01—Abstract
Summary
Summary of the 10-K filed March 10, 1999. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) reported fiscal 1998 net sales of $4.93 billiona, up 1.1% from $4.88 billion in 1997, and net income of $272.9 million, up 4.7%.
Diluted EPS rose to $1.57b from $1.50. Growth came from the Paint Stores Segment, whose sales rose 6.9% on higher gallon volume and comparable-store sales growth of 4.9%, and from the Other (real estate) Segment. These gains offset a 5.7% decline in Coatings Segment external sales, which was hurt by weak do-it-yourself demand, poor South American markets, and lost business from 1997.
Consolidated gross margin improved slightly to 43.2%, while SG&A rose to 32.4% of sales, partly due to Year 2000 spending. Balance sheet and cash flow were solid. Operating cash flow was $478.5 millionc, used to fund $146 million of capital expenditures, reduce debt, repurchase 3 million shares for $85 million, and raise the dividend.
Long-term debt fell $113.6 million to $730.3 milliond, and there were no short-term borrowings at year-end. Interest coverage improved to 7.1 times from 6.3 times. Shareholders' equity grew to $1.72 billion.
Goodwill and intangibles continue to amortize, and the Company faces ongoing lead-pigment litigation and a significant environmental exposure at its southeast Chicago facility, where the ultimate liability could exceed current accruals. Looking ahead, management plans about 65 net new paint stores in 1999, more than 50 new products, a new brand advertising campaign, and a Year 2000 budget of roughly $35 million.
Management expects continued weakness in South America and is pursuing cost reductions there. The quarterly dividend was raised to $.12 per share, the twentieth consecutive annual increase.
02—Key points
Key Highlights
- Net sales of $4.93 billion (+1.1%) and net income of $272.9 million (+4.7%); diluted EPS of $1.57 versus $1.50 in 1997
- Paint Stores Segment sales grew 6.9% to $2.79 billion, with comparable-store sales up 4.9% and 59 net new stores opened in 1998 (2,254 total)
- Coatings Segment external sales fell 5.7% to $2.14 billion on weak DIY demand and South American market conditions, though segment operating margin held at 9.9%
- Operating cash flow of $478.5 million funded $146 million in capex, $85 million of share buybacks, $113.6 million of debt reduction, and a higher dividend
- Long-term debt declined to $730.3 million, with no short-term borrowings outstanding at year-end; interest coverage improved to 7.1x from 6.3x
- Ongoing environmental and lead-pigment litigation, including a southeast Chicago remediation matter where ultimate liability could be significantly higher than the amount accrued
- Dividend increased to $.12 per quarter (announced February 1999), the twentieth consecutive annual increase; the 1998 annual dividend was $.45
03—Questions
Frequently Asked Questions
How did Sherwin-Williams perform financially in 1998?
Net sales rose 1.1% to $4.93 billion and net income increased 4.7% to $272.9 million, or $1.57 per diluted share. Operating profit grew 3.0%, with Paint Stores results offsetting Coatings weakness.
Why did the Coatings Segment decline, and what is the outlook?
Coatings external sales fell 5.7% due to weak do-it-yourself demand, poor South American markets, and the 1997 loss of certain coatings and aerosol business. Management expects growth in 1999 from new product introductions and expanded retailer presence, but South America is expected to stay difficult, so cost reductions there are a priority.
Is the company's balance sheet and cash generation strong?
Yes. Operating cash flow was $478.5 million, long-term debt fell to $730.3 million, and the company had no short-term borrowings at year-end. The current ratio improved to 1.39, and management expects to remain in a borrowing position but does not anticipate needing specific long-term external financing for its capital program.
What are the main risks flagged in the filing?
Key risks include environmental liabilities, particularly the southeast Chicago facility where ultimate costs may be significantly higher than accrued; lead paint lawsuits, which management believes lack merit; foreign currency exposure after Brazil's Real was allowed to float in January 1999; and Year 2000 readiness, where the company targets completion of mission-critical systems by mid-1999.
How is the company returning capital to shareholders?
The company paid $77.8 million in dividends and repurchased 3 million shares for $85.0 million in 1998, with 7 million shares remaining under the April 1997 authorization. The quarterly dividend was raised to $.12 per share in February 1999.
04—Continue