Business Context and Reporting Period
The Sherwin-Williams Company develops, manufactures, distributes and sells paints, coatings and related products through The Americas Group, Consumer Brands Group and Performance Coatings Group. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Net sales | $5,146.7 million | $5,122.2 million | $15,182.5 million | $13,872.9 million |
| Gross profit | $2,139.6 million | $2,455.3 million | $6,663.0 million | $6,553.9 million |
| Gross margin | 41.6% | 47.9% | 43.9% | 47.2% |
| Income before taxes | $611.5 million | $875.6 million | $1,939.7 million | $2,015.3 million |
| Net income | $502.2 million | $705.8 million | $1,560.4 million | $1,623.4 million |
| Diluted EPS | $1.88 | $2.55 | $5.82 | $5.87 |
| Net operating cash flow | Not separately provided | Not separately provided | $2,050.7 million | $2,563.8 million |
| EBITDA | $834.2 million | $1,105.0 million | $2,622.5 million | $2,707.1 million |
Third-quarter sales increased 0.5%, while nine-month sales increased 9.4%. SG&A was 26.6% of sales in the quarter and 27.2% year to date, compared with 27.5% and 28.9%, respectively, in the prior-year periods. The effective tax rate was 17.9% in the quarter and 19.6% year to date.
At September 30, 2021, cash and cash equivalents were $313.3 million. Total debt was $8,976.4 million, including $709.4 million of short-term borrowings and $662.1 million of current long-term debt. Net debt was $8,663.1 million. Unused credit-facility capacity was $2.805 billion, and management stated that the Company was in compliance with its leverage covenant.
Operating cash flow was $2.051 billion year to date. Investing activities used $226.7 million, including $248.1 million of capital expenditures. Financing activities used $1.738 billion, including $2.0765 billion of treasury-stock purchases and $442.9 million of dividends. The Company returned approximately $2.519 billion to shareholders during the first nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter gross profit declined $315.7 million and gross margin fell 630 basis points, primarily because of higher raw-material costs, supply-chain inefficiencies and lower volumes in The Americas and Consumer Brands groups.
- Third-quarter income before taxes decreased 30.2%, net income decreased 28.8%, and diluted EPS decreased 26.3%.
- Raw-material availability issues were estimated to have reduced quarterly sales by a high-single-digit percentage. The Americas Group’s comparable-store sales in the U.S. and Canada declined 2.8%.
- Year-to-date sales growth was led by The Americas Group, up 9.7%, and the Performance Coatings Group, up 23.1%. Consumer Brands sales declined 11.6% as DIY demand normalized and following the Wattyl divestiture.
- The Company recognized a $111.9 million pretax loss on the March 2021 divestiture of Wattyl, contributing approximately $0.34 of diluted EPS impact in the first nine months.
- Shareholders’ equity declined to $2,690.3 million from $3,610.8 million at December 31, 2020, primarily due to share repurchases and dividends.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific numerical revenue or EPS guidance. Management expressed confidence in the long-term outlook but highlighted continuing uncertainty from raw-material inflation, supply-chain constraints and changing demand related to COVID-19. The Company expects to ship all production for the remainder of 2021 and, as material availability improves, build inventory in 2022.
The Company agreed to acquire Specialty Polymers, expected to close in the fourth quarter of 2021, and Sika AG’s European industrial coatings business, expected to close in the first quarter of 2022. Both transactions are subject to customary closing conditions.
Key risks include raw-material availability and pricing, inflation, supply-chain disruptions, COVID-19 effects, foreign-currency fluctuations, acquisition integration, environmental remediation, lead-pigment and lead-based-paint litigation, and other legal proceedings. Environmental-related accruals totaled approximately $339.7 million at September 30, 2021, with an estimated unaccrued maximum of $105.2 million above the minimum accrual for sites where ranges could be estimated. The ultimate exposure for certain environmental and lead-related matters cannot presently be determined.
The Company redeemed $400.0 million of 4.20% senior notes on October 15, 2021 at par plus accrued interest. It also entered into new or amended credit agreements with maturities extending primarily to 2026.
Important Facts for Investors to Verify
- Whether raw-material availability and inflation continue to pressure gross margins and limit sales volumes.
- The sustainability of the Company’s $2.805 billion of unused credit capacity relative to its debt, working-capital deficit and shareholder-return program.
- The closing timing, purchase accounting and integration performance of the Specialty Polymers and Sika transactions.
- The final year-end LIFO inventory valuation and its potential effect on earnings and margins.
- Developments in environmental remediation reserves and lead-pigment, lead-based-paint and related litigation.
- Whether the absence of formal numerical guidance changes in subsequent filings as COVID-19, demand and supply-chain conditions evolve.