# JOHNSON OUTDOORS INC (JOUT) FY 2025 MD&A Verbatim Item 7 Management's Discussion and Analysis from JOHNSON OUTDOORS INC's 10-K for fiscal year 2025. SEC filing source: https://www.sec.gov/Archives/edgar/data/788329/000114036125045348/jout-20251003.htm Accession: 0001140361-25-045348 Filing date: 2025-12-12 Report date: 2025-10-03 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/JOUT/ All MD&A years: /company/JOUT/mda/ Previous year: /company/JOUT/mda/fy2024/ (FY 2024) ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than per share amounts, are stated in thousands. Executive Overview The Company designs, manufactures and markets innovative, high quality recreational products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce and efficient distribution, the Company seeks to set itself apart from the competition in its markets. Its subsidiaries operate as a network that promotes innovation and leverages best practices and synergies in the design, production and marketing of their recreational products, following the strategic vision set by executive management and approved by the Company’s Board of Directors. 17 Table of Contents Highlights The Company’s fiscal 2025 full-year revenues remained essentially flat to the prior year. New product successes in the Fishing segment helped to offset sales declines resulting from the exit of the Company's Eureka! brand in the prior year. Favorable overhead absorption and lower inventory reserve adjustments in the current year contributed to a 1.2 point increase in gross margin year over year. An 8% decrease in operating expenses between years, driven mainly by the $11,173 write-off of goodwill in the prior year, as well as a decrease in promotional spending year over year, contributed to a $27,331 improvement in operating loss in fiscal 2025 from fiscal 2024. Results of Operations Summary consolidated financial results from continuing operations for the fiscal years presented were as follows: [[GREPCENT_TABLE]] [["(thousands, except per share data)","2025","","2024","","2023"],["Net sales","$","592,415","","","$","592,846","","","$","663,844"],["Gross profit","208,093","","","200,980","","","244,087"],["Operating expenses","224,284","","","244,502","","","232,347"],["Operating (loss) profit","(16,191)","","","(43,522)","","","11,740"],["Interest income, net","(3,559)","","","(4,692)","","","(4,391)"],["Other income, net","(3,353)","","","(8,968)","","","(9,693)"],["Income tax expense (benefit)","25,015","","","(3,329)","","","6,290"],["Net (loss) income","(34,294)","","","(26,533)","","","19,534"]] [[/GREPCENT_TABLE]] The Company’s internal and external sales and operating profit (loss) by business segment for each of the three most recent completed fiscal years were as follows: [[GREPCENT_TABLE]] [["","2025","","2024","","2023"],["Net sales:"],["Fishing","$","459,162","","","$","452,341","","","$","492,927"],["Camping & Watercraft Recreation","58,071","","","66,635","","","86,087"],["Diving","75,458","","","73,628","","","85,069"],["Other / Eliminations","(276)","","","242","","","(239)"],["","$","592,415","","","$","592,846","","","$","663,844"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","2025","","2024","","2023"],["Operating profit (loss):"],["Fishing","$","19,570","","","$","(6,598)","","","$","41,325"],["Camping & Watercraft Recreation","918","","","(488)","","","(1,320)"],["Diving","1,667","","","(1,244)","","","6,092"],["Other / Eliminations","(38,346)","","","(35,192)","","","(34,357)"],["","$","(16,191)","","","$","(43,522)","","","$","11,740"]] [[/GREPCENT_TABLE]] See Note 13 to the Consolidated Financial Statements included elsewhere in this report for the definition of segment net sales and operating profit. Fiscal 2025 vs. Fiscal 2024 Net Sales Net sales in fiscal 2025 were $592,415 compared to $592,846 in fiscal 2024. Foreign currency exchange had a negligible impact on the current year’s sales versus the prior year. 18 Table of Contents Net sales for the Fishing business increased by $6,821, or 2% during fiscal 2025 from fiscal 2024.  The increase in sales in this segment year over year was mainly due to sales generated by the introduction of new products, particularly in the last half of the current fiscal year. Camping & Watercraft Recreation net sales decreased $8,564, or 13%, in 2025 from 2024. As previously announced, the Company exited the Eureka! brand in this segment, and completed all remaining sales of Eureka! inventory in the first fiscal quarter of 2025. Excluding the impact of Eureka! sales in the prior year, which accounts for a decrease of approximately $9,432 year over year, sales in this segment increased slightly over the prior year due to success of new Jetboil products introduced into the market by the Company during the year. Diving net sales increased $1,830, or 2%, year over year. The sales increase was primarily driven by modest improvements in market conditions across certain regions, as well as a favorable foreign currency translation impact on sales in this segment of approximately 1% in 2025 versus the prior year period. Cost of Sales Cost of sales was $384,322, or 64.9% of net sales, on a consolidated basis for fiscal 2025 compared to $391,866, or 66.1% of net sales, in the prior year. Incremental tariffs incurred during the current year were, in large part, capitalized on the balance sheet at October 3, 2025. The decrease in cost of sales as a percent of net sales year over year was driven primarily by the sell-off of remaining Eureka! branded product in the prior year at very low margins. Gross Profit Gross profit of $208,093 was 35.1% of net sales on a consolidated basis for the year ended October 3, 2025 compared to $200,980, or 33.9% of net sales in the prior year. Gross profit in the Fishing business increased by $3,451 from the prior year due primarily to the 2% increase in net sales year over year. Material and labor cost increases were largely offset by lower inventory reserves and improved absorption of fixed overhead costs between the periods. Camping & Watercraft Recreation gross profit decreased by $788 from 2024, where the impact of lower sales volumes was partially offset by an improved product mix in fiscal 2025 after fully exiting the Eureka! brand in early 2025. The $4,494 increase in gross profit in the Diving segment was largely due to increased sales as well as reduced inventory reserves and selected pricing actions taken in the current year. Operating Expenses Operating expenses decreased from the prior year by $20,218. Key drivers of the expense change were an $11,173 write off of goodwill in the prior year, approximately $3,600 of lower deferred compensation costs between years, and a decrease in promotional spending versus the prior year period. Operating expenses for the Fishing segment decreased by $22,717 from fiscal 2024 levels.  This decrease was due primarily to the $11,173 write off of goodwill in the prior year, as well as approximately $10,000 of lower advertising and promotional spend between years. Camping & Watercraft Recreation operating expenses decreased by $2,194 from the prior year, mainly due to decreased sales volume related costs between years. Operating expenses for the Diving business increased by $1,583 year over year due primarily to increased variable compensation costs between periods. The Company's fiscal 2025 general corporate expenses of $38,612 increased $3,110 from $35,502 in fiscal 2024. Higher variable compensation and health insurance costs over the prior year were partially offset by approximately $3,600 of lower deferred compensation costs due to less favorable market conditions on the Company's deferred compensation plan assets during fiscal 2025. The deferred compensation expenses are entirely offset in "Other (income) expense, net" related to marking the plan assets to market. Operating Results 19 Table of Contents The Company’s operating loss was $16,191 in fiscal 2025 compared to an operating loss of $43,522 in fiscal 2024.  Fishing operating profit increased by $26,168 from the prior year to a profit of $19,570 due primarily to a goodwill impairment charge in the prior year and increased sales volumes between years, as discussed above.  The operating profit for Camping & Watercraft Recreation was $918 compared to a loss of $488 in 2024 which increase was primarily a result of an improved sales mix of products between periods.  The operating profit for the Diving business was $1,667 in fiscal 2025, up from an operating loss of $1,244 in fiscal 2024, due primarily to decreased materials costs and a favorable product mix between years. Other Income and Expenses Interest expense of $224 increased slightly compared to the prior year expense of $152. Interest income of $3,783 decreased from prior year interest income of $4,844 due to the decreased investment balances over the prior year.  Net other income of $3,353 in fiscal 2025 decreased from $8,968 in fiscal 2024.  The current year net other income included market earnings and dividend income on deferred compensation plan assets of $3,415, partially offset by currency losses of $126. The prior year net other income included the gain on the sale of a building of approximately $1,900 and market earnings and dividend income of $7,049 on deferred compensation plan assets, partially offset by currency losses of $385. The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other (income) expense, net” are offset as compensation expense in “Operating expenses.” Pretax Income and Income Taxes The Company realized a pretax loss of $9,279 in fiscal 2025 compared to a pretax loss of $29,862 in fiscal 2024. The Company recorded income tax expense of $25,015 in 2025, which equated to an effective tax rate of (269.6)%, compared to a tax benefit of $3,329 in 2024, which equated to an effective tax rate of 11.1%.  In fiscal 2025, based on projections for the U.S. tax jurisdictions, the Company determined that it was more likely than not that certain deferred tax assets will not be realized and a valuation allowance balance of $25,880 was reported against the net deferred tax assets for the U.S, resulting in the increase in tax expense over the prior year. Net Income (Loss) The Company recognized net loss of $34,294, or $3.35 per diluted common share, in fiscal 2025 compared to net loss of $26,533, or $2.60 per diluted common share, in fiscal 2024 based on the factors discussed above. Fiscal 2024 vs. Fiscal 2023 Net Sales Net sales in fiscal 2024 decreased by 11% to $592,846 compared to $663,844 in fiscal 2023. Foreign currency exchange had a negligible impact on sales year over year. Net sales for the Fishing business decreased by $40,586, or 8% during fiscal 2024 from fiscal 2023.  Softer overall consumer demand and increased competitive pressure in the Fishing market contributed to the decline between years. Camping & Watercraft Recreation net sales decreased $19,439 in fiscal 2024 from 2023. Approximately $4,500 of the decrease in net sales from the 2023 period was related to the previously disclosed sale of the Military and Commercial Tents product lines during the second fiscal quarter of 2023, with the remainder due primarily to general declines in market demand for camping and watercraft products. Diving net sales decreased $11,441, or 13%, year over year. The sales decrease was due to softening market demand across all geographic regions, partially offset by a favorable foreign currency translation impact on sales in this segment of approximately 1% in 2024 versus the 2023 period. Cost of Sales Cost of sales was $391,866, or 66.1% of net sales, on a consolidated basis for fiscal 2024 compared to $419,757, or 63.2% of net sales, in fiscal 2023. The decrease in total cost of sales dollars was consistent with the decrease in sales year over year. As a percentage of net sales, the increase cost of sales between years was driven primarily by the unfavorable absorption of fixed overhead costs as a result of lower sales volumes between periods. Gross Profit 20 Table of Contents Gross profit of $200,980 was 33.9% of net sales on a consolidated basis for the year ended September 27, 2024 compared to $244,087, or 36.8% of net sales in fiscal 2023. Gross profit in fiscal 2024 in the Fishing business decreased by $28,766 from fiscal 2023 due primarily to the 8% decrease in net sales year over year. While certain material and overhead costs improved year over year as a result of cost savings efforts, it was not enough to overcome unfavorable overhead absorption as a result of the reduced sales volumes between periods, and a product mix that contained lower margin products in fiscal 2024. Camping & Watercraft Recreation gross profit in fiscal 2024 decreased by $7,309 from 2023, mainly due to lower sales volumes between years, as well as lower absorption of fixed overhead related to such sales decrease. The $6,935 decrease in gross profit in the Diving segment was largely due to sales volume decreases during fiscal 2024 as compared to fiscal 2023. Operating Expenses Operating expenses increased in fiscal 2024 from fiscal 2023 levels by $12,155 despite the decrease in sales volumes. Key drivers of the expense change were an $11,173 write off of goodwill in fiscal 2024, approximately $3,800 of higher deferred compensation costs between years, partially offset by lower incentive compensation and professional services expenses between years. Operating expenses for the Fishing segment increased by $19,156 from fiscal 2023 levels.  The increase was due primarily to the $11,173 write off of goodwill in fiscal 2024, as well as approximately $11,000 higher advertising and promotional spend between years offset in part by lower warranty expense and lower sales volume related costs. Camping & Watercraft Recreation operating expenses decreased in fiscal 2024 by $8,142 from fiscal 2023. In addition to decreased sales volume related costs between years, fiscal 2023 included expenses related to the Eureka! product exit of approximately $2,500. Operating expenses for the Diving business increased by $401 year over year due primarily to severance expense and professional services expenses, partially offset by decreased sales volume related expenses between periods. The Company's fiscal 2024 general corporate expenses of $35,503 increased $739 from $34,765 in fiscal 2023. More favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $3,800 of higher deferred compensation expense during fiscal 2024 over fiscal 2023, partially offset by lower incentive compensation and professional services expenses year over year. The deferred compensation expenses are entirely offset by a gain in "Other (income) expense, net" related to marking the plan assets to market. Operating Results The Company’s operating loss was $43,522 in fiscal 2024 compared to an operating profit of $11,740 in fiscal 2023.  Fishing operating profit decreased by $47,923 in fiscal 2024 to a loss of $6,598 from fiscal 2023 due primarily to lower sales volumes between years, as well as increased operating expenses, as discussed above.  The operating loss for Camping & Watercraft was $488 in fiscal 2024 compared to a loss $1,320 in fiscal 2023 which improvement was primarily a result of the lower operating expenses between periods. The operating loss for the Diving business was $1,244 in fiscal 2024, down from an operating profit of $6,092 in fiscal 2023, due primarily to decreased sales volumes between periods. Other Income and Expenses Interest expense of $152 in fiscal 2024 was flat as compared to fiscal 2023 expense of $152. Interest income of $4,844 in fiscal 2024 increased slightly from fiscal 2023 interest income of $4,543 due to the increase in deposit interest rates year over year, as well as increased cash and investment balances year over year.  Net other income of $8,968 in fiscal 2024 decreased from $9,693 in fiscal 2023.  Fiscal 2024 net other income included the gain on the sale of a building of approximately $1,900 and market earnings and dividend income of $7,049 on deferred compensation plan assets, partially offset by currency losses of $385. In fiscal 2023, net other income included the gain on the sale of the Military and Commercial Tents product lines of approximately $6,560, and market earnings and dividends on the deferred compensation plan assets of $3,200, partially offset by $114 of currency losses.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other (income) expense, net” are offset as compensation expense in “Operating expenses.” Pretax Income and Income Taxes 21 Table of Contents The Company realized a pretax loss of $29,862 in fiscal 2024 compared to pretax income of $25,824 in fiscal 2023. The Company recorded an income tax benefit of $3,329 in 2024, which equated to an effective tax rate of 11.1%, compared to tax expense of $6,290 in 2023, which equated to an effective tax rate of 24.4%.  Net Income (Loss) The Company recognized net loss of $26,533, or $2.60 per diluted common share, in fiscal 2024 compared to net income of $19,534, or $1.90 per diluted common share, in fiscal 2023 based on the factors discussed above. Financial Condition, Liquidity and Capital Resources The Company believes its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities. The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments consist of marketable securities, with original maturities greater than three months but less than one year, and long-term investments consist of marketable securities with original maturities greater than one year, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade. The Company’s cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized in the following table: [[GREPCENT_TABLE]] [["","Year Ended"],["(thousands)","October 3 2025","","September 27 2024","","September 29 2023"],["Cash provided by (used for):"],["Operating activities","$","56,206","","","$","40,984","","","$","41,713"],["Investing activities","(11,856)","","","5,034","","","(48,374)"],["Financing activities","(13,563)","","","(13,695)","","","(12,732)"],["Effect of foreign currency rate changes on cash","114","","","1,321","","","1,444"],["Increase (decrease) in cash and cash equivalents","$","30,901","","","$","33,644","","","$","(17,949)"]] [[/GREPCENT_TABLE]] Operating Activities The following table sets forth the Company’s working capital position at the end of each of the years shown: [[GREPCENT_TABLE]] [["(thousands, except share data)","October 3 2025","","September 27 2024"],["Current assets","$","408,788","","","$","428,728"],["Current liabilities","104,640","","","90,444"],["Working capital","$","304,148","","","$","338,284"],["Current ratio","3.9:1","","4.7:1"]] [[/GREPCENT_TABLE]] Cash flows provided by operations in fiscal 2025 totaled $56,206, compared to $40,984 in fiscal 2024, and $41,713 in fiscal 2023. While the net loss in fiscal 2025 was larger than fiscal 2024, a significant portion of the current year's loss was driven by non-cash tax expense. Depreciation and amortization charges were $20,627, $19,608 and $16,295 in fiscal 2025, 2024 and 2023, respectively. Investing Activities Cash flows used for investing activities were $11,856 in fiscal 2025, cash flows provided by investing activities were $5,034 in fiscal 2024, and cash flows used for investing activities were $48,374 in fiscal 2023. Fiscal 2025 cash usage reflects the acquisition of the business of Endless Summer Technologies Proprietary Limited (See Note 17 to the consolidated financial statements included elsewhere in this report for a discussion of the acquisition) for cash of $12,197 in the Company's Diving 22 Table of Contents segment offset by proceeds from the maturity of investments of $16,316. During fiscal 2024, the Company received proceeds from maturities of investments of $27,025, as well as proceeds of approximately $1,900 related to the sale of a building. During fiscal 2023, the Company purchased investments of approximately $40,700 which was offset in part by $14,990 of proceeds from selling the Military and Commercial Tent product lines. Expenditures for property, plant and equipment were $15,975, $22,018 and $22,668 in fiscal 2025, 2024 and 2023, respectively. In general, the Company’s ongoing capital expenditures are primarily related to tooling for new products, facilities investments and information systems improvements. Financing Activities Cash flows used for financing activities totaled $13,563 in fiscal 2025 compared to $13,695 and $12,732 in 2024 and 2023, respectively, and were primarily for the payment of dividends of $13,507, $13,431 and $12,554 in 2025, 2024, and 2023, respectively. Contractual Obligations and Off Balance Sheet Arrangements The Company has contractual obligations and commitments to make future payments under its operating leases and open purchase orders.  There have been no changes outside of the ordinary course of business in the specified contractual obligations during the year ended October 3, 2025. The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance. Letters of credit outstanding at October 3, 2025 and September 27, 2024 were $67 and $67, respectively, and were included in the Company’s total loan availability.  The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of October 3, 2025 or September 27, 2024. The Company has no other off-balance sheet arrangements. Market Risk Management Foreign Exchange Risk The Company has significant foreign operations, for which the functional currencies are denominated primarily in euros, Swiss francs, Hong Kong dollars and Canadian dollars. As the values of the currencies of the foreign countries in which the Company has operations increase or decrease relative to the U.S. dollar, the sales, expenses, profits, losses, assets and liabilities of the Company’s foreign operations, as reported in the Company’s consolidated financial statements, increase or decrease, accordingly.  Approximately 13% of the Company’s revenues for the fiscal year ended October 3, 2025 were denominated in currencies other than the U.S. dollar.  Approximately 6% were denominated in euros and approximately 5% were denominated in Canadian dollars, with the remaining 2% denominated in various other foreign currencies.  Changes in foreign currency exchange rates can cause unexpected financial losses or cash flow needs. Interest Rate Risk The Company operates in a seasonal business and experiences significant fluctuations in operating cash flow as working capital needs increase in advance of the Company’s primary selling and cash generation season, and decline as accounts receivable are collected and cash is accumulated.  Commodities Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancellable supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials. Impact of Inflation The Company anticipates that changing costs of basic raw materials (including due to inflationary conditions in the economy) may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate. The Company’s results of operations and financial condition are presented based on historical cost.  23 Table of Contents Critical Accounting Estimates The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures.  On an on-going basis, the Company evaluates its estimates for product returns, credit losses, inventories, long lived assets and goodwill, income taxes, warranty obligations, pensions and other post-retirement benefits, litigation and other subjective matters impacting the financial statements.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  Management has discussed these policies with the Audit Committee of the Company’s Board of Directors. Inventories The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. The Company also considers current forecast plans, as well as market and industry conditions in establishing reserve levels. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances. Deferred Taxes The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. The Company recorded a reserve on US deferred tax assets in fiscal 2025. See Note 6, Income Taxes, to the consolidated financial statements included elsewhere in this report for additional information. Goodwill and Other Intangible Assets Impairment Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.  Generally, annual impairment tests are performed by the Company in the fourth quarter of each fiscal year. Goodwill is tested for impairment at the reporting unit level. In assessing the recoverability of the Company’s goodwill, the Company estimates the fair value of the reporting unit to which the goodwill relates.  Fair value of the reporting unit is estimated using a discounted cash flow model.  If the fair value of a reporting unit exceeds its carrying value, no impairment exists. When the fair value of the reporting unit is less than it's carrying value, an impairment charge is recognized based on the excess of carrying amount over its fair value, not to exceed the carrying value of the goodwill.  The Company recognized a goodwill impairment charge in the fourth quarter of fiscal 2024 of $11,173 in "Goodwill Impairment" in the accompanying Consolidated Statements of Operations in the Fishing segment, resulting in a full impairment of the Company's balance of goodwill. The Company did not recognize any goodwill impairment charges in 2025 or 2023. See Note 1, subheading "Goodwill," to the consolidated financial statements included elsewhere in this report for additional information. The discounted cash flow model used to estimate fair value of reporting units requires a number of key estimates and assumptions.  The Company estimates the future cash flows of the reporting units based on historical and forecasted revenues and operating costs and applies a discount rate to the estimated future cash flows for purposes of the valuation.  This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions made by management such 24 Table of Contents as market capital structure, market betas, the risk-free rate of return and the estimated costs of borrowing.  Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year. In assessing the recoverability of the Company’s other indefinite lived intangible assets, the Company estimates the fair value of the various intangible assets.  The fair value of trademarks and patents is estimated using the relief from royalty method.  If the fair value of an intangible asset exceeds its carrying value, no impairment exists. When fair value is less than the carrying value of the intangible asset, an impairment loss is recognized for the amount of the difference, not to exceed the carrying value of the intangible asset. A number of factors, many of which the Company has no ability to control, could affect its financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions that the Company uses in preparing its financial statements.  These factors include:  a prolonged global economic crisis, a significant decrease in demand for the Company’s products, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator and successful efforts by the Company’s competitors to gain market share. Warranties The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.