What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-17 · 181 added, 165 removed, 326 unchanged (51% of the section changed)

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The Company is structured into three reportable segments – The Americas Group, Consumer Brands Group and Performance Coatings Group (collectively, the Reportable Segments) – and an Administrative segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources.

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

See Notes 23 and 24 to the Consolidated Financial Statements in Item 8 for additional information on the Company’s Reportable Segments.

• Consolidated net sales increased 11.1% in the year to a record $22.149 billion

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and Canada open more than twelve calendar months increased 11.7% in the year

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We expect raw material availability to continue improving.

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

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

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

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

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

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

Common Stock Split

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

The Stock Split was effected on March 31, 2021.

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

• Diluted net income per share increased to $7.72 per share in the year compared to $6.98 per share in the full year 2021

◦ Adjusted diluted net income per share increased to $8.73 per share in the year compared to $8.15 per share in the full year 2021

• Generated strong net operating cash of $1.920 billion

◦ Deployed $1.003 billion toward five acquisitions that will add to our product offerings and capabilities

◦ Invested $883.2 million in share repurchases and paid $618.5 million in dividends to return value to our shareholders

During 2022, we continued to experience the effects of macroeconomic challenges such as raw material inflation, less than optimal raw material availability, armed conflict in Europe, and COVID-related lockdowns in Asia.

Our focus on cost control measures remains steady as we execute on targeted restructuring actions to simplify our business.

The growth investments we made during the year, including five completed acquisitions, are well-positioned to contribute to our resilient portfolio.

While we anticipate a challenging demand environment in 2023, our long-term strategy and customer-focused solutions drive confidence in our outlook.

We anticipate inflationary pressure in 2023 to impact consumer behavior in both the United States and Europe, particularly in housing markets.

Elevated mortgage rates may have a negative impact on new residential volume.

Certain other costs, such as wages, energy and transportation are expected to increase.

We are focused on gaining market share despite this challenging environment, while leveraging our exposure in more historically resilient end markets such as residential repaint, property maintenance, auto refinish, and packaging.

During 2023, we expect to benefit from price increases we implemented during 2021 and 2022.

Additionally, we expect to realize approximately $50 million to $70 million in estimated annual savings from previously announced restructuring actions, of which we expect 75% will be realized by the end of 2023.

Our deliberate cost control and ongoing continuous improvement initiatives, coupled with anticipated raw material cost deflation, are expected to drive full year gross margin expansion in 2023.

Our capital deployment strategy remains balanced and consistent.

We do not have any long-term debt maturities due in 2023 and expect to reduce short-term borrowings while generating net operating cash.

We have plans to invest in the construction of new facilities, including our new global headquarters (new headquarters) in downtown Cleveland, Ohio and new research and development (R&D) center in the Cleveland suburb of Brecksville, and in the expansion of certain existing manufacturing and distribution facilities.

We plan to expand our footprint by opening 80 to 100 new stores in the United States and Canada in 2023, and pursue acquisitions that align with our long-term growth strategy.

We will also return value to our shareholders through the payment of dividends and the reinvestment of excess cash for share repurchases of Company stock.

Please see Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K for further information regarding the current and potential impact of macroeconomic conditions on the Company, including those relating to supply chain disruptions, raw material availability, and inflation, and the Company’s restructuring actions.

RESULTS OF OPERATIONS

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Total $ 22,148.9 $ 19,944.6 $ 2,204.3 11.1 %

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

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

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

Consolidated Net sales for 2022 increased 11.1% primarily due to selling price increases in all Reportable Segments and higher product sales volume in The Americas Group, partially offset by lower sales volume in the Consumer Brands and Performance Coatings Groups.

Currency translation rate changes decreased 2022 consolidated Net sales by 1.5%, while acquisitions which were completed during the past twelve months added approximately 1.1% to consolidated Net sales.

Net sales of all consolidated foreign subsidiaries increased 1.7% to $4.294 billion for 2022 versus $4.223 billion for 2021 primarily due to benefits from acquisitions offset by weakening demand in the Europe and Asia Pacific regions.

Net sales of all operations other than consolidated foreign subsidiaries increased 13.6% to $17.855 billion for 2022 versus $15.722 billion for 2021.

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

Net sales in The Americas Group increased primarily due to selling price increases as well as volume growth in all end markets, particularly residential repaint.

Net sales from stores in U.S.

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The total number of stores in operation at December 31, 2022 was 4,931 in the United States, Canada, Latin America and the Caribbean.

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

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

Sales of products other than paint increased approximately 0.2% over last year.

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

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

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

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

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

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

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

Net sales in the Administrative segment, which primarily consists of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, decreased by an insignificant amount in 2021.

Net sales of the Consumer Brands Group decreased in 2022 primarily due to lower sales volumes in all regions and the Wattyl divestiture, offset by selling price increases in all regions.

Currency translation rate changes decreased Net sales by 1.1% compared to 2021.

The Performance Coatings Group’s Net sales in 2022 increased primarily due to higher organic sales driven by selling price increases in all end markets, partially offset by lower sales volumes.

Currency translation rate changes decreased Net sales 3.8% compared to 2021, largely offset by the impact of acquisitions completed during the past twelve months which added approximately 3.7% to Net sales.

In 2022, the Performance Coatings Group added 35 new branches, increasing the total to 317 branches open in the United States, Canada, Mexico, South America, Europe and Asia.

Income Before Income Taxes

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Selling, general, and administrative expenses (SG&A) 6,014.5 27.2 % 5,572.5 27.9 %

Other general expense - net 101.8 0.5 % 27.7 0.2 %

Other general (income) expense - net (24.9) (0.1) % 101.8 0.5 %

Amortization 317.1 1.4 % 309.5 1.5 %

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Interest expense 390.8 1.8 % 334.7 1.7 %

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

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

Interest income (8.0) — % (4.9) — %

Other expense (income) - net 47.0 0.1 % (19.5) (0.1) %

Income before income taxes $ 2,573.1 11.6 % $ 2,248.6 11.3 %

Consolidated cost of goods sold increased $1.723 billion, or 17.8% in 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources) and unfavorable currency translation rate changes, partially offset by lower sales volumes primarily as a result of raw material availability issues during the second half of 2021.

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

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

Consolidated Cost of goods sold increased $1.422 billion, or 12.5%, in 2022 compared to the same period in 2021 primarily due to higher raw material costs (including petrochemical-derived resins, latex and solvents, and titanium dioxide), partially offset by lower product volume and favorable currency translation rate changes.

Currency translation rate changes decreased Cost of goods sold by 2.0% in the current year.

Consolidated Gross profit increased $782.4 million in 2022 compared to the same period in 2021.

This increase in Gross profit dollars was driven by higher sales in The Americas Group and Performance Coatings Group.

This was partially offset by higher raw material costs in each Reportable Segment and lower sales in the Consumer Brands Group.

Consolidated Gross profit as a percent to consolidated Net sales decreased to 42.1% in 2022 from 42.8% in 2021.

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

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

The gross margin rate decreased primarily as a result of higher raw material costs.

The Americas Group’s Gross profit for 2022 increased $477.7 million compared to the same period in 2021.

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

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

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

The Consumer Brands Group’s Gross profit decreased $68.6 million in 2022 compared to the same period in 2021.

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

The Consumer Brands Group’s Gross profit dollars and margin rate decreased primarily as a result of lower sales volume and higher raw material costs.

The Performance Coatings Group’s Gross profit for 2022 increased $363.7 million compared to the same period in 2021.

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

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

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

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

The Performance Coatings Group’s Gross profit dollars and margin rate increased due to higher sales, partially offset by higher raw material costs.

Consolidated SG&A increased by $442.0 million compared to the same period in 2021 primarily due to increased expenses to support higher sales levels and net new store openings.

As a percent of Net sales, SG&A decreased 70 basis points compared to the same period in 2021 as a result of effective cost control measures.

The Americas Group’s SG&A increased $304.4 million for the year due primarily to increased spending from new store openings and costs to support higher sales levels, including the hiring of additional sales representatives.

The Consumer Brands Group’s SG&A decreased by $104.9 million for the year primarily due to good sales and marketing cost control in line with a return to more normal DIY sales levels.

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

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

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

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

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

The Consumer Brands Group’s SG&A increased by $52.6 million for the year primarily due to restructuring actions and higher employee costs, offset by favorable currency translation rate changes.

The Performance Coatings Group’s SG&A increased by $82.1 million for the year primarily due to restructuring actions and to support higher sales levels, partially offset by favorable currency translation rate changes and effective cost control measures.

The Administrative segment’s SG&A increased $2.9 million primarily due to higher employee costs.

Refer to Note 4 to the Consolidated Financial Statements in Item 8 for additional information on the restructuring actions.

Other general (income) expense - net improved $126.7 million in 2022 compared to 2021.

The change was primarily attributable to the prior year recognition of a $111.9 million loss on the Wattyl divestiture in March 2021, a $3.1 million decrease in provisions for environmental matters in the Administrative segment, and an $11.7 million increase in the Gain on sale or disposition of assets.

See Notes 3, 11 and 20 to the Consolidated Financial Statements in Item 8 for additional information concerning the Wattyl divestiture, environmental matters and Other general (income) expense - net, respectively.

For information on the amortization of acquired intangible assets and related impairment considerations, see Note 7 to the Consolidated Financial Statements in Item 8.

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

Interest expense increased $56.1 million in 2022 primarily due to higher interest rates associated with short-term borrowings.

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

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

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

Other expense (income) - net increased $66.5 million in 2022 compared to 2021 primarily due to increased investment losses of $40.1 million and foreign currency transaction related losses which increased by $21.6 million.

See Note 20 to the Consolidated Financial Statements in Item 8 for additional information related to Other expense (income) - net.

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

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Consumer Brands Group

13.2 % 19.0 %

Performance Coatings Group

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The effective income tax rate for 2022 was 21.5% compared to 17.1% in 2021.

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

The increase in the effective rate was primarily due to a decrease in tax benefits related to employee share-based payments and a net unfavorable impact of various other tax benefits received by the Company in 2022 as compared to 2021.

See Note 21 to the Consolidated Financial Statements in Item 8 for additional information.

Net Income Per Share

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

Diluted net income per share for 2022 increased to $7.72 per share from $6.98 per share in 2021.

Diluted net income per share in 2022 included acquisition-related amortization expense of $0.81 per share, severance and other expense of $0.15 per share, and a $0.05 per share charge related to trademark impairments.

Refer to Notes 4 and 7 to the Consolidated Financial Statements in Item 8 for additional information regarding the restructuring actions and trademark impairments, respectively.

Currency translation rate changes decreased diluted net income per share in the year by $0.07 per share.

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

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

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

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

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

The Company’s financial condition, liquidity and cash flow continued to be strong in 2022.

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

The Company generated $1.920 billion in net operating cash despite higher raw material costs and inflationary pressures which negatively impacted gross margin and net income.

The net operating cash generation was primarily attributable to operating results as consolidated income before income taxes was $2.573 billion or 11.6% of net sales.

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

This strong cash generation enabled the Company to invest

$1.003 billion in acquisitions and $644.5 million in capital expenditures, and return $1.502 billion to shareholders in the form of cash dividends and share repurchases during the year.

During 2022, the Company generated EBITDA of $3.545 billion and Adjusted EBITDA of $3.608 billion.

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

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

As of December 31, 2022, the Company had Cash and cash equivalents of $198.8 million and total debt outstanding of $10.570 billion.

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Net Working Capital

Net working capital, defined as Total current assets less Total current liabilities, decreased $662.8 million to a deficit of $665.8 million at December 31, 2021 from a deficit of $3.0 million at December 31, 2020.

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

Comparing current asset balances at December 31, 2021 to December 31, 2020, Accounts receivable increased $274.3 million due to higher sales, Inventories increased $123.1 million due to higher raw material costs, and Other current assets increased $125.8 million primarily related to refundable income taxes and prepaid expenses.

Current liability balances increased $1.125 billion at December 31, 2021 compared to December 31, 2020 primarily due to a $763.4 million increase in Short-term borrowings and $235.5 million increase in the Current portion of long-term debt.

Excluding Short-term borrowings and the Current portion of long-term debt, current liabilities increased $126.2 million primarily due to the timing of payments related to accounts payable, partially offset by lower accruals, including compensation.

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

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

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

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

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

Net working capital, defined as Total current assets less Total current liabilities, increased $612.8 million to a deficit of $53.0 million at December 31, 2022 from a deficit of $665.8 million at December 31, 2021.

The net working capital increase was primarily due to an increase in current assets, particularly Inventories.

Comparing current asset balances at December 31, 2022 to December 31, 2021, Accounts receivable increased $211.2 million due to higher sales, Inventories increased $699.3 million due to higher raw material costs and inventory levels, and Other current assets decreased $89.6 million primarily related to refundable income taxes and prepaid expenses.

Current liability balances increased $241.2 million at December 31, 2022 compared to December 31, 2021 primarily due to the timing of payments related to Other accruals and Accrued taxes.

As a result of the net effect of these changes, the Company’s current ratio improved to 0.99 at December 31, 2022 from 0.88 at December 31, 2021.

Accounts receivable as a percent of Net sales decreased to 11.6% in 2022 from 11.8% in 2021.

Accounts receivable days outstanding increased to 58 days in 2022 from 57 days in 2021.

In 2022, provisions for allowance for doubtful collection of accounts increased $7.7 million, or 15.7%.

Inventories as a percent of net sales increased to 11.9% in 2022 from 9.7% in 2021.

Inventory days outstanding was 98 days in 2022 compared to 75 days in 2021.

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Property, Plant and Equipment

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

Net property, plant and equipment increased $339.7 million to $2.207 billion at December 31, 2022 due primarily to capital expenditures of $644.5 million and assets acquired through business combinations of $93.7 million, partially offset by depreciation expense of $264.0 million, sale or disposition of assets with remaining net book value of $24.9 million, and currency translation and other adjustments of $109.6 million, which primarily includes government incentives associated with the construction of our new headquarters and R&D center.

See Note 1 to the Consolidated Financial Statements in Item 8 for additional information on government incentives.

The Company has entered into an agreement to sell its current headquarters and R&D center.

The sale is expected to be completed during 2023.

Capital expenditures during 2022 in The Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores.

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

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

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

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

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

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

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

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

In the Consumer Brands Group and the Performance Coatings Group, capital expenditures during 2022 were primarily attributable to operational efficiencies, capacity and health and safety initiatives at sites currently in operation.

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

Construction on the new headquarters and R&D center is expected to continue in 2023, with completion expected in 2024 at the earliest.

In 2023, the Company expects to spend more than 2022 for capital expenditures, which it will fund primarily through operating cash generated.

Core capital expenditures in support of growth initiatives in 2023 are expected to be for investments in various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings and new or upgraded information systems hardware.

Additionally, the Company will continue to construct its new headquarters and R&D center.

Refer to “Real Estate Financing” section below for further information on the financing transaction for the new headquarters.

Real Estate Financing

In December 2022, the Company closed a transaction to sell and subsequently lease back its partially-constructed new headquarters.

As part of the terms of the transaction, the Company is contractually obligated for completing the construction of the building and related improvements at the new headquarters.

This transaction did not meet the criteria for recognition as an asset sale under U.S.

generally accepted accounting principles (US GAAP) and as such, was accounted for as a real estate financing transaction.

The Company received initial proceeds at closing related to the transaction.

Additionally, the Company will receive incremental reimbursement of construction and other costs incurred, generally on a quarterly basis, until completion of construction with

total proceeds expected to be received under this agreement approximating $800 million to $850 million.

The initial lease term includes the construction period and extends for 30 years thereafter, and the Company has the right and option to extend the lease term.

The lease payment amounts during the construction period are dependent upon the timing and amount of total reimbursement of construction and other costs received by the Company.

Lease payments over the next twelve months are expected to be approximately $22 million, while lease payments through the remaining construction period are expected to be approximately $55 million.

The amount of the lease payments during the initial 30 year lease term will be calculated upon completion of the construction period and receipt of total reimbursement of construction and other costs.

In December 2022, the Company received approximately $210 million at closing.

The net proceeds were recognized as proceeds from real estate financing transactions within the Financing Activities section of the Statements of Consolidated Cash Flows, and corresponding financing obligations were recognized within Other long-term liabilities and Other accruals on the Consolidated Balance Sheets.

The Company will continue to recognize the related assets within Property, plant and equipment, net on the Consolidated Balance Sheets under US GAAP.

These assets will be subject to depreciation over their useful lives in accordance with the Company’s accounting policies.

The Company will also allocate payments between interest and repayment of the financing liability over the life of the agreement.

Refer to Note 1 to the Consolidated Financial Statements within Item 8 for further information.

Goodwill and Intangible Assets

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

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

Goodwill, which represents the excess of cost over the fair value of net assets acquired in business combinations, increased $448.6 million in 2022 primarily due to incremental goodwill recognized in 2022 acquisitions of $493.5 million, partially offset by foreign currency translation rate fluctuations.

Intangible assets increased $0.5 million in 2022 primarily due to finite-lived intangible assets recognized in 2022 through acquisitions of $361.0 million and capitalized software of $21.9 million, partially offset by amortization of finite-lived intangible assets of $317.1 million, foreign currency translation rate fluctuations of $51.1 million, and $15.5 million of trademark impairment charges.

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

See Note 7 to the Consolidated Financial Statements in Item 8 for a description of goodwill, identifiable intangible assets and asset impairments recognized in accordance with the Goodwill and Other Intangibles Topic of the ASC and summaries of the remaining carrying values of goodwill and intangible assets.

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

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

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

Other assets increased $238.3 million to $1.027 billion at December 31, 2022.

The increase was primarily due to non-traded investments.

See Note 1 to the Consolidated Financial Statements in Item 8 for additional information.

Debt (including Short-term borrowings)

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Total debt outstanding $ 10,569.7 $ 9,615.0

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

Total debt outstanding including Short-term borrowings increased by $954.7 million to $10.570 billion in 2022.

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

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

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

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

In October 2021, the Company redeemed the entire outstanding $400.0 million aggregate principal amount of its 4.20% Senior Notes due 2022 and its 4.20% Notes due 2022 initially issued by The Valspar Corporation (collectively, the 4.20% Senior Notes) after exercising its optional redemption rights.

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

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

In August 2022, the Company issued $600.0 million of 4.05% Senior Notes due August 2024 and $400.0 million of 4.25% Senior Notes due August 2025 in a public offering.

The net proceeds from the issuance of these notes were used to repay borrowings outstanding under the Company’s credit agreement dated May 9, 2016, as amended, and domestic commercial paper program.

On August 30, 2022, the Company and two of its wholly-owned subsidiaries, Sherwin-Williams Canada Inc.

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

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

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

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

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

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

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

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

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

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

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

credit up to an aggregate availability of $875.0 million.

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

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

(SW Luxembourg, together with the Company and SW Canada, the Borrowers), entered into a new five-year $2.250 billion credit agreement (2022 Credit Agreement).

The 2022 Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements.

The 2022 Credit Agreement replaced the $2.000 billion credit agreement dated June 29, 2021, as amended, which was terminated effective August 30, 2022.

The 2022 Credit Agreement will mature on August 30, 2027 and provides that the Company may request to extend the maturity date of the facility for two additional one-year periods.

In addition, the 2022 Credit Agreement provides that the Borrowers may increase the aggregate size of the facility up to an additional amount of $750.0 million, 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’s available capacity under its committed credit agreements is reduced for amounts outstanding under its domestic commercial paper program and letters of credit.

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In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans decreased $20.5 million to $58.5 million primarily due to changes in the actuarial assumptions.

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

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

The Company’s liability for other postretirement benefits decreased $122.6 million to $153.8 million at December 31, 2022 due primarily to a plan amendment and changes in the actuarial assumptions.

The assumed discount rate used to determine the projected benefit obligation for the domestic defined benefit pension plan increased to 5.3% at December 31, 2022 from 3.1% at December 31, 2021.

The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans increased to 5.1% at December 31, 2022 from 2.3% at December 31, 2021.

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

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

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

In deciding on the rate of compensation increases, management considered historical Company increases as well as expectations for future increases.

The expected long-term rate of return on assets remained 5.0% at December 31, 2021 for the domestic pension plan and was slightly lower for most foreign plans.

In establishing the expected long-term rate of return on plan assets for 2021, management considered the historical rates of return, the nature of investments and an expectation for future investment strategies.

The assumed health care cost trend rates used to determine the net periodic benefit cost of other postretirement benefits for 2021 were 5.1% and 8.3%, respectively, for medical and prescription drug cost increases, both decreasing gradually to 4.5% in 2029.

The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations increased to 5.2% at December 31, 2022 from 2.8% at December 31, 2021.

The increase in the discount rates was primarily due to higher interest rates.

In deciding on the rates of compensation increases, management considered historical Company increases as well as expectations for future increases.

The rate of compensation increases used to determine the projected benefit obligation at December 31, 2022 was 3.0% for the domestic pension plan and 3.4% for foreign pension plans, which was comparable to the rates used in the prior year.

In establishing the expected long-term rate of return on plan assets, management considered the historical rates of return, the nature of investments and an expectation for future investment strategies.

The expected long-term rate of return on assets for the domestic defined benefit pension plan increased to 6.3% at December 31, 2022 from 5.0% at December 31, 2021.

The expected long-term rate of return on assets for the foreign defined benefit pension plans increased to 5.6% at December 31, 2022 from 3.2% at December 31, 2021.

In developing the assumed health care cost trend rates, management considered industry data, historical Company experience and expectations for future health care costs.

For 2022 net pension cost for the ongoing domestic pension plan, the Company will use a discount rate of 3.1%, an expected long-term rate of return on assets of 5.0% and a rate of compensation increase of 3.0%.

Lower discount rates and expected long-term rates of return on plan assets will be used for most foreign plans.

For 2022 net periodic benefit costs for other postretirement benefits, the Company will use a discount rate of 2.8%.

Net pension cost in 2022 for the ongoing domestic pension plan is expected to be approximately $1.5 million.

Net periodic benefit costs for other postretirement benefits in 2022 is expected to be approximately $11.0 million.

The assumed health care cost trend rates used to determine the projected benefit obligation for other postretirement benefit obligations at December 31, 2022 were 5.5% and 8.3% for medical and prescription drug cost increases, respectively, both decreasing gradually to 4.5% in 2032.

The assumed health care cost trend rates for medical and prescription costs used to determine the projected benefit obligation for other postretirement benefit obligations at December 31, 2021 were 5.1% and 8.3%, respectively.

The respective year-end assumptions described above for the Company’s defined benefit plans are also used to determine expense for the next year.

Net pension cost in 2023 for the domestic pension plan and foreign pension plans is expected to be approximately $1.9 million and $1.6 million, respectively.

Net periodic benefit credit for other postretirement benefits in 2023 is expected to be approximately $15.8 million.

The credit for 2023 is primarily due to amortization of the impact of a plan amendment.

See Note 9 to the Consolidated Financial Statements in Item 8 for additional information on the Company’s obligations and funded status of its defined benefit pension plans and other postretirement benefits.

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Other Long-Term Liabilities

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

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

Other long-term liabilities increased $185.6 million during 2022 due primarily to an increase in long-term commitments related to investments in U.S.

affordable housing and historic renovation real estate partnerships and liabilities associated with real estate financing transactions, partially offset by the impact of expected settlements related to tax positions over the next twelve months as disclosed in Note 21 to the Consolidated Financial Statements in Item 8, favorable fair value movements related to the Company’s outstanding cross currency swap contracts and favorable employee benefit plan experience.

Environmental-Related Liabilities

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Contractual and Other Obligations and Commercial Commitments

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

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

During 2022, the Company signed agreements related to various acquisitions, including related to the German-based Specialized Industrial Coatings Holding (SIC Holding), a Peter Möhrle Holding and GP Capital UG venture comprised of Oskar Nolte GmbH and Klumpp Coatings GmbH.

The SIC Holding transaction is expected to close in 2023.

Refer to Note 3 for additional information.

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Short-term borrowings 978.1 978.1

California litigation accrual 52.7 12.0 24.0 16.7

Real estate financing transactions (1)

178.1 15.2 30.9 31.6 100.4

Purchase obligations (2)

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Total contractual cash obligations $ 18,661.7 $ 2,405.6 $ 3,759.0 $ 3,085.5 $ 9,411.6

(1) Excludes real estate financing transactions related to the new headquarters.

Refer to “Real Estate Financing” section herein for further information.

(2) Relate to open purchase orders for raw materials at December 31, 2022.

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Shareholders’ Equity

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

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

Shareholders’ equity increased $664.9 million to $3.102 billion at December 31, 2022 from $2.437 billion last year.

The increase was primarily attributable to the generation of $2.020 billion of net income and benefits from stock option exercises and the recognition of stock-based compensation expense of $134.0 million.

This was partially offset by the repurchase of $883.2 million in Treasury stock and the payment of $618.5 million in cash dividends.

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

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

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

The Company had remaining authorization from its Board of Directors at December 31, 2022 to purchase 45.2 million shares of its common stock.

The Company’s 2022 annual cash dividend of $2.40 per share represented 34% of 2021 diluted net income per share.

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

The 2022 annual dividend represented the 44 th consecutive year of increased dividend payments.

On February 15, 2023, the Board of Directors increased the quarterly cash dividend to $0.605 per share.

This quarterly dividend, if approved in each of the remaining quarters of 2023, would result in an annual dividend for 2023 of $2.42 per share or a 31% payout of 2022 diluted net income per share.

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

Net operating cash decreased $324.7 million in 2022 to a cash source of $1.920 billion from $2.245 billion in 2021 due primarily to incremental working capital requirements .

Net operating cash decreased as a percent to sales to 8.7% in 2022 compared to 11.3% in 2021.

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

Net investing cash usage increased $1.131 billion to a usage of $1.608 billion in 2022 from a usage of $476.4 million in 2021 due primarily to cash used for acquisitions and an increase in capital expenditures.

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

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

Net financing cash usage decreased $1.552 billion to a usage of $282.4 million in 2022 from a usage of $1.834 billion in 2021.

This was due primarily to a decrease in incremental share repurchases of $1.869 billion, proceeds from real estate financing transactions and lower repayments of long-term debt, partially offset by a reduction in proceeds from short-term borrowings and stock option exercises as compared to 2021.

See Note 12 to the Consolidated Financial Statements in Item 8 for information concerning litigation.

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Certain borrowings contain a consolidated leverage covenant.

The covenant states the Company’s leverage ratio is not to exceed 3.75 to 1.00.

The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) for the 12-month period ended on the same date.

The covenant states the Company’s consolidated leverage ratio is not to exceed 3.75 to 1.00;

however, the Company may elect to temporarily increase the leverage ratio to 4.25 to 1.00 for a period of four consecutive fiscal quarters immediately following the consummation of a qualifying acquisition, as defined in the credit agreement dated August 30, 2022.

Refer to the “Non-GAAP Financial Measures” section in Item 7 for a reconciliation of EBITDA to net income.

At December 31, 2021, the Company was in compliance with the covenant.

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

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

one or more of these borrowings may result.

At December 31, 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.

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

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

Employee Stock Ownership Plan

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

The Company matches 6% of eligible employee contributions.

The Company’s matching contributions to the ESOP charged to operations were $133.7 million in 2021 compared to $120.0 million in 2020.

At December 31, 2021, there were 20,639,085 shares of the Company’s common stock being held by the ESOP, representing 7.9% of the total number of voting shares outstanding.

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

Defined Contribution Savings Plan

Participants in the Company’s salaried defined contribution savings plan are allowed to contribute up to the lesser of fifty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code.

The Company matches one hundred percent of all contributions up to six percent of eligible employee contributions.

The Company’s matching contributions to the defined contribution savings plan charged to operations were $140.0 million in 2022 compared to $133.7 million in 2021.

At December 31, 2022, there were 19,689,197 shares of the Company’s common stock being held by the defined contribution savings plan, representing 7.6% of the total number of voting shares outstanding.

See Note 14 to the Consolidated Financial Statements in Item 8 for additional information concerning the Company’s defined contribution savings plan.

NON-GAAP FINANCIAL MEASURES

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

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

Management utilizes certain financial measures that are not in accordance with US GAAP to analyze and manage the performance of the business.

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

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EBITDA and Adjusted EBITDA

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

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

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 restructuring and impairment expense in 2022 and the loss on the Wattyl divestiture in 2021.

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

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

(millions of dollars) Year Ended December 31,

Year Ended December 31,

Net income $ 2,020.1 $ 1,864.4

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EBITDA 3,545.0 3,155.9

Restructuring and impairment 62.8 —

Loss on Wattyl divestiture — 111.9

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The following table summarizes Free cash flow as calculated by management for the years indicated below:

(millions of dollars) Year Ended December 31,

Year Ended December 31,

Net operating cash $ 1,919.9 $ 2,244.6

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Adjusted Diluted Net Income Per Share

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

Management of the Company believes that investors’ understanding of the Company’s operating performance is enhanced by the disclosure of diluted net income per share excluding Valspar acquisition-related amortization expense in 2022 and 2021, restructuring expense in 2022, and the loss on the divestiture of Wattyl in 2021.

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

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Diluted net income per share $ 7.72

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

Restructuring expense:

Severance and other $ .18 $ .03 .15

Impairment .06 .01 .05

Total .24 .04 .20

Acquisition-related amortization expense (2)

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Diluted net income per share $ 6.98

Loss on divestiture $ .41 $ .07 .34

Acquisition-related amortization expense (2)

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Adjusted Segment Profit

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

Management of the Company believes that investors’ understanding of the Company’s operating performance is enhanced by the disclosure of segment profit excluding Valspar acquisition-related amortization expense in 2022 and 2021, restructuring expense in 2022, and the loss on the divestiture of Wattyl in 2021.

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

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as a % of Net external sales 19.2 % 8.4 % 10.8 % 11.6 %

Loss on Wattyl divestiture — — — 111.9 111.9

Restructuring expense — 41.1 22.2 — 63.3

Acquisition-related amortization expense (1)

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

Loss on Wattyl divestiture — — — 111.9 111.9

Acquisition-related amortization expense (1)

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles (US GAAP) requires management to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements.

These determinations were made based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances, giving due consideration to materiality.

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The royalty savings valuation methodology and calculations used in 2022 impairment testing are consistent with prior years.

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

The annual impairment review performed as of October 1, 2022, which incorporated the impact of a business restructuring plan, resulted in trademark impairments totaling $15.5 million in the Consumer Brands Group related to the discontinuation of an architectural paint brand and lower than anticipated sales of an acquired brand.

No other impairments or risks for impairment were identified as a result of this review.

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

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In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans.

Actuarial gains and losses and prior service costs are recognized and recorded in AOCI.

Actuarial gains and losses and prior service costs are recognized and recorded in Accumulated other comprehensive income (AOCI).

The amounts recorded in AOCI will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension and net periodic benefit costs.

In 2022, pension costs are expected to decrease slightly and other postretirement benefit plan costs are expected to increase slightly based on the actuarial assumptions being applied.

In 2023, pension and other postretirement benefit plan costs are expected to decrease based on the actuarial assumptions being applied.

See Note 9 to the Consolidated Financial Statements in Item 8 for information concerning the Company’s defined benefit pension plans and other postretirement benefit plans.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis