Washington, D.C. 20549
THE SHERWIN-WILLIAMS COMPANY
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PART I
ITEM 1. BUSINESS
Introduction
The Sherwin-Williams Company, founded in 1866 and incorporated in Ohio in 1884, is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe, Asia and Australia. Our principal executive offices are located at 101 West Prospect Avenue, Cleveland, Ohio 44115-1075, telephone (216) 566-2000. As used in this report, the terms “Sherwin-Williams,” “Company,” “we” and “our” mean The Sherwin-Williams Company and its consolidated subsidiaries unless the context indicates otherwise.
Available Information
We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.Commission (SEC). You may access these documents on our Investor Relations website, investors.sherwin-williams.com.investors.sherwin.com.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Independence Standards, our Code of Conduct and the charters of our Audit Committee, our Compensation and Management Development Committee and our Nominating and Corporate Governance Committee. You may access these documents on our Investor Relations website, investors.sherwin-williams.com.investors.sherwin.com.
Basis of Reportable Segments
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the Accounting Standards Codification (ASC).resources. The Company has three reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a "Reportable Segment"“Reportable Segment” and collectively, the “Reportable Segments”). Factors considered in determining the three Reportable Segments of the Company include the nature of business activities, the management structure directly accountable to the Company’s chief operating decision maker (CODM) for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors. The Company reports all other business activities and immaterial operating segments that are not reportable in the Administrative segment. For more information about the Reportable Segments, see Note 2123 to the Consolidated Financial Statements in Item 8.
The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the diverse operations of the Company, the CODM regularly receives discrete financial information about each Reportable Segment as well as a significant amount of additional financial information about certain divisions, business units or subsidiaries of the Company. The CODM uses all such financial information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources to the Reportable Segments based on profit or loss before income taxes and cash generated from operations. The accounting policies of the Reportable Segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in Item 8.
The Americas Group
The Americas Group consisted of 4,7584,931 company-operated specialty paint stores in the United States, Canada, Latin America and the Caribbean region at December 31, 2019.2022. Each store in this segment is engaged in servicing the needs of architectural and industrial paint contractors and do-it-yourself homeowners. The Americas Group company-operatedThese stores market and sell Sherwin-Williams® and other controlled brand architectural paint and coatings, protective and marine products, OEM product finishes and related products. The majority of these products are produced by manufacturing facilities in the Consumer Brands Group. In addition, each store sells select purchased associated products. In addition to our stores in the Latin America region, The Americas Group meets regional customer demands through developing, licensing, manufacturing, distributing and selling a variety of architectural paints, coatings and related products in North and South America. The loss of any single customer would not have a material adverse effect on the business of this segment. At December 31, 2019, The Americas Group consisted of operations from subsidiaries in 10 foreign countries. During 2019, this segment opened 62 net new stores, consisting of 94 new stores opened (83 in the United States, 7 in Canada, and 4 in South America) and 32 stores closed (6 in the United States, 17 in South America and 9 in Mexico). In 2018 and 2017, this segment opened 76 and 101 net new stores, respectively. The CODM uses discrete financial information about The Americas Group, supplemented with information by geographic region, product type and customer type, to assess performance of and allocate resources to The Americas Group as a whole. In accordance with ASC 280-10-50-9, The Americas Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Consumer Brands Group
The Consumer Brands Group manufactures and supplies a broad portfolio of branded and private-label architectural paint, stains, varnishes, industrial products, wood finishes products, wood preservatives, applicators, corrosion inhibitors, aerosols, caulks and adhesives to retailers and distributors throughout North America, as well as in Australia, New Zealand, China and Europe. The Consumer Brands Group also supports the Company'sCompany’s other businesses around the world with new product research and development, manufacturing, distribution and logistics. Approximately 57%67% of the total sales of the Consumer Brands Group in 20192022 were intersegment transfers of products primarily sold through The Americas Group. At December 31, 2019, the Consumer Brands Group consisted of operations in the United States and subsidiaries in 6 foreign countries, including company-operated outlets in Australia and New Zealand. Sales and marketing of certain controlled brand and private-label products is performed by a direct sales staff. The products distributed through third-party customers are intended for resale to the ultimate end-user of the product. The Consumer Brands Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overalland related profitability of the segment. This segment incurred most of the Company’s capital expenditures related to ongoing environmental compliance measures at sites currently in operation. The CODM uses discrete financial information about the Consumer Brands Group, supplemented with information by product type and customer type, to assess performance of and allocate resources to the Consumer Brands Group as a whole. In accordance with ASC 280-10-50-9, the Consumer Brands Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Performance Coatings Group
The Performance Coatings Group develops and sells industrial coatings for wood finishing and general industrial (metal and plastic) applications, automotive refinish, protective and marine coatings, coil coatings, packaging coatings and performance-based resins and colorants worldwide. This segment licenses certain technology and trade names worldwide. Sherwin-Williams® and other controlled brand products are distributed through The Americas Group and this segment’s 281 company-operated317 company-
operated branches and by a direct sales staff and outside sales representatives to retailers, dealers, jobbers, licensees and other third-party distributors. The Performance Coatings Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the segment. During 2019, this segment opened 3 new branches and closed 4 branches for a net decrease of 1 branch. At December 31, 2019, the Performance Coatings Group consisted of operations in the United States and subsidiaries in 45 foreign countries. The CODM uses discrete financial information about the Performance Coatings Group, supplemented with information about geographic divisions, business units and subsidiaries, to assess performance of and allocate resources to the Performance Coatings Group as a whole. In accordance with ASC 280-10-50-9, the Performance Coatings Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Administrative Segment
The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment is interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters and other expenses which are not directly associated with the Reportable Segments. The Administrative segment does not include any significant foreign operations. Also included in the Administrative segment is the operations of a real estate management unit that is responsible for the ownership, management, and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represent external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Material gains and losses from the sale of property are infrequent and not a significant operating factor in determining the performance of the Administrative segment.
Raw Materials and Products Purchased for Resale
Raw materials and products purchased for resale make up the majority of our consolidated cost of goods sold. Raw materials may vary considerably by the specific paint or coating being manufactured but can generally be divided into the following categories: resins and latex, pigments, additives, solvents, and metal or plastic containers. A significant portion of these raw materials are derived from various upstream petrochemical and related commodity feedstocks, notably propylene. Raw materials are sourced from multiple suppliers globally, typically within the geographic region where our products are being manufactured. A portion of specialized resins and other products are manufactured in house. We believe we generally have adequate sourcesalso purchase a variety of products for resale that are highly complementary to our paint and coating offerings, notably spray equipment and parts, floorcovering, and assorted sundries. We attempt, if feasible, to mitigate our potential risk associated with the sourcing of our raw materials and fuel supplies used inother products through inventory management, strategic relationships with key suppliers, alternative sourcing strategies and long-term investments to expand our business. There are sufficient suppliers of each product purchased for resale that none of the Reportable Segments anticipate any significant sourcing problems during 2020.manufacturing capabilities. See Item 1A Risk Factors for more information regarding cost and sourcing of raw materials.
Seasonality
The majority of the sales for the Reportable Segments traditionally occur during the second and third quarters. However, periods of economic downturn can alter these seasonal patterns. There is no significant seasonality in sales for the Administrative segment.
Working Capital
In order to meet increased demand during the second and third quarters, the Company usually builds its inventories during the first quarter. Working capital items (inventories and accounts receivable) are generally financed through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper. For a description of the Company’s liquidity and capital resources, see the “Financial Condition, Liquidity and Cash Flow” section in Item 7.
Trademarks and Trade Names
Customer recognition of our trademarks and trade names owned or licensed by the Company collectively contribute significantly to our sales. The major trademarks and trade names used by each of the Reportable Segments are set forth below.
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• | The Americas Group: Sherwin-Williams®, Cashmere®, Colorgin®, Duration®, Emerald®, Harmony®, Kem Tone®, Loxon®, Metalatex®, Novacor®, Paint Shield®, ProClassic®, ProIndustrial™•The Americas Group: Sherwin-Williams®, A-100®, Builders Solution®, Captivate®, Cashmere®, Colorgin®, Condor®, Duration®, Emerald®, Kem Tone®, Latitude®, Loxon®, Metalatex®, Novacor®, Painters Edge Plus™, ProClassic®, ProCraft®, Pro Industrial™, ProMar®, SuperDeck®, SuperPaint®, Woodscapes® •Consumer Brands Group: Cabot®, Dupli-Color®, Dutch Boy®, Geocel®, HGTV HOME® by Sherwin-Williams, Huarun®, Krylon®, Minwax®, Purdy®, Ronseal®, Thompson’s® WaterSeal®, Valspar®, White Lightning® •Performance Coatings Group: Sherwin-Williams®, Acrolon®, AcromaPro®, ATX®, DeBeer Refinish®, Duraspar®, EcoDex®, Envirolastic®, Excelo®, EzDex®, Fastline®, Firetex®, Fluropon®, Heat-Flex®, House of Kolor®, Huarun®, Inver®, Kem Aqua®, Lazzuril®, Macropoxy®, Martin Senour®, Matrix Edge®, M.L. Campbell®, Octoral®, PermaClad®, Polane®, Powdura®, Sayerlack®, Sher-Wood®, Sumaré®, Ultra 9K®, Ultra 7000®, ValPure®, Valspar®
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• | Consumer Brands Group: Cabot®, Duckback®, Dupli-Color®, Dutch Boy®, Geocel®, HGTV HOME® by Sherwin-Williams, Huarun®, Krylon®, Minwax®, Pratt & Lambert®, Purdy®, Ronseal®, Solver®, Thompson’s® WaterSeal®, Valspar®, Wattyl®, White Lightning®
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• | Performance Coatings Group: Sherwin-Williams®, Acrolon®, AcromaPro®, ATX®, AWX Performance Plus™, DeBeer®, Dimension®, Duraspar®, EcoDex®, Envirolastic®, Euronavy®, Excelo®, EzDex®, Fastline®, Firetex®, Fluropon®, Heat-Flex®, House of Kolor®, Huarun®, Kem Aqua®, Lazzuril®, Macropoxy®, Martin Senour®, ML Campbell®, Perma-Clad®, Planet Color®, Polane®, Powdura®, Sayerlack®, Sher-Wood®, Sumaré®, Ultra™, ValPure® , Valspar®
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Patents
Although patents and licenses are not of material importance to our business as a whole or any segment, The Americas Group and the Performance Coatings Group derive a portion of their income from the licensing of technology, trademarks and trade names to foreign companies.
Backlog and Productive Capacity
Backlog orders are not typically significant in the business of any Reportable Segment since there is normally a short period of time between the placing of an order and shipment. During 2022, we experienced raw material shortages and labor constraints that impacted our production and ability to meet customer orders. We believe that sufficient productive capacity currently exists to fulfill our needs for paint, coatings and related products through 2020.during 2023.
Competition
We experience competition from many local, regional, national and international competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products. We are a leading manufacturer and retailer of paint, coatings and related products to professional, industrial, commercial and retail customers, however, our competitive position varies for our different products and markets.
In The Americas Group, competitors include other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated direct outlets. Product quality, product innovation, breadth of product line, technical expertise, service and price determine the competitive advantage for this segment.
In the Consumer Brands Group, domestic and foreign competitors include manufacturers and distributors of branded and private-label paint and coatings products. Technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price are the key competitive factors for this segment.
The Performance Coatings Group has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Key competitive factors for this segment include technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price.
The Administrative segment has many competitors consisting of other real estate owners, developers and managers in areas in which this segment owns property. The main competitive factors are the availability of property and price.
EmployeesHuman Capital Resources
The success of our business and ability to execute on our strategy depend in large part on our ability to attract, retain, develop and progress a diverse population of qualified employees at all levels of our organization. At December 31, 2022, we employed 64,366 people worldwide, of which 75% were in the United States and 25% were in other global regions.
Our commitment to our people is embedded in the Company’s corporate purpose and guiding values. Through our purpose, we strive to inspire and improve the world by coloring and protecting what matters. Our employees are instrumental in fulfilling this purpose through the development, manufacture, distribution and sale of innovative paint and coatings products. The Company’s seven guiding values — integrity, people, service, quality, performance, innovation and growth — drive how we fulfill our purpose, emphasize the importance of our global workforce and serve as the foundation of our culture of excellence.
We employed 61,111 personshave developed key strategies, objectives and measures as part of the overall management of our business that support our global workforce and enable us to attract, retain, develop and progress top talent in a competitive labor market. These strategies, objectives and measures are advanced through programs, policies and initiatives focused on inclusion, diversity and equity (ID&E), talent acquisition and employee engagement, occupational health and safety and total rewards, which includes compensation and benefits programs and practices.
Inclusion, Diversity and Equity. We strive to foster a culture of inclusion and belonging where differences are welcomed, appreciated and celebrated to positively impact our people and business. Reflected in the Company’s Code of Conduct and reinforced through our actions, training and attitudes, fostering an inclusive culture is a moral and business imperative. The building blocks of our ID&E strategy include:
•Educate and communicate to drive success: Building awareness of inclusive leadership behaviors to leverage the unique contributions of each employee to positively impact our people and business results.
•Fill the pipeline with the best talent: Attracting the best talent pool that reflects the diversity of the communities in which we serve and do business.
•Develop and engage talent by investing in our people: Investing in our people by providing networking and learning opportunities to drive retention, progression and engagement.
•Progress talent by embedding equity into talent planning: Embedding equity into talent practices, processes, tools and resources at December 31, 2019.all levels.
Creating a supportive, welcoming environment across our global footprint is the shared responsibility of all employees, including our senior leaders. Each year, our senior leaders attend an ID&E education and training session to assist us in maintaining our commitment to leading with inclusion and leveraging the diversity of our workforce. During 2022, we held our annual CEO Forums on Inclusion, which are designed to encourage open discussions with employees that are led by our Chief Executive Officer and other senior leaders about opportunities to advance our culture of inclusion and belonging. We also continued our focus on driving allyship and empathy through conscious inclusion training across our global workforce and elevating the visibility and prominence of our Employee Resource Groups (ERGs). These voluntary, employee-led networks are organized around a shared underrepresented demographic, and membership spans across 250 chapters globally. ERGs bring together employees from various groups, divisions and functional teams to foster more inclusive workplaces, create greater synergy around business objectives and serve as a hub for professional development and mentorship opportunities that enable our employees to thrive and find long-term success at Sherwin-Williams.
Talent Acquisition and Employee Engagement. Through our integrated talent management strategy, we strive to attract, retain, develop and progress a workforce that embraces our culture of inclusion and reflects our diversity efforts. This strategy connects major milestones in the employee journey, including talent acquisition, onboarding, performance management, leadership and management development, succession and career progression, and is supported by our focus on employee engagement, ID&E, workforce analytics and human resources information technology governance. The Company’s early talent programs, including our management trainee program and similar programs across our global business, play a critical role in attracting, developing and advancing a diverse pipeline of talent. During 2022, we hired approximately 1,400 college graduates through our management trainee program as part of our long-term growth initiatives. We also partner with various colleges and universities, including Historically Black Colleges and Universities and Hispanic-Serving Institutions, to attract women, underrepresented racial or ethnic groups, individuals with disabilities, veterans and other candidates into the talent pipeline.
We invest in our people by providing learning and employee networking opportunities, including through our ERGs, to drive retention, development and engagement and help employees excel in their current and future roles. During 2022, our employees completed thousands of hours of online and instructor-led courses across a broad range of categories, including leadership, ID&E, professional skills, technical and compliance. We measure our progress toward creating an inclusive culture that empowers employees to learn, grow and achieve their aspirations by conducting periodic pulse surveys and our global engagement survey, which we first conducted during 2021 and expect to conduct every other year. We are focused on using these survey results to drive continued progress with our efforts.
Occupational Health and Safety. Providing safe and healthy working environments for our employees is a core value. We have a consistent focus on Environmental, Health and Safety excellence that promotes employee health and safety, process safety, and occupational health, including evaluation and implementation of reasonable preventative measures to reduce workplace injuries and illness. We strive for incident-free workplaces — continuously assessing and improving the programs that are in place to help keep our employees, customers and communities safe.
Since the onset of the COVID-19 pandemic, we have implemented modifications throughout our business and health and safety programs designed to protect the health and well-being of our employees and customers. These efforts have included, and may continue to include where necessary and appropriate, enhanced cleaning and sanitation procedures and return to work protocols. These efforts also continue to include permitting remote, alternate and flexible work arrangements where possible to promote increased flexibility and support employee health and safety, while maintaining our focus on innovation, collaboration, and engagement.
Total Rewards. We prioritize the fair, consistent and equitable treatment of our employees in relation to working conditions, wages, benefits, policies and procedures. The Company’s policies and programs are designed to respond to the needs of our employees in a manner that provides a safe, professional, efficient and rewarding workplace. Our total rewards programs are designed to offer competitive compensation, comprehensive benefits and other programs to support employees’ growth, both personally and professionally, and the diverse needs and well-being of our employees worldwide.
Over the past few years, we have enhanced certain of the Company’s benefits and practices to support the health and well-being of our employees through the COVID-19 pandemic and other challenges. Our enhanced benefits have included tele-health, paid sick leave, family leave and voluntary leave of absence policies and programs. We also have rewarded our employees’ resiliency and hard work and made changes in our business to encourage retention, including through wage increases, reduced store hours and employee benefits enhancements. During 2022, we continued enhancing the benefits we provide to our employees, including by extending our employee assistance program to our global workforce. The program provides mental
health and well-being, family, career, lifestyle, legal and financial resources, tools and services designed to support our employees across all aspects of their lives.
Regulatory Compliance
For additional information regarding environmental-related matters, see Notes 1, 1011 and 1820 to the Consolidated Financial Statements in Item 8.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Letter to Shareholders” and elsewhere in this report constitute “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are based upon management'smanagement’s current expectations, predictions, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and
earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "believe," "expect," "may," "will," "should," "project," "could," "plan," "goal," "potential," "seek," "intend"“believe,” “expect,” “may,” “will,” “should,” “project,” “could,” “plan,” “goal,” “target,” “potential,” “seek,” “intend,” “aspire,” “strive” or "anticipate"“anticipate” or the negative thereof or comparable terminology.
Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements and from our historical results, performance and experience. These risks, uncertainties and other factors include such things as:
•general business conditions, strengths of retail and manufacturing economies and growth in the coatings industry;
•changes in general domestic and international economic conditions, such asincluding due to higher inflation rates, interest rates, tax rates and unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations;
•changes in raw material and energy supplies and pricing;
•disruptions in the supply chain, including those caused by industry capacity constraints, labor shortages, raw material availability, and transportation and logistics delays and constraints;
•adverse weather conditions or natural disasters, including those that may be related to climate change or otherwise, and public health crises, including the COVID-19 pandemic;
•losses of or changes in our relationships with customers and suppliers;
•competitive factors, including pricing pressures and product innovation and quality;
•our ability to successfully integrate past and future acquisitions into our existing operations, as well as the performance of the businesses acquired;
competitive factors, including pricing pressures and product innovation and quality;
•our ability to attain cost savings fromachieve expected benefits of restructuring and productivity initiatives;
•weakening of global credit markets and our ability to generate cash to service our indebtedness;
•risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, policy changes affecting international trade, political instability, inflation rates, recessions, sanctions, foreign currency exchange rates and controls, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, armed conflict (including the ongoing conflict between Russia and Ukraine), war and other external economic and political factors;
•the achievement of growth in foreign markets, such as Asia, Europe and South America;
•cybersecurity incidents and other disruptions to our information technology systems and operations;
•our ability to protect or enforce our material trademarks and other intellectual property rights;
•our ability to attract, retain, develop and progress a qualified global workforce;
•damage to our business, reputation, image or brands due to negative publicity;
•increasingly stringent domestic and foreign governmental regulations, including those affecting health, safety and the environment;
•inherent uncertainties involved in assessing our potential liability for environmental-related activities;
•other changes in governmental policies, laws and regulations, including changes in tariff policies, as well as changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax lawlaws or interpretations); and
•the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation, and the effect of any legislation and administrative regulations relating thereto; and
adverse weather conditions or impacts of climate change, natural disasters and public health crises.thereto.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
ITEM 1A. RISK FACTORS
The risks described below and in other documents we file from time to time with the Securities and Exchange CommissionSEC could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. While we believe we have identified and discussed below the key risks affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, results of operations, cash flow, liquidity or financial condition in the future. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized.
ECONOMIC AND STRATEGIC RISKS
Adverse changes in general business and economic conditions in the United States and worldwide may adversely affect our results of operations, cash flow, liquidity or financial condition.
Our business is sensitive to global and regional business and economic conditions. Adverse changes in such conditions in the United States and worldwide may reduce the demand for some of our products, adversely impact our ability to predict and meet any future changes in the demand for our products, and impair the ability of those with whom we do business to satisfy their obligations to us, each of which could adversely affect our results of operations, cash flow, liquidity or financial condition. Higher inflation rates, interest rates, tax rates and unemployment rates, higher labor and healthcare costs, recessions, changing governmental policies, laws and regulations, business disruptions due to cybersecurity incidents, terrorist activity, armed conflict (including the ongoing conflict between Russia and Ukraine), war, public health crises fires(including the COVID-19 pandemic), adverse weather conditions or other natural disasters (including those that may be related to climate change or otherwise), supply chain disruptions (including those caused by industry capacity constraints, labor shortages, raw material availability, and transportation and logistics delays and constraints), and other economic factors have in the past and could alsoin the future adversely affect demand for some of our products, our ability to predict and meet any future changes in the demand for our products, the availability, anddelivery or cost of raw materials, our ability to adequately staff and maintain operations at affected facilities and our results of operations, cash flow, liquidity or financial condition and that of our customers, vendors and suppliers.
A weakening or reversal of the general economic recovery With respect to inflation in particular, we expect inflationary pressure to impact consumer behavior during 2023, including in the United States and other countriesEurope housing markets and regionsas a result of elevated mortgage rates. Any such shift in which we do business, or the continuation or worsening of economic downturns in other countries and regions, may adversely affect our results of operations, cash flow, liquidity or financial condition.
Global economic uncertainty continues to exist. A weakening or reversal of the general economic recovery in the United States and other countries and regions in which we do business, or the continuation or worsening of economic downturns in other countries and regions, may adversely impact our net sales, the collection of accounts receivable, funding for working capital needs, expected cash flow generation from current and acquired businesses, and our investments, which may adversely impact our results of operations, cash flow, liquidity or financial condition.
We finance a portion of our sales through trade credit. Credit markets remain tight, and some customers who require financing for their businesses have not been able to obtain necessary financing. A continuation or worsening of these conditions could limit our ability to collect our accounts receivable, whichconsumer behavior could adversely affect our results of operations, cash flow, liquidity or financial condition.
We generally fund a portion of our seasonal working capital needs and obtain fundingthe demand for other general corporate purposes through short-term borrowings backed by our revolving credit facility and other financing facilities. If any of the banks in these credit and financing facilities are unable to perform on their commitments, such inability could adversely impact our cash flow, liquidity or financial condition, including our ability to obtain funding for working capital needs and other general corporate purposes.
Although we currently have available credit facilities to fund our current operating needs, we cannot be certain we will be able to replace our existing credit facilities or refinance our existing or future debt when necessary. Our cost of borrowing and ability to access the capital markets are affected not only by market conditions, but also by our debt and credit ratings assigned by the major credit rating agencies. Downgrades in these ratings will increase our cost of borrowing and could have an adverse effect on our access to the capital markets, including our access to the commercial paper market. An inability to access the capital markets could have a material adverse effect on our results of operations, cash flow, liquidity or financial condition.
We have goodwill and intangible assets recorded on our balance sheet. We periodically evaluate the recoverability of the carrying value of our goodwill and intangible assets whenever events or changes in circumstances indicate such value may not be recoverable. An impairment assessment involves judgment as to assumptions regarding future sales and cash flow and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions and change our estimates of future sales and cash flow, resulting in us incurring substantial impairment charges, which would adversely affect our results of operations or financial condition.
We hold investments in equity and debt securities in some of our defined benefit pension plans. A decrease in the value of plan assets resulting from a general financial downturn may cause a negative pension plan investment performance, which may adversely affectproducts and our results of operations, cash flow, liquidity or financial condition.
Protracted duration of economic downturns in cyclical segments of the economy may depress the demand for some of our products and adversely affect our sales, earnings, cash flow or financial condition.
Portions of our business involve the sale of paint, coatings and related products to segments of the economy that are cyclical in nature, particularly segments relating to construction, housing, manufacturing and oil production, refining, storage and transportation. Our sales to these segments are affected by the levels of discretionary consumer and business spending in these segments. During economic downturns in these segments, the levels of consumer and business discretionary spending may decrease, and the recovery of these segments may lag behind the recovery of the overall economy. This decrease in spending likely will likely reduce the demand for some of our products and may adversely affect our sales, earnings, cash flow or financial condition.
AlthoughIn response to increasing inflation, the U.S. Federal Reserve began to raise interest rates remain low by historical standards,in March 2022 and since then, has signaled it expects to make additional rate increases. We expect inflationary pressure to impact consumer behavior during 2023, particularly in the United States and Europe housing markets and as a result of elevated mortgage rates. Rising interest rates and any increasesuch shift in consumer behavior may adversely affect the demand for new residential homes, existing home turnover and new non-residential construction. A worsening in these segments will reduce the demand for some of our products and may adversely impact sales, earnings and cash flow.
In the U.S. construction and housing segments, the recent demand for new construction has causedwe continue to see project backlogs due to contractors to experienceexperiencing a shortage of skilled workers, resulting in project backlogs and an adverse effect on the growth rate of demand for our products. While we would typically expect to see higher demand for our products as project backlogs are reduced in the future, thisrising inflation and other economic
conditions may delay a recovery in demand, which may result in the labor shortage mayand such other conditions adversely impactimpacting our sales, earnings, cash flow or financial condition.
IncreasesPublic health crises, including pandemics and the measures taken by public health and governmental authorities to address them, could adversely impact our business, results of operations, cash flow, liquidity and financial condition in the costfuture.
Our business, results of raw materialsoperations, cash flow and energyfinancial condition were adversely affected by the COVID-19 pandemic, including the impacts resulting from efforts by public health and governmental authorities to contain and combat the outbreak and spread of COVID-19. The pandemic caused us to make significant changes throughout our business designed to protect the health and well-being of our employees and customers. These changes resulted in additional costs and adversely impacted our business and financial performance. We continue to evaluate the changes we have made in our business and work with public health, government and other authorities and organizations, as necessary and appropriate, to maintain our operations and support the health and well-being of our employees, customers and their families. The pandemic also severely impacted the global economy (and continues to impact certain regional economies more than others), disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets, all of which have adversely affected our business, including as a result of occasional, temporary disruptions and closures of some of our facilities, shifts in consumer behaviors and preferences and impacts in the demand for some of our products.
Public health crises (including the COVID-19 pandemic if current conditions were to worsen for an extended period) and the measures taken by public health and governmental authorities to address them, could adversely impact our business, results of operations, cash flow, liquidity and financial condition in the future. The extent of the impact of any public health crisis to our business will depend on numerous factors that we may not be able to predict or control, including, but not limited to: (a) the duration, severity and scope of the crisis, including the spread of new virus strains and variants; (b) rapidly-changing governmental and public health directives to address it; (c) the development, availability, effectiveness and distribution of treatments and vaccines; (d) the extent and duration of its adverse and/or volatile effects on economic and social activity, supply chain logistics, inflationary pressures, consumer confidence, discretionary spending and preferences, labor and healthcare costs, labor markets and unemployment rates; (e) our ability to sell, provide and meet the demand for our services and products; (f) any temporary reduction in our workforce or closures of our offices and facilities and our ability to adequately staff and maintain our operations; (g) the ability of our customers and suppliers to continue their operations; and (h) any impairment in value of our tangible or intangible assets which could be recorded as a result of weaker economic conditions.
FINANCIAL RISKS
A weakening of global credit markets could adversely affect our earningsresults of operations, cash flow, liquidity or financial condition.
A weakening of global credit markets could adversely impact our net sales, the collection of accounts receivable, funding for working capital needs, expected cash flow.flow generation from current and acquired businesses, access to capital and our investments, which could adversely impact our results of operations, cash flow, liquidity or financial condition.
We purchase raw materials (including titanium dioxidefinance a portion of our sales through trade credit. Credit markets remain tight, and petrochemical feedstock sources, such as propylenesome customers who require financing for their businesses have not been able to obtain, and ethylene) and energy for usemay in the manufacturing, distribution and salefuture have difficulty obtaining, necessary financing. A continuation or worsening of these conditions could limit our ability to collect our accounts receivable, which could adversely affect our results of operations, cash flow, liquidity or financial condition.
We generally fund a portion of our products. Factors such as political instability, higher tariffsseasonal working capital needs and adverse weather conditions, including hurricanes,obtain funding for other general corporate purposes through short-term borrowings backed by our revolving credit facility and other natural disasters can disrupt raw materialfinancing facilities. If any of the banks in these credit and fuel supplies and increase our costs. In addition, environmental and social regulations, including regulations related to climate change, may negatively impact us or our suppliers in terms of availability and cost of raw materials, as well as sources and supply of energy. Although raw materials and energy supplies (including oil and natural gas) are generally available from various sources in sufficient quantities, unexpected
shortages and increases in the cost of raw materials and energy, or any deterioration in our relationships with or the financial viability of our suppliers, may have an adverse effect on our earnings or cash flow in the event wefinancing facilities are unable to offset higher costs in a timely manner by sufficiently decreasingperform on their commitments, such inability could adversely impact our operating costscash flow, liquidity or raising the prices offinancial condition, including our products. In recent years, some raw materialability to obtain funding for working capital needs and energy prices have increased, particularly titanium dioxide and petrochemical feedstock sources, such as propylene and ethylene, as well as metal and plastic packaging. The cost of raw materials and energy has in the past experienced, and likely will in the future continue to experience, periods of volatility.other general corporate purposes.
Although we have an extensive customer base,available credit facilities to fund our current operating needs, we cannot be certain we will be able to replace our existing credit facilities or refinance our existing or future debt when necessary. Our cost of borrowing and ability to access the losscapital markets are affected not only by market conditions, but also by our debt and credit ratings assigned by the major credit rating agencies. Downgrades in these ratings likely would increase our cost of any of our largest customers could adversely affect our sales, earnings or cash flow.
We have a largeborrowing and varied customer base due to our extensive distribution network. During 2019, no individual customer accounted for sales totaling more than ten percent of our sales. However, we have some customers that, individually, purchase a large amount of products from us. Although our broad distribution channels help to minimize the impact of the loss of any one customer, the loss of any of these large customers could have an adverse effect on our sales, earnings or cash flow.
Increased competition may reduceaccess to the capital markets, including our sales, earnings oraccess to the commercial paper market. An inability to access the capital markets could have a material adverse effect on our results of operations, cash flow, performance.liquidity or financial condition.
We face substantial competition from many international, national, regionalhave goodwill and local competitorsintangible assets recorded on our balance sheet. We periodically evaluate the recoverability of various sizes in the manufacture, distribution and salecarrying value of our paint, coatingsgoodwill and related products. Someintangible assets whenever events or changes in circumstances indicate such value may not be recoverable. An impairment assessment involves judgment as to assumptions regarding future sales and cash flow and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our competitors are larger than us assumptions
and have greater financial resources to compete. Other competitors are smaller and may be able to offer more specialized products. Technology, product quality, product innovation, breadthchange our estimates of product line, technical expertise, distribution, service and price are the key competitive factors for our business. Competition in any of these areas may reduce ourfuture sales and cash flow, resulting in us incurring substantial impairment charges, which would adversely affect our earningsresults of operations or financial condition.
We hold investments in equity and debt securities in some of our defined benefit pension plans. A decrease in the value of plan assets resulting from a general financial downturn may cause a negative pension plan investment performance, which may adversely affect our results of operations, cash flow, by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products.liquidity or financial condition.
We require a significant amount of cash to service the substantial amount of debt we have outstanding. Our ability to generate cash depends on many factors beyond our control. We also depend on the business of our subsidiaries to satisfy our cash needs. If we cannot generate the required cash, we may not be able to make the necessary payments required under our indebtedness.
At December 31, 2019,2022, we had total debt of approximately $8.7$10.570 billion, which is a decreasean increase of $658.5$954.7 million since December 31, 2018.2021. We have the ability under our existing credit facilities to incur substantial additional indebtedness in the future. Our ability to make payments on our debt, fund our other liquidity needs, and make planned capital expenditures will depend on our ability to generate cash in the future. Our historical financial results have been, and we anticipate our future financial results will be, subject to fluctuations. Our ability to generate cash, to a certain extent, is subject to general business, economic, financial, competitive, legislative, regulatory and other factors beyond our control.control, including public health crises, such as the COVID-19 pandemic, adverse weather conditions or natural disasters (including those that may be related to climate change or otherwise), supply chain disruptions, changes in raw material and energy supplies and pricing and related impacts. We cannot guarantee our business will generate sufficient cash flow from our operations or future borrowings will be available to us in an amount sufficient to enable us to make payments of our debt, fund other liquidity needs and make planned capital expenditures.
The degree to which we are currently leveraged could have important consequences for shareholders. For example, it could:
•require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other long-term growth initiatives and general corporate purposes;
•increase our vulnerability to adverse business, economic or industry conditions;
•limit our ability to obtain additional financing in the future to enable us to react to changes in our business;business or general business, economic or industry conditions; or
•place us at a competitive disadvantage compared to businesses in our industry that have less debt.
Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default which, if not cured or waived, would have a material adverse effect on us.
A significant portion of our operations are conducted through our subsidiaries. As a result, our ability to generate sufficient cash flow for our needs is dependent to some extent on the earnings of our subsidiaries and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on our debt or to provide us with funds to meet our cash flow needs, whether in the form of dividends, distributions, loans or other payments. In addition,Further, any payment of dividends, loans or advances by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. In addition, evenEven if we are a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us. Finally, changes in the laws of foreign jurisdictions in which we operate may adversely affect the ability of some of our foreign subsidiaries to repatriate funds to us.
Fluctuations in foreign currency exchange rates could adversely affect our results of operations, cash flow, liquidity or financial condition.
Because of our international operations, we are exposed to risk associated with interest rates and value changes in foreign currencies, which may adversely affect our business. Historically, our reported net sales, earnings, cash flow and financial condition have been subjected to fluctuations in foreign exchange rates. Our primary exchange rate exposure is with the Euro, the Chinese yuan, the Canadian dollar, the Brazilian real, the British pound, and the Mexican peso, each against the U.S. dollar. While we actively manage the exposure of our foreign currency risk as part of our overall financial risk management policy, we believe we may experience losses from foreign currency exchange rate fluctuations, and such losses could adversely affect our sales, earnings, cash flow, liquidity or financial condition.
OPERATIONAL RISKS
Unexpected shortages and increases in the cost of raw materials and energy may adversely affect our earnings or cash flow.
We purchase raw materials (including petrochemical-derived resins, latex and solvents, titanium dioxide and various additives) and energy for use in the manufacturing, distribution and sale of our products. Factors such as political instability, higher tariffs, supply chain disruptions, adverse weather conditions and natural disasters (including those that may be related to climate change or otherwise), or public health crises have disrupted, and may in the future disrupt, the availability of raw material and fuel supplies, adversely impact our ability to meet customer demands for some of our products or adequately staff and maintain operations at affected facilities and increase our costs. In addition, environmental and social regulations, including regulations related to climate change or otherwise, may negatively impact us or our suppliers in terms of availability and cost of raw materials, as well as sources and supply of energy.
Although raw materials and energy supplies (including oil and natural gas) are generally available from various sources in sufficient quantities, unexpected shortages and increases in the cost of raw materials and energy, or any deterioration in our relationships with or the financial viability of our suppliers, may have an adverse effect on our earnings or cash flow. In the event we experience supply chain disruptions from our suppliers, we may not be able to timely shift to internal production or secure alternate sources in order to prevent significant impacts to our business, or we may experience quality issues with raw materials and energy sourced from alternate sources. During 2022, industry-wide shortages of alkyd resins impacted our ability to manufacture and meet the demand of some of our products, including certain stains, aerosols and industrial products. If these shortages continue or worsen, and we are unable to offset the shortages through internal production or alternate sources, we may experience adverse impacts to our business, including adverse effects to our earnings and cash flow.
If the cost of raw materials and energy increases, we may not be able to offset higher costs in a timely manner by sufficiently decreasing our operating costs or raising the prices of our products. In recent years, some raw material and energy prices have increased, particularly titanium dioxide and petrochemical feedstock sources, such as propylene and ethylene, as well as metal and plastic packaging. While we have started to see a decline in some raw material prices in recent months, the cost of raw materials and energy could continue to experience periods of volatility in the future and may adversely affect our earnings and cash flow.
Adverse weather conditions and natural disasters, including those that may be related to climate change or otherwise, may temporarily reduce the demand for some of our products, impact our ability to meet the demand for our products or cause supply chain disruptions and increased costs, and could have a negative effect on our sales, earnings or cash flow.
Our business is seasonal in nature, with the second and third quarters typically generating a higher proportion of sales and earnings than other quarters. From time to time, adverse weather conditions and natural disasters, including those that may be related to climate change or otherwise, have had or may have an adverse effect on our sales, manufacture and distribution of paint, coatings and related products. In the event adverse weather conditions or a natural disaster cause significant damage to any one or more of our principal manufacturing or distribution facilities, we may not be able to manufacture the products needed to meet customer demand, which could have an adverse effect on our sales of certain paint, coatings and related products.
Also from time to time, the impact of these risks to our suppliers have had or may have an adverse effect on our sales, manufacture and distribution of certain of our products. Adverse weather conditions or natural disasters and their impacts have resulted, and may in the future result, in industry-wide supply chain disruptions, increased raw material and other costs, and our hindered ability to manufacture the products needed to fully meet customer demand.
In any of these instances, an adverse effect on sales may cause a reduction in our earnings or cash flow.
Although we have an extensive customer base, the loss of any of our largest customers could adversely affect our sales, earnings or cash flow.
We have a large and varied customer base due to our extensive distribution platform. During 2022, no individual customer accounted for sales totaling more than ten percent of our sales. However, we have some customers that, individually, purchase a large amount of products from us. Although our broad distribution channels help to minimize the impact of the loss of any one customer or the loss of a significant amount of sales to any one customer, the loss of any of these large customers, or the loss of significant amount of sales to any of these large customers, could have an adverse effect on our sales, earnings or cash flow.
Increased competition or failure to keep pace with developments in key competitive areas of our business may reduce our sales, earnings or cash flow performance.
We face substantial competition from many international, national, regional and local competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products. Some of our competitors operate more extensively in certain regions around the world and have greater financial or operational resources to compete internationally.
Other competitors are smaller and may be able to offer more specialized products. Technology, product quality, product innovation and development (including relating to increased customer interest in the sustainability attributes of products and our related key strategies and initiatives for expanding our product offerings), breadth of product line, technical expertise, distribution, service and price are key competitive factors for our business. Competition in any of these areas, or failure to keep pace with developments in any of these areas, may reduce our sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products.
Our results of operations, cash flow or financial condition may be negatively impacted if we do not successfully integrate past and future acquisitions into our existing operations and if the performance of the businesses we acquire do not meet our expectations.
We have historically made strategic acquisitions of businesses in the paint and coatings industry and likely will likely acquire additional businesses in the future as part of our long-term growth strategy.strategy and initiatives. During 2022, we invested $1.003 billion to complete five acquisitions. The success of past and future acquisitions depends in large part on our ability to integrate the operations and personnel of the acquired companies and manage challenges that may arise as a result of the acquisitions, particularly when the acquired businesses operate in new or foreign markets. In the event we do not successfully integrate such past and future acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.
We may not successfully execute or achieve the expected benefits of our current business restructuring plan or other productivity initiatives we may take in the future.
In the fourth quarter of 2022, we approved a business restructuring plan to simplify our operating model and portfolio of brands within the Consumer Brands Group and to reduce costs in all regions in the Consumer Brands Group, Performance Coatings Group and the Administrative segment. Key focus areas within the Consumer Brands Group include the China architectural business, aerosol portfolio and optimization of the overall retail portfolio. The majority of these restructuring actions are expected to be completed by the end of 2023. In the event we do not successfully execute on our restructuring plan or other productivity initiatives and are unable to realize expected benefits, our results of operations, cash flow or financial condition could be adversely affected. We discuss the restructuring plan in more detail in Note 4 to the Consolidated Financial Statements in Item 8.
Risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets could adversely affect our results of operations, cash flow, liquidity or financial condition.
Net external sales of our consolidated foreign subsidiaries totaled approximately 20.6%19.4%, 23.0%21.2% and 19.8%19.5% of our total consolidated net sales in 2019, 20182022, 2021 and 2017,2020, respectively. Sales outside of the United States make up a significant part of our current business and future strategic plans. Our results of operations, cash flow, liquidity or financial condition could be adversely affected by a variety of domestic and international factors, including general economic conditions, political instability, inflation rates, recessions, sanctions, tariffs, foreign currency exchange rates, foreign currency exchange controls, interest rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, armed conflict (including the ongoing conflict between Russia and Ukraine), war, difficulties in staffing and managing foreign operations and other external economic and political factors. In addition, public health crises (including viral outbreaks, such as the coronavirus)COVID-19 pandemic) in foreign jurisdictions may temporarily reduce the demand for some of our products and adversely affect the availability and cost of raw materials. During 2022, COVID-related lockdowns in China caused significant weakness in the demand for some of our products and adversely affected our sales in the region. Our inability to successfully manage the risks and uncertainties relating to any of these factors could adversely affect our results of operations, cash flow, liquidity or financial condition.
In many foreign countries, it is acceptablenot uncommon for others to engage in certain business practices we are prohibited from engaging in because of regulations applicable to us, such as the Foreign Corrupt Practices Act and the UK Bribery Act. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both U.S. and non-U.S. regulators, and an increase in criminal and civil proceedings brought against companies and individuals. Although we have internal control policies and procedures designed to ensurepromote compliance with these regulations, there can be no assurance our policies and procedures will prevent a violation of these regulations. Any violation could cause an adverse effect on our results of operations, cash flow or financial condition.
Policy changes affecting international trade could adversely impact the demand for our products and our competitive position.
Due to the international scope of our operations, changes in government policies on foreign trade and investment may affect the demand for our products and services, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, which may include the United States-Mexico-Canada Agreement and EU-UK Trade and Cooperation Agreement, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher
tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a material adverse effect on our results of operations, financial condition or cash flow and that of our customers, vendors and suppliers.
Additionally,Cybersecurity incidents and other disruptions to our information technology systems could interfere with our operations, result in the compromise or loss of critical and confidential information and severely harm our business.
We rely on information technology systems to conduct our business, including recording and processing transactions, manufacturing and selling our products, researching and developing new products, maintaining and growing our competitive position, and supporting and communicating with our employees, customers, suppliers and other vendors. These information technology systems are important to many business-critical processes including, but not limited to, production planning, manufacturing, finance, company operations, research and development, sales and customer service. Some of these systems are maintained or operated by third-party providers, including cloud-based systems. Cyber attacks and cybersecurity threats are increasingly sophisticated, constantly evolving and originate from many sources globally, and often cannot be recognized until launched against a target. Despite our efforts to prevent these threats and disruptions to our information technology systems, these systems may be affected by damage or interruption resulting from, among other causes, cyber attacks, security breaches, power outages, system failures or malware that take the form of phishing and other computer viruses, ransomware, worms, Trojan horses, spyware, adware, rogue software and other programs that act against the system user. These risks are expected to continue to be magnified due to the increased reliance on information technology systems to conduct our business, including those used in furtherance of supporting remote and hybrid in-office work environments and managing our global operations. Disruptions to these systems may impair our ability to conduct business and have a material adverse effect on our business, results of operations and financial condition.
As part of our business, we collect and handle sensitive and confidential information about our business, customers, employees and suppliers. Despite the United Kingdom’s referendum on European Union membership,security measures we have in place, our facilities and systems, and those third parties with which resulted inwe do business, may be vulnerable to cyber attacks, security breaches, malware, viruses, ransomware, power outages, system failures, acts of vandalism, human or technical errors or other similar events or disruptions. Our information, facilities and systems could also be impacted by the United Kingdom's exit from the European Union on January 31, 2020, has causedintentional or unintentional improper conduct of our employees, vendors or others who have access to and may continue to cause significant volatilitymisappropriate sensitive and confidential information. Any such event involving the misappropriation, loss or other unauthorized disclosure of information, whether impacting us or third parties with which we do business, could result in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the United Kingdom’s future relationship with the European Union will be, it is possible there will be greater restrictions on imports and exports between the United Kingdom and the European Union and increased regulatory complexities. Any of these factors could adversely impact customer demand,losses, damage our reputation or relationships with customers and suppliers, expose us to the risks of litigation, regulatory action and liability, disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. We continue to mitigate these risks in a number of ways, including through additional investment, engagement of third-party experts and consultants, improving the security of our facilities and systems (including through upgrades to our security and information technology systems), providing annual training for all employees (with more enhanced or frequent training based on role or responsibility), assessing the continued appropriateness of relevant insurance coverage and strengthening our controls and procedures to monitor, mitigate and respond appropriately to these threats.
The domestic and international regulatory environment related to information security, collection and privacy is increasingly rigorous and complex, with new and rapidly changing requirements applicable to our business, which often require changes to our business practices. Compliance with these requirements, including the European Union’s General Data Protection Regulation, the California Consumer Privacy Act, the California Privacy Rights Act and other international and domestic regulations, are costly and will result in additional costs in our efforts to continue to comply.
Our ability to attract, retain, develop and progress a qualified global workforce could adversely impact our business and impair our ability to meet our strategic objectives and the needs of our customers.
Our continued success depends in part on our ability to identify, attract and onboard qualified candidates with the requisite education, background, skills and experience and our results of operations.
Fluctuations in foreign currency exchangeability to retain, develop, progress and engage qualified employees across our business, including our stores, fleet, manufacturing, research and development, information technology, corporate and other operations and functions. Competition for talent is intense, and we are facing increased wage rates and labor shortages due to a tightened labor market and other macroeconomic conditions. To the extent we are unable to remain competitive with our total rewards programs (which includes compensation and benefits programs and practices), talent management strategy, inclusive workplace culture and related inclusion, diversity and equity and employee engagement strategies, initiatives, programs and practices, or if qualified candidates or employees become more difficult to attract or retain under reasonable terms, we may experience higher labor-related costs and may be unable to attract, retain, develop and progress a qualified global workforce, which could adversely affect our results of operations, cash flow, liquidity or financial condition.
Becausebusiness and future success and impair our ability to meet our strategic objectives and the needs of our international operations, wecustomers.
Our business, reputation, image and brands could be damaged by negative publicity.
Our reputation, image and recognized brands significantly contribute to our business and success. Our reputation and image is critical to retaining and growing our customer base and our relationships with other stakeholders. Our business and brands depend on our ability to maintain a positive perception of us and our business, including through our seven guiding values of integrity, people, service, quality, performance, innovation, and growth. Significant negative claims or publicity involving us, our business or our products, services, culture, values, strategies and practices, undermine confidence, and could materially damage our reputation and image, even if such claims are exposedinaccurate. Damage to risk associated with interest ratesour reputation and value changes in foreign currencies, which mayimage could adversely impact our ability to attract new and retain existing customers, employees and other business and stakeholder relationships. Additionally, negative or inaccurate postings, articles, or comments on social media and the internet about us could generate negative publicity that could damage our business, reputation, image and brands. Damage to our business, reputation or image, or negative publicity, could adversely affect our business. Historically, our reported net sales, earnings, cash flow and financial condition have been subjected to fluctuations in foreign exchange rates. Our primary exchange rate exposure is with the Euro, the Chinese yuan, the Brazilian real, the Canadian dollar, the British pound, the Mexican peso, the Australian dollar and the Argentine peso, each against the U.S. dollar. While we actively manage the exposuredemand for some of our foreign currency risk as part of our overall financial risk management policy, we believe we may experience losses from foreign currency exchange rate fluctuations,products and such losses could adversely affect our sales, earnings, cash flow liquidity or financial condition.
Inability to protect or enforce our material trademarks and other intellectual property rights could have an adverse effect on our business.
We have numerous patents, trade secrets, trademarks, trade names and know-how that are valuable to our business. Despite our efforts to protect such intellectual property and other proprietary information from unauthorized use or disclosure, third parties may attempt to disclose, obtain or use our trademarks or such other intellectual property and information without our authorization. Although we rely on the patent, trademark, trade secret and copyright laws of the United States and other countries to protect our intellectual property rights, the laws of some countries may not protect such rights to the same extent as the laws of the United States. Unauthorized use of our intellectual property by third parties, the failure of foreign countries to have laws to protect our intellectual property rights, or an inability to effectively enforce such rights in foreign countries could have an adverse effect on our business.
LEGAL AND REGULATORY RISKS
We are subject to a wide variety of complex domestic and foreign laws, rules and regulations, forcompliance with which compliance could adversely affect our results of operations, cash flow or financial condition.
We are subject to a wide variety of complex domestic and foreign laws, rules and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, data
privacy and securitycybersecurity laws, and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. From time to time, our Company, our operations and the industries in which we operate are beingmay be reviewed or investigated by regulators, which could lead to enforcement actions or the assertion of private litigation claims and damages.
Although we believe we have adopted appropriate risk management and compliance programs to mitigate these risks, the global and diverse nature of our operations means compliance risks will continue to exist. Investigations, examinations and other proceedings, the nature and outcome of which cannot be predicted, likely will likely arise from time to time. These investigations, examinations and other proceedings could subject us to significant liability and require us to take significant accruals or pay significant settlements, fines and penalties, which could have a material adverse effect on our results of operations, cash flow or financial condition.
We are subject to tax laws and regulations in the United States and multiple foreign jurisdictions. We are affected by changes in tax laws and regulations, as well as changes in related interpretations and other tax guidance.guidance, such as the Inflation Reduction Act enacted in August 2022. This law provides for, among other things, a corporate alternative minimum tax on adjusted financial statement income and an excise tax on corporate stock repurchases. We are continuing to evaluate the impact this new law may have on our results of operations, cash flow or financial condition. In addition, in the ordinary course of our business, we are subject to examinations and investigations by various tax authorities and other regulators. In addition to existing examinations and investigations, there could be additional examinations and investigations in the future, and existing examinations and investigations could be expanded.
For non-income tax risks, we estimate material loss contingencies and accrue for such loss contingencies as required by U.S. generally accepted accounting principles based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments may affect our assessment and estimates of the loss contingency. In the event the loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material adverse effect on our results of operations or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable a liability has been incurred and cannot be reasonably estimated, any potential liability ultimately determined to be attributable to us may result in a material adverse effect on our
results of operations, cash flow or financial condition for the annual or interim period during which such liability is accrued or paid. For income tax risks, we recognize tax benefits based on our assessment that a tax benefit has a greater than 50% likelihood of being sustained upon ultimate settlement with the applicable taxing authority that has full knowledge of all relevant facts. For those income tax positions where we determine there is not a greater than 50% likelihood such tax benefits will be sustained, we do not recognize a tax benefit in our financial statements. Subsequent events may cause us to change our assessment of the likelihood of sustaining a previously-recognized benefit which could result in a material adverse effect on our results of operations, cash flow or financial position for the annual or interim period during which such liability is accrued or paid.
We discuss risks and uncertainties with regard to taxes in more detail in Note 1921 to the Consolidated Financial Statements in Item 8.
Adverse weather conditions or impacts of climate change and natural disasters may temporarily reduce the demand for some of our products and could have a negative effect on our sales, earnings or cash flow.
Our business is seasonal in nature, with the second and third quarters typically generating a higher proportion of sales and earnings than other quarters. From time to time, adverse weather conditions or impacts of climate change and natural disasters have had or may have an adverse effect on our sales of paint, coatings and related products. In addition, unusually cold and rainy weather could have an adverse effect on sales of our exterior paint products. An adverse effect on sales may cause a reduction in our earnings or cash flow.
Inability to protect or enforce our material trademarks and other intellectual property rights could have an adverse effect on our business.
We have numerous patents, trade secrets, trademarks, trade names and know-how that are valuable to our business. Despite our efforts to protect such intellectual property and other proprietary information from unauthorized use or disclosure, third parties may attempt to disclose, obtain or use our trademarks or such other intellectual property and information without our authorization. Although we rely on the patent, trademark, trade secret and copyright laws of the United States and other countries to protect our intellectual property rights, the laws of some countries may not protect such rights to the same extent as the laws of the United States. Unauthorized use of our intellectual property by third parties, the failure of foreign countries to have laws to protect our intellectual property rights, or an inability to effectively enforce such rights in foreign countries could have an adverse effect on our business.
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations, compromise our information and the information of our customers and suppliers and severely harm our business.
As part of our business, we collect, process, and retain sensitive and confidential personal information about our customers, employees and suppliers. Despite the security measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third-party suppliers and vendors with which we do business, may be vulnerable to security breaches,
cyber attacks, acts of vandalism or misconduct, computer viruses, ransomware, misplaced or lost data, programming and/or human errors or other similar events or intrusions. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer, employee, supplier or Company information, whether caused by us, an unknown third party, or the retailers, dealers, licensees or other third-party suppliers and vendors with which we do business, could result in losses, severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. As cyber security threats evolve in sophistication and become more prevalent in numerous industries worldwide, we continue to increase our sensitivity and attention to these threats, seek additional investments and resources to address these threats and enhance the security of our facilities and systems and strengthen our controls and procedures implemented to monitor and mitigate these threats. The domestic and international regulatory environment related to information security, data collection and privacy is increasingly rigorous and complex, with new and constantly changing requirements applicable to our business. Compliance with these requirements, including the European Union's General Data Protection Regulation and other domestic and international regulations, could result in additional costs and changes to our business practices.
Moreover, we rely heavily on computer systems to manage and operate our business, record and process transactions, and manage, support and communicate with our employees, customers, suppliers and other vendors. Computer systems are important to production planning, manufacturing, finance, company operations and customer service, among other business-critical processes. Despite efforts to prevent disruptions to our computer systems, our systems may be affected by damage or interruption from, among other causes, power outages, system failures, computer viruses and other intrusions, including ransomware and other cyber attacks. Computer hardware and storage equipment that is integral to efficient operations, such as email, telephone and other functionality, is concentrated in certain physical locations in the various continents in which we operate. Additionally, we rely on software applications, enterprise cloud storage systems and cloud computing services provided by third-party vendors. If these third-party vendors, as well as our suppliers and other vendors, experience security breaches, cyber attacks, computer viruses, ransomware or other similar events or intrusions, our business may be adversely affected and such events or intrusions may have a material adverse effect on our business, results of operations and financial condition.
We are required to comply with, and may become subject to additional, numerous complex and increasingly stringent domestic and foreign health, safety and environmental (including related to climate change) laws, regulations and regulations,requirements, the cost of which is likely to increase and may adversely affect our results of operations, cash flow or financial condition.
Our operations are subject to various domestic and foreign health, safety and environmental laws, regulations and regulations,requirements, including laws and regulationsthose related to climate change.change, chemicals registration and management and the COVID-19 pandemic. These laws, regulations and regulationsrequirements not only govern our current operations and products, but also may impose potential liability on us for our past operations.
Increased global focus on climate change may result in the imposition of new or additional regulations or requirements applicable to, and increased financial and transition risks for, our business and industry. A number of government authorities and agencies have introduced, or are contemplating, regulatory changes to address climate change, including the regulation and disclosure of greenhouse gas emissions. The outcome of new legislation or regulation in the U.S. and other jurisdictions in which we operate may result in fees or restrictions on certain activities or materials and new or additional requirements, including to fund energy efficiency activities or renewable energy use and to disclose information regarding our greenhouse gas emissions performance, renewable energy usage and efficiency, waste generation and recycling rates, climate-related risks, opportunities and oversight and related strategies and initiatives across our global operations. Compliance with these climate change initiatives may also result in additional costs to us, including, among other things, increased production costs, additional taxes, additional investments in renewable energy use and other initiatives, reduced emission allowances or additional restrictions on production or operations. We may not be able to timely recover the cost of compliance with such new or more stringent laws and regulations, which could adversely affect our results of operations, cash flow or financial condition. Despite our efforts to timely comply with climate change initiatives, implement measures to improve our operations and execute on our related strategies and initiatives, any actual or perceived failure to comply with new or additional requirements or meet stakeholder expectations with respect to the impacts of our operations on the environment and related strategies and initiatives may result in adverse publicity, increased litigation risk, and adversely affect our business and reputation, which could adversely impact our results of operations, cash flow and financial condition.
We expect health, safety and additional environmental laws, regulations and regulationsrequirements to imposebe increasingly stringent requirements upon our industry and us in the future. Our costs to comply with these laws, regulations and regulationsrequirements may increase as these requirementsthey become more stringent in the future, and these increased costs may adversely affect our results of operations, cash flow or financial condition.
We are involved with environmental investigation and remediation activities at some of our currentlycurrently- and formerly ownedformerly-owned sites, as well as a number of third-party sites, for which our ultimate liability may exceed the current amount we have accrued.
We are involved with environmental investigation and remediation activities at some of our currentlycurrently- and formerly ownedformerly-owned sites and a number of third-party sites. We accrue for estimated costs of investigation and remediation activities at these sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are based on currently available facts regarding each site. We continuously assess our potential liability for investigation and remediation activities and adjust our environmental-related accruals as information becomes available, including as a result of sites progressing through investigation and remediation-related activities, upon which more accurate costs can be reasonably estimated. Due to the uncertainties surrounding environmental investigation and remediation activities, our liability may result in costs that are significantly higher than currently accrued and may have an adverse effect on our earnings. We discuss these risks and uncertainties in more detail in the "Environmental Matters"“Environmental-Related Liabilities” and "Environmental-Related Liabilities"“Environmental Matters” sections in Item 7 and in Note 1011 to the Consolidated Financial Statements in Item 8.
The nature, cost, quantity and outcome of pending and future litigation, such as litigation arising from the historical manufacture and sale of lead pigments and lead-based paint, could have a material adverse effect on our results of operations, cash flow, liquidity and financial condition.
In the course of our business, we are subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental (including natural resource damages), intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to us. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, we accrue for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event a loss contingency is ultimately determined to be significantly higher than currently accrued, the recording
of the additional liability may result in a material impact on our results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred andor the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to us may result in a material impact on our results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.
Our past operations included the manufacture and sale of lead pigments and lead-based paints. Along with other companies, we are and have been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs'plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. We have also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. We believe the litigation brought to date is without merit or subject to meritorious defenses and are vigorously defending such litigation. We have not settled any material lead pigment or lead-based paint litigation. We expect additional lead pigment and lead-based paint litigation may be filed against us in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. The Company will continue to vigorously defend against any additional lead pigment and lead-based paint litigation that may be filed, including utilizing all avenues of appeal, if necessary.
Notwithstanding our views on the merits, litigation is inherently subject to many uncertainties, and we ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against us and encourage an increase in the number and nature of future claims and proceedings. In addition, fromFrom time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which we and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings, or the effect any legislation and/or administrative regulations may have on the litigation or against us. In addition,Further, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. Except with respect to the California public nuisance litigation, in California, we have not accrued any amounts for such litigation because we do not believe it is probable that a loss has occurred, and we believe it is not possible to estimate the range of potential losses as there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to us relating to such litigation, or any such liability is higher than any amount currently accrued for such litigation, the recording of the liability, or additional liability, as applicable, may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, dueDue to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to us arising out of such litigation may have a material adverse effect on our results of operations, cash flow, liquidity or financial condition. We discuss the risks and uncertainties related to litigation, including the lead pigment and lead-based paint litigation, in more detail in Note 1112 to the Consolidated Financial Statements in Item 8.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own our world headquarters located in Cleveland, Ohio, which includes the world headquarters for The Americas, Group, Consumer Brands Group and Performance Coatings Group. Groups and the Administrative segment. The Company has entered into an agreement to sell its current headquarters and its research and development center. The sale is expected to be completed during 2023. Refer to Item 7 for further information on the construction of our new headquarters and research and development center.
Our principal manufacturing and distribution facilities are located as set forth below. We believe our manufacturing and distribution facilities are well-maintained and are suitable and adequate, and havewith sufficient productive capacity, to meet our current needs.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Manufacturing (1) | | Distribution (1) |
| | Leased | Owned | Total | | Leased | Owned | Total |
Consumer Brands Group | | | | | | | | |
Africa | | | 1 | 1 | | | 1 | 1 |
Asia | | 3 | 4 | 7 | | 3 | 2 | 5 |
Canada | | | 3 | 3 | | 1 | | 1 |
Europe | | 1 | 17 | 18 | | 3 | 15 | 18 |
Jamaica | | | 1 | 1 | | | 1 | 1 |
Latin America | | 3 | 10 | 13 | | 5 | 10 | 15 |
United States | | 6 | 40 | 46 | | 11 | 10 | 21 |
Total | | 13 | 76 | 89 | | 23 | 39 | 62 |
| | | | | | | | |
Performance Coatings Group | | | | | | | | |
Europe | | 1 | 5 | 6 | | 4 | 2 | 6 |
United States | | | 2 | 2 | | 3 | | 3 |
Total | | 1 | 7 | 8 | | 7 | 2 | 9 |
|
| | | | | | | | |
| | Manufacturing | | Distribution |
| | Leased | Owned | Total | | Leased | Owned | Total |
Consumer Brands Group | | | | | | | | |
Asia | | 1 | 5 | 6 | | 1 | 3 | 4 |
Australia and New Zealand | | | 3 | 3 | | 1 | 4 | 5 |
Canada | | 1 | 2 | 3 | | 1 | | 1 |
Europe | | 1 | 3 | 4 | | 2 | 3 | 5 |
Jamaica | | | 1 | 1 | | | 1 | 1 |
Latin America | | 3 | 6 | 9 | | 4 | 5 | 9 |
United States | | 5 | 29 | 34 | | 8 | 3 | 11 |
Total | | 11 | 49 | 60 | | 17 | 19 | 36 |
| | | | | | | | |
Performance Coatings Group | | | | | | | | |
Africa | | | 1 | 1 | | | 1 | 1 |
Asia | | 2 | 5 | 7 | | 2 | 4 | 6 |
Europe | | 5 | 20 | 25 | | 5 | 13 | 18 |
Latin America | | | 5 | 5 | | 1 | 7 | 8 |
United States | | 1 | 9 | 10 | | 1 | 9 | 10 |
Total | | 8 | 40 | 48 | | 9 | 34 | 43 |
(1) Certain geographic locations may contain both manufacturing and distribution facilities.The operations of The Americas Group included one manufacturing anda leased distribution facility in Uruguay and 4,7584,931 company-operated specialty paint stores, of which 217216 were owned, in the United States, Canada, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia, Uruguay, Brazil, Chile, Peru, Mexico, Ecuador and Barbados at December 31, 2019.2022. These paint stores are divided into six separate operating divisions that are responsible for the sale of predominantly architectural, protective and marine and related products through the paint stores located within their geographical region. At the end of 2019:2022:
•the Mid Western Division operated 1,1251,172 paint stores primarily located in the midwestern and upper west coast states;
•the Eastern Division operated 879901 paint stores along the upper east coast and New England states;
•the Canada Division operated 248252 paint stores throughout Canada;
•the Southeastern Division operated 1,1431,171 paint stores principally covering the lower east and gulf coast states, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados;
•the South WesternSouthwestern Division operated 1,0431,128 paint stores in the central plains and the lower west coast states; and
•the Latin America Division operated 320307 paint stores in Uruguay, Brazil, Chile, Peru, Mexico and Ecuador.
During 2019,2022, The Americas Group opened 6272 net new stores, consisting of 9489 new stores opened (83(71 in the United States, 711 in Mexico, 6 in Canada and 41 in South America) and 3217 stores closed (6(2 in the United States, 1714 in South America and 91 in Mexico).
The Performance Coatings Group operated 221223 branches in the United States, of which 8 were owned, at December 31, 2019.2022. The Performance Coatings Group also operated 6094 branches internationally, of which 67 were owned, at December 31, 2019,2022, consisting of branches in Europe (47), Canada (21), Europe (16)(22), Chile (11), Mexico (5), Peru (4)(3), Vietnam (3), Ecuador (2), and Vietnam (3)Brazil (1). During 2019,2022, this segment opened 3added 35 net new branches, consisting of 39 opened or acquired branches and closed 4 branches for a net decrease of 1 branch.closed.
All real property within the Administrative segment is owned by us. For additional information regarding real property within the Administrative segment, see the information set forth in Item 1 of this report, which is incorporated herein by reference.
For additional information regarding real property leases, see Note 910 to the Consolidated Financial Statements in Item 8.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed inSEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the Company’s Form 10-K for the year ended December 31, 2018, the Company received a letter dated September 26, 2018 from the South Coast Air Quality Management District (“SCAQMD”) in California alleging excess emissions from non-compliant coatingsproceedings and seeking a proposed penalty of approximately $1.5 million. Settlement discussions regarding this matter have been unsuccessful to date, and SCAQMD filed a civil Complaint against the Company on November 30, 2018 in the Superior Court of California seeking civil penalties, costs and injunctive relief including an initial demand of $30 million. The Company disputes the allegations in the Complaint and intends to vigorously defend this matter, if a mutually agreeable settlement cannot be reached.
In addition, as previously disclosed in the Company’s Form 10-Q for the quarterly period ended June 30, 2019, on April 4, 2019, SCAQMD notified the Company of its positionsuch proceedings involve potential monetary sanctions that the Company was engaging in non-compliant sales of denatured alcohol. The letter requested information regarding the Company’s sales of denatured alcohol and invitedreasonably believes will exceed a specified threshold. Pursuant to these regulations, the Company to participate in settlement discussions to resolve the matter. SCAQMD then issued an additional information request regarding denatured alcohol and other products.
The Company and SCAQMD are involved in discussions to resolve the aforementioned matters cooperatively and efficiently.uses a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required.
For information regarding othercertain environmental-related matters and other legal proceedings, see the information included under the captions titled “Other Long-Term Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 1, 10, 11, 12 and 1820 to the “Notes to Consolidated Financial StatementsStatements” in Item 8. The information contained in Note 1112 to the Consolidated Financial Statements is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is the name, age and present position of each of our executive officers and all persons chosen to become executive officers, as well as all prior positions held by each person during the last five years. Executive officers are generally elected annually by the Board of Directors and hold office until their successors are elected and qualified or until their earlier death, resignation or removal.
|
| | | | | | | |
Name | Age | Present Position |
John G. Morikis | 5659 | Chairman and Chief Executive Officer, Director |
David B. SewellHeidi G. Petz | 5148 | President and Chief Operating Officer |
Allen J. Mistysyn | 5154 | Senior Vice President - Finance and Chief Financial Officer |
Jane M. Cronin | 5255 | Senior Vice President - Corporate ControllerEnterprise Finance |
Mary L. Garceau | 4750 | Senior Vice President, General Counsel and Secretary |
Thomas P. Gilligan | 59 | Senior Vice President - Human Resources |
James R. Jaye | 5356 | Senior Vice President - Investor Relations and Corporate Communications |
JoelGregory P. Sofish | 57 | Senior Vice President - Human Resources |
Bryan J. Young | 47 | Senior Vice President - Corporate Strategy and Development |
Justin T. Binns | 47 | President, The Americas Group |
Karl J. Jorgenrud | 46 | President, Performance Coatings Group |
Todd D. BaxterRea | 5948 | President, Consumer Brands Group |
Joseph F. Sladek | 52 | President & General Manager, Global Supply Chain Division, Consumer Brands Group |
Aaron M. Erter | 46 | President, Performance Coatings Group |
Peter J. Ippolito | 55 | President, The Americas Group |
Mr. Morikis has served as Chairman since January 2017 and Chief Executive Officer since January 2016. Mr. Morikis also served as President from March 2021 to March 2022 and October 2006 to March 2019 and Chief Operating Officer from October 2006 to January 2016. Mr. Morikis has served as a Director since October 2015 and has been employed with the Company since December 1984.
Mr. SewellMs. Petz has served as President and Chief Operating Officer since March 2019. Mr. Sewell2022. Ms. Petz served as President, Performance CoatingsThe Americas Group from August 2014March 2021 to March 2022, Senior Vice President, Marketing, The Americas Group from November 2020 to March 2021 and President, Consumer Brands Group from September 2020 to November 2020. Also within the Consumer Brands Group, Ms. Petz served as President & General Manager, Retail North America from March 2019 to September 2020 and Senior Vice President, Marketing from June 2017 to March 2019. Mr. Sewell has been employedMs. Petz joined the Company in June 2017 in connection with the Company since February 2007.Valspar acquisition.
Mr. Mistysyn has served as Senior Vice President - Finance and Chief Financial Officer since January 2017. Mr. Mistysyn served as Senior Vice President - Finance from October 2016 to January 2017 and Senior Vice President - Corporate Controller from October 2014 to October 2016. Mr. Mistysyn has been employed with the Company since June 1990.
Ms. Cronin has served as Senior Vice President - Corporate ControllerEnterprise Finance since October 2016.July 2022. Ms. Cronin served as Senior Vice President - Corporate Audit and Loss PreventionController from September 2013October 2016 to October 2016.July 2022. Ms. Cronin has been employed with the Company since September 1989.
Ms. Garceau has served as Senior Vice President, General Counsel and Secretary since August 2017. Ms. Garceau served as Vice President, Deputy General Counsel and Assistant Secretary from June 2017 to August 2017, Associate General Counsel and Assistant Secretary from April 2017 to June 2017, and Associate General Counsel from February 2014 to April 2017. Ms. Garceau has been employed with the Company since February 2014.
Mr. Gilligan has served as Senior Vice President - Human Resources since January 2016. Mr. Gilligan served as Senior Vice President, Human Resources, The Americas Group from August 2014 to January 2016. Mr. Gilligan has been employed with the Company since October 1983.
Mr. Jaye has served as Senior Vice President - Investor Relations and Corporate Communications since June 2019. Mr. Jaye served as Vice President - Investor Relations from October 2017 to June 2019. Prior to joining the Company, Mr. Jaye served as Senior Director, Communications and Investor Relations at Nordson Corporation, manufacturer of dispensing products and systems, from October 2007 to October 2017. Mr. Jaye has been employed with the Company since October 2017.
Mr. BaxterSofish has served as Senior Vice President - Human Resources since January 2023. Mr. Sofish served as Vice President, Total Rewards from August 2019 to January 2023 and Vice President, Executive Compensation from March 2015 to August 2019. Mr. Sofish has been employed with the Company since September 1996.
Mr. Young has served as Senior Vice President - Corporate Strategy and Development since March 2021. Mr. Young served as Vice President - Corporate Strategy and Development from June 2017 to March 2021. Mr. Young joined the Company in June 2017 in connection with the Valspar acquisition.
Mr. Binns has served as President, The Americas Group since March 2022. Mr. Binns served as President, Performance Coatings Group from November 2020 to March 2022, President & General Manager, Automotive Finishes Division,
Performance Coatings Group from July 2018 to November 2020 and President & General Manager, Eastern Division, The Americas Group from October 2016 to July 2018. Mr. Binns has been employed with the Company since August 1997.
Mr. Jorgenrud has served as President, Performance Coatings Group since March 2022. Mr. Jorgenrud served as President & General Manager, General Industrial Division, Performance Coatings Group from January 2020 to March 2022 and President & General Manager, Protective & Marine Division, Performance Coatings Group from June 2017 to December 2019. Mr. Jorgenrud joined the Company in June 2017 in connection with the Valspar acquisition.
Mr. Rea has served as President, Consumer Brands Group since November 2021. Mr. Rea served within the Consumer Brands Group as President of North America Sales from November 2020 to November 2021, Senior Vice President of Sales, Retail and National Accounts from November 2019 to November 2020, Senior Vice President of Sales, Lowe’s Business Unit from March 2018 to November 2019 and Senior Vice President of Sales, National Accounts from August 2017 to February 2018. Mr. Rea has been employed with the Company since April 1993.
Mr. Sladek has served as President & General Manager, Global Supply Chain Division, Consumer Brands Group since September 2008.January 2021. Mr. Baxter has been employed withSladek served within the Company since September 1990.
Mr. Erter has served as President, Performance Coatings Group since March 2019. Mr. Erter served as President, Consumer Brands Group from August 2017 to March 2019 and President & General Manager, ConsumerGlobal Supply Chain Division, Consumer Brands Group from June 2017 to August 2017. Prior to joining the Company in connection with the acquisition of The Valspar Corporation, Mr. Erter served as Senior Vice President, of ValsparGlobal Operations & Engineering from December 2015August 2020 to June 2017January 2021, Senior Vice President, International & Industrial Operations from April 2019 to August 2020 and Vice President, and General Manager, North America of ValsparExcellence Initiatives from November 2011March 2017 to December 2015.March 2019. Mr. Erter has been employed with the Company since June 2017.
Mr. Ippolito has served as President, The Americas Group since January 2018. Mr. Ippolito served as President & General Manager, Mid Western Division, The Americas Group from November 2010 to January 2018. Mr. IppolitoSladek has been employed with the Company since May 1986.2007.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange and traded under the symbol SHW. The number of shareholders of record at January 31, 20202023 was 5,656.5,232. The information with respect toregarding securities authorized for issuance under the Company’s equity compensation plans is set forth in our Proxy Statement under the caption “Equity Compensation Plan Information” in our Proxy Statement, whichand is incorporated herein by reference.reference into Part III of this report.
Issuer Purchases of Equity Securities
The following table sets forth a summary of the Company’s purchases of common stock during the fourth quarter of 2019.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan | | Maximum Number of Shares that May Yet Be Purchased Under the Plan |
October 1 – October 31 | | | | | | | | |
Share repurchase program (1) | | 150,000 | | | $ | 223.07 | | | 150,000 | | | 45,675,000 | |
Employee transactions (2) | | 2,281 | | | $ | 211.09 | | | | | N/A |
| | | | | | | | |
November 1 – November 30 | | | | | | | | |
Share repurchase program (1) | | 450,000 | | | $ | 219.24 | | | 450,000 | | | 45,225,000 | |
Employee transactions (2) | | — | | | $ | — | | | | | N/A |
| | | | | | | | |
| | | | | | | | |
December 1 – December 31 | | | | | | | | |
Share repurchase program (1) | | — | | | $ | — | | | — | | | 45,225,000 | |
Employee transactions (2) | | 37 | | | $ | 252.23 | | | | | N/A |
| | | | | | | | |
Total | | | | | | | | |
Share repurchase program (1) | | 600,000 | | | $ | 220.20 | | | 600,000 | | | 45,225,000 | |
Employee transactions (2) | | 2,318 | | | $ | 211.75 | | | | | N/A |
| | | | | | | | |
(1)Shares were purchased through the Company’s publicly announced share repurchase program. The Company had remaining authorization at December 31, 2022 to purchase 45,225,000 shares. There is no expiration date specified for the program.
(2)All shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had restricted stock units vest.
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan | | Maximum Number of Shares that May Yet Be Purchased Under the Plan |
October 1 – October 31 | | | | | | | | |
Share repurchase program (1) | | 250,000 |
| | $ | 576.00 |
| | 250,000 |
| | 8,550,000 |
|
Employee transactions (2) | | 759 |
| | $ | 562.89 |
| | | | N/A |
|
| | | | | | | | |
November 1 – November 30 | | | | | | | | |
Share repurchase program (1) | | 75,000 |
| | $ | 569.25 |
| | 75,000 |
| | 8,475,000 |
|
Employee transactions (2) | | 1,282 |
| | $ | 593.83 |
| | | | N/A |
|
| | | | | | | | |
December 1 – December 31 | | | | | | | | |
Share repurchase program (1) | | 25,000 |
| | $ | 574.63 |
| | 25,000 |
| | 8,450,000 |
|
Employee transactions (2) | | 657 |
| | $ | 577.32 |
| | | | N/A |
|
Total | | | | | | | | |
Share repurchase program (1) | | 350,000 |
| | $ | 574.46 |
| | 350,000 |
| | 8,450,000 |
|
Employee transactions (2) | | 2,698 |
| | $ | 581.11 |
| | | | N/A |
|
| |
| All shares are purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program. The Company had remaining authorization at December 31, 2019 to purchase 8,450,000 shares. |
| |
(2)
| All shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had shares of restricted stock vest. |
Comparison of Cumulative Total Return
The following graph compares the cumulative total shareholder return on Sherwin-Williams common stock with the cumulative five-year total return of the companies listed on the Standard & Poor'sPoor’s 500 Stock Index and athe peer groupgroups of companies selected on a line-of-business basis. The cumulative five-year total return assumes $100 was invested on December 31, 20142017 in Sherwin-Williams common stock, the S&P 500 and the peer group. The cumulative five-year total return, including reinvestment of dividends, represents the cumulative value through December 31, 2019.2022.
Peer group of companies comprised of the following: Akzo Nobel N.V., Axalta Coating Systems Ltd., BASF SE, Genuine Parts Company, H.B. Fuller Company, The Home Depot, Inc., Lowe'sLowe’s Companies, Inc., Masco Corporation, Newell Brands Inc., PPG Industries, Inc., RPM International Inc., and Stanley Black & Decker, Inc. and USG Corporation (included through April 2019 when it was acquired by Gebr. Knauf KG).
ITEM 6. SELECTED FINANCIAL DATA[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
(millions of dollars, except per common share data) | 2019 | | 2018 | | 2017 (1) | | 2016 | | 2015 |
Operations | | | | | | | | | |
Net sales | $ | 17,900.8 |
| | $ | 17,534.5 |
| | $ | 14,983.8 |
| | $ | 11,855.6 |
| | $ | 11,339.3 |
|
Cost of goods sold | 9,864.7 |
| | 10,115.9 |
| | 8,265.0 |
| | 5,934.3 |
| | 5,779.7 |
|
Selling, general and administrative expenses | 5,274.9 |
| | 5,033.8 |
| | 4,797.6 |
| | 4,140.3 |
| | 3,885.7 |
|
Amortization | 312.8 |
| | 318.1 |
| | 206.8 |
| | 25.4 |
| | 28.2 |
|
Interest expense | 349.3 |
| | 366.7 |
| | 263.5 |
| | 154.1 |
| | 61.8 |
|
Income from continuing operations before income taxes (2) | 1,981.8 |
| | 1,359.7 |
| | 1,469.3 |
| | 1,595.2 |
| | 1,549.0 |
|
Net income from continuing operations (3) | 1,541.3 |
| | 1,108.7 |
| | 1,769.5 |
| | 1,132.7 |
| | 1,053.8 |
|
|
| | | | | | | | | | | | | | | | | | | |
Financial Position | | | | | | | | | |
Accounts receivable - net | $ | 2,088.9 |
| | $ | 2,018.8 |
| | $ | 2,104.6 |
| | $ | 1,231.0 |
| | $ | 1,114.3 |
|
Inventories | 1,889.6 |
| | 1,815.3 |
| | 1,742.5 |
| | 1,068.3 |
| | 1,018.5 |
|
Working capital - net | 109.8 |
| | 46.8 |
| | 419.8 |
| | 798.1 |
| | 515.2 |
|
Property, plant and equipment - net | 1,835.2 |
| | 1,776.8 |
| | 1,877.1 |
| | 1,095.9 |
| | 1,041.8 |
|
Total assets (4) | 20,496.2 |
| | 19,134.3 |
| | 19,899.5 |
| | 6,752.5 |
| | 5,778.9 |
|
Long-term debt | 8,050.7 |
| | 8,708.1 |
| | 9,885.7 |
| | 1,211.3 |
| | 1,907.3 |
|
Total debt | 8,685.2 |
| | 9,343.7 |
| | 10,520.6 |
| | 1,952.5 |
| | 1,950.0 |
|
Shareholders’ equity | 4,123.3 |
| | 3,730.7 |
| | 3,647.9 |
| | 1,878.4 |
| | 867.7 |
|
|
| | | | | | | | | | | | | | | | | | | |
Per Share Information | | | | | | | | | |
Average shares outstanding - diluted (thousands) | 93,447 |
| | 94,988 |
| | 94,927 |
| | 94,488 |
| | 94,543 |
|
Book value | $ | 44.75 |
| | $ | 40.07 |
| | $ | 38.86 |
| | $ | 20.20 |
| | $ | 9.41 |
|
Net income from continuing operations - diluted (5) | 16.49 |
| | 11.67 |
| | 18.64 |
| | 11.99 |
| | 11.15 |
|
Cash dividends | 4.52 |
| | 3.44 |
| | 3.40 |
| | 3.36 |
| | 2.68 |
|
|
| | | | | | | | | | | | | | |
Financial Ratios | | | | | | | | | |
Return on sales | 8.6 | % | | 6.3 | % | | 11.8 | % | | 9.6 | % | | 9.3 | % |
Asset turnover | 0.9 | x | | 0.9 | x | | 0.8 | x | | 1.8 | x | | 2.0 | x |
Return on assets | 7.5 | % | | 5.8 | % | | 8.9 | % | | 16.8 | % | | 18.2 | % |
Return on equity (6) | 41.3 | % | | 30.4 | % | | 94.2 | % | | 130.5 | % | | 105.8 | % |
Dividend payout ratio (7) | 38.7 | % | | 18.5 | % | | 28.4 | % | | 30.1 | % | | 30.6 | % |
Total debt to capitalization | 67.8 | % | | 71.5 | % | | 74.3 | % | | 51.0 | % | | 69.2 | % |
Current ratio | 1.0 |
| | 1.0 |
| | 1.1 |
| | 1.3 |
| | 1.2 |
|
Interest coverage (8) | 6.7 | x | | 4.7 | x | | 6.6 | x | | 11.4 | x | | 26.1 | x |
Net working capital to sales | 0.6 | % | | 0.3 | % | | 2.8 | % | | 6.7 | % | | 4.5 | % |
Effective income tax rate (9) | 22.2 | % | | 18.5 | % | | 25.1 | % | | 29.0 | % | | 32.0 | % |
|
| | | | | | | | | | | | | | | | | | | |
General | | | | | | | | | |
Earnings before interest, taxes, depreciation and amortization (EBITDA) (10) | $ | 2,906.0 |
| | $ | 2,322.7 |
| | $ | 2,224.6 |
| | $ | 1,946.8 |
| | $ | 1,809.3 |
|
Capital expenditures | 328.9 |
| | 251.0 |
| | 222.8 |
| | 239.0 |
| | 234.3 |
|
Total technical expenditures (11) | 224.6 |
| | 253.9 |
| | 215.7 |
| | 153.3 |
| | 150.4 |
|
Advertising expenditures | 355.2 |
| | 357.8 |
| | 374.1 |
| | 351.0 |
| | 338.2 |
|
Repairs and maintenance | 135.8 |
| | 131.7 |
| | 115.8 |
| | 99.5 |
| | 98.7 |
|
Depreciation | 262.1 |
| | 278.2 |
| | 285.0 |
| | 172.1 |
| | 170.3 |
|
Shareholders of record (total count) | 5,659 |
| | 6,244 |
| | 6,470 |
| | 6,787 |
| | 6,987 |
|
Number of employees (total count) | 61,111 |
| | 59,740 |
| | 59,257 |
| | 49,054 |
| | 46,911 |
|
Sales per employee (thousands of dollars) | $ | 293 |
| | $ | 294 |
| | $ | 253 |
| | $ | 242 |
| | $ | 242 |
|
Sales per dollar of assets | 0.87 |
| | 0.92 |
| | 0.75 |
| | 1.76 |
| | 1.96 |
|
| |
(1)
| 2017 includes Valspar financial results since June 1, 2017. |
| |
(2)
| 2019 includes acquisition-related costs of $389.3 million, non-cash trademark impairment charges of $122.1 million, domestic pension plan settlement expense of $32.4 million, as well as a Brazil indirect tax credit of $50.8 million and a benefit from the resolution of the California litigation of $34.7 million. 2018 includes acquisition-related costs of $484.4 million, environmental expense provisions of $167.6 million, California litigation expense of $136.3 million and domestic pension plan settlement expense of $37.6 million. 2017 includes acquisition-related costs of $488.6 million. |
| |
(3)
| 2019 includes after-tax acquisition-related costs of $299.6 million, after-tax trademark impairment charges of $93.1 million, tax credit investment loss of $74.3 million and after-tax domestic pension settlement expense of $25.0 million, partially offset by an after-tax Brazil indirect tax credit of $33.3 million and after-tax benefit from the resolution of the California litigation of $26.1 million. 2018 includes after-tax acquisition-related costs of $394.4 million, after-tax environmental expense provisions of $126.1 million, after-tax California litigation expense of $103.4 million and after-tax domestic pension plan settlement expense of $28.3 million. 2017 includes a one-time income tax benefit of $668.8 million from deferred income tax reductions resulting from the Tax Act (see Note 19 of Item 8) and includes after-tax acquisition-related costs of $329.4 million. |
| |
(4)
| Total assets at December 31, 2019 includes operating lease right-of-use assets due to the adoption of ASU 2016-02, "Leases", effective January 1, 2019. See Note 2 to the Consolidated Financial Statements in Item 8. |
| |
(5)
| 2019 includes charges of $3.21 per share for acquisition-related costs, $1.00 per share for non-cash trademark impairment charges, a tax credit investment loss of $0.79 per share and domestic pension plan settlement expense of $0.27 per share, partially offset by a Brazil indirect tax credit of $0.36 per share and a benefit from the resolution of the California litigation of $0.28 per share. 2018 includes charges of $4.15 per share for acquisition-related costs, $1.32 per share for environmental expense provisions, $1.09 per share for California litigation expense and $0.30 per share for domestic pension settlement expense. 2017 includes a one-time benefit of $7.04 per share from deferred income tax reductions resulting from the Tax Act (see Note 19 of Item 8) and a charge of $3.47 per share for acquisition-related costs. |
| |
(6)
| Based on net income and shareholders' equity at beginning of year. |
| |
(7)
| Based on cash dividends per common share and prior year's diluted net income per common share. |
| |
(8)
| Ratio of income from continuing operations before income taxes and interest expense to interest expense. |
| |
(9)
| Based on income from continuing operations before income taxes. 2017 excludes impact of one-time income tax benefit primarily related to Tax Cuts and Jobs Act. |
| |
(10)
| EBITDA is a non-GAAP measure which management believes enhances the understanding of the Company's operating performance. See the Non-GAAP Financial Measures section within this Item 6 for additional information. |
| |
(11)
| See Note 1 to the Consolidated Financial Statements in Item 8 for additional information. |
Non-GAAP Financial Measures
Management utilizes certain financial measures that are not in accordance with U.S. generally accepted accounting principles (US GAAP) to analyze and manage the performance of the business. The required disclosures for these non-GAAP measures are shown below. The Company provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate the Company's operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with US GAAP.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP financial measure defined as net income from continuing operations before income taxes and interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure that excludes the Valspar acquisition and other adjustments. Management considers EBITDA and Adjusted EBITDA useful in understanding the operating performance of the Company. The reader is cautioned that the Company's EBITDA and Adjusted EBITDA should not be compared to other entities unknowingly. Further, EBITDA and Adjusted EBITDA should not be considered alternatives to Net income or Net operating cash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows in Item 8.
The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the years indicated below:
|
| | | | | | | |
(millions of dollars) | Year Ended December 31, |
| 2019 | | 2018 |
Net income from continuing operations | $ | 1,541.3 |
| | $ | 1,108.7 |
|
Interest expense | 349.3 |
| | 366.7 |
|
Income taxes | 440.5 |
| | 251.0 |
|
Depreciation | 262.1 |
| | 278.2 |
|
Amortization | 312.8 |
| | 318.1 |
|
EBITDA from continuing operations | 2,906.0 |
| | 2,322.7 |
|
Trademark impairment | 122.1 |
| | |
Brazil indirect tax credit | (50.8 | ) | | |
California litigation expense | (34.7 | ) | | 136.3 |
|
Domestic pension plan settlement expense | 32.4 |
| | 37.6 |
|
Environmental expense provision | | | 167.6 |
|
Integration costs | 81.8 |
| | 157.7 |
|
Adjusted EBITDA | $ | 3,056.8 |
| | $ | 2,821.9 |
|
Free Cash Flow
Free Cash Flow is a non-GAAP financial measure defined as Net operating cash, as shown in the Statements of Consolidated Cash Flows, less the amount reinvested in the business for Capital expenditures and the return of investment to its shareholders by the payment of cash dividends. Management considers Free Cash Flow to be a useful tool in its determination of appropriate uses of the Company’s Net operating cash. The reader is cautioned that the Free Cash Flow measure should not be compared to other entities unknowingly as it may not be comparable, and it does not consider certain non-discretionary cash flows, such as mandatory debt and interest payments. The amount shown below should not be considered an alternative to Net operating cash or other cash flow amounts provided in accordance with US GAAP as disclosed in the Statements of Consolidated Cash Flows in Item 8.
The following table summarizes Free Cash Flow as calculated by management for the years indicated below:
|
| | | | | | | |
(millions of dollars) | Year Ended December 31, |
| 2019 | | 2018 |
Net operating cash | $ | 2,321.3 |
| | $ | 1,943.7 |
|
Capital expenditures | (328.9 | ) | | (251.0 | ) |
Cash dividends | (420.8 | ) | | (322.9 | ) |
Free cash flow | $ | 1,571.6 |
| | $ | 1,369.8 |
|
Adjusted Diluted Net Income Per Share
Management of the Company believes that investors' understanding of the Company's operating performance is enhanced by the disclosure of diluted net income per share excluding Valspar acquisition-related costs and other adjustments. This adjusted earnings per share measurement is not in accordance with US GAAP. It should not be considered a substitute for earnings per share in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile diluted net income per share computed in accordance with US GAAP to adjusted diluted net income per share.
|
| | | | | | | | | |
| Year Ended |
| December 31, 2019 |
| Pre-Tax | Tax Effect (3) | After-Tax |
Diluted net income per share | | | $ | 16.49 |
|
| | | |
Trademark impairment | $ | 1.31 |
| $ | .31 |
| 1.00 |
|
Brazil indirect tax credit | (.54 | ) | (.18 | ) | (.36 | ) |
California litigation expense provision reduction | (.37 | ) | (.09 | ) | (.28 | ) |
Tax credit investment loss | | (.79 | ) | .79 |
|
Domestic pension plan settlement expense | .35 |
| .08 |
| .27 |
|
Total other adjustments | .75 |
| (.67 | ) | 1.42 |
|
| | | |
Integration costs (1) | .88 |
| .19 |
| .69 |
|
Acquisition-related amortization expense (2) | 3.29 |
| .77 |
| 2.52 |
|
Total acquisition-related costs | $ | 4.17 |
| $ | .96 |
| 3.21 |
|
| | | |
Adjusted diluted net income per share | | | $ | 21.12 |
|
|
| | | | | | | | | |
| Year Ended |
| December 31, 2018 |
| Pre-Tax | Tax Effect (3) | After-Tax |
Diluted net income per share | | | $ | 11.67 |
|
| | | |
California litigation expense | $ | 1.44 |
| $ | .35 |
| 1.09 |
|
Environmental expense provision | 1.75 |
| .43 |
| 1.32 |
|
Domestic pension plan settlement expense | .40 |
| .10 |
| .30 |
|
Total other adjustments | 3.59 |
| .88 |
| 2.71 |
|
| | | |
Integration costs (1) | 1.65 |
| .10 |
| 1.55 |
|
Acquisition-related amortization expense (2) | 3.44 |
| .84 |
| 2.60 |
|
Total acquisition-related costs | $ | 5.09 |
| $ | .94 |
| 4.15 |
|
| | | |
Adjusted diluted net income per share | | | $ | 18.53 |
|
| |
(1)
| Integration costs consist primarily of professional service expenses, salaries and other employee-related expenses dedicated directly to the integration effort, and severance expense. These costs are included in Selling, general and administrative and other expenses and Cost of goods sold. |
| |
(2)
| Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization. |
| |
(3)
| The tax effect is calculated based on the statutory rate and the nature of the item, unless otherwise noted. |
Adjusted Segment Profit
Management of the Company believes that investors' understanding of the Company's operating performance is enhanced by the disclosure of segment profit excluding Valspar acquisition-related costs and other adjustments. This adjusted segment profit measurement is not in accordance with US GAAP. It should not be considered a substitute for segment profit in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies. The following tables reconcile segment profit computed in accordance with US GAAP to adjusted segment profit.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| The Americas Group | Consumer Brands Group | Performance Coatings Group | Administrative | Total |
Net external sales | $ | 10,171.9 |
| $ | 2,676.8 |
| $ | 5,049.2 |
| $ | 2.9 |
| $ | 17,900.8 |
|
| | | | | |
Income before income taxes | $ | 2,056.5 |
| $ | 373.2 |
| $ | 379.1 |
| $ | (827.0 | ) | $ | 1,981.8 |
|
as a % of Net external sales | 20.2 | % | 13.9 | % | 7.5 | % | | 11.1 | % |
| | | | | |
Trademark impairment | | 5.1 |
| 117.0 |
| | 122.1 |
|
Brazil indirect tax credit | | | | (50.8 | ) | (50.8 | ) |
California litigation expense provision reduction | | | | (34.7 | ) | (34.7 | ) |
Domestic pension plan settlement expense | | | | 32.4 |
| 32.4 |
|
Total other adjustments | — |
| 5.1 |
| 117.0 |
| (53.1 | ) | 69.0 |
|
| | | | | |
Integration costs (1) | | | | 81.8 |
| 81.8 |
|
Acquisition-related amortization expense (2) | | 91.2 |
| 215.5 |
| 0.8 |
| 307.5 |
|
Total acquisition-related costs | — |
| 91.2 |
| 215.5 |
| 82.6 |
| 389.3 |
|
| | | | | |
Adjusted segment profit | $ | 2,056.5 |
| $ | 469.5 |
| $ | 711.6 |
| $ | (797.5 | ) | $ | 2,440.1 |
|
as a % of Net external sales | 20.2 | % | 17.5 | % | 14.1 | % | | 13.6 | % |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| The Americas Group | Consumer Brands Group | Performance Coatings Group | Administrative | Total |
Net external sales | $ | 9,625.1 |
| $ | 2,739.1 |
| $ | 5,166.4 |
| $ | 3.9 |
| $ | 17,534.5 |
|
| | | | | |
Income before income taxes | $ | 1,898.4 |
| $ | 261.1 |
| $ | 452.1 |
| $ | (1,251.9 | ) | $ | 1,359.7 |
|
as a % of Net external sales | 19.7 | % | 9.5 | % | 8.8 | % | | 7.8 | % |
| | | | | |
California litigation expense | | | | 136.3 |
| 136.3 |
|
Environmental expense provision | | | | 167.6 |
| 167.6 |
|
Domestic pension plan settlement expense | | | | 37.6 |
| 37.6 |
|
Total other adjustments | — |
| — |
| — |
| 341.5 |
| 341.5 |
|
| | | | | |
Integration costs (1) | | | | 157.7 |
| 157.7 |
|
Acquisition-related amortization expense (2) | | 110.9 |
| 215.8 |
| | 326.7 |
|
Total acquisition-related costs | — |
| 110.9 |
| 215.8 |
| 157.7 |
| 484.4 |
|
| | | | | |
Adjusted segment profit | $ | 1,898.4 |
| $ | 372.0 |
| $ | 667.9 |
| $ | (752.7 | ) | $ | 2,185.6 |
|
as a % of Net external sales | 19.7 | % | 13.6 | % | 12.9 | % | | 12.5 | % |
| |
(1)
| Integration costs consist primarily of professional service expenses, salaries and other employee-related expenses dedicated directly to the integration effort, and severance expense. These costs are included in Selling, general and administrative and other expenses and Cost of goods sold. |
| |
(2)
| Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization. |
[THIS PAGE INTENTIONALLY LEFT BLANK]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except as noted and per share data)
Company Background
The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the Company) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region and throughout Europe, Asia and Australia.
The Company is structured into three reportable segments – The Americas Group, Consumer Brands Group and Performance Coatings Group (collectively, the Reportable Segments) – and an Administrative segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources. See Notes 323 and 2124 to the Consolidated Financial Statements in Item 8 for additional information on the Company’s Reportable Segments.
Summary
•Consolidated net sales increased 11.1% in the year to a record $22.149 billion
◦Net sales from stores in U.S. and Canada open more than twelve calendar months increased 11.7% in the year
•Diluted net income per share increased to $7.72 per share in the year compared to $6.98 per share in the full year 2021
◦Adjusted diluted net income per share increased to $8.73 per share in the year compared to $8.15 per share in the full year 2021
•Generated strong net operating cash of $1.920 billion
◦Deployed $1.003 billion toward five acquisitions that will add to our product offerings and capabilities
◦Invested $883.2 million in share repurchases and paid $618.5 million in dividends to return value to our shareholders
Outlook
During 2022, we continued to experience the effects of macroeconomic challenges such as raw material inflation, less than optimal raw material availability, armed conflict in Europe, and COVID-related lockdowns in Asia. Our focus on cost control measures remains steady as we execute on targeted restructuring actions to simplify our business. The growth investments we made during the year, including five completed acquisitions, are well-positioned to contribute to our resilient portfolio. While we anticipate a challenging demand environment in 2023, our long-term strategy and customer-focused solutions drive confidence in our outlook.
We anticipate inflationary pressure in 2023 to impact consumer behavior in both the United States and Europe, particularly in housing markets. Elevated mortgage rates may have a negative impact on new residential volume. Certain other costs, such as wages, energy and transportation are expected to increase. We are focused on gaining market share despite this challenging environment, while leveraging our exposure in more historically resilient end markets such as residential repaint, property maintenance, auto refinish, and packaging. During 2023, we expect to benefit from price increases we implemented during 2021 and 2022. Additionally, we expect to realize approximately $50 million to $70 million in estimated annual savings from previously announced restructuring actions, of which we expect 75% will be realized by the end of 2023. Our deliberate cost control and ongoing continuous improvement initiatives, coupled with anticipated raw material cost deflation, are expected to drive full year gross margin expansion in 2023.
Our capital deployment strategy remains balanced and consistent. We do not have any long-term debt maturities due in 2023 and expect to reduce short-term borrowings while generating net operating cash. We have plans to invest in the construction of new facilities, including our new global headquarters (new headquarters) in downtown Cleveland, Ohio and new research and development (R&D) center in the Cleveland suburb of Brecksville, and in the expansion of certain existing manufacturing and distribution facilities. We plan to expand our footprint by opening 80 to 100 new stores in the United States and Canada in 2023, and pursue acquisitions that align with our long-term growth strategy. We will also return value to our shareholders through the payment of dividends and the reinvestment of excess cash for share repurchases of Company stock.
Please see Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K for further information regarding the Valspar acquisitioncurrent and potential impact of macroeconomic conditions on the Company, including those relating to supply chain disruptions, raw material availability, and inflation, and the Company's Reportable Segments, respectively.Company’s restructuring actions.
RESULTS OF OPERATIONS
The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the years ended December 31, 20192022 and 2018.2021. For comparisons of the years ended December 31, 20182021 and 2017,2020, see Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 20182021 filed on February 22, 2019.17, 2022.
| |
| Year Ended December 31, | | Year Ended December 31, |
| 2019 | | 2018 | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
Net Sales: | | | | | | Net Sales: | | | | | | | |
The Americas Group | $ | 10,171.9 |
| | $ | 9,625.1 |
| | 5.7 | % | The Americas Group | $ | 12,661.0 | | | $ | 11,217.0 | | | $ | 1,444.0 | | | 12.9 | % |
Consumer Brands Group | 2,676.8 |
| | 2,739.1 |
| | (2.3 | )% | Consumer Brands Group | 2,690.7 | | | 2,721.6 | | | (30.9) | | | (1.1) | % |
Performance Coatings Group | 5,049.2 |
| | 5,166.4 |
| | (2.3 | )% | Performance Coatings Group | 6,793.5 | | | 6,003.8 | | | 789.7 | | | 13.2 | % |
Administrative | 2.9 |
| | 3.9 |
| | (25.6 | )% | Administrative | 3.7 | | | 2.2 | | | 1.5 | | | 68.2 | % |
Total | $ | 17,900.8 |
| | $ | 17,534.5 |
| | 2.1 | % | Total | $ | 22,148.9 | | | $ | 19,944.6 | | | $ | 2,204.3 | | | 11.1 | % |
Consolidated netNet sales for 20192022 increased 11.1% primarily due primarily to selling price increases in all Reportable Segments and higher paintproduct sales volume in The Americas Group, partially offset by lower sales volume in the Consumer Brands and selling price increases.Performance Coatings Groups. Currency translation rate changes decreased 20192022 consolidated netNet sales by 1.4%.1.5%, while acquisitions which were completed during the past twelve months added approximately 1.1% to consolidated Net sales. Net sales of all consolidated foreign subsidiaries decreased 8.7%increased 1.7% to $3.679$4.294 billion for 20192022 versus $4.028$4.223 billion for 20182021 primarily due primarily to industrial market softnessbenefits from acquisitions offset by weakening demand in the Europe and macroeconomic pressures in China and Australia.Asia Pacific regions. Net sales of all operations other than consolidated foreign subsidiaries increased 5.3%13.6% to $14.222$17.855 billion for 20192022 versus $13.507$15.722 billion for 2018.2021.
Net sales in The Americas Group increased primarily due primarily to higher paint sales volume across most end market segments and selling price increases. increases as well as volume growth in all end markets, particularly residential repaint.Net sales from stores in U.S. and Canada open for more than twelve calendar months increased 5.3%11.7% in the year over last year'syear’s comparable period. Currency translation rate changes reduced netNet sales by 0.9%0.4% compared to 2018.2021. During 2019,2022, The Americas Group opened 9489 new stores and closed 3217 redundant locations for a net increase of 6272 stores, increasingwith a net increase of 75 new stores in the U.S. and Canada. The total number of stores in operation at December 31, 2019 to 4,7582022 was 4,931 in the United States, Canada, Latin America and the Caribbean. The Americas Group’s objective is to expand its store base by an average of 2% each year, primarily through internalorganic growth. Sales of products other than paint increased approximately 5.9%0.2% over last year. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.
Net sales of the Consumer Brands Group decreased in 20192022 primarily due to the divestiture of the Guardsman insurance business and lower sales outside of North Americavolumes in someall regions and the Wattyl divestiture, offset by selling price increases in all regions. Currency translation rate changes decreased Net sales by 1.1% compared to 2021.
The Performance Coatings Group’s Net sales in 2022 increased primarily due to higher organic sales driven by selling price increases in all end markets, partially offset by selling price increases and higher volumelower sales to some of the group's retail customers. In 2020, the Consumer Brands Group plans to continue promotions of new and existing products and expand its customer base and product assortment at existing customers.
The Performance Coatings Group’s net sales in 2019 decreased due primarily to softer sales outside of North America and unfavorable currency translation rate changes, partially offset by selling price increases.volumes. Currency translation rate changes decreased netNet sales 2.3%3.8% compared to 2018.2021, largely offset by the impact of acquisitions completed during the past twelve months which added approximately 3.7% to Net sales. In 2019,2022, the Performance Coatings Group opened 3added 35 new branches, and closed 4 locations decreasingincreasing the total from 282 to 281317 branches open in the United States, Canada, Mexico, South America, Europe and Asia at
year-end. In 2020, the Performance Coatings Group plans to continue expanding its worldwide presence and improving its customer base.Asia.
Net sales in the Administrative segment, which primarily consists of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, decreasedincreased by an insignificant amount in 2019.2022.
Income Before Income Taxes
The following table presents the components of income before income taxes as a percentage of net sales:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| | | % of Net Sales | | | | % of Net Sales |
Net sales | $ | 22,148.9 | | 100.0 | % | | $ | 19,944.6 | | 100.0 | % |
Cost of goods sold | 12,823.8 | | 57.9 | % | | 11,401.9 | | 57.2 | % |
Gross profit | 9,325.1 | | 42.1 | % | | 8,542.7 | | 42.8 | % |
Selling, general, and administrative expenses (SG&A) | 6,014.5 | | 27.2 | % | | 5,572.5 | | 27.9 | % |
Other general (income) expense - net | (24.9) | | (0.1) | % | | 101.8 | | 0.5 | % |
Amortization | 317.1 | | 1.4 | % | | 309.5 | | 1.5 | % |
Impairment of trademarks | 15.5 | | 0.1 | % | | — | | — |
Interest expense | 390.8 | | 1.8 | % | | 334.7 | | 1.7 | % |
Interest income | (8.0) | | — | % | | (4.9) | | — | % |
Other expense (income) - net | 47.0 | | 0.1 | % | | (19.5) | | (0.1) | % |
Income before income taxes | $ | 2,573.1 | | 11.6 | % | | $ | 2,248.6 | | 11.3 | % |
Consolidated gross profitCost of goods sold increased $617.5 million$1.422 billion, or 12.5%, in 20192022 compared to the same period in 2018. 2021 primarily due to higher raw material costs (including petrochemical-derived resins, latex and solvents, and titanium dioxide), partially offset by lower product volume and favorable currency translation rate changes. Currency translation rate changes decreased Cost of goods sold by 2.0% in the current year.
Consolidated grossGross profit increased $782.4 million in 2022 compared to the same period in 2021. This increase in Gross profit dollars was driven by higher sales in The Americas Group and Performance Coatings Group. This was partially offset by higher raw material costs in each Reportable Segment and lower sales in the Consumer Brands Group. Consolidated Gross profit as a percent to consolidated netNet sales increaseddecreased to 44.9%42.1% in 20192022 from 42.3%42.8% in 2018. Consolidated2021. The gross profit dollars and percent improvedmargin rate decreased primarily as a result ofhigher paint sales volume in North American stores, selling price increases, improved supply chain efficiencies, moderating raw material costs, and lower acquisition-related amortization expense, partially offset by unfavorable currency translation rate changes. costs.
The Americas Group’s grossGross profit for 20192022 increased $384.2$477.7 million compared to the same period in 2018.2021. The Americas Group's grossGroup’s Gross profit dollars and margin improvedincreased primarily as a result of higher paint sales volume, selling price increases, and moderatingpartially offset by higher raw material costs. The Americas Group’s gross margin rate decreased primarily due to higher raw material costs. The Consumer Brands Group’s grossGross profit increased $125.5decreased $68.6 million in 20192022 compared to the same period in 2018.2021. The Consumer Brands Group's grossGroup’s Gross profit dollars and margin improved duerate decreased primarily to improved supply chain efficiencies, synergies, moderatingas a result of lower sales volume and higher raw material costs, and lower acquisition-related depreciation expense, partially offset by lower paint sales volume. costs.The Performance Coatings Group’s grossGross profit for 20192022 increased $51.3$363.7 million compared to the same period in 2018.2021. The Performance Coatings Group's grossGroup’s Gross profit dollars and margin improvedrate increased due primarily to selling price increases and moderating raw material costs,higher sales, partially offset by unfavorable currency translation rate changes.higher raw material costs.
Consolidated SG&A increased by $241.1$442.0 million compared to the same period in 2021 primarily due primarily to increased expenses to support higher sales levels and net new store openings, partially offset by good cost control. SG&A increased asopenings. As a percent of Net sales, SG&A decreased 70 basis points compared to 29.5%the same period in 2019 from 28.7% in 20182021 as a result of softer sales outside of North America. effective cost control measures.
The Americas Group'sGroup’s SG&A increased $196.7$304.4 million for the year due primarily to increased spending due to the number offrom new store openings and general comparable store expensescosts to support higher sales levels.levels, including the hiring of additional sales representatives. The Consumer Brands Group’s SG&A increased by $12.7$52.6 million for the year primarily due to increased expenses to support new customer programs.restructuring actions and higher employee costs, offset by favorable currency translation rate changes. The Performance Coatings Group’s SG&A decreasedincreased by $0.9$82.1 million for the year relatedprimarily due to softerrestructuring actions and to support higher sales outside of North America.levels, partially offset by favorable currency translation rate changes and effective cost control measures. The Administrative segment’s SG&A increased $32.6$2.9 million primarily due to increased investments in information systems and increased compensation, including stock-based compensation.
Other general expense - net decreased $150.0 million in 2019 comparedhigher employee costs.Refer to 2018. The decrease was mainly caused by a decrease of $147.6 million in the Administrative segment, which was primarily attributable to a decrease in expense recognized related to provisions for environmental matters. The expense recognized related to environmental provisions decreased $153.3 million from the prior year. This decrease was the result of the Company reaching a series of agreements in 2018 with the Environmental Protection Agency for remediation plans with cost estimates at one of the Company's four major sites which required significant environmental provisions to be recorded. See Notes 10 and 18 to the Consolidated Financial Statements in Item 8 for additional information concerning environmental matters and Other general expense - net, respectively.
As required by the Goodwill and Other Intangibles Topic of the ASC, management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of October 1, 2019. During the fourth quarter of 2019, the Company recognized non-cash pre-tax impairment charges totaling $122.1 million related to recently acquired trademarks. These charges included impairments totaling $117.0 million in the Performance Coatings Group and $5.1 million in the Consumer Brands Group. In the Performance Coatings Group, $75.6 million related to trademarks in North America directly associated with strategic decisions made to rebrand industrial products to the Sherwin-Williams® brand name, $25.7 million related to trademarks in the Asia Pacific region as a direct result of recent performance which reduced the long-term forecasted net sales and $15.7 million related to other recently acquired trademarks in various regions. The impairment tests in 2018 did not result in any impairment. See Note 6 to the Consolidated Financial Statements in Item 8 for additional information.
Interest expense decreased $17.4 million in 2019 primarily due to lower average debt levels. Interest and net investment income increased $20.7 million in 2019 including an $18.8 million gain recognized during the fourth quarter of 2019 after the Company received a favorable court decision in Brazil related to the recovery of certain indirect taxes previously paid over gross sales. See Note 184 to the Consolidated Financial Statements in Item 8 for additional information on the Brazil indirect tax matter.restructuring actions.
During 2019, the Company recognized a $34.7Other general (income) expense - net improved $126.7 million benefit from the resolution of the California public nuisance litigation as a result of the final court approved agreement issued during the third quarter of 2019. During the third quarter of 2018, the Company recognized expense of $136.3 million relatedin 2022 compared to 2021. The change was primarily attributable to the California litigation.prior year recognition of a $111.9 million loss on the Wattyl divestiture in March 2021, a $3.1 million decrease in provisions for environmental matters in the Administrative segment, and an $11.7 million increase in the Gain on sale or disposition of assets. See Notes 3, 11 and 20 to the Consolidated Financial Statements in Item 8 for additional information concerning the Wattyl divestiture, environmental matters and Other general (income) expense - net, respectively.
For information on the amortization of acquired intangible assets and related impairment considerations, see Note 7 to the Consolidated Financial Statements in Item 8.
Interest expense increased $56.1 million in 2022 primarily due to higher interest rates associated with short-term borrowings. See Note 118 to the Consolidated Financial Statements in Item 8 for additional information on the Company’s outstanding debt.
Other expense (income) - net increased $66.5 million in 2022 compared to 2021 primarily due to increased investment losses of $40.1 million and foreign currency transaction related losses which increased by $21.6 million. See Note 20 to the Consolidated Financial Statements in Item 8 for additional information related to the litigation.
Other expense (income) - net.
The following table presents income before income taxes by segment and as a percentage of net decreasedsales by $3.4 million in 2019segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Income Before Income Taxes: | | | | | | | |
The Americas Group | $ | 2,436.6 | | $ | 2,239.1 | | $ | 197.5 | | | 8.8 | % |
Consumer Brands Group | 225.7 | | 358.4 | | (132.7) | | | (37.0) | % |
Performance Coatings Group | 734.9 | | 486.2 | | 248.7 | | | 51.2 | % |
Administrative | (824.1) | | (835.1) | | 11.0 | | | 1.3 | % |
Total | $ | 2,573.1 | | $ | 2,248.6 | | $ | 324.5 | | | 14.4 | % |
| | | | | | | |
Income Before Income Taxes as a % of Net Sales: | | | | | | | |
The Americas Group | 19.2 | % | | 20.0 | % | | | | |
Consumer Brands Group | 8.4 | % | | 13.2 | % | | | | |
Performance Coatings Group | 10.8 | % | | 8.1 | % | | | | |
Administrative | nm | | nm | | | | |
Total | 11.6 | % | | 11.3 | % | | | | |
| | | | | | | |
nm - not meaningful | | | | | | | |
Income Tax Expense
The effective income tax rate for 2022 was 21.5% compared to 2018. This change17.1% in 2021. The increase in the effective rate was primarily attributabledue to a $38.7 million gaindecrease in tax benefits related to employee share-based payments and a net unfavorable impact of various other tax benefits received by the recognitionCompany in 2022 as compared to 2021.See Note 21 to the Consolidated Financial Statements in Item 8 for additional information.
Net Income Per Share
Diluted net income per share for 2022 increased to $7.72 per share from $6.98 per share in 2021. Diluted net income per share in 2022 included acquisition-related amortization expense of indirect tax credits partially offset by $14.8 million in losses$0.81 per share, severance and other expense of $0.15 per share, and a $0.05 per share charge related to the extinguishment of the 2.25%trademark impairments. Refer to Notes 4 and 2.75% Senior Notes recorded in the Administrative segment and an increase of $13.6 million related to pension plan settlement and other miscellaneous pension expenses. In addition, foreign currency related transaction losses increased $12.2 million in 2019, primarily in The Americas Group and Performance Coatings Group, which were offset by
other miscellaneous sources of income, including dividend and royalty income. There were no other items within Other income or Other expense that were individually significant at December 31, 2019. See Notes 7 8 and 18 to the Consolidated Financial Statements in Item 8 for additional information related to debt, pensionsregarding the restructuring actions and Other expense (income) - net,trademark impairments, respectively.
|
| | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | % Change |
Income Before Income Taxes: | | | | | |
The Americas Group | $ | 2,056.5 |
| | $ | 1,898.4 |
| | 8.3 | % |
Consumer Brands Group | 373.2 |
| | 261.1 |
| | 42.9 | % |
Performance Coatings Group | 379.1 |
| | 452.1 |
| | (16.1 | )% |
Administrative | (827.0 | ) | | (1,251.9 | ) | | 33.9 | % |
Total | $ | 1,981.8 |
| | $ | 1,359.7 |
| | 45.8 | % |
Consolidated Income before income taxes in 2019 increased $622.1 million to $1.982 billion, or 11.1% of net sales, compared to $1.360 billion, or 7.8% of net sales in 2018. Income before income taxes increased $158.1 million and $112.1 million in The Americas Group and Consumer Brands Group, and decreased $73.0 million in the Performance Coatings Group when compared to 2018. In 2019, the Administrative segment expenses favorably impacted Income before income taxes by $424.9 million when compared to 2018 primarily due to lower expense recognized related to environmental matters, benefits from the resolution of the California litigation as well as a Brazil indirect tax credit, and decreased acquisition-related expenses.
The effective income tax rate for 2019 was 22.2% compared to 18.5% in 2018. The increase in the effective rate in 2019 was primarily due to a $74.3 million tax credit investment loss recognized during the second quarter of 2019 related to the reversal of net tax benefits recognized in previous tax years from federal renewable energy tax credit funds. This loss negatively impacted the 2019 effective tax rate by 370 basis points. See Note 19 to the Consolidated Financial Statements in Item 8 for additional information.
Diluted net income per share for 2019 increased to $16.49 per share from $11.67 per share for 2018. Diluted net income per share in 2019 included charges for acquisition-related costs of $3.21 per share and other adjustments totaling $1.42 per share. Acquisition-related costs include integration costs (which primarily consist of professional service expenses, salaries and other employee-related expenses dedicated directly to the integration effort, and severance expenses all of which are included in Selling, general and administrative and other expenses and Cost of goods sold) and amortization of intangible assets recognized in the June 2017 acquisition of Valspar (included in Amortization). Total other adjustments included charges of $1.00 per share for non-cash trademark impairment charges, a tax credit investment loss of $0.79 per share and pension plan settlement expense of $0.27 per share, partially offset by a Brazil indirect tax credit of $0.36 per share and a benefit from the resolution of the California litigation of $0.28 per share. Currency translation rate changes decreased diluted net income per share in the year by $0.18$0.07 per share.
Diluted net income per share in 20182021 included charges for acquisition-related costsamortization expense of $4.15$0.83 per share and other adjustments totaling $2.71 per share. Total other adjustments in 2018 included charges of $1.32a $0.34 per share loss from the Wattyl divestiture. See Note 3 to the Consolidated Financial Statements in Item 8 for environmental expense provisions, $1.09 per share for California litigation expense and $0.30 per share for pension settlement expense.additional information regarding the Wattyl divestiture.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company’s financial condition, liquidity and cash flow continued to be strong in 2019 as2022. The Company generated $1.920 billion in net operating cash increaseddespite higher raw material costs and inflationary pressures which negatively impacted gross margin and net income. The net operating cash generation was primarily attributable to a record $2.321 billion primarily due to improved operating results as consolidated income from continuing operations before income taxes increased to $1.982was $2.573 billion or 11.1%11.6% of net sales. Strong net operatingThis strong cash provided the funds necessary forgeneration enabled the Company to invest $406.2
$1.003 billion in acquisitions and $644.5 million in capital expenditures, and acquisitions of businesses, reduce total debt by $665.8 million and return $1.200$1.502 billion to shareholders in the form of cash dividends and share buybacksrepurchases during the year.
During 2019,2022, the Company generated EBITDA from continuing operations of $2.906$3.545 billion and Adjusted EBITDA of $3.608 billion. See the Non-GAAP Financial Measures section in Item 67 for definitionthe definitions and calculationcalculations of EBITDA and Adjusted EBITDA. As of December 31, 2019,2022, the Company had cashCash and cash equivalents of $161.8$198.8 million and total debt outstanding of $8.685$10.570 billion. Total debt, net of cashCash and cash equivalents, was $8.523$10.371 billion and was less than 3x2.9 times the Company’s Adjusted EBITDA in 2019.2022.
Net Working Capital
Net working capital, defined as Total current assets less Total current liabilities, (net working capital) increased $63.0$612.8 million to a surplusdeficit of $109.8$53.0 million at December 31, 20192022 from a surplusdeficit of $46.8$665.8 million at December 31, 2018.2021. The net working capital increase iswas primarily due to an increase in current assets, partially offset by an increase inparticularly Inventories.
Comparing current liabilities primarily attributableasset balances at December 31, 2022 to the recognition of operating lease
liabilities upon the adoption of the Leases Topic of the ASC (ASU 2016-02) as of January 1, 2019.December 31, 2021, Accounts receivable increased $70.1$211.2 million inventories increased $74.3 million primarily due to intentionalhigher sales, Inventories increased $699.3 million due to higher raw material costs and inventory build to better service customers, otherlevels, and Other current assets increased $136.5decreased $89.6 million primarily related torefundable income taxes and prepaid expenses.
Current liability balances increased $241.2 million at December 31, 2022 compared to December 31, 2021 primarily due tothe surplus assets transferred from the Company's terminated domestic defined benefit pension plan as discussed in the deferred pension and other assets section below. In additiontiming of payments related to the increase in liabilities as a result of adopting ASU 2016-02, Accounts payable increased $76.9 million, partially offset by a decrease in the California litigation accrual of $124.3 million as a result of the terms of the settlement discussed in Note 11 of Item 8 and a decrease in Other accruals of $152.0 million due to timing of payments.and Accrued taxes.
As a result of the net effect of these changes, the Company’s current ratio improved to 1.020.99 at December 31, 20192022 from 1.010.88 at December 31, 2018.2021. Accounts receivable as a percent of Net sales increaseddecreased to 11.7%11.6% in 20192022 from 11.5%11.8% in 2018.2021. Accounts receivable days outstanding remained unchanged from 2018 at 61increased to 58 days in 2019. 2022 from 57 days in 2021.In 2019,2022, provisions for allowance for doubtful collection of accounts decreased $9.4increased $7.7 million, or 20.5%15.7%. Inventories as a percent of Netnet sales increased to 10.6%11.9% in 20192022 from 10.4%9.7% in 2018 primarily to support future growth.2021. Inventory days outstanding remained unchanged from 2018 at 81was 98 days in 2019.2022 compared to 75 days in 2021. The Company has sufficient total available borrowing capacity to fund its current operating needs.
Property, Plant and Equipment
Net property, plant and equipment increased $339.7 million to $2.207 billion at December 31, 2022 due primarily to capital expenditures of $644.5 million and assets acquired through business combinations of $93.7 million, partially offset by depreciation expense of $264.0 million, sale or disposition of assets with remaining net book value of $24.9 million, and currency translation and other adjustments of $109.6 million, which primarily includes government incentives associated with the construction of our new headquarters and R&D center. See Note 1 to the Consolidated Financial Statements in Item 8 for additional information on government incentives. The Company has entered into an agreement to sell its current headquarters and R&D center. The sale is expected to be completed during 2023.
Capital expenditures during 2022 in The Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores. In the Consumer Brands Group and the Performance Coatings Group, capital expenditures during 2022 were primarily attributable to operational efficiencies, capacity and health and safety initiatives at sites currently in operation. The Administrative segment incurred capital expenditures primarily related to construction activities associated with the new headquarters and R&D center. Construction on the new headquarters and R&D center is expected to continue in 2023, with completion expected in 2024 at the earliest.
In 2023, the Company expects to spend more than 2022 for capital expenditures, which it will fund primarily through operating cash generated. Core capital expenditures in support of growth initiatives in 2023 are expected to be for investments in various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings and new or upgraded information systems hardware. Additionally, the Company will continue to construct its new headquarters and R&D center. Refer to “Real Estate Financing” section below for further information on the financing transaction for the new headquarters.
Real Estate Financing
In December 2022, the Company closed a transaction to sell and subsequently lease back its partially-constructed new headquarters. As part of the terms of the transaction, the Company is contractually obligated for completing the construction of the building and related improvements at the new headquarters. This transaction did not meet the criteria for recognition as an asset sale under U.S. generally accepted accounting principles (US GAAP) and as such, was accounted for as a real estate financing transaction.
The Company received initial proceeds at closing related to the transaction. Additionally, the Company will receive incremental reimbursement of construction and other costs incurred, generally on a quarterly basis, until completion of construction with
total proceeds expected to be received under this agreement approximating $800 million to $850 million.The initial lease term includes the construction period and extends for 30 years thereafter, and the Company has the right and option to extend the lease term. The lease payment amounts during the construction period are dependent upon the timing and amount of total reimbursement of construction and other costs received by the Company. Lease payments over the next twelve months are expected to be approximately $22 million, while lease payments through the remaining construction period are expected to be approximately $55 million. The amount of the lease payments during the initial 30 year lease term will be calculated upon completion of the construction period and receipt of total reimbursement of construction and other costs.
In December 2022, the Company received approximately $210 million at closing. The net proceeds were recognized as proceeds from real estate financing transactions within the Financing Activities section of the Statements of Consolidated Cash Flows, and corresponding financing obligations were recognized within Other long-term liabilities and Other accruals on the Consolidated Balance Sheets. The Company will continue to recognize the related assets within Property, plant and equipment, net on the Consolidated Balance Sheets under US GAAP. These assets will be subject to depreciation over their useful lives in accordance with the Company’s accounting policies. The Company will also allocate payments between interest and repayment of the financing liability over the life of the agreement.
Refer to Note 1 to the Consolidated Financial Statements within Item 8 for further information.
Goodwill and Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased $48.1$448.6 million in 20192022 primarily due to incremental goodwill recognized in 20192022 acquisitions of $14.2$493.5 million, partially offset by foreign currency translation rate fluctuations.
Intangible assets increased $0.5 million in 2022 primarily due to finite-lived intangible assets recognized in 2022 through acquisitions of $361.0 million and capitalized software of $21.9 million, partially offset by amortization of finite-lived intangible assets of $317.1 million, foreign currency translation rate fluctuations of $33.9 million. Intangible assets decreased $467.1 million in 2019 primarily due to amortization of finite-lived intangible assets of $312.8 million, impairment of indefinite-lived trademarks of $122.1$51.1 million, and foreign currency translation rate fluctuations$15.5 million of $70.4 million, partially offset by finite-lived intangible assets recognized in 2019 acquisitions of $34.9 million. trademark impairment charges.
See Note 63 to the Consolidated Financial Statements in Item 8 for additional information related to acquisitions and divestitures. See Note 7 to the Consolidated Financial Statements in Item 8 for a description of goodwill, identifiable intangible assets and asset impairments recognized in accordance with the Goodwill and Other Intangibles Topic of the ASC and summaries of the remaining carrying values of goodwill and intangible assets.
Deferred Pension and Other Assets
Deferred pensionOther assets of $43.0increased $238.3 million to $1.027 billion at December 31, 2019 represent the excess of the fair value of assets over the actuarially determined projected benefit obligations.2022. The decrease in Deferred pension assets during 2019 of $227.7 million from $270.7 million last yearincrease was primarily due to the termination of the Company's domestic defined benefit pension plan.non-traded investments. See Note 8 to the Consolidated Financial Statements in Item 8 and the Defined Benefit Pension and Other Postretirement Benefit Plans section below.
Other assets decreased $22.6 million to $561.4 million at December 31, 2019 due primarily to a decrease in deferred tax assets.
Property, Plant and Equipment
Net property, plant and equipment increased $58.4 million to $1.835 billion at December 31, 2019 due primarily to capital expenditures of $328.9 million and assets acquired through business combinations of $16.8 million, partially offset by depreciation expense of $262.1 million and sale or disposition of assets with remaining net book value of $37.5 million. The remaining change of $12.3 million is attributable to currency translation and other adjustments. Capital expenditures during 2019 in The Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores. In the Consumer Brands Group and the Performance Coatings Group, capital expenditures during 2019 were primarily attributable to improvements and normal equipment replacements in manufacturing and distribution facilities. The Administrative segment incurred capital expenditures primarily for information systems hardware. On February 6, 2020, the Company announced that it is finalizing plans to build and occupy a new global headquarters (new headquarters) in downtown Cleveland, Ohio and a new research and development (R&D) center in the Cleveland suburb of Brecksville. Preliminary plans require the Company to invest a minimum of $600 million of capital expenditures to build both the new headquarters and R&D center. Construction on the new headquarters and R&D center is not expected to commence before mid-2020, with completion in 2023 at the earliest. The plans are contingent upon completion of standard due diligence, approvals of economic development incentives and other matters at the state, county and city levels, and resolution of business and legal matters that accompany such major real estate investment projects. The Company has not made any decisions regarding the disposition of the Company’s current Cleveland-area headquarters and R&D centers, which are all owned by the Company. Due to the remaining contingencies and uncertainties listed above, an estimate of the impact on the financial statements cannot be made at this time. In 2020, the Company expects to spend more than 2019 for capital expenditures. The predominant share of the capital expenditures in 2020 is expected to be for various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings, new or upgraded information systems hardware and the new global headquarters and R&D center in Ohio. The Company does not anticipate the need for any specific long-term external financing to support these capital expenditures.
Debt
Total debt including short-term borrowings decreased by $658.5 million to $8.685 billion in 2019. This was primarily attributable to the Company repurchasing $1.071 billion of its 2.25% Senior Notes due May 2020 and $490.0 million of its 2.75% Senior Notes due June 2022, partially offset by the Company issuing $800.0 million of 2.95% Senior Notes due 2029 and $550.0 million of 3.80% Senior Notes due 2049 (collectively the "New Notes") in a public offering during the third quarter of 2019. The net proceeds from the issuance of the New Notes will be used for general corporate purposes. The repurchases of Senior Notes above resulted in a loss of $14.8 million recorded in other expense (income) - net. See Note 18 1 to the Consolidated Financial Statements in Item 8 for additional information.
Debt (including Short-term borrowings)
| | | | | | | | | | | |
| December 31, | | December 31, |
| 2022 | | 2021 |
Long-term debt | $ | 9,591.6 | | | $ | 8,851.5 | |
Short-term borrowings | 978.1 | | | 763.5 | |
Total debt outstanding | $ | 10,569.7 | | | $ | 9,615.0 | |
Total debt outstanding including Short-term borrowings increased by $954.7 million to $10.570 billion in 2022. Short-term borrowings are primarily comprised of amounts outstanding under the Company’s domestic commercial paper program and various foreign credit facilities. The Company’s Long-term debt primarily consists of senior notes.
In August 2022, the Company issued $600.0 million of 4.05% Senior Notes due August 2024 and $400.0 million of 4.25% Senior Notes due August 2025 in a public offering. The net proceeds from the issuance of these notes were used to repay borrowings outstanding under the Company’s credit agreement dated May 9, 2016, as amended, and domestic commercial paper program.
On May 9, 2019, the Company entered into a U.S. Dollar to Euro cross currency swap contract with a total notional amount of $400.0 million to hedge the Company's net investment in its European operations. This contract has been designated as a net investment hedge and will mature on January 15, 2022. During the term of the contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively converting a portion of the Company's U.S. Dollar denominated fixed-rate debt to Euro denominated fixed-rate debt. The fair value of the contract is included in Other assets on the balance sheet. The changes in fair value are recognized in the foreign currency translation adjustments component of Accumulated other comprehensive loss. For the year ended December 31, 2019, an unrealized gain of $1.1 million, net of tax, was recognized in Accumulated other comprehensive loss.
On July 19, 2018,August 30, 2022, the Company and threetwo of its wholly-owned subsidiaries, Sherwin-Williams Canada Inc., (SW Canada) and Sherwin-Williams Luxembourg S.à r.l and Sherwin-Williams UK Holding Limited (allr.l. (SW Luxembourg, together with the Company and SW Canada, the Borrowers), entered into a new five-year $2.000$2.250 billion credit agreement. This credit agreement (2022 Credit Agreement). The 2022 Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements, andrequirements. The 2022 Credit Agreement replaced athe $2.000 billion credit agreement dated July 16, 2015,June 29, 2021, as amended, which was terminated. This credit agreement allowsterminated effective August 30, 2022. The 2022 Credit Agreement will mature on August 30, 2027 and provides that the Company may request to extend the maturity date of the facility withfor two additional one-year extension options andperiods. In addition, the 2022 Credit Agreement provides that the Borrowers tomay increase the aggregate amountsize of the facility up to $2.750 billion, bothan additional amount of which are$750.0 million, subject to the discretion of each lender. In addition,lender to participate in the increase, and the Borrowers may request letters of credit in an amount of up to $250.0 million.On October 8, 2019, the Company amended this agreement to, among other things, extend the maturity date to October 8, 2024. At December 31, 2019 and 2018, there were no short-term borrowings
The Company’s available capacity under this credit agreement.
In September 2017, the Company entered into a five-year letter of credit agreement, subsequently amended on multiple dates, with an aggregate availability of $625.0 million at December 31, 2019. On May 6, 2016, the Company entered into a five-year credit agreement, subsequently amended on multiple dates. This credit agreement gives the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit up to an aggregate availability of $875.0 million at December 31, 2019. Both of theseits committed credit agreements are being usedis reduced for general corporate purposes. At December 31, 2019 and 2018, there were no short-term borrowingsamounts outstanding under these credit agreements.
Borrowing outstanding under the Company’sits domestic commercial paper program asand letters of credit. At December 31, 2019 and 2018 were $191.9 million and $291.4 million, respectively, with a weighted average interest rate2022, the Company had unused capacity under its various credit agreements of 2.1% and 3.0%, respectively. Borrowings outstanding under various other foreign programs were $12.8 million and $37.0 million at December 31, 2019 and 2018, respectively, with a weighted average interest rate of 4.3% and 9.3%, respectively.$2.742 billion.
See Note 78 to the Consolidated Financial Statements in Item 8 for a detailed description and summary of the Company’s outstanding debt, short-term borrowings and other available financing programs.
Defined Benefit Pension and Other Postretirement Benefit Plans
In 2018, the Company terminated its domestic defined benefit pension plan for salaried employees (Terminated Plan) and the participants were moved to a qualified replacement plan (Qualified Replacement Plan), which is the Company's domestic defined contribution plan. The Company settled the liabilities of the Terminated Plan through a combination of (i) lump sum payments to eligible participants who elected to receive them and (ii) the purchase of annuity contracts for participants who either did not elect lump sums or were already receiving benefit payments. The lump sum payments were paid in December 2018 and resulted in a settlement charge of $37.6 million in 2018. During the first quarter of 2019, the Company purchased annuity contracts to settle the remaining liabilities of the Terminated Plan. The annuity contract purchase resulted in a settlement charge of $32.4 million in the first quarter of 2019. The remaining surplus of the Terminated Plan is being used, as prescribed in the applicable regulations, to fund Company contributions to the Qualified Replacement Plan. During 2019, the Company transferred the remaining surplus of $242.2 million to a suspense account held within a trust for the Qualified Replacement Plan. This amount included $131.8 million of Company common stock (300,000 shares). The shares are treated as treasury stock in accordance with ASC 715. The Company's domestic defined benefit pension plan for hourly employees continues to operate.
In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans increased $12.0decreased $20.5 million to $92.7$58.5 million primarily due to changes in the
actuarial assumptions. PostretirementThe Company’s liability for other postretirement benefits other than pensions increased $5.9decreased $122.6 million to $280.5$153.8 million at December 31, 20192022 due primarily to a plan amendment and changes in the actuarial assumptions.
The assumed discount rate used to determine the projected benefit obligation for the domestic defined benefit pension plans was 3.4%plan increased to 5.3% at December 31, 2019 and 3.6%2022 from 3.1% at December 31, 2018 and 2017.2021. The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans decreasedincreased to 2.2%5.1% at December 31, 20192022 from 3.0%2.3% at December 31, 2018. The decrease in the discount rates for both the domestic and foreign defined benefit pension plans was primarily due to lower interest rates.2021. The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations decreasedincreased to 3.2%5.2% at December 31, 20192022 from 4.2%2.8% at December 31, 2018 for the same reason.2021. The rate of compensation increases used to determine the projected benefit obligations at December 31, 2019 was 3.0% for the domestic pension plan and 3.1% for foreign pension plans, which was comparable to the rates usedincrease in the prior year. discount rates was primarily due to higher interest rates.
In deciding on the raterates of compensation increases, management considered historical Company increases as well as expectations for future increases. The expected long-term rate of return on assets remained 5.0%compensation increases used to determine the projected benefit obligation at December 31, 20192022 was 3.0% for the domestic pension plan and 3.4% for foreign pension plans, which was slightly lower for most foreign plans. comparable to the rates used in the prior year.
In establishing the expected long-term rate of return on plan assets, for 2019, management considered the historical rates of return, the nature of investments and an expectation for future investment strategies. The assumed health care cost trend rates usedexpected long-term rate of return on assets for the domestic defined benefit pension plan increased to determine6.3% at December 31, 2022 from 5.0% at December 31, 2021. The expected long-term rate of return on assets for the net periodicforeign defined benefit cost of postretirement benefits other than pensions for 2019 were 4.9% and 9.8%, respectively, for medical and prescription drug cost increases, both decreasing graduallypension plans increased to 4.5% in 2026. 5.6% at December 31, 2022 from 3.2% at December 31, 2021.
In developing the assumed health care cost trend rates, management considered industry data, historical Company experience and expectations for future health care costs. The assumed health care cost trend rates used to determine the projected benefit obligation for other postretirement benefit obligations at December 31, 2022 were 5.5% and 8.3% for medical and prescription drug cost increases, respectively, both decreasing gradually to 4.5% in 2032. The assumed health care cost trend rates for medical and prescription costs used to determine the projected benefit obligation for other postretirement benefit obligations at December 31, 2021 were 5.1% and 8.3%, respectively.
For 2020 Net pension costThe respective year-end assumptions described above for the ongoing domestic pension plan,Company’s defined benefit plans are also used to determine expense for the Company will use a discount rate of 3.4%, an expected long-term rate of return on assets of 5.0% and a rate of compensation increase of 3.0%. Lower discount rates and expected long-term rates of return on plan assets will be used for most foreign plans. For 2020, Net periodic benefit costs for postretirement benefits other than pensions, the Company will use a discount rate of 3.2%.next year. Net pension cost in 20202023 for the ongoing domestic pension plan and foreign pension plans is expected to be approximately $2.8 million.$1.9 million and $1.6 million, respectively. Net periodic benefit costscredit for other postretirement benefits other than pensions in 20202023 is expected to be approximately $10.0$15.8 million. The credit for 2023 is primarily due to amortization of the impact of a plan amendment. See Note 89 to the Consolidated Financial Statements in Item 8 for moreadditional information on the Company’s obligations and funded status of its defined benefit pension plans and other postretirement benefits other than pensions.benefits.
Deferred Income Taxes
Deferred income taxes at December 31, 20192022 decreased $161.0$86.6 million from the prior year primarily due to the change in deferred taxes as a result of the amortization of intangible assets and settlement of the domestic defined benefit pension plan in the current year. See Note 19 to the Consolidated Financial Statements in Item 8 for more information on deferred taxes.
Other Long-Term Liabilities
Other long-term liabilities increased $187.4 million during 2019 due primarily to the final court approved agreement to resolve the California public nuisance litigation, which impacted the timing and amount of expected payments, and an increase related to the reversal of net tax benefits recognized in previous tax years from federal renewable energy tax credit funds. See Notes 10 and 11, and 1921 to the Consolidated Financial Statements in Item 8 for additional information on litigationdeferred taxes.
Other Long-Term Liabilities
Other long-term liabilities increased $185.6 million during 2022 due primarily to an increase in long-term commitments related to investments in U.S. affordable housing and incomehistoric renovation real estate partnerships and liabilities associated with real estate financing transactions, partially offset by the impact of expected settlements related to tax matters, respectively.positions over the next twelve months as disclosed in Note 21 to the Consolidated Financial Statements in Item 8, favorable fair value movements related to the Company’s outstanding cross currency swap contracts and favorable employee benefit plan experience.
Environmental-Related Liabilities
The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures were included in the normal operating expenses of conducting business. The Company’s capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company’s financial condition, liquidity, cash flow or results of operations during 2019.2022. Management does not expect that such capital expenditures, depreciation and other expenses will be material to the Company’s financial condition, liquidity, cash flow or results of operations in 2020.2023. See Note 1011 to the Consolidated Financial Statements in Item 8 for further information on environmental-related long-term liabilities.
Contractual and Other Obligations and Commercial Commitments
During 2022, the Company signed agreements related to various acquisitions, including related to the German-based Specialized Industrial Coatings Holding (SIC Holding), a Peter Möhrle Holding and GP Capital UG venture comprised of Oskar Nolte GmbH and Klumpp Coatings GmbH. The SIC Holding transaction is expected to close in 2023. Refer to Note 3 for additional information. The Company has certain obligations and commitments to make future payments under contractual and other obligations and commercial commitments. The Company believes that cash generated from operating activities and borrowings available under long-term and short-term debt, including its committed credit agreements and commercial paper program, will be sufficient for it to meet its contractual and other obligations and commercial commitments. The following tables summarize such obligations and commitments as of December 31, 2019.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
Contractual and Other Obligations | | Total | | Less Than 1 Year | | 1–3 Years | | 3–5 Years | | More Than 5 Years |
Long-term debt | | $ | 9,674.5 | | | $ | 0.6 | | | $ | 2,150.9 | | | $ | 1,969.5 | | | $ | 5,553.5 | |
Interest on Long-term debt | | 4,611.2 | | | 348.9 | | | 646.3 | | | 489.2 | | | 3,126.8 | |
Operating leases | | 2,131.5 | | | 479.7 | | | 791.7 | | | 487.7 | | | 372.4 | |
Short-term borrowings | | 978.1 | | | 978.1 | | | | | | | |
Real estate financing transactions (1) | | 178.1 | | | 15.2 | | | 30.9 | | | 31.6 | | | 100.4 | |
Purchase obligations (2) | | 474.4 | | | 474.4 | | | | | | | |
Other contractual obligations (3) | | 613.9 | | | 108.7 | | | 139.2 | | | 107.5 | | | 258.5 | |
Total contractual cash obligations | | $ | 18,661.7 | | | $ | 2,405.6 | | | $ | 3,759.0 | | | $ | 3,085.5 | | | $ | 9,411.6 | |
(1)Excludes real estate financing transactions related to the new headquarters. Refer to “Real Estate Financing” section herein for further information.
(2)Relate to open purchase orders for raw materials at December 31, 2022.
(3)Relate primarily to estimated future capital contributions to investments in the U.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitment Expiration Per Period |
Commercial Commitments | | Total | | Less Than 1 Year | | 1–3 Years | | 3–5 Years | | More Than 5 Years |
Standby letters of credit | | $ | 149.8 | | | $ | 149.8 | | | | | | | |
Surety bonds | | 240.7 | | | 240.7 | | | | | | | |
| | | | | | | | | | |
Total commercial commitments | | $ | 390.5 | | | $ | 390.5 | | | $ | — | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
Contractual Obligations | | Total | | Less Than 1 Year | | 1–3 Years | | 3–5 Years | | More Than 5 Years |
Long-term debt | | $ | 8,539.2 |
| | $ | 430.1 |
| | $ | 1,435.6 |
| | $ | 500.4 |
| | $ | 6,173.1 |
|
Interest on Long-term debt | | 3,416.8 |
| | 244.3 |
| | 462.4 |
| | 411.7 |
| | 2,298.4 |
|
Operating leases | | 1,961.1 |
| | 430.3 |
| | 692.5 |
| | 436.4 |
| | 401.9 |
|
Short-term borrowings | | 204.7 |
| | 204.7 |
| | | | | | |
California litigation accrual | | 76.7 |
| | 12.0 |
| | 24.0 |
| | 24.0 |
| | 16.7 |
|
Real estate financing transactions | | 218.4 |
| | 14.0 |
| | 28.1 |
| | 30.2 |
| | 146.1 |
|
Purchase obligations (1) | | 88.0 |
| | 88.0 |
| | | | | | |
Other contractual obligations (2) | | 222.1 |
| | 132.6 |
| | 50.0 |
| | 18.0 |
| | 21.5 |
|
Total contractual cash obligations | | $ | 14,727.0 |
| | $ | 1,556.0 |
| | $ | 2,692.6 |
| | $ | 1,420.7 |
| | $ | 9,057.7 |
|
| |
| Relate to open purchase orders for raw materials at December 31, 2019. |
| |
(2)
| Relate primarily to estimated future capital contributions to investments in the U.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations. |
|
| | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitment Expiration Per Period |
Commercial Commitments | | Total | | Less Than 1 Year | | 1–3 Years | | 3–5 Years | | More Than 5 Years |
Standby letters of credit | | $ | 61.3 |
| | $ | 61.3 |
| | | | | | |
Surety bonds | | 105.1 |
| | 105.1 |
| | | | | | |
Total commercial commitments | | $ | 166.4 |
| | $ | 166.4 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Warranties
The Company offers product warranties for certain products. The specific terms and conditions of such warranties vary depending on the product or customer contract requirements. Management estimated the costs of unsettled product warranty claims based on historical results and experience and included an amount in Other accruals. Management periodically assesses the adequacy of the accrual for product warranty claims and adjusts the accrual as necessary. Changes in the Company’s accrual for product warranty claims during 2019, 20182022 and 2017,2021, including customer satisfaction settlements during the year, were as follows:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Balance at January 1 | $ | 57.1 |
| | $ | 151.4 |
| | $ | 34.4 |
|
Charges to expense | 32.5 |
| | 31.7 |
| | 39.7 |
|
Settlements | (47.3 | ) | | (57.8 | ) | | (53.1 | ) |
Acquisition, divestiture and other adjustments |
|
| | (68.2 | ) | | 130.4 |
|
Balance at December 31 | $ | 42.3 |
| | $ | 57.1 |
| | $ | 151.4 |
|
Warranty accruals acquired in connection with the Valspar acquisition in 2017 include warranties for certain products under extended furniture protection plans. The decrease in the accrual in 2018 was primarily due to the divestiture of the furniture protection plan business during the third quarter of 2018 for an immaterial amount that approximated net book value. | | | | | | | | | | | |
| 2022 | | 2021 |
Balance at January 1 | $ | 35.2 | | | $ | 43.3 | |
Charges to expense | 30.1 | | | 27.5 | |
Settlements | (29.1) | | | (35.6) | |
| | | |
Balance at December 31 | $ | 36.2 | | | $ | 35.2 | |
Shareholders’ Equity
Shareholders’ equity increased $392.6$664.9 million to $4.123$3.102 billion at December 31, 20192022 from $3.731$2.437 billion last yearyear. Theincreasewas primarily dueattributable to an increase in retained earningsthe generation of $1.120$2.020 billion of net income and an increase in Other capital of $256.6 million, partially offset by purchases of Treasury stock and Treasury stock receivedbenefits from stock option exercises totaling $935.8 million and an increase in Accumulated other comprehensive loss of $49.6 million. Retained earnings increased $1.120 billion during 2019 due to net income of $1.541 billion, partially offset by $420.8 million in cash dividends paid. The increase in Other capital of $256.6 million was due primarily to the recognition of stock-based compensation expense of $134.0 million.This was partially offset by the repurchase of $883.2 million in Treasury stock and stock option exercises. The increasethe payment of $618.5 million in Accumulated other comprehensive loss of $49.6 million was due primarily to unfavorable foreign currency translation effects of $49.8 million.cash dividends. See the Statements of Consolidated ShareholdersShareholders’ Equity and Statements of Consolidated Comprehensive Income in Item 8 for additional information.
The Company purchased 1.6753.4 million shares of its common stock for treasury purposes through open market purchases during 2019.2022. The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire shares in the future. The Company had remaining authorization from its Board of Directors at December 31, 20192022 to purchase 8.4545.2 million shares of its common stock.
The Company's 2019Company’s 2022 annual cash dividend of $4.52$2.40 per share represented 38.7%34% of 20182021 diluted net income per share. The 20192022 annual dividend represented the 4144stth consecutive year of increased dividend payments since the dividend was suspended in 1978. At a meeting held onpayments. On February 19, 2020,15, 2023, the Board of Directors increased the quarterly cash dividend to $1.34$0.605 per share. This quarterly dividend, if approved in each of the remaining quarters of 2020,2023, would result in an annual dividend for 20202023 of $5.36$2.42 per share or a 32.5%31% payout of 20192022 diluted net income per share. See the Statements of Consolidated Shareholders’ Equity in Item 8 for more information concerning Shareholders’ equity.
Cash Flow
Net operating cash increased $377.6decreased $324.7 million in 20192022 to a cash source of $2.321$1.920 billion from a cash source of $1.944$2.245 billion in 20182021 due primarily to an increase in net income and favorable changes in non-cash items, partially offset by changes inincremental working capital when compared to 2018.requirements. Net operating cash increaseddecreased as a percent to sales to 13.0%8.7% in 20192022 compared to 11.1%11.3% in 2018. During 2019, strong net operating cash continued to provide the funds necessary to pay down total net debt, invest in new stores and manufacturing and distribution facilities, and return cash to shareholders through treasury stock purchases and dividends paid.2021.
Net investing cash usage increased $211.0 million$1.131 billion to a usage of $462.6 million$1.608 billion in 20192022 from a usage of $251.6$476.4 million in 20182021 due primarily to increased capital expenditures, cash used to fund the acquisition of a domestic packaging companyfor acquisitions and two European coatings companies as disclosedan increase in capital expenditures. See Note 3 to the Consolidated Financial Statements in Item 8 for additional information on acquisitions and decreased proceeds from the sale of assets.divestitures.
Net financing cash usage increased $99.7 milliondecreased $1.552 billion to a usage of $1.846 billion$282.4 million in 20192022 from a usage of $1.747$1.834 billion in 20182021. This was due primarily to increased paymentsa decrease in incremental share repurchases of $1.869 billion, proceeds from real estate financing transactions and lower repayments of long-term debt, treasury stock purchases, cash dividends and activity related to other accruals, partially offset by the issuance of new long-term debta reduction in proceeds from short-term borrowings and a decrease in net payments on short-term borrowings.stock option exercises as compared to 2021.
Litigation
See Note 1112 to the Consolidated Financial Statements in Item 8 for information concerning litigation.
Market Risk
The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. TheIn 2022 and 2021, the Company entered into foreign currency forward contracts with maturity dates of less than twelve months in 2019, 2018 and 2017, primarily to hedge against value changes in foreign currency. There were no material foreign currency forward contracts outstanding at December 31, 2019, 2018 and 2017. In May 2019, the Company entered into a U.S. Dollar to Euro cross currency swap contract with a total notional amount of $400.0 millioncontracts to hedge the Company'sits net investment in its European operations. This contract has been designated as a net investment hedgeSee Notes 1, 17 and will mature on January 15, 2022. During20 to the termConsolidated Financial Statements in Item 8 for additional information related to the Company’s use of the contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively converting a portionderivative instruments.
The Company believes it may be exposed to continuing market risk from foreign currency exchange rate and commodity price fluctuations. However, the Company does not expect that foreign currency exchange rate and commodity price fluctuations or hedging contract losses will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. See Notes 1 and 18 to the Consolidated Financial Statements in Item 8.
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states the Company’s consolidated leverage ratio is not to exceed 3.75 to 1.00.1.00; however, the Company may elect to temporarily increase the leverage ratio to 4.25 to 1.00 for a period of four consecutive fiscal quarters immediately following the consummation of a qualifying acquisition, as defined in the credit agreement dated August 30, 2022. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA), as defined in the credit agreement, for the 12-month period ended on the same date. Refer to the “Results of Operations” caption“Non-GAAP Financial Measures” section in Item 7 for a reconciliation of EBITDA to Netnet income. At December 31, 2019,2022, the Company was in compliance with the covenant.covenant and expects to remain in compliance. The Company’s Notes, Debenturesnotes, debentures and revolving credit agreementagreements contain various default and cross-default provisions. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. See Note 78 to the Consolidated Financial Statements in Item 8 for additional information.
Employee Stock OwnershipDefined Contribution Savings Plan
Participants in the Company’s Employee Stock Purchase and Savings Plan (ESOP)salaried defined contribution savings plan are allowed to contribute up to the lesser of 20%fifty percent of their annual compensation andor the maximum dollar amount allowed under the Internal Revenue Code. The Company
matches 6%one hundred percent of all contributions up to six percent of eligible employee contributions. The Company’s matching contributions to the ESOPdefined contribution savings plan charged to operations were $111.9$140.0 million in 20192022 compared to $104.7$133.7 million in 2018.2021. At December 31, 2019,2022, there were 8,433,72219,689,197 shares of the Company’s common stock being held by the ESOP,defined contribution savings plan, representing 9.2%7.6% of the total number of voting shares outstanding. See Note 1314 to the Consolidated Financial Statements in Item 8 for moreadditional information concerning the Company’s ESOP.defined contribution savings plan.
NON-GAAP FINANCIAL MEASURES
Management utilizes certain financial measures that are not in accordance with US GAAP to analyze and manage the performance of the business. The required disclosures for these non-GAAP measures are shown below. The Company provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate the Company’s operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with US GAAP.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP financial measure defined as net income before income taxes and interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure that excludes restructuring and impairment expense in 2022 and the loss on the Wattyl divestiture in 2021. Management considers EBITDA and Adjusted EBITDA useful in understanding the operating performance of the Company. The reader is cautioned that the Company’s EBITDA and Adjusted EBITDA should not be compared to other entities unknowingly. Further, EBITDA and Adjusted EBITDA should not be considered alternatives to net income or net operating cash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of net income and net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows in Item 8.
The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the years indicated below:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Net income | $ | 2,020.1 | | | $ | 1,864.4 | |
Interest expense | 390.8 | | | 334.7 | |
Income taxes | 553.0 | | | 384.2 | |
Depreciation | 264.0 | | | 263.1 | |
Amortization | 317.1 | | | 309.5 | |
EBITDA | 3,545.0 | | | 3,155.9 | |
Restructuring and impairment | 62.8 | | | — | |
Loss on Wattyl divestiture | — | | | 111.9 | |
Adjusted EBITDA | $ | 3,607.8 | | | $ | 3,267.8 | |
Free Cash Flow
Free cash flow is a non-GAAP financial measure defined as Net operating cash, as shown in the Statements of Consolidated Cash Flows, less the amount reinvested in the business for Capital expenditures and the return of investment to its shareholders by the payment of cash dividends. Management considers Free cash flow to be a useful tool in its determination of appropriate uses of the Company’s Net operating cash. The reader is cautioned that the Free cash flow measure should not be compared to other entities unknowingly as it may not be comparable and it does not consider certain non-discretionary cash flows, such as mandatory debt and interest payments. The amount shown below should not be considered an alternative to Net operating cash or other cash flow amounts provided in accordance with US GAAP as disclosed in the Statements of Consolidated Cash Flows in Item 8.
The following table summarizes Free cash flow as calculated by management for the years indicated below:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Net operating cash | $ | 1,919.9 | | | $ | 2,244.6 | |
Capital expenditures | (644.5) | | | (372.0) | |
Cash dividends | (618.5) | | | (587.1) | |
Free cash flow | $ | 656.9 | | | $ | 1,285.5 | |
Adjusted Diluted Net Income Per Share
Management of the Company believes that investors’ understanding of the Company’s operating performance is enhanced by the disclosure of diluted net income per share excluding Valspar acquisition-related amortization expense in 2022 and 2021, restructuring expense in 2022, and the loss on the divestiture of Wattyl in 2021. This adjusted earnings per share measurement is not in accordance with US GAAP. It should not be considered a substitute for earnings per share in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile diluted net income per share computed in accordance with US GAAP to adjusted diluted net income per share.
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 |
| Pre-Tax | | Tax Effect (1) | | After-Tax |
Diluted net income per share | | | | | $ | 7.72 | |
| | | | | |
Restructuring expense: | | | | | |
Severance and other | $ | .18 | | | $ | .03 | | | .15 | |
Impairment | .06 | | | .01 | | | .05 | |
Total | .24 | | | .04 | | | .20 | |
Acquisition-related amortization expense (2) | 1.06 | | | .25 | | | .81 | |
| | | | | |
Adjusted diluted net income per share | | | | | $ | 8.73 | |
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| Year Ended |
| December 31, 2021 |
| Pre-Tax | | Tax Effect (1) | | After-Tax |
Diluted net income per share | | | | | $ | 6.98 | |
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Loss on divestiture | $ | .41 | | | $ | .07 | | | .34 | |
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Acquisition-related amortization expense (2) | 1.10 | | | .27 | | | .83 | |
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Adjusted diluted net income per share | | | | | $ | 8.15 | |
(1) The tax effect is calculated based on the statutory rate and the nature of the item, unless otherwise noted.
(2) Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization.
Adjusted Segment Profit
Management of the Company believes that investors’ understanding of the Company’s operating performance is enhanced by the disclosure of segment profit excluding Valspar acquisition-related amortization expense in 2022 and 2021, restructuring expense in 2022, and the loss on the divestiture of Wattyl in 2021. This adjusted segment profit measurement is not in accordance with US GAAP. It should not be considered a substitute for segment profit in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies. The following tables reconcile segment profit computed in accordance with US GAAP to adjusted segment profit.
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| Year Ended December 31, 2022 |
| The Americas Group | | Consumer Brands Group | | Performance Coatings Group | | Administrative | | Total |
Net external sales | $ | 12,661.0 | | | $ | 2,690.7 | | | $ | 6,793.5 | | | $ | 3.7 | | | $ | 22,148.9 | |
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Income before income taxes | $ | 2,436.6 | | | $ | 225.7 | | | $ | 734.9 | | | $ | (824.1) | | | $ | 2,573.1 | |
as a % of Net external sales | 19.2 | % | | 8.4 | % | | 10.8 | % | | | | 11.6 | % |
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Restructuring expense | — | | | 41.1 | | | 22.2 | | | — | | | 63.3 | |
Acquisition-related amortization expense (1) | — | | | 76.2 | | | 200.1 | | | — | | | 276.3 | |
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Adjusted segment profit | $ | 2,436.6 | | | $ | 343 | | | $ | 957.2 | | | $ | (824.1) | | | $ | 2,912.7 | |
as a % of Net external sales | 19.2 | % | | 12.7 | % | | 14.1 | % | | | | 13.2 | % |
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| Year Ended December 31, 2021 |
| The Americas Group | | Consumer Brands Group | | Performance Coatings Group | | Administrative | | Total |
Net external sales | $ | 11,217.0 | | | $ | 2,721.6 | | | $ | 6,003.8 | | | $ | 2.2 | | | $ | 19,944.6 | |
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Income before income taxes | $ | 2,239.1 | | | $ | 358.4 | | | $ | 486.2 | | | $ | (835.1) | | | $ | 2,248.6 | |
as a % of Net external sales | 20.0 | % | | 13.2 | % | | 8.1 | % | | | | 11.3 | % |
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Loss on Wattyl divestiture | — | | | — | | | — | | | 111.9 | | | 111.9 | |
Acquisition-related amortization expense (1) | — | | | 82.8 | | | 211.2 | | | — | | | 294.0 | |
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Adjusted segment profit | $ | 2,239.1 | | | $ | 441.2 | | | $ | 697.4 | | | $ | (723.2) | | | $ | 2,654.5 | |
as a % of Net external sales | 20.0 | % | | 16.2 | % | | 11.6 | % | | | | 13.3 | % |
(1) Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (US GAAP)US GAAP requires management to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements. These determinations were made based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
All of the significant accounting policies that were followed in the preparation of the consolidated financial statements are disclosed in Note 1 to the Consolidated Financial Statements in Item 8. Management believes that the following critical accounting policies and estimates have a significant impact on our consolidated financial statements.
Inventories
Inventories were stated at the lower of cost or net realizable value with cost determined principally on the last-in, first-out (LIFO) method based on inventory quantities and costs determined during the fourth quarter. Inventory quantities were adjusted throughout the year as formal cycle counts were completed, or during the fourth quarter as a result of annual physical inventory counts taken at all locations.counts. If inventories accounted for on the LIFO method are reduced on a year-over-year basis, then liquidation of certain quantities carried at costs prevailing in prior years occurs. Management recorded the best estimate of net realizable value for obsolete and discontinued inventories based on historical experience and current trends through reductions to inventory cost by recording a provision included in Cost of goods sold. If management estimates that the reasonable market value is below cost or determines that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value is provided for in the reserve for obsolescence. See Note 5 to the Consolidated Financial Statements in Item 8 for more information regarding the impact of the LIFO inventory valuation and the reserve for obsolescence.
Goodwill and Intangible Assets
In accordance with the Goodwill and Other Intangibles Topic of the ASC, management performs impairment tests of goodwill and indefinite-lived intangible assets on an annual basis, as well as whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. An optional qualitative assessment allows companies to skip the annual quantitative test if it is not more likely than not that impairment has occurred based on monitoring key Company financial performance metrics and macroeconomic conditions. The qualitative assessment is performed when deemed appropriate.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment per the Segment Reporting Topic of the ASC or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of an operating segment having similar economic characteristics. At the time of goodwill impairment testing (if performing a quantitative assessment), management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated fair value is less than the current carrying value, then impairment of the reporting unit exists. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital (“WACC”)(WACC) methodology. The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and Company-specific historical and projected data, develops growth rates, sales projections and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate of all reporting units'units’ fair value is reconciled to the total market capitalization of the Company.
The Company hadseven components, some of which are aggregated due to similar economic characteristics, to form three reporting units (also the operating segments) with goodwill as of October 1, 2019,2022, the date of the annual impairment test. The annual impairment review performed as of October 1, 20192022 did not result in any of the reporting units having impairment or deemed at risk for impairment.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuations at acquisition. Management utilizes the royalty savings method and valuation model to determine the estimated fair value for each indefinite-lived intangible asset or trademark. In this method, management estimates the royalty savings arising from the ownership of the intangible asset. The key assumptions used in estimating the royalty savings for impairment testing include discount rates, royalty rates, growth rates, sales projections, terminal value rates and, to a lesser extent, tax rates. Discount rates used are similar to the rates developed by the WACC methodology considering any differences in Company-specific risk factors between reporting units and trademarks. Royalty rates are established by management and valuation experts and periodically substantiated by valuation experts. Operational management, considering industry and Company-specific historical and projected data, develops growth rates and sales projections for each significant trademark. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. The royalty savings valuation methodology and calculations used in 20192022 impairment testing are consistent with prior years. The annual impairment review performed as of October 1, 20192022, which incorporated the impact of a business restructuring plan, resulted in trademark impairments totaling $15.5 million in the Company recognizing non-cash pre-tax impairment charges totaling $122.1 millionConsumer Brands Group related to certain recentlythe discontinuation of an architectural paint brand and lower than anticipated sales of an acquired indefinite-lived trademarks.brand. No other impairments or risks for impairment were identified as a result of this review.
The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions. See Note 67 to the Consolidated Financial Statements in Item 8 for a discussion of goodwill and intangible assets and the impairment tests performed in accordance with the Goodwill and Other Intangibles Topic of the ASC.
Valuation of Long-Lived Assets
In accordance with the Property, Plant and Equipment Topic of the ASC, if events or changes in circumstances indicated that the carrying value of long-lived assets, including Operating lease right-of-use assets, may not be recoverable or the useful life had changed, impairment tests were performed or the useful life was adjusted. Undiscounted cash flows were used to calculate the recoverable value of long-lived assets to determine if such assets were not recoverable. If the carrying value of the assets was deemed to not be recoverable, the impairment to be recognized is the amount by which the carrying value of the assets exceeds the estimated fair value of the assets as determined in accordance with the Fair Value Topic of the ASC. If the usefulness of an asset was determined to be impaired, then management estimated a new useful life based on the period of time for projected uses of the asset. Fair value approaches and changes in useful life required management to make certain assumptions based upon information available at the time the valuation or determination was performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value or useful life considering the current economic conditions. All tested long-lived assets or groups of long-lived assets had undiscounted cash flows that were substantially in excess of their carrying value. See Notes 4 andNote 6 to the Consolidated Financial Statements in Item 8 for a discussion of the reductions in carrying value or useful life of long-lived assets in accordance with the Property, Plant and Equipment Topic of the ASC. See Note 1 to the Consolidated Financial Statements in Item 8 for the Property, Plant and Equipment accounting policy.
Defined Benefit Pension and Other Postretirement Benefit Plans
To determine the Company’s ultimate obligation under its defined benefit pension plans and other postretirement benefit plans, other than pensions, management must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. To determine the obligations of such benefit plans, management uses actuaries to calculate such amounts using key assumptions such as discount rates, inflation, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs. Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is being considered. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations or financial condition.
In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. Actuarial gains and losses and prior service costs are recognized and recorded in Accumulated other comprehensive loss, a component of Shareholders’ equity.income (AOCI). The amounts recorded in Accumulated other comprehensive lossAOCI will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension and net periodic benefit costs.
In 2023, pension and other postretirement benefit plan costs for 2020 are expected to decrease significantly due to pension settlement lump sum activity in 2018 and annuity contract purchases inbased on the first quarter of 2019. The annuity contract purchases in 2019 resulted in a settlement charge of $32.4 million. The Company will use any remaining overfunded cash surplus balances, as prescribed in the applicable regulations, to fund future Company contributions to a qualified replacement pension plan, which is the current domestic defined contribution plan (Qualified Replacement Plan). Postretirement benefit plan costs for 2020 are expected to be approximately the same as 2019 due to similar actuarial assumptions being applied. See Note 89 to the Consolidated Financial Statements in Item 8 for information concerning the Company’s defined benefit pension plans and other postretirement benefit plans other than pensions.plans.
Environmental Matters
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs, which are not discounted,mostly undiscounted, are determined based on currently available facts regarding each site. If the reasonably estimable costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided.
The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved. See Note 1011 to the Consolidated Financial Statements in Item 8 for information concerning the accrual for extended environmental-related activities and a discussion concerning unaccrued future loss contingencies.
Litigation and Other Contingent Liabilities
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims. Management believes that the Company has properly accrued for all known liabilities that existed and those where a loss was deemed probable for which a fair value was available or an amount could be reasonably estimated in accordance with US GAAP. However, because litigation is inherently subject to many uncertainties and the ultimate result of any present or future litigation is unpredictable, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties involved, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. See Note 1112 to the Consolidated Financial Statements in Item 8 for information concerning litigation.
Income Taxes
The Company estimated income taxes infor each jurisdiction that it operated.operated in. This involved estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes will be made in the period in which the changes occur.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. These assessments of uncertain tax positions contain judgments related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations. Income tax expense is adjusted in our Statements of Consolidated Income in the period in which these events occur. See Note 1921 to the Consolidated Financial Statements in Item 8 for information concerning income taxes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with interest rates, foreign currency and commodity fluctuations. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. In 2019,2022 and 2021, the Company entered into autilized U.S. Dollar to Euro cross currency swap contractcontracts to hedge the Company'sCompany’s net investment in its European operations. This contract hasThe contracts have been designated as a net investment hedgehedges and will mature on January 15, 2022.have various maturity dates. See Note 117 to the Consolidated Financial Statements in Item 8. The Company entered into forward foreign currency exchange contracts during 20192022 to hedge against value changes in foreign currency. There were no material contracts outstanding at December 31, 2019.2022. Forward foreign currency exchange contracts are described in Note 1820 to the Consolidated Financial Statements in Item 8. We believe we may experience continuing losses from foreign currency fluctuations. However, we do not expect currency translation, transaction or hedging contract losses to have a material adverse effect on our financial condition, results of operations or cash flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Report of Management on Internal Control Over Financial Reporting | |
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Report of Management on the Consolidated Financial Statements | |
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Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements (PCAOB ID: 42) | |
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Statements of Consolidated Shareholders'Shareholders’ Equity | |
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Report of Management
On Internal Control Over Financial Reporting
Shareholders of The Sherwin-Williams Company
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. We recognize that internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and is subject to the possibility of human error or the circumvention or the overriding of internal control. Therefore, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, we believe we have designed into the process safeguards to reduce, though not eliminate, this risk. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In order to ensure that the Company’s internal control over financial reporting was effective as of December 31, 2019,2022, we conducted an assessment of its effectiveness under the supervision and with the participation of our management group, including our principal executive officer and principal financial officer. This assessment was based on the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As permitted by SEC rules, we have excluded the operations and related assets of the 2022 acquisitions from the scope of our assessment of the effectiveness of internal control over financial reporting as of December 31, 2022. The Total assets and Net sales of the 2022 acquisitions represented approximately 5.0% and 0.6% of the Company's respective consolidated Total assets and Net sales as of and for the year ended December 31, 2022.
Based on our assessment of internal control over financial reporting under the criteria established in Internal Control – Integrated Framework, we have concluded that, as of December 31, 2019,2022, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting as of December 31, 20192022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report on the effectiveness of our internal control over financial reporting is included on page 3741 of this report.
J. G. Morikis
Chairman and Chief Executive Officer
A. J. Mistysyn
Senior Vice President - Finance and Chief Financial Officer
J. M. Cronin
Senior Vice President - Corporate ControllerEnterprise Finance
Report of Independent Registered Public Accounting Firm
On
To the Shareholders and the Board of Directors of The Sherwin-Williams Company
Opinion on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of The Sherwin-Williams Company
Opinion on Internal Control over Financial Reporting
We have audited The Sherwin-Williams Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Sherwin-Williams Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on the COSO criteria.
As indicated in the accompanying Report of Management On Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Sika AG, Gross & Perthun GmbH, Dur-A-Flex, Inc., Powdertech Oy Ltd., and Industria Chimica Adriatica S.p.A. (collectively the 2022 acquisitions), which are included in the 2022 consolidated financial statements of the Company and constituted 5.0% of Total assets as of December 31, 2022 and 0.6% of Net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the 2022 acquisitions excluded from the scope of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"(“PCAOB”), the consolidated balance sheets of The Sherwin-Williams Company as of December 31, 2019, 2018,2022, 2021, and 2017, and2020, the related statements of consolidated income, and comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2019,2022, and the related notes and the financial statement schedule listed in Item 15(a) and our report dated February 21, 202022, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young, LLP
Cleveland, Ohio
February 21, 202022, 2023
Report of Management
On the Consolidated Financial Statements
Shareholders of The Sherwin-Williams Company
We are responsible for the preparation and fair presentation of the consolidated financial statements, accompanying notes and related financial information included in this report of The Sherwin-Williams Company and its consolidated subsidiaries (collectively, the “Company”) as of December 31, 2019, 20182022, 2021 and 20172020 and for the years then ended in accordance with U.S. generally accepted accounting principles. The consolidated financial information included in this report contains certain amounts that were based upon our best estimates, judgments and assumptions that we believe were reasonable under the circumstances.
We have conducted an assessment of the effectiveness of internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As discussed in the Report of Management on Internal Control Over Financial Reporting on page 3640 of this report, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.2022.
The Board of Directors pursues its responsibility for the oversight of the Company’s accounting policies and procedures, financial statement preparation and internal control over financial reporting through the Audit Committee, comprised exclusively of independent directors. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm. The Audit Committee meets at least quarterly with financial management, internal auditors and the independent registered public accounting firm to review the adequacy of financial controls, the effectiveness of the Company’s internal control over financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and the independent registered public accounting firm have private and confidential access to the Audit Committee at all times.
We believe that the consolidated financial statements, accompanying notes and related financial information included in this report fairly reflect the form and substance of all material financial transactions and fairly present, in all material respects, the consolidated financial position, results of operations and cash flows as of and for the periods presented.
J. G. Morikis
Chairman and Chief Executive Officer
A. J. Mistysyn
Senior Vice President - Finance and Chief Financial Officer
J. M. Cronin
Senior Vice President - Corporate ControllerEnterprise Finance
Report of Independent Registered Public Accounting Firm
On
To the Consolidated Financial Statements
ToShareholders and the Board of Directors and Shareholders of The Sherwin-Williams Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company (the "Company"“Company”) as of December 31, 2019, 20182022, 2021 and 2017, and2020, the related statements of consolidated income, comprehensive income, cash flows and shareholders'shareholders’ equity for each of the three years in the period ended December 31, 2019,2022, and the related notes and the financial statement schedule listed in Item 15(a) (collectively referred to as the "financial statements"“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as ofat December 31, 2019, 20182022, 2021 and 2017,2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"(“PCAOB”), the Company'sCompany’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 202022, 2023 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements,the Company changed its method for accounting for leases in 2019.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the Audit Committeeaudit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
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Gibbsboro environmental-related accrual |
Description of the Matter | As described in Note 811 to the consolidated financial statements, the Company had short-term and long-term accruals for environmental-related activities of $51.0$50.2 million and $321.8$240.2 million, respectively, at December 31, 2019.2022. The Company’s largest and most complex site is the Gibbsboro, New Jersey site (“Gibbsboro”) and the substantial majority of the environmental-related accrual relates to this site. Gibbsboro consists of six operable units which contain a combination of soil, sediment, waterbodies and groundwater contamination, and are in various phases of investigation and remediation with the Environmental Protection Agency (“EPA”). The Company’s estimated environmental-related accrual for Gibbsboro is based on industry standards and professional judgment,judgement, and the most significant assumptions underlying the estimated cost of remediation efforts reserved for Gibbsboro are the types and extent of contamination.future remediation.
Auditing the Company’s environmental-related accrual at the Gibbsboro site required complex judgmentjudgement due to the inherent challenges in identifying the type and extent of future remedies and the costs of implementing those remedies in determining the probable and reasonably estimable loss for which the Company will be responsible.
|
| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's processes to estimate the Gibbsboro environmental-related accrual. For example, we tested controls over management’s review of the environmental loss calculations and the key assumptions affecting those calculations as described above.
To test the Gibbsboro environmental-related accrual, our audit procedures included, among others, a review of correspondence with the EPA supporting the Company’s assessment of the type, extent and extentcost of contaminationremediation at the Gibbsboro site for which the Company is responsible. We assessed the appropriateness of the Company’s policies and procedures and tested management’s environmental reserve estimate. We involved our environmental specialists to confirm our understanding of the remediation plans for the most significant operable unitunits within the Gibbsboro site and to evaluate the impact of current year investigation and remediation activities on the Company's methodology and assumptions used to estimate the unit cost and extent of contaminationremediation in accordance with industry practice, applicable laws and regulations. We recalculated the remediation cost estimate based on unit cost and estimated extent of remediation required. We reconciled types and extent of contaminationremediation identified in communications between the Company and the EPA to the Company’s remediation cost estimates recorded for Gibbsboro and confirmed a sample of underlying cost estimates with third-parties.Gibbsboro. We also conducted a search for publicly available information that might indicate facts contrary to the types and extent of contaminationremediation currently identified in the Company’s remediation cost estimates recorded for Gibbsboro.
|
| |
|
| |
Impairment of recently acquired industrial product trademarks in North America and
the Asia Pacific Region
|
Description of the Matter | As discussed in Note 6 of the consolidated financial statements, the net carrying amount of recently acquired indefinite-lived trademarks utilized in sale of industrial products in North America and the Asia Pacific region was reduced by impairment charges of $75.3 million and $25.7 million, respectively, as the result of strategic decisions made regarding North American branding of industrial products and performance of industrial products in the Asia Pacific region. These assets are assessed for impairment on at least an annual basis, and because the annual assessment reflected fair value less than the carrying amount, impairment losses were recorded to reduce these assets to their fair value.
Auditing the impairment calculation of the recently acquired industrial product trademarks in North America and the Asia Pacific region was complex due to the significant assumptions used in the determination of their fair value and application of the royalty savings method. The significant assumptions included projected revenue associated with each trademark and discount rates, each of which are forward-looking and based on a combination of Company-specific and market factors.
|
| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s measurement of fair value in its test for impairment for its recently acquired industrial product trademarks in North America and the Asia Pacific region. The Company’s test for impairment included, for example, controls over the application of the valuation technique, projected financial information and the significant assumptions used.
To test the estimated fair value of these trademarks, our audit procedures included, among others, evaluating the Company's valuation model using the royalty savings method, and testing the significant assumptions used in the model. For example, when evaluating the revenue projections, we evaluated those projections for consistency with management’s strategic branding initiatives and considered the reasonableness of those projections to marketplace and economic trends, third party industry projections and historical results. In addition, we involved our valuation specialist to assist in our evaluation of the methodology used by the Company and to assist with our assessment of discount rates with consideration given to both internal and external factors. We also performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair value of the trademarks that would result from changes in the significant assumptions.
|
/s/ Ernst & Young, LLP
We have served as the Company'sCompany’s auditor since 1908.
Cleveland, Ohio
February 21, 202022, 2023
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
|
| | | | | | | | | | | |
(millions of dollars, except per share data) | Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net sales | $ | 17,900.8 |
| | $ | 17,534.5 |
| | $ | 14,983.8 |
|
Cost of goods sold | 9,864.7 |
| | 10,115.9 |
| | 8,265.0 |
|
Gross profit | 8,036.1 |
| | 7,418.6 |
| | 6,718.8 |
|
Percent to net sales | 44.9 | % | | 42.3 | % | | 44.8 | % |
Selling, general and administrative expenses | 5,274.9 |
| | 5,033.8 |
| | 4,797.6 |
|
Percent to net sales | 29.5 | % | | 28.7 | % | | 32.0 | % |
Other general expense - net | 39.1 |
| | 189.1 |
| | 20.9 |
|
Amortization | 312.8 |
| | 318.1 |
| | 206.8 |
|
Impairment of trademarks | 122.1 |
| |
|
| | 2.0 |
|
Interest expense | 349.3 |
| | 366.7 |
| | 263.5 |
|
Interest and net investment income | (25.9 | ) | | (5.2 | ) | | (8.6 | ) |
California litigation expense | (34.7 | ) | | 136.3 |
| |
|
|
Other expense (income) - net | 16.7 |
| | 20.1 |
| | (32.7 | ) |
Income from continuing operations before income taxes | 1,981.8 |
| | 1,359.7 |
| | 1,469.3 |
|
Income tax expense (credit) | 440.5 |
| | 251.0 |
| | (300.2 | ) |
Net income from continuing operations | 1,541.3 |
| | 1,108.7 |
| | 1,769.5 |
|
Loss from discontinued operations |
| |
| |
|
Income taxes |
|
| |
|
| | 41.6 |
|
Net loss from discontinued operations | — |
| | — |
| | (41.6 | ) |
Net income | $ | 1,541.3 |
| | $ | 1,108.7 |
| | $ | 1,727.9 |
|
| | | | | |
Basic net income per share: | | | | | |
Continuing operations | $ | 16.79 |
| | $ | 11.92 |
| | $ | 19.04 |
|
Discontinued operations |
| |
| | (.44 | ) |
Net income per share | $ | 16.79 |
| | $ | 11.92 |
| | $ | 18.60 |
|
| | | | | |
Diluted net income per share | | | | | |
Continuing operations | $ | 16.49 |
| | $ | 11.67 |
| | $ | 18.64 |
|
Discontinued operations |
| |
| | (.44 | ) |
Net income per share | $ | 16.49 |
| | $ | 11.67 |
| | $ | 18.20 |
|
| | | | | |
| | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net sales | $ | 22,148.9 | | | $ | 19,944.6 | | | $ | 18,361.7 | |
Cost of goods sold | 12,823.8 | | | 11,401.9 | | | 9,679.1 | |
Gross profit | 9,325.1 | | | 8,542.7 | | | 8,682.6 | |
Percent to Net sales | 42.1 | % | | 42.8 | % | | 47.3 | % |
Selling, general and administrative expenses | 6,014.5 | | | 5,572.5 | | | 5,477.9 | |
Percent to Net sales | 27.2 | % | | 27.9 | % | | 29.8 | % |
Other general (income) expense - net | (24.9) | | | 101.8 | | | 27.7 | |
Amortization | 317.1 | | | 309.5 | | | 313.4 | |
Impairment of trademarks | 15.5 | | | — | | | 2.3 | |
Interest expense | 390.8 | | | 334.7 | | | 340.4 | |
Interest income | (8.0) | | | (4.9) | | | (3.6) | |
Other expense (income) - net | 47.0 | | | (19.5) | | | 5.3 | |
Income before income taxes | 2,573.1 | | | 2,248.6 | | | 2,519.2 | |
Income tax expense | 553.0 | | | 384.2 | | | 488.8 | |
Net income | $ | 2,020.1 | | | $ | 1,864.4 | | | $ | 2,030.4 | |
| | | | | |
Net income per share: | | | | | |
Basic | $ | 7.83 | | | $ | 7.10 | | | $ | 7.48 | |
Diluted | $ | 7.72 | | | $ | 6.98 | | | $ | 7.36 | |
| | | | | |
Weighted average shares outstanding: | | | | | |
Basic | 258.0 | | | 262.5 | | | 271.3 | |
Diluted | 261.8 | | | 267.1 | | | 275.8 | |
| | | | | |
See notes to consolidated financial statements.
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
(in millions)
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 2,020.1 | | | $ | 1,864.4 | | | $ | 2,030.4 | |
| | | | | |
Other comprehensive income (loss), net of tax: | | | | | |
| | | | | |
Foreign currency translation adjustments (1) | (108.7) | | | (30.6) | | | (14.1) | |
| | | | | |
Pension and other postretirement benefit adjustments: | | | | | |
Amounts recognized in AOCI (2) | 106.8 | | | 48.7 | | | (19.4) | |
Amounts reclassified from AOCI (3) | 3.7 | | | 6.3 | | | 1.4 | |
| 110.5 | | | 55.0 | | | (18.0) | |
| | | | | |
Unrealized net gains on cash flow hedges: | | | | | |
Amounts reclassified from AOCI (4) | (4.0) | | | (4.5) | | | (6.7) | |
| | | | | |
Other comprehensive (loss) income, net of tax | (2.2) | | | 19.9 | | | (38.8) | |
| | | | | |
Comprehensive income | $ | 2,017.9 | | | $ | 1,884.3 | | | $ | 1,991.6 | |
|
| | | | | | | | | | | |
(millions of dollars)
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net income | $ | 1,541.3 |
| | $ | 1,108.7 |
| | $ | 1,727.9 |
|
| | | | | |
Other comprehensive (loss) income, net of tax: | | | | | |
| | | | | |
Foreign currency translation adjustments (1) | (49.8 | ) | | (254.3 | ) | | 148.0 |
|
| | | | | |
Pension and other postretirement benefit adjustments: | | | | | |
Amounts recognized in Other comprehensive (loss) income (2) | (5.1 | ) | | (13.5 | ) | | 48.0 |
|
Amounts reclassified from Other comprehensive (loss) income (3) | 22.3 |
| | 31.3 |
| | (7.8 | ) |
| 17.2 |
| | 17.8 |
| | 40.2 |
|
| | | | | |
Unrealized net gains on available-for sale securities: | | | | | |
Amounts recognized in Other comprehensive (loss) income (4) |
|
| |
|
| | 2.1 |
|
Amounts reclassified from Other comprehensive (loss) income (5) |
|
| |
|
| | (0.8 | ) |
| — |
| | — |
| | 1.3 |
|
| | | | | |
Unrealized net (losses) gains on cash flow hedges | | | | | |
Amounts recognized in Other comprehensive (loss) income (6) | | |
|
| | (30.8 | ) |
Amounts reclassified from Other comprehensive (loss) income (7) | (8.7 | ) | | (6.2 | ) | | (3.2 | ) |
| (8.7 | ) | | (6.2 | ) | | (34.0 | ) |
| | | | | |
Other comprehensive (loss) income, net of tax | (41.3 | ) | | (242.7 | ) | | 155.5 |
|
| | | | | |
Comprehensive income | $ | 1,500.0 |
| | $ | 866.0 |
| | $ | 1,883.4 |
|
(1) The years ended December 31, 2022, 2021 and 2020 include unrealized gains (losses), net of taxes, of $34.1 million, $37.1 million and $(54.0) million, respectively, related to net investment hedges. See Note 17.
| |
(1)(2) Net of taxes of $(33.8) million, $(12.6) million and $3.4 million in 2022, 2021 and 2020, respectively. (3) Net of taxes of $(1.2) million, $(2.1) million and $(0.4) million in 2022, 2021 and 2020, respectively. (4) Net of taxes of $1.1 million, $1.0 million and $2.2 million in 2022, 2021 and 2020, respectively. | The year ended December 31, 2019 includes unrealized gains of $1.1 million, net of taxes, related to the net investment hedge. |
| |
(2)
| Net of taxes of $1.3 million, $6.8 million and $(19.3) million in 2019, 2018 and 2017, respectively. |
| |
(3)
| Net of taxes of $(7.3) million, $(10.2) million and $4.7 million in 2019, 2018 and 2017, respectively. |
| |
(4)
| Net of taxes of $(1.2) million in 2017. |
| |
(5)
| Net of taxes of $0.4 million in 2017. |
| |
(6)
| Net of taxes of $18.8 million in 2017. |
| |
(7)
| Net of taxes of $2.8 million, $2.1 million and $2.0 million in 2019, 2018 and 2017, respectively. |
See notes to consolidated financial statements.
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | |
(in millions) | December 31, |
| 2022 | | 2021 | | 2020 |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 198.8 | | | $ | 165.7 | | | $ | 226.6 | |
Accounts receivable, less allowance | 2,563.6 | | | 2,352.4 | | | 2,078.1 | |
Inventories | 2,626.5 | | | 1,927.2 | | | 1,804.1 | |
Other current assets | 518.8 | | | 608.4 | | | 482.6 | |
Total current assets | 5,907.7 | | | 5,053.7 | | | 4,591.4 | |
Property, plant and equipment, net | 2,207.0 | | | 1,867.3 | | | 1,834.5 | |
Goodwill | 7,583.2 | | | 7,134.6 | | | 7,049.1 | |
Intangible assets, net | 4,002.0 | | | 4,001.5 | | | 4,471.2 | |
Operating lease right-of-use assets | 1,866.8 | | | 1,820.6 | | | 1,761.1 | |
Other assets | 1,027.3 | | | 789.0 | | | 694.3 | |
Total Assets | $ | 22,594.0 | | | $ | 20,666.7 | | | $ | 20,401.6 | |
| | | | | |
Liabilities and Shareholders’ Equity | | | | | |
Current liabilities: | | | | | |
Short-term borrowings | $ | 978.1 | | | $ | 763.5 | | | $ | 0.1 | |
Accounts payable | 2,436.5 | | | 2,403.0 | | | 2,117.8 | |
Compensation and taxes withheld | 784.5 | | | 716.6 | | | 752.7 | |
Accrued taxes | 197.4 | | | 160.3 | | | 183.5 | |
Current portion of long-term debt | 0.6 | | | 260.6 | | | 25.1 | |
Current portion of operating lease liabilities | 425.3 | | | 409.7 | | | 387.3 | |
Other accruals | 1,138.3 | | | 1,005.8 | | | 1,127.9 | |
Total current liabilities | 5,960.7 | | | 5,719.5 | | | 4,594.4 | |
Long-term debt | 9,591.0 | | | 8,590.9 | | | 8,266.9 | |
Postretirement benefits other than pensions | 139.3 | | | 259.4 | | | 275.6 | |
Deferred income taxes | 681.6 | | | 768.2 | | | 846.1 | |
Long-term operating lease liabilities | 1,512.9 | | | 1,470.7 | | | 1,434.1 | |
Other long-term liabilities | 1,606.4 | | | 1,420.8 | | | 1,373.7 | |
Shareholders’ equity: | | | | | |
Common stock - $0.33-1/3 par value: | | | | | |
258.9, 261.1, and 268.7 million shares outstanding | | | | | |
at December 31, 2022, 2021 and 2020, respectively | 91.2 | | | 90.8 | | | 89.9 | |
Other capital | 3,963.9 | | | 3,793.0 | | | 3,491.4 | |
Retained earnings | 3,523.2 | | | 2,121.7 | | | 844.3 | |
Treasury stock, at cost | (3,775.6) | | | (2,869.9) | | | (96.5) | |
Accumulated other comprehensive loss | (700.6) | | | (698.4) | | | (718.3) | |
Total shareholders’ equity | 3,102.1 | | | 2,437.2 | | | 3,610.8 | |
Total Liabilities and Shareholders’ Equity | $ | 22,594.0 | | | $ | 20,666.7 | | | $ | 20,401.6 | |
|
| | | | | | | | | | | |
(millions of dollars, except share data) | December 31, |
| 2019 | | 2018 | | 2017 |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 161.8 |
| | $ | 155.5 |
| | $ | 204.2 |
|
Accounts receivable, less allowance | 2,088.9 |
| | 2,018.8 |
| | 2,104.6 |
|
Inventories: | | | | | |
Finished goods | 1,509.6 |
| | 1,426.4 |
| | 1,356.5 |
|
Work in process and raw materials | 380.0 |
| | 388.9 |
| | 386.0 |
|
| 1,889.6 |
| | 1,815.3 |
| | 1,742.5 |
|
Other current assets | 491.4 |
| | 354.9 |
| | 355.7 |
|
Total current assets | 4,631.7 |
| | 4,344.5 |
| | 4,407.0 |
|
Property, plant and equipment: | | | | | |
Land | 242.1 |
| | 244.6 |
| | 254.7 |
|
Buildings | 1,044.2 |
| | 979.1 |
| | 962.1 |
|
Machinery and equipment | 2,952.1 |
| | 2,668.5 |
| | 2,573.0 |
|
Construction in progress | 144.0 |
| | 147.9 |
| | 177.0 |
|
| 4,382.4 |
| | 4,040.1 |
| | 3,966.8 |
|
Less allowances for depreciation | 2,547.2 |
| | 2,263.3 |
| | 2,089.7 |
|
| 1,835.2 |
| | 1,776.8 |
| | 1,877.1 |
|
Goodwill | 7,004.8 |
| | 6,956.7 |
| | 6,814.3 |
|
Intangible assets | 4,734.5 |
| | 5,201.6 |
| | 6,002.4 |
|
Operating lease right-of-use assets | 1,685.6 |
| | | | |
Deferred pension assets | 43.0 |
| | 270.7 |
| | 296.7 |
|
Other assets | 561.4 |
| | 584.0 |
| | 502.0 |
|
Total Assets | $ | 20,496.2 |
| | $ | 19,134.3 |
| | $ | 19,899.5 |
|
| | | | | |
Liabilities and Shareholders’ Equity | | | | | |
Current liabilities: | | | | | |
Short-term borrowings | $ | 204.7 |
| | $ | 328.4 |
| | $ | 633.7 |
|
Accounts payable | 1,876.3 |
| | 1,799.4 |
| | 1,791.5 |
|
Compensation and taxes withheld | 552.7 |
| | 504.5 |
| | 508.2 |
|
Accrued taxes | 85.7 |
| | 80.8 |
| | 79.9 |
|
Current portion of long-term debt | 429.8 |
| | 307.2 |
| | 1.2 |
|
California litigation accrual | 12.0 |
| | 136.3 |
| |
|
|
Current portion of operating lease liabilities | 371.6 |
| | | | |
Other accruals | 989.1 |
| | 1,141.1 |
| | 972.7 |
|
Total current liabilities | 4,521.9 |
| | 4,297.7 |
| | 3,987.2 |
|
Long-term debt | 8,050.7 |
| | 8,708.1 |
| | 9,885.7 |
|
Postretirement benefits other than pensions | 263.0 |
| | 257.6 |
| | 274.7 |
|
Deferred income taxes | 969.9 |
| | 1,130.9 |
| | 1,419.6 |
|
Long-term operating lease liabilities | 1,370.7 |
| | | | |
Other long-term liabilities | 1,196.7 |
| | 1,009.3 |
| | 684.4 |
|
Shareholders’ equity: | | | | | |
Common stock - $1.00 par value: | | | | | |
92,144,839, 93,116,762 and 93,883,645 shares outstanding | | | | | |
at December 31, 2019, 2018 and 2017, respectively | 119.4 |
| | 118.4 |
| | 117.6 |
|
Other capital | 3,153.0 |
| | 2,896.4 |
| | 2,723.2 |
|
Retained earnings | 7,366.9 |
| | 6,246.5 |
| | 5,458.4 |
|
Treasury stock, at cost | (5,836.5 | ) | | (4,900.7 | ) | | (4,266.4 | ) |
Accumulated other comprehensive loss | (679.5 | ) | | (629.9 | ) | | (384.9 | ) |
Total shareholders’ equity | 4,123.3 |
| | 3,730.7 |
| | 3,647.9 |
|
Total Liabilities and Shareholders’ Equity | $ | 20,496.2 |
| | $ | 19,134.3 |
| | $ | 19,899.5 |
|
See notes to consolidated financial statements.
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
|
| | | | | | | | | | | |
(millions of dollars) | Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Operating Activities | | | | | |
Net income | $ | 1,541.3 |
| | $ | 1,108.7 |
| | $ | 1,727.9 |
|
Adjustments to reconcile net income to net operating cash: | | | | | |
Loss from discontinued operations |
|
| |
|
| | 41.6 |
|
Depreciation | 262.1 |
| | 278.2 |
| | 285.0 |
|
Non-cash lease expense | 370.8 |
| |
|
| |
|
|
Amortization of intangible assets | 312.8 |
| | 318.1 |
| | 206.8 |
|
Amortization of inventory purchase accounting adjustments |
|
| |
|
| | 113.8 |
|
Loss on extinguishment of debt | 14.8 |
| | | | |
Impairment of trademarks | 122.1 |
| |
|
| | 2.0 |
|
Amortization of credit facility and debt issuance costs | 9.2 |
| | 12.1 |
| | 8.3 |
|
Provisions for environmental-related matters | 23.0 |
| | 176.3 |
| | 15.4 |
|
Provisions for qualified exit costs | 8.8 |
| | 14.9 |
| | 50.5 |
|
Deferred income taxes | (131.1 | ) | | (143.4 | ) | | (620.7 | ) |
Defined benefit pension plans net cost | 43.1 |
| | 36.4 |
| | 18.2 |
|
Stock-based compensation expense | 101.7 |
| | 82.6 |
| | 90.3 |
|
Net decrease in postretirement liability | (14.4 | ) | | (15.9 | ) | | (17.9 | ) |
Decrease in non-traded investments | 82.3 |
| | 72.5 |
| | 65.7 |
|
Loss on sale or disposition of assets | 16.1 |
| | 12.8 |
| | 5.5 |
|
Other | 15.8 |
| | (13.8 | ) | | 1.1 |
|
Change in working capital accounts: | | | | | |
(Increase) decrease in accounts receivable | (73.2 | ) | | 18.4 |
| | (49.9 | ) |
(Increase) in inventories | (75.5 | ) | | (119.5 | ) | | (90.0 | ) |
Increase in accounts payable | 36.2 |
| | 113.8 |
| | 166.7 |
|
Increase (decrease) in accrued taxes | 5.1 |
| | 2.7 |
| | (20.9 | ) |
Increase in accrued compensation and taxes withheld | 49.6 |
| | 4.6 |
| | 11.3 |
|
(Increase) decrease in refundable income taxes | (47.8 | ) | | 20.1 |
| | (15.5 | ) |
(Decrease) increase in California litigation accrual | (59.6 | ) | | 136.3 |
| |
|
|
Other | 18.8 |
| | (46.7 | ) | | 16.3 |
|
Change in operating lease liabilities | (368.4 | ) | |
|
| |
|
|
Costs incurred for environmental-related matters | (26.1 | ) | | (17.7 | ) | | (13.8 | ) |
Costs incurred for qualified exit costs | (12.8 | ) | | (21.2 | ) | | (45.4 | ) |
Other | 96.6 |
| | (86.6 | ) | | (68.3 | ) |
Net operating cash | 2,321.3 |
| | 1,943.7 |
| | 1,884.0 |
|
| | | | | |
Investing Activities | | | | | |
Capital expenditures | (328.9 | ) | | (251.0 | ) | | (222.8 | ) |
Acquisitions of businesses, net of cash acquired | (77.3 | ) | |
|
| | (8,810.3 | ) |
Proceeds from sale of assets | 6.9 |
| | 38.4 |
| | 47.2 |
|
Increase in other investments | (63.3 | ) | | (39.0 | ) | | (61.5 | ) |
Net investing cash | (462.6 | ) | | (251.6 | ) | | (9,047.4 | ) |
| | | | | |
Financing Activities | | | | | |
Net (decrease) increase in short-term borrowings | (122.8 | ) | | (300.9 | ) | | 356.3 |
|
Proceeds from long-term debt | 1,332.8 |
| |
|
| | 8,275.2 |
|
Payments of long-term debt | (1,875.8 | ) | | (852.6 | ) | | (1,852.8 | ) |
Payments for credit facility and debt issuance costs | (13.6 | ) | | (5.2 | ) | | (49.4 | ) |
Payments of cash dividends | (420.8 | ) | | (322.9 | ) | | (319.0 | ) |
Proceeds from stock options exercised | 154.6 |
| | 90.7 |
| | 143.6 |
|
Treasury stock purchased | (778.8 | ) | | (613.3 | ) | |
|
|
Proceeds from real estate financing transactions | 7.2 |
| | 225.3 |
| | |
Other | (129.2 | ) | | 32.2 |
| | (39.8 | ) |
Net financing cash | (1,846.4 | ) | | (1,746.7 | ) | | 6,514.1 |
|
Effect of exchange rate changes on cash | (6.0 | ) | | 5.9 |
| | (36.3 | ) |
Net increase (decrease) in cash and cash equivalents | 6.3 |
| | (48.7 | ) | | (685.6 | ) |
Cash and cash equivalents at beginning of year | 155.5 |
| | 204.2 |
| | 889.8 |
|
Cash and cash equivalents at end of year | $ | 161.8 |
| | $ | 155.5 |
| | $ | 204.2 |
|
Taxes paid on income | $ | 407.5 |
| | $ | 292.2 |
| | $ | 419.7 |
|
Interest paid on debt | 336.1 |
| | 368.0 |
| | 220.6 |
|
| | | | | | | | | | | | | | | | | |
(in millions) | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating Activities | | | | | |
Net income | $ | 2,020.1 | | | $ | 1,864.4 | | | $ | 2,030.4 | |
Adjustments to reconcile net income to net operating cash: | | | | | |
Depreciation | 264.0 | | | 263.1 | | | 268.0 | |
Non-cash lease expense | 416.9 | | | 400.7 | | | 381.3 | |
Amortization of intangible assets | 317.1 | | | 309.5 | | | 313.4 | |
Loss on divestiture of business | — | | | 111.9 | | | — | |
(Gain) loss on extinguishment of debt | — | | | (1.4) | | | 21.3 | |
Impairment of trademarks | 15.5 | | | — | | | 2.3 | |
Amortization of credit facility and debt issuance costs | 7.6 | | | 6.4 | | | 7.2 | |
Provisions for environmental-related matters | (7.1) | | | (4.0) | | | 37.1 | |
Provisions for restructuring | 47.3 | | | — | | | — | |
Deferred income taxes | (144.8) | | | (80.3) | | | (145.3) | |
Defined benefit pension plans net cost | 5.1 | | | 6.8 | | | 7.6 | |
Stock-based compensation expense | 99.7 | | | 97.7 | | | 95.9 | |
Amortization of non-traded investments | 38.5 | | | 53.6 | | | 84.8 | |
Gain on sale or disposition of assets | (10.7) | | | (6.1) | | | (9.4) | |
Other | 29.6 | | | (6.4) | | | (6.9) | |
Change in working capital accounts: | | | | | |
(Increase) decrease in accounts receivable | (200.2) | | | (287.8) | | | 10.3 | |
(Increase) decrease in inventories | (666.7) | | | (228.1) | | | 84.4 | |
Increase in accounts payable | 46.6 | | | 346.1 | | | 227.2 | |
(Decrease) increase in accrued taxes | (38.1) | | | (32.7) | | | 99.2 | |
Increase (decrease) in accrued compensation and taxes withheld | 65.8 | | | (10.9) | | | 197.7 | |
Decrease (increase) in refundable income taxes | 47.6 | | | (38.5) | | | 40.6 | |
Other | 32.5 | | | (46.8) | | | (62.0) | |
Change in operating lease liabilities | (405.3) | | | (401.4) | | | (371.4) | |
Costs incurred for environmental-related matters | (23.8) | | | (41.3) | | | (39.0) | |
| | | | | |
Other | (37.3) | | | (29.9) | | | 133.9 | |
Net operating cash | 1,919.9 | | | 2,244.6 | | | 3,408.6 | |
| | | | | |
Investing Activities | | | | | |
Capital expenditures | (644.5) | | | (372.0) | | | (303.8) | |
Acquisitions of businesses, net of cash acquired | (1,003.1) | | | (210.9) | | | — | |
Proceeds from divestiture of business | — | | | 122.5 | | | — | |
Proceeds from sale of assets | 33.2 | | | 14.8 | | | 60.7 | |
Other | 6.8 | | | (30.8) | | | (79.3) | |
Net investing cash | (1,607.6) | | | (476.4) | | | (322.4) | |
| | | | | |
Financing Activities | | | | | |
Net increase (decrease) in short-term borrowings | 214.4 | | | 763.9 | | | (204.6) | |
Proceeds from long-term debt | 999.7 | | | 994.8 | | | 999.0 | |
Payments of long-term debt | (260.3) | | | (422.9) | | | (1,204.7) | |
Payments for credit facility and debt issuance costs | (7.3) | | | (11.5) | | | (10.0) | |
Payments of cash dividends | (618.5) | | | (587.1) | | | (488.0) | |
Proceeds from stock options exercised | 67.3 | | | 192.8 | | | 182.7 | |
Treasury stock purchased | (883.2) | | | (2,752.3) | | | (2,446.3) | |
Proceeds from treasury stock issued | 22.0 | | | 11.7 | | | 182.4 | |
Proceeds from real estate financing transactions | 207.3 | | | — | | | — | |
Other | (23.8) | | | (23.4) | | | (30.6) | |
Net financing cash | (282.4) | | | (1,834.0) | | | (3,020.1) | |
| | | | | |
Effect of exchange rate changes on cash | 3.2 | | | 4.9 | | | (1.3) | |
Net increase (decrease) in cash and cash equivalents | 33.1 | | | (60.9) | | | 64.8 | |
Cash and cash equivalents at beginning of year | 165.7 | | | 226.6 | | | 161.8 | |
Cash and cash equivalents at end of year | $ | 198.8 | | | $ | 165.7 | | | $ | 226.6 | |
| | | | | |
Taxes paid on income | $ | 580.1 | | | $ | 466.3 | | | $ | 437.2 | |
Interest paid on debt | 371.1 | | | 338.8 | | | 340.8 | |
See notes to consolidated financial statements.
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS'SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Common Stock | | Other Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance at January 1, 2020 | $ | 119.4 | | | $ | 3,153.0 | | | $ | 7,366.9 | | | $ | (5,836.5) | | | $ | (679.5) | | | $ | 4,123.3 | |
Net income | | | | | 2,030.4 | | | | | | | 2,030.4 | |
Other comprehensive loss | | | | | | | | | (38.8) | | | (38.8) | |
Adjustment to initially adopt ASU 2016-13 | | | | | (3.0) | | | | | | | (3.0) | |
Treasury stock purchased | | | | | | | (2,446.3) | | | | | (2,446.3) | |
Treasury stock issued | | | 61.6 | | | | 120.8 | | | | | 182.4 | |
Treasury stock retired | (30.6) | | | | | (8,061.6) | | | 8,092.2 | | | | | — | |
Stock-based compensation activity | 1.1 | | | 276.4 | | | | | (26.7) | | | | | 250.8 | |
Other adjustments | | | 0.4 | | | (0.4) | | | | | | | — | |
Cash dividends -- $1.7867 per share | | | | | (488.0) | | | | | | | (488.0) | |
Balance at December 31, 2020 | 89.9 | | | 3,491.4 | | | 844.3 | | | (96.5) | | | (718.3) | | | 3,610.8 | |
Net income | | | | | 1,864.4 | | | | | | | 1,864.4 | |
Other comprehensive income | | | | | | | | | 19.9 | | | 19.9 | |
Treasury stock purchased | | | | | | | (2,752.3) | | | | | (2,752.3) | |
Treasury stock issued | | | 9.3 | | | | | 2.4 | | | | | 11.7 | |
Stock-based compensation activity | 0.9 | | | 290.9 | | | | | (23.5) | | | | | 268.3 | |
Other adjustments | | | 1.4 | | | 0.1 | | | | | | | 1.5 | |
Cash dividends -- $2.20 per share | | | | | (587.1) | | | | | | | (587.1) | |
Balance at December 31, 2021 | 90.8 | | | 3,793.0 | | | 2,121.7 | | | (2,869.9) | | | (698.4) | | | 2,437.2 | |
Net income | | | | | 2,020.1 | | | | | | | 2,020.1 | |
Other comprehensive loss | | | | | | | | | (2.2) | | | (2.2) | |
Treasury stock purchased | | | | | | | (883.2) | | | | | (883.2) | |
Treasury stock issued | | | 11.0 | | | | | 11.0 | | | | | 22.0 | |
Stock-based compensation activity | 0.4 | | | 167.1 | | | | | (33.5) | | | | | 134.0 | |
Other adjustments | | | (7.2) | | | (0.1) | | | | | | | (7.3) | |
Cash dividends -- $2.40 per share | | | | | (618.5) | | | | | | | (618.5) | |
Balance at December 31, 2022 | $ | 91.2 | | | $ | 3,963.9 | | | $ | 3,523.2 | | | $ | (3,775.6) | | | $ | (700.6) | | | $ | 3,102.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(millions of dollars, except per share data) | Common Stock | | Other Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance at January 1, 2017 | $ | 116.6 |
| | $ | 2,488.5 |
| | $ | 4,049.5 |
| | $ | (4,235.8 | ) | | $ | (540.4 | ) | | $ | 1,878.4 |
|
Net income | | | | | 1,727.9 |
| | | | | | 1,727.9 |
|
Other comprehensive income | | | | | | | | | 155.5 |
| | 155.5 |
|
Stock-based compensation activity | 1.0 |
| | 232.4 |
| | | | (30.6 | ) | | | | 202.8 |
|
Other adjustments | | | 2.3 |
| | | | | | | | 2.3 |
|
Cash dividends -- $3.40 per share | | | | | (319.0 | ) | | | | | | (319.0 | ) |
Balance at December 31, 2017 | 117.6 |
| | 2,723.2 |
| | 5,458.4 |
| | (4,266.4 | ) | | (384.9 | ) | | 3,647.9 |
|
Net income | | | | | 1,108.7 |
| | | | | | 1,108.7 |
|
Other comprehensive loss | | | | | | | | | (242.7 | ) | | (242.7 | ) |
Adjustment to initially adopt ASU 2016-01 | | | | | 2.3 |
| | | | (2.3 | ) | | — |
|
Treasury stock purchased | | | | | | | (613.3 | ) | | | | (613.3 | ) |
Stock-based compensation activity | 0.8 |
| | 172.4 |
| | | | (21.0 | ) | | | | 152.2 |
|
Other adjustments | | | 0.8 |
| | | | | | | | 0.8 |
|
Cash dividends -- $3.44 per share | | | | | (322.9 | ) | | | | | | (322.9 | ) |
Balance at December 31, 2018 | 118.4 |
| | 2,896.4 |
| | 6,246.5 |
| | (4,900.7 | ) | | (629.9 | ) | | 3,730.7 |
|
Net income | | | | | 1,541.3 |
| | | | | | 1,541.3 |
|
Other comprehensive loss | | | | | | | | | (41.3 | ) | | (41.3 | ) |
Adjustment to initially adopt ASU 2016-02 | | | | | (8.4 | ) | | | | | | (8.4 | ) |
Adjustment to initially adopt ASU 2018-02 | | | | | 8.3 |
| | | | (8.3 | ) | | — |
|
Treasury stock purchased | | | | | | | (778.8 | ) | | | | (778.8 | ) |
Treasury stock transferred from defined benefit pension plan | | | | | | | (131.8 | ) | | | | (131.8 | ) |
Stock-based compensation activity | 1.0 |
| | 254.5 |
| | | | (25.2 | ) | | | | 230.3 |
|
Other adjustments | | | 2.1 |
| |
|
| | | | | | 2.1 |
|
Cash dividends -- $4.52 per share | | | | | (420.8 | ) | | | | | | (420.8 | ) |
Balance at December 31, 2019 | $ | 119.4 |
| | $ | 3,153.0 |
| | $ | 7,366.9 |
| | $ | (5,836.5 | ) | | $ | (679.5 | ) | | $ | 4,123.3 |
|
See notes to consolidated financial statements.
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(millions of dollars, unless otherwise noted)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of The Sherwin-Williams Company and its wholly owned subsidiaries (collectively, the Company). Inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (US GAAP) requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those amounts.
Nature of Operations
The Company is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America, with additional operations in the Caribbean region, Europe, Asia and Australia.
Reportable Segments
See Note 2123 for further details.
Cash Equivalents
Management considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Derivative Instruments
The Company utilizes derivative instruments as part of its overall financial risk management policy. The Company entered into foreign currency forward contracts with maturity dates of less than twelve months in 2019, 2018, and 2017, primarily to hedge against value changes in foreign currency. See Note 18. There were 0 material foreign currency option and forward contracts outstanding at December 31, 2019, 2018 and 2017.
On May 9, 2019, the Company entered into a U.S. Dollar to Euro cross currency swap contract with a total notional amount of $400.0 million to hedge the Company's net investment in its European operations. This contract has been designated as a net investment hedge and will mature on January 15, 2022. During the term of the contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively converting a portion of the Company's U.S. Dollar denominated fixed-rate debt to Euro denominated fixed-rate debt. The fair value of the contract as of December 31, 2019 was $1.5 million and is included in Other assets on the balance sheet. The changes in fair value are recognized in the foreign currency translation adjustments component of Accumulated other comprehensive income (loss) (AOCI). For the year ended December 31, 2019, an unrealized gain of $1.1 million, net of tax, was recognized in AOCI.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable wereare recorded at the time of credit sales, net of allowance for credit losses. The Company recordedrecords an allowance for doubtful accounts of $36.5 million, $45.9 million and $53.0 million at December 31, 2019, 2018 and 2017, respectively, to reduce Accounts receivable to their estimatedthe net amount expected to be collected (estimated net realizable value. Thevalue).
Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments” (ASC 326). Under ASC 326, the Company reviews the collectibility of the Accounts receivable balance each reporting period and estimates the allowance wasfor doubtful accounts based on an analysis of historical bad debts, a review of thedebt experience, aging of Accountsaccounts receivable, and the current creditworthiness of customers.customers, current economic factors, as well as reasonable and supportable forward-looking information. Accounts receivable balances are written-off against the allowance for doubtful accounts if a final determination of uncollectibility is made. All provisions for allowancesthe allowance for doubtful collection of accounts are included in Selling, general and administrative expenses.
See Note 19 for further details.
Property, Plant and Equipment
Property, plant and equipment (including leasehold improvements) is stated on the basis of cost. Depreciation is provided bycharged to expense using the straight-line method.method over the assets’ estimated useful lives which range from 5 to 25 years for buildings and 3 to 15 years for machinery and equipment. Depreciation and amortization are included in the appropriate Cost of goods sold or Selling, general and administrative expenses caption on the Statements of Consolidated Income. The major classes of assets and ranges of annual depreciation rates are:
|
| |
Buildings | 4.0% – 20.0% |
Machinery and equipment | 10.0% – 20.0% |
Furniture and fixtures | 6.7% – 33.3% |
Automobiles and trucks | 10.0% – 33.3% |
Goodwill and Intangible Assets
Goodwill represents the cost in excess of fair value of net assets acquired in business combinations accounted for by the purchase method. Intangible assets include indefinite-lived trademarks, customer relationships and intellectual property. In accordance with the Goodwill and Other Intangibles Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), goodwill and indefinite-lived trademarks are not amortized, but instead are tested for impairment on an annual basis, as well as whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. The costs of finite-livedFinite-lived intangible assets are amortized on a straight-line basis over the expected period of benefit, which ranges primarily from 157 to 20 years. See Note 6.7 for further details.
Impairment of Long-Lived Assets
In accordance with the Property, Plant and Equipment Topic of the ASC, management evaluates the recoverability and remaining lives of long-lived assets (including right-of-use assets) whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. See Notes 4Note 6 for further details.
Derivative Instruments
The Company utilizes derivative instruments to mitigate certain risk exposures as part of its overall financial risk management policy and 6.accounts for these instruments in accordance with the Derivatives and Hedging Topic of the ASC. Derivatives are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in fair value of the derivative instruments are recognized immediately in earnings unless the derivative instrument qualifies for and is designated in an effective hedging relationship.
The Company entered into foreign currency forward contracts with maturity dates of less than twelve months in 2022, 2021, and 2020, primarily to hedge against value changes in foreign currency. There were no material foreign currency option and forward contracts outstanding at December 31, 2022, 2021 and 2020. See Note 20 for further details.
The Company also entered into cross currency swap contracts to hedge its net investment in European operations in 2022, 2021, and 2020. These contracts qualified for and were designated as net investment hedges as permitted under US GAAP. The changes in fair value for the cross currency swaps are recognized in the foreign currency translation adjustments component of accumulated other comprehensive income (loss) (AOCI). The cash flow impact of these instruments is classified as an investing activity in the Statements of Consolidated Cash Flows. See Note 17 for further details.
Non-Traded Investments
The Company has investments in the U.S. affordable housing and historic renovation real estate markets and certain other investments that have been identified as variable interest entities.entities which qualify for certain tax credits. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of Accounting Standard Update (ASU) No.ASU 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The carrying amountsvalue of the investments includedare recorded in Other assets, were $176.2 million, $181.2 million and $189.4 million at December 31, 2019, 2018 and 2017, respectively.assets. The liabilities recorded onfor the balance sheets for estimated future capital contributions are recorded in Other accruals and Other long-term liabilities. The following table summarizes the balances related to the investments were $174.4 million, $183.0 million and $179.0 million at December 31, 2019, 2018 and 2017, respectively.investments.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Other assets | $ | 587.0 | | | $ | 355.8 | | | $ | 198.2 | |
Other accruals | 89.8 | | | 61.8 | | | 89.0 | |
Other long-term liabilities | 476.5 | | | 289.7 | | | 127.3 | |
Standby Letters of Credit
The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements provide credit availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $61.2$149.8 million, $65.6$89.2 million and $75.3$51.3 million at December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
Product Warranties
The Company offers assurance type product warranties for certain products. The specific terms and conditions of such warranties vary depending on the product or customer contract requirements. Management estimated the costs of unsettled product warranty claims based on historical results and experience and included an amount in Other accruals. Management periodically assesses the adequacy of the accrual for product warranty claims and adjusts the accrual as necessary. Changes in the Company’s accrual for product warranty claims during 2019, 20182022, 2021 and 2017,2020, including customer satisfaction settlements during the year, were as follows:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Balance at January 1 | $ | 57.1 |
| | $ | 151.4 |
| | $ | 34.4 |
|
Charges to expense | 32.5 |
| | 31.7 |
| | 39.7 |
|
Settlements | (47.3 | ) | | (57.8 | ) | | (53.1 | ) |
Acquisition, divestiture and other adjustments |
|
| | (68.2 | ) | | 130.4 |
|
Balance at December 31 | $ | 42.3 |
| | $ | 57.1 |
| | $ | 151.4 |
|
Warranty accruals acquired in connection with the Valspar acquisition include warranties for certain products under extended furniture protection plans. The decrease in the accrual for product warranty claims in the year ended December 31, 2018 was primarily due to the divestiture of the furniture protection plan business in the third quarter of 2018. | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Balance at January 1 | $ | 35.2 | | | $ | 43.3 | | | $ | 42.3 | |
Charges to expense | 30.1 | | | 27.5 | | | 38.1 | |
Settlements | (29.1) | | | (35.6) | | | (37.1) | |
| | | | | |
Balance at December 31 | $ | 36.2 | | | $ | 35.2 | | | $ | 43.3 | |
Defined Benefit Pension and Other Postretirement Benefit Plans
The Company accounts for its defined benefit pension and other postretirement benefit plans in accordance with the Retirement Benefits Topic of the ASC, which requires the recognition of a plan’s funded status asCompany recognize an asset for overfunded defined benefit pension or other postretirement benefit plans and as a liability for unfunded or underfunded plans. In addition, actuarial gains and losses and prior service costs of such plans are recorded in AOCI. The amounts recorded in AOCI will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension cost (credit) and net periodic benefit cost (credit). See Note 8.9 for further details.
Environmental Matters
Capital expenditures for ongoing environmental compliance measures wereare recorded in Property, plant and equipment, and related expenses wereare included in the normal operating expenses of conducting business. The Company accrued for environmental-related activities for which commitments or clean-up plans have been developed and when such costs could be reasonably estimated based on industry standards and professional judgment. All accruedAccrued amounts wereare primarily recorded on an undiscounted basis and have not been recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. Environmental-related expenses includedinclude direct costs of investigation and remediation and indirect costs such as compensation and benefits for employees directly involved in the investigation and remediation activities and fees paid to outside engineering, consulting and law firms. See Notes 1011 and 18.20 for further details.
Employee Stock Purchase andDefined Contribution Savings Plan
The Company accounts for the Employee Stock Purchase and Savings Plan (ESOP)its salaried defined contribution savings plan in accordance with the Employee Stock OwnershipDefined Contribution Plans Subtopic of the Compensation – Stock OwnershipRetirement Benefits Topic of the ASC. The Company recognized compensation expense for amounts contributed to the ESOP.defined contribution savings plan. See Note 13.14 for further details on the defined contribution savings plan.
Stock-Based Compensation
The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. See Note 14.15 for further details.
Other Liabilities
The Company retains risk for certain liabilities, primarily workers’ compensation claims, employee medical and disability benefits, and automobile, property, general and product liability claims. Estimated amounts wereare accrued for certain workers’ compensation, employee medical and disability benefits, automobile and property claims filed but unsettled and estimated claims incurred but not reportedreported. Estimates are based upon management’s estimated aggregate liability for claims incurred using historical experience, actuarial assumptions followed in the insurance industry and actuarially-developed models for estimating certain liabilities. Certain estimated general and product liability claims filed but unsettled wereare accrued based on management’s best estimate of ultimate settlement or actuarial calculations of potential liability using industry experience and actuarial assumptions developed for similar types of claims.
Foreign Currency Translation
All consolidated non-highly inflationary foreign operations use the local currency of the country of operation as the functional currency and translated the localcurrency. Local currency asset and liability accounts are translated at year-end exchange rates while income and expense
accounts wereare translated at average exchange rates. The resulting translation adjustments wereare included in AOCI, a component of Shareholders’ equity.AOCI.
Revenue Recognition
The Company recognizedrecognizes revenue when performance obligations under the terms of the agreement are satisfied. This generally occurs with the transfer of control of our products to the product was transferred to unaffiliated customers.customer. Collectibility of amounts recorded as revenue was probable at the time of recognition. See Note 17.19 for further details.
Customer and Vendor Consideration
The Company offeredoffers certain customers rebate and sales incentive programs which wereare classified as reductions in Netnet sales. Such programs wereare in the form of volume rebates, rebates that constituted a percentage of sales or rebates for attaining certain sales goals. The Company receivedreceives consideration from certain suppliers of raw materials in the form of volume rebates or rebates that constituted a percentage of purchases. These rebates wereare recognized on an accrual basis by the Company as a reduction of the purchase price of the raw materials and a subsequent reduction of Cost of goods sold when the related product was sold.
CostsCost of Goods Sold
Included in CostsCost of goods sold wereare costs for materials, manufacturing, distribution and related support. Distribution costs includedinclude expenses related to the distribution of products including inbound freight charges, purchase and receiving costs, warehousing costs, internal transfer costs and other costs incurred to ship products. Also included in CostsCost of goods sold wereare total technical expenditures, which includedinclude research and development costs, quality control, product formulation expenditures and other similar items. Research and development costs included in technical expenditures were $103.1$119.3 million, $51.9$115.9 million and $58.5$97.1 million for 2019, 20182022, 2021 and 2017,2020, respectively.
Selling, General and Administrative Expenses
Selling costs includedinclude advertising expenses, marketing costs, employee and store costs and sales commissions. The cost of advertising wasis expensed as incurred. The Company incurred $355.2$314.4 million, $357.8$311.9 million and $374.1$363.4 million in advertising costs during 2019, 20182022, 2021 and 2017,2020, respectively. General and administrative expenses includedinclude human resources, legal, finance and other support and administrative functions.
Government Incentives
The Company receives incentives from various government entities in the form of tax rebates or credits, grants, and loans. These incentives typically require that the Company maintain specified spending levels and other operational metrics and may be subject to reimbursement if conditions are not met or maintained. Government incentives are recorded in the Company’s consolidated financial statements in accordance with their purpose as a reduction of expense, a reduction of the cost of the capital investment or other income. The benefit of these incentives is recorded when received and all conditions as specified in the agreement are fulfilled.
There were $86.6 million and $49.4 million of government incentives received as cash payments related to the construction of the Company’s new headquarters and R&D center in 2022 and 2021, respectively. These government incentives were recorded as a reduction in the carrying amount of the respective assets under construction within Property, plant and equipment, net on the Consolidated Balance Sheets and within Other as an investing activity on the Statements of Consolidated Cash Flows.
Real Estate Financing
The Company has entered into certain sale-leaseback agreements that do not qualify as asset sales and were accounted for as real estate financing transactions. These arrangements primarily consist of our new headquarters currently under construction, for which we expect to receive total proceeds approximating $800 million to $850 million on an incremental basis until the completion of construction. In December 2022, the Company received $210 million at closing pursuant to the transaction. The net proceeds are recognized within the Financing Activities section of the Statements of Consolidated Cash Flows, and corresponding financing obligations are recognized within Other long-term liabilities and Other accruals on the Consolidated Balance Sheets. Future payments are estimated to be $77 million during the remaining construction period, of which $22 million is estimated to be paid in the following twelve months.
Earnings Per Share
Common stock held in a revocable trust (see Note 12) was13) is not included in outstanding shares for basic or diluted income per share calculations. Basic and diluted net income per share wereare calculated using the treasury stock method in accordance with the Earnings Per Share Topic of the ASC. Basic net income per share amounts wereare computed based on the weighted-average number of shares outstanding during the year. Diluted net income per share amounts wereare computed based on the weighted-average number of shares outstanding plus all dilutive securities potentially outstanding during the year. See Note 20.22 for further details.
Reclassifications
Certain amounts in the notes to the consolidated financial statements for 2017 and 2018 have been reclassified to conform to the 2019 presentation.
NOTE 2 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted in 20192022
Effective January 1, 2019,2022, the Company adopted Accounting Standards Update (ASU) 2016-02, "Leases" (ASC 842). ASC 842 consists2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” This ASU requires disclosures for material government assistance transactions during annual reporting periods. The disclosures include information about the nature of a comprehensive leasethe transaction, the related accounting standard requiring most leasespolicies used to be recognizedaccount for the government assistance, the effect of government assistance on the balance sheetentity’s financial statements, and any significant new disclosures. The Company adopted ASC 842 using the modified retrospective optional transition method. Therefore, the standard was applied starting January 1, 2019terms and prior periods were not restated.
The Company applied the package of practical expedients permitted under the ASC 842 transition guidance. As a result, the Company did not reassess the identification, classification and initial direct costs of leases commencing before the effective date. The Company also applied the practical expedient to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date.
As a result of the adoption of ASC 842, right-of-use assets, current liabilities and non-current liabilities related to operating leases of $1.7 billion, $0.4 billion and $1.4 billion, respectively, were recognized on the balance sheet at December 31, 2019. In addition, the adoption of ASC 842 resulted in a transition adjustment, net of tax, reducing the opening balance of retained earnings by $8.4 million at January 1, 2019. The adoption of ASC 842 did not have a material impact on the Company's results of operations, cash flows or debt covenants. See Note 9 for additional information.
Effective January 1, 2019, the Company adopted ASU 2018-02, "Reclassification of Certain Income Tax Effects from Accumulated Other Comprehensive Income." This standard allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. As a result of this standard, the Company recorded an $8.3 million reclassification from AOCI to retained earnings. See Note 15 for additional information on the impact of the reclassification to each component of AOCI. The adoption of this standard did not have a significant impact on the Company's results of operations, financial condition or liquidity.
Effective January 1, 2019, the Company adopted ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." This standard better aligns hedging activities and financial reporting for hedging relationships. It eliminates the requirement to separately measure and report hedge ineffectiveness and reduces the complexity of applying certain aspects of hedge accounting. There were no outstanding hedges as of the adoption date. The prospective adoption of this standard did not have a significant impact on the Company's results of operations, financial condition or liquidity.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In addition, new disclosures are required. The ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods therein.conditions. The adoption of ASU 2016-13 is2021-10 did not expected to have a material impact onaffect the Company'sCompany’s financial position, results of operations or cash flows.flows as the standard only impacts annual financial statement footnote disclosures. See Note 1 for additional information.
Not Yet Adopted
In December 2019,September 2022, the FASB issued ASU 2019-12, "Income Taxes2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” This ASU requires disclosure about an entity’s use of supplier finance programs, including the key terms of the program, amount of obligations outstanding at the end of the reporting period, and a rollforward of activity within the program during the period. The ASU is effective as of January 1, 2023 and will not affect the Company’s financial position, results of operations or cash flows as the standard only impacts financial statement footnote disclosures.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 740)805): Simplifying the Accounting for Income Taxes."Contract Assets and Liabilities from Contracts with Customers.” This ASU requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The ASU simplifies the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. The standards update is effective for fiscal years and interim periods beginning after December 15, 2020,2022, with early adoption permitted. The amendments are primarily perspective. The Company is currently assessingevaluating the impact of adopting this standards update on our consolidated financial statements.ASU.
NOTE 3 – ACQUISITIONS AND DIVESTITURES
Acquisitions
Pending
During 2019,the fourth quarter of 2022, the Company signed an agreement to acquire German-based Specialized Industrial Coatings Holding (SIC Holding), a Peter Möhrle Holding and GP Capital UG venture comprised of Oskar Nolte GmbH and Klumpp Coatings GmbH. The transaction is subject to customary closing conditions and is expected to close in 2023. The acquired business will be reported within the Company’s Performance Coatings Group.
Closed in Current Year
In April 2022, the Company completed the acquisition of the European industrial coatings business of Sika AG. This business engineers, manufactures and sells corrosion protection coating systems and fire protection coating systems. In July 2022, the Company completed the acquisitions of Gross & Perthun GmbH, a German-based developer, manufacturer, and distributor of coatings primarily for the heavy equipment and transportation industries, Dur-A-Flex, Inc., a domestic floor coatings company, and Powdertech Oy Ltd., a Finland-based distributor of powder coatings and related products. The acquired businesses will be reported within the Company’s Performance Coatings Group. In December 2022, the Company completed the acquisition of Industria Chimica Adriatica S.p.A. (ICA), an Italian designer, manufacturer and distributor of industrial wood coatings with global operations.
The aggregate purchase price for the acquisitions completed in 2022 was approximately $1.024 billion, including amounts withheld as security for certain representations, warranties and obligations of the sellers. The purchase price for each acquisition was preliminarily allocated to identifiable assets and liabilities based on information available at the date of acquisition and may change as the Company completes its analysis of net assets acquired, primarily the identification and valuation of intangible assets. As of December 31, 2022, $282.8 million of intangible assets and $565.8 million of goodwill were recognized from these transactions. The Company expects to finalize the purchase price allocation for each of the acquisitions within the allowable measurement period. The results of operations for the acquisitions have been included in the consolidated financial
statements since the respective acquisition dates. Pro forma results of operations have not been presented as the impact on the Company’s consolidated financial results is not material.
Closed in Prior Year
During the first quarter of 2021, the Company completed the acquisition of a domestic packaging companycoatings company. The acquisition expanded the Performance Coatings Group’s platform for growth and two Europeanportfolio of brands and technologies. During the fourth quarter of 2021, the Company completed the acquisition of Specialty Polymers, Inc. (Specialty Polymers), a leading manufacturer and developer of water-based polymers used in architectural and industrial coatings companies for anand other applications. The acquisition added to the Company’s existing internal resin manufacturing capabilities. Specialty Polymers is reported within the Company’s Performance Coatings Group.
The aggregate purchase price of $84.4for acquisitions completed in 2021 was approximately $227.0 million, including amounts withheld as security for certain representations, warranties and obligations of the sellers. These acquisitions supportThe purchase price for each acquisition was preliminarily allocated to identifiable assets and liabilities based on information available at the growthdate of acquisition. As of December 31, 2021, $155.6 million of goodwill and $11.3 million of intangible assets were recognized from these transactions. During the Performance Coatings Groupfirst quarter of 2022, the Company made certain adjustments to the preliminary purchase accounting adjustments associated with the net assets acquired in its 2021 acquisition of Specialty Polymers. The fair value of finite-lived intangible assets increased by providing new technologies$61.3 million and an expanded global platform.property, plant and equipment assets acquired increased by $11.0 million, offset by a corresponding net decrease in goodwill. There was no material impact on previously reported financial results from these adjustments. The acquisitions have been accounted for as business combinations. TheCompany completed the preliminary purchase price allocations are expected to be finalizedallocation for the acquisitions completed in 2021 within the allowable measurement period. See Note 7 for additional information related to the acquisitions. The results of operations of these companiesfor the acquisitions have been included in the consolidated financial statements since the date of acquisition.respective acquisition dates. Pro forma results of operations have not been presented as the impact on the Company'sCompany’s consolidated financial results wasis not material.
Divestiture
On June 1, 2017,March 31, 2021, the Company completed the acquisitiondivested Wattyl, an Australian and New Zealand manufacturer and seller of architectural and protective paint and coatings with annual revenue of approximately $200 million. The Valspar Corporation (Valspar) at $113 per share in an all cash transaction for a total purchase price of $8.9 billion, net of divestiture proceeds of $431.0 million. On April 11, 2017,will enable the Company and Valspar entered intoto focus its resources on global opportunities which better align with our long-term strategies. In connection with this transaction, the Company recognized a definitive agreement with Axalta Coating Systems Ltd.pre-tax loss of $111.9 million within Other general (income) expense - net (see Note 20). The Wattyl divestiture does not meet the criteria to be reported as discontinued operations in our consolidated financial statements as the Company’s decision to divest this business did not represent a strategic shift that will have a major effect on the assets relatedCompany’s operations and financial results.
NOTE 4 – RESTRUCTURING
In the fourth quarter of 2022, the Company approved a business restructuring plan (Restructuring Plan) to Valspar's North American industrial wood coatings business. The divestiture was also completed on June 1, 2017,simplify the Company’s operating model and is reported as a discontinued operation with 0 pre-tax gain or loss, but includes the tax expense effect of this separate transaction. Proceeds of $431.0 million were received for the divested assets sold. The divestiture resulted in a tax provision of $41.5 million, which reduced basic and diluted net income per share by $0.44 for the year ended December 31, 2017. The acquisition expanded the Company's diversified arrayportfolio of brands and technologies, expanded its global platform and added new capabilities in its packaging and coil businesses.
The following table summarizeswithin the allocation of the fair value of the net assets acquired through the Valspar acquisition. This allocation was based on the acquisition method of accounting and third-party valuation appraisals.
|
| | | | |
Cash | | $ | 129.1 |
|
Accounts receivable | | 817.5 |
|
Inventories | | 684.4 |
|
Indefinite-lived trademarks | | 614.3 |
|
Finite-lived intangible assets | | 4,922.9 |
|
Goodwill | | 5,888.8 |
|
Property, plant and equipment | | 840.7 |
|
All other assets | | 235.1 |
|
Accounts payable | | (553.2 | ) |
Long-term debt | | (1,603.5 | ) |
Deferred taxes | | (1,915.9 | ) |
All other liabilities | | (1,120.8 | ) |
Total | | $ | 8,939.4 |
|
Total, net of cash | | $ | 8,810.3 |
|
Finite-lived intangible assets include customer relationships of $3.2 billion and intellectual property and technology of $1.7 billion, which are being amortized over weighted average amortization periods ranging from 15 to 20 years. The measurement period adjustments for finite-lived intangible assets resulted in a $7.7 million reduction of amortization expense in the second quarter of 2018 that related to prior periods. Goodwill of $2.0 billion, $1.1 billion, and $2.8 billion was recorded in The Americas Group, Consumer Brands Group and to reduce costs in all regions in the Consumer Brands Group, Performance Coatings Group respectively, and relates primarilythe Administrative segment. The actions taken under the Restructuring Plan better position the Company to expected synergies. The results of operations for Valspar have been included incontinue to add long-term shareholder value. Key focus areas within the Company's consolidated financial statements sinceConsumer Brands Group include the date of acquisition.
NOTE 4 – EXIT OR DISPOSAL ACTIVITIES
Management is continually re-evaluating the Company’s operating facilities, including acquired operating facilities, against its long-term strategic goals. Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations TopicChina architectural business, aerosol portfolio and optimization of the ASC. Provisions for qualified exit costsoverall retail portfolio. The majority of these restructuring actions are made atexpected to be completed by the time a facility is no longer operational. Qualified exit costs primarily include post-closure lease expenses or early lease termination costs and costsend of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value. Adjustments to prior provisions and additional impairment charges for property, plant and equipment of closed sites being held for disposal are recorded in Other general expense – net.2023.
The following table summarizes the activity and remaining liabilities associated with qualified exit costs:the Restructuring Plan:
|
| | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
Balance at January 1 | | $ | 7.1 |
| | $ | 13.4 |
| | $ | 3.8 |
|
Acquired balances | | | | | | 4.5 |
|
Provisions in Cost of goods sold or SG&A | | 8.8 |
| | 14.9 |
| | 50.5 |
|
Actual expenditures charged to accrual | | (12.8 | ) | | (21.2 | ) | | (45.4 | ) |
Balance at December 31 | | $ | 3.1 |
| | $ | 7.1 |
| | $ | 13.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Consumer Brands Group | | Performance Coatings Group | | Administrative | | Total |
Balance at January 1, 2022 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
Provisions: | | | | | | | |
Severance and related costs | 14.5 | | | 19.5 | | | | | 34.0 | |
Other qualified costs | 11.1 | | | 2.7 | | | | | 13.8 | |
Total | 25.6 | | | 22.2 | | | — | | | 47.8 | |
| | | | | | | |
Payments | | | (5.7) | | | | | (5.7) | |
| | | | | | | |
Currency impact and other adjustments | | | (0.4) | | | | | (0.4) | |
| | | | | | | |
Balance at December 31, 2022 | $ | 25.6 | | | $ | 16.1 | | | $ | — | | | $ | 41.7 | |
| | | | | | | |
Restructuring Plan Expense: | | | | | | | |
Total expense incurred to date | $ | 25.6 | | | $ | 22.2 | | | $ | — | | | $ | 47.8 | |
Additional expense expected | 93.9 | | | 2.8 | | | 10.0 | | | 106.7 | |
Total expected expense | $ | 119.5 | | | $ | 25.0 | | | $ | 10.0 | | | $ | 154.5 | |
In addition to the provisions above, which were primarily recorded in Cost of goods sold and Selling, general and administrative expense, trademark impairment of $15.5 million was also recorded in the Consumer Brands Group. See Note 7 for further information. NOTE 5 – INVENTORIES
Included in Inventories were the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Finished goods | $ | 1,957.7 | | | $ | 1,378.8 | | | $ | 1,427.6 | |
Work in process and raw materials | 668.8 | | | 548.4 | | | 376.5 | |
Inventories | $ | 2,626.5 | | | $ | 1,927.2 | | | $ | 1,804.1 | |
Inventories were stated at the lower of cost or net realizable value, with cost primarily determined on the last-in, first-out (LIFO) method. Management believes that the use of LIFO results in a better matching of costs and revenues.
The following table summarizes the extent to which the Company'sCompany’s Inventories use the LIFO cost method, and presents the effect on inventoriesInventories had the Company used the first-in, first-out (FIFO) inventory valuation method.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Percentage of total inventories on LIFO | 74 | % | | 70 | % | | 72 | % |
Excess of FIFO over LIFO | $ | 792.7 | | $ | 593.0 | | $ | 312.1 |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Percentage of total inventories on LIFO | 72 | % | | 72 | % | | 71 | % |
Excess of FIFO over LIFO | $ | 339.8 |
| | $ | 377.1 |
| | $ | 288.2 |
|
During 2021, certain inventories accounted for on the LIFO method were reduced, resulting in the liquidation of certain quantities carried at costs prevailing in prior years. The 2021 liquidation increased net income by $25.8 million.The Company recorded a reserve for obsolescence of $115.4$139.0 million, $105.9$118.6 million and $103.7$125.8 million at December 31, 2019, 20182022, 2021 and 2017,2020, respectively, to reduce Inventories to their estimated net realizable value.
NOTE 6 – GOODWILL, INTANGIBLEPROPERTY, PLANT AND LONG-LIVED ASSETSEQUIPMENT
Included in Property, plant and equipment, net were the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Land | $ | 263.0 | | | $ | 257.7 | | | $ | 283.5 | |
Buildings | 1,199.3 | | | 1,157.8 | | | 1,098.0 | |
Machinery and equipment | 3,230.2 | | | 3,043.6 | | | 3,026.8 | |
Construction in progress | 496.1 | | | 205.4 | | | 140.5 | |
Property, plant and equipment, gross | 5,188.6 | | | 4,664.5 | | | 4,548.8 | |
Less allowances for depreciation | 2,981.6 | | | 2,797.2 | | | 2,714.3 | |
Property, plant and equipment, net | $ | 2,207.0 | | | $ | 1,867.3 | | | $ | 1,834.5 | |
In accordance with the Property, Plant and Equipment Topic of the ASC, whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable or the useful life may have changed, impairment tests are to be performed. Subsequent to the adoption of ASU 2016-02, right-of-use assets recognized in the consolidated balance sheet are considered to be long-lived assets. Undiscounted cash flows wereare used to calculate the recoverable value of long-lived assets to determine if such assets wereare not recoverable. If the carrying value of the assets wasis deemed to not be recoverable, the impairment to be recognized is the amount by which the carrying value of the assets exceeds the estimated fair value of the assets as determined in accordance with the Fair Value Topic of the ASC. NaNNo material impairments of long-lived assets were recorded in 2019, 20182022, 2021 or 2017.2020.
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
During 2019,2022, the Company acquired 3five companies which resulted in the recognition of goodwill of $14.2$565.8 million and finite-lived intangibles of $34.9$282.8 million. The acquired intangibles are being amortized over a weighted-average useful life of approximately 14 years. During 2017,2021, the Company recognizedacquired two companies which resulted in the recognition of goodwill of $5.9 billion,$155.6 million and finite-lived intangibles of $4.9 billion$11.3 million. As a result of certain adjustments to the preliminary purchase accounting for the 2021 acquisitions during 2022, goodwill decreased by $72.3 million and indefinite-lived trademarksthe fair value of $614.3 millionfinite-lived intangibles assets increased by $61.3 million. In addition, during 2021, the Company divested its Wattyl business in connection with the acquisition of Valspar in 2017.Australia and New Zealand. See Note 3 for additional information related to the acquisitions.acquisitions and divestiture.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill at the reporting unit level and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate an impairment has more likely than not occurred. October 1 has been established for the annual impairment review. AtAn optional qualitative assessment may alleviate the time ofneed to perform quantitative goodwill and indefinite-lived intangible asset impairment testing,tests when impairment is unlikely. Should a quantitative impairment test be performed, values are estimated separately for goodwill and trademarks with indefinite livesindefinite-lived intangible assets using a valuation model, incorporating discount rates commensurate with the risks involved for each group of assets. An optional qualitative assessment may alleviate the need to perform the quantitative goodwill impairment test when impairment is unlikely.
During the fourth quarter of 2019, the Company performed a strategic review of its business lines as part of the annual planning cycle. Decisions were made during this review related to certain brands which resulted in a reduction to the long-term forecasted net sales for certain indefinite-lived trademarks acquired in the Valspar acquisition within the Performance Coatings and Consumer Brands Groups. As a result of the strategic decisions made at that time and in conjunction with theThe annual impairment review performed as of October 1, 2019,2022, which incorporated the Company recognized non-cash pre-tax impairment charges totaling $122.1 million related to certain recently acquired indefinite-lived trademarks. These charges includedimpact of the Restructuring Plan, resulted in trademark impairments totaling $117.0 million in the Performance Coatings Group and $5.1$15.5 million in the Consumer Brands Group. In the Performance Coatings Group $75.6 million related to trademarks in North America directly associated with strategic decisions made to rebrand industrial products to the Sherwin-Williams®discontinuation of an architectural paint brand name, $25.7 million related to trademarks in the Asia Pacific region as a direct resultand lower than anticipated sales of recent performance that reduced the long-term forecasted net salesan acquired brand and $15.7 million related to other recently acquired trademarks in various regions. The fair valuesno goodwill impairment.
The annual impairment review performed as of October 1, 2021 did not result in any goodwill impairment.
The annual impairment reviews performed as of October 1, 2018 did 0t result in any goodwilltrademark or trademarkgoodwill impairment. The annual impairment review performed as of October 1, 20172020 resulted in trademark impairment of $2.0$2.3 million in The Americasthe Performance Coatings Group related to lower than anticipated sales of an acquired brand and 0no goodwill impairment.
A summary of changes in the Company’s carrying value of goodwill by Reportable Segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | The Americas Group | | Consumer Brands Group | | Performance Coatings Group | | Consolidated Totals |
Balance at January 1, 2020 (1) | | $ | 2,256.6 | | | $ | 1,753.9 | | | $ | 2,994.3 | | | $ | 7,004.8 | |
| | | | | | | | |
Currency and other adjustments | | | | 0.7 | | | 43.6 | | | 44.3 | |
Balance at December 31, 2020 (1) | | 2,256.6 | | | 1,754.6 | | | 3,037.9 | | | 7,049.1 | |
Acquisitions | | | | | | 155.6 | | | 155.6 | |
Currency and other adjustments | | | | (45.7) | | | (24.4) | | | (70.1) | |
Balance at December 31, 2021 (1) | | 2,256.6 | | | 1,708.9 | | | 3,169.1 | | | 7,134.6 | |
Acquisitions and acquisition adjustments | | 49.7 | | | 21.3 | | | 422.5 | | | 493.5 | |
Currency and other adjustments | | | | (2.8) | | | (42.1) | | | (44.9) | |
Balance at December 31, 2022 (1) | | $ | 2,306.3 | | | $ | 1,727.4 | | | $ | 3,549.5 | | | $ | 7,583.2 | |
|
| | | | | | | | | | | | | | | |
Goodwill | The Americas Group | | Consumer Brands Group | | Performance Coatings Group | | Consolidated Totals |
Balance at January 1, 2017 (1) | $ | 285.4 |
| | $ | 699.9 |
| | $ | 141.6 |
| | $ | 1,126.9 |
|
Acquisition | 2,276.1 |
| | 1,473.2 |
| | 1,925.9 |
| | 5,675.2 |
|
Currency and other adjustments | (5.9 | ) | | 60.1 |
| | (42.0 | ) | | 12.2 |
|
Balance at December 31, 2017 (1) | 2,555.6 |
| | 2,233.2 |
| | 2,025.5 |
| | 6,814.3 |
|
Acquisition adjustments | (273.9 | ) | | (413.3 | ) | | 900.8 |
| | 213.6 |
|
Currency and other adjustments | (25.1 | ) | | (66.1 | ) | | 20.0 |
| | (71.2 | ) |
Balance at December 31, 2018 (1) | 2,256.6 |
| | 1,753.8 |
| | 2,946.3 |
| | 6,956.7 |
|
Acquisitions |
|
| |
|
| | 14.2 |
| | 14.2 |
|
Currency and other adjustments |
|
| | 0.1 |
| | 33.8 |
| | 33.9 |
|
Balance at December 31, 2019 (1) | $ | 2,256.6 |
| | $ | 1,753.9 |
| | $ | 2,994.3 |
| | $ | 7,004.8 |
|
| |
(1)(1) Net of accumulated impairment losses of $19.4 million ($10.5 million in The Americas Group, $8.1 million in the Consumer Brands Group and $0.8 million in the Performance Coatings Group).
| Net of accumulated impairment losses of $19.4 million ($10.5 million in The Americas Group, $8.1 million in the Consumer Brands Group and $0.8 million in the Performance Coatings Group). |
A summary of the Company’s carrying value of intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Finite-Lived Intangible Assets | | Trademarks With Indefinite Lives (1) | | Total Intangible Assets |
| | Software | | Customer Relationships | | Intellectual Property | | All Other | | Subtotal | |
December 31, 2022 | | | | | | | | | | | | | | |
Gross | | $ | 180.2 | | | $ | 3,121.2 | | | $ | 1,732.5 | | | $ | 427.5 | | | $ | 5,461.4 | | | | | |
Accumulated amortization | | (148.1) | | | (1,132.1) | | | (477.4) | | | (258.0) | | | (2,015.6) | | | | | |
Net value | | $ | 32.1 | | | $ | 1,989.1 | | | $ | 1,255.1 | | | $ | 169.5 | | | $ | 3,445.8 | | | $ | 556.2 | | | $ | 4,002.0 | |
| | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | |
Gross | | $ | 166.0 | | | $ | 3,005.7 | | | $ | 1,730.3 | | | $ | 303.5 | | | $ | 5,205.5 | | | | | |
Accumulated amortization | | (149.3) | | | (961.6) | | | (396.5) | | | (279.7) | | | (1,787.1) | | | | | |
Net value | | $ | 16.7 | | | $ | 2,044.1 | | | $ | 1,333.8 | | | $ | 23.8 | | | $ | 3,418.4 | | | $ | 583.1 | | | $ | 4,001.5 | |
| | | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | | |
Gross | | $ | 166.8 | | | $ | 3,181.6 | | | $ | 1,730.3 | | | $ | 306.8 | | | $ | 5,385.5 | | | | | |
Accumulated amortization | | (142.8) | | | (804.7) | | | (310.0) | | | (273.4) | | | (1,530.9) | | | | | |
Net value | | $ | 24.0 | | | $ | 2,376.9 | | | $ | 1,420.3 | | | $ | 33.4 | | | $ | 3,854.6 | | | $ | 616.6 | | | $ | 4,471.2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Finite-Lived Intangible Assets | | Trademarks With Indefinite Lives (1) | | Total Intangible Assets |
| Software | | Customer Relationships | | Intellectual Property | | All Other | | Subtotal | |
December 31, 2019 | | | | | | | | | | | | | |
Gross | $ | 166.4 |
| | $ | 3,062.8 |
| | $ | 1,730.3 |
| | $ | 312.9 |
| | $ | 5,272.4 |
| | | | |
Accumulated amortization | (134.8 | ) | | (527.5 | ) | | (223.5 | ) | | (260.5 | ) | | (1,146.3 | ) | | | | |
Net value | $ | 31.6 |
| | $ | 2,535.3 |
| | $ | 1,506.8 |
| | $ | 52.4 |
| | $ | 4,126.1 |
| | $ | 608.4 |
| | $ | 4,734.5 |
|
| | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Gross | $ | 165.2 |
| | $ | 3,103.7 |
| | $ | 1,730.3 |
| | $ | 315.0 |
| | $ | 5,314.2 |
| | | | |
Accumulated amortization | (127.3 | ) | | (326.3 | ) | | (137.0 | ) | | (256.2 | ) | | (846.8 | ) | | | | |
Net value | $ | 37.9 |
| | $ | 2,777.4 |
| | $ | 1,593.3 |
| | $ | 58.8 |
| | $ | 4,467.4 |
| | $ | 734.2 |
| | $ | 5,201.6 |
|
| | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | |
Gross | $ | 165.0 |
| | $ | 3,361.7 |
| | $ | 1,774.0 |
| | $ | 329.4 |
| | $ | 5,630.1 |
| | | | |
Accumulated amortization | (116.6 | ) | | (129.6 | ) | | (51.7 | ) | | (257.5 | ) | | (555.4 | ) | | | | |
Net value | $ | 48.4 |
| | $ | 3,232.1 |
| | $ | 1,722.3 |
| | $ | 71.9 |
| | $ | 5,074.7 |
| | $ | 927.7 |
| | $ | 6,002.4 |
|
(1) Trademarks are net of accumulated impairment losses of $139.9 million as of December 31, 2022 and $124.4 million as of December 31, 2021 and 2020. | |
(1)
| Trademarks with indefinite lives as of December 31, 2019 is net of accumulated impairment losses of $122.1 million. There were no material accumulated impairment losses as of December 31, 2018 and 2017. |
Amortization of finite-lived intangible assets is estimated as follows for the next five years: $298.7 million in 2020, $297.9 million in 2021, $296.3 million in 2022, $293.9$323.1 million in 2023, and $291.3$320.0 million in 2024.2024, $311.1 million in 2025, $302.9 million in 2026 and $298.9 million in 2027.
Although the Company believes its estimates of fair value related to reporting units and indefinite-lived trademarksintangible assets are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact and future impairment charges may be required.
NOTE 78 – DEBT
Long-Term Debt
The table below summarizes the carrying value of the Company'sCompany’s outstanding debt, net of capitalized debt issuance costs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Due Date | | 2022 | | 2021 | | 2020 |
3.45% Senior Notes | 2027 | | $ | 1,492.1 | | | $ | 1,490.4 | | | $ | 1,488.6 | |
4.50% Senior Notes | 2047 | | 1,232.3 | | | 1,231.6 | | | 1,230.8 | |
2.95% Senior Notes | 2029 | | 793.6 | | | 792.6 | | | 791.7 | |
4.05% Senior Notes | 2024 | | 596.9 | | | — | | | — | |
3.80% Senior Notes | 2049 | | 543.2 | | | 543.0 | | | 542.8 | |
3.125% Senior Notes | 2024 | | 499.0 | | | 498.3 | | | 497.7 | |
2.30% Senior Notes | 2030 | | 496.7 | | | 496.2 | | | 495.8 | |
2.20% Senior Notes | 2032 | | 494.2 | | | 493.6 | | | — | |
3.30% Senior Notes | 2050 | | 494.1 | | | 493.9 | | | 493.7 | |
2.90% Senior Notes | 2052 | | 491.5 | | | 491.3 | | | — | |
3.45% Senior Notes | 2025 | | 399.1 | | | 398.7 | | | 398.3 | |
4.25% Senior Notes | 2025 | | 397.7 | | | — | | | — | |
4.55% Senior Notes | 2045 | | 395.0 | | | 394.7 | | | 394.5 | |
3.95% Senior Notes | 2026 | | 354.7 | | | 356.2 | | | 357.8 | |
4.00% Senior Notes | 2042 | | 296.9 | | | 296.7 | | | 296.6 | |
3.30% Senior Notes | 2025 | | 249.8 | | | 249.6 | | | 249.5 | |
4.40% Senior Notes | 2045 | | 240.5 | | | 240.0 | | | 239.6 | |
7.375% Debentures | 2027 | | 119.2 | | | 119.2 | | | 119.1 | |
7.45% Debentures | 2097 | | 3.5 | | | 3.5 | | | 3.5 | |
0.53% to 8.00% Promissory Notes | Through 2026 | | 1.6 | | | 2.0 | | | 2.3 | |
2.75% Senior Notes | 2022 | | — | | | 260.0 | | | 259.6 | |
4.20% Senior Notes | 2022 | | — | | | — | | | 405.7 | |
0.92% Fixed Rate Loan | 2021 | | — | | | — | | | 24.4 | |
Total (1) | | | 9,591.6 | | | 8,851.5 | | | 8,292.0 | |
Less amounts due within one year | | | 0.6 | | | 260.6 | | | 25.1 | |
Long-term debt | | | $ | 9,591.0 | | | $ | 8,590.9 | | | $ | 8,266.9 | |
|
| | | | | | | | | | | | | |
| Due Date | | 2019 | | 2018 | | 2017 |
3.45% Senior Notes (1) | 2027 | | $ | 1,486.8 |
| | $ | 1,485.0 |
| | $ | 1,483.2 |
|
4.50% Senior Notes (1) | 2047 | | 1,230.1 |
| | 1,229.4 |
| | 1,228.6 |
|
2.95% Senior Notes | 2029 | | 790.7 |
| |
|
| | |
2.75% Senior Notes (1) | 2022 | | 757.1 |
| | 1,242.9 |
| | 1,240.8 |
|
3.80% Senior Notes | 2049 | | 542.5 |
| |
|
| | |
3.125% Senior Notes (1) | 2024 | | 497.0 |
| | 496.3 |
| | 495.6 |
|
2.25% Senior Notes (1) | 2020 | | 428.6 |
| | 1,496.0 |
| | 1,493.1 |
|
4.20% Senior Notes (2) | 2022 | | 411.3 |
| | 416.8 |
| | 422.4 |
|
3.45% Senior Notes | 2025 | | 398.0 |
| | 397.6 |
| | 397.3 |
|
4.55% Senior Notes | 2045 | | 394.3 |
| | 394.1 |
| | 393.9 |
|
3.95% Senior Notes (2) | 2026 | | 359.3 |
| | 360.8 |
| | 362.4 |
|
4.00% Senior Notes | 2042 | | 296.4 |
| | 296.3 |
| | 296.1 |
|
Floating Rate Loan | 2021 | | 251.9 |
| | 257.4 |
| | 269.2 |
|
3.30% Senior Notes (2) | 2025 | | 249.4 |
| | 249.3 |
| | 249.2 |
|
4.40% Senior Notes (2) | 2045 | | 239.2 |
| | 238.7 |
| | 238.3 |
|
7.375% Debentures | 2027 | | 119.1 |
| | 119.0 |
| | 119.0 |
|
0.92% Fixed Rate Loan | 2021 | | 22.4 |
| | 22.9 |
|
| 23.9 |
|
7.45% Debentures | 2097 | | 3.5 |
| | 3.5 |
| | 3.5 |
|
0.53% to 8.00% Promissory Notes | Through 2027 | | 2.9 |
| | 3.3 |
| | 3.7 |
|
7.25% Senior Notes (2) | 2019 | |
|
| | 306.0 |
| | 319.4 |
|
Term Loan | 2022 | |
|
| |
|
| | 847.3 |
|
Total (3) | | | 8,480.5 |
| | 9,015.3 |
| | 9,886.9 |
|
Less amounts due within one year | | | 429.8 |
| | 307.2 |
| | 1.2 |
|
Long-term debt | | | $ | 8,050.7 |
| | $ | 8,708.1 |
| | $ | 9,885.7 |
|
(1) Net of capitalized debt issuance costs of $57.3 million, $57.6 million and $52.9 million at December 31, 2022, 2021 and 2020, respectively.Among other restrictions, the Company’s notes, debentures and revolving credit agreement contain certain covenants relating to liens, ratings changes, merger and sale of assets, consolidated leverage and change of control, as defined in the agreements. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. The Company was in compliance with all covenants for all years presented.
The Company provides pension benefits to substantially all full-time employees through primarily noncontributory defined contribution or defined benefit plans and certain health care and life insurance benefits to domestic active employees and eligible retirees. In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes an asset for overfunded defined benefit pension or other postretirement benefit plans and a liability for unfunded or underfunded plans. In addition, actuarial gains and losses and prior service costs of such plans are recorded in AOCI. The amounts recorded in AOCI will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension cost (credit) and net periodic benefit cost.
The Company provides certain domestic health care plans that are contributory and contain cost-sharing features such as deductibles and coinsurance. There were 27,030, 26,32330,009, 29,016 and 26,56527,782 active employees entitled to receivecovered by the benefits under these plans at December 31, 2019, 20182022, 2021 and 2017,2020, respectively. The cost of these benefits for active employees, which includes claims incurred and claims incurred but not reported, amounted to $301.6$347.4 million, $336.0 million and $298.8 million for 2022, 2021 and $281.2 million for 2019, 2018 and 2017,2020, respectively.
The Company’s annual contribution for its domestic defined contribution pension plan was $72.7$88.9 million, $65.2$85.3 million and $38.4$77.0 million for 2019, 20182022, 2021 and 2017,2020, respectively. The contribution percentage ranges from 2two percent to 7seven percent of compensation for covered employees based on an age and service formula. Assets in employee accounts of the domestic defined contribution pension plan are invested in various investment funds as directed by the participants. These investment funds did not own a significant number of shares of the Company’s common stock for any year presented.
The Company’s annual contributions for its foreign defined contribution pension plans, which are based on various percentages of compensation for covered employees up to certain limits, were $24.5$19.4 million, $19.5$17.9 million and $10.5$22.5 million for 2019, 20182022, 2021 and 2017,2020, respectively. Assets in employee accounts of the foreign defined contribution pension plans are invested in various investment funds. These investment funds did not own a significant number of shares of the Company’s common stock for any year presented.
The Company expects to make the following benefit payments for all domestic and foreign defined benefit pension plans: $13.5 million in 2020; $13.1 million in 2021; $14.0 million in 2022; $15.3$15.4 million in 2023; $16.5$16.4 million in 2024; and $88.9$17.4 million in 20252025; $18.5 million in 2026; $19.4 million in 2027; and $114.9 million in 2028 through 2029.2032. The Company expects to contribute $4.6$5.5 million to the foreign plans in 2020.2023.
The following table summarizes the components of the net pension costs and AOCI related to the defined benefit pension plans:
Service cost is recorded in Cost of goods sold and Selling, general and administrative expense. All other components of Net pension costs are recorded in Other expense (income) - net.
The Company employs a total return investment approach for the domestic and foreign defined benefit pension plan assets. A mix of equities and fixed income investments are used to maximize the long-term return of assets for a prudent level of risk. In determining the expected long-term rate of return on defined benefit pension plan assets, management considers the historical rates of return, the nature of investments and an expectation of future investment strategies. The target allocations for plan assets are 35% – 65% equity securities, and 35% – 55% fixed income securities.securities and 0% – 5% other (including alternative investments and cash).
The following tables summarize the fair value of the defined benefit pension plan assets at December 31, 2019, 20182022, 2021 and 2017.2020. The presentation is in accordance with the Retirement BenefitsFair Value Topic of the ASC.
The following table summarizes the obligations, plan assets and assumptions used for the defined benefit pension plans, which are all measured as of December 31:
Employees of the Company hired in the United States prior to January 1, 1993 who are not members of a collective bargaining unit, and certain groups of employees added through acquisitions, are eligible for health care and life insurance benefits upon retirement, subject to the terms of the unfunded plans. There were 3,481, 3,4983,409, 3,410 and 3,4863,465 retired employees entitled to receive suchcovered by these postretirement benefits at December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
The following table summarizes the components of the net periodic benefit cost and AOCI related to postretirement benefits other than pensions:
The assumed health care cost trend rate and prescription drug cost increases used to determine the net periodic benefit cost for postretirement health care benefits for 20202023 both decrease in each successive year until reaching 4.5% in 2026.
The Company expects to make retiree health care benefit cash payments as follows:
The operations of the Company, like those of other companies in its industry, are subject to various domestic and foreign environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws, regulations and regulationsrequirements and has implemented various programs designed to protect the environment and promote continued compliance.
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). In addition, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental
protection laws for the investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company may be similarly designated with respect to additional third-party sites in the future.
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs, which are not discounted,mostly undiscounted, are determined based on currently available facts regarding each site. If the reasonably estimable costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided.
Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. If the Company’s future loss contingency is ultimately determined to be at the unaccrued maximum of the estimated range of possible outcomes for every site for which costs can be reasonably estimated, the Company’s accrual for environmental-related activities would be $115.5$94.2 million higher than the minimum accruals at December 31, 2019.2022. Additionally, costs for environmental-related activities may not be reasonably estimable at early stages of investigation and therefore would not be included in the unaccrued maximum amount.
The largest and most complex of the Major Sites is the Gibbsboro, New Jersey site ("Gibbsboro"(“Gibbsboro”) which comprises the substantial majority of the environmental-related accrual. Gibbsboro, a former manufacturing plant, and related areas, which ceased operations in 1978, has had various areas included on the National Priorities List since 1999. This location has soil, sediment, waterbodies, and groundwater contamination related to the historic operations of the facility. Gibbsboro has been divided by the Environmental Protection Agency ("EPA"(“EPA”) into 6six operable units ("OUs"(“OUs”) based on location and characteristics, whose investigation and remediation efforts are likely to occur over an extended period of time. Each of the OUs are in various phases of investigation and remediation with the EPA that provide enough information to reasonably estimate cost ranges and record environmental-related accruals. The most significant assumptions underlying the reliability and precision of remediation
cost estimates for the Gibbsboro site are the type and extent of future remedies to be selected by the EPA and the costs of implementing those remedies.
Excluding the Major Sites discussed above, no sites are individually material to the total accrual balance. There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution, and securing applicable governmental agency approvals, all of which have the potential to contribute to the uncertainty surrounding these future events. As these events occur and to the extent that the cost estimates of the environmental remediation change, the existing reserve will be adjusted.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indeterminate amount of time to conduct investigation activities at any site, the indeterminate amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indeterminate amount of time necessary to conduct remediation activities.
The Asset Retirement and Environmental Obligations Topic of the ASC requires a liability to be recognized for the fair value of a conditional asset retirement obligation if a settlement date and fair value can be reasonably estimated. The Company recognizes a liability for any conditional asset retirement obligation when sufficient information is available to reasonably estimate a settlement date to determine the fair value of such a liability. The Company has identified certain conditional asset retirement obligations at various current and closed manufacturing, distribution and store facilities. These obligations relate primarily to asbestos abatement, hazardous waste Resource Conservation and Recovery Act (RCRA) closures, well abandonment, transformers and used oil disposals and underground storage tank closures. Using investigative, remediation and disposal methods that are currently available to the Company, the estimated costs of these obligations were accrued and are not significant. The recording of additional liabilities for future conditional asset retirement obligations may result in a material impact on net income for the annual or interim period during which the costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time over which sufficient information may become available regarding the closure or modification of any one or group of the Company’s facilities. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
monitoring costs and others. The Company has also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company expects that additional lead pigment and lead-based paint litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. The Company will continue to vigorously defend against any additional lead pigment and lead-based paint litigation that may be filed, including utilizing all avenues of appeal, if necessary.
Notwithstanding the Company’s views on the merits, litigation is inherently subject to many uncertainties, and the Company ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which the Company and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings or the effect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. Except with respect to the litigation in California discussed below, the Company has not accrued any amounts for such litigation because the Company does not believe it is probable that a loss has occurred, and the Company believes it is not possible to estimate the range of potential losses as there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to the Company relating to such litigation or any such liability is higher than any amount currently accrued for such litigation, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, dueDue to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, cash flow, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in Wisconsin state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed, and on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Courtdistrict court held that
Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The District Court'sdistrict court’s decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings.judgment. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court's review of the Seventh Circuit'sCircuit’s decision, and on May 18, 2015, the United States Supreme Court denied the defendants'defendants’ petition. The case is currently pending inwas remanded to the District Court.district court for further proceedings.
An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, except with respect to the litigation in California discussed above, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.