Sherwin-Williams Company — Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Sherwin-Williams develops, manufactures, distributes and sells paints, coatings and related products through the Paint Stores, Consumer, Global Finishes and Latin America Coatings groups, with an Administrative segment.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $2.603 billion | $2.485 billion | $7.313 billion | $6.695 billion |
| Gross profit | $1.150 billion | $1.038 billion | $3.211 billion | $2.858 billion |
| Gross margin | 44.2% | 41.8% | 43.9% | 42.7% |
| Net income | $235.0 million | $179.9 million | $563.0 million | $427.3 million |
| Diluted EPS | $2.24 | $1.71 | $5.37 | $3.98 |
| EBITDA | $398.3 million | $318.9 million | $977.5 million | $780.9 million |
| Net operating cash flow | Not separately provided | Not separately provided | $569.3 million | $446.0 million |
Third-quarter sales increased 4.8%, pretax income increased 31.8%, net income increased 30.6%, and diluted EPS increased 31.0%. For the first nine months, sales increased 9.2%, pretax income increased 32.9%, net income increased 31.7%, and diluted EPS increased 34.9%.
Management attributed sales growth primarily to higher paint volume and selling-price increases. Gross-margin expansion was partly offset by higher raw-material costs and unfavorable currency translation. Nine-month SG&A declined to 32.4% of sales from 33.0%; third-quarter SG&A was broadly stable at 30.7% versus 30.6%.
At September 30, 2012, cash and cash equivalents were $55.2 million. Current assets were $2.609 billion and current liabilities were $2.292 billion, producing a 1.14 current ratio. Total debt was approximately $969.4 million, or 35.3% of total capitalization, versus $1.169 billion and 41.7% a year earlier. Remaining borrowing ability was $1.682 billion.
Nine-month investing cash usage was $175.0 million, including $103.0 million of capital expenditures and $46.9 million for acquisitions. Financing cash usage was $369.6 million, including $433.1 million of treasury-stock purchases and $120.6 million of dividends. Cash increased $22.5 million during the nine months.
Material changes versus the prior comparable period
- Paint Stores Group sales rose 9.6% in the quarter and 14.2% year to date; its pretax contribution increased 26.9% and 32.8%, respectively.
- Consumer Group sales declined 1.0% in the quarter but rose 4.3% year to date; pretax income increased 39.1% and 34.6%.
- Global Finishes Group sales declined 1.0% in the quarter and increased 4.1% year to date; pretax income increased 32.1% and 46.4%.
- Latin America Coatings Group sales declined 4.0% in the quarter and 0.6% year to date, primarily reflecting adverse currency translation; pretax income increased 37.6% and 4.0%.
- Foreign-currency gains in 2012 materially improved other income compared with foreign-currency losses in 2011.
- The company acquired Geocel effective June 1, 2012, strengthening the Consumer Group’s sealants and adhesives business.
- The company closed seven Paint Stores locations, two Global Finishes branches, two Global Finishes facilities and five Latin America Coatings stores during the first nine months.
- The quarterly dividend was increased from $0.365 to $0.39 per common share in October 2012.
Guidance, outlook, risks and unusual items
The filing does not provide a specific full-year earnings or sales guidance range. Management stated that financial condition, liquidity and cash flow remained strong, supported by improving domestic architectural paint demand, and that available borrowing capacity was sufficient for current operating needs.
Key risks include economic conditions, raw-material and energy costs, pricing pressure, foreign-currency fluctuations, acquisition integration, environmental liabilities, litigation, regulatory changes, commodity prices and unusual weather. The company uses currency and commodity derivatives for hedging and does not use them for speculative trading.
Environmental accruals were $123.6 million at September 30, 2012. The unaccrued maximum of the estimated range of possible environmental outcomes was $97.7 million above the minimum accrued amount. Management believes the liabilities are unlikely to materially impair financial condition, liquidity or cash flow, but the ultimate costs and timing cannot be estimated reliably.
The company has not accrued amounts for lead-pigment and lead-based-paint litigation or the Department of Labor investigation into leveraged ESOP transactions. A significant adverse outcome could materially affect results, liquidity or financial condition. The company was in compliance with its leverage covenant at September 30, 2012.
The effective tax rate increased to 31.5% for the quarter and 30.8% for the first nine months, partly because of the timing of discrete tax items. Unrecognized tax benefits declined to $24.1 million from $29.7 million at December 31, 2011.
Important facts for investors to verify
- Whether volume and price-driven growth in the Paint Stores Group is sustainable as comparisons become more difficult.
- The effect of raw-material inflation, foreign-currency movements and potential pricing pressure on future margins.
- Integration progress and returns from Geocel and prior acquisitions.
- Future cash allocation among share repurchases, dividends, acquisitions and debt reduction; $17.25 million of share-repurchase authorization remained at September 30, 2012.
- Potential exposure from environmental matters, lead-paint litigation and the open DOL ESOP investigation, for which no amounts were accrued.
- Year-end LIFO inventory valuation, physical inventory results and other estimates that may change after the interim reporting period.