01—Abstract
Summary
Summary of the 10-K filed February 23, 2011. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) reported a year of recovery and growth in 2010, with consolidated net sales up 9.6% to $7.78 billiona and net income up 6.1% to $462.5 million.
Diluted EPS rose 11.4% to $4.21b. All three reportable segments achieved organic sales growth for the first time in several years. Growth was driven by higher paint volume, three 2010 acquisitions (Sayerlack, Becker Acroma, and Pinturas Condor for about $298 million), and selling price increases.
Gross margin compressed to 44.8% from 46.0% because of severe raw material shortages and cost inflation, notably acrylic latex and titanium dioxide, which the company offset only partially through price increases. Cash generation weakened. Net operating cash fell 18% to $706.6 millionc (9.1% of sales versus 12.1% in 2009), mainly due to a $191.8 million working capital build.
Free cash flow declined to $425 milliond from $605 million. Total debt rose $227 million to $1.04 billion, and debt-to-capitalization increased to 39.4% from 35.4%. Management nonetheless returned over $530 million to shareholders through buybacks and dividends, and raised the quarterly dividend to $0.365 in February 2011.
The filing also flags persistent risks. Lead pigment and lead-based paint litigation remains unresolved, with no amounts accrued and management unable to estimate potential liability.
Environmental accruals total $149.6 million, and the company faces a possible IRS challenge to ESOP-related tax deductions. Management expects a slow and uneven domestic recovery in 2011, with new construction only modestly higher from a low base and home remodeling a relative bright spot.
02—Key points
Key Highlights
- Net sales rose 9.6% to $7.78 billion; all three reportable segments grew organically for the first time in several years.
- Diluted EPS increased 11.4% to $4.21; net income rose 6.1% to $462.5 million.
- Gross margin fell to 44.8% from 46.0% due to raw material shortages and cost inflation, partly offset by price increases.
- Net operating cash declined 18% to $706.6 million; free cash flow fell to $425 million from $605 million.
- Total debt increased $227 million to $1.04 billion; debt-to-capitalization rose to 39.4% from 35.4%.
- Returned over $530 million to shareholders via share repurchases ($375.7 million) and dividends ($156.4 million); dividend increased for the 32nd consecutive year.
- Unresolved lead pigment and lead-based paint litigation with no accrual recorded; liability cannot be reasonably estimated.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Sherwin Williams Co kept $0.06.
- Revenue$7.78B100.0%
- Cost of revenue−$4.30B55.2%
- Gross profit$3.48B44.8%
- Operating costs−$2.53B32.6%
- Operating income$948.0M12.2%
- Interest, other & tax−$485.5M6.2%
- Net income$462.5M5.9%
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 23, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $7.78B$7.09B | +9.6% |
| Cost of Revenue | $4.30B$3.83B | +12.1% |
| Gross Profit | $3.48B$3.26B | +6.7% |
| R&D Expenses | $39.88M$40.42M | −1.3% |
| SG&A Expenses | $2.73B$2.53B | +7.6% |
| Operating Income | $948.00M— | — |
| Interest Expense | $70.59M$40.03M | +76.4% |
| Net Income | $462.49M$435.85M | +6.1% |
| EPS (Basic) | $1.43$1.27 | +12.6% |
| EPS (Diluted) | $1.40$1.26 | +11.4% |
| Shares Outstanding (Basic) | 321.06M340.54M | −5.7% |
| Shares Outstanding (Diluted) | 326.36M343.37M | −5.0% |
05—Questions
Frequently Asked Questions
How did Sherwin-Williams perform in 2010 compared with 2009?
Net sales increased 9.6% to $7.78 billion, driven by higher paint volume, acquisitions (3.4% contribution), and selling price increases. Net income rose 6.1% to $462.5 million, and diluted EPS grew 11.4% to $4.21. Global Finishes Group sales jumped 26.5%, Paint Stores Group sales rose 4.1%, and Consumer Group sales rose 5.9%.
Why did gross margins decline despite higher sales?
Gross profit as a percent of sales fell to 44.8% from 46.0%. Acute raw material shortages in 2010, especially acrylic latex, titanium dioxide, and petrochemicals, drove rapid cost increases. Selling price increases and cost savings from prior-year site closures only partly offset this pressure.
Is the company's cash flow and balance sheet getting weaker?
Operating cash flow fell 18% to $706.6 million, mainly because of a $191.8 million increase in working capital. Total debt rose to $1.04 billion, and the debt-to-capitalization ratio increased to 39.4%. The company still reported $1.17 billion of remaining borrowing capacity and was in compliance with its leverage covenant.
What are the biggest legal and environmental risks?
The company faces lead pigment and lead-based paint litigation, including public nuisance and personal injury suits, and has accrued nothing for it because management cannot estimate the outcome. Environmental accruals total $149.6 million, and potential losses could be $105.7 million higher than accrued. The IRS is also examining ESOP-related tax deductions for 2004–2008.
What is the outlook for 2011?
Management expects a slow and uneven domestic recovery. New home construction is forecast to rise modestly from a low base, home maintenance and remodeling should keep improving, and industrial coatings volumes should grow with manufacturing. The company plans to open 50–60 net new paint stores and expects higher capital expenditures than in 2010.
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