Sherwin-Williams Company — FY2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012. Sherwin-Williams develops, manufactures, distributes and sells paints, coatings and related products primarily in North and South America, with additional operations in the Caribbean, Europe and Asia. Reportable segments are Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group, plus an Administrative segment.
- Employees: 34,154 at December 31, 2012.
- Paint Stores Group: 3,520 company-operated stores, including 70 net new stores added during 2012.
- Global Finishes Group: 302 company-operated branches; one net branch decrease during 2012.
- Latin America Coatings Group: 276 company-operated stores; 11 net new stores added during 2012.
- Foreign subsidiaries generated approximately 21.5% of consolidated net sales in 2012, compared with 22.6% in 2011.
Financial performance, cash flow, margins, debt and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $9.534 billion | $8.766 billion | Approximately 8.8% increase |
| Net income | $631 million | $442 million | Approximately 42.8% increase |
| Basic EPS | $6.15 | $4.22 | Increase |
| Diluted EPS | $6.02 | $4.14 | Increase |
| Total assets | $6.235 billion | $5.229 billion | Increase |
| Long-term debt | $1.632 billion | $639 million | Increase of approximately $993 million |
| Cash dividends per share | $1.56 | $1.46 | Increase |
| Earnings-to-fixed-charges ratio | 7.2x | 6.3x | Improvement |
Reported net sales and net income increased substantially from 2011. Based on the reported figures, net income margin was approximately 6.6% in 2012 versus approximately 5.0% in 2011. The filing text supplied does not provide clear consolidated gross-margin, operating-margin or operating-cash-flow values.
Interest expense, net, was $43 million in 2012 versus $42 million in 2011. Total debt was approximately $1.7 billion at December 31, 2012, compared with approximately $990 million at December 31, 2011. The increase primarily reflects $1 billion of senior notes issued in December 2012, due in 2017 and 2042. The Company stated that it had available credit facilities to fund current operating needs and used short-term borrowings, including commercial paper and lines of credit, for seasonal working capital.
The Company repurchased 800,000 shares during the fourth quarter of 2012 at an average price of $155.89 per share. Remaining authorization at December 31, 2012 was 16.45 million shares.
Material changes versus the prior comparable period
- Net sales increased approximately 8.8%, while net income increased approximately 42.8%.
- Long-term debt rose from $639 million to $1.632 billion, and total debt increased from approximately $990 million to approximately $1.7 billion.
- Total assets increased by approximately $1.006 billion.
- The Company acquired Geocel Holdings Corporation and Jiangsu Pulanna Coating Co., Ltd. during 2012.
- The Company entered into an agreement to acquire Consorcio Comex, S.A. de C.V. and Conaxe, S.A. de C.V. for approximately $2.34 billion in cash, including assumed debt. Completion remained subject to regulatory and other closing conditions.
- Raw-material prices increased during 2012, particularly for materials affected by constrained capacity and global demand. Titanium dioxide and petrochemicals were identified as significant cost exposures.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide a clear quantitative earnings or revenue guidance range for 2013.
- Management expected continued demand recovery to be uneven, with housing, construction and manufacturing markets remaining cyclical and below pre-recession highs in certain areas.
- The Company expected raw-material pricing pressure to continue in 2013, although it stated that sufficient suppliers existed and that significant sourcing problems were not anticipated.
- The Comex transaction was not subject to a financing condition. The Company expected to use existing and additional financing, including the December 2012 senior notes, to fund the acquisition.
- Completing and integrating Comex could increase leverage, expand international exposure and create execution, regulatory, customer-retention and synergy risks.
- Environmental investigation and remediation liabilities may exceed current accruals. The filing states that no amounts were accrued for lead-pigment and lead-based-paint litigation because a loss was not considered probable and could not reasonably be estimated.
- Life Shield Engineered Systems, LLC, which the Company owns, ceased operations in 2012 and may expose the Company to product-liability risks.
- Other key risks include competition, adverse weather, foreign-exchange volatility, customer credit risk, pension-asset performance, regulatory compliance, tax matters, commodity costs and access to capital markets.
Important facts for investors to verify
- Review the incorporated Annual Report pages 19–39 and the consolidated cash-flow statement for detailed operating cash flow, capital expenditures, free cash flow and liquidity data, which are not reproduced clearly in the filing text provided.
- Verify the final status, purchase accounting, financing and integration results of the planned Comex acquisition.
- Assess the effect of the substantial 2012 debt increase on interest expense, leverage, covenants, maturities and refinancing requirements.
- Review segment-level sales and profit trends, particularly Paint Stores, Global Finishes and Latin America Coatings.
- Evaluate exposure to titanium dioxide, petrochemical and energy costs and the Company’s ability to recover those costs through pricing.
- Review environmental accruals and the status and potential impact of lead-paint litigation and other contingent liabilities.
- Confirm the Company’s 2013 outlook and any subsequent developments because this Form 10-K does not provide a clear quantitative forecast.