Sherwin-Williams 2020 Q2 Form 10-Q Summary
Business Context and Reporting Period
The Sherwin-Williams Company manufactures, distributes and sells paints, coatings, supplies and related products through The Americas Group, Consumer Brands Group and Performance Coatings Group. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Operations were materially affected by the COVID-19 pandemic, although management stated that the pandemic did not have a material adverse effect on consolidated results in the first or second quarter.
Financial Performance and Liquidity
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $4.604 billion | $4.878 billion | $8.751 billion | $8.919 billion |
| Gross profit | $2.209 billion | $2.181 billion | $4.099 billion | $3.917 billion |
| Gross margin | 48.0% | 44.7% | 46.8% | 43.9% |
| Income before taxes | $747.4 million | $675.7 million | $1.140 billion | $974.6 million |
| Net income | $595.9 million | $471.0 million | $917.6 million | $716.2 million |
| Diluted EPS | $6.48 | $5.03 | $9.93 | $7.65 |
| Net operating cash flow | Not separately provided | Not separately provided | $1.075 billion | $758.0 million |
- Q2 sales declined 5.6%; six-month sales declined 1.9%.
- Q2 income before taxes increased 10.6%, and six-month income before taxes increased 16.9%.
- The effective tax rate declined to 20.3% in Q2 and 19.5% for the six months, versus 30.3% and 26.5%, respectively, in 2019. The primary driver was a $74.3 million tax provision recorded in the first six months of 2019 related to renewable energy tax credit funds.
- Q2 SG&A declined $40.0 million, primarily from cost controls and reduced or deferred travel, marketing and information-technology spending, partly offset by COVID-19-related costs.
- At June 30, 2020, cash and equivalents were $188.1 million, unused credit capacity was $2.962 billion, and the current ratio was 1.09.
- Total debt was $8.850 billion, or 69.6% of total capitalization, compared with $8.685 billion and 67.8% at December 31, 2019.
- Six-month cash uses included $142.3 million of capital expenditures, $245.6 million of dividends, $890.3 million of treasury-stock purchases and $205.7 million of net long-term debt repayment.
- EBITDA, as defined by management, was $979.0 million in Q2 and $1.602 billion for the six months, compared with $908.0 million and $1.441 billion, respectively, in 2019.
Material Changes Versus the Prior Comparable Period
- The Americas Group’s Q2 sales decreased 8.4%, Consumer Brands Group sales increased 21.8%, and Performance Coatings Group sales decreased 16.5%. For the six months, the respective changes were down 1.7%, up 9.8% and down 9.0%.
- COVID-19 reduced demand in portions of The Americas Group and Performance Coatings Group, particularly architectural and industrial end markets. Higher DIY and retail demand benefited The Americas Group and Consumer Brands Group.
- Foreign-currency translation reduced Q2 sales by 1.5% and six-month sales by 1.4%. Foreign subsidiary sales declined 19.4% in Q2 and 13.3% for the six months.
- Gross margin improved because of favorable customer and product mix and moderating raw-material costs.
- The Company recognized approximately $26 million of bad-debt expense during the first six months related to the expected COVID-19 impact. The allowance for doubtful accounts increased to $77.7 million at June 30, 2020.
- In March 2020, the Company issued $1.0 billion of senior notes, consisting of $500 million due 2030 at 2.30% and $500 million due 2050 at 3.30%. Proceeds were used to refinance or repurchase existing debt; the transactions generated a $21.3 million debt-extinguishment loss.
- Q2 2020 diluted EPS included $0.62 per share of acquisition-related amortization. Q2 2019 included $0.63 per share of acquisition-related amortization, $0.12 per share of integration costs and $0.79 per share of a tax-credit investment loss.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific quantitative full-year earnings or sales forecast. Management expects economic deterioration related to COVID-19 to continue affecting the business through the remainder of 2020, but stated that the duration, severity and scope of the pandemic remain uncertain. The Company was reopening stores and sales floors with health protocols and reported that all U.S. and Canadian stores were fully reopened by the filing date.
- Management planned to preserve liquidity through reduced capital expenditures, temporarily suspended share repurchases, lower discretionary spending and payroll-cost reductions.
- The Company was in compliance with its 3.75-to-1.00 leverage covenant and expected to remain compliant.
- Key COVID-19 risks include renewed closures or reduced store hours, weaker consumer and industrial demand, supply-chain disruption, raw-material shortages or cost increases, workforce disruption, cybersecurity risks from remote work and reduced access to capital markets.
- Environmental accruals totaled approximately $368.7 million, including $311.1 million in other long-term liabilities and $57.6 million in current accruals. The unaccrued maximum of estimated environmental costs was $116.0 million above the minimum accrued amount.
- The Company maintained a $76.7 million California lead-paint litigation accrual, including a $12.0 million payment due September 22, 2020 and $64.7 million of remaining long-term obligations. Other lead-paint litigation remains unaccrued because losses were not considered probable or reasonably estimable.
- A Pennsylvania lead-paint proceeding was remanded to state court in July 2020. The Company also faced a New Jersey natural-resource-damages lawsuit involving the Gibbsboro site.
- On June 5, 2020, the Company settled South Coast Air Quality Management District allegations for a $1.75 million penalty.
- No interim goodwill or indefinite-lived intangible impairment trigger was identified as of June 30, 2020, but management warned that weaker future results or changed assumptions could require impairment charges.
Most Important Facts for Investors to Verify
- Whether COVID-19 demand weakness, store restrictions or renewed outbreaks materially affect later-quarter sales, especially in architectural and industrial markets.
- The sustainability of the Q2 gross-margin improvement, including the effects of product mix, raw-material costs and COVID-19-related costs.
- Debt maturities, refinancing needs, leverage-covenant compliance and the availability of the reported $2.962 billion of credit capacity.
- Changes in customer credit quality, bad-debt expense and accounts-receivable collections.
- Developments in environmental remediation, California and Pennsylvania lead-paint litigation, insurance coverage litigation and the New Jersey Gibbsboro claim.
- Whether share repurchases remain suspended and how future repurchases and the $1.34 quarterly dividend affect liquidity and leverage.
- Potential goodwill, intangible-asset and other asset impairments if economic conditions deteriorate.