Sherwin-Williams 2015 Form 10-K 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 operations in the Caribbean, Europe and Asia. The filing covers the fiscal year ended December 31, 2015; references to fourth quarter activity primarily relate to share repurchases.
- Reportable segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group, plus an Administrative segment.
- Employees at year-end: 40,706.
- Paint Stores Group: 4,086 company-operated stores, including 83 net new stores added during 2015.
- Global Finishes Group: 296 branches at year-end, a net decrease of four.
- Latin America Coatings Group: 291 stores at year-end, a net increase of 15.
- Sales are seasonal, with the second and third quarters typically generating the majority of sales and earnings.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $11.339 billion | $11.130 billion | +1.9% |
| Net income | $1.054 billion | $866 million | +21.7% |
| Net margin | Approximately 9.3% | Approximately 7.8% | +1.5 percentage points |
| Long-term debt | $1.920 billion | $1.123 billion | +$797 million |
| Total assets | $5.792 billion | $5.706 billion | +$86 million |
| Diluted earnings per share | $11.16 | $8.78 | +27.1% |
| Cash dividends per share | $2.68 | $2.20 | +21.8% |
| Ratio of earnings to fixed charges | 9.1x | 7.7x | Improved |
The filing text provided does not include clear values for operating cash flow, free cash flow, gross margin, operating margin, cash and cash equivalents, current debt, or unused borrowing capacity. Management states that seasonal working capital is generally funded through short-term borrowings, lines of credit and commercial paper, supported by revolving credit and other financing facilities.
Material changes versus the prior comparable period
- Sales increased modestly, while net income increased substantially, resulting in a higher calculated net margin and stronger earnings per share.
- Long-term debt increased materially to $1.920 billion from $1.123 billion. The company reported total debt of approximately $2.0 billion at December 31, 2015.
- The ratio of earnings to fixed charges improved to 9.1x from 7.7x despite higher debt.
- The company added 83 net Paint Stores Group locations and 15 net Latin America Coatings Group stores, while Global Finishes Group branches declined by four.
- Foreign subsidiaries represented approximately 15.8% of consolidated net sales in 2015, down from 19.8% in 2014 and 20.9% in 2013, partly increasing the relative importance of domestic operations.
- The board authorized an additional 10 million shares for repurchase in October 2015. During the fourth quarter, the company repurchased 1 million shares under the public program for an average $269.20 per share and had authorization for 11.65 million additional shares at year-end.
- Christopher M. Connor became Executive Chairman and John G. Morikis became President and Chief Executive Officer in January 2016.
Guidance, outlook, management commentary, risks and unusual items
- The company expected adequate raw-material and fuel supplies and sufficient productive capacity to meet needs through 2016; it did not provide specific numerical 2016 revenue or earnings guidance in the supplied filing text.
- Management identified raw-material and energy price volatility, competitive pricing pressure, adverse weather, cyclical construction and housing markets, and foreign currency movements as key operating risks.
- Foreign operations expose the company to economic, political, regulatory, repatriation, currency and compliance risks. The company used foreign currency options and forward contracts during 2015, with no material contracts outstanding at year-end.
- Environmental investigation and remediation obligations may exceed current accruals, and increasingly stringent health, safety and environmental requirements may increase costs.
- Lead pigment and lead-based paint litigation remains a significant contingency. The company stated that it had not accrued amounts for this litigation because it did not consider a loss probable and could not estimate potential losses.
- A Santa Clara County judgment held the company jointly and severally liable with two other defendants for $1.15 billion to fund public-nuisance abatement; the company appealed. The filing states that the ultimate outcome and potential financial impact cannot reasonably be estimated.
- Other risks include goodwill and intangible-asset impairment, pension-asset performance, acquisition integration, debt refinancing and covenant compliance, tax examinations, cybersecurity incidents and broader regulatory investigations.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2015, with no material changes to internal control over financial reporting identified during the period.
Most important facts for investors to verify
- Review the incorporated 2015 Annual Report MD&A and financial statements for operating cash flow, free cash flow, cash balances, liquidity availability, segment profit, margins and capital expenditures.
- Reconcile the approximately $2.0 billion total debt figure with current debt, long-term debt, maturities, interest rates, covenants and available revolving-credit capacity.
- Assess the potential effect of the $1.15 billion Santa Clara County judgment and other lead-paint litigation, despite the absence of an accrual.
- Determine the drivers of the significant increase in net income and diluted EPS relative to the modest sales increase.
- Evaluate exposure to raw-material prices, foreign exchange, cyclical end markets, weather and international operations.
- Confirm the status of the share-repurchase authorization, dividend policy and post-year-end capital allocation.