Analyzing Business Earnings 631998 to 1999. In the absence of sharp changes in the balance over time, an an-
alyst would be less inclined to look for a note detailing the makeup of the bal-
ance on the face of the income statement. However, some large nonrecurring
items underlie this net balance.
Notice the very large increase in the provision for environmental matters.
This increase is in turn offset in part by the sharp decline in the provision for
disposition and termination of operations. Similarly, the foreign currency loss
declined by about $12 million over the three years covered by the note. Some
or all of the large 1999 increase in the provision for environmental matters
should be considered to be nonrecurring. This would mean that results for 1999
would appear somewhat stronger with the provision added back to earnings.
Some or all of the $12 million provision for disposition and termination of op-
erations should also be added back to results for 1998.
Foreign currency gains and losses usually are not treated as nonrecurring.
However, the case was made in Exhibit 2.2 (Goodyear Tire and Rubber Com-
pany) for treating them as nonrecurring when they are very irregular, either in
terms of amount or sign (i.e., gain versus loss). The Sherwin-Williams foreign-
currency loss declined by about $12 million between 1997 and 1999. Nonre-
curring elements are included in at least three of the line items in the
Sher win-Williams other income and expense note. The net balance of the
other income and expense line item has changed only modestly in the face of
very substantial changes in the components of the net balance. The smooth and
modest growth in this net balance contributes in turn to preserving the growth
and stability of the bottom line, or net income. There is always the possibility
that some of the offsetting balances in the Sher win-Williams note were
recorded for the purpose of producing smooth growth in this line item.
The location and careful analysis of the other income and expense note is
especially important in the case of income statements with very little detail. In
this regard, firm size and the level of detail in the income statement appear to
EXHIBIT 2.20 Composition of an other income and expense note:
The Sherwin-Williams Company, years ended
December 31 (in thousands).
1997 1998 1999
Dividend and royalty income $ (3,361) $ (3,069) $ (4,692)
Net expense of financing and investing activities 3,688 2,542 7,084
Provisions for environmental matters, net 107 695 15,402
Provisions for disposition and termination
of operations 4,152 12,290 3,830
Foreign currency transaction losses 15,580 11,773 3,333
Miscellaneous 3,199 1,815 4,583
$23,365 $26,046 $29,540
Note:Note references included in the Sher win-Williams this schedule have been omitted.
SOURCE: The Sher win-Williams Company, annual report, December 1999, 30.