Sherwin-Williams 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the Period Ended September 30, 2021

or

For the transition period from to

Commission file number 1-04851

THE SHERWIN-WILLIAMS COMPANY

(Exact name of registrant as specified in its charter)

(216) 566-2000

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $0.33-1/3 Par Value – 262,196,196 shares as of September 30, 2021.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

(1) The three months ended September 30, 2021 includes unrealized gains of $14.5 million, net of taxes of $(4.9) million, related to net investment hedges. The three months ended September 30, 2020 includes unrealized losses of $(26.3) million, net of taxes of $8.7 million, related to net investment hedges. The nine months ended September 30, 2021 includes unrealized gains of $31.6 million, net of taxes of $(10.4) million, related to net investment hedges. The nine months ended September 30, 2020 includes unrealized losses of $(26.4) million, net of taxes $8.7 million, related to net investment hedges. See Note 12 for additional information.

(2) Net of taxes of $(0.6) million and $(0.2) million in the three months ended September 30, 2021 and 2020, respectively. Net of taxes of $(1.7) million and $(0.5) million in the nine months ended September 30, 2021 and 2020, respectively.

(3) Net of taxes of $0.6 million and $0.4 million in the three months ended September 30, 2021 and 2020, respectively. Net of taxes of $1.0 million and $1.8 million in the nine months ended September 30, 2021 and 2020, respectively.

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except as noted and per share data)

BACKGROUND

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

The Company is structured into three reportable segments—The Americas Group, Consumer Brands Group and Performance Coatings Group (collectively, the “Reportable Segments”)—and an Administrative segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources. See Note 18 of Item 1 for additional information on the Company's Reportable Segments.

SUMMARY

• Consolidated net sales increased 0.5% in the quarter to $5.147 billion

**◦**Net sales from stores in U.S. and Canada open more than twelve calendar months decreased 2.8% in the quarter

◦Raw material availability issues negatively impacted quarter sales by an estimated high single digit percentage

• Diluted net income per share decreased 26.3% to $1.88 per share in the quarter

• Generated net operating cash of $2.051 billion in the first nine months of the year, or 13.5% of sales

OUTLOOK

While the Company has delivered a solid performance during the first nine months of 2021, many uncertainties remain, including the extent and duration of raw material inflation and supply chain constraints, as well as changes in demand for our products due to the impacts of the COVID-19 pandemic. Despite the uncertainties, our businesses continue to be well-positioned, and we have confidence in our long-term outlook.

The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of the global economy. We continue to work with government and health authorities to operate our business, including our company-operated stores, manufacturing plants and other facilities. We also continue to follow recommended actions of government authorities and health officials in order to protect the health and well-being of our employees, customers and their families worldwide.

As the circumstances around the COVID-19 pandemic remain fluid, we continue to actively monitor the pandemic's impact to the Company worldwide, including our financial position, liquidity, results of operations and cash flows, while managing our response to the pandemic through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners. Please see Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q for further information regarding the current and potential impact of the COVID-19 pandemic on the Company.

In February 2021, Winter Storm Uri had a broad impact on the industry’s raw material supply chain. While the storm had limited direct impact to the Company’s production facilities, the disruption to the supply chain created an economic environment with tight supply fundamentals and higher raw material inflation that is ongoing. In August 2021, Hurricane Ida further disrupted the industry’s raw material supply chain.

The Company continues to work diligently to collaborate across its businesses and with its customers and suppliers to meet robust demand and minimize any impact on production or sales levels as a result of the global supply chain disruptions while providing differentiated solutions and excellent service to our customers. As a result, the Company expects to ship all production for the remainder of 2021 and as raw material availability improves will build inventory in 2022.

Overall, we remain disciplined in our capital allocation approach, focused on driving value for our customers and returns to our shareholders. We will also continue to pursue business acquisitions and transactions that fit our strategy, and we expect to use any excess cash to make open market purchases of our common stock. We have a strong liquidity position, with $313.3 million in cash and $2.805 billion of unused capacity under our credit facilities at September 30, 2021. We are in compliance with bank covenants and expect to remain in compliance.

RESULTS OF OPERATIONS

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The results of operations for the three and nine months ended September 30, 2021 are not indicative of the results to be expected for the full year as 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 downturn 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 nine months ended September 30, 2021 and 2020.

Net Sales

Three Months Ended September 30, 2021

Consolidated net sales increased in the third quarter of 2021 primarily due to selling price increases in all segments and slightly higher product sales volume in the Performance Coatings Group, partially offset by lower sales volume in The Americas Group and the Consumer Brands Group. Currency translation rate changes increased net sales by 0.7% in the third quarter. Net sales of all consolidated foreign subsidiaries increased 5.3% to $1.019 billion in the third quarter compared to $967.6 million in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the third quarter was due primarily to higher sales volumes in most end markets and selling price increases in the Performance Coatings Group and favorable currency translation, partially offset by lower sales in the Consumer Brands Group. Net sales of all operations other than consolidated foreign subsidiaries decreased 0.6% to $4.128 billion in the third quarter compared to $4.155 billion in the same period last year.

Net sales in The Americas Group decreased in the third quarter due primarily to lower sales volume of paint products as a result of raw material availability challenges, partially offset by selling price increases in all end markets. Net sales from stores open for more than twelve calendar months in the U.S. and Canada decreased 2.8% in the third quarter compared to last year’s comparable period. Sales of non-paint products increased 3.8% compared to last year's third quarter. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.

Net sales of the Consumer Brands Group decreased in the third quarter due primarily to lower sales volumes to all of the group’s retail customers as a result of raw material availability issues and the Wattyl divestiture, partially offset by selling price increases. Currency translation rate changes increased the Consumer Brands Group's net sales by 0.7% in the third quarter.

Net sales in the Performance Coatings Group stated in U.S. dollars increased in the third quarter primarily due to higher sales in all end markets and selling price increases. Currency translation rate changes increased the Performance Coatings Group's net sales by 2.0% in the third quarter.

Nine Months Ended September 30, 2021

Consolidated net sales increased in the nine months of 2021 due primarily to higher product sales volume in The Americas Group and the Performance Coatings Group as well as selling price increases in all Reportable Segments, partially offset by lower product sales volume in the Consumer Brands Group. Currency translation rate changes increased net sales by 1.1% in the first nine months of 2021. Net sales of all consolidated foreign subsidiaries increased 22.8% to $3.158 billion in the first nine months compared to $2.572 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the first nine months was due primarily to higher sales volume in most end markets and selling price increases in the Performance Coatings Group, higher sales in The Americas Group and favorable currency translation. Net sales of all operations other than consolidated foreign subsidiaries increased 6.4% to $12.025 billion in the first nine months compared to $11.301 billion in the same period last year.

Net sales in The Americas Group increased in the first nine months due primarily to higher product sales volume in all end markets excluding DIY, and selling price increases. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 7.6% in the first nine months compared to last year’s comparable period. Sales of non-paint products increased 13.9% over last year's first nine 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 of the Consumer Brands Group decreased in the first nine months due primarily to lower volume sales to most of the group’s retail customers as DIY demand returned to more normal levels, and the Wattyl divestiture, partially offset by selling price increases. Currency translation rate changes increased the Consumer Brands Group's net sales by 1.5% in the first nine months of 2021.

Net sales in the Performance Coatings Group stated in U.S. dollars increased in the first nine months primarily due to higher sales volumes in most end markets and selling price increases. Currency translation rate changes increased the Performance Coatings Group's net sales by 3.2% in the first nine months of 2021.

Income Before Income Taxes

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

Three Months Ended September 30, 2021

Cost of goods sold increased $340.2 million, or 12.8%, in the third quarter of 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources) and unfavorable currency translation rate changes, partially offset by lower sales volumes as a result of raw material availability issues. Currency translation rate changes increased Cost of goods sold by 1.0% in the third quarter of 2021.

Consolidated gross profit decreased $315.7 million in the third quarter of 2021 compared to the same period in 2020. Consolidated gross profit as a percent of consolidated net sales decreased in the third quarter to 41.6%, compared to 47.9% during the same period in 2020. Consolidated gross profit dollars decreased primarily due to lower sales volumes in The Americas Group and Consumer Brands Group and higher raw material costs in each Reportable Segment, partially offset by higher sales in the Performance Coatings Group. The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment.

The Americas Group’s gross profit in the third quarter was lower than the same period last year by $124.2 million due primarily to lower sales volume and higher raw material costs, partially offset by selling price increases. The Americas Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period in 2020 primarily due to higher raw material costs. The Consumer Brands Group’s gross profit decreased by $152.4 million in the third quarter compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies. The Consumer Brands Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit decreased $31.3 million, when stated in U.S. dollars, in the third quarter compared to the same period last year, primarily due to higher raw material costs, partially offset by higher sales and favorable currency translation rate changes. The Performance Coatings Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period last year primarily due to higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) decreased $37.9 million in the third quarter versus the same period last year due primarily to good cost control, partially offset by increased spending from new store openings. As a percent of net sales, consolidated SG&A decreased 90 basis points in the third quarter compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A decreased $1.7 million in the third quarter compared to the same period last year due primarily to good cost control, partially offset by investments in strategic growth initiatives including new store openings. The Consumer Brands Group’s SG&A decreased $28.0 million in the third quarter compared to the same period last year due to good sales and marketing cost control in line with a return to more normal DIY sales levels. The Performance Coatings Group’s SG&A increased $15.8 million in the third quarter compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes. The Administrative segment’s SG&A decreased $24.0 million in the third quarter compared to the same period last year due primarily to lower incentive compensation.

In the third quarter of 2021, Other general (income) expense - net improved $11.6 million compared to the same period in 2020 primarily due to a decrease in provisions for environmental matters in the Administrative segment. See Note 15 of Item 1 for additional information.

In the third quarter of 2021, amortization of acquired intangibles was $50.9 million and $19.4 million for the Performance Coatings and Consumer Brands Groups, respectively. In the third quarter of 2020, amortization of acquired intangibles was $50.5 million and $21.7 million for the Performance Coatings and Consumer Brands Groups, respectively.

Nine Months Ended September 30, 2021

Cost of goods sold increased $1.201 billion, or 16.4%, in the first nine months of 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources), higher sales volumes and unfavorable currency translation rate changes. Currency translation rate changes increased Cost of goods sold by 1.6% in the first nine months of 2021.

Consolidated gross profit increased $109.1 million in the first nine months of 2021 compared to the same period in 2020. Consolidated gross profit as a percent of consolidated net sales decreased in the first nine months of 2021 to 43.9%, compared to 47.2% during the same period in 2020. Consolidated gross profit dollars increased primarily due to higher sales in The Americas Group and the Performance Coatings Group, partially offset by the impact of lower sales in the Consumer Brands Group and higher raw material costs in each Reportable Segment. The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment.

The Americas Group’s gross profit in the first nine months of 2021 was higher than the same period last year by $246.4 million due primarily to higher sales volume and selling price increases, partially offset by higher raw material costs. The Americas Group’s gross profit as a percent of net sales decreased in the first nine months of 2021 compared to the same period in 2020 primarily due to higher raw material costs. The Consumer Brands Group’s gross profit decreased by $235.2 million in the first nine months compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies. The Consumer Brands Group’s gross profit as a percent of net sales decreased in the first nine months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $102.0 million, when stated in U.S. dollars, in the first nine months compared to the same period last year primarily due to higher sales volumes and selling price increases, partially offset by higher raw material costs. The Performance Coatings Group’s gross profit as a percent of net sales decreased in the first nine months compared to the same period last year due to higher raw material costs.

Consolidated SG&A increased $126.9 million in the first nine months of 2021 versus the same period last year due primarily to increased spending from new store openings, unfavorable currency translation rate changes and to support higher sales levels, partially offset by good cost control. As a percent of net sales, consolidated SG&A decreased 170 basis points in the first nine months compared to the same period last year primarily due to good cost control and higher sales.

The Americas Group’s SG&A increased $153.6 million in the first nine months of 2021 due primarily to increased spending from new store openings and costs to support higher sales levels. The Consumer Brands Group’s SG&A decreased $56.1 million in the first nine months compared to the same period last year due to good sales and marketing cost control in line with a return to more normal DIY sales levels. The Performance Coatings Group’s SG&A increased $63.5 million in the first nine months compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes, partially offset by good cost control. The Administrative segment’s SG&A decreased $34.1 million in the first nine months compared to the same period last year due primarily to lower compensation, including incentive and stock-based compensation.

In the first nine months of 2021, Other general (income) expense - net declined $98.1 million compared to the same period in 2020 primarily due to the recognition of a $111.9 million loss on the Wattyl divestiture, partially offset by a decrease in provisions for environmental matters in the Administrative segment. See Note 15 of Item 1 for additional information.

In the first nine months of 2021, amortization of acquired intangibles was $152.9 million and $61.0 million for the Performance Coatings and Consumer Brands Groups, respectively. In the first nine months of 2020, amortization of acquired intangibles was $150.6 million and $64.5 million for the Performance Coatings and Consumer Brands Groups, respectively.

Other expense (income) - net improved $32.2 million in the first nine months of 2021 compared to the same period in 2020 primarily due to the $21.3 million loss on extinguishment of debt recognized in the first nine months of 2020. See Note 15 of Item 1 for additional information.

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

Income Tax Expense

The effective tax rate was 17.9% for the third quarter of 2021 compared to 19.4% for the third quarter of 2020, and 19.6% for the first nine months of 2021 compared to 19.4% for the first nine months of 2020. The effective tax rate was favorably impacted by tax benefits related to employee share based payments during 2021 and 2020. The other significant components of the Company's tax rate were consistent year over year. See Note 16 of Item 1 for additional information.

Net Income Per Share

Diluted net income per share in the third quarter of 2021 decreased to $1.88 per share compared to $2.55 per share in the third quarter of 2020. Diluted net income per share for the third quarter of 2021 and 2020 included a $0.21 per share charge for acquisition-related amortization expense. Currency translation rate changes increased diluted net income per share by $0.01 in the third quarter.

Diluted net income per share in the first nine months of 2021 decreased to $5.82 per share compared to $5.87 per share in the first nine months of 2020. Diluted net income per share for the first nine months of 2021 included a $0.34 per share loss from the Wattyl divestiture (see Note 3 of Item 1) and included a $0.64 per share charge for acquisition-related amortization expense. The first nine months of 2020 included a $0.62 per share charge for acquisition-related amortization expense. Currency translation rate changes decreased diluted net income per share by $0.04 in the first nine months.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition, liquidity and cash flow remained strong during the first nine months of 2021. The Company generated $2.051 billion in net operating cash despite ongoing and industry-wide raw material availability issues which negatively impacted total sales and gross margins, and the normal seasonal increase in working capital requirements. During the first nine months of 2021, the Company’s EBITDA decreased 3.1% to $2.623 billion. See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

Cash and cash equivalents increased $86.7 million during the first nine months of 2021. Cash flow from operations, proceeds from the Wattyl divestiture and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return $2.519 billion to shareholders in the form of share buybacks and cash dividends during the first nine months.

At September 30, 2021, the Company had cash and cash equivalents of $313.3 million and total debt outstanding of $8.976 billion. Total debt, net of cash and cash equivalents, was $8.663 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 $1.917 billion to a deficit of $1.100 billion at September 30, 2021 compared to a surplus of $817.3 million at September 30, 2020. The net working capital decrease is due to an increase in current liabilities, partially offset by an increase in current assets.

Comparing current asset balances at September 30, 2021 to September 30, 2020, cash and cash equivalents decreased $306.6 million, accounts receivable increased $143.5 million due to higher sales, inventories increased $143.2 million due to higher raw material costs partially offset by lower inventory quantities, and other current assets increased $222.7 million primarily related to prepaid expenses and refundable income taxes.

Current liability balances increased $2.120 billion at September 30, 2021 compared to September 30, 2020 primarily due to a $709.2 million increase in short-term borrowings and a $638.0 million increase in the current portion of long-term debt. Excluding short-term borrowings and the current portion of long-term debt, current liabilities increased $773.0 million primarily due to the timing of payments related to accounts payable and accruals, including compensation. At September 30, 2021, the Company’s current ratio was 0.83 compared to 1.00 and 1.19 at December 31, 2020 and September 30, 2020, respectively.

Property, Plant and Equipment

Net property, plant and equipment decreased $7.3 million in the first nine months of 2021 and increased $47.2 million in the twelve months since September 30, 2020. The decrease in the first nine months was primarily due to depreciation expense of $199.8 million and the sale or disposition of fixed assets of $50.0 million, partially offset by capital expenditures of $248.1 million. Since September 30, 2020, the increase was primarily due to capital expenditures of $358.1 million and favorable changes in foreign currency translation of $14.3 million, partially offset by depreciation expense of $267.8 million and sale or disposition of fixed assets of $62.5 million. Capital expenditures primarily represented expenditures associated with improvements and normal equipment replacement and additional capacity in manufacturing and distribution facilities in the Consumer Brands Group, normal equipment replacement in The Americas and Performance Coatings Groups, and information systems hardware in the Administrative segment.

Goodwill and Intangible Assets

Goodwill and intangible assets decreased $455.2 million from December 31, 2020 and decreased $439.2 million from September 30, 2020. The net decrease during the first nine months of 2021 was primarily due to dispositions of $168.0 million (primarily related to the Wattyl divestiture), amortization of $233.2 million and foreign currency translation of $69.9 million. The net decrease over the twelve month period from September 30, 2020 was primarily due to amortization of $312.4 million and dispositions of $168.0 million, partially offset by foreign currency translation of $27.5 million.

The fair value of the Company's acquired intangible assets may be impacted by the Company's ongoing integration efforts. See Note 6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for more information concerning the Company's goodwill and intangible assets, including impairment testing of these assets.

Other Assets

Other assets at September 30, 2021 decreased $2.8 million in the first nine months of 2021 and increased $80.3 million from a year ago. The decrease in the first nine months was primarily due to the sale of investments to fund the Company’s domestic defined contribution plan and a decrease in deferred tax assets, partially offset by other investments. The increase from September 30, 2020 was primarily due to an increase in other investments, partially offset by a decrease in deposits. See Notes 13 and 19 in Item 1 for additional information on the Company’s investments.

Debt (including Short-term borrowings)

The Company’s long-term debt primarily consists of senior notes as disclosed in Note 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

At September 30, 2021, the Company's short-term borrowings were comprised of $694.9 million outstanding under its commercial paper program and $14.5 million outstanding under various foreign programs. The weighted average interest rate for the borrowings outstanding under the commercial paper program was 0.17% at September 30, 2021. The Company had unused capacity under its various credit agreements of $2.805 billion at September 30, 2021. See Note 6 in Item 1 for additional information.

On September 15, 2021, the Company elected to exercise its optional redemption rights to redeem the entire outstanding $400.0 million aggregate principal amount of its 4.20% Senior Notes due 2022 and its 4.20% Notes due 2022 initially issued by The Valspar Corporation (collectively, the 4.20% Senior Notes). The Company redeemed the 4.20% Senior Notes on October 15, 2021 at a redemption price equal to 100% of the principal amount, plus accrued interest.

On August 2, 2021, the Company entered into an amended and restated $625.0 million credit agreement, which amends and restates the five-year credit agreement entered into in September 2017. This agreement, which was subsequently amended, will be used for general corporate purposes. See Note 6.

On June 29, 2021, the Company and two of its wholly-owned subsidiaries, Sherwin-Williams Canada, Inc. (SW Canada) and Sherwin-Williams Luxembourg S.à r.l. (SW Luxembourg, together with the Company and SW Canada, the Borrowers), entered into a new five-year $2.000 billion credit agreement (New Credit Agreement). The New Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements. The New Credit Agreement replaced the credit agreement dated July 19, 2018, as amended, which was terminated effective June 29, 2021. The New Credit Agreement will mature on June 29, 2026 and provides that the Company may request to extend the maturity date of the facility for two additional one-year periods. In addition, the New Credit Agreement provides that the Borrowers may increase the aggregate amount of the facility to $2.750 billion, subject to the discretion of each lender to participate in the increase, and the Borrowers may request letters of credit in an amount of up to $250.0 million.

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, 2020 and September 30, 2020. See Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

Deferred income taxes at September 30, 2021 decreased $44.6 million in the first nine months of 2021, and decreased $155.2 million from a year ago, primarily due to amortization of acquisition-related intangible assets and the disposition of certain intangible assets in the Wattyl divestiture.

Other Long-Term Liabilities

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. These laws and regulations not only govern current operations and products, but also

impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.

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 nine months of 2021. 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 2021. See Note 8 in Item 1 for further information on environmental-related long-term liabilities.

Contractual Obligations, Commercial Commitments and Warranties

Except for the Specialty Polymers and Sika acquisition agreements disclosed in Note 3 of Item 1, and the debt transactions discussed above and in Note 6 of Item 1, there have been no other significant changes to the Company’s contractual obligations and commercial commitments in the first nine months of 2021 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, 2020.

Litigation

See Note 9 in Item 1 for information concerning litigation.

Shareholders’ Equity

Shareholders’ equity decreased $920.5 million during the first nine months of 2021 as a result of $2.167 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $442.9 million, partially offset by net income of $1.560 billion and an increase in Other capital of $196.7 million primarily associated with stock-based compensation expense and stock option exercises.

Shareholders’ equity decreased $1.517 billion since September 30, 2020 as a result of $3.242 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $563.1 million, partially offset by net income of $1.967 billion and an increase in Other capital of $314.8 million primarily associated with stock-based compensation expense and stock option exercises.

During the first nine months of 2021, the Company purchased 8.075 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 September 30, 2021 to purchase 50.575 million shares of its common stock.

In February 2021, the Company's Board of Directors increased the quarterly cash dividend from $.4467 per share to $.55 per share. This quarterly dividend was approved in all subsequent quarters and will result in an annual dividend for 2021 of $2.20 per share or a 29.9% payout of 2020 diluted net income per share.

Cash Flow

Net operating cash for the nine months ended September 30, 2021 was a cash source of $2.051 billion compared to a cash source of $2.564 billion for the same period in 2020. The decrease in net operating cash was primarily due to an increase in cash requirements for working capital and a decrease in net income.

Net investing cash usage increased $50.1 million in the first nine months of 2021 to a usage of $226.7 million from a usage of $176.6 million in 2020 primarily due to an increase in capital expenditures and other investments, partially offset by the proceeds received from the Wattyl divestiture in the current year.

Net financing cash usage decreased $178.5 million in the first nine months of 2021 to a usage of $1.738 billion from a usage of $1.916 billion for the same period in 2020 primarily due to decreased payments of long-term debt, partially offset by increased treasury stock purchases and cash dividends paid.

In the twelve month period from October 1, 2020 through September 30, 2021, the Company generated net operating cash of $2.896 billion, used $372.5 million in investing activities and used $2.842 billion in financing activities.

Market Risk

The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company believes it may be exposed to continuing market risk from foreign currency exchange rate and commodity price fluctuations. However, the Company does not expect that foreign currency exchange rate and commodity price fluctuations or hedging contract losses will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

See Note 12 in Item 1 for disclosures related to the $744.0 million of outstanding U.S. Dollar to Euro cross currency swap contracts designed to hedge the Company’s net investment in its European subsidiaries.

Financial Covenant

Certain borrowings contain a consolidated leverage covenant. The covenant states that the Company’s leverage ratio is not to exceed 3.75 to 1.00. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated “Earnings Before Interest, Taxes, Depreciation, and Amortization” (EBITDA), 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 September 30, 2021, 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 6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for more information concerning the Company’s debt and related covenant.

Non-GAAP Financial Measures

Management utilizes certain financial measures that are not in accordance with U.S. generally accepted accounting principles (US GAAP) to analyze and manage the performance of the business. The required disclosures for these non-GAAP measures are shown below. The Company provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate the Company's operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with US GAAP.

EBITDA and Adjusted EBITDA

EBITDA is a non-GAAP financial measure defined as net income before income taxes and interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure that excludes the loss on the divestiture of Wattyl. Management considers EBITDA and Adjusted EBITDA useful in understanding the operating performance of the Company. The reader is cautioned that the Company's EBITDA and Adjusted EBITDA should not be compared to other entities unknowingly. Further, EBITDA and Adjusted EBITDA should not be considered alternatives to Net income or Net operating cash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Condensed Statements of Consolidated Cash Flows in Item 1.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (US GAAP) requires management to make estimates and assumptions that affect amounts reported in the accompanying consolidated unaudited interim financial statements. These determinations were made based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

A comprehensive discussion of the Company’s critical accounting policies, management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2020.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are based upon management’s current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “believe,” “expect,” “may,” “will,” “should,” “project,” “could,” “plan,” “goal,” “potential,” “seek,” “intend” or “anticipate” or the negative thereof or comparable terminology.

Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include such things as:

• general business conditions, strengths of retail and manufacturing economies and growth in the coatings industry;

• changes in general domestic and international economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions, and changing government policies, laws and regulations;

• changes in raw material and energy supplies and pricing;

• changes in our relationships with customers and suppliers;

• our ability to successfully integrate past and future acquisitions into our existing operations, as well as the performance of the businesses acquired;

• competitive factors, including pricing pressures and product innovation and quality;

• our ability to attain cost savings from productivity initiatives;

• risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest and other external economic and political factors;

• the achievement of growth in foreign markets, such as Asia, Europe and South America;

• increasingly stringent domestic and foreign governmental regulations, including those affecting health, safety and the environment;

• inherent uncertainties involved in assessing our potential liability for environmental-related activities;

• other changes in governmental policies, laws and regulations, including changes in tariff policies, as well as changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations);

• the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation, and the effect of any legislation and administrative regulations relating thereto;

• adverse weather conditions or impacts of climate change, natural disasters and public health crises, including the COVID-19 pandemic; and

• the duration, severity and scope of the COVID-19 pandemic and the actions implemented by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19, which may exacerbate one or more of the aforementioned and/or other risks, uncertainties and factors more fully described in the Company’s reports filed with the Securities and Exchange Commission.

Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company enters into option and forward currency exchange contracts and commodity swaps to hedge against value changes in foreign currency and commodities. The Company believes it may experience continuing losses from foreign currency translation and commodity price fluctuations. However, the Company does not expect currency translation, transaction, commodity price fluctuations or hedging contract losses to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There were no material changes in the Company’s exposure to market risk since the disclosure included 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, 2020.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman, President and Chief Executive Officer and our Senior Vice President—Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Senior Vice President—Finance and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and accumulated and communicated to our management including our Chairman, President and Chief Executive Officer and our Senior Vice President—Finance and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Securities and Exchange Commission regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. Pursuant to these regulations, the Company uses a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required.

For information regarding certain environmental-related matters and other legal proceedings, see the information included under the captions titled “Other Long-Term Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 8 and 9 of the “Notes to Condensed Consolidated Financial Statements.” The information contained in Note 9 to the Condensed Consolidated Financial Statements is incorporated herein by reference.

We face a number of risks that could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition. A discussion of our risk factors can be found in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Investors should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. The information below updates the risks relating to the COVID-19 pandemic. The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, any of which could have a material effect on us. This situation continues to change rapidly and additional impacts may arise that we are not aware of currently. During the third quarter ended September 30, 2021, there were no material changes to our other previously disclosed risk factors.

The COVID-19 pandemic has adversely impacted our business, results of operations, cash flow and financial condition, and the extent to which the COVID-19 pandemic will adversely impact our business, results of operations, cash flow, liquidity and financial condition in the future remains uncertain.

Beginning in early 2020, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of a novel strain of coronavirus (COVID-19). Some of these actions have been lifted and reinstated in various jurisdictions, but continue to include quarantines, physical distancing, face coverings, restrictions on public gatherings and other health and safety protocols, stay-at-home orders, travel restrictions, mandatory business closures, vaccine and testing requirements and other mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations.

In response to the pandemic and these actions, we began implementing changes in our business in March 2020 designed to protect the health and well-being of our employees and customers and to support appropriate health and safety protocols. These changes have included: temporarily reducing store hours and closing our sales floors in our company-operated paint stores to the general public; requiring our customers to order product online or via phone and to access their products via curbside pickup or delivery; implementing remote, alternate and flexible work arrangements where possible; enhancing cleaning and sanitation procedures; implementing domestic and international travel restrictions and return to work and visitor screening protocols; postponing or canceling hosting or attending large events; and enhancing certain employee benefits, such as telehealth, paid sick leave, family leave and voluntary leave of absence policies and programs.

In May 2020, we began the process of reinstituting regular store hours and re-opening the sales floors in our stores with appropriate health and safety protocols, which resulted in all of our stores in the U.S. and Canada being fully reopened. We also began the process of returning some of our employees who work in office environments to the office, although many employees continued to work remotely. In May 2021, we commenced a phased-in return of additional employees to many of our offices that resulted in nearly all of our global headquarters and many of our other office employees returning to the office during the third quarter of 2021. We continue to evaluate and adapt the changes we have made in our business since the onset of the pandemic and work with government and other authorities and organizations to maintain our operations and support the health and well-being of our employees, customers and their families.

The necessary and appropriate measures we have taken have resulted in additional costs, including for COVID-related leave and healthcare costs in support of our employees and their families and for enhanced health and safety protocols designed to protect our employees, customers and their families, and have adversely impacted our business and financial performance. We also have faced, and will continue to face, operational risks in connection with remote work arrangements, including but not limited to cybersecurity risks and increased vulnerability to damage or interruption resulting from, among other causes, cyber attacks, security breaches, phishing, malware, viruses, ransomware, power outages or system failures. As our response to the pandemic continues and evolves, we expect to incur additional costs and are likely to experience further adverse impacts to our business, each of which may be significant.

The COVID-19 outbreak has surfaced in all regions around the world and has severely impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets, all of which are expected to continue, and all of which have adversely affected, and are expected to continue to adversely affect, our business. We have experienced occasional, temporary disruptions and closures of some of our facilities due to COVID-19. We also continue to see shifts in consumer behaviors and preferences, as well as impacts in the demand for some of our products. Beginning in the first quarter of 2020, we experienced an unprecedented surge in do-it-yourself (DIY) demand due to some of our customers spending more time at home and focusing on home improvement projects. As a result, our architectural business was quick to recover from the onset of the pandemic, while many of our industrial businesses recovered at a slower pace as a result of commercial and other industrial projects experiencing delays since the onset of the pandemic. While demand levels for our architectural and industrial businesses have begun to return to more normalized levels, our ability to predict and meet any future changes in the demand for our products due to the impacts of the pandemic remains uncertain. Although we have not experienced significant raw material shortages, delays or increased costs to date due to the impacts of the pandemic, COVID-19 may result in increased costs and unexpected shortages or delays in the delivery of some raw materials, each of which could be significant. Since the first quarter of 2020, we have reduced spending in certain areas of our business, and we may need to take additional actions to reduce spending in the future.

While we are closely monitoring the impact of the pandemic on all aspects of our business, the extent of the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our ability to execute near-term and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and which we cannot predict or control, and some of which we are not currently aware, including, but not limited to: (a) the duration, severity and scope of the pandemic, including additional variants and waves of COVID-19 cases in certain areas; (b) rapidly-changing governmental and public health directives to contain and combat the outbreak, including relating to COVID-19 vaccine and testing requirements and the duration, degree and effectiveness of directives, as well as the easing, removal and potential reinstitution of directives; (c) the further development, availability, effectiveness and distribution of treatments and vaccines for COVID-19; (d) the extent and duration of the pandemic’s adverse and/or volatile effects on economic and social activity, consumer confidence, discretionary spending and preferences, labor and healthcare costs, labor markets and unemployment rates, any of which may reduce demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us; (e) our ability to sell, provide and meet the demand for our services and products, including as a result of potential reinstitution of temporarily-reduced store hours and sales floor closures in our stores and continued travel restrictions, mandatory business closures, and stay-at-home or similar orders or directives; (f) any temporary reduction in our workforce, closures of our offices and facilities and our ability to adequately staff and maintain our operations, including as a result of employees or their family members testing positive for COVID-19; (g) the ability of our customers and suppliers to continue their operations, which could affect our ability to sell, provide and meet the demand for our services and products and result in terminations of contracts, losses of revenue and adverse effects to our supply chain; and (h) any impairment in value of our tangible or intangible assets which could be recorded as a result of weaker economic conditions. If the pandemic continues to create disruptions or turmoil in the credit or financial markets, or further impacts our credit ratings, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs.

Given the inherent uncertainty surrounding COVID-19, we expect the pandemic will continue to create challenging operating environments and have an adverse impact on our business in the near term. If these conditions persist or worsen for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, results of operations, cash flow, liquidity, or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

A summary of the Company’s third quarter activity is as follows:

(1)Shares were purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program.

(2)Shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had restricted stock units vest.

During the nine months ended September 30, 2021, the Audit Committee of the Board of Directors of the Company approved permitted non-audit services to be performed by Ernst & Young LLP, the Company’s independent registered public accounting firm. These non-audit services were approved within categories related to global tax advisory and tax compliance services.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.