Sherwin-Williams Company: Q2 2015 Form 10-Q Summary
Business context and reporting period
The 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 and six months ended June 30, 2015, compared with the corresponding 2014 periods. Reportable segments are Paint Stores, Consumer, Global Finishes and Latin America Coatings.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | 6M 2015 | 6M 2014 |
|---|---|---|---|---|
| Net sales | $3.132 billion | $3.043 billion | $5.582 billion | $5.410 billion |
| Gross profit | $1.530 billion | $1.410 billion | $2.662 billion | $2.476 billion |
| Gross margin | 48.8% | 46.3% | 47.7% | 45.8% |
| Net income | $349.9 million | $291.4 million | $481.3 million | $406.9 million |
| Diluted EPS | $3.70 | $2.94 | $5.08 | $4.06 |
| Net operating cash flow | Not separately provided | Not separately provided | $349.0 million | $331.6 million |
| EBITDA | $569.6 million | $495.3 million | $824.6 million | $726.7 million |
Q2 net income margin was approximately 11.2%, versus 9.6% in the prior-year quarter. Six-month net income margin was approximately 8.6%, versus 7.5% in the prior-year period. SG&A was 31.9% of sales in Q2 and 34.5% for the first six months, compared with 31.8% and 34.3%, respectively.
At June 30, 2015, cash and cash equivalents were $75.1 million. Short-term borrowings were $1.159 billion, long-term debt was $1.123 billion, and total debt was approximately $2.285 billion. The current ratio was 0.90, and remaining borrowing capacity was $1.128 billion. The company was in compliance with its 3.25-to-1.00 leverage covenant.
Material changes versus the prior comparable period
- Sales increased 2.9% in Q2 and 3.2% for six months, primarily from higher paint volume in the Paint Stores and Consumer Groups.
- Paint Stores sales increased 5.4% in Q2 and 6.3% year to date; Consumer sales increased 13.1% and 11.0%, respectively.
- Global Finishes sales declined 7.1% in Q2 and 6.4% year to date, while Latin America Coatings declined 17.2% and 13.0%, primarily because of unfavorable currency translation.
- Gross margin expanded 250 basis points in Q2 and 190 basis points year to date, driven by higher paint volume and improved operating efficiency.
- Income before taxes increased 18.3% in Q2 and 17.8% year to date. Paint Stores and Consumer segment profits increased, while Latin America Coatings profit declined.
- Interest expense declined $3.5 million in Q2 and $7.5 million year to date, primarily because of lower short-term borrowing rates.
- Cash from operations increased $17.4 million year to date. Financing cash usage decreased to $224.2 million, despite $679.4 million of treasury-stock purchases and $125.3 million of dividends.
- Total debt increased approximately $595.9 million from June 30, 2014, and shareholders’ equity declined to $757.3 million, primarily because of share repurchases, dividends and accumulated other comprehensive losses.
Guidance, outlook, commentary and unusual items
The filing does not provide specific quantitative earnings or sales guidance. Management characterized liquidity and cash flow as strong and stated that available cash and borrowing capacity were sufficient for current operating needs. Management attributed the operating improvement primarily to core-business results, especially Paint Stores and Consumer.
- Currency translation reduced consolidated sales by approximately 3.0% in both the quarter and first six months.
- SG&A reflected net new-store openings and costs associated with launching a new paint program at a national retailer.
- Other general expense included $10.5 million of environmental provisions in Q2 and $11.6 million year to date.
- Nineteen Paint Stores, two Global Finishes stores and one Latin America Coatings store were closed during the first six months; no provisions were incurred for those 2015 closures due to timing.
- Environmental accruals totaled approximately $137.9 million, with an unaccrued maximum estimated range $90.6 million above the minimum. Management cannot estimate the ultimate potential loss or resolution date.
- Lead-pigment and lead-based-paint litigation remains unaccrued because management does not believe a loss is probable and cannot estimate a loss range. The Santa Clara County case involved a $1.15 billion judgment against the company and other defendants and was stayed pending appeal.
- A Consorcio Comex-related arbitration claim asserted approximately $85 million of damages; the company considers the claims without merit and is defending them.
- On July 16, 2015, after quarter-end, the company entered into a new five-year $1.35 billion credit agreement, with options to extend maturity and increase the facility to $1.85 billion subject to lender approval.
Important facts for investors to verify
- Whether improved gross margins and segment profitability are sustainable after the favorable volume and efficiency effects.
- The impact of foreign exchange movements on Global Finishes, Latin America Coatings and consolidated results.
- Short-term borrowing levels, refinancing capacity, interest rates and compliance with leverage covenants.
- The pace and cost of share repurchases, and the resulting effect on leverage, equity and per-share results.
- Potential exposure from environmental liabilities, lead-paint litigation and the $85 million Comex arbitration claim.
- The final outcome of the Santa Clara appeal and any related insurance coverage litigation.
- Interim LIFO inventory estimates and other accounting estimates that will be finalized or updated at year-end.