2001 Annual Report - Investor Relations - Sherwin Williams

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONSnature, extent and potential impact, if any, of environmentalcontamination at the facility and (ii) implement remedialaction measures, if required, to address any environmentalcontamination identified pursuant to the investigation.While the Company continues to investigate this site, certaininitial remedial actions have occurred at this site.In 1999, the Company entered into a settlement agreementwith PMC, Inc. settling a lawsuit brought by PMCregarding the Company’s former manufacturing facility inChicago, Illinois which was sold to PMC in 1985. Pursuantto the terms of the settlement agreement, the Companyagreed, in part, to investigate and remediate, as necessary,certain soil and/or groundwater contamination caused byhistorical disposals, discharges, releases and/or events occurringat this facility. In 2000, the Company entered into aConsent Decree with the People of the State of Illinois settlingan action brought by the State of Illinois against theCompany regarding the PMC facility. Under the ConsentDecree, the Company agreed, in part, to investigate andremediate, as necessary, certain soil and/or groundwatercontamination caused by historical disposals, discharges,releases and/or events occurring at this facility. The Companyis currently conducting its investigation of this facility.With respect to the Company’s southeast Chicago, Illinoisfacility and the PMC facility, the Company hasevaluated its potential liability and, based upon its investigationsto date, has accrued appropriate amounts. However,due to the uncertainties surrounding these facilities, theCompany’s ultimate liability may result in costs that aresignificantly higher than currently accrued. In such event,the recording of the liability may result in a material impacton net income for the annual or interim period during whichthe additional costs are accrued. The Company expects thecontingent liabilities related to these facilities to be resolvedover an extended period of time.The Company does not believe that any potential liabilityultimately attributed to the Company for itsenvironmental-related matters will have a material adverseeffect on the Company’s financial condition, liquidity, cashflow or, except as set forth in the preceding paragraph, netincome. See Note 9, on page 39 of this report, for discussionof the environmental-related accruals included in theCompany’s Consolidated Balance Sheets.The Company is exposed to market risk associated withinterest rates and foreign currency exposure. The Companyutilizes derivative instruments as part of its overallfinancial risk management policy, but does not use derivativeinstruments for speculative or trading purposes. TheCompany has partially hedged risks associated with fixedinterest rate debt by entering into various interest rate swapagreements (see Note 7, on page 38 of this report). TheCompany does not believe that any potential loss relatedto interest rate exposure will have a material adverse effecton the Company’s financial condition, results of operationsor cash flows. The Company also entered into foreign currencyoption and forward contracts to hedge against valuechanges in foreign currency (see Note 4, on page 35 of thisreport). The Company believes it may experience continuinglosses from foreign currency translation. However, theCompany does not expect currency translation, transactionor hedging contract losses to have a material adverse effecton the Company’s financial condition, results of operationsor cash flows.Results of Operations – 2001 vs 2000Consolidated net sales decreased 2.8 percent to $5.1 billionin 2001. The most significant factors impacting salesduring the year came from the previously announced discontinuedpaint programs at certain customers in theConsumer Segment, continuing poor domestic and SouthAmerican economic conditions and continuing weaknessin foreign currency exchange rates. Excluding the effects ofthe previously announced discontinued paint programs,consolidated net sales would have been down 1.2 percentfor the year.Net external sales in the Paint Stores Segment during2001 increased 0.7 percent to $3.21 billion as higher architecturalpaint sales offset sales shortfalls in the productfinishes and associated product categories. Sales in this Segmentcontinued to be impacted by the sluggish domesticeconomy and weakness in product finishes sales. Sales toprofessional painters and industrial maintenance usersshowed gains for the year. Comparable-store sales decreased1.3 percent in 2001. This Segment ended 2001 with 2,573stores in operation compared to 2,488 stores in operationat the end of the prior year. The objective of the Paint StoresSegment is to expand its store base an average of roughlythree percent each year. In 2001, the Segment added 85 netnew stores through new store openings or acquisition andexpects to add approximately 50 net new stores in 2002.External sales in the Consumer Segment decreased 9.0percent during 2001 to $1.1 billion. Excluding the previouslyannounced discontinued paint programs at certaincustomers, external sales for this Segment would havedecreased 2.4 percent for the year. Sales comparisons willbe impacted in the Consumer Segment for 2002 by the anticipatedloss of sales caused by the disposition of the CleaningSolutions Group business. This Segment also continues tobe impacted by the sluggish domestic economy, which isexpected to continue through 2002. The Segment’s plans for2002 include new product introductions and expansion ofits presence at certain retailers and new customer accountsin preparation of an eventual economic recovery. The pendingoutcome of a bankruptcy filing for reorganization by alarge retail customer may have an adverse effect on sales ofthis Segment. Management is unable to determine the poten-24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONStial impact on sales at this time.External sales in the Automotive Finishes Segmentdecreased 5.9 percent during 2001 to $464.2 million dueprimarily to the continuing negative impact of the softdomestic economy on this Segment’s OEM sales that couldnot be offset by higher collision repair sales throughout theyear. The Company expects that stronger collision repairsales, an increase in the number of automotive branchesand sales from new product and color introductions willresult in a sales increase for this Segment in 2002.External sales in the International Coatings Segmentdecreased 8.9 percent to $279.6 million. The sales decreases,in U.S. dollars, were due primarily to unfavorablecurrency exchange rates. Excluding the effects of currencyexchange fluctuations relative to last year, net sales for theSegment increased 5.2 percent for 2001. Net sales for theyear, in local currencies, continued to be impacted by competitivepricing and a shift in sales to lower priced productsdue to continued poor market and macroeconomic conditionsin Brazil and Argentina. The Company expects torealize only minimal sales volume improvements in theInternational Coatings Segment in 2002 as economic conditionsare not expected to improve in most South Americancountries in which we operate, especially in Argentinawhere a government controlled currency devaluation isbeing implemented during the beginning of 2002.Consolidated gross profit as a percent of sales decreasedto 43.8 percent from 44.3 percent in 2000. The Company’sgross profit margin was impacted by raw material costincreases, inflated energy costs and higher distribution costsduring the first half of the year for 2001 versus 2000. Additionally,gross profit was impacted by rising health care andother employee benefit costs. The Paint Stores Segment’s2001 gross profit margin was flat versus 2000 as a favorablepaint product sales mix and selective selling priceincreases were offset by a charge of $2.1 million for thecosts associated with closing a manufacturing facility in theChemical Coatings Division. Gross profit margin in theConsumer Segment was below last year due to the salesshortfall and competitive pricing pressures that prohibitedselling price increases sufficient to offset higher year-overyearraw material, distribution and energy costs earlier inthe year. Gross profit margin was essentially flat versus lastyear in the Automotive Finishes Segment. Selective sellingprice increases, a favorable product sales mix, and provisionsfor qualified exit costs recorded in 2000 improved themargin comparison in this Segment, while lower productionvolume and higher raw material, distribution andenergy costs earlier in the year offset these improvements.Gross profit margin in the International Coatings Segmentdecreased primarily due to price competition and a marketshift in product sales to lower priced products in the faceof higher U.S. dollar denominated raw material costs.Consolidated selling, general and administrative expenses(SG&A) for 2001 were $1,729.9 million, which was$10.5 million below last year’s spending level. As a percentof sales, SG&A increased to 34.1 percent from 33.4 percentin 2000 due primarily to lower sales. Overall, SG&A in allSegments is being impacted by rising health care and otheremployee benefit costs. The Paint Stores Segment’s SG&Aratio was slightly unfavorable compared to last year primarilydue to incremental increases in expenses associatedwith the 85 stores added through new store openings oracquisition. In spite of the sluggish market conditions, thePaint Stores Segment continues to invest in its business byopening or acquiring stores and maintaining customer service.A slightly favorable SG&A ratio in the ConsumerSegment for 2001 as compared to last year was primarily aresult of certain SG&A cost reductions in response to lowersales activity. In dollar spending, Consumer Segment SG&Afor 2001 was approximately $37.0 million below last year.The Automotive Finishes Segment’s SG&A was higher forthe year as the Segment continued some incremental spendingin order to maintain its market share and customerservice levels in a competitive market. The InternationalCoatings Segment’s SG&A was favorable for the year dueprimarily to weaker foreign currencies and the effect on statingSG&A in U.S. dollars. As a percent of sales, thisSegment’s SG&A ratio increased due to lower sales volume.Consolidated segment operating profit for 2001increased to $424.4 million or 8.4 percent of sales comparedto $143.4 million or 2.8 percent of sales in 2000.During the fourth quarter of 2000, the Company recognizedan asset impairment charge of $352.0 million againstsegment operating profit in the Consumer Segment toreduce the carrying values of certain long-lived assets, primarilygoodwill, to their estimated fair values. Excludingthe asset impairment charge, consolidated segment operatingprofit would have been $495.4 million in 2000 or 9.5percent of sales. Segment operating profit of the Paint StoresSegment decreased to $390.5 million or 12.2 percent ofsales as a favorable paint product sales mix and selectiveselling price increases could not offset the expense associatedwith closing a manufacturing facility in the ChemicalCoatings Division and the incremental expenses related tonew store openings. The Consumer Segment’s operatingprofit declined to $108.2 million or 9.8 percent of externalsales due primarily to the sales shortfall and competitivepricing pressures that prohibited selling price increases sufficientto offset higher year-over-year raw material,distribution and energy costs earlier in the year. Segmentoperating profit of the Automotive Finishes Segmentdecreased to $51.2 million or 11.0 percent of external salesprimarily due to lower production volume and higher rawmaterial, distribution and energy costs earlier in the yearand incremental SG&A spending in order to maintain its25
Page 1: The Sherwin-Williams Company2001 AN
Page 4 and 5: SUMMARY OF Operating SegmentsPaint
Page 6 and 7: Christopher M. ConnorChairman and C
Page 8 and 9: letter to shareholdersnegative year
Page 10 and 11: Alfred LewisCity Manager, Paint Sto
Page 12 and 13: Fred KoneckiCase PackerChicago, Ill
Page 15 and 16: Automotive finishes segmentThe Sher
Page 17 and 18: International Coatings segmentShare
Page 19 and 20: TITUSVILLE,FLA. -➛A shortage of A
Page 21 and 22: SUBSIDIARIESForeignCoatings S.r.L.C
Page 23 and 24: Management’s Discussion and Analy
Page 25: MANAGEMENT’S DISCUSSION AND ANALY
Page 29 and 30: MANAGEMENT’S DISCUSSION AND ANALY
Page 31 and 32: STATEMENTS OF CONSOLIDATED INCOME(T
Page 33 and 34: STATEMENTS OF CONSOLIDATED CASH FLO
Page 35 and 36: NOTES TO CONSOLIDATED FINANCIAL STA
Page 49 and 50: Directors, Officers, Operating Pres

2001 Annual Report - Investor Relations - Sherwin Williams

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