Sherwin-Williams 2018 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. Reportable segments are The Americas Group, Consumer Brands Group and Performance Coatings Group, with an Administrative segment for corporate and other activities.
The filing covers the fiscal year ended December 31, 2018. The company operated 4,696 specialty paint stores in The Americas Group and 282 Performance Coatings branches at year-end, and employed 53,368 people. The business is seasonal, with most sales traditionally occurring in the second and third quarters.
Financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $17.534 billion | $14.984 billion | Up approximately 17.0% |
| Net income from continuing operations | $1.109 billion | $1.769 billion | Down approximately 37.3% |
| Diluted earnings per share from continuing operations | $11.67 | $18.64 | Down approximately 37.4% |
| Total assets | $19.134 billion | $19.900 billion | Down approximately 3.8% |
| Long-term debt | $8.708 billion | $9.886 billion | Down approximately $1.178 billion |
| Total debt | Approximately $9.3 billion | Not clearly provided in the filing text | Down approximately $1.2 billion |
| Ratio of earnings to fixed charges | 3.6x | 4.5x | Declined |
| Cash dividends per share | $3.44 | $3.40 | Up $0.04 |
Based on reported net sales and net income, the continuing-operations net margin was approximately 6.3% in 2018 versus 11.8% in 2017. The filing text supplied does not provide clear consolidated operating cash flow, free cash flow, cash balances, current debt, or unused borrowing capacity values.
Working capital is seasonally funded through short-term borrowings, lines of credit and commercial paper. Management stated that available credit facilities were sufficient for current operating needs, while noting refinancing, credit-market and covenant risks.
Material changes versus the prior comparable period
- Net sales increased substantially, reflecting the inclusion and ongoing integration of Valspar and broader international operations. External sales of foreign subsidiaries represented approximately 23.0% of consolidated sales, compared with 19.8% in 2017.
- Net income and diluted EPS declined materially despite sales growth. The filing text provided does not include sufficient MD&A detail to quantify the specific contribution of pricing, volume, acquisition costs, raw-material inflation, tax effects or other drivers.
- Total debt declined by approximately $1.2 billion during 2018, including debt incurred for the Valspar acquisition, but leverage remains significant.
- Interest expense increased to $367 million from $263 million, while total fixed charges increased to $532 million from $416 million.
- The Americas Group opened 76 net new stores. The Performance Coatings Group opened three branches and closed 11, for a net decrease of eight branches.
- The company repurchased 600,000 shares under its public program in the fourth quarter at an average price of $408.30 per share. Authorization remained for 10.125 million additional shares at December 31, 2018.
Guidance, outlook, commentary, risks and unusual items
- The company stated that it expected sufficient manufacturing capacity and raw-material sources to meet needs through 2019 and did not anticipate significant sourcing problems. No specific consolidated 2019 revenue or earnings guidance is provided in the supplied filing text.
- Management identified continued risks from raw-material and energy costs, especially titanium dioxide and petrochemical feedstocks, as well as tariffs, pricing pressure and supply disruptions.
- Higher interest rates and labor shortages affecting construction and housing could reduce demand. Hurricanes Michael and Florence and California wildfires temporarily shut certain facilities and reduced 2018 revenue.
- The company continues integrating Valspar and may not achieve expected growth opportunities or cost synergies. Integration costs, management distraction and impairment of goodwill or intangible assets remain risks.
- The Tax Cuts and Jobs Act materially changed U.S. tax rules. The company stated that the full impact remained subject to further regulatory guidance and interpretation.
- Environmental liabilities and litigation remain material contingencies. The company disclosed ongoing lead pigment and lead-based paint litigation, for which it generally had not accrued amounts because losses were not considered probable or reasonably estimable, except for California-related litigation.
- The South Coast Air Quality Management District filed a California complaint seeking civil penalties, costs and injunctive relief, with an initial demand of approximately $30 million. Separately, the company agreed to pay a $220,000 penalty related to a California Air Resources Board matter.
- Other principal risks include economic cyclicality, foreign currency, international operations, competition, cybersecurity, regulatory compliance, environmental remediation, customer concentration and access to capital markets.
- Disclosure controls and procedures were reported effective, with no material changes to internal control over financial reporting identified during the year.
Important facts for investors to verify
- Review the incorporated Annual Report MD&A and financial statements for the detailed causes of the 2018 earnings and margin decline despite significant sales growth.
- Verify operating cash flow, free cash flow, cash balances, current maturities, interest rates, covenant requirements and available revolver or commercial-paper capacity.
- Assess Valspar integration progress, realized cost synergies, remaining integration costs and goodwill or intangible-asset impairment sensitivity.
- Review tax-accounting adjustments and remaining uncertainty associated with the Tax Cuts and Jobs Act.
- Evaluate environmental reserves and the potential exposure from lead pigment, lead-based paint and California air-quality litigation.
- Monitor raw-material inflation, tariffs, foreign-exchange movements, interest rates, housing and construction demand, and seasonal working-capital requirements.