FRANKLIN ELECTRIC CO INC
For the period ended Dec 31, 2024. Filed Feb 21, 2025.
View on SEC.govAbout this filing
A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Feb 21, 2025
FELE$94.17-1.8%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-02-23.
0000038725-24-000038
Item 7. Management's Discussion and Analysis of Financial Condition and ResultsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-02-21.
0000038725-25-000026
Item 7. Management's Discussion and Analysis of Financial Condition and ResultsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 84 previous paragraphs and 85 current paragraphs.
45 unchanged; 31 reworded; 9 added; 8 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 5 previous and 5 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (9)
Current report
Net sales in 2024 were $2.0 billion and decreased 2 percent compared to the prior year. Sales were negatively impacted by changes in foreign exchange rates, principally due to the strengthening of the U.S. Dollar relative to the Argentine Peso, Turkish Lira and Brazilian Real. However, the Company increases prices in the local currency to offset the impact of currency devaluation in the Argentina and Turkey highly inflationary economies. As a result, the net negative impact of foreign currency exchange rates on net sales was 1 percent in 2024.
Current report
Water Systems net sales decreased 2 percentin 2024, as compared to the prior year. This sales decline was primarily due to lower volumes, which decreased due to weaker end market demand for large dewatering equipment. Additionally, net sales decreased 2 percentin 2024 due to the negative impact from foreign exchange rates, as compared to prior year while the incremental sales impact from recent acquisitions favorably impacted sales 1 percent in 2024.
Current report
Net Sales-Energy Systems
Current report
Operating income decreased 7 percent in 2024, as compared to the prior year.
Current report
Operating Income-Energy Systems
Current report
Energy Systems operating income in 2024 was $93.6 million, an increase of $0.9 million as compared to the prior year. The 2024 operating income margin was 34.2 percent, an increase of 290 basis points from 31.3 percent in 2023. Operating income and operating margin increased primarily due to a favorable geographic mix of sales, price realization and cost management.
Current report
Operating Income-Corporate Expenses and Eliminations
Current report
In February 2025, the Company acquired 100 percent of the ownership interests of PumpEng for a purchase price of AUD 24.0 million (approximately $15 million), subject to working capital and net debt closing adjustments. Also in February 2025, the Company signed a definitive agreement to acquire Barnes for an enterprise value of $110.0 million, subject to working capital and net debt closing adjustments. The acquisition is subject to customary closing conditions, including Colombian antitrust clearance, and is expected to close on or about March 1, 2025.
Current report
According to FASB ASC Topic 350, Intangibles - Goodwill and Other, goodwill and other intangible assets with indefinite lives must be tested for impairment at least annually or more frequently as warranted by triggering events that indicate potential impairment. The Company has the option to assess goodwill and other indefinite-lived intangible assets for impairment by initially performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. If the Company determines that it is not more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, then a quantitative impairment test is not required to be performed. If the Company determines that it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, or if it does not elect the option to perform an initial qualitative assessment, it performs a quantitative impairment test.
Removed paragraphs (8)
Previous report
Net sales increased 1 percent in 2023 compared to the prior year. Foreign currency unfavorably impacted net sales by 3 percentage points during 2023, principally due to the strengthening of the U.S. Dollar relative to the Turkish Lira and Argentine Peso.
Previous report
Water Systems sales increased 4 percent in 2023, as compared to the prior year. This sales growth was primarily due to price realization. Partially offsetting the increase, sales decreased 5 percent in 2023 due to the negative impact from foreign exchange rates, as compared to prior year.
Previous report
Net Sales-Fueling Systems
Previous report
Distribution sales increased 1 percentage point in 2023, as compared to the prior year. The Distribution segment sales increase was primarily due to higher volumes, partially offset by lower commodity-driven pricing.
Previous report
Water Systems operating income increased $24.3 million in 2023, as compared to the prior-year period, primarily due to price realization and cost management, including lower freight costs. The 2023 operating income margin was 16.3 percent compared to 2022 operating income margin of 14.9 percent of net sales. Operating income margin increased in Water Systems primarily due toprice realization and operating leverage on higher sales.
Previous report
Operating Income-Fueling Systems
Previous report
Operating Income-Eliminations/Other
Previous report
In compliance with FASB ASC Topic 350, goodwill is not amortized. Goodwill is tested at the reporting unit level for impairment annually or more frequently as warranted by triggering events that indicate potential impairment. Reporting units are operating segments or one level below, known as components, which can be aggregated for testing purposes.
Reworded paragraphs (31)
Previous wording
Net sales in 2023 increased 1 percent compared to the prior year. The sales increase in 2023 was primarily due to price realization, partially offset by the negative impact of foreign currency translation and lower volumes. The Company's consolidated gross profit was $697.0 million for 2023, an increase of $5.6 million from the prior year. Diluted earnings per share was $4.11 for 2023, an increase of $0.14 or 4 percent from the prior year.
Current wording
Net sales in 2024 decreased 2 percent compared to the prior year. The sales decrease in 2024 was primarily due to lower volumes and the negative impact of foreign currency translation, partially offset by the incremental sales impact from recent acquisitions. The Company's consolidated gross profit was $717.3 million for 2024, an increase of $20.3 million from the prior year. Diluted earnings per share was $3.86 for 2024, a decrease of $0.25 or 6 percent from the prior year.
Previous wording
Water Systems sales in the U.S. and Canada increased 4 percent in 2023, as compared to the prior year. Sales decreased less than 1 percent in 2023 due to the negative impact from foreign exchange rates, as compared to prior year. In 2023, sales of large dewatering equipment increased 63 percent, sales of groundwater pumping equipment decreased 10 percent and sales of all other surface pumping equipment decreased 1 percent compared to 2022.
Current wording
Water Systems net sales in the U.S. and Canada decreased 5 percent in 2024, as compared to the prior year. In 2024, sales of large dewatering equipment decreased 41 percent, sales of water treatment products increased 11 percent, sales of groundwater pumping equipment increased 4 percent and sales of all other surface pumping equipment increased 5 percent compared to 2023.
Previous wording
Water Systems sales in markets outside the U.S. and Canada increased 3 percent in 2023, as compared to the prior year. Sales decreased 11 percent in 2023 due to the negative impact from foreign exchange rates, as compared to prior year. In 2023 excluding the impact of foreign currency translation, sales increases in EMEA and Latin America more than offset sales declines in the Asia Pacific markets.
Current wording
Water Systems net sales in markets outside the U.S. and Canada increased 4 percent in 2024, as compared to the prior year. Sales decreased 4 percent in 2024 due to the negative impact from foreign exchange rates, as compared to prior year. In 2024 excluding the impact of foreign currency translation, sales increased in all three major regions: EMEA, Latin America and Asia Pacific.
Previous wording
Fueling Systems sales decreased 11 percent in 2023, as compared to the prior year. This sales decline was primarily due to lower volumes driven by customer inventory destocking as well as higher interest rates, labor constraints, and permitting delays causing some new station build plans to move into 2024.
Current wording
Energy Systems net sales decreased 8 percent in 2024, as compared to the prior year. This sales decline was primarily due to lower volumes.
Previous wording
Fueling Systems sales in the U.S. and Canada decreased 9 percent in 2023, as compared to the prior year. The decrease was primarily in dispensing and piping equipment. Outside the U.S. and Canada, Fueling Systems sales decreased 19 percent in 2023, as compared to the prior year, due primarily to the divestiture of the above ground storage tank business in 2022 and lower sales in China.
Current wording
Energy Systems net sales in the U.S. and Canada decreased 3 percent in 2024, as compared to the prior year. Outside the U.S. and Canada, Energy Systems sales decreased 18 percent in 2024, as compared to the prior year. The decreases were across all product lines.
Previous wording
Operating income increased 2 percent in 2023, as compared to the prior year.
Current wording
Distribution net sales increased 2 percent in 2024, as compared to the prior year. The Distribution segment sales increase was primarily due to the incremental sales impact from a recent acquisition, which favorably impacted net sales by 3 percent, partially offset by the negative impact of commodity pricing declines and unfavorable weather.
Previous wording
The gross profit margin ratio was 33.8 percent in 2023 and 2022. The gross profit margin was favorably impacted in 2023 by price realization, product mix and lower freight costs in Water Systems and Fueling, partially offset by margin compression from unfavorable pricing of commodity-based products sold through the Distribution business.
Current wording
The gross profit margin ratio was 35.5 percent and 33.8 percentin 2024 and 2023, respectively. The gross profit margin was favorably impacted in 2024 by cost management, including lower freight costs in Water Systems and Energy Systems, and a favorable product and geographic sales mix shift.
Previous wording
SG&A expenses were $433.5 million in 2023 compared to $432.1 million in 2022. SG&A expenses increased by less than 1 percent in 2023 primarily due to higher compensation costs, partially offset by lower advertising and marketing expenses. The SG&A expenses ratio was 21.0 percent and 21.1 percent in 2023 and 2022, respectively.
Current wording
SG&A expenses were $470.1 million in 2024 compared to $433.5 million in 2023. SG&A expenses increased in 2024 primarily due to higher employee compensation costs, including incremental expenses associated with the Company's CEO transition, and the incremental expense impact of recent acquisitions. The SG&A expenses ratio was 23.3 percent and 21.0 percent in 2024 and 2023, respectively.
Previous wording
Restructuring expenses were $1.1 million and $2.2 million in 2023 and 2022, respectively. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities, branch closings and consolidations.
Current wording
Restructuring expenses were $3.5 million and $1.1 million in 2024 and 2023, respectively. Restructuring actions in 2024 were primarily related to headcount reductions and facility closures to optimize the Company's cost structure. Restructuring expenses in 2023 were primarily from continued miscellaneous manufacturing realignment activities, branch closings and consolidations.
Previous wording
Fueling Systems operating income decreased $4.1 million in 2023, as compared to the prior-year period. Operating income decreased in Fueling Systems primarily due to lower sales volumes, partially offset by a favorable product and geographic mix of net sales and disciplined cost management. The 2023 operating income margin was 31.3 percent compared to 29.0 percent of net sales in 2022. Operating income margin increased in Fueling Systems primarily due to price realization, a favorable product and geographic sales mix shift and disciplined cost management.
Current wording
Water Systems operating income in 2024 was $197.9 million, an increase of $1.3 million as compared to the prior year. The 2024 operating income margin was 16.7 percent, an increase of 40 basis points from 16.3 percent in 2023. Operating income and operating margin increased in 2024 primarily due to price realization, cost management and a favorable product and geographic sales mix shift.
Previous wording
Distribution operating income decreased $20.2 million in 2023, as compared to the prior-year period. The 2023 operating income margin was 5.1 percent compared to 8.2 percent of net sales in 2022. Operating income and operating income margin decreased primarily due to unfavorable pricing of commodity-based products sold through the business.
Current wording
Distribution operating income in 2024 was $24.3 million, a decrease of $10.0 million as compared to the prior-year period. The 2024 operating income margin was 3.5 percent, a decrease of 160 basis points from 5.1 percent in 2023. Operating income and operating income margin decreased in 2024 primarily due to the negative impact on sales from wet weather across much of the United States, decreases in pricing of commodity-based products sold through the business and increased SG&A costs.
Previous wording
Operating income-eliminations/other is composed primarily of intersegment sales and profit eliminations and unallocated general and administrative expenses. The intersegment profit elimination impact in 2023 compared to 2022 was a favorable $6.2 million. The intersegment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until such time as the transferred product is sold from the Distribution segment to its end third party customer. General and administrative expenses increased $1.0 million, compared to the prior year.
Current wording
Operating income-corporate expenses and eliminations is composed primarily of intersegment sales and profit eliminations and unallocated general and administrative expenses. The intersegment profit elimination impact in 2024 compared to 2023 was an unfavorable$2.7 million. The intersegment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until such time as the transferred product is sold from the Distribution segment to its end third party customer. General and administrative expenses increased $8.3 million, compared to the prior year. The increase was primarily driven by to higher employee compensation costs, including incremental expenses associated with the Company’s CEO transition.
Previous wording
Interest expense was $11.8 million in 2023 and $11.5 million in 2022, respectively. The increase in 2023 was primarily driven by higher interest rates, partially offset by lower average borrowings in 2023.
Current wording
Interest expense was $6.3 million in 2024 and $11.8 million in 2023, respectively. The decrease in 2024 was primarily driven by lower average borrowings in 2024.
Previous wording
Other income (expense), net was a benefit of $3.7 million in 2023 and an expense of $3.2 million in 2022. The favorable benefit in 2023 was due to higher interest income as a result of favorable interest rates and lower benefit costs related to the Company’s employee benefit plans.
Current wording
Other income (expense), net was a benefit of $1.3 million in 2024 and $3.7 million in 2023. The benefit in 2024 was lower than 2023 due to lower interest income realized in Argentina as excess cash balances and interest rates have declined in 2024 compared to 2023.
Previous wording
Foreign currency-based transactions produced an expense of $12.1 million in 2023 and $7.2 million in 2022, respectively. The expense in 2023 was primarily due to transaction losses associated with the Turkish Lira, Argentine and Mexican Peso relative to the U.S. dollar. The expense in 2022 was primarily due to transaction losses associated with the Argentine Peso and Turkish Lira. The Company reports the results of its subsidiaries in Argentina and Turkey using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent.
Current wording
Foreign currency-based transactions produced an expense of $6.8 million in 2024 and $12.1 million in 2023, respectively. The expense in 2024 and 2023 was primarily due to transaction losses associated with the Turkish Lira and Argentine Peso relative to the U.S. dollar. The Company reports the results of its subsidiaries in Argentina and Turkey using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent.
Previous wording
The provision for income taxes in 2023 and 2022 were $47.5 million and $46.4 million, respectively. The effective tax rate for 2023 was about 20 percent and before the impact of discrete events was about 21 percent. The effective tax rate for 2022 both before and after the impact of discrete events was about 20 percent. The effective tax rate differs from the U.S. statutory rate of 21 percent primarily due to the recognition of the U.S. foreign-derived intangible income (FDII) provisions, foreign earnings taxed at rates below the U.S. statutory rate, certain incentives, and discrete events partially offset by state taxes.
Current wording
The provision for income taxes in 2024 and 2023 were $50.2 million and $47.5 million, respectively. The effective tax rate for 2024 was about 22 percent and included a favorable benefit from discrete events of 1 percent. The effective tax rate for 2023 was about 20 percent and included a favorable benefit from discrete events of 1 percent. The effective tax rate differs from the U.S. statutory rate of 21 percent, primarily due to U.S. states taxes, foreign earnings taxed at rates higher than the U.S. statutory rate, and nondeductible officer’s compensation, partially offset by the recognition of the U.S. foreign-derived intangible income (FDII) provisions, certain incentives, and discrete events.
Previous wording
Net income for 2023 was $194.7 million compared to 2022 net income of $188.8 million. Net income attributable to Franklin Electric Co., Inc. for 2023 was $193.3 million, or $4.11 per diluted share, compared to 2022 net income attributable to Franklin Electric Co., Inc. of $187.3 million, or $3.97 per diluted share.
Current wording
Net income for 2024 was $181.6 million compared to 2023 net income of $194.7 million. Net income attributable to Franklin Electric Co., Inc. for 2024 was $180.3 million, or $3.86 per diluted share, compared to 2023 net income attributable to Franklin Electric Co., Inc. of $193.3 million, or $4.11 per diluted share.
Previous wording
As of December 31, 2023, the Company had a $350.0 million revolving credit facility. The facility is scheduled to mature on May 13, 2026. As of December 31, 2023, the Company had $335.4 million borrowing capacity under the Credit Agreement as $3.6 million in letters of commercial and standby letters of credit were outstanding and undrawn and $11.0 million in revolver borrowings were drawn and outstanding, which were primarily used for funding working capital requirements.
Current wording
As of December 31, 2024, the Company had a $350.0 million revolving credit facility. The facility is scheduled to mature on May 13, 2026. As of December 31, 2024, the Company had $304.1 million borrowing capacity under the Credit Agreement as $4.5 million in letters of commercial and standby letters of credit were outstanding and undrawn and $41.4 million in revolver borrowings were drawn or outstanding.
Previous wording
In addition, the Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life, and each of the undersigned holders of Notes (the "New York Life Agreement") with a remaining borrowing capacity of $125.0 million as of December 31, 2023. The New York Life Agreement matures on July 30, 2024. The Company also has other long-term debt borrowings outstanding as of December 31, 2023. See Note 10 - Debt for additional specifics regarding these obligations and future maturities.
Current wording
In addition, the Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life, and each of the undersigned holders of Notes (the "New York Life Agreement"). On May 15, 2024, the Company entered into Amendment No. 1 that increased the total available facility amount from lenders to $250.0 million from $200.0 million. As of December 31, 2024, the remaining borrowing capacity on the New York Life Agreement was $175.0 million. The Company also maintains an uncommitted and unsecured note purchase and private shelf agreement with PGIM, Inc. and its affiliates (the "Prudential Agreement"). On May 15, 2024, the Company entered into Amendment No. 1 that increased the total available facility amount from lenders to $250.0 million from $150.0 million. The maturity dates of both agreements were extended from July 30, 2024 to May 15, 2027.
Previous wording
At December 31, 2023, the Company had $69.6 million of cash and cash equivalents held in foreign jurisdictions, which the Company intends to use to fund foreign operations. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions.
Current wording
At December 31, 2024, the Company had $47.1 million of cash and cash equivalents held in foreign jurisdictions, which the Company intends to use to fund foreign operations. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions.
Previous wording
Net cash provided by operating activities was $315.7 million for 2023 compared to $101.7 million for 2022. The increase in cash provided by operating activities was primarily due to actions the Company took to improve working capital including inventory reductions as its supply chain resiliency and lead times improved during the back half of the year.
Current wording
Net cash provided by operating activities was $261.4 million for 2024 compared to $315.7 million for 2023. The change in operating cash flow was primarily attributable to changes in working capital and lower earnings. In 2023, the Company's cash flow benefited from actions it took to improve working capital including inventory reductions as its supply chain resiliency and lead times improved significantly compared to 2022.
Previous wording
Net cash used in investing activities was $74.3 million in 2023 compared to $43.1 million in 2022. The increase was primarily attributable to increased acquisition activity in 2023.
Current wording
Net cash used in investing activities was $45.6 million in 2024 compared to $74.3 million in 2023. The change in investing cash flow was primarily attributable to decreased acquisition activity in 2024.
Previous wording
Net cash used by financing activities was $192.2 million in 2023 compared to $48.5 million in 2022. The change in financing cash flow was primarily attributable to net borrowings under the Company's revolving credit facility in 2022 compared to net repayments in 2023.
Current wording
Net cash used by financing activities was $74.1 million in 2024 compared to $192.2 million in 2023. The change in financing cash flow was primarily due to net borrowings under the Company's credit facility in 2024 compared to net repayments in 2023, partially offset by lower proceeds from option exercises, increased share repurchase activity and higher dividends.
Previous wording
The Company has pension and other post-retirement benefit obligations not included in the table above which will result in estimated future payments of approximately $0.8 million in 2024. In addition, due to the timing of funding in future periods being uncertain and dependent on future movements in interest rates, investment returns, changes in laws and regulations and other variables, the table above excludes the non-current liability of $29.5 million for cash outflows related to the Company's pension plans.
Current wording
The Company has pension and other post-retirement benefit obligations not included in the table above which will result in estimated future payments of approximately $7.3 million in 2025. In addition, due to the timing of funding in future periods being uncertain and dependent on future movements in interest rates, investment returns, changes in laws and regulations and other variables, the table above excludes the non-current liability of $24.1 million for cash outflows related to the Company's pension plans.
Previous wording
The Company also has unrecognized tax benefits, none of which are included in the table above. The unrecognized tax benefits of approximately $0.8 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $0.1 million.
Current wording
The Company also has unrecognized tax benefits, none of which are included in the table above. The unrecognized tax benefits of approximately $1.3 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $0.1 million.
Previous wording
The Company follows the guidance under FASB ASC Topic 805, Business Combinations. The acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and may use an independent third-party valuation firm to assist in determining the fair values of assets acquired, including intangible assets, and liabilities assumed. The identifiable intangible assets acquired typically include customer relationships and trade names. Identifiable intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The fair value of customer relationships is measured using the multi-period excess earnings method ("MPEEM"). The fair value of trade names is measured using a relief-from-royalty ("RFR") approach, which assumes the value of the trade name is the discounted amount of cash flows that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company. Higher royalty rates are assigned to premium brands within the marketplace based on name recognition and profitability, while other brands receive lower royalty rates. The basis for future sales projections for both the RFR and MPEEM are based on internal revenue forecasts which the Company believes represents reasonable market participant assumptions. The future cash flows are discounted using an applicable discount rate as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset. The key uncertainties in the RFR and MPEEM calculations, as applicable, are the selection of an appropriate royalty rate, assumptions used in developing estimates of future cash flows, including revenue growth and expense forecasts, assumed customer attrition rates, as well as the perceived risk associated with those forecasts in determining the discount rate and risk premium. There is inherent uncertainty in forecasted future cash flows and therefore, actual results may differ and could result in subsequent impairment charges of acquired intangibles and/or goodwill.
Current wording
The Company follows the guidance under FASB ASC Topic 805, Business Combinations. The acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and may use an independent third-party valuation firm to assist in determining the fair values of assets acquired, including intangible assets, and liabilities assumed. The identifiable intangible assets acquired typically include customer relationships and trade names. Identifiable intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The fair value of customer relationships is measured using the multi-period excess earnings method ("MPEEM"). The fair value of trade names is measured using a relief-from-royalty ("RFR") approach, which assumes the value of the trade name is the discounted amount of cash flows that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company. Higher royalty rates are assigned to premium brands within the marketplace based on name recognition and profitability, while other brands receive lower royalty rates. The basis for future sales projections for both the RFR and MPEEM are based on internal revenue forecasts which the Company believes represents reasonable market participant assumptions. The future cash flows are discounted using an applicable discount rate as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset. The key uncertainties in the RFR and MPEEM calculations, as applicable, are the selection of an appropriate royalty rate, assumptions used in developing estimates of future cash flows, including revenue growth and expense forecasts, assumed customer attrition rates, as well as the perceived risk associated with those forecasts in determining the discount rate and risk premium. There is inherent uncertainty in forecasted future cash flows and therefore, actual results may differ and could result in subsequent impairment charges of acquired intangible assets and/or goodwill.
Previous wording
According to FASB ASC Topic 350, Intangibles - Goodwill and Other, intangible assets with indefinite lives must be tested for impairment at least annually or more frequently as warranted by triggering events that indicate potential impairment. The Company uses a variety of methodologies in conducting impairment assessments including income and market approaches. For indefinite-lived assets apart from goodwill, primarily trade names for the Company, if the fair value is less than the carrying amount, an impairment charge is recognized in an amount equal to that excess. The Company has not made any material changes to the method of evaluating impairments during the last three years.
Current wording
The Company uses a variety of methodologies in conducting impairment assessments including qualitative reviews as well as quantitative reviews using the income and market approaches.
Previous wording
In assessing the recoverability of goodwill, the Company determines the fair value of its reporting units by utilizing a combination of both the market value and income approaches. The market value approach compares the reporting units’ current and projected financial results to entities of similar size and industry to determine the market value of the reporting unit. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends, as well as the effects of demand and competition. The Company is required to record an impairment if these assumptions and estimates change whereby the fair value of the reporting units is below their associated carrying values. Goodwill included on the balance sheet as of the year ended December 31, 2023 was $342.4 million.
Current wording
The market value approach compares the reporting units’ current and projected financial results to entities of similar size and industry to determine the market value of the reporting unit. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends, as well as the effects of demand and competition. The Company is required to record an impairment if these assumptions and estimates change whereby the fair value of the reporting units or indefinite-lived intangible assets are below their associated carrying values.
Previous wording
During the fourth quarter of 2023, the Company completed its annual impairment test of goodwill and indefinite-lived trade names and determined the fair value of all intangibles were substantially in excess of the respective carrying values. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse changes in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. A 10 percent decrease in the estimated fair value of any of these intangible assets would not have changed this determination. The sensitivity analysis required the use of numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. Further, an extended downturn in the economy may impact certain components of the operating segments more significantly and could result in an impairment determination.
Current wording
During the fourth quarter of 2024, the Company completed its annual impairment tests of goodwill and indefinite-lived trade names. The Company determined it was not more likely than not that the fair values of its reporting units were lower than their carrying values. The Company also determined the fair value of all other indefinite-lived intangible assets were in excess of their respective carrying values. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse changes in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. A 10 percent decrease in the estimated fair value of any of the indefinite-lived trade names would not have changed this determination. The sensitivity analysis required the use of numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. Further, an extended downturn in the economy may impact certain components of the operating segments more significantly and could result in an impairment determination.
Previous wording
The Company consults with its actuaries to assist with the calculation of discount rates used in its pension and post retirement plans. The discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. Market conditions have caused the weighted-average discount rate to move from 5.15 percent last year to 4.90 percent this year for the domestic pension plans and from 5.08 percent last year to 4.88 percent this year for the postretirement health and life insurance plan. A change in the discount rate selected by the Company of 25 basis points would result in a change of about $0.1 million to employee benefit expense and a change of about $2.4 million of liability.
Current wording
The Company consults with its actuaries to assist with the calculation of discount rates used in its pension and post retirement plans. The discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. Market conditions have caused the weighted-average discount rate to move from 4.90 percent last year to 5.48 percent this year for the domestic pension plans and from 4.88 percent last year to 5.47 percent this year for the postretirement health and life insurance plan. A change in the discount rate selected by the Company of 25 basis points would result in a change of about $0.1 million to employee benefit expense and a change of about $2.4 million of liability.
Previous wording
The Company consults with actuaries and investment advisors in making its determination of the expected long-term rate of return on plan assets. Using input from these consultations such as long-term investment sector expected returns, the correlations and standard deviations thereof, and the plan asset allocation, the Company will use an expected long-term rate of return on plan assets of 6.20 percent in measuring net periodic cost for 2024. Market conditions have caused the expected long-term rate or return to increase from 5.70 percent as used in measuring net periodic cost for 2023. A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.3 million of employee benefit expense.
Current wording
The Company consults with actuaries and investment advisors in making its determination of the expected long-term rate of return on plan assets. Using input from these consultations such as long-term investment sector expected returns, the correlations and standard deviations thereof, and the plan asset allocation, the Company will use an expected long-term rate of return on plan assets of 5.75 percent in measuring net periodic cost for 2025. Market conditions have caused the expected long-term rate or return to decrease from 6.20 percent as used in measuring net periodic cost for 2024. A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.3 million of employee benefit expense.