Why did Sherwin-Williams' net income collapse in 2000 even though sales hit a record?

Most of the drop came from a $352.0 million pre-tax ($293.6 million after-tax, or $1.80 per diluted share) impairment of long-lived assets recorded in Q4 2000. The charge reduced the carrying value of goodwill and fixed assets tied to Consumer Segment acquisitions such as Thompson Minwax, Pratt & Lambert and Sunshine Quality Products. The company stated the charge had no cash effect. Excluding it, net income rose 1.9% to $309.7 million.

What is driving the weakness in the Consumer and International Coatings segments?

The Consumer Segment's sales were flat, and its operating profit fell 8.0% (excluding the charge) because raw material cost increases could not be fully passed on to customers amid competitive pricing pressure and a sluggish domestic do-it-yourself market. International Coatings operating profit fell 47.9% to $17.7 million due to a harsh economic climate in South America (especially Argentina), price competition, and a shift toward lower-margin products.

Is the Paint Stores business still a strong growth engine?

Yes. Paint Stores sales rose 6.1% to $3.19 billion, operating profit rose 9.2% to $411.5 million, and the segment's operating margin reached 12.9%. Comparable-store sales rose 3.7%. Management targets an average of about 3% store-base growth per year, planned 65 to 70 net new stores for 2001, and is increasingly focused on professional painting contractors.

What are the main risks investors should monitor?

Key risks include continued raw material and energy cost inflation, a slowdown in demand (management noted a weaker second half of 2000 and expected sluggish DIY demand through at least mid-2001), further goodwill impairments in the Consumer Segment, and foreign currency losses in South America. The company also faces lead pigment and lead-based paint litigation, for which it has accrued no amounts and says it cannot estimate potential liability. Environmental liabilities at the Southeast Chicago and PMC sites could also exceed current accruals.

SHW 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 13, 2001. Cited figures are marked; the original filing is the authoritative source.

The Sherwin-Williams Company (SHW) reported record 2000 net sales of $5.21 billion^a, up 4.2% from $5.00 billion in 1999, driven by the Paint Stores, Automotive Finishes and International Coatings segments.

However, reported net income collapsed to $16.0 million^b ($0.10 per diluted share) from $303.9 million ($1.80) in 1999, due to a $352.0 million pre-tax ($293.6 million after-tax, or $1.80 per share) non-cash impairment of long-lived assets, almost entirely goodwill, recorded in the fourth quarter in the Consumer Segment (Pratt & Lambert, Thompson's and Cleaning Solutions). Excluding the charge, net income rose 1.9% to $309.7 million and diluted EPS rose 5.6% to $1.90, the company's 23rd consecutive year of operating earnings improvement. Management acknowledged margin pressure from a sharp rise in oil-linked raw material costs, a slowdown in demand in the second half, and an underperforming Consumer Segment, where operating profit excluding the charge fell 8.0%.

The Paint Stores Segment, which generated about 61% of sales, remained the core strength, with sales up 6.1% to $3.19 billion^c, operating profit up 9.2%, and 92 net new stores (2,488 total). Management is shifting focus toward professional painting contractors. The Consumer Segment was restructured into three units, and two non-core businesses (Cleaning Solutions and Graphic Arts) are being marketed for divestiture.

International Coatings operating profit fell 47.9% to $17.7 million^d amid South American economic weakness. Balance sheet metrics remain manageable: long-term debt was roughly flat at $623.6 million, the current ratio was 1.39, and the company bought back 6.8 million shares for $146.9 million. The dividend was raised to $0.145 per quarter in February 2001, extending a 22-year streak of increases.

For investors, the headline GAAP loss is primarily non-cash and did not affect 2000 operating cash flow of $461.1 million. The key questions going forward are whether the Consumer Segment can recover pricing power, whether raw material inflation eases, and whether the company's goodwill and remaining lead-pigment litigation exposure, which is not accrued, will generate further charges.

02—Key points

Key Highlights

Record 2000 net sales of $5.21 billion, up 4.2%, with Paint Stores sales up 6.1% to $3.19 billion and 92 net new company-operated stores (2,488 total).
Reported 2000 net income fell to $16.0 million ($0.10 per diluted share) from $303.9 million ($1.80), primarily due to a non-cash $352.0 million pre-tax ($293.6 million after-tax) impairment charge, mostly goodwill, in the Consumer Segment.
Excluding the impairment, 2000 net income rose 1.9% to $309.7 million and diluted EPS rose 5.6% to $1.90, the 23rd consecutive year of operating earnings improvement.
Gross margin fell to 44.3% from 44.9% as raw material costs (linked to oil prices), energy and distribution costs rose faster than prices; SG&A held at 33.4% of sales.
Consumer Segment sales were roughly flat at $1.22 billion, and operating profit excluding the charge fell 8.0%; the segment was reorganized into three units and two non-core businesses are being marketed for sale.
Operating cash flow was $461.1 million; capital expenditures were $132.8 million; the company repurchased 6.8 million shares for $146.9 million and paid $88.1 million in dividends.
Long-term debt was $623.6 million at year-end; the current ratio was 1.39; the quarterly dividend was raised to $0.145 in February 2001, the 22nd consecutive annual increase.

03—Questions

Frequently Asked Questions

Why did Sherwin-Williams' net income collapse in 2000 even though sales hit a record?
Most of the drop came from a $352.0 million pre-tax ($293.6 million after-tax, or $1.80 per diluted share) impairment of long-lived assets recorded in Q4 2000. The charge reduced the carrying value of goodwill and fixed assets tied to Consumer Segment acquisitions such as Thompson Minwax, Pratt & Lambert and Sunshine Quality Products. The company stated the charge had no cash effect. Excluding it, net income rose 1.9% to $309.7 million.
What is driving the weakness in the Consumer and International Coatings segments?
The Consumer Segment's sales were flat, and its operating profit fell 8.0% (excluding the charge) because raw material cost increases could not be fully passed on to customers amid competitive pricing pressure and a sluggish domestic do-it-yourself market. International Coatings operating profit fell 47.9% to $17.7 million due to a harsh economic climate in South America (especially Argentina), price competition, and a shift toward lower-margin products.
Is the Paint Stores business still a strong growth engine?
Yes. Paint Stores sales rose 6.1% to $3.19 billion, operating profit rose 9.2% to $411.5 million, and the segment's operating margin reached 12.9%. Comparable-store sales rose 3.7%. Management targets an average of about 3% store-base growth per year, planned 65 to 70 net new stores for 2001, and is increasingly focused on professional painting contractors.
What are the main risks investors should monitor?
Key risks include continued raw material and energy cost inflation, a slowdown in demand (management noted a weaker second half of 2000 and expected sluggish DIY demand through at least mid-2001), further goodwill impairments in the Consumer Segment, and foreign currency losses in South America. The company also faces lead pigment and lead-based paint litigation, for which it has accrued no amounts and says it cannot estimate potential liability. Environmental liabilities at the Southeast Chicago and PMC sites could also exceed current accruals.

04—Continue

← View all 10-K filings