Sherwin-Williams 10-Q 2024-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2024

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 practicable date.

Common Stock, $0.33-1/3 Par Value – 251,853,291 shares as of September 30, 2024.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

(1) The three months ended September 30, 2024 and 2023 include unrealized (losses) gains, net of taxes, of $(31.4) million and $24.2 million, respectively, related to net investment hedges. The nine months ended September 30, 2024 and 2023 include unrealized (losses) gains, net of taxes, of $(7.3) million and $11.4 million, respectively, related to net investment hedges. See Note 12 for additional information.

(2) Net of taxes of $1.6 million for the three months ended September 30, 2024 and 2023. Net of taxes of $4.5 million and $4.6 million for the nine months ended September 30, 2024 and 2023, respectively.

(3) Net of taxes of $0.3 million for the three months ended September 30, 2024 and 2023. Net of taxes of $0.9 million for the nine months ended September 30, 2024 and 2023.

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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RESULTS OF OPERATIONS AND FINANCIAL CONDITION

(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 function in the same way it is internally organized for assessing performance and making decisions regarding the allocation of resources. See Note 18 in Item 1 for further details on the Company’s Reportable Segments.

SUMMARY

• Consolidated Net sales increased 0.7% in the quarter to $6.163 billion

**◦**Net sales from stores in the Paint Stores Group open more than twelve calendar months increased 2.2% in the quarter

• Diluted net income per share increased 7.8% to $3.18 per share in the quarter compared to $2.95 per share in the third quarter 2023

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the quarter increased 1.2% to $1.282 billion in the quarter, or 20.8% of Net sales

OUTLOOK

We remain focused on navigating choppy macroeconomic conditions by purposefully executing our differentiated strategy to provide our customers with solutions that make them more productive and profitable. We remain well-positioned in each of our targeted markets and continue to prioritize investments in new stores, sales and technical personnel, innovation, digital and other growth initiatives that will allow us to generate sustained and profitable above-market growth in an increasingly uncertain and competitive landscape.

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 $238.2 million in cash and $3.026 billion of unused capacity under our credit facilities at September 30, 2024. 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, 2024 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, 2024 and 2023.

Net Sales

Three Months Ended September 30, 2024

Consolidated Net sales increased by 0.7% in the third quarter of 2024 primarily due to higher sales in the Paint Stores Group and the impact from the acquisition of SIC Holding GmbH in 2023. These increases were partially offset by lower sales in the Consumer Brands and Performance Coatings Groups as well as unfavorable foreign currency translation. Net sales of all consolidated foreign subsidiaries increased to $1.124 billion in the third quarter of 2024 compared to $1.105 billion in the same period last year. The increase in Net sales for all consolidated foreign subsidiaries was due to higher Net sales in the Europe and Asia regions. Net sales of all operations other than consolidated foreign subsidiaries increased to $5.038 billion in the third quarter of 2024 compared to $5.012 billion in the same period last year.

Net sales in the Paint Stores Group increased by 3.2% in the third quarter of 2024 primarily due to low-single digit sales volume growth and continued realization of higher selling prices implemented earlier in the year. Net sales increased in most professional customer end markets, led by protective and marine, residential repaint and new residential. Net sales from stores open for more than twelve calendar months increased by 2.2% in the third quarter of 2024 compared to last year’s comparable period. Net sales of non-paint products increased 1.0% in the third quarter of 2024 compared to last year’s comparable period. A discussion of changes in volume versus pricing for sales of non-paint products is not pertinent due to the wide assortment of general merchandise sold.

Net sales in the Consumer Brands Group decreased by 7.5% in the third quarter of 2024 primarily due to soft DIY demand in North America and a 3.6% impact from unfavorable foreign currency translation driven by Latin America. These decreases were partially offset by selling price increases in Latin America, which impacted Net sales by a low-single digit percentage and a low-single digit percentage sales volume increase in Latin America and Europe.

Net sales in the Performance Coatings Group was effectively flat as sales volume growth, inclusive of the impact of the 2023 acquisition of SIC Holding GmbH, was fully offset by unfavorable foreign currency translation. Performance was led by Packaging, which increased in all regions, Coil and Industrial Wood.

Nine Months Ended September 30, 2024

Consolidated Net sales were essentially flat in the first nine months of 2024. Sales volume growth in the Paint Stores and Performance Coatings Groups was offset by lower sales volume in the Consumer Brands Group, inclusive of the impact from the divestiture of the China architectural business and a non-core domestic aerosol business in the prior period. Net sales of all consolidated foreign subsidiaries increased to $3.370 billion in the first nine months of 2024 compared to $3.342 billion in the same period last year. The increase in Net sales for all consolidated foreign subsidiaries was due to growth in the Europe region, partially offset by lower Net sales in the Latin America and Asia regions. Net sales of all operations other than consolidated foreign subsidiaries decreased 0.2% to $14.431 billion in the first nine months of 2024 compared to $14.458 billion in the same period last year.

Net sales in the Paint Stores Group increased by 2.5% in the first nine months of 2024 primarily due to low-single digit sales volume growth and realization of higher selling prices that were implemented earlier in the year. Net sales from stores open for more than twelve calendar months increased 1.6% in the first nine months of 2024 compared to last year’s comparable period. Net sales of non-paint products increased 0.5% in the first nine months of 2024 compared to last year’s comparable period. 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 8.5% in the first nine months of 2024 primarily due to a mid-single digit percentage sales volume decline primarily due to soft DIY demand in North America and the impact from the divestiture of the China architectural business and a non-core domestic aerosol business in the prior period. In addition, Net sales were unfavorably impacted by foreign currency translation.

Net sales in the Performance Coatings Group decreased by 0.4% in the first nine months of 2024 primarily due to selling price decreases, which impacted Net sales by a low-single digit percentage and unfavorable foreign currency translation, partially offset by mid-single digit sales volume growth, inclusive of the acquisition of SIC Holding GmbH in 2023. Performance was led by Industrial Wood and Coil, but was offset by a decrease in General Industrial and Automotive Refinish.

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, 2024

Consolidated Cost of goods sold decreased $65.5 million, or 2.0%, in the third quarter of 2024 compared to the same period in 2023 primarily due to improved efficiencies in manufacturing and distribution operations and foreign currency translation rate changes, which decreased Cost of goods sold by approximately 1%. These decreases were partially offset by a low single-digit increase in sales volume.

Consolidated gross profit increased $111.3 million in the third quarter of 2024 compared to the same period in 2023 primarily due to higher Net sales in the Paint Stores Group and improved efficiencies in manufacturing and distribution operations. Consolidated gross profit as a percent of consolidated Net sales increased in the third quarter of 2024 to 49.1% compared to 47.7% during the same period in 2023 for these same reasons.

The Paint Stores Group’s gross profit in the third quarter of 2024 was higher than the same period last year by $59.6 million due primarily to higher Net sales. The Paint Stores Group’s gross profit as a percent of Net sales was effectively flat in the third quarter of 2024 compared to the same period in 2023. The Consumer Brands Group’s gross profit increased by $55.1 million in the third quarter of 2024 compared to the same period last year due primarily to higher fixed cost absorption in the manufacturing and distribution operations within the segment, partially offset by lower Net sales. The Consumer Brands Group’s gross profit as a percent of Net sales increased in the third quarter of 2024 compared to the same period in 2023 for these same reasons. The Performance Coatings Group’s gross profit decreased $14.1 million in the third quarter of 2024 compared to the same period last year due primarily to lower sales in North America and unfavorable foreign currency related impacts. The Performance Coatings Group’s gross profit as a percent of Net sales decreased in the third quarter of 2024 compared to the same period last year for these same reasons.

Consolidated Selling, general and administrative expenses (SG&A) increased $137.2 million in the third quarter of 2024 versus the same period last year primarily due to investments in long-term growth strategies, including expenses to support net new store openings and digital technologies, and higher employee-related costs. As a percent of Net sales, consolidated SG&A increased 200 basis points in the third quarter of 2024 compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $75.0 million in the third quarter of 2024 compared to the same period last year due primarily due to investments in long-term growth initiatives, including increased spending from new store openings, and higher employee-related costs. The Consumer Brands Group’s SG&A decreased $5.4 million in the third quarter of 2024 compared to the same period last year primarily due to effective cost control in managing the operations of the business, partially offset by higher employee-related costs. The Performance Coatings Group’s SG&A decreased $0.5 million in the third quarter of 2024 compared to the same period last year primarily due to lower employee-related costs. The Administrative function’s SG&A increased $68.1 million in the third quarter of 2024 compared to the same period last year due primarily to higher employee-related costs and increased expenses related to digital technologies and systems.

Other general expense (income) - net decreased $61.2 million in the third quarter of 2024 compared to the same period last year primarily due to a decrease in provisions for environmental matters, net in the Administrative function and increased net gains on sale or disposition of assets. See Note 15 in Item 1 for further details.

Interest expense increased $1.5 million in the third quarter of 2024 compared to the same period last year primarily due to an increase in short-term borrowings. See Note 6 in Item 1 for additional information on the Company’s outstanding debt.

Other expense (income) - net was expense of $9.5 million in the third quarter of 2024 compared to income of $8.0 million in the same period last year primarily due to higher foreign currency transaction losses in the current year and an increase in miscellaneous expenses, partially offset by an increase in miscellaneous income. See Note 15 in Item 1 for further details.

Nine Months Ended September 30, 2024

Consolidated Cost of goods sold decreased $410.9 million, or 4.3%, in the first nine months of 2024 compared to the same period in 2023 due primarily to moderating raw material costs, partially offset by a low single-digit increase in sales volume.

Consolidated gross profit increased $412.5 million in the first nine months of 2024 compared to the same period in 2023 primarily due to moderating raw material costs and higher Net sales. Consolidated gross profit as a percent of consolidated Net sales increased in the first nine months of 2024 to 48.4% compared to 46.1% during the same period in 2023 for these same reasons.

The Paint Stores Group’s gross profit in the first nine months of 2024 was higher than the same period last year by $181.8 million due primarily to higher Net sales and moderating raw material costs. The Paint Stores Group’s gross profit as a percent of Net sales increased in the first nine months of 2024 compared to the same period in 2023 for these same reasons. The Consumer Brands Group’s gross profit increased by $206.2 million in the first nine months of 2024 compared to the same period last year due primarily to higher fixed cost absorption in the manufacturing and distribution operations within the segment and moderating raw material costs, partially offset by lower Net sales. The Consumer Brands Group’s gross profit as a percent of Net sales increased in the first nine months of 2024 compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $11.6 million in the first nine months of 2024 compared to the same period last year primarily due to moderating raw material costs, partially offset by lower Net sales. The Performance Coatings Group’s gross profit as a percent of Net sales increased in the first nine months of 2024 compared to the same period last year for these same reasons.

Consolidated SG&A increased $329.7 million in the first nine months of 2024 versus the same period last year primarily due to investments in long-term growth strategies, including expenses to support net new store openings and digital technologies, and higher employee-related costs. As a percent of Net sales, consolidated SG&A increased 180 basis points in the first nine months of 2024 compared to the same period last year for these same reasons.

The Paint Stores Group’s SG&A increased $166.9 million in the first nine months of 2024 compared to the same period last year primarily due to investments in long-term growth initiatives, including increased spending from new store openings, costs to support higher sales and higher employee-related costs. The Consumer Brands Group’s SG&A increased $1.0 million in the first nine months of 2024 compared to the same period last year due to higher employee-related costs, partially offset by effective cost control in managing the operations of the business. The Performance Coatings Group’s SG&A increased $15.7 million in the first nine months of 2024 compared to the same period last year due primarily to investments in long-term initiatives. The Administrative function’s SG&A increased $146.1 million in the first nine months of 2024 compared to the same period last year due primarily to higher employee-related costs and increased expenses related to digital technologies and systems.

Other general expense (income) - net was income of $30.9 million in the third quarter of 2024 compared to expense of $39.9 million in the same period last year primarily due to a decrease in provisions for environmental matters, net in the Administrative function, increased net gains on sale or disposition of assets and a decrease in miscellaneous expenses. This activity was partially offset by the gain recognized in the prior period related to the divestiture of a business. See Note 15 in Item 1 for further details.

For information on impairment recognized in prior periods as a result of the divestiture of the China architectural business, see Notes 3 and 5 in Item 1 and Note 3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Interest expense decreased $5.7 million in the first nine months of 2024 compared to the same period last year primarily due to a decrease in long-term debt outstanding during the first nine months of 2024 compared to the same period last year, partially offset by higher interest expense on short-term borrowings. See Note 6 in Item 1 for additional information on the Company’s outstanding debt.

Other expense (income) - net was income of $30.2 million in the first nine months of 2024 compared to income of $17.0 million in the same period last year. The increase is primarily due to lower foreign currency transaction related losses in the current year compared to the prior period and an increase in miscellaneous income, partially offset by a decrease in investment gains. See Note 15 in Item 1 for further details.

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

Income Tax Expense

The effective tax rate was 21.2% for the third quarter of 2024 compared to 24.5% for the third quarter of 2023, and 22.4% for the first nine months of 2024 compared to 22.9% for the first nine months of 2023. The decrease in the effective tax rate for both periods was primarily due to a more favorable impact of tax benefits related to employee share-based payments. The other significant components of the Company’s effective tax rate were consistent year-over-year in both periods. See Note 16 in Item 1 for further details.

Net Income Per Share

Diluted net income per share in the third quarter of 2024 increased 7.8% to $3.18 per share compared to $2.95 per share in the third quarter of 2023. Diluted net income per share included a $0.19 per share charge for acquisition-related amortization expense in both the third quarter of 2024 and 2023. In the third quarter of 2023, diluted net income per share also included a charge of $0.06 per share related to activities associated with the Company’s restructuring plan. Foreign currency translation rate changes decreased diluted net income per share by $0.04 in the third quarter of 2024.

Diluted net income per share for the first nine months of 2024 increased 10.2% to $8.65 per share compared to $7.85 per share in the first nine months of 2023. Diluted net income per share included a $0.59 and $0.60 per share charge for acquisition-related amortization expense for the first nine months of 2024 and 2023, respectively. In the first nine months of 2023, diluted net income per share included a net charge of $0.09 per share related to activities associated with the Company’s restructuring plan. Foreign currency translation rate changes decreased diluted net income per share by $0.06 in the first nine months of 2024.

For information on the Company’s restructuring plan, see Note 4 in Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition and liquidity remained strong at September 30, 2024. The Company generated $2.219 billion in Net operating cash during the first nine months of 2024. The Company returned cash of $1.972 billion to its shareholders in the form of dividends and share repurchases during the first nine months of 2024. The Company’s EBITDA increased 5.5% to $3.616 billion for the first nine months of 2024. Refer to the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA.

At September 30, 2024, the Company had Cash and cash equivalents of $238.2 million and total debt outstanding of $10.140 billion. Total debt, net of Cash and cash equivalents, was $9.902 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 requirements.

Net Working Capital

Net working capital, defined as Total current assets less Total current liabilities, decreased $819.4 million to a deficit of $1.244 billion at September 30, 2024 compared to a deficit of $424.4 million at September 30, 2023. The net working capital decrease is due to an increase in current liabilities and a decrease in current assets.

Current asset balances decreased $224.5 million at September 30, 2024 compared to September 30, 2023 primarily due to a decrease in Cash and cash equivalents of $265.2 million primarily due to the timing of the SIC Holding acquisition in October 2023 and a decrease of $14.9 million in Other current assets, partially offset by an increase of $32.5 million in Accounts receivable, net and an increase in Inventories of $23.1 million.

Current liability balances increased $594.9 million at September 30, 2024 compared to September 30, 2023 primarily due to an increase in Short-term borrowings of $576.9 million, an increase in Other accruals of $140.3 million, primarily related to environmental liabilities, liabilities from contracts with customers, commitments related to Non-Traded Investments and miscellaneous other current liabilities, an increase in Accounts payable of $112.9 million and an increase in the Current portion of operating lease liabilities of $21.7 million, partially offset by a decrease in Accrued taxes of $165.3 million, a decrease in the Current portion of long-term debt of $49.3 million and a decrease of $42.3 million in compensation and taxes withheld. At September 30, 2024 and 2023, the Company’s current ratio was 0.83 and 0.94, respectively, compared to 0.83 at December 31, 2023.

Property, Plant and Equipment

Net property, plant and equipment increased $507.9 million in the first nine months of 2024 and $764.1 million in the twelve months since September 30, 2023. The increase in the first nine months was primarily due to capital expenditures of $730.6 million, partially offset by depreciation expense of $217.3 million and foreign currency translation and other adjustments of $5.4 million. Since September 30, 2023, the increase was primarily due to capital expenditures of $1.080 billion and foreign currency translation and other adjustments of $5.6 million, partially offset by depreciation expense of $291.6 million and the sale or disposition of fixed assets of $29.9 million.

Capital expenditures primarily represented expenditures related to construction activities associated with the new headquarters and research and development (R&D) center in the Administrative function. Construction of the new headquarters and R&D center is expected to be complete in 2025. In addition, capital expenditures were related to manufacturing capacity expansion, operational efficiencies and maintenance projects in the Consumer Brands and Performance Coatings Groups and the opening of new paint stores and renovation and improvements in existing stores in the Paint Stores Group.

In 2024, the Company expects to spend approximately the same as 2023 for capital expenditures, which it will fund primarily through the generation of operating cash. Core capital expenditures are targeted to be approximately 2% of Net sales in 2024 and are expected to be for investments in various productivity improvement and maintenance projects at existing manufacturing, distribution and R&D facilities and new store openings. Additionally, the Company will continue to construct its new headquarters and R&D center. Refer to “Real Estate Financing” 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. As part of the terms of the transaction, the Company is contractually obligated for completing the construction of the building and related improvements at the 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. The Company expects to receive total proceeds approximating $800 million to $850 million on an incremental basis until completion of construction. The initial lease term includes the construction period and extends for 30 years thereafter, and the Company has the right and option to extend the lease term. The lease payment amounts during the construction period are dependent upon the timing and amount of total reimbursement of construction and other costs received by the Company. The amount of the lease payments during the initial 30 year lease term will be calculated upon completion of the construction period and receipt of total reimbursement of construction and other costs. Once determinable, this is expected to result in a significant increase in the Company’s long-term contractual obligations.

See Note 8 in Item 1 and Notes 8 and 11 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning real estate financing.

Goodwill and Intangible Assets

Goodwill increased $31.0 million from December 31, 2023 and increased $244.7 million from September 30, 2023. The increase during the first nine months of 2024 was primarily due to purchase accounting allocations of $27.1 million and foreign currency translation fluctuations of $3.9 million. The increase over the twelve month period from September 30, 2023 was primarily due to purchase accounting allocations of $181.3 million and foreign currency translation fluctuations and other adjustments of $63.4 million.

Intangible assets decreased $223.6 million from December 31, 2023 and $167.1 million from September 30, 2023. The decrease during the first nine months of 2024 was primarily due to amortization of $244.8 million and foreign currency translation fluctuations and other adjustments of $0.4 million, partially offset by capitalized software of $21.6 million. The decrease over the twelve month period from September 30, 2023 was primarily due to amortization of $319.6 million and trademark impairment of $24.0 million, partially offset by purchase accounting allocations of $110.7 million, capitalized software of $21.6 million, and foreign currency translation fluctuations and other adjustments of $44.2 million.

See Note 5 in Item 1 for further details concerning the Company’s Goodwill and Intangible assets and Note 3 in Item 1 for information on the impairment test performed as a result of the China architectural business divestiture in in the third quarter of 2023. In addition, see Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for more information concerning the Company’s Goodwill and Intangible assets.

Other Assets

Other assets increased $234.6 million from December 31, 2023 and $331.3 million from September 30, 2023. The increase in the first nine months of 2024 and from September 30, 2023 was primarily due to an increase in Non-Traded Investments and other assets related to contracts with customers, deposits, including the deposit related to the acquisition that closed in October 2024 (see Note 3 in Item 1), and assets related to cloud computing arrangements. See Note 1 in Item 1 for further details 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, 2023. See Note 6 in Item 1 for additional information concerning debt.

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, 2023. The changes from September 30, 2023 are primarily due to 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, 2023 for more information concerning the Company’s liabilities for defined benefit pension and other postretirement benefit plans.

Deferred Income Taxes

Deferred income taxes decreased $51.4 million from December 31, 2023 and $16.7 million from September 30, 2023 primarily due to amortization of acquisition-related intangible assets.

Environmental-Related Liabilities

The operations of the Company, like those of other companies in the same industry, are subject to various domestic and foreign 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 help 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 2024. 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 2024. See Notes 8 and 15 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 2024 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, 2023.

Litigation

See Note 9 in Item 1 for information concerning litigation.

Shareholders’ Equity

Shareholders’ equity increased $440.3 million during the first nine months of 2024 primarily as a result of Net income of $2.201 billion and an increase in Other capital of $277.8 million mainly associated with stock-based compensation expense and stock option exercises. These increases were partially offset by $1.444 billion of treasury stock activity mainly attributable to treasury stock repurchases, cash dividends paid on common stock of $543.6 million and a decrease in AOCI of $51.9 million mainly due to foreign currency translation adjustments.

Shareholders’ equity increased $376.1 million since September 30, 2023 primarily as a result of Net income of $2.558 billion and an increase in Other capital of $367.5 million mainly associated with stock-based compensation expense and stock option exercises. These increases were partially offset by $1.931 billion of treasury stock activity mainly attributable to treasury stock repurchases, cash dividends paid on common stock of $698.9 million and an increase in AOCI of $80.2 million mainly due to foreign currency translation adjustments.

During the first nine months of 2024, the Company purchased 4.4 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, 2024 to purchase 35.3 million shares of its common stock.

In February 2024, the Company’s Board of Directors increased the quarterly cash dividend from $0.605 per share to $0.715 per share. This quarterly dividend was approved in all subsequent quarters and will result in an annual dividend for 2024 of $2.86 per share, or a 31% payout of 2023 diluted net income per share.

Cash Flow

Net operating cash for the nine months ended September 30, 2024 was a source of $2.219 billion compared to a source of $2.603 billion for the same period in 2023. The decrease in Net operating cash was primarily due to higher cash requirements for working capital, partially offset by higher Net income.

Net investing cash usage increased $401.8 million in the first nine months of 2024 to a usage of $910.8 million compared to a usage of $509.0 million for the same period in 2023 primarily due to an increase in cash used for capital expenditures, cash on deposit for a pending acquisition in the current year and reduced proceeds from the sale of assets, partially offset by proceeds from the divestiture of a business in the prior period.

Net financing cash usage decreased $438.8 million in the first nine months of 2024 to a usage of $1.346 billion compared to a usage of $1.785 billion for the same period in 2023 primarily due to an increase in short-term borrowings, proceeds from long-term debt in the current year and higher proceeds from stock options exercised, partially offset by an increase in payments of long-term debt, treasury stock purchases and cash dividends.

In the twelve month period from October 1, 2023 through September 30, 2024, the Company generated net operating cash of $3.137 billion, used $1.441 billion in investing activities and used $1.986 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. In 2024 and 2023, the Company entered into foreign currency forward contracts with maturity dates of less than twelve months primarily to hedge against value changes in foreign currency. The Company also has cross currency swap contracts to hedge its net investment in European operations. See Notes 12 and 15 in Item 1 for additional information related to the Company’s use of derivative instruments.

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.

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 New Credit Agreement dated July 31, 2024. 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, 2024, 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, 2023 and Note 6 in Item 1 for additional information concerning the Company’s debt and related covenants.

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 management believes enhances investors’ understanding of the Company’s operating performance. 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 condensed 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 condensed consolidated 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, 2023. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2023.

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,” “estimate,” “project,” “plan,” “goal,” “target,” “potential,” “intend,” “aspire,” “strive,” “may,” “will,” “should,” “could,” “would,” “seek,” 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, including the strength of retail and manufacturing economies and growth in the coatings industry;

• changes in general domestic and international economic conditions, including due to changes in inflation rates, interest rates, tax rates, unemployment rates, labor costs, healthcare costs, recessionary conditions, geopolitical conditions, government policies, laws and regulations;

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

• fluctuations in foreign currency exchange rates, including as a result of inflation, central bank monetary policies, currency controls and other exchange restrictions;

• any disruption in the availability of, or increases in the price of, raw material and energy supplies;

• disruptions in the supply chain, including those related to industry capacity constraints, raw material availability, transportation and logistics delays and constraints, political instability or civil unrest;

• catastrophic events, adverse weather conditions and natural disasters, including those that may be related to climate change or otherwise;

• 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;

• 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 conflicts and wars (including the ongoing conflict between Russia and Ukraine and the Israel-Hamas war) and other economic and political factors;

• cybersecurity incidents and other disruptions to our information technology systems, and our reliance on information technology systems;

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

• our ability to execute on our business strategies related to sustainability matters, and achieve related expectations, including as a result of evolving regulatory and other standards, processes, and assumptions, the pace of scientific and technological developments, increased costs and the availability of requisite financing, and changes in carbon markets;

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

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

• our ability to comply with numerous and evolving U.S. and non-U.S. laws, rules, and regulations and the effectiveness of our compliance efforts;

• adverse changes to our tax positions in U.S. and non-U.S. jurisdictions, including as a result of new or revised tax laws or interpretations;

• 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, accounting policies and standards; 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 foreign 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, 2023.

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

We face a number of risks that could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition. A discussion of our risk factors can be found in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. During the nine months ended September 30, 2024, 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 third quarter activity is as follows:

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

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

Trading Arrangements

During the quarter ended September 30, 2024, none of the Company’s directors or “officers,” as defined in Rule 16a-1(f) of the Exchange Act, adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

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.