UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
of the Securities Exchange Act of 1934
for the Quarterly Period Ended March 31, 2022
Commission File Number 1-9608
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (770 ) 418-7000
Securities registered pursuant to Section 12(b) of the Act:
| TITLE OF EACH CLASS | TRADING SYMBOL | NAME OF EXCHANGE ON WHICH REGISTERED | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding (net of treasury shares) as of April 25, 2022: 413.5 million.
| TABLE OF CONTENTS | |||||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEWELL BRANDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions, except per share data)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of products sold | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Restructuring costs, net | |||||||||||
| Operating income | |||||||||||
| Non-operating expenses: | |||||||||||
| Interest expense, net | |||||||||||
| Other income, net | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Income tax provision | |||||||||||
| Net income | $ | $ | |||||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| Earnings per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
2
NEWELL BRANDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Amounts in millions)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Comprehensive income (loss): | |||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of tax | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Pension and postretirement costs | |||||||||||
| Derivative financial instruments | |||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||
| Comprehensive income | |||||||||||
| Total comprehensive loss attributable to noncontrolling interests | ( | ||||||||||
| Total comprehensive income attributable to parent | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
3
NEWELL BRANDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions, except par values)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued compensation | |||||||||||
| Other accrued liabilities | |||||||||||
| Short-term debt and current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Footnote 17) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock ( | |||||||||||
Common stock ( | |||||||||||
Treasury stock, at cost ( | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Retained deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
NEWELL BRANDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Gain from sale of business | ( | ||||||||||
| Deferred income taxes | |||||||||||
| Stock based compensation expense | |||||||||||
| Other, net | ( | ||||||||||
| Changes in operating accounts excluding the effects of divestiture: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued liabilities and other | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sale of divested business | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Other investing activities, net | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Payments on current portion of long-term debt | ( | ( | |||||||||
| Payments on long-term debt | ( | ||||||||||
| Repurchase of shares of common stock | ( | ||||||||||
| Cash dividends | ( | ( | |||||||||
| Equity compensation activity and other, net | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Exchange rate effect on cash, cash equivalents and restricted cash | ( | ||||||||||
| Decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures: | |||||||||||
| Restricted cash at beginning of period | $ | $ | |||||||||
| Restricted cash at end of period | |||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
NEWELL BRANDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
(Amounts in millions)
| Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||
| Comprehensive income | — | — | — | ||||||||||||||||||||||||||||||||
Dividends declared on common stock - $ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity compensation, net of tax | ( | — | — | ||||||||||||||||||||||||||||||||
| Common stock purchased and retired | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Other | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Loss | Stockholders' Equity Attributable to Parent | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Dividends declared on common stock - $ | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Equity compensation, net of tax | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Other changes attributable to noncontrolling interests | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
6
NEWELL BRANDS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Footnote 1 — Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Newell Brands Inc. (collectively with its subsidiaries, the “Company”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (including normal recurring accruals) considered necessary for a fair statement of the financial position and the results of operations of the Company. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, and the footnotes thereto, included in the Company’s most recent Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet at December 31, 2021 has been derived from the audited financial statements as of that date, but it does not include all the information and footnotes required by U.S. GAAP for a complete financial statement.
On March 31, 2022, the Company sold its Connected Home & Security (“CH&S”) business unit to Resideo Technologies, Inc. See Footnotes 2 and 16 for further information.
Use of Estimates and Risks and Uncertainty of Coronavirus (COVID-19)
Since early 2020, the COVID-19 pandemic resulted in various federal, state and local governments, as well as private entities, mandating restrictions on travel and public gatherings, closure of non-essential commerce, stay at home orders and quarantining of people to limit exposure to the virus. Although restrictions have eased since the first quarter of 2021 in certain areas, the Company's global operations, similar to those of many large, multi-national corporations, were adversely impacted by the COVID-19 pandemic.
The extent of the impact of the COVID-19 pandemic to the Company's future sales, operating results, cash flows, liquidity and financial condition continues to be driven by numerous evolving factors that the Company cannot reasonably predict and which will vary by jurisdiction and market, including the severity and duration of the pandemic, the emergence of new strains and variants of the coronavirus, the likelihood of a resurgence of positive cases, the development and availability of effective treatments and vaccines, especially in areas where conditions have recently worsened and work restrictions, operational or travel bans have been reinstituted, the rate at which vaccines are administered to the general public, the timing and amount of fiscal stimulus and relief programs packages that are available to the general public, the availability and prices of supply chain resources, including materials, products and transportation; and changes in consumer demand patterns for the Company's products as the impact of the global pandemic lessens. These primary drivers are beyond the Company's knowledge and control, and as a result, at this time it is difficult to reasonably predict the cumulative impact, both in terms of severity and duration, COVID-19 will have on its future sales, operating results, cash flows and financial condition.
Management’s application of U.S. GAAP in preparing the Company's consolidated financial statements requires the pervasive use of estimates and assumptions. As discussed above, the world continues to be impacted by the COVID-19 pandemic which has required greater use of estimates and assumptions in the preparation of the consolidated financial statements, more specifically, those estimates and assumptions utilized in the Company’s forecasted cash flows that form the basis in developing the fair values utilized in its impairment assessments as well as its annual effective tax rate. These estimates also include assumptions as to the duration and severity of the pandemic, timing and amount of demand shifts amongst sales channels, workforce availability and supply chain continuity. Although management has made its best estimates based upon current information, actual results could materially differ from those estimates and may require future changes to such estimates and assumptions. If so, the Company may be subject to future incremental impairment charges as well as changes to recorded reserves and valuations.
Seasonal Variations
Sales of the Company’s products tend to be seasonal, with sales, operating income and operating cash flow in the first quarter generally lower than any other quarter during the year, driven principally by reduced volume and the mix of products sold in the first quarter. The seasonality of the Company’s sales volume combined with the accounting for fixed costs, such as depreciation, amortization, rent, personnel costs and interest expense, impacts the Company’s results on a quarterly basis. In addition, the Company typically tends to generate the majority of its operating cash flow in the third and fourth quarters of the year due to seasonal variations in operating results, the timing of annual performance-based compensation payments, customer program payments, working capital requirements and credit terms provided to customers. Accordingly, the Company’s results of
7
The Company's sales and operating results, previously disrupted by the COVID-19 pandemic, reverted back to historical patterns in 2021, however, uncertainty still remains over the volatility and direction of future consumer demand patterns.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB clarified the scope of this guidance with the issuance of ASU 2021-01, Reference Rate Reform: Scope. ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate if certain criteria are met. ASU 2020-04 may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the potential effects of the adoption of ASU 2020-04.
Sales of Accounts Receivables
Factored receivables at March 31, 2022 associated with the Company's existing factoring agreement (the “Customer Receivables Purchase Agreement”) were approximately $535 million, an increase of approximately $35 million from December 31, 2021. Transactions under this agreement are accounted for as sales of accounts receivable, and the receivables sold are removed from the Condensed Consolidated Balance Sheet at the time of the sales transaction. The Company classifies the proceeds received from the sales of accounts receivable as an operating cash flow in the Condensed Consolidated Statement of Cash Flows. The Company records the discount as other income, net in the Condensed Consolidated Statement of Operations and collections of accounts receivables not yet submitted to the financial institution as a financing cash flow.
Footnote 2 — Divestiture Activity
Footnote 3 — Accumulated Other Comprehensive Income (Loss)
The following table displays the changes in Accumulated Other Comprehensive Income (Loss) (“AOCL”) by component, net of tax, for the three months ended March 31, 2022 (in millions):
| Cumulative Translation Adjustment | Pension and Postretirement Costs | Derivative Financial Instruments | AOCL | ||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified to earnings | |||||||||||||||||||||||
| Net current period other comprehensive income | |||||||||||||||||||||||
| Balance at March 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
8
Reclassifications from AOCL to the results of operations for the three months ended March 31, 2022 and 2021 were pretax expense of (in millions):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Cumulative translation adjustment (1) | $ | $ | |||||||||
Pension and postretirement benefit plans (2) | |||||||||||
Derivative financial instruments (3) | |||||||||||
(1)See Footnote 2 for further information.
(2)See Footnote 11 for further information.
(3)See Footnote 10 for further information.
The income tax provision (benefit) allocated to the components of AOCL for the periods indicated are as follows (in millions):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Foreign currency translation adjustments | $ | $ | |||||||||
| Pension and postretirement benefit costs | |||||||||||
| Derivative financial instruments | ( | ||||||||||
| Income tax provision related to AOCL | $ | $ | |||||||||
Footnote 4 — Restructuring Costs
Restructuring costs, net incurred by reportable business segments for all restructuring activities for the periods indicated are as follows (in millions):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Commercial Solutions | $ | $ | |||||||||
| Home Appliances | |||||||||||
| Home Solutions | |||||||||||
| Learning and Development | |||||||||||
| Outdoor and Recreation | |||||||||||
| $ | $ | ||||||||||
Accrued restructuring costs activity for the three months ended March 31, 2022 are as follows (in millions):
| Balance at December 31, 2021 | Restructuring Costs, Net | Payments | Balance at March 31, 2022 | ||||||||||||||||||||
| Severance and termination costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Contract termination and other costs | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
2020 Restructuring Plan
The Company’s 2020 restructuring program, which was substantially complete at the end of 2021, was designed to reduce overhead costs, streamline certain underperforming operations and improve future profitability. The restructuring costs, which
9
impacted all segments, include employee-related costs such as severance and other termination benefits. During the three months ended March 31, 2021, the Company recorded restructuring charges of $5 million. Any remaining cash payments are expected to be paid within one year of charges incurred.
Other Restructuring and Restructuring-Related Costs
The Company regularly incurs other restructuring and restructuring-related costs in connection with various discrete initiatives, including certain costs associated with Project Ovid. Restructuring-related costs are recorded in cost of products sold and selling, general and administrative expenses (“SG&A”) in the Condensed Consolidated Statements of Operations based on the nature of the underlying costs incurred. During the three months ended March 31, 2022, the Company recorded restructuring charges of $5 million.
Footnote 5 — Inventories
Inventories are comprised of the following at the dates indicated (in millions):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Raw materials and supplies | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished products | |||||||||||
| $ | $ | ||||||||||
Footnote 6 — Property, Plant and Equipment, Net
Property, plant and equipment, net, is comprised of the following at the dates indicated (in millions):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
Depreciation expense was $49 million and $52 million for the three months ended March 31, 2022 and 2021, respectively.
10
Footnote 7 — Goodwill and Other Intangible Assets, Net
Goodwill activity for the three months ended March 31, 2022 is as follows (in millions):
| Segments | Net Book Value at December 31, 2021 | Foreign Exchange | Gross Carrying Amount | Accumulated Impairment Charges | Net Book Value at March 31, 2022 | ||||||||||||||||||||||||
| Commercial Solutions | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Home Appliances | ( | ||||||||||||||||||||||||||||
| Home Solutions | ( | ||||||||||||||||||||||||||||
| Learning and Development | ( | ( | |||||||||||||||||||||||||||
| Outdoor and Recreation | ( | ||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
Other intangible assets, net, are comprised of the following at the dates indicated (in millions):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| Trade names — indefinite life | $ | $ | — | $ | $ | $ | — | $ | |||||||||||||||||||||||||||
| Trade names — other | ( | ( | |||||||||||||||||||||||||||||||||
| Capitalized software | ( | ( | |||||||||||||||||||||||||||||||||
| Patents and intellectual property | ( | ( | |||||||||||||||||||||||||||||||||
| Customer relationships and distributor channels | ( | ( | |||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
Amortization expense for intangible assets was $27 million and $34 million for the three months ended March 31, 2022 and 2021, respectively.
Footnote 8 — Other Accrued Liabilities
Other accrued liabilities are comprised of the following at the dates indicated (in millions):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Customer accruals | $ | $ | |||||||||
| Operating lease liabilities | |||||||||||
| Accrued self-insurance liabilities, contingencies and warranty | |||||||||||
| Accrued interest expense | |||||||||||
| Accrued marketing and freight expenses | |||||||||||
| Accrued income taxes | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
11
Footnote 9 — Debt
| March 31, 2022 | December 31, 2021 | ||||||||||
| $ | $ | ||||||||||
| Other debt | |||||||||||
Total debt | |||||||||||
| Short-term debt and current portion of long-term debt | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
Senior Notes
On February 11, 2022, S&P Global Inc. (“S&P”) upgraded the Company’s debt rating to “BBB-” from “BB+” as S&P believed the Company has been able to achieve S&P’s target debt level. As a result of this upgrade, the Company is now in a position to access the commercial paper market, up to a maximum of $800 million, provided there is a sufficient amount available for borrowing under the Credit Revolver (defined hereafter). In addition, the interest rate on the relevant senior notes decreased by 25 basis points due to the upgrade, reducing the Company’s interest expense by approximately $10 million on an annualized basis (approximately $8 million in 2022). However, certain of the Company’s outstanding senior notes aggregating to approximately $4.2 billion are still subject to an interest rate adjustment of 25 basis points in connection with the Moody’s Corporation (“Moody’s”) downgraded debt rating in 2020.
Receivables Facility
The Company maintains an Accounts Receivable Securitization Facility (the “Securitization Facility”). The aggregate commitment under the Securitization Facility is $600 million. The Securitization Facility matures in October 2022 and bears interest at a margin over a variable interest rate. The maximum availability under the Securitization Facility fluctuates based on eligible accounts receivable balances. At March 31, 2022, the Company did not have any amounts outstanding under the Securitization Facility.
Revolving Credit Facility
The Company has a $1.25 billion revolving credit facility that matures in December 2023 (the “Credit Revolver”). At March 31, 2022, the Company did not have any amounts outstanding under the Credit Revolver.
Other
The fair value of the Company’s senior notes are based upon prices of similar instruments in the marketplace and are as follows (in millions):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Fair Value | Book Value | Fair Value | Book Value | ||||||||||||||||||||
| Senior notes | $ | $ | $ | $ | |||||||||||||||||||
The carrying amounts of all other significant debt approximates fair value.
12
Footnote 10 —Derivatives
From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.
Interest Rate Contracts
The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company may use fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps would be used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps would be used to reduce the Company’s risk of the possibility of increased interest costs. The cash paid and received from the settlement of interest rate swaps is included in interest expense.
Fair Value Hedges
At March 31, 2022, the Company had approximately $100 million notional amount of interest rate swaps that exchange a fixed rate of interest for variable rate (LIBOR) of interest plus a weighted average spread. These floating rate swaps are designated as fair value hedges against $100 million of principal on the 4.00 % senior notes due 2024 for the remaining life of the note. The effective portion of the fair value gains or losses on these swaps is offset by fair value adjustments in the underlying debt.
Cross-Currency Contracts
The Company uses cross-currency swaps to hedge foreign currency risk on certain financing arrangements. The Company previously entered into three cross-currency swaps, maturing in January 2025, February 2025 and September 2027, respectively, with an aggregate notional amount of $1.3 billion. Each of these cross-currency swaps were designated as net investment hedges of the Company's foreign currency exposure of its net investment in certain Euro-functional currency subsidiaries with Euro-denominated net assets, and the Company pays a fixed rate of Euro-based interest and receives a fixed rate of U.S. dollar interest. The Company has elected the spot method for assessing the effectiveness of these contracts. During the three months ended March 31, 2022 and 2021, the Company recognized income of $5 million and $4 million, respectively, in interest expense, net, related to the portion of cross-currency swaps excluded from hedge effectiveness testing.
Foreign Currency Contracts
The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales and have maturity dates through December 2022. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCL until it is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At March 31, 2022, the Company had approximately $467 million notional amount outstanding of forward foreign currency contracts that are designated as cash flow hedges of forecasted inventory purchases and sales.
The Company also uses foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain other foreign currency transactions. At March 31, 2022, the Company had approximately $1.2 billion notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through December 2022. Fair market value gains or losses are included in the results of operations and are classified in other income, net in the Company's Condensed Consolidated Statement of Operations.
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The following table presents the fair value of derivative financial instruments at the dates indicated (in millions):
| Fair Value of Derivatives | |||||||||||||||||
| Assets (Liabilities) | |||||||||||||||||
| Balance Sheet Location | March 31, 2022 | December 31, 2021 | |||||||||||||||
| Derivatives designated as effective hedges: | |||||||||||||||||
| Cash Flow Hedges | |||||||||||||||||
| Foreign currency contracts | Prepaid expenses and other current assets | $ | $ | ||||||||||||||
| Foreign currency contracts | Other accrued liabilities | ( | ( | ||||||||||||||
| Fair Value Hedges | |||||||||||||||||
| Interest rate swaps | Other assets | ||||||||||||||||
| Interest rate swaps | Other accrued liabilities | ( | |||||||||||||||
| Net Investment Hedges | |||||||||||||||||
| Cross-currency swaps | Prepaid expenses and other current assets | ||||||||||||||||
| Cross-currency swaps | Other noncurrent liabilities | ( | ( | ||||||||||||||
| Derivatives not designated as effective hedges: | |||||||||||||||||
| Foreign currency contracts | Prepaid expenses and other current assets | ||||||||||||||||
| Foreign currency contracts | Other accrued liabilities | ( | ( | ||||||||||||||
| Total | $ | ( | $ | ( | |||||||||||||
The following table presents gain and (loss) activity (on a pretax basis) related to derivative financial instruments designated or previously designated, as effective hedges (in millions):
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
| Gain/(Loss) | Gain/(Loss) | ||||||||||||||||||||||||||||
| Location of gain/(loss) recognized in income | Recognized in OCI (effective portion) | Reclassified from AOCL to Income | Recognized in OCI (effective portion) | Reclassified from AOCL to Income | |||||||||||||||||||||||||
Interest rate swaps | Interest expense, net | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||
Foreign currency contracts | Net sales and cost of products sold | ( | ( | ||||||||||||||||||||||||||
Cross-currency swaps | Other income, net | ||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
At March 31, 2022, net deferred gains of approximately $10 million within AOCL are expected to be reclassified to earnings over the next twelve months.
During the three months ended March 31, 2022 and 2021, the Company recognized expense of $3 million and income of $7 million, respectively, in other income, net, related to derivatives that are not designated as hedging instruments. Gains and losses on these derivatives are mostly offset by foreign currency movement in the underlying exposure.
The Company is not a party to any derivatives that require collateral to be posted prior to settlement.
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Footnote 11 — Employee Benefit and Retirement Plans
The components of pension and postretirement benefit (income) expense for the periods indicated, are as follows (in millions):
| Pension Benefits | |||||||||||||||||||||||
| U.S. | International | ||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization | |||||||||||||||||||||||
| Total (income) expense | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Postretirement Benefits | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Amortization | $ | ( | $ | ( | |||||||
| Total income | $ | ( | $ | ( | |||||||
U.K. Defined Benefit Plan Buy-in
In February 2022, the Company entered into an agreement with an insurance company for a bulk annuity purchase or “buy-in” for one of its U.K. defined benefit pension plans, resulting in an exchange of plan assets for an annuity that matches the plan’s future projected benefit obligations to covered participants. The Company anticipates the “buy-out” for the plan to be completed by the end of 2022 or early 2023. The non-cash settlement charge associated with the transaction is expected to be material to the Company's results of operations.
Footnote 12 — Income Taxes
The Company’s effective income tax rate for the three months ended March 31, 2022 and 2021 were 17.0 % and 29.4 %, respectively, reflecting an increase in discrete tax benefits and a lower effective income tax rate associated with the divestiture of the CH&S business.
The difference between the U.S. federal statutory income tax rate of 21.0
The three months ended March 31, 2022 were also impacted by certain discrete items. Income tax expense for the three months ended March 31, 2022 included a discrete benefit of $4 million associated with the approval of certain state tax credits, offset by $14 million of income tax expense related to the divestiture of the CH&S business unit. The three months ended March 31, 2021 were also impacted by $1 million of discrete tax items.
During the three months ended March 31, 2022, the Company amended its 2017 U.S. federal income tax return to carryback foreign tax credits generated in 2018 and capital losses generated in 2018 and 2020. This resulted in an increase in noncurrent income taxes receivable of approximately $261 million, a decrease in income taxes payable of approximately $95 million, and an increase in deferred tax liabilities of approximately $356 million.
The Company’s U.S. federal income tax returns for 2011 to 2015 and 2017 to 2019, as well as certain state and non-U.S. income tax returns for various years, are under examination.
On June 18, 2019, the U.S. Treasury and the Internal Revenue Service (“IRS”) released temporary regulations under IRC Section 245A (“Section 245A”) as enacted by the 2017 U.S. Tax Reform Legislation (“2017 Tax Reform”) and IRC Section 954(c)(6) (the “Temporary Regulations”) to apply retroactively to the date the 2017 Tax Reform was enacted. On August 21, 2020, the U.S.
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Footnote 13 — Earnings Per Share
The computations of the weighted average shares outstanding for the periods indicated are as follows (in millions):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Basic weighted average shares outstanding | |||||||||||
| Dilutive securities | |||||||||||
| Diluted weighted average shares outstanding | |||||||||||
At March 31, 2022 and 2021 dividends and equivalents for share-based awards expected to be forfeited did not have a material impact on net income for basic and diluted earnings per share.
Footnote 14 — Stockholders' Equity and Share-Based Compensation
During the three months ended March 31, 2022, the Company awarded 1.0 million performance-based restricted stock units (“RSUs”), which had an aggregate grant date fair value of $28 million and entitle the recipients to shares of the Company’s common stock primarily at the end of a three-year vesting period. The actual number of shares that will ultimately vest is dependent on the level of achievement of the specified performance conditions.
During the three months ended March 31, 2022, the Company also awarded 0.6 million time-based RSUs with an aggregate grant date fair value of $16 million. These time-based RSUs entitle recipients to shares of the Company’s common stock and primarily vest either at the end of a three-year period or in equal installments over a three-year period.
During the three months ended March 31, 2022, the Company also awarded 2.2 million time-based stock options with an aggregate grant date fair value of $14 million. These stock options entitle recipients to purchase shares of the Company’s common stock at an exercise price equal to the fair market value of the underlying shares as of the grant date and vest in equal installments over a three-year period.
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The weighted average assumptions used to determine the fair value of stock options granted for the three months ended March 31, 2022, is as follows:
| Risk-free interest rates | % | ||||
| Expected volatility | % | ||||
| Expected dividend yield | % | ||||
| Expected life (in years) | |||||
| Exercise price | $ | ||||
Share Repurchase Program
On February 6, 2022, the Company's Board of Directors authorized a $375 million Share Repurchase Program (“SRP”), effective immediately through the end of 2022. The Company’s common shares may be purchased by the Company in the open market, in negotiated transactions or in other manners, as permitted by federal securities laws and other legal requirements. On February 25, 2022, the Company repurchased $275 million of its shares of common stock beneficially owned by Carl C. Icahn and certain of his affiliates (collectively, “Icahn Enterprises”), at a purchase price of $25.86 per share, the closing price of the Company's common shares on February 18, 2022. At March 31, 2022, the Company has remaining authority to repurchase approximately $100 million of shares of common stock under the SRP.
Footnote 15 — Fair Value Disclosures
Recurring Fair Value Measurements
The following table presents the Company’s non-pension financial assets and liabilities, which are measured at fair value on a recurring basis (in millions):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Fair value Asset (Liability) | Fair value Asset (Liability) | ||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||||||||||||||||||||||||||
| Assets | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||