Sherwin-Williams 10-Q 2022-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended June 30, 2022

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 – 259,183,053 shares as of June 30, 2022.

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 June 30, 2022 and 2021 include unrealized gains (losses), net of taxes, of $30.8 million and $(6.0) million, respectively, related to net investment hedges. The six months ended June 30, 2022 and 2021 include unrealized gains, net of taxes, of $38.9 million and $17.1 million, respectively, related to net investment hedges. See Note 12 for additional information.

(2) Net of taxes of $(0.6) million and $(0.3) million in the three months ended June 30, 2022 and 2021, respectively. Net of taxes of $(0.8) million and $(1.1) million in the six months ended June 30, 2022 and 2021, respectively.

(3) Net of taxes of $0.4 million and $0.1 million in the three months ended June 30, 2022 and 2021, respectively. Net of taxes of $0.7 million and $0.4 million in the six months ended June 30, 2022 and 2021, 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 9.2% in the quarter to $5.872 billion

**◦**Net sales from stores in U.S. and Canada open more than twelve calendar months increased 6.4% in the quarter

• Diluted net income per share was $2.21 per share in the quarter compared to $2.42 per share in the second quarter 2021

OUTLOOK

Demand remained strong during the second quarter in The Americas Group and the Performance Coatings Group, as both groups delivered sales within our guidance. The Americas Group saw continued strength across all professional architectural markets, with momentum that increased as the quarter progressed, and which has further improved into July. The Performance Coatings Group’s strength in North America was partially offset by COVID-related lockdowns in China and macro-economic uncertainty in Europe. Sales in our Consumer Brands Group did not improve as expected, as unfavorable trends persisted in primarily softer DIY demand in North America where consumers have been impacted by inflation, a challenging economic environment in Europe, and COVID-related lockdowns in China.

Consolidated gross margin improved sequentially but at a slower pace than anticipated. Segment profit improved sequentially in The Americas Group as well as in the Performance Coatings Group, where margin also improved on a year over year basis. At the same time, we experienced weaker than expected earnings results in the quarter, which were primarily related to the lower than expected sales in the Consumer Brands Group, supply chain inefficiencies incurred in serving our customers, no meaningful improvement in raw material costs, further inflationary pressures related to labor and transportation, and higher interest and other expense.

Despite the lower than expected earnings, we continue to execute our disciplined capital allocation approach, focused on driving value for our customers and returns to our shareholders. We continue to pursue business acquisitions, transactions, and investments that fit our growth 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 $312.6 million in cash and $1.506 billion of unused capacity under our credit facilities at June 30, 2022. 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 six months ended June 30, 2022 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 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, 2022 and 2021.

Net Sales

Three Months Ended June 30, 2022

Consolidated net sales increased in the second quarter of 2022 primarily due to selling price increases in all segments, higher professional architectural sales volume in North America paint stores and higher sales volumes in our Packaging and Coil businesses within the Performance Coatings Group. These increases were partially offset by lower protective and marine sales volume in North America paint stores and lower sales volumes outside of North America in the the Consumer Brands and Performance Coatings Groups primarily due to challenging prior year comparisons. Currency translation rate changes decreased consolidated net sales by 1.4% in the second quarter. Net sales of all consolidated foreign subsidiaries increased 1.7% to $1.121 billion in the second quarter compared to $1.102 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the second quarter was due primarily to higher sales volumes in most end markets and selling price increases in the Performance Coatings Group, partially offset by lower sales in the Consumer Brands Group as well as unfavorable currency translation. Net sales of all operations other than consolidated foreign subsidiaries increased 11.1% to $4.752 billion in the second quarter compared to $4.278 billion in the same period last year.

Net sales in The Americas Group increased in the second quarter due primarily to selling price increases and higher professional contractor architectural sales volume in North America paint stores, partially offset by lower sales volumes in protective and marine and DIY end markets. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 6.4% in the second quarter compared to last year’s comparable period. Sales of non-paint products decreased 1.5% compared to last year's second quarter. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.

Net sales of the Consumer Brands Group increased in the second quarter due primarily to selling price increases in all regions, partially offset by lower sales volume outside of North America. Currency translation rate changes decreased the Consumer Brands Group's net sales by 1.2% in the second quarter.

Net sales in the Performance Coatings Group increased in the second quarter due to higher sales in most end markets, primarily attributable to selling price increases and sales volume growth in our Packaging and Coil businesses. Currency translation rate changes decreased the Performance Coatings Group's net sales by 3.7% in the second quarter.

Six Months Ended June 30, 2022

Consolidated net sales increased in the six months of 2022 primarily due to selling price increases in all segments, partially offset by lower sales volume in the Consumer Brands and The Americas Groups. Currency translation rate changes decreased net sales by 1.1% in the first six months. Net sales of all consolidated foreign subsidiaries increased 2.8% to $2.198 billion in the first six months compared to $2.139 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the first six months was due primarily to selling price increases in most end markets, partially offset by lower sales volume in the Consumer Brands Group as a result of the Wattyl divestiture and challenging prior year sales volume comparisons in the EMEAI and APAC regions, as well as unfavorable currency translation. Net sales of all operations other than consolidated foreign subsidiaries increased 9.8% to $8.673 billion in the first six months compared to $7.896 billion in the same period last year.

Net sales in The Americas Group increased in the first six months due primarily to selling price increases in all professional end markets, partially offset by lower sales volumes in DIY, protective and marine, and challenging prior year sales volume comparisons in residential repaint and new residential. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 5.2% in the first six months compared to last year’s comparable period. Sales of non-paint products decreased 1.8% compared to last year's first six months. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.

Net sales of the Consumer Brands Group decreased in the first six months due primarily to the Wattyl divestiture and lower sales volumes outside of North America, partially offset by selling price increases. Currency translation rate changes decreased the Consumer Brands Group's net sales by 0.7% in the first six months.

Net sales in the Performance Coatings Group increased in the first six months due to higher sales in all end markets, primarily attributable to selling price increases and sales volume growth in our Packaging and Coil businesses. Currency translation rate changes decreased the Performance Coatings Group's net sales by 2.8% in the first six months.

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, 2022

Consolidated cost of goods sold increased $454.9 million, or 15.3%, in the second quarter of 2022 compared to the same period in 2021 primarily due to higher raw material (including titanium dioxide and petrochemical feedstock sources), supply chain inefficiencies, freight and transportation, and other input costs, partially offset by lower sales volumes in the Consumer Brands Group due primarily to weaker international sales and favorable currency translation rate changes. Currency translation rate changes decreased Cost of goods sold by 1.9% in the second quarter of 2022.

Consolidated gross profit increased $37.6 million in the second quarter of 2022 compared to the same period in 2021. Consolidated gross profit as a percent of consolidated net sales decreased in the second quarter to 41.7% compared to 44.8% during the same period in 2021. Consolidated gross profit dollars increased primarily due to higher sales in the Performance Coatings Group, partially offset by higher raw material costs in each Reportable Segment and lower sales volume in the Consumer Brands Group. The gross margin rate decreased primarily as a result of higher raw material costs and supply chain inefficiencies in each Reportable Segment.

The Americas Group’s gross profit in the second quarter was lower than the same period last year by $4.5 million due primarily to higher raw material costs and lower sales volume, partially offset by selling price increases. The Americas Group’s gross profit as a percent of net sales decreased in the second quarter compared to the same period in 2021 primarily due to higher raw material costs. The Consumer Brands Group’s gross profit decreased by $28.2 million in the second quarter compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies, partially offset by selling price increases. The Consumer Brands Group’s gross profit as a percent of net sales decreased in the second quarter compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $72.5 million in the second quarter compared to the same period last year due primarily to higher sales, partially offset by higher raw material costs and unfavorable currency translation rate changes. The Performance Coatings Group’s gross profit as a percent of net sales decreased in the second quarter compared to the same period last year primarily due to higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) increased $81.3 million in the second quarter versus the same period last year due primarily to increased expenses to support net new store openings and investments in digital technologies and system upgrades, partially offset by favorable currency translation rate changes. As a percent of net sales, consolidated SG&A decreased 80 basis points in the second quarter compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A increased $29.1 million in the second quarter compared to the same period last year due primarily to increased spending from new store openings, higher costs to serve our customers and investments in information systems. The Consumer Brands Group’s SG&A increased $32.5 million in the second quarter compared to the same period last year due to higher marketing spend and investments in customer programs. The Performance Coatings Group’s SG&A increased $16.5 million in the second quarter compared to the same period last year to support higher sales levels, partially offset by good cost control and favorable currency translation rate changes. The Administrative segment’s SG&A increased $3.2 million in the second quarter compared to the same period last year due primarily to higher investments in digital technologies, partially offset by favorable changes in compensation expense.

In the second quarter of 2022, Other general expense (income) - net declined $9.6 million compared to the same period in 2021 primarily due to higher losses from the sale and disposition of fixed assets in the Administrative segment. See Note 15 of Item 1 for additional information.

Interest expense increased $9.4 million in the second quarter compared to the same period last year due primarily to an increase in short-term borrowings and higher interest rates. See Note 6 of Item 1 for additional information on the Company’s outstanding debt.

In the second quarter of 2022, Other expense (income) - net declined $16.6 million compared to the same period in 2021 primarily due to lower returns on investments held in the Administrative segment. See Note 15 of Item 1 for additional information.

Six Months Ended June 30, 2022

Consolidated cost of goods sold increased $856.7 million, or 15.5%, in the first six months of 2022 compared to the same period in 2021 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources), supply chain inefficiencies, freight and transportation, and other input costs, partially offset by lower sales volumes in the Consumer Brands and The Americas Groups, as well as favorable currency translation rate changes. Currency translation rate changes decreased Cost of goods sold by 1.5% in the first six months of 2022.

Consolidated gross profit decreased $21.5 million in the first six months of 2022 compared to the same period in 2021. Consolidated gross profit as a percent of consolidated net sales decreased in the first six months to 41.4% compared to 45.1% during the same period in 2021. Consolidated gross profit dollars decreased primarily due to higher raw material costs in each Reportable Segment and lower sales volumes in The Americas Group and the Consumer Brands Group, partially offset by selling price increases in each Reportable Segment. The gross margin rate decreased primarily as a result of higher raw material costs and supply chain inefficiencies in each Reportable Segment.

The Americas Group’s gross profit in the first six months was lower than the same period last year by $20.6 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 first six months compared to the same period in 2021 primarily due to higher raw material costs. The Consumer Brands Group’s gross profit decreased by $102.5 million in the first six months compared to the same period last year due primarily to lower sales volume (including the impact from the Wattyl divestiture), 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 six months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $101.3 million in the first six months compared to the same period last year due primarily to higher sales, partially offset by higher raw material costs and unfavorable currency translation rate changes. The Performance Coatings Group’s gross profit as a percent of net sales decreased in the first six months compared to the same period last year primarily due to higher raw material costs.

Consolidated SG&A increased $162.9 million in the first six months versus the same period last year due primarily to increased expenses to support net new store openings and investments in digital technologies and system upgrades, partially offset by favorable currency translation rate changes. As a percent of net sales, consolidated SG&A decreased 60 basis points in the first six months compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A increased $51.7 million in the first six months compared to the same period last year due primarily to increased spending from new store openings, higher costs to serve our customers and investments in information systems. The Consumer Brands Group’s SG&A increased $41.9 million in the first six months compared to the same period last

year due to higher marketing spend and investments in customer programs. The Performance Coatings Group’s SG&A increased $36.9 million in the first six months compared to the same period last year to support higher sales levels, partially offset by good cost control and favorable currency translation rate changes. The Administrative segment’s SG&A increased $32.4 million in the first six months compared to the same period last year due primarily to higher investments in digital technologies.

In the first six months of 2022, Other general expense (income) - net improved $105.4 million compared to the same period in 2021 primarily due to the recognition of a $111.9 million loss on the Wattyl divestiture in the Administrative segment in the first quarter of 2021. See Note 15 of Item 1 for additional information.

For information on the amortization of acquired intangible assets and related impairment considerations, see Note 5 of Item 1 and Note 5 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Interest expense increased $14.6 million in the first six months of 2022 compared to the same period last year due primarily to an increase in short-term borrowings and higher interest rates. See Note 6 of Item 1 for additional information on the Company’s outstanding debt.

In the first six months of 2022, Other expense (income) - net declined $35.1 million compared to the same period in 2021 primarily due to lower returns on investments held in the Administrative segment. 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 21.9% for the second quarter of 2022 compared to 20.8% for the second quarter of 2021, and 21.0% for the first six months of 2022 compared to 20.3% for the first six months of 2021. The effective tax rate was favorably impacted by tax benefits related to employee share based payments during 2022 and 2021. 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 second quarter of 2022 decreased to $2.21 per share compared to $2.42 per share in the second quarter of 2021. Diluted net income per share for the second quarter of 2022 included a $0.20 per share charge for acquisition-related amortization expense. Diluted net income per share for the second quarter of 2021 included a $0.23 per share charge for acquisition-related amortization expense. Currency translation rate changes did not have a meaningful impact on diluted net income per share in the second quarter.

Diluted net income per share for the first six months of 2022 decreased to $3.61 per share compared to $3.93 per share in the first six months of 2021. Diluted net income per share for the first six months of 2022 included a $0.41 per share charge for acquisition-related amortization expense. Diluted net income per share for the first six months of 2021 included a $0.34 per share loss from the Wattyl divestiture and a $0.44 per share charge for acquisition-related amortization expense. Currency translation rate changes decreased diluted net income per share by $0.01 in the first six months.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition and liquidity remained strong at June 30, 2022. During the first six months of 2022, the Company generated $639.7 million in net operating cash despite increasing working capital requirements as a result of higher selling prices and raw material costs. During the first six months of 2022, the Company’s EBITDA decreased 6.7% to $1.669 billion. See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

Cash and cash equivalents increased $146.9 million during the first six months of 2022. Cash flow from operations and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return $1.011 billion to shareholders in the form of share buybacks and cash dividends during the first six months of 2022, as well as repay $260.2 million in long-term debt.

At June 30, 2022, the Company had cash and cash equivalents of $312.6 million and total debt outstanding of $10.606 billion. Total debt, net of cash and cash equivalents, was $10.294 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, increased $66.0 million to a deficit of $938.7 million at June 30, 2022 compared to a deficit of $1,004.7 million at June 30, 2021. The net working capital increase is due to an increase in current assets, partially offset by an increase in current liabilities.

Current asset balances increased $1.074 billion at June 30, 2022 compared to June 30, 2021 primarily due to cash and cash equivalents increase of $93.0 million, accounts receivable increase of $391.9 million due to higher sales, inventories increase of $607.5 million due to higher raw material costs, and other current assets decrease of $18.6 million primarily related to prepaid expenses.

Current liability balances increased $1.008 billion at June 30, 2022 compared to June 30, 2021 primarily due to an increase in current debt as short-term borrowings increased $1.250 billion, partially offset by a $686.5 million decrease in the current portion of long-term debt. Excluding short-term borrowings and the current portion of long-term debt, current liabilities increased $444.4 million primarily due to the timing of payments related to accounts payable and accrued taxes. At June 30, 2022, the Company’s current ratio was 0.87 compared to 0.88 and 0.84 at December 31, 2021 and June 30, 2021, respectively.

Property, Plant and Equipment

Net property, plant and equipment increased $94.6 million in the first six months of 2022 and increased $155.6 million in the twelve months since June 30, 2021. The increase in the first six months was primarily due to capital expenditures of $235.8 million and incremental assets recognized through acquisitions of $23.5 million, partially offset by depreciation expense of $130.3 million and the sale or disposition of fixed assets of $14.1 million. Since June 30, 2021, the increase was primarily due to capital expenditures of $456.4 million and incremental assets recognized through acquisition of $51.8 million, partially offset by depreciation expense of $257.0 million, unfavorable changes in foreign currency translation of $77.1 million and sale or disposition of fixed assets of $18.5 million.

Capital expenditures primarily represented expenditures in The Americas Group associated with the opening of new paint stores and renovation and improvements in existing stores, and expenditures associated with operational efficiencies, capacity, health and safety at sites currently in operation in the Consumer Brands and Performance Coatings Groups. The Administrative segment incurred capital expenditures primarily related to construction activities associated with expenditures related to the construction of our new headquarters and R&D center.

Goodwill and Intangible Assets

Goodwill and intangible assets decreased $74.9 million from December 31, 2021 and decreased $122.1 million from June 30, 2021. The net decrease during the first six months of 2022 was primarily due to amortization of $156.5 million and foreign

currency translation of $108.2 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $189.8 million. The net decrease over the twelve month period from June 30, 2021 was primarily due to amortization of $309.0 million and foreign currency translation of $168.1 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $355.0 million.

See Note 3 in Item 1 for additional information on the Company’s recognition of incremental goodwill and intangible assets in the current year in connection with recent acquisitions. See Note 6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information concerning the Company's goodwill and intangible assets, including impairment testing of these assets.

Other Assets

Other assets increased $138.8 million from December 31, 2021 and increased $347.7 million from June 30, 2021. The increase in the first six months was primarily due to an increase in other investments, partially offset by the sale of investments to fund the Company’s domestic defined contribution plan. The increase from June 30, 2021 was primarily due to an increase in other investments (including an increase in deferred pension assets) and deferred tax assets, partially offset by the sale of investments to fund the Company’s domestic defined contribution plan. 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, 2021. The Company had unused capacity under its various credit agreements of $1.506 billion at June 30, 2022. See Note 6 in Item 1 of this report for additional information.

Defined Benefit Pension and Other Postretirement Benefit Plans

Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly from December 31, 2021 and June 30, 2021. See Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

Deferred income taxes decreased $14.2 million from December 31, 2021, and decreased $49.4 million from June 30, 2021, primarily due to amortization of acquisition-related intangible assets.

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 six months of 2022. 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 2022. See Note 8 in Item 1 for further information on environmental-related long-term liabilities.

Contractual Obligations, Commercial Commitments and Warranties

During the second quarter of 2022, the Company completed the acquisition of the European industrial coatings business of Sika AG (Sika). This business engineers, manufactures and sells corrosion protection coating systems and fire protection coating systems. The acquired business will be reported within the Company’s Performance Coatings Group.

Subsequent to quarter end, the Company completed the acquisition of a domestic floor coatings company and a European coatings company. These acquired businesses will be reported within the Company’s Performance Coatings Group. The Company funded the acquisitions, totaling approximately $425 million, in July 2022 through cash generated from operating activities and borrowings available under committed credit agreements.

Except for the closing of the acquisitions discussed above and in Note 3 of Item 1, and the incremental short-term borrowings discussed above, there have been no other significant changes to the Company’s contractual obligations and commercial commitments in the first six months of 2022 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, 2021.

Litigation

See Note 9 in Item 1 for information concerning litigation.

Shareholders’ Equity

Shareholders’ equity decreased $212.6 million during the first six months of 2022 as a result of $725.5 million of Treasury stock activity primarily attributable to treasury stock repurchases, cash dividends paid on common stock of $307.1 million and a decrease in Accumulated other comprehensive loss of $216.2 million, partially offset by net income of $948.7 million and an increase in Other capital of $87.3 million primarily associated with stock-based compensation expense and stock option exercises.

Shareholders’ equity decreased $615.8 million since June 30, 2021 as a result of $1.834 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $596.5 million, partially offset by net income of $1.755 billion and an increase in Other capital of $272.2 million primarily associated with stock-based compensation expense and stock option exercises.

During the first six months of 2022, the Company purchased 2.55 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, 2022 to purchase 46.0 million shares of its common stock.

In February 2022, the Company's Board of Directors increased the quarterly cash dividend from $.55 per share to $.60 per share. If approved in all subsequent quarters, this quarterly dividend will result in an annual dividend for 2022 of $2.40 per share or a 34% payout of 2021 diluted net income per share.

Cash Flow

Net operating cash for the six months ended June 30, 2022 was a cash source of $639.7 million compared to a cash source of $1.201 billion for the same period in 2021. The decrease in net operating cash was primarily due to the change in net income, including the effect of the loss on the Wattyl divestiture in the prior year comparable period, and an increase in cash requirements for working capital.

Net investing cash usage increased $401.4 million in the first six months of 2022 to a usage of $473.9 million compared to a usage of $72.5 million for the same period in 2021 primarily due to an increase in cash used for acquisitions and capital expenditures, as well as the proceeds received from the Wattyl divestiture in the prior year. See Note 3 in Item 1 for additional information on acquisitions.

Net financing cash usage decreased $1.117 billion in the first six months of 2022 to a usage of $8.0 million from a usage of $1.125 billion for the same period in 2021 primarily due to lower treasury stock purchases and incremental cash provided by short-term borrowings, partially offset by an increase in long-term debt repayments.

In the twelve month period from July 1, 2021 through June 30, 2022, the Company generated net operating cash of $1.683 billion, used $877.8 million in investing activities and used $716.7 million 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 $662.7 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 June 30, 2022, 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, 2021 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 in 2021. 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, 2021. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2021.

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, predictions, 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,” “target,” “potential,” “seek,” “intend,” “aspire” 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, performance 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, including due to higher inflation rates, interest rates, tax rates and 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;

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

• cybersecurity incidents and other disruptions to our information technology systems and operations;

• 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, political instability, inflation rates, recessions, sanctions, foreign currency exchange rates and controls, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, armed conflict (including the ongoing conflict between Russia and Ukraine), war and other 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 or revised tax laws or 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 natural disasters, including due to the impacts of climate change; and

• public health crises, including 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 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 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, 2021.

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 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 (“the Exchange Act”). Based upon that evaluation, our Chairman 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 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 year ended December 31, 2021. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. During the six months ended June 30, 2022, there were no material changes to our previously disclosed risk factors.

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

A summary of the Company’s second 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.

None.

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.