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(Exact name of registrant as specified in its charter)
iOhio
i34-0526850
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i101 West Prospect Avenue
iCleveland,
iOhio
i44115-1075
(Address
of principal executive offices)
(Zip Code)
(i216) i566-2000
(Registrant’s telephone number including area code)
Title
of each class
Trading Symbol
Name of exchange on which registered
iCommon Stock, par value of $0.33-1/3 per share
iSHW
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.33-1/3 Par Value – i255,966,090 shares as of September 30, 2023.
Pension
and other postretirement benefit adjustments:
Amounts reclassified from AOCI (2)
(i4.6)
i1.0
(i13.6)
i3.5
Unrealized
net gains on cash flow hedges:
Amounts reclassified from AOCI (3)
(i0.9)
(i0.9)
(i2.7)
(i2.9)
Other
comprehensive loss
(i105.1)
(i147.9)
(i55.8)
(i364.1)
Comprehensive
income
$
i656.4
$
i537.2
$
i1,976.8
$
i1,269.7
(1) The
three months ended September 30, 2023 and 2022 include unrealized gains, net of taxes, of $i24.2 million and $i30.9
million, respectively, related to net investment hedges. The nine months ended September 30, 2023 and 2022 include unrealized gains, net of taxes, of $i11.4 million and $i69.8
million, respectively, related to net investment hedges. See Note 13 for additional information.
(2) Net of taxes of $i1.6 million and $(i0.3)
million for the three months ended September 30, 2023 and 2022, respectively. Net of taxes of $i4.6 million and $(i1.1)
million for the nine months ended September 30, 2023 and 2022, respectively.
(3) Net of taxes of $ii0.3/
million for the three months ended September 30, 2023 and 2022, respectively. Net of taxes of $i0.9 million and $i1.0
million for the nine months ended September 30, 2023 and 2022, respectively.
See notes to condensed consolidated financial statements.
iThe 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.
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The results of operations for the three and nine months ended September 30, 2023 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.
Since December 31, 2022, accounting estimates were revised as necessary during the first nine months of 2023 based on new information and changes in facts and circumstances. Certain amounts in the condensed consolidated financial statements for the three and nine months ended September 30, 2022 have been reclassified to conform to the 2023 presentation.
The following represents updates to certain significant accounting policy disclosures. For further details on the Company’s significant accounting policies, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Reportable Segments
During the first quarter of 2023, the Company realigned its organizational structure to manage the Latin America architectural paint business within the Consumer Brands Group. Previously, the Latin America architectural paint business
was managed within The Americas Group; however, Latin America architectural demand and service model trends are shifting to align more closely with the Consumer Brand Group’s strategy. As a result of the change, The Americas Group has been renamed the Paint Stores Group which now focuses on the core U.S., Canada and Caribbean region stores business. All reported segment information herein, including comparable prior periods, include the Latin America architectural paint business within the Consumer Brands Group. See Notes 6 and 19 for additional information.
iReal
Estate Financing
The Company has entered into certain sale-leaseback agreements that do not qualify as asset sales and were accounted for as real estate financing transactions. These arrangements primarily consist of our new headquarters currently under construction. During the third quarter of 2023, the Company received $i87.4 million pursuant to the transaction for a total
amount in 2023 of $i226.1 million. See Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning real estate financing.
iSupply
Chain Financing
As part of our strategy to manage working capital, we have entered into agreements with various financial institutions that act as intermediaries between the Company and certain suppliers. The Company is not a party to agreements between the suppliers and the financial institutions. These arrangements provide participating suppliers the option to settle outstanding Accounts payable incurred by the Company in the normal course of business early at a discount and do not impact our rights and obligations with suppliers, including amounts due and scheduled payment terms. Under the terms of our agreements, the
Company confirms the validity of each supplier invoice to the respective financial institution upon receipt. On the invoice due date, the Company settles the outstanding amount with the respective financial institution. Liabilities associated with these arrangements are recorded in Accounts payable on the Consolidated Balance Sheets and amounted to $i247.7 million, $i258.1 million
and $i290.3 million at September 30, 2023, December 31, 2022 and September 30, 2022, respectively.
8
iNon-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 which qualify for certain tax credits. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. iThe
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:
Effective
January 1, 2023, the Company adopted Accounting Standards Update (ASU) 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” This ASU requires disclosure about an entity’s use of supplier finance programs, including the key terms of the programs and the obligations outstanding at the end of the reporting period. The adoption of ASU 2022-04 did not affect the Company’s financial position, results of operations or cash flows as the standard only impacts financial statement footnote disclosures. See Note 1 for additional information. In addition, a required rollforward of activity within the programs will be disclosed prospectively beginning with the annual period ending December 31,
2024.
Effective January 1, 2023, the Company adopted 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 adoption of ASU 2021-08 did not have a material impact on the
Company’s financial position, results of operations or cash flows.
Not Yet Adopted
In March 2023, the FASB issued ASU 2023-02, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for investments in tax credit structures using the proportional amortization method.” This ASU allows entities to apply the proportional amortization method to all tax equity investments if certain conditions are met. In addition, the ASU requires certain disclosures about the nature and financial implications of tax equity investments on an entity’s financial position, results of operations and cash flows, including the impact of transition on the periods presented, if any. This ASU is effective for fiscal years and interim periods beginning after December 15, 2023, with early adoption permitted. The
Company is evaluating the impact of adopting this ASU.
9
NOTE 3 - iACQUISITIONS AND DIVESTITURES
Acquisitions
Closed in Prior Year
In April 2022, the
Company completed the acquisition of the European industrial coatings business of Sika AG. In July 2022, the Company completed the acquisitions of Gross & Perthun GmbH, Dur-A-Flex, Inc. and Powdertech Oy Ltd. In December 2022, the Company completed the acquisition of Industria Chimica Adriatica S.p.A. (ICA). The acquired businesses are reported within the Company’s Performance Coatings Group.
During 2023, the Company revised the purchase price allocation from Goodwill to the various net assets acquired through its 2022 acquisition of ICA. Goodwill decreased $i149.6 million
and deferred tax liabilities increased $i59.0 million, partially offset by an increase in finite-lived intangible assets of $i192.7 million,
with the remaining purchase price allocated to various other assets acquired and liabilities assumed in the transaction. There was no material impact on previously reported financial results from these adjustments. Furthermore, in accordance with certain purchase agreements, the Company paid $i22.9 million in 2023 related to holdbacks for acquisitions completed in prior years. The Company has finalized the purchase price allocation for
Sika AG, Gross & Perthun GmbH, Dur-A-Flex, Inc. and Powdertech Oy Ltd. and expects to complete this process for ICA within the allowable measurement period. The results of operations for the acquisitions have been included in the consolidated financial statements since the respective acquisition dates. Pro forma results of operations have not been presented as the impact on the Company’s consolidated financial results is not material.
Subsequent Event
In October 2023, the Company completed the acquisition of the German-based SIC Holding GmbH, a Peter Möhrle Holding venture comprised of Oskar Nolte GmbH and Klumpp Coatings GmbH. This business specializes in foil coatings as well as radiation-cured and waterbased
industrial wood coatings for the board, furniture and flooring industry. The acquired business will be reported within the Company’s Performance Coatings Group and the Company expects to complete the preliminary purchase price allocation for the acquisition within the allowable measurement period.
Divestitures
The Company completed the divestiture of a non-core domestic aerosol business within the Consumer Brands Group in April 2023. This transaction resulted in the recognition of a $i20.1 million
gain within the Administrative segment. This gain was recorded within the Other general expense (income) - net caption in the Statements of Consolidated Income during the second quarter of 2023.
During the second quarter of 2023, the Company signed a definitive agreement to divest the China architectural business within the Consumer Brands Group, with annual revenue of approximately $i100 million and i300
employees. The associated net assets were classified as held for sale at June 30, 2023 in accordance with the Property, Plant, and Equipment Topic of the ASC. Following the prescribed order of impairment testing, the Company first reviewed individual tangible and intangible assets under their applicable Topic of the ASC to determine if their carrying value was higher than their respective fair value. As a result, the Company recorded an impairment charge of $i6.9
million within the Consumer Brands Group related to China architectural trademarks. The Company then compared the updated carrying value of the assets and liabilities comprising the disposal group as a whole to its respective fair value which was determined to be equal to the selling price, less costs to sell. The fair value of the disposal group was classified as level 2 in the fair value hierarchy as it was based on a specific price and other observable inputs for similar items with no active market. As a result of this comparison, the Company recorded an additional impairment charge of $i27.1
million within the Administrative segment. During the third quarter of 2023, the Company completed the divestiture of the China architectural business. The Company expects to finalize an immaterial working capital adjustment in the fourth quarter.
10
NOTE 4 – iRESTRUCTURING
In
the fourth quarter of 2022, the Company announced a business restructuring plan (Restructuring Plan) to simplify the Company’s operating model and portfolio of brands within the Consumer Brands Group and to reduce costs in all regions in the Consumer Brands Group, Performance Coatings Group and the Administrative segment. The actions taken under the Restructuring Plan better position the Company to continue to add long-term shareholder value. Key focus areas within the Consumer Brands Group include the China architectural business, aerosol portfolio and optimization of the overall retail portfolio. Multiple alternatives were considered to determine the course of action related to the focus areas. The
Company ultimately determined that divestiture, rather than restructuring, of the China architectural business and a non-core domestic aerosol business was the highest and best use of resources to drive long-term shareholder value. For more information on these divestitures, see Note 3. As a result of continuing evaluation in the second quarter of 2023, the Company determined that these divestitures and previous actions under the Restructuring Plan achieved the original objectives of the focus areas. Accordingly, and in conjunction with other restructuring actions during 2023, there is no additional expense expected to be incurred under the Restructuring Plan.
i
The
following table summarizes the activity and remaining liabilities associated with the Restructuring Plan:
(1)
Severance and related costs were recorded in Selling, general and administrative expenses.
/
(2) Other qualified costs of $i5.7 million were recorded in Selling, general and administrative expenses and the remaining $i4.9 million
was recorded in Cost of goods sold.
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 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
NOTE 6 - iLONG-LIVED ASSETS
i
Included in Property, plant and equipment, net were the following:
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. As a result of the Latin America architectural paint business moving to the Consumer Brands Group reportable segment, the Company performed a quantitative impairment analysis for the impacted reporting units and determined both before and after the change, there was no indication of impairment. In addition, see Note 3 for information on the impairment tests performed in the second quarter of 2023 for the assets held for sale prior to the divestiture of the China architectural business.
NOTE
7 - iDEBT
i
The following table summarizes the Company’s outstanding debt:
On February 28, 2023, the Company amended its credit agreement dated August 2, 2021, as amended, to extend the maturity of $i125.0 million of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June
20, 2023 to December 20, 2027.
12
On May 1, 2023, the Company amended its credit agreement dated May 9, 2016, as amended, to extend the maturity of $i125.0 million
of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to June 20, 2028.
The Company’s available capacity under its committed credit agreements is reduced for amounts outstanding under its domestic commercial paper program, various credit agreements and letters of credit. At September 30, 2023, the Company had unused capacity under its various credit agreements of $i3.342
billion. iThe following table summarizes the Company’s short-term borrowings:
For
further details on the Company’s debt, including available credit facilities and related agreements, see Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
NOTE 8 - iPENSION AND OTHER POSTRETIREMENT
BENEFITS
i
The following table summarizes the components of the Company’s net periodic benefit cost (credit) for domestic and foreign defined benefit pension plans and other postretirement benefits:
Domestic
Defined Benefit Pension Plan
Foreign Defined Benefit Pension Plans
Other Postretirement Benefits
2023
2022
2023
2022
2023
2022
Three Months Ended September 30:
Service
cost
$
i0.9
$
i1.3
$
i1.1
$
i1.6
$
i0.1
$
i0.3
Interest
cost
i1.1
i0.8
i2.9
i1.9
i1.9
i1.4
Expected
return on assets
(i1.8)
(i2.0)
(i3.1)
(i2.6)
i
i
Amortization
of prior service cost (credit)
i0.3
i0.2
(i0.1)
i
(i6.0)
(i0.1)
Amortization
of actuarial (gains) losses
i
i
(i0.4)
i0.1
i
i1.1
Net
periodic benefit cost (credit)
$
i0.5
$
i0.3
$
i0.4
$
i1.0
$
(i4.0)
$
i2.7
Nine
Months Ended September 30:
Service cost
$
i2.5
$
i3.8
$
i3.2
$
i4.9
$
i0.4
$
i0.9
Interest
cost
i3.4
i2.4
i8.6
i4.8
i5.6
i4.4
Expected
return on assets
(i5.5)
(i5.8)
(i9.3)
(i7.7)
i
i
Amortization
of prior service cost (credit)
i1.0
i0.7
(i0.2)
(i0.1)
(i18.0)
(i0.3)
Amortization
of actuarial (gains) losses
i
i
(i1.1)
i1.1
i0.1
i3.2
Net
periodic benefit cost (credit)
$
i1.4
$
i1.1
$
i1.2
$
i3.0
$
(i11.9)
$
i8.2
/
Service
cost is recorded in Cost of goods sold and Selling, general and administrative expenses. All other components are recorded in Other (income) expense - net. For further details on the Company’s pension and other postretirement benefits, see Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
13
NOTE 9 - iOTHER
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, regulations
and requirements 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, including as a result of sites progressing through investigation and remediation-related activities, upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. At September 30, 2023 and 2022, the Company had accruals reported on the balance sheet as Other
long-term liabilities of $i260.1 million and $i268.0 million, respectively. Estimated costs of current investigation and remediation
activities of $i50.2 million and $i45.9 million are included in Other accruals at September 30,
2023 and 2022, 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 $i92.4 million higher than the minimum accruals at September 30, 2023. 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.
iFour 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 September 30,
2023. At September 30, 2023, $i266.7 million, or i86.0%
of the total accrual, related directly to the Major Sites. In the aggregate unaccrued maximum of $i92.4 million at September 30, 2023, $i69.6
million, or i75.3%, related to the Major Sites. The significant cost components of this liability continue to be related to remedy implementation, regulatory agency interaction, and project management and other costs. While different for each specific environmental situation, these components generally each account for approximately i85%,
i10%, and i5%, 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, sediment, waterbodies, and groundwater contamination related to the historic operations of the facility. Gibbsboro has been divided by the Environmental Protection Agency (EPA) into isix 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
14
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 ithree
Major Sites comprising the majority of the accrual include (1) a multi-party Superfund site that (a) has received a record of decision from the federal EPA and is currently in the remedial design phase for one OU, (b) has received a record of decision from the federal EPA for an interim remedy for another OU, and (c) has a remedial investigation ongoing 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/design phase under a state EPA program. Each of these ithree
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 September 30, 2023, 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.
15
NOTE
10 - iLITIGATION
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 have sought 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.
16
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 in which the Company reached a court-approved agreement in 2019 after nearly twenty years of litigation, 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.
Pennsylvania Proceedings.iTwo
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 and Lehigh County, 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 parties filed their respective briefs in both actions, and oral argument occurred on December 14, 2022. On May 5, 2023, the Commonwealth Court reversed both trial courts’ orders denying the defendants’ preliminary objections and remanded the cases for entry of an order dismissing the actions. On June 5, 2023, Montgomery and Lehigh Counties each filed a petition for allowance of appeal in the Supreme Court of Pennsylvania. The
Company filed its opposition briefs on June 20, 2023.
Litigation seeking damages from alleged personal injury. The Company and other companies are or have been defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. The current proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint. The plaintiffs generally seek compensatory damages and have invoked Wisconsin’s risk contribution theory (which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff.
The United States
District Court for the Eastern District of Wisconsin consolidated ithree 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 ithree
plaintiffs in the amount of $i2.0 million each for a total of $i6.0 million against the
Company and itwo 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 $i800,000,
the Company filed a notice of appeal with 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 ithree 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 on May 12, 2021.
On May 20, 2021, the Company and the ithree other defendants filed motions for summary judgment to dismiss the claims of all plaintiffs then pending in the Eastern District of Wisconsin
as a result of the Seventh Circuit’s decision in favor of the Company
17
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. Briefing on the motion concluded, and the district court denied the plaintiffs’
motion to alter or amend the judgment on August 16, 2022.
On September 15, 2022, the plaintiffs filed notices of appeal with the Seventh Circuit, seeking to appeal the district court’s summary judgment in favor of the Company and the other defendants. The plaintiffs filed their brief in support on December 9, 2022. The defendants filed their brief in opposition on February 22, 2023. On March 24, 2023, the plaintiffs filed their reply brief, which included a motion to certify issues to the Wisconsin Supreme Court. On March 31, 2023, the defendants
filed a motion to strike and response in opposition to plaintiffs’ motion to certify. On April 7, 2023, the plaintiffs filed a response in opposition to defendants’ motion to strike. On April 14, 2023, the defendants filed a reply in support of their motion to strike. Oral argument was held on September 26, 2023.
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, to which the Company responded on April 15, 2022. Prior to filing its response to the declaratory judgment motion, the Company removed the case to the Eastern District of Wisconsin on March 25, 2022. The plaintiff filed a motion to remand the case to the state circuit court on April
7, 2022, which the Company opposed. On May 10, 2022, the plaintiff filed a motion for sanctions related to the Company’s removal of the case to federal court, to which the Company responded on May 27, 2022. On September 30, 2023, the federal court granted the plaintiff’s motion to remand, awarded the plaintiff costs and actual expenses in connection with the notice of removal, but denied the plaintiff’s motion for sanctions.
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, was 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. On September 1, 2022, the appellate court reversed the trial court’s grant of summary judgment, finding in favor of the Company on its appeal and against the insurers on their cross-appeal, and remanded the case to the trial court for further proceedings. On September 12, 2022, the insurers applied to the appellate court for reconsideration of its decision, en banc review, or certification of an appeal to the Ohio Supreme Court, which the Company
opposed. On September 30, 2022, the appellate court denied the insurers’ applications for reconsideration and certification. On January 9, 2023, the appellate court denied the insurers’ application for en banc review. On February 21, 2023, the insurers filed with the Ohio Supreme Court a notice of appeal and memorandum in support of jurisdiction, to which the Company responded in opposition on March 22, 2023. On May 9, 2023, the Ohio Supreme Court accepted the insurers’ appeal. The insurers filed their merit brief with the Ohio Supreme Court on July 17, 2023. The
Company filed its merit brief on September 5, 2023. The insurers filed their reply brief on October 13, 2023. Oral argument is scheduled for October 24, 2023.
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.
18
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 (collectively, the NJ DEP) filed a lawsuit against the Company in the Superior Court of New Jersey Law Division in Camden County, New Jersey. The NJ DEP seeks 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 16, 2024.
NOTE 11 - iSHAREHOLDERS' EQUITY
Dividends
i
The
following table summarizes the dividends declared and paid on common stock:
2023
2022
Cash
Dividend Per Share
Total Dividends (in millions)
Cash Dividend Per Share
Total Dividends (in millions)
First Quarter
$
i0.605
$
i156.5
$
i0.60
$
i150.9
Second
Quarter
i0.605
i156.3
i0.60
i156.2
Third
Quarter
i0.605
i155.6
i0.60
i155.8
Total
$
i1.815
$
i468.4
$
i1.80
$
i462.9
/
Treasury
Stock
The Company acquires its common stock for general corporate purposes through its publicly announced share repurchase program. As of September 30, 2023, the Company had remaining authorization from its Board of Directors to purchase i41.4 million shares
of its common stock. iThe table below summarizes share repurchases during the three and nine months ended September 30, 2023 and 2022:
In
February 2022, the Company received proceeds of $i22.0 million in conjunction with the issuance of treasury shares to fund Company contributions to the domestic defined contribution pension plan.
Other Activity
During the nine months ended September 30, 2023, i705,945
stock options were exercised at a weighted average price per share of $i96.23. In addition, i301,843
restricted stock units vested during the same period.
19
NOTE 12 - iACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
i
The
components of accumulated other comprehensive income (loss) (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
The Company has U.S. Dollar to Euro cross currency swap contracts with various counterparties to hedge the Company's net investment in its European operations. iThe
outstanding contracts as of September 30, 2023 are summarized in the table below.
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.
i
The following table summarizes amounts recognized in the Consolidated Balance Sheets for cross currency swap contracts. See Note 14 for
additional information on the fair value of these contracts.
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 and nine months ended September 30, 2023 and 2022.
The Company enters into foreign currency option and forward contracts with maturity dates less than twelve months primarily to hedge against value changes in foreign currency. There were iino/
material foreign currency option and forward contracts outstanding at September 30, 2023 and December 31, 2022. The total notional value of foreign currency forward contracts outstanding as of September 30, 2022 was $i194.5 million. At September 30,
2022, the Company recorded a $i3.1 million liability in Other accruals to recognize the fair value of these outstanding foreign currency contracts. The related gains and losses are recorded in Other (income) expense - net. See Note 16.
NOTE 14 - iFAIR
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 related fair value measurements and assets held for sale prior to divestiture described in Note 3 and the reporting unit impairment
analysis described in Note 6, there were no assets and liabilities measured at fair value on a nonrecurring basis. iThe following table presents the Company’s financial assets that are measured at fair value on a recurring basis, categorized using the fair value hierarchy.
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 $i74.3
million and $i67.2 million at September 30, 2023 and December 31, 2022, respectively.
The qualified replacement plan assets consisted of investment funds maintained for future contributions to the Company’s domestic defined contribution pension plan. During the first quarter of 2023, the remaining balance was fully utilized to fund the
Company’s domestic defined contribution pension plan. The cost basis of the investment funds was $i29.8 million at December 31, 2022 and the fair value was based on quoted prices multiplied by the number of shares.
The net investment hedge asset represents the fair value of outstanding cross currency swap contracts (see Note 13). The fair value is based on a valuation model that uses observable inputs, including
interest rate curves and foreign currency rates.
21
i
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.
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 i30 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 19 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 i80%
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 i10% in the EMEAI region (Europe, Middle East, Africa and India), with the remaining global regions accounting for the residual balance. No country outside of the United States is individually significant.
The
Company has made payments or given credits for various 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.
22
i
The Company’s Accounts receivable and current and long-term contract assets and liabilities are summarized in the following table.
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 contractual performance obligation and the associated payment.
Provisions for estimated returns are established and the expected costs continue to be recognized as contra-revenue 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 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 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.
i
The following table summarizes the movement
in the Company's allowance for doubtful accounts:
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. During the third quarter of 2023, provisions for environmental matters - net increased primarily due to new information which impacted the estimate of required remediation at certain Major Sites and other Company locations. See Note 9 for further details on the Company’s environmental-related activities.
The (Gains) losses on sale or disposition of
assets represents net realized (gains) 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.
There were no items within the Other caption that were individually significant.
Other (income) expense - net
i
Included in Other (income) expense - net were the following:
Investment
(gains) losses primarily relate to the change in market value of the investments held in the deferred compensation plan and qualified replacement plan. See Note 14 for additional information on the fair value of these investments.
Foreign currency transaction related losses include the impact from foreign currency transactions and net realized losses (gains) from foreign currency option and forward contracts. See Note 13 for additional information regarding these foreign currency contracts.
Miscellaneous pension (credit) expense consists of the non-service components of net periodic benefit cost (credit). See Note 8.
Other income and Other expense includes 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.
24
NOTE 17 - iINCOME TAXES
The
effective tax rate was i24.5% and i22.9% for the third quarter and first nine months of 2023, respectively, compared to i21.9%
and i21.4% for the third quarter and first nine months of 2022, respectively. The increase in the effective tax rate for the third quarter was primarily due to a $i14.7 million discrete tax expense related to the divestiture
of the China architectural business and an unfavorable change in the jurisdictional mix of earnings. For the first nine months, the increase in the effective tax rate was primarily related to an unfavorable change in the jurisdictional mix of earnings. The other significant components of the Company’s effective tax rate were consistent in both comparable periods.
At December 31, 2022, the Company had $i242.4
million in unrecognized tax benefits, the recognition of which would have an effect of $i230.3 million on the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2022 was $i92.7
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, 2022, the Company had accrued $i36.6 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, 2022 during the nine months ended September 30, 2023.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company finalized the IRS audit for the 2013 through 2016 income tax returns and is adequately reserved for the assessment, which is expected to be paid in the fourth quarter. The IRS is currently
auditing the Company’s 2017, 2018 and 2019 income tax returns. As of September 30, 2023, the federal statute of limitations had not expired for the 2013 through 2022 tax years.
At September 30, 2023, the Company is subject to non-U.S. income tax examinations for the tax years of 2014 through 2022. In addition, the Company is subject to state and local income tax examinations for the tax years 1998 through 2022.
NOTE 18 -
iNET INCOME PER SHARE
i
Basic and diluted net income per share are calculated using the treasury stock method.
Stock
options and other contingently issuable shares (1)
i3.3
i3.4
i2.9
i4.0
Average
shares outstanding assuming dilution
i258.4
i261.1
i258.8
i262.2
Diluted
net income per share
$
i2.95
$
i2.62
$
i7.85
$
i6.23
(1)There
were i1.1 million and i2.0 million of stock options and
other contingently issuable shares excluded due to their anti-dilutive effect for the three and nine monthsended September 30, 2023, respectively. There were i1.9 million and i1.1
million of stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three and nine months ended September 30, 2022, respectively.
/
25
NOTE 19 - iREPORTABLE
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. As mentioned in Note 1, the Company realigned the Latin America architectural paint business during the first quarter of 2023. While this changed the composition of certain reportable segments, the Company determined it continues to have ithree
reportable segments: Paint Stores Group (formerly known as The Americas Group), Consumer Brands Group and Performance Coatings Group (individually, a Reportable Segment and collectively, the Reportable Segments). Refer to Note 23 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for further details on the Company's Reportable Segments. Certain information within the Form 10-K Reportable Segment Information Note impacted by the realignment has been revised herein.
In
the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were primarily accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs for paint products. Non-paint domestic and all international intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. All intersegment transfers are eliminated within the Administrative segment.
Net external sales of all consolidated foreign subsidiaries were $i1.105 billion
and $i1.064 billion for the three months ended September 30, 2023 and 2022, respectively. Net external sales of all consolidated foreign subsidiaries were $i3.342
billion and $i3.262 billion for the nine months ended September 30, 2023 and 2022, respectively. Long-lived assets of these subsidiaries totaled $i3.217
billion and $i2.839 billion at September 30, 2023 and 2022, 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 2023 and 2022.
For
further details on the Company's Reportable Segments, see Note 23 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
27
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except as noted and per share data)
BACKGROUND
The
Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the Company) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region and throughout Europe, Asia and Australia.
The Company is structured into three reportable segments - Paint Stores Group, Consumer Brands Group and Performance Coatings Group (collectively, the Reportable Segments) - and an Administrative segment in the same way it is internally organized for assessing performance
and making decisions regarding the allocation of resources. See Note 19 of Item 1 for additional information on the Company's Reportable Segments.
Effective January 1, 2023, the Company changed its organizational structure to manage and report the Latin America architectural paint business within the Consumer Brands Group to more closely align demand and service model trends with its current business strategy. The Latin America business was formerly part of The Americas Group, which has become the Paint Stores Group concurrent with this change. The Company will report segment results for the newly realigned Paint Stores Group and
Consumer Brands Group, for both current and prior periods presented herein.
SUMMARY
•Consolidated net sales increased 1.1% in the quarter to $6.117 billion and 5.2% in the first nine months of 2023 to $17.800 billion
◦Net sales from stores in U.S. and Canada open more than twelve calendar months increased 3.0% in the quarter and 8.3% in the first nine months of 2023
•Diluted net income per share increased 12.6% to $2.95 per share in the quarter compared to $2.62 per share in the third quarter 2022 and 26.0% to $7.85 per share in the first nine months of 2023 compared to $6.23 in the first nine months of 2022
•Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) in the quarter increased 12.6% to $1.266 billion in the quarter, or 20.7% of net sales
•Generated net operating cash of $2.603 billion, or 14.6% of net sales, during the first nine months of 2023
The Company delivered strong results in the third quarter despite a challenging year-over-year comparison, due to low-single digit percentage impacts from selling price increases, modest net benefit from acquisitions and divestitures and favorable currency translation rate changes. This growth was mostly offset by a low-single digit volume decrease primarily driven by the Consumer Brands and Performance Coatings Groups. The divestiture of the China architectural business, which was completed on August 1, 2023,
also reduced sales volume as compared to the prior year. In the Performance Coatings Group, net sales benefited from pricing actions and contributions from acquisitions, but was more than offset by volume declines. Consolidated gross profit margin in the quarter expanded both sequentially and year-over-year driven by pricing discipline and moderating raw material costs.
OUTLOOK
Our fourth quarter is often sequentially lower due to seasonal trends, and we continue to see inconsistent demand by region and end market. We will continue to prioritize investments in new stores, sales and technical personnel, innovation, digital and other growth initiatives that will allow us to capitalize on our strengths and help our customers be successful. We remain committed to our differentiated strategy, capabilities, product and service solutions, and our people. Given our strong year-to-date results,
we have confidence in our ability to continue delivering above market growth and returns.
We employ a disciplined capital deployment strategy, while maintaining a balanced approach toward driving value for our customers and returns to our shareholders. We continue to pursue business acquisitions, transactions and investments that fit our long-term growth strategy. We will return value to our shareholders through the payment of dividends and the reinvestment of excess cash for share repurchases of Company stock. We have a strong liquidity position, with $503.4 million in cash and $3.342 billion of unused capacity under our credit facilities at September 30, 2023. We are, and expect to remain, in compliance with bank covenants.
28
RESULTS
OF OPERATIONS
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The results of operations for the three and nine months ended September 30, 2023 are not indicative of the results to be expected for the full year as our 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.
The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and nine months ended
September 30, 2023 and 2022.
Consolidated net sales increased by 1.1% in the third quarter of 2023 primarily driven by selling price increases in all segments, a modest net benefit from the impact of acquisitions and divestitures and favorable currency translation rate changes. This growth was mostly offset by a sales volume decrease primarily driven by the Consumer Brands and Performance Coatings Groups. Net sales of all consolidated foreign subsidiaries increased to $1.105 billion in the third quarter compared to $1.064 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries was due to growth in the Latin America and Europe regions driven primarily
from selling price increases, as well as contributions from acquisitions, partially offset by lower net sales in the Asia region from lower sales volumes and the divestiture of the China architectural business. Net sales of all operations other than consolidated foreign subsidiaries increased to $5.012 billion in the third quarter compared to $4.983 billion in the same period last year.
Net sales in the Paint Stores Group increased by 3.6% in the third quarter primarily due to selling price increases, which impacted net sales by a low-single digit percentage. Sales volume was approximately flat year-over-year driven by higher pro architectural sales volume, excluding new residential volume which decreased a high-single digit percentage. Net sales from stores open for more than twelve calendar months increased 3.0% in the third quarter
compared to last year’s comparable period. Net sales of non-paint products increased 15.3% compared to last year's third quarter. 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 in the Consumer Brands Group decreased by 4.0% in the third quarter primarily due to a mid-single digit sales volume decrease and a 3.0% decrease from divestitures, primarily related to the China architectural business. These decreases were partially offset by selling price increases, which impacted net sales by a mid-single digit percentage.
Net sales in the Performance Coatings Group decreased by 1.0% in the third quarter primarily due to a high-single digit sales volume decrease, partially offset by a 3.1% increase from the impact of acquisitions, selling price increases, which also
impacted net sales by a low-single digit percentage and favorable currency translation rate changes.
Consolidated net sales increased by 5.2% in the first nine months of 2023 primarily due to selling price increases, volume growth due to higher architectural sales volume in the Paint Stores Group and a 1.1% net increase from the impact of acquisitions and divestitures, partially offset by a sales volume decrease in the Consumer Brands and Performance Coatings Groups. Net sales of all consolidated foreign subsidiaries increased to $3.342 billion in the first nine months compared to $3.262 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries was due to growth in the Latin America and Europe regions, partially offset
by lower net sales in the Asia region from lower sales volumes and the divestiture of the China architectural business. Net sales of all operations other than consolidated foreign subsidiaries increased 5.9% to $14.458 billion in the first nine months compared to $13.656 billion in the same period last year.
Net sales in the Paint Stores Group increased by 8.9% in the first nine months of 2023 primarily due to mid-single digit sales volume growth, as well as selling price increases, which impacted net sales by a mid-single digit percentage. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 8.3% in the first nine months compared to last year’s comparable period. Net sales of non-paint products increased 19.9% compared to last year's first nine months. 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 in the Consumer Brands Group increased 1.2% in the first nine months primarily due to selling price increases, which impacted net sales by a mid-single digit percentage, partially offset by a low-single digit sales volume decrease and a 1.3% decrease from the impact of divestitures.
Net sales in the Performance Coatings Group increased by 0.8% in the first nine months primarily due to a 4.3% increase from the impact of acquisitions and selling price increases, which impacted net sales by a mid-single digit percentage, partially offset by a high-single digit sales volume decrease.
Income Before Income Taxes
The following table presents the components of Income before
income taxes as a percentage of Net sales:
Consolidated cost of goods sold decreased $257.5 million, or 7.4%, in the third quarter of 2023 compared to the same period in 2022 due primarily to lower sales volumes in the Consumer Brands and Performance Coatings Groups and moderating raw material costs, partially offset by the impacts of increases in wages and other employee-related costs. In addition, lower fixed cost absorption in the Consumer Brands Group due to lower production volumes also increased Cost of goods sold. Currency translation rate changes increased Cost of goods sold by an insignificant amount in the third quarter of 2023.
Consolidated gross profit increased $326.8 million in the third quarter of 2023 compared to the same period in 2022. Consolidated gross profit as a percent of consolidated net sales increased in the third
quarter to 47.7% compared to 42.8% during the same period in 2022. Consolidated gross profit dollars increased primarily due to selling price increases in all Reportable Segments, moderating raw material costs and favorable currency translation rate changes, partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups.
The Paint Stores Group’s gross profit in the third quarter was higher than the same period last year by $238.2 million due primarily to selling price increases and moderating raw material costs. The Paint Stores Group’s gross profit as a percent of net sales increased in the third quarter compared to the same period in 2022 for these same reasons. The Consumer Brands Group’s gross profit increased by $15.4 million in the third quarter compared to the same period last year due primarily to selling price increases and moderating raw material costs, partially offset by lower sales
volume and increases in wages and other employee-related costs. In addition, lower fixed cost absorption in the Consumer Brands Group due to lower production volumes also decreased gross profit. The Consumer Brands Group’s gross profit as a percent of net sales increased in the third quarter compared to the same period in 2022 for these same reasons. The Performance Coatings Group’s gross profit increased $80.9 million in the third quarter compared to the same period last year due primarily to selling price increases and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs. The Performance Coatings Group’s gross profit as a percent of net sales increased in the third quarter compared to the same period last year for these same reasons.
Consolidated selling, general and administrative expenses (SG&A) increased $146.6 million in the third quarter versus
the same period last year due primarily to increased employee-related costs, expenses to support higher sales levels and net new store openings, incremental SG&A from the acquisition of ICA and unfavorable currency translation rate changes, partially offset by lower SG&A from divestitures. As a percent of net sales, consolidated SG&A increased 210 basis points in the third quarter compared to the same period last year for these same reasons.
The Paint Stores Group’s SG&A increased $53.4 million in the third quarter compared to the same period last year due primarily to higher employee-related costs and investments in long-term growth initiatives, including increased spending from new store openings and costs to support higher sales levels. The Consumer Brands Group’s SG&A increased $35.4 million in the third quarter compared to the same period last year due to higher employee-related costs and increased
expenses to support manufacturing expansion, partially offset by lower SG&A from divestitures. The Performance Coatings Group’s SG&A increased $42.3 million in the third quarter compared to the same period last year due primarily to higher employee-related costs and incremental costs from the acquisition of ICA. The Administrative segment’s SG&A increased $15.5 million in the third quarter compared to the same period last year due primarily to higher employee-related costs and increased expenses related to technology and systems.
Other general expense (income) - net changed from income of $14.4 million in the third quarter of 2022 to expense of $61.9 million in the third quarter of 2023 primarily due to losses from the sale or disposition of assets in the third quarter of 2023 as compared to gains in the prior year as well as an increase in provisions for environmental matters. See Note 16 of Item 1 for additional
information.
Interest expense increased $0.7 million in the third quarter compared to the same period last year due primarily to higher interest rates, partially offset by a decrease in outstanding debt. See Note 7 of Item 1 for additional information on the Company’s outstanding debt.
In the third quarter of 2023, Other (income) expense - net improved $26.1 million compared to the same period in 2022 primarily due to a decrease in foreign currency translation losses and a miscellaneous pension credit. See Note 16 of Item 1 for additional information.
Consolidated cost of goods sold decreased $236.8 million, or 2.4%, in the first nine months of 2023 compared to the same period in 2022 due primarily to lower sales volumes in the Consumer Brands and Performance Coatings Groups and moderating raw material costs, partially offset by higher sales volume in the Paint Stores Group and the impacts of increases in wages and other employee-related costs. Currency translation rate changes decreased Cost of goods sold by an insignificant amount in the first nine months of 2023.
Consolidated gross profit increased $1.118 billion in the first nine months of 2023 compared to the same period in 2022. Consolidated gross profit as a percent of consolidated net sales increased in the first nine months to 46.1% compared to 41.9% during the same period in 2022. Consolidated gross profit dollars increased primarily due to selling price increases
in each Reportable Segment, increased sales volume in the Paint Stores Group and moderating raw material costs, partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups and unfavorable currency translation rate changes.
The Paint Stores Group’s gross profit in the first nine months was higher than the same period last year by $738.5 million due primarily to selling price increases, higher sales volume and moderating raw material costs. The Paint Stores Group’s gross profit as a percent of net sales increased in the first nine months compared to the same period in 2022 for these same reasons. The Consumer Brands Group’s gross profit increased by $87.4 million in the first nine months compared to the same period last year due primarily due to selling price increases and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related
costs. The Consumer Brands Group’s gross profit as a percent of net sales increased in the first nine months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $315.3 million in the first nine months compared to the same period last year due primarily to higher selling prices and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs. The Performance Coatings Group’s gross profit as a percent of net sales increased in the first nine months compared to the same period last year for these same reasons.
Consolidated SG&A increased $516.5 million in the first nine months versus the same period last year due primarily to increased employee-related costs, expenses to support higher sales levels and net new store openings, partially offset by favorable currency translation rate changes. As
a percent of net sales, consolidated SG&A increased 160 basis points in the first nine months compared to the same period last year for these same reasons.
The Paint Stores Group’s SG&A increased $302.5 million in the first nine months compared to the same period last year due primarily to higher employee-related costs, increased spending from new store openings, higher costs to serve customers, increased investments in technologies and costs to support higher sales levels. The Consumer Brands Group’s SG&A increased $46.1 million in the first nine months compared to the same period last year due to higher employee-related costs and restructuring charges, partially offset by other effective cost control measures. The Performance Coatings Group’s SG&A increased $122.8 million in the first nine months compared to the same period last year due primarily to higher employee-related costs, costs from acquisitions
and costs to support higher sales levels. The Administrative segment’s SG&A increased $45.1 million in the first nine months compared to the same period last year due primarily to higher employee-related costs and increased expenses related to technology and systems.
Other general expense (income) - net changed from income of $7.5 million in the first nine months of 2022 to expense of $39.9 million in the first nine months of 2023 primarily due to an increase in provisions for environmental matters and lower gains from the sale or disposition of assets, partially offset by a gain on the divestiture of businesses. See Note 16 of Item 1 for additional information.
For information on impairment, see Notes 3 and 6 of Item 1 and Note 7 in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2022.
Interest expense increased $40.4 million in the first nine months of 2023 compared to the same period last year due primarily to higher interest rates, partially offset by a decrease in outstanding debt. See Note 7 of Item 1 for additional information on the Company’s outstanding debt.
In the first nine months of 2023, Other (income) expense - net improved $66.9 million compared to the same period in 2022 primarily due to higher returns on investments held in the Administrative segment, a miscellaneous pension credit and an increase in miscellaneous other income. See Note 16 of Item 1 for additional information.
The
following table presents Income before income taxes by segment and as a percentage of Net sales by segment:
The effective tax rate was 24.5% for the third quarter of 2023 compared to 21.9% for the third quarter of 2022, and 22.9% for the first nine months of 2023 compared to 21.4% for the first nine months of 2022. The increase in the effective tax rate for the third quarter was primarily due to a $14.7 million discrete tax expense related to the divestiture of the China architectural business and an unfavorable change in the jurisdictional mix of earnings. For the first nine months, the increase in the
effective tax rate was primarily related to an unfavorable change in the jurisdictional mix of earnings. The other significant components of the Company’s effective tax rate were consistent in both comparable periods. See Note 17 of Item 1 for additional information.
Net Income Per Share
Diluted net income per share in the third quarter of 2023 increased 12.6% to $2.95 per share compared to $2.62 per share in the third quarter of 2022. Diluted net income per share included a $0.19 and $0.21 per share charge for acquisition-related amortization expense for the third quarter of 2023 and 2022, respectively. In addition, diluted net income per share for the third quarter of 2023 included a $0.06 per share charge related to discrete income tax expense from the divestiture of the China architectural business.
Currency translation rate changes decreased diluted net income per share by $0.01 in the third quarter of 2023.
Diluted net income per share for the first nine months of 2023 increased 26.0% to $7.85 per share compared to $6.23 per share in the first nine months of 2022. Diluted net income per share included a $0.60 and $0.61 per share charge for acquisition-related amortization expense for the first nine months of 2023 and 2022, respectively. In addition, diluted net income per share for the first nine months of 2023 included a $0.11 per share charge related to the divestiture of the China architectural business and a $0.04 per share charge related to severance and other charges. These charges were partially offset by a $0.06 per share gain related to the divestiture of a non-core domestic aerosol business. Currency translation rate changes increased diluted net income per share by $0.01 in the first nine months of 2023.
FINANCIAL
CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company’s financial condition and liquidity remained strong at September 30, 2023. During the first nine months of 2023, the Company generated $2.603 billion in net operating cash primarily as a result of higher profit. In addition, the Company’s EBITDA increased 22.7% to $3.427 billion. See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.
Cash and cash equivalents increased $304.6 million during the first nine months of 2023. Cash flow from operations
allowed the Company to return $1.414 billion to shareholders in the form of share buybacks and cash dividends during the first nine months of 2023 and fund the acquisition of SIC Holding in October 2023. See Note 3 in Item 1 for additional information on the Company’s acquisition of SIC Holding.
At September 30, 2023, the Company had cash and cash equivalents of $503.4 million and total debt outstanding of $9.936 billion. Total debt, net of cash and cash equivalents, was $9.433 billion. The Company continues to maintain sufficient short-term borrowing
capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.
Net Working Capital
Net working capital, defined as Total current assets less Total current liabilities, decreased $445.6 million to a deficit of $424.4 million at September 30, 2023 compared to a surplus of $21.2 million at September 30, 2022. The net working capital decrease is primarily due to an increase in current liabilities, partially offset by an increase in current assets.
Current asset balances increased $81.6 million at September 30, 2023 compared
to September 30, 2022 primarily due to an increase in Cash and cash equivalents of $372.9 million and Accounts receivable, net of $43.3 million as a result of higher net sales. These increases were partially offset by a decrease in Inventories of $303.5 million driven by lower inventory levels and moderating raw material costs and a decrease of $31.1 million in Other current assets as a result of a decrease in refundable income taxes, miscellaneous other current assets and prepaid expenses, partially offset by an increase in the net investment hedge asset.
Current liability balances increased $527.2 million at September 30, 2023 compared to September 30, 2022 primarily due to an increase in the current portion of long-term debt of $1.098 billion, Accrued taxes of $174.5 million
and Compensation and taxes withheld of $117.7 million. These increases were partially offset by a decrease in short-term borrowings of $606.6 million and a decrease in Accounts payable of $383.6 million, primarily due to the timing of payments. At September 30, 2023, the Company’s current ratio was 0.94 compared to 0.99 and 1.00 at December 31, 2022 and September 30, 2022, respectively.
Property, Plant and Equipment
Net property, plant and equipment increased $373.6 million in the first nine months of 2023 and increased $539.4 million in the twelve months since September 30, 2022. The increase in the
first nine months was primarily due to capital expenditures of $661.2 million, partially offset by depreciation expense of $218.0 million, the sale or disposition of fixed assets of $62.5 million and currency translation and other adjustments of $7.1 million. Since September 30, 2022, the increase was primarily due to capital expenditures of $895.0 million and incremental assets recognized through acquisitions of $46.8 million, partially offset by depreciation expense of $287.2 million, the sale or disposition of fixed assets of $64.5 million and currency translation and other adjustments of $50.7 million, which primarily includes government incentives associated with the construction of our new headquarters and research and development (R&D) center. The Company closed a transaction to sell its current headquarters and R&D center
during the second quarter of 2023. In connection with the sale, proceeds of $47.2 million were received and an immaterial gain was recognized.
Capital expenditures primarily represented expenditures in the Paint Stores Group associated with the opening of new paint stores, renovation and improvements in existing stores, and expenditures associated with manufacturing capacity expansion, operational efficiencies and maintenance projects in the Consumer Brands and Performance Coatings Groups. The Administrative segment incurred capital expenditures primarily related to construction activities associated with expenditures related to the construction of our new headquarters and R&D center. Construction on the new headquarters and R&D center is expected to complete in 2024 at the earliest.
In 2023, the
Company expects to spend more than 2022 for capital expenditures, which it will fund primarily through the generation of operating cash. 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. Additionally, the Company will
continue to construct its new headquarters and R&D center. Refer to “Real Estate Financing” section below for further information on the financing transaction for the new headquarters.
Real
Estate Financing
In December 2022, the Company closed a transaction to sell and subsequently lease back its partially-constructed new headquarters. This transaction did not meet the criteria for recognition as an asset sale under U.S. generally accepted accounting principles (US GAAP) and as such, was accounted for as a real estate financing transaction. During the nine months ended 2023, the Company received $226.1 million pursuant to the transaction. See Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning real estate financing.
Goodwill
and Intangible Assets
Goodwill and intangible assets decreased $348.9 million from December 31, 2022 and decreased $40.2 million from September 30, 2022 as compared to September 30, 2023. The net decrease during the first nine months of 2023 was primarily due to amortization of $250.2 million, dispositions of $93.1 million (primarily related to the divestiture of the China architectural business), foreign currency translation and other adjustments of $48.8 million and impairment of trademarks of $6.9 million, partially offset by purchase accounting allocations of $50.1 million. The net decrease over the twelve month period from September 30, 2022 was primarily due to amortization of $329.5 million, dispositions of $91.8 million
(primarily related to the divestiture of the China architectural business) and impairment of trademarks of $22.4 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $303.9 million, foreign currency translation and other adjustments of $90.9 million and the capitalization of software of $8.7 million.
See Note 6 in Item 1 for additional information on the Company’s goodwill and intangible assets, including the quantitative impairment analysis performed as a result of the Latin America architectural paint business moving to the Consumer Brands Group reportable segment and Note 3 for information on the impairment test performed as a result of the China architectural business classification change to held for sale as of the second quarter of 2023. See Note 7 in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company's goodwill and intangible assets.
Other Assets
Other assets increased $86.8 million from December 31, 2022 and increased $156.2 million from September 30, 2022. The increase in the first nine months was primarily due to an increase in other assets related to contracts with customers, deposits, miscellaneous other assets and non-traded investments. The increase from September 30, 2022 was primarily
due to an increase in non-traded investments, other assets related to contracts with customers and deposits, partially offset by a decrease in miscellaneous other assets. See Note 1 in Item 1 for additional information on the Company’s non-traded investments.
The
Company’s long-term debt primarily consists of senior notes as disclosed in Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
On February 28, 2023, the Company amended its credit agreement dated August 2, 2021, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to December
20, 2027.
On May 1, 2023, the Company amended its credit agreement dated May 9, 2016, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to June 20, 2028.
The Company had unused capacity under its various credit agreements of $3.342 billion at September 30, 2023. See Note 7 in Item 1 of this report
for additional information.
Defined Benefit Pension and Other Postretirement Benefit Plans
Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2022 and September 30, 2022 other than the Company’s long-term liability for other postretirement benefit plans which decreased $117.2 million from September 30, 2023 due primarily to a plan amendment and changes in actuarial assumptions. See Note 9 to the Consolidated Financial Statements
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company’s benefit plan obligations.
Deferred Income Taxes
Deferred income taxes decreased $33.2 million from December 31, 2022 primarily due to amortization of acquisition-related intangible assets, the capitalization of research and development costs for income tax purposes and the divestiture of the China architectural business, partially offset by the incremental deferred tax liabilities recognized in connection with the acquisition of ICA. Compared to September 30,
2022, deferred income taxes decreased $43.4 million primarily due to these same reasons. See Note 3 in Item 1 of this report for more information regarding the Company’s recent acquisitions.
Other Long-Term Liabilities
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, regulations and requirements 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 the first nine months of 2023. 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 Notes 9 and 16 in Item 1 for further information on environmental-related long-term liabilities.
Contractual Obligations, Commercial Commitments and Warranties
There have been no significant changes to the Company’s contractual obligations and commercial commitments in the first nine months of 2023 as summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. See Note 3 in Item 1 for information on contractual obligations and commercial commitments related to acquisitions and divestitures.
Litigation
See Note 10 in Item 1 for information concerning litigation.
Shareholders’
equity increased $677.9 million during the first nine months of 2023 as a result of net income of $2.033 billion, an increase in Other capital of $140.0 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $971.0 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $468.4 million.
Shareholders’ equity increased $1.182 billion since September 30, 2022 as a result of net income of $2.419 billion and an increase in Other capital of $184.3 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $1.104 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $624.0 million.
During
the first nine months of 2023, the Company purchased 3.8 million shares of its common stock for treasury purposes through open market purchases. The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire additional shares in the future. The Company had remaining authorization at September 30, 2023 to purchase 41.4 million shares of its common stock.
In February 2023, the Company's Board of Directors increased the quarterly cash dividend from $0.60 per share to $0.605
per share. This quarterly dividend was approved in all subsequent quarters and will 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 for the nine months ended September 30, 2023 was a source of $2.603 billion compared to a source of $1.279 billion for the same period in 2022. The improvement in net operating cash was primarily due to higher net income and improved working capital management.
Net investing cash decreased $541.5 million in the first nine months of 2023 to a usage of $509.0 million compared to a usage of $1.051 billion for the same period in 2022 primarily due to lower cash used for acquisitions, proceeds from the divestiture of businesses and an increase in proceeds from the sale of
assets, partially offset by increased cash used for capital expenditures.
Net financing cash increased $1.522 billion in the first nine months of 2023 to a usage of $1.785 billion compared to a usage of $263.6 million for the same period in 2022 primarily due to proceeds from long-term debt in the first nine months of 2022 which did not occur in the same current year period, a net decrease in short-term borrowings and an increase in treasury stock purchases. These usages of cash were partially offset by lower payments of long-term debt and real estate financing proceeds received in the first nine months of 2023 which did not occur in the same prior year period.
In the twelve month period from October 1, 2022 through September 30, 2023, the
Company generated net operating cash of $3.244 billion, used $1.066 billion in investing activities and used $1.804 billion in financing activities.
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. The Company believes it may be exposed to continuing market risk from foreign currency exchange rate and commodity price fluctuations. However, the
Company does not expect that foreign currency exchange rate and commodity price fluctuations or hedging contract losses will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
See Note 13 in Item 1 for disclosures related to the $1.113 billion of outstanding U.S. Dollar to Euro cross currency swap contracts designed to hedge the Company’s net investment in its European subsidiaries.
Financial
Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states that 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 dated August 30, 2022. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated “Earnings Before Interest, Taxes, Depreciation, and Amortization” (EBITDA), as defined in
the credit agreement, for the 12-month period ended on the same date. Refer to the “Non-GAAP Financial Measures” section below for a reconciliation of EBITDA to Net income. At September 30, 2023, 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 the Company’s Annual Report on Form 10-K for the year ended December 31,
2022 for more information concerning the Company’s debt and related covenant.
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, interest expense, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure defined as EBITDA that excludes certain adjustments that do not recur during the normal course of business, such as items related to the previously announced Restructuring Plan. 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 Condensed Consolidated Cash Flows in Item 1.
The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the periods indicated below:
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.
A comprehensive discussion of the Company’s critical accounting policies, management estimates and significant accounting policies followed in the
preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2022.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain
statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of federal securities laws. These forward-looking statements are based upon management’s current expectations, predictions, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “believe,”“expect,”“may,”“will,”“should,”“project,”“could,”“plan,”“goal,”“target,”“potential,”“seek,”“intend,”“aspire,”“strive” or “anticipate” or the negative thereof or comparable terminology.
Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements and from our historical results, performance and experience. These risks, uncertainties and other factors include such things as:
•general business conditions, strengths of retail and manufacturing economies and growth in the coatings industry;
•changes in general domestic and international economic conditions, including due to higher inflation rates, interest rates,
tax rates and unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations;
•changes in raw material and energy supplies and pricing;
•disruptions in the supply chain, including those caused by industry capacity constraints, labor shortages, raw material availability, and transportation and logistics delays and constraints;
•adverse weather conditions or natural disasters, including those that may be related to climate change or otherwise, and public health crises, such as the COVID-19 pandemic;
•losses of or changes in our relationships with customers and suppliers;
•competitive
factors, including pricing pressures and product innovation and quality;
•our ability to successfully integrate past and future acquisitions into our existing operations, as well as the performance of the businesses acquired;
•our ability to achieve expected benefits of restructuring and productivity initiatives;
•weakening of global credit markets and our ability to generate cash to service our indebtedness;
•risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, policy changes affecting international trade, political instability, inflation rates, recessions, sanctions, foreign
currency exchange rates and controls, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, armed conflict (including the ongoing conflict between Russia and Ukraine), war and other economic and political factors;
•the achievement of growth in foreign markets, such as Asia, Europe and South America;
•cybersecurity incidents and other disruptions to our information technology systems and operations;
•our ability to protect or enforce our material trademarks and other intellectual property rights;
•our ability to attract, retain, develop and progress a qualified global workforce;
•damage
to our business, reputation, image or brands due to negative publicity;
•increasingly stringent domestic and foreign governmental regulations, including those affecting health, safety and the environment;
•inherent uncertainties involved in assessing our potential liability for environmental-related activities;
•other changes in governmental policies, laws and regulations, including changes in tariff policies, as well as changes in accounting policies and standards and taxation requirements (such as new or revised tax laws or interpretations); and
•the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation,
and the effect of any legislation and administrative regulations relating thereto.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risk associated with interest rates, 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. The Company enters into option and forward currency exchange contracts and commodity swaps to hedge against value changes in foreign currency and commodities. The Company believes it may experience continuing
losses from foreign currency translation and commodity price fluctuations. However, the Company does not expect currency translation, transaction, commodity price fluctuations or hedging contract losses to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There were no material changes in the Company’s exposure to market risk since the disclosure included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2022.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and accumulated and communicated to our management including our Chairman and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In January 2023, the Company implemented two cloud-based systems consisting of a general ledger and a consolidation tool which replace the Company’s existing enterprise performance management system. The new systems resulted in changes to the
Company’s financial reporting process and consequently, resulted in changes to the design of certain internal controls over activities related to the recording and reporting of information in our consolidated financial statements. Other than these system implementation changes, there have been no other changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the periods covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
The Securities and Exchange Commission regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. Pursuant to these regulations, the Company uses a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required.
For information regarding certain environmental-related matters and other legal proceedings, see the information included under the captions titled “Other Long-Term Liabilities” and “Litigation”
of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 9 and 10 of the “Notes to Condensed Consolidated Financial Statements.” The information contained in Note 10 to the Condensed Consolidated Financial Statements is incorporated herein by reference.
Item 1A. Risk Factors.
We face a number of risks that could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition. A discussion of our risk factors can be found in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2022. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. During the nine months ended September 30, 2023, there were no material changes to our previously disclosed risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
A summary of the Company’s third quarter activity is as follows:
Period
Total Number
of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Number of Shares That May Yet Be Purchased Under the Plan
July 1 - July 31
Share repurchase program (1)
25,000
$
281.19
25,000
42,900,000
Employee
transactions (2)
3,271
$
267.20
N/A
August
1 - August 31
Share repurchase program (1)
925,000
$
273.96
925,000
41,975,000
Employee transactions (2)
1,114
$
272.48
N/A
September
1 - September 30
Share repurchase program (1)
550,000
$
272.26
550,000
41,425,000
Employee transactions (2)
358
$
268.31
N/A
Quarter
Total
Share repurchase program (1)
1,500,000
$
273.45
1,500,000
41,425,000
Employee transactions
(2)
4,743
$
268.52
N/A
(1)Shares were purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified
for the program.
(2)Shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had restricted stock units vest.
Item 5. Other Information.
Trading Arrangements
During the quarter ended September 30, 2023, none of the Company’s directors or “officers,” as defined
in Rule 16a-1(f) of the Exchange Act, iiadopted/, modified, or iiterminated/
a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
The cover page from this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, formatted in Inline XBRL and contained in
Exhibit 101.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
