost pressures. Further, the headwinds we have encountered transitioning to our new European 3PL as that provider refines its system and delivery levels have exacerbated supply chain pressures. While this transition has been difficult in the current logistics environment, we believe this is a critical investment to create long-term capacity that will facilitate future growth. We continue to invest in infrastructure, including in our global distribution and logistics capabilities, end-to-end planning systems, and e-commerce platforms, as well as in expanding our sourcing capabilities and distribution points, to ensure we scale our operations commensurate with consumer demand.
•Due to recent heightened inflation in key global markets, including
the United States, we experienced impacts from inflation during fiscal year 2022, primarily related to supply chain challenges including higher freight costs, discussed above. We expect our business will be impacted by continued or increasing inflation in future periods, including impacts to costs for finished goods, freight, and commodities, which will impact our gross margin in our next fiscal year, as well as potential impacts to our operating expenses, foreign currency exchange rates, wages in a competitive job market, interest rates on borrowings, and customer demand.
Brand and omnichannel strategy
•We remain focused on accelerating consumer adoption of the HOKA brand globally to execute our long-term growth strategy, including through an optimized digital marketing strategy. The HOKA brand's growth has been balanced across its ecosystem of access points, with all geographic regions and distribution channels experiencing significant year-round growth, which has positively impacted our seasonality trends. In our next fiscal year, we intend to focus our efforts to drive HOKA brand performance on distribution management to drive new consumer acquisition in key markets and launching innovative product offerings to increase category adoption and market share gains with existing consumers. For example, we're looking at volume expansion with new and existing global strategic wholesale partners to drive new consumer acquisition. Further, we recently opened the HOKA brand's first owned and operated retail stores in
Asiaand launched pop-up stores in North Americato build upon our retail strategy and define the optimal consumer experience and concept for the HOKA brand. We plan to open additional retail stores for the HOKA brand and to continue exploring opportunities to strategically expand our HOKA brand retail store fleet. •Our marketplace strategies in Europeand Asia(international reset strategies) have continued to drive UGG brand awareness and consumer acquisition through building a foundation of diversified and counter-seasonal product acceptance, especially with younger consumers, through localized marketing investments, which is fueling a healthier product mix and reducing the need for promotional activity. •While we experienced a channel mix shift to wholesale in fiscal year 2022 as we refilled customer inventory levels, our aggregated DTC channel mix continues to be above our historical pre-pandemic levels. Our long-term growth strategy remains focused on building our DTC channel to represent an increasing portion of our total net sales, as we prioritize consumer acquisition and experience strong demand for the HOKA and UGG brands. 32 -------------------------------------------------------------------------------- Table of Contents •We continue to make selective price increases as appropriate by brand and product, taking into consideration, for example, the competitive landscape of our brands, our segmentation strategy, and higher costs, including for inflationary pressures on materials used in the production of our products, as well as ocean freight costs, which we believe can be mitigated by these price increases. However, we do not expect price increases to cover the significant use of air freight in our next fiscal year.
Presentation of the operating segment to be presented
Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our CEO, President, and Principal Executive Officer (PEO), is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic.
We believe demand for UGG-branded products will continue to be driven by the following:
•Successful acquisition of a diverse consumer base that resonates globally and with key markets, including for a younger, fashionable consumer, through strategic marketing activations and collaborations. •High consumer brand loyalty due to consistent delivery of quality and luxuriously comfortable footwear, apparel, and accessories. •Diversification of our footwear product offerings, such as Women's spring and summer lines, as well as expanded category offerings for Men's products, and more fashionable product for our Classics line. •Thoughtful expansion of our apparel and accessories businesses. HOKA Brand. The HOKA brand is an authentic premium line of year-round performance footwear that offers enhanced cushioning and inherent stability with minimal weight, apparel, and accessories. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is rapidly growing within selective key accounts. As a result, the HOKA brand is bolstering its net sales, which continue to increase as a percentage of our aggregate net sales.
We believe that demand for HOKA branded products will continue to be driven by the following:
•Leading performance product innovation, category extensions, and key franchise management, including higher frequency product drop rates and improving accessibility to all athletes. •Increased global brand awareness and new consumer adoption through enhanced global marketing activations and online consumer acquisition, including building a more diverse outdoor community through digital and in-person event sponsorship. •Thoughtful and strategic wholesale distribution choices, allowing the HOKA brand access and introduction to a broader, more diverse, consumer base. •Category extensions in authentic performance footwear offerings such as lifestyle, trail, and hiking categories.
Teva Brand. The Teva brand created the very first sport sandal when it was founded in the Grand Canyonin 1984. Since then, the Teva brand has grown into a multi-category modern outdoor lifestyle brand offering a range of performance, casual, and trail lifestyle products, and has emerged as a leader in footwear sustainability observed through recent growth fueled by young and diverse consumers passionate for the outdoors and the planet. 33
Table of Contents We believe that demand for Teva branded products will continue to be driven by the following:
•Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain. •Increasing brand awareness in key major global markets due to outdoor lifestyle participation amongst younger consumers. •Category extensions in performance hike footwear, including key franchises, as well as year-round product. Sanuk Brand. The Sanuk brand originated in
Southern Californiasurf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand's use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity.
We believe that demand for Sanuk branded products will continue to be driven by the following:
•Introducing a broader, higher-end product line, including through category extensions into casual footwear for younger consumers, including slippers and boots.
Other Brands. Other brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering.
We believe demand for Koolaburra branded products will continue to be driven by the following:
• Increase brand awareness among young consumers. • Evolution of key franchises and further expansion of fashionable casual boots, sneakers and slippers.
Direct to consumer. Our DTC business encompasses all of our brands and includes our retail stores and e-commerce websites which, in an omnichannel marketplace, are intertwined and interdependent. We believe that many of our consumers interact with our retail stores and websites before making in-store and online purchasing decisions.
E-Commerce Business. Our e-commerce business provides us with an opportunity to directly engage with and communicate a consistent brand message to consumers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of
March 31, 2022, we operate our e-commerce business through Company-owned websites and mobile platforms in 59 different countries, for which the net sales are recorded in our DTC reportable operating segment. Retail Business. Our global Company-owned retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, though also include recent openings in our retail store fleet for the HOKA brand. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. As of March 31, 2022, we have a total of 149 global retail stores, which includes 75 concept stores and 74 outlet stores. While we generally open retail store locations during our second or third fiscal quarters and consider closures of retail stores during our fourth fiscal quarter, the timing of such openings and closures may vary. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. Flagship Stores. Included in the total count of global concept stores are eight flagship stores, which are lead concept stores in certain key markets and prominent locations designed to showcase UGG and HOKA brand products in mono branded stores. Primarily located in major tourist locations, these stores are typically larger than our general concept stores with broader product offerings and greater traffic. We anticipate continuing to operate a curated fleet of flagship stores to enhance our interaction with our consumers and increase brand loyalty. The net sales for these stores are recorded in our DTC reportable operating segment. 34 -------------------------------------------------------------------------------- Table of Contents Shop-in-Shop Stores. Included in the total count of global concept stores are 27 shop-in-shop (SIS) stores, defined as concept stores for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales. The net sales for these stores are recorded in our DTC reportable operating segment. Partner Retail Stores. We rely on partner retail stores for the UGG and HOKA brands. Partner retail stores are branded stores that are wholly owned and operated by third parties and not included in the total count of global Company-owned retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the related net sales are recorded in each respective brand's wholesale reportable operating segment, as applicable.
Use of Non-GAAP Financial Measures
Throughout this Annual Report we provide certain financial information on a constant currency basis, excluding the effect of foreign currency exchange rate fluctuations, which we disclose in addition to the financial measures calculated and presented in accordance with generally accepted accounting principles in
the United States(US GAAP). We provide these non-GAAP financial measures to provide information that may assist investors in understanding our financial results and assessing our prospects for future performance. However, the information included within this Annual Report that is presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing the performance of other companies relative to us. For example, in order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements. Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. These non-GAAP financial measures are not intended to represent and should not be considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with US GAAP. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control.
Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending
September 30thand December 31stand the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31stand June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30thand December 31sthave historically significantly exceeded our aggregate net sales in the quarters ending March 31stand June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the impact from seasonality to continue to decrease over time and we have begun to experience shifts during fiscal year 2022 for higher sales in the quarter ending March 31st. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. Refer to Note 14, "Quarterly Summary of Information (Unaudited)," of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period. 35 -------------------------------------------------------------------------------- Table of Contents Result of Operations
Years Ended March 31, 2022 2021 Change Amount % Amount % Amount % Net sales
$ 3,150,339100.0 % $ 2,545,641100.0 % $ 604,69823.8 % Cost of sales 1,542,788 49.0 1,171,551 46.0 (371,237) (31.7) Gross profit 1,607,551 51.0 1,374,090 54.0 233,461 17.0 Selling, general, and administrative expenses 1,042,844 33.1 869,885 34.2 (172,959) (19.9) Income from operations 564,707 17.9 504,205 19.8 60,502 12.0 Other expense, net 69 - 2,691 0.1 2,622 97.4 Income before income taxes 564,638 17.9 501,514 19.7 63,124 12.6 Income tax expense 112,689 3.6 118,939 4.7 6,250 5.3 Net income 451,949 14.3 382,575 15.0 69,374 18.1 Total other comprehensive (loss) income, net of tax (8,212) (0.2) 8,816 0.3 (17,028) (193.1) Comprehensive income $ 443,73714.1 % $ 391,39115.3 % $ 52,34613.4 % Net income per share Basic $ 16.43 $ 13.64 $ 2.79Diluted $ 16.26 $ 13.47 $ 2.79
Years Ended March 31, 2022 2021 Change Amount Amount Amount % Net sales by location Domestic
$ 2,167,793 $ 1,761,477 $ 406,31623.1 % International 982,546 784,164 198,382 25.3 Total $ 3,150,339 $ 2,545,641 $ 604,69823.8 %
Net sales by brand and channel
UGG brand Wholesale
$ 1,088,082 $ 871,799 $ 216,28324.8 % Direct-to-Consumer 893,887 845,283 48,604 5.8 Total 1,981,969 1,717,082 264,887 15.4 HOKA brand Wholesale 628,674 405,243 223,431 55.1 Direct-to-Consumer 262,920 165,997 96,923 58.4 Total 891,594 571,240 320,354 56.1 Teva brand Wholesale 129,094 105,928 23,166 21.9 Direct-to-Consumer 33,643 32,860 783 2.4 Total 162,737 138,788 23,949 17.3 36
Table of Contents Years Ended March 31, 2022 2021 Change Amount Amount Amount % Sanuk brand Wholesale 30,316 26,566 3,750 14.1 Direct-to-Consumer 12,779 15,274 (2,495) (16.3) Total 43,095 41,840 1,255 3.0 Other brands Wholesale 60,573 69,375 (8,802) (12.7) Direct-to-Consumer 10,371 7,316 3,055 41.8 Total 70,944 76,691 (5,747) (7.5) Total
$ 3,150,339 $ 2,545,641 $ 604,69823.8 % Total Wholesale $ 1,936,739 $ 1,478,911 $ 457,82831.0 % Total Direct-to-Consumer 1,213,600 1,066,730 146,870 13.8 Total $ 3,150,339 $ 2,545,641 $ 604,69823.8 % Total net sales increased primarily due to higher HOKA, UGG, and Teva brand sales across all channels, despite impacts from supply chain constraints, including extended transit lead times. Further, we experienced an increase of 22.2% in total volume of pairs sold to 51,200 from 41,900 compared to the prior period. On a constant currency basis, net sales increased by 23.2%, compared to the prior period. Drivers of significant changes in net sales, compared to the prior period, were as follows: •Wholesale net sales of the UGG brand increased globally, driven by growth across a diversified product lineup, particularly for non-core Women's, core Men's products such as slippers, as well as Kids' core product lines, including the benefit of refilling inventory levels as well as our international reset strategies. •Wholesale net sales of the HOKA brand increased globally, resulting from market share gains, including new consumer acquisition, driven by increased brand awareness through expanded sponsorship events and digital marketing, as well as core key franchise updates, the addition of new styles, and select door expansion with key partners. •Wholesale net sales of the Teva brand increased primarily due to continued acceleration of US demand, as well as lapping disruptions from the pandemic, including higher reorders from our customers through the brands' peak sell-in period during the first half of fiscal year 2022. •DTC net sales increased primarily due to higher global UGG and HOKA brand sales. Due to the disruption of our retail store base throughout fiscal year 2021, we are not reporting a comparable DTC net sales metric for fiscal year 2022. •International net sales, which are included in the reportable operating segment net sales presented above, increased by 25.3% and represented 31.2% and 30.8% of total net sales for the years ended March 31, 2022, and 2021, respectively. These increases were primarily driven by higher international sales for the UGG and HOKA brand in all channels and regions. Gross Profit. Gross margin decreased to 51.0% from 54.0%, compared to the prior period, almost entirely due to higher freight costs, as we incurred a substantial increase in air freight usage, ocean container rates and third-party delivery fees. Further, we experienced an unfavorable channel mix shift to wholesale, partially offset by favorable HOKA brand mix, fewer closeouts, and favorable changes in foreign currency exchange rates. 37
Selling, general and administrative expenses. The net increase in SG&A costs, compared to the prior period, is mainly the result of the following:
•Increased variable advertising and promotion expenses of approximately
$67,100, primarily due to higher digital marketing and advertising development expenses for the HOKA and UGG brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing.
•Increase in other variable net selling expenses of approximately
•Increased payroll and related costs of approximately
$48,000, primarily due to higher headcount, including for warehouse teams, and other related compensation, partially offset by lower annual performance-based compensation.
•Increase in other operating expenses of approximately
• Currency-related losses increased by
• Decrease in impairments of operating leases and other long-term assets of approximately
• Decrease in expenses for provisions for accounts receivable by approximately
Income from Operations. Income (loss) from operations by reportable operating segment was as follows: Years Ended March 31, 2022 2021 Change Amount Amount Amount %
Operating income (loss)
UGG brand wholesale
$ 315,240 $ 292,718 $ 22,5227.7 % HOKA brand wholesale 155,344 111,208 44,136 39.7 Teva brand wholesale 33,294 27,120 6,174 22.8 Sanuk brand wholesale 6,463 (162) 6,625 4,089.5 Other brands wholesale 14,028 21,573 (7,545) (35.0) Direct-to-Consumer 435,414 349,465 85,949 24.6 Unallocated overhead costs (395,076) (297,717) (97,359) (32.7) Total $ 564,707 $ 504,205 $ 60,50212.0 % The increase in total income from operations, compared to the prior period, was primarily due to higher net sales and lower SG&A expenses as a percentage of net sales, partially offset by lower gross margin driven by higher freight costs. Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:
• The increase in DTC’s operating income was driven by higher net sales and lower impairments at corporate-owned retail stores, partially offset by higher e-commerce variable operating costs and the increase in variable selling costs.
•The increase in income from operations of HOKA and UGG brand wholesale was due to higher net sales, partially offset by lower gross margin driven by higher freight costs, as well as higher variable marketing expenses. 38 -------------------------------------------------------------------------------- Table of Contents •The increase in unallocated overhead costs was primarily due to higher operating expenses, including warehousing fees, net insurance costs, IT costs, shipping supplies, depreciation expense, higher payroll and related costs driven by higher headcount, as well as higher foreign currency-related losses and variable advertising and promotion expenses.
Other expenses, net. Total other expense, net, compared to the prior period, decreased due to lower interest expense resulting from the repayment of our mortgage in fiscal 2021.
Income Tax Expense. Income tax expense and our effective income tax rate were as follows: Years Ended March 31, 2022 2021 Income tax expense $ 112,689
Effective income tax rate 20.0 % 23.7 % The decrease in our effective income tax rate, compared to the prior period, was due to higher net discrete tax benefits, primarily driven by favorable releases of uncertain tax positions, tax deductions for stock-based compensation, and increased benefits for return to provision adjustments, as well as changes in the jurisdictional mix of worldwide income before income taxes. Foreign income before income taxes was
$168,270and $133,186and worldwide income before income taxes was $564,638and $501,514during the years ended March 31, 2022, and 2021, respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to higher foreign gross margin as a percentage of worldwide sales. For the years ended March 31, 2022, and 2021, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. Refer to the section titled "Liquidity" below for further information. Net Income. The increase in net income, compared to the prior period, was due to higher net sales, partially offset by lower gross margin. Net income per share increased, compared to the prior period, due to higher net income, combined with lower weighted-average common shares outstanding, driven by higher stock repurchases.
Total other comprehensive income, net of tax. The increase in total other comprehensive income, net of tax, compared to the prior period, is due to higher foreign exchange losses related to changes in our net asset position for the unfavorable foreign exchange rates of European and Asian currencies.
We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. As of
March 31, 2022, our cash and cash equivalents are $843,527. While we are subject to uncertainty surrounding the pandemic, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements, contractual obligations, and timely service our debt obligations for at least the next 12 months. Our liquidity may be impacted by additional factors, including our results of operations, the strength of our brands, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, including estimating inventory requirements 39 -------------------------------------------------------------------------------- Table of Contents that require earlier purchasing windows to manage supply chain constraints, our ability to respond to the impacts and disruptions caused by the pandemic, and our ability to respond to economic, political and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. As discussed above under the heading "Trends and Uncertainties Impacting Our Business and Industry," the pandemic has continued to create supply chain challenges that will impact the availability of inventory over the next few quarters as well as increased costs to mitigate these delays, which we expect to adversely impact our results of operations in our next fiscal year. If there are unexpected material impacts to our business in future periods from the pandemic and we need to raise or conserve additional cash to fund our operations, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession, inflationary pressure, or a slow recovery could adversely affect our business and liquidity. Repatriation of Cash. We repatriated $120,000and $175,000of cash and cash equivalents during the years ended March 31, 2022, and 2021, respectively. As of March 31, 2022, we have $133,053of cash and cash equivalents outside the US and held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. Beginning with the tax year ended March 31, 2018, pursuant to the Tax Reform Act, an installment election was made to pay the one-time transition tax on the deemed repatriation of foreign subsidiaries' earnings over eight years. The cumulative remaining balance as of March 31, 2022, is $38,263. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of, future changes to, or interpretations of global tax law and regulations, and our actual earnings for current and future periods. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on the impacts of the recent Tax Reform Act. Stock Repurchase Programs. We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives and drive stockholder value, including by potentially repurchasing additional shares of our common stock. Our stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. As of March 31, 2022, the aggregate remaining approved amount under our stock repurchase programs is $454,007. Subsequent to March 31, 2022, through May 5, 2022, we repurchased 176,046 shares for $47,997at an average price of $272.64per share and had $406,010remaining authorized under the stock repurchase program. Capital Resources Primary Credit Facility. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended. The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank(Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd.and US Bank National Associationas co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year, $400,000unsecured revolving credit facility (Primary Credit Facility), contains a $25,000sublimit for the issuance of letters of credit, and matures on September 20, 2023. As of March 31, 2022, we have no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451under our Primary Credit Facility. 40 -------------------------------------------------------------------------------- Table of Contents China Credit Facility. Our revolving credit facility in China( China CreditFacility) is an uncommitted revolving line of credit of up to CNY300,000, or $47,286.
Japan Credit Facility. Our revolving credit facility in
Debt commitments. From
Refer to Note 6, "Revolving Credit Facilities," of our consolidated financial statements in Part IV within this Annual Report for further information on our capital resources. Cash Flows
The following table summarizes the main components of our consolidated statements of cash flows for the periods presented:
Years Ended March 31, 2022 2021 Change Amount Amount Amount %
Net cash flow generated by operating activities
(51,009) (32,169) (18,840) (58.6) Net cash used in financing activities (367,482) (129,581) (237,901) (183.6) Effect of foreign currency exchange rates on cash and cash equivalents 304 5,458
(5,154) (94.4) Net change in cash and cash equivalents
Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income, other cash receipts and expenditure adjustments, and changes in working capital. The decrease in net cash provided by operating activities during the year ended
March 31, 2022, compared to the prior period, was primarily due to a net unfavorable change in operating assets and liabilities, partially offset by favorable net income after non-cash adjustments. The changes in operating assets and liabilities were primarily due to net unfavorable changes in inventories, other accrued expenses, trade accounts receivable, net, income tax payable, other assets, and income tax receivable, partially offset by a net favorable change in trade accounts payable. Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2022, compared to the prior period, was primarily due to higher capital expenditures for our second US DC, as well as higher showrooms and IT costs, partially offset by lower capital expenditures for retail stores. Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2022, compared to the prior period, was primarily due to higher stock repurchases, higher cash paid for shares withheld for taxes, and lower proceeds from exercise of stock options, partially offset by the mortgage repayment during fiscal year 2021. 41 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations
The following table summarizes our main contractual obligations as of
Payments Due by Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations (1)
$ 238,754 $ 53,886 $ 83,667 $ 58,651 $ 42,550Purchase obligations for product (2) 809,812 809,812 - - - Purchase obligations for commodities (3) 206,979 99,066 107,913 - - Other purchase obligations (4) 207,651 69,057 66,073 72,521 -
Net unrecognized tax benefits
(5) 8,642 - 8,642 - - Total
$ 1,471,838 $ 1,031,821 $ 266,295 $ 131,172 $ 42,550(1)Our operating lease commitments consist primarily of building leases for our retail locations, our warehouse and DCs, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. In April 2022we signed a lease for additional space at our US DC in Mooresville, Indianawith an initial lease term of ten years for a minimum commitment of approximately $46,000, which we expect to operational in the third quarter of our fiscal year ending March 31, 2024. Refer to Note 7, "Leases and Other Commitments," of our consolidated financial statements in Part IV within this Annual Report for further information on our operating lease assets and lease liabilities. (2)Our purchase obligations for product consist mostly of open purchase orders issued in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. Due to increased demand for certain products combined with longer logistics lead times and increased transit times from origin to destination as a result of supply chain disruptions, we are currently expecting that our inventory purchases with our third-party manufacturers will be significantly higher for our next fiscal year compared to fiscal year 2022. (3)Our purchase obligations for commodities include sheepskin, UGGpure, and leather, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. There are $33,120of deposits included in the amount above that have not been fully consumed as of March 31, 2022, which is recorded in other assets in the consolidated balance sheets, which represent remaining minimum commitments under certain expired sheepskin supply agreements that we currently expect to be consumed in future periods. (4)Our other purchase obligations consist of non-cancellable minimum commitments for logistics arrangements, sales management services, supply chain services, IT services, requirements to pay promotional expenses, and other commitments under service contracts, which are due during our fiscal years ending March 31, 2023through 2027. Amounts excluded from other purchase obligations above include any capital expenditures that will be purchased before the end of our next fiscal year, which we estimate will range from approximately $100,000to $110,000. We anticipate these expenditures will primarily relate to the build-out of a third US DC, IT infrastructure and system upgrades, and refreshes to our global retail store fleet including new retail stores. Other anticipated expenditures include upgrades to our existing warehouse and DCs as well as our global office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace existing assets, and the timing of other expenditures. 42
(5)Net unrecognized tax benefits are gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of
March 31, 2022, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations on liabilities of $14,791, therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions. Refer to Note 7, "Leases and Other Commitments," of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments.
Significant Accounting Policies and Estimates
Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements based on historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements: allowances for doubtful accounts, estimated sales return liability, sales discounts and customer chargebacks, inventory valuations, valuation of goodwill, other intangible assets and long-lived assets, and performance-based stock compensation. The full impact of the ongoing pandemic is unknown and cannot be reasonably estimated for these key estimates. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.
Refer to Note 1, “General”, to our Consolidated Financial Statements in Part IV of this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting positions.
Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income. Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment. Refer to Note 2, "Revenue Recognition," of our consolidated financial statements in Part IV within this Annual Report for further information regarding the components of variable consideration, including allowances for sales discounts, chargebacks, and our sales return liability. 43
Allocations of accounts receivable. The following table summarizes the critical accounting estimates for accounts receivable allowances and reserves:
As of March 31, 2022 2021 % of Gross % of Gross Trade Accounts Trade Accounts Amount Receivable Amount Receivable Gross trade accounts receivable
$ 333,279100.0 % $ 242,234100.0 % Allowance for doubtful accounts (9,044) (2.7) (9,730) (4.0) Allowance for sales discounts (2,831) (0.9) (3,016) (1.2) Allowance for chargebacks (18,716) (5.6) (13,770) (5.7) Trade accounts receivable, net $ 302,68890.8 % $ 215,71889.1 % Allowance for Doubtful Accounts. We provide an allowance against trade accounts receivable for estimated losses that may result from customers' inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers' creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. Allowance for Sales Discounts. We provide a trade accounts receivable allowance for sales discounts for our wholesale channel sales, which reflects a discount that our customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Allowance for Chargebacks. We provide a trade accounts receivable allowance for chargebacks and markdowns for our wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel: Three Months Ended March 31, 2022 2021 Amount % of Net Sales Amount % of Net Sales Net Sales Wholesale $ 448,84861.0 % $ 326,10658.1 % Direct-to-Consumer 287,159 39.0 235,082 41.9 Total $ 736,007100.0 % $ 561,188100.0 % As of March 31, 2022 2021 Amount % of Net Sales Amount % of Net Sales Sales Return Liability Wholesale $ (31,082)(6.9) % $ (23,987)(7.4) % Direct-to-Consumer (8,785) (3.1) (13,730) (5.8) Total $ (39,867)(5.4) % $ (37,717)(6.7) % 44
Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are generally accepted from customers between 30 to 90 days from the point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are an asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund liability are recorded against gross sales and changes to the asset for the right to recover the inventory are recorded against cost of sales. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results.
Inventories. The following tables summarize our inventory estimates:
As of March 31, 2022 2021 % of Gross % of Gross Amount Inventory Amount Inventory Gross Inventories
$ 527,531100.0 % $ 297,874100.0 % Write-down of inventories (20,735) (3.9) (19,632) (6.6) Inventories $ 506,79696.1 % $ 278,24293.4 % We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. Operating Lease Assets and Lease Liabilities. We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by our options to extend (or not to terminate) the leases that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its incremental borrowing rate (IBR). We cannot determine the interest rate implicit in the lease because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our non-collateralized borrowings under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.
Refer to Note 7, “Leases and Other Commitments”, to our Consolidated Financial Statements in Part IV of this Annual Report for more information, including more details on our accounting policy choices and information to provide.
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Goodwilland Indefinite-Lived Intangible Assets. We do not amortize goodwill and indefinite-lived intangible assets but instead test for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable at the reporting unit level. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Qualitative factors considered include significant or adverse changes in consumer demand, historical financial performance, changes in management or key personnel, macroeconomic and industry conditions, and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and results of operations, discount rates, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units' projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in customer demand and acceptance of products, or other factors impacting our industry. The fair value assessment could change materially if different estimates and assumptions were used. During the years ended March 31, 2022, and 2021, we performed our annual impairment assessment and evaluated the UGG and HOKA brands' wholesale reportable operating segment goodwill as of December 31stand evaluated our Teva indefinite-lived trademarks as of October 31st. Based on the carrying amounts of the UGG and HOKA brands' goodwill and Teva brand indefinite-lived trademarks, each of the brands' actual fiscal year sales and results of operations, and the brands' long-term forecasts of sales and results of operations as of their evaluation dates, we concluded that these assets were not impaired. Refer to Note 1, "General," and Note 3, " Goodwilland Other Intangible Assets," of our consolidated financial statements in Part IV within this Annual Report for further information on our goodwill and indefinite-lived intangible assets and annual impairment assessment results. Definite-Lived Intangible and Other Long-Lived Assets. Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. When an impairment-triggering event has occurred, we test for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group. We did not identify any definite-lived intangible asset impairments during the year ended March 31, 2022. During the year ended March 31, 2021, we recorded an impairment loss of $3,522for the Sanuk brand definite-lived international trademark, driven by the strategic decision to focus primarily on future domestic growth, within our Sanuk brand wholesale reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. During the years ended March 31, 2022, and 2021, we recorded impairment losses for other long-lived assets, primarily for certain retail store operating lease assets and related leasehold improvements due to performance or store closures, of $3,186and $14,084, respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 1, "General," and Note 3, " Goodwilland Other Intangible Assets," of our consolidated financial statements in Part IV within this Annual Report for further information on our definite-lived intangible and other long-lived assets. 46 -------------------------------------------------------------------------------- Table of Contents Performance-Based Compensation. In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. At the beginning of each fiscal year, our Talent & Compensation Committeereviews our results of operations from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Talent & Compensation Committeethen establishes specific annual financial and strategic goals. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, and pre-tax income, as well as achievement of predetermined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each fiscal year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior fiscal year's performance, business and general economic conditions and market and peer group analysis. Performance-based compensation expense decreased approximately $2,900during the year ended March 31, 2022, compared to the year ended March 31, 2021. The primary reason for this net decrease was the lower achievement of the performance criteria governing our cash bonuses compared to the prior period, partially offset by the expected achievement of the maximum performance criteria for the 2021 and 2020 long-term incentive plan performance-based restricted stock units. Performance-based compensation expense is primarily recorded in SG&A expenses, with cash bonuses for certain employees recorded in cost of goods sold in the consolidated statements of comprehensive income.
Refer to Note 8, “Stock-Based Compensation,” to our Consolidated Financial Statements in Part IV of this Annual Report for more information on our performance-based stock-based compensation.
Income Taxes. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. A cash distribution of income from foreign subsidiaries that was previously taxed earnings and profits (PTEP) by the US Internal Revenue Service does not require recognition of a deferred tax liability as the liability has already been recognized under the Tax Reform Act. We have not changed our indefinite reinvestment assertion of foreign earnings other than PTEP. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy. 47
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