01—Abstract
Summary
Summary of the 10-K filed February 24, 2010. Cited figures are marked; the original filing is the authoritative source.
Sherwin-Williams (SHW) closed 2009 with net sales down 11.1% to $7.09 billiona from $7.98 billion, and net income fell 8.6% to $435.8 million, or $3.78 diluted EPS (down 5.5%).
The decline reflected weak U.S. architectural paint demand, particularly from professional contractors, and a global slowdown. Gross margin improved to 46.0% from 43.8% on selling price increases, cost control and lower freight costs, while SG&A fell $108.8 millionb. Segment profit was mixed: Paint Stores Group profit fell 7.4% to $600 million (margin up to 14.3%), Consumer Group profit rose 12.2% to $157 million, and Global Finishes Group profit fell 57.3% to $65 million after impairments and a $21.9 million subsidiary dissolution loss.
Cash generation and balance sheet management were the strongest parts of the year. Net operating cash was $859 millionc (12.1% of sales) and free cash flow reached an record $605 million. Working capital fell sharply, short-term borrowings were cut by $494 million, and the company issued $500 million of 3.125% five-year notes.
Management returned cash through $530 milliond of share repurchases (9 million shares) and $163 million of dividends, and raised the annual dividend to $1.42 and signaled a higher 2010 payout (quarterly $0.36). Key risks flagged in the filing include the lead pigment and lead-based paint litigation, for which no amount has been accrued and the outcome cannot be estimated, environmental remediation accruals of $170.9 million with up to $99.5 million of additional possible exposure, and product liability exposure from the Life Shield subsidiary. Management described 2010 cautiously, expecting a slow and uneven recovery.
02—Key points
Key Highlights
- Net sales fell 11.1% to $7.09 billion; Paint Stores Group sales dropped 12.9% to $4.21 billion, reflecting weak residential and commercial architectural demand.
- Diluted EPS declined 5.5% to $3.78 from $4.00, while gross margin expanded 220 basis points to 46.0% on pricing and cost control.
- Record free cash flow of $605 million, with net operating cash of $859 million (12.1% of sales) aided by a $172 million working capital reduction.
- Share repurchases of $530 million (9.0 million shares) and dividends of $163 million; 31st consecutive year of dividend increases.
- Global Finishes Group segment profit fell 57.3% to $65 million, hurt by impairments and a $21.9 million loss on dissolving a European subsidiary.
- Balance sheet strengthened: total debt fell $16 million to $818 million, short-term borrowings were cut $494 million, and $500 million of 3.125% notes due 2014 were issued.
- Lead pigment and lead-based paint litigation remains unresolved with no amount accrued; environmental accruals total $170.9 million with up to $99.5 million of possible additional exposure.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 24, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $7.09B$7.98B | −11.1% |
| Cost of Revenue | $3.83B$4.48B | −14.5% |
| Gross Profit | $3.26B$3.50B | −6.7% |
| R&D Expenses | $40.42M$37.47M | +7.9% |
| SG&A Expenses | $2.53B$2.64B | −4.1% |
| Interest Expense | $40.03M$31.97M | +25.2% |
| Net Income | $435.85M$476.88M | −8.6% |
| EPS (Basic) | $1.27$1.35 | −5.9% |
| EPS (Diluted) | $1.26$1.33 | −5.5% |
| Shares Outstanding (Basic) | 340.54M350.51M | −2.8% |
| Shares Outstanding (Diluted) | 343.37M354.53M | −3.1% |
05—Questions
Frequently Asked Questions
How did Sherwin-Williams perform financially in 2009?
Net sales declined 11.1% to $7.09 billion and net income fell 8.6% to $435.8 million, or $3.78 per diluted share. Results were pressured by lower paint volumes in a weak housing and commercial construction market, partly offset by gross margin gains and lower SG&A.
Is the dividend safe, and what is the capital return policy?
The dividend has grown for 31 consecutive years. The 2009 annual dividend was $1.42 per share, and the board raised the quarterly rate to $0.36 in February 2010, implying $1.44 for 2010 if maintained. The company targets a payout of 30% of prior-year diluted EPS and also repurchased $530 million of stock in 2009, with 10.75 million shares remaining under the authorization.
What are the main legal and environmental risks?
The largest open risk is the lead pigment and lead-based paint litigation, where management cannot estimate the outcome and has accrued nothing. Environmental remediation accruals total $170.9 million, and the company estimates up to $99.5 million more could be required. The Life Shield blast and ballistic systems subsidiary also carries potential product liability exposure that is partly limited by SAFETY Act protections.
What is the outlook for 2010?
Management is cautiously optimistic that the worst of the global recession is past but expects a slow and uneven recovery with coatings demand weak in many end markets. Capital expenditures are expected to be only slightly higher than 2009, and the domestic salaried pension net cost is expected to fall by about $13.8 million.
How strong is the balance sheet and liquidity position?
Total debt was $818 million, equal to 35.4% of capitalization, and the company had $1.60 billion of remaining borrowing capacity at year-end. The current ratio improved to 1.27 from 0.99, and a new three-year $500 million revolving credit facility was signed in January 2010 to support commercial paper.
06—Continue