What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-10-26 compared with 2022-10-26 · 92 added, 136 removed, 154 unchanged (60% of the section changed)

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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.

We achieve growth through the development of innovative new products and services, including lighting, lighting controls, building management solutions, and location-aware applications.

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.

Our ability to generate sufficient cash flows 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.

Our significant contractual cash requirements as of August 31, 2023 primarily include principal and interest on our unsecured notes, accounts payable, accrued employee compensation, and operating lease liabilities.

We had no borrowings outstanding under our credit agreement as of August 31, 2023.

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 subsequent to August 31, 2023 include $302.6 million in fiscal 2024.

Contractual purchase obligations beyond fiscal 2024 are not significant.

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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.

Our cash position at August 31, 2022 was $223.2 million, a decrease of $268.1 million from August 31, 2021.

Our cash position at August 31, 2023 was $397.9 million, an increase of $174.7 million from August 31, 2022.

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.

We generated $578.1 million of cash flows from operating activities during fiscal 2023 compared with $316.3 million in the prior-year period, an increase of $261.8 million.

This increase was due primarily to increased cash collections from customers and fewer inventory purchases during the current period, partially offset by the timing of payments for purchases on account.

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.

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements within this Annual Report on Form 10-K for discussion of the terms 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, 2023, our outstanding debt balance was $495.6 million, which consisted solely of our Unsecured Notes, compared to our cash position of $397.9 million.

We were in compliance with all covenants under our financing arrangements as of August 31, 2023.

At August 31, 2023, we had additional borrowing capacity under the Revolving Credit Facility of $596.2 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 $3.8 million issued under the facility.

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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

Investments in Current Business for Growth

We invested $66.7 million and $56.5 million in property, plant, and equipment in fiscal 2023 and 2022, respectively.

We invested more in fiscal 2023 primarily on new and enhanced equipment, facility improvements, and information technology.

Strategic Acquisitions, Investments, and Divestitures

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.

On May 15, 2023, using cash on hand, we acquired all of the equity interests of KE2 Therm Solutions, Inc.

(“KE2 Therm”).

KE2 Therm develops and provides intelligent refrigeration control solutions that deliver the precision of digital controls to promote safety, efficiency, and reliability, while delivering cost savings to the customer.

This acquisition is intended to expand ISG's technology and controls product portfolio and reach new customers.

We sold our Sunoptics prismatic skylights business in November 2022.

We recognized a pre-tax loss of $11.2 million on the sale of this business.

There were no acquisitions or divestitures during fiscal 2022.

The $12.9 million of cash outflows in fiscal 2022 reflected in the Consolidated Statements of Cash Flows primarily relate to working capital settlements for fiscal 2021 acquisitions.

Please refer to the Acquisitions and Divestitures footnote of the Notes to Consolidated Financial Statements for more information.

We paid dividends on our common stock of $16.8 million ($0.52 per share) in fiscal 2023 and $18.1 million ($0.52 per share) in fiscal 2022, indicating a quarterly dividend rate of $0.13 per share.

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As of August 31, 2023, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 1.2 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.

Results of Operations

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Interest expense, net 18.9 24.9 (6.0) (24.1) %

Miscellaneous (income) expense, net (9.1) 8.2 (17.3) NM

Total other expense 15.8 31.4 (15.6) (49.7) %

Miscellaneous expense (income), net 7.8 (9.1) 16.9 NM

Total other expense 26.7 15.8 10.9 NM

Income before income taxes 446.7 493.9 (47.2) (9.6) %

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NM - not meaningful

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 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.

Net sales of $3.95 billion for the year ended August 31, 2023 decreased by $53.9 million, or 1.3%, compared with the prior-year period due to declines in sales within our ABL segment, partially offset by higher sales within our ISG segment.

The divestiture from our Sunoptics prismatic skylight business, the acquisition of KE2 Therm, and changes in foreign currency rates did not have a meaningful impact on net sales for the year ended August 31, 2023.

Gross profit for the year ended August 31, 2023 increased $40.5 million, or 2.4%, to $1.71 billion compared with $1.67 billion for the prior year, and gross profit margin increased 150 basis points to 43.3% for fiscal 2023 compared with 41.8% in the prior-year period.

Our gross profit increased compared with the prior year on lower sales as we strategically managed price.

This increase was partially offset by higher labor costs as well as the recognition of a $13.0 million charge resulting from the collectability of a supplier warranty obligation owed to us for components we used in products manufactured and sold between 2017 and 2019.

Operating Profit

Selling, distribution, and administrative expenses of $1.21 billion for the year ended August 31, 2023 increased $49.9 million, or 4.3%, 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

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.

This increase was due primarily to higher employee-related costs and higher commissions.

We also recognized special charges of $26.9 million during fiscal year 2023.

Please refer to the Special Charges footnote of the Notes to Consolidated Financial Statements within this Annual Report on Form 10-K for further details.

Operating profit for fiscal 2023 was $473.4 million compared with $509.7 million reported for the prior-year period, a decrease of $36.3 million, or 7.1%.

The decrease in operating profit for fiscal 2023 compared with fiscal 2022 was due to the recognition of special charges in fiscal 2023 as well as increased operating expenses, partially offset by an increase in gross profit.

Interest Expense, net

Interest expense, net, was $18.9 million and $24.9 million for the years ended August 31, 2023 and 2022, 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.

The decrease in net interest expense was due to increased investing rates on our interest-bearing cash cash equivalents.

compared to the prior year, partially offset by changes in average short-term borrowings outstanding.

Miscellaneous Expense (Income), net

Miscellaneous expense (income), net consists of non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.

We reported net miscellaneous expense of $7.8 million in fiscal 2023 compared with net miscellaneous income of $9.1 million in fiscal 2022.

This year-over-year change was due primarily to the recognition of an $11.2 million loss on the sale of our Sunoptics prismatic skylights business in fiscal 2023 and an impairment charge of $2.5 million for one unconsolidated equity investment, as well as higher pension cost.

These amounts were partially offset by higher gains on foreign currency-related items compared to the prior year.

The details of the Sunoptics sale are described in the Acquisitions and Divestitures footnote of the Notes to Consolidated Financial Statements .

The details of the equity investment impairment charge are included in the Fair Value Measurements footnote of the Notes to Consolidated Financial Statements .

Income Taxes and Net Income

Our effective income tax rate was 22.5% and 22.3% for the years ended August 31, 2023 and 2022, 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.

Net income for fiscal 2023 decreased $38.0 million, or 9.9%, to $346.0 million from $384.0 million reported for the prior year.

The decrease in net income resulted primarily from a decrease in operating profit compared to the prior-year period.

Diluted earnings per share for fiscal 2023 was $10.76 compared with $11.08 for the prior-year period, a decrease of $0.32, or 2.9%.

This decrease reflects lower net income, partially offset by lower outstanding diluted shares.

Segment Results

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Operating profit margin 12.7 % 10.5 % 220 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

ABL net sales for the year ended August 31, 2023 decreased 2.3% compared with the prior-year period due primarily to lower net sales within original equipment manufacturer ("OEM") and other, independent sales network, and corporate accounts channels, partially offset by higher net sales in direct sales network and retail sales channels.

Operating profit for ABL was $509.5 million (13.7% of ABL net sales) for the year ended August 31, 2023 compared to $545.6 million (14.3% of ABL net sales) in the prior-year period, a decrease of $36.1 million.

The decrease in operating profit was due primarily to special charges of $25.0 million, the recognition of a $13.0 million charge related to the collectability of a supplier receivable, and lower net sales.

These declines were partially offset by our strategic management of price.

ISG net sales for the year ended August 31, 2023 increased 16.9% compared with the prior-year period driven primarily by strong demand for building and heating, ventilation, and air conditioning controls as well as price increases.

ISG operating profit was $32.1 million (12.7% of ISG net sales) for the year ended August 31, 2023 compared with $22.7 million (10.5% of ISG net sales) in the prior-year period, an increase of $9.4 million.

This increase was due primarily to higher sales, partially offset by increased employee costs.

This increase was due primarily to contributions from higher sales, partially offset by increased employee costs.

Accounting Standards Adopted in Fiscal 2023 and Accounting Standards Yet to Be Adopted

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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.

We currently believe that the estimates used in the evaluation of goodwill and indefinite-lived intangibles are reasonable, including our calculations of fiscal 2023 trade name impairment charges described below.

However, future 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 require us to record additional non-cash impairment charges 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.

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.

We performed our annual goodwill impairment analyses on the first day of our fiscal fourth quarter (June 1) for each period presented.

Goodwill was 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.

For the tests performed as of June 1, 2023, we utilized estimated discount rates ranging from 11% to 13%.

These rates were 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.

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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 performed our annual indefinite-lived intangible asset impairment analyses on the first day of our fiscal fourth quarter (June 1) for each period presented.

As of June 1, 2023, the current fiscal year testing date, we held 13 indefinite-lived intangible assets with an aggregate carrying value of $173.4 million.

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

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.

This fair value model requires us to make several significant assumptions, including specific estimated future net sales (including short and long-term growth rates), a royalty rate, and a discount rate for each trade name.

Our fiscal 2023 analyses resulted in impairment charges and the determination that certain assets no longer had indefinite lives.

As of August 31, 2023, we held eight indefinite-lived intangible assets with an aggregate carrying value of $135.6 million.

See the Significant Accounting Policies and Fair Value Measurement footnotes of the Notes to Consolidated Financial Statements for further details regarding the assumptions used and results of our annual impairment tests for the periods presented.

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.

Restricted stock awards, performance stock awards, stock options, and director stock units representing certain deferrals into the Nonemployee Director Deferred Compensation Plan (the “Director Plan”) are valued based on their estimated grant date fair values.

Depending on the nature of the grant, an award's fair value is based on the fair value of our common stock on the grant date, a Black-Scholes model, or a Monte Carlo simulation.

We generally recognize compensation cost for share-based payment transactions on a straight-line basis over an award's requisite service period, derived service period, or expected performance period.

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.

When the actual number of awards earned is based on future performance, we recognize expense when it becomes probable that the performance metric will be satisfied.

Additionally, we estimate forfeitures of all share-based awards at the time of grant.

We adjust forfeiture estimates for awards through their vesting dates to recognize compensation cost only for awards that actually vest.

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.

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.

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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.

Any estimated or actual loss recoveries that offset our costs and payments are reflected as assets based on the timing of receipt of recovery.

Any estimated or actual loss recoveries that offset our costs and payments are reflected as assets based on the timing of receipt of recovery net of any amounts deemed uncollectible.

We are fully self-insured for product warranty costs.

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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;

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.

This filing contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”).

Forward-looking statements include, among other things, statements that describe or relate to the Company’s plans, initiatives, projections, vision, goals, targets, commitments, expectations, objectives, prospects, strategies, or financial outlook, and the assumptions underlying or relating thereto.

In some cases, we may use words such as “expect,” “believe,” “intend,” “anticipate,” “estimate,” “forecast,” “indicate,” “project,” “predict,” “plan,” “may,” “will,” “could,” “should,” “would,” “potential,” and words of similar meaning, as well as other words or expressions referencing future events, conditions, or circumstances, to identify forward-looking statements.

We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act.

Forward-looking statements are not guarantees of future performance.

Our forward-looking statements are based on our current beliefs, expectations, and assumptions, which may not prove to be accurate, and are subject to known and unknown risks and uncertainties, many of which are outside of our control.

These risks and uncertainties could cause actual events or results to differ materially from our historical experience and management’s present expectations or projections.

These risks and uncertainties are discussed in our filings with the U.S.

Securities and Exchange Commission, including this annual report on Form 10-K (including, but not limited to, Part I, Item 1a.

Risk Factors ), quarterly reports on Form 10-Q, and current reports on Form 8-K.

Any forward-looking statement speaks only as of the date on which it is made.

You are cautioned not to place undue reliance on any forward-looking statements.

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 quarterly report or to reflect the occurrence of unanticipated events, whether as a result of new information, future events, or otherwise.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis