# GRACO INC (GGG) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GRACO INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/42888/000004288824000010/ggg-20231229.htm
Accession: 0000042888-24-000010
Filing date: 2024-02-20
Report date: 2023-12-29
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/
Previous year: /company/GGG/mda/fy2022/ (FY 2022)
Next year: /company/GGG/mda/fy2024/ (FY 2024)

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. A discussion of changes in our financial condition and the results of operations from the year ended December 30, 2022 compared to December 31, 2021 can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 30, 2022. 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: Contractor, Industrial and Process. 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 objectives 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 (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, India, Australia and Brazil.

Supply Chain and Inflation

In 2023, the Company's supply chain stabilized, and the associated effects of inflation largely subsided. While the Company experienced isolated supply chain disruptions in 2023, the impact was not as significant as compared to previous years in 2022 and 2021. Pricing actions implemented in 2022 and 2023 have generally mitigated the effects of inflation.

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Results of Operations

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Net Sales","$","2,195.6","","","$","2,143.5"],["Operating Earnings","646.8","","","572.7"],["Net Earnings","506.5","","","460.6"],["Diluted Net Earnings per Common Share","$","2.94","","","$","2.66"],["Adjusted (non-GAAP)(1):"],["Operating Earnings, adjusted","$","646.0","","","$","572.7"],["Net Earnings, adjusted","523.9","","","455.5"],["Diluted Net Earnings per Common Share, adjusted","$","3.04","","","$","2.63"]]
[[/GREPCENT_TABLE]]

(1)     Excludes the impact of a pension settlement loss, contingent consideration fair value adjustment, impairment charge, excess tax benefits from stock option exercises and certain non-recurring tax provision adjustments. See Financial Results Adjusted for Comparability below for a reconciliation of adjusted non-GAAP financial measures to GAAP

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Certain events in the last two years caused fluctuations in financial results. Excess tax benefits related to stock option exercises reduced income taxes by $10 million in 2023 and $5 million in 2022. Other expense for 2023 included a $42 million non-cash pension settlement loss. In 2023, the Company recorded a goodwill impairment and contingent consideration adjustment related to an acquisition that was not material to the financial statements. Other benefits from tax planning activities further reduced income taxes in 2023. Excluding the impacts of those items presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP adjusted measurements of 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]]
[["","2023","","2022"],["Operating earnings, as reported","$","646.8","","","$","572.7"],["Contingent consideration","(8.6)","","","\u2014"],["Impairment","7.8","","","\u2014"],["Operating earnings, adjusted","$","646.0","","","$","572.7"],["Earnings before income taxes, as reported","$","608.8","","","$","565.7"],["Pension settlement loss","42.1","","","\u2014"],["Contingent consideration","(8.6)","","","\u2014"],["Impairment","7.8","","","\u2014"],["Earnings before income taxes, adjusted","$","650.1","","","$","565.7"],["Income taxes, as reported","$","102.3","","","$","105.1"],["Pension settlement tax effect","8.8","","","\u2014"],["Other non-recurring tax benefit","4.8","","","\u2014"],["Excess tax benefit from option exercises","10.3","","","5.1"],["Income taxes, adjusted","$","126.2","","","$","110.2"],["Effective income tax rate"],["As reported","16.8","%","","18.6","%"],["Adjusted","19.4","%","","19.5","%"],["Net Earnings, as reported","$","506.5","","","$","460.6"],["Pension settlement loss, net","33.3","","","\u2014"],["Contingent consideration","(8.6)","","","\u2014"],["Impairment","7.8","","","\u2014"],["Other non-recurring tax benefit","(4.8)","","","\u2014"],["Excess tax benefit from option exercises","(10.3)","","","(5.1)"],["Net Earnings, adjusted","$","523.9","","","$","455.5"],["Weighted Average Diluted Shares","172.2","","","172.9"],["Diluted Net Earnings per Share"],["As reported","$","2.94","","","$","2.66"],["Adjusted","$","3.04","","","$","2.63"]]
[[/GREPCENT_TABLE]]

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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]]
[["","2023","","2022"],["Net Sales","100.0","%","","100.0","%"],["Cost of products sold","47.1","","","50.7"],["Gross profit","52.9","","","49.3"],["Product development","3.7","","","3.7"],["Selling, marketing and distribution","11.9","","","11.7"],["General and administrative","7.8","","","7.2"],["Contingent consideration","(0.4)","","","\u2014"],["Impairment","0.4","","","\u2014"],["Operating earnings","29.5","","","26.7"],["Interest expense","0.2","","","0.4"],["Other expense, net","1.6","","","(0.1)"],["Earnings before income taxes","27.7","","","26.4"],["Income taxes","4.6","","","4.9"],["Net Earnings","23.1","%","","21.5","%"],["Net Earnings, adjusted (see non-GAAP measurements above)","23.9","%","","21.3","%"]]
[[/GREPCENT_TABLE]]

Net Sales

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Americas(1)","$","1,338.0","","","$","1,281.9"],["EMEA(2)","463.9","","","451.8"],["Asia Pacific","393.7","","","409.8"],["Consolidated","$","2,195.6","","","$","2,143.5"]]
[[/GREPCENT_TABLE]]

(1)     North, Central and South America, including the U.S. Sales in the U.S. were $1,162 million in 2023 and $1,116 million in 2022.

(2)    Europe, Middle East and Africa.

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","Volume and Price","","Acquisitions","","Currency","","Total","","Volume and Price","","Acquisitions","","Currency","","Total"],["Americas","4%","","0%","","0%","","4%","","11%","","1%","","(1)%","","11%"],["EMEA","0%","","0%","","3%","","3%","","7%","","0%","","(10)%","","(3)%"],["Asia Pacific","(1)%","","0%","","(3)%","","(4)%","","16%","","0%","","(6)%","","10%"],["Consolidated","2%","","0%","","0%","","2%","","11%","","1%","","(4)%","","8%"]]
[[/GREPCENT_TABLE]]

Sales in the Americas were up modestly in 2023, as conditions varied by end market. Sales of industrial products remained favorable, however rising interest rates and other economic conditions adversely impacted sales in construction markets. EMEA sales growth in 2023 benefited mostly from favorable changes in currency translation rates. Lower finishing system sales in EMEA for 2023 offset broad-based sales growth in Western Europe and emerging countries. In the Asia Pacific region, economic conditions in China and unfavorable changes in currency translation rates more than offset underlying growth in the rest of the region for 2023.

Gross Profit

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The gross profit margin rate for 2023 increased approximately 4 percentage points compared to 2022 mostly due to realized pricing.

Operating Expenses

Total operating expenses for 2023 increased $29 million compared to 2022. The increase includes increased spending on product development and other growth initiatives of $7 million, incremental share-based compensation of $6 million and higher sales and earnings-based expenses of $4 million. Investment in new product development in 2023 was $83 million, approximately 4 percent of sales.

Operating Earnings

Sales growth led to an 8 percent increase in operating earnings. Operating earnings expressed as a percentage of sales in 2023 increased 3 percentage points compared to 2022 as realized pricing more than offset higher product costs and operating expenses.

Other Expense

Interest expense decreased $5 million compared to 2022 as private placement debt was repaid in the first quarter of 2022 and in the third quarter of 2023. Other non-operating expenses for 2023 included a non-cash pension settlement loss of $42 million in connection with the transfer of certain pension obligations to an insurance company. Partially offsetting the pension settlement loss was an increase in interest income of approximately $11 million for the year.

Income Taxes

The effective income tax rate for 2023 was 17 percent, down 2 percentage points from 2022. The decrease in 2023 was due to additional non-recurring tax benefits and excess tax benefits from stock option exercises.

Segment Results

The Company has five operating segments which are aggregated into three reportable segments: Contractor, Industrial and Process. 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]]
[["","2023","","2022"],["Sales"],["Contractor","$","985.7","","","$","999.1"],["Industrial","662.8","","","649.3"],["Process","547.1","","","495.1"],["Total","$","2,195.6","","","$","2,143.5"],["Operating Earnings"],["Contractor","$","285.3","","","$","249.9"],["Industrial","234.1","","","231.3"],["Process","165.3","","","122.3"],["Unallocated corporate (expense) (1)","(38.7)","","","(30.8)"],["Contingent consideration","8.6","","","\u2014"],["Impairment","(7.8)","","","\u2014"],["Total","$","646.8","","","$","572.7"]]
[[/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.

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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]]
[["","2023","","2022"],["Sales"],["Americas","$","730.2","","","$","739.1"],["EMEA","179.5","","","176.8"],["Asia Pacific","76.0","","","83.2"],["Total","$","985.7","","","$","999.1"],["Operating Earnings as a Percentage of Sales","29","%","","25","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","Volume and Price","","Acquisitions","","Currency","","Total","","Volume and Price","","Acquisitions","","Currency","","Total"],["Americas","(1)%","","0%","","0%","","(1)%","","7%","","0%","","(1)%","","6%"],["EMEA","(1)%","","0%","","2%","","1%","","(6)%","","1%","","(9)%","","(14)%"],["Asia Pacific","(5)%","","0%","","(4)%","","(9)%","","0%","","0%","","(6)%","","(6)%"],["Segment Total","(1)%","","0%","","0%","","(1)%","","4%","","0%","","(3)%","","1%"]]
[[/GREPCENT_TABLE]]

Contractor segment sales decreased 1 percent for the year. Favorable response to new product offerings was more than offset for the year by slower economic activity in worldwide construction markets. The operating margin rate for this segment improved 4 percentage points for the year. Realized pricing drove most of the improvement in the operating margin rate for the year.

Sales in the Americas represents the majority of sales for the Contractor segment. Management regularly reviews economic and financial indicators for North America, 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.

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]]
[["","2023","","2022"],["Sales"],["Americas","$","263.6","","","$","239.3"],["EMEA","207.6","","","205.7"],["Asia Pacific","191.6","","","204.3"],["Total","$","662.8","","","$","649.3"],["Operating Earnings as a Percentage of Sales","35","%","","36","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","Volume and Price","","Acquisitions","","Currency","","Total","","Volume and Price","","Acquisitions","","Currency","","Total"],["Americas","10%","","0%","","0%","","10%","","13%","","0%","","(1)%","","12%"],["EMEA","(2)%","","0%","","3%","","1%","","15%","","0%","","(12)%","","3%"],["Asia Pacific","(3)%","","0%","","(3)%","","(6)%","","14%","","0%","","(6)%","","8%"],["Segment Total","2%","","0%","","0%","","2%","","14%","","0%","","(6)%","","8%"]]
[[/GREPCENT_TABLE]]

Industrial segment sales increased 2 percent for the year as continued strength in the automotive, industrial and machinery end markets in the Americas was mostly offset by lower finishing system sales in EMEA and Asia Pacific. The operating margin rate for this segment decreased 1 percentage point for the year as realized pricing and lower product costs were offset by unfavorable changes in currency translation rates and higher operating expenses.

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]]
[["","2023","","2022"],["Sales"],["Americas","$","344.2","","","$","303.5"],["EMEA","76.8","","","69.3"],["Asia Pacific","126.1","","","122.3"],["Total","$","547.1","","","$","495.1"],["Operating Earnings as a Percentage of Sales","30","%","","25","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","Volume and Price","","Acquisitions","","Currency","","Total","","Volume and Price","","Acquisitions","","Currency","","Total"],["Americas","13%","","0%","","0%","","13%","","22%","","3%","","0%","","25%"],["EMEA","10%","","0%","","1%","","11%","","22%","","1%","","(8)%","","15%"],["Asia Pacific","5%","","0%","","(2)%","","3%","","34%","","0%","","(5)%","","29%"],["Segment Total","11%","","0%","","0%","","11%","","25%","","2%","","(2)%","","25%"]]
[[/GREPCENT_TABLE]]

Process segment sales increased in all businesses and regions for the year, reflecting continued favorable conditions in many end markets, such as vehicle services, industrial pumps, oil and gas, mining, industrial lubrication and semi-conductors. The operating margin rate for this segment increased 5 percentage points for the year, primarily due to realized pricing, lower product costs and expense leverage.

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

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Financial Condition and Cash Flow

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Working capital","$","970.6","","","$","805.7"],["Current ratio","3.5","","","3.0"],["Days of sales in receivables outstanding","58","","","57"],["Inventory turnover (LIFO)","2.2","","","2.5"]]
[[/GREPCENT_TABLE]]

Higher cash and cash equivalent balances primarily drove increases in working capital in 2023. Changes in receivables were consistent with higher sales levels. Inventories decreased as supply chain disruptions eased and the associated effects of inflation subsided. As inventory purchases decreased, trade accounts payable decreased. The current ratio increased in 2023 in line with the changes in working capital.

Capital Structure. At December 29, 2023, the Company’s capital structure included current notes payable of $30 million and shareholders’ equity of $2,224 million. At December 30, 2022, the Company’s capital structure included current notes payable of $21 million, long-term debt of $75 million and shareholders’ equity of $1,860 million.

Shareholders’ equity increased by $365 million in 2023. The increase provided by current year earnings of $507 million was primarily offset by dividends of $161 million and share repurchases of $102 million. Other increases in shareholders' equity included share issuances, stock compensation and other comprehensive income of $122 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 29, 2023, the Company had available liquidity of $1,313 million, including cash held in deposit accounts of $538 million, of which $129 million was held outside of the U.S., and available credit under existing committed credit facilities of $775 million.

Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2024, including its capital expenditure plan of approximately $120 million, including $60 million for building projects to expand production capacity, planned dividends estimated at $171 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. The Company believes it has the ability to meet its long-term cash requirements by using available cash and internally generated funds and to borrow under its committed and uncommitted credit facilities.

In December 2023, the Board of Directors increased the Company’s regular quarterly dividend from $0.235 to $0.255 per share, an increase of 9 percent.

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

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Operating activities","$","651.0","","","$","377.4"],["Investing activities","(185.3)","","","(226.8)"],["Financing activities","(268.0)","","","(434.4)"],["Effect of exchange rates on cash","1.0","","","(1.3)"],["Net cash provided","198.7","","","(285.1)"],["Cash and cash equivalents at end of year","$","537.9","","","$","339.2"]]
[[/GREPCENT_TABLE]]

Cash Flows From Operating Activities. Net cash provided by operating activities was $651 million in 2023, up $274 million compared to 2022, due primarily to higher net earnings and fewer inventory purchases in 2023. Other decreases in working capital further contributed to the increase in cash provided by operating activities in 2023.

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Cash Flows Used in Investing Activities. Cash flows used in investing activities totaled $185 million in 2023, including $185 million for capital additions. Cash flows used in investing activities totaled $227 million in 2022 including $201 million for capital additions and $25 million for business acquisitions.

Cash Flows Used in Financing Activities. Cash flows used in financing activities totaled $268 million in 2023 and included share repurchases of $102 million (partially offset by net proceeds from share issuances of $60 million), dividends of $158 million, and net payments on long-term debt and outstanding lines of credit of $65 million.

Cash flows used in financing activities totaled $434 million in 2022 and included dividends of $142 million and net proceeds from share issuances totaling $36 million.

On December 7, 2018, the Board of Directors authorized the purchase of up to 18 million shares of common stock, primarily through open market transactions. The authorization is for an indefinite period of time or until terminated by the Board. As of December 29, 2023, approximately 14 million shares remain available for purchase under the authorization.

The Company repurchased and retired 1.4 million shares in 2023 and 3.6 million shares in 2022. The Company did not repurchase and retire shares in 2021. The Company has made and may continue to make opportunistic share repurchases in 2024 via open market transactions or short-dated accelerated share repurchase (“ASR”) programs.

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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 2024, the Company will use an investment return assumption of 7.6 percent for the funded U.S. plan, consistent with the rate assumed for 2023. Mortality rates are based on current common group mortality tables for males and females.

At December 29, 2023, 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","","","","","$","(15.3)","","","$","2.0"],["Expected return on assets","","","","","\u2014","","","1.2"]]
[[/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 goodwill impairment test is performed by comparing the fair value of the relevant 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.

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

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In the third quarter of 2023, the Company recognized a goodwill impairment related to the reorganization of a business acquired in 2020 that is not material to the consolidated financial statements. We completed our annual impairment testing of goodwill and other intangible assets in the fourth quarter of 2023. No additional impairment charges were recorded as a result of that test.

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.