Enerpac Tool Group Corporation

10/17/2025 | Press release | Distributed by Public on 10/17/2025 12:45

Annual Report for Fiscal Year Ending 8/31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data".
Background
The Company has one reportable segment, the Industrial Tools & Service ("IT&S") segment, and an Other operating segment, which does not meet the criteria to be considered a reportable segment. The IT&S segment is primarily engaged in the design, manufacture and distribution of branded hydraulic and mechanical tools, and in providing services and tool rental to the refinery/petrochemical; general industrial; industrial maintenance, repair and operations ("MRO"); machining & manufacturing; power generation; infrastructure; mining and other markets.Financial information related to the Company's reportable segment is included in Note 16, "Business Segment, Geographic and Customer Information"in the notes to the consolidated financial statements.
Business Update
Our businesses provide an array of products and services across multiple markets and geographies which results in significant diversification. The IT&S segment and the Company are well-positioned to drive shareholder value through a sustainable business strategy built on well-established brands, broad global distribution and end markets, clear focus on the core tools and services business and disciplined capital deployment.
Our Business Model
Our long-term goal is to create sustainable returns for our shareholders through above-market growth in our core business, expanding our margins, generating strong cash flow and being disciplined in the deployment of our capital. We intend to grow through execution of our organic growth strategy, focused on key vertical markets that benefit from long-term macro trends, driving customer driven innovation, expansion of our digital ecosystem to acquire and engage customers, and an expansion in emerging markets such as Asia Pacific. In addition to organic growth, we also focus on margin expansion through operational efficiency techniques, including Lean, continuous improvement and 80/20, to drive productivity and lower costs, as well as optimizing our selling, general and administrative expenses through consolidation and shared service implementation. We also apply these techniques and pricing actions to offset commodity increases and inflationary pricing. Finally, cash flow generation is critical to achieving our financial and long-term strategic objectives. We believe driving profitable growth and margin expansion will result in cash flow generation, which we seek to supplement through minimizing primary working capital. We intend to allocate the cash flow that results from the execution of our strategy in a disciplined way toward investment in our businesses, maintaining our strong balance sheet, disciplined M&A program and opportunistically returning capital to shareholders. We anticipate the compounding effect of reinvesting in our business will fuel further growth and profitable returns.
General Business Update
In March 2022, the Company announced the start of its ASCEND transformation program ("ASCEND"). ASCEND's key initiatives included accelerating organic growth strategies, improving operational excellence and production efficiency by utilizing a Lean approach, and driving greater efficiency and productivity in selling, general and administrative expense by better leveraging resources to create a more efficient and agile organization.
In October 2023, the Company announced that during fiscal 2023, the Company had realized approximately $54 million of annual operating profit from execution of the ASCEND program and would no longer be breaking out the ASCEND benefit from results going into fiscal 2024. The ASCEND program was completed as of August 31, 2024, with total program costs of $75 million, of which $19 million related to restructuring charges. The following summarizes ASCEND transformation charges (in thousands):
2024 2023 Program to Completion
ASCEND Expense recorded in Cost of products sold 1,018 924 1,948
ASCEND Expense recorded in SG&A expenses 6,029 34,495 54,134
Total ASCEND Expense 7,047 35,419 56,082
Recorded with Restructuring charges 7,843 7,719 18,612
Total ASCEND Transformation Charges $ 14,890 $ 43,138 $ 74,694
Historical Financial Data
The following table and corresponding year-over-year analysis sets forth our results of continuing operations (dollars in millions, except per share amounts):
Year Ended August 31,
2025 2024 2023
Statements of Earnings Data: (1)
Total net sales $ 617 100 % $ 590 100 % $ 598 100 %
Total cost of products sold 305 49 % 288 49 % 303 51 %
Gross profit 312 51 % 301 51 % 295 49 %
Selling, general and administrative expenses 167 27 % 169 29 % 205 34 %
Amortization of intangible assets 6 1 % 3 1 % 5 1 %
Restructuring charges 6 1 % 7 1 % 7 1 %
Impairment & divestiture charges - - % - - % (6) (1) %
Operating profit 133 22 % 122 21 % 84 14 %
Financing costs, net 10 2 % 14 2 % 12 2 %
Other expense, net 3 0 % 3 1 % 3 - %
Earnings before income tax expense 121 20 % 106 18 % 69 12 %
Income tax expense 28 5 % 23 4 % 15 3 %
Net earnings from continuing operations $ 93 15 % $ 82 14 % $ 54 9 %
Other Financial Data: (1)
Depreciation $ 2 $ 2 $ 1
Capital expenditures 19 11 9
(1) Results are from continuing operations and exclude the financial results of previously divested businesses reported as discontinued operations. The summation of the individual components may not equal the total due to rounding.
Fiscal 2025 Compared to Fiscal 2024
Consolidated net sales for fiscal 2025 were $617 million, 5% higher than the prior-year sales of $590 million. The effect of the weakening U.S. dollar on foreign currency rates compared to the prior-year period favorably impacted sales by $2 million, or 1%, and the inclusion of DTA, acquired in the first quarter of fiscal 2025 favorably impacted sales by $20 million, or 3%. This resulted in organic consolidated sales growth of approximately 1% in the year. Management refers to sales adjusted to exclude the impact of these items (foreign currency changes and recent acquisitions and divestitures) as "organic sales". Product sales increased 6% to $500 million, compared to the prior fiscal year. Foreign currency rate changes favorably impacted product sales by $2 million, or less than 1%, and the acquisition of DTA favorably impacted product sales by $20 million, or 4%. This resulted in product organic sales growth of 1%. This increase in product organic sales was primarily due to growth in the Americas and APAC regions, and the Cortland Medical business. This was offset by declines in our EMEA region. Service sales were $117 million, an increase of 1% compared to the prior fiscal year. Foreign currency impact was nearly flat, resulting in a 1% increase in service organic sales over the prior fiscal year. The service organic sales increase in the service business was due to strong growth within our Americas region that was partially offset by declines in activity within our EMEA region.
Gross profit as a percentage of sales was approximately 51% in fiscal 2025, remaining consistent with fiscal 2024.
Operating profit for fiscal 2025 was $133 million, approximately $11 million higher than the prior fiscal year operating profit of $122 million. The increase in operating profit is primarily due to the flow through of gross profit on the incremental current year sales and lower selling, general & administrative ("SG&A") expense as a percentage of revenue compared to the prior year.
Fiscal 2024 Compared to Fiscal 2023
Consolidated net sales for fiscal 2024 were $590 million, 1% lower than the prior-year sales of $598 million. The impact of foreign currency rates was nearly flat year-over-year, while the divestiture of the Cortland Industrial business during the fourth quarter of fiscal 2023 unfavorably impacted fiscal 2024 sales by approximately $23 million, or 4%. Product sales declined 3% compared to prior fiscal year to $474 million, with foreign currency impact of less than 1% and the Cortland Industrial divestiture unfavorably impacting sales by 5%, resulting in a 1% improvement in product organic sales. The increase in product organic sales was driven by pricing actions and mix within the IT&S product offerings; however, this was partially offset by a decrease in product organic sales in the Cortland Medical business due to softness in demand related to certain surgical procedures utilizing Cortland Biomedical products. Service sales were $116 million, an increase of 7% compared to the prior fiscal year. Foreign currency impact was nearly flat, resulting in a 7% increase in service organic sales over the prior fiscal year. The service organic sales increase was due to strong growth within our EMEA region from increased work scopes, higher maintenance activity in the North Sea and projects delayed from the prior fiscal year taking place during fiscal 2024.
Gross profit as a percentage of sales was approximately 51% in fiscal 2024, 2% higher than fiscal 2023. The increase in gross profit is primarily attributed to operational improvements from the ASCEND transformation program, as well as pricing actions and the disposition of Cortland Industrial.
Operating profit for fiscal 2024 was $122 million, approximately $38 million higher than the prior fiscal year of $84 million. Operating profit was impacted by the increased gross profit noted above, as well as a reduction of SG&A expense of $36 million compared to the prior fiscal year. The SG&A decrease was primarily due to lower ASCEND transformation program charges ($28 million), M&A charges ($1 million) and leadership transition charges ($1 million), as well as reduced incentive compensation expense.
Segment Results
IT&S Segment
The IT&S segment is a global supplier of branded hydraulic and mechanical tools and services to a broad array of end markets, including refinery/petrochemical; general industrial; industrial MRO; machining & manufacturing; power generation; infrastructure; mining and other markets.Its primary products include branded tools, cylinders, pumps, hydraulic torque wrenches, highly engineered heavy lifting technology solutions and other tools (Product product line). The segment provides maintenance and manpower services to meet customer-specific needs and rental capabilities for certain of our products (Service & Rental product line). The following table sets forth the results of operations for the IT&S segment (dollars in millions):
Year Ended August 31,
2025 2024 2023
Net Sales $ 596 $ 571 $ 555
Operating Profit 164 153 136
Operating Profit % 27.5 % 26.8 % 24.5 %
Fiscal 2025 Compared to Fiscal 2024
Fiscal 2025 net sales were $596 million, an increase of $25 million, or 4% from fiscal 2024 sales of $571 million. The impact of foreign currency was nearly flat and the first quarter acquisition of DTA favorably impacted sales by $20 million, or 3%, resulting in organic sales growth for the segment of approximately 1%. The primary driver of this organic sales increase was strong performance in the Americas and APAC regions.
Fiscal 2025 operating profit increased $11 million to $164 million. This increase was driven by the flow-through impact of the increased sales and lower SG&A expense as a percentage of revenue.
Fiscal 2024 Compared to Fiscal 2023
Fiscal 2024 net sales were $571 million, an increase of $16 million, or 3% from fiscal 2023 sales of $555 million. Organic sales also increased by 3%, as the impact of foreign currency was nearly flat. The increase in sales was predominately driven by our Service business which had strong growth within our EMEA region from increased work scopes, higher maintenance activity in the North Sea and projects delayed from the prior fiscal year taking place during fiscal 2024. Sales in the Product business also increased, but not to the extent of the Service business. The growth in Product business sales was driven by pricing actions and product mix within the IT&S product offerings.
Fiscal 2024 operating profit increased $17 million to $153 million. This increase was driven by the aforementioned pricing actions, with some volume contribution and a reduction in SG&A expenses. The reduction of SG&A expense was from reduced ASCEND charges ($4 million) and lower incentive compensation expense, partially offset by slightly higher restructuring charges ($1 million) for this segment.
Corporate
Corporate consists of selling, general and administrative costs and expenses, including executive, legal, finance, human resources, and information technology, that are not allocated to the segments based on their nature. Corporate expenses were $36 million in fiscal 2025,which were flat compared to fiscal 2024expenses.
Corporate expenses in fiscal 2024were $27 million lower than the fiscal 2023 expenses of $63 million. This decrease was primarily due to a reduction in ASCEND charges in fiscal 2024 ($25 million).
Net financing costs were $10 million, $14 million and $12 million in fiscal years 2025, 2024 and 2023, respectively. The decrease in net financing costs for fiscal 2025 to fiscal 2024 was due to a mix of lower debt balances and lower interest rates. The increase in net financing costs for fiscal 2023 to fiscal 2024 was due to the year-over-year increase in interest rates and debt levels.
Income Tax Expense
The Company's income tax expense is impacted by a number of factors, including, among others, the amount of taxable earnings generated in foreign jurisdictions with tax rates that are different than the U.S. federal statutory rate, permanent items, state tax rates, changes in tax laws, acquisitions and divestitures and the ability to utilize various tax credits and net operating loss carryforwards. Income tax expense also includes the impact of provision to tax return adjustments, changes in valuation allowances and reserve requirements for unrecognized tax benefits. Pre-tax earnings, income tax expense and effective income tax rate from continuing operations for the past three fiscal years were as follows (dollars in thousands):
Year Ended August 31,
2025 2024 2023
Earnings before income tax expense $ 120,729 $ 105,519 $ 68,898
Income tax expense 27,980 23,312 15,249
Effective income tax rate 23.2 % 22.1 % 22.1 %
The fiscal 2025 and fiscal 2024 effective tax rates were 23.2% and 22.1%, respectively. The fiscal 2025 effective tax rate was slightly higher than the statutory 21% primarily as a result of state income taxes and taxes in foreign jurisdictions with rates higher than the U.S. which were partially offset by one-time tax benefits related to the lapse of the statute of limitations on uncertain tax positions, tax benefits related to stock compensation, and global tax planning initiatives that will not repeat in future periods due to certain tax attributes that are no longer available. Both the fiscal 2025 and fiscal 2024 income tax provisions were impacted by the mix of earnings in foreign jurisdictions with income tax rates different than the U.S. federal income tax rate and income tax benefits from global tax planning initiatives.
On July 4, 2025, H.R. 1, "An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14", commonly referred to as the "One Big Beautiful Bill Act," was enacted in the United States. There are multiple business tax provisions for which further guidance from the U.S. Treasury and the Internal Revenue Service is needed. The Company has evaluated the impact of the guidance provided to date and determined that it did not have a material impact related to fiscal 2025. The Company will continue to evaluate the impact of the various provisions that could affect our income tax payable and deferred tax liability, including changes related to bonus depreciation and the expensing of research and development expenditures, among other topics.
Liquidity and Capital Resources
At August 31, 2025, cash and cash equivalents were $152 million, comprised of $105 million of cash held by foreign subsidiaries and $47 million held domestically. The following table summarizes the cash flow attributable to operating, investing and financing activities (in millions):
Year Ended August 31,
2025 2024 2023
Cash provided by operating activities $ 111 $ 81 $ 78
Cash (used in) investing activities (46) (14) 11
Cash used in financing activities (81) (56) (53)
Effect of exchange rate changes on cash 1 2 (2)
Net (decrease) increase from cash and cash equivalents $ (16) $ 13 $ 34
Cash flow provided by operations was $111 million for fiscal 2025 and $81 million for fiscal 2024. The $30 million increase in cash flow from operations was primarily the result of higher earnings, lower annual incentive compensation payments made in the first quarter of fiscal 2025 compared to the prior-year period and the non-recurrence of payments and funds received for legal settlements related to discontinued operations. Net cash used in investing activities was $46 million which is a $32 million increase from the prior fiscal year.The increased use of cash was due to the payment of $27 million for the acquisition of DTA and increased capital expenditures relating to build-out costs for the Company's new headquarters location in Milwaukee, Wisconsin. Cash used in financing activities increased to $81 million, for fiscal 2025 compared to $56 million for fiscal 2024. The $25 million increase is primarily driven by increased expenditures for share repurchases.
Cash flow provided by operations was $81 millionfor fiscal 2024and $78 millionfor fiscal 2023. The $3 million increase in cash flow from operations was primarily the result of $29 million of higher earnings from continuing operations, partially offset by decreases in accrued compensation and benefits, principally due to lower incentive compensation expense, of $18 million, with the remainder due to a decrease in other accrued liabilities principally from reduced costs associated with ASCEND. We had approximately $14 million of cash used in investing activities from continuing operations for fiscal 2024, which is a $25 million decrease from the prior fiscal year, due principally to the $20 million in proceeds from the sale of the Cortland Industrial business in the fourth quarter of fiscal 2023, net of the $1 million in working capital adjustments settled during fiscal 2024 (see Note 6, "Discontinued Operations and Other Divestiture Activities"in the notes to the consolidated financial statements for further detail on the divestiture). The remaining variance was due to higher capital expenditures in fiscal 2024 relating to build-out costs for the company's new headquarters location in Milwaukee and purchase of the business assets of Track Tools during the first quarter of fiscal 2024.
During fiscal 2023, the Company refinanced its credit facility resulting in an updated senior credit facility (the "Senior Credit Facility") of $600 million, comprised of a $400 million revolving line of credit and a $200 million term loan, which will mature in September 2027. The Senior Credit Facility contains restrictive covenants and financial covenants. See Note 8, "Debt" in the notes to the consolidated financial statements for further details of the Senior Credit Facility. The Company was in compliance with all covenants, including the financial covenants, under the Senior Credit facility at August 31, 2025. The unused credit line and amount available for borrowing under the revolving line of credit of the Senior Credit Facility was $399 million at August 31, 2025.
We believe that the revolving credit facility under the Senior Credit Facility, combined with our existing cash on hand and anticipated operating cash flows, will be adequate to meet operating, debt service, acquisition and capital expenditure funding requirements for the foreseeable future.
Primary Working Capital Management
We use primary working capital as a percentage of sales as a key metric for working capital efficiency. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months' sales annualized. The following table shows the components of our primary working capital (dollars in millions):
August 31, 2025 August 31, 2024
$ PWC % $ PWC %
Accounts receivable, net $ 106 16 % $ 104 16 %
Inventory, net 79 12 % 73 12 %
Accounts payable (43) (6) % (43) (7) %
Net primary working capital $ 142 21 % $ 134 21 %
Total primary working capital was $142 million at August 31, 2025, which increased from $134 million at August 31, 2024. The increase in inventory is due to the impact of the incremental tariffs put in place during fiscal 2025.
Capital Expenditures
The majority of our manufacturing activities consist of assembly operations. We believe that our capital expenditure requirements are not as extensive as other industrial companies given the nature of our operations. Capital expenditures associated with continuing operations were $19 million, $11 millionand $9 millionin fiscal 2025, 2024 and2023, respectively. The increase in capital expenditures during fiscal 2025 is primarily related to build-out costs for the Company's new headquarters location in Milwaukee, Wisconsin.
Commitments and Contingencies
Given our desire to allocate cash flow and revolver availability to fund growth initiatives, we have historically leased most of our facilities and some operating equipment. We lease certain facilities, computers, equipment and vehicles under various operating lease agreements, generally over periods ranging from one to twenty years. Under most arrangements, we pay the property taxes, insurance, maintenance and expenses related to the leased property. Many of our leases include provisions that enable us to renew the leases at contractually agreed rates or, less commonly, based upon market rental rates on the date of expiration of the initial leases.
We had outstanding commercial letters of credit of $6 millionand surety bonds of $5 millionat August 31, 2025,while we had $4 million of outstanding letters of credit at August 31, 2024. Most of these instruments relate to commercial contracts and self-insured workers' compensation programs.
Additional detail regarding contingencies is included in Note 17, "Commitments and Contingencies"in the notes to the consolidated financial statements, which is incorporated by reference.
Contractual Obligations
Our predominant sources of contractual obligations include the payment of interest and principal on our outstanding line of credit, our operating lease portfolio, certain employee-related benefit plans and agreements with certain suppliers related to the procurement of inventory.
The timing of principal payments associated with our revolving line of credit are disclosed in Note 8, "Debt" in the notes to the consolidated financial statements.We pay interest monthly based on prevailing interest rates at the time and the balance outstanding on our revolving line of credit.
Our lease contracts are primarily for real estate, vehicles, and manufacturing equipment. See Note 11, "Leases" in the notes to the consolidated financial statements for future minimum lease payments associated with our lease portfolio.
We have long-term obligations related to our deferred compensation, pension and postretirement plans that are summarized in Note 12, "Employee Benefit Plans"in the notes to the consolidated financial statements.
As part of our global sourcing strategy, we have entered into agreements with certain suppliers that require the supplier to maintain minimum levels of inventory to support certain products for which we require a short lead time to fulfill customer orders. We have the ability to notify the supplier that they no longer need to maintain the minimum level of inventory should we discontinue manufacturing a product during the contract period; however, we must purchase the remaining minimum inventory levels the supplier was required to maintain within a defined period of time. These contracts allow for us to terminate with appropriate notice so long as we utilize the remaining inventory on hand at the supplier and there are no overall minimum volumes in these contracts other than what the supplier is required to maintain on hand at any given point in time.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with US GAAP. This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following estimates are considered by management to be the most critical in understanding judgments involved in the preparation of our consolidated financial statements and uncertainties that could impact our results of operations, financial position and cash flow.
Accounts receivable, net:Accounts receivable, net is recorded based on the contractual value of our accounts receivable, net of an estimated allowance for credit losses representing management's best estimate of the amount of receivables that are not probable of collection. Accounts receivable, net was $106 million as of August 31, 2025, which is net of a $4 million allowance for credit losses. Our customer base generally consists of financially reputable distributors, agents, OEMs, and other customers with whom we have long standing relationships, and historically we have not experienced significant bad debt
expense as a percentage of our annual net sales (bad debt expense as a percentage of net sales was less than 0.5% for each the years ended August 31, 2025, 2024, and 2023).
Inventories: Inventory cost is determined using the last-in, first-out ("LIFO") method for a portion of U.S. owned inventory (approximately 47% and 49% of total inventories at August 31, 2025 and 2024, respectively). If the LIFO method were not used, inventory balances would be higher than amounts presented in the Consolidated Balance Sheet by $18 million at both August 31, 2025 and 2024. We perform an analysis on historical sales usage of individual inventory items on hand and record a reserve to adjust inventory cost to net realizable value, if necessary. The inventory valuation assumptions used are based on historical experience. We believe that such estimates are made based on consistent and appropriate methods; however, actual results may differ from these estimates under different assumptions or conditions.
Goodwill and Indefinite-lived intangibles: Goodwill, trademarks and certain tradenames have indefinite lives and are not amortized. However, goodwill and intangible assets are tested annually for impairment, and may be tested more frequently if any triggering events occur that would reduce the recoverability of the asset. In conducting the annual impairment test for goodwill, we have the option to first assess qualitative factors to determine whether it is more likely than not (greater than 50% likelihood) the fair value of any reporting unit is less than its carrying amount. If a qualitative assessment determines an impairment is more likely than not, we are required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, we may elect to proceed directly to the quantitative impairment test.
In conducting a quantitative assessment for goodwill, we generally use a discounted cash flow model, which calculates fair value as the sum of the projected discounted cash flows over a discrete six-year period plus an estimated terminal value. Significant assumptions include forecasted revenues, operating profit margins, and discount rates applied to the future cash flows based on the respective reporting unit's estimated weighted average cost of capital. In certain circumstances, we also may review a market approach in which a trading multiple is applied to either forecasted EBITDA (earnings before interest, income taxes, depreciation and amortization) or anticipated proceeds of the reporting unit to arrive at the estimated fair value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded. We perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value up to the amount of the recorded goodwill.
During 2025 management performed a qualitative assessment over goodwill and indefinite-lived intangibles and determined quantitative testing was not necessary.
During 2024 management performed a qualitative assessment over goodwill and indefinite-lived intangibles and determined quantitative testing was necessary for one reporting unit. The quantitative test for the reporting unit resulted in an estimated fair value that exceeded the carrying value by more than 85%.
As such, no impairment charges were recorded during the years ended August 31, 2025 or 2024.
A considerable amount of management judgment is required in performing impairment tests, principally in determining the fair value of each reporting unit and the indefinite-lived intangible assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, future additional impairment charges could be required. Prolonged weakening industry or economic trends, disruptions to our business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in the use of the assets or in entity structure and divestitures may adversely impact the assumptions used in the valuations and ultimately result in future impairment charges.
Business Combinations and Purchase Accounting: Business combinations are accounted for using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for certain acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets, including intangible assets and tangible long-lived assets, and assumed liabilities including earn-out obligations. Acquired intangible assets, excluding goodwill, are valued using discounted cash flow methodology based on future cash flows specific to the type of intangible asset purchased.
Specifically related to the acquisition of DTA, the Company believes the developed technology intangible asset and the potential contingent earn-out liability required the most significant judgment. The Company used the relief from royalty rate method to value the developed technology intangible. The significant assumptions used to estimate the value of the developed technology intangible included the survivor curve for attrition of existing technology, revenue growth, royalty charges and the discount rate. The Company used the Black-Scholes model to determine the fair value of the potential earn-out payment. The
significant assumptions used to estimate the value of the potential earn-out included the forecasted gross profit and the discount rate. These significant assumptions are forward looking and could be affected by future economic and market conditions.
Defined Benefit Plans:We provide a variety of benefits to employees and former employees including, in some cases, pensions and postretirement health care. Plan assets and obligations are recorded based on an August 31 measurement date utilizing various actuarial assumptions such as discount rates, assumed rates of return on plan assets and health care cost trend rates. We determine the discount rate assumptions by referencing high-quality, long-term bond rates that are matched to the duration of our benefit obligations, with appropriate consideration of local market factors, participant demographics and benefit payment forecasts. At August 31, 2025 and 2024, the discount rates on domestic benefit plans were 5.2% and 5.0%, respectively. In estimating the expected return on plan assets, we consider historical returns, forward-looking considerations, inflation assumptions and the asset-allocation strategy in investing such assets. Domestic benefit plan assets consist primarily of participating units in mutual funds with equity based strategies, mutual funds with fixed income based strategies, and U.S. treasury securities. The expected return on domestic benefit plan assets was 6.2% for each of the fiscal years ended August 31, 2025 and 2024. A 25 basis point change in the assumptions for the discount rate or expected return on plan assets would not have materially changed the fiscal 2025 domestic benefit plan expense.
We review actuarial assumptions on an annual basis and make modifications based on current rates and trends, when appropriate. As required by US GAAP, the effects of any modifications are recorded currently or amortized over future periods. Based on information provided by independent actuaries and other relevant sources, we believe that the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flow. See Note 12, "Employee Benefit Plans"in the notes to the consolidated financial statements for further discussion.
Income Taxes:Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, reserves for unrecognized tax benefits and any valuation allowances recorded against net deferred tax assets. Our effective income tax rate is based on annual income, statutory tax rates, tax planning opportunities available in the various jurisdictions in which we operate and other adjustments. Our annual effective income tax rate includes the impact of discrete income tax matters including adjustments to reserves for uncertain tax positions and the benefits of various income tax planning activities. Tax regulations require items to be included in our tax returns at different times than these same items are reflected in our consolidated financial statements. As a result, the effective income tax rate in our consolidated financial statements differs from that reported in our tax returns. Some of these differences are permanent, such as expenses that are not tax deductible, while others are temporary differences, such as amortization and depreciation expenses.
Temporary differences create deferred tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not large enough to utilize the entire deduction or credit. Relevant factors in determining the realizability of deferred tax assets include future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes.
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