01—Abstract
Summary
Summary of the 10-K filed February 28, 2013. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) closed 2012 with record results driven by a recovering U.S. architectural paint market.
Net sales rose 8.8% to $9.53 billiona, and diluted EPS increased 45.4% to $6.02 (after a $0.47 per-share charge for the Department of Labor ESOP settlement). Gross margin expanded to 44.1% from 42.7%, aided by higher paint volume and selling price increases that more than offset raw material inflation. The Paint Stores Group delivered most of the growth, with segment income before taxes up 33.5%, while the Administrative segment absorbed the $80 million DOL charge and higher incentive compensation.
Operating cash flow reached $887.9 millionb, and free cash flow (as management defines it) was $569.8 million. The balance sheet changed materially. Total debt rose to about $1.7 billion from $993 million after a $1 billion senior notes issuance in December 2012, and the debt-to-capitalization ratio climbed to 48.8% from 39.6%.
Cash ended the year at $862.6 millionc. Management is also pursuing the approximately $2.34 billion cash acquisition of Consorcio Comex, a Latin American coatings company with about $1.4 billion in 2011 sales, which is subject to Mexican regulatory approval and is not financing-conditional. Shareholder returns remained substantial: $557.8 million of buybacks and $160.9 million of dividends, with the quarterly dividend raised to $0.50 for 2013.
Key risks include lead pigment and lead-based paint litigation, for which the company has accrued nothing, including a Santa Clara County public nuisance trial scheduled for June 2013. Other exposures include environmental remediation liabilities, raw material cost volatility (notably titanium dioxide and petrochemicals), leverage after the Comex deal, and currency translation. Investors should weigh strong operating momentum against a more leveraged balance sheet, the pending Comex integration, and the unquantified lead-litigation exposure.
02—Key points
Key Highlights
- Net sales grew 8.8% to $9.53 billion, led by Paint Stores Group sales up 13.2% on higher paint volume and selling price increases.
- Diluted EPS of $6.02 rose 45.4%, including a $0.47 per-share after-tax charge for the DOL ESOP settlement; 2011 EPS included $0.70 of IRS settlement charges.
- Gross profit margin improved to 44.1% from 42.7%, while SG&A rose to 34.2% of sales from 33.8% due to new stores, service spending, and the DOL charge.
- Total debt increased to $1.70 billion from $0.99 billion after $1 billion of senior notes issued in December 2012; debt-to-capitalization rose to 48.8%.
- Pending acquisition of Consorcio Comex for approximately $2.34 billion in cash, subject to Mexican antitrust and foreign investment approvals and not conditioned on financing.
- Operating cash flow of $887.9 million and free cash flow of $569.8 million (company-defined) funded $557.8 million of share repurchases and $160.9 million of dividends.
- Lead pigment and lead-based paint litigation remains unaccrued and unquantified, with a Santa Clara County public nuisance trial set for June 2013.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Sherwin Williams Co kept $0.07.
- Revenue$9.53B100.0%
- Cost of revenue−$5.33B55.9%
- Gross profit$4.21B44.1%
- Operating costs−$2.90B30.4%
- Operating income$1.31B13.7%
- Interest, other & tax−$676.0M7.1%
- Net income$631.0M6.6%
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 28, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $9.53B$8.77B | +8.8% |
| Cost of Revenue | $5.33B$5.02B | +6.1% |
| Gross Profit | $4.21B$3.74B | +12.3% |
| R&D Expenses | $44.65M$41.72M | +7.0% |
| SG&A Expenses | $3.26B$2.96B | +10.1% |
| Operating Income | $1.31B$985.00M | +32.7% |
| Interest Expense | $42.79M$42.50M | +0.7% |
| Net Income | $631.03M$441.86M | +42.8% |
| EPS (Basic) | $2.05$1.41 | +45.7% |
| EPS (Diluted) | $2.01$1.38 | +45.4% |
| Shares Outstanding (Basic) | 305.14M310.41M | −1.7% |
| Shares Outstanding (Diluted) | 311.79M317.02M | −1.6% |
05—Questions
Frequently Asked Questions
Why did Sherwin-Williams earnings rise so sharply in 2012?
Earnings were driven mainly by an improving U.S. architectural paint market, which lifted paint volume in the Paint Stores Group, and by selling price increases across all segments. Gross margin widened to 44.1%. Comparisons were also flattered by 2011, which carried a $75 million IRS settlement charge. These gains were partly offset by a $0.47 per-share DOL ESOP settlement charge recorded in Q4 2012.
How will the Comex acquisition change the company's risk profile?
The roughly $2.34 billion cash purchase will substantially increase leverage, and management expects to take on significant additional debt if the deal closes. Foreign sales as a share of total sales are expected to rise. Risks include regulatory approval in Mexico, integration of a larger Latin American business, and possible financing costs above current expectations if credit facility banks fail to perform. The company has stated its obligation is not subject to a financing condition.
What is the exposure from lead pigment litigation?
The company is a defendant in numerous lead pigment and lead-based paint lawsuits, including public nuisance claims by governmental entities. Management believes the claims are without merit or meritorious defenses exist, but says it cannot estimate potential losses and has not accrued any amounts. The Santa Clara County, California case, seeking abatement costs, is scheduled for trial in June 2013. An adverse outcome there or elsewhere could be material.
Is the dividend and buyback program sustainable?
The company's dividend payout target is 30% of prior-year diluted EPS, and the 2012 dividend represented 37.7% of 2011 EPS. The board increased the quarterly dividend to $0.50 in February 2013, implying $2.00 annually for 2013, or about 33.2% of 2012 diluted EPS. Operating cash flow of $887.9 million covered dividends and capital expenditures, but the company also bought $557.8 million of stock in 2012, and debt rose substantially, so the buyback pace may depend on post-acquisition cash generation. Roughly 16.45 million shares remained authorized for repurchase.
06—Continue