Currency Issues Hit Sherwin-Williams Earnings Results

The Sherwin-Williams Company announced its financial results for the first quarter ended March 31, 2003. Consolidated net sales for the quarter decreased $0.7 million, or 0.1 percent, to $1.148 billion, with currency fluctuations shouldering much of the blame. All figures in U.S. funds.
A continuing poor domestic industrial sector, harsh weather, changes in the buying patterns of some retail customers and weak currency exchange rates adversely impacted first quarter sales.
Income for the quarter declined $4.0 million, or 11.5 percent, to $30.8 million from $34.8 million in 2002 before cumulative effect of change in accounting principle. Excluding a charge of $9.0 million included in cost of goods sold in the first quarter of 2002 due to the recorded impairment of long-lived assets, gross profit for the first quarter 2003 was essentially flat with last year in dollars and as a percent of sales.
Increased selling, general and administrative expenses to maintain customer service in stores and to invest in the Asia/Pacific market adversely impacted income before income taxes and cumulative effect of change in accounting principle.
Diluted income per common share for the quarter was $.21 per share compared to $.23 per share before cumulative effect of change in accounting principle in 2002. In the first quarter of 2002, the company recorded an after-tax transitional impairment charge of $183.1 million, or $1.21 per share, as a cumulative effect of change in accounting principle for indefinite lived intangible assets and goodwill.
First quarter net sales in the Automotive Finishes segment decreased 4.6 percent to $106.4 million from $111.6 million last year. The sales decrease was due primarily to unfavourable currency exchange rates. Excluding the effects of currency exchange fluctuations relative to last year, net sales for this segment were up slightly for the quarter. Domestically, a reduction in the number of repairable vehicles restrained growth in collision repair sales while the slowly recovering automotive market continued to curtail OEM sales. Operating profit of this segment for the first quarter of 2003 went down $1.3 million to $10.1 million from last year’s $11.4 million. This segment’s operating profit was negatively impacted by lower sales volume and manufacturing absorption and increased pension expense compared to last year.
Net sales in the International Coatings segment were down $3.6 million to $57.8 million in the first three months of 2003 from $61.4 million a year ago.
The sales decrease in U.S. dollars of 5.9 percent was due primarily to unfavourable currency exchange rates. Excluding the effects of currency exchange fluctuations relative to last year, net sales for the segment increased 9.5 percent for the quarter.
The International Coatings segment realized an operating loss during the first quarter of 2003 of $0.3 million compared to an operating loss of $8.5 million a year ago. Excluding a charge of $9.0 million to operating profit in the first quarter of 2002 due to the recorded impairment of long-lived assets, the segment realized a reduction of $0.8 million in operating profit for the first quarter of 2003.
This reduction in the operating profit from last year, excluding the impairment charge, was due primarily to significant currency rate fluctuations that adversely affected gross margins as a result of purchasing many required raw materials on a U.S. dollar denominated basis.
Net sales in the Paint Stores segment increased 2.9 percent to $716.3 million in the first quarter of 2003 from $695.9 million in 2002 due to strong architectural paint sales that were partially offset by weak industrial maintenance and product finishes sales.
Architectural paint sales to painting contractors and do-it-yourself customers in the first quarter of 2003 increased over the comparable quarter last year. During the first quarter, sales from stores open for more than twelve calendar months were flat with last year’s first quarter due primarily to the impact of weak industrial coatings sales.
The Paint Stores segment operating profit declined $10.1 million to $29.9 million during the first three months of 2003. This segment’s operating profit decline from the first quarter of 2002 was due primarily to expenses incurred to maintain superior customer service, incremental expenses associated with new and acquired stores, increased pension expense and increased utility costs. This segment opened eight net new stores during the quarter. Net sales of the consumer segment in the first quarter decreased 4.5 percent to $266.2 million from $278.8 million last year. The sales shortfall was due primarily to changes by some of the segment’s largest retail customers in their ordering or promotional patterns, the readjustment of store count by a major retailer, the impact of harsh weather and stringent inventory control relating to the slow domestic economy.
Operating profit of this segment decreased $4.1 million to $39.1 million in the quarter from $43.2 million in the first quarter of 2002. The operating profit decrease was due primarily to lower sales volume and the related manufacturing absorption and increased pension expense compared to a year ago.
Commenting on the first quarter results, Christopher M. Connor, Chairman and Chief Executive Officer, said, “We were encouraged by the strength of the Paint Stores segment’s architectural paint sales and disappointed by the continuing weakness of the industrial maintenance and product finishes markets. We are confident that the Paint Stores segment’s higher pension and utility costs will be offset by productivity gains. This segment will continue to incur higher expenses relating to its ongoing investment pattern in new stores, its investment in the Asia/Pacific market and maintenance of excellent customer service.
"In the Consumer segment, we believe that the first quarter sales decline was caused by the combination of a weak economy, uncertainty amid the war in Iraq and harsh weather that slowed consumer traffic at many of the retail customers. As these factors begin to dissipate, we believe we will see sales improvements in this segment. The cost containment efforts implemented over the past few years in the Consumer segment maintained operating profit at the same percentage of sales before the impact of additional pension expense. Soft domestic economic conditions and the trend of insurance companies to reduce the number of vehicles that are authorized for repair continued to hamper sales of the Automotive Finishes segment. The International Coatings segment continued to improve local operations in spite of lingering poor economic conditions.
"As we discussed in the 2002 annual report, an additional hurdle for us in 2003 is the added cost to our operations of our defined benefit pension plans. We anticipate that the consolidated net pension expense, which was a credit to operations of $23.0 million for the full year 2002, will be a charge to operations of $1.0 million for the full year 2003, resulting in an incremental cost to our operations of $24.0 million. We have considered this impact in determining our expected operating results for the year. We continue to manage the net of accounts receivable, inventories and accounts payable significantly below last year’s level. Our total debt at March 31, 2003 is $116.5 million below total debt at the same time a year ago. We continued our open market purchases of the company’s common stock, acquiring 2,552,000 shares in the first quarter of 2003, and had remaining authorization at March 31, 2003 to purchase 7,748,000 shares. We expect that achieving improved year-over-year sales and profit comparisons for our company will continue to be challenging as we anticipate a long, slow recovery in the industrial and OEM markets.
"We plan to continue launching new products, opening stores, promoting our new colour system, enhancing the shopping experience in our stores and increasing the productivity of operations to improve sales and operating
income. We anticipate that second quarter sales will be flat to up in the low single digits over last year’s second quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $.73 to $.78 per share compared to $.70 per share last year. For the year 2003, we expect sales will increase 2.0 to 3.5 percent over 2002.
"This range is lower than our previous estimate due to the lingering soft domestic economic conditions and the increasing uncertainty of the timing and strength of the eventual economic recovery. We have reduced our expectations for diluted net income per common share for the year, reflecting our lower sales estimates, to a range of $2.08 to $2.24 per share compared to $2.04 per share earned last year before cumulative effect of change in accounting principle.”