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Item 2. Management’s Discussion and Analysis

2022-07-27 compared with 2022-04-26 · 157 added, 99 removed, 164 unchanged (61% of the section changed)

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and Canada open more than twelve calendar months increased 6.4% 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 $401.1 million in cash and $1.814 billion of unused capacity under our credit facilities at March 31, 2022.

• Diluted net income per share was $2.21 per share in the quarter compared to $2.42 per share in the second quarter 2021

Demand remained strong during the second quarter in The Americas Group and the Performance Coatings Group, as both groups delivered sales within our guidance.

The Americas Group saw continued strength across all professional architectural markets, with momentum that increased as the quarter progressed, and which has further improved into July.

The Performance Coatings Group’s strength in North America was partially offset by COVID-related lockdowns in China and macro-economic uncertainty in Europe.

Sales in our Consumer Brands Group did not improve as expected, as unfavorable trends persisted in primarily softer DIY demand in North America where consumers have been impacted by inflation, a challenging economic environment in Europe, and COVID-related lockdowns in China.

Consolidated gross margin improved sequentially but at a slower pace than anticipated.

Segment profit improved sequentially in The Americas Group as well as in the Performance Coatings Group, where margin also improved on a year over year basis.

At the same time, we experienced weaker than expected earnings results in the quarter, which were primarily related to the lower than expected sales in the Consumer Brands Group, supply chain inefficiencies incurred in serving our customers, no meaningful improvement in raw material costs, further inflationary pressures related to labor and transportation, and higher interest and other expense.

Despite the lower than expected earnings, we continue to execute our disciplined capital allocation approach, focused on driving value for our customers and returns to our shareholders.

We continue to pursue business acquisitions, transactions, and investments that fit our growth 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 $312.6 million in cash and $1.506 billion of unused capacity under our credit facilities at June 30, 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 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.

The results of operations for the three and six months ended June 30, 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 following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and six months ended June 30, 2022 and 2021.

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

The Americas Group $ 3,343.1 $ 3,093.4 $ 249.7 8.1 % $ 5,987.2 $ 5,596.5 $ 390.7 7.0 %

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Total $ 5,872.3 $ 5,379.8 $ 492.5 9.2 % $ 10,871.0 $ 10,035.8 $ 835.2 8.3 %

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.

Three Months Ended June 30, 2022

Consolidated net sales increased in the second quarter of 2022 primarily due to selling price increases in all segments, higher professional architectural sales volume in North America paint stores and higher sales volumes in our Packaging and Coil businesses within the Performance Coatings Group.

These increases were partially offset by lower protective and marine sales volume in North America paint stores and lower sales volumes outside of North America in the the Consumer Brands and Performance Coatings Groups primarily due to challenging prior year comparisons.

Currency translation rate changes decreased consolidated net sales by 1.4% in the second quarter.

Net sales of all consolidated foreign subsidiaries increased 1.7% to $1.121 billion in the second quarter compared to $1.102 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the second quarter was due primarily to higher 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 well as unfavorable currency translation.

Net sales of all operations other than consolidated foreign subsidiaries increased 11.1% to $4.752 billion in the second quarter compared to $4.278 billion in the same period last year.

Net sales in The Americas Group increased in the second quarter due primarily to selling price increases and higher professional contractor architectural sales volume in North America paint stores, partially offset by lower sales volumes in protective and marine and DIY end markets.

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

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.

and Canada increased 6.4% in the second quarter compared to last year’s comparable period.

Sales of non-paint products decreased 1.5% compared to last year's second 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 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.

Net sales of the Consumer Brands Group increased in the second quarter due primarily to selling price increases in all regions, partially offset by lower sales volume outside of North America.

Currency translation rate changes decreased the Consumer Brands Group's net sales by 1.2% in the second quarter.

Net sales in the Performance Coatings Group increased in the second quarter due to higher sales in most 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 3.7% in the second quarter.

Six Months Ended June 30, 2022

Consolidated net sales increased in the six months of 2022 primarily due to selling price increases in all segments, partially offset by lower sales volume in the Consumer Brands and The Americas Groups.

Currency translation rate changes decreased net sales by 1.1% in the first six months.

Net sales of all consolidated foreign subsidiaries increased 2.8% to $2.198 billion in the first six months compared to $2.139 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries in the first six months was due primarily to selling price increases in most end markets, partially offset by lower sales volume in the Consumer Brands Group as a result of the Wattyl divestiture and challenging prior year sales volume comparisons in the EMEAI and APAC regions, as well as unfavorable currency translation.

Net sales of all operations other than consolidated foreign subsidiaries increased 9.8% to $8.673 billion in the first six months compared to $7.896 billion in the same period last year.

Net sales in The Americas Group increased in the first six months due primarily to selling price increases in all professional end markets, partially offset by lower sales volumes in DIY, protective and marine, and challenging prior year sales volume comparisons in residential repaint and new residential.

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

and Canada increased 5.2% in the first six months compared to last year’s comparable period.

Sales of non-paint products decreased 1.8% compared to last year's first six months.

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

Net sales of the Consumer Brands Group decreased in the first six months due primarily to the Wattyl divestiture and lower sales volumes outside of North America, partially offset by selling price increases.

Currency translation rate changes decreased the Consumer Brands Group's net sales by 0.7% in the first six months.

Net sales in the Performance Coatings Group increased in the first six months 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 2.8% in the first six months.

Income Before Income Taxes

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

Three Months Ended March 31,

% of Net Sales % of Net Sales

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

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

Net sales $ 5,872.3 100.0 % $ 5,379.8 100.0 % $ 10,871.0 100.0 % $ 10,035.8 100.0 %

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SG&A 1,519.1 25.9 % 1,437.8 26.7 % 2,926.6 26.9 % 2,763.7 27.5 %

Other general expense - net 2.5 0.1 % 117.5 2.5 %

Other general expense (income) - net 4.4 0.1 % (5.2) (0.1) % 6.9 0.1 % 112.3 1.1 %

Amortization 78.5 1.3 % 77.8 1.4 % 156.5 1.4 % 157.0 1.6 %

Interest expense 92.9 1.5 % 83.5 1.6 % 181.3 1.7 % 166.7 1.7 %

Interest and net investment income (0.9) — % (0.6) — %

Interest income (1.3) — % (0.6) — % (2.2) — % (1.2) — %

Other expense (income) - net 15.5 0.3 % (1.1) — % 31.8 0.3 % (3.3) — %

Income before income taxes $ 739.9 12.6 % $ 819.2 15.2 % $ 1,201.0 11.0 % $ 1,328.2 13.2 %

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 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.

Three Months Ended June 30, 2022

Consolidated cost of goods sold increased $454.9 million, or 15.3%, in the second quarter of 2022 compared to the same period in 2021 primarily due to higher raw material (including titanium dioxide and petrochemical feedstock sources), supply chain inefficiencies, freight and transportation, and other input costs, partially offset by lower sales volumes in the Consumer Brands Group due primarily to weaker international sales and favorable currency translation rate changes.

Currency translation rate changes decreased Cost of goods sold by 1.9% in the second quarter of 2022.

Consolidated gross profit increased $37.6 million in the second quarter of 2022 compared to the same period in 2021.

Consolidated gross profit as a percent of consolidated net sales decreased in the second quarter to 41.7% compared to 44.8% during the same period in 2021.

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

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

The Americas Group’s gross profit in the second quarter was lower than the same period last year by $4.5 million due primarily to higher raw material costs and lower sales volume, partially offset by selling price increases.

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

The Consumer Brands Group’s gross profit decreased by $28.2 million in the second quarter compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies, partially offset by selling price increases.

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

The Performance Coatings Group’s gross profit increased $72.5 million in the second 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 second quarter compared to the same period last year primarily due to higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) increased $81.3 million in the second quarter versus the same period last year due primarily to increased expenses to support net new store openings and investments in digital technologies and system upgrades, partially offset by favorable currency translation rate changes.

As a percent of net sales, consolidated SG&A decreased 80 basis points in the second quarter compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A increased $29.1 million in the second quarter compared to the same period last year due primarily to increased spending from new store openings, higher costs to serve our customers and investments in information systems.

The Consumer Brands Group’s SG&A increased $32.5 million in the second quarter compared to the same period last year due to higher marketing spend and investments in customer programs.

The Performance Coatings Group’s SG&A increased $16.5 million in the second 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 $3.2 million in the second quarter compared to the same period last year due primarily to higher investments in digital technologies, partially offset by favorable changes in compensation expense.

In the second quarter of 2022, Other general expense (income) - net declined $9.6 million compared to the same period in 2021 primarily due to higher losses from the sale and disposition of fixed assets in the Administrative segment.

See Note 15 of Item 1 for additional information.

Interest expense increased $9.4 million in the second quarter compared to the same period last year due primarily to an increase in short-term borrowings and higher interest rates.

See Note 6 of Item 1 for additional information on the Company’s outstanding debt.

In the second quarter of 2022, Other expense (income) - net declined $16.6 million compared to the same period in 2021 primarily due to lower returns on investments held in the Administrative segment.

See Note 15 of Item 1 for additional information.

Six Months Ended June 30, 2022

Consolidated cost of goods sold increased $856.7 million, or 15.5%, in the first six months of 2022 compared to the same period in 2021 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources), supply chain inefficiencies, freight and transportation, and other input costs, partially offset by lower sales volumes in the Consumer Brands and The Americas Groups, as well as favorable currency translation rate changes.

Currency translation rate changes decreased Cost of goods sold by 1.5% in the first six months of 2022.

Consolidated gross profit decreased $21.5 million in the first six months of 2022 compared to the same period in 2021.

Consolidated gross profit as a percent of consolidated net sales decreased in the first six months to 41.4% compared to 45.1% during the same period in 2021.

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

The Americas Group’s gross profit in the first six months was lower than the same period last year by $20.6 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 six months compared to the same period in 2021 primarily due to higher raw material costs.

The Consumer Brands Group’s gross profit decreased by $102.5 million in the first six months 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 six months compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit increased $101.3 million in the first six months 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 six months compared to the same period last year primarily due to higher raw material costs.

Consolidated SG&A increased $162.9 million in the first six months versus the same period last year due primarily to increased expenses to support net new store openings and investments in digital technologies and system upgrades, partially offset by favorable currency translation rate changes.

As a percent of net sales, consolidated SG&A decreased 60 basis points in the first six months compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A increased $51.7 million in the first six months compared to the same period last year due primarily to increased spending from new store openings, higher costs to serve our customers and investments in information systems.

The Consumer Brands Group’s SG&A increased $41.9 million in the first six months compared to the same period last

year due to higher marketing spend and investments in customer programs.

The Performance Coatings Group’s SG&A increased $36.9 million in the first six months 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 $32.4 million in the first six months compared to the same period last year due primarily to higher investments in digital technologies.

In the first six months of 2022, Other general expense (income) - net improved $105.4 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.

Interest expense increased $14.6 million in the first six months of 2022 compared to the same period last year due primarily to an increase in short-term borrowings and higher interest rates.

See Note 6 of Item 1 for additional information on the Company’s outstanding debt.

In the first six months of 2022, Other expense (income) - net declined $35.1 million compared to the same period in 2021 primarily due to lower returns on investments held in the Administrative segment.

See Note 15 of Item 1 for additional information.

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

Three Months Ended

2022 2021 % Change

June 30, Six Months Ended

2022 2021 % Change 2022 2021 % Change

Income Before Income Taxes:

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Performance Coatings Group 11.0 % 9.3 % 9.9 % 9.9 %

Administrative nm nm

Administrative nm nm nm nm

Total 12.6 % 15.2 % 11.0 % 13.2 %

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Income Tax Expense

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 21.9% for the second quarter of 2022 compared to 20.8% for the second quarter of 2021, and 21.0% for the first six months of 2022 compared to 20.3% for the first six months 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 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.

Diluted net income per share in the second quarter of 2022 decreased to $2.21 per share compared to $2.42 per share in the second quarter of 2021.

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

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

Currency translation rate changes did not have a meaningful impact on diluted net income per share in the second quarter.

Diluted net income per share for the first six months of 2022 decreased to $3.61 per share compared to $3.93 per share in the first six months of 2021.

Diluted net income per share for the first six months of 2022 included a $0.41 per share charge for acquisition-related amortization expense.

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

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

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

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.

The Company’s financial condition and liquidity remained strong at June 30, 2022.

During the first six months of 2022, the Company generated $639.7 million in net operating cash despite increasing working capital requirements as a result of higher selling prices and raw material costs.

During the first six months of 2022, the Company’s EBITDA decreased 6.7% to $1.669 billion.

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

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.

Cash and cash equivalents increased $146.9 million during the first six months of 2022.

Cash flow from operations and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return $1.011 billion to shareholders in the form of share buybacks and cash dividends during the first six months of 2022, as well as repay $260.2 million in long-term debt.

At June 30, 2022, the Company had cash and cash equivalents of $312.6 million and total debt outstanding of $10.606 billion.

Total debt, net of cash and cash equivalents, was $10.294 billion.

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Net Working Capital

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.

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 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.

Net working capital, defined as total current assets less total current liabilities, increased $66.0 million to a deficit of $938.7 million at June 30, 2022 compared to a deficit of $1,004.7 million at June 30, 2021.

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

Current asset balances increased $1.074 billion at June 30, 2022 compared to June 30, 2021 primarily due to cash and cash equivalents increase of $93.0 million, accounts receivable increase of $391.9 million due to higher sales, inventories increase of $607.5 million due to higher raw material costs, and other current assets decrease of $18.6 million primarily related to prepaid expenses.

Current liability balances increased $1.008 billion at June 30, 2022 compared to June 30, 2021 primarily due to an increase in current debt as short-term borrowings increased $1.250 billion, partially offset by a $686.5 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 $444.4 million primarily due to the timing of payments related to accounts payable and accrued taxes.

At June 30, 2022, the Company’s current ratio was 0.87 compared to 0.88 and 0.84 at December 31, 2021 and June 30, 2021, respectively.

Property, Plant and Equipment

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.

Net property, plant and equipment increased $94.6 million in the first six months of 2022 and increased $155.6 million in the twelve months since June 30, 2021.

The increase in the first six months was primarily due to capital expenditures of $235.8 million and incremental assets recognized through acquisitions of $23.5 million, partially offset by depreciation expense of $130.3 million and the sale or disposition of fixed assets of $14.1 million.

Since June 30, 2021, the increase was primarily due to capital expenditures of $456.4 million and incremental assets recognized through acquisition of $51.8 million, partially offset by depreciation expense of $257.0 million, unfavorable changes in foreign currency translation of $77.1 million and sale or disposition of fixed assets of $18.5 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.

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Goodwill and Intangible Assets

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.

Goodwill and intangible assets decreased $74.9 million from December 31, 2021 and decreased $122.1 million from June 30, 2021.

The net decrease during the first six months of 2022 was primarily due to amortization of $156.5 million and foreign

currency translation of $108.2 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $189.8 million.

The net decrease over the twelve month period from June 30, 2021 was primarily due to amortization of $309.0 million and foreign currency translation of $168.1 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $355.0 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 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.

Other assets increased $138.8 million from December 31, 2021 and increased $347.7 million from June 30, 2021.

The increase in the first six months 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 June 30, 2021 was primarily due to an increase in other investments (including an increase in deferred pension assets) and deferred tax assets, partially offset by the sale of investments to fund the Company’s domestic defined contribution plan.

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

Debt (including Short-term borrowings)

March 31, December 31, March 31,

June 30, December 31, June 30,

2022 2021 2021

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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.

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

The Company had unused capacity under its various credit agreements of $1.506 billion at June 30, 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, 2021 and March 31, 2021.

Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2021 and June 30, 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 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.

Deferred income taxes decreased $14.2 million from December 31, 2021, and decreased $49.4 million from June 30, 2021, primarily due to amortization of acquisition-related intangible assets.

Other Long-Term 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 the first three months of 2022.

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

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

During the second quarter of 2022, 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.

Subsequent to quarter end, the Company completed the acquisition of a domestic floor coatings company and a European coatings company.

These acquired businesses will be reported within the Company’s Performance Coatings Group.

The Company funded the acquisitions, totaling approximately $425 million, in July 2022 through cash generated from operating activities and borrowings available under committed credit agreements.

Except for the closing of the acquisitions discussed above and in Note 3 of Item 1, 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 six 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

March 31, December 31, March 31,

June 30, December 31, June 30,

2022 2021 2021

Total shareholders’ equity $ 2,224.6 $ 2,437.2 $ 2,840.4

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.

Shareholders’ equity decreased $212.6 million during the first six months of 2022 as a result of $725.5 million of Treasury stock activity primarily attributable to treasury stock repurchases, cash dividends paid on common stock of $307.1 million and a decrease in Accumulated other comprehensive loss of $216.2 million, partially offset by net income of $948.7 million and an increase in Other capital of $87.3 million primarily associated with stock-based compensation expense and stock option exercises.

Shareholders’ equity decreased $615.8 million since June 30, 2021 as a result of $1.834 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $596.5 million, partially offset by net income of $1.755 billion and an increase in Other capital of $272.2 million primarily associated with stock-based compensation expense and stock option exercises.

During the first six months of 2022, the Company purchased 2.55 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 March 31, 2022 to purchase 47.1 million shares of its common stock.

The Company had remaining authorization at June 30, 2022 to purchase 46.0 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.

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.

Net operating cash for the six months ended June 30, 2022 was a cash source of $639.7 million compared to a cash source of $1.201 billion 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, and an increase in cash requirements for working capital.

Net investing cash usage increased $401.4 million in the first six months of 2022 to a usage of $473.9 million compared to a usage of $72.5 million for the same period in 2021 primarily due to an increase in cash used for acquisitions and capital expenditures, as well as the proceeds received from the Wattyl divestiture in the prior year.

See Note 3 in Item 1 for additional information on acquisitions.

Net financing cash usage decreased $1.117 billion in the first six months of 2022 to a usage of $8.0 million from a usage of $1.125 billion for the same period in 2021 primarily due to lower treasury stock purchases and incremental cash provided by short-term borrowings, partially offset by an increase in long-term debt repayments.

In the twelve month period from July 1, 2021 through June 30, 2022, the Company generated net operating cash of $1.683 billion, used $877.8 million in investing activities and used $716.7 million 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.

2022, the Company was in compliance with the covenant and expects to remain in compliance.

At June 30, 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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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Net income $ 577.9 $ 648.6 $ 948.7 $ 1,058.2

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis