Sherwin-Williams 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2023

or

For the transition period from to

Commission file number 1-04851

THE SHERWIN-WILLIAMS COMPANY

(Exact name of registrant as specified in its charter)

(216) 566-2000

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.33-1/3 Par Value – 255,966,090 shares as of September 30, 2023.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

(1) The three months ended September 30, 2023 and 2022 include unrealized gains, net of taxes, of $24.2 million and $30.9 million, respectively, related to net investment hedges. The nine months ended September 30, 2023 and 2022 include unrealized gains, net of taxes, of $11.4 million and $69.8 million, respectively, related to net investment hedges. See Note 13 for additional information.

(2) Net of taxes of $1.6 million and $(0.3) million for the three months ended September 30, 2023 and 2022, respectively. Net of taxes of $4.6 million and $(1.1) million for the nine months ended September 30, 2023 and 2022, respectively.

(3) Net of taxes of $0.3 million for the three months ended September 30, 2023 and 2022, respectively. Net of taxes of $0.9 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Showing the first 8K of 123K characters. Open the full section

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except as noted and per share data)

BACKGROUND

The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the Company) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region and throughout Europe, Asia and Australia.

The Company is structured into three reportable segments - Paint Stores Group, Consumer Brands Group and Performance Coatings Group (collectively, the Reportable Segments) - and an Administrative segment in the same way it is internally organized for assessing performance and making decisions regarding the allocation of resources. See Note 19 of Item 1 for additional information on the Company's Reportable Segments.

Effective January 1, 2023, the Company changed its organizational structure to manage and report the Latin America architectural paint business within the Consumer Brands Group to more closely align demand and service model trends with its current business strategy. The Latin America business was formerly part of The Americas Group, which has become the Paint Stores Group concurrent with this change. The Company will report segment results for the newly realigned Paint Stores Group and Consumer Brands Group, for both current and prior periods presented herein.

SUMMARY

• Consolidated net sales increased 1.1% in the quarter to $6.117 billion and 5.2% in the first nine months of 2023 to $17.800 billion

**◦**Net sales from stores in U.S. and Canada open more than twelve calendar months increased 3.0% in the quarter and 8.3% in the first nine months of 2023

• Diluted net income per share increased 12.6% to $2.95 per share in the quarter compared to $2.62 per share in the third quarter 2022 and 26.0% to $7.85 per share in the first nine months of 2023 compared to $6.23 in the first nine months of 2022

• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the quarter increased 12.6% to $1.266 billion in the quarter, or 20.7% of net sales

• Generated net operating cash of $2.603 billion, or 14.6% of net sales, during the first nine months of 2023

The Company delivered strong results in the third quarter despite a challenging year-over-year comparison, due to low-single digit percentage impacts from selling price increases, modest net benefit from acquisitions and divestitures and favorable currency translation rate changes. This growth was mostly offset by a low-single digit volume decrease primarily driven by the Consumer Brands and Performance Coatings Groups. The divestiture of the China architectural business, which was completed on August 1, 2023, also reduced sales volume as compared to the prior year. In the Performance Coatings Group, net sales benefited from pricing actions and contributions from acquisitions, but was more than offset by volume declines. Consolidated gross profit margin in the quarter expanded both sequentially and year-over-year driven by pricing discipline and moderating raw material costs.

OUTLOOK

Our fourth quarter is often sequentially lower due to seasonal trends, and we continue to see inconsistent demand by region and end market. We will continue to prioritize investments in new stores, sales and technical personnel, innovation, digital and other growth initiatives that will allow us to capitalize on our strengths and help our customers be successful. We remain committed to our differentiated strategy, capabilities, product and service solutions, and our people. Given our strong year-to-date results, we have confidence in our ability to continue delivering above market growth and returns.

We employ a disciplined capital deployment strategy, while maintaining a balanced approach toward driving value for our customers and returns to our shareholders. We continue to pursue business acquisitions, transactions and investments that fit our long-term growth strategy. We will return value to our shareholders through the payment of dividends and the reinvestment of excess cash for share repurchases of Company stock. We have a strong liquidity position, with $503.4 million in cash and $3.342 billion of unused capacity under our credit facilities at September 30, 2023. We are, and expect to remain, in compliance with bank covenants.

RESULTS OF OPERATIONS

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The results of operations for the three and nine months ended September 30, 2023 are not indicative of the results to be expected for the full year as our business is seasonal in nature, with the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters. However, periods of economic uncertainty can alter the Company's seasonal patterns.

The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and nine months ended September 30, 2023 and 2022.

Net Sales

Three Months Ended September 30, 2023

Consolidated net sales increased by 1.1% in the third quarter of 2023 primarily driven by selling price increases in all segments, a modest net benefit from the impact of acquisitions and divestitures and favorable currency translation rate changes. This growth was mostly offset by a sales volume decrease primarily driven by the Consumer Brands and Performance Coatings Groups. Net sales of all consolidated foreign subsidiaries increased to $1.105 billion in the third quarter compared to $1.064 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries was due to growth in the Latin America and Europe regions driven primarily from selling price increases, as well as contributions from acquisitions, partially offset by lower net sales in the Asia region from lower sales volumes and the divestiture of the China architectural business. Net sales of all operations other than consolidated foreign subsidiaries increased to $5.012 billion in the third quarter compared to $4.983 billion

Showing the first 8K of 62K characters. Open the full section

The Company is exposed to market risk associated with interest rates, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company enters into option and forward currency exchange contracts and commodity swaps to hedge against value changes in foreign currency and commodities. The Company believes it may experience continuing losses from foreign currency translation and commodity price fluctuations. However, the Company does not expect currency translation, transaction, commodity price fluctuations or hedging contract losses to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There were no material changes in the Company’s exposure to market risk since the disclosure included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and accumulated and communicated to our management including our Chairman and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer, to allow timely decisions regarding required disclosure.

In January 2023, the Company implemented two cloud-based systems consisting of a general ledger and a consolidation tool which replace the Company’s existing enterprise performance management system. The new systems resulted in changes to the Company’s financial reporting process and consequently, resulted in changes to the design of certain internal controls over activities related to the recording and reporting of information in our consolidated financial statements. Other than these system implementation changes, there have been no other changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the periods covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Securities and Exchange Commission regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. Pursuant to these regulations, the Company uses a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required.

For information regarding certain environmental-related matters and other legal proceedings, see the information included under the captions titled “Other Long-Term Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 9 and 10 of the “Notes to Condensed Consolidated Financial Statements.” The information contained in Note 10 to the Condensed Consolidated Financial Statements is incorporated herein by reference.

We face a number of risks that could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition. A discussion of our risk factors can be found in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. During the nine months ended September 30, 2023, there were no material changes to our previously disclosed risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

A summary of the Company’s third quarter activity is as follows:

(1)Shares were purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program.

(2)Shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had restricted stock units vest.

Trading Arrangements

During the quarter ended September 30, 2023, none of the Company’s directors or “officers,” as defined in Rule 16a-1(f) of the Exchange Act, adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.