What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-25 compared with 2023-04-25 · 176 added, 123 removed, 169 unchanged (64% of the section changed)

7 unchanged sentences

The Latin America business was formerly part of The Americas Group, which has become the Paint Stores Group concurrent with this change.

The Company will report segment results for the newly realigned Paint Stores Group and Consumer Brands Group, for both current and prior periods presented, beginning with the first quarter of 2023.

The Company will report segment results for the newly realigned Paint Stores Group and Consumer Brands Group, for both current and prior periods presented herein.

• Consolidated net sales increased 6.3% in the quarter to $6.241 billion

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and Canada open more than twelve calendar months increased 9.5% in the quarter

• Diluted net income per share increased 30.5% to $1.84 per share in the quarter compared to $1.41 per share in the first quarter 2022

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) increased 26.7% to $878.2 million in the quarter

The Company delivered strong first quarter results as pricing initiatives were realized in each of our businesses.

Sales growth was driven primarily by architectural paint, protective and marine, commercial and residential repaint end markets within the Paint Stores Group.

In the Performance Coatings Group, sales benefited from pricing actions and contributions from acquisitions.

Growth was strongest in Automotive Refinish, with modest improvements in General Industrial and Coil Coatings.

This growth was partially offset by softness in Packaging and Industrial Wood.

Within the Consumer Brands Group, strength in the Latin America region was partially offset by weakness in all other regions, particularly Europe and China.

Consolidated gross profit and margin in the first quarter improved both sequentially and year-over-year.

We continue to expect a very challenging demand environment, particularly in the second half of 2023 against difficult year-over-year comparisons.

Although our visibility remains limited at this time, we anticipate softness in new residential and retail home improvement end markets, particularly in North America.

Our industrial end markets are expected to be impacted by slow economic recovery in Europe and China, and we are experiencing increased pressure within North America.

However, we will continue to prioritize our focus on recession resilient markets, new account growth, and managing expenses prudently.

We are confident in our differentiated strategy, capabilities, product and service solutions, and our people.

Our capital deployment strategy remains balanced and disciplined, with an emphasis on driving value for our customers and returns to our shareholders.

• Diluted net income per share increased 38.9% to $3.07 per share in the quarter compared to $2.21 per share in the second quarter 2022

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) increased 31.4% to $1.283 billion in the quarter, or 20.6% of net sales

The Company delivered record net sales in the second quarter, due to mid-single digit percentage impacts from selling price increases and mid-single digit volume growth due to higher architectural sales volume in the Paint Stores Group, partially offset by a high-single digit sales volume decrease in the Performance Coatings Group.

Net sales growth was driven primarily by protective and marine, commercial, property maintenance and residential repaint end markets within the Paint Stores Group.

In the Performance Coatings Group, net sales benefited from pricing actions and contributions from acquisitions.

Growth was strongest in Automotive Refinish, General Industrial and Industrial Wood, offset by softness in Packaging and Coil.

Within the Consumer Brands Group, strength in the Latin America, Europe and North America regions was partially offset by weakness in China.

Consolidated gross profit and margin in the second quarter improved both sequentially and year-over-year.

Entering the second half of 2023, we face challenging year-over-year comparisons and anticipate a wide variation in demand by region and end market.

We expect new residential demand to remain soft, particularly in North America, but anticipate solid demand in commercial, property maintenance, protective and marine and residential repaint.

We continue to see the impacts of slow economic recovery in Europe and Asia.

We will continue to prioritize investments in new stores, sales and technical personnel, innovation, digital and other growth initiatives that will allow us to capitalize on our strengths both now and as markets begin to recover more fully.

We remain committed to our differentiated strategy, capabilities, product and service solutions, and our people.

Improved visibility into the second half of 2023, coupled with strong first half results, gives us confidence in our ability to continue delivering above market growth and returns.

We employ a disciplined capital deployment strategy, while maintaining a balanced approach toward driving value for our customers and returns to our shareholders.

We continue to pursue business acquisitions, transactions and investments that fit our long-term growth strategy.

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

We have a strong liquidity position, with $151.4 million in cash and $2.228 billion of unused capacity under our credit facilities at March 31, 2023.

We have a strong liquidity position, with $209.4 million in cash and $2.874 billion of unused capacity under our credit facilities at June 30, 2023.

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, 2023 are not indicative of the results to be expected for the full year as our 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, 2023 are not indicative of the results to be expected for the full year as our 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, 2023 and 2022.

Three Months Ended March 31,

2023 2022 $ 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, 2023 and 2022.

Three Months Ended June 30,

2023 2022 $ Change % Change Currency Impact Acquisitions

Divestitures Impact

Paint Stores Group $ 3,498.7 $ 3,181.0 $ 317.7 10.0 % (0.1) % — %

Consumer Brands Group 872.7 852.2 20.5 2.4 %

Consumer Brands Group 945.8 900.0 45.8 5.1 % (0.3) % nm

Performance Coatings Group 1,794.9 1,790.3 4.6 0.3 % (0.2) % 4.5 %

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Total $ 6,240.6 $ 5,872.3 $ 368.3 6.3 % (0.2) % 1.4 %

Three Months Ended March 31, 2023

Consolidated net sales increased in the first quarter of 2023 primarily due to selling price increases in all segments and higher architectural sales volume in the Paint Stores Group, partially offset by lower sales volume in the Consumer Brands and Performance Coatings Groups.

Acquisitions added 1.8% to net sales, while currency translation rate changes decreased consolidated net sales by 1.0% in the first quarter.

Net sales of all consolidated foreign subsidiaries increased to $1.087 billion in the first quarter compared to $1.078 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries was due to growth in the Latin America and Europe regions driven primarily from sales price increases, as well as contributions from acquisitions, partially offset by lower sales in most end markets for the Asia region and unfavorable currency translation.

Net sales of all operations other than consolidated foreign subsidiaries increased to $4.356 billion in the first quarter compared to $3.921 billion in the same period last year.

Net sales in the Paint Stores Group increased in the first quarter due primarily to higher volume in protective and marine, property maintenance, commercial and residential repaint, as well as selling price increases.

Net sales from stores open for more than twelve calendar months increased 14.2% in the first quarter compared to last year’s comparable period.

Sales of non-paint products increased 26.5% compared to last year's first quarter.

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Three Months Ended June 30, 2023

Consolidated net sales increased by 6.3% in the second quarter of 2023 primarily driven by selling price increases in all segments, which impacted net sales by a mid-single digit percentage, mid-single digit volume growth due to higher architectural sales volume in the Paint Stores Group and a low-single digit increase from the impact of acquisitions, partially offset by a high-single digit sales volume decrease in the Performance Coatings Group.

Net sales of all consolidated foreign subsidiaries increased to $1.150 billion in the second quarter compared to $1.121 billion in the same period last year.

The increase in net sales for all consolidated foreign subsidiaries was due to growth in the Latin America and Europe regions driven primarily from selling price increases, as well as contributions from acquisitions, partially offset by lower net sales in most end markets for the Asia region.

Net sales of all operations other than consolidated foreign subsidiaries increased to $5.091 billion in the second quarter compared to $4.752 billion in the same period last year.

Net sales in the Paint Stores Group increased by 10.0% in the second quarter primarily due to mid-single digit sales volume growth across most end markets as well as selling price increases, which impacted net sales by a mid-single digit percentage.

Net sales from stores open for more than twelve calendar months increased 9.5% in the second quarter compared to last year’s comparable period.

Net sales of non-paint products increased 19.2% 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 increased in the first quarter due primarily to selling price increases in all regions and strong growth within Latin America, partially offset by lower sales volumes in all other regions.

Currency translation rate changes decreased the Consumer Brands Group's net sales by 1.7% in the first quarter.

Net sales in the Performance Coatings Group increased in the first quarter primarily due to selling price increases in all end markets and incremental sales from acquisitions, partially offset by lower sales volumes in Asia and Europe.

Acquisitions added 5.4% to the Performance Coatings Group’s net sales, while currency translation rate changes decreased net sales by 1.9% in the first quarter.

Net sales in the Consumer Brands Group increased by 5.1% in the second quarter primarily due to selling price increases in all regions, which impacted net sales by a mid-single digit percentage.

Net sales in the Performance Coatings Group increased by 0.3% in the second quarter primarily due to a mid-single digit increase from the impact of acquisitions and selling price increases in all end markets, which also impacted net sales by a mid-single digit percentage, partially offset by a high-single digit sales volume decrease in most regions.

Six Months Ended June 30,

2023 2022 $ Change % Change Currency Impact Acquisitions

Divestitures Impact

Paint Stores Group $ 6,357.8 $ 5,672.3 $ 685.5 12.1 % (0.2) % — %

Consumer Brands Group 1,818.5 1,752.2 66.3 3.8 % (1.0) % nm

Performance Coatings Group 3,504.7 3,444.4 60.3 1.8 % (1.0) % 5.0 %

Administrative 2.0 2.1 (0.1) (4.8) % — % — %

Total $ 11,683.0 $ 10,871.0 $ 812.0 7.5 % (0.6) % 1.6 %

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Six Months Ended June 30, 2023

Consolidated net sales increased by 7.5% in the first six months of 2023 primarily due to selling price increases, which impacted net sales by a mid-single digit percentage, mid-single digit volume growth due to higher architectural sales volume in the Paint Stores Group and a low-single digit increase from the impact of acquisitions, partially offset by a low-double digit sales volume decrease in the Performance Coatings Group.

Net sales of all consolidated foreign subsidiaries increased to $2.237 billion in the first six months compared to $2.198 billion in the same period last year.

Net sales of all operations other than consolidated foreign subsidiaries increased 8.9% to $9.446 billion in the first six months compared to $8.673 billion in the same period last year.

Net sales in the Paint Stores Group increased by 12.1% in the first six months of 2023 primarily due to mid-single digit sales volume growth across most end markets, as well as selling price increases, which impacted net sales by a mid-single digit percentage.

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

and Canada increased 11.6% in the first six months compared to last year’s comparable period.

Net sales of non-paint products increased 22.5% 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 in the Consumer Brands Group increased 3.8% in the first six months primarily due to selling price increases, which impacted net sales by a mid-single digit percentage.

Net sales in the Performance Coatings Group increased by 1.8% in the first six months primarily due to a mid-single digit increase from the impact of acquisitions and selling price increases in all end markets, which impacted net sales by a high-single digit percentage, partially offset by a low-double digit sales volume decrease in most regions.

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,

2023 2022 2023 2022

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

Net sales $ 6,240.6 100.0 % $ 5,872.3 100.0 % $ 11,683.0 100.0 % $ 10,871.0 100.0 %

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SG&A 1,760.0 28.2 % 1,597.6 27.2 % 3,453.0 29.6 % 3,083.1 28.4 %

Other general expense - net 10.5 0.2 % 2.5 0.1 %

Other general (income) expense - net (32.5) (0.5) % 4.4 0.1 % (22.0) (0.2) % 6.9 0.1 %

Impairment 34.0 0.5 % — — % 34.0 0.3 % — — %

Interest expense 111.7 1.8 % 92.9 1.5 % 221.0 1.9 % 181.3 1.6 %

2 unchanged sentences

Income before income taxes $ 1,012.1 16.2 % $ 739.9 12.6 % $ 1,626.9 13.9 % $ 1,201.0 11.0 %

Three Months Ended March 31, 2023

Consolidated cost of goods sold increased $75.7 million, or 2.6%, in the first quarter of 2023 compared to the same period in 2022 primarily due to higher sales volume in the Paint Stores Group, as well as impacts of inflation in wages and other employee-related costs.

This increase was partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups, a slight decrease in raw material costs, and favorable impacts of currency translation rate changes.

Currency translation rate changes decreased Cost of goods sold by 1.1% in the first quarter of 2023.

Consolidated gross profit increased $368.0 million in the first quarter of 2023 compared to the same period in 2022.

Consolidated gross profit as a percent of consolidated net sales increased in the first quarter to 44.5% compared to 41.1% during the same period in 2022.

Consolidated gross profit dollars increased primarily due to selling price increases in all Reportable Segments and higher sales volume in the Paint Stores Group, partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups and unfavorable currency translation rate changes.

The gross margin rate increased primarily as a result of benefits from selling price increases in each Reportable Segment.

The Paint Stores Group’s gross profit in the first quarter was higher than the same period last year by $225.7 million due primarily to selling price increases and higher sales volume in architectural paint end markets.

The Paint Stores Group’s gross profit as a percent of net sales increased in the first quarter compared to the same period in 2022 primarily due to higher sales driven by both increased volume and selling price actions.

The Consumer Brands Group’s gross profit increased by $22.5 million in the first quarter compared to the same period last year due primarily to selling price increases, partially offset by lower sales volume and inflation in wages and other employee related costs.

The Consumer Brands Group’s gross profit as a percent of net sales was comparable in the first quarter to the same period last year.

The Performance Coatings Group’s gross profit increased $130.4 million in the first quarter compared to the same period last year due primarily to selling price increases.

The Performance Coatings Group’s gross profit as a percent of net sales increased in the first quarter compared to the same period last year also due to selling price increases.

Consolidated selling, general and administrative expenses (SG&A) increased $207.5 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, and investments in digital technologies and system upgrades.

These increases were partially offset by favorable currency translation rate changes.

As a percent of net sales, consolidated SG&A increased 140 basis points in the first quarter compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $140.7 million in the first quarter compared to the same period last year due primarily to investments in long-term growth initiatives, including increased spending from new store openings and costs to support higher sales levels.

The Consumer Brands Group’s SG&A increased $6.5 million in the first quarter compared to the same period last year due to higher employee costs including in the Latin America region to support higher sales levels, partially offset by favorable currency translation rate changes.

The Performance Coatings Group’s SG&A increased $48.3 million in the first quarter compared to the same period last year primarily due to costs to support higher sales levels and acquisitions, partially offset by favorable currency translation rate changes.

The Administrative segment’s SG&A increased $12.0 million in the first quarter compared to the same period last year due primarily to higher compensation and investments in digital technologies.

In the first quarter of 2023, Other general expense - net increased $8.0 million compared to the same period in 2022 primarily due to an increase in provisions for environmental matters in the Administrative segment, partially offset by higher gains from the sale and disposition of assets.

Three Months Ended June 30, 2023

Consolidated cost of goods sold decreased $55.0 million, or 1.6%, in the second quarter of 2023 compared to the same period in 2022 primarily due to lower sales volume in the Performance Coatings Group, moderating raw material costs and improvements in operational efficiencies, partially offset by higher sales volume in the Paint Stores Group and the impacts of increases in wages and other employee-related costs.

Currency translation rate changes decreased Cost of goods sold by an insignificant amount in the second quarter of 2023.

Consolidated gross profit increased $423.3 million in the second quarter of 2023 compared to the same period in 2022.

Consolidated gross profit as a percent of consolidated net sales increased in the second quarter to 46.0% compared to 41.7% during the same period in 2022.

Consolidated gross profit dollars increased primarily due to selling price increases in all Reportable Segments, higher sales volume in the Paint Stores Group and moderating raw material costs, partially offset by lower sales volume in the Performance Coatings Group and unfavorable currency translation rate changes.

The Paint Stores Group’s gross profit in the second quarter was higher than the same period last year by $274.6 million due primarily to selling price increases, higher sales volume in architectural paint end markets and moderating raw material costs.

The Paint Stores Group’s gross profit as a percent of net sales increased in the second quarter compared to the same period in 2022 for these same reasons.

The Consumer Brands Group’s gross profit increased by $49.5 million in the second quarter compared to the same period last year due primarily to selling price increases and moderating raw material costs, partially offset by increases in wages and other employee-related costs.

The Consumer Brands Group’s gross profit as a percent of net sales increased in the second quarter compared to the same period in 2022 for these same reasons.

The Performance Coatings Group’s gross profit increased $104.0 million in the second quarter compared to the same period last year due primarily to selling price increases and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs.

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

Consolidated selling, general and administrative expenses (SG&A) increased $162.4 million in the second quarter versus the same period last year due primarily to increased employee-related costs, expenses to support higher sales levels and net new store openings and incremental SG&A for acquisitions.

As a percent of net sales, consolidated SG&A increased 100 basis points in the second quarter compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $108.4 million in the second quarter compared to the same period last year due primarily to higher employee-related costs, investments in long-term growth initiatives, including increased spending from new store openings, and costs to support higher sales levels.

The Consumer Brands Group’s SG&A increased $4.2 million in the second quarter compared to the same period last year due to higher employee-related costs, including in the Latin America region to support higher sales levels, and restructuring charges, partially offset by favorable currency translation rate changes and effective cost control in all other regions.

The Performance Coatings Group’s SG&A increased $32.2 million in the second quarter compared to the same period last year primarily due to costs to support higher sales levels and incremental costs from acquisitions.

The Administrative segment’s SG&A increased $17.6 million in the second quarter compared to the same period last year due primarily to higher employee-related costs.

In the second quarter of 2023, Other general (income) expense - net improved $36.9 million compared to the same period in 2022 due primarily to a gain on the divestiture of a business and an increase in gains from the sale and disposition of assets.

See Note 17 of Item 1 for additional information.

Interest expense increased $20.9 million in the first quarter compared to the same period last year due primarily to higher interest rates and an increase in outstanding debt.

For information on impairment, see Notes 4 and 7 of Item 1 and Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Interest expense increased $18.8 million in the second quarter compared to the same period last year due primarily to higher interest rates, offset by a decrease in outstanding debt.

See Note 8 of Item 1 for additional information on the Company’s outstanding debt.

In the first quarter of 2023, Other (income) expense - net improved $19.5 million compared to the same period in 2022 primarily due to higher returns on investments held in the Administrative segment.

In the second quarter of 2023, Other (income) expense - net improved $21.3 million compared to the same period in 2022 primarily due to higher returns on investments held in the Administrative segment, offset by an increase in foreign currency transaction related losses.

See Note 17 of Item 1 for additional information.

Six Months Ended June 30, 2023

Consolidated cost of goods sold increased $20.7 million, or 0.3%, in the first six months of 2023 compared to the same period in 2022 primarily due to higher sales volume in the Paint Stores Group, partially offset by lower sales volume in the Performance Coatings Group and moderating raw material costs.

Currency translation rate changes decreased Cost of goods sold by an insignificant amount in the first six months of 2023.

Consolidated gross profit increased $791.3 million in the first six months of 2023 compared to the same period in 2022.

Consolidated gross profit as a percent of consolidated net sales increased in the first six months to 45.3% compared to 41.4% during the same period in 2022.

Consolidated gross profit dollars increased primarily due to selling price increases in each Reportable Segment, higher sales volume in the Paint Stores Group and moderating raw material costs, partially offset by lower sales volume in the Performance Coatings Group.

The Paint Stores Group’s gross profit in the first six months was higher than the same period last year by $500.3 million due primarily to selling price increases, higher sales volume and moderating raw material costs.

The Paint Stores Group’s gross profit as a percent of net sales increased in the first six months compared to the same period in 2022 for these same reasons.

The Consumer Brands Group’s gross profit increased by $72.0 million in the first six months compared to the same period last year due primarily due to selling price increases and moderating raw material costs, partially offset by increases in wages and other employee-related costs.

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

The Performance Coatings Group’s gross profit increased $234.4 million in the first six months compared to the same period last year due primarily to higher selling prices and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee related costs.

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

Consolidated SG&A increased $369.9 million in the first six months versus the same period last year due primarily to higher employee-related costs, increased expenses to support net new store openings, investments in digital technologies and system upgrades and acquisitions, partially offset by favorable currency translation rate changes.

As a percent of net sales, consolidated SG&A increased 120 basis points in the first six months compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $249.1 million in the first six months compared to the same period last year due primarily to higher employee-related costs, increased spending from new store openings, higher costs to serve customers and investments in information systems.

The Consumer Brands Group’s SG&A increased $10.7 million in the first six months compared to the same period last year due to higher employee-related costs and restructuring charges, partially offset by favorable currency translation rate changes and other effective cost control measures.

The Performance Coatings Group’s SG&A increased $80.5 million in the first six months compared to the same period last year due primarily to higher employee-related costs, incremental costs from acquisitions and to support higher sales levels, offset by favorable currency translation rate changes.

The Administrative segment’s SG&A increased $29.6 million in the first six months compared to the same period last year due primarily to higher employee-related costs.

In the first six months of 2023, Other general (income) expense - net improved $28.9 million compared to the same period in 2022 due primarily to a gain on the divestiture of a business and higher gains from the sale and disposition of assets, partially offset by an increase in the provisions for environmental matters in the Administrative segment.

See Note 17 of Item 1 for additional information.

For information on impairment, see Notes 4 and 7 of Item 1 and Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Interest expense increased $39.7 million in the first six months of 2023 compared to the same period last year due primarily to higher interest rates, offset by a decrease in outstanding debt.

See Note 8 of Item 1 for additional information on the Company’s outstanding debt.

In the first six months of 2023, Other (income) expense - net improved $40.8 million compared to the same period in 2022 primarily due to higher returns on investments held in the Administrative segment and a miscellaneous pension credit, offset by higher foreign currency transaction related losses.

See Note 17 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

2023 2022 % Change

June 30, Six Months Ended

2023 2022 % Change 2023 2022 % Change

Income Before Income Taxes:

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Performance Coatings Group 15.2 % 11.0 % 14.0 % 9.9 %

Administrative nm nm

Administrative nm nm nm nm

Total 16.2 % 12.6 % 13.9 % 11.0 %

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Income Tax Expense

The effective tax rate was 22.3% for the first quarter of 2023 compared to 19.6% for the first quarter of 2022.

The effective tax rate was less favorably impacted by tax benefits related to employee share based payments in the first quarter of 2023 than in the same period last year.

The effective tax rate was 21.6% for the second quarter of 2023 compared to 21.9% for the second quarter of 2022, and 21.9% for the first six months of 2023 compared to 21.0% for the first six months of 2022.

The effective tax rate was less favorably impacted by tax benefits related to employee share based payments in the first six months of 2023 than in the same period last year.

The other significant components of the Company's tax rate were consistent year over year.

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Net Income Per Share

Diluted net income per share in the first quarter of 2023 increased 30.5% to $1.84 per share compared to $1.41 per share in the first quarter of 2022.

Diluted net income per share for the first quarter of 2023 included a $0.20 per share charge for acquisition-related amortization expense.

Diluted net income per share for the first quarter of 2022 included a $0.20 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 2023 increased 38.9% to $3.07 per share compared to $2.21 per share in the second quarter of 2022.

Diluted net income per share for the second quarter of 2023 and 2022 both included a $0.20 per share charge for acquisition-related amortization expense.

In addition, diluted net income per share for the second quarter of 2023 included a $0.05 per share impairment charge related to the pending divestiture of the China architectural business, as well as severance and other charges totaling $0.03 per share, offset by a $0.06 per share gain on the divestiture of a business.

Currency translation rate changes increased diluted net income per share by $0.02 in the second quarter of 2023.

Diluted net income per share for the first six months of 2023 increased 35.7% to $4.90 per share compared to $3.61 per share in the first six months of 2022.

Diluted net income per share for the first six months of 2023 included a $0.42 per share charge for acquisition-related amortization expense, a $0.05 per share impairment charge related to the pending divestiture of the China architectural business, as well as severance and other charges totaling $0.03 per share, offset by a $0.06 per share gain on the divestiture of a business.

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

Currency translation rate changes increased diluted net income per share by $0.02 in the first six months of 2023.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

The Company’s financial condition and liquidity remained strong at March 31, 2023.

During the first three months of 2023, the Company generated $88.2 million in net operating cash primarily as a result of higher profit driven by selling price actions, despite the normal seasonal increase in working capital requirements.

During the first three months of 2023, the Company’s EBITDA increased 26.7% to $878.2 million.

The Company’s financial condition and liquidity remained strong at June 30, 2023.

During the first six months of 2023, the Company generated $1.295 billion in net operating cash primarily as a result of higher profit and improved working capital management.

During the first six months of 2023, the Company’s EBITDA increased 29.5% to $2.161 billion.

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

Cash and cash equivalents decreased $47.4 million during the first three months of 2023.

Cash flow from operations, along with increased short-term borrowings, funded working capital increases and allowed the Company to return $458.2 million to shareholders in the form of share buybacks and cash dividends during the first three months of 2023.

At March 31, 2023, the Company had cash and cash equivalents of $151.4 million and total debt outstanding of $11.075 billion.

Cash and cash equivalents increased $10.6 million during the first six months of 2023.

Cash flow from operations allowed the Company to return $848.7 million to shareholders in the form of share buybacks and cash dividends during the first six months of 2023.

At June 30, 2023, the Company had cash and cash equivalents of $209.4 million and total debt outstanding of $10.401 billion.

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

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Net Working Capital

Net working capital, defined as Total current assets less Total current liabilities, increased $853.5 million to a deficit of $13.2 million at March 31, 2023 compared to a deficit of $866.7 million at March 31, 2022.

Net working capital, defined as Total current assets less Total current liabilities, increased $950.2 million to a surplus of $11.5 million at June 30, 2023 compared to a deficit of $938.7 million at June 30, 2022.

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

Current asset balances increased $206.4 million at March 31, 2023 compared to March 31, 2022 primarily due to an increase in Inventories of $379.2 million driven by higher inventory levels and a slight decrease in year over year raw material costs, and an increase in Accounts receivable, net of $125.6 million due to higher sales.

These increases were partially offset by a decrease in Cash and cash equivalents of $249.7 million and a decrease of $48.7 million in Other current assets primarily related to refundable income taxes and prepaid expenses.

Current liability balances decreased $647.1 million at March 31, 2023 compared to March 31, 2022 primarily due to a decrease in the current portion of long-term debt, which decreased $260.1 million, and a decrease in short-term borrowings of $258.4 million.

Excluding short-term borrowings and the current portion of long-term debt, current liabilities decreased $128.6 million primarily due to the timing of payments related to accounts payable and accrued taxes.

At March 31, 2023, the Company’s current ratio was 1.00 compared to 0.99 and 0.88 at December 31, 2022 and March 31, 2022, respectively.

Current asset balances increased $91.1 million at June 30, 2023 compared to June 30, 2022 primarily due to an increase in Accounts receivable, net of $135.3 million due to higher net sales, an increase in Inventories of $27.4 million driven by higher inventory levels and moderating raw material costs, and an increase of $31.6 million in Other current assets as a result of the reclassification of assets held for sale (see Note 4 within Item 1), offset by a decrease in refundable income taxes and prepaid expenses.

These increases were partially offset by a decrease in Cash and cash equivalents of $103.2 million.

Current liability balances decreased $859.1 million at June 30, 2023 compared to June 30, 2022 primarily due to a decrease in short-term borrowings of $1.206 billion and a decrease in Accounts payable of $503.2 million primarily due to the timing of payments, partially offset by an increase in the current portion of long-term debt of $498.9 million and increases in Accrued taxes and Compensation and taxes withheld.

At June 30, 2023, the Company’s current ratio was 1.00 compared to 0.99 and 0.87 at December 31, 2022 and June 30, 2022, respectively.

Property, Plant and Equipment

Net property, plant and equipment increased $155.0 million in the first three months of 2023 and increased $454.7 million in the twelve months since March 31, 2022.

The increase in the first three months was primarily due to capital expenditures of $209.9 million, incremental assets recognized through acquisitions of $9.0 million, and currency translation and other adjustments of $7.0 million, offset by depreciation expense of $70.4 million and the sale or disposition of fixed assets of $0.5 million.

Since March 31, 2022, the increase was primarily due to capital expenditures of $748.1 million and incremental assets recognized through acquisitions of $91.2 million, partially offset by depreciation expense of $268.9 million, sale or disposition of fixed assets of $11.8 million, and currency translation and other adjustments of $103.9 million, which primarily includes government incentives associated with the construction of our new headquarters and research and development (R&D) center.

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 primarily represented expenditures in the Paint Stores 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.

Net property, plant and equipment increased $235.5 million in the first six months of 2023 and increased $480.6 million in the twelve months since June 30, 2022.

The increase in the first six months was primarily due to capital expenditures of $416.0 million and currency translation and other adjustments of $1.8 million, partially offset by depreciation expense of $146.1 million and the sale or disposition of fixed assets of $36.2 million.

Since June 30, 2022, the increase was primarily due to capital expenditures of $824.7 million and incremental assets recognized through acquisitions of $70.5 million, partially offset by depreciation expense of $279.8 million, currency translation and other adjustments of $87.8 million, which primarily includes government incentives associated with the construction of our new headquarters and research and development (R&D) center, and sale or disposition of fixed assets of $47.0 million.

The Company closed a transaction to sell its current headquarters and R&D center during the second quarter of 2023.

In connection with the sale, proceeds of $47.2 million were received and an immaterial gain was recognized.

Capital expenditures primarily represented expenditures in the Paint Stores Group associated with the opening of new paint stores and renovation and improvements in existing stores, and expenditures associated with manufacturing capacity expansion, operational efficiencies and maintenance projects in the Consumer Brands and Performance Coatings Groups.

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

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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.

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.

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

During the first quarter of 2023, the Company received $66.5 million pursuant to the transaction.

During the six months ended 2023, the Company received $138.7 million pursuant to the transaction.

See Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning real estate financing.

Goodwill and Intangible Assets

Goodwill and intangible assets decreased $36.3 million from December 31, 2022 and increased $486.1 million from March 31, 2022 as compared to March 31, 2023.

The net decrease during the first three months of 2023 was primarily due to amortization of $83.7 million, offset by purchase accounting allocations of $43.1 million and foreign currency translation and other adjustments of $4.3 million.

The net increase over the twelve month period from March 31, 2022 was primarily due to incremental goodwill and intangible assets recognized from acquisitions of $891.6 million, partially offset by amortization of $322.8 million, foreign currency translation and other adjustments of $67.2 million and impairment of trademarks of $15.5 million.

See Note 6 in Item 1 for additional information on the Company’s goodwill and intangible assets, including the quantitative impairment analysis performed as a result of the Latin America architectural paint business moving to the Consumer Brands Group reportable segment.

Goodwill and intangible assets decreased $204.3 million from December 31, 2022 and increased $319.7 million from June 30, 2022 as compared to June 30, 2023.

The net decrease during the first six months of 2023 was primarily due to amortization of $166.7 million, reclassification to assets held for sale of $93.3 million (see Note 4 within Item 1) and impairment of trademarks of $6.9 million partially offset by purchase accounting allocations of $50.1 million and foreign currency translation and other adjustments of $12.5 million.

The net increase over the twelve month period from June 30, 2022 was primarily due to incremental goodwill and intangible assets recognized from acquisitions of $714.8 million and foreign currency translation and other adjustments of $47.9 million, partially offset by amortization of $327.3 million, reclassification to assets held for sale of $93.3 million and impairment of trademarks of $22.4 million.

See Note 7 in Item 1 for additional information on the Company’s goodwill and intangible assets, including the quantitative impairment analysis performed as a result of the Latin America architectural paint business moving to the Consumer Brands Group reportable segment and Note 4 for information on the impairment test performed as a result of the China architectural business classification change to held for sale.

See Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company's goodwill and intangible assets.

Other assets increased $44.7 million from December 31, 2022 and increased $236.0 million from March 31, 2022.

The increase in the first quarter was primarily due to an increase in deposits and prepaid expenses.

The increase from March 31, 2022 was primarily due to an increase in non-traded investments.

Other assets increased $95.6 million from December 31, 2022 and increased $195.1 million from June 30, 2022.

The increase in the first six months was primarily due to an increase in deposits and other assets related to contracts with customers.

The increase from June 30, 2022 was primarily due to an increase in non-traded investments, deposits and other assets related to contracts with customers.

See Note 1 in Item 1 for additional information on the Company’s non-traded investments.

Debt (including Short-term borrowings)

March 31, December 31, March 31,

June 30, December 31, June 30,

2023 2022 2022

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The Company’s long-term debt primarily consists of senior notes as disclosed in Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

On February 28, 2023, the Company amended its credit agreement dated August 2, 2021, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and for the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to December 20, 2027.

The Company had unused capacity under its various credit agreements of $2.228 billion at March 31, 2023.

On February 28, 2023, the Company amended its credit agreement dated August 2, 2021, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to December 20, 2027.

On May 1, 2023, the Company amended its credit agreement dated May 9, 2016, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to June 20, 2028.

The Company had unused capacity under its various credit agreements of $2.874 billion at June 30, 2023.

See Note 8 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, 2022 and March 31, 2022.

Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2022 and June 30, 2022.

See Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

Deferred income taxes increased $58.3 million from December 31, 2022 primarily due to incremental deferred tax liabilities recognized in connection with the acquisition of ICA as result of adjustments to the preliminary purchase allocation in the first

Compared to March 31, 2022, deferred income taxes decreased $20.3 million primarily due to amortization of acquisition-related intangible assets, partially offset by the incremental deferred tax liabilities recognized in connection with the acquisitions closed during the past 12 months.

Deferred income taxes increased $29.3 million from December 31, 2022 primarily due to incremental deferred tax liabilities recognized in connection with the acquisition of ICA as result of adjustments to the preliminary purchase allocation in the first quarter.

Compared to June 30, 2022, deferred income taxes decreased $43.1 million primarily due to amortization of acquisition-related intangible assets, partially offset by the incremental deferred tax liabilities recognized in connection with the acquisitions closed during the past 12 months.

See Note 3 in Item 1 of this report for more information regarding the Company’s recent acquisitions.

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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 2023.

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 2023.

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Contractual Obligations, Commercial Commitments and Warranties

There have been no significant changes to the Company’s contractual obligations and commercial commitments in the first three months of 2023 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, 2022.

There have been no significant changes to the Company’s contractual obligations and commercial commitments in the first six months of 2023 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, 2022.

See Note 3 in Item 1 for information on contractual obligations and commercial commitments related to acquisitions and divestitures.

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Shareholders’ Equity

March 31, December 31, March 31,

June 30, December 31, June 30,

2023 2022 2022

Total shareholders’ equity $ 3,631.1 $ 3,102.1 $ 2,224.6

Shareholders’ equity increased $64.7 million during the first three months of 2023 as a result of net income of $477.4 million, an increase in Other capital of $34.1 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $325.2 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $156.5 million.

Shareholders’ equity increased $932.5 million since March 31, 2022 as a result of net income of $2.127 billion and an increase in Other capital of $155.3 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $801.9 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $624.1 million.

During the first three months of 2023, the Company purchased 1.30 million shares of its common stock for treasury purposes through open market purchases.

Shareholders’ equity increased $529.0 million during the first six months of 2023 as a result of net income of $1.271 billion, an increase in Other capital of $80.7 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $559.5 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $312.8 million.

Shareholders’ equity increased $1.407 billion since June 30, 2022 as a result of net income of $2.343 billion and an increase in Other capital of $164.3 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $739.7 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $624.2 million.

During the first six months of 2023, the Company purchased 2.30 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, 2023 to purchase 43.9 million shares of its common stock.

The Company had remaining authorization at June 30, 2023 to purchase 42.9 million shares of its common stock.

In February 2023, the Company's Board of Directors increased the quarterly cash dividend from $.60 per share to $.605 per share.

If approved in all subsequent quarters, this quarterly dividend will 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 for the three months ended March 31, 2023 was a cash source of $88.2 million compared to a cash source of $26.3 million for the same period in 2022.

The improvement in net operating cash was primarily due to higher net income, partially offset by an increase in cash requirements for working capital.

Net investing cash usage increased $37.8 million in the first three months of 2023 to a usage of $233.4 million compared to a usage of $195.6 million for the same period in 2022 primarily due to an increase in cash used for capital expenditures.

Net financing cash for the three months ended March 31, 2023 was a cash source of $98.1 million compared to a cash source of $415.7 million for the same period in 2022 primarily due to lower net proceeds from short-term borrowings, partially offset by lower treasury stock purchases and proceeds from real estate financing transactions.

In the twelve month period from April 1, 2022 through March 31, 2023, the Company generated net operating cash of $1.982 billion, used $1.645 billion in investing activities and used $600.0 million in financing activities.

Net operating cash for the six months ended June 30, 2023 was a cash source of $1.295 billion compared to a cash source of $639.7 million for the same period in 2022.

The improvement in net operating cash was primarily due to higher net income and improved working capital management.

Net investing cash usage decreased $56.0 million in the first six months of 2023 to a usage of $417.9 million compared to a usage of $473.9 million for the same period in 2022 primarily due to lower cash used for acquisitions, proceeds from the divestiture of a business and an increase in proceeds from the sale of assets, partially offset by increased cash used for capital expenditures.

Net financing cash for the six months ended June 30, 2023 was a cash usage of $869.6 million compared to a cash usage of $8.0 million for the same period in 2022 primarily due to lower net proceeds from short-term borrowings, partially offset by lower repayments of long-term debt, lower treasury stock purchases and increased proceeds from real estate financing transactions.

In the twelve month period from July 1, 2022 through June 30, 2023, the Company generated net operating cash of $2.575 billion, used $1.552 billion in investing activities and used $1.144 billion in financing activities.

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

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

See Note 13 in Item 1 for disclosures related to the $812.7 million of outstanding U.S.

See Note 14 in Item 1 for disclosures related to the $1.013 billion of outstanding U.S.

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

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

At March 31, 2023, the Company was in compliance with the covenant and expects to remain in compliance.

At June 30, 2023, the Company was in compliance with the covenant and expects to remain in compliance.

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

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EBITDA and Adjusted EBITDA

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

Adjusted EBITDA is a non-GAAP financial measure defined as EBITDA that excludes restructuring expense.

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

Adjusted EBITDA is a non-GAAP financial measure defined as EBITDA that excludes certain adjustments, such as items related to the previously announced Restructuring Plan.

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

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

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

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

The reader should refer to the determination of net income and net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Statements of Condensed Consolidated Cash Flows in Item 1.

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net income $ 793.7 $ 577.9 $ 1,271.1 $ 948.7

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EBITDA $ 1,282.5 $ 976.1 $ 2,160.7 $ 1,669.1

Restructuring 0.9 —

Restructuring expense 8.7 — 9.6 —

Impairment of assets held for sale 34.0 — 34.0 —

Gain on divestiture of domestic aerosol business (20.1) — (20.1) —

Adjusted EBITDA $ 1,305.1 $ 976.1 $ 2,184.2 $ 1,669.1

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

• adverse weather conditions or natural disasters, including those that may be related to climate change or otherwise, and public health crises, including the COVID-19 pandemic;

• adverse weather conditions or natural disasters, including those that may be related to climate change or otherwise, and public health crises, such as the COVID-19 pandemic;

• losses of or changes in our relationships with customers and suppliers;

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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