01—Abstract
Summary
Summary of the 10-K filed February 24, 2009. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) reported a year of sharp earnings pressure in 2008 as the U.S. housing downturn deepened and spread globally in the second half of the year.
Net sales were essentially flat at $7.98 billiona (down 0.3% from $8.01 billion), with volume declines offset in part by selling price increases, acquisitions (which added about 1.9%), and favorable currency translation. Gross margin compressed to 43.8% from 45.0% on higher raw material costs and under-absorbed manufacturing costs, while SG&A rose to 33.1% of sales. Trademark and goodwill impairments of $54.6 million further weighed on results.
Net income fell 22.6% to $476.9 millionb, and diluted EPS fell 14.9% to $4.00 from $4.70. By segment, the Paint Stores Group (about 61% of sales) saw sales fall 2.4% and segment profit drop 15.5%, with same-store sales down 5.3%. The Consumer Group, hit by weak DIY demand, saw profit fall 37.4%.
The Global Finishes Group was the bright spot, with sales up 7.8% to $1.87 billionc and profit down only 5.3%, helped by acquisitions and international growth. Balance sheet and cash flow remained solid: net operating cash was $876 million, free cash flow (as management defines it) was $594 million, total debt fell $132 million to $834 million, and debt-to-capitalization improved to 34.2%.
Management returned capital through $393.5 milliond of share repurchases and $165 million of dividends, and the Board raised the quarterly dividend to $0.355 in February 2009. Investors should weigh the company's cash generation and conservative leverage against the cyclical exposure to housing and DIY demand, rising pension costs (domestic net pension cost expected to rise about $46.8 million in 2009), and open-ended lead pigment litigation for which no accrual has been recorded.
02—Key points
Key Highlights
- Net sales were essentially flat at $7.98 billion (-0.3%), with Global Finishes Group up 7.8% offsetting declines in Paint Stores (-2.4%) and Consumer (-3.0%).
- Net income fell 22.6% to $476.9 million; diluted EPS fell 14.9% to $4.00, including $0.31 per share of impairment charges.
- Gross margin contracted to 43.8% from 45.0% due to higher raw material costs and lower manufacturing volume; SG&A rose to 33.1% of sales.
- Consumer Group segment profit fell 37.4% and Paint Stores Group segment profit fell 15.5%, while Global Finishes profit declined only 5.3%.
- Operating cash flow held steady at $876.2 million; total debt was reduced by $131.7 million to $833.7 million, and debt-to-capitalization improved to 34.2%.
- Shareholder returns remained significant: $393.5 million in share repurchases and $165.1 million in dividends, with the quarterly dividend raised to $0.355 for 2009.
- Lead pigment and lead-based paint litigation remains unresolved with no amounts accrued; management cannot estimate potential liability, and the Rhode Island public nuisance judgment was reversed in July 2008.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 24, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $7.98B$8.01B | −0.3% |
| Cost of Revenue | $4.48B$4.41B | +1.7% |
| Gross Profit | $3.50B$3.60B | −2.8% |
| R&D Expenses | $37.47M— | — |
| SG&A Expenses | $2.64B$2.60B | +1.8% |
| Interest Expense | $31.97M— | — |
| Net Income | $476.88M$615.58M | −22.5% |
| EPS (Basic) | $1.35$1.61 | −16.5% |
| EPS (Diluted) | $1.33$1.57 | −14.9% |
| Shares Outstanding (Basic) | 350.51M381.67B | −99.9% |
| Shares Outstanding (Diluted) | 354.53M392.77B | −99.9% |
05—Questions
Frequently Asked Questions
Why did Sherwin-Williams earnings decline in 2008 despite stable sales?
Sales were nearly flat, but gross margin fell about 120 basis points because of sharply higher raw material costs and under-absorbed manufacturing costs from lower volume. SG&A rose as a share of sales, and $54.6 million of trademark and goodwill impairments further reduced pre-tax income by about 22%.
Which business segments drove the performance differences?
Global Finishes Group grew sales 7.8% through acquisitions, price increases, and currency benefits, and its profit fell only 5.3%. The Consumer Group was the weakest, with profit down 37.4% due to sluggish DIY demand and higher raw material costs. The Paint Stores Group, the largest segment, saw same-store sales decline 5.3%.
Is the company's balance sheet and liquidity position under pressure?
Not materially. Net operating cash was $876 million, total debt fell to $834 million, and the company reported $1.51 billion of remaining borrowing capacity. Working capital improved, and the company stated it was in compliance with its leverage covenant. Its debt ratings remained A3 (Moody's) and A-2 (S&P, negative outlook).
What are the main risks to future earnings highlighted in the filing?
Key risks include continued weakness in U.S. housing and construction, raw material and energy cost inflation, pension plan losses that will raise 2009 net pension cost by roughly $46.8 million, possible further goodwill or trademark impairments, and potentially material liabilities from lead pigment litigation and environmental remediation, for which accruals are $180.7 million but the unaccrued maximum exposure is about $115 million.
How is management returning capital to shareholders given the weaker earnings?
The company repurchased $393.5 million of stock in 2008 and paid $1.40 per share in dividends, equal to 29.8% of 2007 diluted EPS. In February 2009 the board raised the quarterly dividend to $0.355, implying a 2009 annual dividend of $1.42, or 35.5% of 2008 diluted EPS, above the company's stated 30% payout target. About 19.75 million shares remained authorized for repurchase.
06—Continue