01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) reported a record 2007 with net sales surpassing $8 billiona for the first time (up 2.5% to $8.01 billion) and net income of $615.6 million (up 6.9%).
Diluted EPS rose 12.2% to $4.70b, which included a goodwill impairment charge of roughly $0.08 per share. Growth came mainly from the Global Group (sales up 8.7%, segment profit up 23.2%) and acquisitions, while the Consumer Group's sales fell 3.9% on weak do-it-yourself demand. Paint Stores Group sales rose 2.3%, supported by acquisitions and commercial contractor business, but same-store sales declined.
Cash generation was strong, with net operating cash of $874.5 millionc (over 10% of sales) and free cash flow of $546.4 million. Management spent that cash on $863.1 million of share repurchases (13.2 million shares at an average of roughly $60-65) and $162.3 million of dividends, and the board raised the 2008 quarterly dividend to $0.35. Total debt rose to $965 million, which lifted the debt-to-capitalization ratio to 35.1% from 30.5%, and working capital turned negative because short-term borrowings increased.
The main investor overhang is the lead pigment and lead-based paint litigation. The Rhode Island public nuisance judgment is on appeal, with oral argument scheduled for May 2008, and management has not accrued any amount for these suits. Management describes the outlook as "guardedly positive," expecting continued softness in U.S. residential construction and repaint demand through 2008 while growth in commercial, industrial, and international markets offsets it.
02—Key points
Key Highlights
- Record 2007 results: net sales of $8.01 billion (+2.5%), net income of $615.6 million (+6.9%), and diluted EPS of $4.70 (+12.2%).
- Global Group was the standout segment, with external sales up 8.7% to $1.73 billion and segment profit up 23.2% to $160.7 million.
- Consumer Group sales fell 3.9% to $1.31 billion on weak DIY demand, although segment margin improved to 17.1% from 15.7%.
- Strong cash flow: net operating cash of $874.5 million and free cash flow of $546.4 million, with the company returning cash through $863.1 million of buybacks and $162.3 million of dividends.
- Leverage increased: total debt reached $965 million, the debt-to-capitalization ratio rose to 35.1% from 30.5%, and net working capital was negative at $(71.8) million.
- Unaccrued lead pigment litigation: the Rhode Island public nuisance judgment is under appeal (oral argument May 2008), and management cannot estimate potential liability.
- Acquisition-driven growth: seven acquisitions in 2007 (including M.A. Bruder, Columbia Paint, VHT, and Nitco in India) added about 1.4 points to consolidated sales growth.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Revenue | $8.01B |
| Cost of Revenue | $4.41B |
| Gross Profit | $3.60B |
| SG&A Expenses | $2.60B |
| Net Income | $615.58M |
| EPS (Basic) | $1.61 |
| EPS (Diluted) | $1.57 |
| Shares Outstanding (Basic) | 381.67B |
| Shares Outstanding (Diluted) | 392.77B |
05—Questions
Frequently Asked Questions
How did SHW's core segments perform in 2007?
Paint Stores Group sales rose 2.3% to $4.96 billion, with segment profit up 6.5% to $766.5 million, but same-store sales at stores open more than twelve months fell 1.1%. Consumer Group sales fell 3.9% to $1.31 billion but segment profit rose 4.6% to $224.2 million. Global Group sales rose 8.7% to $1.73 billion and segment profit rose 23.2% to $160.7 million.
What is the financial risk from the lead pigment litigation?
The company is a defendant in numerous lead pigment and lead-based paint suits. The Rhode Island court entered a judgment of abatement against it and two other defendants, and that judgment is on appeal to the Rhode Island Supreme Court with oral argument scheduled for May 2008. Management has not accrued any amount for this litigation and says it cannot reasonably estimate the potential liability, so a significant adverse outcome could have a material impact on results, liquidity, or financial condition.
Is the dividend and share repurchase program sustainable?
The dividend policy targets roughly 30% of the prior year's diluted EPS. The 2007 dividend was $1.26 per share, the 29th consecutive annual increase, and the board raised the quarterly dividend to $0.35 for 2008, implying an annual rate of $1.40. In 2007 the company repurchased 13.2 million shares for $863.1 million, and about 27.0 million shares remained authorized. Those buybacks were funded partly with short-term borrowings, so they put pressure on the balance sheet, though operating cash flow covered the dividend comfortably.
What is management's 2008 outlook?
Management described its outlook as guardedly positive. It expects weak new residential construction, residential repaint activity, and DIY demand to continue through 2008, which will mainly affect the Paint Stores and Consumer groups. It expects growth from commercial and industrial markets, the painting contractor segment, new store openings, and international operations, and it plans capital spending of roughly the same amount as 2007.
06—Continue