Business Context and Reporting Period
Company: The Sherwin-Williams Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Founded in 1866, the Company manufactures, distributes, and sells coatings and related products to professional, industrial, commercial, and retail customers primarily in North and South America. Operations are organized into five reportable segments: Paint Stores, Consumer, Automotive Finishes, International Coatings, and Administrative.
Key Financial Metrics
| Metric (in millions, except per share) | 2003 | 2002 |
|---|---|---|
| Net Sales | $5,408 | $5,185 |
| Net Income | $332 | $128 |
| Income Before Cumulative Effect of Accounting Change | $332 | $311 |
| Total Assets | $3,683 | $3,432 |
| Long-term Debt | $503 | $507 |
| Earnings Per Share (Basic) | $2.29 | $0.85 |
| Cash Dividends Per Share | $0.62 | $0.60 |
| Ratio of Earnings to Fixed Charges | 6.8x | 6.5x |
Note: The 2002 Net Income figure of $128 million includes a one-time impairment charge of $294 million ($1.80 per share after tax) related to a change in accounting principles for goodwill and indefinite-lived intangible assets. Excluding this charge, 2002 income was $311 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by approximately 4.3% from $5,185 million in 2002 to $5,408 million in 2003.
- Profitability: Reported Net Income increased significantly from $128 million in 2002 to $332 million in 2003. This increase is largely attributable to the absence of the $294 million impairment charge recorded in 2002. Adjusted income (before cumulative effect of accounting change) grew from $311 million to $332 million.
- Balance Sheet: Total assets grew by $251 million to $3,683 million. Long-term debt remained relatively stable, decreasing slightly by $4 million to $503 million.
- Operational Expansion: The Paint Stores Segment opened 45 net new stores in 2003 (down from 70 in 2002) and relocated 29 stores.
Guidance, Outlook, and Risks
Management Commentary: The Company maintains sufficient productive capacity to meet needs through 2004. Raw materials and fuel supplies are expected to be available in sufficient quantities. The Company utilizes derivative instruments to manage interest rate and foreign currency risks but does not use them for speculative purposes.
Key Risks and Contingencies:
- Legal Proceedings: Significant exposure exists regarding lead pigment and lead-based paint litigation, as well as environmental remediation activities. The outcome of these matters is uncertain.
- Foreign Operations: Risks include inflation, recessions, foreign currency exchange rates, and political unrest in markets such as China, South America, and Mexico.
- Market Conditions: Performance is subject to general business conditions, competitive pricing pressures, and changes in raw material costs.
- Seasonality: Sales for Paint Stores, Consumer, and Automotive Finishes segments are traditionally higher in the second and third quarters.
Investor Verification Checklist
- Accounting Changes: Verify the impact of the 2002 goodwill impairment charge ($294 million) to accurately compare 2002 and 2003 operating performance.
- Legal Exposure: Review the "Legal Proceedings" section and Notes 1, 8, and 12 of the financial statements for updates on lead paint litigation and environmental liabilities.
- Foreign Currency Impact: Assess the potential for continued losses from foreign currency translation given the Company's significant international operations.
- Store Economics: Analyze the profitability of the 45 net new stores opened in 2003 versus the 70 opened in 2002 to gauge the efficiency of expansion.
- Debt Covenants: Confirm compliance with debt covenants given the stable long-term debt level of $503 million.