Sherwin-Williams Company — FY2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020; the source also provides unaudited fourth-quarter results. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products primarily in the Americas, with additional operations in Europe, Asia and Australia. Reportable segments are The Americas Group, Consumer Brands Group and Performance Coatings Group.
At December 31, 2020, the Company operated 4,774 specialty paint stores and 282 Performance Coatings branches and employed 61,031 people worldwide. Management stated that the COVID-19 pandemic did not have a material adverse effect on consolidated 2020 financial results, although demand varied materially by end market.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $18,361.7 million | $17,900.8 million | +2.6% |
| Gross profit | $8,682.6 million | $8,036.1 million | +8.0% |
| Gross margin | 47.3% | 44.9% | +240 bps |
| Income before income taxes | $2,519.2 million | $1,981.8 million | +27.1% |
| Net income | $2,030.4 million | $1,541.3 million | +31.7% |
| Diluted EPS | $22.08 | $16.49 | +33.9% |
| Net operating cash flow | $3,408.6 million | $2,321.3 million | +46.8% |
| Free cash flow | $2,616.8 million | $1,571.6 million | +66.5% |
SG&A increased to $5,477.9 million, or 29.8% of sales, from 29.5%. The effective income tax rate declined to 19.4% from 22.2%, primarily because a $74.3 million tax credit investment loss recorded in 2019 did not recur. EBITDA was $3,441.0 million, and adjusted diluted EPS excluding acquisition-related amortization was $24.58.
At year-end, cash and cash equivalents were $226.6 million, total debt was approximately $8.292 billion, net debt was $8.066 billion, and shareholders’ equity was $3.611 billion. Total debt declined by $393.1 million from 2019. Net debt was 2.4 times EBITDA, and the Company reported $3.500 billion of unused credit capacity and compliance with its 3.75-to-1.00 leverage covenant. Net working capital was a deficit of $3.0 million and the current ratio was 1.00.
Segment performance
- The Americas Group: Sales increased 2.1% to $10,383.2 million; income before taxes increased 11.6% to $2,294.1 million, with margin rising to 22.1% from 20.2%. Growth was led by residential repaint, DIY and new residential demand in the United States and Canada.
- Consumer Brands Group: Sales increased 14.1% to $3,053.4 million; income before taxes increased 55.3% to $579.6 million, with margin rising to 19.0% from 13.9%. Higher retail volume, particularly from DIY demand, product portfolio improvements and international cost reductions supported results.
- Performance Coatings Group: Sales decreased 2.5% to $4,922.4 million; income before taxes increased 31.9% to $500.1 million, with margin rising to 10.2% from 7.5%. Softer industrial end-market demand and unfavorable currency translation were partly offset by strength in packaging and coil coatings.
Material changes versus the prior comparable period
- COVID-19 initially reduced store hours and closed company-operated store sales floors to the public, but stores were progressively reopened beginning in May 2020. DIY and residential demand recovered quickly, while many commercial and industrial markets recovered more slowly.
- Gross margin improved because of favorable customer and product mix and moderating raw-material costs, partly offset by currency effects.
- Net operating cash flow increased by $1.087 billion, supported by higher earnings and improved working-capital management. Accounts receivable and inventory days declined to 57 and 74 days, respectively, from 61 and 81 days.
- The Company issued $1.0 billion of senior notes in March 2020, consisting of $500 million of 2.30% notes due 2030 and $500 million of 3.30% notes due 2050. Proceeds funded the redemption or repurchase of older notes.
- Share repurchases increased substantially to $2.446 billion from $778.8 million. The Company repurchased 3.9 million shares during 2020 and paid $488.0 million of cash dividends.
- Fourth-quarter 2020 sales were $4,488.8 million and net income was $407.0 million, compared with fourth-quarter 2019 sales of $4,114.4 million and net income of $248.6 million.
Guidance, outlook, risks and unusual items
Management expected 2021 capital expenditures to exceed 2020 levels, including spending on productivity and maintenance projects, stores, information systems, and a new Cleveland headquarters and research and development center. Total investment in the new headquarters and R&D center is expected to be at least $600 million, with construction expected to begin in 2021 and completion no earlier than 2024. No specific long-term external financing was expected to be required for these projects.
The Company plans to continue expanding The Americas Group store base and the worldwide presence of the Performance Coatings Group. On February 17, 2021, the Board increased the quarterly dividend to $1.65 per share and authorized an additional 15 million share repurchases. On February 3, 2021, the Board declared a three-for-one stock split. These post-year-end actions were not reflected in 2020 share counts or per-share amounts.
- COVID-19 remains a significant uncertainty, including potential effects on demand, staffing, facility operations, supply chains, raw-material costs, credit markets and liquidity.
- Key operating risks include raw-material and energy price volatility, cyclical construction and manufacturing demand, foreign exchange, competition, cybersecurity, acquisitions and increasingly stringent environmental regulations.
- Environmental accruals totaled $369.1 million at year-end, including $68.6 million current and $300.5 million long term. The filing identifies the Gibbsboro, New Jersey site as the largest and most complex environmental matter; the potential ultimate liability remains uncertain.
- Lead pigment and lead-based paint litigation remains unaccrued except for the California public nuisance settlement, for which the year-end accrual was $64.7 million. Management stated that potential liabilities cannot reasonably be estimated and could materially affect results, liquidity or financial condition.
- The Company recorded a $2.3 million non-cash trademark impairment charge in 2020, compared with $122.1 million in 2019, and a $21.3 million loss on extinguishment of debt in 2020.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2020.
Investor verification checklist
- Verify the sustainability of 2020’s unusually strong DIY and residential demand and the pace of recovery in industrial and commercial markets.
- Reconcile reported GAAP EPS of $22.08 with adjusted EPS of $24.58 and assess the ongoing effect of Valspar-related amortization.
- Review debt maturities, interest obligations, covenant calculations and the Company’s ability to fund higher 2021 capital expenditures while continuing repurchases and dividends.
- Assess environmental accrual sensitivity, particularly the Gibbsboro site and the disclosed $114.5 million unaccrued maximum above minimum environmental accruals.
- Monitor lead-paint litigation, Pennsylvania proceedings, the California settlement payments and the related insurance-coverage appeal.
- Evaluate goodwill and intangible-asset exposure, including the $4.471 billion intangible-asset balance and future amortization estimated at $308.8 million for 2021.
- Confirm the impact and effective dates of the announced three-for-one stock split, dividend increase, additional repurchase authorization and planned Wattyl divestiture.