Business Context and Reporting Period
Company: The Sherwin-Williams Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: The Company manufactures and sells paints, coatings, and related products through four reportable segments: Paint Stores, Consumer, Automotive Finishes, and International Coatings.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2003 | 9 Months Ended Sep 30, 2003 |
|---|---|---|
| Net Sales | $1,503,086 | $4,123,225 |
| Gross Profit | $678,646 | $1,846,162 |
| Gross Margin % | 45.2% | 44.8% |
| Operating Profit | $189,444 | $411,381 |
| Net Income | $120,297 | $261,227 |
| Diluted EPS | $0.82 | $1.77 |
| Operating Cash Flow (9mo) | $277,093 | |
| Cash and Equivalents (Sep 30, 2003) | $148,718 | |
| Total Debt (Current + Long-term) | $516,718 |
Material Changes vs. Prior Period
- Sales Growth: Consolidated net sales increased 5.4% in the third quarter and 2.3% for the first nine months compared to 2002. Growth was driven primarily by strengthening domestic architectural paint sales in the Paint Stores segment.
- Profitability: Net income for the third quarter increased 8.1% to $120.3 million. For the first nine months, income before the cumulative effect of accounting changes increased 3.0% to $261.2 million.
- Segment Performance:
- Paint Stores: Sales up 5.4% (quarter) and 3.7% (9 months); comparable-store sales up 4.5% (quarter).
- Consumer: Sales up 4.7% (quarter) but down 0.3% (9 months) due to raw material price increases and unfavorable mix.
- International Coatings: Sales up 17.1% (quarter) and 5.3% (9 months), aided by currency fluctuations and recovery in Argentina and the UK.
- Accounting Change: The 2002 nine-month net income included a one-time cumulative effect charge of $183.1 million (net of tax) related to the adoption of SFAS No. 142 (Goodwill and Other Intangible Assets), which impaired certain indefinite-lived intangible assets and goodwill. This charge is not present in 2003 results.
Outlook, Risks, and Management Commentary
- Liquidity and Capital Allocation: The Company generated $277.1 million in operating cash flow for the first nine months. This was used for capital expenditures ($87.9 million), cash dividends ($68.2 million), and significant treasury stock purchases ($140.0 million). The Board authorized a new share repurchase program for 20.0 million shares in October 2003.
- Debt and Financing: The Company issued $350.0 million of convertible preferred stock to its ESOP in August 2003. There were no short-term borrowings outstanding under the commercial paper program, with $718.0 million in unused availability.
- Legal and Environmental Risks:
- Lead Paint Litigation: The Company is a defendant in numerous lawsuits regarding lead pigments and lead-based paints. Management believes the litigation is without merit but acknowledges the uncertainty of outcomes and potential future claims. No amounts have been accrued.
- Environmental Remediation: The Company is involved in remediation at current and former sites, including Superfund sites. While accruals exist for known costs, ultimate liabilities could be higher due to uncertainties in investigation and remediation.
- Forward-Looking Risks: Risks include raw material pricing, foreign currency fluctuations, economic conditions in South America and China, and regulatory changes.
Investor Verification Checklist
- Accounting Adjustments: Verify the impact of the SFAS No. 142 adoption in 2002 to ensure accurate year-over-year comparisons of net income and EPS.
- Lead Paint Litigation Exposure: Review the status of pending class actions and government suits regarding lead-based paints, as management has not accrued for these potential liabilities.
- Share Repurchase Activity: Confirm the execution of the new 20.0 million share repurchase authorization announced in October 2003.
- Environmental Accruals: Monitor updates on the southeast Chicago and PMC facility investigations, as final remediation costs may exceed current accruals.
- ESOP Preferred Stock: Track the redemption and conversion activity of the $350 million preferred stock issued to the ESOP in August 2003.