Sherwin-Williams Company — Q1 2012 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2012. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products through the Paint Stores, Consumer, Global Finishes and Latin America Coatings segments, with an Administrative segment.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $2.136 billion | $1.856 billion | 15.1% increase |
| Gross profit | $909.8 million | $797.4 million | 14.1% increase |
| Gross margin | 42.6% | 43.0% | 0.4 percentage-point decrease |
| SG&A | $757.7 million | $691.1 million | 9.6% increase |
| SG&A as a percentage of sales | 35.5% | 37.2% | 1.7 percentage-point improvement |
| Income before taxes | $142.3 million | $94.7 million | 50.3% increase |
| Net income | $100.2 million | $68.3 million | 46.8% increase |
| Diluted EPS | $0.95 | $0.63 | 50.8% increase |
| EBITDA | $197.1 million | $149.1 million | 32.2% increase |
| Net operating cash flow | $(154.8) million | $(153.2) million | $1.7 million greater use |
Net income margin was approximately 4.7%, compared with approximately 3.7% in the prior-year quarter. EBITDA margin was approximately 9.2%, compared with approximately 8.0%.
- Cash and cash equivalents were $25.5 million at March 31, 2012, versus $53.9 million a year earlier.
- Total debt was approximately $1.322 billion, or 46.7% of total capitalization, versus $1.339 billion and 45.4% a year earlier. Debt increased $328.4 million from December 31, 2011, primarily due to seasonal working-capital needs.
- Current assets were $2.477 billion and current liabilities were $2.395 billion, producing a current ratio of 1.03.
- Remaining borrowing ability was $1.584 billion. The company reported compliance with its 3.25-to-1.00 leverage covenant.
- Capital expenditures were $32.8 million, cash dividends were $40.4 million and treasury-stock purchases were $180.8 million.
Material changes versus the prior comparable period
- Sales growth reflected higher paint volume and selling-price increases. Paint Stores Group sales increased 20.9%, Consumer Group sales 8.6%, Global Finishes Group sales 11.0% and Latin America Coatings Group sales 7.1%.
- Paint Stores Group comparable-store sales increased 20.4%, and total paint volume increased by low double digits.
- Gross margin declined because of higher raw-material costs, partly offset by pricing and volume. SG&A leverage improved because expenses grew more slowly than sales.
- Income before taxes increased across all operating segments, although Administrative expenses and other increased to $74.2 million from $52.0 million, primarily reflecting higher incentive compensation, stock-based compensation and information-system integration costs.
- Foreign subsidiaries produced $501.8 million of sales, up 6.8%; unfavorable currency translation reduced foreign sales growth. Acquisitions contributed to Global Finishes Group sales.
- Operating cash flow remained negative in the quarter, partly because of a $59.1 million IRS payment related to the 2011 ESOP settlement. Trailing twelve-month operating cash flow was $734.1 million, including $119.1 million of ESOP-related IRS payments.
- The quarterly common dividend increased from $0.365 to $0.390 per share. The company repurchased 1.8 million shares for $180.8 million and retained authorization to purchase 19.25 million additional shares.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a specific full-year earnings or revenue guidance figure. Management described financial condition, liquidity and cash flow as strong, supported primarily by improving domestic architectural paint demand, and stated that available borrowing capacity was sufficient for current operating needs.
- Raw-material and energy costs, pricing pressure, economic conditions, unusual weather, foreign-exchange movements and commodity prices could affect future results.
- Environmental accruals totaled $127.5 million at March 31, 2012. The unaccrued maximum of the estimated range of possible environmental outcomes was $97.8 million above the accrued amount; management cannot estimate ultimate costs or timing.
- The company has not accrued amounts for lead-pigment and lead-based-paint litigation. Potential losses cannot currently be estimated and a significant adverse outcome could materially affect earnings, liquidity or financial condition.
- The Department of Labor’s investigation of leveraged ESOP transactions remained open. On April 19, 2012, the DOL notified the company and other parties of potential fiduciary-breach enforcement claims seeking monetary and equitable remedies. No amounts were accrued.
- Eight locations were closed during the quarter because of lower demand or redundancy. Remaining qualified exit-cost liabilities were $9.4 million at March 31, 2012.
- The company acquired Leighs Paints in 2011 for aggregate consideration of $41.8 million, net of cash acquired. Integration of prior acquisitions remains an identified risk.
- A new five-year credit agreement entered into in April 2012 provides aggregate borrowing and letter-of-credit availability of up to $150 million; the filing also describes a February 2012 facility with availability of up to $500 million.
Important facts for investors to verify
- Whether price increases can continue to offset raw-material inflation without further gross-margin erosion.
- The sustainability of Paint Stores Group volume and comparable-store growth after the strong first quarter.
- Short-term borrowing levels, liquidity headroom and compliance with the leverage covenant as seasonal working-capital needs change.
- The cash-flow impact of ESOP settlement payments, share repurchases, dividends and acquisition spending.
- Developments in environmental matters, lead-paint litigation, related insurance coverage litigation and the DOL ESOP investigation.
- Management’s eventual full-year outlook, since the filing provides no specific quantitative guidance.