Sherwin-Williams 2017 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. Operations are concentrated in North and South America, with additional activity in Europe, Asia, Australia and the Caribbean.
This Form 10-K covers the fiscal year ended December 31, 2017. The filing is an annual report, not a quarterly filing; the supplied text does not provide a separate Q4 financial statement summary.
Following completion of the Valspar acquisition in the second quarter of 2017, the Company reorganized reporting into three reportable segments: The Americas Group, Consumer Brands Group and Performance Coatings Group, with remaining activities reported in Administrative.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $14.984 billion | $11.856 billion | Approximately +26.4% |
| Net income | $1.814 billion | $1.133 billion | Approximately +60.1% |
| Net income margin | Approximately 12.1% | Approximately 9.6% | Approximately +2.5 percentage points |
| Income before income taxes | $1.528 billion | $1.595 billion | Approximately -4.2% |
| Interest expense, net | $263 million | $154 million | Approximately +70.8% |
| Long-term debt | $9.886 billion | $1.211 billion | Approximately +$8.675 billion |
| Total debt | Approximately $10.5 billion | Not clearly provided in the filing text | Approximately +$8.6 billion versus 2016 |
| Total assets | $19.958 billion | $6.753 billion | Approximately +$13.205 billion |
| Ratio of earnings to fixed charges | 4.7x | 6.5x | Lower coverage |
| Diluted continuing-operations earnings per share | $19.11 | $11.99 | Approximately +59.4% |
| Cash dividends per share | $3.40 | $3.36 | Approximately +1.2% |
The filing text supplied does not provide clear consolidated values for operating cash flow, free cash flow, cash and cash equivalents, current debt, or operating margins. Management states that seasonal working capital is generally financed through short-term borrowings, lines of credit and commercial paper.
Material Changes Versus the Prior Comparable Period
- The Valspar acquisition was completed in the second quarter of 2017 and materially expanded the Company’s sales base, assets and debt.
- Net sales increased by approximately 26.4%, while net income increased by approximately 60.1%. The reported increase in net income was substantially greater than the sales increase.
- Income before income taxes declined approximately 4.2%, despite higher reported net income, indicating that tax-related items materially affected the comparison.
- Interest expense increased by approximately $109 million, and the earnings-to-fixed-charges ratio declined from 6.5x to 4.7x as leverage increased.
- The Americas Group operated 4,620 specialty paint stores at year-end and opened 101 net new stores during 2017. The Performance Coatings Group operated 290 branches and increased its branch count by two net.
- Foreign subsidiaries generated approximately 19.8% of consolidated net sales in 2017, compared with 14.5% in 2016.
- The Company repurchased 11.65 million shares under its publicly announced program during the fourth quarter and had authorization remaining to purchase 11.65 million shares at December 31, 2017. Employee transactions accounted for an additional 12,654 shares.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a specific quantitative 2018 sales or earnings guidance range in the supplied text. Management states that sufficient productive capacity and raw-material sources were expected to meet needs through 2018.
- Management identifies expected benefits from Valspar integration, including growth opportunities and cost synergies, but cautions that integration costs, delays or failure to realize synergies could materially affect results.
- The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Company was still assessing its full impact, including the lower corporate tax rate, deemed repatriation of foreign earnings, interest limitations and changes to foreign-income taxation.
- Raw-material and energy costs, particularly titanium dioxide and petrochemical feedstocks such as propylene and ethylene, had increased and remained volatile. The Company may not be able to offset cost increases through pricing or productivity.
- Hurricanes Harvey, Irma and Maria and two earthquakes in Mexico temporarily disrupted stores, manufacturing facilities and distribution centers and reduced revenues in affected regions.
- The Company faces substantial leverage following the Valspar acquisition and warns that debt service could constrain cash available for working capital, capital expenditures, acquisitions and other corporate purposes. It also relies partly on access to commercial paper and revolving credit facilities.
- Seasonality is significant: the second and third quarters typically produce the majority of sales, and inventory is generally built during the first quarter.
- Environmental investigation and remediation liabilities may exceed current accruals. The Company also faces ongoing lead-pigment and lead-based-paint litigation and had not accrued amounts for that litigation because potential losses were not reasonably estimable.
- In the Santa Clara County, California lead-paint proceeding, an appellate court affirmed liability for residences built before 1951 and vacated liability for later residences. The Company stated that it intended to seek review by the U.S. Supreme Court. Because of joint and several liability, the Company could potentially be responsible for the full abatement fund, although the amount and allocation remained uncertain.
- Other material risks include economic and housing cycles, labor shortages in construction, competition, foreign currency movements, regulatory and tax changes, cybersecurity, intellectual property, adverse weather, environmental compliance and future acquisitions.
Most Important Facts for Investors to Verify
- Review the consolidated statements of cash flows and balance sheet to verify operating cash flow, free cash flow, cash balances, current borrowings and debt maturities.
- Reconcile the reported net-income increase with pretax income, tax expense, acquisition accounting and any Tax Act-related benefits or charges.
- Assess Valspar’s contribution to 2017 sales and earnings and determine whether disclosed cost synergies were achieved and whether integration costs remain.
- Analyze debt covenants, interest-rate exposure, refinancing requirements, commercial-paper availability and liquidity headroom.
- Review segment sales, profit, margins and identifiable assets in Note 18, which are referenced but not reproduced in the supplied filing text.
- Evaluate the potential financial exposure from the Santa Clara lead-paint litigation, other lead-paint claims and environmental remediation matters.
- Verify the final accounting effects of the Tax Cuts and Jobs Act and any subsequent regulatory guidance.