Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section discusses management’s view of the financial condition, results of operations and cash flows of the Company. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, including the Risk Factors section, and information contained elsewhere in this Quarterly Report on Form 10-Q, including the Condensed Consolidated Financial Statements and notes to those financial statements. The results of operations for any interim period may not necessarily be indicative of the results that may be expected for any future interim period or the entire fiscal year.
Summary of Results of Operations
Our net sales decreased 3.3% to $520.7 million for the first quarter of Fiscal 2023 compared to $538.7 million for the first quarter of Fiscal 2022. The sales decrease was driven by decreased comparable direct sales, partially offset by increased sales in the wholesale and store channels and a difficult comparison due to U.S. government stimulus-fueled consumer spending last year. The store channel increase was led by our Schuh Group business as its stores were only open 19% of possible days in the first quarter last year. Journeys Group sales decreased 16% in the first quarter this year, as Journeys was the beneficiary of government stimulus-fueled consumer spending in the first quarter last year, while Schuh Group sales increased 28%, Johnston & Murphy Group sales increased 46% and Licensed Brands sales increased 5% during the first quarter of Fiscal 2023 compared to the same quarter of Fiscal 2022.
Gross margin as a percentage of net sales increased to 48.3% during the first quarter of Fiscal 2023, compared to 47.8% for the first quarter of Fiscal 2022. This reflects increased gross margin as a percentage of net sales in all of our operating business units except Johnston & Murphy Group, primarily due to lower shipping and warehouse expense as a result of lower e-commerce penetration, increased full-price selling and price increases partially offset by the channel mix impact of increased wholesale sales and increased freight and logistics costs as a result of supply chain challenges.
Selling and administrative expenses as a percentage of net sales increased to 46.8% of net sales during the first quarter of Fiscal 2023 from 44.5% for the first quarter of Fiscal 2022, reflecting increased expenses as a percentage of net sales at Journeys Group and Schuh Group, partially offset by decreased expenses as a percentage of net sales at Johnston & Murphy Group and Licensed Brands. The overall increase in expenses as a percentage of net sales is due to more normalized occupancy expense as a result of the one-time benefits for rent credits and government tax relief to the COVID-19 pandemic in the U.K. in the first quarter last year, as well as increased selling salaries and compensation expense, partially offset by decreased performance-based compensation expense.
Operating margin was 1.6% for the first quarter of Fiscal 2023 compared to 2.9% in the first quarter of Fiscal 2022, reflecting decreased operating margin in Journeys Group, partially offset by improved operating margins in all our other operating business units. The decrease in operating margin for the first quarter this year compared to the first quarter last year was driven by more normalized expenses as a percentage of net sales.
Significant Developments
COVID-19
We closely monitored, and will continue to closely monitor, the impact of the COVID-19 pandemic on all facets of our business, including the impact on our employees, customers, suppliers, vendors, business partners and supply chain networks. Although we believe our sales were affected in the first quarter of Fiscal 2023 by the global and domestic supply chain challenges, primarily in the form of lower merchandise in-stock levels in our Journeys retail stores but also in our Johnston & Murphy stores, we have seen some improvement in our in-stock levels by the end of our first quarter of Fiscal 2023. These supply chain challenges remain ongoing and there can be no assurance that we will continue to experience improvements in our in-stock levels or that in-stock levels will reach the optimal levels to satisfy demand.
There are numerous uncertainties surrounding the COVID-19 pandemic and its impact on the economy and our business, as further described in the Risk Factors section under Part I, Item 1A of our Fiscal 2022 Form 10-K, which make it difficult to predict the impact on our business, financial position, or results of operations in Fiscal 2023 and beyond. We cannot predict these uncertainties, or the corresponding impacts on our business, at this time.
Critical Accounting Estimates
We discuss our critical accounting estimates in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022. We describe our significant accounting policies in Note 1, "Summary of Significant Accounting Policies", of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022. There have been no other significant changes in our definition of significant accounting policies or critical accounting estimates since the end of Fiscal 2022.
Key Performance Indicators
In assessing the performance of our business, we consider a variety of performance and financial measures. The key performance indicators we use to evaluate the financial condition and operating performance of our business are comparable sales, net sales, gross margin, operating income
15
and operating margin. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the U.S. GAAP financial measures presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.
Comparable Sales
We consider comparable sales to be an important indicator of our current performance, and investors may find it useful as such. Comparable sales results are important to achieve leveraging of our costs, including occupancy, selling salaries, depreciation, etc. Comparable sales also have a direct impact on our total net revenue, cash and working capital. We define "comparable sales" as sales from stores open longer than one year, beginning with the first day a store has comparable sales (which we refer to as "same store sales"), and sales from websites operated longer than one year and direct mail catalog sales (which we refer to in this report as "comparable direct sales"). Temporarily closed stores are excluded from the comparable sales calculation if closed for more than seven days. Expanded stores are excluded from the comparable sales calculation until the first day an expanded store has comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. We have not disclosed comparable sales for the first three months of Fiscal 2023, as we believe that overall sales is a more meaningful metric during this period due to the impact of the COVID-19 pandemic and related extensive store closures during the first quarter of Fiscal 2022.
Results of Operations – First Quarter of Fiscal 2023 Compared to First Quarter of Fiscal 2022
Our net sales in the first quarter of Fiscal 2023 decreased 3.3% to $520.7 million compared to $538.7 million in the first quarter of Fiscal 2022. The sales decrease was driven by decreased comparable direct sales, partially offset by increased sales in the wholesale and store channels and a difficult comparison due to U.S. government stimulus-fueled consumer spending last year. The store channel increase was led by our Schuh Group business as its stores were only open 19% of possible days in the first quarter of Fiscal 2022 versus 100% of possible days in the first quarter of Fiscal 2023.
Gross margin decreased 2.4% to $251.4 million in the first quarter of Fiscal 2023 from $257.7 million in the first quarter of Fiscal 2022 but increased as a percentage of net sales from 47.8% to 48.3%, reflecting increased gross margin as a percentage of net sales in all of our operating business units except Johnston & Murphy Group, primarily due to lower shipping and warehouse expense as a result of lower e-commerce penetration, increased full-price selling and price increases, partially offset by the channel mix impact of increased wholesale sales and increased freight and logistics costs as a result of supply chain challenges.
Selling and administrative expenses in the first quarter of Fiscal 2023 increased 1.7% and increased as a percentage of net sales from 44.5% to 46.8%, reflecting increased expenses as a percentage of net sales at Journeys Group and Schuh Group, partially offset by decreased expenses as a percentage of net sales at Johnston & Murphy Group and Licensed Brands. The overall increase in expenses as a percentage of net sales is due to more normalized occupancy expense as a result of the one-time benefits for rent credits and government tax relief related to the COVID-19 pandemic in the U.K. in the first quarter last year, as well as increased selling salaries and compensation expense, partially offset by decreased performance-based compensation expense. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Earnings from continuing operations before income taxes (“pretax earnings”) for the first quarter of Fiscal 2023 were $7.9 million compared to $14.8 million for the first quarter of Fiscal 2022. Pretax earnings for the first quarter of Fiscal 2023 included an asset impairment and other gain of $0.3 million for a gain on the termination of the pension plan, partially offset by retail store asset impairments. Pretax earnings for the first quarter of Fiscal 2022 included asset impairments and other charges of $2.7 million for professional fees related to the actions of an activist shareholder and retail store asset impairments.
We recorded an effective income tax rate of 36.7% and 40.1% in the first quarter of Fiscal 2023 and Fiscal 2022, respectively. The tax rate for the first quarter of Fiscal 2023 is lower than Fiscal 2022, reflecting a reduction in the amount of foreign losses for which we are unable to recognize a tax benefit.
Net earnings for the first quarter of Fiscal 2023 were $4.9 million, or $0.37 diluted earnings per share compared to $8.9 million, or $0.60 diluted earnings per share, for the first quarter of Fiscal 2022.
16
Journeys Group
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|
|
|
Three Months Ended |
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|
|
|
|
|
April 30, 2022 |
|
|
May 1, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
314,445 |
|
|
$ |
376,548 |
|
|
|
(16.5 |
)% |
Operating income |
|
$ |
14,930 |
|
|
$ |
33,124 |
|
|
|
(54.9 |
)% |
Operating margin |
|
|
4.7 |
% |
|
|
8.8 |
% |
|
|
|
Net sales from Journeys Group decreased 16.5% to $314.4 million for the first quarter of Fiscal 2023, compared to $376.5 million for the first quarter of Fiscal 2022, primarily due to decreased store sales and decreased digital comparable growth. Journeys was the beneficiary of government stimulus-fueled consumer spending in the first quarter of Fiscal 2022 and experienced a lack of inventory in the first quarter this year to fill demand due to the impact of supply chain disruptions. Journeys Group operated 1,130 stores at the end of the first quarter of Fiscal 2023, including 229 Journeys Kidz stores, 47 Journeys stores in Canada and 36 Little Burgundy stores in Canada, compared to 1,143 stores at the end of the first quarter of last year, including 230 Journeys Kidz stores, 47 Journeys stores in Canada and 37 Little Burgundy stores in Canada.
Journeys Group had operating income of $14.9 million for the first quarter of Fiscal 2023 compared to $33.1 million for the first quarter of Fiscal 2022. The decrease of 54.9% in operating income for Journeys Group was due to (i) decreased net sales and (ii) increased selling and administrative expenses as a percentage of net sales reflecting the deleverage of expenses, especially occupancy and selling salaries, as a result of decreased revenue in the first quarter this year, partially offset by decreased performance-based compensation expense. Gross margin increased as a percentage of net sales in the first quarter of Fiscal 2023 compared to the first quarter of Fiscal 2022, reflecting lower shipping and warehouse expense.
Schuh Group
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Three Months Ended |
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|
April 30, 2022 |
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|
May 1, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
88,159 |
|
|
$ |
68,711 |
|
|
|
28.3 |
% |
Operating loss |
|
$ |
(2,746 |
) |
|
$ |
(3,847 |
) |
|
|
28.6 |
% |
Operating margin |
|
|
(3.1 |
)% |
|
|
(5.6 |
)% |
|
|
|
Net sales from Schuh Group increased 28.3% to $88.2 million for the first quarter of Fiscal 2023 compared to $68.7 million for the first quarter of Fiscal 2022, primarily due to increased store sales as Schuh stores were only open 19% of possible days in the first quarter of Fiscal 2022 versus 100% of possible days in the first quarter of Fiscal 2023, partially offset by decreased digital comparable sales and an unfavorable impact of $4.7 million due to changes in foreign exchange rates. Schuh stores benefitted from pent up demand as the U.K. economy further re-opened this year and more people resumed normal pre-pandemic activities. Schuh Group operated 122 stores at the end of the first quarter of Fiscal 2023, compared to 123 stores at the end of the first quarter of Fiscal 2022.
Schuh Group had an operating loss of $2.7 million for the first quarter of Fiscal 2023 compared to an operating loss of $3.8 million for the first quarter of Fiscal 2022. The smaller loss this year reflects (i) increased net sales and (ii) increased gross margin as a percentage of net sales, reflecting decreased shipping and warehouse expense and less promotional activity in the first quarter of Fiscal 2023. Selling and administrative expenses increased as a percentage of net sales for the first quarter of Fiscal 2023 compared to the first quarter of Fiscal 2022, reflecting more normalized occupancy expense due to the one-time benefits for rent credits and government property tax relief and other government relief related to the COVID-19 pandemic in the U.K. in the first quarter last year, as well as increased selling salaries, partially offset by decreased marketing expense.
Johnston & Murphy Group
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Three Months Ended |
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|
April 30, 2022 |
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May 1, 2021 |
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% Change |
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|
|
(dollars in thousands) |
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|
|
|
Net sales |
|
$ |
71,016 |
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|
$ |
48,762 |
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|
|
45.6 |
% |
Operating income (loss) |
|
$ |
550 |
|
|
$ |
(3,180 |
) |
|
NM |
|
Operating margin |
|
|
0.8 |
% |
|
|
(6.5 |
)% |
|
|
|
Johnston & Murphy Group net sales increased 45.6% to $71.0 million for the first quarter of Fiscal 2023 from $48.8 million for the first quarter of Fiscal 2022, primarily due to increased store sales, wholesale sales and e-commerce sales, despite lower in-stock inventory levels this year.
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Johnston & Murphy has repositioned its brand to offer more casual and comfortable footwear and apparel in this post-pandemic environment, which in addition to recovery from the pandemic, has fueled top line growth. Retail operations accounted for 70.5% of Johnston & Murphy Group's sales in the first quarter of Fiscal 2023, down from 74.5% in the first quarter of Fiscal 2022. The store count for Johnston & Murphy retail operations at the end of the first quarter of Fiscal 2023 was 162 stores, including seven stores in Canada, compared to 178 stores, including eight stores in Canada, at the end of the first quarter of Fiscal 2022.
Johnston & Murphy Group operating income of $0.6 million for the first quarter of Fiscal 2023 improved $3.7 million compared to an operating loss of $3.2 million in the first quarter of Fiscal 2022. The increase was primarily due to (i) increased net sales and (ii) decreased selling and administrative expenses as a percentage of net sales due to greater leverage of expenses as a result of revenue growth, partially offset by increased bad debt expense. Gross margin as a percentage of net sales decreased for the first quarter of Fiscal 2023 compared to the first quarter of Fiscal 2022 reflecting increased airfreight costs and the channel mix of more wholesale sales, partially offset by price increases, decreased retail markdowns and decreased shipping and warehouse expense.
Licensed Brands
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Three Months Ended |
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|
|
April 30, 2022 |
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|
May 1, 2021 |
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|
% Change |
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|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
47,128 |
|
|
$ |
44,674 |
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|
|
5.5 |
% |
Operating income |
|
$ |
3,793 |
|
|
$ |
2,561 |
|
|
|
48.1 |
% |
Operating margin |
|
|
8.0 |
% |
|
|
5.7 |
% |
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|
|
Licensed Brands' net sales increased 5.5% to $47.1 million for the first quarter of Fiscal 2023, from $44.7 million for the first quarter of Fiscal 2022, primarily reflecting the growth in the portfolio as a result of the selling, product and sourcing capabilities gained through an acquisition in late Fiscal 2020.
Licensed Brands' operating income was $3.8 million for the first quarter of Fiscal 2023 compared to $2.6 million in the first quarter of Fiscal 2022. The 48.1% increase in operating income was primarily due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales as increased freight and logistics costs were more than offset by fewer closeout sales as compared to last year and (iii) decreased selling and administrative expenses as a percentage of net sales reflecting leverage of expenses as a result of a favorable sales mix, partially offset by increased bad debt expense.
Corporate, Interest Expenses and Other Charges
Corporate and other expense for the first quarter of Fiscal 2023 was $8.3 million compared to $13.1 million for the first quarter of Fiscal 2022. Corporate expense in the first quarter of Fiscal 2023 included a gain of $0.3 million in asset impairment and other charges from a gain on the termination of the pension plan, partially offset by retail store asset impairments. Corporate expense in the first quarter of Fiscal 2022 included a $2.7 million charge in asset impairment and other charges for professional fees related to the actions of an activist shareholder and retail store asset impairments. The corporate expense decrease, excluding asset impairment and other charges, primarily reflected decreased performance-based compensation expense.
Net interest expense decreased to $0.3 million for the first quarter of Fiscal 2023 compared to net interest expense of $0.7 million for the first quarter of Fiscal 2022 primarily reflecting decreased average borrowings in the first quarter this year.
18
Liquidity and Capital Resources
Working Capital
Our business is seasonal, with our investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year. Historically, cash flows from operations typically have been generated principally in the fourth quarter of each fiscal year.
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Three Months Ended |
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Cash flow changes: |
|
April 30, 2022 |
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|
May 1, 2021 |
|
|
Increase (Decrease) |
|
(in millions) |
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(92.1 |
) |
|
$ |
44.2 |
|
|
$ |
(136.3 |
) |
Net cash used in investing activities |
|
|
(15.4 |
) |
|
|
(12.1 |
) |
|
|
(3.3 |
) |
Net cash provided by (used in) financing activities |
|
|
(11.3 |
) |
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|
10.5 |
|
|
|
(21.8 |
) |
Effect of foreign exchange rate fluctuations on cash |
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|
(1.1 |
) |
|
|
0.4 |
|
|
|
(1.5 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
(119.9 |
) |
|
$ |
43.0 |
|
|
$ |
(162.9 |
) |
Reasons for the major variances in cash used in the table above are as follows:
Cash used in operating activities was $136.3 million higher for the first three months of Fiscal 2023 compared to the first three months of Fiscal 2022, reflecting primarily the following factors:
•a $117.6 million decrease in cash flow from changes in inventory, primarily reflecting increased inventory growth in all of business units in the first three months of Fiscal 2023 as we continue to rebuild inventory following the significant supply chain disruptions resulting from the pandemic;
•a $78.0 million decrease in cash flow from changes in other accrued liabilities, primarily reflecting the payment of Fiscal 2022 performance-based compensation accruals in the first three months of Fiscal 2023 and much lower performance-based compensation accruals for the first three months of Fiscal 2023 compared to Fiscal 2022; and
•a $16.2 million decrease in cash flow from changes in prepaids and other current assets, primarily reflecting increased prepaid rent in the first three months of Fiscal 2023 and the decrease in prepaid income taxes was much lower in the first three months of Fiscal 2023 compared to the decrease in prepaid income taxes in the first three months of Fiscal 2022; partially offset by
•a $77.3 million increase in cash flow from changes in accounts payable, primarily reflecting changes in buying patterns in the first three months of Fiscal 2023.
Cash used in investing activities was $3.3 million higher for the first three months of Fiscal 2023 as compared to the first three months of Fiscal 2022 reflecting increased capital expenditures primarily related to the new headquarters building.
Cash used in financing activities was $21.8 million higher for the first three months of Fiscal 2023 as compared to the first three months of Fiscal 2022 reflecting share repurchases this year and the payment of Fiscal 2022 share repurchase accruals in the first three months of Fiscal 2023 along with decreased borrowings this year compared to the same period last year.
Sources of Liquidity and Future Capital Needs
We have three principal sources of liquidity: cash flow from operations, cash and cash equivalents on hand and our credit facilities discussed in Item 8, Note 9, "Long-Term Debt", to our Consolidated Financial Statements included in our Annual Report on Form 10-K for Fiscal 2022.
As of April 30, 2022, we have borrowed $14.7 million (£11.7 million) under our Credit Facility. We were in compliance with all the relevant terms and conditions of the Credit Facility and Facility Letter as of April 30, 2022.
We believe that cash on hand, cash provided by operations and borrowings under our amended Credit Facility and the Schuh Facility Letter will be sufficient to support our liquidity needs in Fiscal 2023 and the foreseeable future.
During the remainder of Fiscal 2023, we expect our primary cash requirements to be directed towards funding operating activities, including the acquisition of inventory, and other working capital obligations including those related to taxes. Given the continued uncertainty and the potential impact on consumer spending from the COVID-19 pandemic and recent geopolitical events, we believe it is prudent to maintain higher than usual cash balances to support potential disruptions in cash flow. While the timing and amount of any common stock repurchases will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions, we will also consider returning cash to our shareholders through opportunistic share repurchases pursuant to our repurchase authorization described in more detail below.
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In the fourth quarter of Fiscal 2021, we implemented tax strategies allowed under the 5-year carryback provisions in the CARES Act which we believed would generate approximately $55 million of net tax refunds. We received approximately $26 million of such refunds in Fiscal 2022. We expect to receive the balance in Fiscal 2023.
Contractual Obligations
Our contractual obligations at April 30, 2022 decreased 7% compared to January 29, 2022, primarily due to decreased operating lease obligations and long-term debt, partially offset by increased purchase obligations.
We do not currently have any longer-term capital expenditures or other cash requirements other than as set forth above and in the contractual obligations table as disclosed in Item 7 of our Fiscal 2022 Form 10-K. We also do not currently have any off-balance sheet arrangements.
Capital Expenditures
Total capital expenditures in Fiscal 2023 are expected to be approximately $50 million to $55 million of which approximately 56% is for new stores and remodels and 44% is for computer hardware, software and warehouse enhancements for initiatives to drive traffic and omni-channel capabilities. Planned capital expenditures excludes approximately $11 million, or $9 million net of tenant allowances, for the new corporate headquarters building.
Common Stock Repurchases
We repurchased 102,895 shares during the first quarter of Fiscal 2023 at a cost of $6.5 million, or $63.17 per share. There were $4.8 million share repurchases accrued in the fourth quarter of Fiscal 2022 included on the Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2022. We have $100.3 million remaining as of April 30, 2022 under our expanded share repurchase authorization announced in February 2022. We did not repurchase any shares during the first quarter of Fiscal 2022. During the second quarter of Fiscal 2023, through June 8, 2022, we have repurchased 175,000 shares at a cost of $10.1 million, or $57.94 per share.
Environmental and Other Contingencies
We are subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Item 1, Note 8, "Legal Proceedings", to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
New Accounting Pronouncements
Descriptions of recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by us during the first quarter of Fiscal 2023 are included in Note 1 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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