10-QPeriod: Q1 FY2019

SHERWIN WILLIAMS CO Quarterly Report for Q1 Ended Mar 31, 2019

Filed April 25, 2019For Securities:SHW

Summary

The Sherwin-Williams Company's (SHW) first quarter 2019 report shows modest top-line growth with net sales increasing by 1.9% year-over-year to $4.04 billion. This growth was primarily driven by a new customer program, increased paint sales volume in North America, and strategic pricing adjustments, though partially offset by weaker international demand and unfavorable currency fluctuations. Profitability remained robust, with gross profit margin improving to 42.9% from 42.5% in the prior year, attributed to pricing actions and reduced purchase accounting impacts, despite rising raw material costs. While diluted earnings per share remained flat at $2.62, the quarter was impacted by significant non-recurring items including acquisition-related costs and a substantial pension plan settlement charge. The company adopted new lease accounting standards (ASC 842), which increased both assets and liabilities on the balance sheet. The balance sheet reflects a decrease in cash and an increase in short-term borrowings to manage working capital and fund share repurchases and dividends.

Financial Statements
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Key Highlights

  • 1Net sales increased by 1.9% to $4.04 billion, driven by North American volume and pricing strategies, partially offset by international weakness and currency headwinds.
  • 2Gross profit margin improved to 42.9% from 42.5%, benefiting from pricing increases and lower purchase accounting impacts, despite higher raw material costs.
  • 3Diluted Earnings Per Share (EPS) remained flat at $2.62, impacted by acquisition-related costs and a significant pension plan settlement charge in the current quarter.
  • 4The company adopted ASC 842 (Leases), resulting in the recognition of approximately $1.7 billion in operating lease right-of-use assets and related liabilities on the balance sheet.
  • 5Cash and cash equivalents decreased by $61.1 million year-over-year, with increased short-term borrowings utilized to manage working capital and fund share repurchases and dividends.
  • 6The Americas Group, the largest segment, saw net sales increase by 3.6%, while the Consumer Brands Group experienced a slight decrease of 0.3%.
  • 7The company reported compliance with its consolidated leverage covenant, maintaining a healthy financial position despite increased debt levels from short-term borrowings.

Frequently Asked Questions

Revenue growth of 1.9% to $4.04 billion was primarily driven by a new customer program launched in 2018, increased paint sales volume in North America, and selling price increases. However, this was partially offset by soft end-market demand outside the U.S. and unfavorable currency translation rate changes.

Gross profit margin improved to 42.9% due to selling price increases and reduced impacts of purchase accounting on cost of goods sold. However, higher raw material costs and unfavorable currency translation rates acted as headwinds. Diluted EPS was flat at $2.62, significantly impacted by a $0.71 per share charge for acquisition-related costs and a $0.27 per share charge for pension plan settlement expense in the current quarter.

The adoption of ASC 842 (Leases) starting January 1, 2019, resulted in the recognition of approximately $1.7 billion in operating lease right-of-use (ROU) assets and a corresponding amount in operating lease liabilities (current and non-current) on the balance sheet as of March 31, 2019. This also contributed to an increase in current liabilities.

The company continues to be involved in significant litigation, most notably the lead pigment and lead-based paint litigation. While the company believes its defenses are meritorious, these matters involve substantial uncertainties. An adverse outcome, particularly in the California public nuisance case where a $401.1 million abatement fund was established, could have a material adverse effect on its results of operations, liquidity, or financial condition, especially since the company has accrued $136.3 million for this specific litigation.