Business Context and Reporting Period
The Sherwin-Williams Company develops, manufactures, distributes and sells paints, coatings and related products through three reportable segments: The Americas Group, Consumer Brands Group and Performance Coatings Group. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Results are seasonal, with most segment sales traditionally occurring in the second and third quarters.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|
| Net sales | $6,047.4 million | $5,146.7 million | +17.5% |
| Gross profit | $2,589.4 million | $2,139.6 million | +21.0% |
| Gross margin | 42.8% | 41.6% | +120 basis points |
| Income before income taxes | $877.2 million | $611.5 million | +43.5% |
| Net income | $685.1 million | $502.2 million | +36.4% |
| Diluted EPS | $2.62 | $1.88 | +39.4% |
| EBITDA | $1,124.2 million | $834.2 million | +34.8% |
| Metric | 9M 2022 | 9M 2021 | Change |
|---|
| Net sales | $16,918.4 million | $15,182.5 million | +11.4% |
| Gross profit | $7,091.3 million | $6,663.0 million | +6.4% |
| Gross margin | 41.9% | 43.9% | -200 basis points |
| Net income | $1,633.8 million | $1,560.4 million | +4.7% |
| Diluted EPS | $6.23 | $5.82 | +7.0% |
| EBITDA | $2,793.3 million | $2,622.5 million | +6.5% |
Liquidity, Debt and Cash Flow
- Nine-month net operating cash flow was $1,278.9 million, down from $2,050.7 million, primarily because of increased working-capital requirements.
- Investing cash usage was $1,050.5 million, including $626.8 million for acquisitions and $410.7 million of capital expenditures.
- Cash and cash equivalents were $130.5 million at September 30, 2022, compared with $313.3 million at September 30, 2021.
- Total debt was $10,534.7 million, including $9,589.5 million of long-term debt and $945.2 million of short-term borrowings. Net debt was approximately $10,404.2 million.
- The Company had $2.826 billion of unused capacity under its credit agreements and stated that it was in compliance with its debt covenant.
- Share repurchases and dividends totaled $1,214.0 million during the first nine months, including $751.1 million of repurchases and $462.9 million of dividends.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven principally by pricing actions across all segments, higher architectural volumes in The Americas Group, and acquisitions in Performance Coatings. Foreign-currency translation reduced third-quarter sales by 2.1% and nine-month sales by 1.4%.
- Third-quarter profitability improved as pricing and volume gains more than offset higher raw-material, freight and other input costs. Nine-month gross margin declined because of raw-material inflation and supply-chain inefficiencies.
- Third-quarter SG&A increased 11.7% but declined to 25.3% of sales from 26.6%, reflecting cost control. Nine-month SG&A increased 7.8% but declined to 26.3% of sales from 27.2%.
- Performance Coatings Group sales increased 13.7% in the quarter and 16.2% year to date, while segment profit increased 114.0% and 44.8%, respectively, aided by pricing and acquisitions.
- Consumer Brands Group sales increased 8.5% in the quarter but decreased 0.8% year to date. Nine-month segment profit fell 34.8%, reflecting lower volumes, the Wattyl divestiture, raw-material costs and supply-chain inefficiencies.
- The Company completed acquisitions of Sika’s European industrial coatings business, Gross & Perthun, Dur-A-Flex and Powdertech for an aggregate purchase price of approximately $649.1 million. It recognized $380.5 million of goodwill and $214.2 million of intangible assets from these transactions as of September 30.
- Debt increased from $8,976.4 million at September 30, 2021 to $10,534.7 million. In August 2022, the Company issued $1.0 billion of senior notes and entered into a new $2.250 billion five-year credit agreement.
- Compared with 2021, nine-month results benefited from the absence of the $111.9 million pre-tax loss on the Wattyl divestiture.
Guidance, Outlook, Risks and Unusual Items
- Management expected third-quarter momentum to continue into the fourth quarter, supported by demand in The Americas Group and North American industrial markets, price realization, cost control and favorable year-over-year comparisons.
- Management cited interest-rate actions, macroeconomic weakness in Europe and China, raw-material-cost uncertainty, supply-chain constraints and foreign-currency pressure as near-term headwinds.
- In October 2022, management approved plans to simplify the Consumer Brands portfolio and reduce costs across several businesses. Expected pre-tax charges were $160 million to $180 million over the following four quarters, with approximately half expected in the fourth quarter of 2022. Actual amounts and timing may vary.
- Environmental accruals totaled approximately $313.9 million at September 30, 2022, including $268.0 million in other long-term liabilities and $45.9 million in other accruals. The estimated unaccrued maximum for reasonably estimable environmental matters was $92.6 million above recorded minimum accruals.
- Material litigation risks include lead pigment and lead-based paint claims, Pennsylvania public-nuisance proceedings, insurance-coverage litigation and a New Jersey natural-resource-damages case scheduled for trial in September 2023. The Company states that potential losses for much of this litigation cannot presently be estimated.
- The effective tax rate increased to 21.9% in the quarter and 21.4% for nine months, compared with 17.9% and 19.6%, respectively, primarily because of less favorable tax benefits from employee share-based payments.
Important Facts for Investors to Verify
- Whether pricing continues to offset raw-material, freight, labor and supply-chain costs without materially reducing volumes.
- The integration, performance and purchase-price allocations of the 2022 acquisitions, including the pending ICA acquisition expected to close by year-end 2022.
- The timing and final cost of the planned $160 million to $180 million restructuring and portfolio actions.
- Working-capital trends, operating cash conversion and the Company’s ability to manage approximately $10.5 billion of debt amid higher interest rates.
- Developments in lead-paint litigation, environmental remediation, insurance coverage and the potential for unrecorded liabilities to exceed current accruals.
- Foreign-exchange effects and demand conditions in Europe, China and other international markets.
