10-QPeriod: Q1 FY2002

SHERWIN WILLIAMS CO Quarterly Report for Q1 Ended Mar 31, 2002

Filed May 15, 2002For Securities:SHW

Summary

Sherwin-Williams Company (SHW) reported its first-quarter 2002 financial results, marked by a significant net loss primarily driven by a one-time $183.1 million after-tax charge related to the adoption of SFAS No. 142. This new accounting standard requires the cessation of goodwill amortization and mandates impairment testing for goodwill and intangible assets. Despite the reported net loss of $0.98 per share, the underlying operational performance, excluding this accounting change, showed income of $0.23 per share, consistent with the prior year's first quarter. Net sales saw a slight decrease of 0.8% to $1.15 billion, impacted by economic conditions in South America and a sluggish domestic industrial sector. However, gross profit margins improved to 42.8% from 42.2% due to lower raw material and energy costs, partially offset by segment-specific pressures.

Key Highlights

  • 1Reported a net loss of $148.4 million ($0.98 per share) in Q1 2002, largely due to a $183.1 million after-tax charge from adopting SFAS No. 142 related to goodwill and intangible asset impairment.
  • 2Excluding the SFAS No. 142 charge, income before the cumulative effect of accounting changes was $34.8 million, or $0.23 per share, matching Q1 2001.
  • 3Net sales decreased slightly by 0.8% to $1.15 billion compared to $1.16 billion in Q1 2001, attributed to economic challenges in South America and a weak domestic industrial sector.
  • 4Gross profit margin improved to 42.8% from 42.2% due to lower raw material and energy costs, although some segments faced margin pressures.
  • 5Selling, general, and administrative (SG&A) expenses as a percentage of sales increased slightly due to lower sales and increased costs in certain segments.
  • 6Interest expense decreased due to lower average debt levels and borrowing rates.
  • 7The company generated negative operating cash flow of $111.2 million for the quarter, impacted by seasonal working capital increases and a $100 million long-term debt payment.

Frequently Asked Questions

The primary reason for the net loss of $148.4 million is the adoption of SFAS No. 142, 'Goodwill and Other Intangible Assets.' This resulted in a one-time, non-cash transitional impairment charge of $183.1 million after tax, reducing the carrying value of goodwill and certain intangible assets to their estimated fair values. This charge is presented as a cumulative effect of a change in accounting principle.

Sherwin-Williams' net sales experienced a slight decrease of 0.8% to $1.15 billion in the first quarter of 2002, compared to $1.16 billion in the same period of 2001. This decline was attributed to challenging economic conditions in South America, particularly currency devaluation in Argentina and Brazil, and a continued sluggishness in the domestic industrial sector.

For the first quarter of 2002, the company used $111.2 million in operating cash flow, impacted by seasonal working capital needs. To manage operational needs and other expenditures, short-term borrowings increased significantly by $219.8 million. The company expects to remain in a short-term borrowing position for most of 2002 and does not anticipate needing external financing for its capital programs during the remainder of the year.

The company is involved in extensive litigation concerning lead pigments and lead-based paints, facing numerous claims from government entities. While the company believes these claims are without merit and is vigorously defending them, it cannot predict the outcome or estimate potential liabilities. Additionally, the company is addressing environmental compliance, investigation, and remediation activities at current and former sites, and has accrued amounts for which costs can be reasonably estimated, though ultimate liabilities could be higher. Management does not currently believe these matters will have a material adverse effect on the company's financial condition, liquidity, or results of operations, except for potential future adjustments to environmental accruals.