How did Sherwin-Williams perform in 2003 compared with 2002?

Net sales rose 4.3% to $5.41 billion and income before the cumulative accounting effect rose 6.9% to $332.1 million. Diluted EPS before the cumulative effect was $2.26, up from $2.04. Growth came mainly from architectural paint volume to contractors and DIY customers, partly offset by weak industrial and automotive refinish markets.

Is the dividend safe and how is the company returning cash to shareholders?

The board raised the quarterly dividend to $0.17 per share in February 2004, which would be about $0.68 annually if sustained through 2004. Dividends paid in 2003 totaled $90.7 million, a 30% payout of prior-year diluted EPS. The company also repurchased $238.1 million of stock in 2003 and retained authorization for 17.0 million more shares.

What is the biggest legal or financial risk disclosed?

The lead pigment and lead-based paint litigation is the primary risk. Plaintiffs seek broad damages, the company has accrued no amount, and management says it cannot estimate the outcome. Management nonetheless believes the liability will not have a material adverse effect on results, liquidity or financial condition. Environmental remediation accruals of $133.4 million could also rise, with up to $99.8 million of additional exposure.

What were the key drivers of margin and cash flow?

Gross margin improved to 45.4% from 45.1% on volume gains and operational efficiencies. Net operating cash flow was flat at $558.9 million, held back by lower working-capital benefits and a smaller pension credit. Free cash flow, as management defines it, was $351.7 million, up from $341.4 million in 2002.

What should investors watch for in 2004?

Management expects continued store growth and new product launches, a slow recovery in U.S. industrial demand, and a higher 2004 pension expense because it lowered its discount rate to 6.0% and expected return on assets to 7.5%. Capital expenditures are expected to be slightly higher than 2003's $116.5 million, and the company plans to borrow under its commercial paper program seasonally.

SHW 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 2004. Cited figures are marked; the original filing is the authoritative source.

The Sherwin-Williams Company (SHW) closed 2003 with record diluted income before the cumulative accounting change of $2.26^a per share, up 10.8% from $2.04, on net sales of $5.41 billion, up 4.3%.

Income before the cumulative effect rose 6.9% to $332.1 million^b. Growth was led by the Paint Stores Segment, which added 45 net new stores (2,688 total) and produced 64% of sales, while the Consumer Segment's sales grew only 1.0%. The Automotive Finishes segment was weak domestically, and International Coatings grew 16.8% helped by South American recovery and a fiscal-year change at a Brazilian subsidiary.

Operating profit rose 5.2% to $522.9 million^c, though a $13.3 million after-tax drop in the net pension credit weighed on margins and SG&A rose to 34.8% of sales. Balance sheet and cash generation strengthened. Net operating cash flow was flat at $558.9 million, free cash flow (as defined by management) was $351.7 million, and total debt fell to $513.6 million, bringing debt-to-capitalization down to 26.0% from 28.0%.

The company bought back 8.0 million shares for $238.1 million^d and paid $90.7 million in dividends, and the board raised the quarterly dividend to $0.17 per share, which management said would support a 26th consecutive year of dividend increases. Cash ended the year at $302.8 million. The main investor risk flagged in the filing is the lead pigment and lead-based paint litigation, which the company says it is vigorously defending and for which it has accrued nothing.

Environmental remediation accruals total $133.4 million, with a further $99.8 million of reasonably possible unaccrued exposure, and some of that could affect results materially if future loss estimates rise. The filing also cites ongoing currency translation losses in South America and soft domestic industrial and automotive refinish demand as headwinds into 2004.

02—Key points

Key Highlights

Record diluted EPS before accounting change of $2.26, up 10.8% year over year; net sales up 4.3% to $5.41 billion
Paint Stores Segment (64% of sales) grew 5.1% with 45 net new stores, reaching 2,688 company-operated locations
Operating profit up 5.2% to $522.9 million, but SG&A rose to 34.8% of sales and the net pension credit fell by $13.3 million after tax
Debt-to-capitalization improved to 26.0% from 28.0%; total debt reduced to $513.6 million and cash rose to $302.8 million
Returned capital through 8.0 million shares repurchased for $238.1 million and $90.7 million in dividends; quarterly dividend raised to $0.17
Automotive Finishes operating profit fell 3.8% on weak domestic refinish demand; International Coatings operating profit rebounded to $8.4 million from a loss
Lead pigment litigation and environmental exposure remain unaccrued and unquantified, with $99.8 million of possible additional environmental accruals

03—Questions

Frequently Asked Questions

How did Sherwin-Williams perform in 2003 compared with 2002?
Net sales rose 4.3% to $5.41 billion and income before the cumulative accounting effect rose 6.9% to $332.1 million. Diluted EPS before the cumulative effect was $2.26, up from $2.04. Growth came mainly from architectural paint volume to contractors and DIY customers, partly offset by weak industrial and automotive refinish markets.
Is the dividend safe and how is the company returning cash to shareholders?
The board raised the quarterly dividend to $0.17 per share in February 2004, which would be about $0.68 annually if sustained through 2004. Dividends paid in 2003 totaled $90.7 million, a 30% payout of prior-year diluted EPS. The company also repurchased $238.1 million of stock in 2003 and retained authorization for 17.0 million more shares.
What is the biggest legal or financial risk disclosed?
The lead pigment and lead-based paint litigation is the primary risk. Plaintiffs seek broad damages, the company has accrued no amount, and management says it cannot estimate the outcome. Management nonetheless believes the liability will not have a material adverse effect on results, liquidity or financial condition. Environmental remediation accruals of $133.4 million could also rise, with up to $99.8 million of additional exposure.
What were the key drivers of margin and cash flow?
Gross margin improved to 45.4% from 45.1% on volume gains and operational efficiencies. Net operating cash flow was flat at $558.9 million, held back by lower working-capital benefits and a smaller pension credit. Free cash flow, as management defines it, was $351.7 million, up from $341.4 million in 2002.
What should investors watch for in 2004?
Management expects continued store growth and new product launches, a slow recovery in U.S. industrial demand, and a higher 2004 pension expense because it lowered its discount rate to 6.0% and expected return on assets to 7.5%. Capital expenditures are expected to be slightly higher than 2003's $116.5 million, and the company plans to borrow under its commercial paper program seasonally.

04—Continue

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