Sherwin-Williams Company — Q2 2021 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2021. Sherwin-Williams develops, manufactures, distributes and sells paints, coatings and related products through The Americas Group, Consumer Brands Group and Performance Coatings Group. Results are seasonal, with most segment sales historically occurring in the second and third quarters. A three-for-one stock split was completed on March 31, 2021, and prior share and per-share data were retrospectively adjusted.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Net sales | $5,379.8 million | $4,604.0 million | +16.9% |
| Gross profit / margin | $2,411.4 million / 44.8% | $2,208.9 million / 48.0% | Margin down 320 bps |
| Income before taxes | $819.2 million | $747.4 million | +9.6% |
| Net income | $648.6 million | $595.9 million | +8.8% |
| Diluted EPS | $2.42 | $2.16 | +12.0% |
| Six-month metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $10,035.8 million | $8,750.7 million | +14.7% |
| Gross margin | 45.1% | 46.8% | Down 170 bps |
| Net income | $1,058.2 million | $917.6 million | +15.3% |
| Diluted EPS | $3.93 | $3.31 | +18.7% |
| Net operating cash flow | $1,201.3 million | $1,074.6 million | +11.8% |
| EBITDA | $1,788.3 million | $1,602.1 million | +11.6% |
Segment performance and material changes
- Q2 external sales increased 22.6% in The Americas Group to $3,093.4 million, driven by higher professional architectural volume, pricing and non-paint sales. Comparable U.S. and Canadian stores increased sales 19.3%.
- Consumer Brands Group sales declined 25.4% to $731.5 million as DIY demand normalized and the Wattyl divestiture reduced sales, partly offset by price increases. Segment profit declined 48.3%.
- Performance Coatings Group sales increased 41.3% to $1,554.5 million, reflecting higher volumes, price increases and favorable currency translation. Segment profit increased 48.7%.
- Gross margin contracted primarily because of higher raw material costs, including titanium dioxide and petrochemical feedstocks. SG&A increased in dollars but declined to 26.7% of sales from 28.0%.
- The company completed the $27 million acquisition of a domestic coatings company and divested Wattyl on March 31, 2021. The divestiture produced a $111.9 million pretax loss, or approximately $0.34 per diluted share for the first six months.
- Cash returned to shareholders during the first six months totaled $1.943 billion, including $1.645 billion of share repurchases and $297.7 million of dividends. The company repurchased 6.4 million shares during the period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $219.6 million at June 30, 2021.
- Total debt was $9.053 billion, comprising $8.291 billion of long-term debt and $762.1 million of short-term borrowings. Net debt was $8.833 billion.
- Net working capital was negative $1.005 billion, compared with positive $423.6 million at June 30, 2020. The current ratio was 0.84.
- The company reported $2.741 billion of unused credit capacity and stated that it was in compliance with debt covenants. A new five-year $2.0 billion credit agreement was entered into on June 29, 2021, maturing June 29, 2026, with potential increases up to $2.75 billion subject to lender participation.
- Capital expenditures were $151.4 million during the first six months. Investing cash usage was $72.5 million, while financing cash usage was $1.125 billion.
Outlook, commentary, risks and unusual items
Management expressed confidence in the long-term outlook but did not provide specific full-year sales or EPS guidance in the filing. The company expects continued uncertainty from raw material inflation, supply-chain constraints and changing demand associated with COVID-19. It plans to build inventory during the seasonally slower fourth quarter and has announced price increases across its businesses to offset higher raw material costs. Management expects to continue pursuing strategic acquisitions and using excess cash for share repurchases.
- Supply-chain disruptions following Winter Storm Uri contributed to tight supply and higher raw material inflation. Further cost increases or shortages could pressure margins and operations.
- COVID-19 continues to create uncertainty regarding demand, facility operations, staffing, customer and supplier performance, costs and liquidity.
- Environmental liabilities included $283.8 million in long-term accruals and $68.6 million in current remediation-related accruals at June 30, 2021. The unaccrued maximum of estimated environmental outcomes was $108.7 million above the recorded minimum accruals.
- Lead pigment and lead-based paint litigation remains unresolved. The company has generally not accrued amounts for these matters, stating that losses are not probable or cannot be reasonably estimated, and an adverse outcome could materially affect results, liquidity or financial condition.
- The company had $64.7 million accrued for the Santa Clara County settlement, including $12.0 million in current liabilities. It also faces pending Pennsylvania, Illinois, Wisconsin and New Jersey proceedings and related insurance coverage litigation.
- Foreign currency, interest rate and commodity-price exposures are managed partly with derivatives. Outstanding U.S. dollar-to-euro cross-currency swaps had aggregate notional amounts of $744.0 million.
Investor verification items
- Verify whether price increases offset raw material and freight inflation without causing further gross-margin erosion.
- Monitor supply-chain availability, inventory rebuilding and the normalization of DIY and professional demand.
- Assess leverage, commercial paper usage, debt maturities and continued compliance with the 3.75-to-1.00 leverage covenant.
- Track the financial effects of the Wattyl divestiture and the integration and performance of acquired businesses.
- Review developments in environmental remediation, lead-related litigation and insurance coverage disputes, including potential unrecorded exposures.
- Distinguish reported EPS and EBITDA from results adjusted for acquisition amortization and the Wattyl divestiture loss.