Sherwin-Williams(SHW) - 2023 Q4 - Annual Report

Part I Item 1. Business A global leader in the paint and coatings industry, the company operates through three distinct segments with a worldwide presence - The company is organized into three reportable operating segments: Paint Stores Group, Consumer Brands Group, and Performance Coatings Group[14] - As of December 31, 2023, Sherwin-Williams employed 64,088 people, with approximately 75% in the United States[32] Business Segments Overview The company's three segments utilize distinct distribution models, including specialty stores, retail partners, and direct sales channels Segment Store and Branch Count (as of Dec 31, 2023) | Segment | Number of Locations | Geographic Focus | | :--- | :--- | :--- | | Paint Stores Group | 4,694 specialty stores | U.S., Canada, Caribbean | | Consumer Brands Group | 318 specialty stores | Latin America | | Performance Coatings Group | 322 branches | Worldwide | - In 2023, approximately 61% of the Consumer Brands Group's total sales were intersegment transfers, primarily to the Paint Stores Group[16] - During 2023, the Consumer Brands Group divested a non-core domestic aerosol business and its China architectural business[16] Human Capital Resources The human capital strategy focuses on culture, talent acquisition, employee engagement, safety, and competitive total rewards - The company's human capital management is built on seven guiding values: integrity, people, service, quality, performance, innovation, and growth[31] - In 2023, the company hired approximately 1,400 college graduates through its management trainee program to build its talent pipeline[36] - The company conducts a global employee engagement survey every other year, with the most recent one conducted in 2023, to measure progress and drive improvements[37] Item 1A. Risk Factors The company faces significant economic, financial, operational, and legal risks, including inflation, supply chain issues, and lead paint litigation Economic and Strategic Risks Performance is sensitive to economic conditions like inflation and interest rates, which impact housing and industrial markets - High inflation and elevated mortgage rates impacted consumer behavior in 2023 and are expected to continue to do so in 2024, affecting the U.S. housing market and global industrial markets[46] - Contractor labor shortages are causing project backlogs, which could adversely affect the growth rate of demand for the company's products[50] Financial Risks Key financial risks include substantial debt, potential credit market weakness, and foreign currency fluctuations - As of December 31, 2023, the company had total debt of approximately $9.851 billion[57] - The company experienced a loss of $41.8 million in 2023 due to the significant devaluation of the Argentine Peso in December 2023[61] Operational Risks Operational risks include raw material costs, supply chain disruptions from geopolitical events, and cybersecurity threats - The company faces supply chain risks from geopolitical events, noting that the Israel-Hamas war has caused shipping disruptions in the Red Sea and surrounding waterways[64] - The company relies heavily on information technology and acknowledges that it and its third-party partners have experienced cybersecurity attacks and incidents in the past[77][79] - The company's success depends on its ability to attract and retain a qualified global workforce, facing challenges from a tightened labor market and intense competition for talent[81] Legal and Regulatory Risks The company is subject to complex regulations and significant litigation related to historical lead-based paint sales - The company is a defendant in numerous legal proceedings arising from the past manufacture and sale of lead pigments and lead-based paints, which could result in material liability[97] - The company is involved with environmental investigation and remediation activities at current and former sites, and the ultimate liability may exceed the amounts currently accrued[95] - Increased global focus on climate change may lead to new regulations, fees, or restrictions that could increase production costs and require additional investments[93] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[100] Item 1C. Cybersecurity A cybersecurity program aligned with NIST frameworks is overseen by the Audit Committee to manage and mitigate cyber threats - The company's cybersecurity program is aligned with frameworks established by the National Institute of Standards and Technology (NIST)[102] - The Audit Committee assists the Board with oversight of the ERM program and cybersecurity risk, receiving regular reports from the CFO and CISO[103][104] - To date, the company has not experienced a cybersecurity threat or incident that has had a material adverse effect on its business, results of operations, or financial condition[107] Item 2. Properties The company operates numerous global facilities and is completing a new headquarters and R&D center in 2024 Manufacturing and Distribution Facilities by Segment (as of Dec 31, 2023) | Segment | Manufacturing Facilities (Owned/Leased) | Distribution Facilities (Owned/Leased) | | :--- | :--- | :--- | | Consumer Brands Group | 93 (82/11) | 66 (42/24) | | Performance Coatings Group | 11 (8/3) | 13 (4/9) | - The Paint Stores Group opened a net of 70 new stores in 2023, bringing its total to 4,694[111][112] - Construction of the company's new global headquarters and research and development center is expected to be completed in 2024[109] Item 3. Legal Proceedings This section incorporates by reference detailed information on legal and environmental matters from other report sections - The company uses a disclosure threshold of $1 million for environmental proceedings where a governmental authority is a party[117] - Detailed information regarding legal proceedings is incorporated by reference from Note 12 to the Consolidated Financial Statements[118] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[119] Information About Our Executive Officers This section details the company's executive officers, noting recent leadership changes effective January 2024 - Effective January 2024, Heidi G. Petz assumed the role of President and Chief Executive Officer[122][123] - John G. Morikis transitioned from CEO to Executive Chairman in January 2024[122] - Allen J. Mistysyn has served as Senior Vice President – Finance and Chief Financial Officer since January 2017[124] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (SHW) trades on the NYSE, and the company actively repurchased shares during Q4 2023 Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased (Program) | Average Price Paid per Share (Program) | Maximum Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | Oct 2023 | 350,000 | $240.35 | 41,075,000 | | Nov 2023 | 950,000 | $268.86 | 40,125,000 | | Dec 2023 | 500,000 | $292.87 | 39,625,000 | | Q4 Total | 1,800,000 | $269.99 | 39,625,000 | - The company's common stock is listed on the New York Stock Exchange under the symbol SHW[135] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, record sales of $23.05 billion were driven by price increases, leading to strong cash flow and debt reduction 2023 Full Year Financial Highlights | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $23.052 billion | $22.149 billion | +4.1% | | Diluted Net Income per Share | $9.25 | $7.72 | +19.8% | | Adjusted Diluted Net Income per Share | $10.35 | $8.73 | +18.6% | | Net Operating Cash | $3.522 billion | $1.920 billion | +83.4% | | Adjusted EBITDA | $4.239 billion | $3.608 billion | +17.5% | - The company plans to open 80 to 100 new stores in the United States and Canada in 2024[147] Results of Operations Consolidated net sales grew 4.1% to $23.05 billion in 2023, with gross margin improving significantly to 46.7% Net Sales by Segment (Year Ended Dec 31) | Segment | 2023 (in millions) | 2022 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Paint Stores Group | $12,839.5 | $11,963.3 | 7.3% | | Consumer Brands Group | $3,365.6 | $3,388.4 | (0.7)% | | Performance Coatings Group | $6,843.1 | $6,793.5 | 0.7% | | Total | $23,051.9 | $22,148.9 | 4.1% | - Consolidated gross profit as a percentage of net sales increased to 46.7% in 2023 from 42.1% in 2022, driven by selling price increases and moderating raw material costs[156] - SG&A expenses increased to 30.6% of net sales in 2023, up from 28.6% in 2022, due to higher employee-related expenses and costs to support higher sales[155][158] Financial Condition, Liquidity and Cash Flow The company generated $3.52 billion in operating cash, reduced debt, and increased its dividend for the 45th consecutive year - Net operating cash increased to $3.522 billion in 2023 from $1.920 billion in 2022, primarily due to higher net income and improved working capital management[206] - Total debt outstanding decreased by $718.8 million to $9.851 billion at the end of 2023[185] - The company purchased 5.6 million shares of its common stock for $1.432 billion in 2023 and had authorization to purchase an additional 39.6 million shares at year-end[204] - 2023 marked the 45th consecutive year of increased dividend payments[205] Non-GAAP Financial Measures Management uses non-GAAP measures like Adjusted EBITDA and Adjusted EPS to provide a clearer view of ongoing operations Reconciliation of Net Income to Adjusted EBITDA (in millions) | | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $2,388.8 | $2,020.1 | | Interest, Taxes, Depreciation, Amortization | $1,761.1 | $1,525.7 | | EBITDA | $4,149.9 | $3,545.0 | | Adjustments (Restructuring, Impairment, etc.) | $89.2 | $62.8 | | Adjusted EBITDA | $4,239.1 | $3,607.8 | Reconciliation of Diluted EPS to Adjusted Diluted EPS | | 2023 | 2022 | | :--- | :--- | :--- | | Diluted net income per share (GAAP) | $9.25 | $7.72 | | Restructuring Plan Items | $0.09 | $0.20 | | Impairment related to trademarks | $0.07 | - | | Devaluation of the Argentine Peso | $0.16 | - | | Acquisition-related amortization expense | $0.78 | $0.81 | | Adjusted diluted net income per share | $10.35 | $8.73 | Critical Accounting Policies and Estimates Key accounting policies require significant management judgment, particularly for inventory, goodwill, and litigation accruals - Inventories are valued at the lower of cost or net realizable value, with cost determined principally by the LIFO method[227] - Goodwill and indefinite-lived intangible assets are tested for impairment annually on October 1, or more frequently if indicators of impairment exist; the 2023 test resulted in a $23.9 million trademark impairment in the Consumer Brands Group[228][232] - The company accrues for environmental remediation costs when they are probable and can be reasonably estimated, but these estimates are subject to uncertainty[237] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, foreign currency, and commodity price risks, which it manages with derivatives - The company utilizes U.S. Dollar to Euro cross-currency swap contracts to hedge its net investment in European operations[242] - The company does not use derivative instruments for speculative or trading purposes[242] Item 8. Financial Statements and Supplementary Data This section presents the consolidated financial statements, management's report, and the independent auditor's report Management and Auditor Reports Management and the independent auditor, Ernst & Young LLP, both affirmed the effectiveness of internal controls over financial reporting - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[250] - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[253][269] - The audit firm identified the environmental-related accrual for the Gibbsboro, New Jersey site as a critical audit matter, requiring complex judgment[275][276] Consolidated Financial Statements The statements show 2023 net sales of $23.05 billion, net income of $2.39 billion, and total assets of $22.95 billion Key Financial Statement Data (Year Ended Dec 31, 2023, in millions) | Statement | Line Item | Amount | | :--- | :--- | :--- | | Income Statement | Net Sales | $23,051.9 | | | Net Income | $2,388.8 | | Balance Sheet | Total Assets | $22,954.4 | | | Total Liabilities | $19,238.6 | | | Total Shareholders' Equity | $3,715.8 | | Cash Flow | Net Operating Cash | $3,521.9 | | | Net Investing Cash | $(1,039.3) | | | Net Financing Cash | $(2,424.6) | Notes to Consolidated Financial Statements The notes detail key financial data including acquisitions, debt structure, environmental liabilities, and litigation - In October 2023, the company acquired SIC Holding GmbH for approximately $265 million in cash; in April 2023, it divested its China architectural business (Note 3)[331][337] - Total long-term debt maturities for the next five years are: $1.1B in 2024, $1.05B in 2025, $350.1M in 2026, $1.5B in 2027, and none in 2028 (Note 8)[356] - The company had total environmental-related accruals of $318.9 million at year-end 2023, with the majority related to four major sites, primarily the Gibbsboro, NJ site (Note 11)[392][394][395] - The company is vigorously defending numerous legal proceedings related to the historical manufacture of lead-based paint and believes the claims are without merit, but an adverse outcome could be material (Note 12)[405] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[498] Item 9A. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of year-end 2023 - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period[499] - There were no changes in internal control over financial reporting during the period that have materially affected, or are reasonably likely to materially affect, these controls[501] Item 9B. Other Information No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the fourth quarter - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q4 2023[502] Item 9C. Disclosure Regarding Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[503] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors and governance is incorporated by reference from the 2024 Proxy Statement - Information regarding directors, the Audit Committee, and Section 16(a) compliance is incorporated by reference from the 2024 Proxy Statement[506][509][510] - The company has adopted a Code of Conduct for all employees and a Code of Ethics for Senior Financial Management, which are available on its website[511][512][513] Item 11. Executive Compensation Details on executive compensation are incorporated by reference from the company's 2024 Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement[515] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the Proxy Statement[516][517] Item 13. Certain Relationships and Related Transactions, and Director Independence Details on related party transactions and director independence are incorporated by reference from the 2024 Proxy Statement - Information on related transactions and director independence is incorporated by reference from the Proxy Statement[518] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[519] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K Changes in Deferred Tax Asset Valuation Allowances (in millions) | Year | Beginning Balance | Additions (Deductions) | Ending Balance | | :--- | :--- | :--- | :--- | | 2023 | $97.5 | $9.1 | $106.6 | | 2022 | $97.2 | $0.3 | $97.5 | | 2021 | $104.6 | $(7.4) | $97.2 | Item 16. Form 10-K Summary The company provides no summary under this item - None[536]