# MASCO CORP /DE/ (MAS) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MASCO CORP /DE/'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/62996/000006299623000008/mas-20221231.htm
Accession: 0000062996-23-000008
Filing date: 2023-02-09
Report date: 2022-12-31
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/
Previous year: /company/MAS/mda/fy2021/ (FY 2021)
Next year: /company/MAS/mda/fy2023/ (FY 2023)

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 pursue our strategy of driving the full potential of our core businesses, leveraging opportunities across our enterprise, and actively managing our portfolio. We remain confident in the fundamentals of our business and long-term strategy. We execute our strategy by investing in our brands, developing innovative products, making capital investments, and focusing on continuous productivity improvement and operational excellence, among other initiatives. 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, our methodology to drive growth and productivity, 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

Due to changing market conditions, we are experiencing, and may continue to experience, lower market demand for our products. We have been experiencing, and may continue to experience, elevated commodity and other input costs, elevated transportation costs and supply chain disruptions, particularly disruptions related to our ability to source products, components and raw materials. We have also been experiencing, and may continue to experience, employee-related cost inflation and constraints in hiring qualified employees. While still elevated, we have recently seen some reduction of certain costs, and we aim to offset the potential unfavorable impact of our costs and lower demand for our products with productivity improvement, pricing, and other initiatives.

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, 2022 versus December 31, 2021. A detailed discussion of our consolidated, Business Segment and Geographic Area results of operations for the years ended December 31, 2021 compared to the year ended December 31, 2020 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, 2021, which was filed with the SEC on February 8, 2022.

18

SALES AND OPERATIONS

Net Sales

Below is a summary of our net sales, in millions, for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["Net sales, as reported","$","8,680","","","$","8,375","","","$","305"],["Acquisitions","(11)","","","\u2014","","","(11)"],["Divestitures","\u2014","","","(32)","","","32"],["Net sales, excluding acquisitions and divestitures","8,669","","","8,343","","","326"],["Currency translation","211","","","\u2014","","","211"],["Net sales, excluding acquisitions, divestitures and the effect of currency translation","$","8,880","","","$","8,343","","","$","537"]]
[[/GREPCENT_TABLE]]

Net sales for 2022 were $8.7 billion, which increased four percent compared to 2021. Excluding acquisitions, divestitures and the effect of currency translation, net sales increased six percent.

Net sales for 2022 increased primarily due to:

•Higher net selling prices across the entire company which increased sales by nine percent.

These amounts were partially offset by:

•Lower sales volume which decreased sales by three percent.

•Unfavorable foreign currency translation which decreased sales by two percent.

Gross Profit and Gross Margin

Below is a summary of our gross profit, in millions, and gross margin for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Favorable / (Unfavorable)"],["Gross profit","$","2,713","","$","2,863","","$","(150)"],["Gross margin","31.3","%","","34.2","%","","(290) bps"]]
[[/GREPCENT_TABLE]]

The 2022 gross profit margin was negatively impacted by:

•Increased commodity and transportation costs.

•Higher costs due to production inefficiencies and related under absorption, as well as higher excess and obsolete inventory charges resulting from business rationalization activities.

•Lower sales volume.

•Unfavorable sales mix.

These amounts were partially offset by:

•Higher net selling prices.

19

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, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","(Favorable) / Unfavorable"],["Selling, general and administrative expenses","$","1,390","","$","1,413","","$","(23)"],["Selling, general and administrative expenses as percentage of net sales","16.0","%","","16.9","%","","(90) bps"]]
[[/GREPCENT_TABLE]]

Selling, general, and administrative expenses as a percentage of net sales in 2022 was positively impacted by:

•Higher net sales resulting from favorable net selling prices.

•Lower variable compensation.

These amounts were partially offset by:

•Increased marketing costs.

Operating Profit

Below is a summary of our operating profit, in millions, and operating profit margins for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["Operating profit, as reported","$","1,297","","$","1,405","","$","(108)"],["Rationalization charges","32","","4","","28"],["Impairment charges for goodwill and other intangible assets","26","","45","","(19)"],["Operating profit, excluding rationalization charges and impairment charges","$","1,355","","$","1,454","","$","(99)"],["Operating profit margin, as reported","14.9","%","","16.8","%","","(190) bps"],["Operating profit margin, excluding rationalization charges and impairment charges","15.6","%","","17.4","%","","(180) bps"]]
[[/GREPCENT_TABLE]]

Operating profit in 2022 was negatively impacted by:

•Increased commodity and transportation costs.

•Higher costs due to production inefficiencies and related under absorption, as well as higher excess and obsolete inventory charges resulting from business rationalization activities.

•Lower sales volume.

•Unfavorable foreign currency translation.

•Increased marketing costs.

•Unfavorable sales mix.

These amounts were partially offset by:

•Higher net selling prices.

•Lower variable compensation.

•Lower goodwill and other intangible assets impairment charges in our lighting business.

20

OTHER INCOME (EXPENSE), NET

Interest Expense

Below is a summary of our interest expense, in millions, for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Favorable / (Unfavorable)"],["Interest expense","$","(108)","","","$","(278)","","","$","170"]]
[[/GREPCENT_TABLE]]

The decrease in interest expense is primarily due to the absence of 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.

Other, net

Below is a summary of our other, net, in millions, for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Favorable / (Unfavorable)"],["Other, net","$","4","","","$","(439)","","","$","443"]]
[[/GREPCENT_TABLE]]

Other, net, for 2022 included:

•$24 million of income from the revaluation of contingent consideration related to a prior acquisition.

This amount was partially offset by:

•$10 million of net periodic pension and post-retirement benefit expense.

•$6 million of losses related to equity method investments.

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 our Hüppe GmbH ("Hüppe") business.

•$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.

21

INCOME TAXES

Below is a summary of our income tax expense, in millions, and our effective tax rate for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","(Favorable) / Unfavorable"],["Income tax expense","$","288","","$","210","","$","78"],["Effective tax rate","24","%","","31","%","","(7)","%"]]
[[/GREPCENT_TABLE]]

Our 2021 income tax expense included $16 million due to the elimination of disproportionate tax effects from accumulated other comprehensive income related to our debt retirement and pension plan termination and $18 million due to losses providing no tax benefit in certain jurisdictions from our pension plan termination and a business divestiture.

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, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Favorable / (Unfavorable)"],["Income from continuing operations","$","844","","","$","410","","","$","434"],["Diluted income per common share from continuing operations","$","3.63","","","$","1.62","","","$","2.01"]]
[[/GREPCENT_TABLE]]

22

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"],["","2022","","2021","","","2022 vs. 2021"],["Net Sales:"],["Plumbing Products","$","5,252","","","$","5,135","","","","2","%"],["Decorative Architectural Products","3,428","","","3,240","","","","6","%"],["Total","$","8,680","","","$","8,375","","","","4","%"],["North America","$","6,978","","","$","6,624","","","","5","%"],["International, principally Europe","1,702","","","1,751","","","","(3)","%"],["Total","$","8,680","","","$","8,375","","","","4","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","","PercentChange"],["","2022","","2021","","","2022 vs. 2021"],["Operating Profit (A):"],["Plumbing Products","$","819","","","$","929","","","","(12)","%"],["Decorative Architectural Products","565","","","581","","","","(3)","%"],["Total","$","1,384","","","$","1,510","","","","(8)","%"],["North America","$","1,116","","","$","1,214","","","","(8)","%"],["International, principally Europe","268","","","296","","","","(9)","%"],["Total","1,384","","","1,510","","","","(8)","%"],["General corporate expense, net","(87)","","","(105)","","","","(17)","%"],["Total operating profit","$","1,297","","","$","1,405","","","","(8)","%"]]
[[/GREPCENT_TABLE]]

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

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.

23

Plumbing Products

Sales

Net sales in the Plumbing Products segment increased two percent in 2022 due primarily to favorable net selling prices, which increased sales by seven percent, and higher international plumbing sales volume which increased sales by two percent. These amounts were partially offset by unfavorable foreign currency translation which decreased sales by four percent, lower North America plumbing sales volume which decreased sales by two percent, and the divestiture of Hüppe which decreased sales by one percent.

Operating Results

Operating profit in the Plumbing Products segment in 2022 was negatively impacted by increased commodity and transportation costs, higher costs due to production inefficiencies and related under absorption, higher excess and obsolete inventory charges resulting from business rationalization activities, unfavorable foreign currency translation, increased marketing costs and unfavorable sales mix. These amounts were partially offset by favorable net selling prices and, to a lesser extent, lower variable compensation.

Decorative Architectural Products

Sales

Net sales in the Decorative Architectural Products segment increased six percent in 2022, primarily due to favorable net selling prices across the segment. These amounts were partially offset by lower sales volume across the segment.

Operating Results

Operating profit in the Decorative Architectural Products segment in 2022 was negatively impacted by increased commodity and transportation costs, lower sales volume, higher costs due to production inefficiencies and related under absorption, higher excess and obsolete inventory charges resulting from business rationalization activities, and increased marketing costs. These amounts were partially offset by favorable net selling prices and lower goodwill and other intangible assets impairment charges in our lighting business.

Geographic Area Results Discussion

North America

Sales

North America net sales increased five percent in 2022. Favorable net selling prices across all of our product categories increased sales by 10 percent. These amounts were partially offset by lower sales volume, which decreased sales by five percent.

Operating Results

North America operating profit in 2022 was negatively impacted by increased commodity and transportation costs, lower sales volume, higher costs due to production inefficiencies and related under absorption, higher excess and obsolete inventory charges resulting from business rationalization activities, and increased marketing costs. These amounts were partially offset by favorable net selling prices, and to a lesser extent, lower variable compensation and lower goodwill and other intangible assets impairment charges in our lighting business.

International, Principally Europe

Sales

International net sales decreased three percent in 2022. In local currencies (including sales in currencies outside their respective functional currencies), net sales increased eight percent. Favorable net selling prices of plumbing products increased sales by six percent. Higher sales volume of plumbing products increased sales by five percent. These amounts were partially offset by the divestiture of our Hüppe business which decreased sales by two percent and unfavorable sales mix which decreased sales by two percent.

24

Operating Results

International operating profit in 2022 was negatively impacted by increased commodity and transportation costs, unfavorable foreign currency translation, wage inflation, and unfavorable sales mix. These amounts were partially offset by favorable net selling prices and higher sales volume of plumbing products.

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 relevant dividend.

We had cash and cash investments of approximately $452 million and $926 million at December 31, 2022 and 2021, 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, 2022 and 2021, $321 million and $490 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 1.6 to 1 and 1.8 to 1 at December 31, 2022 and 2021, respectively. The decrease in our current ratio is primarily due to the 364-day $500 million term loan that we entered into on April 26, 2022.

Our total debt as a percent of total capitalization was 109 percent and 98 percent at December 31, 2022 and 2021, respectively. Refer to Note L to the consolidated financial statements for additional information.

We believe that our present cash balance and cash flows from operations, and borrowing availability under our 2022 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 changing market conditions and its impact on our customers and suppliers, 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 to increase our productivity, improve customer service and support product innovation. Capital expenditures for 2022 were $224 million, compared with $128 million for 2021. The increase in capital expenditures in 2022 was primarily due to capacity expansion plans in our Plumbing Products and Decorative Architectural Products segments. For 2023, capital expenditures, excluding any potential future acquisitions, are expected to be approximately $250 million. Depreciation and amortization expense for 2022 totaled $145 million, compared with $151 million for 2021. For 2023, depreciation and amortization expense, excluding any potential future acquisitions, is expected to be approximately $150 million. Amortization expense totaled $33 million in 2022, compared with $40 million in 2021.

25

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 statement of operations.

Credit Agreement

On April 26, 2022, we entered into a revolving credit agreement (the “2022 Credit Agreement”) with an aggregate commitment of $1.0 billion and a maturity date of April 26, 2027. Upon entry into the 2022 Credit Agreement, our credit agreement dated March 13, 2019, as amended, with an aggregate commitment of $1.0 billion, was terminated.

Under the 2022 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.

The 2022 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) an 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 2022 Credit Agreement at December 31, 2022. As of the date of this report, $69 million was borrowed and outstanding at a weighted average interest rate of 5.800%.

364-day Term Loan

On April 26, 2022, we entered into a 364-day $500 million senior unsecured delayed draw term loan due April 26, 2023 with a syndicate of lenders. The senior unsecured term loan and commitments thereunder are subject to prepayment or termination at our option and the loans will bear interest at SOFR plus a spread adjustment and 0.70%. The covenants, including the financial covenants, are substantially the same as those in the 2022 Credit Agreement. We repaid $300 million during 2022.

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 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, our Hansgrohe SE subsidiary acquired a 75.1 percent equity interest in Easy Sanitary Solutions B.V., a manufacturer of shower channel drains that 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. During 2021, we also acquired all of the share capital of Steamist, Inc., a manufacturer of residential steam bath products that are complementary to many of our plumbing products, for approximately $56 million in cash.

Divestitures

During 2021, we completed the divestiture of Hüppe, a manufacturer of shower enclosures and shower trays. In connection with the divestiture, we recognized a loss of $18 million. During 2022, we recorded a $2 million pre-tax post-closing gain related to the finalization of working capital items in connection with the divestiture.

26

Share Repurchases

We repurchased and retired 16.6 million shares of our common stock in 2022 for approximately $914 million. This included 0.6 million shares to offset the dilutive impact of restricted stock units granted in 2022. Effective October 20, 2022, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2021. At December 31, 2022, we had $2.0 billion remaining under the 2022 authorization. Consistent with past practice and as part of our long-term capital allocation strategy, we anticipate using approximately $500 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 2023. Refer to Note O to the consolidated financial statements for additional information.

During 2021, we repurchased and retired 17.6 million shares of our common stock (including 0.7 million shares to offset the dilutive impact of restricted stock units granted during the year), for approximately $1,026 million.

Dividend to holders of our Common Shares

We paid a quarterly dividend of $0.28 per common share for an annual dividend of $1.12 per share.

As part of our capital allocation strategy, the Board of Directors declared a quarterly dividend of $0.285 per share in the first quarter of 2023 with the intention to increase the annual dividend to $1.14 per share.

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 $29 million and $43 million at December 31, 2022 and 2021, respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our (decrease) increase 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 $188 million and $220 million for our continuing operations during 2022 and 2021, 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 sterling, 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.

27

Cash Flows

Significant sources and (uses) of cash for the years ended December 31, 2022 and 2021 are summarized as follows, in millions:

[[GREPCENT_TABLE]]
[["","2022","","2021"],["Net cash from operating activities","$","840","","","$","930"],["Retirement of notes","\u2014","","","(1,326)"],["Purchase of Company common stock","(914)","","","(1,026)"],["Cash dividends paid","(258)","","","(211)"],["Dividends paid to noncontrolling interest","(68)","","","(43)"],["Capital expenditures","(224)","","","(128)"],["Proceeds from term loan","500","","","\u2014"],["Payment of term loan","(300)","","","\u2014"],["Debt extinguishment costs","\u2014","","","(160)"],["Proceeds from the exercise of stock options","1","","","5"],["Acquisition of businesses, net of cash acquired","\u2014","","","(57)"],["Issuance of notes, net of issuance costs","\u2014","","","1,481"],["Employee withholding taxes paid on stock-based compensation","(17)","","","(15)"],["Proceeds from disposition of:"],["Businesses, net of cash disposed","\u2014","","","5"],["Property and equipment","1","","","\u2014"],["Financial investments","1","","","171"],["Payment of debt","(10)","","","(3)"],["Effect of exchange rate changes on cash and cash investments","(18)","","","(20)"],["Other, net","(8)","","","(3)"],["Cash decrease","$","(474)","","","$","(400)"]]
[[/GREPCENT_TABLE]]

Our working capital days were as follows:

[[GREPCENT_TABLE]]
[["","At December 31,"],["","2022","","2021"],["Receivable days","53","","","51"],["Inventory days","80","","","85"],["Accounts payable days","68","","","66"],["Working capital (receivables plus inventories, less accounts payable) as a percentage of net sales","17.4","%","","16.0","%"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operations of $840 million primarily benefited from operating profit, partially offset by changes in working capital, primarily lower accounts payable and accrued liabilities balances.

Financing Activities

Net cash used for financing activities was $1,066 million, primarily due to $914 million for the repurchase and retirement of our common stock (including 0.6 million shares repurchased to offset the dilutive impact of restricted stock units granted in 2022), $300 million for the partial payment of the 364-day term loan, $258 million for the payment of cash dividends, $68 million for dividends paid to noncontrolling interest and $17 million for employee withholding taxes paid on stock-based compensation. These uses of cash were partially offset by $500 million in proceeds from the 364-day term loan.

28

Investing Activities

Net cash used for investing activities was $230 million, primarily driven by $224 million of capital expenditures.

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, 2022, in millions:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["","2023","","2024-2025","","2026-2027","","Beyond 2027","","Other","","Total"],["Debt (A)","$","205","","","$","6","","","$","304","","","$","2,644","","","$","\u2014","","","$","3,159"],["Interest (A)","101","","","194","","","192","","","738","","","\u2014","","","1,225"],["Operating leases","50","","","89","","","68","","","174","","","\u2014","","","381"],["Currently payable income taxes","48","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","48"],["Purchase commitments (B)","438","","","64","","","35","","","\u2014","","","\u2014","","","537"],["Uncertain tax positions, including interest and penalties (C)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","92","","","92"],["Total","$","842","","","$","353","","","$","599","","","$","3,556","","","$","92","","","$","5,442"]]
[[/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

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.

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.

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 1.3 percent and 1.5 percent, respectively, in 2023, and 2.0 percent and 1.5 percent, respectively, per annum over the remainder of the five-year forecast.

We utilize our weighted average cost of capital of approximately 8.75 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2022, 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 10.25 percent to 12.75 percent for our reporting units.

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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 2022, we recognized a $19 million non-cash goodwill impairment charge related to a reporting unit within our Decorative Architectural Products segment due to competitive market conditions, higher inflationary costs and increased cost of capital in our lighting business. There is no remaining goodwill associated with the impaired reporting unit. 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 8.75 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2022, based upon our assessment of the risks impacting each of our businesses and the nature of the other indefinite-lived intangible assets (i.e., trade name), we applied a risk premium to increase the discount rate to a range of 11.25 percent to 13.75 percent for our other indefinite-lived intangible assets.

If the carrying amount of an other indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized to the extent that an other indefinite-lived intangible asset's recorded carrying value exceeds its fair value, not to exceed the carrying amount of the other indefinite-lived intangible asset.

In the fourth quarter of 2022, we recognized a $7 million non-cash impairment charge related to a registered trademark within our Decorative Architectural Products segment due to competitive market conditions and increased cost of capital in our lighting business. As of December 31, 2022, the impaired other indefinite-lived intangible asset had a remaining net carrying value of $43 million. 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

We record deferred taxes on the future tax consequences of differences between the financial statement carrying value of our assets and liabilities and their respective tax basis. The realization of deferred tax assets depends on sufficient sources of 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 and projected future taxable income.

If, based upon all available evidence, both positive and negative, it is more likely than not such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to evidence that is objectively verifiable such as cumulative losses in recent years, however, some evidence may be based on estimates and assumptions regarding potential sources of future taxable income. Changes in these estimates and assumptions may result in a change in judgment regarding the realizability of deferred tax assets.

Refer to Note S for additional information.

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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