Sherwin-Williams 2014 Q3 Form 10-Q Summary
Business context and reporting period
The Sherwin-Williams Company develops, manufactures, distributes and sells paint, coatings and related products primarily in North and South America, with additional international operations. The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Reportable segments are Paint Stores, Consumer, Global Finishes and Latin America Coatings, plus Administrative activities. Management stated that financial condition, liquidity and cash flow remained strong, supported by improved operating results in the Paint Stores, Consumer and Global Finishes Groups.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $3.151 billion | $2.847 billion | $8.560 billion | $7.728 billion |
| Gross profit | $1.471 billion | $1.296 billion | $3.947 billion | $3.492 billion |
| Gross margin | 46.7% | 45.5% | 46.1% | 45.2% |
| Income before taxes | $474.0 million | $387.5 million | $1.069 billion | $936.7 million |
| Net income | $326.2 million | $263.0 million | $733.1 million | $636.4 million |
| Diluted EPS | $3.35 | $2.55 | $7.39 | $6.11 |
| EBITDA | $539.8 million | $449.6 million | $1.267 billion | $1.122 billion |
- Q3 net sales increased 10.6%; nine-month sales increased 10.8%.
- Q3 net income increased 24.1%; nine-month net income increased 15.2%.
- Approximate net margins were 10.4% in Q3 and 8.6% for the first nine months, compared with 9.2% and 8.2%, respectively, in the prior-year periods.
- SG&A was 31.2% of sales in Q3, unchanged year over year, and 33.1% for the first nine months, compared with 32.4% in 2013.
- Effective tax rates declined to 31.2% in Q3 and 31.4% for the nine months, from 32.1% in both prior-year periods.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $881.3 million, up from $777.9 million in 2013.
- Investing cash usage was $165.5 million, including $135.9 million of capital expenditures and $92.8 million for acquisitions; prior-year investing usage was $253.9 million.
- Financing cash usage increased to $1.186 billion, primarily because treasury-stock purchases rose to $1.094 billion from $492.0 million.
- Cash and cash equivalents declined to $261.3 million at September 30, 2014, from $1.036 billion a year earlier and $744.9 million at December 31, 2013.
- Total debt was approximately $1.681 billion, down from $1.930 billion a year earlier. Current debt included $502.3 million of long-term debt due within one year.
- The current ratio declined to 1.07 from 1.57 at September 30, 2013. Management reported $2.276 billion of remaining borrowing ability, including $1.050 billion of unused commercial-paper capacity.
- The company was in compliance with its 3.25-to-1.00 consolidated leverage covenant at September 30, 2014.
Material changes versus the prior comparable period
- Paint Stores sales increased 15.0% in Q3 and 16.1% year to date, driven by higher architectural paint volume and acquisitions. Comparable-store sales rose 9.6% in Q3 and 9.2% year to date.
- Consumer sales increased 5.0% in Q3 and 7.0% year to date; Global Finishes sales increased 5.7% and 4.7%, respectively.
- Latin America Coatings sales declined 4.0% in Q3 and 7.6% year to date, primarily because of currency effects and lower volume.
- Gross-margin expansion reflected higher volume, pricing and operating efficiency, partly offset by acquisition mix and unfavorable currency translation.
- Q3 and nine-month comparisons benefited from the absence of 2013 Brazilian import-duty assessment charges of $16.9 million and $28.7 million, respectively, recorded in cost of goods sold, plus $2.9 million recorded in SG&A in Q3 2013.
- Administrative expenses increased, including acquisition integration, information systems and incentive compensation costs.
- The company purchased 5.33 million shares for $1.094 billion during the first nine months and had authorization remaining for 6.825 million shares at September 30, 2014. The quarterly dividend increased from $0.50 to $0.55 per share.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a specific full-year sales or earnings guidance figure.
- Management cited continued growth from core paint volume, acquisitions, pricing and productivity, while identifying currency movements, raw-material costs, economic conditions and acquisition integration as risks.
- Eight Paint Stores facilities, five Latin America facilities and four Consumer facilities were closed during the first nine months. The Global Finishes Group also exited Venezuela; remaining qualified exit-cost liabilities were $7.3 million at September 30.
- Environmental accruals totaled $108.2 million. The unaccrued maximum of estimated environmental outcomes was $87.2 million above the recorded minimum, although management does not expect these matters to materially impair financial condition, liquidity or cash flow because resolution is expected over an extended period.
- In the Santa Clara County lead-paint public-nuisance case, the company and two other defendants were held jointly and severally liable for $1.15 billion. The judgment was stayed automatically pending appeal; the company recorded no accrual because management did not consider a loss probable and could not estimate a loss range.
- The company is also defending claims related to termination of the Mexico Comex acquisition agreement. Potential damages are not quantified in the filing.
- A titanium-dioxide antitrust settlement distribution of approximately $21.0 million was received in October 2014 and is expected to be recorded as a gain in the fourth quarter.
- The company is exposed to foreign-currency, interest-rate and commodity-price risks. Management does not expect current exposures or hedging losses to have a material adverse effect.
- The company is evaluating the new revenue-recognition standard, effective for periods beginning after December 15, 2016; the filing does not quantify its expected impact.
Most important facts for investors to verify
- Whether strong Paint Stores volume and margin performance continued after the quarter, and whether acquisition-related growth translated into sustainable returns.
- The effect of reduced cash balances, the $502.3 million current debt maturity and the company’s reliance on available borrowing capacity.
- Progress and potential financial exposure from the Santa Clara lead-paint judgment, related litigation and insurance-coverage proceedings.
- Changes in environmental accruals and the potential $87.2 million unaccrued exposure, particularly at the two principal sites.
- Fourth-quarter recognition and cash treatment of the approximately $21.0 million titanium-dioxide settlement.
- The impact of foreign-currency movements, raw-material costs, Venezuela exit costs and the integration of acquired businesses.