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Item 7. Management’s Discussion and Analysis

2024-10-28 compared with 2023-10-26 · 105 added, 112 removed, 134 unchanged (62% of the section changed)

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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 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.

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Contractual purchase obligations beyond fiscal 2025 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.

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, borrowing availability under financing arrangements, and current access to capital markets.

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.

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We generated $619.2 million of cash flows from operating activities during fiscal 2024 compared with $578.1 million in the prior-year period, an increase of $41.1 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.

This increase was due primarily to higher net income in fiscal 2024, partially offset by higher working capital investments to fund profitable growth.

Financing Arrangements

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, 2024, our outstanding debt balance was $496.2 million, which consisted solely of our Unsecured Notes, compared to our cash position of $845.8 million.

We were in compliance with all covenants under our financing arrangements as of August 31, 2024.

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.

As of August 31, 2023, our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled approximately $994.1 million.

At August 31, 2024, 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 Revolving Credit Facility less outstanding letters of credit of $3.8 million issued under the facility.

As of August 31, 2024, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $1.4 billion.

The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned subsidiary of Acuity Brands, Inc.

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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.

Our capital allocation priorities are to invest in our current business for growth, to invest in mergers and acquisitions, to pay a dividend, and to make share repurchases.

Investments in Current Business for Growth

We invested $64.0 million and $66.7 million in property, plant, and equipment in fiscal 2024 and 2023, respectively.

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

We invested primarily in new and enhanced information technology, tooling, machinery, and facility improvements in fiscal 2024.

Strategic Acquisitions, Investments, and Divestitures

We seek opportunities to strategically expand and enhance our portfolio of solutions.

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

On January 19, 2024, we acquired certain assets related to Arize® horticulture lighting products from Current Lighting Solutions, LLC.

The assets have been included in ABL's financial results since the date of acquisition and did not have a material impact to our consolidated financial condition, results of operations, or cash flows.

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

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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.

This acquisition expanded ISG's technology and controls product portfolio and reached new customers.

There were no divestitures during fiscal 2024.

We sold our Sunoptics prismatic skylights business in the first fiscal quarter of 2023 and recognized a pre-tax loss of $11.2 million on the sale of this business.

We paid dividends on our common stock of $18.2 million ($0.58 per share) in fiscal 2024 and $16.8 million ($0.52 per share) in fiscal 2023.

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.

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Total cash outflows for share repurchases during fiscal 2024 were $88.7 million.

During fiscal 2023, we repurchased 1.6 million shares of our outstanding common stock for $269.3 million.

Total cash outflows for share repurchases during fiscal 2023 were $266.6 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.

On January 25, 2024, the Board approved an increase of three million shares to the maximum number of shares that may yet be repurchased under the share repurchase program.

As of August 31, 2024, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.8 million shares.

Recent Developments

On October 24, 2024, Acuity Brands Technology Services, Inc., a wholly owned subsidiary of Acuity Brands, Inc.

entered into an equity purchase agreement (the (“Purchase Agreement”) to acquire QSC, LLC (“QSC”), a leader in the design, engineering, and manufacturing of audio, video, and control solutions and services.

Refer to the Subsequent Event footnote of the Notes to Consolidated Financial Statements for additional information.

Results of Operations

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A discussion of our fiscal 2023 results of operations compared to fiscal 2022 can be found within Part II, Item 7.

Management's Discussion and Analysis within our fiscal 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 26, 2022.

Management's Discussion and Analysis of Financial Condition and Results of Operations within our fiscal 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 26, 2023.

The following table sets forth information comparing the components of net income for the year ended August 31, 2024 with the year ended August 31, 2023 (in millions except per share data):

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Other expense:

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

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

Total other expense 26.7 15.8 10.9 NM

Interest (income) expense, net (4.5) 18.9 (23.4) (123.8) %

Miscellaneous expense, net 9.2 7.8 1.4 17.9 %

Total other expense 4.7 26.7 (22.0) (82.4) %

Income before income taxes 548.6 446.7 101.9 22.8 %

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NM - not meaningful

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.

Net sales of $3.84 billion for the year ended August 31, 2024 decreased by $111.2 million, or 2.8%, compared with the prior-year period due to a decline in sales within our ABL segment, partially offset by higher sales within our ISG segment.

Acquisitions and divestitures did not have material impacts on consolidated net sales for the year ended August 31, 2024.

Gross profit for the year ended August 31, 2024 increased $68.5 million, or 4.0%, to $1.78 billion compared with $1.71 billion for the prior year.

Gross profit margin increased 310 basis points to 46.4% for fiscal 2024 compared with 43.3% in the prior-year period.

Our gross profit increased compared with the prior year due primarily to favorable material and import costs, which more than offset the lower net sales and higher production costs.

Additionally in fiscal 2023, we recognized 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 employee-related costs and higher commissions.

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

Selling, distribution, and administrative (“SD&A”) expenses for the year ended August 31, 2024 were $1.23 billion compared with $1.21 billion in the prior year, an increase of $15.5 million, or 1.3%.

The increase in SD&A expenses was due primarily to higher employee-related costs, partially offset by lower commissions and freight costs associated with the decline in net sales.

We 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.

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.

Operating profit for the year ended August 31, 2024 was $553.3 million (14.4% of net sales) compared with $473.4 million (12.0% of net sales) for the prior fiscal year, an increase of $79.9 million, or 16.9%.

The increase in operating profit was due primarily to higher gross profit and nonrecurring fiscal 2023 special charges, partially offset by higher SD&A expenses.

Interest (Income) Expense, net

We reported net interest income of $4.5 million and net interest expense of $18.9 million for the years ended August 31, 2024 and 2023, respectively.

The increase in net interest income was due to higher interest bearing cash and cash equivalent balances, higher investing rates on those balances, and lower average short-term borrowings outstanding compared to the prior year.

Miscellaneous Expense, net

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

We reported net miscellaneous expense of $9.2 million in fiscal 2024 compared with $7.8 million in fiscal 2023.

This year-over-year change was due primarily to the impact of foreign currency-related items compared to the prior year.

This increase in expense was partially offset by the recognition in the prior year of an $11.2 million loss on the sale of our Sunoptics prismatic skylights business and an impairment charge of $2.5 million for one unconsolidated equity investment.

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

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Further details regarding income taxes are included in the Income Taxes footnote of the Notes to Consolidated Financial Statements .

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.

Net income for fiscal 2024 increased $76.6 million, or 22.1%, to $422.6 million from $346.0 million reported for the prior year.

Diluted earnings per share for fiscal 2024 was $13.44 compared with $10.76 for the prior-year period, an increase of $2.68, or 24.9%.

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, 2023 with the year ended August 31, 2022 (in millions):

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the year ended August 31, 2024 with the year ended August 31, 2023 (in millions):

Year Ended August 31,

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Operating profit margin 14.9 % 12.7 % 220 bps

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.

ABL net sales for the year ended August 31, 2024 decreased 4.0% compared with the prior-year period due to lower net sales across all channels, excluding corporate accounts.

Net sales in fiscal 2023 benefited from working through an elevated backlog.

Operating profit for ABL was $582.8 million (16.3% of ABL net sales) for the year ended August 31, 2024 compared to $509.5 million (13.7% of ABL net sales) in the prior year, an increase of $73.3 million.

The increase in operating profit was due primarily to improved profitability on lower sales as well as lower sales-related costs, such as commissions and freight to customers.

This improved profitability was partially offset by higher employee-related costs.

Additionally, in fiscal 2023, we recorded special charges for ABL of $25.0 million, charges related to the collectability of a supplier receivable of $13.0 million, and accelerated amortization expense for intangibles associated with certain brands that were discontinued of $4.0 million.

ISG net sales for the year ended August 31, 2024 increased 15.5% compared with the prior-year period primarily driven by higher demand for Distech products and the acquisition of KE2 Therm.

ISG operating profit was $43.6 million (14.9% of ISG net sales) for the year ended August 31, 2024 compared with $32.1 million (12.7% of ISG net sales) in the prior-year period, an increase of $11.5 million.

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

This increase was due primarily to contributions from higher sales, partially offset by increased employee-related costs and professional fees.

Accounting Standards Adopted in Fiscal 2024 and Accounting Standards Yet to Be Adopted

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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.

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 recognition and measurement of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates.

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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.

In the period of revenue recognition, we estimate and record provisions for 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.

Generally, these provisions are recorded as reductions of revenue and are estimated based on customer agreements, historical trends, expected demand, or specific notification of pending returns.

Although historical experience has generally been within expectations, there can be no assurance that future rebates, sales incentives, product returns, discounts, marketing and trade-promotion programs will not exceed historical amounts.

A significant increase in these activities could have a material adverse impact on our operating results in the future.

Please refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements for additional information, including financial balances, regarding estimates related to revenue recognition.

Inventories include materials, direct labor, inbound freight, customs, duties, tariffs, and related manufacturing overhead.

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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.

Although our historical experience related to demand and market conditions has been within expectations, 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.

Please refer to the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for additional information.

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.

Indefinite-lived intangible assets consist of acquired trade names that are expected to generate cash flows indefinitely.

These assumptions include, but are not limited to, estimated future net sales and profitability, royalty rates, and discount rates.

We review goodwill and indefinite-lived intangible assets for impairment on an annual basis as of the first date of our fiscal fourth quarter (June 1) or more frequently if events occur or circumstances change, such as a significant adverse change in our business climate, that would more likely than not indicate that the fair value of a reporting unit or an indefinite-lived asset is below its carrying value.

For our annual impairment tests, we may elect to perform a qualitative assessment of our goodwill and/or indefinite-lived intangibles as allowed under Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other (“ASC 350”) to determine whether it is more likely than not that an impairment occurred.

If we determine that an asset is more likely than not impaired, we perform a quantitative impairment assessment for that asset.

Alternatively, we may elect to forego the qualitative assessment.

An impairment loss for goodwill is recognized in the event a reporting unit's carrying value exceeds its fair value and for an indefinite-lived intangible asset in the event the asset's carrying value exceeds its fair value.

An assessment of our goodwill and indefinite-lived intangible assets for impairment considers the use of 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.

Under a quantitative assessment, fair values for goodwill and indefinite-lived intangible assets are estimated using discounted future cash flows or another appropriate fair value method.

We currently believe that the estimates used in the evaluation of goodwill and indefinite-lived intangibles are reasonable, including our calculations of fiscal 2024 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.

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 for indefinite-lived intangible assets, 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 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.

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.

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 2.5% 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.

As of June 1, 2024, the current fiscal year testing date, we performed a qualitative analysis to assess goodwill for impairment.

Our qualitative analysis considered and assessed external factors for each reporting unit such as macroeconomic, industry, cost, and market conditions as well as Company-specific factors, including but not limited to, our actual and planned financial performance.

Based on the results of our analysis, we determined there was not a more likely than not probability of impairment for each of our three reporting units.

Thus, no quantitative test was required for our $1.1 billion of goodwill.

We last performed a quantitative goodwill impairment analysis in fiscal 2023 and concluded that any reasonably likely change in the assumptions used in those analyses, including revenue growth rates, discount rates, longer term growth rates, or relevant multiples would not cause the carrying value of any reporting unit to exceed its estimated fair value.

See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for additional information.

Indefinite-Lived Intangible Assets

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), 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, 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.

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.

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.

As of June 1, 2024, the current fiscal year testing date, we held eight indefinite-lived intangible assets with an aggregate carrying value of $135.5 million.

For fiscal 2024, we performed a qualitative analysis to assess our indefinite-lived intangible assets for impairment.

Our qualitative analysis considered and assessed external factors such as macroeconomic, industry, cost, and market conditions as well as asset-specific factors, such as each trade

name's actual and planned financial performance.

Based on the results of our analysis, we determined there was not a more likely than not probability of impairment for seven of the indefinite-lived intangible assets, and no quantitative test for these assets was required.

We last performed a quantitative analysis in fiscal 2023 for these seven trade names and concluded that any reasonably likely change in the assumptions used in those analyses, including revenue growth rates, discount rates, long-term growth rates, or implied royalty rates would not result in an impairment.

In the fourth quarter, management committed to a plan to rebrand certain products in ABL's portfolio.

We determined this plan adversely impacted one trade name.

Therefore, we performed a quantitative analysis to compare the fair value of this trade name with its carrying value.

We estimated the fair value of this indefinite-lived trade name using the relief-from-royalty method, a fair value model based on discounted future cash flows.

Our assumptions in valuing the trade name primarily reflected a projected decline in revenues generated by the trade name due to management’s planned reduction in future use of the asset.

We additionally considered other inputs, including theoretical royalty rates and discount rates, in valuing the asset.

Based on the results of this assessment, we recorded an impairment charge of $3.0 million for one indefinite-lived trade name asset within Selling, distribution, and administrative expenses in the Consolidated Statements of Comprehensive Income related to our ABL segment.

Any reasonably likely change in the assumptions used in the analysis for the trade name would not be material to our financial conditions or results of operations.

See the Significant Accounting Policies footnote 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.

Product Warranty Costs

We accrue for the estimated amount of future warranty costs when the related revenue is recognized and when costs are deemed to be probable and can be reasonably estimated.

Liabilities related to product warranty costs are subject to uncertainty because they require estimates of future costs.

Estimated future warranty costs are primarily based on historical experience, including the number and costs of identified warranty claims as well as the period of time between the shipment of products and our settlement of related claims.

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.

Although we assume that historical experience will continue to be the best indicator of future warranty costs, we cannot assure that future warranty costs will not exceed historical amounts.

If actual future warranty costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow.

See the Commitments and Contingencies footnote of the Notes to Consolidated Financial Statements for further information, including financial balances, on our estimates of liabilities for product warranty costs.

Cautionary Statement Regarding Forward-Looking Statements and Information

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What changed 10-K

Item 7. Management’s Discussion and Analysis