Item 2. Management’s Discussion and Analysis Of Financial Condition and Results Of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our investment plans and anticipated returns on those investments, our future customer growth, our future results of operations and financial position, including our financial outlook and profitability goals, available liquidity and access to financing sources, our business strategy, plans and objectives of management for future operations, including our international expansion, omni-channel strategy and launch of physical retail stores, consumer activity and behaviors, developments in our technology and systems and anticipated results of those developments and the impact of macroeconomic events, including the COVID-19 pandemic, interest rates and rising inflation, and our response to such events, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions.
Forward-looking statements are based on current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that known or unknown risks or uncertainties materialize, actual results could vary materially from Wayfair’s expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and, except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.
Factors that could cause or contribute to differences in our future results include, without limitation, the following:
•our ability to acquire new customers and sustain and/or manage our growth;
•our ability to increase our net revenue per active customer;
•our ability to build and maintain strong brands;
•our ability to manage our growth and expansion initiatives;
•our ability to compete successfully;
•the rate of growth of the Internet and e-commerce;
•macroeconomic factors, such as interest rates, rising inflation, the housing market, currency exchange fluctuations and changes in customer spending;
•disruptions, capacity constraints or inefficiencies in our supply chain or logistics network, including any impact of the COVID-19 pandemic on our suppliers and third-party carriers and delivery agents;
•potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations;
•world events, natural disasters, public health emergencies (such as the COVID-19 pandemic), civil disturbances, and terrorist attacks; and
•developments in, and the outcome of, legal and regulatory proceedings and investigations to which we are a party or are subject, and the liabilities, obligations and expenses, if any, that we may incur in connection therewith.
A further list and description of risks, uncertainties and other factors that could cause or contribute to differences in our future results include the cautionary statements herein and in our other filings with the Securities and Exchange Commission, including those set forth under Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Wayfair is one of the world's largest online destinations for the home. Through our e-commerce business model, we offer visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over thirty-three million products from over 23,000 suppliers.
We believe an increasing portion of the dollars spent on home goods will be spent online and that there is an opportunity for acquiring more market share. Our business model is designed to grow our net revenue by acquiring new customers as well as stimulating repeat purchases from our existing customers. Through increasing brand awareness as well as paid and unpaid advertising, we attract new and repeat customers to our sites. We turn these customers into recurring shoppers by creating a seamless shopping experience across their entire journey — offering best-in-class product discovery, purchasing, fulfillment and customer service.
Global Considerations
We are continuing to closely monitor the impact of the COVID-19 pandemic on our business, results of operations and financial results. The situation surrounding the COVID-19 pandemic remains fluid and the full extent of the impact of the COVID-19 pandemic on our business will depend on certain developments including the duration and severity of the pandemic, the emergence of new variants that may continue to prolong the pandemic, the amount of time it will take for normal economic activity to resume, future government actions that may be taken, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers, partners and stockholders, all of which are uncertain and cannot be predicted. See Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional details. Our focus remains on promoting the health, safety and financial security of our employees and serving our customers.
As the COVID-19 pandemic remains dynamic and subject to rapid and possibly material change, we will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, partners, stockholders and communities.
We are also closely monitoring the recent volatility in the global markets and the rise in inflation and interest rates. These developments could continue to negatively impact global economic activity and consumer behavior, which may adversely affect our business and our results of operations. As our customers react to these global economic conditions, we may take additional precautionary measures to limit or delay expenditures and preserve capital and liquidity.
While it is difficult to predict all of the impacts these global economic events, including the COVID-19 pandemic and rising inflation and interest rates, will have on our business and to predict consumer spending in the near term, we believe the long-term opportunity that we see for shopping for the home online remains unchanged.
We will continue to monitor economic conditions as we work to manage our business to meet the evolving needs of our customers, employees, suppliers, partners, stockholders and communities.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021.
Key Financial and Operating Metrics
We measure our business using key financial and operating metrics, as well as Adjusted EBITDA, Free Cash Flow and Adjusted Diluted (Loss) Earnings per Share (see “Non-GAAP Financial Measures”). Our Free Cash Flow and Adjusted Diluted (Loss) Earnings per Share are measured on a consolidated basis, while our Adjusted EBITDA is measured on a consolidated and reportable segment basis. All other key financial and operating metrics are derived and reported from our consolidated net revenue.
We use the following metrics to assess the near and longer-term performance of our overall business: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions, except LTM Net Revenue per Active Customer, Average Order Value and per share data) |
Key Financial Statement Metrics: | | | | | | | | |
Net revenue | | $ | 2,840 | | $ | 3,121 | | $ | 9,117 | | $ | 10,456 |
Gross profit | | $ | 824 | | $ | 883 | | $ | 2,523 | | $ | 3,014 |
(Loss) income from operations | | $ | (372) | | $ | (70) | | $ | (1,054) | | $ | 102 |
Net (loss) income | | $ | (283) | | $ | (78) | | $ | (980) | | $ | 71 |
(Loss) earnings per share: | | | | | | | | |
Basic | | $ | (2.66) | | $ | (0.75) | | $ | (9.28) | | $ | 0.68 |
Diluted | | $ | (2.66) | | $ | (0.75) | | $ | (9.28) | | $ | 0.65 |
| | | | | | | | |
Net cash used in operating activities | | $ | (431) | | $ | (131) | | $ | (772) | | $ | 321 |
Key Operating Metrics: | | | | | | | | |
Active customers (1) | | 23 | | 29 | | 23 | | 29 |
LTM net revenue per active customer (2) | | $ | 547 | | $ | 484 | | $ | 547 | | $ | 484 |
Orders delivered (3) | | 9 | | 11 | | 29 | | 40 |
Average order value (4) | | $ | 325 | | $ | 283 | | $ | 313 | | $ | 264 |
Non-GAAP Financial Measures: | | | | | | | | |
Adjusted EBITDA | | $ | (124) | | $ | 101 | | $ | (345) | | $ | 618 |
Free Cash Flow | | $ | (538) | | $ | (205) | | $ | (1,113) | | $ | 114 |
Adjusted Diluted (Loss) Earnings per Share | | $ | (2.11) | | $ | 0.14 | | $ | (5.99) | | $ | 3.08 |
| | | | | | | | |
(1) The number of active customers represents the total number of individual customers who have purchased at least once directly from our sites during the preceding twelve-month period. The change in active customers in a reported period captures both the inflow of new customers as well as the outflow of existing customers who have not made a purchase in the last twelve months. We view the number of active customers as a key indicator of our growth.
(2) LTM net revenue per active customer represents our total net revenue in the last twelve months divided by our total number of active customers for the same preceding twelve-month period. We view LTM net revenue per active customer as a key indicator of our customers' purchasing patterns, including their initial and repeat purchase behavior.
(3) Orders delivered represents the total orders delivered in that period, inclusive of orders that may eventually be returned. As we ship a large volume of packages through multiple carriers, actual delivery dates may not always be available, and as such we estimate delivery dates based on historical data. We recognize net revenue when an order is delivered, and therefore orders delivered, together with average order value, is an indicator of the net revenue we expect to recognize in a given period. We view orders delivered as a key indicator of our growth.
(4) We define average order value as total net revenue in a given period divided by the orders delivered in that period. We view average order value as a key indicator of the mix of products on our sites, the mix of offers and promotions and the purchasing behavior of our customers.
Results of Consolidated Operations
Comparison of the three months ended September 30, 2022 and 2021
Net revenue
In the three months ended September 30, 2022, net revenue decreased by $281 million, or 9.0%, compared to the same period in 2021, which reflects some normalization in consumer behavior since the onset of the COVID-19 pandemic, as well as recent macroeconomic pressures felt by consumers. The decrease in net revenue was driven by lower orders, partially offset by higher average order values. There was a decrease in order frequency, with LTM orders per active customer decreasing by 5.2% in the three months ended September 30, 2022 compared to the same period in 2021. LTM net revenue per active customer increased 13.0% in the three months ended September 30, 2022, compared to the same period in 2021, driven by higher average order value due in part to inflationary pressures in the supply chain.
Our U.S. net revenue decreased 6.0% and International net revenue decreased 24.0% in the third quarter of 2022, as compared to the same period in 2021. International Net Revenue Constant Currency Growth (see “Non-GAAP Measures”) for the three months ended September 30, 2022 was (22.6)%. | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
U.S. net revenue | | $ | 2,440 | | | $ | 2,595 | | | (6.0) | % |
International net revenue | | 400 | | | 526 | | | (24.0) | % |
Net revenue | | $ | 2,840 | | | $ | 3,121 | | | (9.0) | % |
For more information on our segments, see Note 10 to the unaudited consolidated and condensed financial statements, Segment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
Cost of goods sold
Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs and fees earned for supplier services rendered. In the three months ended September 30, 2022, cost of goods sold decreased by $222 million, or 9.9%, as compared to the same period in 2021. The decrease in cost of goods sold is primarily driven by a decrease in the number of orders delivered.
The decrease in cost of goods sold as a percentage of net revenue is in part due to mix shifts offset by lower operational efficiencies from fewer orders and rising logistics costs relative to the same period in 2021. | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Cost of goods sold | | $ | 2,016 | | $ | 2,238 | | (9.9) | % |
As a percentage of net revenue | | 71.0 | % | | 71.7 | % | | |
| | | | | | |
| | | | | | |
Operating expenses
Operating expenses are comprised of customer service and merchant fees, advertising and selling, operations, technology, general and administrative expenses, impairment and other related charges and restructuring charges. We disclose separately the equity-based compensation and related taxes that are included in customer service and merchant fees and selling, operations, technology and general and administrative expenses. | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Customer service and merchant fees (1) | | $ | 156 | | $ | 140 | | 11.4 | % |
Advertising | | 353 | | 315 | | 12.1 | % |
Selling, operations, technology, general and administrative (1) | | 656 | | 498 | | 31.7 | % |
| | | | | | |
Restructuring charges | | $ | 31 | | $ | — | | 100.0 | % |
Total operating expenses | | $ | 1,196 | | $ | 953 | | 25.5 | % |
As a percentage of net revenue: | | | | | | |
Customer service and merchant fees (1) | | 5.5 | % | | 4.5 | % | | |
Advertising | | 12.4 | % | | 10.1 | % | | |
Selling, operations, technology, general and administrative (1) | | 23.1 | % | | 15.9 | % | | |
| | | | | | |
Restructuring charges | | 1.1 | % | | — | % | | |
| | 42.1 | % | | 30.5 | % | | |
(1) Includes equity-based compensation and related taxes as follows: | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | |
| | (in millions) | | |
Customer service and merchant fees | | $ | 8 | | | $ | 7 | | | |
Selling, operations, technology, general and administrative | | $ | 113 | | | $ | 79 | | | |
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by $35 million in the three months ended September 30, 2022, compared to the same period in 2021, as a result of restricted stock units awarded in 2021 and in the nine months ended September 30, 2022.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes: | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| | 2022 | | 2021 |
Customer service and merchant fees | | 5.2% | | 4.3% |
Selling, operations, technology, general and administrative | | 19.1% | | 13.4% |
| | | | | | |
| | | | | | |
Customer Service and Merchant Fees
Expenses for customer service and merchant fees, both including and excluding the impact of equity-based compensation and related taxes and as a percentage of net revenues, increased during the three months ended September 30, 2022, as compared to the same period in 2021, due to increased compensation costs and a decrease in net revenue.
Advertising
Our advertising expenses increased by $38 million in the three months ended September 30, 2022, as compared to the same period in 2021, which reflects our response to changing market conditions as we sought to maintain our efficiency targets across various channels. As a percentage of net revenue, advertising expenses increased to 12.4% in the third quarter of 2022, as compared to 10.1% in the same period in 2021, due in part to changes in advertising channel mix as well as lower direct traffic.
Selling, operations, technology, general and administrative
Excluding the impact of equity-based compensation and related taxes, our expenses for selling, operations, technology, general and administrative activities increased by $124 million in three months ended September 30, 2022, as compared to the same period in 2021, primarily attributable to higher personnel costs, and to a lesser extent, higher information technology costs and depreciation and amortization.
As a percentage of net revenue, total selling, operations, technology, general and administrative expenses increased to 23.1% in three months ended September 30, 2022, as compared to 15.9% in the same period in 2021, primarily due to the increase in selling, operations, technology, general and administrative expenses and a decrease in net revenue.
Restructuring charges
During the third quarter of 2022, Wayfair announced a workforce reduction involving approximately 870 employees in connection with its previously announced plans to manage operating expenses and realign investment priorities. This reduction represented approximately 5% of our global workforce and approximately 10% of our corporate team at that time. As a result of this workforce reduction, we incurred a total of $31 million costs, consisting primarily of one-time employee severance and benefit costs. We did not record any charges during the three months ended September 30, 2021.
Interest expense, net
Our interest expense, net decreased by $3 million in the three months ended September 30, 2022, as compared to the same period in 2021, primarily driven by higher interest income. | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Interest expense, net | | $ | (5) | | | $ | (8) | | | (37.5) | % |
Other (expense) income, net
We incurred other expense, net in the three months ended September 30, 2022 of $1 million primarily attributable to unrealized and realized gains (losses) from foreign currency transactions. We generated other income, net of $4 million in the three months ended September 30, 2021, primarily attributable to unrealized and realized gains (losses) from foreign currency transactions. | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Other (expense) income, net | | $ | (1) | | | $ | 4 | | | (125.0) | % |
Gain on debt extinguishment
During the third quarter of 2022, Wayfair used approximately $506 million of the net proceeds from issuance of the 2027 Notes to repurchase for cash approximately $375 million aggregate principal amount of the 2024 Notes and approximately $229 million aggregate principal amount of the 2025 Notes, as well as aggregate accrued interest of $2 million for both the 2024 Notes and 2025 Notes, in privately negotiated repurchase transactions. In accounting for the repurchases of the 2024 Notes and 2025 Notes, Wayfair recorded a $96 million gain on debt extinguishment, representing the difference between the cash paid for principal of $504 million and the combined net carrying value of the 2024 Notes and 2025 Notes of $600 million.We did not record any gain on debt extinguishment during the three months ended September 30, 2021.
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Gain on debt extinguishment | | $ | 96 | | | $ | — | | | 100.0 | % |
Provision for income taxes, net
Our provision for income taxes, net decreased by $3 million in the three months ended September 30, 2022, as compared to the same period in 2021, primarily related to the level and mix of income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, partially offset by the recognition of a lower discrete tax benefit due to excess tax benefits on equity awards for U.S. employees. | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Provision for income taxes, net | | $ | 1 | | | $ | 4 | | | (75.0) | % |
Comparison of the nine months ended September 30, 2022 and 2021
Net revenue
In the nine months ended September 30, 2022, net revenue decreased by $1.3 billion, or 12.8%, as compared to the same period in 2021, which reflects some normalization in consumer behavior since the onset of the COVID-19 pandemic, as well as recent macroeconomic pressures felt by consumers. The decrease in net revenue was driven by lower orders, partially offset by higher average order values. There was a decrease in order frequency, with LTM orders per active customer decreasing by 5.2% in the nine months ended September 30, 2022 compared to the same period in 2021. LTM net revenue per active customer increased 13.0% in the nine months ended September 30, 2022, compared to the same period in 2021, driven by higher average order value due in part to inflationary pressures in the supply chain.
Our U.S. net revenue decreased 8.6%, while our International net revenue decreased 31.1% in the nine months ended September 30, 2022, as compared to same period in 2021. International Net Revenue Constant Currency Growth (see “Non-GAAP Measures” below) for the nine months ended September 30, 2022 was (29.6)%. | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
U.S. net revenue | | $ | 7,778 | | | $ | 8,514 | | | (8.6) | % |
International net revenue | | 1,339 | | | 1,942 | | | (31.1) | % |
Net revenue | | $ | 9,117 | | | $ | 10,456 | | | (12.8) | % |
For more information on our segments, see Note 10 to the unaudited consolidated and condensed financial statements, Segment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
Cost of goods sold
Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs and fees earned for supplier services rendered. In the nine months ended September 30, 2022, cost of goods sold decreased by $848 million, or 11.4%, as compared to the same period in 2021.
The decrease in cost of goods sold on an absolute dollar basis is primarily driven by a decrease in the number of orders delivered. The increase in cost of goods sold as a percentage of net revenue is in part due to mix shifts, lower operational efficiencies from fewer orders and rising logistics costs relative to the same period in 2021. | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Cost of goods sold | | $ | 6,594 | | $ | 7,442 | | (11.4) | % |
As a percentage of net revenue | | 72.3 | % | | 71.2 | % | | |
| | | | | | |
| | | | | | |
Operating expenses
Operating expenses are comprised of customer service and merchant fees, advertising, selling, operations, technology, general and administrative expenses and impairment and other related charges. We disclose separately the equity-based compensation and related taxes that are included in customer service and merchant fees and selling, operations, technology and general and administrative expenses. | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Customer service and merchant fees (1) | | $ | 469 | | $ | 432 | | 8.6 | % |
Advertising | | 1,067 | | 1,033 | | 3.3 | % |
Selling, operations, technology, general and administrative (1) | | 1,970 | | 1,435 | | 37.3 | % |
Impairment and other related charges | | 40 | | 12 | | 233.3 | % |
Restructuring charges | | 31 | | — | | 100.0 | % |
Total operating expenses | | $ | 3,577 | | $ | 2,912 | | 22.8 | % |
As a percentage of net revenue: | | | | | | |
Customer service and merchant fees (1) | | 5.1 | % | | 4.1 | % | | |
Advertising | | 11.7 | % | | 9.9 | % | | |
Selling, operations, technology, general and administrative (1) | | 21.6 | % | | 13.7 | % | | |
Impairment and other related charges | | 0.4 | % | | 0.1 | % | | |
Restructuring charges | | 0.3 | % | | — | % | | |
| | 39.1 | % | | 27.8 | % | | |
(1) Includes equity-based compensation and related taxes as follows: | | | | | | | | | | | | | |
| | Nine months ended September 30, | |
| | 2022 | | 2021 | |
| | (in millions) | |
Customer service and merchant fees | | $ | 25 | | | $ | 19 | | |
Selling, operations, technology, general and administrative | | $ | 335 | | | $ | 236 | | |
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by $105 million in the nine months ended September 30, 2022, as compared to the same period in 2021, as a result of RSUs awarded in 2021 and the nine months ended September 30, 2022.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes: | | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
Customer service and merchant fees | 4.9 | % | | 3.9 | % |
Selling, operations, technology, general and administrative | 17.9 | % | | 11.5 | % |
| | | |
| | | |
Customer Service and Merchant Fees
Expenses for customer service and merchant fees, including and excluding the impact of equity-based compensation and related taxes and as a percentage of net revenues, increased in the nine months ended September 30, 2022, as compared to the same period in 2021, due to increased compensation costs and a decrease in net revenue.
Advertising
Our advertising expenses increased by $34 million in the nine months ended September 30, 2022, as compared to the same period in 2021, which reflects our response to changing market conditions as we sought to maintain our efficiency targets across various channels. As a percentage of net revenue, advertising expenses increased to 11.7% for the nine months ended September 30, 2022, as compared to 9.9% in the same period in 2021, due in part to changes in advertising channel mix as well as lower direct traffic.
Selling, operations, technology, general and administrative
Excluding the impact of equity-based compensation and related taxes, our expenses for selling, operations, technology, general and administrative activities increased by $436 million in the nine months ended September 30, 2022, compared to the same period in 2021, primarily attributable to higher personnel costs, and to a lesser extent, higher information technology costs and depreciation and amortization. As a percentage of net revenue, total selling, operations, technology, general and administrative expenses increased to 21.6% in the nine months ended September 30, 2022, as compared to 13.7% in the same period in 2021, primarily due to the increase in selling, operations, technology, general and administrative expenses and decrease in net revenue.
Impairment and other related charges
During the nine months ended September 30, 2022, we identified an indicator of impairment for one of our U.S. office locations, which was primarily due to current sublease market conditions. As a result, we recorded a charge of $40 million during the second quarter of 2022, which included $32 million of non-cash impairment of the right-of-use (“ROU”) asset, $7 million for the non-cash impairment of fixed assets and the remainder for other items.
During the nine months ended September 30, 2021, we enacted a plan to consolidate certain customer service centers in identified U.S. locations. As a result, we recorded a charge of $12 million during the nine months ended September 30, 2021, which included $6 million for the non-cash impairment of ROU assets, $5 million for the non-cash accelerated depreciation of fixed assets and the remainder for other items.
Restructuring charges
During the nine months ended September 30, 2022, we announced a workforce reduction involving approximately 870 employees in connection with its previously announced plans to manage operating expenses and realign investment priorities. This reduction represented approximately 5% of our global workforce and approximately 10% of our corporate team at that time. As a result of this workforce reduction, we incurred a total of $31 million of costs, consisting primarily of one-time employee severance and benefit costs. We did not record any charges during the nine months ended September 30, 2021.
Interest expense, net
Our interest expense, net decreased by $5 million in the nine months ended September 30, 2022, as compared to the same period in 2021, primarily driven by higher interest income. | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Interest expense, net | | $ | (19) | | | $ | (24) | | | (20.8) | % |
Other expense, net
We did not incur other expense, net in the nine months ended September 30, 2022. We incurred other expense, net in the nine months ended September 30, 2021 of $1 million, primarily attributable to the net change in unrealized and realized gains (losses) from foreign currency transactions.
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Other expense, net | | $ | — | | | $ | (1) | | | (100.0) | % |
Gain on debt extinguishment
During the nine months ended September 30, 2022, we used approximately $506 million of the net proceeds from the issuance of the 2027 Notes to repurchase for cash approximately $375 million aggregate principal amount of the 2024 Notes and approximately $229 million aggregate principal amount of the 2025 Notes, as well as aggregate accrued interest of $2 million for both the 2024 Notes and 2025 Notes, in privately negotiated repurchase transactions. In accounting for the repurchases of the 2024 Notes and 2025 Notes, Wayfair recorded a $96 million gain on debt extinguishment, representing the difference between the cash paid for principal of $504 million and the combined net carrying value of the 2024 Notes and 2025 Notes of $600 million.We did not record any gain on debt extinguishment during the nine months ended September 30, 2021.
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Gain on debt extinguishment | | $ | 96 | | | $ | — | | | 100.0 | % |
Provision for income taxes, net
Our provision for income taxes, net decreased in the nine months ended September 30, 2022, as compared to the same period in 2021, primarily related to the level and mix of income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, partially offset by the recognition of a lower discrete tax benefit related to excess tax benefits on equity awards for U.S. employees. | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| | (in millions) | | |
Provision for income taxes, net | | $ | 3 | | | $ | 6 | | | (50.0) | % |
Liquidity and Capital Resources
Sources of Liquidity
At September 30, 2022, our principal source of liquidity was cash and cash equivalents and short-term investments totaling $1.3 billion. In addition, we have a $600 million senior secured revolving credit facility that matures on March 24, 2026 (the “Revolver”). Wayfair had outstanding letters of credit, primarily as security for certain lease agreements, for approximately $66 million as of September 30, 2022, which reduced the availability of credit under the Revolver. Excluding liquidity available through our Revolver, the following table shows sources of liquidity as of September 30, 2022 and December 31, 2021: | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | (in millions) |
Cash and cash equivalents | | $ | 731 | | | $ | 1,706 | |
Short-term investments | | $ | 557 | | | $ | 693 | |
Working capital | | $ | 43 | | | $ | 795 | |
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We believe that our existing cash and cash equivalents and investments, cash generated from operations and the borrowing availability under our Revolver will be sufficient to meet our anticipated cash needs for at least the foreseeable future. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Further, we may from time to time seek to retire, restructure, repurchase or redeem, or otherwise mitigate the equity dilution associated with, our outstanding convertible debt, through cash purchases, stock buybacks of some or all of the shares underlying convertible notes and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, exchanges or liability management exercises, if any, will be upon such
terms and at such prices and sizes as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Our future capital requirements and the adequacy of available funds will depend on many factors, including those described herein and in our other filings with the Securities and Exchange Commission, or SEC, including those set forth Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021. In addition, macroeconomic events, including the COVID-19 pandemic and related measures to contain its impact, have caused disruption in the capital markets, including increased inflation and interest rates, which could make obtaining financing more difficult and/or expensive. As a consequence, we may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt financing arrangements, those securities and instruments may have rights, preferences or privileges senior to the rights of our common stock, and the holders of our equity securities may experience dilution. We will continue to monitor our liquidity during this time of historic disruption and volatility in the global capital markets.
Credit Agreement and Convertible Notes
As of September 30, 2022, we had $3.2 billion principal amount of indebtedness outstanding.
Under the terms of our Revolver, we may use proceeds to finance working capital, to refinance existing indebtedness and to provide funds for permitted acquisitions, repurchases of equity interests and other general corporate purposes. Any amounts outstanding under the Revolver are due at maturity.
During the third quarter of 2022, we used approximately $506 million of the net proceeds from the issuance of the 2027 Notes to repurchase approximately $375 million aggregate principal amount of the 2024 Notes and approximately $229 million aggregate principal amount of the 2025 Notes, as well as aggregate accrued interest of $2 million for both the 2024 Notes and 2025 Notes. See Note 4, Debt and Other Financing, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q for more information regarding the repurchase of the 2024 Notes and the 2025 Notes.
The conditional conversion features of the 2024 Notes, 2025 Notes, 2026 Notes and 2027 Notes were not triggered during the third quarter of 2022, and therefore the 2024 Notes, 2025 Notes, 2026 Notes and 2027 Notes are not convertible in the fourth quarter of 2022 pursuant to the applicable last reported sales price condition. The 2025 Accreting Notes are convertible at any time prior to the close of business on the second business day immediately preceding the maturity date. There were no conversions of the Notes in the three and nine months ended September 30, 2022.
Whether any of the 2024 Notes, 2025 Notes, 2026 Notes or 2027 Notes will be convertible in future quarters will depend on the satisfaction of the applicable last reported sales price condition or another conversion condition in the future. If one or more holders elect to convert their 2024 Notes, 2025 Notes, 2026 Notes, or 2027 Notes at a time when any such 2024 Notes, 2025 Notes, 2026 Notes, or 2027 Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
The credit agreement and indentures governing our convertible notes contain restrictions and covenants that may limit our operating flexibility. Specifically, the Revolver contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict our ability, subject to negotiated exceptions, to incur additional indebtedness and additional liens on our assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, or change the nature of our businesses. The Revolver also requires us to maintain certain levels of performance in order to maintain our access to the Revolver. For instance, we are required to maintain a Consolidated Senior Secured Debt to Consolidated EBITDA Ratio (as defined in the Revolver) of 4.0 to 1.0, subject to a 0.5 step-up following certain permitted acquisitions. For information regarding our credit agreement and convertible notes, see Note 4, Debt and Other Financing, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. We do not expect any of these restrictions to affect our ability to conduct our business in the ordinary course. During the third quarter of 2022, we were in compliance with all the terms and conditions of our debt agreements.
Stock Repurchase Program
On August 21, 2020, the Board authorized the repurchase of up to $700 million of our Class A common stock in the open market, through privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan (the “2020 Repurchase Program”). On August 10, 2021, the Board authorized a new $1.0 billion share repurchase program on the same terms (the “2021 Repurchase Program,” together with the 2020 Repurchase Program, the “Repurchase Programs”). There is no stated expiration date for either of the Repurchase Programs. We will begin repurchasing shares under the 2021 Repurchase Program upon the completion of the 2020 Repurchase Program.
The Repurchase Programs do not obligate Wayfair to purchase any shares of Class A common stock and have no expiration but may be suspended or terminated by the Board at any time. The actual timing, number and value of shares repurchased under the Repurchase Programs in the future will be determined by Wayfair in its discretion and will depend on a number of factors, including market conditions, applicable legal requirements, our capital needs and whether there is a better alternative use of capital. As of September 30, 2022, Wayfair has repurchased 2,354,491 shares of Class A common stock for approximately $612 million under the Repurchase Programs.
Trends and Historical Cash Flows | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2022 | | 2021 |
| | (in millions) |
Net (loss) income | | $ | (980) | | | $ | 71 | |
Net cash (used in) provided by operating activities | | $ | (772) | | | $ | 321 | |
Net cash used in investing activities | | $ | (211) | | | $ | (276) | |
Net cash flows provided by (used in) financing activities | | $ | 16 | | | $ | (302) | |
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Operating Activities
Cash flows in connection with operating activities consisted of net (loss) income adjusted for certain non-cash items including depreciation and amortization, equity-based compensation, impairment and other related charges, amortization of discount and issuance costs on convertible notes, gain on debt extinguishment and certain other non-cash expenses, as well as the effect of changes in working capital and other activities. Operating cash flows can be volatile and are sensitive to many factors, including changes in working capital and our net (loss) income.
Cash flows used in operating activities in the nine months ended September 30, 2022 decreased by $1,093 million compared to the same period in 2021 primarily due to the decrease in cash from operating assets and liabilities of $141 million and decrease in net (loss) income of $1,051 million, adjusted for non-cash items of $99 million.
Investing Activities
Cash flows used in investing activities in the nine months ended September 30, 2022 decreased by $65 million compared to the same period in 2021 due to the decrease in purchases of short- and long-term investments of $355 million, partially offset by the decrease in sales and maturities of short- and long-term investments of $151 million, increase in site and software development costs of $76 million, increase in purchases of property and equipment of $58 million, and decrease in other investing activities of $5 million. Purchases of property and equipment and site and software development costs (collectively “Capital Expenditures”) were 3.8% of net revenue for the quarter ended September 30, 2022 and primarily related to equipment purchases and improvements for leased warehouses within our expanding logistics network and ongoing investments in our proprietary technology and operational platform. On an absolute dollar basis, we expect Capital Expenditures for the fourth quarter of 2022 to be within a range of $100 million and $110 million as we continue to expand our technology and logistics network.
Financing Activities
Cash flows provided by financing activities in the nine months ended September 30, 2022 increased by $318 million compared to the same period in 2021, primarily due to the $678 million of proceeds from the issuance of convertible notes, net of issuance costs, partially offset by an aggregate payment of $504 million to extinguish convertible debt, $80 million of premiums paid for capped call confirmations, $3 million payment of principal upon maturity of convertible debt, incremental repurchases of Class A common stock of $225 million and a decrease in other financial activities of $2 million.
Contractual Obligations
During the nine months ended September 30, 2022, Wayfair entered into contractual obligations of $266 million for future minimum lease payments under non-cancellable operating leases that have not yet commenced. Other than the additional lease obligations, there have been no material changes to our contractual obligations and estimates as compared to the contractual obligations described in Contractual Obligations included in 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 year ended December 31, 2021.
Non-GAAP Financial Measures
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this Quarterly Report on Form 10-Q Adjusted EBITDA, a non-GAAP financial measure that we calculate as net (loss) income before depreciation and amortization, equity-based compensation and related taxes, interest expense, net, other expense (income), net, provision for income taxes, net, non-recurring items, and other items not indicative of our ongoing operating performance. We have provided a reconciliation below of Adjusted EBITDA to net (loss) income, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and the Board to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis as these costs may vary independent of business performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and the Board.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
▪Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
▪Adjusted EBITDA does not reflect equity-based compensation and related taxes;
▪Adjusted EBITDA does not reflect changes in our working capital;
▪Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us;
▪Adjusted EBITDA does not reflect interest expenses associated with our borrowings;
▪Adjusted EBITDA does not include other items not indicative of our ongoing operating performance, and
▪Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net (loss) income and our other GAAP results.
The following table reflects the reconciliation of net (loss) income to Adjusted EBITDA for each of the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions) |
Reconciliation of Adjusted EBITDA | | | | | | | | |
Net (loss) income | | $ | (283) | | | $ | (78) | | $ | (980) | | | $ | 71 | |
Depreciation and amortization | | 94 | | | 82 | | 270 | | | 240 | |
Equity-based compensation and related taxes | | 123 | | | 89 | | 368 | | | 264 | |
Interest expense, net | | 5 | | | 8 | | 19 | | | 24 | |
Other expense (income), net | | 1 | | | (4) | | — | | | 1 | |
Provision for income taxes, net | | 1 | | | 4 | | 3 | | | 6 | |
Other: | | | | | | | | |
Impairment and other related charges (1) | | — | | | — | | | 40 | | | 12 | |
Restructuring charges (2) | | 31 | | | — | | | 31 | | | — | |
Gain on debt extinguishment (3) | | (96) | | | — | | | (96) | | | — | |
Adjusted EBITDA | | $ | (124) | | | $ | 101 | | | $ | (345) | | | $ | 618 | |
(1) In the nine months ended September 30, 2022, we recorded $40 million of lease impairment and other related charges related to changes in market conditions around future sublease income for one of our office locations in the U.S. In the nine months ended September 30, 2021, we recorded $12 million of customer service center impairment and other related charges related to our plan to consolidate customer service centers in identified U.S. locations.
(2) In the three and nine months ended September 30, 2022, we recorded a $31 million charge to restructuring charges for severance costs associated with the August 2022 workforce reductions. There were no similar charges in the prior period ended September 30, 2021.
(3) In the three and nine months ended September 30, 2022, we recorded a $96 million gain on debt extinguishment upon repurchase of $375 million in aggregate principal amount of our 2024 Notes and $229 million in aggregate principal amount of our 2025 Notes in September 2022.There were no similar charges in the prior period ended September 30, 2021.
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this Quarterly Report on Form 10-Q Free Cash Flow, a non-GAAP financial measure that we calculate as net cash flows from or for operating activities less Capital Expenditures. We have provided a reconciliation below of Free Cash Flow to net cash flows from or for operating activities, the most directly comparable GAAP financial measure.
We have included Free Cash Flow in this Quarterly Report on Form 10-Q because it is an important indicator of our business performance as it measures the amount of cash we generate. Accordingly, we believe that Free Cash Flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
Free Cash Flow has limitations as an analytical tool because it omits certain components of the cash flow statement and does not represent the residual cash flow available for discretionary expenditures. Further, other companies, including companies in our industry, may calculate Free Cash Flow differently. Accordingly, you should not consider Free Cash Flow in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider Free Cash Flow alongside other financial performance measures, including net cash flows from or for operating activities, Capital Expenditures and our other GAAP results.
The following table presents a reconciliation of net cash flows (used in) provided by operating activities to Free Cash Flow for each of the periods indicated:
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| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions) |
Net cash (used in) provided by operating activities | | $ | (431) | | | $ | (131) | | | $ | (772) | | | $ | 321 | |
Purchase of property and equipment | | (43) | | | (29) | | | (136) | | | (78) | |
Site and software development costs | | (64) | | | (45) | | | (205) | | | (129) | |
Free Cash Flow | | $ | (538) | | | $ | (205) | | | $ | (1,113) | | | $ | 114 | |
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Net Revenue Constant Currency Growth
To provide investors with additional information regarding our financial results, we have disclosed in this Quarterly Report on Form 10-Q Net Revenue Constant Currency Growth, a non-GAAP financial measure that we calculate by translating the current period local currency net revenue by the currency exchange rates used to translate our financial statements in the comparable prior-year period.
Net Revenue Constant Currency Growth is included in this Quarterly Report on Form 10-Q because it is an important indicator of our operating results. Accordingly, we believe that Net Revenue Constant Currency Growth provides useful information to investors and others in understanding and evaluating trends in our operating results in the same manner as our management.
Net Revenue Constant Currency Growth has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Net Revenue Constant Currency Growth rates, by their nature, exclude the impact of foreign exchange, which may have a material impact on net revenue.
Adjusted Diluted (Loss) Earnings per Share
To provide investors with additional information regarding our financial results, we have disclosed in this Quarterly Report on Form 10-Q Adjusted Diluted (Loss) Earnings per Share, a non-GAAP financial measure that we calculate as net (loss) income plus equity-based compensation and related taxes, provision for income taxes, net, non-recurring items, other items not indicative of our ongoing operating performance, and, if dilutive, interest expense associated with convertible debt instruments under the if-converted method divided by the weighted-average number of shares of common stock used in the computation of diluted (loss) earnings per share. Accordingly, we believe that these adjustments to our adjusted diluted net (loss) income before calculating per share amounts for all periods presented provides a more meaningful comparison between our operating results from period to period.
Adjusted Diluted (Loss) Earnings per Share has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted Diluted (Loss) Earnings per Share, by its nature, excludes equity-based compensation and related taxes, provision for income taxes, net, non-recurring items, other items not indicative of our ongoing operating performance, and, if dilutive, interest expense associated with convertible debt instruments under the if-converted method. Because of these limitations, you should consider Adjusted Diluted (Loss) Earnings per Share alongside other financial performance measures.
A reconciliation of the numerator and denominator for diluted (loss) earnings per share, the most directly comparable GAAP financial measure, and the numerator and denominator for Adjusted Diluted (Loss) Earnings per Share, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions, except per share data) |
Numerator: | | | | | | | | |
Net (loss) income | | $ | (283) | | | $ | (78) | | | $ | (980) | | | 71 | |
Effect of dilutive securities: | | | | | | | | |
Interest expense associated with convertible debt instruments | | — | | | — | | | — | | | (2) | |
Numerator for diluted EPS - net (loss) income available to common stockholders after the effect of dilutive securities | | (283) | | | (78) | | | (980) | | | 69 | |
Adjustments to net (loss) income: | | | | | | | | |
Interest expense associated with convertible debt instruments | | — | | | — | | | — | | | 25 | |
Equity-based compensation and related taxes | | 123 | | | 89 | | | 368 | | | 264 | |
Provision for income taxes, net | | 1 | | | 4 | | | 3 | | | 6 | |
Other: | | | | | | | | |
Impairment and other related charges | | — | | | — | | | 40 | | | 12 | |
Restructuring charges | | 31 | | | — | | | 31 | | | — | |
Gain on debt extinguishment | | (96) | | | — | | | (96) | | | — | |
Numerator for Adjusted Diluted EPS - Adjusted net income | | $ | (224) | | | $ | 15 | | | $ | (634) | | | $ | 376 | |
Denominator: | | | | | | | | |
Denominator for basic EPS - weighted-average number of shares of common stock outstanding | | 106 | | | 104 | | | 106 | | 104 | |
Effect of dilutive securities: | | | | | | | | |
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Restricted stock units | | — | | | — | | | — | | | 3 | |
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Dilutive potential common shares | | — | | | — | | | — | | | 3 | |
Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities | | 106 | | | 104 | | | 106 | | | 107 | |
Adjustments to effect of dilutive securities: | | | | | | | | |
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Restricted stock units | | — | | | 2 | | | — | | | — | |
Convertible debt instruments | | — | | | — | | | — | | | 15 | |
Denominator for Adjusted Diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities | | 106 | | | 106 | | | 106 | | | 122 | |
Diluted (Loss) Earnings per Share | | $ | (2.66) | | | $ | (0.75) | | | $ | (9.28) | | | $ | 0.65 | |
Adjusted Diluted (Loss) Earnings per Share | | $ | (2.11) | | | $ | 0.14 | | | $ | (5.99) | | | $ | 3.08 | |
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Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, net revenue, costs and expenses and related disclosures. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.
There have been no material changes to our critical accounting policies and estimates since December 31, 2021. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2021 for a description of our critical accounting policies and estimates.
New Accounting Pronouncements
The information called for by this section is incorporated herein by reference to Note 1, Summary of Significant Accounting Policies, of the unaudited consolidated and condensed financial statements