Sherwin-Williams Company 2021 Q1 Form 10-Q Summary
Business Context and Reporting Period
The Sherwin-Williams Company develops, manufactures, distributes and sells paints, coatings and related products serving professional, industrial, commercial and retail customers. The company reports through The Americas Group, Consumer Brands Group and Performance Coatings Group, plus an Administrative segment.
This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results are seasonal, with most segment sales traditionally occurring in the second and third quarters. A three-for-one stock split was effected on March 31, 2021; all share and per-share information was retroactively adjusted.
Financial Performance and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $4,656.0 million | $4,146.7 million | 12.3% increase |
| Gross profit | $2,112.0 million | $1,889.7 million | 11.8% increase |
| Gross margin | 45.4% | 45.6% | Down 20 basis points |
| SG&A | $1,325.9 million | $1,307.6 million | 1.4% increase |
| SG&A as percentage of sales | 28.5% | 31.5% | Down 300 basis points |
| Income before income taxes | $509.0 million | $392.3 million | 29.7% increase |
| Net income | $409.6 million | $321.7 million | 27.3% increase |
| Diluted EPS | $1.51 | $1.15 | 31.3% increase |
| Net operating cash flow | $195.7 million | $54.9 million | 256% increase |
| EBITDA | $736.8 million | $623.1 million | 18.2% increase |
| Adjusted EBITDA | $848.7 million | $623.1 million | Includes $111.9 million divestiture loss add-back |
Sales increased across all reportable segments: The Americas Group rose 8.6% to $2,503.1 million, Consumer Brands Group rose 25.0% to $778.1 million, and Performance Coatings Group rose 12.9% to $1,374.3 million. U.S. and Canadian stores open more than twelve months reported an 8.2% sales increase.
Higher sales volume, favorable mix and selling-price increases supported results. Raw material cost inflation reduced consolidated gross margin and pressured the Performance Coatings Group. Management cited cost control and higher sales volumes as the primary reasons for the lower SG&A ratio.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $314.7 million at March 31, 2021, compared with $226.6 million at December 31, 2020 and $238.5 million at March 31, 2020.
- Total debt was $9.109 billion, including $818.1 million of short-term borrowings and $8.291 billion of long-term debt. Net debt was $8.794 billion.
- The company had $2.683 billion of unused borrowing capacity under its credit facilities and stated that it was in compliance with its bank covenants.
- Operating cash flow was $195.7 million. Investing cash usage was $6.4 million, including $64.3 million of capital expenditures, $24.9 million for acquisitions and $116.2 million of proceeds from the Wattyl divestiture.
- Financing cash usage was $94.8 million, including $775.4 million of share repurchases and $151.8 million of dividends, partly offset by $818.0 million of increased short-term borrowings.
- The company repurchased 3.3 million shares for $775.4 million and had authorization to repurchase 55.35 million additional shares at quarter-end.
- The quarterly dividend increased from $0.4467 to $0.55 per share, implying a 2021 annual dividend of $2.20 per share.
Material Changes Versus the Prior Comparable Period
- Net sales rose $509.3 million, primarily from higher volumes in each reportable segment, selling-price increases and a 0.7% benefit from currency translation.
- Income before taxes increased $116.7 million despite a $111.9 million pre-tax loss on the Wattyl divestiture.
- Gross margin declined modestly because of higher raw material costs, while SG&A leverage improved substantially.
- Q1 2020 included a $21.3 million loss on extinguishment of debt; no comparable charge was recorded in Q1 2021.
- Net operating cash flow improved by $140.8 million, although working capital consumed $495.0 million of operating cash during the quarter.
- Goodwill and intangible assets declined $299.0 million from December 31, 2020, primarily due to the Wattyl disposition, amortization and foreign-currency translation.
- Shareholders’ equity declined $532.1 million during the quarter, primarily because of share repurchases and dividends, partly offset by net income.
Outlook, Commentary, Risks and Unusual Items
Management characterized the start to 2021 as strong but did not provide quantitative full-year earnings or sales guidance in the filing. Management expressed confidence in the long-term outlook and expects to continue pursuing strategically aligned acquisitions and using excess cash for open-market share repurchases.
Key uncertainties include the duration of raw material inflation, supply-chain constraints, recovery in commercial and property-maintenance architectural markets, the duration of elevated DIY demand and the continuing effects of COVID-19. The company also identified exposure to foreign-currency, commodity-price and interest-rate movements.
The company completed a $27.0 million acquisition of a domestic coatings company and divested Wattyl, an Australian and New Zealand coatings business with approximately $200 million of annual revenue. The Wattyl transaction generated a $111.9 million pre-tax loss and was not classified as discontinued operations.
Environmental accruals totaled approximately $361.9 million at March 31, 2021, including $293.3 million in other long-term liabilities and $68.6 million in other accruals. The company disclosed an unaccrued maximum of $112.4 million above minimum environmental accruals, subject to significant uncertainty.
Lead pigment and lead-based paint litigation remains a material contingency. The company has generally not accrued for these matters, except for the Santa Clara County settlement, for which the recorded accrual was $64.7 million. Management stated that potential liabilities cannot currently be estimated and could materially affect results, liquidity or financial condition if adverse outcomes occur. The company also faces litigation concerning insurance coverage and environmental claims related to the Gibbsboro, New Jersey site.
The company determined that goodwill and indefinite-lived intangible assets were not more likely than not impaired as of March 31, 2021, but future impairment charges could be required if assumptions or economic conditions change. The effective tax rate increased to 19.5% from 18.0%.
Important Facts for Investors to Verify
- Whether raw material inflation and supply constraints continue to compress gross margins or can be offset through pricing.
- The sustainability of elevated DIY and residential demand and the pace of recovery in commercial and property-maintenance markets.
- The effect of the Wattyl divestiture and the domestic coatings acquisition on future revenue, margins and reported earnings.
- Short-term borrowing levels, leverage-covenant compliance and the company’s ability to fund substantial repurchases and dividends.
- Potential changes in environmental remediation costs, particularly at the Gibbsboro site, and developments in lead-paint litigation and related insurance coverage proceedings.
- Whether goodwill and acquired intangible assets remain recoverable under changing market and operating assumptions.
- The absence of quantitative full-year guidance in this filing and the seasonal nature of quarterly results.