SHERWIN WILLIAMS CO (SHW) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except as noted and per share data)

Company Background

The Sherwin-Williams Company, founded in 1866, is 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 22 to the consolidated financial statements in Item 8 for additional information on the Company’s Reportable Segments.

Summary

•Consolidated Net sales increased in the year to a record $23.099 billion

◦Net sales from stores in the Paint Stores Group open more than twelve calendar months increased 1.7% in the year

•Diluted net income per share increased 14.1% to $10.55 per share in the year compared to $9.25 per share in the full year 2023

◦Adjusted diluted net income per share increased 9.5% to $11.33 per share in the year compared to $10.35 per share in the full year 2023

•Generated Net operating cash of $3.153 billion, or 13.7% of Net sales, in the year

•Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) increased 6.0% in the year to $4.492 billion or 19.4% of Net sales

Outlook

Sherwin-Williams delivered strong 2024 results despite continued choppy macroeconomic conditions. Full year Net sales grew to a record level, gross margin expanded and Diluted net income per share increased by a double-digit percentage. We continued to generate strong cash flow from operations which was used for investment, an acquisition and returning cash to shareholders through dividends and repurchases of our common stock. We enter 2025 with confidence in our differentiated strategy, Success by Design, that continues to deliver innovative and productive solutions for our customers. Although we expect demand softness to persist in several end markets, we have significant above-market growth opportunities in each business. We will continue to support our growth strategy by executing initiatives within our enterprise priorities, including talent, simplification, digitization, supply chain responsiveness and sustainability.

Within Paint Stores Group and Consumer Brands Group, we anticipate continued economic pressures to impact consumer behavior in both North America and Europe in 2025. Our recent investments in sales reps, training and digital tools, coupled with home builder relationships are expected to drive above-market growth opportunities. The outlook for the Performance Coatings Group is varied by end market and region with expected growth in Coil driven by significant new account wins and Packaging as we support customer conversions to our ValPure® coating which complies with European regulations. Demand softness is forecasted in General Industrial due to negative manufacturing trends in North America and Europe and choppiness is expected in Automotive Refinish, Protective and Marine and Industrial Wood. As it relates to consolidated expenses, we expect raw material and employee-related costs to be up by a low-single digit percentage, offset by cost saving simplification efforts across our supply chain such as capacity and productivity improvements.

Our capital deployment strategy remains balanced and consistent. We have a strong liquidity position, with $210.4 million in cash and $3.274 billion of unused capacity under our credit facilities at December 31, 2024 and expect to end 2025 within our target debt-to-EBITDA leverage ratio of 2 to 2.5 times. We are, and expect to remain, in compliance with all financing covenants. Long-term debt maturities due in 2025 are $1.050 billion and are expected to be refinanced at higher interest rates. Together with the long-term debt maturities refinanced during 2024, Interest expense is expected to increase by approximately $40 million in 2025. In addition, we expect to incur additional costs associated with the transition into our new global headquarters and research and development (R&D) center in 2025 of approximately $100 million, which includes approximately $80 million of Selling, general and administrative expenses and approximately $20 million of Interest expense. Lastly, we plan to expand our footprint by opening 80 to 100 new stores in the United States and Canada in 2025, continue to evaluate acquisitions that align with our long-term growth strategy and return value to our shareholders through the payment of dividends and the reinvestment of excess cash for share repurchases of Company stock.

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See Item 1A Risk Factors for further information regarding the current and potential impact of general business and macroeconomic conditions, including inflation rates and interest rates, supply chain disruptions, raw material availability and fluctuations in foreign currency.

RESULTS OF OPERATIONS

The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the years ended December 31, 2024 and 2023. For comparisons of the years ended December 31, 2023 and 2022, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed on February 20, 2024.

Net Sales

Consolidated Net sales for 2024 increased 0.2% primarily due to higher sales in the Paint Stores Group. This increase was partially offset by lower sales in the Consumer Brands and Performance Coatings Groups. Net sales of all consolidated foreign subsidiaries decreased to $4.426 billion in 2024 compared to $4.428 billion in 2023 primarily due to unfavorable currency translation impact in Latin America and lower Net sales in Asia as a result of the divestiture of the China architectural business, partially offset by higher Net sales in Europe as a result of acquisitions. Net sales of all operations other than consolidated foreign subsidiaries increased to $18.673 billion for 2024 compared to $18.624 billion for 2023.

Net sales in the Paint Stores Group increased 2.7% primarily due to sales volume growth and selling price increases, which both impacted Net sales by a low-single digit percentage. Net sales from stores in the Paint Stores Group open for more than twelve calendar months increased 1.7% in the year over the prior year comparable period. During 2024, the Paint Stores Group opened 84 new stores and closed 5 locations for a net increase of 79 stores. The total number of stores in operation at December 31, 2024 was 4,773 in the United States, Canada and the Caribbean region. The Paint Stores Group’s objective is to expand its store base by an approximate average of 2% each year, primarily through organic growth. Sales of products other than paint increased 0.6% over last year. 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 7.7% in 2024 primarily due to a low-single digit percentage sales volume decline primarily due to soft DIY demand in North America, 2.9% unfavorable foreign currency translation driven by Latin America and the impact from divestitures in the prior year. In 2024, the Consumer Brands Group opened 18 new stores and closed 2 locations for a net increase of 16 new stores. The total number of stores in operation at December 31, 2024 was 334 in Latin America.

Net sales in the Performance Coatings Group decreased 0.7% in 2024 primarily due to selling price decreases, largely attributable to product mix, which impacted Net sales by a low-single digit percentage and unfavorable foreign currency translation. These decreases were partially offset by low-single digit volume growth, inclusive of the acquisition of SIC Holding GmbH in 2023 and the acquisition of a metal packaging coatings business in 2024. In 2024, the Performance Coatings Group added 2 net new branches, increasing the total to 324 branches.

Net sales in the Administrative function, which primarily consists of external leasing revenue, increased by an insignificant amount in 2024.

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Income Before Income Taxes

The following table presents the components of Income before income taxes as a percent of Net sales:

Consolidated Cost of goods sold decreased $390.4 million, or 3.2%, in 2024 compared to the same period in 2023 primarily due to lower sales volume in the Consumer Brands Group and moderating raw material costs, partially offset by higher sales volumes in the Paint Stores and Performance Coatings Groups.

Consolidated Gross profit increased $437.0 million, or 4.1%, in 2024 compared to the same period in 2023 primarily due to higher sales volumes in the Paint Stores and Performance Coatings Groups and moderating raw material costs, partially offset by lower sales volume in the Consumer Brands Group. Consolidated Gross profit as a percent to consolidated Net sales increased to 48.5% in 2024 from 46.7% in 2023 for these same reasons.

The Paint Stores Group’s Gross profit for 2024 increased $242.1 million compared to the same period in 2023 primarily due to higher Net sales driven by sales volume growth, selling price increases and moderating raw material costs. The Paint Stores Group’s Gross profit as a percent of Net sales increased for these same reasons. The Consumer Brands Group’s Gross profit increased $181.1 million in 2024 compared to the same period in 2023 primarily due 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 for these same reasons. The Performance Coatings Group’s Gross profit increased $13.6 million compared to the same period in 2023 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 for these same reasons.

Consolidated SG&A increased by $356.7 million, or 5.0%, in 2024 compared to the same period in 2023 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, SG&A increased 150 basis points compared to the same period in 2023 for these same reasons.

The Paint Stores Group’s SG&A increased $194.1 million or 4.6% for the year primarily due to higher employee-related costs and investments in long-term growth initiatives, including increased spending from net new store openings and costs to support higher sales. The Consumer Brands Group’s SG&A decreased $19.2 million or 2.2% for the 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 increased by $27.5 million or 1.9% for the year primarily due to investments in long-term initiatives and higher employee-related costs. The Administrative function’s SG&A increased $154.3 million or 27.7% primarily due to higher employee-related costs and increased expenses related to digital technologies and systems.

Other general (income) expense - net changed by $105.9 million from expense of $67.1 million in 2023 to income of $38.8 million in 2024. The change was primarily attributable to a decrease in provisions for environmental matters, net in the Administrative function and increased net gains on sale or disposition of assets. This activity was partially offset by the non-recurring gain recognized in 2023 related to the divestiture of a non-core domestic aerosol business. See Note 19 to the consolidated financial statements in Item 8 for additional information.

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There was no impairment in 2024. Asset impairment of $34.0 million related to the divestiture of the China architectural business and impairment related to trademarks of $23.9 million primarily related to a trademark in Europe were recorded in 2023. For information on impairment considerations, see Notes 3 and 6 to the consolidated financial statements in Item 8.

Interest expense decreased $1.8 million in 2024 compared to 2023 primarily due to a decrease in long-term debt, partially offset by higher interest expense as a result of an increase in short-term borrowings. See Note 7 to the consolidated financial statements in Item 8 for additional information on the Company’s outstanding debt.

Other (income) expense - net changed by $110.2 million from expense of $65.5 million in 2023 to income of $44.7 million in 2024 primarily due to lower foreign currency transaction related losses in 2024 compared to 2023 and an increase in miscellaneous income. The foreign currency transaction related losses in 2023 included a $41.8 million unfavorable impact from the significant devaluation of the Argentine peso in December 2023 as part of economic reforms implemented by the government of Argentina. In addition, a $12.8 million loss on extinguishment of debt was recognized in 2023. This activity was partially offset by a decrease in miscellaneous pension income and investment gains. See Note 19 to the consolidated financial statements in Item 8 for additional information related to Other (income) expense - net.

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

Income Tax Expense

The effective income tax rate for 2024 was 22.3% compared to 23.2% in 2023. The decrease in the effective rate 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. See Note 20 to the consolidated financial statements in Item 8 for additional information.

Net Income Per Share

Diluted net income per share for 2024 increased to $10.55 per share from $9.25 per share in 2023. Currency translation rate changes decreased diluted net income per share by $0.06 per share for 2024. Diluted net income per share in 2024 included acquisition-related amortization expense of $0.78 per share. Diluted net income per share for 2023 included acquisition-related amortization expense of $0.78 per share, severance and other expense of $0.04 per share, expenses related to the divestiture of the China architectural business of $0.11 per share, impairment related to trademarks of $0.07 per share and expense related to the devaluation of the Argentine peso of $0.16 per share. These expenses were partially offset by a gain on the divestiture of a non-core domestic aerosol business of $0.06 per share. See Notes 3, 6 and 19 to the consolidated financial statements in Item 8 for additional information.

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FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition, liquidity and cash flow remained strong in 2024. The Company generated $3.153 billion in Net operating cash and invested $1.014 billion in capital expenditures and approximately $80 million in the acquisition of a metal packaging coatings business. The Company also returned cash of $2.462 billion to shareholders in the form of cash dividends and share repurchases during the year.

The Company’s EBITDA increased 8.2% to $4.492 billion. See the Non-GAAP Financial Measures section for the definition and calculation of EBITDA. As of December 31, 2024, the Company had Cash and cash equivalents of $210.4 million and total debt outstanding of $9.888 billion. Total debt, net of Cash and cash equivalents, was $9.678 billion and was 2.2 times the Company’s EBITDA in 2024.

Net Working Capital

Net working capital, defined as Total current assets less Total current liabilities, decreased $293.9 million to a deficit of $1.408 billion at December 31, 2024 compared to a deficit of $1.114 billion at December 31, 2023. The net working capital decrease is due to an increase in Short-term borrowings and a decrease in current assets, particularly Accounts receivable, net and Cash and cash equivalents, partially offset by an increase in Other current assets and a decrease in Accounts payable.

Current asset balances decreased $112.1 million at December 31, 2024 compared to December 31, 2023 primarily due to a decrease in Accounts receivable, net of $79.1 million, a decrease in Cash and cash equivalents of $66.4 million and a decrease in Inventories of $41.7 million. These decreases were partially offset by an increase in Other current assets of $75.1 million, primarily related to prepaid expenses.

Current liability balances increased $181.8 million at December 31, 2024 compared to December 31, 2023 primarily due to an increase in Short-term borrowings of $288.2 million and an increase in Other accruals of $30.7 million primarily related to liabilities related to insurance, investments in U.S. affordable housing and historic renovation real estate partnerships and contracts with customers, partially offset by a decrease in short-term environmental liabilities. These increases were partially offset by a decrease in Accounts payable of $61.8 million, a decrease in Current portion of long-term debt of $49.6 million and a decrease in Accrued taxes of $23.1 million.

As a result of the net effect of these changes, the Company’s current ratio decreased to 0.79 at December 31, 2024 from 0.83 at December 31, 2023. Accounts receivable as a percent of Net sales decreased to 10.3% in 2024 from 10.7% in 2023. Accounts receivable days outstanding was 58 days in 2024 and 2023. In 2024, the allowance for current expected credit losses increased $0.8 million, or 1.3%. Inventories as a percent of Net sales decreased to 9.9% in 2024 from 10.1% in 2023. Inventory days outstanding was 93 days in 2024 compared to 94 days in 2023. The Company has sufficient total available borrowing capacity to fund its current operating needs.

Property, Plant and Equipment

Property, plant and equipment, net increased $696.4 million to $3.533 billion at December 31, 2024 primarily due to capital expenditures of $1.014 billion and assets acquired through a business combination of $32.9 million, partially offset by depreciation expense of $297.4 million and foreign currency translation and other adjustments of $52.6 million. During 2023, the Company closed on a transaction to sell and subsequently lease back its current global headquarters and R&D center. In connection with the sale, proceeds of $47.2 million were received and an immaterial gain was recognized.

Capital expenditures during 2024 included expenditures related to construction activities associated with the new global headquarters and R&D center in the Administrative function. Construction of the new global headquarters and R&D center is expected to be complete in 2025. Also included in 2024 capital expenditures were expenditures 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 2025, the Company expects to spend slightly less than 2024 for capital expenditures, which it will fund primarily through the generation of operating cash. Core capital expenditures are expected to be for investments in various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities and new store openings. Additionally, the Company expects to complete construction of its new global headquarters and R&D center. Refer to the Real Estate Financing section herein for further information on the financing transaction for the new global headquarters.

Real Estate Financing

In December 2022, the Company closed a transaction to sell and subsequently lease back its partially-constructed new global headquarters. As part of the terms of the transaction, the Company is contractually obligated for completing the

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construction of the building and related improvements at the new global headquarters. Construction is expected to complete in 2025. 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, with final proceeds expected in the first quarter of 2025. 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. Lease payments over the next twelve months are expected to be approximately $50 million. 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.

The following table summarizes the activity related to this transaction and the corresponding balances recognized in the Consolidated Balance Sheets.

The net proceeds from this transaction and other real estate financing transactions are recognized as proceeds from real estate financing transactions within the Financing Activities section of the Statements of Consolidated Cash Flows. The Company will continue to recognize the related assets within Property, plant and equipment, net on the Consolidated Balance Sheets under US GAAP. These assets will be subject to depreciation over their useful lives in accordance with the Company’s accounting policies. The Company will also allocate payments between interest and repayment of the financing liability over the life of the agreement. See Note 10 to the consolidated financial statements within Item 8 for further information.

Goodwill and Intangible Assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired in business combinations, decreased $45.9 million to $7.580 billion at December 31, 2024, due to foreign currency translation rate fluctuations of $94.1 million, partially offset by purchase accounting allocations of $48.2 million.

Intangible assets decreased $347.3 million to $3.533 billion at December 31, 2024 due to amortization of finite-lived intangible assets of $326.7 million and foreign currency translation rate fluctuations and other adjustments of $75.9 million, partially offset by purchase accounting allocations of $28.0 million and capitalization of software of $27.3 million.

See Note 3 to the consolidated financial statements in Item 8 for additional information related to acquisitions. See Note 6 to the consolidated financial statements in Item 8 for a description of goodwill, intangible assets, historical impairments and summaries of the remaining carrying values of goodwill and intangible assets.

Other Assets

Other assets increased $420.7 million to $1.632 billion at December 31, 2024. The increase was primarily due to an increase in finance lease right-of-use (ROU) assets of $187.5 million, largely related to a new finance lease which commenced during 2024, an increase in assets related to contracts with customers and investments in U.S. affordable housing and historic renovation real estate partnerships. See Notes 1, 9 and 18 to the consolidated financial statements in Item 8 for additional information.

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Debt (including Short-term borrowings)

Total debt outstanding, including Short-term borrowings, increased by $37.5 million to $9.888 billion in 2024. Short-term borrowings are primarily comprised of amounts outstanding under the Company’s domestic commercial paper program and various foreign credit facilities. The Company’s Long-term debt primarily consists of senior notes. The Company targets Net debt, which is total debt outstanding, net of Cash and cash equivalents, to be 2.0 to 2.5 times EBITDA. At December 31, 2024, Net debt was $9.678 billion and was 2.2 times the Company’s EBITDA in 2024. See the Non-GAAP Financial Measures section for the definition and calculation of EBITDA.

In August 2024, the Company repaid principal of $600.0 million related to the Company’s 4.05% senior notes due August 8, 2024 using commercial paper and subsequently issued $400.0 million of 4.55% senior notes due 2028 and $450.0 million of 4.80% senior notes due 2031 in a public offering. The net proceeds from the issuance of these notes were used to repay outstanding borrowings under the Company’s domestic commercial paper program and for general corporate purposes. The newly issued senior notes contain customary qualitative covenants as defined in their respective agreements. During the second quarter of 2024, the Company repaid the principal of $500.0 million related to its 3.125% senior notes due June 1, 2024 using commercial paper.

In December 2023, the Company exercised its call provision to make-whole the entire outstanding $119.4 million aggregate principal amount of its 7.38% Debentures due 2027 and the entire outstanding $3.5 million aggregate principal amount of its 7.45% Debentures due 2097. The retirement of the Debentures resulted in a loss of $12.8 million recorded in Other general (income) expense - net. See Note 19 to the consolidated financial statements in Item 8 for additional information.

The Company’s available capacity under its committed credit agreements is reduced for amounts outstanding under its domestic commercial paper program and letters of credit. At December 31, 2024, the Company had unused capacity under its various credit agreements of $3.274 billion.

See Note 7 to the consolidated financial statements in Item 8 for a detailed description and summary of the Company’s outstanding debt, short-term borrowings and other available financing programs.

Defined Benefit Pension and Other Postretirement Benefit Plans

In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans decreased $1.2 million to $67.8 million primarily due to changes in actuarial assumptions. The Company’s liability for other postretirement benefits decreased $12.1 million to $135.1 million at December 31, 2024 primarily due to benefits paid and changes in actuarial assumptions.

The assumed discount rate used to determine the projected benefit obligation for the domestic defined benefit pension plan increased to 5.8% at December 31, 2024 from 5.1% at December 31, 2023. The assumed discount rate used to determine the projected benefit obligation for foreign defined benefit pension plans increased to 5.5% at December 31, 2024 from 4.8% at December 31, 2023. The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations increased to 5.6% at December 31, 2024 from 5.0% at December 31, 2023. The increase in the discount rates was primarily due to higher interest rates.

In determining the rates of compensation increases, management considered historical Company increases as well as expectations for future increases. The rate of compensation increases used to determine the projected benefit obligation at December 31, 2024 was 3.0% for the domestic pension plan and 3.3% for foreign pension plans, which was comparable to the rates used in the prior year.

In establishing the expected long-term rate of return on plan assets, management considered the historical rates of return, the nature of investments and an expectation for future investment strategies. The expected long-term rate of return on assets for the domestic defined benefit pension plan was 6.5% and 6.3% at December 31, 2024 and 2023, respectively. The expected long-term rate of return on assets for the foreign defined benefit pension plans was 4.8% at December 31, 2024 and 2023.

In developing the assumed health care cost trend rates, management considered industry data, historical Company experience and expectations for future health care costs. The assumed health care cost trend rates used to determine the projected benefit

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obligation for other postretirement benefit obligations at December 31, 2024 were 6.5% and 11.8% for medical and prescription drug cost increases, respectively, both decreasing gradually to 4.5% in 2034. The assumed health care cost trend rates for medical and prescription costs used to determine the projected benefit obligation for other postretirement benefit obligations at December 31, 2023 were 6.0% and 9.0%, respectively.

The respective year-end assumptions described above for the Company’s defined benefit plans are also used to determine expense for the next year. Net pension (credit) cost in 2025 for the domestic pension plan and foreign pension plans is expected to be approximately $(1.6) million and $5.3 million, respectively. Net periodic benefit credit for other postretirement benefits in 2025 is expected to be approximately $9.7 million. This credit is primarily due to the remaining amortization of the impact of a plan amendment executed in 2022. This impact will be fully amortized in 2025. See Note 8 to the consolidated financial statements in Item 8 for additional information on the Company’s obligations and funded status of its defined benefit pension plans and other postretirement benefits.

Deferred Income Taxes

Deferred income taxes at December 31, 2024 decreased $75.6 million to $607.5 million at December 31, 2024 primarily due to amortization of intangible assets in the current year. See Note 20 to the consolidated financial statements in Item 8 for additional information on deferred taxes.

Other Long-Term Liabilities

Other long-term liabilities increased $401.4 million to $2.309 billion at December 31, 2024 primarily due to liabilities associated with real estate financing transactions, finance leases and commitments related to investments in U.S. affordable housing and historic renovation real estate partnerships, partially offset by the impact of expected settlements related to tax positions over the next twelve months. See Notes 1, 9, 10 and 20 to the consolidated financial statements in Item 8.

Environmental Matters

The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.

Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures were included in the normal operating expenses of conducting business. The Company’s capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company’s financial condition, liquidity, cash flow or results of operations during 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 2025. See Note 10 to the consolidated financial statements in Item 8 for further information on environmental-related liabilities.

Contractual and Other Obligations and Commercial Commitments

The Company has certain obligations and commitments to make future payments under contractual and other obligations and commercial commitments. The Company believes that cash generated from operating activities and borrowings available under long-term and short-term debt, including its committed credit agreements and commercial paper program, will be sufficient for it to meet its contractual and other obligations and commercial commitments. The following tables summarize such obligations and commitments as of December 31, 2024.

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(1)Excludes real estate financing transactions related to the new global headquarters. Refer to “Real Estate Financing” section herein for further information.

(2)Relates to open purchase orders for raw materials at December 31, 2024.

(3)Relates primarily to estimated future capital contributions for investments in the U.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations.

Additionally, the Company has an obligation with respect to an agreement signed in February 2025 to acquire the Brazilian decorative paints business of BASF SE, which is excluded from the preceding table. The timing and amount of this obligation is uncertain as the transaction is expected to close in the second half of 2025 and is subject to customary closing conditions, including Brazilian regulatory approval and post-closing adjustments. Refer to Note 3 to the consolidated financial statements in Item 8 for further information.

Warranties

The Company offers product warranties for certain products. The specific terms and conditions of such warranties vary depending on the product or customer contract requirements. Management estimated the costs of unsettled product warranty claims based on historical results and experience and included an amount in Other accruals. Management periodically assesses the adequacy of the accrual for product warranty claims and adjusts the accrual as necessary. Changes in the Company’s accrual for product warranty claims during 2024 and 2023, including customer satisfaction settlements during the year, were as follows:

Shareholders’ Equity

Shareholders’ equity increased $335.4 million to $4.051 billion at December 31, 2024 from $3.716 billion last year. The increase was primarily attributable to the generation of $2.681 billion of Net income and benefits from stock option exercises and the recognition of stock-based compensation expense of $367.5 million. This was partially offset by the repurchase of $1.739 billion in Treasury stock, the payment of $723.4 million in cash dividends and a decrease in AOCI of $250.9 million mainly due to foreign currency translation adjustments. See the Statements of Consolidated Shareholders’ Equity and Statements of Consolidated Comprehensive Income in Item 8 for additional information.

The Company purchased 5.2 million shares of its common stock for treasury purposes through open market purchases during 2024. The Company acquires its common stock for general corporate purposes, and depending on its cash position and market

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conditions, it may acquire shares in the future. The Company had remaining authorization from its Board of Directors at December 31, 2024 to purchase 34.4 million shares of its common stock.

The Company’s 2024 annual cash dividend of $2.86 per share represented 31% of 2023 diluted net income per share. The 2024 annual dividend represented the 46th consecutive year of increased dividend payments. On February 19, 2025, the Board of Directors increased the quarterly cash dividend to $0.79 per share. This quarterly dividend, if approved in each of the remaining quarters of 2025, would result in an annual dividend for 2025 of $3.16 per share, or a 30% payout of 2024 diluted net income per share.

Cash Flow

Net operating cash decreased $368.7 million in 2024 to a cash source of $3.153 billion from a cash source of $3.522 billion in 2023 primarily due to higher cash requirements for working capital partially offset by higher Net income. Net operating cash decreased as a percent of Net sales to 13.7% in 2024 compared to 15.3% in 2023.

Net investing cash usage increased $157.0 million to a usage of $1.196 billion in 2024 from a usage of $1.039 billion in 2023 primarily due to an increase in cash used for capital expenditures, proceeds from the divestiture of a business in 2023 and reduced proceeds from the sale of assets, partially offset by lower cash used for acquisitions. See Note 3 to the consolidated financial statements in Item 8 for additional information on acquisitions and divestitures.

Net financing cash usage decreased $407.5 million to a usage of $2.017 billion in 2024 from a usage of $2.425 billion in 2023. This decrease was primarily due to a net increase in short-term borrowings, proceeds from long-term debt in 2024 and higher proceeds from stock options exercised, partially offset by an increase in payments of long-term debt, treasury stock purchases and payment of cash dividends.

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 and cross currency swap contracts to hedge its net investment in European operations. See Notes 1, 16 and 19 to the consolidated financial statements in Item 8 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. See Notes 1 and 19 to the consolidated financial statements in Item 8 for additional information related to foreign currency translation.

Financial Covenant

Certain borrowings contain a consolidated leverage covenant. The covenant states 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 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 for a reconciliation of EBITDA to Net income. At December 31, 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 7 to the consolidated financial statements in Item 8 for additional information.

Defined Contribution Savings Plan

Participants in the Company’s defined contribution savings plan are allowed to contribute up to the lesser of fifty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code. The Company matches one hundred percent of all contributions up to six percent of eligible employee contributions. The Company’s matching contributions to the defined contribution savings plan charged to operations were $165.1 million in 2024 compared to $153.9 million in 2023. At December 31, 2024, there were 16,771,640 shares of the Company’s common stock being held by the defined contribution savings plan, representing 6.7% of the total number of voting shares outstanding. See Note 13 to the consolidated financial statements in Item 8 for additional information concerning the Company’s defined contribution savings plan.

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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 Consolidated Cash Flows in Item 8.

The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the years indicated below:

Free Cash Flow After Dividends

Free cash flow after dividends is a non-GAAP financial measure defined as Net operating cash, as shown in the Statements of Consolidated Cash Flows, less the amount reinvested in the business for capital expenditures and the return on investment to its shareholders by the payments of cash dividends. Management considers Free cash flow after dividends to be a useful tool in its determination of appropriate uses of the Company’s Net operating cash. The reader is cautioned that the Free cash flow after dividends measure should not be compared to other entities unknowingly as it may not be comparable and it does not consider certain non-discretionary cash flows, such as mandatory debt and interest payments. The amount shown below should not be considered an alternative to Net operating cash or other cash flow amounts provided in accordance with US GAAP as disclosed in the Statements of Consolidated Cash Flows in Item 8.

The following table summarizes Free cash flow after dividends as calculated by management for the years indicated below:

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Adjusted Diluted Net Income Per Share

Management believes investors’ understanding of the Company’s operating performance is enhanced by the disclosure of diluted net income per share excluding Valspar acquisition-related amortization expense and certain other adjustments. Valspar acquisition-related amortization expense is excluded from diluted net income per share due to its significance as a result of the purchase price assigned to finite-lived intangible assets at the date of acquisition and the related impact on underlying business performance and trends. While these intangible assets contribute to the Company’s revenue generation, the related revenue is not excluded. This adjusted earnings per share measurement is not in accordance with US GAAP. It should not be considered a substitute for earnings per share in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies. The following tables reconcile diluted net income per share computed in accordance with US GAAP to adjusted diluted net income per share.

(1)    The tax effect is calculated based on the statutory rate and the nature of the item, unless otherwise noted.

(2)    Acquisition-related amortization expense, which is included within Selling, general and administrative expenses, consists of the amortization of intangible assets related to the Valspar acquisition. These intangible assets are primarily customer relationships and intellectual property and are being amortized over their remaining useful lives.

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Adjusted Segment Profit

Management believes investors’ understanding of the Company’s operating performance is enhanced by the disclosure of Segment profit excluding Valspar acquisition-related amortization expense and certain other adjustments. Valspar acquisition-related amortization expense is excluded from Segment profit due to its significance as a result of the purchase price assigned to finite-lived intangible assets at the date of acquisition and the related impact on underlying business performance and trends. While these intangible assets contribute to the Company’s revenue generation, the related revenue is not excluded. This Adjusted segment profit measurement is not in accordance with US GAAP. It should not be considered a substitute for Segment profit in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies. The following tables reconcile Segment profit computed in accordance with US GAAP to Adjusted segment profit.

nm    -not meaningful

(1)    Acquisition-related amortization expense, which is included within Selling, general and administrative expenses, consists of the amortization of intangible assets related to the Valspar acquisition. These intangible assets are primarily customer relationships and intellectual property and are being amortized over their remaining useful lives.

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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 critical accounting policies and estimates described below. However, application of these critical accounting policies and estimates involves the exercise of judgment and use of assumptions as to future uncertainties and as a result, actual results could differ from these estimates.

All of the significant accounting policies that were followed in the preparation of the consolidated financial statements are disclosed in Note 1 to the consolidated financial statements in Item 8. Management believes that the following critical accounting policies and estimates have a significant impact on our consolidated financial statements.

Inventories

Inventories are stated at the lower of cost or market with cost determined principally on the last-in, first-out (LIFO) method based on inventory quantities and costs determined during the fourth quarter and market representing current replacement cost, which is the cost to purchase or reproduce the inventory. Market shall not exceed net realizable value and shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin. Inventory quantities are adjusted throughout the year as formal cycle counts are completed, or during the fourth quarter as a result of annual physical inventory counts. If inventories accounted for on the LIFO method are reduced on a year-over-year basis, then liquidation of certain quantities carried at costs prevailing in prior years occurs. Management records an estimate of the lower of cost or market whenever the utility of inventory is impaired by damage, deterioration, obsolescence, changes in price levels, or other causes based on historical experience and current trends through reductions to inventory cost by recording a provision included in Cost of goods sold. If management estimates that the reasonable market value is below cost or determines that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to current market price is provided for in the reserve for obsolescence. See Note 4 to the consolidated financial statements in Item 8 for more information regarding the impact of the LIFO inventory valuation and the reserve for obsolescence.

Goodwill and Intangible Assets

In accordance with the Goodwill and Other Intangibles Topic of the ASC, management performs impairment tests of goodwill and indefinite-lived intangible assets on an annual basis, as well as whenever an event occurs or circumstances change that indicate impairment has occurred on a more likely than not basis. An optional qualitative assessment allows companies to forego the annual quantitative test if it is not more likely than not that impairment has occurred based on monitoring key Company financial performance metrics and macroeconomic conditions. The qualitative assessment is performed when deemed appropriate.

Management tests goodwill for impairment at the reporting unit level. Per the Segment Reporting Topic of the ASC, a reporting unit is an operating segment or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of an operating segment having similar economic characteristics. At the time of goodwill impairment testing (if performing a quantitative assessment), management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated fair value is less than the current carrying value, the difference represents the amount of impairment attributable to the reporting unit. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing. The key assumptions used in the discounted cash flow valuation model for impairment testing include a discount rate, growth rates, cash flow projections and a terminal value rate. Discount rates are set by using the Weighted Average Cost of Capital (WACC) methodology. The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Management, considering industry and Company-specific historical and projected data, develops growth rates, sales projections and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and a long-term growth rate. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate of all reporting units’ fair value is reconciled to the total market capitalization of the Company within a reasonable and supportable control premium.

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The Company had seven components, some of which are aggregated due to similar economic characteristics, to form three reporting units (also the reportable operating segments) with goodwill as of October 1, 2024, the date of the annual impairment test. The Company performed the optional qualitative impairment test as of October 1, 2024, and determined that there was no indication of impairment on a more likely than not basis in the Company’s reporting units.

Management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuations at acquisition. Management utilizes the royalty savings method to determine the estimated fair value for each indefinite-lived intangible asset or trademark. In this method, management estimates the royalty savings arising from the ownership of the intangible asset. The key assumptions used in estimating the royalty savings for impairment testing include a discount rate, a royalty rate, growth rates, sales projections, a terminal value rate and to a lesser extent, a tax rate. The discount rate used is similar to the rate developed by the WACC methodology considering any differences in Company-specific risk factors between reporting units and trademarks. The royalty rate is established by management and valuation experts and periodically substantiated by valuation experts. Management, considering industry and Company-specific historical and projected data, develops growth rates and sales projections for each significant trademark. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant WACC and a low long-term growth rate. The royalty savings valuation methodology and calculations used in 2024 impairment testing are consistent with prior years. The Company performed the optional qualitative impairment test as of October 1, 2024, and determined that there was indication of impairment on a more likely than not basis in certain of the Company’s trademarks. The resulting quantitative impairment test performed as of October 1, 2024 did not result in any trademark impairment.

The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed from the perspective of a market participant. See Note 6 to the consolidated financial statements in Item 8 for a discussion of goodwill and intangible assets and the impairment tests performed in accordance with the Goodwill and Other Intangibles Topic of the ASC.

Valuation of Long-Lived Assets

In accordance with the Property, Plant and Equipment Topic of the ASC, if events or changes in circumstances indicate that the carrying value of long-lived assets, including operating and finance lease right-of-use assets, may not be recoverable or the useful life has changed, impairment tests are performed or the useful life is adjusted. Undiscounted cash flows are used to calculate the recoverable value of long-lived assets to determine if such assets are recoverable. If the carrying value of the assets is deemed to not be recoverable, the impairment to be recognized is the amount by which the carrying value of the assets exceeds the estimated fair value of the assets as determined in accordance with the Fair Value Topic of the ASC. If the usefulness of an asset is determined to be impaired, an updated useful life is assessed based on the period of time for projected use of the asset. Fair value approaches and changes in useful life are based on certain assumptions and information available at the time the valuation or determination is performed. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value or useful life considering the current economic conditions. As of October 1, 2024, the Company performed an analysis and determined that there were no events or changes in circumstances to suggest the carrying value of each long-lived asset group is not recoverable and therefore, no further impairment tests were performed. See Note 5 to the consolidated financial statements in Item 8 for a discussion of the reductions in carrying value or useful life of long-lived assets in accordance with the Property, Plant and Equipment Topic of the ASC.

Defined Benefit Pension and Other Postretirement Benefit Plans

To determine the Company’s ultimate obligation under its defined benefit pension and other postretirement benefit plans, management estimates the future cost of benefits and attributes that cost to the time period during which each covered employee works. To determine the obligations of the benefit plans, management uses actuaries to calculate such amounts using key assumptions which include discount rates, inflation rates, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs. Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is considered. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations or financial condition.

In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. Actuarial gains and losses and prior service costs are recognized and recorded in Accumulated other comprehensive income (AOCI). The amounts recorded in AOCI will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension and net periodic benefit costs. Based on facts and circumstances, the expense amounts recorded in AOCI can also have accelerated amortization due to certain plan changes, including those that result in a

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curtailment. See Note 8 to the consolidated financial statements in Item 8 for information concerning the Company’s defined benefit pension plans and other postretirement benefit plans.

Environmental Matters

The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs, which are mostly undiscounted, are determined based on currently available facts regarding each site. If the reasonably estimable costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided.

The Company routinely assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved. See Note 10 to the consolidated financial statements in Item 8 for information concerning the accrual for extended environmental-related activities and a discussion concerning unaccrued future loss contingencies.

Litigation and Other Contingent Liabilities

In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims. Management accrues for all known liabilities that existed and those where a loss was deemed probable for which a fair value was available or an amount could be reasonably estimated in accordance with US GAAP. However, because litigation is inherently subject to many uncertainties and the ultimate result of any present or future litigation is unpredictable, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the liability may result in a material impact on Net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties involved, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. See Note 11 to the consolidated financial statements in Item 8 for information concerning litigation.

Income Taxes

The Company estimates income taxes for each jurisdiction in which it conducts operations. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes will be made in the period in which the changes occur.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. These assessments of uncertain tax positions contain judgments related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations. Income tax expense is adjusted in our Statements of Consolidated Income in the period in which these events occur. See Note 20 to the consolidated financial statements in Item 8 for information concerning income taxes.

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