Sherwin-Williams(SHW) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2021 and 2020, including income statements, balance sheets, cash flows, and detailed notes Statements of Consolidated Income (Unaudited) This section provides the unaudited consolidated income statements for the three months ended March 31, 2021 and 2020 Three Months Ended March 31, 2021 vs. 2020 (in millions, except per share data): | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--------------------------------- | :----- | :----- | :--------- | :--------- | | Net sales | $4,656.0 | $4,146.7 | $509.3 | 12.3% | | Cost of goods sold | 2,544.0 | 2,257.0 | 287.0 | 12.7% | | Gross profit | 2,112.0 | 1,889.7 | 222.3 | 11.8% | | Selling, general and administrative expenses | 1,325.9 | 1,307.6 | 18.3 | 1.4% | | Other general expense - net | 117.5 | 3.7 | 113.8 | 3075.7% | | Income before income taxes | 509.0 | 392.3 | 116.7 | 29.7% | | Net income | $409.6 | $321.7 | $87.9 | 27.3% | | Basic net income per common share | $1.54 | $1.18 | $0.36 | 30.5% | | Diluted net income per common share | $1.51 | $1.15 | $0.36 | 31.3% | Statements of Consolidated Comprehensive Income (Unaudited) This section presents the unaudited consolidated comprehensive income statements for the three months ended March 31, 2021 and 2020 Three Months Ended March 31, 2021 vs. 2020 (in millions): | Metric | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Net income | $409.6 | $321.7 | $87.9 | 27.3% | | Other comprehensive loss, net of tax | (45.5) | (221.6) | 176.1 | -79.5% | | Comprehensive income | $364.1 | $100.1 | $264.0 | 263.7% | - Foreign currency translation adjustments significantly impacted other comprehensive loss, with a loss of $46.3 million in 2021 compared to $218.7 million in 2020, net of tax[11] Consolidated Balance Sheets (Unaudited) This section details the unaudited consolidated balance sheets as of March 31, 2021, December 31, 2020, and March 31, 2020 Balance Sheet Highlights (in millions): | Metric | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :-------------------------------- | :------------- | :---------------- | :------------- | | Total current assets | $5,109.6 | $4,591.4 | $4,928.0 | | Total assets | $20,435.0 | $20,401.6 | $20,570.3 | | Total current liabilities | $5,651.6 | $4,594.4 | $5,220.2 | | Total liabilities and shareholders' equity | $20,435.0 | $20,401.6 | $20,570.3 | | Total shareholders' equity | $3,078.7 | $3,610.8 | $3,289.1 | - Cash and cash equivalents increased to $314.7 million at March 31, 2021, from $226.6 million at December 31, 2020, and $238.5 million at March 31, 2020[13] - Short-term borrowings significantly increased to $818.1 million at March 31, 2021, from $0.1 million at December 31, 2020, but were lower than $1,051.5 million at March 31, 2020[13] Condensed Statements of Consolidated Cash Flows (Unaudited) This section outlines the unaudited consolidated cash flow statements for the three months ended March 31, 2021 and 2020 Three Months Ended March 31, 2021 vs. 2020 (in millions): | Cash Flow Activity | 2021 | 2020 | Change ($) | | :------------------------- | :----- | :----- | :--------- | | Net operating cash | $195.7 | $54.9 | $140.8 | | Net investing cash | $(6.4) | $(97.9) | $91.5 | | Net financing cash | $(94.8) | $115.7 | $(210.5) | | Net increase in cash and cash equivalents | $88.1 | $76.7 | $11.4 | - Operating cash flow saw a significant increase, primarily driven by higher net income, despite an increase in working capital requirements[14][153] - Investing cash flow improved due to proceeds from the Wattyl divestiture, partially offset by cash used for acquisitions[14][154] Statements of Consolidated Shareholders' Equity (Unaudited) This section presents the unaudited consolidated statements of shareholders' equity for the periods ended March 31, 2021, December 31, 2020, and March 31, 2020 Shareholders' Equity Balances (in millions): | Metric | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :-------------------------------- | :------------- | :---------------- | :------------- | | Common Stock | $90.2 | $89.9 | $119.7 | | Other Capital | $3,543.6 | $3,491.4 | $3,215.5 | | Retained Earnings | $1,102.1 | $844.3 | $7,562.7 | | Treasury Stock, at cost | $(893.4) | $(96.5) | $(6,707.7) | | Accumulated Other Comprehensive Loss | $(763.8) | $(718.3) | $(901.1) | | Total Shareholders' Equity | $3,078.7 | $3,610.8 | $3,289.1 | - Total shareholders' equity decreased by $532.1 million in the first three months of 2021, primarily due to treasury stock repurchases and cash dividends, partially offset by net income[149] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed notes explaining the accounting policies and significant financial events for the interim period Note 1 – Basis of Presentation This note describes the basis of preparation for the interim financial statements, including GAAP compliance and seasonality - The financial statements are prepared in accordance with US GAAP for interim financial information and Form 10-Q, with all necessary adjustments included[17] - The Company's business is seasonal, with the majority of Net sales traditionally occurring during the second and third quarters, meaning Q1 results are not indicative of the full year[19] - A three-for-one stock split was approved and effected on March 31, 2021, with all share and per share information retroactively adjusted[20] Note 2 – Recently Issued Accounting Pronouncements This note discusses the adoption of new accounting pronouncements and their impact on the financial statements - Effective January 1, 2021, the Company adopted ASU 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' which did not have a material impact on financial position, results of operations, or cash flows[21] Note 3 – Acquisitions and Divestitures This note details the Company's acquisition and divestiture activities during the first quarter of 2021 - In Q1 2021, the Company acquired a domestic coatings company for $27 million, expanding the Performance Coatings Group's platform[22] - On March 31, 2021, the Company divested Wattyl, an Australian and New Zealand coatings business with approximately $200 million in annual revenue, recognizing a pre-tax loss of $111.9 million[23] Note 4 – Inventories This note provides a breakdown of inventory balances and the valuation methods used by the Company Inventories (in millions): | Category | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :----------------------- | :------------- | :---------------- | :------------- | | Finished goods | $1,413.0 | $1,427.6 | $1,586.9 | | Work in process and raw materials | 434.3 | 376.5 | 367.9 | | Total Inventories | $1,847.3 | $1,804.1 | $1,954.8 | - The Company primarily uses the last-in, first-out (LIFO) method for inventory valuation, with interim calculations based on management's estimates[24] Note 5 – Goodwill, Intangible and Long-Lived Assets This note presents information on property, plant, and equipment, and discusses goodwill and intangible asset impairment assessments Property, Plant and Equipment, Net (in millions): | Category | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :-------------------------------- | :------------- | :---------------- | :------------- | | Property, plant and equipment, gross | $4,457.0 | $4,548.8 | $4,385.6 | | Less allowances for depreciation | 2,676.6 | 2,714.3 | 2,556.1 | | Property, plant and equipment, net | $1,780.4 | $1,834.5 | $1,829.5 | - As of March 31, 2021, management determined that no interim impairment test for goodwill and intangible assets was required, considering COVID-19 impacts and market conditions[26] Note 6 – Debt This note details the Company's debt structure, including credit agreement amendments and senior note issuances - On February 16, 2021, the Company amended its five-year credit agreement, extending the maturity of $75.0 million of commitments to December 20, 2025[28] - In March 2020, the Company issued $1.0 billion in Senior Notes (2.30% due 2030 and 3.30% due 2050) and used proceeds to repurchase and redeem existing notes, resulting in a $21.3 million loss on extinguishment of debt[29] Note 7 – Pension and Other Postretirement Benefits This note outlines the net periodic benefit cost for the Company's domestic and foreign pension and postretirement benefit plans Net Periodic Benefit Cost (in millions): | Component | Domestic Defined Benefit Pension Plan (2021) | Domestic Defined Benefit Pension Plan (2020) | Foreign Defined Benefit Pension Plans (2021) | Foreign Defined Benefit Pension Plans (2020) | Other Postretirement Benefits (2021) | Other Postretirement Benefits (2020) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------------------------------- | :----------------------------------- | | Service cost | $1.3 | $1.1 | $1.9 | $1.7 | $0.3 | $0.4 | | Interest cost | 0.6 | 0.8 | 1.4 | 1.8 | 1.3 | 1.9 | | Expected return on assets | (1.8) | (1.5) | (2.5) | (2.6) | — | — | | Recognition of unrecognized prior service cost (credit) | 0.3 | 0.3 | — | — | — | (0.3) | | Recognition of unrecognized actuarial loss | — | — | 0.4 | 0.3 | 1.2 | 0.5 | | Ongoing pension cost | 0.4 | 0.7 | 1.2 | 1.2 | 2.8 | 2.5 | | Divestiture of business | — | — | 0.7 | — | — | — | | Net periodic benefit cost | $0.4 | $0.7 | $1.9 | $1.2 | $2.8 | $2.5 | Note 8 – Other Long-Term Liabilities This note discusses environmental-related accruals and other long-term liabilities, including significant uncertainties at major sites - The Company accrues for estimated environmental-related activity costs based on available facts and industry standards, with accruals for Other long-term liabilities at $293.3 million at March 31, 2021, down from $308.6 million at March 31, 2020[34][35] - Four 'Major Sites,' including Gibbsboro, New Jersey, account for the majority (85.1%) of the environmental accrual, with significant uncertainties remaining regarding ultimate costs[37][38] - Management does not expect potential environmental liabilities to materially adversely affect the Company's financial condition, liquidity, or cash flow due to the extended resolution period[41] Note 9 – Litigation This note details the Company's involvement in various claims and lawsuits, including product liability, environmental, and lead pigment litigation - The Company is involved in various claims and lawsuits, including product liability, environmental, and lead pigment/lead-based paint litigation, which are subject to inherent uncertainties[44][45] - For the Santa Clara County, California proceeding, the Company and two other defendants agreed to a $305.0 million settlement in July 2019, with the Company's accrual at $64.7 million at March 31, 2021[50] - In the Wisconsin personal injury litigation (Owens, Sifuentes, Burton Jr.), the Seventh Circuit reversed judgments against the Company in April 2021, entitling the Company to judgment as a matter of law[57] - The Company is also engaged in insurance coverage litigation to determine if abatement costs for lead pigment are covered, with the trial court granting summary judgment in favor of insurers in December 2020, which the Company appealed[63] Note 10 – Shareholders' Equity This note provides information on dividends paid and share-based compensation activities affecting shareholders' equity Dividends Paid on Common Stock: | Period | Dividend Per Share | | :----------------------- | :----------------- | | Q1 2021 | $0.55 | | Q1 2020 | $0.4467 | - During Q1 2021, 461,682 stock options were exercised at a weighted average price of $82.97 per share, and 269,118 restricted stock units vested[66] Note 11 – Accumulated Other Comprehensive (Loss) Income This note details the components of accumulated other comprehensive income (loss) and changes during the period Accumulated Other Comprehensive (Loss) Income (AOCI) (in millions): | Component | Balance at Dec 31, 2020 | Amounts recognized in AOCI (Q1 2021) | Amounts reclassified from AOCI (Q1 2021) | Balance at Mar 31, 2021 | | :-------------------------------- | :---------------------- | :----------------------------------- | :--------------------------------------- | :---------------------- | | Foreign Currency Translation Adjustments | $(671.5) | $(46.3) | — | $(717.8) | | Pension and Other Postretirement Benefits Adjustments | $(87.2) | — | $1.8 | $(85.4) | | Unrealized Net Gains on Cash Flow Hedges | $40.4 | — | $(1.0) | $39.4 | | Total | $(718.3) | $(46.3) | $0.8 | $(763.8) | Note 12 – Derivatives and Hedging This note describes the Company's derivative instruments used for hedging and their impact on financial results - In February 2020, the Company entered into two U.S. Dollar to Euro cross currency swap contracts with notional values of $500.0 million and $244.0 million to hedge its net investment in European operations[70] - An unrealized gain of $23.1 million (net of tax) was recognized in AOCI for the three months ended March 31, 2021, related to changes in fair value of cross currency swap contracts[73] Note 13 – Fair Value Measurements This note provides fair value measurements for financial assets and liabilities, including publicly and non-publicly traded debt Financial Assets and Liabilities Measured at Fair Value (in millions): | Category | March 31, 2021 Total | March 31, 2021 Level 1 | March 31, 2021 Level 2 | December 31, 2020 Total | December 31, 2020 Level 1 | December 31, 2020 Level 2 | | :-------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Assets: | | | | | | | | Deferred compensation plan assets | $72.2 | $39.4 | $32.8 | $69.2 | $37.9 | $31.3 | | Qualified Replacement Plan assets | $87.1 | $87.1 | — | $161.5 | $161.5 | — | | Liabilities: | | | | | | | | Deferred compensation plan liabilities | $95.0 | $95.0 | — | $92.2 | $92.2 | — | | Net investment hedge liability | $55.2 | — | $55.2 | $85.8 | — | $85.8 | Debt Carrying Amounts and Fair Values (in millions): | Debt Type | March 31, 2021 Carrying Amount | March 31, 2021 Fair Value | December 31, 2020 Carrying Amount | December 31, 2020 Fair Value | | :---------------------- | :----------------------------- | :------------------------ | :-------------------------------- | :------------------------ | | Publicly traded debt | $8,265.2 | $8,912.0 | $8,265.2 | $9,707.0 | | Non-publicly traded debt | $25.7 | $25.2 | $26.8 | $26.5 | Note 14 – Revenue This note explains the Company's revenue recognition policies, contract balances, and allowance for doubtful accounts - The Company recognizes revenue primarily at the point of transfer of control of products to the customer, with a large portion from sales not under long-term agreements[80][81] - Variable consideration, such as volume rebates and discounts, is estimated based on historical information and current trends and recorded as a reduction of net sales[84] Contract Assets and Liabilities (in millions): | Category | December 31, 2020 | March 31, 2021 | | :----------------------- | :---------------- | :------------- | | Accounts Receivable, Net | $2,078.1 | $2,414.1 | | Contract Assets (Current) | $52.0 | $61.7 | | Contract Assets (Long-Term) | $170.7 | $157.2 | | Contract Liabilities (Current) | $266.3 | $182.6 | | Contract Liabilities (Long-Term) | $8.2 | $8.4 | Allowance for Doubtful Accounts (in millions): | Metric | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Balance at January 1 | $53.5 | $36.5 | | Bad debt expense | 6.4 | 30.2 | | Uncollectible accounts written off, net of recoveries | (1.1) | (9.5) | | Balance at March 31 | $58.8 | $60.2 | Note 15 – Other This note details the components of other general expense and other (income) expense, including divestiture losses Other General Expense - Net (in millions): | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Provisions for environmental matters - net | $2.5 | $2.2 | | Loss on divestiture of business | 111.9 | — | | Loss on sale or disposition of assets | 3.1 | 1.5 | | Total Other general expense - net | $117.5 | $3.7 | Other (Income) Expense - Net (in millions): | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Investment and royalty (income) expense | $(6.5) | $2.3 | | Loss on extinguishment of debt | — | 21.3 | | Net expense from banking activities | 2.6 | 2.8 | | Foreign currency transaction related losses | 2.5 | 3.9 | | Miscellaneous pension expense | 0.9 | 1.2 | | Other income | (5.2) | (10.8) | | Other expense | 3.5 | 1.7 | | Total Other (income) expense - net | $(2.2) | $22.4 | Note 16 – Income Taxes This note provides information on the effective tax rate, unrecognized tax benefits, and ongoing income tax examinations - The effective tax rate for Q1 2021 was 19.5%, up from 18.0% in Q1 2020, favorably impacted by tax benefits from employee share-based payments[96] - The Company had $227.0 million in unrecognized tax benefits at December 31, 2020, with $16.8 million potentially changing significantly in the next twelve months[97] - The IRS is currently auditing the Company's 2013-2016 income tax returns, and the Company is subject to non-U.S. and state/local income tax examinations for various years[99][100] Note 17 – Net Income Per Share This note presents the calculation of basic and diluted net income per share for the reporting periods Net Income Per Share (in millions, except per share data): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $409.6 | $321.7 | | Basic net income per share | $1.54 | $1.18 | | Diluted net income per share | $1.51 | $1.15 | | Weighted average shares outstanding (Basic) | 265.8 | 273.2 | | Weighted average shares outstanding (Diluted) | 270.6 | 278.6 | - Diluted net income per share increased by 31.3% to $1.51 in Q1 2021, compared to $1.15 in Q1 2020[102] Note 18 – Reportable Segment Information This note provides financial data segmented by the Company's three reportable groups and administrative segment - The Company operates with three reportable segments: The Americas Group, Consumer Brands Group, and Performance Coatings Group, plus an Administrative segment[104] Net External Sales by Segment (in millions): | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :---------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | The Americas Group | $2,503.1 | $2,305.5 | $197.6 | 8.6% | | Consumer Brands Group | $778.1 | $622.3 | $155.8 | 25.0% | | Performance Coatings Group | $1,374.3 | $1,217.6 | $156.7 | 12.9% | | Administrative | $0.5 | $1.3 | $(0.8) | -61.5% | | Consolidated Totals | $4,656.0 | $4,146.7 | $509.3 | 12.3% | Segment Profit (in millions): | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :---------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | The Americas Group | $480.0 | $388.3 | $91.7 | 23.6% | | Consumer Brands Group | $143.7 | $83.5 | $60.2 | 72.1% | | Performance Coatings Group | $143.8 | $113.7 | $30.1 | 26.5% | | Consolidated Totals | $767.5 | $585.5 | $182.0 | 31.1% | - The Administrative segment includes a $111.9 million pre-tax loss on the Wattyl divestiture in Q1 2021[105] Note 19 – Non-Traded Investments This note describes the Company's investments in affordable housing and historic renovation real estate markets - The Company invests in U.S. affordable housing and historic renovation real estate markets, and other variable interest entities, but is not considered the primary beneficiary and thus does not consolidate them[107] Non-Traded Investments Balances (in millions): | Category | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :------------------------ | :------------- | :---------------- | :------------- | | Other assets | $212.7 | $198.2 | $192.4 | | Other accruals | $49.3 | $89.0 | $72.0 | | Other long-term liabilities | $139.8 | $127.3 | $98.6 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Q1 2021 financial performance, liquidity, and capital resources, highlighting strong results despite raw material inflation and supply chain constraints Background This section provides an overview of The Sherwin-Williams Company's business, history, and organizational structure - The Sherwin-Williams Company, founded in 1866, develops, manufactures, distributes, and sells paint, coatings, and related products primarily in North and South America, with operations also in Europe, Asia, and Australia[109] - The Company is structured into three reportable segments: The Americas Group, Consumer Brands Group, and Performance Coatings Group, along with an Administrative segment[110] Summary This section summarizes the Company's strong Q1 2021 performance, ongoing challenges, and disciplined capital allocation strategy - The Company started 2021 strong but faces uncertainties including raw material inflation, supply chain constraints, recovery pace in commercial/property maintenance markets, and DIY demand duration[111] - The Company maintains a disciplined capital allocation approach, focusing on customer value, shareholder returns, strategic acquisitions, and share repurchases with excess cash[112] - The Company reported strong liquidity with $314.7 million in cash and $2.683 billion in unused credit facility capacity at March 31, 2021[112] Outlook This section addresses the ongoing impact of the COVID-19 pandemic and the Company's measures to maintain operations - The COVID-19 pandemic continues to disrupt the global economy, but the Company is actively monitoring its impact and implementing safety measures to maintain operations[113][114] Results of Operations This section analyzes the Company's consolidated and segment-specific financial performance for the first quarter - Consolidated net sales increased 12.3% to $4.656 billion in Q1 2021[115] - Net sales from U.S. and Canada stores open over twelve months increased 8.2%[115] - Diluted net income per share increased 31.3% to $1.51[115] - Net operating cash increased 256% to $195.7 million[115] - Completed a three-for-one stock split to improve investor accessibility[115] Net Sales This section analyzes the consolidated and segment-specific net sales performance for the first quarter Net Sales by Segment (in millions): | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :---------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | The Americas Group | $2,503.1 | $2,305.5 | $197.6 | 8.6% | | Consumer Brands Group | $778.1 | $622.3 | $155.8 | 25.0% | | Performance Coatings Group | $1,374.3 | $1,217.6 | $156.7 | 12.9% | | Administrative | $0.5 | $1.3 | $(0.8) | (61.5)% | | Total | $4,656.0 | $4,146.7 | $509.3 | 12.3% | - Consolidated net sales increased primarily due to higher product sales volume across all Reportable Segments, with currency translation adding 0.7% to net sales[118] - Foreign subsidiary net sales increased 25.3% to $1.037 billion in Q1 2021, driven by higher volume in Consumer Brands and Performance Coatings[118] Income Before Income Taxes This section examines the factors influencing income before income taxes, including gross profit and operating expenses Income Before Income Taxes by Segment (in millions): | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | % Change | | :---------------------- | :-------------------------------- | :-------------------------------- | :------- | | The Americas Group | $480.0 | $388.3 | 23.6% | | Consumer Brands Group | $143.7 | $83.5 | 72.1% | | Performance Coatings Group | $143.8 | $113.7 | 26.5% | | Administrative | $(258.5) | $(193.2) | (33.8)% | | Total | $509.0 | $392.3 | 29.7% | - Consolidated gross profit increased $222.3 million, but the gross margin rate decreased to 45.4% (from 45.6%) due to higher raw material costs[122] - Selling, general and administrative expenses (SG&A) increased $18.3 million but decreased as a percent of sales by 300 basis points due to good cost control and higher sales volumes[124] - Other general expense - net increased significantly by $113.8 million, primarily due to a $111.9 million loss on the Wattyl divestiture[126] Income Tax Expense This section discusses the effective income tax rate and its contributing factors for the first quarter - The effective tax rate increased to 19.5% in Q1 2021 from 18.0% in Q1 2020, benefiting from tax benefits related to employee share-based payments[130] Net Income Per Share This section analyzes the diluted net income per share, considering divestiture losses and acquisition-related amortization - Diluted net income per share increased to $1.51 in Q1 2021 from $1.15 in Q1 2020, despite a $0.34 per share loss from the Wattyl divestiture and a $0.21 per share charge for acquisition-related amortization[131] Financial Condition, Liquidity and Cash Flow This section reviews the Company's financial position, liquidity, and cash flow activities for the first quarter Overview This section provides a high-level summary of the Company's strong financial condition, liquidity, and cash flow improvements - The Company's financial condition, liquidity, and cash flow remained strong in Q1 2021, with net operating cash improving by $140.8 million to $195.7 million[132] - EBITDA increased 18.2% to $736.8 million in Q1 2021[132] - Cash and cash equivalents increased by $88.1 million, and the Company returned $927.2 million to shareholders through share buybacks and dividends[133] Net Working Capital This section analyzes changes in net working capital and the current ratio for the reporting periods - Net working capital decreased by $249.8 million to a deficit of $542.0 million at March 31, 2021, compared to a deficit of $292.2 million at March 31, 2020[135] - The current ratio was 0.90 at March 31, 2021, down from 1.00 at December 31, 2020, and 0.94 at March 31, 2020[136] Property, Plant and Equipment This section discusses the changes in net property, plant, and equipment, including depreciation and asset dispositions - Net property, plant and equipment decreased by $54.1 million in Q1 2021, primarily due to depreciation, asset dispositions, and unfavorable foreign currency translation, partially offset by capital expenditures[137] Goodwill and Intangible Assets This section details the decrease in goodwill and intangible assets, mainly due to divestitures and amortization - Goodwill and intangible assets decreased by $299.0 million in Q1 2021, mainly due to dispositions (primarily the Wattyl divestiture), amortization, and foreign currency translation[138] Other Assets This section explains the decrease in other assets, driven by investment sales and deferred tax asset reductions - Other assets decreased by $99.4 million in Q1 2021, primarily due to the sale of investments to fund the domestic defined contribution plan, and decreases in deferred tax assets and deposits[140] Debt (including Short-term borrowings) This section provides an overview of the Company's total debt outstanding, including short-term borrowings and credit facility capacity Total Debt Outstanding (in millions): | Metric | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :---------------------- | :------------- | :---------------- | :------------- | | Long-term debt | $8,290.9 | $8,292.0 | $8,718.7 | | Short-term borrowings | $818.1 | $0.1 | $1,051.5 | | Total debt outstanding | $9,109.0 | $8,292.1 | $9,770.2 | - Short-term borrowings at March 31, 2021, were $818.1 million, primarily from commercial paper, with a weighted average interest rate of 0.29%[142] - The Company had $2.683 billion in unused capacity under its credit agreements at March 31, 2021[142] Defined Benefit Pension and Other Postretirement Benefit Plans This section notes the stability of long-term liabilities for postretirement benefits other than pensions - Long-term liabilities for postretirement benefits other than pensions did not significantly change from December 31, 2020, and March 31, 2020[143] Deferred Income Taxes This section explains the decrease in deferred income taxes due to amortization and asset dispositions - Deferred income taxes decreased by $48.3 million in Q1 2021, primarily due to amortization of acquisition-related intangible assets and disposition of certain intangible assets in the Wattyl divestiture[144] Other Long-Term Liabilities This section addresses environmental-related liabilities and management's assessment of their potential financial impact - Environmental-related liabilities are subject to various federal, state, and local laws, with management believing operations comply and not expecting material adverse effects on financial condition, liquidity, or cash flow[145][146] Contractual Obligations, Commercial Commitments and Warranties This section confirms no significant changes to contractual obligations and commercial commitments in the first quarter - No significant changes to contractual obligations and commercial commitments occurred in Q1 2021, other than the change in total debt[147] Litigation This section refers to detailed litigation information provided in the notes to the financial statements - Information concerning litigation is detailed in Note 9 of Item 1, which is incorporated by reference[148] Shareholders' Equity This section discusses the changes in total shareholders' equity, including share repurchases and dividends Total Shareholders' Equity (in millions): | Date | Amount | | :---------------- | :----- | | March 31, 2021 | $3,078.7 | | December 31, 2020 | $3,610.8 | | March 31, 2020 | $3,289.1 | - Shareholders' equity decreased by $532.1 million in Q1 2021 due to treasury stock activity ($796.9 million) and cash dividends ($151.8 million), partially offset by net income ($409.6 million)[149] - The Company purchased 3.3 million shares of common stock for treasury purposes in Q1 2021 and had authorization to purchase an additional 55.35 million shares[151][176] - The Board of Directors increased the quarterly cash dividend from $0.4467 to $0.55 per share in February 2021, resulting in an annual dividend of $2.20 per share[152] Cash Flow This section analyzes the Company's operating, investing, and financing cash flow activities for the first quarter - Net operating cash was $195.7 million in Q1 2021, an improvement of $140.8 million from Q1 2020, driven by increased net income[153] - Net investing cash usage decreased by $91.5 million to $6.4 million in Q1 2021, primarily due to proceeds from the Wattyl divestiture[154] - Net financing cash decreased by $210.5 million to a usage of $94.8 million in Q1 2021, due to lower debt issuances and higher cash dividends, partially offset by fewer treasury stock purchases[155] Market Risk This section discusses the Company's exposure to market risks from interest rate, foreign currency, and commodity fluctuations - The Company is exposed to market risk from interest rate, foreign currency, and commodity fluctuations, occasionally using derivative instruments for hedging, not speculation[157] - The Company does not expect foreign currency exchange rate, commodity price fluctuations, or hedging contract losses to materially adversely affect its financial condition, results of operations, or cash flows[157] Financial Covenant This section outlines the Company's consolidated leverage ratio covenant and its compliance status - The Company's consolidated leverage ratio covenant (total indebtedness to EBITDA) is not to exceed 3.75 to 1.00. At March 31, 2021, the Company was in compliance and expects to remain so[159] Non-GAAP Financial Measures This section explains the use of non-GAAP financial measures like EBITDA and Adjusted EBITDA for performance analysis - Management uses non-GAAP financial measures like EBITDA and Adjusted EBITDA to analyze business performance, providing additional data for investors[160][161] EBITDA and Adjusted EBITDA (in millions): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------- | :-------------------------------- | :-------------------------------- | | Net income | $409.6 | $321.7 | | Interest expense | 83.2 | 86.2 | | Income taxes | 99.4 | 70.6 | | Depreciation | 65.4 | 66.5 | | Amortization | 79.2 | 78.1 | | EBITDA | $736.8 | $623.1 | | Loss on divestiture | 111.9 | — | | Adjusted EBITDA | $848.7 | $623.1 | Critical Accounting Policies and Estimates This section addresses the critical accounting policies and estimates used in financial statement preparation - The preparation of financial statements requires management to make estimates and assumptions, which are believed to be reasonable, but actual results could differ[163] - There have been no significant changes in critical accounting policies, management estimates, or accounting policies since December 31, 2020[164] Cautionary Statement Regarding Forward-Looking Information This section provides a cautionary statement regarding forward-looking information, highlighting inherent risks and uncertainties - The report contains forward-looking statements based on management's current expectations, estimates, and beliefs, which are subject to risks and uncertainties that could cause actual results to differ materially[165][166] - Key risks include general economic conditions, raw material/energy pricing, integration of acquisitions, competitive factors, regulatory changes, environmental liabilities, litigation, and impacts of the COVID-19 pandemic[166] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section reiterates the Company's exposure to market risks from interest rate, foreign currency, and commodity fluctuations. It confirms the use of derivative instruments for hedging purposes, not speculation, and states that no material changes in market risk exposure have occurred since the last annual report - The Company is exposed to market risk from interest rate, foreign currency, and commodity fluctuations and uses derivative instruments for hedging, not speculation[167] - No material changes in the Company's exposure to market risk have occurred since the disclosure in the Annual Report on Form 10-K for the year ended December 31, 2020[167] Item 4. Controls and Procedures This section confirms that the Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021. It also states that there were no material changes in internal control over financial reporting during the period - The Company's disclosure controls and procedures were evaluated and concluded to be effective as of March 31, 2021[169] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the period[170] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to the detailed disclosures on environmental-related matters and other legal proceedings provided in Notes 8 and 9 of the Condensed Consolidated Financial Statements, which are incorporated by reference. It also specifies a $1 million threshold for disclosing environmental proceedings involving potential monetary sanctions - Disclosure of environmental matters is required when a governmental authority is a party and potential monetary sanctions exceed $1 million[173] - Information on environmental-related matters and other legal proceedings is incorporated by reference from Notes 8 and 9 of the financial statements[174] Item 1A. Risk Factors This section states that there were no material changes to the Company's previously disclosed risk factors during the first quarter ended March 31, 2021, and refers readers to the Annual Report on Form 10-K for a comprehensive discussion of risk factors - No material changes to previously disclosed risk factors occurred during Q1 2021[175] - A discussion of the Company's risk factors can be found in Part I, Item 1A, Risk Factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[175] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes the Company's share repurchase activity for the first quarter of 2021, detailing shares purchased under the publicly announced program and those related to employee transactions. It also notes the Board's authorization for additional share repurchases Share Repurchase Activity (Q1 2021): | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan | Maximum Number of Shares That May Yet Be Purchased Under the Plan | | :----------------------- | :----------------------------- | :--------------------------- | :------------------------------------------------------------------ | :---------------------------------------------------------------- | | January 1 - January 31 | — | $— | — | 13,650,000 | | February 1 - February 28 | 2,192,838 | $237.91 (program) / $238.22 (employee) | 2,100,000 | 56,550,000 | | March 1 - March 31 | 1,200,237 | $229.79 (program) / $232.87 (employee) | 1,200,000 | 55,350,000 | | Total | 3,393,075 | $234.96 (program) / $238.21 (employee) | 3,300,000 | 55,350,000 | - On February 17, 2021, the Board of Directors authorized the purchase of an additional 45,000,000 shares of common stock for treasury purposes, with no specified expiration date[176] Item 5. Other Information This section discloses that the Audit Committee approved permitted non-audit services, specifically global tax advisory and tax compliance services, to be performed by Ernst & Young LLP during the first quarter of 2021 - The Audit Committee approved global tax advisory and tax compliance non-audit services to be performed by Ernst & Young LLP in Q1 2021[177] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to articles of incorporation, executive officer severance agreements, certifications from the CEO and CFO, and Inline XBRL documents - Exhibit 3.1: Amendment to the Amended and Restated Articles of Incorporation[180] - Exhibit 10.1: Schedule of Executive Officers who are Parties to Amended and Restated Severance Agreements[180] - Exhibits 31(a) and 31(b): Rule 13a-14(a)/15d-14(a) Certifications of CEO and CFO[180] - Exhibits 32(a) and 32(b): Section 1350 Certifications of CEO and CFO[180] - Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE: Inline XBRL Taxonomy Extension Documents[180] - Exhibit 104: The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL[180] SIGNATURES This section contains the required signatures for the Form 10-Q, certifying its submission on behalf of The Sherwin-Williams Company by its Senior Vice President - Finance and Chief Financial Officer, Allen J. Mistysyn, and Senior Vice President - Corporate Controller, Jane M. Cronin, on April 28, 2021 - The report was signed on April 28, 2021, by Allen J. Mistysyn, Senior Vice President - Finance and Chief Financial Officer, and Jane M. Cronin, Senior Vice President - Corporate Controller[184]