10-QPeriod: Q2 FY2001

SHERWIN WILLIAMS CO Quarterly Report for Q2 Ended Jun 30, 2001

Filed August 14, 2001For Securities:SHW

Summary

Sherwin-Williams Company reported a decline in net sales and net income for both the three-month and six-month periods ending June 30, 2001, compared to the prior year. Net sales decreased primarily due to challenging economic conditions in the U.S. and South America, unfavorable currency exchange rates, and discontinued paint programs. The Paint Stores segment showed modest growth, but this was offset by significant declines in the Consumer and International Coatings segments. Gross profit margins were negatively impacted across most segments, attributed to lower volumes, competitive pricing, and rising raw material costs. Selling, general, and administrative expenses as a percentage of sales also increased, particularly in the Paint Stores segment due to new store openings. Despite these top-line and margin pressures, the company's financial condition remained stable, with an increase in cash and cash equivalents and a manageable increase in short-term borrowings. Management is actively managing its capital structure and shareholder returns through share repurchases and dividends, while also navigating significant legal and environmental contingencies.

Key Highlights

  • 1Consolidated net sales decreased by 1.5% to $1.41 billion for the quarter and 3.2% to $2.57 billion for the six months ended June 30, 2001.
  • 2Net income for the quarter decreased to $90.5 million from $115.8 million in the prior year, and for the six months, it fell to $127.4 million from $156.8 million.
  • 3Diluted earnings per share declined to $0.58 for the quarter and $0.80 for the six months, compared to $0.71 and $0.96, respectively, in the prior year.
  • 4The Paint Stores segment demonstrated resilience with a 1.9% increase in net sales for the quarter, though comparable-store sales declined.
  • 5Gross profit margins contracted in most segments due to factors like lower volume, competitive pricing, and rising raw material costs.
  • 6The company issued $250 million of preferred stock to its ESOP, financed by a loan from the company, as part of a new capital structure arrangement.
  • 7Significant legal proceedings related to lead pigments and lead-based paints, as well as environmental remediation activities, continue to be noted with no current accrual for material adverse effects, though uncertainties remain.

Frequently Asked Questions

The decline in net sales was primarily attributed to ongoing weak economic conditions in the U.S. and South America, unfavorable foreign currency exchange rates, and the previously announced discontinuation of paint programs with certain customers. The Consumer and International Coatings segments were particularly impacted.

Profitability declined significantly. Net income decreased by approximately 22% for the quarter and 19% for the six-month period. This was driven by lower sales, a contraction in gross profit margins across most segments, and an increase in selling, general, and administrative expenses as a percentage of sales.

The company's cash and cash equivalents increased during the first six months of 2001. While short-term borrowings increased substantially, this was supported by the company's commercial paper program and revolving credit facilities. The company used operating cash flow for debt repayment, capital expenditures, share repurchases, and dividends. The current ratio decreased, primarily due to increased short-term borrowings.

Sherwin-Williams is involved in numerous legal proceedings related to lead pigments and lead-based paints, seeking damages for health and property issues. Additionally, the company is addressing environmental compliance, investigation, and remediation activities at current and former sites, and is designated as a potentially responsible party at several third-party sites. While the company believes these matters will not have a material adverse effect on its financial condition, there are inherent uncertainties and potential for future costs.