10-QPeriod: Q3 FY2021

SHERWIN WILLIAMS CO Quarterly Report for Q3 Ended Sep 30, 2021

Filed October 26, 2021For Securities:SHW

Summary

Sherwin-Williams reported its Q3 2021 results, showing a slight increase in consolidated net sales to $5.15 billion, a 0.5% rise compared to the prior year quarter. This growth was driven by selling price increases across all segments and higher volume in the Performance Coatings Group, though partially offset by decreased volume in The Americas and Consumer Brands Groups. However, profitability saw a significant decline, with diluted net income per share falling 26.3% to $1.88, largely due to increased cost of goods sold stemming from higher raw material costs and supply chain challenges, which negatively impacted gross margins. Despite these pressures, the company generated substantial operating cash flow of $2.05 billion for the first nine months of the year. Sherwin-Williams is navigating ongoing uncertainties such as raw material inflation and supply chain constraints, exacerbated by events like Winter Storm Uri and Hurricane Ida. The company is strategically managing these challenges through pricing adjustments and efforts to improve production and inventory levels, while also pursuing targeted acquisitions to bolster its offerings.

Financial Highlights

54 data points
Beta

Revenue

$5.15B

41.6% Gross Margin

Net Income

$502.20M

9.8% Net Margin

EPS (Diluted)

$1.88

Total Assets

$20.74B

Cash & Equivalents

$313.30M

Free Cash Flow

$849.40M

Financial Statements
Beta
Revenue$5.15B
Cost of Revenue$3.01B
Gross Profit$2.14B
SG&A Expenses$1.37B
Operating Income$817.70M
Interest Expense$83.10M
Net Income$502.20M
EPS (Basic)$1.92
EPS (Diluted)$1.88
Shares Outstanding (Basic)261.60M
Shares Outstanding (Diluted)266.60M

Key Highlights

  • 1Consolidated net sales for Q3 2021 increased 0.5% to $5.15 billion, driven by price increases and some volume growth, but partially offset by volume declines in key segments.
  • 2Diluted net income per share decreased significantly by 26.3% to $1.88 in Q3 2021, primarily due to increased cost of goods sold and reduced gross margins.
  • 3Cost of goods sold rose by 12.8% in Q3 2021 due to higher raw material costs (titanium dioxide, petrochemicals) and unfavorable currency translation, significantly impacting gross profit margins.
  • 4The company generated $2.05 billion in net operating cash flow for the first nine months of 2021, demonstrating strong cash generation despite margin pressures.
  • 5The Americas Group saw a slight decline in net sales (-0.4% in Q3), with company-operated stores in the U.S. and Canada open more than 12 months reporting a 2.8% decrease.
  • 6The Consumer Brands Group experienced a notable sales decrease of 22.8% in Q3, attributed to lower volumes, raw material availability issues, and the impact of the Wattyl divestiture.
  • 7Performance Coatings Group's net sales increased by 17.4% in Q3, supported by higher sales in all end markets and selling price increases.
  • 8The company is actively managing supply chain disruptions and raw material availability issues, expecting to build inventory as availability improves in 2022.

Frequently Asked Questions

The primary driver for the decrease in profitability was a significant increase in the cost of goods sold, up 12.8% year-over-year. This was largely due to higher raw material costs, particularly for titanium dioxide and petrochemical feedstocks, as well as unfavorable currency translation rate changes. These factors, combined with lower sales volumes in certain segments due to raw material availability challenges, led to a substantial compression of gross profit margins, down from 47.9% in Q3 2020 to 41.6% in Q3 2021.

Sherwin-Williams is actively working to mitigate these challenges. This includes implementing selling price increases across all segments, which helped offset some of the cost pressures. The company is also collaborating with suppliers and customers to meet demand and minimize production impacts, with a stated goal of shipping all available production for the remainder of 2021 and building inventory in 2022 as raw material availability improves. The company's outlook acknowledges these uncertainties but expresses confidence in its long-term position.

The divestiture of Wattyl in Q1 2021 resulted in a pre-tax loss of $111.9 million, which impacted the 'Other general (income) expense - net' line item for the nine-month period. The divestiture contributed to the decrease in net sales for the Consumer Brands Group in Q3 and the nine-month period. On the acquisition front, the company signed agreements to acquire Specialty Polymers, Inc. and the European industrial coatings business of Sika AG, which are expected to enhance its Performance Coatings Group capabilities. The impact of a smaller domestic coatings company acquisition completed in Q1 2021 was not material enough to warrant pro forma disclosure.

Sherwin-Williams maintained a strong liquidity position as of September 30, 2021, with $313.3 million in cash and cash equivalents and $2.805 billion of unused capacity under its credit facilities. Total debt outstanding was $8.976 billion. The company has actively managed its debt structure, including entering into new credit agreements and redeeming senior notes. It remained in compliance with its consolidated leverage covenant, which requires a leverage ratio not to exceed 3.75 to 1.00.