THE SHERWIN-WILLIAMS COMPANY (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 inNorth and South America with additional operations in theCaribbean region and throughoutEurope ,Asia andAustralia . The Company is structured into three reportable segments -The Americas Group ,Consumer Brands Group andPerformance 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 Note 21 to the Consolidated Financial Statements in Item 8 for additional information on the Company's Reportable Segments.
Summary
•Consolidated net sales increased 8.6% in the year to a record
•Net sales from stores inU.S. andCanada open more than twelve calendar months increased 6.0% in the year •Raw material availability issues negatively impacted full year sales by a mid-single digit percentage
•Diluted net income per share decreased to
•Adjusted diluted net income per share decreased to
•Completed a three-for-one stock split to improve accessibility to a broader base of investors
•Finalized the divestiture of our
•Continued to invest in acquisitions expanding our product offerings and manufacturing capacity
Outlook
The Company navigated many uncertainties during 2021, including unprecedented
raw material inflation, industry-wide supply chain disruptions, as well as
temporary changes in the demand for our products due to the impacts of the
COVID-19 pandemic earlier in the year and the Omicron variant later in the year.
Despite the uncertainties, our businesses continue to be well-positioned, and we
have confidence in our long-term outlook.
The COVID-19 pandemic continues to evolve and disrupt normal activities in many
segments of the global economy. We continue to work with government and health
authorities to operate our business, including our company-operated stores,
manufacturing plants and other facilities. We also continue to follow
recommended actions of government authorities and health officials in order to
protect the health and well-being of our employees, customers and their families
worldwide.
As we look to 2022, we are encouraged by the demand environment, which remains
robust across our end markets. Our customers remain positive, and we expect that
jobs delayed by raw material availability issues in 2021 will be completed in
the quarters ahead rather than cancelled. We brought on 50 million gallons of
incremental architectural paint production capacity in 2021 to meet this demand
and will continue to add paint stores in 2022. We expect raw material
availability to continue improving. We are implementing additional price
increases to offset to the sustained cost inflation and expect raw material
costs will ultimately moderate, enabling the recovery of our margins over time.
We intend to remain disciplined in our capital allocation approach, focused on
driving value for our customers and returns for our shareholders. Capital
expenditures, excluding our new global headquarters, will remain modest at
approximately 2 percent of sales and we will continue to pursue acquisitions
that fit our strategy. We expect to use any excess cash to make open market
purchases of Company stock. Our balance sheet remains strong, and we expect debt
to EBITDA to approach the high end of our target of 2.0 to 2.5 times range.
Please see Item 1A "Risk Factors" in Part I of this Annual Report on Form 10-K
for further information regarding the current and potential impact of the
COVID-19 pandemic and the potential impact of supply chain disruptions and raw
material inflation on the Company.
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Common Stock Split
During the first quarter of 2021, the Company's Board of Directors approved and declared a three-for-one stock split to shareholders of record at the close of business onMarch 23, 2021 (the Stock Split). The Stock Split was effected onMarch 31, 2021 . All share and per share information herein has been retroactively adjusted to reflect the Stock Split.
RESULTS OF OPERATIONS
The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the years endedDecember 31, 2021 and 2020. For comparisons of the years endedDecember 31, 2020 and 2019, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed onFebruary 19, 2021 .Net Sales Year Ended December 31, 2021 2020 $ Change % ChangeNet Sales : The Americas Group$ 11,217.0 $ 10,383.2 $ 833.8 8.0 %
Consumer Brands Group 2,721.6 3,053.4 (331.8) (10.9) %
Performance Coatings Group 6,003.8 4,922.4 1,081.4 22.0 %
Administrative 2.2 2.7 (0.5) (18.5) %
Total $ 19,944.6 $ 18,361.7 $ 1,582.9 8.6 %
Consolidated net sales for 2021 increased due primarily to selling price
increases in all Reportable Segments and higher product sales volume in the
Performance Coatings Group , partially offset by lower sales volume in the
Consumer Brands Group . Currency translation rate changes increased 2021
consolidated net sales by 0.8%. Net sales of all consolidated foreign
subsidiaries increased 17.9% to $4.223 billion for 2021 versus $3.581 billion
for 2020 due primarily to returning demand in most industrial end markets
globally. Net sales of all operations other than consolidated foreign
subsidiaries increased 6.4% to $15.722 billion for 2021 versus $14.781 billion
for 2020.
Net sales in The Americas Group increased due primarily to selling price
increases in all end markets, while sales volume remained flat as a result of
raw material availability challenges. Net sales from stores in U.S. and Canada
open for more than twelve calendar months increased 6.0% in the year over last
year's comparable period. Currency translation rate changes reduced net sales by
0.1% compared to 2020. During 2021, The Americas Group opened 92 new stores and
closed 7 redundant locations for a net increase of 85 stores, with a net
increase of 73 new stores in the U.S. and Canada . The total number of stores in
operation at December 31, 2021 was 4,859 in the United States , Canada , Latin
America and the Caribbean . The Americas Group's objective is to expand its store
base an average of 2% each year, primarily through organic growth. Sales of
products other than paint increased approximately 12.5% 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 2021 primarily due to lower
volume sales to most of the group's retail customers as DIY demand returned to
more normal levels, raw material availability issues, and the Wattyl
divestiture, partially offset by selling price increases. In 2022, the Consumer
Brands Group is focused on meeting customer needs through product development,
building inventory, and optimizing the product assortment at existing customers.
The Performance Coatings Group's net sales in 2021 increased due primarily to
higher sales volumes in most end markets and selling price increases. Currency
translation rate changes increased net sales 2.2% compared to 2020. At
December 31, 2021 , the Performance Coatings Group had 282 branches open in the
United States , Canada , Mexico , South America , Europe and Asia . In 2022, the
Performance Coatings Group plans to continue expanding its worldwide presence,
including improving its customer base and product offering.
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, decreased by an insignificant
amount in 2021.
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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,
2021 2020
% of Net Sales % of Net Sales
Net sales $ 19,944.6 100.0 % $ 18,361.7 100.0 %
Cost of goods sold 11,401.9 57.2 % 9,679.1 52.7 %
Gross profit 8,542.7 42.8 % 8,682.6 47.3 %
Selling, general, and administrative
expenses (SG&A) 5,572.5 27.9 % 5,477.9 29.8 %
Other general expense - net 101.8 0.5 % 27.7 0.2 %
Amortization 309.5 1.5 % 313.4 1.7 %
Impairment of trademarks - - % 2.3 - %
Interest expense 334.7 1.7 % 340.4 1.9 %
Interest and net investment income (4.9) - % (3.6) - %
Other (income) expense - net (19.5) (0.1) % 5.3 - %
Income before income taxes $ 2,248.6 11.3 % $ 2,519.2 13.7 %
Consolidated cost of goods sold increased $1.723 billion , or 17.8% in 2021
compared to the same period in 2020 primarily due to higher raw material costs
(including titanium dioxide and petrochemical feedstock sources) and unfavorable
currency translation rate changes, partially offset by lower sales volumes
primarily as a result of raw material availability issues during the second half
of 2021. Currency translation rate changes increased Cost of goods sold by 1.1%
in the current year.
Consolidated gross profit decreased $139.9 million in 2021 compared to the same
period in 2020. Consolidated gross profit as a percent to consolidated net sales
decreased to 42.8% in 2021 from 47.3% in 2020. Consolidated gross profit dollars
decreased primarily due to higher raw material costs in each Reportable Segment
and lower sales volume in the Consumer Brands Group , partially offset by selling
price increases in each Reportable Segment as well as higher sales volume in The
Performance Coatings Group and The Americas Group . The gross margin rate
decreased primarily as a result of higher raw material costs in each Reportable
Segment.
The Americas Group's gross profit for 2021 increased $134.7 million compared to
the same period in 2020. The Americas Group's gross profit dollars increased
primarily as a result of selling price increases, partially offset by higher raw
material costs. The America's Group gross margin rate decreased primarily due to
higher raw material costs. The Consumer Brands Group's gross profit decreased
$327.8 million in 2021 compared to the same period in 2020. The Consumer Brands
Group's gross profit dollars and margin rate decreased primarily as a result of
lower sales volume, the Wattyl divestiture, higher raw material costs and supply
chain inefficiencies. The Performance Coatings Group's gross profit for 2021
increased $58.6 million compared to the same period in 2020. The Performance
Coatings Group's gross profit dollars increased due to higher sales and
favorable currency translation rate changes, partially offset by higher raw
material costs. The Performance Coatings Group's gross margin rate decreased
primarily due to higher raw material costs, partially offset by higher sales
volumes and selling price increases.
Consolidated SG&A increased by $94.6 million due primarily to increased expenses
to support higher sales levels and net new store openings, partially offset by
good cost control. As a percent of net sales, SG&A decreased 190 basis points
compared to the same period in 2020 as a result of good cost control, partially
offset by increased spending from new store openings and costs to support higher
sales levels.
The Americas Group's SG&A increased $196.3 million for the year due primarily to
increased spending from new store openings and costs to support higher sales
levels, including the hiring of additional sales representatives. The Consumer
Brands Group's SG&A decreased by $104.9 million for the year primarily due to
good sales and marketing cost control in line with a return to more normal DIY
sales levels. The Performance Coatings Group's SG&A increased by $75.4 million
for the year primarily to support higher sales levels and unfavorable currency
translation rate changes, partially offset by good cost control. The
Administrative segment's SG&A decreased $72.2 million primarily due to lower
compensation, including incentive compensation.
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Other general expense - net increased$74.1 million in 2021 compared to 2020. The increase was primarily attributable to the recognition of a$111.9 million loss on theWattyl divestiture inMarch 2021 , partially offset by a$41.1 million decrease in provisions for environmental matters in the Administrative segment. See Notes 3, 9 and 18 to the Consolidated Financial Statements in Item 8 for additional information concerning theWattyl divestiture, environmental matters and Other general expense - net, respectively. For information on the amortization of acquired intangible assets and related impairment considerations, see Note 5 to the Consolidated Financial Statements in Item 8. Interest expense decreased$5.7 million in 2021 primarily due to lower expense associated with short-term borrowings. See Note 6 to the Consolidated Financial Statements in Item 8 for additional information on the Company's outstanding debt. Other (income) expense - net improved$24.8 million in 2021 compared to 2020 primarily due to the$21.3 million loss recognized upon extinguishment of debt in 2020 in the Administrative segment. See Notes 6 and 18 to the Consolidated Financial Statements in Item 8 for additional information related to debt and Other (income) expense - net, respectively.
The following table presents income before income taxes by segment and as a percentage of net sales by segment:
Year Ended December 31,
2021 2020 $ Change % Change
Income Before Income Taxes:
The Americas Group $ 2,239.1 $ 2,294.1 $ (55.0) (2.4) %
Consumer Brands Group 358.4 579.6 (221.2) (38.2) %
Performance Coatings Group 486.2 500.1 (13.9) (2.8) %
Administrative (835.1) (854.6) 19.5 2.3 %
Total $ 2,248.6 $ 2,519.2 $ (270.6) (10.7) %
Income Before Income Taxes as a % of Net
Sales :
The Americas Group 20.0 % 22.1 %
Consumer Brands Group 13.2 % 19.0 %
Performance Coatings Group 8.1 % 10.2 %
Administrative nm nm
Total 11.3 % 13.7 %
nm - not meaningful
Income Tax Expense
The effective income tax rate for 2021 was 17.1% compared to 19.4% in 2020. The
decrease in the effective rate was primarily due to an increase in tax benefits
related to employee share-based payments and the net favorable impact of various
other tax benefits received by the Company in the current year. See Note 19 to
the Consolidated Financial Statements in Item 8 for additional information.
Net Income Per Share
Diluted net income per share for 2021 decreased to$6.98 per share from$7.36 per share for 2020. Diluted net income per share in 2021 included acquisition-related amortization expense of$0.83 per share and a$0.34 per share loss from theWattyl divestiture. See Note 3 to the Consolidated Financial Statements in Item 8 for additional information regarding theWattyl divestiture. Currency translation rate changes decreased diluted net income per share in the year by$0.05 per share.
Diluted net income per share in 2020 included acquisition-related amortization
expense of
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FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company's financial condition, liquidity and cash flow continued to be
strong in 2021. The Company generated
During 2021, the Company generated EBITDA of$3.156 billion and Adjusted EBITDA of$3.268 billion . See the Non-GAAP Financial Measures section in Item 7 for definition and calculation of EBITDA and Adjusted EBITDA. As ofDecember 31, 2021 , the Company had Cash and cash equivalents of$165.7 million and total debt outstanding of$9.615 billion . Total debt, net of Cash and cash equivalents, was$9.449 billion and was 2.9 times the Company's Adjusted EBITDA in 2021.
Net working capital, defined as Total current assets less Total current liabilities, decreased$662.8 million to a deficit of$665.8 million atDecember 31, 2021 from a deficit of$3.0 million atDecember 31, 2020 . The net working capital decrease is due to an increase in current liabilities, partially offset by an increase in current assets. Comparing current asset balances atDecember 31, 2021 toDecember 31, 2020 , Accounts receivable increased$274.3 million due to higher sales, Inventories increased$123.1 million due to higher raw material costs, and Other current assets increased$125.8 million primarily related to refundable income taxes and prepaid expenses. Current liability balances increased$1.125 billion atDecember 31, 2021 compared toDecember 31, 2020 primarily due to a$763.4 million increase in Short-term borrowings and$235.5 million increase in the Current portion of long-term debt. Excluding Short-term borrowings and the Current portion of long-term debt, current liabilities increased$126.2 million primarily due to the timing of payments related to accounts payable, partially offset by lower accruals, including compensation. As a result of the net effect of these changes, the Company's current ratio decreased to 0.88 atDecember 31, 2021 from 1.00 atDecember 31, 2020 . Accounts receivable as a percent of net sales increased to 11.8% in 2021 from 11.3% in 2020. Accounts receivable days outstanding remained unchanged at 57 days in 2021. In 2021, provisions for allowance for doubtful collection of accounts decreased$4.6 million , or 8.6%. Inventories as a percent of net sales decreased to 9.7% in 2021 from 9.8% in 2020. Inventory days outstanding was 75 days in 2021 compared to 74 days in 2020. The Company has sufficient total available borrowing capacity to fund its current operating needs.
Property, Plant and Equipment
Net property, plant and equipment increased$32.8 million to$1.867 billion atDecember 31, 2021 due primarily to capital expenditures of$372.0 million , assets acquired through business combinations of$33.5 million , partially offset by depreciation expense of$263.1 million , sale or disposition of assets with remaining net book value of$53.1 million , and other adjustments of$56.5 million , which includes government incentives associated with the construction of our new global headquarters (new headquarters) in downtownCleveland, Ohio and new research and development (R&D) center in theCleveland suburb ofBrecksville and currency translation. Capital expenditures during 2021 inThe Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores. In theConsumer Brands Group and thePerformance Coatings Group , capital expenditures during 2021 were primarily attributable to operational efficiencies, capacity, health and safety at sites currently in operation. The Administrative segment incurred capital expenditures primarily related to construction activities associated with the new headquarters and new R&D center. The Company has committed to spend 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 expected to continue in 2022, with completion in 2024 at the earliest. The Company has not made any decisions regarding the disposition of the Company's currentCleveland -area headquarters and R&D centers, which are all owned by the Company. In 2022, the Company expects to spend more than 2021 for capital expenditures. The predominant share of the capital expenditures in 2022 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 headquarters and R&D center inOhio . The Company does not anticipate the need for any specific long-term external financing to support these capital expenditures. 26
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Goodwill , which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased$85.5 million in 2021 primarily due to incremental goodwill recognized in 2021 acquisitions of$155.6 million , partially offset by foreign currency translation rate fluctuations and theWattyl divestiture. Intangible assets decreased$469.7 million in 2021 primarily due to amortization of finite-lived intangible assets of$309.5 million , dispositions of$148.5 million primarily related toWattyl divestiture, and foreign currency translation rate fluctuations of$37.2 million , partially offset by finite-lived intangible assets recognized in 2021 through acquisitions of$25.5 million . See Note 3 to the Consolidated Financial Statements in Item 8 for additional information related to acquisitions and divestitures. See Note 5 to the Consolidated Financial Statements in Item 8 for a description of goodwill, identifiable intangible assets and asset impairments recognized in accordance with theGoodwill and Other Intangibles Topic of the ASC and summaries of the remaining carrying values of goodwill and intangible assets.
Other Assets
Other assets increased$94.7 million to$789.0 million atDecember 31, 2021 . The increase was primarily due to incremental deposits and investments (including an increase in deferred pension assets), partially offset by the sale of investments to fund the Company's domestic defined contribution plan. See Note 7 to the Consolidated Financial Statements in Item 8 for additional information related to the domestic defined contribution plan.
Debt (including Short-term borrowings)
December 31, December 31,
2021 2020
Long-term debt $ 8,851.5 $ 8,292.0
Short-term borrowings 763.5 0.1
Total debt outstanding $ 9,615.0 $ 8,292.1
Total debt including Short-term borrowings increased by $1.323 billion to $9.615
billion in 2021. 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 November 2021 , the Company issued $500.0 million of 2.20% Senior Notes due
March 2032 and $500.0 million of 2.90% Senior Notes due March 2052 in a public
offering. The net proceeds from the issuance of these notes were used to repay
outstanding borrowings under the Company's domestic commercial paper program.
In October 2021 , the Company redeemed the entire outstanding $400.0 million
aggregate principal amount of its 4.20% Senior Notes due 2022 and its 4.20%
Notes due 2022 initially issued by The Valspar Corporation (collectively, the
4.20% Senior Notes) after exercising its optional redemption rights. The 4.20%
Senior Notes were redeemed at a redemption price equal to 100% of the principal
amount, plus accrued interest, and resulted in a gain of $1.4 million recorded
in Other (income) expense - net.
On June 29, 2021 , the Company and two of its wholly-owned subsidiaries,
Sherwin-Williams Canada Inc. (SW Canada ) and Sherwin-Williams Luxembourg S .à
r.l. (SW Luxembourg, together with the Company and SW Canada , the Borrowers),
entered into a new five-year $2.000 billion credit agreement (New Credit
Agreement). The New Credit Agreement may be used for general corporate purposes,
including the financing of working capital requirements. The New Credit
Agreement replaced the $2.000 billion credit agreement dated July 19, 2018 , as
amended, which was terminated effective June 29, 2021 . The New Credit Agreement
will mature on June 29, 2026 and provides that the Company may request to extend
the maturity date of the facility for two additional one-year periods. In
addition, the New Credit Agreement provides that the Borrowers may increase the
aggregate amount of the facility to $2.750 billion , subject to the discretion of
each lender to participate in the increase, and the Borrowers may request
letters of credit in an amount of up to $250.0 million . At December 31, 2021 and
2020, there were no short-term borrowings under these credit agreements.
On August 2, 2021 , the Company entered into an amended and restated $625.0
million credit agreement (August 2021 Credit Agreement), which amends and
restates the five-year credit agreement entered into in September 2017 . The
August 2021 Credit Agreement was subsequently amended on multiple dates to
extend the maturity of commitments available for borrowing or letters of credit
under the agreement. On May 9, 2016 , the Company entered into a five-year credit
agreement (May 2016 Credit Agreement), subsequently amended on multiple dates to
extend the maturity of commitments available for borrowing or letters of credit
under the agreement. The May 2016 credit agreement gives the Company the right
to borrow and obtain letters of
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credit up to an aggregate availability of$875.0 million . Both of these credit agreements are being used for general corporate purposes. AtDecember 31, 2021 and 2020, there were no borrowings outstanding under these credit agreements. The Company's available capacity under its committed credit agreements is reduced for amounts outstanding under its domestic commercial paper program and letters of credit. AtDecember 31, 2021 , the Company had unused capacity under its various credit agreements of$2.725 billion . See Note 6 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 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 decreased$31.3 million to$79.0 million primarily due to changes in the actuarial assumptions. The Company's liability for other postretirement benefits decreased$15.2 million to$276.4 million atDecember 31, 2021 due primarily to changes in the actuarial assumptions. The assumed discount rate used to determine the projected benefit obligation for domestic defined benefit pension plans was 3.1% atDecember 31, 2021 and 2.9% atDecember 31, 2020 . The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans increased to 2.3% atDecember 31, 2021 from 1.6% atDecember 31, 2020 . The increase in the discount rates for both the domestic and foreign defined benefit pension plans was primarily due to higher interest rates. The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations increased to 2.8% atDecember 31, 2021 from 2.5% atDecember 31, 2020 for the same reason. The rate of compensation increases used to determine the projected benefit obligations atDecember 31, 2021 was 3.0% for the domestic pension plan and 3.3% for foreign pension plans, which was comparable to the rates used in the prior year. In deciding on the rate 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% atDecember 31, 2021 for the domestic pension plan and was slightly lower for most foreign plans. In establishing the expected long-term rate of return on plan assets for 2021, 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 used to determine the net periodic benefit cost of other postretirement benefits for 2021 were 5.1% and 8.3%, respectively, for medical and prescription drug cost increases, both decreasing gradually to 4.5% in 2029. In developing the assumed health care cost trend rates, management considered industry data, historical Company experience and expectations for future health care costs. For 2022 net pension cost for the ongoing domestic pension plan, the Company will use a discount rate of 3.1%, 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 2022 net periodic benefit costs for other postretirement benefits, the Company will use a discount rate of 2.8%. Net pension cost in 2022 for the ongoing domestic pension plan is expected to be approximately$1.5 million . Net periodic benefit costs for other postretirement benefits in 2022 is expected to be approximately$11.0 million . See Note 7 to the Consolidated Financial Statements in Item 8 for additional information on the Company's obligations and funded status of its defined benefit pension plans and other postretirement benefits.
Deferred Income Taxes
Deferred income taxes at
Other Long-Term Liabilities
Other long-term liabilities increased$47.1 million during 2021 due primarily to an increase in long-term commitments related to affordable housing and historic real estate properties, partially offset by the payment ofU.S. federal payroll withholding taxes in accordance with the terms of the legislatively authorized tax payment deferral mechanisms established in 2020.
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.
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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 2021. 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 2022. See Note 9 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 2021, the Company signed agreements related to various acquisitions, including related to the European industrial coatings business of Sika AG (Sika). The Sika transaction is expected to close in the first quarter of 2022. 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 ofDecember 31, 2021 .
Payments Due by Period
Less Than More Than
Contractual and Other Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
Long-term debt $ 8,935.0 $ 260.8
4,265.4 285.9 556.7 500.2 2,922.6
Operating leases 2,035.4 455.2 735.3 470.3 374.6
Short-term borrowings 763.5 763.5
California litigation accrual 52.7 12.0 24.0 16.7
Real estate financing transactions 191.4 14.2 30.4 30.7 116.1
Purchase obligations (1) 630.0 630.0
Other contractual obligations (2) 355.5 65.7 66.5 64.3 159.0
Total contractual cash obligations
(1)Relate to open purchase orders for raw materials at
(2)Relate primarily to estimated future capital contributions to investments in theU.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations.
Amount of Commitment Expiration Per Period
Less Than More Than
Commercial Commitments Total 1 Year 1-3 Years 3-5 Years 5 Years
Standby letters of credit $ 89.2 $ 89.2
Surety bonds 151.7 151.7
Total commercial commitments $ 240.9 $ 240.9 $ - $ - $ -
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 2021 and
2020, including customer satisfaction settlements during the year, were as
follows:
2021 2020
Balance at January 1 $ 43.3 $ 42.3
Charges to expense 27.5 38.1
Settlements (35.6) (37.1)
Balance at December 31 $ 35.2 $ 43.3
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Shareholders' Equity
Shareholders' equity decreased$1.174 billion to$2.437 billion atDecember 31, 2021 from$3.611 billion last year. The decrease was primarily attributable to the Company repurchasing$2.752 billion inTreasury stock and declaring$587.1 million in cash dividends, partially offset by$1.864 billion of net income and an increase of$268.3 million associated with stock option exercises and the recognition of stock-based compensation expense. See the Statements of Consolidated Shareholders' Equity and Statements of Consolidated Comprehensive Income in Item 8 for additional information. The Company purchased 10.1 million shares of its common stock for treasury purposes through open market purchases during 2021. 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. OnFebruary 17, 2021 , the Board of Directors authorized the Company to purchase an additional 45.0 million shares of the Company's stock for treasury purposes. The Company had remaining authorization from its Board of Directors atDecember 31, 2021 to purchase 48.6 million shares of its common stock. The Company's 2021 annual cash dividend of$2.20 per share represented 30% of 2020 diluted net income per share. The 2021 annual dividend represented the 43rd consecutive year of increased dividend payments since the dividend was suspended in 1978. OnFebruary 16, 2022 , the Board of Directors increased the quarterly cash dividend to$0.60 per share. This quarterly dividend, if approved in each of the remaining quarters of 2022, would result in an annual dividend for 2022 of$2.40 per share or a 34% payout of 2021 diluted net income per share.
Cash Flow
Net operating cash decreased$1.164 billion in 2021 to a cash source of$2.245 billion from$3.409 billion in 2020 due primarily to incremental working capital requirements and a decrease in net income, partially offset by favorable changes in non-cash items associated with theWattyl divestiture and deferred taxes when compared to 2020. Net operating cash decreased as a percent to sales to 11.3% in 2021 compared to 18.6% in 2020. Net investing cash usage increased$154.0 million to a usage of$476.4 million in 2021 from a usage of$322.4 million in 2020 due primarily to cash used for acquisitions and an increase in capital expenditures, partially offset by higher proceeds received from the sale of businesses and assets (including theWattyl divestiture). See Note 3 to the Consolidated Financial Statements in Item 8 for additional information on acquisitions and divestitures. Net financing cash usage decreased$1.186 billion to a usage of$1.834 billion in 2021 from a usage of$3.020 billion in 2020 due primarily to$1.746 billion of incremental cash provided by short-term borrowings and long-term debt, partially offset by an increase of$405.1 million , or 13.8%, in cash returned to shareholders in the form of cash dividends and share buybacks during the year and lower proceeds from treasury stock issuances.
Litigation
See Note 10 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. In 2021 and 2020, the Company entered into foreign currency forward contracts with maturity dates of less than twelve months primarily to hedge against value changes in foreign currency and cross currency swap contracts to hedge its net investment in European operations. See Notes 1, 15 and 18 to the Consolidated Financial Statements in Item 8 for additional information related to the Company's use of derivative 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.
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states the Company's leverage ratio is not to exceed 3.75 to 1.00. 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) for the 12-month period ended on the same date. Refer to the "Non-GAAP Financial Measures" section in Item 7 for a reconciliation of EBITDA to net income. AtDecember 31, 2021 , the Company was in compliance with the covenant. The Company's Notes, Debentures and revolving credit agreement contain various default and cross-default provisions. In the event of default under any one of these arrangements, acceleration of the maturity of any 30
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one or more of these borrowings may result. See Note 6 to the Consolidated Financial Statements in Item 8 for additional information.
Employee Stock Ownership Plan
Participants in the Company's employee stock ownership plan (ESOP) are allowed to contribute up to the lesser of 50% of their annual compensation and the maximum dollar amount allowed under the Internal Revenue Code. The Company matches 6% of eligible employee contributions. The Company's matching contributions to the ESOP charged to operations were$133.7 million in 2021 compared to$120.0 million in 2020. AtDecember 31, 2021 , there were 20,639,085 shares of the Company's common stock being held by the ESOP, representing 7.9% of the total number of voting shares outstanding. See Note 12 to the Consolidated Financial Statements in Item 8 for additional information concerning the Company's ESOP. 31
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NON-GAAP FINANCIAL MEASURES
Management utilizes certain financial measures that are not in accordance withU.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
Earnings before interest, taxes, depreciation and amortization (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 the loss on theWattyl divestiture. 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,
2021 2020
Net income $ 1,864.4 $ 2,030.4
Interest expense 334.7 340.4
Income taxes 384.2 488.8
Depreciation 263.1 268.0
Amortization 309.5 313.4
EBITDA 3,155.9 3,441.0
Loss on Wattyl divestiture 111.9 -
Adjusted EBITDA $ 3,267.8 $ 3,441.0
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,
2021 2020
Net operating cash $ 2,244.6 $ 3,408.6
Capital expenditures (372.0) (303.8)
Cash dividends (587.1) (488.0)
Free cash flow $ 1,285.5 $ 2,616.8
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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 the loss on divestiture ofWattyl andValspar acquisition-related amortization expense. 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, 2021
Tax
Pre-Tax Effect (1) After-Tax
Diluted net income per share $ 6.98
Loss on Wattyl divestiture $ .41 $ .07 .34
Acquisition-related amortization expense (2) 1.10 .27 .83
Adjusted diluted net income per share $ 8.15
Year Ended
December 31, 2020
Tax
Pre-Tax Effect (1) After-Tax
Diluted net income per share $ 7.36 Acquisition-related amortization expense (2) 1.10 .27
.83
Adjusted diluted net income per share$ 8.19
(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
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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 the loss on divestiture ofWattyl andValspar acquisition-related amortization expense. 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, 2021 Performance The Americas Consumer Brands Coatings Group Group Group Administrative Total Net external sales$ 11,217.0 $ 2,721.6 $ 6,003.8 $ 2.2$ 19,944.6 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 % Loss on Wattyl divestiture - - - 111.9 111.9 Acquisition-related amortization expense (1) - 82.8 211.2 - 294.0 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 % Year Ended December 31, 2020 Performance The Americas Consumer Brands Coatings Group Group Group Administrative Total Net external sales$ 10,383.2 $ 3,053.4 $ 4,922.4 $ 2.7$ 18,361.7 Income before income taxes$ 2,294.1 $ 579.6 $ 500.1 $ (854.6) $ 2,519.2 as a % of Net external sales 22.1 % 19.0 % 10.2 % 13.7 % Acquisition-related amortization expense (1) - 90.5 213.1 0.9 304.5 Adjusted segment profit$ 2,294.1 $ 670.1 $ 713.2 $ (853.7) $ 2,823.7 as a % of Net external sales 22.1 % 21.9 % 14.5 % 15.4 %
(1) Acquisition-related amortization expense consists primarily of the
amortization of intangible assets related to the
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity withU.S. generally accepted accounting principles (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. 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 4 to the Consolidated Financial Statements in Item 8 for more information regarding the impact of the LIFO inventory valuation and the reserve for obsolescence.
In accordance with theGoodwill 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 theGoodwill 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") 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' fair value is reconciled to the total market capitalization of the Company. The Company had seven components, some of which are aggregated due to similar economic characteristics, to form three reporting units (also the operating segments) with goodwill as ofOctober 1, 2021 , the date of the annual impairment test. The annual impairment review performed as ofOctober 1, 2021 did not result in any of the reporting units having impairment or deemed at risk for impairment. 35
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In accordance with theGoodwill 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 2021 impairment testing are consistent with prior years. The annual impairment review performed as ofOctober 1, 2021 did not result in any of the reporting units having impairment or deemed at risk for impairment. 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 5 to the Consolidated Financial Statements in Item 8 for a discussion of goodwill and intangible assets and the impairment tests performed in accordance with theGoodwill 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 Note 5 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, 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 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 and net periodic benefit costs.
In 2022, pension costs are expected to decrease slightly and other
postretirement benefit plan costs are expected to increase slightly based on the
actuarial assumptions being applied. See Note 7 to the Consolidated Financial
Statements in Item 8 for information concerning the Company's defined benefit
pension plans and other postretirement benefit plans.
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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 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 9 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 10 to the Consolidated Financial Statements in Item 8 for information concerning litigation.
Income Taxes
The Company estimated income taxes for each jurisdiction that it 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 19 to the Consolidated Financial Statements in Item 8 for information
concerning income taxes.
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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 2021 and 2020, the Company utilizedU.S. Dollar to Euro cross currency swap contracts to hedge the Company's net investment in its European operations. The contracts have been designated as net investment hedges and have various maturity dates. See Note 15 to the Consolidated Financial Statements in Item 8. The Company entered into forward foreign currency exchange contracts during 2021 to hedge against value changes in foreign currency. There were no material contracts outstanding atDecember 31, 2021 . Forward foreign currency exchange contracts are described in Note 18 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. 38
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