Sherwin-Williams Company 2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011, with fourth-quarter share repurchase activity disclosed separately. 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 were Paint Stores Group, Consumer Group, Global Finishes Group and, newly separated effective December 31, 2011, Latin America Coatings Group. Prior periods were restated for this segment presentation.
- Employees at December 31, 2011: 32,988.
- Paint Stores Group: 3,450 company-operated stores; 60 net new stores added during 2011.
- Global Finishes Group: 303 company-operated branches; 12 net closures during 2011.
- Latin America Coatings Group: 265 stores; 16 net additions during 2011.
Financial performance, cash flow, margins, debt and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $8.766 billion | $7.776 billion | Up approximately 12.7% |
| Net income | $442 million | $462 million | Down approximately 4.3% |
| Net margin | Approximately 5.0% | Approximately 5.9% | Down approximately 0.9 percentage points |
| Income before income taxes | $742 million | $678 million | Up approximately 9.4% |
| Long-term debt | $639 million | $648 million | Down approximately 1.4% |
| Total assets | $5.229 billion | $5.169 billion | Up approximately 1.2% |
| Diluted earnings per share | $4.14 | $4.21 | Down approximately 1.7% |
| Cash dividends per share | $1.46 | $1.44 | Up approximately 1.4% |
| Ratio of earnings to fixed charges | 6.3x | 5.1x | Improved |
The filing text supplied does not provide clear annual operating cash flow, capital expenditure, cash balance or free cash flow values; those amounts are incorporated by reference from the 2011 Annual Report. Seasonal working capital is generally financed through short-term borrowings, lines of credit and commercial paper. Management stated that available credit facilities supported current operating needs.
Fourth-quarter 2011 share repurchases totaled 460,000 shares at an average price of $84.35 per share. At December 31, 2011, 21.05 million shares remained authorized for repurchase. An additional 1,159 shares were acquired through employee transactions at an average price of $86.22.
Material changes versus the prior comparable period
- Sales increased substantially, but net income and diluted EPS declined, resulting in lower net margin.
- Income before taxes increased and interest expense declined to $42 million from $71 million.
- Latin America Coatings Group became a separate reportable segment; prior periods were restated.
- The company acquired Leighs Paints in 2011, following the 2010 acquisitions of Sayerlack, Becker Acroma and Pinturas Condor.
- Raw-material prices increased during 2011, particularly for key paint inputs such as titanium dioxide and petrochemicals.
- The company entered into foreign-currency options and forward contracts during 2011, but none remained outstanding at year-end.
- The Board authorized an additional 20 million shares for repurchase on October 20, 2011.
Guidance, outlook, management commentary, risks and unusual items
The supplied filing text does not provide a specific numerical earnings or sales outlook. Management expected continued pressure from raw-material costs in 2012 and stated that challenging housing, construction and industrial market conditions could persist, although some end markets had stabilized or modestly improved.
- Principal operating risks include economic weakness, cyclical demand, competition, adverse weather, raw-material and energy cost inflation, supplier disruptions, foreign exchange movements and acquisition integration.
- Foreign subsidiaries generated approximately $1.98 billion of external sales in 2011, or 22.6% of consolidated net sales, increasing exposure to international economic, political, regulatory and currency risks.
- Environmental investigation and remediation liabilities may exceed accrued amounts as facts and cost estimates develop.
- The company faces lead-pigment and lead-based-paint litigation. No amounts were accrued because management did not believe a loss was probable and could not reasonably estimate potential losses.
- Potential liabilities related to litigation, environmental matters, tax examinations and the company’s ownership of Life Shield Engineered Systems could materially affect future results, cash flow or liquidity.
- Goodwill and intangible assets are subject to impairment risk if future sales, cash-flow or market assumptions deteriorate.
Important facts for investors to verify
- Verify the complete consolidated cash-flow statement, cash balance, capital expenditures and free cash flow in the incorporated 2011 Annual Report.
- Review segment sales, profit and asset trends after the Latin America Coatings Group was separately reported and prior periods were restated.
- Assess whether price increases offset raw-material inflation and whether margin pressure continued after 2011.
- Review short-term borrowings, commercial paper availability, credit-facility commitments and debt maturities to evaluate liquidity.
- Examine the full disclosures for environmental liabilities, lead-paint litigation and other contingencies, including any developments after the filing date.
- Evaluate the financial contribution and integration progress of Leighs Paints and prior acquisitions.
- Confirm the absence of outstanding foreign-currency derivative contracts at year-end and assess ongoing currency exposure.