Sherwin-Williams 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products primarily in North and South America, with additional operations in the Caribbean, Europe and Asia. Reportable segments are Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group.
The company operated 3,908 specialty paint stores, 300 Global Finishes branches and 282 Latin America Coatings stores at year-end. It employed 37,633 people.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $10.186 billion | $9.534 billion | +$652 million, approximately 6.8% |
| Net income | $753 million | $631 million | +$122 million, approximately 19.3% |
| Net margin | Approximately 7.4% | Approximately 6.6% | Improved approximately 0.8 percentage points |
| Total assets | $6.383 billion | $6.235 billion | +$148 million |
| Long-term debt | $1.122 billion | $1.632 billion | -$510 million |
| Net income per diluted share | $7.26 | $6.02 | +$1.24 |
| Cash dividends per share | $2.00 | $1.56 | +$0.44 |
| Earnings to fixed charges | 7.4x | 7.2x | Improved |
Income before income taxes was $1.086 billion, compared with $907 million in 2012. Net interest expense was $63 million, compared with $43 million. The filing text provided does not include the detailed 2013 operating cash flow, free cash flow, current liquidity balances or segment-level revenue and profit data; those amounts are incorporated by reference to the 2013 Annual Report.
Material changes versus the prior comparable period
- Sales and profitability increased materially, with net income growing faster than sales and net margin expanding.
- Total debt was approximately $1.7 billion at both December 31, 2013 and December 31, 2012, but increased substantially from approximately $990 million at December 31, 2011. The company issued $1 billion of senior notes in December 2012.
- The company completed the acquisition of the Comex business in the United States and Canada on September 16, 2013.
- The Paint Stores Group acquired 306 stores and opened 82 net new stores during 2013.
- The company repurchased 1.5 million shares for approximately $277.2 million during the fourth quarter of 2013, at an average price of $184.83 per share. The remaining repurchase authorization was 12.15 million shares at December 31, 2013.
- Foreign subsidiaries generated approximately 20.9% of consolidated net sales in 2013, compared with 21.5% in 2012.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear numerical 2014 earnings or revenue guidance figure. Management indicated that demand is seasonal, with most sales traditionally occurring in the second and third quarters, and that inventories are generally built during the first quarter.
- Raw-material prices increased in 2013, and continued global demand could create additional pricing pressure in 2014, particularly for titanium dioxide and petrochemicals.
- The company expected sufficient product capacity and sourcing availability for 2014, but remained exposed to commodity costs, energy prices, supplier concentration and supply disruptions.
- The proposed acquisition of the Comex business in Mexico remained pending after Mexican competition authorities denied authorization and an appeal. The amended transaction value was approximately $2.25 billion, and the agreement could be terminated after March 31, 2014. Completion was not assured and the obligation was not subject to a financing condition.
- The company faces elevated leverage and expected additional borrowing if the Mexico acquisition closes. Debt service, refinancing access, credit ratings and compliance with debt covenants are material liquidity considerations.
- On January 27, 2014, after the fiscal year-end, a California court entered judgment finding Sherwin-Williams and two other defendants jointly and severally liable for $1.15 billion to abate an alleged public nuisance involving lead-based paint. The company stated that it would seek a new trial and vacate the judgment and planned to appeal. No amount had been accrued for the lead-paint litigation because management did not believe a loss was probable and could not estimate a range of potential losses.
- Other significant risks include cyclical housing and construction markets, foreign currency fluctuations, competition, environmental remediation, taxes, regulatory compliance, cybersecurity, product liability and additional lead-pigment and lead-based-paint claims.
Most important facts for an investor to verify
- Review the incorporated 2013 Annual Report for detailed operating cash flow, free cash flow, segment results, margins, cash balances, current debt and credit-facility availability.
- Assess the potential financial impact, timing and financing of the pending Comex Mexico acquisition.
- Monitor the $1.15 billion California lead-paint judgment, appeals and any subsequent accrual or cash exposure.
- Evaluate total leverage, debt maturities, interest costs, covenant capacity and access to commercial paper and revolving credit facilities.
- Verify the sustainability of 2013 margin expansion amid raw-material inflation, foreign exchange movements and cyclical end-market demand.
- Confirm the effect of the Comex United States and Canada acquisition on reported sales, earnings, assets and goodwill.