10-Q 1 lulu-20211031.htm 10-Q lulu-20211031
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-33608

lulu-20211031_g1.jpg
lululemon athletica inc.
(Exact name of registrant as specified in its charter)
Delaware20-3842867
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1818 Cornwall Avenue, Vancouver, British Columbia V6J 1C7
(Address of principal executive offices)

Registrant's telephone number, including area code:
604-732-6124
Former name, former address and former fiscal year, if changed since last report:
N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.005 per shareLULUNasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit such files).    Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated FilerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes No ☑
At December 2, 2021, there were 124,090,903 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At December 2, 2021, there were outstanding 5,203,012 exchangeable shares of Lulu Canadian Holding, Inc., a wholly-owned subsidiary of the registrant. Exchangeable shares are exchangeable for an equal number of shares of the registrant's common stock.
In addition, at December 2, 2021, the registrant had outstanding 5,203,012 shares of special voting stock, through which the holders of exchangeable shares of Lulu Canadian Holding, Inc. may exercise their voting rights with respect to the registrant. The special voting stock and the registrant's common stock generally vote together as a single class on all matters on which the common stock is entitled to vote.


TABLE OF CONTENTS
 
2

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
October 31,
2021
January 31,
2021
ASSETS
Current assets
Cash and cash equivalents
$993,591 $1,150,517 
Accounts receivable75,343 62,399 
Inventories943,900 647,230 
Prepaid and receivable income taxes140,582 139,126 
Prepaid expenses and other current assets157,878 125,107 
2,311,294 2,124,379 
Property and equipment, net876,489 745,687 
Right-of-use lease assets789,381 734,835 
Goodwill387,065 386,877 
Intangible assets, net73,494 80,080 
Deferred income tax assets6,804 6,731 
Other non-current assets127,480 106,626 
$4,572,007 $4,185,215 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$227,067 $172,246 
Accrued inventory liabilities10,038 14,956 
Other accrued liabilities 314,394 211,911 
Accrued compensation and related expenses181,863 130,171 
Current lease liabilities175,445 166,091 
Current income taxes payable43,199 8,357 
Unredeemed gift card liability137,656 155,848 
Other current liabilities28,358 23,598 
1,118,020 883,178 
Non-current lease liabilities684,460 632,590 
Non-current income taxes payable38,073 43,150 
Deferred income tax liabilities60,374 58,755 
Other non-current liabilities12,625 8,976 
1,913,552 1,626,649 
Commitments and contingencies
Stockholders' equity
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
  
Exchangeable stock, no par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding
  
Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding
  
Common stock, $0.005 par value: 400,000 shares authorized; 124,135 and 125,150 issued and outstanding
621 626 
Additional paid-in capital
406,413 388,667 
Retained earnings
2,398,186 2,346,428 
Accumulated other comprehensive loss
(146,765)(177,155)
2,658,455 2,558,566 
$4,572,007 $4,185,215 
See accompanying notes to the unaudited interim consolidated financial statements
3

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
Quarter EndedThree Quarters Ended
October 31,
2021
November 1,
2020
October 31,
2021
November 1,
2020
Net revenue$1,450,421 $1,117,426 $4,127,504 $2,672,330 
Cost of goods sold621,028 490,072 1,755,111 1,221,073 
Gross profit829,393 627,354 2,372,393 1,451,257 
Selling, general and administrative expenses545,124 411,708 1,583,075 1,064,172 
Amortization of intangible assets2,195 2,195 6,585 2,965 
Acquisition-related expenses24,127 8,531 39,934 22,040 
Income from operations257,947 204,920 742,799 362,080 
Other income (expense), net15 (580)338 250 
Income before income tax expense257,962 204,340 743,137 362,330 
Income tax expense70,174 60,697 202,319 103,254 
Net income$187,788 $143,643 $540,818 $259,076 
Other comprehensive income (loss):
Foreign currency translation adjustment10,274 2,269 30,390 (4,035)
Comprehensive income$198,062 $145,912 $571,208 $255,041 
Basic earnings per share$1.45 $1.10 $4.16 $1.99 
Diluted earnings per share$1.44 $1.10 $4.14 $1.98 
Basic weighted-average number of shares outstanding129,684 130,318 130,019 130,271 
Diluted weighted-average number of shares outstanding130,189 130,924 130,557 130,842 
See accompanying notes to the unaudited interim consolidated financial statements
4

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
Quarter Ended October 31, 2021
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of August 1, 20215,203 5,203 $ 124,644 $623 $381,737 $2,445,845 $(157,039)$2,671,166 
Net income187,788 187,788 
Foreign currency translation adjustment10,274 10,274 
Stock-based compensation expense21,657 21,657 
Common stock issued upon settlement of stock-based compensation83 — 7,907 7,907 
Shares withheld related to net share settlement of stock-based compensation(9)— (3,914)(3,914)
Repurchase of common stock(583)(2)(974)(235,447)(236,423)
Balance as of October 31, 20215,203 5,203 $ 124,135 $621 $406,413 $2,398,186 $(146,765)$2,658,455 

Quarter Ended November 1, 2020
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of August 2, 20205,393 5,393 $ 124,917 $625 $358,414 $1,872,948 $(230,885)$2,001,102 
Net income143,643 143,643 
Foreign currency translation adjustment2,269 2,269 
Common stock issued upon exchange of exchangeable shares(177)(177)— 177 1 (1) 
Stock-based compensation expense15,186 15,186 
Common stock issued upon settlement of stock-based compensation30 1 1,678 1,679 
Shares withheld related to net share settlement of stock-based compensation(3)(1)(925)(926)
Balance as of November 1, 20205,216 5,216 $ 125,121 $626 $374,352 $2,016,591 $(228,616)$2,162,953 
5

Three Quarters Ended October 31, 2021
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of January 31, 20215,203 5,203 $ 125,150 $626 $388,667 $2,346,428 $(177,155)$2,558,566 
Net income540,818 540,818 
Foreign currency translation adjustment30,390 30,390 
Stock-based compensation expense51,878 51,878 
Common stock issued upon settlement of stock-based compensation495 2 17,618 17,620 
Shares withheld related to net share settlement of stock-based compensation(152)(1)(49,480)(49,481)
Repurchase of common stock(1,358)(6)(2,270)(489,060)(491,336)
Balance as of October 31, 20215,203 5,203 $ 124,135 $621 $406,413 $2,398,186 $(146,765)$2,658,455 

Three Quarters Ended November 1, 2020
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of February 2, 20206,227 6,227 $ 124,122 $621 $355,541 $1,820,637 $(224,581)$1,952,218 
Net income259,076 259,076 
Foreign currency translation adjustment(4,035)(4,035)
Common stock issued upon exchange of exchangeable shares(1,011)(1,011)— 1,011 5 (5) 
Stock-based compensation expense37,098 37,098 
Common stock issued upon settlement of stock-based compensation515 3 14,139 14,142 
Shares withheld related to net share settlement of stock-based compensation(158)(1)(31,882)(31,883)
Repurchase of common stock(369)(2)(539)(63,122)(63,663)
Balance as of November 1, 20205,216 5,216 $ 125,121 $626 $374,352 $2,016,591 $(228,616)$2,162,953 
See accompanying notes to the unaudited interim consolidated financial statements
6

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
Three Quarters Ended
October 31, 2021November 1, 2020
Cash flows from operating activities
Net income$540,818 $259,076 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization162,086 133,209 
Stock-based compensation expense51,878 37,098 
Settlement of derivatives not designated in a hedging relationship30,427 (9,841)
Changes in operating assets and liabilities:
Inventories(288,821)(234,154)
Prepaid and receivable income taxes(883)(83,113)
Prepaid expenses and other current assets(43,395)(66,778)
Other non-current assets(8,792)(36,419)
Accounts payable50,903 73,596 
Accrued inventory liabilities(5,253)4,240 
Other accrued liabilities93,132 69,496 
Accrued compensation and related expenses50,437 (37,077)
Current and non-current income taxes payable29,862 (25,611)
Unredeemed gift card liability(18,969)(15,624)
Right-of-use lease assets and current and non-current lease liabilities6,318 6,577 
Other current and non-current liabilities8,376 10,729 
Net cash provided by operating activities658,124 85,404 
Cash flows from investing activities
Purchase of property and equipment(266,991)(170,830)
Settlement of net investment hedges(36,447)5,867 
Acquisition, net of cash acquired (452,581)
Other investing activities(10,000)1,000 
Net cash used in investing activities(313,438)(616,544)
Cash flows from financing activities
Proceeds from settlement of stock-based compensation17,620 14,142 
Shares withheld related to net share settlement of stock-based compensation(49,481)(31,883)
Repurchase of common stock(491,336)(63,663)
Net cash used in financing activities(523,197)(81,404)
Effect of foreign currency exchange rate changes on cash and cash equivalents21,585 620 
Decrease in cash and cash equivalents(156,926)(611,924)
Cash and cash equivalents, beginning of period$1,150,517 $1,093,505 
Cash and cash equivalents, end of period$993,591 $481,581 
See accompanying notes to the unaudited interim consolidated financial statements

7

lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS

8

lululemon athletica inc.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. Nature of Operations and Basis of Presentation
Nature of operations
lululemon athletica inc., a Delaware corporation, ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel and accessories, which are sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, sales from temporary locations, sales to wholesale accounts, and license and supply arrangements. The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, South Korea, Germany, New Zealand, Japan, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland. There were 552 and 521 company-operated stores as of October 31, 2021 and January 31, 2021, respectively.
On July 7, 2020, the Company acquired Curiouser Products Inc., dba MIRROR, ("MIRROR") which has been consolidated from the date of acquisition. MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Please refer to Note 3. Acquisition for further information.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") caused governments and public health officials to impose restrictions and recommend precautions to mitigate the spread of the virus.
The Company temporarily closed almost all of its retail locations for a significant portion of the first two quarters of fiscal 2020. While most of the Company's retail locations were open throughout the first three quarters of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance.
During the third quarter and first three quarters of fiscal 2020, the Company recognized $1.4 million and $37.0 million, respectively, of government payroll subsidies as a reduction in selling, general, and administrative expenses. These subsidies partially offset the wages paid to employees while its retail locations were temporarily closed due to COVID-19. The Company did not recognize any payroll subsidies in the first three quarters of fiscal 2021.
Basis of presentation
The unaudited interim consolidated financial statements as of October 31, 2021 and for the quarters and three quarters ended October 31, 2021 and November 1, 2020 are presented in U.S. dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 31, 2021 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 31, 2021, which are included in Item 8 in the Company's fiscal 2020 Annual Report on Form 10-K filed with the SEC on March 30, 2021. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2020 Annual Report on Form 10-K. Note 2. Recent Accounting Pronouncements sets out the impact of recent accounting pronouncements.
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2021 will end on January 30, 2022 and will be a 52-week year. Fiscal 2020 was a 52-week year and ended on January 31, 2021. Fiscal 2021 and fiscal 2020 are referred to as "2021," and "2020," respectively. The first three quarters of 2021 and 2020 ended on October 31, 2021 and November 1, 2020, respectively.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
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Note 2. Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In December 2019, the FASB issued guidance on ASC 740, Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application and make simplifications in other areas of this topic by clarifying and amending existing guidance. The Company adopted this update during the first quarter of 2021 and it did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). Recently issued ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations.
Note 3. Acquisition
On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition. The fair value of the consideration paid, net of cash acquired, was $452.6 million. This resulted in the recognition of intangible assets of $85.0 million and goodwill of $362.5 million. The purchase price allocation was finalized as of January 31, 2021 with no measurement period adjustments.
Acquisition-related expenses
In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred. These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:
acquisition-related compensation, including the partial acceleration of vesting of certain stock options, amounts due to selling shareholders and MIRROR employees that are contingent upon continuing employment;
transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition; and
gain recognized on the Company's existing investment in the acquiree as of the acquisition date.
The following table summarizes the acquisition-related expenses recognized:
Third QuarterFirst Three Quarters
2021202020212020
(in thousands)
Acquisition-related expenses:
Transaction and integration costs$328 $1,017 $1,859 $10,263 
Gain on existing investment   (782)
Acquisition-related compensation23,799 7,514 38,075 12,559 
$24,127 $8,531 $39,934 $22,040 
Income tax effects of acquisition-related expenses$(611)$(896)$(1,417)$(2,862)
In connection with the acquisition, $2.9 million was recognized on the acquisition date for the partial acceleration of vesting of certain stock options held by MIRROR employees, and $57.1 million of consideration was deferred up to three years from the acquisition, subject to the continued employment of the recipients through various vesting dates. This acquisition-related compensation is expensed over the vesting periods as service is provided.
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In September 2021, MIRROR's Chief Executive Officer transitioned into an advisory role with the Company. The remaining deferred consideration payable to this individual will be paid in July 2022. Due to the reduction in this individual's responsibilities, the compensation expense has been accelerated and was recognized in full during the third quarter of 2021.
Note 4. Revolving Credit Facilities
North America revolving credit facility
During 2016, the Company obtained a $150.0 million committed and unsecured five-year revolving credit facility with major financial institutions. During 2018, the Company amended the credit agreement to provide for:
i.an increase in the aggregate commitments under the revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each;
ii.an increase in the option, subject to certain conditions, to request increases in commitments from $400.0 million to $600.0 million; and
iii.an extension in the maturity of the facility from December 15, 2021 to June 6, 2023. Borrowings under the facility may be made in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the lenders' approval.
As of October 31, 2021, aside from letters of credit of $3.1 million, there were no other borrowings outstanding under this facility.
Borrowings under the facility bear interest at a rate equal to, at the Company's option, either (a) rates based on deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, an applicable margin determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax, depreciation, amortization, and rent ("EBITDAR") and ranges between 1.00%-1.50% for LIBOR loans and 0.00%-0.50% for alternate base rate loans. Additionally, a commitment fee of between 0.10%-0.20% is payable on the average unused amounts under the revolving credit facility, and fees of 1.00%-1.50% are payable on unused letters of credit.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
The Company is also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.5:1 and to maintain the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) below 2:1. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). As of October 31, 2021, the Company was in compliance with the covenants of the credit facility.
Mainland China revolving credit facility
In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility with terms that are reviewed on an annual basis. The credit facility was increased to 230.0 million Chinese Yuan during 2020. It is comprised of a revolving loan of up to 200.0 million Chinese Yuan and a financial guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175%. The Company is required to follow certain covenants. As of October 31, 2021, the Company was in compliance with the covenants and, aside from letters of credit of 3.5 million Chinese Yuan, there were no borrowings or guarantees outstanding under this credit facility.
Note 5. Stock-Based Compensation and Benefit Plans
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company.
Stock-based compensation expense charged to income for the plans was $49.6 million and $41.9 million for the first three quarters of 2021 and 2020, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $108.9 million as of October 31, 2021, which is expected to be recognized over a weighted-average period of 2.1 years.
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A summary of the balances of the Company's stock-based compensation plans as of October 31, 2021, and changes during the first three quarters then ended, is presented below:
Stock OptionsPerformance-Based Restricted Stock UnitsRestricted SharesRestricted Stock UnitsRestricted Stock Units
(Liability Accounting)
NumberWeighted-Average Exercise PriceNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Fair Value
(In thousands, except per share amounts)
Balance as of January 31, 2021804 $139.27 199 $149.20 4 $299.09 275 $166.50 15 $328.68 
Granted191 308.96 136 181.56 4 327.22 120 327.82   
Exercised/released169 104.42 166 100.89 4 299.09 142 138.58 15 397.83 
Forfeited/expired28 195.67 5 212.34   17 231.34   
Balance as of October 31, 2021798 $185.23 164 $222.98 4 $327.22 236 $260.76  $ 
Exercisable as of October 31, 2021258 $126.62 
The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the award date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved.
The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first three quarters of 2021:
First Three Quarters
 2021
Expected term3.75 years
Expected volatility39.32 %
Risk-free interest rate0.50 %
Dividend yield %
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the third quarter of 2021, there were 16.1 thousand shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to
12

exceed the dollar amounts set by applicable laws. The Company matches 50% to 75% of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $8.8 million and $6.7 million in the first three quarters of 2021 and 2020, respectively.
Note 6. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - defined as observable inputs such as quoted prices in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of October 31, 2021 and January 31, 2021, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
October 31, 2021Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$416,778 $416,778 $ $ Cash and cash equivalents
Term deposits219,367  219,367  Cash and cash equivalents
Forward currency contract assets6,429  6,429  Prepaid expenses and other current assets
Forward currency contract liabilities7,869  7,869  Other current liabilities
January 31, 2021Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$671,817 $671,817 $ $ Cash and cash equivalents
Term deposits183,015  183,015  Cash and cash equivalents
Forward currency contract assets17,364  17,364  Prepaid expenses and other current assets
Forward currency contract liabilities18,767  18,767  Other current liabilities
The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.
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Note 7. Derivative Financial Instruments
Foreign currency exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar and Chinese Yuan to the U.S. dollar exchange rate and changes in the Euro and Australian dollar to the Canadian dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign currency exchange gains and losses which arise on translation of its international subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during the first three quarters of 2021.
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign currency exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date foreign currency exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first three quarters of 2021, the Company entered into certain forward currency contracts designed to economically hedge the foreign currency exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on specific monetary assets and liabilities denominated in currencies other than the functional currency of the entity. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of October 31, 2021, there were derivative assets of $6.4 million and derivative liabilities of $7.9 million subject to enforceable netting arrangements.
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The notional amounts and fair values of forward currency contracts were as follows:
October 31, 2021January 31, 2021
Gross NotionalAssetsLiabilitiesGross NotionalAssetsLiabilities
(In thousands)
Derivatives designated as net investment hedges:
Forward currency contracts$1,185,000 $ $6,472 $985,000 $ $18,099 
Derivatives not designated in a hedging relationship:
Forward currency contracts1,297,026 6,429 1,397 1,055,000 17,364 668 
Net derivatives recognized on consolidated balance sheets:
Forward currency contracts$6,429 $7,869 $17,364 $18,767 
The forward currency contracts designated as net investment hedges outstanding as of October 31, 2021 mature on different dates between November 2021 and May 2022.
The forward currency contracts not designated in a hedging relationship outstanding as of October 31, 2021 mature on different dates between November 2021 and May 2022.
The pre-tax gains and losses on foreign currency exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows:
Third QuarterFirst Three Quarters
2021202020212020
(In thousands)
Gains (losses) recognized in foreign currency translation adjustment:
Derivatives designated as net investment hedges$(9,766)$(7,391)$(24,822)$(3,863)
No gains or losses have been reclassified from accumulated other comprehensive income or loss into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary.
The pre-tax net foreign currency exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows:
Third QuarterFirst Three Quarters
2021202020212020
(In thousands)
Gains (losses) recognized in selling, general and administrative expenses:
Foreign currency exchange gains (losses)$(8,161)$(3,627)$(28,296)$247 
Derivatives not designated in a hedging relationship6,511 3,823 18,758 (2,123)
Net foreign currency exchange and derivative gains (losses) $(1,650)$195 $(9,538)$(1,876)
Credit risk
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance.
The Company's forward currency contracts are entered into with large, reputable financial institutions that are monitored by the Company for counterparty risk.
The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts.
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Note 8. Earnings Per Share
The details of the computation of basic and diluted earnings per share are as follows:
Third QuarterFirst Three Quarters
2021202020212020
(In thousands, except per share amounts)
Net income$187,788 $143,643 $540,818 $259,076 
Basic weighted-average number of shares outstanding129,684 130,318 130,019 130,271 
Assumed conversion of dilutive stock options and awards505 606 538 571 
Diluted weighted-average number of shares outstanding130,189 130,924 130,557 130,842 
Basic earnings per share$1.45 $1.10 $4.16 $1.99 
Diluted earnings per share$1.44 $1.10 $4.14 $1.98 
The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the first three quarters of 2021 and 2020, 48.0 thousand and 40.2 thousand stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $500.0 million of the Company's common shares on the open market or in privately negotiated transactions. On December 1, 2020, the Company's board of directors approved an increase in the remaining authorization of the existing stock repurchase program from $263.6 million to $500.0 million, and on October 1, 2021, it approved an increase in the remaining authorization from $141.2 million to $641.2 million. The repurchase plan has no time limit and does not require the repurchase of a minimum number of shares. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. As of October 31, 2021, the remaining authorized value of shares available to be repurchased under this program was $508.7 million.
During the first three quarters of 2021 and 2020, 1.4 million and 0.4 million shares, respectively, were repurchased under the program at a total cost of $491.3 million and $63.7 million, respectively.
Subsequent to October 31, 2021, and up to December 2, 2021, 46.5 thousand shares were repurchased at a total cost of $21.5 million.
Note 9. Supplementary Financial Information