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Item 7. Management’s Discussion and Analysis

2024-02-20 compared with 2023-02-22 · 230 added, 216 removed, 291 unchanged (61% of the section changed)

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The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the Company) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region and throughout Europe, Asia and Australia.

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

The Company is structured into three reportable segments – Paint Stores 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 the allocation of resources.

Effective January 1, 2023, the Company changed its organizational structure to manage and report the Latin America architectural paint business within the Consumer Brands Group to more closely align demand and service model trends with its current business strategy.

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 herein.

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

• Consolidated Net sales increased 4.1% in the year to a record $23.052 billion

◦ Net sales from stores in U.S.

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

◦ Net sales from stores in the Paint Stores Group open more than twelve calendar months increased 6.8% in the year

• Diluted net income per share increased 19.8% to $9.25 per share in the year compared to $7.72 per share in the full year 2022

◦ Adjusted diluted net income per share increased to $10.35 per share in the year compared to $8.73 per share in the full year 2022

• 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.

• Generated Net operating cash of $3.522 billion, or 15.3% of net sales, in the year

• Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) increased 17.5% in the year to $4.239 billion or 18.4% of net sales

During 2023, we executed on our strategy to provide differentiated solutions to enable our customers to increase their productivity and profitability.

Net sales grew to a record level, gross margin expanded due to moderating raw material costs and carryover price increases, and Net operating cash increased due to record Net income and improved working capital management.

This performance enabled us to continue to invest in our business through customer-focused innovation, complete the acquisition of SIC Holding GmbH, reduce short-term borrowings and long-term debt, and return capital to shareholders through dividends and share repurchases.

We enter 2024 with confidence, energy and a commitment to seize profitable growth opportunities in our targeted end-markets, although uncertainties do remain in the marketplace.

Within Paint Stores Group and Consumer Brands Group, we anticipate continued inflationary pressure in 2024 to impact consumer behavior in both the United States and Europe, particularly in housing markets.

While mortgage rates are expected to remain high compared to recent historical levels, we expect them to moderate and positively impact new and existing residential sales volume.

We also remain focused on gaining market share and leveraging our strategic investments to counteract forecasted declines in remodeling spend in 2024.

The outlook for the Performance Coatings Group is varied by end market and region with expected resilience in Automotive Refinish and tailwinds in Industrial Wood.

Demand softness is forecasted in General Industrial due to negative manufacturing trends in North America, Europe and Brazil and in Packaging due to expected flat-to-down volumes in the food and beverage industry.

As it relates to consolidated expenses, while we expect raw material costs to be down by a low-single digit percentage, certain other costs, such as wages, healthcare, energy and transportation are expected to increase.

Selling, general and administrative expenses are expected to increase moderately in 2024 to support targeted investments, but remain tightly controlled in non-customer facing functions.

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.

Long-term debt maturities due in 2024 are $1.100 billion and are expected to be refinanced at higher interest rates.

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

expand our footprint by opening 80 to 100 new stores in the United States and Canada in 2024, 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.

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, foreign currency and inflation.

RESULTS OF OPERATIONS

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Year Ended December 31,

2022 2021 $ Change % Change

The Americas Group $ 12,661.0 $ 11,217.0 $ 1,444.0 12.9 %

2023 2022 $ Change % Change Currency Impact Acquisitions and Divestitures Impact

Paint Stores Group $ 12,839.5 $ 11,963.3 $ 876.2 7.3 % (0.1) % — %

Consumer Brands Group 3,365.6 3,388.4 (22.8) (0.7) % (0.4) % (1.9) %

2,690.7 2,721.6 (30.9) (1.1) %

Performance Coatings Group 6,843.1 6,793.5 49.6 0.7 % 0.3 % 4.1 %

6,793.5 6,003.8 789.7 13.2 %

Administrative 3.7 3.7 — — % — % — %

Total $ 23,051.9 $ 22,148.9 $ 903.0 4.1 % — % 1.0 %

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.

Consolidated Net sales for 2023 increased 4.1% primarily due to selling price increases, volume growth due to higher architectural sales volume in the Paint Stores Group and a 1.0% net increase from the impact of acquisitions and divestitures completed during the past twelve months, partially offset by sales volume decreases in the Consumer Brands and Performance Coatings Groups.

Net sales of all consolidated foreign subsidiaries increased 3.1% to $4.428 billion for 2023 versus $4.294 billion for 2022 due primarily to growth in the Europe and Latin America regions, partially offset by lower net sales in the Asia region as a result of the divestiture of the China architectural business.

Net sales of all operations other than consolidated foreign subsidiaries increased 4.3% to $18.624 billion for 2023 versus $17.855 billion for 2022.

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.

and Canada open for more than twelve calendar months increased 11.7% in the year over last year’s comparable period.

Currency translation rate changes reduced Net sales by 0.4% compared to 2021.

During 2022, The Americas Group opened 89 new stores and closed 17 redundant locations for a net increase of 72 stores, with a net increase of 75 new stores in the U.S.

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 by an average of 2% each year, primarily through organic growth.

Net sales in the Paint Stores Group increased 7.3% primarily due to mid-single digit sales volume growth and selling price increases, which impacted net sales by a low-single digit percentage.

Net sales from stores in the Paint Stores Group open for more than twelve calendar months increased 6.8% in the year over the prior year comparable period.

During 2023, the Paint Stores Group opened 76 new stores and closed 6 locations for a net increase of 70 stores.

The total number of stores in operation at December 31, 2023 was 4,694 in the United States, Canada and the Caribbean region.

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

Sales of products other than paint increased approximately 5.0% 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 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.

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, increased by an insignificant amount in 2022.

Net sales in the Consumer Brands Group decreased 0.7% in 2023 primarily due to a low-single digit sales volume decrease and a 1.9% decrease from the impact of divestitures, partially offset by selling prices increases, which impacted net sales by a mid-single digit percentage.

Net sales in the Performance Coatings Group increased 0.7% in 2023 primarily due to selling price increases, which impacted net sales by a mid-single digit percentage, and a 4.1% increase from the impact of acquisitions completed during the past twelve months, partially offset by a high-single digit sales volume decrease.

In 2023, the Performance Coatings Group added 5 net new branches, increasing the total to 322 branches open in the United States, Canada, Mexico, South America, Europe and Asia.

Net sales in the Administrative segment, which primarily consists of external leasing revenue, remained flat in 2023.

Income Before Income Taxes

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Selling, general, and administrative expenses (SG&A) 7,065.4 30.6 % 6,331.6 28.6 %

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

Amortization 317.1 1.4 % 309.5 1.5 %

Impairment of trademarks 15.5 0.1 % — —

Other general expense (income) - net 67.1 0.3 % (24.9) (0.1) %

Impairment 57.9 0.3 % 15.5 0.1%

Interest expense 417.5 1.8 % 390.8 1.8 %

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Income before income taxes $ 3,109.9 13.5 % $ 2,573.1 11.6 %

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.

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

Consolidated Cost of goods sold decreased $530.0 million, or 4.1%, in 2023 compared to the same period in 2022 primarily due to lower sales volumes in the Consumer Brands and Performance Coatings Groups and moderating raw material costs, partially offset by higher sales volume in the Paint Stores Group and the impacts of increases in wages and other employee-related expenses.

In 2023, certain manufacturing and distribution costs (excluding raw materials) incurred within the Consumer Brands Group were in excess of the Company’s standard conversion cost estimates established at the beginning of the year.

Consistent with prior years, these expenses were related to supply chain inefficiencies and remained within the manufacturing and distribution operations of the Consumer Brands Group.

Consolidated Gross profit increased $1.433 billion, or 15.4%, in 2023 compared to the same period in 2022.

Consolidated Gross profit as a percent to consolidated Net sales increased to 46.7% in 2023 from 42.1% 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 volumes in the Consumer Brands and Performance Coatings Groups.

The Paint Stores Group’s gross profit for 2023 increased $908.6 million compared to the same period in 2022 primarily due to sales volume growth, selling price increases and moderating raw material costs.

The Paint Stores Group’s gross profit as a percent of net sales increased for these same reasons.

The Consumer Brands Group’s gross profit increased $139.3 million in 2023 compared to the same period in 2022 due primarily to selling price increases and moderating raw material costs, partially offset by a sales volume decrease and increases in wages and other employee-related expenses in manufacturing and distribution operations.

The Consumer Brands Group’s gross profit as a percent of net sales increased for these same reasons.

The Performance Coatings Group’s gross profit increased $402.2 million compared to the same period in 2022 due primarily to higher selling prices, moderating raw material costs and the impact of acquisitions, partially offset by lower sales volume and increases in wages and other employee-related expenses.

The Performance Coatings Group’s gross profit as a percent of net sales increased for these same reasons.

Consolidated SG&A increased by $733.8 million compared to the same period in 2022 primarily due to increased employee-related expenses, including incentive-based compensation expense, expenses to support higher sales levels and net new store openings.

As a percent of Net sales, SG&A increased 200 basis points compared to the same period in 2022 for these same reasons.

The Paint Stores Group’s SG&A increased $401.4 million for the year due primarily to higher employee-related expenses, increased spending from new store openings, higher costs to serve customers, increased investments in technologies and costs to support higher sales levels, including the hiring of additional sales representatives.

The Consumer Brands Group’s SG&A increased $64.5 million for the year primarily due to higher employee-related expenses and increased spending to support higher sales levels in Latin America.

The Performance Coatings Group’s SG&A increased by $139.9 million for the year primarily due to higher employee-related expenses, costs from acquisitions and investments in technology.

The Administrative segment’s SG&A increased $128.0 million primarily due to higher employee-related expenses, including stock-based and other incentive compensation, as well as increased expenses related to technology and systems.

Other general expense (income) - net changed by $92.0 million from income of $(24.9) million in 2022 to an expense of $67.1 million in 2023.

The change was primarily attributable to an increase in provisions for environmental matters - net due to new information which impacted the estimate of required remediation at certain Major Sites and other Company locations.

In addition, the Company incurred a modest loss on the sale or disposition of assets versus a gain in the prior year.

These decreases were offset by a gain on the sale of a non-core domestic aerosol business in 2023.

See Note 20 to the Consolidated Financial Statements in Item 8 for additional information.

For information on impairment considerations, see Note 7 to the Consolidated Financial Statements in Item 8.

Interest expense increased $26.7 million in 2023 compared to 2022 primarily due to higher interest rates, partially offset by a decrease in outstanding debt.

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

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.

Other expense (income) - net increased $18.5 million in 2023 compared to 2022 primarily due to the significant devaluation of the Argentine Peso in December 2023 as part of economic reforms implemented by the government of Argentina.

As a result of these actions in Argentina, the Company incurred a loss of $41.8 million.

In addition, the Company incurred a loss on the extinguishment of its Debentures due 2027 and 2097 of $12.8 million.

These increases were partially offset by gains on investments held in the Administrative segment and miscellaneous pension and benefit income.

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

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Income Before Income Taxes:

The Americas Group $ 2,436.6 $ 2,239.1 $ 197.5 8.8 %

Paint Stores Group $ 2,860.8 $ 2,348.1 $ 512.7 21.8 %

Consumer Brands Group

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Income Before Income Taxes as a % of Net Sales:

The Americas Group 19.2 % 20.0 %

Paint Stores Group 22.3 % 19.6 %

Consumer Brands Group

Performance Coatings Group

14.5 % 10.8 %

Administrative nm nm

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The effective income tax rate for 2023 was 23.2% compared to 21.5% in 2022.

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.

The increase in the effective rate was primarily due to an unfavorable change in the jurisdictional mix of earnings.

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

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Diluted net income per share for 2023 increased to $9.25 per share from $7.72 per share in 2022.

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.

Diluted net income per share in 2023 included acquisition-related amortization expense of $0.78 per share, severance and other expense of $0.04 per share, expenses related to the divestiture of the China architectural business of $0.11 per share, impairment related to trademarks of $0.07 per share and expense related to the devaluation of the Argentine Peso of $0.16 per share.

These expenses were partially offset by a gain on the divestiture of a non-core domestic aerosol business of $0.06 per share.

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

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 impairment

related to the Restructuring Plan of $0.05 per share.

Refer to Notes 3, 4, 7 and 20 to the Consolidated Financial Statements in Item 8 for additional information.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

The Company’s financial condition, liquidity and cash flow continued to be strong in 2023.

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.

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.

The Company generated $3.522 billion in Net operating cash, primarily due to higher net income and improved working capital management.

This strong cash generation enabled the Company to invest $1.011 billion in capital expenditures and approximately $265 million in the acquisition of SIC Holding, reduce short-term borrowings and long-term debt by $718.8 million and return $2.056 billion to shareholders in the form of cash dividends and share repurchases during the year.

During 2023, the Company generated EBITDA of $4.150 billion and Adjusted EBITDA of $4.239 billion.

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

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

As of December 31, 2023, the Company had Cash and cash equivalents of $276.8 million and total debt outstanding of $9.851 billion.

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Net Working Capital

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.

Net working capital, defined as Total current assets less Total current liabilities, decreased $1.061 billion to a deficit of $1.114 billion at December 31, 2023 from a deficit of $53.0 million at December 31, 2022.

The net working capital decrease was primarily due to an increase in the Current portion of long-term debt and a decrease in current assets, particularly Inventories, partially offset by a decrease in Short-term borrowings.

Comparing current asset balances at December 31, 2023 to December 31, 2022, Accounts receivable decreased $95.7 million, Inventories decreased $296.7 million due to lower inventory levels and moderating raw material costs and Other current assets decreased $80.4 million, primarily related to prepaid expenses and refundable income taxes.

These decreases were partially offset by an increase in Cash and cash equivalents of $78.0 million.

Current liability balances increased $666.2 million at December 31, 2023 compared to December 31, 2022 primarily due an increase in the Current portion of long-term debt of $1.098 billion, an increase in Other Accruals of $191.2 million, primarily related to liabilities from contracts with customers, environmental-related liabilities and miscellaneous other current liabilities, and an increase in Compensation and taxes withheld of $78.2 million.

These increases were partially offset by a decrease in Short-term borrowings of $603.9 million and Accounts payable of $121.5 million.

As a result of the net effect of these changes, the Company’s current ratio decreased to 0.83 at December 31, 2023 from 0.99 at December 31, 2022.

Accounts receivable as a percent of Net sales decreased to 10.7% in 2023 from 11.6% in 2022.

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.

Accounts receivable days outstanding was 58 days in 2023 and 2022.

In 2023, provisions for the allowance for current expected credit losses increased $3.0 million, or 5.3%.

Inventories as a percent of Net sales decreased to 10.1% in 2023 from 11.9% in 2022.

Inventory days outstanding was 94 days in 2023 compared to 98 days in 2022.

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Property, Plant and Equipment

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 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.

Net property, plant and equipment increased $629.8 million to $2.837 billion at December 31, 2023 due primarily to capital expenditures of $1.011 billion, partially offset by depreciation expense of $292.3 million, sale or disposition of assets with remaining net book value of $88.0 million, and currency translation and other adjustments of $(0.5) million.

During 2023, the Company closed on a transaction to sell and subsequently lease back its current headquarters and research and development center.

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

Capital expenditures during 2023 in the Paint Stores Group were primarily attributable to the opening of new paint stores and renovations and improvements in existing stores.

In the Consumer Brands Group and the Performance Coatings Group, capital expenditures during 2023 were primarily related to ongoing environmental compliance measures, manufacturing capacity expansion, operational efficiencies and maintenance projects at sites currently in operation.

The Administrative segment incurred capital expenditures primarily related to construction activities associated with the new headquarters and research and development center.

Construction of the new headquarters and research and development center is expected to be completed in 2024 at the earliest.

In 2024, the Company expects to spend approximately the same as 2023 for capital expenditures, which it will fund primarily through the generation of operating cash.

Core capital expenditures are targeted to be less than 2% of Net sales in 2024 and are expected to be for investments in various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities and new store openings.

Additionally, the Company will continue to

construct its new headquarters and research and development center.

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

Real Estate Financing

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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 Company expects to receive proceeds approximating $800 million to $850 million on an incremental basis until the completion of construction.

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.

Lease payments over the next twelve months, which is the remaining estimated construction period, are expected to be approximately $40 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.

Once determinable, this is expected to result in a significant increase in the Company’s long-term contractual obligations.

In 2023 and 2022, the Company received $305.0 million and $210.0 million, respectively, pursuant to the transaction.

The net proceeds from this transaction and other real estate financing transactions are recognized as proceeds from real estate financing transactions within the Financing Activities section of the Statements of Consolidated Cash Flows.

The corresponding financing obligation for the new headquarters was $515.8 million and $207.0 million at December 31, 2023 and 2022, respectively, on the Consolidated Balance Sheets.

The short-term portion of the liability recorded in Other accruals was $39.9 million and $20.0 million at December 31, 2023 and 2022, respectively.

During 2023, $23.8 million of interest was capitalized with the long-term portion of the liability in Other long-term liabilities.

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

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Goodwill and Intangible Assets

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.

Goodwill, which represents the excess of cost over the fair value of net assets acquired in business combinations, increased $42.8 million in 2023, primarily due to foreign currency translation rate fluctuations and purchase accounting allocations of $8.3 million.

Intangible assets decreased $121.5 million in 2023 primarily due to amortization of finite-lived intangible assets of $325.0 million, dispositions of $83.4 million and trademark impairment charges of $30.9 million, partially offset by purchase accounting allocations of $306.7 million and foreign currency translation rate fluctuations.

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.

See Note 7 to the Consolidated Financial Statements in Item 8 for a description of goodwill, identifiable intangible assets and asset impairments and summaries of the remaining carrying values of goodwill and intangible assets.

Other assets increased $183.5 million to $1.211 billion at December 31, 2023.

The increase was primarily due to non-traded investments.

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

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

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Total debt outstanding $ 9,850.9 $ 10,569.7

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

Total debt outstanding, including Short-term borrowings, decreased by $718.8 million to $9.851 billion in 2023.

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 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 $2.250 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 targets Net

debt, which is total debt outstanding, net of Cash and cash equivalents, to be 2.0 to 2.5 times EBITDA.

At December 31, 2023, Net debt was $9.574 billion and was 2.3 times the Company’s EBITDA in 2023.

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

In December 2023, the Company exercised its call provision to make-whole the entire outstanding $119.4 million aggregate principal amount of its 7.375% Debentures due 2027 and the entire outstanding $3.5 million aggregate principal amount of its 7.45% Debentures due 2097.

The retirement of the Debentures resulted in a loss of $12.8 million recorded in Other general expense (income) - net.

See Note 20 to the Consolidated Financial Statements in Item 8 for additional information.

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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Defined Benefit Pension and Other Postretirement Benefit Plans

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 $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 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 accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans increased $10.5 million to $69.0 million primarily due to changes in actuarial assumptions.

The Company’s liability for other postretirement benefits decreased $6.6 million to $147.2 million at December 31, 2023 due primarily to changes in the actuarial assumptions.

The assumed discount rate used to determine the projected benefit obligation for the domestic defined benefit pension plan decreased to 5.1% at December 31, 2023 from 5.3% at December 31, 2022.

The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans decreased to 4.8% at December 31, 2023 from 5.1% at December 31, 2022.

The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations decreased to 5.0% at December 31, 2023 from 5.2% at December 31, 2022.

The decrease in the discount rates was primarily due to lower interest rates.

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

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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.

The expected long-term rate of return on assets for the domestic defined benefit pension plan was 6.3% at December 31, 2023 and 2022.

The expected long-term rate of return on assets for the foreign defined benefit pension plans decreased to 4.8% at December 31, 2023 from 5.5% at December 31, 2022.

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

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Net periodic benefit credit for other postretirement benefits in 2024 is expected to be approximately $17.0 million.

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

The credit for 2024 is primarily due to amortization of the impact of a plan amendment executed in 2022.

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.

Deferred Income Taxes

Deferred income taxes at December 31, 2022 decreased $86.6 million from the prior year primarily due to the change in deferred taxes as a result of the amortization of intangible assets in the current year.

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

Deferred income taxes at December 31, 2023 increased $1.5 million from the prior year primarily due to an increase in deferred tax liabilities from acquired intangible assets, partially offset by the amortization of intangible assets in the current year.

See Notes 3 and 21 to the Consolidated Financial Statements in Item 8 for additional information on deferred taxes.

Other Long-Term Liabilities

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

Other long-term liabilities increased $301.6 million during 2023 due primarily to liabilities associated with real estate financing transactions and an increase in long-term commitments related to investments in U.S.

affordable housing and historic

renovation real estate partnerships, 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.

Environmental Matters

The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations.

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Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.

During 2023, environmental-related liabilities increased $28.5 million to $318.9 million at December 31, 2023 primarily due to new information which impacted the estimate of required remediation at certain Major Sites and other Company locations.

Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures were included in the normal operating expenses of conducting business.

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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 2024.

See Note 11 to the Consolidated Financial Statements in Item 8 for further information on environmental-related long-term liabilities.

See Note 11 to the Consolidated Financial Statements in Item 8 for further information on environmental-related liabilities.

Contractual and Other Obligations and Commercial Commitments

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.

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

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

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

(3) Relate primarily to estimated future capital contributions to investments in the U.S.

(2) Relates to open purchase orders for raw materials at December 31, 2023.

(3) Relates primarily to estimated future capital contributions for investments in the U.S.

affordable housing and historic renovation real estate partnerships and various other contractual obligations.

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The increase was primarily attributable to the generation of $2.389 billion of Net income and benefits from stock option exercises and the recognition of stock-based compensation expense of $203.9 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.

This was partially offset by the repurchase of $1.432 billion in Treasury stock and the payment of $623.7 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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This quarterly dividend, if approved in each of the remaining quarters of 2024, would result in an annual dividend for 2024 of $2.86 per share, or a 31% payout of 2023 diluted net income per share.

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 $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.

Net operating cash increased $1.602 billion in 2023 to a cash source of $3.522 billion from a cash source of $1.920 billion in 2022 due primarily to improved working capital management and higher net income.

Net operating cash increased as a percent to Net sales to 15.3% in 2023 compared to 8.7% in 2022.

Net investing cash usage decreased $568.3 million to a usage of $1.039 billion in 2023 from a usage of $1.608 billion in 2022 due primarily to lower cash used for acquisitions, proceeds from the divestiture of businesses and an increase in proceeds from the sale of assets, partially offset by increased cash used for 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 $1.552 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.

Net financing cash usage increased $2.142 billion to a usage of $2.425 billion in 2023 from a usage of $282.4 million in 2022.

This increase was due primarily to proceeds from long-term debt in 2022 which did not occur in 2023, a net decrease in short-term borrowings and an increase in treasury stock purchases, partially offset by lower payments of long-term debt and higher proceeds from real estate financing transactions.

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

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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 Notes 1 and 20 to the Consolidated Financial Statements in Item 8 for additional information related to foreign currency translation.

Financial Covenant

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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), as defined in the credit agreement, for the 12-month period ended on the same date.

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

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

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

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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.

Participants in the Company’s 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.

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EBITDA and Adjusted EBITDA

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.

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 that management believes enhances investors’ understanding of the Company’s operating performance.

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

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

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

The 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 8.

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

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EBITDA 4,149.9 3,545.0

Restructuring and impairment 62.8 —

Loss on Wattyl divestiture — 111.9

Restructuring expense 9.6 47.3

Impairment related to Restructuring Plan 34.0 15.5

Gain on divestiture of domestic aerosol business (20.1) —

Impairment related to trademarks 23.9 —

Devaluation of the Argentine Peso 41.8 —

Adjusted EBITDA $ 4,239.1 $ 3,607.8

Free Cash Flow

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

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

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

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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 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 $ 9.25

Restructuring expense:

Items related to Restructuring Plan:

Severance and other $ .06 $ .02 .04

Impairment .06 .01 .05

Impairment of assets related to China divestiture .13 .08 .05

Gain on divestiture of domestic aerosol business (.08) (.02) (.06)

Discrete income tax expense related to China divestiture (1)

Total .11 .02 .09

Impairment related to trademarks .09 .02 .07

Devaluation of the Argentine Peso .16 — .16

Acquisition-related amortization expense (2)

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Diluted net income per share $ 7.72

Loss on divestiture $ .41 $ .07 .34

Items related to Restructuring Plan:

Severance and other $ .18 $ .03 .15

Impairment .06 .01 .05

Total .24 .04 .20

Acquisition-related amortization expense (2)

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

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

(2) Acquisition-related amortization expense consists of the amortization of intangible assets related to the Valspar acquisition and is included within Selling, general and administrative expenses.

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 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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Year Ended December 31, 2023

The Americas Group Consumer Brands

Paint Stores Group Consumer Brands

Group Performance Coatings

Group Administrative Total

Net external sales $ 12,661.0 $ 2,690.7 $ 6,793.5 $ 3.7 $ 22,148.9

Net sales $ 12,839.5 $ 3,365.6 $ 6,843.1 $ 3.7 $ 23,051.9

Income before income taxes $ 2,860.8 $ 309.3 $ 991.6 $ (1,051.8) $ 3,109.9

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

Restructuring expense — 41.1 22.2 — 63.3

Acquisition-related amortization expense (1)

as a % of Net sales 22.3 % 9.2 % 14.5 % 13.5 %

Items related to Restructuring Plan:

Severance and other 14.2 (0.2) 1.3 15.3

Impairment of assets related to

China divestiture 6.9 27.1 34.0

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

Total — 21.1 (0.2) 8.3 29.2

Impairment related to trademarks 23.9 23.9

Devaluation of the Argentine Peso 30.8 11.0 41.8

Acquisition-related amortization

69.3 196.8 266.1

Adjusted segment profit $ 2,860.8 $ 454.4 $ 1,199.2 $ (1,043.5) $ 3,470.9

as a % of Net external sales 19.2 % 12.7 % 14.1 % 13.2 %

as a % of Net sales 22.3 % 13.5 % 17.5 % 15.1 %

Year Ended December 31, 2022

The Americas Group Consumer Brands

Paint Stores Group Consumer Brands

Group Performance Coatings

Group Administrative Total

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

Net sales $ 11,963.3 $ 3,388.4 $ 6,793.5 $ 3.7 $ 22,148.9

Income before income taxes $ 2,348.1 $ 314.2 $ 734.9 $ (824.1) $ 2,573.1

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)

as a % of Net sales 19.6 % 9.3 % 10.8 % 11.6 %

Items related to Restructuring Plan:

Severance and other 25.6 22.2 47.8

Impairment 15.5 15.5

Total — 41.1 22.2 — 63.3

Acquisition-related amortization

76.2 200.1 276.3

Adjusted segment profit $ 2,348.1 $ 431.5 $ 957.2 $ (824.1) $ 2,912.7

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

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

as a % of Net sales 19.6 % 12.7 % 14.1 % 13.2 %

(1) Acquisition-related amortization expense consists of the amortization of intangible assets related to the Valspar acquisition and is included in Selling, general and administrative expenses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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.

We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below.

However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the critical accounting policies and estimates described below.

However, application of these critical accounting policies and estimates involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

All of the significant accounting policies that were followed in the preparation of the consolidated financial statements are disclosed in Note 1 to the Consolidated Financial Statements in Item 8.

Management believes that the following critical accounting policies and estimates have a significant impact on our consolidated financial statements.

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

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

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

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

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

Management recorded the best estimate of net realizable value for obsolete and discontinued inventories based on historical experience and current trends through reductions to inventory cost by recording a provision included in Cost of goods sold.

Management records the best estimate of net realizable value for obsolete and discontinued inventories based on historical experience and current trends through reductions to inventory cost by recording a provision included in Cost of goods sold.

If management estimates that the reasonable market value is below cost or determines that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value is provided for in the reserve for obsolescence.

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Goodwill and Intangible Assets

In accordance with the Goodwill and Other Intangibles Topic of the ASC, management performs impairment tests of goodwill and indefinite-lived intangible assets on an annual basis, as well as whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred.

An optional qualitative assessment allows companies to skip the annual quantitative test if it is not more likely than not that impairment has occurred based on monitoring key Company financial performance metrics and macroeconomic conditions.

An optional qualitative assessment allows companies to forego the annual quantitative test if it is not more likely than not that impairment has occurred based on monitoring key Company financial performance metrics and macroeconomic conditions.

The qualitative assessment is performed when deemed appropriate.

In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests goodwill for impairment at the reporting unit level.

A reporting unit is an operating segment per the Segment Reporting Topic of the ASC or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of an operating segment having similar economic characteristics.

Per the Segment Reporting Topic of the ASC, a reporting unit is an operating segment or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of an operating segment having similar economic characteristics.

At the time of goodwill impairment testing (if performing a quantitative assessment), management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit.

If the calculated fair value is less than the current carrying value, then impairment of the reporting unit exists.

If the calculated fair value is less than the current carrying value, the difference represents the amount of impairment attributable to the reporting unit.

The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing.

The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates.

The key assumptions used in the discounted cash flow valuation model for impairment testing include a discount rate, growth rates, cash flow projections and a terminal value rate.

Discount rates are set by using the Weighted Average Cost of Capital (WACC) methodology.

The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rates to be used.

The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used.

The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business.

Operational management, considering industry and Company-specific historical and projected data, develops growth rates, sales projections and cash flow projections for each reporting unit.

Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.

As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate of all reporting units’ fair value is reconciled to the total market capitalization of the Company.

The Company had seven components, some of which are aggregated due to similar economic characteristics, to form three reporting units (also the operating segments) with goodwill as of October 1, 2023, the date of the annual impairment test.

The annual impairment review performed as of October 1, 2022 did not result in any of the reporting units having impairment or deemed at risk for impairment.

Company performed the optional qualitative impairment test as of October 1, 2023, and determined that there was no indication of impairment on a more likely than not basis in the Company’s three reporting units.

In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuations at acquisition.

Management utilizes the royalty savings method and valuation model to determine the estimated fair value for each indefinite-lived intangible asset or trademark.

Management utilizes the royalty savings method to determine the estimated fair value for each indefinite-lived intangible asset or trademark.

In this method, management estimates the royalty savings arising from the ownership of the intangible asset.

The key assumptions used in estimating the royalty savings for impairment testing include discount rates, royalty rates, growth rates, sales projections, terminal value rates and, to a lesser extent, tax rates.

Discount rates used are similar to the rates developed by the WACC methodology considering any differences in Company-specific risk factors between reporting units and trademarks.

Royalty rates are established by management and valuation experts and periodically substantiated by valuation experts.

The key assumptions used in estimating the royalty savings for impairment testing include a discount rate, a royalty rate, growth rates, sales projections, a terminal value rate and, to a lesser extent, a tax rate.

The discount rate used is similar to the rate developed by the WACC methodology considering any differences in Company-specific risk factors between reporting units and trademarks.

The royalty rate is established by management and valuation experts and periodically substantiated by valuation experts.

Operational management, considering industry and Company-specific historical and projected data, develops growth rates and sales projections for each significant trademark.

Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.

The royalty savings valuation methodology and calculations used in 2023 impairment testing are consistent with prior years.

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.

The annual impairment review performed as of October 1, 2023 resulted in trademark impairment of $23.9 million in the Consumer Brands Group primarily related to a trademark in Europe.

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.

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 from the perspective of a market participant.

Actual results could differ from these assumptions.

Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions.

See Note 7 to the Consolidated Financial Statements in Item 8 for a discussion of goodwill and intangible assets and the impairment tests performed in accordance with the Goodwill and Other Intangibles Topic of the ASC.

Valuation of Long-Lived Assets

In accordance with the Property, Plant and Equipment Topic of the ASC, if events or changes in circumstances indicated that the carrying value of long-lived assets, including Operating lease right-of-use assets, may not be recoverable or the useful life had changed, impairment tests were performed or the useful life was adjusted.

Undiscounted cash flows were used to calculate the recoverable value of long-lived assets to determine if such assets were not recoverable.

If the carrying value of the assets was deemed to not be recoverable, the impairment to be recognized is the amount by which the carrying value of the assets exceeds the estimated fair value of the assets as determined in accordance with the Fair Value Topic of the ASC.

If the usefulness of an asset was determined to be impaired, then management estimated a new useful life based on the period of time for projected uses of the asset.

Fair value approaches and changes in useful life required management to make certain assumptions based upon information available at the time the valuation or determination was performed.

In accordance with the Property, Plant and Equipment Topic of the ASC, if events or changes in circumstances indicate that the carrying value of long-lived assets, including Operating lease right-of-use assets, may not be recoverable or the useful life has changed, impairment tests are performed or the useful life is adjusted.

Undiscounted cash flows are used to calculate the recoverable value of long-lived assets to determine if such assets are recoverable.

If the carrying value of the assets is deemed to not be recoverable, the impairment to be recognized is the amount by which the carrying value of the assets exceeds the estimated fair value of the assets as determined in accordance with the Fair Value Topic of the ASC.

If the usefulness of an asset is determined to be impaired, an updated useful life is assessed based on the period of time for projected use of the asset.

Fair value approaches and changes in useful life are based on certain assumptions and information available at the time the valuation or determination is performed.

Actual results could differ from these assumptions.

Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value or useful life considering the current economic conditions.

All tested long-lived assets or groups of long-lived assets had undiscounted cash flows that were substantially in excess of their carrying value.

As of October 1, 2023, the Company performed an analysis and determined that there were no events or changes in circumstances to suggest the carrying value of each long-lived asset group is not recoverable and therefore, no further impairment tests were performed.

See Note 6 to the Consolidated Financial Statements in Item 8 for a discussion of the reductions in carrying value or useful life of long-lived assets in accordance with the Property, Plant and Equipment Topic of the ASC.

See Note 1 to the Consolidated Financial Statements in Item 8 for the Property, Plant and Equipment accounting policy.

Defined Benefit Pension and Other Postretirement Benefit Plans

To determine the Company’s ultimate obligation under its defined benefit pension plans and other postretirement benefit plans, management must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works.

To determine the obligations of such benefit plans, management uses actuaries to calculate such amounts using key assumptions such as discount rates, inflation, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs.

Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is being considered.

To determine the Company’s ultimate obligation under its defined benefit pension plans and other postretirement benefit plans, management estimates the future cost of benefits and attributes that cost to the time period during which each covered employee works.

To determine the obligations of the benefit plans, management uses actuaries to calculate such amounts using key assumptions which include discount rates, inflation rates, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs.

Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is considered.

An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations or financial condition.

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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 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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If the reasonably estimable costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided.

The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued.

The Company routinely assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued.

Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved.

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In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims.

Management believes that the Company has properly accrued for all known liabilities that existed and those where a loss was deemed probable for which a fair value was available or an amount could be reasonably estimated in accordance with US GAAP.

Management accrues for all known liabilities that existed and those where a loss was deemed probable for which a fair value was available or an amount could be reasonably estimated in accordance with US GAAP.

However, because litigation is inherently subject to many uncertainties and the ultimate result of any present or future litigation is unpredictable, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued.

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

The Company estimated income taxes for each jurisdiction that it operated in.

This involved estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits.

The Company estimates income taxes for each jurisdiction in which it conducts operations.

This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits.

To the extent these estimates change, adjustments to deferred and accrued income taxes will be made in the period in which the changes occur.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

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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