Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future performance. However, future performance involves risks and uncertainties which may cause actual results to differ materially from those expressed in the forward-looking statements. Item 7 should be read in conjunction with the information contained in “Forward-Looking Statements” at the beginning of this report and with the consolidated financial statements and notes thereto included in Item 8. References such as the “Company,” “we,” “our” and “us” refer to GEE Group Inc. and its consolidated subsidiaries.
Overview
GEE Group Inc. and its wholly owned material operating subsidiaries, Access Data Consulting Corporation, Agile Resources, Inc., BMCH, Inc., Paladin Consulting, Inc., Scribe Solutions, Inc., SNI Companies, Inc., Triad Logistics, Inc., and Triad Personnel Services, Inc. are providers of permanent and temporary professional and industrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, accounting, finance, office, and engineering professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics, and provide temporary staffing services for our industrial clients. The acquisitions of Scribe Solutions, Inc., a Florida corporation (“Scribe”) in April 2015, Agile Resources, Inc., a Georgia corporation (“Agile”) in July 2015, Access Data Consulting Corporation, a Colorado corporation (“Access”) in October 2015, Paladin Consulting Inc. (“Paladin”) in January 2016, and SNI Companies, Inc., a Delaware corporation (“SNI”) in April 2017, expanded our geographical footprint within the professional placement and contract staffing verticals or end markets of information technology, accounting, finance, office, engineering professionals, and medical scribes.
The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies (including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing. As of September 30, 2023, we operated from locations in eleven (11) states, including twenty-six (26) branch offices in downtown or suburban areas of major U.S. cities and four (4) additional U.S. locations utilizing local staff members working remotely. We have offices or serve markets remotely, as follows; (i) one office in each of Connecticut, Illinois, Minnesota, and New Jersey, and one remote local market presence in Virginia; (ii) two offices each in Georgia and Massachusetts; (iii) three offices in Colorado; (iv) two offices and two additional local market presences in Texas; (v) six offices and one additional local market presence in Florida; and (vi) seven offices in Ohio.
Management has implemented a strategy which includes organic and acquisition growth components. Management’s organic growth strategy includes seeking out and winning new client business, as well as expansion of existing client business and on-going cost reduction and productivity improvement efforts in operations. Management’s acquisition growth strategy includes identifying strategic, accretive acquisitions, financed primarily through a combination of cash and debt, including seller financing, the issuance of equity in appropriate circumstances, and the use of earn-outs where efficient to improve the overall profitability and cash flows of the Company.
The Company’s contract and placement services are principally provided under two operating divisions or segments: Professional Staffing Services and Industrial Staffing Services. We believe our current segments and array of businesses and brands within our segments complement one another and position us for future growth.
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(Amounts in thousands except per share data, unless otherwise stated)
Results of Operations
Fiscal year ended September 30, 2023 (“fiscal 2023”), and fiscal year ended September 30, 2022 (“fiscal 2022”)
Summary and Outlook
Fiscal 2023 results declined from those of fiscal 2022, as expected, primarily as the result of economic and labor market uncertainties and instability, which negatively impacted the numbers of orders and candidates available to fill orders across our businesses. Fiscal 2022 also was an above average year in terms of performance, and while fiscal 2023 results were lower overall, the Company once again was profitable and generated positive cash flow from operations, as it has consistently done since completion of the significant deleveraging initiatives and a follow-on offering during the quarter ended June 30, 2021. We also believe our top line performance was in line with our industry peers and above average in regards to our IT brands. Our lowest performing businesses continued to be those serving light industrial and office clerical markets. We are cautiously optimistic about our ability to return to growth once again, and especially in our largest professional services businesses, led by IT, as uncertainties and unknowns about the economy and labor environments lessen.
We experienced twelve quarters of cumulative pre-tax income during our fiscal third quarter ended June 30, 2023, for purposes of evaluation of our deferred income tax valuation allowance, which had been set at 100% of our net deferred tax assets. As a result of this and our evaluations of other positive and negative evidence, we have recognized a net deferred tax benefit of $7,249 for the fiscal year ended September 30, 2023, which accounted for approximately $0.06 of this period’s earnings per share. The reversal of this allowance during fiscal 2023 represented a significant milestone and indication of our progress.
We also implemented a $20 million share repurchase program during fiscal 2023, providing a means to return excess capital to our shareholders from our growing cash balances. As of September 30, 2023, we had repurchased 3,411 shares. As of December 15, 2023, the Company has repurchased 5,808 shares (accounting for approximately 5.1% of our issued and outstanding common shares immediately prior to the program). The Company has conducted repurchases consistently since the program’s implementation and intends to continue to take advantage of the present attractive market prices for its common shares.
Net Revenues
Consolidated net revenues are comprised of the following:
Fiscal
2023
2022
$ Change
% Change
Professional contract services
$ 120,046
$ 122,562
$ (2,516 )
(2)%
Industrial contract services
13,005
15,945
(2,940 )
(18)%
Total contract services revenues
133,051
138,507
(5,456 )
(4)%
Direct hire placement services
19,392
26,605
(7,213 )
(27)%
Consolidated net revenues
$ 152,443
165,112
$ (12,669 )
(8)%
Contract staffing services contributed $133,051, or approximately 87%, of consolidated revenue and direct hire placement services contributed $19,392, or approximately 13%, of consolidated revenue for fiscal 2023. This compares to contract staffing services revenue of $138,507, or approximately 84%, of consolidated revenue and direct hire placement revenue of $26,605, or approximately 16%, of consolidated revenue for fiscal 2022.
As a result of the economic headwinds encountered during fiscal 2023, including persistent inflation and threats of recession, consolidated contract staffing services revenues for fiscal 2023 were down only $5,456, or 4%, when compared to fiscal 2022. Professional contract services revenue decreased by $2,516, or 2%, which can be attributed to completion of certain discreet (non-recurring) projects in fiscal 2022, including professional staffing support provided to former COVID-19 response vaccination and testing facilities. These discreet projects generated $3,152 in revenue during fiscal 2022. Excluding the effects of these discreet projects, professional contract services revenues would have increased $636, or 0.5%, during fiscal 2023. Industrial staffing services revenues decreased by $2,940, or 18%, mainly due to a decrease in orders from clients. Our industrial staffing markets in Ohio, as well as office clerical markets in various locations, continue to be affected by workforce volatility following COVID-19, resulting in more competition for orders and temporary labor to fill orders. According to a U.S. Staffing Industry Forecast report published in September 2023 by Staffing Industry Analysts, U.S. staffing industry revenues are expected to decline 10% over the 2023 calendar year.
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(Amounts in thousands except per share data, unless otherwise stated)
Direct hire placement revenue for fiscal 2023 decreased by $7,213, or 27%, over fiscal 2022. Direct hire opportunities tend to be highly cyclical and demand dependent, tending to rise during economic recovery and decline during downturns. Demand for the Company’s direct hire services in fiscal 2022 was extraordinarily high driven by post-COVID employment recovery trends, and is down in 2023 on the presence of economic uncertainties . Management believes that the Company’s direct hire performance during fiscal 2023 was on par with larger employment and industry trends.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes, employee benefits of the Company's contract services employees, and certain other employee-related costs, while they work on contract assignments. Cost of contract services for fiscal 2023 decreased by approximately 4% to $99,571 compared to $103,434 for fiscal 2022. The $3,863 decrease in cost of contract services is consistent with the decrease in revenues as discussed above.
Gross Profit percentage by service:
Fiscal
2023
2022
Professional contract services
26.1%
26.6%
Industrial contract services
16.5%
15.4%
Consolidated contract services
25.2%
25.3%
Direct hire placement services (1)
100.0%
100.0%
Combined gross profit margin (1)
34.7%
37.4%
(1)
Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses.
The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for fiscal 2023 was approximately 34.7% versus approximately 37.4% for fiscal 2022. The substantial portion of the decline in fiscal 2023 compared with fiscal 2022, is due to the corresponding declines in the volume and mix of direct hire placement revenues in fiscal 2023.
In the professional contract staffing services segment, the gross margin excluding direct placement services was approximately 26.1% for fiscal 2023 compared to approximately 26.6% for fiscal 2022. This decrease is due in part to increases in contractor pay associated with the recent rise in inflation resulting in some margin compression. The Company stepped-up counter-inflationary measures during the second half of fiscal 2023, including seeking increases in bill rates and spreads, where possible, to address margin compression.
The Company’s industrial staffing services gross margin for fiscal 2023 was approximately 16.5% as compared with approximately 15.4% for fiscal 2022. This increase is mainly attributable to price increases enacted to offset increases in contractor payroll and achieve higher spreads in the Industrial segment.
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(Amounts in thousands except per share data, unless otherwise stated)
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
·
Compensation and benefits in the operating divisions, which includes salaries, wages and commissions earned by the Company’s employment consultants, recruiters and branch managers on permanent and temporary placements;
·
Administrative compensation, which includes salaries, wages, share-based compensation, payroll taxes and employee benefits associated with general management and the operation of corporate functions, including principally, finance, human resources, information technology and administrative functions;
·
Occupancy costs, which includes office rent, and other office operating expenses;
·
Recruitment advertising, which includes the cost of identifying and tracking job applicants; and
·
Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.
The Company’s SG&A for fiscal 2023 decreased by $4,336 as compared to fiscal 2022. SG&A for fiscal 2023 as a percentage of revenue was approximately 31.2% versus 31.4% for fiscal 2022. The decrease in SG&A relative to revenue, despite the effects of inflation on compensation and other operating costs, is largely a result of certain cost reductions implemented by the Company during the second quarter of fiscal 2023. These cost reductions were expected to provide annual savings of approximately $4.0 million. The Company monitors operating costs including the impacts of inflation with a view towards identifying and taking advantage of potential cost reductions on a routine basis.
SG&A includes certain non-cash costs and expenses incurred related to acquisition, integration and restructuring and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations or have been eliminated on a going forward basis. These costs were $838 and $2,060 for fiscal 2023 and 2022, respectively, and include mainly expenses associated with former closed and consolidated locations, legal fees and a settlement, and personnel costs associated with eliminated positions.
Depreciation and Amortization Expense
Depreciation expense was $383 and $371 for fiscal 2023 and 2022, respectively. The increase in depreciation expense is due to recent net additions to fixed assets. Amortization expense was $2,879, and $3,469 for fiscal 2023 and 2022, respectively. The decrease is due to intangible assets related to certain non-compete agreements and trade names becoming fully amortized.
Goodwill Impairment
The Company completed its most recent annual goodwill impairment assessment as of September 30, 2023 and determined that its goodwill was not impaired. During fiscal 2022, as of December 31, 2021, an interim assessment was performed as the amount of discount inherent in the Company’s market capitalization as reported on the NYSE American exchange when compared with consolidated stockholders’ equity, or net book value, had increased since the annual goodwill impairment assessment as of September 30, 2021. The estimated fair values of its Professional Services and Industrial Services reporting units were adjusted based on qualitative and quantitative analysis so that they reconciled more precisely with the Company’s market capitalization as of December 31, 2021, plus an assumed control premium. As a result, the Company recognized a non-cash impairment charge of $2,150 during the first quarter of fiscal 2022. Upon completion of the annual goodwill impairment assessment as of September 30, 2022, it was determined that the Company’s goodwill was not impaired.
Income from Operations
Income from operations was $2,033 and $3,775 for fiscal 2023 and 2022, respectively. This decrease of $1,742 is consistent with the decrease in revenues, mainly in direct hire placements, as discussed above, and taking into account the goodwill impairment charge of $2,150 included in fiscal 2022 income from operations.
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(Amounts in thousands except per share data, unless otherwise stated)
Interest Expense
Interest expense decreased by $41 to $336 for fiscal 2023 from $377 for fiscal 2022.
Interest Income
The Company began holding excess cash in interest bearing accounts in August 2022 on which interest income earned was $472 and $16 in fiscal 2023 and 2022, respectively.
Provision for Income Taxes
The Company recognized income tax benefits (expense) of $7,249 and $(588) for fiscal 2023 and 2022, respectively. Our effective tax rates for fiscal years ended September 30, 2023 and 2022 are lower than the statutory rate primarily due to the effect of the change in valuation allowance on the net deferred tax asset (“DTA”) position.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of June 30, 2023, in part due to the fact that in the current year we achieved three years of cumulative pretax income, management determined that there is sufficient positive evidence to conclude that it is more likely than not that the deferred taxes are realizable. As a result, the Company released $7,581 of the valuation allowance accordingly during fiscal 2023.
Net Income
The Company’s net income was $9,418 and $19,599 for fiscal 2023 and 2022, respectively. In addition to the changes in income from operations as outlined above, the decrease is primarily due to gains of $16,773 recorded in fiscal 2022 from forgiveness and extinguishment of the Company’s remaining PPP loans, offset by the deferred tax benefit of $7,249 during fiscal 2023.
Liquidity and Capital Resources
The primary sources of liquidity for the Company are revenues earned and collected from its clients and borrowings available under its asset-based senior secured revolving credit facility. Uses of liquidity include primarily the costs and expenses necessary to fund operations, including payment of compensation to the Company’s contract and permanent employees, employment-related expenses, operating costs and expenses, taxes and capital expenditures.
The following table sets forth certain consolidated statements of cash flows data:
Fiscal
2023
2022
Cash flows provided by operating activities
$ 5,890
$ 9,396
Cash flows used in investing activities
(89 )
(328 )
Cash flows used in financing activities
(2,178 )
(167 )
As of September 30, 2023, the Company had $22,471 of cash which was an increase of $3,623 from $18,848 as of September 30, 2022. The Company reported $5,890 and $9,396 in cash flow from operations for the fiscal years ended September 30, 2023 and 2022, respectively.
As of September 30, 2023, the Company had working capital of $30,290 compared to $26,643 as of September 30, 2022. The increase in working capital is mainly attributable to positive cash flow from operations less purchases of treasury stock during fiscal 2023. Cash flows were reduced by installment payments of deferred payroll taxes under the CARES Act from fiscal 2020, of $1,847 each, during the fiscal years ended September 30, 2023 and 2022.
The primary uses of cash for investing activities were for the acquisition of property and equipment, principally information technology equipment, during fiscal 2023 and 2022.
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(Amounts in thousands except per share data, unless otherwise stated)
The cash flows used in financing activities were for purchases of treasury stock during fiscal 2023, and payments made on finance leases during fiscal 2023 and 2022.
The Company had approximately $11,251 in availability for borrowings under its CIT facility as of September 30, 2023. There were no outstanding borrowings on the CIT Facility as of September 30, 2023, or September 30, 2022, except for certain accrued carrying fees and costs, which are included in other current liabilities in the accompanying consolidated balance sheets.
On April 27, 2023, the Company’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to an aggregate of $20 million of the Company’s currently outstanding shares of common stock. The share repurchase program will continue through December 31, 2023, may be suspended or discontinued at any time and does not obligate the Company to repurchase any number of shares of common stock. The share repurchase program is to be conducted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Subject to applicable rules and regulations, the shares of common stock may be purchased from time to time in the open market transactions and in amounts as the Company deems appropriate, based on factors such as market conditions, legal requirements, and other business considerations. During fiscal 2023, the Company repurchased 3,411 shares of its common stock at a total cost of $1,984.
As of December 15, 2023, the Company has repurchased 5,808 shares (accounting for approximately 5.1% of our issued and outstanding common shares immediately prior to the program).
All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on September 30, 2023, are approximately $1,669. There are no minimum debt service principal payments due during the twelve-month period commencing after the close of business on September 30, 2023.
Management believes that the Company can generate adequate liquidity to meet its obligations for the foreseeable future and at least for the next twelve months after the date this Annual Report on Form 10-K is filed.
Off-Balance Sheet Arrangements
As of September 30, 2023, and 2022, and during the two fiscal years then ended, there were no transactions, agreements, or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission.
Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known.
Significant accounting and disclosure matters requiring the use of estimates and assumptions include, but may not be limited to, revenue recognition, accounts receivable allowances, determining fair values of financial assets and liabilities, income tax provisions and benefits, including deferred income tax valuation allowances, accounting for asset impairments, and accounting for share-based compensation. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.
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(Amounts in thousands except per share data, unless otherwise stated)
The following accounting policies are considered by management to be “critical” because of the judgments and uncertainties involved, and because different amounts would be reported under different conditions or using different assumptions.
Revenue Recognition
Our revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Our revenues are recorded net of variable consideration such as sales adjustments or allowances. Direct hire placement service revenues from contracts with customers are recognized when employment candidates accept offers of employment, less a provision for estimated credits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company's guarantee period (referred to as “falloffs”). The Company’s guarantee periods for permanently placed employees generally range from 60 to 90 days from the date of hire.
Falloffs and refunds during the period, including estimates for future falloffs associated with revenues that have been recognized, are reflected in the consolidated statements of operations as a reduction of placement service revenues and in the consolidated balance sheets, in combination with allowance for uncollectible accounts, as a reduction of accounts receivable. Estimated future falloffs are determined by analyzing recent historical trends of actual falloffs and applying a formula comprised of average numbers of falloffs, average falloff amounts, and average cycle times between billing and fall off dates to derive an allowance for falloffs. Thus, the estimated allowance is derived from observed trends in actual historical falloffs and assumes that historical trends are indicative of future falloff activity.
Temporary staffing service revenues from contracts with customers are recognized in amounts for which the Company has a right to invoice, as the services are rendered by the Company’s temporary employees. The Company records temporary staffing revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company controls the specified service before that service is performed for a customer. The Company has the risk of identifying and hiring qualified employees, has the discretion to select the employees and establish their price, and bears the risk for services that are not fully paid for by customers.
Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. An allowance for placement falloffs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’s guarantee period. These allowances together reflect management’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. Management believes that the nature of the contract service business, wherein client companies are generally dependent on our contract employees in the same manner as permanent employees for their production cycles and the conduct of their respective businesses contributes to a relatively small accounts receivable allowance.
Fair Value Measurement
The Company follows the provisions of Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 820, Fair Value Measurement , which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances when observable inputs are not available. The hierarchy is described below:
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(Amounts in thousands except per share data, unless otherwise stated)
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Income Taxes
The Company accounts for income taxes under the asset and liability method, FASB ASC 740, Income Taxes , which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it is believed these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event it is determined that the Company would not be able to realize the entire amount of recorded deferred tax assets in the future, an adjustment would be made to the deferred tax asset valuation allowance, which would increase the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Interest and penalties related to uncertain tax benefits are recognized on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2023 and 2022, no accrued interest or penalties are included on the related tax liability line in the accompanying consolidated balance sheet.
Goodwill
The Company evaluates its goodwill for possible impairment as prescribed by FASB ASU 2017-04 , Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, at least annually and on an interim basis when one or more triggering events or circumstances indicate that the goodwill might be impaired. Under this guidance, annual or interim goodwill impairment testing is performed by comparing the estimated fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.
The Company performed annual goodwill impairment testing effective as of September 30, 2023, and allocated its goodwill among two reporting units: its professional reporting unit and its industrial reporting unit for purposes of evaluation for impairments. In determining the fair value of our two reporting units, we use one or a combination of commonly accepted valuation methodologies: (1) the income approach, which is based on the present value of discounted cash flows projected for the reporting unit or, in certain instances, capitalization of earnings, and (2) the market approach, which estimates a fair value based on an appropriate revenue and/or earnings multiple(s) derived from comparable companies. These valuation techniques rely upon assumptions and other factors, such as the estimated future cash flows of our reporting units, the discount rate used to determine the present value of future cash flows, and the market multiples of comparable companies utilized. In applying our methods, we consider and use averages and medians in the selection of assumptions derived from comparable companies or market data, where applicable, and in the application of the income and/or market approaches if we determine that this will provide a more appropriate estimated fair value or range of fair value estimates of the reporting units. Changes to input assumptions and other factors used or considered in the analysis could result in materially different evaluations of goodwill impairment.
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(Amounts in thousands except per share data, unless otherwise stated)
For purposes of performing this goodwill impairment assessment, management applied the valuation techniques and assumptions to its professional and industrial segments as reporting units discussed above; and also considered recent trends in the Company’s stock price, implied control or acquisition premiums, earnings, and other possible factors and their effects on estimated fair value of the Company’s reporting units.
As a result of the evaluation performed, the estimated fair values exceeded the carrying values of its net assets of the Company’s professional and industrial reporting units as of September 30, 2023.
Intangible Assets
Separately identifiable intangible assets held in the form of customer relationships and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.
Impairment of Long-lived Assets (other than Goodwill)
The Company recognizes an impairment of long-lived intangible assets used in operations, other than goodwill, when events or circumstances indicate that these assets might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. For purposes of testing the long-lived assets other than goodwill, long-lived assets are grouped and considered with other assets and liabilities within the professional and industrial reporting units. The Company did not record any impairments to its long-lived assets during fiscal 2023 and 2022.
Share-Based Compensation
The Company accounts for share-based awards to employees in accordance with FASB ASC 718, Compensation-Stock Compensation , which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the consolidated financial statements based on a determination of the fair value of the stock options or restricted stock grants. The grant date fair value of stock options is determined using the Black-Scholes-Merton ("Black-Scholes") pricing model. For all employee stock options and restricted stock grants, the Company recognizes expense over the employee's requisite service period (generally the vesting period of the equity grant) and records an estimate for forfeitures. The Company's option pricing model requires the input of subjective assumptions, including the expected stock price volatility, and expected term. Any changes in these subjective assumptions significantly impact our share-based compensation expense.
See Note 10 for the assumptions used to calculate the fair value of share-based employee and non-employee compensation. Upon the exercise of options, it is the Company's policy to issue new shares rather than utilizing treasury shares.
Recent Accounting Pronouncements
Not Yet Adopte d
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) , which enhances prior reportable segment disclosure requirements in part by requiring entities to disclose significant expenses related to their reportable segments. The guidance also requires disclosure of the Chief Operating Decision Maker's (“CODM”) position for each segment and detail of how the CODM uses financial reporting to assess their segment’s performance. The new guidance is effective for fiscal years beginning after December 15, 2023. The Company does not expect implementation of the new guidance to have a material impact on its consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses , authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is still evaluating the impact of this guidance on its consolidated financial statements but does not expect implementation of the new guidance to have a material impact on its consolidated financial statements and related disclosures.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future financial statements.