01—Abstract
Summary
Summary of the 10-K filed February 23, 2012. Cited figures are marked; the original filing is the authoritative source.
The Sherwin-Williams Company (SHW) reported a record 2011 with net sales of $8.77 billiona, up 12.7% from $7.78 billion in 2010, and $761 million above its prior revenue peak set in 2007.
Growth was driven mainly by selling price increases, acquisitions (which added roughly 4.5 points to sales), and higher volume in the Global Finishes and Latin America Coatings groups. Gross margin compressed to 42.7% from 44.8% because of raw material inflation, particularly titanium dioxide and petrochemicals, and SG&A rose to 33.8% of sales from 35.1%, though it fell as a percentage of sales. Income before taxes rose 9.4% to $741.5 million, but net income declined to $441.9 millionb ($4.14 diluted EPS) from $462.5 million ($4.21) after a one-time $75.0 million (about $0.70 per share) charge to settle an IRS audit of the employee stock ownership plan.
Segment results were mixed. Paint Stores Group sales rose 9.1% to $4.78 billionc, with segment profit up 4.2% but margin down to 13.5%. Global Finishes Group sales jumped 32.5% to $1.88 billion, and profit rose almost 40%.
Latin America Coatings Group, now a separate reportable segment, grew sales 22.7% to $828 milliond. The Consumer Group was the weak spot, with sales down 1.8% to $1.27 billion after losing part of a paint program at a large retail customer; its profit fell about 15%. Cash generation stayed solid, with operating cash flow of $736 million and free cash flow of $428 million.
The company returned more than $520 million to shareholders through buybacks and dividends, and it raised the quarterly dividend to $0.39 for 2012. The filing also flags several longer-dated risks. The lead pigment and lead-based paint litigation remains unresolved, with no amounts accrued and management unable to estimate potential losses.
Environmental accruals total $132.1 million, and the unaccrued maximum exposure is about $97.8 million higher. Management expects continued raw material cost headwinds in 2012 and says margins may erode unless it takes further pricing action.
02—Key points
Key Highlights
- Record net sales of $8.77 billion, up 12.7% year over year, with acquisitions contributing about 4.5 percentage points of growth.
- Diluted EPS of $4.14 includes a roughly $0.70 per-share charge from the IRS ESOP settlement; excluding it, diluted EPS would have been about $4.84, a record.
- Gross margin fell to 42.7% from 44.8% as raw material costs rose sharply, especially titanium dioxide and petrochemicals.
- Global Finishes Group sales rose 32.5% to $1.88 billion and segment profit rose about 40%, led by acquisitions (Sayerlack, Becker Acroma, Leighs Paints) and volume growth.
- Consumer Group sales fell 1.8% and segment profit dropped about 15%, mainly from the loss of part of a paint program at one large retail customer.
- Operating cash flow was $736 million and free cash flow was $428 million; the company returned over $520 million to shareholders and has 21 million shares left under its buyback authorization.
- Lead pigment and lead-based paint litigation remains unresolved with no amounts accrued, and management cannot estimate potential losses.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Sherwin Williams Co kept $0.05.
- Revenue$8.77B100.0%
- Cost of revenue−$5.02B57.3%
- Gross profit$3.74B42.7%
- Operating costs−$2.76B31.5%
- Operating income$985.0M11.2%
- Interest, other & tax−$543.1M6.2%
- Net income$441.9M5.0%
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 23, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $8.77B$7.78B | +12.7% |
| Cost of Revenue | $5.02B$4.30B | +16.9% |
| Gross Profit | $3.74B$3.48B | +7.6% |
| R&D Expenses | $41.72M$39.88M | +4.6% |
| SG&A Expenses | $2.96B$2.73B | +8.5% |
| Operating Income | $985.00M$948.00M | +3.9% |
| Interest Expense | $42.50M$70.59M | −39.8% |
| Net Income | $441.86M$462.49M | −4.5% |
| EPS (Basic) | $1.41$1.43 | −1.4% |
| EPS (Diluted) | $1.38$1.40 | −1.7% |
| Shares Outstanding (Basic) | 310.41M321.06M | −3.3% |
| Shares Outstanding (Diluted) | 317.02M326.36M | −2.9% |
05—Questions
Frequently Asked Questions
How did Sherwin-Williams perform in 2011 compared with 2010?
Net sales rose 12.7% to $8.77 billion, and income before taxes rose 9.4% to $741.5 million. Net income fell to $441.9 million from $462.5 million because of the one-time $75.0 million IRS ESOP settlement charge. Diluted EPS was $4.14 versus $4.21 in 2010. Excluding the settlement, the company says diluted EPS would have been $4.84, a record.
What drove revenue growth, and what pressured margins?
Revenue growth came from selling price increases, acquisitions (about 4.5 points of growth), and higher paint volume in the Global Finishes and Latin America Coatings groups. Margins were pressured by raw material inflation, notably titanium dioxide and petrochemicals. Gross margin fell to 42.7% from 44.8%, and management expects significant raw material cost headwinds to continue into 2012.
What are the main legal and environmental risks?
The company faces lead pigment and lead-based paint litigation, including public nuisance and personal injury suits, and has accrued no amounts for it. Management says it cannot estimate potential losses, and an adverse outcome could have a material effect. Environmental accruals were $132.1 million at year-end 2011, and the maximum unaccrued exposure is about $97.8 million higher. The company also owns Life Shield, which creates some additional product liability exposure.
How is the company returning capital to shareholders?
In 2011 the company repurchased 4.7 million shares for $367 million and paid $153.5 million in dividends. It raised the annual dividend to $1.46 per share, its 33rd consecutive annual increase, and in February 2012 raised the quarterly dividend to $0.39. It has 21.05 million shares remaining under its repurchase authorization.
Which segment is performing best, and which is struggling?
Global Finishes Group performed best, with sales up 32.5% to $1.88 billion and profit up about 40% to $90.3 million, aided by acquisitions. Latin America Coatings Group also grew strongly, with sales up 22.7% and profit up 27.9%. Consumer Group was the weakest, with sales down 1.8% and profit down about 15% to $173.7 million, reflecting the loss of a paint program at one large retail customer and higher raw material costs.
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