NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, unless otherwise noted)
Periods ended March 31, 2022 and 2021
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of The Sherwin-Williams Company and its wholly owned subsidiaries (collectively, the Company) have been prepared in accordance with U.S. generally accepted accounting principles (US GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
There have been no significant changes in significant accounting policies since December 31, 2021. Accounting estimates were revised as necessary during the first three months of 2022 based on new information and changes in facts and circumstances.
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The results of operations for the three months ended March 31, 2022 are not indicative of the results to be expected for the full year as business is seasonal in nature with the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters. However, periods of economic uncertainty can alter the Company's seasonal patterns.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted
Effective January 1, 2022, the Company adopted Accounting Standards Update (ASU) 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” This ASU requires disclosures for material government assistance transactions during annual reporting periods. The disclosures include information about the nature of the transaction, the related accounting policies used to account for the government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions. The adoption of ASU 2021-10 did not affect the Company’s financial position, results of operations or cash flows as the standard only impacts annual financial statement footnote disclosures.
Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (FASB) issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers.” This ASU requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The ASU is effective for fiscal years and interim periods beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of adopting this ASU.
NOTE 3 - ACQUISITIONS AND DIVESTITURES
During the first quarter of 2022, the Company made certain adjustments to the preliminary purchase accounting adjustments associated with the net assets acquired in its 2021 acquisition of Specialty Polymers, Inc. The fair value of finite-lived intangible assets increased by $61.4 million and property, plant and equipment assets acquired increased by $11.0 million, offset by a corresponding net decrease in goodwill. There was no material impact on previously reported financial results from these adjustments. The Company expects to complete the preliminary purchase price allocation for the acquisition within the allowable measurement period.
Subsequent to quarter end, the Company completed the acquisition of the European industrial coatings business of Sika AG (Sika). This business engineers, manufactures and sells corrosion protection coating systems and fire protection coating systems. The acquired business will be reported within the Company’s Performance Coatings Group.
On March 31, 2021, the Company divested Wattyl, an Australian and New Zealand manufacturer and seller of architectural and protective paint and coatings with annual revenue of approximately $200 million. The divestiture enabled the Company to focus its resources on global opportunities which better align with our long-term strategies. In connection with this transaction, the Company recognized a pre-tax loss of $111.9 million within Other general expense - net (see Note 15). The Wattyl divestiture did not meet the criteria to be reported as discontinued operations in our consolidated financial statements as the Company’s decision to divest this business did not represent a strategic shift that will have a major effect on the Company’s operations and financial results.
NOTE 4 - INVENTORIES
Included in Inventories were the following:
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| March 31, | | December 31, | | March 31, |
| 2022 | | 2021 | | 2021 |
| Finished goods | $ | 1,729.5 | | | $ | 1,378.8 | | | $ | 1,413.0 | |
| Work in process and raw materials | 599.1 | | | 548.4 | | | 434.3 | |
| Inventories | $ | 2,328.6 | | | $ | 1,927.2 | | | $ | 1,847.3 | |
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. For further information on the Company’s inventory valuation, see Note 4 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 5 - LONG-LIVED ASSETS
Included in Property, plant and equipment, net were the following:
| | | | | | | | | | | | | | | | | |
| March 31, | | December 31, | | March 31, |
| 2022 | | 2021 | | 2021 |
| Land | $ | 246.6 | | | $ | 257.7 | | | $ | 256.2 | |
| Buildings | 1,140.6 | | | 1,157.8 | | | 1,067.3 | |
| Machinery and equipment | 3,145.8 | | | 3,043.6 | | | 2,978.7 | |
| Construction in progress | 245.6 | | | 205.4 | | | 154.8 | |
| Property, plant and equipment, gross | 4,778.6 | | | 4,664.5 | | | 4,457.0 | |
| Less allowances for depreciation | 2,871.3 | | | 2,797.2 | | | 2,676.6 | |
| Property, plant and equipment, net | $ | 1,907.3 | | | $ | 1,867.3 | | | $ | 1,780.4 | |
In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually during the fourth quarter, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate an impairment has more likely than not occurred.
NOTE 6 - DEBT
The following table summarizes the Company’s outstanding debt:
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| March 31, | | December 31, | | March 31, |
| 2022 | | 2021 | | 2021 |
| Long-term debt (including current portion) | $ | 8,853.0 | | | $ | 8,851.5 | | | $ | 8,290.9 | |
| Short-term borrowings | 1,739.7 | | | 763.5 | | | 818.1 | |
| Total debt outstanding | $ | 10,592.7 | | | $ | 9,615.0 | | | $ | 9,109.0 | |
The Company’s long-term debt primarily consists of senior notes. For further details on the Company’s debt, including available credit facilities and related agreements, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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. At March 31, 2022, the Company had unused capacity under its various credit agreements of $1.814 billion. The table below summarizes the Company’s short-term borrowings:
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| March 31, | | December 31, | | March 31, |
| 2022 | | 2021 | | 2021 |
| Domestic commercial paper | $ | 1,651.5 | | | $ | 739.9 | | | $ | 816.9 | |
| Foreign facilities | 88.2 | | | 23.6 | | | 1.2 | |
| Total | $ | 1,739.7 | | | $ | 763.5 | | | $ | 818.1 | |
| | | | | |
| Weighted average interest rate: | | | | | |
| Domestic | 0.8 | % | | 0.3 | % | | 0.3 | % |
| Foreign | 7.6 | % | | 9.5 | % | | 3.0 | % |
NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS
The following table summarizes the components of the Company’s net periodic benefit cost for domestic and foreign defined benefit pension plans and other postretirement benefits:
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| Domestic
Defined Benefit
Pension Plan | | Foreign
Defined Benefit
Pension Plans | | Other
Postretirement
Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Three Months Ended March 31: | | | | | | | | | | | |
| Net periodic benefit cost: | | | | | | | | | | | |
| Service cost | $ | 1.3 | | | $ | 1.3 | | | $ | 1.6 | | | $ | 1.9 | | | $ | 0.3 | | | $ | 0.3 | |
| Interest cost | 0.8 | | | 0.6 | | | 2.0 | | | 1.4 | | | 1.4 | | | 1.3 | |
| Expected return on assets | (1.9) | | | (1.8) | | | (2.6) | | | (2.5) | | | | | |
| Amortization of prior service cost (credit) | 0.2 | | | 0.3 | | | (0.1) | | | | | (0.1) | | | |
| Amortization of actuarial losses | | | | | 0.1 | | | 0.4 | | | 1.1 | | | 1.2 | |
| Ongoing net periodic benefit cost | 0.4 | | | 0.4 | | | 1.0 | | | 1.2 | | | 2.7 | | | 2.8 | |
| Divestiture of business | | | | | | | 0.7 | | | | | |
| Net periodic benefit cost | $ | 0.4 | | | $ | 0.4 | | | $ | 1.0 | | | $ | 1.9 | | | $ | 2.7 | | | $ | 2.8 | |
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Service cost is recorded in Cost of goods sold and Selling, general and administrative expenses. All other components are recorded in Other expense (income) - net. For further details on the Company’s pension and other postretirement benefits, see Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 8 - OTHER LONG-TERM LIABILITIES
The operations of the Company, like those of other companies in its industry, are subject to various domestic and foreign environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). In addition, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company may be similarly designated with respect to additional third-party sites in the future.
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs, which are 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. At March 31, 2022 and 2021, the Company had accruals reported on the balance sheet as Other long-term liabilities of $272.5 million and $293.3 million, respectively. Estimated costs of current investigation and remediation activities of $45.9 million and $68.6 million are included in Other accruals at March 31, 2022 and 2021, respectively.
Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. If the Company's future loss contingency is ultimately determined to be at the unaccrued maximum of the estimated range of possible outcomes for every site for which costs can be reasonably estimated, the Company's accrual for environmental-related activities would be $100.4 million higher than the minimum accruals at March 31, 2022. Additionally, costs for environmental-related activities may not be reasonably estimable at early stages of investigation and therefore would not be included in the unaccrued maximum amount.
Four of the Company’s currently and formerly owned manufacturing sites (“Major Sites”) account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at March 31, 2022. At March 31, 2022, $274.4 million, or 86.2% of the total accrual, related directly to the Major Sites. In the aggregate unaccrued maximum of $100.4 million at March 31, 2022, $77.2 million, or 76.9%, related to the Major Sites. The significant cost components of this liability continue to be related to remedy implementation, regulatory agency interaction, project management and other costs. While different for each specific environmental situation, these components generally each account for approximately 85%, 10%, and 5%, respectively, of the accrued amount and those percentages are subject to change over time. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.
The largest and most complex of the Major Sites is the Gibbsboro, New Jersey site (“Gibbsboro”) which comprises the substantial majority of the environmental-related accrual. Gibbsboro, a former manufacturing plant, and related areas, which ceased operations in 1978, has had various areas included on the National Priorities List since 1999. This location has soil, waterbodies, and groundwater contamination related to the historic operations of the facility. Gibbsboro has been divided by the Environmental Protection Agency (“EPA”) into six operable units (“OUs”) based on location and characteristics, whose investigation and remediation efforts are likely to occur over an extended period of time. Each of the OUs are in various phases of investigation and remediation with the EPA that provide enough information to reasonably estimate cost ranges and record environmental-related accruals. The most significant assumptions underlying the reliability and precision of remediation cost estimates for the Gibbsboro site are the type and extent of future remedies to be selected by the EPA and the costs of implementing those remedies.
The remaining three Major Sites comprising the majority of the accrual include (1) a multi-party Superfund site that has received a record of decision from the federal EPA and is currently in the remedial design phase for one OU and for which a remedial investigation/feasibility study has been submitted for another OU, (2) a closed paint manufacturing facility that is in the operation and maintenance phase of remediation under both federal and state EPA programs, and (3) a formerly-owned site containing warehouse and office space that is in the remedial investigation phase under a state EPA program. Each of these three Major Sites are in phases of investigation and remediation that provide sufficient information to reasonably estimate cost ranges and record environmental-related accruals.
Excluding the Major Sites discussed above, no sites are individually material to the total accrual balance. There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution, and securing applicable governmental agency approvals, all of which have the potential to contribute to the uncertainty surrounding these future events. As these events occur and to the extent that the cost estimates of the environmental remediation change, the existing reserve will be adjusted.
Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. Unasserted claims could have a material effect on the Company's loss contingency as more information becomes available over time. At March 31, 2022, the Company did not have material loss contingency accruals related to unasserted claims. Management does not expect that a material portion of unrecognized loss contingencies will be recoverable through
insurance, indemnification agreements or other sources. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Moreover, management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended length of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indeterminate amount of time to conduct investigation activities at any site, the indeterminate amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indeterminate amount of time necessary to conduct remediation activities.
The Asset Retirement and Environmental Obligations Topic of the ASC requires a liability to be recognized for the fair value of a conditional asset retirement obligation if a settlement date and fair value can be reasonably estimated. The Company recognizes a liability for any conditional asset retirement obligation when sufficient information is available to reasonably estimate a settlement date to determine the fair value of such a liability. The Company has identified certain conditional asset retirement obligations at various current and closed manufacturing, distribution and store facilities. These obligations relate primarily to asbestos abatement, hazardous waste Resource Conservation and Recovery Act (RCRA) closures, well abandonment, transformers and used oil disposals and underground storage tank closures. Using investigative, remediation and disposal methods that are currently available to the Company, the estimated costs of these obligations were accrued and are not significant. The recording of additional liabilities for future conditional asset retirement obligations may result in a material impact on net income for the annual or interim period during which the costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time over which sufficient information may become available regarding the closure or modification of any one or group of the Company’s facilities. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
NOTE 9 - LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
Lead pigment and lead-based paint litigation. The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company has also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on
surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company expects that additional lead pigment and lead-based paint litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. The Company will continue to vigorously defend against any additional lead pigment and lead-based paint litigation that may be filed, including utilizing all avenues of appeal, if necessary.
Notwithstanding the Company’s views on the merits, litigation is inherently subject to many uncertainties, and the Company ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which the Company and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings or the effect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. Except with respect to the litigation in California discussed below, the Company has not accrued any amounts for such litigation because the Company does not believe it is probable that a loss has occurred, and the Company believes it is not possible to estimate the range of potential losses as there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. Due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, cash flow, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
Public Nuisance Claim Litigation. The Company and other companies are or were defendants in legal proceedings seeking recovery based on public nuisance liability theories, among other theories, brought by the State of Rhode Island; the City of St. Louis, Missouri; various cities and counties in the State of New Jersey; various cities in the State of Ohio and the State of Ohio; the City of Chicago, Illinois; the City of Milwaukee, Wisconsin; the County of Santa Clara, California, and other public entities in the State of California; and Lehigh and Montgomery Counties in Pennsylvania. Except for the Santa Clara County, California proceeding and the pending Pennsylvania proceedings, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
Santa Clara County, California Proceeding. The Santa Clara County, California proceeding was initiated in March 2000 in the Superior Court of the State of California, County of Santa Clara. After nearly twenty years of litigation, the Company and two other defendants (ConAgra Grocery Products Company and NL Industries, Inc.) reached an agreement in principle with the plaintiffs to resolve the litigation on July 17, 2019. The agreement provides that, in full and final satisfaction of any and all claims of the plaintiffs, the defendants collectively shall pay a total of $305.0 million, with the defendants each paying approximately $101.7 million as follows: (i) an initial payment of $25.0 million within sixty days after the entry of a dismissal order and judgment; (ii) subsequent annual payments of $12.0 million one year after the initial payment and for a period of four years thereafter; and (iii) a final payment of approximately $16.7 million on the sixth anniversary of the initial payment. Should NL Industries fail to make any of its payments required under the agreement, the Company has agreed to backstop and pay on behalf of NL Industries a maximum amount of $15.0 million. On July 24, 2019, the trial court approved the agreement, discharged the receiver, and granted a judgment of dismissal with prejudice in favor of the defendants. At March 31, 2022 and 2021, the Company had accruals for this agreement reported on the balance sheet of $52.7 million and $64.7 million, respectively, with $12.0 million included in Current liabilities and the remaining $40.7 million and $52.7 million, respectively, included in Other long-term liabilities.
Pennsylvania Proceedings. Two proceedings in Pennsylvania were initiated in October 2018. The Pennsylvania counties of Montgomery and Lehigh filed complaints against the Company and several other former lead-based paint and lead pigment manufacturers in the Courts of Common Pleas of Montgomery County, Pennsylvania and Lehigh County, Pennsylvania, respectively. In both actions, the counties request declaratory relief establishing the existence of a public nuisance and the defendants’ contribution to it, the abatement of an ongoing public nuisance arising from the presence of lead-based paint in housing throughout the applicable county, an injunction against future illicit conduct, and the costs of litigation and attorneys’ fees. After the defendants removed the actions to federal court and the actions were remanded to state court, the defendants filed preliminary objections on December 21, 2020, seeking to dismiss the complaints with prejudice.
In the Lehigh County action, the trial court denied the defendants’ preliminary objections on August 6, 2021. Defendants filed a motion to amend the order to allow an interlocutory appeal or, in the alternative, for reconsideration. The trial court denied the defendants’ motion on September 13, 2021. On September 27, 2021, the Company answered the complaint, asserted new matter and affirmative defenses, alleged counterclaims against Lehigh County, and filed a third-party complaint against certain County officials, other owners of pre-1980 housing, and lead abatement contractors who have been cited for violating state or local laws. On October 13, 2021, the defendants filed with the Superior Court, one of Pennsylvania’s intermediate appellate courts, a petition for permission to appeal the trial court’s order denying the defendants’ preliminary objections. On November 17, 2021, the Superior Court transferred the appeal to the Commonwealth Court, another one of Pennsylvania’s intermediate appellate courts.
In the Montgomery County action, the trial court denied the defendants’ preliminary objections on October 15, 2021. The defendants filed a motion to amend the order overruling their preliminary objections to allow an interlocutory appeal, which the trial court granted on November 9, 2021. On December 3, 2021, the defendants filed a petition for permission to appeal with the Commonwealth Court.
The Commonwealth Court granted the defendants’ petitions for permission to appeal in both the Montgomery County and Lehigh County actions on February 18, 2022, and stayed all proceedings in the trial courts pending the appellate court proceedings. The Company’s opening appellate briefs in both actions are due on May 18, 2022.
Litigation seeking damages from alleged personal injury. The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in Wisconsin state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed, and on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the district court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The district court’s decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the Seventh Circuit reversed the judgment and remanded the case back to the district court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking review of the Seventh Circuit’s decision, and on May 18, 2015, the United States Supreme Court denied the defendants’ petition. The case is currently pending in the district court.
The United States District Court for the Eastern District of Wisconsin consolidated three cases (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) for purposes of trial. A trial was held in May 2019 and resulted in a jury verdict for the three plaintiffs in the amount of $2.0 million each for a total of $6.0 million against the Company and two other defendants (Armstrong Containers Inc. and E.I. du Pont de Nemours). After post-trial motions resulted in the damages award to plaintiff Glenn Burton, Jr. being reduced to $800,000, the Company filed a notice of appeal with the United States Court of Appeals for the Seventh Circuit. On April 15, 2021, the Seventh Circuit reversed the judgments and held that the Company was entitled to judgment as a matter of law on all claims filed by the three plaintiffs. The plaintiffs filed a petition with the Seventh Circuit on April 27, 2021, seeking a rehearing en banc and, in the alternative, a request for certification of questions to the Wisconsin Supreme Court. The plaintiffs’ petition was denied by the Seventh Circuit on May 12, 2021.
In Maniya Allen, et al. v. American Cyanamid, et al., also pending in the United States District Court for the Eastern District of Wisconsin, cases involving six of the 146 plaintiffs were selected for discovery. In Dijonae Trammell, et al. v. American Cyanamid, et al., also pending in the United States District Court for the Eastern District of Wisconsin, discovery for one of the three plaintiffs was consolidated with the six Allen cases referenced above. The parties selected four of the cases to proceed to expert discovery and to prepare for trial. The district court previously issued an order scheduling trial in the four cases to commence on June 15, 2020, but the trial date was continued due to the COVID-19 pandemic, and no new trial date has been scheduled.
On May 20, 2021, the Company and the three other defendants filed motions for summary judgment to dismiss the claims of all plaintiffs then pending in the district court as a result of the Seventh Circuit’s decision in favor of the Company in the Owens, Sifuentes and Burton cases. On March 3, 2022, the district court granted summary judgment in favor of the Company and the other defendants on all claims then pending in the district court.
On March 31, 2022, the plaintiffs filed a motion seeking to alter or amend the judgment. The Company and the other defendants opposed the motion on April 21, 2022.
On August 24, 2021, the plaintiff in Arrieona Beal v. Armstrong Containers, Inc., et al. filed an amended complaint in Milwaukee County Circuit Court, naming the Company and other alleged former lead pigment manufacturers as defendants pursuant to the risk contribution liability theory. The defendants answered the plaintiff’s complaint on December 17, 2021. On March 2, 2022, the plaintiff filed a motion for declaratory judgment seeking to clarify Wisconsin law following the Seventh Circuit’s decision in favor of the Company in the Owens, Sifuentes and Burton cases. On March 25, 2022, the Company removed the case to the United States District Court for the Eastern District of Wisconsin. The plaintiff filed a motion to remand the case to the state circuit court on April 7, 2022. The Company’s response to the declaratory judgment motion was filed in federal court on April 15, 2022, and the Company’s opposition to the motion to remand is due to be filed on April 28, 2022.
Other lead-based paint and lead pigment litigation. In Mary Lewis v. Lead Industries Association, et al. pending in the Circuit Court of Cook County, Illinois, parents seek to recover the cost of their children’s blood lead testing against the Company and three other defendants that made (or whose alleged corporate predecessors made) white lead pigments. The circuit court had certified a statewide class and a Chicago subclass of parents or legal guardians of children who lived in high-risk zip codes identified by the Illinois Department of Health and who were screened for lead toxicity between August 1995 and February 2008. Excluded from the class were those parents or guardians who have incurred no expense, liability or obligation to pay for the cost of their children’s blood lead testing. In 2017, the defendants moved for summary judgment on the grounds that the three named plaintiffs have not paid and have no obligation or liability to pay for their children’s blood lead testing because Medicaid paid for the children of two plaintiffs and private insurance paid for the third plaintiff without any evidence of a co-pay or deductible. The circuit court granted the motion, but on September 7, 2018, the appellate court reversed with respect to the two plaintiffs for whom Medicaid paid for their children’s testing. Defendants appealed to the Supreme Court of Illinois, and on May 21, 2020, the Supreme Court reversed the appellate court’s judgment, affirmed the circuit court’s summary judgment dismissing the claims of the two plaintiffs for whom Medicaid paid for their children’s testing, and remanded the case for further proceedings consistent with the Supreme Court’s decision. On August 19, 2020, the defendants filed their renewed motion for class decertification and entry of final judgment with the circuit court. The parties filed their respective briefs on the motion, and oral argument occurred on February 4, 2021.
On March 8, 2021, the Illinois Department of Healthcare and Family Services filed a petition to intervene and a proposed amended complaint, which would eliminate the class and all prior claims by individual plaintiffs and would propose a subrogation claim by the State agency to recover its expenditures for blood lead testing. Defendants opposed the petition to intervene, and briefing on the petition concluded. A hearing on the petition to intervene occurred on August 10, 2021.
On October 8, 2021, the circuit court entered an order granting the defendants’ motion for decertification of the class, denying the petition to intervene by the Illinois Department of Healthcare and Family Services, and noting that an entry of final judgment in the defendants’ favor was now appropriate. On October 19, 2021, the circuit court entered final judgment in favor of the defendants. On November 5, 2021, the Illinois Department of Healthcare and Family Services filed a Notice of Appeal with the Appellate Court of Illinois, First District.
Insurance coverage litigation. The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed.
The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, previously was stayed and inactive. On January 9, 2019, the Company filed an unopposed motion to lift the stay with the trial court, which was granted, allowing the case to proceed. On June 28, 2019, the Company and its liability insurers each filed separate motions for
summary judgment seeking various forms of relief. The trial court entered an order on December 4, 2020, granting the insurers’ motion for summary judgment, denying the Company’s motion, and entering final judgment in favor of the insurers. The trial court sided with the Company on all of the issues presented, except one. On December 21, 2020, the Company filed a notice of appeal to the Court of Appeals of Cuyahoga County, Ohio, Eighth Appellate District, and the insurers filed cross-appeals. Briefing on the issues concluded, and oral argument occurred on August 25, 2021. The insurers then filed on January 13, 2022, a motion for leave to file a supplemental brief to address the Eighth Appellate District’s recent decision in Cincinnati Ins. Co. v. Discount Drug Mart, Inc. The Company filed a response to the insurers’ motion on January 19, 2022. On March 25, 2022, the Company filed a notice of additional authority, submitting a March 24, 2022 decision from the New York Appellate Division, First Judicial Department in Certain Underwriters at Lloyd’s, London, et al., v. NL Industries, Inc., et al. The insurers filed a response to the notice on April 1, 2022. On April 20, 2022, the insurers filed a notice of additional authority, submitting an April 19, 2022 decision from the California Court of Appeal, First Appellate Division in Certain Underwriters at Lloyd’s, London v. ConAgra Grocery Products Co. The Company filed a response to the notice on April 25, 2022. The parties are awaiting the appellate court’s decision.
An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, except with respect to the litigation in California discussed above, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.
Other litigation. On December 18, 2019, the New Jersey Department of Environmental Protection, the Commissioner of the New Jersey Department of Environmental Protection, and the Administrator of the New Jersey Spill Compensation Fund filed a lawsuit against the Company in the Superior Court of New Jersey Law Division in Camden County, New Jersey. The plaintiffs seek to recover natural resource damages, punitive damages, and litigation fees and costs, as well as other costs, damages, declaratory relief, and penalties pursuant to New Jersey state statutes and common law theories in connection with the alleged discharge of hazardous substances and pollutants at the Company’s Gibbsboro, New Jersey site, a former manufacturing plant and related facilities. The court has scheduled a trial date of September 25, 2023.
NOTE 10 - SHAREHOLDERS' EQUITY
Dividends
The following table summarizes the dividends declared and paid on common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | | | |
| Cash
Dividend
Per Share | | Total
Dividends
(in millions) | | Cash
Dividend
Per Share | | Total
Dividends
(in millions) | | | | |
| First Quarter | $ | 0.60 | | | $ | 150.9 | | | $ | 0.55 | | | $ | 151.8 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Treasury Stock
The Company acquires its common stock for general corporate purposes through its publicly announced share repurchase program. As of March 31, 2022, the Company had remaining authorization from its Board of Directors to purchase 47.1 million shares of its common stock. The table below summarizes share repurchases during the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
| Treasury stock purchases (millions of dollars) | $ | 407.1 | | | $ | 775.4 | | | | | |
| Treasury stock purchases (shares) | 1,450,000 | | | 3,300,000 | | | | | |
| Average price per share | $ | 280.77 | | | $ | 234.96 | | | | | |
In February 2022, the Company received proceeds of $22.0 million in conjunction with the issuance of treasury shares to fund Company contributions to the domestic defined contribution plan.
Other Activity
During the three months ended March 31, 2022, 129,981 stock options were exercised at a weighted average price per share of $90.18. In addition, 355,581 restricted stock units vested during this period.
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income (AOCI), including the reclassification adjustments for items that were reclassified from AOCI to net income, are shown below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign
Currency
Translation
Adjustments | | Pension and
Other
Postretirement
Benefits
Adjustments | | Unrealized
Net Gains on
Cash Flow
Hedges | | Total |
| Balance at December 31, 2021 | $ | (702.1) | | | $ | (32.2) | | | $ | 35.9 | | | $ | (698.4) | |
| Amounts recognized in AOCI | (43.6) | | | | | | | (43.6) | |
| Amounts reclassified from AOCI | | | 1.0 | | | (1.0) | | | — | |
| Balance at March 31, 2022 | $ | (745.7) | | | $ | (31.2) | | | $ | 34.9 | | | $ | (742.0) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign
Currency
Translation
Adjustments | | Pension and
Other
Postretirement
Benefits
Adjustments | | Unrealized
Net Gains on
Cash Flow
Hedges | | Total |
| Balance at December 31, 2020 | $ | (671.5) | | | $ | (87.2) | | | $ | 40.4 | | | $ | (718.3) | |
| Amounts recognized in AOCI | (46.3) | | | | | | | (46.3) | |
| Amounts reclassified from AOCI | | | 1.8 | | | (1.0) | | | 0.8 | |
| Balance at March 31, 2021 | $ | (717.8) | | | $ | (85.4) | | | $ | 39.4 | | | $ | (763.8) | |
NOTE 12 - DERIVATIVES AND HEDGING
The Company has two U.S. Dollar to Euro cross currency swap contracts to hedge the Company's net investment in its European operations. The contracts have a notional value of $500.0 million and $244.0 million, respectively, and mature on June 1, 2024 and June 1, 2027, respectively. During the term of the contracts, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively converting a portion of the Company's U.S. Dollar denominated fixed-rate debt to Euro denominated fixed-rate debt.
The following table summarizes the balance sheet location of the cross currency swaps. See Note 13 for additional information on the fair value of these contracts.
| | | | | | | | | | | | | | | | | |
| March 31, | | December 31, | | March 31, |
| 2022 | | 2021 | | 2021 |
| | | | | |
| Other accruals | $ | — | | | $ | — | | | $ | 20.0 | |
| Other long-term liabilities | 25.8 | | | 36.5 | | | 35.2 | |
The changes in fair value of the cross currency swap contracts are recognized in the foreign currency translation adjustments component of AOCI. The following table summarizes the unrealized gains for the three months ended March 31, 2022 and 2021.
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | March 31, | | | | |
| 2022 | | 2021 | | | | |
| Unrealized gains | $ | 10.7 | | | $ | 30.6 | | | | | |
| Tax effect | (2.6) | | | (7.5) | | | | | |
| Unrealized gains, net of taxes | $ | 8.1 | | | $ | 23.1 | | | | | |
NOTE 13 - FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. Under the guidance, assets and liabilities measured at fair value are categorized as follows:
Level 1: Quoted prices in active markets for identical assets
Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs
Except for the acquisition and divestiture-related fair value measurements described in Note 3, there were no assets and liabilities measured at fair value on a nonrecurring basis. The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | |
| Deferred compensation plan assets | $ | 78.3 | | | $ | 43.4 | | | $ | 34.9 | | | | | $ | 80.4 | | | $ | 43.1 | | | $ | 37.3 | | | |
| Qualified Replacement Plan assets | 32.4 | | | 32.4 | | | | | | | 98.8 | | | 98.8 | | | | | |
| $ | 110.7 | | | $ | 75.8 | | | $ | 34.9 | | | $ | — | | | $ | 179.2 | | | $ | 141.9 | | | $ | 37.3 | | | $ | — | |
| | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | |
| Net investment hedge liability | $ | 25.8 | | | | | $ | 25.8 | | | | | $ | 36.5 | | | | | $ | 36.5 | | | |
The deferred compensation plan assets consist of the investment funds maintained for the future payments under the Company’s executive deferred compensation plans, which are structured as rabbi trusts. The investments are marketable securities accounted for under the Debt and Equity Securities Topics of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models.
The cost basis of the investment funds was $63.9 million and $63.0 million at March 31, 2022 and December 31, 2021, respectively.
The Qualified Replacement Plan assets consist of investment funds maintained for future contributions to the Company’s domestic defined contribution plan. See Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for additional information. The investments are valued using quoted prices multiplied by the number of shares. The cost basis of the investment funds was $31.0 million and $86.9 million at March 31, 2022 and December 31, 2021, respectively.
The net investment hedge liability is the fair value of the cross currency swaps (see Note 12). The fair value is based on a valuation model that uses observable inputs, including interest rate curves and foreign currency rates.
The table below summarizes the carrying amounts and fair values of the Company's debt. The Company's publicly traded debt and non-publicly traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Publicly traded debt | $ | 8,851.1 | | | $ | 8,763.0 | | | $ | 8,849.6 | | | $ | 9,777.4 | |
| Non-publicly traded debt | 1.9 | | | 1.8 | | | 1.9 | | | 1.9 | |
NOTE 14 - REVENUE
The Company manufactures and sells paint, stains, supplies, equipment and floor covering through company-operated stores, branded and private label products through retailers, and a broad range of industrial coatings directly to global manufacturing customers through company-operated branches. A large portion of the Company’s revenue is recognized at a point in time and made to customers who are not engaged in a long-term supply agreement or any form of contract with the Company. These sales are paid for at the time of sale in cash, credit card or on account with the vast majority of customers having terms between 30 and 60 days, not to exceed one year. Many customers who purchase on account take advantage of early payment discounts offered by paying within 30 days of being invoiced. The Company estimates variable consideration for these sales on the basis of both historical information and current trends to estimate the expected amount of discounts to which customers are likely to be entitled.
The remaining revenue is governed by long-term supply agreements and related purchase orders (“contracts”) that specify shipping terms and aspects of the transaction price including rebates, discounts and other sales incentives, such as advertising support. Contracts are at standalone pricing. The performance obligation in these contracts is determined by each of the individual purchase orders and the respective stated quantities, with revenue being recognized at a point in time when obligations under the terms of the agreement are satisfied. This generally occurs with the transfer of control of our products to the customer. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Refer to Note 18 for the Company's disaggregation of Net sales by reportable segment. As the reportable segments are aligned by similar economic factors, trends and customers, this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Approximately 80% of the Company’s net external sales are in the Company’s North America region (which is comprised of the United States, Canada and the Caribbean region), slightly less than 10% in the EMEAI region (Europe, Middle East, Africa and India), with the remaining global regions accounting for the residual balance. No individual country outside of the United States is individually significant.
The Company has made payments or credits for rebates or incentives at the beginning of a long-term contract where future revenue is expected and before satisfaction of performance obligations. Under these circumstances, the Company recognizes a contract asset and amortizes these prepayments over the expected benefit life of the long-term contract typically on a straight-line basis.
The majority of variable consideration in the Company’s contracts include a form of volume rebate, discounts, and other incentives, where the customer receives a retrospective percentage rebate based on the amount of their purchases. In these situations, the rebates are accrued as a fixed percentage of sales and recorded as a reduction of net sales until paid to the customer per the terms of the contract. Forms of variable consideration such as tiered rebates, whereby a customer receives a retrospective price decrease dependent on the volume of their purchases, are calculated using a forecasted percentage to determine the most likely amount to accrue. Management creates a baseline calculation using historical sales and then utilizing forecast information, estimates the anticipated sales volume each quarter to calculate the expected reduction to sales. The
remainder of the transaction price is fixed as agreed upon with the customer, limiting estimation of revenues including constraints.
The Company’s Accounts receivable and current and long-term contract assets and liabilities are summarized in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts Receivable,
Less Allowance | | Contract
Assets
(Current) | | Contract
Assets
(Long-Term) | | Contract Liabilities
(Current) | | Contract Liabilities
(Long-Term) |
| Balance sheet caption | Accounts receivable | | Other
current assets | | Other
assets | | Other
accruals | | Other
liabilities |
| Balance at December 31, 2021 | $ | 2,352.4 | | | $ | 60.9 | | | $ | 131.2 | | | $ | 259.8 | | | $ | 9.2 | |
| Balance at March 31, 2022 | 2,783.6 | | | 68.3 | | | 118.0 | | | 211.1 | | | 7.4 | |
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.
Provisions for estimated returns are established and the expected costs continue to be recognized as contra-revenue per ASC 606 when the products are sold. The Company only offers an assurance type warranty on products sold, and there is no material service to the customer beyond fixing defects that existed at the time of sale and no warranties are sold separately.
Warranty liabilities are excluded from the table above. Amounts recognized during the quarter from deferred revenue were not material. The Company records a right of return liability within each of its operations to accrue for expected customer returns. Historical actual returns are used to estimate future returns as a percentage of current sales. Obligations for returns and refunds were not material individually or in the aggregate.
Allowance for Credit Losses
The Company's primary allowance for credit losses is the allowance for doubtful accounts. The allowance for doubtful accounts reduces the Accounts receivable balance to the net amount expected to be collected (estimated net realizable value). The Company reviews the collectibility of the Accounts receivable balance each reporting period and estimates the allowance based on historical bad debt experience, aging of accounts receivable, current creditworthiness of customers, current economic factors, as well as reasonable and supportable forward-looking information. Accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful accounts are included in Selling, general and administrative expenses.
The following table summarizes the movement in the Company's allowance for doubtful accounts:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Balance at January 1 | $ | 48.9 | | | $ | 53.5 | |
| Bad debt expense | 12.6 | | | 6.4 | |
| Uncollectible accounts written off, net of recoveries | (3.9) | | | (1.1) | |
| Balance at March 31 | $ | 57.6 | | | $ | 58.8 | |
NOTE 15 - OTHER
Other general expense - net
Included in Other general expense - net were the following:
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| | 2022 | | 2021 | | | | |
| Provisions for environmental matters - net | $ | 0.6 | | | $ | 2.5 | | | | | |
| Loss on divestiture of business (see Note 3) | — | | | 111.9 | | | | | |
| Loss on sale or disposition of assets | 1.9 | | | 3.1 | | | | | |
| | | | | | | |
| Other general expense - net | $ | 2.5 | | | $ | 117.5 | | | | | |
Provisions for environmental matters - net represent initial provisions for site-specific estimated costs of environmental investigation or remediation and increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The loss on sale or disposition of assets represents net realized losses associated with the sale or disposal of property, plant and equipment and intangible assets previously used in the conduct of the primary business of the Company.
Other expense (income) - net
Included in Other expense (income) - net were the following:
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| | 2022 | | 2021 | | | | |
| Investment losses (gains) | $ | 6.7 | | | $ | (6.5) | | | | | |
| | | | | | | |
| Net expense from banking activities | 2.9 | | | 2.6 | | | | | |
| Foreign currency transaction related losses | 4.1 | | | 2.5 | | | | | |
| Miscellaneous pension expense | 0.9 | | | 0.9 | | | | | |
| Other income | (7.5) | | | (5.2) | | | | | |
| Other expense | 9.2 | | | 3.5 | | | | | |
| Other expense (income) - net | $ | 16.3 | | | $ | (2.2) | | | | | |
Foreign currency transaction related losses include the impact from foreign currency transactions and net realized losses from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at March 31, 2022 and 2021.
Miscellaneous pension expense consists of the non-service components of Net periodic benefit cost. See Note 7.
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no other items within the Other income or Other expense caption that were individually significant.
NOTE 16 - INCOME TAXES
The effective tax rate was 19.6% for the first quarter of 2022 compared to 19.5% for the first quarter of 2021. The effective tax rate was favorably impacted by tax benefits related to employee share based payments during the first quarter of 2022 and 2021. The other significant components of the Company’s effective tax rate were consistent year over year.
At December 31, 2021, the Company had $228.5 million in unrecognized tax benefits, the recognition of which would have an effect of $218.9 million on the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2021 was $13.7 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months.
The Company classifies all income tax related interest and penalties as income tax expense. At December 31, 2021, the Company had accrued $26.4 million for the potential payment of income tax interest and penalties.
There were no significant changes to any of the balances of unrecognized tax benefits at December 31, 2021 during the three months ended March 31, 2022.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS audited the Company's 2013, 2014, 2015 and 2016 income tax returns. As a result of these audits, certain adjustments have been assessed. The Company has filed a protest, submitted additional information for consideration, and is currently in the appeals process with the IRS. The Company continues to evaluate the adjustments and believes that it is adequately reserved for any potential exposure. As of March 31, 2022, the federal statute of limitations had not expired for the 2013 through 2021 tax years.
At March 31, 2022, the Company is subject to non-U.S. income tax examinations for the tax years of 2013 through 2021. In addition, the Company is subject to state and local income tax examinations for the tax years 1998 through 2021.
NOTE 17 - NET INCOME PER SHARE
Basic and diluted net income per share are calculated using the treasury stock method.
| | | | | | | | | | | | | | | |
| (in millions, except per share data) | Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| Basic | | | | | | | |
| Net income | $ | 370.8 | | | $ | 409.6 | | | | | |
| Average shares outstanding | 258.8 | | | 265.8 | | | | | |
| Basic net income per share | $ | 1.43 | | | $ | 1.54 | | | | | |
| | | | | | | |
| Diluted | | | | | | | |
| Net income | $ | 370.8 | | | $ | 409.6 | | | | | |
| Average shares outstanding assuming dilution: | | | | | | | |
| Average shares outstanding | 258.8 | | | 265.8 | | | | | |
Stock options and other contingently issuable shares (1) | 4.3 | | | 4.8 | | | | | |
| | | | | | | |
| Average shares outstanding assuming dilution | 263.1 | | | 270.6 | | | | | |
| Diluted net income per share | $ | 1.41 | | | $ | 1.51 | | | | | |
(1)There were 1.0 million stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three months ended March 31, 2022. There were no stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three months ended March 31, 2021.
NOTE 18 - REPORTABLE SEGMENT INFORMATION
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the ASC. The Company has determined that it has three reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a Reportable Segment and collectively, the Reportable Segments).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated
Totals |
| Net external sales | $ | 2,644.1 | | | $ | 699.4 | | | $ | 1,654.1 | | | $ | 1.1 | | | $ | 4,998.7 | |
| Intersegment transfers | — | | | 1,206.5 | | | 52.3 | | | (1,258.8) | | | — | |
| Total net sales and intersegment transfers | $ | 2,644.1 | | | $ | 1,905.9 | | | $ | 1,706.4 | | | $ | (1,257.7) | | | $ | 4,998.7 | |
| | | | | | | | | |
| Segment profit | $ | 445.4 | | | $ | 64.9 | | | $ | 144.5 | | | | | $ | 654.8 | |
| Interest expense | | | | | | | $ | (88.4) | | | (88.4) | |
| Administrative expenses and other | | | | | | | (105.3) | | | (105.3) | |
| Income before income taxes | $ | 445.4 | | | $ | 64.9 | | | $ | 144.5 | | | $ | (193.7) | | | $ | 461.1 | |
| | | | | | | | | |
| Three Months Ended March 31, 2021 |
| | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated
Totals |
| Net external sales | $ | 2,503.1 | | | $ | 778.1 | | | $ | 1,374.3 | | | $ | 0.5 | | | $ | 4,656.0 | |
| Intersegment transfers | — | | | 984.0 | | | 32.0 | | | (1,016.0) | | | — | |
| Total net sales and intersegment transfers | $ | 2,503.1 | | | $ | 1,762.1 | | | $ | 1,406.3 | | | $ | (1,015.5) | | | $ | 4,656.0 | |
| | | | | | | | | |
| Segment profit | $ | 480.0 | | | $ | 143.7 | | | $ | 143.8 | | | | | $ | 767.5 | |
| Interest expense | | | | | | | $ | (83.2) | | | (83.2) | |
| Administrative expenses and other | | | | | | | (175.3) | | | (175.3) | |
| Income before income taxes | $ | 480.0 | | | $ | 143.7 | | | $ | 143.8 | | | $ | (258.5) | | | $ | 509.0 | |
In the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs. International intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site and the operations of a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses that were not directly associated with the Reportable Segments. In addition, the Administrative segment includes the $111.9 million pre-tax loss on the Wattyl divestiture recognized during the three months ended March 31, 2021. See Notes 3 and 15 for additional information on the Wattyl divestiture. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. The Administrative segment did not include any significant foreign operations. Gains and losses from the sale of property were not a significant operating factor in determining the performance of the Administrative segment.
Net external sales of all consolidated foreign subsidiaries were $1.078 billion and $1.037 billion for the three months ended March 31, 2022 and 2021, respectively. Long-lived assets of these subsidiaries totaled $2.796 billion and $2.820 billion at March 31, 2022 and 2021, respectively. Domestic operations accounted for the remaining net external sales and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes or consolidated long-lived assets. Export sales and sales to any individual customer were each less than 10% of consolidated sales in 2022 and 2021.
For further details on the Company's Reportable Segments, see Note 21 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 19 - NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets and certain other investments that have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. The carrying value of the investments is recorded in Other assets. The liabilities for the estimated future capital contributions are recorded in Other accruals and Other long-term liabilities. The following table summarizes the balances related to the investments at March 31, 2022, December 31, 2021 and March 31, 2021.
| | | | | | | | | | | | | | | | | |
| March 31, | | December 31, | | March 31, |
| 2022 | | 2021 | | 2021 |
| Other assets | $ | 420.2 | | | $ | 355.8 | | | $ | 212.7 | |
| Other accruals | 49.7 | | | 61.8 | | | 49.3 | |
| Other long-term liabilities | 357.4 | | | 289.7 | | | 139.8 | |