ACUITY INC. (DE) 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Acuity Brands, Inc. (referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries for the fiscal years ended August 31, 2022 and 2021. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included within this report. A discussion of the year ended August 31, 2021 compared to the year ended August 31, 2020 can be found within Part II, Item 7. Management's Discussion and Analysis within our fiscal 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 27, 2021. Overview Company We are a market-leading industrial technology company. We use technology to solve problems in spaces and light. Through our two business segments, Acuity Brands Lighting and Lighting Controls (“ABL”) and the Intelligent Spaces Group (“ISG”), we design, manufacture, and bring to market products and services that make a valuable difference in people's lives. We achieve growth through the development of innovative new products and services, including lighting, lighting controls, building management systems, and location-aware applications. We achieve customer-focused efficiencies that allow us to increase market share and deliver superior returns. We look to aggressively deploy capital to grow the business and to enter attractive new verticals. Financial Condition, Capital Resources, and Liquidity We have numerous sources of capital, including cash on hand and cash flows generated from operations as well as various sources of financing. Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases. Sufficient cash flow generation is also critical to fund our operations in the short and long terms and to maintain compliance with covenants contained in our financing agreements. Our significant contractual cash requirements as of August 31, 2022 primarily include principal and interest on our unsecured notes and borrowings under our credit agreement as well as payments for operating lease liabilities. Further details on our borrowings and operating lease liabilities are outlined in the Debt and Lines of Credit and Leases footnotes of the Notes to Consolidated Financial Statements , respectively, within this Form 10-K. Additionally, we incur purchase obligations in the ordinary course of business that are enforceable and legally binding. Contractual purchase obligations for years subsequent to August 31, 2022 include $533.1 million in fiscal 2023. Contractual purchase obligations beyond fiscal 2023 are not significant. We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flows from operations, and borrowing availability under financing arrangements. Additionally, we believe that our cash flows from operations and sources of funding, including, but not limited to, future borrowings and borrowing capacity, will sufficiently support our long-term liquidity needs. In the event of a sustained market deterioration, we may need additional capital, which would require us to evaluate available alternatives and take appropriate actions. Cash Our cash position at August 31, 2022 was $223.2 million, a decrease of $268.1 million from August 31, 2021. Cash generated from operating activities and cash on hand were used during the current year to fund our capital allocation priorities as discussed below. We generated $316.3 million of cash flows from operating activities during fiscal 2022 compared with $408.7 million in the prior-year period, a decrease of $92.4 million. This decline was due primarily to higher working capital investments to support year-over-year growth as well as to mitigate inconsistent supply availability at our production facilities. 19 Table of Contents Financing Arrangements See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030 (the “Unsecured Notes”) as well as the terms of our $600.0 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”). At August 31, 2022, our outstanding debt balance was $513.0 million compared to our cash position of $223.2 million. We were in compliance with all financial covenants under our financing arrangements as of August 31, 2022. At August 31, 2022, we had additional borrowing capacity under the revolving credit facility of $577.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the facility less the outstanding letters of credit of $4.1 million issued under the facility. As of August 31, 2022, our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled approximately $801.1 million. The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned subsidiary of Acuity Brands, Inc. The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc. and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc. The following tables present summarized financial information for Acuity Brands, Inc., Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions): Summarized Balance Sheet Information August 31, 2022 August 31, 2021 Current assets $ 1,056.6 $ 1,172.0 Current assets due from non-guarantor affiliates 280.2 213.4 Non-current assets 1,414.3 1,391.7 Current liabilities 620.4 595.1 Non-current liabilities 821.0 815.7 Summarized Income Statement Information Year Ended August 31, 2022 Net sales $ 3,397.2 Gross profit 1,406.4 Net income 366.0 Capital Allocation Priorities Our capital allocation priorities are to invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases. Investments in Current Business Growth We invested $56.5 million and $43.8 million in fiscal 2022 and 2021, respectively, in property, plant, and equipment, primarily related to investments in new and enhanced information technology capabilities, tooling, equipment, and facility enhancements. Additionally, we invested in working capital to support growth and to mitigate inconsistent supply availability at our production facilities. Strategic Acquisitions and Investments We seek opportunities to strategically expand and enhance our portfolio of solutions. There were no acquisitions during fiscal 2022. The $12.9 million of cash outflows in fiscal 2022 reflected in Consolidated Statements of Cash Flows primarily relate to working capital settlements for fiscal 2021 acquisitions. We invested in acquisitions of businesses, net of cash acquired, of $75.3 million in fiscal 2021. Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information. 20 Table of Contents Dividends We paid dividends on our common stock of $18.1 million ($0.52 per share) in fiscal 2022 and $19.1 million ($0.52 per share) in fiscal 2021, indicating a quarterly dividend rate of $0.13 per share. All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors (the “Board”) and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant. Share Repurchases During fiscal 2022, we repurchased 2.9 million shares of our outstanding common stock for $511.7 million. Total cash outflows for share repurchases during fiscal 2022 were $514.8 million. We expect to repurchase shares on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash. As of August 31, 2022, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 2.8 million shares. The COVID-19 Pandemic The COVID-19 pandemic has resulted in intermittent worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets. We remain committed to prioritizing the health and well-being of our associates and their families and ensuring that we operate effectively. We have implemented various health and safety policies and processes at our facilities in the United States, Mexico, Canada, and other locations as permitted by law. The COVID-19 pandemic has had an adverse impact on our results of operations. The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our operating results. Although our facilities are open, a resurgence in COVID-19 cases, including as a result of new variants, may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance. We also continue to incur additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by the Centers for Disease Control and Prevention. We have taken actions to reduce costs, including the realignment of headcount with current volumes, a limit on all non-essential employee travel, other efforts to decrease discretionary spending, and reductions in our real estate footprint. Additionally, we elected to defer certain employer payroll taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) signed into law on March 27, 2020. Half of these deferrals were paid in December 2021, and the remaining deferrals are due in December 2022. Although we have implemented significant measures to mitigate further spread of the virus, our employees, customers, suppliers, and contractors may continue to experience disruptions to business activities due to potential further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic. We are continuously monitoring the adverse effects of the pandemic and identifying steps to mitigate those effects. As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration and impact. See Part I, Item 1a. Risk Factors for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows. Russia and Ukraine Conflict The current conflict between Russia and Ukraine and the related sanctions and other penalties imposed by countries across the globe against Russia are creating substantial uncertainty in the global economy. While we do not have operations in Russia or Ukraine and do not have significant direct exposure to customers and vendors in those countries, we are unable to predict the impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows as of the date of these financial statements. 21 Table of Contents Results of Operations The following is a discussion of our results of operations in fiscal 2022 compared to fiscal 2021. A discussion of our fiscal 2021 results of operations compared to fiscal 2020 can be found within Part II, Item 7. Management's Discussion and Analysis within our fiscal 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 27, 2021. The following table sets forth information comparing the components of net income for the year ended August 31, 2022 with the year ended August 31, 2021 (in millions except per share data): Year Ended August 31, Increase Percent 2022 2021 (Decrease) Change Net sales $ 4,006.1 $ 3,461.0 $ 545.1 15.7 % Cost of products sold 2,333.4 1,986.0 347.4 17.5 % Gross profit 1,672.7 1,475.0 197.7 13.4 % Percent of net sales 41.8 % 42.6 % (80) bps Selling, distribution, and administrative expenses 1,163.0 1,044.1 118.9 11.4 % Special charges — 3.3 (3.3) NM Operating profit 509.7 427.6 82.1 19.2 % Percent of net sales 12.7 % 12.4 % 30 bps Other expense: Interest expense, net 24.9 23.2 1.7 7.3 % Miscellaneous (income) expense, net (9.1) 8.2 (17.3) NM Total other expense 15.8 31.4 (15.6) (49.7) % Income before income taxes 493.9 396.2 97.7 24.7 % Percent of net sales 12.3 % 11.4 % 90 bps Income tax expense 109.9 89.9 20.0 22.2 % Effective tax rate 22.3 % 22.7 % Net income $ 384.0 $ 306.3 $ 77.7 25.4 % Diluted earnings per share $ 11.08 $ 8.38 $ 2.70 32.2 % NM - not meaningful Net Sales Net sales of $4.01 billion for the year ended August 31, 2022 increased by $545.1 million, or 15.7%, compared with the prior-year period. Both our ABL and ISG segments benefited from recent price increases as well as higher volumes. Revenues from acquired companies contributed an approximately 3% increase in net sales compared to the prior year. Changes in foreign currency rates did not have a meaningful impact on net sales for the year ended August 31, 2022. Gross Profit Gross profit for the year ended August 31, 2022 increased $197.7 million, or 13.4%, to $1.67 billion compared with $1.48 billion for the prior year. Gross profit margin decreased 80 basis points to 41.8% for fiscal 2022 compared with 42.6% in the prior-year period. In this inflationary environment, we continued to experience material, labor, and freight escalations while also taking pricing actions that mitigated these escalations. Gross profit margin was also unfavorably impacted by the near-term dilutive effects of recent acquisitions. Operating Profit Selling, distribution, and administrative expenses of $1.16 billion for the year ended August 31, 2022 increased $118.9 million, or 11.4%, compared with the prior year. This increase was due primarily to higher commissions and freight costs associated with higher sales as well as increased employee-related costs due, in part, to recent acquisitions. Operating profit for fiscal 2022 was $509.7 million compared with $427.6 million reported for the prior-year period, an increase of $82.1 million, or 19.2%. Operating profit margin increased 30 basis points to 12.7% for fiscal 2022 22 Table of Contents compared with 12.4% for fiscal 2021. The increase in operating profit margin was primarily the result of improved leveraging of our operating costs as well as lower special charges, partially offset by a lower gross profit margin. Other Expense Other expense consists of net interest expense and net miscellaneous (income) expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses. Interest expense, net, was $24.9 million and $23.2 million for the years ended August 31, 2022 and 2021, respectively. We reported net miscellaneous income of $9.1 million in fiscal 2022 compared with net miscellaneous expense of $8.2 million in fiscal 2021. During fiscal 2021, we recorded impairment charges totaling $6.0 million for certain unconsolidated equity investments. Further details regarding the impairment charges are included in the Fair Value Measurements footnote of the Notes to Consolidated Financial Statements . Excluding the impairments, the year-over-year change in net miscellaneous (income) expense was largely due to changes in pension cost as well as foreign currency-related transactions. Income Taxes and Net Income Our effective income tax rate was 22.3% and 22.7% for the years ended August 31, 2022 and 2021, respectively. The change in our effective income tax rate year over year is due primarily to the impact of discrete items. Further details regarding income taxes are included in the Income Taxes footnote of the Notes to Consolidated Financial Statements . Net income for fiscal 2022 increased $77.7 million, or 25.4%, to $384.0 million from $306.3 million reported for the prior year. The increase in net income resulted primarily from an increase in operating profit compared to the prior-year period partially offset by higher income tax expense related to the increase in profit. Diluted earnings per share for fiscal 2022 was $11.08 compared with $8.38 for the prior-year period, an increase of $2.70, or 32.2%. This increase reflects higher net income as well as lower outstanding diluted shares. Segment Results The following tables set forth information comparing the operating results of our segments, ABL and ISG, for the year ended August 31, 2022 with the year ended August 31, 2021 (in millions): Year Ended August 31, ABL: 2022 2021 Increase (Decrease) Percent Change Net sales $ 3,810.1 $ 3,287.3 $ 522.8 15.9 % Operating profit 545.6 476.2 69.4 14.6 % Operating profit margin 14.3 % 14.5 % (20) bps ISG: Net sales $ 216.1 $ 190.0 $ 26.1 13.7 % Operating profit 22.7 9.9 12.8 129.3 % Operating profit margin 10.5 % 5.2 % 530 bps ABL net sales for the year ended August 31, 2022 increased 15.9% compared with the prior-year period. Sales within the independent and direct sales network channels increased due primarily to benefits from recent price increases as well as higher volumes. Additionally, sales within the corporate accounts channel increased year over year as some large accounts began previously deferred maintenance and renovations. Acquisitions contributed an approximately 3% increase in sales compared to the prior year and are reflected within the other sales channel in ABL's disaggregated revenue. Operating profit for ABL was $545.6 million (14.3% of ABL net sales) for the year ended August 31, 2022 compared to $476.2 million (14.5% of ABL net sales) in the prior-year period, an increase of $69.4 million. The increase in operating profit was due primarily to contributions from higher sales partially offset by increased material, labor, and freight costs as well as higher operating costs to support the increase in sales. ISG net sales for the year ended August 31, 2022 increased 13.7% compared with the prior-year period driven primarily by strong demand for building and heating, ventilation, and air conditioning controls as well as price 23 Table of Contents increases. ISG operating profit was $22.7 million (10.5% of ISG net sales) for the year ended August 31, 2022 compared with $9.9 million (5.2% of ISG net sales) in the prior-year period, an increase of $12.8 million. This increase was due primarily to higher sales, partially offset by increased employee costs. Accounting Standards Adopted in Fiscal 2022 and Accounting Standards Yet to Be Adopted See the New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for information on recently adopted and upcoming standards. Critical Accounting Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition and results of operations as reflected in our Consolidated Financial Statements , which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). As discussed in the Description of Business and Basis of Presentation footnote of the Notes to Consolidated Financial Statements , the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on our substantial historical experience and/or other relevant factors, such as projections of future performance, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We discuss the development of accounting estimates with our Audit Committee of the Board of Directors on a recurring basis. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for a summary of our accounting policies. We believe the following accounting topics represent our critical accounting estimates. Revenue Recognition We recognize revenue when we transfer control of goods and services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for goods and services. In the period of revenue recognition, we estimate and record provisions for certain rebates, sales incentives, product returns, and discounts to customers, in most instances, as reductions of revenue. We also maintain one-time or on-going marketing and trade-promotion programs with certain customers that require us to estimate and accrue the expected costs of such programs. Generally, these items are estimated based on customer agreements, historical trends, and expected demand. For sales with multiple deliverables, significant judgment may be required to determine which performance obligations are distinct and should be accounted for separately. We allocate the expected consideration to be collected to each distinct performance obligation based on its standalone selling price. Standalone selling price is generally estimated using a cost plus margin valuation when no observable input is available. Actual results could differ from estimates, which would require adjustments to recorded amounts. Please refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements for additional information regarding estimates related to revenue recognition. Inventories Inventories include materials, direct labor, inbound freight, customs, duties, tariffs, and related manufacturing overhead. Inventories are stated on a first-in, first-out basis at the lower of cost and net realizable value. We review inventory quantities on hand and record a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions. A significant change in customer demand, market conditions, or technology could render certain inventory obsolete and thus could have a material adverse impact on our operating results in the period the change occurs. 24 Table of Contents Goodwill and Indefinite-Lived Intangible Assets Indefinite-lived intangible assets consist of trade names acquired through multiple acquisitions that are expected to generate cash flows indefinitely. Significant estimates and assumptions were used to both identify and determine the initial fair value of these acquired intangible assets, often with the assistance of third-party valuation specialists. These assumptions include, but are not limited to, estimated future net sales and profitability, customer attrition rates, royalty rates, and discount rates. Goodwill is calculated as the residual value of an acquisition's purchase price less the value of the identifiable net assets and is thus dependent on the appropriate identification and valuation of the net assets obtained in an acquisition. We review goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fiscal fourth quarter and on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill or an indefinite-lived asset is below its carrying value. An impairment loss for goodwill or an indefinite-lived intangible asset would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or another appropriate fair value method. The evaluation of goodwill and indefinite-lived intangibles for impairment requires management to use significant judgments and estimates in accordance with U.S. GAAP including, but not limited to, economic, industry, and Company-specific qualitative factors, projected future net sales, operating results, and cash flows. Although we currently believe that the estimates used in the evaluation of goodwill and indefinite-lived intangibles are reasonable, differences between actual and expected net sales, operating results, and cash flows and/or changes in the discount rates or theoretical royalty rates used could cause these assets to be deemed impaired. If this occurs, we are required to record a non-cash charge to earnings for the write-down in the value of such assets. Such charges could have a material adverse effect on our results of operations and financial position but not our cash flows from operations. Goodwill We perform our annual goodwill impairment analysis on the first day of our fiscal fourth quarter (June 1). Goodwill is tested for impairment at the reporting unit level using a combination of discounted future cash flows and relevant market multiples. Our discounted cash flow analyses required significant assumptions about discount rates, short and long-term growth rates, and future profitability. We utilized estimated discount rates ranging from 9% to 13% as of June 1, 2022, based on the Capital Asset Pricing Model, which considers a risk-free interest rate, beta, market risk premium, and size premium to determine an appropriate discount rate for a reporting unit. Short-term growth rates were based on management’s forecasted financial results, which consider key business drivers such as specific revenue growth initiatives, market share changes, growth in our addressable market, and general economic factors such as macroeconomic conditions, credit availability, and interest rates. We calculated the discounted cash flows attributable to our reporting units for a 10-year discrete period with a terminal value and compared this calculation to the discounted cash flows generated over a 40-year period to corroborate the reasonableness of assumptions used. The long-term growth rate used in determining terminal value was estimated at 3.5% and was primarily based on our understanding of projections for expected long-term growth in our addressable market and historical long-term performance. We corroborate the values determined from our discounted cash flow models using a relevant market multiple, generally published earnings and/or revenue multiples. We also reconcile the sum of the fair values for each reporting unit to our market capitalization at the testing date, including consideration of a control premium. Any reasonably likely change in the assumptions used in these analyses, including revenue growth rates, discount rates, long-term growth rates, or relevant multiples would not cause the carrying value of any reporting unit to exceed its estimated fair value as determined under the goodwill impairment analysis. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details. Indefinite-Lived Intangible Assets We perform our annual indefinite-lived intangible asset impairment analyses on the first day of our fiscal fourth quarter (June 1). Our indefinite-lived intangible assets consist of 13 trade names with an aggregate carrying value of $173.7 million at August 31, 2022. We utilized significant assumptions to estimate the fair value of these indefinite-lived trade names using a fair value model based on discounted future cash flows (“fair value model”) in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). Future cash flows associated with each of our indefinite-lived trade names are calculated by multiplying a theoretical royalty rate a willing third party would pay for use of the particular trade name by estimated future net sales attributable to the 25 Table of Contents relevant trade name. The present value of the resulting after-tax cash flows is our current estimate of the fair value of each trade name. This fair value model requires us to make several significant assumptions, including specific estimated future net sales (including short and long-term growth rates), the royalty rate, and the discount rate for each trade name. Future net sales and short-term growth rates are estimated for each particular trade name based on management’s financial forecasts, which consider key business drivers, such as specific revenue growth initiatives, market share changes, expected growth in our addressable market, and general economic factors, such as macroeconomic conditions, credit availability, and interest rates. The long-term growth rate used in determining terminal value was estimated at 3.5% and was based primarily on our understanding of projections for expected long-term growth for our addressable market and historical long-term performance. The theoretical royalty rate is estimated primarily using management’s assumptions regarding the amount a willing third party would pay to use the particular trade name and is compared with market information for similar intellectual property within and outside of the industry. If future operating results are unfavorable compared with forecasted amounts, we may be required to reduce the theoretical royalty rate used in the fair value model, which would result in lower expected future after-tax cash flows in the fair value model. We utilized a range of estimated discount rates between 9% and 13% as of June 1, 2022, based on the Capital Asset Pricing Model, which considers a current risk-free interest rate, beta, market risk premium, and size premium appropriate for each intangible. During fiscal 2022, we performed an evaluation of the fair values of our indefinite-lived trade names. Our expected revenues were based on our fiscal 2023 projections and recent third-party lighting, controls, and building technology solutions market growth estimates for fiscal 2024 through 2025 as of June 1, 2022. We also included revenue growth estimates based on current initiatives expected to help improve performance. During fiscal 2022, estimated theoretical royalty rates ranged between 1% and 3%. The impairment analyses of our indefinite-lived intangible assets indicated that their fair values exceeded their carrying values; therefore, no impairments were recorded for fiscal 2022. Any reasonably likely change in the assumptions used in the analyses for our trade names, including revenue growth rates, royalty rates, and discount rates, would not be material to our financial condition or results of operations. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details. Share-based Payment Expense We recognize compensation cost for share-based payment transactions in the financial statements under the provisions of ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). Restricted stock awards, performance stock awards, and director stock units representing certain deferrals into the Nonemployee Director Deferred Compensation Plan (the “Director Plan”) are valued based on the fair value of our common stock on the grant date. We review the values of our performance awards on a frequent and recurring basis and adjust those values based on the probability that the related performance metric will be satisfied. We utilize the Black-Scholes model in deriving the fair value estimates of our stock option awards that only have a service requirement, and we utilize the Monte Carlo simulation model to determine grant date fair value estimates of stock options also subject to a market condition. Additionally, we estimate forfeitures of all share-based awards at the time of grant, which are revised in subsequent periods if actual forfeitures differ from initial estimates. Forfeitures are estimated based on historical experience. If factors change causing different assumptions to be made in future periods, estimated compensation expense may differ significantly from that recorded in the current period. We generally recognize compensation cost for share-based payment transactions on a straight-line basis over an award's requisite service period as defined by ASC 718. In certain circumstances, such as when a performance award is subject to graded vesting, we apply the accelerated attribution method to recognize compensation cost related to our share-based payment awards. See the Share-based Payments footnote of the Notes to Consolidated Financial Statements for further information on these awards, including assumptions used in estimating the fair value of our awards. Product Warranty and Recall Costs Our products generally have a standard warranty term of five years. We accrue for the estimated amount of future warranty costs when the related revenue is recognized. Estimated future warranty costs are primarily based on historical experience of identified warranty claims. Estimated costs related to product warranty and recall costs outside of our historical experience, which could include significant product recalls or formal campaigns soliciting repair or return of a product, are accrued when they are deemed to be probable and can be reasonably estimated. 26 Table of Contents Any estimated or actual loss recoveries that offset our costs and payments are reflected as assets based on the timing of receipt of recovery. We are fully self-insured for product warranty costs. Although we expect that historical activity will continue to be the best indicator of future warranty costs, there can be no assurance that future warranty costs will not exceed historical amounts. If actual future warranty or recall costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow. We also sell certain service-type warranties that extend coverages for products beyond their base warranties. We account for service-type warranties as distinct performance obligations, allocate an appropriate amount of transaction price to these transactions, and recognize revenue for these contracts ratably over the life of the additional warranty period. We allocate transaction price to our service-type warranties largely based on expectations of cost plus margin based on our estimate of future claims. These estimates are subject to a higher level of estimation uncertainty than other estimates, as we have less experience in costs in the extended warranty period. Claims related to service-type warranties are expensed as incurred. Cautionary Statement Regarding Forward-Looking Statements and Information This filing contains forward-looking statements within the meaning of the federal securities laws. Statements made herein that may be considered forward-looking include statements incorporating terms such as “expects,” “believes,” “intends,” “anticipates,” and similar terms that relate to future events, performance, or results of the Company. In addition, the Company, or the executive officers on the Company’s behalf, may from time to time make forward-looking statements in reports and other documents we file with the U.S. Securities and Exchange Commission or in connection with oral statements made to the press, current and potential investors, or others. Forward-looking statements include, without limitation: (a) our projections regarding financial performance, including our expected margins and ability to leverage operating costs, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends; (b) external and internal forecasts projecting growth in our addressable market; (c) expectations about the impact of any changes in demand, including improvements in our end markets, as well as volatility, challenges, and uncertainty in general economic conditions; (d) expectations about volatility in raw material, purchased finished goods, and transportation costs as well as component and labor availability; (e) our ability to execute and realize benefits from initiatives related to streamlining our operations and integrating recent acquisitions, realize synergies from acquisitions, capitalize on growth opportunities, introduce innovative products and services, and realize benefits from sustainability initiatives; (f) our estimate of our future results of operations and cash flows; (g) our estimate of future amortization expense; (h) the impact of future product warranty and recall costs; (i) our ability to achieve our long-term financial goals and measures; (j) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, tax, and trade policies; (k) our expectations about the resolution of legal matters; (l) our expectations of the impact of the ongoing COVID-19 pandemic and the conflict between Russia and Ukraine; (m) our human capital initiatives; and (n) our ability to reduce our carbon output and seize market opportunities related to sustainability. You are cautioned not to place undue reliance on any forward looking statements, which speak only as of the date of this annual report. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the historical experience of the organization and management’s present expectations or projections. These risks and uncertainties include, but are not limited to, customer and supplier relationships and prices; competition; ability to realize anticipated benefits from initiatives taken and timing of benefits; market demand; litigation and other contingent liabilities; and economic, political, governmental, and technological factors that have affected us as a company. Also, additional risks that could cause our actual results to differ materially from those expressed in our forward-looking statements are discussed in Part I, Item 1a. Risk Factors of this Annual Report on Form 10-K, and are specifically incorporated herein by reference. The industry and market data contained in this report are based either on management’s own estimates or, where indicated, independent industry publications, reports by governmental agencies, or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates. However, industry and market data are subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey of market shares. We have not independently verified market and industry data from third-party sources. 27 Table of Contents