10-QPeriod: Q3 FY2019

SHERWIN WILLIAMS CO Quarterly Report for Q3 Ended Sep 30, 2019

Filed October 22, 2019For Securities:SHW

Summary

Sherwin-Williams Company reported solid financial results for the nine months ended September 30, 2019, with consolidated net sales increasing by 2.3% to $13.79 billion. Diluted net income per share saw a significant increase to $13.82 from $10.59 in the prior year period, largely driven by improved segment profitability and a favorable resolution of the California litigation. The company's Americas Group and Consumer Brands Group demonstrated robust growth in segment profit, up 8.2% and 37.9% respectively, while the Performance Coatings Group also saw a 13.7% increase. This growth was bolstered by higher sales volumes, increased selling prices, and improved supply chain efficiencies. The company also highlighted strong net operating cash flow, which improved to $1.66 billion for the nine-month period. Management remains confident in the company's financial condition, liquidity, and cash flow.

Financial Highlights

54 data points
Beta

Revenue

$4.87B

45.7% Gross Margin

Net Income

$576.50M

11.8% Net Margin

EPS (Diluted)

$2.05

Total Assets

$20.86B

Cash & Equivalents

$189.60M

Free Cash Flow

$903.40M

Financial Statements
Beta
Revenue$4.87B
Cost of Revenue$2.64B
Gross Profit$2.23B
SG&A Expenses$1.35B
Operating Income$916.00M
Interest Expense$85.30M
Net Income$576.50M
EPS (Basic)$2.09
EPS (Diluted)$2.05
Shares Outstanding (Basic)275.47M
Shares Outstanding (Diluted)280.81M

Key Highlights

  • 1Consolidated net sales increased by 2.3% to $13.79 billion for the first nine months of 2019.
  • 2Diluted net income per share rose significantly to $13.82 for the nine months ended September 30, 2019, compared to $10.59 in the prior year period.
  • 3The Americas Group and Consumer Brands Group showed strong segment profit growth of 8.2% and 37.9%, respectively.
  • 4Net operating cash flow improved by $230.2 million to $1.66 billion for the first nine months of 2019.
  • 5The company resolved the California public nuisance litigation, leading to a reduction in accrual and a positive impact on earnings per share.
  • 6The adoption of ASC 842 (Leases) resulted in the recognition of significant operating lease right-of-use assets and liabilities on the balance sheet.
  • 7The company repurchased a substantial amount of its debt in the third quarter of 2019 and issued new senior notes.

Frequently Asked Questions

The substantial increase in diluted net income per share was driven by several factors, including improved segment profitability across The Americas Group and Consumer Brands Group, higher overall sales volumes, increased selling prices, and favorable supply chain efficiencies. Additionally, a significant positive impact came from the resolution of the California public nuisance litigation, which reduced previously accrued expenses and boosted earnings per share. The company also benefited from certain tax adjustments during the period.

The adoption of ASC 842, "Leases," effective January 1, 2019, required the company to recognize operating leases on the balance sheet. This resulted in the recognition of approximately $1.7 billion in operating lease right-of-use assets and $1.7 billion in operating lease liabilities (current and non-current combined) as of September 30, 2019. This accounting change did not materially impact the company's results of operations, cash flows, or debt covenants.

The company continues to address environmental-related liabilities, with accruals totaling $321.8 million at September 30, 2019, primarily related to four "Major Sites." The company has also resolved the significant California public nuisance litigation, agreeing to pay $305 million over time, with an initial payment made in September 2019. This resolution led to a reduction in the previously accrued liability and a positive impact on earnings. Other litigation, including lead-based paint claims, remains ongoing, with some recent unfavorable jury verdicts in Wisconsin that the company intends to appeal.

Foreign currency translation rate changes had a negative impact on net sales and earnings during the period. For the nine months ended September 30, 2019, currency translation decreased net sales by 1.5% and diluted net income per share by $0.21. The company also experienced foreign currency transaction-related losses, contributing to higher 'Other expense (income) - net'.