UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended March 31, 2002
--------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ______
Commission file number 1-4851
------
THE SHERWIN-WILLIAMS COMPANY
----------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0526850
- -------------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075
- -------------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(216) 566-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1.00 Par Value - 152,627,029 shares as of April 30, 2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thousands of dollars, except per share data
Three months ended March 31,
----------------------------
2002 2001
----------- -----------
Net sales $ 1,149,178 $ 1,158,370
Cost of goods sold 657,074 669,347
Gross profit 492,104 489,023
Percent to net sales 42.8% 42.2%
Selling, general and administrative expenses 422,186 421,659
Percent to net sales 36.7% 36.4%
Operating income 69,918 67,364
Percent to net sales 6.1% 5.8%
Interest expense 10,692 15,206
Interest and net investment income (789) (1,405)
Other expense - net 3,910 (5,046)
----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 56,105 58,609
Income taxes 21,320 21,685
----------- -----------
Income before cumulative effect
of change in accounting principle 34,785 36,924
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
----------- -----------
Net (loss) income $ (148,351) $ 36,924
=========== ===========
Income per share:
Basic:
Before cumulative effect of
change in accounting principle $ 0.23 $ 0.23
Cumulative effect of change in accounting
principle - net of income taxes (1.21)
----------- -----------
Net (loss) income $ (0.98) $ 0.23
=========== ===========
Diluted:
Before cumulative effect of
change in accounting principle $ 0.23 $ 0.23
Cumulative effect of change in accounting
principle - net of income taxes (1.21)
----------- -----------
Net (loss) income $ (0.98) $ 0.23
=========== ===========
See notes to condensed consolidated financial statements.
- 2 -
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
March 31, December 31, March 31,
2002 2001 2001
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 19,333 $ 118,814 $ 1,151
Accounts receivable, less allowance 597,862 523,278 637,304
Inventories:
Finished goods 564,802 530,916 610,248
Work in process and raw materials 87,932 101,847 99,527
----------- ----------- -----------
652,734 632,763 709,775
Deferred income taxes 109,267 104,672 104,728
Other current assets 149,055 127,418 174,048
----------- ----------- -----------
Total current assets 1,528,251 1,506,945 1,627,006
Goodwill 562,253 672,397 697,966
Intangible assets 188,659 304,506 306,980
Deferred pension assets 400,105 393,587 371,495
Other assets 102,357 77,802 105,889
Property, plant and equipment 1,539,019 1,564,636 1,536,364
Less allowances for depreciation 886,748 891,948 825,132
----------- ----------- -----------
652,271 672,688 711,232
----------- ----------- -----------
Total assets $ 3,433,896 $ 3,627,925 $ 3,820,568
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 219,844 $ 360,868
Accounts payable 469,802 $ 454,410 462,131
Compensation and taxes withheld 91,165 141,640 89,150
Current portion of long-term debt 12,280 111,852 111,851
Other accruals 296,787 326,854 268,884
Accrued taxes 108,561 106,597 88,103
----------- ----------- -----------
Total current liabilities 1,198,439 1,141,353 1,380,987
Long-term debt 503,528 503,517 519,193
Postretirement benefits other than pensions 211,252 209,963 209,836
Other long-term liabilities 242,546 285,328 260,462
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
128,481 and 168,305 shares outstanding at
March 31, 2002 and December 31, 2001, respectively 128,481 168,305
Unearned ESOP compensation (128,481) (168,305)
Common stock - $1.00 par value:
152,218,327, 153,978,356 and 158,589,049 shares
outstanding at March 31, 2002, December 31, 2001
and March 31, 2001, respectively 208,544 208,031 207,378
Other capital 211,235 200,643 163,670
Retained earnings 1,949,691 2,120,927 1,962,476
Treasury stock, at cost (884,969) (837,284) (716,652)
Cumulative other comprehensive loss (206,370) (204,553) (166,782)
----------- ----------- -----------
Total shareholders' equity 1,278,131 1,487,764 1,450,090
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,433,896 $ 3,627,925 $ 3,820,568
=========== =========== ===========
See notes to condensed consolidated financial statements.
- 3 -
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Three months ended March 31,
----------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net (loss) income $(148,351) $ 36,924
Adjustments to reconcile net (loss) income to net operating cash:
Cumulative effect of change in accounting principle 183,136
Depreciation 25,280 26,556
Amortization of goodwill, intangibles, and other assets 2,739 9,772
Increase in deferred pension assets (6,518) (7,144)
Net increase in postretirement liability 1,289 1,163
Other 10,431 40
Change in current assets and liabilities-net (180,815) (126,109)
Unusual tax-related payments and timing items (105,093)
Other 1,611 (3,570)
--------- ---------
Net operating cash (111,198) (167,461)
INVESTING ACTIVITIES
Capital expenditures (18,365) (22,612)
Acquisitions of businesses (27,405)
Increase in other investments (12,924) (9,580)
Proceeds from sale of assets 11,001 9,866
Other (3,338) (3,791)
--------- ---------
Net investing cash (51,031) (26,117)
FINANCING ACTIVITIES
Net increase in short-term borrowings 219,844 254,014
Increase in long-term debt 2,000 436
Payments of long-term debt (100,629) (6,135)
Payments of cash dividends (22,885) (23,200)
Proceeds from stock options exercised 10,432 5,195
Treasury stock purchased (47,685) (37,874)
Other 147 (238)
--------- ---------
Net financing cash 61,224 192,198
--------- ---------
Effect of exchange rate changes on cash 1,524 (365)
--------- ---------
Net decrease in cash and cash equivalents (99,481) (1,745)
Cash and cash equivalents at beginning of year 118,814 2,896
--------- ---------
Cash and cash equivalents at end of period $ 19,333 $ 1,151
========= =========
Income taxes paid $ 22,597 $ 5,281
Interest paid 21,979 25,474
See notes to condensed consolidated financial statements.
- 4 -
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended March 31, 2002 and 2001
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the fiscal year ended December
31, 2001. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The consolidated results for the three months ended March 31, 2002 are
not necessarily indicative of the results to be expected for the fiscal year
ending December 31, 2002.
NOTE B--DIVIDENDS
Dividends paid on common stock during the first quarter of 2002 and 2001 were
$.15 per share and $.145 per share, respectively.
NOTE C--OTHER EXPENSE - NET
Significant items included in Other expense - net are as follows:
(Thousands of dollars) Three months ended March 31,
----------------------------
2002 2001
------- -------
Dividend and royalty income $ (958) $(1,255)
Net expense (income) from financing
and investing activities 1,713 (5,101)
Foreign currency related losses 3,584 587
The net expense (income) from financing and investing activities represents the
realized gains or losses associated with disposing of fixed assets, the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance and other related fees.
NOTE D--COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
(Thousands of dollars) Three months ended March 31,
----------------------------
2002 2001
--------- ---------
Net (loss) income $(148,351) $ 36,924
Foreign currency translation adjustments (1,817) (3,173)
--------- ---------
Comprehensive (loss) income $(150,168) $ 33,751
========= =========
NOTE E--RECLASSIFICATION
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 presentation.
-5-
NOTE F--INCOME PER COMMON SHARE
Three months ended March 31,
---------------------------------
(Thousands of dollars, except per share data) 2002 2001
------------- -------------
Income before cumulative effect
of change in accounting principle $ 34,785 $ 36,924
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
------------- -------------
Net (loss) income $ (148,351) $ 36,924
============= =============
Basic
Average common shares outstanding 151,693,590 158,422,735
============= =============
Income per common share:
Income before cumulative effect
of change in accounting principle $ 0.23 $ 0.23
Cumulative effect of change in accounting principle (1.21)
------------- -------------
Net (loss) income $ (0.98) $ 0.23
============= =============
Diluted
Average common shares outstanding 151,693,590 158,422,735
Non-vested restricted stock grants 375,600
Stock options - treasury stock method 1,365,498
------------- -------------
Average common shares assuming dilution 151,693,590 160,163,833
============= =============
Income per common share:
Income before cumulative effect
of change in accounting principle $ 0.23 $ 0.23
Cumulative effect of change in accounting principle (1.21)
------------- -------------
Net (loss) income $ (0.98) $ 0.23
============= =============
-6-
NOTE G--REPORTABLE SEGMENT INFORMATION
The Company reports segment information in the same way that management
internally organizes its business for assessing performance and making decisions
regarding allocation of resources in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Net External Sales/Operating Profit
- -----------------------------------
Three months ended March 31,
--------------------------------------------------------
2002 2001
------------------------- -------------------------
(Thousands of dollars) Net Segment Net Segment
External Operating External Operating
Sales Profit Sales Profit
---------- ---------- ---------- ----------
Paint Stores $ 695,898 $ 40,068 $ 693,413 $ 46,881
Consumer 278,779 43,156 277,882 25,399
Automotive Finishes 111,559 11,427 115,826 11,557
International Coatings 61,416 (8,533) 69,483 4,338
Administrative 1,526 (30,013) 1,766 (29,566)
---------- ---------- ---------- ----------
Consolidated totals $1,149,178 $ 56,105 $1,158,370 $ 58,609
========== ========== ========== ==========
Intersegment Transfers
- ----------------------
Three months ended March 31,
----------------------------
(Thousands of dollars) 2002 2001
-------- --------
Paint Stores $ 413 $ 178
Consumer 209,918 196,194
Automotive Finishes 5,456 8,311
International Coatings 291 403
Administrative 1,045 2,652
-------- --------
Segment totals $217,123 $207,738
======== ========
Segment operating profit is total revenue, including intersegment transfers,
less operating costs and expenses. Domestic intersegment transfers are accounted
for at the approximate fully absorbed manufactured cost plus distribution costs.
International intersegment transfers are accounted for at values comparable to
normal unaffiliated customer sales. The Administrative Segment's expenses
include interest which is unrelated to certain financing activities of the
Operating Segments, certain foreign currency transaction losses related to
dollar-denominated debt and other financing activities, and other adjustments.
Net external sales and operating profits of all consolidated foreign
subsidiaries were $120.7 million and $0.9 million, respectively, for the first
quarter of 2002, and $128.6 million and $7.7 million, respectively, for the
first quarter of 2001. Long-lived assets of these subsidiaries totaled $111.8
million and $236.9 million, respectively, at March 31, 2002 and 2001. Domestic
operations account for the remaining net external sales, operating profits and
long-lived assets. The Administrative Segment's expenses do not include any
significant foreign operations. No single geographic area outside the United
States was significant relative to consolidated net external sales or
consolidated long-lived assets.
Export sales and sales to any individual customer were each less than 10% of
consolidated sales to unaffiliated customers during all periods presented.
- 7 -
NOTE H--CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Goodwill and intangible assets deemed to have
indefinite lives are no longer being amortized but are subject to impairment
tests in accordance with SFAS No. 142. Excluding such amortization expense of
$6,126 from first quarter 2001 net income to be comparable with 2002, diluted
net income per common share in the first quarter 2001 would have been $.27 per
share.
During the first quarter 2002, the Company recognized a transitional impairment
charge of $247,612 ($183,136 after tax or $1.21 per share) as the cumulative
effect of a change in accounting principle to reduce the carrying values of
certain indefinite lived intangible assets and goodwill to estimated fair values
as required by SFAS No. 142. Impairment of indefinite lived intangible assets
amounted to $118,220 ($77,422 after tax or $.51 per share) and impairment of
goodwill amounted to $129,392 ($105,714 after tax or $.70 per share). The
impairment of indefinite lived intangible assets was due primarily to a
shortfall in sales from levels anticipated at the time of acquisition and
related principally to trademarks in the Consumer Segment associated with the
acquisition of Thompson Minwax Holding Corp. In addition, certain trademarks in
the International Coatings Segment were impaired. The impairment of goodwill
relates primarily to international operations in the International Coatings and
Automotive Finishes Segments. Weakening foreign currency exchange rates and
economic conditions, particularly in South America, have negatively impacted
profit and cash flow in U.S. dollars. Fair values of indefinite lived intangible
assets and goodwill were estimated using a discounted cash flow valuation model,
incorporating a discount rate commensurate with the risks involved for each
group of assets.
SFAS No. 142 also requires a complete review of useful life and classification
of all intangible and other assets. As a result, certain assets were
reclassified from Other assets to Intangible assets on all balance sheets
presented in the accompanying financial statements.
A summary of changes in the Company's goodwill during the quarter by reportable
operating segment is as follows:
Goodwill
---------------------------------------------------------------------
January 1, Other March 31,
2002 Acquisitions Impairments Adjustments 2002
--------- ------------ ----------- ----------- -----------
Paint Stores $ 81,886 $ 15,989 $ (5,388) $ (6) $ 92,481
Consumer 450,054 (16,571) 744 434,227
Automotive Finishes 49,631 1,417 (19,009) 1,364 33,403
International Coatings 90,826 (88,424) (260) 2,142
--------- --------- --------- --------- ---------
Consolidated totals $ 672,397 $ 17,406 $(129,392) $ 1,842 $ 562,253
========= ========= ========= ========= =========
- 8 -
The Company's intangible assets and related accumulated amortization is as
follows:
<Table>
<Caption>
Intangible assets subject to
amortization Trademarks Total
----------------------------------- with indefinite Intangible
Software All other Subtotal lives assets
--------- --------- --------- --------------- ----------
March 31, 2001
- --------------
Gross $ 59,287 $ 123,237 $ 182,524
Accumulated amortization (7,590) (103,693) (111,283)
--------- --------- --------- --------- ---------
Net value 51,697 19,544 71,241 $ 235,739 $ 306,980
========= ========= ========= ========= =========
December 31, 2001
- -----------------
Gross 68,917 71,083 140,000
Accumulated amortization (11,900) (53,775) (65,675)
--------- --------- --------- --------- ---------
Net value 57,017 17,308 74,325 230,181 304,506
========= ========= ========= ========= =========
March 31, 2002
- --------------
Gross 72,857 74,248 147,105
Accumulated amortization (13,498) (56,514) (70,012)
--------- --------- --------- --------- ---------
Net value $ 59,359 $ 17,734 $ 77,093 $ 111,566 $ 188,659
========= ========= ========= ========= =========
Certain fully amortized intangible assets were written-off during the
quarter-ended December 31, 2001. Based on the current amount of intangible
assets subject to amortization, the estimated amortization expense for each of
the succeeding 5 years would be $11.6 million for 2002, $11.4 million for 2003,
$11.3 million for 2004, $9.6 million for 2005, and $8.0 million for 2006.
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACCOUNTING POLICIES AND 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. The Company bases
these estimates on historical results and various other assumptions believed to
be reasonable, the results of which form the basis for making estimates
concerning the carrying values of assets and liabilities that are not readily
available from other sources. Actual results could differ from those estimates.
The Company's significant accounting policies are disclosed in Note 1 of Notes
to Consolidated Financial Statements in the Company's 2001 Annual Report.
Management believes the following accounting policies affect the more
significant estimates used in preparing the consolidated financial statements.
SFAS No. 142 requires that goodwill and intangible assets deemed to have
indefinite lives no longer be amortized but are subject to impairment tests.
Management's judgement was used in determining which intangible assets had
indefinite lives as well as determining the useful lives of remaining intangible
assets. In accordance with SFAS No. 142 transitional impairment tests, fair
values of indefinite lived intangible assets and goodwill were estimated using a
discounted cash flow valuation model, incorporating a discount rate commensurate
with the risks involved for each group of assets. Growth models were developed
using both historical results and industry forecasts.
Inventories are stated at the lower of cost or market with cost determined
principally on the last-in, first-out (LIFO) method. Management records
reductions to inventory cost based on historical experience and expected trends
for obsolete and discontinued inventories. Management also records an allowance
for doubtful accounts receivable based on historical experience and expected
trends. Property, plant and equipment is stated on the basis of cost and
depreciated principally on a straight-line method using industry standards and
historical experience to estimate useful lives.
Defined benefit pension plans and postretirement health care and life insurance
benefits require estimating the cost of benefits to be provided well into the
future and attributing that cost to the time period each covered employee works.
To record these net assets and obligations, management uses estimates relating
to assumed inflation, investment returns, mortality, employee turnover, rate of
compensation increases, medical costs and discount rates. Management along with
third-party actuaries review all of these assumptions on an ongoing basis to
ensure that the most recent information available is being considered.
- 10 -
The Company is self-insured for certain liabilities relating to worker's
compensation, employee benefits and other property and general liability claims.
Self-insurance claims filed and claims incurred but not reported are accrued
based upon management's estimates of the aggregate liability for uninsured
claims incurred using actuarial assumptions followed in the insurance industry
and historical experience.
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 based on industry
standards and historical experience. 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.
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 EITF 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.
Estimates of such costs are determined by contractual agreement or estimated by
management based on historical experience. Concurrently, property, plant and
equipment is tested for impairment in accordance with SFAS No. 144 and, if
impairment exists, carrying value is reduced to estimated net fair value using a
cash flow valuation model incorporating a discount rate commensurate with the
risks involved for each group of assets.
RESULTS OF OPERATIONS
Consolidated net sales for the quarter decreased 0.8 percent to $1.15 billion
from $1.16 billion in the first quarter of 2001. Poor economic conditions in
South America, weakening currency exchange rates in Argentina and Brazil and a
continuing sluggish domestic industrial sector impacted sales. Net sales in the
Paint Stores Segment increased 0.4 percent to $695.9 million in the first
quarter of 2002 from $693.4 million in 2001 due primarily to strong
architectural paint sales that were partially offset by weak industrial
maintenance and product finishes sales. Architectural paint sales to painting
contractors and do-it-yourself customers were higher in 2002 compared to the
first quarter of 2001. Comparable-store sales declined 0.5 percent in the
quarter. Net sales of the Consumer Segment increased 0.3 percent to $278.8
million in the first quarter from $277.9 million last year. Increased sales of
certain products to existing customers were essentially offset by a shortfall in
sales in the Cleaning Solutions Business Unit. The Automotive Finishes Segment's
net sales decreased 3.7 percent to $111.6 million in the first quarter from
$115.8 million last year. The slowly recovering domestic economy continued to
curtail this Segment's OEM sales and a mild winter restrained growth in
collision repair sales. Net sales in the International Coatings Segment were
down $8.1 million to $61.4 million in the
- 11 -
first three months of 2002 from $69.5 million a year ago. The sales decrease in
U.S. dollars of 11.6 percent was due primarily to unfavorable currency exchange
rates in the Brazilian real and Argentine peso. Excluding the effects of
currency exchange fluctuations relative to last year, net sales for the Segment
increased 2.6 percent for the quarter and gallon sales were up slightly.
Consolidated gross profit as a percent of sales for the first quarter 2002
increased to 42.8 percent from 42.2 percent in the first quarter of 2001. First
quarter margins in the Paint Stores and Consumer Segments were higher than last
year primarily due to lower raw material, distribution and energy costs. In
addition, the Paint Stores Segment had favorable product sales mix from higher
architectural paint sales and lower industrial maintenance and product finishes
sales. The Automotive Finishes Segment's lower production volumes and related
manufacturing absorption caused margins to decline in the first quarter of 2002
and were only partially offset by moderating raw material, distribution and
energy costs compared to last year. The International Coatings Segment's margins
were lower than last year due primarily to an impairment charge of $9.0 million
for property, plant and equipment in Argentina in accordance with SFAS No. 144.
Higher raw material costs purchased on a U.S. dollar denominated basis with
weaker local currencies, particularly in South America, also negatively impacted
this Segment's margins.
Consolidated selling, general and administrative expenses as a percent of sales
were unfavorable to last year for the first quarter primarily due to lower sales
and higher SG&A expenses. In the Paint Stores Segment, SG&A expenses as a
percent of sales were unfavorable to last year, primarily due to costs incurred
to launch a new color system, including an exclusive licensed color palette, and
incremental increases in expenses associated with the increased number of
stores. The Consumer Segment's SG&A ratio was favorable to last year in the
first quarter primarily due to higher sales and tighter expense control. First
quarter SG&A expenses as a percent of sales were unfavorable in the Automotive
Finishes and International Coatings Segments primarily due to lower sales.
Decreased interest expense in the first quarter of 2002 versus 2001 occurred due
to lower average outstanding short-term and long-term debt and lower average
short-term borrowing rates.
Other expense - net for the first quarter of 2002 was expense versus income for
the first quarter of 2001 primarily due to increased foreign currency related
losses in 2002 and non-recurring gains realized from the sale of certain assets
in 2001.
In the first quarter of 2002, income before cumulative effect of change in
accounting principle declined $2.1 million, or 5.8 percent, to $34.8 million
from $36.9 million in 2001. Diluted income per share before cumulative effect of
change in accounting principle for the quarter was $.23 per share compared to
$.23 per share in 2001. Excluding amortization expense of indefinite lived
intangible assets and goodwill in 2001 to be comparable with 2002, diluted
income per share before the accounting change would have been $.27 per share for
the first quarter of 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with the requirements of that pronouncement,
indefinite lived intangible assets and goodwill were reviewed for possible
impairment. Due to the reduction in fair value of certain acquired trademarks
and businesses, related principally to international acquisitions and
- 12 -
the acquisition of Thompson Minwax Holding Corp., the Company recorded an
after-tax transitional impairment charge of $183.1 million, or $1.21 per share,
in the first quarter. The transitional impairment charge was recorded as a
cumulative effect of change in accounting principle in accordance with SFAS No.
142. The net loss after cumulative effect of change in accounting principle was
$148.4 million in the quarter, or $.98 per share.
FINANCIAL CONDITION
Cash and cash equivalents decreased $99.5 million during the first three months
of 2002, primarily as a result of a maturity payment on long-term debt of $100.0
million. Cash used by operating activities of $111.2 million was impacted by
normal seasonably higher working capital balances. During the first three months
of 2002, short-term borrowings increased $219.8 million. Short-term borrowings
primarily relate to the Company's commercial paper program, which had unused
borrowing availability of $530.8 million at March 31, 2002. This program is
backed by the Company's revolving credit agreements. The proceeds from the
issuance of short-term borrowings were used for normal seasonal operating needs,
acquisition of businesses of $27.4 million, capital expenditures of $18.4
million, treasury shares acquired of $47.7 million, and cash dividends of $22.9
million. The Company's current ratio declined to 1.28 from 1.32 at December 31,
2001. The decrease in this ratio occurred primarily due to the increased
short-term borrowings.
Since March 31, 2001, cash and cash equivalents increased $18.2 million
primarily due to cash generated by operations of $617.9 million offset by net
increases in short-term borrowings and long-term debt of $250.2 million, capital
expenditures of $78.3 million, treasury shares acquired of $166.9 million,
payments of cash dividends of $90.7 million, and acquisitions of businesses of
$42.6 million. The Company expects to remain in a short-term borrowing position
throughout most of 2002.
Capital expenditures during the first quarter of 2002 represented primarily the
costs associated with new store openings and normal equipment replacement in the
Paint Stores Segment, and new or upgraded information systems hardware in the
Administrative and other Segments. We do not anticipate the need for any
specific external financing to support our capital programs during the remainder
of 2002.
During the first quarter of 2002, the Company purchased 1,762,800 shares of its
common stock for treasury purposes. The Company acquires shares of its common
stock for general corporate purposes and, depending upon its cash position and
market conditions, the Company may acquire additional shares of its common stock
in the future. The Company had remaining authorization at March 31, 2002 to
purchase approximately 15.2 million shares of its common stock.
The Company's past operations included the manufacture and sale of lead pigments
and lead-based paints. The Company, along with other companies, is a defendant
in a number of legal proceedings, including purported class actions, separate
actions brought by the State of Rhode Island, and actions brought by various
counties, cities, school districts and other government-
- 13 -
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 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.
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
- 14 -
and/or operated by businesses acquired by the Company). The Company, together
with other parties, has also been designated a potentially responsible party
under federal and state environmental protection laws for the investigation and
remediation of environmental contamination and hazardous waste at a number of
third-party sites, primarily Superfund sites. The Company may be similarly
designated with respect to additional third-party sites in the future.
The Company accrues for environmental-related activities relating to its past
operations and third-party sites, including Superfund sites, for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. These estimated costs are determined based on currently
available facts regarding each site. The Company continuously assesses its
potential liability for investigation and remediation-related activities and
adjusts its environmental-related accruals as information becomes available upon
which more accurate costs can be reasonably estimated and as additional
accounting guidelines are issued which require changing the estimated costs or
the procedure utilized in estimating such costs. Actual costs incurred may vary
from these estimates due to the inherent uncertainties involved including, among
others, the number and financial condition of parties involved with respect to
any given site, the volumetric contribution which may be attributed to the
Company relative to that attributed to other parties, the nature and magnitude
of the wastes involved, the various technologies that can be used for
remediation and the determination of acceptable remediation with respect to a
particular site. The Company's environmental-related 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 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
- 15 -
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based upon management's current
expectations, estimates, assumptions and beliefs concerning future events and
conditions and may discuss, among other things, anticipated future performance
(including sales and earnings), expected growth and future business plans. Any
statement that is not historical in nature is a forward-looking statement and
may be identified by the use of words and phrases such as "expects,"
"anticipates," "believes," "will," "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 and from the Company's historical results and experience.
These risks, uncertainties and other factors include such things as: (a) general
business conditions, strengths of retail and manufacturing economies and the
growth in the coatings industry; (b) competitive factors, including pricing
pressures and product innovation and quality; (c) changes in raw material
availability and pricing; (d) changes in the Company's relationships with
customers and suppliers; (e) the ability of the Company to attain cost savings
from productivity initiatives; (f) 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; (g) the ability of the Company to
successfully complete planned divestitures; (h) changes in general domestic
economic conditions such as inflation rates, interest rates and tax rates; (i)
risks and uncertainties associated with the Company's expansion into and its
operations in South America and other foreign markets, including inflation
rates, recessions, foreign currency exchange rates, foreign investment and
repatriation restrictions, unrest and other external economic and political
factors; (j) the achievement of growth in developing markets, such as Mexico and
South America; (k) increasingly stringent domestic and foreign governmental
regulations including those affecting the environment; (l) inherent
uncertainties involved in assessing the Company's potential liability for
environmental remediation-related activities; (m)
- 16 -
other changes in governmental policies, laws and regulations, including changes
in accounting policies and standards and taxation requirements (such as new tax
laws and new or revised tax law interpretations); (n) 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 (o) unusual weather
conditions.
Readers are cautioned that it is not possible to predict or identify all of the
risks, uncertainties and other factors that may affect future results and that
the above list should not be considered to be a complete list. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
- 17 -
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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. 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. 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. There were no material changes in the
Company's exposure to market risk since December 31, 2001.
- 18 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
(10)(a) The Sherwin-Williams Company 2003 Stock Plan (filed
herewith).
(b) Reports on Form 8-K - The Company filed a Current Report on
Form 8-K, dated March 21, 2002, reporting under Item 5 that the Company
issued a press release regarding its earnings expectations for the
first quarter of 2002 and the full year 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SHERWIN-WILLIAMS COMPANY
May 15, 2002 By: /s/ J.L. Ault
--------------------------------
J.L. Ault
Vice President-Corporate Controller
May 15, 2002 By: /s/ L.E. Stellato
--------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
- 19 -
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBIT
- ----------- -------
(10)(a) The Sherwin-Williams Company 2003 Stock Plan (filed herewith).
- 20 -