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Item 2. Management’s Discussion and Analysis

2024-07-23 compared with 2024-04-30 · 173 added, 122 removed, 170 unchanged (63% of the section changed)

4 unchanged sentences

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 function in the same way it is internally organized for assessing performance and making decisions regarding the allocation of resources.

See Note 18 of Item 1 for additional information on the Company's Reportable Segments.

• Consolidated Net sales decreased 1.4% in the quarter to $5.367 billion

◦ Net sales from stores in the Paint Stores Group open more than twelve calendar months were approximately flat in the quarter

• Diluted net income per share increased 7.1% to $1.97 per share in the quarter compared to $1.84 per share in the first quarter 2023

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the quarter increased 2.0% to $896.2 million in the quarter, or 16.7% of Net sales

We remain highly confident in our customer focused strategy and are well-positioned as the painting season begins.

While uncertainties persist in the macroeconomic environment, we are encouraged by pro architectural demand and sentiment in the second quarter.

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 and help our customers be successful.

Demand in the Performance Coatings Group is expected to remain variable by business and region.

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

See Note 18 in Item 1 for additional information on the Company's Reportable Segments.

• Consolidated Net sales increased 0.5% in the quarter to $6.272 billion

◦ Net sales from stores in the Paint Stores Group open more than twelve calendar months increased 2.4% in the quarter

• Diluted net income per share increased 14.0% to $3.50 per share in the quarter compared to $3.07 per share in the second quarter 2023

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the quarter increased 12.1% to $1.438 billion in the quarter, or 22.9% of Net sales

Entering the second half of 2024, we face continued macroeconomic uncertainties.

While we are not immune to market conditions, we are well-positioned in each of our targeted markets and remain highly confident in our customer focused strategy.

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

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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 $179.9 million in cash and $2.445 billion of unused capacity under our credit facilities at March 31, 2024.

We have a strong liquidity position, with $200.0 million in cash and $2.343 billion of unused capacity under our credit facilities at June 30, 2024.

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

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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, 2024 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, 2024 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, 2024 and 2023.

Three Months Ended March 31,

2024 2023 $ Change % Change Currency Impact Acquisitions

Divestitures Impact

The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and six months ended June 30, 2024 and 2023.

Three Months Ended June 30, 2024

Three Months Ended June 30,

2024 2023 $ Change % Change Currency Impact Acquisition

Divestiture Impact

Paint Stores Group $ 3,619.9 $ 3,498.7 $ 121.2 3.5 % (0.1) % — %

3 unchanged sentences

Total $ 6,271.5 $ 6,240.6 $ 30.9 0.5 % (0.6) % 0.2 %

Three Months Ended March 31, 2024

Consolidated Net sales decreased by 1.4% in the first quarter of 2024 primarily due to lower sales volumes in the Consumer Brands Group (inclusive of the impact from the divestiture of the China architectural business and a non-core domestic aerosol business in the prior year) and the Performance Coatings Group in North America.

Net sales in the Paint Stores Group was essentially flat in the quarter.

Net sales of all consolidated foreign subsidiaries increased to $1.103 billion in the first quarter compared to $1.087 billion in the same period last year.

The increase in Net sales for all consolidated foreign subsidiaries was due to growth in the Europe region, partially offset by lower Net sales in the Asia region from the divestiture of the China architectural business.

Net sales in the Latin America region was essentially flat in the quarter.

Net sales of all operations other than consolidated foreign subsidiaries decreased to $4.264 billion in the first quarter compared to $4.355 billion in the same period last year.

Net sales in the Paint Stores Group increased by 0.5% in the first quarter primarily due to a modest impact from the February 2024 price increase with sales volume approximately flat year-over-year.

Net sales growth in the residential repaint, commercial and protective & marine end markets was partially offset by lower Net sales in the new residential and property maintenance end markets .

Net sales from stores open for more than twelve calendar months were approximately flat in the quarter.

Net sales of non-paint products decreased 1.3% compared to last year's first quarter.

Consolidated Net sales increased by 0.5% in the second quarter of 2024 primarily due to higher sales volumes in the Paint Stores and Performance Coatings Groups, partially offset by lower sales volumes in the Consumer Brands Group, inclusive of the impact from the divestiture of the China architectural business in the prior year.

Net sales of all consolidated foreign subsidiaries decreased to $1.143 billion in the second quarter of 2024 compared to $1.150 billion in the same period last year.

The decrease in Net sales for all consolidated foreign subsidiaries was due to lower Net sales in the Latin America and Asia regions, partially offset by higher Net sales in the Europe region.

Net sales of all operations other than consolidated foreign subsidiaries increased to $5.129 billion in the second quarter of 2024 compared to $5.091 billion in the same period last year.

Net sales in the Paint Stores Group increased by 3.5% in the second quarter of 2024 primarily due to low-single digit sales volume growth and continued realization of higher selling prices implemented earlier in the year.

Net sales grew in all end markets, lead by residential repaint, new residential, commercial and protective and marine, with the exception of property maintenance which declined modestly year-over-year.

Net sales from stores open for more than twelve calendar months increased by 2.4% in the second quarter of 2024 compared to last year’s comparable period.

Net sales of non-paint products increased 1.4% in the second quarter of 2024 compared to last year's second quarter.

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

Net sales in the Consumer Brands Group decreased by 7.1% in the first quarter primarily due to a mid-single digit percentage sales volume decline, the impact from the divestitures in the prior year, which reduced sales by approximately 2.6% in the quarter and unfavorable currency translation.

Sales volume decreased in North America, but was partially offset by sales volume growth in Europe and selling price increases in Latin America and Europe, which impacted Net sales by a low-single digit percentage.

Net sales in the Performance Coatings Group decreased by 1.6% in the first quarter primarily due to a low-single digit percentage sales volume decline.

Lower sales volumes in North America and Latin America were partially offset by higher sales volumes in Europe, inclusive of acquisition impact which increased sales by approximately 1.3% in the quarter, and Asia.

Selling prices also unfavorably impacted Net sales by a low-single digit percentage, which was partially offset by favorable currency translation.

Net sales in the Consumer Brands Group decreased by 10.7% in the second quarter of 2024 primarily due to a mid-single digit percentage sales volume decline as a result of soft DIY demand in North America, the impact from the divestitures in the prior year and unfavorable currency translation.

These decreases were partially offset by selling price increases in Latin America, which impacted Net sales by a low-single digit percentage.

Net sales in the Performance Coatings Group increased by 0.6% in the second quarter of 2024 primarily due to incremental sales from an acquisition and low-single digit percentage sales volume growth, partially offset by selling price decreases, which impacted Net sales by a low-single digit percentage and unfavorable currency translation.

Sales volume was varied by region and business unit.

Performance was led by Industrial Wood, Coil and Automotive Refinish in North America, partially offset by a decrease in General Industrial across all regions.

Six Months Ended June 30, 2024

Six Months Ended June 30,

2024 2023 $ Change % Change Currency Impact Acquisition

Divestiture Impact

Paint Stores Group $ 6,492.9 $ 6,357.8 $ 135.1 2.1 % — % — %

Consumer Brands Group 1,655.3 1,818.5 (163.2) (9.0) % (1.6) % (2.4) %

Performance Coatings Group 3,488.3 3,504.7 (16.4) (0.5) % (0.3) % 1.5 %

Administrative 2.3 2.0 0.3 15.0 % — % — %

Total $ 11,638.8 $ 11,683.0 $ (44.2) (0.4) % (0.4) % 0.1 %

Consolidated Net sales decreased by 0.4% in the first six months of 2024 primarily due to higher sales volume in the Paint Stores and Performance Coatings Groups, partially offset by lower sales volumes in the Consumer Brands Group, inclusive of the impact from the divestiture of the China architectural business and a non-core domestic aerosol business in the prior year.

Net sales of all consolidated foreign subsidiaries increased to $2.246 billion in the first six months of 2024 compared to $2.237 billion in the same period last year.

The increase in Net sales for all consolidated foreign subsidiaries was due to growth in the Europe region, partially offset by lower Net sales in the Latin America and Asia regions.

Net sales of all operations other than consolidated foreign subsidiaries decreased 0.6% to $9.393 billion in the first six months of 2024 compared to $9.446 billion in the same period last year.

Net sales in the Paint Stores Group increased by 2.1% in the first six months of 2024 primarily due to low single digit sales volume growth and realization of higher selling prices that were implemented earlier in the year.

Net sales from stores open for more than twelve calendar months increased 1.3% in the first six months of 2024 compared to last year’s comparable period.

Net sales of non-paint products increased 0.1% in the first six months of 2024 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 decreased by 9.0% in the first six months of 2024 primarily due to a mid-single digit percentage sales volume decline, the impact from divestitures in the prior year and unfavorable currency translation.

Net sales in the Performance Coatings Group decreased by 0.5% in the first six months of 2024 primarily due to selling price decreases, which impacted Net sales by a low-single digit percentage and unfavorable currency translation, partially offset by low single-digit sales volume growth, inclusive of an acquisition in the prior year.

Performance was led by Industrial Wood and Coil, but was offset by a decrease in General Industrial and Packaging.

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,

2024 2023 2024 2023

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

Net sales $ 6,271.5 100.0 % $ 6,240.6 100.0 % $ 11,638.8 100.0 % $ 11,683.0 100.0 %

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SG&A 1,845.7 29.4 % 1,760.0 28.2 % 3,645.5 31.3 % 3,453.0 29.6 %

Other general expense - net 2.0 — % 10.5 0.2 %

Other general income - net (33.6) (0.5) % (32.5) (0.5) % (31.6) (0.3) % (22.0) (0.2) %

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

Interest expense 110.8 1.8 % 111.7 1.8 % 213.8 1.8 % 221.0 1.9 %

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Income before income taxes $ 1,173.4 18.7 % $ 1,012.1 16.2 % $ 1,813.4 15.6 % $ 1,626.9 13.9 %

Three Months Ended March 31, 2024

Consolidated Cost of goods sold decreased $185.2 million, or 6.1%, in the first quarter of 2024 compared to the same period in 2023 due primarily to moderating raw material costs and lower sales volumes in the Consumer Brands Group (inclusive of the impact from the divestitures in the prior year) and the Performance Coatings Group.

Currency translation rate changes increased Cost of goods sold by an insignificant amount in the first quarter of 2024.

Consolidated gross profit increased $110.1 million in the first quarter of 2024 compared to the same period in 2023.

Consolidated gross profit as a percent of consolidated Net sales increased in the first quarter to 47.2% compared to 44.5% during the same period in 2023.

Consolidated gross profit dollars increased primarily due to moderating raw material costs, partially offset by lower sales volumes in the Consumer Brands Group (inclusive of the impact from the divestitures in the prior year) and the Performance Coatings Group.

The Paint Stores Group’s gross profit in the first quarter was higher than the same period last year by $28.9 million due primarily to moderating raw material costs and a modest impact from the recently announced price increase.

The Paint Stores Group’s gross profit as a percent of Net sales increased in the first quarter compared to the same period in 2023 for these same reasons.

The Consumer Brands Group’s gross profit increased by $71.5 million in the first quarter compared to the same period last year due primarily to higher fixed cost absorption in the manufacturing and distribution operations within the segment, moderating raw material costs, and selling price increases, partially offset by a sales volume decrease.

The Consumer Brands Group’s gross profit as a percent of Net sales increased in the first quarter compared to the same period in 2023 for these same reasons.

The Performance Coatings Group’s gross profit increased $5.8 million in the first quarter compared to the same period last year due primarily to moderating raw material costs, partially offset by lower sales volume and selling prices.

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 for these same reasons.

Consolidated selling, general and administrative expenses (SG&A) increased $106.8 million in the first quarter versus the same period last year due primarily to higher employee-related costs and investments in long-term growth strategies including expenses to support net new store openings.

As a percent of Net sales, consolidated SG&A increased 240 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 $55.4 million in the first quarter compared to the same period last year due primarily to higher employee-related costs and investments in long-term growth initiatives, including increased spending from new store openings.

The Consumer Brands Group’s SG&A increased $7.9 million in the first quarter compared to the same period last year due primarily to higher employee-related costs.

The Performance Coatings Group’s SG&A decreased $0.2 million in the first quarter compared to the same period last year.

The Administrative function’s SG&A increased $43.7 million in the first quarter compared to the same period last year due primarily to higher employee-related costs and increased expenses related to digital technologies and systems.

Other general expense - net decreased $8.5 million in the first quarter compared to the same period last year primarily due to a decrease in provisions for environmental matters in the Administrative function.

See Note 15 of Item 1 for additional information.

Interest expense decreased $6.3 million in the first quarter compared to the same period last year due primarily to a decrease in outstanding debt.

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

Other income - net increased $4.5 million in the first quarter compared to the same period last year due primarily to higher returns on investments held in the Administrative function.

See Note 15 of Item 1 for additional information.

Three Months Ended June 30, 2024

Consolidated Cost of goods sold decreased $160.2 million, or 4.8%, in the second quarter of 2024 compared to the same period in 2023 due primarily to moderating raw material costs, partially offset by a low single-digit increase in sales volume.

Currency translation rate changes decreased Cost of goods sold by approximately 0.7% in the second quarter of 2024.

Consolidated gross profit increased $191.1 million in the second quarter of 2024 compared to the same period in 2023.

Consolidated gross profit as a percent of consolidated Net sales increased in the second quarter of 2024 to 48.8% compared to 46.0% during the same period in 2023.

Consolidated gross profit dollars increased primarily due to moderating raw material costs and higher Net sales.

The Paint Stores Group’s gross profit in the second quarter of 2024 was higher than the same period last year by $93.3 million due primarily to higher Net sales and moderating raw material costs.

The Paint Stores Group’s gross profit as a percent of Net sales increased in the second quarter of 2024 compared to the same period in 2023 for these same reasons.

The Consumer Brands Group’s gross profit increased by $79.6 million in the second quarter of 2024 compared to the same period last year due primarily to higher fixed cost absorption in the manufacturing and distribution operations within the segment and moderating raw material costs, partially offset by lower Net sales.

The Consumer Brands Group’s gross profit as a percent of Net sales increased in the second quarter of 2024 compared to the same period in 2023 for these same reasons.

The Performance Coatings Group’s gross profit increased $19.9 million in the second quarter of 2024 compared to the same period last year due primarily to moderating raw material costs and higher Net sales.

The Performance Coatings Group’s gross profit as a percent of Net sales increased in the second quarter of 2024 compared to the same period last year for these same reasons.

Consolidated Selling, general and administrative expenses (SG&A) increased $85.7 million in the second quarter of 2024 versus the same period last year due primarily to investments in long-term growth strategies, including expenses to support net new store openings and digital technologies, and higher employee-related costs.

As a percent of Net sales, consolidated SG&A increased 120 basis points in the second quarter of 2024 compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $36.5 million in the second quarter of 2024 compared to the same period last year due primarily to investments in long-term growth initiatives, including increased spending from new store openings, and higher employee-related costs.

The Consumer Brands Group’s SG&A decreased $1.5 million in the second quarter of 2024 compared to the same period last year due primarily to the divestiture of the China architectural business, partially offset by higher employee-related costs.

The Performance Coatings Group’s SG&A increased $16.4 million in the second quarter of 2024 compared to the same period last year due to higher employee-related costs.

The Administrative function’s SG&A increased $34.3 million in the second quarter of 2024 compared to the same period last year due primarily to higher employee-related costs and increased expenses related to digital technologies and systems.

Other general income - net increased $1.1 million in the second quarter of 2024 compared to the same period last year primarily due to a decrease in provisions for environmental matters, net in the Administrative function, an increase in the gain on sale or disposition of assets and a decrease in miscellaneous expenses.

This activity was partially offset by the gain recognized in the prior year related to the divestiture of a business.

See Note 15 in Item 1 for additional information.

For information on impairment as a result of the China architectural business classification change to held for sale as of June 30, 2023, see Notes 3 and 5 in Item 1 and Note 3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Interest expense decreased $0.9 million in the second quarter of 2024 compared to the same period last year due primarily to a decrease in outstanding debt.

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

Other income - net increased $26.2 million in the second quarter of 2024 compared to the same period last year due primarily to foreign currency transaction related gains in the current year compared to losses in the prior year, partially offset by a decrease in investment gains.

See Note 15 in Item 1 for additional information.

Six Months Ended June 30, 2024

Consolidated Cost of goods sold decreased $345.4 million, or 5.4%, in the first six months of 2024 compared to the same period in 2023 due primarily to moderating raw material costs, partially offset by a low single-digit increase in sales volume.

Currency translation rate changes decreased Cost of goods sold by approximately 0.4% in the first six months of 2024.

Consolidated gross profit increased $301.2 million in the first six months of 2024 compared to the same period in 2023.

Consolidated gross profit as a percent of consolidated Net sales increased in the first six months of 2024 to 48.1% compared to 45.3% during the same period in 2023.

Consolidated gross profit dollars increased primarily due to moderating raw material costs, partially offset by lower Net sales.

The Paint Stores Group’s gross profit in the first six months of 2024 was higher than the same period last year by $122.2 million due primarily to higher Net sales and moderating raw material costs.

The Paint Stores Group’s gross profit as a percent of Net sales increased in the first six months of 2024 compared to the same period in 2023 for these same reasons.

The Consumer Brands Group’s gross profit increased by $151.1 million in the first six months of 2024 compared to the same period last year due primarily to higher fixed cost absorption in the manufacturing and distribution operations within the segment and moderating raw material costs, partially offset by lower Net sales.

The Consumer Brands Group’s gross profit as a percent of Net sales increased in the first six months of 2024 compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit increased $25.7 million in the first six months of 2024 compared to the same period last year due primarily to moderating raw material costs, partially offset by lower Net sales.

The Performance Coatings Group’s gross profit as a percent of Net sales increased in the first six months of 2024 compared to the same period last year for these same reasons.

Consolidated SG&A increased $192.5 million in the first six months of 2024 versus the same period last year due primarily to investments in long-term growth strategies, including expenses to support net new store openings and digital technologies, and higher employee-related costs.

As a percent of Net sales, consolidated SG&A increased 170 basis points in the first six months of 2024 compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $91.9 million in the first six months of 2024 compared to the same period last year due primarily to investments in long-term growth initiatives, including increased spending from new store openings, and higher employee-related costs.

The Consumer Brands Group’s SG&A increased $6.4 million in the first six months of 2024 compared to the same period last year due to higher employee-related costs, partially offset by other effective cost control measures.

The Performance Coatings Group’s SG&A increased $16.2 million in the first six months of 2024 compared to the same period last year due primarily to higher employee-related costs and investments in long-term initiatives.

The Administrative function’s SG&A increased $78.0 million in the first six months of 2024 compared to the same period last year due primarily to higher employee-related costs and increased expenses related to digital technologies and systems.

Other general income - net increased $9.6 million in the first six months of 2024 compared to the same period last year primarily due to a decrease in provisions for environmental matters, net in the Administrative function, an increase in the gain on sale or disposition of assets and a decrease in miscellaneous expenses.

This activity was partially offset by the gain recognized in the prior year related to the divestiture of a business.

See Note 15 in Item 1 for additional information.

Interest expense decreased $7.2 million in the first six months of 2024 compared to the same period last year due primarily to a decrease in outstanding debt.

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

Other income - net increased $30.7 million in the first six months of 2024 compared to the same period last year due primarily to lower foreign currency transaction related losses in the current year compared to the prior year, partially offset by a decrease in investment gains.

See Note 15 in 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

2024 2023 % Change

June 30, Six Months Ended

2024 2023 % Change 2024 2023 % Change

Income Before Income Taxes:

9 unchanged sentences

Performance Coatings Group 16.7 % 15.2 % 15.5 % 14.0 %

Administrative nm nm

Administrative nm nm nm nm

Total 18.7 % 16.2 % 15.6 % 13.9 %

1 unchanged sentence

Income Tax Expense

The effective tax rate was 21.1% for the first quarter of 2024 compared to 22.3% for the first quarter of 2023.

The decrease in the effective tax rate for the first quarter was due primarily to a more favorable impact of tax benefits related to employee share-based payments in the first quarter of 2024 compared to the same period last year.

This benefit was partially offset by unfavorable audit settlements in the first quarter of 2024.

The effective tax rate was 24.2% for the second quarter of 2024 compared to 21.6% for the second quarter of 2023, and 23.1% for the first six months of 2024 compared to 21.9% for the first six months of 2023.

The increase in the effective tax rate for the second quarter was due primarily to a less favorable impact of tax benefits related to employee share-based payments and a favorable adjustment in the second quarter of 2023 related to the divestiture of the China architectural business.

For the first six months, the increase in the effective tax rate was primarily related to the divestiture of the China architectural business in the second quarter of 2023, and partially offset by a more favorable impact of tax benefits related to employee share-based payments during the first six months.

The other significant components of the Company’s effective tax rate were consistent in both comparable periods.

See Note 16 of Item 1 for additional information.

See Note 16 in Item 1 for additional information.

Net Income Per Share

Diluted net income per share in the first quarter of 2024 increased 7.1% to $1.97 per share compared to $1.84 per share in the first quarter of 2023.

Diluted net income per share included a $0.20 per share charge for acquisition-related amortization expense in both the first quarter of 2024 and 2023.

Currency translation rate changes did not have a meaningful impact on diluted net income per share in the first quarter of 2024.

Diluted net income per share in the second quarter of 2024 increased 14.0% to $3.50 per share compared to $3.07 per share in the second quarter of 2023.

Diluted net income per share included a $0.20 per share charge for acquisition-related amortization expense in both the second quarter of 2024 and 2023.

In the second quarter of 2023, diluted net income per share also included a net charge of $0.02 per share related to activities associated with the Company’s restructuring plan.

Currency translation rate changes decreased diluted net income per share by $0.02 in the second quarter of 2024.

Diluted net income per share for the first six months of 2024 increased 11.6% to $5.47 per share compared to $4.90 per share in the first six months of 2023.

Diluted net income per share included a $0.39 and $0.42 per share charge for acquisition-related amortization expense for the first six months of 2024 and 2023, respectively.

In the first six months of 2023, diluted net income per share also included a net charge of $0.02 per share related to activities associated with the Company’s restructuring plan.

Currency translation rate changes decreased diluted net income per share by $0.02 in the first six months of 2024.

For information on the Company’s restructuring plan, see Note 4 in Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

The Company’s financial condition and liquidity remained strong at March 31, 2024.

The Company used $58.9 million in Net operating cash during the first quarter of 2024 primarily as a result of seasonal increases in working capital requirements, partially offset by Net income.

This Net operating cash usage was funded through an increase in Short-term borrowings.

The Company returned cash of $728.0 million to its shareholders in the form of dividends and share repurchases during the first quarter of 2024.

The Company’s EBITDA increased 2.0% to $896.2 million.

The Company’s financial condition and liquidity remained strong at June 30, 2024.

The Company generated $1.144 billion in Net operating cash during the first six months of 2024.

The Company returned cash of $1.341 billion to its shareholders in the form of dividends and share repurchases during the first six months of 2024.

The Company’s EBITDA increased 8.0% to $2.334 billion.

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

At March 31, 2024, the Company had Cash and cash equivalents of $179.9 million and total debt outstanding of $10.735 billion.

At June 30, 2024, the Company had Cash and cash equivalents of $200.0 million and Total debt outstanding of $10.339 billion.

Total debt, net of Cash and cash equivalents, was $10.139 billion.

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Net Working Capital

Net working capital, defined as Total current assets less Total current liabilities, decreased $1.628 billion to a deficit of $1.641 billion at March 31, 2024 compared to a deficit of $13.2 million at March 31, 2023.

Net working capital, defined as Total current assets less Total current liabilities, decreased $1.428 billion to a deficit of $1.416 billion at June 30, 2024 compared to a surplus of $11.5 million at June 30, 2023.

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

Current asset balances decreased $450.4 million at March 31, 2024 compared to March 31, 2023 primarily due to a decrease in Inventories of $329.8 million driven by lower inventory levels and moderating raw material costs, a decrease of $100.1 million in Accounts receivable, net and a decrease of $49.0 million in Other current assets primarily due to a decrease in refundable income taxes and other tax receivables.

These decreases were partially offset by an increase in Cash and cash equivalents of $28.5 million.

Current liability balances increased $1.178 billion at March 31, 2024 compared to March 31, 2023 primarily due to an increase in Current portion of long-term debt of $1.349 billion, an increase in Other accruals of $132.8 million, an increase in Compensation and taxes withheld of $32.2 million and an increase in the Current portion of operating lease liabilities of $23.8 million, partially offset by a decrease in Short-term borrowings of $225.0 million, a decrease in Accrued taxes of $75.1 million and a decrease in Accounts payable of $59.7 million primarily due to the timing of payments.

At March 31, 2024, the Company’s current ratio was 0.78 compared to 0.83 and 1.00 at December 31, 2023 and March 31, 2023, respectively.

Current asset balances decreased $300.0 million at June 30, 2024 compared to June 30, 2023 primarily due to a decrease in Inventories of $149.9 million driven by lower inventory levels and moderating raw material costs, a decrease of $71.0 million in Other current assets, a decrease of $69.7 million in Accounts receivable, net and a decrease in Cash and cash equivalents of $9.4 million.

The decrease in Other current assets primarily relates to the assets classified as held for sale as of June 30, 2023 which were subsequently sold (see Note 3 in Item 1).

Current liability balances increased $1.128 billion at June 30, 2024 compared to June 30, 2023 primarily due to an increase in Short-term borrowings of $552.1 million, an increase in the Current portion of long-term debt of $350.2 million, an increase in Other accruals of $152.1 million, primarily related to environmental liabilities, liabilities from contracts with customers and miscellaneous other current liabilities, an increase in Accrued taxes of $39.1 million and an increase in the Current portion of operating lease liabilities of $21.7 million.

At June 30, 2024, the Company’s current ratio was 0.81 compared to 0.83 and 1.00 at December 31, 2023 and June 30, 2023, respectively.

Property, Plant and Equipment

Net property, plant and equipment increased $172.0 million in the first three months of 2024 and $646.8 million in the twelve months since March 31, 2023.

The increase in the first three months was primarily due to capital expenditures of $258.5 million, partially offset by depreciation expense of $71.1 million and currency translation and other adjustments of $15.4 million.

Since March 31, 2023, the increase was primarily due to capital expenditures of $1.059 billion, partially offset by depreciation expense of $293.0 million, the sale or disposition of fixed assets of $87.5 million and currency translation and other adjustments of $31.7 million.

Capital expenditures primarily represented expenditures in the Paint Stores Group associated with the opening of new paint stores, 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 function incurred capital expenditures primarily related to construction activities associated with the new headquarters and research and development (R&D) center.

Net property, plant and equipment increased $299.8 million in the first six months of 2024 and $694.1 million in the twelve months since June 30, 2023.

The increase in the first six months was primarily due to capital expenditures of $498.6 million, partially offset by depreciation expense of $142.9 million and currency translation and other adjustments of $55.9 million.

Since June 30, 2023, the increase was primarily due to capital expenditures of $1.093 billion, partially offset by depreciation expense of $289.1 million, the sale or disposition of fixed assets of $54.9 million and currency translation and other adjustments of $55.1 million.

Capital expenditures primarily represented expenditures related to construction activities associated with the new headquarters and research and development (R&D) center in the Administrative function.

Construction of the new headquarters and R&D center is expected to be complete in 2024 at the earliest.

In addition, capital expenditures were related to manufacturing capacity expansion, operational efficiencies and maintenance projects in the Consumer Brands and Performance Coatings Groups and the opening of new paint stores and renovation and improvements in existing stores in the Paint Stores Group.

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 R&D facilities and new store openings.

Core capital expenditures are targeted to be approximately 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 R&D facilities and new store openings.

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

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

As part of the terms of the transaction, the Company is contractually obligated for completing the construction of

the building and related improvements at the new headquarters.

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

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

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

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

The Company expects to receive total proceeds approximating $800 million to $850 million on an

incremental basis until 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.

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

During the first quarter of 2024 and 2023, the Company received $77.0 million and $66.5 million, respectively, pursuant to the transaction.

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

The corresponding financing obligation for the new headquarters on the Consolidated Balance Sheets was $594.0 million and $274.2 million at March 31, 2024 and 2023, respectively.

The short-term portion of the liability recorded in Other accruals was $43.3 million and $24.8 million at March 31, 2024 and 2023, respectively.

Interest capitalized within the long-term portion of the liability was $9.4 million and $4.0 million for the three months ended March 31, 2024 and 2023, respectively.

See Note 8 in Item 1 and Note 11 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning real estate financing.

See Note 8 in Item 1 and Notes 8 and 11 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning real estate financing.

Goodwill and Intangible Assets

Goodwill decreased $4.6 million from December 31, 2023 and increased $176.0 million from March 31, 2023.

The decrease during the first three months of 2024 was primarily due to foreign currency translation fluctuations and other adjustments of $31.8 million, partially offset by purchase accounting allocations of $27.2 million.

The increase over the twelve month period from March 31, 2023 was primarily due to purchase accounting allocations of $185.1 million, partially offset by foreign currency translation fluctuations and other adjustments.

Intangible assets decreased $103.0 million from December 31, 2023 and $326.0 million from March 31, 2023.

The decrease during the first three months of 2024 was primarily due to amortization of $82.1 million and foreign currency translation fluctuations and other adjustments of $20.9 million.

The decrease over the twelve month period from March 31, 2023 was primarily due to amortization of $323.4 million, disposition of assets of $83.4 million, trademark impairment of $30.9 million and foreign currency translation fluctuations and other adjustments, partially offset by purchase accounting allocations of $113.9 million.

See Note 5 in Item 1 and Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning the Company's Goodwill and Intangible assets.

Other assets increased $88.3 million from December 31, 2023 and $227.1 million from March 31, 2023.

The increase in the first quarter was primarily due to an increase in other assets related to contracts with customers and Non-Traded Investments.

The increase from March 31, 2023 was primarily due to an increase in Non-Traded Investments and other assets related to contracts with customers and deposits and other receivables.

Goodwill decreased $19.1 million from December 31, 2023 and increased $160.4 million from June 30, 2023.

The decrease during the first six months of 2024 was primarily due to foreign currency translation fluctuations and other adjustments of $46.3 million, partially offset by purchase accounting allocations of $27.2 million.

The increase over the twelve month period from June 30, 2023 was primarily due to purchase accounting allocations of $181.4 million, partially offset by foreign currency translation fluctuations and other adjustments of $21.0 million.

Intangible assets decreased $187.7 million from December 31, 2023 and $241.6 million from June 30, 2023.

The decrease during the first six months of 2024 was primarily due to amortization of $163.6 million and foreign currency translation fluctuations and other adjustments of $39.0 million, partially offset by capitalized software of $14.9 million.

The decrease over the twelve month period from June 30, 2023 was primarily due to amortization of $321.9 million, trademark impairment of $24.0 million and foreign currency translation fluctuations and other adjustments of $21.2 million, partially offset by purchase accounting allocations of $110.6 million and capitalized software of $14.9 million.

See Note 5 in Item 1 for more information concerning the Company's Goodwill and Intangible assets and Note 3 in Item 1 for information on the impairment test performed as a result of the China architectural business classification change to held for sale as of June 30, 2023.

In addition, see Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning the Company's Goodwill and Intangible assets.

Other assets increased $145.5 million from December 31, 2023 and $233.4 million from June 30, 2023.

The increase in the first six months of 2024 and from June 30, 2023 was primarily due to an increase in Non-Traded Investments and other assets related to contracts with customers and deposits and other receivables.

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,

2024 2023 2023

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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, 2023.

The Company had unused capacity under its various credit agreements of $2.445 billion at March 31, 2024.

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

The Company had unused capacity under its various credit agreements of $2.343 billion at June 30, 2024.

See Note 6 in Item 1 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, 2023.

The changes from March 31, 2023 are primarily due to changes in actuarial assumptions.

The changes from June 30, 2023 are primarily due to changes in actuarial assumptions.

See Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning the Company’s liabilities for defined benefit pension and other postretirement benefit plans.

Deferred Income Taxes

Deferred income taxes decreased $16.8 million from December 31, 2023 and $73.6 million from March 31, 2023 primarily due to amortization of acquisition-related intangible assets.

Deferred income taxes decreased $41.1 million from December 31, 2023 and $68.9 million from June 30, 2023 primarily due to amortization of acquisition-related intangible assets.

Environmental-Related Liabilities

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.

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

These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations.

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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 2024.

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.

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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 2024 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, 2023.

There have been no significant changes to the Company’s contractual obligations and commercial commitments in the first six months of 2024 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, 2023.

See Note 9 in Item 1 for information concerning litigation.

Shareholders’ Equity

March 31, December 31, March 31,

June 30, December 31, June 30,

2024 2023 2023

Total shareholders’ equity $ 3,751.8 $ 3,715.8 $ 3,631.1

Shareholders’ equity decreased $212.1 million during the first three months of 2024 as a result of $559.5 million of treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $182.5 million, partially offset by Net income of $505.2 million and an increase in Other capital of $105.2 million primarily associated with stock-based compensation expense and stock option exercises.

Shareholders’ equity increased $336.9 million since March 31, 2023 as a result of Net income of $2.417 billion and an increase in Other capital of $300.8 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $1.692 billion of treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $649.7 million.

During the first three months of 2024, the Company purchased 1.7 million shares of its common stock for treasury purposes through open market purchases.

Shareholders’ equity increased $36.0 million during the first six months of 2024 as a result of Net income of $1.395 billion and an increase in Other capital of $148.4 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $994.1 million of treasury stock activity primarily attributable to treasury stock repurchases, cash dividends paid on common stock of $361.1 million and a decrease in AOCI of $152.6 million primarily due to foreign currency translation adjustments.

Shareholders’ equity increased $120.7 million since June 30, 2023 as a result of Net income of $2.513 billion and an increase in Other capital of $297.4 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $1.893 billion of treasury stock activity primarily attributable to treasury stock repurchases, cash dividends paid on common stock of $672.0 million and a decrease in AOCI of $125.6 million primarily due to foreign currency translation adjustments.

During the first six months of 2024, the Company purchased 3.1 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, 2024 to purchase 37.9 million shares of its common stock.

The Company had remaining authorization at June 30, 2024 to purchase 36.5 million shares of its common stock.

In February 2024, the Company's Board of Directors increased the quarterly cash dividend from $0.605 per share to $0.715 per share.

If approved in all subsequent quarters, this quarterly dividend will 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 for the three months ended March 31, 2024 was a usage of $58.9 million compared to a source of $88.2 million for the same period in 2023.

Net operating cash for the six months ended June 30, 2024 was a source of $1.144 billion compared to a source of $1.295 billion for the same period in 2023.

The decrease in Net operating cash was primarily due to higher cash requirements for working capital, partially offset by higher Net income.

Net investing cash usage increased $87.9 million in the first three months of 2024 to a usage of $321.3 million compared to a usage of $233.4 million for the same period in 2023 primarily due to an increase in cash used for capital expenditures.

Net financing cash increased $191.5 million in the first three months of 2024 to a source of $289.6 million compared to a source of $98.1 million for the same period in 2023 primarily due to a net increase in Short-term borrowings and higher proceeds from stock options exercised, partially offset by an increase in treasury stock purchases.

In the twelve month period from April 1, 2023 through March 31, 2024, the Company generated net operating cash of $3.375 billion, used $1.127 billion in investing activities and used $2.233 billion in financing activities.

Net investing cash usage increased $164.2 million in the first six months of 2024 to a usage of $582.1 million compared to a usage of $417.9 million for the same period in 2023 primarily due to an increase in cash used for capital expenditures, reduced proceeds from the sale of assets and the proceeds from the divestiture of a business in the prior year.

Net financing cash usage decreased $241.8 million in the first six months of 2024 to a usage of $627.8 million compared to a usage of $869.6 million for the same period in 2023 primarily due to a net increase in Short-term borrowings, higher proceeds from stock options exercised and real estate financing transactions, partially offset by an increase in payments of long-term debt, treasury stock purchases and cash dividends.

In the twelve month period from July 1, 2023 through June 30, 2024, the Company generated net operating cash of $3.371 billion, used $1.204 billion in investing activities and used $2.183 billion in financing activities.

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

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

At March 31, 2024, the Company was in compliance with the covenant and expects to remain in compliance.

At June 30, 2024, the Company was in compliance with the covenant and expects to remain in compliance.

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

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Three Months Ended

June 30, Six Months Ended

2024 2023 2024 2023

Net income $ 889.9 $ 793.7 $ 1,395.1 $ 1,271.1

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Restructuring expense — 8.7 — 9.6

Impairment of assets related to China divestiture — 34.0 — 34.0

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

Adjusted EBITDA $ 1,437.5 $ 1,305.1 $ 2,333.7 $ 2,184.2

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis