THE SHERWIN-WILLIAMS COMPANY (dollars in millions, except as noted and per share data) BACKGROUNDThe 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 inNorth and South America with additional operations in theCaribbean region and throughoutEurope ,Asia andAustralia . The Company is structured into three reportable segments-The Americas Group ,Consumer Brands Group andPerformance 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 allocation of resources. See Note 18 of Item 1 for additional information on the Company's Reportable Segments. SUMMARY •Consolidated net sales increased 0.5% in the quarter to$5.147 billion •Net sales from stores inU.S. andCanada 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 26.3% to$1.88 per share in the quarter •Generated net operating cash of$2.051 billion in the first nine months of the year, or 13.5% of sales OUTLOOK While the Company has delivered a solid performance during the first nine months of 2021, many uncertainties remain, including the extent and duration of raw material inflation and supply chain constraints, as well as changes in demand for our products due to the impacts of the COVID-19 pandemic. Despite the uncertainties, our businesses continue to be well-positioned, and we have confidence in our long-term outlook. The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of the global economy. We continue to work with government and health authorities to operate our business, including our company-operated stores, manufacturing plants and other facilities. We also continue to follow recommended actions of government authorities and health officials in order to protect the health and well-being of our employees, customers and their families worldwide. As the circumstances around the COVID-19 pandemic remain fluid, we continue to actively monitor the pandemic's impact to the Company worldwide, including our financial position, liquidity, results of operations and cash flows, while managing our response to the pandemic through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners. Please see Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q for further information regarding the current and potential impact of the COVID-19 pandemic on the Company. InFebruary 2021 , Winter Storm Uri had a broad impact on the industry's raw material supply chain. While the storm had limited direct impact to the Company's production facilities, the disruption to the supply chain created an economic environment with tight supply fundamentals and higher raw material inflation that is ongoing. InAugust 2021 , Hurricane Ida further disrupted the industry's raw material supply chain. The Company continues to work diligently to collaborate across its businesses and with its customers and suppliers to meet robust demand and minimize any impact on production or sales levels as a result of the global supply chain disruptions while providing differentiated solutions and excellent service to our customers. As a result, the Company expects to ship all production for the remainder of 2021 and as raw material availability improves will build inventory in 2022. Overall, we remain disciplined in our capital allocation approach, focused on driving value for our customers and returns to our shareholders. We will also continue to pursue business acquisitions and transactions that fit our strategy, and we expect to use any excess cash to make open market purchases of our common stock. We have a strong liquidity position, with$313.3 million in cash and$2.805 billion of unused capacity under our credit facilities atSeptember 30, 2021 . We are in compliance with bank covenants and expect to remain in compliance. 26 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2021 are not indicative of the results to be expected for the full year as 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 downturn 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 endedSeptember 30, 2021 and 2020. Net Sales (dollars in millions) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change The Americas Group$ 2,967.0 $ 2,978.3 $ (11.3) (0.4) %$ 8,563.5 $ 7,807.5 $ 756.0 9.7 % Consumer Brands Group 646.7 838.1 (191.4) (22.8) % 2,156.3 2,440.6 (284.3) (11.6) % Performance Coatings Group 1,532.5 1,305.3 227.2 17.4 % 4,461.3 3,622.7 838.6 23.1 % Administrative 0.5 0.5 - - % 1.4 2.1 (0.7) (33.3) % Total$ 5,146.7 $ 5,122.2 $ 24.5 0.5 %$ 15,182.5 $ 13,872.9 $ 1,309.6 9.4 % Three Months EndedSeptember 30, 2021 Consolidated net sales increased in the third quarter of 2021 primarily due to selling price increases in all segments and slightly higher product sales volume in thePerformance Coatings Group , partially offset by lower sales volume inThe Americas Group and theConsumer Brands Group . Currency translation rate changes increased net sales by 0.7% in the third quarter. Net sales of all consolidated foreign subsidiaries increased 5.3% to$1.019 billion in the third quarter compared to$967.6 million in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the third quarter was due primarily to higher sales volumes in most end markets and selling price increases in thePerformance Coatings Group and favorable currency translation, partially offset by lower sales in theConsumer Brands Group . Net sales of all operations other than consolidated foreign subsidiaries decreased 0.6% to$4.128 billion in the third quarter compared to$4.155 billion in the same period last year. Net sales inThe Americas Group decreased in the third quarter 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. Net sales from stores open for more than twelve calendar months in theU.S. andCanada decreased 2.8% in the third quarter compared to last year's comparable period. Sales of non-paint products increased 3.8% compared to last year's third quarter. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold. Net sales of theConsumer Brands Group decreased in the third quarter due primarily to lower sales volumes to all of the group's retail customers as a result of raw material availability issues and theWattyl divestiture, partially offset by selling price increases. Currency translation rate changes increased theConsumer Brands Group's net sales by 0.7% in the third quarter. Net sales in thePerformance Coatings Group stated inU.S. dollars increased in the third quarter primarily due to higher sales in all end markets and selling price increases. Currency translation rate changes increased thePerformance Coatings Group's net sales by 2.0% in the third quarter. Nine Months EndedSeptember 30, 2021 Consolidated net sales increased in the nine months of 2021 due primarily to higher product sales volume inThe Americas Group and thePerformance Coatings Group as well as selling price increases in all Reportable Segments, partially offset by lower product sales volume in theConsumer Brands Group . Currency translation rate changes increased net sales by 1.1% in the first nine months of 2021. Net sales of all consolidated foreign subsidiaries increased 22.8% to$3.158 billion in the first nine months compared to$2.572 billion in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the first nine months was due primarily to higher sales volume in most end markets and selling price increases in thePerformance Coatings Group , higher sales inThe Americas Group and favorable currency translation. Net sales of all operations other than consolidated foreign subsidiaries increased 6.4% to$12.025 billion in the first nine months compared to$11.301 billion in the same period last year. 27 -------------------------------------------------------------------------------- Net sales inThe Americas Group increased in the first nine months due primarily to higher product sales volume in all end markets excluding DIY, and selling price increases. Net sales from stores open for more than twelve calendar months in theU.S. andCanada increased 7.6% in the first nine months compared to last year's comparable period. Sales of non-paint products increased 13.9% over last year's first nine months. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold. Net sales of theConsumer Brands Group decreased in the first nine months due primarily to lower volume sales to most of the group's retail customers as DIY demand returned to more normal levels, and theWattyl divestiture, partially offset by selling price increases. Currency translation rate changes increased theConsumer Brands Group's net sales by 1.5% in the first nine months of 2021. Net sales in thePerformance Coatings Group stated inU.S. dollars increased in the first nine months primarily due to higher sales volumes in most end markets and selling price increases. Currency translation rate changes increased thePerformance Coatings Group's net sales by 3.2% in the first nine months of 2021. Income Before Income Taxes The following table presents the components of income before income taxes as a percentage of net sales: (dollars in millions) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 % of Net % of Net % of Net % of Net Sales Sales Sales Sales Net sales$ 5,146.7 100.0 %$ 5,122.2 100.0 %$ 15,182.5 100.0 %$ 13,872.9 100.0 % Cost of goods sold 3,007.1 58.4 % 2,666.9 52.1 % 8,519.5 56.1 % 7,319.0 52.8 % Gross profit 2,139.6 41.6 % 2,455.3 47.9 % 6,663.0 43.9 % 6,553.9 47.2 % SG&A 1,368.9 26.6 % 1,406.8 27.5 % 4,132.6 27.2 % 4,005.7 28.9 % Other general (income) expense - net (1.1) - % 10.5 0.2 % 111.2 0.7 % 13.1 0.1 % Amortization 76.2 1.5 % 78.7 1.5 % 233.2 1.5 % 234.2 1.7 % Interest expense 83.1 1.6 % 83.3 1.6 % 249.8 1.7 % 257.6 1.8 % Interest and net investment income (0.7) - % (1.4) - % (1.9) - % (2.6) - % Other expense (income) - net 1.7 - % 1.8 - % (1.6) - % 30.6 0.2 % Income before income taxes $ 611.5 11.9 %$ 875.6 17.1 %$ 1,939.7 12.8 %$ 2,015.3 14.5 % Three Months EndedSeptember 30, 2021 Cost of goods sold increased$340.2 million , or 12.8%, in the third quarter of 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources) and unfavorable currency translation rate changes, partially offset by lower sales volumes as a result of raw material availability issues. Currency translation rate changes increased Cost of goods sold by 1.0% in the third quarter of 2021. Consolidated gross profit decreased$315.7 million in the third quarter of 2021 compared to the same period in 2020. Consolidated gross profit as a percent of consolidated net sales decreased in the third quarter to 41.6%, compared to 47.9% during the same period in 2020. Consolidated gross profit dollars decreased primarily due to lower sales volumes inThe Americas Group andConsumer Brands Group and higher raw material costs in each Reportable Segment, partially offset by higher sales in thePerformance Coatings Group . The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment.The Americas Group's gross profit in the third quarter was lower than the same period last year by$124.2 million due primarily to lower sales volume and higher raw material costs, partially offset by selling price increases.The Americas Group's gross profit as a percent of net sales decreased in the third quarter compared to the same period in 2020 primarily due to higher raw material costs.The Consumer Brands Group's gross profit decreased by$152.4 million in the third quarter compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies.The Consumer Brands Group's gross profit as a percent of net sales decreased in the third quarter compared to the same period last year for these same reasons.The Performance Coatings Group's gross profit decreased$31.3 million , when stated inU.S. dollars, in the third quarter compared to the same period last year, primarily due to higher raw material costs, partially offset by higher sales and favorable currency translation rate changes.The Performance Coatings Group's gross profit as a percent of net sales decreased in the third quarter compared to the same period last year primarily due to higher raw material costs. 28 -------------------------------------------------------------------------------- Consolidated selling, general and administrative expenses (SG&A) decreased$37.9 million in the third quarter versus the same period last year due primarily to good cost control, partially offset by increased spending from new store openings. As a percent of net sales, consolidated SG&A decreased 90 basis points in the third quarter compared to the same period last year primarily due to good cost control.The Americas Group's SG&A decreased$1.7 million in the third quarter compared to the same period last year due primarily to good cost control, partially offset by investments in strategic growth initiatives including new store openings.The Consumer Brands Group's SG&A decreased$28.0 million in the third quarter compared to the same period last year due to good sales and marketing cost control in line with a return to more normal DIY sales levels.The Performance Coatings Group's SG&A increased$15.8 million in the third quarter compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes. The Administrative segment's SG&A decreased$24.0 million in the third quarter compared to the same period last year due primarily to lower incentive compensation. In the third quarter of 2021, Other general (income) expense - net improved$11.6 million compared to the same period in 2020 primarily due to a decrease in provisions for environmental matters in the Administrative segment. See Note 15 of Item 1 for additional information. In the third quarter of 2021, amortization of acquired intangibles was$50.9 million and$19.4 million for the Performance Coatings and Consumer Brands Groups, respectively. In the third quarter of 2020, amortization of acquired intangibles was$50.5 million and$21.7 million for the Performance Coatings and Consumer Brands Groups, respectively. Nine Months EndedSeptember 30, 2021 Cost of goods sold increased$1.201 billion , or 16.4%, in the first nine months of 2021 compared to the same period in 2020 primarily due to higher raw material costs (including titanium dioxide and petrochemical feedstock sources), higher sales volumes and unfavorable currency translation rate changes. Currency translation rate changes increased Cost of goods sold by 1.6% in the first nine months of 2021. Consolidated gross profit increased$109.1 million in the first nine months of 2021 compared to the same period in 2020. Consolidated gross profit as a percent of consolidated net sales decreased in the first nine months of 2021 to 43.9%, compared to 47.2% during the same period in 2020. Consolidated gross profit dollars increased primarily due to higher sales inThe Americas Group and thePerformance Coatings Group , partially offset by the impact of lower sales in theConsumer Brands Group and higher raw material costs in each Reportable Segment. The gross margin rate decreased primarily as a result of higher raw material costs in each Reportable Segment.The Americas Group's gross profit in the first nine months of 2021 was higher than the same period last year by$246.4 million due primarily to higher sales volume and selling price increases, partially offset by higher raw material costs.The Americas Group's gross profit as a percent of net sales decreased in the first nine months of 2021 compared to the same period in 2020 primarily due to higher raw material costs.The Consumer Brands Group's gross profit decreased by$235.2 million in the first nine months compared to the same period last year due primarily to lower sales volume, higher raw material costs and supply chain inefficiencies.The Consumer Brands Group's gross profit as a percent of net sales decreased in the first nine months compared to the same period last year for these same reasons.The Performance Coatings Group's gross profit increased$102.0 million , when stated inU.S. dollars, in the first nine months compared to the same period last year primarily due to higher sales volumes and selling price increases, partially offset by higher raw material costs.The Performance Coatings Group's gross profit as a percent of net sales decreased in the first nine months compared to the same period last year due to higher raw material costs. Consolidated SG&A increased$126.9 million in the first nine months of 2021 versus the same period last year due primarily to increased spending from new store openings, unfavorable currency translation rate changes and to support higher sales levels, partially offset by good cost control. As a percent of net sales, consolidated SG&A decreased 170 basis points in the first nine months compared to the same period last year primarily due to good cost control and higher sales.The Americas Group's SG&A increased$153.6 million in the first nine months of 2021 due primarily to increased spending from new store openings and costs to support higher sales levels.The Consumer Brands Group's SG&A decreased$56.1 million in the first nine months compared to the same period last year due to good sales and marketing cost control in line with a return to more normal DIY sales levels.The Performance Coatings Group's SG&A increased$63.5 million in the first nine months compared to the same period last year to support higher sales levels and unfavorable currency translation rate changes, partially offset by good cost control. The Administrative segment's SG&A decreased$34.1 million in the first nine months compared to the same period last year due primarily to lower compensation, including incentive and stock-based compensation. 29 -------------------------------------------------------------------------------- In the first nine months of 2021, Other general (income) expense - net declined$98.1 million compared to the same period in 2020 primarily due to the recognition of a$111.9 million loss on theWattyl divestiture, partially offset by a decrease in provisions for environmental matters in the Administrative segment. See Note 15 of Item 1 for additional information. In the first nine months of 2021, amortization of acquired intangibles was$152.9 million and$61.0 million for the Performance Coatings and Consumer Brands Groups, respectively. In the first nine months of 2020, amortization of acquired intangibles was$150.6 million and$64.5 million for the Performance Coatings and Consumer Brands Groups, respectively. Other expense (income) - net improved$32.2 million in the first nine months of 2021 compared to the same period in 2020 primarily due to the$21.3 million loss on extinguishment of debt recognized in the first nine months of 2020. See Note 15 of Item 1 for additional information. The following table presents income before income taxes by segment and as a percentage of net sales by segment: (dollars in millions) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 % Change 2021 2020 % Change Income Before Income Taxes: The Americas Group$ 631.5 $ 747.4 (15.5) %$ 1,838.8 $ 1,735.4 6.0 % Consumer Brands Group 75.8 198.3 (61.8) % 342.3 519.2 (34.1) % Performance Coatings Group 110.4 155.3 (28.9) % 399.0 366.4 8.9 % Administrative (206.2) (225.4) 8.5 % (640.4) (605.7) (5.7) % Total$ 611.5 $ 875.6 (30.2) %$ 1,939.7 $ 2,015.3 (3.8) % Income Before Income Taxes as a % of Net Sales: The Americas Group 21.3 % 25.1 % 21.5 % 22.2 % Consumer Brands Group 11.7 % 23.7 % 15.9 % 21.3 % Performance Coatings Group 7.2 % 11.9 % 8.9 % 10.1 % Administrative nm nm nm nm Total 11.9 % 17.1 % 12.8 % 14.5 %
nm - not meaningful
Income Tax Expense The effective tax rate was 17.9% for the third quarter of 2021 compared to 19.4% for the third quarter of 2020, and 19.6% for the first nine months of 2021 compared to 19.4% for the first nine months of 2020. The effective tax rate was favorably impacted by tax benefits related to employee share based payments during 2021 and 2020. The other significant components of the Company's tax rate were consistent year over year. See Note 16 of Item 1 for additional information. Net Income Per Share Diluted net income per share in the third quarter of 2021 decreased to$1.88 per share compared to$2.55 per share in the third quarter of 2020. Diluted net income per share for the third quarter of 2021 and 2020 included a$0.21 per share charge for acquisition-related amortization expense. Currency translation rate changes increased diluted net income per share by$0.01 in the third quarter. Diluted net income per share in the first nine months of 2021 decreased to$5.82 per share compared to$5.87 per share in the first nine months of 2020. Diluted net income per share for the first nine months of 2021 included a$0.34 per share loss from theWattyl divestiture (see Note 3 of Item 1) and included a$0.64 per share charge for acquisition-related amortization expense. The first nine months of 2020 included a$0.62 per share charge for acquisition-related amortization expense. Currency translation rate changes decreased diluted net income per share by$0.04 in the first nine months. 30 -------------------------------------------------------------------------------- FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW Overview The Company's financial condition, liquidity and cash flow remained strong during the first nine months of 2021. The Company generated$2.051 billion in net operating cash despite ongoing and industry-wide raw material availability issues which negatively impacted total sales and gross margins, and the normal seasonal increase in working capital requirements. During the first nine months of 2021, the Company's EBITDA decreased 3.1% to$2.623 billion . See the Non-GAAP Financial Measures section below for the definition and calculation of EBITDA. Cash and cash equivalents increased$86.7 million during the first nine months of 2021. Cash flow from operations, proceeds from theWattyl divestiture and increased short-term borrowings funded normal seasonal working capital increases and allowed the Company to return$2.519 billion to shareholders in the form of share buybacks and cash dividends during the first nine months. AtSeptember 30, 2021 , the Company had cash and cash equivalents of$313.3 million and total debt outstanding of$8.976 billion . Total debt, net of cash and cash equivalents, was$8.663 billion . The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs. Net Working Capital Net working capital, defined as total current assets less total current liabilities, decreased$1.917 billion to a deficit of$1.100 billion atSeptember 30, 2021 compared to a surplus of$817.3 million atSeptember 30, 2020 . The net working capital decrease is due to an increase in current liabilities, partially offset by an increase in current assets. Comparing current asset balances atSeptember 30, 2021 toSeptember 30, 2020 , cash and cash equivalents decreased$306.6 million , accounts receivable increased$143.5 million due to higher sales, inventories increased$143.2 million due to higher raw material costs partially offset by lower inventory quantities, and other current assets increased$222.7 million primarily related to prepaid expenses and refundable income taxes. Current liability balances increased$2.120 billion atSeptember 30, 2021 compared toSeptember 30, 2020 primarily due to a$709.2 million increase in short-term borrowings and a$638.0 million increase in the current portion of long-term debt. Excluding short-term borrowings and the current portion of long-term debt, current liabilities increased$773.0 million primarily due to the timing of payments related to accounts payable and accruals, including compensation. AtSeptember 30, 2021 , the Company's current ratio was 0.83 compared to 1.00 and 1.19 atDecember 31, 2020 andSeptember 30, 2020 , respectively. Property, Plant and Equipment Net property, plant and equipment decreased$7.3 million in the first nine months of 2021 and increased$47.2 million in the twelve months sinceSeptember 30, 2020 . The decrease in the first nine months was primarily due to depreciation expense of$199.8 million and the sale or disposition of fixed assets of$50.0 million , partially offset by capital expenditures of$248.1 million . SinceSeptember 30, 2020 , the increase was primarily due to capital expenditures of$358.1 million and favorable changes in foreign currency translation of$14.3 million , partially offset by depreciation expense of$267.8 million and sale or disposition of fixed assets of$62.5 million . Capital expenditures primarily represented expenditures associated with improvements and normal equipment replacement and additional capacity in manufacturing and distribution facilities in theConsumer Brands Group , normal equipment replacement in TheAmericas and Performance Coatings Groups, and information systems hardware in the Administrative segment.Goodwill and Intangible AssetsGoodwill and intangible assets decreased$455.2 million fromDecember 31, 2020 and decreased$439.2 million fromSeptember 30, 2020 . The net decrease during the first nine months of 2021 was primarily due to dispositions of$168.0 million (primarily related to theWattyl divestiture), amortization of$233.2 million and foreign currency translation of$69.9 million . The net decrease over the twelve month period fromSeptember 30, 2020 was primarily due to amortization of$312.4 million and dispositions of$168.0 million , partially offset by foreign currency translation of$27.5 million . The fair value of the Company's acquired intangible assets may be impacted by the Company's ongoing integration efforts. See Note 6 in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for more information concerning the Company's goodwill and intangible assets, including impairment testing of these assets. 31 -------------------------------------------------------------------------------- Other Assets Other assets atSeptember 30, 2021 decreased$2.8 million in the first nine months of 2021 and increased$80.3 million from a year ago. The decrease in the first nine months was primarily due to the sale of investments to fund the Company's domestic defined contribution plan and a decrease in deferred tax assets, partially offset by other investments. The increase fromSeptember 30, 2020 was primarily due to an increase in other investments, partially offset by a decrease in deposits. See Notes 13 and 19 in Item 1 for additional information on the Company's investments. Debt (including Short-term borrowings) September 30, December 31, September 30, 2021 2020 2020 Long-term debt$ 8,267.0 $ 8,292.0 $ 8,291.0 Short-term borrowings 709.4 0.1 0.2 Total debt outstanding$ 8,976.4 $ 8,292.1 $ 8,291.2 The Company's long-term debt primarily consists of senior notes as disclosed in Note 6 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . AtSeptember 30, 2021 , the Company's short-term borrowings were comprised of$694.9 million outstanding under its commercial paper program and$14.5 million outstanding under various foreign programs. The weighted average interest rate for the borrowings outstanding under the commercial paper program was 0.17% atSeptember 30, 2021 . The Company had unused capacity under its various credit agreements of$2.805 billion atSeptember 30, 2021 . See Note 6 in Item 1 for additional information. OnSeptember 15, 2021 , the Company elected to exercise its optional redemption rights to redeem the entire outstanding$400.0 million aggregate principal amount of its 4.20% Senior Notes due 2022 and its 4.20% Notes due 2022 initially issued byThe Valspar Corporation (collectively, the 4.20% Senior Notes). The Company redeemed the 4.20% Senior Notes onOctober 15, 2021 at a redemption price equal to 100% of the principal amount, plus accrued interest. OnAugust 2, 2021 , the Company entered into an amended and restated$625.0 million credit agreement, which amends and restates the five-year credit agreement entered into inSeptember 2017 . This agreement, which was subsequently amended, will be used for general corporate purposes. See Note 6. OnJune 29, 2021 , the Company and two of its wholly-owned subsidiaries,Sherwin-Williams Canada, Inc. (SW Canada ) andSherwin-Williams Luxembourg S .à r.l. (SW Luxembourg, together with the Company andSW Canada , the Borrowers), entered into a new five-year$2.000 billion credit agreement (New Credit Agreement). The New Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements. The New Credit Agreement replaced the credit agreement datedJuly 19, 2018 , as amended, which was terminated effectiveJune 29, 2021 . The New Credit Agreement will mature onJune 29, 2026 and provides that the Company may request to extend the maturity date of the facility for two additional one-year periods. In addition, the New Credit Agreement provides that the Borrowers may increase the aggregate amount of the facility to$2.750 billion , subject to the discretion of each lender to participate in the increase, and the Borrowers may request letters of credit in an amount of up to$250.0 million . Defined Benefit Pension and Other Postretirement Benefit Plans Long-term liabilities for defined benefit pension and other postretirement benefit plans did not change significantly fromDecember 31, 2020 andSeptember 30, 2020 . See Note 7 in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for more information concerning the Company's benefit plan obligations. Deferred Income Taxes Deferred income taxes atSeptember 30, 2021 decreased$44.6 million in the first nine months of 2021, and decreased$155.2 million from a year ago, primarily due to amortization of acquisition-related intangible assets and the disposition of certain intangible assets in theWattyl divestiture. Other Long-Term Liabilities Environmental-Related Liabilities The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern current operations and products, but also 32 -------------------------------------------------------------------------------- impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance. Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures were included in the normal operating expenses of conducting business. The Company's capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company's financial condition, liquidity, cash flow or results of operations during the first nine months of 2021. Management does not expect that such capital expenditures, depreciation and other expenses will be material to the Company's financial condition, liquidity, cash flow or results of operations in 2021. See Note 8 in Item 1 for further information on environmental-related long-term liabilities. Contractual Obligations, Commercial Commitments and Warranties Except for the Specialty Polymers and Sika acquisition agreements disclosed in Note 3 of Item 1, and the debt transactions discussed above and in Note 6 of Item 1, there have been no other significant changes to the Company's contractual obligations and commercial commitments in the first nine months of 2021 as summarized 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 endedDecember 31, 2020 . Litigation See Note 9 in Item 1 for information concerning litigation. Shareholders' Equity September 30, December 31, September 30, 2021 2020 2020
Total shareholders' equity $ 2,690.3 $ 3,610.8 $ 4,207.3
Shareholders' equity decreased $920.5 million during the first nine months of
2021 as a result of $2.167 billion of Treasury stock activity primarily
attributable to treasury stock repurchases and cash dividends paid on common
stock of $442.9 million , partially offset by net income of $1.560 billion and an
increase in Other capital of $196.7 million primarily associated with
stock-based compensation expense and stock option exercises.
Shareholders' equity decreased $1.517 billion since September 30, 2020 as a
result of $3.242 billion of Treasury stock activity primarily attributable to
treasury stock repurchases and cash dividends paid on common stock of $563.1
million , partially offset by net income of $1.967 billion and an increase in
Other capital of $314.8 million primarily associated with stock-based
compensation expense and stock option exercises.
During the first nine months of 2021, the Company purchased 8.075 million shares
of its common stock for treasury purposes through open market purchases. The
Company acquires its common stock for general corporate purposes, and depending
on its cash position and market conditions, it may acquire additional shares in
the future. The Company had remaining authorization at September 30, 2021 to
purchase 50.575 million shares of its common stock.
In February 2021 , the Company's Board of Directors increased the quarterly cash
dividend from $.4467 per share to $.55 per share. This quarterly dividend was
approved in all subsequent quarters and will result in an annual dividend for
2021 of $2.20 per share or a 29.9% payout of 2020 diluted net income per share.
Cash Flow
Net operating cash for the nine months ended September 30, 2021 was a cash
source of $2.051 billion compared to a cash source of $2.564 billion for the
same period in 2020. The decrease in net operating cash was primarily due to an
increase in cash requirements for working capital and a decrease in net income.
Net investing cash usage increased $50.1 million in the first nine months of
2021 to a usage of $226.7 million from a usage of $176.6 million in 2020
primarily due to an increase in capital expenditures and other investments,
partially offset by the proceeds received from the Wattyl divestiture in the
current year.
Net financing cash usage decreased $178.5 million in the first nine months of
2021 to a usage of $1.738 billion from a usage of $1.916 billion for the same
period in 2020 primarily due to decreased payments of long-term debt, partially
offset by increased treasury stock purchases and cash dividends paid.
33
--------------------------------------------------------------------------------
In the twelve month period from October 1, 2020 through September 30, 2021 , the
Company generated net operating cash of $2.896 billion , used $372.5 million in
investing activities and used $2.842 billion in financing activities.
Market Risk
The Company is exposed to market risk associated with interest rate, 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 believes it may be exposed to continuing market risk from foreign
currency exchange rate and commodity price fluctuations. However, the Company
does not expect that foreign currency exchange rate and commodity price
fluctuations or hedging contract losses will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
See Note 12 in Item 1 for disclosures related to the $744.0 million of
outstanding U.S. Dollar to Euro cross currency swap contracts designed to hedge
the Company's net investment in its European subsidiaries.
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states
that the Company's leverage ratio is not to exceed 3.75 to 1.00. The leverage
ratio is defined as the ratio of total indebtedness (the sum of Short-term
borrowings, Current portion of long-term debt and Long-term debt) at the
reporting date to consolidated "Earnings Before Interest, Taxes, Depreciation,
and Amortization" (EBITDA), as defined in the credit agreement, for the 12-month
period ended on the same date. Refer to the "Non-GAAP Financial Measures"
section below for a reconciliation of EBITDA to Net income. At September 30,
2021 , the Company was in compliance with the covenant and expects to remain in
compliance. The Company's notes, debentures and revolving credit agreements
contain various default and cross-default provisions. In the event of default
under any one of these arrangements, acceleration of the maturity of any one or
more of these borrowings may result. See Note 6 in the Company's Annual Report
on Form 10-K for the year ended December 31, 2020 for more information
concerning the Company's debt and related covenant.
34--------------------------------------------------------------------------------
Non-GAAP Financial Measures Management utilizes certain financial measures that are not in accordance withU.S. generally accepted accounting principles (US GAAP) to analyze and manage the performance of the business. The required disclosures for these non-GAAP measures are shown below. The Company provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate the Company's operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with US GAAP. EBITDA and Adjusted EBITDA EBITDA is a non-GAAP financial measure defined as net income before income taxes and interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure that excludes the loss on the divestiture ofWattyl . Management considers EBITDA and Adjusted EBITDA useful in understanding the operating performance of the Company. The reader is cautioned that the Company's EBITDA and Adjusted EBITDA should not be compared to other entities unknowingly. Further, EBITDA and Adjusted EBITDA should not be considered alternatives to Net income or Net operating cash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Condensed Statements of Consolidated Cash Flows in Item 1. The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the periods indicated below:
© Edgar Online, source
