Sherwin-Williams 2019 Form 10-K Summary
Business Context and Reporting Period
The Sherwin-Williams Company develops, manufactures, distributes and sells paint, coatings and related products to professional, industrial, commercial and retail customers. The filing covers the fiscal year ended December 31, 2019; quarterly data identifies fourth-quarter 2019 results. Reportable segments are The Americas Group, Consumer Brands Group and Performance Coatings Group, with remaining activities in Administrative.
- The Americas Group operated 4,758 specialty paint stores and opened 62 net new stores during 2019.
- Consumer Brands supplies branded and private-label products through retailers and distributors.
- Performance Coatings operated 281 branches worldwide at year-end.
- The Company employed 61,111 people at December 31, 2019.
Financial Results and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $17,900.8 million | $17,534.5 million | +2.1% |
| Gross profit | $8,036.1 million | $7,418.6 million | +8.3% |
| Gross margin | 44.9% | 42.3% | +260 bps |
| Income before income taxes | $1,981.8 million | $1,359.7 million | +45.8% |
| Net income from continuing operations | $1,541.3 million | $1,108.7 million | +39.0% |
| Diluted EPS from continuing operations | $16.49 | $11.67 | +41.3% |
| Effective tax rate | 22.2% | 18.5% | Higher |
| Net operating cash flow | $2,321.3 million | $1,943.7 million | +19.4% |
| Free cash flow | $1,571.6 million | $1,369.8 million | +14.7% |
| EBITDA | $2,906.0 million | $2,322.7 million | +25.1% |
Fourth-quarter 2019 net sales were $4,114.4 million, gross profit was $1,894.0 million and net income was $248.6 million, compared with fourth-quarter 2018 net sales of $4,064.2 million, gross profit of $1,682.7 million and net income of $101.0 million.
- Segment sales: The Americas Group $10,171.9 million, Consumer Brands Group $2,676.8 million and Performance Coatings Group $5,049.2 million.
- The Americas Group sales increased 5.7%, while Consumer Brands and Performance Coatings sales each declined 2.3%.
- Segment profit margins were 20.2% for The Americas Group, 13.9% for Consumer Brands and 7.5% for Performance Coatings.
- Cash and cash equivalents were $161.8 million at year-end; net working capital was $109.8 million and the current ratio was 1.02.
- Total debt was $8,685.2 million, down $658.5 million from 2018. Net debt was $8.523 billion, below three times EBITDA.
- Capital expenditures were $328.9 million, cash dividends were $420.8 million and treasury-stock purchases were $778.8 million.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher North American paint volume and price increases, partly offset by a 1.4% unfavorable currency translation effect.
- Gross margin improved from 42.3% to 44.9% due to volume, pricing, supply-chain efficiencies and moderating raw-material costs.
- Foreign-subsidiary sales declined 8.7% to $3.679 billion, primarily because of industrial-market softness and macroeconomic pressure in China and Australia.
- Consumer Brands sales were reduced by the divestiture of the Guardsman insurance business and lower non-North-American sales.
- Performance Coatings profit declined 16.1% because of softer international sales and currency effects.
- Administrative results improved substantially due to lower environmental provisions, lower acquisition-related expenses, the California litigation resolution benefit and a Brazil indirect-tax benefit.
- The Company recorded $122.1 million of non-cash trademark impairment charges, primarily in Performance Coatings, related to rebranding decisions and weaker Asia-Pacific forecasts.
- The Company reduced debt through repurchases of senior notes while issuing $800.0 million of 2.95% notes due 2029 and $550.0 million of 3.80% notes due 2049.
- Adoption of lease accounting resulted in recognition of approximately $1.7 billion of operating lease right-of-use assets and related liabilities without a material impact on earnings or cash flow.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2020 capital expenditures to exceed 2019 levels and did not anticipate requiring specific long-term external financing for those expenditures.
- The Company announced preliminary plans for a new Cleveland headquarters and research and development center, requiring at least $600 million of capital investment, with construction not expected before mid-2020 and completion no earlier than 2023. The plans remained subject to approvals and other contingencies.
- The Americas Group planned continued store expansion; Consumer Brands planned additional product promotions and customer expansion; Performance Coatings planned continued global expansion and customer-base improvement.
- The Board increased the quarterly dividend to $1.34 per share in February 2020. If paid for all 2020 quarters, the annualized dividend would be $5.36 per share.
- A $74.3 million tax provision was recorded after the Company determined that prior tax benefits associated with DC Solar renewable-energy investment funds were more likely than not unrecoverable. The ultimate tax consequences remained uncertain.
- The California lead-paint public-nuisance litigation was resolved for the Company and co-defendants’ collective payments of $305.0 million. Sherwin-Williams’ share was approximately $101.7 million, including a $25.0 million initial payment and subsequent installments; the Company recorded a $34.7 million 2019 benefit from the resolution.
- Lead-pigment and lead-based-paint litigation remains a significant unaccrued contingency. Management stated that potential losses cannot reasonably be estimated, and material adverse outcomes could affect earnings, liquidity or financial condition.
- Environmental accruals totaled approximately $371.8 million at year-end, including substantial exposure related to the Gibbsboro, New Jersey site. The filing states that ultimate costs may exceed current accruals.
- The Company was subject to a California air-quality enforcement action seeking penalties and injunctive relief, including an initial demand of approximately $30 million; the Company disputed the allegations.
- Debt agreements included a consolidated leverage covenant of 3.75 to 1.00. The Company was in compliance at December 31, 2019.
- Key ongoing risks include raw-material and energy costs, economic cyclicality, foreign currency, international operations, competition, leverage, cybersecurity, environmental regulation, litigation and adverse weather or public-health events.
Important Facts for Investors to Verify
- Reconcile reported EPS of $16.49 with adjusted diluted EPS of $21.12 after acquisition-related costs and other unusual items.
- Assess the sustainability of the 2019 margin expansion and determine how much resulted from temporary cost, litigation, tax or acquisition-related items.
- Review debt maturities, refinancing requirements and covenant headroom, particularly the $430.1 million of long-term debt due in 2020 and $1.160 billion due in 2022.
- Evaluate potential future cash requirements for environmental remediation, lead-paint litigation, California settlement payments and the proposed headquarters and R&D projects.
- Monitor international demand, especially Performance Coatings and Consumer Brands exposure to China, Australia and other foreign markets.
- Review the DC Solar tax-credit matter, related unrecognized tax benefits of $203.0 million and ongoing tax examinations.
- Confirm the effect of the 2019 trademark impairment and the risk of additional impairment if forecasts or branding strategies deteriorate.