Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements set forth below under this caption constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this annual report on Form 10-K for additional factors relating to such statements and see “Risk Factors” in Part I, Item 1A for a discussion of certain risks applicable to our business, financial condition, and results of operations.
The following section discusses our results of operations for 2024 and 2023 and year-to-year comparisons between those periods.
Company Overview
Advanced Energy provides highly engineered, critical, precision power conversion, measurement, and control solutions to our global customers. We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications.
We are organized on a global, functional basis and operate as a single segment of power electronics conversion products. Within this segment, our products are sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.
On June 20, 2024, we acquired Airity Technologies, Inc. (“Airity”). This acquisition added high voltage power conversion technologies and products, broadening our range of targeted applications within the Semiconductor Equipment and Industrial and Medical markets. See Note 2. Acquisition in Part II, Item 8 “Financial Statements and Supplementary Data.”
Business Environment and Trends
2024 Summary Results and Key Activities
For the year ended December 31, 2024, our revenue was $1,482.0 million, representing a decline of 10.5% as compared to 2023. The decline was attributable to lower revenue from our Industrial and Medical and Telecom and Networking markets due to customer inventory rebalancing, resulting in a lower demand environment. These declines were partially offset by higher revenues in the Semiconductor Equipment market, from the 2023 trough level, and growing AI-related demand in the Data Center Computing market. For more details on the trends in our end markets, see “End Markets Summary and Trends” elsewhere in this Item 7.
In 2024, we reported higher operating expenses of $492.7 million, an increase of $14.0 million primarily attributable to higher stock-based compensation expense, higher research and development (“R&D”) program costs, higher restructuring charges from initiatives focused on optimizing manufacturing and support operations, partially offset by a general workforce reduction to align to our revenue levels. The restructuring actions should largely be completed in 2026 and are expected to enable a more efficient and cost-effective operating structure.
In the third quarter of 2024, we approved further manufacturing consolidation initiatives, including the closure of our Zhongshan, China manufacturing facility. In connection with the 2024 Plan, we recorded a $29.6 million charge primarily associated with expected employment-related charges and facility exit costs. See Note 12. Restructuring, Asset Impairments, and Other Charges in Part II, Item 8 “Financial Statements and Supplementary Data.”
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In the third quarter of 2024, we entered into an amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million. This amendment was in connection with the concurrent prepayment, using existing cash on hand, of the full $345.0 million outstanding principal balance under our Term Loan Facility. See Note 18. Long-Term Debt in Part II, Item 8 “ Financial Statements and Supplementary Data ” and Liquidity and Capital Resources below.
During 2024, we continued progress on a new factory near Bangkok, Thailand, which we expect to be operational in 2026.
End Markets Summary and Trends
The demand environment in each of our markets is impacted by macroeconomic conditions, various market trends, customer buying patterns, design wins, and other factors. Although we are currently experiencing a lower demand environment in certain markets, we continue to believe that the long-term market growth drivers support our long-term strategy, research and development efforts, and capital investments. However, in the short-term it is unclear how certain macroeconomic conditions, including the effect of higher interest rates impacting end customers’ capital investment, the timing of inventory digestion, and customer buying patterns, will affect customer demand and our revenue.
Semiconductor Equipment Market
The Semiconductor Equipment market appears to be slowly recovering from a cyclical downturn, which bottomed in 2023. Demand improved in 2024, but a number of external factors continue to limit the market recovery, including unfavorable macroeconomic conditions, prolonged weak demand for consumer electronics, low fab utilization, and U.S. export restrictions to China.
We continue to believe the long-term growth drivers will support cyclical growth for this market. Growth drivers include more manufacturing capacity needed to support increasing demand for semiconductor devices, increasing etch and deposition process steps with new technology inflections, and the transition to advanced technology nodes requiring higher content of advanced power solutions per tool. In addition, we believe our investment in new products can enable market share gains resulting in higher than market growth.
Industrial and Medical Market
Beginning in the second half of 2023, the impact of weaker macroeconomic conditions started to lower demand for our products in the Industrial and Medical market. In addition, in the previous two years, many customers built inventories of our products following the supply chain disruption and extended lead times. As lead times normalized in 2024, customers rebalanced their elevated inventory levels resulting in further decline in revenue. We expect these factors will continue to limit our revenue in the near term but believe that growth will return to this market after customer inventories return to normal levels and end markets recover.
Data Center Computing Market
Revenue in the Data Center Computing market was weak in the first quarter of 2024 driven by reduced investments by our hyperscale customers, lower demand for enterprise systems, and the timing of large customer orders. Starting in the second quarter of 2024, demand rebounded driven by accelerated investments in AI and customers starting to ramp new generations of high power solutions, resulting in revenue growth in 2024. We expect these factors will continue to support strong demand for the next few quarters.
Telecom and Networking Market
In 2023, improved supply of critical components drove a meaningful increase in revenue, which more than offset weakening market conditions in the Telecom and Networking market. End demand further weakened during 2024. In addition, customers rebalanced their elevated inventory levels as lead times normalized, resulting in a further decline in our revenue. We expect the current market conditions to continue for several quarters.
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Results of Continuing Operations
The analysis presented below is organized to provide the information we believe will be helpful for understanding of our historical performance and relevant trends going forward and should be read in conjunction with our consolidated financial statements, including the notes thereto, in Part II, Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K. Also included in the following analysis are measures that are not in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). A reconciliation of the non-GAAP measures to U.S. GAAP is provided below.
The following table summarizes our Consolidated Statements of Operations and as a percentage of revenue:
Years Ended December 31,
Change 2024 v. 2023
2024
2023
Dollar
Percent
(in thousands)
Revenue
$
1,482,042
$
1,655,810
$
(173,768)
(10.5)
%
Gross profit
529,343
592,398
(63,055)
(10.6)
%
Operating expenses
492,736
478,704
14,032
2.9
%
Operating income from continuing operations
36,607
113,694
(77,087)
(67.8)
%
Interest income
42,860
27,092
15,768
58.2
%
Interest expense
(25,105)
(16,566)
(8,539)
51.5
%
Other income (expense), net
(1,985)
(1,759)
(226)
12.8
%
Income from continuing operations, before income tax
52,377
122,461
(70,084)
(57.2)
%
Income tax benefit
(3,929)
(8,288)
4,359
(52.6)
%
Income from continuing operations
$
56,306
$
130,749
$
(74,443)
(56.9)
%
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Revenue
The following tables summarize net revenue and percentages of revenue by markets:
Years Ended December 31,
Change 2024 v. 2023
2024
2023
Dollar
Percent
(in thousands)
Semiconductor Equipment
$
792,559
53.5
%
$
743,794
44.9
%
$
48,765
6.6
%
Industrial and Medical
316,177
21.3
474,449
28.7
(158,272)
(33.4)
%
Data Center Computing
284,192
19.2
249,874
15.1
34,318
13.7
%
Telecom and Networking
89,114
6.0
187,693
11.3
(98,579)
(52.5)
%
Total
$
1,482,042
100.0
%
$
1,655,810
100.0
%
$
(173,768)
(10.5)
%
Total revenue decreased from the same period in the prior year due primarily to lower end demand and customer inventory rebalancing, resulting in lower demand in our Industrial and Medical and Telecom and Networking markets. The Semiconductor Equipment market modestly recovered from the cyclical trough in 2023, and revenue in the Data Center Computing market grew as hyperscale customers increased investments in AI.
Revenue by Market
Sales in the Semiconductor Equipment market increased $48.8 million, or 6.6%, to $792.6 million, as compared to $743.8 million in the prior year. The increase was primarily due to improved demand as we emerge from the cyclical trough in 2023.
Sales in the Industrial and Medical market decreased $158.3 million, or 33.4%, to $316.2 million, as compared to $474.4 million in the prior year. After a record year in 2023, the decrease was primarily due to lower end demand and customers working down their elevated inventories on shortened lead times following the supply chain disruption.
Sales in the Data Center Computing market increased $34.3 million, or 13.7%, to $284.2 million, as compared to $249.9 million in the prior year. The increase was due to accelerated hyperscale investments in AI and growing adoption of next generation high power solutions.
Sales in the Telecom and Networking market decreased $98.6 million, or 52.5%, to $89.1 million as compared to $187.7 million in the prior year. The decrease was due to the prior year benefiting from the improved supply of critical components. This enabled fulfillment of outstanding orders in 2023, which did not continue in 2024. In addition, we experienced a slow demand environment and inventory rebalancing at many of our customers, which we expect to continue.
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Gross Profit and Gross Margin
Years Ended December 31,
Change 2024 v. 2023
2024
2023
Dollar
Percent
(in thousands)
Gross profit
$
529,343
$
592,398
$
(63,055)
(10.6)
%
Gross margin
35.7
%
35.8
%
The decrease in gross profit was largely due to the decline in revenue, partially offset by reduction in manufacturing expenses. Gross margin declined mainly due to the impact of lower volume, largely offset by lower manufacturing, material, and other costs of 170 basis points and favorable mix of 150 basis points.
Operating Expenses
The following table summarizes our operating expenses:
Years Ended December 31,
Change 2024 v. 2023
2024
2023
Dollar
Percent
(in thousands)
Research and development
$
211,834
$
202,439
$
9,395
4.6
%
Selling, general, and administrative
224,538
221,034
3,504
1.6
%
Amortization of intangible assets
26,046
28,254
(2,208)
(7.8)
%
Restructuring, asset impairments, and other charges
30,318
26,977
3,341
12.4
%
Total operating expenses
$
492,736
$
478,704
$
14,032
2.9
%
Research and Development
Research and development expenses increased $9.4 million to $211.8 million, as compared to $202.4 million in the prior year. The increase is related to higher stock-based compensation expense as well as higher program and materials costs compared to the prior year. This was partially offset by lower variable compensation.
Selling, General and Administrative
Selling, general and administrative expenses increased $3.5 million to $224.5 million, as compared to $221.0 million in the prior year. The increase is primarily driven by higher stock-based compensation expense, partially offset by actions taken to control costs, including headcount reduction and lower variable compensation.
Amortization of Intangible Assets
Amortization expense decreased $2.2 million to $26.0 million, as compared to $28.3 million in the prior year. Certain intangible assets reached the end of their estimated useful life in the current year. This was partially offset by amortization of intangible assets acquired in the Airity acquisition. For additional information, see Note 2. Acquisition and Note 11. Intangible Assets and Goodwill in Part II, Item 8 “Financial Statements and Supplementary Data.”
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Restructuring, Asset Impairments and Other Charges
In the third quarter of 2024, we approved further manufacturing consolidation initiatives, including the closure of our Zhongshan, China manufacturing facility. In connection with the 2024 Plan, we recorded a $29.6 million charge primarily associated with expected employment-related charges and facility exit costs. The amounts incurred as a result of the approved actions are estimates and actual results may differ, which could result in incremental restructuring charges in future periods. We anticipate the 2024 Plan will be substantially completed by the end of second quarter of 2025, with final activities expected to conclude in 2026.
For additional information about this and prior year restructuring plans, see Note 12. Restructuring, Asset Impairments, and Other Charges in Part II, Item 8 “Financial Statements and Supplementary Data.”
Interest Income, Interest Expense, and Other Income (Expense), net
We experienced an increase in interest income on higher cash balances, due in part to proceeds from the issuance of the Convertible Notes in the third quarter of 2023, our ability to concentrate cash in investment accounts, and higher short term market interest rates.
Interest expense increased due to interest associated with the Convertible Notes and a higher interest rate on the portion of our Term Loan Facility subject to a variable interest rate. We prepaid in full the Term Loan Facility on September 9, 2024, and the interest rate swap contracts expired on September 10, 2024. Should we have future borrowings under our Term Loan Facility or Revolving Facility, those borrowings would be subject to a variable rate.
Other expense, net was $2.0 million in 2024, as compared to $1.8 million of expense in the prior year. Other expense, net consists primarily of foreign exchange gains and losses and other miscellaneous items. We had unrealized foreign exchange losses during the year 2024 compared to unrealized gains in the prior year. Additionally, in 2024, we incurred costs associated with foreign currency translation adjustments related to liquidated foreign operations and debt discount and fees associated with our Term Loan Facility prepayment. There were no such costs during the same periods in the prior year.
See Note 18. Long-Term Debt in Part II, Item 8 “Financial Statements and Supplementary Data” for information regarding our debt.
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Income Tax Benefit
The following table summarizes tax benefit and the effective tax rate for our income from continuing operations:
Years Ended December 31,
2024
2023
(in thousands)
Income from continuing operations, before income tax
$
52,377
$
122,461
Income tax benefit
$
(3,929)
$
(8,288)
Effective tax rate
(7.5)
%
(6.8)
%
Our effective tax rates differ from the U.S. federal statutory rate of 21% for the years ended December 31, 2024 and 2023, primarily due to the intercompany transfer of intellectual property among certain of our subsidiaries in 2024 and a valuation allowance release in 2023. Additionally, both 2024 and 2023 included the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, as well as tax credits, partially offset by net U.S. tax on foreign operations.
Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.
As of January 1, 2024, the Pillar II minimum global effective tax rate of 15% enacted by the Organization for Economic Cooperation and Development (“OECD”) was effectuated. More than 140 countries agreed to enact the Pillar II global minimum tax. However, the timing of the implementation for each country varies. For the year ended December 31, 2024, we included an estimate of global minimum tax liability as a result of those countries where we conduct business that have adopted Pillar II. As countries continue to make revisions to their legislation and release additional guidance with respect to the global minimum tax, we continue to determine any potential impact in the countries in which we operate. The impact of these changes may have a material impact on our cash tax expense and tax rate.
Non-GAAP Results
Management uses non-GAAP operating income and non-GAAP earnings per share (“EPS”) to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives, and make business decisions, including developing budgets and forecasting future periods. In addition, management’s incentive plans include these non-GAAP measures as criteria for achievements. These non-GAAP measures are not prepared in accordance with U.S. GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. However, we believe these non-GAAP measures provide additional information that enables readers to evaluate our business from the perspective of management. The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.
The non-GAAP results presented below exclude the impact of non-cash related charges, such as stock-based compensation, amortization of intangible assets, and long-term unrealized foreign exchange gains and losses. In addition, we exclude discontinued operations and other non-recurring items such as acquisition-related costs, facility expansion and related costs, and restructuring expenses, as they are not indicative of future performance. The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each non-GAAP adjustment after consideration of their respective book and tax treatments. Finally, non-GAAP results exclude one-time tax benefits and losses associated with changes in our legal entity structure or ownership of certain assets.
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Reconciliation of non-GAAP measure
Operating expenses and operating income from continuing
Years Ended December 31,
operations, excluding certain items
2024
2023
(in thousands)
Gross profit from continuing operations, as reported
$
529,343
$
592,398
Adjustments to gross profit:
Stock-based compensation
3,994
2,059
Facility expansion, relocation costs and other
4,421
2,334
Acquisition-related costs
(13)
238
Non-GAAP gross profit
537,745
597,029
Non-GAAP gross margin
36.3%
36.1%
Operating expenses from continuing operations, as reported
492,736
478,704
Adjustments:
Amortization of intangible assets
(26,046)
(28,254)
Stock-based compensation
(41,946)
(28,942)
Acquisition-related costs
(5,965)
(4,026)
Facility expansion, relocation costs and other
(1,222)
(189)
Restructuring, asset impairments, and other charges
(30,318)
(26,977)
Non-GAAP operating expenses
387,239
390,316
Non-GAAP operating income
$
150,506
$
206,713
Non-GAAP operating margin
10.2%
12.5%
Reconciliation of non-GAAP measure
Years Ended December 31,
Income from continuing operations, excluding certain items
2024
2023
(in thousands)
Income from continuing operations, less non-controlling interest, net of income tax
$
56,306
$
130,749
Adjustments:
Amortization of intangible assets
26,046
28,254
Acquisition-related costs
5,952
4,264
Facility expansion, relocation costs, and other
5,643
2,523
Restructuring, asset impairments, and other charges
30,318
26,977
Unrealized foreign currency gain
(3,512)
(89)
Other costs included in other income (expense), net
2,812
(1,516)
Tax effect of non-GAAP adjustments, including certain discrete tax benefits
(19,563)
(31,303)
Non-GAAP income, net of income tax, excluding stock-based compensation
104,002
159,859
Stock-based compensation, net of tax
36,292
24,181
Non-GAAP income, net of income tax
$
140,294
$
184,040
Years Ended December 31,
Weighted-average common shares
2024
2023
(in thousands)
Diluted weighted-average common shares outstanding
37,839
37,750
Reconciliation of non-GAAP measure
Years Ended December 31,
Per share earnings excluding certain items
2024
2023
Diluted earnings per share from continuing operations, as reported
$
1.49
$
3.46
Add back:
Per share impact of non-GAAP adjustments, net of tax
2.22
1.42
Non-GAAP earnings per share
$
3.71
$
4.88
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Liquidity and Capital Resources
Liquidity
Adequate liquidity and cash generation are important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity continue to be our available cash, cash generated from operations, and available borrowing capacity under the Revolving Facility (refer to Note 18. Long-Term Debt in Part II, Item 8 “Financial Statements and Supplementary Data”).
As of December 31, 2024, our cash and cash equivalents totaled $722.1 million, and our available funding under our Revolving Facility is $600.0 million. Additionally, we generated $132.9 million of cash flow from continuing operations in 2024. We believe our sources of liquidity will be adequate to meet anticipated debt service, share repurchase programs, and dividends. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected revenue and demand. Our capital expenditures are primarily directed towards manufacturing and operations and can materially influence our available cash for other initiatives.
In addition, we may seek additional debt or equity financing from time to time; however, such additional financing may not be available on acceptable terms, if at all.
Debt
On September 9, 2024, we used existing cash on hand to prepay the full $345.0 million outstanding principal balance under our Term Loan Facility. On the same date, we entered into an additional amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million.
As of December 31, 2024, our only outstanding debt is the $575.0 million Convertible Notes, which mature on September 15, 2028 and carry a 2.5% interest rate.
The interest rate swap contracts previously entered into related to the Term Loan Facility expired on September 10, 2024. Should we have future borrowings under our Term Loan Facility or Revolving Facility, those borrowings would be subject to a variable rate.
As of December 31, 2024, no amounts were outstanding under the Revolving Facility, and we had $600.0 million in available funding.
In addition to the available capacity on the Revolving Facility, prior to the maturity date of the Credit Agreement, we may request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $250.0 million. Any requested increase is subject to lender approval.
For more information see Note 18. Long-Term Debt in Part II, Item 8 “Financial Statements and Supplementary Data.”
Dividends
During 2024, we paid quarterly cash dividends of $0.10 per share, totaling $15.4 million. We currently anticipate that a cash dividend of $0.10 per share will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, business conditions, and other factors.
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Share Repurchases
To repurchase shares of our common stock, we periodically enter into share repurchase agreements. The following table summarizes these repurchases:
Years Ended December 31,
2024
2023
2022
(in thousands, except per share amounts)
Amount paid or accrued to repurchase shares
$
1,770
$
40,132
$
26,635
Number of shares repurchased
19
378
356
Average repurchase price per share
$
93.58
$
105.74
$
74.90
At December 31, 2024, the remaining amount authorized by the Board for future share repurchases was $197.4 million with no time limitation.
Cash Flows
A summary of our cash from operating, investing, and financing activities was as follows:
Years Ended December 31,
2024
2023
(in thousands)
Net cash from operating activities from continuing operations
$
132,924
$
212,925
Net cash used in operating activities from discontinued operations
(2,177)
(3,988)
Net cash from operating activities
130,747
208,937
Net cash used in investing activities
(73,541)
(64,751)
Net cash (used in) from financing activities
(377,093)
445,684
Effect of currency translation on cash and cash equivalents
(2,583)
(4,132)
Net change in cash and cash equivalents
(322,470)
585,738
Cash and cash equivalents, beginning of period
1,044,556
458,818
Cash and cash equivalents, end of period
$
722,086
$
1,044,556
Net Cash From Operating Activities
Net cash from operating activities from continuing operations was $132.9 million, a decrease of $80.0 million, compared to $212.9 million in the prior year. The decrease was primarily due to lower net income from continuing operations, primarily due to a decline in revenue. Additionally, during the current year, we had a significant use of cash for inventories due to a strategic inventory buildup. In addition, we had net cash usage related to accounts payable, accrued expenses, restructuring payments, and other liabilities.
Net Cash From Investing Activities
Net cash used in investing activities in 2024 was $73.5 million, an increase of $8.7 million, compared to $64.8 million in the prior year. The increase was primarily due to our acquisition of Airity for $13.8 million and continued capital investments in our Mexico and Thailand manufacturing facilities.
Net Cash From Financing Activities
Net cash used in financing activities in 2024 was $377.1 million, compared to a cash inflow of $445.7 million in the prior year. In 2024, we used existing cash on hand to make payments towards our Term Loan Facility for $355.0 million, including $10.0 million in principal payment made in the first half of the year and the September prepayment of the remaining $345.0 million outstanding principal balance, and repurchased common stock for $1.8 million. We do not have any scheduled debt maturities in the next twelve months.
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During 2023, we received $561.1 million net proceeds from the issuance of long-term debt from our Convertible Note. In conjunction with the Convertible Note issuance, we also received $74.9 million proceeds from sale of warrants and made a $115.0 million payment for purchase of note hedges. We also repurchased $40.1 million of our common stock.
Critical Accounting Estimates
The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported. Note 1. Summary of Operations and Significant Accounting Policies and Estimates in Part II, Item 8 “Financial Statements and Supplementary Data” describes the significant accounting policies used in the preparation of our consolidated financial statements. The accounting positions described below are significantly affected by critical accounting estimates. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the consolidated financial statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.
Inventories
We value inventories at the lower of cost or net realizable value, computed on a first-in, first-out basis. General market conditions, as well as our design activities, can cause certain products to become obsolete and we adjust our inventory carrying value for estimated excess and obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based on projected end-user demand, which is determined by considering historical usage, customer orders and forecast, and qualitative considerations such as market and economic conditions. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. Demand for our products can fluctuate significantly. A significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand.
Income Taxes
We follow the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for future tax consequences. A deferred tax asset or liability is computed for both the expected future impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Tax rate changes are reflected in the period such changes are enacted.
We assess the recoverability of our net deferred tax assets and the need for a valuation allowance on a quarterly basis. Our assessment includes several factors, including historical results and taxable income projections for each jurisdiction. The ultimate realization of deferred income tax assets is dependent on the generation of taxable income in appropriate jurisdictions during the periods in which those temporary differences are deductible. We consider the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in determining the amount of the valuation allowance. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, we determine if we will more likely than not realize the benefits of these deductible differences.
Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.
For more details see Note 4. Income Taxes in Part II, Item 8 “Financial Statements and Supplementary Data.”
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Business Combinations
We record the assets acquired and liabilities assumed in a business combination at their acquisition date fair values. Fair values of assets acquired, and liabilities assumed are based upon available information and may involve engaging an independent third party to perform an appraisal. Estimating fair values can be complex and subject to significant business judgment. We must also identify and include in the allocation all acquired tangible and intangible assets that meet certain criteria, including assets that were not previously recorded by the acquired entity. The estimates most commonly involve intangible assets. The excess of the purchase price over the net fair value of acquired assets and assumed liabilities is recorded as goodwill, which is not amortized but instead is evaluated for impairment at least annually. Pursuant to U.S. GAAP, an entity is allowed a reasonable period of time (not to exceed one year) to obtain the information necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination .
Off-Balance Sheet Arrangements
As of December 31, 2024, we did not have any off-balance sheet arrangements pursuant to Regulation S-K.
Contractual Obligations
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. Information regarding our obligations relating to income taxes, lease obligations, pension liabilities, and debt is provided in Note 4. Income Taxes , Note 14. Leases , Note 15. Employee Retirement Plans and Postretirement Benefits, and Note 18. Long-Term Debt , respectively, in Part II, Item 8 “Financial Statements and Supplementary Data.”
Recent Accounting Pronouncements
From time to time, updates to the Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.
To understand the impact of recently issued guidance from the Financial Accounting Standards Board (“FASB”) or other standards setting bodies, whether adopted or to be adopted, please review the information provided in Note 1. Summary of Operations and Significant Accounting Policies and Estimates in Part II, Item 8 “Financial Statements and Supplementary Data.”