2005 Annual Report - Investor Relations - Sherwin-Williams

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales for 2005 increased due primarily
to volume increases from continuing strong domestic
architectural paint sales to contractor and DIY
customers and improved international sales. Consolidated
net sales include the operations of four acquisitions
completed at various times after April 2004 including
the operations of two larger acquisitions, Duron and
PSB, beginning with the month of September 2004. The
acquisitions increased consolidated net sales $369.7
million, or 6.0 percent, in 2005. Favorable currency
exchange fluctuations increased consolidated net sales
approximately 1.1 percent.
Net sales in the Paint Stores Segment in 2005
increased due primarily to continuing strong domestic
architectural paint sales to contractor and DIY customers.
The acquisition of Duron added 229 stores
to this Segment in 2004 and increased 2005 net sales
approximately 6.7 percent. Net sales from stores opened
more than twelve calendar months increased 13.6 percent
for the full year. During 2005, the Paint Stores
Segment opened 98 net new stores. At the end of 2005,
this Segment had 3,081 stores in operation in the United
States, Canada, Mexico, Puerto Rico and the Virgin
Islands. The Paint Stores Segment’s objective is to
expand its store base an average of three percent each
year, primarily by internal growth.
Consumer Segment net sales increased 7.7 percent
due primarily to sales from acquisitions that increased
net sales 7.7 percent. In 2006, this Segment plans to
continue its aggressive promotions of new and existing
products and expanding its customer base.
The Automotive Finishes Segment’s net sales increase
for the year resulted primarily from strong international
sales and favorable currency fluctuations that increased
net sales approximately 4.5 percent and new product
line introductions. The Segment was negatively impacted
by the disposition of Kinlita during the third quarter
of 2005. There were 203 automotive branches open at
the end of 2005 in the United States, Canada, Chile,
Jamaica and Peru. In 2006, this Segment expects to continue
opening new branches, increasing sales in strengthening
international markets and improving its customer
base in a soft domestic market.
Net sales in the International Coatings Segment
increased due primarily to favorable currency exchange
fluctuations that increased net sales approximately 9.8
percent and pricing improvements in South America.
Partially offsetting these increases were lower volume
sales in the United Kingdom.
Shown below are operating profit and the percent
change for the current period by reportable segment:
(thousands of dollars)
2005 Change 2004
Paint Stores.................. $ 592,508 23.4% $ 480,213
Consumer .................... 169,136 (9.9%) 187,717
Automotive Finishes .... 57,244 (1.4%) 58,056
International Coatings. 23,559 30.6% 18,041
Administrative ............. (186,232) (13.7%) (163,832)
$ 656,215 13.1% $ 580,195
Consolidated operating profit in 2005 increased
primarily due to increased sales volume generating an
increase in gross profit of $379.0 million that more than
offset increased selling, general and administrative
expenses of $257.3 million. As a percent of sales, consolidated
gross profit decreased to 42.8 percent from
44.2 percent in 2004. The decrease in gross profit as a
percent of sales was due primarily to raw material cost
increases that could not be completely offset by price
increases or manufacturing efficiencies.
The Paint Stores Segment’s gross profit for 2005
increased $343.0 million due primarily to increased
sales volume, but decreased as a percent of sales approximately
1.6 percent due to significantly increased raw
material costs. In the Consumer Segment, gross profit
for 2005 increased due primarily to the PSB acquisition
and manufacturing efficiencies. Gross profit as a percent
of sales declined due to increasing raw material costs
that could not be recovered through selling price
increases. The Automotive Finishes Segment’s gross
profit increased over 2004 due primarily to increased
selling prices and foreign sales volume increases that
were partially offset by rising raw material costs. The
International Coatings Segment’s gross profit increased
due to the net sales gain, and improved operating efficiencies
related to additional manufacturing volume in
South America partially offset by continued raw material
cost increases and a reduction in gross profit caused
by lower volume sales in the U.K.
Consolidated selling, general and administrative
expenses (SG&A), increased $257.3 million due primarily
to expenses associated with the sales growth but
decreased as a percent of sales to 32.4 percent in 2005
from 33.8 percent in 2004 due to good expense control.
In the Paint Stores Segment, SG&A increased $232.0
million, and declined as a percent of sales approximately
1.5 percent, due primarily to incremental expenses
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