10-QPeriod: Q2 FY2015

SHERWIN WILLIAMS CO Quarterly Report for Q2 Ended Jun 30, 2015

Filed July 22, 2015For Securities:SHW

Summary

Sherwin-Williams reported solid financial results for the second quarter and first six months of 2015, demonstrating continued growth and operational improvements. Net sales increased across key segments, particularly in the Paint Stores Group and Consumer Group, driven by higher paint sales volume. Gross profit margins improved significantly, reflecting increased volume and better operational efficiency. Diluted earnings per share saw a notable increase, indicating enhanced profitability. The company also managed its expenses effectively, with SG&A costs remaining relatively stable as a percentage of sales, despite investments in new store openings and program launches. Financially, Sherwin-Williams maintained a strong cash flow from operations, which improved year-over-year. However, the company's liquidity position saw a significant shift due to increased short-term borrowings, largely to fund treasury stock purchases and working capital needs. While this led to a decrease in the current ratio and an increase in total debt as a percentage of capitalization, the company stated it has sufficient borrowing capacity and cash on hand to meet its operating needs. The company also continued its commitment to returning capital to shareholders through dividends and share repurchases.

Financial Statements
Beta

Key Highlights

  • 1Net sales increased by 2.9% to $3.13 billion for the second quarter and 3.2% to $5.58 billion for the first six months of 2015, driven by higher paint sales volume in the Paint Stores and Consumer Groups.
  • 2Gross profit margin improved to 48.8% in Q2 2015 (vs. 46.3% in Q2 2014) and 47.7% for the first six months (vs. 45.8% in H1 2014), indicating better operational efficiency and volume leverage.
  • 3Diluted earnings per share increased significantly to $3.70 in Q2 2015 (vs. $2.94 in Q2 2014) and $5.08 for the first six months (vs. $4.06 in H1 2014).
  • 4The company experienced a significant increase in short-term borrowings, up by $1.095 billion compared to Q2 2014, primarily to fund increased working capital needs and substantial treasury stock purchases.
  • 5Shareholders' equity decreased by $239.1 million in the first six months of 2015, largely due to treasury stock purchases ($679.4 million) and cash dividends paid ($125.3 million), partially offset by net income.
  • 6The company reported strong net operating cash flow, which improved by $17.4 million to $349.0 million for the first six months of 2015.
  • 7The company is facing ongoing litigation related to lead pigment and lead-based paint, with a significant public nuisance claim in California resulting in a $1.15 billion judgment against the company, which is currently under appeal.

Frequently Asked Questions

Net sales increased primarily due to higher paint sales volume in the Paint Stores Group and Consumer Group. Profitability was boosted by improved gross profit margins, resulting from increased sales volume and enhanced operational efficiencies, along with effective management of selling, general, and administrative expenses.

Sherwin-Williams maintains strong operating cash flow. However, liquidity has been impacted by a significant increase in short-term borrowings to fund substantial treasury stock repurchases and working capital needs. This led to a lower current ratio and a higher debt-to-capitalization ratio compared to the prior year, though the company indicates it has sufficient borrowing capacity.

The company faces ongoing risks including market fluctuations (interest rates, foreign currency, commodities), competitive pressures, raw material costs, and integration of acquisitions. A significant ongoing risk is the material litigation related to lead pigment and lead-based paint, particularly the public nuisance claim in California, which carries substantial financial implications if the appeal is unsuccessful.

Sherwin-Williams is returning value to shareholders through a combination of increased quarterly cash dividends (raised to $0.67 per share) and ongoing share repurchase programs. The company acquired a significant number of shares for treasury during the period.