10-QPeriod: Q1 FY2007

SHERWIN WILLIAMS CO Quarterly Report for Q1 Ended Mar 31, 2007

Filed April 23, 2007For Securities:SHW

Summary

Sherwin-Williams' Q1 2007 report shows a slight decrease in net sales and net income compared to the prior year, with net sales down 0.7% to $1.756 billion and net income down 1.6% to $111.8 million. This was primarily attributed to softness in the domestic architectural paint DIY and new residential markets. Despite the revenue dip, diluted earnings per share saw a marginal increase to $0.83 from $0.82, reflecting a reduction in average shares outstanding. The company's gross profit margin improved due to better factory utilization and pricing strategies, though this was offset by an increase in selling, general, and administrative expenses. Sherwin-Williams also announced significant acquisition agreements for M.A. Bruder & Sons Incorporated and Nitco Paints, indicating strategic growth initiatives. Investors should note the ongoing material risks associated with lead pigment and lead-based paint litigation, where a Rhode Island court ruled against the company for abatement costs, a decision under appeal, and substantial environmental liabilities requiring ongoing assessment.

Key Highlights

  • 1Consolidated net sales slightly decreased by 0.7% to $1.756 billion in Q1 2007 compared to Q1 2006.
  • 2Net income decreased by 1.6% to $111.8 million, impacted by a higher effective tax rate.
  • 3Diluted Earnings Per Share (EPS) increased by 1.2% to $0.83 due to a reduction in outstanding shares.
  • 4Gross profit margin improved to 45.1% from 43.6%, driven by better factory utilization and pricing.
  • 5Selling, General, and Administrative (SG&A) expenses increased as a percentage of sales to 35.2% from 33.8%.
  • 6The company entered into agreements to acquire M.A. Bruder & Sons Incorporated and Nitco Paints (India), signaling expansion.
  • 7Significant ongoing litigation and environmental liabilities remain a material risk, with no amounts accrued for lead-based paint litigation.

Frequently Asked Questions

The decrease in net sales was primarily due to softness in the domestic architectural paint do-it-yourself (DIY) customer market and weakness in the new residential construction market.

The company acknowledges significant risks associated with lead pigment and lead-based paint litigation, including a recent adverse ruling in Rhode Island regarding abatement costs, which is under appeal. Environmental liabilities are substantial and require ongoing assessment, with the company estimating potential liabilities significantly higher than current accruals, though they do not currently believe these will materially affect financial condition, liquidity, or cash flow due to the extended time frame for resolution.

Yes, Sherwin-Williams entered into definitive agreements to acquire M.A. Bruder & Sons Incorporated and Nitco Paints (India), indicating a strategy for growth through acquisitions.

While net sales and net income slightly decreased, diluted EPS saw a modest increase. The improvement in gross profit margin was a positive driver, but this was counteracted by an increase in SG&A expenses and a higher effective tax rate, which ultimately led to the slight decline in net income.