Sherwin-Williams Company — Q2 2023 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2023. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products through the Paint Stores Group, Consumer Brands Group and Performance Coatings Group. Effective January 1, 2023, the Latin America architectural paint business was moved from the former Americas Group into the Consumer Brands Group; prior periods were recast for comparability.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Net sales | $6.241 billion | $5.872 billion | +6.3% |
| Gross profit | $2.872 billion | $2.449 billion | +17.3% |
| Gross margin | 46.0% | 41.7% | +430 bps |
| Income before taxes | $1.012 billion | $739.9 million | +36.8% |
| Net income | $793.7 million | $577.9 million | +37.3% |
| Diluted EPS | $3.07 | $2.21 | +38.9% |
| EBITDA | $1.283 billion | $976.1 million | +31.4% |
For the first six months, net sales were $11.683 billion, up 7.5%; net income was $1.271 billion, up 34.0%; diluted EPS was $4.90, up 35.7%; gross margin was 45.3% versus 41.4%; and EBITDA was $2.161 billion, up 29.5%. The Q2 effective tax rate was 21.6%, compared with 21.9% in the prior-year quarter.
- Q2 segment net sales were $3.499 billion for Paint Stores, $945.8 million for Consumer Brands and $1.795 billion for Performance Coatings.
- Paint Stores sales increased 10.0%, supported by mid-single-digit pricing and volume growth; comparable U.S. and Canadian store sales increased 9.5%.
- Consumer Brands sales increased 5.1%, primarily from pricing, with strength in Latin America, Europe and North America partly offset by weakness in China.
- Performance Coatings sales increased only 0.3%; pricing and acquisitions were offset by a high-single-digit volume decline.
- Six-month operating cash flow was $1.295 billion versus $639.7 million in 2022. Capital expenditures were $416.0 million, and investing cash usage was $417.9 million.
- At June 30, 2023, cash was $209.4 million, total debt was $10.401 billion and net debt was $10.192 billion. Unused credit capacity was $2.874 billion, and management reported compliance with debt covenants.
- The current ratio was approximately 1.00. Shareholders’ equity was $3.631 billion, compared with $2.225 billion at June 30, 2022.
- The company paid $312.8 million in dividends and repurchased $535.9 million of stock during the first six months. Board authorization remaining at June 30 was 42.9 million shares.
Material changes versus the prior comparable period
- Profitability improved substantially because of selling-price increases, moderating raw-material costs and operational efficiencies. SG&A increased 10.2% in Q2 and rose to 28.2% of sales from 27.2%, reflecting employee costs, growth investments, new stores and acquisitions.
- Interest expense increased $18.8 million in Q2 and $39.7 million year to date, primarily because of higher interest rates, despite lower short-term borrowings.
- Short-term borrowings declined to $806.2 million from $2.012 billion at June 30, 2022, while the current portion of long-term debt increased to $499.5 million from $0.6 million.
- The company completed the divestiture of a non-core domestic aerosol business and recorded a $20.1 million gain. It also signed an agreement to divest its China architectural business, which had approximately $100 million of annual revenue and 300 employees.
- The China business was classified as held for sale, resulting in $34.0 million of impairment charges, including $6.9 million for trademarks and $27.1 million for the disposal group.
- The restructuring plan generated $15.3 million of provisions during the first six months. Remaining liabilities were $15.1 million, and management expects no additional restructuring expense.
- Cash flow from operations more than doubled year over year, primarily from higher earnings and improved working-capital management, while financing cash usage increased to $869.6 million because of lower short-term borrowing proceeds and shareholder returns.
Guidance, outlook, risks and unusual items
Management expects challenging year-over-year comparisons and wide variation by region and end market in the second half of 2023. New residential demand is expected to remain soft, particularly in North America, while commercial, property maintenance, protective and marine, and residential repaint markets are expected to remain solid. Europe and Asia continue to experience slow economic recovery. Management expressed confidence in delivering above-market growth and returns but did not provide specific full-year revenue or EPS guidance in the filing.
- Key risks include economic weakness, inflation and interest rates, raw-material and energy costs, supply-chain disruption, labor costs, foreign currency, international operations, acquisition integration, cybersecurity, competition, environmental regulation and litigation.
- Environmental accruals totaled approximately $290.9 million at June 30, 2023, including $240.7 million in other long-term liabilities and $50.2 million in other accruals. The unaccrued maximum of estimated environmental costs was $85.9 million above the minimum accrual; management does not expect these matters to materially affect financial condition, liquidity or cash flow because remediation is expected to extend over many years.
- Significant legal exposures include lead pigment and lead-based paint litigation, Pennsylvania public-nuisance proceedings, insurance-coverage litigation and the New Jersey environmental case concerning the Gibbsboro site. Outcomes and potential losses generally cannot be reliably estimated; an adverse material result could affect earnings, liquidity or financial condition.
- The company received $138.7 million in 2023 under real-estate financing arrangements related primarily to construction of its new headquarters and research and development center, which is expected to be completed in 2024 at the earliest.
- The company implemented new cloud-based general-ledger and consolidation systems in January 2023. Management concluded disclosure controls were effective and reported no material adverse change in internal control over financial reporting.
Most important facts for investors to verify
- Whether pricing and gross-margin gains remain durable as volume trends weaken in Performance Coatings and residential markets soften.
- The timing, proceeds and final accounting impact of the proposed China architectural business divestiture.
- Debt maturities, refinancing needs, interest-rate sensitivity and compliance with the 3.75-to-1.00 leverage covenant.
- Execution and returns from elevated capital expenditures, new stores, acquisitions and the new headquarters project.
- Developments in lead-paint, environmental and insurance litigation, including potential liabilities not currently accrued.
- Second-half demand trends in North America, Europe and Asia and whether management issues more specific full-year guidance.