Sherwin-Williams 10-Q 2023-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended March 31, 2023

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 – 257,890,316 shares as of March 31, 2023.

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 March 31, 2023 and 2022 include unrealized unrealized gains (losses), net of taxes, of $(4.2) million and $8.1 million, respectively, related to net investment hedges. See Note 13 for additional information.

(2) Net of taxes of $1.7 million and $(0.2) million in the three months ended March 31, 2023 and 2022, respectively.

(3) Net of taxes of $0.3 million in the three months ended March 31, 2023 and 2022.

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 - Paint Stores 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 19 of Item 1 for additional information on the Company's Reportable Segments.

Effective January 1, 2023, the Company changed its organizational structure to manage and report the Latin America architectural paint business within the Consumer Brands Group to more closely align demand and service model trends with its current business strategy. The Latin America business was formerly part of The Americas Group, which has become the Paint Stores Group concurrent with this change. The Company will report segment results for the newly realigned Paint Stores Group and Consumer Brands Group, for both current and prior periods presented, beginning with the first quarter of 2023.

SUMMARY

• Consolidated net sales increased 8.9% in the quarter to $5.442 billion

**◦**Net sales from stores in U.S. and Canada open more than twelve calendar months increased 14.2% in the quarter

• Diluted net income per share increased 30.5% to $1.84 per share in the quarter compared to $1.41 per share in the first quarter 2022

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) increased 26.7% to $878.2 million in the quarter

The Company delivered strong first quarter results as pricing initiatives were realized in each of our businesses. Sales growth was driven primarily by architectural paint, protective and marine, commercial and residential repaint end markets within the Paint Stores Group. In the Performance Coatings Group, sales benefited from pricing actions and contributions from acquisitions. Growth was strongest in Automotive Refinish, with modest improvements in General Industrial and Coil Coatings. This growth was partially offset by softness in Packaging and Industrial Wood. Within the Consumer Brands Group, strength in the Latin America region was partially offset by weakness in all other regions, particularly Europe and China. Consolidated gross profit and margin in the first quarter improved both sequentially and year-over-year.

OUTLOOK

We continue to expect a very challenging demand environment, particularly in the second half of 2023 against difficult year-over-year comparisons. Although our visibility remains limited at this time, we anticipate softness in new residential and retail home improvement end markets, particularly in North America. Our industrial end markets are expected to be impacted by slow economic recovery in Europe and China, and we are experiencing increased pressure within North America. However, we will continue to prioritize our focus on recession resilient markets, new account growth, and managing expenses prudently. We are confident in our differentiated strategy, capabilities, product and service solutions, and our people.

Our capital deployment strategy remains balanced and disciplined, with an emphasis on driving value for our customers and returns to our shareholders. We continue to pursue business acquisitions, transactions, and investments that fit our long-term growth strategy. We will return value to our shareholders through the payment of dividends and the reinvestment of excess cash for share repurchases of Company stock. We have a strong liquidity position, with $151.4 million in cash and $2.228 billion of unused capacity under our credit facilities at March 31, 2023. 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 months ended March 31, 2023 are not indicative of the results to be expected for the full year as our business is seasonal in nature, with the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters. However, periods of economic uncertainty can alter the Company's seasonal patterns.

The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three months ended March 31, 2023 and 2022.

Net Sales

Three Months Ended March 31, 2023

Consolidated net sales increased in the first quarter of 2023 primarily due to selling price increases in all segments and higher architectural sales volume in the Paint Stores Group, partially offset by lower sales volume in the Consumer Brands and Performance Coatings Groups. Acquisitions added 1.8% to net sales, while currency translation rate changes decreased consolidated net sales by 1.0% in the first quarter. Net sales of all consolidated foreign subsidiaries increased to $1.087 billion in the first quarter compared to $1.078 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries was due to growth in the Latin America and Europe regions driven primarily from sales price increases, as well as contributions from acquisitions, partially offset by lower sales in most end markets for the Asia region and unfavorable currency translation. Net sales of all operations other than consolidated foreign subsidiaries increased to $4.356 billion in the first quarter compared to $3.921 billion in the same period last year.

Net sales in the Paint Stores Group increased in the first quarter due primarily to higher volume in protective and marine, property maintenance, commercial and residential repaint, as well as selling price increases. Net sales from stores open for more than twelve calendar months increased 14.2% in the first quarter compared to last year’s comparable period. Sales of non-paint products increased 26.5% compared to last year's first 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 first quarter due primarily to selling price increases in all regions and strong growth within Latin America, partially offset by lower sales volumes in all other regions. Currency translation rate changes decreased the Consumer Brands Group's net sales by 1.7% in the first quarter.

Net sales in the Performance Coatings Group increased in the first quarter primarily due to selling price increases in all end markets and incremental sales from acquisitions, partially offset by lower sales volumes in Asia and Europe. Acquisitions added 5.4% to the Performance Coatings Group’s net sales, while currency translation rate changes decreased net sales by 1.9% in the first quarter.

Income Before Income Taxes

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

Three Months Ended March 31, 2023

Consolidated cost of goods sold increased $75.7 million, or 2.6%, in the first quarter of 2023 compared to the same period in 2022 primarily due to higher sales volume in the Paint Stores Group, as well as impacts of inflation in wages and other employee-related costs. This increase was partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups, a slight decrease in raw material costs, and favorable impacts of currency translation rate changes. Currency translation rate changes decreased Cost of goods sold by 1.1% in the first quarter of 2023.

Consolidated gross profit increased $368.0 million in the first quarter of 2023 compared to the same period in 2022. Consolidated gross profit as a percent of consolidated net sales increased in the first quarter to 44.5% compared to 41.1% during the same period in 2022. Consolidated gross profit dollars increased primarily due to selling price increases in all Reportable Segments and higher sales volume in the Paint Stores Group, partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups and unfavorable currency translation rate changes. The gross margin rate increased primarily as a result of benefits from selling price increases in each Reportable Segment.

The Paint Stores Group’s gross profit in the first quarter was higher than the same period last year by $225.7 million due primarily to selling price increases and higher sales volume in architectural paint end markets. The Paint Stores Group’s gross profit as a percent of net sales increased in the first quarter compared to the same period in 2022 primarily due to higher sales driven by both increased volume and selling price actions. The Consumer Brands Group’s gross profit increased by $22.5 million in the first quarter compared to the same period last year due primarily to selling price increases, partially offset by lower sales volume and inflation in wages and other employee related costs. The Consumer Brands Group’s gross profit as a percent of net sales was comparable in the first quarter to the same period last year. The Performance Coatings Group’s gross profit increased $130.4 million in the first quarter compared to the same period last year due primarily to selling price increases. The Performance Coatings Group’s gross profit as a percent of net sales increased in the first quarter compared to the same period last year also due to selling price increases.

Consolidated selling, general and administrative expenses (SG&A) increased $207.5 million in the first quarter versus the same period last year due primarily to increased expenses to support higher sales levels and net new store openings, and investments in digital technologies and system upgrades. These increases were partially offset by favorable currency translation rate changes. As a percent of net sales, consolidated SG&A increased 140 basis points in the first quarter compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $140.7 million in the first quarter compared to the same period last year due primarily to investments in long-term growth initiatives, including increased spending from new store openings and costs to support higher sales levels. The Consumer Brands Group’s SG&A increased $6.5 million in the first quarter compared to the same period last year due to higher employee costs including in the Latin America region to support higher sales levels, partially offset by favorable currency translation rate changes. The Performance Coatings Group’s SG&A increased $48.3 million in the first quarter compared to the same period last year primarily due to costs to support higher sales levels and acquisitions, partially offset by favorable currency translation rate changes. The Administrative segment’s SG&A increased $12.0 million in the first quarter compared to the same period last year due primarily to higher compensation and investments in digital technologies.

In the first quarter of 2023, Other general expense - net increased $8.0 million compared to the same period in 2022 primarily due to an increase in provisions for environmental matters in the Administrative segment, partially offset by higher gains from the sale and disposition of assets. See Note 16 of Item 1 for additional information.

Interest expense increased $20.9 million in the first quarter compared to the same period last year due primarily to higher interest rates and an increase in outstanding debt. See Note 7 of Item 1 for additional information on the Company’s outstanding debt.

In the first quarter of 2023, Other (income) expense - net improved $19.5 million compared to the same period in 2022 primarily due to higher returns on investments held in the Administrative segment. See Note 16 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 22.3% for the first quarter of 2023 compared to 19.6% for the first quarter of 2022. The effective tax rate was less favorably impacted by tax benefits related to employee share based payments in the first quarter of 2023 than in the same period last year. The other significant components of the Company's tax rate were consistent year over year. See Note 17 of Item 1 for additional information.

Net Income Per Share

Diluted net income per share in the first quarter of 2023 increased 30.5% to $1.84 per share compared to $1.41 per share in the first quarter of 2022. Diluted net income per share for the first quarter of 2023 included a $0.20 per share charge for acquisition-related amortization expense. Diluted net income per share for the first quarter of 2022 included a $0.20 per share charge for acquisition-related amortization expense. Currency translation rate changes decreased diluted net income per share by $0.01 in the first quarter.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition and liquidity remained strong at March 31, 2023. During the first three months of 2023, the Company generated $88.2 million in net operating cash primarily as a result of higher profit driven by selling price actions, despite the normal seasonal increase in working capital requirements. During the first three months of 2023, the Company’s EBITDA increased 26.7% to $878.2 million. See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

Cash and cash equivalents decreased $47.4 million during the first three months of 2023. Cash flow from operations, along with increased short-term borrowings, funded working capital increases and allowed the Company to return $458.2 million to shareholders in the form of share buybacks and cash dividends during the first three months of 2023.

At March 31, 2023, the Company had cash and cash equivalents of $151.4 million and total debt outstanding of $11.075 billion. Total debt, net of cash and cash equivalents, was $10.924 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 $853.5 million to a deficit of $13.2 million at March 31, 2023 compared to a deficit of $866.7 million at March 31, 2022. The net working capital increase is primarily due to an increase in current assets and a decrease in current liabilities.

Current asset balances increased $206.4 million at March 31, 2023 compared to March 31, 2022 primarily due to an increase in Inventories of $379.2 million driven by higher inventory levels and a slight decrease in year over year raw material costs, and an increase in Accounts receivable, net of $125.6 million due to higher sales. These increases were partially offset by a decrease in Cash and cash equivalents of $249.7 million and a decrease of $48.7 million in Other current assets primarily related to refundable income taxes and prepaid expenses.

Current liability balances decreased $647.1 million at March 31, 2023 compared to March 31, 2022 primarily due to a decrease in the current portion of long-term debt, which decreased $260.1 million, and a decrease in short-term borrowings of $258.4 million. Excluding short-term borrowings and the current portion of long-term debt, current liabilities decreased $128.6 million primarily due to the timing of payments related to accounts payable and accrued taxes. At March 31, 2023, the Company’s current ratio was 1.00 compared to 0.99 and 0.88 at December 31, 2022 and March 31, 2022, respectively.

Property, Plant and Equipment

Net property, plant and equipment increased $155.0 million in the first three months of 2023 and increased $454.7 million in the twelve months since March 31, 2022. The increase in the first three months was primarily due to capital expenditures of $209.9 million, incremental assets recognized through acquisitions of $9.0 million, and currency translation and other adjustments of $7.0 million, offset by depreciation expense of $70.4 million and the sale or disposition of fixed assets of $0.5 million. Since March 31, 2022, the increase was primarily due to capital expenditures of $748.1 million and incremental assets recognized through acquisitions of $91.2 million, partially offset by depreciation expense of $268.9 million, sale or disposition of fixed assets of $11.8 million, and currency translation and other adjustments of $103.9 million, which primarily includes government incentives associated with the construction of our new headquarters and research and development (R&D) center. The Company has entered into an agreement to sell its current headquarters and R&D center. The sale is expected to be completed during 2023.

Capital expenditures primarily represented expenditures in the Paint Stores 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. Construction on the new headquarters and R&D center is expected to complete in 2024 at the earliest.

In 2023, the Company expects to spend more than 2022 for capital expenditures, which it will fund primarily through the generation of operating cash. Core capital expenditures in support of growth initiatives in 2023 are expected to be for investments in various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings and new or upgraded information systems hardware. Additionally, the Company

will continue to construct its new headquarters and R&D center. Refer to “Real Estate Financing” section below for further information on the financing transaction for the new headquarters.

Real Estate Financing

In December 2022, the Company closed a transaction to sell and subsequently lease back its partially-constructed new headquarters. This transaction did not meet the criteria for recognition as an asset sale under U.S. generally accepted accounting principles (US GAAP) and as such, was accounted for as a real estate financing transaction. During the first quarter of 2023, the Company received $66.5 million pursuant to the transaction. See Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning real estate financing.

Goodwill and Intangible Assets

Goodwill and intangible assets decreased $36.3 million from December 31, 2022 and increased $486.1 million from March 31, 2022 as compared to March 31, 2023. The net decrease during the first three months of 2023 was primarily due to amortization of $83.7 million, offset by purchase accounting allocations of $43.1 million and foreign currency translation and other adjustments of $4.3 million. The net increase over the twelve month period from March 31, 2022 was primarily due to incremental goodwill and intangible assets recognized from acquisitions of $891.6 million, partially offset by amortization of $322.8 million, foreign currency translation and other adjustments of $67.2 million and impairment of trademarks of $15.5 million.

See Note 6 in Item 1 for additional information on the Company’s goodwill and intangible assets, including the quantitative impairment analysis performed as a result of the Latin America architectural paint business moving to the Consumer Brands Group reportable segment. See Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company's goodwill and intangible assets.

Other Assets

Other assets increased $44.7 million from December 31, 2022 and increased $236.0 million from March 31, 2022. The increase in the first quarter was primarily due to an increase in deposits and prepaid expenses. The increase from March 31, 2022 was primarily due to an increase in non-traded investments. See Note 1 in Item 1 for additional information on the Company’s non-traded investments.

Debt (including Short-term borrowings)

The Company’s long-term debt primarily consists of senior notes as disclosed in Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

On February 28, 2023, the Company amended its credit agreement dated August 2, 2021, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and for the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to December 20, 2027.

The Company had unused capacity under its various credit agreements of $2.228 billion at March 31, 2023. See Note 7 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, 2022 and March 31, 2022. See Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

Deferred income taxes increased $58.3 million from December 31, 2022 primarily due to incremental deferred tax liabilities recognized in connection with the acquisition of ICA as result of adjustments to the preliminary purchase allocation in the first

quarter. Compared to March 31, 2022, deferred income taxes decreased $20.3 million primarily due to amortization of acquisition-related intangible assets, partially offset by the incremental deferred tax liabilities recognized in connection with the acquisitions closed during the past 12 months. See Note 3 in Item 1 of this report for more information regarding the Company’s recent acquisitions.

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, regulations and requirements 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 three months of 2023. 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 2023. See Note 9 in Item 1 for further information on environmental-related long-term liabilities.

Contractual Obligations, Commercial Commitments and Warranties

There have been no significant changes to the Company’s contractual obligations and commercial commitments in the first three months of 2023 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, 2022. See Note 3 in Item 1 for information on contractual obligations and commercial commitments related to acquisitions and divestitures.

Litigation

See Note 10 in Item 1 for information concerning litigation.

Shareholders’ Equity

Shareholders’ equity increased $64.7 million during the first three months of 2023 as a result of net income of $477.4 million, an increase in Other capital of $34.1 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $325.2 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $156.5 million.

Shareholders’ equity increased $932.5 million since March 31, 2022 as a result of net income of $2.127 billion and an increase in Other capital of $155.3 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $801.9 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $624.1 million.

During the first three months of 2023, the Company purchased 1.30 million shares of its common stock for treasury purposes through open market purchases. The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire additional shares in the future. The Company had remaining authorization at March 31, 2023 to purchase 43.9 million shares of its common stock.

In February 2023, the Company's Board of Directors increased the quarterly cash dividend from $.60 per share to $.605 per share. If approved in all subsequent quarters, this quarterly dividend will result in an annual dividend for 2023 of $2.42 per share or a 31% payout of 2022 diluted net income per share.

Cash Flow

Net operating cash for the three months ended March 31, 2023 was a cash source of $88.2 million compared to a cash source of $26.3 million for the same period in 2022. The improvement in net operating cash was primarily due to higher net income, partially offset by an increase in cash requirements for working capital.

Net investing cash usage increased $37.8 million in the first three months of 2023 to a usage of $233.4 million compared to a usage of $195.6 million for the same period in 2022 primarily due to an increase in cash used for capital expenditures.

Net financing cash for the three months ended March 31, 2023 was a cash source of $98.1 million compared to a cash source of $415.7 million for the same period in 2022 primarily due to lower net proceeds from short-term borrowings, partially offset by lower treasury stock purchases and proceeds from real estate financing transactions.

In the twelve month period from April 1, 2022 through March 31, 2023, the Company generated net operating cash of $1.982 billion, used $1.645 billion in investing activities and used $600.0 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 13 in Item 1 for disclosures related to the $812.7 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 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 March 31, 2023, the Company was in compliance with the covenant and expects to remain in compliance. The Company’s notes, debentures and revolving credit agreements contain various default and cross-default provisions. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. See Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 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 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, interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure defined as EBITDA that excludes restructuring expense. 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 Statements of Condensed 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 US GAAP requires management to make estimates and assumptions that affect amounts reported in the accompanying consolidated 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, 2022. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2022.

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 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,” “strive” 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;

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

• adverse weather conditions or natural disasters, including those that may be related to climate change or otherwise, and public health crises, including the COVID-19 pandemic;

• losses of or changes in our relationships with customers and suppliers;

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

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

• our ability to achieve expected benefits of restructuring and productivity initiatives;

• weakening of global credit markets and our ability to generate cash to service our indebtedness;

• risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, policy changes affecting international trade, 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;

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

• our ability to protect or enforce our material trademarks and other intellectual property rights;

• our ability to attract, retain, develop and progress a qualified global workforce;

• damage to our business, reputation, image or brands due to negative publicity;

• 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); and

• 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.

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 rates, 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, 2022.

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.

In January 2023, the Company implemented two cloud-based systems consisting of a general ledger and a consolidation tool which replace the Company’s existing enterprise performance management system. The new systems resulted in changes to the Company’s financial reporting process and consequently, resulted in changes to the design of certain internal controls over activities related to the recording and reporting of information in our consolidated financial statements. Other than these system implementation changes, there have been no other 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 9 and 10 of the “Notes to Condensed Consolidated Financial Statements.” The information contained in Note 10 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, 2022. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. During the three months ended March 31, 2023, 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 first quarter activity is as follows:

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

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

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.