The Sherwin-Williams Company — Form 10-Q Summary
Business context and reporting period
The company develops, manufactures, distributes and sells paints, coatings and related products primarily in North and South America, with additional international operations. The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Reportable segments were Paint Stores, Consumer, Global Finishes and Latin America Coatings.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $2.450 billion | $2.367 billion | +3.5% |
| Gross profit | $1.132 billion | $1.066 billion | +6.2% |
| Gross margin | 46.2% | 45.0% | +120 bps |
| SG&A expense | $929.2 million | $884.1 million | +5.1% |
| SG&A as a percentage of sales | 37.9% | 37.4% | +50 bps |
| Income before taxes | $193.2 million | $166.1 million | +16.4% |
| Net income | $131.4 million | $115.5 million | +13.8% |
| Diluted EPS | $1.38 | $1.14 | +21.1% |
| EBITDA | $255.0 million | $231.4 million | +10.2% |
Operating cash flow was negative $55.1 million, improving from negative $83.1 million in the prior-year quarter. Investing cash flow was negative $36.3 million, including $42.9 million of capital expenditures. Financing cash flow was positive $111.1 million, primarily because of a $731.7 million net increase in short-term borrowings, partially offset by $614.9 million of treasury-stock purchases and $62.6 million of dividends.
Cash and cash equivalents were $64.0 million at March 31, 2015, compared with $366.5 million a year earlier and $40.7 million at December 31, 2014. Total debt was approximately $2.531 billion, including $1.405 billion of short-term borrowings, $3.1 million of current long-term debt and $1.123 billion of long-term debt. Remaining borrowing ability was $877.1 million. The company was in compliance with its 3.25-to-1.00 leverage covenant.
The current ratio declined to 0.82 from 1.21 at March 31, 2014 and 0.96 at December 31, 2014. Shareholders’ equity declined to $469.2 million from $996.5 million at December 31, 2014, primarily because of treasury-stock purchases, dividends and accumulated other comprehensive loss.
Material changes versus the prior comparable period
- Paint Stores sales increased 7.5% to $1.462 billion, and segment profit increased 20.7% to $176.6 million. Comparable-store sales increased 6.4%.
- Consumer sales increased 8.1% to $351.7 million, supported by the launch of a new paint program at a national retailer; segment profit increased 8.5%.
- Global Finishes sales declined 5.6% to $469.6 million and segment profit declined 16.3%, principally because of unfavorable currency translation and lower sales.
- Latin America Coatings sales declined 8.9% to $166.2 million and segment profit declined 4.9%, primarily because of currency translation and higher raw-material costs.
- Foreign subsidiary sales declined 13.7% to $456.5 million, with currency translation reducing consolidated sales by 3.1%.
- Interest expense decreased $4.0 million to $12.4 million, while the effective tax rate increased to 32.0% from 30.5% because of lower federal tax credits and fewer discrete tax benefits.
- Average diluted shares declined approximately 6.1%, benefiting diluted EPS in addition to higher net income.
Guidance, outlook, risks and unusual items
Management stated that financial condition, liquidity and cash flow remained strong and that available cash and borrowing capacity were sufficient for current operating needs. The filing does not provide specific full-year sales or earnings guidance.
Management expects 2015 environmental compliance capital expenditures and related operating expenses to remain immaterial. Environmental accruals included $112.9 million in other long-term liabilities and $16.9 million in other accruals. The unaccrued maximum of the estimated environmental loss range exceeded the minimum estimate by $89.4 million; management could not determine the ultimate potential loss or timing.
The company has not accrued amounts for lead-pigment and lead-based-paint litigation. A California public-nuisance judgment held the company jointly and severally liable with other defendants for $1.15 billion, but the judgment was stayed pending appeal. Management believes a loss is not probable and the potential loss cannot be estimated. An adverse outcome could materially affect results, liquidity or financial condition.
Other notable items included a $2.7 million gain on asset dispositions, $761,000 of qualified exit-cost provisions, closure of 14 Paint Stores locations and one Latin America Coatings location, and completion of an accelerated share repurchase that required a $39.4 million settlement payment. The company repurchased 2.0 million shares under its publicly announced program during the quarter and had authorization remaining for 3.225 million shares.
Key ongoing risks include foreign-currency volatility, raw-material and commodity costs, economic and housing conditions, competitive pricing, environmental obligations, litigation, regulatory changes, acquisitions, interest rates and unusual weather. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether elevated short-term borrowing and the 0.82 current ratio remain temporary seasonal effects or indicate increased liquidity pressure.
- The pace and funding of share repurchases, including the remaining 3.225 million-share authorization and impact on leverage and equity.
- Currency effects and operating trends in the Global Finishes and Latin America Coatings segments.
- The status and potential financial impact of the Santa Clara County lead-paint litigation and related insurance coverage proceedings.
- Changes in environmental accruals and the range of reasonably possible remediation costs.
- Whether the new national-retailer paint program generates sustainable sales and margins after launch-related expenses.
- Final year-end LIFO inventory valuation, since interim LIFO amounts are based on management estimates.