Sherwin-Williams 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016; it is an annual Form 10-K rather than a standalone fourth-quarter filing. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products primarily in North and South America, with additional operations in Europe, Asia and the Caribbean.
The company reported four operating segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group. At year-end, it operated 4,180 specialty paint stores, 288 Global Finishes branches and 339 Latin America Coatings stores, and employed approximately 42,550 people.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $11.856 billion | $11.339 billion | Up approximately 4.6% |
| Net income | $1.133 billion | $1.054 billion | Up approximately 7.5% |
| Basic earnings per share | $12.33 | $11.43 | Up approximately 7.9% |
| Diluted earnings per share | $11.99 | $11.15 | Up approximately 7.5% |
| Total assets | $6.753 billion | $5.779 billion | Up approximately 16.8% |
| Long-term debt | $1.211 billion | $1.907 billion | Down approximately 36.5% |
| Cash dividends per share | $3.36 | $2.68 | Up approximately 25.4% |
| Ratio of earnings to fixed charges | 6.5x | 9.1x | Lower |
Net income margin was approximately 9.6% in 2016 versus approximately 9.3% in 2015, based on reported net sales and net income. The filing text provided does not clearly state operating or gross margins.
Income before income taxes was $1.595 billion. Interest expense, net, was $154 million, compared with $62 million in 2015. Total fixed charges were $292 million versus $192 million in 2015. Total debt was approximately $2.0 billion at December 31, 2016.
The filing identifies operating cash generation as a key management performance measure and states that seasonal working capital is generally financed through short-term borrowings, commercial paper and revolving credit facilities. The provided filing text does not include the detailed consolidated cash-flow amounts or year-end cash balance, so a clear free-cash-flow and cash-liquidity figure cannot be stated.
Material changes versus the prior comparable period
- Sales increased by approximately $517 million, while net income increased by approximately $79 million.
- Reported assets increased by approximately $974 million, while long-term debt declined by approximately $696 million; however, interest expense increased substantially.
- Paint Stores Group added 94 net stores during 2016, reaching 4,180 stores.
- Global Finishes Group opened five branches and closed 13, for a net decrease of eight branches.
- Latin America Coatings Group added 48 net stores, including expansion in South America and Mexico.
- Foreign subsidiaries generated approximately 14.5% of consolidated net sales in 2016, compared with 15.8% in 2015 and 19.8% in 2014.
- The company increased its annual cash dividend per share to $3.36 from $2.68 and retained authorization to repurchase 11.65 million shares at December 31, 2016.
Guidance, outlook, commentary, risks and unusual items
Management stated that raw-material and fuel supplies were generally adequate and that sufficient productive capacity existed to meet needs through 2017. Sales and earnings are seasonal, with the second and third quarters typically generating the highest levels.
The company had entered into an agreement to acquire The Valspar Corporation. Completion remained subject to customary closing conditions and regulatory approvals, including potential divestitures. Sherwin-Williams had obtained committed financing of $9.3 billion and expected to incur substantial additional debt if the acquisition closed. The filing does not provide a clear standalone 2017 earnings or sales guidance figure.
Principal risks include economic weakness in housing, construction, manufacturing and oil-related markets; raw-material and energy-price volatility; competition and pricing pressure; foreign-currency fluctuations; cybersecurity; regulatory and environmental compliance; access to financing; and acquisition-integration risks.
Environmental investigation and remediation liabilities may exceed recorded accruals. The company also faces lead-pigment and lead-based-paint litigation, including a $1.15 billion Santa Clara County judgment that was under appeal. The company had not accrued amounts for this litigation and stated that potential losses could not reasonably be estimated.
The company reported effective disclosure controls and procedures, no unresolved SEC staff comments, no material changes in internal control over financial reporting and no changes or disagreements with its accountants.
Most important facts for investors to verify
- Review the incorporated 2016 Annual Report for segment sales, segment profit, detailed operating margins, cash flows, cash balances and liquidity facilities.
- Verify the closing status, final financing structure, divestitures, purchase accounting and integration costs associated with the Valspar acquisition.
- Assess total debt, interest costs, covenant requirements and refinancing exposure following the planned acquisition.
- Review the status and potential financial impact of lead-paint litigation, including the Santa Clara County judgment and related appeals.
- Evaluate environmental accruals and other contingent liabilities, including exposures that are not currently accrued because they are not considered probable or estimable.
- Monitor raw-material costs, especially titanium dioxide and petrochemical feedstocks, along with the company’s ability to offset inflation through pricing and productivity.
- Confirm the company’s 2017 outlook, seasonal working-capital needs and expected capital-allocation priorities, including dividends and share repurchases.