EXHIBIT 13
THE 2001 ANNUAL REPORT TO SHAREHOLDERS
THE SHERWIN-WILLIAMS COMPANY
2001 ANNUAL REPORT
[SHERWIN-WILLIAMS LOGO]
America's Paint Company
[PHOTOS]
STRENGTH
STABILITY
SECURITY
AMERICA'S PAINT COMPANY. Words of strength about a company with more than $5
billion in annual sales. Words of stability about a company with more than 135
years of coatings experience. Words of security about a company with increased
dividends to shareholders for 22 consecutive years. Words that honor, humble and
remind us of our industry leadership and corporate responsibility to our
customers, employees and shareholders.
TABLE OF CONTENTS
SUMMARY OF OPERATING SEGMENTS 2
FINANCIAL HIGHLIGHTS 3
LETTER TO SHAREHOLDERS 4
THE OPERATING SEGMENTS 8
STORES MAP 18
SUBSIDIARIES AND CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION 19
FINANCIAL SUMMARY 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS 28
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 29
DIRECTORS, OFFICERS, OPERATING PRESIDENTS 47
SHAREHOLDER INFORMATION 48
ON THE COVER
[PHOTO]
Like many Americans, Philadelphia painter Meg Saligman was "struck by a desire
to do something" after the events of Sept. 11, 2001.
Working with the city's Mural Arts Program and with paint, brushes and
buckets supplied by Sherwin-Williams, she and three other painters -- Efrain
Hererra, Larissa Preston and Cesar Viveros -- painted a 7,500-square-foot flag
mural in downtown Philadelphia.
"We are not doctors or therapists, so we couldn't help people heal in
that way," Saligman says. "But if in our small way we could offer solace and a
sense of unity to even one person, it would be worthwhile." It also was
important to her that people go about their daily activities despite the
tragedy.
"We're painters, and we paint," she says.
The Sherwin-Williams Company recruits, selects and hires the best possible
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.
SUMMARY OF OPERATING SEGMENTS
PAINT STORES
[PHOTO]
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 original equipment manufacturer (OEM) product finishes
MAJOR BRANDS SOLD
Sherwin-Williams(R), Con-Lux(R), Old Quaker(TM), Mercury(R), Brod Dugan(R),
Mautz(R), Pro-Line(R), Sea-Guard(R), ArmorSeal(R), Kem(R) Hi-Temp, Cook(TM),
Sher-Wood(R), Powdura(R), Polane(R) and Kem Aqua(R)
OUTLETS
2,573 Sherwin-Williams stores in North America
[PIE CHART]
NET EXTERNAL SALES BY OPERATING SEGMENT
CONSUMER
[PHOTO]
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) Water Seal(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, automotive retailers and industrial distributors in North America
AUTOMOTIVE FINISHES
[PHOTO]
PRODUCTS SOLD
High performance interior and exterior coatings for the automotive, fleet and
heavy truck 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
MAJOR BRANDS SOLD
Sherwin-Williams(R), Martin Senour(R), Western(R), Lazzuril(TM), Excelo(TM),
Baco(TM) and ScottWarren(TM)
OUTLETS
174 company-operated branches in the United States, Canada, Jamaica and Chile,
and other operations in the United States, Canada, Mexico, Brazil, Jamaica,
Chile and Italy
INTERNATIONAL COATINGS
[PHOTO]
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), Martin Senour(R),
Pratt & Lambert(R), Minwax(R), Sumare(TM), Ronseal(TM), Globo(TM),
Pulverlack(R), Colorgin(TM), Andina(TM), Tri-Flow(TM), Thompson's(R) Water
Seal(R) and Marson(TM)
OUTLETS
Distribution in more than 20 countries through wholly-owned subsidiaries, joint
ventures and licensees of technology, trademarks and trade-names, including 52
company-operated architectural and industrial stores in Chile and Brazil
2
FINANCIAL HIGHLIGHTS
(thousands of dollars except per share data) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
NET SALES $5,066,005 $5,211,624 $5,003,837
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE IMPAIRMENT(1) 263,158 309,654 303,860
LESS: IMPAIRMENT OF LONG-LIVED ASSETS, NET OF TAX 293,628
---------- ---------- ----------
NET INCOME 263,158 16,026 303,860
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE:
NET INCOME BEFORE IMPAIRMENT - DILUTED(1) 1.68 1.90 1.80
LESS: IMPAIRMENT OF LONG-LIVED ASSETS, NET OF TAX 1.80
---------- ---------- ----------
NET INCOME - DILUTED 1.68 .10 1.80
NET INCOME - BASIC 1.69 .10 1.81
CASH DIVIDENDS .58 .54 .48
BOOK VALUE 9.66 9.22 10.25
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING (THOUSANDS) 155,557 161,912 167,925
RETURN ON SALES(1) 5.2% 5.9% 6.1%
- ----------------------------------------------------------------------------------------------------------------------
RETURN ON NET OPERATING ASSETS EMPLOYED (RONAE)(2) 27.5% 29.8% 29.8%
- ----------------------------------------------------------------------------------------------------------------------
RETURN ON BEGINNING SHAREHOLDERS' EQUITY(1) 17.9% 18.2% 17.7%
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)(1) $ 627,174 $ 717,503 $ 707,030
- ----------------------------------------------------------------------------------------------------------------------
FREE CASH FLOW(3) $ 388,090 $ 242,442 $ 271,941
- ----------------------------------------------------------------------------------------------------------------------
TOTAL DEBT TO CAPITALIZATION 29.3% 33.5% 30.4%
- ----------------------------------------------------------------------------------------------------------------------
INTEREST COVERAGE(1) 8.8X 9.0X 9.0X
- ----------------------------------------------------------------------------------------------------------------------
CURRENT RATIO 1.3 1.4 1.4
- ----------------------------------------------------------------------------------------------------------------------
TOTAL TECHNICAL EXPENDITURES(4) $ 86,222 $ 83,627 $ 78,189
SALES
(millions of dollars)
[BAR GRAPH]
NET INCOME PER SHARE - DILUTED (1)
[BAR GRAPH]
(1) Based on net income before the impairment of long-lived assets charge in
2000, net of tax. See Note 2, page 35.
(2) Based on income before taxes, and the impairment of long-lived assets
charge in 2000, divided by average net accounts receivable, inventories,
property, plant and equipment and accounts payable.
(3) Net operating cash less capital expenditures and payments of cash
dividends.
(4) See Note 1, page 34, for a description of technical expenditures.
3
[PHOTO]
CHRISTOPHER M. CONNOR JOSEPH M. SCAMINACE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER PRESIDENT AND CHIEF OPERATING OFFICER
TOTAL RETURNS
Percent Change of Stock Price and Dividends Reinvested
December 29, 2000, to December 31, 2001
[BAR CHART]
4
LETTER TO SHAREHOLDERS
BY ANY MEASURE, 2001 WILL BE REMEMBERED AS AN EXTRAORDINARY YEAR. It was a year
of tough business conditions in a tough economy that affected us all. It was a
year of a shocking national tragedy that touched us deeply. It was a year that
brought our nation together and caused us to reflect upon our individual,
family, community and corporate values. At The Sherwin-Williams Company, our
culture is shaped by the values we have adhered to for the past 136 years. Our
Annual Report to Shareholders begins by naming a few of these cornerstone
values. Words like strength, stability and security have always been woven
tightly into the fabric of our company just as they reflect what is good and
right about our country.
In 2001, Sherwin-Williams generated sales of $5.07 billion, which was a
2.8 percent decline year over year. Net income came in at $263.16 million vs.
$309.65 million in 2000, before a charge for impairment of long-lived assets.
Diluted net income per share finished 2001 at $1.68 vs. $1.90 before the
impairment of long-lived assets charge. While the landscape of American business
was filled with companies that fared far worse, we take no satisfaction in this
relative comparison. We are disappointed with our results.
Despite previous widespread forecasts, we recognized early in the year
that an economic recovery in 2001 wasn't likely to occur. It was clear that our
track record of 23 consecutive years of improved earnings was in jeopardy.
Management reacted quickly by implementing a program we called "Challenge 24."
The goal was straightforward and simple: leave no stone unturned in an effort to
achieve a 24th consecutive year of improved earnings. Challenge 24 was a
rallying cry for each employee. We wanted to unleash the talent, knowledge and
power of 25,000 employees pulling in the same direction.
Unfortunately, the combined energy and effort of our team was not
enough to overcome the significant challenges posed by a weak global economy.
Although our string of consecutive years of improved earnings ended at 23,
Challenge 24 made us a stronger company and helped us achieve some impressive
gains.
In a year of lower sales and earnings, investors look for signs of
strength, such as a company's ability to generate cash. This past year, through
excellent management of working capital, we increased free cash flow by $145.65
million to a record $388.09 million. We define free cash flow as net operating
cash available after dividend payments and capital expenditures.
Two factors contributed heavily to this strong performance. We reduced
accounts receivable and inventory levels by a combined $133.63 million and
decreased days outstanding on both accounts receivable balances and inventory.
Our selling, general and administrative expenses were lower year over year for
the first time in 20 years. This was accomplished while still making significant
investments in our company. We also were able to reduce headcount through
thoughtful and responsible management of our human resource needs.
Our increased free cash flow was used to further strengthen, stabilize
and secure our company in a number of ways. We retired $123.06 million of debt
and increased our year-end cash position by $115.92 million. We also used the
cash to make an important acquisition in our Paint Stores Segment by purchasing
the net assets of the Mautz Paint Company, including their 33 paint stores in
the Midwest. Additionally, we bought back 6.7 million shares of the company's
common stock on the open market.
On the strength of our free cash flow performance, in 2002 the Board of
Directors approved our 23rd consecutive increase in first quarter dividend
payments. While 2001 was not the year we had hoped for, we nonetheless view
these results as a positive indicator - during an especially tough year - of
management's commitment to fiscal responsibility and shareholder value.
PAINT STORES SEGMENT
The Paint Stores Segment increased sales by 0.7 percent over last year
to finish the year at $3.21 billion. Operating profit came in at $390.49
million, which was a decrease of 5.1 percent from 2000's performance. Sales of
architectural and industrial paint gallons increased but were offset by
5
LETTER TO SHAREHOLDERS
negative year over year comparisons in our chemical coatings business.
Our marketing strategy is driven by paint purchase trends. As the
population ages and people have less free time, the do-it-yourself market is
shifting toward hiring professional painting contractors, who purchase almost
all of the products they need from the paint store channel. Therefore, our 2,573
company paint stores in North America and the Caribbean give us a significant
advantage over all other paint store competitors serving professional customers.
We remain committed to our program of store expansion and added or
acquired a net of 85 stores to our chain in 2001. In addition, we continued to
introduce new products specifically aimed at improving the productivity of our
professional customers. This commitment to technology ensures that we are at the
forefront of product innovations year after year.
This past year, we continued to strengthen our leadership position in
the industrial and marine coatings business. We gained market share by
introducing new product technology aimed at specific focus markets. Our expanded
business with the U.S. Navy is one example of our growing customer base for
industrial and marine coatings.
Our chemical coatings business had a tough year as manufacturing
companies across North America posted lower output month after month throughout
2001. We took steps to significantly strengthen this part of our company by
forming a dedicated division within the Paint Stores Segment focused on growing
domestic market share, expanding our supply capabilities outside North America,
driving gallon sales and improving profits. We have significant opportunities in
this business and look forward to improved results in the future.
CONSUMER SEGMENT
Net sales for the Consumer Segment ended the year at $1.11 billion for
a 9.0 percent decline from 2000's performance. Operating profit came in at
$108.17 million, representing a 24.1 percent decrease over last year.
Despite this performance, there were encouraging positive trends in our
Consumer Segment. During the second half of the year, sales with existing
customers began to stabilize. More importantly, quarter over quarter profit
improvements were registered in the fourth quarter for the first time in several
years. We completed the realignment of this Segment to create three separate
divisions: Consumer Division, Diversified Brands Division and Wood Care
Division. The management teams responsible for these divisions played a
significant role in the improved cash performance of the company. The leadership
role these teams assumed in our company's Operational Excellence program is
beginning to pay dividends that we expect to continue in 2002.
The Consumer Segment has a portfolio of outstanding brand names and
relationships with leading retailers throughout North America. We expect
improved future results from this Segment.
AUTOMOTIVE FINISHES SEGMENT
The Automotive Finishes Segment experienced a net sales decrease of 5.9
percent to $464.23 million for the year. Operating profit decreased to $51.23
million from $61.26 million. The decline in operating profit for the year was
due primarily to lower sales volume and related manufacturing absorption. While
collision repair sales throughout the year were higher, this gain was
insufficient to offset a soft domestic economy that negatively impacted car and
truck production, curtailing this Segment's OEM sales. In addition, inventory
corrections by customers in the secondary distribution channels of this Segment
further adversely impacted sales. We are encouraged, though, by the quarter over
quarter operating profit improvement registered by our Automotive Finishes
Segment in the fourth quarter of 2001.
This was the first full year of residency by our Automotive Finishes
Segment in its 350,000-square-foot World Headquarters in Warrensville Heights,
Ohio. This investment in technology and facilities is already paying dividends
by improving our customer relationships and service. Our customer loyalty
program, the A-Plus(TM) Club, has an enrollment of more than 750 customers. We
are excited about our growing and highly visible participation in NASCAR as the
paint supplier to nearly 20 racing teams in 2001. Automotive Finishes Segment
customers also can avail themselves of numerous e-business options at our highly
interactive web site.
The Automotive Finishes Segment has developed a comprehensive
distribution platform that includes 174 company-operated branches, thousands of
automotive refinish distributors and a presence in nearly 30 countries through
subsidiaries and licensing agreements.
INTERNATIONAL COATINGS SEGMENT
Net sales in the International Coatings Segment decreased 8.9 percent
to $279.62 million in 2001. Operating profit, in U.S. dollars, decreased to
$4.90 million from $17.65 million. The sales decrease was due primarily to
unfavorable currency exchange rates and weak economic conditions in South
America. Excluding the effects of currency exchange fluctuations relative to
last year, net sales for the Segment increased 5.2 percent in 2001. The
operating profit decrease was a result of several factors including price
competition, worsening economic conditions
6
in Argentina, and margin erosion caused by a market shift to
lower-priced products.
We are committed to expanding our reach in this Segment and remain
confident about the sales opportunities that exist for our 52 company-operated
stores and distribution outlets in more than 20 countries. Our ability to
transfer advanced technologies from our domestic operations enables us to
maintain a leadership position in many of the markets we serve by providing
superior coatings and a constant flow of new product introductions. Successful
market expansion and penetration occurred in architectural, industrial, marine,
aerosol and chemical coatings markets. Ronseal, our operation in the United
Kingdom, successfully introduced an enamel paint line and an exterior stain
line, achieving substantial gallon sales growth in 2001.
MANAGEMENT PROMOTIONS
This past year, three important management promotions were announced.
Sean P. Hennessy was promoted to the position of Senior Vice President -
Finance, Treasurer and Chief Financial Officer. Sean has had an impressive
17-year career with Sherwin-Williams and has served in a wide range of financial
and operating roles. Timothy A. Knight was promoted to President & General
Manager, Diversified Brands Division. Tim has been a sales and marketing team
leader throughout his seven-year career with the company and is well suited for
this division assignment. Harvey P. Sass was promoted to President & General
Manager, Wood Care Division. Harvey has made significant contributions to our
wood care business over his 14 years with the company, most notably in the area
of sales and marketing. These changes strengthen our company and exemplify the
importance we place on the retention and development of our strongest assets -
our people.
OUTLOOK FOR 2002
Financial forecasting has become increasingly difficult in the face of
such uncertain economic times. Overall, we expect market conditions in 2002 to
be flat to up slightly over 2001 with pockets of strength domestically tempered
by a continued weakness in foreign currency and the economy as a whole. However,
The Sherwin-Williams Company has remained strong, stable and secure through all
phases of the economic cycle, beginning its 23rd consecutive year of anticipated
dividend growth for shareholders and delivering the kind of performance expected
from the market leader.
Carrying the moniker "America's Paint Company" is a badge of honor that
the 25,000 employees of our company wear proudly and responsibly. We salute and
thank each and every one of them for their dedication and hard work, and know
that they join us in thanking our loyal customers, our outstanding suppliers and
our trusting shareholders.
/s/ Christopher M. Connor
------------------------------------
CHRISTOPHER M. CONNOR
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Joseph M. Scaminace
------------------------------------
JOSEPH M. SCAMINACE
PRESIDENT AND CHIEF OPERATING OFFICER
[SHERWIN WILLIAMS LOGO]
7
[PHOTO]
ALFRED LEWIS
CITY MANAGER, PAINT STORES GROUP
CHICAGO, ILL.
WITH MORE THAN 2,500 STORES IN NORTH AMERICA, SHERWIN-WILLIAMS HAS MORE STORES
THAN THE NEXT NINE PAINT STORE COMPANIES COMBINED.
PAINT STORES SEGMENT
SHERWIN-WILLIAMS STORES ARE THE EXCLUSIVE OUTLETS for Sherwin-Williams(R)
branded architectural and industrial paints, stains and products. In 2001, our
Paint Stores Group added or acquired 85 stores, bringing the total to 2,573
company-operated outlets in North America. These stores supply a diverse
customer base, including architectural and industrial painting contractors,
residential and commercial builders and property managers, OEM product
finishers, and do-it-yourself homeowners.
[PIE CHART]
PAINT STORES
63% OF NET EXTERNAL SALES
This unique store network enables us to maintain close working
relationships with the end users of our products. Staying close to customers
helps us to better anticipate and satisfy the diverse needs of each market we
serve. In recent years, we have sharpened the focus of our product development
and store merchandising efforts on the needs of some key customer segments. This
customer-focused approach helps ensure the success of our new products.
Our new Cashmere(TM) interior wall paint is a good example. Its ease of
application saves residential painting contractors time and effort. Its smooth,
stipple-free finish appeals to upscale homeowners. This combination of benefits
made Cashmere paint an overnight success and will propel its growth and
popularity for years to come.
Other examples include Harmony(R), a low-odor, low-VOC wall paint that
minimizes disruption in occupied areas; AquaClad(TM) Water-Based Alkyd, a
one-coat waterborne industrial and marine topcoat; and a Sher-Wood(R) product
line extension to help production wood finishers comply with ever-tightening
environmental regulations. Each of the 21 new products introduced by the Paint
Stores Group in 2001 builds on our reputation as an innovator and technology
leader.
Color is as fundamental to our business as product technology. In 2001,
we launched Color Excellence(TM), an ongoing program to establish
Sherwin-Williams paint stores as the industry leader in color selection and
delivery. The Color Excellence program is an end-to-end process-control
initiative that improves color accuracy and uniformity by improving
batch-to-batch manufacturing consistency, container fill level accuracy, and
store tinting equipment calibration. The Color Excellence program sets the stage
for the introduction of a new color system, including an exclusive color palette
by Martha Stewart, in the spring of 2002.
In 2001, we also initiated key changes to the structure and focus of
our Chemical Coatings business. Recognizing the increasing globalization of the
OEM product finishing industry, we organized teams of technical, marketing and
sales specialists to serve specific user markets and expanded our supply
capabilities beyond North America. This new organization offers customers around
the world professional consultation based on a thorough understanding and depth
of experience in their specific industry, combined with a vast technological
resource.
We will continue to explore and develop e-business applications that
provide value to our customers. For example, customers can now search through
thousands of wallpaper patterns and place orders on-line. In 2002, we will
launch our on-line business center, offering wholesale customers
password-protected 24/7 access to order history, account status, pricing,
on-line ordering features and other account-management tools.
[PHOTO]
9
[PHOTO]
FRED KONECKI
CASE PACKER
CHICAGO,ILL.
OUR CONSUMER SEGMENT SELLS PRODUCTS UNDER FAMILIAR BRANDS SUCH AS DUTCH BOY(R),
PRATT & LAMBERT(R), MINWAX(R), KRYLON(R) AND THOMPSON'S(R) WATER SEAL(R) THROUGH
TOP RETAIL OUTLETS NATIONWIDE.
10
CONSUMER SEGMENT
THE THREE OPERATING UNITS WITHIN OUR CONSUMER SEGMENT -- the Consumer Division,
the Wood Care Division and the Diversified Brands Division -- produce some of
the most powerful brand names in the coatings industry. Private label
manufacturing and licensed brand programs have extended our reach among home
centers, hardware stores, mass merchandisers, industrial distributors and
independent paint stores throughout North America.
[PIE CHART]
CONSUMER
22% OF NET EXTERNAL SALES
CONSUMER DIVISION - With 10 manufacturing facilities and eight
distribution centers, the Consumer Division has the resources to serve both
external customers and Sherwin-Williams paint stores. We manufacture and market
well-known brands like Dutch Boy(R), Pratt & Lambert(R) and Martin
Senour(R). We also supply private label products to leading retailers.
Successful product launches in 2001 included the Dutch Boy(R)
Dimension(R) line of products for faux decorating; the Martha Stewart One Coat
Program; and the Pratt & Lambert(R) Ovation(TM) line of faux decorating
products.
The Consumer Division launched several key operations initiatives
designed to reduce costs and maximize efficiencies. These include a supplier
collaboration program that relies on close interaction with raw materials
suppliers, a purchasing program that leverages our buying power, and a supplier
diversity program.
We also implemented Six Sigma, a statistical approach to process
improvement, as part of our Operational Excellence initiative. We are committed
to establishing measurable operational procedures and a culture of continuous
improvement.
WOOD CARE DIVISION - Headquartered in Upper Saddle River, N.J., the
Wood Care Division is responsible for our Minwax(R), Thompson's(R) Water
Seal(R), Formby's(R), DuraSeal(R) and Fabulon(R) product lines. Constant
product innovation and technological advancement differentiates our Wood Care
products and helps build and strengthen our brands.
Our products are developed for performance, convenience and lasting
beauty. In 2001, we introduced Minwax(R) Stainable Wood Filler, an
interior/exterior wood filler for wood finishing repairs. It is a latex formula
that stains can penetrate as well as natural wood. We also added Minwax(R)
Super Fast-Drying Polyurethane for Floors, an oil-based protective clear finish
designed for use with hardwood floors. Because of its fast drying time and
formulation that doesn't require sanding between coats, consumers can begin and
finish a project in a single day.
DIVERSIFIED BRANDS DIVISION - The Diversified Brands Division produces
aerosol paints and chemicals, paint brushes and rollers, and caulks and
sealants. Our brands include Krylon(R) and Dupli-Color(R) spray paints;
Rubberset(R) and Sherwin-Williams(R) brushes and rollers; and White
Lightning(R) caulks and sealants. Additionally, we supply private label spray
paint to several mass merchandisers.
We are the largest manufacturer and marketer of aerosol paint in the
country. In 2001, we launched several key products into this market.
Dupli-Color(R) Mirage(R) is a multi-color effect spray paint for automotive
retail use that is gaining popularity among do-it-your-selfers and
professionals alike. The Krylon Products Group introduced several new products
under the Krylon(R) brand for the craft market and developed targeted programs
for contractors.
We also launched a complete line of extension poles for use with our
paint rollers.
[PHOTO]
11
[PHOTO]
TOOLIKA RHOADES
SCIENTIST, TRANSPORTATION COATINGS DEVELOPMENT
A SPECIAL GROUP OF SCIENTISTS AT THE WORLD AUTOMOTIVE CENTER IN WARRENSVILLE
HEIGHTS, OHIO ATTEMPT TO FORSEE THE NEEDS OF CUSTOMERS 3 TO 5 YEARS DOWN THE
ROAD. THIS REQUIRES VISION, THE USE OF NON-TRADITIONAL TECHNOLOGY AND A
WILLINGNESS TO EXPLORE NEW AND UNIQUE IDEAS.
12
AUTOMOTIVE FINISHES SEGMENT
THE SHERWIN-WILLIAMS NAME HAS BECOME synonymous with high-quality,
high-performance interior and exterior automotive finishes. It's why in addition
to serving traditional automotive, fleet and heavy-duty truck markets, nearly 20
NASCAR teams selected us as their paint supplier in 2001. As one racing team
owner remarked recently, "We couldn't help but notice a big difference in the
appearance of the cars. The color ... the shine ... the vehicles painted with
Sherwin-Williams(R) automotive paint truly stood apart from the rest. And once
we heard of the superior support and service that Sherwin-Williams provided the
other NASCAR teams, we knew it was time to make a switch."
[PIE CHART]
AUTOMOTIVE FINISHES
9% OF NET EXTERNAL SALES
While being a part of the high-profile racing circuit is certainly
rewarding, Sherwin-Williams earned its stripes in automotive markets long before
racing achieved its current popularity. In fact, Sherwin-Williams entered the
market in 1922 with a lacquer product under the trade name Opex(R). Since
then, our Automotive Finishes Segment has extended its reach through
174 company-operated branches in the United States, Canada, Jamaica and Chile,
along with a comprehensive distribution platform consisting of thousands of
automotive refinish distributors. Our products also have a presence in nearly 30
countries through wholly-owned subsidiaries and foreign licensing agreements.
The major brands we offer are Sherwin-Williams(R), Martin Senour(R),
Western(R), Lazzuril(TM), Excelo(TM), Baco(TM) and ScottWarren(TM).
Our customer-driven service is apparent in all aspects of our
organization. Our automotive learning centers have trained thousands of
customers and employees on curricula ranging from product specifications to
color to business management. The 350,000-square-foot World Automotive Center in
Warrensville Heights, Ohio, is a state-of-the art research and development
facility that can also replicate virtually any refinishing environment -- from
airflow conditions to climate variations. And, with 280 employees in the key
automotive finishing disciplines on-site together, customers are assured of the
most accurate and timely service possible. At year-end, our customer loyalty
program, the A-Plus(TM) Club, had an enrollment of more than 750 customer
members, who receive valuable marketing and business management services as part
of their membership.
The latest in automotive finishing e-technology is also available to
Sherwin-Williams customers at www.sherwin-automotive.com. Customers can access
automotive color formula mixing information through our Formula Finder, as well
as purchase products on-line at our e-store, and remain up-to-date on the latest
in color and product technology. The Automotive Finishes Segment of
Sherwin-Williams will continue to develop the most technologically advanced,
productive, user-friendly products available, while continuing to streamline and
consolidate each refinishing system.
13
[PHOTO]
JOCELIO VERISSIMO SILVA
PRODUCTION CHIEF
SHERWIN-WILLIAMS DO BRASIL
OUR INTERNATIONAL DIVISION
IS STRENGTHENED BY A VERY
LOYAL, DEDICATED
WORKFORCE OF MORE
THAN 2,100 EMPLOYEES.
INTERNATIONAL COATINGS SEGMENT
SHARED DOMESTIC TECHNOLOGIES - Combined with significant manufacturing
capabilities, expanded distribution channels and a growing presence in the
markets we serve - fuels optimism in our International Coatings Segment. While
our financial performance was hurt by unfavorable currency exchange rates and
weak economic conditions in South America, our business is fundamentally sound
and poised for growth.
[PIE CHART]
INTERNATIONAL COATINGS
6% OF NET EXTERNAL SALES
The International Coatings Segment distributes Sherwin-Williams brand
products and products marketed under well-recognized regional brands in more
than 20 countries. We operate through wholly-owned subsidiaries, joint ventures,
licensing agreements and independent distributors, along with 52 company-
operated stores in Chile and Brazil.
CHILE - In Chile, we provide coatings for virtually all retail and
wholesale applications. These include Architectural, Industrial, Marine,
Chemical Coatings and Aerosols, where we are the market leader with our
Marson(TM) brand. We have increased market share and market penetration in
each of these areas and are confident of future growth. We will continue to open
company stores in support of all these markets. Sales into Industrial and Marine
markets, such as fishing and copper mining, benefited from the introduction of
new coatings technologies -- transferred from domestic operations. Further
expansion in Industrial will occur with the introduction of new products for the
industrial flooring market from the Paint Store Segment's General Polymers
business unit.
ARGENTINA - The addition of two new major dealer chains and expansion
of our home center business were bright spots in an otherwise depressed market
hit by an unemployment rate of 22%, a fourth consecutive year of recession and,
in 2002, a significant currency devaluation. While we anticipate gallon volume
to continue shrinking, we expect to gain market share. And, the strong
distribution we enjoy with the dealer chains will continue to present future
growth and sales opportunities.
BRAZIL - This is our largest subsidiary. Our strong portfolio of brands
positions us well in every coatings category we serve. We are the market leader
in Aerosols with our Colorgin(TM) brand, which is distributed through home
centers, mass retailers and hardware stores. Our Sumare(TM) brand has helped us
achieve market leadership in Industrial and Marine, which is sold directly to
customers as well as through our company stores. We will continue to support
this distribution method with the opening of new company stores. Many of the
Sumare product technologies in use were developed from the domestic market. We
also manufacture and distribute products for the powder coatings and chemical
coatings markets. In our Architectural Coatings business, numerous new products
were successfully introduced for hospitals and kitchens and baths, along with
texture paints and other specialty coatings. These products are primarily sold
through home centers, independent dealers and hardware stores.
UNITED KINGDOM - The launch of our Tri-Flow(TM) Metal Care(TM) enamel
paint was very successful. Continued growth of this line is expected in Europe.
Ronseal Limited will continue its focus on upgrading our interior Woodcare line
to increase awareness and preference in all sectors. The introduction by Ronseal
Limited of exterior stains in the Gardencare(TM) line helped propel significant
gallon sales increases for the year and will provide solid growth opportunities
among existing distribution and major home centers.
(PHOTO)
15
AMERICA'S PAINT COMPANY
While 2001 proved to be a challenging year for our company and our nation, the
men and women of Sherwin-Williams were again at their best. If adversity truly
introduces us to ourselves, then you'll like the people you meet at
Sherwin-Williams. Their gifts of time, money, items of need, support and prayers
following the events of Sept. 11 were particularly inspiring and worthy of
America's Paint Company. Sherwin-Williams employees dispatched countless dust
masks, five-gallon pails, respirators, gloves, buckets and other needed supplies
to New York, Pennsylvania and the Pentagon. Yet, these gifts cannot be measured
merely in hours, dollars or cartons -- but equally, in terms of thoughts, words
and deeds. We are proud of, and thankful to, the many dedicated Sherwin-Williams
employees who stood so tall in our country's hour of need.
[PHOTO]
ROCK ISLAND, ILL. - The roof of the Thoms Proestler Co. warehouse is adorned
with an Old Glory 274 feet long by 156 feet wide, with a total area of 42,744
square feet. Sherwin-Williams donated the 150 gallons of paint needed for the
project, and Jim Phillips, owner of Excel Painting and Wallcoverings, donated
more than 100 labor hours. Visible only from the air, the flag is intended to
show support for pilots and the airline industry. The red and white areas were
painted with Sherwin-Williams(R) Setfast(R) Acrylic Latex Traffic Marking Paint,
and the blue areas were painted with Sherwin-Williams(R) Metalatex(R) Semi-Gloss
Coating.
16
[PHOTO]
RIO RANCHO, N.M. - More than 1,200 gallons of Sherwin-Williams(R) paint were
used to cover seven acres of soccer fields at the Rio Rancho Sports Complex.
Commercial painting contracting firm JTC Inc. painted the flag with Snow White
A-100(R) Exterior Latex Flat and Setfast(R) Acrylic Latex Traffic Marking
for the red and blue areas.
[PHOTO]
TITUSVILLE, FLA. - A shortage of American flags didn't stop the employees of
Sherwin-Williams store #2197 from displaying their patriotism and support for
the victims of Sept. 11 and their families. Store employees painted their own
Stars and Stripes on a 9-by-12-foot canvas drop cloth.
[PHOTO]
WASHINGTON, D.C. - Sherwin-Williams donated 10,000 gallons of paint for the
restoration of sections of the Pentagon damaged by the Sept. 11 terrorist
attacks. The idea for the donation came from Sherwin-Williams computer
programmer/analyst Kim Falk. In a letter to Secretary of Defense Donald
Rumsfeld, Sherwin-Williams Chairman and CEO Christopher M. Connor explained
that the company wanted to honor all who were lost in the attacks and support
the government in its restoration of the Pentagon.
[PHOTO]
CHEYENNE, WYO.- Scott Cloudy, a Sherwin-Williams store manager in Cheyenne,
displayed his patriotism by painting the American flag on his garage door. He
used white Sherwin-Williams(R) DTM Acrylic Coating and Sher-Cryl(TM) Safety
Red for the stripes, All Surface Enamel Latex in Regalia Blue for the blue
field, and Krylon(R) spray paint for the white stars.
17
STORES MAP
[MAP]
PAINT STORES
AUTOMOTIVE BRANCHES
[PHOTO]
[MAP]
TODAY, MORE THAN 90% OF THE U.S. POPULATION LIVES WITHIN A 50-MILE RADIUS OF A
SHERWIN-WILLIAMS PAINT STORE. FOR THE LOCATION OF THEIR LOCAL STORE, CUSTOMERS
CAN CALL 1-800-4-SHERWIN, OR VISIT OUR WEB SITE (WWW.SHERWIN-WILLIAMS.COM). THE
WEB SITE ALSO OFFERS APPROXIMATELY 10,000 WEB PAGES OF VALUABLE COATINGS
INFORMATION. IT'S A COMPREHENSIVE RESOURCE FOR OUR MOST SOPHISTICATED PAINT
CUSTOMERS AS WELL AS AN EASY-TO-USE PROJECT GUIDE FOR THE DO-IT-YOURSELFER.
18
SUBSIDIARIES
FOREIGN
Coatings S.r.L.
Compania Sherwin-Williams, S.A. de C.V.
Eurofinish S.r.L.
Kriesol, S.A.
Productos Quimicos y Pinturas, S.A. de C.V.
Proquipsa, S.A. de C.V.
Quetzal Pinturas, S.A. de C.V.
Ronseal (Ireland) Limited
Ronseal Limited
ScottWarren S.p.A.
Sherwin-Williams (Caribbean) N.V.
Sherwin-Williams (West Indies) Limited
Sherwin-Williams Argentina I.y C.S.A.
Sherwin-Williams Canada Inc.
Sherwin-Williams Cayman Islands Limited
Sherwin-Williams Chile S.A.
Sherwin-Williams do Brasil Industria e Comercio Ltda.
Sherwin-Williams Foreign Sales Corporation Limited
Sherwin-Williams Japan Co., Ltd.
Sherwin-Williams Singapore PTE, Ltd.
The Sherwin-Williams Company Resources Limited
DOMESTIC
Contract Transportation Systems Co.
DIMC, Inc.
Dupli-Color Products Company
Sherwin-Williams Automotive Finishes Corp.
Sherwin-Williams Realty Holdings, Inc.
SWIMC, Inc.
The Sherwin-Williams Acceptance Corporation
Thompson Minwax International Corp.
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.
19
FINANCIAL SUMMARY
(Millions of Dollars Except Per Share Data)
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
OPERATIONS
Net sales ........................................ $ 5,066 $ 5,212 $ 5,004 $ 4,934 $ 4,881
Cost of goods sold ............................... 2,846 2,904 2,755 2,804 2,784
Selling and administrative expenses .............. 1,730 1,740 1,673 1,598 1,574
Impairment of long-lived assets .................. 352
Interest expense ................................. 55 62 61 72 81
Income before income taxes ....................... 424 143 490 440 427
Net income ....................................... 263 16 304 273 261
Net income before impairment (A) ................. 263 310 304 273 261
FINANCIAL POSITION
Inventories ...................................... $ 633 $ 704 $ 703 $ 683 $ 722
Accounts receivable - net ........................ 523 594 606 605 546
Working capital .................................. 366 436 437 458 417
Property, plant and equipment - net .............. 673 722 712 719 692
Total assets ..................................... 3,628 3,751 4,033 4,051 4,036
Long-term debt ................................... 504 621 622 730 844
Total debt ....................................... 615 740 742 848 1,005
Shareholders' equity ............................. 1,488 1,472 1,699 1,716 1,592
PER SHARE INFORMATION
Average shares outstanding (000's) ............... 155,557 161,912 167,925 172,162 172,107
Book value ....................................... $ 9.66 $ 9.22 $ 10.25 $ 10.03 $ 9.21
Net income before impairment - diluted (A) ....... 1.68 1.90 1.80 1.57 1.50
Net income - diluted ............................. 1.68 .10 1.80 1.57 1.50
Net income - basic ............................... 1.69 .10 1.81 1.58 1.51
Cash dividends ................................... .58 .54 .48 .45 .40
FINANCIAL RATIOS
Return on sales (A) .............................. 5.2% 5.9% 6.1% 5.5% 5.3%
Asset turnover (A) ............................... 1.4x 1.3x 1.2x 1.2x 1.2x
Return on assets (A) ............................. 7.3% 7.5% 7.5% 6.7% 6.5%
Return on equity (A)(B) .......................... 17.9% 18.2% 17.7% 17.1% 18.6%
Dividend payout ratio (A) ........................ 34.6% 28.5% 26.6% 28.5% 26.5%
Total debt to capitalization ..................... 29.3% 33.5% 30.4% 33.1% 38.7%
Current ratio .................................... 1.3 1.4 1.4 1.4 1.4
Times interest earned (C) ........................ 8.8x 9.0x 9.0x 7.1x 6.3x
Working capital to sales ......................... 7.2% 8.4% 8.7% 9.3% 8.5%
Effective income tax rate (A) .................... 38.0% 37.5% 38.0% 38.0% 39.0%
GENERAL
Capital expenditures ............................. $ 83 $ 133 $ 134 $ 146 $ 164
Total technical expenditures (D) ................. 86 84 78 73 63
Advertising expenditures ......................... 236 276 265 283 296
Repairs and maintenance .......................... 48 48 46 45 45
Depreciation ..................................... 109 109 105 98 90
Amortization of intangible assets ................ 39 51 50 50 49
Shareholders of record ........................... 10,281 10,813 11,475 11,929 11,964
Number of employees .............................. 25,789 26,095 25,697 24,822 24,964
Sales per employee (000's) ....................... $ 196 $ 200 $ 195 $ 199 $ 196
Sales per dollar of assets ....................... 1.40 1.39 1.24 1.22 1.21
(A) Based on net income before the impairment of long-lived assets charge in
2000, net of tax. See Note 2, page 35.
(B) Based on shareholders' equity at beginning of year and net income before
impairment.
(C) Ratio of income before income taxes excluding the charge for impairment in
2000 and interest expense to interest expense.
(D) See Note 1, page 34, for a description of technical expenditures.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION - 2001
Net operating cash flow generated by the Company during 2001 was $561.6
million primarily as a result of net income from operations and reductions in
working capital which were partially offset by an unusual tax-related payment of
$65.7 million that was made to the U.S. Internal Revenue Service for contested
tax issues plus accrued interest. The unusual tax-related payment was made to
prevent the imposition of above-market interest charges while contested tax
issues are being resolved. Working capital reductions occurred as a result of an
increased focus by management to improve collections of accounts receivable and
accelerate inventory turnover to coincide with lower sales demand. The operating
cash flow provided the majority of funds to invest $82.6 million in property,
plant and equipment, reduce total debt by $123.1 million, purchase treasury
stock of $157.1 million, increase the annual dividend to $91.0 million, and
complete acquisitions of businesses of $15.2 million. The Company ended the year
with $118.8 million in cash and cash equivalents. The Company's current ratio
decreased to 1.32 at December 31, 2001 from 1.39 at the end of 2000. The
Company's Consolidated Balance Sheets and Statements of Consolidated Cash Flows,
on pages 30 and 31 of this report, provide more detailed information on the
Company's financial position and cash flows.
Goodwill, which represents the excess of cost over the fair value of
net assets acquired in purchase business combinations, decreased $33.2 million
in 2001. Intangible assets, which represent items such as trademarks and
patents, decreased $11.6 million in 2001. These decreases were due to
amortization expense and foreign currency translation adjustments, partially
offset by increases resulting from acquisitions completed in 2001. During 2001,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which supersedes APBO No. 17, "Intangible Assets." See Note 1 on pages 34 and 35
of this report for a description of SFAS No. 142. The Company has adopted or
will adopt SFAS No. 142 in the required periods. Application of the
non-amortization provisions of the statement for goodwill and intangible assets
acquired before July 1, 2001 is expected to increase net income approximately
$24.7 million for the full year 2002.
Deferred pension assets of $393.6 million at December 31, 2001
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 2001 increase in deferred pension assets of $29.2 million
represents primarily the recognition of the current year net pension credit,
described in Note 6 on pages 36 to 38 of this report. The assumed discount rate
used to compute the actuarial present value of projected benefit obligations was
decreased from 7.00 percent to 6.75 percent at December 31, 2001 due to
decreased rates of high-quality, long-term investments. The decrease in the
actual return on plan assets during 2001 was primarily the result of returns on
equity investments that were below the assumed return of 8.5 percent.
A decrease in Other assets of $13.0 million was due primarily to the
amortization of capitalized costs incurred 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." In addition, a reduction in assets related to
certain marketing programs of the Company also contributed to the decrease in
Other assets.
Net property, plant and equipment decreased $49.7 million to $672.7
million at December 31, 2001 due to depreciation expense of $109.2 million,
impairment charges on assets held for disposal of $6.4 million and foreign
currency translation adjustments partially offset by capital expenditures of
$82.6 million and acquisitions. Capital expenditures during 2001 in the Paint
Stores Segment were primarily attributable to opening new paint stores and store
relocations along with normal replacement and upgrading of store equipment. In
the Consumer and International Coatings Segments, capital expenditures during
2001 were primarily related to efficiency improvements in production facilities
and information systems hardware. Capital expenditures in the Automotive
Finishes Segment during 2001 primarily related to improvements and upgrades to
the automotive technology center. In 2002, the Company expects that its most
significant capital expenditures will relate to various capacity and
productivity improvement projects at manufacturing and distribution facilities,
new store openings, new point-of-sale equipment and new or upgraded information
systems hardware. The Company does not anticipate the need for any specific
long-term external financing to support these capital programs.
There were no short-term borrowings outstanding under the Company's
commercial paper program at December 31, 2001. During the year, borrowings were
made under the Company's commercial paper program that is fully backed by and
limited to the borrowing availability under the Company's revolving credit
agreements. The aggregate maximum borrowing capacity under the current revolving
credit agreements as of December 28, 2001 is $750.6 million. The current portion
of long-term debt increased $98.9 million due primarily to the reclassification
of $100.0 million of 6.5% Notes due February 1, 2002. Current portion of
long-term debt at December 31, 2001 also included current maturities of $11.9
million related to various promissory notes and other obligations.
Long-term debt decreased $117.2 million to $503.5 million at December
31, 2001, resulting primarily from
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
reclassification to current debt maturities of $111.9 million and early
redemption of $10.0 million of the Company's 9.875% Debentures. The Company
expects to remain in a borrowing position throughout 2002.
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 $14.9 million at December 31, 2001, is
included in Other accruals. The assumed discount rate used to calculate the
actuarial present value of the postretirement benefit obligations was decreased
from 7.00 percent to 6.75 percent at December 31, 2001 due to the reduced rates
of high-quality, long-term investments. The assumed health care cost trend rates
were revised during 2000 for years 2001 through 2009. The revised rates reflect
escalating health care costs that continued to exceed the previously established
rates. The trend rate for 2001 was a more representative 9.5 percent annual
increase. The rate for 2002 is 8.9 percent decreasing gradually to 5.5 percent
in 2010. See Note 6, on pages 36 to 38 of this report, for further information
on the Company's postretirement benefit obligations.
The decrease of $48.9 million in Other long-term liabilities during
2001 was due primarily to the previously mentioned unusual tax-related payment
of $65.7 million made to prevent the imposition of above-market interest charges
while contested issues are being resolved. Partially offsetting this decrease
was an increase in certain tax liabilities resulting from timing items. See Note
9, on page 39 of this report, for information concerning the Company's Other
long-term liabilities.
Shareholders' equity increased $15.9 million during 2001 to $1,487.8
million due primarily to net income of $263.2 million and net increases in
common stock and other capital of $43.1 million due to the tax impact of certain
Employee Stock Purchase and Savings Plan (ESOP) transactions and stock option
activity. Partially offsetting such increases were cash dividends paid of $91.0
million, purchases of 6.7 million shares of Company common stock for treasury at
a cost of $157.1 million, and other comprehensive losses related to foreign
currency translations of $40.9 million. The Company acquires its own common
stock for general corporate purposes and, depending on its future cash position
and market conditions, it may acquire additional shares in the future. In July
2001, the Company's Board of Directors rescinded the previous authorization
limit for treasury stock purchases and issued a new authorization for the
Company to purchase, in the aggregate, 20.0 million shares of its common stock.
During the third and fourth quarters of 2001, the Company acquired 3.0 million
shares of its common stock through open market purchases for treasury purposes.
The Company had remaining authorization at December 31, 2001 to purchase 17.0
million shares of its common stock.
The 2001 annual dividend of $.58 per share approximated our payout
ratio target of 30.0 percent of the prior year's earnings (based on net income
before the impairment of long-lived assets charge in 2000, net of tax). This
annual dividend represented the twenty-second consecutive year that the dividend
has increased and a compounded annual rate of increase of 23.5 percent since the
dividend was reinstated in the fourth quarter of 1979. At a meeting held on
February 6, 2002, the Board of Directors increased the quarterly dividend to
$.15 per share.
The changes in Cumulative other comprehensive loss consisted solely of
foreign currency translation adjustments for all years presented in the
Company's Consolidated Balance Sheets. The increases in 2001 of $40.9 million
and in 2000 of $18.0 million were attributable 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
2000, 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. In January 2002, the
Argentine government announced plans to discontinue its currency board policy of
maintaining a one-to-one fixed exchange rate between the peso and U.S. dollar
and will attempt to implement a controlled devaluation during 2002. Due to the
uncertainty associated with this new currency policy, management is unable at
this time to accurately estimate the future impact of the foreign currency
translation of the Argentine peso on comprehensive income. The change in the
currency translation rate of the Argentine peso is not expected to have a
material impact on the results of operations of the International Coatings
Segment.
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
various counties, cities, school districts and other government-related
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
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. The Company expects that
additional lead pigment and lead-based paint litigation will be filed against
the Company in the future asserting 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, among other factors, 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 the lead
pigment and lead-based paint litigation, the number or nature of possible future
claims and proceedings, or the affect that any legislation and/or administrative
regulations may have on the litigation or against the Company. In addition,
management cannot reasonably determine the scope or amount of the costs and
potential liabilities related to such litigation, or any such legislation and
regulations. The Company has not accrued any amounts for such litigation. Any
costs that may be incurred or potential liabilities 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 liabilities
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 2001, 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 2002.
The Company is involved with environmental compliance, investigation
and remediation activities at some of its current and former sites (including
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 cleanup 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 contingent liabilities 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
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 39 of this report, for discussion of the environmental-related accruals
included in the Company's Consolidated Balance Sheets.
The Company is exposed to market risk associated with interest rates and
foreign currency exposure. The Company utilizes derivative instruments as part
of its overall financial risk management policy, but does not use derivative
instruments for speculative or trading purposes. The Company has partially
hedged risks associated with fixed interest rate debt by entering into various
interest rate swap agreements (see Note 7, on page 38 of this report). The
Company does not believe that any potential loss related to interest rate
exposure will have a material adverse effect on the Company's financial
condition, results of operations or cash flows. The Company also entered into
foreign currency option and forward contracts to hedge against value changes in
foreign currency (see Note 4, on page 35 of this report). The Company believes
it may experience continuing losses from foreign currency translation. However,
the Company does not expect currency translation, transaction or hedging
contract losses to have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
RESULTS OF OPERATIONS - 2001 VS 2000
Consolidated net sales decreased 2.8 percent to $5.1 billion in 2001. The
most significant factors impacting sales during the year came from the
previously announced discontinued paint programs at certain customers in the
Consumer Segment, continuing poor domestic and South American economic
conditions and continuing weakness in foreign currency exchange rates. Excluding
the effects of the previously announced discontinued paint programs,
consolidated net sales would have been down 1.2 percent for the year.
Net external sales in the Paint Stores Segment during 2001 increased 0.7
percent to $3.21 billion as higher architectural paint sales offset sales
shortfalls in the product finishes and associated product categories. Sales in
this Segment continued to be impacted by the sluggish domestic economy and
weakness in product finishes sales. Sales to professional painters and
industrial maintenance users showed gains for the year. Comparable-store sales
decreased 1.3 percent in 2001. This Segment ended 2001 with 2,573 stores in
operation compared to 2,488 stores in operation at the end of the prior year.
The objective of the Paint Stores Segment is to expand its store base an average
of roughly three percent each year. In 2001, the Segment added 85 net new stores
through new store openings or acquisition and expects to add approximately 50
net new stores in 2002.
External sales in the Consumer Segment decreased 9.0 percent during 2001 to
$1.1 billion. Excluding the previously announced discontinued paint programs at
certain customers, external sales for this Segment would have decreased 2.4
percent for the year. Sales comparisons will be impacted in the Consumer Segment
for 2002 by the anticipated loss of sales caused by the disposition of the
Cleaning Solutions Group business. This Segment also continues to be impacted by
the sluggish domestic economy, which is expected to continue through 2002. The
Segment's plans for 2002 include new product introductions and expansion of its
presence at certain retailers and new customer accounts in preparation of an
eventual economic recovery. The pending outcome of a bankruptcy filing for
reorganization by a large retail customer may have an adverse effect on sales of
this Segment. Management is unable to determine the poten-
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
tial impact on sales at this time.
External sales in the Automotive Finishes Segment decreased 5.9 percent
during 2001 to $464.2 million due primarily to the continuing negative impact of
the soft domestic economy on this Segment's OEM sales that could not be offset
by higher collision repair sales throughout the year. The Company expects that
stronger collision repair sales, an increase in the number of automotive
branches and sales from new product and color introductions will result in a
sales increase for this Segment in 2002.
External sales in the International Coatings Segment decreased 8.9 percent
to $279.6 million. 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 5.2
percent for 2001. Net sales for the year, in local currencies, continued to be
impacted by competitive pricing and a shift in sales to lower priced products
due to continued poor market and macroeconomic conditions in Brazil and
Argentina. The Company expects to realize only minimal sales volume improvements
in the International Coatings Segment in 2002 as economic conditions are not
expected to improve in most South American countries in which we operate,
especially in Argentina where a government controlled currency devaluation is
being implemented during the beginning of 2002.
Consolidated gross profit as a percent of sales decreased to 43.8 percent
from 44.3 percent in 2000. The Company's gross profit margin was impacted by raw
material cost increases, inflated energy costs and higher distribution costs
during the first half of the year for 2001 versus 2000. Additionally, gross
profit was impacted by rising health care and other employee benefit costs. The
Paint Stores Segment's 2001 gross profit margin was flat versus 2000 as a
favorable paint product sales mix and selective selling price increases were
offset by a charge of $2.1 million for the costs associated with closing a
manufacturing facility in the Chemical Coatings Division. Gross profit margin in
the Consumer Segment was below last year due to the sales shortfall and
competitive pricing pressures that prohibited selling price increases sufficient
to offset higher year-over-year raw material, distribution and energy costs
earlier in the year. Gross profit margin was essentially flat versus last year
in the Automotive Finishes Segment. Selective selling price increases, a
favorable product sales mix, and provisions for qualified exit costs recorded in
2000 improved the margin comparison in this Segment, while lower production
volume and higher raw material, distribution and energy costs earlier in the
year offset these improvements. Gross profit margin in the International
Coatings Segment decreased primarily due 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) for 2001
were $1,729.9 million, which was $10.5 million below last year's spending level.
As a percent of sales, SG&A increased to 34.1 percent from 33.4 percent in 2000
due primarily to lower sales. Overall, SG&A in all Segments is being impacted by
rising health care and other employee benefit costs. The Paint Stores Segment's
SG&A ratio was slightly unfavorable compared to last year primarily due to
incremental increases in expenses associated with the 85 stores added through
new store openings or acquisition. In spite of the sluggish market conditions,
the Paint Stores Segment continues to invest in its business by opening or
acquiring stores and maintaining customer service. A slightly favorable SG&A
ratio in the Consumer Segment for 2001 as compared to last year was primarily a
result of certain SG&A cost reductions in response to lower sales activity. In
dollar spending, Consumer Segment SG&A for 2001 was approximately $37.0 million
below last year. The Automotive Finishes Segment's SG&A was higher for the year
as the Segment continued some incremental spending in order to maintain its
market share and customer service levels in a competitive market. The
International Coatings Segment's SG&A was favorable for the year due primarily
to weaker foreign currencies and the effect on stating SG&A in U.S. dollars. As
a percent of sales, this Segment's SG&A ratio increased due to lower sales
volume.
Consolidated segment operating profit for 2001 increased to $424.4 million
or 8.4 percent of sales compared to $143.4 million or 2.8 percent of sales in
2000. During the fourth quarter of 2000, the Company recognized an asset
impairment charge of $352.0 million against segment operating profit in the
Consumer Segment to reduce the carrying values of certain long-lived assets,
primarily goodwill, to their estimated fair values. Excluding the asset
impairment charge, consolidated segment operating profit would have been $495.4
million in 2000 or 9.5 percent of sales. Segment operating profit of the Paint
Stores Segment decreased to $390.5 million or 12.2 percent of sales as a
favorable paint product sales mix and selective selling price increases could
not offset the expense associated with closing a manufacturing facility in the
Chemical Coatings Division and the incremental expenses related to new store
openings. The Consumer Segment's operating profit declined to $108.2 million or
9.8 percent of external sales due primarily to the sales shortfall and
competitive pricing pressures that prohibited selling price increases sufficient
to offset higher year-over-year raw material, distribution and energy costs
earlier in the year. Segment operating profit of the Automotive Finishes Segment
decreased to $51.2 million or 11.0 percent of external sales primarily due to
lower production volume and higher raw material, distribution and energy costs
earlier in the year and incremental SG&A spending in order to maintain its
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
market share and customer service levels in a competitive market. Segment
operating profit of the International Coatings Segment decreased to $4.9 million
or 1.8 percent of external sales primarily due to increased 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. 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 2001 primarily due to the reduction in certain information systems
expenses and decreased interest expense which were partially offset by increases
in certain unallocated employee benefit expenses. Refer to Note 16, on pages 44
through 46 of this report, for additional reportable segment information.
Interest expense decreased in 2001 primarily due to lower average short-term
debt outstanding and rates. However, interest coverage decreased to 8.8 times in
2001 versus 9.0 times in 2000, excluding the effects of the asset impairment
charge, due primarily to lower income before income taxes in 2001. Fixed charge
coverage, which is calculated using interest and rent expense, decreased to 5.2
times in 2001 from 5.7 times in 2000, excluding the effects of the asset
impairment charge.
Interest and net investment income decreased in 2001 primarily due to lower
average balances of cash and cash equivalents, partially offset by higher
average yields. Other expense - net for 2001 was essentially flat with 2000, as
gains from the sale of certain assets were partially offset by provisions for
environmental matters in 2001. See Note 4, on page 35 of this report, for
further detail on Other expense - net. As shown in Note 13, on page 43 of this
report, the effective income tax rate increased to 38.0 percent in 2001 from
37.5 percent in 2000, excluding the effects of the asset impairment charge, due
to the impact of certain investment vehicles.
Net income increased in 2001 to $263.2 million from $16.0 million in 2000.
Net income per share-diluted increased to $1.68 per share compared to $.10 per
share last year. See Note 15, on page 44 of this report, for detailed
computations. Excluding the effects of the asset impairment charge in 2000, net
income for 2000 was $309.7 million and net income per share-diluted was $1.90
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. In 2000, the Segment added 92 net new stores and ended the
year with 2,488 stores in operation compared to 2,396 stores in operation at the
end of 1999.
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.
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 domestic economy during the fourth quarter of 2000 negatively
impacted this Segment's OEM sales.
External sales in the International Coatings Segment for 2000 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 2000 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.
Consolidated gross profit as a percent of sales decreased in 2000 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 1999 primarily due to increased paint volume sales, a
favorable product sales mix and selective selling price increases. Gross profit
margin in the Consumer Segment for 2000 was lower than 1999 as competitive
pricing pressures prohibited selling price increases sufficient to offset
increased raw material costs and higher distribution costs. In addition, costs
associated with 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 during 2000 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 in 2000.
SG&A expenses for 2000 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
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 2000 SG&A ratio was
slightly unfavorable compared to 1999 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 2000. A slightly favorable SG&A ratio in the Consumer
Segment for 2000 as compared to 1999 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 in 2000 was also slightly favorable compared to
1999 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 for 2000 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 35 of this report. Accordingly, consolidated segment operating
profit for 2000 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 in 2000 increased 1.1 percent but declined as a percent of
sales to 9.5 percent from 9.8 percent in 1999. Segment operating profit of the
Paint Stores Segment for 2000 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 2000 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 during 2000 for
the Automotive Finishes Segment decreased $5.3 million or 7.9 percent primarily
due to increased raw material costs and disposition and termination of
operations expenses of $6.8 million for two research centers idled by the
consolidation into the new automotive technology center. See Note 5, on page 36
of this report, for additional disposition and termination of operations
information. Segment operating profit of the International Coatings Segment
decreased in 2000 to $17.7 million from $33.9 million in 1999 primarily due to
increased price competition, increased raw material costs and an unfavorable
product sales mix to lower margin products. 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 16, on pages 44 through 46 of this report, for
additional reportable segment information.
Interest expense increased slightly in 2000 primarily due to higher average
short-term debt outstanding and 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 5.7 times in 2000 from 5.8 times in 1999. Fixed
charge coverage in 2000, after recording the effects of the asset impairment
charge, was 2.4 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 35 of this report, for further detail on
Other expense - net. As shown in Note 13, on page 43 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 for 2000 was reduced to $.10 per share from $1.80 in 1999. See
Note 15, on page 44 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-diluted increased 5.6
percent to $1.90 per share.
27
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, 2001, 2000
and 1999. 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. CONNOR
C. M. Connor
Chairman and Chief
Executive Officer
/s/ S. P. HENNESSY
S. P. Hennessy
Senior Vice President - Finance,
Treasurer and Chief Financial
Officer
/s/ J. L. AULT
J. L. Ault
Vice President -
Corporate Controller
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, 2001, 2000 and
1999, and the related statements of consolidated income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. 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, 2001, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNEST & YOUNG LLP
Cleveland, Ohio
January 25, 2002
28
STATEMENTS OF CONSOLIDATED INCOME
(Thousands of Dollars Except Per Share Data)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net sales ........................................ $ 5,066,005 $ 5,211,624 $ 5,003,837
Cost of goods sold ............................... 2,846,376 2,904,013 2,755,323
Gross profit ..................................... 2,219,629 2,307,611 2,248,514
Percent to net sales .......................... 43.8% 44.3% 44.9%
Selling, general and administrative expenses ..... 1,729,855 1,740,367 1,673,449
Percent to net sales .......................... 34.1% 33.4% 33.4%
Impairment of long-lived assets .................. 352,040
Operating income ................................. 489,774 215,204 575,065
Percent to net sales .......................... 9.7% 4.1% 11.5%
Interest expense ................................. 54,627 62,026 61,168
Interest and net investment income ............... (4,087) (4,981) (5,761)
Other expense - net .............................. 14,785 14,753 29,540
----------- ----------- -----------
Income before income taxes ....................... 424,449 143,406 490,118
Income taxes ..................................... 161,291 127,380 186,258
----------- ----------- -----------
Net income ....................................... $ 263,158 $ 16,026 $ 303,860
=========== =========== ===========
Net income per share:
Basic ......................................... $ 1.69 $ .10 $ 1.81
=========== =========== ===========
Diluted ....................................... $ 1.68 $ .10 $ 1.80
=========== =========== ===========
</Table>
See notes to consolidated financial statements.
29
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 118,814 $ 2,896 $ 18,623
Accounts receivable, less allowance .................................. 523,278 594,162 606,046
Inventories:
Finished goods ................................................... 530,916 597,472 591,912
Work in process and raw materials ................................ 101,847 106,255 111,476
----------- ----------- -----------
632,763 703,727 703,388
Deferred income taxes ................................................ 104,672 104,662 108,899
Other current assets ................................................. 127,418 146,092 141,143
----------- ----------- -----------
Total current assets ............................................. 1,506,945 1,551,539 1,578,099
Goodwill ................................................................. 672,397 705,547 1,039,555
Intangible assets ........................................................ 247,489 259,085 274,924
Deferred pension assets .................................................. 393,587 364,351 334,094
Other assets ............................................................. 134,819 147,769 94,464
Property, plant and equipment:
Land ................................................................. 64,447 65,546 62,517
Buildings ............................................................ 441,418 431,524 431,802
Machinery and equipment .............................................. 1,024,701 980,560 913,346
Construction in progress ............................................. 34,070 52,779 40,262
----------- ----------- -----------
1,564,636 1,530,409 1,447,927
Less allowances for depreciation ..................................... 891,948 808,030 736,251
----------- ----------- -----------
672,688 722,379 711,676
----------- ----------- -----------
Total Assets ............................................................. $ 3,627,925 $ 3,750,670 $ 4,032,812
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ................................................ $ 106,854
Accounts payable ..................................................... $ 454,410 448,799 $ 458,919
Compensation and taxes withheld ...................................... 141,640 137,211 140,934
Current portion of long-term debt .................................... 111,852 12,920 119,949
Other accruals ....................................................... 326,854 334,891 335,691
Accrued taxes ........................................................ 106,597 74,568 85,396
----------- ----------- -----------
Total current liabilities ........................................ 1,141,353 1,115,243 1,140,889
Long-term debt ........................................................... 503,517 620,675 621,957
Postretirement benefits other than pensions .............................. 209,963 208,673 206,591
Other long-term liabilities .............................................. 285,328 334,215 364,843
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
168,305 shares outstanding at December 31, 2001 .................. 168,305
Unearned ESOP compensation ........................................... (168,305)
Common stock - $1.00 par value: 153,978,356, 159,558,335
and 165,663,601 shares outstanding at December 31, 2001,
2000 and 1999, respectively ...................................... 208,031 206,848 206,309
Other capital ........................................................ 200,643 158,650 150,887
Retained earnings .................................................... 2,120,927 1,948,753 2,020,851
Treasury stock, at cost .............................................. (837,284) (678,778) (533,891)
Cumulative other comprehensive loss .................................. (204,553) (163,609) (145,624)
----------- ----------- -----------
Total shareholders' equity ....................................... 1,487,764 1,471,864 1,698,532
----------- ----------- -----------
Total Liabilities and Shareholders' Equity ............................... $ 3,627,925 $ 3,750,670 $ 4,032,812
=========== =========== ===========
</Table>
See notes to consolidated financial statements.
30
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Thousands of Dollars)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
OPERATING ACTIVITIES
Net income ........................................................... $ 263,158 $ 16,026 $ 303,860
Adjustments to reconcile net income to net operating cash:
Impairment of long-lived assets .................................. 352,040
Depreciation ..................................................... 109,187 108,906 105,350
Deferred income taxes ............................................ 15,677 (26,886) 21,170
Provisions for qualified exit costs .............................. 5,302 3,304 6,331
Impairment charges-net on assets held for disposal ............... 6,402 4,719 1,309
Provisions for environmental-related matters ..................... 5,609 16,334
Amortization of intangible assets ................................ 38,911 51,124 50,394
Defined benefit pension plans net credit ......................... (29,366) (29,629) (28,083)
Income tax effect of ESOP on other capital ....................... 22,902
Net increase in postretirement liability ......................... 2,990 3,682 3,428
Foreign currency related losses .................................. 2,277 2,115 3,333
Other ............................................................ 1,101 9,980 15,546
Change in working capital accounts:
Decrease (increase) in accounts receivable ....................... 61,497 21,264 (28,212)
Decrease (increase) in inventories ............................... 72,132 6,188 (24,420)
Increase (decrease) in accounts payable .......................... 10,233 (21,790) 60,487
Increase (decrease) in accrued taxes ............................. 31,468 (11,744) 6,019
Other ............................................................ 17,035 (22,645) 3,650
Unusual tax-related payment .......................................... (65,677)
Increase in long-term accrued taxes .................................. 419 10,005 15,715
Payments for environmental-related matters ........................... (17,565) (9,105) (15,808)
Payments for qualified exit costs .................................... (3,326) (6,173) (15,529)
Other ................................................................ 11,280 1,963 (13,808)
--------- --------- ---------
Net operating cash ............................................... 561,646 463,344 487,066
INVESTING ACTIVITIES
Capital expenditures ................................................. (82,572) (132,778) (134,171)
Acquisitions of businesses ........................................... (15,162) (60,108) (15,427)
Increase in other investments ........................................ (16,614) (51,163) (23,435)
Proceeds from sale of assets ......................................... 9,866 7,670 9,409
Other ................................................................ 13,590 (16,659) (298)
--------- --------- ---------
Net investing cash ............................................... (90,892) (253,038) (163,922)
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings ..................... (106,854) 106,854
Increase in long-term debt ........................................... 8,487
Payments of long-term debt ........................................... (16,210) (116,344) (98,982)
Payments of cash dividends ........................................... (90,984) (88,124) (80,954)
Proceeds from stock options exercised ................................ 17,798 6,419 7,107
Treasury stock purchased ............................................. (157,088) (146,857) (145,806)
Other ................................................................ (786) 3,898 (2,225)
--------- --------- ---------
Net financing cash ............................................... (354,124) (225,667) (320,860)
Effect of exchange rate changes on cash .............................. (712) (366) (2,794)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................. 115,918 (15,727) (510)
Cash and cash equivalents at beginning of year ....................... 2,896 18,623 19,133
--------- --------- ---------
Cash and cash equivalents at end of year ............................. $ 118,814 $ 2,896 $ 18,623
========= ========= =========
Income taxes paid .................................................... $ 129,435 $ 156,514 $ 153,890
Interest paid ........................................................ 55,769 64,400 61,868
</Table>
See notes to consolidated financial statements.
31
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Thousands of Dollars Except Per Share Data)
<Table>
<Caption>
UNEARNED
PREFERRED ESOP COMMON OTHER RETAINED
STOCK COMPENSATION STOCK CAPITAL EARNINGS
----------- ------------ ----------- ----------- -----------
Balance at January 1, 1999 ............. $ 205,701 $ 143,686 $ 1,797,945
Comprehensive income:
Net income ......................... 303,860
Other comprehensive loss ...........
Comprehensive income ...........
Treasury stock purchased ...............
Stock issued (tendered)
for exercise of options ............ 463 8,597
Stock tendered in connection
with restricted stock grants .......
Restricted stock grants
(net activity) ..................... 145 (69)
Stock acquired for trust ............... (1,327)
Cash dividends -- $.48 per share ....... (80,954)
----------- ----------- -----------
Balance at December 31, 1999 ........... 206,309 150,887 2,020,851
Comprehensive income:
Net income ......................... 16,026
Other comprehensive loss ...........
Comprehensive loss .............
Treasury stock purchased ...............
Stock issued (tendered)
for exercise of options ............ 534 8,121
Restricted stock grants
(net activity) ..................... 5 3,176
Stock acquired for trust ............... (1,199)
Treasury stock transferred to trust .... (2,335)
Cash dividends -- $.54 per share ....... (88,124)
----------- ----------- -----------
Balance at December 31, 2000 ........... 206,848 158,650 1,948,753
Comprehensive income:
Net income ......................... 263,158
Other comprehensive loss ...........
Comprehensive income ...........
Treasury stock purchased ...............
Issuance of preferred stock
to pre-fund ESOP ................... $ 250,000 $ (250,000)
Income tax effect of ESOP .............. 22,902
Redemption of preferred stock .......... (81,695) 81,695
Stock issued (tendered)
for exercise of options ............ 1,031 19,947
Stock tendered in connection
with restricted stock grants .......
Restricted stock grants
(net activity) ..................... 152 979
Stock acquired for trust ............... (1,835)
Cash dividends -- $.58 per share ....... (90,984)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 ........... $ 168,305 $ (168,305) $ 208,031 $ 200,643 $ 2,120,927
=========== =========== =========== =========== ===========
<Caption>
CUMULATIVE
OTHER
TREASURY COMPREHENSIVE
STOCK LOSS TOTAL
----------- ------------- -----------
Balance at January 1, 1999 ............. $ (386,465) $ (44,927) $ 1,715,940
Comprehensive income:
Net income ......................... 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 ............ (252) 8,808
Stock tendered in connection
with restricted stock grants ....... (1,368) (1,368)
Restricted stock grants
(net activity) ..................... 76
Stock acquired for trust ............... (1,327)
Cash dividends -- $.48 per share ....... (80,954)
----------- ----------- -----------
Balance at December 31, 1999 ........... (533,891) (145,624) 1,698,532
Comprehensive income:
Net income ......................... 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 ............ (365) 8,290
Restricted stock grants
(net activity) ..................... 3,181
Stock acquired for trust ............... (1,199)
Treasury stock transferred to trust .... 2,335
Cash dividends -- $.54 per share ....... (88,124)
----------- ----------- -----------
Balance at December 31, 2000 ........... (678,778) (163,609) 1,471,864
Comprehensive income:
Net income ......................... 263,158
Other comprehensive loss ........... (40,944) (40,944)
-----------
Comprehensive income ........... 222,214
Treasury stock purchased ............... (157,088) (157,088)
Issuance of preferred stock
to pre-fund ESOP ...................
Income tax effect of ESOP .............. 22,902
Redemption of preferred stock ..........
Stock issued (tendered)
for exercise of options ............ (532) 20,446
Stock tendered in connection
with restricted stock grants ....... (886) (886)
Restricted stock grants
(net activity) ..................... 1,131
Stock acquired for trust ............... (1,835)
Cash dividends -- $.58 per share ....... (90,984)
----------- ----------- -----------
Balance at December 31, 2001 ........... $ (837,284) $ (204,553) $ 1,487,764
=========== =========== ===========
</Table>
See notes to consolidated financial statements.
32
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 16.
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 $10,182, $15,913, and $21,093 at December
31, 2001, 2000, and 1999, 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. See Note 7 for the fair value of
interest rate swap contracts.
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
CARRYING FAIR Carrying Fair Carrying Fair
AMOUNT VALUE Amount Value Amount Value
-------- -------- -------- -------- -------- --------
Publicly traded debt ..... $603,762 $598,529 $613,709 $592,113 $726,017 $698,031
Non-traded debt .......... 13,184 12,571 19,886 17,752 15,889 14,792
</Table>
DERIVATIVE INSTRUMENTS: The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, effective
January 1, 2001 with no impact on the Company's results of operations,
liquidity or financial condition. 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's designated as a
hedge. The Company utilizes derivative instruments as part of its
overall financial risk management policy. The Company does not use
derivative instruments for speculative or trading purposes. The Company
entered into interest rate swap contracts during 2001 primarily to
hedge against interest rate risks. See Note 7. The Company also entered
into option and forward currency exchange contracts in 2001 primarily
to hedge against foreign currency risk exposure. See Note 4.
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 $13,771, $25,143,
and $15,860 at December 31, 2001, 2000, and 1999, 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 was 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
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." See Note 2. See Impact of recently issued
accounting standards below for information on SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
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
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
straight-line basis over the expected period of benefit ranging from 10 to 40
years for acquisitions prior to July 1, 2001. Accumulated amortization of
goodwill was $104,746, $84,827 and $107,365 at December 31, 2001, 2000, and
1999, respectively. See Note 2. The Company adopted SFAS No. 141, "Business
Combinations," which supersedes Accounting Principles Board Opinion (APBO) No.
16, as required on July 1, 2001. 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. The adoption of
this statement had no impact on the Company's results of operations, liquidity
or financial condition. See Impact of recently issued accounting standards below
for information on SFAS No. 142, "Goodwill and Other Intangible Assets."
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, net of writeoffs of fully
amortized intangible assets in 2001, was $87,897, $129,320, and $119,125 at
December 31, 2001, 2000, and 1999, 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:
<Table>
Buildings ....................... 2% - 6-2/3%
Machinery and equipment ......... 4% - 20%
Furniture and fixtures .......... 5% - 33-1/3%
Automobiles and trucks .......... 10% - 33-1/3%
</Table>
LETTERS OF CREDIT. The Company occasionally enters into standby letter
of credit agreements to guarantee various operating activities. These
agreements, which expire in 2002, provide credit availability to the various
beneficiaries if certain contractual events occur. Amounts outstanding under
these agreements totaled $14,400, $12,230, and $14,177 at December 31, 2001,
2000, and 1999, 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.
COMPREHENSIVE INCOME. Cumulative other comprehensive loss consisted
solely of foreign currency translation adjustments for all years presented.
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 $37,193, $33,927, and $27,200 for 2001, 2000, and 1999,
respectively.
ADVERTISING EXPENSES. The cost of advertising is expensed as incurred.
The Company incurred $236,259, $276,078, and $265,411 in advertising costs
during 2001, 2000, and 1999, 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 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. Shares of preferred stock held in an unallocated
account of the ESOP (see Note 10) and common stock held in a revocable trust
(see Note 11) are not considered outstanding shares for basic or diluted net
income per share calculations. All references to "shares or per share
information" throughout this report relate to common shares, unless otherwise
indicated. 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 net income or losses per share throughout this report are stated
on a diluted per share basis, unless otherwise indicated.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. During 2001, the FASB
issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes
APBO No. 17, "Intangible Assets." Goodwill and intangible assets deemed to
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
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 July 1, 2001. However, this statement was effective July
1, 2001 for all goodwill and intangible assets acquired after June 30, 2001. The
Company has adopted or will adopt SFAS No. 142 in the required periods.
Application of the non-amortization provisions of the statement is expected to
increase net income approximately $24.7 million for the full year 2002. Prior to
the end of the first and second quarters of 2002, the Company will perform the
required impairment tests of intangible assets deemed to have indefinite lives
and the first step in testing goodwill for impairment, respectively, as of
January 1, 2002. Management has not yet determined the effect on the Company's
results of operations, financial condition or liquidity of any potential
impairments resulting from such tests. Also during 2001, the FASB issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
supercedes SFAS No. 121 and parts of APBO No. 30. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. This statement retains many of
the fundamental provisions of SFAS No. 121 relating to assets to be held and
used, but excludes goodwill and intangible assets that are not amortized. This
statement also supercedes the accounting and reporting provisions for the
disposal of a segment of a business found in APBO No. 30. The Company will adopt
this statement as required, and management does not believe the adoption will
have a material effect on the Company's results of operations, financial
condition or liquidity.
RECLASSIFICATION. Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform with the 2001
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 purchases of the assets of Sunshine
Quality Products, Inc. and the Household and Professional Products Division of
Grow Group, Inc. Current 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.
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 with cost
determined principally on the last-in, first-out (LIFO) method which provides a
better matching of current costs and revenues. 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 method 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.
<Table>
<Caption>
2001 2000 1999
--------- --------- --------
Percentage of total inventories on LIFO ....... 88% 89% 90%
Excess of FIFO over LIFO ...................... $ 112,669 $ 110,124 $ 97,953
Decrease in net income due to LIFO ............ (1,567) (7,916) (894)
Decrease in net income per share due
to LIFO .................................... (.01) (.05) (.01)
</Table>
NOTE 4 - OTHER EXPENSE - NET
A summary of significant items included in Other expense - net is as follows:
<Table>
<Caption>
2001 2000 1999
--------- --------- --------
Dividend and royalty income ................... $ (3,922) $ (4,144) $ (4,692)
Net (income) expense of financing
and investing activities .................... (1,796) 10,926 7,084
Provisions for environmental
matters - net (see Note 9) .................. 5,609 15,402
Disposition and termination of
operations expense - net (see Note 5) ....... 7,304 6,968 3,830
Foreign currency related losses ............... 2,277 2,115 3,333
Other expense (income) ........................ 5,313 (1,112) 4,583
--------- --------- --------
$ 14,785 $ 14,753 $ 29,540
========= ========= ========
</Table>
The net (income) 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 pretax expense associated with the Company's investment in
broad-based corporate owned life insurance and other related fees.
Foreign currency related losses include foreign currency transaction
losses and realized and unrealized gains and losses from foreign currency option
and forward contracts. All foreign currency option and forward contracts
outstanding at December 31, 2001 have maturity dates of less than twelve months
and are undesignated hedges with value changes being recognized currently in
earnings in accordance with SFAS No. 133. These derivative instrument
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
values are included in either Other current assets or Other accruals on the
balance sheet and were immaterial at December 31, 2001. There were no foreign
currency option and forward contracts outstanding at December 31, 2000 and 1999.
NOTE 5 - DISPOSITION AND TERMINATION OF OPERATIONS
The Company is continually re-evaluating its operating facilities
against its long-term strategic goals. Upon commitment to a formal shutdown plan
of an operating facility, provisions are made for all estimated qualified exit
costs in accordance with Emerging Issues Task Force No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity" and other related accounting guidance. Qualified exit costs include
primarily post-closure rent expenses, incremental post-closure costs and costs
of employee terminations. Adjustments may be made to prior provisions for
qualified exit costs if information becomes available upon which more accurate
amounts can be reasonably estimated. Concurrently, property, plant and equipment
is tested for impairment in accordance with SFAS No. 121 and, if impairment
exists, carrying value is reduced to estimated net fair value. Adjustments may
be made for subsequent revisions in estimated net fair value, not to exceed
original asset carrying value before impairment.
During the fourth quarter of 2001, formal plans were approved to close
two manufacturing facilities in the Paint Stores and Consumer Segments. During
2000, two research centers in the Automotive Finishes Segment and a distribution
center in the Consumer Segment were closed. In 1999, two manufacturing
facilities and a leased warehouse were closed in the Consumer Segment. Qualified
exit costs were accrued and asset impairment charges recorded for all of these
facilities. The following table summarizes disposition and termination of
operations activities.
<Table>
<Caption>
2001 2000 1999
--------- --------- --------
QUALIFIED EXIT COSTS:
Beginning accruals - January 1 ............... $ 17,903 $ 20,772 $ 29,970
Provisions in Cost of goods sold ............. 4,400 1,055 3,810
Adjustments to prior provisions in
Other expense-net .......................... 902 2,249 2,521
Actual expenditures charged to accrual ....... (3,326) (6,173) (15,529)
--------- --------- --------
Ending accruals - December 31 ................ $ 19,879 $ 17,903 $ 20,772
========= ========= ========
IMPAIRMENT CHARGES-NET ON ASSETS
HELD FOR DISPOSAL INCLUDED IN
OTHER EXPENSE-NET ............................ $ 6,402 $ 4,719 $ 1,309
========= ========= ========
IMPACT ON NET INCOME RELATING TO
THE DISPOSITION AND TERMINATION
OF OPERATIONS:
Decrease in net income ..................... $ 7,608 $ 5,215 $ 4,966
========= ========= ========
Decrease in net income per share ........... $ 0.05 $ 0.03 $ 0.03
========= ========= ========
</Table>
Approximately 28 percent of the ending accrual for qualified exit costs at
December 31, 2001 related to facilities shutdown in 2001 and 2000. The majority
of expenditures related to these facilities are expected to be completed by the
end of 2003. The remaining portion of the ending accrual primarily represents
ongoing contractual expenses and post-closure demolition expenses related to
certain owned facilities that have been closed and are involved in ongoing
environmental-related activities. The Company cannot reasonably estimate when
such matters will be concluded.
NOTE 6 - PENSION AND OTHER BENEFITS
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 16,512, 16,811, and 16,081 active employees entitled
to receive benefits under these plans as of December 31, 2001, 2000, and 1999,
respectively. The cost of these benefits for active employees is recognized as
claims are incurred and amounted to $68,158, $58,782, and $52,640 for 2001,
2000, and 1999, 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 were $8,113, $7,410,
and $6,421 in 2001, 2000, and 1999, respectively.
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
was based on 5 percent of compensation for covered employees, was $35,991,
$33,043, and $31,512 in 2001, 2000, and 1999, respectively. Beginning January 1,
2002, the annual contribution increased to 6 percent of compensation for covered
employees (see Note 10 for information related to a reduction in other annual
contributions). Assets in employee accounts of the defined contribution pension
plan are invested in various mutual funds as directed by the participants. These
mutual funds do not own a significant number of shares of the Company's common
stock.
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 4,837,
4,855, and 4,831 retired employees entitled to receive benefits as of December
31, 2001, 2000, and 1999, respectively. The plans are unfunded.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
A summary of the obligation and assets of the defined benefit pension plan's
and postretirement health care and life insurance benefits is as follows:
<Table>
<Caption>
DEFINED BENEFIT PENSION PLANS OTHER POSTRETIREMENT BENEFITS
-------------------------------- ----------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- --------- --------- ---------
BENEFIT OBLIGATION:
Balance at beginning of year ................... $194,879 $170,632 $169,099 $ 247,936 $ 225,686 $217,627
Service cost ................................... 2,952 2,990 3,237 3,753 3,821 4,215
Interest cost .................................. 13,092 12,504 11,516 16,301 15,649 14,467
Actuarial loss (gain) .......................... 5,339 8,957 (1,106) 14,012 15,930 966
Plan amendments ................................ 875 738
Plan mergers ................................... 9,446
Other - net .................................... 202 208 181
Benefits paid .................................. (13,491) (10,596) (12,295) (14,884) (13,150) (11,589)
-------- -------- -------- --------- --------- ---------
Balance at end of year ......................... 203,848 194,879 170,632 267,118 247,936 225,686
PLAN ASSETS:
Balance at beginning of year ................... 554,454 523,453 492,384
Actual return on plan assets ................... (1,551) 25,534 44,859
Plan mergers ................................... 17,017
Other - net .................................... (1,420) (954) (1,495)
Benefits paid .................................. (13,491) (10,596) (12,295)
-------- -------- --------
Balance at end of year ......................... 537,992 554,454 523,453
EXCESS (DEFICIENCY) OF PLAN ASSETS
OVER BENEFIT OBLIGATION:
Balance at end of year ....................... 334,144 359,575 352,821 (267,118) (247,936) (225,686)
Unrecognized net asset ....................... (1,279)
Unrecognized actuarial loss (gain) ........... 56,734 2,080 (20,262) 51,134 37,752 21,993
Unrecognized prior service cost (credit) ..... 2,345 2,320 2,404 (8,879) (11,689) (14,498)
-------- -------- --------- --------- --------- --------
NET ASSET (LIABILITY) RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS .................... $393,223 $363,975 $333,684 $(224,863) $(221,873) $(218,191)
======== ======== ======== ========= ========= =========
NET ASSET (LIABILITY) RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS CONSISTS OF:
Prepaid benefit cost ......................... $393,587 $364,351 $334,094
Long-term accrued benefit liability .......... $(209,963) $(208,673) $(206,591)
Amount included in current liabilities ....... (364) (376) (410) (14,900) (13,200) (11,600)
-------- -------- -------- --------- --------- ---------
$393,223 $363,975 $333,684 $(224,863) $(221,873) $(218,191)
======== ======== ======== ========= ========= =========
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31:
Discount rate ................................ 6.75% 7.00% 7.25% 6.75% 7.00% 7.25%
Expected long-term rate of return
on assets .................................. 8.50% 8.50% 8.50%
Rate of compensation increase ................ 4.50% 5.00% 5.00%
Health care cost trend rate .................. 9.50% 6.00% 6.40%
NET PERIODIC BENEFIT (CREDIT) COST:
Service and interest cost .................... $ 16,044 $ 15,494 $ 14,753 $ 20,054 $ 19,470 $18,682
Net amortization and deferral ................ 943 (490) (699) (2,149) (2,814) (2,768)
Expected return on assets .................... (46,353) (44,633) (42,137)
-------- -------- -------- --------- --------- ---------
Net periodic benefit (credit) cost ........... $(29,366) $(29,629) $(28,083) $ 17,905 $ 16,656 $15,914
======== ======== ======== ========= ========= =========
</Table>
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
At December 31, 2001, defined benefit pension plan assets included
2,025,200 shares of the Company's common stock with a market value of $55,693,
which was 10.4 percent of total plan assets. Dividends received during the year
from Company stock was $1,246.
The assumed health care cost trend rate is 8.9 percent for 2002
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 plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects as of December 31, 2001:
<Table>
<Caption>
ONE-PERCENTAGE-POINT
------------------------
INCREASE (DECREASE)
---------- ----------
Effect on total of service and interest
cost components ................................... $ 611 $ (592)
Effect on the postretirement benefit
obligation ........................................ $ 8,889 $ (8,576)
</Table>
NOTE 7 - LONG-TERM DEBT
<Table>
<Caption>
Due Date 2001 2000 1999
-------- --------- --------- ---------
6.85% Notes ........................... 2007 $ 199,839 $ 199,807 $ 199,775
7.375% Debentures ..................... 2027 149,914 149,910 149,907
7.45% Debentures ...................... 2097 149,414 149,408 149,402
6.5% Notes ............................ 2002 99,989 99,978
9.875% Debentures ..................... 2016 1,500 11,500 15,900
5% to 8.5% Through
Promissory Notes .................... 2005 3,319 8,882 5,752
10.25% Promissory Note
partially secured by Through
land and building ................... 2003 1,108 1,179 1,243
--------- --------- ---------
Long-term debt before
SFAS No. 133
adjustments ......................... 505,094 620,675 621,957
Fair value adjustments
to 6.85% Notes in
accordance with
SFAS No. 133 ........................ (1,577)
--------- --------- ---------
$ 503,517 $ 620,675 $ 621,957
========= ========= =========
</Table>
Maturities of long-term debt are as follows for the next five years:
$111,852 in 2002; $4,087 in 2003; $125 in 2004; $215 in 2005, and zero in 2006.
Interest expense on long-term debt was $44,582, $46,569, and $55,415
for 2001, 2000, and 1999, respectively.
During 2001, the Company entered into four separate interest rate swap
contracts with a bank to hedge against changes in the fair value of a portion of
the Company's 6.85% Notes. Each interest rate swap contract had a notional
amount of $25,000. The Company has agreed to receive interest at a fixed rate of
6.85% and pay interest at six-month London Interbank Offered Rates plus points
that vary by contract. These contracts have been designated as perfect fair
value hedges of the 6.85% Notes. Accordingly, changes in the fair value of these
contracts are recorded as assets or liabilities and offset changes in the
carrying value of the 6.85% Notes. The fair value of the interest rate swap
contracts represents unrealized losses of $1,577 at December 31, 2001 and is
included in Other long-term liabilities on the balance sheet. The weighted
average interest rate on these contracts was 3.98% at December 31, 2001.
Management believes the risk of incurring losses related to credit risk of these
contracts is remote. There were no interest rate swap agreements outstanding at
December 31, 2000 and 1999.
The Company has 364-day and multi-year amended revolving credit
agreements. The current agreements with effective dates of December 28, 2001 and
January 3, 2001 reflect the following: 1) a 364-day agreement aggregating
$112,200 expiring on December 27, 2002; and 2) a multi-year 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.
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, 2001 and 1999, respectively. The Company uses the
revolving credit agreements to satisfy its commercial paper program's dollar for
dollar liquidity requirement. The aggregate maximum borrowing capacity under the
current revolving credit agreements as of December 28, 2001 limits the
commercial paper program to a maximum borrowing capability of $750,600.
On October 6, 1997, the Company issued $50,000 of debt securities
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, 2001 and 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, 2001, 2000, and
1999.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
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, 2001, 2000, and 1999.
NOTE 8 - OPERATING 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 $141,072, $130,552,
and $123,084 for 2001, 2000, and 1999, 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 $13,479, $12,423, and
$11,530 in 2001, 2000, and 1999, 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, 2001:
<Table>
2002 .............................. $ 104,275
2003 .............................. 85,430
2004 .............................. 68,735
2005 .............................. 51,987
2006 .............................. 33,771
Later years ....................... 81,530
---------
Total minimum lease payments ...... $ 425,728
=========
</Table>
NOTE 9 - OTHER LONG-TERM LIABILITIES
Included in Other long-term liabilities at December 31, 2001, 2000, and
1999 were accruals for extended environmental-related activities of $111,003,
$116,594 and $124,096, 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 Other 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 AND PREFERRED STOCK
As of December 31, 2001, 14,077 employees contributed to the Company's
Employee Stock Purchase and Savings Plan (ESOP). Participants in the ESOP were
allowed to contribute up to 11 percent of their annual compensation, up to 7
percent of which could be made on a pre-tax basis, to purchase common shares of
the Company or invest in a government fund. Employees making contributions to
purchase Company common stock received a matching contribution from the Company
of 50 percent of the employee's pre and post-tax contributions, up to a maximum
of 7 percent of their annual compensation, plus an additional variable match
based on the Company's return on equity (54 percent for the year ended 2001).
Beginning January 1, 2002, participants will be allowed to contribute, on a
pre-tax basis only, the lesser of 20 percent of their annual compensation or the
maximum dollar amount allowed under the Internal Revenue Code which may be
invested in a variety of mutual funds or Company common stock. The Company will
match such contributions up to 6 percent of annual compensation with Company
common stock (see Note 6 for information related to an increase in other annual
contributions). The ESOP was further amended to provide all participants the
ability to diversify prior employee investments in Company common stock into a
variety of mutual funds over a five year period. This right to diversify was
previously only available to participants fifty-five years of age and older. The
Company's contribution to the ESOP charged to operations was $33,744, $28,070,
and $36,535 for 2001, 2000, and 1999, respectively. Additionally, the Company
made contributions on behalf of participating employees, representing amounts
authorized by employees to be withheld from their earnings, of $27,374, $26,636,
and $22,581 in 2001, 2000, and 1999, respectively.
At December 31, 2001, there were 23,140,191 shares of the Company's
common stock being held by the ESOP, representing 15.0 percent of the total
number of voting
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
shares outstanding. Shares of Company common stock credited to each member's
account under the ESOP 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 ESOP, are voted by the trustee in the
same proportion as those for which instructions are received.
On April 18, 2001, the Company issued 250,000 shares of convertible
participating serial preferred stock, no par value with cumulative quarterly
dividends of ten dollars per share, for $250,000 to the ESOP. The ESOP financed
the acquisition of the preferred stock by borrowing $250,000 from the Company at
the rate of 8 percent 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 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 81,695 shares of preferred stock for cash in 2001.
NOTE 11 - CAPITAL STOCK
<Table>
<Caption>
Common Common
Shares Shares
in Treasury Outstanding
------------ -------------
Balance at January 1, 1999 .................... 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
SHARES TENDERED AS PAYMENT FOR
OPTIONS EXERCISED ......................... 19,995 (19,995)
SHARES ISSUED FOR EXERCISE
OF STOCK OPTIONS .......................... 1,031,486
SHARES TENDERED IN CONNECTION WITH
RESTRICTED STOCK GRANTS ................... 42,970 (42,970)
NET SHARES ISSUED UNDER
RESTRICTED STOCK GRANTS ................... 151,500
TREASURY STOCK PURCHASED .................... 6,700,000 (6,700,000)
------------ -------------
BALANCE AT DECEMBER 31, 2001 .................. 54,052,268 153,978,356
============ =============
</Table>
An aggregate of 17,964,052 shares, 19,184,038 shares, and 19,722,529 shares
of common stock at December 31, 2001, 2000 and 1999, respectively, were reserved
for future grants of restricted stock and the exercise and future grants of
stock options. Shares outstanding include 507,943 shares, 432,518 shares, and
215,150 shares of common stock held in a revocable trust at December 31, 2001,
2000, and 1999, respectively. At December 31, 2001, there were 300,000,000
shares of common stock and 30,000,000 shares of serial preferred stock
authorized for issuance. Of the authorized serial preferred stock, 3,000,000
shares 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 and 1,000,000
shares have been designated as convertible participating serial preferred stock
(see Note 10).
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
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.
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 116,000 and 120,400 during 2001 and 1999,
respectively. No shares of restricted stock vested during 2000. At December 31,
2001, there were 388,000 shares of restricted stock outstanding. Unamortized
deferred compensation expense with respect to the restricted stock grants
amounted to $5,691, $3,036, and $4,249 at December 31, 2001, 2000, and 1999,
respectively, and is being amortized over the four-year vesting period. Deferred
compensation expense aggregated $1,130, $3,180, and $77 in 2001, 2000, and 1999,
respectively. No stock appreciation rights have been granted.
A summary of restricted stock granted during 2001, 2000, and 1999 is as
follows:
<Table>
<Caption>
2001 2000 1999
---------- ------- --------
Shares granted ............................ 188,500 4,500 204,000
Weighted-average fair value of
restricted shares granted during year ... $ 25.72 $ 19.63 $ 23.77
</Table>
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:
<Table>
<Caption>
2001 2000 1999
------ ------- ------
Risk-free interest rate ........................ 4.00% 6.29% 5.34%
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 ................... 0.353 0.305 0.265
</Table>
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.
<Table>
<Caption>
2001 2000 1999
-------- -------- ---------
Pro forma net income ................ $253,892 $ 9,617 $ 297,107
Pro forma net income per share:
Basic ............................. $ 1.63 $ .06 $ 1.77
Diluted ........................... $ 1.62 $ .06 $ 1.76
</Table>
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
A summary of the Company's stock option activity and related
information for the years ended December 31, 2001, 2000 and 1999 is shown in the
following table:
<Table>
<Caption>
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONED EXERCISE OPTIONED EXERCISE OPTIONED EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------------- ------------- ------------- ------------- -------------
Outstanding beginning of year ..... 12,588,310 $ 22.47 10,724,653 $ 22.78 6,259,702 $ 22.89
Granted ........................... 3,070,700 24.29 2,820,900 19.75 5,292,350 22.33
Exercised ......................... (1,031,486) 17.26 (533,991) 12.02 (462,598) 15.36
Canceled .......................... (498,348) 24.10 (423,252) 24.62 (364,801) 27.69
------------- ------------- ------------- ------------- ------------- -------------
Outstanding end of year ........... 14,129,176 $ 23.19 12,588,310 $ 22.47 10,724,653 $ 22.78
============= ============= ============= ============= ============= =============
Exercisable at end of year ........ 7,681,476 $ 23.75 5,923,537 $ 23.31 3,971,139 $ 21.09
Weighted-average fair value of
options granted during year ..... $ 5.36 $ 4.72 $ 4.67
Reserved for future grants ........ 3,834,876 6,595,728 8,997,876
</Table>
Exercise prices for optioned shares outstanding as of December 31, 2001
ranged from $13.63 to $35.34. A summary of these options by range of exercise
prices is as follows:
<Table>
<Caption>
OUTSTANDING EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
RANGE OF OPTIONED EXERCISE CONTRACTUAL OPTIONED EXERCISE
EXERCISE PRICES SHARES PRICE LIFE (YEARS) SHARES PRICE
- --------------- ------------ ------------ ------------ ------------ ------------
< $19.00 529,065 $ 16.56 3.62 469,055 $ 16.38
$19.00 - $22.99 6,097,641 20.15 7.60 3,286,201 20.27
$23.00 - $28.99 5,919,720 25.24 8.12 2,367,491 26.31
> $28.99 1,582,750 29.43 6.18 1,558,729 29.43
------------ ------------ ------------ ------------ ------------
14,129,176 $ 23.19 7.46 7,681,476 $ 23.75
============ ============ ============ ============ ============
</Table>
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, 2001,
2000 and 1999 are as follows:
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Deferred tax assets:
Dispositions, environmental and
other similar items .............. $ 54,856 $ 55,220 $ 56,123
Other items (each less than 5%
of total assets) ................. 107,726 98,107 94,196
------------ ------------ ------------
Total deferred tax assets ..... $ 162,582 $ 153,327 $ 150,319
============ ============ ============
Deferred tax liabilities:
Depreciation and amortization ....... $ 49,164 $ 35,691 $ 66,374
Deferred employee benefit items ..... 58,535 50,333 42,785
------------ ------------ ------------
Total deferred tax liabilities ... $ 107,699 $ 86,024 $ 109,159
============ ============ ============
</Table>
Significant components of the provisions for income taxes are as
follows:
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Current:
Federal ................... $ 118,882 $ 125,393 $ 128,185
Foreign ................... 9,893 6,211 11,787
State and local ........... 16,839 22,662 25,116
------------ ------------ ------------
Total current .......... 145,614 154,266 165,088
Deferred:
Federal ................... 15,374 (27,386) 14,388
Foreign ................... (2,458) 6,213 3,851
State and local ........... 2,761 (5,713) 2,931
------------ ------------ ------------
Total deferred ......... 15,677 (26,886) 21,170
------------ ------------ ------------
Total income tax expense ..... $ 161,291 $ 127,380 $ 186,258
============ ============ ============
</Table>
Significant components of income before income taxes as used for income
tax purposes, are as follows:
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Domestic ........... $ 393,200 $ 90,412 $ 411,626
Foreign ............ 31,249 52,994 78,492
------------ ------------ ------------
$ 424,449 $ 143,406 $ 490,118
============ ============ ============
</Table>
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
A reconciliation of the statutory federal income tax rate and the
effective tax rate follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Statutory tax rate ......................... 35.0% 35.0% 35.0%
Effect of:
State and local taxes ................ 3.0 7.7 3.7
Investment vehicles .................. 1.3 (7.3) (1.5)
Impairment of long-lived assets ...... 51.0
Other - net .......................... (1.3) 2.5 0.8
-------- -------- --------
Effective tax rate ......................... 38.0% 88.9% 38.0%
======== ======== ========
</Table>
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 include 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 $11,473 of retained
earnings at December 31, 2001 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 $10,200, $9,082 and $16,211 at December 31, 2001, 2000, and 1999,
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)
<Table>
<Caption>
2001
- ------------------------------------------------------------------------------------------------------
NET INCOME NET INCOME
PER SHARE PER SHARE
QUARTER NET SALES GROSS PROFIT NET INCOME - BASIC - DILUTED
- ------- ------------ ------------ ------------ ------------ ------------
1st $ 1,158,370 $ 489,023 $ 36,924 $ .23 $ .23
2nd 1,407,514 608,537 90,480 .58 .58
3rd 1,366,768 601,039 90,321 .58 .58
4th 1,133,353 521,029 45,433 .29 .30
</Table>
Net income in the fourth quarter was decreased by $2,092 ($.01 per
share) due to certain year-end adjustments. Gross profit increased by $18 ($12
after-tax, no per share impact) as a result of physical inventory adjustments of
$4,418 ($2,872 after-tax, $.02 per share) offset by fourth quarter provisions
for qualified exit costs associated with certain facility closings of $4,400
($2,860 after-tax, $.02 per share). Selling and Administrative expenses
decreased $11,735 ($7,628 after-tax, $.05 per share) due to the reduction of
$10,368 ($6,739 after-tax, $.04 per share) in certain annual selling expenses
related to lower sales, and certain other adjustments of $1,367 ($889 after-tax,
$.01 per share). Other expense-net increased $14,972 ($9,732 after-tax, $.06 per
share) due primarily to the provisions for the estimated costs of
environmental-related matters at current, former and third party sites of $5,609
($3,645 after-tax, $.02 per share), impairment charges and adjustments to prior
provisions related to facility closings of $7,304 ($4,748 after-tax, $.03 per
share), and other year-end adjustments of $2,059 ($1,339 after-tax, $.01 per
share).
<Table>
<Caption>
2000
- ----------------------------------------------------------------------------------------------
NET INCOME NET INCOME
(LOSS) PER (LOSS) PER
NET INCOME SHARE - SHARE -
QUARTER NET SALES GROSS PROFIT (LOSS) BASIC 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)
</Table>
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 qualified exit costs associated with certain facility closings of $1,055
($686 after-tax, no per share 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 impairment charges and adjustments to prior provisions related to
facility closings of $6,968 ($4,529 after-tax, $.03 per share).
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
NOTE 15 - NET INCOME PER SHARE
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Basic
Average shares outstanding ..... 155,557,085 161,911,789 167,924,660
============ ============ ============
Net income ..................... $ 263,158 $ 16,026 $ 303,860
============ ============ ============
Net income per share ........... $ 1.69 $ .10 $ 1.81
============ ============ ============
Diluted
Average shares outstanding ..... 155,557,085 161,911,789 167,924,660
Non-vested restricted
stock grants ................ 321,500 279,300 263,567
Stock options -
treasury stock method ....... 1,014,950 503,982 838,069
------------ ------------ ------------
Average shares
assuming dilution ........... 156,893,535 162,695,071 169,026,296
============ ============ ============
Net income ..................... $ 263,158 $ 16,026 $ 303,860
============ ============ ============
Net income per share ........... $ 1.68 $ .10 $ 1.80
============ ============ ============
</Table>
NOTE 16 - 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 page 2 and pages 8 through 15 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, business 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 chief operating decision maker evaluates the performance of the 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 2,573 company-operated specialty
paint stores in the United States, Canada, Virgin Islands, Puerto Rico and
Mexico. Each division and business unit of the Segment is engaged in the related
business activity of selling the Company's own manufactured coatings and related
products to end-use customers. During 2001, this Segment opened or acquired 85
net new stores, remodeled 6 and relocated 38. The net new stores consisted of 83
stores in the United States, 2 in Canada, and 1 in Puerto Rico along with 1
closing in Mexico. In 2000, there were 92 net new stores opened or acquired (79
in the United States). In 1999, there were 73 net new stores opened (66 in the
United States). This Segment also manufactures original equipment manufacturer
(OEM) product finishes sold through certain shared or dedicated 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 page 18 of this report shows the number of
paint stores and their geographical location.
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 44 percent of the total sales of the Consumer
Segment in 2001, 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
124 company-operated automotive branches in the United States
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
and 17 in Canada. Additional automotive branches in Jamaica (14) and Chile (19)
complete this Segment's worldwide network. At December 31, 2001, this Segment
included 11 foreign wholly-owned subsidiaries in 8 foreign countries and 10
licensing agreements in 14 foreign countries. A map on page 18 of this report
shows the number of branches and their geographical location.
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 33 company-operated specialty paint stores in Chile and 19 in
Brazil, and by outside selling functions to dealers and other distributors. At
December 31, 2001, this Segment included 12 foreign wholly-owned subsidiaries in
8 foreign countries, 4 foreign joint ventures and 30 licensing agreements in 21
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 and foreign currency option and
forward contracts, certain expenses related to closed facilities 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 $504
million, $540 million, and $497 million for 2001, 2000, and 1999, respectively.
Operating profits of all consolidated foreign subsidiaries were $17 million, $32
million, and $70 million for 2001, 2000, and 1999, 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 $211 million,
$245 million, and $242 million at December 31, 2001, 2000, and 1999,
respectively. The consolidated total of long-lived assets for the Company was
$1,593 million, $1,687 million, and $2,026 million at December 31, 2001, 2000,
and 1999, 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, and headquarters property, plant and
equipment. 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.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of Dollars)
<Table>
<Caption>
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
NET EXTERNAL SALES
Paint Stores ................................... $ 3,206 $ 3,185 $ 3,002 $ 2,822 $ 2,639
Consumer ....................................... 1,109 1,219 1,224 1,282 1,409
Automotive Finishes ............................ 464 493 471 474 476
International Coatings ......................... 280 307 299 348 350
Administrative ................................. 7 8 8 8 7
-------- -------- -------- -------- --------
Consolidated totals ............................ $ 5,066 $ 5,212 $ 5,004 $ 4,934 $ 4,881
OPERATING PROFITS
Paint Stores ................................... $ 390 $ 411 $ 377 $ 347 $ 315
Consumer ....................................... 108 (210)* 155 125 167
Automotive Finishes ............................ 51 61 67 65 64
International Coatings ......................... 5 18 34 24 36
Administrative:
Interest expense ............................ (54) (60) (59) (70) (79)
Corporate expenses and other ................ (76) (77) (84) (51) (76)
-------- -------- -------- -------- --------
Income before income taxes ..................... $ 424 $ 143* $ 490 $ 440 $ 427
IDENTIFIABLE ASSETS
Paint Stores ................................... $ 954 $ 1,018 $ 930 $ 881 $ 832
Consumer ....................................... 1,296 1,360* 1,804 1,850 1,938
Automotive Finishes ............................ 329 349 279 275 274
International Coatings ......................... 261 298 294 356 312
Administrative ................................. 788 726 726 689 680
-------- -------- -------- -------- --------
Consolidated totals ............................ $ 3,628 $ 3,751* $ 4,033 $ 4,051 $ 4,036
CAPITAL EXPENDITURES
Paint Stores ................................... $ 36 $ 48 $ 49 $ 57 $ 56
Consumer ....................................... 18 40 40 37 57
Automotive Finishes ............................ 11 29 10 8 14
International Coatings ......................... 7 6 11 15 13
Administrative ................................. 11 10 24 29 24
-------- -------- -------- -------- --------
Consolidated totals ............................ $ 83 $ 133 $ 134 $ 146 $ 164
DEPRECIATION
Paint Stores ................................... $ 47 $ 45 $ 42 $ 38 $ 40
Consumer ....................................... 31 28 29 30 24
Automotive Finishes ............................ 9 9 8 8 7
International Coatings ......................... 6 6 6 6 6
Administrative ................................. 16 21 20 16 13
-------- -------- -------- -------- --------
Consolidated totals ............................ $ 109 $ 109 $ 105 $ 98 $ 90
OPERATING SEGMENT MARGINS
Paint Stores ................................... 12.1% 12.9% 12.5% 12.3% 11.9%
Consumer ....................................... 5.5% (10.1%)* 7.6% 6.1% 8.0%
Automotive Finishes ............................ 10.2% 11.5% 13.3% 12.8% 12.5%
International Coatings ......................... 1.8% 5.9% 11.4% 6.9% 10.2%
-------- -------- -------- -------- --------
Operating segment totals ....................... 9.3% 4.6%* 10.8% 9.8% 10.4%
INTERSEGMENT TRANSFERS
Paint Stores ................................... $ 9 $ 10 $ 8 $ 5
Consumer ....................................... 858 860 817 771 $ 666
Automotive Finishes ............................ 34 36 31 34 37
International Coatings ......................... 2
Administrative ................................. 9 11 12 11 9
-------- -------- -------- -------- --------
Segment totals ................................. $ 910 $ 917 $ 868 $ 821 $ 714
</Table>
* Includes charge and reduction in asset value of $352 in 2000 for impairment of
long-lived assets. See note 2.
46
DIRECTORS, OFFICERS, OPERATING PRESIDENTS
<Table>
BOARD OF DIRECTORS CORPORATE OFFICERS OPERATING PRESIDENTS
JAMES C. BOLAND, 62* CHRISTOPHER M. CONNOR, 45** THOMAS S. BRUMMETT, 56
President and Chief Executive Officer Chairman and Chief Executive Officer President & General Manager
CAVS/Gund Arena Company Eastern Division
JOSEPH M. SCAMINACE, 48** Paint Stores Group
JOHN G. BREEN, 67 President and Chief Operating Officer
Retired, former Chairman, Chief ROBERT J. DAVISSON, 41
Executive Officer and President SEAN P. HENNESSY, 44** President & General Manager
The Sherwin-Williams Company Senior Vice President - Finance, Southeastern Division
Treasurer and Chief Financial Paint Stores Group
DUANE E. COLLINS, 65 Officer
Chairman MICHAEL A. GALASSO, 54**
Parker-Hannifin Corporation THOMAS E. HOPKINS, 44** President & General Manager
Senior Vice President - Human International Division
CHRISTOPHER M. CONNOR, 45 Resources
Chairman and Chief Executive Officer TIMOTHY A. KNIGHT, 37
The Sherwin-Williams Company CONWAY G. IVY, 60** President & General Manager
Senior Vice President - Corporate Diversified Brands Division
DANIEL E. EVANS, 65 Planning and Development
Retired, former Chairman, Chief BLAIR P. LACOUR, 55
Executive Officer and Secretary JOHN L. AULT, 56** President & General Manager
Bob Evans Farms, Inc. Vice President - Corporate Controller Mid Western Division
Paint Stores Group
ROBERT W. MAHONEY, 65* CYNTHIA D. BROGAN, 50
Retired, former Chairman, Chief Vice President and JOHN G. MORIKIS, 38**
Executive Officer and President Assistant Treasurer President
Diebold, Incorporated Paint Stores Group
MARK J. DVOROZNAK, 43
GARY E. MCCULLOUGH, 43 Vice President - Corporate Audit and RONALD P. NANDOR, 42**
Senior Vice President - Americas Loss Prevention President & General Manager
Wm. Wrigley Jr. Company Automotive Division
JAMES J. SGAMBELLONE, 44
A. MALACHI MIXON, III, 61 Vice President - Taxes and Assistant STEVEN J. OBERFELD, 49
Chairman and Chief Executive Officer Secretary President & General Manager
Invacare Corporation South Western Division
LOUIS E. STELLATO, 51** Paint Stores Group
CURTIS E. MOLL, 62* Vice President, General Counsel and
Chairman and Chief Executive Officer Secretary HARVEY P. SASS, 44
MTD Products, Inc. President & General Manager
RICHARD M. WEAVER, 47 Wood Care Division
JOSEPH M. SCAMINACE, 48 Vice President - Administration
President and Chief Operating Officer THOMAS W. SEITZ, 53**
The Sherwin-Williams Company President & General Manager
Consumer Division
RICHARD K. SMUCKER, 53*
President and Co-Chief Executive ROBERT A. TAYLOR, 48
Officer President & General Manager
The J. M. Smucker Company Chemical Coatings Division
Paint Stores Group
</Table>
* Audit Committee Member
** Executive Officer as defined by the Securities Exchange Act of 1934
47
SHAREHOLDER INFORMATION
<Table>
ANNUAL MEETING FORM 10-K INDEPENDENT AUDITORS
The annual meeting of The Company's Annual Report Ernst & Young LLP
shareholders will be held at on Form 10-K, filed with the Cleveland, Ohio
9:00 A.M., April 24, 2002 in Securities and Exchange
the Landmark Conference Commission, is available STOCK TRADING
Center, 927 Midland Building, without charge. To obtain a Sherwin-Williams Common Stock -
101 Prospect Avenue, N.W., copy, contact the Investor Symbol, SHW - is traded on the
Cleveland, Ohio. Relations Office. New York Stock Exchange.
INVESTOR RELATIONS DIVIDEND REINVESTMENT TRANSFER AGENT &
Conway G. Ivy PROGRAM REGISTRAR
The Sherwin-Williams Company A dividend reinvestment The Bank of New York
101 Prospect Avenue, N.W. program is available to Shareholder Relations
Cleveland, Ohio 44115-1075 shareholders of common Department-11E
Internet: www.sherwin.com stock. For information, P.O. Box 11258
contact our transfer agent, Church Street Station
The Bank of New York. New York, NY 10286
1-866-537-8703
HEADQUARTERS E-mail address:
The Sherwin-Williams Company Shareowner-svcs@Email.bony.com
101 Prospect Avenue, N.W. Internet: www.stockbny.com
Cleveland, Ohio 44115-1075
(216) 566-2000
</Table>
COMMON STOCK TRADING STATISTICS
<Table>
<Caption>
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
High ....................................... $ 28.23 $ 27.625 $ 32.875 $ 37.875 $ 33.375
Low ........................................ 19.73 17.125 18.750 19.438 24.125
Close December 31 .......................... 27.50 26.313 21.000 29.375 27.750
Shareholders of record ..................... 10,281 10,813 11,475 11,929 11,964
Shares traded (thousands) .................. 162,219 158,349 161,118 128,942 98,855
</Table>
QUARTERLY STOCK PRICES AND DIVIDENDS
<Table>
<Caption>
2001 2000
- ------------------------------------------------------------ ------------------------------------------------------------
QUARTER HIGH LOW DIVIDEND QUARTER HIGH LOW DIVIDEND
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1st $ 27.25 $ 23.52 $ .145 1st $ 23.000 $ 17.125 $ .135
2nd 26.51 19.73 .145 2nd 27.625 21.172 .135
3rd 23.88 19.95 .145 3rd 24.625 19.875 .135
4th 28.23 21.27 .145 4th 26.563 18.875 .135
</Table>
48
[PHOTO]
[SHERWIN-WILLIAMS LOGO]
THE SHERWIN-WILLIAMS COMPANY
101 PROSPECT AVENUE, N.W.
CLEVELAND, OHIO 44115-1075
SHERWIN-WILLIAMS.COM