# MASCO CORP /DE/ (MAS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MASCO CORP /DE/'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/62996/000006299622000011/mas-20211231.htm
Accession: 0000062996-22-000011
Filing date: 2022-02-08
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MAS/
All MD&A years: /company/MAS/mda/
Next year: /company/MAS/mda/fy2022/ (FY 2022)

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (and notes related thereto) and other more detailed financial information appearing elsewhere in this Report. Further, you should read the following discussion and analysis of our financial condition and results of operations together with the “Risk Factors” included elsewhere in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also “Cautionary Statement Concerning Forward-Looking Statements” at the beginning of this report.

Overview

We design, manufacture and distribute branded home improvement and building products. These products are sold primarily for repair and remodeling activity and, to a lesser extent, new home construction. We sell our products through home center retailers, online retailers, wholesalers and distributors, mass merchandisers, hardware stores, direct to the consumer, professional contractors and homebuilders.

We continue to execute our strategy of leveraging our strong brand portfolio, industry-leading positions and the Masco Operating System, our methodology to drive growth and productivity, to create long-term shareholder value. We remain confident in the fundamentals of our business and long-term strategy. We believe that our strong financial position and cash flow generation, together with our investments in our industry-leading branded building products, our continued focus on innovation and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders.

We continue to leverage the Masco Operating System and continuous improvement initiatives across our enterprise to identify additional opportunities to improve our business operations. From time to time, we may take actions to drive efficiency in the business focused on the strategic rationalization of our businesses, including business consolidations, plant closures, headcount reductions and other cost savings initiatives.

Recent Trends

COVID-19 Impact and General Business Conditions

The COVID-19 pandemic has significantly disrupted global economic activity, including our workforce and operations, as well as the operations of our customers and suppliers. There remains substantial uncertainty regarding the global economic impact of, and the speed and shape of the recovery from, the ongoing COVID-19 pandemic and the resulting impact on our future operations and financial results. We are experiencing, and may continue to experience, higher commodity and transportation costs, and supply chain disruptions, particularly disruptions related to our ability to source products, components and raw materials. We are also experiencing and may continue to experience labor cost inflation and constraints in hiring qualified employees. We aim to offset the potential unfavorable impact of these items with productivity improvement and other initiatives.

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Consolidated Results of Operations

We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). However, we believe that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. These include the disclosure of net sales, operating profit and operating profit margins adjusted for certain items. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.

We discuss our consolidated results as well as our Business Segment and Geographic Area results of operations for the year ended December 31, 2021 versus December 31, 2020. A detailed discussion of our consolidated, Business Segment and Geographic Area results of operations for the years ended December 31, 2020 compared to the year ended December 31, 2019 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 9, 2021.

Sales and Operations

Net Sales

Below is a summary of our net sales, in millions, for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Favorable / (Unfavorable)"],["Net sales, as reported","$","8,375","","","$","7,188","","","$","1,187"],["Acquisitions","(231)","","","\u2014","","","(231)"],["Divestitures","\u2014","","","(43)","","","43"],["Net sales, excluding acquisitions and divestitures","8,144","","","7,145","","","999"],["Currency translation","(98)","","","\u2014","","","(98)"],["Net sales, excluding acquisitions, divestitures and the effect of currency translation","$","8,046","","","$","7,145","","","$","901"]]
[[/GREPCENT_TABLE]]

Net sales for 2021 were $8.4 billion, which increased 17 percent compared to 2020. Excluding acquisitions, divestitures and the effect of currency translation, net sales increased 13 percent.

Net sales for 2021 increased primarily due to:

•Higher sales volume of plumbing products which increased sales by nine percent.

•Favorable net selling prices of paints and other coating products and plumbing products increased sales by three percent.

•The acquisitions of Kraus USA Inc. ("Kraus"), Easy Sanitary Solutions B.V. ("ESS"), Work Tools International Inc. and Elder & Jenks, LLC (collectively, "Work Tools") and Steamist, Inc. ("Steamist") increased sales by three percent.

•Favorable foreign currency translation increased sales by one percent.

•Favorable sales mix of plumbing products increased sales by one percent.

These amounts were slightly offset by:

•The divestiture of our Hüppe GmbH ("Hüppe") business decreased sales one percent.

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Gross Profit and Gross Margin

Below is a summary of our gross profit, in millions, and gross margin for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Favorable / (Unfavorable)"],["Gross profit","$","2,863","","$","2,587","","$","276"],["Gross margin","34.2","%","","36.0","%","","(180) bps"]]
[[/GREPCENT_TABLE]]

The 2021 gross profit margin was negatively impacted by:

•Increased commodity, transportation and labor costs.

These amounts were partially offset by:

•Increased sales volume.

•Favorable net selling prices.

•Cost savings initiatives.

•Favorable sales mix.

Selling, General and Administrative Expenses

Below is a summary of our selling, general and administrative expenses, in millions, and selling, general and administrative expenses as a percentage of net sales for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","(Favorable) / Unfavorable"],["Selling, general and administrative expenses","$","1,413","","$","1,292","","$","121"],["Selling, general and administrative expenses as percentage of net sales","16.9","%","","18.0","%","","(110) bps"]]
[[/GREPCENT_TABLE]]

The improvement in selling, general, and administrative expenses as a percentage of sales in 2021 was primarily driven by:

•Cost savings initiatives.

•Leverage of fixed expenses due primarily to increased sales volume.

These amounts were partially offset by:

• Increase in other expenses (such as labor and marketing costs).

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Operating Profit

Below is a summary of our operating profit, in millions, and operating profit margins for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Favorable / (Unfavorable)"],["Operating profit, as reported","$","1,405","","$","1,295","","$","110"],["Rationalization charges","4","","11","","(7)"],["Impairment charge for goodwill","45","","\u2014","","45"],["Operating profit, excluding rationalization charges and impairment charge","$","1,454","","$","1,306","","$","148"],["Operating profit margins, as reported","16.8","%","","18.0","%","","(120) bps"],["Operating profit margins, excluding rationalization charges and impairment charge","17.4","%","","18.2","%","","(80) bps"]]
[[/GREPCENT_TABLE]]

Operating profit in 2021 was positively affected by:

•Increased sales volume.

•Favorable net selling prices.

•Cost savings initiatives.

•Favorable sales mix.

•Favorable foreign currency translation.

These positive impacts were partially offset by:

•Increased commodity costs.

•Increased other costs including transportation and marketing costs as well as increased labor costs.

•Goodwill impairment charge in our lighting business.

Interest Expense

Below is a summary of our interest expense, in millions, for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Favorable / (Unfavorable)"],["Interest expense","$","(278)","","","$","(144)","","","$","(134)"]]
[[/GREPCENT_TABLE]]

The increase in interest expense is primarily due to the $168 million loss on debt extinguishment, which was recorded as additional interest expense in connection with the early retirement of debt in the first quarter of 2021, partially offset by interest savings related to debt refinancing in the first quarter of 2021.

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Other, net

Below is a summary of our other, net, in millions, for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Favorable / (Unfavorable)"],["Other, net","$","(439)","","","$","(20)","","","$","(419)"]]
[[/GREPCENT_TABLE]]

Other, net, for 2021 included:

•$430 million of net periodic pension and post-retirement benefit expense, which includes $399 million of net settlement loss related to the termination of our qualified domestic defined-benefit pension plans.

•$18 million loss related to the divestiture of Hüppe.

•$16 million expense from the revaluation of contingent consideration related to a prior acquisition.

These amounts were partially offset by:

•$14 million gain recognized on the redemption of the preferred stock of ACProducts Holding, Inc. and $6 million of related dividend income.

•$11 million of earnings related to equity method investments.

Other, net, for 2020 included:

•$35 million of net periodic pension and post-retirement benefit expense.

•$10 million of realized foreign currency transaction losses.

These amounts were partially offset by:

•$10 million of dividend income related to preferred stock of ACProducts Holding, Inc.

•$9 million of income due from an escrow settlement.

Income Tax Expense

Below is a summary of our income tax expense, in millions, and our effective tax rate for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","(Favorable) / Unfavorable"],["Income tax expense","$","210","","$","269","","$","(59)"],["Effective tax rate","31","%","","24","%","","7","%"]]
[[/GREPCENT_TABLE]]

Our effective tax rate in 2021 was higher than our normalized tax rate of 25 percent due primarily to:

•$18 million additional income tax expense primarily from the loss on the termination of our qualified domestic defined-benefit pension plans providing no tax benefit in certain state jurisdictions and a shift in pre-tax income from the lower-taxed U.S. jurisdiction to higher-taxed foreign jurisdictions.

•$4 million additional income tax expense from a loss providing no tax benefit in certain foreign jurisdictions related to the divestiture of Hüppe.

•$16 million income tax expense from the elimination of disproportionate tax effects from accumulated other comprehensive income (loss) related to our interest rate swap following the retirement of the related debt, and the termination of our qualified domestic defined-benefit pension plans.

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Our effective tax rate in 2020 was lower than our normalized tax rate of 25 percent due primarily to:

•$5 million income tax benefit from a change in judgment regarding the realizability of certain deferred tax assets in our foreign jurisdictions.

•$4 million tax benefit from stock-based compensation payments.

•$6 million tax benefit due to an anticipated refund claim from the retroactive application of the exclusion of certain high-taxed foreign income from the U.S. tax effects on Global Intangible Low-taxed Income back to 2018.

Refer to Note S to the consolidated financial statements for additional information.

Income and Income Per Common Share from Continuing Operations (Attributable to Masco Corporation)

Below is a summary of our income and diluted income per common share from continuing operations, in millions, except per share data, for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Favorable / (Unfavorable)"],["Income from continuing operations","$","410","","","$","810","","","$","(400)"],["Diluted income per common share from continuing operations","$","1.62","","","$","3.04","","","$","(1.42)"]]
[[/GREPCENT_TABLE]]

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Business Segment and Geographic Area Results

The following table sets forth our net sales and operating profit information for our continuing operations by Business Segment and Geographic Area, dollars in millions.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","","PercentChange"],["","2021","","2020","","","2021 vs. 2020"],["Net Sales:"],["Plumbing Products","$","5,135","","","$","4,136","","","","24","%"],["Decorative Architectural Products","3,240","","","3,052","","","","6","%"],["Total","$","8,375","","","$","7,188","","","","17","%"],["North America","$","6,624","","","$","5,805","","","","14","%"],["International, principally Europe","1,751","","","1,383","","","","27","%"],["Total","$","8,375","","","$","7,188","","","","17","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","","PercentChange"],["","2021","","2020","","","2021 vs. 2020"],["Operating Profit: (A)"],["Plumbing Products","$","929","","","$","806","","","","15","%"],["Decorative Architectural Products","581","","","583","","","","\u2014","%"],["Total","$","1,510","","","$","1,389","","","","9","%"],["North America","$","1,214","","","$","1,167","","","","4","%"],["International, principally Europe","296","","","222","","","","33","%"],["Total","1,510","","","1,389","","","","9","%"],["General corporate expense, net","(105)","","","(94)","","","","12","%"],["Total operating profit","$","1,405","","","$","1,295","","","","8","%"]]
[[/GREPCENT_TABLE]]

(A)Before general corporate expense, net; refer to Note Q to the consolidated financial statements for additional information.

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Business Segment Results Discussion

Changes in operating profit in the following Business Segment and Geographic Area Results discussion exclude general corporate expense, net, and compares each respective period to the same period of the immediately preceding year.

Plumbing Products

Sales

Net sales in the Plumbing Products segment increased 24 percent in 2021 due primarily to higher sales volume, which increased sales by 15 percent. The acquisitions of Kraus, ESS and Steamist increased sales by five percent. Additionally, favorable foreign currency translation and higher net selling prices both increased sales by two percent and positive sales mix increased sales by one percent. Such increases were slightly offset by the divestiture of Hüppe, which decreased sales by one percent.

Operating Results

Operating profit in the Plumbing Products segment in 2021 was positively impacted by higher sales volume, favorable net selling prices, positive sales mix, cost savings initiatives and favorable currency translation. These positive impacts were partially offset by increased commodity costs and an increase in other expenses (such as transportation and labor costs).

Decorative Architectural Products

Sales

Net sales in the Decorative Architectural Products segment increased six percent in 2021, primarily due to favorable net selling prices of paints and other coating products and to a lesser extent higher volume of builders' hardware products. The Work Tools acquisition increased sales by one percent.

Operating Results

Operating profit in the Decorative Architectural Products segment in 2021 was positively impacted by favorable net selling prices as well as cost savings initiatives and lower fixed expenses in our lighting business. These positive impacts were partially offset by higher commodity costs and an increase in other expenses (such as transportation and marketing costs), as well as a goodwill impairment charge in our lighting business.

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Geographic Area Results Discussion

North America

Sales

North American net sales in 2021 increased 14 percent. Higher sales volume of plumbing products, and to a lesser extent, builders' hardware, in aggregate, increased sales by seven percent. The acquisitions of Kraus, Work Tools and Steamist increased sales by three percent and favorable net selling prices of paints and other coating and plumbing products increased sales by three percent.

Operating Results

Operating profit from North American operations in 2021 was positively affected by favorable net selling prices, higher sales volume, cost savings initiatives, and lower fixed expenses in our lighting business. These positive impacts were partially offset by increased commodity costs and an increase in other expenses (such as transportation and labor costs) as well as a goodwill impairment charge in our lighting business.

International, Principally Europe

Sales

Net sales from International operations in 2021 increased 27 percent. In local currencies (including sales in foreign currencies outside their respective functional currencies), net sales increased 21 percent. Higher sales volume and, to a lesser extent, favorable sales mix and net selling prices of plumbing products increased sales by 21 percent and the acquisition of ESS increased sales by three percent. Such increases were slightly offset by the divestiture of Hüppe that decreased sales by three percent.

Operating Results

Operating profit from International operations in 2021 was positively impacted by higher sales volume, favorable net selling prices, positive sales mix, and favorable foreign currency translation. These positive impacts were partially offset by an increase in other expenses (such as marketing, transportation and labor costs) and increased commodity costs.

Liquidity and Capital Resources

Overview of Capital Structure

Historically, we have largely funded our growth through cash provided by our operations, the issuance of notes in the financial markets, bank borrowings and the issuance of our common stock, including issuances for certain mergers and acquisitions. Maintaining high levels of liquidity and focusing on cash generation are among our financial strategies. Our capital allocation strategy includes reinvesting in our business, balancing share repurchases with potential acquisitions and maintaining a meaningful dividend.

We had cash and cash investments of approximately $926 million and $1.3 billion at December 31, 2021 and 2020, respectively. Our cash and cash investments consist of overnight interest bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations. While we attempt to diversify these investments in a prudent manner to minimize risk, it is possible that future changes in the financial markets could affect the security or availability of these investments. Of the cash and cash investments we held at December 31, 2021 and 2020, respectively, $490 million and $385 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.

Our current ratio was 1.8 to 1 at both December 31, 2021 and 2020.

Our total debt as a percent of total capitalization was 98 percent and 87 percent at December 31, 2021 and 2020, respectively. Refer to Note L to the consolidated financial statements for additional information.

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Costs of environmental responsibilities and compliance with existing environmental laws and regulations have not had, nor do we expect them to have, a material effect on our capital expenditures, financial position or results of operations.

We believe that our present cash balance and cash flows from operations, and borrowing availability under our Amended Credit Agreement, are sufficient to fund our near-term working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities. However, due to the highly uncertain nature and duration or resurgence of the COVID-19 pandemic and its impact on our customer, suppliers and employees, we are unable to fully estimate the extent of the impact it may have on our future financial condition.

Capital Expenditures

We continue to invest in our manufacturing and distribution operations of those businesses that align with our long-term growth strategy to increase our productivity, improve customer service and support product innovation. Capital expenditures for 2021 were $128 million, compared with $114 million for 2020. For 2022, capital expenditures, excluding any potential future acquisitions, are expected to be approximately $250 million. Depreciation and amortization expense for 2021 totaled $151 million, compared with $133 million for 2020. For 2022, depreciation and amortization expense, excluding any potential future acquisitions, is expected to be approximately $150 million. Amortization expense totaled $40 million in 2021, compared with $28 million in 2020.

Senior Indebtedness

On March 4, 2021, we issued $600 million of 1.500% Notes due February 15, 2028, $600 million of 2.000% Notes due February 15, 2031 and $300 million of 3.125% Notes due February 15, 2051. We received proceeds of $1,495 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On March 22, 2021, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire our $326 million 5.950% Notes due March 15, 2022, $500 million 4.450% Notes due April 1, 2025, and $500 million 4.375% Notes due April 1, 2026. In connection with these early retirements, we incurred a loss on debt extinguishment of $168 million, which was recorded as interest expense in the consolidated statements of operations.

On September 18, 2020, we issued $300 million of 2.000% Notes due October 1, 2030 (the "2030 Notes") and received proceeds of $300 million, net of discount, for the issuance of the 2030 Notes. Also on September 18, 2020, we issued an incremental $100 million on our existing 4.500% Notes due May 15, 2047 (the "2047 Notes") and received proceeds of $119 million, including a premium, for the issuance of the 2047 Notes. The incremental $100 million formed a single series with the existing $300 million of 4.500% Notes due May 15, 2047. The 2030 Notes and 2047 Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On September 29, 2020, proceeds from the debt issuances were used to repay and early retire our $400 million 3.500% Notes due April 1, 2021. In connection with this early retirement, we incurred a loss on debt extinguishment of $6 million, which was recorded as interest expense in our consolidated statements of operations.

Credit Agreement

On March 13, 2019, we entered into a credit agreement (the "Credit Agreement") with an aggregate commitment of $1.0 billion and a maturity date of March 13, 2024. On December 22, 2021, we amended the Credit Agreement with the bank group (the "Amended Credit Agreement"). The Credit Agreement was amended to (i) expand the “Agreed Currencies” for which loans thereunder may be denominated outside of the swingline facility to include British Pounds Sterling and Canadian Dollars, together with their applicable interest rate benchmark, (ii) replace the London Interbank Offering Rate (“LIBOR”) with the Euro Interbank Offered Rate (“EURIBOR”) as the interest rate benchmark for purposes of loans denominated in Euros and (iii) provide mechanics for the replacement of a benchmark for an applicable Agreed Currency upon the occurrence of certain specified events.

 Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $500 million with the current lenders or new lenders. See Note L to the consolidated financial statements for additional information.

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The Amended Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0. We were in compliance with all covenants and no borrowings were outstanding under our Amended Credit Agreement at December 31, 2021.

Corporate Development Strategy

We expect to maintain a balanced growth strategy pursuing organic growth by maximizing the full potential of our existing businesses and, as appropriate, complementing our existing business with strategic acquisitions.

In addition, we actively manage our portfolio of companies by divesting of those businesses that do not align with our long-term growth strategy. We will continue to review all of our businesses to determine which businesses, if any, may not align with our long-term growth strategy.

Acquisitions

During 2021, we acquired a 75.1 percent equity interest in ESS, a manufacturer of shower channel drains and offers a wide range of products for barrier-free showering and bathroom wall niches, for approximately €47 million ($58 million), including $52 million of cash and $6 million of debt that will be paid out over two years. We also acquired all of the share capital of Steamist, a manufacturer of residential steam bath products that are complementary to many of our plumbing products, for approximately $56 million in cash.

During 2020, we acquired substantially all of the net assets of Kraus, a designer and distributor of sinks, faucets and accessories for the kitchen and bathroom, as well as Work Tools, a leading manufacturer of high-quality precision painting tools and accessories including brushes, rollers and mini rollers for DIY and professionals. Additionally, we acquired all of the share capital of SmarTap A.Y Ltd. ("SmarTap"), a developer of a smart bathing system that monitors and controls the temperature and flow of water. We acquired these businesses for a combined $175 million of cash and $5 million of debt.

Divestitures

During 2021, we completed the divestiture of our Hüppe business, a manufacturer of shower enclosures and shower trays. In connection with the divestiture, we recognized a loss of $18 million.

During 2020, we completed the divestiture of our Masco Cabinetry LLC ("Cabinetry") business, a manufacturer of cabinetry products, for proceeds of approximately $989 million, including $853 million, net of cash disposed. In connection with the divestiture, we recognized a gain of $585 million.

Share Repurchases

We repurchased and retired 17.6 million shares of our common stock in 2021 for approximately $1,026 million. This included 0.7 million shares to offset the dilutive impact of restricted stock units granted in 2021. At December 31, 2021, we had $1,128 million remaining under the 2021 authorization. Consistent with past practice and as part of our long-term capital allocation strategy, we anticipate using approximately $600 million of cash for share repurchases (including shares which will be purchased to offset any dilution from restricted stock units granted as part of our compensation programs) in 2022. Refer to Note O to the consolidated financial statements for additional information.

During 2020, we repurchased and retired 18.8 million shares of our common stock (including 0.4 million shares to offset the dilutive impact of restricted stock units granted during the year), for approximately $727 million.

Dividend to holders of our Common Shares

In the second quarter of 2021 we increased our quarterly dividend to $0.235 per common share from $0.14 per common share in order to increase the annual dividend to $0.94 per share.

As part of our capital allocation strategy, the Board of Directors declared a quarterly dividend of $0.28 per share in the first quarter of 2022 with the intention to increase the annual dividend to $1.12 per share.

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Other Liquidity and Capital Resource Activities

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program.

All outstanding payments owed under the program are recorded within accounts payable in our consolidated balance sheets. The amounts owed to participating financial institutions under the program and included in accounts payable for our continuing operations were $43 million and $45 million at December 31, 2021 and 2020, respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our increase (decrease) in accounts payable and accrued liabilities, net, line within our consolidated statements of cash flows. The amounts settled through the program and paid to participating financial institutions were $220 million and $146 million for our continuing operations during the years ended December 31, 2021 and 2020, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit funds to, and participate in, the program. We do not believe such risk would have a material impact on our working capital or cash flows, as substantially all of our payments are made outside of the program.

We utilize derivative and hedging instruments to manage our exposure to currency fluctuations, primarily related to the European euro, British pound, the Chinese renminbi and the U.S. dollar; occasionally, we have also used derivative and hedging instruments to manage interest rate fluctuations, primarily related to debt issuances. We review our hedging program, derivative positions and overall risk management on a regular basis. We currently do not have any derivative instruments for which we have designated hedge accounting.

30

Cash Flows

Significant sources and (uses) of cash for the years ended December 31, 2021 and 2020 are summarized as follows, in millions:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Net cash from operating activities","$","930","","","$","953"],["Retirement of notes","(1,326)","","","(400)"],["Purchase of Company common stock","(1,026)","","","(727)"],["Cash dividends paid","(211)","","","(145)"],["Dividends paid to noncontrolling interest","(43)","","","(23)"],["Capital expenditures","(128)","","","(114)"],["Debt extinguishment costs","(160)","","","(5)"],["Proceeds from the exercise of stock options","5","","","26"],["Acquisition of businesses, net of cash acquired","(57)","","","(227)"],["Issuance of notes, net of issuance costs","1,481","","","415"],["Employee withholding taxes paid on stock-based compensation","(15)","","","(25)"],["Proceeds from disposition of:"],["Businesses, net of cash disposed","5","","","870"],["Property and equipment","\u2014","","","1"],["Financial investments","171","","","3"],["Payment of debt","(3)","","","(2)"],["Effect of exchange rate changes on cash and cash investments","(20)","","","31"],["Other, net","(3)","","","(2)"],["Cash (decrease) increase","$","(400)","","","$","629"]]
[[/GREPCENT_TABLE]]

Our working capital days were as follows:

[[GREPCENT_TABLE]]
[["","At December 31,"],["","2021","","2020"],["Receivable days","51","","","54"],["Inventory days","85","","","72"],["Accounts payable days","66","","","71"],["Working capital (receivables plus inventories, less accounts payable) as a percentage of net sales","16.0","%","","15.6","%"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operations of $930 million primarily benefited from higher operating profit, partially offset by changes in working capital, pension contributions related to the settlement of our qualified domestic defined-benefit pension plans and deferred income taxes.

Financing Activities

Net cash used for financing activities was $1,298 million, which included $1,326 million for the early retirement of our 5.950% Notes due March 15, 2022, 4.450% Notes due April 1, 2025, and 4.375% Notes due April 1, 2026 and $160 million of related debt extinguishment costs. Net cash used for financing activities was also impacted by $1,026 million for the repurchase and retirement of our common stock (including 0.7 million shares repurchased to offset the dilutive impact of restricted stock units granted in 2021), $211 million for the payment of cash dividends, $43 million for dividends paid to noncontrolling interest and $15 million for employee withholding taxes paid on stock-based compensation. These uses of cash were partially offset by proceeds, net of issuance costs, of $1,481 million due to the issuances of $600 million of 1.500% Notes due February 15, 2028, $600 million of 2.000% Notes due February 15, 2031 and $300 million of 3.125% Notes due February 15, 2051.

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Investing Activities

Net cash used for investing activities was $12 million, primarily driven by $128 million of capital expenditures and $56 million for the acquisition of Steamist, partially offset by the $166 million received, in cash, for the redemption of the preferred stock of ACProducts Holding Inc.

Commitments and Contingencies

Litigation

Information regarding our legal proceedings is set forth in Note U to the consolidated financial statements, which is incorporated herein by reference.

Other Commitments

We enter into contracts, which include reasonable and customary indemnifications that are standard for the industries in which we operate. Such indemnifications include claims made against builders by homeowners for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications. We have not paid a material amount related to these indemnifications, and we evaluate the probability that amounts may be incurred and record an estimated liability when probable and reasonably estimable.

Contractual Obligations

The following table provides payment obligations related to current contracts at December 31, 2021, in millions:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["","2022","","2023-2024","","2025-2026","","Beyond 2026","","Other","","Total"],["Debt (A)","$","10","","","$","8","","","$","5","","","$","2,947","","","$","\u2014","","","$","2,970"],["Interest (A)","97","","","194","","","193","","","833","","","\u2014","","","1,317"],["Operating leases","44","","","68","","","49","","","95","","","\u2014","","","256"],["Currently payable income taxes","34","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","34"],["Purchase commitments (B)","486","","","49","","","49","","","\u2014","","","\u2014","","","584"],["Uncertain tax positions, including interest and penalties (C)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","92","","","92"],["Total","$","671","","","$","319","","","$","296","","","$","3,875","","","$","92","","","$","5,253"]]
[[/GREPCENT_TABLE]]
______________________________

(A)We assume that all debt would be held to maturity. Amounts include finance lease obligations.

(B)Excludes contracts that do not require volume commitments and open or pending purchase orders.

(C)Due to the high degree of uncertainty regarding the timing of future cash outflows associated with uncertain tax positions, we are unable to make a reasonable estimate for the year in which cash settlements may occur with applicable tax authorities.

Refer to Note N to the consolidated financial statements for defined-benefit pension plan obligations.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect or could have affected the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based upon historical experience, as well as current economic conditions and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities and related disclosures, and future revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

Note A to the consolidated financial statements includes our accounting policies, estimates and methods used in the preparation of our consolidated financial statements.

We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition and Receivables

We recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers. We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period.

We monitor our exposure for credit losses on customer receivable balances and the credit worthiness of customers on an on-going basis and maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. Allowances are estimated based upon specific customer balances, where a risk of loss has been identified, and also include a provision for losses based upon historical collection experience and write-off activity as well as reasonable and supportable forecast information that considers macro-economic factors and industry-specific trends associated with our businesses, among others. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity.

Goodwill and Other Intangible Assets

We record the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets. In the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, we complete the impairment testing of goodwill utilizing a discounted cash flow method. We selected the discounted cash flow methodology because we believe that it is comparable to what would be used by market participants. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level.

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Determining market values using a discounted cash flow method requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, and, currently, a two percent to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, planned timing of new product launches, estimated repair and remodel activity and, to a lesser extent, estimated housing starts. Our assumptions included U.S. and Eurozone Gross Domestic Product growing at approximately 3.8 percent and 4.5 percent, respectively, in 2022 and per annum over the five-year forecast.

We utilize our weighted average cost of capital of approximately 7.5 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2021, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 9.0 percent to 11.5 percent for our reporting units.

If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's recorded carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

In the fourth quarter of 2021, we recognized a $45 million non-cash goodwill impairment charge related to a reporting unit within our Decorative Architectural Products segment due to competitive market conditions and higher inflationary costs in our lighting business. As of December 31, 2021, the impaired reporting unit had a remaining net goodwill balance of $19 million. A 10 percent decrease in the estimated fair value of our other reporting units would not have resulted in any additional goodwill impairment.

We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. Potential impairment is identified by comparing the fair value of an other indefinite-lived intangible asset to its carrying value. We utilize a relief-from-royalty model to estimate the fair value of other indefinite-lived intangible assets. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term. We also consider the profitability of the business, among other factors, to determine the royalty rate for use in the impairment assessment.

We utilize our weighted average cost of capital of approximately 7.5 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2021, based upon our assessment of the risks impacting each of our businesses and the nature of the trade name, we applied a risk premium to increase the discount rate to a range of 10.0 percent to 15.5 percent for our other indefinite-lived intangible assets.

In the fourth quarter of 2021, we estimated that future discounted cash flows projected for our other indefinite-lived intangible assets were greater than the carrying values. Accordingly, we did not recognize any impairment charges for other indefinite-lived intangible assets. A 10 percent decrease in the estimated fair value of our other indefinite-lived intangibles assets would not have resulted in an impairment for any of our other indefinite-lived intangible assets.

Refer to Note H for additional information.

Income Taxes

Deferred taxes are recognized based on the future tax consequences of differences between the financial statement carrying value of assets and liabilities and their respective tax basis. The future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.

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If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. The need to maintain a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.

Based upon all available evidence, primarily three-year cumulative loss positions in certain state and foreign tax jurisdictions, we determined that it is more likely than not certain deferred tax assets will not be realized. As a result, we maintain a $17 million valuation allowance on certain state and foreign deferred tax assets as of December 31, 2021.

Recently Adopted and Issued Accounting Pronouncements

Refer to Note A to the consolidated financial statements for discussion of recently adopted and issued accounting pronouncements, which is incorporated herein by reference.

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