01—Abstract
Summary
Summary of the 10-K filed February 24, 2016. Cited figures are marked; the original filing is the authoritative source.
Sherwin-Williams (SHW) closed 2015 with record results.
Net sales rose 1.9% to $11.339 billiona, gross margin expanded to 49.0% from 46.4%, and net income grew 21.7% to $1.054 billion. Diluted EPS rose 27.1% to $11.16. The gains were driven mainly by higher architectural paint volume in the Paint Stores Group (sales +5.2%, segment profit +19.3%) and the Consumer Group (sales +11.1%, boosted by the HGTV HOME by Sherwin-Williams program at a national retailer).
Global Finishes and Latin America Coatings were weaker, with Latin America segment profit down 54%b on currency translation losses. Foreign currency translation reduced consolidated sales by about 3.3%. Cash generation was strong.
Net operating cash reached $1.447 billionc, the third straight year above $1 billion, and free cash flow (as management defines it) was $963 million. The company returned capital through $1.035 billion of share repurchases and $250 million of dividends. The board also raised the quarterly dividend to $0.84 per share, implying $3.36 annualized for 2016.
Total debt rose to $1.963 billiond, and debt-to-capitalization reached 69.3%, up from 64.4%, largely because of $800 million of new senior notes issued in July 2015 and the aggressive buyback program. Shareholders' equity fell to $868 million. The main investor concern is the lead pigment and lead-based paint litigation.
The Santa Clara County, California public nuisance judgment of $1.15 billion remains under appeal, and the company has accrued nothing for this litigation, judging a loss not probable and not estimable. The company describes this as the key risk to its balance sheet. Management also notes ongoing exposure to environmental remediation and foreign currency swings, particularly in Latin America.
02—Key points
Key Highlights
- Net sales rose 1.9% to $11.339 billion; gross profit margin improved to 49.0% from 46.4%, driven by paint volume, operating efficiency, and lower raw material costs.
- Net income increased 21.7% to $1.054 billion; diluted EPS rose 27.1% to $11.16.
- Paint Stores Group was the main profit engine, with segment profit up 19.3% to $1.434 billion on 83 net new stores (4,086 total).
- Net operating cash reached $1.447 billion, and free cash flow was $963 million, up from $666 million in 2014.
- The company repurchased $1.035 billion of treasury stock and paid $249.6 million in dividends. The quarterly dividend was raised to $0.84 for 2016.
- Total debt rose to $1.963 billion (69.3% of total capitalization) after $800 million of senior notes were issued in July 2015.
- Lead pigment litigation remains the largest contingent risk: a $1.15 billion public nuisance judgment in Santa Clara County is under appeal, and no amount has been accrued.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Sherwin Williams Co kept $0.09.
- Revenue$11.34B100.0%
- Cost of revenue−$5.78B51.0%
- Gross profit$5.56B49.0%
- Operating costs−$3.60B31.7%
- Operating income$1.96B17.3%
- Interest, other & tax−$909.2M8.0%
- Net income$1.05B9.3%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 24, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $11.34B$11.13B | +1.9% |
| Cost of Revenue | $5.78B$5.97B | −3.1% |
| Gross Profit | $5.56B$5.16B | +7.7% |
| R&D Expenses | $57.67M$50.02M | +15.3% |
| SG&A Expenses | $3.89B$3.82B | +1.6% |
| Operating Income | $1.96B$1.70B | +15.8% |
| Interest Expense | $61.79M$64.20M | −3.8% |
| Net Income | $1.05B$865.89M | +21.7% |
| EPS (Basic) | $3.81$3.00 | +27.0% |
| EPS (Diluted) | $3.72$2.92 | +27.1% |
| Shares Outstanding (Basic) | 276.59M288.57M | −4.2% |
| Shares Outstanding (Diluted) | 283.63M296.22M | −4.3% |
05—Questions
Frequently Asked Questions
How did Sherwin-Williams perform financially in 2015?
The company grew net sales 1.9% to $11.339 billion and net income 21.7% to $1.054 billion. Diluted EPS was $11.16, up 27.1%. Margin expansion was the main driver, with gross margin reaching 49.0%. Growth was concentrated in the domestic paint businesses, while the Global Finishes and Latin America segments were hurt by a strong U.S. dollar.
What is the biggest legal risk facing the company?
The lead pigment and lead-based paint litigation. The Santa Clara County, California court entered a judgment of $1.15 billion (jointly and severally with two other defendants) for public nuisance abatement. The company is appealing and believes the judgment conflicts with established law. It has not accrued any amount for this or other lead pigment litigation, because it does not consider a loss probable and cannot estimate one. An adverse outcome could materially affect results, liquidity, and financial condition.
Is the company's balance sheet under more pressure?
Leverage increased. Total debt rose to $1.963 billion and debt-to-capitalization rose to 69.3% from 64.4%. Shareholders' equity fell to $868 million from $996 million, mainly due to $1.035 billion of share buybacks and currency-driven losses in other comprehensive income. Management says liquidity is sufficient, with $2.078 billion of remaining borrowing capacity, and the company was in compliance with its leverage covenant (maximum 3.50x).
What drove sales and profit growth by segment?
The Paint Stores Group, the largest segment at $7.2 billion in sales, grew 5.2% on higher architectural paint volume across end markets. The Consumer Group grew 11.1%, helped by a new HGTV HOME by Sherwin-Williams agreement with a large U.S. retailer. The Global Finishes Group fell 7.9% and Latin America Coatings fell 18.2%, both mainly because of unfavorable currency translation. Latin America segment profit dropped 54.3% to $18.5 million.
What is the company's capital return policy?
The company is returning substantial cash. It repurchased 3.58 million shares in 2015 for $1.035 billion and had 11.65 million shares remaining under its authorization at year-end. The dividend payout target is 30% of prior-year diluted EPS. The 2015 dividend was $2.68 per share, and the board raised the quarterly dividend to $0.84 for 2016, implying $3.36 annually.
06—Continue