What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-26 compared with 2021-10-26 · 119 added, 188 removed, 144 unchanged (68% of the section changed)

7 unchanged sentences

◦ Net sales from stores in U.S.

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, 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 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 flows, while managing our response to the pandemic through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners.

Please see Part II, Item 1A.

Risk Factors in this Quarterly Report on Form 10-Q for further information regarding the current and potential impact of the COVID-19 pandemic on the Company.

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 that is ongoing.

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.

and Canada open more than twelve calendar months increased 3.8% in the quarter

• Diluted net income per share was $1.41 per share in the quarter compared to $1.51 per share in the first quarter 2021

Our first quarter results were in line with our expectations in an environment characterized by strong demand, ongoing cost inflation, and choppy but improving raw material availability.

Sales grew 7.4% against a double-digit comparison a year ago, and we delivered sequential improvement in consolidated gross margin and segment margins in all of our businesses.

Our margins remained under pressure on a year over year basis, as significant pricing actions previously announced in all businesses have not yet fully caught up to offset highly elevated raw material costs.

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

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

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 flows, while managing our response to the impacts and developments relating to the pandemic through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners.

Please see Part I, Item 1A.

Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further information regarding the current and potential impact of the COVID-19 pandemic on the Company.

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 $313.3 million in cash and $2.805 billion of unused capacity under our credit facilities at September 30, 2021.

We have a strong liquidity position, with $401.1 million in cash and $1.814 billion of unused capacity under our credit facilities at March 31, 2022.

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

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

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 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

The results of operations for the three months ended March 31, 2022 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 uncertainty 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 months ended March 31, 2022 and 2021.

Three Months Ended March 31,

2022 2021 $ Change % Change

The Americas Group $ 2,644.1 $ 2,503.1 $ 141.0 5.6 %

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Total $ 4,998.7 $ 4,656.0 $ 342.7 7.4 %

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 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 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 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.

Consolidated net sales increased in the first quarter of 2022 primarily due to selling price increases in all segments and higher product sales volume in the Performance Coatings Group.

These increases were partially offset by lower sales volume in the Consumer Brands and The Americas Groups, primarily due to challenging prior year comparisons, along with anticipated raw material availability challenges which are largely behind us.

Currency translation rate changes decreased net sales by 0.7% in the first quarter.

Net sales of all consolidated foreign subsidiaries increased 3.9% to $1.078 billion in the first quarter compared to $1.037 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the first quarter was due primarily to higher sales volumes in most end markets and selling price increases in the Performance Coatings Group, partially offset by lower sales in the Consumer Brands Group as a result of the Wattyl divestiture and raw material availability challenges, as well as unfavorable currency translation.

Net sales of all operations other than consolidated foreign subsidiaries increased 8.3% to $3.921 billion in the first quarter compared to $3.619 billion in the same period last year.

Net sales in The Americas Group increased in the first quarter due primarily to selling price increases in all professional contractor end markets, partially offset by challenging prior year sales volume comparisons in residential repaint and new residential.

The anticipated raw material availability challenges mostly impacted DIY volume, as we prioritized serving our professional painting contractors.

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.

and Canada increased 3.8% in the first quarter compared to last year’s comparable period.

Sales of non-paint products decreased 2.3% compared to last year's first 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 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 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.

Net sales of the Consumer Brands Group decreased in the first quarter due primarily to the Wattyl divestiture, lower sales outside of North America, and challenging prior year comparisons, partially offset by selling price increases.

Currency translation rate changes decreased the Consumer Brands Group's net sales by 0.3% in the first quarter.

Net sales in the Performance Coatings Group increased in the first quarter due to higher sales in all end markets, primarily attributable to selling price increases and sales volume growth in our Packaging and Coil businesses.

Currency translation rate changes decreased the Performance Coatings Group's net sales by 1.8% in the first quarter.

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 September 30, Nine Months Ended September 30,

2021 2020 2021 2020

% of Net Sales % of Net Sales % of Net Sales % of Net Sales

Three Months Ended March 31,

% of Net Sales % of Net Sales

Net sales $ 4,998.7 100.0 % $ 4,656.0 100.0 %

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SG&A 1,407.5 28.2 % 1,325.9 28.5 %

Other general (income) expense - net (1.1) — % 10.5 0.2 % 111.2 0.7 % 13.1 0.1 %

Other general expense - net 2.5 0.1 % 117.5 2.5 %

Amortization 78.0 1.6 % 79.2 1.7 %

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Income before income taxes $ 461.1 9.2 % $ 509.0 10.9 %

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 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.

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.

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.

Consolidated cost of goods sold increased $401.8 million, or 15.8%, in the first quarter of 2022 compared to the same period in 2021 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources), partially offset by lower sales volumes as a result of raw material availability challenges and favorable currency translation rate changes.

Currency translation rate changes decreased Cost of goods sold by 0.9% in the first quarter of 2022.

Consolidated gross profit decreased $59.1 million in the first quarter of 2022 compared to the same period in 2021.

Consolidated gross profit as a percent of consolidated net sales decreased in the first quarter to 41.1% compared to 45.4% during the same period in 2021.

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

The Americas Group’s gross profit in the first quarter was lower than the same period last year by $16.1 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 first quarter compared to the same period in 2021 primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased by $74.3 million in the first quarter compared to the same period last year due primarily to lower sales volume (including the impact from the Wattyl divestiture), 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 quarter compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit increased $28.8 million in the first quarter compared to the same period last year due primarily to higher sales, partially offset by higher raw material costs and unfavorable currency translation rate changes.

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

Consolidated selling, general and administrative expenses (SG&A) increased $81.6 million in the first quarter versus the same period last year due primarily to increased expenses to support higher sales levels and net new store openings, partially offset by good cost control.

As a percent of net sales, consolidated SG&A decreased 30 basis points in the first quarter compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A increased $22.6 million in the first quarter compared to the same period last year due primarily to increased spending from new store openings, partially offset by good cost control.

The Consumer Brands Group’s SG&A increased $9.4 million in the first quarter compared to the same period last year due to higher marketing spend.

The Performance Coatings Group’s SG&A increased $20.4 million in the first quarter compared to the same period last year to support higher sales levels, partially offset by good cost control and favorable currency translation rate changes.

The Administrative segment’s SG&A increased $29.2 million in the first quarter compared to the same period last year due primarily to higher compensation and investments in information systems.

In the first quarter of 2022, Other general expense - net improved $115.0 million compared to the same period in 2021 primarily due to the recognition of a $111.9 million loss on the Wattyl divestiture in the Administrative segment in the first quarter of 2021.

See Note 15 of Item 1 for additional information.

For information on the amortization of acquired intangible assets and related impairment considerations, see Note 5 of Item 1 and Note 5 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 % Change 2021 2020 % Change

Three Months Ended

2022 2021 % Change

Income Before Income Taxes:

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Performance Coatings Group 8.7 % 10.5 %

Administrative nm nm nm nm

Administrative nm nm

Total 9.2 % 10.9 %

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Income Tax Expense

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 19.6% for the first quarter of 2022 compared to 19.5% for the first quarter of 2021.

The effective tax rate was favorably impacted by tax benefits related to employee share based payments during 2022 and 2021.

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Net Income Per Share

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.

Diluted net income per share in the first quarter of 2022 decreased to $1.41 per share compared to $1.51 per share in the first quarter of 2021.

Diluted net income per share for the first quarter of 2022 included a $0.20 per share charge for acquisition-related amortization expense.

Diluted net income per share for the first quarter of 2021 included a $0.34 per share loss from the Wattyl divestiture and a $0.21 per share charge for acquisition-related amortization expense.

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

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

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.

The Company’s financial condition and liquidity remained strong at March 31, 2022.

During the first three months of 2022, the Company generated $26.3 million 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 three months of 2022, the Company’s EBITDA decreased 5.9% to $693.0 million.

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

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.

Cash and cash equivalents increased $235.4 million during the first three months of 2022.

Cash flow from operations and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return $558.0 million to shareholders in the form of share buybacks and cash dividends during the first three months of 2022.

At March 31, 2022, the Company had cash and cash equivalents of $401.1 million and total debt outstanding of $10.593 billion.

Total debt, net of cash and cash equivalents, was $10.192 billion.

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Net Working Capital

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.

Net working capital, defined as total current assets less total current liabilities, decreased $324.7 million to a deficit of $866.7 million at March 31, 2022 compared to a deficit of $542.0 million at March 31, 2021.

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 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.

Current asset balances increased $976.8 million at March 31, 2022 compared to March 31, 2021 primarily due to cash and cash equivalents increase of $86.4 million, accounts receivable increase of $369.5 million due to higher sales, inventories increase of $481.3 million due to higher raw material costs, and other current assets increase of $39.6 million primarily related to refundable income taxes and other miscellaneous receivables.

Current liability balances increased $1.302 billion at March 31, 2022 compared to March 31, 2021 primarily due to an increase in current debt as short-term borrowings increased $921.6 million, partially offset by a $167.8 million decrease in the current portion of long-term debt.

Excluding short-term borrowings and the current portion of long-term debt, current liabilities increased $547.7 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.

At March 31, 2022, the Company’s current ratio was 0.88 compared to 0.88 and 0.90 at December 31, 2021 and March 31, 2021, respectively.

Property, Plant and Equipment

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.

Net property, plant and equipment increased $40.0 million in the first three months of 2022 and increased $126.9 million in the twelve months since March 31, 2021.

The increase in the first three months was primarily due to capital expenditures of $106.3 million and incremental assets recognized through acquisitions of $11.5 million, partially offset by depreciation expense of $65.5 million and the sale or disposition of fixed assets of $13.6 million.

Since March 31, 2021, the increase was primarily due to capital expenditures of $414.0 million and incremental assets recognized through acquisition of $39.2 million, partially offset by depreciation expense of $263.2 million, unfavorable changes in foreign currency translation of $41.9 million and sale or disposition of fixed assets of $21.2 million.

Capital expenditures primarily represented expenditures in The Americas Group associated with the opening of new paint stores and renovation and improvements in existing stores, and expenditures associated with operational efficiencies, capacity, health and safety at sites currently in operation in the Consumer Brands and Performance Coatings Groups.

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

Goodwill and Intangible Assets

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.

Goodwill and intangible assets decreased $73.3 million from December 31, 2021 and decreased $158.5 million from March 31, 2021.

The net decrease during the first three months of 2022 was primarily due to amortization of $78.0 million and foreign currency translation of $1.3 million, partially offset by incremental intangible assets recognized through acquisitions of $6.0 million.

The net decrease over the twelve month period from March 31, 2021 was primarily due to amortization of $308.3 million and foreign currency translation of $21.2 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $171.0 million.

See Note 3 in Item 1 for additional information on the Company’s recognition of incremental goodwill and intangible assets in the current year in connection with recent acquisitions.

See Note 6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information concerning the Company's goodwill and intangible assets, including impairment testing of these assets.

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.

Other assets increased $47.0 million from December 31, 2021 and increased $241.1 million from March 31, 2021.

The increase in the first quarter was primarily due to an increase in other investments partially offset by the sale of investments to fund the Company’s domestic defined contribution plan.

The increase from March 31, 2021 was primarily due to an increase in other investments (including an increase in deferred pension assets) and deferred tax assets, 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)

September 30, December 31, September 30,

March 31, December 31, March 31,

2022 2021 2021

Long-term debt $ 8,267.0 $ 8,292.0 $ 8,291.0

Long-term debt (including current portion) $ 8,853.0 $ 8,851.5 $ 8,290.9

Short-term borrowings 1,739.7 763.5 818.1

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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, 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.

(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 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.

The Company had unused capacity under its various credit agreements of $1.814 billion at March 31, 2022.

See Note 6 in Item 1 of this report for additional information.

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 September 30, 2020.

Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2021 and March 31, 2021.

See Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

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.

Deferred income taxes decreased $8.0 million from December 31, 2021, and decreased $37.6 million from March 31, 2021, primarily due to amortization of acquisition-related intangible assets.

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 nine 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 2022.

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Contractual Obligations, Commercial Commitments and Warranties

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.

Subsequent to quarter end, the Company completed the acquisition of the European industrial coatings business of Sika AG (Sika).

This business engineers, manufactures and sells corrosion protection coating systems and fire protection coating systems.

The acquired business will be reported within the Company’s Performance Coatings Group.

Except for the closing of the Sika acquisition and the incremental short-term borrowings discussed above, there have been no other significant changes to the Company’s contractual obligations and commercial commitments in the first three months of 2022 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, 2021.

See Note 9 in Item 1 for information concerning litigation.

Shareholders’ Equity

September 30, December 31, September 30,

March 31, December 31, March 31,

2022 2021 2021

Total shareholders’ equity $ 2,234.3 $ 2,437.2 $ 3,078.7

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.

Shareholders’ equity decreased $202.9 million during the first three months of 2022 as a result of $429.0 million of Treasury stock activity primarily attributable to treasury stock repurchases, cash dividends paid on common stock of $150.9 million and a decrease in Accumulated other comprehensive loss of $43.6 million, partially offset by net income of $370.8 million and an increase in Other capital of $49.7 million primarily associated with stock-based compensation expense and stock option exercises.

Shareholders’ equity decreased $844.4 million since March 31, 2021 as a result of $2.406 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $586.2 million, partially offset by net income of $1.826 billion and an increase in Other capital of $299.1 million primarily associated with stock-based compensation expense and stock option exercises.

During the first three months of 2022, the Company purchased 1.45 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 September 30, 2021 to purchase 50.575 million shares of its common stock.

The Company had remaining authorization at March 31, 2022 to purchase 47.1 million shares of its common stock.

In February 2022, the Company's Board of Directors increased the quarterly cash dividend from $.55 per share to $.60 per share.

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.

If approved in all subsequent quarters, this quarterly dividend will result in an annual dividend for 2022 of $2.40 per share or a 34% payout of 2021 diluted net income per share.

Net operating cash for the three months ended March 31, 2022 was a cash source of $26.3 million compared to a cash source of $195.7 million for the same period in 2021.

The decrease in net operating cash was primarily due to the change in net income, including the effect of the loss on the Wattyl divestiture in the prior year comparable period.

Net investing cash usage increased $189.2 million in the first three months of 2022 to a usage of $195.6 million compared to a usage of $6.4 million for the same period in 2021 primarily due to an increase in capital expenditures and other investments, as well as the proceeds received from the Wattyl divestiture in the prior year.

Net financing cash source increased $510.5 million in the first three months of 2022 to a source of $415.7 million from a usage of $94.8 million for the same period in 2021 primarily due to lower treasury stock purchases and incremental cash provided by short-term borrowings.

In the twelve month period from April 1, 2021 through March 31, 2022, the Company generated net operating cash of $2.075 billion, used $665.6 million in investing activities and used $1.324 billion in financing activities.

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

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

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

2022, 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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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 divestiture of Wattyl.

Adjusted EBITDA is a non-GAAP financial measure that excludes the loss on the divestiture of Wattyl in 2021.

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

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Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Net income $ 370.8 $ 409.6

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Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of the federal securities laws.

These forward-looking statements are based upon management’s current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation.

Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “believe,” “expect,” “may,” “will,” “should,” “project,” “could,” “plan,” “goal,” “potential,” “seek,” “intend” or “anticipate” or the negative thereof or comparable terminology.

These forward-looking statements are based upon management’s current expectations, predictions, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation.

Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “believe,” “expect,” “may,” “will,” “should,” “project,” “could,” “plan,” “goal,” “target,” “potential,” “seek,” “intend,” “aspire” or “anticipate” or the negative thereof or comparable terminology.

Readers are cautioned not to place undue reliance on any forward-looking statements.

Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements and from our historical results and experience.

These risks, uncertainties and other factors include such things as:

• general business conditions, strengths of retail and manufacturing economies and growth in the coatings industry;

• changes in general domestic and international economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions, and changing government policies, laws and regulations;

• changes in general domestic and international economic conditions, including due to higher inflation rates, interest rates, tax rates and unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations;

• changes in raw material and energy supplies and pricing;

• changes in our relationships with customers and suppliers;

• disruptions in the supply chain, including those caused by industry capacity constraints, labor shortages, raw material availability, and logistics delays and constraints;

• cybersecurity incidents and other disruptions to our information technology systems and operations;

• our ability to successfully integrate past and future acquisitions into our existing operations, as well as the performance of the businesses acquired;

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• our ability to attain cost savings from productivity initiatives;

• risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest and other external economic and political factors;

• risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, political instability, inflation rates, recessions, sanctions, foreign currency exchange rates and controls, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, armed conflict (including the ongoing conflict between Russia and Ukraine), war and other economic and political factors;

• the achievement of growth in foreign markets, such as Asia, Europe and South America;

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• inherent uncertainties involved in assessing our potential liability for environmental-related activities;

• other changes in governmental policies, laws and regulations, including changes in tariff policies, as well as changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations);

• the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation, and the effect of any legislation and administrative regulations relating thereto;

• adverse weather conditions or impacts of climate change, natural disasters and public health crises, including the COVID-19 pandemic;

• the duration, severity and scope of the COVID-19 pandemic and the actions implemented by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19, which may exacerbate one or more of the aforementioned and/or other risks, uncertainties and factors more fully described in the Company’s reports filed with the Securities and Exchange Commission.

Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list.

• adverse weather conditions or natural disasters, including due to the impacts of climate change;

• public health crises, including the duration, severity and scope of the COVID-19 pandemic and the actions implemented by international, federal, state and local public health and governmental authorities to contain and combat COVID-19, which may exacerbate one or more of the aforementioned and/or other risks, uncertainties and factors more fully described in the Company’s reports filed with the Securities and Exchange Commission.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

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