Sherwin-Williams Company: Q1 2013 Form 10-Q Summary
Business context and reporting period
The Sherwin-Williams Company develops, manufactures, distributes and sells paints, coatings and related products primarily in North and South America, with additional operations in the Caribbean, Europe and Asia. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Reportable segments are Paint Stores, Consumer, Global Finishes and Latin America Coatings.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $2.167 billion | $2.136 billion | 1.4% increase |
| Gross profit | $962.9 million | $909.8 million | 5.8% increase |
| Gross margin | 44.4% | 42.6% | 180 basis-point increase |
| Income before taxes | $168.4 million | $142.3 million | 18.3% increase |
| Net income | $116.2 million | $100.2 million | 16.0% increase |
| Diluted EPS | $1.11 | $0.95 | 16.8% increase |
| EBITDA | $230.3 million | $197.1 million | 16.8% increase |
| Net operating cash flow | $(91.1) million | $(154.8) million | $63.7 million improvement |
| Capital expenditures | $31.2 million | $32.8 million | Decrease |
SG&A increased to $778.7 million from $757.7 million, and rose to 35.9% of sales from 35.5%, primarily because of new store openings, acquisitions and higher support costs. Interest expense increased to $15.3 million from $10.3 million because of higher long-term debt. The effective tax rate increased to 31.0% from 29.6%.
At March 31, 2013, cash and cash equivalents were $613.9 million, current assets were $3.087 billion and current liabilities were $1.783 billion. The current ratio was 1.73. Total debt was approximately $1.704 billion, including $68.3 million of short-term borrowings and $1.636 billion of long-term debt. Remaining borrowing capacity was reported at $2.273 billion.
Material changes versus the prior comparable period
- Paint Stores sales increased 4.0%, supported by higher paint volume; comparable-store sales increased 3.2% and paint volume increased by a high-single-digit percentage.
- Consumer Group sales decreased 3.7%, primarily because a portion of a paint program with a large retail customer was eliminated.
- Global Finishes sales increased 0.8%, while Latin America Coatings sales decreased 2.9%, with foreign currency translation a significant headwind.
- Paint Stores segment profit increased 15.1% and Global Finishes segment profit increased 18.5%; Consumer segment profit declined 2.4%.
- Gross margin improved because of higher paint volume, selling-price increases and improved operating efficiency.
- Cash usage from operations improved but remained negative, reflecting seasonal working-capital requirements and the $80.0 million payment to the ESOP related to the Department of Labor settlement.
- Long-term debt was substantially higher than a year earlier following the December 2012 issuance of $700.0 million of 1.35% Senior Notes due 2017 and $300.0 million of 4.00% Senior Notes due 2042.
- The company repurchased 500,000 shares for $81.4 million and paid common-stock dividends of $51.7 million. The quarterly dividend was increased from $0.39 to $0.50 per share.
Outlook, risks, contingencies and unusual items
Management described financial condition, liquidity and cash flow as strong and attributed performance primarily to improving domestic architectural paint demand. The filing does not provide specific full-year sales or earnings guidance. Management stated that available cash and borrowing capacity were sufficient for current operating needs.
- The planned acquisition of Comex, announced at an aggregate purchase price of approximately $2.34 billion including assumed debt, remained subject to conditions and regulatory approvals.
- Environmental-related accruals totaled $110.6 million at March 31, 2013. The maximum of the estimated range of possible outcomes exceeded the recorded accrual by $87.3 million; ultimate costs remain uncertain and could materially affect results in the period recognized.
- The company had not accrued amounts for lead pigment and lead-based paint litigation. Management could not estimate potential losses, and a significant adverse outcome could materially affect earnings, liquidity or financial condition. A Santa Clara County public-nuisance trial was scheduled for June 2013.
- Product warranty liabilities were $22.2 million at March 31, 2013.
- The company was exposed to interest-rate, foreign-currency and commodity-price risks. Foreign currency translation reduced sales in certain international businesses, particularly Latin America.
- The company was in compliance with its consolidated leverage covenant, which generally required leverage not to exceed 3.00 to 1.00 or 3.25 to 1.00 under the newer credit facility.
- Interim results are not necessarily indicative of full-year results. Inventory values under the LIFO method and other estimates remain subject to year-end adjustments.
Most important facts for investors to verify
- Whether the planned Comex acquisition received required approvals, its final purchase price and resulting leverage.
- Trends in Paint Stores comparable sales, paint volume, pricing and gross-margin sustainability.
- Consumer Group customer-program changes and the performance of acquired businesses.
- Operating cash flow after seasonal working-capital needs, dividends, share repurchases and the ESOP payment.
- Debt maturities, interest expense, covenant headroom and available borrowing capacity.
- Developments in the Santa Clara County lead-paint litigation and the company’s unaccrued environmental exposure.
- Foreign-currency effects, raw-material costs and any changes to management’s outlook or guidance.