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 Notes 23 and 24 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
•Net sales from stores in
•Diluted net income per share increased to
•Adjusted diluted net income per share increased to
•Generated strong net operating cash of
•Deployed
•Invested
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 inEurope , and COVID-related lockdowns inAsia . 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 boththe United States andEurope , 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 downtownCleveland, Ohio and new research and development (R&D) center in theCleveland suburb ofBrecksville , and in the expansion of certain existing manufacturing and distribution facilities. We plan to expand our footprint by opening 80 to 100 new stores inthe United States andCanada 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 current 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 restructuring actions. 22
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RESULTS OF OPERATIONS
The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the years endedDecember 31, 2022 and 2021. For comparisons of the years endedDecember 31, 2021 and 2020, 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, 2021 filed onFebruary 17, 2022 .Net Sales Year Ended December 31, 2022 2021 $ Change % ChangeNet Sales : The Americas Group$ 12,661.0 $ 11,217.0 $ 1,444.0 12.9 %
Consumer Brands Group 2,690.7 2,721.6 (30.9) (1.1) %
Performance Coatings Group 6,793.5 6,003.8 789.7 13.2 %
Administrative 3.7 2.2 1.5 68.2 %
Total $ 22,148.9 $ 19,944.6 $ 2,204.3 11.1 %
Consolidated Net sales for 2022 increased 11.1% primarily due to selling price
increases in all Reportable Segments and higher product sales volume in The
Americas Group , partially offset by lower sales volume in the Consumer Brands
and Performance Coatings Groups. Currency translation rate changes decreased
2022 consolidated Net sales by 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 increased 1.7% to
$4.294 billion for 2022 versus $4.223 billion for 2021 primarily due to benefits
from acquisitions offset by weakening demand in the Europe and Asia Pacific
regions. Net sales of all operations other than consolidated foreign
subsidiaries increased 13.6% to $17.855 billion for 2022 versus $15.722 billion
for 2021.
Net sales in The Americas Group increased primarily due to selling price
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 11.7% in the year over last year's comparable period.
Currency translation rate changes reduced Net sales by 0.4% compared to 2021.
During 2022, The Americas Group opened 89 new stores and closed 17 redundant
locations for a net increase of 72 stores, with a net increase of 75 new stores
in the U.S. and Canada . The total number of stores in operation at December 31,
2022 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 organic growth. Sales of products other than paint
increased approximately 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 2022 primarily due to lower
sales volumes in all 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 lower sales volumes. Currency translation rate changes
decreased Net sales 3.8% compared to 2021, largely offset by the impact of
acquisitions completed during the past twelve months which added approximately
3.7% to Net sales. In 2022, the Performance Coatings Group added 35 new
branches, increasing the total to 317 branches open in the United States ,
Canada , Mexico , South America , Europe and 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, increased by an insignificant
amount in 2022.
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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,
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 Cost of goods sold increased $1.422 billion , or 12.5%, in 2022
compared to the same period in 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 Gross 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
Net sales decreased to 42.1% in 2022 from 42.8% in 2021. The gross margin rate
decreased primarily as a result of higher raw material costs.
The Americas Group's Gross profit for 2022 increased $477.7 million compared to
the same period in 2021. The Americas Group's Gross profit dollars increased
primarily as a result of selling price increases, partially 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 Gross profit decreased
$68.6 million in 2022 compared to the same period in 2021. The Consumer Brands
Group's Gross profit dollars and margin rate decreased primarily as a result of
lower sales volume and higher raw material costs. The Performance Coatings
Group's Gross profit for 2022 increased $363.7 million compared to the same
period in 2021. The Performance Coatings Group's Gross profit dollars and margin
rate increased due to higher sales, partially offset by higher raw material
costs.
Consolidated SG&A increased by $442.0 million compared to the same period in
2021 primarily due to increased expenses to support higher sales levels and net
new store openings. As a percent of Net sales, SG&A decreased 70 basis points
compared to the same period in 2021 as a result of effective cost control
measures.
The Americas Group's SG&A increased $304.4 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 increased by $52.6 million for the year primarily due to
restructuring actions and higher employee costs, offset by favorable currency
translation rate changes. The Performance Coatings Group's SG&A increased by
$82.1 million for the year primarily due to restructuring actions and to support
higher sales levels, partially offset by favorable currency translation rate
changes and effective cost control measures. The Administrative segment's SG&A
increased $2.9 million primarily due to higher employee costs. Refer to Note 4
to the Consolidated Financial Statements in Item 8 for additional information on
the restructuring actions.
Other general (income) expense - net improved $126.7 million in 2022 compared to
2021. The change was primarily attributable to the 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.
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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
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 Other expense (income) - net.
The following table presents income before income taxes by segment and as a percentage of net sales by segment:
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 17.1% in 2021. The
increase in the effective rate was primarily due to a decrease in tax benefits
related to employee share-based payments and a net unfavorable impact of various
other tax benefits received by the Company 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$0.81 per share, severance and other expense of$0.15 per share, and a$0.05 per share charge related to trademark impairments. Refer to Notes 4 and 7 to the Consolidated Financial Statements in Item 8 for additional information regarding the restructuring actions and trademark impairments, respectively. Currency translation rate changes decreased diluted net income per share in the year by$0.07 per share. 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.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company's financial condition, liquidity and cash flow continued to be strong in 2022. The Company generated$1.920 billion in net operating cash despite higher raw material costs and inflationary pressures which negatively impacted gross margin and net income. The net operating cash generation was primarily attributable to operating results as consolidated income before income taxes was$2.573 billion or 11.6% of net sales. This strong cash generation enabled the Company to invest 25
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$1.003 billion in acquisitions and$644.5 million in capital expenditures, and return$1.502 billion to shareholders in the form of cash dividends and share repurchases during the year. During 2022, the Company generated EBITDA of$3.545 billion and Adjusted EBITDA of$3.608 billion . See the Non-GAAP Financial Measures section in Item 7 for the definitions and calculations of EBITDA and Adjusted EBITDA. As ofDecember 31, 2022 , the Company had Cash and cash equivalents of$198.8 million and total debt outstanding of$10.570 billion . Total debt, net of Cash and cash equivalents, was$10.371 billion and was 2.9 times the Company's Adjusted EBITDA in 2022.
Net working capital, defined as Total current assets less Total current liabilities, increased$612.8 million to a deficit of$53.0 million atDecember 31, 2022 from a deficit of$665.8 million atDecember 31, 2021 . The net working capital increase was primarily due to an increase in current assets, particularly Inventories. Comparing current asset balances atDecember 31, 2022 toDecember 31, 2021 , Accounts receivable increased$211.2 million due to higher sales, Inventories increased$699.3 million due to higher raw material costs and inventory levels, and Other current assets decreased$89.6 million primarily related to refundable income taxes and prepaid expenses.
Current liability balances increased
As a result of the net effect of these changes, the Company's current ratio improved to 0.99 atDecember 31, 2022 from 0.88 atDecember 31, 2021 . Accounts receivable as a percent of Net sales decreased to 11.6% in 2022 from 11.8% in 2021. Accounts receivable days outstanding increased to 58 days in 2022 from 57 days in 2021. In 2022, provisions for allowance for doubtful collection of accounts increased$7.7 million , or 15.7%. Inventories as a percent of net sales increased to 11.9% in 2022 from 9.7% in 2021. Inventory days outstanding was 98 days in 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 atDecember 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 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 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
InDecember 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 underU.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 26
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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. InDecember 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 , which represents the excess of cost over the fair value of net assets acquired in business combinations, increased$448.6 million in 2022 primarily due to incremental goodwill recognized in 2022 acquisitions of$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$51.1 million , and$15.5 million of trademark impairment charges. See Note 3 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 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
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
InAugust 2022 , the Company issued$600.0 million of 4.05% Senior Notes dueAugust 2024 and$400.0 million of 4.25% Senior Notes dueAugust 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 datedMay 9, 2016 , as amended, and domestic commercial paper program. 27
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OnAugust 30, 2022 , the Company and two of its wholly-owned subsidiaries,Sherwin-Williams Canada Inc. (SW Canada ) andSherwin-Williams Luxembourg S .à r.l. (SW Luxembourg, together with the Company andSW Canada , the Borrowers), entered into a new five-year$2.250 billion credit agreement (2022 Credit Agreement). The 2022 Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements. The 2022 Credit Agreement replaced the$2.000 billion credit agreement datedJune 29, 2021 , as amended, which was terminated effectiveAugust 30, 2022 . The 2022 Credit Agreement will mature onAugust 30, 2027 and provides that the Company may request to extend the maturity date of the facility for two additional one-year periods. In addition, the 2022 Credit Agreement provides that the Borrowers may increase the aggregate size of the facility up to an additional amount of$750.0 million , 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 . 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, 2022 , the Company had unused capacity under its various credit agreements of$2.742 billion . See Note 8 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$20.5 million to$58.5 million primarily due to changes in the actuarial assumptions. The Company's liability for other postretirement benefits decreased$122.6 million to$153.8 million atDecember 31, 2022 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 plan increased to 5.3% atDecember 31, 2022 from 3.1% atDecember 31, 2021 . The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans increased to 5.1% atDecember 31, 2022 from 2.3% atDecember 31, 2021 . The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations increased to 5.2% atDecember 31, 2022 from 2.8% atDecember 31, 2021 . The increase in the discount rates was primarily due to higher interest rates. In deciding on the rates of compensation increases, management considered historical Company increases as well as expectations for future increases. The rate of compensation increases used to determine the projected benefit obligation atDecember 31, 2022 was 3.0% for the domestic pension plan and 3.4% for foreign pension plans, which was comparable to the rates used in the prior year. In establishing the expected long-term rate of return on plan assets, management considered the historical rates of return, the nature of investments and an expectation for future investment strategies. The expected long-term rate of return on assets for the domestic defined benefit pension plan increased to 6.3% atDecember 31, 2022 from 5.0% atDecember 31, 2021 . The expected long-term rate of return on assets for the foreign defined benefit pension plans increased to 5.6% atDecember 31, 2022 from 3.2% atDecember 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 atDecember 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 atDecember 31, 2021 were 5.1% and 8.3%, respectively. The respective year-end assumptions described above for the Company's defined benefit plans are also used to determine expense for the next year. Net pension cost in 2023 for the domestic pension plan and foreign pension plans is expected to be approximately$1.9 million and$1.6 million , respectively. Net periodic benefit credit for other postretirement benefits in 2023 is expected to be approximately$15.8 million . The credit for 2023 is primarily due to amortization of the impact of a plan amendment. See Note 9 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
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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 inU.S. affordable housing and historic renovation real estate partnerships and liabilities associated with real estate financing transactions, partially offset by the impact of expected settlements related to tax 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 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 2023. See Note 11 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-basedSpecialized Industrial Coatings Holding (SIC Holding ), a Peter Möhrle Holding and GP Capital UG venture comprised ofOskar Nolte GmbH andKlumpp 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 ofDecember 31, 2022 .
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 $ 9,674.5 $ 0.6
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
(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
(3)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 $ 149.8 $ 149.8
Surety bonds 240.7 240.7
Total commercial commitments $ 390.5 $ 390.5 $ - $ - $ -
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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 2022 and
2021, including customer satisfaction settlements during the year, were as
follows:
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 $664.9 million to $3.102 billion at December 31,
2022 from $2.437 billion last year. The increase was primarily attributable to
the generation of $2.020 billion of net income and benefits from stock option
exercises and 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 the payment of $618.5 million in cash dividends. See the
Statements of Consolidated Shareholders' Equity and Statements of Consolidated
Comprehensive Income in Item 8 for additional information.
The Company purchased 3.4 million shares of its common stock for treasury
purposes through open market purchases during 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, 2022 to
purchase 45.2 million shares of its common stock.
The Company's 2022 annual cash dividend of $2.40 per share represented 34% of
2021 diluted net income per share. The 2022 annual dividend represented the 44th
consecutive year of increased dividend payments. On February 15, 2023 , the Board
of Directors increased the quarterly cash dividend to $0.605 per share. This
quarterly dividend, if approved in each of the remaining quarters of 2023, would
result in an annual dividend for 2023 of $2.42 per share or a 31% payout of 2022
diluted net income per share.
Cash Flow
Net operating cash decreased $324.7 million in 2022 to a cash source of $1.920
billion from $2.245 billion in 2021 due primarily to incremental working capital
requirements. Net operating cash decreased as a percent to sales to 8.7% in 2022
compared to 11.3% in 2021.
Net investing cash usage increased $1.131 billion to a usage of $1.608 billion
in 2022 from a usage of $476.4 million in 2021 due primarily to cash used for
acquisitions and an increase in capital expenditures. See Note 3 to the
Consolidated Financial Statements in Item 8 for additional information on
acquisitions and divestitures.
Net financing cash usage decreased $1.552 billion to a usage of $282.4 million
in 2022 from a usage of $1.834 billion in 2021. This was due primarily to a
decrease in incremental share repurchases of $1.869 billion , proceeds from real
estate financing transactions and lower repayments of long-term debt, partially
offset by a reduction in proceeds from short-term borrowings and stock option
exercises as compared to 2021.
Litigation
See Note 12 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
2022 and 2021, 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, 17 and 20 to the Consolidated
Financial Statements in Item 8 for additional information related to the
Company's use of derivative instruments.
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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 consolidated leverage ratio is not to exceed 3.75 to 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 datedAugust 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 "Non-GAAP Financial Measures" section in Item 7 for a reconciliation of EBITDA to net income. AtDecember 31, 2022 , the Company was in compliance with the covenant and expects to remain in compliance. The Company's notes, debentures and revolving credit agreements 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 8 to the Consolidated Financial Statements in Item 8 for additional information.
Defined Contribution Savings Plan
Participants in the Company's salaried defined contribution savings plan are allowed to contribute up to the lesser of fifty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code. The Company matches one hundred percent of all contributions up to six percent of eligible employee contributions. The Company's matching contributions to the defined contribution savings plan charged to operations were$140.0 million in 2022 compared to$133.7 million in 2021. AtDecember 31, 2022 , there were 19,689,197 shares of the Company's common stock being held by the defined contribution savings plan, representing 7.6% of the total number of voting shares outstanding. See Note 14 to the Consolidated Financial Statements in Item 8 for additional information concerning the Company's defined contribution savings plan. 31
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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 theWattyl 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
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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 excludingValspar acquisition-related amortization expense in 2022 and 2021, restructuring expense in 2022, and the loss on the divestiture ofWattyl 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
Tax
Pre-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
Year Ended
December 31, 2021
Tax
Pre-Tax Effect (1) After-Tax
Diluted net income per share $ 6.98
Loss on divestiture $ .41 $ .07 .34
Acquisition-related amortization expense (2) 1.10 .27 .83
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
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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 excludingValspar acquisition-related amortization expense in 2022 and 2021, restructuring expense in 2022, and the loss on the divestiture ofWattyl 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. Year Ended December 31, 2022 Performance The Americas Consumer Brands Coatings Group Group Group Administrative Total Net external sales$ 12,661.0 $ 2,690.7 $ 6,793.5 $ 3.7$ 22,148.9 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 % Restructuring expense - 41.1 22.2 - 63.3 Acquisition-related amortization expense (1) - 76.2 200.1 - 276.3 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 %
Year Ended
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 %
(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 with 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 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.
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, 2022 , the date of the annual impairment test. The annual impairment review performed as ofOctober 1, 2022 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 2022 impairment testing are consistent with prior years. The annual impairment review performed as ofOctober 1, 2022 , which incorporated the impact of a business restructuring plan, resulted in trademark impairments totaling$15.5 million in theConsumer Brands Group related to the discontinuation of an architectural paint brand and lower than anticipated sales of an acquired 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 7 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 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, 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 income (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.
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In 2023, pension and other postretirement benefit plan costs are expected to decrease based on the actuarial assumptions being applied. See Note 9 to the Consolidated Financial Statements in Item 8 for information concerning the Company's defined benefit pension plans and other postretirement benefit 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 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 11 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 12 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 21 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 2022 and 2021, 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 17 to the Consolidated Financial Statements in Item 8. The Company entered into forward foreign currency exchange contracts during 2022 to hedge against value changes in foreign currency. There were no material contracts outstanding atDecember 31, 2022 . Forward foreign currency exchange contracts are described in Note 20 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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