01—Abstract
Summary
Summary of the 10-K filed March 10, 2005. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) reported a strong 2004 in its 10-K filed March 10, 2005.
Net sales rose 13.1% to $6.11 billiona, the first time the company passed $6 billion, and diluted EPS grew 20.4% to a record $2.72 on net income of $393.3 million. Growth was driven by strong domestic architectural paint demand from contractors and DIY customers, the Duron and Paint Sundry Brands acquisitions, and favorable currency effects in South America. Paint Stores, the largest segment at about 65% of sales, grew sales 14.6% and operating profit 19.0%.
Management warned that rapidly rising raw material costs pressured gross margin, which fell to 44.2% from 45.4%, and expects that pressure to continue. Balance sheet leverage increased. Acquisitions of $554.5 millionb were funded partly with short-term borrowings, pushing total debt to capitalization up to 30.9% from 26.0%, and cash fell to $45.9 million.
Operating cash flow remained robust at $544.7 millionc, supporting $106.8 million of capex, $96.9 million of dividends, and $267.4 million of share repurchases. Management plans to reduce debt toward the mid-20% range in 2005 and raised the quarterly dividend 20% to $0.205.
The main legal and financial overhang is the lead pigment and lead-based paint litigation, including a Rhode Island public nuisance retrial tentatively set for September 2005, for which no amount has been accrued. Environmental accruals total $141.5 million, with up to $117.1 milliond more possible.
02—Key points
Key Highlights
- Record 2004 net sales of $6.11 billion (+13.1%), surpassing $6 billion for the first time in company history
- Diluted EPS of $2.72, up 20.4%; net income of $393.3 million (+18.4%); return on beginning equity of 27.0%
- Paint Stores Segment, about 65% of sales, grew sales 14.6% to $3.98 billion and operating profit 19.0% to $480.2 million, with comparable store sales up 10.1%
- Gross margin compressed to 44.2% from 45.4% due to sharply rising raw material costs, which management expects to continue into 2005
- Acquisitions totaling $554.5 million (Duron, Paint Sundry Brands, Kinlita) lifted total debt to 30.9% of capitalization from 26.0%, with a target to return to the mid-20% range
- Operating cash flow of $544.7 million funded capex, $96.9 million in dividends, and $267.4 million in buybacks; quarterly dividend raised 20% to $0.205
- Lead pigment and lead-based paint litigation remains unresolved with no accrual recorded; a Rhode Island retrial is tentatively set for September 2005
03—Questions
Frequently Asked Questions
How did Sherwin-Williams perform financially in 2004?
Net sales grew 13.1% to $6.11 billion, net income rose 18.4% to $393.3 million, and diluted EPS increased 20.4% to a record $2.72. Growth came from strong domestic architectural paint volume, acquisitions, and favorable currency in South America, partly offset by higher raw material costs that compressed gross margin.
What acquisitions did Sherwin-Williams complete in 2004 and how were they financed?
The company acquired Kinlita (a majority stake in a Chinese automotive coatings company), Duron, Inc. (229 specialty paint stores), and Paint Sundry Brands (Purdy and Bestt Liebco applicators), for total acquisition spending of $554.5 million. They were financed with cash, short-term investments, and $350 million of commercial paper, which raised total debt to $738.3 million.
What risks should investors watch in the 10-K?
Key risks include continued raw material cost inflation pressuring margins, rising leverage after acquisitions, the lead pigment and lead-based paint litigation (no amount accrued, with a Rhode Island retrial tentatively set for September 2005), environmental remediation liabilities of $141.5 million accrued with up to $117.1 million more possible, and foreign currency translation exposure in South America.
What is the outlook and capital return policy for 2005?
Management expects economic conditions to strengthen and favorably affect sales volume in all segments, and plans to open its 3,000th store in the first half of 2005. Capex is expected to rise about 40% to fund a new emulsion plant and capacity projects. The dividend policy targets 30% of prior-year diluted EPS, the quarterly dividend was raised to $0.205, and the company will keep repurchasing stock opportunistically while reducing debt.
04—Continue