01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
Sherwin-Williams (SHW) reported a strong 2013, with net sales up 6.8% to $10.19 billiona and net income up 19% to $752.6 million, or $7.26 diluted EPS (up 20.6%).
Growth was driven mainly by higher architectural paint volume in the Paint Stores Group, which added 388 net stores in 2013 including acquired Comex U.S./Canada stores, and by acquisitions that contributed about 1.8 points of sales growth. Gross margin improved to 45.3% from 44.1%, while SG&A held at 34.0% of sales. Operating cash flow rose to $1.08 billionb and free cash flow (operating cash less capex and dividends) reached $712 million.
Total debt was about $1.72 billionc, with a debt-to-capitalization ratio of 49.2%, and the company plans to pay about $1.6 billion-scale debt for the pending Comex Mexico deal (about $2.25 billion purchase price). The most important risk for investors is litigation. On January 27, 2014, a Santa Clara County, California court entered a final judgment holding Sherwin-Williams jointly and severally liable with two other defendants for $1.15 billion to abate lead-pigment public nuisance.
The company strongly disputes the ruling, has filed post-trial motions, and has recorded no accrual because it does not believe a loss is probable. Other exposures include lead-based paint personal injury suits, Life Shield product liability, and environmental remediation accruals of $102 milliond. The pending Mexico acquisition of Comex, which the Mexican competition authority has blocked, is also uncertain and must close by March 31, 2014 or the agreement can be terminated.
The company also increased its quarterly dividend to $0.55 per share, implying $2.20 for 2014, and it repurchased $769 million of stock in 2013 with 12.15 million shares still authorized. Overall, the filing shows a financially strong business with solid margins and cash generation, offset by a large, unresolved litigation overhang and near-term financing and regulatory uncertainty around the Comex transaction.
02—Key points
Key Highlights
- Net sales rose 6.8% to $10.19B in 2013, driven by Paint Stores Group volume growth (+10.9%) and acquisitions (+1.8 pts).
- Gross margin expanded to 45.3% from 44.1%; diluted EPS grew 20.6% to $7.26 (including a $0.21 Brazil tax charge).
- Free cash flow reached $712M (operating cash $1.08B less capex and dividends), up from $570M in 2012.
- Santa Clara County lead-pigment public nuisance judgment of $1.15B (Jan 27, 2014) is a major contingent risk; no amount has been accrued and the company is contesting it.
- Pending Comex Mexico acquisition (~$2.25B) was not authorized by Mexico's competition commission; the agreement can be terminated after March 31, 2014.
- Total debt rose to $1.72B (debt-to-capitalization 49.2%), with $503M of 3.125% notes due in 2014 pushing current liabilities up.
- Quarterly dividend raised to $0.55 (implied $2.20 for 2014); $769M of stock repurchased in 2013 with 12.15M shares remaining under authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Sherwin Williams Co kept $0.07.
- Revenue$10.19B100.0%
- Cost of revenue−$5.57B54.7%
- Gross profit$4.62B45.3%
- Operating costs−$3.17B31.2%
- Operating income$1.44B14.2%
- Interest, other & tax−$689.4M6.8%
- Net income$752.6M7.4%
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $10.19B$9.53B | +6.8% |
| Cost of Revenue | $5.57B$5.33B | +4.5% |
| Gross Profit | $4.62B$4.21B | +9.8% |
| R&D Expenses | $47.04M$44.65M | +5.4% |
| SG&A Expenses | $3.47B$3.26B | +6.4% |
| Operating Income | $1.44B$1.31B | +10.3% |
| Interest Expense | $62.71M$42.79M | +46.6% |
| Net Income | $752.56M$631.03M | +19.3% |
| EPS (Basic) | $2.47$2.05 | +20.5% |
| EPS (Diluted) | $2.42$2.01 | +20.6% |
| Shares Outstanding (Basic) | 302.69M305.14M | −0.8% |
| Shares Outstanding (Diluted) | 309.15M311.79M | −0.8% |
05—Questions
Frequently Asked Questions
How much did Sherwin-Williams earn in 2013 and how did it compare with 2012?
Net income was $752.6 million, up from $631.0 million in 2012, or $7.26 diluted EPS versus $6.02. Net sales were $10.19 billion, up 6.8%. The 2012 results included a $0.47 per share charge for the DOL ESOP settlement, while 2013 included a $0.21 per share charge for Brazil tax assessments.
What is the potential exposure from the lead pigment litigation?
The Santa Clara County judgment (entered January 27, 2014) holds the company jointly and severally liable with two other defendants for $1.15 billion to abate public nuisance. The company disagrees with the ruling, has filed motions for a new trial and to vacate, and plans to appeal. It has not accrued any amount because it does not consider a loss probable and cannot estimate a range. Other lead-paint suits, including personal injury claims, are also pending, and the company says it has not settled any of them.
Is the Comex acquisition still going ahead?
Not as originally structured. The U.S./Canada portion of Comex closed on September 16, 2013 for about $75 million net of cash. Mexico's Federal Competition Commission blocked the Mexico portion, and the company's appeal was denied on October 29, 2013. The company is considering its options, including refiling. The agreement, amended to a purchase price of about $2.25 billion, can be terminated by either party after March 31, 2014.
How is Sherwin-Williams funding its growth and shareholder returns?
Operating cash flow of $1.08 billion covered $167 million of capex, $205 million of dividends, $769 million of share repurchases, and $80 million of acquisitions. Working capital is largely financed with short-term borrowings and commercial paper, and the company had about $2.28 billion of remaining borrowing capacity at year-end. Long-term debt is $1.12 billion, and the $503 million of 3.125% notes due in 2014 are classified as current.
What are the key operating trends behind the 2013 results?
Paint Stores Group sales rose 10.9% to $6.0 billion on higher architectural paint volume, same-store sales growth of 7.8%, and net store additions (388 net new stores including acquisitions). Consumer Group sales rose 1.5%, Global Finishes rose 2.2%, and Latin America Coatings fell 0.4% due to currency translation. Latin America segment profit dropped 52% to $39 million, largely due to Brazil tax charges and currency effects.
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