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 September 30, 2001
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 - 154,444,093 shares as of October 31, 2001.
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 September 30, Nine months ended September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 1,366,768 $ 1,411,903 $ 3,932,652 $ 4,063,086
Costs and expenses:
Cost of goods sold 765,729 785,808 2,234,053 2,279,273
Selling, general and administrative expenses 443,173 437,954 1,309,209 1,308,721
Interest expense 12,681 15,906 43,358 47,448
Interest and net investment income (1,013) (1,123) (3,501) (3,079)
Other expense - net 2,831 1,232 3,938 5,747
----------- ----------- ----------- -----------
1,223,401 1,239,777 3,587,057 3,638,110
----------- ----------- ----------- -----------
Income before income taxes 143,367 172,126 345,595 424,976
Income taxes 53,046 65,407 127,870 161,491
----------- ----------- ----------- -----------
Net income $ 90,321 $ 106,719 $ 217,725 $ 263,485
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.58 $ 0.66 $ 1.39 $ 1.62
=========== =========== =========== ===========
Diluted $ 0.58 $ 0.66 $ 1.38 $ 1.61
=========== =========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
SEPTEMBER 30, December 31, September 30,
2001 2000 2000
---------------- ---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,514 $ 2,896 $ 3,004
Accounts receivable, less allowance 673,602 594,162 741,747
Inventories:
Finished goods 517,220 597,472 567,708
Work in process and raw materials 83,616 106,255 103,459
----------- ----------- -----------
600,836 703,727 671,167
Deferred income taxes 104,862 104,662 111,686
Other current assets 144,243 146,092 158,400
----------- ----------- -----------
Total current assets 1,526,057 1,551,539 1,686,004
Goodwill 672,275 705,547 1,064,144
Intangible assets 249,558 259,085 263,824
Deferred pension assets 386,315 364,351 355,307
Other assets 168,139 147,769 147,347
Property, plant and equipment 1,553,443 1,530,409 1,529,495
Less allowances for depreciation and amortization 863,654 808,030 797,995
----------- ----------- -----------
689,789 722,379 731,500
----------- ----------- -----------
Total assets $ 3,692,133 $ 3,750,670 $ 4,248,126
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 83,732 $ 106,854 $ 215,296
Accounts payable 443,233 448,799 459,935
Compensation and taxes withheld 118,225 137,211 114,705
Current portion of long-term debt 121,392 19,376 26,268
Other accruals 298,988 328,435 325,007
Accrued taxes 194,243 74,568 132,196
----------- ----------- -----------
Total current liabilities 1,259,813 1,115,243 1,273,407
Long-term debt 512,015 623,587 624,382
Postretirement benefits other than pensions 212,179 208,673 209,015
Other long-term liabilities 251,154 331,303 351,151
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
181,137 shares outstanding at September 30, 2001 181,137
Unearned ESOP compensation (181,137)
Common stock - $1.00 par value:
154,549,179, 159,558,335 and 162,641,951 shares
outstanding at September 30, 2001, December 31, 2000
and September 30, 2000, respectively 207,424 206,848 206,639
Other capital 164,242 158,650 156,018
Retained earnings 2,097,893 1,948,753 2,217,922
Treasury stock, at cost (805,696) (678,778) (644,660)
Cumulative other comprehensive loss (206,891) (163,609) (145,748)
----------- ----------- -----------
Total shareholders' equity 1,456,972 1,471,864 1,790,171
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,692,133 $ 3,750,670 $ 4,248,126
=========== =========== ===========
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
Nine months ended September 30,
------------------------
2001 2000
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OPERATIONS
Net income $ 217,725 $ 263,485
Adjustments to reconcile net income to net operating cash:
Depreciation 80,517 80,824
Amortization of goodwill, intangibles, and other assets 29,690 38,528
Increase in deferred pension assets (21,964) (21,213)
Net increase in postretirement liability 3,506 2,424
Other 5,988 7,439
Change in current assets and liabilities-net 76,172 (98,530)
Unusual tax-related payment (65,677)
Other (14,081) (21,722)
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Net operating cash 311,876 251,235
INVESTING
Capital expenditures (64,075) (97,656)
Acquisitions of businesses (1,879) (58,924)
Increase in other investments (11,584) (45,303)
Proceeds from sale of assets 9,866 6,537
Other (22,239) (18,439)
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Net investing cash (89,911) (213,785)
FINANCING
Net (decrease) increase in short-term borrowings (23,122) 215,296
Increase in long-term debt 13,231 15,897
Payments of long-term debt (22,550) (111,736)
Payments of cash dividends (68,585) (66,414)
Proceeds from stock options exercised 6,632 4,012
Treasury stock purchased (126,032) (110,769)
Other (603) 520
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Net financing cash (221,029) (53,194)
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Effect of exchange rate changes on cash (1,318) 125
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Net decrease in cash and cash equivalents (382) (15,619)
Cash and cash equivalents at beginning of year 2,896 18,623
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Cash and cash equivalents at end of period $ 2,514 $ 3,004
========= =========
Taxes paid on income $ 83,706 $ 119,951
Interest paid on debt 54,665 60,059
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 September 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 nine months ended September 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 three 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 Nine months ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
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Dividend and royalty income $ (901) $ (1,072) $ (2,809) $ (3,229)
Net expense from financing
and investing activities 3,387 2,069 2,914 10,249
Foreign currency exchange losses (gains) 820 (130) 2,696 256
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 Nine months ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income $ 90,321 $ 106,719 $ 217,725 $ 263,485
Foreign currency translation adjustments (16,542) (32,005) (43,282) (124)
--------- --------- --------- ---------
Comprehensive income $ 73,779 $ 74,714 $ 174,443 $ 263,361
========= ========= ========= =========
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NOTE E--NET INCOME PER COMMON SHARE
Three months ended Nine months ended
September 30, September 30,
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(Thousands of dollars, except per share data) 2001 2000 2001 2000
------------ ------------ ------------ ------------
Basic
Average common shares outstanding 154,735,820 161,320,695 156,292,366 162,750,088
============ ============ ============ ============
Net income $ 90,321 $ 106,719 $ 217,725 $ 263,485
============ ============ ============ ============
Net income per common share $ 0.58 $ 0.66 $ 1.39 $ 1.62
============ ============ ============ ============
Diluted
Average common shares outstanding 154,735,820 161,320,695 156,292,366 162,750,088
Non-vested restricted stock grants 300,000 278,400 325,200 278,400
Stock options - treasury stock method 694,711 562,759 1,076,233 439,950
------------ ------------ ------------ ------------
Average common shares assuming dilution 155,730,531 162,161,854 157,693,799 163,468,438
============ ============ ============ ============
Net income $ 90,321 $ 106,719 $ 217,725 $ 263,485
============ ============ ============ ============
Net income per common share $ 0.58 $ 0.66 $ 1.38 $ 1.61
============ ============ ============ ============
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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
2001 2000
------------------------- -------------------------
(Thousands of dollars) NET SEGMENT Net Segment
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
---------- ---------- ---------- ----------
THREE MONTHS ENDED SEPTEMBER 30:
Paint Stores $ 894,137 $ 131,078 $ 899,268 $ 141,650
Consumer 288,464 31,672 307,084 39,414
Automotive Finishes 115,263 13,398 127,328 17,905
International Coatings 67,271 (146) 76,405 5,336
Administrative 1,633 (32,635) 1,818 (32,179)
---------- ---------- ---------- ----------
Consolidated totals $1,366,768 $ 143,367 $1,411,903 $ 172,126
========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30:
Paint Stores $2,472,478 $ 298,039 $2,467,340 $ 308,271
Consumer 888,165 104,699 987,341 148,986
Automotive Finishes 355,767 39,208 377,301 52,453
International Coatings 211,146 5,056 225,370 14,984
Administrative 5,096 (101,407) 5,734 (99,718)
---------- ---------- ---------- ----------
Consolidated totals $3,932,652 $ 345,595 $4,063,086 $ 424,976
========== ========== ========== ==========
===============================================================================
INTERSEGMENT TRANSFERS
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
(Thousands of dollars) 2001 2000 2001 2000
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Paint Stores $ 2,410 $ 2,788 $ 6,833 $ 7,241
Consumer 241,502 241,216 669,785 677,591
Automotive Finishes 8,623 9,023 26,515 27,087
International Coatings 32 (36) 103 175
Administrative 2,675 2,633 7,984 8,186
---------- ---------- ---------- ----------
Segment totals $ 255,242 $ 255,624 $ 711,220 $ 720,280
========== ========== ========== ==========
==============================================================================
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 $123.8 million and $4.6 million, respectively, for the third
quarter of 2001, and $134.7 million and $8.1 million, respectively, for the
third quarter of 2000. Net external sales and operating profits of theses
subsidiaries were $382.3 million and $12.9 million, respectively, for the first
nine months of 2001, and $403.5 million and $25.0 million, respectively, for the
first nine months of 2000. Long-lived assets of these subsidiaries totaled
$211.2 million and $257.6 million, at September 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.
- 7 -
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 34,633 and 68,863
preferred stock shares for cash during the third quarter and first nine months
of 2001, respectively.
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 as required.
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 has adopted SFAS No. 142 in the
required periods. Application of the non-amortization provisions of the
statement is expected to increase net income approximately $22.0 million for the
full year 2002. Prior to June 30, 2002, the Company will perform the first step
of the required impairment tests of goodwill and intangible assets deemed to
have indefinite lives as of January 1, 2002 and has not yet determined the
effect of these tests 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.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net sales decreased 3.2 percent in the quarter to $1.37 billion and
3.2 percent in the first nine months to $3.93 billion. The most significant
factors impacting sales came from the continuing poor domestic and South
American economic conditions, continuing weakness in foreign currency exchange
rates and previously announced discontinued paint programs at certain customers.
In addition, third quarter sales were further negatively impacted by the
temporary change in buying habits due to the attacks on the United States on
September 11, 2001. Net sales in the Paint Stores Segment decreased 0.6 percent
in the quarter to $894.1 million while improving 0.2 percent in nine months to
$2.47 billion due primarily to higher architectural paint sales which, prior to
the third quarter, offset sales shortfalls in product finishes and associated
product categories. Third quarter sales in this Segment continued to be impacted
by the sluggish domestic economy and sales of product finishes that remain weak.
Comparable-store sales declined 1.8 percent in the third quarter and 1.7 percent
for the first nine months. Net sales of the Consumer Segment decreased 6.1
percent in the quarter to $288.5 million and 10.0 percent in nine months to
$888.2 million compared to last year. Excluding the previously announced
discontinued paint programs at certain customers, net sales for this Segment
would have been essentially flat with last year in the quarter and 3.4 percent
below last year in the first nine months. The Automotive Finishes Segment's net
sales decreased 9.5 percent in the quarter to $115.3 million and 5.7 percent in
nine months to $355.8 million. Higher collision repair sales in the quarter and
nine months were not enough to offset the continuing negative impact of the soft
domestic economy on this Segment's OEM sales. Net sales in the International
Coatings Segment were down 12.0 percent in the quarter to $67.3 million and down
6.3 percent in nine months to $211.1 million compared to a year ago. The sales
decreases, in U.S. dollars, were due primarily to unfavorable currency exchange
rates. Excluding the effects of currency exchange fluctuations relative to last
year, net sales for the Segment increased 4.4 percent and 6.1 percent for the
quarter and nine months, respectively.
Consolidated gross profit as a percent of sales declined to 44.0 and 43.2
percent for the third quarter and first nine months, respectively, from 44.3 and
43.9 percent for the comparable periods in 2000. Gross profit in all Segments is
being impacted by rising health care and other employee benefit costs. Margins
in the Paint Stores Segment were flat for the third quarter and slightly higher
than last year for the first nine months due primarily to selective selling
price increases and favorable paint product sales mix. The Consumer Segment's
margins were below last year for the third quarter and first nine months due to
the sales shortfall, competitive pricing pressures and, earlier in the year,
higher year-over-year raw material, distribution and energy costs. The
Automotive Finishes Segment's margins were favorable versus last year for the
third quarter primarily due to selective selling price increases and product
sales mix. The Segment's margins for the first nine months were lower than last
year due primarily to lower production volume and higher raw material,
distribution and energy costs earlier in the year. Margins in the International
Coatings Segment were lower for the third quarter and first nine months, due
-9-
primarily to price competition and a market shift in product sales to lower
priced products in the face of higher U.S. dollar denominated raw material
costs.
Consolidated selling, general and administrative expenses (SG&A) in the third
quarter were $443.2 million, which was $5.2 million higher than last year. For
the first nine months, SG&A was $1,309.2 million, which was $0.5 million higher
than last year. As a percent of sales, SG&A was 1.4 and 1.1 percentage points
unfavorable to last year for the third quarter and first nine months,
respectively, due primarily to lower sales. Overall, SG&A in all Segments is
being impacted by rising health care and other employee benefit costs,
particularly in the third quarter. In the Paint Stores Segment, SG&A was
unfavorable to last year for the third quarter and first nine months due
primarily to incremental increases in expenses associated with the increased
number of new stores opened since last September. In spite of the impact on
current profitability, the Segment continues to invest in its business by
opening new stores and providing and maintaining superior service levels to its
customers. The Consumer Segment's SG&A was lower than last year in the third
quarter and first nine months due primarily to continued SG&A reductions in
response to lower sales activity. In the Automotive Finishes Segment, the SG&A
was essentially flat for the third quarter and slightly up for the first nine
months, as the Segment aims to protect market share and maintain customer
service levels in a difficult market. The International Coatings Segment's SG&A
was lower for the third quarter and first nine months due primarily to weaker
foreign currencies and the effect on stating SG&A in U.S. dollars.
Interest expense decreased in the third quarter and first nine months compared
to 2000 due primarily to lower average short-term borrowing rates and long-term
debt balances. Lower average short-term debt balances during the quarter also
favorably impacted interest expense.
Other expense - net was higher for the third quarter compared to 2000, due
primarily to higher net investing and financing related expenses. Other expense
- - net for the first nine 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 $90.3 million from $106.7 million in 2000
and in nine months declined to $217.7 million from $263.5 million last year.
Diluted net income per common share for the quarter decreased to $.58 per share
from $.66 per share in 2000 and for nine months decreased to $1.38 per share
from $1.61 per share a year ago.
FINANCIAL CONDITION
- -------------------
Cash and cash equivalents decreased $0.4 million during the first nine months of
2001. Cash provided by operating activities of $311.9 million was adversely
impacted by an unusual tax-related payment during the first quarter 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. Cash provided by
operating activities for the nine months was favorably impacted by the timing of
third quarter accrued tax-related payments.
-10-
Net short-term borrowings decreased $23.1 million while long-term debt decreased
$9.6 million. Short-term borrowings outstanding primarily relate to the
Company's commercial paper program, which had unused borrowing availability of
$744.9 million at September 30, 2001. This program is backed by the Company's
revolving credit agreements. Cash flow from operations was used for repayment of
long-term debt and short-term borrowings, capital expenditures of $64.1 million,
treasury stock purchases of $126.0 million, and cash dividends of $68.6 million.
The Company's current ratio declined to 1.21 from 1.39 at December 31, 2000. The
decrease in this ratio occurred due primarily to decreased inventories and
increased current maturities of long-term debt and accrued taxes, resulting from
timing, partially offset by seasonably higher accounts receivable balances.
Since September 30, 2000, cash and cash equivalents decreased $0.5 million due
primarily to cash generated by operations of $521.7 million, which was used for
treasury stock purchases of $162.1 million, capital expenditures of $99.2
million, payments of cash dividends of $90.3 million, and net reductions to
long-term debt and short-term borrowings of $148.4 million. The Company expects
to remain in a short-term borrowing position throughout the remainder of 2001.
Capital expenditures during the third quarter and first nine months of 2001
represented primarily the costs associated with new store openings and normal
equipment replacement in the Paint Stores Segment, plant and facility upgrades
in the Consumer and International Coatings Segments, and improvements and
upgrades to the automotive technology center for the Automotive Finishes
Segment. We do not anticipate the need for any specific external financing to
support our capital programs during the remainder of 2001.
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. During the third
quarter of 2001, the Company acquired 1.8 million shares of its common stock
through open market purchases for treasury purposes, which brings the total
number of shares purchased in 2001 to 5.5 million shares. At September 30, 2001,
the Company has authorization to purchase an additional 18.2 million shares of
its common stock. 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.
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
-11-
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 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, including Superfund sites. The
Company may be similarly designated with respect to additional third-party sites
in the future.
-12-
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 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.
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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" 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.
-14-
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.
-15-
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits.
(10)(a) Schedule of Certain Executive Officers who
are Parties to the Severance Pay Agreements
in the Forms Attached as Exhibit 10(b) to
the Company's Quarterly Report on Form 10-Q
For the Period Ended June 30, 1997 (filed
herewith).
(b) Reports on Form 8-K - none.
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
November 13, 2001 By: /s/ J.L. AULT
----------------------------------------------
J.L. Ault
Vice President-Corporate Controller
November 13, 2001 By: /s/ L.E. STELLATO
----------------------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
-16-
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBIT
- ----------- -------
(10)(a) Schedule of Certain Executive Officers who are Parties to the
Severance Pay Agreements in the Forms Attached as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q For the
Period Ended June 30, 1997 (filed herewith).
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