# GRACO INC (GGG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GRACO INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/42888/000004288822000013/ggg-20211231.htm
Accession: 0000042888-22-000013
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/GGG/
All MD&A years: /company/GGG/mda/
Next year: /company/GGG/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s consolidated results of operations, financial condition and liquidity. This discussion should be read in conjunction with our financial statements and the accompanying notes to the financial statements. Certain prior year disclosures have been revised to conform with current year reporting. The discussion is organized in the following sections:

•Overview

•Results of Operations

•Segment Results

•Financial Condition and Cash Flow

•Critical Accounting Estimates

Overview

Graco designs, manufactures and markets systems and equipment used to move, measure, control, dispense and spray fluid and powder materials. The Company specializes in equipment for applications that involve difficult-to-handle materials with high viscosities, materials with abrasive or corrosive properties and multiple-component materials that require precise ratio control. Graco sells primarily through independent third-party distributors worldwide to industrial and contractor end users. Graco’s business is classified by management into three reportable segments: Industrial, Process and Contractor. Each segment is responsible for product development, manufacturing, marketing and sales of their products.

Graco’s key strategies include developing and marketing new products, leveraging products and technologies into additional, growing end-user markets, expanding distribution globally and completing strategic acquisitions that provide additional channel and technologies. Long-term financial growth targets accompany these strategies, including our expectation of 10 percent revenue growth and 12 percent consolidated net earnings growth per annum. We continue to develop new products in each operating division that are expected to drive incremental sales growth, as well as continued refreshes and upgrades of existing product lines. Graco has made a number of strategic acquisitions that expand and complement organically developed products and provide new market and channel opportunities.

Manufacturing is a key competency of the Company. Our management team in Minneapolis provides strategic manufacturing expertise, and is also responsible for factories not fully aligned with a single division. Our largest manufacturing facilities are in the U.S. We also manufacture some of our products in Switzerland (Industrial segment), Italy (Industrial segment), the United Kingdom (Process segment), the People’s Republic of China (“P.R.C.”) (all segments), Belgium (all segments) and Romania (Industrial segment). Our primary distribution facilities are located in the U.S., Belgium, Switzerland, United Kingdom, P.R.C., Japan, Italy, Korea, Australia and Brazil.

The ongoing global COVID-19 pandemic and related governmental, business and societal responses continue to have an impact on our operations, supply chains, distribution channels, and end-user customers. The timing, duration, and extent of the impact from the pandemic in our major geographies is still uncertain and we cannot predict the magnitude of the impact to the results of our operations or financial position.

In 2021, the Company experienced logistical and production constraints associated with raw materials and purchased components. These constraints were due to limited raw material and component availability, reduced freight capacity, shipping delays, and labor shortages as a result of responses to the COVID-19 pandemic and other supply chain disruptions. We also experienced the effects of price inflation related to raw materials, purchased components, and freight and transportation costs. The supply chain disruptions and associated effects of inflation have adversely impacted profitability in the near-term and limited our ability to satisfy strengthening customer demand, especially within our high-volume Contractor segment. We expect these challenges to continue into at least the first half of 2022.

Results of Operations

20

Table of Contents

A summary of financial results follows (in millions except per share amounts):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Net Sales","$","1,987.6","","","$","1,650.1"],["Operating Earnings","531.3","","","391.7"],["Net Earnings","439.9","","","330.5"],["Diluted Net Earnings per Common Share","$","2.52","","","$","1.92"],["Adjusted (non-GAAP)(1):"],["Net Earnings, adjusted","425.7","","","335.2"],["Diluted Net Earnings per Common Share, adjusted","$","2.44","","","$","1.95"]]
[[/GREPCENT_TABLE]]

(1)     Excludes impacts of pension settlement loss, prior year impairment, excess tax benefits from stock option exercises and certain non-recurring income tax provision adjustments. See adjusted financial results below for a reconciliation of the adjusted non-GAAP financial measures to GAAP.

21

Table of Contents

Multiple events in the last two years caused significant fluctuations in financial results. Other expense for 2021 included a $12 million non-cash pension settlement loss. In 2020, operating expenses included $35 million of non-cash impairment charges related to the sale of the Company's U.K.-based valve business (Alco). Excess tax benefits related to stock option exercises reduced income taxes by $12 million in 2021 and $21 million in 2020. Other benefits from tax planning activities further reduced income taxes in 2021 and 2020. Excluding the impacts of those items presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements of adjusted operating earnings, earnings before income taxes, income taxes, effective income tax rates, net earnings and diluted earnings per share follows (in millions except per share amounts):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Operating earnings, as reported","$","531.3","","","$","391.7"],["Impairment","\u2014","","","35.2"],["Operating earnings, adjusted","$","531.3","","","$","426.9"],["Earnings before income taxes, as reported","$","508.5","","","$","374.7"],["Impairment","\u2014","","","35.2"],["Pension settlement loss","12.0","","","\u2014"],["Earnings before income taxes, adjusted","$","520.5","","","$","409.9"],["Income taxes, as reported","$","68.6","","","$","44.2"],["Impairment tax benefit","\u2014","","","1.2"],["Pension settlement tax effect","2.5","","","\u2014"],["Excess tax benefit from option exercises","11.5","","","21.3"],["Other non-recurring tax benefit","12.2","","","8.0"],["Income taxes, adjusted","$","94.8","","","$","74.7"],["Effective income tax rate"],["As reported","13.5","%","","11.8","%"],["Adjusted","18.2","%","","18.2","%"],["Net Earnings, as reported","$","439.9","","","$","330.5"],["Impairment, net","\u2014","","","34.0"],["Pension settlement loss, net","9.5","","","\u2014"],["Excess tax benefit from option exercises","(11.5)","","","(21.3)"],["Other non-recurring tax benefit","(12.2)","","","(8.0)"],["Net Earnings, adjusted","$","425.7","","","$","335.2"],["Weighted Average Diluted Shares","174.5","","","172.0"],["Diluted Net Earnings per Share"],["As reported","$","2.52","","","$","1.92"],["Adjusted","$","2.44","","","$","1.95"]]
[[/GREPCENT_TABLE]]

22

Table of Contents

Components of Net Earnings as a Percentage of Sales:

The following table presents an overview of components of net earnings as a percentage of net sales:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Net Sales","100.0","%","","100.0","%"],["Cost of products sold","48.0","","","48.2"],["Gross profit","52.0","","","51.8"],["Product development","4.0","","","4.4"],["Selling, marketing and distribution","13.7","","","13.4"],["General and administrative","7.6","","","8.2"],["Impairment","\u2014","","","2.1"],["Operating earnings","26.7","","","23.7"],["Interest expense","0.5","","","0.7"],["Other expense, net","0.6","","","0.3"],["Earnings before income taxes","25.6","","","22.7"],["Income taxes","3.5","","","2.7"],["Net Earnings","22.1","%","","20.0","%"],["Net Earnings, adjusted (see non-GAAP measurements above)","21.4","%","","20.3","%"]]
[[/GREPCENT_TABLE]]

Net Sales

The following table presents net sales by geographic region (in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Americas(1)","$","1,150.2","","","$","996.5"],["EMEA(2)","464.1","","","371.8"],["Asia Pacific","373.3","","","281.8"],["Consolidated","$","1,987.6","","","$","1,650.1"]]
[[/GREPCENT_TABLE]]

(1)     North, Central and South America, including the U.S. Sales in the U.S. were $1,004 million in 2021 and $883 million in 2020.

(2)    Europe, Middle East and Africa

The following table presents the components of net sales change by geographic region:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","Volume and Price","","Acquisitions/Divestitures","","Currency","","Total","","Volume and Price","","Acquisitions/Divestitures","","Currency","","Total"],["Americas","15%","","0%","","0%","","15%","","3%","","1%","","0%","","4%"],["EMEA","21%","","0%","","4%","","25%","","(11)%","","1%","","1%","","(9)%"],["Asia Pacific","30%","","(3)%","","6%","","33%","","(1)%","","2%","","0%","","1%"],["Consolidated","19%","","0%","","1%","","20%","","(1)%","","1%","","0%","","0%"]]
[[/GREPCENT_TABLE]]

Improved global economic conditions drove a double-digit percentage increase in sales in 2021. Sales growth was notably strong in the P.R.C. and Western Europe. There were 53 weeks in 2021, compared to 52 weeks in 2020.

Gross Profit

Gross profit margin rate for 2021 increased slightly compared to 2020, as increased volume, realized pricing and favorable changes in currency translation rates were able to offset higher product costs due to supply chain disruptions and the effects of inflation.

23

Table of Contents

Operating Expenses

Total operating expenses for 2021 were $39 million higher than 2020, including the non-cash impairment charge of $35 million in 2020. Excluding the impairment charge, total operating expenses for 2021 increased $75 million. This increase includes $29 million of increases in sales and earnings-based expenses, $5 million related to foreign currency translation, and other volume and rate-related increases as pandemic-related restrictions eased in 2021 compared to 2020. Investment in new product development was $80 million in 2021, up 10 percent over 2020.

Operating Earnings

Operating earnings as a percentage of sales were 3 percentage points higher than 2020. Excluding the prior year non-cash impairment charge, operating earnings as a percentage of sales increased 1 percentage point primarily due to the effects of higher gross margin.

Other Expense

Other expense for 2021 included a non-cash pension settlement loss of $12 million in connection with the transfer of certain pension obligations to an insurance company. Other expense increased $7 million for 2021 as favorable market valuation changes on investments held to fund certain retirement benefits liabilities partially offset the pension settlement loss.

Income Taxes

The effective income tax rate for 2021 was 13 percent, up 1 percentage point from 2020. The increase was primarily due to a decrease in excess tax benefits from stock option exercises partially offset by increased foreign-related tax benefits.

Segment Results

The Company has six operating segments which are aggregated into three reportable segments: Industrial, Process and Contractor. Refer to Part I Item 1. Business, for a description of the Company’s three reportable segments. Management assesses performance of segments by reference to operating earnings excluding unallocated corporate expenses and asset impairments.

The following table presents net sales and operating earnings by reporting segment (in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Sales"],["Industrial","$","840.3","","","$","677.7"],["Process","397.6","","","326.1"],["Contractor","749.7","","","646.3"],["Total","$","1,987.6","","","$","1,650.1"],["Operating Earnings"],["Industrial","$","296.5","","","$","226.6"],["Process","91.0","","","64.5"],["Contractor","169.5","","","164.5"],["Unallocated corporate (expense) (1)","(25.7)","","","(28.7)"],["Impairment","$","\u2014","","","$","(35.2)"],["Total","$","531.3","","","$","391.7"]]
[[/GREPCENT_TABLE]]

(1)    Unallocated corporate (expense) includes such items as stock compensation, certain acquisition transaction items, bad debt expense, charitable contributions, and certain facility expenses.

24

Table of Contents

Industrial Segment

The following table presents net sales and operating earnings as a percentage of sales for the Industrial segment (dollars in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Sales"],["Americas","$","354.5","","","$","294.4"],["EMEA","256.6","","","207.1"],["Asia Pacific","229.2","","","176.2"],["Total","$","840.3","","","$","677.7"],["Operating Earnings as a Percentage of Sales","35","%","","33","%"]]
[[/GREPCENT_TABLE]]

The following table presents the components of net sales change by geographic region for the Industrial segment:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","Volume and Price","","Acquisitions","","Currency","","Total","","Volume and Price","","Acquisitions","","Currency","","Total"],["Americas","20%","","0%","","0%","","20%","","(9)%","","0%","","0%","","(9)%"],["EMEA","19%","","2%","","3%","","24%","","(15)%","","0%","","1%","","(14)%"],["Asia Pacific","25%","","0%","","5%","","30%","","(4)%","","0%","","0%","","(4)%"],["Segment Total","21%","","1%","","2%","","24%","","(10)%","","0%","","1%","","(9)%"]]
[[/GREPCENT_TABLE]]

Improved worldwide economic activity drove Industrial segment sales higher for 2021, particularly in general industry, construction, automotive, electrical equipment and alternative energy end markets. For 2021, the operating margin rate increased as higher production volume, favorable product and channel mix and realized pricing were able to offset the adverse impacts of higher product costs.

In this segment, sales in each geographic region are significant and management looks at economic and financial indicators in each region, including gross domestic product, industrial production, capital investment rates, automobile production, building construction and the level of the U.S. dollar versus the euro, the Swiss franc, the Canadian dollar, the Chinese renminbi and various other Asian currencies.

Process Segment

The following table presents net sales and operating earnings as a percentage of sales for the Process segment (dollars in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Sales"],["Americas","$","242.7","","","$","206.4"],["EMEA","60.1","","","53.1"],["Asia Pacific","94.8","","","66.6"],["Total","$","397.6","","","$","326.1"],["Operating Earnings as a Percentage of Sales","23","%","","20","%"]]
[[/GREPCENT_TABLE]]

25

Table of Contents

The following table presents the components of net sales change by geographic region for the Process segment:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","Volume and Price","","Acquisitions/Divestitures","","Currency","","Total","","Volume and Price","","Acquisitions/Divestitures","","Currency","","Total"],["Americas","17%","","0%","","1%","","18%","","(10)%","","3%","","0%","","(7)%"],["EMEA","14%","","(5)%","","4%","","13%","","(19)%","","5%","","0%","","(14)%"],["Asia Pacific","48%","","(10)%","","5%","","43%","","(2)%","","11%","","0%","","9%"],["Segment Total","23%","","(3)%","","2%","","22%","","(10)%","","5%","","0%","","(5)%"]]
[[/GREPCENT_TABLE]]

The Process segment had organic sales growth in all product applications in 2021, reflecting favorable conditions in many end markets, such as vehicle services, industrial pumps, industrial lubrication, semi-conductors and mining. Operating margin rates for this segment improved by 3 percentage points for 2021, as increased production volume and expense leverage more than offset the adverse effects of higher product costs and increased sales and earnings-based expenses.

Although the Americas represent the substantial majority of sales for the Process segment, and indicators in that region are the most significant, management monitors indicators such as levels of gross domestic product, capital investment, industrial production, oil and natural gas markets and mining activity worldwide.

Contractor Segment

The following table presents net sales and operating earnings as a percentage of sales for the Contractor segment (dollars in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Sales"],["Americas","$","553.0","","","$","495.7"],["EMEA","147.4","","","111.6"],["Asia Pacific","49.3","","","39.0"],["Total","$","749.7","","","$","646.3"],["Operating Earnings as a Percentage of Sales","23","%","","25","%"]]
[[/GREPCENT_TABLE]]

The following table presents the components of net sales change by geographic region for the Contractor segment:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","Volume and Price","","Acquisitions","","Currency","","Total","","Volume and Price","","Acquisitions","","Currency","","Total"],["Americas","11%","","0%","","1%","","12%","","20%","","0%","","0%","","20%"],["EMEA","28%","","0%","","4%","","32%","","5%","","0%","","1%","","6%"],["Asia Pacific","21%","","0%","","6%","","27%","","14%","","0%","","(1)%","","13%"],["Segment Total","15%","","0%","","1%","","16%","","17%","","0%","","0%","","17%"]]
[[/GREPCENT_TABLE]]

Contractor segment sales increased for the quarter and year due to continued strength in North American construction markets and improved demand in the EMEA and Asia Pacific regions. Higher product costs due to supply chain and inflationary challenges led to a 2 percentage point decrease in operating margin for 2021.

In this segment, sales in all regions are significant and management reviews economic and financial indicators in each region, including levels of residential, commercial and institutional construction, remodeling rates and interest rates. Management also reviews gross domestic product for the regions and the level of the U.S. dollar versus the euro and other currencies.

26

Table of Contents

Financial Condition and Cash Flow

Working Capital. The following table highlights several key measures of asset performance (dollars in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Working capital","$","856.8","","","$","702.4"],["Current ratio","2.7","","","3.2"],["Days of sales in receivables outstanding","60","","","64"],["Inventory turnover (LIFO)","2.8","","","2.8"]]
[[/GREPCENT_TABLE]]

Higher cash and cash equivalent balances primarily drove the increases in working capital in 2021. The current ratio decreased primarily due to a change in classification of a debt obligation from long-term to current. The debt obligation was repaid subsequent to December 31, 2021 (See Note F, Debt).

Increases in accounts receivable were consistent with higher sales levels and inventories increased to meet higher demand and service levels.

Capital Structure. At December 31, 2021, the Company’s capital structure included current notes payable of $43 million, long-term debt, including current portion, of $150 million and shareholders’ equity of $1,709 million. At December 25, 2020, the Company’s capital structure included current notes payable of $22 million, long-term debt of $150 million and shareholders’ equity of $1,284 million.

Shareholders’ equity increased by $425 million in 2021. The increase from current year earnings of $440 million was offset by dividends of $131 million and restricted stock issuances of $2 million. Increases related to shares issued, stock compensation and other comprehensive income totaled $119 million.

Liquidity and Capital Resources. The Company evaluates liquidity as its ability to generate cash to fund its operating, investing and financing activities. Historically the Company has funded cash requirements for working capital, capital expenditures, businesses acquisitions, repayment of debt obligations, retirement plans, dividends, and common stock repurchases, all as applicable, through cash provided by its operations. The Company's other primary source of liquidity includes funds available through various debt financing arrangements.

As of December 31, 2021, the Company had available liquidity of $1,149 million, including cash held in deposit accounts of $624 million, of which $120 million was held outside of the U.S., and available credit under existing committed credit facilities of $525 million.

Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2022, including its capital expenditure plan of approximately $190 million, including $140 million for building projects to expand production capacity, planned dividends estimated at $143 million, share repurchases and acquisitions. If acquisition opportunities increase, the Company believes that reasonable financing alternatives are available for the Company to execute on those opportunities. The Company has no significant off-balance sheet debt or other unrecorded obligations.

In December 2021, the Board of Directors increased the Company’s regular quarterly dividend to $0.21 from $0.1875 per share, an increase of 12 percent.

Cash Flow. A summary of cash flow follows (in millions):

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Operating activities","$","456.9","","","$","394.0"],["Investing activities","(153.3)","","","(99.0)"],["Financing activities","(57.1)","","","(139.5)"],["Effect of exchange rates on cash","(1.1)","","","2.4"],["Net cash provided","245.4","","","157.9"],["Cash and cash equivalents at end of year","$","624.3","","","$","378.9"]]
[[/GREPCENT_TABLE]]

27

Table of Contents

Cash Flows From Operating Activities. Net cash provided by operating activities was $457 million in 2021, up $63 million compared to 2020. The impact of the increase in net earnings in 2021 was partially offset by increases in working capital that reflect growth in business activity.

Cash Flows Used in Investing Activities. Cash flows used in investing activities totaled $153 million in 2021, including $134 million for capital additions and $19 million for business acquisitions. Cash flows used in investing activities totaled $99 million in 2020 including $71 million for capital additions and $28 million for business acquisitions.

Cash Flows Used in Financing Activities. Cash flows used in financing activities totaled $57 million in 2021 and included dividends of $127 million and net proceeds from share issuances totaling $51 million. Cash flows used in financing activities totaled $139 million in 2020 and included dividends of $117 million and net payments from share repurchases and issuances totaling $21 million.

On April 24, 2015, the Board of Directors authorized the purchase of up to 18 million shares of common stock, primarily through open market transactions. There were approximately 3.3 million shares remaining under the authorization on December 7, 2018, when the Board of Directors authorized the purchase of up to an additional 18 million shares. The authorizations are for an indefinite period of time or until terminated by the Board. As of December 31, 2021, approximately 18.5 million shares remain available for purchase under the authorizations.

The Company did not repurchase and retire shares in 2021, compared to 2.3 million shares that were repurchased and retired in 2020. The Company has made and may continue to make opportunistic share repurchases in 2022 via open market transactions or short-dated accelerated share repurchase (“ASR”) programs.

28

Table of Contents

Critical Accounting Estimates

The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company’s most significant accounting policies are disclosed in Note A (Summary of Significant Accounting Policies) to the consolidated financial statements. The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts will differ from those estimates. The Company considers the following policies to involve the most judgment in the preparation of the Company’s consolidated financial statements.

Retirement Benefits. The measurements of the Company’s pension and postretirement medical obligations are dependent on a number of assumptions including estimates of the present value of projected future payments, taking into consideration future events such as salary increases and demographic experience. These assumptions may have an impact on the expense and timing of future contributions.

The assumptions used in developing the required estimates for pension obligations include discount rate, inflation, salary increases, retirement rates, expected return on plan assets and mortality rates. The assumptions used in developing the required estimates for postretirement medical obligations include discount rates, rate of future increase in medical costs and participation rates.

For U.S. plans, the Company establishes its discount rate assumption by reference to a yield curve published by an actuary and projected plan cash flows. For plans outside the U.S., the Company establishes a rate by country by reference to highly rated corporate bonds. These reference points have been determined to adequately match expected plan cash flows. The Company bases its inflation assumption on an evaluation of external market indicators. The salary assumptions are based on actual historical experience, the near-term outlook and assumed inflation. Retirement rates are based on experience. The investment return assumption is based on the expected long-term performance of plan assets. In setting this number, the Company considers the input of actuaries and investment advisers, its long-term historical returns, the allocation of plan assets and projected returns on plan assets. For 2022, the Company will use an investment return assumption of 6.25 percent for the funded U.S. plan, down 0.05 percentage points from the rate assumed for 2021. Mortality rates are based on current common group mortality tables for males and females.

At December 31, 2021, a one-half percentage point decrease in the indicated assumptions would have the following effects (in millions):

[[GREPCENT_TABLE]]
[["Assumption","","","","","Funded Status","","Expense"],["Discount rate","","","","","$","(30.8)","","","$","3.4"],["Expected return on assets","","","","","\u2014","","","1.7"]]
[[/GREPCENT_TABLE]]

Goodwill and Other Intangible Assets. The Company performs impairment testing for goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company estimates the fair value of the reporting units using a present value of future cash flows calculation cross-checked by an allocation of market capitalization approach. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit. If the estimated fair value exceeds its carrying value, step two of the impairment analysis is not required. If the estimated fair value is less than its carrying amount, impairment is indicated and the second step must be completed in order to determine the amount, if any, of the impairment. In the second step, an impairment loss is recognized for the difference between the implied value of goodwill and the carrying value.

The Company’s primary identifiable intangible assets include customer relationships, trademarks, trade names, proprietary technology and patents. Finite lived intangibles are amortized and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite lived intangibles are reviewed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate the asset might be impaired.

A considerable amount of management judgment and assumptions are required in performing the impairment tests. Management makes several assumptions, including earnings and cash flow projections, discount rate, product offerings and market strategies, customer attrition, and royalty rates, each of which have a significant impact on the estimated fair

29

Table of Contents

values. Though management considers its judgments and assumptions to be reasonable, changes in these assumptions could impact the estimated fair value.

In 2021, we completed our annual impairment testing of goodwill and other intangible assets in the fourth quarter. No impairment charges were recorded as a result of that review.

Income Taxes. In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet using statutory rates in effect for the year in which the differences are expected to reverse. These assets and liabilities are analyzed regularly, and management assesses the likelihood that deferred tax assets will be recoverable from future taxable income. A valuation allowance is established to the extent that management believes that recovery is not likely. Liabilities for uncertain tax positions are also established for potential and ongoing audits of federal, state and international issues. The Company routinely monitors the potential impact of such situations and believes that liabilities are properly stated. Valuations related to amounts owed and tax rates could be impacted by changes to tax codes and the Company’s interpretation thereof, changes in statutory rates, the Company’s future taxable income levels and the results of tax audits.