What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-19 · 64 added, 156 removed, 134 unchanged (62% of the section changed)

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We develop, manufacture, distribute and market specialty performance ingredients and products for the nutritional, food, pharmaceutical, animal health, medical device sterilization, plant nutrition and industrial markets.

Previously, our four reportable segments were:

Human Nutrition and Health, Animal Nutrition and Health, Specialty Products, and Industrial Products.

However, effective in the first quarter of 2020, in order to align with our strategic focus on health and nutrition, allocation of resources, and evaluation of operating performance, and given the 2019 reduction in portfolio scale of Industrial Products, we have revised our reporting segment structure to three reportable segments:

Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products.

These reportable segments are strategic businesses that offer products and services to different markets.

This realignment has been retrospectively applied.

Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated" and applied retroactively to 2019 and 2018.

There was no change to the Consolidated Financial Statements as a result of the change to the reportable segments.

We expect that the new reportable segment structure will provide investors greater understanding of and alignment with our strategic focus.

In order to ensure appropriate transparency and visibility into the financial performance of the Company, sufficient detail will continue to be provided relative to Other and Unallocated, including material contributions from oil and gas and other industrial market activities.

Our three reportable segments are strategic businesses that offer products and services to different markets:

Human Nutrition & Health, Animal Nutrition &

Health, and Specialty Products, as more fully described in Note 11 of the consolidated financial statements.

Sales and production of products outside of our reportable segments and other minor business activities are included in "Other and Unallocated".

Balchem is committed to solving today's challenges to shape a healthier tomorrow by operating responsibly and providing innovative solutions for the health and nutritional needs of the world.

Sustainability is at the heart of our company's vision to make the world a healthier place, and we proudly support the Ten Principles of the United Nations Global Compact on human rights, labor, environment and anti-corruption.

In January 2022, Balchem was named one of America’s Most Responsible Companies by Newsweek magazine for the second consecutive year.

This list, compiled by Newsweek in partnership with Statista Inc., recognizes the most responsible companies in the U.S.

across a variety of industries, and is based on publicly available environmental, social and governance (ESG) data.

Our Sustainability Framework focuses on the most critical ESG topics relevant to our business and stakeholders.

We are very proud of our ESG accomplishments to date and are pleased with the recognition by Newsweek.

Balchem will continue to foster these fundamental principles broadly along our entire value chain, develop new ideas and technologies that help us work smarter, and help build a world that is a better place to live.

COVID-19 Response

The COVID-19 response effort has been a primary focus for us since early in the first quarter.

The COVID-19 response effort has been a primary focus for us since early last year.

Our focus has been on employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate.

To date, all of our manufacturing sites are operating at near normal conditions enabling us to supply our customers with the important products and services they need, our

research and development teams are advancing our innovation efforts, and all of our other employees are effectively carrying on their responsibilities and functions remotely.

While impact on demand has not been material to our Company, we are continuing to watch the markets that we serve closely.

We have stress tested our balance sheet under various significant downturn scenarios and, given our relatively low net debt position, cash on hand, access to our undrawn revolving credit facility, and expected free cash flows, we are satisfied with the strength of our balance sheet as we continue through this uncertain market environment.

After a short pause in implementation of our new ERP system across the company due to the pandemic in the second quarter, we successfully resumed our implementation efforts during the second half of 2020, adding a total of five additional sites onto the new system since the pause.

We now have approximately 92% of our revenue on the new system and expect full conversion by 2021.

As a result of our broad based risk mitigation efforts of the direct impacts of the Covid-19 pandemic, our manufacturing sites have been operating at near normal conditions, our research and development teams have continued to innovate in our laboratories, and all of our other employees have been effectively carrying on their responsibilities and functions remotely or in a reduced density hybrid setting.

We are increasingly focused on managing the extraordinary supply chain disruptions that are challenging the markets we operate within that are, at least in part, related to the pandemic and/or the global recovery from the pandemic.

We are experiencing severe input cost inflation, raw material shortages, logistics disruptions, and labor availability issues.

These indirect pandemic related challenges accelerated as 2021 progressed and are likely to continue for some time.

Segment Results

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Total $ 799,023 $ 703,644 $ 95,379 13.6 %

• The increase in net sales within the HNH segment for 2020 as compared to 2019 was primarily driven by higher sales within food and beverage markets, strong sales growth of chelated minerals and choline nutrients, and beneficial impact from the Zumbro acquisition we closed in December 2019, partially offset by lower sales to food service-related markets and the elimination of sales associated with the Reading, Pennsylvania manufacturing site that we divested in 2019.

• The increase in net sales within the ANH segment for 2020 compared to 2019 was primarily the result of higher volumes in both the ruminant species and monogastric species, including companion animal, markets and a favorable mix.

• The increase in Specialty Products segment sales for 2020 compared to 2019 was primarily due to the incremental contribution of Chemogas and higher plant nutrition sales, partially offset by lower legacy ethylene oxide sales, which were negatively impacted by reduced elective surgical procedures during the pandemic.

• Sales relating to business formerly included in the Industrial Products segment decreased from the prior year due to a decline in shale fracking activity.

• The increase in net sales within the Human Nutrition & Health segment for 2021 as compared to 2020 was primarily attributed to sales growth within food, beverage, and nutrition markets.

Total sales for this segment grew 10.6%, with average selling prices contributing 9.3%, volume and mix contributing 1.2%, and the change in foreign currency exchange rates contributing 0.1%.

• The increase in net sales within the ANH segment for 2021 compared to 2020 was primarily the result of higher sales in both monogastric and ruminant animal markets.

Total sales for this segment grew 18.0%, with average selling prices contributing 10.6%, volume and mix contributing 6.3%, and the change in foreign currency exchange rates contributing 1.2%.

• The increase in Specialty Products segment sales for 2021 compared to 2020 was primarily due to year over year sales growth in both the medical device sterilization market and plant nutrition business.

Total sales for this segment increased 13.0%, with average selling prices contributing 8.6%, volume and mix contributing 3.4%, and the change in foreign currency exchange rates contributing 1.1%.

• Sales relating to Other increased from the prior year due to higher demand.

• Sales may fluctuate in future periods based on macroeconomic conditions, competitive dynamics, changes in customer preferences, and our ability to successfully introduce new products to the market.

(in thousands) 2021 2020 Increase

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% of net sales 30.4 % 31.8 %

Gross margin as a percentage of sales decreased in 2020 compared to 2019 primarily due to mix, partially offset by certain lower raw material costs.

Gross margin dollars increased in 2021 compared to 2020 due to the aforementioned higher sales of $95,379, partially offset by an increase in cost of goods sold of $76,102.

The 15.9% increase in cost of goods sold was primarily driven by the significant inflation of manufacturing input costs, primarily related to raw materials.

Price increases lagged this inflation, leading to a 140 basis point decrease in gross margin as a percentage of sales.

Operating Expenses

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% of net sales 14.5 % 16.0 %

The increase in operating expenses was primarily due to incremental operating expenses related to the Chemogas and Zumbro acquisitions and the prior year benefiting from the timing of an insurance recovery.

These increases were partially offset by lower selling expenses driven by reduced travel and lower bad debt expenses.

The increase in operating expenses was primarily due to certain higher compensation-related costs of $8,748, partially offset by a decrease in consulting costs and outside services of $3,000, a decrease in amortization and depreciation expenses of $1,392, and the timing of an insurance recovery amounting to $1,051.

Earnings From Operations

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% of net sales (operating margin) 16.0 % 15.8 %

• Earnings from operations for the HNH segment increased primarily due to the aforementioned higher sales and lower selling expenses as a result of reduced travel and lower bad debt expenses.

• ANH segment earnings from operations increased primarily due to the aforementioned higher sales, certain lower raw material costs, and lower selling expenses due to reduced travel, partially offset by an increase in certain compensation-related costs.

• The decrease in earnings from operations for the Specialty Products segment was primarily due to lower legacy ethylene oxide sales, mix, and higher operating expenses primarily related to the acquisition of Chemogas.

• The decrease in other and unallocated was driven primarily by lower earnings from the business formerly reported in the Industrial Products segment, as well as increased unallocated amortization related to a company-wide ERP implementation.

• Earnings from operations for the Human Nutrition & Health segment increased primarily due to the aforementioned higher sales and a 60 basis point increase in gross margin.

• Animal Nutrition & Health segment earnings from operations decreased primarily due to a 430 basis point decrease in gross margin as a percentage of sales, driven by a significant increase in certain manufacturing input costs, primarily related to raw materials, partially offset by the aforementioned higher sales.

Additionally, total operating expenses for this segment increased by $3,240, primarily due to higher compensation-related costs of $3,031.

• The increase in earnings from operations for the Specialty Products segment was primarily due to the aforementioned higher sales, partially offset by a 240 basis point decrease in gross margin as a percentage of sales, driven by a significant increase in certain manufacturing input costs, primarily related to raw materials.

• The increase in Other and unallocated was primarily driven by a decrease in transaction and integration costs of $1,562 and the prior year being negatively impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment of $1,228, partially offset by an increase in costs related to a company-wide ERP implementation of $1,300.

Other Expenses (Income)

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Interest expense for 2021 and 2020 was primarily related to outstanding borrowings under our credit facility.

The decrease was due to a reduction in borrowings during 2021.

Income Tax Expense

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Effective tax rate 23.3 % 20.5 %

Our effective tax rate for 2020 and 2019 was 20.5% and 17.4%, respectively.

The increase was primarily due to a reduction in certain tax credits.

Our effective tax rate for 2021 and 2020 wa s 23.3% and 20.5%, respectively.

The increase was primarily due to a reduction in certain tax credits, lower tax benefits from stock-based compensation, and higher enacted state tax rates.

LIQUIDITY AND CAPITAL RESOURCES

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Contractual Obligations

The Company’s contractual obligations as of December 31, 2020, are summarized in the table below:

Payments due by period

Contractual Obligations Total 2021 2022-2023 2024-2025 Thereafter

Operating lease obligations (1)

$ 11,602 $ 3,258 $ 4,120 $ 1,541 $ 2,683

Purchase obligations (2)

50,716 50,716 — — —

Debt obligations (3)

163,569 — 163,569 — —

Interest payment obligations (4)

5,098 2,238 2,860 — —

Total $ 230,985 $ 56,212 $ 170,549 $ 1,541 $ 2,683

(1) Principally includes obligations associated with future minimum non-cancelable operating lease obligations.

(2) Principally includes open purchase orders with vendors for inventory not yet received or recorded on our balance sheet.

(3) Consists of contractual obligations under the Credit Agreement, which was effective on June 27, 2018 and expires on June 27, 2023.

(4) Includes interest payments on debt obligations based on interest rates at December 31, 2020, and the assumption that there will be no prepayments of principal.

This interest is related to the Credit Agreement that expires on June 27, 2023, and the Contractual Obligations table reflects this expiration date and related current contractual obligations.

The table above excludes a $5,335 liability for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, as we are unable to reasonably estimate the timing of settlement, if any.

Our short-term purchase obligations primarily include contractual arrangements in the form of purchase orders with suppliers.

As of December 31, 2021, such purchase obligations were $123,828.

For debt obligations, see Note 8, Revolving Loan, and for operating and finance lease obligations, see Note 16 Commitments and Contingencies.

The contractual obligations exclude a $5,881 liability for uncertain tax positions, including the related interest and penalties, recorded in accordance with ASC 740-10, as we are unable to reasonably estimate the timing of settlement, if any.

We know of no current or pending demands on, or commitments for, our liquid assets that will materially affect our liquidity.

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At December 31, 2021, we had $52,071 of cash and cash equivalents held by our foreign subsidiaries.

It is our intention to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions;

therefore, we do not currently expect to repatriate these funds to fund U.S.

We presently intend to permanently reinvest these funds in foreign operations by continuing to make additional plant related investments, and potentially invest in partnerships or acquisitions;

therefore, we do not currently expect to repatriate these funds in order to fund U.S.

operations or obligations.

However, if these funds are needed for U.S.

operations, we could be required to pay additional withholding taxes to repatriate them.

operations, we could be required to pay additional withholding taxes to repatriate these funds.

Working capital was $178,430 at December 31, 2021 as compared to $172,460 at December 31, 2020, an increase of $5,970.

Working capital reflects the payment of the 2019 declared dividend in 2020 of $16,705, net payments on the revolving debt of $85,000, capital expenditures and intangible assets acquired of $33,828, and the purchase of treasury stock for the amount of $13,463.

Working capital reflects the payment of the 2020 declared dividend in 2021 of $18,723, net payments on the revolving debt of $55,000, capital expenditures and intangible assets acquired of $37,449, and common stock repurchases of $35,239.

(in thousands) 2021 2020 Increase

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Cash flows used in investing activities (35,300) (34,591) (709) (2.0) %

Cash flows (used in) provided by financing activities (101,164) 43,385 (144,549) 333.2 %

Cash flows used in financing activities (102,178) (101,164) (1,014) (1.0) %

Operating Activities

The increase in cash flows from operating activities was primarily due to beneficial changes in assets and liabilities, increased earnings, and higher depreciation and amortization.

The increase in cash flows from operating activities was primarily due to increased earnings and improved changes in assets and liabilities.

Investing Activities

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Total investments in property, plant and equipment and intangible assets were $37,449 and $33,828 for the years ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, capital expenditures are projected to range from $30,000 to $40,000 for 2022.

As mentioned above, we expect that our operations will continue to generate sufficient cash flow to fund the commitments for capital expenditures.

These capital expenditures are part of our continuous efforts to support our growing businesses.

Financing Activities

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The total authorization under this program is 3,763,038 shares.

Since the inception of the program in June 1999, a total of 2,568,396 shares have been purchased, of which 76,084 shares and 203,879 shares remained in treasury at December 31, 2020, and 2019, respectively.

Since the inception of the program in June 1999, a total of 2,818,244 shares have been purchased.

We repurchase shares from employees in connection with settlement of transactions under our equity incentive plans.

We also intend to acquire shares from time to time at prevailing market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market conditions and other factors.

We also intend to acquire shares from time to time at

prevailing market prices if and to the extent we deem it is advisable to do so based on our assessment of corporate cash flow, market conditions and other factors.

Proceeds from stock options exercised were $6,943 and $14,155 for the years ended December 31, 2021 and 2020, respectively.

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Refer to Note 18, "Related Party Transactions".

Critical Accounting Policies

Our management is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

Our management is required to make these critical accounting estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements.

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Actual results could differ from those estimates.

Our “critical accounting policies” are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.

Management considers the following accounting policies to be critical.

Revenue Recognition

Revenue for each of our business segments is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to realize in exchange for those goods.

We report amounts billed to customers related to shipping and handling as revenue and include costs incurred for shipping and handling in cost of sales.

Amounts received for unshipped merchandise are not recognized as revenue but rather they are recorded as customer deposits and are included in current liabilities.

In instances of shipments made on consignment, revenue is recognized when control is transferred to the customer.

ASC 606, Revenue from Contracts with Customers , was adopted for the fiscal year beginning on January 1, 2018.

Per the standard, revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation.

The standard allows for recognition of revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer.

Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service.

The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria:

(i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset.

We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Inventories are valued at the lower of cost (first in, first out or average) or net realizable value and have been reduced by an allowance for excess or obsolete inventories.

The write-down of potentially obsolete or slow-moving inventory is recorded based on management’s assumptions about future demand and market conditions.

Long-lived assets

Long-lived assets, such as property, plant, and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows.

For the year ended December 31, 2019, we incurred impairment charges of $1,026 in connection with a restructuring in the HNH segment.

Goodwill represents the excess of costs over fair value of assets of businesses acquired.

ASC 350, “Intangibles-Goodwill and Other,” requires the use of the acquisition method of accounting for a business combination and defines an intangible asset.

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are instead assessed for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the provisions of ASC 350.

We performed our annual test as of October 1.

ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment if events and circumstances indicate that the asset might be impaired.

In January 2017, the FASB issued ASU No.

2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which addresses changes to the testing for goodwill impairment by eliminating Step 2 of the process.

A goodwill impairment test will now be performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

We adopted the new standard on January 1, 2020.

This ASU did not have a significant impact on our consolidated financial statements.

As of October 1, 2020 and 2019, we opted to bypass the qualitative assessment and proceeded directly to performing the quantitative goodwill impairment test.

We assessed the fair values of our reporting units by utilizing the income approach, based on a discounted cash flow valuation model as the basis for our conclusions.

Our estimates of future cash flows included

significant management assumptions such as revenue growth rates, operating margins, discount rates, estimated terminal values and future economic and market conditions.

Our assessment concluded that the fair values of the reporting units exceeded their carrying amounts, including goodwill.

Accordingly, the goodwill of the reporting units was not considered impaired as of October 1, 2020.

However, during the second quarter of 2020, we recorded a goodwill impairment charge of $1,228 related to business formerly included in the Industrial Products segment.

Refer to Note 6, "Intangible Assets".

We may resume performing the qualitative assessment in subsequent periods.

Accounts Receivable

We market our products worldwide to a diverse customer base, principally throughout the Americas, Europe, and Asia.

We grant credit terms in the normal course of business to our customers and perform on-going credit evaluations of our customers.

In June 2016, the FASB issued ASU No.

2016-13, "Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments", which requires that credit losses be reported based on expected losses instead of the incurred loss model.

Based on this ASU, customers' credit limits are adjusted based upon their reasonably expected credit worthiness which is determined through review of their payment history, their current credit information, and any foreseeable future events.

Collections and payments from customers are continuously monitored and allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments are maintained.

Estimated losses are based on historical experience, any specific customer collection issues identified, and any reasonably expected future adverse events.

If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances and related bad debt expense may be required.

Post-employment Benefits

We provide life insurance, health care benefits, and defined benefit pension plan payments for certain eligible retirees and health care benefits for certain retirees’ eligible survivors.

The costs and obligations related to these benefits reflect our assumptions as to health care cost trends and key economic conditions including discount rates, expected rate of return on plan assets, and expected salary increases.

The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.

If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease.

In accordance with ASC 715, “Compensation-Retirement Benefits,” we are required to recognize the overfunded or underfunded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in our statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.

Intangible Assets with Finite Lives

The useful life of an intangible asset is based on our assumptions regarding expected use of the asset;

the relationship of the intangible asset to another asset or group of assets;

any legal, regulatory or contractual provisions that may limit the useful life of the asset or that enable renewal or extension of the asset’s legal or contractual life without substantial cost;

the effects of obsolescence, demand, competition and other economic factors;

and the level of maintenance expenditures required to obtain the expected future cash flows from the asset and their related impact on the asset’s useful life.

If events or circumstances indicate that the life of an intangible asset has changed, it could result in higher future amortization charges or recognition of an impairment loss.

For the year ended December 31, 2020, there were no triggering events which required intangible asset impairment reviews.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled.

Valuation allowances would be established when necessary to reduce deferred tax assets to the amount expected to be realized.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies.

The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.

We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority.

An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision.

As of December 31, 2020, we have federal and state income tax net operating loss (NOL) carryforwards of $2,367 and $1,026, respectively.

The federal NOL will not expire.

The state NOL will expire between 2025 to 2034.

We believe that the benefit from the state NOL carryforwards will be realized, therefore a valuation allowance is not required to be established on these assets.

However, we also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas.

These NOLs are not expected to be realized and therefore a valuation allowance on these items was established.

We consider the undistributed earnings of certain non-U.S.

subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings.

We project that our foreign earnings will be utilized offshore for working capital and future foreign growth.

The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to our legal entity structure and the complexity of U.S.

and local country tax laws.

If we decide to repatriate the undistributed foreign earnings, we will need to recognize the income tax effects in the period we change our assertion on indefinite reinvestment.

Stock-based Compensation

We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation-Stock Compensation.” Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period.

Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates.

Expected volatilities are based on historical volatility of our stock.

The expected term of the options is based on our historical experience of employees’ exercise behavior.

As stock-based compensation expense recognized in the Consolidated Statements of Earnings is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures.

ASC 718 allows for forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Forfeitures were estimated based on historical experience.

If factors change and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.

See Note 3 in Notes to Consolidated Financial Statements for additional information.

New Accounting Pronouncements

See Note 1 in Notes to Consolidated Financial Statements regarding recent accounting pronouncements.

Our “critical accounting estimates” are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.

Management considers the following to be critical accounting estimates.

Goodwill and Intangible Assets

The valuation methods and assumptions used in assessing the impairment of goodwill and identified intangibles, as well as determining the useful life of an intangible asset involve a significant level of estimation uncertainty.

Refer to the Goodwill and Acquired Intangible Assets section in Note 1, "Business Description and Summary of Significant Accounting Policies," for details related to the valuation and impairment process of both goodwill and intangible assets.

Changes in market conditions, laws and regulations, and key assumptions made in future quantitative assessments, including expected cash flows, competitive factors and discount rates, could result in the recognition of an impairment charge, and in turn could have a material impact on our financial condition or results of operations in subsequent periods.

Significant Accounting Policies and Recent Accounting Pronouncements

See Note 1 in Notes to Consolidated Financial Statements regarding significant accounting policies and recent accounting pronouncements.

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