The Sherwin-Williams Company (NYSE: SHW) announced its financial results for the third quarter ended September 30, 2021. All comparisons are to the third quarter of the prior year, unless otherwise noted.
SUMMARY
- Consolidated net sales increased 0.5% in the quarter to $5.15 billion
- Net sales from stores in U.S. and Canada open more than twelve calendar months decreased 2.8% in the quarter
- Raw material availability issues negatively impacted quarter sales by an estimated high single digit percentage
- Diluted net income per share decreased to $1.88 per share in the quarter compared to $2.55 per share in the third quarter 2020
- Adjusted diluted net income per share decreased to $2.09 per share in the quarter compared to $2.76 per share in the third quarter 2020
- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) decreased in the quarter to $834.2 million, or 16.2% of sales
- Generated net operating cash of $2.1 billion, or 13.5% of sales, in the first nine months of the year
- FY21 diluted net income per share guidance in the range of $7.16 to $7.36 per share, including a loss of $0.34 per share from the Wattyl divestiture and acquisition-related amortization expense of $0.85 per share
- Reaffirming adjusted diluted net income per share guidance in the range of $8.35 to $8.55 per share
CEO REMARKS
“Demand remains strong across our pro architectural and industrial end markets; however, results in the quarter were significantly impacted by ongoing and industry-wide raw material supply chain challenges,” said Chairman, President and Chief Executive Officer, John G. Morikis. “Consolidated net sales increased less than 1%, as raw material availability negatively impacted total sales by a high single digit percentage, of which approximately 75% of the impact was in The Americas Group. The raw material availability challenges combined with higher raw material costs significantly pressured gross margins in the quarter. We continue to implement price increases to offset higher raw material costs across the business and are confident margins will recover as inflation headwinds eventually subside. Despite the near-term margin pressure, cash flow generation remained strong during the quarter, enabling us to invest in long-term strategic growth initiatives, open 19 new stores, announce two acquisitions and purchase 1.675 million shares.
“In The Americas Group, underlying demand in our professional architectural businesses remains robust. We expect delayed projects to be completed as raw material availability improves, and our team is aggressively pursuing additional business. In the Consumer Brands Group, our sales remained down double-digits, driven by difficult comparisons to the prior year, consumers returning to the workplace, raw material availability issues and the divestiture of the Wattyl business. Growth in the Pros Who Paint category in this segment was not enough to offset the lower North America DIY demand and raw material availability challenges. In the Performance Coatings Group, all businesses and regions delivered growth, most by double digit percentages.”
THIRD QUARTER CONSOLIDATED RESULTS
| Three Months Ended September 30, | |||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||
| Net sales | $ | 5,146.7 | $ | 5,122.2 | $ | 24.5 | 0.5 | % | |||
| Income before income taxes | $ | 611.5 | $ | 875.6 | $ | (264.1) | (30.2) | % | |||
| As a % of sales | 11.9% | 17.1% | |||||||||
| Net income per share – diluted | $ | 1.88 | $ | 2.55 | $ | (0.67) | (26.3) | % | |||
| Adjusted net income per share – diluted | $ | 2.09 | $ | 2.76 | $ | (0.67) | (24.3) | % |
Consolidated net sales increased primarily due to selling price increases in all segments and higher product sales volume in the Performance Coatings Group, partially offset by lower sales volumes in the Consumer Brands Group and The Americas Group primarily due to raw material availability issues. Income before income taxes decreased primarily due to lower sales volumes in the Consumer Brands Group and The Americas Group and higher raw material costs across all three segments, partially offset by selling price increases and SG&A spending controls.
Diluted net income per share included a charge of $0.21 per share for acquisition-related amortization expense.
THIRD QUARTER SEGMENT RESULTS
The Americas Group (“TAG”)
| Three Months Ended September 30, | ||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||
| Net sales | $ | 2,967.0 | $ | 2,978.3 | $ | (11.3) | (0.4) | % | ||||||
| Same-store sales (1) | (2.8)% | 3.1% | ||||||||||||
| Segment profit | $ | 631.5 | $ | 747.4 | $ | (115.9) | (15.5) | % | ||||||
| Reported segment margin | 21.3% | 25.1% |
| (1) | Same-store sales represents net sales from stores in U.S. and Canada open more than twelve calendar months. |
Net sales in TAG decreased due primarily to lower sales volume of paint products as a result of raw material availability challenges, partially offset by selling price increases in all end markets. TAG segment profit decreased due primarily to lower paint sales volume in all end markets and increased raw material costs, partially offset by selling price increases.
Consumer Brands Group (“CBG”)
| Three Months Ended September 30, | ||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||
| Net sales | $ | 646.7 | $ | 838.1 | $ | (191.4) | (22.8) | % | ||||||
| Segment profit | $ | 75.8 | $ | 198.3 | $ | (122.5) | (61.8) | % | ||||||
| Reported segment margin | 11.7% | 23.7% | ||||||||||||
| Adjusted segment profit (1) | $ | 95.2 | $ | 221.0 | $ | (125.8) | (56.9) | % | ||||||
| Adjusted segment margin | 14.7% | 26.4% |
| (1) | Adjusted segment profit excludes the impact of acquisition-related amortization expense. Acquisition-related amortization expense in CBG was $19.4 million and $22.7 million in the third quarter of 2021 and 2020, respectively. |
Net sales in CBG decreased due primarily to lower sales volumes to all of our retail customers as a result of raw material availability issues and the Wattyl divestiture, partially offset by selling price increases. CBG segment profit decreased primarily due to lower sales volume, increased raw material costs and supply chain inefficiencies, partially offset by selling price increases and good cost control. Acquisition-related amortization expense reduced segment profit as a percent of net external sales by 300 basis points compared to 270 basis points in the third quarter of 2020.
Performance Coatings Group (“PCG”)
| Three Months Ended September 30, | ||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||
| Net sales | $ | 1,532.5 | $ | 1,305.3 | $ | 227.2 | 17.4 | % | ||||||
| Segment profit | $ | 110.4 | $ | 155.3 | $ | (44.9) | (28.9) | % | ||||||
| Reported segment margin | 7.2% | 11.9% | ||||||||||||
| Adjusted segment profit (1) | $ | 161.3 | $ | 208.8 | $ | (47.5) | (22.7) | % | ||||||
| Adjusted segment margin | 10.5% | 16.0% |
| (1) | Adjusted segment profit excludes the impact of acquisition-related amortization expense. Acquisition-related amortization expense in PCG was $50.9 million and $53.5 million in the third quarter of 2021 and 2020, respectively. |
Net sales in PCG increased due primarily to higher sales in all end markets and selling price increases. Currency translation rate changes increased the group’s net sales by 2.0%. PCG segment profit decreased due primarily to increased raw material costs, partially offset by higher sales volume and selling price increases. Acquisition-related amortization expense reduced segment profit as a percent of net external sales by 330 basis points compared to 410 basis points in the third quarter of 2020.
LIQUIDITY AND CASH FLOW
The Company generated $2.05 billion in net operating cash during the first nine months of 2021. This strong cash generation, along with an increase in our short-term borrowings, allowed the Company to return cash of approximately $2.52 billion, or an increase of approximately 52%, to our shareholders in the form of dividends and share repurchases. The Company purchased 8.075 million shares of its common stock during the first nine months. At September 30, 2021, the Company had remaining authorization to purchase 50.575 million shares of its common stock through open market purchases.
2021 GUIDANCE
| Fourth Quarter | Full Year | ||||
| 2021 | 2021 | ||||
| Net sales | Up mid-to-high single digit % | Up high-single digit % | |||
| Effective tax rate | Slightly below twenty percent | ||||
| Diluted net income per share | $7.16 | – | $7.36 | ||
| Adjusted diluted net income per share (1) | $8.35 | – | $8.55 |
| (1) | Excludes $0.34 per share loss from the Wattyl divestiture and $0.85 per share of acquisition-related amortization expense. |
“Our full year adjusted diluted net income per share guidance remains unchanged from our September 28, 2021 range of $8.35 – $8.55 per share. The pace of recovery in raw material availability remains highly fluid as the impacts of Hurricane Ida are more severe and longer lasting than initially thought, and we do not expect any moderation in raw material inflation any sooner than next year,” said Mr. Morikis. “At the same time, we are encouraged by the demand environment, which remains strong across pro architectural and industrial end markets. Our teams remain highly engaged with customers, and we continue to invest in solutions that will drive long-term growth. We are focused on offsetting higher costs with the incremental price increases we have announced, and we are prepared to implement additional increases should they be necessary to offset higher raw material costs. We also continue to work closely with our suppliers to improve raw material availability, and we believe we are extremely well positioned as the situation improves, including by adding an incremental 50 million gallons of architectural production capacity through expansion of existing facilities by the end of the first quarter of 2022. We fully expect to emerge from current conditions as a stronger company with stronger customer relationships, and we remain undeterred in our long-term growth strategies.”
Source: The Sherwin-Williams
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