UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended June 30, 2002
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
Commission file number 1-4851
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THE SHERWIN-WILLIAMS COMPANY
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(Exact name of registrant as specified in its charter)
OHIO 34-0526850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075
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(Address of principal executive offices) (Zip Code)
(216) 566-2000
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 - 150,505,911 shares as of July 31, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (UNAUDITED)
Thousands of dollars, except per share data
Three months ended June 30, Six months ended June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 1,453,198 $ 1,407,514 $ 2,602,376 $ 2,565,884
Cost of goods sold 801,388 798,977 1,458,462 1,468,324
Gross profit 651,810 608,537 1,143,914 1,097,560
Percent to net sales 44.9% 43.2% 44.0% 42.8%
Selling, general and administrative expenses 465,517 444,377 887,703 866,036
Percent to net sales 32.0% 31.6% 34.1% 33.8%
Operating income 186,293 164,160 256,211 231,524
Percent to net sales 12.8% 11.7% 9.8% 9.0%
Interest expense 10,127 15,471 20,818 30,677
Interest and net investment income (951) (1,083) (1,740) (2,488)
Other expense - net 3,688 6,153 7,600 1,107
----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 173,429 143,619 229,533 202,228
Income taxes 65,903 53,139 87,223 74,824
----------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting principle 107,526 90,480 142,310 127,404
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
----------- ----------- ----------- -----------
Net income (loss) $ 107,526 $ 90,480 $ (40,826) $ 127,404
=========== =========== =========== ===========
Income (loss) per share:
Basic:
Before cumulative effect of
change in accounting principle $ 0.71 $ 0.58 $ 0.94 $ 0.81
Cumulative effect of change in accounting
principle - net of income taxes (1.21)
----------- ----------- ----------- -----------
Net income (loss) $ 0.71 $ 0.58 $ (0.27) $ 0.81
=========== =========== =========== ===========
Diluted:
Before cumulative effect of
change in accounting principle $ 0.70 $ 0.58 $ 0.93 $ 0.80
Cumulative effect of change in accounting
principle - net of income taxes (1.20)
----------- ----------- ----------- -----------
Net income (loss) $ 0.70 $ 0.58 $ (0.27) $ 0.80
=========== =========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
JUNE 30, December 31, June 30,
2002 2001 2001
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 11,503 $ 118,814 $ 13,377
Accounts receivable, less allowance 687,259 523,278 711,601
Inventories:
Finished goods 529,258 530,916 552,278
Work in process and raw materials 83,113 101,847 94,892
----------- ----------- -----------
612,371 632,763 647,170
Deferred income taxes 108,124 104,672 104,958
Other current assets 131,678 127,418 155,050
----------- ----------- -----------
Total current assets 1,550,935 1,506,945 1,632,156
Goodwill 555,799 672,397 682,777
Intangible assets 197,409 304,506 304,551
Deferred pension assets 406,942 393,587 378,855
Other assets 108,695 77,802 103,029
Property, plant and equipment 1,555,341 1,564,636 1,542,996
Less allowances for depreciation 904,397 891,948 841,876
----------- ----------- -----------
650,944 672,688 701,120
----------- ----------- -----------
Total assets $ 3,470,724 $ 3,627,925 $ 3,802,488
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 51,996 $ 252,331
Accounts payable 530,774 $ 454,410 464,897
Compensation and taxes withheld 122,037 141,640 118,864
Current portion of long-term debt 13,481 111,852 111,052
Other accruals 302,667 326,854 293,857
Accrued taxes 175,952 106,597 145,207
----------- ----------- -----------
Total current liabilities 1,196,907 1,141,353 1,386,208
Long-term debt 507,244 503,517 506,183
Postretirement benefits other than pensions 212,551 209,963 211,011
Other long-term liabilities 237,017 285,328 253,457
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
105,351, 168,305 and 215,770 shares outstanding
at June 30, 2002, December 31, 2001 and
June 30, 2001, respectively 105,351 168,305 215,770
Unearned ESOP compensation (105,351) (168,305) (215,770)
Common stock - $1.00 par value:
151,646,746, 153,978,356 and 156,339,746 shares
outstanding at June 30, 2002, December 31, 2001
and June 30, 2001, respectively 209,587 208,031 207,372
Other capital 231,049 200,643 163,014
Retained earnings 2,034,238 2,120,927 2,030,240
Treasury stock, at cost (936,525) (837,284) (764,648)
Cumulative other comprehensive loss (221,344) (204,553) (190,349)
----------- ----------- -----------
Total shareholders' equity 1,317,005 1,487,764 1,445,629
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,470,724 $ 3,627,925 $ 3,802,488
=========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Six months ended June 30,
---------------------------------
2002 2001
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OPERATING ACTIVITIES
Net (loss) income $ (40,826) $ 127,404
Adjustments to reconcile net (loss) income to net operating cash:
Cumulative effect of change in accounting principle 183,136
Depreciation 50,572 53,761
Amortization of goodwill, intangibles, and other assets 5,781 19,753
Increase in deferred pension assets (13,355) (14,504)
Net increase in postretirement liability 2,588 2,338
Other 10,306 3,099
Change in current assets and liabilities-net (52,287) (52,955)
Unusual tax-related payments (65,677)
Other (9,596) (12,560)
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Net operating cash 136,319 60,659
INVESTING ACTIVITIES
Capital expenditures (53,811) (45,248)
Acquisitions of businesses (26,248)
Increase in other investments (13,208) (10,346)
Proceeds from sale of assets 12,146 9,866
Other (1,097) (3,593)
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Net investing cash (82,218) (49,321)
FINANCING ACTIVITIES
Net increase in short-term borrowings 51,996 145,477
Increase in long-term debt 2,285 1,568
Payments of long-term debt (101,791) (20,659)
Payments of cash dividends (45,864) (45,917)
Proceeds from stock options exercised 32,431 5,727
Treasury stock purchased (99,241) (84,984)
Other (2,745) (835)
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Net financing cash (162,929) 377
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Effect of exchange rate changes on cash 1,517 (1,234)
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Net (decrease) increase in cash and cash equivalents (107,311) 10,481
Cash and cash equivalents at beginning of year 118,814 2,896
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Cash and cash equivalents at end of period $ 11,503 $ 13,377
============ ============
Income taxes paid $ 28,299 $ 80,606
Interest paid 23,650 31,467
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended June 30, 2002 and 2001
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally accepted in the United States 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 second quarter and six months ended June 30, 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 each of the first two quarters of 2002 and
2001 were $.15 per common share and $.145 per common share, respectively.
NOTE C--OTHER EXPENSE - NET
Significant items included in Other expense - net are as follows:
(Thousands of dollars) Three months ended June 30, Six months ended June 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
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Dividend and royalty income $ (490) $ (653) $(1,448) $(1,908)
Net expense (income) from financing
and investing activities 1,948 4,628 3,661 (473)
Foreign currency related losses 1,909 1,289 5,493 1,876
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 (LOSS)
Comprehensive income (loss) is summarized as follows:
(Thousands of dollars) Three months ended June 30, Six months ended June 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
Net income (loss) $ 107,526 $ 90,480 $ (40,826) $ 127,404
Foreign currency translation adjustments (14,974) (23,567) (16,791) (26,740)
--------- --------- --------- ---------
Comprehensive income (loss) $ 92,552 $ 66,913 $ (57,617) $ 100,664
========= ========= ========= =========
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 June 30, Six months ended June 30,
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(Thousands of dollars, except per share data) 2002 2001 2002 2001
------------- ------------- ------------- -------------
Income before cumulative effect
of change in accounting principle $ 107,526 $ 90,480 $ 142,310 $ 127,404
Cumulative effect of change in accounting
principle - net of income taxes of $64,477 (183,136)
------------- ------------- ------------- -------------
Net income (loss) $ 107,526 $ 90,480 $ (40,826) $ 127,404
============= ============= ============= =============
Basic
Average common shares outstanding 151,792,721 155,718,543 151,743,156 157,070,639
============= ============= ============= =============
Income per common share:
Income before cumulative effect
of change in accounting principle $ 0.71 $ 0.58 $ 0.94 $ 0.81
Cumulative effect of change in accounting principle (1.21)
------------- ------------- ------------- -------------
Net income (loss) $ 0.71 $ 0.58 $ (0.27) $ 0.81
============= ============= ============= =============
Diluted
Average common shares outstanding 151,792,721 155,718,543 151,743,156 157,070,639
Non-vested restricted stock grants 318,400 300,000 317,067 337,800
Stock options - treasury stock method 2,222,264 459,870 1,615,653 1,184,254
------------- ------------- ------------- -------------
Average common shares assuming dilution 154,333,385 156,478,413 153,675,876 158,592,693
============= ============= ============= =============
Income per common share:
Income before cumulative effect
of change in accounting principle $ 0.70 $ 0.58 $ 0.93 $ 0.80
Cumulative effect of change in accounting principle (1.20)
------------- ------------- ------------- -------------
Net income (loss) $ 0.70 $ 0.58 $ (0.27) $ 0.80
============= ============= ============= =============
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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
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2002 2001
------------------------------- -------------------------------
(Thousands of dollars) NET SEGMENT Net Segment
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
---------- ---------- ---------- ----------
THREE MONTHS ENDED JUNE 30:
- --------------------------
Paint Stores $ 911,756 $ 123,589 $ 874,064 $ 118,937
Consumer 350,913 66,252 338,409 48,636
Automotive Finishes 123,637 17,731 124,678 14,253
International Coatings 65,393 3,018 68,666 999
Administrative 1,499 (37,161) 1,697 (39,206)
---------- ---------- ---------- ----------
Consolidated totals $1,453,198 $ 173,429 $1,407,514 $ 143,619
========== ========== ========== ==========
SIX MONTHS ENDED JUNE 30:
- --------------------------
Paint Stores $1,607,654 $ 163,657 $1,567,477 $ 165,818
Consumer 629,692 109,408 616,291 74,035
Automotive Finishes 235,195 29,159 240,504 25,810
International Coatings 126,810 (5,516) 138,149 5,337
Administrative 3,025 (67,175) 3,463 (68,772)
---------- ---------- ---------- ----------
Consolidated totals $2,602,376 $ 229,533 $2,565,884 $ 202,228
========== ========== ========== ==========
===================================================================================================================================
Intersegment Transfers
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Three months ended June 30, Six months ended June 30,
------------------------------- -------------------------------
(Thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Paint Stores $ 298 $ 281 $ 711 $ 459
Consumer 277,114 266,088 487,032 462,282
Automotive Finishes 10,396 9,581 15,852 17,892
International Coatings 259 (332) 550 71
Administrative 1,096 2,657 2,141 5,309
---------- ---------- ---------- ----------
Segment totals $ 289,163 $ 278,275 $ 506,286 $ 486,013
========== ========== ========== ==========
====================================================================================================================================
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 $131.6 million and $6.8 million, respectively, for the second
quarter of 2002, and $129.9 million and $1.0 million, respectively, for the
second quarter of 2001. Net external sales and operating profits of these
subsidiaries were $252.3 million and $7.7 million, respectively, for the first
six months of 2002, and $258.5 million and $8.4 million, respectively, for the
first six months of 2001. Long-lived assets of these subsidiaries totaled $103.8
million and $220.7 million at June 30, 2002 and 2001, respectively. Domestic
operations account for the remaining net external sales, operating profits and
long-lived assets. The Administrative Segment's expenses do not include any
significant foreign operations. No single geographic area outside the United
States was significant relative to consolidated net external sales or
consolidated long-lived assets.
Export sales and sales to any individual customer were each less than 10% of
consolidated sales to unaffiliated customers during all periods presented.
- 7 -
NOTE 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
$6,147 and $12,273 from second quarter and first six months of 2001
respectively, to be comparable with 2002, diluted net income per common share
would have been $.62 per share in the second quarter 2001 and $.88 per share for
the first six months of 2001.
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 requires a review at least annually of the carrying value of
indefinite lived assets and goodwill. In addition to the transitional impairment
test completed in the first quarter, another impairment test will be completed
in the fourth quarter 2002 and at least annually thereafter.
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 first six months by
reportable operating segment is as follows:
Goodwill
-----------------------------------------------------------------------------------
January 1, Other June 30,
2002 Acquisitions Impairments Adjustments 2002
---------- ------------ ------------ ----------- ----------
Paint Stores $ 81,886 $ 12,487 $ (5,388) $ 17 $ 89,002
Consumer 450,054 (16,571) 753 434,236
Automotive Finishes 49,631 1,417 (19,009) (1,879) 30,160
International Coatings 90,826 (88,424) (1) 2,401
---------- ---------- ---------- ---------- ----------
Consolidated totals $ 672,397 $ 13,904 $ (129,392) $ (1,110) $ 555,799
========== ========== ========== ========== ==========
- 8 -
The Company's intangible assets and related accumulated amortization is as
follows:
Intangible assets subject to amortization Trademarks Total
------------------------------------------------- with indefinite Intangible
Software All other Subtotal lives assets
------------- ------------- ------------ ----------------- -------------
June 30, 2001
- -----------------------------------
Gross $ 61,491 $ 122,142 $ 183,633
Accumulated amortization (8,957) (104,011) (112,968)
----------- ----------- ----------- ----------- -----------
Net value $ 52,534 $ 18,131 $ 70,665 $ 233,886 $ 304,551
=========== =========== =========== =========== ===========
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
=========== =========== =========== =========== ===========
June 30, 2002
- -----------------------------------
Gross $ 80,113 $ 75,146 $ 155,259
Accumulated amortization (15,296) (54,782) (70,078)
----------- ----------- ----------- ----------- -----------
Net value $ 64,817 $ 20,364 $ 85,181 $ 112,228 $ 197,409
=========== =========== =========== =========== ===========
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 five succeeding years is expected to approximate $12.0 million in 2002,
$11.9 million in 2003, $11.8 million in 2004, $10.1 million in 2005 and $8.5
million in 2006.
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL 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, the 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 increased 3.2 percent to $1.45 billion
from $1.41 billion in the second quarter last year and increased 1.4 percent for
six months to $2.60 billion from $2.57 billion in the first six months of 2001.
Strong domestic architectural paint sales were partially offset by continued
sluggishness in domestic industrial and automotive sales. Poor economic
conditions in South America and weak currency exchange rates in Argentina and
Brazil continue to negatively impact international sales in U.S. dollars. Net
sales in the Paint Stores Segment increased 4.3 percent to $911.8 million in the
quarter and 2.6 percent to $1.61 billion for the first six months due primarily
to strong architectural paint sales which continue to be partially offset by
sales shortfalls in industrial maintenance and product finishes. Architectural
paint sales to painting contractors and do-it-yourself customers continued to be
higher in 2002 than last year. Comparable-store sales, which declined 0.5
percent in the first quarter, were up 1.8 percent in the second quarter
resulting in an increase of 0.8 percent for the first six months. Net sales of
the Consumer Segment increased 3.7 percent to $350.9 million in the quarter and
2.2 percent to $629.7 million in the first six months compared to last year.
Sales of aerosols and other paint-related products to existing customers
improved during the first six months more than offsetting
- 11 -
a shortfall in sales in the Cleaning Solutions Business Unit. The Automotive
Finishes Segment's net sales decreased 0.8 percent to $123.6 million in the
quarter and 2.2 percent to $235.2 million for the first six months. The slowly
recovering domestic economy continued to adversely impact this Segment's OEM
sales. Vehicle refinish sales were curtailed by lower accident rates resulting
from the lingering effects of a mild winter. Net sales in the International
Coatings Segment were down 4.8 percent to $65.4 million in the quarter and 8.2
percent to $126.8 million in the first six months of 2002. The sales decreases
in U. S. dollars were 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
8.2 percent and 4.1 percent for the quarter and the six months, respectively.
Consolidated gross profit as a percent of sales increased to 44.9 percent in the
second quarter of 2002 from 43.2 percent in the second quarter of 2001 and to
44.0 percent for the first six months of 2002 from 42.8 percent for the first
six months of 2001. Second quarter and first six months gross margins in the
Paint Stores and Consumer Segments were higher than last year primarily due to
higher sales levels, moderating raw material costs, lower conversion costs
resulting from improved overhead absorption related to volume gains and
manufacturing expense reductions due to plant closures. In addition, the Paint
Stores Segment's margins in the second quarter of 2002 improved due to higher
architectural paint sales volume and an improved higher margin product sales
mix. The Automotive Finishes Segment's margins increased in the second quarter
and first six months of 2002 due to moderating raw material costs, improved
manufacturing absorption and stabilizing sales declines. The International
Coatings Segment's margins were higher than last year during the second quarter
in spite of economic and competitive pressures.
Consolidated selling, general and administrative expenses as a percent of sales
were unfavorable to last year for the second quarter and first six months
primarily due to higher expenses associated with additional investment in our
businesses. In the Paint Stores Segment, SG&A expenses as a percent of sales
were unfavorable to last year for the quarter and six months 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 unfavorable to
last year in the second quarter primarily due to increasing expenses over the
first quarter to support higher sales. For six months, the SG&A ratio in the
Consumer Segment was essentially flat due to higher sales levels and related
costs. Second quarter and six months SG&A expenses as a percent of sales were
favorable to last year in both periods in the Automotive Finishes and
International Coatings Segments primarily due to tight expense control.
Decreased interest expense in the second quarter and first six months 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 was lower for the second quarter of 2002 compared to 2001
primarily due to lower financing expenses related to lower long-term debt
outstanding in 2002. For the first six months, other expense - net increased due
to higher foreign currency related losses in 2002 and non-recurring gains
realized from the sale of certain fixed assets in 2001.
- 12 -
In the second quarter of 2002, net income increased $17.0 million, or 18.8
percent and $14.9 million, or 11.7 percent for the first six months before the
cumulative effect of change in accounting principle. Diluted net income per
common share increased to $.70 per share in the quarter compared to $.58 per
share in 2001. Before the cumulative effect of change in accounting principle
for the first six months, the diluted net income per common share increased to
$.94 per share from $.80 per share in 2001. Excluding amortization expense of
intangible assets and goodwill in 2001 to be comparable with 2002, diluted net
income per common share would have been $.62 per share for the second quarter
and $.88 per share for the first six months 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 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 $40.8
million, or $.27 per common share, for the first six months of 2002.
FINANCIAL CONDITION
- -------------------
Cash and cash equivalents decreased $107.3 million during the first six months
of 2002, primarily as a result of a maturity payment on long-term debt of $100.0
million. During the first six months of 2002, short-term borrowings increased
$52.0 million. Short-term borrowings primarily relate to the Company's
commercial paper program, which had unused borrowing availability of $698.6
million at June 30, 2002. This program is backed by the Company's revolving
credit agreements. The proceeds from the issuance of short-term borrowings and
net operating cash were used for acquisition of businesses of $26.2 million,
capital expenditures of $53.8 million, treasury stock purchases of $99.2
million, and cash dividends of $45.9 million. The Company's current ratio
declined to 1.30 from 1.32 at December 31, 2001. The decrease in this ratio
occurred primarily due to the increased short-term borrowings.
Since June 30, 2001, $637.8 million of cash generated by operations was used to
reduce short-term borrowings and long-term debt by $297.0 million, support
capital expenditures of $91.1 million, acquire treasury shares of $171.3
million, pay cash dividends of $90.9 million, and acquire businesses of $41.4
million. The Company expects to remain in a short-term borrowing position
throughout most of 2002.
Capital expenditures during the second quarter and first six months 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.
- 13 -
During the second quarter of 2002, the Company purchased 1,479,400 shares of its
common stock for treasury purposes which brings the total number of shares
purchased in 2002 to 3,242,200. 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 June 30, 2002 to purchase
approximately 13.8 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-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.
- 14 -
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 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.
- 15 -
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.
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
- 16 -
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) changes in general domestic economic conditions such as
inflation rates, interest rates and tax rates; (h) 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; (i) the achievement of
growth in developing markets, such as Mexico and South America; (j) increasingly
stringent domestic and foreign governmental regulations including those
affecting the environment; (k) inherent uncertainties involved in assessing the
Company's potential liability for environmental remediation-related activities;
(l) 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); (m) 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 (n) 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 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The Company's 2002 Annual Meeting of Shareholders was held on
April 24, 2002.
(b) The following persons were nominated to serve, and were elected,
as directors of the Company to serve until the next annual meeting of
shareholders and until their successors are elected: J.C. Boland,
J.G. Breen, D.E. Collins, C.M. Connor, D.E. Evans, R.W. Mahoney, G.E.
McCullough, A.M. Mixon, III, C.E. Moll, J. M. Scaminace and R.K.
Smucker. The voting results for each nominee were as follows:
Name For Withheld
---- --- --------
J.C. Boland 123,784,019 6,022,751
J.G. Breen 122,708,854 7,097,916
D.E. Collins 123,918,550 5,888,220
C.M. Connor 125,740,391 4,066,379
D.E. Evans 125,714,127 4,092,643
R.W. Mahoney 124,008,929 5,797,841
G.E. McCullough 125,758,448 4,048,322
A.M. Mixon, III 125,764,269 4,042,501
C.E. Moll 123,987,162 5,819,608
J.M. Scaminace 125,708,888 4,097,882
R.K. Smucker 124,011,957 5,794,813
(c) The proposal to approve The Sherwin-Williams Company 2003 Stock
Plan was adopted with 99,901,420 shares voting for, 13,351,507 shares
voting against, 2,772,097 shares abstaining and 13,781,746 broker
non-votes.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
(10)(a) Schedule of Certain Executive Officers who are
Parties to the Severance Pay Agreements in the
Forms Attached as Exhibit 10(b) to the
Company's Quarterly Report on Form 10-Q For
the Period Ended June 30, 1997 (filed
herewith).
(99)(a) Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
- 19 -
(99)(b) Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
(b) Reports on Form 8-K. The Company filed a Current Report on Form
8-K, dated April 10, 2002, reporting under Item 5 that the Company had
issued a press release regarding its adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
and 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
August 9, 2002 By: /s/ J.L. Ault
-------------
J.L. Ault
Vice President-Corporate Controller
August 9, 2002 By: /s/ L.E. Stellato
-----------------
L.E. Stellato
Vice President, General Counsel and
Secretary
- 20 -
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBIT
- ----------- -------
(10)(a) Schedule of Certain Executive Officers who are Parties to
the Severance Pay Agreements in the Forms Attached as
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
For the Period Ended June 30, 1997 (filed herewith).
(99)(a) Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
(99)(b) Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
-21-