1
EXHIBIT 13
PORTIONS OF THE 2000 ANNUAL REPORT TO SHAREHOLDERS
INTRODUCTION
- ------------
ask.
How are we structured to maximize market opportunity?
Sherwin-Williams is a manufacturer, distributor and retailer of coatings and
other related products, with annual sales in excess of $5.2 billion. More than
half of our worldwide revenue is generated by our network of North American
company-operated paint stores and automotive branches. We also market branded,
private label and licensed brand products through a variety of other channels.
These include mass merchandisers, home centers, hardware stores, independent
paint dealers, industrial and marine distributors, automotive distributors and
body shops, joint ventures, and licensees of technology, trademarks and trade
names.
Our Company is organized into four operating segments. These segments allow us
to closely tailor our technology, distribution and service to the needs of a
particular marketplace.
TABLE OF CONTENTS
- -----------------
Highlights .................................................................................. 2
Letter to Shareholders....................................................................... 3-5
Company Overview............................................................................. 6-11
Financial Summary............................................................................ 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................ 13-20
Report of Management and Cautionary Statement Regarding
Forward-Looking Information............................................................... 21
Report of Independent Auditors............................................................... 22
Consolidated Financial Statements and Notes.................................................. 23-37
Directors, Officers, Managers................................................................ 38
Shareholder Information...................................................................... 39
Subsidiaries................................................................................. 40
The Sherwin-Williams company recruits, selects and hires the best qualified
people available - without discrimination based on race, religion, color, creed,
sex, national origin, age, disability, status as a special disabled veteran,
veteran of the Vietnam era or any other unlawful consideration.
Inside front cover | The Sherwin-Williams Company 2000 Annual Report
2
OUR FOUR OPERATING SEGMENTS
[Photo of paint store]
PAINT STORES SEGMENT
- --------------------
PRODUCTS SOLD: Paints, stains, caulks, applicators, wallcoverings,
floorcoverings, spray equipment and related products
MARKETS SERVED: Do-It-Yourselfers, professional painting contractors, home
builders, property managers, architects, interior designers, industrial, marine,
aviation, flooring and OEM product finishes
MAJOR BRANDS SOLD: Sherwin-Williams(R), Con-Lux(R), Old Quaker(TM), Mercury(TM),
Broad Dugan(TM), Pro-Line(R), SeaGuard(R), ArmorSeal(R), Kem(R)Hi-Temp,
Cook(TM), Sher-Wood(R), Powdura(R), Polane(R), Kem Aqua(R)
OUTLETS: 2,488 Sherwin-Williams stores in North America
[Photo of cans of paint]
CONSUMER SEGMENT
- ----------------
PRODUCTS SOLD: Branded, private label and licensed brand paints, stains,
varnishes, industrial products, wood finishing products, applicators, corrosion
inhibitors, aerosols and related products
MARKETS SERVED: Do-It-Yourselfers, professional painting contractors and
industrial maintenance
MAJOR BRANDS SOLD: Dutch Boy(R), Krylon(R), Minwax(R), Cuprinol(R),
Thompson's(R), Formby's(R), Red Devil(R), Pratt & Lambert(R), Martin Senour(R),
H&C(TM), White Lightning(R), Dupli-Color(R)and Rubberset(R)
OUTLETS: Leading mass merchandisers, home centers, independent paint dealers,
hardware stores and industrial distributors
[Photo of car]
AUTOMOTIVE FINISHES SEGMENT
- ---------------------------
PRODUCTS SOLD: High performance interior and exterior coatings for the
automotive and fleet industries, and automotive and heavy truck original
equipment manufacturer (OEM) markets; as well as thousands of associated
products.
MARKETS SERVED: Automotive jobbers, wholesale distributors, collision repair
facilities, dealerships, fleet owners and refinishers, production shops, body
builders and original equipment manufacturers (OEM).
MAJOR BRANDS SOLD: Sherwin-Williams(R), Martin Senour(R), Western(R),
Lazzuril(R), Excelo(TM), Marson(TM)and ScottWarren(TM)
OUTLETS: 175 company-operated branches worldwide, including operations in the
United States, Canada, Mexico, Brazil, Jamaica, Chile and Italy.
[Photo of paint store]
INTERNATIONAL COATINGS SEGMENT
- ------------------------------
PRODUCTS SOLD: Architectural paints, stains, varnishes, industrial maintenance
products, aerosols, product finishes, wood finishing products and related
products.
MARKETS SERVED: Do-It-Yourselfers, professional painting contractors,
independent dealers, industrial maintenance and OEM product finishes
MAJOR BRANDS SOLD: Sherwin-Williams(R), Dutch Boy(R), Krylon(R), Kem-Tone(R),
Pratt & Lambert(R), Minwax(R), Sumare(TM), Ronseal(TM), Globo(TM),
Pulverlack(R), Colorgin(TM), Andina(TM)and Marson(TM)
OUTLETS: Distribution in more than 20 foreign countries through wholly-owned
subsidiaries, joint ventures and licensees of technology, trademarks and
tradenames, including 45 company-operated architectural and industrial stores in
Chile and Brazil
The Sherwin-Williams Company 2000 Annual Report | 1
3
LETTER TO SHAREHOLDERS
----------------------
to our shareholders
In 2000, The Sherwin-Williams Company posted record sales of $5.2 billion
representing a 4.2 percent improvement over last year, our strongest sales
performance in the past several years. Our net income, excluding a one-time
charge for the impairment of long-lived assets, also set a new high at $309.7
million, a 1.9 percent increase over 1999's performance. Earnings per share from
operations, prior to the asset impairment charge, improved 5.6 percent from
$1.80 in 1999 to $1.90 in 2000. This represents our 23rd consecutive year of
improvement in earnings from operations. This past year we also increased the
dividend for our 22nd consecutive year. As a sign of the Company's confidence in
our future and in the value of our stock, we purchased 6.8 million shares of our
stock on the open market for treasury. The price of our stock at year-end
compared to last year was up over 25 percent.
Despite these positive results, we were disappointed with our performance in
2000. We expected to do better and fell short in a number of areas. This past
year we experienced significant raw material cost increases driven by a sharp
run up in the price of oil. Management reacted quickly by implementing selective
mid-year price increases in some of our operating segments and making tough cuts
in spending in all of our segments. However, we were not able, in the short
term, to overcome the severity of these increases and margins suffered. We also
experienced a slow down in the demand for our products over the second half of
the year. Even though we believe that we continued to gain market share in most
product categories, our sales results lagged behind our expectations. There were
a number of positive results in our operating segments that give us confidence
as we begin 2001.
PAINT STORES SEGMENT
- -------------------------------------------------------------------------------
2000 marked the twentieth consecutive year of improved sales results from our
Paint Stores Segment. Net sales increased 6.1 percent to $3.2 billion while
comparable store net sales improved by 3.7 percent. Operating profit rose 9.2
percent to $411.5 million. Gallon gains were posted in the architectural,
industrial and marine and chemical coatings categories.
While servicing do-it-yourself customers remains an important part of our
architectural coatings mission, we are increasingly focused on the professional
painting contractor market. There has been a significant increase in the
purchase of architectural gallons by painting contractors. This shift is driven
by the demographic changes in our country as our population ages and
has less-free time to tackle major projects around the home. We are further
encouraged by the fact that painting contractors continue to purchase almost all
of their product requirements from the paint store channel. Our 2,488 company
paint stores throughout North America give us a significant advantage over all
other paint store competitors serving professional painting contractors.
As a critical component of this contractor focused strategy, we remain committed
to expanding our network of company paint stores. This past year, we opened 92
net new stores, providing more convenient access to every customer in these
neighborhoods. Included in this number are nine stores acquired from the Norfolk
Paint Company in Norfolk, Virginia that now proudly offer Sherwin-Williams(R)
products. In addition to new stores, this Segment added 70 new sales
representatives and launched 35 new products, strengthening our commitment to be
the service and technology leader in our industry.
This past year, our industrial and marine business continued to be an important
growing part of our Company. The acquisition of the business of General Polymers
Corporation added a full line of industrial floor coatings to our existing broad
line of industrial products. Our chemical coatings business also posted improved
results as we accelerated our original equipment manufacturer specification
approval process, launched new products and successfully grew our powder
coatings business.
We believe the internet will play an increasing role in helping paint customers
choose a supplier. Last year,
The Sherwin - Williams Company 2000 Annual Report | 3
4
we made substantial progress in evolving our award-winning web site from a
comprehensive information source to an e-business platform for professional
customers. A select group of diverse professional customers took part in a pilot
program to help us design a site that serves a broad range of their business
needs. In the years ahead, we will continue to enhance this site and expand the
service to a significant number of our professional customers.
CONSUMER SEGMENT
- -------------------------------------------------------------------------------
Net sales for our Consumer Segment ended the year at $1.2 billion, essentially
flat with last year's performance. More disappointing, operating profit declined
8.0 percent to $142.5 million, excluding the asset impairment charge. Our poor
performance in this Segment reflects our lackluster sales and inability to pass
on raw material cost increases to our customers in a timely fashion.
In addition, certain parts of our Consumer Segment, specifically Pratt &
Lambert, Thompson's and Cleaning Solutions, lacked the past financial
performance or management's expectations of future cash flow to support the
carrying value of certain long-lived assets, particularly goodwill, resulting in
a $293.6 million after-tax write-off for impaired long-lived assets ($1.80 per
diluted share on an annual basis). This one-time charge had no cash effect on
our Company in 2000.
After a year like this, it is important that management reacts, makes changes
and moves in a different direction. We have done that. We have made organization
and management changes to reduce the complexity of our operation, gain greater
focus on individual product lines and further reduce costs. As a result, we have
created three operating units within this Segment.
The Wood Care Business Unit will be responsible for the sales, marketing,
manufacturing and technical development of our Thompson's(R), Minwax(R) and
Formby's(R) product lines. Harvey Sass, Senior Vice President - Wood Care, will
head this organization.
Our Diversified Brands Business Unit will be responsible for the sales,
marketing, manufacturing and technical development of our Krylon(R) and Red
Devil(R) brands of aerosol and small package paint, our industrial, automotive
and custom-filled aerosol products, our White Lightning(R) brand of caulks and
sealants and our applicator business. This business will be managed by Tim
Knight, Senior Vice President- Diversified Brands.
The Consumer Division will be responsible for the sales and marketing of our
branded and private label architectural coatings other than the
Sherwin-Williams(R) brand. These names include Dutch Boy(R), Pratt& Lambert(R)
and Martin Senour(R), as well as nationally recognized private label and
licensed brands. This Division will continue to be responsible for the
manufacturing and technical development for all architectural and industrial and
marine coatings for our Company domestically. Tom Seitz, President & General
Manager, Consumer Division, will lead this team.
In addition to these organizational changes, two non-core business units in the
Consumer Segment are currently being marketed for potential divestiture. We
believe the Cleaning Solutions and Graphic Arts businesses will perform better
within an organization where their focus relates more closely to the core
function of a potential acquirer.
The Consumer Segment has a portfolio of outstanding brand names and relation-
ships with the top retailers in our country. We expect these changes will
improve our ability to react quickly to changing market conditions and bring a
heightened sense of urgency to required improvements.
AUTOMOTIVE FINISHES SEGMENT
- -------------------------------------------------------------------------------
The Automotive Finishes Segment ended the year with $493.4 million in net sales
for a 4.8 percent improvement. Operating profit declined to $61.3 million from
$66.5 million in 1999. Operating profit was negatively impacted in 2000 by a
$6.8 million provision for the disposition of the Chicago and Troy technical
facilities as the Segment moved to its new state-of-the-art automotive
technology center in Warrensville Heights, Ohio. This new facility will improve
the efficiency and productivity of our automotive finishes product development
effort.
In 2000, the Automotive Finishes Segment expanded its distribution network
through both company branches and independent distributors. Three net new
Sherwin-Williams branches were opened or acquired bringing our total to 175
facilities. The acquisition of Scott Warren S.p.A. in Italy, a manufacturer of
automotive coatings for the collision repair market, provides a solid base upon
which to grow our presence in Europe and enhances our color match capability for
all European automobile makes.
The Automotive Finishes Segment begins 2001 under new leadership. Ron Nandor has
been promoted back into this Segment to the position of President & General
Manager, Automotive Division, after a successful assignment as Executive Vice
President - Marketing of our Paint Stores Group.
INTERNATIONAL COATINGS SEGMENT
- --------------------------------------------------------------------------------
2000 proved to be another difficult year for our International Coatings Segment.
Net sales improved 2.6 percent to $307.0 million, but operating profit declined
by 47.9 percent to finish at $17.7 million. A harsh economic climate in South
America negatively impacted our performance in the entire region, most notably
in Argentina. In the United Kingdom, an extended truck strike, poor weather and
rising oil prices took their toll on our Ronseal operations.
Despite our results in this Segment, we remain optimistic about our growth
prospects in these markets over time. Last year, Sherwin-Williams and our
subsidiaries introduced 60 products to meet specific coatings needs in these
countries, with much of the technology transferred from our domestic operations.
In Brazil, the acquisition of Pulverlack Tintas Ltda.,
4 | The Sherwin - Williams Company 2000 Annual Report
5
a powder coatings manufacturer, strengthens our industrial position in
this region. A key management change was made in our International
Coatings Segment as well. Mike Galasso was named President, International
Division after his successful assignment as President & General Manager of our
Automotive Division.
OUTLOOK FOR 2001
While the economic climate does not look promising at the
beginning of this new year, we look forward with optimism and confidence. This
optimism and confidence comes from sound strategic plans in support of each of
our Segments, a track record of past success and 26,000 employees committed to
making this year better. We are focused on the significant opportunities we have
to gain market share in every business segment regardless of the economic
environment.
MANAGEMENT CHANGES
This past year, we said goodbye to two long-time leaders of our Company. Don
Fields retired after 46 years of service, most recently as President of our
International Division. Don's steady hand touched many different divisions at
Sherwin-Williams over his impressive career and he has made numerous significant
contributions. We wish Don and his wife Joyce many years of continued good
health and happiness.
Our long-time Chairman, Jack Breen, completed the last phase of the Company's
orderly management succession plan as he stepped down from his position as
Chairman of our Board of Directors. The legacy Jack leaves behind is impressive,
beginning with the consecutive years of earnings growth and strong stock
performance throughout his tenure. But more lasting for those of us who had the
pleasure of knowing and working for him, will be the manner in which Jack
conducted his personal and business affairs. Words like integrity, honesty and
morality are ingrained in this Company as a result of Jack's leadership. While
he is missed on a daily basis, Jack continues to play an important role as an
active member of our Board of Directors. We wish Jack and Mary Jane an active
life, full of adventure, good health and happiness.
Every day our hard working team arrives at Sherwin-Williams commited to
improving your Company. We are blessed with the most dedicated and talented
employees in our industry. We are thankful for the loyalty of our customers and
the support of our suppliers. We are excited about our future, proud of our past
and most appreciative of your continuing trust.
Christopher M. Connor
Chairman and Chief Executive Officer
Joseph M. Scaminace
President and Chief Operating Officer
The Sherwin - Williams Company 2000 Annual Report | 5
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
FINANCIAL CONDITION - 2000
Net operating cash flow generated by the Company during 2000 was $461.1 million,
while net proceeds from short-term borrowings were $106.9 million. This cash
flow provided the funds to invest in property, plant and equipment, reduce
long-term debt, acquire treasury stock, increase the annual dividend, complete
several acquisitions and make other long-term investments. The Company's current
ratio increased to 1.39 at December 31, 2000 from 1.38 at the end of 1999. The
Company's Consolidated Balance Sheets and Statements of Consolidated Cash Flows,
on pages 24 and 25 of this report, provide more detailed information on the
Company's financial position and cash flows.
Borrowings outstanding under the Company's commercial paper program are included
in Short-term borrowings on the balance sheet. Such borrowings had a
weighted-average interest rate of 6.6 percent. Borrowings under the commercial
paper program are fully backed by and limited to the borrowing availability
under the Company's revolving credit agreements which aggregated $768.0 million
effective January 3, 2001. The current portion of long-term debt decreased
$102.9 million due primarily to the payment of 6.5% notes totaling $100.0
million during the first quarter of 2000. The $19.4 million balance in Current
portion of long-term debt at December 31, 2000 related to various promissory
notes and other obligations. Increases and decreases in components of net
working capital were primarily due to timing during 2000.
Deferred pension assets of $364.4 million at December 31, 2000 represent the
excess of the fair market value of the assets in the Company's defined benefit
pension plans over the actuarially-determined projected benefit obligations.
The 2000 increase in deferred pension assets of $30.3 million represents
primarily the recognition of the current year net pension credit, described in
Note 6 on pages 29 to 31 of this report. The assumed discount rate used to
compute the actuarial present value of projected benefit obligations was
decreased from 7.25 percent to 7.00 percent at December 31, 2000 due to
decreased rates of high-quality, long-term investments. The decrease in the
actual return on plan assets during 2000 was primarily the result of returns on
equity investments that were below the assumed return of 8.5 percent.
Goodwill, which represents the excess of cost over the fair value of net assets
acquired in purchase business combinations, decreased $334.0 million in 2000.
Intangible assets, which represent items such as trademarks and patents,
decreased $15.8 million in 2000. These decreases were due primarily to a total
charge for the impairment of long-lived assets of $352.0 million, of which
$342.5 million related to goodwill, as described in Note 2 on page 28 of this
report. In addition, amortization expense of $47.3 million and foreign currency
translation adjustments decreased goodwill and intangible assets, offset by
increases resulting from acquisitions completed in 2000. An increase in Other
assets of $53.3 million was primarily due to the capitalization of costs
incurred, net of amortization, related to designing, developing, obtaining and
implementing internal use software in accordance with Statement of Position
98-1, "Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." Other long-term investments, related to certain marketing
programs of the Company, also increased Other assets.
Net property, plant and equipment increased $10.7 million to $722.4 million at
December 31, 2000. The increase results primarily from capital expenditures of
$132.8 million, partially offset by depreciation expense of $108.9 million and a
portion of the total charge for the impairment of long-lived assets. Provisions
for disposition or retirement of certain assets and foreign currency translation
adjustments further offset capital expenditures. Capital expenditures in 2000
represented primarily the costs of purchasing and remodeling the automotive
technology center in Warrensville Heights, Ohio, upgrading information systems
equipment, the capacity expansion or upgrade of manufacturing and distribution
centers and costs related to opening new paint stores. Capital expenditures
during 2000 in the Paint Stores Segment were primarily attributable to opening
new paint stores and store relocations along with normal replacement and
upgrading store equipment. Capital expenditures in the Consumer and
The Sherwin - Williams Company 2000 Annual Report | 13
7
International Coatings Segments during 2000 were primarily related to capacity
expansions, efficiency improvements in production facilities and information
systems hardware. Capital expenditures during 2000 in the Automotive
Finishes Segment primarily related to the purchase and remodeling of the
automotive technology center, capacity expansions and equipment upgrades. In
2001, the Company expects that its most significant capital expenditures will
relate to various capacity and productivity improvement projects at
manufacturing facilities, continued new store openings, and new or upgraded
information systems equipment. The Company does not anticipate the need for any
specific long-term external financing to support these capital programs.
Long-term debt decreased during the year to $623.6 million at December 31, 2000,
resulting primarily from current debt maturities of $19.4 million that were
partially offset by increased debt associated with acquired companies. The
Company expects to remain in a borrowing position throughout 2001.
The increase in the Company's long-term postretirement benefit liability
occurred due to the excess of the net postretirement benefit expense over the
costs for benefit claims incurred. The current portion of the accrued
postretirement liability, amounting to $13.2 million at December 31, 2000, is
included in Other accruals. The assumed discount rate used to calculate the
actuarial present value of the postretirement benefit obligations was decreased
from 7.25 percent to 7.00 percent at December 31, 2000 due to the reduced rates
of high-quality, long-term investments. The assumed health care cost trend
rates, first established in 1992 during the adoption of SFAS No. 106, were
revised during 2000 for years 2001 through 2009. The revised rates reflect
escalating health care costs that continue to exceed the assumed cost trend
rates. The trend rate for 2001 was revised from the previous 5.5 percent annual
increase to a more representative 9.5 percent annual increase. The trend rate
will decrease gradually to 5.5 percent in 2010 - the same trend rate as
previously estimated for 2010. The net effect of these changes is expected to
increase the net postretirement benefit expense approximately 15 percent for
2001 as the cumulative unrecognized net loss is above the threshold for required
amortization. See Note 6, on pages 29 to 31 of this report, for further
information on the Company's postretirement benefit obligations.
Other long-term liabilities include accruals for environmental-related
liabilities and other non-current items. The decrease of $31.1 million in other
long-term liabilities during 2000 primarily related to a reduction in certain
tax liabilities resulting from timing items and to a decrease in the accrual for
environmental-related liabilities. See Note 9, on page 32 of this report, for
additional information concerning the Company's other long-term liabilities.
The Company's past operations included the manufacture and sale of lead pigments
and lead-based paints. The Company, along with other companies, is a defendant
in a number of legal proceedings, including purported class actions, separate
actions brought by the State of Rhode Island, and actions brought by other
governmental entities, arising from the manufacture and sale of lead pigments
and lead-based paints. The plaintiffs are seeking recovery based upon various
legal theories, including negligence, strict liability, breach of warranty,
negligent misrepresentations and omissions, fraudulent misrepresentations and
omissions, concert of action, civil conspiracy, violations of unfair trade
practices and consumer protection laws, enterprise liability, market share
liability, nuisance, unjust enrichment and other theories. The plaintiffs seek
various damages and relief, including personal injury and property damage, costs
relating to the detection and abatement of lead-based paint from buildings,
costs associated with a public education campaign, medical monitoring costs and
others. The Company believes that the litigation is without merit and is
vigorously defending such litigation. Considering the Company's past operations
relating to lead pigments and lead-based paints, it is possible that additional
lead pigment and lead-based paint litigation may be filed against the Company
based upon similar or different legal theories and seeking similar or different
types of damages and relief.
Litigation is inherently subject to many uncertainties. Adverse court rulings or
determinations of liability could affect the lead pigment and lead-based paint
litigation against the Company and encourage an increase in the number and
nature of future claims and proceedings. In
14 | The Sherwin - Williams Company 2000 Annual Report
8
addition, from time to time, various legislation and administrative regulations
have been enacted or proposed to impose obligations on present and former
manufacturers of lead pigments and lead-based paints respecting asserted health
concerns associated with such products and to overturn court decisions in which
the Company and other manufacturers have been successful. Due to the
uncertainties involved, management is unable to predict the outcome of such
litigation or the number or nature of possible future claims and proceedings, or
the affect of any such legislation and administrative regulations. In addition,
management cannot reasonably determine the scope or amount of the potential
costs and liabilities related to such litigation, or such legislation and
regulations. The Company has not accrued any amounts for such litigation. Any
potential liability that may result from such litigation or such legislation and
regulations cannot reasonably be estimated. However, based upon, among other
things, the outcome of such litigation to date, management does not currently
believe that the costs or potential liability ultimately determined to be
attributable to the Company arising out of such litigation will have a material
adverse effect on the Company's results of operations, liquidity or financial
condition.
The operations of the Company, like those of other companies in our industry,
are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern our current operations
and products, but also impose potential liability on the Company for past
operations which were conducted utilizing practices and procedures that were
considered acceptable under the laws and regulations existing at that time. The
Company expects environmental laws and regulations to impose increasingly
stringent requirements upon the Company and our industry in the future. The
Company believes that it conducts its operations in compliance with applicable
environmental laws and regulations and has implemented various programs designed
to protect the environment and promote continued compliance.
Depreciation of capital expenditures and other expenses related to ongoing
environmental compliance measures are included in the normal operating expenses
of conducting business. The Company's capital expenditures, depreciation and
other expenses related to ongoing environmental compliance measures were not
material to the Company's financial condition, results of operations or
liquidity during 2000, and the Company does not expect that such capital
expenditures and other expenses will be material to the Company's financial
condition, results of operations or liquidity in 2001.
The Company is involved with environmental compliance, investigation and
remediation activities at some of its current and former sites (including former
sites which were previously owned and/or operated by businesses acquired by the
Company). The Company, together with other parties, has also been designated a
potentially responsible party under federal and state environmental protection
laws for the investigation and remediation of environmental contamination and
hazardous waste at a number of third-party sites, primarily Superfund sites.
The Company may be similarly designated with respect to additional third-party
sites in the future.
The Company accrues for environmental-related activities relating to its past
operations and third-party sites, including Superfund sites, for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. These estimated costs are determined based on currently
available facts regarding each site. The Company continuously assesses its
potential liability for investigation and remediation-related activities and
adjusts its environmental-related accruals as information becomes available upon
which more accurate costs can be reasonably estimated and as additional
accounting guidelines are issued which require changing the estimated costs or
the procedure utilized in estimating such costs. Actual costs incurred may vary
from these estimates due to the inherent uncertainties involved including, among
others, the number and financial condition of parties involved with respect to
any given site, the volumetric contribution which may be attributed to the
Company relative to that attributed to other parties, the nature and magnitude
of the wastes involved, the various technologies that can be used for
remediation and the determination of acceptable remediation with respect to a
particular site. The Company's environmental-related contingencies are
The Sherwin - Williams Company 2000 Annual Report | 15
9
expected to be resolved over an extended period of time.
Pursuant to a Consent Decree entered into with the United States of America in
1997, on behalf of the Environmental Protection Agency, filed in the United
States District Court for the Northern District of Illinois, the Company has
agreed, in part, to (i) conduct an investigation at its southeast Chicago,
Illinois facility to determine the nature, extent and potential impact, if any,
of environmental contamination at the facility and (ii) implement remedial
action measures, if required, to address any environmental contamination
identified pursuant to the investigation. While the Company continues to
investigate this site, certain initial remedial actions have occurred at this
site.
In 1999, the Company entered into a settlement agreement with PMC, Inc. settling
a lawsuit brought by PMC regarding the Company's former manufacturing facility
in Chicago, Illinois which was sold to PMC in 1985. Pursuant to the terms of the
settlement agreement, the Company agreed, in part, to investigate and remediate,
as necessary, certain soil and/or ground water contamination caused by
historical disposals, discharges, releases and/or events occurring at this
facility. In 2000, the Company entered into a Consent Decree with the People of
the State of Illinois settling an action brought by the State of Illinois
against the Company regarding the PMC facility. Under the Consent Decree, the
Company agreed, in part, to investigate and remediate, as necessary, certain
soil and/or groundwater contamination caused by historical disposals,
discharges, releases and/or events occurring at this facility. The Company is
currently conducting its investigation of this facility.
With respect to the Company's southeast Chicago, Illinois facility and the
PMC facility, the Company has evaluated its potential liability and, based upon
its investigations to date, has accrued appropriate amounts. However, due to the
uncertainties surrounding these facilities, the Company's ultimate liability may
result in costs that are significantly higher than currently accrued. In such
event, the recording of the liability may result in a material impact on net
income for the annual or interim period during which the additional costs are
accrued. The Company expects the contingent liabilities related to these
facilities to be resolved over an extended period of time.
The Company does not believe that any potential liability ultimately attributed
to the Company for its environmental-related matters will have a material
adverse effect on the Company's financial condition, liquidity, cash flow or,
except as set forth in the preceding paragraph, net income. See Note 9, on page
32 of this report, for discussion of the environmental-related accruals
included in the Company's Consolidated Balance Sheets.
Shareholders' equity decreased $226.7 million during 2000 to $1,471.9 million
due primarily to the purchase of 6,800,000 shares of Company stock for treasury
at a cost of $146.9 million. The Company acquires its own stock for general
corporate purposes and, depending on its future cash position and market
conditions, it may acquire additional shares in the future. The Company had
remaining authorization at December 31, 2000 to purchase 13,200,000 shares of
its common stock. Also contributing to the decrease in shareholders' equity were
cash dividends paid of $88.1 million and other comprehensive losses related to
foreign currency translations of $18.0 million. These decreases were partially
offset by current year net income of $16.0 million.
Comprehensive loss is comprised of net income and the components of other
comprehensive income or loss including foreign currency translation adjustments.
The 2000 increase of $18.0 million in Cumulative other comprehensive loss was
attributed to weakness in several foreign operation's functional currencies,
while the 1999 increase of $100.7 million occurred primarily due to the
devaluation of the Brazilian real. In January 1999, the Brazilian Central
Bank eliminated its governmental policy of supporting and tightly managing the
trading band of the real and allowed it to trade freely in the open market
against other currencies. Shortly after this announcement, the Brazilian real
weakened significantly in trading with the U.S. dollar and other foreign
currencies and has only partially recovered since that time. As a result of the
floating exchange rate of certain foreign currencies, the Company believes it
may experience continuing losses from foreign currency translation. The Company
does
16 | The Sherwin - Williams Company 2000 Annual Report
10
not expect any devaluation or other currency translation losses to have a
material adverse effect on the Company's financial condition, results of
operations or cash flows. See Note 16, on page 35 of this report.
The Company is exposed to market risk through various financial instruments,
including fixed rate debt instruments. The Company does not believe that any
potential loss related to these financial instruments will have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
The 2000 annual dividend of $.54 per share approximated our payout ratio target
of 30.0 percent of the prior year's earnings. This annual dividend represented
the twenty-first consecutive year that the dividend has increased and a
compounded annual rate of increase of 24.5 percent since the dividend was
reinstated in the fourth quarter of 1979. At a meeting held on February 7, 2001,
the Board of Directors increased the quarterly dividend to $.145 per share.
RESULTS OF OPERATIONS - 2000 vs 1999
- -------------------------------------------------------------------------------
Consolidated net sales increased 4.2 percent to $5.2 billion in 2000, primarily
due to increased sales in the Paint Stores, Automotive Finishes and
International Coatings Segments that were partially offset by decreased sales in
the Consumer Segment.
Net external sales in the Paint Stores Segment during 2000 increased 6.1
percent to $3.2 billion as higher volume sales of paint products outpaced
increases in the stores' other product lines (wallcoverings, floorcoverings,
spray equipment and associated products) with sales to professional painters and
industrial users showing the greatest gains. Comparable-store sales increased
3.7 percent in 2000. This Segment ended 2000 with 2,488 stores in operation
compared to 2,396 stores in operation at the end of the prior year. It is the
objective of the Paint Stores Segment to expand its store base an average of
three percent each year. In 2000, the Segment added 92 net new stores and
expects to add 65 to 70 net new stores in 2001.
External sales in the Consumer Segment decreased 0.4 percent during 2000 to $1.2
billion primarily due to a sluggish domestic do-it-yourself market. New product
launches, sales to new customers and increased sales to certain existing
customers could not offset the effects of the sluggish retail market. The
Company expects that additional Consumer Segment sales in 2001 from new product
introductions, expansion of its presence at certain retailers and new customer
accounts will not be sufficient to offset the effects of lost business and
customer accounts in 2000. In addition, a sluggish domestic do-it-yourself
market is expected to continue through at least the first half of 2001 and
adversely impact year-over-year sales comparisons with 2000.
External sales in the Automotive Finishes Segment increased 4.8 percent during
2000 to $493.4 million due primarily to the sales of vehicle refinish products.
The soft fourth quarter domestic economy negatively impacted this Segment's OEM
sales. The Company expects that sales from new product and color introductions,
a stronger vehicle refinish market and an increase in the number of automotive
branches will result in a sales increase for this Segment in 2001.
External sales in the International Coatings Segment increased 2.6 percent to
$307.0 million due primarily to increased gallons sold. Sales in local
currencies were up 6.5 percent, while U.S. dollar comparisons were affected by
currency conversions. Net sales for the year continued to be impacted by a shift
in sales to lower priced products and competitive pricing due to poor market
conditions in South America, particularly in Argentina. The Company expects to
realize sales improvements in the International Coatings Segment in 2001 as
economic conditions are expected to improve in most South American countries in
which we operate.
Consolidated gross profit as a percent of sales decreased to 44.3 percent from
44.9 percent in 1999. The Company's gross profit margin was impacted by raw
material cost increases, inflated energy costs and higher distribution costs.
The Paint Stores Segment's 2000 gross profit margin was slightly higher than
last year primarily due to increased paint volume sales, a favorable product
sales mix and selective selling price increases. Gross profit margin in the
Consumer Segment was lower than last year as competitive pricing pressures
prohibited selling price increases sufficient to offset increased raw material
costs and higher distribution costs. In addition, costs associated with
The Sherwin - Williams Company 2000 Annual Report | 17
11
new product launches and new customer start-ups could not be offset by volume
related manufacturing efficiencies and certain cost reductions. Gross profit
margin decreased in the Automotive Finishes Segment and was also unfavorably
impacted by increased raw material costs. Gross profit margin in the
International Coatings Segment decreased primarily due to price competition,
increased raw material costs and an unfavorable product sales mix to lower
margin products.
Consolidated selling, general and administrative (SG&A) expenses remained flat
as a percent of sales at 33.4 percent. Increased expenses in 2000 related to new
store openings, new products, new customers and the consolidation of two
research facilities and division administrative functions into the automotive
technology center. Offsetting these increased expenses was the reduction in
costs in 2000 due to the completion in 1999 of the Company's Year 2000
compliance project. The Paint Stores Segment's SG&A ratio was slightly
unfavorable compared to last year primarily due to increased expenses related to
92 net new store openings. The Paint Stores Segment continued its investment in
expanding its business in spite of the soft domestic economy during the latter
part of the year. A slightly favorable SG&A ratio in the Consumer Segment for
2000 as compared to last year was primarily a result of certain administrative
cost reductions partially offset by decreased sales and increased costs of new
product launches and new customer start-ups. The Automotive Finishes
Segment's SG&A ratio was also slightly favorable compared to last year primarily
due to higher sales volume partially offset by severance and moving costs
associated with the consolidation of the Segment's research and administrative
functions into the newly purchased automotive technology center. The
International Coatings Segment's SG&A ratio was unfavorable primarily due to
higher commissions in Brazil relating to increased sales, partially offset by
overall sales increases.
During the fourth quarter of 2000, the Company recognized an asset impairment
charge of $352.0 million ($293.6 million after-tax or $1.80 per diluted share)
in the Consumer Segment to reduce the carrying values of certain long-lived
assets, primarily goodwill, to their estimated fair values. Cash flow in 2000
was not affected by this accounting charge which is more fully described in Note
2 on page 28 of this report. Accordingly, consolidated segment operating profit
for the year was reduced to 2.8 percent of sales compared to 9.8 percent of
sales in 1999. Excluding the asset impairment charge, consolidated segment
operating profit increased 1.1 percent but declined as a percent of sales to 9.5
percent from 9.8 percent last year. Segment operating profit of the Paint Stores
Segment increased 9.2 percent to 12.9 percent of sales, as increased paint
volume sales, a favorable product mix and selective selling price increases more
than offset increased expenses related to new store openings. The Consumer
Segment's operating profit, excluding the effects of the asset impairment
charge, declined 8.0 percent primarily due to competitive pricing pressures that
did not allow recovery of all increased raw material costs and higher
distribution costs. Segment operating profit of the Automotive Finishes Segment
decreased $5.3 million or 7.9 percent primarily due to increased raw material
costs and a $6.8 million provision for the disposition of two research centers
idled by the consolidation into the new automotive technology center. See Note
5, on page 29 of this report, for additional disposition and termination of
operations information. Segment operating profit of the International Coatings
Segment decreased to $17.7 million from $33.9 million last year primarily due to
increased price competition, increased raw material costs and an unfavorable
product sales mix to lower margin products. There are certain risks in
transacting business internationally, such as changes in applicable laws and
regulatory requirements, political instability, general economic and labor
conditions, fluctuations in currency exchange rates and expatriation
restrictions, which could adversely affect the financial condition or results of
operation of the Company's consolidated foreign subsidiaries. Corporate expenses
decreased in 2000 primarily due to the reduction in certain information systems
expenses, including the completion of the Company's Year 2000 compliance project
in 1999, partially offset by increased interest expense and certain unallocated
employee benefit expenses. Refer to Note 17, on pages 35 through 37 of this
report, for additional reportable segment information.
Interest expense increased slightly in 2000 primarily due to higher average
short-term debt outstanding and
18 | The Sherwin - Williams Company 2000 Annual Report
12
rates, partially offset by lower average long-term debt outstanding. As a
result, interest coverage, excluding the effects of the asset impairment charge,
remained unchanged from 1999 at 9.0 times. Interest coverage in 2000, after
recording the effects of the asset impairment charge, decreased to 3.3 times.
Fixed charge coverage, excluding the effects of the asset impairment charge,
which is calculated using interest and rent expense, decreased to 4.5 times from
5.8 times in 1999. Fixed charge coverage in 2000, after recording the effects of
the asset impairment charge, was 1.2 times.
Interest and net investment income decreased in 2000 primarily due to lower
average cash and short-term investment balances, partially offset by higher
average yields. See Note 4, on page 29 of this report, for further detail on
Other expense - net. As shown in Note 13, on page 34 of this report, the
effective income tax rate was 88.9 percent in 2000 due to the effect of a
portion of the asset impairment charge that was not deductible for tax purposes.
Excluding the effects of the asset impairment charge, the effective tax rate
declined to 37.5 percent from 38.0 percent in 1999.
Net income decreased in 2000 to $16.0 million from $303.9 million in 1999 due
primarily to the effects of the asset impairment charge. Net income per
share-diluted was reduced to $.10 per share from $1.80 last year. See Note 15,
on page 35 of this report, for detailed computations. Excluding the effects of
the asset impairment charge, net income for 2000 increased 1.9 percent to $309.7
million, and net income per share increased 5.6 percent to $1.90 per diluted
share.
RESULTS OF OPERATIONS - 1999 vs 1998
- -------------------------------------------------------------------------------
Consolidated net sales increased 1.4 percent to $5.0 billion in 1999, primarily
due to increased sales in the Paint Stores Segment which were partially offset
by decreased sales in each of the other reportable segments.
Net external sales in the Paint Stores Segment during 1999 increased 6.3 percent
primarily due to higher volume sales of paint products, combined with sales
gains in each of the remaining major product lines (wallcoverings, floor
coverings, spray equipment and associated products). Comparable-store sales
increased 4.0 percent in 1999. The Company launched its web site,
"www.sherwin-williams.com" in 1999. A portion of the web site provides Paint
Stores Segment customers, painting contractors, and others with product
information and store locations along with do-it-yourself instruction.
External sales in the Consumer Segment decreased 4.5 percent during 1999
primarily due to the bankruptcy and subsequent liquidation of a large retail
customer, the anticipated sales losses due to the closing of a Cleaning
Solutions plant in the fourth quarter of 1998, and slow do-it-yourself coatings
sales at certain customers.
External sales in the Automotive Finishes Segment declined 0.6 percent. The
sales decrease in this Segment was primarily due to the effects of foreign
currency translation losses and, to a lesser extent, a soft domestic automotive
refinish market.
External sales in the International Coatings Segment declined 14.0 percent.
Sales declines in the International Coatings Segment resulted primarily from the
first quarter 1999 devaluation of the Brazilian real and continuing poor market
conditions in South America. Gallons sold and sales in local currencies were up
in most market areas.
Consolidated gross profit as a percent of sales increased to 44.9 percent from
43.2 percent in 1998. The Paint Stores Segment's 1999 gross profit margin was
slightly higher than 1998 primarily due to a favorable product sales mix. Gross
profit margin in the Consumer Segment was higher than 1998 as increased factory
efficiencies and cost reductions associated with closing four manufacturing
plants early in 1999 took effect. Gross profit margin in the Automotive Finishes
Segment increased slightly due to product sales mix. Gross profit margin in the
International Coatings Segment increased primarily due to increased factory
efficiencies and cost reduction efforts.
SG&A expenses as a percent of sales increased to 33.4 percent in 1999 from 32.4
percent in 1998 resulting primarily from increased expenses related to new store
openings, bad debts, certain employee benefits and information systems,
partially offset by decreased SG&A expenses in the Consumer Segment primarily
resulting from the consolidation of administrative functions of
The Sherwin - Williams Company 2000 Annual Report | 19
13
four separate operating divisions into one. The Paint Stores Segment's SG&A
ratio was slightly unfavorable compared to 1998 primarily due to increased
expenses related to new store openings. A slightly unfavorable SG&A ratio in the
Consumer Segment for 1999 as compared to 1998 was primarily a result of
decreased sales and increased bad debt expense, partially offset by the
consolidation of administrative functions. Automotive Finishes Segment's SG&A
ratio was slightly unfavorable compared to 1998 primarily due to increases in
bad debt expense and reduced sales volume. International Coatings Segment's SG&A
ratio was unfavorable primarily due to reduced sales.
Consolidated operating profits increased 11.4 percent in 1999. Operating profits
of the Paint Stores Segment increased 8.6 percent, primarily due to increased
sales volume and gross profit margins. The Consumer Segment's operating profits
were 23.7 percent higher than 1998 primarily due to decreased SG&A expenses and
increased gross profit margins, partially offset by lower sales volume.
Operating profits of the Automotive Finishes Segment increased 2.0 percent
primarily due to increased gross profit margins, partially offset by slightly
lower sales and increased SG&A expenses. Operating profits of the International
Coatings Segment increased 40.3 percent primarily due to decreased foreign
currency transaction losses associated with U.S. dollar denominated debt that
was reduced and improved gross profit margins, partially offset by decreased
sales and increased SG&A expenses. Corporate expenses increased in 1999
primarily due to the increase in certain unallocated employee benefit and
information systems expenses, partially offset by decreased interest expense.
Additionally, the 1998 Corporate expenses included a net gain related to the
sale of the Company's joint venture interest in American Standox, Inc.
Interest expense decreased in 1999 primarily due to lower average outstanding
debt balances. As a result, interest coverage increased to 9.0 times from 7.1
times in 1998. Fixed charge coverage, which is calculated using interest and
rent expense, increased to 3.7 times from 3.3 times in 1998.
Interest and net investment income decreased in 1999 primarily due lower average
yields, partially offset by slightly higher average cash and short-term
investment balances. See Note 4, on page 29 of this report, for further detail
on Other expense - net. As shown in Note 13, on page 34 of this report, the
effective income tax rate in 1999 remained unchanged from 1998 at 38 percent.
Net income increased 11.4 percent in 1999 to $303.9 million from $272.9 million
in 1998. Net income per share-diluted increased 14.6 percent to $1.80 from
$1.57. See Note 15, on page 35 of this report for detailed computations.
20 | The Sherwin - Williams Company 2000 Annual Report
14
REPORT OF MANAGEMENT
- -------------------------------------------------------------------------------
Shareholders
The Sherwin-Williams Company
We have prepared the accompanying consolidated financial statements and related
information included herein for the years ended December 31, 2000, 1999 and
1998. The primary responsibility for the integrity of the financial information
rests with management. This information is prepared in accordance with
accounting principles generally accepted in the United States, based upon our
best estimates and judgments and giving due consideration to materiality.
The Company maintains accounting and control systems which are designed to
provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. There are limits inherent in all systems of internal control based
on the recognition that the cost of such systems should not exceed the benefits
to be derived. We believe our systems provide this appropriate balance.
The Board of Directors pursues its responsibility for these financial statements
through the Audit Committee, composed exclusively of independent directors. The
Committee meets periodically with management, internal auditors and our
independent auditors to discuss the adequacy of financial controls, the quality
of financial reporting and the nature, extent and results of the audit effort.
Both the internal auditors and independent auditors have private and
confidential access to the Audit Committee at all times.
/s/ C. M. Connnor
C. M. Connor
Chairman and Chief
Executive Officer
/s/ L. J. Pitorak
L. J. Pitorak
Senior Vice President - Finance,
Treasurer and Chief Financial
Officer
/s/ J. L. Ault
J. L. Ault
Vice President -
Corporate Controller
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- -------------------------------------------------------------------------------
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Letter to Shareholders," and
elsewhere in this report constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based upon
management's current expectations, estimates, assumptions and beliefs concerning
future events and conditions and may discuss, among other things, anticipated
future performance (including sales and earnings), expected growth and future
business plans. Any statement that is not historical in nature is a
forward-looking statement and may be identified by the use of words and phrases
such as "expects," "anticipates," "believes," "will likely result," "will
continue," "plans to," and similar expressions. Readers are cautioned not to
place undue reliance on any forward-looking statements. Forward-looking
statements are necessarily subject to risks, uncertainties and other factors,
many of which are outside the control of the Company, that could cause actual
results to differ materially from such statements. These risks, uncertainties
and other factors include such things as: general business conditions, strengths
of retail economies and the growth in the coatings industry; competitive
factors, including pricing pressures and product innovation and quality; changes
in raw material availability and pricing; changes in the Company's relationships
with customers and suppliers; the ability of the Company to successfully
integrate past and future acquisitions into its existing operations, as well as
the performance of the businesses acquired; the ability of the Company to
successfully complete planned divestitures; changes in general domestic economic
conditions such as inflation rates, interest rates and tax rates; risk and
uncertainties associated with the Company's expansion into foreign markets,
including inflation rates, recessions, foreign currency exchange rates, foreign
investment and repatriation restrictions and other external economic and
political factors; the achievement of growth in developing markets, such as
Mexico and South America; increasingly stringent domestic and foreign
governmental regulations including those affecting the environment; inherent
uncertainties involved in assessing the Company's potential liability for
environmental remediation-related activities; the nature, cost, quantity and
outcome of pending and future litigation and other claims, including the lead
pigment and lead-based paint litigation and the affect of any legislation and
administrative regulations relating thereto; and unusual weather conditions.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
The Sherwin - Williams Company 2000 Annual Report | 21
15
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
Shareholders and Board of Directors
The Sherwin-Williams Company
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of The
Sherwin-Williams Company and subsidiaries as of December 31, 2000, 1999 and
1998, and the related statements of consolidated income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Sherwin-Williams Company and subsidiaries at December 31, 2000, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 26, 2001
22 | The Sherwin - Williams Company 2000 Annual Report
16
STATEMENTS OF CONSOLIDATED INCOME
- -------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 1998
---- ---- ----
Net sales ................................. $ 5,211,624 $ 5,003,837 $ 4,934,430
Cost of goods sold ........................ 2,904,013 2,755,323 2,804,459
Gross profit .............................. 2,307,611 2,248,514 2,129,971
Percent to net sales .................... 44.3% 44.9% 43.2%
Selling, general and administrative
expenses ................................ 1,740,367 1,673,449 1,598,333
Percent to net sales .................... 33.4% 33.4% 32.4%
Impairment of long-lived assets ........... 352,040
Operating income .......................... 215,204 575,065 531,638
Percent to net sales .................... 4.1% 11.5% 10.8%
Interest expense .......................... 62,026 61,168 71,971
Interest and net investment income ........ (4,981) (5,761) (6,482)
Other expense - net ....................... 14,753 29,540 26,046
----------- ----------- -----------
Income before income taxes ................ 143,406 490,118 440,103
Income taxes .............................. 127,380 186,258 167,239
----------- ----------- -----------
Net income ........ ....................... $ 16,026 $ 303,860 $ 272,864
=========== =========== ===========
Net income per share:
Basic ................................... $ .10 $ 1.81 $ 1.58
=========== =========== ===========
Diluted ................................. $ .10 $ 1.80 $ 1.57
=========== =========== ===========
See notes to consolidated financial statements.
The Sherwin - Williams Company 2000 Annual Report | 23
17
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Thousands of Dollars)
DECEMBER 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
Assets
Current assets:
Cash and cash equivalents ................................ $ 2,896 $ 18,623 $ 19,133
Accounts receivable, less allowance ...................... 594,162 606,046 604,516
Inventories:
Finished goods ......................................... 597,472 591,912 568,328
Work in process and raw materials ...................... 106,255 111,476 114,195
----------- ----------- -----------
703,727 703,388 682,523
Deferred income taxes .................................... 104,662 108,899 102,818
Other current assets ..................................... 146,092 141,143 123,398
----------- ----------- -----------
Total current assets ................................... 1,551,539 1,578,099 1,532,388
Goodwill ................................................... 705,547 1,039,555 1,123,128
Intangible assets .......................................... 259,085 274,924 291,715
Deferred pension assets .................................... 364,351 334,094 304,006
Other assets ............................................... 147,769 94,464 80,466
Property, plant and equipment:
Land ..................................................... 65,546 62,517 67,567
Buildings ................................................ 431,524 431,802 422,902
Machinery and equipment .................................. 980,560 913,346 906,501
Construction in progress ................................. 52,779 40,262 43,274
----------- ----------- -----------
1,530,409 1,447,927 1,440,244
Less allowances for depreciation ......................... 808,030 736,251 721,387
----------- ----------- -----------
722,379 711,676 718,857
----------- ----------- -----------
Total Assets ............................................... $ 3,750,670 $ 4,032,812 $ 4,050,560
=========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings .................................... $ 106,854
Accounts payable ......................................... 448,799 $ 458,919 $ 408,144
Compensation and taxes withheld .......................... 137,211 140,934 125,698
Current portion of long-term debt ........................ 19,376 122,277 118,184
Other accruals ........................................... 328,435 333,363 345,191
Accrued taxes ............................................ 74,568 85,396 76,804
----------- ----------- -----------
Total current liabilities .............................. 1,115,243 1,140,889 1,074,021
Long-term debt ............................................. 623,587 624,365 730,283
Postretirement benefits other than pensions ................ 208,673 206,591 204,763
Other long-term liabilities ................................ 331,303 362,435 325,553
Shareholders' equity:
Common stock- $1.00 par value: 159,558,335, 165,663,601
and 171,033,231 shares outstanding at December 31, 2000,
1999 and 1998, respectively ............................ 206,848 206,309 205,701
Other capital ............................................ 158,650 150,887 143,686
Retained earnings ........................................ 1,948,753 2,020,851 1,797,945
Treasury stock, at cost .................................. (678,778) (533,891) (386,465)
Cumulative other comprehensive loss ...................... (163,609) (145,624) (44,927)
----------- ----------- -----------
Total shareholders' equity ............................. 1,471,864 1,698,532 1,715,940
----------- ----------- -----------
Total Liabilities and Shareholders' Equity ................. $ 3,750,670 $ 4,032,812 $ 4,050,560
=========== =========== ===========
See notes to consolidated financial statements.
24 | The Sherwin - Williams Company 2000 Annual Report
18
STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------
(Thousands of Dollars)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
Operating Activities
Net income ............................................... $ 16,026 $ 303,860 $ 272,864
Adjustments to reconcile net income to net operating cash:
Impairment of long-lived assets ........................ 352,040
Depreciation ........................................... 108,906 105,350 97,821
Deferred income taxes .................................. (26,886) 21,170 30,557
Provisions for disposition of operations ............... 8,023 7,640 23,557
Provisions for environmental-related matters ........... 16,334 4,295
Amortization of intangible assets ...................... 51,124 50,394 50,067
Defined benefit pension plans net credit ............... (29,629) (28,083) (30,851)
Net increase in post retirement liability .............. 3,682 3,428 5,424
Foreign currency transaction losses .................... 2,115 3,333 11,773
Other .................................................. 7,744 13,594 554
Change in working capital accounts:
Decrease (increase) in accounts receivable ............. 21,264 (28,212) (65,679)
Decrease (increase) in inventories ..................... 6,188 (24,420) 35,130
(Decrease) increase in accounts payable ................ (21,790) 60,487 (12,272)
(Decrease) increase in accrued taxes ................... (11,744) 6,019 32,449
Other .................................................. (22,645) 3,650 35,175
Increase in long-term accrued taxes ...................... 10,005 15,715 8,211
Costs incurred for environmental-related matters ......... (9,105) (15,808) (14,275)
Costs incurred for disposition of operations ............. (6,173) (15,529) (5,322)
Other .................................................... 1,963 (13,808) (10,721)
--------- --------- ---------
Net operating cash ..................................... 461,108 485,114 468,757
--------- --------- ---------
Investing Activities
Capital expenditures ..................................... (132,778) (134,171) (146,129)
Acquisitions of businesses ............................... (60,108) (15,427)
Increase in other investments ............................ (51,163) (23,435) (19,281)
Other .................................................... (8,989) 9,111 6,478
--------- --------- ---------
Net investing cash ..................................... (253,038) (163,922) (158,932)
--------- --------- ---------
Financing Activities
Net increase (decrease) in short-term borrowings ......... 106,854 (106,913)
Increase in long-term debt ............................... 16,931 4,559
Payments of long-term debt ............................... (120,316) (102,046) (54,673)
Payments of cash dividends ............................... (88,124) (80,954) (77,801)
Proceeds from stock options exercised .................... 6,419 7,107 16,818
Treasury stock purchased ................................. (146,857) (145,806) (83,791)
Other .................................................... 1,662 2,791 7,579
--------- --------- ---------
Net financing cash ..................................... (223,431) (318,908) (294,222)
--------- --------- ---------
Effect of exchange rate changes on cash .................. (366) (2,794)
--------- ---------
Net (decrease) increase in cash and cash equivalents ..... (15,727) (510) 15,603
Cash and cash equivalents at beginning of year ........... 18,623 19,133 3,530
--------- --------- ---------
Cash and cash equivalents at end of year ................. $ 2,896 $ 18,623 $ 19,133
========= ========= =========
Taxes paid on income ..................................... $ 156,514 $ 153,890 $ 85,746
Interest paid on debt .................................... 64,400 61,868 71,970
See notes to consolidated financial statements.
The Sherwin - Williams Company 2000 Annual Report | 25
19
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Cumulative
Other
Common Other Retained Treasury Comprehensive
Stock Capital Earnings Stock Loss Total
--------- --------- ----------- --------- --------- ----------
Balance at January 1, 1998 ............... $ 204,538 $ 119,695 $ 1,602,882 $(301,418) $ (33,517) $1,592,180
Comprehensive income:
Net income ............................. 272,864 272,864
Other comprehensive loss ............... (11,410) (11,410)
----------
Comprehensive income ................. 261,454
Treasury stock purchased ................. (83,791) (83,791)
Stock issued (tendered)
for exercise of options ................ 1,201 23,103 (1,256) 23,048
Restricted stock grants (net activity).... (38) 2,128 2,090
Stock acquired for trust ................. (1,240) (1,240)
Cash dividends-- $.45 per share .......... (77,801) (77,801)
--------- --------- ----------- --------- --------- ----------
Balance at December 31, 1998 ............. 205,701 143,686 1,797,945 (386,465) (44,927) 1,715,940
Comprehensive income:
Net income ............................. 303,860 303,860
Other comprehensive loss ............... (100,697) (100,697)
----------
Comprehensive income ................. 203,163
Treasury stock purchased ................. (145,806) (145,806)
Stock issued (tendered)
for exercise of options ................ 463 8,597 (252) 8,808
Stock tendered in connection
with restricted stock grants ........... (1,368) (1,368)
Restricted stock grants (net activity) ... 145 (69) 76
Stock acquired for trust ................. (1,327) (1,327)
Cash dividends-- $.48 per share .......... (80,954) (80,954)
--------- --------- ----------- --------- --------- ----------
Balance at December 31, 1999 ............. 206,309 150,887 2,020,851 (533,891) (145,624) 1,698,532
Comprehensive income:
Net income ............................. 16,026 16,026
Other comprehensive loss ............... (17,985) (17,985)
----------
Comprehensive loss ................... (1,959)
Treasury stock purchased ................. (146,857) (146,857)
Stock issued (tendered)
for exercise of options ................ 534 8,121 (192) 8,463
Stock tendered in connection
with restricted stock grants ........... (173) (173)
Restricted stock grants (net activity) ... 5 3,176 3,181
Stock acquired for trust ................. (1,199) (1,199)
Treasury stock transferred to trust ...... (2,335) 2,335
Cash dividends-- $.54 per share .......... (88,124) (88,124)
--------- --------- ----------- --------- --------- ----------
Balance at December 31, 2000 ............. $ 206,848 $ 158,650 $ 1,948,753 $(678,778) $(163,609) $1,471,864
========= ========= =========== ========= ========= ==========
See notes to consolidated financial statements.
26 | The Sherwin - Williams Company 2000 Annual Report
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Thousands of Dollars Unless Otherwise Indicated)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CONSOLIDATION. The consolidated financial statements include all controlled
subsidiaries. Inter-company accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
NATURE OF OPERATIONS. The Company is engaged in the manufacture, distribution
and sale of coatings and related products to professional, industrial,
commercial and retail customers primarily in North and South America.
REPORTABLE SEGMENTS. See Note 17.
CASH FLOWS. The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate fair value.
SHORT-TERM INVESTMENTS: The carrying amounts reported in the consolidated
balance sheets for marketable debt and equity securities are based on quoted
market prices and approximate fair value.
INVESTMENTS IN SECURITIES: The Company maintains certain long-term
investments, classified as available for sale securities, in a fund to
provide for payment of health care benefits of certain qualified employees.
The estimated fair values of these securities, included in Other assets, of
$15,913, $21,093, and $25,523 at December 31, 2000, 1999, and 1998,
respectively, are based on quoted market prices.
LONG-TERM DEBT(INCLUDING CURRENT PORTION): The fair values of the Company's
publicly traded debentures, shown below, are based on quoted market prices.
The fair values of the Company's non-traded debt, also shown below, are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
December 31,
-----------------------------------------------------------
2000 1999 1998
---------------- ----------------- -----------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- ----- -------- ----- -------- -----
Publicly traded
debt ....... $613,709 $592,113 $726,017 $698,031 $764,806 $825,989
Non-traded
debt ....... 29,179 26,203 20,536 18,969 83,559 80,929
INTEREST RATE SWAPS: The Company occasionally enters into interest rate swaps
primarily to hedge against interest rate risks. These agreements generally
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying principal amounts. Counterparties to
these agreements are major financial institutions. Management believes the
risk of incurring losses related to credit risk is remote. There were no
interest rate swaps outstanding at December 31, 2000 and 1999.
NON-TRADED INVESTMENTS: It was not practicable to estimate the fair value of
the Company's investment in certain non-traded investments because of the
lack of quoted market prices and the inability to estimate fair values
without incurring excessive costs. The carrying amounts, included in Other
assets, of $25,143, $15,860, and $20,034 at December 31, 2000, 1999, and
1998, respectively, represent the Company's best estimate of current economic
values of these investments.
INVESTMENT IN LIFE INSURANCE. The Company invests in broad-based corporate
owned life insurance. The cash surrender values of the policies, net of
policy loans, are included in Other assets. The net expense associated with
such investment is included in Other expense - net. Such expense is
immaterial to Income before income taxes.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company evaluates the recoverability of
long-lived assets and the related estimated remaining lives at each balance
sheet date. The Company records an impairment or change in useful life
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable or the useful life has changed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." See Note 2.
GOODWILL. Goodwill represents the cost in excess of fair value of net assets
acquired in business combinations accounted for by the purchase method and is
amortized on a straight-line basis over the expected period of benefit
ranging from 10 to 40 years. Accumulated amortization of goodwill was
$84,827, $107,365 and $78,983 at December 31, 2000, 1999, and 1998,
respectively. See Note 2.
INTANGIBLES. Intangible assets include non-compete covenants, operating
rights, patents, and trademarks. These assets are amortized on a
straight-line basis over the expected period of benefit ranging from 2 to 40
years. Accumulated amortization of intangible assets was $129,320, $119,125,
and $102,359 at December 31, 2000, 1999, and 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated on the
basis of cost. Depreciation is provided principally by the straight-line
method. The major classes of assets and ranges of depreciation rates are as
follows:
The Sherwin - Williams Company 2000 Annual Report | 27
21
Buildings ................... 2% - 6-2/3%
Machinery and equipment ..... 4% - 20%
Furniture and fixtures ...... 5% - 33-1/3%
Automobiles and trucks ...... 10% - 33-1/3%
LETTERS OF CREDIT. The Company occasionally enters into standby letter of credit
agreements to guarantee various operating activities. These agreements, which
expire in 2001, provide credit availability to the various beneficiaries if
certain contractual events occur. Amounts outstanding under these agreements
totaled $12,230, $14,177, and $15,042 at December 31, 2000, 1999, and 1998,
respectively.
FOREIGN CURRENCY TRANSLATION. All consolidated non-highly inflationary foreign
operations use the local currency of the country of operation as the functional
currency and translate the local currency asset and liability accounts at
year-end exchange rates while income and expense accounts are translated at
average exchange rates. The resulting translation adjustments are included in
Cumulative other comprehensive loss, a component of Shareholders' equity.
REVENUE RECOGNITION. Substantially all revenues are recognized when products are
shipped and title has passed to unaffiliated customers.
TECHNICAL EXPENDITURES. Total technical expenditures include research and
development costs, quality control, product formulation expenditures and other
similar items. Research and development costs included in technical expenditures
were $33,927, $27,200, and $23,955 for 2000, 1999, and 1998, respectively.
ADVERTISING EXPENSES. The cost of advertising is expensed as incurred. The
Company incurred $276,078, $265,411, and $282,817 in advertising costs during
2000, 1999, and 1998, respectively.
ENVIRONMENTAL MATTERS. Capital expenditures for ongoing environmental compliance
measures are recorded in the consolidated balance sheets, and related expenses
are included in the normal operating expenses of conducting business. The
Company is involved with environmental compliance, investigation and remediation
activities at some of its current and former sites and at a number of
third-party sites. The Company accrues for certain environmental
remediation-related activities for which commitments or clean-up plans have been
developed and for which costs can be reasonably estimated. All accrued amounts
are recorded on an undiscounted basis. Accrued environmental remediation-related
expenses include direct costs of remediation and indirect costs related to the
remediation effort, such as compensation and benefits for employees directly
involved in the remediation activities and fees paid to outside engineering,
consulting and law firms. See Notes 4 and 9.
STOCK-BASED COMPENSATION. The Company uses the intrinsic value method of
accounting for stock-based compensation in accordance with Accounting Principles
Board Opinion (APBO) No. 25. See Note 12 for pro forma disclosure of net income
and earnings per share under the fair value method of accounting for stock-based
compensation as prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation."
EARNINGS PER SHARE. Basic net income per share is computed based on the
weighted-average number of shares outstanding during the year. Diluted net
income per share is computed based on the weighted-average number of shares
outstanding plus all dilutive securities potentially outstanding during the
year. See Note 15. All references to earnings or losses per share throughout
this report are stated on a diluted per share basis unless otherwise indicated.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. Financial Accounting Standards
Board (FASB) SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective for all fiscal years beginning after June
15, 2000. SFAS No. 133 requires all derivative instruments to be recorded as
either assets or liabilities at fair value. Gains or losses resulting from
changes in the values of those derivative instruments may be recognized
immediately or deferred depending on the use of the derivative or whether it
qualifies as a hedge. The Company will comply with the requirements of SFAS No.
133 beginning January 1, 2001, as required. The impact of complying with this
statement is not expected to have a material effect on the Company's financial
condition, results of operations or cash flows.
RECLASSIFICATION. Certain amounts in the 1999 and 1998 consolidated financial
statements have been reclassified to conform with the 2000 presentation.
NOTE 2-IMPAIRMENT OF LONG-LIVED ASSETS
- --------------------------------------------------------------------------------
During the fourth quarter of 2000, the Company recognized an impairment charge
of $352,040 ($293,628 after tax or $1.80 per share) to reduce the carrying
values of certain long-lived assets to their estimated fair values. Charges of
$342,522 reduced goodwill while the remaining portion of the charge primarily
reduced fixed assets. The impaired assets are part of the Consumer Segment
related to the previous acquisitions of Thompson Minwax Holding Corp. and Pratt
& Lambert United, Inc., and the assets of Sunshine Quality Products, Inc. and
the Household and Professional Products Division of Grow Group, Inc. Current
year losses, cash flow deficiencies and cash flow shortfalls from expectations
indicated an impairment review was necessary. Undiscounted future cash flows
estimated by management established that impairment existed at December 31,
2000. The amount of impairment was estimated using a discounted cash flow
valuation technique incorporating a discount rate commensurate with the risks
involved for each group of assets.
NOTE 3-INVENTORIES
- --------------------------------------------------------------------------------
Inventories are stated at the lower of cost or market. Cost is determined
principally on the last-in, first-out (LIFO) method which provides a better
matching of current costs and revenues in periods of inflation. The following
presents the effect on inventories, net income and net income per share had the
Company used the first-in, first-out (FIFO) inventory valuation adjusted for
income taxes at the statutory rate and assuming no other adjustments. This
information is presented to enable the reader to make comparisons with companies
using the FIFO method of inventory valuation.
28 | The Sherwin - Williams Company 2000 Annual Report
22
2000 1999 1998
---- ---- ----
Percentage of total inventories on LIFO ................. 89% 90% 91%
Excess of FIFO over LIFO ................................ $110,124 $97,953 $96,235
Increase (decrease) in net income due to LIFO ........... (7,916) (894) 4,685
Increase (decrease) in net income per share due to LIFO.. (.05) (.01) .03
NOTE 4 - OTHER EXPENSE - NET
- --------------------------------------------------------------------------------
A summary of significant items included in Other expense - net is as follows:
2000 1999 1998
---- ---- ----
Dividend and royalty income................... $(4,144) $(4,692) $(3,069)
Net expense of financing and
investing activities ....................... 10,926 7,084 2,542
Provisions for environmental
matters- net(see Note 9) ................... 15,402 695
Provisions for disposition and
termination of operations (see Note 5) ..... 6,968 3,830 12,290
Foreign currency exchange losses ............. 2,115 3,333 11,773
Other (income) expense ....................... (1,112) 4,583 1,815
------- ------- -------
$14,753 $29,540 $26,046
======= ======= =======
The net expense of financing and investing activities represents the net
realized gains or losses from disposing of fixed assets, the net gain or loss
associated with the investment in certain long-term asset funds, the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance, other related fees and, in 1998, the net gain
related to the sale of the Company's joint venture interest in American Standox,
Inc.
The provisions for environmental matters represent the net charge necessary to
record the most current estimates of potential costs of environmental
remediation at current, former and third-party sites. See Note 9. The provision
for 1998 was partially offset by settlements with certain insurance carriers
totaling $3,600.
The provisions for disposition and termination of operations reduce property,
plant and equipment at closed facilities to estimated net realizable value and
adjust previous provisions to current estimates as closure or disposition
occurs. See Note 5.
NOTE 5-DISPOSITION AND TERMINATION
OF OPERATIONS
- --------------------------------------------------------------------------------
The Company is continually re-evaluating its operating facilities against its
long-term strategic goals. Upon cessation of operations, a provision is made to
reduce property, plant and equipment to its estimated net realizable value. The
expense is included in Other expense - net. Similarly, provisions are made, and
included in Cost of goods sold, to provide for all qualified exit costs such as
lease cancellation penalties, post-closure rent expenses, incremental
post-closure expenses and the estimated costs of employee terminations.
During 2000, provisions were made to reduce certain assets to their net
realizable value for two research centers idled by the Automotive Finishes
Segment, resulting from the consolidation of its research operations into a
newly purchased facility, and for a closed distribution center. Provisions were
made for qualified exit costs associated with the shut down of these facilities,
primarily incremental post-closure costs. In 1999, provisions were made to
reduce certain assets to their net realizable value and to accrue qualified exit
costs for two idle manufacturing facilities and a leased warehouse and for four
redundant manufacturing facilities in 1998. Adjustments are made to prior
accruals as information becomes available upon which more accurate costs can be
reasonably estimated.
Approximately 45 percent of the ending accrual at December 31, 2000 consisted of
reductions in property, plant and equipment to estimated net realizable values.
Approximately one-half of the reduction to net realizable value relates to
facilities closed in 2000 while the other half relates primarily to facilities
that ceased operations prior to 1998. The remaining portion of the ending
accrual at December 31, 2000 relates primarily to post-closure demolition
expenses, continued lease payments or cancellation penalties, and ongoing
contractual expenses relating to facilities whose operations ceased prior to
1998. The Company is involved in ongoing environmental-related activities at
certain owned facilities that have been closed and cannot reasonably estimate
when such matters will be concluded to allow for disposition. As sale of the
facilities occurs, following the completion of the environmental-related
activities or at time of demolition, the realized loss from carrying value to
net realizable value will be charged to the accrual. Most remaining demolition
expenses are expected to be incurred during 2001.
A summary of the financial data related to the closing or sale of the facilities
is as follows:
2000 1999 1998
---- ---- ----
Beginning accruals- January 1 .............. $34,883 $ 56,097 $47,111
Provisions included in Cost of goods sold... 1,055 3,810 11,267
Provisions included in
Other expense - net ...................... 6,990 278 14,094
Prior accrual adjustments included
in Other expense - net ................... (22) 3,552 (1,804)
------- -------- -------
Total charges included in
Other expense - net ................. 6,968 3,830 12,290
Actual expenditures charged to accrual ..... (6,173) (15,529) (5,322)
Realized losses charged to accrual ......... (4,459) (13,325) (9,249)
------- -------- -------
Ending accruals- December 31 ............... $32,274 $ 34,883 $56,097
======= ======== =======
Net after-tax charges to
current operations ..................... $ 5,215 $ 4,966 $15,312
Net after-tax charges per share ............ $ .03 $ .03 $ .09
NOTE 6 - PENSION AND OTHER BENEFITS
- --------------------------------------------------------------------------------
The Company provides pension benefits to substantially all employees through
noncontributory defined benefit or defined contribution plans. The Company's
annual contribution for its defined contribution pension plans, which is based
on a level percentage of compensation for covered employees, was $33,043,
$31,512, and $27,004 in 2000, 1999, and 1998, respectively.
The Company provides certain health care benefits for active employees. The
plans are contributory and contain cost-sharing features such as deductibles and
coinsurance. There were 16,811, 16,081, and 15,894, active employees entitled to
receive benefits
The Sherwin - Williams Company 2000 Annual Report | 29
23
under these plans as of December 31, 2000, 1999, and 1998, respectively. The
cost of these benefits for active employees is recognized as claims are incurred
and amounted to $58,782, $52,640, and $47,563 for 2000, 1999, and 1998,
respectively. The Company has a fund, to which it no longer intends to
contribute, that provides for payment of health care benefits of certain
qualified employees. Distributions from the fund amounted to $7,410, $6,421, and
$4,928 in 2000, 1999, and 1998, respectively.
Employees of the Company who were hired prior to January 1, 1993 and who are not
members of a collective bargaining unit, and certain groups of employees added
through acquisitions, are eligible for certain health care and life insurance
benefits upon retirement from active service, subject to the terms, conditions
and limitations of the applicable plans. There were 4,855, 4,831, and 4,800
retired employees entitled to receive benefits as of December 31, 2000, 1999,
and 1998, respectively. The plans are unfunded.
DEFINED BENEFIT PENSION PLANS OTHER POSTRETIREMENT BENEFITS
---------------------------------- -------------------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
BENEFIT OBLIGATION:
Balance at beginning of year ................ $170,632 $169,099 $175,204 $ 225,686 $ 217,627 $ 206,007
Service cost ................................ 2,990 3,237 2,564 3,821 4,215 3,877
Interest cost ............................... 12,504 11,516 11,942 15,649 14,467 13,909
Actuarial loss (gain) ....................... 8,957 (1,106) 1,702 15,930 966 3,184
Plan amendments ............................. 738 2,003
Plan mergers ................................ 9,446
Other - net ................................. 208 181
Benefits paid ............................... (10,596) (12,295) (24,316) (13,150) (11,589) (9,350)
-------- -------- -------- --------- --------- ---------
Balance at end of year ...................... 194,879 170,632 169,099 247,936 225,686 217,627
PLAN ASSETS:
Balance at beginning of year ................ 523,453 492,384 446,271
Actual return on plan assets ................ 25,534 44,859 71,188
Plan mergers ................................ 17,017
Other - net ................................. (954) (1,495) (759)
Benefits paid ............................... (10,596) (12,295) (24,316)
-------- -------- --------
Balance at end of year ...................... 554,454 523,453 492,384
EXCESS(DEFICIENT) PLAN ASSETS:
Balance at end of year ...................... 359,575 352,821 323,285 (247,936) (225,686) (217,627)
Unrecognized net asset ...................... (1,279) (2,792)
Unrecognized actuarial loss (gain) .......... 2,080 (20,262) (20,348) 37,752 21,993 20,171
Unrecognized prior service cost (credit) .... 2,320 2,404 2,330 (11,689) (14,498) (17,307)
-------- -------- -------- --------- --------- ---------
NET ASSET (LIABILITY) RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS ................. $363,975 $333,684 $302,475 $(221,873) $(218,191) $(214,763)
======== ======== ======== ========= ========= =========
NET ASSET (LIABILITY) RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS CONSISTS OF:
Prepaid benefit cost ...................... $364,351 $334,094 $304,006
Accrued benefit liability ................. $(208,673) $(206,591) $(204,763)
Amount included in current liabilities .... (376) (410) (1,531) (13,200) (11,600) (10,000)
-------- -------- -------- --------- --------- ---------
$363,975 $333,684 $302,475 $(221,873) $(218,191) $(214,763)
======== ======== ======== ========= ========= =========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate ............................... 7.00% 7.25% 6.75% 7.00% 7.25% 6.75%
Expected long-term rate of return on assets . 8.50% 8.50% 8.50%
Rate of compensation increase ............... 5.00% 5.00% 5.00%
Health care cost trend rate ................. 6.00% 6.40% 6.70%
NET PERIODIC BENEFIT (CREDIT) COST:
Service and interest cost ................... $ 15,494 $ 14,753 $ 14,506 $ 19,470 $ 18,682 $ 17,786
Net amortization and deferral ............... (490) (699) (2,524) (2,814) (2,768) (2,809)
Expected return on assets ................... (44,633) (42,137) (37,531)
Settlement gain ............................. (5,302)
-------- -------- -------- --------- --------- ---------
Net periodic benefit (credit) cost .......... $(29,629) $(28,083) $(30,851) $ 16,656 $ 15,914 $ 14,977
======== ======== ======== ========= ========= =========
30 | The Sherwin - Williams Company 2000 Annual Report
24
Plan assets included 2,338,800 shares of the Company's common stock at December
31, 2000 with a market value of $61,541. Dividends received during the year from
Company stock was $1,155.
The assumed health care cost trend rate was revised during the year ended
December 31, 2000, to 9.5 percent for 2001 decreasing gradually to 5.5 percent
for 2010 and thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plan. A one-percentage-point
change in assumed health care cost trend rates would have the following effects
as of December 31, 2000:
One-Percentage-Point
-----------------------
Increase (Decrease)
-------- ----------
Effect on total of service and interest
cost components .................... $ 580 $ (565)
Effect on the post retirement benefit
obligation ......................... $8,137 $(7,900)
NOTE 7-LONG-TERM DEBT
- --------------------------------------------------------------------------------
Amount Outstanding
------------------------------------------------------------
Due Date 2000 1999 1998
-------- ---- ---- ----
6.85% Notes ......................... 2007 $199,807 $199,775 $199,742
7.375% Debentures ................... 2027 149,910 149,907 149,903
7.45% Debentures .................... 2097 149,408 149,402 149,396
6.5% Notes .......................... 2002 99,989 99,978 99,966
6.25% Notes ......................... 2000 99,974
9.875% Debentures ................... 2007 to 2016 11,500 15,900 15,900
5% to 9% Promissory Notes............ Through 2005 8,882 5,752 10,623
8% to 12% Promissory Notes
partially secured by certain
land and buildings ................. Through 2005 2,259 3,569 3,884
4.75% Promissory Note ............... 2000 800
Other Obligations ................... 1,832 82 95
-------- -------- --------
$623,587 $624,365 $730,283
======== ======== ========
Maturities of long-term debt are as follows for the next five years: $19,368 in
2001; $106,616 in 2002; $5,632 in 2003; $405 in 2004, and $204 in 2005.
Interest expense on long-term debt was $46,569, $55,415, and $59,137 for 2000,
1999, and 1998, respectively.
The Company has renewable 364-day and five-year amended revolving credit
agreements. The current agreements with effective dates of December 29, 2000 and
January 3, 2001 reflect the following: 1) a 364-day annually renewable agreement
aggregating $129,600 expiring on December 28, 2001; and 2) a five-year rolling
agreement aggregating $638,400, with $30,400, $190,400, and $417,600 expiring on
January 3, 2003, 2005, and 2006, respectively. There were no borrowings
outstanding under any revolving credit agreement during all years presented.
The Company uses the revolving credit agreements to satisfy its commercial paper
program's dollar for dollar liquidity requirement. At December 31, 2000,
borrowings outstanding under the commercial paper program totaled $106,854 and
are included in Short-term borrowings on the balance sheet. The weighted-average
interest rate related to these borrowings was 6.6% at December 31, 2000. There
were no borrowings outstanding under this program at December 31, 1999 and 1998,
respectively. Effective January 3, 2001, this program is limited to $768,000,
which equals the new aggregate maximum borrowing capacity under the revolving
credit agreements.
On October 6, 1997, the Company issued $50,000 of debt securities remaining
under a previously existing shelf registration with the Securities and Exchange
Commission consisting of 5.5% notes, due October 15, 2027, with provisions that
the holders, individually or in the aggregate, may exercise a put option on
October 15, 1999 and annually thereafter that would require the Company to repay
the securities. On October 15, 2000 and 1999, individual debt security holders
exercised put options requiring the Company to repay $7,960 and $38,945 of these
debt securities. The remaining balance of $3,095 at December 31, 2000 and
$11,055 at December 31, 1999 of these debt securities are included in Current
portion of long-term debt on the balance sheets.
On December 24, 1997, the Company filed a shelf registration with the Securities
and Exchange Commission covering $150,000 of unsecured debt securities with
maturities greater than nine months from the date of issue. The Company may
issue these securities from time to time in one or more series and will offer
the securities on terms determined at the time of sale. There were no borrowings
outstanding under this registration at December 31, 2000, 1999, and 1998.
On August 18, 1998, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission to issue debt securities, common
stock and warrants up to $1,500,000. The registration was effective September 8,
1998. There were no borrowings outstanding under this registration at December
31, 2000, 1999, and 1998.
NOTE 8-LEASES
- --------------------------------------------------------------------------------
The Company leases certain stores, warehouses, manufacturing facilities, office
space and equipment. Renewal options are available on the majority of leases
and, under certain conditions, options exist to purchase certain properties.
Rental expense for operating leases was $130,552, $123,084, and $117,762 for
2000, 1999, and 1998, respectively. Certain store leases require the payment of
contingent rentals based on sales in excess of specified minimums. Contingent
rentals included in rent expense were $12,423, $11,530, and $10,329 in 2000,
1999, and 1998, respectively. Rental income, as lessor, from real estate leasing
activities and sublease rental income for all years presented was not
significant.
Following is a schedule, by year and in the aggregate, of future minimum lease
payments under noncancellable operating leases having initial or remaining terms
in excess of one year at December 31, 2000:
2001 ............................. $ 98,001
2002 ............................. 81,919
2003 ............................. 62,376
2004 ............................. 46,533
2005 ............................. 30,805
Later years ...................... 81,959
--------
Total minimum lease payments ..... $401,593
========
The Sherwin - Williams Company 2000 Annual Report | 31
25
NOTE 9--OTHER LONG-TERM LIABILITIES
- --------------------------------------------------------------------------------
Included in Other long-term liabilities at December 31, 2000, 1999, and 1998
were accruals for extended environmental-related activities of $116,594,
$124,096 and $127,613, respectively. The accrual for extended
environmental-related activities represents the Company's provisions for
estimated costs associated with some of its current and former sites. Also, the
Company, together with other parties, has been designated a potentially
responsible party under federal and state environmental protection laws for the
remediation of hazardous waste at a number of third-party sites, primarily
Superfund sites. In general, these laws provide that potentially responsible
parties may be held jointly and severally liable for investigation and
remediation costs regardless of fault. The Company provides for, and includes in
long-term liabilities, its estimated potential long-term liability for
investigation and remediation costs with respect to such third-party sites.
The Company initially provides for the estimated cost of environmental-related
activities relating to its current, former and third-party sites when costs can
be reasonably estimated. These estimates are determined based on currently
available facts regarding each site. If the best estimate of costs can only be
identified as a range and no specific amount within that range can be determined
more likely than any other amount within the range, the minimum of the range is
accrued. Actual costs incurred may vary from these estimates due to the inherent
uncertainties involved. The Company believes that any additional liability in
excess of amounts provided which may result from the resolution of such matters
will not have a material adverse effect on the financial condition, liquidity or
cash flow of the Company.
Current environmental-related liabilities are included in Other accruals on the
consolidated balance sheets.
NOTE 10-STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
As of December 31, 2000, 14,611 employees participated in the Company's Employee
Stock Purchase and Savings Plan. The Company's contribution charged to
operations was $28,070, $36,535, and $32,679 for 2000, 1999, and 1998,
respectively. Additionally, the Company made contributions on behalf of
participating employees, representing amounts authorized by employees to be
withheld from their earnings, of $26,636, $22,581, and $20,250 in 2000, 1999,
and 1998, respectively.
At December 31, 2000, there were 25,345,026 shares of the Company's stock being
held by this plan, representing 15.9 percent of the total number of voting
shares outstanding. Shares of company stock credited to each member's account
under the plan are voted by the trustee under instructions from each individual
plan member. Shares for which no instructions are received, along with any
unallocated shares held in the plan, are voted by the trustee in the same
proportion as those for which instructions are received.
NOTE 11-CAPITAL STOCK
- --------------------------------------------------------------------------------
Shares Shares
in Treasury Outstanding
----------- -----------
Balance at January 1, 1998 ...................... 31,630,255 172,907,418
Shares tendered as payment for
options exercised .......................... 37,663 (37,663)
Shares issued for exercise of stock options .. 1,201,476
Shares cancelled under previous
restricted stock grants .................... (38,000)
Treasury stock purchased ..................... 3,000,000 (3,000,000)
----------- ------------
Balance at December 31, 1998 .................... 34,667,918 171,033,231
Shares tendered as payment for
options exercised .......................... 8,392 (8,392)
Shares issued for exercise of stock options... 462,598
Shares tendered in connection with
restricted stock grants .................... 44,236 (44,236)
Net shares issued under
restricted stock grants ..................... 145,400
Treasury stock purchased ..................... 5,925,000 (5,925,000)
----------- ------------
Balance at December 31, 1999 .................... 40,645,546 165,663,601
Shares tendered as payment for
options exercised .......................... 8,757 (8,757)
Shares issued for exercise of
stock options .............................. 533,991
Shares transferred to revocable trust ........ (165,000) 165,000
Net shares issued under
restricted stock grants .................... 4,500
Treasury stock purchased ..................... 6,800,000 (6,800,000)
----------- ------------
Balance at December 31, 2000 .................... 47,289,303 159,558,335
=========== ============
An aggregate of 19,184,038 shares, 19,722,529 shares, and 20,389,127 shares of
stock at December 31, 2000, 1999 and 1998, respectively, were reserved for
future grants of restricted stock and the exercise and future grants of stock
options. Shares outstanding include 432,518 shares, 215,150 shares, and 159,800
shares of stock held in a revocable trust at December 31, 2000, 1999, and 1998,
respectively. At December 31, 2000, there were 300,000,000 shares of common
stock and 30,000,000 shares of serial preferred stock authorized for issuance
(3,000,000 shares of the authorized serial preferred stock have been designated
as cumulative redeemable serial preferred stock which may be issued pursuant to
the Company's shareholders' rights plan if the Company becomes the target of
coercive and unfair takeover tactics).
NOTE 12-STOCK PLAN
- --------------------------------------------------------------------------------
The Company's 1994 Stock Plan permits the granting of restricted stock, stock
appreciation rights and stock options to eligible employees. The 1994 Stock Plan
succeeded the 1984 Stock Plan which expired on February 15, 1994. Although no
further grants may be made under the 1984 Stock Plan, all rights granted under
such plan remain. The Company's 1997 Stock Plan for Nonemployee Directors
provides for the granting of restricted stock and stock options to members of
the Board of Directors who are not employees of the Company. There were 400,000
shares authorized as available for grant under the 1997 Stock Plan. Grants made
pursuant to the 1997 Stock Plan are authorized by the Board of Directors.
32 | The Sherwin - Williams Company 2000 Annual Report
26
Restricted stock grants, which generally require four years of continuous
employment from the date of grant before vesting and receiving the shares
without restriction, have been awarded to certain officers and key employees
under the 1994 Stock Plan. The number of shares to be received without
restriction is based on the Company's performance relative to a peer group of
companies. Shares of restricted stock that vested and were delivered to officers
and employees amounted to 120,400 during 1999. No shares of restricted stock
vested during 2000 or 1998. At December 31, 2000, there were 352,500 shares of
restricted stock outstanding. Unamortized deferred compensation expense with
respect to the restricted stock grants amounted to $3,036, $4,249, and $2,781 at
December 31, 2000, 1999, and 1998, respectively, and is being amortized over the
four-year vesting period. Deferred compensation expense aggregated $3,180, $77,
and $2,090 in 2000, 1999, and 1998, respectively. No stock appreciation rights
have been granted.
A summary of restricted stock granted during 2000, 1999, and 1998 is as follows:
2000 1999 1998
---- ---- ----
Shares granted ............................. 4,500 204,000 4,000
Weighted-average fair value of
restricted shares granted during year.... $19.63 $ 23.77 $33.06
Non-qualified and incentive stock options have been granted to certain officers
and key employees under the plans at prices not less than fair market value of
the shares, as defined by the plans, at the date of grant. The options generally
become exercisable to the extent of one-third of the optioned shares for each
full year following the date of grant and generally expire ten years after the
date of grant. The number of options and any period of service required before
the options may be exercised is determined by the Board of Directors at the time
of grant. No options may be exercised more than ten years from the date of the
grant.
The Company has elected to follow APBO No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires use of highly subjective assumptions in option valuation models. Under
APBO No. 25, because the exercise price of the Company's employee stock options
is not less than fair market price of the shares at the date of grant, no
compensation expense is recognized in the financial statements. Pro forma
information regarding net income and earnings per share, determined as if the
Company had accounted for its employee stock options under the fair value method
of SFAS No. 123, is required by that statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for all options granted:
2000 1999 1998
---- ---- ----
Risk-free interest rate ........... 6.29% 5.34% 5.14%
Expected life of option ........... 3 years 3 years 3 years
Expected dividend yield of stock .. 2.00% 2.00% 2.00%
Expected volatility of stock ...... 0.305 0.265 0.194
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, it
is management's opinion that the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The amounts below represent the pro forma information calculated through use of
the Black-Scholes model. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period.
2000 1999 1998
---- ---- ----
Pro forma net income .......... $9,617 $297,107 $269,838
PRO FORMA NET INCOME PER SHARE:
Basic ...................... $ .06 $ 1.77 $ 1.57
Diluted .................... $ .06 $ 1.76 $ 1.56
A summary of the Company's stock option activity and related information for the
years ended December 31, 2000, 1999 and 1998 is shown in the following table:
2000 1999 1998
--------------------- -------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Optioned Exercise Optioned Exercise Optioned Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding beginning of year .............................. 10,724,653 $22.78 6,259,702 $22.89 5,810,471 $18.47
Granted .................................................... 2,820,900 19.75 5,292,350 22.33 1,867,500 29.10
Exercised .................................................. (533,991) 12.02 (462,598) 15.36 (1,201,476) 14.00
Canceled ................................................... (423,252) 24.62 (364,801) 27.69 (216,793) 26.68
---------- ------ ---------- ------ --------- ------
Outstanding end of year .................................... 12,588,310 $22.47 10,724,653 $22.78 6,259,702 $22.89
========== ====== ========== ====== ========= ======
Exercisable at end of year ................................. 5,923,537 $23.31 3,971,139 $21.09 3,019,873 $17.77
Weighted-average fair value of options granted during year.. $4.72 $4.67 $5.12
Reserved for future grants ................................. 6,595,728 8,997,876 14,129,425
The Sherwin - Williams Company 2000 Annual Report | 33
27
Exercise prices for optioned shares outstanding as of December 31, 2000 ranged
from $9.56 to $35.34. A summary of these options by range of exercise prices is
as follows:
Outstanding Exercisable
------------------------------------ ------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Range of Optioned Exercise Contractual Optioned Exercise
Exercise Prices Shares Price Life (years) Shares Price
--------------- --------- --------- ------------ --------- -----------
less than $16.00 .... 390,829 $12.86 1.80 390,829 $12.86
$16.00 - $19.99 .... 3,241,788 19.03 9.38 557,988 16.51
$20.00 - $26.00 .... 6,128,196 22.00 8.01 2,701,625 21.74
greater than $26.00.. 2,827,497 28.77 6.96 2,273,095 28.65
---------- ------ ---- --------- ------
12,588,310 $22.47 7.67 5,923,537 $23.31
========== ====== ==== ========= ======
NOTE 13-INCOME TAXES
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes using the enacted tax
rates and laws that are currently in effect. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 2000, 1999 and
1998 are as follows:
2000 1999 1998
---- ---- ----
DEFERRED TAX ASSETS:
Dispositions, environmental and
other similar items ............ $ 55,220 $ 56,123 $ 61,857
Other items (each less than 5% of
total assets) .................. 98,107 94,196 88,432
-------- -------- --------
Total deferred tax assets ... $153,327 $150,319 $150,289
======== ======== ========
DEFERRED TAX LIABILITIES:
Depreciation and amortization .... $ 35,691 $ 66,374 $ 51,997
Deferred employee benefit items .. 50,333 42,785 35,163
-------- -------- --------
Total deferred tax liabilities . $ 86,024 $109,159 $ 87,160
======== ======== ========
Significant components of the provisions for income taxes are as follows:
2000 1999 1998
---- ---- ----
CURRENT:
Federal ................ $125,393 $128,185 $106,538
Foreign ................ 6,211 11,787 6,982
State and Local ........ 22,662 25,116 23,162
-------- -------- --------
Total Current ........ 154,266 165,088 136,682
DEFERRED:
Federal ................ (27,386) 14,388 20,946
Foreign ................ 6,213 3,851 5,587
State and Local ........ (5,713) 2,931 4,024
-------- -------- --------
Total Deferred ....... (26,886) 21,170 30,557
-------- -------- --------
Total income tax expense... $127,380 $186,258 $167,239
======== ======== ========
Significant components of income before income taxes as used for income
tax purposes, are as follows:
2000 1999 1998
---- ---- ----
Domestic.............. $ 90,412 $411,626 $382,469
Foreign............... 52,994 78,492 57,634
-------- -------- --------
$143,406 $490,118 $440,103
======== ======== ========
A reconciliation of the statutory federal income tax rate and the effective
tax rate follows:
2000 1999 1998
---- ---- ----
Statutory tax rate ................... 35.0% 35.0% 35.0%
EFFECT OF:
State and local taxes ............. 7.7 3.7 4.0
Investment vehicles ............... (7.3) (1.5) (2.7)
Impairment of long-lived assets.... 51.0
Other - net ....................... 2.5 0.8 1.7
---- ---- ----
Effective tax rate ................... 88.9% 38.0% 38.0%
==== ==== ====
A portion of the impairment of long-lived assets charge in 2000 related to
goodwill was not deductible for tax purposes. The effect on the statutory
federal income tax rate is shown separately in the previous table. The state and
local tax effect is not shown separately. The remaining portion of the
impairment charge created federal, state and local deferred tax benefits due to
the significant temporary differences between the reduced financial carrying
amounts and amounts used for tax purposes.
The provisions for income taxes includes estimated taxes payable on that portion
of retained earnings of foreign subsidiaries expected to be received by the
Company. A provision was not made with respect to $5,647 of retained earnings at
December 31, 2000 that have been invested by foreign subsidiaries. It is not
practicable to estimate the amount of unrecognized deferred tax liability for
undistributed foreign earnings.
Netted against the Company's other deferred tax assets are valuation reserves of
$9,082, $16,211 and $16,703 at December 31, 2000, 1999, and 1998, respectively,
resulting from the uncertainty as to the realization of the tax benefits from
certain foreign net operating losses and certain other foreign assets.
NOTE 14-SUMMARY OF QUARTERLY RESULTS
OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
Net Income Net Income
Net Income (Loss) per (Loss) per
Quarter Net Sales Gross Profit (Loss) Share - Basic Share - Diluted
- ------- --------- ------------ ----------- ------------- ---------------
1st $1,221,916 $516,244 $ 40,923 $ .25 $ .25
2nd 1,429,267 641,474 115,843 .71 .71
3rd 1,411,903 626,095 106,719 .66 .66
4th 1,148,538 523,798 (247,459) (1.55) (1.55)
The fourth quarter net loss resulted from an after-tax charge for the impairment
of long-lived assets of $293,628 or $1.84 per share ($1.80 per share for the
year due to the effect of dilution and higher average shares outstanding). Net
income in the fourth quarter of $46,169, excluding the impairment charge, was
decreased by $484, no per share impact, due to certain year-end adjustments.
Gross profit increased by $8,666 ($5,633 after-tax, $.04 per share) primarily as
a result of physical inventory adjustments of $9,889 ($6,428 after-tax, $.04 per
share) partially offset by fourth quarter provisions for closing costs
associated with certain operations of $1,055 ($686 after-tax, no per share
34 | The Sherwin - Williams Company 2000 Annual Report
28
impact). Administrative expenses increased $1,288 ($838 after-tax, $.01 per
share) due to other year-end adjustments. Other expense-net increased $8,122
($5,279 after-tax, $.03 per share) due primarily to fourth quarter provisions
for the reduction to net realizable value of certain fixed assets related to
site closings of $6,968 ($4,529 after-tax, $.03 per share).
1999
- --------------------------------------------------------------------------------
Net Income Net Income
per per
Quarter Net Sales Gross Profit Net Income Share - Basic Share - Diluted
- ------- --------- ------------ ---------- ------------- ---------------
1st $1,127,867 $477,086 $ 28,797 $.17 $.17
2nd 1,384,070 610,390 107,594 .64 .63
3rd 1,345,483 609,834 111,482 .67 .66
4th 1,146,416 551,204 55,987 .34 .34
Net income during the fourth quarter decreased by $1,751 ($.01 per share) due to
certain year-end adjustments. Gross profit increased by $23,006 ($14,953
after-tax, $.09 per share) as a result of physical inventory adjustments of
$32,659 ($21,228 after-tax, $.12 per share). These adjustments were partially
offset by other year-end adjustments of $5,843 ($3,798 after-tax, $.02 per
share) and by provisions for the closing costs associated with certain
operations of $3,810 ($2,477 after-tax, $.01 per share). Administrative expenses
decreased $703 ($457 after-tax, no per share effect) due to other year-end
adjustments. Other expense - net increased $26,403 ($17,162 after-tax, $.10 per
share) due to the net provisions for environmental-related matters at current,
former and third-party sites of $16,860 ($10,959 after-tax, $.07 per share), the
provision of $3,830 ($2,490 after-tax, $.01 per share) for the adjustment to net
realizable value of certain net fixed assets related to site closings, and due
to other year-end adjustments of $5,713 ($3,713 after-tax, $.02 per share).
NOTE 15-NET INCOME PER SHARE
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
BASIC
Average shares outstanding ......... 161,911,789 167,924,660 172,162,472
============ ============ ============
Net income ......................... $ 16,026 $ 303,860 $ 272,864
============ ============ ============
Net income per share ............... $ .10 $ 1.81 $ 1.58
============ ============ ============
DILUTED
Average shares outstanding ......... 161,911,789 167,924,660 172,162,472
Non-vested restricted stock grants . 279,300 263,567 235,317
Stock options-
treasury stock method ............ 503,982 838,069 1,137,890
------------ ------------ ------------
Average shares assuming dilution ... 162,695,071 169,026,296 173,535,679
============ ============ ============
Net income ......................... $ 16,026 $ 303,860 $ 272,864
============ ============ ============
Net income per share ............... $ .10 $ 1.80 $ 1.57
============ ============ ============
NOTE 16-COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Cumulative other comprehensive loss consists of the following components:
Foreign Minimum Cumulative
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustments Loss
----------- ----------- -------------
Balance at January 1, 1998 ... $ (33,089) $(428) $(33,517)
Other comprehensive loss ..... (11,838) 428 (11,410)
--------- ----- --------
Balance at December 31, 1998.. (44,927) $ 0 (44,927)
=====
Other comprehensive loss ..... (100,697) (100,697)
--------- ---------
Balance at December 31, 1999.. (145,624) (145,624)
Other comprehensive loss ..... (17,985) (17,985)
--------- ---------
Balance at December 31, 2000.. $(163,609) $(163,609)
========= =========
NOTE 17 - REPORTABLE SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Company reports its segment information in five reportable segments - the
Paint Stores, Consumer, Automotive Finishes, International Coatings
(collectively, the "Operating Segments") and Administrative Segments - in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires an enterprise to report segment
information in the same way that management internally organizes its business
for assessing performance and making decisions regarding allocation of
resources. See the inside front cover and page 1 of this report for more
information about reportable segments.
The Company's chief operating decision maker has been identified as the Chief
Executive Officer because he has final authority over performance assessment and
resource allocation decisions. Because of the global, diverse operations of the
Company, the chief operating decision maker regularly receives discrete
financial information about each reportable segment as well as a significant
amount of additional financial information about certain aggregated divisions,
operating units and subsidiaries of the Company. The chief operating decision
maker uses all such financial information for performance assessment and
resource allocation decisions. Factors considered in determining the five
reportable segments of the Company include the nature of the business
activities, existence of managers responsible for the operating and
administrative activities and information presented to the Board of Directors.
The Company evaluates the performance of operating segments and allocates
resources based on profit or loss and cash generated from operations before
income taxes, excluding corporate expenses and financing gains and losses. The
accounting policies of the reportable segments are the same as those described
in Note 1.
The Paint Stores Segment consists of 2,488 company-operated specialty paint
stores in the United States, Canada, Virgin Islands, Puerto Rico and Mexico.
Each of the stores has the same business activity of selling identical national
and similar regional products to similar types of customers. During 2000, this
Segment opened or acquired 92 net new stores, remodeled 52 and relocated 36. The
net new stores consisted of 79 stores in the United States, 3 in Canada, 1 in
the Virgin Islands, 4 in Puerto Rico and 5 in Mexico. In 1999, there were 73 net
new stores opened (66 in the
The Sherwin - Williams Company 2000 Annual Report | 35
29
United States). In 1998, 64 net new stores were opened (55 in the United
States). This Segment also manufactures original equipment manufacturer (OEM)
product finishes sold through the paint stores and by direct outside sales
representatives. In addition to stores, operations in Mexico include a
manufacturing facility, distribution activities and outside selling functions to
dealers and other distributors.
The Paint Stores Segment is the exclusive North American marketer and seller of
Sherwin-Williams(R) branded architectural coatings, industrial and marine
products, OEM product finishes and related items produced by its Mexican
operations, its product finishes manufacturing and by the Consumer Segment. The
loss of any single customer would not have a material adverse effect on the
business of this Segment. A map on the inside back cover of this report shows
the number of paint stores and their geographical locations.
The Consumer Segment develops, manufactures and distributes a variety of paint,
coatings and related products to third party customers and the Paint Stores
Segment. Approximately 41 percent of the total sales of the Consumer Segment in
2000, including inter-segment transfers, represented products sold through the
Paint Stores Segment. Sales and marketing of certain control-branded and private
labeled products is performed by a direct sales staff. The products distributed
through third party customers are intended for resale to the ultimate end-user
of the product. The Consumer Segment has sales to certain customers that,
individually, may be a significant portion of the sales of the Segment. However,
the loss of any single customer would not have a material adverse effect on the
overall profitability of the Segment. This Segment incurs most of the Company's
capital expenditures related to ongoing environmental compliance measures.
The Automotive Finishes Segment develops, manufactures and distributes a variety
of motor vehicle finish, refinish and touch-up products primarily throughout
North and South America, the Caribbean Islands, and Italy. This Segment also
licenses certain technology and trade names worldwide. Sherwin-Williams(R)
branded automotive finish and refinish products are distributed throughout North
America solely through this Segment's network of 127 company-operated automotive
branches in the United States and 17 in Canada. Additional automotive branches
in Jamaica (14) and Chile (17) complete this Segment's worldwide network. At
December 31, 2000, this Segment included 11 foreign wholly-owned subsidiaries in
8 foreign countries and 11 licensing agreements in 15 foreign countries. During
2000, the Automotive Finishes Segment opened or acquired three net new branches
worldwide. A map on the inside back cover of this report shows the number of
branches and their geographical locations.
The International Coatings Segment develops, licenses, manufactures and
distributes a variety of paint, coatings and related products worldwide. The
majority of the sales from licensees and subsidiaries occur in South America,
the Segment's most important international market. This Segment sells its
products through 29 company-operated specialty paint stores in Chile and 16 in
Brazil and by outside selling functions to dealers and other distributors. At
December 31, 2000, this Segment included 12 foreign wholly-owned subsidiaries in
8 foreign countries, 4 foreign joint ventures and 29 licensing agreements in 20
foreign countries.
The Administrative Segment includes the administrative expenses of the Company's
and certain consolidated subsidiaries' headquarters sites. This Segment includes
interest expense which is unrelated to retail real estate leasing activities,
investment income, certain foreign currency transaction losses related to
dollar-denominated debt, certain provisions for disposition and
environmental-related matters, and other expenses which are not directly
associated with any Operating Segment. Administrative expenses do not include
any significant foreign operations. Also included in the Administrative Segment
is a real estate management unit that is responsible for the ownership,
management, leasing of non-retail properties held primarily for use by the
Company, including the Company's headquarters site, and disposal of idle
facilities. Sales of the Administrative Segment represent external leasing
revenue of excess headquarters space or leasing of facilities no longer used by
the Company in its operations. Gains and losses from the sale of property are
not a significant operating factor in determining the performance of this
Segment.
Net external sales of all consolidated foreign subsidiaries were $540 million,
$497 million, and $521 million for 2000, 1999, and 1998, respectively. Operating
profits of all consolidated foreign subsidiaries were $32 million, $70 million,
and $47 million for 2000, 1999, and 1998, respectively. Domestic operations
account for the remaining net sales and operating profits. Long-lived assets
consist of net property, plant and equipment, goodwill, and intangibles.
Long-lived assets of consolidated foreign subsidiaries totaled $245 million,
$242 million, and $312 million at December 31, 2000, 1999, and 1998,
respectively. The consolidated total of long-lived assets for the Company was
$1,687 million, $2,026 million, and $2,134 million at December 31, 2000, 1999,
and 1998, respectively. No single geographic area outside the United States was
significant relative to consolidated net external sales or operating profits.
Export sales and sales to any individual customer were each less than 10 percent
of consolidated sales to unaffiliated customers during all years presented.
In the reportable segment financial information that follows, operating profit
is total revenue, including inter-segment transfers, less operating costs and
expenses. Identifiable assets are those directly identified with each reportable
segment. Administrative Segment assets consist primarily of cash, investments,
deferred pension assets, headquarters property, plant and equipment, and other
real estate. The operating margin for each Operating Segment is based upon total
external sales and inter-segment transfers. Domestic inter-segment transfers are
accounted for at the approximate fully absorbed manufactured cost plus
distribution costs. International inter-segment transfers are accounted for at
values comparable to normal unaffiliated customer sales.
36 | The Sherwin - Williams Company 2000 Annual Report
30
Reportable Segment Financial Information
- --------------------------------------------------------------------------------
(Millions of Dollars)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
NET EXTERNAL SALES
Paint Stores .................... $3,185 $3,002 $2,822 $2,639 $2,414
Consumer ........................ 1,219 1,224 1,282 1,409 1,162
Automotive Finishes ............. 493 471 474 476 434
International Coatings .......... 307 299 348 350 114
Administrative .................. 8 8 8 7 9
------ ------ ------ ------ ------
Consolidated totals ............. $5,212 $5,004 $4,934 $4,881 $4,133
OPERATING PROFITS
Paint Stores .................... $ 411 $ 377 $ 347 $ 315 $ 277
Consumer ........................ (210)* 155 125 167 126
Automotive Finishes ............. 61 67 65 64 52
International Coatings .......... 18 34 24 36 20
Administrative:
Interest Expense .............. (60) (59) (70) (79) (22)
Corporate expenses and other (77) (84) (51) (76) (78)
------ ------ ------ ------ ------
Income before income taxes ...... $ 143* $ 490 $ 440 $ 427 $ 375
IDENTIFIABLE ASSETS
Paint Stores .................... $1,018 $ 930 $ 881 $ 832 $ 757
Consumer ........................ 1,360* 1,804 1,850 1,938 1,122
Automotive Finishes ............. 349 279 275 274 274
International Coatings .......... 298 294 356 312 194
Administrative .................. 726 726 689 680 648
------ ------ ------ ------ ------
Consolidated totals ............. $3,751* $4,033 $4,051 $4,036 $2,995
CAPITAL EXPENDITURES
Paint Stores .................... $ 48 $ 49 $ 57 $ 56 $ 49
Consumer ........................ 40 40 37 57 44
Automotive Finishes ............. 29 10 8 14 10
International Coatings .......... 6 11 15 13 12
Administrative .................. 10 24 29 24 8
------ ------ ------ ------ ------
Consolidated totals ............. $ 133 $ 134 $ 146 $ 164 $ 123
DEPRECIATION
Paint Stores .................... $ 45 $ 42 $ 38 $ 40 $ 35
Consumer ........................ 28 29 30 24 21
Automotive Finishes ............. 9 8 8 7 7
International Coatings .......... 6 6 6 6 1
Administrative .................. 21 20 16 13 12
------ ------ ------ ------ ------
Consolidated totals ............. $ 109 $ 105 $ 98 $ 90 $ 76
OPERATING SEGMENT MARGINS
Paint Stores .................... 12.9% 12.5% 12.3% 11.9% 11.5%
Consumer ........................ (10.1%) 7.6% 6.1% 8.0% 7.0%
Automotive Finishes ............. 11.5% 13.3% 12.8% 12.5% 11.1%
International Coatings .......... 5.9% 11.4% 6.9% 10.2% 17.5%
------ ------ ------ ------ ------
Operating segment totals ........ 4.6%* 10.8% 9.8% 10.4% 9.9%
INTERSEGMENT TRANSFERS
Paint Stores .................... $ 10 $ 8 $ 5
Consumer ........................ 860 817 771 $ 666 $ 645
Automotive Finishes ............. 36 31 34 37 33
International Coatings .......... 2
Administrative .................. 11 12 11 9 9
------ ------ ------ ------ ------
Segment totals .................. $ 917 $ 868 $ 821 $ 714 $ 687
* Includes charge and reduction in asset value of $352 in 2000 for impairment
of long-lived assets. See note 2.
The Sherwin - Williams Company 2000 Annual Report | 37
31
DIRECTORS, OFFICERS, MANAGERS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
JAMES C. BOLAND, 61*
President and Chief Executive Officer
CAVS/Gund Arena Company
JOHN G. BREEN, 66
Retired, former Chairman, Chief Executive
Officer and President
The Sherwin-Williams Company
DUANE E. COLLINS, 64
Chairman and Chief Executive Officer
Parker-Hannifin Corporation
CHRISTOPHER M. CONNOR, 44
Chairman and Chief Executive Officer
The Sherwin-Williams Company
DANIEL E. EVANS, 64
Chairman
Bob Evans Farms, Inc.
ROBERT W. MAHONEY, 64
Retired, former Chairman, Chief Executive
Officer and President
Diebold, Incorporated
WILLIAM G. MITCHELL, 70*
Retired, former Vice Chairman
Centel Corporation
A. MALACHI MIXON, III, 60
Chairman and Chief Executive Officer
Invacare Corporation
CURTIS E. MOLL, 61*
Chairman and Chief Executive Officer
MTD Products, Inc.
HELEN O. PETRAUSKAS, 56*
Vice President-Environmental and
Safety Engineering
Ford Motor Company
JOSEPH M. SCAMINACE, 47
President and Chief Operating Officer
The Sherwin-Williams Company
RICHARD K. SMUCKER, 52*
President
The J. M. Smucker Company
CORPORATE OFFICERS
CHRISTOPHER M. CONNOR, 44**
Chairman and Chief Executive Officer
JOSEPH M. SCAMINACE, 47**
President and Chief Operating Officer
LARRY J. PITORAK, 54**
Senior Vice President - Finance,
Treasurer and Chief Financial Officer
JOHN L. AULT, 55**
Vice President - Corporate Controller
CYNTHIA D. BROGAN, 49
Vice President and
Assistant Treasurer
MARK J. DVOROZNAK, 42
Vice President -
Corporate Audit and Loss Prevention
THOMAS E. HOPKINS, 43**
Vice President -
Human Resources
CONWAY G. IVY, 59**
Vice President -
Corporate Planning and Development
JAMES J. SGAMBELLONE, 43
Vice President -
Taxes and Assistant Secretary
LOUIS E. STELLATO, 50**
Vice President, General
Counsel and Secretary
RICHARD M. WEAVER, 46
Vice President - Administration
OPERATING MANAGERS
THOMAS S. BRUMMETT, 55
President & General Manager
Eastern Division
Paint Stores Group
ROBERT J. DAVISSON, 40
President & General Manager
Southeastern Division
Paint Stores Group
MICHAEL A. GALASSO, 53**
President & General Manager
International Division
BLAIR P. LACOUR, 54
President & General Manager
Mid Western Division
Paint Stores Group
JOHN G. MORIKIS, 37**
President
Paint Stores Group
RONALD P. NANDOR, 41**
President & General Manager
Automotive Division
STEVEN J. OBERFELD, 48
President & General Manager
South Western Division
Paint Stores Group
THOMAS W. SEITZ, 52**
President & General Manager
Consumer Division
ROBERT A. TAYLOR, 47
President & General Manager
Chemical Coatings Business Unit
Paint Stores Group
* Audit Committee Member
** Executive Officer as defined by the Securities Exchange Act of 1934
38 | The Sherwin - Williams Company 2000 Annual Report
32
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
Annual Meeting
The annual meeting of shareholders will be held at 10:00 A.M., April 25, 2001 in
the Landmark Conference Center, Room 927, Midland Building, 101 Prospect Avenue,
N.W., Cleveland, Ohio.
Investor Relations
Conway G. Ivy
The Sherwin-Williams Company
101 Prospect Avenue, N.W.
Cleveland, Ohio 44115-1075
Internet: www.sherwin.com
Form 10-K
The Company's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission, is available without charge. To obtain a copy, contact the Investor
Relations Office.
Dividend Reinvestment Program
A dividend reinvestment program is available to shareholders of common stock.
For information, contact our transfer agent, The Bank of New York.
Headquarters
The Sherwin-Williams Company
101 Prospect Avenue, N.W.
Cleveland, Ohio 44115-1075
(216) 566-2000
Independent Auditors
Ernst & Young LLP
Cleveland, Ohio
Stock Trading
Sherwin-Williams Common
Stock-Symbol, SHW-is traded on the New York Stock Exchange.
Transfer Agent& Registrar
The Bank of New York
Shareholder Relations Department-11E
P.O. Box 11258
Church Street Station
New York, NY 10286
1-800-432-0140
E-mail address:
Shareowner-svcs@Email.bony.com
COMMON STOCK TRADING STATISTICS
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
High ......................... $ 27.625 $ 32.875 $ 37.875 $33.375 $28.875
Low .......................... 17.125 18.750 19.438 24.125 19.500
Close December 31 ............ 26.313 21.000 29.375 27.750 28.000
Shareholders of record ....... 10,813 11,475 11,929 11,964 11,933
Shares traded (thousands)..... 158,349 161,118 128,942 98,855 72,638
QUARTERLY STOCK PRICES AND DIVIDENDS
2000 1999
- -------------------------------------------------- ---------------------------------------------
Quarter High Low Dividend Quarter High Low Dividend
- ------- ---- --- -------- ------- ---- --- --------
1st $23.000 $17.125 $.135 1st $30.688 $23.063 $.12
2nd 27.625 21.172 .135 2nd 32.875 27.000 .12
3rd 24.625 19.875 .135 3rd 30.000 19.438 .12
4th 26.563 18.875 .135 4th 23.125 18.750 .12
The Sherwin - Williams Company 2000 Annual Report |39
33
[MAP]
Map shows the approximate geographical separation of each domestic division and
the number of paint stores and automotive branches in each state or province and
in the Virgin Islands, Puerto Rico, Mexico and South America. Map also shows the
United Kingdom and Italy.