Aug 27 - Fitch Ratings has affirmed its ratings for The Sherwin-Williams
Company (NYSE: SHW), including the company's Issuer Default Rating (IDR)
at 'A'. The Rating Outlook is Stable. A complete list of rating actions follows
at the end of this release.
The rating and Outlook for SHW are based on the company's leading market
position in the architectural coatings industry, the company's unique
distribution platform, the breadth and depth of its product offerings, SHW's
focus on painting contractors and property maintenance managers, solid free cash
flow generation and strong management team. Risk factors include lead-based
paint litigation cases involving SHW, the cyclicality of the company's end
markets, volatile raw material costs and SHW's relatively aggressive growth
SHW has demonstrated that it is capable of managing working capital and lowering
expenses to generate robust cash flow, maintaining strong credit metrics and
building liquidity during periods of economic pressure. Leverage as measured by
the ratio of debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) as calculated by Fitch was 1.2 times (x) for the latest 12
months (LTM) ending June 30, 2012, consistent with its leverage target. Interest
coverage was 27.9x for the June 30, 2012 LTM period, compared with 23.8x during
2011. FFO interest coverage was 20.4x during the LTM period versus 17.9x for
2011. Fitch expects SHW to maintain these strong credit metrics through 2013.
Cash flow generation also remains solid with free cash flow (FCF) totaling
$518.8 million for the LTM period ending June 30, 2012. FCF totaled $428.6
million during 2011, $425 million during 2010, $605.3 million during 2009,
$593.9 million during 2008 and $546.3 million during 2007. Fitch currently
expects FCF for 2012 will be slightly above 2011 levels and anticipates FCF will
be moderately higher in 2013.
SHW maintains solid liquidity with cash of $46.6 million and approximately
$506.1 million of availability under its commercial paper program that is backed
by its $1.05 billion revolving credit agreement that matures in July 2016. In
addition, the company has two other credit agreements that provide $750 million
of borrowing availability and letters of credit capacity. SHW also has a CAD
(Canadian Dollar) 75 million revolving credit facility maturing in 2017. The
company should have continued access to these facilities as Fitch expects SHW to
have sufficient cushion under its financial covenant.
SHW has been active with share repurchases so far this year, acquiring 3.3
million shares of its stock for a total investment of $362.6 million. By
comparison, share repurchases totaled $367.4 million, $375.7 million and $530.4
million during 2011, 2010 and 2009, respectively. At the end of the second
quarter, SHW had 17.75 million shares remaining under its current share
The company completed one acquisition during the first half of 2012 for a total
investment of $44 million. By comparison, SHW spent $44.4 million in 2011,
$298.2 million in 2010, $15.4 million in 2009, $68.7 million in 2008, and $282.4
million in 2007. Fitch expects SHW to continue to pursue acquisitions that would
enhance its domestic controlled distribution platform, provide the company with
new technologies and grow its presence in international markets.
SHW has a long track record of adhering to a disciplined financial strategy, and
Fitch expects this to continue. Fitch believes that the company will remain
disciplined in its uses of cash, balancing share repurchases with selective
acquisition opportunities. Fitch also expects SHW to maintain its targeted debt
to EBITDA in the 1.0x range, although SHW may be slightly above this level
during certain periods when the company increases short-term borrowings to fund
working capital. Additionally, the company's leverage may also go above this
level if it makes a sizeable acquisition. However, Fitch expects SHW to return
to its target leverage within a reasonable period of time following an
SHW has a network of 3,450 company-operated paint stores and 568
company-operated branches as of Dec. 31, 2011. The company is unique in that
most of its competitors distribute their products through 'Big Box' retailers,
hardware stores and mass merchandisers. The networks of competitor paint
companies that distribute through company-owned stores are not as extensive as
that of SHW. Fitch views this as an advantage, as the company can directly
control marketing, merchandising, service, and price decisions at its stores.
Additionally, SHW also distributes through 'Big Box' Home Centers and mass
merchandisers, primarily reaching the do-it-yourself (DIY) customer segment. The
company estimates that about 70% of its sales are through its controlled
distribution platform, with the remaining 30% through independent retailers.
SHW seeks to expand its distribution platform by opening new stores and pursuing
acquisition opportunities. In a solidly expanding economy, management plans to
expand the store base at an average of 3% per year (100+ stores annually).
However, the pace of store expansion has been slower over the past four and a
half years as demand slowed and the company closed redundant stores from
previous acquisitions. Fitch believes that store growth will remain below the 3%
per year level over the next 18 months as demand remains lackluster.
Fitch's ratings on SHW take into account the cyclicality of the company's end
markets. Residential, commercial and industrial construction are each cyclical
and can be influenced by economic trends. With the slower growth in the U.S.
economy and lingering problems of key European economies, Fitch expects only
moderate growth in the company's end markets over the next year and a half.
SHW's margins have been negatively affected by increasing raw materials costs.
The company's gross margins for the first half of 2012 improved 60 basis points
to 43.8% compared with 43.2% during the same period last year. Nevertheless,
current gross margins are roughly 220 basis points below the peak margins of 46%
reported during 2009. The company and other paint manufacturers have implemented
several price increases to offset the inflation of input costs. Fitch believes
that coatings manufacturers are likely to realize most of the pricing increases
that have been implemented. However, Fitch believes that incremental price
increases may be difficult to achieve in 2012 as coatings raw material cost
inflation appear to have stabilized.
The company (and other companies) are or were defendants in legal proceedings
seeking recovery based on public nuisance liability theories, among other
theories, brought by the state of Rhode Island, the city of St. Louis, Missouri,
various cities and counties in the State of New Jersey, the state of Ohio and
various cities in the state of Ohio, the city of Milwaukee, Wisconsin and the
county of Santa Clara, California and other public entities in the state of
California. Except for the Santa Clara County, California case, all of these
legal proceedings have been concluded in favor of the company and other
defendants at various stages in the proceedings. The trial for the Santa Clara
case is set to begin in March 2013. The potential liability related to this
legal proceeding cannot be determined at this time.
Future ratings and Outlooks will be influenced by broad economic and
construction market trends, as well as company specific activity, particularly
free cash flow trends and uses. SHW's ratings are somewhat constrained in the
short to intermediate term due to outstanding litigation against the company as
well as its sometimes aggressive growth strategy. Nevertheless, a positive
rating action may be considered if SHW's various end markets show signs of
sustained growth, leading to improved profitability and FCF, and leverage ratios
consistently well below 1x. On the other the hand, a negative rating action will
be considered if leverage is consistently at about 2x due to greater than
expected share repurchases combined with sizeable acquisitions financed with
debt. Additionally, Fitch may also consider a negative rating action if there is
an adverse decision against the company related to outstanding lead-based paint
litigation cases wherein the judgment will result in significantly higher debt
levels and leverage at around 2x.
Fitch has affirmed the following ratings for SHW with a Stable Outlook:
--IDR at 'A';
--Revolving bank credit facilities at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper (CP) at 'F1'.