Annual Report for Fiscal Year Ending March 31, 2026 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

In "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), management explains the general financial condition and results of operations for Agilysys and subsidiaries including:

- what factors affect our business;

- what our earnings and costs were;

- why those earnings and costs were different from the year before;

- where the earnings came from;

- how our financial condition was affected; and

- where the cash will come from to fund future operations.

The MD&A analyzes changes in specific line items in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 8 of this Annual Report titled, "Financial Statements and Supplementary Data." Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See "Forward-Looking Information" on page 3 of this Annual Report and Item 1A "Risk Factors" in Part I of this Annual Report for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Recent Developments

Macroeconomic Conditions

During the year ended March 31, 2026, global macroeconomic conditions were, and continue to be, influenced by a number of factors, including, but not limited to, political unrest, armed conflicts, changes to tariffs and trade policies, labor shortages and natural disasters. We believe such conditions are impacting customer spending and provider pricing decisions resulting in decreased demand, increased costs, and reduced margins particularly in areas outside of the United States.

Book4Time

On August 20, 2024, we acquired Book4Time Parent, Inc. (Book4Time), a global leader in spa management SaaS software, as further described in Note 16, Business Combination, to our consolidated financial statements included under Part II, Item 8 of this annual report. The cash consideration for the acquisition totaled $145.8 million of net cash, partially funded by a credit agreement (the Credit Agreement) we entered into on August 16, 2024 (the Credit Agreement Closing Date), with the lenders party thereto and Bank of America, N.A., as lender and administrative agent, as further described in Note 15, Debt, to our consolidated financial statements included under Part II, Item 8 of this annual report.

Our Business

Agilysys has been a leader in hospitality software for more than 45 years, delivering innovative cloud-native SaaS and on-premise solutions for hotels, multi-amenity resorts, cruise lines, casinos, corporate foodservice management, restaurants, universities, stadiums, and healthcare facilities. The Company's software solutions include point-of-sale (POS), property management (PMS), inventory and procurement, payments, and related applications that manage and enhance the entire guest journey. Agilysys is also known for its world-class customer-centric service. Many of the top hospitality companies around the world use Agilysys solutions to improve guest loyalty, drive revenue growth, and increase operational efficiencies. The Company has one reportable segment serving the global hospitality industry. Agilysys operates across the Americas, Europe, the Middle East, Africa, Asia-Pacific, and India with headquarters located in Alpharetta, GA.

Our top priority is increasing shareholder value by improving operating and financial performance and profitably growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to fund enhancements to existing software products, to develop and market new software products, and to expand our customer breadth, both vertically and geographically.

Our strategic plan specifically focuses on:

The primary objective of our ongoing strategic planning process is to create shareholder value by capitalizing on growth opportunities, increasing profitability and strengthening our competitive position within the specific technology solutions and end markets we serve. Profitability and industry-leading growth will be achieved through tighter management of operating expenses and sharpening the focus of our investments to concentrate on growth opportunities that offer the highest returns.

Revenue - Defined

As required by the SEC, we separately present revenue earned as products revenue, subscription and maintenance revenue or professional services revenue in our Consolidated Statements of Operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

Results of Operations

Fiscal 2026 Compared to Fiscal 2025

Net Revenue and Operating Income

The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2026 and 2025:

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The following table presents the percentage relationship of our Consolidated Statements of Operations line items to our consolidated net revenues for the periods presented:

Net revenue. Total net revenue increased $43.7 million, or 15.9%, in fiscal 2026 compared to fiscal 2025. Products revenue decreased $0.2 million, or 0.4%, due to increasing customer preference for subscription-based software licenses instead of perpetual software licenses. Subscription and maintenance revenue increased $35.9 million, or 21.1%, driven by continued growth in subscription-based revenue including $21.3 million and $11.2 million of Book4Time subscription-based revenue during the years ended March 31, 2026 and 2025, respectively. Total subscription revenue, including Book4Time subscription revenue, increased 30.2% in fiscal 2026 compared to fiscal 2025. Professional services revenue increased $8.0 million, or 12.4%, due to higher sales and service activity as our new and existing customers continue implementing technology to improve their operations.

Gross profit and gross profit margin. Our total gross profit increased $27.9 million, or 16.2%, in fiscal 2026 and total gross profit margin increased from 62.4% to 62.6% compared to fiscal 2025 driven by changes in the composition of revenue by category. Products gross profit decreased $2.5 million, or 12.7%, and gross profit margin decreased from 46.6% to 40.9% due to the composition of hardware and proprietary software products delivered. Subscription and maintenance gross profit increased $30.8 million, or 23.3%, and gross profit margin increased from 78.0% to 79.4% as revenue increases outpaced variable costs as a result of cost optimization discipline. Professional services gross profit decreased $0.4 million, or 2.2%, and gross profit margin decreased from 31.3% to 27.3% reflecting lower utilization rates due to continued hiring and training of new staff and timing of certain large projects.

Operating expenses

Operating expenses, excluding the charges for legal settlements and other (gains) charges, net increased $20.4 million, or 14.2%, in fiscal 2026 compared with fiscal 2025. As a percent of total revenue, operating expenses have decreased 0.8% in fiscal 2026 compared with fiscal 2025.

Product development. Product development includes all expenses associated with research and development. Product development increased $10.3 million, or 16.6%, during fiscal 2026 as compared with fiscal 2025 due to hiring and increased compensation rates across our development teams and increased travel.

Sales and marketing. Sales and marketing increased $6.6 million, or 20.0%, in fiscal 2026 compared with fiscal 2025 due to hiring and increased compensation rates across our sales teams, sales team additions from the Book4Time acquisition, continued expansion of marketing event and trade show activity, and increased bad debt expense.

General and administrative. General and administrative increased $1.4 million, or 3.4%, in fiscal 2026 compared to fiscal 2025 due to increased compensation rates across our administrative teams.

Depreciation of fixed assets. Depreciation of fixed assets increased $0.2 million or 4.4% in fiscal 2026 as compared to fiscal 2025 due to the timing of asset additions and assets reaching their useful life.

Amortization of internal-use software and intangibles. Amortization of internal-use software and intangibles increased $1.9 million or 48.9% in fiscal 2026 as compared to fiscal 2025 due to the addition of certain intangible assets resulting from the Book4Time acquisition.

Other (gains) charges, net. Other (gains) charges, net changed $12.3 million due primarily to significant gains from employee retention credits during fiscal 2026 compared to significant acquisition costs related to business combinations during fiscal 2025.

Legal settlements. Legal settlements decreased $0.6 million during fiscal 2026 compared to fiscal 2025 due to a decrease in certain customer settlements.

Other Income (Expense)

Interest income. Interest income consists of interest earned on cash equivalents including short-term investments in commercial paper, treasury bills and money market funds.

Interest expense. Interest expense consists of interest charges and unutilized commitment fees under our Credit Agreement and amortization of related debt issuance costs.

Other income, net. Other income, net mainly consists of movement of foreign currencies against the U.S. dollar.

Income Taxes

For fiscal 2026, the effective tax rate was different than the statutory rate due primarily to excess tax benefits associated with share-based compensation, Net Controlled Foreign Corporation Tested Income (NCTI), previously global intangible low-taxed income (GILTI), and U.S. R&D credits.

For fiscal 2025, the effective tax rate was different than the statutory rate due primarily to the benefit of U.S. R&D credits and the release of valuation allowances recorded against foreign deferred tax assets, consisting primarily of Net Operating Losses.

We are consistently subject to tax audits. Due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months that we cannot anticipate.

The ultimate realization of deferred tax assets depends on various factors including the generation of taxable income during the future periods in which the underlying temporary differences are deductible. As of March 31, 2026, we had $10.5 million of federal net operating loss carryforwards that expire, if unused, in fiscal year 2039, and $42.5 million of federal net operating loss carryforwards that can be carried forward indefinitely. We also had $112.2 million of state net operating loss carryforwards that expire, if unused, in fiscal years 2027 through 2046. We maintain valuation allowances for deferred tax assets until we have sufficient evidence to support the reversal of all or some portion of the allowances. Based on recent earnings and anticipated future earnings, we released valuation allowances previously maintained against our businesses in Singapore and Hong Kong.

Fiscal 2025 Compared to Fiscal 2024

Net Revenue and Operating Income

The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2025 and 2024:

The following table presents the percentage relationship of our Consolidated Statements of Operations line items to our consolidated net revenues for the periods presented:

Net revenue. Total net revenue increased $38.2 million, or 16.1%, in fiscal 2025 compared to fiscal 2024. Products revenue decreased $7.8 million, or 15.8%, due to increasing customer preference for subscription-based software licenses instead of perpetual software licenses and to their decreasing need for hardware due to improvements we have made to our technology enabling more support for consumer grade devices our customers can source elsewhere. Subscription and maintenance revenue increased $32.0 million, or 23.2%, driven by continued growth in subscription-based revenue including service to Book4Time customers. Total subscription revenue increased 39.5% in fiscal 2025 compared to fiscal 2024. Professional services revenue increased $13.9 million, or 27.7%, due to higher sales and service activity as our new and existing customers continue implementing technology to improve their operations.

Gross profit and gross profit margin. Our total gross profit increased $27.7 million, or 19.2%, in fiscal 2025 and total gross profit margin increased from 60.7% to 62.4% compared to fiscal 2024 driven by changes in the composition of revenue by category. Products gross profit decreased $3.5 million, or 15.4%, and gross profit margin increased from 46.4% to 46.6% due to the composition of hardware and proprietary software products delivered. Subscription and maintenance gross profit increased $25.4 million, or 23.7%, and gross profit margin increased from 77.6% to 78.0% as revenue increases outpaced variable costs due to certain cost control measures. Professional services gross profit increased $5.8 million, or 40.9%, and gross profit margin increased from 28.4% to 31.3% reflecting improved utilization rates from efficiency gains on multi-solution implementations and revenue associated with a large development service contract.

Operating expenses

Operating expenses, excluding the charges for legal settlements and other charges, increased $17.2 million, or 13.6%, in fiscal 2025 compared with fiscal 2024. As a percent of total revenue, operating expenses have decreased 1.1% in fiscal 2025 compared with fiscal 2024.

Product development. Product development includes all expenses associated with research and development. Product development increased $5.7 million, or 10.0%, during fiscal 2025 as compared to fiscal 2024 due to hiring and increased compensation rates across our development teams and increased travel.

Sales and marketing. Sales and marketing increased $4.7 million, or 16.5%, in fiscal 2025 compared with fiscal 2024 due to hiring and increased compensation rates across our sales and marketing teams, and continued expansion of marketing event and trade show activity.

General and administrative. General and administrative increased $4.6 million, or 12.5%, in fiscal 2025 compared to fiscal 2024 due to investments in our information security and information technology infrastructure, increased compensation rates across our administrative teams and, during the quarter ended June 30, 2024, payroll taxes associated with certain exercises of stock-settled appreciation rights.

Depreciation of fixed assets. Depreciation of fixed assets decreased $0.2 million or 5.6% in fiscal 2025 as compared to fiscal 2024 due to the timing of assets reaching their useful life.

Amortization of internal-use software and intangibles. Amortization of internal-use software and intangibles increased $2.5 million or 182.5% in fiscal 2025 as compared to fiscal 2024 due to the addition of certain intangible assets resulting from the Book4Time acquisition.

Other charges, net. Other charges, net increased $2.9 million due to a significant increase in acquisition costs related to business combinations and a reduction of gains on asset disposals during fiscal 2025 compared to fiscal 2024.

Legal settlements, net. Legal settlements, net increased $0.8 million during fiscal 2025 compared to fiscal 2024 due to an increase in certain customer settlements.

Other Income (Expense)

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Interest income. Interest income consists of interest earned on cash equivalents including short-term investments in commercial paper, treasury bills and money market funds.

Interest expense. Interest expense consists of interest charges under our Credit Agreement and amortization of related debt issuance costs.

Other income (expense), net. Other income (expense), net mainly consists of movement of foreign currencies against the U.S. dollar.

Income Taxes

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For fiscal 2025, the effective tax rate was different than the statutory rate due primarily to the benefit of U.S. R&D credits and the release of valuation allowances recorded against foreign deferred tax assets, consisting primarily of Net Operating Losses.

We are consistently subject to tax audits. Due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months that we cannot anticipate.

The ultimate realization of deferred tax assets depends on various factors including the generation of taxable income during the future periods in which the underlying temporary differences are deductible. As of March 31, 2025, we had $29.7 million of federal net operating loss carryforwards that expire, if unused, in fiscal years 2036 to 2039, and $42.5 million of federal net operating loss carryforwards that can be carried forward indefinitely. We also had $111.5 million of state net operating loss carryforwards that expire, if unused, in fiscal years 2026 through 2043. We maintain valuation allowances for deferred tax assets until we have sufficient evidence to support the reversal of all or some portion of the allowances. Based on recent earnings and anticipated future earnings, we released valuation allowances previously maintained against our businesses in Singapore and Hong Kong.

Liquidity and Capital Resources

Overview

Our primary recurring source of cash is the collection of proceeds from the sale of products and services to our customers, including cash periodically collected in advance of delivery or performance.

Our cash requirements consist primarily of working capital needs, capital expenditures, and payments of contractual obligations. Our contractual obligations consist primarily of operating leases for office space and our Credit Agreement. We disclose our lease obligations in Note 6, Leases, to our Consolidated Financial Statements included under Item 8 of this Annual Report.

The Credit Agreement provides for a revolving credit facility in the initial maximum aggregate principal amount of $75.0 million (the Revolving Facility). The Revolving Facility includes the ability for the Company to request an increase in the commitments under the Revolving Facility by an additional aggregate principal amount of up to $25.0 million. On the Credit Agreement Closing Date, we drew $50.0 million on the Revolving Facility, the proceeds of which we used to fund the Business Combination described below. We disclose our Revolving Facility in Note 15, Debt, to our Consolidated Financial Statements included under Item 8 of this Annual Report.

We have expanded our business in part by investing in strategic growth through business acquisitions. We have used cash as consideration in our business acquisitions, including $145.8 million of net cash, partially funded by our Revolving Facility, during the year ended March 31, 2025, to complete the acquisition of Book4Time. We completed no business combinations during the years ended March 31, 2026 and 2024.

At March 31, 2026, 100% of our cash and cash equivalents, of which 94% were held in the United States, were deposited in bank accounts or invested in highly liquid investments including treasury bills with original maturity from the date of acquisition of three months or less and money market funds. We also invest in commercial paper. We determine the fair value of commercial paper using significant other observable inputs based on pricing from independent sources that use quoted prices in active markets for identical assets or other observable inputs including benchmark yields and interest rates. We believe credit risk is limited with respect to our cash and cash equivalents.

We believe that cash flow from operating activities, cash on hand of $116.9 million as of March 31, 2026, and access to our Revolving Facility and the broader capital markets will provide adequate funds to meet our short- and long-term liquidity requirements.

Cash Flows

Cash flows provided by operating activities. Cash flows provided by operating activities were $70.0 million in fiscal 2026 due to cash-based earnings of $77.8 million and a decrease of $7.8 million from the changes in operating assets and liabilities during fiscal 2026. Cash-based earnings is net income of $38.8 million and $39.0 million in non-cash adjustments including depreciation, amortization, share-based compensation, and deferred income taxes.

Cash flows provided by operating activities were $55.1 million in fiscal 2025. The provision of cash was due to cash-based earnings of $49.4 million and an increase of $5.7 million from the changes in operating assets and liabilities. Cash-based earnings is net income of $23.2 million and $26.2 million in non-cash adjustments including depreciation, amortization, share-based compensation, and deferred income taxes.

Cash flows provided by operating activities were $48.2 million in fiscal 2024. The provision of cash was due to cash-based earnings of $38.2 million and an increase of $10.0 million from the changes in operating assets and liabilities. Cash-based earnings is net income of $86.2 million and $48.0 million in non-cash adjustments including depreciation, amortization, share-based compensation, and deferred income taxes.

Cash flows used in investing activities. Cash flows used in investing activities in fiscal 2026 were $1.8 million consisting of property and equipment purchases.

Cash flows used in investing activities in fiscal 2025 were $148.6 million consisting primarily of $145.8 million in cash paid for business combinations, net of cash acquired, and property and equipment purchases, which decreased during the year ended March 31, 2025 compared to the year ended March 31, 2024 due primarily to leasehold improvements and equipment purchases for our new office lease in Chennai, India during fiscal 2024.

Cash flows used in investing activities in fiscal 2024 were $7.6 million due to $8.1 million in purchases of property and equipment, including internal use software and $0.5 million in cash received from the sale of fixed assets located at our India research and development center.

Cash flows provided by (used in) financing activities. Cash flows used in financing activities in fiscal 2026 were $24.5 million due to debt repayments of $24.0 million, proceeds from Employee Stock Purchase Plan purchases of $1.5 million, and share repurchases of $2.0 million to satisfy employee tax withholding on share-based compensation.

Cash flows provided by financing activities in fiscal 2025 were $21.9 million due to $49.6 million in debt proceeds, net of issuance costs, debt repayments of $26.0 million, proceeds from Employee Stock Purchase Plan purchases of $1.0 million, and share repurchases of $2.7 million to satisfy employee tax withholding on share-based compensation.

Cash flows used in financing activities in fiscal 2024 were $8.6 million due to share repurchases of $6.9 million to satisfy employee tax withholding on share-based compensation, and $1.7 million in preferred stock dividends.

Investments

Investments in Corporate-Owned Life Insurance Policies

Agilysys invests in corporate-owned life insurance policies for certain former executives, for which some are endorsement split-dollar life insurance arrangements. We entered into agreements with each of the former executives, whereby we must maintain the life insurance policy for a specified amount and split a portion of the policy benefits with their designated beneficiary. Our investment in these corporate-owned life insurance policies were recorded at their cash surrender value, which approximates fair value at the balance sheet date. On the Consolidated Balance Sheets at the balance sheet date, the cash surrender value of $1.1 million for the remaining policies were held in "Other non-current assets," and the present value of future proceeds owed to those executives' designated beneficiary of $0.1 million, which approximates fair value, were recorded within "Other non-current liabilities" in the Consolidated Balance Sheets at the balance sheet date.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies

Managements' Discussion and Analysis is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. We regularly evaluate our estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe 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.

Our most significant accounting policies relate to the sale, purchase, and promotion of our products and services. The policies discussed below are considered by management to be critical to an understanding of our Consolidated Financial Statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs.

For all these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.

Revenue recognition. We derive revenue from the sale of products (proprietary software licenses, third party hardware and operating systems), subscription and maintenance, and professional services.

Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master service or universal agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer order to specify the different goods and services, the associated prices, and any additional terms for an individual contract. Performance obligations specific to each individual contract are defined within the terms of each order. Each performance obligation is identified based on the goods and services that will be transferred to our customer that are both capable of being distinct and are distinct within the context of the contract. The transaction price is determined based on the consideration to which we will be entitled and expect to receive in exchange for transferring goods or services to the customer. Typically, our contracts do not provide our customer with any right of return or refund; we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or refund.

Typically, our customer contracts contain one or more of the following goods or services which constitute performance obligations.

Our proprietary software licenses typically provide for a perpetual right to use our software. Generally, our contracts do not provide significant services of integration and customization, and installation services are not required to be purchased directly from us. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We have concluded that the software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered or made available for download to the customer.

We recognize revenue for hardware sales when the product is shipped to the customer and when obligations that affect the customer's final acceptance of the arrangement have been fulfilled. Hardware is purchased from suppliers and provided to the end-user customers via drop-ship or from inventory. We are responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we ship or are notified by the supplier that the product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of destination or upon installation at the customer site.

Our subscription service revenue is comprised of fees for contracts that provide customers a right to access our software for a subscribed period. We do not provide the customer the contractual right to license the software at any time outside of the subscription period under these contracts. Our subscription service revenue is primarily based on rates per location, including rates per points of sale and per room. We recognize certain subscription service revenue on a per-transaction basis. The customer can only benefit from the software and software maintenance when provided the right to access the software. Accordingly, each of the rights to access the software, the maintenance services, any hosting services, and any transaction-based services are not considered a distinct performance obligation in the context of the contract and should be combined into a single performance obligation to be recognized over the contract period. The Company recognizes subscription revenue over monthly periods based on the typical service, invoicing and renewal cycle in accordance with our customer agreement terms.

We derive maintenance service revenue from providing unspecified updates, upgrades, bug fixes, and technical support services for our proprietary software. These services represent a stand-ready obligation that is concurrently delivered and has the same pattern of transfer to the customer; we account for these maintenance services as a single performance obligation. Maintenance revenue includes the same services provided by third-parties for remarketed software. We recognize substantially all maintenance revenue over the contract period of the maintenance agreement. We also recognize certain maintenance service revenue based on the volume of payment transactions processed by third parties through access to our software.

Professional services revenue primarily consists of fees for consulting, implementation, installation, integration and training and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are being performed. Certain professional development services are recognized upon delivery of the developed solutions to the customer. At the end of each reporting period, we recognize the most likely amount of variable consideration on any contract holdbacks we expect to bill for development services delivered. Professional services can be provided by internal or external providers, do not significantly affect the customer's ability to access or use other provided goods or services, and provide a measure of benefit beyond that of other promised goods or services in the contract. As a result, professional services are considered distinct in the context of the contract and represent a separate performance obligation. Professional services that are billed on a time and materials basis are recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation.

We use the market approach to derive standalone selling price (SSP) by maximizing observable data points (in the form of recently executed customer contracts) to determine the price customers are willing to pay for the goods and services transferred. Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold. Revenue is recorded net of any applicable taxes collected and remitted to governmental agencies.

Share-based compensation. We have an equity incentive plan under which we may grant non-qualified stock options, incentive stock options, stock-settled stock appreciation rights, restricted shares, restricted stock units and performance shares. Shares issued pursuant to awards under this plan may be made out of treasury or authorized but unissued shares.

We record compensation expense related to stock-settled stock appreciation rights, restricted shares, restricted stock units, performance shares, and employee stock purchase plan shares granted to certain employees and non-employee directors based on the fair value of the awards on the grant date. The fair value of restricted share and restricted stock unit grants subject only to a service condition is based on the closing price of our common shares on the grant date. For stock option and stock-settled appreciation right grants subject only to a service condition, we estimate the fair value on the grant date using the Black-Scholes-Merton option pricing model with inputs including the closing market price at grant date, exercise price and assumptions regarding the risk-free interest rate, expected volatility of our common shares based on historical volatility, and expected term as estimated using the simplified method. For employee stock purchase plan grants, we estimate the fair value on the grant date using the Black-Scholes-Merton option pricing model with inputs including the closing market price at grant date and assumptions regarding the risk-free interest rate, expected term, and expected volatility of our common shares over the offering period based on historical volatility. For restricted share, restricted stock unit and SSAR grants subject to a market condition, we estimate the fair value on the grant date through a lattice option pricing model that utilizes a Monte Carlo analysis with inputs including the closing market price at grant date, share price threshold, performance period term and assumptions regarding the risk-free interest rate and expected volatility of our common shares based on historical volatility. Inputs for SSAR grants subject to a market condition also include exercise price, remaining contractual term, and suboptimal exercise factor. Forfeitures of awards are recognized as they occur. Additional information regarding the assumptions used to value share-based compensation awards is provided in Note 13, Share-Based Compensation, to our Consolidated Financial Statements included under Item 8 of this Annual Report.

Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements included under Item 8 of this Annual Report for additional information about accounting pronouncements.