10-QPeriod: Q1 FY2016

SHERWIN WILLIAMS CO Quarterly Report for Q1 Ended Mar 31, 2016

Filed April 27, 2016For Securities:SHW

Summary

Sherwin-Williams Company (SHW) reported strong performance for the first quarter of 2016, with net sales increasing by 5.1% to $2.574 billion compared to the prior year's first quarter. This growth was primarily driven by higher paint sales volume in the Paint Stores and Consumer Groups. The company also saw an improvement in gross profit margin to 49.0% from 46.2%, attributed to increased volume and operational efficiencies. A significant development during the quarter was the announcement of an agreement to acquire The Valspar Corporation for approximately $9.5 billion. This strategic move is expected to expand Sherwin-Williams' global reach and product offerings. Despite incurring $31.0 million in acquisition-related expenses during the quarter, diluted earnings per share rose to $1.57 from $1.38 in the prior year, demonstrating the company's robust operational performance. Financially, the company maintained a strong liquidity position, with a current ratio of 1.28 at quarter-end. While net operating cash usage increased compared to the prior year, this was primarily due to investments in working capital and significant capital expenditures. Sherwin-Williams also announced an increase in its quarterly cash dividend, signaling confidence in its financial health and future prospects.

Financial Highlights

50 data points
Beta

Revenue

$2.57B

49.0% Gross Margin

Net Income

$164.88M

6.4% Net Margin

EPS (Diluted)

$0.58

Total Assets

$6.04B

Cash & Equivalents

$70.55M

Free Cash Flow

-$62.06M

Financial Statements
Beta
Revenue$2.57B
Cost of Revenue$1.31B
Gross Profit$1.26B
SG&A Expenses$1.00B
Operating Income$365.15M
Interest Expense$25.73M
Net Income$164.88M
EPS (Basic)$0.60
EPS (Diluted)$0.58
Shares Outstanding (Basic)274.43M
Shares Outstanding (Diluted)282.34M

Key Highlights

  • 1Net sales increased 5.1% to $2.574 billion, driven by higher paint sales volume in key segments.
  • 2Gross profit margin improved to 49.0% from 46.2%, reflecting increased volume and operational efficiencies.
  • 3Announced definitive agreement to acquire The Valspar Corporation for approximately $9.5 billion.
  • 4Diluted EPS grew to $1.57 per share from $1.38 in the prior year, despite acquisition-related expenses.
  • 5Strong liquidity maintained with a current ratio of 1.28, up from 0.82 in the prior year.
  • 6Company increased its quarterly cash dividend by 25.4% to $0.84 per share.
  • 7Paint Stores Group showed significant profit growth of 43.6%, indicating strong performance in its core retail channel.

Frequently Asked Questions

The announced acquisition of Valspar is a major strategic development. While the transaction is subject to customary closing conditions and regulatory approvals, it is expected to significantly expand Sherwin-Williams' global footprint and diversify its product portfolio. Management has incurred acquisition-related expenses during the quarter, and the full integration is anticipated to bring growth opportunities and cost synergies, although these are subject to various risks and integration challenges.

The Paint Stores Group was a strong performer, with net sales up 10.5% and income before taxes increasing by 43.6%. The Consumer Group also saw positive growth with net sales up 7.5%. However, the Global Finishes Group experienced a 3.3% decrease in net sales, and the Latin America Coatings Group saw a significant 24.7% decline, largely attributed to unfavorable currency translation rates and, in Latin America, volume declines.

Sherwin-Williams demonstrated a strong financial position. Cash and cash equivalents increased modestly, and the current ratio improved significantly to 1.28 from 0.82 in the prior year, primarily due to a decrease in short-term borrowings. The company also has substantial available borrowing capacity and maintained compliance with its financial covenants, indicating good liquidity to meet its operational needs and fund strategic initiatives like the Valspar acquisition.

The company is involved in ongoing litigation, most notably related to lead pigment and lead-based paint, which presents significant uncertainties regarding potential future liabilities. While no amounts have been accrued for this litigation, management acknowledges that a significant adverse ruling could materially impact future results. Additionally, environmental-related liabilities for past operations continue to be accrued, with a majority concentrated at three manufacturing sites.