1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended June 30, 2001
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to ___________
Commission file number 1-4851
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THE SHERWIN-WILLIAMS COMPANY
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(Exact name of registrant as specified in its charter)
OHIO 34-0526850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075
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(Address of principal executive offices) (Zip Code)
(216) 566-2000
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $1.00 Par Value - 156,348,879 shares as of July 31, 2001.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thousands of dollars, except per share data
Three months ended June 30, Six months ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 1,407,514 $ 1,429,267 $ 2,565,884 $ 2,651,183
Costs and expenses:
Cost of goods sold 798,977 787,793 1,468,324 1,493,465
Selling, general and administrative expenses 444,377 434,846 866,036 870,767
Interest expense 15,471 16,665 30,677 31,542
Interest and net investment income (1,083) (917) (2,488) (1,956)
Other expense - net 6,153 4,035 1,107 4,515
----------- ----------- ----------- -----------
1,263,895 1,242,422 2,363,656 2,398,333
----------- ----------- ----------- -----------
Income before income taxes 143,619 186,845 202,228 252,850
Income taxes 53,139 71,002 74,824 96,084
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Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.58 $ 0.71 $ 0.81 $ 0.96
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Diluted $ 0.58 $ 0.71 $ 0.80 $ 0.96
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
JUNE 30, December 31, June 30,
2001 2000 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 13,377 $ 2,896 $ 1,726
Accounts receivable, less allowance 711,601 594,162 767,785
Inventories:
Finished goods 552,278 597,472 607,335
Work in process and raw materials 94,892 106,255 112,282
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647,170 703,727 719,617
Deferred income taxes 104,958 104,662 110,669
Other current assets 155,050 146,092 211,782
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Total current assets 1,632,156 1,551,539 1,811,579
Goodwill 682,777 705,547 1,060,937
Intangible assets 252,017 259,085 267,955
Deferred pension assets 378,855 364,351 348,240
Other assets 155,563 147,769 116,588
Property, plant and equipment 1,542,996 1,530,409 1,516,141
Less allowances for depreciation and amortization 841,876 808,030 779,697
----------- ----------- -----------
701,120 722,379 736,444
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Total assets $ 3,802,488 $ 3,750,670 $ 4,341,743
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 252,331 $ 106,854 $ 292,763
Accounts payable 464,897 448,799 503,132
Compensation and taxes withheld 118,864 137,211 116,181
Current portion of long-term debt 116,015 19,376 22,611
Other accruals 288,894 328,435 315,122
Accrued taxes 145,207 74,568 128,015
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Total current liabilities 1,386,208 1,115,243 1,377,824
Long-term debt 507,392 623,587 621,094
Postretirement benefits other than pensions 211,011 208,673 208,207
Other long-term liabilities 252,248 331,303 356,215
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
215,770 shares outstanding at June 30, 2001 215,770
Unearned ESOP compensation (215,770)
Common stock - $1.00 par value:
156,339,746, 159,558,335 and 162,641,951 shares
outstanding at June 30, 2001, December 31, 2000
and June 30, 2000, respectively 207,372 206,848 206,487
Other capital 163,014 158,650 153,928
Retained earnings 2,030,240 1,948,753 2,133,155
Treasury stock, at cost (764,648) (678,778) (601,424)
Cumulative other comprehensive loss (190,349) (163,609) (113,743)
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Total shareholders' equity 1,445,629 1,471,864 1,778,403
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,802,488 $ 3,750,670 $ 4,341,743
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Six months ended June 30,
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2001 2000
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OPERATIONS
Net income $ 127,404 $ 156,766
Adjustments to reconcile net income to net operating cash:
Depreciation 53,761 53,254
Amortization of goodwill, intangibles, and other assets 19,753 26,115
Increase in deferred pension assets (14,504) (14,146)
Net increase in postretirement liability 2,338 1,616
Other 3,099 6,928
Change in current assets and liabilities-net (52,955) (174,802)
Unusual tax-related payments (65,677)
Other (12,560) (13,638)
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Net operating cash 60,659 42,093
INVESTING
Capital expenditures (45,248) (78,655)
Acquisitions of businesses (43,210)
Increase in other investments (10,346) (18,437)
Proceeds from sale of assets 9,866 7,670
Other (3,593) (6,956)
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Net investing cash (49,321) (139,588)
FINANCING
Net increase in short-term borrowings 145,477 292,763
Increase in long-term debt 1,568 6,533
Payments of long-term debt (20,659) (109,491)
Payments of cash dividends (45,917) (44,462)
Proceeds from stock options exercised 5,727 2,195
Treasury stock purchased (84,984) (67,533)
Other (835) 479
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Net financing cash 377 80,484
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Effect of exchange rate changes on cash (1,234) 114
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Net increase (decrease) in cash and cash equivalents 10,481 (16,897)
Cash and cash equivalents at beginning of year 2,896 18,623
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Cash and cash equivalents at end of period $ 13,377 $ 1,726
========= =========
Taxes paid on income $ 80,606 $ 57,709
Interest paid on debt 31,467 34,111
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended June 30, 2001 and 2000
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the fiscal year ended December
31, 2000. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The consolidated results for the six months ended June 30, 2001 are
not necessarily indicative of the results to be expected for the fiscal year
ending December 31, 2001.
NOTE B--DIVIDENDS
Dividends paid on common stock during each of the first two quarters of 2001 and
2000 were $.145 per common share and $.135 per common share, respectively.
NOTE C--OTHER EXPENSE - NET
Significant items included in Other expense - net are as follows:
(Thousands of dollars) Three months ended June 30, Six months ended June 30,
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2001 2000 2001 2000
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Dividend and royalty income $ (653) $ (749) $(1,908) $(2,157)
Net expense (income) from financing
and investing activities 4,628 2,548 (473) 8,180
Foreign currency exchange losses 1,289 1,671 1,876 386
The net expense (income) from financing and investing activities represents the
realized gains or losses associated with disposing of fixed assets, the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance and other related fees.
NOTE D--COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
(Thousands of dollars) Three months ended June 30, Six months ended June 30,
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2001 2000 2001 2000
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Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766
Foreign currency translation adjustments (23,567) 19,206 (26,740) 31,881
--------- --------- --------- ---------
Comprehensive income $ 66,913 $ 135,049 $ 100,664 $ 188,647
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NOTE E--NET INCOME PER COMMON SHARE
Three months ended June 30, Six months ended June 30,
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(Thousands of dollars, except per share data) 2001 2000 2001 2000
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Basic
Average common shares outstanding 155,718,543 162,624,909 157,070,639 163,464,785
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Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766
============ ============ ============ ============
Net income per common share $ 0.58 $ 0.71 $ 0.81 $ 0.96
============ ============ ============ ============
Diluted
Average common shares outstanding 155,718,543 162,624,909 157,070,639 163,464,785
Non-vested restricted stock grants 300,000 278,400 337,800 278,400
Stock options - treasury stock method 459,870 970,984 1,184,254 383,636
------------ ------------ ------------ ------------
Average common shares assuming dilution 156,478,413 163,874,293 158,592,693 164,126,821
============ ============ ============ ============
Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766
============ ============ ============ ============
Net income per common share $ 0.58 $ 0.71 $ 0.80 $ 0.96
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NOTE F--REPORTABLE SEGMENT INFORMATION
The Company reports segment information in the same way that management
internally organizes its business for assessing performance and making decisions
regarding allocation of resources in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Net External Sales/Operating Profit
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2001 2000
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(Thousands of dollars) NET SEGMENT Net Segment
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
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THREE MONTHS ENDED JUNE 30:
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Paint Stores $ 884,238 $ 119,959 $ 868,016 $ 123,017
Consumer 326,300 48,013 354,870 72,500
Automotive Finishes 124,678 14,253 129,021 20,102
International Coatings 70,601 600 75,523 2,741
Administrative 1,697 (39,206) 1,837 (31,515)
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Consolidated totals $1,407,514 $ 143,619 $1,429,267 $ 186,845
========== ========== ========== ==========
SIX MONTHS ENDED JUNE 30:
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Paint Stores $1,578,341 $ 166,961 $1,568,072 $ 166,621
Consumer 599,701 73,027 680,257 109,572
Automotive Finishes 240,504 25,810 249,973 34,548
International Coatings 143,875 5,202 148,965 9,648
Administrative 3,463 (68,772) 3,916 (67,539)
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Consolidated totals $2,565,884 $ 202,228 $2,651,183 $ 252,850
========== ========== ========== ==========
====================================================================================================
Intersegment Transfers
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Three months ended June 30, Six months ended June 30,
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(Thousands of dollars) 2001 2000 2001 2000
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Paint Stores $ 1,736 $ 2,235 $ 4,423 $ 4,453
Consumer 246,083 247,050 428,283 436,375
Automotive Finishes 9,896 9,317 17,892 18,064
International Coatings 34 134 71 211
Administrative 2,657 2,710 5,309 5,553
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Segment totals $ 260,406 $ 261,446 $ 455,978 $ 464,656
========== ========== ========== ==========
====================================================================================================
Segment operating profit is total revenue, including intersegment transfers,
less operating costs and expenses. Domestic intersegment transfers are accounted
for at the approximate fully absorbed manufactured cost plus distribution costs.
International intersegment transfers are accounted for at values comparable to
normal unaffiliated customer sales. The Administrative Segment's expenses
include interest which is unrelated to certain financing activities of the
Operating Segments, certain foreign currency transaction losses related to
dollar-denominated debt and other financing activities, certain provisions for
disposition and termination of operations and environmental remediation which
are not directly associated with any Operating Segment, and other adjustments.
Net external sales and operating profits of all consolidated foreign
subsidiaries were $129.9 million and $1.0 million, respectively, for the second
quarter of 2001, and $138.1 million and $9.0 million, respectively, for the
second quarter of 2000. Net external sales and operating profits of theses
subsidiaries were $258.5 million and $8.4 million, respectively, for the first
six months of 2001, and $268.8 million and $16.9 million, respectively, for the
first six months of 2000. Long-lived assets of these subsidiaries totaled $220.7
million and $252.4 million, at June 30, 2001 and 2000, respectively. Domestic
operations account for the remaining net external sales, operating profits and
long-lived assets. The Administrative Segment's expenses do not include any
significant foreign operations. No single geographic area outside the United
States was significant relative to consolidated net external sales or
consolidated long-lived assets.
Export sales and sales to any individual customer were each less than 10% of
consolidated sales to unaffiliated customers during all periods presented.
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Note G--PREFERRED STOCK
On April 18, 2001, the Company issued 250,000 shares of convertible
participating serial preferred stock (preferred stock), no par value with
cumulative quarterly dividends of $10.00 per share, for $250.0 million to The
Sherwin-Williams Company Employee Stock Purchase and Savings Plan (ESOP). The
ESOP financed the acquisition of the preferred stock by borrowing $250.0 million
from the Company at the rate of 8% per annum. This borrowing is payable over ten
years in equal quarterly installments. Each share of preferred stock is entitled
to one vote upon all matters presented to the Company's shareholders and
generally vote with the common stock together as one class. The preferred stock
will be held in an unallocated suspense account by the ESOP until compensation
expense related to the Company's contributions is earned at which time
contributions will be credited to the members' accounts. The value of the
preferred stock is redeemable and convertible into the Company's common stock at
the option of the ESOP based on the relative fair value of the preferred and
common stock at time of conversion. The ESOP redeemed 34,230 preferred stock
shares for cash during the second quarter of 2001.
Note H--IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations," which supersedes Accounting Principles Board
Opinion (APB) No. 16. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations and changes the criteria to recognize
intangible assets apart from goodwill. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001. The Company has adopted
this statement for all future business combinations.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB No. 17, "Intangible Assets." Goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to impairment tests in accordance with SFAS No. 142.
Other intangible assets will continue to be amortized over their useful lives.
This statement is effective for fiscal years beginning after December 15, 2001
for goodwill and intangible assets acquired before June 30, 2001. However, this
statement is effective immediately for all goodwill and intangible assets
acquired after June 30, 2001. The Company will adopt SFAS No. 142 in the
required periods and has not yet determined the effect of this statement on the
Company's results of operations and financial position.
Note I--RECLASSIFICATION
Certain amounts in the 2000 financial statements have been reclassified to
conform with the 2001 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Consolidated net sales decreased 1.5 percent for the quarter to $1.41 billion
from $1.43 billion in the same quarter last year and decreased 3.2 percent for
six months to $2.57 billion from $2.65 billion in the first six months of 2000.
The largest impacts on sales came from the continuing poor U. S. and South
American economic conditions, which adversely affected all Operating Segments,
weakening foreign currency exchange rates and previously announced discontinued
paint programs at certain customers. Net sales in the Paint Stores Segment
increased 1.9 percent to $884.2 million in the quarter and 0.7 percent to $1.58
billion for six months due primarily to higher architectural paint sales which
more than offset sales shortfalls in product finishes and associated product
categories. Comparable-store sales, which declined 3.5 percent in the first
quarter, were essentially flat in the second quarter resulting in a decline of
1.6 percent for six months. Net sales of the Consumer Segment, which were
impacted by previously announced discontinued paint programs at certain
customers, decreased 8.1 percent to $326.3 million in the quarter and 11.8
percent to $599.7 million in six months compared to last year. Excluding the
previously announced discontinued paint programs, net sales for this Segment
would have decreased 1.7 percent in the quarter and 4.9 percent in six months.
Increased sales to certain customers in the quarter and first six months of 2001
could not offset the overall weak order rates, as retailers of DIY coatings were
slow to replenish their inventory in view of the uncertain U. S. economy. The
Automotive Finishes Segment's net sales decreased 3.4 percent to $124.7 million
in the quarter and 3.8 percent to $240.5 million in six months. The negative
impact of the soft domestic economy continued to adversely impact this Segment's
OEM sales that were partially offset by stronger collision repair sales. Net
sales in the International Coatings Segment were down 6.5 percent to $70.6
million in the quarter and down 3.4 percent to $143.9 million in six months
compared to a year ago. The sales decreases in U.S. dollars were due primarily
to unfavorable currency exchange rates. Excluding the effect of currency
exchange fluctuations relative to last year, net sales for the Segment increased
7.1 percent and 6.9 percent for the quarter and six months, respectively.
Consolidated gross profit as a percent of sales declined to 43.2 and 42.8
percent for the second quarter and first six months, respectively, from 44.9 and
43.7 percent for the comparable periods in 2000. Margins in the Paint Stores
Segment were flat for the second quarter and slightly higher than last year for
the first six months due primarily to selective selling price increases and
favorable paint product sales mix, partially offset by slightly lower volume for
the first six months. The Consumer and Automotive Finishes Segments' margins
were below last year for the second quarter and first six months. The Consumer
Segment's margins were impacted by the sales shortfall, competitive pricing
pressures and higher year-over-year raw material, distribution and energy costs.
The Automotive Finishes Segment's margins declined due primarily to lower
production volume. Margins in the International Coatings Segment were lower for
the second quarter and first six months, due primarily to currency rate
fluctuations, raw material cost
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increases, price competition and an unfavorable product sales mix to lower
margin products throughout South America.
Consolidated selling, general and administrative expenses as a percent of sales
were 1.1 and 0.9 percentage points unfavorable to last year for the second
quarter and first six months, respectively. In the Paint Stores Segment, SG&A
expenses as a percent of sales were unfavorable to last year for the second
quarter and first six months due primarily to incremental increases in expenses
associated with the increased number of new stores opened since last June. The
Consumer and Automotive Finishes Segments' SG&A ratios were unfavorable to last
year in the second quarter and first six months. The Consumer Segment's second
quarter unfavorable SG&A ratio was due primarily to decreased sales, partially
offset by continued SG&A expense reductions. In the Automotive Finishes Segment,
the SG&A ratio was unfavorable, due primarily to lower sales. The International
Coatings Segment's SG&A ratio was favorable for the second quarter and first six
months due primarily to lower discretionary SG&A spending in Brazil and the
United Kingdom, partially offset by decreased sales.
Interest expense decreased in the second quarter and first six months compared
to 2000 due to lower average short-term borrowing rates and long-term debt
balances, partially offset by higher average short-term debt balances.
Other expense - net was higher for the second quarter compared to 2000, due
primarily to higher net investing and financing related expenses. Other expense
- - net for the first six months was lower versus 2000 due primarily to gains
realized on the sale of certain fixed assets during the first quarter of 2001,
partially offset by higher foreign currency exchange losses.
Net income in the quarter declined to $90.5 million from $115.8 million in 2000
and in six months declined to $127.4 million from $156.8 million last year.
Diluted net income per common share for the quarter decreased to $.58 per share
from $.71 per share in 2000 and for six months decreased to $.80 per share from
$.96 per share a year ago.
FINANCIAL CONDITION
- -------------------
Cash and cash equivalents increased $10.5 million during the first six months of
2001. Cash provided by operating activities of $60.7 million was impacted by an
unusual tax-related payment that was made to the U.S. Internal Revenue Service
for contested tax issues plus accrued interest. This payment was made to prevent
the imposition of above-market interest charges while the contested issues are
being resolved.
Net short-term borrowings increased $145.5 million while long-term debt
decreased $19.6 million. Short-term borrowings outstanding primarily relate
to the Company's commercial paper program, which had unused borrowing
availability of $516.7 million at June 30, 2001. This program is backed by
the Company's revolving credit agreements. Cash flow from operations and
proceeds from the issuance of short-term borrowings were used for repayment
of long-term debt, capital expenditures of $45.2 million, treasury stock
purchases of $85.0 million, and cash dividends of $45.9 million. The
Company's current ratio declined to 1.18 from 1.39 at
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December 31, 2000. The decrease in this ratio occurred due primarily to the
increased short-term borrowings and current maturities of long-term debt,
partially offset by seasonably higher accounts receivable balances.
Since June 30, 2000, cash and cash equivalents increased $11.7 million due
primarily to cash generated by operations of $479.7 million, which was used for
treasury stock purchases of $164.3 million, capital expenditures of $99.4
million, payments of cash dividends of $89.6 million, and net reductions to
long-term debt and short-term borrowings of $60.0 million. The Company expects
to remain in a short-term borrowing position throughout most of 2001.
Capital expenditures during the second quarter and first six months of 2001
represented primarily the costs associated with new store openings and normal
equipment replacement in the Paint Stores Segment, plant and facility upgrades
in the Consumer Segment, and improvements and upgrades to the automotive
technology center for the Automotive Finishes Segment. We do not anticipate the
need for any specific external financing to support our capital programs during
the remainder of 2001.
During the second quarter of 2001, the Company acquired 2.2 million shares of
its common stock through open market purchases for treasury purposes, which
brings the total number of shares purchased in 2001 to 3.7 million shares. The
Company acquires shares of its common stock for general corporate purposes and,
depending upon its cash position and market conditions, the Company may acquire
additional shares of its common stock in the future. In July 2001, the Company's
Board of Directors rescinded the previous authorization limit and issued a new
authorization for the Company to purchase, in the aggregate, 20.0 million shares
of its common stock.
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
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encourage an increase in the number and nature of future claims and proceedings.
In 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.
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
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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 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 groundwater contamination caused by historical
disposal, discharges, releases 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 any additional 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- ----------------------------------------------------------
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report
constitute "forward-looking statements"
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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 liquidity. There were no material changes in the
Company's exposure to market risk since December 31, 2000.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities.
----------------------
On April 18, 2001, the Company issued 250,000 shares of
convertible participating serial preferred stock, no par value with
cumulative quarterly dividends of $10.00 per share, for $250 million to The
Sherwin-Williams Company Employee Stock Purchase and Savings Plan ("Plan").
The Plan financed the acquisition of the preferred stock by borrowing $250
million from the Company at the rate of 8% per annum. This borrowing is
payable over ten years in equal quarterly installments. The issuance of the
preferred stock qualified as a private placement under Section 4(2) of the
Securities Act of 1933, as amended. Each share of preferred stock is
entitled to one vote upon all matters presented to the Company's
shareholders and generally vote with the common stock together as one
class. The preferred stock will be held in an unallocated suspense account
by the Plan until compensation expense related to the Company's
contributions is earned at which time contributions will be credited to the
members' accounts. The preferred stock is redeemable and convertible into
the Company's common stock at any time at the option of the Plan based on
the relative fair value of the preferred and common stock at the time of
conversion.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
A. The Company's 2001 Annual Meeting of Shareholders was held on April
25, 2001.
B. The following persons were nominated to serve, and were elected, as
directors of the Company to serve until the next annual meeting of shareholders
and until their successors are elected: J.C. Boland, J.G. Breen, D.E. Collins,
C.M. Connor, D.E. Evans, R.W. Mahoney, A.M. Mixon, III, C.E. Moll, H.O.
Petrauskas, J. M. Scaminace and R.K. Smucker. H.O. Petrauskas subsequently
retired as a director of the Company on July 20, 2001 for personal reasons. The
voting results of the Annual Meeting for each nominee were as follows:
Name For Withheld
---- --- --------
J.C. Boland 138,370,161 2,264,641
J.G. Breen 138,264,248 2,370,554
D.E. Collins 138,305,211 2,329,591
C.M. Connor 138,284,193 2,350,609
D.E. Evans 138,243,836 2,390,966
R.W. Mahoney 138,407,813 2,226,989
A.M. Mixon, III 136,989,894 3,644,908
C.E. Moll 138,411,387 2,223,415
H.O. Petrauskas 138,372,123 2,262,679
J.M. Scaminace 138,089,749 2,545,053
R.K. Smucker 138,324,400 2,310,402
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Item 5. Other Information.
------------------
On August 8, 2001, the Company issued a press release announcing
that Larry J. Pitorak, Senior Vice President - Finance, Treasurer and Chief
Financial Officer, has left the Company to pursue other business interests.
The Company also announced the appointment of Sean P. Hennessy to the
position of Senior Vice President - Finance, Treasurer and Chief Financial
Officer. The press release is attached hereto as Exhibit 99 and is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
(99) Press Release dated August 8, 2001.
(b) Reports on Form 8-K. The Company filed a Current Report on
Form 8-K, dated June 21, 2001, reporting under Item 5 that the
Company had announced its earnings expectations for the second
quarter of 2001 and the year 2001.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE SHERWIN-WILLIAMS COMPANY
August 14, 2001 By: /s/ J.L. Ault
-------------
J.L. Ault
Vice President-Corporate Controller
August 14, 2001 By: /s/ L.E. Stellato
-----------------
L.E. Stellato
Vice President, General Counsel and
Secretary
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EXHIBIT INDEX
-------------
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
99 Press Release dated August 8, 2001.
18