Sherwin-Williams Company — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed July 24, 2014. The company develops, manufactures, distributes and sells paints, coatings and related products primarily in North and South America, through Paint Stores, Consumer, Global Finishes and Latin America Coatings segments.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $3.043 billion | $2.714 billion | $5.410 billion | $4.881 billion |
| Income before taxes | $429.2 million | $380.9 million | $595.3 million | $549.3 million |
| Net income | $291.4 million | $257.3 million | $406.9 million | $373.5 million |
| Diluted EPS | $2.94 | $2.46 | $4.06 | $3.57 |
| Gross margin | 46.3% | 45.5% | 45.8% | 45.0% |
| SG&A as a percentage of sales | 31.8% | 30.8% | 34.3% | 33.1% |
| Net operating cash flow | Not separately provided | Not separately provided | $331.6 million | $302.1 million |
Management reported that sales growth was driven primarily by higher Paint Stores volume and acquisitions. Acquisitions contributed approximately 4.6% of quarterly sales growth and 4.5% of six-month sales growth, while unfavorable currency translation reduced sales by approximately 0.9% and 1.3%, respectively. EBITDA, as defined by management, was $495.3 million for the quarter and $726.7 million for the six months.
At June 30, 2014, cash and cash equivalents were $267.2 million, compared with $741.1 million at June 30, 2013 and $744.9 million at December 31, 2013. Total debt was approximately $1.689 billion, including $502.1 million of current maturities and $1.122 billion of long-term debt. The current ratio was 1.14, compared with 1.70 a year earlier and 1.25 at year-end 2013. Remaining borrowing capacity was $2.290 billion, including $1.050 billion of unused commercial paper capacity. The company was in compliance with its 3.25-to-1.00 leverage covenant.
Six-month investing cash usage was $84.0 million, including $66.9 million of capital expenditures. Financing cash usage was $725.7 million, principally reflecting $665.5 million of treasury stock purchases and $108.8 million of dividends. The company purchased 3.33 million shares during the first six months and had authorization remaining for 8.825 million shares at June 30, 2014. The quarterly dividend was increased from $0.50 to $0.55 per share.
Material changes versus the prior comparable period
- Quarterly sales increased 12.1%; six-month sales increased 10.8%.
- Quarterly net income increased 13.3%; six-month net income increased 9.0%.
- Quarterly diluted EPS increased 19.5% to $2.94; six-month diluted EPS increased 13.7% to $4.06. Acquisition-related losses reduced EPS by approximately $0.06 in the quarter and $0.18 for the six months.
- Gross margin improved by 80 basis points in the quarter and 80 basis points for the six months, primarily from volume, pricing and operating efficiency.
- SG&A increased faster than sales, primarily because of new store openings, acquisitions, integration and related support costs.
- Paint Stores sales increased 17.2% in the quarter and 16.9% for the six months; Global Finishes sales increased 6.1% and 4.2%, respectively. Latin America Coatings sales declined 8.9% and 9.5%, principally because of currency effects and lower volume.
- Cash declined substantially because of treasury stock purchases, seasonal working-capital requirements and the increase in the current portion of debt. The 3.125% Senior Notes became due in 2014, increasing current maturities by approximately $499.5 million year over year.
Outlook, unusual items and risks
The filing does not provide specific quantitative full-year revenue or earnings guidance. Management stated that financial condition, liquidity and cash flow remained strong and that available cash and borrowing capacity were sufficient for current operating needs. Management also cautioned that interim results are not necessarily indicative of full-year results.
- The company closed four Paint Stores facilities, three Latin America Coatings facilities and three Consumer facilities during the first six months. Global Finishes also exited its Venezuela business. Qualified exit-cost liabilities totaled $11.4 million at June 30, 2014.
- The company terminated the proposed acquisition of the Mexico business of Consorcio Comex effective April 3, 2014. The sellers initiated arbitration alleging breach and seeking damages; management considers the claims without merit.
- In the Santa Clara County lead-paint public-nuisance litigation, the company was held jointly and severally liable with two other defendants for $1.15 billion. The company appealed, the judgment was automatically stayed without a bond, and no liability was accrued because management did not believe a loss was probable or estimable.
- Environmental accruals totaled $98.1 million. The unaccrued maximum of the estimated range of possible environmental outcomes was $93.6 million above the recorded minimum; management stated that the ultimate exposure remains uncertain.
- Other risks include raw-material and energy prices, foreign currency, economic and industry conditions, acquisition integration, competition, environmental regulation, tax matters, litigation and unusual weather. The company also identified a pending FASB revenue-recognition standard effective after December 15, 2016 and was evaluating its impact.
- The company was a claimant in a titanium-dioxide antitrust settlement expected to total approximately $109.0 million before fees and expenses, but its potential recovery could not yet be reasonably determined.
Investor verification points
- Verify the maturity, refinancing or repayment plan for the $502.1 million current portion of long-term debt and the company’s liquidity after share repurchases.
- Monitor the Santa Clara lead-paint appeal, related insurance-coverage litigation and the potential effect of any adverse outcome despite the absence of an accrued liability.
- Assess environmental liabilities against the $98.1 million accrual and the disclosed $93.6 million unaccrued maximum exposure.
- Evaluate whether acquisition-related revenue growth and losses, store openings and integration costs are improving or diluting sustainable margins.
- Track Latin America performance, currency pressure, the Venezuela exit and raw-material pricing.
- Confirm future share repurchases, dividend approvals and their effect on leverage, cash balances and shareholders’ equity.