10-KPeriod: FY2013

SHERWIN WILLIAMS CO Annual Report, Year Ended Dec 31, 2013

Filed February 27, 2014For Securities:SHW

Summary

The Sherwin-Williams Company's 2013 10-K filing highlights a company with significant operations across four reportable segments: Paint Stores Group, Consumer Group, Global Finishes Group, and Latin America Coatings Group. The company demonstrates a strong retail presence with nearly 4,000 paint stores in North and South America, along with broader manufacturing and distribution in global markets. Key focus areas for investors include the company's strategic growth through acquisitions, such as the pending Comex business in Mexico and recent acquisitions in the US, Canada, and China. However, the filing also underscores substantial risks, most notably the unresolved legal proceedings concerning lead pigment and lead-based paint litigation, which resulted in a significant adverse judgment in California. Additionally, the company faces challenges related to raw material cost volatility, economic downturns impacting cyclical segments like construction, and the complexities of integrating international operations.

Financial Highlights

54 data points
Beta

Revenue

$10.19B

45.3% Gross Margin

Net Income

$752.56M

7.4% Net Margin

EPS (Diluted)

$2.42

Total Assets

$6.38B

Cash & Equivalents

$744.89M

Free Cash Flow

$1.08B

Financial Statements
Beta
Revenue$10.19B
Cost of Revenue$5.57B
Gross Profit$4.62B
R&D Expenses$47.04M
SG&A Expenses$3.47B
Operating Income$1.44B
Interest Expense$62.71M
Net Income$752.56M
EPS (Basic)$2.47
EPS (Diluted)$2.42
Shares Outstanding (Basic)302.69M
Shares Outstanding (Diluted)309.15M

Key Highlights

  • 1Sherwin-Williams operates through four distinct segments: Paint Stores Group (largest retail presence), Consumer Group, Global Finishes Group, and Latin America Coatings Group, serving diverse customer bases.
  • 2The company is actively pursuing growth through acquisitions, notably the pending acquisition of Comex in Mexico, which is subject to regulatory approval, and has already completed acquisitions of Comex's US and Canadian businesses.
  • 3Significant legal risks are present, particularly concerning lead pigment and lead-based paint litigation, with a recent $1.15 billion judgment in California against the company for public nuisance abatement, which is currently under appeal.
  • 4The company acknowledges the impact of raw material price volatility, especially for key ingredients like titanium dioxide and petrochemicals, and anticipates potential price increases in 2014.
  • 5Sherwin-Williams' business is subject to seasonality, with peak sales typically occurring in the second and third quarters, necessitating inventory build-up in the first quarter.
  • 6Expansion into international markets (Asia, Europe, Mexico, South America) is a key strategic focus, but it also introduces risks related to economic conditions, currency fluctuations, and regulatory environments.
  • 7The company maintains a share repurchase program and repurchased 1.5 million shares in the fourth quarter of 2013, indicating a commitment to returning capital to shareholders.

Frequently Asked Questions

Sherwin-Williams reports through four main segments: Paint Stores Group (its largest retail network), Consumer Group (manufacturing and distribution to third parties and the Paint Stores Group), Global Finishes Group (protective and marine, automotive, OEM finishes globally), and Latin America Coatings Group (architectural and industrial coatings in Latin America). While specific financial breakdowns for each segment aren't detailed in this section, the Paint Stores Group's extensive store count suggests a significant retail footprint.

The most significant risks highlighted include the substantial legal liabilities associated with lead pigment and lead-based paint litigation, particularly the recent $1.15 billion judgment in California. Other key risks involve the volatility of raw material costs, potential impacts from economic downturns, challenges in integrating acquisitions (especially the Comex Mexico deal), foreign currency fluctuations, and compliance with evolving domestic and international regulations.

Sherwin-Williams has acquired Comex's US and Canadian businesses but is awaiting regulatory approval from Mexico's Federal Competition Commission for the acquisition of Comex's Mexican operations. The deal has faced regulatory hurdles, with initial authorization denied. The outcome is uncertain and could negatively impact the company's stock price and future financial results if not completed. The revised purchase price is approximately $2.25 billion.

The company's sales are traditionally seasonal, with the majority occurring in the second and third quarters. To prepare for this increased demand, Sherwin-Williams typically builds its inventory during the first quarter. Working capital needs, such as for inventories and accounts receivable, are generally financed through short-term borrowings, including lines of credit and commercial paper.