# WATTS WATER TECHNOLOGIES INC (WTS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WATTS WATER TECHNOLOGIES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/795403/000155837022001530/wts-20211231x10k.htm
Accession: 0001558370-22-001530
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

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

Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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Overview

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We are a leading supplier of products, solutions and systems that manage and conserve the flow of fluids and energy into, through and out of buildings in the commercial and residential markets in the Americas, Europe and Asia-Pacific, Middle East and Africa (“APMEA”). For over 140 years, we have designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems and water filtration technology that helps purify and conserve water. We earn revenue and income almost exclusively from the sale of our products. Our principal product lines include:

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[[GREPCENT_TABLE]]
[["","\u25cf","Residential & commercial flow control products\u2014includes products typically sold into plumbing and hot water applications such as backflow preventers, water pressure regulators, temperature and pressure relief valves, thermostatic mixing valves and leak detection products."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","HVAC & gas products\u2014includes commercial high-efficiency boilers, water heaters and custom heat and hot water solutions, hydronic and electric heating systems for under-floor radiant applications, hydronic pump groups for boiler manufacturers and alternative energy control packages, and flexible stainless steel connectors for natural and liquid propane gas in commercial food service and residential applications. HVAC is an acronym for heating, ventilation and air conditioning."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Drainage & water re-use products\u2014includes drainage products and engineered rain water harvesting solutions for commercial, industrial, marine and residential applications."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Water quality products\u2014includes point-of-use and point-of-entry water filtration, conditioning and scale prevention systems for commercial, marine and residential applications."]]
[[/GREPCENT_TABLE]]

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Our business is reported in three geographic segments: Americas, Europe, and APMEA. We distribute our products through four primary distribution channels: wholesale, original equipment manufacturers (OEMs), specialty, and do-it-yourself (DIY).

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We believe that the factors relating to our future growth include continued product innovation that meets the needs of our customers and our end markets; our ability to continue to make selective acquisitions, both in our core markets as well as in complementary markets; regulatory requirements relating to the quality and conservation of water and the safe use of water; increased demand for clean water; and continued enforcement of plumbing and building codes. We have completed 12 acquisitions since 2012. Our acquisition strategy focuses on businesses that promote our key macro themes around safety and regulation, energy efficiency and water conservation. We target businesses that will provide us with one or more of the following: an entry into new markets and/or new geographies, improved channel access, unique and/or proprietary technologies, advanced production capabilities or complementary solution offerings.

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Our innovation strategy is focused on differentiated products and solutions that will provide greater opportunity to distinguish ourselves in the marketplace. Conversely, we continue to migrate away from commoditized products where we cannot add value. Our goal is to be a solutions provider, not merely a components supplier. We continually look for strategic opportunities to invest in new products and markets or divest existing product lines where necessary in order to meet those objectives.

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The Internet of Things has allowed companies to transform components into smart and connected devices.  Over the past several years we have been building our smart and connected foundation by expanding our internal capabilities and making strategic acquisitions. Our strategy is to deliver superior customer value through smart and connected products and solutions. This strategy focuses on three dimensions: Connect, Control and Conserve. We intend to introduce

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products that will connect our customers with smart systems, control systems for optimal performance, and conserve critical resources by increasing operability, efficiency and safety. 

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Products representing a majority of our sales are subject to regulatory standards and code enforcement, which typically require that these products meet stringent performance criteria. We have consistently advocated for the development and enforcement of such plumbing codes. We are focused on maintaining stringent quality control and testing procedures at each of our manufacturing facilities in order to manufacture products in compliance with code requirements and take advantage of the resulting demand for compliant products. We believe that product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a competitive advantage for us.

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COVID-19 Pandemic and Supply Chain Disruptions

The COVID-19 pandemic materially impacted our operating results in 2020. The impact was most pronounced during the second quarter of 2020, which was shortly after the World Health Organization declared COVID-19 a global pandemic and government authorities around the world imposed lockdowns and restrictions. However, as the second half of 2020 progressed and government-imposed restrictions subsided, we noted market activity levels increasing with sales and profits improving sequentially from the second to fourth quarters. Profits improved in part from better volumes and in part from the cost actions we executed in response to the pandemic. Results in 2021 continued that trend of improved top line growth and profit performance. However, there are still end markets we serve that may take time to recover, and potential regional COVID-19 outbreaks and associated restrictions may occur that could further impact our operating results.

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We remain diligent as a Company to mitigate potential future outbreaks in our facilities by taking precautions to reduce the spread of COVID-19 while maintaining our production capabilities. We continue to focus on the health and safety of our employees by maintaining continuous adherence to social distancing guidelines, temperature monitoring, encouraging vaccinations, enabling remote work and hybrid work schedules where feasible, providing personal protective equipment and providing COVID-19 information, which includes the latest CDC and other government protocols and our Pandemic Plan.

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Further, we believe the actions we have taken over the last several years to strengthen our portfolio and increase customer focus, along with aggressively paying down debt, have put us in a strong financial position. We maintain ample liquidity to work through these uncertain times, including the refinancing of our credit facility in the second quarter of 2021, and we continue to invest for the future. Our experienced management team is proactively managing this situation and we are well positioned to respond to challenges presented by the COVID-19 pandemic as they arise.

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Our revenues improved in all three geographic segments for 2021 as compared to 2020, primarily driven by the global economic recovery, as well as from incremental price increases. Although, we continue to see recovery in certain markets, future sales expansion or contraction is dependent on the duration and severity of the evolving COVID-19 pandemic. Factors affecting our results include supply chain disruptions, the construction lending markets, investments and capital spending in building services construction markets, labor shortages, additional governmental actions that may or may not be taken, and numerous other uncertainties, including COVID-19 vaccination rates, the impact of virus variants and vaccination efficacy.

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As worldwide economies recover from the pandemic, increased market demand is straining suppliers’ ability to fill orders. This has been compounded by logistical issues with respect to container capacity on ships, port congestion and in-road trucking. The global shortage of electronic components like semiconductors and other raw materials continues to challenge our supply chain. We are also experiencing higher transportation costs, including expedited freight cost, as well as rising prices for commodities and other raw materials. Labor shortages and other workforce disruptions have primarily affected our supply chain, manufacturing and distribution processes, as well as our suppliers, including higher absenteeism caused by illness from virus variants or quarantine measures. While we were able to effectively manage these issues during 2021, we cannot predict how supply chain disruptions and related costs may impact our ability to service our customers or the potential impact on our profit margins.

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Due to the above circumstances and as described generally in this Form 10-K, our results of operations for the year ended December 31, 2021 are not necessarily indicative of future results. Management cannot predict the full impact of the COVID-19 pandemic on our sales, supply chain disruptions, manufacturing and distribution or on economic conditions generally, including effects on customer spending. The extent of the effects of the COVID-19 pandemic on us

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remains uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends. For further information regarding the impact of COVID-19 pandemic and supply chain disruptions on us, see Item 1A, “Risk Factors.”

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Financial Overview

Net sales for 2021 increased 19.9%, or $300.6 million, on a reported basis and 17.3%, or $260.1 million, on an organic basis, compared to 2020, primarily driven by the global economic recovery across all of our operating segments, as well as incremental price increases. The reported sales increase included the impact of foreign exchange movements of 2.0%, or $29.9 million, primarily driven by a stronger euro, and a net increase in acquired/divested sales of $10.6 million. Organic sales is a non-GAAP financial measure that excludes the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, because it allows for additional insight into underlying sales trends by providing sales growth on a consistent basis. We reconcile the change in organic sales to our reported sales for each region within our results below. Operating income of $239.6 million increased by $58.5 million, or 32.3%, in 2021 compared to 2020. This increase was primarily driven by higher sales volume, price, savings from productivity and restructuring actions, partially offset by higher inflation including logistic and freight costs, investments, incentives and the return of expenses related to business normalization.

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Despite the challenges presented by the COVID-19 pandemic and supply chain disruptions in 2021, we continued to drive commercial and operational excellence, invest in our business through capital expenditures, the acquisition discussed in the section below, and invest in product innovation, technology, including our smart and connected products and solutions, and commercial excellence, as we strove to meet the needs of our customers.

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Management’s discussion and analysis of our financial condition, results of operations and cash flows as of and for the year ended December 31, 2019 can be found in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020.

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Acquisitions

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On September 30, 2021, we acquired Sentinel Hydrosolutions, LLC (“Sentinel”) in an all-cash merger transaction. Sentinel is based in Escondido, California, and specializes in the design, marketing and assembly of leak detection products, primarily sold into high-end residential settings.  The acquisition of Sentinel expands our product offering in the leak detection market. The acquisition of Sentinel was deemed not to be material.

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Recent Developments

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On February 4, 2022, Munish Nanda, President of Americas and Europe, provided notice of his intention to retire from the Company. Mr. Nanda has agreed to remain in his current role as President of Americas and Europe until a successor is in place. Mr. Nanda has further agreed that after he has transferred his responsibilities as President of Americas and Europe to a successor, he will remain employed in a different role until May 2023 to assist with the transition and provide advisory services. We expect to enter into a transition and retention agreement with Mr. Nanda to document these arrangements.

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On February 7, 2022, the Board of Directors voted unanimously to name Robert J. Pagano, Jr., the Company’s Chief Executive Officer, as the new Chairperson of the Board effective immediately. The Board also voted unanimously to name the former Chairperson of the Board, W. Craig Kissel, as Lead Independent Director. The Company’s Corporate Governance Guidelines prevent any Board member from being renominated for election to the Board after their 72nd birthday, and as such Mr. Kissel will not be eligible to stand for reelection at the 2023 Annual Meeting of Stockholders. The Board decided to make this change now in order to have an orderly transition of responsibilities.

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On February 7, 2022, we declared a quarterly dividend of twenty-six cents ($0.26) per share on each outstanding share of Class A common stock and Class B common stock payable on March 15, 2022 to stockholders of record on March 1, 2022.

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Results of Operations

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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Net Sales. Our business is reported in three geographic segments: Americas, Europe and APMEA. Our net sales in each of these segments for the years ended December 31, 2021 and December 31, 2020 were as follows:

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[[/GREPCENT_TABLE]]

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The change in net sales was attributable to the following:

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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Our products are sold to wholesalers, OEMs, DIY chains, and through various specialty channels. The change in organic net sales by channel was attributable to the following:

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[[/GREPCENT_TABLE]]

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Organic net sales in the Americas increased primarily due to higher volume and price in all of our channels. The higher volume in 2021 was primarily supported by the global economic recovery, as well as strong repair and replacement activity and the positive impact on our wholesale and DIY channels from the February 2021 severe weather freeze in the South-Central U.S. We estimate the impact of the severe weather freeze drove approximately 3% of incremental sales for the region in 2021.

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Organic net sales in Europe increased primarily due to higher volume and price, with volume growth in most regions in 2021 driven by the global economic recovery. More specifically, net sales increased due to higher demand in our plumbing products within the French wholesale market, in our HVAC products within the Italy and Germany OEM markets driven by government energy incentives, and due to the recovery in our marine-based drains products in the second half of 2021.

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Organic net sales in APMEA increased primarily due to higher volumes in China, Australia, New Zealand and the Middle East, primarily from the global economic recovery. The sales growth in China was primarily driven by higher demand for commercial valves within data centers.

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The net increase in sales due to foreign exchange was primarily due to the appreciation of the euro against the U.S. dollar in 2021. We cannot predict whether foreign currencies will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.

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The change in net sales due to acquisitions/divestitures relates to three immaterial acquisitions, one in the APMEA segment in the third quarter of 2020, one in the Americas segment in the fourth quarter of 2020 and one in the Americas segment in the fourth quarter of 2021, partially offset by an immaterial divestiture in our APMEA segment during the third quarter of 2020.

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Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for 2021 and 2020 were as follows:

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[[/GREPCENT_TABLE]]

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Gross profit and gross margin increased primarily from higher sales volume, price and productivity savings, partially offset by material and labor costs inflation, higher logistic and freight costs to expedite components and product, and the return of expenses related to business normalization.

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Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses increased $75.8 million, or 17.5%, in 2021 compared to 2020. The increase in SG&A expenses was attributable to the following:

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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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The organic increase was primarily due to higher variable costs from the higher sales volume of $21.3 million, an increase in short-term and long-term compensation costs of $20.1 million based on expected attainment levels, an increase in investments of $17.8 million, including new products, commercial excellence, and technology, the return of expenses related to business normalization of $10.8 million, increased general inflation of $5.5 million, as well as product liability and insurance costs of $3.1 million compared to 2020. These increases were partially offset by $18.2 million due to productivity and restructuring savings. The increase in foreign exchange was mainly due to the appreciation of the euro against the U.S. dollar. The acquired/divested, net SG&A costs related to three immaterial acquisitions, partially offset by SG&A costs related to an immaterial divestiture. Total SG&A expenses, as a percentage of sales, were 28.1% in 2021 compared to 28.7% in 2020.

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Restructuring. In 2021, we recorded a net restructuring charge of $19.3 million, primarily for costs related to a 2021 French restructuring program that was approved in the second quarter of 2021. For a more detailed description of our current restructuring plans, see Note 3 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K. 

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Other long-lived asset impairment charges. In 2020, we recorded impairment charges of $1.4 million in our Americas segment, primarily relating to $1.0 million for a long-lived asset impairment charge and $0.4 million related to a technology intangible asset in which market value expectations indicated the carrying amounts of these assets were in excess of the fair value.

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Operating Income (Loss). Operating income (loss) by geographic segment for 2021 and 2020 was as follows:

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[[/GREPCENT_TABLE]]

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The increase (decrease) in operating income (loss) is attributable to the following:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Change As a % of","\u200b","Change As a % of"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Consolidated Operating Income","\u200b","Segment Operating Income"],["\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","","\u200b","","\u200b","","\u200b","","\u200b","","\u200b","","\u200b","","\u200b","","\u200b"],["\u200b","\u200b","Americas","\u200b","Europe","\u200b","APMEA","\u200b","Corporate","\u200b","Total","\u200b","Americas","\u200b","Europe","\u200b","APMEA","\u200b","Corporate","\u200b","Total","\u200b","Americas","\u200b","Europe","\u200b","APMEA","\u200b","Corporate"],["\u200b","\u200b","(dollars in millions)"],["Organic","\u200b","$","36.7","\u200b","$","28.2","\u200b","$","7.2","\u200b","$","(10.6)","\u200b","$","61.5","\u200b","20.3","%","15.5","%","4.0","%","(5.9)","%","33.9","%","22.1","%","56.2","%","\u2014","%","27.3","%"],["Foreign exchange","\u200b","\u200b","0.9","\u200b","\u200b","3.4","\u200b","\u200b","0.6","\u200b","\u200b","\u2014","\u200b","\u200b","4.9","\u200b","0.5","\u200b","1.9","\u200b","0.3","\u200b","\u2014","\u200b","2.7","\u200b","0.5","\u200b","6.8","\u200b","\u2014","\u200b","\u2014"],["Acquired","\u200b","\u200b","(0.7)","\u200b","\u200b","\u2014","\u200b","\u200b","0.8","\u200b","\u200b","\u2014","\u200b","\u200b","0.1","\u200b","(0.4)","\u200b","\u2014","\u200b","0.4","\u200b","\u2014","\u200b","\u2014","\u200b","(0.4)","\u200b","\u2014","\u200b","\u2014","\u200b","\u2014"],["Restructuring, impairment charges","","\u200b","7.8","","\u200b","(18.2)","","\u200b","2.3","","\u200b","0.1","","\u200b","(8.0)","","4.3","","(10.0)","","1.3","","0.1","","(4.3)","","4.7","","(36.3)","","\u2014","","(0.3)","\u200b"],["Total","\u200b","$","44.7","\u200b","$","13.4","\u200b","$","10.9","\u200b","$","(10.5)","\u200b","$","58.5","","24.7","%","7.4","%","6.0","%","(5.8)","%","32.3","%","26.9","%","26.7","%","\u2014","%","27.0","%"]]
[[/GREPCENT_TABLE]]

​

The increase in organic operating income was due to higher sales volume, price, savings from productivity initiatives and restructuring actions in response to the COVID-19 pandemic. These increases were partially offset by material and labor costs inflation, higher logistics and freight costs, the return of expenses related to business normalization, compensation costs and investments.

​

Interest Expense. Interest expense decreased $7.0 million, or 52.6%, in 2021 as compared to 2020 primarily due to a decline in interest rates as well as a reduction in the principal balance of debt outstanding. Refer to Note 11 of Notes to

Consolidated Financial Statements in this Annual Report on Form10-K for further details.

​

Other (income) expense, net. Other (income) expense increased $1.8 million to an income balance of $0.8 million compared to 2020. The increase was primarily due to more favorable net foreign currency transaction gains.

​

Income Taxes. Our effective income tax rate decreased to 29.2% in 2021, from 31.6% in 2020. The tax rate decreased primarily because the inclusion of an increase in the valuation allowance in the prior year income tax rate as a result of 2020 final tax regulations, which was partially offset by the net tax adjustment related to the restructuring of our Mexican manufacturing supply chain operations.

​

Net Income. Net income for 2021 was $165.7 million, or $4.88 per common share on a diluted basis, compared to $114.3 million, or $3.36 per common share on a diluted basis, for 2020. Results for 2021 include an after-tax charge of $14.1 million, or $0.42 per common share, for restructuring and $7.2 million, or $0.22 per common share, for an income tax adjustment related to the restructuring of our Mexican manufacturing supply chain operations.

​

Results for 2020 include an after-tax charge of $7.4 million, or $0.22 per common share, for restructuring; $9.7 million, or $0.28 per common share, for changes in tax regulations; $1.0 million, or $0.03 per common share, for other long-lived asset impairment charges; $1.0 million, or $0.03 per common share, for acquisition related costs; $0.8 million, or $0.02 per common share, for footprint optimization; partially offset by a $1.5 million benefit, or $0.04 per share for the elimination of an earnout from a prior immaterial acquisition in our Americas segment, and $0.7 million, or $0.02 per common share of a net gain on disposal.

​

33

Table of Contents

Liquidity and Capital Resources

​

2021 Cash Flows

​

We generated $180.8 million of net cash from operating activities in 2021 as compared to $228.8 million in 2020. The decrease in cash generated was primarily due to a proactive decision to increase inventory in response to a combination of strong market demand and disrupted supply chains, partially offset by higher net income.

​

We used $30.7 million of net cash for investing activities in 2021 compared to $54.8 million used in 2020. We spent $17.1 million less on capital expenditures and $6.1 million less for acquisitions in 2021 compared to 2020. We received $5.1 million in cash proceeds from the sale of property, plant and equipment in 2021.

​

We used $118.6 million of net cash from financing activities in 2021 primarily due to long-term debt repayments of $95.0 million, dividend payments of $34.3 million, tax withholding payments on vested stock awards of $9.6 million and payments of $16.0 million to repurchase approximately 110,000 shares of Class A common stock. These payments were partially offset by proceeds from drawdowns on our line of credit totaling $40.0 million.

​

On March 30, 2021, we and certain of our subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent. The Second Amended Credit Agreement amends and restates the Amended Credit Agreement (defined below) to extend the maturity date of the $800 million senior unsecured revolving credit facility from February 12, 2022 to March 30, 2026. Among other changes, the Second Amended Credit Agreement increases our maximum consolidated leverage ratio (including both the base ratio and the ratio permitted during temporary step-ups following certain acquisitions), adjusts certain fees to reflect market conditions and reduces the 1.00% floor on the adjusted LIBOR rate to 0.00%.The senior unsecured revolving credit facility under the Second Amended Credit Agreement (the " New Revolving Credit Facility") also includes sublimits of $100 million for letters of credit and $15 million for swing line loans. As of December 31, 2021, we had drawn down $145.0 million on this line of credit and had $14.0 million in letters of credit outstanding, which resulted in $641.0 million of unused and available credit under the New Revolving Credit Facility. Borrowings outstanding under the New Revolving Credit Facility bear interest at a fluctuating rate per annum equal to an applicable percentage defined as (i) in the case of Eurocurrency rate loans, the adjusted British Bankers Association LIBOR rate plus an applicable percentage, ranging from 1.075% to 1.325%, determined by reference to our consolidated leverage ratio, or (ii) in the case of alternate base rate loans and swing line loans, interest (which at all times will not be less than 1.00%) at the greatest of (a) the Prime Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus 0.50% and (c) the adjusted LIBOR rate plus 1.00% for a one month interest period in dollars. The weighted average interest rate on debt outstanding under the New Revolving Credit Facility as of December 31, 2021 was 1.17%. The weighted average interest rate on debt outstanding inclusive of the interest rate swap discussed in Note 5 of the Notes to Consolidated Financial Statements and interest rates under the New Revolving Credit Facility as of December 31, 2021 was 1.82%. In addition to paying interest under the Second Amended Credit Agreement, we are also required to pay certain fees in connection with the New Revolving Credit Facility, including, but not limited to, an unused facility fee and letter of credit fees. The Second Amended Credit Agreement matures on March 30, 2026, subject to extension under certain circumstances and subject to the terms of the Second Amended Credit Agreement. We may repay loans outstanding under the Second Amended Credit Agreement from time to time without premium or penalty, other than customary breakage costs, if any, and subject to the terms of the Second Amended Credit Agreement. As of December 31, 2021, we were in compliance with all covenants related to the Second Amended Credit Agreement.

​

On April 24, 2020, we and certain of our subsidiaries entered into the Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the other lenders referred to therein (the “Amended Credit Agreement”). The Amended Credit Agreement amended and restated the previous Credit Agreement (the “Prior Credit Agreement”) in its entirety while increasing the amount of revolving credit available from $500 million to $800 million and extending the maturity by one additional year to February 2022. The senior unsecured revolving credit facility (the “Revolving Credit Facility”) also included sublimits of $100 million for letters of credit and $15 million for swing line loans. The term loan facility under the Prior Credit Agreement was terminated and paid off effective April 24, 2020. Borrowings outstanding under the Revolving Credit Facility bore interest at a fluctuating rate per annum equal to an applicable percentage defined as (i) in the case of Eurocurrency rate loans, the adjusted British Bankers Association LIBOR rate (which at all times was not less than 1.00%) plus an applicable percentage, ranging from 1.50% to 2.10%, determined by reference to our consolidated leverage ratio, or (ii) in the case of alternate base rate loans and swing line loans, interest (which at all times was not less than 2.00%) at the

34

Table of Contents

greatest of (a) the Prime Rate in effect on such day, (b) the FRBNY Rate in effect on such day plus 0.50% and (c) the adjusted LIBOR rate plus 1.00% for a one month interest period in dollars.

​

As of December 31, 2021, we held $242.0 million in cash and cash equivalents. Of this amount, $195.9 million was held by foreign subsidiaries. Our U.S. operations typically generate sufficient cash flows to meet our domestic obligations. However, if we did have to borrow to fund some or all of our expected cash outlays, we can do so at reasonable interest rates by utilizing the undrawn borrowings under our New Revolving Credit Facility. We believe that our financial resources allow us to manage the anticipated impacts of the COVID-19 pandemic on our business operations for the foreseeable future. We anticipate the impacts of COVID-19 will continue to evolve, and, as a result we will continue to evaluate our financial position as additional information becomes available, particularly relating to COVID-19. Subsequent to recording the Toll Tax as part of the Tax Cuts and Jobs Act of 2017, our intent is to permanently reinvest undistributed earnings of foreign subsidiaries, and we do not have any current plans to repatriate post-Toll Tax foreign earnings to fund operations in the United States. However, if amounts held by foreign subsidiaries were needed to fund operations in the United States, we could be required to accrue and pay taxes to repatriate these funds. Such charges may include potential state income taxes and other tax charges.

​

Covenant Compliance

Under the Second Amended Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests as of December 31, 2021. The financial ratios include a consolidated interest coverage ratio based on consolidated earnings before income taxes, interest expense, depreciation, and amortization (Consolidated EBITDA) to consolidated interest expense, as defined in the Second Amended Credit Agreement. The Second Amended Credit Agreement defines Consolidated EBITDA to exclude unusual or non-recurring charges and gains. We are also required to maintain a consolidated leverage ratio of consolidated funded debt to Consolidated EBITDA. Consolidated funded debt, as defined in the Second Amended Credit Agreement, includes all long and short-term debt, finance lease obligations and any trade letters of credit that are outstanding, less cash and cash equivalents on the balance sheet.

​

As of December 31, 2021, our actual financial ratios calculated in accordance with the Second Amended Credit Agreement compared to the required levels under the Second Amended Credit Agreement were as follows:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Actual Ratio","","Required Level"],["\u200b","\u200b","\u200b","","Minimum level"],["Interest Charge Coverage Ratio","","51.4 to 1.00","","3.50 to 1.00"],["\u200b","\u200b","\u200b","","Maximum level"],["Leverage Ratio","","0.00 to 1.00","","3.50 to 1.00"]]
[[/GREPCENT_TABLE]]

​

As of December 31, 2021, we were in compliance with all covenants related to the Second Amended Credit Agreement.

​

In addition to financial ratios, the Second Amended Credit Agreement contains affirmative and negative covenants that include limitations on disposition or sale of assets, prohibitions on assuming or incurring any liens on assets with limited exceptions and limitations on making investments other than those permitted by the agreement.

​

Working capital (defined as current assets less current liabilities) as of December 31, 2021 was $453.0 million compared to $396.7 million as of December 31, 2020. The ratio of current assets to current liabilities was 2.1 to 1 as of December 31, 2021 compared to 2.3 to 1 as of December 31, 2020. The increase in working capital is primarily related to the increase in inventory as a result of the supply chain disruptions.

​

35

Table of Contents

Material Cash Requirements

​

We expect existing cash and cash equivalents and cash flows from operations and financing activities to be sufficient to meet our cash needs for the next 12 months and thereafter for the foreseeable future.

​

We anticipate investing between $40 million to $50 million in capital expenditures in the next 12 months to improve our manufacturing capabilities and invest in technology and other commercial and operational excellence initiatives.

​

We anticipate spending approximately $15 million in the next 12 months related to the French restructuring program that was approved in 2021. For a more detailed description of our current restructuring plans, see Note 3 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.

​

We intend to continue to repurchase shares of Class A common stock consistent with prior years. The repurchases are executed from time to time on the open market or in privately negotiated transactions. The timing and number of shares repurchased will be determined based on our evaluation of market conditions and other factors, see Note 12 of Notes to Consolidated Financial Statements in this Annual Report Form 10-K.

​

While we presently intend to continue to pay comparable quarterly cash dividends on both Class A and B common stock, the payment of future cash dividends depends upon the Board of Directors’ assessment of our earnings, financial condition, capital requirements and other factors.

​

We maintain letters of credit that guarantee our performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $14.0 million as of December 31, 2021 and $16.2 million as of December 31, 2020. Our letters of credit are primarily associated with insurance coverage and, to a lesser extent, foreign purchases and generally expire within one year of issuance. These instruments may exist or expire without being drawn down; therefore, they do not necessarily represent future cash flow obligations.

​

Our contractual obligations as of December 31, 2021 are presented in the following table:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","\u200b","","Next","","Beyond"],["Contractual Obligations","\u200b","Total","\u200b","12 Months","\u200b","12 Months"],["\u200b","\u200b","(in millions)"],["Long-term debt obligations, including current maturities(a)","\u200b","$","145.0","\u200b","$","\u2014","\u200b","$","145.0"],["Operating lease obligations(b)","\u200b","","60.0","\u200b","","10.4","\u200b","","49.6"],["Finance lease obligations(c)","\u200b","","3.6","\u200b","","1.4","\u200b","","2.2"],["Pension contributions(d)","\u200b","","9.2","\u200b","","0.5","\u200b","","8.7"],["Interest(e)","\u200b","","17.1","\u200b","","5.0","\u200b","","12.1"],["2017 Tax Act Toll Tax payable(f)","\u200b","\u200b","18.7","\u200b","\u200b","\u2014","\u200b","\u200b","18.7"],["Capital expenditures(g)","\u200b","\u200b","6.8","\u200b","\u200b","6.8","\u200b","\u200b","\u2014"],["Other(h)","\u200b","","66.4","\u200b","","59.9","\u200b","","6.5"],["Total","\u200b","$","326.8","\u200b","$","84.0","\u200b","$","242.8"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","Relates to the drawdown on the line of credit under the Second Amended Credit Agreement as recognized in the consolidated balance sheet. See Note 11 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(b)","Relates to the lease liabilities recognized for right-of-use assets of operating leases with a lease term longer than twelve months. See Note 5 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(c)","Relates to the lease liabilities recognized for right-of-use assets of financing leases with a lease term longer than twelve months. See Note 5 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(d)","Relates to estimated future obligations for the Europe pension plans. See Note 14 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures."]]
[[/GREPCENT_TABLE]]

​

36

Table of Contents

[[GREPCENT_TABLE]]
[["(e)","Represents the current estimate of future interest payments due on the current drawdown on the line of credit under the Second Amended Credit Agreement referenced above at (a)."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(f)","Relates to the 2017 Tax Act one time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax which was payable over a number of years."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(g)","Relates to capital expenditure obligations included in investment totals of $40 million to $50 million discussed above."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(h)","The majority relates to commodity commitments, as well as the contingent consideration related to two immaterial acquisitions."]]
[[/GREPCENT_TABLE]]

​

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

​

Non-GAAP Financial Measures

​

In accordance with the SEC's Regulation G and Item 10(e) of Regulation S-K, the following provides definitions of the non-GAAP measures used by management. We believe that these measures enhance the overall understanding of underlying business results and trends. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to more fully understand our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.

​

Organic net sales growth is a non-GAAP measure of net sales growth that excludes the impacts of acquisitions, divestitures and foreign exchange from period-over-period comparisons. A reconciliation to the most closely related U.S. GAAP measure, net sales, has been included in our discussion within “Results of Operations” above. Organic net sales should be considered in addition to, and not as a replacement for or as a superior measure to net sales. Management believes reporting organic sales growth provides useful information to investors, potential investors and others, by facilitating easier comparisons of our revenue performance with prior and future periods.

​

Adjusted operating income, adjusted operating margins, adjusted net income, and adjusted earnings per share are non-GAAP measures that exclude certain expenses incurred and benefits recognized in the periods presented that relate primarily to our global restructuring programs, other long-lived asset impairment charges, professional fees, acquisition related costs, footprint optimization costs, an earnout adjustment, loss on disposal, and the related income tax impacts on these items and other tax adjustments. Management believes reporting these financial measures provides useful information to investors, potential investors and others, by facilitating easier comparisons of our performance with prior and future periods.

​

37

Table of Contents

A reconciliation of U.S. GAAP results to these adjusted non-GAAP measures is provided below (dollars in millions, except per share amounts):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Year Ended"],["\u200b","\u200b","December 31,","\u200b","December 31,"],["\u200b","\u200b","2021","\u200b","2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net sales","\u200b","$","1,809.2","\u200b","$","1,508.6"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating income - as reported","\u200b","\u200b","239.6","\u200b","\u200b","181.1"],["Operating margin %","\u200b","\u200b","13.2%","\u200b","\u200b","12.0%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjustments for special items:","\u200b","","\u200b","\u200b","","\u200b"],["Restructuring","\u200b","\u200b","19.3","\u200b","\u200b","9.9"],["Footprint optimization","\u200b","\u200b","\u2014","\u200b","\u200b","1.1"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Acquisitions / divesture costs / adjustments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["- Other long-lived asset impairment charge","\u200b","\u200b","\u2014","\u200b","\u200b","1.4"],["- Acquisition related costs","\u200b","\u200b","\u2014","\u200b","\u200b","1.3"],["- Loss on disposal","\u200b","\u200b","\u2014","\u200b","\u200b","0.6"],["- Earnout adjustment","\u200b","\u200b","\u2014","\u200b","\u200b","(1.5)"],["Total acquisitions / divesture costs / adjustments","\u200b","\u200b","\u2014","\u200b","\u200b","1.8"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total adjustments for special items","\u200b","$","19.3","\u200b","$","12.8"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating income - as adjusted","\u200b","$","258.9","\u200b","$","193.9"],["Adjusted operating margin %","\u200b","\u200b","14.3%","\u200b","\u200b","12.9%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net income - as reported","\u200b","$","165.7","\u200b","$","114.3"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjustments for special items - tax effected:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Restructuring","\u200b","\u200b","14.1","\u200b","\u200b","7.4"],["Footprint optimization","\u200b","\u200b","\u2014","\u200b","\u200b","0.8"],["Tax adjustments","\u200b","\u200b","7.2","\u200b","\u200b","9.7"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Acquisitions / divesture costs / adjustments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["- Other long-lived asset impairment charge","\u200b","\u200b","\u2014","\u200b","\u200b","1.0"],["- Acquisition related costs","\u200b","\u200b","\u2014","\u200b","\u200b","1.0"],["- Net gain on disposal","\u200b","\u200b","\u2014","\u200b","\u200b","(0.7)"],["- Earnout adjustment","\u200b","\u200b","\u2014","\u200b","\u200b","(1.5)"],["Total acquisitions / divesture costs / adjustments","\u200b","\u200b","\u2014","\u200b","\u200b","(0.2)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total adjustments for special items - tax effected:","\u200b","$","21.3","\u200b","$","17.7"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net income as adjusted","\u200b","$","187.0","\u200b","$","132.0"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Diluted earnings per share - as reported","\u200b","$","4.88","\u200b","$","3.36"],["Adjustments for special items","\u200b","","0.64","\u200b","","0.52"],["Diluted earnings per share - as adjusted","\u200b","$","5.52","\u200b","$","3.88"]]
[[/GREPCENT_TABLE]]

​

Free cash flow is a non-GAAP measure that does not represent cash generated from operating activities in accordance with U.S. GAAP. Therefore, it should not be considered an alternative to net cash provided by operating activities as an indication of our performance. The cash conversion rate of free cash flow to net income is also a measure of our performance in cash flow generation. We believe free cash flow to be an appropriate supplemental measure of our operating performance because it provides investors with a measure of our ability to generate cash, repay debt, pay dividends, repurchase stock and fund acquisitions.

​

38

Table of Contents

A reconciliation of net cash provided by operating activities to free cash flow and calculation of our cash conversion rate is provided below:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","\u200b","2021","\u200b","2020","\u200b"],["\u200b","\u200b","(in millions)"],["Net cash provided by operating activities","\u200b","$","180.8","\u200b","$","228.8","\u200b"],["Less: additions to property, plant, and equipment","\u200b","","(26.7)","\u200b","","(43.8)","\u200b"],["Plus: proceeds from the sale of property, plant, and equipment","\u200b","","5.1","\u200b","","2.2","\u200b"],["Free cash flow","\u200b","$","159.2","\u200b","$","187.2","\u200b"],["Net income \u2014as reported","\u200b","$","165.7","\u200b","$","114.3","\u200b"],["Cash conversion rate of free cash flow to net income","\u200b","","96.1","%","","163.8","%"]]
[[/GREPCENT_TABLE]]

​

Our free cash flow declined in 2021 when compared to 2020 primarily driven by a proactive decision to increase inventory in response to a combination of strong market demand and disrupted supply chains, partially offset by higher net income and lower net capital expenditures.

​

Our net debt to capitalization ratio, a non-GAAP financial measure used by management, at December 31, 2021 was (9.3)% for 2021 compared to (2.0)% in 2020. The decrease was driven by an increase in net cash outstanding of $23.1 million and a reduction of debt outstanding of $56.3 million at December 31, 2021 compared to December 31, 2020. Management believes the net debt to capitalization ratio is an appropriate supplemental measure because it helps investors understand our ability to meet our financing needs and serves as a basis to evaluate our financial structure. Our computation may not be comparable to other companies that may define their net debt to capitalization ratios differently.

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A reconciliation of long-term debt (including current portion) to net debt and our net debt to capitalization ratio is provided below:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,"],["\u200b","","2021","","2020"],["\u200b","\u200b","(in millions)"],["Current portion of long\u2011term debt","","$","\u2014","\u200b","$","\u2014"],["Plus: long-term debt, net of current portion","","\u200b","141.9","\u200b","","198.2"],["Less: cash and cash equivalents","","\u200b","(242.0)","\u200b","","(218.9)"],["Net debt","\u200b","$","(100.1)","\u200b","$","(20.7)"]]
[[/GREPCENT_TABLE]]

​

A reconciliation of capitalization is provided below:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,"],["\u200b","","2021","","2020"],["\u200b","\u200b","(in millions)"],["Net debt","\u200b","$","(100.1)","\u200b","$","(20.7)","\u200b"],["Total stockholders\u2019 equity","\u200b","","1,173.2","\u200b","","1,069.8","\u200b"],["Capitalization","\u200b","$","1,073.1","\u200b","$","1,049.1","\u200b"],["Net debt to capitalization ratio","\u200b","","(9.3)","%","","(2.0)","%"]]
[[/GREPCENT_TABLE]]

​

​

Application of Critical Accounting Policies and Key Estimates

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The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used, or, a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no significant changes in our accounting policies or significant changes in our accounting estimates during 2021.

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We periodically discuss the development, selection and disclosure of the estimates with our Audit Committee. Management believes the following critical accounting policies reflect our more significant estimates and assumptions.

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​

Revenue recognition

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We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration to which we expect to be entitled. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. When determining the transaction price of each contract, we consider contractual consideration payable by the customer and variable consideration that may affect the total transaction price. Variable consideration, consisting of early payment discounts, rebates and other sources of price variability, are included in the estimated transaction price based on both customer-specific information as well as historical experience. We regularly review our estimates of variable consideration on the transaction price and recognize changes in estimates on a cumulative catch-up basis as if the most current estimate of the transaction price adjusted for variable consideration had been known as of the inception of the contract.

​

Our revenue for product sales is recognized on a point in time model, at the point control transfers to the customer, which is generally when products are shipped from the Company’s manufacturing or distribution facilities or when delivered to the customer’s named location. Sales tax, value-added tax, or other taxes collected concurrent with revenue producing activities are excluded from revenue. Freight costs billed to customers for shipping and handling activities are included in revenue with the related cost included in selling, general and administrative expenses. See Note 4 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further disclosures and detail regarding revenue recognition.

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Inventory valuation

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Inventories are stated at the lower of cost or net realizable value with costs determined primarily on a first-in first-out basis. We evaluate the need to record adjustments for excess or obsolete inventory at least quarterly. We utilize both specific product identification and historical product demand as the basis for estimating our excess or obsolete inventory reserve. We identify all inventories that exceed a range of one to three years in sales to calculate inventory on hand that exceeds estimated demand. This is determined by comparing the current inventory balance against unit sales for the trailing twelve months. New products added to inventory within the past twelve months are excluded from this analysis. A portion of our products contain recoverable materials, therefore the excess and obsolete reserve is established net of any estimated recoverable amounts based on historical experience. Changes in market conditions, lower-than- expected customer demand or changes in technology or features could result in additional excess or obsolete inventory that is not saleable and could require additional inventory reserve provisions.

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In certain countries, additional inventory reserves are maintained for potential shrinkage experienced in the manufacturing process. The reserve is established based on the prior year’s inventory losses adjusted for any change in the gross inventory balance.

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Goodwill and other intangibles

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We have made numerous acquisitions over the years and have recognized a significant amount of goodwill. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit when a quantitative analysis is performed. We estimate the fair value of our reporting units using an income approach based on the present value of estimated future cash flows, and when appropriate, guideline public company and guideline transaction market approaches.

​

Accounting guidance allows us to assess goodwill for impairment utilizing either qualitative or quantitative analyses. We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the quantitative impairment test is unnecessary.

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We first identify those reporting units that we believe could pass a qualitative assessment to determine whether further impairment testing is necessary. For each reporting unit identified, our qualitative analysis includes:

​

[[GREPCENT_TABLE]]
[["","1)","A review of the most recent fair value calculation to identify the extent of the cushion between fair value and carrying amount, to determine if a substantial cushion existed."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","2)","A review of events and circumstances that have occurred since the most recent fair value calculation to determine if those events or circumstances would have affected our previous fair value assessment. Items identified and reviewed include macroeconomic conditions, industry and market changes, cost factor changes, events that affect the reporting unit, and financial performance against expectations and the reporting unit\u2019s performance relative to peers."]]
[[/GREPCENT_TABLE]]

​

We then compile this information and make our assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we determine it is not more likely than not, then no further quantitative analysis is required.

​

In 2021, we had seven reporting units. One of these reporting units, Water Quality, had no goodwill. We performed a qualitative analysis for each of the six remaining reporting units, which include Blücher, US Drains, Fluid Solutions-Europe, Fluid Solutions-Americas, Heating and Hot Water Solutions (“HHWS”) and APMEA.

​

As of our October 24, 2021 testing date, we had $605.8 million of goodwill on our balance sheet. As a result of our qualitative analyses, we determined that the fair values of the six reporting units noted above were more likely than not greater than the carrying amounts. In 2021, we did not need to proceed beyond the qualitative analysis, and no goodwill impairments were recorded. Changes in macroeconomic, industry or market conditions, or our inability to achieve projected results that were used to complete the qualitative analyses could result in the reporting unit fair value not exceeding the carrying amounts and could lead to impairment.

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Intangible assets such as trademarks and trade names are generally recorded in connection with a business acquisition and we have recorded certain trademarks and trade names as indefinite-lived intangible assets. Values assigned to intangible assets are typically determined by an independent valuation firm based on our estimates and judgments regarding expectations of the success and life cycle of products and technology acquired. Accounting guidance allows us to perform a qualitative impairment assessment of indefinite-lived intangible assets consistent with the goodwill guidance noted previously. For our 2021 impairment assessment, which occurred as of October 24, 2021, we performed a qualitative assessment for all trademarks and tradenames as each intangible asset’s fair value significantly exceeded the carrying value in the previous quantitative assessment performed, each had sales growth in 2021, sales growth is expected in the trademark or tradename in 2022, and no other indicators of impairment were present. As a result of our qualitative analyses, we determined that the fair values of the indefinite-lived intangibles assets were more likely than not greater than the carrying amounts. If we were to perform a quantitative assessment, the methodology we employ is the relief from royalty method, a subset of the income approach. During 2021, 2020, and 2019, no impairment was recognized on our indefinite-lived intangible assets. Changes in macroeconomic, industry or market conditions, or our inability to achieve projected results that were used to complete the qualitative analyses could result in the trademark’s or trade name’s fair value not exceeding its carrying amount and could lead to impairment.

​

Product liability

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Because of retention requirements associated with our insurance policies, we are generally self-insured for potential product liability claims. We are subject to a variety of potential liabilities in connection with product liability cases, and for our most significant volume of liability matters, we maintain a high self-insured retention limit within our product liability and general liability coverage, which we believe to be generally in accordance with industry practices. We maintain excess liability insurance to minimize our risks related to claims in excess of our primary insurance policies. The product liability accrual is established after considering any applicable insurance coverage.

​

For our product liability cases in the U.S., we establish a product liability accrual, which includes estimated legal costs associated with accrued claims. For our most significant volume of liability matters, we utilize third-party actuarial valuations which incorporate historical trend factors including, but not limited to, claim frequency and loss severity, and our specific claims experience derived from loss reports provided by third-party claims administrators to establish our product liability accrual. The product liability accrual represents the estimated ultimate losses for all reported and

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incurred but not reported claims. For the remainder of our product liability accrual, where we do not utilize third-party actuarial valuations, we maintain insurance and calculate potential product liability accruals which includes legal costs associated with the accrued claims on a case by case basis. Changes in the nature and volume of product liability claims, legal costs, or the actual settlement amounts could affect the adequacy of the estimates and require changes to the accrual. Because the liability is an estimate, the ultimate liability may be more or less than reported. Any material change in the aforementioned factors could have an adverse impact on our operating results for any particular period depending, in part, upon the operating results for such period.

​

Legal contingencies

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We are a defendant in numerous legal matters including those involving environmental issues and product liability as discussed in more detail in Part I, Item 1. “Business—Product Liability, Environmental and Other Litigation Matters” and Note 15 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. As required by GAAP, we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and the loss amount can be reasonably estimated. When it is possible to estimate reasonably possible loss or range of loss above the amount accrued, that estimate is aggregated and disclosed. Estimates of potential outcomes of these contingencies are often developed in consultation with outside counsel. While this assessment is based upon all available information, litigation is inherently uncertain and the actual liability to fully resolve litigation cannot be predicted with any assurance of accuracy. In the event of an unfavorable outcome in one or more legal matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to our operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to us, management believes that the ultimate outcome of all legal contingencies, as they are resolved over time, is not likely to have a material adverse effect on our financial condition, though the outcome could be material to our operating results for any particular period depending, in part, upon the operating results for such period.

​

Income taxes

​

We are subject to income taxes in the U.S. (federal and state) and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.

​

We estimate and use our expected annual effective income tax rates to accrue income taxes. Effective tax rates are determined based on budgeted earnings before taxes, including our best estimate of permanent items that will affect the effective rate for the year. Management periodically reviews these rates with outside tax advisors and changes are made if material variances from expectations are identified.

​

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

​

A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider estimated future taxable income, future reversals of the deferred tax liabilities, and tax planning strategies, in assessing the need for a valuation allowance. Changes in the relevant facts, including the accuracy of our estimated future taxable income, can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

​

As of December 31, 2021, we released $22.1 million of our valuation allowance on foreign tax credits related to the additional foreign source income resulting from our restructured Mexican manufacturing supply chain operations. See Note 9 of Notes to the Consolidated Financial Statements in this Annual Report for further disclosures.

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