The Sherwin-Williams Company — FY2010 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2010. Sherwin-Williams develops, manufactures, distributes and sells paint, coatings and related products primarily in North and South America, with additional operations in the Caribbean, Europe and Asia.
- Reportable segments: Paint Stores Group, Consumer Group and Global Finishes Group; administrative activities are reported separately.
- At year-end, the Paint Stores Group operated 3,390 company-operated specialty paint stores, while the Global Finishes Group operated 564 branches.
- The Company employed 32,228 people and reported approximately $1.47 billion of foreign-subsidiary net external sales, or 18.9% of consolidated net sales.
- Sales are seasonally concentrated in the second and third quarters; inventories are generally built during the first quarter.
Financial performance and condition
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $7.776 billion | $7.094 billion | +9.6% |
| Net income | $462 million | $436 million | +6.0% |
| Basic earnings per share | $4.28 | $3.80 | +12.6% |
| Diluted earnings per share | $4.21 | $3.78 | +11.4% |
| Cash dividends per share | $1.44 | $1.42 | +1.4% |
| Total assets | $5.169 billion | $4.324 billion | +19.5% |
| Long-term debt | $648 million | $783 million | -17.2% |
| Ratio of earnings to fixed charges | 5.1x | 5.6x | Lower |
- Reported net profit margin was approximately 5.9% in 2010 versus approximately 6.1% in 2009.
- Income before income taxes was $678 million, and fixed charges were $164 million, including $71 million of net interest expense and $93 million representing the interest component of rent expense.
- The filing text provided does not include the detailed 2010 operating cash flow, capital expenditures, cash balance, total debt, or liquidity availability figures; those amounts are incorporated by reference to the 2010 Annual Report.
- Seasonal working capital is financed partly through short-term borrowings, lines of credit and commercial paper. The Company reported available credit facilities for current operating needs.
- The Company repurchased 1.525 million shares under its repurchase program during the fourth quarter at an average price of $80.08 per share. Authorization for 5.75 million additional shares remained at December 31, 2010.
Material changes versus the prior comparable period
- Sales and net income increased from 2009, although net margin and the earnings-to-fixed-charges ratio declined.
- Long-term debt declined by $135 million, while total assets increased by $845 million, primarily in the context of business expansion and acquisitions.
- The Company opened 36 net new Paint Stores Group locations in 2010, compared with 8 net new stores in 2009.
- The Global Finishes Group increased its branch count by 25 net locations, opening or acquiring 35 branches and closing 10.
- 2010 acquisitions included Becker Acroma Industrial Wood Coatings, Sayerlack Industrial Wood Coatings and Pinturas Condor.
- Raw-material shortages and price increases emerged as significant operating pressures, particularly for titanium dioxide and petrochemical-based inputs.
- The allowance for doubtful accounts increased to $59.3 million from $44.8 million, including $14.7 million acquired through acquisitions.
Guidance, outlook, commentary and risks
The filing does not provide a clear numerical earnings or sales guidance figure in the supplied text. Management indicated that challenging conditions in housing, construction and manufacturing were expected to continue, despite stabilization and modest improvement in some end markets.
- Management expected continued pressure from raw-material and energy inflation, tight supplies and global demand, with the ability to offset costs through pricing and productivity identified as important.
- The Company believed productive capacity was sufficient to meet needs through 2011 and did not anticipate significant sourcing problems for purchased resale products.
- Key risks include cyclical end-market weakness, competition and pricing pressure, raw-material availability and costs, foreign exchange, international operations, acquisitions and integration, interest rates, credit-market access, and customer credit risk.
- Environmental investigation and remediation liabilities may exceed accrued amounts.
- The Company faces litigation related to historical lead pigments and lead-based paint, as well as other product liability, environmental, commercial and regulatory claims. No amounts were accrued for the lead-pigment and lead-based-paint litigation because potential liability could not reasonably be estimated.
- Potential liabilities associated with Life Shield Engineered Systems could adversely affect results, cash flow, liquidity or financial condition.
- The Company stated that its disclosure controls and procedures were effective as of December 31, 2010, and reported no material changes to internal control over financial reporting.
Investor verification priorities
- Verify detailed segment sales, segment profit, operating margins and acquisition contributions in Note 19 and the incorporated MD&A.
- Verify operating cash flow, capital expenditures, cash balances, short-term borrowings, total debt and unused credit capacity.
- Assess the effect of raw-material inflation and the timing and effectiveness of price increases.
- Review acquisition accounting, goodwill and intangible-asset balances, and impairment sensitivity.
- Review environmental accruals and contingencies, including the unaccrued lead-pigment and lead-based-paint litigation exposure.
- Confirm the Company’s 2011 outlook and any subsequent guidance, because a clear numerical forecast is not provided in the supplied filing text.