Sherwin-Williams Company — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing also provides unaudited fourth-quarter results. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products through The Americas Group, Consumer Brands Group and Performance Coatings Group.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $19,944.6 million | $18,361.7 million | +8.6% |
| Gross profit | $8,542.7 million | $8,682.6 million | -1.6% |
| Gross margin | 42.8% | 47.3% | -450 bps |
| Income before income taxes | $2,248.6 million | $2,519.2 million | -10.7% |
| Net income | $1,864.4 million | $2,030.4 million | -8.2% |
| Diluted EPS | $6.98 | $7.36 | -5.2% |
| Adjusted diluted EPS | $8.15 | $8.19 | -0.5% |
| Net operating cash flow | $2,244.6 million | $3,408.6 million | -34.2% |
| Capital expenditures | $372.0 million | $303.8 million | +22.5% |
| Free cash flow | $1,285.5 million | $2,616.8 million | -50.9% |
Segment Performance
- The Americas Group: Sales increased 8.0% to $11,217.0 million. Comparable U.S. and Canadian store sales increased 6.0%, while volume was constrained by raw-material availability. The group opened 85 net new stores and operated 4,859 stores at year-end. Income before taxes decreased 2.4% to $2,239.1 million; margin declined to 20.0% from 22.1%.
- Consumer Brands Group: Sales decreased 10.9% to $2,721.6 million, primarily from lower retail volume as do-it-yourself demand normalized, supply constraints and the Wattyl divestiture. Income before taxes decreased 38.2% to $358.4 million; margin declined to 13.2% from 19.0%.
- Performance Coatings Group: Sales increased 22.0% to $6,003.8 million, driven by higher volume, pricing and returning industrial demand. Income before taxes decreased 2.8% to $486.2 million; margin declined to 8.1% from 10.2%.
Cash, Debt and Liquidity
- Cash and cash equivalents were $165.7 million at December 31, 2021, compared with $226.6 million at year-end 2020.
- Total debt increased $1.323 billion to $9.615 billion, including $763.5 million of short-term borrowings and $8.851 billion of long-term debt before current-portion presentation.
- Net debt was $9.449 billion, equal to 2.9 times adjusted EBITDA of $3.268 billion.
- The Company had $2.725 billion of unused capacity under committed credit agreements and stated that available borrowing capacity was sufficient for current operating needs.
- Net working capital shifted to a deficit of $665.8 million from a deficit of $3.0 million, and the current ratio declined to 0.88 from 1.00, primarily because of higher short-term borrowings and current debt maturities.
- The Company generated $2.245 billion of operating cash, invested $476.4 million in investing activities and used $1.834 billion in financing activities.
Material Changes and Unusual Items
- Raw-material inflation, supply-chain disruptions, labor constraints and weather-related shutdowns materially reduced product availability and compressed gross margin. Management estimated that raw-material availability issues reduced full-year sales by a mid-single-digit percentage.
- The Company recognized a $111.9 million pretax loss on the divestiture of the Wattyl business in Australia and New Zealand. Wattyl had annual revenue of approximately $200 million.
- The Company completed acquisitions for approximately $227.0 million, including Specialty Polymers, and signed an agreement to acquire Sika AG’s European industrial coatings business, expected to close in the first quarter of 2022.
- The Company issued $1.0 billion of senior notes in November 2021 and redeemed $400.0 million of 4.20% notes due 2022.
- The Company repurchased 10.1 million shares for $2.752 billion and paid $587.1 million in cash dividends. The Board increased the quarterly dividend to $0.60 per share in February 2022.
- A three-for-one stock split was completed on March 31, 2021. All share and per-share data in the filing are retroactively adjusted.
- Fourth-quarter 2021 net sales were $4,762.1 million, gross profit was $1,879.7 million, net income was $304.0 million and diluted EPS was $1.15, compared with fourth-quarter 2020 net sales of $4,488.8 million, gross profit of $2,128.7 million, net income of $407.0 million and diluted EPS of $1.49.
Guidance, Outlook and Risks
- Management described demand across end markets as robust and expected delayed jobs from 2021 material shortages to be completed rather than canceled.
- The Company added 50 million gallons of incremental architectural paint capacity in 2021, plans additional store openings in 2022 and expects raw-material availability to improve.
- Additional price increases are intended to offset sustained cost inflation. Management expects raw-material costs to moderate over time, supporting margin recovery.
- Capital expenditures excluding the new headquarters were expected to remain approximately 2% of sales, although total 2022 capital expenditures were expected to exceed 2021 because of the new headquarters and research and development center. The Company has committed to at least $600 million for those projects, with completion expected no earlier than 2024.
- Management expected debt-to-EBITDA to approach the high end of its 2.0-to-2.5 target range.
- Primary risks include COVID-19 and future variants, supply-chain and labor disruptions, raw-material and energy inflation, cyclical construction and manufacturing demand, foreign-exchange exposure, cybersecurity, environmental remediation, litigation related to historical lead pigments and lead-based paint, and the Company’s substantial leverage.
- Environmental accruals totaled $323.3 million at year-end, including $45.9 million in current liabilities and $277.4 million in long-term liabilities. The Company disclosed an additional unaccrued maximum estimated environmental exposure of $101.4 million above minimum accruals.
- The Company was party to ongoing Pennsylvania lead-paint proceedings and other lead-related litigation. Except for the California public nuisance settlement accrual, no amounts were accrued for lead-paint litigation because management did not consider a loss probable or reasonably estimable.
- The Company was in compliance with its consolidated leverage covenant, which limits the leverage ratio to 3.75-to-1.00.
Investor Verification Items
- Verify whether pricing actions and improved raw-material availability restore gross margins toward historical levels.
- Monitor working-capital requirements, commercial-paper usage, debt maturities and leverage as the Company funds acquisitions, capital projects and shareholder returns.
- Assess the contribution and integration of Specialty Polymers and the expected Sika transaction.
- Review the effect of the Wattyl divestiture and other unusual items when comparing reported and adjusted earnings.
- Evaluate potential changes in environmental remediation costs, particularly at the Gibbsboro site, and developments in lead-paint litigation and insurance coverage proceedings.
- Confirm the pace and cost of the new headquarters and research and development center, including the stated minimum $600 million commitment.