Sherwin-Williams(SHW) - 2021 Q2 - Quarterly Report

Part I. Financial Information Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021, and 2020, including income, comprehensive income, balance sheets, cash flows, and shareholders' equity, with detailed notes on accounting policies, acquisitions, debt, litigation, and segment information Consolidated Financial Statements The company reported increased net sales and income for Q2 2021, with total assets stable, but shareholders' equity decreased to $2.84 billion due to treasury stock purchases, while net operating cash flow rose to $1.20 billion Consolidated Income Statement Highlights | (in millions USD) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $5,379.8 | $4,604.0 | $10,035.8 | $8,750.7 | | Gross profit | $2,411.4 | $2,208.9 | $4,523.4 | $4,098.6 | | Net income | $648.6 | $595.9 | $1,058.2 | $917.6 | Consolidated Balance Sheet Highlights | (in millions USD) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $5,185.7 | $4,591.4 | | Total assets | $20,519.6 | $20,401.6 | | Total current liabilities | $6,190.4 | $4,594.4 | | Long-term debt | $7,603.8 | $8,266.9 | | Total shareholders' equity | $2,840.4 | $3,610.8 | Consolidated Cash Flow Highlights | (in millions USD) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net operating cash | $1,201.3 | $1,074.6 | | Net investing cash | ($72.5) | ($146.8) | | Net financing cash | ($1,125.3) | ($886.1) | Notes to Condensed Consolidated Financial Statements Notes detail a three-for-one stock split, a $27 million acquisition, a $111.9 million pre-tax loss from divestiture, a new $2.0 billion credit agreement, and a $64.7 million accrual for lead paint litigation - A three-for-one stock split was effected on March 31, 2021, with all prior year share and per-share information retroactively adjusted[19] - In Q1 2021, the company acquired a domestic coatings company for $27 million and divested its Wattyl business, recognizing a pre-tax loss of $111.9 million[21][22] - On June 29, 2021, the company entered into a new five-year $2.0 billion credit agreement, replacing the 2018 agreement[25] - The company maintains a $64.7 million accrual as of June 30, 2021, for the Santa Clara County lead paint litigation settlement[50] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2021 financial performance, noting a 16.9% increase in consolidated net sales driven by Americas and Performance Coatings, offset by Consumer Brands decline, while facing raw material inflation and supply chain constraints, maintaining strong liquidity and capital allocation Outlook and Summary The company delivered solid first-half performance but faces raw material inflation and supply chain uncertainties, remaining confident in its long-term outlook while managing COVID-19 impacts and maintaining strong liquidity for acquisitions and share repurchases - Key uncertainties for the remainder of 2021 include the extent and duration of raw material inflation and supply chain constraints[111] - The company has announced price increases across all businesses to offset higher raw material costs[115] - The company maintains a strong liquidity position with $219.6 million in cash and $2.741 billion of unused credit facility capacity as of June 30, 2021[116] Results of Operations Q2 2021 consolidated net sales rose 16.9% to $5.38 billion, driven by Americas and Performance Coatings, offsetting a 25.4% decline in Consumer Brands, while gross margin decreased to 44.8% due to higher raw material costs, yet diluted EPS increased 12.0% to $2.42 Net Sales by Segment | (in millions USD) | Q2 2021 Net Sales | Q2 2020 Net Sales | % Change | | :--- | :--- | :--- | :--- | | The Americas Group | $3,093.4 | $2,523.7 | 22.6% | | Consumer Brands Group | $731.5 | $980.2 | (25.4)% | | Performance Coatings Group | $1,554.5 | $1,099.8 | 41.3% | | Total | $5,379.8 | $4,604.0 | 16.9% | - Consolidated gross profit as a percent of net sales decreased to 44.8% in Q2 2021 from 48.0% in Q2 2020, primarily due to higher raw material costs across all segments[130] Segment Profit | (in millions USD) | Q2 2021 Segment Profit | Q2 2020 Segment Profit | % Change | | :--- | :--- | :--- | :--- | | The Americas Group | $727.3 | $599.7 | 21.3% | | Consumer Brands Group | $122.8 | $237.4 | (48.3)% | | Performance Coatings Group | $144.8 | $97.4 | 48.7% | - Diluted net income per share increased 12.0% to $2.42 in Q2 2021, compared to $2.16 in Q2 2020[116][146] Financial Condition, Liquidity and Cash Flow The company's financial position remains strong, with net operating cash increasing to $1.201 billion for the first six months of 2021, returning $1.943 billion to shareholders, while total debt was $9.053 billion and shareholders' equity decreased by $770.4 million due to share repurchases - Net operating cash for the first six months of 2021 was $1.201 billion, an improvement of $126.7 million from the prior year period[148][172] - The company returned $1.943 billion to shareholders in the first six months of 2021, comprising $1.646 billion in share buybacks and $297.7 million in cash dividends[149][168] - During the first six months of 2021, the Company purchased 6.4 million shares for treasury purposes and had remaining authorization to purchase 52.25 million shares as of June 30, 2021[170] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency, and commodity fluctuations, utilizing derivative instruments for hedging, not speculation, and expects no material adverse effect on its financial condition, with no material changes since fiscal year 2020 - The company is exposed to market risk associated with interest rate, foreign currency, and commodity fluctuations[188] - Derivative instruments are used for hedging, not for speculative or trading purposes, and the company does not expect hedging contract losses to have a material adverse effect on its financial condition[188] Controls and Procedures Based on CEO and CFO evaluation, the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[190] - No changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect internal controls were identified during the quarter[191] Part II. Other Information Legal Proceedings This section refers to Notes 8 and 9 of the financial statements for environmental and other legal proceedings, incorporating details by reference, with a $1 million threshold for disclosing environmental proceedings involving governmental authorities - Information regarding environmental-related matters and other legal proceedings is incorporated by reference from Notes 8 and 9 of the Condensed Consolidated Financial Statements[195] Risk Factors This section updates risk factors from the 2020 Annual Report, focusing on the uncertain impacts of the COVID-19 pandemic, detailing adverse effects on operations, demand shifts, supply chain disruptions, and increased costs, with future impact highly uncertain and dependent on evolving factors - The COVID-19 pandemic has adversely impacted the business, and the extent of future impact remains uncertain[197] - The pandemic caused an unprecedented surge in do-it-yourself (DIY) demand in 2020, which has since begun to normalize, while industrial businesses recovered at a slower pace[201] - Future impacts depend on numerous evolving and uncertain factors, including the pandemic's duration, scope, government directives, and the effectiveness of treatments and vaccines[202] Unregistered Sales of Equity Securities and Use of Proceeds The company details Q2 2021 share repurchase activity, with 3.1 million shares repurchased at an average price of $280.70 per share, and 52.25 million shares remaining authorized for purchase as of June 30, 2021 Share Repurchase Activity - Q2 2021 | Period | Shares Purchased (Program) | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 285,420 | $269.69 | | May 2021 | 2,714,580 | $282.06 | | June 2021 | 100,000 | $275.40 | | Q2 Total | 3,100,000 | $280.70 | - At the end of the second quarter, the company had remaining authorization to purchase 52,250,000 shares under its repurchase program[205] Other Information During the first six months of 2021, the Audit Committee approved global tax advisory and tax compliance non-audit services to be performed by the independent auditor, Ernst & Young LLP - The Audit Committee approved permitted non-audit services related to global tax advisory and tax compliance to be performed by Ernst & Young LLP during the first half of 2021[206] Exhibits This section lists exhibits filed with the Form 10-Q, including amendments to credit agreements, CEO and CFO certifications, and XBRL data files - Exhibits filed with the report include amendments to credit agreements, certifications by the CEO and CFO, and Inline XBRL documents[209]