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Letter to the Editor

Sherwin-Williams Quarterly Report Shows Automotive Finishes Segment's Net Sales Down 9.5%

Consolidated net sales decreased 3.2 percent in the quarter to $1.37 billion and 3.2 percent in the first nine months to $3.93 billion. The most significant factors impacting sales came from the continuing poor domestic and South American economic conditions, continuing weakness in foreign currency exchange rates and previously announced discontinued paint programs at certain customers. In addition, third quarter sales were further negatively impacted by the temporary change in buying habits due to the attacks on the United States on September 11, 2001.

Net sales in the Paint Stores Segment decreased 0.6 percent in the quarter to $894.1 million while improving 0.2 percent in nine months to $2.47 billion due primarily to higher architectural paint sales which, prior to the third quarter, offset sales shortfalls in product finishes and associated product categories. Third quarter sales in this Segment continued to be impacted by the sluggish domestic economy and sales of product finishes that remain weak. Comparable-store sales declined 1.8 percent in the third quarter and 1.7 percent for the first nine months. Net sales of the Consumer Segment decreased 6.1 percent in the quarter to $288.5 million and 10.0 percent in nine months to $888.2 million compared to last year. Excluding the previously announced discontinued paint programs at certain customers, net sales for this Segment would have been essentially flat with last year in the quarter and 3.4 percent below last year in the first nine months.

The Automotive Finishes Segment's net sales decreased 9.5 percent in the quarter to $115.3 million and 5.7 percent in nine months to $355.8 million. Higher collision repair sales in the quarter and nine months were not enough to offset the continuing negative impact of the soft domestic economy on this Segment's OEM sales.

Net sales in the International Coatings Segment were down 12.0 percent in the quarter to $67.3 million and down 6.3 percent in nine months to $211.1 million compared to a year ago. The sales decreases, in U.S. dollars, were due primarily to unfavorable currency exchange rates. Excluding the effects of currency exchange fluctuations relative to last year, net sales for the Segment increased 4.4 percent and 6.1 percent for the quarter and nine months, respectively.

Consolidated gross profit as a percent of sales declined to 44.0 and 43.2 percent for the third quarter and first nine months, respectively, from 44.3 and 43.9 percent for the comparable periods in 2000. Gross profit in all Segments is being impacted by rising health care and other employee benefit costs. Margins in the Paint Stores Segment were flat for the third quarter and slightly higher than last year for the first nine months due primarily to selective selling price increases and favorable paint product sales mix. The Consumer Segment's margins were below last year for the third quarter and first nine months due to the sales shortfall, competitive pricing pressures and, earlier in the year, higher year-over-year raw material, distribution and energy costs.

The Automotive Finishes Segment's margins were favorable versus last year for the third quarter primarily due to selective selling price increases and product sales mix. The Segment's margins for the first nine months were lower than last year due primarily to lower production volume and higher raw material, distribution and energy costs earlier in the year.

Margins in the International Coatings Segment were lower for the third quarter and first nine months, due primarily to price competition and a market shift in product sales to lower priced products in the face of higher U.S. dollar denominated raw material costs.

Consolidated selling, general and administrative expenses (SG&A) in the third quarter were $443.2 million, which was $5.2 million higher than last year.In the Automotive Finishes Segment, the SG&A was essentially flat for the third quarter and slightly up for the first nine months, as the Segment aims to protect market share and maintain customer service levels in a difficult market.

Capital expenditures during the third quarter and first nine months of 2001 represented primarily the costs associated with new store openings and normal equipment replacement in the Paint Stores Segment, plant and facility upgrades in the Consumer and International Coatings Segments, and improvements and upgrades to the automotive technology center for the Automotive Finishes Segment. No specific external financing to support capital programs is anticipated during the remainder of 2001.

During the third quarter of 2001, the Company acquired 1.8 million shares of its common stock through open market purchases for treasury purposes, which brings the total number of shares purchased in 2001 to 5.5 million shares. At September 30, 2001, the Company has authorization to purchase an additional 18.2 million shares of its common stock.

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