Quarterly Report for Quarter Ending August 2, 2025 (Form 10-Q)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Foot Locker, Inc. is a leading footwear and apparel retailer that unlocks the "inner sneakerhead" in all of us. We have a strong history of sneaker authority that sparks discovery and ignites the power of sneaker culture through our portfolio of brands, including Foot Locker, Kids Foot Locker, Champs Sports, WSS, and atmos.

Ensuring that our customers can engage with us in the most convenient manner for them whether in our stores, on our websites, or on our mobile applications, is a high priority for us. We use our omni-channel capabilities to bridge the digital world and physical stores, including order-in-store, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the brand names of our store banners. These sites offer our largest product selections and provide a seamless link between our e-commerce experience and physical stores.

As previously announced on May 15, 2025, we entered into an agreement and plan of merger with DICK'S Sporting Goods, Inc. The transaction is subject to Foot Locker shareholder approval and other customary closing conditions, including regulatory approvals. On August 22, 2025, Foot Locker received shareholder approval for the Merger. The waiting period under the HSR Act expired at 11:59 p.m. Eastern time on August 25, 2025 and all required regulatory approvals to complete the transaction have been received. The Company expects the transaction will close on September 8, 2025.

Store Count

At August 2, 2025, we operated 2,354 stores as compared with 2,410 and 2,464 stores at February 1, 2025 and August 3, 2024, respectively.

Licensed Operations

A total of 243 licensed stores were operating at August 2, 2025, as compared with 224 and 213 stores at February 1, 2025 and August 3, 2024, respectively, operating in the Middle East, Asia, and Europe. These stores are not included in the operating store count above. During the first quarter of 2025, we transitioned our operations in Greece and Romania to our licensing partner.

Results of Operations

We evaluate performance based on several factors, primarily the banner's financial results, referred to as division profit. Division profit reflects income before income taxes, impairment and other charges, corporate expenses, non-operating income, and net interest expense.

The table below summarizes our results for the period.

Reconciliation of Non-GAAP Measures

In addition to reporting our financial results in accordance with U.S. generally accepted accounting principles ("GAAP"), we report certain financial results that differ from what is reported under GAAP. We have presented certain financial measures identified as non-GAAP, such as sales changes excluding foreign currency fluctuations, adjusted income before income taxes, adjusted net income, and adjusted diluted earnings per share.

We present certain amounts as excluding the effects of foreign currency fluctuations, which are also considered non-GAAP measures. Where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our business that are not related to currency movements.

These non-GAAP measures are presented because we believe they assist investors in allowing a more direct comparison of our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core business or affect comparability. In addition, these non-GAAP measures are useful in assessing our progress in achieving our long-term financial objectives. We estimate the tax effect of all non-GAAP adjustments by applying a marginal tax rate to each item. The income tax items represent the discrete amount that affected the period.

The non-GAAP financial information is provided in addition, and not as an alternative, to our reported results prepared in accordance with GAAP. Presented below is a reconciliation of GAAP and non-GAAP pre-tax (loss) income.

Presented below is a reconciliation of GAAP and non-GAAP after-tax (loss) income and GAAP and non-GAAP earnings per share.

During the thirteen and twenty-six weeks ended August 2, 2025, we recorded pre-tax charges of $15 million and $291 million, respectively, classified as impairment and other. See the Impairment and Other section for further information.

The adjustments made to other income / expense, net reflected fair value changes and losses associated with our minority investments. The current-year period also included gains on sale of businesses. See the Other (Expense) Income, net section for further information.

During first quarter of 2025, we recorded a valuation allowance and a write off of deferred tax costs related to certain of our European businesses. See the Income Tax section for further information.

Segment Reporting and Results of Operations

We have determined that we have three operating segments, North America, EMEA, and Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Champs Sports, Kids Foot Locker, and WSS, including each of their related e-commerce businesses. Our EMEA operating segment includes the results of Foot Locker and Kids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of the Foot Locker banner and its related e-commerce business operating in Australia and New Zealand, as well as atmos, which operates in Japan. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.

Sales

All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable sales also includes our direct-to-customers channel. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effect of foreign currency fluctuations. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.

For the thirteen weeks ended August 2, 2025, total sales decreased by $45 million, or 2.4%, to $1,851 million, as compared with the corresponding prior-year period. For the twenty-six weeks ended August 2, 2025, total sales decreased by $131 million, or 3.5%, to $3,639 million, as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales decreased by $70 million, or 3.7% for the thirteen weeks ended August 2, 2025, and decreased by $154 million, or 4.1% for the twenty-six weeks ended August 2, 2025. For both comparative periods, fluctuations in currencies increased sales primarily due to the U.S. dollar weakening against the euro, British pound, and Japanese yen, partially offset by the U.S dollar strengthening against the Canadian dollar and Australian dollar.

Comparable sales for the combined channels decreased by 2.0% and 2.3% for the thirteen and twenty-six weeks ended August 2, 2025, respectively.

The information shown below represents certain sales metrics by sales channel.

The information shown below represents certain combined stores and direct-to-customers sales metrics for the thirteen and twenty-six weeks ended August 2, 2025 as compared with the corresponding prior-year periods.

For both the quarter and year-to-date periods, comparable sales decreased within the stores channel due to ongoing macroeconomic headwinds, declines in consumer discretionary spending, and lower demand of key basketball footwear styles, which affected customer traffic. This was partially offset by an increase within the direct-to-customers channel due to improved digital product launches coupled with investments in technology that improved the overall online customer experience including our mobile app enhancements. From a product perspective for the combined channels, comparable sales were negatively affected by lower sales within the apparel category, partially offset by modestly higher sales in footwear in both the quarter and year-to-date periods. Comparable sales within the accessories channel were essentially unchanged in the quarter and year-to-date periods.

For the thirteen weeks ended August 2, 2025, constant currency sales in North America increased due to exciting product offerings from strategic brands and improved sales conversion aided by the FLX loyalty program in the Foot Locker, Kids Foot Locker, and Champs Sports banners, partially offset by the decline in WSS sales. Our Champs Sports banner continued its momentum following successful brand repositioning under the platform, "Sports for Life," and in the second quarter generated its fourth consecutive quarter of comparable increases. The WSS banner experienced high single-digit declines in customer traffic, due to ongoing geopolitical uncertainty affecting consumer spending, resulting in a comparable decline for both the quarter and year-to-date periods. Also affecting constant currency sales was our strategic decision to close underperforming stores in the Foot Locker, Kids Foot Locker, and Champs Sports banners, as 36, 13, and 16 fewer stores, respectively, were operating at period end as compared with the prior year period. For the twenty-six weeks ended August 2, 2025, constant currency sales in North America were slightly negative due to the aforementioned store closures and macroeconomic headwinds, partially offset by increased sales from exciting product offerings from our strategic vendors.

Constant currency sales in EMEA were negatively affected by lower customer traffic due to macroeconomic uncertainty. Customers responded to promotional actions taken during summer sales period, however this resulted in gross margin erosion. Also contributing to the sales decline was our strategic decision to close underperforming stores or exit stores in the region, currently operating 39 fewer stores than the prior year. For the thirteen and twenty-six weeks ended August 2, 2025, sales decreased by $17 million and $28 million, respectively, related to our closure of operations in Denmark, Norway, and Sweden, and the sale of our Greece and Romania businesses.

Constant currency sales in Asia Pacific were also negatively affected by the macroeconomic headwinds and a highly competitive marketplace, partially offset by increases in e-commerce sales. For the thirteen and twenty-six weeks ended August 2, 2025, Asia Pacific sales decreased by $9 million and $11 million, respectively, due to the previously disclosed closure of our business in South Korea. Constant currency sales in the atmos banner increased primarily from its e-commerce channel, as consumers were seeking promotional goods coupled with an increase in store sales from unique product offerings from our strategic vendors.

Gross Margin

Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers' compensation. Occupancy costs include rent (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities.

The gross margin rate decreased to 27.1% for the thirteen weeks ended August 2, 2025, as compared with the corresponding prior-year period, reflecting a 50 basis point decrease in the merchandise margin rate. The merchandise margin rate decreased as we were more promotional in certain markets due to market pressures. Additionally, markdowns were taken to ensure we maintained healthy inventory levels. Additionally, vendor allowances were lower in the period, resulting in a lower merchandise margin.

The gross margin rate decreased to 27.8% for the twenty-six weeks ended August 2, 2025, as compared with the corresponding prior-year period, reflecting a 20 basis point decrease in the merchandise margin rate and a 20 basis point deleverage in the occupancy and buyers' compensation rate. The merchandise margin rate decreased as we were more promotional to clear inventory in the countries we exited in the first quarter of 2025. The occupancy and buyers' compensation rate deleverage reflected the fixed nature of these costs in relation to the decline in sales. The year over year effect of vendor allowances was not significant for the twenty-six weeks ended August 2, 2025.

Selling, General and Administrative Expenses (SG&A)

Excluding the effect of foreign currency fluctuations, SG&A decreased by $15 million and $18 million for the thirteen and twenty-six weeks ended August 2, 2025, as compared with the corresponding prior-year periods, with savings from the cost optimization program and ongoing expense discipline partially offset by investments in technology. As a percentage of sales, SG&A increased by 20 basis points and 50 basis points for the thirteen and twenty-six weeks ended August 2, 2025, due to underlying deleverage on the sales decline.

Depreciation and Amortization

Depreciation and amortization expense was unchanged for the thirteen and twenty-six weeks ended August 2, 2025, as compared with the corresponding prior-year periods. The increase in depreciation and amortization from our capital expenditures was offset by operating fewer stores and lower depreciation and amortization associated with prior impairment charges. In addition, the WSS and atmos customer list intangible assets were fully amortized by the third quarter of 2024, which reduced amortization expense by $1 million and $3 million for the thirteen and twenty-six weeks ended August 2, 2025.

Impairment and Other

For the thirteen weeks ended August 2, 2025, we recorded $15 million of expenses related to our pending acquisition by DICK'S Sporting Goods ("DICK'S"). Acquisition-related charges consisted of costs necessary to consummate the acquisition, including legal and investing banking advisory fees, as well as employee retention costs. We also recognized a net credit of $2 million for impairment, consisting of a $9 million benefit from lease terminations related to the South Korea business shutdown, partially offset by $4 million of impairment of long-lived assets, primarily for the shutdown of a distribution center and $3 million of accelerated tenancy from the closure of our global headquarters. Finally, we recognized $2 million of reorganization costs primarily related to the announced closure and relocation of the Company's global headquarters and other shutdown costs related to our businesses in South Korea, Denmark, Norway, and Sweden, and a distribution center.

Additionally, during the twenty-six weeks ended August 2, 2025, we recorded non-cash impairment charges of $140 million to write down the WSS tradename and $110 million related to goodwill. The review of goodwill was the result of a triggering event due to a reduction in the Company's stock price and resulting market capitalization, coupled with general macroeconomic factors. Further, we recorded $15 million in non-cash impairment charges of long-lived assets and right-of-use assets. In connection with the previously announced global headquarters relocation and the shutdown of our businesses in South Korea, Denmark, Norway, and Sweden, we recorded accelerated tenancy and lease termination charges of $8 million. We have closed all stores operating in those regions as we focus on improving the overall results of international operations. We also incurred $3 million of reorganization costs primarily related to the announced closure and relocation of the Company's global headquarters and the shutdown costs.

For the thirteen weeks ended August 3, 2024, we recorded $9 million of impairment of long-lived assets and right-of-use assets primarily related to our decision to exit underperforming operations in South Korea, Denmark, Norway, and Sweden. For the twenty-six weeks ended August 3, 2024, we recorded an additional $7 million of impairment of long-lived assets and right-of-use assets related to our decision to no longer operate, and to sublease, an unprofitable store in Europe during the first quarter, and a $7 million loss accrual for legal claims.

Corporate Expense

Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to our corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Corporate expense decreased by $4 million for the thirteen weeks ended August 2, 2025, as compared with the corresponding prior-year period. Depreciation and amortization included in corporate expense was $8 million and $9 million for the thirteen weeks ended August 2, 2025 and August 3, 2024, respectively. Corporate expense decreased primarily due to lower incentive compensation tied to our performance, partially offset by our ongoing investments in information technology to modernize our customer-facing and support capabilities.

Corporate expense increased by $7 million for the twenty-six weeks ended August 2, 2025, as compared with the corresponding prior-year period. Depreciation and amortization included in corporate expense was $17 million and $18 million for the twenty-six weeks ended August 2, 2025 and August 3, 2024, respectively. Corporate expense increased primarily due to our ongoing investments in information technology to modernize our customer-facing and support capabilities, partially offset by lower incentive compensation tied to our performance.

Operating Results

Division profit, as a percentage of sales, decreased to 0.1% and 0.8% for the thirteen and twenty-six weeks ended August 2, 2025, respectively, as compared with the corresponding prior-year periods, due to lower sales coupled with a lower gross margin rate and the deleverage in SG&A expenses. Our operating results have been negatively affected by underperformance of the WSS banner and our Foot Locker stores operating in Europe. Management is evaluating and implementing various strategic initiatives to improve the overall profitability of our WSS banner and stores operating in Europe, which is focused on merchandising, supply chain activities, and cost optimization. Management is also evaluating the effect of macroeconomic trends on projected future earnings. Management will continue to monitor the progress of these initiatives and will assess, if necessary, the effect of the various initiatives on the projected performance of these businesses, which may include an analysis of recoverability of long-lived assets.

Interest Expense, Net

Interest expense, net was unchanged for the thirteen weeks ended August 2, 2025 and increased by $1 million for the twenty-six weeks ended August 2, 2025, as compared with the corresponding prior-year periods. This reflected lower interest income on cash and cash equivalents.

Other (Expense) Income, Net

This caption includes non-operating items, including changes in fair value of minority investments measured at fair value or using the fair value measurement alternative, changes in the market value of our available-for-sale security, our share of earnings or losses related to our equity method investments, and net benefit / (expense) related to our pension and postretirement programs excluding the service cost component.

In 2024, we entered into agreements to sell our Greece and Romania businesses and entered into license arrangements with the purchaser for the rights to operate Foot Locker stores in Greece and Romania and six other countries in South East Europe. The sale transactions, which closed in April 2025, reflected total consideration of $12 million (net of cash of $1 million) of which $6 million was paid at closing. The transactions resulted in a gain of $6 million.

Additionally, for the thirteen and twenty-six weeks ended August 2, 2025 other (expense) income, net reflected expense of $1 million and $2 million, respectively, related to our pension and postretirement programs. For the twenty-six weeks ended August 2, 2025 we recognized a loss of $1 million on our equity method investments.

For the thirteen and twenty-six weeks ended August 3, 2024, other (expense) income, net reflected expense of $1 million and $3 million, respectively, related to our pension and postretirement programs. In addition, we recorded a $2 million loss on our equity method investments for the twenty-six weeks ended August 3, 2024.

Income Taxes

Our current year interim provision for income taxes was measured using an estimated annual effective tax rate, which represented a blend of federal, state, and foreign taxes and included the effect of certain nondeductible items as well as changes in our mix of domestic and foreign earnings or losses, adjusted for discrete items that occurred within the periods presented.

In the first quarter of 2025, it was determined that due to recent weakness in market conditions, the ability to utilize the entirety of our European deferred tax asset was less likely than prior periods or "not more likely than not" as defined under the accounting standards. As of May 3, 2025, we recorded a $117 million valuation allowance on all the deferred tax assets related to net operating loss carryforwards and other net deferred tax assets of certain European businesses. In the second quarter, we adjusted this amount by $1 million. Additionally, in connection with the first quarter assessment, we wrote off certain deferred tax costs of $7 million. We will continue to monitor the recoverability of deferred tax assets on a quarterly basis. As of the second quarter all Dutch losses were fully valued. We will recognize the benefit of the deferred tax assets in the future if sufficient positive evidence emerges to support their realization.

Also during the first quarter of 2025, we recognized a non-cash impairment charge of $110 million on non-deductible goodwill, accordingly no benefit was recognized in connection with this charge.

We regularly assess the adequacy of our provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The change in tax reserves during the thirteen weeks and twenty-six weeks ended August 2, 2025 was not significant. During the twenty-six weeks ended August 1, 2024, we recognized $2 million in reserve releases related to various statute of limitations expirations on our foreign income taxes.

Excluding these items, the effective tax rate for the current year periods increased, as compared with the corresponding prior-year periods, primarily due to fully valued losses coupled with lower-level income before tax with non-deductible expenses remaining relatively unchanged.

On July 4, 2025, the President signed into law the One Big Beautiful Bill Act ("OBBBA"), introducing significant amendments to the U.S. Internal Revenue Code. The amendments include the permanent extension of certain individual, business, and international tax measures initially established under the 2017 Tax Cuts and Jobs Act, which were set to expire at the end of 2025. As of the date these financial statements were available to be issued, we are evaluating the effects of the OBBBA on our consolidated financial statements. The OBBBA permanently extends the 100% bonus depreciation of qualifying assets and eliminates the requirement under the Internal Revenue Code Section 174 to capitalize and amortize U.S.-based research and experimental expenditures over 5 years. We anticipate that these provisions will enhance cash flows in the near term due to the deferral of tax payments. We will continue to assess the implications of the OBBBA and will provide further disclosures in subsequent reporting periods as necessary.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity has been cash flow from operations, while the principal uses of cash have been to fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, internet and mobile sites, information systems, including the implementation of a new enterprise resource planning system, and other support facilities; make retirement plan contributions, and interest payments; and fund other cash requirements to support the development of our short-term and long-term operating strategies. We generally finance real estate with operating leases. We believe our cash, cash equivalents, future cash flow from operations, and amounts available under our credit agreement will be adequate to fund these requirements.

Our expected full-year capital spending is $230 million and an additional $20 million is expected related to software-as-a-service implementation costs, totaling spend of $250 million. These amounts represents an overall reduction of $50 million as compared with our plan of $350 million. The forecast includes $150 million related to the updating ("refresh"), remodeling or relocation of stores, as well as new stores. This includes the planned opening of approximately 70 "Reimagined" Foot Locker and Kids Foot Locker stores, primarily through conversions or relocations of existing stores. Spending for 2025 also includes refreshing approximately 240 existing stores to our current brand design standards and will incorporate key elements of our "Reimagined" design specifications. Updating our stores or "refreshes" represent spending directed towards elevating our brand experience, with modest capital expenditures per store. Additionally, we expect to spend $80 million primarily for our technology and supply chain initiatives, including capital expenditures related to a new distribution center and our new global headquarters. We also expect to spend an additional $20 million in software-as-a-service implementation costs, related to our technology initiatives as we modernize our customer facing and support capabilities as part of a multi-year project.

Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix, retail locations and websites, uncertainties related to the effect of competitive products and pricing, our reliance on a few key suppliers for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the headings "Disclosure Regarding Forward-Looking Statements," and "Risk Factors" could affect our ability to continue to fund our needs from business operations.

Operating Activities

Operating activities reflects net (loss) income adjusted for non-cash items and working capital changes. Adjustments to net (loss) income for non-cash items include impairment charges, other charges, depreciation and amortization, deferred income taxes, and share-based compensation expense.

The decrease in cash from operating activities primarily reflected a higher loss adjusted for non-cash items, a $50 million increase in rent payments due the timing of our fiscal year, a $24 million increase in incentive bonus payments made in the current year, and a $20 million contribution to fund our qualified pension plan, partially offset by working capital changes.

Investing Activities

The following table presents a reconciliation of net cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.

Critical Accounting Policies and Estimates

Recoverability of Goodwill and Indefinite-Lived Intangible Assets

We review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of each fiscal year or more frequently if impairment indicators arise. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. The review of impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a one-step qualitative impairment test.

When we perform the qualitative assessment, we consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in our stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed. The quantitative test requires that the carrying value of each reporting unit be compared with its estimated fair value. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill).

During the first quarter of 2025, a triggering event occurred as a result of a reduction in our market capitalization due to a decline in stock price and changes in the macroeconomic environment, which affected consumer discretionary spending. We used a discounted cash flow approach to determine the fair value of our reporting units. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires significant estimates and assumptions. These estimates and assumptions are consistent with our internal forecasts and operating plans and primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. Additionally, we compare the indicated equity value to our market capitalization and evaluate the resulting implied control premium to determine if the estimated enterprise value is reasonable compared to external market indicators. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. We evaluate the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units.

We have three reporting units, representing our operating segments of North America, EMEA, and Asia Pacific. Our first quarter 2025 quantitative analysis determined that the fair value of the North America reporting unit exceeded its carrying value of $521 million by 9%. However, the EMEA and Asia Pacific reporting units had fair values that were below their carrying values. We recorded a full impairment to EMEA goodwill of $29 million and a partial impairment of $81 million on the Asia Pacific reporting unit. The goodwill amount, after the impairment charge, that is attributable to the Asia Pacific reporting unit was $134 million as of August 2, 2025. Goodwill is net of accumulated impairment charges of $277 million as of August 2, 2025.

Valuation Allowances for Deferred Tax Assets

We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We must assess the likelihood that our deferred tax assets will be recoverable based on expected future taxable income. To the extent that we determine it is more-likely-than-not (greater than a 50% probability) that some portion or all of the deferred tax assets will not be realized, we must establish a valuation allowance.

To the extent valuation allowances are established or increased in a period, we include an expense within the tax provision in our Condensed Consolidated Statements of Operations. During the first quarter of 2025, we recognized a full valuation allowance of $117 million related to our European businesses' net operating loss carryforward and other net deferred tax assets. These valuation allowances may be released in future years when it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, we will need to periodically evaluate whether or not all available evidence, such as future income and reversal of temporary differences, tax planning actions, and recent results of operations, provides sufficient positive evidence to offset any other negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, we would record an income tax benefit for a portion or all of the deferred tax valuation allowance released.

There have been no other significant changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," within the 2024 Annual Report on Form 10-K.

Recent Accounting Pronouncements

Descriptions of the recently issued and adopted accounting principles are included in Item 1. "Financial Statements" in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.