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 - 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 the 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 herein.

SUMMARY

• Consolidated net sales increased 1.1% in the quarter to $6.117 billion and 5.2% in the first nine months of 2023 to $17.800 billion

**◦**Net sales from stores in U.S. and Canada open more than twelve calendar months increased 3.0% in the quarter and 8.3% in the first nine months of 2023

• Diluted net income per share increased 12.6% to $2.95 per share in the quarter compared to $2.62 per share in the third quarter 2022 and 26.0% to $7.85 per share in the first nine months of 2023 compared to $6.23 in the first nine months of 2022

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the quarter increased 12.6% to $1.266 billion in the quarter, or 20.7% of net sales

• Generated net operating cash of $2.603 billion, or 14.6% of net sales, during the first nine months of 2023

The Company delivered strong results in the third quarter despite a challenging year-over-year comparison, due to low-single digit percentage impacts from selling price increases, modest net benefit from acquisitions and divestitures and favorable currency translation rate changes. This growth was mostly offset by a low-single digit volume decrease primarily driven by the Consumer Brands and Performance Coatings Groups. The divestiture of the China architectural business, which was completed on August 1, 2023, also reduced sales volume as compared to the prior year. In the Performance Coatings Group, net sales benefited from pricing actions and contributions from acquisitions, but was more than offset by volume declines. Consolidated gross profit margin in the quarter expanded both sequentially and year-over-year driven by pricing discipline and moderating raw material costs.

OUTLOOK

Our fourth quarter is often sequentially lower due to seasonal trends, and we continue to see inconsistent demand by region and end market. We will continue to prioritize investments in new stores, sales and technical personnel, innovation, digital and other growth initiatives that will allow us to capitalize on our strengths and help our customers be successful. We remain committed to our differentiated strategy, capabilities, product and service solutions, and our people. Given our strong year-to-date results, we have confidence in our ability to continue delivering above market growth and returns.

We employ a disciplined capital deployment strategy, while maintaining a balanced approach toward 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 $503.4 million in cash and $3.342 billion of unused capacity under our credit facilities at September 30, 2023. We are, and expect to remain, in compliance with bank covenants.

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, 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 and nine months ended September 30, 2023 and 2022.

Net Sales

			Three Months Ended September 30,
			2023						2022						$ Change						% Change												Currency Impact						Acquisitions and Divestitures Impact
Paint Stores Group			$	3,537.1					$	3,414.0					$	123.1					3.6		%										(0.1)		%				—		%
Consumer Brands Group			854.8						890.6						(35.8)						(4.0)		%										0.7		%				(3.0)		%
Performance Coatings Group			1,724.2						1,741.7						(17.5)						(1.0)		%										1.9		%				3.1		%
Administrative			0.6						1.1						(0.5)						(45.5)		%										(9.1)		%				—		%
Total			$	6,116.7					$	6,047.4					$	69.3					1.1		%										0.6		%				0.5		%

Three Months Ended September 30, 2023

Consolidated net sales increased by 1.1% in the third quarter of 2023 primarily driven by selling price increases in all segments, a modest net benefit from the impact of acquisitions and divestitures and favorable currency translation rate changes. This growth was mostly offset by a sales volume decrease primarily driven by the Consumer Brands and Performance Coatings Groups. Net sales of all consolidated foreign subsidiaries increased to $1.105 billion in the third quarter compared to $1.064 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 selling price increases, as well as contributions from acquisitions, partially offset by lower net sales in the Asia region from lower sales volumes and the divestiture of the China architectural business. Net sales of all operations other than consolidated foreign subsidiaries increased to $5.012 billion in the third quarter compared to $4.983 billion in the same period last year.

Net sales in the Paint Stores Group increased by 3.6% in the third quarter primarily due to selling price increases, which impacted net sales by a low-single digit percentage. Sales volume was approximately flat year-over-year driven by higher pro architectural sales volume, excluding new residential volume which decreased a high-single digit percentage. Net sales from stores open for more than twelve calendar months increased 3.0% in the third quarter compared to last year’s comparable period. Net sales of non-paint products increased 15.3% 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 in the Consumer Brands Group decreased by 4.0% in the third quarter primarily due to a mid-single digit sales volume decrease and a 3.0% decrease from divestitures, primarily related to the China architectural business. These decreases were partially offset by selling price increases, which impacted net sales by a mid-single digit percentage.

Net sales in the Performance Coatings Group decreased by 1.0% in the third quarter primarily due to a high-single digit sales volume decrease, partially offset by a 3.1% increase from the impact of acquisitions, selling price increases, which also impacted net sales by a low-single digit percentage and favorable currency translation rate changes.

			Nine Months Ended September 30,
			2023						2022						$ Change						% Change												Currency Impact						Acquisitions and Divestitures Impact
Paint Stores Group			$	9,894.9					$	9,086.3					$	808.6					8.9		%										(0.1)		%				—		%
Consumer Brands Group			2,673.3						2,642.8						30.5						1.2		%										(0.4)		%				(1.3)		%
Performance Coatings Group			5,228.9						5,186.1						42.8						0.8		%										(0.1)		%				4.3		%
Administrative			2.6						3.2						(0.6)						(18.8)		%										(3.1)		%				—		%
Total			$	17,799.7					$	16,918.4					$	881.3					5.2		%										(0.2)		%				1.1		%

Nine Months Ended September 30, 2023

Consolidated net sales increased by 5.2% in the first nine months of 2023 primarily due to selling price increases, volume growth due to higher architectural sales volume in the Paint Stores Group and a 1.1% net increase from the impact of acquisitions and divestitures, partially offset by a sales volume decrease in the Consumer Brands and Performance Coatings Groups. Net sales of all consolidated foreign subsidiaries increased to $3.342 billion in the first nine months compared to $3.262 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, partially offset by lower net sales in the Asia region from lower sales volumes and the divestiture of the China architectural business. Net sales of all operations other than consolidated foreign subsidiaries increased 5.9% to $14.458 billion in the first nine months compared to $13.656 billion in the same period last year.

Net sales in the Paint Stores Group increased by 8.9% in the first nine months of 2023 primarily due to mid-single digit sales volume growth, as well as selling price increases, which impacted net sales by a mid-single digit percentage. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 8.3% in the first nine months compared to last year’s comparable period. Net sales of non-paint products increased 19.9% 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 increased 1.2% in the first nine months primarily due to selling price increases, which impacted net sales by a mid-single digit percentage, partially offset by a low-single digit sales volume decrease and a 1.3% decrease from the impact of divestitures.

Net sales in the Performance Coatings Group increased by 0.8% in the first nine months primarily due to a 4.3% increase from the impact of acquisitions and selling price increases, which impacted net sales by a mid-single digit percentage, partially offset by a high-single digit sales volume decrease.

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,
			2023												2022												2023												2022
									% of Net Sales												% of Net Sales												% of Net Sales												% of Net Sales
Net sales			$	6,116.7					100.0		%				$	6,047.4					100.0		%				$	17,799.7					100.0		%				$	16,918.4					100.0		%
Cost of goods sold			3,200.5						52.3		%				3,458.0						57.2		%				9,590.3						53.9		%				9,827.1						58.1		%
Gross profit			2,916.2						47.7		%				2,589.4						42.8		%				8,209.4						46.1		%				7,091.3						41.9		%
SG&A			1,756.5						28.7		%				1,609.9						26.6		%				5,209.5						29.3		%				4,693.0						27.7		%
Other general expense (income) - net			61.9						1.0		%				(14.4)						(0.2)		%				39.9						0.2		%				(7.5)						—		%
Impairment			—						—		%				—						—		%				34.0						0.2		%				—						—		%
Interest expense			101.9						1.7		%				101.2						1.6		%				322.9						1.8		%				282.5						1.6		%
Interest income			(5.1)						(0.1)		%				(2.6)						—		%				(15.8)						(0.1)		%				(4.8)						—		%
Other (income) expense - net			(8.0)						(0.1)		%				18.1						0.3		%				(17.0)						(0.1)		%				49.9						0.3		%
Income before income taxes			$	1,009.0					16.5		%				$	877.2					14.5		%				$	2,635.9					14.8		%				$	2,078.2					12.3		%

Three Months Ended September 30, 2023

Consolidated cost of goods sold decreased $257.5 million, or 7.4%, in the third quarter of 2023 compared to the same period in 2022 due primarily to lower sales volumes in the Consumer Brands and Performance Coatings Groups and moderating raw material costs, partially offset by the impacts of increases in wages and other employee-related costs. In addition, lower fixed cost absorption in the Consumer Brands Group due to lower production volumes also increased Cost of goods sold. Currency translation rate changes increased Cost of goods sold by an insignificant amount in the third quarter of 2023.

Consolidated gross profit increased $326.8 million in the third quarter of 2023 compared to the same period in 2022. Consolidated gross profit as a percent of consolidated net sales increased in the third quarter to 47.7% compared to 42.8% during the same period in 2022. Consolidated gross profit dollars increased primarily due to selling price increases in all Reportable Segments, moderating raw material costs and favorable currency translation rate changes, partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups.

The Paint Stores Group’s gross profit in the third quarter was higher than the same period last year by $238.2 million due primarily to selling price increases and moderating raw material costs. The Paint Stores Group’s gross profit as a percent of net sales increased in the third quarter compared to the same period in 2022 for these same reasons. The Consumer Brands Group’s gross profit increased by $15.4 million in the third quarter compared to the same period last year due primarily to selling price increases and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs. In addition, lower fixed cost absorption in the Consumer Brands Group due to lower production volumes also decreased gross profit. The Consumer Brands Group’s gross profit as a percent of net sales increased in the third quarter compared to the same period in 2022 for these same reasons. The Performance Coatings Group’s gross profit increased $80.9 million in the third quarter compared to the same period last year due primarily to selling price increases and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs. 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 for these same reasons.

Consolidated selling, general and administrative expenses (SG&A) increased $146.6 million in the third quarter versus the same period last year due primarily to increased employee-related costs, expenses to support higher sales levels and net new store openings, incremental SG&A from the acquisition of ICA and unfavorable currency translation rate changes, partially offset by lower SG&A from divestitures. As a percent of net sales, consolidated SG&A increased 210 basis points in the third quarter compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $53.4 million in the third quarter compared to the same period last year due primarily to higher employee-related costs and 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 $35.4 million in the third quarter compared to the same period last year due to higher employee-related costs and increased expenses to support manufacturing expansion, partially offset by lower SG&A from divestitures. The Performance Coatings Group’s SG&A increased $42.3 million in the third quarter compared to the same period last year due primarily to higher employee-related costs and incremental costs from the acquisition of ICA. The Administrative segment’s SG&A increased $15.5 million in the third quarter compared to the same period last year due primarily to higher employee-related costs and increased expenses related to technology and systems.

Other general expense (income) - net changed from income of $14.4 million in the third quarter of 2022 to expense of $61.9 million in the third quarter of 2023 primarily due to losses from the sale or disposition of assets in the third quarter of 2023 as compared to gains in the prior year as well as an increase in provisions for environmental matters. See Note 16 of Item 1 for additional information.

Interest expense increased $0.7 million in the third quarter compared to the same period last year due primarily to higher interest rates, partially offset by a decrease in outstanding debt. See Note 7 of Item 1 for additional information on the Company’s outstanding debt.

In the third quarter of 2023, Other (income) expense - net improved $26.1 million compared to the same period in 2022 primarily due to a decrease in foreign currency translation losses and a miscellaneous pension credit. See Note 16 of Item 1 for additional information.

Nine Months Ended September 30, 2023

Consolidated cost of goods sold decreased $236.8 million, or 2.4%, in the first nine months of 2023 compared to the same period in 2022 due primarily to lower sales volumes in the Consumer Brands and Performance Coatings Groups and moderating raw material costs, partially offset by higher sales volume in the Paint Stores Group and the impacts of increases in wages and other employee-related costs. Currency translation rate changes decreased Cost of goods sold by an insignificant amount in the first nine months of 2023.

Consolidated gross profit increased $1.118 billion in the first nine months of 2023 compared to the same period in 2022. Consolidated gross profit as a percent of consolidated net sales increased in the first nine months to 46.1% compared to 41.9% during the same period in 2022. Consolidated gross profit dollars increased primarily due to selling price increases in each Reportable Segment, increased sales volume in the Paint Stores Group and moderating raw material costs, partially offset by lower sales volumes in the Consumer Brands and Performance Coatings Groups and unfavorable currency translation rate changes.

The Paint Stores Group’s gross profit in the first nine months was higher than the same period last year by $738.5 million due primarily to selling price increases, higher sales volume and moderating raw material costs. The Paint Stores Group’s gross profit as a percent of net sales increased in the first nine months compared to the same period in 2022 for these same reasons. The Consumer Brands Group’s gross profit increased by $87.4 million in the first nine months compared to the same period last year due primarily due to selling price increases and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs. The Consumer Brands Group’s gross profit as a percent of net sales increased in the first nine months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $315.3 million in the first nine months compared to the same period last year due primarily to higher selling prices and moderating raw material costs, partially offset by lower sales volume and increases in wages and other employee-related costs. 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 for these same reasons.

Consolidated SG&A increased $516.5 million in the first nine months versus the same period last year due primarily to increased employee-related costs, expenses to support higher sales levels and net new store openings, partially offset by favorable currency translation rate changes. As a percent of net sales, consolidated SG&A increased 160 basis points in the first nine months compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $302.5 million in the first nine months compared to the same period last year due primarily to higher employee-related costs, increased spending from new store openings, higher costs to serve customers, increased investments in technologies and costs to support higher sales levels. The Consumer Brands Group’s SG&A increased $46.1 million in the first nine months compared to the same period last year due to higher employee-related costs and restructuring charges, partially offset by other effective cost control measures. The Performance Coatings Group’s SG&A increased $122.8 million in the first nine months compared to the same period last year due primarily to higher employee-related costs, costs from acquisitions and costs to support higher sales levels. The Administrative segment’s SG&A increased $45.1 million in the first nine months compared to the same period last year due primarily to higher employee-related costs and increased expenses related to technology and systems.

Other general expense (income) - net changed from income of $7.5 million in the first nine months of 2022 to expense of $39.9 million in the first nine months of 2023 primarily due to an increase in provisions for environmental matters and lower gains from the sale or disposition of assets, partially offset by a gain on the divestiture of businesses. See Note 16 of Item 1 for additional information.

For information on impairment, see Notes 3 and 6 of Item 1 and Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Interest expense increased $40.4 million in the first nine months of 2023 compared to the same period last year due primarily to higher interest rates, partially offset by a decrease in outstanding debt. See Note 7 of Item 1 for additional information on the Company’s outstanding debt.

In the first nine months of 2023, Other (income) expense - net improved $66.9 million compared to the same period in 2022 primarily due to higher returns on investments held in the Administrative segment, a miscellaneous pension credit and an increase in miscellaneous other income. 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:

			Three Months Ended September 30,																		Nine Months Ended September 30,
			2023						2022						% Change						2023						2022						% Change
Income Before Income Taxes:
Paint Stores Group			$	917.5					$	741.3					23.8		%				$	2,293.5					$	1,854.1					23.7		%
Consumer Brands Group			101.6						117.7						(13.7)		%				305.7						279.1						9.5		%
Performance Coatings Group			279.7						236.3						18.4		%				771.3						577.6						33.5		%
Administrative			(289.8)						(218.1)						(32.9)		%				(734.6)						(632.6)						(16.1)		%
Total			$	1,009.0					$	877.2					15.0		%				$	2,635.9					$	2,078.2					26.8		%
Income Before Income Taxes as a % of Net Sales:
Paint Stores Group			25.9		%				21.7		%										23.2		%				20.4		%
Consumer Brands Group			11.9		%				13.2		%										11.4		%				10.6		%
Performance Coatings Group			16.2		%				13.6		%										14.8		%				11.1		%
Administrative			nm						nm												nm						nm
Total			16.5		%				14.5		%										14.8		%				12.3		%
nm - not meaningful

Income Tax Expense

The effective tax rate was 24.5% for the third quarter of 2023 compared to 21.9% for the third quarter of 2022, and 22.9% for the first nine months of 2023 compared to 21.4% for the first nine months of 2022. The increase in the effective tax rate for the third quarter was primarily due to a $14.7 million discrete tax expense related to the divestiture of the China architectural business and an unfavorable change in the jurisdictional mix of earnings. For the first nine months, the increase in the effective tax rate was primarily related to an unfavorable change in the jurisdictional mix of earnings. The other significant components of the Company’s effective tax rate were consistent in both comparable periods. See Note 17 of Item 1 for additional information.

Net Income Per Share

Diluted net income per share in the third quarter of 2023 increased 12.6% to $2.95 per share compared to $2.62 per share in the third quarter of 2022. Diluted net income per share included a $0.19 and $0.21 per share charge for acquisition-related amortization expense for the third quarter of 2023 and 2022, respectively. In addition, diluted net income per share for the third quarter of 2023 included a $0.06 per share charge related to discrete income tax expense from the divestiture of the China architectural business. Currency translation rate changes decreased diluted net income per share by $0.01 in the third quarter of 2023.

Diluted net income per share for the first nine months of 2023 increased 26.0% to $7.85 per share compared to $6.23 per share in the first nine months of 2022. Diluted net income per share included a $0.60 and $0.61 per share charge for acquisition-related amortization expense for the first nine months of 2023 and 2022, respectively. In addition, diluted net income per share for the first nine months of 2023 included a $0.11 per share charge related to the divestiture of the China architectural business and a $0.04 per share charge related to severance and other charges. These charges were partially offset by a $0.06 per share gain related to the divestiture of a non-core domestic aerosol business. Currency translation rate changes increased diluted net income per share by $0.01 in the first nine months of 2023.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition and liquidity remained strong at September 30, 2023. During the first nine months of 2023, the Company generated $2.603 billion in net operating cash primarily as a result of higher profit. In addition, the Company’s EBITDA increased 22.7% to $3.427 billion. See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

Cash and cash equivalents increased $304.6 million during the first nine months of 2023. Cash flow from operations allowed the Company to return $1.414 billion to shareholders in the form of share buybacks and cash dividends during the first nine months of 2023 and fund the acquisition of SIC Holding in October 2023. See Note 3 in Item 1 for additional information on the Company’s acquisition of SIC Holding.

At September 30, 2023, the Company had cash and cash equivalents of $503.4 million and total debt outstanding of $9.936 billion. Total debt, net of cash and cash equivalents, was $9.433 billion. The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.

Net Working Capital

Net working capital, defined as Total current assets less Total current liabilities, decreased $445.6 million to a deficit of $424.4 million at September 30, 2023 compared to a surplus of $21.2 million at September 30, 2022. The net working capital decrease is primarily due to an increase in current liabilities, partially offset by an increase in current assets.

Current asset balances increased $81.6 million at September 30, 2023 compared to September 30, 2022 primarily due to an increase in Cash and cash equivalents of $372.9 million and Accounts receivable, net of $43.3 million as a result of higher net sales. These increases were partially offset by a decrease in Inventories of $303.5 million driven by lower inventory levels and moderating raw material costs and a decrease of $31.1 million in Other current assets as a result of a decrease in refundable income taxes, miscellaneous other current assets and prepaid expenses, partially offset by an increase in the net investment hedge asset.

Current liability balances increased $527.2 million at September 30, 2023 compared to September 30, 2022 primarily due to an increase in the current portion of long-term debt of $1.098 billion, Accrued taxes of $174.5 million and Compensation and taxes withheld of $117.7 million. These increases were partially offset by a decrease in short-term borrowings of $606.6 million and a decrease in Accounts payable of $383.6 million, primarily due to the timing of payments. At September 30, 2023, the Company’s current ratio was 0.94 compared to 0.99 and 1.00 at December 31, 2022 and September 30, 2022, respectively.

Property, Plant and Equipment

Net property, plant and equipment increased $373.6 million in the first nine months of 2023 and increased $539.4 million in the twelve months since September 30, 2022. The increase in the first nine months was primarily due to capital expenditures of $661.2 million, partially offset by depreciation expense of $218.0 million, the sale or disposition of fixed assets of $62.5 million and currency translation and other adjustments of $7.1 million. Since September 30, 2022, the increase was primarily due to capital expenditures of $895.0 million and incremental assets recognized through acquisitions of $46.8 million, partially offset by depreciation expense of $287.2 million, the sale or disposition of fixed assets of $64.5 million and currency translation and other adjustments of $50.7 million, which primarily includes government incentives associated with the construction of our new headquarters and research and development (R&D) center. The Company closed a transaction to sell its current headquarters and R&D center during the second quarter of 2023. In connection with the sale, proceeds of $47.2 million were received and an immaterial gain was recognized.

Capital expenditures primarily represented expenditures in the Paint Stores Group associated with the opening of new paint stores, renovation and improvements in existing stores, and expenditures associated with manufacturing capacity expansion, operational efficiencies and maintenance projects 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. 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 nine months ended 2023, the Company received $226.1 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 $348.9 million from December 31, 2022 and decreased $40.2 million from September 30, 2022 as compared to September 30, 2023. The net decrease during the first nine months of 2023 was primarily due to amortization of $250.2 million, dispositions of $93.1 million (primarily related to the divestiture of the China architectural business), foreign currency translation and other adjustments of $48.8 million and impairment of trademarks of $6.9 million, partially offset by purchase accounting allocations of $50.1 million. The net decrease over the twelve month period from September 30, 2022 was primarily due to amortization of $329.5 million, dispositions of $91.8 million (primarily related to the divestiture of the China architectural business) and impairment of trademarks of $22.4 million, partially offset by incremental goodwill and intangible assets recognized from acquisitions of $303.9 million, foreign currency translation and other adjustments of $90.9 million and the capitalization of software of $8.7 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 and Note 3 for information on the impairment test performed as a result of the China architectural business classification change to held for sale as of the second quarter of 2023. 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 $86.8 million from December 31, 2022 and increased $156.2 million from September 30, 2022. The increase in the first nine months was primarily due to an increase in other assets related to contracts with customers, deposits, miscellaneous other assets and non-traded investments. The increase from September 30, 2022 was primarily due to an increase in non-traded investments, other assets related to contracts with customers and deposits, partially offset by a decrease in miscellaneous other assets. See Note 1 in Item 1 for additional information on the Company’s non-traded investments.

Debt (including Short-term borrowings)

			September 30,						December 31,						September 30,
			2023						2022						2022
Long-term debt (including current portion)			$	9,597.4					$	9,591.6					$	9,589.5
Short-term borrowings			338.6						978.1						945.2
Total debt outstanding			$	9,936.0					$	10,569.7					$	10,534.7

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 obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to December 20, 2027.

On May 1, 2023, the Company amended its credit agreement dated May 9, 2016, as amended, to extend the maturity of $125.0 million of the commitments available for borrowing and obtaining the issuance, renewal, extension, and increase of a letter of credit under the credit agreement from June 20, 2023 to June 20, 2028.

The Company had unused capacity under its various credit agreements of $3.342 billion at September 30, 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 September 30, 2022 other than the Company’s long-term liability for other postretirement benefit plans which decreased $117.2 million from September 30, 2023 due primarily to a plan amendment and changes in actuarial assumptions. See Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information concerning the Company’s benefit plan obligations.

Deferred Income Taxes

Deferred income taxes decreased $33.2 million from December 31, 2022 primarily due to amortization of acquisition-related intangible assets, the capitalization of research and development costs for income tax purposes and the divestiture of the China architectural business, partially offset by the incremental deferred tax liabilities recognized in connection with the acquisition of ICA. Compared to September 30, 2022, deferred income taxes decreased $43.4 million primarily due to these same reasons. 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 nine 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 Notes 9 and 16 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 nine 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

			September 30,						December 31,						September 30,
			2023						2022						2022
Total shareholders’ equity			$	3,780.0					$	3,102.1					$	2,597.8

Shareholders’ equity increased $677.9 million during the first nine months of 2023 as a result of net income of $2.033 billion, an increase in Other capital of $140.0 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $971.0 million of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $468.4 million.

Shareholders’ equity increased $1.182 billion since September 30, 2022 as a result of net income of $2.419 billion and an increase in Other capital of $184.3 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by $1.104 billion of Treasury stock activity primarily attributable to treasury stock repurchases and cash dividends paid on common stock of $624.0 million.

During the first nine months of 2023, the Company purchased 3.8 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, 2023 to purchase 41.4 million shares of its common stock.

In February 2023, the Company's Board of Directors increased the quarterly cash dividend from $0.60 per share to $0.605 per share. This quarterly dividend was approved in all subsequent quarters and 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 nine months ended September 30, 2023 was a source of $2.603 billion compared to a source of $1.279 billion for the same period in 2022. The improvement in net operating cash was primarily due to higher net income and improved working capital management.

Net investing cash decreased $541.5 million in the first nine months of 2023 to a usage of $509.0 million compared to a usage of $1.051 billion for the same period in 2022 primarily due to lower cash used for acquisitions, proceeds from the divestiture of businesses and an increase in proceeds from the sale of assets, partially offset by increased cash used for capital expenditures.

Net financing cash increased $1.522 billion in the first nine months of 2023 to a usage of $1.785 billion compared to a usage of $263.6 million for the same period in 2022 primarily due to proceeds from long-term debt in the first nine months of 2022 which did not occur in the same current year period, a net decrease in short-term borrowings and an increase in treasury stock purchases. These usages of cash were partially offset by lower payments of long-term debt and real estate financing proceeds received in the first nine months of 2023 which did not occur in the same prior year period.

In the twelve month period from October 1, 2022 through September 30, 2023, the Company generated net operating cash of $3.244 billion, used $1.066 billion in investing activities and used $1.804 billion in financing activities.

Market Risk

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

See Note 13 in Item 1 for disclosures related to the $1.113 billion 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 September 30, 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 expense, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure defined as EBITDA that excludes certain adjustments that do not recur during the normal course of business, such as items related to the previously announced Restructuring Plan. 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:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Net income			$	761.5					$	685.1					$	2,032.6					$	1,633.8
Interest expense			101.9						101.2						322.9						282.5
Income taxes			247.5						192.1						603.3						444.4
Depreciation			71.9						64.5						218.0						194.8
Amortization			83.5						81.3						250.2						237.8
EBITDA			$	1,266.3					$	1,124.2					$	3,427.0					$	2,793.3
Restructuring expense			—						—						9.6						—
Impairment of assets related to China divestiture			—						—						34.0						—
Gain on divestiture of domestic aerosol business			—						—						(20.1)						—
Adjusted EBITDA			$	1,266.3					$	1,124.2					$	3,450.5					$	2,793.3

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, such as 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.