Sherwin-Williams 2010 Q3 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 Europe and Asia. Reportable segments are Paint Stores Group, Consumer Group and Global Finishes Group. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $2.172 billion | $1.997 billion | $5.881 billion | $5.495 billion |
| Gross profit | $971.6 million | $929.0 million | $2.635 billion | $2.505 billion |
| Gross margin | 44.7% | 46.5% | 44.8% | 45.6% |
| SG&A as a percentage of sales | 32.4% | 32.8% | 34.1% | 34.9% |
| Income before taxes | $255.4 million | $258.6 million | $574.1 million | $541.7 million |
| Net income | $175.3 million | $175.2 million | $389.6 million | $370.5 million |
| Diluted EPS | $1.60 | $1.51 | $3.53 | $3.17 |
| EBITDA | $309.7 million | $310.2 million | $745.8 million | $701.1 million |
Q3 net income margin was approximately 8.1%, compared with approximately 8.8% in the prior-year quarter. Nine-month net income margin was approximately 6.6%, compared with approximately 6.7% in 2009. The filing presents EBITDA as a non-GAAP measure and cautions that it should not be viewed as an alternative to net income or operating cash flow.
- Q3 sales increased 8.8%; nine-month sales increased 7.0%.
- Paint Stores Group sales increased 5.4% in Q3 and 2.8% for nine months; comparable-store sales increased 5.1% and 2.5%, respectively.
- Consumer Group sales increased 3.0% in Q3 and 5.9% for nine months.
- Global Finishes Group sales increased 22.6% in Q3 and 19.4% for nine months, supported by acquisitions, favorable currency translation and higher volume.
- Q3 income before taxes declined 1.3%, while nine-month income before taxes increased 6.0%.
- Interest expense increased to $11.3 million in Q3 and $49.2 million for nine months, from $8.5 million and $31.0 million, respectively, in 2009.
Cash flow, liquidity and capitalization
- Net operating cash flow was $477.6 million for the first nine months of 2010, down from $615.6 million in 2009, primarily because of higher working-capital requirements.
- Capital expenditures were $76.1 million and business acquisitions used $264.3 million.
- The company paid $117.7 million in dividends and repurchased $253.6 million of treasury stock during the first nine months.
- Cash and cash equivalents were $64.9 million at September 30, 2010, versus $32.8 million at September 30, 2009 and $69.3 million at December 31, 2009.
- Total debt was approximately $1.066 billion, up $355.3 million from September 30, 2009. Debt represented 39.4% of total capitalization, compared with 29.5% a year earlier.
- Short-term borrowings were $354.6 million, including $57.9 million under the domestic commercial paper program and $296.7 million under foreign borrowing programs.
- Remaining borrowing ability was $1.268 billion. The current ratio was 1.09 at September 30, 2010, compared with 1.02 a year earlier and 1.27 at year-end 2009.
- The company was in compliance with its consolidated leverage covenant, which limits total indebtedness to 3.00 times trailing 12-month EBITDA.
Material changes versus the prior comparable period
- Sales growth was led by Global Finishes and acquisitions, including Sayerlack, acquired April 1, 2010 for $53.8 million, and Becker Acroma, acquired September 1, 2010 for $230.4 million.
- Gross margins declined because rising raw-material costs exceeded the benefit of selected price increases, cost controls and prior site-rationalization savings.
- SG&A improved as a percentage of sales despite higher absolute spending associated with acquisitions, volume and currency translation.
- Average diluted shares declined materially due to share repurchases, supporting EPS growth despite largely flat Q3 net income.
- Total assets increased to $5.181 billion from $4.323 billion at December 31, 2009, while shareholders’ equity increased to $1.643 billion from $1.491 billion.
- The company repurchased 3.48 million shares during the first nine months and had authorization to repurchase 7.275 million additional shares at September 30, 2010.
- The quarterly dividend was increased to $0.36 per common share from $0.355, subject to approval for the final quarter of 2010.
Outlook, commentary, risks and unusual items
Management described domestic conditions as sluggish but reported improving domestic architectural and global-market conditions. Management expected continued pressure from raw-material costs and supply shortages and had implemented selected price increases. The filing does not provide a specific quantitative earnings or sales forecast.
- A one-time $11.4 million tax charge related to the 2010 health-care legislation reduced nine-month basic and diluted EPS by $0.11 and $0.10, respectively.
- Costs associated with the repurchase of 7.45% debentures and the health-care legislation reduced nine-month EPS by an aggregate $0.18, according to management.
- Environmental accruals totaled $154.5 million at September 30, 2010. The unaccrued maximum of estimated environmental outcomes exceeded the recorded minimum accrual by $100.7 million; ultimate costs and timing remain uncertain.
- The company has not accrued amounts for lead-pigment and lead-based-paint litigation because potential liabilities cannot reasonably be estimated. A significant adverse outcome could materially affect earnings, liquidity or financial condition.
- Other risks include raw-material and commodity prices, foreign exchange, economic conditions, acquisition integration, regulatory changes, product liability, litigation and unusual weather.
- The company had $128.1 million of non-traded affordable-housing and historic-renovation investments and $74.7 million of estimated future capital contributions.
- Eleven Paint Stores Group stores and six Global Finishes Group branches were closed during the first nine months because of lower demand or redundancy; remaining qualified exit-cost liabilities were $21.2 million.
Important facts for investors to verify
- Whether price increases and procurement or productivity actions offset continued raw-material inflation without further gross-margin erosion.
- The contribution, integration progress and acquisition accounting for Becker Acroma and Sayerlack.
- Working-capital trends, seasonal borrowing needs and compliance with the 3.00-times leverage covenant.
- The sustainability of cash flow after acquisitions, capital expenditures, dividends and share repurchases.
- Potential environmental-cost increases, particularly the $100.7 million unaccrued exposure above recorded accruals.
- Developments in lead-pigment litigation, the Santa Clara County proceeding and related insurance coverage matters.
- Future tax effects, including unrecognized tax benefits and the impact of the 2010 health-care legislation.