Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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 17.5% in the quarter to $6.047 billion

**◦**Net sales from stores in U.S. and Canada open more than twelve calendar months increased 20.7% in the quarter

• Diluted net income per share was $2.62 per share in the quarter compared to $1.88 per share in the third quarter 2021

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) increased to $1.124 billion, or 18.6% of sales, in the quarter

OUTLOOK

Demand remained strong during the third quarter as pricing initiatives were realized in each of our businesses and volumes increased in all architectural paint end markets in The Americas Group. In the Performance Coatings Group, sales grew in every division as a result of pricing actions and contributions from acquisitions. The Consumer Brands Group continued to gain momentum in North America with our retail partners. Consolidated gross margin and profit improved sequentially and year-over-year.

The Company expects the strong positive results we experienced in the third quarter to continue into the fourth quarter, driven by continued momentum in both The Americas Group and North American industrial end markets, continued price realization, good cost control, and softer year-over-year comparisons. In the near term, our team will continue to remain focused on new account growth, expanding product offerings to existing customers and managing expenses tightly, given interest rate actions designed to slow U.S. demand and the expectations of continued macro headwinds in Europe and China into next year. The trajectory of raw material costs is trending favorably as we exit the year, although the pace and level of potential relief next year is difficult to project. We remain confident in our strategy, our capabilities and solutions, and our people.

We maintained 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 $130.5 million in cash and $2.826 billion of unused capacity under our credit facilities at September 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 nine months ended September 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 nine months ended September 30, 2022 and 2021.

Net Sales

			Three Months Ended September 30,																								Nine Months Ended September 30,
			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
The Americas Group			$	3,602.7					$	2,967.0					$	635.7					21.4		%				$	9,589.9					$	8,563.5					$	1,026.4					12.0		%
Consumer Brands Group			701.9						646.7						55.2						8.5		%				2,139.2						2,156.3						(17.1)						(0.8)		%
Performance Coatings Group			1,741.7						1,532.5						209.2						13.7		%				5,186.1						4,461.3						724.8						16.2		%
Administrative			1.1						0.5						0.6						120.0		%				3.2						1.4						1.8						128.6		%
Total			$	6,047.4					$	5,146.7					$	900.7					17.5		%				$	16,918.4					$	15,182.5					$	1,735.9					11.4		%

Three Months Ended September 30, 2022

Consolidated net sales increased in the third quarter of 2022 primarily due to selling price increases in all segments and higher architectural sales volume in The Americas Group, partially offset by lower sales volume in the Consumer Brands Group. Currency translation rate changes decreased consolidated net sales by 2.1% in the third quarter. Net sales of all consolidated foreign subsidiaries increased 4.5% to $1.064 billion in the third quarter compared to $1.019 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the third quarter was due primarily to selling price increases in the Latin America and APAC regions, partially offset by lower sales volumes in most end markets for the EMEAI region and unfavorable currency translation. Net sales of all operations other than consolidated foreign subsidiaries increased 20.7% to $4.983 billion in the third quarter compared to $4.128 billion in the same period last year.

Net sales in The Americas Group increased in the third quarter due primarily to higher architectural sales volume across all end markets and selling price increases. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 20.7% in the third quarter compared to last year’s comparable period. Sales of non-paint products increased 4.9% 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 increased in the third quarter due primarily to selling price increases in all regions, partially offset by lower sales volume outside of North America and continued tightness in alkyd resins impacting certain product sales in North America. Currency translation rate changes decreased the Consumer Brands Group's net sales by 1.6% in the third quarter.

Net sales in the Performance Coatings Group increased in the third quarter due to higher sales volume in most end markets, primarily attributable to selling price increases and acquisitions, partially offset by lower sales volume outside of North America. Currency translation rate changes decreased the Performance Coatings Group's net sales by 5.1% in the third quarter.

Nine Months Ended September 30, 2022

Consolidated net sales increased in the first nine months of 2022 primarily due to selling price increases in all segments and higher architectural sales volume in The Americas Group, partially offset by lower sales volume outside of North America. Currency translation rate changes decreased net sales by 1.4% in the first nine months. Net sales of all consolidated foreign subsidiaries increased 3.3% to $3.262 billion in the first nine months compared to $3.158 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 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 13.6% to $13.656 billion in the first nine months compared to $12.025 billion in the same period last year.

Net sales in The Americas Group increased in the first nine months due primarily to selling price increases and higher sales volume in all professional end markets, partially offset by lower sales volume in DIY. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 10.6% in the first nine months compared to last year’s comparable period. Sales of non-paint products increased 0.5% compared to 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 in the Consumer Brands Group decreased in the first nine 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 1.0% in the first nine months.

Net sales in the Performance Coatings Group increased in the first nine months due to higher sales in all end markets, primarily attributable to selling price increases and contributions from acquisitions. Currency translation rate changes decreased the Performance Coatings Group's net sales by 3.6% in the first nine 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 September 30,																								Nine Months Ended September 30,
			2022												2021												2022												2021
									% of Net Sales												% of Net Sales												% of Net Sales												% of Net Sales
Net sales			$	6,047.4					100.0		%				$	5,146.7					100.0		%				$	16,918.4					100.0		%				$	15,182.5					100.0		%
Cost of goods sold			3,458.0						57.2		%				3,007.1						58.4		%				9,827.1						58.1		%				8,519.5						56.1		%
Gross profit			2,589.4						42.8		%				2,139.6						41.6		%				7,091.3						41.9		%				6,663.0						43.9		%
SG&A			1,528.6						25.3		%				1,368.9						26.6		%				4,455.2						26.3		%				4,132.6						27.2		%
Other general (income) expense - net			(14.4)						(0.2)		%				(1.1)						—		%				(7.5)						—		%				111.2						0.7		%
Amortization			81.3						1.3		%				76.2						1.5		%				237.8						1.4		%				233.2						1.5		%
Interest expense			101.2						1.6		%				83.1						1.6		%				282.5						1.6		%				249.8						1.7		%
Interest income			(2.6)						—		%				(0.7)						—		%				(4.8)						—		%				(1.9)						—		%
Other expense (income) - net			18.1						0.3		%				1.7						—		%				49.9						0.3		%				(1.6)						—		%
Income before income taxes			$	877.2					14.5		%				$	611.5					11.9		%				$	2,078.2					12.3		%				$	1,939.7					12.8		%

Three Months Ended September 30, 2022

Consolidated cost of goods sold increased $450.9 million, or 15.0%, in the third quarter of 2022 compared to the same period in 2021 primarily due to higher sales volume in The Americas Group and higher raw material costs (including titanium dioxide and petrochemical feedstock sources), freight and transportation, and other input costs, partially offset by lower sales volume outside of North America in the Consumer Brands Group and favorable currency translation rate changes. Currency translation rate changes decreased Cost of goods sold by 2.7% in the third quarter of 2022.

Consolidated gross profit increased $449.8 million in the third quarter of 2022 compared to the same period in 2021. Consolidated gross profit as a percent of consolidated net sales increased in the third quarter to 42.8% compared to 41.6% during the same period in 2021. Consolidated gross profit dollars increased primarily due to selling price increases in all Reportable Segments and higher sales volume in The Americas 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 third quarter was higher than the same period last year by $284.5 million due primarily to selling price increases and higher sales volume in all architectural paint end markets, partially offset by higher raw material costs. The Americas Group’s gross profit as a percent of net sales decreased in the third quarter compared to the same period in 2021 primarily due to higher raw material costs. The Consumer Brands Group’s gross profit increased by $18.3 million in the third quarter compared to the same period last year due primarily to selling price increases, partially offset by higher raw material costs, lower sales volume 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 increased $141.1 million in the third quarter compared to the same period last year due primarily to selling price increases, 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 increased in the third quarter compared to the same period last year primarily due to selling price increases, partially offset by higher raw material costs.

Consolidated selling, general and administrative expenses (SG&A) increased $159.7 million in the third 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 130 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 increased $157.2 million in the third quarter compared to the same period last year due primarily to increased spending from new store openings and higher costs to serve our customers. The Consumer Brands Group’s SG&A decreased $1.2 million in the third quarter compared to the same period last year due to lower marketing spend and good cost

control. The Performance Coatings Group’s SG&A increased $10.7 million in the third quarter compared to the same period last year primarily due to acquisitions, partially offset by good cost control and favorable currency translation rate changes. The Administrative segment’s SG&A decreased $7.0 million in the third quarter compared to the same period last year due primarily to lower investments in digital technologies.

In the third quarter of 2022, Other general (income) expense - net improved $13.3 million compared to the same period in 2021 primarily due to higher gains from the sale and disposition of fixed assets, partially offset by an increase in provisions for environmental matters in the Administrative segment. See Note 15 of Item 1 for additional information.

Interest expense increased $18.1 million in the third quarter compared to the same period last year due primarily to higher interest rates and an increase in outstanding debt. See Note 6 of Item 1 for additional information on the Company’s outstanding debt.

In the third quarter of 2022, Other expense (income) - net declined $16.4 million compared to the same period in 2021 primarily due to higher foreign currency transaction related losses in the Administrative segment. See Note 15 of Item 1 for additional information.

Nine Months Ended September 30, 2022

Consolidated cost of goods sold increased $1.308 billion, or 15.3%, in the first nine months of 2022 compared to the same period in 2021 primarily due to higher sales volume in The Americas Group and 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 volume in the Consumer Brands Group, as well as favorable currency translation rate changes. Currency translation rate changes decreased Cost of goods sold by 1.9% in the first nine months of 2022.

Consolidated gross profit increased $428.3 million in the first nine months of 2022 compared to the same period in 2021. Consolidated gross profit as a percent of consolidated net sales decreased in the first nine months to 41.9% compared to 43.9% during the same period in 2021. Consolidated gross profit dollars increased primarily due to selling price increases in each Reportable Segment and higher sales volume in The Americas Group, partially offset by higher raw material costs in each Reportable Segment and lower sales volumes in the Consumer Brands Group. The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment and supply chain inefficiencies in the Consumer Brands Group.

The Americas Group’s gross profit in the first nine months was higher than the same period last year by $263.9 million due primarily to selling price increases and higher sales volume, 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 compared to the same period in 2021 primarily due to higher raw material costs. The Consumer Brands Group’s gross profit decreased by $84.2 million in the first nine 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 nine months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $242.4 million in the first nine months compared to the same period last year due primarily to higher selling prices, 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 increased in the first nine months compared to the same period last year primarily due to higher selling prices, partially offset by higher raw material costs.

Consolidated SG&A increased $322.6 million in the first nine 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 90 basis points in the first nine months compared to the same period last year primarily due to good cost control.

The Americas Group’s SG&A increased $208.9 million in the first nine 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 $40.7 million in the first nine 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 $47.6 million in the first nine months compared to the same period last year due primarily to acquisitions and to support higher sales levels, partially offset by good cost control and favorable currency translation rate changes. The Administrative segment’s SG&A increased $25.4 million in the first nine months compared to the same period last year due primarily to integration costs related to acquisitions and higher investments in digital technologies.

In the first nine months of 2022, Other general (income) expense - net improved $118.7 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 $32.7 million in the first nine months of 2022 compared to the same period last year due primarily to higher interest rates and an increase in outstanding debt. See Note 6 of Item 1 for additional information on the Company’s outstanding debt.

In the first nine months of 2022, Other expense (income) - net declined $51.5 million compared to the same period in 2021 primarily due to lower returns on investments held in the Administrative segment and higher foreign currency transaction related losses. 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:

			Three Months Ended September 30,																		Nine Months Ended September 30,
			2022						2021						% Change						2022						2021						% Change
Income Before Income Taxes:
The Americas Group			$	764.1					$	631.5					21.0		%				$	1,909.9					$	1,838.8					3.9		%
Consumer Brands Group			94.9						75.8						25.2		%				223.3						342.3						(34.8)		%
Performance Coatings Group			236.3						110.4						114.0		%				577.6						399.0						44.8		%
Administrative			(218.1)						(206.2)						(5.8)		%				(632.6)						(640.4)						1.2		%
Total			$	877.2					$	611.5					43.5		%				$	2,078.2					$	1,939.7					7.1		%
Income Before Income Taxes as a % of Net Sales:
The Americas Group			21.2		%				21.3		%										19.9		%				21.5		%
Consumer Brands Group			13.5		%				11.7		%										10.4		%				15.9		%
Performance Coatings Group			13.6		%				7.2		%										11.1		%				8.9		%
Administrative			nm						nm												nm						nm
Total			14.5		%				11.9		%										12.3		%				12.8		%
nm - not meaningful

Income Tax Expense

The effective tax rate was 21.9% for the third quarter of 2022 compared to 17.9% for the third quarter of 2021, and 21.4% for the first nine months of 2022 compared to 19.6% for the first nine months of 2021. The effective tax rate was less favorably impacted by tax benefits related to employee share based payments in the third quarter and first nine months of 2022 than in the same periods last year. 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 2022 increased 39.4% to $2.62 per share compared to $1.88 per share in the third quarter of 2021. Diluted net income per share for the third quarter of 2022 included a $0.21 per share charge for acquisition-related amortization expense. Diluted net income per share for the third quarter of 2021 included a $0.21 per share charge for acquisition-related amortization expense. Currency translation rate changes decreased diluted net income per share by $0.04 in the third quarter.

Diluted net income per share for the first nine months of 2022 increased 7.0% to $6.23 per share compared to $5.82 per share in the first nine months of 2021. Diluted net income per share for the first nine months of 2022 included a $0.61 per share charge for acquisition-related amortization expense. Diluted net income per share for the first nine months of 2021 included a $0.34 per share loss from the Wattyl divestiture and a $0.64 per share charge for acquisition-related amortization expense. Currency translation rate changes decreased diluted net income per share by $0.06 in the first nine months.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition and liquidity remained strong at September 30, 2022. During the first nine months of 2022, the Company generated $1.279 billion in net operating cash despite increasing working capital requirements as a result of higher selling prices and raw material costs. During the first nine months of 2022, the Company’s EBITDA increased 6.5% to $2.793 billion. See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

Cash and cash equivalents decreased $35.2 million during the first nine months of 2022. Cash flow from operations, along with increased short-term borrowings and long-term debt, funded normal seasonal working capital increases and allowed the Company to return $1.214 billion to shareholders in the form of share buybacks and cash dividends, repay $260.3 million in long-term debt, and close acquisitions with an aggregate purchase price of $649.1 million during the first nine months of 2022.

At September 30, 2022, the Company had cash and cash equivalents of $130.5 million and total debt outstanding of $10.535 billion. Total debt, net of cash and cash equivalents, was $10.404 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 $1.121 billion to a surplus of $21.2 million at September 30, 2022 compared to a deficit of $1.100 billion at September 30, 2021. The net working capital increase is due to an increase in current assets and a decrease in current liabilities.

Current asset balances increased $738.8 million at September 30, 2022 compared to September 30, 2021 primarily due to an increase in inventories of $731.8 million due to higher raw material costs and an increase in accounts receivable of $299.6 million due to higher sales, partially offset by a decrease in cash and cash equivalents of $182.8 million and a decrease in other current assets of $109.8 million primarily related to prepaid expenses and refundable income taxes.

Current liability balances decreased $382.5 million at September 30, 2022 compared to September 30, 2021 primarily due to a decrease in current debt as current portion of long-term debt decreased $661.5 million, partially offset by an increase in short-term borrowings of $235.8 million. Excluding short-term borrowings and the current portion of long-term debt, current liabilities increased $43.2 million primarily due to the timing of payments related to accounts payable and accrued taxes. At September 30, 2022, the Company’s current ratio was 1.00 compared to 0.88 and 0.83 at December 31, 2021 and September 30, 2021, respectively.

Property, Plant and Equipment

Net property, plant and equipment increased $173.9 million in the first nine months of 2022 and increased $214.0 million in the twelve months since September 30, 2021. The increase in the first nine months was primarily due to capital expenditures of $397.5 million and incremental assets recognized through acquisitions of $46.9 million, partially offset by depreciation expense of $194.8 million, unfavorable changes in foreign currency translation of $52.8 million and the sale or disposition of fixed assets of $22.9 million. Since September 30, 2021, the increase was primarily due to capital expenditures of $521.5 million and incremental assets recognized through acquisition of $75.2 million, partially offset by depreciation expense of $258.1 million, unfavorable changes in foreign currency translation of $98.6 million and sale or disposition of fixed assets of $26.0 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 increased $140.4 million from December 31, 2021 and increased $211.4 million from September 30, 2021. The net increase during the first nine months of 2022 was primarily due to incremental goodwill and intangible assets recognized from acquisitions of $600.7 million and capitalized software of $13.2 million, partially offset by amortization of $237.8 million and foreign currency translation of $235.7 million. The net increase over the twelve month period from September 30, 2021 was primarily due to incremental goodwill and intangible assets recognized from acquisitions of $765.9 million and capitalized software of $13.2 million, partially offset by amortization of $314.1 million and foreign currency translation of $253.6 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 $168.9 million from December 31, 2021 and increased $266.4 million from September 30, 2021. The increase in the first nine months was primarily due to an increase in other investments and the net investment hedge asset, partially offset by the sale of investments to fund the Company’s domestic defined contribution plan. The increase from September 30, 2021 was primarily due to an increase in other investments (including an increase in deferred pension assets), the net investment hedge asset 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)

			September 30,						December 31,						September 30,
			2022						2021						2021
Long-term debt (including current portion)			$	9,589.5					$	8,851.5					$	8,267.0
Short-term borrowings			945.2						763.5						709.4
Total debt outstanding			$	10,534.7					$	9,615.0					$	8,976.4

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. In August 2022, the Company issued $600.0 million of 4.050% Senior Notes due 2024 and $400.0 million of 4.250% Senior Notes due 2025 in a public offering. The net proceeds from the issuance of these notes were used to repay borrowings outstanding under the Company’s credit agreement dated May 9, 2016, as amended, and domestic commercial paper program.

On August 30, 2022, the Company and two of its wholly-owned subsidiaries, Sherwin-Williams Canada Inc. (SW Canada) and Sherwin-Williams Luxembourg S.à r.l. (SW Luxembourg, together with the Company and SW Canada, the Borrowers), entered into a new five-year $2.250 billion credit agreement (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 $2.000 billion credit agreement dated June 29, 2021, as amended, which was terminated effective August 30, 2022. The New Credit Agreement will mature on August 30, 2027 and provides that the Company may request to extend the maturity date of the facility for two additional one-year periods. In addition, the New Credit Agreement provides that the Borrowers may increase the aggregate size of the facility up to an additional amount of $750.0 million, subject to the discretion of each lender to participate in the increase, and the Borrowers may request letters of credit in an amount of up to $250.0 million.

The Company had unused capacity under its various credit agreements of $2.826 billion at September 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 September 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 $76.4 million from December 31, 2021, and decreased $109.7 million from September 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 nine 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 first nine months of 2022, the Company completed the acquisition of a domestic floor coatings company and three European coatings companies. The acquired businesses will be reported within the Company’s Performance Coatings Group. The Company funded the acquisitions, totaling approximately $649.1 million, through cash generated from operating activities and borrowings under committed credit agreements.

During the third quarter of 2022, the Company signed an agreement to acquire Industria Chimica Adriatica S.p.A. (ICA), an Italian designer, manufacturer and distributor of industrial wood coatings with global operations and production facilities in Italy and Poland. The transaction is subject to customary closing conditions and is expected to close by the end of 2022.

Except for the acquisitions discussed above and 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 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

			September 30,						December 31,						September 30,
			2022						2021						2021
Total shareholders’ equity			$	2,597.8					$	2,437.2					$	2,690.3

Shareholders’ equity increased $160.6 million during the first nine months of 2022 as a result of net income of $1,633.8 million and an increase in Other capital of $126.6 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $773.1 million of Treasury stock activity primarily attributable to treasury stock repurchases, cash dividends paid on common stock of $462.9 million and a decrease in Accumulated other comprehensive loss of $364.1 million.

Shareholders’ equity decreased $92.5 million since September 30, 2021 as a result of $1.380 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $607.1 million, partially offset by net income of $1.938 billion and an increase in Other capital of $231.5 million primarily associated with stock-based compensation expense and stock option exercises.

During the first nine months of 2022, the Company purchased 2.75 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, 2022 to purchase 45.8 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. This quarterly dividend was approved in all subsequent quarters and 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 nine months ended September 30, 2022 was a cash source of $1.279 billion compared to a cash source of $2.051 billion for the same period in 2021. The decrease in net operating cash was primarily due to an increase in cash requirements for working capital.

Net investing cash usage increased $823.8 million in the first nine months of 2022 to a usage of $1.051 billion compared to a usage of $226.7 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 $1.474 billion in the first nine months of 2022 to a usage of $263.6 million from a usage of $1.738 billion for the same period in 2021 primarily due to lower level of cash used for treasury stock purchases and an increase in net proceeds from debt (including short-term borrowings and long-term debt).

In the twelve month period from October 1, 2021 through September 30, 2022, the Company generated net operating cash of $1.473 billion, used $1,300.2 million in investing activities and used $359.9 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 and $194.5 million of outstanding foreign currency forward contracts not designated as hedging instruments.

Financial Covenant

Certain borrowings contain a consolidated leverage covenant. The covenant states that the Company’s consolidated leverage ratio is not to exceed 3.75 to 1.00, however, the Company may elect to temporarily increase the leverage ratio to 4.25 to 1.00 for a period of four consecutive fiscal quarters immediately following the consummation of a qualifying acquisition, as defined in the credit agreement dated August 30, 2022. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated “Earnings Before Interest, Taxes, Depreciation, and Amortization” (EBITDA), as defined in the credit agreement, for the 12-month period ended on the same date. Refer to the “Non-GAAP Financial Measures” section below for a reconciliation of EBITDA to Net income. At September 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:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Net income			$	685.1					$	502.2					$	1,633.8					$	1,560.4
Interest expense			101.2						83.1						282.5						249.8
Income taxes			192.1						109.3						444.4						379.3
Depreciation			64.5						63.4						194.8						199.8
Amortization			81.3						76.2						237.8						233.2
EBITDA			$	1,124.2					$	834.2					$	2,793.3					$	2,622.5
Loss on divestiture			—						—						—						111.9
Adjusted EBITDA			$	1,124.2					$	834.2					$	2,793.3					$	2,734.4

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.