Business Context and Reporting Period
The Sherwin-Williams Company develops, manufactures, distributes and sells paints, coatings and related products through the Paint Stores Group, Consumer Brands Group and Performance Coatings Group. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The company realigned its Latin America architectural paint business into the Consumer Brands Group beginning in 2023, with prior periods revised for comparability.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $6,116.7 million | $6,047.4 million | $17,799.7 million | $16,918.4 million |
| Gross profit | $2,916.2 million | $2,589.4 million | $8,209.4 million | $7,091.3 million |
| Gross margin | 47.7% | 42.8% | 46.1% | 41.9% |
| Income before taxes | $1,009.0 million | $877.2 million | $2,635.9 million | $2,078.2 million |
| Net income | $761.5 million | $685.1 million | $2,032.6 million | $1,633.8 million |
| Diluted EPS | $2.95 | $2.62 | $7.85 | $6.23 |
| EBITDA | $1,266.3 million | $1,124.2 million | $3,427.0 million | $2,793.3 million |
| Net operating cash flow | Not separately provided | Not separately provided | $2,603.3 million | $1,278.9 million |
Third-quarter sales increased 1.1%, while nine-month sales increased 5.2%. Third-quarter diluted EPS increased 12.6%; nine-month diluted EPS increased 26.0%. EBITDA represented 20.7% of third-quarter sales and 19.3% of nine-month sales. Management attributed margin expansion primarily to pricing discipline and moderating raw-material costs, partly offset by lower volumes and higher employee-related costs.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $503.4 million at September 30, 2023, compared with $130.5 million at September 30, 2022.
- Total debt was $9,936.0 million, including $9,597.4 million of long-term debt and $338.6 million of short-term borrowings. Net debt was $9,433.0 million.
- The company had $3.342 billion of unused credit capacity and stated that it remained in compliance with its debt covenant.
- Net working capital was negative $424.4 million, compared with positive $21.2 million at September 30, 2022; the current ratio was 0.94.
- Capital expenditures were $568.9 million in the cash flow statement for the first nine months, while management stated that total 2023 capital expenditures are expected to exceed 2022 levels.
- The company paid $468.4 million of dividends and repurchased $946.0 million of stock during the first nine months. Remaining share-repurchase authorization was 41.4 million shares at September 30, 2023.
Material Changes Versus the Prior Comparable Period
- Paint Stores Group: Third-quarter sales increased 3.6% and nine-month sales increased 8.9%. U.S. and Canada stores open more than 12 months grew 3.0% in the quarter and 8.3% year to date. New residential volume declined at a high-single-digit rate in the quarter, while pro architectural volume increased.
- Consumer Brands Group: Third-quarter sales declined 4.0%, primarily from a mid-single-digit volume decline and the China architectural divestiture. Nine-month sales increased 1.2%, supported by pricing.
- Performance Coatings Group: Third-quarter sales declined 1.0% and nine-month sales increased 0.8%. Acquisitions and pricing were offset by high-single-digit volume declines.
- Gross margin expanded 490 basis points in the quarter and 420 basis points for the first nine months, driven by pricing and lower raw-material costs.
- SG&A increased 9.1% in the quarter and 11.0% for the first nine months, primarily due to employee-related costs, new-store investments, technology spending, acquisition costs and expenses supporting higher sales.
- Interest expense increased to $322.9 million for the first nine months from $282.5 million, primarily because of higher interest rates, despite lower debt.
- Operating cash flow more than doubled year over year, primarily due to higher earnings and improved working-capital management.
Outlook, Commentary, Risks and Unusual Items
Management expects fourth-quarter results to be seasonally lower and described demand as inconsistent by region and end market. It expressed confidence in delivering above-market growth and returns, while continuing investments in stores, personnel, innovation, digital capabilities and other growth initiatives. The filing does not provide specific full-year revenue or earnings guidance.
- The China architectural business was divested on August 1, 2023. The transaction generated $34.0 million of impairment charges, including $27.1 million recorded in the Administrative segment and $6.9 million related to trademarks, plus a $14.7 million discrete tax expense.
- A non-core domestic aerosol business was divested in April 2023, generating a $20.1 million gain.
- The restructuring plan is substantially complete, with $5.5 million of remaining liabilities and no additional expense expected under the plan.
- In October 2023, after quarter-end, the company acquired German-based SIC Holding GmbH; the preliminary purchase price allocation had not been completed.
- Environmental accruals totaled approximately $310.3 million at September 30, 2023. The estimated unaccrued maximum for currently estimable environmental matters was $92.4 million above the minimum accrued amount.
- Lead pigment and lead-based paint litigation remains unresolved, and the company has generally not accrued amounts because losses are not considered probable or reasonably estimable. A material adverse outcome could affect results, liquidity or financial condition.
- The New Jersey Department of Environmental Protection lawsuit concerning the Gibbsboro site has a scheduled trial date of September 16, 2024.
- Key ongoing risks include demand and economic conditions, raw-material and labor costs, supply-chain disruption, foreign currency, interest rates, acquisitions, cybersecurity, environmental liabilities and litigation.
Facts Investors Should Verify
- Whether pricing benefits and raw-material cost moderation can offset continued volume pressure, particularly in Consumer Brands and Performance Coatings.
- The sustainability of the 47.7% quarterly gross margin and the effect of higher SG&A and interest costs.
- Debt maturities, refinancing requirements and compliance with the consolidated leverage covenant.
- The final purchase accounting and financial contribution from the SIC Holding acquisition.
- Potential changes to environmental reserves and the outcome of lead-paint, insurance-coverage and Gibbsboro litigation.
- The impact of the China divestiture and other portfolio actions on future revenue, earnings and segment comparability.