Sherwin-Williams 2014 Q1 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 international operations. The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Reportable segments are Paint Stores, Consumer, Global Finishes and Latin America Coatings.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $2.367 billion | $2.167 billion | +9.2% |
| Gross profit | $1.066 billion | $963 million | +10.7% |
| Gross margin | 45.0% | 44.4% | +60 basis points |
| SG&A | $884.1 million | $778.7 million | +13.5% |
| SG&A as percentage of sales | 37.4% | 35.9% | +150 basis points |
| Income before taxes | $166.1 million | $168.4 million | -1.4% |
| Net income | $115.5 million | $116.2 million | -0.6% |
| Diluted EPS | $1.14 | $1.11 | +2.7% |
| EBITDA | $231.4 million | $230.3 million | +0.5% |
Net income margin was approximately 4.9% in Q1 2014 versus approximately 5.4% in Q1 2013. The effective tax rate declined to 30.5% from 31.0%. Management reported a $19.2 million pre-tax loss from acquisitions and a $0.12 per-share acquisition-related loss in diluted EPS.
Net operating cash flow was a use of $83.1 million, compared with a use of $91.1 million in the prior-year quarter. Capital expenditures were $29.4 million. Investing cash usage was $45.1 million, while financing cash usage was $254.3 million, including $256.4 million of treasury-stock purchases and $55.1 million of dividends.
Cash and cash equivalents were $366.5 million at March 31, 2014, down from $613.9 million a year earlier and $744.9 million at December 31, 2013. Total debt was approximately $1.712 billion, including $87.4 million of short-term borrowings, $502.2 million of current long-term debt and $1.122 billion of long-term debt. Remaining borrowing ability was $2.275 billion, including $1.050 billion of unused commercial-paper capacity. The current ratio was 1.21, compared with 1.73 at March 31, 2013. The company was in compliance with its 3.25-to-1 leverage covenant.
Material changes versus the prior comparable period
- Sales growth was led by the Paint Stores Group, where sales increased 16.4%; comparable-store sales increased 7.9%, and core paint volume increased in the high-single digits.
- Consumer Group sales increased 5.4%, while Global Finishes sales increased 2.2%. Latin America Coatings sales declined 10.0%, principally because of currency translation and lower volume.
- Acquisitions increased consolidated sales by 4.5%, while unfavorable currency translation reduced sales by 1.9%.
- Gross margin improved because of higher paint volume, improved operating efficiency and selling-price increases. SG&A rose faster than sales because of new-store timing, acquisitions and higher support costs.
- Segment profit increased 12.8% in Paint Stores and 37.0% in Global Finishes, but declined 5.3% in Consumer and 52.1% in Latin America Coatings. Administrative expenses and other items increased the corporate burden.
- Shares outstanding declined, reflecting repurchases. The company purchased 1.30 million shares for $256.4 million during the quarter and had authorization to purchase another 10.85 million shares at March 31, 2014.
- The quarterly common dividend increased from $0.50 to $0.55 per share.
Guidance, outlook, risks and unusual items
The filing does not provide specific quarterly or full-year earnings or sales guidance. Management characterized financial condition, liquidity and cash flow as strong and expected sufficient cash and borrowing capacity to fund current operating needs. Results for the first quarter are not necessarily indicative of full-year results.
- The company completed the acquisition of the U.S./Canada Comex business in September 2013. It terminated the agreement to acquire the Mexico Comex business effective April 3, 2014, after the closing deadline passed.
- Seven facilities or stores were closed during the quarter because of lower demand or redundancy. Qualified exit-cost liabilities rose to $8.2 million from $5.8 million at December 31, 2013.
- Environmental accruals totaled $98.7 million. The unaccrued maximum of estimated environmental exposure was $86.6 million above the minimum accrued amount. Management stated that the ultimate liability cannot presently be estimated and could materially affect results if substantially higher costs are recorded.
- In the Santa Clara County lead-paint litigation, the company was found jointly and severally liable with two other defendants for $1.15 billion. The company filed an appeal on March 28, 2014; the judgment was automatically stayed without a bond. No liability was accrued because management did not believe a loss was probable and could not estimate the potential loss range.
- Other risks include raw-material and energy costs, pricing pressure, foreign-exchange movements, acquisitions and integration, unusual weather, regulatory changes, environmental obligations, tax examinations and litigation.
- The company had no outstanding domestic commercial-paper borrowings at quarter-end; foreign short-term borrowings carried a weighted-average rate of 7.9%. Interest-rate, currency and commodity risks were managed with limited hedging activity, and management did not expect a material adverse effect from those exposures.
Most important facts for investors to verify
- Whether Paint Stores and Global Finishes growth and improved gross margins continue after acquisition effects and seasonal factors.
- The timing and funding of the $502.2 million current portion of long-term debt due in 2014, together with borrowing capacity and covenant compliance.
- The effect of continued share repurchases and the higher dividend on cash balances, leverage and liquidity.
- The outcome of the Santa Clara lead-paint appeal and any potential impact of related litigation or insurance-coverage proceedings.
- Changes in environmental remediation estimates, particularly the $86.6 million unaccrued range above the minimum accrual.
- Integration costs and operating performance of the U.S./Canada Comex acquisition, as well as the implications of terminating the Mexico transaction.
- Whether foreign-exchange pressure, Latin America weakness, raw-material costs and unusual weather affect subsequent quarters.