01—Abstract
Summary
Summary of the 10-K filed February 25, 2015. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) closed 2014 with record results driven by its Paint Stores Group.
Net sales rose 9.3% to $11.13 billiona from $10.19 billion, helped by higher architectural paint volume and acquisitions (which added about 3.1 points of growth). Gross margin improved to 46.4% from 45.3%, and net income grew 15.0% to $865.9 million. Diluted EPS was $8.78, up 20.9%, though 2014 included roughly $0.22 per share of environmental charges, a $0.18 per share acquisition-related loss, and a $0.13 per share benefit from a $21.4 million titanium dioxide antitrust settlement.
Net operating cash flow was about $1.08 billionb, roughly flat year over year, and the company deployed it largely into share repurchases of $1.49 billion, capital expenditures of $200.5 million, and dividends of $215.3 million. The balance sheet shifted meaningfully toward leverage. Shareholders' equity fell to $996.5 million from $1.775 billion after buybacks, total debt rose to $1.805 billion, and the debt-to-capitalization ratio climbed to 64.4% from 49.2%.
Working capital turned negative at a deficit of $113.9 millionc, with a current ratio of 0.96. Management described this as manageable given sufficient short-term borrowing capacity and $1.638 billion of remaining borrowing ability, and the company was in compliance with its 3.25x leverage covenant. The most important investor-relevant risk in the filing is the lead pigment and lead-based paint litigation.
A California jury-based judgment in the Santa Clara County public nuisance case requires the company, jointly and severally with two co-defendants, to pay $1.15 billiond into an abatement fund. The company has appealed and has not accrued any amount for this or other lead litigation, stating that it cannot estimate a range of loss. Growth also depends on continued expansion of the store base and on foreign operations, which accounted for about 19.8% of 2014 net sales.
02—Key points
Key Highlights
- Net sales rose 9.3% to $11.13 billion, driven by Paint Stores Group volume growth of 14.2% and acquisitions contributing about 3.1 points
- Gross profit margin expanded to 46.4% from 45.3%, supported by higher paint volume, operating efficiency, and selling price increases
- Diluted EPS increased 20.9% to $8.78; results included a $21.4 million titanium dioxide settlement gain and environmental charges of about $0.22 per share
- Returned significant capital to shareholders: $1.49 billion in share repurchases and $215.3 million in dividends, with the quarterly dividend raised to $0.67 for 2015
- Balance sheet leverage increased sharply: total debt of $1.805 billion, debt-to-capitalization of 64.4% (vs. 49.2%), and a working capital deficit of $113.9 million
- Lead pigment litigation poses a major contingent risk, including the $1.15 billion Santa Clara County public nuisance judgment under appeal, with no amount accrued
- Store footprint expanded to 4,003 Paint Stores Group locations after a net addition of 95 stores in 2014, supporting the long-term growth strategy
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Sherwin Williams Co kept $0.08.
- Revenue$11.13B100.0%
- Cost of revenue−$5.97B53.6%
- Gross profit$5.16B46.4%
- Operating costs−$3.47B31.2%
- Operating income$1.70B15.2%
- Interest, other & tax−$829.1M7.4%
- Net income$865.9M7.8%
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 25, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $11.13B$10.19B | +9.3% |
| Cost of Revenue | $5.97B$5.57B | +7.1% |
| Gross Profit | $5.16B$4.62B | +11.9% |
| R&D Expenses | $50.02M$47.04M | +6.3% |
| SG&A Expenses | $3.82B$3.47B | +10.2% |
| Operating Income | $1.70B$1.44B | +17.5% |
| Interest Expense | $64.20M$62.71M | +2.4% |
| Net Income | $865.89M$752.56M | +15.1% |
| EPS (Basic) | $3.00$2.47 | +21.5% |
| EPS (Diluted) | $2.92$2.42 | +20.8% |
| Shares Outstanding (Basic) | 288.57M302.69M | −4.7% |
| Shares Outstanding (Diluted) | 296.22M309.15M | −4.2% |
05—Questions
Frequently Asked Questions
How did Sherwin-Williams perform financially in 2014?
Sherwin-Williams delivered strong 2014 results. Net sales increased 9.3% to $11.13 billion, gross margin improved to 46.4%, net income rose to $865.9 million, and diluted EPS increased 20.9% to $8.78. Growth came mainly from higher architectural paint volume in the Paint Stores Group and from acquisitions, and the company's EBITDA rose to $1.52 billion.
Why did the company's leverage and working capital change so much in 2014?
The company used most of its operating cash flow and a meaningful amount of its cash balance to repurchase $1.49 billion of stock, along with paying dividends and capital expenditures. Cash and equivalents fell from $745 million to $41 million. Short-term borrowings increased $583 million, and the current portion of long-term debt fell after the 3.125% Senior Notes were repaid. As a result, equity declined to $996.5 million, total debt-to-capitalization rose to 64.4%, and working capital turned negative. Management stated it has sufficient borrowing capacity and remained in compliance with its leverage covenant.
What is the biggest legal risk facing Sherwin-Williams?
The most significant risk is the lead pigment and lead-based paint litigation. In the Santa Clara County, California public nuisance case, the court entered a judgment in January 2014 holding the company jointly and severally liable with two other defendants for $1.15 billion to abate lead paint in local residences. The company has appealed and believes the judgment is unsupported, but an adverse outcome could be material. The company has not accrued any amount for this litigation and says it cannot reasonably estimate a range of loss, and similar claims may be filed in the future.
What is driving growth at the Paint Stores Group?
The Paint Stores Group was the main growth engine, with net sales up 14.2% to $6.85 billion and segment profit up 21.3% to $1.20 billion. Growth came from higher architectural paint volume across all end markets, acquisitions (which added 4.5 points), and a net increase of 95 stores in 2014. Stores open more than twelve months grew sales by 8.8%. The company aims to expand its store base by about 3% annually.
What does the company plan to do with its capital and dividends going forward?
In February 2015 the board raised the quarterly dividend to $0.67 per share, which would total $2.68 for 2015 if maintained, or about 30.5% of 2014 diluted EPS, consistent with a 30% payout target. The company has authorization to repurchase about 5.23 million more shares. Management expects 2015 capital expenditures to exceed 2014's $200.5 million, focused on productivity, store openings, and information systems, and does not anticipate needing specific long-term external financing for these projects.
06—Continue