What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-22 compared with 2024-07-23 · 148 added, 152 removed, 191 unchanged (61% 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 in Item 1 for additional information on the Company's Reportable Segments.

See Note 18 in Item 1 for further details on the Company’s Reportable Segments.

• Consolidated Net sales increased 0.7% in the quarter to $6.163 billion

◦ Net sales from stores in the Paint Stores Group open more than twelve calendar months increased 2.2% 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

• Diluted net income per share increased 7.8% to $3.18 per share in the quarter compared to $2.95 per share in the third quarter 2023

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the quarter increased 1.2% to $1.282 billion in the quarter, or 20.8% 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 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 drive share gains and above market performance.

We remain focused on navigating choppy macroeconomic conditions by purposefully executing our differentiated strategy to provide our customers with solutions that make them more productive and profitable.

We remain well-positioned in each of our targeted markets and continue to prioritize investments in new stores, sales and technical personnel, innovation, digital and other growth initiatives that will allow us to generate sustained and profitable above-market growth in an increasingly uncertain and competitive landscape.

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

1 unchanged sentence

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 $200.0 million in cash and $2.343 billion of unused capacity under our credit facilities at June 30, 2024.

We have a strong liquidity position, with $238.2 million in cash and $3.026 billion of unused capacity under our credit facilities at September 30, 2024.

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

1 unchanged sentence

The Company has historically experienced, and expects to continue to experience, variability in quarterly results.

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.

The results of operations for the three and nine months ended September 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 and six months ended June 30, 2024 and 2023.

Three Months Ended June 30, 2024

Three Months Ended June 30,

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

Three Months Ended September 30, 2024

Three Months Ended September 30,

2024 2023 $ Change % Change Currency Impact Acquisition

5 unchanged sentences

Total $ 6,162.5 $ 6,116.7 $ 45.8 0.7 % (0.8) % 0.3 %

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.

Consolidated Net sales increased by 0.7% in the third quarter of 2024 primarily due to higher sales in the Paint Stores Group and the impact from the acquisition of SIC Holding GmbH in 2023.

These increases were partially offset by lower sales in the Consumer Brands and Performance Coatings Groups as well as unfavorable foreign currency translation.

Net sales of all consolidated foreign subsidiaries increased to $1.124 billion in the third quarter of 2024 compared to $1.105 billion in the same period last year.

The increase in Net sales for all consolidated foreign subsidiaries was due to higher Net sales in the Europe and Asia regions.

Net sales of all operations other than consolidated foreign subsidiaries increased to $5.038 billion in the third quarter of 2024 compared to $5.012 billion in the same period last year.

Net sales in the Paint Stores Group increased by 3.2% in the third 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 increased in most professional customer end markets, led by protective and marine, residential repaint and new residential.

Net sales from stores open for more than twelve calendar months increased by 2.2% in the third quarter of 2024 compared to last year’s comparable period.

Net sales of non-paint products increased 1.0% in the third quarter of 2024 compared to last year’s comparable period.

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 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,

Net sales in the Consumer Brands Group decreased by 7.5% in the third quarter of 2024 primarily due to soft DIY demand in North America and a 3.6% impact from unfavorable foreign currency translation driven by Latin America.

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

Net sales in the Performance Coatings Group was effectively flat as sales volume growth, inclusive of the impact of the 2023 acquisition of SIC Holding GmbH, was fully offset by unfavorable foreign currency translation.

Performance was led by Packaging, which increased in all regions, Coil and Industrial Wood.

Nine Months Ended September 30, 2024

Nine Months Ended September 30,

2024 2023 $ Change % Change Currency Impact Acquisition

5 unchanged sentences

Total $ 17,801.3 $ 17,799.7 $ 1.6 — % (0.5) % 0.2 %

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.

Consolidated Net sales were essentially flat in the first nine months of 2024.

Sales volume growth in the Paint Stores and Performance Coatings Groups was offset by lower sales volume 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 period.

Net sales of all consolidated foreign subsidiaries increased to $3.370 billion in the first nine months of 2024 compared to $3.342 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.

Net sales of all operations other than consolidated foreign subsidiaries decreased 0.2% to $14.431 billion in the first nine months of 2024 compared to $14.458 billion in the same period last year.

Net sales in the Paint Stores Group increased by 2.5% in the first nine 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 1.6% in the first nine months of 2024 compared to last year’s comparable period.

Net sales of non-paint products increased 0.5% in the first nine months of 2024 compared to last year’s comparable period.

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.

Net sales in the Consumer Brands Group decreased by 8.5% in the first nine months of 2024 primarily due to a mid-single digit percentage sales volume decline primarily due to soft DIY demand in North America and the impact from the divestiture of the China architectural business and a non-core domestic aerosol business in the prior period.

In addition, Net sales were unfavorably impacted by foreign currency translation.

Net sales in the Performance Coatings Group decreased by 0.4% in the first nine months of 2024 primarily due to selling price decreases, which impacted Net sales by a low-single digit percentage and unfavorable foreign currency translation, partially offset by mid-single digit sales volume growth, inclusive of the acquisition of SIC Holding GmbH in 2023.

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

Income Before Income Taxes

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

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SG&A 1,893.7 30.7 % 1,756.5 28.7 % 5,539.2 31.1 % 5,209.5 29.3 %

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

Other general expense (income) - net 0.7 — % 61.9 1.0 % (30.9) (0.2) % 39.9 0.2 %

Impairment — — % — — % — — % 34.0 0.2 %

1 unchanged sentence

Interest income (2.6) — % (5.1) (0.1) % (9.6) (0.1) % (15.8) (0.1) %

Other income - net (32.0) (0.6) % (5.8) (0.1) % (39.7) (0.2) % (9.0) (0.1) %

Other expense (income) - net 9.5 0.2 % (8.0) (0.1) % (30.2) (0.2) % (17.0) (0.1) %

Income before income taxes $ 1,022.8 16.6 % $ 1,009.0 16.5 % $ 2,836.2 15.9 % $ 2,635.9 14.8 %

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.

Three Months Ended September 30, 2024

Consolidated Cost of goods sold decreased $65.5 million, or 2.0%, in the third quarter of 2024 compared to the same period in 2023 primarily due to improved efficiencies in manufacturing and distribution operations and foreign currency translation rate changes, which decreased Cost of goods sold by approximately 1%.

These decreases were partially offset by a low single-digit increase in sales volume.

Consolidated gross profit increased $111.3 million in the third quarter of 2024 compared to the same period in 2023 primarily due to higher Net sales in the Paint Stores Group and improved efficiencies in manufacturing and distribution operations.

Consolidated gross profit as a percent of consolidated Net sales increased in the third quarter of 2024 to 49.1% compared to 47.7% during the same period in 2023 for these same reasons.

The Paint Stores Group’s gross profit in the third quarter of 2024 was higher than the same period last year by $59.6 million due primarily to higher Net sales.

The Paint Stores Group’s gross profit as a percent of Net sales was effectively flat in the third quarter of 2024 compared to the same period in 2023.

The Consumer Brands Group’s gross profit increased by $55.1 million in the third 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, partially offset by lower Net sales.

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

The Performance Coatings Group’s gross profit decreased $14.1 million in the third quarter of 2024 compared to the same period last year due primarily to lower sales in North America and unfavorable foreign currency related impacts.

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

Consolidated Selling, general and administrative expenses (SG&A) increased $137.2 million in the third quarter of 2024 versus the same period last year primarily due 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 200 basis points in the third quarter of 2024 compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $75.0 million in the third quarter of 2024 compared to the same period last year due primarily due 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 $5.4 million in the third quarter of 2024 compared to the same period last year primarily due to effective cost control in managing the operations of the business, partially offset by higher employee-related costs.

The Performance Coatings Group’s SG&A decreased $0.5 million in the third quarter of 2024 compared to the same period last year primarily due to lower employee-related costs.

The Administrative function’s SG&A increased $68.1 million in the third 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 expense (income) - net decreased $61.2 million in the third 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 and increased net gains on sale or disposition of assets.

See Note 15 in Item 1 for further details.

Interest expense increased $1.5 million in the third quarter of 2024 compared to the same period last year primarily due to an increase in short-term borrowings.

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.

Other expense (income) - net was expense of $9.5 million in the third quarter of 2024 compared to income of $8.0 million in the same period last year primarily due to higher foreign currency transaction losses in the current year and an increase in miscellaneous expenses, partially offset by an increase in miscellaneous income.

See Note 15 in Item 1 for further details.

Nine Months Ended September 30, 2024

Consolidated Cost of goods sold decreased $410.9 million, or 4.3%, in the first nine 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.

Consolidated gross profit increased $412.5 million in the first nine months of 2024 compared to the same period in 2023 primarily due to moderating raw material costs and higher Net sales.

Consolidated gross profit as a percent of consolidated Net sales increased in the first nine months of 2024 to 48.4% compared to 46.1% during the same period in 2023 for these same reasons.

The Paint Stores Group’s gross profit in the first nine months of 2024 was higher than the same period last year by $181.8 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 nine months of 2024 compared to the same period in 2023 for these same reasons.

The Consumer Brands Group’s gross profit increased by $206.2 million in the first nine 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 nine months of 2024 compared to the same period last year for these same reasons.

The Performance Coatings Group’s gross profit increased $11.6 million in the first nine months of 2024 compared to the same period last year primarily due 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 nine months of 2024 compared to the same period last year for these same reasons.

Consolidated SG&A increased $329.7 million in the first nine months of 2024 versus the same period last year primarily due 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 180 basis points in the first nine months of 2024 compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $166.9 million in the first nine months of 2024 compared to the same period last year primarily due to investments in long-term growth initiatives, including increased spending from new store openings, costs to support higher sales and higher employee-related costs.

The Consumer Brands Group’s SG&A increased $1.0 million in the first nine months of 2024 compared to the same period last year due to higher employee-related costs, partially offset by effective cost control in managing the operations of the business.

The Performance Coatings Group’s SG&A increased $15.7 million in the first nine months of 2024 compared to the same period last year due primarily to investments in long-term initiatives.

The Administrative function’s SG&A increased $146.1 million in the first nine 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 expense (income) - net was income of $30.9 million in the third quarter of 2024 compared to expense of $39.9 million in the same period last year primarily due to a decrease in provisions for environmental matters, net in the Administrative function, increased net gains on sale or disposition of assets and a decrease in miscellaneous expenses.

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

See Note 15 in Item 1 for further details.

For information on impairment recognized in prior periods as a result of the divestiture of the China architectural business, 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 $5.7 million in the first nine months of 2024 compared to the same period last year primarily due to a decrease in long-term debt outstanding during the first nine months of 2024 compared to the same period last year, partially offset by higher interest expense on short-term borrowings.

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.

Other expense (income) - net was income of $30.2 million in the first nine months of 2024 compared to income of $17.0 million in the same period last year.

The increase is primarily due to lower foreign currency transaction related losses in the current year compared to the prior period and an increase in miscellaneous income, partially offset by a decrease in investment gains.

See Note 15 in Item 1 for further details.

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

Three Months Ended

June 30, Six Months Ended

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 % Change 2024 2023 % Change

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Income Tax Expense

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 in Item 1 for additional information.

The effective tax rate was 21.2% for the third quarter of 2024 compared to 24.5% for the third quarter of 2023, and 22.4% for the first nine months of 2024 compared to 22.9% for the first nine months of 2023.

The decrease in the effective tax rate for both periods was primarily due to a more favorable impact of tax benefits related to employee share-based payments.

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

See Note 16 in Item 1 for further details.

Net Income Per Share

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.

Diluted net income per share in the third quarter of 2024 increased 7.8% to $3.18 per share compared to $2.95 per share in the third quarter of 2023.

Diluted net income per share included a $0.19 per share charge for acquisition-related amortization expense in both the third quarter of 2024 and 2023.

In the third quarter of 2023, diluted net income per share also included a charge of $0.06 per share related to activities associated with the Company’s restructuring plan.

Foreign currency translation rate changes decreased diluted net income per share by $0.04 in the third quarter of 2024.

Diluted net income per share for the first nine months of 2024 increased 10.2% to $8.65 per share compared to $7.85 per share in the first nine months of 2023.

Diluted net income per share included a $0.59 and $0.60 per share charge for acquisition-related amortization expense for the first nine months of 2024 and 2023, respectively.

In the first nine months of 2023, diluted net income per share included a net charge of $0.09 per share related to activities associated with the Company’s restructuring plan.

Foreign currency translation rate changes decreased diluted net income per share by $0.06 in the first nine 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 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 June 30, 2024, the Company had Cash and cash equivalents of $200.0 million and Total debt outstanding of $10.339 billion.

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

The Company generated $2.219 billion in Net operating cash during the first nine months of 2024.

The Company returned cash of $1.972 billion to its shareholders in the form of dividends and share repurchases during the first nine months of 2024.

The Company’s EBITDA increased 5.5% to $3.616 billion for the first nine months of 2024.

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

At September 30, 2024, the Company had Cash and cash equivalents of $238.2 million and total debt outstanding of $10.140 billion.

Total debt, net of Cash and cash equivalents, was $9.902 billion.

The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.

Net Working Capital

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.

Net working capital, defined as Total current assets less Total current liabilities, decreased $819.4 million to a deficit of $1.244 billion at September 30, 2024 compared to a deficit of $424.4 million at September 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 $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.

Current asset balances decreased $224.5 million at September 30, 2024 compared to September 30, 2023 primarily due to a decrease in Cash and cash equivalents of $265.2 million primarily due to the timing of the SIC Holding acquisition in October 2023 and a decrease of $14.9 million in Other current assets, partially offset by an increase of $32.5 million in Accounts receivable, net and an increase in Inventories of $23.1 million.

Current liability balances increased $594.9 million at September 30, 2024 compared to September 30, 2023 primarily due to an increase in Short-term borrowings of $576.9 million, an increase in Other accruals of $140.3 million, primarily related to environmental liabilities, liabilities from contracts with customers, commitments related to Non-Traded Investments and miscellaneous other current liabilities, an increase in Accounts payable of $112.9 million and an increase in the Current portion of operating lease liabilities of $21.7 million, partially offset by a decrease in Accrued taxes of $165.3 million, a decrease in the Current portion of long-term debt of $49.3 million and a decrease of $42.3 million in compensation and taxes withheld.

At September 30, 2024 and 2023, the Company’s current ratio was 0.83 and 0.94, respectively, compared to 0.83 at December 31, 2023.

Property, Plant and Equipment

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.

Net property, plant and equipment increased $507.9 million in the first nine months of 2024 and $764.1 million in the twelve months since September 30, 2023.

The increase in the first nine months was primarily due to capital expenditures of $730.6 million, partially offset by depreciation expense of $217.3 million and foreign currency translation and other adjustments of $5.4 million.

Since September 30, 2023, the increase was primarily due to capital expenditures of $1.080 billion and foreign currency translation and other adjustments of $5.6 million, partially offset by depreciation expense of $291.6 million and the sale or disposition of fixed assets of $29.9 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.

Construction of the new headquarters and R&D center is expected to be complete in 2025.

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.

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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.

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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Goodwill and Intangible Assets

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.

Goodwill increased $31.0 million from December 31, 2023 and increased $244.7 million from September 30, 2023.

The increase during the first nine months of 2024 was primarily due to purchase accounting allocations of $27.1 million and foreign currency translation fluctuations of $3.9 million.

The increase over the twelve month period from September 30, 2023 was primarily due to purchase accounting allocations of $181.3 million and foreign currency translation fluctuations and other adjustments of $63.4 million.

Intangible assets decreased $223.6 million from December 31, 2023 and $167.1 million from September 30, 2023.

The decrease during the first nine months of 2024 was primarily due to amortization of $244.8 million and foreign currency translation fluctuations and other adjustments of $0.4 million, partially offset by capitalized software of $21.6 million.

The decrease over the twelve month period from September 30, 2023 was primarily due to amortization of $319.6 million and trademark impairment of $24.0 million, partially offset by purchase accounting allocations of $110.7 million, capitalized software of $21.6 million, and foreign currency translation fluctuations and other adjustments of $44.2 million.

See Note 5 in Item 1 for further details 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 divestiture in in the third quarter of 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.

Other assets increased $234.6 million from December 31, 2023 and $331.3 million from September 30, 2023.

The increase in the first nine months of 2024 and from September 30, 2023 was primarily due to an increase in Non-Traded Investments and other assets related to contracts with customers, deposits, including the deposit related to the acquisition that closed in October 2024 (see Note 3 in Item 1), and assets related to cloud computing arrangements.

See Note 1 in Item 1 for further details on the Company’s Non-Traded Investments.

Debt (including Short-term borrowings)

June 30, December 31, June 30,

September 30, December 31, September 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 $2.343 billion at June 30, 2024.

See Note 6 in Item 1 for additional information.

See Note 6 in Item 1 for additional information concerning debt.

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

The changes from September 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 $41.1 million from December 31, 2023 and $68.9 million from June 30, 2023 primarily due to amortization of acquisition-related intangible assets.

Deferred income taxes decreased $51.4 million from December 31, 2023 and $16.7 million from September 30, 2023 primarily due to amortization of acquisition-related intangible assets.

Environmental-Related Liabilities

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

The Company’s capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company’s financial condition, liquidity, cash flow or results of operations during the first six 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 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.

There have been no significant changes to the Company’s contractual obligations and commercial commitments in the first nine 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

June 30, December 31, June 30,

September 30, December 31, September 30,

2024 2023 2023

Total shareholders’ equity $ 4,156.1 $ 3,715.8 $ 3,780.0

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.

Shareholders’ equity increased $440.3 million during the first nine months of 2024 primarily as a result of Net income of $2.201 billion and an increase in Other capital of $277.8 million mainly associated with stock-based compensation expense and stock option exercises.

These increases were partially offset by $1.444 billion of treasury stock activity mainly attributable to treasury stock repurchases, cash dividends paid on common stock of $543.6 million and a decrease in AOCI of $51.9 million mainly due to foreign currency translation adjustments.

Shareholders’ equity increased $376.1 million since September 30, 2023 primarily as a result of Net income of $2.558 billion and an increase in Other capital of $367.5 million mainly associated with stock-based compensation expense and stock option exercises.

These increases were partially offset by $1.931 billion of treasury stock activity mainly attributable to treasury stock repurchases, cash dividends paid on common stock of $698.9 million and an increase in AOCI of $80.2 million mainly due to foreign currency translation adjustments.

During the first nine months of 2024, the Company purchased 4.4 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 June 30, 2024 to purchase 36.5 million shares of its common stock.

The Company had remaining authorization at September 30, 2024 to purchase 35.3 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 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.

This quarterly dividend was approved in all subsequent quarters and 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 nine months ended September 30, 2024 was a source of $2.219 billion compared to a source of $2.603 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 $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.

Net investing cash usage increased $401.8 million in the first nine months of 2024 to a usage of $910.8 million compared to a usage of $509.0 million for the same period in 2023 primarily due to an increase in cash used for capital expenditures, cash on deposit for a pending acquisition in the current year and reduced proceeds from the sale of assets, partially offset by proceeds from the divestiture of a business in the prior period.

Net financing cash usage decreased $438.8 million in the first nine months of 2024 to a usage of $1.346 billion compared to a usage of $1.785 billion for the same period in 2023 primarily due to an increase in short-term borrowings, proceeds from long-term debt in the current year and higher proceeds from stock options exercised, partially offset by an increase in payments of long-term debt, treasury stock purchases and cash dividends.

In the twelve month period from October 1, 2023 through September 30, 2024, the Company generated net operating cash of $3.137 billion, used $1.441 billion in investing activities and used $1.986 billion in financing activities.

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

7 unchanged sentences

Certain borrowings contain a consolidated leverage covenant.

The covenant states that the Company’s consolidated leverage ratio is not to exceed 3.75 to 1.00, however, the Company may elect to temporarily increase the leverage ratio to 4.25 to 1.00 for a period of four consecutive fiscal quarters immediately following the consummation of a qualifying acquisition, as defined in the credit agreement dated August 30, 2022.

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 below for a reconciliation of EBITDA to Net income.

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

At September 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.

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

See Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning the Company’s debt and related covenant.

See Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and Note 6 in Item 1 for additional information concerning the Company’s debt and related covenants.

Non-GAAP Financial Measures

12 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

50 unchanged sentences

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