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IRS Audit Dings Sherwin, But Q3 Booms

Tuesday, October 25, 2011

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Sherwin-Williams is reporting good news for its third quarter and bad news for its fourth, with record Q3 net sales trailed by a $75 million tax charge to end the year.

“Strong organic sales growth” by the Global Finishes Group, which includes Protective and Marine Coatings, helped deliver a record $2.48 billion in consolidated net sales for the third quarter and a record $6.7 billion for the first nine months of the year, the Cleveland-based coatings maker reported Tuesday (Oct. 25).


 Photos: Sherwin-Williams

The Global Finishes Group, which includes Protective and Marine Coatings, saw record net sales for the third quarter and first nine months of the year.

After a disappointing second quarter, the company’s consolidated net sales rose 14.4 percent for the third quarter and 13.8 percent for nine months.

CEO Christopher M. Connor said he was “encouraged” by performance in the architectural segments and “pleased” with the strong sales in the Global Finishes Group.

Tax Audit Settlement

Hours before releasing its third-quarter results, however, the company had other news for shareholders: It announced late Monday (Oct. 24) that it had settled a long-running Internal Revenue Service audit regarding transactions involving its employee stock ownership plan (ESOP).

Under the settlement, Sherwin will pay an after-tax charge of $75 million—or 72 cents per diluted common share—in the fourth quarter, which will reduce shareholders’ equity in that quarter by about $51.2 million, the company said.

The settlement “resolves all ESOP related tax issues, including interest,” the company said.  The company did not include the settlement amounts in its earlier fourth-quarter or full-year earnings guidance.

Deductions Challenged

The audit involved Sherwin-Williams’ federal tax returns for 2004 through 2007 for income taxes and 2003 through 2009 for excise taxes. The audit focused on Leveraged ESOP Transactions implemented Aug. 27, 2003, and Aug. 1, 2006.

The IRS had challenged $418.7 million in federal income tax deductions related to the Leveraged ESOP Transactions that saved the company $146.5 million in federal taxes. Later deductions related to the same transactions saved the company $99.2 million and $34.7 million, respectively.

The IRS informed Sherwin-Williams in May that it would face tax adjustments related to the transactions, and the company said it would “vigorously defend” its position. Later, it agreed to a Fast Track Settlement of the case.

IRS policy prohibits the agency from discussing the case, an agency spokesman said Tuesday.

Share Earnings, News

Before disclosing the tax settlement, Sherwin-Williams shored up investors Friday with news that it would buy back 20 million shares.

On Tuesday, the company reported, third-quarter diluted net income per common share increased to $1.71 from $1.60 in 2010; the nine-month figure increased to $3.98 per share from $3.53 in 2010.

The nine-month increase was due primarily to higher sales in the Global Finishes Group, selling price increases, and cost control, partially offset by raw-material cost increases, the company said.

Global Finishes: Sales Soar

Net sales in the Global Finishes Group increased by 31.2% to $714.4 million in the quarter and by 39.3% to $2.02 billion in nine months, due mainly to acquisitions, selling price increases, higher paint sales volume, and favorable currency translation rate changes.

The quarter also saw Sherwin-Williams’ acquisition of Leighs Paints, a leading UK protective and marine and fire protection coatings innovator.

 Sherwin-Williams' CEO Christopher M. Connor
CEO Christopher M. Connor reported improvement in domestic architectural sales.

Acquisitions increased net sales by 16.3% for the quarter and 23.3% for nine months.

Segment profit increased to $43.5 million from $31.9 million for the third quarter and to $126.4 million from $94.9 million for the nine-month period.

Acquisitions unfavorably impacted segment profit by about $2.5 million in the quarter and nine months. As a percent to net external sales, segment profit increased to 6.1% in the quarter versus 5.9% last year.

Paint Stores, Consumer Segments

Net sales in the Paint Stores Group increased 10.2% to $1.42 billion in the quarter and 7.8% to $3.65 billion in nine months, due to selling price increases and improving domestic architectural paint sales volume across most segments.

Segment profit increased to $236.9 million in the quarter (from $225.1 million last year) and to $512.4 million in nine months (from $484.8 million last year).

Net sales by the Consumer Group increased 3.3% to $351.6 million in the quarter. Net sales decreased 2.0% to $1.02 billion in nine months, due to the loss of the company’s program with Wal-Mart.

Segment profit decreased for the quarter and the nine-month period.

‘We are Encouraged’

“We are encouraged by our improving sales results across most domestic architectural segments generated by our Paint Stores Group in the quarter,” said Connor. “We are pleased with the continued sales development in the Global Finishes Group and the corresponding improvement in core operating results.”

Connor said the new acquisitions “expand our global reach and provide important assets to support future growth in our worldwide business.”

He added: “Our balance sheet remains flexible and is positioned for future acquisitions and investments in our business.”


The company expects an increase of 6 to 10 percent in consolidated net sales for the fourth quarter. Q4 per-share income should range from -5 cents to +15 cents, including the one-time charge related to the IRS settlement, compared to 67 cents per share in 2010.

For the full year 2011, the company expects consolidated net sales to increase in the low teen percentages over 2010.


Tagged categories: Architectural coatings; Coatings manufacturers; Earnings reports; High-performance coatings; Marine Coatings; Protective coatings; Sherwin-Williams

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