10-QPeriod: Q3 FY2012

SHERWIN WILLIAMS CO Quarterly Report for Q3 Ended Sep 30, 2012

Filed October 26, 2012For Securities:SHW

Summary

The Sherwin-Williams Company (SHW) reported a strong third quarter and first nine months of 2012, demonstrating significant year-over-year growth in net sales and net income. Net sales increased by 4.8% for the quarter and 9.2% for the nine-month period, driven by higher paint sales volumes and strategic pricing increases. The company also saw an improvement in gross profit margin, which expanded to 44.2% in the third quarter, reflecting effective cost management and favorable pricing. Profitability metrics showed a substantial increase, with diluted earnings per share rising to $2.24 for the quarter and $5.37 for the nine months. This robust performance was supported by disciplined selling, general, and administrative (SG&A) expense control, which remained stable as a percentage of sales. The company also maintained a strong financial position, with ample liquidity and a reduced debt-to-capitalization ratio, underscoring its financial health and operational efficiency.

Financial Statements
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Key Highlights

  • 1The Sherwin-Williams Company reported a 4.8% increase in consolidated net sales for the third quarter of 2012, reaching $2.603 billion, and a 9.2% increase for the first nine months, totaling $7.313 billion, driven by volume and price increases.
  • 2Gross profit margin improved significantly, rising to 44.2% in the third quarter (from 41.8% in Q3 2011) and 43.9% for the nine months (from 42.7% in the prior year), attributed to pricing and volume gains, partially offset by raw material costs.
  • 3Diluted net income per common share saw substantial growth, increasing by 31.0% to $2.24 for the third quarter and by 34.9% to $5.37 for the first nine months compared to the previous year.
  • 4The company generated $569.3 million in net operating cash for the first nine months of 2012, an increase of $123.3 million year-over-year, reflecting improved net income and working capital management.
  • 5Total debt decreased to $969.4 million at September 30, 2012, down from $1.169 billion a year prior, and represented a lower percentage of total capitalization (35.3% vs. 41.7%), indicating strengthening financial leverage.
  • 6Acquisitions, including Geocel Corporation and Leighs Paints, contributed to sales growth and strengthened market positions, particularly in the Consumer and Global Finishes segments.
  • 7The company continued its share repurchase program, buying back 500,000 shares in the third quarter, and maintained authorization for further repurchases, demonstrating a commitment to shareholder returns.

Frequently Asked Questions

The primary drivers for Sherwin-Williams' revenue growth in the third quarter of 2012 were higher paint sales volume and strategic selling price increases across its segments, particularly the Paint Stores Group.

Profitability metrics showed strong improvement. Gross profit margin increased due to favorable pricing and volume, leading to a significant rise in net income. Diluted earnings per share grew substantially, increasing by 31.0% for the quarter and 34.9% for the nine-month period compared to the prior year.

Sherwin-Williams continues to address environmental liabilities, with accruals totaling $123.6 million at September 30, 2012. The company is also involved in significant litigation, most notably concerning lead pigment and lead-based paints. While the company believes it has meritorious defenses, it acknowledges the inherent uncertainties and potential material impact on future financial results if adverse outcomes occur. No amounts have been accrued for this specific litigation due to the current inability to reasonably estimate potential losses.

Acquisitions, such as Geocel Corporation and Leighs Paints, contributed positively to the company's performance. These acquisitions strengthened the Consumer Group's position in sealants and adhesives and enhanced the Global Finishes Group's international platform, driving incremental sales growth.