10-QPeriod: Q1 FY2014

SHERWIN WILLIAMS CO Quarterly Report for Q1 Ended Mar 31, 2014

Filed April 23, 2014For Securities:SHW

Summary

Sherwin-Williams Company (SHW) reported solid results for the first quarter ended March 31, 2014. Net sales increased by 9.2% to $2.37 billion, driven primarily by higher paint sales volume in the Paint Stores Group and contributions from recent acquisitions. Gross profit margin improved slightly to 45.0% due to increased volume and efficiency. Diluted earnings per share (EPS) rose to $1.14 from $1.11 in the prior year, despite an $0.12 per share negative impact from acquisitions. While the company demonstrated revenue growth and improved profitability margins, an increase in Selling, General & Administrative (SG&A) expenses as a percentage of sales, attributed to new store openings and integration costs from acquisitions, offset some of the gains. The company also continues to manage significant legal and environmental liabilities, notably the ongoing lead pigment and lead-based paint litigation, which, while not currently accrued, poses a material risk. Overall, the quarter showed operational strength in core segments, though investors should remain aware of integration costs and significant contingent liabilities.

Financial Highlights

50 data points
Beta

Revenue

$2.37B

45.0% Gross Margin

Net Income

$115.46M

4.9% Net Margin

EPS (Diluted)

$0.38

Total Assets

$6.19B

Cash & Equivalents

$366.46M

Free Cash Flow

-$83.12M

Financial Statements
Beta
Revenue$2.37B
Cost of Revenue$1.30B
Gross Profit$1.07B
SG&A Expenses$884.09M
Operating Income$253.82M
Interest Expense$16.39M
Net Income$115.46M
EPS (Basic)$0.39
EPS (Diluted)$0.38
Shares Outstanding (Basic)296.50M
Shares Outstanding (Diluted)302.58M

Key Highlights

  • 1Net sales increased 9.2% to $2.37 billion, driven by the Paint Stores Group and acquisitions.
  • 2Gross profit margin improved to 45.0% from 44.4% due to higher volume and pricing.
  • 3Diluted EPS increased to $1.14 from $1.11, despite a $0.12 per share impact from acquisitions.
  • 4SG&A expenses increased as a percentage of sales (37.4% vs. 35.9%) due to new store openings and acquisition integration.
  • 5Cash and cash equivalents decreased by $378.4 million, primarily due to treasury stock purchases and dividend payments.
  • 6The company is appealing a $1.15 billion judgment in a public nuisance litigation case related to lead paint, which it believes is unsupported by evidence.
  • 7The Board of Directors increased the quarterly cash dividend from $0.50 to $0.55 per common share.

Frequently Asked Questions

The acquisition of Comex's U.S./Canada business contributed to a 4.5% increase in consolidated net sales and a 3.9% increase in the Consumer Group's net sales. However, it also led to increased SG&A expenses and had a negative impact of $0.12 per share on diluted EPS for the quarter.

The company is involved in significant litigation related to lead pigment and lead-based paint. Notably, a California court entered a $1.15 billion judgment against Sherwin-Williams and others in a public nuisance case. The company strongly disagrees with this judgment, has filed for a new trial and to vacate the judgment, and has appealed the decision. The outcome remains uncertain, and the company has not accrued any amounts for this litigation, but acknowledges it could materially impact future results if a significant liability is determined.

Sherwin-Williams maintained strong financial condition and liquidity. However, cash and cash equivalents decreased by $378.4 million in the quarter, primarily due to significant treasury stock purchases ($256.4 million) and cash dividend payments ($55.1 million). The company has sufficient borrowing capacity and cash on hand to meet its operating needs.

The Paint Stores Group showed strong growth with a 16.4% increase in net sales and a 12.8% increase in segment profit. The Global Finishes Group also saw revenue growth and a significant increase in segment profit (37.0%). The Consumer Group experienced modest sales growth but a slight decrease in segment profit. The Latin America Coatings Group saw a 10.0% decline in net sales, primarily due to currency fluctuations and lower volumes.