What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-07-27 · 147 added, 141 removed, 185 unchanged (61% of the section changed)

7 unchanged sentences

◦ Net sales from stores in U.S.

and Canada open more than twelve calendar months increased 19.3% in the quarter

• Diluted net income per share increased 12.0% to $2.42 per share in the quarter

• Net operating cash increased 11.8% year-to-date to $1.201 billion, or 12.0% of sales

While the Company has delivered a solid performance during the first half of 2021, many uncertainties remain, including the extent and duration of raw material inflation and supply chain constraints, as well as changes in demand for our products due to the impacts of the COVID-19 pandemic.

and Canada open more than twelve calendar months decreased 2.8% in the quarter

◦ Raw material availability issues negatively impacted quarter sales by an estimated high single digit percentage

• Diluted net income per share decreased 26.3% to $1.88 per share in the quarter

• Generated net operating cash of $2.051 billion in the first nine months of the year, or 13.5% of sales

While the Company has delivered a solid performance during the first nine months of 2021, many uncertainties remain, including the extent and duration of raw material inflation and supply chain constraints, as well as changes in demand for our products due to the impacts of the COVID-19 pandemic.

Despite the uncertainties, our businesses continue to be well-positioned, and we have confidence in our long-term outlook.

The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of the global economy.

We continue to work with government and health authorities to operate our business during this crisis, including our company-operated stores, manufacturing plants and other facilities.

We continue to work with government and health authorities to operate our business, including our company-operated stores, manufacturing plants and other facilities.

We also continue to follow recommended actions of government authorities and health officials in order to protect the health and well-being of our employees, customers and their families worldwide.

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In February 2021, Winter Storm Uri had a broad impact on the industry’s raw material supply chain.

While the storm had limited direct impact to the Company’s production facilities, the disruption to the supply chain created an economic environment with tight supply fundamentals and higher raw material inflation.

The Company continues to work diligently to collaborate across its businesses and with its customers to meet robust demand and minimize any impact on production or sales levels as a result of the global supply chain disruptions while providing differentiated solutions and excellent service to our customers.

The Company anticipates building inventory during its seasonally slower fourth quarter and has announced price increases in all businesses to offset the impact of higher raw material costs.

In August 2021, Hurricane Ida further disrupted the industry’s raw material supply chain.

The Company continues to work diligently to collaborate across its businesses and with its customers and suppliers to meet robust demand and minimize any impact on production or sales levels as a result of the global supply chain disruptions while providing differentiated solutions and excellent service to our customers.

As a result, the Company expects to ship all production for the remainder of 2021 and as raw material availability improves will build inventory in 2022.

Overall, we remain disciplined in our capital allocation approach, focused on driving value for our customers and returns to our shareholders.

We will also continue to pursue business acquisitions and transactions that fit our strategy, and we expect to use any excess cash to make open market purchases of our common stock.

We have a strong liquidity position, with $219.6 million in cash and $2.741 billion of unused capacity under our credit facilities at June 30, 2021.

We have a strong liquidity position, with $313.3 million in cash and $2.805 billion of unused capacity under our credit facilities at September 30, 2021.

We are in compliance with bank covenants and expect to remain in compliance.

1 unchanged sentence

The Company has historically experienced, and expects to continue to experience, variability in quarterly results.

The results of operations for the three and six months ended June 30, 2021 are not indicative of the results to be expected for the full year as business is seasonal in nature with the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters.

The results of operations for the three and nine months ended September 30, 2021 are not indicative of the results to be expected for the full year as business is seasonal in nature with the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters.

However, periods of economic downturn can alter the Company's seasonal patterns.

The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and six months ended June 30, 2021 and 2020.

(dollars in millions) Three Months Ended June 30, Six Months Ended June 30,

The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and nine months ended September 30, 2021 and 2020.

(dollars in millions) Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 $ Change % Change 2021 2020 $ Change % Change

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Total $ 5,146.7 $ 5,122.2 $ 24.5 0.5 % $ 15,182.5 $ 13,872.9 $ 1,309.6 9.4 %

Three Months Ended June 30, 2021

Consolidated net sales increased in the second quarter of 2021 primarily due to higher product sales volume in The Americas Group and the Performance Coatings Group, partially offset by lower product sales volume in the Consumer Brands Group.

Currency translation rate changes increased net sales by 2.1% in the second quarter.

Net sales of all consolidated foreign subsidiaries increased 42.0% to $1.102 billion in the second quarter compared to $776.2 million in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the second quarter was due primarily to higher volume sales in most end markets and selling price increases in the Performance Coatings Group and favorable currency translation.

Net sales of all operations other than consolidated foreign subsidiaries increased 11.8% to $4.278 billion in the second quarter compared to $3.828 billion in the same period last year.

Net sales in The Americas Group increased in the second quarter due primarily to higher architectural sales across all professional end markets, led by residential repaint, commercial and property maintenance that more than offset the decrease in DIY paint sales, and selling price increases.

Three Months Ended September 30, 2021

Consolidated net sales increased in the third quarter of 2021 primarily due to selling price increases in all segments and slightly higher product sales volume in the Performance Coatings Group, partially offset by lower sales volume in The Americas Group and the Consumer Brands Group.

Currency translation rate changes increased net sales by 0.7% in the third quarter.

Net sales of all consolidated foreign subsidiaries increased 5.3% to $1.019 billion in the third quarter compared to $967.6 million in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the third quarter was due primarily to higher sales volumes in most end markets and selling price increases in the Performance Coatings Group and favorable currency translation, partially offset by lower sales in the Consumer Brands Group.

Net sales of all operations other than consolidated foreign subsidiaries decreased 0.6% to $4.128 billion in the third quarter compared to $4.155 billion in the same period last year.

Net sales in The Americas Group decreased in the third quarter due primarily to lower sales volume of paint products as a result of raw material availability challenges, partially offset by selling price increases in all end markets.

Net sales from stores open for more than twelve calendar months in the U.S.

and Canada increased 19.3% in the second quarter compared to last year’s comparable period.

Sales of non-paint products increased 34.1% compared to last year's second quarter.

and Canada decreased 2.8% in the third quarter compared to last year’s comparable period.

Sales of non-paint products increased 3.8% compared to last year's third quarter.

A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.

Net sales of the Consumer Brands Group decreased in the second quarter due primarily to lower sales volume to most of the group’s retail customers as DIY demand returned to more normal levels, and the Wattyl divestiture, partially offset by selling price increases.

Currency translation rate changes increased the Consumer Brands Group's net sales by 1.5% in the second quarter.

Net sales of the Consumer Brands Group decreased in the third quarter due primarily to lower sales volumes to all of the group’s retail customers as a result of raw material availability issues and the Wattyl divestiture, partially offset by selling price increases.

Currency translation rate changes increased the Consumer Brands Group's net sales by 0.7% in the third quarter.

Net sales in the Performance Coatings Group stated in U.S.

dollars increased in the second quarter primarily due to higher sales volumes in all end markets and selling price increases.

Currency translation rate changes increased the Performance Coatings Group's net sales by 6.0% in the second quarter.

Six Months Ended June 30, 2021

Consolidated net sales increased in the six months of 2021 due primarily to higher product sales volume in The Americas Group and the Performance Coatings Group, partially offset by lower product sales volume in the Consumer Brands Group.

Currency translation rate changes increased net sales by 1.4% in the first six months of 2021.

Net sales of all consolidated foreign subsidiaries increased 33.4% to $2.139 billion in the first six months compared to $1.604 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the first six months was due primarily to higher volume sales in most end markets and selling price increases in the Performance Coatings Group.

Net sales of all operations other than consolidated foreign subsidiaries were up 10.5% to $7.896 billion in the first six months compared to $7.147 billion in the same period last year.

Net sales in The Americas Group increased in the first six months due primarily to higher product sales volume in all of our end markets excluding DIY, and selling price increases.

Net sales from stores open for more than twelve calendar months in the

and Canada increased 14.1% in the first six months compared to last year’s comparable period.

Sales of non-paint products increased 20.3% over last year's first six months.

dollars increased in the third quarter primarily due to higher sales in all end markets and selling price increases.

Currency translation rate changes increased the Performance Coatings Group's net sales by 2.0% in the third quarter.

Nine Months Ended September 30, 2021

Consolidated net sales increased in the nine months of 2021 due primarily to higher product sales volume in The Americas Group and the Performance Coatings Group as well as selling price increases in all Reportable Segments, partially offset by lower product sales volume in the Consumer Brands Group.

Currency translation rate changes increased net sales by 1.1% in the first nine months of 2021.

Net sales of all consolidated foreign subsidiaries increased 22.8% to $3.158 billion in the first nine months compared to $2.572 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the first nine months was due primarily to higher sales volume in most end markets and selling price increases in the Performance Coatings Group, higher sales in The Americas Group and favorable currency translation.

Net sales of all operations other than consolidated foreign subsidiaries increased 6.4% to $12.025 billion in the first nine months compared to $11.301 billion in the same period last year.

Net sales in The Americas Group increased in the first nine months due primarily to higher product sales volume in all end markets excluding DIY, and selling price increases.

Net sales from stores open for more than twelve calendar months in the U.S.

and Canada increased 7.6% in the first nine months compared to last year’s comparable period.

Sales of non-paint products increased 13.9% over last year's first nine months.

A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.

Net sales of the Consumer Brands Group decreased in the first six months due primarily to lower volume sales to most of the group’s retail customers as DIY demand returned to more normal levels, and the Wattyl divestiture, partially offset by selling price increases.

Currency translation rate changes increased the Consumer Brands Group's net sales by 2.0% in the first six months of 2021.

Net sales of the Consumer Brands Group decreased in the first nine months due primarily to lower volume sales to most of the group’s retail customers as DIY demand returned to more normal levels, and the Wattyl divestiture, partially offset by selling price increases.

Currency translation rate changes increased the Consumer Brands Group's net sales by 1.5% in the first nine months of 2021.

Net sales in the Performance Coatings Group stated in U.S.

dollars increased in the first six months primarily due to higher sales volumes in most end markets and selling price increases.

Currency translation rate changes increased the Performance Coatings Group's net sales by 3.9% in the first six months of 2021.

dollars increased in the first nine months primarily due to higher sales volumes in most end markets and selling price increases.

Currency translation rate changes increased the Performance Coatings Group's net sales by 3.2% in the first nine months of 2021.

Income Before Income Taxes

The following table presents the components of income before income taxes as a percentage of net sales:

(dollars in millions) Three Months Ended June 30, Six Months Ended June 30,

(dollars in millions) Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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Interest and net investment income (0.7) — % (1.4) — % (1.9) — % (2.6) — %

Other (income) expense - net (1.1) — % 6.4 0.1 % (3.3) — % 28.8 0.3 %

Other expense (income) - net 1.7 — % 1.8 — % (1.6) — % 30.6 0.2 %

Income before income taxes $ 611.5 11.9 % $ 875.6 17.1 % $ 1,939.7 12.8 % $ 2,015.3 14.5 %

Three Months Ended June 30, 2021

Cost of goods sold increased $573.3 million, or 23.9%, in the second quarter of 2021 compared to the same period in 2020 primarily due to higher sales volumes, higher raw material costs (including titanium dioxide and petrochemical feedstock sources) and unfavorable currency translation rate changes.

Currency translation rate changes increased Cost of goods sold by 2.9% in the second quarter of 2021.

Consolidated gross profit increased $202.5 million in the second quarter of 2021 compared to the same period in 2020.

Consolidated gross profit as a percent of consolidated net sales decreased in the second quarter to 44.8%, compared to 48.0% during the same period in 2020.

Consolidated gross profit dollars increased primarily due to higher sales in The Americas Group and the Performance Coatings Group, partially offset by the impact of lower sales in the Consumer Brands Group and higher raw material costs in each Reportable Segment.

Three Months Ended September 30, 2021

Cost of goods sold increased $340.2 million, or 12.8%, in the third quarter of 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources) and unfavorable currency translation rate changes, partially offset by lower sales volumes as a result of raw material availability issues.

Currency translation rate changes increased Cost of goods sold by 1.0% in the third quarter of 2021.

Consolidated gross profit decreased $315.7 million in the third quarter of 2021 compared to the same period in 2020.

Consolidated gross profit as a percent of consolidated net sales decreased in the third quarter to 41.6%, compared to 47.9% during the same period in 2020.

Consolidated gross profit dollars decreased primarily due to lower sales volumes in The Americas Group and Consumer Brands Group and higher raw material costs in each Reportable Segment, partially offset by higher sales in the Performance Coatings Group.

The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment.

The Americas Group’s gross profit in the second quarter was higher than the same period last year by $250.9 million due primarily to higher sales volume and selling price increases, partially offset by higher raw material costs.

The Americas Group’s gross profit as a percent of net sales decreased in the second quarter compared to the same period in 2020 primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased by $139.8 million in the second quarter compared to the same period last year due primarily to lower sales volume and higher raw material costs.

The Consumer Brands Group’s gross profit as a percent of net sales decreased in the second quarter compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit increased $87.6 million, when stated in U.S.

dollars, in the second quarter compared to the same period last year, primarily due to higher sales and favorable currency translation rate changes, partially offset by higher raw material costs.

The Performance Coatings Group’s gross profit as a percent of net sales decreased in the second quarter compared to the same period last year primarily due to higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) increased $146.5 million in the second quarter versus the same period last year due primarily to increased spending from new store openings and to support higher sales levels, partially offset by good cost control.

As a percent of net sales, consolidated SG&A decreased 130 basis points in the second quarter compared to the same period last year primarily due to good cost control and higher sales.

The Americas Group’s SG&A increased $123.0 million in the second quarter compared to the same period last year due primarily to increased spending from new store openings and costs to support higher sales levels.

The Consumer Brands Group’s SG&A decreased $23.0 million in the second quarter compared to the same period last year due to good cost control in line with a return to more normal DIY sales levels.

The Performance Coatings Group’s SG&A increased $38.1 million in the second quarter compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes.

The Administrative segment’s SG&A increased $8.4 million in the second quarter compared to the same period last year.

In the second quarter of 2021, Other general (income) expense - net improved $4.1 million compared to the same period in 2020 primarily due to a decrease in provisions for environmental matters in the Administrative segment.

See Note 15 of Item 1 for additional information.

In the second quarter of 2021, amortization of acquired intangibles was $51.0 million and $19.4 million for the Performance Coatings and Consumer Brands Groups, respectively.

In the second quarter of 2020, amortization of acquired intangibles was $49.9 million and $21.4 million for the Performance Coatings and Consumer Brands Groups, respectively.

Other (income) expense - net improved $7.5 million in the second quarter of 2021 compared to the same period in 2020 primarily due to higher miscellaneous sources of income, including investment and royalty income in the Administrative segment.

The Americas Group’s gross profit in the third quarter was lower than the same period last year by $124.2 million due primarily to lower sales volume and higher raw material costs, partially offset by selling price increases.

The Americas Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period in 2020 primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased by $152.4 million in the third quarter compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies.

The Consumer Brands Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit decreased $31.3 million, when stated in U.S.

dollars, in the third quarter compared to the same period last year, primarily due to higher raw material costs, partially offset by higher sales and favorable currency translation rate changes.

The Performance Coatings Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period last year primarily due to higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) decreased $37.9 million in the third quarter versus the same period last year due primarily to good cost control, partially offset by increased spending from new store openings.

As a percent of net sales, consolidated SG&A decreased 90 basis points in the third quarter compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A decreased $1.7 million in the third quarter compared to the same period last year due primarily to good cost control, partially offset by investments in strategic growth initiatives including new store openings.

The Consumer Brands Group’s SG&A decreased $28.0 million in the third quarter compared to the same period last year due to good sales and marketing cost control in line with a return to more normal DIY sales levels.

The Performance Coatings Group’s SG&A increased $15.8 million in the third quarter compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes.

The Administrative segment’s SG&A decreased $24.0 million in the third quarter compared to the same period last year due primarily to lower incentive compensation.

In the third quarter of 2021, Other general (income) expense - net improved $11.6 million compared to the same period in 2020 primarily due to a decrease in provisions for environmental matters in the Administrative segment.

See Note 15 of Item 1 for additional information.

Six Months Ended June 30, 2021

Cost of goods sold increased $860.3 million, or 18.5%, in the first six months of 2021 compared to the same period in 2020 primarily due to higher sales volumes, higher raw material costs (including titanium dioxide and petrochemical feedstock sources) and unfavorable currency translation rate changes.

Currency translation rate changes increased Cost of goods sold by 1.9% in the first six months of 2021.

Consolidated gross profit increased $424.8 million in the first six months of 2021 compared to the same period in 2020.

Consolidated gross profit as a percent of consolidated net sales decreased in the first six months of 2021 to 45.1%, compared to 46.8% during the same period in 2020.

In the third quarter of 2021, amortization of acquired intangibles was $50.9 million and $19.4 million for the Performance Coatings and Consumer Brands Groups, respectively.

In the third quarter of 2020, amortization of acquired intangibles was $50.5 million and $21.7 million for the Performance Coatings and Consumer Brands Groups, respectively.

Nine Months Ended September 30, 2021

Cost of goods sold increased $1.201 billion, or 16.4%, in the first nine months of 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources), higher sales volumes and unfavorable currency translation rate changes.

Currency translation rate changes increased Cost of goods sold by 1.6% in the first nine months of 2021.

Consolidated gross profit increased $109.1 million in the first nine months of 2021 compared to the same period in 2020.

Consolidated gross profit as a percent of consolidated net sales decreased in the first nine months of 2021 to 43.9%, compared to 47.2% during the same period in 2020.

The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment.

The Americas Group’s gross profit in the first six months of 2021 was higher than the same period last year by $370.6 million due primarily to higher sales volume and selling price increases, partially offset by higher raw material costs.

The Americas Group’s gross profit as a percent of net sales decreased in the first six months of 2021 compared to the same period in 2020 primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased by $82.8 million in the first six months compared to the same period last year due primarily to lower sales volume and higher raw material costs.

The Consumer Brands Group’s gross profit as a percent of net sales decreased in the first six months compared to the same period last year for these same reasons.

The Americas Group’s gross profit in the first nine months of 2021 was higher than the same period last year by $246.4 million due primarily to higher sales volume and selling price increases, partially offset by higher raw material costs.

The Americas Group’s gross profit as a percent of net sales decreased in the first nine months of 2021 compared to the same period in 2020 primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased by $235.2 million in the first nine months compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies.

The Consumer Brands Group’s gross profit as a percent of net sales decreased in the first nine months compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit increased $102.0 million, when stated in U.S.

dollars, in the first six months compared to the same period last year primarily due to higher sales volumes and selling price increases, partially offset by higher raw material costs.

The Performance Coatings Group’s gross profit as a percent of net sales decreased in the first six months compared to the same period last year due to higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) increased $164.8 million in the first six months of 2021 versus the same period last year due primarily to increased spending from new store openings and to support higher sales levels, partially offset by good cost control.

As a percent of net sales, consolidated SG&A decreased 220 basis points in the first six months compared to the same period last year primarily due to good cost control and higher sales.

The Americas Group’s SG&A increased $155.3 million in the first six months of 2021 due primarily to increased spending from new store openings and costs to support higher sales levels.

The Consumer Brands Group’s SG&A decreased $28.1 million in the first six months compared to the same period last year due to good cost control in line with a return to more normal DIY sales levels.

The Performance Coatings Group’s SG&A increased $47.7 million in the first six months compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes, partially offset by good cost control.

The Administrative segment’s SG&A decreased $10.1 million in the first six months compared to the same period last year due primarily to lower stock-based compensation.

In the first six months of 2021, Other general (income) expense - net declined $109.7 million compared to the same period in 2020 primarily due to the recognition of a $111.9 million loss on the Wattyl divestiture in the Administrative segment.

dollars, in the first nine months compared to the same period last year primarily due to higher sales volumes and selling price increases, partially offset by higher raw material costs.

The Performance Coatings Group’s gross profit as a percent of net sales decreased in the first nine months compared to the same period last year due to higher raw material costs.

Consolidated SG&A increased $126.9 million in the first nine months of 2021 versus the same period last year due primarily to increased spending from new store openings, unfavorable currency translation rate changes and to support higher sales levels, partially offset by good cost control.

As a percent of net sales, consolidated SG&A decreased 170 basis points in the first nine months compared to the same period last year primarily due to good cost control and higher sales.

The Americas Group’s SG&A increased $153.6 million in the first nine months of 2021 due primarily to increased spending from new store openings and costs to support higher sales levels.

The Consumer Brands Group’s SG&A decreased $56.1 million in the first nine months compared to the same period last year due to good sales and marketing cost control in line with a return to more normal DIY sales levels.

The Performance Coatings Group’s SG&A increased $63.5 million in the first nine months compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes, partially offset by good cost control.

The Administrative segment’s SG&A decreased $34.1 million in the first nine months compared to the same period last year due primarily to lower compensation, including incentive and stock-based compensation.

In the first nine months of 2021, Other general (income) expense - net declined $98.1 million compared to the same period in 2020 primarily due to the recognition of a $111.9 million loss on the Wattyl divestiture, partially offset by a decrease in provisions for environmental matters in the Administrative segment.

See Note 15 of Item 1 for additional information.

In the first six months of 2021, amortization of acquired intangibles was $102.0 million and $41.6 million for the Performance Coatings and Consumer Brands Groups, respectively.

In the first six months of 2020, amortization of acquired intangibles was $100.1 million and $42.8 million for the Performance Coatings and Consumer Brands Groups, respectively.

Other (income) expense - net improved $32.1 million in the first six months of 2021 compared to the same period in 2020 primarily due to the $21.3 million loss on extinguishment of debt recognized in the first six months of 2020.

In the first nine months of 2021, amortization of acquired intangibles was $152.9 million and $61.0 million for the Performance Coatings and Consumer Brands Groups, respectively.

In the first nine months of 2020, amortization of acquired intangibles was $150.6 million and $64.5 million for the Performance Coatings and Consumer Brands Groups, respectively.

Other expense (income) - net improved $32.2 million in the first nine months of 2021 compared to the same period in 2020 primarily due to the $21.3 million loss on extinguishment of debt recognized in the first nine months of 2020.

See Note 15 of Item 1 for additional information.

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(dollars in millions) Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 % Change 2021 2020 % Change

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Income Tax Expense

The effective tax rate was 20.8% for the second quarter of 2021 compared to 20.3% for the second quarter of 2020, and 20.3% for the first six months of 2021 compared to 19.5% for the first six months of 2020.

The effective tax rate was 17.9% for the third quarter of 2021 compared to 19.4% for the third quarter of 2020, and 19.6% for the first nine months of 2021 compared to 19.4% for the first nine months of 2020.

The effective tax rate was favorably impacted by tax benefits related to employee share based payments during 2021 and 2020.

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Net Income Per Share

Diluted net income per share in the second quarter of 2021 increased to $2.42 per share compared to $2.16 per share in the second quarter of 2020.

Diluted net income per share for the second quarter of 2021 included a $0.23 per share charge for acquisition-related amortization expense.

The second quarter of 2020 included a $0.21 per share charge for acquisition-related amortization expense.

Currency translation rate changes increased diluted net income per share by $0.01 in the second quarter.

Diluted net income per share in the first six months of 2021 increased to $3.93 per share compared to $3.31 per share in the first six months of 2020.

Diluted net income per share for the first six months of 2021 included a $0.34 per share loss from the Wattyl divestiture (see Note 3 of Item 1) and included a $0.44 per share charge for acquisition-related amortization expense.

The first six months of 2020 included a $0.41 per share charge for acquisition-related amortization expense.

Currency translation rate changes decreased diluted net income per share by $0.05 in the first six months.

Diluted net income per share in the third quarter of 2021 decreased to $1.88 per share compared to $2.55 per share in the third quarter of 2020.

Diluted net income per share for the third quarter of 2021 and 2020 included a $0.21 per share charge for acquisition-related amortization expense.

Currency translation rate changes increased diluted net income per share by $0.01 in the third quarter.

Diluted net income per share in the first nine months of 2021 decreased to $5.82 per share compared to $5.87 per share in the first nine months of 2020.

Diluted net income per share for the first nine months of 2021 included a $0.34 per share loss from the Wattyl divestiture (see Note 3 of Item 1) and included a $0.64 per share charge for acquisition-related amortization expense.

The first nine months of 2020 included a $0.62 per share charge for acquisition-related amortization expense.

Currency translation rate changes decreased diluted net income per share by $0.04 in the first nine months.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

The Company’s financial condition, liquidity and cash flow continued to be strong during the first six months of 2021 as net operating cash was $1.201 billion, an improvement of $126.7 million from the prior year comparable period, primarily due to improved operating results as consolidated income before income taxes increased $188.5 million to $1.328 billion in the current year or 13.2% of net sales.

During the first six months of 2021, the Company’s EBITDA increased 11.6% to $1.788 billion.

The Company’s financial condition, liquidity and cash flow remained strong during the first nine months of 2021.

The Company generated $2.051 billion in net operating cash despite ongoing and industry-wide raw material availability issues which negatively impacted total sales and gross margins, and the normal seasonal increase in working capital requirements.

During the first nine months of 2021, the Company’s EBITDA decreased 3.1% to $2.623 billion.

See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

Cash and cash equivalents decreased $7.0 million during the first six months of 2021.

Cash flow from operations, proceeds from the Wattyl divestiture and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return $1.943 billion to shareholders in the form of share buybacks and cash dividends during the first six months.

At June 30, 2021, the Company had cash and cash equivalents of $219.6 million and total debt outstanding of $9.053 billion.

Cash and cash equivalents increased $86.7 million during the first nine months of 2021.

Cash flow from operations, proceeds from the Wattyl divestiture and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return $2.519 billion to shareholders in the form of share buybacks and cash dividends during the first nine months.

At September 30, 2021, the Company had cash and cash equivalents of $313.3 million and total debt outstanding of $8.976 billion.

Total debt, net of cash and cash equivalents, was $8.663 billion.

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Net Working Capital

Net working capital, defined as total current assets less total current liabilities, decreased $1.428 billion to a deficit of $1.005 billion at June 30, 2021 compared to a surplus of $423.6 million at June 30, 2020.

Net working capital, defined as total current assets less total current liabilities, decreased $1.917 billion to a deficit of $1.100 billion at September 30, 2021 compared to a surplus of $817.3 million at September 30, 2020.

The net working capital decrease is due to an increase in current liabilities, partially offset by an increase in current assets.

Comparing current asset balances at June 30, 2021 to June 30, 2020, cash and cash equivalents increased $31.5 million, accounts receivable increased $118.1 million due to higher sales, inventories increased $15.5 million due to higher costs partially offset by lower inventory quantities, and other current assets increased $137.4 million primarily related to prepaid expenses.

Current liability balances increased $1.731 billion at June 30, 2021 compared to June 30, 2020 primarily due to a $686.4 million increase in the current portion of long-term debt, a $654.4 million increase in accounts payable primarily due to the timing of payments, a $202.6 million increase in short-term borrowings and a $163.8 million increase in accruals primarily due to higher incentive compensation accruals and the timing of payments.

At June 30, 2021, the Company’s current ratio was 0.84 compared to 1.00 and 1.09 at December 31, 2020 and June 30, 2020, respectively.

Comparing current asset balances at September 30, 2021 to September 30, 2020, cash and cash equivalents decreased $306.6 million, accounts receivable increased $143.5 million due to higher sales, inventories increased $143.2 million due to higher raw material costs partially offset by lower inventory quantities, and other current assets increased $222.7 million primarily related to prepaid expenses and refundable income taxes.

Current liability balances increased $2.120 billion at September 30, 2021 compared to September 30, 2020 primarily due to a $709.2 million increase in short-term borrowings and a $638.0 million increase in the current portion of long-term debt.

Excluding short-term borrowings and the current portion of long-term debt, current liabilities increased $773.0 million primarily due to the timing of payments related to accounts payable and accruals, including compensation.

At September 30, 2021, the Company’s current ratio was 0.83 compared to 1.00 and 1.19 at December 31, 2020 and September 30, 2020, respectively.

Property, Plant and Equipment

Net property, plant and equipment decreased $28.2 million in the first six months of 2021 and increased $7.7 million in the twelve months since June 30, 2020.

The decrease in the first six months was primarily due to depreciation expense of $136.4 million and the sale or disposition of fixed assets of $48.7 million, partially offset by capital expenditures of $151.4 million.

Since June 30, 2020, the increase was primarily due to capital expenditures of $312.9 million and favorable changes in foreign currency translation of $39.4 million, partially offset by depreciation expense of $271.8 million and sale or disposition of fixed assets of $78.1 million.

Net property, plant and equipment decreased $7.3 million in the first nine months of 2021 and increased $47.2 million in the twelve months since September 30, 2020.

The decrease in the first nine months was primarily due to depreciation expense of $199.8 million and the sale or disposition of fixed assets of $50.0 million, partially offset by capital expenditures of $248.1 million.

Since September 30, 2020, the increase was primarily due to capital expenditures of $358.1 million and favorable changes in foreign currency translation of $14.3 million, partially offset by depreciation expense of $267.8 million and sale or disposition of fixed assets of $62.5 million.

Capital expenditures primarily represented expenditures associated with improvements and normal equipment replacement and additional capacity in manufacturing and distribution facilities in the Consumer Brands Group, normal equipment replacement in The Americas and Performance Coatings Groups, and information systems hardware in the Administrative segment.

Goodwill and Intangible Assets

Goodwill and intangible assets decreased $337.0 million from December 31, 2020 and decreased $327.2 million from June 30, 2020.

The net decrease during the first six months of 2021 was primarily due to dispositions of $166.5 million (primarily related to the Wattyl divestiture), amortization of $157.0 million and foreign currency translation of $29.4 million.

The net decrease over the twelve month period from June 30, 2020 was primarily due to amortization of $314.9 million and dispositions of $166.5 million, partially offset by foreign currency translation of $139.8 million.

Goodwill and intangible assets decreased $455.2 million from December 31, 2020 and decreased $439.2 million from September 30, 2020.

The net decrease during the first nine months of 2021 was primarily due to dispositions of $168.0 million (primarily related to the Wattyl divestiture), amortization of $233.2 million and foreign currency translation of $69.9 million.

The net decrease over the twelve month period from September 30, 2020 was primarily due to amortization of $312.4 million and dispositions of $168.0 million, partially offset by foreign currency translation of $27.5 million.

The fair value of the Company's acquired intangible assets may be impacted by the Company's ongoing integration efforts.

See Note 6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for more information concerning the Company's goodwill and intangible assets, including impairment testing of these assets.

Other assets at June 30, 2021 decreased $114.2 million in the first six months of 2021 and decreased $25.5 million from a year ago.

The decrease in the first six months was primarily due to the sale of investments to fund the Company’s domestic defined contribution plan, as well as a decrease in deferred tax assets and deposits.

See Note 13 in Item 1 for additional information on investments.

The decrease from June 30, 2020 was primarily due to a decrease in deferred tax assets and deposits, partially offset by an increase in other investments.

Other assets at September 30, 2021 decreased $2.8 million in the first nine months of 2021 and increased $80.3 million from a year ago.

The decrease in the first nine months was primarily due to the sale of investments to fund the Company’s domestic defined contribution plan and a decrease in deferred tax assets, partially offset by other investments.

The increase from September 30, 2020 was primarily due to an increase in other investments, partially offset by a decrease in deposits.

See Notes 13 and 19 in Item 1 for additional information on the Company’s investments.

Debt (including Short-term borrowings)

June 30, December 31, June 30,

September 30, December 31, September 30,

2021 2020 2020

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The Company’s long-term debt primarily consists of senior notes as disclosed in Note 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

At June 30, 2021, the Company's short-term borrowings were comprised of $758.9 million outstanding under its commercial paper program and $3.2 million outstanding under various foreign programs.

The weighted average interest rate for the borrowings outstanding under the commercial paper program was 0.19% at June 30, 2021.

The Company had unused capacity under its various credit agreements of $2.741 billion at June 30, 2021.

At September 30, 2021, the Company's short-term borrowings were comprised of $694.9 million outstanding under its commercial paper program and $14.5 million outstanding under various foreign programs.

The weighted average interest rate for the borrowings outstanding under the commercial paper program was 0.17% at September 30, 2021.

The Company had unused capacity under its various credit agreements of $2.805 billion at September 30, 2021.

See Note 6 in Item 1 for additional information.

On September 15, 2021, the Company elected to exercise its optional redemption rights to redeem the entire outstanding $400.0 million aggregate principal amount of its 4.20% Senior Notes due 2022 and its 4.20% Notes due 2022 initially issued by The Valspar Corporation (collectively, the 4.20% Senior Notes).

The Company redeemed the 4.20% Senior Notes on October 15, 2021 at a redemption price equal to 100% of the principal amount, plus accrued interest.

On August 2, 2021, the Company entered into an amended and restated $625.0 million credit agreement, which amends and restates the five-year credit agreement entered into in September 2017.

This agreement, which was subsequently amended, will be used for general corporate purposes.

On June 29, 2021, the Company and two of its wholly-owned subsidiaries, Sherwin-Williams Canada, Inc.

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Defined Benefit Pension and Other Postretirement Benefit Plans

Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2020 and June 30, 2020.

Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2020 and September 30, 2020.

See Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

Deferred income taxes at June 30, 2021 decreased $42.7 million in the first six months of 2021, and decreased $149.8 million from a year ago, primarily due to amortization of acquisition-related intangible assets and the disposition of certain intangible assets in the Wattyl divestiture.

Deferred income taxes at September 30, 2021 decreased $44.6 million in the first nine months of 2021, and decreased $155.2 million from a year ago, primarily due to amortization of acquisition-related intangible assets and the disposition of certain intangible assets in the Wattyl divestiture.

Other Long-Term Liabilities

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The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations.

These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations.

These laws and regulations not only govern current operations and products, but also

impose potential liability on the Company for past operations.

Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future.

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Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures were included in the normal operating expenses of conducting business.

The Company’s capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company’s financial condition, liquidity, cash flow or results of operations during the first six months of 2021.

Management does not expect that such capital expenditures,

depreciation and other expenses will be material to the Company’s financial condition, liquidity, cash flow or results of operations in 2021.

Management does not expect that such capital expenditures, depreciation and other expenses will be material to the Company’s financial condition, liquidity, cash flow or results of operations in 2021.

See Note 8 in Item 1 for further information on environmental-related long-term liabilities.

Contractual Obligations, Commercial Commitments and Warranties

Except for the change in total debt discussed above and the disclosures related to debt in Note 6 of Item 1, there have been no other significant changes to the Company’s contractual obligations and commercial commitments in the first six months of 2021 as summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Except for the Specialty Polymers and Sika acquisition agreements disclosed in Note 3 of Item 1, and the debt transactions discussed above and in Note 6 of Item 1, there have been no other significant changes to the Company’s contractual obligations and commercial commitments in the first nine months of 2021 as summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

See Note 9 in Item 1 for information concerning litigation.

Shareholders’ Equity

June 30, December 31, June 30,

September 30, December 31, September 30,

2021 2020 2020

Total shareholders’ equity $ 2,690.3 $ 3,610.8 $ 4,207.3

Shareholders’ equity decreased $770.4 million during the first six months of 2021 as a result of $1.665 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $297.7 million, partially offset by net income of $1.058 billion, an increase in Other capital of $116.7 million primarily associated with stock-based compensation expense and stock option exercises, and a decrease in Accumulated other comprehensive loss of $17.1 million.

Shareholders’ equity decreased $1.030 billion since June 30, 2020 as a result of $3.146 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $540.1 million, partially offset by net income of $2.171 billion, an increase in Other capital of $319.0 million primarily associated with stock-based compensation expense and stock option exercises, and a decrease in Accumulated other comprehensive loss of $166.0 million.

During the first six months of 2021, the Company purchased 6.4 million shares of its common stock for treasury purposes through open market purchases.

Shareholders’ equity decreased $920.5 million during the first nine months of 2021 as a result of $2.167 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $442.9 million, partially offset by net income of $1.560 billion and an increase in Other capital of $196.7 million primarily associated with stock-based compensation expense and stock option exercises.

Shareholders’ equity decreased $1.517 billion since September 30, 2020 as a result of $3.242 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $563.1 million, partially offset by net income of $1.967 billion and an increase in Other capital of $314.8 million primarily associated with stock-based compensation expense and stock option exercises.

During the first nine months of 2021, the Company purchased 8.075 million shares of its common stock for treasury purposes through open market purchases.

The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire additional shares in the future.

The Company had remaining authorization at June 30, 2021 to purchase 52.25 million shares of its common stock.

The Company had remaining authorization at September 30, 2021 to purchase 50.575 million shares of its common stock.

In February 2021, the Company's Board of Directors increased the quarterly cash dividend from $.4467 per share to $.55 per share.

If approved in all subsequent quarters, this quarterly dividend will result in an annual dividend for 2021 of $2.20 per share or a 29.9% payout of 2020 diluted net income per share.

Net operating cash for the six months ended June 30, 2021 was a cash source of $1.201 billion compared to a cash source of $1.075 billion for the same period in 2020.

The improvement in net operating cash was primarily due to an increase in net income including the impact from the Wattyl divestiture, partially offset by an increase in cash requirements for working capital.

Net investing cash usage decreased $74.3 million in the first six months of 2021 to a usage of $72.5 million from a usage of $146.8 million in 2020 primarily due to the proceeds received from the Wattyl divestiture, partially offset by cash used for acquisitions in the current year.

Net financing cash usage increased $239.2 million in the first six months of 2021 to a usage of $1.125 billion from a usage of $886.1 million for the same period in 2020 primarily due to an increase in treasury stock purchases and cash dividends paid, partially offset by an increase in proceeds from debt (primarily short-term borrowings).

In the twelve month period from July 1, 2020 through June 30, 2021, the Company generated net operating cash of $3.535 billion, used $248.1 million in investing activities and used $3.259 billion in financing activities.

This quarterly dividend was approved in all subsequent quarters and will result in an annual dividend for 2021 of $2.20 per share or a 29.9% payout of 2020 diluted net income per share.

Net operating cash for the nine months ended September 30, 2021 was a cash source of $2.051 billion compared to a cash source of $2.564 billion for the same period in 2020.

The decrease in net operating cash was primarily due to an increase in cash requirements for working capital and a decrease in net income.

Net investing cash usage increased $50.1 million in the first nine months of 2021 to a usage of $226.7 million from a usage of $176.6 million in 2020 primarily due to an increase in capital expenditures and other investments, partially offset by the proceeds received from the Wattyl divestiture in the current year.

Net financing cash usage decreased $178.5 million in the first nine months of 2021 to a usage of $1.738 billion from a usage of $1.916 billion for the same period in 2020 primarily due to decreased payments of long-term debt, partially offset by increased treasury stock purchases and cash dividends paid.

In the twelve month period from October 1, 2020 through September 30, 2021, the Company generated net operating cash of $2.896 billion, used $372.5 million in investing activities and used $2.842 billion in financing activities.

The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations.

The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes.

The Company believes it may be exposed to continuing market risk

from foreign currency exchange rate and commodity price fluctuations.

The Company believes it may be exposed to continuing market risk from foreign currency exchange rate and commodity price fluctuations.

However, the Company does not expect that foreign currency exchange rate and commodity price fluctuations or hedging contract losses will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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Refer to the “Non-GAAP Financial Measures” section below for a reconciliation of EBITDA to Net income.

At June 30, 2021, the Company was in compliance with the covenant and expects to remain in compliance.

At September 30, 2021, the Company was in compliance with the covenant and expects to remain in compliance.

The Company’s notes, debentures and revolving credit agreements contain various default and cross-default provisions.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis