What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-19 · 238 added, 173 removed, 253 unchanged (62% of the section changed)

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See Note 21 to the Consolidated Financial Statements in Item 8 for additional information on the Company’s Reportable Segments.

Beginning in early 2020, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of a novel strain of coronavirus (COVID-19).

These actions have included, and continue to include, quarantines, physical distancing, face coverings, restrictions on public gatherings and other health and safety protocols, stay-at-home orders, travel restrictions, mandatory business closures, and other mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations.

We have worked with government and health authorities to continue to operate our business during this crisis, including our company-operated stores, manufacturing plants and other facilities, due to the essential nature of our products.

We have endeavored 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 by implementing online and phone ordering of products, using curb side pickup or delivery, and implementing remote, alternate and flexible work arrangements where possible.

We will continue to work with government authorities and health officials in implementing appropriate safety measures, adapting as recommendations and safety protocols evolve so that we may maintain our operations, keep our stores open and continue to return employees who work in office environments.

The COVID-19 pandemic did not have a material adverse effect on our consolidated financial results for 2020.

We have a strong liquidity position, with $226.6 million in cash and $3.500 billion of unused capacity under our credit facilities at December 31, 2020.

The Company is in compliance with bank covenants and expects to remain in compliance.

During the first half of the year, we took actions to preserve liquidity and generate cash flow during the crisis.

As the circumstances around the COVID-19 pandemic remain fluid, we continue to actively monitor the pandemic’s impact to the Company worldwide, including our financial position, liquidity, results of operations and cash flow, while managing our response to the crisis through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners.

Please see Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K for further information regarding the current and potential impact of the COVID-19 pandemic on the Company.

• Consolidated net sales increased 8.6% in the year to a record $19.94 billion

◦ Net sales from stores in U.S.

and Canada open more than twelve calendar months increased 6.0% in the year

◦ Raw material availability issues negatively impacted full year sales by a mid-single digit percentage

• Diluted net income per share decreased to $6.98 per share in the year compared to $7.36 per share in the full year 2020

◦ Adjusted diluted net income per share decreased to $8.15 per share in the year compared to $8.19 per share in the full year 2020

• Completed a three-for-one stock split to improve accessibility to a broader base of investors

• Finalized the divestiture of our Wattyl business in Australia and New Zealand

• Continued to invest in acquisitions expanding our product offerings and manufacturing capacity

The Company navigated many uncertainties during 2021, including unprecedented raw material inflation, industry-wide supply chain disruptions, as well as temporary changes in the demand for our products due to the impacts of the COVID-19 pandemic earlier in the year and the Omicron variant later in the year.

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, 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.

As we look to 2022, we are encouraged by the demand environment, which remains robust across our end markets.

Our customers remain positive, and we expect that jobs delayed by raw material availability issues in 2021 will be completed in the quarters ahead rather than cancelled.

We brought on 50 million gallons of incremental architectural paint production capacity in 2021 to meet this demand and will continue to add paint stores in 2022.

We expect raw material availability to continue improving.

We are implementing additional price increases to offset to the sustained cost inflation and expect raw material costs will ultimately moderate, enabling the recovery of our margins over time.

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

Capital expenditures, excluding our new global headquarters, will remain modest at approximately 2 percent of sales and we will continue to pursue acquisitions that fit our strategy.

We expect to use any excess cash to make open market purchases of Company stock.

Our balance sheet remains strong, and we expect debt to EBITDA to approach the high end of our target of 2.0 to 2.5 times range.

Please see Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K for further information regarding the current and potential impact of the COVID-19 pandemic and the potential impact of supply chain disruptions and raw material inflation on the Company.

Common Stock Split

During the first quarter of 2021, the Company’s Board of Directors approved and declared a three-for-one stock split to shareholders of record at the close of business on March 23, 2021 (the Stock Split).

The Stock Split was effected on March 31, 2021.

All share and per share information herein has been retroactively adjusted to reflect the Stock Split.

RESULTS OF OPERATIONS

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Total $ 19,944.6 $ 18,361.7 $ 1,582.9 8.6 %

Consolidated net sales for 2020 increased due primarily to higher sales to most of the Consumer Brands Group’s retail customers in the U.S.

and Europe, and higher sales in residential repaint, DIY and new residential in the U.S.

and Canada paint stores in The Americas Group, partially offset by the impacts of COVID-19 on some end markets primarily served by the Performance Coatings Group.

Currency translation rate changes decreased 2020 consolidated net sales by 1.1%.

Net sales of all consolidated foreign subsidiaries decreased 2.7% to $3.581 billion for 2020 versus $3.679 billion for 2019 due primarily to demand softness in certain industrial end markets globally and changes in The Americas Group’s store footprint outside of the U.S.

Consolidated net sales for 2021 increased due primarily to selling price increases in all Reportable Segments and higher product sales volume in the Performance Coatings Group, partially offset by lower sales volume in the Consumer Brands Group.

Currency translation rate changes increased 2021 consolidated net sales by 0.8%.

Net sales of all consolidated foreign subsidiaries increased 17.9% to $4.223 billion for 2021 versus $3.581 billion for 2020 due primarily to returning demand in most industrial end markets globally.

Net sales of all operations other than consolidated foreign subsidiaries increased 6.4% to $15.722 billion for 2021 versus $14.781 billion for 2020.

Net sales in The Americas Group increased due primarily to higher residential repaint, DIY and new residential paint sales in the U.S.

and Canada, partially offset by the impacts of COVID-19 on demand in some end markets served.

Net sales in The Americas Group increased due primarily to selling price increases in all end markets, while sales volume remained flat as a result of raw material availability challenges.

Net sales from stores in U.S.

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The total number of stores in operation at December 31, 2021 was 4,859 in the United States, Canada, Latin America and the Caribbean.

The Americas Group’s objective is to expand its store base an average of 2% each year, primarily through internal growth.

Sales of products other than paint decreased approximately 2.0% over last year.

The Americas Group’s objective is to expand its store base an average of 2% each year, primarily through organic growth.

Sales of products other than paint increased approximately 12.5% over last year.

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 increased in 2020 primarily due to higher volume sales to most of the group’s North American and European retail customers from strong DIY demand.

In 2021, the Consumer Brands Group plans to expand its customer base and product assortment at existing customers.

The Performance Coatings Group’s net sales in 2020 decreased due primarily to softer end market demand in most businesses, mostly due to the impacts of COVID-19, and unfavorable currency translation rate changes, partially offset by increased sales in the packaging and coil divisions in all regions.

Currency translation rate changes decreased net sales 1.6% compared to 2019.

In 2020, the Performance Coatings Group opened 1 new location, increasing the total to 282 branches open in the United States, Canada, Mexico, South America, Europe and Asia at December 31, 2020.

Net sales of the Consumer Brands Group decreased in 2021 primarily due to lower volume sales to most of the group’s retail customers as DIY demand returned to more normal levels, raw material availability issues, and the Wattyl divestiture, partially offset by selling price increases.

In 2022, the Consumer Brands Group is focused on meeting customer needs through product development, building inventory, and optimizing the product assortment at existing customers.

The Performance Coatings Group’s net sales in 2021 increased due primarily to higher sales volumes in most end markets and selling price increases.

Currency translation rate changes increased net sales 2.2% compared to 2020.

At December 31, 2021, the Performance Coatings Group had 282 branches open in the United States, Canada, Mexico, South America, Europe and Asia.

In 2022, the Performance Coatings Group plans to continue expanding its worldwide presence, including improving its customer base and product offering.

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Income Before Income Taxes

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

(millions of dollars, except % of sales data) Year Ended December 31,

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

Year Ended December 31,

% of Net Sales % of Net Sales

Net sales $ 19,944.6 100.0 % $ 18,361.7 100.0 %

Cost of goods sold 11,401.9 57.2 % 9,679.1 52.7 %

Gross profit 8,542.7 42.8 % 8,682.6 47.3 %

Selling, general, and administrative expenses 5,477.9 29.8 % 5,274.9 29.5 %

Selling, general, and administrative expenses (SG&A) 5,572.5 27.9 % 5,477.9 29.8 %

Other general expense - net 101.8 0.5 % 27.7 0.2 %

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Interest and net investment income (4.9) — % (3.6) — %

California litigation expense — — % (34.7) (0.2) %

Other expense - net 5.3 — % 16.7 — %

Other (income) expense - net (19.5) (0.1) % 5.3 — %

Income before income taxes $ 2,248.6 11.3 % $ 2,519.2 13.7 %

Consolidated gross profit increased $646.5 million in 2020 compared to the same period in 2019.

Consolidated gross profit as a percent to consolidated net sales increased to 47.3% in 2020 from 44.9% in 2019.

Consolidated gross profit dollars and percent improved as a result of favorable customer and product mix and moderating raw material costs, partially offset by unfavorable currency translation rate changes.

Consolidated cost of goods sold increased $1.723 billion, or 17.8% in 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 primarily as a result of raw material availability issues during the second half of 2021.

Currency translation rate changes increased Cost of goods sold by 1.1% in the current year.

Consolidated gross profit decreased $139.9 million in 2021 compared to the same period in 2020.

Consolidated gross profit as a percent to consolidated net sales decreased to 42.8% in 2021 from 47.3% in 2020.

Consolidated gross profit dollars decreased primarily due to higher raw material costs in each Reportable Segment and lower sales volume in the Consumer Brands Group, partially offset by selling price increases in each Reportable Segment as well as higher sales volume in The Performance Coatings Group and The Americas 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 for 2021 increased $134.7 million compared to the same period in 2020.

The Americas Group’s gross profit dollars and margin improved as a result of favorable customer and product mix and moderating raw material costs.

The Consumer Brands Group’s gross profit increased $221.0 million in 2020 compared to the same period in 2019.

The Consumer Brands Group’s gross profit dollars and margin improved due primarily to higher volume sales, product portfolio improvements and international cost reductions.

The Americas Group’s gross profit dollars increased primarily as a result of selling price increases, partially offset by higher raw material costs.

The America’s Group gross margin rate decreased primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased $327.8 million in 2021 compared to the same period in 2020.

The Consumer Brands Group’s gross profit dollars and margin rate decreased primarily as a result of lower sales volume, the Wattyl divestiture, higher raw material costs and supply chain inefficiencies.

The Performance Coatings Group’s gross profit for 2021 increased $58.6 million compared to the same period in 2020.

The Performance Coatings Group’s gross profit dollars and margin improved due primarily to moderating raw material costs, partially offset by unfavorable currency translation rate changes.

The Performance Coatings Group’s gross profit dollars increased due to higher sales and favorable currency translation rate changes, partially offset by higher raw material costs.

The Performance Coatings Group’s gross margin rate decreased primarily due to higher raw material costs, partially offset by higher sales volumes and selling price increases.

Consolidated SG&A increased by $94.6 million due primarily to increased expenses to support higher sales levels and net new store openings, partially offset by good cost control.

SG&A increased as a percent of sales to 29.8% in 2020 from 29.5% in 2019 as a result of higher costs to support our higher sales levels and investments in future growth initiatives.

The Americas Group’s SG&A increased $159.3 million for the year due primarily to increased spending from new store openings, additional sales reps and COVID-19 costs, partially offset by currency translation rate changes.

The Consumer Brands Group’s SG&A increased by $28.3 million for the year primarily to support higher sales levels.

The Performance Coatings Group’s SG&A increased by $8.7 million for the year primarily due to investments in information technology systems and expenses related to COVID-19, partially offset by currency translation rate changes.

The Administrative segment’s SG&A increased $6.7 million primarily due to higher compensation, including incentive and stock-based compensation.

Other general expense - net decreased $11.4 million in 2020 compared to 2019.

The decrease was primarily attributable to a $25.5 million increase in gains from the sale and disposition of fixed assets, partially offset by a $14.1 million increase in provisions for environmental matters in the Administrative segment.

See Notes 9 and 18 to the Consolidated Financial Statements in Item 8 for additional information concerning environmental matters and Other general expense - net, respectively.

As required by the Goodwill and Other Intangibles Topic of the ASC, management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of October 1, 2020.

During the fourth quarter of 2020, the Company recognized non-cash pre-tax impairment charges totaling $2.3 million related to recently acquired trademarks in the Performance Coatings Group as a direct result of recent performance which reduced the long-term forecasted net sales in the Asia Pacific region.

During the fourth quarter of 2019, the Company recognized non-cash pre-tax impairment charges totaling $122.1 million related to recently acquired trademarks.

These charges included impairments totaling $117.0 million in the Performance Coatings Group and $5.1 million in the Consumer Brands Group.

In the Performance Coatings Group, $75.6 million related to trademarks in North America directly associated with strategic decisions made to rebrand industrial products to the Sherwin-Williams® brand name, $25.7 million related to trademarks in the Asia Pacific region as a direct result of recent

performance which reduced the long-term forecasted net sales and $15.7 million related to other recently acquired trademarks in various regions.

See Note 5 to the Consolidated Financial Statements in Item 8 for additional information.

Interest expense decreased $8.9 million in 2020 primarily due to lower average debt levels.

Interest and net investment income decreased $22.3 million in 2020 to $3.6 million.

The decrease is primarily due to the recognition of an $18.8 million gain during the fourth quarter of 2019 after the Company received a favorable court decision in Brazil related to the recovery of certain indirect taxes previously paid over gross sales.

See Note 18 to the Consolidated Financial Statements in Item 8 for additional information on the Brazil indirect tax matter.

During the third quarter of 2019, the Company recognized a benefit of $34.7 million related to the California litigation.

See Note 10 to the Consolidated Financial Statements in Item 8 for additional information related to the litigation.

Other expense - net decreased by $11.4 million in 2020 compared to 2019 primarily due to a decrease in foreign currency transaction related losses primarily in the Performance Coatings Group.

In 2020, the Administrative segment recognized a $21.3 million loss related to the extinguishment of the 2.75% Senior Notes due 2022.

In 2019, the Administrative segment recognized a $32.4 million charge for a domestic pension plan settlement and $14.8 million in losses related to the extinguishment of the 2.25% Senior Notes due 2020 and 2.75% Senior Notes due 2022, partially offset by a $38.7 million gain related to the recognition of indirect tax credits.

There were no other items within Other income or Other expense that were individually significant at December 31, 2020 or 2019.

See Notes 6, 7 and 18 to the Consolidated Financial Statements in Item 8 for additional information related to debt, pensions and Other expense - net, respectively.

The following tables presents income before income taxes by segment and as a percentage of net sales by segment:

As a percent of net sales, SG&A decreased 190 basis points compared to the same period in 2020 as a result of good cost control, partially offset by increased spending from new store openings and costs to support higher sales levels.

The Americas Group’s SG&A increased $196.3 million for the year due primarily to increased spending from new store openings and costs to support higher sales levels, including the hiring of additional sales representatives.

The Consumer Brands Group’s SG&A decreased by $104.9 million for the year primarily 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 by $75.4 million for the year primarily to support higher sales levels and unfavorable currency translation rate changes, partially offset by good cost control.

The Administrative segment’s SG&A decreased $72.2 million primarily due to lower compensation, including incentive compensation.

Other general expense - net increased $74.1 million in 2021 compared to 2020.

The increase was primarily attributable to the recognition of a $111.9 million loss on the Wattyl divestiture in March 2021, partially offset by a $41.1 million decrease in provisions for environmental matters in the Administrative segment.

See Notes 3, 9 and 18 to the Consolidated Financial Statements in Item 8 for additional information concerning the Wattyl divestiture, environmental matters and Other general expense - net, respectively.

For information on the amortization of acquired intangible assets and related impairment considerations, see Note 5 to the Consolidated Financial Statements in Item 8.

Interest expense decreased $5.7 million in 2021 primarily due to lower expense associated with short-term borrowings.

See Note 6 to the Consolidated Financial Statements in Item 8 for additional information on the Company’s outstanding debt.

Other (income) expense - net improved $24.8 million in 2021 compared to 2020 primarily due to the $21.3 million loss recognized upon extinguishment of debt in 2020 in the Administrative segment.

See Notes 6 and 18 to the Consolidated Financial Statements in Item 8 for additional information related to debt and Other (income) expense - net, respectively.

The following table presents income before income taxes by segment and as a percentage of net sales by segment:

Year Ended December 31,

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The effective income tax rate for 2021 was 17.1% compared to 19.4% in 2020.

The decrease in the effective rate was primarily due to the recognition of a $74.3 million tax credit investment loss in 2019 related to the reversal of certain partnership tax credits, partially offset by a reduction in research and development credits.

The tax credit investment loss negatively impacted the 2019 effective tax rate by 370 basis points.

The decrease in the effective rate was primarily due to an increase in tax benefits related to employee share-based payments and the net favorable impact of various other tax benefits received by the Company in the current year.

See Note 19 to the Consolidated Financial Statements in Item 8 for additional information.

Net Income Per Share

Diluted net income per share for 2020 increased to $22.08 per share from $16.49 per share for 2019.

Diluted net income per share in 2020 included charges for acquisition-related amortization expense of $2.50 per share.

Diluted net income per share for 2021 decreased to $6.98 per share from $7.36 per share for 2020.

Diluted net income per share in 2021 included acquisition-related amortization expense of $0.83 per share and a $0.34 per share loss from the Wattyl divestiture.

See Note 3 to the Consolidated Financial Statements in Item 8 for additional information regarding the Wattyl divestiture.

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

Diluted net income per share in 2019 included charges for acquisition-related costs of $3.21 per share and other adjustments totaling $1.42 per share.

Acquisition-related costs include integration costs (which primarily consist of professional service

expenses, salaries and other employee-related expenses dedicated directly to the integration effort, and severance expenses all of which are included in Selling, general and administrative and other expenses and Cost of goods sold) and amortization of intangible assets recognized in the June 2017 acquisition of Valspar (included in Amortization).

Total other adjustments in 2019 included charges of $1.00 per share for non-cash trademark impairment charges, a tax credit investment loss of $0.79 per share and pension plan settlement expense of $0.27 per share, partially offset by a Brazil indirect tax credit of $0.36 per share and a benefit from the resolution of the California litigation of $0.28 per share.

Diluted net income per share in 2020 included acquisition-related amortization expense of $0.83 per share.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

The Company’s financial condition, liquidity and cash flow continued to be strong in 2020 as net operating cash increased to a record $3.409 billion primarily due to improved operating results as consolidated income before income taxes increased to $2.519 billion or 13.7% of net sales.

Strong net operating cash provided the funds necessary for the Company to invest $303.8 million in capital expenditures, reduce total debt by $410.3 million and return $2.934 billion to shareholders in the form of cash dividends and share buybacks during the year.

During 2020, the Company generated EBITDA of $3.441 billion.

See the Non-GAAP Financial Measures section in Item 6 for definition and calculation of EBITDA.

The Company’s financial condition, liquidity and cash flow continued to be strong in 2021.

The Company generated $2.245 billion in net operating cash despite ongoing and industry-wide raw material availability issues which negatively impacted total sales and gross margins.

The net operating cash generation was primarily attributable to operating results as consolidated income before income taxes was $2.249 billion or 11.3% of net sales.

The strong cash generation, along with an increase in our short-term borrowings and long-term debt, allowed the Company to invest $372.0 million in capital expenditures and return $3.339 billion to shareholders in the form of cash dividends and share buybacks during the year.

During 2021, the Company generated EBITDA of $3.156 billion and Adjusted EBITDA of $3.268 billion.

See the Non-GAAP Financial Measures section in Item 7 for definition and calculation of EBITDA and Adjusted EBITDA.

As of December 31, 2021, the Company had Cash and cash equivalents of $165.7 million and total debt outstanding of $9.615 billion.

Total debt, net of Cash and cash equivalents, was $8.066 billion and was 2.4 times the Company’s EBITDA in 2020.

Total debt, net of Cash and cash equivalents, was $9.449 billion and was 2.9 times the Company’s Adjusted EBITDA in 2021.

Net Working Capital

Total current assets less Total current liabilities (net working capital) decreased $112.8 million to a deficit of $3.0 million at December 31, 2020 from a surplus of $109.8 million at December 31, 2019.

The net working capital decrease is due to both a decrease in current assets and an increase in current liabilities.

Accounts receivable decreased $10.8 million, Inventories decreased $85.5 million, and Other current assets decreased $8.8 million primarily related to refundable income taxes.

Current liabilities excluding Short-term borrowings and the Current portion of long-term debt increased $681.8 million primarily due to the timing of payments and higher incentive compensation, partially offset by a $609.3 million decrease in Short-term borrowings and the Current portion of long-term debt.

Net working capital, defined as Total current assets less Total current liabilities, decreased $662.8 million to a deficit of $665.8 million at December 31, 2021 from a deficit of $3.0 million at December 31, 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 December 31, 2021 to December 31, 2020, Accounts receivable increased $274.3 million due to higher sales, Inventories increased $123.1 million due to higher raw material costs, and Other current assets increased $125.8 million primarily related to refundable income taxes and prepaid expenses.

Current liability balances increased $1.125 billion at December 31, 2021 compared to December 31, 2020 primarily due to a $763.4 million increase in Short-term borrowings and $235.5 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 $126.2 million primarily due to the timing of payments related to accounts payable, partially offset by lower accruals, including compensation.

As a result of the net effect of these changes, the Company’s current ratio decreased to 0.88 at December 31, 2021 from 1.00 at December 31, 2020.

Accounts receivable as a percent of net sales decreased to 11.3% in 2020 from 11.7% in 2019.

Accounts receivable days outstanding decreased to 57 days in 2020 from 61 days in 2019.

In 2020, provisions for allowance for doubtful collection of accounts increased $17.0 million, or 46.6%.

Accounts receivable as a percent of net sales increased to 11.8% in 2021 from 11.3% in 2020.

Accounts receivable days outstanding remained unchanged at 57 days in 2021.

In 2021, provisions for allowance for doubtful collection of accounts decreased $4.6 million, or 8.6%.

Inventories as a percent of net sales decreased to 9.7% in 2021 from 9.8% in 2020.

Inventory days outstanding decreased to 74 days in 2020 from 81 days in 2019.

Inventory days outstanding was 75 days in 2021 compared to 74 days in 2020.

The Company has sufficient total available borrowing capacity to fund its current operating needs.

Property, Plant and Equipment

Net property, plant and equipment decreased $0.7 million to $1.835 billion at December 31, 2020 due primarily to depreciation expense of $268.0 million and sale or disposition of assets with remaining net book value of $46.9 million, partially offset by capital expenditures of $303.8 million and currency translation and other adjustments of $10.4 million.

Net property, plant and equipment increased $32.8 million to $1.867 billion at December 31, 2021 due primarily to capital expenditures of $372.0 million, assets acquired through business combinations of $33.5 million, partially offset by depreciation expense of $263.1 million, sale or disposition of assets with remaining net book value of $53.1 million, and other adjustments of $56.5 million, which includes government incentives associated with the construction of our new global headquarters (new headquarters) in downtown Cleveland, Ohio and new research and development (R&D) center in the Cleveland suburb of Brecksville and currency translation.

Capital expenditures during 2021 in The Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores.

In the Consumer Brands Group and the Performance Coatings Group, capital expenditures during 2020 were primarily attributable to improvements and normal equipment replacements in manufacturing and distribution facilities.

The Administrative segment incurred capital expenditures primarily to acquire the land for the new global headquarters (new headquarters) in downtown Cleveland, Ohio and a new research and development (R&D) center in the Cleveland suburb of Brecksville.

The Company expects to invest a minimum of $600 million of capital expenditures to build both the new headquarters and R&D center.

Construction on the new headquarters and R&D center is expected to commence in 2021, with completion in 2024 at the earliest.

In the Consumer Brands Group and the Performance Coatings Group, capital expenditures during 2021 were primarily attributable to operational efficiencies, capacity, health and safety at sites currently in operation.

The Administrative segment incurred capital expenditures primarily related to construction activities associated with the new headquarters and new R&D center.

The Company has committed to spend a minimum of $600 million of capital expenditures to build both the new headquarters and R&D center.

Construction on the new headquarters and R&D center is expected to continue in 2022, with completion in 2024 at the earliest.

The Company has not made any decisions regarding the disposition of the Company’s current Cleveland-area headquarters and R&D centers, which are all owned by the Company.

In 2022, the Company expects to spend more than 2021 for capital expenditures.

The predominant share of the capital expenditures in 2021 is expected to be for various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings, new or upgraded information systems hardware and the new global headquarters and R&D center in Ohio.

The predominant share of the capital expenditures in 2022 is expected to be for various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings, new or upgraded information systems hardware and the new headquarters and R&D center in Ohio.

The Company does not anticipate the need for any specific long-term external financing to support these capital expenditures.

Goodwill and Intangible Assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased $44.3 million in 2020 due to foreign currency translation rate fluctuations.

Intangible assets decreased $263.3 million in 2020 primarily due to amortization of finite-lived intangible assets of $313.4 million, impairment of indefinite-lived trademarks of $2.3 million, partially offset by foreign currency translation rate fluctuations of $51.5 million.

Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased $85.5 million in 2021 primarily due to incremental goodwill recognized in 2021 acquisitions of $155.6 million, partially offset by foreign currency translation rate fluctuations and the Wattyl divestiture.

Intangible assets decreased $469.7 million in 2021 primarily due to amortization of finite-lived intangible assets of $309.5 million, dispositions of $148.5 million primarily related to Wattyl divestiture, and foreign currency translation rate fluctuations of $37.2 million, partially offset by finite-lived intangible assets recognized in 2021 through acquisitions of $25.5 million.

See Note 3 to the Consolidated Financial Statements in Item 8 for additional information related to acquisitions and divestitures.

See Note 5 to the Consolidated Financial Statements in Item 8 for a description of goodwill, identifiable intangible assets and asset impairments recognized in accordance with the Goodwill and Other Intangibles Topic of the ASC and summaries of the remaining carrying values of goodwill and intangible assets.

Deferred Pension and Other Assets

Deferred pension assets of $53.1 million at December 31, 2020 represent the excess of the fair value of assets over the actuarially determined projected benefit obligations.

See Note 7 to the Consolidated Financial Statements in Item 8 and the Defined Benefit Pension and Other Postretirement Benefit Plans section below.

Other assets increased $94.7 million to $789.0 million at December 31, 2021.

The increase was primarily due to incremental securities purchased with the proceeds generated from the sale of treasury shares to fund future contributions to the Company’s Qualified Replacement Plan.

See Notes 7 and 11 to the Consolidated Financial Statements in Item 8 for additional information related to the Qualified Replacement Plan and the sale of treasury stock, respectively.

Total debt including Short-term borrowings decreased by $393.1 million to $8.292 billion in 2020.

This was primarily attributable to the repayment of Short-term borrowings and a net reduction in Long-term debt.

In March 2020, the Company issued $500.0 million of 2.30% Senior Notes due May 2030 and $500.0 million of 3.30% Senior Notes due May 2050 in a public offering.

The net proceeds from the issuance of these notes were used to repurchase a portion of the 2.75% Senior Notes due 2022 and redeem the 2.25% Senior Notes due May 2020.

The repurchase of the 2.75% Senior Notes due 2022 during the first quarter of 2020 resulted in a loss of $21.3 million recorded in Other expense - net.

On July 19, 2018, the Company entered into a new five-year $2.000 billion credit agreement.

This credit agreement may be used for general corporate purposes, including the financing of working capital requirements.

This credit agreement allows the Company to extend the maturity of the facility with two one-year extension options and the Borrowers to increase the aggregate amount of the facility to $2.750 billion, both of which are subject to the discretion of each lender.

In addition, the Borrowers may request letters of credit in an amount of up to $250.0 million.

On October 8, 2019, the Company amended this credit agreement to, among other things, extend the maturity date to October 8, 2024.

At December 31, 2020 and 2019, there were no short-term borrowings under this credit agreement.

On May 6, 2016, the Company entered into a five-year credit agreement, subsequently amended on multiple dates to extend the maturity of the agreement.

This credit agreement gives the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit up to an aggregate availability of $875.0 million at December 31, 2020.

In September 2017, the Company entered into an additional five-year letter of credit agreement, subsequently amended on multiple dates to extend the maturity of the agreement, with an aggregate availability of $625.0 million at December 31, 2020.

The increase was primarily due to incremental deposits and investments (including an increase in deferred pension assets), partially offset by the sale of investments to fund the Company’s domestic defined contribution plan.

See Note 7 to the Consolidated Financial Statements in Item 8 for additional information related to the domestic defined contribution plan.

Debt (including Short-term borrowings)

December 31, December 31,

Long-term debt $ 8,851.5 $ 8,292.0

Short-term borrowings 763.5 0.1

Total debt outstanding $ 9,615.0 $ 8,292.1

Total debt including Short-term borrowings increased by $1.323 billion to $9.615 billion in 2021.

Short-term borrowings are primarily comprised of amounts outstanding under the Company’s domestic commercial paper program and various foreign credit facilities.

The Company’s long-term debt primarily consists of senior notes.

In November 2021, the Company issued $500.0 million of 2.20% Senior Notes due March 2032 and $500.0 million of 2.90% Senior Notes due March 2052 in a public offering.

The net proceeds from the issuance of these notes were used to repay outstanding borrowings under the Company’s domestic commercial paper program.

In October 2021, the Company redeemed 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) after exercising its optional redemption rights.

The 4.20% Senior Notes were redeemed at a redemption price equal to 100% of the principal amount, plus accrued interest, and resulted in a gain of $1.4 million recorded in Other (income) expense - net .

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

(SW Canada) and Sherwin-Williams Luxembourg S.à r.l.

(SW Luxembourg, together with the Company and SW Canada, the Borrowers), entered into a new five-year $2.000 billion credit agreement (New Credit Agreement).

The New Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements.

The New Credit Agreement replaced the $2.000 billion credit agreement dated July 19, 2018, as amended, which was terminated effective June 29, 2021.

The New Credit Agreement will mature on June 29, 2026 and provides that the Company may request to extend the maturity date of the facility for two additional one-year periods.

In addition, the New Credit Agreement provides that the Borrowers may increase the aggregate amount of the facility to $2.750 billion, subject to the discretion of each lender to participate in the increase, and the Borrowers may request letters of credit in an amount of up to $250.0 million.

At December 31, 2021 and 2020, there were no short-term borrowings under these credit agreements.

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

The August 2021 Credit Agreement was subsequently amended on multiple dates to extend the maturity of commitments available for borrowing or letters of credit under the agreement.

On May 9, 2016, the Company entered into a five-year credit agreement (May 2016 Credit Agreement), subsequently amended on multiple dates to extend the maturity of commitments available for borrowing or letters of credit under the agreement.

The May 2016 credit agreement gives the Company the right to borrow and obtain letters of

credit up to an aggregate availability of $875.0 million.

Both of these credit agreements are being used for general corporate purposes.

At December 31, 2021 and 2020, there were no borrowings outstanding under these credit agreements.

There were no borrowings outstanding under the Company’s domestic commercial paper program at December 31, 2020.

Borrowings outstanding under the Company’s domestic commercial paper program at December 31, 2019 were $191.9 million with a weighted average interest rate of 2.1%.

Borrowings outstanding under various foreign programs were $0.1 million and $12.8 million at December 31, 2020 and 2019, respectively with a weighted average interest rate of 0.2% and 4.3%, respectively.

The Company’s available capacity under its committed credit agreements is reduced for amounts outstanding under its domestic commercial paper program and letters of credit.

At December 31, 2021, the Company had unused capacity under its various credit agreements of $2.725 billion.

See Note 6 to the Consolidated Financial Statements in Item 8 for a detailed description and summary of the Company’s outstanding debt and other available financing programs.

See Note 6 to the Consolidated Financial Statements in Item 8 for a detailed description and summary of the Company’s outstanding debt, short-term borrowings and other available financing programs.

Defined Benefit Pension and Other Postretirement Benefit Plans

In 2018, the Company terminated its domestic defined benefit pension plan for salaried employees (Terminated Plan) and the participants were moved to a qualified replacement plan (Qualified Replacement Plan), which is the Company’s domestic defined contribution plan.

The surplus assets of the Terminated Plan are being used, as prescribed in the applicable regulations, to fund Company contributions to the Qualified Replacement Plan.

During 2019, the Company transferred the remaining surplus of $242.2 million to a suspense account held within a trust for the Qualified Replacement Plan.

included $131.8 million of Company common stock (300,000 shares).

The shares are treated as treasury stock in accordance with ASC 715.

During 2020, the Company sold 275,000 treasury shares fro m the trust in the Company’s Qualified Replacement Plan.

The proceeds generated from the sale of the treasury shares were used to fund the Company’s 2020 contribution to the Qualified Replacement Plan and purchase securities held in a suspense account to fund future contributions to the Company’s Qualified Replacement Plan.

The Co mpany’s domestic defined benefit pension plan for hourly employees continues to operate.

In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans increased $17.5 million to $110.3 million primarily due to changes in the actuarial assumptions.

The Company’s liability for other postretirement benefits increased $11.1 million to $291.6 million at December 31, 2020 due primarily to changes in the actuarial assumptions.

In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans decreased $31.3 million to $79.0 million primarily due to changes in the actuarial assumptions.

The Company’s liability for other postretirement benefits decreased $15.2 million to $276.4 million at December 31, 2021 due primarily to changes in the actuarial assumptions.

The assumed discount rate used to determine the projected benefit obligation for domestic defined benefit pension plans was 3.1% at December 31, 2021 and 2.9% at December 31, 2020.

The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans decreased to 1.6% at December 31, 2020 from 2.2% at December 31, 2019.

The decrease in the discount rates for both the domestic and foreign defined benefit pension plans was primarily due to lower interest rates.

The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations decreased to 2.5% at December 31, 2020 from 3.2% at December 31, 2019 for the same reason.

The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans increased to 2.3% at December 31, 2021 from 1.6% at December 31, 2020.

The increase in the discount rates for both the domestic and foreign defined benefit pension plans was primarily due to higher interest rates.

The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations increased to 2.8% at December 31, 2021 from 2.5% at December 31, 2020 for the same reason.

The rate of compensation increases used to determine the projected benefit obligations at December 31, 2021 was 3.0% for the domestic pension plan and 3.3% for foreign pension plans, which was comparable to the rates used in the prior year.

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Other Long-Term Liabilities

Other long-term liabilities increased $177.0 million during 2020 due primarily to legislatively authorized tax payment deferral mechanisms available primarily for U.S.

federal payroll withholding taxes until 2021 and 2022 and the net investment hedges being in a net loss position at December 31, 2020.

See Note 15 to the Consolidated Financial Statements in Item 8 for additional information on the net investment hedges.

Other long-term liabilities increased $47.1 million during 2021 due primarily to an increase in long-term commitments related to affordable housing and historic real estate properties, partially offset by the payment of U.S.

federal payroll withholding taxes in accordance with the terms of the legislatively authorized tax payment deferral mechanisms established in 2020.

Environmental-Related Liabilities

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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 2020.

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 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 2022.

See Note 9 to the Consolidated Financial Statements in Item 8 for further information on environmental-related long-term liabilities.

Contractual Obligations and Commercial Commitments

The Company has certain obligations and commitments to make future payments under contractual obligations and commercial commitments.

Contractual and Other Obligations and Commercial Commitments

During 2021, the Company signed agreements related to various acquisitions, including related to the European industrial coatings business of Sika AG (Sika).

The Sika transaction is expected to close in the first quarter of 2022.

Refer to Note 3 for additional information.

The Company has certain obligations and commitments to make future payments under contractual and other obligations and commercial commitments.

The Company believes that cash generated from operating activities and borrowings available under long-term and short-term debt, including its committed credit agreements and commercial paper program, will be sufficient for it to meet its contractual and other obligations and commercial commitments.

The following tables summarize such obligations and commitments as of December 31, 2021.

Payments Due by Period

Contractual Obligations Total Less Than

Contractual and Other Obligations Total Less Than

1 Year 1–3 Years 3–5 Years More Than

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Changes in the Company’s accrual for product warranty claims during 2021 and 2020, including customer satisfaction settlements during the year, were as follows:

2020 2019 2018

Balance at January 1 $ 43.3 $ 42.3

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Settlements (35.6) (37.1)

Divestiture and other adjustments (68.2)

Balance at December 31 $ 35.2 $ 43.3

Warranty accruals acquired in connection with the Valspar acquisition in 2017 include warranties for certain products under extended furniture protection plans.

The decrease in the accrual in 2018 was primarily due to the divestiture of the furniture protection plan business during the third quarter of 2018 for an immaterial amount that approximated net book value.

Shareholders’ Equity

Shareholders’ equity decreased $512.5 million to $3.611 billion at December 31, 2020 from $4.123 billion last year.

The decrease was primarily attributable to the Company repurchasing $2.446 billion in Treasury stock and declaring $488.0 million in cash dividends, partially offset by $2.030 billion of net income, an increase of $250.8 million associated with the recognition of stock-based compensation expense and stock option exercises, and an increase of $182.4 million from the issuance of treasury stock during the year.

During the fourth quarter of 2020, the Company retired 30.6 million common stock shares held in treasury, which resulted in decreases of Common stock, Retained earnings and Treasury stock of $30.6 million, $8.062 billion, and $8.092 billion, respectively.

Shareholders’ equity decreased $1.174 billion to $2.437 billion at December 31, 2021 from $3.611 billion last year.

The decrease was primarily attributable to the Company repurchasing $2.752 billion in Treasury stock and declaring $587.1 million in cash dividends, partially offset by $1.864 billion of net income and an increase of $268.3 million associated with stock option exercises and the recognition of stock-based compensation expense.

See the Statements of Consolidated Shareholders’ Equity and Statements of Consolidated Comprehensive Income in Item 8 for additional information.

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

The Company had remaining authorization from its Board of Directors at December 31, 2020 to purchase 4.55 million shares of its common stock.

On February 17, 2021, the Board of Directors authorized the Company to purchase an additional 45.0 million shares of the Company’s stock for treasury purposes.

The Company had remaining authorization from its Board of Directors at December 31, 2021 to purchase 48.6 million shares of its common stock.

The Company’s 2021 annual cash dividend of $2.20 per share represented 30% of 2020 diluted net income per share.

The 2020 annual dividend represented the 42 nd consecutive year of increased dividend payments since the dividend was suspended in 1978.

The 2021 annual dividend represented the 43 rd consecutive year of increased dividend payments since the dividend was suspended in 1978.

On February 16, 2022, the Board of Directors increased the quarterly cash dividend to $0.60 per share.

This quarterly dividend, if approved in each of the remaining quarters of 2022, would result in an annual dividend for 2022 of $2.40 per share or a 34% payout of 2021 diluted net income per share.

On February 3, 2021, the Board of Directors approved and declared a three-for-one stock split in the form of a stock dividend.

Each shareholder of record at the close of business on March 23, 2021 will receive two additional common shares for each then-held common share, to be distributed after close of trading on March 31, 2021.

Net Investment Hedges

In February 2020, the Company settled its $400.0 million U.S.

Dollar to Euro cross currency swap contract entered into in May 2019 to hedge the Company’s net investment in its European operations.

At the time of the settlement, an unrealized gain of $11.8 million, net of tax, was recognized in Accumulated other comprehensive income (loss) (AOCI), a component of Shareholders’ equity.

In February 2020, the Company also entered into two U.S.

Dollar to Euro cross currency swap contracts to hedge the Company’s net investment in its European operations.

The contracts, which were designated as net investment hedges, have a notional value of $500.0 million and $244.0 million, respectively, and mature on June 1, 2024 and November 15, 2021, respectively.

During the term of the $500.0 million contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S.

Dollars, thereby effectively converting a portion of the Company’s U.S.

Dollar denominated fixed-rate debt to Euro denominated fixed-rate debt.

During the term of the $244.0 million contract, the Company will pay floating-rate interest in Euros and receive floating-rate interest in U.S.

As of December 31, 2020, the outstanding cross currency swap contracts were in a net loss position of $85.8 million with $31.0 million included in Other accruals and $54.8 million included in Other liabilities, respectively, on the consolidated balance sheet.

As of December 31, 2019, the outstanding cross currency swap contract was in a net gain position of $1.5 million.

See Note 15 to the Consolidated Financial Statements in Item 8 for additional information.

Net operating cash increased $1.087 billion in 2020 to a cash source of $3.409 billion from $2.321 billion in 2019 due primarily to an increase in net income and improved working capital management, partially offset by unfavorable changes in non-cash items when compared to 2019.

Net operating cash increased as a percent to sales to 18.6% in 2020 compared to 13.0% in 2019.

During 2020, strong net operating cash continued to provide the funds necessary to pay down total net debt, invest in new stores and manufacturing and distribution facilities, and return cash to shareholders through treasury stock purchases and dividends paid.

Net investing cash usage decreased $140.2 million to a usage of $322.4 million in 2020 from a usage of $462.6 million in 2019 due primarily to a decrease in cash used for acquisitions and an increase in proceeds from sale of assets.

See Note 3 to the Consolidated Financial Statements in Item 8 for additional information on the acquisitions in 2019.

Net financing cash usage increased $1.174 billion to a usage of $3.020 billion in 2020 from a usage of $1.846 billion in 2019 due primarily to an increase in treasury stock purchases, repayments of short-term borrowings and cash dividends paid, partially offset by a decrease in long-term debt repayments and issuances, as well as the issuance of 275,000 shares of treasury stock

(which were associated with the domestic defined benefit plan terminated in 2018 as disclosed in Notes 7 and 11 to the Consolidated Financial Statements in Item 8).

Net operating cash decreased $1.164 billion in 2021 to a cash source of $2.245 billion from $3.409 billion in 2020 due primarily to incremental working capital requirements and a decrease in net income, partially offset by favorable changes in non-cash items associated with the Wattyl divestiture and deferred taxes when compared to 2020.

Net operating cash decreased as a percent to sales to 11.3% in 2021 compared to 18.6% in 2020.

Net investing cash usage increased $154.0 million to a usage of $476.4 million in 2021 from a usage of $322.4 million in 2020 due primarily to cash used for acquisitions and an increase in capital expenditures, partially offset by higher proceeds received from the sale of businesses and assets (including the Wattyl divestiture).

See Note 3 to the Consolidated Financial Statements in Item 8 for additional information on acquisitions and divestitures.

Net financing cash usage decreased $1.186 billion to a usage of $1.834 billion in 2021 from a usage of $3.020 billion in 2020 due primarily to $1.746 billion of incremental cash provided by short-term borrowings and long-term debt, partially offset by an increase of $405.1 million, or 13.8%, in cash returned to shareholders in the form of cash dividends and share buybacks during the year and lower proceeds from treasury stock issuances.

See Note 10 to the Consolidated Financial Statements in Item 8 for information concerning litigation.

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The Company’s Notes, Debentures and revolving credit agreement contain various default and cross-default provisions.

In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result.

In the event of default under any one of these arrangements, acceleration of the maturity of any

one or more of these borrowings may result.

See Note 6 to the Consolidated Financial Statements in Item 8 for additional information.

Employee Stock Ownership Plan

Participants in the Employee Stock Purchase and Savings Plan, the Company’s employee stock ownership plan (ESOP), are allowed to contribute up to the lesser of 50% of their annual compensation and the maximum dollar amount allowed under the Internal Revenue Code.

Participants in the Company’s employee stock ownership plan (ESOP) are allowed to contribute up to the lesser of 50% of their annual compensation and the maximum dollar amount allowed under the Internal Revenue Code.

The Company matches 6% of eligible employee contributions.

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See Note 12 to the Consolidated Financial Statements in Item 8 for additional information concerning the Company’s ESOP.

NON-GAAP FINANCIAL MEASURES

Management utilizes certain financial measures that are not in accordance with U.S.

generally accepted accounting principles (US GAAP) to analyze and manage the performance of the business.

The required disclosures for these non-GAAP measures are shown below.

The Company provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate the Company’s operations.

Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with US GAAP.

EBITDA and Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure defined as net income before income taxes and interest, depreciation and amortization.

Adjusted EBITDA is a non-GAAP financial measure that excludes the loss on the Wattyl divestiture.

Management considers EBITDA and Adjusted EBITDA useful in understanding the operating performance of the Company.

The reader is cautioned that the Company’s EBITDA and Adjusted EBITDA should not be compared to other entities unknowingly.

Further, EBITDA and Adjusted EBITDA should not be considered alternatives to net income or net operating cash as an indicator of operating performance or as a measure of liquidity.

The reader should refer to the determination of net income and net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows in Item 8.

The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the years indicated below:

(millions of dollars) Year Ended December 31,

Net income $ 1,864.4 $ 2,030.4

Interest expense 334.7 340.4

Income taxes 384.2 488.8

Depreciation 263.1 268.0

Amortization 309.5 313.4

EBITDA 3,155.9 3,441.0

Loss on Wattyl divestiture 111.9 —

Adjusted EBITDA $ 3,267.8 $ 3,441.0

Free Cash Flow

Free Cash Flow is a non-GAAP financial measure defined as Net operating cash, as shown in the Statements of Consolidated Cash Flows, less the amount reinvested in the business for Capital expenditures and the return of investment to its shareholders by the payment of cash dividends.

Management considers Free Cash Flow to be a useful tool in its determination of appropriate uses of the Company’s Net operating cash.

The reader is cautioned that the Free Cash Flow measure should not be compared to other entities unknowingly as it may not be comparable and it does not consider certain non-discretionary cash flows, such as mandatory debt and interest payments.

The amount shown below should not be considered an alternative to Net operating cash or other cash flow amounts provided in accordance with US GAAP as disclosed in the Statements of Consolidated Cash Flows in Item 8.

The following table summarizes Free Cash Flow as calculated by management for the years indicated below:

(millions of dollars) Year Ended December 31,

Net operating cash $ 2,244.6 $ 3,408.6

Capital expenditures ( 372.0 ) ( 303.8 )

Cash dividends ( 587.1 ) ( 488.0 )

Free cash flow $ 1,285.5 $ 2,616.8

Adjusted Diluted Net Income Per Share

Management of the Company believes that investors’ understanding of the Company’s operating performance is enhanced by the disclosure of diluted net income per share excluding the loss on divestiture of Wattyl and Valspar acquisition-related amortization expense.

This adjusted earnings per share measurement is not in accordance with US GAAP.

It should not be considered a substitute for earnings per share in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies.

The following tables reconcile diluted net income per share computed in accordance with US GAAP to adjusted diluted net income per share.

December 31, 2021

Diluted net income per share $ 6.98

Loss on Wattyl divestiture $ .41 $ .07 .34

Acquisition-related amortization expense (2)

Adjusted diluted net income per share $ 8.15

December 31, 2020

Diluted net income per share $ 7.36

Acquisition-related amortization expense (2)

Adjusted diluted net income per share $ 8.19

(1) The tax effect is calculated based on the statutory rate and the nature of the item, unless otherwise noted.

(2) Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization.

Adjusted Segment Profit

Management of the Company believes that investors’ understanding of the Company’s operating performance is enhanced by the disclosure of segment profit excluding the loss on divestiture of Wattyl and Valspar acquisition-related amortization expense.

This adjusted segment profit measurement is not in accordance with US GAAP.

It should not be considered a substitute for segment profit in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies.

The following tables reconcile segment profit computed in accordance with US GAAP to adjusted segment profit.

Year Ended December 31, 2021

The Americas Group Consumer Brands

Group Performance Coatings

Group Administrative Total

Net external sales $ 11,217.0 $ 2,721.6 $ 6,003.8 $ 2.2 $ 19,944.6

Income before income taxes $ 2,239.1 $ 358.4 $ 486.2 $ ( 835.1 ) $ 2,248.6

as a % of Net external sales 20.0 % 13.2 % 8.1 % 11.3 %

Loss on Wattyl divestiture — — — 111.9 111.9

Acquisition-related amortization expense (1)

— 82.8 211.2 — 294.0

Adjusted segment profit $ 2,239.1 $ 441.2 $ 697.4 $ (723.2) $ 2,654.5

as a % of Net external sales 20.0 % 16.2 % 11.6 % 13.3 %

Year Ended December 31, 2020

The Americas Group Consumer Brands

Group Performance Coatings

Group Administrative Total

Net external sales $ 10,383.2 $ 3,053.4 $ 4,922.4 $ 2.7 $ 18,361.7

Income before income taxes $ 2,294.1 $ 579.6 $ 500.1 $ (854.6) $ 2,519.2

as a % of Net external sales 22.1 % 19.0 % 10.2 % 13.7 %

Acquisition-related amortization expense (1)

— 90.5 213.1 0.9 304.5

Adjusted segment profit $ 2,294.1 $ 670.1 $ 713.2 $ (853.7) $ 2,823.7

as a % of Net external sales 22.1 % 21.9 % 14.5 % 15.4 %

(1) Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Inventories were stated at the lower of cost or net realizable value with cost determined principally on the last-in, first-out (LIFO) method based on inventory quantities and costs determined during the fourth quarter.

Inventory quantities were adjusted during the fourth quarter as a result of annual physical inventory counts taken at all locations.

Inventory quantities were adjusted throughout the year as formal cycle counts were completed, or during the fourth quarter as a result of annual physical inventory counts.

If inventories accounted for on the LIFO method are reduced on a year-over-year basis, then liquidation of certain quantities carried at costs prevailing in prior years occurs.

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The royalty savings valuation methodology and calculations used in 2021 impairment testing are consistent with prior years.

The annual impairment review performed as of October 1, 2020 resulted in the Company recognizing non-cash pre-tax impairment charges totaling $2.3 million related to lower than anticipated sales of an acquired indefinite-lived trademark.

The annual impairment review performed as of October 1, 2021 did not result in any of the reporting units having impairment or deemed at risk for impairment.

The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed.

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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-K

Item 7. Management’s Discussion and Analysis