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 quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. Results are seasonal, with most segment sales traditionally occurring in the second and third quarters.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2022 | Year-over-Year Change | Six Months Ended June 30, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $5.872 billion | Up 9.2% | $10.871 billion | Up 8.3% |
| Gross profit | $2.449 billion | Up $37.6 million | $4.502 billion | Down $21.5 million |
| Gross margin | 41.7% | Down from 44.8% | 41.4% | Down from 45.1% |
| Income before income taxes | $739.9 million | Down 9.7% | $1.201 billion | Down 9.6% |
| Net income | $577.9 million | Down from $648.6 million | $948.7 million | Down from $1.058 billion |
| Diluted EPS | $2.21 | Down from $2.42 | $3.61 | Down from $3.93 |
| Net operating cash flow | Not separately provided | Not applicable | $639.7 million | Down from $1.201 billion |
| EBITDA | $976.1 million | Down from $1.052 billion | $1.669 billion | Down 6.7% |
Revenue growth primarily reflected selling-price increases across segments, higher professional architectural sales in North America and growth in Performance Coatings. Segment sales in the second quarter increased 8.1% in The Americas Group, 0.9% in Consumer Brands and 15.2% in Performance Coatings. For the six-month period, sales increased 7.0% in The Americas Group and 17.6% in Performance Coatings but declined 4.8% in Consumer Brands.
Cost of goods sold increased 15.3% in the second quarter and 15.5% for the first six months, driven by raw-material inflation, supply-chain inefficiencies, freight and transportation costs, and other input costs. SG&A increased 5.7% in the quarter and 5.9% for the six months, although SG&A as a percentage of sales improved to 25.9% from 26.7% in the quarter and to 26.9% from 27.5% for the six months.
At June 30, 2022, cash and cash equivalents were $312.6 million. Total debt was $10.606 billion, comprising $8.594 billion of long-term debt including the current portion and $2.012 billion of short-term borrowings. Unused capacity under committed credit agreements was $1.506 billion. Total debt net of cash was $10.294 billion. The company was in compliance with its 3.75-to-1.00 leverage covenant and expected to remain in compliance.
Operating cash flow was reduced by working-capital investment, including higher accounts receivable and inventories. Capital expenditures were $235.8 million, acquisition spending was $211.8 million, cash dividends were $307.1 million and treasury-stock purchases were $703.5 million during the first six months. The quarterly dividend was increased from $0.55 to $0.60 per share, and 2.55 million shares were repurchased during the first six months.
Material Changes Versus the Prior Comparable Period
- Sales increased, but gross margin declined 310 basis points in the second quarter and 370 basis points for the first six months.
- Net income and diluted EPS declined despite higher revenue, reflecting raw-material inflation, supply-chain inefficiencies, labor and transportation inflation, higher interest expense and higher other expense.
- Consumer Brands weakened materially: second-quarter segment profit fell 48.3% and six-month segment profit fell 51.8%, primarily because of softer DIY demand, weaker international sales, inflationary pressure and supply-chain inefficiencies.
- Performance Coatings was the strongest segment, with second-quarter segment profit up 35.9% and six-month profit up 18.3%.
- The six-month 2021 comparison included a $111.9 million pre-tax loss on the Wattyl divestiture; no comparable loss was recorded in 2022.
- Short-term borrowings increased to $2.012 billion from $762.1 million at June 30, 2021, while total debt increased to $10.606 billion from $9.053 billion.
- Comprehensive income declined to $405.3 million in the second quarter from $711.2 million, primarily because of a $173.1 million foreign-currency translation loss.
Guidance, Outlook, Risks and Unusual Items
Management stated that demand remained strong in The Americas Group and Performance Coatings, while Consumer Brands sales did not improve as expected. The Americas Group reported continued strength in professional architectural markets, with momentum improving into July. Performance Coatings benefited from North American demand but was affected by COVID-19 lockdowns in China and macroeconomic uncertainty in Europe. Consumer Brands faced softer North American DIY demand, a challenging European economy and China lockdowns.
Management said gross-margin improvement was slower than anticipated and earnings were weaker than expected because of lower Consumer Brands sales, supply-chain inefficiencies, limited improvement in raw-material costs, inflation in labor and transportation, and higher interest and other expense. The filing does not provide a specific full-year earnings or sales guidance figure.
In the second quarter, the company acquired Sika AG’s European industrial coatings business for $211.4 million. In July 2022, after quarter-end, it acquired a domestic floor-coatings company and a European coatings company for approximately $425 million, funded with operating cash and committed borrowings.
Environmental accruals totaled approximately $315.1 million at June 30, 2022, including $269.2 million in other long-term liabilities and $45.9 million in other accruals. The estimated unaccrued maximum of current environmental cost ranges was $94.5 million above recorded minimum accruals. Management cannot estimate the ultimate potential loss for certain sites, including the Gibbsboro, New Jersey site.
The company remains involved in lead-pigment and lead-based-paint litigation, Pennsylvania public-nuisance proceedings, insurance-coverage litigation and a New Jersey natural-resource-damages lawsuit scheduled for trial on September 25, 2023. Except for the California settlement accrual, the company generally has not accrued amounts for lead-related litigation because losses are not considered probable or reasonably estimable. Material adverse outcomes could affect results, liquidity or financial condition.
Principal risks include raw-material and energy costs, supply-chain disruptions, inflation and interest rates, foreign-currency movements, COVID-19 impacts, acquisition integration, cybersecurity, environmental liabilities, litigation, regulation and geopolitical conditions including the Russia-Ukraine conflict.
Important Facts for Investors to Verify
- Whether price increases can offset raw-material, freight, labor and supply-chain costs without further margin erosion.
- The sustainability of demand in The Americas Group and Performance Coatings and the recovery trajectory of Consumer Brands.
- Post-quarter-end acquisition contributions, purchase accounting and the resulting impact on debt and leverage.
- Cash conversion, inventory and receivables growth, and reliance on increased short-term borrowings.
- Compliance with the 3.75-to-1.00 leverage covenant after the July 2022 acquisitions.
- Developments in environmental remediation, lead-related litigation, insurance coverage and the Gibbsboro natural-resource-damages case.
- Foreign-currency effects, COVID-19 restrictions in international markets and broader economic conditions.
- The filing’s statement that no material changes occurred in internal control over financial reporting and that disclosure controls were effective.